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Friday's Top 10 with NZ Mint: China's property developers doubled their debts; Higher inflation targets debated in Germany and America; JP Morgan's Too Big to Fail Whale; Clarke and Dawe

Posted in News

Here's my Top 10 links from around the Internet at 11 am in association with NZ Mint.

I welcome your additions in the comments below or via email tobernard.hickey@interest.co.nz.

I'll pop the extras into the comment stream. See all previous Top 10s here.

My must read today is #9 on income inequality and the financial crisis. Seems there is a link.

1. China stops buying European bonds - Bloomberg reports sovereign wealth fund China Investment Corp has stopped buying European sovereign debt.

Yikes.

The Chinese were supposed to be the great saviour.

Related Topics

There is another Chinese sovereign wealth fund, SAFE (!), which is likely to keep buying.

But this isn't a good sign.

Europe is a running sore that just can't seem to grow a scab that sticks.

Here's Bloomberg:

“What is happening in Europe right now is of course of concern,” CIC President Gao Xiqing said yesterday in an interview in Addis Ababa, Ethiopia, during the World Economic Forum on Africa. “We still have our people looking at opportunities in Europe, even though we don’t want to buy any government bonds.”

2. House of cards - The WallStJournal reports Chinese property developers doubled their debts in the last two years. That can't end well.

The official data suggest that loans to China's thousands of developers at the end of the first quarter totaled a manageable 3.6 trillion yuan ($570 billion), equal to just 6.3% of total yuan loans in the banking system.

A look at the financials of 159 mainland-listed developers, though, suggests the official numbers are not telling the whole story. Numbers from Wind—a China data provider—show total liabilities for this subset ballooned to 1.8 trillion yuan in the first quarter of 2012. That's more than 100% higher than the level when the government first pointed its policy needle at the property bubble in early 2010.

3. 'You have to be a Chinese citizen' - Reuters reports China has ordered the big four accounting firms to have Chinese citizens running their operations in China.

And New Zealanders worry about what the Chinese might think about us blocking a foreign purchase of New Zealand land...

The changes come at a difficult time for the Big Four, grappling with the fall-out from a string of accounting scandals at Chinese companies listed in the U.S. that has left investors questioning the quality of auditing in China.

The new rules will force the proportion of foreign partners at the Big Four to be a maximum of 40 percent when the structure is adopted in August this year, and fall to under 20 percent by 2017.

4. A way through in Germany? - The muddle-through tactic du jour in this financial crisis is to force down interest rates and then force up inflation to allow debt be eaten away slowly by inflation.

Now even the Bundesbank is talking about allowing inflation to rise in Germany to help solve the European financial crisis, the FT reports.

The Bundesbank, the most hawkish of central banks, has signalled it would accept higher inflation in Germany as part of an economic rebalancing in the eurozone that would boost the international competitiveness of countries worst-hit by the region’s debt crisis.

A future German inflation rate above the eurozone average could be part of a natural adjustment process as crisis-hit countries pulled themselves out of recession, the Bundesbank argued in evidence to German parliamentarians submitted on Wednesday.

5. A way through in America? - There's also a debate going on in America about deliberately increasing inflation to try to solve the problems.

Here's Mike Konzcal (rortybomb) on his blog:

The Fed is fighting the last war: against 1970s stagflation. It is of course essential that the Fed maintains its hard-won credibility against runaway inflation. But the best way to do so isn’t to keep the economy in a perpetual state of high unemployment. It is to be explicit in what it wants to see accomplished and what it is willing to tolerate in order to get it. As Charles Evans, President of the Chicago Federal Reserve, recently pointed out, the Fed could “make a simple conditional statement of policy accommodation relative to our dual mandate responsibilities.” An “Evans Rule” would mean the Fed would agree to keep interest rates at zero and tolerate 3 per cent average inflation until unemployment went down to 7 per cent, setting market expectations in such a way that would allow aggregate demand to surge.

Commentators would like to argue that monetary policy rewards some people over others, forgetting that mass unemployment is the most regressive policy imaginable. But beyond that, monetary policy is not a morality play, and it’s not about rewarding the good people and punishing the bad ones. It’s about stabilising growth, prices and maximum employment without overheating the system or letting it choke to death from a lack of oxygen. Now, more than ever, a commitment to both goals is necessary for the good of our economy.

