First Reflation, now Stagflation, the cost of Covid 19

By | Insights
Whilst we continue to try and assess the ongoing social and economic costs of this pandemic, inflation has become a key concern for financial markets as it broadens while growth...
Whilst we continue to try and assess the ongoing social and economic costs of this pandemic, inflation has become a key concern for financial markets as it broadens while growth recedes. This unusual mix is in part driven by a lowering of economic support and lack of supply normalization, as the world grapples with differing re-opening strategies and trade channels remain logjammed. Over the past 3-4 months, investors have witnessed a significant acceleration of inflation that is steadily broadening and running ahead of expectations. At the same time, as the initial sugar rush subsided, economic indicators globally are surprising in... Read more

Why long-term interest rates are more likely to fall.

By | Insights
While investors are currently preoccupied with shorter-term questions of higher interest rates, inflation and tightening economic conditions, the reality is interest rates have been on a consistently declining path for...
While investors are currently preoccupied with shorter-term questions of higher interest rates, inflation and tightening economic conditions, the reality is interest rates have been on a consistently declining path for the last three decades and those forces responsible for this phenomenon remain relevant and in some cases are likely to strengthen. What are some of these forces? The increase in size and influence of governments and central banks (financialization) is highly disinflationary and no longer reversable. Central banks decision to manage through crises, with as little damage as possible to financial assets (2001, 2008, 2020) by pumping in liquidity and... Read more

Bank economists continue to ‘lean’ on the RBNZ

By | Insights
I wrote an article recently highlighting the disadvantages of being a ‘first mover’ in normalizing interest rates ahead of other developed economies such as Australia and the US. The premise...
I wrote an article recently highlighting the disadvantages of being a ‘first mover’ in normalizing interest rates ahead of other developed economies such as Australia and the US. The premise being, this would be premature considering our modest progress in getting the population vaccinated and the likely upward pressure on our exchange rate, at a time when businesses are already facing cost pressures and the uncertainty of future lockdowns. Our local bank economists clearly disagree. Despite the events of this week, they still appear in no mood for a period of further assessment with one bank on record requiring the... Read more

First mover disadvantage

By | Insights
It was not that long ago that New Zealand was once referred to as the ‘rock star’ economy. A rather infamous quote from a bank economist describing our envious economic...
It was not that long ago that New Zealand was once referred to as the ‘rock star’ economy. A rather infamous quote from a bank economist describing our envious economic position at the time relative to our global peers. This reference was premised around three key factors (i) above trend growth, (ii) a residential housing boom and (iii) rising dairy prices driven by strong demand from China. At the time, the Reserve Bank were compelled to raise interest rates on fears of an overheating economy due to inflationary pressures. This strategy of raising interest rates out of step with other... Read more

A world of fairness, equality, and no waste

By | Insights
In the last couple of weeks investors have witnessed two initiatives both locally and internationally: (a) the announcement of the New Zealand clean car government rebate whereby people buying new...
In the last couple of weeks investors have witnessed two initiatives both locally and internationally: (a) the announcement of the New Zealand clean car government rebate whereby people buying new electric and hybrid vehicles will be eligible for a cash rebate (b) and the announcement by G7 of their intention to pursue a minimum 15% tax for the largest multinationals. What links these two seemingly unrelated topics is the growing societal desire for a new world of ‘fairness, equality and no waste’, as opposed to a more relaxed philosophy of 1980’s-2000’s, which emphasized ‘choice, freedom and efficiency’. While different in... Read more

Are interest rates really heading higher?

By | Insights
While most investors are pre-occupied with when interest rates are going to be adjusted higher, particularly in the wake of much stronger-than-expected US consumer price inflation (CPI) data and rising...
While most investors are pre-occupied with when interest rates are going to be adjusted higher, particularly in the wake of much stronger-than-expected US consumer price inflation (CPI) data and rising inflation expectations domestically, this is largely yesterday’s story. A far more important question is how likely is it that investors might witness first steps towards more support rather than a tightening of economic conditions sometime over the next twelve months? First, if you look at the latest US CPI data (4.2% annualised) it is not indicative of broad-based inflationary pressures. As highlighted by the Macquarie US economist, price rises were... Read more

Government clutching at straws on housing

By | Insights
In a rather predictable statement last week, the Reserve Bank reiterated their commitment to keeping interest rates low for an extended period, and that any short-term inflationary pressures are just...
In a rather predictable statement last week, the Reserve Bank reiterated their commitment to keeping interest rates low for an extended period, and that any short-term inflationary pressures are just that, short term and temporary. This messaging has clearly rattled some in central government. Housing affordability continues to be the thorn in this governments side. The latest REINZ house price index had prices up 19.2% year on year which clearly feels like an unsustainable level of house price growth. Whilst this is expected to moderate as the impact of lower interest rates reduce and the reintroduction of LVR restrictions take... Read more

Is reflation just a matter of time?

By | Insights
Over the last six months, investors have become more amenable to inflationary arguments or what is being referred to as the reflation trade. This in essence is the growing belief...
Over the last six months, investors have become more amenable to inflationary arguments or what is being referred to as the reflation trade. This in essence is the growing belief that short term interest rates are unlikely to go lower from current settings; and these enormous fiscal measures being implemented across the globe will finally result in wage cost pressures as one measure; and catapult us out of an environment of persistently low inflation that we have been in mired in for the past decade. Now we could have a whole other argument on how inflation is being measured; and... Read more

Bond and Currency Markets not the signal they once were?

By | Insights
In the past, there was a near universal consensus that bond and currency markets are much better at reading the macro-economic picture impacting financial markets, and thus can be a...
In the past, there was a near universal consensus that bond and currency markets are much better at reading the macro-economic picture impacting financial markets, and thus can be a useful guide for equity investors when assessing risks and the direction of share markets. Currently, if we were to look at equity markets you wouldn’t guess that many industries will be either permanently impaired or face prolonged recoveries or that political and social risks are rapidly rising. High yielding debt instruments (riskier bonds) are now back to some of their lowest levels in yield and currency markets have been stable... Read more

How should investors strategies change?

By | Insights
On what seems like a daily basis, investors are being bombarded by sanctions, restrictions, and blockages that would have been unthinkable even six months ago. In this environment it is...
On what seems like a daily basis, investors are being bombarded by sanctions, restrictions, and blockages that would have been unthinkable even six months ago. In this environment it is tempting to follow news without forming a coherent backdrop. However, from an investing point of view this will likely prove to be short-sighted. The attempted separation between China and the rest of the developed world is getting deeper and it is unlikely to be fully bridged in the near term. This will apply to all aspects of life, from politics & military affairs to trade, technology, immigration to capital. While... Read more