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Shamubeel Eaqub on whether gold is really a defensive asset, 2008 reprised, economic forecasting, oil, inflation, China's GDP, Davos & more

Shamubeel Eaqub on whether gold is really a defensive asset, 2008 reprised, economic forecasting, oil, inflation, China's GDP, Davos & more

Today's Top 10 is a guest post from economist, author and commentator Shamubeel Eaqub. 

As always, we welcome your additions in the comments 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. Bear market. 

The FT reported that many global bourses are now officially in a bear market. While we are enjoying a lazy summer start, the rest of the world has begun on a gloomy note. 

Fear rippled through global markets, taking the UK, French and Japanese stocks to more than 20 per cent below their 2015 highs — the common definition of a bear market — and compounding equities’ worst start to a year on record.

2. Gold a defensive asset?

Gold is often talked about as a defensive asset. There are many reasons for this, including that it is often done as a physical purchase. But a 2013 analysis of historical data suggests the rhetoric may not match reality.

…Professor Robert Barro of Harvard and his co-author Sanjay Misra point out that gold investments significantly underperformed the stock market on an annual basis by a factor of seven during the period 1821 to 2011 and all more recent sub periods with substantial volatility. Indeed, in the period 1975-2011 the return on the stock market (in constant dollar terms) has experienced almost twice the return on gold with only two thirds the volatility.

They go on to warn that:

The standard prescription for troubled times is to do nothing. It is very dangerous to your financial health to make major portfolio reallocations in times of market turmoil. If you are considering an investment in gold, why not consider the pokies?

3. 2008 de ja vu?

Markets are falling and questions are being asked, is it a repeat of the GFC? The warning from BIS is stark – we have no ammo this time. I reckon 2016 will be more about emerging markets and the global economy will slow, rather than the sudden stock we saw in 2008. This is because emerging markets' financial markets are not nearly as deeply embedded as in advanced economies.

William White, a former chief economist of the Bank for International Settlements (BIS), the central bankers club, who now chairs the OECD’s review committee warned that central bankers had “used up all their ammunition”.

“The situation is worse than it was in 2007. Our macroeconomic ammunition to fight downturns is essentially all used up. Debts have continued to build up over the last eight years and they have reached such levels in every part of the world that they have become a potent cause for mischief,” he said on the eve of the event.

The BIS was one of the few organisations to warn during 2006 and 2007 about the unstable levels of bank lending that eventually led to the Lehman Brothers crash.

4. Forecasts and errors.

At the beginning of the year, there are all kinds of forecasts by all kinds of people. They range from sanguine to doom. In the Economist, there was a great article about economic forecasts. They are inevitably wrong. But also, forecasts never predict downturns accurately.

“Forecasts of all sorts are especially bad at predicting downturns. Over the period, there were 220 instances in which an economy grew in one year before shrinking in the next. In its April forecasts the IMF never once foresaw the contraction looming in the next year. Even in October of the year in question, the IMF predicted that a recession had begun only half the time.”

5. Oil and downturn.

Oil prices have been falling sharply. Global demand is not strong enough for the increase in supply. With risks to growth, lower oil prices will provide some relief to embattled households and business, but don’t expect it to boost global growth.

Bloomberg had this great chart of inventory and the price of oil.

“[Oil] Markets could “drown in oversupply,” sending prices even lower as oil demand growth slows and Iran boosts exports, the International Energy Agency said Tuesday. A "lower-for-even-longer" scenario is forcing companies’ budget planners to trim spending even further.”

6. What inflation?

The latest data for NZ shows there is little or no inflation. Some of this is due to lower global commodity prices, particularly oil. But there is a much wider theme of low and subdued inflation across the economy, with only a few hotspots that show no indication of spreading. It hasn’t been just consumer prices that have barely grown, it's also wages.

The weakness in inflation is a global story, not just local. US interest rate predictions have been scaled back from gradual increases to just a 10% chance of another hike in coming months.