6. Stephen King wants to be taxed real hard - Horror novelist Stephen King has written a Warren Buffett style plea at The Daily Beast to be taxed at a higher rate. HT Toby Manhire at The Internaut on The Listerner

Here's King. I've carefully exerpted bits that don't have any swearwords in them so I can get through a bunch of firewalls at the banks.;)

What charitable 1 percenters can’t do is assume responsibility—America’s national responsibilities: the care of its sick and its poor, the education of its young, the repair of its failing infrastructure, the repayment of its staggering war debts. Charity from the rich can’t fix global warming or lower the price of gasoline by one single red penny. That kind of salvation does not come from Mark Zuckerberg or Steve Ballmer saying, “OK, I’ll write a $2 million bonus check to the IRS.” That annoying responsibility stuff comes from three words that are anathema to the Tea Partiers: United American citizenry.

Last year during the Occupy movement, the conservatives who oppose tax equality saw the first real ripples of discontent. Their response was either Marie Antoinette (“Let them eat cake”) or Ebenezer Scrooge (“Are there no prisons? Are there no workhouses?”). Short-sighted, gentlemen. Very short-sighted. If this situation isn’t fairly addressed, last year’s protests will just be the beginning. Scrooge changed his tune after the ghosts visited him. Marie Antoinette, on the other hand, lost her head.

Think about it.

7. JP Morgan's fail whale - It seems a proprietary trader on JP Morgan's London synthetic credit  desk may have lost the bank more than US$1 billion, WSJ reports.

This is a bank that can borrow unlimited amounts from the US Federal Reserve and is effectively too big to fail.

No wonder there is so much protest against governments bailing out banks with one breath and then demanding austerity with the next. This is at a time when those very same  'Too Big To Fail' banks spend millions lobbying to stop the likes of the Volcker Rule which would separate licensed banks from their proprietary trading arms.

The 'whale''s name is Bruno Michel Iksil.

He was born in France....Shades of Jerome Kerviel?

Plus ca change.

8. Wall of refinancing - FT.com reports Standard and Poors saying companies must refinance US$46 trillion worth of loans over the next five years. It says European companies may struggle to get European banks to roll over those loans.

That's trillion with a capital T.

Not a capital B.

The rating agency predicted that companies round the world would need new funding or to refinance existing debt totalling as much as $46tn over the next five years. And while global banks and debt capital markets should largely be able to provide the majority of funding for companies, S&P raised concerns about the ability of European lenders in particular to meet all corporate funding needs as they deal with the impact of sluggish economic growth and tough regulatory requirements.

S&P warned of the risk of a “perfect storm” forming as non-financial companies looked to refinance debt raised at the peak of the credit boom or find new funds just as banks were deleveraging and restructuring. The report chimes with a view that as banks shrink, companies in Europe will over the next few years increasingly turn to capital markets to meet their funding requirements.

9. Toxic inequality - German macroeconomist Till van Treeck writes about the growing academic work being done to work out if the rise in income inequality in recent decades was permanent and whether it caused the global financial crisis.

There are alternatives to the outdated paradigm of rational consumers and efficient financial markets. In particular, there is the relative income hypothesis, first formally stated by James Duesenberry back in the 1940s and more recently developed by behavioural and Keynesian economists: it says that consumers care about their consumption relative to others as a signal of social status. This means that higher inequality can lead to increased pressure for the lower and middle class to keep up with consumers at the top. Similarly, the basic Keynesian insight that middle-class incomes need to grow in line with productivity in order to sustain robust aggregate demand appears today more relevant than ever.

There is ample evidence that, especially in the US, households reacted to higher inequality by working longer hours, lowering savings, and increasing debt in an attempt to maintain their relative consumption status. Up to a point this allowed them to pay for medical bills, the ever-increasing costs of children's college education and a house; but eventually the bubble burst. The situation is not dissimilar in the UK.

The renewed interest among economists in inequality as a macroeconomic risk is highly encouraging. Undoubtedly more research is needed to pin down the macroeconomic implications of inequality under different country-specific circumstances. But it should be clear that, in hindsight, the dominant textbook economic theories of consumption look almost as toxic as some of the credit products that ultimately caused the crisis.

10. Totally Clarke and Dawe - Mort Gagebelt is a fiction writer for the Australian banks.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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24 Comments

So, let me get this

So, let me get this straight.  I'm sure the common taters will put me right if I'm astray.  Or even a stray.
 
