The Kākā by Bernard Hickey

TLDR: Bernard Hickey and the NZ Herald’s senior political reporter Thomas Coughlan talk through the events in the political economy this week in the podcast above, including closer looks at:

* Te Waihanga’s estimate of our infrastructure deficit and how much more we’d need to build to cope with future population growth, improve our water quality and prepare for climate change ($1t in today’s money over 30 years or a doubling of investment to 10%/GDP per year);

* Finance Minister Grant Robertson’s response that such a doubling was not financially or politically possible, and that we can’t build our way out of our infrastructure deficit;

* Robertson’s unveiling of a new 30% of GDP debt ceiling, which is effectively 30 percentage points higher than the last one, but that he doesn’t want to use the spare fiscal headroom, yet;

* The Government’s decision to freeze new capital spending and leave its $6b operating allowance unchanged in the May 19 Budget to avoid adding to inflation;

* Reserve Bank Governor Adrian Orr’s comments this week that a 30% fall in house prices was feasible and that our banking system could cope with that just fine, along with an estimate that sustainable house prices were 5-20% below current levels in his select committee clashes with Green MP Chloe Swarbrick and National MP Nicola Willis; and,

* PM Jacinda Ardern’s painful prevarications and eventual capitulation on whether she would propose a wealth tax in her political lifetime.

Enjoy. And many thanks to the paid subscribers to The Kaka who support this sort of work I do reporting on and analysing issues around the political economy, in particular housing unaffordability, climate change inaction and child poverty.

This is a semi-regular feature open for all subscribers in which I talk with one or more of the other Parliamentary Press Gallery ‘wonks’ with an interest in fiscal and monetary policy, among other issues in the political economy. A ‘hoon’ is the plural for The Kaka.

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: US stocks cratered 3-5% this morning in a belated realisation that a fast rise in US interest rates is probably bad for US economic growth, corporate profits and relative demand for global stocks. Yesterday they had rallied 3% after the hike on apparent relief future hikes may not be as high as they feared earlier in the week.

Elsewhere in the news overnight and this morning:

* The Bank of England hiked its cash rate and warned of both a recession in Britain later this year and double-digit inflation;

* Opec+ decided overnight to hold its production unchanged despite the EU’s proposal this week to cut itself off from Russian oil this year, which pushed Brent crude futures prices up 1% over US$110/barrel;

* Reserve Bank Governor Adrian Orr told MPs he had no regrets about the policy easing of 2020, which he described as ‘courageous’, told them to ‘take a breath’ and his deputy said house prices were 5-20% above their sustainable level; and,

* Countdown announced it would freeze the prices of some staples over the winter to help customers cope with inflation, although it also said it would ‘work with suppliers’ to ensure they shared some of the profit pain of rising costs.

Later today, I’ll invite paid subscribers to my weekly Ask Me Anything thread at midday and our weekly ‘hoon’ live webinar with Peter Bale and guests at the new time of 5pm for an hour (while Peter is in the UK). Paid subscribers can see the invite link below the paywall fold.

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

What? Rate hikes are bad? Really? - Having bounced 3% on Thursday immediately after the Federal Reserve’s biggest rate hike in 22 years, US stock markets slumped this morning on fears a fast series of big hikes might actually slow economic growth, corporate profits and make other assets such as bonds relatively more attractive. Who would have thunk it… CNBC

Selling off everywhere - The Dow, S&P 500 and Nasdaq closed down 3%, 3.5% and 5% respectively this morning. Bond markets sold off broadly as well. The key 10 year Treasury bond yield (yes the one I’m always nagging you about) rose a decisive 19 basis points to a fresh three-year of 3.10%, before closing at 3.03%.

Britain’s stagflationary future - The Bank of England hiked its official cash rate by 25 basis points to a 13-year high of 1.0% overnight, but that wasn’t the main news. It also warned in its May report of a 0.25% contraction in GDP in 2022 and a rise in the annual inflation rate from 7% currently to over 10%. It forecast its rate hikes to control inflation would cause 600,000 job losses.

Hot, hot, really hot - The Reserve Bank of India also hiked its main interest rate yesterday, which was sooner than expected. The 40 basis point rise in its main ‘repo’ rate to 4.4% surprised markets and comes as India is having to ramp up coal production to feed into its power plants to keep the air conditioners going through the hottest heatwave in years. Rolling blackouts are hitting the hottest parts of the country with as many as 18 coal-fired power plants offline because of coal shortages and a jump in coal prices.

An oily profit - Shell reported a near tripling of its quarterly profit to US$9b overnight because of higher oil prices, beating market expectations even after a US$3.9b asset writedown due to its decision to exit Russia in the wake of its invasion of Ukraine.’

Scoops and news of note here this morning

‘Take a breath’ - Reserve Bank Governor Adrian Orr told MPs at a select committee hearing yesterday to “step back and just breathe and think about what we have gone through,” when challenged by National MP Nicola Willis and others about the central bank’s record on inflation and house prices. Full video Stuff NZ Herald-$$$ Bloomberg-$$$

‘Sustainable is 5-20% away’ - Under questioning from Labour MP Duncan Webb and Green MP Chloe Swarbrick, Reserve Bank Deputy Governor Christian Hawkesby told the committee current house prices were "in the order of 5 to 20%,” away from sustainable and prices would need to fall 5% to enter the “range of sustainability.” They’ve already fallen 6%.

Huge news? Or not? - Swarbrick said this was “huge news.” Orr said in response it was “not really news” but the Reserve Bank would publish more detail on house price sustainability in the coming months. See much more in the quotes of the day below.

Price freeze - Countdown (owned by Woolworths Australia) announced last night it had frozen the prices of over 500 essential items from May 9 for an unspecified number of months over winter, including the prices of diced tomatoes, butter, cheese, sugar, flour, shaved ham, hot roast chicken, carrots and pumpkin. MD Spencer Sonn said Countdown had received almost 1,000 cost increase requests from suppliers over the last 10 months, more than double those in the same period a year ago. The average increase of just over 9% was as a result of suppliers’ own costs of raw products, fuel, fertiliser, grains and import costs rising, he said.

Suppliers will ‘help’ - Countdown’s packaged goods director Steve Mills told Lisa Owen on RNZ’s Checkpoint last night he was working with suppliers to try to ‘absorb’ the cost increases. Mills said Countdown’s profit margin was 2.4%, although he wasn’t specific as to whether it was an EBIT or Net Profit profit margin as a share of gross revenues. The Commerce Commission estimated in its market study report (page 63) this year that Woolworths NZ’s EBIT/sales margins had been around 2.7% in 2018, which was above an overseas representative sample of around 2.0%. See more in the quotes of the day below.

Toxic voices - An investigation into the New Zealand Broadcasting School in Christchurch found a toxic culture of bullying, sexual harassment and harmful behaviour among students and staff, Alison Mau reported for Stuff last night.

Some hope for Kim - Immigration Minister Kris Faafoi has offered some relief and hope for murder suspect Kyung Yup Kim that he may not now be extradited to China to face charges. A High Court ruled last month it trusted China not to execute Kim over the 2009 murder, but the final decision is with Faafoi. Advocates for Kim have said China cannot be trusted and have appealed to Faafoi to block the extradition.

‘It’s sensitive’ - The issue of Kim’s extradition is a sensitive one as part of Aotearoa-NZ’s wider relations with China. The minister had yet to comment on the court ruling, but the Dominion Post’s court reporters reported this morning Faafoi was considering Kim’s health. The newspaper reported via Stuff the 47-year old man has been in custody for five years, was suicidal, had a small brain tumour, and liver disease.

11 years later - China has accused Kim of murdering Pei Yun Chen, 20, in her Shanghai apartment in 2009. Kim has denied knowing her, although he was in Shanghai at the time. He was living in Auckland in 2011 with his two children when China applied to New Zealand’s courts to extradite him. Aotearoa-NZ does not have an extradition treaty with China because of its capital punishment policy and fears about state-directed torture and unfair trials. Kim’s advocates are also applying to the United Nations to block the extradition. The case is being watched closely for any legal precedents in Britain BBC , Australia and Canada, who share Westminister-style legal systems and also don’t have extradition treaties with China.

ESG hits DGL - KiwiWealth and Simplicity put NZX-listed chemicals company DGL Group on their banned lists overnight after its CEO, founder and major shareholder Simon Henry, was reported in the NBR-$$$ this week as deriding My Food Bag founder Nadia Lim as ‘Eurasian fluff’. He had said ugly boards produced better IPOs than attractive ones. See the full quote below. Sorry. It is painful to read, but it’s having real world effects.

Lim speaks out - Lim gave an extensive interview to Kim Knight of the NZ Herald-$$$ that was published this morning, in which explained why she was speaking out and why she wanted to have a cup of tea and a chat with Henry. See her quotes below.

Cycling wins this time - Auckland Council voted late yesterday 13-3 in favour of a plan to spend $306m on cycleways in and around central Auckland over the next 10 years. The issue had become of a lightening rod for debate between mayoral and council candidates for council elections in October. See more in the quotes of the day below. There were seven abstentions in the vote. Here’s Simon Wilson’s report in the NZ Herald last night and Phil Pennington’s report on RNZ last night.

Willis Bond buy Z station sites? - Property Developer Willis Bond is in advanced talks to buy about 50 of Z Energy’s petrol station sites in New Zealand from Ampol for about NZ$140m in a sale-and-lease back deal, Bridget Carter reports this morning for The Australian-$$$. Ampol bought Z Energy earlier this year. Some of Z’s inner city or main road sites would be excellent locations for medium to high density residential and/or commercial development.

Towers auctions heating up - Sale and lease back deals are all the rage at the moment, especially for Aotearoa-NZ’s mobile phone towers. Morrison & Co and Brookfield are selling Vodafone NZ’s towers in a similar sale-and-leaseback deal, as is Spark. Overnight, the AFR-$$$’s Street Talk column reported KKR-owned infrastructure investor John Laing has joined the NZ$1b auction for Vodafone’s towers, along with Canadian investor Northleaf Capital, paired with London’s InfraRed Capital Partners.

NZ Super in the mix too - Australia’s Infrastructure Capital Group is also bidding, alongside the Ontario Teachers’ Pension Plan and its partner the NZ Super Fund. Street Talk reported the list also included DigitalBridge Group. Street Talk said Spark was preparing to launch its own sale of a smaller tower portfolio in the coming weeks.

