Here are my Top 10 links from around the Internet at 10am. I welcome your additions and comments below or please email your suggestions for Wednesday's Top 10 at 10. 
1. Must read - Nouriel Roubini is right back on form in this cracker of a column in the FT about the 'mother of all carry trades facing an inevitable bust.'
The combined effect of the Fed policy of a zero Fed funds rate, quantitative easing and massive purchase of long-term debt instruments is seemingly making the world safe "“ for now "“ for the mother of all carry trades and mother of all highly leveraged global asset bubbles. While this policy feeds the global asset bubble it is also feeding a new US asset bubble. Easy money, quantitative easing, credit easing and massive inflows of capital into the US via an accumulation of forex reserves by foreign central banks makes US fiscal deficits easier to fund and feeds the US equity and credit bubble. Finally, a weak dollar is good for US equities as it may lead to higher growth and makes the foreign currency profits of US corporations abroad greater in dollar terms. The reckless US policy that is feeding these carry trades is forcing other countries to follow its easy monetary policy. Near-zero policy rates and quantitative easing were already in place in the UK, eurozone, Japan, Sweden and other advanced economies, but the dollar weakness is making this global monetary easing worse. Central banks in Asia and Latin America are worried about dollar weakness and are aggressively intervening to stop excessive currency appreciation. This is keeping short-term rates lower than is desirable. Central banks may also be forced to lower interest rates through domestic open market operations. Some central banks, concerned about the hot money driving up their currencies, as in Brazil, are imposing controls on capital inflows. Either way, the carry trade bubble will get worse: if there is no forex intervention and foreign currencies appreciate, the negative borrowing cost of the carry trade becomes more negative. If intervention or open market operations control currency appreciation, the ensuing domestic monetary easing feeds an asset bubble in these economies. So the perfectly correlated bubble across all global asset classes gets bigger by the day. But one day this bubble will burst, leading to the biggest co-ordinated asset bust ever: if factors lead the dollar to reverse and suddenly appreciate "“ as was seen in previous reversals, such as the yen-funded carry trade "“ the leveraged carry trade will have to be suddenly closed as investors cover their dollar shorts. A stampede will occur as closing long leveraged risky asset positions across all asset classes funded by dollar shorts triggers a co-ordinated collapse of all those risky assets "“ equities, commodities, emerging market asset classes and credit instruments.
We have all been warned.
This unraveling may not occur for a while, as easy money and excessive global liquidity can push asset prices higher for a while. But the longer and bigger the carry trades and the larger the asset bubble, the bigger will be the ensuing asset bubble crash. The Fed and other policymakers seem unaware of the monster bubble they are creating. The longer they remain blind, the harder the markets will fall.
2. Japan's fiscal crisis - Ambrose Evans Pritchard at The Telegraph has shone his dark light on an area of the global financial system that hasn't been getting a lot of attention lately: Japans' fiscal crisis. His report is startling. It also paints a picture of what happens to an economy over the long term that has a demographic problem, a zombie bank problem and decades of stagnation after a property bubble burst. Sound familiar?
The rocketing cost of insuring against the bankruptcy of the Japanese state is telling us that the model has smashed into the buffers. Credit default swaps (CDS) on five-year Japanese debt have risen from 35 to 63 basis points since early September. Japan has suddenly decoupled from Germany (21), France (22), the US (22), and even Britain (47). Regime-change in Tokyo and the arrival of Yukio Hatoyama's neophyte Democrats "“ raising $550bn (£333bn) to help fund their blitz on welfare and the "new social policy" "“ have concentrated the minds of investors at long last. "Markets are worried that Japan is going to hit a brick wall: the sums are gargantuan," said Albert Edwards, a Japan-veteran at Société Générale. Simon Johnson, former chief economist of the International Monetary Fund (IMF), told the US Congress last week that the debt path was out of control and raised "a real risk that Japan could end up in a major default". The IMF expects Japan's gross public debt to reach 218pc of gross domestic product (GDP) this year, 227pc next year, and 246pc by 2014. This has been manageable so far only because Japanese savers have been willing "“ or coerced "“ into lending for almost nothing. The yield on 10-year government bonds has been around 1.30pc this year, though they jumped to 1.42pc last week. "Can these benign conditions be expected to continue in the face of even-larger increases in public debt? Going forward, the markets capacity to absorb debt is likely to diminish as population ageing reduces saving," said the IMF.
