Thursday's Top 10 with NZ Mint: We lack shadow banking regulation; manufacturing without workers; fronting; basic statistics, 'are you a client or a muppet?''

Here's my Top 10 links from around the Internet at 10:00 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 especially 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. Unintended consequence
The big consequence of the GFC has been the much more aggressive regulation of banks. But it was really the 'shadow banking system' that was at the heart of the crisis. And a huge unintended and ironic consequence of tougher banking regulation and oversight has been that it has spurred the growth of that 'shadow banking system'.

Before the GFC hardly any NZ corporate treasurers accessed the modest US private placement market - but now it is a common funding source and a huge market. Before the GFC large corporates hardly ever funded their smaller suppliers, but now it is no longer rare. The FT reports:

But the post-crisis world has seen banks selling assets to non-bank financial groups to improve their capital ratios, meet regulatory requirements and reassure their own lenders – such as money market funds, themselves a fundamental part of shadow banking – that they are sufficiently resilient.

“One of the many unintended consequences of the brutal regulatory crackdown on banks is that there is now a massive incentive to be a shadow bank,” says the chief executive of a big European bank.

This has stimulated growth in previously small areas of lending, especially in Europe and Asia. In parts of Europe large retailers and industrial groups have begun providing funding to smaller companies, including their suppliers. A similar trend away from bank finance has benefited credit hedge funds and in the leveraged finance world, new bespoke funding suppliers have sprung up.

2. How close is the electric car?
They have been foreshadowed for years. You can even buy them now - the Nissan Leaf, the Mitshubishi i, and the Chevy (Holden?) Volt (although not in New Zealand yet). But when you are out-and-about, where will you recharge them? The prospect for recharging stations in New Zealand seems extremely remote. We are wedded to petrol.

But things are changing in key markets. In California, private companies have built a network of  2,000 public charge stations, with plans for 10,000 more. A fast charge there takes 'only' 30 minutes. How long before we see this sort of investment here? It might be quicker than we realise. And it might make your shares in the about-to-be listed electricity SOEs a really good investment that you hold on to.

3. Manufacturing without workers
Is the US building an export powerhouse economy without manufacturing workers? Competing for manufacturing market share means making some very tough calls. In open societies, the pressure on the tradeables sector is relentless and to survive maybe you have to go all the way to full automation. Some see the US making that transition.

President Obama's 2010 'goal' of doubling US exports within five years was seen at the time as pretty empty rhetoric. But as things now stand, it could well be achieved. If the US can do that with manufacturing, what could we do? Here is Tyler Cowan:

The factory has been reinvented as a quiet place. There is now a joke that “a modern textile mill employs only a man and a dog - the man to feed the dog, and the dog to keep the man away from the machines.”

At least three forces are likely to combine to make the United States an export powerhouse.

[But there is] bad news: The new export-based prosperity may not translate into higher wages for everyone, or even most people, in the United States. Skilled laborers who work with smart machines or even hold advanced managerial jobs will continue to make big gains, as the numbers have been showing for some time. Capital will do well too, especially if it is geared toward export success. The class of elite labor will grow.

4. The middle-class crime of 'fronting' 
A recent poll in Britain has revealed that "one in four parents" have or would put their own name on their kids car insurance policy as the main driver in order to get a lower premium for them. This is known as 'fronting', and is illegal - it's straight-out fraud. John Grant earlier reviewed the issue as it applies in New Zealand here ».

Don't do it because the consequneces if you get caught (and you are very likely to get caught when there is a claim) could be very severe. Imagine you have a mortgage; that requires you to keep the property insured of course. But if you are tainted with insurance fraud, you will be in a very tough spot with both the insurance industry and the banking industry, not to mention your credit record.

5. de ja vu all over again
US lawmakers are debating whether their proposed Volker Rule should apply to US banks internationally. The banks hate the idea. But a London-based trader for JP Morgan is currently making investment and hedging decisions with the banks own money that are so large, his activity is causing concern - and being used by Volker Rule proponents as a reasons why it is important the new rule apply everywhere. More on Bloomberg.

Harvey Pitt, also a former SEC chairman, said he would ask JPMorgan to explain the trades and then have the agency report to the public.

"Any time any trader can be dominant in the marketplace, that has to raise appropriate regulatory concerns," Pitt said today in a phone interview on Bloomberg Television. "That means the markets can be influenced by a single actor, and that is not the way our markets ought to operate."

