Monday's Top 10 with NZ Mint: Rouibini's ten worries; Auckland housing stress; Warren Buffet has an unsatisfactory year; bank leverage matters; 'Fed has failed to do its job'; 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 back tomorrow with his version.

As always, we welcome your additions in the comments below or via email to bernard.hickey@interest.co.nz.

See all previous Top 10s here.

1. Ten QE questions
Most observers regard unconventional monetary policies such as quantitative easing as necessary to jump-start growth in today’s anemic economies.

But questions about the effectiveness and risks of such policies have begun to multiply as well.

Nouriel Roubini has ten potential costs associated with such policies that merit attention. He thinks the time has come to withdraw them. For someone who thought the world was ending and was very critical of the policy responses used to contain the crisis, he certainly seems to have changed his tune. He is suggesting these policies worked, and now it is time to unwind them before unintended consequences arise:

In short, policies are becoming more unconventional, not less, with little clarity about short-term effects, unintended consequences, and long-term impacts.

To be sure, QE and other unconventional monetary policies do have important short-term benefits.

But if such policies remain in place for too long, their side effects could be severe – and the longer-term costs very high.

2. The cost of political correctness
Let's try and look past the pointless angst of who is buying houses in Auckland and focus on the core issue: why it is so hard to find affordable accommodation. The answer is in this chart. For more than a decade we have been building far too few new houses. According to Auckland Council, there were an average of 3 people per household in 2006 (the last Census). Since 2005 we have built 40,770 houses in the Queen City to accommodate an increase in population of 167,200. That means we are starting 2013 with 15,000 houses short. We need to build those right now, and then 7,000 new ones per year just to stand still. In 2012 we built 4,582, the highest number since 2007, barely half of what we need.

But none of this is actually news. "Smart Growth" has delivered a social disaster. Len Brown wants to make Auckland 'compact' - just like Sydney. The problem is that is a recipe for crowded rentals. No-one thinks Sydney is affordable. We have to aspire to do better than that.  Change focus, Len.

3. Not such a good year (!)
Warren Buffett has written his annual letter to shareholders. In 2012 he did not outperform the S&P500. Written in accessible prose largely free of financial jargon, Berkshire’s annual letter holds appeal far beyond Wall Street.

This year’s dispatch contained plenty of Buffett’s folksy observations about investing and business that his devotees relish. “More than 50 years ago, Charlie told me that it was far better to buy a wonderful business at a fair price than to buy a fair business at a wonderful price,” he wrote, referring to his longtime partner, Charlie Munger.

Berkshire’s share price recently traded at a record high, surpassing its prefinancial crisis peak reached in 2007 and rising about 22% over the last year. The company reported profits last year of US$14.8 billion, up about 45% from 2011. Yet the company’s book value, or net worth lagged the broader stock market, increasing 14.4%, compared with the market’s 16% return.

When the partnership I ran took control of Berkshire in 1965, I could never have dreamed that a year in which we had a gain of $24.1 billion would be subpar, in terms of the comparison we present on the facing page. But subpar it was.

For the ninth time in 48 years, Berkshire’s percentage increase in book value was less than the S&P’s percentage gain (a calculation that includes dividends as well as price appreciation). In eight of those nine years, it should be noted, the S&P had a gain of 15% or more. We do better when the wind is in our face.

4. Today's raw market data ...
A quick new week update:

5. Leverage matters - can banks be too safe?
Regular readers will know that we have banged on for years that the low levels of capital in banks is a key reason for vulnerability. Capital levels need to be higher and shareholders need to accept that banks are utilities and as such need to have lower return expectations.

Some say banks should be required to finance themselves in part with a form of debt that automatically converts into equity if a bank’s finances deteriorate. These “contingent convertible” securities - known as CoCos -work like canaries in the coal mine, losing value at the first sign of trouble so banks have time to fix things. BusinessWeek's review of a new book about the issue is helpful:

The Bankers’ New Clothes, published on Feb. 24, is wowing critics of fragile banks with a simple and attractive message: Force banks to have much thicker cushions of capital and you can make them safer without paying any cost in terms of higher interest rates, less lending, or lower economic growth. At a Feb. 11 prepublication event with authors Anat Admati and Martin Hellwig at the Peterson Institute for International Economics, senior fellow Morris Goldstein called the book “the most important contribution to the analysis of banking regulation in the past 25 years  ...  beautifully written and forcefully argued.”

