Hard News by Russell Brown

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Hard News: Theories, please ...

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  • Stephen Judd,

    Ok, here's one theory.

    Most New Zealand companies still have real earnings and real assets and pay honking great tax-imputed dividends. Many of the biggies (which therefore weight the index) are utilities in areas where people will not economise much. The best of them are not dependent on bank credit and will survive a liquidity crunch. This is why people like me have been buying companies like, say, Hallensteins. Will people make fewer phone calls and use the internet less next year? Will they use a lot less power? Well then, there is a limit to how far Telecom and Contact and so on can fall before their become brilliant business propositions.

    Contrast with 1987 where a good chunk of the NZ market was speculative companies with nothing behind them but shares in other speculative companies.

    NZ companies will suffer from fallout from the American mess - credit will be scarce and expensive, and exports to the US will fall with the USD. But they won't go bust. Therefore there is a level at which they are good value. We may be already seeing that level.

    Also, a lot of the fall that we have seen is foreign investors pulling out - once they've sold, they've sold.

    Finally, as crashes go, this is pathetic compared to, say, 87. Our business writers lack, among other things, perspective.

    (I would not like to be a middle-aged American right now, that's for sure.)

    Wellington • Since Nov 2006 • 3122 posts Report Reply

  • Russell Brown,

    (I would not like to be a middle-aged American right now, that's for sure.)

    But I fear that my pension fund puts me in basically the same boat as them ...

    Auckland • Since Nov 2006 • 22850 posts Report Reply

  • Stephen Judd,

    Oh, the ASX has been hugely driven by spec mining/resource companies - double whammy as people fly from speculative ventures and realise what will happen to the OZ mineral->China manufacturing->USA consumption flow if the US stops importing so much. ASX also has some large financial companies with very opaque structures (eg MFS, AFG, BNB) and banks that have already admitted some US subprime exposure. The NZX is far different in composition.

    Wellington • Since Nov 2006 • 3122 posts Report Reply

  • Stephen Judd,

    But I fear that my pension fund puts me in basically the same boat as them

    Really? Did your pension fund invest heavily in the US finance sector (or fur-bearing trout farms)?

    After the 87 crash the Dow had regained its position in two years. Ditto after the 9/11 dip. Markets recover.

    Give it a couple of years. One year to go and GWB will be forced to hand over to someone more sensible. If you're not retiring in the next 5 years, don't worry.

    (Also, if you keep putting in now, the miracle of dollar-cost-averaging will boost your eventual return.)

    Wellington • Since Nov 2006 • 3122 posts Report Reply

  • BenWilson,

    Russell, can you get another case worker? I know for a fact that not everyone from Special Education shares her beliefs about mainstreaming, as you tell it.

    Very happy to hear of the older boy's achievements, though. The mind is mysterious and wonderful.

    Auckland • Since Nov 2006 • 10657 posts Report Reply

  • Russell Brown,

    Give it a couple of years. One year to go and GWB will be forced to hand over to someone more sensible.

    Like I said, after a quick look at the candidates' economic policies, I wonder if they're capable of sensible policy shifts.

    If you're not retiring in the next 5 years, don't worry.

    Yeah, I know. Perhaps someone should have pointed out same to the Herald's editors before they ran their panic story about the six-month-old KiwiSaver schemes.

    Auckland • Since Nov 2006 • 22850 posts Report Reply

  • Russell Brown,

    Russell, can you get another case worker?

    I guess so.

    I know for a fact that not everyone from Special Education shares her beliefs about mainstreaming, as you tell it.

    The understanding and support for AS conditions is quite patchy. GSE in Wellington seems quite good, and you're probably completely out of luck in the regions.

    Very happy to hear of the older boy's achievements, though. The mind is mysterious and wonderful.

    Hell yeah!

    But anyway, it would be good to have the discussion of that post take place on the humans site, so anyone with a comment should feel free to make it there.

