Thursday's Top 10 with NZ Mint: Reputation in ruins; dependency and house prices; exports; Siberian pipeline; household wealth; Dilbert, and more

Here's my Top 10 links from around the Internet at 10:00 am today in association with NZ Mint.

Bernard is on his summer break and will be back in late January 2013, from Wellington.

As always, we welcome your additions in the comments below or via email to

See all previous Top 10s here.

1. A swamp of scandal 
Deutsche Bank was once Germany's proudest financial institution. Now, though, the giant is facing myriad investigations, legal troubles, scandals and accusations of malfeasance. Its current leadership has pledged a new beginning, but several senior executives are tainted as well. Its reputation is in ruins, explains Speigel Online:

At 9 a.m. last Wednesday, Deutsche Bank co-CEO Jürgen Fitschen was sitting in his office on the executive floor at Deutsche Bank headquarters in Frankfurt. Fitschen, who has led Germany's largest bank together with Anshu Jain since May, was in a cheerful mood. That, though, was about to change. He didn't know yet what was happening on the ground floor of the twin, glass towers.

Some 20 police cars were parked in front of the entrance and later, a helicopter circled overhead, according to accounts given by bank employees. Hundreds of government officials crowded into the building while armed police officers secured the lobby.

When Fitschen heard that officials from the public prosecutor's office were in the building, he immediately wondered what the reason for the visit might be. But he didn't have long to think about it. Investigators were quick to make the trip to the top floors of the building where they informed the co-CEO of the reason for their visit.

Fitschen was told that he was under investigation for "severe tax evasion." He is said to have signed an erroneous tax declaration relating to value added taxes. The authorities searched Fitschen's office, sparsely furnished with a few pieces of furniture and a handful of exotic works of art, and then they left.

The raid was unprecedented. No German multinational had ever been subjected to quite the same level of public humiliation before. The Frankfurt public prosecutor's office had organized its raid on Deutsche Bank as though it were an organized crime sting. Five executives were arrested, several of them have been held in pre-trial detention since. One was allowed to go home for health reasons and the tabloid Bild reported on Wednesday that another has now been released as well.

2. Household net wealth
Earlier in December, the RBNZ released data that showed NZ average household net wealth rising 3.0% to $636,569 as at December 2011. Of that $442,788 was net equity in housing, or 70% of household net worth. With positive increases in housing during 2012, both these figues are bound to rise when the 2012 data is published in eleven months time. (Remember, these are averages not medians so they say nothing about distribution of that net wealth.)

However, data published today in Australia shows that Aussie household net wealth rose +6.6% in 2012 after falling -4.0% in 2011 2012, and by the end of December 2012 was AU$868,000 per household (NZ$1,1 million). New Zealand households did not suffer that decline in 2011, but we are still significantly behind those across the ditch.

3. Depressing?
Matt King, CitiBank's global head of credit strategy, has built some useful charts that plot the relationship between the dependency ratio and real house prices. The Dependency Ratio is the ratio of the population that is 0-14 years plus 65+ to the "working age population" 15-64 years.

It's what I like to call "the most depressing slide I've ever created." In almost every country you look at, the peak in real estate prices has coincided – give or take literally a couple of years – with the peak in the inverse dependency ratio (the proportion of population of working age relative to old and young). In the past, we all levered up, bought a big house, enjoyed capital gains tax-free, lived in the thing, and then, when the kids grew up and left home, we sold it to someone in our children's generation. Unfortunately, that doesn't work so well when there start to be more pensioners than workers.

So we have worked out the data for New Zealand, using REINZ median house price data, and StatisticNZ data for population, CPI, and dependency ratio (which they have estimated through 2030).

