|Posted on September 21, 2013 at 8:25 PM|
New Zealand has undoubtedly weathered the GFC and its aftermath far better than most developed countries thanks largely to high commodity prices and its export linkages to its two largest trading partners, China and Australia. Government debt levels before the GFC were low and, despite several years of large budget deficits, the government is paying lip service to cutting spending and returning the budget to surplus by 2014-2015. Admittedly, the projections rely on some sanguine assumptions that are unlikely to materialise. Consequently, it is more probable that the New Zealand government will record a small deficit in 2014-2015. By comparison, the government of neighbouring Australia had promised to deliver a budget surplus in 2013, but projections now suggest that the surplus might not materialise until 2016, if then.
Although New Zealand’s public balance sheet is currently sound, the country is poised to witness a catastrophic house bubble explosion. The New Zealand Reserve Bank has identified this risk and enacted regulations limiting the percentage of new loans that banks can issue from borrowers with less than a 20% deposit. The rationale is that the financial system will handle a sudden and precipitous decline in property prices better if fewer borrowers run the risk of ending up with negative equity.
Regrettably, the Reserve Bank’s action might be too little too late. In fact, the provident regulations might only hasten the inevitable house price correction. The Reserve Bank can regulate the banking system, but it is powerless to alter the regulatory morass that has made New Zealand houses the most horrendously overpriced in the English-speaking world. Moreover, central bank regulations cannot alter the ineffable stupidity of many Kiwis who erroneously believe that property speculation is the surest path to prosperity. This might have been true in the past when property prices were low, but is certainly no longer the case.
New Zealand house prices have become extortionately expensive due to a confluence of factors. First, poor planning of local councils has created an artificial land shortage. Local councils have elected not to spend money building new infrastructure, so they unnecessarily curtail the amount of land available for residential development. Unfortunately, this policy is short-sighted given that New Zealand’s population has gone from 3 million to 4.5 million people over the past quarter century. Much of this increase in population has occurred in the country’s principal urban centres of Auckland, Wellington, and Christchurch, which have absorbed most of the population increase.
Second, New Zealanders generally lack the imagination to invest in anything other than property. Many became petrified of the share markets after the crash of 1987 and the country’s financial system remains somewhat underdeveloped, as shown by the absence of a domestic annuity market and the colossal failure of finance companies several years ago. This means that the country collectively funnels its meagre savings into unproductive property speculation rather than into furthering research and development or growing businesses that provide goods and services.
Third, house construction in New Zealand is an inordinately protracted and expensive process. Councils impose onerous consents that delay construction and increase costs. Additionally, most New Zealand builders are woefully inefficient. They often construct a single house at a time rather than building large-scale residential developments that can benefit from economies of scale. Moreover, the country’s largest supplier of building materials, Fletchers, has a monopoly on building materials. Consequently, the same building materials sell for far more than they do anywhere else in the world, which needlessly drives up house prices.
Fourth, New Zealand has had higher interest rates than the rest of the developed world for many years. This has produced the famous carry trade whereby large institutions borrow in low yielding currencies such as the Japanese Yen and then lend wholesale at a higher interest rate to Australian and New Zealand banks, which enjoy a somewhat unfounded perception of solidity. The investors benefit from both the higher yield and the appreciation of the New Zealand Dollar. The carry trade has created a gigantic pool of money available to lend for residential property speculation that would otherwise not be there. Despite running a balanced current account, New Zealand is a net debtor nation that imports vast amounts of capital due to insufficiently low levels of domestic savings. It must therefore borrow from abroad to finance internal property speculation.
Aside from former Reserve Bank governor Don Brash, few commentators have pointed out the knavery of restricting residential development to cause house prices to skyrocket and then borrow the money from overseas. Unfortunately, the “landlord lobby” and those aspiring to become landlords hold tremendous sway, which has prevented a sensible discussion on development. Most political decision makers in New Zealand have large property portfolios and many Kiwis have most of their net worth tied up in property. Consequently, enacting the sensible policies that would make homeownership attainable to first time buyers would prove politically unpalatable. Most foreigners that visit New Zealand often remark at the shoddy state of the country’s houses. Many lack insulation, double glazed windows, and central heating for the winter. Regrettably, needless government meddling and collective shortsightedness have coalesced to create the most astronomically priced and poor quality residential housing anywhere in the world.
