I’ve finally finished wading through the paperweight (as is the norm) aka the Savings Working Group report. Having read the initial commentary, I wasn’t that excited about the prospect but often in these reports there are useful nuggets of information. The main noise is around saving more and adjusting savings incentives especially to promote Kiwisaver.

What is not clear though is to what extent we have an actual savings problem. Our gross saving is at the low end of the OECD with Portugal and Greece below us along with two nations that might surprise: The US and the UK (page 121). There is also difficulty in analysing the differences between household and business saving. NZ is a country of small businesses and often business and household financials are closely interlinked. There is no definite conclusion around this issue and the report asks for further research into this topic, especially around data collection.

The macro level is really where the problem can be seen. When looking at the growth in national wealth, it’s clear to see that housing revaluations are the key driver (page 127) of growth since 1999. In fact “property revaluations explain nearly all changes in household net worth since 2001 (page 130). This is another way of demonstrating that we haven’t actually created any productive wealth: we’ve simply revalued our housing base and used that to fund increased consumption. That consumption has been funded by debt and that is why we have a serious debt problem.

So can we save our way out of this problem? Looking at the data on household incomes one would have to say “no chance”. Market incomes have fallen (yes fallen) for the bottom half of the population between 1988 and 2007 (page 140). That is simply astounding. This at a time when house prices have risen 490%. This is the cause of the deepening inequality between the owners of property and the renters. Even with benefits added in income for the first four deciles has remained largely the same (page 141).

Poor choices? Or simply no income with which to save. I think we must face the fact that half of our population is existing on meagre income. They cannot save and are likely to be in debt simply by virtue of not having enough cash to afford purchases or expenses outside of the simple basics of living. Those who have managed to get on the property ladder have prospered primarily because their asset has risen substantially in value. That is where their  savings lie. It should be noted though that, for many, this increased wealth is purely on paper.

At this point it might be worth looking across to data from Australia (page 128. Aussies actually have more of their wealth in residential property than Kiwis do (50% vs 46%). Investment in shares in much the same (8% vs 9%). The big difference is in long term assets. Aussies have 19% in Pensions and Superannuation whereas Kiwis have 2%. To balance that out Kiwis have 22% in business and farm assets against Aussies holding just 9%. So for Kiwis businesses and farms are their pensions. This is not an exact comparison but it’s clear that there is not much to separate the two countries other than Aussies invest in public companies and Kiwis keep it private. It also shows that Australia may have the same debt problem we do though they have benefitted more from the commodities bubble than NZ.

The oft quoted statement (from Ministers, the RB and other officials) that Kiwis should save more is somewhat optimistic. Save more from what exactly?

So what can we do? Well we can look at the other side of the savings coin and that is our expenditure. As a country we have essentially borrowed our GDP for the last 20 years. This is reflected in our current account position which has left us with a Net Foreign Liability (NFL) of 85% of GDP. Poor investment and low labour productivity (not sure where the NZBR gets its numbers from) has left is with nearly 40 years of negative current account balances (pages 20-24). The simple explanation is that we have consumed more than we have sold (plus all that accumulated and compounding interest). This consistent deficit should have seen NZ with a consistently weak currency (to allow the balance of payments to correct) but this has not been the case. NZ’s high real interest rates have been attracting overseas investment looking for a high yielding home (page 26). NZ is seen as a safe place to invest and, in an era of low global rates, has seen major inward flows which have not just funded the current account deficit but also the major revaluation in house prices.

The accumulated current account deficit has pushed interest rates thus forcing up the currency . This in turn has made imports even cheaper fueling the spending boom and embedding the circularity of higher prices in the economy (page 39). The bottom line here is that our currency is too high. This has been noted for some time but successive governments have chosen to ignore the problem, hoping that regular comments will help keep a lid on its appreciation. A 2010 IMF study estimated “that stabilising NFL would require the real effective exchange rate to depreciate by 20%”….that’s to just keep NFl where it is now. To reduce “NFL to 75% of GDP over 15 years would require the real effective exchange rate to depreciate by 25%” (page 36).

