The Hoon

TLDR: This week in geo-politics, the global economy and our local political economy, our inflation was hotter than expected as profit margins rose, Xi Jinping doubled down on China’s zero Covid strategy, the Government loosened migration settings without a population plan or enough infrastructure, and Liz Truss resigned.

The podcast above is a recording of our weekly ‘hoon’ (plural for Kaka) webinar for paying subscribers, which co-host Peter Bale and myself regularly do on Fridays for an hour at 5pm. This week’s edition includes special guests Robert Patman, a Professor in International Relations at the University of Otago, and Kelvin Davidson, the Chief Property Economist at CoreLogic. We talked about:

* the chances of a Russian nuclear strike in Kherson this weekend;

* whether Russia might have cut undersea cables to Britain;

* why Iran sending drones to Russia is disturbing;

* how the faster-than-expected CPI inflation figures here on Tuesday led to mortgage rate increases and may cool a reheating housing market; and,

* what Christopher Luxon should learn from Liz Truss’ demise.

Here’s what I focused on this week

Ready fire aim - PM Jacinda Ardern denied the Government was flying blind on migration and hadn’t built enough infrastructure before removing its residency planning range and loosening visa settings (see my full analysis here from Tuesday);

It was the lettuce wot won it - UK PM Liz Truss resigned after 44 days in the job because global investors rejected her plans for unfunded tax cuts for the rich and an anti-climate approach, which offers lessons for Christopher Luxon here in my full analysis yesterday;

A profit-price spiral - Data on Tuesday showing CPI inflation in the September quarter of 7.2% from a year ago was higher than the 6.5% consensus forecast from economists, which I argued on Thursday is partly due to companies globally and here widening their profit margins because they have greater market power.

Some longer weekend reads

George Magnus is right on this. The Chip Choke is a very big deal.

Very worried Germans - Jeremy Stern’s piece in The Tablet this week about Germany’s fears about Russia and the winter is more than sobering. A chilling sample here:

“As many Germans see it, Ukraine’s dazzling advances do not leave Putin with the binary choice of accepting his own death and defeat or else embarking on Armageddon. He may instead be left with the potentially attractive option of deploying a tactical nuclear bomb to achieve a limited military objective in Ukraine, or of causing an “accident” at the Russian-occupied Zaporizhzhia nuclear plant and attempting to blame it on the Ukrainians. This would almost certainly trigger some sort of NATO attack on Russia—to which Germany would never, under any circumstances, ever agree. Berlin would instead lead a small dissenting bloc within NATO, including Hungary, refusing any use of its funds, communications, weapons, or territory. In other words, Germany would violate its treaty obligations—as Putin has likely judged.”

“NATO would thus officially break along the lines Putin knows it is already broken. The EU’s commitment to Ukraine would also fracture. The U.S.-German alliance would be no more. Even a small nuclear explosion would send markets crashing, and the German economy would grind to a halt. All of Europe would enter a depression more severe than anything Russia has experienced to date. It would no longer make sense to speak of “the West.” This, as much as reclaiming lost territories, would be Putin’s life’s work.” Jeremy Stern in The Tablet

Useful longer watches

Profundities, soberings and feel-goods

The Craic

Have a great weekend

Ka kite ano

Bernard

TLDR: This week on the weekly ‘hoon’ webinar for paying subscribers on Friday at 5pm for an hour, myself and co-host Peter Bale, along with economist Rodney Jones and University of Canterbury-based and Ukrainian-born political communications scientist Natalia Chaban discussed the news of the week in geo-politics, the global economy and Aotearoa’s political economy, including:

* the anti-Labour backlash in local elections last weekend that saw older pro-car and anti-densification candidates win most of the mayoralties (except Wellington) … see my analysis earlier in the week here;

* the Government’s proposal for a world-first methane and nitrous oxide levy on farmers to slash climate emissions, which beef and sheep farmers said would gut their sector because the scheme would not allow offsets from mass tree planting on farms and the levy would be set by the Government, rather than farmers (see my analysis here from Wednesday);

* the Government’s announcement of the reopening of the Skilled Migrant and Parent residency visa programmes, along with the removal of the decades-long residency planning range (see my analysis here out today);

* the Bank of England’s desperate attempts to avert a financial crisis in Britain after a disastrous mini Budget by new PM Liz Truss and new Chancellor of the Exchequer Kwasi Kwarteng proposed £45b of unfunded tax cuts for the rich (we talked about this with Rodney Jones last night before this morning’s news that Liz Truss had sacked Kwarteng and done a U-turn on a planned corporate tax cut);

