Wednesday's Top 10 with NZ Mint: A Babyboomer confesses; Beware the Hindenburg Omen; Europe's woes back; Hotchin and Watson probed; Dilbert

Here are my Top 10 links from around the Internet at 10 to 1 pm, brought to you in association with New Zealand Mint for your reading pleasure.

I welcome your additions and comments below, or please send suggestions for Thursday's Top 10 at 10 via email to bernard.hickey@interest.co.nz. Remember that registered commenters can more easily include links out in their comments. Use the box in the right hand column to register. We're turning off unregistered comments from September 12. I'll pop any surplus suggestions I get into the comment stream under the Top 10.

1. 'I'm sorry for my generation' - This mea culpa from Berkeley Professor Michael O'Hare about how his generation chose to go on a spending spree that is impoverishing their children. HT Matt via email.

O'Hare focuses particularly on California, which has its own problems with Proposition 13, that lowered property taxes.

I wonder if this resonates outside of America. Some of it might.

We have our own generation of baby boomers who removed a land tax and championed tax free capital gains on property. They are also blocking any new land tax. Many would argue they too have invested poorly in infrastructure here. Certainly New Zealand had an infrastructure spending drought in the 1980s, 1990s and for most of the 2000s.

O'Hare says there was a time in the 1940s, 1950s and 1960s when the grown ups in California saved by investing in infrastructure such as education and roads.

Then from the late 1970s onwards voters chose to be selfish. They could be babyboomers...

California voters realized that while they had done very well from the existing contract, they could do even better by walking away from their obligations and spending what they had inherited on themselves. “My kids are finished with school; why should I pay taxes for someone else’s? Posterity never did anything for me!”

An army of fake ‘leaders’ sprang up to pull the moral and fiscal wool over their eyes, and again and again, your parents and their parents lashed out at government (as though there were something else that could replace it) with tax limits, term limits, safe districts, throw-away-the-key imprisonment no matter the cost, smoke-and-mirrors budgeting, and a rule never to use the words taxes and services in the same paragraph.

Now, your infrastructure is falling to pieces under your feet, and as citizens you are responsible for crudities like closing parks, and inhumanities like closing battered women’s shelters. It’s outrageous, inexcusable, that you can’t get into the courses you need, but much worse that Oakland police have stopped taking 911 calls for burglaries and runaway children.

If you read what your elected officials say about the state today, you’ll see things like “California can’t afford” this or that basic government function, and that “we need to make hard choices” to shut down one or another public service, or starve it even more (like your university). Can’t afford? The budget deficit that’s paralyzing Sacramento is about $500 per person; add another $500 to get back to a public sector we don’t have to be ashamed of, and our average income is almost forty times that. Of course we can afford a government that actually works: the fact is that your parents have simply chosen not to have it.  

O'Hare is an interesting character. He was once falsely accused of being the Zodiac mass murderer. The detail is here.

2. Beware the Hindenburg Omen - Market chatterers and chartists are agog watching the Hindenburg Omen, a chart series that suggests a stock market collapse is nigh. Marketwatch.com's Mark Hulbert has a piece on this. Zerohedge reckons the third sign of the Hindenburg Omen has just been sighted. Oh the Humanity! There are many doubters.

The market is falling, the market is falling! That's the urgent warning coming from devotees of an esoteric market timing gauge known as the Hindenburg Omen. They say that it is a reliable indicator of an imminent stock market crash.

But I'm not so sure. In fact, my review of the data suggests that those using the Omen to predict a crash are good candidates to win the Chicken Little award.

The core idea behind the Hindenburg Omen, for those of you who haven't been reading your investment blogs over the last two weeks, is that it's bearish whenever there are a large number of both new 52-weeks highs and new 52-week lows on the NYSE.  

Couldn't resist including this video. Quite some newsreel.

3. Ireland downgraded - CNBC reports Standard and Poor's has cut Ireland's credit rating again and the European financial system is extremely nervous this morning. There were even wild unsourced and unconfirmed rumours on the Twittersphere this morning that Greece was hours away from pulling out of the euro. We are in for a rocky few weeks. HT Nicola at NZMint.

S&P cut Ireland's long term rating one notch to AA-minus, the fourth highest investment grade. A negative outlook indicates another downgrade is more likely over the next one-to-two years.

"The projected fiscal cost to the Irish government of supporting the Irish financial sector has increased significantly above our prior estimates," S&P said in a statement.

S&P said it now expects Ireland will need to spend 90 billion euros to support its banking system, up from its prior estimates of 80 billion euros, including capital used to improve the solvency of financial institutions and losses taken from loans the government acquired from banks.

4. Risk of European double dip - Nobel Prize winning economist Joseph Stiglitz, who we've interviewed, reckons the European economy is at risk of sliding back into recession.

"Cutting back willy-nilly on high-return investments just to make the picture of the deficit look better is really foolish,” Stiglitz, a Columbia University professor, told Dublin-based RTE Radio in an interview broadcast today.

Euro-area governments stepped up efforts to cut their deficits to below the European Union limit of 3 percent of gross domestic product after the Greek crisis earlier this year eroded investor confidence in the 16-member currency union. While the economy expanded at the fastest pace in four years in the second quarter, the recovery is showing signs of weakening.

