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Tuesday's Top 10 with NZ Mint: Most Germans want to ditch the euro; Iron ore prices slump as China steel demand dries up; Argentinian capital flight; 'Lower for longer interest rates fuel housing bubbles'; Dilbert

Tuesday's Top 10 with NZ Mint: Most Germans want to ditch the euro; Iron ore prices slump as China steel demand dries up; Argentinian capital flight; 'Lower for longer interest rates fuel housing bubbles'; Dilbert

Here's my Top 10 links from around the Internet at 12 pm today in association with NZ Mint.

As always, we welcome your additions in the comments below or via email tobernard.hickey@interest.co.nz.

See all previous Top 10s here.

My must watch today is number 10 from Jon Stewart. You will laugh and yell at the screen over the ludicrous nuttiness of America's elite all at the same time.

1.'We're in the euro -- get us the hell out of here' - The Telegraph reports that 51% of Germans surveyed in a Bild am Sontag poll want out of the euro-zone.

When even the Germans want out of the euro-zone that's a good thing -- and a bad thing.

For the euro-zone to survive it needs the Germans to hold their noses and stump up enormous amounts of their cash (or more importantly guarantees to pay out if necessary) or to allow the European Central Bank to print cash Weimar-style to make the debt go away.

When they clearly don't want to do either that's a problem for the future of the euro-zone. (Unless of course Germany's leaders either hoodwink or ignore their voters).

The other way to view it is this makes an early euro-zone breakup more likely, which would 'clear the system' to allow it to start again. The pain could be sharp, but at least relatively short. The exit of Germany from the euro-zone first would be the easiest, fastest and cheapest solution. That may explain why German two year bund yields are now negative. Investors want to be in Germany itself when its currency is revalued higher back into deutsch marks.

Some people are saying it could take 10-20 years of grinding pain for the euro-zone to survive along the current path of supply-side deflation and adjustment without breakup.

Here's the Telegraph:

The Emnid poll for the Bild am Sonntag mass circulation weekly showed 51pc of Germans believed Europe's top economy would be better outside the 17-country eurozone. Twenty-nine percent said it would be worse off, AFP reports.

The survey also showed that 71pc of Germans wanted Greece to leave the euro if it did not live up to its austerity promises.

Economy Minister Philipp Roesler told Bild am Sonntag there were "considerable doubts whether Greece is living up to its reform promises."

"The implementation (of the reforms) is faltering. There is still no functioning tax office. Also, almost nothing has happened in terms of the promised privatisation of public assets," Mr Roesler told the paper.

2. Iron ore prices crashing - This is obviously important for Australia, which in turn means it's important for New Zealand.

Here's FTAlphaville on the latest action on iron ore and how it's now fallen below the US$120/tonne marginal cost threshold, beyond which it doesn't make sense to add new production. This is the sort of thing behind BHP's decision this week to delay its US$33 billion Olympic Dam expansion, albeit for copper/gold/uranium.

It looks like spot iron ore prices are indeed catching up (or down) with (Shanghai steel) rebar, and that’s taken iron ore below the critical $120/tonne mark.

Why is $120 important? Because of the cost curve. This comes up a lot in the world of iron ore, so it might be worth revisiting what that means.

The “cost  curve” just refers to the price level at which each producer can and will continue to produce. Above their price level they’ll profit and below it, they’ll tend to cut or stop producing. Of course this is a very broad generalisation and lots of things can get in the way but that’s believed to be the general structure of the market today.

3. No pressure - Ambrose Evans Pritchard writes at The Telegraph that ECB President Mario Draghi is the only player in Europe who can prevent financial catastrophe by printing money in a wholesale way to buy Spanish and Italian bonds.

The only issue that matters at this late stage is whether Germany is willing to let the ECB step up to its responsibility as a global central bank after two years of ideological posturing and take all risk of sovereign default in Spain and Italy off the table - which it can do easily enough once it stops playing politics and obeys the “financial stability” clause (Article 127) of the Lisbon Treaty.

That is to say, whether Latin states are willing to mobilize their majority power on the ECB’s council to force a change in policy over German protest, or lamely let themselves be picked off one by one in serial disasters like the death of the Gold Standard in 1931.

