Friday's Top 10: Christian Hawkesby on RBNZ speed and determination, secular stagnation, German aversion, feeding the world, Dilbert and more

Friday's Top 10: Christian Hawkesby on RBNZ speed and determination, secular stagnation, German aversion, feeding the world, Dilbert and more

Today's Top 10 is a guest post from Christian Hawkesby, head of fixed interest at Harbour Asset Management. Prior to joining Harbour, Christian spent nine years working at the Bank of England.

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

And if you're interested in contributing the occasional Top 10 yourself, contact

See all previous Top 10s here.

1. LVR restrictions starting to bite
The RBNZ has shown impressive speed and determination in designing and implementing new macroprudential tools to cool the housing market and reduce risks to the financial system.

Measuring their effectiveness will be very difficult.

I like this chart in the RBNZ’s Financial Stability Report, which helps highlight that we are already seeing some impact on mortgage approvals.

Data for 15 November is consistent with this trend.

House sales and house prices are the next indicators to watch.

2. Optimal control and the Fed’s unemployment target
The Senate hearing of Janet Yellen was a key focus for interest rate markets.  The main objective is to better understand her monetary policy views.

In that spirit a new research paper called “The Federal Reserve’s Framework for Monetary Policy - Recent Changes and New Questions” is getting a lot of attention from informed commentators.

Many see it as a justification to keep US overnight interest rates near zero till 2017 or to cut the Fed’s unemployment target to 5.5%.

3. The case for secular stagnation
Lawrence Summers may have missed out on becoming the next US Federal Reserve Chairman, but he is still very vocal with his views on the global economy.

Martin Wolf at the Financial Times does a nice job summing up his argument that the US economy may be entering a period of so-called “secular stagnation”, with low real interest rates doing little to spark a strong economic recovery.

He argues that the easy money and leverage in the mid 2000s masked structural weakness reducing the potential growth rate of the US economy.

4. Are rising interest rates good for investors?
Fixed interest investors have spent the past few years fearful of rising interest rates and the capital losses that can incur on securities that are valued on a mark-to-market basis.

May and June 2013 was painful for those who had locked-in long-term investments at low rates.

Jon Short from PIMCO argues that in the long-term investors are better off with higher interest rates.

While true for fixed interest investors, it is still important to manage the risk of short term pain.

In fact, despite the potential for short-term discomfort, rising rates should be welcomed by long-term investors, particularly in this era of historically low yields. This is due to the fact that interest income is the primary driver of bond returns, and the ability to reinvest into a gradually rising rate environment can actually increase returns, helping to build wealth over time. In other words, by reinvesting the income and proceeds of your maturing bonds in securities that pay a higher coupon, you are increasing the income you receive, and your future growth potential.

5. Systemic risk survey
When I worked at the Bank of England, I led a team in 2005 that began designing a systemic risk survey.

Eight years down the track, the survey now provides a useful time series of the risks that the market is worrying most about.

While the fastest growing risk is the low interest rate environment (and damage that could be done from a correction), sovereign risk (particularly in Europe) remains the top risk in the survey. 

6. Delusional Germany
On sovereign risks in Europe, I find the Project Syndicate website a really useful way to keep in touch with longer-term structural themes and ideas.

This week Marcel Fratzscher, a former head of International Policy Analysis at the ECB, makes the case that three illusions are responsible for the German public’s growing aversion to European integration.

He argues that changing this perception gap should be Angela Merkel’s top priority.

Against this background, Chancellor Angela Merkel’s third government, once it is formed, must rid the country of the illusions that are preventing it from playing a proactive and constructive role in ensuring that Europe functions as a union. Such an undertaking requires, above all, the restoration of trust among European countries. While that will undoubtedly be difficult to achieve, it is Germany’s only real option – and Europe’s real hope.

7. RBA leaves the door slightly ajar
Closer to home, the RBA released the minutes of its 5 November Board meeting that resulted in the cash rate remaining on hold at 2.5%.  There is no requirement to read between the lines with the RBA.  They spell it out in black and white: not planning to cut more, but not ruling out further cuts.  The paths of cash rates in Australia and NZ look set to diverge in 2014, as the RBNZ eyes a tightening cycle.

