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Bernard's Top 10 at 10: How Europe is turning Japanese; Just restructure the euro-debt; World Bank climate change warning; The Chinese general's tonne of cash; Dilbert

Bernard's Top 10 at 10: How Europe is turning Japanese; Just restructure the euro-debt; World Bank climate change warning; The Chinese general's tonne of cash; Dilbert

Here's my Top 10 items from around the Internet over the last week or so. 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.

My must read is #4 on the political and economic problems in Europe.

As it always does, it is coming down to a fight between bond holders and the unemployed, which the bond holders will win unless the poor get their act together to revolt.

1. I really think so - I'm (Europe) turning Japanese, yes I'm turning Japanese...I really think so. See the video below.

It's a great song, and now it's being sung by Royal Bank of Scotland's economists about the European economy, which faces the same problems of an ageing population slowing economic growth, creating deflation and the grounds for massive money printing.

Essentially, the developed world (or at least those parts that don't allow much migration) is seeing its economic 'metabolic rate' slow down in line with that of the biggest chunk of its population. Older people spend proportionally less, they save more, the invest less and take fewer risks.

Eventually they buy adult nappies at a greater rate than the number of nappies needed for babies.

Luckily for New Zealand, we have a high migration rate of young people and some parts of our population (Maori and Pacifica) have a relatively higher birth rate, which is helping.

But in Europe the picture is much darker, Ambrose Evans Pritchard at the Telegraph tells the story well with the help of RBS' economists. The key message: buy bunds with your ears pinned back, even if the real yield goes below zero (see chart below). It's all about the capital gain. Where have we heard that before? (Oh yes. Everywhere).

German bond yields are to fall below Japanese levels and plumb depths never seen before in history as Europe becomes the epicentre of global deflationary forces, according to new forecast from the Royal Bank of Scotland.

“We are seeing `Japanification’ setting in across Europe,” said Andrew Roberts, the bank’s credit strategist. “We expect 10-year Bund yields to cross the 10-year Japanese government bond and we are amply positioned for such an outcome.”

Mr Roberts said it is a “weighty win-win” situation for investors. If the European Central Bank launches full-blown quantitative easing, it will almost certainly have to buy large amounts of German Bunds, and these are becoming scarce.

2. Show us the innovation - One argument put forward for the strangely slowing rate of economic growth in the developed world in the last few years is a lack of technical innovation.

The golden era of inventing things like the steam engine, the petrol engine, the jet engine, electric power, nuclear reactors and the toaster has ended, it seems.

Here's Ben Southwood with a look at the evidence on patents (at least). I'm not sure I buy this argument, but some people use it. I think you could just as easily have lots of innovation and hardly any real economic growth for most of the population as the benefits are captured by a lucky and clever few.

3. The problem with Britain - New Zealand is in better shape than many other economies, but we are subject to many of the same trends such as the globalisation of services, the evaporation of jobs and wages into the cloud, the advent of 'zero hours' McJobs and a lack of investment in new products, services and technologies.

In Britain, the GFC and the above trends have driven wages of younger workers significantly lower, as Chis Giles points out at the FT.

New Zealand has softened the blow somewhat over the last decade with significant increases in the minimum wage and some redistribution of income to poorer workers through the likes of Working For Families and Interest Free Student Loans.

Britain has not been so lucky.

Here's Giles:

Apart from the huge squeeze in pay, the only other thing of note in the distribution is an unprecedented improvement for the old relative to the young. As Paul Gregg, Steve Machin and Mariña Fernández-Salgado have demonstrated, the fall in real wages for those aged 18 to 25 has been so extreme, they are now back to levels last seen in 1988. Older workers appear unconcerned by seeing more junior colleagues suffer.

If past trends are clear, the present is statistically murky. There is again no sign of any increase in wage or income inequality and younger people are still bearing the brunt of squeezed incomes, but the degree of squeeze is very difficult to gauge. The latest ASHE shows simultaneously that overall real median pay fell 1.6 per cent in the year to April, but that pay for the continuously employed rose 2.3 per cent. How so?

