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Monday's Top 10 with NZ Mint: Can the US survive longer than 60 months?; LIBOR corrupted; what the quants are doing now; Dilbert; Clarke and Dawe

Posted in Opinion

Bernard Hickey is taking a well deserved vacation (in France) and so this edition of Top 10 is not Bernard's. In fact it won't be again until early May.

But, as a self-conscious substitute for the real thing, here's my Top 10 links from around the Internet at 10 am in association with NZ Mint.

I welcome your additions in the comments below or via email to david.chaston@interest.co.nz.

See all previous Top 10s here.

1.  Carol Baum at Bloomberg looks at four troublesome numbers for the US economy and thinks a debt disaster is on the horizon
It has long been 'known' that America's current debt burden relative to the size of it's economy is less than they built up, shouldered and worked through after WWII.

But it turns out there is a big - a very big - difference. This time most if it will fall due in about five years. They can handle the interest burden at the current average of 2.2%, but can they handle higher rates when that mountain of debt rolls over?

The bigger threat is rollover risk: “the same thing that got countries from Portugal to Argentina to Greece into trouble. It’s the repayment of principal that often provides the catalyst for a market event or a crisis,” says Lawrence Goodman, president of the Center for Financial Stability.

Based on the current structure, a one percentage-point increase in the average interest rate will add $88 billion to the Treasury’s interest payments this year alone, Goodman says. If market interest rates were to return to more normal levels, well, you do the math.

2. Rot at the core
There's a big and worrying multi-country inquiry currently underway into how the benchmark LIBOR index is operated. LIBOR is an important cog in international finance, being the base of how a huge set of transactional interest rates are set. But now, nitty gritty evidence is emerging that people thought they could manipulate it, and they tried routinely, it seems.

All this new evidence is undermining the credibility of self-regulating market mechanisms - or at least showing they need an essential element of real security and enforcement. At a minimum, they don't need small historical clubs running them as has been the case with LIBOR. Here's a report covering the issue by the UK Telegraph:

Tan Chi Min, a former RBS trader who claims he was wrongfully dismissed by the bank after it fired him for allegedly trying to manipulate Libor - the average rate at which banks lend to each other - said he had received the request in 2007 from Brevan Howard.

"Brevan Howard telephoned on 20 Aug 2007 to ask the defendant to change the Libor rate," according to a paper filed with the Singapore High Court cited by Bloomberg.

The court filing alleges RBS "received this request without objection". Brevan Howard is not a party to the lawsuit and is not being investigated or sued for any alleged wrongdoing. RBS and Brevan Howard both declined to comment.

Mr Tan claimed in his filing that Scott Nygaard, head of short-term markets finance at RBS, knew about the call from Brevan Howard. However, the filing contained no further details to support his allegations. However, he is reported to have said he would provide further evidence at a later stage.

3. It's what we do, not what we say, that is important
We won't buy expensive locally made products when inexpensive products of the same quality are available - even if our jobs are dependent on them. General Motors has been wooed and seduced for decades to make cars locally - most recently in Australia - but unless you force your citizens to buy them via high tariff protection, it will all fall apart eventually, as it is in Germany and England with the Opel brands. In open markets, customers rule despite the best efforts of politicians using taxpayers money.

4. Why Chinese is ideal for micro-blogging
Chinese is ideal for micro-blogs, which typically restrict messages to 140 symbols: most messages do not even reach that limit. Arabic requires a little more space, but written Arabic routinely omits vowels anyway. Arabic tweets mushroomed last year, though thanks to the uprisings across the Middle East rather than to its linguistic properties. It is now the eighth most-used language on Twitter with over 2 million public tweets every day.

5. A disappointed fan
I am a big fan of Tom Friedman, the NY Times columnist and author and have been ever since reading The World is Flat in 2005 - I even went to Sydney to hear him speak earlier this year. But I had no idea he was in Christchurch recently until it was mentioned by readers and on Offsetting Behaviour. Damn.

But his short column on the visit comparing NZ and Australia to his own country is not one of his best. Proves that even award-winning columnist's see local life filtered through the views of the very few people you meet when the visits are fleeting.

6. Why gold is tarnished
Have you noticed how the gold price has languished recently? There is a 'jewellers strike' underway in India, and that is having an impact on international trade, it seems. Imports into India shrank to 95 tonnes in the January-March 2012 period compared with 283 tonnes in the same period in 2011, according to preliminary industry data. In fact, the ongoing strike against the Indian Government plan to levy excise duty on unbranded jewellery and hike import on gold has depressed imports to as low as 20 tonnes in March.

