Follow The Money

Dav tries to follow the money to gauge where growing worldwide debt & money printing might lead us.

Was the wealth effect in NZ just a game of musical chairs?

He had grown up learning that an asset’s value was a measure of its earning capability.
But the rule book had been thrown out in the 2008 Global Financial Crisis (GFC). Global economies sped on a money highway with no traffic rules.
Absolute worldwide debt was bound to exceed the $43 trillion that had been borrowed last year in 2016.
That was already $6,500 owed by every man, woman and child on the planet, a vast majority of whom earned nowhere near enough to repay a debt of any size.
Standard & Poor (S&P) were forecasting total global sovereign debt of around $7 trillion in 2017, with USA at $2.2 trillion and Japan at $1.8 trillion expected to borrow almost 60% of that, followed by China, Italy, and France.
S&P's chief sovereign analyst Moritz Kraemer’s calendar analogy provided an insightful perspective on the comparative scale of borrowing of nations.
If it were distributed evenly across the year, U.S. issuance “would have already covered Switzerland's 2017 borrowing needs at lunchtime on Jan. 1; Brazil's on Jan. 30, and Italy's on Feb. 17," Kraemer said. “It would then have passed China's and also the rest of the world's by Feb 28.”
What kind of a debt was this? Riskier than before, and getting riskier by the day. Only 7% of these borrowed 43 trillions now carried a AAA rating – an all-time low.
According to the Bank for International Settlements, which was the central bank of central banks, global debt-to-GDP (Gross Domestic Product) was now at a record high and debts of governments, households and corporations since 2000 had gone up... everywhere.
Despite wishful thinking that the world would deleverage post the GFC and mend its borrowing ways, debt was up 63% in the USA, and up an average of over 50% in the Eurozone, Japan, U.K., Canada and Australia. In emerging markets, led by China, leverage was up 85%.
Central Bankers of the world had pumped the world with liquidity, printing fiat money, ostensibly to avoid having another Great Depression, penalizing savers with negative interest rates in the process, in the name of the greater good.
Now, almost a decade later, no one seemed to be in a hurry to arrest this increased use of debt - anywhere. The next debt default was inevitable. The disciplined savers, who provided these loans, had another lesson coming.
Or did they? For any loan to exist, there must be a loan-maker, who traditionally had been the saver. But it was a print and lend world now. With ever increasing debt ceilings, as boundaries got pushed out every year.
In this brave new world, nobody needed to save. Almost everybody could borrow. And almost everybody could default. Without any real consequences.
In fact, it was even becoming fashionable to expect to be bailed out every so often, at everyone else’s expense. Today was all that mattered. Tomorrows had ceased to exist.
Bailouts were now legalized. Institutionalized. Internationally. As wealth creation had just got a whole lot easier. No sweat and blood needed now. Ink or keyboard strokes sufficed.
 What should he do in this game of musical chairs? The music will stop, he knew, but until then? He was still in the game. Not playing was not an option.
Should he have less fixed interest then, and more stocks and property, which were riskier but inflation protected? Should he stay local in New Zealand or continue to diversify internationally?
New Zealand had emerged relatively unscathed from the GFC. Yet, almost all of its finance company sector had perished in the GFC. Globally, there had been no place to hide, for any asset – anywhere. Cash had been king. Would Cash and Gold be still safe when the next tsunami hit?
What had the rest of the Kiwis been doing? Borrowing, it seems, as well as salting away their cash. Kiwi Households were flush with NZD 162 billion in cash held in bank accounts, up almost 11 bln in a year (up 7.1%). Probably baby boomers cashing up, while the youngsters borrowed to buy houses.
Reserve bank of New Zealand (RBNZ) figures at the end of Dec 2016, showed Kiwi household financial liabilities (mostly mortgages) at NZD 263 billion, just a 100 billion more, net of our cash. Not bad, yet most commentaries implied that the country was going broke due to private borrowing.
RBNZ figures also revealed a Household disposable income of NZD 156 billion. Household debt as a percentage of household disposable income was now up to 168% - A new all-time high!
However, considering our cash holdings and total Household disposable income, the total net loan could be repaid within a year or two. Another thing was clear. Historically, Kiwis shied away from borrowing, and had lived within their means.
Our mortgage only borrowing of NZD 230 billion dwarfed our outstanding business credit of NZD 95 billion, as well as our agricultural lending of NZD 61 billion. But what to do? The Aussie Banks lent easier on housing.
Still, the RBNZ had been cornered into fast-forwarding the 60% LVR (Loan-to-Value Ratio) rule. Forcing investors to come up with 40% deposit on houses was having real impact, although owner-occupiers and first home buyers had picked up some slack.
Sure, in the past 12 months, NZ household debt had risen by 8.4% (NZD 20 billion - housing loans up 9.1%, or NZD 19.2 bln, and other household credit like credit cards was up 4.1%, or NZD 0.6 bln).
This was almost double the rate of increase of our disposable income (up 4.4%, by over NZD 6.5 billion). And almost double the rate of growth of our business and agricultural debts.
Yet, the household debt burden was now more affordable than it had ever been, due to interest rate reductions. Debt servicing cost only 8.6% of disposable income, down from 9.4% a year ago (13.9% in Dec 2008). It was expected to stay down for decades, despite the recent scaremongering.
In the previous 12 months, to Sep 2016 (collection of these figures lagged a bit), the value of NZ houses and land had also risen almost 16% (over NZD 750 billion), making our total household net wealth over NZD 1.2 trillion.
So, over the nine years from 2007, Kiwis had basked in this wealth effect, spending 57% more on eating out, 60% more in insurance, 67% more on rent and 50% more on transport, even though our income had only grown 32% over the same period.
We had spent record levels on credit cards. Because we had never been wealthier. Thank you, Quantitative Easing, Immigration, Globalization! But one can't drive a car by looking in rear view mirrors all the time.
Looking forward, wages weren’t expected to rise by more than CPI (Consumer Price index, or Inflation) in the next few years, putting limits on rent rises. But immigration was expected to remain high and new house builds low. Demand and supply situation remained favorable for the vendor, despite the rhetoric.
It was in no one’s interest to crash the property market, and Bill English had already declared that he had no intention of doing so. Should he buy more houses then? He looked blankly outside his window, staring into an invisible crystal ball.
Follow the money, he told himself. You will discover what to do…

