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US factories falter, homebuilders buoyant; Greece close to 'emergency'; world property markets boom; RBA also frustrated with supply lack; NZ$1 = 69.9 US¢, TWI-5 = 73.6

US factories falter, homebuilders buoyant; Greece close to 'emergency'; world property markets boom; RBA also frustrated with supply lack; NZ$1 = 69.9 US¢, TWI-5 = 73.6
16th Jun 15, 7:40am by David Chaston

Here's my summary of the key issues from overnight that affect New Zealand, with news the world is besotted with property.

But first, new data out overnight shows that American factories faltered in May and they are likely to continue to sputter as they face the head winds of a stronger US dollar and weaker export orders.

But America's house builders are increasingly confident with plenty of signs their house building market is picking up steam after a sluggish winter.

Greece and its creditors hardened their stances overnight after the collapse of talks aimed at preventing a default and possible euro exit. Germany's EU commissioner said the time had come to prepare for a "state of emergency" which includes figuring out how Greece will pay for "energy supplies, police pay, medical supplies, and pharmaceutical products". In turn, that is adding a strong whiff of 'contagion' to markets; Euro zone CDS spreads jumped overnight.

The Greek prime minister is soon off to Russia for a few days. And in Russia, they have announced a cut in their official interest rate by 1%, to 11.5%. Inflation is still high there although it has now fallen to +16%.

According to a new report, the total value of the world’s property markets hit a record high of US$13.6 tln in 2014, up 4% over the previous year, as investors poured cash into real estate assets. Buyers pumped US$771 bln into real estate deals in 2014, just short of the previous record set before the global financial crisis. 

In Australia, their Reserve Bank has echoed ours on a now-familiar theme - frustration with the damage caused by low housing supplies. The RBA has warned of even higher home prices, saying stocks of unsold land suitable for development in Sydney and parts of other cities are getting "unusually low".

But one place where property is actually not doing too well is China.

And here's a headline that might surprise you. It's from Xinhua, the official Chinese news agency: "The head of New Zealand's armed forces said he is visiting China this week to build links with the People's Liberation Army." It is featured at the top of the home page of their website.

Back in New York, UST 10yr benchmark yields fell again today by -3 bps to 2.36%.

Also down are US oil markets, with the US benchmark price at US$59/barrel, and Brent crude is now at US$63/barrel.

The gold price is up however, now at US$1,186/oz.

The Kiwi dollar was range bound overnight. This morning it opens at 69.9 US¢, at 90.1 AU¢, and it is now at 62.1 euro cents. The TWI-5 is at 73.6.

If you want to catch up with all the local changes yesterday, we have an update here.

The easiest place to stay up with event risk today is by following our Economic Calendar here »

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43 Comments

by  Stephen Hulme  |  16th Jun 15, 8:11am 1434399115

In Australia, their Reserve Bank has echoed ours on a now-familiar theme - frustration with the damage caused by low housing supplies. The RBA has warned of even higher home prices, saying stocks of unsold land suitable for development in Sydney and parts of other cities are getting "unusually low".

Trying to dodge the bullets for not limiting the money supply at the wrong price, which is it's prime duty. The governor is preparing the masses for the wrong outcome - the forthcoming downturn in the US is unfolding without due attention. Read more

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by  bw  |  16th Jun 15, 9:05am 1434402325

This...is what low % rates do in a debt soaked World. Create a supply/demand imbalance in favour of supply....that's...deflation, writ large. ( from your excellent link)
"..the massive inventory problem is indeed massive, having cut a great deal out of already wholesale activity and now into production and manufacturing itself (both here and abroad). That such a trend already began without a significant and open “trigger” (orthodox economics assumes that recessions require a “shock”) is cause for even greater concern (consumers that never left the bunker from the last “cycle”)."

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by  steven  |  16th Jun 15, 10:11am 1434406307

I very much do not agree here. in fact cart before horse. What you are saying is low interest rates cause businesses making a good to over-invest, thus producing over-capacity. I cant see any justification for this point of view in fact there is little sign of such investment and its been commented on. Conventionally, it is the opposite, In a boom over-investment occurs no matter the interest rate 9within reason) as long as the profit is big enough. However in a downturn in consumption lack of demand causes the existing capacity to be not needed and interest rates are lowered to try and stimulate that lack of demand using debt, thus absorbing it.

