Trading Banks are Not Central Banks
I am not in any sense a “bank hater” – that oh so popular persona favoured by numerous customers who seem to forget that:
- there are no free lunches
- that they love secure deposits
- that but for debt most homeowners would never get to buy a house
- that in NZ a significant tranche of Australian shareholders bear the risks of lending
Still – that is no reason to either listen or take too much notice of trading banks busily telling the RBNZ what to do – a highly popular sport amongst trading bank “analysts” at present. There is no reason to suppose that trading bank analysts have any better idea of how to do the RB’s job that the RB itself – dangerously however for the rest of us – they do know their own bank and its strategy all too well and are, in this sense no different to (say) the liquor industry advising on what our liquor laws should be – simple rent seekers.
A few things we do want from the RBNZ are:
- consistency over time in policies reflecting the long term (which is not the next quarter) objectives for a strong economy,
- Independence – in particular independence from objectives such as growing a residential debt book, or getting “new homeowners into homes”,
- a medium to long term view and a set of behaviors which are consistent with that view and the broad direction of the governments overall (not just monetary) policy.
- A firm stance which stands back – well back – from the noise of trading banks and others seeking whatever interest rate matches their tactical position over the period till they next report.
Adoption of this boring but highly functional approach has been shown to serve us well.
When political decisionmaking is a bad choice
Recent years have seen an increase in political involvement in large scale projects which essentially have little to do with politics. Why is that a problem?
Political decisionmaking is aimed, at bottom at producing votes. It matters little whether votes for left right or centre – the output is votes.
Problem is:
- votes do not produce health treatment
- votes do not produce plant and equipment
- votes do not produce roads, or bridges or infrastructure
Indeed they produce votes. Nothing else (more than a few nasty side effects as well).
And yet our politicians and their govts are donkey deep in decisions about these outputs yet we need them quite regardless of whose got the votes, they need to be financially sound, they need to match demonstrated needs of myriad groups and individuals, they need to be professionally designed and delivered and they need to work.
Votes and those who hold them have little or no expertise in any of these domains – they are politicians ever bound by aspirations of gaining and maintaining power.
Their better contribution would be to:
- stay out of pretending they have expertise. Simple truth is – they don’t
- stick to setting and maintaining rules for independent professionals who do know what they are doing
- holding such independents to account by rewarding success and penalising failure (heavily) promptly
- growing some expertise in supervising contracts (of all kinds) that will produce the outcomes needed regardless of votes.
Representation Achieved by Force Fails
Law which purports to “require” representation fails two fundamentals of democracy:
- Laws which include or exclude, are instruments of force not voluntary commitment
- Democracy, rightly or wrongly, requires voluntary action
While attempts to camouflage this bare bones fact may sound elegant and seemly the law in this role is the ugly instrument of yesterday’s armies and operates by force and the threat of force. Representation which cannot be achieved without behaviour enforced by law is neither voluntary nor democratic.
So much for “fair”
The NZ Grocery Commissioner has had a guess at the level of overcharging in NZ supermarkets and come up with two notions of interest:
- the number is likely to be in the “tens of millions of dollars”; and, more dangerously than this idle speculation,
- the idea that overcharged customers should get the entire purchase “free”.
Apart from the fact that Commissioners bear no risk (other than to their reputation) in adopting these god like postures (and their “reckons” should be discounted accordingly), a more interesting point is that if we apply his logic to undercharging – and it seems that the type of errors which sometimes lead to overcharging equally arise with resultant undercharging – with some 18,000 items in a typical supermarket this seems likely – then customers would presumably be charged double the original item’s price if we apply the Commissioner’s logic. He may have some argument of the “they can afford it” variety – but even seen in a kindly light that’s an equity argument of some sort.
Even anecdotal tales do not reveal large numbers of customers reporting under charging let alone offering to make up any shortfall or more. This is surely what we would expect. Why?
- rational self interest without the morals suggests customers should be charged correctly and compensated for any amount overcharged. That is apparently common – certainly that is my experience
- supermarket operators do not, however seem to pursue or harass or even try to find customers who benefit from errors of under pricing (theft is a different animal). Why is it that rational and what does it tell us.
Given that both shop owners and customers are likely to be equally self-interested one conclusion is that they are operating on rather different time scales. Over the long run the shop owner likely has little to gain and a deal of goodwill to lose in trying to recover underpricing error losses. For the customer there is short term gain to reporting over charging (though making a federal case of it on a serial basis may lead to longer term costs).
Both parties then may well be operating rationally. What’s “fair” and what’s “unfair” depends a bit on the time scale being considered. The overall outcome certainly seems to be rational over the bucket of different time frames we all operate in.
It is more difficult to see much logic in wild guesses and back of the envelope compensation schemes applied inconsistently – the incentives for that sort of approach involve a quite different story.
