Top 10 at 10: Paritai Dr farmers; Japan's debt bomb; Obama's lipstick on Wall St pigs; Dilbert

Here are my Top 10 links from around the Internet at 10am. I welcome your additions and comments below or please send suggestions for Tuesday's Top 10 at 10 to bernard.hickey@interest.co.nz 1. Paritai Drive farmers - Greg Ninness at the Sunday Star Times looks in depth at the area of investors, often who are not farmers, buying into dairy farms that have loaded up with too much debt. This suggests that eventually ownership of dairy farms will transfer outside the industry, but not in an obvious way through the NZX. It will end up dotted around hundreds of trusts off the market owning stakes in farm companies, which in turn own Fonterra shares. It's a dismantling of the cooperative and family ownership of the industry by stealth. Fair enough. That's what happens when you take on too much debt.

Many farmers who borrowed heavily during the dairy boom to increase the size of their farm or buy multiple farms have been forced to look for new sources of capital to reduce debt and shore up their balance sheets. "I think [that trend] will continue," said Ben Russell, the general manager of Rabobank, one of the biggest lenders to the rural sector. "In the next three years we'll see a gradual exchange of equity for debt into farming businesses, not all of them, but certainly reasonable numbers of farming businesses will be looking to strengthen their balance sheets and replace debt with equity. "One of the big lessons out of the last 18 months for a lot of farmers and a lot of bankers is that if you've got a lot of debt on your balance sheet, you become much more vulnerable during the down times. And there will be down times and not just in dairying, other sectors such as property face the same thing. When you load up with debt, the business is not sufficiently robust to handle a downturn. "In the dairy industry there have been many farmers that have come to the conclusion that the levels of debt they carried previously may not be sustainable. "So they are working with their banks and going through the exercise, and in some cases it means selling off part of their business and in other cases it means bringing in outside investors to buy a share of the enterprise, or some combination."

2. Seriously unaffordable - Tauranga and Auckland are almost as unaffordable as New York in the annual Demographia survey of house affordability globally. Prices in Tauranga are on 6.9 times income, while Auckland is at 6.8 times and New York is on 7.0 times income.

Demographia makes a few comments on New Zealand.

In 1991, New Zealand attempted to liberalize housing development, however, the opposite occurred, as regulation was tightened under the Resource Management Act. It is likely that New Zealand would have avoided the housing bubble if the new regulatory structure had been administered as intended. Since 1991, housing affordability has declined substantially in New Zealand. Recently, the government"Ÿs "2025 Taskforce" identified planning constraints on land as the "biggest obstacle" providing housing that is affordable. This problem has attracted the attention of the new government that was elected in 2008.

Hmm. We'll see. 3. Ever tighter - Westpac has announced in Australia a reduction in its loan to value (LVR) requirements for new loans to 87% from 92%, our sister site Interestratenews.com.au reports. I don't think people have really understood how a combination of tighter liquidity requirements, tighter capital requirements, lower profits and global deleveraging is forcing the banks to tighten their lending requirements for home lending. This will have a depressing effect on house prices for a long time, as Steve Keen points out in the Sydney Daily Telegraph.

Although it may appear relatively small, such a cut has a disproportionate effect on how much people can borrow and can halve the value of the property they can afford to buy. "If you have a $50,000 deposit and you can get a 95 per cent loan, you are able to bid on a property worth $1 million," said Steve Keen, associate professor of economics at the University of Western Sydney. "But if the LVR is cut to 90 per cent, your $50,000 deposit is only equivalent to 10 per cent deposit on a $500,000 property, so the amount you can spend is halved." Westpac's reduction from a maximum LVR of 92 per cent means that buyers with a $50,000 deposit will see the maximum that they can afford to pay for a property slashed from $625,000 to $384,615.

