Chris Lee & Partners Ltd

Taking Stock 30 January 2025

IF THE economies of the world are to be ignited in 2025, bursting into a satisfactory rate of growth, at least four changes will have occurred.

1. Interest rates would need to fall in NZ to an overnight cash rate of perhaps 3%-3.5%. In NZ mortgage rates might then fall to 4.5%. The US rate will need to fall as will the UK’s.

2. Inflation would need to fall globally, perhaps sparked by more Saudi oil production leading to lower oil prices.

3. Trump’s various threats would lead to the withdrawal of proposed ugly tariffs (which inevitably generate inflation) and to a withdrawal of the proposal to expel the offspring of many immigrants (which would disrupt the US economy).

4. The bellicosity from Russia, North Korea, China, and Israel would need to end by negotiation, perhaps ending the sanctions on Russia, and thus helping to reduce energy prices.

If all of those issues untangled themselves, then the cost of servicing debt in the UK, USA, and NZ might be somewhat “less unaffordable” than current projections (on increasing debt).

Current forecasts imply the USA would be requiring taxation increases of close to $1 trillion, were debt to rise on the trajectory now predicted. Does anyone there care about debt?

Given the USA already has an annual structural fiscal deficit of close to $2 trillion, the new level of cost would be vulnerable to the response of the global bond market.

If the USA is forced to keep borrowing ever larger sums at current rates, the global bond market would be unlikely to provide such sums, except at higher rates.

The 10-year US bond rate now hovers between 4.5% and 4.75%. That rate is unaffordable. 

Heaven help us if the rate keeps rising.

In NZ, the 10-year bond rate is similar to the USA. Ouch.

In both countries the markets will continue to wonder why the governments of 2021-2023 did not overfill their coffers by borrowing very long-term debt at the rates then available - between 0.5% and 1.0%, for 10-year fixed-rate NZ government bonds.

Just to illustrate the point, NZ’s nett debt, now a sickening NZ$180 billion, costs $1.8 billion for each full percentage point of interest.

A smart decision to raise half that amount in 2022 at 1% would now be saving of at least NZ$2.7 billion a year, or $27 billion over 10 years.

As a courtesy, I will not name the people who ignored that opportunity in 2021-2023, but I do hope that they are never in a position to preach to the country’s future decision-makers.

Very clearly, debt servicing costs impact on what is available for Crown spending, and what must be done to increase tax revenues.

It is somewhat nauseating to think that political goofiness, and public sector errors, have caused such an immense problem.

Given this is “spilt milk,” it is clear that NZ must now innovate, improve productivity, and widen its income sources to compensate for those multi-billion errors.

My advice is to watch the 10-year government bond rate.

If it miraculously fell by a significant amount, let us hope that those in charge today would lock in long-term debt at the lower costs.

To repeat, three years ago the long-term bond rate was 0.45% and as negative rates were being discussed, global investors poured money into high-rated bonds, like New Zealand’s. In NZ, individual political legacies will reflect goofiness.

_ _ _ _ _ _ _ _ _ _

THE collapse of "Ubco" — the electric motorbike company based in NZ — casts light on those who funded the start-up but did not succeed in ensuring the company executed its plan.

Funders of start-ups, often using other people’s money, do not fulfil their obligation by writing out cheques or by persuading others to write out cheques. The start-up must succeed!

Ubco was funded in part by the Asian manufacturers of the motorcycles, and partly by the likes of Stephen Tindall’s K1W1 and even the all-care-no-responsibility Snowball Fund.

Ubco failed because its sales were slow and its cash resources inadequate to straddle the development years, and perhaps because it made social decisions like not marketing to those armies which might have bought the bikes.

One has to note that Tindall, an excellent, generous man, is a great philanthropist through The Tindall Foundation which is funded by the money made from his baby, The Warehouse Group.

He built that company cleverly but failed badly to identify others who could take over management and grow it. Frankly, he selected some dummies to manage and govern the company he created.

The Warehouse shares have slumped to $1.00 from their $7.00 peak 20 years ago, the company painfully wounded by poorly executed forays into Australia, and into other markets (like expensive bicycles sold by Torpedo 7). The collapse all began with the Australian nightmare, led by an inexperienced fellow, perhaps with a greater ego than business nous.

I have great admiration for Tindall’s generosity, but my balanced view would also note that K1W1 has performed bleakly. K1W1 is a start-up company financier which he created. Again, his involvement in K1W1 has produced meagre returns.

One wonders if it has the right people to achieve realistic goals.

On Snowball, which marketed the high-risk, potentially high-return Ubco shares, my views have been often expressed.

Snowball now also seeks to sell some managed funds to its database, implying that it has the skill to differentiate the best of fund managers from the mediocre and, implicitly, give advice by endorsement. I cannot see any value-add in this new idea.

I continue to believe that crowdfunding should be restricted to donations to people out of luck (flood victims, etc), but should go nowhere near promoters of start-ups, nor should it pretend it has competitive advantage in the field of financial intermediation, let alone implied advice.

Snowball has had some of its offerings succeed, of course.

It has had its share of duds. Retail investors are usually ill-equipped to assess the longevity of start-ups. Snowball is not equipped to intermediate the knowledge gap.

Obviously wholesale investors err also. They are generally dealing with other people's money so the frequent poor outcomes do not get noticed in suburbia.

Taking the risk of backing start-ups is a task best left to those who can afford to lose their own money, and to those with experience and special analytical skills.

_ _ _ _ _ _ _ _ _ _

THOSE who invested in the Bendigo-Ophir gold project by buying Santana Minerals’ shares should take the time to read its quarterly report, published last week.  Here is a link: https://www.nzx.com/announcements/445631

Investors who are advised clients of our firm can read my analysis of this report via the private client area of our website. All clients are welcome to contact us for a copy of the analysis.

Also of some interest is the report published by Australian mining researcher, Blue Ocean. It has put on paper its expectation of Santana’s share price by year end, as have many Australian brokers. Clearly their enthusiasm is being signalled by their share price forecasts.

