Monday, June 15, 2009

Whither interest rates?

I've been quiet this week, just watching and listening. Letting some things just mature, unfold and generally reveal themselves more fully.

It's fascinating watching MPs bash the banks for, they claim, keeping interest rates high. The reasons for higher interests are obvious to anyone who has been paying attention. That would not appear to include many of our MPs. More likely they are simply playing to the prejudices of the vast majority of the public who pay little attention (and it shows) to almost everything. The funny thing about this is the MPs are - in effect - demanding the banks reduce their deposit rates even further and further reduce the interest incomes of Kiwis who have saved instead of borrowing far too much.

In my own case, the interest on my savings has gone from 8.3% a year ago to 2.5% today. So low, in fact, I have converted it into an asset (bought a house at a great price) instead of leaving it in the bank.

The banks have defended their moves by highlighting their cost of borrowing overseas is higher than the Reserve Bank's historically OCR (now 2.5%) in order to have funds to lend here. They aren't borrowing their mortgage-lending or business-lending money from the Reserve Bank. They also say they need to attract local capital and rock bottom rates won't do that. The prevailing view is that heavy demand for funds to service debt will result in higher interest rates is already showing the moves by banks to increase their rates on longer terms loans. Five-year fixed rates are now at, or just below, 8%.

The way I read the big picture, it's pointing to higher interest rates in a generally deflationary environment. By deflationary, I mean people will, over time, see their buying power reduced even if prices remain the same.....though prices based on components made from oil will surely rise over time.

There are two huge trends running that will have a huge impact over time. Indeed, one of them already has had a huge effect and played a role in precipitating the credit crash.

One is the obvious needs of governments everywhere to fund the huge deficits they are running to either support existing expenditure in a downturn, or the billions they have conjured up for bailouts - especially in the US and the UK. The US, particular , is looking at a US$1.75 TRILLION deficit there in the next year alone. That debt needs to be funded. If they just print money, then inflation will drive interest rates up. If they seek to borrow the money, then they will have to raise interest rates to attract the fuinds they need. Either way.....interest rates must go up. We are competing for the money. Our interest rates will be higher than theirs.

The other huge trend is the rapidly accelerating job losses and decline in wages and conditions in the OECD countries. Call it "globalisation" or "free trade", if you like. Workers everywhere are now competing with workers in China and India directly - and losing. In the US, over 6 million jobs have been lost since the recession began. Unemployment is at 9.4% - the highest in over 25 years. While the rate of loss is declining in some areas, it is notably still rising in others: job losses in manufacturing were higher in May than in April. Jobs are still racing to China as fast as the lights can be turned out in the US factories. This trend will accelerate further as the US auto industry is effectively dismantled and moved to China. This isn't a new trend. It began a decade ago and got up to warp speed just in the past 3-4 years. It's one of the many reason's so many US workers found themselves unable to pay those sub-prime mortgages: either they lost their jobs or their incomes fell or they or someone in the family got sick and they had to choose between paying mountains of cash for health care - even if insured - or paying the mortgage. The mortgages lost.

I see these two trends - government debt due to the crash and job losses - as amplifying each other. Higher interest rates resulting from the debt will dampen economic activity and result in further job losses even as more jobs continue to flow away from the soon-to-be-formerly wealthy countries of North America and Europe.

In New Zealand, this trend is well advanced on the jobs side. More and more jobs are at very low wages and with employment contracts that would shock most people over 50 who had their first jobs in an era when wages and conditions were most often part part of national awards negotiated by unions. Now, you work any day of the week they want you to for as long as they want you to. There is no 8 hour day or 40 hour week anymore for the vast majority of workers in the private sector. The present government's way of realising its "higher wage" policy appears to be by passing laws that will allow wages and conditions to erode even further as they did by passing the 90-day sacking without cause law recently.

It looks to me like we will see a return of the stagflation of the 70s and early 80s....without as much chance of a recovery. That's because so many of the jobs haven't been lossed due to downturn. They have been exported forever unless there are some major policiy changes.

