Q&A: Is a Depression coming?

Dear Mr. Newland,  
I have read your latest column which has given me hope, however, I have also read Harry S. Dent’s latest book about The Crash Ahead. His information is based on demographics and spending patterns; and the strategies for inflation vs deflation are opposite. How do you think the slow down that he predicts will impact here in New Zealand? If globally, we are entering the start of a depression, what is your prognosis for New Zealand? Thank you for considering my question.  
Sincerely, Bill  

Dear Bill  
I don’t there is the slightest chance of a depression. The most likely scenario is just muddling ahead going now no where for a few years. Just behind that is hyper-inflation which is big risk- because if economies do not improve governments will print their way out of the problem. I have seen this time and again. Inflation is always the lesser evil as compared to deflation or stagflation.  

Interview: Hard assets are better than stocks…

Olly Newland interviewed by interest.co.nz’s Bernard Hickey about why hard assets such as property are better than ‘paper assets’ in an era of share market volatility and possible hyper-inflation.

from Bernard Hickey’s introduction at interest.co.nz:

“The share market is a den of thieves and is not for the small investor at all,” Newland said. “They’re tired of having their share portfolios messed around with and they’d like to get into something hard that they can see in the morning and is still there and has the same value from one day to the next.”

US Fed – no interest rate rises till 2013

US Fed to keep interest rate at record low

The Federal Reserve has said that it will likely keep interest rates at record lows for the next two years after acknowledging that the US economy is weaker than it had thought and faces increasing risks.

The Fed announced that it expects to keep its key interest rate near zero through mid-2013.

It has been at that record low since December 2008. The Fed had previously only said that it would keep it low for “an extended period.” …

NZ Herald

With this announcement we should be able to kiss goodbye to any more interest rate increases for some time to come. Unless inflation roars into a life (a good possibility, as I discussed here) interest rates are here to stay or even fall.
Already our major banks have a announced mortgage rates cuts, only a few days after putting them up. There’ll be more.
Allan Bollard who threatened to raise interest rates with the next OCR must be staring into his coffee wishing that the earth would swallow him up.
With low, if not zero interest rates being the new norm in much of the western world, there will be a rush to the NZ dollar because our interest rates are “high” by comparison to others. This may be a problem to exporters … but a bonanza to every one else.

This is all good news for property. If you listen very carefully you might just hear, way off in the distance, the first tentative whisperings of the next property boom. Keep listening. I’ll swear it’s getting louder.

The Other Side of Capitalism

Here is graphic evidence  that there is an “ugly” side of capitalism.

Capitalism is all about growth, the right to profit, and to deal. It is also the right to do nothing and builders are doing just that. The end result will be a chronic shortage of homes and its consequences.

In a relatively short time, the lack of new homes will become a  hot political issue as the shortage leads to over crowding, rising rents and “shock horror” stories.

It also is laying the ground work for the next property boom (hard as it may seem to imagine at this time).

In 5-10 years from now we will look back and wish prices and rents would be so cheap again.

Published 30 June 2011 Bob Dey Property Report

Consents for new homes fell 16.3% in May from a year earlier, to 1139, and the annual consent rate fell 12.4% to 13,917.

The May consent figure was up by 200 from April and the highest monthly tally since November. There were 66 apartment consents, taking the annual tally for apartments to 1010.

Statistics NZ said today 68 Canterbury consents were identified as earthquake-related. The $28 million-worth of earthquake-related consents doubled the value of such consents issued since last September.

Consents were issued for $77 million of alterations & additions and $15 million of outbuildings, taking the total residential consents for May to $389 million, 19.3% below May last year.

The total value for all residential categories, $5.08 billion, is $533 million less than for the previous year, a 9.5% fall.

Auckland consents for the month fell to 236 (321 a year ago), Northland rose by one to 52, Waikato fell to 163 (202), Bay of Plenty fell to 72 (67), Wellington fell to 89 (141), Canterbury rose by 14 to 251, Otago by 10 to 85.

Consents around Auckland – using the old council boundaries except for Franklin, which has been sliced in half – for May were Rodney 52 (63), North Shore 33 (48), Waitakere 28 (40), Auckland 60 (56), Manukau 40 (73), Papakura 14 (21), Franklin 9 (27 for the whole former district).

