90 seconds at 9 am with BNZ

90 seconds at 9 am with BNZ: Nervous markets lose gains on Greek, Italian doubts ahead of Fed's twist; IMF cuts Australian, US growth forecasts; Full Tilt poker ponzi scheme

21st Sep 11, 9:01am by Bernard Hickey

Bernard Hickey details the key news overnight in 90 seconds at 9 am in association with Bank of New Zealand, including news that US markets gave up their early gains to close flat this morning as nervousness about European sovereign debt crisis returned.

The Troika (EU, IMF, ECB) of inspectors who will decide on Greece's next bailout payment signalled they will not return to Greece to make a final decision until early October, which would be at the last minute. See more here on the market's late slide here at Bloomberg.

Greece is expected to run out of cash in early October and financial markets are fearful of what a default would unleash inside Europe's banking system, where there are already severe stresses. For example, German giant Siemens withdrew 600 million euros from Societe Generale and placed it on deposit at the European Central Bank. It now has 6 billion euros on deposit there, which some saw as signalling its lack of trust in the banking system. Also, a Chinese state bank has stopped trading with French banks and UBS on fears about their stability. See more here at Reuters.

News overnight that Greece's Prime Minister is considering a referendum on Greek membership of the Eurozone also unnerved investors. See more here at Reuters.

Meanwhile, concerns about the 'Big Kahuna' of the European Sovereign Debt crisis, Italy, are growing. Standard and Poor's downgraded Italy's sovereign debt rating to A from A+ yesterday, driving the yield on Italy's 10 year bond yield up 9 basis points to 5.67%. See more here at Bloomberg.

Prime Minister Silvio Berlusconi, who is mired in a scandal over call girls and 'bunga bunga parties', blamed politics and newspaper reports for the downgrade. See more here at CNN.

This rise in bond yields makes it much more expensive for Italy to roll over its massive debts, which at 1.9 trillion euros are bigger than all the debt issued by Portugal, Ireland, Greece and Spain combined. Italy has to issue 50 billion euros worth of debt in the coming months, starting with a big issue next week. Many believe that as interest rates rise towards 6% Italy's fiscal position becomes unsustainable, given the size of its debts and the slowness of its economic growth. See more background on the European crisis at the New York Times.

Meanwhile, the International Monetary Fund cut its global economic growth forecast overnight to 4% this year from 4.3%. It warned the global economy was entering a "dangerous new phase" and faced severe repercussions if the sovereign debt crisis in Europe could not be contained and if America's political system could not agree on both fiscal stimulus and longer term deficit reduction. See more here at BBC.

In particular, the IMF slashed the growth forecast for our largest trading partner, Australia, to 1.8% from 3% and cut its US growth forecast to 1.5% from 2.5%. See more here at The Age.

US new home starts also fell more than expected in August. See more here at Reuters.

Markets are also nervously looking ahead to the results of the US Federal Reserve's special two day monthly FOMC (Federal Open Markets Committee) meeting due around 6.15 am on Thursday morning NZ. Many are expecting the Fed to unveil a new 'Twist' strategy of selling short term bonds and buying longer term bonds in an effort to further lower long term interest rates and therefore boost lending by households who often refinance their home loans for 30 year terms. See a preview of the FOMC meeting here at Reuters.

Finally, US authorities have accused the owners and directors of online poker firm Full Tilt of running a global ponzi scheme to the tune of more than US$500 million. See more here at Bloomberg.

The New Zealand dollar was broadly steady at around 82.3 US cents overnight, although it has generally weaker this week.

Prices fell a further 2.1% at Fonterra's fortnightly milk powder auction overnight. See more here in our earlier article.

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15 Comments

by Andrewj | 21st Sep 11, 9:09am 1316552992

I posted this on another link but it belongs here

CRASH 2: CHINA FINGERS BNP PARIBAS AS THE WEAK LINK Beijing stops credit line to French bank as mistrust goes worldwide

The Bank of China Ltd. has told BNP Paribas that it has put a stop on further trade with the bank in Asian markets, amid broader investor concerns over Europe’s debt woes. It told BNP Paribas (and UBS) that they had reached the limits of their trading credit lines; having notified the banks about its decision last week, the stop to further trading began yesterday (Monday 19th September).