    Auckland • Since Nov 2006 • 22850 posts Report Reply

  • BenWilson,

    Like I said, after a quick look at the candidates' economic policies, I wonder if they're capable of sensible policy shifts.

    Watching American politics I often wonder if the candidates have anything to do with policy.

    Auckland • Since Nov 2006 • 10657 posts Report Reply

  • Rob Hosking,

    Stephen,

    Yeah, I think you're at least partially right about NZ firms.

    By and large they've been very cautious users of credit over the past few years. In fact, the Reserve Bank has pointed out they're net savers.

    As far as pension funds go....well, I've got a bit of money earmarked for KiwiSaver but right now it's earning a pretty good rate in the bank. Might keep it there for a wee while longer...

    Russell: If you've got time (yeah I know, big question) complain. We've had cause to over the past year. It's an onerous process crafting fully documented complaints letters but its worth it. Partly there's the public service element (case workers seem wildly varying in quality, in our much shorter experience than yours: some are worse than useless, other I'd want to put up for sainthood).

    But it also sends a message: don't mess with us.

    Oh, and congrats on the NCEA thing. Must have been a real lift.

    South Roseneath • Since Nov 2006 • 830 posts Report Reply

  • Emma Hart,

    Partly there's the public service element (case workers seem wildly varying in quality, in our much shorter experience than yours: some are worse than useless, other I'd want to put up for sainthood).

    But it also sends a message: don't mess with us.

    Eh, yeah. We've had three SES workers over the last seven years - at some point they stopped being 'facilitators' and became 'advisors', perhaps to remove any suggestion that they might be supposed to help. One was very, very good, and burnt out after about two years. What we have now appears to be the sort of personality that lasts a long time in these jobs - the Doesn't Give a Crap. Last year my mainstreamed daughter lost her itinerant hours, but we were told not to worry, because our faciliator spent a lot more time with the itinerant-less children.

    We've seen her precisely once. Where we pointed out she hadn't done a bunch of stuff she said she would, she apologised, promised to do it, and didn't.

    But at least Special Education has a divison especially for deaf kids. When they can be arsed, at least they know what they're talking about.

    Christchurch • Since Nov 2006 • 4651 posts Report Reply

  • Stephen Judd,

    *cough* I have plans to start a money-orientated blog shortly, and those OMG! Kiwisaver plunges! stories were top of my list for potential posts.

    To my mind the big story about Kiwisaver and the whole PIE regime is how Cullen has given an enormous boost to the fat, happy fund managers, despite all the evidence that shows that they simply do not perform to a level that merits their outrageous fees. Where are the breaks for index funds which research shows to consistently outperform managed funds? Why can't I set up a "Stephen's self-managed fund" of shares selected by me, a la the Aussies, and choose to bypass the fund-management boodle altogether?

    I know Gareth Morgan has been banging on about this for a while but still...

    Re the American government: once the Dems get the White House and firm control of the legislature, the adults will be in charge again.

    Wellington • Since Nov 2006 • 3122 posts Report Reply

  • BenWilson,

    Where are the breaks for index funds which research shows to consistently outperform managed funds?

    Do they need breaks? If they're outperforming consistently, they should sell themselves.

    An index fund is the only kind I'd want, personally. But paying off debt is by far the best option in NZ at the moment for most people.

    I suspect part of our slightly less precipitous fall is on account of that - that margin borrowing for stock here has already taken it's hit when our interest rates kept rising. So the panic sell off will be less.

    Auckland • Since Nov 2006 • 10657 posts Report Reply

  • Craig Ranapia,

    Does anyone else find the economic policy responses of not only the incumbent, but all the US presidential hopefuls unconvincing to the point of being delusional?

    'Delusional' might be a bit harsh, Russell, then again there might be one or two of us who think politicians have economic Messiah complexes and delusions of influence with monotonous regularity.

    Re the American government: once the Dems get the White House and firm control of the legislature, the adults will be in charge again.

