90 seconds at 9 am: G7 oil move

90 seconds at 9 am: G7 leaders call for oil production lift to offset growth-killing spike in oil price; RBNZ seen holding OCR til 2014; Australian house sales slump 5.6%

29th Aug 12, 9:00am by Bernard Hickey

Here's my summary of the key news overnight in 90 seconds at 9 am, including news that finance ministers from the world's seven largest economies have called for increased oil output to cope with an increase in demand and offset the growth-killing effects of the recent oil price spike.

The said they 'stand ready to call upon the International Energy Agency to take appropriate action to ensure that the market is fully and timely supplied'. See more here at Bloomberg.

The increased concern about peak oil and an 11% surge in the oil price in July and August has combined with a spike in food prices because of the worst US drought in 50 years to worry policy makers that these twin price shocks could derail any gathering economic recovery.

The NZIER said overnight the Reserve Bank of New Zealand was likely to 'look through' these two price shocks and keep the Official Cash Rate on hold until 2014. See more here in Alex Tarrant's article.

Meanwhile, the oil price rose overnight on talk of falling US inventories and a fire at a Venezuelan refinery. There is also concern Tropical Storm Isaac may shut Gulf Coast refineries. See more here at Bloomberg.

US President Barack Obama is also thought to be considering releasing oil from America's strategic oil reserves to try to contain oil prices that have driven 'gas' prices to the politically painful level of almost US$4/gallon. See more here at Bloomberg.

Petrol rose near NZ$2.24/ltr at some Auckland petrol stations overnight.

Elsewhere, US consumer confidence fell in August by the most in 10 months, driven in part by those rises in 'gas' prices. See more here at Bloomberg.

In Australia, new home sales fell 5.6% in July from June to their second lowest on record as consumers worried about the slowing Australian economy, the impending end of the mining boom and very high debt levels. See more here at Bloomberg.

Also in Australia, Labor Prime Minister Julia Gillard has announced the scrapping of Australia's A$15/tonne floor price and the adoption of the European market price for carbon. This also brings the Australian system more into line with New Zealand's carbon emissions trading system. See more here at SMH.com.au.

The New Zealand dollar was solid overnight around 80.5 USc, having dipped yesterday after Fonterra reduced its milk payout forecast. Stock markets were flat and quiet ahead of key central bank speeches and announcements over the next two weeks.

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48 Comments

by David George | 29th Aug 12, 9:35am 1346189718

A really worthwhile macro read from William White (In 1994, he joined the Bank for International Settlements as Manager in the Monetary and Economic Department. From May 1995 to June 2008, he served as its Economic Adviser and Head of the Monetary and Economic Department.

He predicted financial crisis of 2007–2010 before 2007's subprime meltdown.[1] He was one of the critics of Alan Greenspan's theory of the role of Monetary Policy as early as 1996. He challenged the former Federal Reserve chairman's view that central bankers can't effectively slow the causes of asset bubbles. On Aug. 28, 2003, White made his argument directly to Greenspan, at the Kansas City Fed's annual meeting in Jackson Hole, Wyoming. White recommended to "raise interest rates when credit expands too fast and force banks to build up cash cushions in fat times to use in lean years.".[2] Greenspan was unconvinced that this would work and said: "there has never been an instance, of which I'm aware, that leaning against the wind was successfully done") Well we all know what a fool Greenspan turned out to be, have a read of this:

"Ultra Easy Monetary Policy and the Law of Unintended Consequences"

The case for ultra easy monetary policies has been well enough made to convince the central banks of most AMEs to follow such polices. They have succeeded thus far in avoiding a collapse of both the global economy and the financial system that supports it. Nevertheless, it is argued in this paper, that the capacity of such policies to stimulate “strong, sustainable and balanced growth” in the global economy is limited. Moreover, ultra easy monetary policies have a wide variety of undesirable medium term effects ‐ the unintended consequences. They create malinvestments in the real economy, threaten the health of financial institutions and the functioning of financial markets, constrain the “independent “ pursuit of price stability by central banks, encourage governments to refrain from confronting sovereign debt problems in a timely way, and redistribute income and wealth in a highly regressive fashion. While each medium term effect on its own might be questioned, considered all together they support strongly the proposition that aggressive monetary easing in economic downturns is not “a free lunch”. Looking forward to when this crisis is over, the principal lesson for central banks would seem to be that they should lean more aggressively against credit driven upswings, and be more prepared to tolerate the subsequent downswings. This could help avoid future crises of the current sort. Of course the current crisis is not yet over, and the principal lesson to be drawn from this paper concerns governments rather more than central banks. What central banks have done is to buy time to allow governments to follow the policies that are more likely to lead to a resumption of “strong, sustainable and balanced” global growth. If governments do not use this time wisely, then the ongoing economic and financial crisis can only worsen as the unintended consequences of current monetary policies increasingly materialize.