Film-TV industry in uproar - Duncan Greive had the scoop via The Spinoff on Wednesday about conflict of interest concerns expressed around Film Commission CEO David Strong. Strong has been put on special leave and the Commission is now conducting a review into concerns about funding for a film script Strong wrote in 2008. It got an NZ on Air grant to be made into a TV series by Great Southern Television a month after his appointment in June last year. Blair Ensor also reported for Stuff late on Wednesday about the review and about Ensor being on special leave. A letter from Commission Chair Kerry Prendergast to the Screen Production and Development Association (SPADA) in March noting the conflict of interest sparked the outrage.

‘More accountability please’ - The Auditor-General, John Ryan, released a letter to The Treasury yesterday calling for more accountability over the $74.1b granted under the Covid Response and Recovery Fund (CRRF). Watch this space.

Quotes of the day

‘Just chillax dudes’

“We’re not playing catchup, we’re just doing monetary policy as usual. We’ve got this.

“We were one of the first countries in the world to stop quantitative easing and to start raising our interest rates. As much as we like to think we are a big important country, going alone on monetary policy in a global shock takes enormous courage. I congratulate our monetary policy committee members and our staff for doing that.” Reserve Bank Governor Adrian Orr responding at a Finance and Expenditure Select Committee hearing to questions from MPs about the bank’s inflation record. Full video here

‘Je ne regrette rien. Rien de rien.’

“No regrets, and I will continue to have no regrets. You have to play the cards that are in front of you at the time.

“I regret not buying Apple shares in 2000.” Orr in the same hearing when asked if he had regrets about the bank’s actions in the last two years.

‘They’re actually tightening’

"The unusual part, that we've come through. That has passed - that was the unusual period. That macro, one-off support has gone, and we're back to the more targeted approach.

"Fiscal policy - the Government's impulse was last year and the year before - is actually a drag now.” Orr when asked by Willis whether the Government’s fiscal policy was being enough of a ‘mate’ to monetary policy. Orr described fiscal policy as now operating at ‘business as usual’ levels. NZ Herald-$$$

A ‘slay the dragon’ moment

“It’s like when we all take medication, it’s got to build up in your system and these Fed-fund rises always have a lag time. Meanwhile the market pricing in so much more is a tightening of financial conditions that have a knock on effect on the real estate market, mortgages.

“That’s getting some of the Fed’s job done until that medication builds up enough that it really becomes the decisive ‘slay the dragon moment.’ Tim Horan, co-chief investment officer of fixed income at Chilton Trust, quoted in WSJ-$$$ this morning. (And no it’s the former Fed economist Tim Horan, not the former Australian rugby great Tim Horan)

‘Ugly boards are better’

“I can tell you, and you can quote me, when you’ve got Nadia Lim, when you’ve got a little bit of Eurasian fluff in the middle of your prospectus with a blouse unbuttoned showing some cleavage, and that’s what it takes to sell your scrip, then you know you’re in trouble.

“Go back to that prospectus and find that photo. You know you’re in trouble. I mean, you know, when you got a TV celebrity showing off her sensuality to hock script, then you know you’re in trouble. The uglier the board, the more successful the share. So, I sort of don't get it; you come to market telling everyone it’s a great company. And, by the way, we’re selling it and running.

“I don’t get it. I mean, I’m a simple man. I don’t get it. If it’s so good, why are you selling it?” DGL founder, CEO, director and major shareholder Simon Henry, quoted in an NBR-$$$ article about board quality and IPOs.

‘Let’s have a cup of tea and a chat Simon’

"I just kept thinking about it the whole way. What if it was your daughter? I realised it's not about me. I'm lucky, I've had years of support and opportunities to build up a thick skin and resilience, but there are obviously so many people who aren't in that position, who are vulnerable, and who would have seen a reflection of themselves in those comments. Those are the people I feel sad and disappointed for. I'm not speaking out for me - it's for them.

"I would be more than happy to make him a cup of tea and sit him down and have a korero with him - and I think he'd very quickly discover I'm not a little bit of Euro-asian fluff.” Nadia Lim in an interview with Kim Knight published in the NZ Herald-$$$ this morning

A preview of the culture war we’re going to get in October

“All the evidence in the world is if there's any one thing you can do as a city, is you get people biking. And we can be a Copenhagen in the South Pacific, we can be an Amsterdam." Auckland Councillor and Planning Committee chair Chris Darby in yesterday’s debate on a $306m plan to invest in cycling infrastructure. RNZ

"It's farting against thunder." Auckland Councillor Daniel Newman, who opposed plan and questioned whether spending $2b overall to reduce emissions by 30,000 tonnes was value for money. He also rejected giving up any road space to cyclists. NZ Herald

“Only 1.2% of Aucklanders bike to work and yet Auckland Transport is proposing to waste an insane amount of money, during a cost of living crisis, on compulsory bike training in schools while stripping teachers and parents of their parking.

“Auckland Transport must end its war on the long suffering 80% of ratepayers who use private motor vehicles for essential services.” Auckland Mayoral candidate Leo Molloy in a statement on the plan.

‘Making profit is not a bad thing’

“We are working very closely with our suppliers and they are being very proactive about how we can both try and absorb cost, price increases and mitigate those where we can. So we try to pass on the least amount of increase as we possibly can to our customers.

"Sixty-three cents in the dollar of the price we're getting from suppliers is made up of raw materials, packaging, freight costs. We're at 2.4% profit in our business. Yes, we are high volume, but we're a very low margin business.

"Making profit is not a bad thing. We're investing $1b over the next couple of years in infrastructure.” Countdown’s packaged goods director Steve Mills said when asked about the Commerce Commission’s estimate in its Market Study final report that the Countdown-Foodstuffs supermarket duopoly was making excess profits of $430m/year, as of 2018.

Numbers of the day

14.9m - The World Health Organisation published its latest estimate overnight of the number of excess deaths globally from Covid January 1, 2020 to December 31, 2021. It saw a range of range 13.3 million to 16.6 million, centred around a total of 14.9m, which was almost three times the the 5.4m official death toll via World In Data.

Minus 2,677 - The WHO’s mean cumulative estimate of Aotearoa-NZ’s excess deaths during those first two years of Covid, according to its data pack. Britain had an estimated 149,000 excess deaths over the two years Covid. If New Zealand had dealt with Covid in the same way as Britain, we would have had 36,300 more deaths than we did.

70% - I rounded up. Turkey’s annual inflation rate hit a two-decade high of 69.97% in April because of the halving of its currency over the last year and higher oil and commodity prices due to the war in Ukraine. The monthly inflation rate of 7.5% was above economists’ consensus forecast for 6%. The Turkish lira is in a feedback loop with higher inflation and a lack of faith in Turkey’s politically-controlled central bank, which was forced by President Tayyip Erdogan to cut its cash rate 500 basis points in September. CNN

1% - Standard Chartered has estimated Chinese oil consumption fell in April by as much as 1.1m barrels a day or 1% of global demand because of Covid lockdowns, although it sees this recovering by July.

Chart of the day

Global economy not as oil-reliant as it used to be

This IMF chart gives some hope the oil shock of the last year won’t be quite as painful as the ones in 1973 and 1979 due to the Israel-Egypt Yom Kippur war and the Iraq/Iran war respectively.

Cartoons of the day

Here’s the link for paid subscribers to join our live webinar hoon at 5pm (repeat 5pm NZ Time) for an hour. We’ve shifted it back an hour while Peter is in the UK. He needs a bit more sleep and we appreciated the extra time suggested by subscribers last week.

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 podcast above is a recording of our Friday evening live ‘hoon’ webinar with myself, Peter Bale and Professor Robert Patman talking about the events of the week that was for almost 100 paid subscribers to The Kākā. I send an invite to paid subscribers on Friday afternoons.

This week:

* the Labour Government pushed ahead with a tweaked version of Three Waters over the top of council objections;

* Revenue Minister David Parker proposed a new tax principles law to ensure only fair tax changes, creating the potential for another wealth tax debate at next year’s election;

* the Reserve Bank put off launching a new debt to income multiple tool so far into next year it’s unlikely before the election (and therefore unlikely at all);

* the US Federal Reserve is set to almost quadruple its key cash rate inside 90 days to control inflation, but may instead over-tighten and deepen a US recession next year; and,

* Britain and the United States ramped up their rhetoric about beating Russia militarily and sent extra supplies of heavy weapons for Ukraine this week, which Vladimir Putin warned could trigger a ‘lightening-fast’ Russian military response against NATO (seen as him again hinting Russia might use nuclear weapons).

Labour persists with Three Waters

Finance and Infrastructure Minister Grant Robertson and Local Government Minister Nanaia Mahuta announced on Friday the Labour Government had decided to proceed with its Three Waters reforms despite the protests of councils governing the water assets for about half the motu’s population. Responding to the report of a working group set up by the Government, Cabinet agreed to various tweaks that made privatisation less possible and emphasised that the ‘co-governance’ Regional Representative Groups that will include council and iwi representatives won’t have any day-to-day control over the separate merit-based boards of the four new water entities.

But the changes didn’t placate anyone, least of all the Opposition. ACT and National said they would repeal the changes. They’ll have an opportunity if they win the election next year because the necessary two pieces of legislation won’t both be through Parliament before the next election.

Auckland Council and a group of councils under the Communities for Local Democracy remain opposed to the changes, which they say take away their water assets and remove their ability to control them. Some also fear co-governance. Their opposition doesn’t matter technically as Labour can simply use its majority in Parliament to pass any legislation creating the new water bodies that include the assets. But the overwhelming opposition at both a local and national level has added to the wider political pressure on Labour that now sees it behind National in the polls. It risks becoming the focal point in local election wipeouts for Labour later this year and a niggling source of opposition in the key provincial electorates next year.

All about finding room for $4b-plus of new borrowing

In my view, everyone is missing the point of why the Government is pursuing Three Waters and therefore missing some of the underlying problems. The Government and many councils know that more than $100b needs to be borrowed and spent in fresh investments and making up for past under-investments over the next decade or two. That is simply to provide drinkable water for the existing population and stop the most egregious of storm and sewerage releases into rivers, lakes and beaches. Even more will be needed to re-engineer the biggest cities to deal with climate change and cater for continual (and apparently unplanned) population growth.

Three Waters is all about extracting water assets from councils and organising them into entities that can charge for water. Those revenues are much easier for ratings agencies to see and be confident will be there to service debt against the assets. That will effectively allow much higher borrowing by councils and the Government, but without having to either ask ratepayers’ permission to borrow or charge for water. Only Auckland, Tauranga and Kapiti Coast charge for water at the moment.