4. Today's raw market data ...
A quick holiday update:

as at 11:10am Today
9:00 am
Dec 24 Four
weeks ago
year ago
NZ$1 = US$ 0.8184 0.8240 0.8235 0.7739
NZ$1 = AU$ 0.7893 0.7927 0.7860 0.7621
TWI 73.40 73.75 73.62 69.10
Gold, US$/oz 1,660 1,694 1,615 1,613
Dow 13,119 13,139 13,022 12,287
Copper, US$/tonne 7,780 7,768 7,850 7,372
Volatility Index 19.16


15.06 21.91

5. deja vu all over again
China may be about to allow house prices rise - in fact, it may be about to start encouraging it. Here is the essence of a Bloomberg report:

The Ministry of Housing and Urban-Rural Development said today it will support “home improvement demand” next year, while keeping in place home-purchase limits to restrict speculation, the official Xinhua News Agency reported. The comments eased concerns that authorities may ramp up efforts to control the property market as home prices and sales rebound, according to CEBM Group, an advisory company.

“People are now thinking that the policy risk may not be as big as they worried it might be,” Luo Yu, CEBM’s Shanghai- based analyst, said by phone. “Should housing policy remain neutral, home sales would continue to rise.”

China’s new home prices rose in the majority of cities the government tracks in November as property curbs slowed construction, reducing the supply available for sale, and banks offered discounts on mortgage rates to first-home buyers. Prices climbed in 53 of the 70 cities tracked from the previous month, compared with 35 in October, according to data from the National Bureau of Statistics. That was the most in 18 months. Developers are depending on people seeking a bigger second home to sustain a recovery in sales next year, CEBM’s Luo said.

6. How important are exports? 
Here's some data that may surprise you. It's from the World Bank database for 2011. Exports are less or a proportion of GDP for New Zealand than many will realise.

Country Exports as a %
of GDP 
Brazil 12%
United States 14%
Japan 14%
Australia 21%
Greece 25%
France 27%
New Zealand                                   30%
China 31%
Canada 31%
UK 32%
Fiji 48%
Germany 50%
Denmark 53%
Korea 56%
Malaysia 92%

7. Night light
A Nasa photo (below) has sparked debate about the about of 'natural light polution'. It turns out to be both less than it first appears, and more. In just 13 days in October, fires consumed a chunk of real estate much larger than the sprawl of five major Australian cities. More here »

8. Russia targets oil sales to US
A new trans-Siberian oil pipeline aims to sell 35% of its deliveries to the US, 30% to Japan, and 28% to China. Russia does "not owe a single EU country a thing". More from the AFR:

Russian President Vladimir Putin has unveiled the final extension of a new $US25 billion oil pipeline to the Pacific that underscores the energy power's gradual shift away from stagnant European markets. The East Siberia-Pacific Ocean (ESPO) link is also expected to expand sales to the United States and fulfil Putin's dream of cementing Russia's place as a dominant force in international crude markets.

Moscow hopes to turn the price of oil transported through ESPO into a benchmark in the Asia-Pacific region that competes with West Texas Intermediate (WTI) – the US oil standard whose price some traders believe is too heavily based on domestic political factors.

But analysts worry that Russia may currently lack enough accessible oil in its underdeveloped East Siberia fields to keep the line fully flowing despite strong demand in China and Japan.

9. A holiday tradition?
Christmas carols for those in the finance industry - via FTAlphaville: an excerpt ...

Walking in a credit wonderland

High-yield bonds, are you listening?
Leveraged loans, covenants missing
A beautiful sight
We’re indebted tonight
Walking in a credit wonderland

Gone away is the default
Multiples, now exalt
Maturities extended
Covenants amended
Walking in a credit wonderland.

In the vacuum we can lever up
And pretend the risks have gone away
Just be sure to buy a national champion
With plenty of political sway!

Spanish banks now are ailing
But they daren’t attempt bail-in
The sub debt is cheap
The price discount is steep
Walking in a credit wonderland.

The risk department doesn’t like the name
They think they could be short liquidity
But the lenders can’t afford to lose their claim
They’d rather roll than have to face reality!

