Here's our summary of key events overnight that affect New Zealand, with news a China dollar-debt crisis may have been sneaking up on us.
But first in the US, household indebtedness rose again in the September quarter, and across almost all types of borrowing. That is now almost 5 years of continuous rises, following almost five years of straight reductions. But at US $13.5 tln, this is now only +6.5% higher than the last peak ten years ago. Interestingly, mortgage debt is still -4.3% lower than in 2008. However other types of personal debt have climbed to more than +45% above its 2008 level to just under US$4 tln. But of course their economy has grown substantially in the past ten years, so household debt as a percentage of GDP has actually shrunk from 87% then to 66% today. (Equivalent New Zealand household debt levels are 76% on the same basis in 2018.)
US industrial production growth stalled in October but the result is probably better than it first appears. Car production was lower so that means there is strength in the rest of the American factory sector. Canadian factory sales edged higher in data released overnight.
Comments that were interpreted as dovish from the newly appointed vice-chairman of the US Fed saw the greenback fall and US benchmark interest rate yields fall. He said interest rates are at near 'neutral' levels which traders are interpreting as meaning the Fed may be near-done raising its policy rate. The next Fed review is on December 20, NZT.
Mexico however has moved again already. Today they raised their policy rate by +25 bps to 8.0%. They cited their new government's spending and stimulus programs that have driven down the value of the peso and raised the rate of inflation sharply. Mexican inflation is now at +5% and these new fiscal policies are expected to push it a lot higher.
And Indonesia has also raised its policy rate in a surprise move, upping it to 6.0%.
China holds about US$1+ tln of US Treasury securities and has about US$3 tln in foreign exchange reserves. All very impressive until you realise that it's private sector (mainly) owes about US$3 tln in US dollar-denominated debt. A falling yuan exchange rate to the US dollar, or a rise in US benchmark interest rate will hurt. Both at the same time would hurt even more. Analysts are now worrying about a dollar debt crisis in China.
The UST 10yr yield is ending the week at 3.07% and a net dip of -12 bps for the week. Their 2-10 curve is still at +26 bps however. The Aussie Govt 10yr is at 2.69% (down -6 bps over the week), the China Govt 10yr is at 3.37% and down -13 bps for the week, while the NZ Govt 10 yr is at 2.74% and down -8 bps over the week. New Zealand swap curve flattened this week with falling rates at the long end but little change at the short end. Local demand from our mortgage market may have kept it from slipping.
The VIX has risen slightly to over 19 this week. And it is still above its average over the past year of 15. And the Fear & Greed index has remained at the extreme end of the 'fear' side but has gotten a little less extreme in the past few days.
Gold is up +US$10 overnight to US$1,223/oz.
US oil prices are stable today at their new lower levels at just on US$56.50/bbl. That is a -$US3.50/bbl weekly change. The Brent benchmark is now over US$66.50/bbl also a pullback from this time last week. Oddly, the US rig count is still holding high this week despite these low prices.
The Kiwi dollar is ending the week +1½ c stronger again at 68.8 USc. These gains are accumulating; in three weeks the NZD has gained +10% against the USD. On the cross rates we are also firmer at 93.8 AUc, and stronger at 60.3 euro cents. That puts the TWI-5 at back up to 73.1 ending the week at its highest level since June.
Bitcoin is now at US$5,556 and unchanged from where we left it yesterday. This rate is charted in the exchange rate set below.
The easiest place to stay up with event risk today is by following our Economic Calendar here ».
Daily exchange rates
Select chart tabs
39 Comments
Prior to its collapse, Mainzeal's board had been counting on receiving cash injections from its Chinese parent company, Richina.
These never came and, coupled with a raft of problems like expensive leaky building claims and projects running millions of dollars over budget, Mainzeal went under.
Justice Cooke disagreed with Mr Hodder's assertion that there was no conflict of interest on Mainzeal's board, pointing out that the director Richard Yan was also the controller shareholder of Richina.
Sounds like the J would agree with you.
Ireland v New Zealand a comparison by Digital Finance Analytics
Interesting video Nic and a fairly vigorous analysis of the property market fundamentals in NZ! Other interesting data points of comparison would have been rental yield and proportion of investor activity.
Another interesting parallel is that in Ireland price decreases were tiny (some could even call them "oscillations") of only 0.6% in March 2007, and of 0.8% in April 2007. The peak to trough was 6 years but it started out with something that looked quite stable.
The boom phases between NZ and Ireland have similarities, however, Ireland's crash ultimately coincided with the GFC. So, we can say that NZ is looking very vulnerable to a crash but have we experienced a trigger?
We will know soon enough whether the foreign "marginal buyer" theory turns out to be correct.