http://www.scribd.com/doc/104109398/Dallas-Fed-QE

by Andrewj | 29th Aug 12, 9:43am 1346190222

Petrol in California is up 17c a gallon ,so far this week. Thats going to be a big problem.

by The best statu… | 29th Aug 12, 9:55am 1346190914

A big problem for Obama, not in CA where he will carry the vote, but in swing states like OH, VA, FL, WI etc.

by Stephen Hulme | 29th Aug 12, 10:08am 1346191699

Shit this is getting too close to home for comfort - there are a lot of punters being paid to yell "Fire" in the Australian banking industry at the moment - where's the benefit and to whom?

by goldenfox | 29th Aug 12, 10:11am 1346191911

Its not going to be pretty. The mortgage belt is struggling in Melbourne. With the Gov't Budget already looking like moving into Deficit, Gillard has no more pork to give to the locals...

Its not going to be an easy landing - think Hindenburg Its just a matter of time until it blows....

Worse will be that Abbott is in charge when the explosion arrives. He'll hit Aussie hard with massive rounds of Austerity.

Sold my Bank and the speculative mining shares long ago...

by David George | 29th Aug 12, 10:27am 1346192823

Thanks for the links, Hugh. That Varient Perception report on Aussie is excellent, highlights the problems with our shared Banks, current account deficits, housing bubbles and deeply negative Net International Investment Positions.

Reccomended.

by David George | 29th Aug 12, 11:05am 1346195106

The Maudlin article is from Varient Perception, same as the one you posted. I got his by email yesterday.

by Bernard Hickey | 29th Aug 12, 3:56pm 1346212570

Interesting that the CDS spreads for Aussie banks have started to rise again.

http://www.interest.co.nz/charts/interest-rates/credit-default-swap

cheers

Bernard

by Chris_J | 29th Aug 12, 12:15pm 1346199308

Lane Neave's presentation last night about the legal impacts of confiscations was interesting.

The legislation allows the Government to "succeed" any insurance claims, hence the value the Crown needs to pay is that of the land plus any unclaimed insurance proceeds.

Of course if you had full reinstatement and have not settled with the insurer, then the Crown will need to pay the current market value of what is entitled under the insurance policy.

So if you had a 1000m2 old dunger worth $1.2m that had a full replacement policy which is now demolished, the Crown will have to base its valuation on a brand new 1000m2 building completed in the current market place and as we all know the price of completed buildings and rents are actually sky high at the moment - up 20-30% realistically from pre-quake. So the Crown may end up having to buy the vacant site as if it were a completed building for around $3.5m and then having to negotiate with the insurer to settle for cash if they don't want the rebuild! Which of course will be for an indemnity value only and likely be something like $500k versus $2.5m replacement in this example, so that the Crown ends up paying $3m for a $1m piece of land!

On top of that if you have already settled with the insurer then the Crown must pay the market value of the building irrespective of the payout. So that for instance you had a building worth $1m pre quake and it's land value was $500k, $500k for buildings but it had full replacement cover which turned out to be $1.5m. The insurer had decided to write it iff and pay out the full in cash or alternate property, however the building was fully functioning with only cosmetic damage but the buildings was written off because it was slightly out of level and impossible to repair. Then as the Crown must pay the current market value irrespective of the payout, they must pay for the value of the usable building which may well be about the same as the prequake value (as building prices have increased) while the owner has already claimed the insurance! So the owner might well get $2.5m in this example and the Crown end up paying full price for a building they want to demolish!

It appears the Crown have not at all thought this through and they will not only have to pay substantial prices but have to deal with potentially hundreds of unsettled insurance claims.

This will all involve thousands of man hours of work for the property owners, courts and of course CERA's bureaucrats to resolve.

