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Monday's Top 10 with NZ Mint: Project Hawaii; Defending competitive capitalism; How shadow banks rule the world; A big wealth effect; NZ manufacturing; Baltic Dry update; Dilbert

Monday's Top 10 with NZ Mint: Project Hawaii; Defending competitive capitalism; How shadow banks rule the world; A big wealth effect; NZ manufacturing; Baltic Dry update; Dilbert

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 bernard.hickey@interest.co.nz.

See all previous Top 10s here.

1. Project Hawaii 
Sephen Shore at the AFR has a nice summary of how the TAF scheme was born.

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?”

4. A Christmas rate cut - in Australia
Tomorrow the RBA will meet and decide what to do with Aussie interest rates. Gareth Hutchens has been reading the tea leaves and he thinks they will cut.

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.

6. How shadow banks rule the world
Banks, regulators, politicians and economists are worried about the parallel universe that has developed beyond the major banks. Spiegel Online has the story:

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. 

Not bonds? 
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.

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27 Comments

#7 It's common to practice to undervalue IPO's and see a large early lift in capital gain. For every buyer there must be a seller. Great if you are first in.
Maggie Thatcher used this technique to great effect with UK state assets in the 80's.
Cheers

You need to move a large amount of shares in a short period of time to ensure that you raise all the capital that you planned.  The only way to do this is to offer the shares at a discount or else why would anyone buy into an IPO, they would simply buy off the open market. 
 
The bounce on this IPO however is a little out of proportion and should drop back a little. 

#2  "s the benefit it has bestowed over the past 150 years to every stratum of society, including the poor".
Actually, it was the increasing supply of energy both total and per-head, plus efficiencies.
So expect more poor, and poorer rich.
 
#10 - haw about comparing that graph to the period 2005-8, David? It's a valid indicator, one of the best; but you have to see the long trail, not the clip. We types always said there'd be a saw-tooth on the way down.

And why was there an increasing supply of energy?  Because capitalism allowed people to develop the capital necessary to utilise the various forms of energy.  It didn't happen by magic.

Actually governments too played a primary role in allowing humanity to harness fossil fuels over the past 300 years. Capitalism is such a misnomer. One can't argue that an economy where fully 40% of its economy is composed of government activity can be honestly described as capitalist can you? And thats a historically low proportion in historical terms, because in times past public capital investment and miitary spending was far greater. 
 

#2.  .. it was the increasing supply of energy ..
We did a worldwide experiment that disproves this idea.
 
We lowered the cost of energy for all government and commerce systems that were being run in the world over a long period of time. Regardless that energy was made cheaper for all not every system bestowed measurable material benefits to every stratum of society, including the poor.  In some there was no measurable material at all.
 
The results showed that whilst not by any means a perfect system the capitalistic based systems consistently produced more material benefit to a wider part of society than all other systems.  Central command economies and dictatorial governments that did not respect property rights or subscribe to the other principles of western capitalism did worst of all.

Capitalism was just a  way we found for the most efficient extraction of a one time resource.
The Q is was it the best? consider that future generations will now have far less than us.
In any event I suspect capitalism wont survive as such moving forward, but you are right the others were worse....I dont know where we are going but it wont be business as usual.
regards

@WEALTH EFFECT , Dont Bank on the valuation being placed on these Fonterra shares remaining at this level . The spread indicates an unwillingness to accept the low rates of Treasury  Gilts and vanilla bank deposits. The market is starved of reasonably yielding investments.
This valuation is simply indicative of a highly liquid Market that is starved of decent yields , because  there are not too many places for investors to put their money .
The other thing is that there is a correlation between this takeup of the issue and the ever increasing value of the Kiwi$. Foreing buyers get both a good yield and potentially a currency gain .
A columnist in the NBR has gone on about the Money Ferris Wheel ( consequence of loose monetary polic ) that is pushing equities, bonds and even property,   ever higher  

How do we know there is going to be a good yeild. Fonterra claims it is a cooperative, therefore its primary responsibility is maximise return to farmer shareholders and owners (be they the ever increasing number of Queen St and foreign, or traditional), and this is done through milk price, wether return be attributed to commodity or value add, the common denominator being milk.
The fact is the bulk of that $6.88 value was created in the 100 years leading up to the formation of Fonterra. The govt and financial advisors think that value is better managed individually than under a cooperative structure. Of course it won't be used to bid up farmland beyond productive value or anything shortsighted like that.

