By Bernard Hickey
New Zealanders and their fund managers just can't seem to stomach investing in big, hairy and risky long-term privately funded infrastructure projects.
The failure this week of Pacific Fibre to convince local investors to stump up most of the required NZ$500 million to build a second optic fibre cable to Australia and America is symptomatic of economies with ageing populations and shriveling appetites for riskier, long term projects.
As savers get older they get more conservative and they want their assets to be more liquid.
That's understandable. Savers nearing or in retirement have to worry that they don't have a lot of time to make up for any sharp slump in the value of any asset.
They also want to know that if they need a hip replacement or to draw down quickly on their savings that they can pull their money out quickly.
That tends to drive older investors towards more liquid and lower risk investments such as bonds, and particularly, government bonds.
This tendency of ageing investors towards investing in governments and government guaranteed deposits is all fine and dandy when they make up a relatively small part of the investing population.
But when the relative size of this population starts to have a heavier weight and the markets for riskier assets such as shares are volatile for a long time then the world has a problem.
All around the world this problem is bogging down economies, driving down growth rates and increasing unemployment.
Companies and the investors behind them are reluctant to invest in longer term risky projects, and it's not just because they are uncertain about the economic outlook.
This drying up of investment appetites is structural. In demographic terms, the 'pig' of the baby boomer cohort of the population is moving through the 'python' of the investment landscape.
During the 1980s through to the mid-2000s this generation were keener to invest in shares and riskier assets because they were younger and less risk averse. That helped fuel the stock market booms of the mid 1980s and the late 1990s.
But now this 'pig' is moving into the bond-investing part of the life cycle and, even more frustratingly, have seen the intense volatility of the last four years as the catalyst to begin investing heavily in the safest type of investments, either government bonds or government guaranteed bank deposits.
When investors buy bonds they drive up the price, which pushes down the yeld.
This bond-buying and term depositing spree by New Zealand has driven New Zealand's 10 year government bond yield down from a high of 7% in March 2002 to 3.5% this week and lifted term deposits from NZ$44 billion to NZ$108 billion over the same period, even though 1 year term deposit rates have slumped from 8.7% in March 2008 to around 4.4% now.
But this problem is also an opportunity.
Countries like China that are serious about infrastructure investment with long investment horizons don't wait for investors get their mojo back or wait for a new generation to move through the 'python'. China's leaders simply borrow the money from its people at artificially low interest rates and invest in the roads, airports, houses, motorways and broadband infrastructure they needs.
New Zealand's leaders should do the same.
And the government doesn't even have to rely on forcing interest rates on those bonds to artificiallly low levels. They are already low, thanks to the new old conservatism of the pig in our investment python.
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This column first appeared in The Herald on Sunday.
36 Comments
Invest in a “NZManufacturing culture”
The government must foremost invest in the younger generation, providing training and skill for the wider NZpopulation. The government has to accept, this cannot be done by currently allocating billions infrastructure needs (skilful jobs) to foreign companies/ countries.
Especially in sectors like energy and transport not only new NZ companies need to be developed, but existing ones need to be supported.
Skilful job creation for the wider population is a task for any government to run an economy successfully. Badly neglected by the current government – unfortunately.
I actually said the boomers were buying shares and other risky assets (which includes leveraged property) until the mid 2000s. After the mid 2000s as the baby boomers started retiring (ie Those born in 1945 are 60 in 2005) they started buying more bonds and investing in deposits.
It is really starting to drive through now.
cheers
Bernard
As iconoclast said "Can't let facts get in the way of fiction."
More "OPINION" from Bernard, NO FACTS.
Where is your evidence when you say
"I actually said the boomers were buying shares and other risky assets (which includes leveraged property) until the mid 2000s. After the mid 2000s as the baby boomers started retiring (ie Those born in 1945 are 60 in 2005) they started buying more bonds and investing in deposits."
I agree "don't let facts get in the way of ones over opinionated self indulgence"
Another infotainment piece. Selective memory. Aimed at the twitterati audience, who don't even come here.
An excellent topic. Needs to be discussed. If you don't present all aspects of the issue you run the risk of descending into the morass much of todays media is accused of. Instead of reporting the news, todays media IS the news. You are being ageist again.
