Of Interest

According to Statistics New Zealand's Consumers' Price Index (CPI) inflation is running above 7%, its highest level since 1990. The Reserve Bank, tasked with targeting CPI inflation of between 1% and 3%, has been aggressively increasing its Official Cash Rate, which means higher interest rates flow through to borrowers and savers.

Given the importance of the CPI as a measure of the changes in the price of goods and services for NZ households, do we have its settings right? What's in it, how is this determined and measured, and is a quarterly CPI release frequent enough?

To address all this we spoke with Bill Rosenberg in a new episode of interest.co.nz's Of Interest podcast. Rosenberg, now a Commissioner of the Productivity Commission, is the former Policy Director and Economist at the Council of Trade Unions. He was also one of nine people Statistics NZ appointed to a committee to independently review the CPI 10 years ago.

Rosenberg notes interest payments are excluded from the CPI. And while housing rentals and purchases of newly constructed dwellings excluding land are in, sales of existing houses are not. The CPI is "an index is designed for the Reserve Bank," Rosenberg says and the Household Living-Costs Price Indexes (HLPI), another Statistics NZ series, is a better measure of inflation for NZ households. It includes mortgage interest payments.

The latest HLPI figures show the annual inflation rate in the December quarter for all households was 8.2%, significantly higher than the CPI's 7.2%. 

The HLPI breaks out different indexes for all households being the average household, beneficiaries, Māori, superannuitants, highest-spending households and lowest-spending households. The CPI, in contrast, measures how inflation affects New Zealand as a whole. Thus the HLPI is able to show highest spending households experienced the biggest annual inflation increase of 9.4% in the December quarter because they spend more on interest payments than other household groups.

"I think there should be more focus on the HLPI, the Household Living-Cost Price Index," Rosenberg says.

"It's more representative of the costs that people face and people can actually go to it and see 'roughly speaking I'm [a] middle income household, I can see how my costs have been changing'," he says.

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There's no reason why a partnership between the Government and banks making equity investments in small and medium sized businesses (SMEs) wouldn't work in New Zealand, says the man who heads up such a fund in Australia.

The NZ Government expects the major banks to be in a position soon to decide whether to join it as an investor in a business growth fund (BGF). This comes after last year's Budget proposed a BGF to improve SMEs' access to finance, with up to $100 million earmarked for Crown investment as a minority shareholder alongside banks.

Speaking in interest.co.nz's Of Interest podcast, Anthony Healy, CEO and Managing Director of the Australian Business Growth Fund (ABGF), explains how the ABGF works and sets out why he thinks such a fund is easily transferable to NZ. Healy, now based in Melbourne, was CEO of BNZ between 2014 and 2017.

"There are no differences that I could identify that would suggest the Fund wouldn't work [in NZ]. And I think the banks in New Zealand, their parent banks obviously supported the concept here, so it's not unknown to them," says Healy. "...the economies, the market, the business environment, they're very similar. The banking system's pretty similar."

Establishing a BGF was a recommendation made by the Government's Small Business Council in its New Zealand Small Business Strategy in 2019. 

The ABGF received A$100 million from the Federal Government, A$100 million each from the Aussie parents of ANZ NZ, ASB, BNZ and Westpac NZ, plus A$20 million each from HSBC and Macquarie Group.

Healy suggests a $400 million to $500 million BGF feels about the right size for NZ.

"There are tens of thousands of SMEs that would fit the [investment] profile in New Zealand. They could be in every sector of the economy," he says.

In the podcast Healy also talks about how he got involved in the ABGF, getting the banks onboard, why it fills a gap in the investment market, the ABGF's investment process, the returns it seeks, the investments made to date and lots more.

You can find all episodes of the Of Interest podcast here.

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Silicon Valley Bank’s meltdown this week was partly because it had been investing customer deposits in US Treasuries, considered one of the world’s safest investments, without hedging the risk of interest rates rising. 

