Holiday briefing: No more 'circuit breaker'

China gives up stock market fall limits; World Bank raises growth forecasts; Brazil in trouble too; Aussie trade dives; UST 10yr yield 2.19%; gold up again; oil down again; NZ$1 = 66.4 USc, TWI-5 = 72

8th Jan 16, 8:35am by David Chaston

Here's my final summary of the key news overnight to keep you up-to-date over these holidays. It's back to the regular 90@9 Reports on Monday.

For the second time this year, trading on the Shanghai and Shenzhen stock markets was called off yesterday after the CSI 300 Index tumbled -7%, triggering the second stage of their 'circuit breaker'. They traded for less than 15 minutes for the day before the forced closure. These markets are now at their lowest point in more than five years.

Overnight however, authorities have had second thoughts and have announced they will not apply the 'circuit breaker' today. Brace yourself. Shanghai will open at 2:15pm NZ time. This situation is casting a pall over every other market in the world; Wall Street is down -2% in early afternoon trading.

Yesterday's surprisingly good jobs data in the US was followed up by today's data that showed initial claims fell last week for unemployment benefits, and job layoffs were the lowest in 15 years. All eyes early tomorrow morning will be on the US non-farm payrolls report which is expected to show a seasonally adjusted +200,000 jobs gain for December. Any variance will likely be magnified in market signals, given the jitteriness of early 2016 markets.

The tables are turning between the developed and developing world. It was only a short time ago that all the talk was about the renaissance in emerging markets. But today's release by the World Bank of its latest outlook report paints the reverse picture. Global economic activity should still pick up modestly to a +2.9% pace, from +2.4% growth in 2015, as advanced economies gain speed, they say. Spillovers from major emerging markets will hold back growth in developing countries and pose a threat to hard-won gains in raising people out of poverty, they warn.

Among the BRICS, it is not only China that is staggering, Brazil is on the ropes as well. Their industry contracted in November by even more than economists’ dire predictions had indicated, as the country’s worst recession in decades deepened. Industrial production declined -2.4% from October in seasonally adjusted terms capping a whopping -12.4% from November 2014. Brazil is in trouble.

And in Australia, data out late yesterday revealed a worrying trend in their construction industry.Building consents were down more than -12% in November from October, and are down -8% year-on-year. Analysts were expecting only a minor pullback. Of special concern is the pullback in housing renovation work; that is down a whopping -23% from October, -14% year-on-year.

Australia might still be shipping ever-larger amounts of minerals, but slumping prices for the country’s key commodities mean it is on track for a record trade deficit. The January-to-November shortfall has already surpassed the previous annual record set in 2007 of AU$26 bln. The RBAs commodity price index fell -17% in 2015 while iron ore prices dropped more than -30%.

Those with a good memory will recall that the State of California had trouble with persistent budget deficits. But things have changed on that front, rather dramatically. Lawmakers there instituted a tax on the wealthy and their deficits have turned to strong surpluses. Tight spending control helped too. Today, the Governor has launched a record US$171 budget plan (+6%) that envisions a $5 bln surplus. What is interesting about the assumptions is that it forecasts a US recession in 2017/18.

The oil price is lower again today. Now, both the US and Brent prices are just under US$34/bbl.

Gold is up sharply, now at US$1,106/oz.

The UST benchmark 10yr bond yield is still slipping, now down to 2.19%. You have to say, though, the bond market is being quite restrained given the China situation.

The NZ dollar starts today at 66.4 USc, the Aussie has been especially hit by the China situation and is now at 94.6 AUc, and 61.1 euro cent. The TWI-5 is at 72. The Yuan has seen its largest fall in five months.

The easiest place to stay up with event risk over the holiday period is by following our Economic Calendar here »

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91 Comments

by sharetrader | 8th Jan 16, 9:45am 1452199534

looks like bear markets are a coming, give it a month to settle then could be some good buying

by Andrewj | 8th Jan 16, 10:16am 1452201403

Baltic dry index
http://www.zerohedge.com/news/2016-01-07/nowhere-hide-baltic-fried-inde…

by David Chaston | 8th Jan 16, 10:24am 1452201893

These days, much more important is IATA's airfreight volumes report.

by Plutocracy | 8th Jan 16, 12:30pm 1452209458

Do they transport dry bulk commodities and raw materials by air freight these days?

by Andrewj | 8th Jan 16, 12:47pm 1452210448

The new narrow body jets have complicated air freight.

by David George | 8th Jan 16, 12:47pm 1452210445

Thanks David. The airfreight volumes are telling a similar story to the bulk sea borne freight so I'm not sure what your point is or any reason to ignore the Baltic index.
"IATA’s director general and chief executive officer, Tony Tyler says: “The outlook for air cargo continues to be very difficult. While there was some optimism from third quarter growth it has all but disappeared as the industry basically flat-lined.

“Cargo capacity has grown largely in lock-step with the continued robust demand for passenger travel. As a result, freight load factors have sunk to the 44 per cent range—a level not seen since 2009"

http://www.aircargoweek.com/air-cargo-volumes-continue-flatline-iata-re…

by King of the whiners | 8th Jan 16, 9:57pm 1452243469

LOL. Zing.

by bender | 8th Jan 16, 11:36am 1452206198

Simple to get to surplus and fund needed services - get the wealthy to pay their fair share. Won't happen here, unfortunately.

by rastus1 | 8th Jan 16, 12:35pm 1452209714

good to see Chinese media picking up on our polluted waterways. This Nat Govt is/has/will destroyed one of our major assets - clean, green image and premium quality environment. All for bulk milk powder anyone can produce. Fools.

http://www.936.nz/article/6293/1.html

by workingman | 8th Jan 16, 2:45pm 1452217509

Volume and value both start with v, Rastus. And that's as far ahead as the government and the industry likes to look.