Here are the aspects not discussed
- Since 1987 stock market crash, ALL world markets have recovered, except NZ. Why not? Research that and come back with an answer.
- The dark cloud hanging over the Fibre project is political which brings political risk
- Is new zealand still suffering from the US-NZ-Lange-ANZUS anti-nuclear tensions
- If the US is concerned why doesnt it cough up the funding
- Why doesn't China fund it.
- Given the above, local retail investors would be nuts to invest in the project.
- Maybe retail investors are smarter than you think and aren't going to be co-erced
Why didn't you mention any of that?
Which is more fundamental to this issue, Ageism? or Politics?
We just don't have the money full stop. We borrow to pay what is due today on past debt follies - ponzi finance. Equally the masses share of the GDP is shrinking and it would be unexpected for private enterprise to undertake such large high risk structures without a taxpayer underwrite - it hasn't been the case for a while - the extent of existing corporate strategy erects barriers to new entrants. They just cash up on past initiatives - as does Apple, USD 110 billion reserves.
iconoclast
To be fair, I have 600 words or so to talk about the issue and it has to be written for the broad Herald on Sunday Audience.
I agree retail investors are pretty smart. But they were never given a chance on this one. It wasn't going to go anywhere unless one of the big funds stumped up money.
Here's the San Francisco Federal Reserve research my thoughts are based on, largely:
http://www.frbsf.org/publications/economics/letter/2011/el2011-26.html
Historical data indicate a strong relationship between the age distribution of the U.S. population and stock market performance. A key demographic trend is the aging of the baby boom generation. As they reach retirement age, they are likely to shift from buying stocks to selling their equity holdings to finance retirement. Statistical models suggest that this shift could be a factor holding down equity valuations over the next two decades.
Bernard
You say: Your thoughts are based (largely) on the San Francisco Federal Reserve research
Historical data indicate a strong relationship between the age distribution of the U.S. population and stock market performance
That's a mistake. Basing opinions and conclusions on conditions not applicable in NZ.
Any analysis of that implies your audience is in the USA and they should be fixing NZ investment problems.
I say: Since 1987 stock market crash, ALL world markets have recovered, except NZ.
If you had an answer to that your article would have a different outcome. From memory, that guy from Milford Asset Management has discoursed on the matter a few times.
Jeepers Bernard. Did you you write that with a straight face?
And the government doesn't even have to rely on forcing interest rates on those bonds to artificiallly low levels. They are already low, thanks to the new old conservatism of the pig in our investment python
Bazooka Bernanke with his near zero interest rates. Japan with their near zero interest rates. Nah they can't have anything to do with it.
Bailout Bollard, the New Zealand Parliament property investors friend, and his dropping of the OCR?
Overseas investors looking for a bolthole with a bit more interest than Bazooka Bernanke's?
Nah. Can't be any of those.
Good to see you have some consistency and are still blaming the boomers. Keep it up. Beats intelligent analysis when you can come out with such comic relief. Thanks.
Any sane investor?
Spoken to any investors in Xero lately?
Or how about the early investors in TradeMe? Or even the ones in the IPO.
They took big hairy risks on the same people and ideas in this plan and it paid off.
When are New Zealanders going to look for an investment choice beyond a 2 bedroom brick and tile bought with a 90% LVR loan?
cheers
Bernard
Or how about the early investors in TradeMe?
Weren't they Morgan Family and close business associates? - it would be illuminating to discuss Morgan senior's relationship with Fay Richwhite. Or am I totally unable to question the source and veracity of one's wealth?
I similarly unearthed the original permission from an RBNZ research document, If I remember correctly, which authorised NZers to freely trade the NZD in the forex market. - It was difficult to lose money because, at the time, the government was officially devaluing the NZD against the trade weighted basket of currencies. Stealing from a baby would have been more demanding.
Bernard - How can you compare these projects? Xero and Trademe were not large infrastructural projects. The start-up Capital requirements were significantly smaller and income was able to be generated from the early stages.
BIg hairy risks are taken by everyone entering into business. If your heart is not pounding, and your stress levels not elevated you will not have the necessary drive and determination to carry the project through.
This group knows what the problems are and if they want investors they will have to show that they can solve the problems. You have to get over the hurdles to get to the finishing line.