I’m not in the “crash” camp and as you suggest – I currently don’t see the obvious trigger to cause one.
But I do see a softening in prices – especially Auckland.
With the auction rate of success numbers coming out of late (along with anecdotal chatter) the market is clearly out of equilibrium – not for lack of willing sellers or buyers – price appears the problem.
Could be totally wrong – but I think you may already be starting to see some of the impact of the removal of the foreign “marginal buyer” - obviously very early days.
Caught me with my feet up Nic so watched the clip all the way through – again, the big factors in terms of market impact over the next few months will continue to be the removal of the marginal buyer and tighter credit conditions – others, such as lower immigration, increasing supply etc etc still muddling along.
Those Irish new build numbers were certainly out there!
I think sellers will eventually start to capitulate in the first half of next year and prices will slowly start to more truly reflect NZ incomes and financial wherewithal – especially Auckland.
I'm curious about what effect the Australian downturn in property may have on the construction sector. I.e. they seem to have overbuilt in parts of Australia, and would a fall result in Kiwi workers from the construction sector there coming over to NZ to build instead?
I found the video to be a little bit of a nonsense...
eg...Leading into the crash Construction in Ireland was 11% of GDP.... in NZ its about 4% ( ie.. oversupply was new construction ..which is kinda like a lead weight on prices )
Irelands economy crashed ( gdp contracted by 14%, unemployment 16% ).
This probably had more to do with the whole "Celtic Tiger" paradigm. ( seeds of that were sown in the 1990s'). https://en.wikipedia.org/wiki/Celtic_Tiger
This video is like comparing the 36-30-36 measurements of a woman with a transexual....
ie.. measurements might be similar ....BUT...they are a world of difference..
just my view.. (I'm not saying that NZ does not have issues...)
I'd also add that no-one mentions the structural affect of the Auckland Unitary Plan. It resulted in a large one-off shift in land values...
Rodney Dickens talks about section prices http://www.sra.co.nz/pdf/DoTheObviousNov18.pdf
China sells goods offshore priced is US$. We buy Chinese products and China gets foreign currency mostly US$. Local Chinese companies selling goods need local currency, the Bank of China takes the US$ and converts it to yuan and gives to Chinese export companies, it then invests the US$ back into liquid US treasuries.
When a Chinese company needs to buy raw materials the Bank of China gives those companies US$ for their Yuan. The big expense for China is energy and the way around this is to get energy exporters to trade in Yuan which the BOC can print.
The crunch is being caused by banks unwilling to lend in this environment, it's the huge amount of ledger liabilities called Euro dollars in the unregulated shadow banking system, the great unknown. Who wants to take risk with unsecured loans at low interest rates?
Thats what makes this conversation so interesting, and why it's not in the MSM.
https://sputniknews.com/radio_double_down/201811131069763807-brent-crud…
China could never grow like it did, if it was dependent on US$, the US$'s are simply not there. China's growth was backed by Euro dollars and they were created as Milton Friedman said, ' at the stroke of a book keepers pen'.
China problems are Eurodollar problems.
"In other words, “stepped up support” for currency means reducing the reserve assets on the PBOC’s balance sheet (or, if you like, selling UST’s). Simple accounting requires either the PBOC to offset those losses with RMB program lending (which tends to be CNY negative), or to further shrink its liability side to match. Guess which one the central bank has chosen the past two years.
The RRR cut signals that the reserve problem therefore dollar problem is anticipated to grow worse. The PBOC is actually telling us that they expect in the months ahead the same or perhaps bigger commitment to “stepped up support.” CNY doesn’t need support if there is no worsening “capital outflow” situation of retreating eurodollar funding.
This will require more monetary contraction in bank reserves than we’ve already seen. The central bank is forecasting more problems ahead."
https://www.alhambrapartners.com/2018/10/08/china-reopens-with-another-…
Peking Review-Eurodollar and the Dollar Crisis
https://www.marxists.org/subject/china/peking-review/1973/PR1973-11b.htm
File it under “what were they thinking?” In March 2015, confronted by a severe external monetary squeeze, the PBOC made a truly radical choice. Maybe it was that for a few months anyway things looked a little better. The eurodollar system had practically melted down globally first on October 15, 2014 (collateral) and then in December 2014 and January 2015 culminating with the breaking of the Swiss National Bank. February and March 2015 were so much better by comparison.
