Gareth Vaughan on the central bank propping up a share market, an obituary for a failed presidency, trusts slipping through the crackdown cracks, the buy now pay later bubble & Iran's struggles with bitcoin mining

Gareth Vaughan on the central bank propping up a share market, an obituary for a failed presidency, trusts slipping through the crackdown cracks, the buy now pay later bubble & Iran's struggles with bitcoin mining

This Top 5 comes from interest.co.nz's Gareth Vaughan.

As always, we welcome your additions in the comments below or via email to david.chaston@interest.co.nz. And if you're interested in contributing the occasional Top 5 yourself, contact gareth.vaughan@interest.co.nz.

See all previous Top 5s here.

Given the inauguration of Joe Biden as the 46th President of the United States this week, I probably should be looking ahead to what we can expect in this new Biden era. But I can't help but take a last look back at the extraordinary Donald Trump presidency. 

Cartoon: Matt Wuerker, Politico.

1) Obituary for a failed presidency.

Donald Trump has left the building and his tumultuous term as US President is over. In The New Yorker Susan B Glasser has a superb obituary.

This bit really resonates with me.

And so we are ending these four years having learned not that Donald Trump is a bad man—the evidence of that was already voluminous and incontrovertible before he entered politics—but that there are millions of Americans who were willing to overthrow our constitutional system in order to keep him in power, who would follow Trump’s dark lies rather than acknowledge unwelcome truths.

During the 2016 presidential campaign I understood the legitimate frustration and anger many Americans felt towards the status quo and the establishment in a post Global Financial Crisis world. But what I couldn't get my head around was why anyone, if they'd done their homework on who and what Trump was, thought he could be a saviour. He was never going to be.

That said 74 million Americans voted for him in November last year after he'd been their president for four years. There'll be a whole range of reasons why, and a whole range of different types of people among them. I think it's fair to say things are going to remain interesting in the US for some time to come. And we'll be hearing plenty more about Trump and Trumpism.

There are some antecedents for Trump’s failures in the long record of American Presidents, of course. Woodrow Wilson botched the handling of a pandemic in 1918; L.B.J. and Richard Nixon lied to the American public about Vietnam and much else besides. Bill Clinton and Andrew Johnson were impeached; many Presidents were outright bigots and philanderers. But none before Trump was all of those things at once, and that in the end will be the lasting embarrassment that Trump bears with him to Mar-a-Lago.

On the eve of his Inauguration, exactly four years ago today, Trump attended a glittering fireworks display at the Lincoln Memorial. “We’re going to work together,” he said. “We are going to make America great again—and, I’ll add, greater than ever before.” History will be brutally clear on this: he did not.

A friend in the US also sent me this article, by Timothy Snyder, the Levin professor of history at Yale University. It includes this cracker paragraph.

Post-truth is pre-fascism, and Trump has been our post-truth president. When we give up on truth, we concede power to those with the wealth and charisma to create spectacle in its place. Without agreement about some basic facts, citizens cannot form the civil society that would allow them to defend themselves. If we lose the institutions that produce facts that are pertinent to us, then we tend to wallow in attractive abstractions and fictions. Truth defends itself particularly poorly when there is not very much of it around, and the era of Trump — like the era of Vladimir Putin in Russia — is one of the decline of local news. Social media is no substitute: It supercharges the mental habits by which we seek emotional stimulation and comfort, which means losing the distinction between what feels true and what actually is true.

2) Surprise, surprise: Trusts among the loopholes in a shell company crackdown.

In December the International Consortium of Investigative Journalists (ICIJ) cheered long awaited US anti-money laundering reforms. The ICIJ, at the forefront of Panama Papers revelations in 2016 and the FinCEN files last year, said laws to stop the use of US shell companies by terrorists, human traffickers, arms dealers and kleptocrats, were to be enacted after more than a decade of lobbying and politicking. And there was even bipartisan support.

However, with the benefit of a deeper look, the ICIJ's Spencer Woodman has found some loopholes, as there always seems to be. For example, the law doesn't apply to some hedge funds and private equity firms. Big companies are exempt too. 

And surprise, surprise, Woodman says trusts could slip through the cracks.

Trusts are a preferred means of conveying generational wealth — and sometimes to avoid taxes and to hide and launder money, as ICIJ has previously reported. They are murky legal creatures: often, composed mainly of a contract dictating how the wealth they hold will be allocated. It can be difficult to determine who technically owns a trust’s wealth before distributions are made, experts say. Unlike companies, trusts often do not register with any government.

