Thursday's Top 10 with NZ Mint: Graeme explains why his hands are still off the wheel (but getting closer); How China's new leaders are letting its economy slow; 4 unexpected responses to QE withdrawal; Dilbert

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

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

See all previous Top 10s here.

My must read speech is #1-5 from Graeme Wheeler. He does a nice job of explaining why he hasn't done much, but how he might do a bit more. His hands are awfully tied up.

1. Please scale it up - Reserve Bank Governor Graeme Wheeler poppped out an interesting and useful speech this morning explaining the gordian knot the Reserve Bank is tied in.

The New Zealand dollar is 18% over its 15% average in real effective terms. 

That's helping to keep inflaiton low and allowing mortgage rates to be stuck at 50 year lows.

That is in turn helping to drive up house prices and create risks for our financial system.

But the RBNZ's blunt instrument of the Official Cash Rate has limited use here. 

Cutting the OCR to bring down the currency would just worsen the house price inflation and prudential stability problem.

Increasing the OCR could push up the currency.

So what to do? The Reserve Bank is creating some macro-prudential policy tools to supplement its OCR and Wheeler rattled his sabre again today about using them. He also talked more about scaling up the so-far limited exchange rate intervention.

Here's the key section on that:

In assessing whether to intervene in the exchange market, we apply four criteria. These are whether the exchange rate is at an exceptional level, whether its level is justifiable, whether intervention would be consistent with monetary policy, and whether market conditions are conducive to intervention having an impact. This last factor is especially important given the volume of trading in the Kiwi. (In the most recent survey – April 2010 – by the Bank for International Settlements, the Kiwi was the tenth most traded currency in the world with daily turnover of spot and forward exchange transactions totalling around USD $27 billion.)

In recent months we have undertaken some foreign exchange transactions to try and dampen some of the spikes in the exchange rate. But we are also realistic in respect of potential outcomes given the strength of the foreign demand for the New Zealand dollar relative to the scale of our intervention capacity. We can only hope to smooth the peaks off the exchange rate and diminish investor perceptions that the New Zealand dollar is a one-way bet, rather than attempt to influence the trend level of the Kiwi. But we are prepared to scale up our foreign exchange activities if we see opportunities to have greater influence.


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2. Relying on the Auckland Accord - Wheeler mentions the so-called Auckland Accord in the speech as one of the responses to the supply shortages in Auckland, which are combining with those demand drivers of low interest rates to create double digit housing inflation.

But he also pointed to this chart below showing just how indebted New Zealand households are.

At the moment the assumption is that first home buyers and investors will gear up yet more to buy the 39,000 houses to be built in Auckland over the next three years. That would be an extra NZ$16 billion or so of debt to the NZ$180 billion of mortgage debt already sitting on top of the household sector. That would lift the debt to disposable income ratio to closer to 160% from 145% now. 


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3. How much more deleveraging to come? - The Governor also made the good point that New Zealand households haven't really done much deleveraging and, if anything, have stopped and are now releveraging.

Consequently, the share of mortgage lending to clients with deposits less than 20 percent of the value of the house now comprises around 30 percent of new lending across the five major banks – up from around 23 percent in October 2011. Households remain highly levered with household debt around 145 percent of household disposable income. The correction in the debt ratio after the global financial crisis was gradual relative to the build up over the 15 years prior to the global financial crisis, and the ratio has recently picked up.


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4. Maybe he might even use them - At the end of last year Graeme Wheeler said that even if he had macro-prudential tools he wouldn't use them.

He's rattling his sabre a lot more now.

Macro-prudential instruments directed at the financial sector risks arising from the housing sector have been deployed in several countries (eg., Canada, Israel, Korea, Norway, and Sweden), with weight often put on restrictions around the level of high LVR lending. While there are important design issues to address in devising such measures, the empirical evidence to date suggests that during episodes of quickly rising real estate prices, LVR limits can help reduce the incidence of credit booms and decrease the probability of financial distress and sub-par growth following the boom.

One should be cautious in predicting the size of the impact of such measures when house prices are increasing rapidly, but we believe that macro-prudential instruments could have played a useful role in building up capital buffers and reducing credit demand and asset price pressures in the housing price boom of 2003-2007.

5. Lower for longer? - Despite all of this, the Governor seemed to even suggest he might be able to cut the OCR. He seemed to hold it out as a carrot for governments (or someone) to deal with the supply problems.

For example, if house price pressures abate, all other things unchanged, it would increase the possibility that the OCR could remain at its current level for longer than through this year, which is the time profile built into the forward projections contained in the March 2013 Monetary Policy Statement. Similarly, if housing pressures are much less of a concern and the exchange rate continues to appreciate and the inflation risk looks low, it may create opportunities to lower the OCR.

Macro-prudential measures can be useful in helping to restrain housing pressures, but they are no panacea. This reinforces the importance of progressing measures to enhance productivity in the construction sector, free up land supply, and examine related tax issues. If the house price and credit expansion begin to fuel excessive consumption spending and inflationary pressures, a monetary policy response would become more likely.

