Here's my summary of the key events overnight that affect New Zealand, with news that international public policy officials are out in force warning of downside risks.
These concerns were reinforced by data out of China late yesterday.
Chinese exports have seen their sharpest drop in almost seven years. Some of the decline can be attributed to the lack of business activity during the Chinese New Year holiday, but the numbers still point to persistent weak demand. Exports dropped very sharply by more than -20% from the same month a year earlier, while imports fell more than -8% on the same basis. Their trade surplus halved from January, and is half what it was the same month a year ago. But don't over-look that in 2015 the Chinese New Year holiday was a few weeks later, and the March 2015 trade surplus shrank much more than it did in February this year.
And Japan has reported a shrinking economy, down less than first expected, but lower by -1.1% in the December quarter, the second quarterly decline in the last three.
So, risks to the international economy are very much on the minds of regulators and public policy officials today.
The Australian Treasury has warned of them overnight. It says these risks have intensified in the past few months amid wild fluctuations on financial markets. They say volatility on international stock markets was likely to continue in a "lower growth, lower inflation" world economy where risks have tilted to the downside.
The OECD called for broad-based reform plans that "incorporate monetary, fiscal, and structural policies to stimulate persistently weak demand".
And the IMF added its voice to the concerns, also calling for 'bold' reforms.
These concerns contrast sharply with what we see from New Zealand, although no doubt the RBNZ will be talking about them in its Monetary Policy Statement this time tomorrow.
And none of these concerns are showing up in air traffic, either. Yesterday we reported a good start to 2016 from airfreight volumes, today IATA is reporting a strong start to the year for passenger traffic.
In New York the benchmark UST 10yr yield has had a steep drop in mid-day trading and is currently at 1.81%.
The oil price is also lower, now at US$37/barrel in the US while Brent is at US$40/barrel. Kuwait is the latest OPEC producer to reject output cuts.
The gold price is higher on the day, up $7 to US$1,270/oz.
The NZ dollar will start today at 67.7 US¢, at 90.8 AU¢, and at 61.4 euro cents. The TWI-5 index is just on 71.9.
If you want to catch up with all the local changes yesterday, we have an update here.
The easiest place to stay up with event risk today is by following our Economic Calendar here ».
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Negative rates as we know are about trying to weaken the domestic currency to make industry more competitive. The U.K. have an alternative policy to keep their currency weak, They have an annual referendum whether it be Scotland,EU,Wales etc. Seems to be remarkably successful so far......
China is and has been a reflection of the global economy since it was built throughout the late 1990’s and middle 2000’s (again on eurodollars) to service it as its primary producer. If Chinese industry is not producing because Chinese exporters aren’t exporting then it is plain silly to suggest China’s problems are Chinese. To decay at increasingly steady and already significant rates is to suggest the global economy not “cooling” but flailing, falling or just plain failing. We don’t know exactly which one yet because so many statistics were never designed for these broader, structural circumstances. Read more
While money market dealers maintain a strong liquidity preference and are not prepared to lend balance sheet capacity to create much needed global wholesale credit no amount of monertary stimulus will turn this risk avoidance behaviour around. Mainly because those most likely to execute a risk underwriting role are not rewarded to do so. And yet central banks are determined to offer anything but returns appropriate to risks sustained.
While money market dealers maintain a strong liquidity preference and are not prepared to lend balance sheet capacity to create much needed global wholesale credit no amount of monertary stimulus will turn this risk avoidance behaviour around. Mainly because those most likely to execute a risk underwriting role are not rewarded to do so. And yet central banks are determined to offer anything but returns appropriate to risks sustained.
Is this what ANZ's Nigel Williams is getting at when claims?
ANZ has said that it will “vigorously defend” itself against ASIC’s action, which Chief Risk Officer Nigel Williams has said is based on a “misunderstanding of how bank bill issuance and interest-rate risk management operates.”
Almost half of Australia’s A$20.7 trillion ($15.4 trillion) in over-the-counter interest-rate derivatives reference BBSW, while A$2.4 trillion of bank loans are linked to the benchmark via wholesale funding costs that reference it, according to an ASIC report published last year. Read more
Mr Williams might suggest the banks act in a transparent manner and publicly disseminate the FRA stack component prices underlying the zero coupon curve for respective semi-annual BEY swap quotes. Even with disclosure, which is published real time in the US on the CME Eurodollar strip trading platform, there is a capital commitment failure to arbitrage negative swap rates. Is this deliberate or otherwise? Just for convenience here is a list of on the run US Treasury yields.