The Board's judgement was that, given the substantial degree of policy stimulus that had been imparted, it was prudent to hold the cash rate steady while continuing to gauge the effects, but not to close off the possibility of reducing it further should that be appropriate to support sustainable growth in economic activity, consistent with the inflation target.

8. Beijing announces significant reforms
The outlook for New Zealand and Australia is intertwined with China.

My colleagues that cover Australasian equities travel regularly to China, and closely follow the details of the Chinese economy and policy making.

Even their upbeat expectations were exceeded by the much anticipated Third Plenary session of the Communist Party of China.

As set out in their Harbour Navigator, there are far reaching implications from SOE reform, environmental reform, land reform, Hukou reform, and the relaxing of the one-child policy.  

9. Feeding the world
The growing Chinese middle class is a key part of the structural rise in commodity prices.

As set out here on the Bond Vigilantes website, the OECD and FAO estimate that butter will experience the fastest rise in per capita consumption of any major food group over the next 10 years.

10. Explaining NZ's capital market reforms
Finally, I was overseas through most of the 2000s, so I found this video, released this week, very useful background to the work of the NZ Capital Markets Task Force, and how that shaped the recent reforms.

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.

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.


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I saw this and figured it just had to be here.  Apologies if you've already seen it:

I find Marcel Fratzscher attempt to paint the German public as deluded to be wholly unconvincing.  He makes three claims to delusion:

1.  That Germany has weathered the storm very well

But to prove they haven’t he uses a time period wider than the storm whilst stating their economy has grown 8% during it.  Clearly, in fact, they *have* weathered it well.

2.  That other European governments want their money.

It seems obvious that any crisis rooted in solvency must lean on (use) those who are solvent.  The fact the OMT program calmed wider markets is not proof this is a delusion; it could well have worked because the Germans had the money to make it credible.  The fact the Greek government did falsify its accounts and become insolvent makes their fear more than a delusion.

3.  The crisis is a euro currency crisis

No economy is an optimal currency area but this does not discount the structural flaws of a euro monetary union without fiscal and banking union.  There *are* structural problems with the currency, no delusion there.

#1 But  germany has successflly exported un-employment to spain its like saying the right arm is fine, ergo person is fine wuhile the left arm dies of gangrene.

you are right, housing is too expensive, and too high a percentage of income goes towards putting a roof over your head.  
Leading up to the 2008 election, I thought that if National get in, there will be change.  Phil Heatley was making big promises about housing and increasing affordability.  Labour had been asleep at the wheel with regards to housing since the year 2000.  Their mismanagement was criminal, as house prices doubled.  How can 'the workers/poor peoples party' allow the doubling in cost of an essential for life?  They made it so much harder for their constituency, who are the biggest victims.
But when National got in, they did nothing for 5 years.  I had put off purchasing, but bought in 2012 because I gave up hope that normality would quickly be restored.
Housing will never go back to the 3 X multiple.  There needs to be majority consensus for this to happen.  Now, the majority of people who actually vote are very happy with the status quo.  The people most disadvantaged now, 30 years old and younger, don't even realise they have it hard.  They are oblivious.
I want to go back to the 3 X multiple.  Why should life be about paying a massive mortgage off?  When the young and disadvantaged get older, say 10 years from now, they might start to use their political might, and get some policies introduced.  Until then, property will keep going up.

That is why any solution to housing has to include transfering funds (taxes) and responsibility for transport provision to the Supercity and other equivalent local authorities. The specific transport solution will vary from place to place -motorways, bus lanes, bridges, tunnels, rail, tram, cycle lanes... depending on geography, need, cost, the gradual switch from fossil fuels to electric energy and voter inclination.
The different local authorities will be competing against each other and the Australian cities on providing the best infrastructure.

