The Dim-Post

June 24, 2012

Didn’t we learn anything from the finance company debacle?

Filed under: finance — danylmc @ 12:16 pm

The Herald on Sunday commissioned a poll showing that 64% of the country oppose asset sales, but that 60% of the country would purchase shares in those same assets if they had the money.

This is something that’s always bugged me about the whole ‘mum and dad’ investors trope. ‘Ordinary mums and dads’ shouldn’t buy shares. They especially shouldn’t buy shares in a bunch of companies that all do the same thing, ie power companies.

They should invest money into their KiwiSaver accounts, in which the government will stake them a thousand dollars and partially match their contributions. If their provider’s analysis shows that the assets being sold are worth the purchase price of the shares, they’ll buy them (without the cost of the transaction fees mum and dad have to pay when they trade) and reinvest the dividends across a broad range of equities based on mum and dad’s risk profile. They’ll also monitor the company’s performance and sell down if they aren’t happy (if, say, the companies are so badly mismanaged the shares become worthless, something that isn’t too unlikely given that we’re talking about the New Zealand business sector here).

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27 Comments »

  1. It might be that the 60% feel altruistic about maintaining ownership in New Zealanders’ hands. While they may not in the end go through with purchasing shares, their view is that it’s about maintaining shareholding in the interests of New Zealanders – making the best of MOM.

    While it may not be the best decision for RoI, at least they can make something of the proverbial pig’s ear.

    Comment by Patrick — June 24, 2012 @ 12:28 pm

  2. the big caveat in that second question is “if they had the money”. If ther poll actually asked “Do you have the money to purchase power company shares?” I’d be surprised if the response was much above 1%. Which makes the statistic kind of stupid. I’m sure you’d get a pretty high response to asking “If you could bring about World Peace at no cost to yourself or others, would you do so?”.

    I am dismayed by the way the govt have been able to get away with with seeding the whole mum & dads thing. Although NZ ownership of these assets is preferable (aren’t we haemorraging enough profits offshore through our banks and telcos?) this ownership should be, as you say, through kiwisaver and the super fund.

    basically it’s just National’s sadly successful way to re-spin asset sales away from the fundamental (and well-deserved) unpopularity they gained in the 80s.

    Gah!… and GAH!

    Comment by nommopilot — June 24, 2012 @ 12:41 pm

  3. “(aren’t we haemorraging enough profits offshore through our banks and telcos?)”

    Profits can’t effectively go overseas. They are in $NZD and if exported are worth nothing unless someone buys them to then buy NZ goods and services.

    http://www.cis.org.au/media-information/opinion-pieces/article/3191-sending-profits-abroad-is-a-good-thing

    “First, the profits might stay in Australia to expand the business of the US company, creating more jobs and extra economic activity here. Even ardent nationalists would find it hard to argue against this.

    If the parent company however decided to transfer the profits from its Australian branch to America, it would soon find out that Australian dollars are pretty useless outside Australia and change them into US dollars.

    But what happens to the Australian dollars? Since Australian dollars don’t buy anything abroad, they will return to Australia to buy Australian goods and services. Maybe a US company will use them to buy Australian minerals. Perhaps US tourists will come here to spend their holidays. Or the US might import Australian-made cars.

    In any case, Australian dollar profits transferred abroad return to Australia sooner rather than later because outside Australia, our dollars are just printed paper that will not get you a cup of coffee.”

    Comment by JC — June 24, 2012 @ 1:35 pm

  4. that sounds like economic wizardry, JC. And hopefully when those little dollars come back to New Zealand they will be invested in things of benefit to New Zealanders like digging up our National parks and polluting our waterways.

    We pay our heavily inflated power bills to overseascorp in New Zealand dollars, they exchange them for other international currency with offhore holdings ltd who in turn “invest” them back in NZ in whatever extractive, polluting industry the Nats are currently pimping out as our economic salvation. sounds like a really good thing.

    Comment by nommopilot — June 24, 2012 @ 1:51 pm

  5. “They especially shouldn’t buy shares in a bunch of companies that all do the same thing, ie power companies. They should invest money into their KiwiSaver accounts, in which the government will stake them a thousand dollars and partially match their contributions.”

    Most ordinary mums and dads will already have a KS account so the $1k is done and dusted. But I don’t get why taking charge of a small part your own financial affairs is a bad thing to do while putting money into an amorphous fund you have no control over and very little transparency and accountability, plus all the associated fees is a really good thing.

    Comment by insider — June 24, 2012 @ 1:59 pm

  6. How do KiwiSaver accounts differ from finance companies (apart from the subsidy)? Is there an implicit government deposit guarantee with the former? Nope (although the public perception may be otherwise). Do they have the same sort of fangless, in-bred oversight committee to ensure rules are followed? Yep. It’s only a matter of time before we’re partying like it’s 1987.

