Archive | Gainz

Investore sells South Dunedin Countdown

Investore Property Ltd has an unconditional agreement for the sale of its Countdown supermarket in South Dunedin, 10 months after a tender for it closed.

The sale of the property at 323 Andersons Bay Rd is for $19.328 million, representing an initial yield of 6.26% & a 5.6% premium over the $18.3 million valuation in the March accounts. Settlement is scheduled for 1 April 2019.

Philip Littlewood, chief executive of Investore’s manager, Stride Investment Management Ltd, said the Dunedin sale completed the divestment programme Investore announced in November 2017, associated with the purchase of 3 Bunnings-operated properties for $78.5 million in February 2018.

To buy the Bunnings properties, Investore decided to sell this Countdown, another one in Christchurch and the Fresh Choice in Queenstown. Sales of the other 2 were settled in March for $32.6 million.

The South Dunedin Countdown sits on 10,298m² and has a 4071m² floor area. The tender documents showed it was returning $1,225,375/year net + gst and had a 14.7-year weighted average lease term. Even after its sale, Countdown stores still dominate the Investore portfolio. At the March balance date they represented 73% of contract rent.

Earlier stories:
21 November 2018: Investore lifts rent but profit slips
6 August 2018: Investore launches share buyback
26 March 2018: Investore settles 2 property sales
5 March 2018: Investore sells Hornby supermarket property
2 March 2018: Stride’s 3-property sale to Investore settles
9 February 2018: Investore confirms 3-shop buy from Stride, and signs a sale
13 July 2016: Stride stapled securities & Investore start trading

Attribution: Company release.

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The Build Act is new US anti-China weapon

In the hubbub over the US-China trade war, one element of it skipped my notice: an act passed through both chambers of the US Congress which will heighten tension, reduce environmental safeguards & politicise aid.

The Build Act (full title, the Better Utilisation of Investments Leading to Development Act) is overtly political in its requirement for projects to serve a US foreign policy purpose.

This will be done through a new organisation, the International Development Finance Corp (IDFC), which will replace the Overseas Private Investment Corporation (OPIC), set up in 1969.

Sarah Brewin, an agriculture & investment advisor to the International Institute for Sustainable Development, wrote about the enactment of the policy change in an article for the Independent Media Institute, which appeared on EcoWatch last week.

Her key paragraph:

“The Build Act requires the IDFC to develop guidelines & criteria to ensure that each project it supports has ‘a clearly defined development & foreign policy purpose.’ The requirement that all projects serve a foreign policy purpose, combined with weakened environmental protections, could see the IDFC supporting environmentally damaging projects if they are seen to be in US foreign policy interests – for instance, if it was thought that if not financed by IDFC, the project would instead be financed by a ‘strategic competitor,’with debt, influence & diplomatic relations accruing to that competitor rather than the US.”

The Build Act advances President Donald Trump’s view that human activity is the cause of climate change, while also advancing his anti-China cause.

EcoWatch, 4 December 2018: A US-China investment war is quietly emerging, and the environment will be the ultimate casualty
Reuters article, 4 October 2018: Congress, eying China, votes to overhaul development finance
International Institute for Sustainable Development

Attribution: EcoWatch, Reuters.

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Goodman buys Mangere site

The Goodman Property Trust has conditionally bought an industrial property in Mangere for $29 million.

The 3 adjoining sites at 42, 60 & 70 Favona Rd cover 7ha backing on to the Manukau Harbour, predominantly leased to T&G Global Ltd. Currently operated as a market garden, the property has a 2279m² warehouse & 41,790m² glasshouse, and associated office & coolstore space.

Investment management director James Spence, of trust manager Goodman (NZ) Ltd, said last week: “While we are continually investing in the trust’s development programme, we are also looking at strategic acquisitions that complement the portfolio. Leased until June 2023, this property offers longer-term opportunity with the potential to develop 30,000m² of new warehouse space. Providing direct access to State Highway 20 and easy connectivity with the cbd, port & airport, the location is ideal for logistics operators.”