According to 'capitalism with mumbledy characteristics' China, Europe has run out of OPM?
 
And of course it doesn't take an academic to figure out that stoking the expectations of those hapless souls who cluster at the shorter end of life's sticks, isn't a reliable way to Progress. 
 
But (again, let me ask if I understand all this), isn't that exactly the definition of Marketing?
 
And lest those in the pinker end of the commentariat imagine I have aimed my ferocious weapon at the Temples of Commerce, what I actually was t'inking of when I penned this missive was Edumication......

To inspire the aspirations of

To inspire the aspirations of any who want to be...by any means , and that may include sanctioned deception based on misinformation.
Yes thats marketing.....nifty isn't it...

"Europe is a running sore

"Europe is a running sore that just can't seem to grow a scab that sticks?"
 
Eeeeuuughh!  That is gross! 

"interesting" comment from

"interesting" comment from Tony Alexander in his report today:
"Above trend growth has been an article of faith more than a solidly grounded forecast for most of us over the past three years. At this stage there is no reason for saying that the probability of us being right has improved."

Tony A's had his epiphany

Tony A's had his epiphany moment.
 
Welcome aboard - now think even more about what you might do with this enlightened thinking.
 

I'm surprised his comment

I'm surprised his comment hasn't attracted more interest (pun not intended).
He has essentially admitted that his and other economists' forecasts are often based on wishful thinking rather than empirical analysis.
"Oh let's see, we need GDP to grow 3% this year, and house prices 10%, for optimal bank performance, so although we don't really think these results will occur let's predict them and spruik them anyway because that might influence the market and wouldn't it be nice for our business" 
I think we all suspected an element of this in bank economists, but its come from the horse's mouth

Tony made a similar comment a

Tony made a similar comment a year back... Wolly and myself had a laugh about it then..attracted no attention then either. It all PR and market manipulation with economist public comments unless you commission independent agency.

Tony made a similar comment a

Tony made a similar comment a year back... Wolly and myself had a laugh about it then..attracted no attention then either. It all PR and market manipulation with economist public comments unless you commission independent agency.

More on No. 8 - the

More on No. 8 - the refinancing wall - here, including a nice chart - http://www.interest.co.nz/bonds/59258/standard-and-poors-warns-potential...

AUSTRALIAN HOUSING MARKET

AUSTRALIAN HOUSING MARKET VERY WEAK
 
Macrobusiness Australia's Leith van Onselen reporting on the latest RP Data Report -
 
http://www.macrobusiness.com.au/2012/05/rp-data-describes-a-gloomy-housing-market/
 
.....with the Housing Industry Association in the crying room following the Budget......
 
http://www.macrobusiness.com.au/2012/05/housing-lobby-gets-no-budget-relief/
 
 
Not very pretty on the bulk commodities front either....
 
http://www.macrobusiness.com.au/2012/05/bulk-weakness-spreads/
 
Hugh Pavletich
www.cantabriansunite.co.nz
www.PerformanceUrbanPlanning.org
 

Great result and one which

Great result and one which Sue Bradford's mob should read. http://www.otago.ac.nz/wellington/otago032196.pdf
Conclusion - If you work hard in NZ its absolutely possible to move out of the poor house and into something better. 30-40% of people whom are cronically poor move out of this situation.
Class Mobility is alive and well in NZ. Graeme Hart was a towie from Mt Albert, Michael Hill a fiddler from Whangarei. If you work and apply yourself, the sky is the limit

Serious this time,

Serious this time, BH.
 
Great graph and commentary about the absurdity of Europe.  And it';s Friday!

I wonder how big the JP

I wonder how big the JP Morgan story is going to get?

It's a non story.  JP lost, 

It's a non story.  JP lost,  another counterparty won. Net Zero effect.

hmmm I dont see it that way

hmmm I dont see it that way but then anything is possible now given the fraud and deceit going on. JP could go bankrupt and do a Lehman, remember that one? So time for US tax payers to throw Billions into JP.......if thats possible...to shovel it in fast enough that is....going to be interesting given its a US election year....Obama will be hanged if he does bail JP.
 
regards

Thats true Steven,

Thats true Steven, shareholders and possibly bond holders, could feel the fall out. But in the end, unless the losses are an example of a bigger picture, then I see this as just a trading loss, a big one for sure, but still no system failure.

I suspect the CDS issue is

I suspect the CDS issue is the Gorilla in the room on that one. If JPM goes down there could be hell to pay. Love to hear from Iconoclast on that one, he has a few clues in that regard.

