The Kākā by Bernard Hickey

TL;DR: Auckland Mayor Wayne Brown has become our version of Donald Trump and Boris Johnson, except without any of the insatiable appetite for media appearances. He has mastered their impulsive crash-or-crash-through styles of ‘policy making’ and could poison the well for National on October 14 if he (and National) are not careful.

Yesterday’s decision to pull Auckland Council out of LGNZ was not only ludicrous, counter-productive and self-defeating ($640,000 of savings are wiped out by $1 million of savings forgone by Auckland because of leaving LGNZ). It also wasn’t supported by Auckland’s boards and sent a collective middle finger to everyone south of the Bombay Hills. Those north of Orewa already know Brown as the Far North Mayor they ejected angrily after six years in 2013. Sadly, Auckland’s voters didn’t appear to notice he had form.

The news in our political economy this morning

Our Donald Trump/Boris Johnson does it again - Auckland Mayor Wayne Brown just had his Trump moment by pulling Auckland Council out of Local Government New Zealand (LGNZ) with his casting vote yesterday. Call it #auxit with the x prounced 'sh'. National may well have a 'Wayne Brown' problem to solve by the election. The crash or crash-through approach and all the nasty shocks might spook Aucklanders worried about what a change to National nationally might mean.

Let’s do this? - Child poverty stats out yesterday showed no real improvement in 2021/22 vs 2020/21. There's still nearly 120,000 kids or 10% living in material hardship. It's 18% for Maori and 26% for Pasifika. It hasn't improved much since 2016. Labour's new child poverty minister Jan Tinetti said she was encouraged it hadn't gotten worse. Hardly 'let's do this' energy. This is all because Labour (and National) haven't improved housing costs because they both haven't (and won't) invest enough in local public transport and water infrastructure to cope with 1.5% population growth (which they both accidentally on purpose keep engineering without permission or planning).

Rent stress worse than mortgage stress - Household living cost stats out yesterday show renters in Aotearoa are still doing it tougher than owners with mortgages. Over a quarter of renters pay more than 40% of their disposable income in rent. It's just under 20% for those with mortgages. Rents have nearly doubled in the last 15 years while mortgages rose by less than half. And rents actually rose faster (5.0%) in the last year than mortgages did (4.6%). Renters also report higher rates of mould and cold

Watch your Ps and Ws (profits and wages) - Reserve Bank Chief Economist Paul Conway warned firms and workers in a speech late yesterday they needed to avoid embedding higher inflation into their wage demands and their profit margins. The profit margin line was a slightly stronger and interesting one that previous comments. And he said a mild recession is still on its way and necessary to get inflation down. Also, he said we should also realise Covid and the floods made us poorer, and the RBNZ can't fix that.

“If businesses and workers try to push their real profit margins and real wages to where they would have been if not for the pandemic, the war, and storms, then the more likely it is that high inflationary pressures persist into the future.” Paul Conway in a speech.

Quote of the day

Read it and weep

“They (LGNZ) need us more than we need them. By staying on our own we force them (Ministers of the Crown) to come and see us.” Wayne Brown.

Chart of the day

ANZ's Truckometer data suggests another fall in GDP is possible in the just-ending March quarter, which would technically create a recession.

I welcome your suggestions for things I've missed in the comments. I'm loving the action here this week.

A version of this went up on Chat for paying subscribers at 6 am. I’ll send it more directly via email in future, but with much better formatting.

Cartoons of the day

Substack of the day

Profundities, curiosities, spookies and feel-goods

A fun thing

Cheers.

Bernard.

PS: I'm all on for the AMA at midday and the Hoon at 5pm with Peter. I welcome your suggestions for guests today too.

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit thekaka.substack.com/subscribe

TL;DR: The new Consumer Advocacy Council set up as a result of the Labour Government’s Electricity Price Review in 2019 has called on either or both the Commerce Commission and the Electricity Authority to look into whether retailers are engaging in anti-competitive or restrictive practices by bundling their services in ‘deals’ with broadband and/or gas providers.

I spoke with Council Chair Deborah Hart in the podcast above about its first consumer sentiment survey and she said consumers found it difficult to understand bills and compare apples with apples when thinking about switching. Bundling made that harder.

The Commerce Commission has already started to look at bundling, but from the broadband and mobile point of view, with broadband one of the favoured bundling partners for the electricity retailers. It is included in a project to include retail service quality in telecommunications and asked specifically for feedback on bundling in this release from October last year. I’ve asked the Commission and the Electricity Authority for comment and will update this once received.

Here’s the EA response:

The Electricity Authority is aware of the concerns around the practices of bundling services in the electricity retail market.

When the Authority published its customer care guidelines for electricity retailers in 2021 it provided a recommendation (see Part 5; 34c)  on how bundled services should be detailed on bills so consumers could better understand their electricity bills.

The Authority is supportive of the work underway by the Consumer Advocacy Council and Consumer NZ to simplify power bills so consumers can easily understand their bill and make it easier to compare electricity deals on Powerswitch and other price comparison sites.

The Authority is not currently looking into bundling practices but is aware that the Commerce Commission is looking into it as part of its work on market power guidelines and comparisons for telecommunications services.

Here’s the Commerce Commission response:

The Commerce Commission is concerned about the transparency/comparability of bundle pricing.

Our view is that it is useful (and should be possible) for consumers to compare base prices for unbundled services. For example, when mobile services are bundled with Spotify/Netflix, in a direct comparison of mobile service prices, consumers should be able to see which bundles include Spotify/Netflix and (by subtraction) figure out how much they would be paying for those extra services. Our telecommunications regulation work is heading in this direction. (paper)

The same concerns arise over bundling in the energy sector, and between energy and telecommunications. We recognise competition and fair trading concerns here, and we are actively working on ways to address these problems for consumers.

In other news today…

Flattening the dots in its plot - The US Federal Reserve hiked the fed funds rate by 25 basis points to a range of 4.75% to 5.0% and indicated it would lift the rate only one more time, but said it would continue its Quantitative Tightening programme of bond selling to reverse 2020's massive Quantitative Easing or money printing. Markets now expect rate cuts later this year, but the Fed expected to signal a lift to 5.1% in its 'dot plot' of median expectations from voting committee members. US stocks fell around 1.7% after Treasury Secretary Janet Yellen clarified this morning that authorities had yet to consider a full ‘blanket’ insurance policy for all deposits in smaller banks, beyond the existing US$250,000 per account policy.

