Friday's Top 10: A whisky bubble? the Scrooge McDuck problem; new slicing & dicing; parabolic gains; business overdrafts; Dilbert & more

Today's Top 10 is a compilation due to a no-show from our intended guest contributor. It happens. A number of people have contributed today.

As always, we welcome your additions in the comment stream below or via email to david.chaston@interest.co.nz.

And if you're interested in contributing the occasional Top 10 yourself, contact gareth.vaughan@interest.co.nz.

See all previous Top 10s here.

1. The next 10 investment bubbles
MarketWatch has put together an interesting article on 10 asset classes showing the type of frothiness that suggests a bubble in the making. Not surprisingly virtual currency Bitcoin features.

So does the "liquid asset" of rare Scottish whisky.

The Auckland housing market doesn't make it, but London's does. As does China's.

Tech start-ups and frothy equities also get a mention.

Whisky Highland, a Scottish company that tracks auction prices and compiles an index of the top-selling Scotches, says prices have soared by 170% since the end of 2008. And with buyers purchasing more than $18 million worth of bottles at auction in 2012 and with the rarest of whiskies routinely fetching four and five-figure prices, some collectors say the market has nowhere to go but up. But others caution we could be seeing the beginning of a whisky bubble, particularly as more distilleries release limited-edition bottles and potentially push the supply beyond the demand.

2. Gross gets radical
Bill Gross, the head of giant bond fund manager PIMCO is under pressure these days. The returns his funds are giving to his investors are looking decidedly ordinary, not only against equity funds, but also against other bond funds. The critics are growing. But its hard for him and his company because they are so huge they will always struggle to 'beat the market' when they are such a big a big part of it.

However, that has not held him back when he comments, as he does regularly. Now he says growth depends on investment and investment in part depends on an equitable rebalancing of personal income taxes, capital gains and carried interest. He also thinks the era of taxing "capital" at lower rates than "labour" should end. And investors in the US and elsewhere must look for investment in the real economy, not share buy-back manoeuvres that artificially elevate stock prices.

He's another billionaire - like Warren Buffett - who knows that the game is nearly up.

Developed economies work best when inequality of incomes are at a minimum. Right now, the U.S. ranks 16th on a Gini coefficient for developed countries, barely ahead of Spain and Greece. By reducing the 20% of national income that “golden scrooges” now earn, by implementing more equitable tax reform that equalizes capital gains, carried interest and nominal income tax rates, we might move up the list to challenge more productive economies such as Germany and Canada.

Our problems are significant, Mr. President, and “Obamacare” and the signing up for it is far down the list of what we need to correct in order to move in the direction of “old normal” growth rates. Surely a few astute observers in Congress know that as well. Until we can more equitably balance “Scrooge McDuck” tax rates to rebalance wealth and “GINI coefficients,” while at the same time focusing on investment in the real as opposed to the financial economy, then the prospects for markets – whatever the asset class – are anything but “golden.”

3. A 'glorious Bolivarian' surrender?
Venezuela has lots of problems and they are getting worse. But they also have lots of gold - 365 tonnes of it and at today's prices that is worth about NZ$20 bln. They also have lots of oil. Their problem is that both commodities are falling in price at the same time their problems are growing. That means real stress - so much so they are finding themselves talking to Goldman Sachs and Bank of America about how to use these sinking assets to just pay their bills. Hugo Chavez will be rolling over uncomfortably, you would think. More from Reuters:

Less than two weeks before December 8 local elections, the government of President Nicolas Maduro faces chronic product shortages and annual inflation of close to 55 percent.

Latest data showed Venezuela's economic growth slowing in the third quarter to 1.1 percent, compared with 4.2 percent in the same period of last year.

Talk of possible deals with foreign banks began when the opposition said last week that the Venezuelan government was negotiating a swap operation with Goldman Sachs (GS.N) involving 1.45 million ounces of gold worth around $1.86 billion.

A senior government source said on Wednesday that nothing was finalized, "but if there's an opportunity to do something, it could be done."

4. Deja Vu
Slicing and dicing was the financial 'skill' that got us all into trouble in 2008. Its hard to believe but the latest iteration of this 'innovation' seems eerily like groundhog day. Now, however, it is the background of very low interest rates that is juicing up the chase for better yields. Yield chasers have a lot to answer for - they supply the fuel for the IB hucksters. More from Tracy Alloway at the FT:

Five years on, and bankers are beginning to experiment with new assets that can be bundled up and sold to investors as they rush to take advantage of resurgent demand for higher-yielding products. In recent weeks, the cash flows from US solar panel leases, single-family rental homes and “peer-to-peer” loans have all been sliced and diced into investable bonds.

The experimentation with new assets follows a broader recovery in many areas of traditional structured finance. Issuance of collateralised loan obligations (CLOs), which pool together leveraged loans made to companies, has reached the highest level since 2007. Sales of commercial mortgage-backed securities (CMBS) have multiplied from $4bn in 2008 to $86bn so far this year, according to Dealogic.

“It feels like 2013 has been the year in which many of the recovering products became mainstream again,” says Tom Cheung, co-head of structured credit for the Americas and Europe at Deutsche Bank, which built the rental bonds. “We have also seen a lot of innovation in several asset classes this year.”

This recovery, however, is prompting questions over whether history could be repeating itself.