How does that make economic sense?  So spend many many millions just so some get houses cheaper? at the expense of others?
So we over spend on infrastructure to compete? to what end? no profit (direct $s or economic/GDP returns)  in why?  Now if we had toll roads OK, user pays I have no huge issues with that.  Sure there are going to be some cases of yes it makes sense but to expect provision carte blanche because someone else is paying isnt reasonable IMHO.  Now when you look at MUDS then when they also provide roading/rail  for a satellite town (ie scale) then that sort of starts to make sense....but I dont see it as any cheaper then the present system, except the burden of cost isnt on the existing ratepayers.
I wonder how you see this "gradual" switch to electric over 20years?  30 years?  and its costs?  Someone such as myself frankly I dont expect to have a (EV) car at all inside a decade, not for normal  use as I do now. They will be priced out of most ppls pockets.  its going to be interesting, yes indeed all those bits of tin paid for on HP or the house.....

Light railway, single track, $4.5million per km. I'd assume quite a bit would have to be double lines. (Re-use what we have plus another line?)
Where is the payback? 

Spending large sums of money that doesnt not give a net payback except to propert investors and land bankers makes no sense.

if i recall double line runs from te rapa to the whangamarino swamp near te kauwhata .
Single line thru the swamp and then double line from near pokeno.

Yes I agree with Ngara and Huntly being cheap.  If there was a proper train system, like how Japan does it, then living there and working in Auckland would be possible.  Japan has a high frequency of trains per hour.  So there is very little waiting time.  The hours of operation are also long.  This is convenient.
Currently NZ is a long long way from doing commuter trains the way they need to be done.  It's pie in the sky to think we can go from what we have now, to the benchmark.  
I really like the idea of satellite towns with high speed rail links to Auckland central.  I want it to happen.  It might happen one day, but not in the next 20 years.  Life is too short to wait for the glacial rate of progress every government has towards housing.  Instead I get my kicks from sim city and building model railway.
So in summary, buying a house in Huntly and waiting for the train links to be built isn't really an option.  You'll be waiting for a long time, and probably retired by the time any progress is made, eliminating the need to go to Auckland to work!

Re #3
I thought Bank of International Settlements' operative, Andrew Crockett and his acolytes put Bernanke's 'glut of savings' myth out to pasture a while back.  

"Rich people don't create jobs"

Worse my opinion is actually they destroy jobs.

In terms of keynesian, no....I guess those that wont listen to keyens might well be convinced otherwise as that fits their mindset.
He gives examples where (office worker) where really a household does not work like a country, so hmmm.
Needs more study.........

Yeah right - Read more

and you quote zerohedge? generally a bunch of austrian loons?
Im trying to find what he's quoting, Im wondering as per normal if he's making it up, "which SK might boil down like this:"
So it looks like he's constructing a straw man and making it look, um silly.
Appears to be claiming things I have not seen, so out of context, if not downright lies.
like I said,
"and you quote zerohedge? generally a bunch of austrian loons?"

On the one hand we have a contributor to zerohedge who appears to be making up things ppl didnt say and then knocking down these.
This seems to be par for zerohedge.
Reporting of an event, which given the notorious partianship of journalists in the US at least would need some reasearch to get to the bottom of Im not going to comment on beyond oops that looks like a booper.
Dunno masybe you go through life never making mistakes? 
Huge difference to me when someone makes a genuine mistake V what looks like an outright lie in order to smear someones (PK and LS) and attempt to discredit Keynesian economics in the process.
Really if "right wingers" ppl have been going on like this its no wonder we are in such a mess.

Im not going to comment on beyond oops that looks like a booper.
Dunno masybe you go through life never making mistakes?

Do you mean the type of mistake that gets to call upon the citizens to join the ride?

and what about the billions if not trillions the financial sector have lost? 

Thanks for that link to the Raghuram Rajan speech,
It rather suggests my suspicions that the central bankers are the true successors to the spirit of Gosplan may not be so far from the truth. They were able to save the banks, this does not mean they are able to reform economies.
I particularly like this bit:
Spillovers - Capital Flows and Exchange Rate Appreciation and Credit Booms
The spillovers from easy global liquidity conditions to cross-border gross banking flows, exchange rate appreciation, stock market appreciation, and asset price and credit booms in capital receiving countries - and eventual overextension, current account deficits, and asset price busts has been documented elsewhere, both for pre-crisis Europe and post-crisis emerging markets. 21 The transmission mechanism appears to be that easy availability of borrowing increases asset prices, increases bank capitalization and reduces perceived leverage, reduces risk perceptions and measures (as indicated by the VIX index or value at risk), all of which feed back into more credit and actual leverage. When this occurs cross-border, exchange rate appreciation in the receiving country is an additional factor that makes lending appear safer.