* hotter-than-expected inflation figures in the United States that is driving up expectations for US interest rates, driving up the US dollar to record highs and threatening financial market mayhem (we talked about this with Rodney Jones);

* this weekend’s Communist Party Congress is set to confirm President Xi Jinping for a third term and unveil a new lineup of China’s leaders (we talked about this with long-time analyst of China’s politics and economy Rodney Jones); and,

* Vladimir Putin lashed back at Ukraine with dozens of missile strikes on civilian targets in cities across the country after his signature bridge to Crimea was blown up (we talked with Natalia Chaban about how the strikes only hardened Ukraine and West’s resolve to push Russia out of Ukraine completely).

My longer deep-dive listening for the weekend

This weekly podcast from New York-based British political and economic historian Adam Tooze on Europe’s energy crisis is an eye-opener in explaining just how important Germany’s reliance on Russian gas was and how broken it is now.

This is a weekly podcast from Irish economist David McWilliams is one I try to listen to. He is a hoot and this week’s piece on how central bankers want more unemployment is a cracker. It explores the ultimate class war behind inflation targeting.

This week’s episode of The Spinoff’s ‘Gone By Lunchtime’ is an excellent and comprehensive debriefing of last week’s local council election results.

Useful longer reads elsewhere

There’s so much news around this week, but this shouldn’t be ignored. The US is really, really cracking down on US high tech exports or sharing with China.

Paul Krugman makes some great points about this week’s hot US inflation number. It’s mostly about rents, and the CPI numbers that looked hot are lagging indicators of rents that are now falling.

This is another big story among many this week I haven’t had a chance to tackle properly.

This is a sweeping and fascinating piece from Ben Hunt.

Scoops of the week elsewhere

Charts of the week

Cartoons of the week

The Craic

I’m a big fan of Gillian Tett from the FT.

Profundities and feel-goods

Ka kite ano

Bernard

Have a great weekend.

TLDR: This week in the news in geo-politics, the global economy and Aotearoa-NZ’s political economy:

* Te Pūtea Matua (The Reserve Bank) hiked its interest rates again to control inflation (Thursday’s email);

* the Government revealed a robust set of accounts that will allow room for competing tax cut offers in next year’s election (Thursday’s email);

* local elections came to a close with a revolt against the Government brewing (Interviews with Efeso Collins and Simon Wilson);

* TOP proposed a residential land tax to pay for income tax cuts for low to middle income earners (Interview with Raf Manji)

* An increasingly-desperate Vladimir Putin faces growing opposition at home and more defeats on the battlefield in Ukraine; and,

* the IMF and UNCTAD warned about a slowing of global economic growth, especially in developing economies, because of the rapid and concerted tightenings of monetary policy led by the US Federal Reserve (Friday’s email).

We recorded the podcast above from the weekly ‘hoon’ webinar we do for paying subscribers every Friday evening at 5pm for an hour. This week co-host Peter Bale and myself talked about the local elections, flawed plans to merge TVNZ and RNZ and the potential for tax cuts next year.

We talked in the second half of the show with regular guest, University of Otago Foreign Relations Professor Robert Patman about the situation in Ukraine, the risk Putin might use tactical nuclear weapons and Saudi Arabia’s defiance of the United States by promising (along with Russia) to cut oil output.

Five things this week

These are the five key bits of news and analysis this week that may not have crossed your radar and I thought was important, given in my focus on the issues of improving housing affordability, reducing climate emissions and reducing child poverty. I welcome the support of paying subscribers to allow me to do this work, and to share it publicly after paying subscribers see it first.

Te Pūtea Matua may hike 75 bps to 4.25% on Nov 23

Deep in the notes from the Monetary Policy Committee’s commentary with the statement on this week’s fifth consecutive 50 basis point hike in the Official Cash Rate to 3.5%, Te Pūtea Matua said the committee considered putting up the OCR by 75 basis points, which would really have thrown the cat into the mortgage rate pigeons. It argued this was partly because mortgage rates had yet to rise in line with wholesale rates (swaps rates) and it wondered if the tightening therefore needed a hurry up.

In the end, the committee decided against 75 basis points, in part because it thought the banks would get around to putting up mortgage rates more.

