The Kākā by Bernard Hickey

TLDR: Evidence emerged this morning that the IRD was asked to look at delivering $100 helicopter payments to each and every Aucklander during the city’s extended lockdowns last year. It said it couldn’t do it easily.

Those logistics issues are now being confirmed with IRD struggling to find the bank accounts for 170,000 people eligible for Budget 2022’s $350 cost of living payment to non-beneficiaries earning less than $70,000 per year.

Paid subscribers can see more detail and my analysis below the paywall fold, plus an idea I put forward for a better, fairer, faster and simpler way to make helicopter money payments.

Elsewhere in the news here and overseas:

* CoreLogic published its latest update of its Mapping The Market tool this morning that showed 51% of Aotearoa-NZ’s suburbs had fallen in price in the last three months;

* Infometrics published a new analysis of housing affordability this morning that showed affordability at its worst level since 1957;

* The Human Rights Measurement Initiative’s annual report for Aotearoa New Zealand was published last night, showing tangata whenua were the most likely to suffer human rights violations in education, healthcare, housing and justice;

* US Federal Reserve Chairman Jerome Powell told Congress this morning a ‘soft landing’ for the world’s largest economy was now a ‘very challenging’ prospect and that a recession was now a ‘possibility,’ which nudged global stock and bond prices higher on hopes Powell’s comments meant much, much higher interest rates wouldn’t be needed to bludgeon inflation lower;

* Britain’s annual inflation rate rose in May to a 40-year high of 9.1%, the Office of National Statistics reported, which was above April’s rate of 9.0%, but in line with economists’ forecasts; and,

* US President Joe Biden called on Congress overnight to suspend federal ‘gas’ taxes of 18 USc per gallon on petrol (7.6 NZc/litre) and 24 USc per gallon of diesel (9.9 NZc/litre) for three months. CNBC

Govt eyed helicopter payments for Aucklanders

This morning we awake to news that the IRD has struggled to find the bank accounts of all the 2.1m people eligible for the $350 ‘cost of living’ payments for non-beneficiaries earning less than $70,000 per year that was announced in the Budget in May.

Also, we’ve discovered IRD argued it would not be able to easily make a ‘helicopter money’ payment of $100 per person to Aucklanders, as was suggested (and then rejected) internally by the Government late last year during extended Covid lockdowns in Auckland and the Waikato.

Jenee Tibshraeny reports for the NZ Herald-$$$’s front page story this morning that IRD initially didn’t have bank account numbers for 170,000 of the 2.1m when the $350 payment was announced in May, and has now found 130,000 of them. It thinks it will be able to get all but 11,000 of them. Jenee reported the IRD’s acting commissioner and CEO Cath Atkins told a select committee yesterday IRD had taken on 300 contractors to administer the payments over five months and expected to need as many as 750 IRD staff to handle inquiries at peak payment times.

Meanwhile, Marc Daalder reports this morning for Newsroom that the Government considered making ‘helicopter cash’ payments of $100 per Aucklander during the extended Covid lockdowns late last year, but that they decided against it after IRD warned it would struggle to roll out such a payment to all New Zealanders, let alone anything more targeted.

Citing OIA documents, Marc quotes IRD officials writing in a November 3 briefing about a suggested one-off payment to all New Zealanders that:

"Designing, implementing and administering this payment would require a significant reprioritisation of Inland Revenue's work programme. Our experience is that it would be very challenging to design and stand up an untargeted one-off payment before the end of the year.

"We need further confirmation and details on the parameters to design the payment, and to assess whether it is feasible, cost effective, and establish a timeline if Inland Revenue is asked to deliver the payment."

A week later, Marc reports ministers asked about narrowing the payment to Aucklanders only, which elicited this IRD response on November 10:

"The level of operational support required to accurately deliver a $100 payment to Aucklanders prior to Christmas would be significant and beyond Inland Revenue's current capacity.

"Given the Government's and public expectations around these [Regional Support Payment] measures, we consider there would be significant reputational fallout if progressing the one-off payment resulted in Inland Revenue failing to meet these expectations.”

Marc reports Revenue Minister David Parker saying the Government decided against the payments after the November 10 briefing. Parker is quoted as saying:

"Ministers focused on support for businesses and the CBD, which was why in the end they went with other measures including vouchers.” David Parker quoted from an email via Newsroom.

The case for a helicopter payment system instead

This highlights the issues around why the Government did not make ‘helicopter money’ cash payments to all residents during the lockdowns of 2020 and 2021. Instead, the Reserve Bank printed $55b to buy Government bonds in financial markets from banks and fund managers. The Government, in turn, used $20b of that money to pay cash directly as few-questions-asked grants to employers as wage subsidies and resurgence payments.

That money was crucial in the initial weeks of lockdowns in reassuring employers about cash flows and avoiding mass sackings. But it was soon evident the money was not needed and it has ended up as increased cash balances in the bank accounts of households with assets (ie home owners) and non-financial businesses, as the chart shows. It was an indirect transfer of wealth from taxpayers in general, including renters, PAYE wage earners and GST payers, to asset owners in the form of home owners and business owners. Less than $1b has been repaid and many companies, including NZME and Fletcher Building, have chosen to keep the cash and pay it out to shareholders as dividends and share buy-backs.

Why not pay it direct to everyone, not just the richest?

The Government could have instead paid that $20b in cash directly and equally to all residents, including children, to support the economy in the event of feared collapse due to lockdowns. This sort of payment was made in other countries during lockdowns, but the Labour Government chose to focus the cash grants on businesses.

One argument against such helicopter payments, as detailed above by IRD, was the logistical challenges involved in identifying residents and being able to make payments quickly into their bank accounts. Another argument is that ‘helicopter money’ funded directly by the Reserve Bank printing money and handing it directly to the Government would be seen as inflationary, reckless and unfair. That’s one reason why the Government chose the roundabout route of the Reserve Bank buying bonds on the financial markets after the Government had issued the bonds to banks and fund managers.

One result of that was the banks and fund managers capturing a margin on the way through on the money roundabout. Also, interestingly, the Government never actually spent all of the $55b in freshly printed money it received in that roundabout way. There is still $33.4b sitting in the Crown Settlement Account with the Reserve Bank, the Reserve Bank’s data shows. The difference of $22b almost exactly matches the $23b in extra household and business savings seen in the above chart.

So how could the helicopter money have been done?

My suggestion? One way to ensure immediate, fair, direct and controllable payments to all residents would be for the Reserve Bank to create accounts for every resident of Aotearoa-NZ as soon as they were born, that could be accessed by an app or debit card connected to the EFTPOS payment system.

The Reserve Bank is considering whether (and how) to develop a central bank digital currency that would effectively be able to generate New Zealand dollars independently of the banking system. These Reserve Bank-created ‘e-dollars’ would be exchangeable one-for-one with regular private bank dollars. So far, the Reserve Bank has focused on creating wholesale facilities or accounts for these e-dollars, but it could just as easily create retail accounts for each New Zealander on birth.

This could be done by creating an app and a Reserve Bank account for every individual ahead of a crisis. The bank would have to identify someone as a resident of Aotearoa-NZ and ensure that resident had a way of using that account to buy things, through an app linked to the account and/or some form of debit card linked to the EFTPOS system. If a Government was worried about how the money might be spent, it could be limited so the e-dollars could not be used to buy alcohol or for gambling, for example. Australia has issued a similar type of debit card payment system for some beneficiaries.

When the crisis hits, the Reserve Bank could then be directed to inject the fresh e-dollars equally in a one-off way to every resident to spend or convert into a ‘regular’ NZ dollar in a regular bank account. Given the e-dollars could be endowed with smart contract qualities, they could be time-limited and even given a special interest rate, which could even be negative. That would encourage people to spend it quicker, if the rate was negative and highly-enough negative.

Open Matariki accounts for all that use e-tāras

I’d propose every baby born here and everyone classified as a permanent resident be given such a ‘citizen’s dividend’ account. The ‘citizen’s dividend’ idea has been proposed overseas as a way of making universal basic income payments, or setting up endowments for children that can be used for college education.

I’d suggest the accounts be called Matariki accounts and the currency be called the e-tāra. Every child born here could be granted a starting payment of, say, $10,000, which would be linked to the parents’ or guardians’ Matariki account. That could be used to help families in those tough early years, but also create a base of usage that meant people and shops were familiar with the Matariki cards, the Matariki app and the e-tāras. In time, the accounts could be used for benefit payments and, if people chose, as their main transaction account that employers, the IRD, Government departments, ACC and others would use. Anyone being granted residency would be given a Matariki account.

Such an account would solve many of the online identity issues currently handicapping many Government and small business attempts to build the online economy. It would also provide a competitive element for private banks to keep their fees low.

Just a thought. I welcome your comments and suggestions for improvement below.

Quote of the day

GIB and other shortages are pushing builders to the brink of failure

"In one subdivision alone, I counted 19 houses waiting for either bricks, windows, or Gib board. And they've all been sitting at this stage for a number of weeks. So there will be cashflow issues." Building Supplies Cooperative chairperson Carl Taylor talking to Sam Olley on RNZ’s Checkpoint last night.