A great way to get nothing done, except keeping bureaucrats busy.

by Andrewj | 29th Aug 12, 10:31am 1346193087

Deposit flight from Spanish banks smashes record in July Spain has suffered the worst haemorrhaging of bank deposits since the launch of the euro, losing funds equal to 7pc of GDP in a single month.

http://www.telegraph.co.uk/finance/financialcrisis/9504911/Deposit-flig…

by Andrewj | 29th Aug 12, 10:36am 1346193393

http://www.zerohedge.com/news/spain-shall-bitterly-begin-his-fearful-da…

The total banking deposits in Spain are $1.51 trillion we are told and the loss in deposits is 56.4% on an annualized basis which, if this trend continues, would effectively wipe out the capital of each and every bank in Spain. With an economy that has shrunk to $1.3 trillion the drop in bank deposits represents a 6.6% loss of capital to support the economy. This is not a leak, as reported by some in the Press, but a bank run. Spain also reported out for June bad loans at 9.4% ($205.45 billion) which is the highest on record as reported but it is also a number which may not be believed!

by steven | 29th Aug 12, 12:10pm 1346199052

Given leverage I wonder with almost 5% a month loss whether the spanish banks are now already insolvent...if not well at that rate by xmas and 5% a month....25%+ gone.....

regards

by Christov | 29th Aug 12, 10:40am 1346193655

Putting on my drench slicker now thank you A.J.,

I'd recommend waders too as it's getting a bit deep for gumboots.

Has the ECB declared a civil emergency yet...? sure looks like a faecal hurricane from here.

by steven | 29th Aug 12, 12:13pm 1346199223

indeed....5% a month cant be sustained unless,

a) you stop reporting that because of leverage you are insolvent and bankrupt and the Govn stops asking/looking.

b) or someone throws 100s x billions at you every month.....

The money has to go somewhere....

regards

by Andrewj | 29th Aug 12, 11:01am 1346194888

Exactly whats happening, went to an outlet mall this morning, 10.15 am two cars in the carpark.

by Rudderless | 29th Aug 12, 11:56am 1346198198

At last - someone else who identifies the reality of the past 30 years.

NZ Heads of Finance - you are a genius!

For 38 years my main product line was the same. Aimed at true middle class customers. Crafted by someone who was proud to be working class. For 25 years the salary I drew from that manufacturing business never increased. But we had a load of fun.

The rent on the factory (that we owned ourselves) did keep rising though. Saving grace to an OK retirement.

Fast forward to 2012. The things that we need are esculating in price. The 'toys' that we want are collapsing in value.

Andrew J - our NZ state highways are virtually empty. And everywhere the tourist industry are readjusting to "a few" where there used to be "many".

I still own my mothballed factory. I am currently tooling up to make some strange 'Import Substitution' items. I will most probably have a booming new 'retirement' industrial activity within the next 18 months!

Anyone want to take up some shares in my new enterprise?

by Christov | 29th Aug 12, 12:53pm 1346201631

Yep maybe Rudderless, get your proposal together and email it , Big B...will provide you with the address.

As you know I'm a big believer in a return to protectionism as a result of meltdown GFC.

So most of my investments (business) are in KIWI development and innovation enterprise , I rather like the idea of something being made here and made well, not too shabby hands on either depends on what it is. So eh yeah I'll have a look, you work some numbers.

by Andrewj | 29th Aug 12, 1:47pm 1346204860

I would be interested.

by Rudderless | 29th Aug 12, 1:57pm 1346205420

Thanks Andrew

Noted. See message to Christov

by Rudderless | 29th Aug 12, 1:51pm 1346205087

Thanks Christov

I will quietly proceed with the creation of the tooling for these items. Motivation? I want one myself.

At the time these items are deemed to be marketable (after the global reset) I will track you down for a talk. Bernard / David - make a note.

by Rudderless | 29th Aug 12, 12:04pm 1346198698

NZ Heads of Finance

You are possibly the worlds most realistic and 100% honest genius.

For many families the depression is already here - today - not tomorrow or next year.

What happened? Simple! They lost their customers.

And without customers - there is no "economy"

NZHOF - keep up the good work

by Christov | 29th Aug 12, 1:01pm 1346202104

NZHTF...far be it from me to question your genius, and I agree with a lot you've said here, but don't go factoring QE3 just yet my good man, the naysayers at the FED have Bernake backpeddling at super speed.

