Bill Dalton

Last week I spoke of my imminent retirement and I mentioned some of the things I wanted to do. Now, one week into retirement, I am already realising that I’m going to have to be more organised than I was when I was full time at the office. Because one of the reasons I really wanted to retire was I had so much to do, so many projects I wanted to tackle in my workshop. And guess what? I haven’t had time to get near the place since I handed over my office key.

One of the projects I have been looking at over the last few days is the Hawke’s Bay Regional Council’s proposal to form an investment company. Like all proposals it is not all bad or all good, but on balance I see their proposal as being structurally flawed. For a start it is proposed that all the directors will be elected Regional Councillors. That begs the question – why can these people make better investment decisions wearing their “director of an investment company” hat than they can wearing their “Regional Councillors hat?”

We are told that the investment company structure is a tool for enhancing the council’s capability to manage an active investment policy. How does that happen when it is the same people making the decisions?

We are told that the investment company structure will provide access to financial tools not otherwise available directly to council. What are these tools that are suddenly going to become available just because the structure has changed?

We are told that corporate governance should be separated from political governance and yet we are also told that the council can direct the investment policy of the investment company. How do you reconcile that?

Much is made of the suggestion that an investment company would reduce the risk to which the council is currently exposed. That one has got me beat. Risk is ultimately carried by the shareholders in this case you and I the humble ratepayers. How can an investment company, with a stated intention to gear-up its portfolio by borrowing be of less risk to you and I then a non-geared portfolio administered by the very same people.

And lastly, I wonder what experience the current Regional Councillors, who would become directors of this investment company, have had in the use of the sort of financial instruments suggested for use in this proposal.

I for one have serious misgivings about the structure suggested in this proposal and even greater misgivings about the proposal document which is written like a car sales brochure. The idea has some merit but I believe it needs far more work and yes – thought.

It’s a somewhat strange feeling sitting making notes for this week’s piece.

After 25 years of scribbling notes in between appointments and then tossing them out for a typist to try and make sense of, I have suddenly realised I am no longer going to have the services of a typist. I’m going to have to write more tidily and then type my piece myself.

Because tomorrow – the 31st March 2011, I retire. After 42 years in the workforce, the last 30 of them behind the same desk, I have decided now is the time to move on to the next phase of my life. And whilst it is a well planned and considered move, when it comes to the reality that on Friday I am no longer on the payroll, it really is a bit scary.

I have worked in the financial industry for the last 32 years and for much of that time, I have been advising clients on saving for retirement. Putting a nest egg together that will help them enjoy their retirement years. And it will be no surprise to you to know that the most frequently asked question I have been asked is “how much do I need?” What size portfolio do I need to allow me to retire in comfort?

The short and simple answer to that question is simply save as much as you can. Clearly with the cost of living today and the fact that salaries and wages have not kept pace with increased costs it is difficult to put money aside for the future. But any money you can put aside during your working life will enhance your standard of living in retirement.

But money is only one side of the retirement argument. The other is time, what are you going to do with your time when you retire? You have been so used to getting up and going to work every morning, what are you going to do now you don’t have to?

And that’s where I’m so fortunate. Firstly I have my Napier City Councillor duties and I’m looking forward to being able to devote more time to that responsibility. Secondly I have my workshop and my race and vintage cars to enjoy. And thirdly we are keen to do a bit more travelling. Oh – and did I mention – my wife wants me to start exercising, loose some weight and get fit.

So it’s going to be an interesting adjustment at every level and I’m looking forward to the challenge.

I never cease to be amazed by people who somehow think that they must get a whole lot better deal when they deal out of town.

We see it in the share broking industry. We often discover that locals are dealing with brokers in Auckland or Wellington because somehow they think they are getting a better deal. And what’s worse of course is that often those same people rely on the support of locals for the success of their own business.

The truth is that a broker in Auckland or Wellington sits looking at exactly the same data screen all day that a broker in Hawke’s Bay does. There is absolutely no reason why a provincial broker can’t give exactly the same service as a metropolitan broker can.

Look what the Art Deco Trust has done regarding entertainment for their Deco Decanted weekend. They have got entertainers coming from Australia, Auckland and Wellington. Why? Why aren’t they using the huge pool of excellent talent that we have right here in the Bay? Why do we have a made up “Big Band” coming to town, when the Hawke’s Bay Jazz Club “Big Band” is available?