First, pay gains for the continuously employed almost always exceed the raw median because the measure includes promotions but excludes retirement – but the gap is unusually large this year. So the second part of the explanation is that there has been a large change in the composition of the workforce with an increase in low wage employees, depressing the average.

4.  Where have we heard this before? - Wolfgang Munchau reckons Europe needs to restructure its debt to solve its economic problems. Fat chance. The older generations holding the bonds will not stand for it.

But Munchau wonders if the young and the poor will eventually rise up and force a restructuring. He points to the growth of a new left wing party in Spain called Podemas:
 

Of the radical parties that have emerged recently, the one to watch is Podemos. It is still young, with an agenda in the making. From what I have read so far, it may be the one that comes the closest of all those in the eurozone to offering a consistent approach to post-crisis economic management.

In a recent interview, Nacho Alvarez, a senior member of the party’s economics team, laid out his programme with a refreshing clarity. The 37-year-old economics professor says the Spanish debt burden, both private and public, is unsustainable and needs to be reduced. That could include some combination of a renegotiation of interest rates, grace periods, debt rescheduling and a haircut. He also said Podemos’ goal was not to leave the eurozone – but that equally the party would not insist on membership at all costs. The aim is the economic wellbeing of the country.

To an outsider, that seems a balanced position. Not so in Spain. The establishment fears that this agenda will turn the country into a European version of Venezuela. But there is nothing controversial about the statement that if debt is unsustainable it needs to be restructured. Or that if the euro were to bring decades of suffering, it would be perfectly legitimate to question the eurozone’s institutions and policies.

5. How old is too old? - As #3 above shows, the young are having to save for longer to repay student debt and save up deposits to buy houses. They're having to wait until well into their 40s before buying.

But is that too late? New mortgage rules in Britain may stop those in their late 30s and 40s from borrowing because of fears they may retire before they've paid off their mortgages.

Increasingly, we will see banks and regulators acknowledging that with very low interest rates for the forseeable future, longer term mortgages and very late retirement ages, that they will have to allow those in their 50s and 60s to borrow to buy houses. Or more importantly, banks will be encouraging those in their 50s and 60s to buy houses, particularly rental properties that can be funded from the equity gained from ownership of previous homes (or lump sums being withdrawn from pensions).

No worries.

Here's what's happening in Britain.

Experts warned that the rules brought in by the Mortgage Market Review (MMR) on lending to older borrowers lacked clarity, meaning many people in their forties or even late thirties could face difficulty getting a mortgage. Rising house prices have led many households to take out mortgages with terms of 30 years or more.

The Intermediary Mortgage Lenders Association (IMLA), which represents brokers across the UK, warned in a report that a "substantial" number of borrowers would be affected because many lenders now require them to prove their income from the state pension age, regardless of whether they intend to stay in work for longer.

"With lengthening mortgage terms and the general difficulty people are having getting mortgages, the issue of lending into retirement has reached further down the spectrum than people might have imagined," said Peter Williams, executive director of the IMLA.

"I think many lenders have interpreted that as people over 65, but even then you’ve got a problem because now there isn’t a statutory retirement age."

6. Unusual suspects - Even the World Bank is worrying now about the frightening prospects for global economic growth from Climate Change. It has put out a new report.

7. A tonne of cash - Literally a tonne of cash was found in the home of one of China's top-ranking generals in a recent hunt by anti-corruption officials. It should remind us about the dangers of money laundering.

Here's Jamil Anderlini with the shocking details, including the system of naming the sources of the bribes for promotions:

When investigators searched the Beijing home of Xu Caihou, one of China’s highest-ranking army generals, they found so much cash and precious gems they needed a week to count it all and 12 trucks to haul it away.

The cash was neatly stacked in boxes, each with the name of the soldier who had paid the bribe in exchange for promotion up the chain of command. Many of the boxes, each containing millions of renminbi, had never been opened, said people familiar with the case.

Investigators swooped on Gen Xu in March, but details of his extraordinary hoard emerged only this week. Chinese law enforcement officials confirmed the cash in total weighed more than a tonne.

Gen Xu’s hoard is not the largest so far. In May, investigators detained Wei Pengyuan, the deputy head of the National Energy Administration’s coal department. It took 16 machines to count the more than Rmb200m he had stashed in his home, according to Xinhua, the official news agency. Four of the machines reportedly burnt out due to the workload.