“The Committee expects that higher wholesale interest rates will be reflected in higher retail interest rates, particularly deposit rates, as banks compete for funding.” MPC

Here’s the chart for the two year swap rate, which has risen by 350 basis points from 1.25% before Covid to 4.75% now. In theory, that should have meant average two-year mortgage rates should have risen from 3.5% pre-Covid to 7% now, all other things being equal, including profit margins.

Instead, what we’ve seen is the average two-year mortgage rate has risen from 3.5% pre-covid to 5.5%, although it has risen 300 basis points from its post-covid low of around 2.5%.

Some of those average figures disguise the discounted rates that banks offer so the 7% estimate of where they ‘should’ be may not include the loss-leader discounts the banks include.

So what? - My suspicion is the Reserve Bank wants to see the banks give up some of those discounts and put the mortgage rates up to around 6% from 5.5% now. We’ll find out more on November 23 when the last full Monetary Policy Statement of the year (and the last monetary policy decision) comes out. If the banks have not put their ‘specials’ up closer to 6% by then, that may encourage the Reserve Bank to do a final 75 basis point hike for the year to 4.25%, given the next decision after that is not until February 22.

The bottom line - Brace for a 75 basis point hike on November 23 if inflation is still running hot and the banks have not nudged their retail mortgage rates up much. We’ll find out more about inflation on October 18 (the Tuesday after next) when the September Quarter CPI comes out.

The young are deserting Labour and going to ACT & TOP

The Roy Morgan opinion poll is the only long-running and truly regular monthly public poll but is not promoted or attached to a media outlet or interest group so doesn’t get much publicity. Some others also think it’s an inferior poll to the 1News-Kantar, Newshub-Reid Research, Talbot Mills (for corporate clients and Labour) and Curia-Taxpayers Union polls. The television-sponsored polls are irregular and depend on the whims and budgets of newsrooms. The monthly Talbot Mills poll is not regularly leaked and the Curia poll has not been available publicly and monthly for long. The Roy Morgan poll’s methodology is standard, but its commentary release is written from Australia and often jars, which undermines its credibility. Its numbers though are as good or bad as the others, in my view.

This week Roy Morgan released its September poll of 942 electors taken by landline and mobile phone. It found Labour down 5.5 percentage points to a record-low 29.5% since Labour came to power in 2017. National rose 0.5 points to 36% and ACT rose 2% to 12.5%. The Greens rose 2.5 points to 12.5%. Te Pāti Māori fell 1.5% to 3.5%, while TOP rose 1.5% to 2.5%. On those numbers, National/ACT would be able to govern alone

But the most interesting trend for me was the continued desertion of Labour and National for ACT, Te Pāti Māori and TOP by young men and women. Support for Labour among young women (18-49) fell to 26.5% from 30.5% a month ago and fell for National to 30.5% from 31% a month ago. Support for Labour among young men fell from 30.5% to 27% and fell for National to 25.5% from 35%. Young men increased their support for the Greens to 16% from 9.5%, to 5% from 3.5% for Te Pāti Māori and others (including TOP) to 8% from 4%.

The other thing to watch is whether support for the Government, and therefore Labour, bounces in line with consumer confidence as the summer arrives and passes without more Covid drama, as the economy opens up more and as inflation fades. Consumer and business confidence have bounced in the last couple of months and their may be a lagged effect to boost Labour over the summer.

So what? - TOP/Te Pāti Māori are now regularly polling at 5-6% overall and over 10% for the young. Disillusion with National and Labour’s addiction to untaxed capital gains is beginning to grate among the young, who have much lower home ownership rates.

The bottom line - If TOP leader Raf Manji can win the Christchurch electorate seat of Ilam (where he polled second in 2017 when up against then-National-MP Gerry Brownlee) and drag in one or two more TOP MPs, alongside another three or four Te Pāti Māori MPs, then there is the prospect that TOP and Te Pāti Māori could extract some form of wealth, land or capital gains tax out of Labour or National for either to form a Government.

The bottom bottom line - TOP and Te Pāti Māori need electorate polls done in early 2023 to show they are viable prospects to coat-tail in votes under 5% to win more support from the young who don’t want to ‘waste’ their votes.

The early global inflation indicators are falling fast

We all tend to watch our own inflation figures in the rear-vision mirror, which means here we still think inflation is 7.3%. That was actually four to seven months ago and since then the leading indicators for inflation globally for later this year and early next year are blowing cold as the European and…

TLDR: I spoke this week in the podcast above to NZ Herald senior writer Simon Wilson about the election campaign for the Auckland Council that ends this weekend. In particular, we looked at the potential makeup of the new council and the attributes of Mayoralty contenders Efeso Collins and Wayne Brown.

