Tech drives Wall St lower; US pending home sales fall; German inflation settles; G20 Ag ministers sideline the US; Aussie mortgage rate moves diverge; UST 10yr at 2.98%; oil jumps while and gold unchanged; NZ$1 = 68.3 USc; TWI-5 = 71.6

Tech drives Wall St lower; US pending home sales fall; German inflation settles; G20 Ag ministers sideline the US; Aussie mortgage rate moves diverge; UST 10yr at 2.98%; oil jumps while and gold unchanged; NZ$1 = 68.3 USc; TWI-5 = 71.6

Here's our summary of key events overnight that affect New Zealand, with news the Aussie Royal Commission into banking is doing some market damage and a few large banks are cashing in.

But first on Wall Street, key equipment maker and exporter Caterpillar raised its full-year profit outlook after earnings in the second quarter nearly doubled, beating market expectations, helped by global demand for its equipment.

However, overall market indexes are lower, with the tech sector down a very sharp -1.25%.

And pending home sales in the US have disappointed. In June they have come in -4% lower than for the same month a year ago. The real weakness is in the West.

In Japan, markets are also on tenterhooks awaiting their latest central bank policy tweaks. Speculation and markets signals both are betting that interest rates will be allowed to rise.

In Germany, their July CPI rise has come in at +2.0% and that was both lower than June's +2.1% and lower than markets were expecting.

Deutsche Bank has moved the clearing of a "large part" of new euro-denominated derivatives trades from London to Frankfurt, as financial firms ramp up their Brexit preparations.

G20 Agriculture ministers are claiming a "huge breakthrough'. They issued a joint statement confirming their commitment to the WTO and against unilateral protectionism. They agreed to avoid "unnecessary obstacles" to trade as global tensions escalate off the back of tariffs imposed by the Americans. US objections were noted, and sidelined. One thing they didn't do however is commit to reducing existing tariffs.

In Australia, more unintended consequence are emerging in the pricing of home loans. The smaller players are being caught up in wholesale cost pressure and passing on higher rates. But today, giant CBA has actually lowered rates for some key fixed rates, putting some distance between them and many rivals. The Hayne Commission is roiling the risk profiles of many smaller institutions and making the largest stronger. This CBA move comes even as analyst Moody's sees the smaller bank hikes clearing the way for the majors to follow. One thing is clear, no-one seems to know where the chips will fall and it will stay confused until the final Hayne report is released and official policy action from it becomes clearer. Right now, its murky and working against consumers most of the time.

The UST 10yr yield is up +2 bps to 2.98%. Their 2-10 curve has steepened to over +30 bps. The Chinese 10yr is at 3.54% (down -2 bps from this time yesterday) while the New Zealand equivalent is now at 2.76%, unchanged.

Gold is unchanged at US$1,222/oz in New York.

US oil prices have jumped sharply today and now just on US$70/bbl. The Brent benchmark is now just over US$74.50/bbl.

The Kiwi dollar will open today at 68.3 USc and showing some end-of-month firming. On the cross rates we are also firmer at 92.1 AUc, and at 58.3 euro cents. That puts the TWI-5 at 71.6 and right at the top of its range - true a very narrow range - for all of July.

Bitcoin is now at US$7,922 which is down a sharp -3.3% since this time yesterday after the US SEC confirmed it won't approve an ETF based on the cryptocurrency. We track this rate daily in the interactive chart below.

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41 Comments

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Regarding the Hayne Commission; any extra regulations will only stregnthen the "Big 4" as they will be the ones that can afford to employ more compliance staff. Extra compliance means smaller companies, whatever the sector, cannot compete.

And call me a cynic if you want but when I hear the words "Food Security" coming from the G20 that means protectionism.

Just the normal holier than thou foot stamping and tantrum throwing to deflect any difficult questions from their own populace about why they have to pay more for food, and who actually benefits.

The Pension Hole for U.S. Cities and States Is the Size of Japan’s Economy
https://www.wsj.com/articles/the-pension-hole-for-u-s-cities-and-states-...