It will be market awareness and market pressure that forces the industry to take action. Whether it's palm kernel expeller or antibiotics, cadmium poisoned soils, or the state of our rural ecology, short-term thinking will do whatever it thinks it can get away with for as long as possible.

Our long term well-being appears to be in the hands of others. It amounts to a massive failure of our own duty of care.

by Casual Observer | 9th Jan 16, 1:05pm 1452297903

Genuine question workingman. Can you explain what your concerns with antibiotics in dairy are?

by workingman | 9th Jan 16, 2:59pm 1452304787

Sure, CO. My concerns are to do with the increasing development and spread of antibiotic resistant bacteria in the environment and in the human population. Widespread use of antibiotics in agriculture - in intensive dairying, beef, chicken and pig farming - is regularly referenced as a substantial risk or contributing factor in this internationally serious public health problem.

The issue goes far beyond dairying here - the large-scale, free use of antibiotics in hope of treating PSA in kiwifruit orchards is a prime example of irresponsible, almost ignorant, antibiotic practice. I value our environment and our health - as well as our agricultural economy - and wish to avoid preventable damage to any of these, and, more than this, enhance their well-being. It seems to me that common practices could and should, in many such areas, move to sounder, more sustainable foundations.

by Casual Observer | 9th Jan 16, 4:41pm 1452310898

I hear what you are saying. Many farmers are aware of antibiotic resistance and the problems of overuse. NZ has strict controls of antibiotic use in animal health and many that are available for dairy use off shore, are not available in NZ. Anecdotally, there is an awareness and use of homeopathic in dairy that flies under the radar. It is not used just on organic farms. http://www.farmsupport.co.nz/

Just to clarify with regards dairy - antibiotic milk is banned from being sent to factory. Fonterra has the following practice for antibiotic testing : Two farm milk samples, plus milk from that farm is added to a separate tanker load sample at time of pickup on every farm, every pickup. Tanker loads get tested on the way back to factory after last pickup. Farmers are charged the cost of the tanker load plus penalties if antibiotic milk is found in their sample. Fonterra can now test to a level of around 30/billionths of a part for residues etc.

I lived surrounded by kiwifruit orchards at the time of the PSA outbreak, and I found it unbelievable that they considered/used antibiotics. Especially since a PSA like virus, Bacterial Canker, is found widely in cherries throughout NZ and treated with copper applications.

Fonterra has said it will be having discussions with shareholders re PKE use this year. It could be an interesting year for shareholders. Hopefully Fonterra has the cojoines to raise issues like grass fed premiums/no GMO feed etc. IMO while there is a groundswell of change in regards to these issues (for the better) I don't believe that there is enough to get it over the line if it relies on a shareholder vote - yet. ;-) The gap in attitudes to these between corporate and smaller family farms is widening on some of these issues IMO.

by workingman | 9th Jan 16, 6:58pm 1452319094

Thanks, CO. I appreciate having your information re the care and checks in current practice, but I gather that stalled dairy - for which there is industry enthusiasm - requires substantial antibiotic dosing, as with any intensive factory farming set-up. Antibiotic residues in the milk, the meat and the environment are then, so I understand, hard to avoid.

Yes, antibiotic use by the kiwifruit industry is a scandal, and I hear much else in that sector that's environmentally concerning. Again, it is short-term thinking, at the expense of long-term well-being.

Yes to a grass-fed premium. I said somewhere else that I think Fonterra should establish a separately managed premium division, rather as Toyota has done with Lexus, marketing the premium portfolio and rewarding grass-fed farmers etc accordingly. The differential might be capable, in time, of driving a structural change in the entire sector, to the benefit of the farmers, the environment and the country.

The gap in these issues may be widening between corporates and family farms, but value is in one direction, not both. We are on the cusp of radical generational change in thinking, in values, life choices and thus buying habits. And environmental concern is uppermost in this change. Does dairy want young, educated, wealthy consumers or not? It's that simple.

by Whitney | 10th Jan 16, 9:03am 1452369824

Casual Observer
Why do you think " the gap in attitudes to these corporate and smaller family farms is widening " ?
Surly they all have the same drivers for Fonterra to perform at a higher level ?

by Casual Observer | 14th Jan 16, 12:26am 1452684414

Everyone wants Fonterra to perform at a higher level - so long as achieving that doesn't impact personally on their business model. An example: Capacity adjustment is strongly disliked by a significant number of North Island farmers, as South Island farmers with their flatter milk curve will usually reap the rewards capacity adjustment allows for a flatter milk curve. A high spiked milk curve that many north island farms have, requires a lot of stainless steel to be built to process a large quantity of milk for a short time period. A flatter milk curve means that processing capacity can be utilised more efficiently due to stainless steel being kept full(er) over a longer period of time. On our farm the capacity adjustment usually means we earn approx 2c/kg more than basic milk price. On some North Island farms it could mean they are paid 2c less than basic milk price.

For the purpose of clarity my definition of corporate farmers are syndicate owned farms and large farms owned by the likes of Landcorp and other owners who have not arrived at farm ownership by moving up through the traditional farming pathway e.g. junior farm staff (as in experience not age) - contract/sharemilking-farm ownership.

Smaller family farmers usually have a different philosophy to corporate farmers. The biggest difference is passion for what they are doing as opposed to seeing it solely as a business investment/capital gain investment. Family farmers usually see their farms as an intergenerational asset and therefore look to ensure their farms will be sustainable in to the future. When there is no intergenerational driver the focus of the operation is different.