    Comment by Will de Cleene — June 24, 2012 @ 2:16 pm

  7. “How do KiwiSaver accounts differ from finance companies”

    Not greatly, but if the government insists on selling high-earning power companies it would be better if those earnings were helping deal with our retirement funding problems and not simply inflating our power prices and empowering other economic powers to gain more power over our economy.

    power games

    Comment by nommopilot — June 24, 2012 @ 2:34 pm

  8. I suspect the poll results just show most people are opposed to asset sales, but know they have great profitability, so would buy them if they could for their private fiscal benefit. On the plus side, 40% are altruistic enough to say ‘no – buying into asset sales that we are opposed to would be hypocritical’…

    Like Will and insider above, I disagree with the finance company comparison – they were either scams (typically Ponzi schemes) or got caught by dropping property equity when the bubble burst. Utility SOEs on the other hand, have a near monopoly and consequent good sustained profits. Which is why corporates have been desperate to grab some ownership of SOEs for a long time.

    The real fraud round ‘Mum ‘n’ Dad’ investors is that we ALL currently own the SOEs completely (except AirNZ, where we own most of it). So it will only be the minority of Kiwi ‘family’ investors who can afford to buy any shares, and the rest of us pay higher power bills to give those greedy few greater profits and share growth.

    And all that to ‘pay off’ government debt that only exists because Key and cronies maintain the unaffordable tax cuts he gave to the rich. Like nommo said – Gah!

    Comment by bob — June 24, 2012 @ 3:23 pm

  9. The poll that would be really fascinating is if NZ had recall referenda, like in the US! Arny got the governorship in California on the back of deposing the unpopular ex-Governor, and Wisconsin’s governor just held on against public backlash to his union-busting moves. Would Key and National survive a recall on asset sales? He’d have to smile ‘n’ wave a lot ;)

    Comment by bob — June 24, 2012 @ 3:28 pm

  10. When there was a sell off of utility companies last time, back in the ’90s I guess, my wife bought as many as we could afford and held onto them. Her main motivation was the altruistic thing Patrick @1 refers to, but she tells me it has worked out well enough financially (for myself I can barely count…). So she’ll do the same thing this time around, not as a vote of support for the sales (though I guess it will be spun that way) but to make something of the pig’s ear.
    Not to suggest our minuscule effort will make much difference, but on the basis every little helps.

    Comment by Roger Parkinson (@RogerParkinson) — June 24, 2012 @ 3:40 pm

  11. Dear God I hope the Greens never ever get their hands on the levers of power otherwise we’ll all be wearing sack cloths and genuflecting to neo-green policy inside the beltway.

    Comment by Tim — June 24, 2012 @ 5:24 pm

  12. @11 — I think National are managing to do pretty well at reducing NZ to a peon economy without any help from the Greens Tim. Great insightful commentary though. really interesting comment and oh so relevant to the topic.

    @10 — If I had the money I’d totally buy shares because they’re well-performing assets paying a great rate of return and servicing a growing, captive market. provided they are managed properly they will be an excellent investment. WHICH IS THE REASON THEY SHOULDN’T BE SOLD!!!! eleven!

    Comment by nommopilot — June 24, 2012 @ 5:41 pm

  13. the big caveat in that second question is “if they had the money”.

    It’s so big it renders the question meaningless. Would you buy expensive product x if you had the money? If I had the money? Yeah, sure, why the fuck not.

    Comment by Psycho Milt — June 24, 2012 @ 5:48 pm

  14. otherwise we’ll all be wearing sack cloths and genuflecting to neo-green policy inside the beltway.

    As opposed to wearing sack cloth and genuflecting to neo-lib policy, which is what happens now, you mean?

    I am wondering if the whole 17% dividend thing is a bit of a crock and has been pumped up, as in demanded, in anticipation of the big fire sale. Suck in those mums and dads, only for them to find that the profits they expected have to be ploughed back into the neglected infrastructure.

    Comment by Neil — June 24, 2012 @ 5:50 pm

  15. As a blog-bot insult, “neo-green” has some way to go before it can claim the same revered status as “tree-hugger”, “rentamob” or “feminazi”.

    But hey, let’s give it a chance. So, what exactly is “neo” about this shade of green? How does one earn the prefix? Is it like, following Lucy Lawless on Twitter?

    Comment by sammy 2.0 — June 24, 2012 @ 7:03 pm

  16. JC – corporate monies can and do go overseas.

    In the case of companies that issue bonds to or take loans from foreign markets for say, large scale infrastructure, those funds are generally in the form of USD. Interest paid on those loans is also in USD (purchased from local banks in exchange for NZD) and then remitted – though strictly a pre tax expense and as such, out of revenue rather than profit, the money still ‘leaves’.