Obviously until consent is sought (this quarter) and considered (maybe next quarter) the project must be described as conditional.

Because of the continuing rise in the gold price, the Crown has accorded some priority to the project.

Two years ago I calculated the Crown stood to receive more than a billion dollars in royalties and taxes during the first of what should be several decades of production.

At the current gold price, the projected 10-year figure today dwarfs my estimate.

I note that Santana has barely started to seek staff but unsolicited has received more than 600 job applications, many from iwi who make up 40% of New Zealand’s mining workforce.

_ _ _ _ _ _ _ _ _ _

On Friday of last week one of the world's biggest news services, CNN, announced it would be making large headcount cuts, totalling several hundred.

On the same day the NZ Herald group announced plans to cut journalist numbers, and the same response will affect television and radio staffing.

The underlying cause of falling readership (or viewing audiences) is attributed to the lack of interest from younger people in listening to or reading what they believe is blatantly biased news reporting and outdated delivery systems.

The younger generations are said to want their news in headlines and to want to use their mobile phones and other devices to fast-read the news. Not unexpectedly, advertisers choose to spend where their advertisements have the biggest and most responsive audience. Governments cannot instruct advertisers where they must place their ads. (However, they could reinforce copyright rules and stop the plagiarism alleged by the media.)

Surveys show many regard some news providers as far right (Fox etc) and some as far left (CNN, Stuff etc).

All of this bodes ill for those who invest in media shares, and for those who seek employment in a sector that, rightly or wrongly, is regarded as biased and dependent on obsolete delivery systems.

For investors this is bad news.

If the media ever offered factual reporting and competent, unbiased analysis of corporate results, investors would be likely to include proper business news in their daily reading, restoring a subset of buyers who have money and are of an age group that is interested in financial markets.

In my own case, Bloomberg, The Financial Times, The Wall St Journal, a mix of The Australian and The Australian Financial Review, Business Desk (NZ Herald), NZX announcements, and New Zealand’s National Business Review provide me with the breadth of news needed to help me to do my job and stay connected to my investment portfolio.

I buy the NZ Herald and have The Post delivered, but both these publications more closely resemble the Women's Weekly that used to be in every doctor's waiting room. I confess I am not remotely interested in the romances or parenthood of media workers, nor do I want reporters to give me “advice” on anything, least of all financial matters.

I assume that strategy, of being an entertainment organ rather than a newspaper, must be based on some sort of logic, presumably to cut costs.

Perhaps the two newspaper groups have accepted that news gathering is expensive and does not pay its way. Obviously, the low revenue no longer accommodates good salaries so those who enter the sector are people whose ambitions do not include the trappings of wealth.

I was reminded of what newspapers used to look like when I performed some research on the history of the central Otago gold sector, prior to presenting a seminar in Cromwell last year.

Going back to the 1860s archives revealed the Cromwell, Bendigo, Tarras area to contain about 1000 dwellings. There were TWO daily newspapers, each costing around a halfpenny (1 cent). Neither had much, if any, advertising to bring in revenue. They relied on sales.

Neither wasted much space. Obviously, the papers were black and white, yet both survived for many decades.

Perhaps the explanation for their readership was the content. Every item was “news”, with no dross. How much gold was produced in different areas by different prospectors was reported daily.

A small item might say something like “Thomas Bloggs yesterday panned six ounces of gold from his 15-yard prospect in the Bendigo creek. Thirty yards up the creek Barnabas Wilberforce collected four ounces.” The news led to more people arriving in the area.

The next item might say that the coal price at Bannockburn had been re-set at 16 shillings a tonne. The cost of ferrying the coal to the vibrant Bendigo area was one pound a tonne. These prices were down from 17 shillings and one pound one shilling from last week. Readers clearly wanted facts that were relevant to their lives.

The next item might say that a horse and its rider fell down a crevasse covered by bush, killing the horse and injuring the rider. The dangerous crevasse was 600 yards east of the Hairpin Bend and the Bendigo creek and was now signalled by three white posts.

I shall not record more of such reports, but my point should be clear.

The newspapers printed news. People bought the papers and trusted the accuracy of the news. There were no bylines or pictures of the reporter. The only opinion to appear on the paper was the editorial, clearly marked as comment.

There was no dross, no columns from some irrelevant reporters about their fear of mice, or their big mortgage, or horrible ex partners/husbands, or their collections of cats.

There were no bylines; no “celebrities”; no political bias.

Admittedly back then they were not even telegrams, let alone digital news, videos, podcasts, iPhones etc. So newspapers were needed. They were the only option for those who wanted “news”.

Today printed media faces extinction, its current survival dependent on retail advertisements, the retailers wooed by promotions (like eight pages for the price of two), effectively a 75% discount. Retailers have many options to advertise their wares. Obviously the 8 for 2 option is cheap.

The media proposes to cut staffing costs rather than to seek a greater paying audience. An audience would depend greatly on a switch back to factual, unbiased news presentations, requiring a very different balance between reporter skills and the by-lined entertainment stuff we endure today from reporters who think their opinions are relevant to an adult audience.

As an example of bias, I kept a note for two months of the editorial pages.

The cartoonists presented more than half their drawings to lampoon Luxon, Peters, Seymour or Trump. There were virtually none examining their equivalents in those parties rejected by the electorate.

Aside from the wonderful Joe Bennett, the regulars who write opinion (presumably without payment) were in many cases expressing the views of the young, the has-beens, and the green. They are of course entitled to air their views. But a balancing group might have been helpful. A return to presenting news and global news, would be better than the chanting of ideology, in my opinion. Perhaps the majority of readers have provided different feedback.

Maybe those on the other side of the left are busily working on recovery rather than pontificating with what must be ample spare time as university people often exhibit. Growing the economy is a task that does not create spare time.

Of course the even more dramatic changes are coming in television.

A rare adult news reader, Simon Dallow, noted last week that television would best discard its “faux celebrity” childishness and get on with presenting the news factually, without the bias of its reporters. Dallow is in his 60s. Enough said.

