Fed on path to 'normalisation'; US Federal deficit jumps by a third; US home loan rates breach 5%; China expands TBTF resilience; equity markets tumble; UST 10yr at 3.23%; oil down, gold holds; NZ$1 = 64.7 USc; TWI-5 = 68.8

Fed on path to 'normalisation'; US Federal deficit jumps by a third; US home loan rates breach 5%; China expands TBTF resilience; equity markets tumble; UST 10yr at 3.23%; oil down, gold holds; NZ$1 = 64.7 USc; TWI-5 = 68.8

Here's our summary of key events overnight that affect New Zealand, with news equity markets are falling in a sharp case of risk aversion due to rising interest rates.

Overnight, New York Fed President John Williams said he expects the Federal Reserve to return its target interest rate to normal or neutral levels within “the next year or so.” He said that once rates were at a normal level, then the Fed would be well positioned to respond to surprises - either inflationary, or a softening in the economy - that may require raising or lowering rates. But he didn't suggest what the 'normal' rate range is.

While the Fed may not be artificially stimulating the American economy, Congress certainly is and at a faster rate. US Federal deficit for the full year to September has come in at an enormous -US$900 bln, 35% higher than the -$665.8 bln in the previous budget year. The political will to control these exploding deficits has evaporated. For perspective, the US federal deficit has risen from -3.4% of GDP in the year to September 2017, to -4.3% in the year to September 2018. This debt binge is unprecedented, accentuated by large corporate tax cuts. At the current rate of deficit spending it will be -5.5% of GDP in twelve months, and rising. Almost certainly it is past a sustainable rate with interest payments now taking a bigger slice of their spending than even what is spent on Defense. And of course, rising interest rates just exposes the issue to a bigger, earlier shock. Confidence could leak away quickly when markets take fright.

American producer prices rose +2.6% in the year to September, just marginally lower than market forecasts. That is down from +2.8% in August.

Meanwhile data on wholesale trade came in pretty much as expected, but wholesale inventories have been revised significantly higher and for August showed the biggest jump in nearly five years. Inventories rising faster than sales means there will be a production pullback soon.

In the giant US home loan market, rates for a standard 30 yr loan topped 5% last week and a new seven year high. More, the rate jumped +9 bps in a week. But demand was down with new applications falling.

In China, they are about to expand the list of too-big-to-fail companies and financial institutions. That will require them to raise much larger capital buffers, and comes as concerns mount about the resilience of those institutions in their economy.

Yesterday, the Shanghai stock exchange index eked out a small rise. That is in stark contrast to what is happening on Wall Street this morning where investors are fleeing risk and the S&P500 has tumbled -1.9%, the NASDAQ more than -2%. Earlier, European markets all dropped about -2% as well.

In its latest Global Financial Stability Report issued overnight, the IMF has fingered Australia for risks to their economy from bulging household debt and high house prices. But New Zealand doesn't get any mention of that concern. When New Zealand does get mentioned, it is about our low government debt levels compared to most other countries.

The UST 10yr yield is higher today at 3.23%. Their 2-10 curve is now at +33 bps. The Aussie Govt 10yr is at 2.77% and down -1 bp from this time yesterday. The China 10yr is at 3.63%, down -2 bps, while the NZ Govt 10yr is at 2.69%, unchanged.

Gold is at US$1,189/oz this morning, another small +US$2 rise overnight.

US oil prices are down by about -US$2 today at just over US$73/bbl. The Brent benchmark is now just over US$83/bbl.

The Kiwi dollar is starting today at 64.7 64.9 USc having firmed a little in the past 24 hours. Oddly, we aren't yet a victim of that risk aversion this time around - so far at least. It is the greenback that has fallen. On the cross rates we are at 91.2 AUc and at 56.1 euro cents. That leaves the TWI-5 at 68.8 and unchanged since yesterday.

Bitcoin is now at US$6,528 and that is a tiny slip of less than +1% overnight. This rate is charted in the exchange rate set below.

This chart is animated here.

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

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For those that have an interest in yield curves or would like to learn a bit more. Good article from Jeremy Warner of the Telegraph


'the IMF has fingered Australia for risks to their economy from bulging household debt and high house prices. But New Zealand doesn't get any mention of that concern.

Hi David - I think that that might have something to do with Australia having the 14th largest GDP in the world and therefore posing a bigger systemic risk to the banking and financial sector - they're worth mentioning. New Zealand doesn't even feature in the top 50 so our household indebtedness poses more of a risk to ourselves than to anyone else.


Not having anything invested in shares I decided to put my entire KiwiSaver into the highest risk fund which is mostly shares I think. You know, because of all the hype recently about not actively managing your Kiwisaver investment. Now it's dropping like a stone. Not feeling much love for shares at the moment...