It is natural for the Baby-boomers to take a cautious approach to investing as many have been bitten by the failed Finance Companies. They know they misplaced their trust and they wont make the same error again.
Another Sick Sunday Splurge.
Borrowing from, Bernard?
The past?
Nope.
The present?
Nope.
The future, then .
Did they sign up? You're happily handing them a depleted planet, a polluted planet, and now want to hand them the debt for having had it done to them in a faster manner?
Not much different from fraud.
In fact, no different.
Shame.
Kind of agree and not agree.
For not agree, my reasoning is; the big problem is determining the eventual steady state and the level / complexity of technology that will allow.
For instance for "renewable/green" projects such as say electrifying the main line, yes I'd take 10 year debt on that because such a line of communication is essential...assuming we will still have electric trains of course (but I cant see why not, the tech isnt complex)....if not then no point.
Unlike pollution and depletion though the debt is make believe, I certainly dont think worrying about debt thats sourced globally is much of a worry. When globalisation goes bye bye, who cares about 1s and 0s? and sending them back?
For agree, Yes I think its wrong to sign ppl up, even those not born yet for the future debt especially when they earnings will be compromised. So I think right now our present debt isnt cleared until 2050? Much of that because we voted in a National Govn that promised to give us our money back, or a Labour Govn spending on social engineering....both are / were clearly, incompetant...
Fraud, yes well morally bankrupt at any rate.....Interesting thing I see in here is so many like say OMG who deny anything like AGW is possible....its not reasoned....sad really.
regards
The cable is an interesting thing, the problem is really no guarantee in price and hence a return, the bad world of "competition" was mentioned....
There would seem to be no point in suggesting the Govn cough the difference up anyway, the USA wont allow that cable to come ashore on US soil I assume....not unless its American tech end to end....
Its also not something that is directly stimulating in terms of local / NZ jobs....
regards
FYI from a reader via email:
Love your site, read it everyday. Given your thoughts on baby boomers etc I thought you might find the attached interesting. http://www.resourceinvestor.com/2012/07/30/surviving-the-great-bust-ahead-harry-dent Whether the problem is too much debt, rising property prices or AGW the underlying issue is matching population and its changes with available resources. That’s why NZ needs to review urgently its immigration policy. Does NZ have the resources now or in the near future to support its present population and changing demographic? Without major new economic resources I doubt it and consequently a fall in wealth per capita is inevitable. Importing more “tax payers” cant be done unless NZ grows its total income. More immigrants initially put pressure on housing but long term reduces the wealth of the existing population unless the economy grows to pay for the increased population. GDP is such a woeful measure of economic activity. Concentrating on Government debt level only and not the total public and private debt is misleading. Both have to be supported by the country’s ability to pay. The Govt needs to act more quickly on population, if Australia’s economy slows and we are flooded by Nzers returning home because they cant get the dole in Oz then we will have much higher unemployment levels and the cost will borne by all of NZ.Funny given how bad the private sector is....lets not forget Enron for one.
All Muldoon did was look ahead and end up being 20 to 30 years to early, but given the ineptitude of our present Govns that might save our collective ass. Given the rising costs of fuel and its probable scarcity in the future, I would hope we will.
regards
I agree.
People keep saying that the private sector is more efficient and profitable than the state.
So
Was Pike River more efficient and profitable than all of the Solid energy mines before the fire?
Is Contact Energy more efficient and profitable than all of the State run energy companies?
Then there is Kiwibank and so on and so on
And what about Co-ops are they badly run?
Too many people are too bogged down in their own ideology to see the truth.
Hence you have to go looking for it yourself....which of course takes a lot of time on occasion.
I certianly think its hard to refute that generally the private sector isnt often more efficient when and IF you have a true open, flat and competitive market (sadly that seems rare) and in a production line type situation (ie repetitive).