Because family farmers are passionate about the work/lifestyle farming gives them and they are looking long term for their business goals, they are more likely to accept a grass fed system premium, lower rates of PKE, no GMO feeds etc. The corporates however are more likely to be in it solely for the dollars and capital return on investment and potentially need to service higher debt levels, whether that is the actual farm debt or the dividend required by the investors in order to receive what they consider to be an acceptable return on their investment. They usually need higher intensity farming systems to make their business work and often will have less flexibility in their systems to change.

My comments are based on the chatter I hear among my networks. The lower payout has got farmers thinking about doing things differently. An increasing number of family farmers appear to believe they in a good position to take advantage of a payment incentive system.The corporate farmers don't appear so positive.

by Andrewj | 8th Jan 16, 1:00pm 1452211205

What will become of the dairy farmer down the road with 8000 cows producing 3 million kgs of milk solids losing $2 a kg and with 68 million of debt?

by bigblue | 8th Jan 16, 1:03pm 1452211400

Did you mean $6m to $8m of debt?
Suspect the banks will be reviewing many of their dairy farm related loans early in 2016

by Andrewj | 8th Jan 16, 1:14pm 1452212063

Oh no, i meant 68 million of debt. I have another good mate with 2000 cows and 24 million of debt.

I have sheep farming friends with 8 million of debt. Thats peanuts in the ' new normal' that is rural debt.

by Andrewj | 8th Jan 16, 1:27pm 1452212844

I should add that average dairy debt is $8000 a cow so with only 68 million debt, at $8500 a cow they are smack in the middle. As a 3rd of dairy farmers have no debt, there are ones out there that are a lot worse.

by Sheep Shagger | 8th Jan 16, 1:43pm 1452213799

Bang on the money as usual AJ. The official state of denial about the real state of the rural economy is going to be very hard to sweep under the carpet again this year. The current international market rout and the underlying issues that are being laid bare make the desperately need rebound in commodity prices look pretty remote. NZsover reliance on commodities to China is not looking to be a good space to be in. Unless we get a sharp correction in the NZD and significant rain there are going to be some bad outcomes.
http://www.odt.co.nz/regions/otago/369154/most-farmers-have-had-gutsful

by rastus1 | 8th Jan 16, 2:20pm 1452216053

..heard similair this morning from chat with a friend down Ashburton way. Local farm $28 mill in debt. Purchased neighbours, converted, all the whistle and bell upgrades, irrigation, new sheds etc etc....

by iconoclast | 8th Jan 16, 3:56pm 1452221767

AJ:- what sort of interest rates would they be paying? - mortgage rates or overdraft?

by Andrewj | 8th Jan 16, 4:00pm 1452222039

depends, I talked to one farmer who sold his cows to a livestock finance firm and nows pays %11.5 for the privilege of milking them.
I have heard of some farm loans that got low as %5.5 but only in exceptional circumstances and not for long. A lot of farmers like me are in the mid 7's plus a few overdraft fees which bug's the hell out of me.
However I don't borrow much so I'm not a good example and most of my contacts 'really' don't want to talk about the mortgage.

by Whitney | 8th Jan 16, 5:24pm 1452227094

Iconoclast
Some balance required to your question

Typical Dairy Farm term debt will be attracting an interest rate of between 4.35 - 5.10 floating longer term swaps will be higher depending on interest cover and equity . current account will be about 6.5%
The farm with 68 mil debt will be drawing on its substantial equity if they are losing $2 kg , I think they will will adjusting there farm costs substantially to reduce said losses .
If they have had the acumen to build a business that banks are prepared to lend 68 mil then they are not going to allow it to disappear without doing stuff

by Andrewj | 8th Jan 16, 5:40pm 1452228042

I hear that dairy farm operation costs are about $5.00 a kg, interest averages around $1.50 a kg. This years payout looks to be in the low $4's. Those are average dairy debts, a 3rd have no debt, the debt is concentrated in the bigger producers. Many of whom have made substantial commitment to costly irrigation schemes.
This is an absolute mess and a lot of the responsibility is with our government, MPI and their ridiculous goal of doubling exports from Ag by 2025.
Farm inflation has been running at %8 and compounding away for years. We have got to where the costs are ruining what were once profitable enterprises. The government carrying the spoils off to the cities.
Those dairy farms have valuations they don't deserve, it was all about chasing capital gains tax free, borrow enough so the interest bill takes care of your taxes and just keep buying, the farm is just a vehicle for capital gain.
I would not pay enough for that farm to cover the banks debt. I sure as hell don't want to be lending my deposit to a bank with this exposure and only getting %4.5 for the risk

by Belle | 8th Jan 16, 5:48pm 1452228493

A dairy farmer I know has to milk a month to pay his rates of 30k.

by steven | 8th Jan 16, 6:12pm 1452229972

Farmers took this silly debt on freely, but now you blame the Govn? really?

by Andrewj | 8th Jan 16, 6:23pm 1452230632

Their finger prints are all over it.

by Belle | 8th Jan 16, 6:27pm 1452230820

The guy that milks a month to pay his rates has been on that place 40 years or more. I bet he didnt bargain on those sorts of rates 40 years ago. He doesnt farm in an upmarket area either.
It is a regular practise for a banker to stand alongside a purchaser at a farm auction. Convenient no? One bank has rorted one farmer so much he is selling. Another banker urges a purchaser to keep bidding ....to cover the exit of the vendor?? As for govt...as Aj says they have actively encouraged this nonsense. Evil bastards.

by workingman | 8th Jan 16, 6:35pm 1452231313

It adds up, Andrewj, to a re-run of the 'Think Big' fantasies of the Muldoon era.