4. Global debt bomb - Daniel Fisher at Forbes has an interesting piece on the 'Global Debt Bomb'. He looks in particular at Japan's debt problem and the risks over the next year that higher interest rates will put budget deficits under enormous pressure. In the last two years enormous amounts of private debt (often in banks) was transferred to the public sector. Consumers stopped spending but governments spent up a storm. Now all that debt and all those deficits have to be serviced. The piece starts off with a chat with Kyle Bass, a Dallas Hedge fund manager who is betting rates will rise sharply in Japan, forcing it close to default. HT Gertraud via email.

"Japan is the most asymmetric opportunity I have ever seen," he says, "way better than subprime." Bass could be wrong on Japan. The island nation (and the world's second-largest economy) has defied skeptics for so long that experienced traders call betting against it "the widowmaker." But he may be right on the bigger picture. If 2008 was the year of the subprime meltdown, 2010, he thinks, will be the year entire nations start going broke. The world has issued so much debt in the past two years fighting the Great Recession that paying it all back is going to be hell--for Americans, along with everybody else. Taxes will have to rise around the globe, hobbling job growth and economic recovery. Traders like Bass could make a lot of money betting against sovereign debt the way they shorted subprime loans at the peak of the housing bubble. National governments will issue an estimated $4.5 trillion in debt this year, almost triple the average for mature economies over the preceding five years.

5. What an ageing population really means - A big part of the Japan story is the problem of an ageing population and how the government will no longer be able to rely on a high savings rate of those approaching retirement. Kyle Bass (mentioned above) talks in a video interview with CNBC's David Faber about this. Essentially Bass says the rest of the developed world is headed down Japan's path to decades of deflation and stagnation after choosing to shift private debt to the public sector and then having to cope with the effects of an ageing population. Ominous for us all, particularly as New Zealand's government continues to borrow heavily this year. Interest rates are rising. HT Mish

I think the big canary in the coalmine is Japan. When you see how Japan has lost 20 years of their prosperity from 1990 to today, you see what happens when a government steps in and runs giant deficits to make up for the private market place pulling back and attempting to deleverage. So what we've seen around the globe in the developed world, bad private assets are moving onto public balance sheets. Sovereign balance sheets have expanded 86% from pre-crisis levels of debt. If you extrapolate that from the beginning levels of debt, many of these countries around the world won't be able to service their debt. So I think in the next 2-3-4 years you start to see significant defaults. David Faber: Do you believe Japan is in a position where it might default and/or devalue its currency as well, in the next 3-4 years? Kyle Bass: I do not think Japan has a way out of this. David Faber: Why Not? Kyle Bass: You have a secular decline in population, and you have a huge funding structure at below market rates. So Japan's weighted cost of capital is only 1.4% and their sovereign balance sheet is much worse than the rest of the developed world. If their cost of capital goes up 250 basis points, their interest expenses of the government will exceed their total government revenue, and it can't even get there [that high]. David Faber: Now their debt is held there as opposed to us where our debt is held by foreigners, in Japan it's mostly citizens. Kyle Bass: That's right. In the United States about 57% of our debt is held externally. In Japan 6% of their debt is held externally. 94% is held by the people, the pensions, and the life [insurance] companies. What's happening now with the population decline, all the buyers of their debt are turning to sellers. And the largest pension fund in the world in Japan told the Ministry of Finance in May that they are going to be a net seller from now on. So their buyer's base is disappearing and if they have to go to the international capital markets to raise money, they can't exist. It's an awful social problem for Japan.

6. Higher rates - Along a similar line to the two pieces above, here's an interesting piece from Reuters about how Japan's biggest pension fund, which invests only in Japanese government bonds, says it needs to find higher returns from somewhere (maybe not in Japanese government bonds).