When it comes to resiliance of course thats costs money and its less optimised/efficient...and then businesses are not well set up for ot to scale for this, Govn's are.....
regards
FYI from a reader via email:
Hi Bernard, good on you for all your research and commentary. I have been checking out your website for a while now (years) and I often read the comments below your articles. Some extreme views there and that is good to see. I could go on for ages about a lot of things, but I thought I might just share a couple of my observations. I stress - observations - not theories or rules. The first struck me about 2005, when I felt uncomfortable about all these super successful people doing really well, all fuelled by debt. How can this be? I often pondered. So debt is a tool? After all, I had a mortgage, just like my parents. My sister informed me at a family lunch that she was to buy a set of flats. The deal was awesome as it would be negatively geared. She can claim a tax refund. Fantastic. For 30 years she will top up $100 per week. Even better, it was interest only. I tried and I tried to explain that this was BAD. At the end of 30 years she still had to pay the purchase price. Ah! but we will refinance - brilliant again. Rates and insurance and maintenance... I asked. "Oh, that's not much". As a last resort, I offered her a deal: Pay me $100pw for the next 30 years and in 30 years I will buy the flats from the owner at market plus 10% and give to you. And with the money left I will buy the next door house for myself. I was of course just trying to make a point. But she ignored all my advice based on the principal (sheep) that "everybody else was doing it so it must be right". Fortunately, she did not proceed after going to a seminar, that explained exactly what I had told her!!!! In 2008 however, she baled me up and said I owe her $140,000, that being the difference between the asking price of $460k in 2006 and the 2007 new CV of $600k. So I explained that CV was probably 10% over. take off agents fees for selling, the interest etc etc etc, and I asked her for $20k that I felt she was better off for NOT buying. All this and many other scenarios that I had seen just reinforced the following understanding. I believe there are four types of money, call it a money quadrant. 1. NOW money. cash/credit that you can consume right now. 2. REAL money. Sum of your assets ie wealth. 3. FUTURE money. future earnings/rents, inheritance, etc. 4. IMAGINARY money. capital gains, assumed returns dividends. N | F R | I It seemed to me that the boom times have experts converting everyday peoples FUTURE and IMAGINARY aspirations into REAL and NOW money for themselves. I am talking about the self interested parties like estate agents, banks, lawyers, valuers etc. I do not use the term "Mums and Dads" as I find it a ridiculous generalisation. I think that is what has pretty much been the case. My next observation is that most people are actually quite dumb in a lot of ways, which may be related to the sheep mentality mentioned above. I am quite OK to be placed into this category, but I do like to think I have my eyes open in this regard. I do however think that this is all quite normal and fine in a lot of ways. Financiers talk in their own language and then invent all sorts of distortions so that even they cannot unwind or understand what they have done. CDO, CDS, derivatives, hypothecation... blah blah blah. How that hell are we supposed to work with all that rubbish, when all we want to do is go to work and earn an honest living and have a reasonably nice life. How about a little bit of honesty in this industry, but that is a question asked many times. How about some simplicity. The last observation is seen all around us all the time. I call it the minus 8 minus 8 rule (yes I said no rules before). That is, what does -8 - 8 =. Well of course it is -16. I was reviewing my then) 14yo son's homework and noticed that he was marked wrong for an equation -11 - 5. He had answered correctly that it was -16. He was told by the teacher that the answer was -6. I assumed that he had mistakenly penned the original equation, and that he should double check with the teacher the next day. It was confirmed that the question was -11 - 5, and the answer was -6. Double negatives do this we are told. I reassured my son that his first answer of -16 was in fact correct and we just left it there. But I did not really leave it there, as I tarted asking many people a simplified version. "What is -8 -8?". I was shocked at the results. I refer to it as a quantum question, as I ask people out of the blue and they assume it is some trick. At least half of the people get it wrong. Of those who get it right, I ask "are you sure?" with a smile. About half of those change to a wrong answer like +8, zero, or even +16. Of the ~25% that stick with the correct -16, I ask again "are you really sure, there is double negatives?". Again after this third question, 50% of the 25% will change to a wrong answer. It is fun to try, maybe up in smarter Auckland, the results may vary (I am in Lower Hutt) but I am sure many human traits are at play here. Suggestive techniques, wanting to please the inquisitor, trickery (or assumption of), persuasion, gesturing. What I am saying is that we are being sold on an idea that the solution of debt is more debt. Yes -8 -8 = +16. My son (last year) defends a victim of physical bullying and gets a detention for his efforts. He gets bullied himself, and injured - goes to "mediation" and told that he must stay away from the bully. -8 -8 again. We are about to sell the best state assets that can pay off our debt, -8 -8 again. Increase class sizes for a better education, -8 -8. Allow farms to be sold to dodgy offshore firms, -8-8. Tax cuts to the rich and increase GST, we are all better off !!! -8-8. "Mums and Dads" who are the very ones with mortgages, told to but $2000 worth of shares - borrow to invest in shares. -8-8. The guy that does not give way at an intersection and then gives YOU the finger. -8-8. I find that we are surrounded in -8-8 every day, if only people could see it...... There we go, there is my rambling off my chest. Just a bit of fun. Cheers, and keep up your good work, Gordon
Well Bernard,
IMHO following the herd (US,UK,EU) and getting a little bit of their dust, is much more sensible than standing in their path and being mowed down.
