A review of things you need to know before you sign off on Wednesday; no retail rate changes yet following the OCR hike, Auckland a buyers market, building consents high, Fonterra confirms good result coming, swaps dip, NZX firms, NZD drops, & more

GDPpc growth relates to productivity improvement. NZs 2+ decades of significant immigration has kept labour costs lower than they would be without it (under both Left & Right govts)..

Repeating my comment from last week:

"NZ has historically been about 30% less productive than Australia. However, NZ workers also work longer average hours. The main reasons are 1. that Australia has a capital intensive mining sector with access to large economies of scale & 2. Australian wages are 30% higher than NZ which "encourages" businesses generally to invest capital in labour reducing initiatives.

To improve NZ productivity, raise pay rates? Note foreseen consequences include displaced employees...where do they go?...& why would we need more immigration?"

We are very conservative. Inflation slightly over 3% and we kill all growth to get it back down. Other countries don't panic about 3%, they try and balance the risk of inflation vs the risk of unemployment. We think they are idiots, then wonder why they are doing better than us. 

Years ago it used to said something along the lines of: "owing the bank $100k is your problem, owing the bank $1M is the banks problem"

$12B...ROFL

If you have the recipe, there is no need to write the book

All he was, was a bettor. In RE, there were a lot around; just like shares in the mid-80s. Lots of mindless egos out there, always. 

Funny that he was aligned with Trump. 

I know that comment is tongue in cheek, IT GUY.

I'm with Yvil  in calling this incoming debacle. The way Bessent is carrying on, watch the US 10-Year Treasury, he could cause a cascading sovereign debt crisis, where rising yields trigger a systemic unwinding of the global financial system. 

KNOW WHEN TO HOLD

Bessent, the George Sorros trained blathering buffoon's 'policy' is playing out basically a text-book roadmap, of how to wreck the entire US bond market, which by definition means the same for the US dollar, what's left of it's status as both a reserve and default currency - it all goes up in smoke, followed by the US economy at large.

Anyone would think he was doing this on purpose, so that the FIC and the billionaire club can orchestrate the most blatant and tragic wealth heist from Main Street, in the  entire history of our species.  

The thesis that a specific psychological threshold, such as a 5% to 6% yield on the US 10-Year Treasury, could trigger a parabolic sell-off, is rooted in real-world debt servicing mathematics. Personally, I expect the entire casino to implode well before it gets anywhere near 6%. 

When the longer dated treasury yields surge, the cost of rolling over massive national debts becomes unsustainable, forcing a choice between hyper-inflationary debt monetisation, or system-wide default. 

History shows that politicians always choose the former, so they will crank up the printing presses, plus every kind of stealth QE under the sun. Hyperinflation will result in technical default anyway, and so which ever way they spin the wheel the end result is a meltdown. 

The danger of rising yields is not merely psychological - it is an unsolvable mathematical trap for the United States Treasury, and the Fed can't fix this either. 

Some sobering stats...

(i) The last time the US Treasury yield this high was in 2007 just before the so-called GFC.

(ii) In late 2007 the US National Debt was ~$9 trillion - today it is over $40 trillion.

(iii) In 2007 the Debt-to-GDP Ratio was ~64%, today it is ~120%.

(iv) In 2007 the annual federal deficit was ~$161 billion - today it is ~$2,100 billion ($2.1 trillion)

(v) In 2007 financing $9T at 4.8% hovered at around $240B - today its around $2T.  

(vi) In 2007 the US economy had the tax base and fiscal headroom to withstand these yields. Today running a $4.8% yield on $40T creates an immediate, self-feeding debt spiral, where the govt. is forced to borrow over $2T annually just to cover deficits, whilst at the same time being hit with an increase of 400-500% in interest costs to rollover the $9T in debt maturing this year alone.

(vii) As the Rest of the World (RoW) realises that long-term sovereign paper carries immense inflation risk, capital flees the long bond (10-to-30-year maturities) and crowds into ultra-short-term Treasury bills (1-to-3 months). This triggers a "parabolic" steepening of the yield curve, destroying the global benchmark for mortgage rates, corporate debt, and banking liquidity.