Perhaps a number of funds will offer haircuts, in a take-it-or-leave-it manner - and those not taking the haircut, might be exempted from paying any State or City taxes (as is applicable) until death, as a tradeoff for relinquishing their pension liability.

13
up

Excellent commentary from Martin North, he’s a star. Note his analysis about support levels in Sydney, he makes the obvious point that the level for accomodation demand is best reflected in rents rather than house prices, and he infers given the difference in rental vs price growth that accomodation demand (as opposed to investment demand) will not underpin prices. Seems obvious to me, but many on this site do seem to struggle with that idea.

But of course, he is talking of Sydney which is part of a faraway country of which we know little, so why would we care. Totally irrelevant to us, for sure.

https://youtu.be/L_1HdiaVg7Q

Agreed, he appears to have excellent data and his daily podcasts are well worth following. His estimates of about 1 million AUS households in mortg stress is pretty scary stuff.

I wish we had someone doing this for the NZ market, there seems to be a dearth of crunchy independent economic commentators in the property space. Some of the op eds in the NZH used to be good but they are few and far between and tend to be once over lightly

True. As we have had the same drivers here and the same banks, I'd say his findings as highly relevant to Aucks.

He is only across the ditch. Maybe it's worth getting in touch with the guy and asking him to do an episode or short series on the risks in the NZ market?

Agree Martin North is well worth following. An Interest.co.nz reader put me onto him so thankyou to who ever mentioned him a couple of months ago. “Hold onto your hats it’s going to be a bumpy ride” .... if we’re lucky! If not then it’s the fast elevator down, down, down!
We should all be reviewing our financial position to make sure we can weather whatever happens over the next few years.

""We should all be reviewing our financial position to make sure we can "" ...grab the bargains available if something... "" happens over the next few years "".

...You mean, essentially, exactly the test for assessing market bubbles?
I think there was an article a few years back on here using Phillips bubble tests to highlight the exact same thing in the case of Auckland?

Don’t recall seeing that. Yeah it seems obvious to me, but some people here don’t buy it

Economics has long pretended to be a 'science' and tried to look as if it followed some sort of mathematical 'laws'.

But with the partial exceptions of Ricardo, Alfred Marshall, Mill and the poignant Haney, most of them monitor an artificial set of presumptions..

Yes, this bubble will burst, but it won't recover - that is the paradigm shift. Nobody is going to believe in a second decade of QE, and there are no more fiscal tools to fight what isn't a fiscally-caused problem. And this lot of QE pidgies are coming home to roost.

PDK...Still trying to seem relevant, I see.

At least keep on topic.
Phillips bubble tests are statistical tests - unless of course you believe asymptotic theory is hocus-pocus, too?
Your brand of logic would have a hard time against Peter Phillips, I think. who, as you probably don't know is also an ardent researcher of the resource and climate change issues we face.

FYI...
Nobody is going to believe in a second decade of QE, and there are no more fiscal tools to fight what isn't a fiscally-caused problem.
QE isn't a fiscal policy - it's a monetary policy.

Chuckle.

I call it limits (to growth, usually) and overshoot. Fancy words usually just reflect someone wanting to profit out of the language....... Overshoot any limit and your bubble pops......

Can you point me out a treatise of his on on growth/collapse/sustainability please?

You'd agree that QE didn't 'stimulate normal growth'? You'd agree that perhaps 'normal' was - in a longer timescale - the aberration? The one-off? And you'd agree that QE had to appear in some form, somewhere, sometime? And that that form was the overpricing of deteriorating infrastructure (mostly housing)?

Doesn't matter to me whether a bank, a government or a government bank comes up with the policy - I just track the physical world - it doesn't particularly care......

Fancy words usually just reflect someone wanting to profit out of the language

Asymptotic is not a fancy word, at all.
It does have some very important properties that the Tim Morgans and Gail Tverbergs of this world ignore when they make their 'arguments'.
So, no. The capital isn't in the word, itself. It's importance lies in it's ability to provide justification for scientific reason.