Swimming With The Tide

Everybody had been present at the project meeting. It was a usual affair, except that the new contractor had shown a lot of initiative, made lots of suggestions, but they had all been vetoed down.

Personally, Daniel thought some of his suggestions were workable, but perhaps the management thought they rocked the boat too much.

The contractor caught up with him as he came out of the building to buy himself some lunch.

"So what did you think of what happened today?" asked the contractor.

"Some good suggestions," Daniel answered, "and good on you for making them. Keep up this initiative, this thinking outside the square and you will soon become an asset to the company."

"I'll never be an asset to this company," the contractor muttered.

"Why's that?"Daniel asked as they crossed the road.

"Because the shop-floor staff here play football. Mid-level managers are more interested in tennis. And the top management here has a distinct preference for golf."

Daniel looked at the contractor, completely baffled. He didn't know what he was talking about. What did sport preferences of staff and management have to do with their company or with anything else, he wondered.

The contractor noticed Daniel's puzzlement. He liked Daniel. This guy was a hard worker and a hard taskmaster, but he was also a straight shooter and played fair.

He was also quite smart, and the fact that he expected high standards from others that he worked with, actually inspired people like the contractor.

"As you go up the corporate ladder here," he explained, "the balls reduce in size."

Daniel laughed at his clever turn of the phrase. He had been given a lot of flak, and it was only natural that he gives some of it back. Daniel didn't mind because he didn't take it personally.

"Be patient," Daniel replied, as he paid for his takeaway, "Good things come to those who wait."

"Looks like I'll be retired," the contractor retorted, as he paid for his lunch, "before they listen to me here."

"Creativity and courage are great assets," said Daniel, as they started walking back towards their office, "but for success and longevity, you also need empathy and prudence."

"Change can be costly for an enterprise. The speed of change can also kill an organization. More important than Return on Money in Business and Investment is the Return of Money."

"Management has to be careful that they do not act or expand in a way that could adversely impact their own livelihood and the livelihood of their other employees. Profit is the reason a business exits, but cash bottlenecks have killed many a profitable business."