The new law explicitly exempts certain types of charitable and semi-charitable trusts. Advocates are also concerned about the wider category of personal and family trusts slipping through the cracks because these entities might not fall into the new law’s definition of a “company.” For this reason, experts believe the new law could de facto exclude a wide swath of personal and family trusts.

“This is the biggest concern for me,” said Gary Kalman, the director of Transparency International’s United States office, adding that he believes that trusts are already one of the U.S.’s largest money laundering vulnerabilities. Kalman adds that it is possible that, during the implementation of the law, federal agencies could interpret its language to include some trusts — and the law mandates a study into problems that the lack of trust ownership information poses.

Regular interest.co.nz readers may recall our stories on the NZ Government's proposals to improve the transparency of the beneficial ownership of NZ companies and limited partnerships. They may also recall trusts will be excluded from these. That's even though the NZ Police acknowledge trusts as an extremely attractive vehicle for money launderers and terrorism financiers to use to hide the identity of beneficial owners.

In terms of where the NZ Government is at with plans to improve beneficial ownership transparency, I asked a spokeswoman for new Commerce and Consumer Affairs Minister David Clark just before Christmas.

The project was delayed pre-lockdown while funding issues were being worked through. While there has been some progress on this work, the incoming Government is yet to make a decision on its relative priority. Decisions are expected in early 2021.

3) The buy now pay later bubble – unregulated and unprofitable.

Grant Halverson, CEO of retail banking and payments consultancy McLean Roche in Melbourne, has taken to LinkedIn to have a good crack at the buy now pay later sector (BNPL), and the unwillingness of Aussie regulators to regulate the sector.

Halverson goes as far as comparing BNPL later with collapsed German payments company Wirecard, and highlights the huge share market valuations BNPL companies enjoy.

Buy Now Pay Later (BNPL) has been hailed as one of Australian greatest innovations, yet the ‘industry' is totally unregulated and protected by fawning politicians – just as Wirecard Germany was – will this massive bubble end up the same?

Australia’s BNPL sector has 8 ASX listed stocks making no profits – yet have combined market cap of US$35.75 billion (A$45.8 billion) making one of the biggest tech bubbles globally. Total Revenues are a modest $891 million with 16.2 million ‘customers’ in 11 markets.

Among other things, he sees a bad debts problem.

Australian BNPL apps have excessively high bad debts and this is the key risk, along with longer term funding risks. The Australian sector has average bad debts of 30% of revenue which is four times higher than European BNPLs.

BNPL Fintechs do not use retail bank measures for bad debts - which use receivables as the key measure - as applied to personal loans, credit cards or auto loans. BNPLs instead use bad debts as a percent of sales, as this measure lowers bad debts substantially – yet bad debts are the biggest single expense.

Ultimately Halverson warns the bubble may burst in a costly manner.

The risk for Australian and global investors is if BNPL's US$35 billion bubble bursts it will be 3 times higher than Wirecard which cost investors US$12.5 billion - watch this space.

Here in NZ the Government is considering including BNPL merchant fees in its planned regulation of broader merchant service fees. You can see details on NZ BNPL service providers here.

4) A central bank propping up its country's share market.

With super low interest rates and a central bank undertaking quantitative easing (QE), it's often said that New Zealand's now following in the footsteps of a path well trodden by Japan. So it's interesting to hear that the Bank of Japan is reviewing its policies. 

Here RBNZ QE could see our central bank holding up to 60% of government bonds on issue. Aside from holding a huge volume of government bonds, in Japan these days the central bank is also a major equities holder via exchange-traded funds (ETFs) with holdings valued at ¥35 trillion yen (about NZ$468 billion). That's somewhere in the vicinity of 80% of Japan’s ETF market.

The bank in November became the biggest single owner of Japanese equities and criticism is mounting that it is needlessly propping up a stock market trading around a 30-year high, while complicating any future normalization of policy.

"The BOJ will probably adjust its buying in a way that can’t be seen as a retreat from monetary easing, considering the ETF purchases can fuel too much bullish market sentiment,” said Shinichiro Kobayashi, chief economist at Mitsubishi UFJ Research & Consulting.

As at September last year, the Bank of Japan was the largest holder of Japanese government bonds with ¥542 trillion, accounting for 45.1% of the total outstanding. According to The Japan Times, the central bank’s total assets at September stood at about ¥690 trillion, exceeding Japan’s GDP.

Meanwhile, the suggestion has been made that the Bank of Japan might provide assistance to banks that lend to green and pro-digitalisation projects.

One creative step the BOJ could consider is paying interest to banks that lend to projects aimed at helping the economy become greener or more digitalized, former BOJ executive director Eiji Maeda said in a interview this week.

The Bank of Japan also has yield curve control targets of -0.1% for short-term interest rates and around 0% for 10-year bond yields.