Of course, high house prices also cannibalise an economy and render it uncompetitive. Most politicians applaud high house prices as a sign of economic progress for it deceives the house owners into thinking that they are wealthier when in actuality high house prices are the symptom of monetary inflation. However, high property prices also mean that owners of retail and commercial properties must charge high lease rates, which eventually translate into higher prices for consumers and businesses. Outside the agricultural sector, New Zealand lacks a single internationally competitive economic sector thanks to spiralling high costs and appallingly low productivity. Much of this is attributable to the outrageously high property prices extolled by imbecilic politicians and media commentators.
No one can predict with any exactitude when the correction will arrive. However, the correction is more a question of if rather than when. House prices in Auckland are now ten times the median household annual income whereas nationally the ratio between median house prices and median income is around seven. Clearly, this trajectory is unsustainable and unhealthy. Property prices experienced an unprecedented rise over the preceding twenty years, but the past is not necessarily a harbinger of things to come. Property prices only retreated modestly during the GFC and they have rebounded to surpass their pre-GFC heights. This is true in the country’s urban centres, but not in rural areas where prices remain below their pre-GFC peaks. This has occurred because the GFC only marginally affected New Zealand and because the government has allowed Kiwisaver withdrawals for first time buyers and introduced a scheme that allows qualified first time buyers to receive a handout of up to NZ $10,000. The additional money flowing into residential housing from a new pool of buyers has allowed the party to go on somewhat longer, but the eventual correction will arrive.
The fall in house prices will likely occur due to international events. For example, if credit markets froze the way they did in 2008, then we can expect a sudden unwillingness of foreigners to lend to New Zealand banks that would cause property prices to plummet. Likewise, a drop in the New Zealand Dollar would cause the flood of overseas money to recede. This drop in the New Zealand Dollar could happen due to the slowing Australian and Chinese economy or even an outbreak of foot and mouth disease. The recent botulism scare involving dairy giant Fonterra caused the New Zealand Dollar to lose close to 2% of its value within two days, although the New Zealand Dollar recovered its lost ground once the botulism fear subsided.
The most important thing New Zealand investors can do is to take decisive action now. I suggest the following general steps. First, have assets denominated in currencies other than New Zealand Dollars or precious metals. The New Zealand Dollar is close to record highs against most other currencies and the Reserve Bank has surreptitiously placed an unofficial ceiling of US .85 on the New Zealand Dollar and openly admitted to interfering in currency markets to protect exporters. Consequently, the upside of holding the New Zealand Dollar is minimal, whilst the downside risks are much larger, as anyone that saw the sharp decline from US $.83 to US .51 in 2008 would attest.
Second, it is time for New Zealanders heavily invested in property to sell their portfolios and realise their gains. Property prices have risen dramatically over the previous two decades and such trends will not duplicate themselves, particularly when income increases are failing to keep pace with property inflation. Prices eventually regress towards the mean and the supply of first time buyers required to sustain the Ponzi scheme in property will dissipate. Property investment does have a place in one’s portfolio, but not outrageously priced New Zealand property. I would strongly suggest that these buyers look to buy properties in distressed areas of Europe such as Portugal or Ireland to take advantage of the high New Zealand Dollar. In some parts of Europe, brand new properties are selling for less than construction costs. Savvy buyers can take advantage of these opportunities.
Third, avoid having large amounts of money in New Zealand financial institutions. Losses from failed property investments will show up on bank balance sheets, just as bad loans brought down finance companies and the investors that lent to them. Most New Zealand banks have low capitalisation and New Zealand does not have a government guarantee of bank deposits. Consequently, having large amounts of money in New Zealand financial institutions is unsound given that property prices have approached or are approaching a crest.
There are additional steps that individuals can take to protect themselves, but the above are integral to protecting yourself. The evidence that New Zealand house prices are unsustainably high is incontrovertible and long overdue for a correction. Now is the time to take decisive action to protect your family and your wealth.
|Posted on May 4, 2013 at 4:10 AM|
Few falsities have gained more credence in our modern world than the ridiculous idea that a person must go to university to succeed. Regrettably, many young people credulously buy into this mantra and too often end up anchoring themselves to enormous debts irreversibly harming their future.
Incidentally, the people most stridently extolling the benefits of university tend to hail from the very education establishment that has a vested pecuniary interest in perpetrating the university racket. Admittedly, graduating from a university once symbolised that a man had undergone rigorous academic preparation and attained a certain level of erudition. Unfortunately, many of today’s university graduates are useless narcissists that cannot offer anything of value. Too many lack the most rudimentary skills or even a work ethic that might enable them to overcome their deficiencies through diligence and perseverance. If anything, the conceit that they gain from their deficient education often renders them incapable of thinking properly or learning from others.