Failure to halt a full-blown debt debacle in Spain and Italy at this delicate juncture - with China, India and Brazil by now in the grip of a broken credit cycle and the US on the cusp of fresh recession even before the “fiscal cliff” hits - would tip the entire global system into a downward spin, triggering the sort of feedback loop that caused such havoc in late 2008.

4. Keep an eye on the Cliff - Senior US political figures tell Reuters in this piece that a political solution to America's 'fiscal cliff' at the end of the year will not be possible before the Presidential elections on November 6.

That means a lame duck Congress will have to fix things within a few weeks... It could be a bumpy end to the year.

5. Capital flight - Argentinians run for the exit. Argentina has a history of shutting its banks and revaluing currencies, so it's no surprise claims from the government that the same won't happen again aren't being believed.

The All Blacks go there for a test on September 29. They should be careful to take any spare US dollars home with them.

6. Housing bubbles and interest rates - The Swiss National Bank's Christian Hott and Terhi Jokipii have written a paper about Housing bubbles and interest rates.

They conclude that unnaturally low interest rates (ie below the rates required to keep inflation at a particular level) do indeed fuel housing bubbles.

Sigh.

The last time New Zealand's Official Cash Rate was held unchanged for a long period was in 2007 when it was held at 7.25%. Eventually the Reserve Bank worked out this was too low when the housing market went ballistic. It raised it to 8.25% in short order, but by then the damage was done.

Now we have had the OCR at 2.5% since March 2011 and the Reserve Bank's own forecasts suggest it will stay there until mid 2013. The SNB suggests alternative counter cyclical measures. That would be LVR limits.

So why are we surprised the housing market is taking off again?

Sigh.

Our results indicate that there is a strong link between low interest rates and housing bubbles. This impact is especially strong when interest rates are “too low for too long”. We argue that, by ensuring that rates do not deviate too far from Taylorimplied rates, central banks could lean against house price fluctuations without considering house price developments directly. If this is not possible, e.g. because a single monetary policy is confronted with a very heterogenous economic development within the currency area, alternative counter cyclical measures have to be considered.

7. 'Obama is the anti-Romney' - Robert Reich is a caustic critic from the left of Barack Obama. Here's his view on Obama's re-election strategy and what he could do about the economy, but is not.

The President could propose a new WPA, modeled after the Depression-era jobs program that hired hundreds of thousands of jobless Americans to rebuild the nation’s infrastructure, or a new Civilian Conservation Corps.

He could suggest permanently exempting the first $25,000 of income from payroll taxes, and making up the lost revenues by eliminating the ceiling on income subject to it. He could propose resurrecting the Glass-Steagall Act and breaking up the big banks, so Wall Street doesn’t cause another financial collapse.

But you won’t hear any of this, or anything else of this magnitude, because the White House doesn’t want to take any risks. Polls give Obama a slight edge in the critical eight or so battleground states, so, the thinking goes in the Obama camp, why say anything that might give Romney and the GOP a target?  Besides, polls also show Romney isn’t well-liked by the electorate.  So Obama has decided to campaign as the anti-Romney.

8. Violent environmental protest in China - Reuters reports there were riots in Qidong over the weekend that forced the local government there to abandon plans for an industrial waste pipeline for a Japanese-owned factory. Now an official paper is calling for political reforms to stop the violence spreading. Keep an eye on this.

Chinese officials cancelled an industrial waste pipeline project on Saturday after the violence in the city of Qidong, the latest in a string of pollution protests across the country.

Similar scenes of violence sparked by environmental fears played out earlier this month in the town of Shifang, in Sichuan province, highlighting the social tensions China faces as it approaches a leadership transition this year. Authorities are especially worried about maintaining social stability as they balance economic growth and the fallout from environmental pollution.

"An irrational decision-making process is the main reason why the Shifang and Qidong governments experienced mass incidents," the normally hawkish Global Times said.

In a development likely to cause concern in Beijing, some demonstrators in Qidong said they were inspired by the events in Shifang, where the protests were widely seen as having forced the local government to cancel a refinery project.