This election is crucial for Auckland’s future, given the huge decisions needed in the next couple of years around mode shift from cars to walking and cycling, and whether Auckland’s housing densification plans are sufficient.

We talked through the particular sets of skills and attributes of Collins and Brown to be Mayor. The long story short: Brown, 76, has a combative and reactionary approach that is less likely to build the necessary agreements on those issues above with fellow councillors and the Government than Collins, 48, who is a two-term councillor.

For more reading on this issue, here’s all of Simon’s articles via NZ Herald-$$$ on the election campaign, including this piece on Wayne Brown and this piece on Efeso Collins.

I spoke with Efeso Collins in this podcast recorded on Monday. Wayne Brown declined a request for an interview with me earlier in the campaign.

Ka kite ano

Bernard

TLDR: This week the financial and geo-political outlooks darkened in Britain and northern Europe after Britain’s plans for unfunded tax cuts were trashed by financial markets and sabotage of gas pipelines in the Baltic Sea aggravated tensions between NATO and Russia.

Closer to home, National’s leaders Christopher Luxon and Nicola Willis were forced to deny their tax cuts were similar to Britain’s disastrous plans and postal voting in council elections got off to a slow start, prompting suggestions they should be run in future by the Electoral Commission in similar ways to the General Election.

In the podcast above of Friday evening’s ‘hoon’ webinar for paying subscribers, co-host Peter Bale and myself talked about the news of the week in geo-politics and Aotearoa-NZ’s political economy with the University of Otago’s Robert Patman, including:

* The Bank of England’s intervention to promise to print at least £65b to stop Britain’s £1.5t pension sector from collapsing under the weight of billions of pounds of margin calls from the use of a new derivative tool called Liability Driven Instruments (LDIs);

* the LDIs were triggered by the fastest ever rise in British bond yields because new PM Liz Truss and new Chancellor of the Exchequer Kwasi Kwarteng promised £45b of unfunded tax cuts, most of which will go to the richest taxpayers;

* the turmoil on global financial markets saw the NZ dollar fall to a 14 year low of 56 USc, complicating the inflation-fighting job of the Reserve Bank, which is expected to hike the Official Cash Rate again next Wednesday at 2pm by 50 basis points to 3.5%;

* the mysterious explosions under the Baltic Sea that destroyed the Nordstream 1 and 2 gas pipelines from Russia to Europe, which Danish authorities have said was caused by sabotage with 500kg of TNT;

* without formally accusing Russia of the sabotage, NATO pledged to defend Europe’s infrastructure with concerted military action;

* Russia’s deputy head of security said he thought Russia would be able to get away with nuking Ukraine because NATO was afraid of retaliation;

* surveys of the confidence of consumers, employees and businesses in Aotearoa-NZ found improvements in the September quarter as mask restrictions were lifted and tourists and working holiday makers began returning; and,

* a political opinion poll showed National-ACT in a position to govern alone (just) if the election was held now, with another survey showing the net approval ratings of Christopher Luxon and Jacinda Ardern were neck and neck.

Here’s Peter Bale’s weekly email on world affairs as a primer.

An update from the podcast: Robert Patman talked on Friday night about the potential fall of the key city of Lyman in the Donetsk province of Ukraine. Since then, Russia’s troops have indeed pulled out of the strategic city.

Ka kite ano

Bernard

TLDR: This week The Kākā had its first anniversary as a paid subscription email newsletter and podcast. We marked the occasion at midday for an hour on Friday by having a special ‘hoon’ webinar for all subscribers to discuss the events of the week in geo-politics and Aotearoa-NZ.

Popular special guests Professor Robert Patman from the University of Otago, ANZ Chief Economist Sharon Zollner and Dominion Post columnist Josie Pagani joined myself and Hoon co-host Peter Bale to discuss some monumental events in geo-politics and the global economy, and what they might mean for our political economy.

