Taking Stock 21 November 2024 

FOR those who follow economics and investment, the arrival of Alan Bollard as guest speaker at an adult education meeting in Central Otago would be celebrated.

As guest speakers go, he would be from the top shelf, a former Commerce Commission chairman (1994–98), Secretary to Treasury (1998–2002), and Reserve Bank Governor (2002–2012), now a university professor.

As a member of the adult group, you would expect Bollard to be deeply concerned about the trajectory of the world’s debt levels.

As noted in Taking Stock last week, the Trump plan to blow the US deficit from US$2 trillion a year to $3 trillion, while providing tax cuts and introducing extreme tariffs on imports, is a plan that must produce higher inflation unless the laws of gravity are reversed.

My conclusion is that the majority of US voters who liked Trump’s tariff plan must prefer inflation and ever-greater debt, implicitly discounting the burden on future generations to service this debt.

Bollard is a learned economist, once the head of the NZ Institute of Economic Research, and is married to Jenny Morel, once an energetic enthusiast for venture capital. They would be committed to the concept that growth and productivity are the right answers, not exponential increases in government debt.

Bollard told the Central Otago audience recently that his concern about Trump’s economic plan was that it was inflationary and relied on even more debt.

The global bond market, which matters somewhat more than Kapiti Coast investment advisors, or even former Reserve Bank governors, has expressed its view, loudly.

The 10-year bond, here and in the USA, is around 4.5%.

Clearly, the bond market’s benchmark implies a long period when, as an example, mortgage rates must be high.

The loud bleat for drops in short-term rates might base its shrillness on the allegedly low (in my view false) inflation figures and anticipate an imminent cut in the overnight cash rate. (Inflation for many is much higher than the chosen index indicates.)

Swap rates and the 10-year bond rate insinuate doubt about the trajectory of interest rates.

Why would a bank or a pension fund lend at mortgage rates of 5%, if the risk-free 10-year bond settled at 4.5%? The extra 0.5% return over of the mortgage return would easily be offset by the lower risk capital requirement and admin support cost of a 10-year bond.

It has long been said that you can bet against the equity market, and many do (by shorting it) but no capital market participant has learned much if he wants to bet against the bond market.

As a truism that is as staunch as the other old saying that "you can bet against bond markets for a long time, but they always outlast your solvency".

Bollard’s warning was timely. In the words of an investment adviser like me, he was saying that if Trump implements his plans inflation will be reignited.

To investors that means one should not sacrifice liquidity to lock in long-term investments returns now.

The ANZ and others may well be right that business growth will one day be restored but one must always remember that, whatever rates might do, the ANZ wins.

As an aside, Trump’s tax-cut promises - also inflationary - depend on tariffs and more debt.

The promise to boot out of the USA those largely South American and Asian workers who have not been granted working visas is an absurd commitment.

Increasingly, Americans are retiring from work earlier, and increasingly stepping away from service sector jobs.

The thought that service sector workers can be expelled and replaced by America’s unemployed is about as lucid and savvy as the thought that America will benefit from re-opening coal mines while stripping support from renewable energy projects.

The adult education meeting in Central Otago that was privileged to listen to Bollard’s speech has now received guidance from an experienced, highly educated public sector leader, no longer bound by rules about speaking the truth.

Listen to him.

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MENTION of Bollard may jangle some nerves of those who endured the ravages of the 2008 global financial crisis.

In NZ the global crisis resulted in a savage decrease in our share market, lasting nearly three years, a collapse in our property development market, a nasty fall in the values of properties, and it exposed the rot in our contributory mortgage and finance company sector.

The finance companies that had funded the surging property development market were found to have been governed and managed mostly by knaves.

Worse, they had been supervised by trust companies with virtually zero skill or understanding, audited carelessly, overseen and regulated by incompetent and lazy people at the NZX and the Securities Commission and, worst of all, wilfully ignored by politicians until it was too late.

It would be unfair to apportion much of the blame to Bollard and the Reserve Bank, though they certainly failed to influence the politicians or a poorly-led Treasury.

The country failed to rescue billions from the bonfire, largely because Key had neither the experience, wisdom, nor motive to put “chump change” (in his words) ahead of election successes.

A foreign exchange dealer with an unadmired greedy American bank was unable to understand the offers of people who were competent, experienced, and wise, Duncan Saville, an international fund manager, being the obvious example of a rescuer with a full-sized cerebral organ.

Of course we must also acknowledge the incendiary behaviour of hopeless consultants, C-grade legal and corporate advisers, receivers, statutory managers and valuers, many of whom were as self-centred as any politician. Few, if any, are held in respect today.

Bollard and the Reserve Bank did insufficient to earn praise during this debacle, the RB dysfunctional in its relationship with Treasury.

But as is the case in most disasters, it is fair to put most of the blame on the villains who created the fire, and not judge as harshly those who failed to extinguish it.

Nor should we discuss Bollard during a conversation about the current oafish plan for the Crown to guarantee finance company investors for a charge roughly equal to their corporate entertainment bill.