“Because so many in Europe are focusing on the 3 percent artificial number, which has no reality and is just looking at one side of a balance sheet, Europe is at risk of going into a double-dip,” Stiglitz said.

5. The Fed is divided - CNN reports the US Federal Reserve's Open Market Committee was badly divided at last month's meeting.

At the meeting, seven officials expressed disagreement with all or part of Chairman Ben Bernanke's plan to change the way the Fed manages its $2.05 trillion in mortgage debt and U.S. Treasuries, The Wall Street Journal said, citing interviews with meeting participant.

Ultimately, Bernanke prevailed at the meeting in getting policy makers to approve reinvesting maturing securities in order to maintain the current portfolio, which is at high levels in an effort to bolster the flagging economy.

The Journal said the disagreements at the meeting included concern that Fed officials were sending a message that the economy was worse than it really was. The paper also said one official was concerned that banks were not acting to extend credit even with the large amount of money already in the system.

6. America's true national debt - The Burning Platform's Jim Quinn argues at Zerohedge America's national government debt is near a tipping point and that a US dollar collapse is now just a matter of time.

The true National Debt of the United States is $18.964 Trillion. Therefore, our debt as a percentage of GDP is really 130%. This is beyond the level reached during World War II. We are no longer the manufacturer to the world. We are the consumer to the world. The country adds $4 Billion per day to the National Debt.

Our GDP is stagnanting with future growth no better than 2% being realistic. Kenneth Rogoff and Carmen Reinhart, after analyzing data over 200 years throughout the world, have concluded that once debt reaches 90% of GDP, a tipping point is reached. Crisis and collapse will ensue. After looking at data from 44 countries spanning 200 years, they’ve concluded that at ratios of debt to GDP up to 90%, there’s not much correlation between government debt and economic growth.

Above 90%, however, median economic growth rates fall by one percentage point and average economic growth rates fall by about four percentage points. That makes the 90% level a kind of make-or-break point for countries that are hoping to grow their way out of debt. If the government debt load climbs above 90% of GDP, economic growth slows so much that growth is no longer a viable solution to reducing that debt. Above the 90% level, governments serious about reducing their debt load have to increasingly rely on “solutions” such as reducing wages and depreciating their currencies, which might over time increase global economic competitiveness enough to give a boost to national economic growth.

In the short to medium term, however, these “solutions” inflict real pain on the citizens of the countries since they reduce standards of living.

The U.S. is well beyond the tipping point. By the time Obama exits Washington DC in 2012, the ratio will be 140% of GDP. That is if the currency collapse doesn’t happen first.

7. Questions about Hotchin and Watson - Fran O'Sullivan writes in her NZHerald column about a campaign by Hanover Finance investor  John Hepburn to get the authorities to investigate the directors of Hanover Finance over the legitimacy of NZ$17 million of dividends paid to Mark Hotchin and Eric Watson in the final few months of the Hanover debacle and why they were paid out while the company was apparently insolvent. I wouldn't dare to question the legality of what happened at Hanover.

In my view there are still major questions over why the directors of a company that was facing financial issues - it did, after all, effectively shut up shop in July 2008 - agreed to pay out cash dividends in the first place instead of conserving its assets.

A finance go-round may have been used to reduce Watson and Hotchin's inter-related loans exposures. When it came to crunch-time they may have been persuaded to tip $10 million of cash and $40 million of property assets back into the pot.

8. UK mortgage rates at 14%? - The Telegraph reports a forecast the Bank of England will have to increase the official rate there to 8% to contain the inflationary pressures now building in the economy. That would lead to mortgage rates at 14%. HT Hugh via email.

Andrew Lilico, chief economist at the influential Policy Exchange think tank, has warned of an interest rate environment not seen since the 1990s.

He said the rise could happen as the recovery beds in and Government measures to stave off a recession lead to an explosion in the money supply. A brief double dip recession early next year is likely, he said, but it "would be quite compatible with a boom thereafter".

That boom would quickly run out of control, as the £200bn of "money printing" by the Bank during the crisis would lead to "a huge expansion in the money supply, which will lead to inflation".

9. A change in mindset - Felix Salmon from Reuters has a good take on the woeful US house sales figures overnight. It's ugly over there.

The number is so low that it looks like a statistical aberration: let’s hope it is. Because if it isn’t, the news is gruesome. It means that despite record-low mortgage rates, people aren’t able to buy houses: essentially all the benefit from those low rates is going to people who already own their homes and are taking the opportunity to refinance.

The news also means that there’s a big gap between buyers and sellers: the market isn’t clearing. Sellers are convinced that their homes are worth lots of money, or will rise in price if they just hold out a bit longer; buyers are happily renting, waiting for prices to come down. And entrepreneurial types, whom one would expect to arbitrage the two by buying houses with super-cheap mortgages and renting them out at a profit, don’t seem to have found those opportunities yet.

Houses are rarely a liquid asset; they were, briefly, during the housing boom, but now they’re more illiquid than ever. America is a country where two generations of homeowners have learned to consider their houses an asset; they’re rapidly learning that at times like these, a house can look much more like a liability. (And refinancing your mortgage is just liability management.)

The enormous repercussions of that change in mindset are only just beginning to be felt.

10. Totally irrelevant video - Jon Stewart has another go at Fox news on the Ground Zero Mosque. He nails Fox and Rupert Murdoch big time. Love it. Funny as hell. HT Troy via email.