    Whatever... I'll just say the evidence from the Democrat-controlled Congress (both houses with workable majorities, Stephen) has been less than encouraging. But who knows, Viggo might want to celebrate his Oscar nomination with a candle-lit dinner with moi as well.

    North Shore, Auckland • Since Nov 2006 • 12370 posts Report Reply

  • John Quinn,

    Re Stephen's comment on fat fees by money managers, I have often wondered if one could set up your own advisory firm and secure the discounts for yourselves and friends on perfectly straight-forward investments.

    Auckland • Since Nov 2006 • 15 posts Report Reply

  • Geoff Lealand,

    I think the critical problem is in regarding the FSTE, SE and all other acronyms as being underpinned by rational processes. They are like a skittery horse, responding to rattle snakes on the trail. If we treat the stock market, and associated economic processes, as irrational (melodramatic rather than coherent) processes, I think we will come to a better understanding.

    Screen & Media Studies, U… • Since Oct 2007 • 2562 posts Report Reply

  • Russell Brown,

    'Delusional' might be a bit harsh, Russell, then again there might be one or two of us who think politicians have economic Messiah complexes and delusions of influence with monotonous regularity.

    Much as I admire Obama's style, his "give everyone $250" policy is daft. It seems that everyone's solution involves cranking up the federal deficit some more, and worrying about inflation some other time.

    Auckland • Since Nov 2006 • 22850 posts Report Reply

  • BenWilson,

    Dunno about 'irrational'. I'd call them 'unpredictable'. It's not irrational to panic and pull out of a crashing market. But the effects of people doing that are hard to predict. Unpredictable != Irrational unless you want to call the weather irrational.

    Auckland • Since Nov 2006 • 10657 posts Report Reply

  • Stephen Judd,

    Geoff, do you know Benjamin Graham's parable of Mr Market?

    Imagine you are in business with a chap called Mr Market. Every day, he offers you a price to buy your share or sell his share of the business. Some days he is in a marvellous mood, and quotes you a very high price - the next day he can be deeply depressed, and quote you a low one. You are not obliged to take him up on his offer, no matter what...

    Graham also coined the proverb "in the short term the market is a voting machine, in the long term it is a weighing machine."

    And then there's Keynes (naughty speculator that he was): "The market can stay irrational longer than you can stay solvent."

    I think it's been clearly demonstrated that sharemarkets are not perfectly efficient and that the invisible hand is somewhat Parkinsonian. But they are still kinda sorta reflecting reality, with distortions and delays. Rattlesnakes do present a real risk after all...

    My approach these days is plod along as a boring, long term, value investor, looking for dividends and earnings above all, and treat everything else as speculation. If other people want to buy dear and end up selling cheap, that's their business.

    John: that is a very interesting idea. I fear it could lead to some strained friendships though...

    Ben: in truth, I don't believe any particular form of fund should receive breaks - I just think there should be a level playing field. Cullen seems to have been advised that managed funds are where everyone should have their retirement money, and I find that advice suspect.

    Wellington • Since Nov 2006 • 3122 posts Report Reply

  • BenWilson,

    I guess an index fund is technically a managed fund though. Certainly some managed funds are index funds.

    Auckland • Since Nov 2006 • 10657 posts Report Reply

  • Stephen Judd,

    Ben, here's my understanding.

    Note that by "managed fund" I mean one that does not merely follow the index, but actively selects stocks.

    Under the old regime, index funds did not pay tax on capital gains, because they were not trading for income. (NZ doesn't have capital gains tax, remember; just tax on income). Managed funds did pay tax on capital gains, because they were deemed to be trading for income.

    This upset the managed funds people.

    Now, I could see that it might be fairer to allow managed funds to have a lower tax regime if they were genuinely not trading for gain. This would put managed funds on the same plane as personal investors and index funds.

    But instead, PIE funds now pay no tax on capital gains in NZ or Australian shares no matter how they are managed. In other words, I personally would pay income tax if I traded shares for income, but as a shareholder in a PIE, I wouldn't. (In fact worse than that, because PIE income is taxed at 33%).