Scarfie: Question by neco

Scarfie: Question by neco over on 90 seconds at 9:00 am
http://www.interest.co.nz/news/59252/90-seconds-9-am-chinese-import-growth-slumps-03-april-bank-india-intervenes-support-rupee
 

  • A Q (actually 2) for you iconoclast. At least one of our local trading banks holds their NZ client FCA funds at JPM. Are you aware of these funds being secured in any way and what would be the obligation of said local trading bank to their NZ customer should JPM go down the gurgler? All hypothetically speaking of course.

 

  • Answer by iconoclast 11 May 12
  • I imagine said local trading bank will be reviewing and re-assessing its continued business relationship with JPM. Much the same risks as MF Global and "customer funds" and hypothecation.
  • Peoples new found understanding of hypothecation by merchant banks and their proprietary own-account-trading means "get out now" which means a run on the bank.

 
This is what happened - The other merchant banks got wind that one of their own was stuck with an outsize position - they attack it by selling against the "fool". He has so much sunk-cost in it he cant defend it and hold the price up.
 
WHALE OF A LOSS
The April Wall Street Journal report said Bruno Iksil, a London-based trader in JPMorgan's Chief Investment Office, nicknamed the 'London Whale', had amassed an outsized position that prompted hedge funds to bet against it.

6.  Bernard, you ex c erpted

6.  Bernard, you ex c erpted out all the fun bits! 
 
Great story BTW. 

CHRISTCHURCH

CHRISTCHURCH UPDATE.......
 
 
Shape up or ship out, council told | Stuff.co.nz
 
 
Hugh Pavletich   #11   8:47am
 
BROWNLEE BULL
 
The reality is that Recovery Minister Brownlee and his Government is just as much at fault as Mayor Parker and his dysfunctional Council. There is a long history to all this, going back to the time of forced Local Government amalgamation back in 1989.
 
Cantabrians Unite www.cantabriansunite.co.nz has spelt all this out in "chapter and verse" on its website and associated facebook page.
 
While the article conveys the impression Brownlee is decisive, the reality is that his bungled "top down" approach is a complete circus.
 
Putting Kerry Marshall in was another Key Government "kicking the can down the road" exercise. His report has been on the Local Government Ministers desk since 20 March which they are still hiding. No one can find Carter.
 
It was Brownlee who put in place the disastrous Regional Policy Statement 12A last September - in essence a National Government Social Cleansing Programme banning the provision of new affordable housing. No wonder the building industry here is in dire straits.
 
Cantabrians Unite sets out clearly with its 5 major objectives exactly what needs to be done. A recovery cannot get underway until an early local election is held to sort this Council out. The recovery can only be led by the locals, as international evidence makes blindingly obvious.
 
Stop playing games Mr Brownlee.

Nicholas Lynch   #10   8:32am
 
The B-Team kowtowed to a government appointed spy who was sent down to protect the Parker Marryatt regime.
 
I over heard Cr. Livingstone in the chamber state verbatim, whilst grinning, "We can talk now that Kerry isn't in the room hehe."
 
Gutless, spineless "career" councillors. The citizens of Christchurch deserve so much better. Put the councillors back on an honourariam and see who really has the citizens interests at heart.
 
Nicholas Lynch www.cantabriansunite.co.nz www.facebook.com/cantabriansunite
 
Dalziel won't run for mayor - news - the-press | Stuff.co.nz
 
Hugh Pavletich
www.cantabriansunite.co.nz
www.PerformanceUrbanPlanning.org

http://www.guardian.co.uk/com

http://www.guardian.co.uk/commentisfree/2012/may/06/leveson-murdoch-came...
 

A web of privilege supports this so-called meritocracy
On both sides of the Atlantic, the social ties that bind our political, legal and corporate forces lie exposed
A  good article
 
 

 

Alan Greenspan explained that

Alan Greenspan explained that unemployment was not needed to keep labor down these days. All that is needed is to traumatize and disable them politically by debt leverage. (Quote his Senate testimony)
http://michael-hudson.com/2012/04/productivity-the-miracle-of-compound-i...
 
 
I think the same can be said for Student Loans- they keep the masses undercontrol while the children of the elites do not have student loans anyway.
 

Another succinct and

Another succinct and doomladen analysis, from our friends at zh.  Double or nothing....