#7 What matters is real wealth. It is very difficult to value "things" today and yields are negative in a lot of cases. This is part of the reason people are starting to hoard monetary metals. In my view this will increase as their is no way for states to retire debt. Gobal liquidity will increase at a compounding rate as they try to inflate debt away.
For people trying to save in the traditional sense it is a minefield. The word "investment" has almost lost it's meaning.
I maintain that in general these undervalued IPO's are a good way for institutional investors to get good initial capital gain. At the expense of later purchasers.
Cheers

#1.  Project "Hawaii."  Should be called project  "Shoot yourself in the foot."   It's another one where hard working New Zealanders do all the hard work of building a great business.   Then sell it off at a fraction of real value.  And steer carefully towards an improverished future.
And they asked Deutsche Bank if it was a good idea.  It was !!  Quelle suprise.  

Here is the 20 year Baltic Dry Index!
http://en.wikipedia.org/wiki/File:Baltic_Dry_Index.png

Stunning.
Everyone should look at that, and remember to question all selected data.
 
T'is quite a good measure, eh?
 
I turned to my better half, watching the China Olympics, and said "this is it - we have to be seeing the high-point of human activity".
 
I rest my case.

yes....2001 to 2006 expotential, peak oil and then the saw tooth...
ouch
regards

congrats, you get my post of the month award.
:]
Even this early in the month I dont think anyone can beat it.
(and maybe this year)
regards

No 10....santas deliveries?

Belle - that would be the present.
The index tracks the past
:)

Anyone know what has become of Gummy Bear Hero? Haven't seen any comments from him in ages...

I was wondering myself...hope he's OK.
regards

I'm sure he's OK Steven, but following Darth into the Deathstar is in essence his Destiny, to bring Vader back from the dark side remains the ongoing mission.
 Unfortunately he seems to have taken some of the light from this place with him, I been stumbling around here bumping my head a little to much in the gloom.
 Stay well.

He's ever-present .. a GBH comment popped up in the NZ Herald in reponse to Bernard's Motor-Mower article.

DavidC for someone who's site is littered with charts....I would have hoped you wouldnt cherry pick....
Do a 1 year trend line on that data alone....I suspect its negative...prove me wrong.
Then look at sore loser's 20 year.
regards
 

David is making a very simple point. An index with a base of 500 points has lifted 400 points, from 600, in less the 3 months. That is quite a lift.

Looking at the last 28 years the Baltic index has spent very little time below 1000 so being still below that level indicates we are experiencing the low points of the last 28 years so the rise whilst welcome is just spin as many would recognise that a lower tax take locally and globally indicates less economic activity. Economists and some journos fail to look at the big signals because they are absorbed by the noise others have a specific agenda.

#1
Oh! you poor people having to work all those hours no wonder you are all paid squillions
 
#2
I am rich and you are poor.
Now i am half rich and you are half poor
Well done capitalism, we have all been lifted to half poor

That chart Baltic Dry posted by "Learn to Social' is one of those wonky ones.  The vertical axis is "adjusted".   Allow for that and if shows even more dramatically than it's current visual presentation.  (16000 is shown as only four times 1000)   ---  The rise 02 to 07 was actually four times as extreme than first visual expression indicates.  And same for the fall
http://en.wikipedia.org/wiki/File:Baltic_Dry_Index.png

You are quite right. If you want to see a true representation of how unbelievably depressed the BDI actually is (compared to the pre-GFC levels) then look here:
http://investmenttools.com/futures/bdi_baltic_dry_index.htm
 
I do not see the point in Mr Chaston's highlighting the BDI measure in this top 10 - it is clear from the above 10 year chart that the BDI is bouncing along a bottom. Looking at a 6 month chart and making claims of recovery is nonsensical.

Days to the General Election: 26
See Party Policies here. Party Lists here.