We have a government with no business expertise (deal making, whether in FX or in media, is not the same); add an institutionalised focus on capital gain rather than revenue and profitability, from government and the banking sector downwards; civil servants, academics and others easily impressed and enthused by involvement in anything of tangible scale; hustling of farmers by every one of these.

And finally an open-mouthed, starry-eyed failure to take the measure of China. Turnbull got the measure of the government in minutes; China has played it like a flute.

by iconoclast | 8th Jan 16, 6:01pm 1452229283

Whitney - That's general rather than specific. As you state - typical. The farm with $68 million in borrowings. Do you think that that is exclusively secured over the land value of the farm alone at the rates you indicate. Or (your best guess) do you think those borrowings include stock? Can you get 4.35%-5.10% for loans for stock purchases and working capital?. According to AndrewJ - no

What rate would they be paying for unsecured working capital?
Surely greater than 5%

by Whitney | 8th Jan 16, 6:10pm 1452229849

Assuming 50 % equity in the business , the bank would take security over Land & Buildings , livestock & plant & Fonterra shares .there would be one loan of term debt with a provision for a current account . Pricing of total debt would be based on equity levels and interest cover and secured over all assets
Contrary to AJ - yes

Unlikely there is any unsecured working capital

by Andrewj | 8th Jan 16, 6:27pm 1452230863

%50 equity in farming is way to low at these bubble prices, that would be including livestock,shares and plant. The land prices were never justified by earnings. My present farm cost me 600k in 2000, now valued at 2 mill, what if it goes back to 2000 values and I had %50 debt to equity. What are those Fonterra shares really worth? In 2000 I got $140 for my late lambs this year it was more like $80.
This will ruin many very hard working dairy farmers. I sold my farm to a large scale dairy farmer, National bank required a valuation every year and he took that equity and leveraged it into more land, In my case he borrowed %100.

by Belle | 8th Jan 16, 6:51pm 1452232270

Its a common story Aj. Lately I have been noticing friends and acquaintances are really ramping up the debt again. More farms, more baches, more houses. The plot is truly lost.

by Casual Observer | 9th Jan 16, 1:52pm 1452300752

Apparently sheep farms in Southland are selling well - at $8000 an acre - to existing sheep farmers. Spoke to one farmer who has sold his farm - at $8000 and acre to a fellow sheep farmer - who said while he was really happy to get that sort of money, he was darned if he could figure out how the purchaser could make it pay at those prices.

Sheep shagger what's your take on sheep farm sales in the South?

by Andrewj | 9th Jan 16, 3:03pm 1452305000

Farms prices are no longer linked to fundamentals. The same is happening around here.
http://www.milkproducerscouncil.org/updates/010816.pdf

by Henry_Tull | 10th Jan 16, 6:07pm 1452402449

rules of thumb are gonski

see report page 12.
http://www.rbnz.govt.nz/financial_stability/financial_stability_report/…
LVR the problems starts at 90%, they say

The Reserve Bank supports the medium-term approach to assessing farm sustainability adopted by banks, and expects they will continue to work with customers facing short-term cash flow pressures. A broadbased tightening in lending standards would risk exacerbating the pressures currently faced by dairy farmers.

Hence $68m man is still bona fide
https://www.youtube.com/watch?v=twuiF2Ft8bk
but in a tight spot - no mistake

by Andrewj | 10th Jan 16, 6:32pm 1452403939

Thanks Henry, look forward to the results of this;

The proportion of NPLs that will eventually result in loan defaults is highly
uncertain. Under the assumption that all NPLs result in defaults, the
stress testing model can be used to estimate an upper limit for banking
system losses.5 Loss rates for the banking system under the three
scenarios are estimated to range from 2 to 14 percent of all dairy lending.
These losses amount to around 2 to 18 percent of total before-tax profits,
and a similar proportion of capital, of the five largest dairy lenders over
a typical four-year period, suggesting that they are manageable for the
system as a whole. The Reserve Bank has requested that the five largest
dairy lenders undertake stress tests of their dairy portfolios, providing an institutional level view of potential losses under similar scenarios.
Results are expected to be returned before the end of the year, and will
be reported on in due course.

by Belle | 8th Jan 16, 2:11pm 1452215513

I guess he will owe 74 million. Plus. With compounding interest.

by Andrewj | 8th Jan 16, 3:40pm 1452220831

Nice thought Belle, have you tried that with your bank, you know I need 6 million to cover working losses on farm and then another 6 mill for the interest I cannot pay, and oh yeh, about those penalties, can we negotiate?
Oh and while we are here, about next year...
The real world doesn't work like that in my experience.

by Belle | 8th Jan 16, 4:54pm 1452225292

Darno Aj. The old adage owing ur bank f all and u hav a problem. Owe your bank a lot and the bank has a problem. I heard a story once about the dude Yealands that owns the big vineyard out of Seddon. Him and bankers and staff plus others were all at a big dinner, he started bragging about the massive bulldozer he had just bought. Apparently the bankers started steaming visibly. He was supposed to be on the verge of receivership but it was circa 2009 and noone was buying vineyards. The banks had dozens of smaller vineyards on their books and really had to suck this one up. So on he went. And as of now I think hes doing well. I did hear a couple of days ago ANZ sending a letter to a customer demanding 100k off the mortgage by the end of jan. This guy has no way of paying. If sold up 10 years of milking cows down the tubes. He will have zip. Another one, sharemilker, was doin it real tough so the owner bought the cows, he went onto contract. Still making zippo though and drinking like a fish. Hmm its the little fish that will cop it and the big sharks generally escape. I think it suits governments now to have corporates taking all the spoils. But governments change. I do think a lot of people in high places are in fairyland about your 'next year'. And Mr 68 mil now 74 mil man might be too. Wiĺl our deflation turn around by then? Probably not. And when 74 mil turns into 80 plus, then what. I think thats what you were getting at. Good rain here again. Xlnt.