Last year was the first since 1870 that bonds and equities both experienced an annual decline, as the interest rate shock destroyed the value of assets in almost all classes. 

Investors have been rushing to redesign their portfolios as the style of investing, which had worked so well in the years post-global financial crisis, somewhat fell apart. 

Speaking in interest.co.nz's Of Interest podcast, Greg Fleming, head of global diversified funds at Salt Funds, said fiscal and monetary stimulus during the pandemic had created several parallel bubbles which are now deflating. 

"We had an extraordinary amount of money sloshing around after Covid triggered that super-stimulus; not just fiscal stimulus but also central bank stimulus."

“That amount of money sloshing around the system had to find a home. Many markets took that money, some as solid as residential property, others as ethereal as ethereum.” 

Bubbles in both dependable and speculative markets have been deflating and bringing investment portfolios with them. 

Silicon Valley Bank, for example, was at the heart of the venture capital boom which occurred in 2021 as cashed up investors looked for places to invest all the excess liquidity they found themselves holding. 

Deposits rushed into the bank as start-ups raised big funding rounds and Silicon Valley Bank invested that cash in treasury bonds. 

But it couldn’t last, start-ups stopped depositing money when venture capitalists stopped writing them checks in 2022 and sky-rocketing rates depleted the value of the bank’s bonds. 

It's a classic boom and bust story. The economy got too hot, the bank grew too fast, and it imploded when conditions suddenly reversed. 

Not all assets and investments have experienced the dizzying extremes that Silicon Valley Bank has, but most have charted a similar direction of travel. 

Accident waiting to happen

“If you go back three years, and were constructing a portfolio from scratch, one thing you would see was horrifically expensive bonds everywhere, that looked like an accident waiting to happen,” Fleming said. 

“It is almost wearying to see people expressing surprise at the bond meltdown that happened last year, it was always going to happen and was just a question of minimizing your investors' exposure to it.” 

The meltdown was the worst bear market in bonds that has ever occurred, which coincided with a bear market in stocks. These two assets have traditionally had an inverse-correlation, meaning one would fall when the other climbed. 

That has not been the case in the past year and these two asset types have begun moving in the same direction, posing a challenge to traditional portfolio construction.  

It is possible both stocks and bonds could rally when – or if – central banks cut interest rates, extending the correlation between the assets. 

This might require investors to look for other uncorrelated assets to smooth out volatility in portfolios. Examples might include infrastructure, carbon credits, or even commodities like timber. 

In its quarterly Global Outlook Report, Salt Funds said the approach of building portfolios from hundreds or thousands of individual securities was reliant on broad multi-year market rallies such as occurred after the global financial crisis. 

“However, such rallies may now be found to belong to a vanished era, where central banks cushioned or prevented recessions by expanding liquidity and lowering the cost of activity through interest rate suppression”.

With central banks now focused on price stability, and willing to induce recessions to get there, the era of “wave riding investment strategies” may have passed. 

“For instance, it is plausible to foresee a phase in which the main market benchmark indices move sideways in ranges, whilst individual securities within them still offer scope for better outcomes.”

Fleming said his expectation for financial markets in the remainder of 2023 was that it won’t be as bad as it might have felt this past week. 

“We’re in more of a dilemma than a disaster,” he said. “It is a dilemma because the central banks do have to put a stopper in inflation, but they don’t want to break too many things that are reliant on yields not going through the roof”. 

“Be satisfied with the quality and the underlying balance sheet of anything you invest in; be very, very vigilant about that."

You can find all episodes of the Of Interest podcast here.

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Just a couple of years ago there was huge excitement about buy now pay later (BNPL) companies. Via smartphone applications, or apps, their buy now and pay over installments service0 was drawing in consumers and worrying banks.

The high water mark saw US payments company Square, now Block, strike a US$29 billion deal to acquire Australian BNPL service provider Afterpay in August 2021.