"You have thought as an entrepreneur. They were thinking as a manager. Perhaps, they will find your ideas and suggestions more useful if you heard what they want first and then channelized your creativity into suggesting solutions to the problems they already have."

"A manager and a couple of his staff were on their way to buy their lunch at the local takeaway. They saw an old lamp lying on the side of a road."

"One of the employees picked it up and rubbed it jokingly, as if it were Aladdin's Magic Lamp. But it was indeed a wonder lamp."

"Puff", and a genie emerged out of it. He said he was very grateful for his release from the lamp. An evil magician had imprisoned him there."

"I'll grant you guys a wish each now, before I go," he said to show them his gratitude, "So long as it is reasonable, you can have anything you want. So tell me, what would you like?"

"I've never heard a Jinn put a reason ability condition on wishes before granting them!" the contractor laughed.

"There's always a first time," Daniel jested, "Besides, the world is getting unreasonable. You've got to have checks and balances in place to manage your risk and exposure."

"Must have been a manager d jinn!" the contractor gagged, "Would wishing for three wishes be an unreasonable wish?"

"I guess," agreed Daniel, "Anyway, the first employee said he wanted to be cruising in Mauritius on his own speed boat and have no worries. There you go, that's a three-in-one wish."

"Puff", and he was gone, cruising in Mauritius on his own speedboat and without any worries."

The other employee said, "I want to be in Florida with beautiful girls, plenty of grub and booze."

"Puff", and he was gone too, into Florida to enjoy beautiful girls, plenty of food and cocktails.

The manager thought for a minute, and said calmly, "I want these two idiots back in the office after lunch".

The contractor laughed boisterously.

"So," he asked, "always allow the boss to speak first?"

Daniel nodded and winked at the contractor, taking his first bite as he sat down on the grass to eat his lunch. The afternoon was sunny, his kebabs looked tempting, and his trainee's progress was promising. What more could a man ask for?

"You'll make swift progress," he offered, "if you can learn to swim with the tide. Don't worry, be happy."

The Air Up There

John was training a new casual contractor that his firm had employed.

He usually gave his subordinates and trainees independence and discretion to get the work done in a manner they decided was best, once the targets, budgets and timelines had been discussed and work delegated.

But sometimes, like with this new person, he had to intervene more than usual.

He had received complaints that the new person had been taking overly long lunch, tea and smoking breaks.

Even when he worked, he seemed more interested in social conversations with colleagues and passing time rather than in getting things done.

This was beginning to impact on the group dynamic, besides delay the project due to bottlenecks his habits were starting to create.

John discussed the issues with him and things improved for a while, but then he settled back into his old routines. "Get him to play fair," the director said to John, "or get rid of him."

"I work harder," the contractor retorted when confronted, "harder than some of these full-timers here. I deserve my longer breaks. They over load me, then try and lord me over. It's not my fault my tasks aren't finished in time?"

"An eagle was sitting on a tree resting," answered John, remembering an old online joke he'd read, "doing nothing. A little rabbit saw the eagle and asked him, "Can I also sit like you and do nothing?"

"Sure, why not," shrugged the eagle.

"So the rabbit sat around too," John continued, "and rested. But all of a sudden, a fox appeared. He pounced on the rabbit and gobbled it up. Comprehend?"

"No comprehend," uttered the baffled contractor, "What's it got to do with me?"

"Even if you work as hard as everyone else buddy," said John, "being high up has its privileges."

"The air up there is different. To be sitting and doing nothing, you need to be sitting very, very high up."

"So let's get cracking before the foxes arrive, shall we?"

Exciting Period

Emmy talks about the run on Northern Bank and the period leading up to GFC. But Mary jokes about why Little Johnny thinks a period is so exciting.

Emmy sat reading the stock market analysis in his bed when Mary came in.

"Anything exciting?" she asked, as she got in bed.

"Yeah," said Emmy, "Northern Rock has had the first run on a British bank in more than a century. Its price has crashed."

"On 17 Sep 2007, Chancellor Alistair Darling dramatically intervened to try and end this crisis by agreeing to guarantee all deposits held by Northern Rock."

"He said savers will not lose a penny and that his action was motivated by the "importance I place on maintaining a stable banking system".

"Should be an exciting period ahead if one were to buy its shares now, as Prime Minister Gordon Brown has also just implied that he won't let it fail."