CNN has the same problem. Perhaps the problem is universal, though I do note that the BBC seems to avoid the need for constant hydraulicking of reporter egos, as CNN is wont to do.

All of this might seem of no relevance to readers of Taking Stock.

Obviously I think the media should be relevant, and could be worthy of investment. Perhaps there are many journalists who would support change.

The mix of advertorials, reporter egos, political bias, and an absence of evidence of genuine knowledge and experience (real work), produces stuff that is of very little help to investors, does not generate margin, and clearly is not sustainable, judging by cost-cutting announcements.

The people who buy newspapers and seek “news” from radio and television are allegedly 60 plus, the average age growing by one, every year. It is alleged that the age group of 60 plus has a high percentage of people with enough nett wealth to be real investors and real paying consumers of news.

Continue these two thoughts and it is pretty clear that those who actually buy news would want relevant, credible information from their media consumption and certainly do not buy into the absurdly-paid “celebrities” or “Paris Hiltons”, as some would say.

They will get their “advice” not from reporters but from those who are qualified and trusted not to be salesmen or commentators, unless the media commentary is validated by a history of relevant skills and experience with, perhaps, evidence of personal success.

Last week we were told even the huge networks like CNN are losing their audience.

I hope that an advertising drop off can be reversed and might restore an audience, if a new generation of reporters arrived with no interest in celebrity status, but with a new mantra.

My guess is that a focus on news, and a sharp reduction on “comment”, might be the catalyst for a larger, paying audience.

_ _ _ _ _ _ _ _ _ _

Travel

Auckland - Albany - 31 January - Edward Lee

Wellington – 4 February – Edward Lee

Christchurch – 13 February – Fraser Hunter

Lower Hutt – 20 February – Fraser Hunter

Blenheim – 20 February – Edward Lee

Nelson – 21 February – Edward Lee

Dargaville – 26 February – David Colman

Kerikeri – 27 February – David Colman

Wairarapa – 28 February – Fraser Hunter

Whangarei – 28 February – David Colman

Napier - Mission Estate - 6 March - Edward LeeNapier - Havelock North - 7 March - Edward Lee

Please contact us if you would like to make an appointment to see any of our advisers.

Chris Lee & Partners Ltd

Taking Stock 23 January 2025

WHEN banking nett profits surge, as night follows day, there will be a clamour for “revenge or extra taxes” on bank profits.

Perhaps these will be called “windfall” taxes or “temporary” taxes.

For the calendar year 2024 the major six US banks reported a combined profit of US$142 billion, the second highest, by equal measurement, in history, only a few billion less than the profit of 2022, so stupidly created by politicians.

Of course it was in 2021 that banks in most countries benefited from oafish government interventions, the politicians bluffed by bankers into a panic, in fear of bank collapses.

New Zealand was no exception, our sadly inexperienced and somewhat goofy political leadership duped into “rescuing” the banks, with a handful of badly designed interventions. We will all recall how the finance minister Robertson agreed to repurchase government bonds from banks at a price some $12 billion more than the bonds were worth two years later.

He either forgot or did not know how to balance his purchase with a re-sale agreement that would have avoided the $12 billion loss. Dopes will be dopes.

Banks here, and in many countries, graciously thanked the goofs in power and have since included those gifts in their profits to the great advantage of the dividend pool and the bonus pool.

The NZ government also entered into deals with the banks that allowed banks to lend with reduced risk, the Crown accepting 80% of the risk of the loan (but NOT 80% of the profit).

Other countries made other concessions that also reflected equal negligence and a careless approach to Crown (other people's) money.

When the banks in subsequent years were forced to disclose their profits they naturally sought to compress profits by overstating unknown loan impairments.

Last year the suppression of profits could not be continued.

As a result, globally, taxpayers clamoured for revenge against bank super profits. Voters sacked the clowns in government who had so squandered money. Revenge taxes became a political objective.

So far, to my knowledge, Spain, Italy, Hungary, the Czech Republic, Lithuania, Ukraine and, I think, France, have initiated special taxes on banks.

Of course there are many ways of taxing banks.

I now ponder whether the NZ decision to implement a Crown guarantee for bank deposits is in fact a sneaky, de facto, claw back of bank profits.

Hear me out.

Consider what process one would follow if one wanted money from the banks without risking litigation.

One might begin by encouraging irrelevant “peacocks” like Hooten, Rashbrooke, Wilson, Small, Eaqub, and Stubbs to use their media access to build their public bar audience of anti-bank people. (Though, interestingly enough, none of those commentators discuss what NZ would look like if it had a fragile banking system, as opposed to a highly robust banking sector.)

An organised media and political campaign to find a way of ultra-taxing bank profits might begin with “communication managers” writing columns attacking the banks.

Next up, the regulators would demand tougher capital levels, and have new anti-risk settings for bank lending, such as limits on how much a bank can lend to an individual, based on income and the valuation of the security (usually a house).

Stage two is complete when the banks have so much capital and such stringent lending conditions that they are virtually impregnable.

At that point, aided by the “communication” people, you, the Crown, convince the general public, including the public bar, that the risk of using bank deposits requires an off-setting Crown guarantee.

You bring in the academics who all talk about how other countries, with much weaker bank controls, now offer Crown guarantees. You display NZ as an outlier, rather than the proud owner of a highly robust banking sector.

Stage three is the big moment. Promise to guarantee all bank deposits to a maximum retail level, say $100,000 per person per bank, and then here is the punchline.

Charge the banks 0.05% on all deposits as the cost to offset the virtually non-existent liability for guaranteeing very robust banks. Is this a guarantee fee, or a deviously-disguised new “revenge” tax?

The truth, of course, is that robust banks in a crisis require liquidity support, which is already automatic, the Reserve Bank being the provider, as it has been for decades. Robust banks do not lose billions overnight and do not need the Crown guarantee.

Here is the outcome.

The NZ big banks (A-rated to AA-rated) have deposits of at least $500 billion. They produce a profit (combined) of around $6 billion after tax. Presumably they pay around $2 billion of tax.