When the housing market with bits tacked on stops circulating lots and lots of cash - CoreLogic NZ reported this morning that just 60,859 properties were sold in the year to February 2023 - the lowest 12-month total since October 1983. There were just 4,100 sales in the month of February, the lowest February sales since at least 1981. So what happens in an economy that is a housing market with bits tacked on when houses don't sell? How do people realise capital gains to retire or refinance failing small businesses or move towns/cities?

Couldn’t we do this too? Portugal’s PM Antonio Costa told Parliament last night his Government was considering taking GST off food there to tame inflation. Bloomberg via Yahoo.

Profit-price-wage-profit-price spiral? ECB President Christine Lagarde warned in a speech last night against 'tit for tat' inflationary spirals where firms raise profit margins and workers demand ever-bigger pay increases to catch up with higher prices caused by the previous increases in profits and wages.

Monstered - Thomas Coughlan reports in the NZ Herald-$$$ that Transport Minister Michael Wood tried to make half-price public transport fares permanent last October, but was blocked in Cabinet, even though Treasury supported (yes supported) the idea. National's Simeon Brown agreed not to extend the half-price fares, saying National wanted the money used for tax cuts.

Toys being thrown - Auckland Council is considering pulling out of Local Government NZ to save $400,000 a year. Just nuts. LGFA should consider dumping Auckland Council. Stuff

Wage-PR-consultant-news spiral - Te Whatu Ora revealed it has over 200 comms people. There are only 400 journalists working at all of Stuff nationwide. RNZ

Scoops & useful links, threads & podcasts elsewhere

Charts of the day

Britain’s Brexit humiliation knows no bounds

US eggflation comes off the boil

The Craic

Ka kite ano

Bernard

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit thekaka.substack.com/subscribe

This is a free preview of a paid episode. To hear more, visit thekaka.substack.com

TL;DR: No wonder an entire generation of investors are used to ‘buying the dip’ and ‘holding on for dear life’.

US Treasury Secretary Janet Yellen has again overnight reassured American savers and global savers generally that the power of the US Treasury and Federal Reserve to loan unlimited amounts to banks will protect all savers, even the ones with millions of dollars in bank accounts with deposit insurance limited to US$250,000.

Paying subscribers can see more analysis of the bank crisis below the paywall fold and in the podcast above, including how financial markets now expect central banks to ‘blink’ and prioritise financial stability over getting inflation down.

This morning’s top news…

TL;DR: The Opportunities Party’s Leader Raf Manji is hopeful the party’s new Teal Card, a type of Gold card for under 30s, will be popular with students, and not just in his Ilam electorate where students make up more than a quarter of the voters and where Manji is confident he can outpoll two low-profile candidates from National and Labour.

I spoke with Manji in the podcast above about:

* TOP’s Teal Card announced yesterday;

* TOP’s electoral and Parliamentary strategies;

* how TOP aims to win Green and other voters who want a party sitting on the cross-benches in Parliament, rather than joining one or other of the big parties in a coalition or cooperation agreement after that trading away support in Budget supply and confidence votes in Parliament for ministerial and policy wins.

TOP’s Teal Card would ensure anyone under 30 would have:

* full publicly funded healthcare;

* free public transport;

* a $5,000 Universal Savings Boost payment for 18 year olds after an Outward Bound-style National Civic Service course; and

* a $1,500 electric bike or scooter voucher.

The NZ$1.5 billion/year cost would be paid for by:

* a 1% point rise in the corporate tax rate to 29%;

* a new top income tax rate of 45% for those on wage incomes over $250,000 per year; and,

* a rise in the 39% income tax rate to 42%.

I asked for some help from paying subscribers via Chat for questions here:

Here’s a summary of the responses I got during the interview. The full interview is available for all in the podcast above.

Here’s the 6 things to know at 6 am I put out for paying subscribers earlier

And here’s a few useful links sent to paying subscribers via chat and email earlier.

Ka kite ano

Bernard

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit thekaka.substack.com/subscribe

This is a free preview of a paid episode. To hear more, visit thekaka.substack.com

TLDR: This week’s news in geopolitics and the political economy covered on The Kākā included:

* PM Chris Hipkins’ announcement of the rest of a policy bonfire to save a combined $1.7 billion, but which blew up the Emissions Trading Scheme (Thursday’s email), upset the Greens and was overshadowed somewhat by Stuart Nash’s resignation as Police Minister, but not as Economic Development, Forestry and Oceans Minister (Tuesday’s email);

* the failure of Silicon Valley Bank and the collapse in the share price of Credit Suisse has renewed nerves about the Global Financial System, and shows the fast rate hikes of the last year may not be sustainable if they endanger bank stability Monday’s email;

* a new report showed the new RMA could generate new carbon liabilities of up to $16 billion because of consenting delays (Friday’s email); and,

* Auckland Mayor Wayne Brown’s budget cuts came under fire, justifiably, from those arguing the so-called ‘fiscal hole’ and debt crisis is not a hole or a crisis (Wednesday’s email).

What we talked about on the ‘hoon’

In this week’s podcast above of the weekly ‘hoon’ webinar for paying subscribers at 5pm on Friday night, I talked with co-host Peter Bale and special guests TOP Party Leader Raf Manji, National Finance Spokesperson and Deputy Leader Nicola Willis and Green MP Chloe Swarbrick about:

* PM Chris Hipkins’ bonfire of the policies on Monday, which blew up the ETS;

* the bank crises that broke out in the United States and Europe this week;

* Labour’s rejection of a select committee inquiry into bank competition; and,

* the Better Budget Auckland challenge to Auckland Mayor Wayne Brown’s austerity approach.

Peter and I also talked about Chinese President Xi Jinping’s ‘great wall of steel’ speech, former Australian PM Paul Keating’s tour-de-force rejection of AUKUS’ submarine deal and the latest drama in the Black Sea when Russian jets ‘collided’ with an American drone.

Other places I appeared this week

Thanks to the support of paying subscribers here, I’m able to spread the work from my public interest journalism here about housing affordability, climate change and poverty reduction around in other public venues.

