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Tuesday's Top 10 with NZ Mint: Low rates; back-door gold standard; 'Don't be evil'; the funds-flow paradox; mortgagee sales; Victor Borge; Dilbert

Posted in Opinion

Here's my Top 10 links from around the Internet at 10:30 am today in association with NZ Mint.

Bernard Hickey is on vacation and won't be back until early May.

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

I am still keen to get your suggestions for suitable cartoons. If you notice a really good one, please email me.

See all previous Top 10s here.

1. A vote of no-confidence in Europe
The principle of free movement within Europe is under threat. Denmark said it wanted to reintroduce border controls last year. And now France and Germany want to have the ability to do the same "on a temporary basis". Moving from country-to-country within Europe could revert to pre-EU arrangement.

This is happening because northern countries are fed-up with the lack of control southern countries have at their external borders. When the Greeks or Italians let in Mid-east or African migrants, they head straight for the north where the jobs are. Rather than tackling the issues as a collective, France and Germany want to have the flexibility to respond individually. Spiegel Online has the background:

Still, both of these problems appear to be solvable without simultaneously watering down the principle of free movement. One can strengthen border protection and find a better way to distribute refugees within the EU. The only thing needed for such measures is political will. Indeed, putting restraints on Schengen freedoms is the last thing Europe needs right now given the fact that the euro crisis has already put serious strain on European unity. Populist maneuvers on other issues cannot be allowed to further hasten the trend toward renationalization.

2. Low rates suggest low expectations for future growth
Are low interest rates one core reason our house prices have stayed high? After all, the US has even lower rates than us and their house prices have corrected down significantly and pretty much stayed down. The British are wondering about this too, and noting that despite the collapsed US house prices, they have growth, whereas the British economy has retained fairly high house prices but is really struggling for growth.

Martin Wolf tackles the issue, as does The Economist:

But what about real assets like equities and houses? The big argument at the end of the 1990s was that equities deserved higher valuations because real rates were low. Since, in theory, the current price ought to be equal to the discounted value of all future cashflows, then, other things being equal, a fall in the discount rate ought to lead to a rise in prices. But other things aren't equal.

Low real interest rates should suggest low expectations for future growth. This is true whether (as now) low rates have been engineered by central banks, or whether it is the result of supply and demand for savings. In the former case, central banks are holding rates low because they are worried about the growth rate; if they are wrong then inflation will quickly emerge (and rates will have to rise). In the second case, low rates would be the result of desired savings being higher than desired investment; there are simply not enough exciting investment projects to go round, which implies low growth.

 

3. Where is the line?
"Don't be evil' is the famous Google motto. But it is an easy target now that it is a behemoth and cynics are having a field day. Regulators are taking them on as well. Google (and others) are companies chock full of braniacs and amazingly smart people, and they are in a frantic race to not "miss the train" in markets that are evolving and morphing super-fast. Basically, we users expect them to stay on top of their game - we even expect them to push the boundaries so that we can get early acceess to the latest innovations.

But are we just encouraging them to blurr the eithical line? Quentin Hardy looks at the issue:

Another hazard is also one of the great strengths of the Silicon Valley: a tolerance of failure. Failing at an interesting project is seen as an important kind of learning. In the most famous case, Steve Jobs was driven from Apple, then failed in his NeXT Computer venture and for a while floundered at Pixar. But he picked up vital skills in management and technology along the way. There are a thousand lesser such stories.

If tech is building a new culture, with new senses of the private and the shared, the failure of overstepping boundaries is also the only way to learn where those boundaries have shifted.

It is a self-serving point, but that doesn’t mean it’s entirely wrong. To the outsiders, it can look a lot as if the companies are playing “catch us if you can” by continually testing, and sometimes exceeding, boundaries.

4. Be careful what you wish for
The idea of a AU-NZ currency union is essentially off the real agenda. At least, I hope so. But in case any readers still think it is a good idea (and typically those that still do are business leaders who have operations on both sides of the Tasman), and you perhaps don't think the euro/EU situation is not helpful, you may wish to read this by Matthew O'Brien.

Welcome to life in a suboptimal currency area. After all, countries that share a currency also share monetary policy. If they don't share fiscal policy too - that is, there is no centralized treasury - they can get into trouble. Just ask Europe. But as Christian Odendahl at The Economist points out, this also means that each individual country's fiscal policy becomes a much, much more important economic tool than it would otherwise be.