Stand at the edge of the fiscal cliff, erect a giant fan and spray greenbacks into the abyss.

You can put it in any dress you like, but that is what it boils down to, you know it , he knows it........as I said the other day it's time to seperate the Speculative component of the Market from the Productive Market that underwrites it.

by steven | 29th Aug 12, 1:07pm 1346202447

NB Bernake is looking over his shoulder for Romney and Ryan...a GOP win in november will see Mr B. back in academia.....I assume we'll see Neiil F. in that chair....and then wait for it....no QE....no nothing that will be one abyss to fall into.

Should we hope that Romney wins?

regards

by scarfie | 29th Aug 12, 3:38pm 1346211483

...it's time to seperate the Speculative component of the Market from the Productive Market that underwrites it.

and then we print right? :-P

by Christov | 29th Aug 12, 3:52pm 1346212364

No ...scarfo....maybe from time to time some bloody interventioary thing or other , but this bulls*#t has just got to stop....and that means taking the hit head on eyes open knowing the result will be catastrophic, but potentially worse if the can kicking continues.

Remember a long time back when I said the U.S. were probaly wanting a multilaterial Ground Zero ...? well the Germans are pretty much the only fly left in the ointment.....absolutely willing to prop and stop, but come Sept 12 that may be tested in their own Constitutional Courts.....do I think a jubilee is possible....hmmmm something akin to it perhaps...

We shall see eh ...? don't mind being wrong , been wrong before, I'll be wrong again, but I'm 4 for4 this time and that's got to be tipping the odds in my favour.

by scarfie | 29th Aug 12, 5:01pm 1346216485

Haha, well their won't be any printing going on with the gas price where it is that is for sure. You are of course right, but the problem you face is that you talk common sense and that sort of thing won't get you anywhere:-P Next move will come from left field I think. Could even be war to disguise the printing they do. Civil war in Spain has to be a contender. How long can they maintian that unemployment level without it? German court certainly a big day, but you sort of get immune to these big days after a while:-)

by Rudderless | 29th Aug 12, 12:08pm 1346198927

Put Tim Grosser out to pasture>>>>>>

We need Free Trade Agreements - just like a hole in the head

by antonymouse | 29th Aug 12, 12:13pm 1346199216

Yes he should go.

TPP Secret Trade Agreement Puts International Tribunal Above U.S. Law

http://thenewamerican.com/usnews/constitution/item/11736-tpp-secret-trade-agreement-puts-international-tribunal-above-us-law

Wednesday morning a document was leaked that reveals President Obama’s plans to surrender American sovereignty to international tribunals. This is one of several frightening provisions of the Trans-Pacific Strategic Economic Partnership (also known as the Trans-Pacific Partnership, or TPP) being negotiated in secret by American trade representatives.

In the now-public document, as part of its membership in the TPP, the United States would agree to exempt foreign corporations from our laws and regulations, placing the resolution of any disputes as to the applicability of those matters to foreign business in the hands of an international arbitration tribunal overseen by the Secretary General of the United Nations.

The leaked information confirms the fears of many who have opposed this trade agreement from the beginning. Several groups from the Left and the Right have decried the shroud of secrecy covering the TPP negotiations and are now vindicated by Wednesday’s revelations.

by notaneconomist | 29th Aug 12, 2:00pm 1346205653

Antonymouse - yes this TPP stuff is highly concerning. The fact that the only information anyone can obtain is when someone actually leaks it really annoys me.

by Christov | 29th Aug 12, 2:09pm 1346206147

Now this could ...really ...actually bury Obama.....sigh I wasn't quite ready for Bush Mk3,...out of interest what is the Republican stance on the matter...? Oh well back to investing in munitions for me.