5) Cryptocurrency mining blamed for Iranian electricity woes.

Iranian cities have recently been swamped by smog and hit by by blackouts. Bloomberg reports the use of low-quality fuel and power-sucking cryptocurrency mining are being blamed for these problems.

The outages have been compounded by the mining of Bitcoin and other cryptocurrencies, which uses banks of high-powered computers to verify the legitimacy of transactions and create units of digital coin, government officials have said.

U.S. sanctions that have isolated Iran from global financial institutions have fueled a surge in cryptocurrency mining in the Islamic Republic, which has some of the cheapest electricity in the world.

The strains on the electricity grid led the government to start cracking down on illegal mining operations, and about 6,000 mining machines were recently confiscated in Markazi province, the managing director of the Markazi Electricity Supply Co., told ISNA.

A spokesman for the country’s electricity industry apologized for the shutdowns on state TV and said power supplies to Bitcoin miners and industry have been strictly limited to meet domestic needs.

Dr Doom, Nouriel Roubini, is no fan of cryptocurrencies and is never someone to mince his words. Hence he took the opportunity of the recent bitcoin price fall to have another crack.

For those interested in a deep dive into curious goings on in bitcoin trading, this article may be of interest.

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43 Comments

Governments propping up markets with huge QE capital inflows, transferring wealth from the working poor to corporations and asset holders, creating an artificial representation of value at the expense of core services (health, education, housing) is just one of many reasons why Bitcoin will be a future reserve asset. It is immune from this behavior.

The real story about Iran isn't their teething problems getting their mining network up and running. It's that they're using BTC to undermine the greenback.

With renewables becoming cheaper by the day, the logical outcome is that mining in Iran will drive adoption of things like wind and solar. Short term pain, for long term gain.

The crypto narrative is exposing the inherant hypocrisy in the current system, from Janet Yellen acting like USD isn't the largest vehicle for criminal activity in the world, to us pointing fingers at Iran using fossil fuel electricity generation while Huntley stays open.

Check out this awesome fud busting podcast
[The Breakdown] The Definitive Breakdown of All Bitcoin FUD, With Dan Held #theBreakdown
https://podcastaddict.com/episode/117789796 via @PodcastAddict
Easily destroys all of the pathetic arguments against Bitcoin. great listen

So, the President was asked a perfectly fair question. Instead of answering it in good faith, he offered the same kind of nonsense complaint about the media that we all came to expect from Mr Trump.
So much for defending truth and defeating lies.
We're three days into the new administration, and we have already seen Mr Biden and Ms Psaki manipulating facts to suit their arguments.
Hopefully, now that inauguration week is out of the way, we can start to critique this presidency with the same rigour as the last one.

https://tinyurl.com/y2jz42z5

The Kafkaesque Imprisonment of Julian Assange Exposes U.S. Myths About Freedom and Tyranny

The real measure of how free is a society is not how its mainstream, well-behaved ruling class servants are treated, but the fate of its actual dissidents.

Only a tyrant like the resonating "Donald Trump is a bad man" would have a diet coke button. What came out when Billy Clinton pushed that button?

RE:4) A central bank propping up its country's share market.

QQE To The Moon, *Deflation* Returns to Japan Anyway

How corrupt that they still referred to bank reserves, the byproduct of every form of QE, including Japan’s QQE, as the “monetary base.” Technically true insofar as mainstream definitions go; however, since said definitions are half a century outdated this amounts to useless trivia intended to mislead the public.

Fed sets 0% reserve requirement ratio, urges banks to use capital, liquidity buffers to bolster lending in face of coronavirus

Not reserves and certainly not the expediently defined "monetary base" moniker - Fed and RBNZ.

Great stuff Audaxes. As the commentary alludes to, the Japanese people / private firms will not budge and spend like drunken sailors as the BoJ wants. Behavioral responses are a little different in NZ....for now.

How high do you want house prices to go? Inflating household debt to unsustainable levels is not the answer. The government should be using its fiscal capacity in supporting the economy. It could start by increasing benefit levels and that would help give to a boost to the economy and increase spending.
Giving money to people that are already well off does nothing to help, there is no trickle down effect, money in fact trickles upwards.

Gareth: We have seen too much focus on Trump himself (TDS) , which has taken us away from the bigger picture. Try this
https://geopoliticalfutures.com/understanding-trump/?tpa=Mzg3Mzk0YmYwMDY...

Electors didn’t just vote for Trump they voted as well for the Republican Party. And they voted that way because many would vote willy nilly, regardless of who the nominee was due to stalwart party membership or a historical imbedded uncompromising preference. And propping all that up is the corruption that underlies the USA political arena, federal,state, municipal whereby the snouts in the trough are better rewarded by a certain power flow, blue or red for instance.

