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Tuesday's Top 10 with NZ Mint: Bill Gross; German housing demand; weak Aust. service sector; NZ$77.1 bln in debt; Chinese Madoffs; multiplier debate; Dilbert, and more
Here's my Top 10 links from around the Internet at 10:00 am today in association with NZ Mint.
Bernard is on his summer break and will be back on January 22, 2013, from Wellington.
As always, we welcome your additions in the comments below or via email to email@example.com.
1. Money for nothin'
Bill Gross, the PIMCO boss, worries that purchases of 'paper' shares as opposed to investments in tangible productive investment assets become the likely preferred corporate choice.
Those purchases may be initially supportive of stock prices but ultimately constraining of true wealth creation and real economic growth.
At some future point, risk assets – stocks, corporate and high yield bonds – must recognise the difference, he says.
He is worried about a Bernanke quote: "Like gold, US dollars have value only to the extent that they are strictly limited in supply. But the US government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many US dollars as it wishes at essentially no cost."
It's that 'no cost' bit that gets Gross exercised.
Investors and ordinary citizens might wonder then, why the fuss over the fiscal cliff and the increasing amount of debt/GDP that current deficits portend? Why the austerity push in the U.K., and why the possibly exaggerated concern by US Republicans over spending and entitlements? If a country can issue debt, have its central bank buy it, and then return the interest, what’s to worry? Alfred E. Neuman for President (or House Speaker!).
Well ultimately government financing schemes such as today’s QE’s or England’s early 1700s South Sea Bubble end badly. At the time Sir Isaac Newton was asked about the apparent success of the government’s plan and he responded by saying that "I can calculate the movement of the stars but not the madness of men."
The future price tag of printing six trillion dollars’ worth of checks (cheques) comes in the form of inflation and devaluation of currencies either relative to each other, or to commodities in less limitless supply such as oil or gold.
While they are not likely to breathe fire in 2013, the inflationary dragons lurk in the 'out' years towards which long-term bond yields are measured. You should avoid them and confine your maturities and bond durations to short/intermediate targets supported by Fed policies.
2. Now Germany
Few Western countries are as conservative about home ownership as Germany, where less than half the country's citizens own property. But they too are now being seduced by low interest rates. America's NPR has the story:
Stefan Mitropoulos, an analyst with Germany's Helaba bank, says the buying spree has sent German property prices soaring in recent years, leading buyers to take on large loans that many can't afford.
That means Germany, which has footed much of the bill for Greek and other European bailouts, could soon face tough financial times of its own.
Mitropoulos recalls a similar rise in property prices at the time of German reunification. That paralyzed the housing market here for more than a decade, he says. But, he adds, Germany's traditionally conservative banking practices should help reduce the risk of widespread financial disaster experienced by other countries where real estate bubbles have burst.
Riney, the Berlin real estate agent, agrees, adding that German banks already take steps to protect against property devaluations.
"They take the market value and knock 20 percent off it, and use this as their value for orientation," Riney says. "They usually give a loan for 80 percent of that."
3. Out of thin air
Whether streaming from the exhaust pipes of cars or the chimneys of power plants and factories, carbon dioxide emissions keep growing around the globe.
Now a Canadian company has developed a cleansing technology that may one day capture and remove some of this heat-trapping gas directly from the sky. And it is even possible that the gas could then be sold for industrial use. More from the NY Times:
Carbon Engineering, formed in 2009 with $3.5 million from Bill Gates and others, created prototypes for parts of its cleanup system in 2011 and 2012 at its plant in Calgary, Alberta. The company plans to build a complete pilot plant by the end of 2014 for capturing carbon dioxide from the atmosphere, said David Keith, its president and a Harvard professor who has long been interested in climate issues.
The carbon-capturing tools that Carbon Engineering and other companies are designing have made great strides in the last two years, said Timothy A. Fox, head of energy and environment at the Institution of Mechanical Engineers in London.
"The technology has moved from a position where people talked about the potential and possibilities to a point where people like David Keith are testing prototype components and producing quite detailed designs and engineering plans," Dr. Fox said. "Carbon Engineering is the leading contender in this field at this moment for putting an industrial-scale machine together and getting it working."
4. Today's raw market data ...
A quick holiday update:
|as at 11:10am||Today
|NZ$1 = US$||0.8355||0.8308||0.8348||0.7794|
|NZ$1 = AU$||0.7969||0.7920||0.7958||0.7638|
5. In retreat
The Australian service sector is going backwards, according to their PSI. And this is not just a recent or one-off trend. But gues which sub-sector actually grew? Without that, the tailoff would have been pretty sharp. More from the ABC:
The monthly Performance of Services Index by the Australian Industry Group and Commonwealth Bank shows the sector shrank every month last year, except for January.
Even more concerning was an acceleration in the pace of decline, with the PSI falling 3.9 points to 43.2 in December, further away from the 50-point level that separates expansion from contraction.
Finance and insurance was the only sub-sector to record growth last month, with retail trade and communications services recording two of the weakest results.
6. Not a record
Governments around the world are getting good at issuing new debt, and ours is no different. Data out yesterday shows that Government securities on issue at the end of 2012 were worth $77.1 billion. That is up $11.7 billion from the start of the year, a rise of almost 18% in one year. We took on that much more debt because we felt that not to would be too socially disruptive.
We rejected austerity. Either our kids can pay it back or they can inflate it away (upsetting our retirement savings).
The general idea is that "when the economy recovers we will go back to a balanced budget". To be fair, we do have a track record of paying some back (see chart). We also have a good track record of accepting inflation (baby boomers will remember). What's it going to be? (Don't forget there are folks out there who want billions more for their pet train projects.)
7. Is the real Bernie Madoff hiding in China?
Chinese 'wealth management products' have a huge following, precisely because Chinese official interest rates are so low. Investors chasing yield may have been caught up in very murky products. Its been more than five years now since these WMPs started to be issued in huge volumes. If there is nothing behind them - even some of them - the crisis of confidence could be explosive. Here is the opening para. from a Reuters story: Read the whole thing here ».
The default of a Chinese investment plan has handed Beijing a tough choice: bail out investors and endorse moral hazard or let it fail and risk unnerving those who hold at least US$1 trillion in so-called wealth management products.
8. What food price crisis?
The latest FAO food price index shows that since 1990 the average real rise in food prices is only 1.45% cumulative. It was lower than that early in the period, higher later. I am not sure we actually have a food price crisis - more likely a 'removal of subsidies' reaction.
9. Getting it right
Economists get criticised for issuing forecasts that aren't accurate. The results are obvious. A number of professionals are working on the problem and a few high-profile ones (including the IMF gurus) have decided that it is their 'multipliers' that weren't sensitive enough. But not everyone is convinced. Some think that 'multipliers' are "estimates of central bank incompetance". Nice line, but is it true? TVHE has been following the explanations:
Obviously the illustrious authors of the multiplier studies aren’t unaware of this problem. The general theme of their arguments is that we are currently in a liquidity trap and monetary policy has little traction in these circumstances. Central banks are thus unable to counteract the effects of fiscal policy, which is only doing what the central bank would do itself if it could: boosting demand.
10. Today's quote
"Money is better than poverty, if only for financial reasons." - Woody Allen