The week that was for the week to Sept 25
Including our first anniversary 'hoon' with Bernard Hickey, co-host Peter Bale, ANZ's Chief Economist Sharon Zollner, Otago Uni's Prof Robert Patman and political columnist Josie Pagani
TLDR: This week The Kākā had its first anniversary as a paid subscription email newsletter and podcast. We marked the occasion at midday for an hour on Friday by having a special ‘hoon’ webinar for all subscribers to discuss the events of the week in geo-politics and Aotearoa-NZ.
Popular special guests Professor Robert Patman from the University of Otago, ANZ Chief Economist Sharon Zollner and Dominion Post columnist Josie Pagani joined myself and Hoon co-host Peter Bale to discuss some monumental events in geo-politics and the global economy, and what they might mean for our political economy.
We talked about:
Vladimir Putin’s announcement of the mobilisation of 300,000 reservists and subsequent street protests in Russia, along with attempts by potential draftees to flee the country;
Putin’s barely disguised threat to use tactical nuclear weapons to defend the ‘motherland’ of Russia, which will shortly include the areas of Ukraine annexed by Russia and where referendums to confirm that will shortly be held;
the West’s strong and mostly united reaction rejecting the annexation and nuclear threat at the United Nations General Assembly (UNGA), where PM Jacinda Ardern gave this speech on Friday night;
some signs of division in support for Ukraine bubbling in Europe, including in the Putin-backed Hungary and in Italy, where an election this weekend is expected to deliver a right-wing Government seen as more sympathetic to Russia;
the US Federal Reserve’s ‘jumbo’ 75 basis point rate hike to a range of 3.0% to 3.25% and Chairman Jerome Powell’s hawkish rhetoric about the need to clamp down on inflation with interest rates over 4% for a couple of years;
the Bank of Japan’s vow to keep printing to keep its interest rates low, and its subsequent need to intervene to stop the yen falling late on Thursday, which was the first such currency market intervention by a major central bank since 1998;
the new Liz Truss-led UK Government’s plan to borrow to fund massive tax cuts for higher income earners and companies, which it subsequently confirmed yesterday with a plan to borrow £234b to pay for £150b of winter energy subsidies and £45b of tax cuts;
new polling showing voters in democracies want to tax wages less and wealth more, as Josie Pagani detailed in her column yesterday;
signs consumers in Aotearoa-NZ are not rolling over and tightening their belts under the weight of higher interest rates, which Sharon Zollner said might require our Reserve Bank to hike higher than the 4.75% peak she had previously forecast; and,
why voters in western democracies want more of their tax money spent at local levels, and how difficult that is in Aotearoa-NZ where the central Government doesn’t share tax revenues with councils.
Five things of note this week
‘You can’t go out much, and we order you to go up’
The Government ordered councils not to allow greenfields housing developments to sprawl out into highly productive farmlands, but also wants councils to open up more land for housing. I argued these two things weren’t credibly consistent with the current approach to funding infrastructure and winning the political battles needed for housing to grow ‘up’ instead of ‘out.’
They could be if the Government also provided the financial incentives and released the debt funding shackles on itself and councils that would enable much, much more brownfields ‘densification’ of housing. Instead, the Government is simply ordering councils to allow more densification, without adequately funding the public transport or allowing for the NIMBY-fueled political backlash that is now consuming councils from the political ground up. It is magical thinking of the highest order.
This creates an awful Catch 22. Not allowing councils to build ‘out’ or helping them much to build ‘up’ is a recipe for yet more land price appreciation captured by today’s land owners. This comes at the expense of future renters locked out of the home ownership they need to build stable families and finances, and keeps them paying the world’s most expensive rents. Here’s my full article from Monday.
The densification backlash went mainstream
Earlier this month, the Christchurch City Council refused to submit an updated plan that allowed the three-storey townhouses on all sections, as ordered by the central Government after a bipartisan ‘Townhouse Nation’ deal late last year. Outgoing Mayor and former Labour minister Liane Dalziel wrote to Environment Minister David Parker to protest against the ‘one size fits all’ approach and call for a more ‘bespoke’ approach.
I asked Parker if the Government was considering legal action to force the Council to adopt the new rules, or could even appoint Commissioners. He declined comment because he said he yet to receive legal advice.
Here’s Dalziel’s argument (bolding mine):
“We are supportive of the Government’s aims to address housing shortages and enable the delivery of a wider range of housing options. However, a blanket rule change is not necessary here. We have an ample supply of places available where people can subdivide to create more housing and where no resource consent is required.” Liane Dalziel’s plea to the Labour Government.
My view: There is not ample supply of land available in Christchurch, otherwise housing would be affordable. Truly elastic land supply would allow developers to build in response to the recent surge in prices and push prices back down in response with a new housing supply surge. That has not and is not happening, as well demonstrated in this speech from Treasury Chief Economist Dominick Stephens, which is in turn based on this deep research note on housing costs by the Housing Technical Working Group, which includes Treasury, the Reserve Bank, and HUD.
‘We’re really serious this time’
The US Federal Reserve hiked its key interest rate by 75 basis points for a third consecutive time and forecast significantly higher interest rates for another couple of years to try to win back its reputation for keeping inflation low.
The very hawkish view of the world’s most important central bank is now much tougher than most investors, traders and economists think. Global stocks fell sharply.
Someone is wrong and this could get ugly because global asset prices, and that includes the most expensive residential land in the world in Aotearoa-NZ, are based on lower interest rates sooner and for longer than the Fed is now saying. This morning the Fed forecast quite high rates for quite a bit longer.
Is it safe to come out now?
Spring is in the process of springing in the housing market for first home buyers, thanks to strong income growth, low unemployment, lower prices and early signs mortgage rates have peaked.
FOOP (Fear Of Over Paying) is about to flip back to FOMO, unless global central banks pull the rug out from under the market heading into summer with big new rate hikes to beat down un-cooperatively high inflation rates. See more detail here in my Thursday email detailing signs that first home buyers and some investors are nudging back into the market.
Another captured state
Liz Truss’ extraordinary embrace of Reagan-style supply-side economic theories that are now widely debunked from people as conventional as the IMF stood out this week. It is another case where the populist leaders of a democracy win power and then promptly cut taxes in a way that makes their wealthy backers vastly wealthier.
The brazenness and cravenness is something to behold. Now even financial markets are calling out the economic lunacy of tax cuts paid for with borrowing. The bond vigilantes stirred back into life this week and drove British ‘gilt’ bond yields higher in the biggest and fastest way in modern history.
Quotes of the week
‘I’m not bluffing’
“To those who allow themselves such statements regarding Russia, I want to remind you that our country also has various means of destruction, and for separate components and more modern than those of Nato countries and when the territorial integrity of our country is threatened, to protect Russia and our people, we will certainly use all the means at our disposal. It’s not a bluff.” Vladimir Putin in a presidential address, via The Guardian
‘I’m also not bluffing’
“We have got to get inflation behind us. I wish there were a painless way to do that. There isn’t.” US Federal Reserve Chair Jerome Powell in a news conference on Thursday, via PBS.
‘I think trickle down will work this time’
“I don’t accept this argument that cutting taxes is somehow unfair. People on higher incomes generally pay more tax, so when you reduce taxes, there is often a disproportionate benefit because those people pay more taxes in the first place.” UK PM Liz Truss this week, via CNBC
‘Trickle-down has been tried and failed’
“I am sick and tired of trickle-down economics. It has never worked. We're building an economy from the bottom up and middle out.” US President Joe Biden in a tweet a day before meeting Truss.
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