One of the key announcements in the latest Australian Government budget has been to implement a tax on banks who have assets over AUD$100 million. Currently this would only affect the five biggest banks in the country. The tax comes in at 0.06% of the amount of liabilities. This does not sounds like a lot, but is expected to raise about AUD$6.2 billion over four years. Whether it is that successful, remains to be seen.
What I am most interested in is how the Government has sold this idea. By taxing liabilities, it sounds at first glance, that the banks are being punished for something bad. After all liabilities are considered "bad" in most cases. It is something that liabilities are a net obligation owed to someone else. In this case it is the bank's deposits. That is right, the government is taxing deposits. This tax will decrease the interest rate that banks are currently paying for deposits. If you have a savings account, you will receive a lower interest rate at one of the big five banks compared to a smaller bank. These banks will find it harder to compete for deposits or they will have to earn a lower interest spread decreasing profit. Either way this tax makes the big four banks less sound. We all know what happens when a large lender has financial problems. I am not implying this tax will lead to this, but is this really the best way to raise more revenue?
Monday 22 May 2017
Saturday 20 May 2017
Brexit and the Billionaires
A lot has been written about the rise in quantity of millionaires and billionaires in the UK, post the Brexit vote, while the working class population struggle with price increases and stagnent balance sheets.
What I am most surprised about when reading these articles is the anger towards the rich profiting of a Brexit event. It is as if the rich wanted a Brexit to happen and through various channels were able to orchestrate it. By making Brexit happen, the rich then went on to profit and maybe even 'exploit' the country. For the population that did not want a Brexit, this possibility would be disgusting.
What has been overlooked is two very important factors. Firstly, the rich are in the position they are in because they have a network of people who are likeminded and they are smart, astute investors. The rich prepare for these sort of events ahead of time and take all necessary steps to avoid any potential loss from a 'black swan' event. Second, the Bank of England has been on a path to destroy the value of the Pound since at least 2008. Interest rates have been at historical lows since the Great Recession and they have engaged in currency printing. However the destruction and attempted undermining of the value of the Pound has been ongoing for a long time.
I want to expand on the second point, as this is the most important factor. When an easy monetary policy is implemented, there will always be 'winners' and 'losers'. This is because the newly created currency does not flow evenly throughout the economy and it is the ones who receive this new currency first that benefit the most. The banks are the first to receive this currency as they own a lot of the government bonds the central bank is buying with the new currency (the central bank is also not allowed to buy directly from the government, so banks have to be involved). The extra currency the banks now have on-account is available to lend out and as the above events unfolded during the recession, the most creditworthy borrowers are the wealthy as they have bigger balance sheets. The wealthy borrow this newly created currency at record low interest rates and proceed to bid up asset prices within the country and around the world using their connections to find deals. As this money is spent, prices rise (or fall less than they otherwise would have) because more people are coming into contact with the new currency. Asset prices rise and the wealthy who purchased when prices were lower are sitting on a very nice capital gain. Eventually interest rates will be forced to rise and people who most recently borrowed money to buy high priced assets will find themselves unable to service the loan.
Brexit has merely shown a light on the rich, they were alway there. In fact, if the wealth of the rich was measured in a stable store of wealth, ie Gold, their wealth would not have changed much at all. The rich have had a 10-15% 'assistance' from a falling Pound. Instead of blaming the exit of a political union, it would be more useful to to target the monetary policy that has been eroding the value of the Pound for the last 40 plus years.
What I am most surprised about when reading these articles is the anger towards the rich profiting of a Brexit event. It is as if the rich wanted a Brexit to happen and through various channels were able to orchestrate it. By making Brexit happen, the rich then went on to profit and maybe even 'exploit' the country. For the population that did not want a Brexit, this possibility would be disgusting.
What has been overlooked is two very important factors. Firstly, the rich are in the position they are in because they have a network of people who are likeminded and they are smart, astute investors. The rich prepare for these sort of events ahead of time and take all necessary steps to avoid any potential loss from a 'black swan' event. Second, the Bank of England has been on a path to destroy the value of the Pound since at least 2008. Interest rates have been at historical lows since the Great Recession and they have engaged in currency printing. However the destruction and attempted undermining of the value of the Pound has been ongoing for a long time.