5. The funds-flow paradox
How come equity markets have been bouyant and volatility indicies muted when the data shows investors have been net sellers? You would expect that when investors bail out, prices would fall and volatility rise. It is a paradox that interests Wade Sloam.

He reckons the bulk of those shifts happened some time ago and the remaining participants are an optimistic bunch. Now, there are huge amounts of cash on the sidelines (in bonds) waiting to re-enter equity markets. Believable?

The doubling in stock prices have occurred on low volumes, largely on the backs of a smaller institutional investor base, not to mention high frequency traders and speculators. While sentiment surveys may currently provide some insight into short-term equity trader attitudes, don’t let these volatile and unreliable data cloud the true underlying pessimism of the masses who have left the stock stadium in large numbers. Trillions of dollars remain on the sidelines as potential fuel for future equity appreciation, once confidence returns.

6. Bo's fall exposing some ugly truths
Bo Xilai's salary as Communist Party boss of Chongqing was about NZ$2,000 per month. However his family fortune is estimated to be more than NZ$150 million. How that is reconciled is opening up some embarrassing perspectives of the Chinese ruling class.

"The danger for them, the Chinese, is that the whole of the Politburo and their Central Committee colleagues will be exposed as a new property-owning class," said Roderick MacFarquhar, a Harvard University professor who focuses on Chinese politics. "It’s already got out of hand. The problem for the regime is that it is now out in the public sphere."

The Chongqing growth 'miracle' propelled Bo into national prominance. But it was built on property speculation and leaves a legacy of huge debt. The Wall Street Journal investigated:

"I don't think it would be a stretch to say that Chongqing local government, state-owned enterprises and state-owned developers collectively owed 1 trillion yuan at the end of 2011," says Victor Shih, an expert on China's local-government debt at Northwestern University. That estimate, based on Mr. Shih's own look through the records of Chongqing's financing vehicles, would put local-government debt in Chongqing at 100% of gross regional product, far higher than the 22% level for China as a whole, according to numbers from China's national audit office.

7. Mortgagee sales
Data on New Zealand mortgagee sales is surprisingly hard to get on an up-to-date basis, and regularly. Terralink was releasing it monthly, three months in arrears, but that seems to have stopped. So as a substitute we track mortgagee listings on websites like Trade Me and realestate.co.nz and do this weekly. We are trying to pick up early signals of credit stress in the housing market.

We are aided greatly in this by the good folks at realestate.co.nz who send us data that has duplicates cleaned up (the disadvantage of just counting website listings). And the latest data shows something very interesting. Mortgagee sale listing drop (as you would expect) each year at Christmas time. They first rose to significant levels in 2008, but have been trending down since then. But in 2012, the trend has been sharply down - in fact the level of mortgagee sales being listed on realestate.co.nz is almost as low now as it gets in that January holiday season.

Credit stress levels in housing seem to be declining. Do you know more about this? email me.

8. 'We like NZ Govt bonds'
Jeremy Grantham is an investor who likes our government bonds. He says ... "the only bonds we have much fondness for are Australian and New Zealand government bonds, because only those countries give a combination of a decent real yield and government spending policies that are sustainable in the long run."

He also also made these points about his position as someone giving advice to investor/clients:

The central truth of the investment business is that investment behavior is driven by career risk. In the professional investment business we are all agents, managing other peoples’ money. The prime directive, as Keynes knew so well, is first and last to keep your job. To do this, he explained that you must never, ever be wrong on your own. To prevent this calamity, professional investors pay ruthless attention to what other investors in general are doing. The great majority "go with the flow," either completely or partially. This creates herding, or momentum, which drives prices far above or far below fair price.

9. The unwitting move towards a global gold standard
Izabella Kaminska at ft.com/alphaville has an interesting perpsective about the role of gold. She makes the telling point that when US Treasuries are yielding virtually nothing, gold looks remarkably similar. And in many minds, gold may have some better values with regards to safety.

She links to a blog post by Lew Spellman. and then goes on with this ...

Though the best way to think about it really is like a giant game of musical chairs. While the music is playing, nobody cares about there being a lack of chairs. Probability wise, the impression is that almost everyone will be able to get a chair if and when the music stops.

But what happens when the music stops and there are far fewer chairs than anyone expected…? (And when the probability of winding up with no chair next time round is much higher than originally expected?) In that scenario participants begin to “eye” their potential seats ever more closely. Anyone with a stake in the game might even choose to reserve a seat by paying off fellow participants.