by Andrewj | 8th Jan 16, 5:04pm 1452225860

It's the old adage owe the banks 100k and you have a problem, owe them a million and they have a problem.
Well while with this much debt dairy farmers have banks by the balls , I can assure you that the banks will cut their own balls off to save themselves from drowning.
Not saying they will like the idea but the other options are not pleasant.

by Belle | 8th Jan 16, 5:37pm 1452227850

I dont know that I would give them a rusty blunt knife. Maybe just suggest they take a deep breath and use their teeth.

by steven | 8th Jan 16, 5:54pm 1452228882

OMG...

by Belle | 8th Jan 16, 6:04pm 1452229482

Think of all those dairy farmer suicides. I cant garner much sympathy for bankers.

by steven | 8th Jan 16, 6:27pm 1452230837

I kind of lose it a bit though Belle when I consider that the farmer willingly took this debt on. Bankers, yes I have none what so ever, but they are not the ones suffering.

by Belle | 8th Jan 16, 7:01pm 1452232867

I know what you mean. Sometimes I think the same. But some of my closest friends and family have been caught up by bank tactics. Its hard sell. We do need to be saved from ourselves. You take an accountant a lawyer a farm advisor and a banker. Gee they will all make a lot of money from a big dairy sale and future business. They will all have a big meeting together and ra ra ra cheer you on. Yes you can do it. And yes we will take a cut....

by steven | 8th Jan 16, 7:14pm 1452233640

I can understand on a personal level, but just recall the flak thrown at me and others when I/we suggest investment is dodgy "you are totally wrong as it hasnt happened yet" etc. To me we seem hell bent on making an utter mess of ourselves and well we can only blame ourselves.

by Belle | 8th Jan 16, 7:48pm 1452235724

Agree Steven. For a long time I have seen us heading back to a feudal system. If one was to check out most of my neighbours not that much would be different to 19th century Britain. Workers in workers cottages. Slaving for the master. No hope of ever owning a slice of the pie. Its sad. I imagine what a difference it would make to those families if they could slice off some of that pie. Bet instead of losing money as these entities do they would be making money.

by steven | 8th Jan 16, 9:20pm 1452241216

Yes.

by O.Farr-Kinnell | 8th Jan 16, 5:05pm 1452225905

With a debt like that at this stage of the economy, I would need a personal effluent pond.

by steven | 8th Jan 16, 9:26pm 1452241572

What stage do you think we are at?

by O.Farr-Kinnell | 9th Jan 16, 12:19pm 1452295172

Unsustainable. And dare I say it, due to our own gullibility,stupidity and failing to "do your own research"

by steven | 9th Jan 16, 12:35pm 1452296117

Ah yes, I very much agree. As someone said it isnt what we dont know that is dangerous its what we do know that isnt.

by steven | 8th Jan 16, 10:16pm 1452244568

He's toast....if there are enough of them so is the bank and then the depositors.....ikky.

by Andrewj | 8th Jan 16, 1:08pm 1452211729

DC, yesterday you did an excellent article on NZ debt.
http://www.interest.co.nz/opinion/79416/david-chaston-looks-our-addicti…

In it you said regards bank debt,, quote ;
New Zealand households now owe them $221 bln. (Businesses, farms, and our governments and their agencies are in hock to them for another $150 bln or so.)

Well on my calculator which does a lot of rounding up or down depending on my mood, time of day etc. Thats is close to 400 billion of debt, if there are 4 million of us, thats 100k a head.
Take out the old and infirm then those not left school, it's looks a bit of a herculean task. Just saying.

by workingman | 8th Jan 16, 2:30pm 1452216619

Remarkable series of posts, Andrewj. It is the banks that are doing the farming in New Zealand.

Farmers appear to be caught between debt on one side (farming for capital gain no longer being the option it commonly was), and policy makers with little or no business sense on the other.

We all depend on agricultural well-being, but the sector has been led into a ditch by unrealistic, short-term thinking - by the banks, advisers and government. The banks are going to want their harvest or, in the worst case, to get anything back they can.

And as rural incomes stagnate or dry up, servicing urban household debt - which doesn't have a productive element to it - isn't going to be a walk in the park.

by tim12 | 8th Jan 16, 3:01pm 1452218477

Will it be the banks that have the real problem? The farmers themselves are stuffed that probably goes without saying. But isn't this a global problem? How much debt is there in the oil and mining industries? Is this the beginning of the next GFC?

by sharetrader | 8th Jan 16, 3:50pm 1452221423

better hope its not GFC 2, NZ is not in as good a shape to handle it as GFC 1 we now hold way too much debt
its a rebalancing of world trade with the USA getting stronger and china getting weaker until they themselves can change from an mainly export economy to a mainly domestic economy.