The acquisition is conditional on Overseas Investment Office approval.

Attribution: Company release.

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VXV Fanshawe St sale unconditional

The Goodman Property Trust’s sale of its interest in the owner of the VXV property portfolio along Fanshawe St in Auckland, Wynyard Precinct Holdings Ltd, went unconditional last week.

Goodman said the buyer, a group of funds managed by US asset manager Blackstone Group LP, had received approval from the Overseas Investment Office and the sale would settle this Friday, 14 December.

The 51:49 joint venture between Goodman & Singapore sovereign wealth fund GIC agreed the $635 million sale in May.

After selling $1.2 billion of property over the last 5 years, the Goodman trust’s investment strategy is now exclusively focused on the Auckland industrial market.

The VXV portfolio includes 7 lowrise office buildings, with a total floor area of 88,000m², in the commercial precinct adjoining the Wynyard Quarter.

Earlier story:
18 May 2018: Goodman & Singapore fund sell VXV portfolio to Blackstone

Attribution: Goodman release.

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Pacific Property offer fully subscribed

Property Managers Group closed its $37.44 million Pacific Property Fund Ltd syndication offer fully subscribed on Friday.

The Tauranga-based syndicator raised the money to add 2 industrial properties in Hamilton & Palmerston North to the fund’s portfolio.

Pacific Property, an unlisted commercial property fund, holds a diversified portfolio.

Earlier story:
9 November 2018: PMG looks to add 2 properties to unlisted Pacific fund

Attribution: Company release.

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Vital doubles loan to NorthWest for Healthscope acquisition

NZX-listed Vital Healthcare Property Trust has doubled its loan to its manager to support the acquisition of an increased stake in Australian listed company Healthscope Ltd.

Vital had paid $A41 million to support the investment in Healthscope, and this week upped it to $A81 million.

Vital’s manager, NorthWest Healthcare Properties Management Ltd, is part of a group of entities controlled by Paul Dalla Lana of Toronto, Canada, which invest in & manage properties & businesses in the healthcare sector. The Northwest group also owns 24% of Vital’s units.

Vital chief executive David Carr reiterated in a release yesterday that “an acquisition of Healthscope’s underlying hospital-related real estate is of interest to NorthWest & Vital, in line with their long-term strategy to invest in healthcare real estate assets in the Australasian market”.

He added: “Consistent with their conflicts policy, NorthWest & Vital currently intend to pursue any potential Healthscope real estate acquisition jointly, with scope to introduce other capital partners as appropriate.”

The immediate owner of Vital’s manager, NorthWest Healthcare Properties REIT, announced in May it had acquired a 10% interest in Healthscope at $A2.39/share by way of a derivative contract with Deutsche Bank AG’s Sydney branch. On 20 November, NorthWest said it had bought another 1% on market and on 30 November it amended the derivative contract to increase its interest in voting shares to up to 13.41%, acquired at an average $A2.360062/share.

As an extension of its loan arrangement with NorthWest, Vital agreed to lend the further $A40 million to NorthWest to reflect “Vital’s proportionate contribution to the funding required to support the acquisition of the 13.41% position. The loan is repayable in 12 months, unless the parties agree to a shorter timeframe. The loan continues to be on arm’s-length terms and interest is payable by NorthWest.”

Healthscope owns 43 private hospitals in Australia (down from 45 when Northwest bought in) and pathology operations in New Zealand, and has been a takeover target for months, after its sell-off of $A300 million of assets & 19% drop in net profit to $A89 million for the year to June.

In late November, Healthscope granted exclusive due diligence to Brookfield Capital Partners Ltd of Toronto, making its second bid to take over Healthscope at a total value of $A2.585/share, or about $A4.5 billion.

Through all the takeover activity, Healthscope has Brookfield’s agreement for it to continue working on establishing an unlisted property trust to hold most of its hospital assets and lease them back to Healthscope, provided it doesn’t enter a binding divestment agreement in the meantime. Healthscope added that “a new co-investor (unnamed) would be introduced to hold an interest of 49%” in the new trust.