The fraught balance
It is difficult to ascertain reliably whether long run political stability or instability favours economic growth and welfare. The Economist July 20th 2024 suggest this useful distillation:
“It is a fraught balance-neither extreme instability nor extreme stasis, all while staying within the bounds of civilised discourse. That this balance has been the norm for decades in much of the West is a miracle. To lose it would be a tragedy.”
Time to take notice.
Smart Way to Think of Govt Debt
Reuters reports that in the US:
“Short-term government borrowing rates are cranking towards the 6% mark for the first time in history – not far off the rate you’d expect to pay on a 30-year mortgage, with all the risk that this would entail.”
Berkshire Hathaway – Strong Result
There are a handful of larger companies, and there are older companies, but there are few companies that have been around as long as Berkshire that have compounded as consistently. In this sense the stock is at least a reasonable proxy for a diversified exposure to relatively conventional US stocks.
Earnings Recap
Berkshire Hathaway’s most recent quarterly release beat analyst estimates on both the top and bottom lines, with metrics such as:
- $85.93 billion in revenue, up 21% year-over-year,
- $8.065 billion in operating earnings, up 12%,
- $35.7 billion in net income,
- $16.25 in GAAP EPS,
These earnings metrics were all well ahead of average. GAAP EPS, in particular, was 364% ahead of analyst estimates. It’s possible that some analysts have taken Buffett’s words to heart, and are using operating earnings as their “EPS” metric. If that’s the case then, with 2.184 billion ‘B’ shares outstanding, EPS was $3.69, which was also ahead of the $3.50 estimate. Especially noteworthy in the release was $4.4 billion worth of buybacks, which helped propel EPS slightly higher, and showed management’s commitment to returning value to shareholders.
Not only did all relevant metrics beat analyst expectations, but underwriting earnings rose from $167 million to $911 million largely through turnaround of the auto insurance business .
Creating More Emissions while Driving Up Prices
Even first round effects of the proposed agricultural emissions pricing scheme will see:
- Agricultural production shifted abroad to more inefficient, carbon emitting economies given that N.Z. is the lowest carbon emission producer;
- Prices, notably consumer prices for food, will likely increase when substitutes are imported as production falls; and,
- Even existing “Green” treaty commitments specifically state that policies dealing with climate change should be designed such that they do not affect food production.
The logic here does not seem that difficult to understand. Even the politics of the proposed scheme tests rationality severely.
Managing Bear Market Performance
There is of course no fancy way or means whereby you can either:
- Avoid bear markets. They are a fact of investment life; or,
- Devise ways of beating these markets. They are capital markets.
You can however understand and thus try to manage the type and extent of your exposure to risks arising in bear markets. Understanding their broad characteristics is a rational place to start. The past helps – somewhat – with this.
Definitions
- Bear market – a 20% drop from a recent (material) high
- Correction – a 10% drop from a recent high.
Recovery or move to a new phase involves observing reversals in these. Two things to notice. First the numbers are arbitrary – but so are any numbers. Consistency is more important than being overly precious. Second, a bear market may be well underway prior to its being noticed.
Characteristics (based on US equities – a good enough global proxy)
- The average bear market sees a 36% drop in prices
- The average bull market sees a 114% gain in prices
- Since 1928 26 bear markets in the US
- Since 1928 27 bull markets
Thus long run equities have gained and that by a significant margin over that period, bears have ben unavoidable but so have bulls so simple “buy and hold” would have won handsomely had it been stuck to.
- A bear market lasts an average of 280 days or 9 months
- A bull market lasts an average of 991 days or 2.7 years.
Do these change? Of course they do. These are averages. Reality unfolds in cases.
Undershooting and Overshooting
- half of the strongest days in the last 20 years occured during a bear market; and,
- A third o best days in a bull market occurred in the first 2 months of that market.
It is close to impossible to “time” this sort of price behaviour.
Conclusions
- Up beats down over the long run
- Most action has occured before we are aware of it
- Stay invested – you wont “pick” changes easily
- Equities have risen 78% of the time over the last 92 years.
Over a 50 year time horizon expect 14 bear markets but expect not to know when they will occur.
For portfolio strategies to help cope see THE FINANCIAL STRATEGIES GROUP LTD FAP -FSP771591.
Will Higher Interest Rates Demolish Equities?
It is commonly supposed that the higher interest rates currently being deployed by central banks to address inflation are very likely to depress share prices. US data suggests that inflation is the bigger danger.
For the period 1928 to 2021 annual returns show:
With rising inflation average returns sat at 5.6%
With falling inflation average returns sat at 14.7%
In contrast
With rising interest rates average returns sat at 9.7%
With falling interest rates average returns sat at 9.6%
Data: Ben Carlson drawing on US Securities data (Blog A Wealth of Common Sense)
There seems to be no discernible trend associated with interest rates whereas rising inflation seems to be worse news than falling inflation – at least for the US. A proximate explanation may be that inflation, being an across-the-board erosion in purchasing power, is difficult to escape whereas share prices being driven by numerous factors only one of which is the immediate cost of money (at least in the shorter term) exhibit a more muted response to interest rate rises.
Eye2theLongRun 