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Monday's Top 10: World without debt; 'we know what we're doing'; quadrillions; Russian mea culpa; kindness; Muppets; Dilbert, and more

Monday's Top 10: World without debt; 'we know what we're doing'; quadrillions; Russian mea culpa; kindness; Muppets; Dilbert, and more

Here's my Top 10 links from around the Internet at 10:00 am today.

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. Big numbers, big improvement
The US Federal budget year ends on September 30 so we now have 10 months of data. Last year in 2012 they spent more than US$3.5 trillion while tax revenues were 'only' $2.4 trillion. This year they budgeted to spend US$3.8 trillion but are scheduled to spend 'only' US$3.6 trillion. However tax revenues have been rising fairly fast and should be at least US$2.8 trillion - leaving a deficit of only US$759 billion. Data here.

Or maybe less. There is wind in the sails in these final two months.

Tax revenue is generally beating everyone's estimates, and spending is constrained quite a bit by sequestration.

And then there is the housing market. The two huge Federal mortgage banks, Freddie Mac and the giant Fannie Mae are generating ginormous profits once again and these are being distributed as fast as they can to the US Treasury. Seems fair given the US taxpayer bailed them out a few years ago. These dividends move the US budget needle - Fannie Mae is making profits of US$10 bln per quarter, while Freddie Mac about US$5 bln per quarter.

In the budget review, the forecast for a deficit of $759 billion translates to 4.7 percent of the gross domestic product. That compares with a deficit estimate by the nonpartisan Congressional Budget Office on May 14 of $642 billion this year, or 4 percent of the economy, less than half the shortfall in fiscal 2009 when it was 10.1 percent of GDP.

Burwell said deficits will be reduced to less than 3 percent of the economy by 2017 and continue to fall to about 2 percent by 2023. Economists generally agree that the deficit shouldn’t exceed 3 percent of the GDP in a country with a stable economy.

Image sourced from Shutterstock.com

2. A world without debt
Edward Hadas thinks debt funding and interest rates are a real-world anachronism; the typical debt arrangement is an unfortunate holdover from a more primitive age. He says loans are bets on future inflation rates. Sometimes borrowers gain, sometimes lenders do, but either way a totally unnecessary risk is created. He points out that there is already operating a much better funding idea - equity.

He points out that not only would it be better for 'borrowers', but we would be much better off if lenders funded themselves with no debt as well. The full idea is here:

What is needed? Financial instruments which have no maturity, which are protected from inflation and which have variable payments. There’s nothing fantastic about that wish list. Common shares tick all the boxes.

Then why don’t common shares, or something like them, dominate finance? Well, the disadvantages of debt are clear, but it has one crucial advantage: a crude but clear duality. It is easy to tell whether counterparties are living up to the loan terms, so strangers can deal with each other relatively easily.

The refusal to relegate this obsolete tool to the dustbin of history helps explain the peculiar vulnerability of modern economies to financial distress. With a more resilient financial system, it would not take more than five years to recover fully from the failure of a single big bank.

Indeed, with an equity-based financial system, leverage – effectively building large debt structures on small equity foundations – would be almost impossible. Instead of making unrealistic promises of safe nominal returns, banks would offer a plausible commitment of fair real returns. They would fail far less often than now, and far less spectacularly.

3. 'Stick with us - we know what we are doing'
Bonds have taken a thrashing recently. As yields rise, prices fall, and portfolio values decline. Not good if you need fixed income in your strategy. The biggest bond investor, PIMCO, is feeling the pain too. Bill Gross is a bit late this month with his missive. Maybe he had trouble justifying why his clients should stay with him.

It certainly looks like this was on his mind; his August review points to the stupidity of the British in WWI and their strategy at the Somme. And then he carefully describes why his bond strategies have way more flexibility and forward-thinking than a British general. Actually, he makes a good case. And reading his piece does point out the breadth of profit-making strategies available to bond investors - well, professional bond investors - these days, even in a rising yield environment. Won't be as easy though when yields fell and prices rose. Here's Gross:

Here’s why, and here’s the logic behind our evolving future strategy. All investments, bonds included, have a number of modern-day weapons at their disposal which can be used to defend against higher interest rates, weapons that don’t necessarily go down in price as yields rise. These weapons can collectively be categorized as “carry.”

All bonds have carry in the following form:

1) Maturity risk
2) Credit risk
3) Volatility risk
4) Curve risk
5) Currency risk

Now at first, second or third blush this might seem rather obvious. Gross may have taken many of you through a WWI moment only to confirm what many of you have already figured out. Your reallocations to unconstrained strategies, alternative asset, and even lower duration portfolios are ongoing, and it is those products that predominantly contain non-maturity extension carry. If you are leaning in that direction, then we are in sync even for classic bond strategies such as the PIMCO Total Return Strategy. Less carry from duration, more carry from credit, volatility, curve and currency in the future years ahead.

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

as at 11:10am Today
9:00 am
Friday Four
weeks ago
One
year ago
         
NZ$1 = US$ 0.8030 0.7994 0.7792 0.8120
NZ$1 = AU$ 0.8754 0.8788 0.8592 0.7693
TWI 75.31 75.07 74.13 73.03
         
Gold, US$/oz 1,309 1,298 1,285 1,623
Dow 15,411 15,491 15,482 13,168
Copper, US$/tonne 7,186 7,122 6,852 7,426
Volatility Index 13.41 12.74 13.79 13.70

5. A really, really big number
It's a quadrillion. That is, 1,000,000,000,000,000 - I think that is right. It's 1,000 trillion. It's the size of the Japanese public debt in Yen, with the news over the weekend it has hit this level for the first time ever as at June 30. In NZ$ it is NZ$12.9 trillion ! Still, it is 'only' about 2/3 of annual US GDP, to put it in perspective, although it is larger than the annual GDP of Germany, France and the UK combined, and more than twice the size of the Japanese economy itself. They need to do something about it of course, and the only practical solution on the table at present is to introduce a GST.