Earlier stories:
25 November 2018: Vital Healthcare management fees up for review, new action at Healthscope
23 November 2018: Northwest increases Healthscope stake to 11.1%
9 May 2018: Vital Healthcare’s parent makes new Australian investment

Attribution: Company releases.

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Augusta buys Queenstown site for second tourism fund hotel

Augusta Capital Ltd announced last Monday it had entered into an unconditional agreement to acquire land in the Queenstown cbd for a 5-star hotel development, and on Friday it confirmed settlement.

The site is at 17-19 Man St, en route to the Queenstown gondola. Augusta intends to transfer it to its proposed tourism fund. In the meantime, managing director Mark Francis said the company would continue to progress discussions with potential hotel operators.

“Locations for a hotel development in Queenstown do not come much better than this site,” he said. “The location is central Queenstown, within walking distance of all the key sights & activities in the Queenstown cbd, while sitting in an elevated position which provides premium, uninterrupted views out to the Remarkables.”

He said the vendor had obtained resource consent to undertake the proposed hotel development, which has been progressed to a level of detailed design. “Initial discussions have also been held with potential contractors regarding construction of the hotel, but a construction contract will not be let until a hotel operator is secured. It is expected that construction should commence by the middle of 2019.”

The total consideration payable under the agreement was $13.95 million for the land as well as the designs, intellectual property & site works undertaken to date.

The planned tourism fund already has one asset lined up – 54 Cook St, on the fringe of the Auckland cbd, which is being converted from office to a pod hotel for Jucy Snooze Ltd. The shareholders of Augusta Value Add Fund No 1 Ltd approved the sale of the building to the Augusta Capital group in September, awaiting transfer to the tourism fund.

Earlier stories:
23 October 2018: Fund shareholders approve sale to initiate Augusta tourism fund
24 September 2018: Pod hotel the opportunity for Augusta to close value-add fund with strong return and open tourism fund

Attribution: Company release.

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Funds manager Augusta lifts earnings 122%

Augusta Capital Ltd lifted its half-year earnings by 122%, driven primarily by higher operating earnings & revaluations. On another measure, the non-GAAP adjusted funds from operations assessment of underlying financial performance, the return was 16% higher than a year ago.

Augusta chair Paul Duffy said in the results release on Thursday: “The material improvement in the interim result reflects the early benefits of Augusta’s transition to a funds management earnings model, which is being actively supported by improved balance sheet capability.

“Improved earnings came from Asset Plus and the launch of the Augusta Industrial Fund. The launch & expansion of investor funds, including fees from assets under management, are now core to the company’s growth story.”

Mr Duffy said the new funds had attracted new investors, and a number of existing investors had reinvested.

Broad picture

The company generated $5.03 million of net offeror & underwriting fees and created $950,000 of ongoing gross annual management fees from the 2 new offers.

Net management fee income rose 32% to $4.17 million ($3.15 million), driven by strong transactional income & new assets under management.

Net rental income fell by $840,000 following divestment of Augusta House (19 Victoria St West in Auckland) in July 2017 and the retail title in March 2018, offset against income from the Hub in Wellington until 15 June 2018.

Corporate costs increased by $620,000 to $5.02 million, driven by the level of investment required to support the launch of new fund initiatives.

Net funding costs fell $570,000 to $890,000 after the sale of directly held investments. The company had $32 million of undrawn lending facility at 30 September, to support new initiatives.

Total assets were reduced by $36 million to $105.3 million, primarily as a result of the sale of the Hub in Wellington to the Industrial Fund for $44.9 million. The bulk of these proceeds ($35.9 million) was applied as a debt repayment and the balance held as working capital.

Group gearing based on drawn debt was 6.3% of gross asset value. Intangible assets & goodwill are held at cost net of impairment, driven by asset sales in the managed portfolio. However, Augusta will continue to revalue investment assets to fair value.

2 new investment offerings were completed oversubscribed, raising $143.5 million of new equity, and Augusta completed transition of the Asset Plus Ltd management contract.