That would put the NZ$ at between $0.55-0.60. Ouch!

That is the real story to come out of this report. To summarise:

- We don’t save much because half the population has had no increase in income for 20 years.

- The other half have increased wealth due to large revaluations in house prices.

- The top 2 deciles have seen increases in wages and this is where most of the real saving is coming from (if any).

- Debt funded consumption has seen interest rates rise thereby sucking in more investment flows and boosting the currency.

- We have borrowed to live and really have no spare cash to save.

- The best form of saving is paying down debt, both private and public.

- The only way to improve our position is to export more and import less.

- The primary way to export more and import less is to engineer a significant and lasting depreciation in the currency.

- The second option is to develop and invest further in export based industries.

Adjusting tax incentives and boosting Kiwisaver are not going to help us out of this malaise. Only strong and decisive action can help us from here. So what would I recommend? That’s too much for this post but at a high level some of the following (most of which I have written about previously).

- Lower the exchange rate by direct intervention.

- Cut interest rates as well as bringing down the cost of mortgages which are still very high.

- Restrict bank credit by raising asset requirements.

- Build a self-sustaining energy sector.

- Introduce a basic income to replace welfare and superannuation.

- Liquidate the overseas portion of the Cullen Fund (now whilst markets are at 30 month highs).

- Invest more in the productive export sector.

- Oh and let’s have a land tax whilst we’re at it (this was ruled out by the government in the terms of reference!).

Next week: The Welfare Working Group reports…..can’t wait!

Yesterday Julia Gillard became the first foreign leader to give a speech in Parliament. It was full of mateship and the usual joshing that is a theme for Australian-New Zealand relations. Beneath the jovial tone lay the theme of integration. This has been around for a long time, probably since the CER was first implemented back in 1983. It’s been somewhat on the backburner over the last 12 months as Australia has gone through a political shift but now the same theme is back on the table.

Is complete economic union likely? I addressed this back in September 2009 when it was last on the table. What has changed since then?

There has been a major shift in global political alignments. As the shift of economic power has moved from West to East, so has the political spotlight. Back in 2008 I noted cross border acquisitions from the East and that these signaled a major shift to a post-imperial world. That shift has continued apace with China rising to the fore, now the second largest economy in the world. For the ANZAC brothers that has major implications.

Being connected to the ASEAN has helped both Australia and New Zealand define its geo-political position in a post-Empire world, specifically post European Community integration. Asia is quite clearly the major focus in terms of trade and this has seen some interesting reaction from the old allies. This year we had a visit from William Hague, the British Foreign Secretary, along with his Defence colleague, Liam Fox. It was the first visit in almost 20 years and indicated that the UK was taking this shift East a little bit more seriously. Suddenly old friends were very much worth getting to know again. Previous to this we had a semi-royal visit from Hilary Clinton, the US Secretary of State, down under to sign the Wellington Declaration which put NZ back in the very, very good friends corner. And today we see the Treasury heads of the UK and Australia in town to meet with their NZ counterpart. This is of note as it is the first time they have met together.

So what does this all mean? Simply it’s a jostling for position and a reaffirming of old ties in  a very new world. This puts Australia and New Zealand in a very strong strategic position. We are friends of the old and the new world. We are well located geographically…out of the way but close enough. For the ANZAC buddies that poses some interesting questions. Stronger together, weaker alone or carry on as is?

We can see that the CER is being re-negotiated to allow of higher levels of non-reviewed investment which could mean a lift for corporate activity as well as a loss of company control. And this is really the crux of the matter. Do we want to control our own destiny? Lessons from Europe are all too stark in this regard. Sinking economies have no room to lower their currencies and so swing in the wind, completely reliant on bailouts.

Ultimately the people will decide on this, though its clear that further integration around common borders, regulations and practices is likely to continue. At what point does having separate currencies become a pain? Well ask anyone trying to transfer money between the two countries. You would imagine you could shift cash at minor spreads but actually you pay through the nose. Travelex is one the worst players in this market. Even market spreads are quite wide. So there is definitely a cost to doing business which might add up to 1-2% of overall activity.