Too often, these “educated people” support similarly flawed mental midgets like Obama or the leftist cause dejour because they are incapable of probing deeper past their facile analysis. These people often point to statistics showing that, on average, university graduates earn more than non-graduates do as demonstrating their wisdom. Yet those citing these statistics often conflate correlation with causality. In the past, the more industrious and intelligent were more likely to attend university, so this self-selected group of people attending university tended to possess the qualities in greater abundance that might enable them to succeed in life. These people would probably have done just as well even if they had not attended university. In fact, many talented and innovative people such as George Orwell, Henry Ford, or Bill Gates never completed university and managed just fine.
Rather than going through university, my advice for those finishing school is to embrace the real world and learn from the university of life. Learn some productive skills that you can leverage into a business. Even better, leave your comfort zone and travel the world. By travelling, you will undoubtedly meet new people, see new places, gain new perspectives, and expand your horizons. Obtain a work permit, go to another country or two to live or work there for a couple years. The experience will enrich you, teach you new things, and provide you with fresh insights and unforgettable memories. Many of the most successful and fascinating people whom I admire the most are travellers and expats that have explored the world and savoured every moment of life.
Life is short and one can do so much better than simply wasting away at a university suffering indoctrination and drinking oneself into a stupor on Friday night. Of course, some people do apply themselves assiduously and study useful skills at university such as engineering, science, or medicine and none of what I have written should discourage you from pursuing your studies. However, I would also urge you to leave your comfort zone, study and work abroad, and explore the world while you can because it will enrich you on countless levels. As the famous American poet Robert Frost wrote, “Two roads diverged in a wood, and I, I took the one less travelled by, and it has made all the difference.”
I will be heeding my own advice and travelling to the ends of the earth in a few days. Over the next few weeks, I will share my own findings and hope that you find them interesting. I have not left the antipodes since I arrived two and a half years ago and I am eager to see the Old World, its history, and its peoples once again. As much as I feel as if I have carved a small slice of paradise on the edge of the Southern Alps of Middle Earth, I still have an irrepressible pioneering spirit that yearns to explore the ends of the earth. I will be sharing my travels with my wife over the coming weeks rather than boring investment information.
|Posted on April 27, 2013 at 2:40 AM|
Statistics New Zealand announced this week that China has overtaken Australia as New Zealand’s largest export market. This is an interesting yet unsurprising development and further solidifies China’s importance to the New Zealand economy. Statistics New Zealand also reported that New Zealand’s annual trade deficit was a negligible NZ $520 million for the 2012 financial year. New Zealand is not perfect, but the foregoing facts do illustrate that New Zealand is a country that produces what it consumes.
Furthermore, New Zealand’s economy is highly adaptable. The United Kingdom was once New Zealand’s primary export market until the UK’s entry into what was then the European Economic Community forced it to enact policies that no longer favoured New Zealand agricultural products. The loss of the lucrative UK market combined with New Zealand’s then socialist economy produced economic troubles that caused New Zealand to lag behind the rest of the developed world for many years.
Fortunately, New Zealand has begun reversing this trend by being adaptable enough to undertake reforms such as liberalising its economy and lowering taxes. In fact, New Zealand’s tax burden is currently amongst the lowest in the OECD. Over the past ten years, New Zealand is one of the few developed countries where real median wages have actually risen. The sizeable rise in wages combined with the appreciating New Zealand Dollar has propelled New Zealand wages from amongst the lowest in the developed world ten years ago to some of the highest in US Dollar terms today.
Many investors want to make money by investing in China, but they are fearful of China’s opacity and endemic corruption. One way to invest in China’s economic growth is by investing in New Zealand companies that make money by exporting to China. For instance, New Zealand exports voluminous amounts of dairy products to China. If you believe as I do that dairy prices are likely to remain high then perhaps it might be worth considering buying shares in the New Zealand dairy co-operative Fonterra. Fonterra is New Zealand’s largest company and the largest dairy company in the world. It plans to expand its milk farms in China tenfold by 2020. Admittedly, the share price has risen since some of its shares went public and perhaps does not offer great value, but it is a strong company worth monitoring.
Likewise, it is worth considering investing in tourism ventures that target Chinese visitors to New Zealand. The number of Chinese tourists going abroad is exploding and clever companies that know how to market directly to the Chinese consumer and bypass the established Chinese tourism companies stand to benefit enormously. New Zealand has what China lacks, namely wilderness and open spaces, and Chinese tourism numbers will likely increase as a result.