Higher debt, water charges without political contests

The Government has said it expects the new entities will allow those water assets to be able to sustain six to eight times their current borrowing. The Government hasn’t said exactly how much that could be, but LGFA estimated there would be $5.5b of council debt against those water assets by mid 2024 when the entities are due to be up and running. That implies up to $44b in borrowing in total, or an extra $38.5b.

The convenient thing for the Government is this debt is not counted as core Crown debt under its own made up debt limit rules, even though it is effectively guaranteed by the Crown.

Three Waters is a vehicle for the Government to do the necessary borrowing and impose the necessary charges in a way that complies with its own debt rules and avoids debates with ratepayers and taxpayers about those higher debts and water charges. In many ways, the non-debates over co-governance and privatisation (neither of which were real threats) have been the perfect distractions for both the councils and Government.

I’ll publish a more detailed analysis and podcast on Monday on Three Waters, including my questions and answers to Robertson and Mahuta on Friday.

A speech about tax fairness without a wealth tax. Yet.

Revenue Minister David Parker gave a thoughtful speech about tax and fairness this week. I published this analysis on Wednesday.

DTI limit increasingly unlikely before the next election

The Reserve Bank indicated this week in releasing feedback on debt to income multiple proposals that it would not be introducing any new DTI restrictions until after mid-2023 at the earliest. That would leave the way clear for any controls to be delayed until after the election, which may please a Government that has been reluctant to introduce them.

The previous National Government refused to allow the Reserve Bank to introduce them in 2017. Labour has agreed to their potential use, but has not signed off their final use.

The Reserve Bank also said it had no plans for now to introduce a formal interest rate serviceability measure for banks to use. They currently use a collection of rates, not all of which are disclosed.

150 basis points of hikes in 90 days

Financial markets are now pricing in three 50 basis point hikes in a row by the US Federal Reserve by the end of July. That would be an effective quadrupling of the world’s key interest rate and the fastest tightening of monetary policy in recent history.

I argued in my Friday morning Dawn Chorus an over-tightening that leads to falling interest rates late next year, along with no DTIs and the growing likelihood of a National election win late next year, creates the conditions for a rebound in house through late 2023 and early 2024.

The rhetoric and heavy weapons deliveries are ramping up

It would be a mistake to think the war in Ukraine has settled into some sort of stability. The rhetoric between NATO and Russia ramped up to new higher levels this week, along with all sorts of weapons deliveries and retaliatory actions. The list of escalations included:

* Britain said it would be ok if its missiles were used by Ukraine to strike inside Russia;

* there were more Ukrainian strikes and mysterious explosions inside Russia;

* Germany decided to send anti-aircraft tanks to Russia, ending months of being reluctant to provoke Russia by sending heavy weapons;

* The United States delivered howitzers to Ukraine and began training Ukrainians to use them;

* US President Joe Biden asked Congress for US$33b in funds for weapons and aid for Ukraine, preparing for a long and heavy proxy war between a NATO-supplied Ukraine and Russia;

* Britain pledged to drive Russia out of Ukraine completely and called for NATO to play a role in defending Taiwan;

* Russia cut off gas to Poland and Bulgaria, while the European Union is expected to announce in the next week or two it will cut off Russian oil later this year; and,

* Vladimir Putin warned NATO any further threats to Russia would trigger a ‘lightening fast’ military reaction.

So what? - Any direct clashes between NATO forces and Russia could be explosive. The hardening oil and gas sanctions will further escalate energy costs globally. The higher the NATO vs Russia tensions, the higher the risk that China is somehow pulled into the conflagration.

We talked with University of Otago’s Professor Robert Patman in the podcast above.

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 Gist): The US dollar surged to 20-year highs overnight because financial markets now expect the Fed to quadruple the world’s key interest rate in three months in a belated attempt to crunch inflation lower. Paradoxically, that creates a risk the Fed creates a hard landing that drags global interest rates down (yes down) next year.

That would be happening just as opinion polls convince home buyers here that a National election victory and the delivery of its promised tax cuts for home owners would fire up the housing market again. I think there’s now a high prospect that if National are still ahead in the polls in the winter of next year and the global economy is slowing because the Fed tightened too quickly, house prices will spring back strongly in the weeks before and after the election. (See more below and in the podcast above. I’ve opened this up to all given the public interest involved.)

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

Buckle in for a long war - US President Joe Biden asked Congress overnight for US$33b in funds for more weapons and aid for Ukraine, adding to fears the war in Ukraine will turn into a protracted and bloody proxy war. NATO also said overnight it was willing to send arms to Ukraine for years. Reuters

King dollar resplendent - The US dollar ramped up to its highest level in 20 years overnight when measured against a basket of currencies. It has risen most against the euro, yen and renminbi on financial market expectations the US Federal Reserve is set to hike the Fed Funds rate by 150 basis points (three consecutive 50 point hikes) to 2.0-2.25% by the end of July. Elsewhere, the Bank of Japan and the European Central Bank are still printing money and the Peoples Bank of China is easing policy to avoid a Covid-and-apartment-development-growth slowdown in China. CNBC

Yen slump and euro slide - The Japanese yen hit a 20 year low vs the US dollar this morning after the Bank of Japan appeared to double down on its stimulus because its inflation (1.2%) is much lower than elsewhere. The central bank pledged last night to keep printing to keep longer term interest rates low.

The euro hit a five-year low of 1.04 US$ overnight as fears grow the shock of the war in Ukraine to consumers and businesses will drive it into a recession. Euro parity with the US$ is now seen possible. Reuters

So what? - The higher US dollar will help suppress inflationary forces coming from overseas, but will also slow its exports a tad. The bigger concern is this very fast tightening of US monetary conditions via both higher interest rates and a higher currency could cause a hard landing. The weakness of the other currencies also indicate growth in Asia and Europe are trending much weaker than many had expected.

NZ$ dips too - All this has meant the New Zealand dollar has fallen under 65 USc overnight and is 64.9 USc just before 8am. That’s near a two-year low. That’s great for exporters, but will add upward pressure to imported prices. It’s also a reflection of the changing interest rate differentials between Aotearoa-NZ and the United States, given our Reserve Bank stopped money printing earlier than the others and its forecasts for interest rate rates are already ‘baked in’ to our wholesale interest rates.

This quote catches the mood in currency markets:

“We had two decades of the benefits of low inflation, but now central banks are trying to win back their inflation-fighting credibility. But the ECB is facing stagflation and will struggle to keep with the Fed, and the BoJ isn’t even coming to the party. With lower exposure to China, and lower exposure to Ukraine, the US stands out as resilient.” Nomura foreign exchange strategist Jordan Rochester via FT-$$$.

Unexpected US contraction - Reinforcing those fears of a Fed mistake, the US Bureau of Economic Analysis reported this morning the US economy contracted unexpectedly at an annual rate of 1.4%. Some of it was temporary, including a windback in inventory build-ups connected to Covid supply chain dramas. But there was also slower business investment and the US house building market is slowing after the fastest rise in key mortgage rates in history. The key 30 year mortgage rate there has risen 220 basis points to 5.3% in 12 months. Reuters

Why BTFD and HODL probably works for housing too

And for us? - My longer term view is the very-fast rate hikes in the United States and the slowing growth engines in China, Asia and Europe will take the heat out of global inflation faster than most expect. That means our Official Cash Rate (now at 1.5%) may not rise to the 3.4% peak the Reserve Bank currently expects or the 4.0% the market expects. The Fed lost its ‘transitory’ nerve late last year and looks set to over-react to inflation being reported now that was caused last year.

Team Transitory, which I’m still in … albeit with a longer timeframe for transitory :), would say the Fed is about to make a pro-cyclical monetary policy mistake that will cause a hard landing and shock those betting on higher interest rates for longer. The deep structural forces underpinning low inflation, including the cloudification of services, the globalisation of services and labour supply and weak labour power remain firmly in place, especially while China remains in the global economy (which it is).

Housing rebound quite possible here next year - If the rate hikes don’t eventuate later this year and early next year, then the pressure for fixed mortgage rates will be to fall and not rise. The likely non-approval of DTIs next year and expectations of a change of Government would then put a stronger floor under house prices around the current levels of being down 5-10% from the November 2021 peak.

National has promised to repeal the 39c tax rate, cut taxes for higher income asset owners, restore interest deductibility for landlords and wind back the brightline test for taxing capital gains from house trading. A National win late next year just as fixed mortgage rates are falling would be highly likely to spark a house price rebound in late 2023 and early 2024. Especially as DTI limits are now highly unlikely under either National or Labour.

Big China in big trouble

China in trouble - Shanghai’s Covid numbers dropped again overnight, but there are growing concerns about tough lockdowns looming in Beijing and other big northern industrial cities. Factory shutdowns, truck driver shortages and restrictions on inter-city travel are crippling supply chains inside China and at some ports.

A well-connected private equity fund manager in Hong Kong, Weijian Shan, told investors the Chinese economy was in the worst shape he’d seen in 30 years, with “draconian” Covid restrictions “semi-paralysing” large parts of China’s economy. His comments were in a private video subsequently made public via the FT-$$$. His PAG group manages US$50b in funds.

“The market sentiment towards Chinese stocks is also at the lowest point in the past 30 years. I also think popular discontent in China is at the highest point in the past 30 years.

“China feels to us like the US and Europe in 2008. While we remain long-term confident in China’s growth and market potentials, we are very cautious towards China markets.” Weijian Shan

Shanghai closed to refrigerated shipping - Fonterra disclosed yesterday that all refrigerated shipping into Shanghai, the world’s biggest port, had been suspended because of Covid disruptions, Rebecca Howard reported this morning for BusinessDesk-$$$

“With the announcement of suspension of bookings for reefer services into Shanghai by the major shipping lines, we have been working with our in-market teams to reroute product via other ports and to manage timing of delivery.

“Transportation disruptions in and around Shanghai are also contributing to the logistical challenges that we are currently facing.” Fonterra’s director global supply chain Gordon Carlyle as quoted in BusinessDesk-$$$, although he noted Fonterra had been able to re-route shipments successfully for the rest of Covid.

Freightwaves reported on April 11 that all carriers were diverting ‘reefer’ shipping away from Shanghai because of a lack of dock storage space connected to the Covid lockdowns.

Economists said Shanghai’s lockdowns were more damaging than the ones in Wuhan in early 2020 because the industrial and logistics operations were much bigger on the east coast.