Number of the day

Goods imports galore now

$9.5b - Stats NZ reported yesterday Aotearoa-NZ’s annual merchandise (goods) trade deficit was $9.5b in the year to the end of May 2022, vs a deficit of $49m the previous year. Goods exports were valued at $67.2b for the year, up $7.7b from the previous year. Annual goods imports were valued at $76.7b, up $17.1b from the previous year.

Chart of the day

A goods deficit, which won’t have many services exports to offset it

Comment of the day in The Kākā community

Fixing the flaws in consumer confidence measures

Hi Bernard, could you dive into how fit for purpose the consumer confidence index even is? It feels incredibly flawed on a number of levels. Firstly, as you pointed out, due to the fact the statistics do not reconcile with the survey, which reflects the power of certain stories being told and held, regardless of the reality. Secondly, (and perhaps more importantly) the fact we are still seeking to assess people's engagement and understanding of the economy based on their intended consumption, in a midst of global converging crises, where "consuming" our way out of global warming and biodiversity loss isn't physically possible and in fact perpetuating the crisis. I wonder if it was replaced with a citizen confidence index (informing on engagement on policy and strategy in governments and organisations big and small - per Jon Alexander's suggestion), or removed entirely as a distraction would be more helpful? Georgia in yesterday’s Chorus

Some fun things

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: Rather than print more money to make asset owners even wealthier again, the Reserve Bank should instead prepare to distribute ‘helicopter money’ in equal amounts into a separate Reserve Bank account for every resident called a Matariki account.

This money should be a new central bank digital currency called the e-tāra, which is pegged to the regular New Zealand dollar, and able to be used by account-holding residents or their guardians with Matariki cards and Matariki apps via EFTPOS and credit/debit card system. It would create a new way to quickly, fairly and cleanly distribute Government payments, run monetary policy and back up the existing banking system in the next crisis.

This article and podcast above is a tweaked version of a proposal I included in my daily Chorus email for paid subscribers. They’ve asked me to break it out and may it available for the public. You are welcome to forward and share it. Only paid subscribers can comment below.

Why is giving every resident cash so hard?

This morning we awoke to news that the IRD has struggled to find the bank accounts of all the 2.1m people eligible for the $350 ‘cost of living’ payments for non-beneficiaries earning less than $70,000 per year that was announced in the Budget in May.

Also, we’ve discovered IRD argued it would not be able to easily make a ‘helicopter money’ payment of $100 per person to Aucklanders, as was suggested (and then rejected) internally by the Government late last year during extended Covid lockdowns in Auckland and the Waikato.

Interest.co.nz alumni Jenee Tibshraeny reports for the NZ Herald-$$$’s front page story this morning that IRD initially didn’t have bank account numbers for 170,000 of the 2.1m when the $350 payment was announced in May, and has now found 130,000 of them. It thinks it will be able to get all but 11,000 of them. Jenee reported the IRD’s acting commissioner and CEO Cath Atkins told a select committee yesterday IRD had taken on 300 contractors to administer the payments over five months and expected to need as many as 750 IRD staff to handle inquiries at peak payment times.

Meanwhile, Marc Daalder reports this morning for Newsroom that the Government considered making ‘helicopter cash’ payments of $100 per Aucklander during the extended Covid lockdowns late last year, but that they decided against it after IRD warned it would struggle to roll out such a payment to all New Zealanders, let alone anything more targeted.

Citing OIA documents, Marc quotes IRD officials writing in a November 3 briefing about a suggested one-off payment to all New Zealanders that:

"Designing, implementing and administering this payment would require a significant reprioritisation of Inland Revenue's work programme. Our experience is that it would be very challenging to design and stand up an untargeted one-off payment before the end of the year.

"We need further confirmation and details on the parameters to design the payment, and to assess whether it is feasible, cost effective, and establish a timeline if Inland Revenue is asked to deliver the payment."

A week later, Marc reports ministers asked about narrowing the payment to Aucklanders only, which elicited this IRD response on November 10:

"The level of operational support required to accurately deliver a $100 payment to Aucklanders prior to Christmas would be significant and beyond Inland Revenue's current capacity.

"Given the Government's and public expectations around these [Regional Support Payment] measures, we consider there would be significant reputational fallout if progressing the one-off payment resulted in Inland Revenue failing to meet these expectations.”

Marc reports Revenue Minister David Parker saying the Government decided against the payments after the November 10 briefing. Parker is quoted as saying:

"Ministers focused on support for businesses and the CBD, which was why in the end they went with other measures including vouchers.” David Parker quoted from an email via Newsroom.

The case for a helicopter payment system instead

This highlights the issues around why the Government did not make ‘helicopter money’ cash payments to all residents during the lockdowns of 2020 and 2021. Instead, the Reserve Bank printed $55b to buy Government bonds in financial markets from banks and fund managers. The Government, in turn, used $20b of that money to pay cash directly as few-questions-asked grants to employers as wage subsidies and resurgence payments.

That money was crucial in the initial weeks of lockdowns in reassuring employers about cash flows and avoiding mass sackings. But it was soon evident the money was not needed and it has ended up as increased cash balances in the bank accounts of households with assets (ie home owners) and non-financial businesses, as the chart shows. It was an indirect transfer of wealth from taxpayers in general, including renters, PAYE wage earners and GST payers, to asset owners in the form of home owners and business owners. Less than $1b has been repaid and many companies, including NZME and Fletcher Building, have chosen to keep the cash and pay it out to shareholders as dividends and share buy-backs.

Why not pay it direct to everyone, not just the richest?

The Government could have instead paid that $20b in cash directly and equally to all residents, including children, to support the economy in the event of feared collapse due to lockdowns. This sort of payment was made in other countries during lockdowns, but the Labour Government chose to focus the cash grants on businesses.

One argument against such helicopter payments, as detailed above by IRD, was the logistical challenges involved in identifying residents and being able to make payments quickly into their bank accounts. Another argument is that ‘helicopter money’ funded directly by the Reserve Bank printing money and handing it directly to the Government would be seen as inflationary, reckless and unfair. That’s one reason why the Government chose the roundabout route of the Reserve Bank buying bonds on the financial markets after the Government had issued the bonds to banks and fund managers.2

One result of that was the banks and fund managers capturing a margin on the way through on the money roundabout. Also, interestingly, the Government never actually spent all of the $55b in freshly printed money it received in that roundabout way. There is still $33.4b sitting in the Crown Settlement Account with the Reserve Bank, the Reserve Bank’s data shows. The difference of $22b almost exactly matches the $23b in extra household and business savings seen in the above chart.

So how could the helicopter money have been done?

My suggestion? One way to ensure immediate, fair, direct and controllable payments to all residents would be for the Reserve Bank to create accounts for every resident of Aotearoa-NZ as soon as they were born, that could be accessed by an app or debit card connected to the EFTPOS payment system.

The Reserve Bank is considering whether (and how) to develop a central bank digital currency that would effectively be able to generate New Zealand dollars independently of the banking system.3 These Reserve Bank-created ‘e-dollars’ would be exchangeable one-for-one with regular private bank dollars. So far, the Reserve Bank has focused on creating wholesale facilities or accounts for these e-dollars, but it could just as easily create retail accounts for each New Zealander on birth.

This could be done by creating an app and a Reserve Bank account for every individual ahead of a crisis. The bank would have to identify someone as a resident of Aotearoa-NZ and ensure that resident had a way of using that account to buy things, through an app linked to the account and/or some form of debit card linked to the EFTPOS system. If a Government was worried about how the money might be spent, it could be limited so the e-dollars could not be used to buy alcohol or for gambling, for example. Australia has issued a similar type of debit card payment system for some beneficiaries.

When the crisis hits, the Reserve Bank could then be directed to inject the fresh e-dollars equally in a one-off way to every resident to spend or convert into a ‘regular’ NZ dollar in a regular bank account. Given the e-dollars could be endowed with smart contract qualities, they could be time-limited and even given a special interest rate, which could even be negative. That would encourage people to spend it quicker, if the rate was negative and highly-enough negative.

Open Matariki accounts for all that use e-tāras

I’d propose every baby born here and everyone classified as a permanent resident be given such a ‘citizen’s dividend’ account. The ‘citizen’s dividend’ idea has been proposed overseas as a way of making universal basic income payments, or setting up endowments for children that can be used for college education.

I’d suggest the accounts be called Matariki accounts and the currency be called the e-tāra. Every child born here could be granted a starting payment of, say, $10,000, which would be linked to the parents’ or guardians’ Matariki account. That could be used to help families in those tough early years, but also create a base of usage that meant people and shops were familiar with the Matariki cards, the Matariki app and the e-tāras. In time, the accounts could be used for benefit payments and, if people chose, as their main transaction account that employers, the IRD, Government departments, ACC and others would use. Anyone being granted residency would be given a Matariki account.

Such an account would solve many of the online identity issues currently handicapping many Government and small business attempts to build the online economy. It would also provide a competitive element for private banks to keep their fees low.

Just a thought. I welcome your comments and suggestions for improvement below.

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: Momentum is growing towards a supermarkets-style breakup of Fletcher Building’s GIB monopoly, reinforced by the Government’s increasing focus on blaming monopolies for at least some of the inflation that is eroding its popularity and has driven consumer confidence to record lows. Paid subscribers can see more detail and analysis below the paywall fold, and leave comments on further lines of inquiry.

