Here are my Top 10 links from around the Internet at 10 to 5 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.
I'll pop any surplus suggestions I get into the comment stream
1. We're better than the Australians at something - Our housing bubble is bigger than the Australian housing bubble in many ways, according to Australian investment banker and blogger Leith van Onselen at the Unconventional Economist. HT Stephen. A must read I reckon.
He points out that New Zealand's housing assets to GDP ratio is over 3, which is almost as bad as the Japanese housing bubble before it popped in the late 1980s.
Prices there have halved over the last 20 years.
This is another cracking housing bubble post of his from August.
Here's Leith's argument.
Another way to measure the growth in housing values is to plot the total value of the residential housing stock against a country's GDP. As discussed in my previous post, Battle of the Bubbles, a country's housing market is clearly in bubble territory (severely over-valued) when its housing stock is valued at more than three times GDP.
Despite as significant reduction of mortgage interest rates over the past 20 years, the ratio of average interest payments (comprising mortgages plus other consumer debt) to average HDI has increased from around 8% in 1991 to 11 per cent currently (after peaking at around 15% in 2008).
The situation is similar in Australia, albeit less extreme. Whilst this ratio may look benign on the surface, only 35% of households in both New Zealand and Australia have a mortgage. So the actual repayment burden on indebted households is much larger than implied by the average.
He summarises thus:
The end result is that we are now left with Trans-Tasman banking systems where both nation's banks continue to borrow heavily offshore to inflate their housing markets under the cover of an implied government (taxpayer) guarantee that would become explicit should global credit markets again freeze. Leaving aside the broader competition effects of the guarantees, how are our situations all that different from how Fannie Mae and Freddie Mac operated in the United States prior to the GFC, with an implied guarantee from the United States Government?
Both Fannie/Freddie and the Trans-Tasman banks were privately owned enterprises that were 'too-big-to-fail' that engaged in risky finance under the premise of taxpayer support.As it turns out, New Zealand's taxation treatment of property is truly world-beating. First, New Zealand provides essentially the same negative gearing concessions as Australia, so property investors are permitted to write-off property losses against other forms of income (e.g. wages and salaries).
Second, New Zealand is the only jurisdiction in the OECD that does not have capital gains tax, so once an investment property is sold, the money remains with the investor. Third, the New Zealand Government does not levy stamp duties on property transfers and loans.
Finally, New Zealand’s 4% deprecation on buildings is higher than Australia’s 2.5%.
There's a half-off sale in the world's tallest building. Even with an address at the iconic Burj Khalifa, rents for residences in the tower are not immune from Dubai's real estate crash.
Indeed, nearly a year after it was inaugurated with a massive water-and-fireworks display, about 825 of the tower's 900 ultra-luxury apartments remain unoccupied, according to Better Homes, a real estate brokerage in Dubai.
The cost of renting a studio with floor-to-ceiling windows, marble fixtures and wooden floors has dropped to $1,815 a month from $3,025, while a one-bedroom apartment is available for $2,722 (it used to be $4,536), the brokerage says.
3, The problem with America - American hedge fundie Paul Tudor Jones puts his finger on the problem in America's relationship with China. America capitulated without a fight to get some cheap trinkets. Now's it's trying to fight back and we're all suffering. Worth a read. Jones is an interesting character.
That so many Americans continue to accept this suppression of a variety of exchange rates against the dollar is probably a function of the fact that for so long this suppression provided benefits such as cheap goods and cheap credit. In addition, for a while, manufacturing jobs seemed to be replaced by jobs in the service economy and construction industry without any economic disruption or any rise in the unemployment rate. However, the bursting of the credit bubble exposed the true structural decay that had occurred in the US economy.
But, like zombies, many Americans still cling to the naive belief that we can return to the good times of the 90s and the earlier part of this decade, unable or unwilling to recognize that those high times were a debt-driven anomaly. This delusion is fueled by a myriad of financial pundits who warn about the dangers of disrupting free trade. They are quick to point out that the Ryan Bill is contrary to rules of the World Trade Organization.
Incredibly, in the WTO’s rules of governance, there is not one reference in any of its documents to the underlying bilateral exchange rate between two countries when trying to reconcile trade differences. It is like trying to referee a World Cup match with a soccer ball that only the players can see. In the case of a controlled or manipulated exchange rate, it is patently unfair if the currency of one partner is grossly misaligned, as the RMB/USD rate is.
4. Greece to default within 3 years - Bloomberg reports that PIMCO, the world's biggest bond fund, is saying it expects Greece to default within 3 years.