Key finance & portfolio points:

  • Net profit & total comprehensive income, up 122% to $5.1 million ($2.3 million)
  • Net revenue, up 7.1% to $11.84 million ($11.05 million)
  • Profit before fair value movements, disposals & tax, up 14.3% to $5.9 million ($5.2 million)
  • Adjusted funds from operations, up 16% to $4.56 million ($3.94 million)
  • Total assets, down 25.2% to $105.3 million ($140.85 million)
  • Net assets, up 3% to $86.7 million ($84.2 million)
  • Net asset value/share increased to 99c (98c) due to retained earnings
  • Net tangible assets/share, fell 3c to 75c (78c, but up from 71c in March)
  • Basic & diluted earnings/share 5.83c (2.62c)
  • Second quarter cash dividend 1.5c/share, fully imputed with imputation credits of 0.583c/share attached, and supplementary dividend of 0.2647c/share for non-resident shareholders; the board expects to maintain the full-year dividend at 6c/share, subject to quarterly review
  • All assets within the Augusta Value Add Fund unconditionally sold, generating an 11.7% internal rate of return 
  • Increase in corporate costs as Augusta continues to invest in people to support the growth strategy.

Managing director Mark Francis said Augusta would maintain its focus on growing assets under management & diversifying the portfolio: “The tourism sector remains a key focus for Augusta’s next new multi-asset fund offering, and we have previously signalled our intentions as to the future growth of the Industrial Fund. The acquisition of the Queenstown Views property is a further asset secured for the tourism fund initiative and we are also pursuing further opportunities in both Queenstown & Auckland.”

Immediate aims: 
• Exit the final 2 Finance Centre assets
• Launch sector-specific funds
• Grow existing assets under management, specifically Asset Plus & the Augusta Industrial Fund 
• Leverage balance sheet to support underwriting & broader business objectives 
• Invest in further IT to support growth 
• Active asset management in New Zealand & Australia in terms of acquisition, divestment & development opportunities.

Immediate aims:

  • Exit the final 2 Finance Centre assets
  • Launch sector-specific funds
  • Grow existing assets under management, specifically Asset Plus & the Augusta Industrial Fund 
  • Leverage balance sheet to support underwriting & broader business objectives 
  • Invest in further IT to support growth 
  • Active asset management in New Zealand & Australia in terms of acquisition, divestment & development opportunities.

Attribution: Company release.

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The debt clock pounds on, Trump & Xi use different decks of cards, Lagarde wants illusions to come true

I did a longer count on Sunday morning to see if my 36 seconds estimate of how long it takes the US Debt Clock to add $US1 million to the country’s national public debt was correct. From 8.55am, my estimate put the tick over to a total $US21.8 trillion at 9.14am. It was right on time.

While this is a game that can amuse a small mind, it’s also a deadly serious game.

The US Federal Reserve will feel obliged to lift its funds rate at least once in its next 3 scheduled meetings and has warned of a possible 3 raises in 2019, but…. And it’s a big but.

Inconvenient for Trump’s power game

President Donald Trump doesn’t want to add $US55 billion/year to the interest bill through one quarter-percent raise, let alone 2 or 3 of them. But his primary target at the moment is to get a trade deal with China, primarily requiring a step back from technology transfer which US officialdom has deemed illicit.

The answer to the question, which will be posed in Buenos Aires this afternoon NZ time as Mr Trump & China’s president-for-life, Xi Jinping, sit down to dinner, will require an answer from the Chinese leader: How long does he want to be president for life?

If his answer is (1), a short time, he can acquiesce to every Trump demand, or even just that main one.

If his answer is (2), a long time, he can tell Mr Trump there is no way he can acquiesce, because he would be out of office, and probably out of breath, around the time his plane lands in Beijing. For that answer he needs a backup plan that saves face, puts a convoluted timeframe in place for technology change, reduces some US tariffs and involves at least some US oversight of change plus agreement allowing a better deal for US exports to China.

Even if China isn’t breaking US & Word Trade Organisation trade agreements, Mr Xi is in no position to disagree. His country’s trade position is worsening, China is spending reserves propping up malfunctioning businesses, and he doesn’t have a tariff response to match Mr Trump’s.