Another Xinhua report told of Ma Chaoquin, the former general manager of a state-owned water company in Hebei province, who kept more than Rmb100m in cash and 37kg of gold in his flat. Mr Ma had also amassed a portfolio of 68 properties by the time investigators caught up with him, said Xinhua.

8. US$2 trln fat bill  - McKinsey have published a study showing the global obesity epidemic is costing the global economy US$2 trillion a year. Yet little is being done here to address this.

9. Regression to the mean - What would China look like with a 2% growth rate? What might cause it? Larry Summers and Lant Pritchett reckon it could be plain old 'regression to the mean' in a paper titled "Asiaphoria meets regression to the mean."

David Pilling reports here:

For them, “the single most robust and striking fact” about growth is “regression to the mean” of about 2 per cent. Only rarely in modern history, they say, have countries grown at “super-rapid” rates above 6 per cent for much more than a decade.

China has managed to buck the trend since 1977 by harnessing market forces, engineering possibly the longest spell “in the history of mankind”. But what goes up, the authors tell us, must eventually come down.

10. Here's John Oliver with a piece on turkey pardoning.

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15 Comments

China has managed to buck the trend because it spent the 30 years prior destroying the country, and so had a low low base to start from.  Remember the 'Great Leap Forward' with it's 20-40 million dead from starvation?  What goes down, must come up, once you stop mis-managing it.

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The world really is going to hell in a hand basket.. Cowboy shortage!

http://fuelfix.com/blog/2014/11/25/oil-boom-triggering-cowboy-shortage-…

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Investors Should Gird for Political Chaos in Britain

http://www.nytimes.com/2014/11/21/business/international/investors-shou…

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#6 wow....that graph

regards

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#6 Bernard are you treating the data cautiously or suffering from too much CNN?

 

From your FT link:

 

"It says there has been a “robust increase” in the number of droughts, storms, floods and landslides recorded over the last 50 years, but warns the numbers have to be treated cautiously because of an increase in climate-related disaster reporting over the same period that is “very difficult to quantify”."

 

The IPCC is perhaps more realistic and taken a crack at quantifying it - take global floods for instance:

 

"In summary, there appears to be a lack of evidence and thus low confidence regarding the sign of trend in the magnitude and/or frequency of floods on a global scale"

 

Such "frightening prospects"?

 

http://www.ipcc.ch/pdf/assessment-report/ar5/wg1/WG1AR5_Chapter02_FINAL…

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Oh dear cherry picking again.

Floods are a subset of heavy rains.  So its likely that even if there has been less rainfall, there have been more heavy rain events. section 2.6.2.1.  So crop damage and under-production is looking pretty likely.  So it is statistically likely that there have been more hvy rainfall events.  On top of that its suggested from what I have read elswhere that this increase isnt linear but accelerating.

Then we can look at droughts and then super storms section2.6.4 which can cause huge damage when they strike land.

The kicker of course is to look at insurance claims and indeed what the industry is saying and they are not happy. 

"frightening" yes if you can read with open eyes what they are saying, yes indeed.

regards

 

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“So it is statistically likely that there have been more hvy rainfall events.” This is contradicted by the IPCC quote above.

 

As for “Droughts and “super” storms”… some more cherry picking of IPCC AR5 summaries.

 

Droughts

“In summary, the current assessment concludes that there is not enough evidence at present to suggest more than low confidence in a global-scale observed trend in drought or dryness (lack of rainfall) since the middle of the 20th century”

“Super” storms

“In summary, confidence in large scale changes in the intensity of extreme extratropical cyclones since 1900 is low. There is also low confidence for a clear trend in storminess proxies over the last century due to inconsistencies between studies or lack of long-term data in some parts of the world (particularly in the SH). Likewise, confidence in trends in extreme winds is low, owing to quality and consistency issues with analysed data.”

 

Guess those storms aren’t so super after all.

 

I can see why insurance companies would be dead keen for us to get super storm insurance – those nasty capitalists scaring money out of  peoples/suckers pockets.

