Indexgroup Newsletter

Hi [salutation],

Not alot of fun out there is it- mid winter and in the teeth of the great recession its hard to see how it can get much worse? Well hopefully it won't, and I for one think we might just about be through the worst of it, but you just never know...

1. OCR Review- More of the same..

Although the door is open to further cuts the market is pricing in a pretty slim chance of these actually being required- the elephant in the room however remains the currency which is stubbornly and almost unbelievably high. It would be fair to say that there is not alot of air for the Kiwi north of USD65c. Bollards statement identified the $NZD as a problem and a major impediment to a return to growth. Overall his view is dovish, and he has chosen to ignore reasonably upbeat recent data. I have some sympathy for his view and was never a buyer of the 'green shoots' approach, although ultimately you do need to respect the data. The problem with advocating the start of the recovery is that for every 'green shoot' there is the dark cloud of rising unemployment on the horizon, ready to dampen the first fragile steps out of recession. For home owners however he reiterated his view that the OCR will stay down until the end of 2010 so that, at least, is not the end of the world.

2. If I was a borrower...

Fortunately I am a borrower so this one is pretty easy. You stay short now, either float if you need flexibility, or go for a rolling 6 month strategy until next year. The longer term rates look priced out of the market by the hefty risk premium NZ is attacting at present. As the global recovery continues these rates will rise, but those rises will be mitigated by a reduction in the afore mentioned risk premium as everyone gets their heads screwed back on properly. The net effect is that all things being equal long term rates shouldn't run away too hard from the current state of play.

3. Economic Outlook

I have some major concerns about the ability of the NZ economy to rebalance away from its current fixation with residential property which I see as a/ the major impediment to productivity in this country. The average kiwi seems to get the blame but ultimately we, as average kiwis, simply respond to the market- its the policy settings that are at fault at both a political level, and commercially, thanks to the banking system. We buy property for the following reasons:

1. The government gives us tax advantages to do so. (LAQC's, no capital gains tax)

2. The banks will not lend money to small/ medium businesses unless they have property assets as security. Thus unless you own a house you cannot own a business. The result is that capital that would otherwise be put to use productively, gets channelled into non- productive property assets to de risk the banks.

Anyone who is self employed will appreciate the reality of these scenarios. It appears that the RBNZ and Treasury have identified the above vicious circle. The question is will the current government do anything about it? You would like to think so but I suspect its a candidate for the too hard basket...

Keep your head down out there...