Here's my Top 10 links from around the Internet at 10:00 am today in association with NZ Mint.
Bernard will be back with his version tomorrow.
As always, we welcome your additions in the comments below or via email to firstname.lastname@example.org.
A few days before Christmas 2009, dairy executive Alex Duncan stopped by the Auckland Airport bookshop at the start of his holiday and bought an orange A4 exercise book. Duncan, the general manager of strategy and economics at Fonterra ... had a lot on his mind. His wife was worried he would be mentally absent for most of the trip, so he promised to buy the notebook so he could jot down ideas and then forget about them. He and his wife were about to board a plane to Hawaii to spend the holidays with his daughter and son-in-law.
On his return in January 2010, the Fonterra strategy team of Duncan, Abhy Maharaj, Mike Cronin and Jonathan Mason met regularly at the company’s Auckland headquarters. The rest of the office staff were still on holidays, so the team of four turned up in T-shirts and sandals to toss around ideas. Duncan brought out the orange notebook. What if they could create a fund without voting rights for non-farmer shareholders? Farmers could trade their shares with other farmers or with non-farmer shareholders on the exchange at a price determined by the market, shifting the redemption risk to investors and off the Fonterra balance sheet.
The strategy team called Deutsche Bank’s Mike Roche and Brett Shepherd to see if it was possible. Nothing like it had ever been tried before but the pair were willing to give it a go. The plan became known as Project Hawaii.
2. Lifting all boats?
Gary Becker thinks he shows how the quest for profit improves human welfare. Competitive capitalism helps societies blunt the effects of racial discrimination he says. Private enterprise has eliminated the most abject poverty among more than a billion people in China, India, and other parts of Asia he says. Is he right?
The financial crisis and recession have led to a backlash against the profit motive and private enterprise. Left-of-center political parties have gained power and influence in France, Mexico, Greece, and other lands with the promise of much greater regulation of banks and other businesses, the renationalizing of some companies, and the constraint of profits through higher taxes and other ways. It is easy to sympathize with the hostility to banks that behaved (in retrospect) so foolishly, damaging everyone else as they took on excessive risk in their quest for greater profits.
One can also understand the general reaction against capitalism and “market failures” because commercial and investment banks were in the past a leading example of capitalism at work. Yet anyone concerned about the welfare of the poor and middle class should resist the temptation to attack competitive private enterprise and capitalism. (Monopolies and crony capitalism should always be deplored, of course.) Government failures also contributed in an important way to the financial crisis, as regulators failed to rein in the asset explosion of banks and households. Indeed, regulators often encouraged lending to lower-income families so they could buy houses with low down payments and assume large mortgages and ballooning interest payments.
But the main reason to defend competitive capitalism from the current attacks is the benefit it has bestowed over the past 150 years to every stratum of society, including the poor.
3. The World According to Xi
On November 15 Xi Jinping became General Secretary of the Chinese Communist Party and Chairman of the Central Military Commission, giving him supreme authority over China’s armed forces. Next March, he will become President of China as well. How does China’s new leader see the world, and how will he handle the country’s foreign policy?
China’s leaders approach power in a very different way than do political leaders in, say, the United States. American politicians must sell their ideas and values to voters; China’s leaders do not need to inform the press and the public directly about anything, including their foreign-policy positions. Indeed, with the notable exceptions of Mao Zedong and Deng Xiaoping, China’s leaders have seldom imposed their own personalities upon Chinese diplomacy.
When this generation assumes the mantle of leadership, its members will turn their passion and curiosity about knowledge and innovation into real work. They are surely willing to learn from the wider world as they seek to promote China’s national interests abroad and encourage gradual change at home. Like previous Chinese leaders, Xi firmly believes that the world should respect China’s authority to manage its own affairs.
Thus, he is willing to show diplomatic muscle if China is challenged on a core area of concern. His speech in Mexico in 2009 demonstrated this. “Some foreigners with full bellies and nothing better to do engage in finger-pointing at us,” he said. “First, China does not export revolution; second, it does not export famine and poverty; and, third, it does not mess around with you. So what else is there to say?”
This time last year, the [Australian] Reserve Bank delivered some Christmas cheer to home owners by cutting interest rates. And most economists think it will happen again this year given the sharp and worrying decline in the investment intentions of our mining bosses. Money markets are tipping an 83 per cent chance of a 25 basis point cut when the Reserve Bank board meets on Tuesday, a move that would result in the official cash rate falling to 3 per cent. This means cash rates would return to the emergency settings last seen at the depths of the global financial crisis.
