Top 10 at 10 with NZ Mint: WOF on Hubbard's VW lapses; Deleveraging 101; 'Rip off NZ'; US tax liens anyone?; Dilbert

Here are my Top 10 links from around the Internet at 10 past 12 pm brought to you in association with New Zealand Mint for your luncheon reading pleasure.

I welcome your additions and comments below, or please send suggestions for Wednesday's Top 10 at 10 via email to bernard.hickey@interest.co.nz

1. 'Rip off NZ' - Justin Marshall, who has just returned from living in Britain, agrees in this NZHerald piece with rugby commentator Peter Bills that the cost of living in New Zealand seems inordinately high compared to Britain. And it's not just about the exchange rate jump in the NZ dollar versus the pound, he reckons. This series is sparking some real debate. It highlights the benefits of an exchange rate depreciation for an economy like Britain's: it makes you more competitive. It also highlights the inflation we've had here in the last four or five years, mostly driven by government fees and spending.

"All of my mates who had come home kept saying to me that I needed to be aware that the expense of living in New Zealand is something you really have to take into account ... It really has become an expensive country to live in." He said his weekly grocery spend in Britain was between £150 and £200 ($323-$431) to feed his family of five. Here, the bill is $400 to $500 a week.

"I've really noticed it with things like cheese, milk and bread and butter ... When I was in the UK I bought a leg of imported New Zealand lamb for 17 quid [$36.60]. I bought the same thing here and it was close to $40.

"Even when you take the exchange rate into account, it still costs more to buy our own meat here."

2. '7 lean years' - Influential fund manager Jeremy Grantham has written in his July commentary that he has given up on the prospect of inflation and now sees deflationary risks. He now sees 7 lean years ahead. Again, this is all about deleveraginmg.

"I, like many, was mesmerised by the potential for money supply to increase dramatically, given the floods of government debt used in the bailout.

But now, better late than never, I am willing to take sides: with weak loan supply and fairly weak loan demand, the volocity of money has slowed and inflation seems a distant prospect.

Suddenly (for me), it is fairly clear that a weak economy and declining or flat prices are the prospect for the immediate future."

3. A lot on his plate - It seems Allan Hubbard has let the Warrant of Fitness on his legendary 1971 VW Beetle (registration DJ8219) lapse, according to Carjam.co.nz, which is a site that allows you to check  the WOF and licence details of any car you are thinking of buying.

This site says the WOF lapsed on June 10 (10 days before he was put into Statutory Management) and says there are also some inconsistencies with the odometer readings.

The license is due to expire on August 15.

I'm sure Allan Hubbard has been very busy with other matters in recent months and/or has not had time to drive.

I'd welcome any reports of whether this car has been driving around Timaru in recent weeks or days. I'm not sure I'd want to be the meter maid or policeman in Timaru that wrote out that ticket... HT a reader via twitter.

I'm guessing this car would be worth quite a few thousand dollars if it was put up for sale on TradeMe.

But maybe not as much as the NZ$60,000 given by SCF's Face Finance to the Child Cancer Foundation in this cheque photographed with Hubbard and the legendary VW in 2008.

4. Geithner vs Warren - The battle within the Obama administration over whether Elizabeth Warren should head up the new Consumer Financial Protection Bureau is shaping up as a real test of Obama's mettle and whether the Big 6 banks' lackies inside Obama's administration, Tim Geithner and Larry Summers, can protect their interests.

John R Talbott at Huffington Post has an excellent piece on why the Big 6 don't want Warren and why Geithner is fighting so hard to stop her behind the scenes. A great insight into the real problems underneath the US political economy. If Warren doesn't get in I reckon the American left will abandon Obama and he will be an utterly lame duck President after November.

I reckon too there's a real risk of uncontrollable political revolts inside America if Obama sides with the banker again. You could get an unholy alliance between the left and the Tea Parties. America's political elite is morally bankrupt and corrupt.

The trillions of dollars of underwater mortgages, CDO's and worthless credit default swaps are still on the banks books. Geithner is going to the familiar "bank in crisis" playbook and hoping that the banks can earn their way out of their solvency problems over time so the banks are continuing to slowly write off their problem loans but at a rate that will take years, if not decades, to clean up the problem. And this is where defeat of the nomination of Elizabeth Warren becomes critical for Geithner.