That process of reserving a seat thus echoes the collateralisation that’s going on today. Collateralisation equals the location and identification of real-world assets against which existing financial claims can be satisfied. If there’s a lack of acceptable assets in the system versus outstanding claims - the stakes in the financial version of musical chairs rise significantly. As does the cost of reserving a seat, a fact which manifests in the real world as negative yields.

10. The last laugh
Time for some more Victor Borge I think.

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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18 Comments

Rod Oram give govt a fail on

Re: 5 I am sick and tired of

Re: 5
I am sick and tired of so called experts that do not understand basic market principles.
In a secondary market for every dollar that leaves cash to buy a share another is added as a result of the sale. Thus by definition there cannot be trillions of dollars sitting on the sidelines waiting to be invested. And this guy is a CFA!

Yes I don't know why these

Yes I don't know why these myths continue to perpetuate, perhaps because the 'sidelines' is always linked with "you'd better get in".

I think you read it

I think you read it wrong....the cash on the sidelines is in Govn bonds a so called safe haven....thats seems simple and clear?
I would assume that at some stage after the huge crash that money will exit US bonds (for instance) and those rates should rise a lot....that will hurt......ditto NZ bonds....
It comments that those that are left are "optimistic", I wonder if in fact besides GBH that in  fact these are the likes of GSach and they are the ones borrowing off the Fed for nothing and so speculate for "free".........
regards

No Steven I am not  reading

No Steven I am not  reading it wrong it is basic maths. When someone buys someone else sells, the cash position does not change. 
The following is from John Hussmans weekly letter 26/03/12 which may explain it better then me.
 
"The iron law of equilibrium
A final observation. We continue to hear endless variations of this comment - "The Fed is creating huge amounts of money, and all of that money has to go somewhere."
Actually no, it does not. The iron law of equilibrium is that once a security is issued - whether that piece of paper is a share of stock, a bond certificate, or a dollar bill - that security has to be held by someonein exactly that form, and in no other form, until it is retired. If IBM issues one share of stock, that share of stock can change hands between any number of people, but someone has to hold that share until it is retired. If the Fed creates a dollar of base money, that base money can change hands between any number of people, but someone has to hold that dollar until it is retired. There is no "getting out" of cash and into stocks in aggregate. There is only an exchange of ownership between existing pieces of paper that will each continue to exist until each is retired."

I think this is similar to

I think this is similar to the debate Chris and I have been having.
"The Fed is creating huge amounts of money, and all of that money has to go somewhere.", No, as Curious says obviously bollocks. Just because the Fed creates some base money, that doesn't mean its borrowed. This sentiment is pure monetarism, monetarism boils down to one very mistaken concept. The concept (which is wrong) is that all forms of monetary stimulus are equally stimulatory, it doesn't matter if the government borrows and spends on everybodies behalf or the banks increase their leverage capacity (because the Fed creates reserves). In monetarism both should be equally stimulatory.
The implication appears to be why wouldn't everybody always want the same amount of debt at all times. However on aggregate people get into more debt than they want (or ought to) people also get into less than they ought to at other times. Also this violates the "iron law of equilibrium", which points to the ideal aggregate debt rate being whatever it is now, and never changing from that.
The "iron law of equilibrium" is not that "iron", and it doesn't say that the amount of dollers in circulation constrain the M3 money supply either. Through the practise of Fractional Reserve Banking, the M3 supply fluctuates, relatively independent of M1. The number of doller bills is basically fixed by the fed, but this doesn't mean their 'velocity' remains constant, or that the M3 supply is fixed to be a multiple of M1 (even through the more complicated money multiplier model and taking into account changes in M1).
Fudiciary media is basically the stuff in M3, not the stuff in M1, so the number of doller bills is not exactly that important (no matter how much fancy investors and financial analysts want to think it is).
 

