Top 10 at 10 to 12: Gold link to house prices?; Detroit an investor paradise; The anti-Fink; Dilbert

Here are my Top 10 links from around the Internet at 10 to 12. I welcome your additions and comments below or please send suggestions for Friday’s Top 10 at 10 to bernard.hickey@interest.co.nz We have good feng shui at Interest.co.nz... Dilbert.com 1. Price fall coming - Glenn Thomas at Gold Survival Guide has crunched the numbers to work out the ratio of New Zealand median house prices to gold (ozs) to see if the two have any sort of connection. There does seem to have been a reasonably close correlation from 1980 to about 2006, but since then gold has sprinted ahead, reducing the ratio. If the pattern followed, house prices would follow too. I'm not sure I understand the direct connection, but it's certainly curious and a great looking chart. I suppose it's all about the deflated value of money and the relative value of hard assets. It suggests that house values have been pumped up by cheap debt, which I do agree with. Here's what Glenn has to say.
If history repeats and the trends in the US and UK are similar to NZ, could we in fact be heading down close to 50 ounces again by the end of the current financial crisis? Also worth noting is that while house prices in NZD terms peaked in 2007, priced in gold they had already topped out in 2005. So, at first glance it may seem like you’ve “missed the boat” if you didn’t sell housing and buy gold in 2005 when the top was in at 500 oz. With the ratio currently standing at about 250 oz you would have been able to buy back the same house now and still have 250 ounces left over. Or put another way you could now buy 2 houses. That is, twice the buying power in real estate by holding gold for 4 years. However if we consider that in the 70’s the ratio bottomed at 50, this is a further 80% drop in the ratio from today’s value!

2. Cheap at the price - This story in The Age captures the signs of the times in Australia nicely. It's about some refugees from El Salvador who now live in Australia and are buying investment properties in America. They are essentially leveraging their capital gains from the bubbly Australian housing market to pick through the wreckage in America to pick up some bargains. Anyone in New Zealand doing this? HT Ross Palmer via email.
The couple, originally from El Salvador, have never been to Phoenix. But they already own two other homes purchased there this year for $A41,000 and $A52,100, as well as a fourth rental asset in Melbourne. They are part of a small wave of Australian investors picking over the ruins of the US property market crash, many of whom have been frustrated by Australia's surging house prices. However, experts have warned that US property prices are depressed for sound economic reasons and international bargain-hunters risk losing all in a market they do not understand. They say the dangers of being ripped off or hit with unexpected taxes and costs are high. But for Mrs Canepa, a mother of two teenagers, it is the sharemarket and superannuation that are dubious since the financial crisis. She instead put her faith in US property to fund her retirement. ''Here in Australia, people on basic salaries can't even afford to think of buying an investment house because it's too much,'' she says. ''But in America it's affordable and there are great opportunities.''
3. Too big to save - Simon Johnson writes in Huffington Post about the risks of allowing America's 'Too Big to Fail' banks to continue growing. The Congress is currently doing its best to water down the 'Volcker Rule' proposed to put the monster banks in a straitjacket. HT Andrew Wilson via email.
The administration proposes -- in one part of the Volcker Rules -- to cap the size of individual banks relative to total nominal liabilities of the financial system. That makes no sense at all -- go talk to the Irish, the British, the Swiss, or the Icelanders (when they become less furious and are willing to talk). Big banks have a funding advantage -- the implicit government guarantee makes it easier for them to raise capital and cheaper for them to borrow money. They will become larger. There are no economies of scale in banking above $100 billion in total assets, but this is not about economics. It's the politics of becoming large in order to become even bigger -- building your empire, and paying yourself and your people a lot more money (in the good times) and making it more likely your fiefdom survives (in bad times). The biggest banks in some European countries today are already too big to save. Unless we take immediate and real action to reduce the power -- and size -- of our largest banks, we are heading in exactly the same direction.
4. A good move - New Zealand's government is fleshing out plans for an Australian-style Productivity Commission. It seems there was a decision in cabinet on Monday. Brian Fallow at the NZHerald has a nice wrapup of what people think of the idea here. It seems to be the one thing from the 2025 Taskforce that might actually get adopted. That's a good move. 5. Bank boycott  - The Guardian points out that European governments have staged their own boycott of sorts of American investment banks, lashing out at institutions they believe helped create the financial crisis. HT Gertraud via email.
For the first time in five years, no big US investment bank appears among the top nine sovereign bond bookrunners in Europe, according to Dealogic data compiled for the Guardian. Only Morgan Stanley ranks at number 10. Goldman Sachs doesn't make the table. Goldman made it to number five last year and in 2006, and number eight in 2007, the data shows. JP Morgan was in the top ten last year and in 2007 and 2006 but doesn't appear this year. "Governments do not have the confidence that the excessive risk-taking culture of the big Wall Street banks has changed and they still cannot be trusted to put the stability of the financial system before profit," said Arlene McCarthy, vice chair of the European parliament's economic and monetary affairs committee. "It is no surprise therefore that governments are reluctant to do business with banks that have failed to learn the lesson of the crisis. The banks need to acknowledge the mistakes that were made and behave in an ethical way to regain the trust and confidence of governments."
6. Elephant in the balance sheet - One of the things not spoken about much these days is how American bank balance sheets are built on fictional valuations that are not 'marked to market'. This fiction can survive as long as banks aren't forced to recognise how many of their mortgages are worthless. Rolfe Winkler at Reuters points this out in a piece talking about whether the US government will allow 'principal writedowns' by banks as a way for consumers to get out of debt traps.
Principal writedowns are the only sure-fire way to slow foreclosures, but that means hitting banks’ capital big time. Consider, for instance, that three-quarters of the ~$1 trillion of second-lien mortgages in the U.S. are on commercial bank balance sheets. Writing down principal to some level that again gives folks equity in their home would wipe out a meaningful share of these second-liens. Many banks may not have the capital to withstand that. And if folks think principal writedowns will become official policy, suddenly many will just stop paying their mortgage. These are big reasons this is so controversial inside the administration.
7. "I was completely wrong on house prices: ask me how" - Economist Steve Keen made a now famous bet with Rory Robertson about house prices. The loser had to walk to the top of Mt Kosciousko wearing a t-shirt advertising how the bet was lost. Here's one of the designs for the T-shirt. Keen wants to prove he will eventually win by printing charts on his T-shirt. A man after my own heart. Maybe there's a business model for us. Charts as T-Shirt designs. By the way, I need to pay out on my bets. Could those who bet against my 30% pick please email me. There were a few bottles of wine...

