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David Hargreaves looks to the second half of the year and beyond with a mixture of hope and trepidation

David Hargreaves looks to the second half of the year and beyond with a mixture of hope and trepidation

So, here we are, almost halfway through Covid Year Two. How has it been for you?

When we get to some time in June I like to do a half-term temperature check of how things are looking in New Zealand and the world and share my thoughts on this with you.

Last year's 'halfway' piece was published a day after New Zealand went to Alert Level 1 and so everything was 'open' again following the Great Lockdown - with the notable exception of our borders.

It's fascinating to look back just those short 12 months and realise how much has changed. That article in June last year was questioning how successfully we would be able to get get businesses up and running and taking in some money. 

The key thing at that point was whether people would spend. And they have done.

No tidal wave

The key to people being able to spend is that the jobs market has remained incredibly buoyant despite the savaging of the tourism sector. The tidal wave of job losses never eventuated.

It was timely for me to this week receive the New Zealand Institute of Economic Research's latest quarterly consensus forecasts.  These combine the forecasts of various major economists to produce average forecast figures. 

And it's pretty interesting and informative to compare the latest set of forecasts with the forecasts of a year ago, if we look at some of the 'big stuff'.

A year ago economists were forecasting an annual GDP outcome for the year to March 2021 of -9.0%. Ouch. The latest forecast is now suggesting -2.9% and the actual figure may well turn out a bit better than that. 

Then there is unemployment. A year ago the forecast for the unemployment rate at the end of the March quarter 2021 was 8.2%. The ACTUAL figure was 4.7%.

So, we've done a whole lot better than it looked as though we might. And the main reason for that is since the end of the big lockdown New Zealand has mostly been open for business and life has been 'normal', in so far as that's been possible.

We've been buying houses again

In fact, it's been so normal that Kiwis have once again been getting in a lather over houses, with a resultant 30% rise (give or take a few percentage points) in the country's house prices. And we did this one all by ourselves with minimal help from overseas buyers.

There can be no doubt at all that massive house price rises have done much to underpin public confidence and keep Kiwis spending. Also, as I've suggested before, I wonder whether we have in some way previously statistically under-counted just how much Kiwis normally spend when they are out of the country and therefore the amounts of money available to be spent domestically during the no-fly time are maybe greater than expected.

Anyway, it's all gone so much better than anybody had dared to hope.

All eyes now are on whether a mass vaccination programme can be successfully implemented by the end of this year. That's vital. Until that's done we remain vulnerable both health-wise and economically. Until we have some degree of Covid immunity, everything could yet go pear-shaped.

Clouds forming?

Assuming we can achieve wide-scale vaccination and begin to start easing our borders open during next year, how are we looking?

Well, for me, one of the fascinating things about this year and a half of Covid is the way in which one set of dark clouds on the horizon can be replaced by another. 

As we look out at the next six months, twelve months, 18 months, we can see a set of potential problems wholly different in nature to what we were looking at a year ago. 

Will Covid have a sting in the tale yet? Or more to the point, will the way global economies have reacted to Covid carry a sting in the tail?

I'm talking of course about the massive economic stimulus, the money that's been poured in by governments around the world and which has (significant parts of it anyway) been fed into bubbles. There's bubbles everywhere, whether we wish to talk about sharemarkets, property or cryptocurrencies. 

As I never tire of saying, to call something a bubble doesn't mean you think it's going to burst. Demonstrably bubbles can exist for a very long time and can reduce of their own accord without bursting. But the world is very vulnerable right now to another major episode of bubble-bursting.

And the potential catalyst? Inflation.

Yes, that forgotten thing. But, courtesy of the massive disruptions of Covid and global supply problems, there are pricing pressures everywhere.

Central banks remain adamant that these pricing pressures will abate. We can only hope that is the case.

Shock treatment

But wasn't the huge wave of 1970s inflation the result of (oil) supply shocks? Well, it's different now, the central bankers tell us. But is it? We will find out and maybe this time around inflation will yet again prove to be just a phantom as it has in some many recent years.

Worth keeping your eye on though.

You see, if price pressures were to persist, that would necessitate global rises in interest rates. And the combination of higher prices and higher interest rates would inevitably lead money to start flowing from some of those asset bubbles. The reason the money's in those asset bubbles in the first place is largely down to the low interest rates. 

So, if we start to see an outflow of money from various asset classes, well, TROUBLE.

Look, might not happen. But if anything's keeping me awake at night at the moment, that prospect is.

And remember, in this country, we've just added 30% on top of a housing market that was already unaffordable on an international basis.

The wishlist

Looking forward through the rest of this year and beyond then, what do we want and need to happen?

Well, priority number one would be that vaccination programme and moving towards opening up the country again.

Then we've got to hope that the global supply problems settle down and such inflation as we see does prove transitory. We should know the answer to that within the next six to 12 months.

We've got a lot to be thankful for. And hopefully that will continue to be the case. 

And as for any potential dark clouds on the horizon, well, what would life be if we didn't have something to worry about?

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30 Comments

Fed's creditability is at stake on Thursday's announcement.

“The idea that inflation is transitory, to me ... that one just doesn’t work the way I see the world,” said Jones, who added he feels the central bank’s inflation views put its credibility at risk.

https://www.cnbc.com/2021/06/14/paul-tudor-jones-says-bet-heavily-on-ev…

Besides if they say anything ( Real truth) other than what they have been saying uptill now market will react sharply.

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Everyone is in the 'don't bet against the Fed' trade. Everyone is also in the 'tapering QE is impossible everything must go up' trade.

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"we've just added 30% on top of a housing market that was already unaffordable on an international basis".

The higher house prices go, the messier is going to be when this housing Ponzi implodes under its own weight.