Further that building of capacity is the result of effectively lots of independent manufacturers entering the market in order to make money. As an example say the demand is 150 but the existing maker can only make 110, that maker boosts capacity by 30. Meanwhile 3 other ppl decide its big profit and build 30 capacity each, oopsie demand is 150 capacity is 200 prices get cut we see "deflation" This doesnt strike me as a inherently stable system, in fact the opposite.

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by  Stephen Hulme  |  16th Jun 15, 11:05am 1434409530

Yeah right!!! - there always has to be a greater fool to sell to and apparently it is you and your ilk.

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by  steven  |  16th Jun 15, 1:58pm 1434419929

Sell what to?

my ilk are whom?

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by  Stephen Hulme  |  16th Jun 15, 2:27pm 1434421660

By your own admission you are an indentured mortgage debt servant to the lending class.

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by  steven  |  16th Jun 15, 2:54pm 1434423243

Oh dear. and you appear to be one of the lending class, dissatisfied with his return on investment v the level of risk out there, and determined to get your pound of flesh no matter the amount of blood on the floor. there, name calling now over?

So really what are you saying I am a vested interest so un-trustworthy? and use this to suggest others totally ignore that the information and articles I point at on events proving that there has been gross mismanagement and greed by the private financial sector can 'safely" be ignored?

Lets be clear on one thing, I have a tiny residual mortgage that frankly if the interest rates hit 30% I wouldn't directly be be in difficulty because I have over-paid for 15 odd years to get rid of it. Really the OCR does not effect me directly then. What I do see however is many of the "lending class" who seem determined to bring the world down around them because they do not think they are getting the return they "deserve".

Really I think this "lending class" is dis-connected from the real world of Main Street and their pain. Is indeed determined to make it worse purely for reasons greed and faulty dogma. Further what they seem to be disbelieving of, is the pain growing into anger and on into violence ie if you think there will be no pay back for this on many levels, you will I really fear be proven wrong.

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by  cowboy  |  16th Jun 15, 11:30am 1434411044

"What you are saying is low interest rates cause businesses making a good to over-invest, thus producing over-capacity."

Non-sequitur. Please re-phrase.

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by  Roelof  |  16th Jun 15, 1:14pm 1434417267

what stephen is saying is that Credit Growth, as a result of lower interest rates, leads to increased aggregate demand.. ( consumers spending )..
Manufacturers respond to that.. BUT... the growth in demand, thru debt, is bringing tomorrows consumption forward to today.. ( when consumers decide to pay down debt, rather than borrow...guess what happens..?? )
It is Manufacturers response to meeting this "artificial" demand that leads to Malinvestment and overcapacity..
China is a classic case... the crash in Dairy products ( and other commodities ) to China is exactly because of the above ..
Chinas private sector debt is 200% of GDP ...AND.. it has grown 60% in the last 5 yrs.
Should Have a company like Fonterra have seen this coming..??? You would think someone who is paid $4 million should have.

Richard Vague saw it coming.....

http://www.theatlantic.com/business/archive/2014/09/government-debt-isn…

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by  steven  |  16th Jun 15, 2:06pm 1434420417

I dont disagree with "lower interest rates, leads to increased aggregate demand." in fact this is exactly the point I am making, yet the original poster seems to be saying lower rates cause an excess in supply, (or less demand).

In terms of response, you are though not starting far enough back in the business cycle. eg during boom times manufacturers put in more capacity to meet "excessive" demand (that well maybe caused by to low interest rates if borrowing to consume is occuring) , when the boom is topping and the demand falters the idea is a lower interest rate keeps consumers buying the already existing production.

"private debt" indeed I do not disagree and I am pretty sure I have commented on the similarity of the Great Depression to today's excesses. Steve keen and his/Minsky work also I think has commented on it as indeed Paul Krugman I think.

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by  Stephen Hulme  |  16th Jun 15, 2:10pm 1434420648

what stephen is saying is that Credit Growth, as a result of lower interest rates, leads to increased aggregate demand.. ( consumers spending )..