Perhaps thinking that was the beginning of a recovery, at least an end to the squeeze, China’s central bank would decide beginning at that time over the rest of the year it would permit its asset side contraction (eurodollar problem) to visit domestically via its liability side. As I diagrammed earlier today, on the money side the level of bank reserves had to correspond proportionally. They shrunk precipitously.
http://www.talkmarkets.com/content/global-markets/not-a-good-start-for-…
When Nixon took the dollar off gold on August 15th 1971 he did not end the Bretton-Woods arrangement. On the contrary, he exacerbated the very same destructive effects that had forced him to renege on the promise to pay gold at a fixed exchange rate to the dollar in the first place. To fund wars and an ever expanding welfare state the custodian of the global reserve currency had fallen for the almost irresistible temptation to print excess dollars above and beyond what was prudent relative to bullion levels.
In the Bretton-Woods period dollars were pyramided on top of reserve gold holdings while another layer of fiduciary dollar claims were pyramided on top of the issued dollars in a fractional reserve banking system. In addition to this, Eurodollar claims abroad added another layer to the pyramiding of fiat money in the global reserve system. While a Eurodollar is in itself 100 per cent backed by actual dollars, further fiduciary claims to dollars, for which no dollars actually exists, are bread and butter in this system; hence the need for Federal Reserve SWAP lines in times of stress in financial markets.
The US dollar depreciated by 51 per cent from 1985 to 1987 and looked like it would break the back on the Japanese export miracle of the early 1980s. Not coincidentally, the global current account imbalance peaked in 1985 as the Plaza Accord got going.
Japanese authorities panicked as their export dependent economy essentially came to a halt in the first half of 1986 with the economy in recession and the exchange rate appreciating rapidly. A sizeable Keynesian “stimulus” package was introduced to substitute domestic demand for waning foreign demand. Policy interest rates were reduced by about 3 percentage points; a large fiscal package was introduced in 1987, despite the fact that the economy showed signs of a robust recovery. In response to free money and centralised demand management the economy was actually booming again by 1987. Unsurprisingly, the free money found its way into existing assets as investing for an uncertain future was less of an option. In any case, the once lucrative export sector had accumulated massive overcapacity so there were few easy profit opportunities to be found.\\\
http://bawerk.net/2015/07/27/chinas-unfortunate-dependence-on-the-eurod…
t is all a mirage though. Just as in Japan, the Chinese will not allow the market process to do its magic to get the economy back on a stable footing. Draconian measures to stop the recent stock market rout are a clear testimony of that. In other words, the Chinese economy will resemble that of Japan, and it will do so very soon, if it is not already there. Global commodity producers will be crushed and once again all the pundits proclaiming Chinese global dominance with the Yuan as the new world reserve currency will be put to shame. It will not happen; the “miracle” will turn into a nightmare.
Concluding remarks
Global “dollar” issuance looks like genuine demand based on prior production but it is not. Export powerhouses fall into the trap and think the domestic boom they are living through is because they are exceptional. Old socialist are celebrating the fact that alternative growth “models” can outpace freer societies in the west, but these are often nothing more than pragmatic command economies with little ability to change in times of hardship. Just as Japan thought they could go back to pre-Plaza Accord growth rates by holding on to the old ways in the 1990s, the Chinese will expect the growth miracle to return in 2016 with the “right” policies. It will not. China is heading straight into a zero growth environment, and will be mired there for years to come.
http://bawerk.net/2015/07/27/chinas-unfortunate-dependence-on-the-eurod…
Today we discuss the largest wholesale funding market in the world, the eurodollar market, and how its “normal” form of functioning has dramatically changed, causing all manner of problems in the global economy.
https://capitalistexploits.at/2016/12/eurodollar-market-not-working/
The Chinese government has sold its first dollar bond issue in thirteen years. Given that fact alone, the idea is causing more than a little confusion, perhaps consternation. Why now? What are they really up to? It seems as if it is contradictory, especially given China’s very public positions against the dollar as hegemonic reserve (the coming market for oil in CNY, for one).
There is no inconsistency here, though; there is instead the dollar rock meeting the economic hard place. The Chinese still need dollars, billions of them, hundreds of billions, in fact. They can’t just tomorrow decide to pay for everything that goes into China in RMB as the economy would immediately collapse. Dollar defaults would send shockwaves throughout the global system in a way that would make 2008 look pitifully small, and it would hit China the hardest.
The dollar short applies to China more than any other country on Earth. To pay for everything that has already made its way to that country, Chinese banks have had to borrow those dollars primarily from eurodollar banks trading on eurodollar markets. The liquidity provided by those eurodollar markets are the problem; it has made procuring dollars the Chinese need more difficult, expensive, and occasionally prone to drastic interruption (August 2015 & January 2016 more recently).
What do you do if you find yourself in that situation? You still need dollars, but it isn’t so easy anymore.
