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Top 10 at 10: Roubini sees double dip recession; Milk powder 'blip'; Dilbert; Daily Show

Top 10 at 10: Roubini sees double dip recession; Milk powder 'blip'; Dilbert; Daily Show

Here are my Top 10 links from around the Internet at 10am. My apologies for lateness. I welcome your additions in the comments below or please email your suggestions for Wednesday's Top 10 at 10 to bernard.hickey@interest.co.nz We at interest.co.nz have plenty of empathy for good reasons... Dilbert.com 1. Nouriel Roubini from RGE Economics writes in his latest missive that he is worried about a double dip recession. He even mentions New Zealand in a wrap-up of countries who will slow spending because of high debts. HT Reuel Newman via email.

Domestic private demand, especially consumption, is now weak or falling in over-spending countries (the US, UK, Spain, Ireland, Australia and New Zealand, etc.), while not increasing fast enough in over-saving countries (China, other Asian countries, Germany and Japan, etc.) to compensate for the reduction in these countries' net exports. Thus, there is a global slackening of aggregate demand relative to the glut of supply capacity, which will impede a robust global economic recovery. There are also now two reasons to fear a double-dip recession. First, the exit strategy from monetary and fiscal easing could be botched, because policymakers are damned if they do and damned if they don't. If they take their fiscal deficits (and a potential monetization of these deficits) seriously and raise taxes, reduce spending and mop up excess liquidity, they could undermine the already weak recovery. But if they maintain large budget deficits and continue to monetize them, at some point"”after the current deflationary forces become more subdued"”bond markets will revolt. At this point, inflationary expectations will increase, long-term government bond yields will rise and recovery will be crowded out. A second reason to fear a double-dip recession concerns the fact that oil, energy and food prices may be rising faster than economic fundamentals warrant, and could be driven higher by the wall of liquidity chasing assets, as well as by speculative demand. Last year, oil at $145 a barrel was a tipping point for the global economy, as it created a major income shock for the US, Europe, Japan, China, India and other oil-importing economies. The global economy, barely rising from its knees, could not withstand the contractionary shock if similar speculative forces were to drive oil rapidly towards $100 a barrel. So, the end of this severe global recession will be closer at the end of this year than it is now, the recovery will be anaemic rather than robust in advanced economies, and there is a rising risk of a double-dip recession. The recent market rallies in stocks, commodities and credit may have gotten ahead of the improvement in the real economy. If so, a correction cannot be too far behind.
2. Bancorp Treasury Services client adviser Cliff Brown reckons the bounce in wholesale milk powder prices this month was a blip and dairying remains a difficult area. He points out prices are back near their historic norm after a bubble and the NZ dollar isn't that high. The leap upwards during 2006 and 2007 was clearly a bubble, and the market has simply returned to "normal" levels. The latest price spike is just one move in an erratic series and prices could easily fall back again, Brown writes in the NZ Herald.
International dairy prices have simply returned to "normal" after a two-year windfall bonus. The NZD/USD is a little higher than its long-term history but not exceptionally so. It is unrealistic to be overly negative about the present state of affairs, and it does the country no favours to base business development decisions upon false impressions and short-term trends. Some valuable lessons can be drawn from the turbulent years. Dairy and other industry leaders are more acutely aware of how managing economic risk is key to fostering business success. Hopefully, this understanding will last beyond the next dairy price bubble. The clearest lesson to be drawn for milk powder prices, the New Zealand dollar, or other market price variables such as interest rates is that it is prudent to figure out whether the business is sustainable at a wide range of those prices, and budget accordingly. An export business that only makes money if the NZD/USD is below (say) US60c is not a sustainable proposition.
3. The US stock market is seriously over-valued when you look at one of the key measures of value: a market-wide price to earnings ratio, according to the Bespoke Investment Group. The chart says it all.
A P/E ratio rising from 10 to 18.35 is what happens when the S&P 500 rallies 50% (the P) while earnings (E) continue to decline. Obviously if the current bull is going to have any sustainability at all, earnings will have to start growing again.  But for now, as evidenced by the skyrocketing P/E ratio, investors are paying up on the hopes of future earnings growth.
