Is Fonterra running a Ponzi Scheme?

First a quick introduction to Ponzi Schemes, recently made famous by the now notorious Bernie Madoff. A Ponzi Scheme involves paying the investors with equity, rather than genuine returns. The Ponzi Scheme survives by attracting more investment.

Fonterra has dropped their payout to $5.10 but they need to drop it further to combat their mounting debt and cash flow problem. However they are reluctant to do so fearing a back lash from farmers who budgeted on the $7 estimate they were given at the start of the season and are already struggling.

So what do they do to cover the shortfall? Here are the words from the official press release on the Fonterra web site:

“..farmers must bring their shareholdings fully in line with this season’s milk production is expected to bring in around $400 million of additional equity by the end of the financial year.”

Never fear we’ll have that extra equity to help with the payout soon.

Here is the wonderful graph showing equity trending down. Doesn’t look sustainable.

Whilst everything goes up Equity goes down!

Image Credit: www.agprodecon.org

Inflation and deflation – Does anyone know what is going on?

The UK records two measures of inflation the CPI (Consumer Prices Index) and the RPI (Retail Prices Index). The RPI is the older measure, however the Bank of England’s target of 1-2% inflation is based on the CPI. The RPI is still used for wage negotiations and is a common part of commercial contracts.

The CPI has just risen to 3.2% more than 1% above the target range prompting the bank governor to publically explain why inflation is so high and what he is doing to reduce it.

In the same month the RPI shrunk to 0% for the first time in 1960. A worrying sign for those concerned about deflation.

How can the UK be experiencing inflation and deflation? In reality it can’t. The disparity between the two measures shows that economics is an inexact science and the models especially break down in unpredictable and volatile times.

Inflation measures never capture exactly what is going on in the real world. It is left to the judgement of those making the decisions to make up for what is lacking in their tools. Let’s hope they have what it takes.

New Zealand Dollar – time to intervene?

The humble New Zealand dollar gets a mention in the Economist. Apparently the Canadian’s think we are going to start efforts to de-value our dollar. Switzerland has recently made efforts to devalue their currency.

What if this is just the begining? – Longwave Theory

Most discussions about how long the recession will be have the economy growing this year or some point next year. However one group of people predict we’ll be in recession for a lot lot longer. They think we won’t see an upturn for 15 years!

Those who follow longwave theory aren’t in the main stream, but then neither were market bears in early 2007. There is a body of evidence  that is worth a second look.

4 Longwaves in US History

Essentially, so the theory goes, the economy moves in 50 to 60 year cycles, rather than the short 5 to 10 year cycles that we generally recognise. The graph above shows the cycles that we’ve been through in the last couple of hundred years.

The first point that lends this theory credability is that it was published prior to the Great Depression. Correctly predicting the Great Depression is one thing but what about this time round?

Ian Gordon at the Longwave Group claims to have published this article in 2005 predicting the start of the “long winter”. Unfortunately the original publication site seems to be off air so we can’t validate it.

However if the Great Recession and Great Depression were predicted by the theory how does it work? This is one of the big weaknesses. There are several theories including innovation and technology cycles and wars. Check out wikipedia for details.

The eminent historian Eric Hobsbawm wrote of the theory: “That good predictions have proved possible on the basis of Kondratiev Long Waves – this is not very common in economics – has convinced many historians and even some economists that there is something in them, even if we don’t know what.” (Hobsbawm, 1999: 87n.)

Whatever the reason it might pay to not expect the upturn for while.

The Great Recession recognised

It must be official now. Stuff proclaim we are in “The Great Recession” stuff.co.nz article.

Alan Greenspan on trial

Alan Greenspan has gone from semi god in the US to one of the villains of the Great Recession. Many people blame loose monetary conditions in the early 2000′s that went on too long. Alan Greenspan was indeed celebrated for the rapid recovery after the dot com bust. So should he be vilified for excess liquidity that led to this crisis.

He believes the answer is no. In fact he published his defense on march 11th here. Below is the short plain english version of his defense.

1. Mortgage interest rates and federal fund rates became disconnected – It wasn’t me I don’t control mortgage rates.

2. “That ex ante excess of savings propelled global long-term interest rates progressively lower between early 2000 and 2005″ – The Chinese save too much which is why I lost control of interest rates.

3. In response to Stanford University Professor John Taylor “His statistical analysis carries empirical relationships of earlier decades into the most recent period where they no longer apply” – Just because you predicted I was causing a housing bubble John and then there was one doesn’t mean I did.

4. “I personally prefer Milton Friedman’s performance appraisal of the Federal Reserve” – My friends still love me.

So there you have it no humble pie eating from Alan, in his eyes no mistakes were made all this was unavoidable. Hummm….

Special Drawing Rights – What the?

We’ve tried everything else shall we all get some Special Drawing Rights (SDRs)? Never heard of them? Don’t know what I’m on about?

