Gaynor calls for end to farm sales to foreigners; NZ's demographic crisis; Stocks underperform bonds in the long term; Nothing about that wedding; Dilbert galore
Here's my Top 10 links from around the Internet at 10am in association with NZ Mint.
I'll pop the extras into the comment stream. See all previous Top 10s here.
I welcome your additions in the comments below or via email to bernard.hickey@interest.co.nz.
I will not welcome any mention of this wedding thing in Britain. Interest.co.nz is officially a wedding-free zone this week.
1. Tenants in our own land - Brian Gaynor bravely came out against the sale of Crafar Farms to foreign interests in his column in Saturday's NZ Herald.
This is important because it's the first time I've seen a mainstream commentator say so directly that we have to end the process of selling our assets to foreigners to sustain our unsustainable spending.
Gaynor argues rightly that we used to have a domestically owned forestry and wood products industry.
Now we just have foreign owned forests, lots of log exports and locally owned sawmillers who can't get access to logs.
My views on this have hardened in recent months. This series of charts convinced me we have to stop selling our assets or we face an ultimately dispiriting march lower in our local income.
Here's Gaynor in the NZHerald.
He muddies the waters somewhat with a call to open up Fonterra's share register, but his point is well made.
Fonterra can either raise fresh capital from outside investors, while leaving farmers with majority control, or continue to hamstring management by insisting on 100 per cent farmer ownership.
If farmers adopt the latter approach, and farm ownership is opened up to foreign interests, we could see a repeat of the forestry sector's unfulfilled potential in which Chinese-owned farms would export low value product directly to China to the detriment of New Zealand's dairy industry, our domestic farmers and, ultimately, farm values.
2. Demographic crisis unfolding - Natalie Jackson from Waikato University tells Maria Slade at NZHerald that a demographic crisis is unfolding as our baby boomers age and the workers who are supposed to support them with taxes are leaving.
Professor Natalie Jackson says the downstream effects of New Zealand's baby boom will be more severe than in most other countries.
The post-war population burst was much greater here than in other places - New Zealand's baby-boom birth rate was 4.2 births per woman, compared with Australia's 3.6.
Added to that, the baby boomers were living much longer than anticipated and New Zealand had suffered a "bite" out of its 20- and 30-something population thanks to migration.
Businesses and government agencies tended to focus only on the particular demographic that affected them, the University of Waikato academic said. "But the whole age structure is the story ... There is a crisis unfolding."
Between 1996 and 2001, 24,000 young men and 12,000 young women disappeared from New Zealand's population because of migration.
3. Stocks aren't necessarily better - The theory that returns from stocks are always better than those from bonds or cash over the long term is ingrained into the thinking of every professional fund manager and many financial advisers.
You often hear the phrase it's 'time in the market' rather than 'timing the market' that allows stock investors to do better over the long run.
But US fund manager Rob Arnott from Research Affiliates writes that the S&P500 has underperformed bonds by 5% over the last 10 years and has only outperformed bonds by 0.53% over the last 30 years.
Arnott points out that 30 years is reasonably long term horizon for investors and questions the thinking about bonds being worse over the long run.
A 30-year stock market excess return of approximately zero is a huge disappointment to the legions of “stocks at any price” long-term investors. But it’s not the first extended drought. From 1803 to 1857, U.S. equities struggled; the stock investor would have received a third of the ending wealth of the bond investor.
Stocks managed to break even only in 1871. Most observers would be shocked to learn there was ever a 68-year stretch of stock market underperformance. After a 72-year bull market from 1857 through 1929, another dry spell ensued. From 1929 through 1949, stocks failed to match bonds, the only long-term shortfall in the Ibbotson time sample.
Perhaps it was the extraordinary period of history—The Great Depression and World War II— and the spectacular aftermath from 1950–1999, that lulled recent investors into a false sense of security regarding long-term equity performance.
In our view, a more normal economic environment would suggest 2–3%, which is the historic risk premium absent the rise in valuation multiples in the past 30 years. But these are not normal times. Today’s low starting yields, combined with the prospective challenges from our addiction to debt-financed consumption and aging population, would put us closer to 1% .
4. Russia's kleptocracy exposed - This is an extraordinary story from Jamison Firstone at Foreign Policy that exposes the depths of corruption at the heart of the Russian government. It's a stunning must-read for anyone with connections or trade with Russia. Here's the Barron's version of it, that's also shocking.
5. A strike in China - This is well worth watching. A rarity and on a large scale. Reuters reports truck drivers in Shanghai have protested for a third day, holding up operations at the world's busiest container port.
There are also widespread reports of crackdowns on dissidents and religious groups in China.
The strike is a very public demonstration of anger over rising consumer prices and fuel price increases in China. It comes as the government struggles to contain higher inflation, which hit 5.4 percent in March, fearful that rising prices could fuel protests like those that have rocked the Middle East.