For Geithner's strategy to work, the banks have to find increasing sources of profitability in their business segments to balance out their annual loan loss recognition from their existing bad loans in an environment in which they continue to recognize new losses in prime residential mortgages, commercial real estate lending, sovereign debt investments, bridge loans to private equity groups, leverage buyout lending and credit card defaults. The banks have made no secret as to where they will find this increase in cash flow. They intend to soak their small retail customers, their consumer and small business borrowers, their credit card holders and their small depositors with increased costs and fees and are continuing many of the bad mortgage practices that led to the crisis (ARM's, option pay deals, zero down payments, second mortgages, teaser rates, etc).

American and Banking Market News reports this week that the rule changes in the financial reform bill may lead banks to start implementing fees that had essentially disappeared from the industry early in the new millennium, such as fees for not meeting minimum balance requirements on a checking account, or reinstituting fees for certain online banking transactions that are currently free or charging to receive a paper statement or to talk to a live teller as Bank of America's CEO has recently proposed.  

Bonus 4 - Gratuitous fun at the expense of our good friends at National Bank. Someone at National Bank missed out on the 'n' in their Online Banking trial. The tag says 'Better Online Baking coming soon'. First a bank. Now a baker. Ho Ho. HT a friend from twitter.

5. A disturbing commentary - Matt Simmons is an old oil industry investment banker. He is the insider's insider, yet he is saying BP's oil gusher and associated methane leakage has destroyed the Gulf of Mexico and could wipe out the human population on the southern Gulf coast. It sounds needlessly scary, but have a listen to this interview and have a look at this guy's background. He is seriously informed and serious. Worth looking at at least. HT Blair.  Jim Kunstler has a cautious view too.

Simmons's current warning about the situation focuses on the gigantic "lake" of crude oil that is pooling under great pressure 4000 to 5000 feet down in the "basement" of the Gulf's waters. More particularly, he is concerned that a tropical storm will bring this oil up - as tropical storms and hurricanes usually do with deeper cold water - and with it clouds of methane gas that will move toward the Gulf shore and kill a lot of people.

Simmons makes two additional points that are pretty radical: he says that several states along the Gulf ought to begin systematic evacuations in counties along the shore now. Secondly, Simmons maintains - as he has from near the beginning of the blowout - that the US military should take over operations from BP and ought to set off a "small" nuclear device down in the well-bore to fuse the rock into glass and seal the site permanently.

Iif Matt Simmons is correct, and it turns out that the US government has been played by BP, then remaining public trust in the competence and legitimacy of government could evaporate.

This is not a happy thing to contemplate at a time when the state of the nation and its economy are so fragile. What follows could make the current political situation seem like little more than, well, than a tea party, compared to the politics-to-come.  

6. Make or break decade - This piece from The China Vortex is a useful summary of the longer term challenges for China. China has to watch out for the Japan problem of an ageing population, particularly in the wake of their one child policy. HT Blair Rogers @bmr789 and the authoer Paul Denlinger @pdenlinger.

China’s economic development so far is based on two assumptions which will come under pressure over the next decade. The first assumption is that rapid urbanization is a good thing, since that will lead to the development of an urban middle class. The challenge over the next ten years will be how to find jobs for that urban middle class, whose living costs have gone dramatically higher, while the global macro climate has dramatically worsened? This is already showing up in the rise of the ant people, educated white collar workers who cannot make it up all the way to the top of the pyramid.

For the first time in its history, the belief that education is the path to success in Chinese society will be challenged. The second assumption will be a shortage of blue-collar factory workers, which has already begun to show up in southern China in the form of strikes and slowdowns at foreign-owned factories. As China’s working population dramatically ages over the next decade, this situation will worsen. Technology can, to some extent, ameliorate the labor shortage, but it cannot generate demand. During the next decade, we will find out if China can become rich, on a sustained basis, before it grows old.

If the Chinese government does not succeed, then China will head into a prolonged economic slump after 2020, which will be much like Japan’s, and further adding to what is likely to become a prolonged global economic depression. In addition, the workforce which starts working after that year will have to deal with a worsening environment and dues, in the form of non-performing loans (NPLs), from spending in the high-growth years. That is why this next decade is make-or-break for China.

7. America's US$4 trillion problem - Dhaval Joshi, Chief Strategist at London based hedge fund RAB Capital, has written an analysis that Barry Ritholz and Bloomberg have picked up on that says America has US$4 trillion too much mortgage debt. HT John Walley via email.

Essentially, Joshi is saying that house prices have dropped, but the mortgages haven't, which means the size of the deleveraging task is enormous. Either a massive jubilee is required (huge debt forgiveness) or US households face decades of penury and weak consumption growth. The chart is as scary as all hell.