 

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No the quote above from you was for floods, not rainfall. 2.6.2..1 "substantial increases" in heavy rainfall events, yet possibly less rain.  So that's really great fro crops.

Table 2.13 uses the word "high" an awful lot where they have enough data to give them confidence, many others areas they simply do not have the data and observations and hence cannot have a high confidence in changes.

Insurance, well when they start to hike premiums or not insure at all, bit late then...

Meanwhile in the real world,

Forbes no less,

http://www.forbes.com/sites/kensilverstein/2014/05/18/rift-widening-bet…

"Rift Widening Between Energy And Insurance Industries Over Climate Change"

"He says that the United States suffered $400 billion in weather-related damages in 2011 and insured losses of $119 billion, which were record amounts. In 2012 — and despite Superstorm Sandy — losses were well above the 10-year averages at $165 billion total, of which insurers paid $50 billion. In 2013, insurance companies paid out, globally, $45 billion in claims, says Zurich-based Swiss Reinsurance Co., adding that the United States accounted for $19 billion of that.

Meantime, Standard & Poor’s Ratings Services just issued a report saying that the credit ratings of sovereign countries would be affected by global warming. It pointed to Typhoon Haiyan in the Philippines, heavy flooding in Great Britain and the record cold temperatures this past winter in the United States, all of which caused economic damages and disrupted business practices."

"Not all carriers are “passive.” This past week, Farmers Insurance Co., a unit of the Zurich Insurance Co., filed suit against the city of Chicago for its alleged failure to prevent flood-related damages that it says are associated with climate change. It maintains that city officials are aware of the potential fallout from climate-related weather and yet they have done nothing to mitigate such events. As a result, it paid out millions in claims a year ago tied to storms in the city."

http://evanmills.lbl.gov/pubs/pdf/climate-action-insurance.pdf

and another piece on the nasty capitalists trying to charge more,

“Our business depends on us being neutral. We simply try to make the best possible assessment of risk today, with no vested interest,” says Robert Muir-Wood, the chief scientist of Risk Management Solutions (RMS), a company that creates software models to allow insurance companies to calculate risk. “In the past, when making these assessments, we looked to history. But in fact, we’ve now realized that that’s no longer a safe assumption—we can see, with certain phenomena in certain parts of the world, that the activity today is not simply the average of history.”

This pronounced shift can be seen in extreme rainfall events, heat waves and wind storms. The underlying reason, he says, is climate change, driven by rising greenhouse gas emissions. Muir-Wood’s company is responsible for figuring out just how much more risk the world’s insurance companies face as a result of climate change when homeowners buy policies to protect their property."

I had this discussion with PB's developer mate on how after the Chch earthquake businesses might well find insurance un-affordable, seems this has indeed happened.

http://www.smithsonianmag.com/science-nature/how-the-insurance-industry…

Of course you dont have to buy insurance for "superstorms", you can ask for such events to be removed from your policy, bet many wont.

regards

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#2, Flurries of activity follow the eventual development of a singularity of innovation as previously considered applications could be implemented. Steam power led to machinery capable of more work than wind or horses. Internal combustion to more compact, mobile power sources for transport of all types including the development of powered flight. Electricity generation and reticulation to appliances of all sorts including computing hardware which still runs on the simplest logic.

The common theme is the localised provision or redirection of energy. There have been few inventions out of the blue, many were born in the mists of time but could not be brought to bear for lack of required process or material.

Nuclear fusion is the next big nut to crack and may power us off planet.

As for medical and scientific observations, while astonishing in their complexity, these are not innovations but discoveries about our universe which we were previously unable to perceive.

Patents are not claimed for altogether new things, they are just to protect the time invested in the modification of old systems to be more efficient or reliable.

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#7

As a general rule, it takes a lot of cash to get into New Zealand.

As a general rule it takes a lot of cash from  elsewhere, to prop up our debt run systems.

It also costs a lot to stay.

Dot.com is finding out who his mates are since the election. I thought he had gone quiet on the subject. As a general rule, it does not pay to advertise, when your friends disown you.

You cannot rely on anyone these days, dirty politics aside. As a general rule.

Deniability is paramount.

If you cannot get your friends re-elected by throwing cash at the situation, then someone had more to lose.

