90 seconds at 9 am: Dow nears 20,000

Dow approaches 20,000; Chinese investment depends on SOEs; Greek crisis about to flare again; Aussie banks limit investor lending; UST 10yr yield at 2.49%; oil stable, gold lower; NZ$1 = 72.1 US¢, TWI-5 = 77.9

14th Dec 16, 7:47am by David Chaston

Here's my summary of the key events overnight that affect New Zealand, with news the Dow is heading towards an index level of 20,000 just ahead of the next Federal Reserve rate decision.

However, in China, there was a data dump yesterday.

China's industrial output expanded +6.2% year-on-year in November, thanks largely to the electronic equipment and automobile sectors, official data showed overnight.

But it is their capital-asset investment data that is interesting. It rose +8.3% year-on-year to almost NZ$11 tln in the first 11 months of 2016 and growth is now 'stuck' at that level and far below the level seen in the previous year. Infrastructure investment expanded +19% in the period, while investment in high-tech industries was up +16% during the period, according to the data. But it is being driven by state-owned enterprises whose 'investment' climbed more than +20%. Private sector investment, which accounts for more than 60% of the total, grew just +3.1%.

And China's retail sales grew +10.8% year-on-year in November, a slightly faster pace that the rise posted for October. It is the on-line sales segment that is driving this. Traditional retail is struggling.

In Europe, the Greek crisis looks like it might flare up again. The Greek strategy seems to have been based on winning more debt relief concessions, but the prospects seem to have dried up. Greece wants more loans, just to pay its daily operating expenses. They are not really making structural adjustment progress, and voters are weary of austerity. So the Greek government is raising state benefits and transfers which will no doubt cause a crisis in its relations with its creditors again. A New year Greek crisis is now on the traditional calendar.

In Australia, the CBA has become the latest big bank to raise interest rates for property investors. They are up another +7 bps to 5.56% variable, up +15 bps for a line of credit. The other major banks have also done the same recently. What makes the CBA move interesting is their statement that they don't want any more exposure to property investors. They see risk and regulatory limits with extra exposure. Aussie house prices have grown at their slowest pace in three years.

In New York today, the UST 10yr yield has edged higher to 2.49%.

Oil prices are holding at their higher level, now just over US$53 for the US benchmark, while the Brent benchmark is now just under US$56 a barrel. Just to give you an idea how quickly oil markets are responding to the new higher prices, North Dakota’s crude-oil production is back above the one million barrel a day level.

The gold price is down -US$7, now at US$1,156/oz. Investors in gold ETFs are reducing their exposure; this sector cut -12% from its holdings in November, becoming a net seller.

The New Zealand dollar is higher today, now at 72.1 US¢ but it was quite a bit higher earlier in the night. On the cross rates it is at 96.1 AU¢, and against the euro up at 67.8 euro cents. The NZ TWI-5 index is up to 77.9 and still at its 18 month high.

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 ».

Daily exchange rates

Select chart tabs

Source: RBNZ

Source: CoinDesk

We welcome your comments below. If you are not already registered, please register to comment

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

27 Comments

by Andrewj | 14th Dec 16, 8:28am 1481657288

We are witnessing a rise in illusory
liquidity: liquidity that is there in quiet
times when you do not need it and disappears
when you do. Reforms that have
made banks safer have contributed to
this. Life is full of trade-offs, but paying
more attention to the structure of markets
opens the possibility of a win–win
position. Appropriate adjustments to the
defi nition of risk in insurance regulation
and curbs on high-frequency trading
such as levies on cancelled or very short term
trades could push us to a point
where capital requirements make banks
safer, but systemic liquidity is higher.
http://www.epw.in/system/files/pdf/2016_51/50/CL_LI_50_101216_HTP_Avina…

by scarfie | 14th Dec 16, 9:21am 1481660493

Once you let the genie out of the bottle it is extremely difficult to stuff it back in. Maybe impossible. Really what we are talking about here is leverage, and it never goes well in reverse.

by Ergophobia | 14th Dec 16, 1:04pm 1481673875

Keep a weather eye on developments in USA ahead of 19 December - slight chance the Electoral College may not elect Trump: http://www.bbc.com/news/world-us-canada-38297353

by Stephen Hulme | 14th Dec 16, 10:01am 1481662906

....the Dow is heading towards an index level of 20,000 just ahead of the next Federal Reserve rate decision.