4. Joseph Stiglitz, who we've interviewed on this site, reckons the US and the rest of the industrialised world need to spend even more to get the economy going. I still don't understand how you can borrow and spend your way out of a problem caused by too much borrowing and spending, even if it is the government instead of consumers who are borrowing and spending.
The Obama administration erred in asking for too small a stimulus, especially after making political compromises that caused it to be less effective than it could have been.  It made another mistake in designing a bank bailout that gave too much money with too few restrictions on too favorable terms to those who caused the economic mess in the first place "“ a policy that has dampened taxpayers' appetite for more spending. But that is politics. The economics is clear: the world needs all the advanced industrial countries to commit to another big round of real stimulus spending. This should be one of the central themes of the next G-20 meeting in Pittsburgh.
5. Ed Harrison at Credit Writedowns reckons we are in for a long period of slow consumer spending in the United States. He talks about a balance sheet recession. It all sounds very Japanese. They depict a tsunami of debt in the U.S. economy that has been building for four decades.  Even debt service levels have been inching inexorably higher since the 1980s. Clearly, the U.S. consumer is tapped out. And they are cutting consumption and reducing debt as a result.
So, for America, it is not business but consumers which are going to suffer a balance sheet recession.  In looking for evidence on Koo's thesis, we need to look at consumption and retail sales. ne can only conclude that the asset-based economy of the last quarter century is over. It was based not just on a dubious productivity miracle but also on mountains of debt and over-consumption.  The new normal is debt reduction and savings.
This chart showing retail sales in America adjusted for inflation is a tad frightening.
7. Gillian Tett at the Financial Times looks at the idea of creating 'living wills' for banks, whereby they have to plan for how to fail smoothly. How entertaining. A great idea.
The issue at stake revolves around a matter that often bedevils personal wills "“ namely, the tricky question of transparency. In order to make it easy to wind down a large bank, it is crucial to have structures that are relatively simple and streamlined. However, in the past few decades, the largest banks in the world have stealthily built corporate structures that are fiendishly complex, straddling numerous borders and plagued with offshore entities. Lehman Brothers was but one example of that. The pattern, of course, is no accident. After all, large investment banks excel in regulatory and tax arbitrage, and all that cross-border complexity and opacity enables them to exploit such loopholes with ease. The pattern is also one reason that the living will idea could be very controversial, if regulators ever try to push it through. After all, if the banks were ever forced truly to streamline their operations, it might become that much harder to jump between tax regimes, for example. To my mind, that is one very good reason that the living will idea should be roundly applauded, almost irrespective of whether it might help stem any future crises. The degree to which large banks have been allowed to get away with tax arbitrage in recent years is nothing short of scandalous (and potentially even more shocking than some of their pay practices). But sadly, this is also one reason that the living will idea may never fly. Six months ago, the largest global banks were on the back foot in political terms as they reeled from the shock of the Lehman Brothers collapse. However, these days they are regrouping with startling speed.
8. Felix Salmon at Reuters points out that the Federal Deposit Insurance Corp that insures banks can't run out of money, essentially because the US government can print more if needed. There was some commentary about this because it appears to have run out of its last batch of funds after cleaning up the mess around Colonial Bank over the weekend.
The insurance fund might be down to its last $13 billion, but that number is really useful only for accounting purposes. There's a government guarantee on bank deposits; the FDIC is merely the arm of the government which administers that guarantee and tries to make sure, by charging banks insurance premiums, that it doesn't cost the taxpayer any money over the long term.
9. The Daily Show's John Oliver asks a Columbia Business School ethics professor if he's good at his job in the wake of all the Wall St scandals. He also asks a few Harvard MBA students (hmm I wonder...) why they're not signing an ethics oath. It's hilarious and scary all at the same time. This will brighten your day. It ends with an interesting discussion on a white board about an anal chastity default swap...
The Daily Show With Jon Stewart Mon - Thurs 11p / 10c
MBA Ethics Oath
www.thedailyshow.com
Daily Show Full Episodes Political Humor Spinal Tap Performance
10. I couldn't resist this video because it's just plain funny.

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