3. Aussie Parity Party - A bunch of economists are now forecasting the Australian dollar will hit parity versus the US dollar next year because it is benefiting so much from the Chinese economy. We are so lucky to be right next door to the lucky country. Here's the Bloomberg report.
Australia's dollar is heading toward parity with the U.S. currency for the first time as investors hungry for China's economic growth buy into the world's biggest exporter of iron ore used in making steel. The so-called Aussie has soared 35 percent the past 12 months, more than any other currency tracked by Bloomberg. Citigroup Inc., Calyon, Barclays Capital and National Australia Bank Ltd. forecast it will trade at 1 U.S. dollar next year, implying an additional 11 percent gain. Hedge funds and other large traders have more bets than anytime since July 15, 2008, that the rally will continue, data from the Washington-based Commodity Futures Trading Commission show.
4. GDP mirage - Michael Mandel at BusinessWeek makes the case that apparent US GDP strength is a mirage because it overlooks cuts in research and development, product design, and worker training. HT Mish.
The official statistics are not designed to pick up cutbacks in "intangible investments" such as business spending on research and development, product design, and worker training. There's ample evidence to suggest that companies, to reduce costs and boost short-term profits, are slashing this kind of spending, which is essential for innovation. Without investment in intangibles, the U.S. can't compete in a knowledge-based global economy. Yet you won't see that plunge reflected in the GDP and productivity statistics, which are still too focused on more traditional sectors, such as motor vehicles and construction. In effect, government statisticians are trying to track a 21st century bust with 20th century tools. Not only is that distorting the critical data that investors, policymakers, and corporate executives use to evaluate the economy, but it might also be creating a false sense of relief as Americans battle a brutal recession.
5. Cheap Jobs? - Mish at Global EconomicAnalysis has worked out that the US government's US$207.3 billion of stimulus spending so far has created 640,329 jobs at a cost of US$323,793 per job. Maybe not such a good investment.... Even if Obama hits his 3.5 million jobs target the numbers are ugly.
Funds paid out so far = $83.8 billion + $52.1 billion + $71.4 billion = $207.3 billion $207,300,000,000 / 640,329 = $323,739.83 per job created Now let's assume this stimulus package will eventually create (or save) 3.5 million jobs and all the money (but no more) will be spent. Here's the math again. $787,000,000,000 / 3,500,000 = $224,857.14 per job created
6. Want to sleep? - I think sleep is overrated. Here is a piece from MoneyWatch with 5 scenarios on what could go wrong with the US economy. All very plausible. They are: Runaway inflation; Stagflation; Crippling government debt; A 10 year Japanese style recession; The Dollar Collapses. The one option they didn't include was all of the above. Here's Barry Ritholz on the Japanese lost decade scenario.
"My biggest fear is the U.S. becomes like Japan. During their economic crisis in the 1990s, the Japanese lowered interest rates to zero, never forced their ailing banks to write down their bad assets, and threw a ton of money at bad banks that accomplished nothing. That looks like what we're doing right now. We're not requiring banks to take write-downs, and we've suspended mark-to-market accounting so that banks can hide their losses. And we're propping up banks that are borderline insolvent with billions of dollars in government assistance even though they're not lending as they're supposed to do. If we follow Japan's model, we may have Japan's results "” 10 years of subpar economic growth and a lot of government spending on zombie banks that refuse to lend. The Nikkei stock index has fallen more than 70 percent from its 1989 peak as a consequence. That could be our future."
7. Lobbyists win -- again - US Congressman Ron Paul says his broadly supported (by the public) bill to Audit the Fed has been gutted in the equivalent of select committee, Bloomberg reported.