I want to expand on the second point, as this is the most important factor. When an easy monetary policy is implemented, there will always be 'winners' and 'losers'. This is because the newly created currency does not flow evenly throughout the economy and it is the ones who receive this new currency first that benefit the most. The banks are the first to receive this currency as they own a lot of the government bonds the central bank is buying with the new currency (the central bank is also not allowed to buy directly from the government, so banks have to be involved). The extra currency the banks now have on-account is available to lend out and as the above events unfolded during the recession, the most creditworthy borrowers are the wealthy as they have bigger balance sheets. The wealthy borrow this newly created currency at record low interest rates and proceed to bid up asset prices within the country and around the world using their connections to find deals. As this money is spent, prices rise (or fall less than they otherwise would have) because more people are coming into contact with the new currency. Asset prices rise and the wealthy who purchased when prices were lower are sitting on a very nice capital gain. Eventually interest rates will be forced to rise and people who most recently borrowed money to buy high priced assets will find themselves unable to service the loan.
Brexit has merely shown a light on the rich, they were alway there. In fact, if the wealth of the rich was measured in a stable store of wealth, ie Gold, their wealth would not have changed much at all. The rich have had a 10-15% 'assistance' from a falling Pound. Instead of blaming the exit of a political union, it would be more useful to to target the monetary policy that has been eroding the value of the Pound for the last 40 plus years.
Monday 1 May 2017
Chalking a Pool Cue
When to chalk a pool cue is a decision that seems very simple, but yet can and does beat more people than it should. For the professional pool player this is a no brainer. You chalk the pool cue before every shot. However for the amateur player, it's often after they have made a bad shot and miscue that the thought to chalk the cue crosses their mind. By then it is too late. The shot was missed and your opponent now has a turn.
This leads to one of my favourite sayings (and I have to admit that I do not always abide by it); 'do it when you can, not when you have to'. If the pool player chalked their cue when they could (before their shot) has opposed to when they had to (no chalk on the cue so they missed the shot, forcing them to chalking the cue), they would be far better off for it. Why does an action that is assumed to be of benefit to us be left until it is seemingly too late? Is it the 'she'll be right mentality' or procrastination or just simply not aware of the situation?
Thoughts on this are welcome. Please leave a comment!
This leads to one of my favourite sayings (and I have to admit that I do not always abide by it); 'do it when you can, not when you have to'. If the pool player chalked their cue when they could (before their shot) has opposed to when they had to (no chalk on the cue so they missed the shot, forcing them to chalking the cue), they would be far better off for it. Why does an action that is assumed to be of benefit to us be left until it is seemingly too late? Is it the 'she'll be right mentality' or procrastination or just simply not aware of the situation?
Thoughts on this are welcome. Please leave a comment!
Monday 6 February 2017
DIRA and the Impact on Fonterra
The Dairy Industry Restructuring Act 2001 (DIRA) was a piece of legislation that was passed by Parliament when the Labour Party was government. The main reason this piece of legislation was introduced, was to allow then New Zealand Dairy Group to merge with Kiwi Co-operative Dairies along with the New Zealand Dairy Board. At the time of the proposed merger, the New Zealand Dairy Board was the only organsation that was permitted to export dairy products out of New Zealand. In order to create this monopoly (the combined organsation would be collecting about 90% of all milk produced in New Zealand), the laws needed to be changed. Initially the Commerce Commission declined the application under anti-competitive behaviour. However, the government came to the party and changed the law to allow the merger. But there was conditions around the collection of milk.
The first significant act was the compulsory collection of milk from any producer who requests to supply the new company. As Fonterra was collecting such a large volume of milk, there was no other option for a supplier if Fonterra was allowed declined their request to supply. The effect this had on Fonterra will be felt for many more years. In order to process this huge supply of milk, Fonterra set about building dairy factories that processed raw milk into milk powder. Milk powder is the lowest value product they could make. But their hands were tied. Fonterra could not turn away any supply of milk and unlike almost any other commodity, fresh milk has a very short shelf life until it is processed. It has to be processed within three days to avoid it spoiling. Milk powder was a safe bet. It is also the lowest return.
The second and equally onerous rule imposed, required Fonterra to supply up to 500 million kgs of raw milk solids to competitors at a below market price. This price was calculated using a complex formula that would provide a fair price and allow competition to access raw milk without their own milk collection infrastructure. While the price that was calculated using the special formula was above Fonterra's costs to collect this milk, the actual risks around a volatile fresh product as well as its seasonal supply fluctuations were not fully appreciated or worked in to this equation. The vast majority of milk is produced in the spring (this also adds to the above paragraph requiring production capacity to be built based on a peak that is only reached for 1-2 weeks a year) with very low volumes during the traditional 'dry' period of April-July. However, Fonterra still has an obligation to supply milk to its competitors over this time, up to the limit. In addition, if a competitor no longer requires the milk, they can simply make the call to delay or cancel the future deliveries. This risk is all Fonterra's. They need to have the capacity to process every drop of milk they collect, knowing that their competitors may or may not take their full allocation. Fonterra is legally obliged to have a constant excess production capacity. This reduces the return to their shareholders.