I have responded to the fallacies underpinning this AEP article ie 1 year Eurodollar libor has risen 25.5 bps over the last year to 0.79% as has the USD index. Nonetheless, it points up the savage increase in EM producer/consumer debt liabilities.

The IMF fears a “liquidity storm” once the Fed starts to tighten, causing them to pull out en masse. It has repeatedly called on EM economies to beef up their defences and curb ballooning credit before it is too late. The great worry is what will happen if Fed action causes the dollar to spike dramatically and drives up global borrowing costs, transmitting a double shock through the international financial system.

This would amount to a “margin call” on $9 trillion of off-shore dollar debt, a figure that has exploded from $2 trillion fifteen years ago.

The Bank for International Settlements estimates that emerging markets now account for €4.5 trillion of this dollar debt, an unprecedented sum that escaped control over the last seven years as cheap liquidity from zero rates and quantitative easing in the West spilled into Asia, Latin America, and the rest of the EM nexus.

Many of these countries were unable to defend themselves against a flood of capital, much of it on offer at a real rates of just 1pc, far too low for conditions in fast-growing countries that were then overheating. The inflows set off credit booms that are now unwinding painfully.

They leave a stock of debt that will have to be rolled over in hostile markets, if it is possible at all. The BIS says that the dollar debts of Chinese companies have jumped fivefold to at least $1.1 trillion since 2008.

Emerging markets now account for half of global GDP, twice the level in the early 1990s. They are now so large – with debts to match – that a funding crisis induced by Fed tightening could rock the whole global boat and eventually come back to haunt the US itself. read more

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by  steven  |  16th Jun 15, 2:20pm 1434421242

So lets just consider that the reason cheap money was lent out was purely about greed with no care for the risk of impact on the lender or loss of that "someone elses" capital.

greed

lets repeat that,

greed

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by  Stephen Hulme  |  16th Jun 15, 3:22pm 1434424943

Central bank encouraged greed - outright purchases of term US government liabilities by the US Federal Reserve had no other purpose than to force investors away from the safe issue of excess US deficit spending and fire up the borrowing spirits in other not so secure avenues.

Thus, Federal Reserve purchases of mortgage-backed securities (MBS), for example, should raise the prices and lower the yields of those securities; moreover, as investors rebalance their portfolios by replacing the MBS sold to the Federal Reserve with other assets, the prices of the assets they buy should rise and their yields decline as well. Declining yields and rising asset prices ease overall financial conditions and stimulate economic activity through channels similar to those for conventional monetary policy. Following this logic, Tobin suggested that purchases of longer-term securities by the Federal Reserve during the Great Depression could have helped the U.S. economy recover despite the fact that short-term rates were close to zero, and Friedman argued for large-scale purchases of long-term bonds by the Bank of Japan to help overcome Japan's deflationary trap. Read more

Do the disparaging comments, made by Jim Grant, that I posted yesterday have a more solid basis from which to view them and with less contempt than you did yesterday?

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by  Anarkist  |  16th Jun 15, 3:19pm 1434424775

Yes, that is what he is saying, but it's just not true. Its nothing more than an unsubstantiated claim. Its just not supported in the historical record. Instead the opposite is true. Low interest rates are a consequence of a down turn in economic activity, which leaves excess inventory that drives down prices and spare capital with few profitable avenues to invest.

Take the 1920-21 "Depression" as an example, after the end of World I War firms made optimistic forecasts about the future prospects of postwar prosperity and a boom in consumption driven by the end of hostilities and the end to wartime rationing. The allowed excess inventories of raw and intermediate materials to build up with the expectation of increased sales due to an anticipated civilian consumption boom.

Instead the Federal Reserve made the fateful decision to raise baseline interest rates, exports fell by 20%, and sales declined particularly textile products, iron, and steel, all key products associated with military expenditure for the war effort. It took 18 months before the economy began to recover, helped measurably by the Federal Reserve restoring interest rates to pre crisis levels.
http://socialdemocracy21stcentury.blogspot.co.nz/2014/02/the-causes-of-…
http://socialdemocracy21stcentury.blogspot.co.nz/2010/10/us-recession-o…

Btw, credit growth in China has little to do with low interest rates, unless you would define 5.1 benchmark interest rates as low, and that has been reduced several times in just the recent six month period.