A “guarantee” fee of 0.05% on $500 billion produces $250 million per annum.

If the taxes already paid were $2 billion, your new “levy” increases Crown revenue from the banks by 12.5%.

This is not a challengeable “windfall” tax, the Crown will postulate. It is a fee for a liability (the guarantee).

Yet the Crown has introduced controls that mean the liability is very very unlikely to convert to a real cost.

Genius!

Political parties in NZ now uniformly operate by consulting small groups of people (described as a forum) who respond to ideas and to invitations to complain. If the forum strongly supports an action, bet your boots that the forum response will bring political follow up.

Clearly, the forum and the public bar patrons want more tax on banks.

Machiavelli lives on!

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OF COURSE the new Crown deposit guarantee (CDG) proposal, to be implemented this year, wants to go far further than being a clever way to strip revenue from banks.

Most unwisely, the guarantee will extend to highly vulnerable non-bank deposit takers like credit unions, building societies and, inexplicably, privately owned finance companies.

The need for this risky guarantee is explained by the Crown fear that its unnecessary bank deposit guarantee could fatally damage the non-banks if the guarantee excluded them.

The Crown response is to extend the guarantee to non-banks.

My response to the non-banks would have been “diddums”.

Let me explain.

Prior to the 1987 property and sharemarket crash, NZ had multiple non-bank lenders, primarily because anti-competitive regulations defined what banks could NOT do.

For example, banks could not offer hire purchase or leasing, could not participate in the unofficial cash markets, and were easily and quickly punished with costly increases in Reserve Asset ratios (RARs) should the banks be seen to grow too much or too quickly, in the eyes of the government.

RARs were the tool used by the likes of Muldoon, as Prime Minister AND Minister of Finance. He could unilaterally declare that banks and other financial institutions must invest more of their depositors’ money into miserably low-yielding government or local authority stock.

He could, and did, implement immediate limits on what deposit rates banks could pay and at what rates they could lend.

He could and did put limits on the quantum wage increases paid to staff.

Major banks responded by part or wholly investing in non-banks, enabling them to benefit from the activities that were denied to banks. Many invested in finance companies and investment banks, then known as merchant banks.

BNZ Finance, UDC Finance, AGC, General Finance, NAB Finance, NatWest Finance, Indosuez, Citicorp, Chase NBA and CBA Merchant Finance were all busy lenders owned by major banks. All accepted public deposits. The good news was that the banks effectively were cautious owners. Yet when the 1987 market collapse occurred, all, bar UDC and AGC, disappeared, either closed down or sold off.

Thanks to the bank caution and access to capital not one investor lost their deposit money.

The finance companies, controlled by banks, had balance sheets and processes that were authentic. Loan books were generally sound, impaired loans identified, and thus analysts could offer meaningful research. They were able to analyse financial reports that were real, properly audited, and overseen carefully.

How this was to change in the period 2002-2008.

In that era of privately-owned finance companies, published information often became untrustworthy, “capital” was often fabricated by including “profits” that were not, and never were, earned, and bad loans were routinely hidden. We discovered this when investor confidence was destroyed by the visibly crooked in the sector.

Auditors, trustees and the incompetent Securities Commission were lazy and inept as were the politicians, unable to detect the rot that was to rob investors.

The tissue of lies, fraud and fabrication were created by often dishonest non-bank owners, governors and executives, who behaved in many cases like common thieves.

The media enabled some of this, promoting and lauding crooked companies and accepting the advertising revenue, the likes of TV1 actually allowing completely toxic companies to promote themselves by sponsoring the 6pm news or weather. Were the media companies even interested in the veracity of the companies they allowed in as partners?

Happily, today's accounting standards are better but most importantly the Reserve Bank now puts real energy and a degree of intelligence into its role as supervisor of financial institutions.

Yet today there remains real risk. The new iteration of non-banks, especially finance companies, have little or no access to shareholder support, most of them privately-owned by people with modest wealth and with little ability to underwrite a crisis.

So why is the taxpayer of NZ nationalising the risk for an absurdly underpriced fee?

The guarantee will enable tens of thousands of investors to obtain a better return, underwritten by taxpayers.

Philosophically this is nonsensical.

To me, with several decades of experience in analysing financial institutions, the only sane involvement of the Crown should be to set the rules, oversee behaviour, and de-licence cheats, referring them to the courts.

Those non-banks with sensible management and governance, ample capital, owned by people of considerable liquid wealth (not toys), should be allowed to offer people higher returns for higher risk.

Let the buyer beware of the risk and make an informed decision.

Let the buyer investigate the substance of the shareholders.

When the non-bank market was eviscerated in 2007-2010, I came to admire greatly two companies who were owned privately, Broadlands and Instant Finance.

Broadlands, owned by Tony Radisich and family, and IFC, owned by the Nausbaums and others, had the wealth and integrity to stand behind their companies.

Investors were fully repaid.

Think about all the others like First Step, Bridgecorp, Lombard, Nathan, Strategic, St Laurence, Capital & Merchant Finance, and others, where in many cases the owners “moved on”, some accepting bankruptcy or jail, some choosing to hide wealth rather than use it to escape contempt and honour their commitments (and their marketing promises).

Happily, relevant laws and the supervision of auditors and trustee companies have improved.

The fallacious concept that trust companies have ever had the skills and the energy to act as a “guard dog” has been discredited, as I described in The Billion Dollar Bonfire, which focused on South Canterbury Finance.

Perhaps Treasury now acknowledges that it lacks the experience, the skill and the motivation to contribute to fair private sector investment outcomes, but the Reserve Bank as the new “trust company” has developed its skills.

Regrettably I am unaware of any improvement in the politicians who so often have proved to be gutless, inept, and in some cases, as The Billion Dollar Bonfire displays, duplicitous, more interested in the status quo and re-election than in addressing obvious flaws.

Put all of this together and one might accept that the concept of guaranteeing non-banks will always be a high-risk proposition. 

