Matt Nolan

The ETS: Another good Brian Fallow article

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I have to admit that I enjoy reading Brian Fallow’s economics articles in the Herald.  His clear and concise writing about economic issues provides a public service to New Zealand.

His recent article describes what the Emissions trading scheme will do to the economy. The money quote for me is:

By ratifying the Kyoto Protocol in 2002, New Zealand took responsibility for its share of global greenhouse gas emissions. What the ETS does is devolve that responsibility from taxpayers to the firms and individuals whose decisions ultimately determine how large those emissions are.

Exactly!  It is not the ETS that creates the costs we are going to face – it is the ratification of the Kyoto protocol.

Other posts that mention the article (Frog Blog – although I would ignore their Rod Oram style discussion on the “opportunities” 🙂 )

Matt Nolan

Watch out Wellington

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In New Zealand, there is a train of thought that the Wellington regional economy is relatively “recession proof” given the high number of public servants.

However, according to EconLog this isn’t necessarily the case in capital territories.

The money quote has to be:

It turns out that outlandish pay increases for public sector unions are what is recession-proof. The local communities are not.

Now I’m not a public servant and I’m not in a profession that’s on the “recession proof” job list (ht Frog Blog) and now it turns out that living in Wellington doesn’t protect me. Dang.

goonix

Putting your money where your mouth is

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ISCR have just launched New Zealand’s first prediction market.

From iPredict:

Who’s going to be the next Prime Minister – Helen or John? Will the price of petrol be $3 a litre by Christmas? Will Winston be sacked before election day?

These are some of the questions Kiwis may find themselves backing their opinions on with iPredict – www.iPredict.co.nz – New Zealand’s first real money online prediction market, which launches tomorrow (9 September).

The online marketplace enables users to trade on their predictions on a broad range of future political and business events that pay real money if their prediction comes true.

Established as a research tool by Victoria University of Wellington and think tank ISCR, iPredict harnesses the wisdom of crowds via the Internet to predict future outcomes and has a strong focus on helping companies, government agencies and academics with research. …

Mr Burgess says that iPredict is like a simple stock exchange, trading real money.

“How it works is that contracts pay $1 if an event comes true – nothing otherwise – and the price these contracts trade for is the prediction. For example, you could have a contract that pays $1 if Helen Clark is the next Prime Minister, and pays nothing otherwise. If that contract trades for 60 cents, then the market’s prediction is a 60% probability that Helen Clark will stay on as Prime Minister.”

Mr Burgess says that prediction markets are the gold standard for forecasting.

“Traders on prediction markets combine information from polls, expert commentary and any other source to produce a prediction that is more accurate than any available alternative,” Mr Burgess says.

“Prediction markets work because they ask traders to put their money where their mouths are, so it pays to be honest, objective, and even do a little homework.” …

Anybody can browse iPredict and see the predictions for free by going to www.iPredict.co.nz but traders have to be 18 years and older to set up an account. Accounts are free to set up and people can start trading with as little as $5.

Get some money on your account and get predicting.

Goonix

Matt Nolan

September 2008 MPS preview

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On Thursday the Reserve Bank is going to take another look at interest rates – and they will also be releasing a new set of forecasts. Like last time, lets try to describe the Reserve Bank’s decision and state what they are likely to do (rather than stating what we think they should do).

Essentially, in a preview to the Thursday meeting we want to ask two overarching questions:

  1. How has economic data panned out compared to the June forecast – and how will this influence the RBNZ’s interest rate decisions,
  2. How has economic data panned out since July (when they cut rates – between forecasts) – and what does this tell us about the potential for interest rate cuts.

Once we have explored this is more detail – we can talk about the likelihood of of the Reserve Bank cutting rates given the net impact of the change in data.

For people that don’t want to read a long boring post, it appears the data from June-July was substantially softer, while data from July-September was stronger. In my opinion, the net impact of data over the past 3 months has made rate cuts more likely – but maybe not to the degree that the market has priced in.

If you want to read my reasoning – have a look below the tab 😉

Read more

Matt Nolan

Thinking about commodity prices: What do you think the risks are?

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The June terms of trade numbers (due out on Wednesday) are likely to come in lower than they did in March – as a result of the huge lift in petrol prices over the quarter. However, even so, New Zealand’s terms of trade will still be at a historically elevated level.

A higher terms of trade implies that we need to sell less in order to buy the same basket of goods overseas – in other words, it indicates that our country is effectively wealthier. This is ultimately a good thing for the country.

The increase in the terms of trade has been the result of a lift in the price of commodities that New Zealand sells overseas – specifically dairy. More recently beef and lamb meat have joined the party, while other commodities such as coal and aluminum have also performed well. Although import prices have also increased (specifically the cost of inputs such as fertiliser and fuel), the lift in New Zealand commodity prices has been dramatic.

However, risks to commodity prices have appeared, with the dairy component of the September ANZ commodity price index recording a 7.5% slump in August!

Do we think that dairy prices can be sustained near current levels – or is the price going to fall sharply? Even if we don’t have a bubble in dairy prices, Economists View has a good piece on why commodity prices may have a long way to correct – specifically, the potential for a supply response.

This begs the question – is the increase in New Zealand’s income going to last. How much of it is a structural increase? What do you think – I will write on it following the TOT data.

Matt Nolan

Real estate data and interpretation (2)

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The latest(August) Barefoot sales statistics are now available.  In the news release we are told that sales have fallen sharply since July while prices have risen.  However, if we take into consideration what we discussed last time, we will remember that the sale of an apartment block both biased down prices and increased sales in July.  If anything – the current figures tell us that Auckland remains flat, but they don’t give us much of a read on the rest of the country.

Other discussions of general real estate statistics are on the Rates Blog, and the Real estate site.

Mike Pero also indicate that they believe house sales are going to begin rising.  If this does happen I would also recommend that we keep two other things in mind:

  1. House sales are at a incredibly low base – so any lift does not imply to us that the market is truly “back to normal”.
  2. With rents currently falling, the yield on property is terrible – so any significant increase in sales will HAVE to come from further substantial easing in prices.  In real quality adjusted terms we are starting to see this happen.