Another Day, Another Finance Company Busts

You have to feel sorry for Kiwi investors as another finance company goes bust. Today it’s the turn of Nathans Finance to declare itself out of the game. They used to send me stuff through the mail every month. Who knows how many were seduced by the slightly higher interest rates on offer.

It may sound like i’m enjoying this but i’m not. I wrote several letters to the powers that be well over 3 years ago exhorting them to sort out the non-bank financial sector but to no avail.

Ultimately it’s a case of caveat emptor. Before you invest in anything understand the risks. I am amazed how many financial “advisors” have put their clients into these flaky companies. I use the term advisor loosely here.  I seriously doubt whether many of them actually understand how the products they sell actually work and how to stress test them.

If you want higher yields then invest in a decent fund that buys the whole spectrum of bonds and therefore diversifies the risk. A couple of decent Kiwi funds are Fisher Funds and of course the self styled people’s champion, Gareth Morgan.

Check the fees and check what you are getting. Don’t listen too much to the experts. Learn about it yourself. There really is no free lunch out there except at the City Mission and if you’re down there the chances are you’ve blown your dough already.

It’s your money and your responsibility.

Fed comes to the party…..again

So the Fed yielded to pressure and cut the discount rate. Come borrow more they say….so much for a prudent approach to banking. But really they have no choice. They will just keep flooding the market with dollars for as long as it takes.

The market rallied as expected but it’s hardly a vote of confidence in the system. There will be an expectation of a cut in the funds rate at some point if credit woes continue. The problem is that the last few weeks have been so volatile that for many the opportunity to liquidate positions has not been possible.

Flight to quality has seen the $ rally except for that old favourite $Yen which has taken a pounding.

Who would want to own $? This flight to quality argument alway amuses me given the world is awash with $ and $ assets.

The volatility in the fx markets has been extreme reminding me of the Stg ERM debacle. It just shows that the leverage in the market creates an instability in the system which causes wild swings.  The range mileage in KiwiYen on Friday was the biggest i;ve ever seen in any currency pair…22 big figures in 24 hrs….thats 27.5% in absolute terms of up and down movements.

You would need Kevlar pants to trade that pair. I’ve been trading small amounts but cannot imagine much volume getting through at any reasonable spread.

This is market dislocation. The Fed can cut rates all they want but it wont help people who are under water whether owners of houses on 100% mortgages or funds with boatloads of credit on their books.

Another wild week beckons so expect more central bank ministrations.

Credit Boom ……..Busts

The credit inspired boom of the last 15 years is now over. Markets are in severe dislocation and whilst underlying economies are very sound there is a serious problem in global banking liquidity.

On the good side we have record low unemployment and company profits are in good shape. But the driver of that has been consumption driven by an expanding money supply which has driven up asset prices and created a wave of paper wealth.

Interest rates have been hiked up to halt this boom. It’s too late. The record low rates in the US over the last 5 years created easy money that was too good to refuse. As rates were jacked up people realised they hadn’t done their sums properly.

Wave after wave of derivative offers, capital guaranteed notes and other “too good to be true” offers have come pouring forth. There is nothing so easy as making money out of money.

But mathematics will always intervene. Compound interest takes no prisoners in its tsunami like advance across personal and corporate balance sheets.

The central banks now have no option but to step in and sort this mess out. The risk of systemic crash is clearly a possibility now, not just in stock markets but banking systems.

Whether markets can recover from here is a moot point. They always do eventually whether its months or years.

If the consumer goes to sleep expect a recession plain and simple. It wont matter where you are or what you do.

The important point is that our financial systems need a serious revamp. The gross expansion of the global money supply, condoned by the global central banks, needs a full inquiry.

Nothing less will do.

Volatile Markets - par for the course

It’s been an interesting week or so since the RBNZ lifted interest rates t0 a wallet popping 8.25%. The Kiwi peaked above 81cts in a nice blow off move and post rate hike and carefully worded statement it has retraced as far at 75.5cts with the Yen cross taking a battering from 97.50 to 88.50. So much for safe carry trades.

The South Korean Finance Minister made some loud noises about the carry trade implications for the Won which was a bit firm for comfort.

Look really this is just a big game. And in all games there are winners and losers. As we see domestically in NZ with the collapse of yet another finance company, its usually the average risk averse investor who takes a cold bath.

Belgian dentists and Japanese housewives watch out!

All this because irresponsible and incompetent central bankers mismanage the global monetary system.

Leveraged money is like water….it will run down until it finds a place that can hold it. Anything that looks remotely fixed will attract attention..exchange rates, interest rates etc.