It seems there are some within the US Federal Reserve system calling for the organisation's reach to be pruned to rationalise activities consistent with those of a regulator.

  • President Charles Plosser discusses what he believes is the Federal Reserve’s essential role and proposes how this institution might be improved to better fulfill that role.
  • President Plosser proposes four limits on the central bank that would limit discretion and improve outcomes and accountability.
    • First, limit the Fed’s monetary policy goals to a narrow mandate in which price stability is the sole, or at least the primary, objective;
    • Second, limit the types of assets that the Fed can hold on its balance sheet to Treasury securities;
    • Third, limit the Fed’s discretion in monetary policymaking by requiring a systematic, rule-like approach;
    • And fourth, limit the boundaries of its lender-of-last-resort credit extension.
  • These steps would yield a more limited central bank. In doing so, they would help preserve the central bank’s independence, thereby improving the effectiveness of monetary policy, and they would make it easier for the public to hold the Fed accountable for its policy decisions. Read more

Yes, it seems their independence is most dear to them.
I hadn't figured out the bit that Ragan mentioned that the banking system in the capital receiving country (ie NZ) actually appears safer as it in fact gets riskier due to the country's greater indebtedness. That was exactly what happened here, Michael Cullen thought he was doing a fine job when it turned out he was asleep at the wheel and the country was stagnating economically and only appeared to be doing well because of the increased household borrowing. I'm sure Jenny Shipley would have thought the same thing if she was still at the wheel.

That's why I keep banging on about this:

But I guess BNZ still funds mortgage assets with foreign wholesale loans, exempt from OBR pre-positioning, to extend the asset to liabiltiy ratio beyond the prudent 100% of local deposits - an update confirming this ratio is below the previously noted 140% level would offer some comfort to depositors. Read more and follow links
More explicit rating agency detail can be viewed here:
In January Moody's highlighted that, at more than 140%, the New Zealand banking sector has the highest loan-to-deposit ratio out of 13 Asia-Pacific countries. Of the big four banks, S&P figures as of December 31, put ANZ's at 135.9%, ASB's at 136.6%, BNZ's at 162%, and Westpac's at 147.4%. Kiwibank's was 109.9%

How To Tell If Your Small Bank Is In Trouble
Next, look at the bank’s loan-to-deposit ratio. Even if your lender didn’t lard up on mortgage-backed securities, it might still be “loaned up”–meaning that it has maxed out its percentage of loans to deposits on hand. The larger that percentage, the greater the risk the bank has taken on. If customers begin to pull deposits, the bank might be suddenly strapped for cash.
Healthy loan-to-deposit ratios typically fall between 95% to 105%, says Dick Bove, bank analyst at Punk Ziegel & Co., a boutique investment bank and advisory. Venture much higher than that and the bank could be courting trouble. To find this ratio, divide “loans and leases, net of unearned income and allowance” (item 4.d. in Schedule RC-Balance Sheet) by “deposits” (item 13 in the same Schedule).

So BNZ is in a very dodgy position.  The other Aussies are ordinary dodgy.  And Kiwibank is OK.  Relatively speaking.  ?????

Factboy, I like your ideas.  May be too rational and hit too many vested interests to pass. 

You have to know will hand out solid, unbiased analysis. With FedFarm already desparate to drown every river so we can feed the world this graph seems like further evidence of our need to convert the Tasman Glacier to dairy farming (there's plenty of cheap wool going to knit our cows some booties).
Or we could use our smarts to make the food supply chain more efficient and meet increasing demand from existing production capability. Who knew a McKinsey director could be so left-wing?

So lets feed the starving to death, who then breed another generation...
Putting aside the humane aspect, just how do you feed an ever growing number of mouths for ever?
You cant.
So 2 dead this generation or 4 the next or 8 after...
Seems we are letting nature decide that one, so much for an intelligent species.