We talked about:

* Vladimir Putin’s announcement of the mobilisation of 300,000 reservists and subsequent street protests in Russia, along with attempts by potential draftees to flee the country;

* Putin’s barely disguised threat to use tactical nuclear weapons to defend the ‘motherland’ of Russia, which will shortly include the areas of Ukraine annexed by Russia and where referendums to confirm that will shortly be held;

* the West’s strong and mostly united reaction rejecting the annexation and nuclear threat at the United Nations General Assembly (UNGA), where PM Jacinda Ardern gave this speech on Friday night;

* some signs of division in support for Ukraine bubbling in Europe, including in the Putin-backed Hungary and in Italy, where an election this weekend is expected to deliver a right-wing Government seen as more sympathetic to Russia;

* the US Federal Reserve’s ‘jumbo’ 75 basis point rate hike to a range of 3.0% to 3.25% and Chairman Jerome Powell’s hawkish rhetoric about the need to clamp down on inflation with interest rates over 4% for a couple of years;

* the Bank of Japan’s vow to keep printing to keep its interest rates low, and its subsequent need to intervene to stop the yen falling late on Thursday, which was the first such currency market intervention by a major central bank since 1998;

* the new Liz Truss-led UK Government’s plan to borrow to fund massive tax cuts for higher income earners and companies, which it subsequently confirmed yesterday with a plan to borrow £234b to pay for £150b of winter energy subsidies and £45b of tax cuts;

* new polling showing voters in democracies want to tax wages less and wealth more, as Josie Pagani detailed in her column yesterday;

* signs consumers in Aotearoa-NZ are not rolling over and tightening their belts under the weight of higher interest rates, which Sharon Zollner said might require our Reserve Bank to hike higher than the 4.75% peak she had previously forecast; and,

* why voters in western democracies want more of their tax money spent at local levels, and how difficult that is in Aotearoa-NZ where the central Government doesn’t share tax revenues with councils.

Five things of note this week

‘You can’t go out much, and we order you to go up’

The Government ordered councils not to allow greenfields housing developments to sprawl out into highly productive farmlands, but also wants councils to open up more land for housing. I argued these two things weren’t credibly consistent with the current approach to funding infrastructure and winning the political battles needed for housing to grow ‘up’ instead of ‘out.’

They could be if the Government also provided the financial incentives and released the debt funding shackles on itself and councils that would enable much, much more brownfields ‘densification’ of housing. Instead, the Government is simply ordering councils to allow more densification, without adequately funding the public transport or allowing for the NIMBY-fueled political backlash that is now consuming councils from the political ground up. It is magical thinking of the highest order.

This creates an awful Catch 22. Not allowing councils to build ‘out’ or helping them much to build ‘up’ is a recipe for yet more land price appreciation captured by today’s land owners. This comes at the expense of future renters locked out of the home ownership they need to build stable families and finances, and keeps them paying the world’s most expensive rents. Here’s my full article from Monday.

The densification backlash went mainstream

Earlier this month, the Christchurch City Council refused to submit an updated plan that allowed the three-storey townhouses on all sections, as ordered by the central Government after a bipartisan ‘Townhouse Nation’ deal late last year. Outgoing Mayor and former Labour minister Liane Dalziel wrote to Environment Minister David Parker to protest against the ‘one size fits all’ approach and call for a more ‘bespoke’ approach.

I asked Parker if the Government was considering legal action to force the Council to adopt the new rules, or could even appoint Commissioners. He declined comment because he said he yet to receive legal advice.

Here’s Dalziel’s argument (bolding mine):

“We are supportive of the Government’s aims to address housing shortages and enable the delivery of a wider range of housing options. However, a blanket rule change is not necessary here. We have an ample supply of places available where people can subdivide to create more housing and where no resource consent is required.” Liane Dalziel’s plea to the Labour Government.

My view: There is not ample supply of land available in Christchurch, otherwise housing would be affordable. Truly elastic land supply would allow developers to build in response to the recent surge in prices and push prices back down in response with a new housing supply surge. That has not and is not happening, as well demonstrated in this speech from Treasury Chief Economist Dominick Stephens, which is in turn based on this deep research note on housing costs by the Housing Technical Working Group, which includes Treasury, the Reserve Bank, and HUD.

‘We’re really serious this time’

The US Federal Reserve hiked its key interest rate by 75 basis points for a third consecutive time and forecast significantly higher interest rates for another couple of years to try to win back its reputation for keeping inflation low.

The very hawkish view of the world’s most important central bank is now much tougher than most investors, traders and economists think. Global stocks fell sharply.

Someone is wrong and this could get ugly because global asset prices, and that includes the most expensive residential land in the world in Aotearoa-NZ, are based on lower interest rates sooner and for longer than the Fed is now saying. This morning the Fed forecast quite high rates for quite a bit longer.

Is it safe to come out now?

Spring is in the process of springing in the housing market for first home buyers, thanks to strong income growth, low unemployment, lower prices and early signs mortgage rates have peaked.