"European Central Bank and US Fed have already pumped in huge amounts of cash in the market to boost liquidity, and Mervin

King might just have to take a U-turn on his "No pumping" stance. What about your day?"

"Oh nothing as exciting as a run on a bank," she answered, "pumping central bankers or jumping share markets. All is quiet on the home front. But I did hear a joke about another kind of exciting period today."

Emmy put away his laptop and looked at her.

"Called Little Johnny's Assignment," she began, "it tells of a kindergarten teacher who had given a homework assignment to her kids."

They were to share with the class anything exciting they found the day before. Now little Johnny had been building up a reputation to be a little crude. So, when the time came for the little kids to give their reports, the teacher called them one at a time."

"She had been reluctant to call upon Johnny, but eventually his turn came."

"He walked slowly up to the blackboard, picked up a piece of chalk, and made a small dot on the blackboard. Then he slowly walked back and sat back down."

"As nobody could fathom what he was on about and he hadn't uttered a word, a frustrated expectation built up in the class. When the teacher couldn't bear it any longer, she asked him to explain himself."

"It's a period," said Johnny, unusually restrained.

"Well I can see that!" she said, "But what is so exciting about a period?"

"Damned if I know," said Johnny, "but this morning my sister said she missed one. Then Daddy had a heart attack, Mommy fainted and the man next door shot himself."

Taming The Mind

Mary was up late, waiting for Matt the next evening, despite his being late from work.

She served him dinner and as he settled down to eat, asked him, "Tell me more about Gabriel Ben's novel ways of taming the mind."

Matt understood. He smiled and spoke between mouthfuls of food, "One day Gabriel Ben was expecting a visit from a large number of his sponsors."

"Wanting to impress them, he fretted and fussed. He arranged and rearranged that day's offerings on his shrine in front of the image of Buddh."

"Examining his handiwork when he was finally satisfied, he suddenly realized that his intentions were not pure. He had done what he had done today merely to try and impress his patrons."

"Disgusted with himself, he picked up a handful of dirt and threw it over the offerings saying, "Monk, just stay where you are and don't put on airs!"

"It is said that when Stanly  or 'Father Smith' heard this story, he said, "That handful of dirt that Ben Mark
threw was the best offering in all Tibet!"

"Why?” asked Mary

“We have no control over what thoughts will arrive in our minds,” answered Matt, “But if we can remain constantly vigilant, recognize the wrong immediately, confess it and try not to do it again, we do less and less wrong. Which also simply means that we will begin to do more and more right."

"Have more food", Mary insisted when she saw that Matt was almost done, eating as well as speaking.

'One way to this man's heart', she thought lovingly, 'is through his tummy'. And, it was beginning to show.

"Tell me more", she asked once she had filled his plate with another generous helping of rice and curd.

Matt put his spoon aside, poured curd on his rice, and sprinkled some salt over it. He started eating again, creating little balls of curd-rice before popping them into his mouth with his fingers.

"One day Gabriel Ben was at a large gathering of geshes at Penyulgyal. Gabriel, as you probably already know, is a Tibetan Buddhist academic degree for monks and nuns. As part of the meal, some curd was offered to the guests."

"Gabriel Ben, it is said, was seated in one of the middle rows, and noticed that the monks in the first row were receiving large portions."

'The way they are lavishly serving that delicious yogurt...' he thought, 'they will run out of it before they reach me. I don't think I’ll get my fair share.'

"Suddenly realizing what he was thinking, he caught hold of himself: 'You curd-addict!' he thought, 'Here you go again'.

"He immediately turned his bowl upside down. As it turned out, there was enough curd for everyone. When the man serving the curd came and asked him if he would like some, Gabriel Ben refused."

“This evil mind has already taken its share,” he said.

"But there was nothing wrong in wanting to have a fair share?" Mary objected.

"Indeed", Matt agreed as he got up from the dining table, "but it was the realization of the self-contentedness of his expectations, that made him refuse it in the end.”

“If the mind can always be examined like this and taught, adopting what is wholesome and rejecting what is harmful, it can become malleable and there can be hope that it can be tamed."

"And have you tamed your mind yet, my husband?" Mary teased, clearing the dinner table.