The bill, with 308 co-sponsors, has been stripped of provisions that would remove Fed exemptions from audits of transactions with foreign central banks, monetary policy deliberations, transactions made under the direction of the Federal Open Market Committee and communications between the Board, the reserve banks and staff, Paul said today. "There's nothing left, it's been gutted," he said in a telephone interview. "This is not a partisan issue. People all over the country want to know what the Fed is up to, and this legislation was supposed to help them do that." The Fed, led by Chairman Ben S. Bernanke, has come under greater congressional scrutiny while attempting to end the financial crisis by bailing out financial firms and more than doubling its balance sheet to $2.16 trillion in the past year. The central bank is also buying $1.25 trillion of securities tied to home loans. Paul, a member of the House Financial Services Committee, said Mel Watt, a Democrat from North Carolina, has eliminated "just about everything" while preparing the legislation for formal consideration. Watt is chairman of the panel's domestic monetary policy and technology subcommittee.
8. Cold Turkey - Bob Janjuah, chief strategist at Royal Bank of Scotland, is the bear's bear. Here's his latest missive, as cited by FTAlphaville. Warning: it carries a bitter taste.
Near term I think the battle will be between Central Bankers, who deep down, and I think privately at least, FEAR bubbles, FEAR failure and FEAR FORCED abandonment if current policies are persisted with too long and/or added to, vs Fiscal Authorities, who by definition want short-term fixes (there is after all an election cycle in the UK & in the US next yr). This is like a rumble in the jungle between the VOLCKER-ites and the GREENSPAN-ites, with GREENSPAN representing the Fiscal Authorities (he was after all surely the most politicised central banker ever). Are the Volcker-ites up to a fight? I think so. I hope so. Kevin feels and I FEAR however that they aren't/they won't. In which case MORE policy and then, very soon thereafter DISASTER, will follow. In this rumble the inevitable outcome is deflation and multi-yr austerity. China will be the Ref in the boxing ring.
9. Don't wait too long - Wolfgang Munchau at the FT.com reckons the world's central bankers shouldn't wait too long before beginning the big exit. He points out it is the world's central banks who should apply the brakes rather than governments. His views don't match those of Alan Bollard here, who seemed to suggest last week he expected budget stimulus to be withdrawn before he would withdraw monetary stimulus.
As the world economy heads into a still uncertain recovery, this is not the time to apply the fiscal brakes. But it is perhaps time for a moderate monetary tightening. Unwinding the unusual policy measures like quantitative easing should be a first step, but without higher interest rates there is a risk that this policy would lead to renewed financial instability, which might be difficult and costly to undo.
10. Outlook for Shiti - The New York Times has a long, detailed look at the outlook for the ultimate 'Too Big To Fail' bank which is Citigroup.
OVER the past 80 years, the United States government has engineered not one, not two, not three, but at least four rescues of the institution now known as Citigroup. While Citigroup has written down tens of billions of dollars' worth of mortgages on its books, there are looming problems in its huge credit card portfolio. Of the company's $1.2 trillion in credit commitments outstanding in the second quarter, $873 billion were credit card lines. A measure of the bank's efforts to wrestle that problem to the ground is the interest it charges customers: in October, Citigroup raised interest rates on some credit card holders to 29.99 percent. Chris Whalen, editor of the Institutional Risk Analyst, calls Citigroup "the queen of the zombie dance," referring to the group of financial institutions that the government has on life support. "They are hoping that a combination of bank assistance and maximizing revenue and buying time will let them survive," he said. "When I look at the whole picture, Citigroup is in the process of resolution. I continue to believe the equity is worth zero and that the company will have to go to bondholders for some kind of money to make the bank stable."
Here's my favourite quote from the article. It's from 1999 just after Glass-Steagall was repealed, which allowed investment banks to join together to regular banks.
"By liberating our financial companies from an antiquated regulatory structure, this legislation will unleash the creativity of our industry and insure our global competitiveness," Mr. Weill and Mr. Reed, Citigroup's co-chairmen and co-chief executives, said in a statement after Congress repealed the law. "As a result, all Americans "” investors, savers, insureds "” will be better served."
Sure thing.
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