Joshi concludes that America will have to keep interest rates ultra low for an extraordinarily long period, Japan style.

Can the US economy really return to “business as usual” when it has 4 million houses surplus to requirement, when 1 out of 4 mortgages are in negative equity, and when by our calculation, it is burdened with $4 trillion of excess mortgage debt, equivalent to 30% of GDP?

For many years, total mortgage debt consistently and reliably equalled 0.4 times the value of the US housing stock. Intuitively, this average of 0.4 makes perfect sense as every property usually has a mortgage ranging from 0 to 0.9 times its value. So in 1990, $6 trillion of housing collateral could support $2.5 trillion of mortgages, and by 2006, $23 trillion of housing collateral could support $10 trillion of mortgages.

But since then, the US housing stock’s value has slumped to $16 trillion which means the amount of mortgage lending supportable by the collateral has plunged to $6 trillion. However, actual mortgage debt has remained at $10 trillion – $4 trillion too high.

With a quarter of US mortgages underwater, the Fed must heed the advice of its own research if it wants to prevent a cascade of defaults and the consequent repercussions on the financial system and the economy. Hence, expect US interest rates to stay ultra low until millions of mortgages escape out of negative equity.

8. US Deleveraging 101 - Roger Lowenstein has written an excellent 'How To' guide in the New York Times on what is happening with consumers deleveraging in the United States.

He makes the point that US debt to disposable income is currently running at 126% and there is another 5 years of deleveraging to come. The same ratio in New Zealand is 156% so that means....who knows.

My pick is at least 10 years of de-leveraging to come. That chart above suggests something much, much more ominous. Remember, US household debt/equity ratios have actually gotten much, much worse in the last couple of years because of the destruction of equity. That hasn't happened here much...yet.

How much of that debt will have to be repaid before people return to their customary, and stimulative, profligacy? Thus far, we have undone only a portion of the excess. Household debt now stands at 26 percent more than income — still very high by historical standards.

“There is no magical level where it should be,” says David Resler, an economist with Nomura Securities. “There is no clear equilibrium.” Absent a massive federal stimulus (and maybe even with one), the economy is not likely to show much life until deleveraging ends. The conventional view is that we are almost there.

That assumes that the average American will resume borrowing and spending before the prior excesses are fully washed out. To return to the status quo of before the housing boom — say, back to debt to income ratios prevailing in 2000 — it would take five more years of deleveraging at the current rate.

Deleveraging cycles are rare, notes David Rosenberg, an economist with the Toronto firm Gluskin Sheff, but five to seven years is typically what they take.  

9. US Tax liens anyone? - Further to the above, It seems New Zealand's Dean Letfus, who is a big fan of property investments, has done a U-turn on the sort of US tax lien investing that the amazing Phil Jones has spruiked. Once Letfus thought they were a bad idea, now Rob Stock at the Sunday Star Times reports that he thinks it might be a good idea. My personal view is that any investment that depends on recovering money from houses 'owned' by broke Americans is an insanely risky venture, but hey...I'm not making any money from selling that advice.

Letfus told the Sunday Star-Times his position had changed on tax liens.

"We looked at it at the time [in March last year] and we couldn't find anybody doing well out of it," he said.

His earlier opposition had, he said, been partly based on his personal antipathy for Jones, as well as other factors such as exchange rate risk and what he saw as excessive costs. But Letfus said his new view was based on a changed exchange rate position, as well as the tax lien education being sold at the seminar being delivered by Steve Goodey in New Zealand rather than out of the US.

"Because Steve's involved and people are making good money out of it, and the world has a totally different look to it, it is a good opportunity for some people."

Tax lien certificates are a product of US local authorities. When a household fails to pay local property taxes (the equivalent of our rates), the local authority may recover the debt by auctioning it off to investors. In return for paying the debt, investors buy the right to recover the money and levy penalty interest, sometimes as high as 25%. The tax defaulters are often struggling families hit hard by America's housing and jobs market crashes. The debt is entered as a lien against their homes, and should they not pay, the certificate holder can force the sale of the property.

10. Totally irrelevant picture - Darth Vader Tries to Clean the Black Sea With a Brita Filter. He'd need a lot of filters for the Gulf of Mexico. But he does have the force on his side...

11. Totally irrelevant video - A girl raised by a Wolf is being taken into protective custody...the onion

Girl Raised From Birth By Wolf Blitzer Taken Into Protective Custody