US jobs and pay rise; interest rates jump; Japan pay claims rise; Canada threatens NAFTA; UPS confident on trade growth; Vancouver and Hong Kong house prices jump; UST 10yr at 2.84%; oil and gold down; NZ$1 = 73 USc; TWI-5 = 74

Will NZ mortgage interest rates rise due to US & global trends?
If so, the effect on Auckland house prices likely to be negligible.

Hong Kong property is the closest thing to the idea prices can climb forever.

In a week when Barfoots will announce their lowest January sales this century,on an adjusted basis,whilst interest rates have never been lower this century, yet apparently demand has never been higher this century I wonder what drivers will reignite our religion .In 2017 Barfoots sold fewer than 50 percent of the homes it listed ,yet homes sell in 30-35 days. In 2017 Barfoots saw 90 million in lower commissions and the final unreported M13 data of the 2017 year showed that as listings steadily rise again fewer people see New Zealand real estate as an economic windfall. Auckland mortgage brokers must be thinking winter will never end

But there is sign that wages are rising faster now, up +2.9% above the same month a year ago and the largest annual gain in more than 8½ years. Markets take that as an inflation signal.

The largest employment category did not participate in the gains to the same extent.

The BLS estimates that the average weekly earnings of production and non-supervisory employees gained all of 0.8% in January (year-over-year). The series does tend to be quite noisy month to month, and it’s not uncommon for low growth to intersperse with often higher growth months. But 0.8% is unusually weak, the lowest in fourteen months going back to November 2016, and for the past eight months average weekly earnings are trending lower, not higher. Read more

Even well into 2017, variations of the “secular stagnation” thesis remained popular within the economics community. Accelerating synchronized global growth notwithstanding, there’s been this enduring notion that economies are burdened by “insufficient aggregate demand.” The “natural rate” (R-Star) has sunk to a historical low. Conviction in the central bank community has held firm – as years have passed - that the only remedy for this backdrop is extraordinarily low rates and aggressive “money” printing. Over-liquefied financial markets have enjoyed quite a prolonged celebration.

Going back to early CBBs, I’ve found it useful to caricature the analysis into two distinctly separate systems, the “Real Economy Sphere” and the “Financial Sphere.” It’s been my long-held view that financial and monetary policy innovations fueled momentous “Financial Sphere” inflation. This financial Bubble has created increasingly systemic maladjustment and structural impairment within both the Real Economy and Financial Spheres. I believe finance today is fundamentally unstable, though the associated acute fragility remains suppressed so long as securities prices are inflating.

The mortgage finance Bubble period engendered major U.S. structural economic impairment. This became immediately apparent with the collapse of the Bubble. As was the case with previous burst Bubble episodes, the solution to systemic problems was only cheaper “money” in only great quantities. Moreover, it had become a global phenomenon that demanded a coordinated central bank response.

Where has all this led us? Global “Financial Sphere” inflation has been nothing short of spectacular. QE has added an astounding $14 TN to central bank balance sheets globally since the crisis. The Chinese banking system has inflated to an almost unbelievable $38 TN, surging from about $6.0 TN back in 2007. In the U.S., the value of total securities-to-GDP now easily exceeds previous Bubble peaks (1999 and 2007). And since 2008, U.S. non-financial debt has inflated from $35 TN to $49 TN. It has been referred to as a “beautiful deleveraging.” It may at this time appear an exquisite monetary inflation, but it’s no deleveraging. We’ll see how long this beauty endures. Read more

Hmmmmm.....

It would seem logical, then, to distinguish between “good” speculation and “bad” speculation. And that’s exactly what the banking system itself was meant for. Its primary role in a capitalist economy was as intermediation. In that role it meant achieving a level of information, insight, and technical competence that could do just that. Banks would never be perfect, of course, but they could greatly help define and shape the invisible hand as it pertained to money, risk, and reward.

That brings us back to Walter Bagehot and specifically his dictum. Lend freely at high rates on good collateral. The idea was blazingly simple and in many ways elegant, too. As he also wrote in Lombard Street:

“Fourthly. Mr. Hankey should have observed that, as has been explained, in most panics, the principal use of a ‘banking reserve’ is not to advance to bankers; the largest amount is almost always advanced to the mercantile public and to bill-brokers. But the point is, that by our system all extra pressure is thrown upon the Bank of England. In the worst part of the crisis of 1866, 50,000l. “fresh money” could not be borrowed, even on the best security – even on Consols – except at the Bank of England. There was no other lender to new borrowers.”

If banks had good collateral, they had done their job in intermediating speculation of all kinds. If they had done a poor job, they would not have had the collateral to survive, and thus would have been expunged from the system, a direct benefit to it.  But what did he mean by collateral?

Any use of the word in today’s money markets immediately brings up repo. That’s not what Bagehot was talking about, however, and this is no small point. In 19th century England, financial collateral wasn’t just some bond security, government or otherwise. It was in almost every instance what was called a “real bill.” That was, after all, the very thing, the only thing, central banks were discounting and using for their monetary policies.

A real bill was nothing more than a financial instrument tied purposefully and directly to an economic act. A bankers’ acceptance qualified as a real bill in that there was a shipment of goods in existence that required only the monetary means to complete. A steamship full of US agricultural produce leaving the vast stockyards of Chicago, for instance, financed by a bill as it headed for the East Coast via railroad was “good” collateral. Contained in that category, because it was included already in the real economy, was the “good” form of speculation.

A bond issued by the railroad to finance prospective future tracks was not, even if it was issued by the best quality railroad of the time. The bond was purely speculative, in Bagehot’s framing, while the bill was what mattered in keeping to monetary terms. Not that there was no use for the former.

Read again the passage I quoted above, particularly his reference to “bank reserves.”  Bagehot writes specifically that, “the principal use of a ‘banking reserve’ is not to advance to bankers.” It is supposed to, in the end, like the good collateral of real bills, directly support the mercantilist ventures of that system. All these things relate first and foremost to the real economy. Even the banking system itself is a secondary approach upon that primary task.

Read more and more

Good to see the heat is finally being removed from the residential housing market , sales have slumped in January