FOOP (Fear Of Over Paying) is about to flip back to FOMO, unless global central banks pull the rug out from under the market heading into summer with big new rate hikes to beat down un-cooperatively high inflation rates. See more detail here in my Thursday email detailing signs that first home buyers and some investors are nudging back into the market.

Another captured state

Liz Truss’ extraordinary embrace of Reagan-style supply-side economic theories that are now widely debunked from people as conventional as the IMF stood out this week. It is another case where the populist leaders of a democracy win power and then promptly cut taxes in a way that makes their wealthy backers vastly wealthier.

The brazenness and cravenness is something to behold. Now even financial markets are calling out the economic lunacy of tax cuts paid for with borrowing. The bond vigilantes stirred back into life this week and drove British ‘gilt’ bond yields higher in the biggest and fastest way in modern history.

Quotes of the week

‘I’m not bluffing’

“To those who allow themselves such statements regarding Russia, I want to remind you that our country also has various means of destruction, and for se…

TLDR: The podcast above is a recording of our Weekly ‘Hoon’ webinar for paying subscribers. We do this every Friday for an hour at 5pm and it’s one of our most popular features, along with my Ask Me Anything session from midday on a Friday. Yesterday’s was a cracker.

This week’s guests on the ‘hoon’ were University of Otago Foreign Relations Professor Robert Patman and Kiwibank Chief Economist Jarrod Kerr.

This week I was in the Parliamentary Press Gallery in Whanganui-a-tara and co-host Peter Bale joined us from Tamaki Makaurau.

The five things of note I’ve focused this week included:

* Christchurch City Council voting against the Government’s densification directives and doubling down by promising to charge developers extra if they don’t have enough trees;

* the Government completely dumping the ‘traffic lights’ system of Covid controls, including vaccine mandates and mask mandates, but not seven-day isolation for Covid sufferers;

* REINZ figures showing Auckland City and Wellington City house prices down 17-23% from the peak in October/November, but with signs the market is warming up again in Auckland in particular;

* Wellington City Council voting to limit speeds on most city streets to 30 km/hr, triggering accusations of being ‘anti-car’ as voting papers are mailed to potential council voters; and,

* an inflationary surprise in the United States unnerving investors hoping the Fed won’t have to crunch the global economy into a recession with sharply higher interest rates.

But also overseas:

* Ukraine’s amazing counter-offensive that drove Russian troops out of 6,000 square kilometres of eastern and southern Ukraine, and have sparked the glimmerings of dissent in Russia;

* Vladimir Putin met with Xi Jinping overnight and Putin reported Xi was not thrilled with his invasion of Ukraine; and,

* Europe announced windfall taxes on energy firms.

Here’s Peter’s always excellent weekly bulletin email on international affairs that goes out on a Thursday via the Spinoff. Sign up here

I also started the Substack ‘threads’ trial on the Substack iOs app.

Chart of the week

ANZ lifted its OCR forecast peak to 4.75% from 4%

Quote of the week

“We’re making Earth our only shareholder.” Patagonia founder Yvon Chouinard said while announcing he and his family had given the company to two trusts dedicated to fighting the climate crisis.

Other places I’ve been

A fun thing. I want one.

Mā te wā

Bernard

TLDR: In this week’s ‘hoon’ webinar in podcast form above, Peter Bale and myself invited on ANZ Chief Economist Sharon Zollner and talked about:

* Europe’s energy crisis and how Governments were intervening in markets to impose windfall taxes and pay hundreds of billions in energy subsidies to households;

* the European Central Bank’s biggest rate hike in 24 years and why this meant Peter would finally get some interest on his euro deposits;

* what the election of Liz Truss means for Britain’s debt and taxes;

* Sharon’s view house prices may not fall as much as previously thought; and,

* Emmanuel Macron’s speech about the ‘end of the age of abundance’.

We also briefly talked about the Queen’s passing, including Peter’s recollections from meeting her a couple of times. The podcast above is available for all paying and free subscribers as part of this weekly sampler email. Subscribe in full to support my public interest journalism on housing affordability, climate change and child poverty and to join our community debating these issues daily.

My Five Things to note this week

Our housing crisis writ large in Rotorua

TVNZ’s Sunday programme (below) aired a startling documentary exposing bullying of homeless people in Rotorua motels by a charity with unlicensed security guards with gang connections. Opposition parties called for an inquiry. The Government said it hadn’t found anything untoward.