One Xi option: distractions

Mr Xi can look to alternatives while simply smiling with his lips pursed, as he does in all his photos with Mr Trump. He can widen China’s South China Sea military presence by adding drills in the North Pacific Ocean, where the only notable dot of land between China & California is Hawaii, and increasing investment in the South Pacific, perhaps along with some military presence.

If he relaxes the debt arrangements for Belt & Road investment, China will be able to advance that programme more rapidly. African nations are an open target and less of a focus for the US.

There is thus scope for Mr Xi to ease tension and create distractions, probably in timeframes to suit himself so long as he indicates a confirm response on addressing technology transfer.

For Mr Trump, that leaves the question of the growing US debt, which he needs to address while avoiding tipping the stock markets into reversal. He can do that by agreeing a China trade deal that sees more industrial activity in the US, lifting trade & stock positions on the one hand while at least slowing the rise of national debt on the other.

As Trump talks proprietary, Lagarde talks propriety

International Monetary Fund manging director Christine Lagarde was plainly focused on these issues when she sent out a release this morning NZ time calling for “decisive & collaborative action” by Group of 20 leaders “as global growth moderates and risks increase”.

She didn’t name anybody, certainly didn’t propose any specific solutions, but did throw a couple of figures into the air to show effects if the trade war spreads.

She said the IMF estimated 0.75% of global gdp could be lost by 2020 (that’s a year away) “if recently raised & threatened tariffs were to remain in place and announced tariffs were implemented”.

On the other hand, she said, “If, instead, trade restrictions in services were reduced by 15%, global gdp could be higher by 0.5%. The choice is clear: there is an urgent need to de-escalate trade tensions, reverse recent tariff increases and modernise the rules-based multilateral trade system.”

For Mr Trump, Ms Lagarde’s recipe is easy: Mr Xi accedes to his primary demand, in some form, and US trade will be rising in crucial markets ahead of the 2020 presidential election.

For Mr Xi, it’s harder. He needs to turn China’s domestic markets around but also reduce depletion of reserves, and he can only do both of those by agreeing some sort of external change. The trick will be to turn the technology transfer dispute into a win, which he can do by negotiating terms that appear favourable.

He can put some pressure back on Mr Trump by delaying change, and thereby delaying the impetus of business growth back home, which Mr Trump will be focused on heading to November 2020.

Ms Lagarde also had her eye on an issue which the 2 trade giants have been setting aside, “the excessive level of global debt – about $US182 trillion by the IMF’s estimate”. That debt total is international, public & private, and disguised because much of it is in the form of derivatives. A small tumble could quickly escalate into a worldwide collapse.

Her solution is one the “highly indebted emerging-market & low-income countries” she spoke of on one side of the balance sheet are unable to dictate, and one derivative marketeers are unlikely to support wholeheartedly while they’re making mega-returns from scalping their clients.

She said: “It is important, particularly for highly indebted emerging-market & low-income countries, to rebuild buffers and reverse procyclical fiscal policies. Increasing debt transparency, such as on the volumes & terms of loans, by borrowers as well as lenders, is as important as supporting debt sustainability.”

Ms Lagarde recommended 5 policies to the G-20’s members:

  1. Fix trade – priority No 1 to boost growth & jobs
  2. Continue to normalise monetary policy in a well communicated, gradual, data-driven manner – and with due regard to potential spillover effects
  3. Address financial risks, using micro- & macro-prudential tools to tackle problems related to leveraged lending, deteriorating credit quality & high exposure to foreign currency or foreign-owned debt
  4. Use exchange rate flexibility to mitigate external pressures, avoiding tariffs & other policies that could weaken market confidence, and
  5. Eliminate legal obstacles to the participation of women in the economy. This is key to tackling high & persistent inequality, and would add to the growth potential of all G-20 countries.

Realistically, what chance?

The first of those policies is less about trade, more about a power struggle deep into the 21st century. The big players will treat innocent bystanders like roadkill.

