Top 10 at 10: Hoenig my Hero; Chinese wage rises; Greek cry from the heart; Negative gearing; Dilbert

Here are my Top 10 links from around the Internet at 10 past 1pm. I welcome your additions and comments below or please send suggestions for Tuesday's Top 10 at 10 via email to bernard.hickey@interest.co.nz

1. Chinese wages rising fast - One of the relief valves in the global economy will be a rise in Chinese wages reducing its competitiveness as the 'Factory of the World'. This would reduce the size of China's trade surpluses and make it less able to 'vendor finance' continued deficit-fuelled spending in the developed world. There are fresh signs of these fast wage rises in this LA Times piece. It will, however, add to some of the inflationary and interest rate pressures building in the global economy.

 Experts say younger factory workers, having grown up in a time of relative prosperity, will find it increasingly difficult to accept low pay and grueling work hours the way previous generations have. China's rapidly aging population also is expected to boost labor's leverage as the number of working-age Chinese dwindles to about half its current portion of the population by 2030.

Labor shortages already are being reported in many export-driven coastal provinces because of rapid development in China's interior. Several provinces and major cities such as Shanghai have had little choice but to raise minimum wages. "Most of the workers born after 1980 have a better awareness of their rights," said Liu Kaiming, an expert on migrant labor and executive director of the Institute of Contemporary Observation.

"They will choose where to work and ask for better salary." That's exactly what happened May 17, when nearly 2,000 workers at a Honda parts factory in the southern city of Foshan walked off the job to demand higher wages. About 600 of the employees were interns receiving credits for work experience as part of their school curriculum. Assembly lines were resuming production Tuesday as workers contemplated management's offer of a 24% pay increase that would bring monthly salaries to about $281, or 1,910 yuan, said David Iida, a Honda spokesman in Torrance.

2. Money stuck in vaults - Here's one of the reasons why the real easy money policies of the US Federal Reserve and the European Central Banks are having little real effect in the real economy. The Northern Hemisphere banks have the money, but are either too sick or too scared witless to lend it. This Bloomberg story explains that bank reserves on deposit with the European Central Bank (rather than being lent out to customers or other banks) have hit a record high of 320 billion euros in recent days.

Banks are parking cash with the ECB amid investor concern that a 750 billion-euro European rescue package may not be enough to stop the crisis from spreading and spilling into the banking industry. The ECB said on May 31 that banks will have to write off more loans this year than in 2009 and their ability to sell bonds may be hampered as governments seek to finance fiscal deficits.

“The banking crisis is back,” said Norbert Aul, an interest-rate strategist at Commerzbank AG in London. “The news flow over the past few weeks has spooked banks and since nobody knows how exposed individual financial institutions are, it’s deemed safer to park cash with the ECB rather than lend it on.”

Money market tensions are resurfacing even after the ECB started buying government bonds and said it would offer banks as much cash as they want for up to six months. Money market rates are rising, with the euro interbank offered rate, or Euribor, for three-month loans yesterday increasing to 0.704 percent, the highest this year. Banks borrowed 9 million euros from the ECB at the marginal rate of 1.75 percent, the central bank said today.

3.  APRA comfortable - Australia's chief banking regulator, APRA chairman John Laker, has told Australia's parliament it is comfortable about the level of exposures the big Four Australian banks (which means our banks too) have to the European Sovereign debt crisis, the Sydney Morning Herald reported. This is good news and reinforces the importance of the Four Pillars and our relative isolation from the rest of the world.

Local banks are seen as well-funded after raising about A$47 billion from wholesale markets this year, but could be vulnerable if the recent jitters in overseas credit markets continue or worsen. However, Mr Laker said lenders were now better prepared for any market troubles stemming from Europe than they had been after the collapse of Lehman Brothers.

''Australian banks have only very small exposures to countries in the euro area and, although spreads have been widening, global funding markets … have been more discerning about the fundamental strength of our banks,'' he said. ''We are continuing to liaise closely with Australian banks that tap offshore wholesale markets, and we are satisfied that these banks are much better placed than they were in October 2008 to deal with potential disruptions to these markets.''

4. The GFC 'experience' - Those crazy yanks. Now an ex-bond trader is hosting guided 'tours' of the scenes from the Global Financial Crisis in New York, The Guardian reports. I love how one of the tour guides is a Goldman Sachs employee earning a bit extra on the side...

Dwarfed by the Corinthian columns of the New York Stock Exchange's towering facade, Wall Street tour guide Tom Comerford opens a weather-beaten folder on a busy street in the heart of the Big Apple's financial district.

"I'm going to show you a toxic asset," he tells a small group of curious tourists. "You can even touch it." Comerford, a graphics employee at Goldman Sachs who leads guided walks in his spare time, gets out the front page of an inch-thick legal document that comprised a US$1.5bn collateralised debt obligation, issued in 2006. The derivative, granted a triple-A rating for its top tranches by credit agencies, went spectacularly sour, with investors losing 80 cents in every dollar.

He explains: "The collateral for this deal was sub-prime mortgages or, as we know it today, crap."

5.  Prices may rise somewhere - Some people are picking that Japanese real estate prices may have finally hit rock bottom. They are now at 36 year lows (yes thirty six not a typo) , Bloomberg reported. Japan had a property bubble that started deflating in the late 1980s. It has taken three decades for the market to be approaching the bottom. 

“The best time to invest is before things hit bottom, because if everyone were to agree we are right at bottom, they would all come rushing back in,” said Buddy Ferrie, a general manager of the investment division at property consulting firm Colliers Halifax in a phone interview in Tokyo. “If you have a longer term outlook, now is a very interesting time to be looking.”