Like all government policy there is unintended consensuses. In the case of the DIRA, the cost of this policy lies squarely on Fonterra and its shareholders. Observers could argue that this is the 'cost' of forming Fonterra. I disagree and would instead argue that this make the entire dairy industry in New Zealand less competitive. Without government support, the merger would have never taken place and this is the way it should have been for the better of New Zealand dairy farmers. The quicker the entire DIRA is thrown out the better it will be for the industry.
The first significant act was the compulsory collection of milk from any producer who requests to supply the new company. As Fonterra was collecting such a large volume of milk, there was no other option for a supplier if Fonterra was allowed declined their request to supply. The effect this had on Fonterra will be felt for many more years. In order to process this huge supply of milk, Fonterra set about building dairy factories that processed raw milk into milk powder. Milk powder is the lowest value product they could make. But their hands were tied. Fonterra could not turn away any supply of milk and unlike almost any other commodity, fresh milk has a very short shelf life until it is processed. It has to be processed within three days to avoid it spoiling. Milk powder was a safe bet. It is also the lowest return.
The second and equally onerous rule imposed, required Fonterra to supply up to 500 million kgs of raw milk solids to competitors at a below market price. This price was calculated using a complex formula that would provide a fair price and allow competition to access raw milk without their own milk collection infrastructure. While the price that was calculated using the special formula was above Fonterra's costs to collect this milk, the actual risks around a volatile fresh product as well as its seasonal supply fluctuations were not fully appreciated or worked in to this equation. The vast majority of milk is produced in the spring (this also adds to the above paragraph requiring production capacity to be built based on a peak that is only reached for 1-2 weeks a year) with very low volumes during the traditional 'dry' period of April-July. However, Fonterra still has an obligation to supply milk to its competitors over this time, up to the limit. In addition, if a competitor no longer requires the milk, they can simply make the call to delay or cancel the future deliveries. This risk is all Fonterra's. They need to have the capacity to process every drop of milk they collect, knowing that their competitors may or may not take their full allocation. Fonterra is legally obliged to have a constant excess production capacity. This reduces the return to their shareholders.
Like all government policy there is unintended consensuses. In the case of the DIRA, the cost of this policy lies squarely on Fonterra and its shareholders. Observers could argue that this is the 'cost' of forming Fonterra. I disagree and would instead argue that this make the entire dairy industry in New Zealand less competitive. Without government support, the merger would have never taken place and this is the way it should have been for the better of New Zealand dairy farmers. The quicker the entire DIRA is thrown out the better it will be for the industry.
Wednesday 9 March 2016
You've got to get Poor to get Rich
The title of this article is borrowed from my good friend, it is his favourite saying. It takes two sides. One is that most people and countries work in order to increase their wealth, ie they desire savings or to be able to buy more goods and services, thus increasing their living standards. The second is that Central Banks believe that a lower value currency on the exchange market is a good thing for the country. By 'good thing' I mean the low currency makes the country better off. However you cannot have your lunch and eat it too. A low currency and a high living standard and high savings (that are able to purchase good and services in the future) are mutually exclusive. You either have a strong and valuable currency that has high purchasing power, or you don't.
Central Banks cite a high currency as a reason to cut interest rates, because in their view it is overvalued. A currency is simply the exchange ratio between goods and services in two different countries. To imply this ratio is overvalued, is incorrect. That is because it is virtually impossible to quantify what the ratio should be. How do you compare the price of a steak in Darling Harbour to a steak in Rotorua? Or a Lexus LX570 purchased from a prestigious dealership in Sydney who offers many extras to that of a dealership in the outskirts of Durban? There are too many factors at play to simply state that the currency is over or undervalued. The Big Mac index is a guide, but there is more to the price of the burger than just the ingredients. Rent and wages are two big factors that need to be accounted for, but are difficult to do so.
The idea that you can lower the currency's value today, thus decreasing the living standards and purchasing power of the citizens and then at some point in the future, this will reverse and increase the living standards and purchasing power is absurd. But this is exactly what the Central Bank is saying when they use an overvalued exchange rate as a reason to cut interest rates. This does assume that the Central Bank wants a prosperous country - this could be debated, as in recent years their actions are questionable and one does wonder who they work for.