A Japanese government minister on Friday urged the country's massive public pension fund to seek higher returns, ramping up pressure on the traditionally conservative investment portfolio to take more risk. The size of the $1.36 trillion public pension fund, the world's largest, is greater than the 2008 gross domestic products of countries including Australia, India and Mexico, and is almost seven times bigger than top U.S. pension fund CalPERS. Internal Affairs Minister Kazuhiro Haraguchi told reporters at a news conference after a health ministry panel meeting that the Government Pension Investment Fund (GPIF) should seek greater returns than it has generated in the last few years. He urged a review of the fund's performance after the rate of return on its investments fell to minus 10.3 percent, or a record loss of 9.7 trillion yen ($108 billion), in the financial year that ended in March 2009. The GPIF has boasted that its conservative strategy, under which nearly 70 percent of its assets are held in Japanese government bonds, helped limit its losses compared to foreign pension funds that year.

7. Lifestyles of the rich and unpopular - Gawker, who are a cheeky bunch, have hunted down pictures from Google Maps of the mansions that Goldman Sachs executives have bought with their bonuses of recent years. Tsk. Tsk.

8. Reinstate Glass-Steagall - Nobel prize winner Joseph Stiglitz writes an excellent piece in The Daily Telegraph saying that the form of market capitalism that created the global financial crisis is broken and must be fixed, regardless of those in banking who say all it needed was a few tweaks and bailouts. He calls for the reintroduction of parts of the Glass-Steagall Act, the depression-era law that separated investment and commercial banks before it was repealed in 1999. He captures the move of anger building in the American political system nicely. HT AndrewJ via email.

The current crisis has uncovered fundamental flaws in the capitalist system, or at least the peculiar version of capitalism that emerged in the latter part of the 20th century in the US (sometimes called American-style capitalism). It is not just a matter of flawed individuals or specific mistakes, nor is it a matter of fixing a few minor problems or tweaking a few policies. The alacrity with which all the major investment banks decided to become "commercial banks" in the fall of 2008 was alarming "“ they saw the gifts coming from the federal government, and evidently, they believed that their risk-taking behaviour would not be much circumscribed. They now had access to the Fed window, so they could borrow at almost a zero interest rate; they knew that they were protected by a new safety net; but they could continue their high-stakes trading unabated. This should be viewed as totally unacceptable. There is an obvious solution to the too-big-to-fail banks: break them up. If they are too big to fail, they are too big to exist. The only justification for allowing these huge institutions to continue is if there were significant economies of scale or scope that otherwise would be lost. I have seen no evidence to that effect. Indeed, the evidence is to the contrary, that these too-big-to-fail, too-big-to-be-financially-resolved institutions are also too big to be managed. Their competitive advantage arises from their monopoly power and their implicit government subsidies. This crisis has exposed fissures in our society, between Wall Street and Main Street, between America's rich and the rest of our society. While the top has been doing very well over the last three decades, incomes of most Americans have stagnated or fallen. The consequences were papered over; those at the bottom "“ or even the middle "“ were told to continue to consume as if their incomes were rising; they were encouraged to live beyond their means, by borrowing; and the bubble made it possible. The consequences of being brought back to reality are simple "“ standards of living are going to have to fall.

9. No so much change - There was a flurry of hope/fear on Thursday that maybe Obama had grown a pair and was about to overturn the orthodoxy of using public money to prop up the 'Too Big to Fail' banks to print money for themselves. Obama threatened to break up the big banks and stop them using a government guarantee to back their gambling. It seemed. Simon Johnson at baselinescenario is not sure on closer examination. It may just be window dressing.

Increasingly, however, there are very real indications that the conversion is either superficial (on the economic side of the White House) or entirely a marketing ploy (on the political side). The Geithner strategy of being overly nice to the mega-banks was not good economics and has proven impossible to sell politically "“ the popular hostility to his approach is just common sense prevailing over technical mumbo jumbo. But selling incoherent mush with a mixed message and cross-eyed messengers could be even worse.

10. Totally irrelevant video - Here's Jon Stewart on The Daily Show on what that Massachusetts result means. Stewart has another go at Jim Cramer around 8.50mins. Good fun.