In a way speculators act in harmony with natural systems. Our world is in constant flux and it is normal for systems to move as new information is incorporated. Nowhere is this more obvious than the global currency markets…each breath of news is immediately received into the price no matter how minute.

So as soon as Alan Bollard said this is enough for now, then all bets were off and the market responded accordingly. Throw in the sub-prime meltdown in the US and it turned into a rout which could continue further. As i noted previously the Kiwi was at a level worth selling and could fall much further especially if the crosses get unwound.

We shouldn’t be overly concerned because we know the system is built to generate these crises every few years. According to Fred Harrison its every 18 years for the big bust  but currency debacles happen more regularly than that…..Asia, South America, Euro land, Russia…its par for the course.

So don’t be too alarmed. Just remember what Newton said…..whats goes up always comes down….eventually.

Monetary Policy 101: time for a rewrite?

Local government rates go up followed by interest rates.

Energy prices go up followed by interest rates.

So people are made worse off by increases in prices for goods and services that they cannot easily deflect or cut back on. That’s hard.

But wait there’s more, like a boxer climbing off the floor after a big punch they are hit again even harder by interest rate rises.

And to cap it off it’s all their fault.

I must be missing something here.

The only result of this type of policy is a regular cycle of boom and bust with more and more people forced into bankruptcy for no good reason.

It could be argued that interest rates should be cut in this scenario so that people are not forced to seek higher wages to compensate.

The main concern in the inflation issue is asset and commodity prices. But really its asset prices that are the culprit. They have been driving the global economy for many years now, most notably since financial deregulation in the 80s.

Talk has surfaced recently of the Treasurer invoking a clause in the Reserve Bank Act to move the inflation target aside in order to focus on the exchange rate. Whilst this is a bit far fetched it is another symptom of the policy malaise NZ is facing.

The Reserve Bank Governor has made the same mistake many others have before him: not understand the role and process of bank credit.

It’s as simple as that.

Using an inflation target to manage an economy is like riding a bike with one eye closed. Eventually you have a write off.

RBNZ: Have They Lost the Plot?

There has been a lot of hand wringing over the recent Reserve Bank’s intervention in the currency market. So what’s the story here?

Well the RB has a clear mandate to keep inflation, as measured by the CPI, between 1-3% on an annual basis. According to them they also say that,

“The Bank is required to ensure that, throughout the economy, money works as well as possible as a mechanism for making transactions, storing value, and keeping account.”

So let’s say they are also responsible for price stability in a general sense i.e. no serious asset bubbles or major deflationary shocks.

So how are they doing?

Since 1998 the CPI has risen 20.7% to December 2006. So an average of 2.5% per annum which is within the prescribed band.

But the key worry, or so they keep repeating, has been the housing market which in the same period has risen 143%.

So what have they done about it?

From Mar 04 to Dec 06 they raised interest rates by 2%, from 5.25% to 7.25%. That doesn’t sound like a great deal by historical standards and clearly has not had any impact.

From Mar 04 to Mar 05 rates went up 1.5% as inflation took off towards 3%. However, they stopped when they should have kept going. When CPI hit 3.4% and stayed above, the bank should have got really serious and jacked rates up very quickly.

They didn’t. CPI was above 3% from Sep 2005 to Sep 2006 and they moved only 50bp. This was their big mistake. With house prices on the march as well they should have had rates up to 8% by June 06. They are a year behind the curve and that could cause some major problems.

Alan Bollard has been soft in his approach and this may well stem from the false comfort that low global rates has brought. The great inflation crush of the late 1990s has seen global rates fall into ranges not seen for many a year. Central bankers have been playing in a very small range and have been lulled into a false sense of security.

All around us we witness the asset price bubble caused by cheap global credit. The Japanese are still at it pumping out cheap yen that no one really wants. This is a major disaster waiting to happen. We’ve seen it before when USD/JPY fell to 79.65 back in 1995 on the back of US trade concerns and Asian Central banks dumping their US$. For now the flow out of the yen and into the kiwi continues with a rise of over 15% in the last 6 months.

Yesterday Winston Peters called for an amendment to the Reserve Bank Act asking that the Reserve Bank take a more rounded approach to managing monetary policy. I have to agree with him that a major review is needed and that simply using the OCR to control the economy is not working.

Submissions for the inquiry into a future monetary policy framework close on 19th July. I will post my submission up here in due course. It’s a great opportunity to throw open the arcane nature of our monetary system and make proposals that may lead to a more productive and stable economic system.