Never mind the balance sheet
Credit ratings? Obsolete!
Valuations misjudged
Capital needs soon fudged
Walking in a credit wonderland.

Four percent, ain’t it thrilling
Though your clients must be willing
We’ll load up the boat,
Defaults seem remote,
Walking in a credit wonderland.

10. Today's quote
"You aren't wealthy until you have something money can't buy." (assistance with attribution needed.)

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment or click on the "Register" link below a comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current Comment policy is here.


Re 6 Exports as % of GDP.

This only really tells half the story, Imports are another important factor.  You could have a country that exports nothing but imports nothing also; i.e. self sufficient.  It still may have a very succesfull or very poor economy depending on how well it is managed.  One thing is true however, if you need to import a lot of stuff then you need to at least balance that with exports.

If you plot those figures against %GNP growth rate per year there is a moderate correlation.  i.e. the more you export the faster you grow your economy.  (this is sort of what would you expect anyway) When you go through the list, consider the particular circumstances of each and their ecconomic outlook: exports are probably more important than my charting suggests.

Re 3.  The sooner house prices fall the better.  It might be depressing crooks in the funny money banking and credit buisnesses.  Others may view it as a well deserved come uppance.  The wisest thing we all can do is prepare ourselves accordingly and take it as a warning, to not get caught up in a property bubble.  One day the party will end.

# 10 : Troyal Garth Brooks ( US singer/song writer )

Well here you are - this is exactly what I said would happen. Foreign owned NZ farms will produce raw material for foreign owned factories and exported on foreign owned ships.

Chinese dairy firm Inner Mongolia Yili Industrial Group plans to spend $214 million building an infant formula plant in South Canterbury in a deal that will see it take over Oceania Dairy Group.

Yili will acquire Oceania to access its land resource consents to build a plant over 38 hectares in South Canterbury, according to a notice on the Shanghai Stock Exchange on December 18.

Is this such a bad thing?

The plant will provide construction jobs, and then production jobs in south canterbury....its value add over milk solids, tax will be paid etc....

We would be exporting our milk solids anyway.

Sure it would be better if it were NZ owned, I have to ask the Q why is no NZer doing this?



Depends on who you are steven. ;-)  As a Fonterra supplier I see no joy in Yilli's comment 'and indicated plans to draw on Fonterra Cooperative Group's regulated supply of raw milk'.  If Yilli keep their farmer milk supply below the DIRA minimum, Fonterra (as in me and my fellow shareholders) will forever be subsidising this new company.  Yilli will not be competing on the NZ domestic milk market and so there is no benefit to the NZ consumer.  The milk is already being processed by Synlait and exported, so nothing new and or special there.  Will Yilli be paying the same costs of tariffs to China to sell their product there as Fonterra?  Probably not as it is a Chinese company as opposed to a 'foreign owned' company.

It could be said the worst kept secret in the industry is that Fonterra's dairy farms in China have nothing to do with it's intention to build chinese milk supply but everything to do with the requirement to do so, in order to be allowed to continued to export milk powder in to China.  Some may call it being held to ransom by authorities, others may call it the 'the cost of doing business in China'.  So, what is the 'cost of doing business in NZ' going to be to Yilli?

Surely the answer to your last question is that 'they came, they tried, and they failed'.  Farmers can be a fickle lot. Certainty of supply of raw product is one of the biggest risks Yilli face on a medium term, unless they buy up farms.  But then if Fonterra shares continue to rise ($7.19 today) it may be Fonterra that has the milk redemption risk.

Will be interesting to see the finer detail of this buyout. 



They say:


"The cost of importing overseas milk is now even lower than collecting domestic ones," Zhang said.

"The original dairy source and quality control of dairy production abroad is much better and more reliable than products made in China," said Qu Yongxiang, an analyst at Guotai Junan Securities Co Ltd.