The FT writes that interest rates are unlikely to rise soon and not to pre-GFC highs.

Will [interest rates] return to pre-crisis levels? Not for the foreseeable future, according to Fed policymakers’ own projections. The Fed believes the rate compatible with stable growth and prices has sunk sharply because of the lingering effects of the crisis and will increase only gradually. In this subdued post-crisis world, the central bank will need to keep its foot on the accelerator for some time to come.

7. Capital fleeing emerging markets.

Capital fled emerging markets faster than earlier expectations, according to the Institute of International Finance (IIF).

Capital inflows boosted investment and economic activity, as well indicating confidence in emerging markets. But last year, capital fled the region and China was most affected.

The bulk of these outflows relate to China, driven in part by repayment of corporate FC liabilities in the face of concerns about a weakening currency. We estimate total capital outflows from China amounted to $676 billion in 2015. 

With the latest clampdown on capital outflows in China and changes in the foreign exchange regime, its unclear if that outflow can continue in 2016. NZ could be a recipient of these funds for businesses and real estate if the IIF’s forecasts for 2016 are correct.

8. Overqualified?

Recent research from Canada shows that students with PhDs do not always go on to get good jobs. After decades where tertiary education has been used as a shorthand for lifting skills, employability and incomes – it is time for a rethink. Not all tertiary qualifications will get good jobs.

A study from Canda shows that:

40% of young Canadian graduates are overqualified for the work they do

some fields are worse affected than others: with business, management, law, and humanities being the worst hit

labour mismatches are worsening across subnational regions

struggling with a “new normal” of economic growth, wherein the difficultly of creating high quality jobs commensurate with an educated young workforce increases considerably.

The story could just well be about New Zealand. We have to think seriously about getting our young people into the right skills paths that will give them a lifetime of employability. Provinces need even greater care, which have been lagging cities for many decades.

9. Davos: Issues facing the world.

In Davos, the who’s who of the business and political world has gathered to talk about the economy. Their main concerns are not that different from NZ:


“Increasing numbers of humans may disappear from the workplace with the arrival of mass automation”


“[…] spooked by the past six months, from last August’s exchange rate gyrations and first stock market crash, to the second bout of stock market panic that opened this year. Beijing’s communiqués have come too little, too late to soothe investors’ anxieties.”

Emerging markets:

“During the past year, money flowed out of emerging market investments into dollar-denominated ones, in anticipation of a stronger dollar and better interest rates in the US. Net investment portfolio inflows to emerging markets became negative for the first time since during the global financial crisis in 2009.”

10. Believe China GDP numbers?

China’s economic growth is moderating, or is it slumping? Financial markets suggest the latter, but some academics suggest things aren’t as bad as they are made out to be.

GDP was up 6.9% in 2015, right in line with survey expectations. Any talk about this being the slowest pace of growth in 25 years is off the mark.

No doubt some commentators will be quick to dismiss today’s official figures as being made up by the Chinese government and to suggest that the real situation is much worse.

But that’s not the conclusion reached by those who have made it their academic career to study the quality of Chinese economic data.

[…] take a look at how China’s economic growth shows up in some of the numbers closer to home. More than one million Chinese tourists arrived in Australia last year, up 22% on a year earlier. Spending by Chinese tourists totalled $7.7 billion, accounting for more than one-fifth of total international visitor spending, and more than double that of second placed, UK.

New Zealand tourism is riding the same wave. But can we shrug off plunging commodity prices and slowing exports to just naysaying?

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#4 - Forecasts and errors
#6 - How fast will rates rise?


#8. Phd ? Strangely a common feature of third world countries is there is a surfeit of unemployed university graduates. Come to think of it, that's us.


Education has been a bug bear of mine for ages. When I was at Uni there were only 6 universities and numerous Tech Institutes. Now we have god knows how many 'Universities' where a lot are giving out useless degrees so a few individuals can have a cosy lifestyle with govt grants etc. We need a radical overhaul of the tertiary education system where emphasis is on useful degrees (science/maths/medicine/enginnering etc), not Art degrees which are a passion. Also, skills such as electrical/building/drain laying need to be emphasied more as a skill in secondary school so we can get away from the 'Need a degree' mantra.