“I have never seen 11 per cent of GDP being delivered” under the current program assumptions, Mr El Erian said. The debt burden at the end of the process is likely to be higher than it was at the beginning, he said. “The most likely outcome is at some point when the rest of system will be reinforced, they will have to address the debt overhang and its competitive position,” he said.
Credit-default swaps protecting Greek government bonds for a year cost 568 basis points, 66 basis points less than 10-year protection, according to CMA in London. Before the nation was rescued with the 110 billion euro international loan package in May, investors concerned Greece would renege on its debt commitments were willing to pay 665 basis points more for one-year swaps than for 10-year insurance.
Something's amiss. Without a bubble, Wall Street is a lackluster industry. Profitable?
Yes. But its ability to turn in the kind of performance it regularly turned out in the 2000s, without hollow capital being created out of dead-on-arrival Internet start-ups or straight-to-default mortgages is questionable at best.
6. Is it fair for anyone to be paid A$16 million in one year's work? - The Age reports Ralph Norris and the board of Commonwealth Bank of Australia seem to think so.
THE prospect of an investor revolt over chief executive Ralph Norris's $16 million reward package fizzled out after 90 per cent of shareholders backed his bonus deal at Commonwealth Bank's annual meeting yesterday.
7. The drugs don't work - Ian Fletcher gives 6 reasons why America should abandon the Free Trade Myth. HT John via email.
The price of living in the fantasy world of free-trade economics continues to rise for America. Failure to recognize the pitfalls will probably mean a continuing struggle to emerge from recession, as much U.S. domestic demand leaks abroad due to the trade deficit, rather than being recycled at home. And America will continue to lose key industries: not just the primitive ones a developed nation should shed, but the high-tech jobs of the future.
Any serious discussion of free trade must confront David Ricardo’s celebrated 1817 theory of comparative advantage, whose tale of English cloth and Portuguese wine is familiar to generations of economics students. According to a myth accepted by both laypeople and far too many professional economists, this theory proves that free trade is best, always and everywhere, regardless of whether a nation’s trading partners reciprocate.
Unfortunately for free traders, it is riddled with holes, some of which even Ricardo acknowledged. If they held true, the hypothesis would hold water. But because they often don’t, it is largely inapplicable in the real world.
8. The middle income trap - Alan Wheatley (who I used to play squash against when I worked with him at Reuters in Singapore) has written an excellent piece on the challenges China faces in kicking on from the 'middle income' area that seems to be a type of wall that many economies can't break through. HT Stephen via email.
Wheatley makes the point that South Korea seemed to avoid the trap.
“Many countries make it from low income to middle income, but very few actually make that second leap to high-income,” said Ardo Hansson, a World Bank economist in Beijing. “They seem to get stuck in a trap where your costs are escalating and you lose competitiveness.”
According to data compiled by Angus Maddison, an economic historian, and cited by Morgan Stanley, about 40 economies have attained a per capita gross domestic product level of $7,000 over the past century or so. Remarkably, the average economic growth rate of 31 of those 40 economies was 2.8 percentage points less in the decade after the $7,000 inflection point was reached than in the preceding decade. Japan and South Korea reached the $7,000 mark around 1969 and 1988, respectively, whereupon their annual average economic growth rates decelerated in the following decade by 4.1 and 2.4 percentage points, respectively, Morgan Stanley calculates.
China’s per capita gross domestic product is less than $4,000 at market exchange rates, but Morgan Stanley said China had reached Mr. Maddison’s magic number, which is based on purchasing power, in 2008. “If history is a guide and the law of gravity applies to China, China’s economic growth is set to slow,” Morgan Stanley said in a report.
9. David Llewellyn Smith at Houses and Holes points out what all this might mean for Australia. Remembering, of course, that Australia is a province of China and New Zealand is a suburb of Australia.
There is a double blow here for Australia. Not only is it a slower China, but its growth mix is less favourable to the key commodities of iron ore and metallurgic coal as it moves away from fixed investment and towards consumption. This blogger agrees this is a likely outcome for three reasons.
First, China is experiencing a shift to higher labour costs. Second, external pressures arising from the trade imbalance with the US give it no choice but to rebalance internally. And third, this blogger sees no evidence that China will be able to make the political shift to greater freedoms needed if it is to further liberalise its economy and escape the trap like Korea has been able to.
10. Totally irrelevant video - Jon Stewart on the NPR staffing mess. It's funny. Believe me.
| The Daily Show With Jon Stewart | Mon - Thurs 11p / 10c | |||
| NPR Staffing Decision 2010 | ||||
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