So lets get this straight,

So lets get this straight, you or Hussman anyway are saying one piece of paper == another?  because that is what it sounds like to me, and sorry I cant see that as being correct if only in its effect...ie we can see ppl are buying US Treasuries so the interest is in effect negative when you allow for inflation....money has flowed there.......
To start with we have a few ppl who have an opinion on how things work, doesnt mean they are right....but its well worth understanding where they are coming from especially as its Mish. What I need to get my head around is that while yes the NET could be eqiulibrium does assuming this tell us anything about a dynamic situation....I dont think it does. As he almost seems to be saying 0+1+3-2 = 0+5-3=0  Anyway this is an interesting topic , something I will read up on to understand because I dont and I dont know as yet if its matters or if it is a help...thanks
http://globaleconomicanalysis.blogspot.co.nz/2011/03/hussman-on-qe-and-i...
regards
 

He, he, ==  

He, he, ==
 

The first part of the Mish

The first part of the Mish article confirms the point I was trying to make.
"Money never goes “into” or comes “out of” a secondary market. It is always “home.”

"If you think carefully about equilibrium, it helps to clear up all sorts of fallacies that people hold about the financial markets. For example, the currency and money market securities that are held by investors will - in aggregate - never "find a home" in any other form or any other market. If somebody takes their cash and tries to buy stock, they get the stock and the seller gets the cash. Nothing disappears, and nothing is created - only the owner changes."
 
There cannot be a "mountain of money" sitting on the sidelines waiting to enter the market.
All that changes is sentiment sometimes there are more people who consider that it is a good time to buy, thus pushing up prices, and other times the reverse applies. The volume of money in cash is of little relevance, neither is whether it was created by an actual printing press or a computer entry at the Fed or the bank.
However I concede that the more cash the Fed issues via QE the more probable it is that it will end up with someone wanting to exchange it for some other form of security, thus putting pressure on prices.

"But they have

"But they have growth".........I can only guess the plan is to repeat this load of BS as often as possible in the hope it might come true!
Basic Fact...the USA is not experiencing real growth....there is enough happening to allow the liars in the govt agencies to report a positive GDP result but given the reality of their endless recession that faces them...along with their hundreds of trillions in liabilities and trillions in budget deficits and continuing housing failure and enless corporate and banking fraud and the never ending fed printing and the no change but really getting worse employment scene....it is more honest to report the terminal path the USA is on...
oops forgot to mention state govt failure wrapped up in mountains of debt...
witness:http://www.marketoracle.co.uk/Article34269.html
"This data is so twisted that there is absolutely no doubt the Federal Government is purposely manipulating the numbers to make the economic situation appear better than the reality."

"Plans to slash policy jobs

"Plans to slash policy jobs in the creation of a economic "super ministry'' shows there is a cost-cutting motivation behind the merger, the Public Service Association says."...herald
Can't have this carry on....bureaucrats are a protected lot...jobs for life...especially at a time when govt revenue falls short of the splurge and when billions are being borrowed every year to finance past debt and grow new debt so govt can carry on building a fatter State with more jobs for bureaucrats.
The PSA should have spoken up when the Labour idiots boosted the state machine and stuffed it with makework job positions...where was the PSA at that point in time?....why was the PSA not warning new bureaucrats that the party and the booze would come to an abrupt end....Not a peep was heard throughout the binge....

I see the socialists are

I see the socialists are still at it..
"One of the great moral disasters of our time is that our society lets inadequate people have children. In fact, it doesn't just allow the pathetic to become parents, it positively encourages it"
http://www.stuff.co.nz/sunday-star-times/columnists/6784836/Stop-feckless-mums-having-more-kids

..... not often that I agree

..... not often that I agree with Michael Laws , but he's bang on ..... if you excuse the pun ..
 
Bloody WFF is one of the worst policies to slop out of the parliament ...... since we gave women the vote !

Interesting to note, gummy,

Interesting to note, gummy, that it was a women behind WWF!

..... Linda McMahon ? ......

..... Linda McMahon ? ...... WWF used to be World Wresting Federation , before those wastral panda bears & spotted barn owls took the initials for their poxy World Wildlife Fund ......
 
....... don't give a hoot about them !
 
[ .. Gotta go , time for the BBQ ...... life is good ! ...... sorry PDK & steven , Gummy is still in the happy zone ...... must try harder to " gloomsterise "....... aha ha haaaaaaa ! .. ]

Obviously Michael Laws is

Obviously Michael Laws is talking extreme eugenics, and a rather disgusting set of values. Totally un-related to moderate socialist values.
Thats the behaviour we have all come to know and love from Wolly, he is never short of calling a spade a red herring.
 
 
 

Wolly Thank you for your

Wolly
Thank you for your efforts. You display so much common sense. Your mind is well trained. You hold the thin line. You make us laugh at things that are not really funny. Keep it up. Thank you.