Let me join the ever-swelling ranks of those who disagree with you, steven. Global population is set to top out at 10b around 2050. And there is evidence that that number will be lower and we will reach it sooner. We will do this not by starving the excess but through intelligence. Tools such as pensions, birth control, the internet and international trade all contribute to making it possible to reduce birth rates and interrupt the exponential growth cycle we have seen in the past.
The post I linked to above suggests we are currently producing enough calories to feed 14b and yet, since I put that link up some 200 people have died of hunger related causes. Globally we reward ourselves financially for killing part of the world through obesity-related illness at the same time as killing the rest of the world by starvation. To add insult to injury we have designed a supply chain that wastes 1/3 - 1/2 of all we produce.
Before we allow the doom-merchants in Federated Farmers and the FIRE sector to create an environment of "produce more at any cost" we should at least look for improving supply efficiencies first. We have already done that with energy and proven that improving efficiency is way more cost-effective than making ever more, ever more.

Join the queue to dis-agree, well sure go for it. If you wish to join the uh, "illustrious" ranks of lemmings be my guest, or maybe think, your choice.
a) Read limits to growth and its re-visit, 2030 would seem far more likely....
b) Consider that we basically eat fossil fuels and they are gone by about 2050 and peak about now and then decline.
c) The huge land area we now have under cultivation, needs b) and water.
d) Supply "efficiency" needs energy, see b).
e) As fossil fuels decline ppl will do like the USA and turn corn into ethanol, even if mexicans are hungry.
Sure I can understand that the subject is pretty ugly, but really thinking that we'll just keep on improving efficiency as a solution is doubtful to say the least. Just look at how ppl / countries are behaving see e) then the Q is how do we get that changed while Americans are happy to drive gas guzzlers while pp over the border starve.
Answer, I cant see it.

The world might make it, because we are not growing exponentially. Population growth is slowing and will  stabilise in the near future. Grantham who has made billions from studying booms and busts believes/hopes we will make it.
But is that relevant to New Zealand because the ugly truth is that we will survive even if much of the world overshoots their population versus resources. We would survive here in New Zealand without some Steven mass-dieoff even if we could not replace fossil fuel energy. Many European countries had greater population densities than New Zealand's in pre fossil fuel times. But using existing technolgy we can replace fossil fuels.
Why Steven is harrassing a few innocent kiwis when he could be over in somewhere like Nigeria advising them to stop having children to save the world is a little unclear.

The world will definitely survive. As for humans? There is certainly some ugly coming up and the question is whether we experience a hard or soft landing.
On the food side we can manage for the soft landing through policies such as:

  • elimination of agricultural protectionism and subsidies in developed countries
  • elimination of waste between farm gate and plate in developed countries
  • encouraging shorter supply chains in developed countries to reduce the energy footprint

To say that we eat fossil fuels is way too sweeping a generalisation. The bulk of calories produced in aggregate are produced using non-mechanical means. We just ignore that fact because it happens outside the cosy elite OECD world. Even within our rich man's club when you exclude fertiliser the EROEI on mechanised agriculture is not bad.
If we could give up the notion that we absolutely have to keep increasing production at any cost then we could throw the R&D sink at low-input farming methods; i.e. keep eliminating intensive energy use and waste from the food supply chain. That would get us our soft landing.

Eat fossil fules as also in transport food which is a big component. EROEI is terrible for food. To make bo-deisel the EROEI is about 1 to 1, we need 8+ to 1 so I cant see how your sums adds up for EROEI for food, please explain.

Um....I did say  "encourag[e] shorter supply chains in developed countries to reduce the energy footprint"

Hmm yes, apparantly tesco ships all its produce to regional centres and then back out. So food can ravel 200 miles when it needed to only travel 10miles, crazy.

I actually think we will be growing more of our own, many houses are a bit small....but low energy use,

The world will make it, humans wont.
popualtion is already too high. Projections say 9billion, maybe, even if so, then there is the expectation that the 7~9billion will live like us.
Grantham I'd suspect is going as far as he can given his position. 
"NZ survive", Ive said time and time again swamped lifeboat scenario.
Technology, uh no, technology is the application of energy, see EROEI.
Why is it Brendon cant face reality, is very unclear.