“Normalising” monetary policy is about handing to future politicians the gloss the incumbents want for themselves. Few will heed Ms Lagarde’s call. The debt mountain will grow.

Bankers can adopt more conservative practices – but what happens when competitors don’t? Or if a bailout is a prospect?

A large financial player – say, one of the world’s big banks – can adjust a small country’s exchange rate at will. Ms Lagarde is talking about exchange rates floating on the tide, untainted by sharp practices. Wholesome, unmanipulated. In short, an illusion.

And last, Ms Lagarde is talking about unravelling the deeply embedded misogyny that ensures inequality is the norm in much of the world. Her recommendation is to be rational, but she’s talking about upending centuries of religious & cultural dogma that it’s been convenient for males to uphold.

As Mrs Brown of Irish TV programme fame would say: “That’s nice.”

US Debt Clock

Attribution: IMF release.

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US debt level pushing fast towards $US22 trillion, and a look into Fed deliberations

On my way through a selection of economic articles & announcements this week, I looked at the US Debt Clock website a couple of times, and pondered how long it would be until the US clocked up $US22 trillion of national debt.

In addition, the US Federal Reserve open market committee issued the minutes yesterday from its 8 November meeting, showing there was considerably more discussion about future interest rate strategy than blunt headlines of up versus hold indicated.

According to the St Louis Federal Reserve Bank in its latest quarterly calculations, also out yesterday, total US public debt at 30 June was $US21.195 trillion – a long way off $US22 trillion, but rising fast.

After a debt crisis in early 2013, the legislated debt ceiling was raised to $US16.699 trillion in May 2013. President Donald Trump again suspended the debt ceiling on February 9 this year, through to 1 March 2019.

The Committee for a Responsible Federal Budget estimated public debt would hit $US22 trillion in March 2019, but it could happen earlier.

Total public debt went through $US21 trillion on 15 March 2018 and was closing in on $US21.8 trillion this morning. It’s quite hard to run a stopwatch on it, but the debt rises by $US1 million about every 36 seconds. At that rate it should hit $US22 trillion in 84 days – 23 February 2019.

This is a debt picture which makes US President Donald Trump – and plenty of others – keen to hold interest rates down. The US Federal Reserve had begun to raise its federal cashrate, increasing the target range for the federal funds rate to 2-2.25% in September but holding it at that level on 8 November.

US national public debt:gdp.

The St Louis Fed showed federal debt (total public debt) as a percentage of gross domestic product, seasonally adjusted, was 103.84% at the end of the second quarter of 2018, down from 105.23% in the previous quarter and 105.26% in the fourth quarter of 2016.

Debt caution evaporates

Despite those high ratios, now that Barack Obama’s out of office the Republicans don’t seem to have the same caution about rising debt as they used to. They’ve been aided in this reinterpretation of sound policy by having a new president who’s built his business empire on debt, and is keen to lift spending in some sectors, particularly the military budget.

Among interpretations of the Fed open market committee’s November minutes, one view was that the US central bank would hold back from raising its funds rate, which gave the US sharemarkets a boost.

The minutes show the committee went well beyond a yes/no on specific rates, holding a debate on various aspects of policy, including the levels of reserves it would require in an environment where banks had built up reserves as a precaution, making money market rates less sensitive to small fluctuations in the demand for & supply of reserves.

Fed staff also briefed the committee on alternative policy rates. The minutes showed no decision following that discussion, except to continue the discussion on options for long-run implementation frameworks.

The overall federal debt level, and the absence or re-imposing of a debt ceiling, weren’t factors leading the discussion.

Fed surveys strategy options

An examination of market behaviour & market movers’ expectations didn’t disclose any favouring of one policy likelihood over another: “On balance, the turbulence in equity markets did not leave much imprint on near-term US monetary policy expectations. Respondents to the open market desk’s recent survey of primary dealers and survey of market participants indicated that respondents placed high odds on a further quarter-point increase in the target range for the federal funds rate at the December open market committee meeting.