Hmmmm...

Household net worth in the United States surpassed $90 trillion for the first time in Q3 2016, according to the latest estimates from the Federal Reserve’s Financial Accounts of the United States (Z1). That’s up sharply from $67.9 trillion now estimated (with revisions) for Q3 2012 when QE3 was introduced. Despite a massive gain of just about a third, Nominal Final Sales to Domestic Purchasers (from the BEA’s GDP data) have increased but 14.5%, a pathetic (nominal) 3.4% compounded annual rate.

We should not expect a dollar for dollar increase in spending for paper “wealth”, of course, but if this QE “wealth effect” was as efficient in the past almost five years as it was, theoretically, during the worst of the dot-com bubble, Nominal Final Sales to Domestic Purchasers would be $2 trillion more in the latest quarter. That would have been a 26% gain in final sales since QE3, or 6.1% compounded, nearly twice the rate above what actually occurred.

It should be painfully clear even to economists that there is no wealth effect, especially where paper “wealth” is involved as a matter of arguable imbalance (i.e., asset bubbles). There is no detectible relationship between net worth and spending, even though by common sense there might be. To the left, that is a function of “inequality”; to the right, a matter of income distribution; to Economists, it’s the Baby Boomers. Read more

Hence:

American families are taking on increasing amounts of debt as incomes fail to keep pace.

Indebted households today have credit card balances averaging $16,061 — just shy of 2008's high, according to a new NerdWallet report, based on data from the Federal Reserve Bank of New York and the Census Bureau.

And total household debt, including mortgages, has ballooned to $132,529, up from $88,063 in 2002, when NerdWallet started tracking the data. While household income has grown by 28 percent in the past 13 years, it lags the the cost of living, which increased 30 percent during the period. Read more

Where are the advocates of trickle down economics hiding now?

by Bozeman | 14th Dec 16, 10:59am 1481666343

Do such advocates actually exist? As far as I know, "trickle down" has never been put forward as a serious economic theory nor has the idea ever been embraced by true economists. I've never seen the term used in anything other than a pejorative sense.

by Stephen Hulme | 14th Dec 16, 11:15am 1481667323

Ex Fed Chairman Bernanke's own words:

Importantly, the effects of LSAPs do not appear to be confined to longer-term Treasury yields. Notably, LSAPs have been found to be associated with significant declines in the yields on both corporate bonds and MBS.14 The first purchase program, in particular, has been linked to substantial reductions in MBS yields and retail mortgage rates. LSAPs also appear to have boosted stock prices, presumably both by lowering discount rates and by improving the economic outlook; it is probably not a coincidence that the sustained recovery in U.S. equity prices began in March 2009, shortly after the FOMC's decision to greatly expand securities purchases. This effect is potentially important because stock values affect both consumption and investment decisions.

Nonetheless, you are free to question his previous unrealised assumptions.

by Ms de Meanour | 14th Dec 16, 11:48am 1481669322

That was a powerful and effective response if you are trying to demonstrate how clever and well-informed you are; it was an absolutely useless response if you are trying to persuade other interest readers to agree with your point.

What is an LSAP? What is an MBS? Is what he says about the impact of LSAPs on corporate bond and MBS yields true or not? Did US equity prices show a sustained recovery after FOMC's decision or did they not? Is he justified in his claim that they did, and that this is probably not a coincidence? What does any of this have to do with either the question of whether trickle-down exists or the question of whether Bernanke is an advocate of it?