The exposure of the ‘Golden Mile’ highlights again the failure of 30 years of infrastructure under-investment allied with a structural taxation bias in favour of residential property. The Government, like the last one, is now scrambling with short term solutions, but won’t address the core issue:

* our taxes and infrastructure investment rates are too low;

* we don’t tax capital gains or wealth, unlike every other developed country; and,

* there is no immediate political prospect to break this log jam, largely because home-owning median voters like it just the way it is, until they see the end results of child poverty, social dysfunction and rising welfare costs in their faces every day.

The immediate solution is to push the social problems ‘somewhere else.’ That somewhere else in the middle of the North Island is Rotorua. The same ‘Golden Miles’ are in place in many provincial cities up and down the country.

Here’s my weekly ‘When the Facts Changes’ podcast via The Spinoff talking about the housing supply issues with Kiwibank economist Jeremy Couchman, and the Golden Mile documentary below that.

Europe intervenes massively in energy markets

Faced with Vladimir Putin’s act of economic warfare of cutting off their gas supplies completely, European governments are intervening massively in markets to impose price caps and redistribute profits and resources from asset owners to households, or to simply park the cost as public debt and let the owners reap the rewards from more taxpayer-funded bailouts.

European Union countries this week announced plans to imposing windfall taxes on the winners from exploding wholesale gas and electricity prices in order to pay over €500b euros in subsidies to households so they can afford to pay their gas and power bills this winter.

Britain’s new PM Liz Truss announced plans to borrow over £150b to freeze household energy bills. She also announced Britain would start fracking for gas and remove its energy levies designed to reduce climate emissions. She is effectively paying taxpayers’ money to fund profits and cash returns for the energy companies on the right side of the price spikes, and to rescue those on the wrong side.

Europe is now re-organising parts of its economy for a long war, which means pivoting production for war aims and imposing the sorts of rationing and price caps used in war. The video below that emerged this week of French President Emmanuel Macron’s first call with former comedic actor and now Ukraine President Volodymyr Zelensky on the first night of the war is remarkable. It introduces the phrase ‘total war’ to the conversation.

Europe scrambling to contain inflation headed for 10%

The European Central Bank hiked its main interest rates by the most in the 24 year history of the euro this week. It is battling inflation that is headed for 10% across the continent and faces the prospect of a recession later this year at the same time as double-digit inflation.

Europe’s other problem is it hasn’t yet matched its single monetary policy and currency with a single Government or fiscal policy. It means the ECB has ended up printing money to buy Greek, Italian and Spanish bonds to contain their interest rates, which would normally be much higher because their Governments have higher debts than the rest of Europe. Rising interest rates and the stresses of the winter will put this fundamental weak point in the global economy under enormous financial and political pressure in the months to come.

Vladimir Putin may be losing on the battlefields of Ukraine, but his acts of economic warfare on Ukraine’s immediate suppliers of support and arms is having an extraordinary effect. As Peter points out in the podcast above, Italy’s leaders are now openly talking about trying to negotiate with Putin to resume gas supplies.

We talk about Europe’s economic and political woes with Sharon in the podcast above, as well as whether the US Federal Reserve will win its battle of wills with markets. The Fed reiterated again this week it is very determined to squeeze the US economy with rate hikes until the pips squeak to beat down inflation, while markets see inflation solving itself and the Fed eventually relenting so asset prices can stay high.

Underlying all these problems is the very live issue of whether central banks can maintain their independence in the face of political pressure to solve Government debt and economic growth problems by just inflating away the debt.

‘The end of the age of abundance’

On August 24, Macron gave a sobering short speech to his first post-summer cabinet meeting on what faced them. In the process, he became the first world leader to openly talk about ‘de-growth.’ This is the idea that the planet is hitting its physical limits and the task now is to manage a decline in GDP and a redistribution of resources to stop the earth from cooking and dissolving into a Mad Max-style hellscape of wars over energy and water.

Here’s what he said:

“What we are currently living through is a kind of major tipping point or a great upheaval … we are living the end of what could have seemed an era of abundance … the end of the abundance of products of technologies that seemed always available … the end of the abundance of land and materials including water.

“This overview that I’m giving, the end of abundance, the end of insouciance, the end of assumptions – it’s ultimately a tipping point that we are going through that can lead our citizens to feel a lot of anxiety. Faced with this, we have a duty, duties, the first of which is to speak frankly and clearly without doom-mongering.” Emmanuel Macron talking to his cabinet. Guardian

I wrote a piece on Wednesday about how 30 years of magical thinking had led us to this point. Here’s the guts of it.