Nigel Farage

http://www.youtube.com/watch?v=ZC3-VVhkiEc

From the telegraph, get that debt paid off guy's.

http://blogs.telegraph.co.uk/finance/jeremywarner/100012073/imfs-progno…

We’ve known for a long time that this is no ordinary recession. Everyone has been saying it, including the International Monetary Fund. Yet there has been a curious reluctance to admit the likely reality of slow growth and insipid recovery for advanced economies in the official forecasts. Well now the International Monetary Fund has finally capitulated and gone some way to recognising the truth.the best rated comment on this article

dandaniels

The IMF finally understand the following inconvenient facts....

1. Too many unskilled people,

2. Not enough resources,

3. Too much debt:- personal, corporate, sovereign.

A debt based system based on endless growth that's come to the end of its natural lifecycle. No politician can stop it reaching its ultimate conclusion and that is the total collapse of the current economic system, both capitalism and socialism, makes no difference, both models will fail without abundant resources we need to survive, let alone grow.

I sincerely hope that man isn't forced into picking up weapons like every other time in history when let's face it, there was an abundance of resources when you take a moment to look back in time. What a fucking waste of epic proportions.

Note to politicians/economists....When something finishes it has a tendancy to stop. That reinforced brick wall of reality is fast approaching us all and your promises will finally be exposed for what they've always been....bullshit.

We all know what's going to happen. Every one of us that posted on the DT columns the last 3 years knew full well it was just the start of the greatest adjustment in history back towards a more sustainable equilibrium. Possibly the greatest challenge to our modern species. That is no understatement.

If you're still around the next 20-30 years, it should be enormous fun for you and your beloveds no thanks to the ignorance and apathy of many.

We better hope there are some incredibly smart people in the world with all the answers ready to jump in and save our fat, lazy, in denial hides and furthermore they can come up with solutions fast.

We need resources to continue this game and it has dawned on me how much we've taken things for granted.

The natural laws of the universe always wins Report Recommend

by LloydM1 | 21st Sep 11, 11:41pm 1316605260

AJ - Assumptions are the mother of all F-UP's so we are told, and IMO you make some in your post. Note, I am not debating that the situation is dire, always was going to be, and has been easily tracked, predicted and as best can, hopefully prepared for by people who had a desire to try understand it all.

1: The IMF have always understood the facts - These are not stupid people, they have never been uninformed, ill-equipped to do their job.

2: Self interest has most often prevented truth from being presented to the public, and with so much access to information be it good bad or ugly, it makes it difficult for those who take an interest, and makes it understandable in some ways why the masses take no interest at all. It is no excuse to be ignorant, but again the dumbing down of the public and he decades of lies in all arenas has created this exact situation of disinterest and disenfranchisement.

3: You say that "we better hope some incredibly smart people with all the answers jump in" - What makes people think that the technology for so many of the worlds ills has not existed for eons already, and that those self interests who own & control the R&D, who control the research who own the science & technology industries, who own & control the health & biotech industries, would want to share the technology with the peasants? - Yes I want to believe in the good in people, however, I think that it is another entry of yours in this same topic which says ...

"Don't you stumble, sometimes, into something that seems to make a lot of sense but you can't say exactly why? " - This can be applied to so many areas of the chaos that has taken over the world at pace and will continue to do so. It is not possible to apply to only one sector like the "Peak" discussions, because these are all tied together, it is not possible to separate them from each other.

by scarfie | 21st Sep 11, 9:24am 1316553858

To carry on from Andrews comment on resources, I was asked a question in the weekend regarding the sustainability of steel for construction in residential housing. While on the face of it this may seem okay, as we have almost limitless iron, the problem comes to the galvanising as we only have 20 years of zinc left.

I popped over the the US Geological Survey website to draw out some stats. Some of our key minerals are getting quite low in reserves:

Chromium(think stainless steel) 16 years

Tin, Lead and Zinc all 20 years

Cadmium 30 years

Copper 40 years

Nickle 50 years.