8. Fink no hero - Regular readers might recall I linked to a long (and generally glowing) Vanity Fair piece on hedge fund maestro Larry Fink at BlackRock. Here's the antidote from former monoline executive Tom Adams at Naked Capitalism, who takes an (er) alternative view. Worth it for balance.
So why is Larry Fink and his company the subject of such a glowing article? I had actually thought he was a pretty good businessman before I read this but he comes off looking like a bad analyst, a vengeful ratfink and a parasite who made most of his and his company’s money through government connections, blatant breaches of conflict and rule bending (oh, but he does fly commercial, so he must be a real down to earth guy). Seriously, from the time of the S&L crisis, has he ever not had a big government contract to keep the lights on, while submitting million dollar a day contracts which the government then fights to keep secret in flagrant violation of all established practices? Where would Blackrock be without the FDIC, the RTC, LTMC, Fannie Mae, Freddie Mac, AIG, dozens of desperate state pension funds? When will someone audit their fees and assess what exactly it is they get paid for and why it is Palooka Bank in Iowa couldn’t do a better job? At least Palooka Bank would probably know better than to bet billions of dollars of its own and other people’s money on a New York City landlords being able to magically toss tenants out on the street. Perhaps articles like these, which are so wildly out of tune with the current popular attitudes towards Wall Street genius, are finally reaching a saturation point with journalists and publications. Even as they try to celebrate one of the great bankers, they seem to run short of noteworthy accomplishments beyond cozying up to the great government fee paying machine.
9. 'We don't buy it' - The pound fell heavily this week after Fitch warned Britain's parlous budget position endangered its AAA credit rating. Ambrose Evans Pritchard from The Telegraph has the story. Double dip anyone?
Brian Coulton, the agency's head of sovereign ratings, said the UK has seen "the most rapid rise in the ratio of public debt to GDP of any AAA-rated country" and is courting fate with its leisurely plan to halve the deficit by the middle of the decade. "It is frankly too slow, a pedestrian pace. Why the UK thinks it has more time than other countries , we're not sure. This needs to be reoriented," he told the Fitch forum on sovereign hotspots. he Government is clearly counting on a "Korean" recovery, modelled on Korea's fast return to trend growth following the Asian crisis in 1998. It relies on rising output and tax revenues to plug much of the deficit. "This is an optimistic assumption," said Fitch. There is a "distinct possibility" that Britain will face something closer to Japan's 'Lost Decade' when a bursting debt bubble left the country on a permanently lower growth path. "The UK faces the same massive deleveraging by the private sector," said Mr Coulton.
10. Totally irrelevant video - John Clarke pretends to be an Australian minister talking about an oil tanker in Western Australia where the 'front fell off'

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