Admittedly, New Zealand cannot be reliant exclusively on agriculture and tourism. However, the future is bright in New Zealand/Australia thanks to low debt levels and strong export links to the growing economies of Asia. Those wishing to relocate themselves and/or their wealth from the troubled economies of the United States and Western Europe should definitely look more closely at New Zealand.
|Posted on April 20, 2013 at 4:15 AM|
Last week I extolled the virtues of buying bullion after the recent drop. I intuitively thought that the “correction” had bottomed, yet gold and silver tumbled even more this week. Fortunately, they have regained half their weekly losses as countless buyers have taken advantage of the temporary drop in prices to expand their physical bullion portfolio.
The reasons for buying bullion remain as compelling as they were last week. Incidentally, it is worth noting that the drop in the bullion market occurred after Goldman Sachs issued a sell recommendation and countless large institutional investors dumped bullion in the paper markets. Many traders in the paper markets also had stop loss orders, which only exacerbated the cascading prices.
Presently, it costs between US $1,200-1,300 to mine an ounce of gold. Gold prices tumbled to as low as US $1,330 per ounce before recovering to US $1,400 by the end of the week. Physical orders for bullion from America to Australia to Asia skyrocketed as investors swooped in for the bargains.
Although I am far from a clairvoyant and I suspect that central banks and investments banks will continue to try to manipulate the gold price, I firmly believe that gold remains a sound investment in this epoch of money printing and debt. Admittedly, all investors should diversify and a place exists for other asset types such as property or shares. Nonetheless, holding physical gold is a bet against the degenerate banking system that rules the world.
My message to my subscribers is not to despair and remain disciplined. Investing is about the long term rather than the ephemeral. Of course, anything can happen in this world and owning gold offers no guarantees. However, hard assets such as precious metals remain the best form of protection against monetary debasement. Consequently, it might be a good time to buy some more metals lest you regret not buying them when the ruinous effects of debt and inflation fully percolate through the economy.
In the meantime, I wish everyone a good week.
|Posted on April 12, 2013 at 10:00 PM|
This week has been terrible for gold. Gold prices tumbled by over US $60 today to just above US $1,500. The past few months have been brutal for precious metals investors, or at least for those that bought bullion recently. The decline is more pronounced for those of us in New Zealand because the New Zealand Dollar continues to rise in value against the US Dollar and other currencies whilst gold tumbles.
It is important to recognise that the recent drop in gold prices has occurred in the paper markets rather than in the physical markets. If you go to the online auction site Trademe, you will not find a seller willing to sell physical gold at US $1,500 per ounce.
No one can predict the future with any exactitude, but I believe this is a time to hold one’s bets in place and perhaps use the opportunity to consolidate your position for several reasons. First, China has unofficially continued to buy the physical metal in large quantities, as have other central banks. You will notice that each time the paper gold markets tumble in New York, they recover slightly when trading opens in China and Asia. The Chinese are clearly taking advantage of every dip to buy as much physical gold as possible.
Second, gold production is expensive. It currently costs between US $1,200-$1,300 for a mine to produce an ounce of gold, which places an artificial floor on the gold price. If the price of gold dropped below those amounts, then countless miners would shut down and the price would recover.
Lastly, the same factors that have made gold such an appealing store of value remain. The US and Europe remained mired in a depression and many global governments have too much debt. They already have and will continue to respond by printing money, which will unleash an avalanche of inflation.
Consequently, this may be a perfect time to buy gold. For us in New Zealand, our strong currency combined with the weak price of gold in US Dollars makes this perhaps the last great buying opportunity before gold prices skyrocket, or paper currencies plummet.
In the meantime, I wish everyone a good week.
|Posted on April 6, 2013 at 2:25 AM|
People often ask me “what is the safest investment?” As easy as it is to ask the question, the answer is virtually impossible to answer. Most people perceive money in the bank as safe. However, money deposited in the bank is merely an unsecured loan with the bank. As the events in Cyprus demonstrate, funds at the bank are not “guaranteed” regardless of any insurance schemes that governments might have.
Likewise, many people consider gold a safe investment. Admittedly, it is impossible for governments to conjure gold out of thin air as they manufacture paper currencies or the electronic equivalent. However, the value of gold fluctuates depending on the amount of money in circulation along with supply and demand based on how individuals value it at any given time. Moreover, one must store gold in a safe place. If you store gold at the bank, the possibility exists that the bank might not return it. Likewise, if you store gold under the mattress, then a thief might steal it. Ultimately, gold is a store of wealth and the price of things in gold terms tends to remain constant over time whilst the value of paper currencies depreciates. As much as I love gold, I certainly would never suggest that you hold all your wealth in gold.
