90 seconds at 9 am with BNZ

90 seconds at 9 am with BNZ: German bond auction fails; Chinese manufacturing contracts; Australian housing slumps

24th Nov 11, 8:54am by David Chaston

David Chaston details the key news overnight in 90 seconds at 9 am in association with Bank of New Zealand, including news there are some worrying signs in China as the slowdown there starts to bite harder.

HSBC is reporting that Chinese PMI is likely to come in at less than 50, a level that means manufacturing output is shrinking there. This is not good news for Australia and goes a long way to explaining why the Baltic Dry Index is falling fast and why some important classes of bulk ships are very underemployed.

Australian housing is taking a bit of a beating at present. Prices are reported as very soft in Melbourne and Sydney.

Housing confidence in New Zealand is also easing slightly as well, according to the ASB Housing Confidence survey out overnight. Price expectations are falling everywhere except Christchurch, it seems.

But the really big and shocking news overnight is that a German sovereign bond auction failed in a spectacular fashion. Normally, German government bonds are oversubscribed by two or three times, but in this latest auction they sold only 60% of the offering to third parties. Some say they set the coupon too low at 2%. Even so, it has rattled markets.

CDS spreads clearly show that German bonds no longer have safe-haven status. This is seriously corrosive for the euro and the EU system, and policy makers know it. You know politicians are scared when French President Sarkosy starts calling for greater intergration of France with Germany; of France into a much more intergrated Europe.

Compounding Europe's woes, their PMI continues to point to manufacturing contraction. In fact, overnight Nokia Siemens, a large telecom equipment manufacturer announced their were cutting 17,000 jobs worldwide.

The Dow is falling, oil prices are down, and our currency went briefly under 74 US cents this morning, although it has climbed back above the level recently.

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17 Comments

by Bernard Hickey | 24th Nov 11, 9:13am 1322079193

Cheers David. It's all kicking off in Europe.

That German bond auction failure is a shocker.

This line in particular is worrying

The German debt agency could not find buyers for almost half a bond sale of 6 billion euros. That pushed the cost of borrowing over 10 years for the bloc's paymaster above those for the United States for the first time since October.

"It is a complete and utter disaster," said Marc Ostwald, strategist at Monument Securities in London.

That meant the central bank had to pick up 39 percent of the 6 billion euros of debt Germany had hoped to sell after commercial banks bought just 3.644 billion euros of the issue.

http://www.reuters.com/article/2011/11/23/us-markets-bonds-bunds-idUSTRE7AM0Y920111123?feedType=RSS&feedName=businessNews&utm_source=dlvr.it&utm_medium=twitter&dlvrit=56943

by AndyM | 24th Nov 11, 9:26am 1322079999

Thud.

Thats the sound of me falling off my chair. I would never have picked that. The bond buyers know something that we don't. An exit strategy happening in secret perhaps?

The end of the Euro is a lot closer than I thought. How long till the end now?

Bernard - you need to run a picking competition.

by steven | 24th Nov 11, 10:55am 1322085351

"thud" indeed, my jaw dropped......probable, yes, but not so soon.....

Conclusion though is if Germany cant sell its bonds, then any other countries bonds sold at the moment must be mostly bought by the ECB.

Second conclusion their leveraged fund idea is dead with a capital D.....

This is a ZOMBIE.....

regards

by Andrewj | 24th Nov 11, 9:37am 1322080638

If Germany can't sell its bonds what chance do the rest of us have?

by spirk | 24th Nov 11, 9:46am 1322081185

The bad side may not be that that they were German bonds but because they are denominated in Euro? End of the Euro?

WE have more time, but thats about all

by Christov | 24th Nov 11, 2:01pm 1322096466

Don't sweat it A.J. ....all we have to do is....

Do Nothing ...Wait n See..wait some more.