    I regard this as an effective subsidy for managed fund managers.

    Wellington • Since Nov 2006 • 3122 posts Report Reply

  • Craig Ranapia,

    Much as I admire Obama's style, his "give everyone $250" policy is daft. It seems that everyone's solution involves cranking up the federal deficit some more, and worrying about inflation some other time.

    Indeed. I'd pledge my vote to the first candidate on either side of the aisle who had the intellectual honesty (and political courage) to just stand up and say: I don't have a soundbite solution to a horrible and complex mess that is going to get worse before it gets better -- and anyone else who says differently is lying to you.

    Then again, reality doesn't go down well in the primary process. McCain got hammered in Michigan for telling the truth that auto manufacturing jobs just won't "come back". Romney wins by pandering his arse off - promising the corporate welfare and federal subsidies to auto companies that used to give fiscal conservatives strokes.

    North Shore, Auckland • Since Nov 2006 • 12370 posts Report Reply

  • Terence Wood,

    and again, with the proper tags this time:

    "Does anyone else find the economic policy responses of not only the incumbent, but all the US presidential hopefuls unconvincing to the point of being delusional?"

    Nope.

    Much as I admire Obama's style, his "give everyone $250" policy is daft. It seems that everyone's solution involves cranking up the federal deficit some more, and worrying about inflation some other time.

    Have you been possessed by the spirit of Herbert Hoover this morning Russell?

    Inflation and the deficit are the least of the United State's worries at present*. If (and that is still an if) the recession comes and is as bad as people fear, priorities ought to be (a) helping those in need of help and (b) increasing consumer spending and confidence. If (b) alone was your sole concern then you might simply rely on monetary policy*. However, monetary policy isn't a heck of a lot use to those suffering in the short term. The solutions offered by the front Democrat front-runners on the other hand may well be.

    And Obama's plan isn't necessarily daft at all. If directed at lower socio-economic groups it's money to ease the pain of the recession and money which will be spent.

    The trouble with Bush's stimulus suggestions is that (a) they will give money to people who won't need it and (b) to people who wont necessarily spend it. Not the fact that they are deficit increasing per se.

    _
    *There is a risk of Stagflation which might change this a bit. However, inflation is not dangerously high in the US and it certainly isn't the cause of the current crisis. Meanwhile the deficit is a mid-long run concern. The current crisis is something in the here and now.
    **even then, for fear of a liquidity trap, you might want to involve fiscal policy too.

    Since Nov 2006 • 148 posts Report Reply

  • Stephen Judd,

    Yes, it would be better to give money to people who a) can use it and b) will spend it than to reward the finance sector for its unwise practices by bailing it out, which it what Bush wants to do.

    It really doesn't matter what the problem of the day is, the Bush solution is tax cuts for the rich.

    Wellington • Since Nov 2006 • 3122 posts Report Reply

  • BenWilson,

    Stephen, I wasn't trying to be semantic about it, just suggesting that an index fund isn't quite as purely unmanaged as it may seem. The way in which such a fund is kept in line with the index is quite a complex process which involves human judgments. The question of when to rebalance any stock which has moved in price, so as to keep transaction fees to a minimum, is not simple.

    I don't really get the distinction either our or the ozzie tax departments are making about trading for gain. You wouldn't be in the stockmarket at all if it wasn't to gain. But tax systems aren't that rational either. I'm also in property to gain (in the long run). The line between having assets that you buy and sell and 'being a trader' is quite a hazy one, I guess they have to just base it on the number of transactions. But an index fund can have one hell of a lot of transactions.

    Auckland • Since Nov 2006 • 10657 posts Report Reply

  • Terence Wood,

    Brad Delong does a good job, I think, of explaining the potential strength of Obama's Plan

    On the other hand (well it is economics, after all) here's Paul Krugman criticising Obama in favour of HRC and JE.

    Since Nov 2006 • 148 posts Report Reply

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