by Andrewj | 8th Jan 16, 3:55pm 1452221728

It was perhaps the seasonally-adjusted series that indicated more forcefully the dreadful state of US trade on both sides. If there is US consumer demand driving the economy to the precipice of overheating, it is conspicuously absent from these figures. That would be highly confusing since consumer demand is likewise absent from domestic production as well. Seasonally-adjusted, US imports in November matched the rout in February, hitting again the lowest level since early 2011. Similarly, exports fell to just $121 billion, which was the same amount of export trade recorded in March 2011.
http://www.alhambrapartners.com/2016/01/07/the-us-economy-restrains-its…

by steven | 8th Jan 16, 6:42pm 1452231759

So many bad markers, add one more BDI is the lowest ever and its currently dropping like a stone. On top of that we see the BIS hell bent on sending us into a GFC mk2 as fast as possible.

by steven | 8th Jan 16, 6:34pm 1452231261

I certainly hope it isnt but frankly I think its coming, its just when.

by steven | 8th Jan 16, 6:51pm 1452232272

Yes, I expect the banks to go out of business.

by sharetrader | 8th Jan 16, 8:09pm 1452236985

I do not see that but I do see them putting a lot of people out of business as they tighten their lending criteria and become more risk averse

by steven | 8th Jan 16, 9:04pm 1452240278

To be a bit more clear, I think we are facing an OBR event. Sure I expect them to tighten lending, which in effect will be austerity which will hassen the OBR event ie its what comes after that that will hurt.

by dtcarter | 8th Jan 16, 1:29pm 1452212970

Given the number of empty homes in australia, it's not surprising there might be a pullback in consenting, given the newish restrictions limiting the demand for those empty homes from non-residents.

by Robo47 | 8th Jan 16, 7:47pm 1452235631

The current situation of Diary Farmers in NZ is replicated in almost all industries across the global. We can thank this situation on Central Banks and fiat currency, the driving forces of the pending disaster is CREDIT. Credit has driven economies for decades, for consumption, investment and government spending. Global debt is up 57 billion USD since 2008.

Most media are blaming China for the slide in stocks since 2016 began. China has big problems but the main reason is the USA. While the job numbers are touted as reason for optimism, reality is that employment is a trailing indicator, employers don't lay off workers until recession hits. U9 measure of employment the employment participation rate, is at decade lows, bread winner jobs have declined and been replaced by low wage and part time jobs. 50% of 18-24 year olds have no job while the group taking up the so called jobs boom is the over 55's.

Cheap credit has allowed over investment in many industries, as a result supply is now greater than demand. Oil is the poster child for malinvestment boosting supply. Their are many industries in a similar situation, coal, copper, natural gas. The US auto industry will find the same as sub prime car loans have driven production and a massive inventory build.

This is true across many industries, the US inventory to sales ratio is at a near record as companies followed the Feds rosy forecasts and built inventory in what has turned out to be a declining demand. The Fed painted itself into a corner with constant rosy forecasts and forced it to raise rates at the end of 2015 just to keep up the fantasy. Its likely that history will show the Fed raised rates into a recession or maybe in a recession.

I think we are at the beginning of continuation of the 08 GFC, cheap credit has papered over the underlying problem of declining household incomes, and growing debt having stifled demand since 09.

NZ with its "rock star" economy has been stuck with the same problem thanks to the National Parties step to the left, selling the country down the river for popularity.

I was a dairy farmer and sold out in 1996, I didn't understand back then what was happening I just didn't want to keep borrowing more to keep expanding as I would have had to maintain economies of scale to remain viable. Since 08 I have had the good fortune to have the time to study the economy and understand what is going on. I have lived in Europe and Asia in that time, I have seen what has happened across these parts of the world. My wife actually works for Dairy companies, I have seen the growth in milk supply fuelled by cheap credit and the need for increasing production on farms to grow incomes to remain viable. In years of increased payouts suppliers to the dairy industry have pushed up prices leaving farmers with stagnant margins and no room for a decline in farm gate prices. Farmers have willingly become surfs to banks, with ever declining cost of credit inflating asset prices much faster than incomes

The real culprit and cause of the current problems is the flawed economic policies of Central Banks.

by Belle | 8th Jan 16, 7:57pm 1452236227

A very good summation Robo. Thank you

by steven | 8th Jan 16, 10:54pm 1452246881

National' party's step to the left? oh boy that just about sums up your entire opinion right there. What you may miss is if they had not appeared to be close to centre they would probably never have been elected.

Growth which is considered essential is driven by two things, preferably cheap energy and then debt, [1]
or if you want credit. You blame the central banks well really I dont agree here, debt is created by private banks [2][4] when they lend to willing borrowers. So we, us the ppl have willingly taken on more and more debt which has kept the ponzi scheme going. On top of that, "The problem of reaching limits in a finite world manifests itself in an unexpected way: slowing wage growth for non-elite workers. Lower wages mean that these workers become less able to afford the output of the system. These problems first lead to commodity oversupply and very low commodity prices. Eventually these problems lead to falling asset prices and widespread debt defaults. These problems are the opposite of what many expect, namely oil shortages and high prices. This strange situation exists because the economy is a networked system. Feedback loops in a networked system don’t necessarily work in the way people expect." [3]

Sure I can see the media blaming china for the slide in US and EU stocks. Apart from that making no sense beyond speculators greed which now is turning to fear when they see that the last bastion of growth, china is also faltering leaving nothing to prop up their own ponzi scheme, sure. Its almost like blaming the last man standing after a gunfight for the carnage because he's now keeling over from his injuries.

I dont think you should blame cheap credit by itself, cheap credit is the medicine to try and cure the complaint that of recession. So you are blaming cheap credit when really I'd suggest its simple private mal-investment resulting in the over-capacity. Dairy world wide is looking to be a classic example of this.

