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Top 10 at 10: UV light robbery; QE II steaming over the horizon; Gold under-owned?; Dilbert

Top 10 at 10: UV light robbery; QE II steaming over the horizon; Gold under-owned?; Dilbert

Here are my Top 10 links from around the Internet at 10 past 11am. I welcome your additions and comments below or please send suggestions for Monday's Top 10 at 10 via email to bernard.hickey@interest.co.nz

1. Euro strength? - Maybe not. The euro surged overnight, in part some say because the European Central Bank apparently managed to get through the end of its one year special loan facility without a disaster, rolling many banks over onto a 3 month loan facility. But Tyler Durden (not his real name) at Zerohedge reckons this euro surge is because the banks are struggling to get their hands on cash.

Here's his rather gloomy view. He points to a rise in interbank lending rates in recent days between European banks. Just as during the Lehman crisis, we should all be watching these interbank markets like hawks.

Today, we are seeing a spike not only in Libor and Euribor (both EUR denominated), but most notably in the 30 Day Repo rate. The result is a scramble to fund EUR positions. This EUR surge is nothing more than a liquidity scramble and should in fact be interpreted as EUR adverse and is indicative of an even worse funding pictures in Europe and among European banks.

The recent acceleration in the rise in Euribor and Euro Libor is also scary, and tells you that banks are really pulling in their horns on each other and continuing to 'hunker down' -- of course, why shouldn't they when nobody knows whether the counterparty has cancer or is just fine?

I don't amaze much, but it amazes me that we watched this exact reel here 2 years ago and investors still talk about TED spreads or Libor-OIS... talk about generals analyzing the last war. It does NOT surprise me that the press was trying to put a nice face on the lower-than-expected 3mth facility uptake yesterday as the LTRO rolls off. I say: WHO CARES? The real story is the complete collapse in confidence among "highly interconnected banks" who now wish they weren't so connected!

2. Liquidation pressure - Zerohedge also reckons the sharp falls overnight in the gold and oil prices are linked to these problems in the European inter-bank credit markets. People are now seriously talking about the impending arrival of 'QE2' (Quantitative Easing II) where the Fed and the ECB print money to avoid a slide into a debt deflationary spiral towards depression.

The European liquidations we discussed earlier courtesy of the ECB MRO and the repo rate spike, which resulted in a massive EURUSD covering squeeze, have followed through into industrial commodities such as oil and lastly into gold. And as liquidations are merely emblematic of a broken liquidity system (as the name implies), the unwind behind the scenes must be fierce.

3. Some Chinese worries - Former IMF economist Simon Johnson writes in the New York Times that he is worried the G20 (and a few others including New Zealand) are relying too much on strong Chinese growth to get the global economy out of its mess, particularly given it represents just 6% of the world economy

Among Chinese experts — I was in Beijing over the weekend — there are three major worries.

1) There is already a great deal of wasteful investment in infrastructure. At some level, there is a desire to clean this up and make it more sensible. This implies slower growth.

2) There is much discussion of “overcapacity” in the state sector. Again, there is interest in addressing this — although it is not an easy problem. In any case, this further lowers the incentive for state investment both directly and through various forms of subsidies to government-backed enterprises.

3) The incentives for local government officials have been heavily weighted toward driving G.D.P. growth; they move up (and presumably down) the government and party hierarchy based on how they do in this dimension. There is now a great deal of thinking that it would be better to include other objectives, like effects on the environment. This makes sense — air and water quality are hot issues – but it would also imply slower growth.

China’s reported G.D.P. numbers are likely to remain robust — the reported statistics are very much part of the broader government management process. But the economy could still slow down in ways that would affect commodity prices — these are the key variables to watch, including those for energy and metals used in industrial production.

4. The other side - Christopher Joye at BusinessSpectator.com.au believes house prices are not overvalued in Australia and has been the loudest voice on the other side of the debate vs Steve Keen. Now he says Chinese house prices aren't overvalued either. He does it in a long post full of data, so it's worth a read. HT Danielle via email.