A nation’s currency is ultimately a reflection of its sovereignty. The ability to issue your own coin is one the the most recognised symbols of nationhood and has often been as an economic weapon in the colonisation process. If you lose that ability then you lose control. It’s as simple as that. The way to overcome that is to just recognise that you are part of something bigger (in this case Australasia) and take the good with the bad. Personally I think it’s a tough decision to make. History tells me that having control over your own affairs is a good thing. But perhaps the mateship bond will swing views the other way. Perhaps it’s already happened. I’ll leave the final word to Peter Costello, the former Australian Treasurer, at the second Australia New Zealand Leadership Forum in April 2005 (“Crisis”, Bollard, 2010, 26):

“You guys in New Zealand have to get real. If you want to be part of a single economic market with us you can forget having your own banking system. Remember, you sold your banks to us: you don’t own your financial system any more. Leave the regulation to us”.

Strewth!!

“

People are always asking me where to put their money so I thought I would do a simple post about it. I should add this is simply my own opinion and you should really check with a financial advisor…………tongue firmly in cheek!

Let’s start with the obvious. There is no such thing as a risk free investment. Even sovereign bonds (those issued by governments) can turn into wallpaper….look at the US Treasury market now, the world’s safest place to park your cash. Ultimately it’s just an IOU, generally backed by commodities or in the case of the US by a fairly large military and lots of nuclear rockets.

Having got that out of the way the first question you need to ask yourself is why am I investing? Is it for regular income or the hope of generating a huge pile of cash for future income generation (retirement for example).

Let’s start with the income piece by looking at what is available:

- Cash deposits.

- Term deposits.

- Government bonds.

- Corporate bonds.

- Shares that pay dividends.

- Property.

Generally, as in all things, you pay for what you get. The main issue any investor should consider before making an investment is liquidity:

How quickly can I get my cash and what will I have to pay to get it?

As many investors found to their cost in recent years, liquidity is the single most important issue.

Which draws the question: is there a market for my investment?

In the case of cash that is not a problem (actually that’s not true but for the sake of this exercise we will pretend that cash is always available – see Northern Rock for further details).

Stocks can generally be sold on the spot and cash received quickly (of course stocks can be suspended at anytime which means you can’t trade it, well not on the exchange).

Bonds have a market you can trade on but liquidity can be an issue sometimes.

Property you can forget. That’s a highly illiquid asset.

Managed funds as we see all to often can be very hard to get out of and the fees can be severe. If the fund holds any kind of assets other than plain stocks then redemptions may force suspension of the fund (we’ve seen that).

Baring all that in mind cash seems like the best place to have your money if access is an issue and you are risk averse. Second up would be quoted shares with high liquidity (shares on the major index e.g. Telecom in NZ which pays a good dividend). Bonds would be next and then managed funds and property bringing up the rear.

Anything that offers these with a twist is to be avoided unless you’re a professional. Like guaranteed capital return plus 100% of the 5 year blah blah return on some index. Avoid. There are huge fees and margins built into what is a simple option structure.

I’m sorry but there’s no free lunch in the investment world. But it’s very easy to lose money or receive poor returns whilst paying out large fees and charges.

My advice is start with cash and spend some time learning about basic stocks and bonds. Believe me it is not difficult.

Armed with a little knowledge most people could construct a portfolio of cash, stocks and bonds in a few hours.

Also don’t be lulled into the idea that you are a long term investor and won’t be pulling down the cash for 20-30 years. Look at how fast the world is changing…….planning that far ahead may not actually make much sense.

As with most things in life, keeping it simple can pay off. Also spending a little time learning about investment can save you a lot of money as well as enabling yourself to take charge of your own financial destiny.

Thanks to Jim for this post (his post in bold)

The BBC has provided a platform for Sir Evelyn de Rothschild, one of Britain’s most noted financiers, to express his views on the global financial situation:

All of us – countries, corporations and consumers – have neglected basic principles.