Dear me....he's as gone as a goneburger....crikey.

by Stephen Hulme | 29th Aug 12, 2:14pm 1346206495

Should bury Key too. What are NZ citizens up for?

by Christov | 29th Aug 12, 2:18pm 1346206692

Yes although I'm a bit stumped as to how even the President could get it ratified without breeching / changing constitutional law....Stephen H..as follows

This poses an even wider problem, though. Obama is negotiating a trade pact that would constitute a judicial authority higher than even the U.S. Supreme Court that could overrule federal court rulings applying U.S. law to foreign companies. That is unconstitutional. The U.S. cannot be allowed to enter a treaty that would abrogate our Constitution.

by Stephen Hulme | 29th Aug 12, 2:26pm 1346207193

We need the input of Prof. Jane Kelsey to elaborate upon which crimes against NZers our executive arm of government commits when signing trade deals without open parliamentary debate and majority approval.

by Christov | 29th Aug 12, 2:42pm 1346208157

I suppose our problem would be in terms of having effective Constitutional watchdogs, just how they would monitor a Constitution based on the Treaty, particularly when that door can be swung both ways by definition of a Living Treaty...or redefined on a case by case basis as will be evident post the Tribunals ruling on water rights..............Tweek n Fiddle Wolly would call it.

There had to be some kind of outdoor here in terms of the U.S. position, or conduit that referred matters back to the Supreme Court...or gee I don't know , I just cannot see how he'd get that done....set in stone I mean.

by notaneconomist | 29th Aug 12, 2:55pm 1346208940

Christov - NZ is part of this TPP so we have the same issues as the States.

Does the Governor General of NZ sign off on these trade agreements? If the answer to this question is no, then we are in effect losing our Sovereignty and Constitution over this.

My understanding is that the TPP in NZ wont be released publicly for 4 years after signing. This makes me highly suspicious of the contents and implications.

The New Zealand Council of Civil Liberties has requested a copy of the TPP but my understanding is they have not been provided with a copy.

It is looking like international agreements like these are not subject to the Official Information Act requests.

by Christov | 29th Aug 12, 3:10pm 1346209836

With the leak of this information notaneconomist ( now to be called Notaneco), it follows the clarification of the document at least in the U.S. will become paramount and an election issue.........as to our Gov Gen....a Queens Servant, my good man a token figure of ceremony to disolve Parliment only under very limited circumstance.

We are suceptible more so in that the Constitution has to be Treaty inclusive if not bound, which is why I referred to it a few weeks back as a Constitution in flux......I mean the jury is still out on us becoming a republic.......

Full and final settlement...remember those words...? apparently not , and therefore the Constitution is not clear in intent enough to administer constitutional law.....on all matters that erode Soveignty....or embed it.

by scarfie | 29th Aug 12, 3:43pm 1346211837

I posted the other day that Professor Margaret Mutu is actively working on a constitution, which Maori have an active interest in of course. I have a sneaking suspicion that Maori might just be the saviour of this country. I have been thinking of stopping by to visit her and see what she really knows.

by Christov | 29th Aug 12, 3:55pm 1346212531

Please do Scarfo....a good idea, even if for posterity

by Stephen Hulme | 29th Aug 12, 4:23pm 1346214183

It is looking like international agreements like these are not subject to the Official Information Act requests.

LGFA is exempt from OIA requests.

So says Chapman Tripp

The Bill provides that the LGFA will be a limited liability company but will be tax-exempt and gives it certain statutory entitlements and exemptions to enable it to be “treated as if it were a local authority”, including exemption from the requirement to produce a prospectus.

The LGFA will not be subject to the Official Information Act 1982 (OIA), but nor will local authorities be able to use it to shield themselves from the operation of the OIA. If a local authority is entitled to access particular information as a result of a contract with the LGFA, that information will be treated as being held by that local authority (even if this is not physically/factually accurate) and will, therefore, be subject to the OIA.

It's not subject to much other than being our liability. I guess it's the same with TPP.

by Rudderless | 29th Aug 12, 8:13pm 1346228004

http://www.stuff.co.nz/national/politics/7574021/Groser-mulls-tilt-at-WTO-job

MMMMMMMMMMMMMMMMMMM

I had no idea!

by steven | 29th Aug 12, 12:04pm 1346198690

"The said they 'stand ready to call upon the International Energy Agency to take appropriate action to ensure that the market is fully and timely supplied'."

la la land the lot of them. Just what can the IEA do? its a site to gather data and warn pollies about impending shortages.....which the pollies have ignored for several years....blah..... what a bunch of losers.

