News } TBK Capital

Baby Boomers, Interest Rates & Retirement

Interest rates are always a subject followed closely by borrowers and investors alike, so I thought it was about time I revisited this topic. In my January newsletter I noted that commentators at that time were concerned a rise in interest rates was fraught with risks, and that it was unlikely the world was going to quickly return to a high interest rate environment.

Date Created: 29/10/2016

“However beautiful the strategy, you should occasionally look at the results.”

Attributed to Winston Churchill - but some doubt.

Interest rates are always a subject followed closely by borrowers and investors alike, so I thought it was about time I revisited this topic. In my January newsletter I noted that commentators at that time were concerned a rise in interest rates was fraught with risks, and that it was unlikely the world was going to quickly return to a high interest rate environment.

So it’s interesting to look at what’s happened since then. The other day I came across an article on this subject by John Maudlin whose newsletters provide excellent commentary on the U.S. and international financial markets. It was the quote above (whether it be by Churchill or not) that preceded his 9 October “Thoughts from the Frontline”.

It’s a long article which addressed the consequences of the low interest rate environment initiated by the U.S. Federal Reserve around 2008, but well worth reading. His conclusion is “What did happen was the opposite of stimulus, at least for those who were not the direct beneficiaries of quantitative easing. That would be the people who actually wanted to be prudent and save and put money in fixed-income and certificates of deposits. Remember when you could invest in a CD at 5% to 6%? What a quaint notion."

“By reducing the incomes of retirees and terrifying near-retirees, the Fed successfully reduced economic activity. Hopefully, that was not their intent, but that is what happened.”

New Zealand Interest Outlook

Here the annual inflation rate has fallen to 0.2%. Since 2000, the New Zealand Consumers Price Index inflation has averaged around 2.7%. This compares with averages of 2.4% in the 1990s, and averages of over 11% for the previous two decades. It’s been below the bottom of the bank’s target band of 1% - 2% for two years now.

On 18 August the Reserve Bank reduced the Official Cash Rate by 25 basis points to 2.0%. The current view, according to a recent article by David Hargreaves in Interest.co.nz, is that the ANZ Economists expect the Reserve Bank will have one more reduction to a record 1.75%, but that this will be the last drop. The feeling is the case for easing is becoming “more tenuous by the day”. Factors include:

• Strong domestic demand in the economy.
• Emerging capacity pressures.
• A tightening Labour Market.
• Rising domestic inflation pressures - despite the low headline inflation figure (see later).
• The housing market still needs to slow.

The section of this article I found most interesting was their comments on the growth in economic activity, which is anticipated to “moderate” in 2017. This is expected to be partially driven by capacity constraints – the economy cannot continue to grow at a rate above past trends for too long.

Of particular interest is their observation that "the impact of a required slowdown in credit growth should not be under-estimated. Credit is being rationed more tightly as late cycle excesses become apparent. That’s a good thing. A failure to rein in credit growth and associated excesses would only up the odds on a starker turn in the economic cycle down the track, which has been New Zealand’s historical experience.”

Cancellations of subdivisions and housing developments are examples of capacity constraints. This is also partly due to banks exercising more caution.    By the way, at TBK we have access to other lenders that will fill the hole – but that’s another story.

Of course we don’t necessarily all feel prices aren’t rising. This is largely due to the fact that the Consumer Price Index doesn’t include average house price data. This is ready for an update through the Household Living-costs Price Index, which I must say I am looking forward to. It’s been designed to reflect the fact that real world inflation varies greatly depending on your household wealth and expenditure. See NZ Herald article by Liam Dann.

Investment Options

ASB bank’s latest quarterly investor confidence research shows home ownership is still rated the best investment, up from 14% at the end of last year to 21% now. The second-most popular choice was rental property which was backed by 18% of those surveyed across the country and 20% for those based in Auckland. The investment picks were as follows:

• 21% of people say their own home.
• 18% pick rental property.
• 13% term deposits.
• 7% bank savings accounts.
• 6% publicly listed companies.

BNZ Economist Tony Alexander’s 20 October Weekly Overview has another reason why house prices are so high. As Tony says “No Baby Boomer lobbied the government or Reserve Bank for interest rates to fall back to 1960s levels just as they are retiring.” 

“Older people are buying houses for yield and to help finance a retirement likely to last considerably longer than previously thought due to health, medical and lifestyle advances.”

Interest Returns

Meanwhile investors looking for interest returns on their money are searching for yield and security. There are plenty of options for these so I thought I’d just pick three of the many we know about and which have interesting features for the investor. IM’s are available through TBK Capital.

Please note none of these are offers to the public and are available only to people who qualify as a wholesale investor as defined by the Financial Markets Conduct Act – see statement at the end of this newsletter.

Alpine Fresh Finance – Optional Convertible Notes

Alpine Fresh has been in the water cooler business for over 13 years. It specialises in renting non-bottled water coolers to business customers. It has built up a recurring rental book which consists of approximately 3,700 water coolers under 2,200 rental agreements with a weighted average economic life of 7 to 8 years.

It is issuing up to $2 million of OCNs secured by way of a first ranking security over the rental agreements and water coolers owned by Alpine Fresh. The Alpine Notes will be for a term of 5 years with an early repayment option after 1 year. Interest will be paid monthly at 7% per annum. At maturity the investor has the option to request repayment or convert to ordinary shares in Alpine Fresh.

Manuka Bonds – 8% Return + Bonus Interest

See our website for a summary of the Offer. The Bonds will pay interest at 8% per annum, payable quarterly in arrears, and have a maturity date of between 12 - 18 months.

On the maturity date the investor will be repaid the face value of the Manuka Bonds, any outstanding accrued interest and potentially an additional 20% of the increase in the market value of the Manuka honey within the Manuka Barrels over which the bonds are secured if the honey has moved into a higher UMF band.


TBK Capital is in the business of offering debt finance options to borrowers. See my March 2016 newsletter. Or for further information on all or any of the above email or call me on +64 21 902 901 or +64 9 307 3257.

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The above investments are not offers of financial products that require disclosure under the Financial Markets Conduct Act 2013 (Act) and are available only to wholesale investors as defined in Schedule 1 of that Act (other than any person who is only a "wholesale investor" under clause 3(3)(b)(i) or (ii) of Schedule 1 of that Act). They are intended for distribution only to selected people to whom, under the relevant laws, they can be lawfully distributed. They cannot be distributed in any other jurisdiction, or to any other people. They are not offers or solicitations in any jurisdiction in which such offers or solicitations are not authorised, or in which the person making such offers or solicitations are not qualified to do so, or to any person to whom it is unlawful to make such offers or solicitations. Any representation to the contrary would be unlawful. No action has been taken by any person that would permit a public offering in any jurisdiction where action for that purpose would be required.