It is simply not good enough to say the “tax” on banks - a fee for virtually no risk - might cover the cost of guaranteeing the high-risk non-banks. Only a charlatan would pursue that unfair paradigm.

_ _ _ _ _ _ _ _ _ _

A NEW, tiny Hawke’s Bay non-bank deposit taker, Welcome, is now advertising that its retail depositors will soon be granted the Crown guarantee.

Welcome will focus on the lower risk area of non-bankable property lending, perhaps with a focus on lending to the self-employed, or to the those needing bridging finance, or to those who might want capitalised interest loans.

Welcome sounds like a mortgage trust but with some capital.

I have been unable to find a figure for its paid capital.

It will be managed by a fellow who has been acclaimed as a good mortgage loan broker, with badges and ribbons from his industry awards.

My expectation is that Welcome would commit to maintaining capital of at least 20% of its total lending book, and that it would reward its depositors with a rate of around 8% per annum, were it left without a Crown guarantee.

I expect Welcome will have governors and managers who are expert at managing cash flow, liquidity, credit control and loan quality, as well as compliance and careful legal paperwork.

Welcome will need this level of expertise. Finance companies in NZ have very short life spans unless they engage with such staff and have access to substantial shareholder wealth (tens of millions).

I have no doubt that there is a genuine market for unconventional property loans, secured by existing cautiously valued real estate.

But for the life of me, I know not why the Crown wants to guarantee this sector.

Will we next be guaranteeing a fund that wants to leverage the purchase of Trump's absurd Trump tokens, all billion of them, as Trump plans?

Let us be clear. Trump's tokens are like used postage stamps, entirely dependent for value on what someone else is prepared to pay for the tokens.

I recall being present at a political function where someone had painted a portrait of Key. A man sitting behind me bought it at the auction for $50,000.

My guess is that it now sits on some wooden trestle available for sale to raise money for a school netball trip.

Do I hear $5? $10?

Trump's tokens may have even less real value.

_ _ _ _ _ _ _ _ _ _

Travel

Auckland - Ellerslie - 30 January - Edward LeeAuckland - Albany - 31 January - Edward Lee

Wellington – 4 February – Edward Lee

Christchurch – 13 February – Fraser Hunter

Lower Hutt – 20 February – Fraser Hunter

Blenheim – 20 February – Edward Lee

Nelson – 21 February – Edward Lee

Wairarapa – 28 February – Fraser Hunter

Napier - Mission Estate - 6 March - Edward LeeNapier - Havelock North - 7 March - Edward Lee

Please contact us if you would like to make an appointment to see any of our advisers.

Chris Lee & Partners Ltd

Taking Stock 16 January 2025

JANE Fraser, the CEO of one of America’s biggest banks (Citi, formerly Citigroup), has explained why she and her bank are so optimistic about the American sharemarket’s prospects in 2025.

She bases her hopes on “American exceptionalism”, a relatively modern concept which acknowledges America’s entrepreneurialism, innovation, and technological leadership.

Implicitly it points to the funding of research and development of America’s Magnificent Seven (MS). The MS spend this year will exceed US$250 billion, three times what they spent in 2020.

Fraser sees equity markets rising inexorably, based on the growing profits of these giant companies which she and many believe will address and conquer the challenges of global pollution, labour and skills shortages, unimaginably high sovereign, corporate, and household debt, healthcare and education.

She does not offer a view on how a structurally inadequate US tax system will address social spending.

Like most American banks, Citi is recording enormous profits, perhaps disposing of doubtful loans to private credit funds.

American exceptionalism is now a widely-cited concept, overtaking Trump’s catchphrase “Make America Great Again”. (I wonder if Trump struggles with pronouncing the multi-syllabled word “exceptionalism”.)

Europeans seems disdainful about crass American slogans but Fraser could easily counter that the economic growth in the USA continually confounds commentators as does the extraordinary exuberance of its debt and equity investors.

The S&P 500 has risen by nearly 50% in the past two years, unfazed by enormous fiscal deficits, wars, domestic dysfunction, not to mention weather/insurance events.

The MS technology giants (Amazon, Meta, Tesla, Nvidia, Microsoft, Alphabet, and Apple) comprise a stunning 35% of the world’s biggest index of 500 companies.

The banks, the manufacturers, the retailers, the energy, food, transport, construction and engineering companies have become barely relevant to the growth of the S&P 500 valuation.

American exceptionalism, as Fraser observed, has led to the exciting development of Artificial Intelligence, an undeniable piece of evidence in support of that description.

Many of my generation will have no idea how to identify the real oysters from mountain oysters so, as investors, many default to the logically inane philosophy of buying the whole of the S&P index, ensuring they capture the astonishing winners (at the expense of the scores of losers).

(Does anyone back the whole field at Trentham?)

In his introductory Taking Stock published before Christmas, our chairman-elect, James Lee, noted how at the start of his career the “dotcom” boom saw many high-flying “dotcoms” within a year or two become objects of derision.

Implicitly he asked the question, would the AI boom lead to balloons so over-inflated that they would perish?

I recall an absurd example of investor mania in the dotcom boom, when a wireless technology company morphed into a dotcom company that warehoused “adult toys”, believing the internet purchasers would make the company millions. Its share price soared and collapsed within months. Curiously, nobody was accountable for such nonsense.

Yet “American exceptionalism” are the words that feed the confidence of the vast majority of our investment managers, who are busily investing other people’s money into American index funds and ETFs. They base their strategy on the unknown future progress of companies enabled by AI and their somewhat unwise belief that more American debt will see US interest rates fall while the US dollar keeps getting stronger. Markets this week do not support that optimism.

These non-sequiturs obviously trump the boring old investment philosophies based on analysis of fundamentals.

The bold new strategies will succeed until they do not.

This is okay if each investor has calculated how much of his savings should accept obvious risk in search of high return.

In the very short term, the US companies will benefit from the cost-cutting that results from a growing exit from strategies aimed at “zero carbon” and an abandonment of awkward “Biden” initiatives in areas like gender diversity. These initiatives cost money. In recent weeks the six largest banks have scrapped such policies.