I produced my weekly When the Facts Change podcast for The Spinoff on Why Auckland Council should just use its balance sheet and borrow to deal with lower revenues because of the covid and flood crises. I spoke to BetterBudgetAuckland’s India Logan-Riley about how Mayor Wayne Brown’s spending cuts were hurting Auckland’s most vulnerable, and what the alternatives should be.

Charts of the week

What the Fed’s latest rescue of rich savers looks like

There’s more detail on that US Federal Reserve action here in this Bloomberg article.

All told, the emergency loans reversed around half of the balance-sheet shrinkage that the Fed has achieved since it began so-called quantitative tightening — allowing its portfolio of assets to run down — in June last year. And the central bank’s reserve balances jumped by some $440 billion in a week — which “basically reversed all the Fed’s QT efforts,” according to Capital Economics.

Analysts at JPMorgan Chase & Co. estimated $2 trillion as an upper level for how much liquidity the new backstop could ultimately provide, although they also developed a smaller calculation of around $460 billion based on the amount of uninsured deposits at six US banks that have the highest ratio of uninsured deposits over total deposits. Bloomberg article

Quotes of the week

A loose goose calls a rail project a duck

“Light rail is a dead duck mate, let’s be real.” Auckland Mayor Wayne Brown telling NewstalkZB he didn’t want the Auckland Council to have to pay half of the new $5.493b cost for the City Rail Link, after its cost estimate rose by $1.074b to $5.493b this week.

Wayne Brown plans to ‘leverage’ the Crown to pay > 50% of CRL

“I’m a trader and I’m in there to trade. I’ve got $1b to pay for the weather. I’ve got a budget blowout bequest to me by the new High Commissioner to England.”

Brown also said he wanted to hand a “whole bunch of things back to the Government”, including the Citizen’s Advice Bureau, which he might try to leverage his way out of.

“I don’t see why ratepayers should be fixing people’s marriages, that’s something that should go back to the Government.” Wayne Brown via NewstalkZB

Cartoons of the week

Profundities, spookies, curiousities and feel-goods

Longer reads and listens for the weekend

Here’s a few useful longer reads, scoops and podcasts for paying subscribers for the weekend.

TLDR: Now we have a climate liability number to measure the potential failure of the RMA reforms with. Along with housing affordability effects, I think it’s the lens through which we should assess all our big decisions and changes.

A damning and detailed report by Sapere for the Infrastructure Commission (Te Waihanga) on the RMA reforms was released this morning. Sapere forecast the expected delays in the new system could block projects responsible for up to 34% of the emissions reduction needed to hit our net zero targets by 2050. It estimated that meant Aotearoa faced climate liabilities worth up to $16 billion by 2050.

The RMA reforms designed to improve our environment and wellbeing look set to make things worse without themselves being reformed again. A great example emerged yesterday when the Government announced it had punted a decision on whether to build the Lake Onslow dry-year hydro-battery project three years into the future, with building it taking a further seven to nine years at a cost of $15.7 billion (vs the $4 billion cost estimated in 2006 when it was first looked at).

That’s 2035. And the Government’s also looking at an alternative battery project made up of a grab-bag of projects and technologies costing $13.5 billion to build, but being more costly to run in the long term. When in doubt and bending under the pressure of a looming election reeking with the smell of bread and butter, a Government has yet again bought popularity at the expense of time, and cost for future generations.

Just as the first RMA enabled a deliberate starvation of infrastructure investment for 30 years to protect a low-tax and low-public-debt fiscal framework that delivered the most unaffordable housing market in the world and among the highest per-capita emissions in the world, the second RMA looks set to worsen the damage.

National Energy Spokesperson Stuart Smith said National would cancel Lake Onslow if elected in October and “focus on making it easier for renewables to be consented and built.” National’s Infrastructure Spokesman Chris Bishop described the Sapere report as a “giant wake-up call for Labour on their failing RMA reforms,” although Bishop has yet to say National would oppose the reforms in Parliament.

Here’s the key details from the report:

* Sapere forecast total demand for consents would rise 40% by 2050;

* Aotearoa is on track to not deliver between 11% and 15% of the necessary emissions reductions from energy and transport by 2050 because of consenting delays, which would incur emissions liabilities of $5 billion to $7 billion;

* Delays may create a threshold where the projects don’t happen all, which would see total emissions fall 29% to 34% short of commitments, creating a potential liability of $13 billion to $16 billion; and,

* Achieving net zero would require the new RMA to be in place by 2028 and for consent times to halve from what is expected.

News elsewhere today

Debit Suisse - Credit Suisse announced overnight it planned to borrow US$54b from the Swiss central bank to buy back debt and calm the farm with its very nervous savers and shareholders. Its shares closed up 19% overnight and the immediate price of the bonds expected to be bought back surged, but later maturity bond prices and the price of insurance against its bonds defaulting (Credit Default Swaps) remained at crisis levels.

‘We’re here to help’ - America's biggest banks, including JP Morgan, Bank of America and Wells Fargo, are in talks to deposit billions of dollars into the San Francisco-based First Republic Bank. It had US$213b in assets at the end of 2022 and has suffered in the last week as its mostly high-net-worth clients withdrew money to put into those other big banks. It was downgraded to junk status by S&P yesterday. Here's how the WSJ's editors described the situation this morning:

"The rescue would be an extraordinary effort to protect the entire banking system from widespread panic by turning First Republic into a firewall. Two banks have already failed in the past week after depositors withdrew billions, and fears have grown that First Republic could be next." Here's a free link to the full story on WSJ.

Swings and roundabouts - Stats NZ reported yesterday our GDP fell 0.6% in the Dec Qtr, which was down from a revised 1.7% surge in the Sept Qtr. That was a bigger fall than expected (especially the Reserve Bank, which forecast a 1.7% rise), but it's pretty noisy data. A big swing and a big roundabout. It didn't change the overall view on the economy still being too inflationary, albeit it's becoming clearer the RBNZ's hikes are now starting to bite.