5. 93% of us think we are above average
There is a growing trend in car insurance to price it based on your actual driving habits. Insurers currently use all sorts of proxies for risk - age, gender, home address, etc - but what if they had a record of your actual driving activity? In the US there are a number of such offers with years of experience. And the payoff? lower premiums - actually, significantly lower premiums. Being priced because you are in an 'insurers class' never feels very satisfactoiry to me. You just know you are subsidising others. Here is Randall Stross in the NY Times:
In 2010, Progressive introduced Snapshot, which, unlike a predecessor, is offered without a threat of penalizing incautious drivers. Participating customers who drive without alarming tendencies will receive a discount of up to 30 percent; those with poor driving habits simply do not receive the discount. The company says that more than half of Snapshot participants earn discounts, which average 10 percent annually.
The Snapshot device records the time of day and distance traveled, along with the vehicle’s speed, second by second. But Progressive deliberately left GPS out of the device so the car’s exact location is not known; otherwise, more drivers might be nervous about using it.
Beyond the banking world, a parallel universe of shadow banks has grown in the form of hedge funds and money market funds. They're outside the reach of conventional financial regulation, prompting authorities to plan introducing new rules to prevent the obscure sector from triggering a new financial crisis. But in doing so they risk drying up an important source of funding to banks and firms.
The stricter the regulations for normal banks, the more money migrates to the unregulated parts of the financial world. FSB Secretary General Andresen fears that investors will soon forget the potential consequences of risky deals with shadow banks. "And if regulations aren't in place by then, we could easily experience something similar to what happened in 2008."
7. Wealth effect
Accourding to the last financial statements issued, there were 1,435,793,000 shares issued by Fonterra. Last week, they issued 100,000,000 non-voting units @$5.50 each - 44% to foreigners, 66% to New Zealanders. The farmer-owned shares were valued by the company at $4.52 each. Now the new market says those 100,000,000 units are worth $6.85 each.
The willing-buyer/willing-seller situation suggests a huge wealth effect has been created. 1,435,793,000 times $6.85 = NZ$9.8 billion versus the NZ$6.5 billion the previous valuation worked out at. Dairy farmer wealth just looked it jumped NZ$3.3 billion.
I wonder what the banks think those farmer-owner shares are worth now?
8. Charlie Rose talks to Warren Buffett
Warren Buffett is a leading voice in the US to raise taxes on the wealthy. In this interview he lays out the case. He also talks about a number of other things in a pretty straightforward way.
What would you tell investors?
Overwhelmingly, for people that can invest over time, equities are the best place to put their money.
Bonds might be the worst place to put their money. They are paying very, very little, and they’re denominated in a currency that will probably decline in value. Other than that, they’re terrific.
You’re adept at valuing companies. Why are you so good at it?
I only get into situations where I know the value. There are thousands of companies whose value I don’t know. But I know the ones that I know. And incidentally, you don’t pinpoint things. If somebody walks in this door and they weigh between 300 and 350 pounds, I don’t need to say they weigh 327 to say that they’re fat.
9. Making things in New Zealand
Matt Nolan at TVHE has pointed to some recent reviews done by the RBNZ on the state of manufacturing in New Zealand. Some interesting stuff in the Report, well worth the read. It paints a picture much more nuanced than "it's the exchange rate wot done it'. Good summary from TVHE (here, but without the emoticons or numbering system):
Now, what comes out of this research? Employment fell during the GFC, and hasn’t recovered. Productivity has risen. Exporting sectors have done well, due to their exposure to Australia. The low NZ$ to Aussie and a strong Aussie market for plant and machinery (think fridges as much as capital equipment ) have helped out even as global demand has been weak. Import competiting sectors have been hit – as imported capital equipment, and imported consumer goods, have been cheap. This is a story of the high dollar, and potentially “overcapacity” overseas. Construction, and the related drop in domestic demand for manufactured goods (think furniture and hardware as well – a retail area that has been gutted), has had a major impact. Although manufacturing is currently close to where we would expect given construction – during the deepest parts of the crisis it was worse.
These trends are important to note. It is construction exposed industries that have struggled the most – not firms looking to export (although this is definitely not to suggest that there have been difficulties for exporters – after all, this is a massive global slowdown). Painting it this way shows that the “solution” to any perceived “problem” is unlikely to be as clear as some people writing articles are keen to suggest.
10. Baltic Dry update
The last time we checked this 'canary' was September 5 and it was bumping along at a low 669. Now it is 400+ points higher, a solid rise in 3 months. World trade has picked up, it seems.