Even before he takes over, Trump seems to have emboldened corporate America to discard any role in social engineering.

In short, Americans are to return to eliminating expensive social pursuits in pursuit of high short-term gains (and bonuses), enhanced by stock buybacks and, I guess, all of this fuelled by “exceptionalism”.

I guess that summarises the case for confident, index-based investment with other people’s money - for the moment, and for the amount that accepts the level of risk.

_ _ _ _ _ _ _ _ _ _

THE bold pursuit of returns of around 15% per annum rewarded investors (and fund manager bonuses) in 2023 and 2024, in spite of the issues highlighted in previous paragraphs (wars, debt etc).

During those two years another risk has surfaced but has been ignored, crowded out of discussion by the high returns (and bonuses).

That risk relates to the possibility of collapses in the private equity (PE) and private credit (PC) funds, where high returns will always correlate with high risk.

The global amount directed into this opaque, loosely regulated, under-capitalised area of investment reached US$13 trillion (yes, trillion) in 2023, and very likely at least $15 trillion by the end of 2024.

New Zealanders’ money caught up in this vortex would barely be $20 billion. Most of this would have come from our KiwiSaver managers, other pension funds (NZSF), and other managed funds (ACC, etc).

The current market and political sentiment seems to be that fund managers should bulldoze even more of other people’s money into this market segment in pursuit of higher returns. The government seems to support the strategy.

It is true that the private equity/private credit managers have certain advantages.

Like the Chinese car manufacturers, who can use any international technology, have opaque labour and safety rules, and opaque zero carbon rules, the private credit and equity managers have various exemptions from more transparent regulated investing.

1. They are subject to less scrutiny and less supervision.

2. Because they fund from other fund managers or the unprotected hyper-wealthy, they are not subject to the protections in place for retail investors.

3. They typically promise no liquidity so are not bound to match funding to the exit rights of investors, though the patience of investors changes when losses occur.

4. They use the money they raise as “capital” by subordinating it behind whatever bank debt they can raise. (Banks might lend to risky transactions if the risk of failure is underwritten by such subordination.)

5. They report their gains by engaging with “valuers” who “assess” the changing, theoretical value of the PE/PC managers.

6. They have great discretion on rolling over troubled loans, without disclosure.

7. They minimise costs; no branches, no prospectuses, no retail cost, yet high discretion over any covenants.

The trend today is for PE managers to enter the leveraged buy-out market when borrowing costs are cheap, and to switch to PC when rates rise, making lending a high-return activity (providing there are NO bad debts).

PE managers generally seek to use low-cost debt and implement a severe cost-cutting programme (research and development, staff training, travel constraints, lower executive compensation) to lift short-term gains, in pursuit of a high-price sale in the quickest possible time frame.

If their timing is good, they then trade/sell the asset, or if that fails they seek to IPO the asset (sell it through a public listing).

A PC manager gains opportunities from PE-owned companies when poor business conditions or higher interest rates make the traditional banks unwilling to roll over big-ticket loans to aspirational but fragile companies.

The banks will demand more restrictive covenants and higher interest rates to rollover big corporate loans, often with extreme penalties for any breach of covenants.

The PC manager may then step in, replace the bank loan, and hope it can massage the corporate borrower, gaining either through high margins, high fees, high penalties, or through a bonus system if the borrowing client recovers.

The PC lender, recall, is unlikely to have the capital of a bank and is able to be flexible, without public disclosure.

My view is that banks are blessed by a better database, superior analytics, and a broader base on which to calculate risk, as well as by skilled executives with long-term ambitions.

To illustrate the value of such experienced, skilled people, recall the 1980s when almost all our property companies (Chase, an example) sought huge bank loans, often from a syndicate of banks. Some had to resort to American lenders with little understanding of the risks then threatening the NZ market (dreadful governance, improbable valuations, no liquidity).

At that time the NZ banks had an unhealthy focus on market share and quarterly profits, the BNZ being the dopiest, until, in the 1990s its new CEO, Peter Thodey, rebuilt a true banking culture.

The standout banker of that era was (Sir) John Anderson, CEO of the country’s only true investment bank, South Pacific Merchant Finance, wholly owned by the dreadfully led National Bank of New Zealand, itself owned by the later-bankrupted Lloyds Bank (in London).

Anderson took time to analyse Chase. He analysed its debt levels and the mismatch of (short-term) loans to unsaleable, usually glitzy, but badly built property.

He analysed the liquidity and valuations of Chase’s properties.

He observed the cash Chase was sucking out of the company.

He assessed the dubious accounting standards Chase was employing.

He was soon to discover how before Chase became worthless it bought Farmers and then eviscerated Farmers’ pension scheme by using all of its tens of millions to buy a single asset – Chase shares – and thus reduce to rubble the savings of thousands of people. (Yet nobody was ever accountable.)

Anderson was a real banker, a real leader, a large man with a matching intellect and presence. He commanded attention and could wake up the most indolent bank executive, once famously thumping the board table with such vigour that glasses of water jumped and spilled.

He told the NBNZ that Chase was a doomed “pack of cards” likely to collapse at the mildest zephyr.

When Chase collapsed soon after, costing its lenders hundreds of millions, the NBNZ lost not a dollar, having responded to Anderson’s analysis.

Today there are very few, if any, of Anderson’s calibre but those who have his experience and skill are most unlikely to be chasing high rates from dubious corporate loans. The PC managers will need to find lots of John Andersons.

The fabulous database held by banks ensure they are scouring out all worrying loans, hopefully more focussed on the return of capital than on the return on capital. They should not resent the PC takeouts. They should welcome them.

I accept the possible status as an outlier but I am happy to forecast that private credit as an asset class will eventually be seen as another iteration of high-risk non-bank lending, just as Equiticorp was in the 1980s, and as were so many (Bridgecorp, First Step, South Canterbury Finance, Strategic, Hanover, St Laurence) in the period between 2004-2007.

There will be some survivors but many corpses.