Not so high for not as long - But one bank did change its OCR view. Westpac revised its forecast peak to 5.0% from 5.5% in a note late yesterday. That means just one more 25 bps hike to 5.0% on April 5. Most of the other banks are clustered around 5.25% as the peak. The RBNZ itself forecast a 5.5% peak for the OCR on Feb 22, but that's a bit out of date now.

“We suspect that the December quarter was more of an air-pocket during our descent, rather than an earlier and harder landing than the RBNZ was aiming for. Even so, the RBNZ will need to adjust its flight path accordingly.” Westpac Acting Chief Economist Michael Gordon in a note.

He has previous - It turns out Attorney General David Parker formally warned Stuart Nash not to breach the cabinet manual by commenting publicly on prosecutions way back in 2020. The Solicitor General even considered prosecuting Nash, but decided not to in the end, 1News reported last night. The Opposition called last night for him to resign his Economic Development, Forestry and Oceans and Fisheries portfolios, as well as the Police he has already given up. PM Chris Hipkins said it was in the past, but Nash is clearly on his last warning and his position in Cabinet is hanging by a thread.

Ka kite ano

Bernard

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit thekaka.substack.com/subscribe

TLDR: Bonfires can be dangerous things when they get out of control. They also create a lot of smoke and heat and burn the grass. I hate to think of the climate emissions. But sometimes, they do much more damage when someone accidentally throws on a full can of petrol and the fire burns too hot.

It turns out that’s what the Labour Government has just done with its ‘policy bonfire’ of late 2022 and early 2023. PM Chris Hipkins threw another couple of bin loads of climate policy paper on the bonfire on Monday afternoon that heated up the bonfire so much it melted the metal in that can of petrol.

The moment the bonfire went ‘boom!’

The sound of the bonfire going boom was heard loud and clear across the climate change community shortly after midday yesterday when the Emissions Trading Scheme essentially failed for the first time in its quarterly auction of containment reserve credits. The scheme’s entire future is now in doubt.

The failure also blows a hole in the Government’s Budget plans because up to $1 billion in revenue was expected from the auction. That number is now zero and has effectively wiped out all the savings from removing emissions reduction policy in one fell swoop. It is the biggest and most-expensive self-administered removal of a Budgetary foot with an explosive device in Chris Hipkins’ eight weeks in charge.

Labour just blew up the Emissions Trading Scheme, which is a key component of Aotearoa’s climate emissions reduction strategy to get to net zero by 2050. How do we know? Yesterday, the quarterly auction of new Emissions Trading Scheme (ETS) reserve credits failed for the first time because of a collapse in market confidence in the Government’s commitment to a serious ETS. This followed policy tweaks by Cabinet at the end of last year designed to stop the ETS price rising in the way the Climate Commission recommended it should. The Government wanted to stop a higher ETS price translating into higher petrol, diesel and electricity prices, given it’s relentless focus on ‘cost of living’ and ‘bread and butter’ (and petrol) issues since late last year.

Unfortunately, they didn’t realise that tweak effectively unloaded mountains of fresh carbon credits onto the market, destroying any confidence the ETS is a credible limit on emissions. The Government’s climate policy is now a black mushroom cloud with a bunch of policy wonks standing around looking at each others’ singed eyebrows.

The Government’s climate policy is now a black mushroom cloud with a bunch of policy wonks standing around looking at each others’ singed eyebrows.

Cabinet put way too many chocolate biscuits on the shelf

Late yesterday I spoke to climate policy expert Christina Hood from Compass Climate for an upcoming episode of my weekly podcast for The Spinoff, which is called When The Facts Change. She explained to me how the Cabinet decision to reject the Climate Commission’s advice to push the carbon price higher has destroyed confidence, and I include that part of our chat in the podcast above.

Here’s Christina’s explanation of what that cabinet decision just before Christmas has done, in part because cabinet didn’t really understand the implications of what containing the carbon price meant for the volume of reserve credits available to the market.

I’ve included her full explanation because it paints a clear and understandable picture of a complicated topic. Here’s the full transcript (bolding mine):

“So the Climate Change Commission had recommended certain settings for the ETS and the key one was the cost containment reserve, which is some extra units that the market can access in a situation where prices spike really high.

“And the commission had said ‘put that well out of the way because there shouldn't be a normal part of the functioning of the market.’ It's like, you know, the packet of chocolate biscuits. If they're sitting on the kitchen bench, you help yourself to them. (the Commission was saying) ‘shut them up in a box in the top of the pantry out of sight.’

“Officials in their regulatory impact analysis agreed with that and actually Minister (James) Shaw recommended that, but Cabinet disagreed.

“Cabinet decided instead to set that price much lower so that the market would have ready access to a much, much larger volume of units. I don't think they understood what they were doing, to be honest. Because when you go and look at the cabinet paper, the discussion was all about price. The discussion was all about ‘what might the impact on price be if prices went high or prices were low, and how do we deal with that, and what are the social impacts and so on.

“The discussion never circled back to the actual key question for meeting the targets, which is, okay, if you try and lower the price by releasing more units into the market, every unit that you release allows an extra tonne of emissions, and are you then allowing a level of emissions which is no longer consistent with the targets. And the cabinet paper and the discussion never circled back to consider that.

"So they have effectively done is allowed the market ready access to an extra 42.5 million tonnes of units compared to what the commission recommended.

“By setting the threshold so low that the market could easily reach it, they (the markets) know that those biscuits are just there if they want them. That volume is, in my view, inconsistent with meeting the budgets. And there is a test in the law that says you're supposed to align it with the (carbon) budgets.

“I don't think it is aligned with the budgets. So the reaction from the market has been really interesting. So if you make a few extra units available, the market might say, ‘okay, that's good. You know, we'll, that might moderate the price a little.’

“But what's happened here is that they've turned on the fire hose and the market is sort of staring open mouthed and saying, ‘but that's more units than is consistent with these targets — what the hell?

“And it has undermined confidence that the government is actually committed to meeting these targets because they're releasing or allowing the market access to so many units. And so that has actually crashed the price in the market.

“So the market price has fallen from over $80 to around $65 lately in trading. And that just reflects the expectations of participants of where the price is going to be in the future. So in the auction (yesterday), the bids that were put in did not meet the confidential reserve price, which is based on how the market's been trading over the last period. That's confidential.