I dont agree with you on oil (or other materials), the high price of oil is what allowed the excessive investment in USA shale oil as it promised a substantial return (but sure maybe low returns helped investors gamble) On top of that the US shale players and US banks gambled that Saudi Arabia would be the swing producers and reduce output to hold the price up, they lost that bet and big time. On top of that if you look at the oil output (apart from US shale oil of 4.5mbpd) all the big players are more of less flat out or in decline and have been since about 2009. Without the USA's shale its pretty certain we would be facing a declining oil output ie we are post peak Oil, but that's for another thread.

So what it really comes down to is you blame the "leftie" central Govn govn for the problem by trying to blame cheap central bank credit for all the ills when in fact I blame private right wing oriented ppl such as yourself for being the incompetent ones, busily mal-investing. I guess time will show who's right.

reference
[1] http://ourfiniteworld.com/2015/12/08/economic-growth-how-it-works-how-i…
[2] http://positivemoney.org/how-money-works/how-banks-create-money/
[3] http://ourfiniteworld.com/2016/01/07/2016-oil-limits-and-the-end-of-the…
[4] http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin…

by Roelof | 8th Jan 16, 10:41pm 1452246096

I think Robo47 nailed it...

The real culprit and cause of the current problems is the flawed economic policies of Central Banks.

Just like a game of rugby.... there are rules that the game is played by.
In an aggregate sense..... when the whole world is in this mess.... its' the rules that the spotlight should be put on....... NOT some isolated players behavior in playing the game...
In my view the real culprit is Central Bank, flawed Monetary policy , within a flawed Monetary system.
( they have taken a myopic view of what price stability means, in allowing unfettered Credit Growth over the last 50 yrs ).
The culmination of this was the GFC....and we are now in the "shadowlands" of Global deleveraging...which ain't going to well.

Also...Cheap credit isn't a medicine..... doesn't cure anything..... and has unintended consequences .
( which Robo47 alluded to)
In a way, for a little while, it is just a gift to borrowers..

by steven | 9th Jan 16, 7:55am 1452279338

Hmm no, as I posted above most credit is created by private banks and not the CB. The culprit for me is lack of cheap oil. There is an interesting piece I came across that looks at credit from WW2 to today. The interesting thing is after WW2 there was a lot of credit available and we grew no issues, we did also of course have a lot of cheap crude oil, today we dont have the oil.

by Roelof | 9th Jan 16, 8:52am 1452282734

I hear what u are saying.... AND... I still say the buck stops with the Central Banks...
A Central Bank is the "Godfather" of the private Banking system... It is the Central Bank that lays the rules down as to how much credit can be created by the Private Banking system..
( eg... In NZ we now have LVR restrictions )..

I have also read the history of credit growth since WWII...
Credit growth has been a major force in the amazing economic growth the Western World has had since wwII ......
The trouble is..... credit growth has been exponential..... has been excessive... Insane levels of Debt everywhere... ( just look at US govt debt....just look at China expanding its money supply by over 30% in 1 yr )....
It is excessive credit growth that is destructive.....and it is only after a period of time that this becomes very problematic...
Also problematic is how credit is used.... ( can only be used for consumer spending, investment and speculation )...
If it is used for consumer spending... ( and one mans debt becomes another mans income... )..we end up with producers responding to what is an increase in demand.... The trouble is this demand is kinda false... and is simply bring tomorrows consumption forward.... at some point the music stops.
This is one of the reasons we end up with malinvestment..... Investors responding to the demand which is created by debt...
We reach a point where if enuf people decide to start paying down debt ...we get an economic contraction because demand collapses.

The context of Robo47s' post was about Farmers.... and insane Farm prices and debt levels..
Same is happening in Scotland
http://www.sharetherents.org/articles/scotlands-bank-backed-land-grab/

At the moment we have relativelycheap oil.... so your Oil thesis has yet to impact the world in a profound way...(Lets hope we get a technology breakthru before that happens..)
( I'll never forget the 1970s' and the mindboggling increases in oil prices...end of the world stuff... carless days...etc )

by two otherguys | 9th Jan 16, 9:11am 1452283884

I remember having car-less days in the 1970's. I remember the oil shocks, but my memory is fading. I'm danged if I can remember why we had car-less days

Remind me

by Roelof | 9th Jan 16, 9:16am 1452284160

Muldoon..... He liked to control.. :)

by two otherguys | 9th Jan 16, 9:34am 1452285288

Loopholes and exploitation

A black market for exemption stickers and imitations quickly developed, rendering the scheme unworkable

Carless days scheme (1979) was largely ineffective. It lasted less than a year, being scrapped in May 1980. The legislation was a failure for a number of reasons. Most importantly, exemptions were allowed, by an exemption sticker. A black market for exemption stickers and imitations of them quickly developed, rendering the scheme unworkable. There was also a distinct problem in inequality - households that could afford to run two cars simply chose different days for the two cars and continued to drive on all seven days as before

https://en.wikipedia.org/wiki/Carless_days_in_New_Zealand

by steven | 9th Jan 16, 12:11pm 1452294695

If I recall you had an even or an odd number plate, so you just changed it I assume.

by steven | 9th Jan 16, 11:53am 1452293636

You will be reminded inside 10 years, maybe 5.

by steven | 9th Jan 16, 11:56am 1452293816

Um what about the GFC? that didnt impact us in a profound way? What did the oil price get to in mid 2008? followed by?

by steven | 9th Jan 16, 12:41pm 1452296496

The govn is the god father IMHO. What we have seen is the Govn do too little or the opposite of what it should be doing. This isnt just JK but includes HC before him its a gross failure to look longer term.

by Robo47 | 14th Jan 16, 1:41am 1452688888

I pretty much agree with you Steven. But I don't think the current economic situation is dependant on a country being governed by a left or right leaning government. My comment about National stepping to the left is that to be popular and get voted in a party needs to keep moving left offering some thing for nothing to the largest group of voters. To do this the governing party must either increase taxes or borrow, National borrowed. Central Banks must maintain economic stability so as debt increases it can leave interest rates alone and get slower growth while excess are curbed or washed out or reduce interest rates to maintain stability.