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Agree. Problem is that if you entertain all the different outcomes, you're looked at as someone who's a DGM (an immature term used in a society where independent thought is not admired). But in reality, accepting the probability of different outcomes is basic risk management.

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After the inflation is "transitory" lie is exposed for what it is, like clockwork the narrative will switch to the inflation being good for us.

The indebted need to be bailed out after all and the central bankers know exactly who to pickpocket.

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Nah, sounds a bit conspiracy theory to me. If inflation is not transitory (which is a bit 50/50 at the moment) then central banks will raise rates. Central banks are not responsible for saving the economy.

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Ahem
You should read the RBNZ mandate which was updated by the brilliant and outstanding finance minister

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They cannot get the borders open until a sufficient balance of NZrs are vaccinated. As well arrivals will require to be vaccinated. That should reduce the risk of an outbreak to the point that present MIQ facilities and procedures will be able to identify and contain one, hopefully. It is clear that the government, quite correctly, identified that our hospital system can barely cope with normal activities, but not an influx of CV19 patients. So, but bearing in mind that this is only my unqualified opinion, will the government let us know what the plan is in this regard for the foreseeable future. Many, many NZrs’ livelihoods are hanging out for this news.

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Surely once everyone over 18 has been offered the vaccine they will open the borders up to vaccinated people. Agree it would be nice for govt to confirm that.

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Seems the problem is vaccination reduces but doesn't eliminate your chance of catching it. If you do catch it you're less likely to have symptoms /complications, but are still carrying the disease. NZ can't afford to have 'carriers' come in until a decent proportion of our own population are vaccinated.

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Fully vaccinated people who have caught COVID also transmit it at about 80-90% less than someone who is unvaccinated.

And if they're spreading into a community that has 70% vaccination rates, outbreaks are naturally going to be small in nature, and realistically only amongst people who aren't vaccinated.

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The plan is to get as many people vaccinated then open back up. I think it will be Sept/Oct 2022. They will not be ready to open up by March 2022 & won't want to open up in winter. The question is by the time they get round to opening up in Sept/Oct 2022 will the pfizer vaccine stand up to all variants at that point in time. If the answer is no, then what happens then is anyone's guess. Maybe we stay closed forever? Maybe we give up.

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Sounds a bit pessimistic! My guess we will be vaccinated by summer. Well those that choose to be anyway.

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But that’s part of the problem. A lot people are already pessimistic and worse. Downright depressed, even desperate in cases. Mental health stats are already scary despite massaging and concealment by the MoH. I hope you are right. Next summer, NZ must re-open.

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It's only a pessimistic assessment if you ignore the data and vaccination rates

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The tidal wave of job losses never eventuated.

Well there were subsidies and the govt paid people's wages. The reality is that many h'holds are living close to the bone in terms of cash savings. Little saved for a rainy day. Research on ASB cash balances supports this.

But yes, there was no 'tidal wave'. But much will depend on consumer spending going forward. When (or if) people stop reaching for the 'nice to have' products on the shelves or start trading down, the impacts will be felt across the supply chain and the wider economy. Early days I suspect.

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Unfortunate, because CPI data is only updated quarterly in New Zealand, I suspect we are going to be in for a very nasty little surprise on the 16th of July.

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Inflation. Yes
Totally agree

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"There's bubbles everywhere, whether we wish to talk about sharemarkets, property or cryptocurrencies." One of these has burst - 2 to go!

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"So, if we start to see an outflow of money from various asset classes, well, TROUBLE."

TROUBLE or OPPORTUNITY? If inflation is due to supply chain constraints in the rest of the world, then there will be opportunity to profitably invest in locally sourced alternatives. If this occurs we would see the outflow of money from non-productive to productive assets.

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Inflation or not, there will be no serious adjustments to interest rates. Orr, Powell, whoever — they know that raising rates would precipitate chaos and they would be seen as responsible. Arse-covering is always, always priority number 1 for bureaucrats. Their arses will not be covered unless inflation reaches Zimbabwe/Venezuela levels. So it won’t happen.

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So the total holding of NZ government debt securities before 2020 was more or less static at ~80 billion for years. It's now approaching ~160 billion after 1 year (See RBNZ hD30.xlsx). Meanwhile the growth in private debt for housing has also exploded to all time highs, while at the same time debt growth for business has collapsed to all time lows (see RBNZ hc5.xlsx). This is not a sugar rush. It's more like a guy suffering a bullet wound to the stomach then snorting several lines of cocaine, doing some special K, poppers, ecstasy, having a few swigs of booze and then yelling "I feel great".

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Well said.

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"whether a mass vaccination programme can be successfully implemented"
I think that we already know the answer to this, and it ain't "at the head of the queue"

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The thing about queues is that everyone eventually gets served, it just might take a while.

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Unless the kitchen is closed/out of stock/sold out sign goes up.

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What we have is stagflation. A big increase in the price of consumer goods like houses, with no corresponding increase in economic output or incomes. A classic example was a young guy I declined to hire yesterday who thought I should pay him more than the going rate because he's just built a house at the top of the market. The income we can derive from his labour has barely changed in many years, and our customers wont pay more for the kind of services we provide, we test that regularly.

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Maybe you need to diversify your business to provide new services and find new customers, because eventually you will find you can't hire good staff and your business will stagnate.

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I didn't say my businesses weren't growing, they are - income is growing at 150% p.a., nor do we have problems finding staff. I was talking about the wider economy and I gave one example of a young man with unrealistic expectations who is caught in a stagflationary cycle. We can easily increase our businesses' share of the pie, but we can't increase prices beyond what the market will bear.

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I see more of this as the likely income. A generation who'll find that the economy can't support them and their million-dollar mortgages in any kind of style. A whole lot of people sitting on enormous paper wealth while living like paupers, for decades.

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