But 18 months on the picture is very different with several BNPL companies in serious difficulties or shutting up shop. Latitude Financial Services has just announced its pulling the plug on Genoapay, its BNPL service. Openpay went into receivership, Humm pulled out of the New Zealand market and NZ company Laybuy has delisted from the Australian Stock Exchange.

So what has gone wrong with the BNPL sector? And did its substance ever really match the hype swirling around it?

To discuss this we spoke with Melbourne-based Grant Halverson, CEO of retail banking and payments consultancy McLean Roche, in the latest episode of interest.co.nz's Of Interest podcast.

Halverson notes that BNPL services, in one form or another, have been around for centuries. The new twist was putting an app on a phone. He notes the sector, which both the NZ and Australian governments are moving to regulate, currently offers unregulated credit.

A long time critic of the sector, Halverson describes it as: "Worse than payday lenders in terms of what they're doing, but they do it with an image that doesn't actually hold scrutiny."

Whilst supporting moves to regulate BNPL services, Halverson suggests many of the companies won't be around for much longer as the rising interest rate environment has dramatically increased their funding costs.

'I think it [the future] is very dismal. I think unless they can be bought by somebody most of them [ BNPL companies] will have disappeared by the end of this year. They're all in trouble, they're all in deep trouble," says Halverson.

You can find all episodes of the Of Interest podcast here.

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In a rare show of bipartisan cooperation, the Labour and National parties teamed-up to enact new housing intensification laws in late 2021.

This came through the Resource Management (Enabling Housing Supply and Other Matters) Amendment Act. Pushed through a rushed select committee process to the protestations of the ACT and Green parties, it will allow the building of up to three homes of up to three storeys on most sites in Auckland, Hamilton, Tauranga, Wellington and Christchurch without the need for a resource consent.

Councils in the five cities are now moving to adopt medium density residential standards (MDRS). 

But what does all this really mean, where's the process at, and is this actually the right way to tackle New Zealand's housing crisis?

To discuss all this we spoke with Doug Fairgray, director at consulting and economic research firm Market Economics, in a new episode of the Of Interest podcast.

"One of the effects [of the changes] will be that the distribution of new housing supply is likely to become spread more widely across cities rather than focused around centres and transit stations as is intended under the National Policy Statement [on Urban Development]," Fairgray says.

"There has been a strong narrative, [over] the last decade at least, that planning is to blame for high housing prices. And that has led to a focus that therefore planning legislation should solve the problem. There's quite a debate about that because house prices have been driven above all by consumer sentiment and interest rates," adds Fairgray, who is also secretary of the Association for Resource Management Practitioners.

You can find all episodes of the Of Interest podcast here.

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Money laundering is a scourge of the modern financial world. Whether it's the actual dirty money stretching its tentacles and influence widely, or the US$210 billion annual tick-box compliance effort as people and companies strive to meet anti-money laundering laws, the impact is massive.

In a new book, The War on Dirty Money, authors Nicholas Gilmour and Tristram Hicks detail the failings of the fight against money laundering and offer solutions designed to make the war more winnable.

Speaking to interest.co.nz for the Of Interest podcast, Gilmour describes dirty money as all money deriving from crime, and money laundering as a series of transfers and purchases as criminals strive to distance the money from the crime. The war against dirty money needs a better global response, says Gilmour, with New Zealand one of hundreds of countries where dirty money sloshes around.

Hicks points out the horrendously high death toll from the recent Turkish earthquake involves a "straight forward link" between corruption, dirty money and the loss of life because of corruption around building standards.

So is the war winnable?

"We think it is [but] it's going to be a difficult war to win. This is a global problem, it requires a global solution. But it is winnable and it's winnable in small increments. It's not going to be easy and it's going to mean that some people have to change their mindset completely, do a 180 degree change in their mindset," says Gilmour.

"The Financial Action Task Force [the global money laundering and terrorist financing watchdog] only looks at countries, it doesn't look at illicit financial flows between countries. We think that it could do that and we've proposed a way of doing it," Hicks adds. 