“We don't know how they set it, but that price was not met and the auction failed and no units were released. It's the first one that has failed. So in the past, not only have they succeeded, but all of these extra units from the cost containment reserve have been released in the last two years.

“So it's a complete flip around — going from a perception last year that prices were going to climb quickly, that constraints were going to bind, that units were valuable. To a perception this year of ‘we don't know where things are headed. Is it worth buying these things?’

“So that one decision from Cabinet in December has had a really, really, guge impact on confidence in the market.

“Confidence in the future price path is only as good as participants confidence that current and future governments are gonna stick by it and keep it tight and make it tough. And if they start to doubt that, then the, then it starts to unravel.” Christina Hood in an interview with Bernard Hickey in the podcast above.

The shock behind the scenes yesterday

Here’s a bit of the reaction online just to reinforce this is a big deal behind the scenes.

Up to $1b lost in an afternoon, with billions more now in doubt

BusinessDesk reporter Ian Llewellyn covers the market regularly and wrote this piece, which was published this morning for all via Farmers Weekly.

Cabinet papers show that ministers were more concerned about the cost pressures from a rising carbon price than they were about sending stronger price signals to reduce greenhouse gas emissions.

Secondary market operators have reported stagnant interest from buyers and sellers since then, largely due to political and regulatory uncertainty.

There had been predictions that buyer wariness could lead to a no-show at the auction.

The auction’s failure to raise any money for the government compares to the last auction in December (just before Cabinet’s decisions, made in November, were made public) which cleared at $79 and reaped $381m.

There were 4.475 million NZ Units (NZUs) offered with another 8 million NZUs available in the cost-containment reserve if the trigger price of $80.64 was reached.

If all the reserve credits had been sold at that trigger price, the Government would have received $1.005 billion. That is now gone and the future of billions more of assumed income from credits is now in doubt.

A market commentary from market operator Carbon Market also captured the mood. The bolding is mine. The capitalisation is Carbon Market’s.

"After much anticipation, the first NZ ETS auction of 2023 took place today. No units were sold as the auction clearing price FAILED to meet its minimum price settings - i.e. the confidential reserve price, which remains undisclosed.

“We think that today's auction result reflects the considerable uncertainty around specific regulatory settings and the fact that this an election year, alongside recent backpeddling on specific policies in the climate space.” Carbon Market’s commentary email yesterday.

Climate Change Minister James Shaw commented obliquely about the failure yesterday, saying to reporters in Wellington (bolding mine):

“The price has come down pretty substantially, since before that cabinet decision last year, and that has led to a price which is lower than the replacement cost of coal.” James Shaw answering reporters’ questions yesterday.

For more background reading, here’s a commentary from Christina Hood from last week on the five things wrong with the ETS at the moment via LinkedIn. Hat tip to Ben Reid in his Memia Substack.

I have decided to open this one up immediately for sharing and subscribing to all. Many thanks to paying subscribers to The Kākā who support my work covering housing affordability, climate change and poverty reduction. Join us to help me do more. And feel free to share this one around. It’s open for all.

Elsewhere in the news

‘Help. I need a bail out too!’

Kicked in the Saudis - Global financial markets are in turmoil again. It’s all about Credit Suisse, which asked overnight for a show of support from its central bank and regulator after its shares slumped as much as 30%. It has created mayhem on European and US financial markets, with bank shares down sharply and market interest rates dropping too.

A scary number in a data series few watch anymore

Quote of the day

Paul Keating is meanest and most interesting politician alive today

I had the privilege of being sneered at in a news conference by then-Australian PM Paul Keating in 1994. I worked for two years for Reuters in Parliamentary Press Gallery in Canberra from 1992 to 1994 and enjoyed asking him questions about fiscal and monetary policy. By the end, he didn’t enjoy my questions and resorted to trying to belittle the questioner. I wore it as a badge of honour and he was always friendly in person after the match. Australian politicians play hard and enjoy a beer at the after match function.

Here’s Keating in top form at yesterday’s National Press Club event in Canberra.

“Signing the country up to the foreign proclivities of another country – the United States, with the gormless Brits, in their desperate search for relevance, lunging along behind is not a pretty sight.” Paul Keating at a National Press Club event in Canberra yesterday via 9News

Here’s the full set of exchanges in all their glory. Enjoy.

Chart of the day

At least $3b of borrowing headroom in Auckland Council’s Budget

Scoops and useful longer reads and listens elsewhere

A fun thing

Ka kite ano

Bernard

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit thekaka.substack.com/subscribe

TLDR: PM Chris Hipkins announced a further $1 billion of spending cuts on emissions reduction last night, arguing the Government needed to ‘cut its cloth to fit’ to show households it understood their pain about higher living costs.

But in choosing to spend less on efforts to address climate change in the midst of an actual climate emergency event, Labour has fallen into the classic mistake of seeing a Government’s finances as just like a household’s, as well as overturning two decades of arguments used to justify tight budgets and low public debt.

Both Labour and National have argued since the early 2000s they needed to run budget surpluses and keep debt low to ‘save for the rainy day’. They have also both argued that spending money on emissions reductions could reduce the pain of future rainy days by making them less rainy.

Yet when the classic rainy day arrived, Hipkins and his Cabinet decided to reduce spending on emissions reductions designed to stop future days from being even rainier. In making this choice, he has exposed the real priorities of both National and Labour over the last 20 years of fiscally tight policies. It was not for saving for rainy days. It was all about prioritising low public debt, low taxes, no taxes on capital gains and low interest rates over everything else.

That makes perfect sense when you realise the most important variables for swinging median voters who own their own homes and have mortgages are:

* keeping mortgage rates as low as possible and income taxes as low as possible to maximise disposable income;

* keeping interest rates as low as possible by minimising public investment in infrastructure to support new land supply for housing because that maximises rises in land prices;

* maximising capital gains on leveraged rises in residential land prices and keeping them tax-free because that is the main way these median voters become wealthier, can save for their retirement and become able to help their own children into their own homes.

So where does that leave young renters?

Young renters are toast in this scenario. They can vote Labour or Green as often as they like, but will end up having to pay the price of more and bigger climate emergencies, while also paying most of their after-tax income on rent and being unable to hope of owning their own homes with secure futures for their families unless they can be gifted deposits by relatives or marry into wealth.