The gold industry is expecting a sharp rise in prices when that Indian demand returns, although this year's Indian wedding season may be over by the time the strike is settled. Of course, there is more to gold demand than that from jewellery - see our earlier investigation of supply and demand for gold here » - but it still accounts for nearly half.

7. Where have the quants gone?
We know where most of the best statistical brains - the quants - went before the GFC, but since then, what have the best been doing with their skills? Big computers and complex algorithms battered financial markets.

Now the quants behind that debacle are turning to the social sciences - but with insights that excite the commercial world. Another bubble coming? Here's Sam Knight at the FT:

When I asked him whether the ongoing agony in the economy had thrown up research opportunities, he said: “Oh yes, absolutely… the mother of invention is all something, you know? Look at what happened in the war, you have loads of scientific breakthroughs.”

But the professor’s real animus is that he believes that what has been taking place in the financial industry – a heady meeting of computing power and the finest young scientific brains – is about to break into the rest of the social sciences. That is because what Treleaven’s students do, what quants do, is find patterns in oceans of electronic data. In a hedge fund, that might mean finding relationships between price movements and then trading on them. In public health, it might mean tracking millions of pharmacy transactions and spotting the next outbreak of flu.

“They think of themselves as doing computational finance,” Treleaven said of his students, “but let’s jump forward: people who are interested in politics in the next 10 years will be doing computational politics.” The calculating power and analytical techniques used in finance could also model the impact of public policies, or seek insights in sport and education. This year, for the first time, Treleaven has a psychology graduate among his students and he enjoys telling undergraduates from other faculties – economics, music even – that they should learn how to program computers if they want to stand a chance in the world that is coming.

8. Karl Marx is 193
The world’s most typical person is a 28-year old Han Chinese man with no bank account who earns less than NZ$15,000 a year. Karl Marx would not be surprised. About much else, he’d be shocked.

Some people still hail his apparent foresights, but in the end he overlooked the importance of the endless ways that capitalism can morph and adapt to the challenges it faces.

9. Moral markets?
We live in a time when almost everything can be bought and sold. Over the past three decades, markets - and market values - have come to govern our lives as never before. We did not arrive at this condition through any deliberate choice. It is almost as if it came upon us. As a result, society is more affluent – and more debased, says Michael Sandel.

The financial crisis did more than cast doubt on the ability of markets to allocate risk efficiently. It also prompted a widespread sense that markets have become detached from morals, and that we need to somehow reconnect the two. But it’s not obvious what this would mean, or how we should go about it.

10. The last laugh
Some tips from Britain on how to have dinner with "not the Prime Minister" ...

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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12 Comments

US bonds will never go down

US bonds will never go down in price.  Obviously higher interest rates will send the US and the global reserve currency into the abyss.  For that reason it will never happen, even if ctrl+P has to buy every single issue.  Which he wont because of the circular reference between the banks, the Fed and the govt.  Every player must play, if anyone blinks it's MAD.  It is a nice pipe dream that, things that would 'normally' happen will actually happen, they wont. 
 
The only thing that matters is the next action by the Reserve/Central Banks.  They have the only tool that matters ctrl+P.  There is too much to lose if the system crashes, and there are no limits to debt, priniting or the ever increasing desperate actions designed to maintain the status quo.

So Bernard is on holiday in

So Bernard is on holiday in France....it better not be the south of France (with the rest of the 1%)

Sorry David, not a fan of The

Sorry David, not a fan of The New York Times and especially Tom Friedman.
 
The Times beneath its "liberal" veneer is a more effective mouthpiece for US elites than the bombast of Fox or any of the other Murdoch institutions. The way it was recently revealed the paper filtered all its stories, including the Wikileaks material, through the Obama administration showed how far the US media has descended into obsequiousness.
As to Friedman he is an unabashed imperialist. Here are a couple of his gems.
“The hidden hand of the market will never work without a hidden fist – McDonalds cannot flourish without McDonnell Douglas….and the hidden fist that keeps the world safe for Silicon Valley’s technologies is called the United States Army, Air Force, Navy and Marine Corps”

 “For globalism to work, America can’t be afraid to act like the almighty superpower that it is.”