Central Banks cite a high currency as a reason to cut interest rates, because in their view it is overvalued. A currency is simply the exchange ratio between goods and services in two different countries. To imply this ratio is overvalued, is incorrect. That is because it is virtually impossible to quantify what the ratio should be. How do you compare the price of a steak in Darling Harbour to a steak in Rotorua? Or a Lexus LX570 purchased from a prestigious dealership in Sydney who offers many extras to that of a dealership in the outskirts of Durban? There are too many factors at play to simply state that the currency is over or undervalued. The Big Mac index is a guide, but there is more to the price of the burger than just the ingredients. Rent and wages are two big factors that need to be accounted for, but are difficult to do so.
The idea that you can lower the currency's value today, thus decreasing the living standards and purchasing power of the citizens and then at some point in the future, this will reverse and increase the living standards and purchasing power is absurd. But this is exactly what the Central Bank is saying when they use an overvalued exchange rate as a reason to cut interest rates. This does assume that the Central Bank wants a prosperous country - this could be debated, as in recent years their actions are questionable and one does wonder who they work for.
Saturday 5 March 2016
Understanding the Rise of Donald Trump
People are not happy. This true on both sides of the isle. The fact that Bernie Sanders and Donald Trump, who are both extremely left and right respectively, have gained any traction is remarkable. The status quo is no longer an option for many people. The two parties have offered run of the mill candidates, that have shown no imagination and no ideas to actually changing anything, for too long. Obama run on 'Change. Yes we can'. What exactly has changed? In the eyes of many Americans, nothing, and this is why the Republicans will have Donald Trump as their presidential candidate.
The media, including social media is all over Donald Trump as to why he should not become President. The mainstream media is so intrenched (and some would argue each media outlet is just an extension of their respective party), that every article that bad mouths Trump is encouraging more people to vote for him. I have struggled to find a positive article written about Trump. Has he really said NOTHING that would benefit the country? Or has everything he has commented on ruffled the establishment so much they have to discredit him?
This same media has for all intents and purposes, endorsed every Presidential candidate in memory. These Presidents who have ultimately been elected have not resulted in much, if any benefit to everyday Americans and have only gone on to increase the size of government and in rich Wall Street. This has resulted in a loss of trust for any candidate who the mainstream media portray as an ideal President. By default, anyone who is accepted as the right person for the job, actually is not someone who will work for the everyday person.
What is also helping Donald Trump's campaign is the likes of Russell Brand and John Oliver (among many others) coming out and giving every reason not to vote for him. The fact that they have remained silent on previous nominees, who have gone on to win and maintained the status quo, is the reason they are helping Donald Trump. Trump is different in every way a candidate could be. He is not cosy with big business and states he owes no one anything.
How bad will Donald Trump be? He may well have the House and Senate behind him, but any crazy ideas (like the wall), would only come into being through Executive Order. We might see the limits of the amount of Executive Orders reached under Donald Trump! Time will tell how this all unfolds.
** I am not endorsing Donald Trump, just attempting to explain his popularity. Actually there is no candidate that I would vote for from either main party.
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| Donald Trump. Source: wikipedia.com |
The media, including social media is all over Donald Trump as to why he should not become President. The mainstream media is so intrenched (and some would argue each media outlet is just an extension of their respective party), that every article that bad mouths Trump is encouraging more people to vote for him. I have struggled to find a positive article written about Trump. Has he really said NOTHING that would benefit the country? Or has everything he has commented on ruffled the establishment so much they have to discredit him?
This same media has for all intents and purposes, endorsed every Presidential candidate in memory. These Presidents who have ultimately been elected have not resulted in much, if any benefit to everyday Americans and have only gone on to increase the size of government and in rich Wall Street. This has resulted in a loss of trust for any candidate who the mainstream media portray as an ideal President. By default, anyone who is accepted as the right person for the job, actually is not someone who will work for the everyday person.
What is also helping Donald Trump's campaign is the likes of Russell Brand and John Oliver (among many others) coming out and giving every reason not to vote for him. The fact that they have remained silent on previous nominees, who have gone on to win and maintained the status quo, is the reason they are helping Donald Trump. Trump is different in every way a candidate could be. He is not cosy with big business and states he owes no one anything.
How bad will Donald Trump be? He may well have the House and Senate behind him, but any crazy ideas (like the wall), would only come into being through Executive Order. We might see the limits of the amount of Executive Orders reached under Donald Trump! Time will tell how this all unfolds.
** I am not endorsing Donald Trump, just attempting to explain his popularity. Actually there is no candidate that I would vote for from either main party.
Friday 26 February 2016
The US Dollar
This is a topic I have wanted to write on for awhile and finally made sometime.