I have not asked Bollard for his view on this madness, but I would bet my best bow tie that if he were governor, he would be pricing risk appropriately.

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INVESTORS should note that the Australian deposit guarantee is more generous than NZ proposes, covering in total A$250,000 (maximum, per deposit) invested in a bank, building society, or credit union.

Please note there is no mention of any guarantee of any finance company.

The guarantee fees are displayed as follows: -

Credit ratings

AA minus – AAA - 0.7% per annum

A minus - A plus - 1.0% per annum

BBB plus – unrated - 1.5% per annum

The current NZ proposal, which I hope is reversed by Finance Minister Nicola Willis, is to charge finance companies in NZ less than AAA banks pay in Australia.

My view remains that NZ should not guarantee any finance company but if NZ must take this risk, it should price the guarantee fee based on an in-depth risk assessment, beginning with a base fee that acknowledges any credit rating.

Finance companies with weak shareholders (individuals with no material wealth), meagre capital (less than $100 million), might have an attraction for investors chasing a high return if we ever did have sufficiently vicious penalties for those who cheat (including jail).

As our weak laws apply today, the finance companies should be funded only by other institutions, like banks, with the skill to price risk accurately.

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ONE of Trump's goals is to integrate a non-fungible token (Bitcoin) into our settlement system, legitimising the virtual currency so favoured by those who do not want their transactions to be visible.

I met last week with a bullion depository owner who attends conferences in the USA, listening to presentations on commodities and new ideas.

A decade or so ago, he sat beside a conference attendant during a plenary session that was focused on the future hopes of Bitcoin. His conference neighbour subsequently had a gentle punt on Bitcoin, at the time US$12 per coin, buying 200 coins, carefully storing his unique 16-digit access code in his computer.

The “coins” lost value. The buyer lost interest.

That was not the only thing he lost.

He lost his computer and the 16-digit code.

Despite subsequent expensive efforts his code has not been discovered. The “coins” have disappeared.

Ah well, win some, lose some.

Today, 200 Bitcoins would be “worth” at US $80,000 a coin, a mere US$16 million.

Perhaps this recollection explains the wisdom of the NZX in offering a Smart Bitcoin fund, where the punter has no responsibility for storing their “coins” or password.

The Smart fund does all the tricky stuff.

The fund has risen sharply in value since Trump was elected.

Note, Bitcoin, in most parts of the world, remains an unregulated fungible token. Its followers have done sensationally well in recent weeks. Now is not the time to recall the days when tulip bulbs sold for more than country estates, I suppose.

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SANTANA Minerals holds its AGM in Auckland next week.

Those attending will no doubt be seeking answers to the questions left dangling by its release last week of its Pre-Feasibility Study (PFS).

Investors should know that by ASX regulations a PFS must be reliable to an extent of 70-80%, meaning the assumptions must be made reasonably.

A Final Feasibility Study must be 80-90% reliable.

Of course the biggest assumption relates to the future of the gold price. I am unsure how you can attach a percentage of certainty to that figure.

Edward and I will attend the AGM and report back to our clients on anything useful we learn.

The project remains the most interesting project in which I have been involved for many years.

The new PFS discloses that Santana aims to mine 147,000 ounces on average for each of its first three years, assessing the total cost per produced ounce at NZ$1,620.

The gold price of NZ$4,300 implies a margin of NZ$2,680, per ounce, which should convert to nett profit before tax.

One can perform one's own arithmetic but very clearly if this margin were realised as per the PFS the thousands of New Zealanders who hold a meaningful number of the shares would be more gruntled than disgruntled.

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Infratil Limited – 6-Year Senior Bond

Infratil has announced its intention to issue a new 6-year senior bond. Full details of the offer are expected to be released on 28 November 2024. Infratil is an infrastructure investment company with significant holdings in Digital Assets, Renewable Energy, Healthcare, and other infrastructure assets. It anticipates earnings for FY2025 to be approximately $1 billion.

While the initial interest rate has not been announced yet, we expect it to be approximately 6.20% per annum based on current market conditions. Infratil will cover the transaction costs for this offer, so clients will not be charged any brokerage fees.

The offer will comprise two separate parts:

New Firm Offer: Expected to open on 28 November 2024 which will be open to new and existing investors. The Firm Offer is expected to close at 11:00am on 3 December 2024, with payment due the following week.Exchange Offer: Expected to open on 4 December 2024 (following the Firm Offer). Under this offer, all New Zealand resident holders of the IFT260 bonds maturing on 15 December 2024 will have the opportunity to exchange some or all their maturing bonds into these new bonds.

If you are interested in being added to the list for these bonds, please contact us promptly with the desired amount and the CSN you wish to use, and we will pencil you in on our list. 

If you are an existing IFT260 bondholder and would like to exchange your bonds into this offer, please inform us at the time of your request.

We will send a follow-up email next week to anyone who has been added to our list once the interest rate and terms have been confirmed.

Chris Lee

Chris Lee and Partners Limited