No doubt all of this is perfectly clear to you and you have made your point completely to your own satisfaction. If that's all you want to achieve, then that's fine and congratulations to you. But I doubt that you have convinced many of your fellow interest readers.

by Zachary Smith | 14th Dec 16, 12:36pm 1481672197

It has been suggested that Stephen Hulme is not actually a human but a bot. The comment above would appear to support this theory.

by Bozeman | 14th Dec 16, 12:50pm 1481673055

I couldn't have come up with a better response if I had all week to work on it!

by Stephen Hulme | 14th Dec 16, 8:51pm 1481701916

My intent is not to appeal to the financially illiterate. Those needing instruction can engage Google or read the referenced article.

by Bozeman | 15th Dec 16, 8:45am 1481744744

You crack me up!

by rastus1 | 14th Dec 16, 9:26pm 1481704001

I think we have just seen why we have bankers who never hit the jail cells. No one can understand what the heck most if this mumbo jumbo means, let alone try and unwind it all.

Nevertheless, I do try and understand and read Stephens posts in an attempt to educate myself. However the odd hint in his post would be helpful to help explain things for us illiterates. Each to his own.

by Ms de Meanour | 14th Dec 16, 11:24am 1481667877

Two results, one from the right and one from the left, from a search for "in defence of trickle down":

https://danieljmitchell.wordpress.com/2016/09/27/the-myth-and-reality-o…

http://www.politicalgarbagechute.com/trickle-down-metaphor/

And from the latter:

The question we all have to ask these fiscal conservatives is very simple. “Do you believe in an economic model that taxes the rich at as a low a rate as possible so that the overages work their way back into the economy by way of investment, consumer spending, and raises for the labor force?” If they answer in the affirmative, congratulate them for confirming that Trickle Down not only exists, they are firm, firm believers in it.

Thing is, I myself do not believe that a fiscal conservative would answer yes to that question. I think they would respond that they believe in an economic model that taxes everybody at as low a rate as possible. The rest of it still holds.

by Kate | 14th Dec 16, 11:29am 1481668197

The Opportunities Party uses the term in respect of its tax policy:

"Our tax policy will:

a. Make the tax system fairer;

b. Make housing more affordable over time;

c. Lead to more sensible investment of capital (everyone’s savings);

d. Make capital more readily available for productive businesses that create jobs and pay wages;

e. Encourage a lot more “trickle down” from those who have stockpiled wealth courtesy of this loophole; and

f. Reduce New Zealand’s reliance on foreign investment and debt to finance our growth."

http://www.top.org.nz/top1

Which is interesting given earlier in the policy it suggests trickle down theory of the 80s and 90s didn't work.

by Ms de Meanour | 14th Dec 16, 11:58am 1481669902

Great spot which goes straight to the point of what being a "trickle down advocate" actually means.

Is it somebody who thinks that if you allow rich people to accumulate wealth, then that wealth will benefit other people and society as a whole? (Demonstrably false, if all of that wealth is tied up in expensive housing in the expectation that it will appreciate in value due to external circumstances).

Or somebody who thinks that rich people's wealth can and should benefit other people and society as a whole (as could be the case if it were invested, or spent, in other ways - eg employing people, buying goods and services from them - cutting out the Government middle-man)?

by murray86 | 14th Dec 16, 12:18pm 1481671087

Great discussion. Question is - what is "rich people"? At what level of accumulated wealth do they then get captured by this criteria? Does an elderly person living in Auckland, on the GRI only, who purchased their home for $50k in the 50s or 60s and now find it worth over a $million through no action of their own other than living in it get caught by this? Possibly change the question - What is wealth?