As in Australia, house price-to-income ratios are the doomsayers’ weapon of choice. In China, the crude house price-to-income ratio is a very high nine times. But as UBS points out, the people buying new homes in China are not earning the official ‘average’ incomes, which are under-reported anyway because of non-disclosed ‘grey’ earnings. UBS argues that home buyers tend to be in the top 20-30 per cent of the urban income distribution.

If one takes the official view that the top 20 per cent of income earners generate 2.2 times average income (the top 40 per cent earn 1.7 times), which UBS believes is an ‘underestimate’, we get a ratio a little more than four times. This is in turn nearly identical to Australia’s current house price-to-income ratio of 4.6 times .

5. The darker you get the more you pay - Tanning salons always seemed like a waste of time to me. So I think the US move to tax tanning salons seems like a great idea. Here's the report in the New York Times. But wait, there's always an unintended consequence. It seems tans are now being added as 'free' services on top of all sorts of things, including video rentals and gym memberships...and Congress considered a tax on Botox that they were going to call the 'Botax,' but the lobbyists blocked it...Oy vey...

You can see the sorts of grief we face in coming years as politicians try to raise money through all sorts of taxes that can be gamed by lobbyists. Fat and sugar taxes will come. Window tax anybody? I just learned this is why daylight robbery is called daylight robbery. So would a spray tanning tax be UV light robbery? HT Gareth.

It's a universal truth in Washington: There's no such thing as a simple tax. Free tans at video-rental stores might be taxable, but tanning services offered by health clubs mostly aren't, thanks to a late exemption. Ultraviolet tans are taxed. Spray tans aren't.

Tanning salons are fretting over how to calculate unlimited memberships that combine taxed and non-taxed tans. Customers, meanwhile, have been racing to cram in tanning sessions to avoid the levy. "It's just total confusion," said Ted Engen, president of Video Buyers Group in Coon Rapids, Minn., who has encouraged numerous video chains to add tanning services. "How come gyms got to be exempt?...Why don't we have that for the video side?"

When they completed their health bill last year, Senate Democrats searched high and low for new taxes to pay for the legislation. One idea, a tax on cosmetic surgery dubbed the Botax, was scotched by lobbying by the American Medical Association. Instead, lawmakers turned to the indoor tanning industry.

6. Vuvuzelas as a weapon - Some protesters in London want to organise 100 people to blow those bloody vuvuzelas outside BP HQ in London to protest at the oil spill. Fair enough. I hope their lungs can handle it and they take their ear plugs. This was first reported in the excellent Mashable on Wednesday. It's in the mainstream media today.

Adam Quirk, a web video producer from Brooklyn and the co-founder of Wreck & Salvage art video collective, has launched a Kickstarter project that’s truly a unique method of protesting BP’s follies. He’s aiming to raise $2,000, with which he will purchase 100 vuvuzelas to be distributed to 100 Craigslist volunteers who will then park themselves outside of BP’s International Headquarters in London for an entire day. Predictably, said volunteers will vuvuzela the day away, returning each day until the situation is resolved.

7. Gold underowned? - Paul Kedrosky at Infectious Greed (great name for a blog) points to some research by JP Morgan that shows gold is relatively under-represented in investment portfolios compared to previous episodes of financial market volatility. Here's the table. Don't know what it means. It could be that everything else is still overvalued...

8. Just unsustainable - The Economist points to some ominous projections about the US budget situation from the official forecaster, the Congressional Budget Office. It shows US public health care costs are expected to blow out in the next 20 years and drag the US budget deficit back to 10% of GDP and public debt to 200% of GDP. Yet, somehow, 30 year Treasury bond yields are at 3.9%... Does not compute. HT Kevin via email.

 

9. Totally relevant video - Here's Nouriel Roubini talking on CNBC about the prospects for a double dip recession. He actually sees US growth falling to 1.5%, rather than going negative, but this isn't brilliant because the budget deficit will get worse, the jobless rate will get worse and house prices will fall. "It's going to feel like a recession." Roubini reckons Spain, Germany, the US and Japan shouldn't tighten their budgets too soon. QEII here we come.

10. Totally irrelevant video - Aussies make fun of our accent. Sort of funny. Sort of. Some Faux Kiwi sports presenters wax larrical about the All Whites now versus 1982. "It was butter. Much butter"

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