Steven because your 'swamped lifeboat theory' is not reality, it is not science, it is just speculation. An overshot humanity future might go that way but I don't think so.
You can't extrapolate some global resource overshoot model for 9 -10 billion that has huge margins of error to explain what will happen to a few isolated Islands of 5 million.
For much of humanities history we have butted up against the malthusian limit and those areas that exceeded it did not swamp the others, especially distant difficult to get to places like New Zealand.
We are in a unique time because we are chosing to stop population growth even though we have not reached the mathusian limit.

The (pre-)historic analogy could be the collapse of the Mycenean civilisation. Around 1200BCE there was a sophisticated palace-based culture in Greece that simply disappeared for no obvious reason. These were the Trojan War and Oddysey people. The weird thing is the towns and villages that had previously been ruled by the palaces just carried on alone and later re-emerged as Classical Greece. The fragility of the elite culture did not apply to the ordinary people.
The point is that all the discussions about "we" and "the world" reference only the rich man's club of OECD/G20. The bulk of the world is way less reliant on technology than us to stay alive. So, if steven's worst nightmares come true it may well be that the world is basically brown, yellow and black with sweet FA white. But there will still be humans...just not us.

Developing survive, yes indeed in terms of (lack of) technology, many in the developing world dont have much so consume little energy....the problem then is their numbers....but its a long swim to NZ.

Brendon - bollocks. Time we moved on from this nonsense. Read Jared Diamopnds 'Collapse'. Get a load of gravel delivered, and shovel it somewhere. One shovel the first night, 2 the second, 4 the next, 8, 16....... tell you what happens; the last night you shifted the LAST HALF.     Doesn't matter that you 'hadn't run out yet', or that you'd pullled off a 'doubling' to date.
Sorry, but you're indulging in wishful thinking, aiming for a result, and attempting to back-cast. Not logical.
We have overshot the limit (the planet's ability to replace/reproduce/absorb) and we went past it in 1980. Global overshoot is tracked:
But of course, you could hold your hands over your face. Come on - get real. We need folk like you to be there sooner rather than later.

I have read Jared Diamonds books, including Collaspe. From memory he was quite critical of Australia with its old nutrient deficient soil and hot arid conditions. Don't think he discussed New Zealand collasping.
I think to prove your collaspe argument you need to be able to approach it from multiple angles. Sure the global view has something going for it. Sure parts of the world look like they might collaspe -Egypt and Pakistan come to mind. The massive population growth of Nigeria cannot/will not continue.
But that doesn't prove that all parts of the world will be equally affected.
In New Zealand's case many of the drivers of growth are gone -no more natural population growth, woman have already entered the labour force -although this shows GDP growth isn't real growth. As BH explains today we are reaching the limits of how many more cows our rivers can sustain. So that growth route is almost tapped out.
The thing that you guys do not get is that to keep 'growth' going we are being seduced into ever greater debt that only benefits a few 'elite'.

Sorry Brendon, but you seem to fail to understand 'draw-down'. You can dradw down resources (soil nutrient is a biggie) for so long, and get away with it. Don't mix that up with sustainability. To sustain indefinitely, is an entirely different thing. That's what you missed with Ireland. You have to throw every stat into it.

#5 but who did you ask in your "survey"? I mean if you asked "financial gurus" who tend to be right wingers and of the austrian bent then all you are really you are in danger of doing nothing more than a) surveying political point of view, b) surveying vested interests.
So is it that useful?  hmmmm

#9 Apparantly 40% of the world's land surface is already set to agriculture. So we want to add another 2 billion and "improve" their diet.  3 things wrong with this being a happening thing,
1) That would seem to mean that the land area under agriculture has to double if not 120% of the land surface under agriculture?????
2) We eat fossil fuels, that output has now peaked more or less....just where is the energy going to come from to do 1)?
3) Where is the water going to come from to do 1 and 2?.
and we wont even bother mentioning the environmental damage that comes from the above.
Or the fact we have planted the best land already, or built over it.

Re #2 Yellen's strategy and options:
You can not taper a ponzi scheme, QE will continue until the whole system explodes.

It looks like it....IF they had fixed the banks well maybe....instaed the parasites will kill the system.