_ _ _ _ _ _ _ _ _ _

YOU might expect any skilled, cautious pension fund managers in NZ to be watching the rapid growth of private credit corporate lending with the same nervousness that drove Anderson to analyse Chase in 1986.

Those managing the money of people who are solely reliant on the fund manager to match investor risk profiles to fund manager asset selections would, you would expect, be highly tuned into matching risk aversion with their investment policies.

There is a special responsibility on these KiwiSaver managers.

By a ratio of about 50 to 1, KiwiSaver users rarely are even remotely inquisitive about the skills or the wisdom of those who manage their investments. Their faith is touching, but misplaced.

Indeed, a double figure percentage of such investors cannot recall which company manages their savings.

We all nod silently when some politician says we needed to improve the education of investors, perhaps reinstating money skills in the secondary school syllabus. (Yes, please!)

The risk of incompetence is not just that a dedicated salesman will be given hours of airtime to sell poorly researched ideas, just as Money Managers did on Radio Pacific in the 1990s. The greater risk is that the essence of KiwiSaver is being threatened, as some salesmen conflate the objective of obtaining returns for risk, with the social objective of using this pool of other people's money “for the good of the country”.

Regularly I read of unaccomplished fund managers preaching that the pool of money should build our infrastructure, or social housing, or the like.

I interpret this as a cavalier or self-focused attitude towards the owners of that pool of money.

The ONLY objective of a skilled, wise pension fund manager is to carefully define the assets in which he will invest, explain the return for risk, manage the quality of the fund, and by so doing attract money that accepts his fund management investment style.

Only a charlatan would promise a particular investment style and then expand his investment style into “social” projects, without receiving highly specific approval by the investors, via their trustee.

If there are any wise trustee companies in NZ, and there is an argument to say there are none, then that wise trust company would very specifically engage with each investor about his desire to fund any opaque investment, where there is no or little validation of value enhancement.

KiwiSaver investors are said to “deserve what they get” if they take no interest in how their money is invested. I disagree.

I can think of one outcome that might change this arrogance.

It would not be the very long term of improving the education syllabus. That would be a 10-20 year solution; worthwhile but not relevant today.

The momentum would change if any new investing adventures produced not just poor returns, but negative returns.

Investing in infrastructure suits companies like Infratil because its investors have given Infratil the mandate to invest in the sector. The investors select that strategy.

They expect Infratil to be skilled, wise, insightful and transparent. (Generally, Infratil delivers.) Investors allocate to Infratil an amount that is appropriate for each of them, individually.

How can a KiwiSaver replicate that without the equivalent of Infratil’s skills and mandate?

And quite why would a government, that can borrow at 4.5%, hand over to KiwiSaver managers a project that must return 6.5% to be commercial?

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CLIENTS are welcome to share this Taking Stock with their families. If KiwiSaver investors wish to discuss our views on choosing a wise manager and suitable investment style, they should find an independent adviser, here or elsewhere. 

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Travel

Auckland - Ellerslie - 30 January - Edward LeeAuckland - Albany - 31 January - Edward Lee

Christchurch – 13 February – Fraser Hunter

Blenheim – 20 February – Edward Lee

Nelson – 21 February – Edward Lee

Napier - Mission Estate - 6 March - Edward LeeNapier - Havelock North - 7 March - Edward Lee

Please contact us if you would like to make an appointment to see any of our advisers.

Chris Lee

Taking Stock 9 January 2025

THERE are few things more energising and inspirational than a series of good news events coinciding with a new year.

Investors should grasp these items of hope. We need to have hope.

By far the most significant was the published plans of the newly-appointed head of Treasury, Iain Rennie, dragged in to make yet another public sector contribution at the tail-end of an admired career.

He seems to have accepted responsibility for restoring the role of guiding government, declaring an attitude of “let us get on with fixing New Zealand”. 

Rennie, one of our most accomplished career public servants, will have watched the politicisation of the public service, resulting inevitably in dreadfully unintelligent programmes. He will have seen this come to a head in the past few years when social engineering pretended it could be given precedence over the country’s need to address structural over-spending.

In effect, the household of NZ has been committed to spending more than it earned, making up the deficit by pledging the future income of the teenagers yet to join the work force.

Rennie has put his line in the sand.

He acknowledges that NZ needs to improve greatly the quality of its spending, it needs to address the revenue collected (wider tax base) and it needs to trim the unaffordable entitlements of those who do not need such beneficence.

Specifically he wants a review of the age at which pensions are paid, the concept of a means-tested pension and the concept of tax on realised capital gains (whether in property, share investments or any other asset sales).

He has not been quoted as saying this, but his attitude logically reveals he wants to see outcomes that represent value for money, and he wants to see our education and health spending producing measurable improvement.

Perhaps Rennie will make the difference that the likes of Murray Sherwin and Graham Scott made after NZ’s level of decay had become impossible to ignore in the 1980s.

Rennie will know that a deteriorating economy, based on structural deficits and ever-greater borrowing, would inevitably lead to a collapsing currency, resulting in higher debt costs, entrenched inflation and a bleak standard of living for most.

You might argue that Rennie must begin by restoring “merit” as the only criterion on which executive appointments are made. Sanity surely will prevail one day.

The media interviews with Rennie, on the eve of 2025, must be seen as a glorious signal that New Zealand will put an end to the mindset that successive governments have revealed: “borrow and hope commodity prices lift exports enough to enable us to borrow more next year”.

No pressure, Iain Rennie, but on your leadership all adults and all investors will be dependent. Your views expressed in the media give us hope.

_ _ _ _ _ _ _ _ _ _

THE second important item of good news for investors came from the financial market regulator, the FMA.

It has recognised the threat to thousands of New Zealand investors, and billions of dollars of investor money, posed by the loose laws that have given charlatans access to investor money, away from the oversight of regulators.

I refer here to the lazily and incompetently designed “wholesale investor” laws which have resulted in billions of dollars being sucked into dodgy investments.