Many people also regard specific countries such as Switzerland as safe. Switzerland is arguably the safest place in the world to store your money or precious metals given its stable political institutions. However, no guarantee exists that Switzerland will always remain a sanctuary. The Swiss government could stop upholding the rule of law or simply start spending beyond its means and eventually resort to expropriation just as other governments have done. Perhaps the bankrupt European Union might decide to invade Switzerland one day, as remote a possibility as this might be. In short, one should never regard a place on this earth as 100% safe.
Likewise, many people and financial institutions also believe that insurance will guarantee safety. For instance, many institutional investors buy credit default swaps to protect themselves against a default. For example, if you buy $1 million in Canadian government bonds, another institutional investor might sell you a credit default swap promising to pay in the event of a default. The price of credit default swaps fluctuates according to perceived risk. For example, it is much cheaper to insure the sovereign debt of Australia or New Zealand because both governments have low amounts of debt compared to Greece or Italy, whose debts are enormous. However, during the height of the Lehman Crisis of 2008 everyone learned the utter uselessness of these devices given that everyone is hedged against everyone, yet shockingly these products remain extant and institutions trade them.
Given the undeniable reality that even “safe” investments carry some risk, the only option available to investors is to diversify. However, diversification is not as simple as merely investing money in a diversified stock fund and letting your fund manager run it for you. Rather, one needs to diversify across an array of different asset classes, countries, and institutions. Perhaps an investor might deposit money at several different banks in several safer countries like Singapore, Switzerland, Norway, Australia, or New Zealand. Likewise, that same investor might keep some of his precious metals buried in several different stashes or in several different vaults or have shares invested in a variety of different companies in different countries. Perhaps most important of all is to diversify your income. The worst thing that a person can do is to rely on a single job or business, as many retrenched middle age people with a narrow skill set can attest. By diversifying your income, you can stay afloat should one source of income wither.
Such a strategy requires time and energy, but it is the best mechanism for protecting your wealth. Unfortunately, too many people do not diversify properly and they imperil their future because of it. My suggestion is to sit down, examine your finances, and find ways to diversify your wealth and income. Of course, diversification is only as good as the composition of the underlying investments. However, a person that invests across an array of sound investments will generally do far better and with fewer downside risks than the person who places all their eggs in one basket.
|Posted on March 29, 2013 at 11:25 PM|
I vocally and unashamedly identify as a capitalist for I believe that the free enterprise system produces the greatest prosperity for the greatest number of people. Moreover, capitalism parcels out rewards much more justly than Socialism to the extent that capitalism usually rewards those that produce valuable goods and services whereas socialism favours politicos and apparatchiks who are more adept at working the system than they are at doing actual work.
A visit to the Korean Peninsula amply demonstrates the superiority of capitalism over socialism. To the North of the 38th parallel is a country that boastfully dubs itself the “Democratic People’s Republic of Korea”. Unfortunately, North Korea is a tyrannical Communist cesspool where the government monopolises resources and millions have starved over the years. In contrast, South Korea is largely capitalistic and it has meteorically ascended from an impoverished agrarian society to one of the world’s most modern nations. The Korean people share the same DNA, language, and culture, yet South Korea prospers whilst North Korea languishes in misery. Incidentally, North Korea was once the more modern and prosperous of the two countries before the partition of Korea because the Japanese colonisers had placed most of the modern industry in what today is North Korea.
At any rate, despite the superiority of capitalism over socialism, capitalism contains flaws and imperfections. However, the government is powerless to rectify these imperfections, as the remedy is usually worse than the malady. In fact, the problems with capitalism tend to originate from inherent flaws in human nature. Having the defective human beings comprising the government try to correct these flaws is a recipe for disaster.
One flaw in capitalism is that products and services catered to humans of the lowest order often make far more than do those catered to individuals with more discriminating tastes. For example, McDonalds makes terrible food, yet McDonalds is the world’s largest restaurant chain thanks to exceptional marketing and a replicable business model that allows it to reproduce itself in large quantities. It takes years to train a skilled chef, but McDonalds can have an employee heating and flipping burgers in his first day of work. Ultimately, a business model that creates a reproducible system that can easily insert individuals into a well-designed system will make more money on the aggregate compared to one that requires highly specialised and individualised skills.