Credit growth in China has little to do with low interest rates and everything to do with the mal-distribution of economic and political power.

"And, lest we begin to think of China as a dynamic market economy, the latest data showed that of the 27.8 trillion yuan in fixed asset investment, 15 trillion was accounted for by investment undertaken by state-owned enterprises or investment in real estate. Even among the ‘joint stock’ firms, many are actually state-controlled."
http://thediplomat.com/2011/03/chinas-highly-unequal-economy/
"The People’s Bank of China said on Sunday that it was reducing the one-year lending rate by 25 basis points to 5.1pc – the third such reduction in six months"
http://www.telegraph.co.uk/finance/economics/11595822/China-cuts-intere…

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by  steven  |  16th Jun 15, 1:57pm 1434419841

I agree the original post doesn't seem logical (to me anyway).

"is what low % rates do in a debt soaked World. Create a supply/demand imbalance in favour of supply." So the original poster seems to be saying that low interest rates are the cause of a supply / demand imbalance? or not?

As a slight aside, there are 2 possibilities here, either low interest rates cause an increase in production, or a decrease in demand. Which one are we arguing?

From my point of view lower interest rates are a response to excess in supply causing dis-inflation/deflation and are not the cause of that condition. If anything the reverse ie high interest rates should be true surely?

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by  cowboy  |  16th Jun 15, 6:38pm 1434436683

Roelof and Anarkist are both right. Dropping interest rates in and of itself doesn't do that much unless there is pressure caused by overly high interest rates.

Foolish companies are going to continue to be foolish except now they can borrow even more.
Greedy executives and shareprice peacocks are going just use the extra room to do what they were going to do but bigger, or a few extra projects that weren't actually feasible now scrape in (your over capacity is one, also social projects are also now theoretically "in budget").
One classic is that people in debt will now be able to service that debt and more, so will do as Roelof said and bring forward their purchasing, making sales seem like the immediate economy is improving, but they're only bringing forward what they would have spent tomorrow, and now they can't buy tomorrow (without debt extension) and have to pay extra interest in the mean time.

that's what made it a non-sequitor... there were a lot of ways things could go wrong between step B and step C and not enough logical information supplied for a deterministic (logical) prediction.
What is also obvious once I try to gert from step B to step C... was that post-step B there were very few good options.
Basically lowering interest rates while no problems are solved is likely to let the system over-stretch that much further but with no actual sign of recovery. Considering that in many ways it doesn't even know what direction it wants to go in, then no solution is going to result from the given options.

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by  Anarkist  |  16th Jun 15, 11:31am 1434411084

Yes I agree with you Steven, it's a common shibboleth amongst Libertarians, used to absolve marketplace decision makers of responsibility for imperfect t decision-making and is used to recast blame onto outside forces, in this case Central Bank actions.

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by  Stephen Hulme  |  16th Jun 15, 11:42am 1434411755

Really?

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by  steven  |  16th Jun 15, 2:12pm 1434420756

yes really.

it is greed pure and simple, and it has back-fired.

http://www.marketwatch.com/story/greed-not-regulation-causes-financial-…

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by  steven  |  16th Jun 15, 2:17pm 1434421046

Ah right, that would explain it. Somehow I always find the Libertarian/Austrian view point totally confusing as it seems backwards to me.

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by  Colt 45  |  16th Jun 15, 12:53pm 1434415980

I don't know anything about economic thoery but I do know that in our little rural corner of Canterbury, the velocity of money has slowed significantly and that a lowering of mortgage/interest rates will not, in itself, cause folks to rush out and spend. I think they know that the longer they hold off (on other than essentials) the lower the price will be when they do choose to buy.

Working men know the wage packet is not doing what it used to and that they need to cut the garment according to the cloth, once again.

We are sick to death of hearing about Auckland and even more sick of the way the politicians right us off as collateral damage in their power games up North.

I'll expect we'll have to take a 'haircut' to help them all out in the end 'tho!

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by  Mike B  |  16th Jun 15, 1:40pm 1434418806

Colt 45
The slowdown in the velocity of money can be due to either

a) - The money supply remains constant but spending slows
b) - The money supply increases but spending remains constant

Either way there is no growth.