He smiled and replied, "No my dear, not yet. I try often, but I always fail."

"Then make sure you do not fail me tonight!", she commanded, a twinkle in her eye.

His smile deepened as he responded, "I have never said, Do as I do. But do as I say, and there is hope - for you."

She laughed throatily at his rejoinder, then retorted, "There is always hope, so long as there is love."

'He knows so much', she thought, 'yet he knows so little.'

"Come here", she flashed a mischievous grin, "Let me fill you with both."

She touched him ever so lightly. Sensually. Music began in his mind.

“Go Kamli”, he said, as he waited. Waited and watched.

She moved slowly. Then her tempo accelerated, accelerating the beats in his temple.

Taming of the beast had begun.

Caught You Red-Handed

The night was dark. The shriveled moon paled in its efforts to bring light to the earth. Matt lay awake late that night, thinking.

Mary sensed his restlessness, and turned around to face him.

She touched his face lovingly, and with her finger gently traced his facial contours down to his neck.

"What bothers you so?" she asked.

"Morality is a not an innate trait which humans are born with. It is a social construct imposed and enforced by society so we can all live in peace with each other. It is the parent's duty to teach it to their child."

"But you already do," protested Mary, "you already teach them everything."

"I didn't today," Matt answered, "I failed. I yielded to your judgment, as it seemed so reasonable. But I suspect, we have both erred today."

"Why do you think so?" she asked.

"We cannot teach our kids to watch their minds, when we are unable to watch ours. We have to be like Gabriel Ben Gungyal."

"Who was he?" she asked. She loved the stories he told, just like her kids.

"He was a 12th century Tibetan Zen master", answered her husband, "It is said that he neither recited prayers nor meditated in traditional ways. All he did was to observe his mind very carefully. Whenever he noticed his mind becoming agitated, he became especially vigilant."

"For example, if he felt self-cherishing was about to arise, he would immediately recall its disadvantages, and focus on Universal Love, the opposite of self-contentedness. He became renowned for his novel ways of nipping such persuasive feelings in the bud."

"To gauge his spiritual progress, it is told, he would put a black pebble down in front of him whenever a negative thought arose, and a white pebble whenever a positive thought arose. At the end of the day he would count the pebbles."

"If there were more black pebbles he would berate himself and try even harder the next day. But if there were more white pebbles he would praise and encourage himself."

"At the beginning, the black pebbles greatly outnumbered the white ones, but over the years his mind improved until the white ones began to greatly outnumber the black ones."

"As a youngster, Gabriel Ben Mark had a reputation for being wild and unruly, but by watching his mind closely all the time and judging it with complete honesty, he gradually got better. Several stories from his life can be found in Patrul Rinpoche's book Words of My Perfect Teacher."

"Tell me more about him", she asked, as she adjusted her pillow and settled back more comfortably on the bed.

"As was customary at the time", Matt began, "Buddhist monks, or Bhikkus, begged door to door for alms, when they were not engaged in their spiritual development activities. The people were poor and the takings were minimal at the best of the times. But recent times had been leaner."

"Gabriel Ben hadn't eaten for days. A householder invited him inside to be fed, as he roamed the streets on this particular day. He was seated respectfully in a room and the host went off to the kitchen to prepare food for him. The room was bare except for a jar of food on the shelf beside where he sat."

"Time passed slowly and the expectation that he was finally going to eat made his stomach growl with eager anguish. Gabriel Ben was so hungry that he found it difficult to wait. His eyes kept returning to the jar of food within his reach."

"Obviously, he couldn't just take food from the jar himself, without it first being offered to him by his host. But the host was nowhere to be seen. He was alone in the room. Yearning for food was beginning to cloud his mind. His mouth watered, yet his throat hurt from empty swallows. His fingers trembled, intestines grumbled."

"Seconds turned into minutes, minutes into hour. The waiting was made worse by the delicious smell of food cooking in the kitchen that wafted into his nostrils."

"To his complete shock, he found himself stealing food from the jar. Gabriel Ben suddenly burst out into loud cries of "Thief! Thief! I've caught you red-handed."

"His hosts rushed into the room, to find him berating himself and threatening his hand with being cut off, if it ever behaved like that again."

