The clear advantage of this is diversification. As our table shows, when one stock market is not performing well, that will usually be offset by another market.
There are some years, such as 2008, when there’s no good news anywhere. But look what happened the following year – with Japan’s respectable 9 per cent performance the worst of the pack.
A couple of other things to note about the table – which includes all the big sharemarkets plus Australia and New Zealand:
• New Zealand recorded the best returns in the early 1980s, and among the ugliest worst returns in the 1987 crash. This suggests that our market might be more volatile than many others – at least back then.
• Sometimes a country stays “best” or “worst” for two or three years. But then we find a country switching from one extreme to the other, such as India from 2008 to 2009 and the Australia/China swap from 2003 to 2004. There’s no predicting sharemarket trends.

* Have you actually done the sums?
* Can you afford to repay the mortgage if there is a 3% interest rate increase?
* We could see a US style housing collapse.
* Auctions are a good example of buying on emotion with all the hype.

Loads of behavioural economics in the programme. You should be able to see the following:

Herding – People tend to follow the herd, especially information is uncertain, incomplete, and asymmetric (some people are more informed than others).

Relative Positioning – is a concern people have regrading their own economic and social status relative to other people.

Overconfidence – is a belief, fed by emotions, that you can predict movements better than you actually can. When you’re overconfident, you’re not as smart as you think you are.

Institutional Failure – Investment decisions that can be bad for society but good for the individual can be a product of the institutional environment. If decision makers face little or no downside risk when making very risky decisions, they’ll take those risks.

Here is the link to the programme – “Sunday – Going, Going, Going”

The Economist looked at this and made the point that German has opened up its borders to not just traditional labour but also football players. Of the two squads on show at the Champions League Final at Wembley last month, 17 were from outside Germany.

Most visibly, Germany opened up. Just as immigrants flock to German jobs (more than 1m net arrivals in 2012), so players join German clubs. Between them Bayern and Dortmund have four Brazilians, three Poles, a Peruvian-Italian, a Serb, a Croat, a Swiss of Kosovar extraction, an Austrian of Filipino/Nigerian stock, a Ukrainian and two Australians—and so on. Of the German players, several have dual citizenship or a “migration background”. If the choice is between a German Europe or a European Germany, as the novelist Thomas Mann once put it, football points to the second.

A HDI below 0.5 is considered to represent “low development”. All 22 countries in that category are located in Africa. The highest-scoring Sub-Saharan countries, Gabon and South Africa, are ranked 119th and 121st, respectively. Nine countries departed from this category this year and joined the “medium development” group.

A HDI of 0.8 or more is considered to represent “high development”. This includes all developed countries, such as those in North America, Western Europe, Oceania, and Eastern Asia, as well as some developing countries in Eastern Europe, Central and South America, Southeast Asia, the Caribbean, and the oil-rich Arabian Peninsula. Seven countries were promoted to this category this year, leaving the “medium development” group: Albania, Belarus, Brazil, Libya, Macedonia, Russia and Saudi Arabia.

the Great Moderation occured because Americans borrowed up big from 1993 till 2008, increasing private debt from $10 trillion to $40 trillion when GDP rose from $6 trillion to $14 trillion. It’s also why ‘the Great Recession’ occurred – because when Americans stopped borrowing and instead started to reduce their debt, demand (for both goods and services and assets like houses and shares) collapsed.

So contra Bernanke’s belief that the aggregate level of private debt doesn’t matter, it matters a great deal. That in turn means that Americans are very unlikely to spend more because of QE, because they’re already straining under a level of private debt that is unprecedented – even after several years of deleveraging, the level of private debt compared to GDP is higher than it ever was during the Great Depression.

Chile has done very well out of the shift of China’s rural population to the more urban areas – new homes with copper wire and pipes are needed. Furthermore Emerging markets everywhere are using vast amounts of copper to put in bridges, cars, fridges and more or less anything that uses electricity. However China’s recent slowdown has caused copper prices to slide by 15% since the beginning of the year.

The Economist reported that in 2000-05 the government’s income from mining averaged $2.1 billion a year. As Chinese growth accelerated, that rose to $11.5 billion a year between 2005 and 2011. But the boom owed almost everything to the copper price. Chile’s output of the red metal has hardly grown in a decade.