“That expectation also seemed to be embedded in federal funds futures quotes. Further out, the median of survey respondents’ modal expectations for the path of the federal funds rate pointed to about 3 additional policy firmings next year, while futures quotes appeared to be pricing in a somewhat flatter trajectory.”

Later in the minutes, the committee noted: “Almost all participants [staff, advisors & committee members] reaffirmed the view that further gradual increases in the target range for the federal funds rate would likely be consistent with sustaining the committee’s objectives of maximum employment & price stability.”

That read like a ‘We can keep raising the rate and blame somebody else, or blame everybody’ response – perhaps handy, knowing that President Trump wants no rate rise.

The discussion points that followed represented up, down & no change, giving Fed chair Jerome Powell the ability to acquiesce with the president’s preference, or push ahead with lifting the funds rate to a level where it’s closer to the long-term average and allows for easing if conditions worsen: “Consistent with their judgment that a gradual approach to policy normalisation remained appropriate, almost all participants expressed the view that another increase in the target range for the federal funds rate was likely to be warranted fairly soon if incoming information on the labour market & inflation was in line with or stronger than their current expectations.

“However, a few participants, while viewing further gradual increases in the target range of the federal funds rate as likely to be appropriate, expressed uncertainty about the timing of such increases. A couple of participants noted that the federal funds rate might currently be near its neutral level and that further increases in the federal funds rate could unduly slow the expansion of economic activity and put downward pressure on inflation & inflation expectations.”

There was also concern that the committee was signalling intentions – that it would raise rates at stipulated intervals or frequency – and that it would be better to be vague, basing rate changes on new data rather than a programme seen as being set in place.

Quantitative tightening

One aspect of the Fed deliberations that’s been emphasised less is the now-continual withdrawal of maturing Treasury securities from the market at the rate of $US30 billion/month, and agency debt & mortgage-backed securities at $US20 billion/month (assuming that much in each category matures in a month).

Fed view on China

Among global considerations, the US Fed committee’s markets had this to say on China: “In China, investors were concerned about the apparent slowing of economic expansion and the implications of continued trade tensions with the US.

“Chinese stock price indexes declined further over the inter-meeting period and were off nearly 20% on the year to date. The renminbi continued to depreciate, moving closer to 7.0 renminbi/$US – a level that some market participants viewed as a possible trigger for intensifying depreciation pressures. Anecdotal reports suggested that Chinese authorities had intervened to support the renminbi.”

Half-pie view on affordability

The committee minutes surprised me on one issue which is international – the relationship between house prices & interest rates: “Real residential investment declined further in the third quarter, likely reflecting a range of factors including the continued effects of rising mortgage interest rates on the affordability of housing.

“Starts of both new single-family homes & multifamily units decreased last quarter, but building permit issuance for new single-family homes – which tends to be a good indicator of the underlying trend in construction of such homes – was little changed on net. Sales of both new & existing homes declined again in the third quarter, while pending home sales edged up in September.”

The first surprise was the lack of comment on mortgage rates rising despite minimal movement in the base federal funds rate. The second surprise was that the Fed should see higher borrowing costs as affecting “affordability” – presumably the affordability of paying for what’s already bought – without comment on whether this would also bring pressure on house prices, which is a second segment of the affordability question.

Comments on volume alone, without factoring in price movements, leave the question open on whether supply will slump, thus maintaining price levels, or suppliers will agree to lower returns.

This issue is playing out in Australia at the moment, particularly in Sydney, where oversupply based on investor (and especially foreign investor) ambitions & high immigration is being followed by a sharp decline in values.

Different price/mortgage issues will arise in Auckland as immigration declines further, barring of foreign investors takes effect and supply of townhouses & standalone homes rises.

US Debt Clock
Federal Reserve open market committee minutes 8 November 2018
St Louis Federal Reserve Bank, total US public debt
St Louis Federal Reserve Bank, federal debt as percentage of gdp
The Balance, 1 August 2018: US debt ceiling & its current status

Attribution: Federal Reserve, St Louis Federal Reserve Bank, US Debt Clock, The Balance.

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