A crowd of up to 600 people milled about outside an office of a logistics company near the Baoshan Port, one of the city's ports. Some threw rocks at trucks whose drivers had not joined in the strikes, breaking the windows of at least one truck. The strikers, many of them independent contractors who carry goods to and from the port, stopped work on Wednesday demanding the government do something about high fuel costs and what some called high fees charged by logistics firms, said the drivers, who clashed with police on Thursday.
China is especially wary about threats to social stability following online calls for Middle East-inspired "Jasmine Revolution" protests and has detained dozens of dissidents, including renowned artist Ai Weiwei.
6. Here's Paul Callaghan - This was his presentation at a recent Strategy NZ session.
7. Sweden's amazing strength - Sweden may be a member of the European Union, but has kept its own currency, like Britain. It's doing very well now. Its growth is strong, it has a budget surplus and falling unemployment.
Here's Sweden's Finance Minister Anders Borg, who has a ponytail and an ear ring. Dude.
Can you imagine Bill English with a ponytail and an ear ring?
He makes some very interesting points about the outlook for Europe and how America is operating in this interview in Foreign Policy.
You have three different things going on at the same time. One is a very strong recovery in Northern Europe. It is not only Sweden that is growing. Estonia, Poland, Finland: all of these countries are forecasted to have around 5 percent growth next year. Germany is obviously in a much stronger position. So, the northern part of Europe is growing very fast.
This could be an issue in a couple of years, because you still have a lot of problems in the south of Europe, which means that the [European Central Bank] will be very reluctant to raise interest rates. So there is a risk that we could have a more unbalanced development.
We have two really big problems to deal with: one is the banking sector. The recapitalization that is needed in Europe is substantial. Then you have the huge issue of public finances which is both shot-term and long-term. Short term, obviously it's Greece, Portugal, and Ireland. That could be dealt with. The governments are doing the right things. They are increasing VAT rates and the retirement age and so forth.
The other problem is that the whole of Europe is now indebted. So the room for stabilization policy in the next downturn will be very limited. We could have a very severe and harsh crisis the next time we see a slowdown in the world economy.
For us to say that we would ever be over-expansionary, would be very difficult. The U.S. can be very expansionary. You have 10 percent deficit and interest rates are still hovering around 1,2,3, percent. It's basically only the U.S. that could behave that way. For everybody else it would mean huge bond spreads. To my mind, the U.S. is saying to the rest of us that we should be more expansionary, but we're also on top of a huge U.S. debt. The markets will not punish the U.S., they will punish everybody else standing on top of that debt. I would be very cautious about running a huge debt like the U.S. because we are a small vulnerable country. That is true of many of these European countries.
8. Not so motivated - Alistair Helm has a useful piece over at Unconditional on how 'stressed' the property market is. He measures the amount of times the phrase 'must sell, desperate, urgent and motivated' are used by both sellers and searchers.
It shows a gradual decline over the last couple of years of interest by searchers, but not so much of a decline among listers in the last year or so. Here's our own chart of a housing stress index for listings on both realestate.co.nz and trademe.co.nz.
So it would seem that whilst the urgency of buyers to seek out properties whose vendors are experiencing pressure of mounting financial stress has declined markedly over the past 2 years the use of these key emotive phrases by real estate agents on behalf of clients has not diminished.
9. 'Don't rely on interest rates or Standard and Poor's' - Carmen Reinhart and Kenneth Rogoff wrote the seminal paper (and then book) on how growth in indebted economies is slower after a financial crisis.
Reinhart points out via this NYTimes blog that ratings agencies are not good at predicting sovereign debt crises, and neither are low interest rates. Those claiming, therefore, that America's AAA credit rating and its very low interest rates are a predictor that everything is alright and America can keep borrowing willy nilly should not be so relaxed.
In a recent interview, the financial crisis historian Carmen M. Reinhart said that ratings agencies had historically done a poor job at predicting sovereign debt defaults, currency collapses and other financial crises.
That is because, as she wrote in her paper, “Default, Currency Crises, and Sovereign Credit Ratings,” ratings agencies — like so many other professional forecasters — tend to focus on the wrong variables in calculating their ratings. In other words, S.&P.’s announcement may not actually tell us very much.
In other research Professor Reinhart has found that that interest rates are surprisingly bad at predicting debt crises in the near future. The painful rise in the cost of borrowing that is typical in a sovereign debt crisis often comes on extremely suddenly, Professor Reinhart says. (After all, the assumption that just because things have been trending a certain way for a long while means they will stay that way forever is exactly the kind of logic that led to the housing bubble.)
In other words, there are a lot of things to pay attention to when you are trying to predict whether the United States is likely to default. Unfortunately, despite what you may have read lately and seen in the markets, sovereign credit ratings and current interest rates may not actually lend you that much insight.
10. Totally excellent Clarke and Dawes - Bob Brown talks about the 'polluders'.
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