I totally agree. The concern the Republicans have now are the illegal immigrants marching from Honduras and the enormous stimulus payouts, including $300 per child per month and $200 extra payout for SSI recipients. With the Dreamers now having a pathway to citizenship, more illegal immigrants will be heading to the non-wall.

(From your link)

Many politicians shape their beliefs to match the voters. Trump shaped his soul to validate and give hope to this era’s dispossessed – economically, socially and morally. More precisely, his soul remained what it always was: ruthlessly opportunistic.
Trump draws his power from two sources: speaking to the disenchanted and inciting his opponents to attack him. His great skill is in making himself so hated that everything revolves around him. A second impeachment plays right into his hands. But the Democrats have never understood Trump’s power. They think that beating him in an election and impeaching him defeats him.

In an era where ALL politicians are the same, Trump gave the disillusioned, hope. It didn't matter what he was. That he wasn't 'them' was all that mattered - and still does.
What better example do we see of the first line in that quote than our own Jacinda Ardern.
The question then become, "Who will be New Zealand's Trump?"

Yes. We sure need someone not of the tired old political class.

BNPL. Just another way to suck a percentage of money out of the system till they pop. More financial leeches.

It seems to me that many people rely on credit cards for consumption, not just for convenience, but also because of their debt-based lifestyles. BNPL provider AfterPay works better for the consumer than using a credit card as the short-term debt load is shifted to the seller. In terms of value to the consumer, AfterPay is a far better value proposition. Furthermore, the space is changing so fast that businesses will be able to implement their our BNPL solutions instead of third parties. https://www.smartcompany.com.au/industries/retail/limepay-21-million-pre...

Good points.
I don't see why BNPL is worse than credit cards and in some respects is better
I think one of the reason we load up on these things is that our cost of living is so high relative to our incomes.

BNPL is better for the consumer than using a credit card if you plan to clear your debt reasonably quickly. It's about shifting the cost of credit to merchants to some extent. The is represents a 'cost of sale' to the merchant that might be more effective than a discount or promotion.

Why is it better? If the balance of the credit card is cleared monthly there are no interest fees. BNPL is pandering to the "I want it now but can't afford it" segment of consumers. If you can't afford it - you don't need it, you just "want" it.
Many consumers are pretty illiterate when it comes to control of costs. Saw a woman yesterday use an EFTPOS card to buy a coffee - totally oblivious to the transaction cost the Bank will charge her (up to 50c) so her $5 coffee just went up by 10%..

I don't know who you bank with, but I've never paid an EFTPOS transaction fee in my life.

Why is it better?

Better for the consumer: no charges for purchases that can be paid later. BNPL is not designed for buying coffee or to run up expenses. As a tech solution, far better too.

Well done New Zealand. Time to start buying shares in ADT Inc....maybe start up a little side business importing wrought iron window bars, door gates and fence "razor rolls" from South Africa.

10
up

World leaders in high housing costs, child poverty and lame climate change responses.
Increasingly I am of the view that we should not blame our governments, rather we should blame ourselves.
We get what we want and deserve.

That is not a surprise of course.

Demographia's annual survey comes out tomorrow. NZ won't be looking good, again.

I imagine we will have worsened more than anywhere else.

And that data is from 2019. From 2019 to 2020 we had a nationwide average rent increase of 5.4% (with double digit rent increases in many areas of the country - see);

https://www.interest.co.nz/property/104729/average-rents-increased-more-...

And from 2020 to 2021, I'm guessing another double-digit increase in most centres as well. It would probably be fair to say there have been 20% on average rental price increases since this OECD report came out.

We are maintaining our world beater status for sure.

#rentcontrolnow.

On the flip side big increases in minimum wage too.

Truthfully Gareth I think many people who voted for Trump didn't really have many other options...and still don't. It looks like the US is beginning to ramp up its vaccination program now and hopefully this will provide some respite in public sentiment.

We're pinning all our hopes on a vaccine, but the reality is, it may not be the silver bullet we're looking for. There's a high probability Biden will die from COVID whilst in office.

EZY
What is a “high probability” in this case?
Better than 20%, 80%????

Let me Google that for you pedant8. Biden will turn 80 in office. With deadlier strains popping up, just do the math mate. It's not that hard really is it?

https://ourworldindata.org/mortality-risk-covid#case-fatality-rate-of-co...

The silver lining of that scenario is Kamala Harris will take the reins.

The silver lining of that scenario is Kamala Harris will take the reins.