I drew up a graph recently measuring economic growth in America. It clearly showed that the rate of economic has been declining for the past 70 years such that, i believe, America will not achieve a real economic growth of 3% ever again and will gradually fall to 2% then 1% then zero%.

If it has been falling for the past 70 years then what miracle is going to happen that will change it?

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by  steven  |  16th Jun 15, 2:31pm 1434421915

the velocity is

amount of money x spending within a time constraint

so a) computes,

your b) however does not to me. If there is more money then for the velocity to decrease spending must be decreasing faster.

So the increase in money that is occurring is an attempt to compensate for less spending.

Not so sure on 70 years, 40 years yes. Up until the 1970s oil crisis there seemed to be significant growth ie in the 1940s, 50s and 60s. Since the 1970s however and expensive oil and especially after 2004 we see little growth and what there is seems to be debt funded at an increasing rate.

"miracle" ? its sure going to change but in a negative way. Not unless someone very soon discovers a cheap to implement, carbon neutral energy conversion process with an EROEI of over 15 to 1 for transport fuels. If that person does, he/she will I think be the richest person on earth bar none and probably treated like a deity.

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by  Mike B  |  16th Jun 15, 3:05pm 1434423954

Steven - If the money supply is $100 and $200 is spent that is a velocity of turnover of 2.

If (as in a) money supply remains the same but spending slows we have
$100 money supply and $100 sent or a velocity of 1.
So velocity of turnover has fallen from 2 to 1 which satisfies a)
Now b)
Money suply increases but spending remains constant
Money supply $100 spending $200 = T/0 of 2
Money supply grows to $1000 but spending remains constant at $200
So velocity of turnover is now -5 (minus) a fall in velocity of turnover from 2 to -5
That satisfies b)

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by  Mike B  |  16th Jun 15, 3:19pm 1434424752

If you look at GDP over the short term it can be up and down so hard to predict.

I did 1yr, 5yr, 10yr, 15,yr and 20yr rolling averages that gave a very clear picture of a steady decline since the mid 1940's.

Sure there were highs and lows over the period, but the clear overall trend was down

This is real GDP not inflated GDP.

Remember Free Trade Agreements have been around for years but the trend is still down. So the TPP or any other agreement is not going to change the long term trend.

I also suspect that China has reached a peak and will see the same trend as America. It is possible that Japan has already reached the point and India will see big growth then decline.

It is hard to cover topics in a comment section

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by  cowboy  |  16th Jun 15, 6:57pm 1434437874

no steven, the velocity of money is the amount of money x how many transactions it passes through before it is worthless (ie taxed to nothing or sucked up by interest).

so a credit card of 25% paying and sales tax of 15%, will have very low velocity. A $1000 spend in such a manner will only have roughly $600 economic power in the first step, $360 in the second, $270 in third, and so on - consider a consumer, buying from a retailer, who buys from a distributor, who pays the importer... not much economic strength.
Buying on 3% interest, sales tax of 0%, that $1000 will still buy $970, then $940... _long_ time before the economic worth of that purchase reaches a lousy $270 equivalent.

the time period calculation is the Time Value of Money, which is reflected in loss against inflation or loss over a regular number of periods.

So considering a Time Value of Money reduces the money's buying power in a inflating system, and the velocity of money is per event (transaction) if inflation is also taken into account then poor Money Velocity can render that $1000 worthless in under a year.
Whereas a 5.39% interest house purchase, with it's low number of events, and it's ability to "lock in the value" against inflation (currency shrinkage), Given 10 years the house purchase has a significant economic value, while the Velocity of Money reduces the currency to nothing).
Again major reasons you can't "inject" foreign money into an economic system by buying such assets, of by regular "investment"

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by  steven  |  16th Jun 15, 2:09pm 1434420555

I agree with you. "haircut" well when the Auckland mess implodes I expect our Govn to step in and bail out the banks and depositors at our expense. The haircut we'll take is in increased tax into teh future and even our children. This is due to one reason alone, greed.

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by  Colt 45  |  16th Jun 15, 3:37pm 1434425873

I'm not sure that's how it works. Under OBR, depositors are unsecured creditors of the bank and won't get too much support from the Crown. The days of SCF are gone !

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by  cowboy  |  16th Jun 15, 6:58pm 1434437916

depend if it's an election year I think.