Japan’s commercial land prices declined 6.1 percent in 2009 from a drop of 4.7 percent a year earlier, the Ministry of Land, Infrastructure, Transport and Tourism said in a report in March. Values are at their lowest since the ministry began collecting comparable data in 1974.

6. My hero - Thomas Hoenig is the rebel with a cause within the US Federal Reserves Open Markets Committee that sets US interest rates. The Fed's current official stance is to keep the Fed Funds Rate (the US version of the Official Cash Rate) at an "exceptionally low level for an extended period", but Hoenig is the black sheep in the family, regularly calling for higher rates and warning of inflation. Hurrah.

Hoenig spoke out again overnight, Bloomberg reported. His team of hawks is growing with in the Fed. If Obama had any sense he would appoint Hoenig Chairman of the Fed and get rid of Helicopter Ben.

“The first step toward a more normal policy is to move policy rates off zero, back toward neutral.” Hoenig said today in a speech in Bartlesville, Oklahoma. “With the improvements in market conditions and liquidity, and with an improving outlook, the FOMC would be prepared to raise the funds rate target to 1 percent by the end of summer.” Hoenig’s view hasn’t shifted since the European debt crisis last month posed a risk to the U.S. recovery.

He urged that the funds rate be raised “toward 1 percent this summer,” according to minutes of the Fed’s April 27-28 meeting. He has voted against central bank statements, saying in April the “extended period” language limited the Fed’s “flexibility to begin raising rates modestly.” Dallas Fed President Richard Fisher, James Bullard of St. Louis and Philadelphia Fed’s Charles Plosser have also expressed concerns about the “extended period” language. Richmond Fed President Jeffrey Lacker said last week he was “just sort of marginally comfortable” with the phrase.

7. A raw voice from Greece - My wife Lynn is a graphic designer who sells her digitally uploaded designs to digital scrap-bookers through a US based website. She points out to me regularly how much more she earns than me and how she has more google pages linking to her than to me. She's also part of quite a tight online community of digital scrapbookers globally. They talk about all sorts of things, often very personal, and sometimes political.

Lynn has pointed me to this plea from the heart from a Greek scrapbooker, Exogenia (pictured left), from Athens. It's not pretty and I wouldn't want to debate the economic logic of what she's saying (or try to correct her Gringlish), but it does give you a vivid feel of what real people in Greece are feeling right now.

The measures of IMF are very harsh and make a long list I will only mention the cut of salaries and pensions from 5-25%, thousands of layoffs, high taxes in everything, increase of the cost of electricity in 30% and every day government surprises us with a new one. Yesterday was announced that a widow can take the pension of her dead husband only if she is 50 years old and over. The salary of a new employee will be 550 Euros instead of the today HUGE sum of 700 Euros.

The generation of 700 Euros will become now the generation of 500 Euros. These measures drive us in a labor dark age and the population in pauperization, they drive us into death. Who can live with 500 Euro? What will be the future of our children? Greek civilians think that it is the final solution for the Greek nation. Society will collapse. Greece will become a great concentration camp. These measures will not save our economy; they will execute the population; we will die from hunger like during the WW2.

Greece of today has more doctors than we need, we have more lawyers than France, but we don't have plumbers and the manicure girl earns more money than a girl who studied economics and works in a bank. The 90% of the population has their own house and a great number of families have two cars. We achieved all these after a 12 hours hard work in two jobs, because of the low salaries and emigration. Nobody gifted us anything.

We feel angry for the fishy publication of the German "Focus" magazine which calls Greeks lazy people who must learn to work and not dance syrtaki. It"s unfair.. Such publications of German press doesn't help, because they scratch wounds and destroy the good relations between Greek and German people.

8Negative gearing eez vonderful  - The budget on May 20 doesn't seem to have stopped the property spruikers over at PropertyTalk. Here's Rosco talking about how "The Negative Gearing still works". He makes the interesting point that the tax cuts for the rich mean they can justify even more debt to buy houses. I wonder what the banks think of this lark. Your view?

I had a client come in yesterday who is building a brand new 5 bedroom investment property in Hamilton. This particular client is building very cheaply, so this is partially why this equation isn't too bad. On completion there should be $80k equity, which does help alot.

Rent less expenses plus tax refund (not huge but includes chattels depreciation) = ($2,000) per year or $40 per week topup. Client earns $100,000, so tax cuts will save then $70 per week. So extra $70 per week tax cuts, property only needs $40, so still $30 per week better off then before, plus own property.

There is obviously two major risks 1) Interest rates going up - reasonable rate in calculation. 2) Whats in the next budget BUT, rents should also go up over the next 1-2 years. But these are long term investors, and they are looking for reasonable capital growth long term. They require 0.56% growth to match the weekly topup. They think this is easily achieveable over the next 10 + years.

9. Rare and getting rarer - China is planning to tighten up access to the rare earth metals crucial for the production globally of hybrid cars, wind turbines and other high-tech devices, the New York Times reports.

The State Council, China’s highest legislative body, is weighing a proposal to put the government in control of private and unauthorized mines that produce rare earth minerals, a strategic resource that much of the world depends on, according to China Daily, the official English-language newspaper.

Rare earth minerals are an unusual group of natural elements that are vital for high-performance electric motors in hybrid cars, wind turbines, efficient light bulbs and even missiles. China now accounts for over 90 percent of the world’s production of the minerals.

Some governments and global companies have recently expressed concern about whether China is planning to restrict exports of its rare earth minerals or force global companies to move factories to China to complete production of items using the minerals.

Here's an excellent graphic showing how deep the crippled oil well in the Gulf of Mexico is and how hard it is to work at these depths.

Click here to get a bigger version

10. Here's totally irrelevant video of the investment banker in New York who was fired for looking too good...it is alleged. Will let you all judge for yourselves. And keep it seemly in the comments. 

 

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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