As China's political and economic power continue to grow, there will be less willingness among their political and economic clients in every country to annoy them (and disadvantage themselves) by making those policy changes.

The solution would be to impose some protectionist measures where cheap labour alone was the primary problem. It has been a primary failure in the global economic system that democracies have been economically disadvantaged with respect to a fascist dictatorship like China. The other key element in any solution would be to increase taxes where necessary and useful and reduce taxes in areas where they get in the way of doing things better. We could find ways to tax waste and at the same time reduce income taxes. We could reduce taxes on things that energy efficient and increase taxes on things that aren't or less efficient. These simple measures would ansure some certainty for local manufacturers and at the same time see resources used more efficiently and effectively LOCALLY.

People will have to start paying attention soon or they will see the world they have known slip away year on frogs in a pot that is slowly heating up around they jostle for the shrinking cool places and generally stop well short of getting the hell out of the pot.

Whatever happens, it looks to me like people with assets and little or no debt will be in the best position in the long run. That's where I plan to be. It's a position that can be cashed in and changed, if opportunity arises. Any other positionlooks more risky and less attractive in the longer term.
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Monday, June 8, 2009

My Auckland housing market story

The Auckland housing market appears to be bubbling along quite merrily at the moment. I did the numbers a few weeks ago and worked out we would be much better off paying gobs of money into a low-rate variable mortgage than we are renting. Obviously, time is the enemy as rates will surely head up, so all the better to get into a house as soon as possible and start piling on the cash and building the equity while money is relatively cheap. At the same time, the interest in our bank deposit had shrunk each month by more than half, amounting to a huge pay cut over the past year.

We want to pay a house off in less than a handful of years, so we opted to jump in at the lower mid-range on the North Shore. While $350K to $450K could get you 2 or even 3 homes outright in parts of south Auckland, on the North Shore you'll have to settle for just the one. In Auckland city proper you won't get much of a house at all for the same money. Maybe a passable 2 or maybe 3 bedroom flat...though the shoe boxes can be had fairly cheaply.

Last year, we could take weeks to not make up our minds. The houses weren't selling in any hurry. May / June '09 has been a very different story. We spent a couple of weeks chasing a handful of worthy houses only to find that things had accelerated considerably. The last two we were interested in - around $375 to $400K - went in barely a day.

Last week, we lifted our game, sharpened our focus and moved like lightning to make an offer on a lovely 5 bedroom home in Birkdale with a full size section. We got it for a lot less than the capital valuation. Half the borrowed sum is to be variable rate and will paid off in two years. The other half is fixed-rate at 6.09% for two years and we will roll that over into a variable mortgage, in whole of in part, when the time comes....and pay it off as fast as we can. Two more years or less.

These days, it makes a lot of sense to keep the debt as low as possible (if you must have any at all) and pay it off as fast as possible. At the same time, if inflation takes off, we have an asset that will appreciate. Having said that, the government's policies look set to keep downward pressure on house prices through rising unemployment and lower wages for those still in work.

Whatever. I'm feeling affirmed today as Bernard Hickey says now is the time to fix those mortgage rates.

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New PC or just defrag?

We have one Windows XP system in the house. Over recent months it was getting slower and slower. Once booted up, which was taking longer and longer, the performance rapidly degraded.

I was in the habit of looking at the thing darkly and imagining the day I would replace it with a "real PC".

Instead, I went through it and freed up about 15% of the disc space, including wiping out all but the in-use *.tmp files. Then, I booted to Safe Mode and ran a defrag...hoping this would allow the files normally in use in a conventional boot to be movable.

The defrag ran for hours as the disc I/O in Safe Mode is a fair bit slower than in a normal boot.

But it was well worth it. The system now runs like a fresh install. It's responsive, moves between apps quickly and we can switch between users in seconds instead of minutes as had been the case.

The system is a 1.6Ghz AMD Athlon with 512MB of RAM. I'm guessing the amount of memory used for disc caching is now being used much effectively once the file system was defragged.

Now WinXP feels almost as fast as Ubuntu Linux 9.10 on the same system.

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