Elsewhere in the news overseas and here this morning:

* Auckland GPs report a winter flu crisis has spilled back out of A&E departments and into their surgeries (NZ Herald), while Wellington’s DHBs are giving vouchers for patients to visit GPs instead of coming to A&Es (RNZ) and the Government denied the health system was in crisis (RNZ);

* Wellington Council faces a once-in-a-generation decision this afternoon over whether to approve a new 1,281 page District Plan that would enable an extra 73,400 homes in the City over the next 30 years; (Dominion Post)

* The NZ Super Fund is among the bidders Spark’s mobile towers seen worth NZ$1b; (The Australian-$$$)

* Kelloggs announced overnight surprise plans to spin off its North American cereals business, including its Cornflakes brand, and keep its snacks group, including Pringles chips and Cheez-It crackers; (Reuters)

* Russia warned NATO member Lithuania of ‘serious consequences’ if it continued its blockade of trains through its territory to the Russian enclave of Kaliningrad; (BBC) and,

* US stocks rose 2.5% this morning as bargain hunters sorted through the rubble after the market’s 6% fall last week and its 20%-plus fall this year , although it’s not clear this is a ‘bottom’ in the latest slump or another dead cat bounce. CNBC

GIB carveup and Placemakers spinoff nearer

Members of a GIB crisis taskforce set up by new Building and Construction Minister Megan Woods yesterday have called in the past for the forced sale of Fletcher Building’s GIB monopoly and its Placemakers hardware chain.

The political momentum is building towards a supermarkets-style breakup of Fletcher Building’s 95% share of the plasterboard market after the appointment of Simplicity Living’s Shane Brealey and anti-monopoly campaigner Tex Edwards, both of whom have proposed Government-imposed interventions in the past, to Woods’ new taskforce yesterday. Edwards also wants to see BRANZ, the industry-dominated setter of building material standards, abolished.

The minister also threw in a warning to Fletcher Building in her announcement not to try to enforce the trademarks on its new coloured versions of GIB.

Attention will now turn to the Commerce Commission’s draft report from its ongoing market study into building materials. That report is due next month and its final report is due in December.

Grocery duopoly measures toughened

Woods’ announcement came as Commerce Minister David Clark announced a toughening of the Government’s legislation yesterday to stop supermarkets using land covenants and lease exclusivity provisions to block competitors.

The select committee considering the Grocery Sector Covenants Amendment Bill recommended in its report a widening of the application of the bill to stop the grocery duopoly blocking non-grocery retailers from shopping centres and handing over policing of the rules to the Commerce Commission.

The bill passed its second reading in Parliament last night with the support of all parties. Hansard

Consumer confidence collapses to record low

It was the best of times. It was the worst of times.

Westpac published its McDermott Miller survey of consumer confidence for the June quarter yesterday, showing the worst result in the survey’s history since it started in 1988. That is worse than in the depths of the Global Financial Crisis, worse than in the deep recession of 1990 and 1991 when unemployment rose to 10.9%, and worse than in the initial panic phase of the pandemic in March 2020.

It is extraordinary, considering home-owning households are sitting on net wealth gains of over $700b since the onset of Covid and unemployment is at a record low 3.4%, along with gross earnings per job having risen faster than CPI inflation (see RBNZ chart below) since the onset of Covid, even if hourly wages are currently not.

(Not) going to Harvey Norman?

The indicators of consumer confidence fell violently across the board, including for buying a major household item. This contrasts with recent relatively buoyant sales figures for white goods and household items such as TVs and couches.

So what? - Consumer and business confidence are good leading indicators (usually) for economic growth and for political support for the Government. This year is turning into both a summer and a winter of malcontent for Labour.

Quotes of the day

Bear rally or capitulation?

“The outstanding question is whether this is simply a bounce or the bottom. I think that this could certainly be a bounce but not the bottom because the one missing ingredient is a fear-based capitulation sell-off.” Sam Stovall, chief investment strategist at CFRA Research via CNBC

“We were overdue a bear market rally, as being down for 10 out of eleven weeks is a bit extreme. It doesn’t really change the bigger picture of growth slowing down and tightening financial conditions.” Hani Redha, multi-asset portfolio manager at PineBridge Investments via FT-$$$.

Chart of the day

Less worried than before in short run, but freaked about long run

Number of the day

Consumer spending doesn’t match the ugly consumer sentiment

$1.7b - Seasonally-adjusted durables spending via credit and debit cards in May, which was unchanged from May a year ago and up 0.2% in seasonally adjusted terms from April. That’s despite the record low figures for consumer confidence overall and intentions to buy major household items.

So what? - In my view, something weird is going on with our collective economic psyche, or at least how we answer surveys. I blame social media…

Comment of the day on The Kākā

The problem with BRANZ

“Bernard, it would be interesting to dig into Branz to better understand it’s governance structure and whether it is fit for purpose for our time. It seems to me that it’s questionable that a private organisation should have so much control over materials in the NZ market, especially given the pressures in housing here.” Harrison on yesterday’s Dawn Chorus.

Some fun things

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: The GIB crisis in the construction sector is escalating into a political and regulatory crisis for Fletcher Building’s Winstone Wallboards, which has a 95% market share and is now rationing the building material in ways that have crippled small builders and new housing completions.

PM Jacinda Ardern told me at yesterday’s post-Cabinet conference that new Building and Construction Minister Megan Woods would make an announcement about the crisis later in the week. Paid subscribers can see more analysis and detail on the GIB crisis below the paywall fold.

Elsewhere in the news overnight here and overseas:

* Wellington’s two DHBs have suspended non-urgent admissions as the winter flu season keeps overwhelming A&Es up and down the country - RNZ

* ECB’s President says she’s determined to control inflation - ECB

* Bitcoin steadies above $20k - YahooFinance

* WSJ survey shows 44% of economists see US recession

* ACCC launches price gouge probe into Australian power companies

* Biden sees ‘gas’ tax cut news by end of week Reuters

An escalating GIB crisis

It’s remarkable that one particular brand and type of building material is now at the centre of a crisis enveloping a significant chunk of the economy.

GIB is crucial for getting the certificates of completion granted by Council building inspectors, who overwhelmingly prefer GIB’s plasterboard and structural bracing system used here in Aotearoa-NZ to build the sort of light timber frame homes we build (but used less overseas).

This increasing use of the GIB bracing system as a structural element in house building and its approval by industry-driven standard setter BRANZ and risk averse council inspectors has effectively locked out competitors, especially from overseas.

Simplicity Living is one of the few building firms able to dump Fletcher Building’s GIB because it builds its apartments from concrete and bricks, and uses plasterboard generically as an internal wall covering, rather than a structural element.

It dumped Fletcher last week and announced it was buying plasterboard from Thailand instead. Simplicity CEO Sam Stubbs and NZ Shareholders Association CEO Oliver met with Fletcher CEO Ross Taylor on Friday to air their criticisms. Yesterday, they called on Fletcher Chairman Bruce Hassall to resign, for the directors to put themselves up for re-election, and for Fletcher to order independent reviews into its culture and risk practices.

The pressure is building on Fletcher Building, which forced Winstone Wallboards to put out a statement explaining the shortages yesterday. It again blamed stockpiling.

Little action can proceed until the Commerce Commission has completed its ongoing markets study, but there are already calls for the sector to be broken up in ways similar to supermarkets, which the Government is actively considering.

Quotes of the day

The winter flu crisis

"The system is under unprecedented stress, it is not coping, it is chaotic and it's dangerous." College of Emergency Medicine deputy chair Dr Kate Allan via RNZ

Bitcoin’s HODLers

Rabobank’s daily newsletter writer passing on an argument he’d heard for holding bitcoin.

“It’s worth holding in small amounts as a lottery ticket given the system is so rigged against the asset-poor young that there is no other way they can ever hope to retire with dignity.” Rabobank’s daily newsletter writer

Chart of the day

Australian workers are on the move

A Reserve Bank of Australia analysis published yesterday shows Australia’s labour force is on the move, with 440,000 people there changing jobs in the last three months, which is a one-decade high. That will create plenty of openings for New Zealanders.

Number of the day

China is still close to Russia, just not loud enough for secondary sanctions. Yet.

55% up - China’s imports of oil from Russia in May, from a year ago.

Ka kite ano

Bernard

PS: Apologies for the shortness today. I had a speaking engagement with the Auckland Chamber of Commerce.

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: The surge in oil and gas prices because of the war in Ukraine is derailing plans all over the world to wean consumers and businesses off fossil fuels in an effort to reduce emissions. Cost of living concerns and Germany’s fear of its exposure to Russian gas this coming winter sparked big moves over the weekend that set back emissions reductions plans by years.