Gilmour, now a consultant/advisor working with governments and the private sector on financial crime, analysis plus information and intelligence sharing, previously worked for the NZ Police Financial Intelligence Unit. Hicks is an advisor on the operational effectiveness of asset recovery and criminal justice anti-money laundering regimes.

You can find all episodes of the Of Interest podcast here.

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After their Government's "clumsily conceived and executed lurch" away from its zero-Covid policy, the Chinese people are "back to work with real energy," says David Mahon.

Mahon, the Beijing-based Managing Director of Mahon China Investment Management, spoke to interest.co.nz in the latest episode of our Of Interest podcast.

"China has to come some distance still to get away from the fear of this virus, the fear it may return. I'm sure that when we get into the autumn there'll be considerable concern amongst a lot of people. Nonetheless China has come through this reasonably well. People are back to work with real energy. They might be a little nervous, they will wear masks on public transport...but people are working, people are very keen to be back at work. Production has kicked in. The Chinese economy is beginning to really move again. So from that measure people have gone back to what they now perceive as a normality," Mahon says.

In the podcast Mahon talks about his recent traveling experience in China including differences in rural and urban areas, the impact from the spread of the omicron Covid variant, and a perception in parts of China that they've been failed by their leaders with public confidence needing to be re-earned. He also talks about what banks are being told, his expectation for the property sector this year, why he sees a year of relative economic strength, and gives his take on changes at the top of the political pyramid following the 20th national congress of the Chinese Communist Party in October.

Mahon also talks about China's relationships with the United States and Russia, suggesting the relationship with the US is "bad and getting worse," and that there's "fury" in the Chinese administration over Russia both initiating a war in Ukraine, and that it has gone on for so long.

Overall he says the "trauma" of Covid has been considerable, but a positive is it's leading to more challenging of authority from the general population, in terms of an attitude of "show me the facts here, tell me why this is something I should comply with."

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Auckland's unprecedented flooding highlights the importance of climate adaptation finance and the potential for parametric insurance, says David Hall.

Hall, Climate Policy Director at Tohaand until recently Senior Lecturer in Social Sciences and Public Policy at the Auckland University of Technology (AUT), spoke to interest.co.nz for the Of Interest podcast.

Hall says in events like the recent flooding he feels "a sense of grizzly resignation" with what has been predicted "playing out before our eyes."

With the likelihood, as in post-earthquake Christchurch, for a long wait for people who've filed insurance claims due to flood damage to their property, Hall highlights potential for prolonged uncertainty as insurance claims are assessed.

Hall, who recently published a detailed paper on adaptation finance, suggests parametric insurance could complement traditional indemnity insurance. Parametric insurance is a type of insurance contract that insures a policyholder against the occurrence of a specific event by paying a set amount based on the magnitude of the event, as opposed to the magnitude of the losses in a traditional indemnity policy.

"So it could be the severity of the event. [For example], if a flood event reaches a certain level of precipitation, or if an ex-tropical cycle event reaches a certain threshold in terms of wind speed, or drought reaches a certain threshold. Then that trigger is hit and a payout is made. And then people can use that money in a multitude of different ways. They don't necessarily need to use it to pay for replacement or repair of the assets lost or damaged. They might choose to use it in order to relocate, for instance. And so not only does parametric insurance have the advantage of being quick, it also has the advantage of being flexible," says Hall.

"I don't think this is necessarily a replacement for indemnity insurance. But it could be a complement which could give people greater flexibility and certain comfort after events like this." 

He notes parametric insurance is used in Fiji.

"When Fiji gets hit by cyclones or similar events a trigger is struck and a small payout is made to small-hold farmers and so on who are dealing with the consequences of those events. It gives you quick settlement and a bit of liquidity," Hall says.

He goes on to say that parametric insurance products might work better for a public insurance scheme, rather than private insurers, such as EQC as it morphs into the Natural Hazards Commission.