Or they could try to restrain the public social costs associated with their demographics - ageing Japan is a fiscal timebomb. Interesting from a New Zealand perspective though. It's what happens when voters are shortsighted over a long period of time. Voters get short-term benefits in return for long-term pain (to not-yet-voters). This effect here keeps WP in the game.

6. 'Affordable housing' rorts
When governments get into the business of providing 'incentives' for affordable housing, all sorts of unintended consequences are initiated. Programs like this provide 'incentives' to game the bureaucrats, as the Chinese are finding out. Bloomberg has the China story:

A Chinese audit concluded that about 5.8 billion yuan (NZ$1.2 bln) was misappropriated from an affordable-housing program that Premier Li Keqiang said would provide a test of the government’s credibility.

Funds from 360 projects were diverted to pay back loans or make outside investments, while money designated to pay for demolitions was used to start other construction, the National Audit Office said in a report posted on its website yesterday.

The five-month audit’s findings draw new scrutiny to a program that was designed to reduce the risk of real-estate bubbles and ease discontent among the poor. In February 2012, when Li was vice premier, he called on the public to supervise the government’s push to distribute affordable housing in a fair way.

In 2012, the government invested 412.9 billion yuan in affordable housing, while another 466.8 billion yuan came from bank loans, bonds and other social financing, according to the report. The real amount of money that was lost may be higher than reported, Jinsong Du, a Hong Kong-based property analyst at Credit Suisse Group AG, said in a phone interview.

“If there’s any surprise it should be that it’s so small,” Du said of the abuses. “This is probably a deflated number.”

7. A mafia solution
It's certainly a novel approach, but Vladimir Putin has a problem in Russia's stalled economy. His solution: release many of the entrepreneurs he locked up in the Gulags. Using his own definitions, we wants the "economic criminals" back on the streets to kick-start his economy. Very Russian. More on the NYTimes:

More than 110,000 people are serving time for what Russia calls “economic crimes,” out of a population of about three million self-employed people and owners of small and medium-size businesses. An additional 2,500 are in jails awaiting trial for this class of crimes that includes fraud, but can also include embezzlement, counterfeiting and tax evasion.

“This can be understood in the Russian context,” Boris Titov, Mr. Putin’s ombudsman for entrepreneurs’ rights, said of what is, even by the standards of the global recession, a highly unusual stimulus effort.

The amnesty is needed, he said, because the government had “overreacted” to the threat of organized crime and the inequities of privatization and over-prosecuted entrepreneurs during Mr. Putin’s first 12 years in power as president and prime minister.

8. Group think?
With numbers like this, you may be forgiven thinking this is a Zimbabwean poll, but no, its from Japan.

94.8% of those businesses polled think their economy is now on the right track following PM Abe's big election win recently. This is a big contrast to the October 2012 poll where only 9.6% were optimistic. Abenomics is certainly changing attitudes in Japan. More from The Japan News: HT Gareth.

The findings of the survey, carried out between July 22 and Aug. 2, indicate that many companies have high hopes that the administration of Prime Minister Shinzo Abe will accelerate efforts to implement its economic measures.

Asked what measures should be given priority, 85 companies, the largest group, said business tax incentives, such as reducing the corporate tax’s effective tax rate and tax cuts on capital spending. Regulatory and institutional reforms, chosen by 77 companies, came second, while 52 firms picked the promotion of negotiations on the Trans-Pacific Partnership multilateral trade agreement in the multiple answer question.

9. On kindness
I have a soft spot for an Americanism, a good commencement address. This one is by George Saunders, among other things, about the trouble with swimming in a river full of monkey feces.

It's actually about kindness.

I find these things amazing in that they speak to you at a very personal, connected level. Well worth reading in full:

If we’re going to become kinder, that process has to include taking ourselves seriously – as doers, as accomplishers, as dreamers.  We have to do that, to be our best selves.

Still, accomplishment is unreliable.  “Succeeding,” whatever that might mean to you, is hard, and the need to do so constantly renews itself (success is like a mountain that keeps growing ahead of you as you hike it), and there’s the very real danger that “succeeding” will take up your whole life, while the big questions go untended.

So, quick, end-of-speech advice: Since, according to me, your life is going to be a gradual process of becoming kinder and more loving: Hurry up.  Speed it along.  Start right now.

10. Today's quote
"Today, there are three kinds of people: the haves, the have-nots, and the have-not-paid-for-what-they-haves." - Earl Wilson

Electricity prices, Retail

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Source: MBIE
Source: MBIE

11. Because I could ...

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3 Comments

# 11 ....  because u could.. yes       :)

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Just love the purple!

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#1 - is there any year when there hasn't been a deficit, since '63 or so? Nope. No good crowing about reducing it, it's still 'result misery'. All you can do is inflate it away.

 

#2 - Some of us have been saying that here, for years. The future can't underwrite, so it won't.

 

Putins optimism and the Japanese optimism are the same - based on a misunderstanding of what does the underwrite.

 

Meantime, London is bubbling along like Auckland - wishful-thinking transferred to existing items. Stand clear.......

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