S&P credit rating changes in New Zealand sure are interesting

Surging Auckland house prices lead to raft of S&P credit rating and stand-alone credit profile downgradeshttp://www.interest.co.nz/news/77085/surging-auckland-house-prices-lead-raft-sp-credit-rating-and-stand-alone-credit-profile

“The rating actions reflect our view that New Zealand financial institutions face heightened risks because of an increase in the country’s overall level of economic imbalances over the past three years. In particular, we believe that the rapid rise in house prices in Auckland during this period has amplified the risk of a sharp correction in property prices, although we consider that such a scenario remains unlikely in our base case,” S&P says.

S&P places Fonterra on credit watchhttp://www.nzherald.co.nz/fonterra-co-operative-group/news/article.cfm?o_id=298&objectid=11496769

Fonterra has been put on credit watch with negative implication by ratings agency Standard and Poor’s – a move the international agency says reflects weakening global dairy market conditions.

It means Fonterra could lose it’s A grade credit rating and face higher borrowing costs. S&P will make the final call when it has finished a review of Fonterra’s financial results for 2015.

S&P said it had placed Fonterra’s A long-term and A-1 short-term ratings on CreditWatch – these would include all the company’s associated debt products.

Move along though, nothing to see here. 90% of household “wealth” in housing and 25% of exports from dairy products. Do you have your popcorn standing by?

The irony of privatisation arguments

The irony of privatisation arguments is that the private sector will “make things more efficient” or deliver “higher quality services”.

There’s no doubt that from time to time, under certain conditions, private sector operators will do things better than their public sector counterparts.

But there’s no clear evidence at all that this occasional relative out performance justifies sweeping changes to how certain functions of government are performed.

The inability of many economists to rationally examine these sorts of contracts for the hidden incentives and unintended consequences within highlights the myopia that even an economist can’t escape when their livelihood depends on not highlighting the obvious to the public at large.

This isn’t intentional on their part – they’re just preaching from their ivory tower, like every other expert on offer in the media, unaware of the irony embedded in many of their proclamations.

Raw commercial experience makes none of these “unforeseen” goings on surprising. It’s patently obvious that the economics of contract law get forgotten by a lot of people who should know better.

It would be smarter for people to acknowledge that some public functions will never be “efficient” or “optimised” and move on to “problems” that can actually be worked through appropriately through public policy.

The streetlight effect, inertia and house prices

The streetlight effect or “drunk’s search” is a bias where people only look for things where it’s easiest to look for them. The old story goes something like, a drunk loses his key and is found by a policeman searching for it under the streetlight. He asks if he’s sure he lost them in the street, replies he’s not sure, but he’s looking for them on the street because that’s where the light is.

House prices in Auckland and complaints about their effect on young couples trying to form households are suffering from a similar observational bias. In 2015, it makes sense to think of a household’s life as a bundle of goods – you don’t just need shelter, you need a stable job and other amenities in order to justify taking the risk of forming a family.

I’m not convinced by arguments around agglomeration value of cities that the larger cities are necessarily the best “bundle of goods” on offer for young couples, particularly if they work in industries where work is less secure than days gone by or if they have any ability to use technology and the occasional flight to a main centre to assemble a reasonable household income.

Despite having one of the highest tertiary qualification rates in the OECD, we have one of the lowest earnings premiums. This makes sense – higher relative supply of graduates implies a lower premium for graduates. The college premium in the United States is far higher, particularly for professional school graduates able to obtain the sort of job they went to graduate school for soon after graduating.

But we have to look at revealed preference here – what do lots of young couples do? They want to buy houses! They want to travel! They want to have fun! They don’t want to look at what they see as “inferior” options in the provinces even if the raw cost savings could be sufficient to enable more international travel each year and even sending the kids to boarding school if they wanted to. Young people are leaving the provinces in droves and even if the provinces do have young populations, it’s not clear that they’re going to stick around forever and contribute to infrastructure costs for that province.

Relative house prices do in a sense reflect one component of the value of the bundle of goods on offer in the provinces. But there is little evidence of detailed investigation of what life is actually like in the provinces. It might not be as wonderful as in “the big smoke”, but the raw cost difference could give many families a higher standard of living if they left Auckland or Wellington or Christchurch.

