Comments on: Released today – Version two of Swan Dive or Belly Flop?

By: Daniel Perret

Daniel Perret — Wed, 19 Nov 2008 08:34:36 +0000

Following my earlier contribution to the blog, I’d like to thank you Lloyd, Paul and the team at HRL Morrison for raising the measurable goal issue as it turned out to be the right challenge at the right time and the response indicates that you have hit the nail on the head. I read many of the responses and for a while thought that we were straying from the target, however in a free democracy everyone is entitled to their opinion and point of view and this is what make us strong. Personally I do not believe that reducing the wage gap between Australia and ourselves or being satisfied with 20th ranking by 2025 are acceptable benchmarks, we need to do better and cast the net wider, we were number one once so why not aim at being number one again and regardless of the Mitre Ten man saying that big is better, I say quality is better than size, and being small as a Nation means that we are nimble, resourceful and flexible, so let’s use these skills to develop our Goal to be the best and the envy of the rest of the world. Our new government is leading the way to become unified regardless of our political, social, ethnic or religious affiliation, so as individuals we must become passionate about being the best and do our best in what ever small way we can. Go New Zealand!

By: Falafulu Fisi

Falafulu Fisi — Tue, 18 Nov 2008 10:39:31 +0000

Stephen Hulme said…
mechanics of the financial derivative employed in these schemes.

There are many, but the majority fall in 2 main categories.

- Interest rate based derivative
- Equity based derivative

Within those 2 categories, there are many different derivative models under them.

Jens Meder said…
Isn’t hedging basically a dubious instrument for share market speculation on credit?

Hedging is about portfolio insurance against market movement and also an important consideration in modern finance. This again doesn’t guarantee zero loss, but if the portfolio is optimized, then the loss is minimal when the market moves against the portfolio and similarly the portfolio gain is maximal when the market moves in the direction that is favorable to the portfolio in comparison to a non-optimized portfolio with exactly the same asset class compositions. Whether or not to hedge, how much portfolio insurance is adequate, and how often to re-balance a portfolio are important considerations for traders, portfolio managers, and financial institutions alike. If there were no transaction costs, financial professionals would prefer to re-balance portfolios continually, thereby minimizing exposure to market movements. However, in practice, the transaction costs associated with frequent portfolio rebalancing may be expensive. Therefore, traders and portfolio managers must carefully assess the cost needed to achieve a particular portfolio sensitivity. Thus, the hedging problem involves the fundamental trade-off between portfolio insurance and the cost of such insurance coverage.

By: Jens Meder

Jens Meder — Sun, 16 Nov 2008 21:41:43 +0000

Jane – Agreed! We want growth! So let’s increase our savings and investment rate, because that is the way to achieve it. I have done it myself, and neither Roger Kerr’s nor Michael Littlewood’s cleverness can disprove it through sophisticated “smoke and mirrors” camouflaged “studies”, that savings are not essential for providing growth, security, and widening opportunities for actions and choices. How can that be doubted at all, and do not attempts to deliberately ignore or even refute it without practical, tangible evidence and proof, come close to deception?

By: Jane

Jane — Sat, 15 Nov 2008 08:13:33 +0000

I just hope that John Key, and particularly Bill English – who seems a little/lot Roger Kerr-like at times – read this and realise that we need a strategy that pushes us to compete. The idea of cutting corporate tax is awesome. We do not need to lose the total tax take – as getting rid of stupid and difficult and idiosyncratic and stranded and distortionary imputation does that – but this will mean that, finally, investing in firms makes sense, and that firms don’t sit around doing stupid things like borrow to pay dividends – b/c investors will care about growth – and THAT IS WHAT NZ NEEDS – BADLY!!!

By: Jens Meder

Jens Meder — Thu, 13 Nov 2008 22:37:35 +0000

Hi Miki – your blog is full of good ideas so why don’t you get them going? According to the Business Roundtable’s wizard Roger Kerr, there is no shortage of capital (or wouldn’t be , if it had not evaporated in hedging wizardry?)
But is it true or not, that despite our reasonable properity, child poverty is reported to be expanding, arguably, because we have a welfare supported and cultivated “have not” underclass – and how could that problem be tackled?
Do you agree with the all-inclusive increased personal savings-investment-ownership effort as easily introduced through allocating the NZSF to PAs (Personal Accouts), as a basic priority to open up a widened range of investment ideas on this forum, or not, and why, or why not?
Do you want the need for charity & welfare be widening as it seems to be at present, or narrowing, as it inevitably would under a successful effort towards the Ownership Society, with at least a minimally meaningful level of personal wealth ownership by all citizens eventually? (Or if you think this is just wishful thinking, please explain!)

By: Miki Szikszai

Miki Szikszai — Thu, 13 Nov 2008 09:43:02 +0000

So I can’t comment on the various economic arguments that are being put forward here.

But what I do know is that the most important impact of this work has to been able to articulate a goal and start charting a path towards that. From what I can see most agree with the goal. And the conversation is heading towards an assessment of the path.

What I am interested in is this.

1. Who is really interested in being part of this debate with the aim of taking it to the point where we know what we want to do?