"It is a wise strategy that Yili has taken to expand the overseas market with buying a company with a full production chain and reliable sources to meet the increasing demands for imported products in China," Qu said.


The Shanghai-based Bright Dairy and Food, China's third-largest dairy producer, spent about 382 million yuan on a 51 percent stake in the New Zealand milk processor Synlait in 2010.

The company also recently announced that its profits increased by 44.1 percent year-on-year between July and September thanks to high brand loyalty among its customers in East China.

"The purchase behaviors of Bright and Yili Dairy show that Chinese dairy giants have the capacity to chase higher-quality and lower-cost dairy sources globally," said Zhao Jun, an analyst from Xiangcai Securities.

International Dairy Companies Face Obstacles to Entering China

Foreign firms see demand for their milk products in China, but are having trouble entering the market due to supermarket practices and underground importers


Fonterra Co-operative Group Ltd., one of the largest dairy companies in New Zealand, has been seeking to expand in China. But so far Fonterra has introduced just two milk powder products, one for pregnant woman and the other for the seniors.

But the sales of the products in the mainland market have been lukewarm. The main reason is that the company's investors, more than 10,000 dairy farmers in New Zealand, cannot accept the high marketing costs imposed by retailers. Part of these costs would be passed on to consumers, but part would be borne by Fonterra.

Chen Bin, regional manager for a company selling baby formula made in the Netherlands, said his company introduced its products to China this summer, but has not had much success.

"At the moment, we have only put our product in some high-end supermarkets in Wuhan," he said. "But we haven't entered the important markets such as Beijing and Shanghai yet."


Nordic Dairy Giant Arla Buys Stake in Mengniu

Chinese company hopes cooperation with industry leader boosts public confidence


Mega-Dairies Riding a Herd Instinct Industry

Investors and dairy companies with huge herds are expanding milk production in a business rush some call unreasonable



Yili Industrial Group Denies Plans to Shut Down Chinese Milk Powder Plants

伊利11亿新西兰建奶粉厂 否认关闭国内工厂

Dec 26, 2012 10:06 AM GMT+0800 | Prepared by ChinaScope Financial | Source: 21st Century Business Herald | Author: ZHANG Xu

  • Inner Mongolia Yili Industrial Group Co. (600887: SHE) recently announced a CNY 1.1 billion investment in New Zealand to build a milk powder plant with an annual capacity of 47,000 metric tons.
  • A source close to the matter said that after the New Zealand plant starts operation, four of Yili’s five domestic plants will be shut down. Yili has denied this, stating the overseas plant under construction will be used to produce infant formula milk powder.
  • The five production bases of Yili are Heilongjiang-based Duerbote Yili Dairy Co., Inner Mongolia-based Qingshan Dairy Co., Yili Fubeier Dairy Co., Zhalantun Yili Dairy Co., and Jinshan New Industrial Park Milk Powder Processing Co. 
  • WANG Dingmian, a dairy expert, said that the importing prices of milk powder for Chinese companies in November and December this year range from CNY 29,000 to 30,000 per metric ton, compared to the CNY 33,000 to 34,000 per metric ton which domestic milk suppliers charge. 

the CNY is about 20c of a NZD. So working back you can see the margins being made on top of the GDT price...


Thanks for the links, Henry. :-)

Thanks for that.....interesting points....Q is there a limit on how much raw milk Fontera has to sell to any one customer?

Is this legislation? (I believe so?) in which case why cant it be modified to limit one buyer to so much?

When you look at the debt in dairying then in effect the farmers have left themselves vunerable to a severe down turn. Such a downturn which frankly I think is a certianty is going to do what? force farms onto the market. Who is going to buy at their present 50% plus inflated prices? I'd guess the chinese, and the banks are going to sell. The Govn is going to allow it because the alternative is a bank going bankrupt/insolvent and the tab is met by the voter, no pollie will wear that.

Whos the fool here?

and whos the patsy?