What we have been witnessing over recent years comes as no surprise because the entire financial-economic system was established on the basis of fraud, deceit and plain stupidity. Indeed, the surprise is that it has been possible to conceal the basic flaws in the system for so long and to maintain the pretence the system has a future.
When we examine the economic-financial system it is clear that numerous fundamental flaws are incorporated into the system, yet few bother to question any of them.
1. Creation of money out of thin air and charging of interest on it.(where does the money to pay the interest come from?)
2. Conversion of sequestered carbon into carbon dioxide as the prime driver of everything yet no recognition of the role energy plays in economic planning or recognition that it is a finite resource which becomes increasingly difficult to acquire. (what happens when the supply is constrained or goes into decline?)
3. The absurd notion that economic activity can increase forever on a finite planet (what happens on a finite planet with limited resources and limited capacity to process pollution?)
4. No accounting for the effect of pollution in the prime economic metric of GDP. Indeed, the present system demands and rewards increased levels of pollution, and is therefore terminal. (what happens when the effects of pollution start to break the system? which is what we are witnessing now)
5. No value placed on natural systems or their role in maintaining life on this planet. Indeed, the present economic-financial system rewards conversion of sustainable natural systems into unsustainable artificial systems.
6. The absurd notion that having more people and having them consume more is progress. This absurd notion is not actually written into the 'laws of economics' but there are few economists who do not advocate population growth and growth in consumption.
No wonder we are in a predicament which gets worse by the day, and for which mainstream economists have no solutions.
Extraction of conventional oil peaked over 2005 to 2008, and is in decline. Expensive-to-extract unconventional oil has allowed the system to continue since 2008 but the additional costs, energetic, financial and environmental, are mounting and we must expect total available liquids to decline very soon. The 'free market' is utterly useless as a mechanism for distribution of prime energy source, and in the past decade we have seen oil range from as high as $147 a barrel to as low as $15 a barrel.
There is probably no faster way (other than nuclear war) to destroy the habitability of the Earth than to burn coal and use it to extract metals from their ores. The Australian economic model was, until very recently, predicated on digging up coal and metal ores and sending them to China for conversion into stuff and waste. Should the global economic system make some kind of short-term recovery, the Australian economic model would immediately revert to destroying the habitability of Australia as quickly as possible via Abrupt Climate Change.
And so it goes on.
Here are two fundamental truths that cannot be disputed:
Industrial civilisation is unsustainable because it is dependent on the conversion of finite fossil fuel reserves into atmospheric waste.
The metrics of the financial-economic system are prime drivers of the self-destruction of industrial civilisation..
Neither of those essential truths is acceptable to bankers, economists and politicians, so both are ignored.
It therefore follows that the self-destruction will continue until some critical point is reached, at which it all 'implodes'.
James Howard Kunstler postulated some time ago that Japan will be the first developed nation to 'go medieval', i.e. lose access to fossil fuels and electricity, and repeats his prediction occasionally:
'At the heart of the matter was (and continues to be) the relationship between energy and economic growth. Without increasing supplies of cheap energy, economic growth — as we have known it for a couple of centuries — does not happen anymore. At the center of the economic growth question is credit. Without continued growth, credit can’t be repaid, and new credit cannot be issued honestly — that is, with reasonable assurance of repayment — making it worthless. So, old debt goes bad and the new debt is generated knowing that it is worthless. To complicate matters, the new worthless debt is issued to pay the interest on the old debt, to maintain the pretense that it is not going bad. And then all kinds of dishonest side rackets are run around this central credit racket — shadow banking, “innovative” securities (i.e. new kinds of frauds and swindles, CDOs CDSs, etc.), flash trading, insider flimflams, pump-and-dumps, naked shorts, etc. These games give the impression of an economy that seems to work. But the reported “growth” is phony, a concoction of overcooked statistics and wishful thinking. And the net effect moves the society as a whole in the direction of more destructive ultimate failure......