Those who vote Green are in a particularly difficult situation. They vote for policies that can never be enacted while the Green party is the minor party in any coalition. That’s because the Green party has no leverage in any government-forming negotiations when it is in the minority because it can never credibly threaten to put National in Government. A Green vote is consciously or unconsciously wasted while the Green Party will never suggest enabling a National-led Government, unless there is a real prospect of it having a larger vote share than Labour.

The most realistic prospect for these voters now is to vote for Te Pāti Māori or TOP, who have kept their options open to ensure they have leverage, and have pro climate policies that either Labour or National might adopt to win power. A Green vote now is purely performative. It allows voters to feel better about not voting for Labour and appearing to vote for climate action and poverty reduction policies, but actually enabling a Green-washing of Labour that achieves none of those policies.

Yesterday’s announcement and the defeated-sounding statement in response from the Green Party’s co-leaders James Shaw and Marama Davidson has reinforced that, yet again, Ford Ranger Man’s love of a suburban lifestyle and land plot that makes them richer always has priority for a Labour Party in a neck-and-neck race for power.

That leaves Te Pāti Māori and TOP as the only smaller party options with the negotiating leverage to extract real measures on climate change, housing or poverty improvements. Last night’s 1News/Kantar poll showed Labour would need Te Pāti Māori (up 2% to 3%) to govern.

The Green element of any coalition can be assumed and then ignored.

Paying subscribers can see more detail and analysis of the Government’s announcements below the paywall and in the podcast above. FYI. I have decided to open this one up immediately, given the public interest involved in climate issues. Many thanks to paying subscribers who support my journalism covering the political economy of housing unaffordability, climate change inaction and poverty reduction.

Elsewhere in the news this morning

* US President Joe Biden had to reassure depositors in smaller US banks their money was safe overnight after the collapse of Silicon Valley Bank threatened to turn into a series of bank runs; Reuters

* Biden had to say the US Government would do ‘whatever was needed’ to ensure stability, even after the US Federal Reserve, the Treasury and the Federal Deposit Insurance Corporation were forced to create a new US$25 billion fund to guarantee the uninsured deposits of high-net-worth individuals and tech firms would be fully available last night; FT, WSJ

* US regional bank stocks slumped 15% and investors and traders lowered their forecasts for the peak of US Federal Reserve’s key cash rate by 50-80 basis points to 4.75-5.0%, which in turn drove US 2 year Treasury bond yields down to as low as 3.98% (It was over 5% late last week); WSJ

* China’s President Xi Jinping ended this week’s National Party Congress for 3,000 Communist Party cadres and invited billionaires overnight, declaring in a speech that China needed to strengthen its military to build a “great wall of steel” to defend its interests; FT

* KPMG released its Financial Institutions Performance Survey (FIPS) report overnight, showing New Zealand’s banks increased net profit by 17% to $7.18 billion in calendar 2022 after a 13 basis point rise in their collective net interest margin from 1.97% to 2.10%, thanks to cheap loans from the Reserve Bank and not passing on term deposit increases to savers as fast as they were passed on to borrowers; and,

* New Zealand government bond yields are also expected to fall further today, putting extra pressure on banks to offer lower fixed mortgage rates in the months to come ahead of the election.

Coming up later today

* Migration figures for January are due at 10.45 am from Stats NZ; and,

* Parliament resumes at 2pm for Question Time in the second week of a two-week session.

Choosing lower mortgage rates over climate action now

PM Chris Hipkins announced a range of moves yesterday designed to save the Government money, which were mostly about stopping or delaying spending that would have reduced climate emissions, and in one case was to restrict the use of a road safety move that was unpopular with fast car drivers.

The changes included:

* stopping the clean car upgrade scheme, which would have seen $568 million spent on a ‘cash-for-clunkers’ scheme that swapped polluting old cars for cleaner cars and public transport, and which would have benefited the poorer drivers the most;

* stopping the social car leasing scheme, which would have allowed poorer drivers to lease an low emissions car at an annual cost of $19 million;

* limiting the Auckland Light Rail project to just one section that does not reach to the airport to save ‘billions’ and a suggestion completion could take the same 40 years that the recent Waikato Expressway took;

* narrowing Waka Kotahi’s speed reduction programme to just 1% of the most dangerous roads, which will reduce the emissions benefits of lower speeds;

* removing cities smaller than Auckland, Hamilton, Tauranga, Wellington and Christchurch from a requirement to prioritise public transport over driving; and,

* deferring work on the refund for container scheme to avoid cost increases for consumers.

The $1 billion saved is on top of $700 million being used from the Climate Emergency Response Fund to extend fuel tax and road user charge cuts. Essentially, the Government has chosen to use $1.7 billion initially allocated to the Climate Emergency Response Fund (CERF) to cut fuel prices and reduce borrowing and public debt. This was money raised from the Emissions Trading Scheme and is being used to keep interest rates and mortgage rates lower than they otherwise be the case, and to actively encourage drivers to burn more petrol and diesel. ETS prices have fallen in recent months as the Government rejected Climate Commission advice to strengthen the scheme.

It is a classically short-term approach to winning an election that sacrifices longer-term climate action and more infrastructure investment for extra land for housing supply and public transport to ensure that fuel prices are kept low for now and that mortgage rates stay lower than would otherwise be the case, which also stops suburban land prices from falling too much.

On that front…

House prices bottoming out

REINZ reported data this morning that its House Price Index bounced in February by 0.1% nationally and 0.3% outside Auckland. The index for the hardest-hit market of Wellington bounced 0.2% in February.

The plan to win back Ford Ranger Man is working. Last night’s 1News/Kanter poll showed Labour able to form a Government with Te Pāti Māori and the Green Party, which is in line with the trend seen since Labour’s pivot to less climate spending.

Six quotes of the day

Joe Biden’s ‘whatever it takes’ pledge last night

“We will not stop at this. We’ll do whatever is needed on top of all (this). Americans can have confidence that the banking system is safe. Your deposits will be there when you need them.” US President Joe Biden overnight after two banks were closed and stocks in others fell sharply. CNN

Fund manager wants full guarantee. Current it’s US$250k per account

“Our economy will not function effectively without our community and regional banking system. Therefore, the @FDICgov needs to explicitly guarantee all deposits now. Hours matter.” Pershing Square CEO Bill Ackman via Twitter. He is a well known fund manager.