There is a sense of inertia at play as well – if you grew up in Auckland but can’t afford to buy a house there, but many of your peer group has bought a house, then you will feel like a loser and because of that, your decision making will become far more emotional instead of rational and based on the facts at hand. Shamubeel Eaqub was getting at something when he wrote about how culturally, home ownership is seen as a mark of adulthood in New Zealand and renters are looked down on no matter what their household balance sheet actually looks like.

What many young couples are forgetting is that not everyone can be a winner and there are enormous costs involved if you do what everyone else is doing for the sake of everyone else doing it instead of what’s truly in your best economic interests. There is no guarantee that house prices will keep going up and up – and the very same people grabbing at any government assistance on offer to help them buy a house will be the same people bleating for a bailout when the inevitable tide of mortgagee sales comes. There is no such thing as a free lunch!

Beats1, Spotify0? #Beats1

Apple Music kicked off today around the world. It is a massive move by Apple, and based on listening to a few suggested playlists and Beats1 for a couple of hours this evening, it is clear that Spotify is at a high risk of losing millions of subscribers over the next few months alone.

Because Apple Music is included with the iOS 8.0.4 upgrade – baked in just like notes or health – and it uses your iTunes account to sort billing details – switching over from whatever streaming music service you were previously using is trivial.

I don’t have the time like I used to have when I was a student to curate playlists – I haven’t listened to radio (save National Radio for the news) in quite some time, because in the age of the curated playlist, ads and people talking can kill the vibe.

So far, the DJs and light advertisements on Beats1 are very different from what we’re used to on commercial radio in New Zealand. The DJs know their music and transitions are quite snappy. There is an interesting opportunity here – for a generation that has moved away from radio towards Spotify/Pandora/iTunes/Soundcloud – perhaps Beats1 might shake up commercial radio in a way that satellite radio never really did outside of the US.

Anyway, the user experience is great. The suggestions obviously play on previous iTunes purchases so that was a trip down memory lane, but the curated playlists, particularly in electronic music, are excellent. They might be brief – but this is the tl;dr generation so a 9-10 track playlist in between listening to Beats1 means that Apple Music could capture the ears of tens of millions of subscribers in the next year.

What does this mean for other streaming music services? From a technology point of view, they’re basically competing as a standalone product against a firm that has made integration with all of its products and ease of use a priority. I will definitely smash Apple Music for the next couple of weeks – and the more I tune in, the less likely I’ll still be a Spotify subscriber this time next month – that is disruption.

Thoughts on the skills gap

Old, but interesting piece over at Prospect:

If we want to improve the quantity of jobs, we’ll have to do more to promote labor demand. We’ll need to worry less about robots and more about austere fiscal policy, imbalanced trade, weak capital investment, and bubbles and busts. If we want the jobs we create to be of higher quality, we’ll have to do more to lift workers’ bargaining power, by enforcing labor standards, raising minimum wages, and leveling the playing field for collective bargaining. Supply-side solutions targeting workers’ skills may well help the targeted individuals, but they won’t help raise the number and quality of jobs.

Eric Crampton’s piece “The STEM Sucking Sound” is an interesting read and related:

The government messes up teaching of maths at primary, making things harder at secondary. Then, pushes to increase NCEA Level 2 completion rates lead kids away from harder subjects and into more basket-weaving unit standards: basically, a form of stat-juking. So fewer numerate grads show up at university doors.

Next, Minister Joyce wants to push Sciences, Technology, Engineering and Maths. So Universities get way more money for degree completions in STEM subjects than for degree completions in other disciplines that require numeracy: economics, for example, but also education (for maths teachers). This has staffing and course offering consequences at the Universities, which kill off less lucrative lines.

The whole STEM thing is a bit overcooked. Technology isn’t that hard to learn if you have high general intelligence. The same goes for things like data analysis or even coding. It’s just a matter of intensity * hours worked on the right things. Looking to the government to set policy that will some how magically lead to better labour market outcomes for people who spend more time socialising at university rather than studying make this “issue” a bit moot.

By the time policy settings have changed, it’s simply too late. The importance of getting on the right career track is basically set up by what subjects you do at Level 2 / Level 3 and “stats juking” is basically going to ruin any genuine attempts to get higher skilled graduates out of the university pipeline and into good jobs – the sort of jobs they went to university for instead of getting a trade certificate or working in retail or hospitality.