If you can get a general election won by copying a general rule, then somewhere a little more money changed hands. They just never admit it. Generally.

If an asset is sold down the river, was it an asset in the first place.

If an asset was sold to your friends, at a low price, was that a corrupt move or a fringe benefit, or a marginal play. Promoting others above their station, is often called into question.

Someyimes at question time.

If a deficit is increased who benefitted from that deficit. Was it a good call or a bad one.

If it pays to have less money, but raised assets, can one exchange those assets for more money, after a period. Is it legal to have a trust fund to avoid the costs and claim back the expenses.

When is a state house, not a state house. When is a private call, not a private call,

When not politically expedient, generally.

When is a deduction from income, some one else earned, beneficial as a general rule.

When did it become acceptable to make money out of selling us all down the river, as a general rule to add to our deficit, payed back by increased taxes on those who cannot avoid taxes, with diminishing income. Generally.

If power corrupts, does all our powerful people corrupt singularly or plurally as a general rule.

General rules and hand in tills are being eliminated in China, I understand. It is the policy of their new broom who is sweeping out the rubbish.

But it appears we import a lot of that as a general rule.

As a general rule, could we not go the same way.

 The deadwood stage is driving us all to rack and ruin.

Inflated quantative easing is generally  a failure for some, but a boon to  others.

But not if you make the rules, generally. Unless you slip up and generally display a tonne of cash, in little packages. We call it house price inflation, as a genaral rule.

We imported that general rule from overseas. Worth a kings ransom to know. Generally.

Generally you have to limit building the little ones. Not much profit in that to house the deadwood, we need upwardly mobile to hand over more dosh.

Generally from China, if I am not generally mistaken, again.

Why did we have to import things generally from China. When a killing was to be made.

Generally.

 

 

 

 

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Re No. 8. I always thought it was mean spirited to take away the subsidy for those participating in tertiary education. Especially as it was done by those who had already benefitted from the previous system. Some of the negative results have been slow to manifest. One was that the universities had little to constrain their budgets as the costs could be passed on to the students. Now it appears the housing market will be disrupted as young people have to pay off their student loans before buying. Take that baby boomers just try flicking your too large house now. unless of course you live in Auckland or Christchurch. 

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I always thought it was crazy taking away that subsidy.

The relatively small subsidy injects capital at the most sensitive part of a persons financial life.  It enables them to function at a much higher level, and to chase community goals that woud be out of their immediate grasp.  What's more additional subsidises when a small amount of funding makes a huge difference, can be added to encourage marginal opportunities into good opporunities in fields the community needs.  This was an investment in our future, and in our people.
  Not only that but much of the education can be provided relatively cheaply - it's not like farming where you need huge amounts of land, or IT where you're competing and need a leading technological edge, or forestry where it takes 25 years for the market to start returning, or industry where huge capital is required...or even media and advertsing where you have to re-invent yourself every morning or you are quite literally yesterdays news.

  Nope in most education, the need is driven by people, the initial material is tried and true, and fresh to the students.  They don't need the newsest or greatest for most tasks - in fact that holds them back when they get out in the real world and find most people can't afford the latest or the greatest.  And you don't need to rebuild the working parts from the ground up each time.  Foundation principles are going to hold true no matter how the market winds are blowing.

What does annoy me though, is that so much government over funding occurs, and not enough funding for people (ie parents) who wish to use these services - it allows that overinflation (a bit like US doctors and their insurance scam) to occur, rather than consume-community price control to cut in.  Government needs to be funding NZ'ers, not institutions; results not bums on seats.   Developing people, not cultivating debt burdens.

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I suspect that not all, but much of the university education system is occupied by rentiers who teach begrudgingly in support of their tenure.

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Well Bernard patents are quite a slow process but I am pleased to say my first came out of the 3 month appeal period in October uncontested. It seems that finding something novel is actually not that easy so I have joined an elite club. In the last 10 years the average number of NZ patents granted to New Zealanders has been about 400 per annum, but the median is much lower because of a wide range.

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#8.  Now ya has me worried - the "obesity epidemic".

 

I sat next to a portly chap on the plane back from Awkland last night.

 

When do I explode?

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