6. China's economic reforms - We're getting a lot more detail now about what Xi Jingping is going to do with the Chinese economy. Here's Deutsche Bank's view on the key 4 reforms via Caijing.

Higher taxes and levies on polluting products (e.g., coal) and sectors. 

The reform plan stated that the government would "include products that are heavily polluting and consume natural resources excessively into the consumption tax list", "reform the resource tax system by converting the unit tax on coal to an ad valorem tax", and "establish the strictest environmental protection system". In our view, these messages imply that taxes and levies on coal and pollutants generated by coal burning will likely rise.    
Implications: coal consumption growth will likely slow in the coming few years. Clean energies, as a result, should replace coal at an accelerated pace. 

7. The Chinese aren't reacting - The slowdown in Chinese growth would normally trigger a fresh round of investment stimulus. Not this time, writes Bill Bishop via Dealbook.

“Enterprises need to close down backward production and upgrade their industrial structure, and should not expect further economic stimulus measures by the government,” an official from the National Development and Reform Commission, who wished to remain anonymous, told the Beijing-based newspaper [The Economic Observer].

In a sign of how concerned the new administration is about China’s environmental crisis and the constraints it places on the country’s future development, PresidentXi Jinping told senior officials at a study session last Friday that the government should “set and strictly observe an ecological ‘red line’ amid the country’s rapid urbanization in order to protect the environment.”

8. Here we go again - Fortune reports Americans are increasingly borrowing against the inflated value of their stocks in their brokerage accounts to buy apartments....

Borrowing against brokerage accounts hit an all-time high earlier this year, according to data from FINRA, and has continued to go higher. Margin loans outstanding totaled nearly $409 billion at the end of April. That compares to $381 billion back in July 2007, the last time stock-market-fueled lending peaked.

Debt is often seen in bubbles, and loose lending was a key part of what led to the housing bust. So the recent rise in stock market borrowing has some people nervous, especially at a time when the market is already making new highs, and seemingly headed straight up.

9. Four things that might happen next - Matthew Lynn writes at MarketWatch what might happen next as the US Federal Reserve starts withdrawing stimulus. He thinks gold will rise, bank shares will rise, stocks will rise and interest rates will stay low. None of which most would expect.

His argument is the central banks will simply not allow markets to fall, banks to fail and interest rates to spike until the debt burden has been unloaded. He might be right if inflation stays as low as it seems to be.

Everything is a bit too big to fail now.

The conventional analysis is that it is the central banks printing money that is keeping bond yields at their lowest levels in half a century or more. Withdraw it, and yields will spike sharply upwards — after all, without that artificial stimulus, there will be no buyers. Even worse, there will be a flood of bonds on the market as central banks unload the hundreds of billions they have accumulated on their own balance sheets during the last three years. 

The trouble is, it isn’t going to happen.

Central bankers know that the quickest way to trash the economy is to allow bond yields to rise sharply. They are only going to end QE once government and corporate debts are under control, and they certainly are not going to hike interest rates at the same time as they are ending QE.

10. Totally Stephen Colbert on the IRS targeting the Tea Party non-tax payers.

(Updated with more quotes/cartoons)

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?

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"an ecological red line".  Well, well, well, where have I heard that before.
Of course, they're communists. That'll be it. Couldn't possibly be that they're right.

Chicken or egg?
Are house prices rising because there is more high LVR lending  or is high LVR lending rising because house prices are higher?
For sure 20% of $500,000 is more than 20% of $400,000 so the LVR for a given deposit is higher when house prices are higher. Also potential buyers will take on more debt if they think prices are rising because they know waiting just makes their position worse.
It still seems to me that restricting high LVR lending to control house prices is very tough on those not on the ladder already. Increasing interest rates to control house prices takes a slegehammer to the productive parts of the economy. If house prices are the big threat then a supply response has to be the answer. Given the comments elsewhere on this site regarding the difficulties of a quick supply response it really will need the RBNZ, Central and local Government, building supplies industry construction industry, trades education bodies and banks to work together somehow.  That probably has not happened since WW2.
Not sure if all of the value of New Housing will finish up as additional household debt. If some of those buyers are migrants as we are told or returning expats they will have reasonable equity. Also some of the profits from all this building and the multiplier from it will finish up as additional income which will be used in part to pay back existing debt.

Hi, The former. Steve Keen showed/wrote a good piece on the effects of the OZ first time buyer grant and I think also that the effcts of small changes in LVR caused a lot more leverage and hence rises....
"Increasing interest rates to control house prices takes a slegehammer to the productive parts of the economy." totally agree....we cant keep doing it.
I dont see there being affordable housing anytime soon while the present land banker / piece meal release of land model continues.  If the Govn or council compulsory purchases a huge swath of land and releases it en mass so land prices collapse, then we need competition. All I see here is we'll pass the monopoly onto someone else who will milk it for every penny possible....result no fix in 3 years time....