2. How do we have this conversation? I don’t like the idea of forming lots of committees – we have the knowledge now so it’s about creating a forum for active debate – and committees are easily captured.

Once this happens – then we can start to correctly shape the resources and funds available to make it happen.

I just posted on my blog http://szikszai.blogspot.com/2008/11/how-to-spend-15-billion.html about how to would treat the investment in broadband – this approach of looking at an overall goal and then deciding what to do would mean we probably don’t spend it on a Fibre to the Home network but predominantly on transport and improving the base level of broadband access across all NZ.

By: Jens Meder

Jens Meder — Thu, 13 Nov 2008 07:14:57 +0000

Stephen – I must admit I do not understand the “convoluted aspects” of the hedging flow chart, which seems to be an ideal instrument of deception, and – I understand – will come under serious investigation as causing, or having allowed to cause the recent meltdown, through concealing the deficit in savings to sustain the excessive speculation on credit.
Isn’t hedging basically a dubious instrument for share market speculation on credit? Yes or no?
Has the NZSF really sunk to that level of economic gambling? I understand, when it lost $100 million through the Italian dairy company bankruptcy, it was a loss not softened by hedging? Is the NZSF a share market gambler, or a long term investor? If the latter is true, then all this hedging smoke and mirrors is irrelevant to our discussion on a measurable goal to lift New Zealand’s economic performance rate.
By the way, it is share market speculation which creates booms and busts, and not long term investments, an increasing proportion of which would have a stabilising effect on trading cycles.
I believe our search for a better economic future should include severely restricting, or even banning, share market speculation on credit, just as I understand, casinos do on gambling. Your views on this would be important for economic commonsense to prevail.

By: Stephen Hulme

Stephen Hulme — Wed, 12 Nov 2008 23:51:58 +0000

Dear Jens

I am not a supporter of Roger Kerr or the policies he espouses. But in this instance he has exposed the method by which our banks, RBNZ and other Crown entities, in my view, finance hedged foreign reserves and hence NZD deposits (liabilities) for our local banks to invest in what they choose. Mortgages seem a favourite choice.

I believe it would benefit your understanding if you came to grips with the mechanics of the financial derivative employed in these schemes. It is called a cross currency basis swap. A brief flowchart description can be viewed here: http://www.omo.co.nz/Uridashi%20Flow%20Chart.gif

I hope the question you ask of me will be answered when you understand the convoluted aspects of this instrument. And please feel free to follow the links I indicated were of value in my previous comment.

By: Jens Meder

Jens Meder — Wed, 12 Nov 2008 08:55:05 +0000

Dear Stephen – Roger Kerr is a passionate promoter of the status quo from a plutocratic point if view (”there is no shortage of capital for profitable investments….so reduce taxes…etc). He himself is too cautious to debate economic basics, but commissions people to write books & studies to “prove” that the NZ savings rate is adequate (which it is for any state of any economy, because NOTHING is created without someone’s savings – a physical fact, not theory), and that savings are the result of wealth, and not its creator. (Of course, my grandmother knew already, that if you are wealthy, it is no effort to save more, you don’t need any studies with complicated equations to prove that).
According to plutocratic laissez faire, his way of raising our economic growth rate is to reduce taxes, so the wealthy cannot help becoming more wealthy – and resort to the trickery of “hedging” – about which he himself admits no one knows where the money ends up. According to R.Kerr, NZSF investment abroad, commonly understood as “spreading the risk” – is practically “smoke & mirrors” – and the only honest investment without the need of the trickery of “hedging”, would be domestic investment!
Stephen – why would the banks have to leave their foreign borrowings in place, when the NZSF – our savings – would cancel the foreign debt by converting uridashi bonds into domestic debt, which in the case of home mortgages are pretty low risk?
The way I understand it, there would be no foreign debt nor interest to be paid to Japan. Please explain.

By: Stephen Hulme

Stephen Hulme — Wed, 12 Nov 2008 00:52:10 +0000

Jens Meder.

Thank you for replying – November 9th , 2008 at 9.44pm

In the case where the NZSF is authorised to divert NZD 1.0 million from foreign investment to a local infrastruce project a number of factors have to be taken into account.

It has to be understood the NZSF in conjunction with the NZDMO (both Crown entities) are engaging in quite sophisticated financial engineering schemes to obtain the foreign currency investment funds whilst leaving the accrued NZD taxpayers contributed funds lodged with our New Zealand banks.

May I refer you to an article posted recently by Roger Kerr here: http://www.interest.co.nz/ratesblog/index.php/2008/10/24/opinion-home-or-away-investing-the-cullen-fund/
to better understand the mechanics involved.
Please read my responses below the article and the linked comments on my website.

I think it will become clear that which you propose will serve no purpose other than to temporarily divert the banks’ deposits securing NZD 1.0 million in mortgages to the NZSF infra structure project.

The banks will still have to leave their foreign borrowing in place and secure another source of NZD funding via, say, Uridashi bond issuance. This process will inevitably require the banks to monetise the bond issuance to replace the deposits lost to the infrastructure project.

The net result is a devaluation/dilution of the outstanding credit currency in circulation by NZD 1.0 million.