I often discuss the matter with people I meet who insist on doing their business out of the district and almost without exception they tell me that somehow or other they think they are getting a deal in Auckland or Wellington that they can’t get in Hawke’s Bay. That of course is rubbish.

I wonder what these people’s expectation of the future of the Bay is.

Don’t they have a vision as I do, that the Hawke’s Bay economy will prosper – that businesses will grow – that growing businesses will provide jobs for their kids – that having their kids working locally means their grandkids will also be here in the Bay.

Two of my three children currently work out of Hawke’s Bay. In time, if appropriate jobs are available, both of them would like to settle back here. I could think of nothing better.

And if supporting local businesses means I am increasing the chances of having my family around me, then I am all for it.

Buying goods or services outside the district when these goods and services can be bought locally makes no sense to me – nor does bringing musicians in for an event like Deco Decanted when here in Hawke’s Bay we have a pool of talent as deep as anywhere in the county.

It has been calculated – I would prefer to use the word estimated, that in the 18 months to June 2009, one third of the world’s wealth disappeared.

When I say wealth, much of that wealth was really only perceived wealth. I well recall visiting folk in America. They were in their 60’s, had a nice home, a car and what the yanks call a truck and a RV (motor home) parked up their drive. To the casual observer, this was the home of a reasonably well-off couple. Yet chatting to the fellow over a BBQ, he admitted that they had about 25% equity in the lot. Such was, and I emphasise was, the way of life of the average American.

Now in the States, especially in the industrial belt, the place is virtually in ruins. In Detroit, the home of the car industry, it is estimated that there are between 30 and 40 thousand homes that have simply been abandoned. The local authority is bankrupt. It will take decades for some of these industrial cities to recover and most of them will never recover to what they were.

So how did all this come about and I suppose if we boil it all down to its most simple level, there is only one word for it – greed.

Since the late 30’s in America, if you took out a mortgage and couldn’t service it, you could walk away from your home with nothing. The bank would then get what they could for the home but they couldn’t pursue for any shortfall.

Because you had walked away from a mortgage you were regarded as being sub-prime. No one would lend to you – you were committed to a life of renting.

Then the greedy boys said – “We can lend to these sub-prime people and charge them plenty. We can make a fortune.” And to get the punters in, they gave them very low interest rates for the first two years. As soon as the mortgage was written they flogged it off to a merchant bank which subsequently securitised it.

Of course when the true interest rates kicked in, the borrowers could not service their loans and so the sub-prime crisis began to snowball.

We moan and groan about rules and regulations here in New Zealand but I guess it is better than living in the Wild West.

I hear on the radio this morning that Murray Douglas from the Chamber of Commerce is calling for us to extend the Hawke’s Bay Airport runway with all speed.  The reason given – that part of the Pacific Blue airline, might be looking to extend their services to new airports.

Time and time again, since I became a Napier City Councillor, I have asked for someone, or anyone, to present to me a compelling business plan, for the extension to the runway.  No one has even bothered to try and convince me.  The best I have had is to be told that a previous City Council voted for it because it future proofed our airport.

If an extended runway becomes necessary in the future, why don’t we do the work then.  Why aren’t we putting a proposal to airlines – getting a commitment from them – and then building to meet a need.

The extension to the runway at Hawke’s Bay airport is going to cost somewhere around 10-12 million dollars.  That of course just allows bigger planes to land, it does not give us an airport with international capabilities.  For that you need to completely fence the entire area to internationally accepted standards, you need to put in full customs facilities including x ray machines etc., you need to build facilities for immigration and the police – the list goes on.

I would guess that the infrastructure facilities would cost another 10-12 million dollars.

Again I stress, I am not coming down hard and fast against the extension to the runway.  What I am saying is that I have very real reservations about spending up to $20 million and incurring debt to do so, to extend a runway at one of the most difficult times experienced in an economic sense – for a runway that just might be needed in the future.

Frankly, I believe Air New Zealand provides a fantastic service in to Napier especially in terms of frequency.

What I need is someone to convince me that our air services will improve and an extended runway will be an economic benefit to Hawke’s Bay rather than an economic burden like extended runways have been in other provincial cities. 

I’m still waiting.