The biggest threat to Chile’s copper boom comes from China. If the country that buys 40% of the world’s copper slows further, the price of the metal will fall again and Chile will have rely on something else. Is this another resource curse waiting to happen? Below is a short report from AlJazeerah which also looks at the positives from lower copper prices – lower currency value, the peso, and ultimately more competitive exports.

1. Is the exchange rate at an exceptional level,
2. Whether its level is justifiable,
3. Is intervention consistent with monetary policy, and
4. Are market conditions conducive to intervention having an impact.

This last factor is especially important given the volume of trading in the Kiwi. In the most recent survey – April 2010 – by the Bank for International Settlements, the Kiwi was the tenth most traded currency in the world with daily turnover of spot and forward exchange transactions totaling around USD $27 billion.

“We can only hope to smooth the peaks off the exchange rate and diminish investor perceptions that the New Zealand dollar is a one-way bet, rather than attempt to influence the trend level of the Kiwi.” Graeme Wheeler – RBNZ Governor

See the graph below for the value of the NZD after his speech.

The model shows the flow of immigrants in the centre of the diagram, and the well-recognised downward impact on domestic wages through increased supply. The extent to which increased supply of immigrants can impact domestic wages depends on the occupational attainment of immigrants, and the extent to which immigrants are substitutes for domestic labour.

The left-hand side of the diagram shows the added effect of immigration, with an upward effect on domestic wages through increased demand for goods and services and new job creation. This effect can explain why wage decreases may not result after an influx of immigrants. In addition, a feedback loop is shown on the right-hand side, which shows that if downward pressure on wages is created, outward migration of immigrant or domestic workforce would have an increasing feedback effect on wages. The out-migration part of the diagram is pertinent to New Zealand due to its geographic and institutional proximity to Australia.

GDP – Construction is the main driver of growth over the next couple of years – mainly residential. Net exports is likely to take a hit as import penetration starts to build with as the economy recovers. GDP is forecast to increase to 3.6% in 2014 from 2.9% in 2013.

Unemployment – the current rate is 6.2% and the labour market is tightening with the increase in economic activity. Forecast to fall to 5.2% by March 2015. Tighter labour market will mean higher wage growth but also because of higher inflationary expectations as the economy recovers.

Inflation - quite subdued and the annual rate has been 1% or less over the last four quarters. A strong NZD, weakening commodity prices and low inflation globally are conspiring to offset domestic-demand driven price increases. Low inflation also becomes self-fulfilling to the extent that it moderates inflation expectations and price-setting behaviour elsewhere.

Current Account - The current account deficit appears to be stabilising in
a 4.0% to 5.0% of GDP range. This is thanks largely to a resurgence in the commodity prices of the goods that New Zealand exports. This is a welcome development to the extent that it may appease nervous rating agencies for a year or so.

Overall

The New Zealand economic expansion is gaining in momentum. The rebuild of Christchurch is now building up a head of steam and this is supporting increasingly widespread confidence. Very low interest rates and a booming housing market are playing their part too. Eventually this will necessitate a response from the central bank but while annual inflation remains below 1.0% (and set to stay there for a while) it suggests that any such response might be some time in coming. Meanwhile, the NZD remains supported by money printing elsewhere and the relative strength of the economy here.

Australia $9,738 million
China $7,414 million
USA $4,338 million
Japan $3,143 million

Exports to the top ten destination countries accounted for approximately two-thirds of New Zealand’s merchandise exports by value. See chart below for percentages. With regard to the composition of exports the breakdown is as follows:

Milk power, butter and cheese products are $11,434 million
Meat and edible offal $5,287 million
Logs, wood, and wood articles $3,274 million
Crude oil $1,767 million

The top ten export commodities accounted for 64 percent of export value in the March 2013 year. With regard what destination it was sent from we can see the following:

34% of are sent from the Port of Tauranga
11% exported from the Ports of Auckland and Lyttleton Port
10% exported from Auckland International Airport

1. Ships now have to burn cleaner and better grade fuel like diesel – ships used to burn cheap unrefined crude. This means a 50% increase in the cost of fuel
2. The IMO is making ship operators buy tradeable permits to emit CO2.
3. They are also introducing new standards for cleaner ballast water. It has been estimated that approximately 60,000 ships would need to be refitted and that would cost up to $1.7m each.
4. The EU are also proposing to introduce recycling levies on vessels calling at EU ports to pay for the safer scrapping of old ships

Is this fair? 90% of global trade is carried on shipping containers but they only emit 2.7% of the CO2 in the world. It seems that as a lobby group the shipping industry has been too fragmented and unable to influence policy like that of the airlines. See graph below for negative externalities.