In the news overseas overnight and this morning:

* Germany announced overnight it would legislate to reopen coal-fired electricity plants able to generate 10 gigawatts of electricity, which is enough to power 5% of its power needs, and therefore swap out that 5% from using Russian gas;

* US President Joe Biden is set to reduce its petrol or ‘gas’ taxes to reduce the costs of living for motorists and voters angry about US$5/gallon gas ahead of mid-term elections in November;

* The New South Wales Government announced a ban on coal exports over the weekend in an attempt to reassure consumers it could keep the lights on at reasonable prices in the wake of the energy market regulator taking control of wholesale electricity markets;

* The Bank of Japan decided late on Friday to plough ahead with its money-printing and bond-buying plans to keep longer term interest rates under a ceiling of 0.25%, making Japan the ‘odd man out’ of central banks hiking rates to control inflation;

* Bitcoin slumped over the weekend below the key US$20,000 level, adding to a 30% fall in the previous week and extending the slide from its November 2021 to 74%;

* Australian house prices could fall 30% from their recent peaks if the Reserve Bank of Australia hikes its official cash rate over 4%, according to a new forecast that uses a Reserve Bank of Australia model; and,

* Aotearoa-NZ’s hospitals are under intense stress this morning as an extended cold and wet snap threatens to escalate winter illnesses and further overwhelm A&E departments already turning people away.

There’s more detail and analysis on this below the paywall fold. I’ll be covering the post-cabinet news conference this afternoon in Wellington before flying to Auckland tonight ahead of my Tuesday morning quarterly breakfast briefing for Auckland Chamber of Commerce members with Chamber CEO Michael Barnett.

How the war is derailing the world’s climate ambitions

Germany’s Green Party economics minister was forced overnight to announce the Federal Parliament there would have to legislate to re-open 10 gigawatts worth of coal-fired power plants to reduce the nation’s dependence on Russian gas before the winter and reduce the cost of living pain from soaring gas prices.

Russia’s Gazprom cut gas supplies to Germany through its Nordstream pipeline by 60% last week, blaming delays in getting gas turbines back from maintenance in Canada due to sanctions. However Germany said the move was political and designed to increase political stress on the alliance backing Ukraine.

The plants will increase Germany’s dependence on coal by up to a third or about 5% of total electricity production over the next two years, allowing Europe’s largest economy to substitute coal for Russian gas. Germany wants to be in position by the end of the year to get through a Northern winter without having to use Russian gas. Before Russia invaded Ukraine, Germany relied on Russia for 55% of its gas, which in turn generated 15% of Germany’s electricity.

Useful links for a deeper look: Sky News UK, FT-$$$, Politico Europe

Eyeing November’s elections, Biden is set to slash ‘gas’ tax

US Secretary of Energy Jennifer Granholm and US Treasury Secretary Janet Yellen used appearances of US political talk shows overnight to suggest US President Joe Biden is preparing to slash Federal taxes on petrol and diesel.

Having initially played down cost of living concerns last year, Biden and his Cabinet are now scrambling to take some of the pain away at the pump as prices head toward US$5/gallon ahead of mid-term elections. Biden’s approval ratings have slumped in recent months as fast as ‘gas’ prices have risen ahead of the key US summer ‘driving season’ when American holiday-makers take to the interstate highways.

Useful links for a deeper look: CNN, NBC News

Quote of the day

A German Green minister reopens coal mines

“The situation is serious. It is obviously Putin’s strategy to upset us, to drive prices upwards, and to divide us . . . We won’t allow this to happen.

“This is bitter, but in this situation essential to lower the use of gas.” German Federal Economics Minister Robert Habeck.

Number of the day

The ‘gas’ tax that might get cut

US18.4c/gallon - This is the Federal ‘gas’ tax in the United States that Joe Biden is considering suspending. That’s the equivalent of about 44 NZ cents per litre. Aotearoa-NZ’s petrol taxes are normally worth around NZ$1.22c/litre, including GST. They are currently NZ 96c because of a 25c/litre temporary cut that has already been extended once. It is due to expire in mid August.

Like for like, without taxes and adjusting for the currency, US ‘gas’ costs around NZ$1.86/litre, while ours also costs NZ$1.86/litre.

Chart-Map of the day

Europe and North America brace for record heat waves

Some fun things

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: This week the US Federal Reserve hiked its key interest rate by a super-sized 75 basis points to fight inflation running at 8.6%. That unleashed fresh mayhem on global markets, including another slump in shares into bear market territory and the collapse of crypto-lender Celcius. Bitcoin fell more than a third.

Meanwhile, house prices in Aotearoa-NZ fell again, including Auckland City’s median price falling $360,000 or 23% in six months, the chances of a recession here rose and the Gib crisis morphed into shareholder complaints to Fletcher Building’s CEO. PM Jacinda Ardern replaced Building and Construction Minister Poto Williams with Housing Minister Megan Woods to deal with the crisis. Williams was also replaced by Chris Hipkins as Police Minister.

In this week’s live hoon webinar for paid subscribers, which is in recorded form above, Peter Bale and I talk with special guests independent economist Rodney Jones and Easy Crypto CEO Janine Grainger.

This is my weekly summary and sampler of the big news of the week I’ve covered on The Kaka for both free and paid subscribers. The public interest journalism I do daily on housing unaffordability, climate change inaction and poverty reduction is possible with the support of paid subscribers. Come and join our community by subscribing in full. Our full subscribers have allowed us to make The Kākā fully free for students, teachers and those working for advocacy groups and political parties in these areas. Anyone in these groups should just sign up to the free tier with their work, school, university, polytechnic or advocacy group emails and we’ll convert you to the full paid tier behind the scenes.

A reminder to free subscribers reading here that we have a special $30 a year deal for under 30s and anyone on a benefit. We also have a new special $65 a year deal for over 65s who are renting and reliant on NZ Superannuation.

The five things that changed this week

The Fed’s super-sized rate hike

The US Federal Reserve announced a 75 basis point rise in its official cash rate to a range of 1.50% to 1.75%, which was its biggest official interest rate hike since 1994. Global stocks fell sharply before and after the hike, which only a week earlier economists had expected to be a 50 basis point hike. The difference was surprisingly hot inflation data last Friday night showing US CPI inflation of 8.6% in the year to May.

Now we’ll find out how much pain the US economy and global markets can take before the Fed and other central banks have to stop the tightening, or even resume the money printing, as they have done repeatedly over the last decade whenever they tried to force investors to go ‘cold turkey’ on the easy and cheap money.

The Federal Reserve appears determined to squash inflation rather than rescue investors again, but the European Central Bank showed on Wednesday it doesn’t have the same resolve. Having only just signalled last week it would stop printing this month and would hike from below 0% next month, the ECB held an emergency meeting and pledged to keep printing to buy Italian and Greek Government bonds to stamp on a threatened return of the repeated European debt crises seen from 2009 to 2012.

We talked with Rodney Jones about the dramas through the week on global markets, and also looked again the Reserve Bank’s decision to keep lending at cheap rates to banks here, and to slowly unwind its money printing from 2020 and 2021.

Crypto-currency lender Celsius collapsed and Bitcoin fell almost a third

Celsius, an unregulated bank of sorts that lent crypto-currencies to crypto startups at double-digit interest rates, collapsed after a classic run on the bank. It froze withdrawals and is now trying to work out where the collateral for its loans is and whether it can pay back the crypto-currencies it has lent. Fellow crypto lender Babel Financial also blocked withdrawals and crypo-investing hedge fund Three Arrows Financial collapsed.

The collapses comes after the implosion of the Terra-Luna stable coin complex a month ago and coincided with near 30% fall in Bitcoin to a key support level at US$20,000 on Friday. We talked late on Friday with Easy Crypto CEO Janine Grainger on the hoon about the events in global crypto markets and how it had affected traders in Aotearoa-NZ.

Bitcoin fell another 15% to US$17,616 on Sunday morning.

House prices kept falling in Aotearoa-NZ

The Real Estate Institute released sales volumes and prices data for May showing prices nationwide down 6.0% from the peak in November to where they were in June 21. Prices, as measured by the REINZ’s House Price Index, were down 13.3% in Auckland City to where they were in October 2020. Prices were down 15.8% in Wellington City to where they were in October 2020.

In median price terms, Auckland City’s median price has fallen by $360,000 or 23% from a peak of $1.54m in November to $1.18m in May. The median price isn’t as representative a measure as the House Price Index because a change in the type of properties sold can skew the figures. For example, a surge in the sale of apartments relative to larger houses would skew the numbers lower. But still, that’s a loss of $60,000 a month or $2,000 a day.

In Wellington City, the median price fell 14.6% to $988,000 in May from a peak of $1.157m in October.

The Gib crisis moves to Fletcher Building’s board room

After last week’s loudly-announced decision by Simplicity Living to dump Fletcher Building as its plasterboard supplier, Fletcher Building’s Wallstone Wallboards announced it would import one million square metres of plasterboard that would be available from July. The imports by the maker of Gib, which has a 94% market share, represents an increase of about 7-8% of annual supply.

By Thursday, MBIE and Auckland Council were reassuring ministers and the public that the largest consenter was approving non-Gib plasterboard. By Friday, the Shareholders Association and Simplicity, which owns 0.8% of Fletcher Building worth $35m, met in person with Fletcher CEO Ross Taylor. It didn’t go well from the shareholders’ point of view.

A recession in Aotearoa-NZ by the end of 2022?

Stats NZ reported this GDP fell 0.2% in the March quarter and was up 1.2% in Q1 from the same quarter a year ago. GDP in the year to the end of the March quarter was up 5.1%. The result was below market expectations that ranged from no growth to as high as 0.7% growth by the Reserve Bank in its April Monetary Policy Statement. Covid illness and the after-affects of the lockdowns in the second half of 2021 were blamed.