I agree with Squishy...the DUMBster lost the election more than Biden won it. Biden will be tough to listen to for the next 4 years as he stumbles through his cue cards. Hopefully he can keep most of the spending progressives at bay as the country goes bankrupt. But at least he is someone who has more integrity and honesty in a day than the DUMBster will ever have in ten lifetimes.

11
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Trumps problem was that he wasn't an insider. Those on the liberal left may yet find themselves outnumbered.

Trump did some amazing things, in the Middle Eas,t with Nth Korea, he started to withdraw troops, he attacked the waste that is NATO, he was honest about lack of jobs, outsourcing production to the far east etc. Immigration and it's flow on to low wages and often associated high crime.

Trump used to be a Democrat and like many Americans he left the party when it became the party of the Elites and the liberal left, turning its back on working America. The MSM today is far removed from the reality of life in the USA for millions.

Entirely correct, Aj.

Particularly about the hook-swallowing media.

Donald Trump is a pampered little Richie Rich trust fund frat boy who has never done an honest day’s work in his life, and never even held a real job until he was in his 70s. A job he ignored in favor of playing golf.

Trump is corrupt and incompetent. He is a chronic narcissist with the grotesque sense of divine entitlement common among the born wealthy. That America’s brokest people — the red staters who are propped up by blue states — could claim he is one of them, or “a man of the people”, is as dishonest as it is stupid.

But Trump pandered to the red states fear of everyone and everything that isn’t exactly like themselves — everyone and everything that isn’t themselves — and stoked the hateful fires of racism and ignorance so beloved of evangelicals, conservatives, and Republicans.

While doing that he was cutting taxes for his rich cronies and shoving many billions of tax dollars into offshore accounts, courtesy of the out-of-sight-out-of-mind Stimulus Fund.

And of course there’s the “Chinese Democrat hoax virus” and his massive debts in Russia and China, among so much else.

Donald Trump was not only the worst so-called President in American history; he was a self-inflicted wound that may yet prove fatal. Any who defend him belong in prison or a padded cell.

"" the hateful fires of racism and ignorance so beloved of evangelicals"" - as a dedicated atheist I dispute your assertion. Evangelicals are ignorant that is obvious but why do you accuse them of racism? The opposite is the truth; for example just inspect the congregation at a typical JW meeting. The big message of the bible is all people being made by God and his loving everyone equally. That may be a load of rubbish to an atheist like myself but it is the basis of the belief of evangelists. It is the reason they spend time and effort evangelising.
After 50 years of determined atheism my deeply held views are being shaken by the modern intellectual argument that ethnicity matters more than equality.

...and there you have it. People believing DUMBty was a savior from reading the likes of murdoch scum media...or was it just fascist social media sheep sites? everyone with half a brain knows the DUMBster was a pathological liar. If you actually ever read msn or any other of hundreds of media sites besides fox entertainment you'd realise they pull their articles form hundreds of different media outletsand say where the article was sourced from at the very top of the article. It is up to you what you read. But if you only read murdoch lies, you would be believed into thinking that is the only thing out there and you just prove what an uneducated person you are. Incredibly uneducated way of going through life. Not saying they are perfect but at least they are not basing their stories on outright lies like fox and other murdoch scum media.
74 million people still voted for a person( impossible to call it a man), with not one positive character trait to benefit the world. But you don't need the media to tell you what sort of thing it was, you just have to listen for 5 minutes what actually driveled out of its mouth to realise there is no way an honorable or honest person could ever vote for that scum. And that's the scary part about it. People have no bullshit meter anymore. It is indeed a sad world with a failed education system that someone like trump would ever be voted in, in the first place. Just so very sad.
With social media pushing the lies day in and day out it is only a matter of time before we have another pre WWII Germany..and if you look at the extremism going on with the USA and the DUMBster followers you'd see they are getting closer and closer by the day.

Netflix doco on Trump is excellent to gain a feeling for the man.

So there, the mystery of rising prices of shares of power companies is solved.
More elecricity required by two new developments. Mining Bitcoins and increasing use of EVs.
Gonna buy more MCY, MEL, CEN, TrustPower, etc.

Central banks buying up government bonds is proof that they never needed to be issued in the first place and that they are just a subsidy to the finance industry.
Also neo-liberal governments and treasury departments such as ours here in NZ don't want us to understand that they are not financially constrained in their spending and so they issue bonds to give the impression that they are dependent upon the private sector for finance.
Our government is the source of our currency and as such it must always spend first before it can tax or borrow. Why do we tolerate our high levels of poverty, hunger and homelessness in this country, we should demand better of our government, but it wishes us to believe that it does not have money to tackle these problems.