In the podcast Hall also talks about the difficulty of measuring whether adaptation finance is money well spent, insurance retreat, the urgency for climate adaptation and the politics of it plus much more.

His fullAdaptation finance: Risks and opportunities for Aotearoa New Zealand report is here.

Hall was also a contributing author for the Australasia chapter in the Intergovernmental Panel on Climate Change (IPCC) report Climate Change 2022: Impacts, Adaptation and Vulnerability. Additionally And Hall was co-Chair of the Mayor's Independent Advisory Group for Auckland's Climate Plan issued in December 2020.

You can find all episodes of the Of Interest podcast here.

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The Reserve Bank ought to move faster to offload the government bonds bought during its 2020-21 quantitative easing programme to unwind the distorted effect this has on the financial system, says John McDermott.

McDermott, Executive Director of economic and policy research institute Motu is also a former Reserve Bank Assistant Governor. 

He says quantitative easing (QE) via the Reserve Bank's large scale asset purchase programme has proven problematic.

"I think we'll reassess history and decide QE turns out to be a really bad idea, apart from [during] the really emergency settings."

"Under normal times central banks should not be doing this and they should be repairing the balance sheet. Because QE just seems to find itself in asset markets. It moves equity markets up, it moves house prices [up], it creates other distortions in the economy that we really don't need to have. It creates all kinds of financial stability problems. QE has proved very dangerous. Maybe we should have it for just in case, but understand the cost of using it is much, much higher than we ever anticipated," McDermott says.

QE) is a monetary policy tool through which a central bank buys securities on the open market with the aim of reducing interest rates, increasing the money supply and bolstering economic activity. During 2020 and 2021 the Reserve Bank bought $53 billion worth of government and local government bonds from banks. It's now selling $5 billion worth annually to New Zealand Debt Management, the Treasury unit that manages government debt.

QE, McDermott says, gets into the financial system where it has to work through asset prices.

"So it has over inflated asset prices. It creates a distortion in terms of wealth distribution, it distorts business decisions, and it creates financial fragility in the system so everybody is over leveraged, there's too much debt in the system," says McDermott.

The exit strategy for central banks is tricky, McDermott adds, saying he hasn't seen any country do this well.

"The business model relies on keeping QE going. So I think we need to say that has not to be New Zealand's future, we don't want a distorted financial system. So it's important to reduce it before we get hooked on that really bad habit."

In the podcast he also talks about whether inflation has peaked, good and bad forward guidance from central banks, the sport of Federal Reserve watching, the need for New Zealand to have monthly Consumers Price Index inflation data, the state of the global economy, including China, the US and Australia, and the three things he'd be watching over summer if he still worked at the Reserve Bank.

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Geopolitical tensions are playing a significant role in the growth of cybercrime and New Zealand should consider following Australia's lead and having a Minister of Cyber Security.

That's the view of Adam Boileau, Executive Director of security, testing and assurance at cyber security provider CyberCX.

Speaking in a new episode of interest.co.nz's Of Interest podcast, Boileau says it's clear cybercrime is getting worse. Criminal gangs can make good money out of computer crime, and when the likes of Russia won't extradite criminals, doing so has become a viable occupation, Boileau says.

"The world around us has shaped how computer security has become relevant to individual people and to businesses, to enterprises, to government," says Boileau.

In the podcast Boileau explains why he's closely watching Australia, where Minister for Cyber Security Clare O'Neil pledges to "punch back at the hackers," taking the attack to cyber-criminals. He describes the Aussie approach as "a pragmatic answer to a very real problem"

New Zealand, Boileau adds, should also have a Cyber Security Minister.

"Computers are so important to everything now. ..This is no longer a thing [just] for nerds."

I have a message for all cybercriminals: Australia is fighting back.#Insiders pic.twitter.com/jEyk6rzgGj

— Clare O'Neil MP (@ClareONeilMP) November 13, 2022

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