Don't borrow it, print it!
Call it money printing , QE or using created money is OK if the cash ends up being used productively.
The side effect would be a better valuation of the currency which would be helpful in advancing the private sector to be more productive with more exports. It may even give a few overseas mainly Asian residential property speculators a shock
I do hope you didn't stay up Saturday night to write that piece of air plucked drivel Bernard.
Boomers gone off riskier investments..?....where were you in 87...? where were you in 97/98..? come to think of it where are you now......?
If you want unforced ( local) investment in infrastructure you need critical components known as incentive......and credible historical data.
Boomers may be senile but their long term memories for hands on hotplates don't appear to have diminished.
Please give examples of successful investment projects historicaly where Joe Public didn't get his ass handed to him...........minus the pants.
Pacific Fibre.....Drury and core investors made an extremely foreseeable error of judgement, clumsy for that level of entrepreneur.
The idiot Minister running off to China for the moolah would have to recieve an F in foreign affairs knowledge........let alone be apprised of events of March 2012 with the Australians in regard to concerns over Chinese input.
Hey bernard i was listening to Media Watch on the National program.
I see you were happy to go along with John Key's PR game over the unveiling of the new ChCh city plan. Good on you for helping John Key score some more brownie points.
Well Bernard you sent an emal demanding that the NBR be banned from other PM John Key lock outs because they would not go along with the PM's little PR scam.
Listening to it made me think off a little posh boy sulking
Well Bernard you sent an emal demanding that the NBR be banned from other PM John Key lock outs because they would not go along with the PM's little PR scam.
Ohh - is this a case of a servant of the entitled demanding their rights be re-affirmed?
Or just another instance of those "storm in a tea cup" situations.
Either way - fascinating.
Did you do that Bernard....? is that correct....? why has this thread dropped off the list so quickly......? Questions ....questions...?
Usually if the comment stream is flowing with interest it stays up....! do I smell a mouse..?
DId you really do that Bernard..?.....cooooome on matey...!
Well, lookee here christov: he did: the answers are always out there
http://www.nbr.co.nz/article/raw-data-bernard-hickeys-complaint-government-ck-125216
Internet's a real bugger isn't it. Comments aren't too kind. Get the DSM4 out.
Bernard is probably right about baby boomers getting risk averse but the bbs are not being very smart if they think long term debt at super low rates is a good investment even if the borrower is a Government that IS likely to pay its bills.
All the stuff about default Kiwi saver funds out performing because they are mostly invested in Govt stock misses the point about what will happen to the capital values of those bonds when interest rates do rise or we see more Sovereign strife. The performance so far has been because capital values have risen as interest rates fell. Cant fall any more as they are already Zero. The GFC was all about misspriced risk and the bond markets are that in spades.
The people who may be on to a winner are those buying Bunds in the expectation the Deutschmark will revalue significantly if and when the euro ceases to exist.
There is a lot more involved in NZer's lack of interest in investing in projects or much else, beyond property.. One is the history of investment disasters that goes back along way. From the companies that got wiped out completely in 87 to many jack up scams since, such as Feltex, Finance Companies of recent years,, many listed companies that have been run for the benefit of the major shareholders and execs at the cost of minority shareholders. There are many listed companies who shares have gone no where in decades. Property has been the one consistant positive and you have control over it. Not to say property will continue to do the same over the next decade.
The economic environment of the last 25 years or so has been one built of debt and central banks lowering interest rates and powering economies out of recessions. That method of economic management has come at the price of huge borrowing on speculation at the cost of saving for investment. I think the chickens are now coming how to roost. http://j.mp/L32BnJ
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