Ethics – we have lost sight of an honest day’s work for an honest day’s pay.

Careful management – we have indulged our wants without the taxes or the prices or the cash to pay for them.

Oversight – public relations and spin have replaced disclosure and transparency; casual yet complex accounting and accommodating rating agencies left us blissfully unaware of the problems, and we revelled in our ignorance.

Hubris has replaced community responsibility as a requirement for executive positions.

American automobile executives and British bankers have been unable to form their lips into an apology.

Yet their institutions lie in ruins and the rest of us are left feeling embarrassed for them.

Their customers worry that their savings or their working capital will just vanish, their mortgage will be transferred to a new institution they have never heard of.

Their employees wonder which of their colleagues – or they themselves – will be unemployed in the coming week, with bleak prospects for working again anytime soon.

Where is the shame of those who only months earlier boasted of ever increasing profits, of ever more clever products, of ever easier loans?

Remaining credit

The US automakers may be the worst of the lot, so far.

Years of incompetence and now manoeuvring in the halls of Congress for a massive bailout.

Management prefers to hold onto private corporate jets rather than push for fuel efficiency standards to make their products more competitive.

Union members would rather hold onto their gold-plated pensions for life than to save their companies.

Why should taxpayers help those who have so frequently refused to accept responsibility themselves?

If the US government uses up its remaining credit to help the auto industry carry on as usual, who will lend the country the money to repair its bridges, build its power stations, clean its water, fuel its navy?

Slow revival

Thirty years ago, New York City found itself in a position similar to GM, Ford and Chrysler today.

They asked Washington for help. The government refused.

The Daily News summed it up in its front page headline – Ford to City: Drop Dead [ed. the president]

Instead New York balanced its budget, taxed itself, reduced hiring, negotiated better labour contracts and gradually worked itself back to fiscal health.

It took more than 10 years.

Take responsibility

This era of struggle may last as long.

Until we can be generous in accepting fault for our predicament, we will have difficulty dropping our suspicions about others so that we can get on with repairing the damage.

Unless action is taken soon, we can only see a long time of difficult and very onerous problems continuing.

Could be one or two years.

It is therefore essential that management must take a firm look at its problems and accept its faults and redeem them.

A lot of talk and a lot of words have been written.

But in the end action has to be taken and action must be taken very soon if we are not going to see this stretched out over many years.

What we have to remember is that the crisis we are in the midst of is a financial one. A crisis of the syntheticism of money.

Like a cancer this is slowly being removed from the system. What is left of the corpse remains to be seen. But the end of the derivatives trade, especially the highly structured piece, cannot come too soon.

The role of interest (unearned income) in our economy needs to be reviewed. We need to refocus on the productive economy and the ability to invest in it i.e. by purchasing shares in companies are receiving dividends or, in the case of new innovative companies, an opportunity for capital gain commensurate with risk.

My own investment philosophy is simple. Buy low and sell high.

When interest rates (here in NZ) were low in 2003 i bought commercial property which was then yielding 9% (against an interest rate of 6.5%). In 2007 when interest looked like they were going higher (over 9%) I sold the properties which were then yielding 7.25-7.5%).

The market kept going for another 9 -12 months and has now fallen heavily.

I didn’t buy shares as dividend yields were lower than interest rates and p/e ratios were too high.

I put the cash in the bank.

Now I have started buying shares. Why? Because dividend yields are sky high (although earnings will continue to fall), p/e ratios are in single digits and interest rates are falling. Shares could keep falling for sure.

But the point I’m making is investment is pretty simple. Ignore the hype and focus on the numbers.

The hardest skill to learn as an investor (and we are all investors to some extent) is knowing when to sell. When the market is flying high its so hard to sell because you worry you’ll miss out on more. When its falling you secretly hope it will somehow bounce back.

As Evelyn reinforces, its all about basics whether values, ethics or simple strategy.

We’ve been living in a fool’s paradise for a while now and its time to get back to reality.