The spread of a "Shifang-Qidong Model" of violent protest would damage social stability "and present an unprecedented challenge to China's future development", the Global Times warned. "Now is a good opportunity with these classic cases of Shifang and Qidong to undertake serious reforms within the system," it said.

9. Home made highlights - There's a fair amount of grumpiness around in America about NBC deciding not to televise live the Olympic victory of 17 year old swimmer Missy Franklin. The WSJ does its best in this video to recreate the mood. Good cheap television. HT Gareth.

10. Totally Jon Stewart points out how a typographical error stopped the enactment of regulatory reform of banking...seriously. And makes a complete mess of Sandy Weill.

(Updated to replace Paradox of Choice video that was in David's Top 10 yesterday. My apologies.)

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28 Comments

Barry Schwartz did go far enough in his TED talk. There is a minimum number you need as well to help facilitate purchasing. It turns out that the perfect number of “alternatives” or “customizations” to any particular product is (3).  If you only offer (2) choices (i.e. small and large) people will shy away from any purchasing decision at all. However, if you put a “medium” choice in it not only helps people feel better about purchasing decision one but it tends to drive more sales towards the (2) larger version.  Anything more than (3) alternatives and then people tend to start losing the plot. You will be hard pressed to find any of the tech giants offering more or less then (3) alternatives to any product. The only exception to this rule is color. If you only have one product then you can offer multiple colors with little punishment.

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Interesting idea....

Lots of examples spring to mind to agree....

this?

http://www.ted.com/talks/barry_schwartz_on_the_paradox_of_choice.html

regards

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i think it goes without savings that lower for longer rates creates housing bubbles unless alternative measure are invoked to limit housing lending - and its happenning again in NZ. As many people here have observed in the past, using the OCR to target inflation is not only a blunt tool, it is also perversely a tool that creates inflation given that the inflation index used (CPI) does not include asset price inflation. Low rates will generally lead to more money creation via bank lending. A higher money supply via lending will lead to higher inflation if there is not a corresponding increase in goods and services in the economy. GDP growth is slow, so we can only assume the money is fuelling asset growth, otherwise where else is it going??? But the CPI does not measure this so the RBNZ thinks all is fine and dandy.

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But Jimmy, credit growth has slowed to a crawl, at least in the private sector. 1.5% for households according to the RBNZ. Debt repayment is largely offsetting new credit creation and the asset apreciation, such as it is, is localised and driven by factors other than rampant overall credit growth. New overseas money perhaps. We're walking a de-leveraging tightrope. If the PTB central planners get it wrong (do they ever get it right?) things will get very messy with out of control deflation or inflation. So we're basically screwed then.

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When all money is introduced as interest bearing credit, then those paying down debt are creating default on debt elsewhere, it is just that those defaults have not been marked to market yet. New credit will have to catch up and overtake the defaults eventually, either that or a systemic default occurs.

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Re:#6 - They conclude that unnaturally low interest rates (ie below the rates required to keep inflation at a particular level) do indeed fuel housing bubbles.

 

Unless Dun & Bradstreet are captured by the banks as we think the RBNZ might be, the following extract from their most recent credit report supports the need for lower rates:

 

The D&B survey also reveals that some New Zealand households continue to face financial pressures. Thirty four percent of households will need to use their credit card for a purchase they couldn't otherwise afford during the June quarter. In addition, 29 percent indicate they will have difficulty meeting their credit obligations and 18 percent expect their level of debt to increase. This equates to increases of four and two percent respectively over the past six months.

 

The likelihood of an interest rate rise during the June quarter is relatively low as inflation remains within the Reserve Bank's target range. However, if an upward movement were to occur, the finances of 45 percent of New Zealand households would be negatively impacted. This figure is up two percent on the same quarter last year.

 

"Difficulty meeting credit obligations, increased debt levels and a need to turn to credit for otherwise unaffordable expenses are often early warning signs of financial distress, or the start of a continuing debt spiral," said Mr Scott.

 

Is Mr Scott confirming my recent assertion that New Zealand is in the grip of Ponzi finance mechanics?

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I would disagree, I recall that in 2007~8 the floating rate was 10.25% hardly low.  So I would suggest that the rate isnt important, ppls expectations of profit above that is.