 

#9 Very good essay but

#9 Very good essay but suspect it would go over the PM's head. He is by his own admission amoral when it comes to markets and money

Fergie assumes that since

Fergie assumes that since China is getting out of US debt and into commodities, the US will have some problem making interest payments. Given the current state of America exceptionalism lawlessness (MBS, Robosigning, MF Global, etc., etc., ab surdium, ad nauseam)... It should be apparent to anyone paying close attention that in order to solve these problems, the Fed will simply... Print.
After all, it's not like "preserving the value of the currency those treasury bonds you bought" is included anywhere in the fine print or anything. Given that (as Zerohedge has well documented) contract law in the US is now interpreted to the advantage of the highest political bidder, at this point defaulting on an "unspoken agreement" with a bunch of foreigners is a very low threshold to cross indeed.
Guest Post: A Postmortem Of Niall Ferguson's Otherwise Epic Lecture: Empires On The Edge Of Chaos

"at this point defaulting on

"at this point defaulting on an "unspoken agreement" with a bunch of foreigners is a very low threshold to cross indeed."
I get the impression that the US wouldnt hesitate........there is no come back, cant see how it would cost votes....though I guess they might lose some politrical funds....
I think like Greece the US's day of reckoning will come.....personally I think it will be when the world finally undertsands/accepts peak oil and that the debt needs more and more energy in order for it to be paid off, which isnt going to be available....it might be a lot sooner than 60 months.
regards
 
 
 

AEP   Germany's reluctant

AEP
 

Germany's reluctant hegemony and misguided Calvinism
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/917923...
 
 most recommended comment
 

drjonathanwilson
1 hour ago

 

Ambrose
What are the two immoveable facts in your commentary?
The first is that Germany has a rapidly aging indigenous population. Secondly the life-long savings of that aging population are rapidly being dispersed by the ECB to southern European countries to fill in their fiscal deficits.
Where does this end up in the next three to five years?
Although it is hard to accept, these simple realities mean that there will soon be a very old indigenous German population that can no longer draw down its savings to house, feed and clothe itself because those savings will no longer exist.
Great poverty will have come once again to indigenous Germany, except this time there is no way back through a younger generation because that generation comes from a foreign land - the flame of indigenous German culture begins to flicker as it grows dimmer.
How ironic it is that the indigenous German generation that swallowed the lie that children were a hindrance to living a "full life" will be the reason that this generation dies in poverty.
Ambrose we in Western Europe have forgotten the lesson that even cave-dwellers understood - children are the future for those living in the present.
And we thought that we could simply import the missing indigenous children to support our old age. We are watching the dying of the flame; this generation has dropped the torch handed in trust to us by previous generations. In this regards the UK is no different from Germany.
Financial meltdown meets indigenous demographic implosion and blows away our Western civilization. Can there ever have been such mass narcissism? Is nobody profoundly angry?
Jonathan

 

Actually I find this

Actually I find this ironic...."How ironic it is that the indigenous German generation that swallowed the lie that children were a hindrance to living a "full life" will be the reason that this generation dies in poverty."
The fact that there is simply too many ppl on the planet that has a finite supply of fossil fuels is why we will probably die in poverty...So no more beyond only having replacement population, ie 2 children families...but that should have been in place generations ago....in the 1920s when we only had 2 billion. 
I certainly wonder where and when the ECB money dumping will end....its follishness to think that we can grow out of this....its a black hole IMHO....
Given that,
a) Greece is all but defaulted
b) That others will follow
c) and indeed that it sounds like Greece will re-visit defaulted
d) that the ECB wont take haircuts
e) That I cant believe anyone else is in there buying bonds to act as canon fodder for the ECB
I can but wonder when the brick wall is hit.......ie the ECB see's a complete 100% loss as Greece wont be able to pay and there will be no canon fodder in front of them to take the can.  I really cant see how the EU isnt going to fall apart....
regards

Steven, I think you missed

Steven, I think you missed the point, European peoples are a violent bunch nothing they do better than a bit of wanton violence and destruction.
I ask you  a question, do you think France will let it self become a Islamic state in 2030?

Hi, I would assume

Hi,
I would assume not......
regards

Thanks David, no need to be

Thanks David, no need to be self conscous. I always very much appreciated in the past  your very well researched and unbiased reports, the "masters voice" is sometimes grating........may he enjoy his holiday.
 

(Capitalism) has conjured up

(Capitalism) has conjured up such gigantic means of production and of exchange, that it is like the sorcerer who is no longer able to control the powers of the nether world whom he has called up by his spells (Karl Marx)