Thos are about half of the ones I checked and is by no means exhaustive. Gold and Silver are down at 20 years also.

Now reserves has a specific meaning, and doesn't not actually mean known deposits. However it is the easy stuff to get, whether that is physically or politically. It gets harder from here on in, and peak oil will also restrict the ability to extract cheap minerals.

Remember Japan fought the second world war when America starved them of minerals.

Anyone can see these stats, just go to usgs.com and type in the mineral. Look at the latest annual report and page down to current products and divided that from reserves.

by Andrewj | 21st Sep 11, 10:35am 1316558101

Don't you stumble, sometimes, into something that seems to make a lot of sense but you can't say exactly why? For a long time, I had in mind the idea that when things start going bad, they tend to go bad fast. We might call this tendency the "Seneca effect" or the "Seneca cliff," from Lucius Anneaus Seneca who wrote that "increases are of sluggish growth, but the way to ruin is rapid."

http://www.theoildrum.com/node/8317

by steven | 21st Sep 11, 10:50am 1316559019

Yes......when I read a piece on peak food in 2006, I stood back and said what? I then read the green evolution and limits to growth....and then I got to Peak oil and it was like a light bulb going on....

It all came together....and the word was f***

regards

by steven | 21st Sep 11, 10:47am 1316558866

Iron, I am not so sure.....if you read Matt Simmons one of the comments was that we needed huge steel production to replace the aging and falling apart oil infrastructure ie keep it gong until we had a replacement.

but,

We would need the same quantity of steel again to replace the oil infrastructure with what ever new we "discovered" infrastructure and that assumed a 1 for 1 relationship.....ie 1 tonne of steel to make 1 barrel of crude into petrol but its likely that the replacement wouldnt be that good.....so maybe double or treble the steel...just to replace, plus steel to repair...

So a minimum of 3 maybe 4 times the steel would be needed....

and to get steel out you use oil......its like trying to catch your tail.......

Then, yes think of the copper needed......

So the money has to come from somewhere......the only place is Govn and taxes.....that I can see....

So the "Long emergency" is a very apt title for our problem.

regards

by scarfie | 21st Sep 11, 9:16pm 1316596616

Well Steven I held off hoping some deniers would have a crack at me, no takers though.

I did actually want an independent appraisal of my reasoning, looks like it might be sound eh?

by scarfie | 21st Sep 11, 10:03am 1316556226

Why the US won't help the world financial crisis.

"The founders gave the United States a government that, no matter how large it gets, can’t act on domestic policy without a powerful consensus. Today there is none, and therefore there can’t be action."

A worthy read by George Friedman.

by andyh | 21st Sep 11, 10:11am 1316556709

Why economists ignore the Australian housing bubble:

http://theconversation.edu.au/are-economists-ignoring-australias-proper…

by scarfie | 21st Sep 11, 10:47am 1316558857

Good piece.

The second reason is one of wealth. During a bubble, the rich become much wealthier. This wealth is actually rent, which is unearned income.

We are told that in a capitalist economy, people make a living by either working or deploying capital in a productive enterprise.

The rich, however, are rich precisely because they manage to privatise the rents that land produces, including what is made from speculation (intellectual property is another). Rent stemming from residential land equates to about 30% of GDP in Australia.

Okay all those scumbag PI's, come out and defend that one!

by meh | 21st Sep 11, 11:53am 1316562824

Great link andyh.

The full report:

http://www.prosper.org.au/wp-content/uploads/2011/07/PhilipSoosBubblingOver1.pdf

Explains well the evidence of a bubble and its causes and provides reasoned arguments against the bubble deniers re housing shortage etc, as well as further evidence of how govt. policies only fuel the bubble further.