“The supply chain impact from this lockdown will be at least as bad, if not worse, than in spring 2020. Wuhan as an industrial base is not as important as Shanghai.” Nomura’s chief China economist Lu Ting quoted in FT-$$$

Rhodium Group head of China markets research, Logan Wright, told the FT-$$$ the easing of Covid restrictions in cities was not helping much because inter-city traffic remained restricted. He estimated that road traffic in the Jiangsu and Zhejiang areas bordering Shanghai had fallen 50-70% from the same week a year ago.

Keeping its palm oil - Indonesia, the world’s biggest palm oil exporter, decided overnight to restrict exports of refined palm oil to ensure it had enough local supplies. The move is expected to further inflate global prices of the key ingredients of hundreds of consumer products, including cooking oil.

Palm oil prices have been rising and shortages developing because of lower exports from the the world’s largest sunflower oil producer, Ukraine, and lower production of soybean oil and canola oil elsewhere because of droughts. Palm oil is estimated to be in 50% of all packaged products in supermarkets globally. Reuters

“We have had really almost a perfect storm. You almost couldn't make it up how bad it's been. We've never really tested this kind of situation. It will be the poorest in big countries or countries in Africa who will almost certainly have to bear the brunt.” LMC International Chairman James Fry via Reuters

Scoops and news of note here this morning

Expensive pines - Thomas Manch reports this morning via Stuff that taking pine forests out of the ETS could cost $64b.

Please extend - Employers want the successful apprenticeship subsidy scheme set up at the start of Covid to be extended beyond August. ODT

For the record here yesterday

Taihoa - The Rotorua Council paused progress on its controversial representation bill before Parliament after a ruling it breached Human Rights laws. (Stuff)

Quote of the day

If you’re wondering why Russia and China are jumpy, and others too…

This is the official British line now in this speech below from the UK Foreign Secretary Liz Truss. It’s doubling down on arming Ukraine and has committed to push Russia out of Ukraine completely. It also wants NATO to have the ability to defend Taiwan. (Bolding mine)

“We cannot be complacent – the fate of Ukraine hangs in the balance. But let’s be clear – if Putin succeeds there will be untold further misery across Europe and terrible consequences across the globe. We would never feel safe again.

“So we must be prepared for the long haul. We’ve got to double down on our support for Ukraine. And we must also follow through on the unity shown in the crisis. We must reboot, recast and remodel our approach.

“My vision is a world where free nations are assertive and in the ascendant. Where freedom and democracy are strengthened through a network of economic and security partnerships. Where aggressors are contained and forced to take a better path.

“We also reject the false choice between Euro-Atlantic security and Indo-Pacific security. In the modern world we need both.

“We need a global NATO. By that I don’t mean extending the membership to those from other regions. I mean that NATO must have a global outlook, ready to tackle global threats.

“We need to pre-empt threats in the Indo-Pacific, working with our allies like Japan and Australia to ensure the Pacific is protected. And we must ensure that democracies like Taiwan are able to defend themselves.” UK Foreign Secretary Liz Truss in this speech at Mansion House for the Lord Mayor’s Banquet

In my view: Hoo boy.

Chart of the day

China’s imports and commodity prices are curiously divergent

IMF revises inflation outlook up, but still 2.5% next year

Numbers of the day

The brain drain’s started, as seen via this Infometrics chart from Stats NZ jobs figures

422 on 4/22 in 2022 for first time in 4.22m years

Profundities, spookies, curiosities and feel-goods

The toys being made for this Christmas

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: Revenue Minister David Parker wants to measure the fairness of our tax system and legislate to effectively outlaw unfair tax changes like the one proposed by National Leader Christopher Luxon, but he hasn’t signalled Labour wants to try again for a wealth or capital gains tax. Yet.

I interviewed Parker yesterday after he delivered a speech titled ‘Shining a light on unfairness in our tax system’ at Victoria University. The full interview is in the podcast above, which everyone is welcome to listen to and share. I have opened up this article and podcast for free subscribers and the public generally, thanks to the support of paid subscribers. I welcome their comments, corrections and suggestions for further inquiry below.

Everyone is welcome to join The Kākā’s community fully as a paid subscriber. It’s $30 a year for under 30s (deal here), free for students and teachers from their school, university and polytech email addresses (sign up with that email as a free subscriber and we’ll convert you to a full one).

A long project to build the political frame for a wealth tax

Revenue Minister David Parker is one of the bigger and most ambitious thinkers inside the core of the Labour Cabinet and has been thinking about tax and the politics of tax for the longest time. He doesn’t have much of a choice, but he is also engaged in a ‘long game’ to build the political, evidential and policy framework for a much fairer tax system. He hopes to build the case for tax changes that will last through the ups and downs of political and economic cycles, and ultimately be fairer and hold up for the long run.

But it’s a very long run.

So it was useful to read Parker’s big speech on unfairness in the tax system to see what that long game plan might look like. It was also a breath of fresh air to see a speech about tax that is more than about raw politics and has some cohesive logic. He even talked about the challenges of the political economy of tax out loud and complemented National’s previous political strategy for tax reform.

It was a feat of deeper political thinking done out loud in speech form. That’s rare to see these days and hard to do for a politician near the top of a Government. Usually they keep their heads down and try not to get run over by the sound bites of news bulletins and the partisan sub-tweeters on Elon Musk’s new plaything.

No this is not Labour’s wealth tax plot

So firstly, let’s cleanse the time line of this article of the sound bites you might have heard in the last few milliseconds about the speech to cover off what it was not. Here’s what the Opposition’s leaders said about it:

“Labour is planting the seed for increased taxation to fund their addiction to spending.

“While talking about how “unfair” our tax system is, the Minister failed to acknowledge the Government has taken in a massive $14 billion more in income tax revenue than expected due to record inflation. That Minister, is unfair.” ACT Leader David Seymour in a statement about the speech.

Seymour has the most efficient and speedy sound bite production machine of the political parties at the moment, but to be fair to ACT, those bites are usually backed up by a big policy that is usually coherent and simple. Seymour’s ACT wants a single 17.5% income tax rate and no tax on wealth or capital gains. He deems anything different unfair and puts quote marks around the word ‘fairness’ when Labour uses the word.

Luxon has yet to make statement or respond to the speech as of this morning. I’ll update this article once he comes out, but obviously National is proposing tax cuts for those on higher incomes by raising the tax rate thresholds to adjust for inflation and removing the new 39c rate for those earning over $180,000. National would also reverse the tax deductibility changes for landlords and the longer bright line test. For more on Luxon’s thoughts on tax, here’s a useful interview he gave Tova O’Brien at Today FM yesterday.

Parker anticipated the focus on the speech would be on finding the ‘smoking gun’ of another Labour attempt to tax wealth. So he put the rebuttal in the first sentence of the speech.

“Those coming here expecting announcements of new tax policy will be disappointed. None are being made. We have no secret plan to introduce a CGT nor a wealth tax or a deemed income tax, nor others. The IRD is not doing any work to even develop these or other options.” David Parker.

In answer to subsequent questions from reporters, Parker also restated the Labour Party’s 2020 election position that no new wealth or other taxes were planned for this term. A busy person tired of endless debates and elections about wealth taxes and no action might be forgiven for skipping on to the next thing in their news feeds without reading what Parker said next. That would be a mistake.

So what was the speech about then?

Parker used the speech to detail how, despite umpteen tax working groups and official tax inquiries, IRD, Treasury and Statistics NZ don’t actually know how much wealth our wealthiest have and whether it’s being taxed at all, or enough. They also don’t know whether the overall tax system is progressive or not, once you analyse the effects of different groups from the income tax and welfare systems, GST and the lack of taxes on wealth and income.

In theory, we already have a progressive tax system if you only take PAYE income and corporate tax into account, along with Working For Families and Accommodation Supplements. As Luxon mentioned yesterday, the top nine percent of wage and salary income earners pay 42% of the wage and salary income tax.

But how fair is the tax system overall? Those on the lowest incomes spend much closer to 100% (and sometimes more) of their income on goods and services, and therefore pay a 15% tax on their disposable income. Much wealthier people on higher earnings invest a lot more of their disposable income in bank accounts, property and other assets, some of which are taxed, and others are not. Corporate tax payers pay tax on their profits, but not on their spending (they pass through GST to the Government) and not on their capital gains, unless the gains were from ‘trading’ rather than holding.

Here’s how Parker describes the situation, which, bizarrely, was not measured or analysed by the last two Tax Working Groups, only asserted generally.

“Currently many people look at our headline personal income tax rates and see a system that charges higher rates on higher taxable income – and they assume that the system is progressive overall. It isn’t.

“What’s hidden is that the effective marginal tax rate for middle income Kiwis is generally higher than it is for their wealthier co-citizens. Indeed some of their wealthier Kiwi compatriots pay very low rates of tax on most of their income.” Parker

Parker is talking in particular there about about half of those on Working For Families are paying effective marginal tax rates of well over 50% as they move through the abatement thresholds as their incomes rise. Over 10% have marginal tax rates of over 75% and a couple of percent actually pay over 100% for a short period.

Parker also focused on GST and wealth, where he pointed to big gaps in the IRD’s information. The gap on the amounts paid was smaller for GST, but just as large on the issue of regressivity.

“It is rare for the debate to properly factor in the effective rate of that regressive tax - GST - as a percentage of income, or for that debate to include economic income that is untaxed.

“I support our GST system, but it is regressive. While not all taxes need to be progressive, the system overall should be. We can’t properly assess our tax system without knowing what effective GST rates are for different cohorts in New Zealand. So we will better analyse this.

“We have good, largely automated systems underlying the GST payments that are due to IRD. However we have much more limited understanding of how much different groups in our population pay. 

“While GST is collected by businesses, they pass that cash-cost on. The actual cost is borne by those who buy GST-inclusive goods and services. Thus GST is really paid out of our earnings when we spend them. In economic terms GST is mainly a tax on labour income. Who bears that cost?

“Data is limited on the effective overall GST rate paid by New Zealanders. We don’t really know this by either income or wealth decile. I have asked IRD to remedy this. I expect we’ll be using the best data we have, rather than collecting more.” Parker.

‘The Household Economic survey is useless’

The data collected on wealth was very poor, Parker said, pointing to how the Household Economic Surveys (HES) don’t ask the right questions or the have the power to delve deeper.

“We have virtually no idea what rate of tax is paid by the very wealthy.  As wealth concentrates into the hands of an ever smaller cohort at the very top, more and more of their income, and a greater proportion of national income, is represented by returns on capital. 

“How much this amounts to, and how much of it is taxed or untaxed, is currently unknown in New Zealand. Our statistics are worse than Australia’s & Europe’s.