6. Statistics 101
Economist Eric Crampton really hates sloppy use of statistics in news stories. Here's his followup on the "social cost of tobacco use". He's got a point. All it does is undermine the very issue being raised.

I really really hate "Social costs of Blah" studies. Because it's just so easy for somebody who doesn't know the term of are employed to read it as equating to costs on the taxpayer. Just like Krupp did. "Smoking costs" turned into "Kiwi taxpayers fork out ... to treat smoking-related diseases".

The social costs of social cost studies, in screwing up how the public views the distribution of the burden of various activities and consequently making folks think a paternalistic policy is really a Pigovean one, are not insubstantial.

7. Cheap shots in the culture wars
It's sophomoric to rubbish your opponents reasoning skills. But sometimes its fun. Here is the Huffington Post (US East Coast liberal) dissing US conservatives.

As The Huffington Post reported in February, a study published in the journal "Psychological Science" showed that children who score low on intelligence tests gravitate toward socially conservative political views in adulthood - perhaps because conservative ideologies stress "structure and order" that make it easier to understand a complicated world.

Ouch.

And now there's the new study linking conservative ideologies to "low-effort" thinking.

"People endorse conservative ideology more when they have to give a first or fast response," the study's lead author, University of Arkansas psychologist Dr. Scott Eidelman, said in a written statement released by the university.

And the there's this » by Daniel Klien who discovered our (his?) political leanings leave us more biased than we realise. It may also help some readers reassess their "I'm right; you're wrong" mentality.

8. Why pump prices produce less angst
When petrol prices hit $2.20 per litre in the past, there was angst and worry about how we would handle the cost pressures. It all started way back with the early 1970's 'oil crisis'. Since then, as each peak has been breached, the 'pain' seemed less and less. We are about to hit a new high at the pump, but the general chatter is missing. It gives all the appearances we will take it in our stride. Why?

Well one reason is that a lot of the pump price is tax, a cost we have imposed on ourselves rather than one imposed by outsiders. But an equally good reason is that we now rely on oil significantly less. We're more energy efficient. We have taken the consumption data released by the MED and related that to the economy's output (as measured by real GDP). Apart from the bubble years (1999 to 2008), it seems we now use 23% less oil for our outputs than we did 35 years ago. 

9. Statistics 102
The US is a big place, far bigger than New Zealand. Yet, they can report their unemployment rate within 10 days of the end of each month while New Zealand can only report ours 33 days after the end of each quarter. How do the US do that? (Actually, China does stats releases even quicker than the US.)

The answer of course is that they sample. In the US case, its a big, a very big sample. They survey more than 140,000 enterprises each month. Still, the margin of error involved while 'small', can amount to a big number itself. In the US case, it is effectively 100,000 jobs either way. So, they reported growth of "only 120,000" jobs in March, which could actually be +/-100,000 of that. We will need to wait for the future month revisions to know whether it is 20,000 or 220,000. The Globe and Mail explores the issue:

The margin of error around employment surveys is extremely wide.

The headline U.S. jobs figured is derived from a poll of about 141,000 businesses and government agencies, representing roughly 486,000 individual worksites, according to the Bureau of Labour Statistics (BLS).

Compared with your typical opinion poll, that’s a massive sample. But it’s not big enough to get more than a rough idea about what’s really happening in the labour market of a country of more than 313 million people. Accordingly, the BLS explains that there is a 90 per cent chance that its results will be within 1.6 standard errors from the “true” value. In the case of the establishment survey that means the BLS is fairly confident that the reported number is within about 100,000, plus or minus, of the actual number of people hired or fired in the month.

“All of the U.S. labour surveys have such large errors that one needs to be careful in not getting carried away with monthly changes in job growth that may not be statistically significant,” Derek Holt and Dov Zigler of Bank of Nova Scotia said in a report released last week.

Rarely does the U.S. economy generate hundreds of thousands of jobs for months in a row without taking a breather.

So maybe Statistics NZ has it right doing our surveys quarterly. Our way, we eliminate the space where the conspiracy theorists and perpetual sceptics can mess with minds of people who don't wish to think stuff through properly.

10. The last laugh
It had to happen, I suppose. However it is a good thing it was Felix Salmon who did it. Done well here ...