I assume the RB looks are core inflation to set the OCR...not CPI.

blunt tool, yes, problem is unless ppls wages are rising they have no more $s to pay the increased prices.  So in effect the rising cost of petrol will be a big deflator and not inflator.

regards

 

 

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Agree with that - most of the world have much lower rates than us at the moment, and I don't think they have housing bubbles or inflation. Rising the OCR will just mean we have less money to pay off debt

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"Rising OCR" yes except I dont think it would be so benign. I think of it as an aircraft very close to the stall point, if it stalls it will cost a lot of height to get out of the tail spin...

regards

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Lost or embezzled? : certainly the plot thickens over Feeley's sudden departure to grasses greener.

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Well it was interesting that the Council broke the news of his resignation rather than his existing employer.  And then this obviously deliberate 'leak' of info from him.  Makes me wonder whether he had concenrs the prosecution would not be taken in the event he remained - and so the only way to ensure its follow up was to resign so as to be free to make the 'leak'.

 

Certainly odd.  And of course the previous CEO of QLDC finished up her contract early (and very abruptly in terms of notice) and has now gone to head up that Tamaki residential redevelopment PPP initiative recently announced in Auckland.

 

Musical chairs.

 

 

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LOL- Musical chairs: more party apparatchiks prostrating themselves at the bidding of their political master's money men, I'd say.

 

But just as the veil of secrecy descended over the identity of SCF's bailout beneficiaries, I am sure a whisper proof shroud is being erected around those Mr Feeley thinks are indictable, despite his apparent inabilty to bring the investigation before the glare of public scrutiny.  

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Using the Tar 'n' Feather principle that exonerates everyone with wealth of less than $200 mil available to be lost.

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LOL - I guess you haven't had your shoulder tapped?

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Initial reaction was, if the issue came up some time long before last week, and Feeley was rocking a few boats, and some at the top-end-of-town were pressuring him to leave it alone, but being the honest-soul that he is, chose the honourable route, and left, but in doing so decided to lob a hand-grenade as he walked ... is that too convoluted? ...

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but being the honest-soul that he is, chose the honourable route, and left, but in doing so decided to lob a hand-grenade as he walked ... is that too convoluted? ...

 

 

Maybe you are right and he is not going to take the CEO position in Queenstown, which looks as though it was hastily vacated, to make room for him. See Kate's comment above.

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Disagree with number 6, it is not such a simplistic relationship ("low interest rates cause housing bubbles")

During the boom of the early / mid 2000s interest rates were, in historical terms, relatively low in the USA. Yet cities like Houston didn't experience a bubble, because their supply side response was sufficient.

Interest rates in Japan have been close to zero for 20 years and house price inflation has been minimal

Very low interest rates are usually the product of a weak economy, therefore although low interest rates will stimulate demand, demand is usually weakish anyway because the economy is weak, people are cautious, unemployment is high etc.

Auckland is bucking the trend for several reasons. Although its economy is far from strong, pathetically low house building rates by international standards resulting from over regulation and lack of construction economies of scale has killed supply response, which even in the face of only moderate demand pressures will push prices higher.     

A better claim would be "when interest rates are low to moderate by historical standards, when the economy is at least reasonably strong, when population growth is steady and when the supply response is insufficient, housing bubbles will be created." 

 

 

 

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Texas also has a LVR of 80% so the Q is was it supply side? (ie build as you want) or the LVR, I'll go with Steve Keen's comment (I think it was) its the LVR. 

For instance for it have have been supply then other states should have done as well as texas,  yet they suffered.

Very low interest rates are Govn response to a weak economy so a cure not a symptom I'd suggest.

The problem with right now is there seems to be a lot of variables, for instance leverage, debt have all climbed.

If you look at the tulip craze its hard to see that as anything but a speculative bubble...ppl borrowed at no matter the rate because they expected to make even more....and it seems sane to compare this with todays housing bubble....

The proof will be in the eating, if the deflationistas are right then housing will drop hugely no matter the interest rate....