Similarly, tawdry tabloid newspapers that sensationalise and titillate sell far more widely and profitably than edifying literature. The regrettably reality is that the average person prefers to indulge in banality rather than challenge himself mentally, hence Cosmopolitan is more read than War and Peace. Given the pitiful moral and intellectual state of the average person combined with capitalism’s penchant for providing the masses with the goods and services that they desire, irrespective of how bad they might be, it is unsurprising that most news is of appallingly poor quality. If you look at the most read “news” stories on the web, you will find that it often includes those featuring frivolous gossip about Hollywood celebrities or the royal family. Clearly, the average person seems to desire stimulation of the lowest order. It is embarrassingly shameful that whilst we collectively have access to more knowledge and information than ever before, we generally use that unprecedented power to access the crudest and most useless things imaginable.
Thanks to capitalism, we have also witnessed a sharp decline in the number and quality of craftsmen, as the proliferation of cheap mass produced goods replaces the fine handiwork of the craftsman. Admittedly, mass production has enabled people to buy more and a greater variety of goods than ever before, but one must ask whether the world is truly better off because of it. Cheap goods are less durable than quality goods. Moreover, the destruction of fine craftsmanship has produced a stultification of skills and an atrophying of our collective mental qualities. The ability of human beings to create wonders such as Michelangelo’s Sistine Chapel has withered away and the average person has lost the ability to create magnificent things with his hands or take apart a device and figure out how to fix it.
I certainly do not have a romanticised notion of the past and I understand that our world is one where one must accept tradeoffs. For instance, machine-produced clothing permits us to clothe more people more cheaply, but we also must accept the homogenisation of fashion and a corresponding loss in the quality of much of what we wear. Our world certainly does not offer free lunches, except perhaps in the dreams of the deluded.
I remain an avowed capitalist, but our world is rarely as black and white as a Holstein Cow. In fact, our world is filled with nuance, subtlety, and has far more than fifty shades of grey. Understanding these differences and the reasons for why things are the way they are, difficult as it might be to accept, often represents the difference between merely surviving and thriving in our accursed world.
Until next time, I wish you all a great week.
|Posted on March 22, 2013 at 9:35 PM|
This week, the Cyprian government and its overlords in the European Union froze the accounts of everyone foolish enough to have left money deposited in a Cyprian bank. The EU and the International Monetary Fund agreed to bail out Cyprus to the tune of 10 billion Euros. In exchange, Cyprus must impose a “tax” on bank depositors’ money. The original plan called for 6.7% “tax” on deposits totalling less than 100,000 Euros and 9.9% on deposits over 100,000 Euros. However, the potentates in Europe are now “reviewing” the plan. In the meantime, Cypriots are unable to withdraw money from the bank and the Cyprian government has imposed capital controls.
Many foolish people in Cyprus, and the foreigners that parked their money in Cyprus, assumed that the European Union’s scheme to guarantee deposits of up to 100,000 Euros protected them, which is why the European Union has labelled the expropriation a tax. In actuality, the actions of Cyprus and the European Union amount to theft. Ultimately, the government has openly decreed that it will steal from savers to bail out the banksters and maintain the illusion that the financial system is solvent.
The situation in Cyprus will likely convince those holding substantial amounts of money in Greek, Italian, Portuguese, or Spanish banks to withdraw their money quickly. This in itself has the potential to destabilise these already insolvent banks, which will only exacerbate the problem.
Interestingly, an article appeared in the New Zealand press stating that the New Zealand government and the Reserve Bank might adopt a similar solution should one of the banks fail. Unlike other OECD countries, the New Zealand government does not guarantee deposits, although it briefly ran a deposit insurance scheme from 2008-2011. The Australian government guarantees deposits up to AU $250,000, but the “guarantee” is simply the ability of the government to tax someone else to make you whole.
My take is that New Zealand and Australian banks remain amongst the safest in the world. Incidentally, the Big Four Australian banks own most of the major New Zealand banks, although their businesses are largely separate entities. However, when property prices inevitably correct in both countries, it will likely produce an increase in foreclosures. If the number of foreclosures is large enough, then it will likely unsettle the banking system and imperil depositors who keep large amounts of money at the bank.
My opinion is that everyone should minimise the amount of money you keep at the bank. Furthermore, if you have substantial amounts of money at the bank, then you should consider diversifying it across different banks in different jurisdictions. Otherwise, you assume an unacceptable level of risk disproportionate to the reward of paltry interest rates.
It is important to remember that depositing money at the bank is tantamount to providing a bank with an unsecured loan. If you loan money to an insolvent bank in a bankrupt country, then you are jeopardising the money that you have given them.