His point made, Matt said no more. Sleep came quickly to him. Mary lay awake, pondering late into the night. She was blissfully oblivious of Matt's usually annoying loud snores as images of Buddhist monks flashed on the canvas inside her closed eyelids.

Some encouraging words I wrote:

* See a dear friend in your position. What would you say to encourage them? 

* Challenges are inevitable. Getting back up however, is a choice. 

* Are you really going to let this defeat you? After all the work, sweat, and tears you have put into this, you are going to give up now? 

* You’re not alone. Many have gone before you. Many will go after you. The important thing to keep in mind is that you need to keep on going. 

* You may think you know your limits but you don’t. You’re capable of far more than you realize. 

* Root for yourself even if you’re the only one. Even if no one believes in you, you have to at least believe in yourself.

* No matter what, today will come to an end and tomorrow will arrive, leaving you one less day to live. You can either sit there and waste another day feeling sorry for yourself or you can get up and do something about it. 

* You’re more than your past failures and mistakes. You’re more than what you’ve been demonstrating up to this point in your life. Don’t let your screw ups define you. Instead, let your potential guide you toward becoming the person you want to be.

* Things could be worse, much worse. Consider yourself lucky that things aren’t worse than they are. 

* If you’re still breathing, it’s not the end and as long as it’s not yet the end, make the remainder of your life worth living.

* Sometimes, not achieving your current goal is exactly what needed to happen in order for you to step up your game and experience greatness. 

* If you’re going through the pain of a break up, realize that the odds of that person being your perfect match is incredibly low. In other words, there’s a very good chance that you will find someone much better. 

* We tend to learn the most when things don’t go as we had hoped. If anything, past failures can make you better prepared to take advantage of greater opportunities. 

* Things will turn out okay not because it’s a guarantee that your situation will improve but because you have the strength to deal with anything life can throw at you and the power to turn things around if you choose to do so. 

* The ups and downs of life, it’s all part of the life experience package. Without the downs, the ups won’t feel as good. Without the absence of the sun during a storm, you won’t appreciate the warmth of its light when it eventually reappears. 

* You’ve got one life to live; one life to experience all that life has to offer. Embrace it while you still can. 

* Sometimes, it helps to take a step back and look at the grand scheme of things. Perhaps then you’ll realize just how silly it would be to spend another minute worrying and stressing about things you won’t even care about or remember a year from now. 

* Life can be tough and even unfair at times. I don’t really have an answer as to why certain things happen but I do know that these are usually the moments in life where the potential for personal growth is the greatest. Diamonds are created under intense pressure. Muscles are built by overcoming tremendous resistance. You could either let these moments in life break you or use them to become a mentally stronger person.

* How far you can go in life is yet to be seen. Don’t let other people’s limited beliefs about what’s possible diminish your potential. 

* Losing someone dear to you can be one of the toughest things to go through but you’ll get through it when enough time has passed. Keep in mind that they wouldn’t want you to stop embracing your life because of their passing. If anything, they’d rather you take this as a sign to live life to the fullest if you haven’t been doing so already. 

* Through our failures and setbacks, we can become wiser and more mentally prepared to deal with future obstacles. The problem is, we usually don’t realize the value of the experience until later on since we can be too emotionally involved. If you’re struggling through something right now, chances are, it won’t be for no reason. You’ll eventually find some sort of benefit from this experience even if it may not be obvious at the moment. 

* When you think about just how short a human life is compared to time itself, you’ll realize how insignificant our problems are in the whole grand scheme of things. No matter what you’re going through, it’s all temporary. Work on letting go of all the unnecessary stress you’re carrying around in order to have more time and mental energy to enjoy life. 

* When life gets you down and no one is there to help lift you back up, you can either continue waiting for someone to come along to help you, stay down, or decide that you’re strong enough to lift yourself back up. 

* If you feel like your life sucks, it’s a sign that something needs to change. If you don’t like where you are in life, do something about it. Improve yourself, daily. Sitting there and feeling sorry for yourself isn’t going to change anything. Plenty of people have turned their entire life around just by deciding to do so. Realize that you have the power to determine your own destiny. You can either waste it and live an unhappy life or use it to design and enjoy an incredible life. 

* Give yourself some time to heal, but not too much time. Misery can be addictive and no matter how comfortable it can make you feel at times, hanging on to it will only make things worse.