Economists said the result hadn’t changed their views on what the Reserve Bank would do with the Official Cash Rate on July 13 because the labour market and inflation pressures remained very tight. They still see another 50 basis point hike to 2.5%, although markets have been flirting with the prospects of a 75 basis point hike in recent days.

Most see GDP rebounding around 1.0% in the June quarter to avoid the technical definition of a recession, which is two quarters of lower GDP in row. However, BNZ Economist Stephen Toplis said on Thursday a mild recession was possible later this year.

Other places I’ve been this week

Part of the deal I have with paid subscribers is that I’ll spread my analysis and reporting on the economy, housing, climate and poverty as widely as I can through interviews and panel appearances on publicly available media, such as Newshub’s The Nation, Waatea News, my When the Facts Change podcast via The Spinoff and The Working Group.

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: Global stocks resumed their slump into bear territory this morning, discarding yesterday’s surprise gains after the Fed’s jumbo rate hike. Fears about big rate hikes forcing a global recession returned as both the Bank of England and the Swiss National Bank hiked rates overnight. British inflation is set to hit 11% by October.

Elsewhere in the news overnight and this morning here and overseas:

* forecasts of a mild recession in Aotearoa-NZ later this year emerged after a surprise 0.2% fall in March quarter GDP was reported yesterday;

* concerns are growing about hospitals being swamped by winter flu, with one patient with a headache who was turned away from Middlemore dying of a brain hemorrhage overnight;

* Fletcher Building promised to supply an extra one million square metres of Gib by July ahead of a crisis meeting with shareholders later today;

* New South Wales’ Government told Sydney residents overnight to turn off their power for two hours to avoid blackouts caused by coal and gas shortages;

* Russia further squeezed gas supplies to Germany and Austria overnight, forcing European gas prices up another 30%; and,

* Revlon went bankrupt overnight because its Elizabeth Arden and Revlon brands are being outsold by other brands linked to Rihanna and Kylie Jenner.

Paid subscribers can see more analysis, source links and detail below the paywall fold, along with the quote, number, comment and chart of the day. I’ll also be sending invites to paid subscribers to our weekly Ask Me Anything session at midday and our weekly hoon live webinar at 5pm with special guests. The link to join the webinar is below the fun things.

The global selloff resumes

The S&P 500 and Nasdaq were down 3% and 4% respectively by 6.30 am NZT as investor fear returned about fast rate hikes causing recessions. European stocks also fell 2-3% after the Bank of England hiked its cash rate by 25 basis points to 1.25% and the Swiss National Bank surprised investors with a 50 basis point hike, albeit to minus 0.25 from minus 0.75. Stock markets gave up all their gains from their surprise rally after the Federal Reserve’s jumbo 75 basis point hike yesterday morning.

Elevating the fears that central banks will have to clamp down even harder on economic growth to get inflation under control, the Bank of England forecast annual inflation there would rise to 11% by October.

There were also fresh signs a US recession is likely later this year or early next year. US housing starts fell 14.4% to 1.5m in May from April, which was below the 1.8m pace in April and below economists’ forecasts of around 1.7m. The US house-building sector has come off the boil sharply in recent months as the US 30-year mortgage rate, which is closely linked to US Treasury yields and expectations of future inflation, has jumped from 3% to almost 6% in six months.

Russia squeezes European gas flows even more

Germany protested again overnight after Russia’s Gazprom further tightened the screws on gas flowing through its Nord Stream One pipeline. Gazprom cut supplies to Germany by 30% on Wednesday and extended those cuts to 60% yesterday. It blamed technical problems linked to some Siemens gas turbines having to be sent to Canada for repairs, and then being held in Canada because of its sanctions against Russia.

Germany sees the move as an attempt to squeeze the European economy to try to break an increasingly shaky consensus of support behind Ukraine. Deputy Chancellor Robert Habeck appealed on Twitter for Germans to do whatever they could to reduce energy use. Gazprom also cut its supplies to Italy, Slovakia and Austria.

So far, the cuts have yet to cause blackouts or factory shutdowns because much of Northern Europe is bathed in summer heatwaves that mean boilers and heaters are off, and air conditioners are not as widely used in Northern Europe.

European gas prices rose another 30% overnight to €146/megawatt-hour and have risen 70% this week, adding to the inflation and recession fears sweeping Europe’s financial markets.

A recession here by the end of the year?

Stats NZ reported yesterday GDP fell 0.2% in the March quarter and was up 1.2% in Q1 from the same quarter a year ago. GDP in the year to the end of the March quarter was up 5.1%. The result was below market expectations that ranged from no growth to as high as 0.7% growth by the Reserve Bank in its April Monetary Policy Statement. Covid illness and the after-affects of the lockdowns in the second half of 2021 were blamed.

Economists said the result hadn’t changed their views on what the Reserve Bank would do with the Official Cash Rate on July 13 because the labour market and inflation pressures remained very tight. They still see another 50 basis point hike to 2.5%, although markets have been flirting with the prospects of a 75 basis point hike in recent days.

Most see GDP rebounding around 1.0% in the June quarter to avoid the technical definition of a recession, which is two quarters of lower GDP in row. However, BNZ Economist Stephen Toplis said last night a mild recession was possible later this year. See more in Chart and Quote of the day below.

Quote of the day

A warning of a mild recession

“We're just starting to feel the impact of rising interest rates, but those interest rates are going to keep going up. And it's going to take a while for them to really flow right through the economy.

"Most developed countries in the world are experiencing high inflation, rising interest rates and if everyone attacks it in the same way at the same time then that risks generating a much nastier world for us.” Stephen Toplis on RNZ’s Checkpoint last night.

Number of the day

A fall in real disposable income

Down 0.5% - Stats NZ’s GDP stats include real gross national disposable income (RGNDI), which measures the volumes of goods and services that New Zealand residents have command over - ie the real purchasing power of the country’s disposable income. It takes into account changes in the terms of trade (the relative prices of our imports and exports, the country’s net investment income, and net transfers to the rest of the world in the form of dividends and interest payments).

RGNDI fell 0.5% in the March quarter because GDP, net transfer flows, and net investment income on our international investments all decreased, overwhelming a slight improvement in terms of trade. The 0.5% fall in RGNDI, coupled with a population rise of 0.1% also meant RGNDI per capita fell 0.5%. RGNDI rose 4.7% in the year to March and was up 4.3% in the March quarter from the same quarter a year ago.

Chart of the day

A recession before the election?

A fun thing

Ka kite ano

Bernard

PS: Here’s the link for paid subscribers to join the ‘hoon’ live webinar at 5pm today.

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: The big global monetary policy tightening has started in earnest, but will it stick? The US Federal Reserve announced its biggest official interest rate hike since 1994 this morning. US stocks, paradoxically, rallied with relief it wasn’t worse, although only after a big selloff earlier in the week that was prompted by hints of the big Fed hike that reset expectations.

Now we’ll find out how much pain the US economy and global markets can take before the Fed and other central banks have to stop the tightening, or even resume the money printing, as they have done repeatedly over the last decade whenever they tried to force investors to go ‘cold turkey’ on the easy and cheap money.

The Federal Reserve appears determined to squash inflation rather than rescue investors again, but the European Central Bank showed overnight it doesn’t have the same resolve. Having only just signaled it will stop printing this month and will hike from below 0% next month, the ECB had to hold an emergency meeting overnight and pledge to keep printing to buy Italian and Greek Government bonds to stamp on a threatened return of the repeated European debt crises seen from 2009 to 2012. Paid subscribers can see more of my analysis on the monetary policy pivots below the paywall fold and in the podcast above.

Elsewhere in the news here and overseas this morning:

* FDA set to approve Pfizer vaccine for kids as young as six months NBC News;

* Russia cuts gas supplies to Germany by 40% and to Italy by 15% for ‘repairs’ AFP;

* Xi tells Putin he wants to help find settlement of Ukraine War CNBC;

* Truce called in gang war between Killer Beez and Tribesmen NZ Herald; and,

* Mediaworks CEO tells staff Sky TV merger talks are off. Newshub

I’ll be watching out later today for March quarter GDP figures for Aotearoa-NZ, which some see showing no growth in a quarter badly affected by the late 2021 lockdowns.

Finally, it begins in earnest

This morning US Federal Reserve massively ramped up its attempts to slow inflation running at 8.6% in the world’s largest economy. The Fed hiked its Federal Funds Rate (its version of our Official Cash Rate) by 75 basis points to a range of 1.5% to 1.75%. Our OCR is currently 2.0% and is expected to be lifted to 2.5% on July 13. The range thing is normal for the Fed.

The Fed’s hike is the biggest by the Fed since 1994 and if it had been done a week ago it would have profoundly shocked global investors and markets. But the Fed appears to have nudged and winked its way to a series of articles on Monday by the Wall St Journal and others that reset expectations for the hike from 50 basis points to 75 basis points. That was handy for the Fed because it got the ugly market reaction to higher interest rates out of the way on Monday and Tuesday.