Non-residential construction for the month rose 17.2% to $350 million ($299 million) but is still down 6.5% for the year to $3.695 billion ($3.95 billion).

Total consents, including the $33 million ($40 million) of non-building construction, fell 6% for the month to $771 million ($820 million) and 8.5% for the year to $9.185 billion ($10.036 billion).

Welcome To Hyper Inflation

In several previous articles I have warned readers of the risks of hyper inflation (otherwise known as the “speculators friend”) and here we have a respected author saying the same thing.

Inflation can be a blessing for investors as it increases assets prices and thereby reduces debt proportionally.

But it has to be handled carefully, as greed and fear can take control and make people spend wildly in an attempt to keep up with inflation.

Sure, interest rates might rocket, but who cares if you pay 20% interest but make 100% capital gain? You think I’m joking? Nope.

That’s exactly what happened in the 1980s — and human nature hasn’t changed one little bit since then.

Roger J Kerr challenges RBNZ view on inflation – thinks it is being driven by different factors (www.interest.co.nz)

June 27, 2011 – 12:57pm, Roger J Kerr

There has been much analysis and debate in New Zealand over the last six months as to why this economic recovery out of recession back to positive GDP growth is fundamentally different to all other economic recoveries.

The argument goes that this it is entirely different this time because the pick-up in the economy is not consumer spending-led and therefore the inflation risks stemming from stronger growth are less concerning.

Households still have too much debt on board to go crazy buying new fizz-boats, TV’s and holidays homes.

Therefore there is a valid argument that RBNZ can delay increasing the OCR as the inflation risks are different.

I don’t agree with this thinking at all.

The RBNZ gurus like this line of reasoning as they have always seen our inflation risks coming from the demand side of the economy with excessive consumer demand fuelled by housing prices/credit expansion. For this reason the RBNZ are not likely to lift the OCR and return monetary policy settings from ‘super loose’ to ‘neutral’ until they see retail sales, house prices and credit growth increasing significantly.

They don’t see the inflation risks occurring until the demand side increases.

The reality of the NZ economy is that most of the inflation comes from the supply side of the equation, be it commodity prices, oil, rents, electricity or building costs.

Price increases from these sources can still push annual inflation above the RBNZ’s limit of 3.0%.

However, the big question is whether pushing interest rates upwards to slow consumer demand will have any impact on these supply-side sourced inflationary pressures.

Probably not.

Herein lays the dilemma of only relying on monetary policy (interest rate changes) as the sole controller of inflation in New Zealand.

The core funding ratio regulation on bank borrowing does provide another lever for the RBNZ to pull, however again this is all about restricting credit growth to the feared residential property sector.

What is the RBNZ doing about the supply-side inflation risks that will potentially cause them to breach their 3.0% inflation ceiling next year?

The answer is sweet bugger all!

The RBNZ are mandated by the Government of the day to control inflation between 1% and 3%, however they seem to think it is someone else’s responsibility to push for proper competition policies and control public sector price increases. Most of our inflation continues to come from these two sources, but you never read about this reality in the RBNZ’s Monetary Policy Statements. Their view of the sources of inflation and how you address those pressures remains far too narrow in my opinion.

Until we have a wider inflation control mandate for the RBNZ to highlight the true sources and prompt change we will have sub-optimal management of inflation in this economy.

If I was the Governor of the RBNZ, I would currently be worried about the following sources of inflationary pressures outside the obvious food and petrol price increases:-

- Inflationary expectations increasing from the high headline inflations rates of late.
- For the last 10 years China has exported deflation to New Zealand with price decreases on imported consumer goods. Massive wage increases in China has now ended this deflationary phenomena.
- Wage demands and settlements will be sharply higher over the coming 12 months as workers seek a catch-up on the zero increases of recent years.
- Building costs have to increase as local construction industry resources cannot meet the Christchurch rebuild demand.
- Rents are also likely to continue increasing as wages lift and residential property construction remains well below historical averages - that is, housing shortages.
- Current low capacity utilisation in the economy will not last much longer as production is ramped-up by agriculture exporters and manufacturing exporters selling into Australia.

Add on constantly rising electricity prices and local body rates and the end-conclusion is elevated inflation risks.

I re-read the 9 June RBNZ Monetary Policy Statement and did not get the impression that these aforementioned inflations risks are well recognised and understood.