It is estimated that in the last 18 months, the world has lost 40% of its wealth. How the so-called experts arrive at that figure I have no idea.

The starving millions in Africa, South America, India and other deprived areas of the world are in no different position then they were 18 months ago or 5 years ago or 10 years ago. They were on the bones of their bums then and still are today.

So if those huge areas of the world’s population have not seen their net worth reduced and the world has lost 40% of it’s wealth on average, then those of us in the affluent world must have lost a hell of a lot more than 40% of our wealth. I can relate to that!

Our houses have dropped dramatically in value – our equity investments have tanked – our fixed interest investment portfolios have diminished in value and frankly – we are all feeling somewhat battered and bruised.

Sometimes we think: “how could things be worse?”

Well for a start we could be in rural Victoria. We could be in a shelter having lost our homes and several relatives and friends. In fact we could have lost everything.

And the truth is – we haven’t.

My son, who works for the Victorian State Treasury and is on call waiting to head into the affected area, says it is chaotic in rural Victoria. It is a sad sad scene. His girlfriend, a Doctor at the Alfred hospital is working long hours dealing with the burns victims. Who would swap places with her?

My daughter is at the Royal Melbourne hospital. That institution is also seeing the results of these horrific fires.

In Victoria hundreds of people have lost their lives. Thousands more have lost everything they ever owned. The State of Victoria is a ravaged and devastated disaster area.

And we are worried because our assets are worth a little less then they were worth 18 months ago.

Most of us still get three meals a day – we sleep in comfort at night and just occasionally we might have a wee drink or two.

I think people in rural Victoria would think that’s not a bad place to be right now.

There is no doubt that the worlds financial system is under serious threat right now.  And there is no doubt that – just as day follows night – good times will follow bad.

One thing has become very obvious over recent weeks.  The American system of unfettered, unregulated capitalism simply doesn’t work.

Take the housing market for instance.  After the 1929 crash, most states changed the rules for borrowing.  What they said was that if someone borrowed money secured over their house and they defaulted, the bank could only seize the house.  They couldn’t pursue the individual.  The assumption was that if a homeowner defaulted on his mortgage, then his credit rating would be so bad that no-one would lend to him.

Of course, in recent times the system has fallen down.  Because first line lenders were not going to hold the mortgage, they were just going to flick it on, they didn’t care who they lent to.  So these people who had simply walked away from a previous mortgage were eagerly lent to by greedy mortgage brokers.

Hence the sub-prime mortgage saga which triggered this crisis.

Bush, Bernanke and Paulson are all rushing around with clever solutions.  They are presenting themselves as the saviours – the clever guys with all the answers.

Make no mistake – this crisis has happened on their watch.  Sure its origins may go back a long way – but the Bush administration has been in charge for 8 years.  They must carry a huge burden of responsibility.

Many people believe that in some way, this crisis is caused by the Share market.  We hear commentators blaming the crisis on Wall Street and people assume that Wall Street is the stock exchange.

Stock Exchanges around the world reflect the strength of an economy and the companies in that economy.  They are an indicator of strength or weakness not the direct cause.

So where to from here?  There is no question that the totally free market capitalist system will be replaced.  Just as the Berlin Wall coming down was a momentous occasion in politics this crisis is a momentous occasion in economics.

We will see a new system evolve – one with checks and balances and one where wealth will relate to real assets not speculative profits.

At long last the American people, from the pauper to the President, have admitted there are very serious faults in their financial system.

I have long marvelled at the average American citizens ability to remain totally unaware of what was happening in the financial world. I suppose when you get out of bed – go to work – have breakfast at the roach-coach – stop off at Denny’s for your evening meal – then go home and watch the baseball channel or the car racing channel or the porno channel, it is inevitable that important events would pass you by.

Well let me assure you – everybody in America is now aware of the serious problems facing the financial system. For the first time in my experience, travelling in the USA, I saw the average American becoming aware of the big picture.

On previous trips to the States, when they found out what I did for a living, people would say “I’m not involved in the money and investment market.” I would say then, what are you doing about providing for retirement?” and they would say they had a 401K account or some other super scheme. They simply never related their retirement schemes with the financial market.

Now all Americans realise that last week, the financial system in their country was on the verge of a catastrophic collapse. The world as they knew it, was no more. Their lives were changed forever.