Same. I was late getting my degree and have noted over many years some highly qualified individuals with and alphabet soup after their name, who don't know what they are talking about! More enamoured of their own opinion than they have a right to be and a huge ego. Others, bugger all education but lots of experience are much more knowledgeable. Sometimes QBE is the best qualification!


Exactly, there are also a whole lot who have absolutely no work experience during their long years of study and find it really hard to communicate and perform in a working environment. The fact that they have a PHD but no people skills is tough. And for those that say ARTs Degrees etc is a necessity, I agree, but it does suck when u finish university, cant find a job and the student loan u took is being paid off by the tax payer. Those that want to follow their dream jobs with no scope in NZ should do so with their private $ cos all they will end up doing is leaving the burden on the tax payer. I know it sounds harsh but I have close family who have done exactly that. Completed masters in a useless degree and now working in a store selling BBQ's. (and no its not his dream job)


The problem is a qualification does not mean a good education. In addition, seriously tired of management with personality issues, bias and ego getting in the way of a sound education....


Art degrees are not just a passion. As a society we need Anthropologist's, archeologists, Historians and the like. Imagine a wold where everyone only trained to be an engineer. Brilliant.
You are right, however, regarding the number of universities. There are now many people with bachelor's degrees from poor educational institutions who have no idea what they are talking about.


You are correct we do need people with arts degrees. Some do head onto jobs where their degree helps, other participate in the community in a way that helps us as a society. Unfortunately there is a disproportionately large number of graduates.

Whenever I watch the graduates going past my office there's a very large number of them that are collecting an arts degrees relative to science and commerce graduates. There's an imbalance so much so that I need to point out a world without scientists and engineers would be a terrible place.

There is an actual underlying problem of teachers, parents/family and universities claiming that a degree will make you better off financially. Sure if you mix all graduates together in one pot the average income is higher, if you remove everyone but the arts graduates you'll find a different conclusion.


We now have 8. Too many bad hardly a dramatic change.


I agree. Having a Zoologist Degree gets you all of these important jobs like S. Joyce has in his portfolio;
Economic Development - Minister
Finance - Associate Minister
Novopay - Minister Responsible
Regulatory Reform - Minister
Science and Innovation - Minister
Tertiary Education, Skills and Employment - Minister

Go figure!


#5 Oil Currently approaching $27 and the curve is getting steeper,

$20 by 1st Feb?


A sudden mood of optimism, or more likely market manipulation, has pushed oil towards $30 a barrel.

Not that $2 or $3 is going to make much difference to rupturing oil-sector companies and rupturing oil-export-dependent nations.

Another 10,000 oil sector jobs gone:…

And if you scan down the graphs you will see how kaput Mexico is, and also that US shale oil extraction has peaked.


Not surprising, market was oversold. The lack of breadth to the rally is indicative of underlying weakness, so until central banks do something, everything is going lower...


A sudden mood of optimism? - I doubt it

More like short covering - the behaviour of shorts taking profits

All together now - 123


#8. We need more builders and sub-trades.


agreed I heard the other day how a tutor was dismayed at how our education system is set up to funnel as many as they can to university. well qualified tradesman can make a dam good living and there skills are transferable to peripheral occupations


We may need more builders ,but who can afford to buy what they build?


we may need them however is it a good deal for them?


Gold is not an investment, gold is money, ask a person who should know, Allan Greenspan, ex Head of the FED.
“Deficit spending is simply a scheme for the ‘hidden’ confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights.”
Having studied the subject over the past decade it appears to me that the only time gold works is when everything else doesn't, 2008-2009 and maybe 2016?

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As Ray Dalio says: "If You Don't Own Gold, You Know Neither History Nor Economics"