Some see the Federal Reserve unable to hike rates next week

"The bank run was precipitated by the Federal Reserve's overly hawkish policy. The bull case is that this will finally knock some sense into them (the Fed) and they will stop raising rates.” Jay Hatfield, founder and CEO of Infrastructure Capital Management via Reuters

What the sharp fall in US interest rates means for us

"Against a backdrop of other central banks pulling in their horns, there will be less pressure on the RBNZ to tighten as well.  Given the significant mortgage repricing yet to come through the system and the economy on the verge of recession, if the banking crisis in the US means an earlier end to NZ’s official tightening cycle, then that might end up being a good thing.” BNZ Markets Strategist Jason Wong in a morning note

‘Our Government wants you to know we’re quite like your household’

“Stopping some of our plans and putting others on a slower track gives us the bandwidth to focus on these immediate priorities while also saving some money so that we can provide a little bit of extra support to help families with increasing costs. It’ll also help to keep downward pressure on any domestic-related inflation. I want New Zealanders to know that the Government’s doing its bit and is cutting its cloth to suit the times that we are in.” PM Chris Hipkins announcing $1b of cuts and project delays to help fund the Gabrielle rebuild (Post Cabinet news conference transcript.)

National now well out of line with other conservative parties on China

 “China represents a country that has very different values to ours. It presents an epoch-defining challenge to us and to the global order. It’s a regime that is increasingly authoritarian at home and assertive abroad and has a desire to reshape the world order. We’ve recognized it as the biggest state-based threat to our economic security.” UK PM Rishi Sunak in a speech on China via Politico Europe

Six charts of the day

Labour could govern with Te Pāti Māori in this 1News poll

Christopher Luxon’s personal popularity is sliding

Smaller US bank stocks were hit hard overnight

The US 2 year Treasury yield fell the most overnight in 25 years

NZ annual food price inflation of 12% in Feb highest since Sept 1989

But will fruit and vege growers receive the higher prices too?

Profundities, curiosities, spookies and feel-goods

Fun things

Ka kite ano

Bernard

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TLDR: This week’s news in geo-politics and the political economy covered on The Kākā included:

* National proposed a select committee inquiry into bank profits, which prompted the Government to say it was considering a full market study of the banking sector by the Commerce Commission (Thursday’s email);

* National proposed allowing easier foreign investment in build-to-rent projects and allowing owners to claim depreciation, as student accommodation, retirement villages and others can now;

* Transport Minister Michael Wood was forced to downplay the role of emissions reduction in his transport strategy after the Opposition criticised the prospect of fuel tax money being used for buses, cycleways and walkways instead of road repairs (Tuesday’s email);

* A survey commissioned by the Ministry of Transport found most young people in cities would prefer revenues from new wealth, congestion or pollution taxes be used to improve public transport, walking and cycling, while most older voters don’t want any of those taxes, and instead want their existing fuel taxes used to repair roads, rather than subsidise emissions reduction. (Wednesday’s email)

What we talked about on the ‘hoon’

In this week’s podcast above of the weekly ‘hoon’ webinar for paying subscribers at 5pm on Friday night, I talked with co-host Peter Bale and special guests Robert Patman and Crockers CEO Helen O’Sullivan about:

* Michael Wood’s about-face on a new transport policy prioritising emissions reductions;

* the Labour Government finally deciding to look at doing a market study of bank profits after the Reserve Bank suggested it would like one and the Opposition called for a short and sharp Parliamentary Select Committee inquiry into bank competition;

* National proposed allowing easier foreign investment in build-to-rent projects and allowing owners to claim depreciation, as student accommodation, retirement villages and others can;

* China’s warnings of war if the United States keeps trying to contain China;

* Australia agreeing to buy five US nuclear submarines, which China doesn’t like;

* China accusing New Zealand of jumping at shadows over accusations an analyst in Wellington passed on information to China’s security services, which the analyst has denied; and,

* More intrigue around the Nordstream explosions.

Other places I appeared this week

Thanks to the support of paying subscribers here, I’m able to spread the work from my public interest journalism here about housing affordability, climate change and poverty reduction around in other public venues.

I produced my weekly When the Facts Change podcast for The Spinoff on turning grass into ngahere.

Our emissions trading scheme incentivises sheep and beef farmers on marginal land to sell or lease it to pine foresters for carbon credits. It’s a classically bad unintended consequence of a policy that is supposed to improve the environment.

Instead, the slash and silt unleashed from those plantations wrecked rich horticultural land down in the valleys in Gabrielle. I talked to farmers John Burke and Alison Dewes about other ways to change land use that is much healthier and more profitable in the long run, including retiring that land into ngahere and wetlands that will thrive in a changing climate and protect other farms down stream how rising corporate profit margins are fuelling a profit-price spiral here and overseas.

Longer reads and listens for the weekend

Here’s a few useful longer reads, scoops and podcasts for paying subscribers for the weekend.

TLDR: A survey ordered by the Ministry of Transport has found more than 80% of young people wanted a wealth tax, congestion charges and/or pollution pricing to pay for improvements in public transport, walking and cycling, rather than only through fuel taxes, as is the case now.

However, the University of Auckland survey of over 400 people late last year also found less than a third of older respondents wanted a wealth tax and barely a half wanted congestion charges, pollution pricing or increased contributions from developers.

The Ministry of Transport said it did not suggest the taxes to the surveyers and was not “at this stage” suggesting such measures. Transport Minister Michael Wood batted the question back to the Ministry yesterday in the article on the survey by Thomas Coughlan for NZ Herald-$$$, but National Finance Spokeswoman Nicola Willis suggested Labour was still eyeing up some sort of wealth tax.

There’s more detail and analysis on the survey below the paywall fold for paying subscribers and in the podcast above. I’ve taken the liberty of opening this one up to all immediately, given the public interest in how to fund emissions reduction and housing affordability. Many thanks again to paying subscribers for their support to allow me to do this sort of public interest journalism in public.