5. Business overdrafts
Today, we are releasing a new and very useful feature on our service. It is for people who have a business overdraft. For most, a business overdraft is a crucial piece of working capital, enabling you to manage day-to-day cashflows more conveniently.

But few of us understand the real costs we pay for that convenience. We probably recall we signed some papers, and we certainly see the 'interest' and 'fee' entries in our bank accounts.

But it takes real work to figure out the true costs.

For a long time, we have had a 'Business base rates' page as a core resource. But now we have added a new calculator where you can work out three key things:

a) what you are actually paying for the facility (the real % interest rate, and you will probably be surprised)

b) how much you may be able to save by switching providers or thinking about working capital management differently

c) whether you could qualify for a larger facility.

The new calculator is here.

Our news item announcing the feature is here, which includes some useful background.

6. Crowding out
One of the presumably unintended consequences of new Reserve Bank LVR policy is that term deposit rates will fall. If you rely on interest income from a bank TD, start to worry.

Banks are coming to a time when they will have less home owners to lend to when first home buyers become a much smaller part of the mortgage market. That raises competition for lending to existing homeowners. But their repayments tend to have a much larger component of 'principal' in the repayment. Lower mortgage rates - and 4.95% is the new normal now - raises the amounts being paid down on housing loans.

Second and third tier lenders - like credit unions, personal loan finance companies like Instant Finance, even small banks like Heartland - are all noticing the big banks moving in on their usual customer base, looking for business that can replace their lost mortgage business.

Lower levels of lending and higher levels of repayments mean banks need less funds. "Can't lend it, don't need deposits." So we are seeing the start of reduced term deposit offer rates. BNZ cut its one year TD rate on Thursday and no doubt others will follow soon.

And perhaps things could get worse for local savers. If the RBNZ does in fact raise the OCR next year, overseas investors may come chasing the extra yield - well extra from their viewpoint. (In the US, one year TDs pay 0.68%, while a 5 year TD pays 1.68%. In Britain, a one year TD pays 2% or less.) A flood of offshore funding will raise our exchange rate and probably lower our TD rates - or at least inhibit them from rising as much as the OCR increase.

If banks need more funding, they will issue bonds aimed at institutions and big investors who are struggling with low yields. ASB issued one yesterday with a yield at ~3.4%. Why would they pay retail investors more? 4% TDs may go the way of 6% mortgages.

That's my guess anyway (and to be honest, I am often wrong).

These influences make managed funds (and KiwiSaver) returns look pretty good these days. Just get your risk tolerance understood. It's not a time to be financially illiterate.

7. Disappearing kids
China put a lid on its mushrooming population with official policy. It has been effective, and China's population will probably fall below India's soon. But what happens when populations age and fall at the same time? The answer is 'Japan'.

At least Japan got rich before it got old. Perhaps it has the wealth to handle the changed demographics - and the change will be very dramatic. In 40 years, Japan's monocultural economy will need huge levels of automation to afford just survive. They economy is being transformed as we speak.

An automation imperative in Japan will flow out to everywhere else. Don't expect the coming robot revolution to be easy on many of our low skilled jobs. Employable 'skills' will look very different in the future.

8. Brazil gets aggressive
The recent talk of the RBNZ raising the OCR early next year gets some people's backs up here. They see it as unlikely given "everyone else is cutting rates". Well actually, it's not true. Readers will know that Indonesia recently raised their benchmark rates. And yesterday Brazil did the same - raising them by an eyewatering 50 bps to double digits - to 10%. Far from being inconceivable, some other central banks are doing it now.

Brazil is a 'commodity economy' too, just like us. You ready for a 10% OCR? I wonder what mortgage rates would be then?

9. Parabolic gains
Bitcoin prices are going up, spectacularly. No-one is talking or thinking of it going down. That is usually a sign of a bubble. The chart below compares the Bitcoin price rise with the South Seas bubble, something that happened 200+ years ago.

This chart however shows what happened to the South Seas stock price when the bubble burst. Couldn't happen to Bitcoin, could it? The picture is from Mebane Farber Research.

10. Explaining NZ's financial stability toolkit
The Reserve Bank explains in this video how it goes about mitigating against the excesses of booms and busts, and the tools it has available to do this important work. 

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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5 Comments

#3 They have a lot of hvy oil which is probably un-economic to ever extract.
They are also about at their peak oil output.
http://www.indexmundi.com/energy.aspx?country=ve&product=oil&graph=produ...
http://www.eluniversal.com/economia/130911/opec-venezuelas-oil-output-dr...
regards

#8 and for the effect of raising the OCR look to what happened in Sweden.
Ready for a recession if not Depression?
regards

#1 The Auckland market might not make the list - but by my calculations, Auckland has had a greater %age rise than London over the period considered.

I am quite happy to fund any booming business overdraft at a mere 15%. For example.
Any takers??

It's Friday .....Yay !! Things being a bit medical lately I've decided this is the way to do tests.
 
There was this guy who was sick,so he went to the doctor.
The doc ran some tests and sent him home with some medicine.
The next day the doctor called and the wife answered.
"I'm going to need to run a few more tests", the doctor said.
"I'm going to need a semen, urine and a fecal sample".
After she hung up the husband asked, "What did the doctor say?"
"He needs a pair of your underwear".