Private Banks, as you pointed out do create credit, they can only do so if they keep within certain leverage limits, generally set by Central Banks. CB's have tended to be much too loose, allowing massive credit creation to inflate assets and leverage and discourage savings in good times so a buffer is not created for use in downturns. Bad government policy is papered over by CB's falsifying interest rates making economic outlooks better than they really are. While CB's are politically neutral they economically always act in favour of the current government by loosing monetary policy even in the face of bad policy.

Economic slow downs can be caused by many things but CB's always try to soften the blow by easing credit conditions. Hence we have had declining interest rates for the last few decades and ballooning levels of debt. The effect has been that governments of all colours have not had to address the real reason behind the down turns.

That is a simplistic description of why asset prices and been on a tear and incomes have not kept up the gap being filled with credit.

by njm | 9th Jan 16, 11:00am 1452290421

Yes indeed. Capitalism is dead. Now we have Bankism. Gerald Celeste of TrendsResearch lets fly at the Goldman Sachs former bosses now leaders of countries. Episode 856 of Keiser Report starting 15.20 on rt.com

by steven | 9th Jan 16, 12:16pm 1452294990

I think Gerald Celeste is a bit of a wacko but brilliant to watch/listen to and has some considerable truth/accuracy in there.

by tim12 | 8th Jan 16, 10:50pm 1452246656

I think that banks have created the problem through their greed, and have encouraged borrowing, by slackening their lending requirements and really aiming for lending growth. I'm not sure exactly when it started probably in the last 15 years? banks started lending large amounts of money to people who I knew had businesses that weren't making any money, but had assets that were rising in value. I guess this has been the theory of this type of lending, your business won't have to pay back the debt because inflation will take care of it for you. And this has been encouraged by the government changing laws giving people the perception that rich foreigners will come and buy their assets, (so they still think they are rich) even though their business is making a loss, so they keep borrowing.

by Andrewj | 8th Jan 16, 10:50pm 1452246641

Tim, I can remember going to a ASB field day somewhere in Hastings must have been 2002. They were pushing Farming Systems Uruguay, recommending those with equity in farms could borrow against it for a sure thing.
My brother in law in Santiago was horrified , not such a great fan of Uruguay, he had a clip from the local paper with a picture of a group of NZ farmers, mostly dairy, who the article said had turned up with over 200 million and rented every twin engine plane they could find, Here to buy land for conversion to dairy. Nothing like letting the sellers know you are interested and how much you have to spend.

by Henry_Tull | 10th Jan 16, 7:33pm 1452407615

Tim, on agribanking (dairy lending) look at the whole set of activities, all "processes" from loan debt to farm.

The lenders are stressed by the one thing they cannot control/influence by weight of process. The farmgate milk price (i.e. the business revenue line). (greater than a climatic volume effect).
In taking a loan the biggest make-up number is the farmgate milk price used in the cashflow analysis showing the lender servicing being completed.

We are still a dollar plus away from most bank farmgate milk price lending cashflows exclud. div..

Your question might be why when lending funded the last 30% of NZ dairy production increase, why did the banks think the farmgate milk price for each extra kg would continue to go up (ever gently) and most certainly not go down.

In finding resource projects the Oz banks usually request firm off take (take or pay) arrangements.
So your, supplementary question could be why, when our friends in China were buying everything, wouldn't a seller obtain long term supply volume arrangements for a major portion of ss. Thereby embedding our supply in their domestic thinking....
Like some Australian supplier groups seem to have.

by steven | 9th Jan 16, 8:51am 1452282688

Agree, well 50%. The banks officers with yearly bonuses in their eyes and no job security if they dont perform have clearly acted irresponsibly IMHO. That can be addressed easily, all you do is stop bonuses then the bank officer will think about long term job security and be careful.

The other 50% is the stupidity and greed of ppl taking on that debt thinking they can get a huge tax free lump sum on retirement just like the farmer before them. That is also easily fixed, we have a CGT.

In terms of the economic theory you comment on, well that is a short termism "theory" that clearly has not stood up to practice. Just look at the many housing commentators in here for just the same speculative, simplistic viewpoint that the farmers have had, grafted from the world of finance.

by Roelof | 9th Jan 16, 9:27am 1452284825

we are all passengers in the same bus... lenders and borrowers...and politicians... in my view

History of financial mkts shows we never learn....
After 1 or 2 generations we seem to repeat things.. make the same mistakes...
Driven by the "Dark side" .... Greed, power, etc...

by two otherguys | 9th Jan 16, 9:49am 1452286196

Some passengers are bigger than others, occupying two seats while others get SRO

Airlines - a 250kg passenger gets 10kg carry-on while an anorexic gets the same 10kg

by O.Farr-Kinnell | 9th Jan 16, 10:03am 1452287025

Been a great ride on the party bus, but as we descend with slowly failing brakes, we will notice the lenders,ticket-clippers and designers of "the emperor's new clothes" are the ones who are closest to the emergency exits.

by steven | 9th Jan 16, 12:00pm 1452294031

Indeed except there is no where to exit to? What I do see is the ticket clippers retaining control to the bitter end, ie ever increasing confiscation of assets and capital to keep their "essential" lifestyle going.