Elsewhere in the news overnight

* National Finance Spokeswoman Nicola Willis announced this morning she had written a letter to the Finance and Expenditure Select Committee to ask for a Parliamentary Select Committee Inquiry into retail banking regulation and competition after Reserve Bank Chief Economist Paul Conway said he thought a Commerce Commission market study into the sector would be worthwhile;

* ACC and Pharmac Chair (and former Labour Minister) Steve Maharey offered to resign after writing a column for Stuff that criticised the Opposition, but that appeared not to have been read by either ministers or the Opposition. Health Minister Ayesha Verrall, who sacked Rob Campbell as Te Whatu Ora Chair last week for his repeated critique of National and its leader Christopher Luxon, said the two cases were different because Maharey was truly contrite, although she is still waiting on advice about whether Maharey should go too;

* Dunedin Hospital announced last night it had postponed all operations because of staff shortages and a busy emergency department, RNZ reported, while Isaac Davison reported for NZ Herald this morning that hospital patients in Auckland were being held in cafes while they waited for treatment, with one ED at 195% capacity (and it’s only March);

* Public Service Minister Andrew Little is set to announce a change in the three-year-long pay freeze for the highest paid public servants later today, Stuff's Anna Whyte reported this morning, while Newshub’s Jenna Lynch reported that the exceptional circumstances clause had been used to give pay increases to 427 public servants earning more than $100,000 per year between April and November last year;

* The Government is backing away under new PM Chris Hipkins from proposals to lower the voting age to 16, Glenn McConnell reported for Stuff this morning;

* China’s new foreign minister Qin Gang ramped up an attack on US foreign policy overnight, accusing the United States of operating double standards and “hysterical neo-McCarthyism” that was hurting relations between the two super-powers; Politico

* The Reserve Bank of Australia hiked its cash rate for a 10th consecutive meeting to an 11-year high of 3.6% as expected last night, but it opened the door for a pause in May after just one more hike because it said inflation had peaked and was cooling down. If it were to pause, it would mean Australia’s official rate would peak below 4.0% next month, while the Reserve Bank of New Zealand is still hiking towards a peak of 5.5% later this year; and,

* Federal Reserve Chair Jerome Powell said this morning the US central bank might have speed its rate hikes back up to 50 basis points per meeting from 25 basis points because inflation remained too strong, which drove down stock and bond prices in New York this morning.

A generational clash over paying for public transport

A survey done for the Ministry of Transport by the University of Auckland late in 2022 has been uncovered by Thomas Coughlan for NZ Herald-$$$ via OIA requests that shows younger voters would much prefer wealth taxes, congestion charges and higher development contributions to pay for better public transport and mode shift. However, the same survey shows older voters are not keen at all on higher taxes to pay for these changes.

The self-selecting survey of 436 people in October and November by the University’s Koi Tū: The Centre for Informed Futures using pol.is found a range of ideas on how to develop public transport and how to pay for it. The survey was of ‘stakeholder groups’ who understood the issues, and therefore may have been skewed towards public transport users and advocates, the survey report writers said.

The engagement did not attempt to achieve representativeness in the participant sample; rather it focused on stakeholder groups, many of whom would have knowledge of or interest in how the transport system is evolving.

The majority (93%) of participants were between 26 and 64 years of age (fairly evenly spread between 26-39 and 40-64 year brackets) and 60% were male. With regard to transport modes, about a quarter of participants (24%) regularly used a bicycle, scooter or other personal transport mode, and walking was a regular transport mode for 19%. 

While it is likely that most people use private vehicles to some extent, only 48% of respondents signalled that cars were their ‘main’ mode of transport. Most (82%) live in suburban or urban areas of New Zealand. A total of 436 people voted on (agreed or disagreed with, or passed on) at least one of the 106 statements that were moderated into the ‘discussion’. Koi Tū survey.

Here’s the key tables of the results of the survey, with group A being mostly younger respondents with less than a third using cars, group B in the middle and group C being older respondents, two-thirds of which used cars to get around.

Transport Minister Michael Wood’s office was quoted in Thomas’ piece as referring questions back to the Ministry, while the Ministry said it had not suggested the wealth tax idea.

Willis was quoted as saying even studying such options was wasteful (bolding mine):

“How loosey-goosey have contracting arrangements got that public money is being used to poll people on a wealth tax that the Government promised it wouldn’t be implementing.

“You’ve got to ask, what went wrong here. Either they got the ‘wink, wink, nudge nudge from public officials’ who thought that there was appetite for a range of new taxes - or they’ve gone off on a new foray and if that is the case, public officials should be asking for their money back.” Nicola Willis via NZ Herald-$$$

So what? Is it a dodgy survey?

In my view, the survey results show the huge appetite for changing how public transport and mode shift is done among young city-dwellers, while older home-owners in suburbs and provincial towns are just fine with the status quo. This survey was not a representative survey done in a non-self-selecting way online, so it can’t be said to represent the views of most voters, even in each age group.

But even the mere mention of these options was enough to light up the third rails of Aotearoa’s political economy around wealth taxes and repurposing roads and fuel taxes for mode shift and public transport. This is now the culture war of our age. For now, Ford Ranger Man is winning because the politicians of both National and Labour who understand how to win MMP elections know there are more swinging median voters who are older and own homes in suburbs and provincial towns than there are non-car-driving renters in the big cities who vote. That won’t change until the electoral demographics change, which would require more than 500,000 non-voting young renters to vote, and for several hundred thousand older swinging voters to not vote.

The survey is titled: The Future of Transport - Who Should Pay for What - Polis Analysis and is available on Scribd for free to those who register.

Scoops and essential longer reads and listens

The meter is still running - Glenn McConnell reported for Stuff this morning that the $8,000 a day board set up for the now-not-being-merged TVNZ-RNZ combination is still operating.

Time to sell (the cars) - Martin Van Beynen and Poppy Clark reported for The Press this morning that the champagne lifestyle appears to be over for Christchurch-based Townhouse King Matthew Horncastle, who controls Williams Corp, which has been the biggest developer and builder of townhouses close to Christchurch’s central city. He has put his 2019 black McLaren, a white Rolls-Royce and G3 Mercedes up for sale via Instagram.

Charts of the day

Via Reuters

A fun thing

Ka kite ano

Bernard 

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit thekaka.substack.com/subscribe