Share prices were crumbling, the banking system was collapsing, and the country’s wealth was disappearing before their eyes.

The government had to, at last, act and they did. Bush announced a bail-out package that will cost the American taxpayers upwards of a trillion dollars

This essential package prevented the collapse of the financial system but it will not solve all of America’s problems. Rather, it will spread today’s problems over generations to come.

The stories of greed and stupidity by executives earning millions of dollars per year are simply amazing. Some unbelievable. My only hope is that the pendulum doesn’t swing too far. That we don’t see everyone going to ground and money not changing hands. Then we really will be in trouble.

In the meantime for investors, it’s a case of sitting tight, riding out the storm, and seeking good advice from experienced professionals with a sound track record.

I am often asked the question – what has caused the meltdown in the Finance Company Sector in New Zealand – and the answer is simple. It’s greed.

It all began in the USA with the sub-prime crisis. Greedy lenders lending far too much to poor borrowers. Greedy borrowers borrowing far more than they could hope to repay. So the dramas began in the banking and mortgage sector in the States and the effects spread throughout the world.

In New Zealand we had greedy owners and directors of finance companies who raised money from the public and then lent it to developers – many of whom were related parties – in an appallingly cavalier manner.

And of course we had greedy financial planners who poured millions of dollars of client’s money into these disreputable, bound to fail finance companies. Bridgecorp didn’t have any trouble raising funds from some advisers when they were offering two and three times normal brokerage. I would have thought such ridiculous levels of brokerage would have rung alarm bells.

So greed created an environment which resulted in these poorly run finance companies failing.

The problem we now face is that the investing public has decided that all finance companies are poison and that of course is not true.

Companies like South Canterbury Finance have been around since 1926 and they have been an essential part of commerce – financing plant and equipment, property, aircraft, vehicles and participating in New Zealand’s growth.

The sad part of the meltdown in the Finance Company Sector apart of course from the thousands of individual loss stories, is that now, even very good companies are suffering.

Companies like Strategic Finance, that has one of the best teams of personnel in the country, have suffered due to the lack of confidence in the sector. Because of the failure of other companies re-investment rates that were around 70% have dropped to 10% and that is unsustainable.

But Strategic highlights the difference between them and the shonky lot like Bridgecorp and Blue Chip. No hiding the Porsche or other assets from the investors for Strategic. The management team have put up $22m of their own funds and is negotiating a restructure plan that will see all investors protected for both income and capital.

Frankly I’m not sorry to see the Petricevics of this world biting the dust. I’m just sad that he and his cohorts have hurt so many people and damaged a good sound industry.

Related Links

Somerset Smith Partner’s disclosure-statement. (PDF 1.1mb)

Several times a day I have the same question put to me. Is it time to climb back into the share market? And frankly there is no yes/no answer.

When share markets are high, we often suggest that investors take a profit. That doesn’t mean you sell all your good stocks that have done well. It means that selling a few off the top locks in some profit – reduces the average cost of the remaining shares you hold in that company and better protects you if there should be a downturn. It may be that it makes sense to take a profit on a certain stock on several occasions.

When stocks are well down – like right now – investors seem to think they have to either stay right away or climb back into the market in a big way. They are ignoring the very sensible process of dollar cost averaging.

Dollar cost averaging happens when an investor decides how much he or she wants to invest in a certain company, then moves towards that goal with a series of purchases.

Say for example XYZ Ltd was currently trading at $5 – an all time low. An investor may decide to buy say 3,000 shares. In these uncertain times it makes sense to buy say 1,000 shares right now and two parcels of 1,000 at later dates.

In that way – if the price continues to fall the investor has the opportunity to average their price down and if the price moves upwards they have bought one third of their proposed holding at the bottom of the market.

So it’s not a case of all in or all out – it’s a case of taking a sensible approach.

Right now the financial market place is the most difficult I have known in 30 years in the industry. But difficulty means volatility and volatility means opportunity.

In the secondary fixed interest market there are securities in good companies trading on yields up to 20% – such is the lack of confidence in that sector.

The share market has fallen right across the board and yet some of those companies are performing well and have good prospects.

As one commentator so aptly put it – Buying last year was like buying in the days before Christmas, buying today is like buying in the Boxing Day sales.

Related Links

Somerset Smith Partner’s disclosure-statement. (PDF 1.1mb)