It may take some getting used to as it's such a liquid investment. With rental property you have no idea if your portfolio dropped by 1% yesterday. Liquidity is a good thing, but it can be psychologically damaging if you concentrate on the day by day value too much.

High growth funds are for long term investing.. like 8years minimum. Pays not to check to often, and you've just hit a rough patch.

My money is in conservative. It could get a lot worse if the credit bubble starts deflating.

When kiwisaver first came out, it was right before the GFC. The panic of "Losing money" over that period hit a real concern for the validity of kiwisaver. Since then we've seen Greece bail out and a massive tumble from the Shanghai market, all having an impact on share investments.

Those who continued to invest money have seen great gains since. Looking back 10 years, the peak before GFC in terms of market price seems like a low price. The bottom seems like amazin buying.

So long as you've got the time to continue investing and enjoying the benefits of dollar cost averaging, you shouldn't be too concerned. If you need the money in the next 5 years, you should probably be looking at less risky options than a growth fund.

It's the nature of growth stocks, you will have days when they drop.

No you didn't Zachary. You're too heavilly into Spruiking property for that!

I fell victim to the Share Spruikers!

Anyway, going to hang in there as I believe if you are going to invest in something you shouldn't panic at the first patch of trouble. If you think you will panic you should pull out before there is any trouble.

I have been actively diversifying this year.

Does that mean selling up in Auckland and buying in Dunedin?

Zachary, did you honestly think shares would just keep on rising? Banking equity by selling the family home and moving into one of your rentals was certainly a sly move I'll give you that. One way of avoiding CGT under the intent provision ;-)

Good on you, being over-exposed to a single asset class is risky. I'm going the other way and selling some shares to free up cash for a house.

If you did not know what the fund was made up of I have no sympathy. Actively managing your Kiwisaver investment means doing some research. But at least you have your property portfolio which should be gaining every year?

Not setting up a 'givealittle' page then?
I only seem to have a few options so put it all on red to win.

Obviously you are just being funny but the first rule of investing in shares is drip feed the money in. I know this won’t come naturally to property aficionados as you have to go balls in when doing property.

No, it isn't.

Given the sharemarket run since March 2009, an actuary would indicate investing at this point in cycle would be consistent with 0% returns with significant volatility over the next several years. The double top with rejection of new highs on the Dow Jones would indicate we are in for a wild ride over the next few years. The same should apply to the Auckland/ Tauranga/ Hamilton property markets.

Zachary , great to see you are diversified, can I interest you in some ostriches.?

The NZD was 64.7 at best at time of writing? Typo?

ah, yes it is. Thank you for spotting. When written it was 64.75, but has slipped a little since then.

Trump needs to see those corporate tax cuts start flowing through to higher wages. If the corporates don't start playing ball - he should threaten to endorse Sen. Warren's Accountable Capitalism Bill. Regardless the deficits, the Fed needs to do what it's doing and the executive needs to stay the course.

In catch up, our Government debt will too quickly explode as we get caught in the downdraft with spending commitments colliding with falling tax revenue and ever increasing Social Security payments. NZ is better positioned than a lot of other countries however, our biggest trading partners are coming unstuck big time and we will surely follow.

It seems the US has decided that rather than reduce government spending and/or increase taxes they will grow their way out of their debt problem. It's a bold move and it may or may not pay off. However, it requires no major increases in Fed spending for a better part of a decade. The good news for the US is that unemployment is at record lows and the economy is doing well. However, if that were to change (even a bit of a slow down not even a recession) then keeping government increases in spending low will be challenging to say the least.

Here we go folks, time to buckle up tight.

I'm loving it so far... Burn baby burn.

Housing market craps out - latest market news from REINZ:
Across the country 12 out of 16 regions saw a fall in volumes with 6 of those regions experiencing
double-digit decreases.
September (usually a winter recovery month) was the lowest level number of properties
sold since January this year, according to the latest data from the Real Estate Institute of New
Zealand (REINZ), source of the most complete and accurate real estate data in New Zealand.
The number of properties sold across the country fell from 5,674 in September 2017 to 5,506 in
September this year.

A drop of less than 200 compared to a year ago doesn't seem too dramatic. Gives me confidence if anything.

This September result despite banks offering negotiated 1 year fixed mortgage rates below 4% and a market swamped with stock.

I was pussled by the EUR going up and US-T 10 year yields going up, but it seems the entire European and Japanese banking systems have had their credit cards declined:

Astonishing, or what?

It is exactly as if I go to the bank to roll over a loan and they say,
"Sorry Mr Witherspoon, we're not happy to roll that loan over at the old rate. We want you to pay off that loan but as you're a good customer we are willing to roll it over this time, but the rate will have to be significantly higher." Effectively that is what JP Morgan are saying to Deutsche bank.

