It’s an election year here in NZ and the two main parties have, bit by bit, been showing their hand in the matter of economic policy. Much of it looks to be policy made on the fly, either in response to what the other side has been signalling, or as a reaction to the tensions and fears around the international credit crunch (on which, more at a later date). However, one good thing is that both parties are now advocating infrastructure projects as way out of a potential economic black hole; and are prepared to do the hitherto unthinkable, namely to issue long term debt to do it. We have been saying this for some time, notably in a paper about financing structures written for a Treasury workshop earlier this year. Long term public debt has important externalities for the capital market as a whole. You'll find the paper under the Public Interest Papers. A shortened version is shortly to appear in JASSA, the journal of FINSIA.

There's more confusion over Auckland Airport and the Overseas Investment Act,with the Canucks now seeking compensation over their terminated takeover bid. The epside highlighted the incomplete nature of the Act, something that should surely have been tightened up at the drafting stage. The navigational failures don’t stop at the airport. Carbon, energy, inflation, the currency, education, health, burogobble, and other pressure points, all add to the problems created by our increasingly bipolar economy. A new book by Roger Bowden entitled ‘The Economic State of the Nation’, is a racy and readable overview of what the stuff ups have been, where we’re at, and where we need to go. Policies are needed, not just sound bites. Find the book by clicking on the Kiwicap Education link at left.

The web page currently features several other special areas: (a)Is currency intervention a good idea?(b) the agribusiness cycle; (c) current problems of NZ monetary policy; (d) using public debt to finance baby-boomer retirement; (e) portfolio technology;and (f) what are financial bubbles made of? Find these among the Public Interest or Technical Papers. The Archive is also worth a look for older papers.

(a) In June 2007 the Reserve Bank of NZ used its currency intervention powers to try to stabilise a soaring Kiwi dollar? Was it a good idea? A new paper by Roger Bowden and Dawn Lorimer argues that it was better to leave well alone. Look among the Public Interest papers for the 'Kiwi that had to fly'.

(b) Farming has long been known as a cyclical business. but a recent study by Roger Bowden and Jennifer Zhu shows just how much. They use a statistical technique called wavelet analysis for an integrated look at both cycles and trend in a proxy for the dairy farmer’s net profit margin. Bowden and Zhu break the causals of the cycle down into commodity prices, the exchange rate and input (expense) prices. They are also bullish on an apparent change for better in the trend. Expect to be wealthy, but not if you’re just buying a farm now.

(c) Current concern about inflation policy in NZ has centred (in effect) on the ability of the Reserve Bank to stabilise economic activity by means of a single instrument, namely the official cash rate OCR. Say hello to the rest of the world: the rise of financial globalisation via eurobonds, uridashis and swap technology, has weakened the link between the OCR and aggregate expenditure, forcing a search for a more distributed policy impact. Look in the public interest section for two papers on this.

(d) Just in case you thought annuities were something new, tontines were the name given to 17th century French and British public debt that paid off a lifetime annuity to the holder; the name comes from Lorenzo Tonti (1630-95). A recent paper by Roger Bowden (see technical papers page) brings the whole idea up to date by attaching derivatives to long dated public debt. For example, options could allow the holder’s estate to sell the debt at a pre-assigned strike price back to the government on death. The option premium is used to buy more debt and hence enhance the coupon income to provide a decent standard of living in the meantime. It’s a neater alternative to the current equity-based approach, which sees the burden fall wholly on current taxation revenue.

(e) Fund investors are typically pretty phlegmatic about temporary dips in portfolio value, but longer run slumps are another matter, precipitating investor withdrawal risk. In the technical papers, Roger Bowden and Jennifer Zhu use wavelet analysis to design band pass portfolios that are differentially exposed to such swings,interpreting the idea in terms of a dynamic value at risk concept.

In addition, the public interest papers contain a non technical review of ordered mean difference portfolio analysis. The methodology was originally designed as a fund performance measurement technology, or for detecting historical pricing inefficiencies. However, its close links with classical stochastic dominance can be used to design portfolios. The papers illustrate such aspects as using OMD to enhance portfolios, e.g. in overlay management, and using it to test for CAPM. In the process, they illustrate the methodology of risk profiling, which can be used to determine whether any particular investment adds value to a base or benchmark portfolio for investors of differing risk preferences. Results for the NZ stock market show that no faith whatsoever can be placed in the use of the NZ index for cost of capital purposes. In that respect, CAPM is no Moa. Look in the public interest papers, technical papers, or Archive for more on the OMD.