Over the next few decades, enormous differences in labour market earnings are going to make things a bit more difficult for policy makers. They already live in a Wellington bubble, but their relatively higher earnings compared to many graduates means that their frame of reference for all of these policy settings is skewed in the direction of reliance on tertiary qualifications as an appropriate proxy for ability to perform the job.

I’m not convinced that incremental measures like limiting student loans to 5 years of full-time study can be reconciled with dreams of a STEM driven future. We have to remember that skill in STEM (technology in particular) is not normally distributed, and just because you graduate with a computer science degree does not mean that you will be able to contribute productively to a team of developers or engineers.

There are many more components to building a successful career and I think that this whole “government can design a perfect tertiary sector” project that has been going on since 1991 has run its course. It’s clear that material differences in graduate labour market outcomes even amongst those who study the same things, means that there is a lot more to do than having high level goals that can’t be reconciled with the dismal math learning experience many young Kiwis face in the schooling system.

Excellent Radio New Zealand Insight programme on NZ Super


Despite that message of self reliance, the University of Auckland’s Retirement Policy and Research Centre co-director, Susan St John, believes younger generations will feel the pinch of an aging population.

“The working age population will be squeezed mercilessly. They’ll get ever lower benefits, tax credits and lots of student debt, while an older, mostly, more affluent population lives longer and takes what is seen as an unfair share of resources.”

Susan St John believed means testing super to exclude the wealthiest pensioners would save about $1 billion a year, which could then be redirected to the poorest families, easing inequality.


Some quick thoughts:

  • NZ Super Fund should not be paying tax – that is a failure of finance 101 – tax reduces the compounding growth of the fund materially when you forecast out to the 2020’s and 2030’s – $1 billion at a 5% real return more than doubles by 2030 – the irony here is that materially affects the deficit/surplus if you think about it!
  • Government cost of debt has been lower than both ACC and Super Fund returns since 2008 – the government can’t do what every tinpot property investor has done – borrow at low rate / invest at higher rate….billions of dollars in future compound growth lost…far lower “Save As You Go” coverage the end result
  • Kiwisaver is solid policy that has clearly helped “Generation Rent” – auto-enrolment is great and attempts to look at net wealth of Kiwisaver members a few short years into a multi-decade savings scheme with the greatest growth tacked onto the end years before retirement is pretty poor thinking particularly when household wealth data is one of the lightest data sets around and really difficult to measure accurately / reasonably
  • The fact that older people vote more than younger people will basically ruin New Zealand’s public finances unless significant levels of immigration alter the beneficiary/taxpayer ratio – forget 50,000 net migrants/year – a few million migrants could arrive between now and 2030, how will that additional infrastructure be paid for as well? Do recent immigrants care about supporting NZ Super? How will the political calculus change in that environment?
  • There is no entitlement to anything anymore unfortunately, the user pays generation won’t stomach higher taxes for nothing in return, leaders not making tough decisions now are clearly out of touch with the levels of resentment many younger people have towards the older generation – but it’s understandable because this is such a political third rail
  • This is just another one of those policy problems that can’t be resolved in a democracy without causing a whole lot of drama, so it will never be resolved until there is a crisis point and the government’s hand is forced to means test or increase the age of eligibility or increase taxes a lot
  • A cheap and easy solution to at least stem the massive outflow of cash to superannuitants, making the application process at least as painful as someone going into a WINZ office for anything else would be surely be a reasonable interim step towards means testing

Retirement planning is an interesting conundrum

Over at the New York Times, there is a really good article about retirement planning – http://www.nytimes.com/2015/05/09/your-money/some-new-math-for-the-4-percent-retirement-rule.html

That’s the trouble with this strategy. “Most of the time, you underspend,” said Mr. Pfau, who is also a principal at McLean Asset Management. “Yet you still run the risk of running out.”

A major problem New Zealand faces is that most people have a house and NZ super and basically nothing else. 92% of household wealth is allocated to housing. Only 8% is in financial assets. That is clearly not diversified, when you consider that New Zealand is not even 1% of the global equity and bond markets and nor is even Australia!