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by  steven  |  16th Jun 15, 2:14pm 1434420873
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by  Stephen Hulme  |  16th Jun 15, 8:55am 1434401727

And here's a headline that might surprise you. It's from Xinhua, the official Chinese news agency: "The head of New Zealand's armed forces said he is visiting China this week to build links with the People's Liberation Army."

Do we have the intellectual capacity to stretch our accommodation across the East/West ideological superpower divide?

From the ruling Communist Party's paper.

The G7 summit concluded in Germany last week. Chinese scholars and media barely showed any interest to this outdated informal institution, except for a Declaration on Maritime Security issued by G7 foreign ministers. The declaration expressed their concerns on "unilateral actions" in the South China Sea, with China as the obvious target.

Judging from the agenda and outcomes of this year's G7 summit, it has run counter to the global trend of peace, development and cooperation and become mere of a geopolitical tool.

Since the very beginning of the establishment of the G7, it has been a rich-man's club that consists of Western major powers and aims to maintain the collective hegemony of the US-led West. It used to focus on the world's economic issues, and then extended to political and security affairs. After the Cold War, Russia was included in this grouping, which almost became the core of global governance and looked as though it might replace the UN Security Council.

However, the other G7 members never treated Russia as an equal partner. Russia was only entitled to discuss politics and security but not financial and economic issues. Read more

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by  Mike B  |  16th Jun 15, 1:29pm 1434418188

Stephen H - A much more important meeting held around the same time and more secretive is the Bilderberg Group
http://www.independent.co.uk/news/world/what-is-the-bilderberg-group--a…

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by  Stephen Hulme  |  16th Jun 15, 1:52pm 1434419533

I am not aware that the representatives at this meeting can mobilise the US DoD or the US Treasury to fund the former.

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by  Mike B  |  16th Jun 15, 3:25pm 1434425157

Nobody knows what they can or cannot do because it is so secretive. The meeting was heavily guarded and the media could not get anywhere neer the place.

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by  notaneconomist  |  16th Jun 15, 3:35pm 1434425714

USD reset perhaps?!?!
Takeover all the pension funds of the US citizens!?!?

FIAT

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by  bender  |  16th Jun 15, 9:33am 1434404027

"The head of New Zealand's armed forces said he is visiting China this week to build links with the People's Liberation Army."
More military insanity.

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by  waymad  |  16th Jun 15, 10:29am 1434407394

I, for one, welcome our new military overlords. I'd like to remind them that as a trusted defence chief I could be helpful in rounding up others to toil in their underground missile silos!

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by  cowboy  |  16th Jun 15, 11:31am 1434411077

I just don't want a job in the secret police.

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by  bender  |  16th Jun 15, 11:56am 1434412619

But them's where oligarchs come from, c.f. ex-KGB in Russia.

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by  waymad  |  16th Jun 15, 12:48pm 1434415685

Great article (on a long-time theme of his) from Spengler: http://atimes.com/2015/06/genosuicide-and-its-causes/

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by  Andrewj  |  16th Jun 15, 3:20pm 1434424816

I drove down to Sacramento with a friend today, the new investment is obvious and it's everywhere. My friend has a cattle Ranch and just got %100 of his water cut off, he is selling half his cows. Money is still good, but this cattle market has to get the jitters soon. Went to a barbecue on Saturday, purchased some beef ribs at $1.50 a pound, lots of meat on them and great eating.
I'm not confident about the USA, I have a friend trying to sell a house ,he started at $490k came down to 450k and is worried he may have to come down to $390k, no offers so far and he's been on the market a few months. The bay area is different.
I'm at LA airport on route to the UK, be interesting to see how rural UK and France are getting on.
We are a week late as my daughter managed to fracture her pelvis and break her arm, she's sore but OK as long as she's in a wheel chair. Doesn't pay to fall out of trees when you are 14ft off the ground.
We will be in Cornwall for a bit, by the beach, which I'm looking forward to as the valley has been too bloody hot.

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by  notaneconomist  |  16th Jun 15, 3:29pm 1434425362

Yesterday US confidence was surging while today the factories are faltering!.....

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by  Colt 45  |  16th Jun 15, 3:58pm 1434427099
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