“Our rough measure of net assets suggest that outside the family home, 65% of all wealth is held by the top 10%. In fact, it could be that more than 2/3rds of all financial assets are held by the top 5%, with most of that concentrated in the top few per cent.

“I said the 65% held by the top 10% is a rough measure, because it is undoubtedly an underestimate based on the Household Economic Survey, which has severe limitations at the top end.” Parker

‘The NBR rich list is better’

No Parker speech on tax and wealth would be complete without a name check for Thomas Piketty.

“(Piketty) explained that survey measures of wealth don’t work at the top end because survey questions are too general to burrow into the multiple and complex discretionary trust and private company legal structures used by the very wealthy.

“Questions don’t delve into capital income. Valuation methodologies are inconsistent. 

“And at the top end there is a propensity to understate when making disclosures to government agencies. When I delved into our survey measure, we proved that the highest net wealth ever surveyed in the Household Economic Survey was $20 million dollars. 

“That’s right. The NBR rich list is a better data set than the official statistics. I was not surprised, but I was still shocked. A $20 million max. Really?

“How come, in a country with billionaires, our data set used for policy purposes effectively ignored the wealthiest? It’s not out by a factor of ten – that would be huge in itself. But that maximum is out by a factor of hundreds. Until recent years most people thought the HES was pretty reliable. In fact it is close to useless in disclosing the wealth or income of the top few percent.” Parker

‘IRD now have the power to ask for the detail on wealth’

Parker said he learned on becoming Revenue Minister that the intermediaries holding data on the wealthiest 1% did not provide information to IRD not needed for tax administration.

“They could say “all taxes properly payable are paid, so bugger off”.

“It beggars belief that we currently don’t know what rate of tax is paid by the top cohort in New Zealand on their economic income. We do know the rate paid by wage and salary earners, and by small business owners.

“I was advised that the UK Revenue department has an information gathering power for policy purposes. Other countries already collect the information because they ordinarily tax capital income in some way. I concluded we were an outlier.  Cabinet agreed. That’s why, in last year’s Budget, we moved to address this data gap.

“Parliament conferred this much needed information-gathering power on the Commissioner of Inland Revenue here, and Inland Revenue was allocated funds to conduct research relating to the tax paid by the wealthiest New Zealanders relative to their economic income.” Parker.

Parker said the work was underway and he aimed to release it before next year’s election.

“While we already have evidence that the wealthy pay lower rates of tax than middle income earners, no one can tell you how much lower their effective tax rate is. 

Currently it really is a stab in the dark. Until we have a more accurate picture about how much tax the very wealthy pay, relative to their full “economic income”, we can’t honestly say that our tax system is fair. 

“I think the gap will shock some people, but whether my instincts are right or wrong will be proven by the data. 

“It will mean that in the future, our tax policy advice is better informed – whatever the political stripe of the Government of the day.” Parker

A law to ensure unfair tax changes are blocked

Parker did the surprising thing of complimenting the political strategy of the National Party, albeit under the now-departed Bill English, in the way the 2010/11 ‘tax switch’ helped frame the debate in a way that change was politically possible.

“While I did not agree with the proportion of that “tax switch” that went to higher income earners, the way he carried that debate was a master class in the politics of changing the tax mix.” Parker

His attempt to create a framework that forces any change to consider fairness as well as efficiency and fiscal responsibility is to create a Tax Principles Act, which was the other main part of the speech.

“It surprises some who witness the heat of tax debates that there is widespread agreement about core tax principles. These are long settled.

“Adam Smith in his 1776 book The Wealth of Nations laid out four maxims that still hold sway. Successive tax enquiries over many decades in New Zealand and similar countries overseas have all enunciated similar principles.

They all endorse the same principles, based in that most core value of New Zealand - fairness.

The main settled principles are:

-       horizontal equity, so that those in equivalent economic positions should pay the same amount of tax

-       vertical equity, including some degree of overall progressivity in the rate of tax paid

-       administrative efficiency, for both taxpayers and Inland Revenue

-       the minimisation of tax induced distortions to investment and the economy.

New Zealand is renowned for our fiscal responsibility legislation and reporting framework - now in the Public Finance Act. It has served us well.

So do reporting frameworks for child poverty and climate change.”

Parker hopes to table a bill before the end of the year on progress with those principles after wide public consultation.

They need them to be clear enough to avoid ambiguity, without determining outcomes which are political.

Lots of people have strong views on what tax policy should seek to uphold. Many hold opposing views. The trick will be to find that higher level, common ground from which information can be reported and the debate can be had.

In the context of a tax principles statutory reporting framework, this could mean a set of high-level, general principles in legislation, with a legislated requirement for the government to issue a guiding statement setting out its views on the development of tax policy. Tax policy officials would be required to independently report information relevant to those tax principles.

It could also entail more detailed principles and defined measures in legislation with officials reporting according to those defined criteria with a focus on the data controversies of the day.  For example, it could require officials to report on the progressivity of the tax system. Parker

So the big tax debate starts again, hopefully with better information.

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 inflation hit a 30-year high of 6.9%, Auckland Council prioritised protecting villas over allowing extra houses, global interest rates kept rising, Grant Robertson was accused of not helping Adrian Orr enough to fight inflation and I gave an update on The Kaka’s growth plans.

The podcast above is a recording of our weekly ‘hoon’ webinar from Friday afternoon. Unfortunately, Peter Bale was not available so it’s a simple one of me talking about the week’s events and answering questions from paid subscribers. It was a bit longer than the usual hour because I received lots of questions about housing, politics and electric double cab utes.

I also aired in depth for the first time my first draft of a big new idea how we could build half a million affordable homes and slash net transport and housing emissions in a way that turns a tiny fraction of the last 30 years’ unearned tax-free capital gains into housing and climate investments that ‘pay it forward’ for today’s under 30s and future generations. I’ll write about this in more depth over the long weekend.

Five things to note this week

Inflation hit a 30-year high

I wrote in depth on Friday morning about this week’s 6.9% annual inflation figure and why its causes are painfully familiar.

Labour challenged to help Reserve Bank more on inflation

On Tuesday an interview Reserve Bank Governor Adrian Orr had with the IMF was released that prompted accusations from the Opposition that Finance Minister Grant Robertson was not being enough of a monetary policy mate for Orr.

Here’s my analysis of those claims and defences.

Auckland Council’s reluctant and partial up-zoning

The Auckland Council released its updated maps showing how it wants to tweak its Unitary Plan in response to the Government’s legislative attempts to upzone around urban centres through the National Policy Statement on Urban Development (NPS-UD), which allows six storey high apartments within walkable distance of CBDs and the Medium Density Residential Standards (MDRS), which allow three three-storey townhouses on pretty much any section.

The Council’s response was to carve 16,000 houses out of the MDRS by designating them special character, including this one on Dominion Rd. It said it was “all about special character.”

Have a look inside it. And the careful way the agent doesn’t say what development potential it has.

Only 5,000 homes lost that protection.

It would be nice if Auckland Council was all about affordable housing and carbon zero.

Here’s a good explanation with detail from Matt Lowry via Greater Auckland.

And this thread is useful.

The Solomon Islands signed a security deal with China

The Solomon Islands confirmed it had signed a security deal with China that Australia, the United States and Aotearoa-New Zealand fear could China’s warship stationed in a position able to block Australasia’s trade routes and significantly ramp up the militarisation of the Pacific.

Here’s Anne-Marie Brady’s deeper analysis of the deal.

The US 10 year bond yield hit a three-year high

The US 10 year Treasury bond yield, which I’d argue is the one market interest rate to watch globally if you want to see what might happen next, jumped from just over 2.8% to a three-year intra-day high on Friday of 2.97%.

That made US stock markets very nervous on Friday. Remember, the higher bond yields go, the more attractive they are relatively instead of stocks. Many fear the Federal Reserve’s apparently more aggressive approach to taming inflation could push up interest rates quite high and cause a recession, which would also be bad for corporate profits and therefore share values.

The S&P 500 fell 2.8% on Friday night in what appears to be the beginning of another market conniption over rising interest rates.

Charts of the week

Spookies, profundities, curiosities and feel-goods

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: Reserve Bank Governor Adrian Orr appeared to suggest the Government could cool its spending to help the central bank fight inflation. Acting PM Grant Robertson said in response Orr was speaking broadly and denied government spending was responsible for inflation. National Finance Spokesperson Nicola Willis called on Robertson to listen to Orr and exercise fiscal restraint.

In the podcast above, I include my questions to Grant Robertson and Nicola Willis this afternoon and their answers in full, along with the full comments from Adrian Orr in an interview released today with the IMF’s Acting Director of the Asia and Pacific Department Anne-Marie Gulde-Wolf.

A plea for Govt to be more of a monetary policy mate?

Reserve Bank Governor Adrian Orr gave a video interview to the IMF’s Anne-Marie Gulde-Wolf last Thursday after the Reserve Bank’s 50 basis point hike in the Official Cash Rate to 1.50%. The interview was released this morning. Orr detailed how the bank was up against the threat of higher inflation expectations becoming embedded as inflation headed over 7% early this year and that “we’re not in a great place right now”.

He reiterated that the bank’s move last Wednesday, its first 50 point hike in 22 years, was about “doing it sooner rather than believing we have to do more”.

But it was Orr’s comments about how fiscal policy could help central banks use monetary policy to fight inflation that got the most attention from the Opposition and, in response, the Government.

In his opening comments Orr said the following (bolding mine):

“Without doubt, central banks around the world are currently challenged by a very high and sustained inflationary pressures. The challenges are familiar one. But I would say that the background and the setting is unique. I mean, central banks now have to meet our low and stable inflation and contribute to employment mandates. We have to do that in the context of a large evolving severe health shock to the global economy, exacerbated by the Russian invasion of Ukraine at present.

“So it is incredibly uncertain environment. The challenge in front of us is central banks, and I'm talking in general because we're all in this together at present, is really how do we tighten our monetary policies to constrain inflation expectations, but without creating a recession. So the challenge of a soft landing coming out over the next two years.

“For us though, of course, we're considering this in this unusual environment, we have extremely volatile near term data. So getting a starting point or launching pad is very hard to estimate. There have been dramatic changes in the way people are behaving either through regulated constraints or through natural human concern going on from the health shock. And there are an unbelievable number of continued economic shocks hitting the environment, whether they be health, geopolitical concerns, and of course, underlying this the continued climate change challenge that we have, I would say that central banks aren't going to achieve these mandates on their own — low and stable inflation and maximum sustainable employment — we are going to need support.