If you had the virgin oil fields it takes years to open up, 5+. All thats left is to open the spgots on existing fields and if you do that you reduce to total final output as oil gets left behind.....Saudi found that to its cost. If of course today there are any valves not fully open.....and oh the morons stopped buying Iranian oil about 3~5% of the market....I wonder whos laughing harder now, the west or iran.

regards

by steven | 29th Aug 12, 12:18pm 1346199491

Yes....I think some and certianly many in here should get over the Govn and taxes are the problem....the amounts / taxes they are paying others like bank charges and in overheads is just as painful....and will rise faster.

regards

by notaneconomist | 29th Aug 12, 1:14pm 1346202842

Steven - you are very complex to follow. One moment you advocate AUSTERITY measures which implies to me that you want Govt to reduce its deficit. The only way a Govt can reduce its deficit is to cuts its services and spending. The you say "many in here should get over the Govn and taxes are the problem". Just what are you saying and what are you trying to achieve? Because I'm completely unable to follow what I see as a major contradiction in your postings.

I'm thinking you find it OK that business is unfairly lumbered with all the tax compliance costs which leads me to the conclusion you have never been in business and never had to wear the compliance costs at all. You seem to think that people pay the GST when they purchase goods or services and that that is the end of the transaction. You forget that the person who collected the GST from your transaction on behalf of the Govt has to sit down and complete the appropriate records (which take time and more money to complete) and furnish the return to the IRD in the time period they dictate and pay accordingly.

You obviously don't consider the fact that every pay packet you get (after swapping your labour for money) someone has to sit down and do the nessary PAYE for your wages and also collect and pay any further cost that is required by the IRD and then furnish this along with your taxes which they have to pay on your behalf and at their expense.

The same applies if you are receive any Fringe Benefit in your employment, another heap of form fillng and payment required.

by steven | 29th Aug 12, 12:52pm 1346201563

"An honest days work does not pay anymore."

That is correct...

regards

by Rudderless | 29th Aug 12, 1:31pm 1346203886

Once again 100% honestly true.

About 9 years ago my industry was attacked by the Environment Risk Management Authority (ERMA). And I mean attacked.

ERMA decreed that all Class 3 handling people should do a three week course (hundreds of dollars fee) to obtain an "Approved Handlers Cerfificate.

No Approved Handlers Certificate would mean zero access to future raw material purchases.

Suddenly it all went quiet. Very quiet.

You see - the petrol that you filled your new scooter up with is Class 3.

These servants of mine were going to make everyone who handled a petrol pump obtain an Approved Handlers Certificate. By accident. Really by stupidity.

This is just an example. I wonder - what have ERMA been doing for the past 8 years?

by Christov | 29th Aug 12, 1:57pm 1346205474

ERMA have been busy sytematically dismantling the No8 can do mentality of the Kiwi innovator to the point where through fatigue from carring the regulatory baggage the industry in question simply shuts the doors and reflects on what if.

Meanwhile our dependence on cheap imported goods that carry no such approvals from ERMA flourish..., leaving us to be either Finance lenders or IT developers.

eh Rudderless.......?

by Rudderless | 29th Aug 12, 5:16pm 1346217397

As NZ Heads of Finance would say - MMMMMMMMMMMM

The IT developer who I assist financially has a world class product and dines on 2 minute noodles! Like most modern business setups - it looks much better from the outside.

ERMA shut down Ag chemical sales to uncertified half-wits like myself. Five years later I needed 20 litres of that grusome grass grub exterminator that you spray at nidnight in the rain. Easy. Went to a town where I was completely unknown and I could have bought the whole warehouse. Only limitation was my ability to pay.

As a 'lifestyler' I can assure you that I deal with my tank residue in ways totally sensitive to the environment. Which cannot always be said about those who get excited about my grass grub.

by Rudderless | 30th Aug 12, 9:22am 1346275356

NZ Heads of Finance

On the day of this Ninety at Nine you have stated much solid wisdom - and exposed many myths. This comes form life experience. Thank you!

I still remember the day that the law was changed to abolish 'Youth Rates' of pay. The youths pay was raised to the adult minimum wage level - and they headed for the local liquor store.

Over the years the minimum pay rate has morphed into the new defacto youth rate.

These days struggling families survive on what amounts to - two or three 'youth-rates'

http://www.stuff.co.nz/national/7577131/Teen-has-job-to-keep-siblings-at-school

Just a great big con trick. So sad.