The du Val property fund is just one small example of a fund that targeted “wholesale investors” yet was able to escape intervention while it self-destructed. There are many such funds, some run by charlatans previously convicted of crimes, banned from making public offers, banned from being directors, or bankrupted, having left creditors facing losses of millions or even tens of millions.

How could this ever have been allowed to happen?

The answer may be because bad law was open to arguable interpretations, allowing greaseball lawyers to teach “entrepreneurs” to exploit loopholes.

Equally ugly lawyers then reap fees “protecting” their clients.

The great 2025 news is that the FMA, having tried hard to guide investors away from loopholes, has now accepted it needs help to stop these miscreants. The FMA will ask the High Court to define the “wholesale” laws to ensure the regulator can build a moat that prevents greedy people from creating their little castles with other people’s money.

We should all applaud the FMA.  Surely the courts will co-operate.

New Zealand savers simply cannot be left to be raided by charlatans who have been enabled by poorly-drafted law.

There are any number of property syndicators and fund managers who have exploited such loopholes.  Perhaps many of these people did not plan to destroy money. It is conceivable that many, like the couple who created du Val, simply were not bright enough to understand that revenue is not the same as tax-paid profit, and that in property development, “profits”, so poorly described because of accounting nonsense, should not be distributed until developments are completed after fully providing for all future liabilities (such as repairing deficiencies).

Such poor business knowledge is widespread and is particularly obvious in the property section. Indeed it has been since the 1980s. In this area the media has some responsibility, having often failed to understand that gross assets do not indicate wealth, and that “valuations” are just a guess of a future sale price, the guess often massaged to suit the property owner.

So if du Val has a valuation of a half-completed project that valuation might be, indeed is likely to be, completely irrelevant, certainly not used to estimate the nonsense we see in “rich lists”. If the owners are spending the IMPLIED profit before it is realised, they are living on other people’s money, not dividends. If they are spending revenue as though it were profit, they might simply be hopelessly incompetent rather than common thieves.

Investors funding such developments need the support of expert overseers armed with very precise law giving the regulators the right to intervene as soon as they observe misuse of funds. Misuse begins the day that lifestyles are based on other people’s money.

I loudly applaud the FMA for recognising the need for clarity about a law I have often criticised. I have referred to regulators some evidence that self-interested accountants and lawyers have certified as “wholesale” many investors who had wealth but absolutely no idea of understanding the investment risk.

For example, a person who has inherited a large sum may well have the money to qualify as a “wholesale” investor, as might someone who wins a large lottery prize. The likelihood of either person being wise enough to forego the support of regulators, or regulatory supervision, is next to nil.

Neither would it be likely that such a “rich” person had any idea about the history of charlatans who described themselves as “experts”, having previously cost their creditors through their business failures.

It will be great news when one of those rare High Court judges, with genuine commercial skills, gets to offer guidance to the regulators and to investors.

_ _ _ _ _ _ _ _ _ _ _ _

ON a much smaller scale there was more “good news” when the clever NZ software service company, Orion Healthcare, was sold to a bold, committed Canadian company for $200 million, the sale reported in recent days.

Orion Healthcare, created by the software genius Ian McCrae, will be remembered for its public NZX listing 10 years ago. It was described then as a clever technology company with global potential requiring years to convert its potential into monetary success.

Sadly, the NZ funds management sector, with Brian Gaynor’s Milford a notable exception, could not see past the somewhat naïve financial skills of McCrae and would not provide the time or support for McCrae’s vision to be monetised. So McCrae bought the company back, continued with his vision, and has now sold part of Orion Healthcare to the Canadians, accepting that his personal health may not provide the time for him to see his company reach its potential.

One could argue the sale is another example of a New Zealand technology company receiving inadequate NZ capital market support. But I would argue that McCrae’s genius and the value of his contribution to the future of healthcare is recognised by the sale.

_ _ _ _ _ _ _ _ _ _ _ _

SO these are three items of good news to boost our spirits as NZ seeks to recalibrate after 15 years of quite dreadful governance, in part caused by the failure of the public sector to set its sights on incremental, long-term improvements.

Rennie is quoted as saying that now must be the time to start afresh, recognising the errors of recent years and aim to recalibrate, making tough decisions. If his initiative succeeds, NZ might become an outlier, for there is ample evidence of short-termism and Band-Aid mentality in the world’s biggest economies.

Few talk about the remarkable global statistics, according to The Financial Times, of the rising number of young people who do not want to work, irrespective of availability, or not, of jobs (20-40%).

Few talk about the huge switch of young voters to extreme left or right, expressing utter dissatisfaction with the status quo.

Few talk about the madness of devaluing currencies, or the compounding costs of ever-increasing debt.

Few talk about the finite resources of the planet.

But at least we will make a start if Rennie and Treasury can convince New Zealand that structural deficits are the signal that change must start now.

Hope springs eternal.

_ _ _ _ _ _ _ _ _ _ _ _

THERE was another item of good news I will share.

There are numerous “experts” ready to stand up and condemn our banking systems. The subject of the day seems to be who should be responsible when investors are scammed and/or hacked. The following happened within our family in recent days.

A text warned that a credit card was being cancelled because of the fear of illegal use. The card, with a minimal credit limit, is used only for online purchases, the limit set to minimise fraud.

The family member had been charged US$75 for something never purchased. The ANZ noted the “purchase” was made in the small hours after midnight and that there was no history of purchases at such an hour. It stopped the card and sought confirmation that the card was being used by a hacker.

A very helpful phone conversation with someone who spoke clearly and carefully followed, after a wait of 90 seconds. The debt was reversed and within days a replacement card sent.

All of this occurred during a weekend.

Banks, like retirement villages, are often lacerated by vacuous puffballs feigning expertise. In this case the ANZ deserves a hat-tip for repairing a problem it did not create.

Heaven help New Zealand if goofy public sector peahens or headline-chasing peacocks ever undermine our banks. If only those attention-seekers could understand the value of rich friends!

May 2025 be a year in which more good news can be identified.

Chris Lee

Chris Lee & Partners