The thicker a bank’s buffer of capital is—that is, the less it relies on borrowing to fund its operations—the lower the chance it will require a taxpayer bailout. Also, the easier it will be for the bank to keep lending and sustaining growth in a financial crisis. The extra margin of safety provided by more capital is a free lunch, argue Admati, a professor of economics and finance at Stanford business school, and Hellwig, an economist and director of the Max Planck Institute for Research on Collective Goods in Bonn, Germany. Says Admati in an interview: “What we are told - that you have to choose between growth and safety of banks - is just a false trade-off.”

6. Energy transformations
The sources of our energy are changing fast. Coal is in decline - just ask Don Elder.

Efficiency may be improving, but if economies start growing (and most are) the demand for raw energy will rise. NPR has been reviewing the current state of play in the biggest energy consuming market, and looking at where 'renewables' stand.

The way Americans get their electricity is changing. Coal is in decline. Natural gas is bursting out of the ground in record amounts. And the use of wind and solar energy is growing fast. All this is happening as power companies are trying to choose which kind of energy to bet on for the next several decades. Until recently, half of these plants burned coal to make electricity. Now, that's down to about one-third. Since 2010, about 150 coal plants either have been retired or it's been announced they will be retired soon.

What knocked King Coal off its throne? Mostly natural gas. "We added almost twice as much natural gas capacity as we retired coal capacity last year," says Trevor Houser, an energy analyst with the Rhodium Group in New York. Why gas? "That is primarily because of the price." The price of natural gas is well below what it was a few years ago. That's mostly because hydraulic fracturing technology is reaching more gas reserves, and also because a weak economy has lowered the demand for electricity.

And there's plenty more gas to come. On Thursday, a study from the University of Texas confirmed government estimates of huge reserves in Texas alone. That would suggest that coal is doomed.

But not so fast. The gas market is quirky. As people started burning more natural gas, gas prices crept up.

It's classic economics: "As natural gas prices have started to increase over the past few months," Houser points out, "coal's share of U.S. power generation has increased right alongside it."

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7. Another train failure lesson
Note to Len B: big fancy rail projects have a universal habit to being financial boondoggles. Even the Germans aren't immune. The interesting thing about this Spiegel story is that the amounts that are causing angst in Stuttgart not too dissimilar to the NZ$3 bil. the Auckland mayor is proposing to spend - before the inevitable cost over-runs here.

The Germans now acknowledge their mistake, but they are trapped. Give up now Len; change your focus to housing affordability.

But the paper says the company fears abandoning the project altogether could lead to liabilities of at least €2 billion, and possibly more. Thus, "the executive board supports a continuation of the Stuttgart 21 project," the paper states. Executives also admit that "with the knowledge we have today, we would not have begun the project, but we would still continue it." Despite the explosion in costs, the federal government has signaled it will give the green light for continuation of the project and the board is likely to approve its completion as well.

Company officials are now saying the project will have a maximum total price tag of €6.5 billion. But internal documents suggest it may be lower, around €6 billion.

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8. Not enough inflation
Annual price inflation in the US has been less than 2% in four of the last five years, evidence that "the Fed failed to do its job". In January, the rate came in at 1.2% for personal consumption expenditures, its lowest level since 2009.  More from the NY Times:

But the January number does underscore that the Fed failed to do its job over the last two years. It underestimated the stimulus that the economy required then to prevent inflation from sagging below 2 percent now. As Janet Yellen, the Fed’s vice chairwoman, said last April, “In effect there has been a significant shortfall in the overall amount of monetary policy stimulus since early 2009,” because the central bank can’t push short-term interest rates below zero, and its other measures, like asset purchases, haven’t filled the gap."

9. Job losses
No job loss stories again this week. It is very quiet on that front. But we did report on some expansion and major job hiring at Fonterra and Fisher&Paykel Appliances, but those don't count for our tally.

We are keeping a tally of reported job losses and we are asking readers for help keeping track of them. Let us know when you see some.

10. Today's quote
"We all need money, but there are degrees of desperation." Anthony Burgess