What we do know is that unless the detail is clearly covered then people will manipulate the rules to avoid liability. My guess is you mean those who INVEST to grow wealth, so that their investment has genuine benefit to society. More tricky questions.

by antonymouse | 14th Dec 16, 12:25pm 1481671512

Kenneth Galbraith had this to say about 'trickle down' economics:

"Trickle-down economics is that if you feed enough oats to the horse, some will pass through to feed the sparrows"

by Ms de Meanour | 14th Dec 16, 1:03pm 1481673805

Not a good analogy. Oats don't have the same nutritional value when they come out of the horse as when they go into it. Whereas money's money, whoever's hands it has been through and whatever use they made of it before it got to you.

by Noncents | 14th Dec 16, 2:35pm 1481679357

If you include inflation, usually by the time the money makes it way through the system it is worth less.

by Kate | 14th Dec 16, 1:44pm 1481676241

To me, even Gareth's use of "trickle down" as above is merely a suggestion about redistribution without any commensurate policy for real redistribution. I think TOP really missed the opportunity (pun intended) to properly forecast this comprehensive capital tax policy and in doing so, to correspondingly introduce the reforms of the other side of the ledger by way of introducing a UBI.

Instead they say the policy will collect no additional revenue for government, but rather any gains from the tax will be redistributed in tax cuts. To me, that is just an empty promise of some new form of "trickle down".

If you want to solve inequality/poverty: show me the money.

by sharetrader | 14th Dec 16, 2:05pm 1481677509

sometimes it does work, bill gates, warren buffet, mark zukerberg are or have donated vast amounts of money to fund research, medical, training and many other programs. As have a lot of other very rich people
even GM has joined in as
but I guess it depends on the personality, how they were brought up and their culture they come from.
some will use some of their wealth to improve the situation for fellow humans, others will say bugger them I will buy another house or another super yacht

by Kate | 14th Dec 16, 2:20pm 1481678424

Look at it another way - had Microsoft, Facebook and the BH stable of business entities simply not employed all their tax minimisation strategies in the first place - there would likely have been greater ability for their government to redistribute wealth by way of healthcare, education and trade/skills training.

The real reason Western governments the world over are stuggling to keep up with social need is because corporate entities don't pay tax willingly. As Trump pointed out to Hills in the recent debate - your system/laws were written expressly in order that I could legally, legitimately screw the state.

by scarfie | 14th Dec 16, 10:06am 1481663171

Is the Bond market predicting what I have been telling you guys, that interest rates are in a firm downward trend and current prices reflect a bargain? http://www.zerohedge.com/news/2016-12-13/last-time-commercial-traders-b…

by bw | 14th Dec 16, 10:34am 1481664888

You could be right. But it could be that bond traders are hedging their positions ahead of the Christmas break ( left the junior in charge over the festive period!). Besides, if we do get a 2006 to 2008 period, just look at what 2008 brought us all! Lower interest rates will be the least of our problems if that reoccurs.

by @tony | 14th Dec 16, 10:19am 1481663966

Various reports (I get a feed) saying scientists have given up with current models as the changes are just far too fast to use the models any more!

http://www.independent.co.uk/environment/arctic-extreme-climate-change-…

“Scientists who produced the annual Arctic Report Card warned the situation was changing so quickly it was “outpacing our ability to understand and explain” what they were witnessing.”

Way too late to stop trillions in damage globally...

Maybe just too late now for anything...

Enjoy Xmas and new Year with your families.

by ham n eggs | 14th Dec 16, 11:55am 1481669736

" too late now for anything..."

Yip - i suspect so. i realise you are referring to global warming ... but economic collapse may hit first..

"High oil prices will lead to a slowdown in economic activity, to demand destruction, to an increase in oil inventories… which will push the oil price down.

Low oil prices will then lead to cuts in capex which will lead to a fall in production… which will raise the oil price… which leads to a new round of economic slowdown and demand destruction.

It’s a death spiral."

https://www.theguardian.com/business/2016/jan/17/why-falling-oil-price-…

by David George | 14th Dec 16, 11:58am 1481669900

It's down right scary what's going on with the climate Tony.
The herald is reporting on an investigation into human trafficking and (migrant) worker exploitation. For those that missed it:
http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=11766210
What beggars belief is how completely useless the Government has been in sorting this out - as well as the farcical foreign education sector, immigration fraud and fraudulent Kiwi registered companies. All of this has been common knowledge for years. We are becoming a joke, our reputations and institutions a laughing stock. John Keys legacy.