What is a contestable market?

• One in which there is one firm (or a small number of firms)
• Because of freedom of entry and exit, the firm faces competition and might operate in a way similar to a perfectly competitive firm
• The threat of “hit and run entry” from new firms may be sufficient to keep the industry operating at a competitive price and output
• The key requirement for a contestable market is the absence of sunk costs – i.e. costs that cannot be recovered if a business decides to leave a market
• When sunk costs are high, a market is more likely to produce an price and output similar to monopoly (with the risk of allocative inefficiency and loss of economic welfare)
• A perfectly contestable market occurs only when entry and exit into and out of a market is perfectly costless
• Contestable markets are different from perfect competitive markets
• It is possible for one incumbent firm to dominate the industry
• Each existing firm in the market produces a differentiated product (i.e. goods and services are not perfect substitutes for each other)

There are 3 conditions for market contestability:

• Perfect information and the ability and or legal right to use the best available technology
• Freedom to market / advertise and enter a market
• The absence of sunk costs

Example
• Liberalisation of the European Airline Market in late 1990s
• Traditional “flag-flying” airlines faced new competition
• Barriers to entry in the industry were lowered (including greater use of leased aircraft)
• New Entrants – easyJet- Ryanair

He is doing a presentation to teachers from around the Auckland area at King’s College on Thursday at 2pm. Please email me if you would like to attend – address below. We are very lucky to have someone of Geoff’s calibre here in NZ.

m.johnston@kingscollege.school.nz

However, care has to be taken in using national income figures to compare living standards both over time and between countries. It is important to use GDP at constant prices (i.e. real national income) so that a misleading impression is not given because of the effects of inflation. It is also important to take into account differences in population size. A country with a large population is likely to produce more than a country with a small population. However, this output has to be shared out among more people so living standards are not necessarily higher. This is why economist divide output by population and compare real GDP per capita. Even when adjustments have been made for inflation and differences in population size, national income figures as a measure of living standards have to be interpreted cautiously.

A rise in real GDP per capital may have resulted from an increase in the output of capital goods. In the longer run this will increase productive capacity and result in more consumer goods being produced. However, in the short run people may not feel any benefit from more capital goods being made. An increase in weapons will also increase GDP but, again, may not necessarily improve living standards. If more police are employed and crime is reduced, the quality of people’s lives will be improved. However, if more police are employed to keep pace with rising crime, people will be feeling worse off. So economists have to look not only at the amount of goods and services produced but also at the composition of those goods and why the quantity has changed. In addition, the quality of goods and services produced should be examined. The same quantity could be produced this year as last year or five years ago but if the quality of the output has risen, living standards will have improved.

The distribution of income also has to be taken into account. National income may rise but if it is concentrated in the hands of a few, the living standards of the majority may not rise. See graph below (The Economist – 2nd February) showing the Gini coefficient of income inequality.

National income figures also fail to take into account some items which affect the quality of people’s lives. A certain amount of economic activity is not declared, either to avoid paying taxes or because it is illegal. If there is an increase in, say, people providing home hairdressing services but not declaring them, people’s living standards may rise, although this increase will not be reflected in the official figures.

Differences in working hours and working conditions are also not taken into account. If output remains constant but working hours fall, people are likely to have a higher quality of life.

National income figures only take into account economic activities for which a payment is made. They do not take into account externalities and non-marketed activities. So, for example, an increase in pollution will reduce living standards while an increase in people decorating the homes of old people, on a voluntary basis, will improve the quality of life of the elderly. Neither of these will be recorded in national income figures.

All of these factors have to be taken into account in using national income figures to make comparisons both over time and between countries. However, some additional factors have to be considered when making international comparisons. Different statistical methods are employed in some countries and the degree of accuracy can vary. Tastes and needs can be different in different countries. For example, people living in a cold climate have to spend more on heating than those in warm countries, merely to enjoy the same standard of living. There is also the problem of selecting a rate of exchange to make the comparison. Exchange rate fluctuate and do not always reflect relative prices in compared using purchasing power parities which compare the cost of a given basket of goods in different countries.