    Comment by Gregor W — June 24, 2012 @ 7:55 pm

  17. Number of things:

    1 – Herald on Sunday
    2 – The question probably didn’t ask “Would you cash up all your other investments and invest solely in the power companies being partially floated by the government.
    3 – We already have Gareth Morgan et al to offer strange views on the world of finance, stick to your niche.

    Comment by Andrew M — June 24, 2012 @ 8:33 pm

  18. thanks Gregor (#16): It sounded like a bunch of economics BS but it was on the website of “Australasia’s most independent thinktank” or something lol so I figured it must be true.

    Comment by nommopilot — June 24, 2012 @ 9:23 pm

  19. Profits can’t effectively go overseas. They are in $NZD and if exported are worth nothing unless someone buys them to then buy NZ goods and services.

    The current account balance isn’t always zero. A lot of this ‘flow-back’ would only happen when there is an exchange for something else. My question is whether or not the VALUE of this ‘electronic credit’ yet to flow-back can be negatively affected?

    Also as mentioned; isn’t it relevant HOW profits are recycled into the economy and by WHO? I don’t necessarily want large overseas owned companies deciding how our resources should be used.

    Comment by questlovenz — June 24, 2012 @ 9:59 pm

  20. “It sounded like a bunch of economics BS but it was on the website of “Australasia’s most independent thinktank” or something lol so I figured it must be true.”

    It must be a Pacific Ocean thing.. even our own economists believe it:

    http://antidismal.blogspot.co.nz/2012/04/just-what-does-david-cunliffe-know.html

    “As to the money goes overseas bit I have said this before but let me say it again: Let us assume for a moment that evil foreigners make a NZ$1 profit which, in an effort to piss-off David Cunliffe, they wish to take it back to, say, China. How do they do it? Clearly a New Zealand dollar isn’t worth anything in China so the Chinese holder of NZ currency will have to sell their NZ$1 to buy Yuan. But why would anyone want to buy said NZ$1? The only use for a NZ$s is to buy something made in NZ. Thus the buyer of the NZ$s must want it to buy a NZ export of some kind. What is Michael Fry’s problem with this? The NZ$1 doesn’t go overseas in any meaningful way, it gets spent on New Zealand produced goods and services no matter who gets the profits from the ownership of local firms. If a New Zealander gets the profits they spend them on New Zealand made goods and services, if a foreigners gets the profits they sell the NZ$s to someone who wants to buy New Zealand made goods and services.”

    Basically the “profits going overseas” is a political con used by politicians right and left to stir up xenophobia, but ask yourself this.. if profits were truly going overseas why would virtually every nation seek the overseas investment in the first place if it were such a bad idea? Why did the Clark Govt allow 600,000 hectares of land to be purchased by foreigners and allow Kiwibank to borrow overseas?

    JC

    Comment by JC — June 25, 2012 @ 11:30 am

  21. JC you’ve made your point that the dollars that go overseas eventually return. but it is stupid. it may be that the dollars are just little bits of paper overseas, but they can and do purchase and extract real wealth from our economy.

    your question “why would virtually every nation seek the overseas investment in the first place if it were such a bad idea?” can also be asked inversely: if profits can’t be taken overseas from our economies, why would any foreign national or company ever invest here?

    we have stuff other countries want and they need NZ dollars to get it. that’s great, but not universally beneficial to us as a nation. overseas trade is a bit more nuanced than your independent tank-thinkers seem to believe. they should get out of their tank a bit more.

    most economists (and lots of politicians) seem to be stuck in the stupid mindset that all economic growth is good and so all foreign investment is good.

    but it isn’t. for example:
    in the real world our regular housing bubbles allow our (and by our, I mean, actually Australia’s) banks to extract mucho interest on inflated house prices. we work longer to pay more in rent and mortgages in order to keep the rain off. that money jets off to Australia and comes back through the complex magical world of forex to buy our power companies. what has the New Zealand economy gained from the transaction? the housing bubble bursts so house values fall but the mortgages still attract the same interest and thus assets held by New Zealanders are worth less while the mortgage profits stay high.

    the differential in asset value between the peak and trough of the bubble is extracted from our economy. who cares about the actual currency?

    It is up to our government to manage the economy in such a way that our economy benefits from foreign investment. at the moment it’s being managed in such a way as to minimise the amount of services it provides to citizens, minimise the amount of tax it takes from them, and maximise the amount of resources and commodities we dig up and ship out. they’re terrible economic managers and every shonkey deal they stitch together sees the New Zealand people they’re supposed to represent poorer (except for a few of their mates, of course).