The quarrel between China and Japan over the Senkaku Islands is a diversion from the real action in the South China Sea, said to hold large underwater petroleum reserves. China is the world’s second greatest oil importer. Their economy and the credibility of its non-elected government depends on keeping the oil supply up. They are a long way from other places in the world where oil comes from, hence their eagerness to secure and dominate the South China Sea. The idea is that China would make a fuss over the Senkaku group, get Japan and the US to the negotiating table, and cede the dispute over them to Japan in exchange for Japan and the US supporting China’s claims in the South China Sea against the other neighbors there: Vietnam, Indonesia, Malaysia, and the Philippines.
The catch is that Japan may be going politically insane just now between the rigors of (Shinzo) Abenomics and the mystical horrors of Fukushima. Japan’s distress appears to be provoking a new mood of nationalist militarism of a kind not seen there since the 1940s. They’re talking about arming up, rewriting the pacifist articles in their constitution. Scary, if you have a memory of the mid-20th century. China should know something about national psychotic breaks, having not so long ago endured the insanity of Mao Zedong’s Cultural Revolution (1966-71). So they might want to handle Japan with care. On the other hand, China surely nurtures a deep, deadly grudge over the crimes perpetrated by Japan in the Second World War, and now has a disciplined, world-class military, and so maybe they would like to kick Japan’s ass. It’s a hard one to call. I suspect that in 2014, the ball is in Japan’s court. What will they do? If the US doesn’t stay out of the way of that action, then we are insane, too.
That said, I stick by my story from last year’s forecast: Japan’s ultimate destination is to “go medieval.” They’re never going to recover from Fukushima, their economy is unraveling, they have no fossil fuels of their own and have to import everything, and their balance of payments is completely out of whack. The best course for them will be to just throw in the towel on modernity. Everybody else is headed that way, too, eventually, so Japan might as well get there first and set a good example.'
http://www.zerohedge.com/news/2014-01-06/jim-kunstlers-2014-forecast-bu…
mmm... Money so dam easy to 'print'...not so for real wealth. I think there has been a recent book release with a title like 'Half Earth' that sees us with about half the natural capital we had 100 yrs ago but 5 times the population. Stick that in your supply/demand equation.
The 1MDB scandal highlights the level of corruption that has been rife in Asia and South America for the last few years.
http://thediplomat.com/2016/03/no-end-in-sight-for-malaysias-power-stru…
A titbit. Neighbouring Remuera property sold February. Owners offshore Hong Kong 14 years . Rented until January for entire 14 year period , managed by Auckland based property management company. Settlement deferred until late April. No IRD number . Question, why no immediate settlement given the ease to obtain an IRD number.
A ripper little 90at 9 David.......Cant help but imagine Wheeler holding a gun that has a Bang flag poking out the barrel....that said I never thought Id say this but that IMF want Bold reform piece is a must read as its probably the least diplomatic thing Ive seen coming from them......Like.."Commodity exporters need to recognize that commodity prices may well be permanently lower. Fiscal buffers can help smooth the adjustment to lower commodity prices, but it will be important to plan for more resilient fiscal models by upgrading the efficiency of spending, strengthening fiscal institutions, and increasing non-commodity revenues.
Exchange rate flexibility, where feasible, should be used to cushion the impact of adverse shocks these countries are facing. Macro prudential tools should also be employed to mitigate risks, for instance by raising provisioning requirements on risky loans, and ensuring adequate safeguards are in place to cover banks’ foreign exchange exposures...."
So where feasible ?and Wheeler out of ammo..!
Billy is on the board.
https://www.imf.org/external/am/2015/speeches/pr20e.pdf
From June last year, looks like we are going to borrow.
New Zealand is the third-luckiest country in the world, as measured by its ability to take on more public debt, according to a new International Monetary Fund (IMF) paper.
The IMF report, titled 'When should public debt be reduced?', found NZ had ample fiscal headroom and could more than double its current debt load before maxing out its credit.
http://m.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11461…
The Commanding Heights
http://michael-hudson.com/2016/02/the-commanding-heights/
Why This Sucker Is Going Down——The Case Of Japan’s Busted Bond Market
http://davidstockmanscontracorner.com/why-this-sucker-is-going-down-the…
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