“Central banks are going to have to communicate very, very clearly about our purpose and why we are looking to lift interest rates in the current environment. We're going to have to be very clear with our fiscal authorities around what we're doing, and how they could assist around more targeted effective fiscal policies. And I would say, speaking to the global institutions here, we really do need to get on and make progress, work collaboratively on what I would call common issues, or issues of the common.” Adrian Orr speaking in an IMF interview.

Orr seemed to suggest later in his comments that Government spending or demand was less of a factor than supply constraints (bolding mine). He also indicated monetary policy had to do the work.

“The big lesson for us is, we have to work very closely with the fiscal authorities to understand what they can do and can't do, and hence what we need to do, in addition, with monetary policy. And really, it's been the supply constraints and supply side of the economy that a lot of learning is well underway.

“Here for us, you know, I think the main things we need to do is remove any remaining unnecessary monetary stimulus with that view, that focus on the domestic driven part of our inflation. We have to retain an anti-inflation bias in everything we do. That is our role as central banks, to head off that headline, inflation expectations becoming baked in to price setting.” Orr

‘Listen to what the Governor says. He wants help’

National Finance Spokeswoman Nicola Willis then put out a statement calling on Finance Minister (and currently Acting PM) Grant Robertson to listen to Orr “about the need to use his fiscal tools to help control inflation.”

“The Finance Minister must heed this warning. It’s not credible for Grant Robertson to keep claiming inflation is a mysterious visitor from overseas over which he has no control.  

“He must do his bit to remove inflationary pressure in the domestic economy: stop adding costs to business, quit wasteful spending & remove bottlenecks to productive growth. 

“This is absolutely not the time to put fuel on the fire with the biggest Budget spending allowance in history, which he has foreshadowed for his May Budget. 

“Grant Robertson should take the Reserve Bank Governor’s comments seriously and rein in his extravagant spending plans.” Nicola Willis in a statement.

‘He didn’t point at me. And what would you have us cut?’

Robertson then held the regular post-Cabinet news conference as the acting PM, giving us a chance to ask him if he was being enough of a mate.

He denied the Government was responsible for inflation, which he argued was coming from the Covid and Ukrainian war shocks to fuel, food and other logistics costs.

He then challenged the Opposition to say what spending it would cut and said any Government decision to cut health spending would not reduce food or fuel inflation.

“I think it's really important still to note that the big drivers of cost of living pressures are ones that are generated offshore. So in particular the COVID 19 pandemic and the pressure that's put on supply chains. Obviously we've got war in Ukraine now that is putting through the pressure on that. And so while we have to be careful with our spending, we've got to continue to be balanced in the way that we approach our government spending, it is important that we don't cut our nose off to spite our face and take away funding that's really important in areas like health or educational housing.

“We're not going to reduce the price of food at the supermarket by cutting health spending. We have to look carefully at all of our initiatives to make sure that their value for many and that they're doing the things that New Zealanders would expect us to do. But in this budget for example, we are completely rebuilding New Zealand's health system. There is a one off component to the operating allowance which is for that purpose. Other than that the operating allowance is similar to levels that we've seen recently. But the job of making sure that we carefully balance our spending is one meanings when I take seriously. I know that the job of making sure that monetary policy plays its role is one that the Governor of the Reserve Bank takes seriously.

“In terms of fiscal policy, we will continue to operate a carefully balanced policy. There are areas of investment in New Zealand society that we need to continue with. The building of state houses for example, there are areas such as the health system where I think COVID-19 has shown New Zealanders the importance of the kinds of reforms that we're proposing, and I believe we need to carry on with those. But every decision we make at the budget is based on whether we get value for money and how we can best make sure that New Zealanders benefit.” Grant Robertson talking at the post-Cabinet news conference.

Robertson downplayed Orr’s comments about targeted fiscal spending to help control inflation.

“I think he made those comments in the context of all central banks around the world. And I agree with him that we've got to make sure that our spending is targeted, and make sure that it goes to the right places. It's the reason why we've focused our cost of living attention on those on low and middle incomes with our April 1 package. And with the winter energy payment coming back in on the first of May, rather than untargeted tax cuts that benefit people who earn more than $180,000 a year as the National Party would have it.” Robertson.

I then asked whether Budget 2022 due on May 19 would tighten or loosen fiscal policy. Robertson did not answer directly, citing instead indications of new fiscal rules. The old rule adopted pre-Covid by Robertson was that the Government looked to keep net core crown debt in a range of 15-25% of GDP, which was different to the below-20% lid set before 2019. Robertson has said he’ll update this debt rule before the Budget.

“We will be setting new fiscal rules because the last couple of years is obviously seen as needing to suspend some of the targets that we've previously had. I'm also on the record as saying that I think it's really important that we use fiscal policies sensibly to be able to make sure New Zealand not only keeps a lid on debt, but also make sure that we invest in the right things such as infrastructure, long term. And so I have more to say about all of that before the budget and on Budget Day.

“We will continue to keep a lid on debt. It is important for New Zealand that our debt levels return down from where they are now. We will well served by having relatively low debt as we came in to a crisis like COVID-19, but I also had to balance that against the fact that New Zealand has a massive infrastructure deficit, which we will continue to invest in.” Robertson

After the news conference I spoke with Willis in an interview, in which she again accused the Government of wasteful spending and pointed to official findings that the Government’s plans for nearly $2b of mental health spending had been ineffective.

The full interview is in the podcast above.

But just how stimulatory is the Government right now?

The Government certainly did add to demand in 2020 and 2021 when it gave $20b in cash to businesses as wage subsidies and resurgence payments. The net effect of that spending was a near equivalent increase in cash deposits for households and businesses. The 40%-plus rise in house prices caused by this monetary and fiscal stimulus also bolstered the ‘wealth effect’ on consumer spending and some business investment.

But that broad spending has now stopped. The Government did indicate it would have a new operational spending allowance of $6b for this current Budget to help pay the one-off costs of health system restructuring and to reduce climate emissions.

But the December Half Yearly Update actually showed (see chart below) the net fiscal impulse from this plan was a net detraction from GDP of 2.8% over the next four years. In reality, that detraction will now be larger because the Crown Accounts have shown smaller than expected monthly deficits since December.

This actually shows the Government is tightening fiscal policy as the Reserve Bank is tightening policy through 2022 and 2023. The broader question should be whether it is enough.

This is not a plea for a monetary policy mate. Yet.

In my view, I don’t think Orr’s comments were a carefully designed shot across the Government’s bows or a public plea for more fiscal restraint. He was speaking broadly about central banks generally. It would also be highly provocative to use an interview with the IMF to slap the Government about the face. It would be akin to saying into a hot mic that the whole school could hear that you had just dobbed the headmaster into the ministry for fiddling the school’s books. Orr is blunt. Just not that blunt.

He commented in the interview that central banks should talk clearly with Governments if their help is needed. He will if it’s necessary, but right now the Government is actually contracting, not expanding, fiscal policy.

But the Governor is right that they have to work together. It could be argued in hindsight that they both put their policy-easing pedals ‘too close to the metal’ in 2020 in 2021 by pumping in $20b in cash, slashing interest rates and removing LVR restrictions. They only really started taking their foot off the accelerator late last year.

I don’t think the LVRs should have been removed in the first place and that the bond-buying programme was only really effective in the first few months of the pandemic in calming a dysfunctional bond market. Orr said himself in the interview that the bond buying, which ended in July 2021 with $55b worth of bonds bought with invented money, did most of its work in the early months.

The Reserve Bank bought $17.5b in the three months to the end of June 2020, but kept plugging away to buy $55b by July 2021 and had also pledged to buy up to $100b. Also, somewhat surprisingly to me, the bank’s Funding for Lending Programme (FLP) of discounted loans to banks at the Official Cash Rate is still going. It has now lent $8.3b to banks, including $5.1b lent after the end of the bond buying.

I asked Robertson about why it was still going and his eyebrows were also somewhat raised in this response:

“I'm sure the governor is, and you could certainly put the question to him, as aware of the role that it plays. And if he's looking at the broader tightening, it may be an area he chooses to look at.” Robertson.

So what now?

The Opposition is on to a political winner by blaming the Government for both higher inflation and higher-than-necessary interest rates. The coup de grace would be to extend the blaming to lower house prices, caused by higher interest rates.

However, it’s a relatively easy shot. No Opposition will ever have to specify what it would cut. It can make broad accusations about Government wastage, more bureaucrats, fewer contractors and higher inflation. All it needs is a few high-profile examples of bad value for money and the broad accusation will stick, even if the numbers don’t justify the specific accusation about inflation.

The Government can rightly argue that cutting spending on infrastructure, housing, health and all the other public services that got us through Covid would be counter-productive, especially if the problems of housing affordability, climate change and child poverty are to be solved.

In reality, about half of the inflation is generated by local demand and supply issues. The biggest causes of inflation flowing to the peak in the first quarter of this year were 2% mortgage rates, rampant high LVR lending and $20b of cash payouts through 2020 and 2021. All of those factors are finished now and the effects will flow through in late 2022 and 2023.

Aggressively tightening both fiscal and monetary policy now would just turn into a pro-cyclical feedback loop that worsens any slowdown into a recession next year. But calling for the Government to act like a household and ‘balance its books’ is always good politics when those households are feeling the pain right now of inflation.

Short-term pain converted into long-term pain

But it has been exactly the attitude that has left us with the 20% debt millstone around our necks stopping us from investing properly in infrastructure, health and housing. Politics work in lizard brain timeframes that convert short term pain into long term pain.

We’ll see whether Robertson is able to shift the debt narrative much over the next couple of weeks before the Budget. He may be able to nudge the range out a bit from 15-25%, but not in a meaningful enough way that changes the outlook for infrastructure under-investment, housing shortages and the feedback loops turning today’s poor kids into tomorrow’s poor grandparents with poor kids.

Meanwhile, the Reserve Bank should shut down its FLP programme and the Government should allow the bank to use the Debt To Income multiple tool it wants to take some of the leverage out of the economy. Both are unlikely in the next year or so while the Government tries to get re-elected.

How to win elections

The rule of thumb for any Government in the modern era is that to get re-elected, interest rates need to be falling, house prices need to be rising, taxes need to be flat or falling vs GDP, and inflation needs to be low.

The only way to square that circle is constantly squeeze down the size of Government and prefer the interests of asset owners (mostly home owners) over the interests of renters and PAYE wage earners who spend 100% of their pay packets on goods and services taxed at 15%.