What I will agree with is the low rate is stopping the bubble from popping....if rates climb then affordabilty will come into play and that could be very nasty very fast...wont happen, I expect the OCR to drop, what the retail rates will do is another matter.

regards

 

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i think your last sentence is correct - basically there is no reason to have interest rates as low as they are except to bolster bank balance sheets and continue the ponzi housing bubble.

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I disagree, there are very good, indeed overwelming reason(s) 

1) its helping keeping businesses afloat....thats employment which is spending, and lower WINZ payments more PAYE, keeps tax and debt levels down.

2) Housing, in terms of the bubble be careful what you wish for.....lots of ppl with very high LVRs. They can (and will) go bankrupt, mortgagee sales, nasty things losses for the the householder and the banks and the depositors. So a decent % of ppl would/will be wiped out if/when there are substantial drops, which will feed back to more drops in value, less paying tax, a rising tax rate or govn debt results.

3) The bubble popping will see un-employment climb, and a depression which will feed back into more mortgagee sales and even banks going bust, which means depositors lose....and/or tax payers...someone(s) will lose, guaranteed.

4) With a depression rates will go even lower as no one is making a profit so wont borrow to expand....so your present 4% deposit rate could go < 1%...even 0.25%....then listen to the wailing.

regards

 

 

 

 

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RBNZ takes an early step to make redemption smoothing purchases of the 6.5%, 15 April 2013 Government Stock Issue. View data release - normally the RBNZ waits until the penultimate coupon has been paid before undertaking this procedure.

 

Historical purchases of redeemed issues can be viewed here: choose the "Government Bond Repurchases" tab.

 

I will leave the readers to decide whether this liquifying action constitutes "printing" in the sense that analysts believe it to be when the BoE and Fed buy government securities on an outright basis in return for cash credits to the stock deliver's A/C.

 

The real question of concern is whether the participants will feel compelled to buy more newly issued replacement Government Stock investments because of an early sale to the RBNZ of the 2013 issue?

 

If so, the thorny issue becomes:  is the RBNZ interfering in the NZ Government Stock market place by making it more liquid for purchases to be brought forward, thus possibly driving yields down, against Roger J Kerr's best intended advice?

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#6.  Steven and M.I.A. call it correctly.  Currently we have extremely low interest rates.  And no bubble in prices (Auckland aside)  Past bubbles have occured when we had high interest rates.   It seems to me that the interest rates don't matter.  What does influence purchase decisions is the expectation of higher prices in the future.  From memory, that was a decisive factor in my own past house buying decisions. 

Maybe an inflation environment with it's mentality about ever increasing prices, also produces the expectation that a purchase now is always better than later.  That would be a pressure that leads to the 'bubble'.   

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Do we have job security?

Do we have low inflation pressures on lifes necessary commodities?

Do we have Chinese property investors hoarding around Auckland?

Do we have relatively low interest rates compared to other western nations?

Maybe we don't have a 'bubble' but did we have one that actually popped?

Maybe we don't have a 'bubble' but we DO have a ponzi scheme on price expectations as you stated then..........and still.........now.

 

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Relax , guys ..... Bernard's just ratty again because his prediction of a 30 % property crash has still not occurred .....

 

..... keep waiting big fella ...... another 5 years may do the trick ........

 

Or , just have a little contemplate , next time you feel a " Steve Keen " moment coming on ...... and instead of mouthing-off ,..  " mouth-in " ,..  suck on a gummy bear ...

 

..... life is good , friends !

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Maybe we should re-visit what BH said, my recollection was a decline in the BB years, which have barely started.

Also we have so far avoided a serious depression event by the Fed doing QEing, ditto BofE and china buying EU debt as I recall(?)  so aka Steve Keen who was caught out by yet another first time buyers handout, so far we have dodged that bullet.

Im not sure on that 5 years....it feels more like 5 months.

Of course this will also see the share market decline....

trying to find the piece(s) in question,

Think its March 2008,

So far I have march 2009,

http://www.interest.co.nz/news/45373/opinion-5-reasons-why-house-prices…

Oh and lets not forget Infometrics 12~24% gains...16% auckland etc

 

regards

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"suck on a gummy bear ..."
 

Have you jumped the fence ??

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Relax...GBH isnt in Thailand.

regards

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