The irony is the market reaction today to the announcement at 6am NZT was one of relief. The S&P 500 was up 1.6% and the US 10 Year Treasury yield was down 13 basis points at 3.34% as of 8am NZT. That’s still worse than before the nudges and winks on Monday, but means the initial reaction looked positive.

Part of the reason for the relatively positive initial reaction was the Fed’s new ‘dot plot’ of forecasts by Federal Reserve voting members showed a rise in the Fed Funds Rate to ‘only’ a median of 3.4% at the end of this year and 3.8% at the end of next year, before falling back to 3.4% by the end of 2024.

‘This super-sized hike was unusual and may not be repeated’

To be fair, that median for the end of this year was up from the dot plot published in March showing a rise to 1.9% this year and 2.8% by the end of next year. However, market forecasts before the decision and the release of the dotplot were for the Fed Funds rate to rise to 4.0% this year.

Also, Federal Reserve Chairman Jerome Powell downplayed talk of even bigger hikes in the coming meetings, suggesting the next one might even go down to 75 basis points. Some of the more fearful economists had suggested the Fed might even unleash 100 basis points earlier this morning.

“Clearly, today’s 75-basis-point increase is an unusually large one and I do not expect moves of this size to be common. From the perspective of today, either a 50-basis-point or a 75-basis-point increase seems most likely at our next meeting.” Federal Reserve Chairman Jerome Powell talking at a news conference after the decision.

Financial markets were relieved even bigger hikes appeared off the table for now.

“There was a hawkish risk that the market would take 75 basis points and price it in to multiple consecutive meetings. The fact Powell came out against that idea was read as risk on.” BMO Capital Markets strategist Ben Jeffery quoted in the FT-$$$

So what now? We wait to see whether the global market reaction lasts, or whether a closer look spooks investors again. Much of the pain has already been delivered to the real economy through a surge in 30-year fixed mortgage rates from 3% at the end of last year to 6% this morning (Next) That in turn is hammering new home starts and existing home sales in the United States.

The Fed seems determined right now to look through the latest ‘Taper Tantrum’ and go after inflation with a hammer, but we’ll see. It has blinked before and this unwinding of stimulus is monumental compared to the failed attempts in 2013 (the taper tantrum) and in 2019 (when the Fed had to cut rates after a mild tightening and small amounts of Quantitative Tightening) forced it to relent with fresh rate cuts and money printing. That printing accelerated massively when the Covid pandemic hit.

The unwinding actually started today

It didn’t get as much attention as the rate hike, but the Federal Reserve formally began the process of unwinding its US$9t worth of money printing today. It started its already-foreshadowed sale back of US$47.5b/month worth of bonds back into the bond market. This rate of unwinding lasts for three months and then it is due to double to US$95b/month or an annual rate of US$1.1t. Many fear the shock of the ‘un printing’ will seize up bond markets. They are already in the most stress since March 2020 when the pandemic hit.

We’re in the middle of another ‘Taper Tantrum’ that the Fed seems determined to ignore because it has pledged to get on top of inflation. We’ll see. It’s blinked before.

The Europeans blinked before they had even started

As if to emphasise that this tightening is far from locked in or over, the European Central Bank was forced to have an emergency meeting overnight and announced it would intervene to buy Italian, Greek and Spanish Government bonds again with a special ‘defragmentation’ facility to avoid another version of the debt crises that wracked European financial markets from 2009 to 2012.

The ECB announced a pivot to tightening and the end of its still-ongong money printing programme just last week. Its deposit rate is still minus 0.5%. As I mentioned last week, Europe is much more vulnerable to a tightening because the southern European ‘PIGS’ of Portugal, Italy, Greece and Spain’ are still deep in public debt and Europe’s banks did not clean house after the Global Financial Crisis of 2008/09 in the way the US and British banks did (thanks largely to recapitalisations and rescues by British and US taxpayers).

For example, ECB board member Isabel Schnabel said this week (bolding mine) the ECB would not hesitate do ‘whatever it takes’ to keep the euro together. Analysts estimate it has a war chest of €200b to use buying southern European bonds.

“While the flexible allocation of PEPP (Pandemic Emergency bond Purchase Programme) reinvestments is one way to address fragmentation, our commitment is stronger than any specific instrument. Our commitment to the euro is our anti-fragmentation tool. This commitment has no limits. And our track record of stepping in when needed backs up this commitment.” ECB board member Isabel Schnabel

Meanwhile, the Bank of Japan is still printing money hand over fist and has actually re-invigorated its money printing to buy bonds in recent weeks, driving the yen down to multi-decade lows this week as investors shuffle the freshly printed cash out into other economies.

It’s not hard to see why investors don’t really believe the money printing is over yet.

HODL and BTFD again?

My view - The broad assumption among economists and market players is that ‘this time is different’ because the Fed in particular, and even the ECB, can’t fall back on the excuse that inflation is low and therefore the money printing to rescue stock, bond and bank investors doesn’t do any harm to economy. (Although there’s been plenty of harm done to the social contract over the last decade after repeated central bank and Government bailouts for asset owners that has finally created real wage deflationary shocks for workers who rent.)

This assumption that markets won’t be allowed to fall much by central banks because ‘there’s always a bailout’ has fueled the HODL (Hold On For Dear Life) and BTFD (Buy the F…ing Dip) movements of retail investors in particular over the last three years.

This time inflation is running rampant and central banks are supposed to be primarily about keeping inflation low, rather than keeping asset owners whole. We’ll see. My view is this very-fast monetary policy tightening is going to unleash a world of pain in financial markets and a hard stop to economic growth in the United States and Europe. Very quickly, unemployment is likely to start rising again and the inflation genie will disappear back into its bottle with a fright. Of course, that depends on the war in Ukraine ending quickly, energy prices falling and no new pandemic or geo-political shocks to supply chains. President Xi Jinping’s comments overnight about wanting to help Russia into a ‘settlement’ of the Ukraine war suggests China has had enough of Russia’s malarkey.

My expectation is the central banks will have stopped hiking by the end of the year because most of the developed world will be in or near recession. The wild card is what happens in China. If President Xi Jinping persists with his zero Covid policy and there are a cascading series of brutal lockdowns for the rest of the year, then that global economic slowdown could come even faster.

In other geo-political, economic, business & markets news

* US retail sales drop 0.3% in May unexpectedly - YahooFinance

* China industrial output and retail sales data for May better than forecast - Reuters

* Automated driving tech a factor in hundreds of US car crashes - NPR

* Apple buys streaming rights to US Major League Soccer for US$2.5b - Deadline

Scoops and news of note here in Aotearoa-NZ this morning

Verrall confirms pre-departure tests for overseas flights end June 20 - RNZ

Simplicity Living says trademarking of coloured Gib anti-competitive - RNZ

Auckland Council starts approving non-Gib products in new homes - RNZ

Heritage listing saves Kāinga Ora flats on Wellington’s Dixon St - DomPost

Ardern says Govt won’t help Christchurch fund stadium cost blowout - The Press

Useful longer reads

Quote of the day

President Xi tells everyone he wants the Ukraine war over

“All parties should push for a proper settlement of the Ukraine crisis in a responsible manner. China is willing to continue to play its due role in this regard.” President Xi quoted in a readout of a call he had overnight with Russian President Vladimir Putin.

Biden attacks oil major super-profits in refining

“I understand that many factors contributed to the business decisions to reduce refinery capacity, which occurred before I took office. But at a time of war, refinery profit margins well above normal being passed directly on to American families are not acceptable.” US President Joe Biden in letters sent overnight to Marathon Petroleum, Phillips 66 and Chevron.

Number of the day

What happened when Russia squeezed its gas supplies

22% - Gas prices in Europe rose 22% to €118 per megawatt hour after Russia reduced gas supplies to Germany through the Nordstream 1 pipeline by 40% and to Italy by 15%, ostensibly to repair the line. Germany accused Russia of political motives for the squeeze.

Chart of the day

Underneath the housing market’s fall

This chart via a briefing note from Kiwibank’s Economists shows how the median days-to-sell rose in May to 40 days and is now over the long-run average of 39 days. Meanwhile, listings also rose in the Real Estate Institute’s data released yesterday to pre-Covid levels. The national median price is now down 6% from its November peak, while Auckland City and Wellington City are down 10-12% from their peaks.

Fun things

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: Global markets are in meltdown mode this morning as renewed fears about hotter-than-expected US inflation and central bank rate hikes slammed stock and bond prices in China, Europe and the United States. Bitcoin crashed 18% overnight after crypto lender Celsius blocked withdrawals and Binance had an outage.

Elsewhere in the news this morning:

* UN Human Rights Commissioner Michelle Bachelet, 70, announced overnight she would not seek a second term from August, creating the sort of opening that a Helen Clark or Jacinda Ardern could go for if they were that way inclined;

* Economists surveyed by the FT-$$$ see a near-70% chance of a US recession next year; and,

* Fletcher Building faces a grilling from major shareholder Simplicity later this week over its Gib supply crisis, while new Building and Construction Minister Megan Woods (replacing Poto Williams in yesterday’s Cabinet reshuffle) will also address the crisis.

I have decided to put this one out to all publicly, partly as a reminder the Dawn Chorus is here for paid subscribers, and because of the magnitude of the shifts overnight and yesterday. Many thanks to paid subscribers, who support my ability to do this work.