By the way, here’s the full post-cabinet news conference if you’re really into the political and economic geekery. Hopefully I’ve saved you a bit of time with the detail above…

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 Reserve Bank hiked its official rate by a ‘bazooka’-sized 50 basis points this afternoon, but a comment buried in its statement about not changing its forecast track caused wholesale interest rates that underpin fixed mortgage rates to actually fall in the last couple of hours. Go figure. I do that lower down.

I also talk about that irony and the implications for housing, mortgage rates and the economy in a pop-up hoon in podcast form above with Kiwibank Chief Economist Jarrod Kerr and Fisher Funds’ Head of Fixed Income David McLeish.

Elsewhere in the news today:

Covid-19 Minister Chris Hipkins announced this afternoon that Aotearoa-NZ would go to the ‘orange’ setting from ‘red’ at 11.59 pm tonight, which means indoor venues will have unlimited capacity and seating arrangements;

Food prices rose at an annual rate of 7.9% in March, which was their fastest annual rate in almost 11 years, and which Commerce Minister David Clark said confirmed “the need to rein in the super profits of the supermarket duopoly,”;

‘Bazooka’ hike fires softly

The Reserve Bank hiked its Official Cash Rate by 50 basis points to 1.50% this afternoon, which was more than the 25 basis points that most economists expected and the first 50-calibre ‘bazooka’ hike in 22 years.

But the bank buried a comment in its statement that showed it had not increased its forecast track for the OCR from its February 23 Monetary Policy Statement. Back then, it forecast the OCR would peak near 3.35% by the end of next year. That was well below the forecast track of over 4.0% already priced into wholesale interest rates by swaps and bill traders.

The bank said today it saw inflation headed over 7% in the first half of this year, which is well above the 6.6% peak the bank saw in late February. It did note however that growth was slowing globally and there were headwinds to consumption and residential construction at home.

So the irony of today’s ‘bazooka’ rate hike, is that the dovish comment about the OCR track saw wholesale interest rates drop 10-20 basis points. No one is suggesting that would allow fixed mortgage rates to fall, but there’s little in this decision to force fixed interest rates higher than they had already been pushed. Floating mortgage rates are, however, likely to rise by around 50 basis points.

Here’s the Reserve Bank’s key comments in the decision announced today at 2pm (bolding mine):

“The risk of more persistent high inflation expectations has increased. The Committee agreed that their policy ‘path of least regret’ is to increase the OCR by more now, rather than later, to head off rising inflation expectations and minimise any unnecessary volatility in output, interest rates, and the exchange rate in the future. The Committee agreed to a 50 basis point rise in the OCR, consistent with this least regrets analysis.

“The Committee noted that the OCR is stimulatory at its current level. Members agreed that a larger rise in the OCR now is consistent with the forward path for interest rates outlined in their February Statement. Members also agreed that this ‘stitch in time’ approach is consistent with near-term financial market pricing.” Reserve Bank statement.

So what? - This front-loading of rate hikes but with the same peak next year achieves the Reserve Bank’s aim of trying to scare down inflationary expectations in the short term without necessarily increasing longer term mortgage rates any more than they have.

My view is the Reserve Bank is unlikely to get too close to the 3.35% by the end of next year, let alone the 4% the market was expecting. The feedback loops of a cooling housing market, cooling consumer spending because of ‘demand destruction’ from higher fuel, energy and rent costs, and a slowing house-building market will be more than enough to cool things down without having to replace the bazooka with an NLAW or a Stinger.

The day we finally reopened properly

Today marks something of an historic day in our Covid history. It’s the first day since the omicron wave reared up in January and February that our borders are open quarantine-free to Australians, and there are no limits on gathering indoors.

Viv Beck, the CEO of Auckland business group Heart of the City, said the move to orange was a major relief for Auckland hospitality, retail and tourism businesses. She estimated the various trading restrictions had reduced receipts by 50% or $1b. She noted the Heart of the City's membership had fallen by 213 since early 2020 to its current 1,195 because of business closures. Beck is now running to be Auckland Mayor.

Auckland Chamber of Commerce CEO Michael Barnett said the move to orange would finally give event and hospitality planners and bookers the confidence they needed to restart.

“The orange light will have an immediate and positive impact with the lifting of capacity restrictions that have hurt hospitality and events and clearly signal to customers that it is safe to re-engage.

“We have to make up for lost time and show the world that New Zealand is still on the map and offers opportunity and a lifestyle to attract the skills and money we desperately need to re-energise our economy.” Michael Barnett

So what now? - An exhaustion and sense of anti-climax hung over today’s announcement. The damage to confidence and spending in the first quarter has been much heavier than many expected and is certainly no repeat of the celebration in the second half of 2020 when it appeared we have beaten the first version of Omicron.

Now we’ll see whether the Australian tourists come back and how many young residents here choose to jump on the plane going back across the Tasman for higher wages and lower rents. 

Scoops and news of note

Chart of the day

For the record today

Rent inflation - Statistics NZ reported rent inflation in March from a year ago was 5.8%, as measured by its ‘flow’ measure of new tenancies started in March. The ‘stock’ measure was up 3.7% in March from a year ago.

Thread of the day

Spookies, profundities, curiosities and feel-goods

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: National leader Christopher Luxon’s relative inexperience in politics and public policy has been exposed in an area the former Air NZ CEO might have been expected to be across: public transport.

Luxon questioned the need for taxpayer subsidies for buses and trains yesterday, but also said he saw the need for ‘mode shift’ out of cars in cities, although when challenged he said he ‘hadn’t thought much about it’. Paid subscribers can see more detail and analysis below the paywall fold.

Elsewhere in the news this morning:

* Russian President Vladimir Putin said peace talks with Ukraine had come to a ‘dead end,’ blaming western provocation of ‘fake news’ reports of war crimes in Bucha and saying Russia would ‘rhythmically and calmly’ continue its ‘special military operation’ in Ukraine; (Reuters)

* Data out overnight showed US consumer price inflation hit an annual rate of 8.5% in March, but core inflation of 0.3% for the month was less than the 0.5% expected by economists, which prompted a rise in global stocks this morning and a fall in market interest rates (CNBC);

* A Financial Services Council survey of 2,000 people in January found ‘Generation Rent’ (18-39 year olds, including 60% who rent), had been hit the hardest financially by Covid, were the least confident about the future, had the most concerns about house prices, were the most worried about wage stagnation; and a third did not have enough cash saved to last more than a month without income;

* Treasury Secretary Caralee McLiesh gave a major speech yesterday highlighting what she said was a ‘growing gap in wellbeing between young and old’ (see more on that in Charts of the Day below the paywall fold); and,

* Ageing cement pipes in Christchurch are leaching asbestos fibre into the city’s water supplies, but not at dangerous levels, a University of Otago study of asbestos pipes in 35 Christchurch locations has found, The Press and ODT reported this morning, adding the report’s authors said Aotearoa-NZ has 9,000kms of asbestos piping that would cost $2b to replace.

Look out later today for Covid-19 Minister Chris Hipkins announcing at 1pm whether some or all of the country will go ‘orange’ from Good Friday. We will also find out whether the Reserve Bank will hike the Official Cash Rate by 25 basis points or 50 basis points to as high as 1.5% at 2pm. I’ll include both decisions in my Dawn Chorus email sent to paid subscribers only shortly after 5pm.

An incoherence and lack of thought on public transport

Christopher Luxon’s lack of political and public policy experience was always going to trip him up at some stage, but few would have expected it on transport policy, and the issue of Government subsidies for transport, given the Government’s 51% ownership of Air NZ and the more than $1.3b in loans and subsidies it has received in the last two years alone.

The National leader was asked on his way into Parliament yesterday whether he thought the 50% discount on bus and train fares put in place for three months from April 1 should be extended. He told reporters he didn’t think these public transport services should not be continued to be propped up by taxpayers, even though he saw the need for ‘mode shift’ away from cars in cities.

Here’s the quotes below, as cited in this RNZ piece from Jane Patterson and from Thomas Couglan at NZ Herald.

"There's a need for us to continue to drive mode shift, I get it, but you've got to build good-quality public transport options that people choose to use." Christopher Luxon

He went on to say the 50% discount was helpful right now for those suffering in the cost of living crisis, but would need to be revisited.

"But ultimately, public transport needs to stand on its own feet. It can't be subsidised or underwritten ... it has to be able to build on its own case.” Luxon

It seems astonishing to me that the former CEO of Air NZ did not know or realise that Waka Kotahi-NZTA will spend at least $2.6b in the next three years on subsidising buses and trains, as a matter of bipartisan public policy for decades. That money comes from the hypothecated National Land Transport Fund, which is funded by fuel taxes and road user chargers, rather than general taxation. It is a crucial element in any Government’s plans to get to net zero by 2050, which National voted for.

"Fundamentally, it's got to stand on its own merits." Luxon

He was then reminded public transport has been heavily subsidised for decades, he said:

“I haven't thought too deeply about it too honest. I think the bottom line is, we want to encourage more mode shift.”

He referred to the $100m spent on the Te Huia commuter train between Hamilton and Auckland as a wasteful subsidy.

"When you look at some of the options, think about Te Huia, a slow train, $100m being wasted on that. It doesn't matter how much you spend on that, it's a white elephant right?" Luxon

Luxon went on to say public transport had to be attractive in its own right.

"The bigger issue is public transport has to be a compelling as a proposition so that people want to use it. There's a need for us to continue to drive mode shift, I get it, but you've got to build good quality public transport people choose to use." Luxon

As Luxon said, it is clear he not thought about the issue in depth, which is astonishing for a former CEO of a government-subsidised public transport company that committed itself to reducing climate emissions dramatically, including under his watch.

The reaction was swift

Finance Minister Grant Robertson was derisory yesterday afternoon.

"If he wants a cost of living crisis he'll get one if he doesn't subsidise public transport. Public transport more generally is important, it's good for people who are on lower incomes but it's also good for the environment in terms of climate change ... we'll be continuing to subsidise public transport." Grant Robertson

Transport Minister Michael Wood could also barely contain himself, tweeting this:

Green Transport spokeswoman Julie-Anne Genter was also critical.

In my view, this exchange should be a wakeup call for National on building a coherent transport policy that matches with its climate change commitments and its campaign about the cost of living crisis. It also begs some interesting questions about National’s view on the public subsidies (certainly in capital investment terms, if not maintenance terms) for roads and motorways that are embedded in the day-to-day lives of motorists and trucking companies.