(viii) The bondholders then begin to realise that they are making massive real losses on their coupon rates, because the headline inflation stats are complete fiction - then it begins to dawn on them that they face massive capital losses depending on how long-dated they are, and if they wait to cash them in with an impending fiat currency crisis, they might get next to nothing back.

A this begins to unfold, the bond vigilantes, who have no allegiance to anyone but their own pockets, come out, and yields could turn parabolic in a matter of days.

2022 CRISIS ON THREADNEEDLE STREET

As in the case of the gormless "Miss Trust" initiated UK 2022 gilt crises, when the "confidence game" of unbacked sovereign debt snaps, it doesn't take months or weeks - in that case it took just 120 hours for he market to break down. 

Thursday September 22 - bond markets were normal and managable, with te 30-year gilt yield at a stable 3.8%.

 Friday September 23 - the government announced its unbacked mini-budget and the market revolted instantly. Yields jumped by dozens of basisc pointsin hours as investors began dumping debt.

Saturday/Sunday 24-25th - The weekend acted as a structural "pressure valve," but it also created a terrifying illusion of calm while the real damage was compounding in the dark. Without that two-day weekend gap, the entire British financial system likely would have collapsed on live television.

By Tuesday, September 27, the 30-year yield had exploded past 5% - spiking an astronomical 120-140 basis points in a 3 day trading window.

Liquidity basically hit zero, bid-ask spreads evaporated, and the entire British pension system faced total structural insolvency by the following morning. It forced the Bank of England to intervene on Wednesday to physically stop a total financial collapse.

The BOE intervened by printing its own currency to buy its own debt in a desperate attempt to resurrect the situation. If the Fed tries this when there is already a massive flight from the dollar, it would trigger a massive feedback loop.

CRISIS ON PENNSYLVANIA AVENUE

Something similar would mean Dah Fed printing trillions of new unbacked dollars to absorb the massive supply of dumped treasuries, and this hits the market just as the RoW is doing the same thing. That morphs a bond crisis straight into a currency collapse, domestic hyperinflation and the wiping out the purchasing power of Main Street, who are already struggling to make ends meet.

The U.S. Treasury is a debtor, not a central bank. It cannot physically create money to buy its own bonds or artificially push yields down, and it relies entirely on its cash account, the TGA (Treasury General Account) at the Fed, which is funded strictly by tax revenues and new debt issuance.

When the global buyers flee, the Treasury cannot issue new debt to cover the old debt because there won't be buyers at sustainable rates. The Treasury cannot bail out the bond market - it is the entity requiring the bailout.

The UK gilt market was a localised problem involving a few hundred billion pounds of leveraged pension fund bets. The U.S. Treasury market is a $40 trillion global monster.

When smaller nations face a bond crisis, the IMF or foreign central banks can offer dollar-denominated lifelines. If the U.S. dollar system collapses, there is no larger global entity with a bigger balance sheet to bail out the United States.

As Michael Hudson outlined in the last few days - countries in the Global South and the Eurasian core (Russia, China, Iran) are already building alternative, non-dollar payment rails and infrastructure. If buyers flee U.S. paper, they will not return. They will permanently shift their capital into tangible commodities, gold, or the newly formed Eurasian equity-based architecture, leaving the Fed completely isolated.

YOU WERE WARNED

China has already warned the US that they have to get their financial/fiscal house in order, and that they won't be there to help the US out  as they were during the 2008 GFC. Besides, the US has declared economic war on China anyway - its as if the US's hobby is to continually bludgeon and insult one of its key bank manager/creditors.

When you are the global reserve currency, and when the world is already actively rejecting your over-printed currency, you cannot print your way out of a crisis. The very act of intervening to patch the bond market destroys the dollar itself.

And so the $40 trillion dollar question remains for all the card players (bondholders) dumb enough to still be sitting at the table - in the immortal words of Kenny Rogers 

"You've got to know when to hold 'em, know when to fold 'em / Know when to walk away, know when to run / You never count your money when you're sittin' at the table / There'll be time enough for countin' when the dealin's done.”