For that is the Mantra of The Bolly.

by Anarkist | 24th Nov 11, 12:13pm 1322090039

I second your recommendation of the Kyle Bass interview, Hugh. Though I didn't think much of his conclusion that we must allow periodic crisises to wring out the excess out of the system. Obviously he hasn't put much thought into the possible ramifications of such an event. Basically a recipie for the return of New Deal or worse Nazi/Stalinist corporatacracy.

Hugh, I'm looking at organising a public forum intended to raise awareness about contemporary real estate value and banking issues and I would appreciate it if you would be willing to contact me about perhaps attending as a speaker. You can contact me at bluecollargreenie@gmail.com

PhilBest, if you're reading this, perhaps you would be interested as well.

by Stephen Hulme | 24th Nov 11, 10:17am 1322083075

From the Guardian

Norbert Barthle, a senior MP for Chancellor Angela Merkel's conservative bloc, argued that there was nothing surprising in Germany's failure to sell the full €6bn-worth of bonds. Barthle told Reuters that:

"The situation is not dramatic at all...The fact that the interest rate offered is around the inflation rate means no profit for investors."

The German politician's words are applicable to NZ. You cannot pay negative real interest rates and expect things to be dandy.

But heh - I am already hoarse reminding people of such realities. Those borrowing on the cheap never grow an economy - they just consume it's worth.

by steven | 24th Nov 11, 11:00am 1322085631

Yep, he's talking rubbish.....the US treasuries are neg geared....so were Germany's as they were seen as safe havens....Germany is clearly seen as no longer safe. Lets see where the second auction goes, this might be a one off but its panic in the back rooms I reckon....

NZ isnt paying neg rates BTW, its 5% for bonds with inflation around 2%....

regards

by Matt in Auck | 24th Nov 11, 10:34am 1322084075

Too right hugh, yet some idiots -bank economists, our pm, roger kerr, big daddy -somehow seem to think a decent recovery is brewing

by steven | 24th Nov 11, 12:07pm 1322089656

When your economy is the housing market.....you cant pop the bubble and expect the economy and the Govn's tax income not to tank...

Then there are the gen Xs and Ys who have 90%+ mortgages...send them into serious neg equity and they wont thankyou at the ballot box...then the highly geared PIs, also national voters.....make them bankrupt and bye bye votes....

Im afraid as per normal I dont agree with your views pretty strongly........

regards

by Anarkist | 24th Nov 11, 1:52pm 1322095925

"steven - with all due respect, that is naive blather. Politicians dont run anything - other than run things ibn to the ground.

Note my Posner quote above. Markets rule the world - and politicians are judged ultimately on how they respond and deal with these issues and events."

I think naive is probably the wrong term to describe Steven's comment Hugh. In fact I personally think he's correct. Of course politicians run things, they have an incredibly powerful role in enacting policy advice that forms the frameworks within which market participants operate. You yourself have complained alot about the fact that politicians at the local level withhold land from real estate markets in order to maintain the housing bubble. What you have failed to account for is that self-serving property investors aren't the only ones who have much to gain from the maintainance of the artificially induced values of the housing bubble. I'm familiar with Judge Posner's work and find there to be alot of value in it. But I'd also incorporate the insights of Ronald Coase and Karl Polayni into any conceptual economic model as well.

"There was nothing natural about laissez-faire; free markets could never have come into being merely by allowing things to take their course. ... Laissez-faire itself was enforced by the state. The [1830s and 1840s] saw not only an outburst of legislation repealing restrictive regulations, but also an enormous increase in the administrational bureaucracy able to fulfil the tasks set by the adherents of liberalism. ... Laissez-faire was not a method to achieve a thing, it was the thing to be achieved."