If he is against subsidies for public transport, then surely he would be in favour of congestion charging, and proper pricing of the climate cost of motoring and farming.

A query for paid subscribers. Do you want this opened up to the public for sharing? Please comment or like below if you do so you can share it. (Update: The answer was yes so I’ve now opened it up.)

In other news in geo-politics and the global economy

Fined - UK PM Boris Johnson, his wife Carrie and his finance minister Rishi Sunak were fined overnight for breaches of Covid-19 rules during parties at 10 Downing St, which some fellow Conservative MPs said confirmed he had misled Parliament (although his resignation is now seen unlikely in the middle of the war in Ukraine).

Defaulted - Sri Lanka suspended payments on its government bonds overnight, ending its “unblemished record of external debt service since independence in 1948,” and triggering a call for a debt restructuring supervised by the IMF. Sri Lanka has US$35b of foreign debt, much of it owed to China, and faces US$7b of repayments this year, with ony $2b in foreign reserves. Sri Lanka’s rupee has fallen 37% this year, making it the worst performing currency in the world (even worse than the rouble).

Imprisoned - There were various reports overnight that Vladimir Putin had thrown his top spy chief into prison because he believed the official had leaked Russia’s invasion plans to the United States.

Lowered - The World Trade Organisation last night lowered its projections for growth in global merchandise trade this year to 3% from its previous projection of 4.7%.

Warned - China’s Premier Li Keqiang warned last night for a third time in less than a week that Covid lockdowns would hurt China’s economic growth because of disruptions to production and consumer spending. IPhone assembler Pegatron also announced the suspension of production in Shanghai and Kunshan. (SCMP via YahooFinance)

10c saved - US President Joe Biden announced overnight a waiver of environmental protection rules to save 10c per gallon off ‘gas’ prices in many states. The Environmental Protection Agency will issue an emergency waiver to allow the widespread sale of 15% ethanol blend fuel that is usually prohibited between June 1 and Sept. 15 because of smog concerns. (CNBC)

Other scoops and news of note in Aotearoa-NZ today

Charts of the day

The growing wealth gap between young and old

This chart was in a speech delivered yesterday by Treasury Secretary Caralee McLiesh.

“Housing also matters for wellbeing due to the role it plays as a stock of wealth. Since the early eighties house prices in New Zealand have increased more than five-fold, a higher rise than any other OECD country. At that time, 73% of people in their early thirties owned a home; by 2018 it was 51%.

“The result is growing wealth inequality between the young and old. Consider the difference in wealth distribution by age in 2000 compared to 2018. As you can see in Figure 10, in both cases we see a pattern where older people have more wealth. This is expected—we tend to accumulate wealth as we grow old.

“But since the turn of this century the gap between wealth of the over 65s and under 35s has more than doubled. Limitations in our wealth data make it hard to be precise, but we estimate that at least half of this gap can be attributed to the growth in house prices.” Treasury Secretary Caralee McLiesh in a speech.

World food prices hit record highs in March

The Food and Agriculture Organisation reported its food price index hit a record high in March and was up 33.6% from a year ago. The highs were in both nominal and real terms for prices measured since 1961.

Useful longer reads

This is encouraging. The answer is Nau Mai Ra arranged a wholesale hedge arrangement in December with an unnamed player. That’s great news.

Some fun things

Have a great day

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: Here’s the podcast above of the weekly hoon from Friday afternoon, where Peter Bale and I chewed over the big events of the week in geo-politics, and here in Aotearoa-NZ’s political economy for an hour in a live webinar for paid subscribers.

This week our special guests were:

* Elaine Monaghan, a former Reuters correspondent in Moscow, bureau chief in Ukraine and Belarus, and former US national security correspondent for The Times, and is now a journalism professor in the United States;

* University of Otago Professor Robert Patman, a Fulbright Senior Scholar and author of 12 books on international affairs and security issues;

* University of Canterbury Professor Natalia Chaban, who has a doctorate from the Kyiv National Linguistic University and specialises in political communication, public diplomacy and EU Foreign Policy; and,

* Stuff columnist and senior reporter Dileepa Fonseka, who writes about economics, housing and transport issues from Auckland, including reporting this week on the failure of the Infrastructure Funding and Financing Act, and the inside story on how NIMBYs strangled housing supply from the 1960s onwards.

We talked about:

* evidence emerging of war crimes in Ukraine and how that had harded the resolve in both Ukraine and Europe to push Russia out of Ukraine and send as many arms as possible into Ukraine;

* whether the west was culpable for Russia’s invasion;

* whether Finland and Sweden might apply to join NATO;

* how the war in Ukraine and China’s lockdowns were blocking global supply chains already roiled by Covid;

* whether Putin could stay on if he lost in Ukraine, especially with Russia’s May 9 ‘Victory Day’ celebrations looming;

* how Sri Lanka got into such a mess in recent weeks, and how China is involved;

* the failure of the Infrastructure Funding and Financing Act to generate new houses; and,

* new research showing how councils and Governments strangled housing supply and allowed congestion to build from the 1970s onwards.

This is our free sampler email and podcast for both free and paid subscribers and is freely available to share. It also includes my summary below of the five news events of the week from my point of view, plus links to my work through the week for paid subscribers, to give free subscribers an idea of what they’d get. A quick technical note: some subscribers may have received a repeat of yesterday’s Ask Me Anything thread in error. Substack said this morning it was having a couple of technical gremlines.

Five things of note this week

Evidence of Russian war crimes emerged

World leaders started setting up war crimes tribunals and gathering evidence of Russian war crimes in Ukraine after discovering hundreds of executed civilians in suburbs around Kyiv that had been occupied by Russian troops.

US President Joe Biden again branded Russian President Vladimir Putin a war criminal and some western leaders openly talked about the need to remove him as a war aim. NATO countries ramped up their sending of air defence and anti-tank missiles to Ukraine, and started sending heavier weapons such as tanks and artillery pieces ahead of an expected new Russian onslaught in the eastern parts of Ukraine.

Our Government announced tariffs on Russian imports and imposed new sanctions of Russian individuals and companies. PM Jacinda Ardern downplayed the need to send lethal military aid to Ukraine, although it emerged later in the week Defence Minister Peeni Henare proposed to Cabinet on Monday that Aotearoa-NZ send its Javelin anti-tank missiles to Ukraine. We have 24 such missiles and their launchers, which we were sent by the United States via Te Kaha from Pearl Harbour to Auckland in 2016 at a cost of $21m. Our army also has stocks of the Carl Gustaf M3 shoulder-launched anti-tank missiles.

National and ACT called on the Government to send the missiles to Ukraine, given they weren’t needed here now and we could restock at a later date.

Shanghai’s lockdowns are causing global economic pain

The ultra-harsh lockdowns of over 28m residents of Shanghai are beginning to hurt the Chinese economy and clog up global supply chains again. Many workers are sleeping in offices and factories and there are reports of residents shut in their tower blocks being unable to get food or medical help.

Dissent is growing online about President Xi Jinping’s ‘zero’ Covid policy, which has mandated increasingly restrictive lockdowns. They’ve worked until now with regular and delta Covid, but is now struggling against Omicron, as our zero policy did. The difference with China though is its vaccination rates are much lower than here, and China used its own much-less-effective vaccines, rather than Pfizer. For example, the vaccination rate of China’s over 70s population is less than 50%.

China’s Government is desperate to offset the growth-slowing effects of the lockdowns in China’s manufacturing and shipping hubs in the east and south. In the last two weeks it has unleashed US$2.3t worth of infrastructure spending plans, which is more than double the amount the United States, for example, is planning over the next five years.

Various factories have shut down, including Tesla’s massive new plant in Shanghai, which is designed to produce more than half of its global output. Global supply chains often begin and end in Shanghai and Shenzen, where there have also been lockdowns.

I covered how these lockdowns and the war in Ukraine are likely to worsen commodity price and shipping inflation, while also slowing global economic growth. I also looked at how it was good news for Australia’s economy, but bad news for hopes of trying to stop our tradies jumping the Tasman for better paid jobs in and around the mines.

Ashley Bloomfield resigned unexpectedly

The Fed became much more hawkish

It started with speech from US Federal Reserve Vice Chair Lael Brainard, who had until been renowned as a dovish presence on the Federal Open Markets Committee (FOMC), which decides on monetary policy for the world’s largest central bank and issuer of the world’s reserve currency. She said in a speech on Tuesday that inflation was running way too hot and the Fed would have to hike fast and sell down its stockpile of US$9t of bonds quickly to get inflation under control. Then on Thursday, the minutes of the FOMC’s last meeting, which decided on a 25 basis point hike in the Fed Funds rate last month, said it had been close to going 50 basis points and wanted to ramp up its bond sales to a rate of US$95b a month or over US$1t a year.

This even-more-hawkish turn surprised markets and caused a steep selloff in US Treasury bond markets, and a less severe selloff in stock markets. The US 10 Year Treasury bond yield rose 34 basis points this week to a three-year high of 2.71%. Financial markets now see an 80% chance of a 50 basis point hike on May 4.

These comments below from former Federal Reserve Bank of New York President Bill Dudley were a particularly pungent sign of what is to come, and how the Fed is unlikely to get away with a soft landing this time.

“It’s hard to know how much the US Federal Reserve will need to do to get inflation under control. But one thing is certain: to be effective, it’ll have to inflict more losses on stock and bond investors than it has so far . . . 

“As [Fed chair Jay Powell] put it in his March press conference: “Policy works through financial conditions. That’s how it reaches the real economy.”

“He’s right . . . The US economy doesn’t respond directly to the level of short-term interest rates. Most home borrowers aren’t affected, because they have long-term, fixed-rate mortgages. And . . . many US households do hold a significant amount of their wealth in equities.” Bill Dudley

This interview with him is also worth watching.

So what? - What the Fed does with interest rates is arguably the most important indicator of where the global economy and asset prices are headed. It will also be closely watched by our Reserve Bank, which is expected to put up our Official Cash Rate from 1.0% to either 1.25% or 1.5% next Wednesday.

The bottom line: The Fed has now completely shed its ‘transitional’ view on inflation and is going to crack down very hard on inflation, possibly to the point of causing a US recession. That will affect us. However, some think the Fed will over-tighten and have to be slowing down and possibly reversing by late next year. The 2-10 year spread’s dip into negative territory last week suggested just that.

That potential for interest rates to stop rising later this year or early next year is a factor I think in a likely bottoming out of our housing market with falls of as much as 10%, but not much more.

How the NIMBYs downzoned their way to greater wealth

Ka kite ano

Have a great weekend

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