Over the past two years it has been difficult to ignore the rise in the US Dollar. For some (me included), it is somewhat bewildering. You have the worlds largest ever debtor (over 19 Trillion in debt!), money printing that has spanned around four years and interest rates were at zero for almost a decade. However, on the mere hint of a rate increase, from 0-0.25% to 0.25-0.5%, the USD has soared.
The above chart shows the USD Index before the breakout to the upside.
Despite the Zero Interest Rate Policy (ZIRP), Quantitive Easing 1, 2, and 3, Operation Twist and endless government borrowing, the USD failed to fall below its 2008 pre financial crises low. Instead of other countries following a responsible monetary policy (i.e not following the US down the worm hole), they implemented their own money printing schemes. This was the birth of the Currency Wars. At the time, I believed the US was going to win, that is debase their currency the quickest. But as the chart shows, the UK, Japan, Switzerland and the EU, among others, were 'better' at it.
The above chart shows the remarkable rise in the USD Index.
South Africa and Brazil are the most obvious mismanaged economies with major Monetary Policy mistakes from countries in the developing world. Instead of allowing their respective currencies to rise, not propping up the USD, they fought their rising currencies on multiple fronts (intervention in the FX market, cutting rates, government spending). They forwent higher standards of living and keeping their economies on a sound footing in exchange for depressing their currencies. Inflation would not have undermined their citizens savings and the government would not have been able to go on a borrowing spree. Instead they also adopted an expansion monetary policy, which has seen their economy unable to cope when the tightening cycle started and everyone run back into the US Dollar. The piper must always be paid and it is now pay day. South Africa and Brazil are paying for this misguided policy.
The US has not even started tightening in the true sense, they have just talked about decreasing the stimulus and this was enough the propel the USD to ten year highs. True tightening would see the UD Fed first sell (or cease rolling over) their bond portfolio. No word on this happening yet.
The lessons of this story is that no country sets their monetary policy in isolation. Where the US goes, the world will follow. While the US has raised rates, while the other mayor world economies have not followed, the question is when will the US admit they made a major policy error. The other major Central Banks are trying to force the hand of the US Fed by further reducing interest rates, causing the USD to rise even more. The Currency Wars are not over and the winner is the one to depress their currency the most. There will only be one survivor, the money of the last 5000 years.
Over the past two years it has been difficult to ignore the rise in the US Dollar. For some (me included), it is somewhat bewildering. You have the worlds largest ever debtor (over 19 Trillion in debt!), money printing that has spanned around four years and interest rates were at zero for almost a decade. However, on the mere hint of a rate increase, from 0-0.25% to 0.25-0.5%, the USD has soared.
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| Source: www.danericselliottwaves.blogspot.com |
Despite the Zero Interest Rate Policy (ZIRP), Quantitive Easing 1, 2, and 3, Operation Twist and endless government borrowing, the USD failed to fall below its 2008 pre financial crises low. Instead of other countries following a responsible monetary policy (i.e not following the US down the worm hole), they implemented their own money printing schemes. This was the birth of the Currency Wars. At the time, I believed the US was going to win, that is debase their currency the quickest. But as the chart shows, the UK, Japan, Switzerland and the EU, among others, were 'better' at it.
 | |
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South Africa and Brazil are the most obvious mismanaged economies with major Monetary Policy mistakes from countries in the developing world. Instead of allowing their respective currencies to rise, not propping up the USD, they fought their rising currencies on multiple fronts (intervention in the FX market, cutting rates, government spending). They forwent higher standards of living and keeping their economies on a sound footing in exchange for depressing their currencies. Inflation would not have undermined their citizens savings and the government would not have been able to go on a borrowing spree. Instead they also adopted an expansion monetary policy, which has seen their economy unable to cope when the tightening cycle started and everyone run back into the US Dollar. The piper must always be paid and it is now pay day. South Africa and Brazil are paying for this misguided policy.
The US has not even started tightening in the true sense, they have just talked about decreasing the stimulus and this was enough the propel the USD to ten year highs. True tightening would see the UD Fed first sell (or cease rolling over) their bond portfolio. No word on this happening yet.
The lessons of this story is that no country sets their monetary policy in isolation. Where the US goes, the world will follow. While the US has raised rates, while the other mayor world economies have not followed, the question is when will the US admit they made a major policy error. The other major Central Banks are trying to force the hand of the US Fed by further reducing interest rates, causing the USD to rise even more. The Currency Wars are not over and the winner is the one to depress their currency the most. There will only be one survivor, the money of the last 5000 years.
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