This magical thinking says voters in a property-owners’ democracy can have:

* low taxes, low debt, low interest rates and rising asset prices into infinity;

* without having to invest much in repairing or preventing the damage to the environment, or in new technology to use energy more efficiently;

* or having to invest in affordable housing or transport for the generations of youth sentenced to live as renters on precarious wages for decades to come;

* or don’t have to worry about election revolts from those unborn generations who will have to pay both rent and taxes for the publicly-funded pension and healthcare costs for today’s asset owners;

* that democracies can easily survive the social stresses and lower economic growth rates caused by wide…

TLDR: This week on the weekly hoon webinar, we talked about the Government’s GST U-turn, the likely election of Liz Truss as UK PM, Ukraine’s counter-attack in Ukraine, and National’s relaxed reaction to a UN report on China’s oppression of Uighurs.

I’m keeping this short this week as I’ve been focused on getting out my interview with Adrian Orr earlier this morning.

The audio from the webinar on Friday night for paying customers is in the podcast above for all subscribers.

TLDR: The five signals I picked out from the noise this week were:

The Fed scared markets a bit

US Federal Reserve Chair Jerome Powell said in his hotly-anticipated speech at Jackson Hole at 2am this morning that the Fed must keep hiking interest rates “until the job is done,” which would probably lower economic growth for “a sustained period.” This was seen as tougher than traders and investors had expected so the S&P 500 fell 3% by 10 am. The 2-year Treasury bond yield, which is the one fixed mortgage borrowers here in Aotearoa-NZ should watch, rose only 3 basis points to 2.07%. The 10-year yield rose just 1 basis point to 3.03%.

So what? - Clearly Powell’s hawkishness has unnerved share investors a bit, but bond investors, who are the ones who forecast inflation and interest rates for a living, were more relaxed. The bond market moves were not enough on their own to force big moves up in our fixed mortgage rates, but our stocks are likely to fall a bit on Monday morning. Meh.

Europe’s gas shock deepened

European gas prices jumped another 10% overnight to a fresh record-high over €343 per megawatt hour because of fear Russia will turn off its gas completely. This is more than ten times pre-war prices. Heating bills in Europe in the coming winter will be brutal and the political pain of Europe’s support for Ukraine is deepening. Putin is applying the screws hard.

This chart from Capital Economics this week shows just how serious the shock is for Europe.

The 20% fall in house prices won’t wipe out many at all

Some people are worried a lot of recent first home buyers will be wiped out by the 20% fall in house prices that is now rippling out from Auckland and Wellington. I wrote in Wednesday’s email about why very few people are likely to lose their houses and deposits. As in less than 10. I was then invited on to 1News’ Breakfast show to talk about it and on RNZ’s The Panel on Friday.

Climate Change is hitting the economy from all directions

Climate change feedback loops hammered the global economy this week, adding to the inflationary and recessionary pain of Covid and the war in Ukraine. Europe’s drought was declared the worst in 500 years as German and French factories hit by higher electricity costs reported output in recessionary territory.

Meanwhile, China closed shopping centres, turned off light displays and ordered factory closures because of hydro-electric power shortages from the worst drought it has experienced in 50 years.

That water seemed to head straight for us in an extension of the ‘Atmospheric River’ that caused extensive damage in Nelson and Marlborough this week. I wrote in Tuesday’s email about how these climate changes are affecting our economy.

Migration settings are being loosened

I wrote in Monday’s email about how the Labour Government was loosening migration settings and in Tuesday’s email I wrote about how this loosening reinforced that all roads towards a real improvement in investment and productivity would lead to an annual levy or tax on residential land values.

I hosted our weekly live ‘hoon’ webinar for over 100 paying subscribers on Friday night to talk about these events of the week. The audio from the webinar is in the podcast above for all subscribers immediately as part of this weekly summary and sampler of the week’s news and my work this week on The Kaka.

We talked about:

* why a 20% fall in house prices isn’t too big a problem for NZ Inc;

* how consumers are feeling about spending (a bit better), even those with mortgages;

* why all roads lead to a tax or levy on residential land values;

* how accelerating climate change is shunting the global economy around;

* why Labour’s loosening of migration settings shows how hard it is to kick our economy’s basic business model; and,

* what might happen next with inflation, interest rates, asset prices and jobs markets.