Great link, Roger. I've followed David Goldman since 9/11, have a couple of his books, and he's always worth reading. Plus, if you can read between the lines and have the capacity to do so, his ruminations are worth Acting on.

Thanks Waymad. I find that high level banking stuff hard to follow, and I only ever understand a part of it, but it does seem it is the hidden world that drives everything else.

Aha, looking on Wiki it seems he and Spengler are one and the same....

Did you see my comment to Roelof at yesterdays 90@9?

In a credit based system the money has to be borrowed into existence to pay the interest on last years borrowing. The (western) consumer is the ultimate source of this borrowing, and the consumer seems to have had about enough. That borrowing, mostly against houses, is the real inside money. Well the loan document is, but only as long as the loan is serviced.

Hidden within that article is the comment that it is the interest on existing bonds that is getting hard to pay. Welll that might just be because new money isn't being borrowed into existence to pay it. I foresaw this outcome back in 2013 with my Quantity Theory of Money revision. Some of the detail wasn't known to me then. All of it still isn't, but it is making itself apparent as it happens.

It seems the US taxpayer can still at least pay at this time, it is the free lunch on top of a free lunch that is FX risk now unhedgeable that isn't so appetising. Suck it up, anyone in this position only has themselves to blame.

roger... I'm not so impressed with that article. He says :

Hedging the foreign exchange risk in this half-trillion-dollar per year business has exhausted the balance sheet of the global banking system.

Hedging is basically an insurance policy.. protecting an underlying asset. How on earth does this exhaust a Banks balance sheet..??
If the price of the hedge goes up, how is this any different to our house insurance costs going up..??
And then the author shifts to discussing FX derivatives in general... ( which includes speculative plays..etc..etc.. )

Also suggesting that this is the reason long term rates are rising.... is a little tenuous... in my view..

I'll have a crack at this. A hedge doesn't eliminate risk, it just transfers it. It is another bet, or derivative. Ask who the counterparty is? Why does the counterparty now want more to take on that risk?

He does point to a problem, but I agree he wanders all over the place without tracking back to the source of the problem clearly.

Scafie... That also what Insurance does...transfer risk.
Its not a bet , in this context.
The insurance company is my counterparty.... He assumes that risk , because in aggregate, only a few homes will be claimed against, and my premiums + plus all others more than covers that.

With insurance we don't jump up and down because of the total possible liability of the insurance industry??
$14 trillion of house insurance is not so different to $14 trillion in FX hedging.....as far as I know.

The article still bugs me and I will read it a few more time and ponder it for a bit. It was the interest payments on existing bonds that jumped out at me though, and adding that to the knowledge that the money supply rate of expansion is going down then it is certainly worth noting as a default risk. The swaps just sit in the middle of that process.

Worth keeping clear is that insurance is also unearned income. As the money supply tightens the supply of unearned income dries up with it. Working just on this principle, rather than specific detail, can help give context to certain flows drying up.

Having just read the breaking banner headline, I feel a Toothypointy moment coming

That's similar to a Minsky moment right?

Chinese stock markets could have a messy day today, given the huge amount of pledged stocks . Breakers will surely come into play.

Dow down 800+
I won't be the only one that shivers at "this week in October" given that it was Monday 19/10/87 that the start of the 25% fall kicked in. It's not that it's going to happen again, but that it could....And if it does, ALL assets are going to $zero for a while until the buyers return.
Economic fear is not having to sell at a loss, but having no one to sell to at all.

Oil prices are ‘entering the red zone,’ warns International Energy Agency chief
He added that expensive energy “is back at a bad time, when the global economy is losing momentum. We really need more oil...


Some of us like to buy distressed assets

During a market collapse there are often assets that aren't even distressed, just the investors involved in panic selling.

You're correct. Financial strong companies and businesses owned by highly leveraged owners.

For example take Berkshire Hathaway which is a financially strong and fiscally conservatively managed company.

Shareholders buy the shares of Berkshire Hathaway. The one key difference is how they pay for them. Some aggressive shareholders and investors may buy using lots of debt (say margin debt, or via a financial product which uses a lot of leverage such as contract for difference https://www.plus500.com/Instruments/BRK.B ). When the market value of the shares fall, the LVR breaches minimum levels by lenders and owners are then requested to make a margin call. If they do not have the cash or collateral then they may sell.

Many owners subject themselves to mark to market risk by using leverage and are unable to hold on in a downturn in price, causing leveraged shareholders to panic sell.

Seen it happen many many times. Will happen again. Makes for great investment opportunities for savvy well financed investors ...

Exactly. One man's up is another mans down. What is a problem for me may be an opportunity for you. There's always two sides to every situation. Fundamentally however, debt is chocking us. A bit like living in Beijing''s poisonous atmosphere. Or New Delhi's. It's hard to escape. Someone has to pay in the end. And their are many ways to pay. It's the story of human life really.