In the meantime, I wish everyone a good week.
|Posted on March 15, 2013 at 8:35 PM|
This week, I had a brief discussion with New Zealand’s Deputy Prime Minister and Minister of Finance Bill English at an informal community meeting. For those unfamiliar with New Zealand’s parliamentary system, the Deputy Prime Minister is analogous to a Vice President in the US context. However, individual ministers in New Zealand are legislators who oversee portfolios such as Finance, Foreign Affairs, Health, etc. In contrast, the President of the United States heads the government and appoints cabinet members to head individual government departments and the legislature is separate, at least in theory.
The first noteworthy thing about the meeting was that Bill English merely turned up without a security detail. Unlike the United States or many Western European countries, none of the attendees had to undergo humiliating security screening nor did security officials vet participants to ensure that they were all loyal supporters. Just like in a Communist country, the Secret Service in the United States prohibits political opponents from attending speeches by White House officials by vetting the attendees. For example, a few years ago, the Secret Service refused to allow a teenager with a John Kerry sticker on his backpack to attend a George W. Bush speech and the Obama administration engages in the same insidious practice.
At any rate, Bill English spoke at length about the high New Zealand Dollar, which worries many exporters. He explained that the two primary causes of the strong currency were New Zealand’s relatively robust economic performance and the higher interest rates in New Zealand. Bill English noted that in the past several years, wages have increased by 10% in New Zealand, whereas they have declined by the same amount in the United Kingdom. Incidentally, the United States has had a similar reversal in median wages, although he did not mention the United States.
Second, Bill English noted that the higher interest rates in New Zealand and the perceived safety and political stability have resulted in a flood of foreign money to New Zealand, pushing up the New Zealand Dollar to record highs against a myriad of currencies. Essentially, large hedge funds and investment firms borrow money in currencies such as Yen, British Pounds, or US Dollars at less than 1% and loan money to New Zealand banks at rates between 2 and 3 %. The hedge funds profit from the difference in interest rates and the appreciation of the New Zealand Dollar. New Zealand consumers benefit by paying record low prices for imported goods. The arrangement generally works, although a major economic event could result in an exodus of foreign money, drastically lowering the value of the New Zealand Dollar, as happened in 2008 where it declined from US$ .83 to $.51. The major drawback to the arrangement is that it provides New Zealand’s banks with gargantuan sums of foreign money to lend to fund unproductive real estate speculation and purchases.
Bill English believed that the New Zealand Dollar is overvalued, but dismissed the possibility that the Reserve Bank or the government would intervene to lower the currency, saying that the global recovery indicated that interest rates would begin to rise elsewhere in the world. I did press him on this point and told him that the high Kiwi Dollar was a permanent fixture and that it was unlikely for interest rates to rise abroad given that the American, Japanese, and European governments would continue to maintain artificially low interest rates to enable their bankrupt governments to continue to service their debts. I told him that rather than trying to lower the value of the currency, it was preferable to lower property prices and the input costs for businesses. If property prices are higher, then commercial building owners must increase the lease rates to the businesses renting their premises, which must then pass on the higher prices to consumers. Bill English did say that the New Zealand government was going to take measures to facilitate the ability of local councils to place a lid on house prices. Currently, New Zealand cities have some of the most obscenely high house prices in the world, something that could produce a systemic risk if the government does not open up the supply of land to lower house prices.
Bill English also spoke at length about the reforms that the current government was undertaking to the benefit system and the civil service. Essentially, the government is making real spending cuts and trying to increase efficiencies in the distribution of services. These measures have included making some civil servants redundant, which is ultimately beneficial because it reduces the size of the government sector and the resultant strain it places on the economy. Bill English noted that government spending in New Zealand has gone from 35% of GDP in 2008 to a projected 30% by 2014/2015. For comparison’s sake, government spending in the United States is now close to 40% of GDP, and many Western European countries have even higher figures.
Overall, Bill English left me with a very positive impression. He struck me as an intelligent man well versed in economics, public policy, and even health. He was also surprisingly humble in that he openly acknowledged the shortcomings and inefficacy of government action, something that one rarely hears from a politician. Politicians always want others to see them as “doing something” despite the reality that “doing something” usually exacerbates the original problem. Bill English frankly admitted that the New Zealand government could not control the exchange rate or the economic tumult offshore.
New Zealand has imperfections and the omnipresent threat of a Labour/Green government that might enact its usual panoply of Marxist measures. However, New Zealand is one of the places in the world where the government is making genuine cuts and doing its utmost not to impede the free market. Unsurprisingly, places like New Zealand, Chile, Singapore, or Switzerland where the government is making real spending cuts and removing regulatory obstacles are prospering whereas locales such as the United States or Western Europe where the government continues to deteriorate. Bill English struck me as a far more knowledgeable and erudite man than his blabbing counterpart in the United States, Joe Biden. Generally, the government here functions far more efficiently than it does in other countries of the so-called developed world.