Doesn't matter to me whether a bank, a government or a government bank comes up with the policy
Well, yes, it sort of does. You can't act righteously about you perspective on economics when you don't understand fundamentals of it to start with.

nymad - I've been doing this for decades, and I've noticed two things in response to my message (particularly from those 'trained' in economics) - fear and denial. They manifest as 'you're no expert (so you can't be right)', 'You're wrong in minutae (therefore you're all wrong) - or sometimes as outright avoidance (the media stance in this country).

I suggest they're all aimed in the same direction for the same reason. I put up an Ellen MacArthur/Full Circle/TED Talk piece earlier - what she has is the bravery to confront what is. And she has. And she's in a minority. Which tells us a lot.

Go well.

It's not fear and denial, at all.
Again, more blogger buzz words about economists.

What it's about is robustness.
Without that, your perspective is nothing more than an opinion.
Economists aren't scared of change, at all. They are scared of proposing something they can't logically prove.

It's a hurdle that bloggers don't have to jump.
It's very easy to criticise when you don't have such a requirement in your own arguments.

Sorry, but economics is an abstract, the physical world is real, and - as the unaddressing of climate change, fisheries depletion, overpopulation, acidification, ozone-hole(s), biodiversity loss, aquifer depletion, feed-back loops, the list goes on, all physical, suggests - it hasn't been able to control the madness.

The invisible hand is indeed well named.

But tell you what, I'll make an effort to seem more languaged. How about this: The problem is one of chrematistics. That better?

:)

You are welcome to your opinion about how markets are abstract.

Just when you find something to substantiate it that isn't a blog post by washed up attention junkies, let us all know.

Economists aren't scared of change, at all. They are scared of proposing something they can't logically prove.

Really? Economic theory is still rooted in neo-classical thought on the whole with the same assumptions on the individual as a rational actor. Behavioral economics has come to the forefront in recent times to start to explain many things. MMT and even Austrian economics are still still seen as fringe schools of thought.

The advent of behavioral economics is also evidence that economists are willing to change their ideas. I have seen many cases where economists have embraced the results of robust behavioral experiments.

The flaw with behavioral economics is that it is limited to often very small samples unless you have a huge amount of funding. Going back to my asymptotics point earlier, this has obvious issues.
The issues are especially profound when small sample behavioral experiments contradict huge sample revealed preference actions of observational data.

The advent of behavioral economics is also evidence that economists are willing to change their ideas.

Behavioral economics has arguably been around longer than neo-classical economics.

The flaw with behavioral economics is that it is limited to often very small samples unless you have a huge amount of funding. Going back to my asymptotics point earlier, this has obvious issues.
The issues are especially profound when small sample behavioral experiments contradict huge sample revealed preference actions of observational data

Waffle.

Okay, modern behavioral economics which is generally experimental based economics.
If you are proposing that behavioral economics is the answer, generally the only place you find it is in the lab.

Hence, not waffle.

I find the point PDK makes about this bubble bursting (i.e., in economics speak, that there is a significant "correction" coming), but that with this correction there will be no recovery - a really, really relevant proposition for the discipline of economics to explore.

I tend to agree with PDK, there will be no "recovery" in the sense that, I suspect the current level of global debt will not be re-paid - ever. At least not within the present international monetary framework.

There will in my opinion have to be some kind of reset - some kind of debt forgiveness - if not, it will be all out war/take over of sovereign territories and private assets within by those who are owed money and still have access to the energy needed to execute that take over.

Hence, I look to the economics profession to be providing us with modeling and options with respect to what debt forgiveness might look like.

That that profession - and the majority of academics within it - seem to instead be clinging onto the false assumptions within the current paradigm is truly irresponsible. But as Thomas Kuhn pointed out;

“Paradigm change is closely aligned to perceptual change and novelty emerges with difficulty, manifested by resistance, against a background provided by expectation” (Kuhn 1992, 64).

Classical/neoclassical economists need to stop resisting and start challenging themselves.