When you look at the 1930s depression firesales were very common.  Good businesses with too much debt and too few sales were bought for cash the debt written off and thats looking probable again today.  Who has lots of "spare" US cash btw?

We have really believed that the "free market" was the best way, I think that it was pretty obviously not. Really though "the market" was just rigged differently and now we watch as the better players collect their winnings.

Should I feel sorry for the farmers? honesty Im hard pushed to, they went willingly into the game.  Now we have Bruce Willis whining about how hard farmers are being done by.  He  who says that environmentalists should get out of the way of allowing more profits which of course triggers another round of extra debt and yet higher bubble prices as the next fool lines up. Somehow he doesnt want to see the expotential function at work or the factors that will reverse that very soon.

Of course rinse and repeat in other sectors......

Its going to be a very hard and long depression I think.








steven, 50m litres is the limit. It is only available for three years if they have their own farmer supplier contracts that produce 35m or more.  A level playing field would see that all processors can only take it for 3 years and if you don't have farmer suppliers then tuff.  After all, what is the benefit to NZ Inc if they don't have to compete at the farmgate for the milk?  No other country in the western world forces a private company to supply it competitors with raw product so that those same competitors can then go and compete with the supplying company on the world market, in perpetuity.

Yep there is debt out there, but lets not get too carried away by tarring all dairy farmers with that brush.  There is also a lot of money in the coffers out there. 

Steven, What makes you think that profits will be attributed to NZ when Hong Kong is to hand (and exporting accounts for GST).

Agree with you re the business as usual jobs...

The other point is, "what value does say-so over assets have"

Locally and nationally there will be another constituency with a powerful voice for not the farmer, not NZ industry etc.....


Profits, Im sure that there will be an attempt to make the profit offshore, and Im sure the IRD will be watching with great interest. With vertical integration of course thats I suspect going to happen, I have little knowledge on how that will be "dodged".

Powerful voice, the most powerful is the voter....un-fortunately for the voter they dont sem to use it wisely.


Steven: start here. revolves around "residency" determination

A company is considered a New Zealand resident when

  • It is incorporated in New Zealand
  • Control by company directors is exercised in New Zealand
  • It has its centre of management in New Zealand
  • It has its head office in New Zealand

(none of the above will apply)

Otherwise it is not a "New Zealand Resident" (ie Starbucks, Google, Facebook)

steven: Construction Jobs? Production Jobs? .. careful .. that has not been the experience in Africa and more recently in Australia where 90% of materials have to be sourced from China.

More than 95% of all China’s programs in Africa have a clause that stipulates one breathtaking agreement: all infrastructure-related programs are required to have 70% Chinese contracted personnel. Only 30% of the people hired in these infrastructure programs are Africans. While African governments choose where the infrastructure is needed, they have to pay back the money in natural resources, and are practically forced to give employment to thousands of Chinese instead of Africans.

#3 says it all doesnt it BH?  aka the drop you predicted. Of course you havnt allowed for peak oil and the debt overhang in your 30% somewhere north of 60% then.


Deutsche Bank.

It gets better.

Co-CEO Jürgen Fitschen calls the premier of the state of Hesse to complain about the antics of the DPP and the impact that the news of  500 tax investigators rummaging through the bank's files would have on the bank's reputaion in world markets.

Premier tells him to #$%^ off

Apologises later by saying that he regrets any false impressions that his phone call could have left.

Which isn't really an apology.

Re #3 Dependency ratio

What the dependency ratio plots are showing us is the low proportion of dependents that our ecconomies have enjoyed as the baby boomers have moved through their working life.  We are now entering a phase where the dependency ratio is returning to more normal levels and will overshoot as the bormers enter retirement.  The point to note is that the low levels we have enjoyed over the past generation are an extreem abnormality resulting from the baby boomers and a low birth rate as a result of the pill.  In time the boomers will die, we will still have a low birth rate which will still lower the dependency ratio.  We will however have a longer life expectancy