Anyone interested in learning more on how they can relocate themselves and their wealth to securer locales like New Zealand should sign up for one of our emigration consultations.
Until next time, I wish everyone a great week.
|Posted on March 8, 2013 at 11:15 AM|
People often ask me how one should go about investing in the various government sponsored/subsidised retirement schemes. Governments often tout them as beneficial and even subsidise them with money or tax advantages. However, the programmes often come with extensive stipulations and the fund management firms that run these schemes will erode your returns with their extensive fees.
Generally, I am sceptical of these schemes, especially given that the fund management fees and the rules governing when you can withdraw your money and under what conditions are highly prescriptive. Moreover, other entities control your retirement money and make decisions on your behalf. Nonetheless, I recommend participating in these schemes to take advantage of any subsidies and tax incentives provided you do not make them the centrepiece of your retirement. Below, I will include some very general information on how some of these schemes operate in the countries where many of my readers reside.
New Zealand enacted a KiwiSaver programme as a poor man’s imitation of the Australian Superannuation. However, the programme is voluntary. An employee participates in the programme by contributing 2% of his earnings (soon to be 3%) and the employer must contribute 2%. Furthermore, the government offers a $1,000 kick-start and provides $521 per year in subsidies if you contribute $1,042.
I believe that every New Zealander should enrol in this programme to take advantage of the government subsidy and the employee matching. The main restriction is that it is virtually impossible to withdraw funds before age 65, except to buy a first home. Consequently, I do not recommend contributing more than the required minimum. Instead, one should manage the remainder of one’s own money.
The Australian Superannuation scheme is the Rolls Royce of retirement schemes. An employer must contribute 9% of an employee’s salary into his superannuation funds and individuals can contribute some additional money and take advantage of tax benefits. Like the New Zealand scheme, an employee can only start to withdraw money between ages 55-60.
One advantage of the Australian scheme is that individuals can self-manage their own money albeit with stringent regulations and potentially high compliance costs. This provides a distinct advantage in that individuals have more autonomy over their own money.
My general suggestion is for individuals to maximise their contributions, but contribute no more than what is necessary to take full advantage of tax benefits. The remainder of your retirement funds should remain separate. Despite the fact that the fund management companies skim returns with their fees and often invest money in the same way as their competitors, I do believe that the Keating government showed prescient foresight when it introduced compulsory superannuation. Australians collectively have A $1.4 trillion invested in superannuation funds, which is one reason why Australians have the highest net wealth per capita of any country in the world.
USA 401(k) and IRA
The United States has a myriad of retirement schemes as well, but the rules are highly complex and one should conduct extensive research to determine which is best. Employers usually manage 401(k) plans and the employer will usually match an employee’s contribution, usually about 2-3%. In contrast, individuals tend to manage IRAs, albeit usually through a professional fund management company.
The main benefit of these schemes is that you can receive tax deductions or credits from the plans. However, many of the plans only defer taxes until retirement, so the tax benefits are not as robust as advertised. One major risk that Americans who have money in these programmes face is the possibility that he US government will expropriate money from these funds as the fiscal situation worsens by increasing taxes at withdrawal or forcing individuals to buy US government bonds with the money in their retirement accounts. It is also not possible to withdraw money before age 59 and ½ except if one incurs a 10% tax penalty above the taxes owed at withdrawal.
My suggestion is to take advantage of any employer matching, but not to invest more. It is also possible to establish your own self-managed IRA with funds stored outside the United States in the form of gold or foreign property. For most people, this requires professional legal advice, but it is certainly worthwhile considering as a means to protect your retirement funds from an insolvent US government.
Generally, I recommend that one participate in these programmes to take advantage of any subsidies or tax benefits. However, I only recommend contributing the minimum required to obtain these benefits and leaving the remainder of your retirement funds under your own direct care.
Ultimately, having sufficient money in retirement means that one must save extensively and obtain the best rates of return with the lowest risk. Aside from taking advantage of these schemes, I believe it is important for every individual to save as much as possible and deploy the money effectively by purchasing assets with the potential to appreciate in the long term. Depending on where you live, this might include a combination of shares, rental property, precious metals, or a small business. Remember that you must look after yourself in retirement rather than expecting increasingly bankrupt governments to do it for you.
Until next time, I wish everyone a good week.