So the policy problem in New Zealand is that no one wants to cut their standard of living and we still have cradle-to-grave welfare mentality and old people are a massive voting block so the most likely scenario because lots of households don’t save enough for retirement is higher NZ Super payments paid for through higher taxes or borrowing.

A lot of people will have a rude awakening when they are forced through ill health or labour market conditions to reassess their standard of living when they have no safety net to fall back in until NZ super kicks in at 65 or later depending on how policy changes between now and then.

Maybe, just maybe, house prices won’t keep going up…just because Auckland house prices have kept going up for decades doesn’t mean house prices can’t go down and you can’t meet mortgage repayments. Thinking that New Zealand is “special” is a recipe for financial disaster.

The story of college over at Medium, interesting US piece

We are left with a situation in which institutions that were originally created to perpetuate the reign of an inherited, moneyed elite, and to train that elite to be civic leaders, are now facing the burden of incredible expectations. We expect our colleges, at this point, to essentially create a healthy labor market. With the demise of the middle class uneducated lifestyle, thanks to deliberate policy choices to crush unions and globalize labor markets, colleges are now expected to train an ever-growing population of students adequately to ensure them good jobs. Meanwhile, the madcap race to compete in the Resort-Hotel-Plus-Classes vision of higher education has resulted in an increasing reliance on exploited adjunct labor, the demise of the professoriate, the rise of sky-high tuitions and attendant debt loads, and more and more deserved public scrutiny.

Source: https://medium.com/bull-market/the-story-of-college-48d3603e58c6

Tone deaf rhetoric as examined by Andrew Dean

It is quite clear that one team thinks the economic history of New Zealand is very different from what it actually is in terms of outcomes across heterogeneous households.

But the other team doesn’t have an accurate version of that economic history either. Nothing is black and white in New Zealand’s economic history, and the short ebook “Ruth, Roger and me” by Andrew Dean (published recently by Bridget Williams Books) is a really interesting look into how one side thinks about these things from a non-elderly person’s perspective.

Many of the reformist grey ones – once cardigan wearers now sporting grey hair – suffer from attribution error where successes are their responsibility, but failures are not theirs at all and the suggestion that there were any negative outcomes at all from the reforms of the 1980’s and 1990’s is met with an indignant “what do you mean, the gains were so much greater than the losses”.

There are obviously enormous benefits that have accrued to society as a whole in terms of standard of living – but not all of those gains can be directly linked to the reforms. More seems to be driven by technology and the ability to import cheap goods than the easier path of entrepreneurial trial and error that will never feasibly be open to lower quintile households.

The recent efforts by the UNITE union to make zero-hour contracts untenable for fast food restaurants are an interesting example of this asymmetric information and bargaining power conflict that the top quintile barely understand as it is discussed on National Radio.

Ironically, normally higher levels of uncertainty lead to higher wages – see how much IT contractors get paid relative to IT permanent staff for clear labour market evidence – but this doesn’t apply to “low skill” jobs. It seems that economics doesn’t apply equally because clearly bargaining power is necessary to be treated appropriately in a 21st century liberal democracy.

Who cares about the gains to other countries from TPP?

Seriously, who cares about the gains to other countries from TPP? This is just another example of poorly developed critical thinking skills on the part of many economists, the same silliness that ignores that most gains from migration accrue to the migrant as opposed to the host country.

If the mark of “good policy” or an attempt to sell “good policy” is to focus on people in other countries then clearly there’s something less wonderful than sunshine happening to the natives.

Think of this as a repeated game – if you know that the inhabitants of Country A always consider the welfare of Country B when playing their hand, then you’re going to exploit that in negotiations so most of the gains from the deal accrue to your country.

The idea that “poor countries” are charity cases that need free lunches from trade deals is silly. Re-read the literature on institutions – and think about how most of the gains from trade have accrued to the Community Party connected elite in China – and then keep asking “why?” until you bump into the inevitable conclusion that all of these gains from trade simply won’t “trickle down” to the poorer citizens except incrementally over long stretches of time.

The more likely outcome from TPP for the countries being discussed is non-trivial increases in luxury good consumption and capital flight, which, if you really care about the poorest people in these poorer countries, you would not support the watering down of the shallow capital or retained equity held by those firms experiencing the gains from trade.