It turns out that SDRs are the IMF’s super currency or more accurately a basket of currencies made up of the US Dollar, Euro, Pound and Yen. Here is the long version.

So what? Apparently the next big idea is to start handing out SDRs that we make up out of thin air in a “Global Quantitative Easing”. As with the regular Quantitative Easing this means printing money just scaled up to the global stage. Here is the original article by the guy who is proposing this move.

As quantitative easing has never actually been proved to work surely kicking off a global experiment is a touch fool hardy?

NZX – 12.5% Average Dividend Yield

Dividend paying companies on the NZSX are paying an average of 12.5% based on today’s prices (see below for details on how I worked this out). 12.5% is a pretty high yield, especially when you consider that us kiwi’s consider any yield from an investment property good news. We ran head first into finance companies for 9.5% and recently got all in a lather over corporate bonds paying about the 8% mark.

Kiwi’s are still a bit sceptical about equities and this could help the canny investor. One of Warren Buffet’s favourite sayings is be “fearful when others are greedy and greedy when others are fearful”.

In New Zealand most people are fearful of equities and greedy towards property. Think about it!

Let’s take a look behind the headline figure. I took a sample of 50 companies and averaged their dividend yield as quoted on www.nzx.com. I only used companies that pay a dividend.

The dividend yield number is based on the most recent financial year. As such it is backwards looking. The very real risk is that during the great recession profits will be down and so will dividends. The real yield for the next few years will be much lower.

However, whilst this is true, if the dividends dip for a year or two that shouldn’t impact the long term investor. It’s more relevant for a buy and hold strategy to ask whether the company could average a payout at their historic level plus inflation over the long term. In essence is the company experiencing a short term issue or a fundamental decline in it’s ability to produce dividends.

Obviously further analysis is required on a case by case basis. Hopefully this is enough to motivate us all to look a little closer. Here is the link to the detailed sample of NZSX companies for those of you who are interested.

The End for the US Dollar?

It seems strange to ask if the US dollar is loosing it’s universal appeal when it has done so well in this crisis. And yet this is what Chinese Premier Wen Jiabao did this weekend.

Ever since Warren Buffet wrote his charming story about Squanderville and Thriftville in 2003 I came to realise that something was wrong. If Warren thinks something is up you take another look. Check out the article he has a great writing style and you suddenly start thinking why no-one has done anything about all this sooner!

Just like the dot com bubble and the housing bubble the US deficits are unsustainable. Most recently we’ve seen bubbles burst quite spectacularly, but they can also slowly deflate. I think however that the agressive expansion of the current account and budget deficits now can only mean one thing and that is a big sharp correction.

This is a vast and complex problem and warrants a deeper discussion. Let’s just for a second look at one tiny aspect. China is now the US’s largest creditor. It feels emboldened to make public it’s concerns about the US devaluing “it’s assets”. This is a diplomatic bomb shell. This resulted in President Obama and Ben Bernanke making public responses in the same weekend.Does this sound like the US has a grip on it’s own destiny?

This little story will disapear in no time. However this is the tip of the ice berg. If the US current account deficit was unsustainable in 2003 then it is a recipie for disaster now.

If you were the Chinese Premier where would you put your money? The biggest thing saving the US dollar right now seems to be a lack of a credible alternative. As one commentator put it there just aren’t that many places you can park 2 Trillion Dollars.

2 Trillion Dollars – free to a good home, anyone interested?

Have the Stock Markets bottomed out?

The Dow Jones industrial average is up 11.5% from it’s Monday low and the FTSE 100 has managed a respectable 8.5%. So is this it? Can we start the long slow recovery at least in equities?

I think not. This is a Bear Market rally or what some people less generously call a sucker rally.

But is it a good time to move back to equities? I have read many calls to start buying equities not becasue this is the market bottom but becasue of two reasons. Firstly equities are looking cheap. P/E ratios look better than they have done in decades and dividend yeilds also are paying more than bonds. The dividend yeilds in particular are outstanding.

Secondly it is pointed out that you can’t pick the market bottom. No-one has consistently picked a market top or bottom not even those people like Warren Buffet who have consistently out performed the market. So if you end up getting in a little early you end up fine over a few years anyway. Or so the theory goes.

I personally think equities are going to be a great investment. But here are a few reasons to hold onto your cash just a little longer.

1. Aside from a Citigroup rumour, a very weak sign of health from GM there has been very little good news. In fact there has been continuing bad news.

2. In answer to the “you can’t time the market”. It’s true but getting in assumes that the only possible outcomes are that the market ticks up now or somewhere in the next 6 months. If this were to turn into a Japanese style lost decade do you really want to be in the market for more than 10 years before you get a return?

3. Most Market bottoms are violent drops of 10-15%. We’ve been floating down on a trickle of bad news. There we’ve got to be able to see that nothing worse could happen a month from now. If you can’t you haven’t been reading the news or you haven’t got much imagination.

I think equities are going to be a great place to be at some point. But if we are going to not be able to time the market, I might just miss the bottom on the safer side.