"This paradox [of the need for a strong central executive under laissez-faire] was topped by another. While laissez-faire economy was the product of deliberate state action, subsequent restrictions on laissez-faire started in a spontaneous way. Laissez-faire was planned; planning was not."

http://keithrankin.co.nz/nzpr1998_4Polanyi.html

"Rather than seeking to colonise other disciplines using the economists formal

techniques, economists would do better to study other social systems, such as the

legal and political ones, "not with the aim of contributing to law or political

science, but because it is necessary if they are to understand the working of the

economic system itself" (p. 45)."

http://www.allofliferedeemed.co.uk/Cameron/COASE.pdf

Look at what happened in the United States, when people could no longer rely on continuing capital gains from flipping real estate to another clown who thinks house prices will only rises forever, whilst interest rates will remain low for the foreseeable future. What resulted was a massive housing glut, which led to panic selling as people sought to liquidate their holdings before the bubble burst, essentially bringing on a self-fulfilling prophecy for those who got out too late. Imagine the effect on those who've purchased properties in the boom years. Who wants to continue paying a mortgage that was taken out in the bubble years, when their houses value is significally less that what they have to pay? People just walked away from their homes and left keys in the postbox for the bankers to collect when they call buy wondering why the mortgagee is no long paying off their debt. Do you imagine Kiwis acting differently if they were in that position? I doubt it.

Yes politicians often fail to ensure their policies produce benefical outcomes for every market participant, but thats kind of besides the point. They'll do whatever is necessary to get elected, whether it means pander to the demands of corporate fat cats or appealing dishing out loot to the most numerous special interest group, e.g. the elderly, students, middle class families, regardless of whether its the most economically efficacious action or not.

by Anarkist | 24th Nov 11, 3:12pm 1322100752

"Indeed sound governance and administration, is the foundation for markets to flourish. This is why I popped in the Posner quote, because I think the "mirror markets" thinking is hugely important."

Yes but I understand that it is Judge Posner's argument in his book, Economics of Justice, that customary law systems such as English common law (without the contamination of Continental civil law) and Maori tikanga are actually more economically efficient that civil law that is the product of the parliamentary system. Treasury released a document on the subject, but unfortunately its no longer accessible, though thankfully I had already saved a copy. I'll send it to you if you'd like to read it.

Theres more and more evidence that are seeking dispute resolution outside the judicial/legislative nexus, in order to receive mutually beneficial outcomes out of the process of arbitration.

"Not only is legislation unnecessary for law, but law is unnecessary for order. After studying dispute resolution among ranchers and farmers in Shasta County, California, Ellickson came to realize that most people find the costs of learning about the law (judge-made or statutory) and submitting to formal resolution procedures to be so high that it is easier to fall back on common-sense norms. He finds that all three of the functions of law - dispute resolution, rule formation, and enforcement - get supplied by means of these informal norms. Ellickson derives this observation about the importance of informal dispute resolution from "law and society" scholars, but firmly rejects their characteristic disinterest in economic analysis."

http://econfaculty.gmu.edu/bcaplan/ellick.htm

"It is hard to imagine a judge more asleep at the switch than Helen Winkelmann . As the Chief High Court Judge who has accurately identified that courtrooms around New Zealand are sporting more cobwebs these days than litigants, one would think she might try to figure out what it is about the courts that seems to have provoked a broad allergic reaction among the public. Instead she is out to attack her 'competition' - as she sees it."

That competition, according to Winkelmann J, is those damn mediators and private arbitrators. They deprive the nation of the body of court precedent which guides commercial and civil law, and - hold your hats - are not as trustworthy as the courts."

http://kiwisfirst.com/

by Rob of the North | 24th Nov 11, 10:44am 1322084677

Leonard Cohen must've had prescince when he wrote that famous song with the opening line " First we take Manhattan; then we take Berlin?"

Ironically, as the world monetary system heads to meltdown, buying , not investing , in bricks and mortar as a tangible asset is taking on a new common sense ?

by Christov | 24th Nov 11, 1:56pm 1322096204

Robo ....He also scribed the lyric ..

And wasn't it a long way down

Wasn't it a strange way down..

by Rob of the North | 24th Nov 11, 2:19pm 1322097574

...but i don't like your fashion business, mister...or those drugs you gave to my sister and the pils that make her seem so slim..

by Christov | 24th Nov 11, 3:28pm 1322101739

Mary..