In geo-politics, the global economy, business and markets

Concerted selloff - Chinese, European and US stocks and bonds cratered overnight on growing investor concern that faster-than-expected US and European inflation figures could force the world’s two biggest central banks to rapidly hike their official interest rates much-more-rapidly than previously assumed in coming weeks. As of 6.30 am NZT, the S&P 500 was down 3.7%, the Nasdaq was down 4.5% and the US 10 year Treasury bond yield had jumped 25 basis points to 3.40%, which is its highest level since 2011. The fall in stocks puts the US market into bear market territory, which is down 20% from a peak. Earlier European stocks closed down 2.4% and Hong Kong stocks closed down 3.3%. CNBC

100 bps Fed hike? - Financial markets are now pricing in the chance the US Federal Reserve could decide on Wednesday night to put up its Federal Funds Rate by 75 basis points to a range of 1.5% to 1.75%. Previously, the consensus was that only a 50 basis point hike was necessary. One or two outliers are even suggesting a 100 basis point mega-hike is possible when the Fed’s decision is announced on Thursday morning NZ Time. Reuters

Crypto meltdown - Bitcoin’s price crashed as much as 20% this morning to under US$24,000 for the first time since December after, a crypto-currency lender, blocked withdrawals and Binance, the world’s biggest crypto-currency exchange, suffered a ‘stuck transaction’ outage for several hours. The total market value of crypto-currencies fell below US$1t and is now US$2.2t below its November 2021 peak. Reuters

So what? - Markets are going into meltdown mode now over the fear that higher inflation will stop the usual central bank response to a downturn or market slump of lowering interest rates. The crypto-currency world is in even worse shape, with an effective run on crypto banks now a regular thing. Last night’s collapse of Celcius does not bode well. There is a growing risk now of some sort of GFC version 2.0 that is driven by collapses in the crypto sector, emerging market crashes and severe stress on Europe’s banking system as investors dump their Italian, Greek and Spanish bonds.

Buckle up. This matters here because a big markets meltdown and bigger chances of a global recession may force the Reserve Bank to pause its own rate hikes, which would see mortgage rate hikes slowing down or stopping. See more in quote and chart of the day below.

Briefly elsewhere this morning

Ukraine suffers big losses as Russia advances in the east - BBC

China scrambling to contain Beijing super spreader event - Reuters

EU eyes legal action after UK scraps Brexit clauses over Northern Ireland - Reuters

New South Wales set to swap land tax for (existing) stamp duties - The Guardian

Scoops and news of note here in Aotearoa-NZ

Fletcher faces grillings - Major shareholder Simplicity is set to grill Fletcher Building’s board on Friday over the Gib supply crisis, which has crippled building projects and forced dozens of smaller builders and developers into receivership. PM Jacinda Ardern also said yesterday new Building and Constructions Minister Megan Woods, who is replacing Poto Williams, would also be able to more actively address the issue, given Woods is also Housing Minister and ultimately responsible for Kāinga Ora’s massive build programme, and is therefore a major Gib buyer.

Defensive stance - Fletcher Building CEO Ross Taylor (no not the cricketer) went out to do a round of interviews yesterday to defend Fletcher’s position. He told NZ Herald-$$$’s Anne Gibson that Gib stockpiling was partly to blame and Fletcher had been surprised by the surge in consents to 50,000 last year from 30,000, as had others. Taylor also spoke to Lisa Owen on RNZ’s Checkpoint about the Gib crisis, saying there was no bias in the industry towards plasterboard. The Australian-$$$’s Bridget Carter also spoke to Taylor, who is from Australia, about Fletcher’s bullish profit outlook and its Australian growth plans.

So what? - This is a perfect storm for Fletcher Building’s social license to operate. Amid an ongoing building materials market study, the political temperature is rising over Fletcher’s 95% dominance of the plasterboard market and how shortages are crippling large swathes of the building sector, causing collapses and delays that will stifle the overall economy’s momentum and threatens to unravel growth in what has been the economy’s most robust sector. Ross Taylor should have a chat with Foodstuffs CEO Chris Quin to see what it’s like to lose that social license.

Briefly elsewhere this morning

West Coast blames Govt for seawall funding shortfall - The Press

House asking prices drop 2% on Trade Me in May, biggest drop ever - Stuff

Commissioners dump plan to put houses on Tauranga Racecourse - Stuff

For the record yesterday

A major-minor reshuffle - PM Jacinda Ardern announced what her office described yesterday as a minor reshuffle that saw:

* Poto Williams stripped of the Police and Building and Construction, but somehow remaining in Cabinet with her 10 ranking intact (she was given the Conservation and Disability Ministries);

* Kris Faafoi leaving Cabinet and Parliament altogether to spend more time with his family;

* Kiri Allan promoted into Cabinet and given Faafoi’s Justice portfolio (already in cabinet);

* Chris Hipkins given Police and relinquishing Covid 19 (to Ayesha Verrall) and parts of his Education portfolio (to Jan Tinetti);

* Michael Wood given Immigration and Willie Jackson given Broadcasting;

* Kiri Allan and Priyanca Radhakrishnan promoted into Cabinet from being ministers outside Cabinet;

* Kieran McAnulty given Emergency Management and Racing ministries outside cabinet, while also becoming Associate Local Government minister; and,

* Trevor Mallard is leaving as Speaker to become an ambassador in Europe (thought to be Ireland) and will be replaced by Deputy Speaker Adrian Rurawhe.

So what? Ardern realised the Government is in deep trouble over perceptions of being soft on crime and not being in control of gang violence and drive-by shootings. She also acknowledged the Gib crisis and that heavy-hitter Megan Woods needs to grab the issue off Williams.

The reshuffle, which was not minor, but also not major, has strengthened the roles of the ‘kitchen Cabinet’ around Ardern and Grant Robertson, with Woods and Wood being given the troublesome and potentially dangerous ministries of Building and Immigration respectively. Chris Hipkins’ reputation as a ‘Mr Fixit’ of Cabinet is concreted in with his assumption of the Police portfolio.

But the biggest news may be Ardern’s comment that she plans a bigger reshuffle early next year. The biggest wildcard (and I know nothing specific to back up this possibility) would be the removal of herself in the same way (and similar timing) in which John Key handed over to Bill English before the 2017 election. There is a plumb UN job up for grabs. Just saying…

That would give Grant Robertson a clear run to the election with the flexibility to propose a wealth tax, which he has not ruled out for himself, even if the PM has. This is purely speculative on my part, but stranger things have happened.

Useful longer reads

Todd Niall has a good piece in Stuff this morning explaining how political disunity in Auckland is hurting its climate change efforts.

Quote of the day

This reveals a lot about investor thinking

“There is very little chance of the Fed pivoting to support financial markets until there is a trend of very meaningful economic disappointments.” Seema Shah, chief strategist at Principal Global Investors, via FT-$$$

Number of the day

Russia making more now from oil than before the war

€93b - Russia earned €93b from fossil fuel exports in the first 100 days of the war, the Center for Research on Energy and Clean Air reported overnight. Just over 60% of the revenues came from the European Union.

Chart of the day

How market expectations of Fed hikes have changed

Comment of the day on The Kākā

A truly radical idea for a money-printing followup

“If the RBNZ lends to commercial banks via FLP, what stops the RBNZ having an offshoot that provides retail banking services?.” Neil on Monday’s Dawn Chorus.

Spookies, profundities, curiousities and feel-goods

Fun things

Ka kite ano

Bernard

PS: I have corrected that Kiri Allan was promoted into cabinet. She was already there. My apologies and thanks to readers for pointing this out. I’ve also clarified that New South Wales is looking at swapping its existing stamp duties for a land tax, not the other way around, as the original headline could be read to me.

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TLDR: This week our Reserve Bank detailed its plans to slowly unwind its $55b of Covid-era money printing, the European Central Bank finally stopped its money printing to fight inflation of over 8%, the United Nations warned the war in Ukraine was unleashing a global hunger and poverty catastrophe, and Simplicity Living cancelled its orders to buy Gib from Fletcher Building.

Elsewhere: US inflation figures overnight was higher than expected, which triggered another slump in share prices and fears the US Federal Reserve will have to hike interest rates much faster and higher than previously thought. Meanwhile, the Reserve Bank of Australia surprised most investors and economists earlier this week by hiking a full 50 basis points. That slammed Australian bank share prices and prompted ANZ to put up its mortgage rates here.

In this week’s live hoon webinar for paid subscribers, which is in recorded form above, Peter Bale and I talk with special guests Professor Robert Patman from the University of Otago about the latest geo-political news and Simplicity CEO Sam Stubbs about financial market ructions and Simplicity Living’s decision to cancel its orders to buy Gib from Fletcher Building.

This is my weekly summary and sampler of the big news of the week I’ve covered on The Kaka for both free and paid subscribers. The public interest journalism I do daily on housing unaffordability, climate change inaction and poverty reduction is possible with the support of paid subscribers. Come and join our community by subscribing in full. Our full subscribers have allowed us to make The Kākā fully free for students, teachers and those working for advocacy groups and political parties in these areas. Anyone in these groups should just sign up to the free tier with their work, school, university, polytechnic or advocacy group emails and we’ll convert you to the full paid tier behind the scenes.