The Aussie FHOG was a different beast, especially when it was doubled  to $14,000 for new builds as a way to get building and thus employment going. The Government got the banks to accept the grant in lieu of genuine savings and with Aussie building costs being quite low and land on city fringes also being cheap it was possible for people who had never saved a cent in their lives to get a 95% loan and a brand new house. It was really more than 95% as there was generally a 3% low equity fee capitalised on top. Not sure how many of those people managed to keep those houses.
I still think there would be less high LVR lending if house prices were not rising.

Much has been made of skill shortages in the construction industry. But is this really such a problem? The Australia mining boom is going off the boil, many workers who would have gone across the ditch could be employed in construction here. Further in Europe the construction industry is on its knees and many of those workers can easily be assimulated into our workforce, like skilled Irish construction workers if we had comprehensive plan.

2. Debt Growth
From a Bankers perspective happiness is getting everyone into extreme debt as that's how they make lots of money. On the other hand they have to be careful not to go overboard and crash the system as then the debt serfs might rise up and come after them with their pitchforks.
The evidence seems to suggest that so far they have judged things quite nicely.
Does the Reserve Bank work for all the other little banks or for New Zealand.?

wrong reply

Hmmm. But what about the derivatives Mr Wheeler? Is it true the ANZ alone has a gross derivative exposure of 1 Trillion dollars? How can you reconcile that with your mandate for ensuring financial stability?
As we know, contingent liabilities become real liabilities when the financial system hits a pot hole, so wittering about the ANZ only have a net derivative exposure of 15 shillings and sixpence just does not cut it.
Is the RBNZ too busy knitting solutions to how the world worked 20 years ago because understanding the big problems is just too hard?

"Mark Carney will try to devalue the pound by as much as 15pc after he takes over as Bank of England Governor in July in a last ditch attempt to cement the UK recovery, Pimco, the world’s largest bond house, has warned".

Nikkei seemingly falling faster than it rose -down 5% plus again.
Meanwhile AEP has gone all negative (again), off the back of the HSBC global index rolling over:

Interestingly gold is spiking at the same time. Given that paper traders are ovewhelmingly short on gold, one imagines they will be watching this with some trepidation - this could lead to a rather significant short squeeze as they cover their positions (possibly what is beginning to happen):

"HSBC said it is cutting its holdings of high yield credit, emerging market debt, gold and real estate REITs. It is plumping instead for US Treasuries, the “least rotten apple in the barrow”. An astonishing 42pc of its tactical portfolio is now in US Treasuries."
So sure it might be paper traders, but do you actually have any proof? or more likely it looks like gold is being sold off. As an alternative, the Q is now how low can it go and when will the rout start.  NB has cyprus started selling its gold yet?

I think this piece deserves a top ten spot, thanks
"Much of this critique is, in my view, misguided, and risks a repeat of the Fed’s great policy error of 1937, when it killed recovery stone dead. Yet QE critics clearly have a point. As Pimco’s Bill Gross puts it, there are “bubbles everywhere”. The Credit Suisse index of Global Risk Appetite has been flirting with the “euphoria” line, not far short of levels seen in 1987, 2000 and 2007.
The share of leveraged “cove-lite” loans issued this year without covenant safeguards has been twice as high as in 2007, the last peak just before Armaggedon. Companies are borrowing cheap to buy back their own stock at nosebleed prices, and doing so en masse with the carefree abandon of those pre-Lehman days. By some estimates this has driven half the US equity gains this year. No wonder Fed hawks such as Richard Fisher are watching this with horror."
GBH & Vera busy buying I suppose....

All currency bets are surely essentially bets about the US dollar . To make a bet about the US dollar you need something else. That is the only reason the the NZD is highly traded overnight when we are all asleep. A lot of talk about the NZ economy may be interesting but I should have thought that NZD are a bet for or against the USD rather than saying much of anything about us.

Oil traders do not actually want the oil, nor do coffee traders or orange juise traders. Traders in NZD do not actually want anything in NZD they want to trade NZD. Many things have a life as something to trade that has very little to do with the actual making of coffee etc.

I think you are talking about futures traders?  While, yes there is speculation it also meets a need, ie the producer gets a future price, knows they can make a profit and makes/drills/grows the good.  The end user also of course has the advantage of buying something in the future at a known price today so can plan/ do business, if the price is too high, it doesnt get done...
Now yes you could argue that has been abused to the point of well making the futures market counter-productive....
Funny thing isn't it...not long after the media in NZ report what Peters blathers and other blurt about corruption and crime re China etc....and bingo the Chinese govt managed media bash the NZ milk powder exports..
If anything ought to get the Beehive backsides off the seats ....this should.....don't hold your breath.


Not right up there with ...Yah...! ..Gibber, but still good all the same.