If you’ve been keeping up with news in the financial world over the past few weeks you’ll know that things look quite bright. Sharemarkets have powered ahead with Japan’s market having its most extended upward run since 1988 and the Dow Jones Industrials index back to levels of 2007-08. Measurements of investor risk aversion have declined sharply and high beta currencies like the NZ and Aussie dollars have been pushed to firm levels. So why the seeming euphoria when one can make a very strong case for the underlying fundamentals for many economies still being munted?
It comes down to a number of things of which perhaps the most important, but also the most worrying, is ongoing money printing by central banks. Since 2008 central banks have been determined to avoid their money-shrinking mistake of the 1930s by quickly cutting and keeping interest rates low, and making as much liquidity available to banks to allow them to keep functioning as laws would allow. Bank liquidity is no longer an issue apart from in parts of southern Europe, but central banks have continued to pump money out because although their early efforts managed to stop the Depression scenario, they failed to get normal economic cycles going again because all parties bar central banks and the US government have been trying hard to reduce their debt.
In the face of a sustained debt attack it is hard for economies to grow much. But with unemployment rates rising as governments raise taxes and cut spending, businesses cut hiring and capital spending, and consumers restrain themselves when shopping and house-hunting, concerns about social dislocation have become dominant. The ability of governments to address rising social woe through budgetary policies has been constrained by high debts built up in recent decades and low willingness generally of investors to keep financing large annual deficits. So central banks have extended their money printing exercises beyond liquidity provision to throwing money in the hope someone will catch and spend it.
The money printing is achieved by central banks buying government bonds thus leaving money in the bank accounts of investors who were going to buy the bonds but were beaten to the punch. Those frustrated investors have been buying other assets such as shares and risky currencies, selling their own currencies, and meanwhile optimism about low interest rates continuing has encouraged some consumers to spend and businesses to hire and invest. Thus we can also say that markets have risen recently also because economic indicators have been turning for the better.
Last year the European Central Bank wiped out the bulk of worries about the Euro collapsing when the ECB President said he would do whatever it takes to hold the Euro-zone together. The Federal Reserve has also promised to keep interest rates low and printing money until things look a lot better. The Bank of Japan is also joining in the fray with more to come in the near future and the Bank of England has been a printing player as well.
As previously noted, in essence what the central banks are doing is a “hair of the dog that bit them” exercise. They are attempting to recreate the credit boom of the 2000s only this time through their own actions rather than their inactions back then which let the bubbles develop. Their explicit aim is to boost asset prices and therefore feelings of perceived wealth and maybe willingness to spend through weight of money looking for a home in other than government bonds. That plan may be working with assistance from the passage of time naturally bringing buyers into markets for houses and durable consumer goods such as cars.
In the United States most importantly the economic data have tended to come in on the better than expected side in the past two to three months and the same can be said for China where export growth has been surprisingly positive. In Europe worries about collapse have eased substantially though the economic data remain poor, while in Japan although the economy may still be in recession, planned fiscal and monetary stimuli from the new Prime Minister have boosted growth forecasts.
What this all means is not so much that expectations for world growth have soared as that worries about very bad scenarios have pulled back. Hence investors buying risky assets like shares and the NZ dollar. So how will this play out over 2013?
The determination of central banks is clear so growth looks likely. However they are building up a very large money retraction exercise down the track and at some stage this year it is likely that investors will flock out of fixed asset investments just as they last did to a huge degree in 1994. That means a high risk of some sharp rises in medium to long term interest rates though it is impossible to predict when, how much and at what speed.
Investors are likely to continue to favour risky assets so the NZD will probably hit US 90 cents at some stage while appreciating further against the British pound, Euro, Yen, and Aussie dollar. The RBNZ probably still won’t raise the cash rate until 2014 given the strong currency. But they will start issuing warnings before the end of the year as NZ economic growth gets a lift from numerous construction factors (earthquake rebuilding, Auckland supply catch-up, earthquake strengthening, water-tightness sealing, infrastructure), house prices rise by more than over 2012, and the unemployment rate eventually falls away amidst worsening shortages of skilled people. But strong growth as such will almost certainly still elude our economy this year given the restraining effects of the high NZD and debt consolidation.
One could write more but that is enough. It is Sunday morning currently where I am in Hong Kong staying as usual at the Charterhouse Causeway Bay Hotel (acceptable, definitely not flash), ahead of the annual Asian Financial Forum which will be over by the time you read this and I’ll be on my way home. Sunday in Hong Kong is maid’s day off so Central and Victoria Park will be filled with groups of different nationalities whiling away their time before returning to their cubby-hole bedrooms usually located behind the tiny kitchens in Hong Kong’s apartments.
What do I have on for the year ahead when I get back from the Aussie holiday at the end of this month? I’ll be easing back further from day to day run of the mill analysis moving down the track started three years ago with summer study of the impediments to growth in New Zealand’s economy, then China and New Zealand’s relationship with it, then expat analysis of late last year. Specifically my aims this year are the following on top of simply informing folk about the state of and short term prospects for the NZ economy.
- Lift awareness of the need to raise non-primary exports, the knowledge and business cultural attributes needed to successfully engage in exporting, and the assistance paths available through the likes of NZTE.
- Raise awareness of the coming global labour shortage and the need for NZ businesses to develop strategies for finding and effectively utilising returning expats, expats staying offshore, and immigrants.
- Raise awareness of the special multi-generational rise in China and emerging economies more generally and the implications for trade and investment flows and global geopolitics.