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The five things that changed this week

The Reserve Bank confirmed a slow unwinding of its money-printing

The Reserve Bank detailed on Thursday its plans to unwind its $55b programme of money printing relatively slowly over the next five years to avoid disrupting the economy and asset markets. It also says it might have to print again and wants to sideline the issue of growing inequality between renters and home owners in its current review of monetary policy.

I argued in Friday’s Dawn Chorus that the Reserve Bank decisions in early 2020 to unleash a credit boom that inflated the housing market by 45% to save the economy should be reviewed with an eye on the long-term effects of money printing on inequality. Right now, both the Government and the Reserve Bank are hoping few will notice or care about the $1t transfer of wealth to asset owners engineered during Covid without debate.

Finally, the Europeans stopped printing

The European Central Bank took a hawkish turn against inflation on Thursday night, announcing after its monthly monetary policy meeting it would stop printing money later this month and hike next month by 25 basis points. That would be the ECB’s first hike in 11 years. Its main deposit rate is actually still -0.5%. The ECB said it expected to hike by more at its September meeting, which markets saw as meaning a 50 basis point hike is likely. It forecast inflation wouldn’t fall from 6.8% this year to its 2% target until well into 2024.

So what? - It’s astonishing to think that the ECB still hasn’t stopped quantitative easing yet, which means it is still creating its own cash to buy European Government bonds, especially the ones from the PIGS (Portugal, Italy, Greece and Spain). Remember the PIGS? And the ECB pledging in 2012 to do ‘whatever it takes’ to stop the euro zone breaking up? It’s still doing that, partly because that last rate hike in 2011 was premature and destabilised the euro zone economies. So that’s why the pivot to stop printing and start hiking overnight matters.

Behind the curve - For comparison’s sake, our Reserve Bank stopped printing money and buying bonds in the middle of last year and started hiking in October. Our official cash rate is now up to 2.0% and is expected be hiked by another 50 basis points on July 13. Our inflation is about the same as Europe’s, but our unemployment rate is half that of Europe’s at 6.8%.

Brace for fallout - Even the anticipation of this ECB pivot from very dovish to slightly hawkish has caused ructions in financial markets. That’s because the euro zone economies remain much weaker than others in the developed world and its banking system is still under-capitalised. The ECB also has to extricate itself from being the largest owner of PIGS bonds and avoid another Greek-style meltdown in financial markets. That’s why the ECB went out of its way in its statement overnight to reassure investors it would keep buying Greek bonds to stop another collapse.

Mamma Mia - Italy’s 10 year bond yield jumped 27 basis points to 3.68%. It has tripled in the last year. It has also risen sharply relative to Germany’s 10 year yield at 1.51%, which has itself risen faster in the last 90 days than at any time in this century. This gap or ‘spread’ between Italy’s 10 year yield and the German ‘bund’ is a key indicator of stress and fear inside Europe’s financial system. It rose to a two-year high this week. And then there’s the not-so-small matter of the most destructive war since World War Two raging on the edge of the euro zone…

On meltdown alert - Plenty of players in financial markets have feared some sort of repeat of the Global Financial Crisis at various points since the Covid pandemic broke out in February 2020. Central banks acted preemptively and globally to throw all sorts of money-printing kitchen sinks to avoid a repeat of the 2008 GFC, which forced central banks and Governments to bail out US banks and UK banks, and to prop up European banks. The US and British banks have since been reorganised and recapitalised, but the European banks have mostly just staggered on without having to have proper cleanouts.

The excuses evaporate - The ECB’s ‘whatever it takes’ interventions in 2012 helped the European banking system stave off its ‘Minsky Moment.’ Here’s a useful Enda Curran backgrounder via WaPo on what a Minsky Moment is. But those interventions through money printing to buy the weakest European government’s bonds and hold up their values on bank balance sheets was only possible because European inflation was painfully low and the ECB knew it could stimulate through money printing without having to worry about a damaging inflation breakout. Now there is nowhere for the ECB, European banks and the PIGS to hide. That’s why many fear this pivot to rate hikes and the end of ECB money printing could trigger a European version of the 2008 GFC. As if we (and the Europeans in particular) don’t have enough to worry about…

UN warns of global food and poverty catastrophe

‘A food catastrophe’ - The United Nations warned on Wednesday that the war in Ukraine and the after-effects of the Covid Pandemic had turned into a perfect storm of higher food, energy and finance costs for 1.2b workers. It issued a briefing note showing how higher energy and food costs, along with blockades on fertiliser and wheat exports via the Black Sea, could turn a food crisis this year into a food catastrophe next year.

UN Secretary General Antonio Guterres called again for a lifting of the blockades in the Black Sea and said the developed world would have to ensure emerging market debt crises can be resolved. See more below in chart and quote of the day.

“The cost-of-living crisis could spark a cycle of social unrest leading to political instability.” UN trade chief Rebeca Grynspan in a briefing note on what the UN calls the greatest cost of living crisis of the 21st Century.

The note explains the negative feedback loops and spirals of prices and supply that are worsening the situation, driving more than a third of a billion people into starvation territory. The bolding is mine.

“Countries and people with limited capacity to cope are the most affected by the ongoing cost-of-living crisis. Three main transmission channels generate these effects: rising food prices, rising energy prices, and tightening financial conditions.

“Each of these elements can have important effects on its own, but they can also feed into each other creating vicious cycles - something that unfortunately is already starting. For instance, high fuel and fertilizer prices increase farmers’ production costs, which may result in higher food prices and lower farm yields. This can squeeze household finances, raise poverty, erode living standards, and fuel social instability.

“Higher prices then increase pressure to raise interest rates, which increase the cost of borrowing of developing countries while devaluing their currencies, thus making food and energy imports even more expensive, restarting the cycle. These dynamics have dramatic implications for social cohesion, financial systems and global peace and security.” UN briefing note.

I think the note is this week’s must-read. It includes this chart showing how even-faster-rising fertiliser prices were worsening the feedback loops.

Simplicity Living cancelled its orders for Gib from Fletcher Building

‘We’re not taking it any more’ - Simplicity Living, which is building 550 build-to-rent- homes in Auckland, announced on Thursday night it had cancelled its orders for Gib plasterboard from Fletcher Building and was importing an alternative from Thailand for 40% cheaper per-sheet of plasterboard board, even after shipping costs.

Simplicity Living MD Shane Brealey blasted Fletcher Building over the Gib crisis.

"It's tragic that it takes only eight weeks to get much needed plasterboard from South Asia, but eight months from south Auckland. By looking at building consents, Fletchers must have known there would be a shortage of plasterboard at least 12 months ago. So why aren’t they doing what we’ve just done?” Simplicity Living MD Shane Brealey in a statement

We asked Simplicity CEO Sam Stubbs onto the weekly hoon to talk in more depth about the decision and he explained how the Gib shortages were hammering so many small builders, who were too dependent on Gib-driven building techniques and too fearful that using an alternative would mean their homes weren’t approved by Council building inspectors, who are themselves hyper-focused on avoiding any new products that might expose councils to ‘last-man-standing’ building quality claims (as happened with leaky buildings that used James Hardie’s Hardietex cladding).

The discussion is fascinating. I’d recommend listening to the start, where Peter explains the origin of the Gib brand name, and from 44:18 onwards where we discuss the Gib crisis and the way it is scuppering large sections of the building industry.

Don’t expect a grocery duopoly breakup pre-election…or maybe ever

High bar for breakup - MBIE released a Cabinet paper on Wednesday that it prepared for Commerce Minister David Clark on The Government’s response to the Commerce Commission’s recommendations on dealing with (or to…) the supermarkets duopoly. MBIE’s advice included slightly more detail on the breakup option including talking about retail divestment rather than structural separation, but noted there would be a high bar for action and hardly any preparatory analysis had been done. Consultation would not begin until early next year.

Here’s the key details in the cabinet paper on Clark’s actions and officials’ timelines (bolding mine):

“Retail divestment would involve divestment of existing retail stores or banners by major grocery retailers to establish new grocery retailers. There is a high burden of proof to be met before decisions on retail divestment can be taken as the Commission did not carry out a detailed cost-benefit analysis.

There are several considerations to be worked through further, including: considering possible implementation options in detail; undertaking policy design and a detailed cost-benefit analysis of retail divestment options; considering potential risks and issues; understanding the potential impacts of retail divestment on retailers’ operations, economies of scale, property rights and supply models; and, determining how interventions would be enforced. MBIE on Page 15 in the paper

Officials will consider these matters in detail between now and September 2022. I will then report back to Cabinet in October 2022 with a detailed cost benefit analysis on retail divestment options and to seek decisions on whether to proceed with further steps on retail divestment. Based on this work, implementation options could then be developed for public consultation in early 2023.” David Clark on Page 15 in the paper.

So what? I’d be surprised if any concrete breakup plans or action emerge before the next election. The grocery duopoly can happily stall action ahead of a likely change of Government. National has said it supports the creation of a regulator and mandatory codes for wholesale access and suppliers, but has been cautious about supporting a breakup. I think that would be highly unlikely, given National stalled Section 36 reform from 2009 to 2017 that would have given the Commerce Commission more powers.

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