    Comment by nommopilot — June 25, 2012 @ 1:32 pm

  22. “but they can and do purchase and extract real wealth from our economy.”
    So if that $1 is used to buy milk powder, and that milk powder is delivered to China..? Stop me if i’m putting words into your mouth, but do you REALLY believe that exporting is bad?

    Comment by Clunking Fist — June 25, 2012 @ 1:47 pm

  23. “but do you REALLY believe that exporting is bad?”

    no and I never said anything of the sort. We’re trading. whenever 2 people trade one or the other partner may or may not do better or worse out of the deal for a variety of reasons. does the trade of low priced iPods for high price commodities benefit New Zealand’s economy more than China’s? it’s a complex question with different answers depending on exactly what metrics you use and your position in the economy.

    claiming that international trade can not possibly result in one party profiting over the other ignores all the external and political factors that create imbalances in trade-power. do you think china would worry at all about losing trade with New Zealand? maybe a twinge… but it would be a major thing for us if vice was versa. that kind of imbalance can’t help but affect the terms of trade in favour of the other partner. it is up to our government to protect New Zealand’s economy from the effects of this using all of the fiscal policy tools available to it, especially those around ownership of land, infrastructure and assets. I don’t think National are doing very well at all in this regard, and the Clark government were only marginally better… cough TPPA cough

    Comment by nommopilot — June 25, 2012 @ 2:45 pm

  24. “So if that $1 is used to buy milk powder, and that milk powder is delivered to China..?”

    It’s good for some people and not for others. It’s good for farmers but means our food prices are higher. It’s good for Chinese consumers but costs our economy jobs in the milk processing industry as it just gets powdered and shipped in NZ and all the value gets added in Chinese factories. It’s good for the economy because it brings NZ dollars back home from magical foreign exchange land but not so good for our environment as we overload the carrying capacity of our land and foul our waterways.

    it’s f**kin’ way more complex than ever gets discussed on even the most unwatched political current affairs shows…

    Comment by nommopilot — June 25, 2012 @ 3:01 pm

  25. Aye nommo, the greatest success of capitalists has been their linguistic propaganda success – their conflation of ‘capitalism’ with ‘money’, ‘currency’, ‘trade’, ‘business’, and other similar terms.

    People then struggle to conceive of any other economic system.It is so successful that most school and uni students studying accounting and economics never hear the word capitalism; that macro-economic system is simply assumed as the only possibility. Or it’s put in code, called ‘neo-liberalism’ instead of ‘liberal capitalism’.

    Short term, asset sales may not bring down the house of cards. It is the long-term damage of ongoing balance of trade deficits (in NZ’s case, caused overwhelmingly by those SOE profits being extracted offshore through forex transactions) that crashes economies.

    When NZ has imported more than we exported too much, or sent too many profits offshore, we get to a point where the nations buying our currency (to sell us imports) refuse to do so any more. They refuse because they get worried they are holding too much of our currency – they are too exposed to radical government monetary policy changes, for example. At that point, we have a currency crisis (just like Greece), and we get forced austerity cuts. That’s a real bugger if we need to import things like drugs (for hospitals ;) ).

    Comment by bob — June 26, 2012 @ 12:35 am

  26. I believe in legislation being introduced which would disallow the Government to implement an action (partial asset sales, in this case) if there is a petition circulating with a substantial amount of signatories (100,000 or over). This Bill would ensure that the Government wouldn’t be able to, in this case going ahead with selling assets, for a period of two years of leniency for the petitioners to gain the number of signatories required to hold a referendum.

    Comment by Daniel Lang — June 26, 2012 @ 12:14 pm

  27. Aye bob. “People then struggle to conceive of any other economic system”. Well, any other economic system that WORKS, anyhow, eh? Name 2 other economic systems that make a reasonable fist of feeding the masses. In fact, name one.
    “At that point, we have a currency crisis (just like Greece), and we get forced austerity cuts.”
    Um, unlike Greece, we don’t have a fixed exchange rate*. When we sell our milk powder overseas, we (likely) receive $US for it. Then Fonterra finds Noel Leeming and Z (who want to stock up on TVs and oil) and swaps $US for NL & Z’s $NZ. Fonterra then they give those $NZ to their farmer shareholders.
    (*Yep, aren’t you glad all those numbskulls calling for currency union with Aussie didn’t get any momentum! In the Euro, Greece has a currency set too high: their exports are uncompetitive. But Germany has a currency (arguably) set too low, making their exports super-competitive. No wonder everyone expects Germany to step up and save them: way to reduce nationalistic tensions, EU!)

    Comment by Clunking Fist — June 26, 2012 @ 12:37 pm


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