We've sort of touched on this in prior discussions Kate. Looking to the economists may well be a false hope though, as you suggest. i suggest that it is they, and the banks who have created the mess, proving credit with virtually no limit. Thus the correction that you talk about will effectively be them shooting themselves in the foot. But no fear, they will try to transmit the pain to everyone.

Goes back to my old mantra - regulation is required to keep them in check.

Let us be totally frank. Economists are certainly among those that have failed our world's economies. Yet perhaps they are only parasites of our elites.

Sure do agree there, murray.

The Daly/Cobb book 'For the Common Good' (Beacon Press) is about the best treatise - 500+ pages but nails the shortcomings of the discipline, by one of it's own.

I'd call it essential reading - nymad can borrow my copy any time :)

Great to see you back here PDK. I'm guessing you're on a bit of downtime between developing the homestead and sailing?

::)

Actually, I started here because I picked Bernard Hickey as the most likely independent to 'get' what had to be 'got'. He didn't quite get there, and I abandoned the effort on the grounds of lack of return (you gotta laugh).

But clearly the times are a'changing, and it's time for those with perhaps more applicable ideas about where to go from here, to step up.

And I don't mind stepping up - someone has to do it.

Which is the problem with bank stress tests, they expect a recession followed a short time later by a 'recovery', or should I say back to 'normal'.

This has good insights re why economists are off the mark ... in particularly the insight re the Supply Demand model (slide 5) being misleading about energy being just another input ...

https://ourfiniteworld.com/2018/05/11/how-the-economy-works-as-it-reache...

"Supply and Demand Are Both Affected by Reaching Limits

As the economy approaches energy limits, lack of sufficient growth in energy consumption affects both Supply and Demand. Diminishing returns leads to high costs on the Supply side. Because of this, the cost of producing oil and other energy products tends to rise.

At the same time, businesses find that they cannot pass on these higher costs to their consumers because the wages of consumers don’t rise with rising energy costs"

Re Debt forgiveness .... It solves no resource issue re the low hanging fruit ...
Debt forgiveness is wealth forgiveness.
You cant downsize the economy this way ... its like trying to somehow manipulate the numbers so that your trucking business can be viable with only 2 days a week work. Or your farm being reduced to 25% of the stock.

If you take away the debt, you take away the subsidy for energy inputs. Which is the subsidy for EVERYTHING. And when the trucks stop running ...

The words "will not be re-paid" and "some kind of debt forgiveness" sound the same to me.
Is the depression of fixed interest rates already evidence of this effect? If debt does not get repaid, isn't the effect a decrease in net interest rates? What happens when a debtor dies? The debt gets "forgiven". Anyone who's (been) mucked around on Harmoney and suffered a defaulter knows this. What happens to your personal RAR? It goes down. Thankfully it doesn't stay down forever and reverts to some mean value, if your loan portfolio is big enough.

I don't anticipate all-out war will occur, since it's not economical to do so.
I think what will happen, is that people will continue to move from poorer countries to wealthier countries, and that is something that people will have to accept.

Question - does an expectation of capital gain have an impact? It seems that many thought that a significant driver, and there is a belief that at least in AK, there is a portion of the residential properties owned by investors, but not rented - effectively land banked. I guess two + questions; is it a part of the picture in AK and is it in Sydney? if they are different why?

The expectation of capital gain is what defines a bubble.
A correctly priced asset should be heavily anchored to it's (low risk) current and future period yields. When the pricing reflects (inherently volatile) capital gains is when it ventures into bubble territory.

So not accommodation pressures driving the prices? Sort of goes against what is being said above isn't it?

I suggest that the drivers for these sort of things are fairly complex, and disregarding one would be a risky exercise. Imbalance would be a factor, but would need to be quantified and understood to properly measure the impact?

My Framework For Spotting Bubbles
https://vimeo.com/280727225/6e6ed02e58

Also, this sort of behaviour. Properties in Auckland that were flipped a number of times in a very short time ...

https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=116...