You do a couple of things, one of which is to work feverishly toward reducing any marginal need to transact in dollars. CNY for oil is one way, including getting repaid prior dollar loans from all across Africa in direct crude shipments, as are the small bilateral trade agreements signed between China and a number of other countries. Those, however, only marginally reduce China’s bogey, they do not get close to eliminating it.
https://www.cobdencentre.org/2017/10/jeffrey-p-snider-chinas-dedollar-b…
"When markets are booming and cheap Credit remains readily available, Wall Street is content to overlook operating cash flow and balance sheet/capital structure issues. Heck, a ton of money is made lending to, brokering loans for and providing investment banking services to big borrowers. That has been the case for the better part of the past decade (or three). No longer, it appears, as rather suddenly balance sheets and debt matter.
After ending 1994 with Total Liabilities (TL) of $158 billion (total equity $28bn), GE TL closed the nineties at $357 billion. Over the subsequent five boom years, TL increased to $382 billion, $425 billion, $507 billion, $563 billion and then 2004's $627 billion. TL peaked in Q2 2008 at $720 billion (total equity $127bn). A slimmed down GE ended Q3 2018 with TL of $263 billion supported by $48 billion of Total Equity. GE finished the quarter with Short-Term Debt of $15.2 billion and Long-Term Debt of $100 billion.
GE CDS (Credit default swap) prices surged 24 bps Friday and 86 bps for the week, to 259 bps. This was after beginning 2018 at 41 bps. It's worth noting that GE CDS closed this week at the highest level since the Fed "exit strategy" mini-panic back in 2011. But rather than commencing an exit from its bloated crisis-era balance sheet, the Fed proceeded over the next three years to double holdings again, to $4.5 TN. This extended GE's lease on life, along with the fortunes of scores of aggressive borrowers. Perhaps a $9.0 TN Fed balance sheet could save GE. "
http://creditbubblebulletin.blogspot.com/
Repo fails for Primary Dealers surged in September 2017, raising our first alarms that “something” eurodollar negative was in the works. According to TIC, that began to register in foreign repo/collateral by December. Since the end of November 2017, more than $200 billion has disappeared from “Other” foreign firms in the category of collateral held under repo.
The key difference this time, and what may have been the biggest shock this year, is that FOI’s, these other central banks, did nothing about it. They just let it happen, which may account for why the EM crisis/”rising dollar” (and gold) was so severe and condensed.
https://www.alhambrapartners.com/2018/11/16/tic-you-really-cant-say-eno…
The Economic Collapse Of China! Nightmare Scenario For Beijing
Roll up, roll up, get your fill of Doom Porn here. Why settle for one when you can titillate the senses with more than thirty videos?. Thrill to the creepy doom laden music and gasp at the high production values. Brought to you by Doctor Doom himself:
https://www.youtube.com/user/PeterSchiffChannel/videos
Advisory: Seek professional medical advice if you have a heart condition, liver complaints or are pregnant before viewing.
LOLZ @doomporn
You do have a point though Zach, if a person wants their bias confirmed, there is a youtube channel or blog for you online somewhere. No one lacks for bias confirmation anymore!
IMO It's probably best to absorb opinion/bias/news from the whole spectrum and try to take a balanced view based on all that. Andrewj does share some more mainstream links (like Bloomberg) but there is some pretty fringe stuff there too.
it will be interesting where the liquidity crisis is going to hurt most, Im not sure China won't pass a lot of the pain on.
Ridiculing me won't stop me. I just think you are stupid when you probably are not, just entrenched thinking.
Banks create credit but you gotta work to pay the interest, so let keep the OCR following along on the downhill.
Zachary Smith, your dismissive and overly simplistic quip reminded me of this famous comment ""There is no cause to worry. The high tide of prosperity will continue."... Sec. of Treasury, Andrew Mellon, September 1929.
Tomorrow, many will regret these renewed heights of complacency.
In Japan, they call it “the collapse of the ‘Chinese collapse’ theory.”
There seems to be a 'feels good' wishful thinking, will confirm everything we know to be true and right, aspect to the notion that China will economically collapse. The news has been reporting imminent collapse at least since 1990.
People may have been brainwashed to believe that communism must inevitably fail, that an economy cannot be guided by mere mortals but must let 'the force' guide it. This may not be true. The people accepted the idea that the West had found the only true way and thus "history had ended". It was only a matter of time before China got sucked into the vortex of truth and light.
This is challenging everything we hold dear. That along with rising inequality, rising poverty and homelessness, rising suicide, declining life expectancy and the breakdown of border security, which is really a breakdown of common sense.
My theory is that the Chinese leadership appear to have 'buy-in' from all classes of society which is the secret to this particular brand of socialism being successful. If they held a free election tomorrow the CCP would retain its power.
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.