In addition to scarfie's comment:

Minack (2010) confirms that residential property is used for speculative purposes, as property investors make their decisions on the basis of future capital gains rather than rental yields:

Australian Tax Office data confirm that residential investment is a poor investment: total rent has not covered total costs since FY2000 (again, the date the bubble started to inflate). In short, this is an investment that depends on capital gain for its payback. With net income not even covering interest charges, this is a classic Hyman Minsky Ponzi scheme. Ponzi owns the house, and he's betting that house prices keep rising.

Not only is the aggregate private rental market a loss-making affair, but a rising share of landlords are making rental losses. The percentage of landlords claiming a rental loss (that is, rent not covering interest and other costs) has increased from 50% to 70% over the past decade. It's not just that there are more landlords, there are more loss-making landlords. This matters a lot. Much of the discussion on the residential market concentrates on owner-occupiers. But arguably property investors represent a significantly larger risk if they became widespread sellers of their loss-making investments.

The pushback is that rental properties are largely owned by upper income earners. Certainly, property investment is more prevalent at higher income scales. But it is simply wrong to assert that rental properties are largely owned by high-income households: losing on residential property investment is largely a middle-class affair. Only 3% of all loss-making properties are owned by taxpayers with a taxable income of over $200,000. Taxpayers who earn $80,000 or less own 80% of all loss-making properties. The reported losses on rental properties are a meaningful percentage of taxpayers' income. The average rental loss, in dollar terms and relative to income, is typically around 10% of income.

They say that if the interest bill on your investment property exceeds the rental income, the excess is deductible against your wage/salary income although it is not incurred in the process of earning that wage/salary income. Meanwhile an expense that is incurred in the process of earning your wage/salary, namely the cost of travel to and from work, is not deductible. That's not a consistent application of any “basic premise”. It's one rule for the gentry and another for the peasants.

Negative gearing hurts first home buyers because an investor can claim a tax deduction for the margin by which the interest bill exceeds the rent, whereas an owner-occupant can't claim a tax deduction for the margin by which the interest exceeds the rental value; this enables investors to outbid owner-occupants for the same property.

This is a pretty large subsidy from people who are working and saving to people who are borrowing and speculating (since those landlords who are making “running losses” on their property investments expect to more than make up those losses through capital gains when they sell the properties).

And it‟s hard to think of any worthwhile public policy purpose that is served by it. It certainly does nothing to increase the supply of housing, since the vast majority of landlords buy established properties: 92 per cent of all borrowing by residential property investors over the past decade has been for the purchase of established dwellings, as against 82 per cent of all borrowing by owner-occupiers.

But wait, we're different.

by meh | 21st Sep 11, 12:03pm 1316563402

The first part of the report also highlights IMO, the flaws in current economics.

The second approach consists of a complex and demanding analysis as it requires the application of non-conventional economic modeling that is not typically practiced within the conventional economics profession today. This type of analysis dispenses with the fictions and unrealistic assumptions that form the basis of mainstream equilibrium theory. Such economic theory assumes equilibrium, a state where supply equals demand, and all resources are produced, allocated and consumed in the most efficient manner possible. Under these conditions, modification or intervention in the system is ill-advised. Other unrealistic assumptions, for instance, rational investors and consumers who possess all information and competitive financial markets that perfectly allocate resources, are considered hindrances to modeling the economy in a realistic fashion. Adding to these complexities are externalities, information asymmetries, uncertainty, moral hazard and imperfect competition.

This dynamic approach comprehends that markets do not correctly price assets as conventional theory says it should. If markets are considered internally inefficient, and combined with government intervention that amplifies these inefficiencies, then markets will naturally undergo the boom-bust cycle that has plagued economies for centuries.

Central to the contrarians‟thinking is an accounting of financial flows (of credit, interest, profit and wages) and stocks (debt and wealth) in the economy, as well as a sharp distinction between the real economy and the financial sector (including property). In these “flow-of-funds” models, liquidity generated in the financial sector flows to companies, households and the government as they borrow. This may facilitate fixed-capital investment, production and consumption, but also asset-price inflation and debt growth. Liquidity returns to the financial sector as investment or in debt service and fees.

It follows that there is a trade-off in the use of credit, so that financial investment may crowd out the financing of production. A second key insight is that, since the economy‟s assets and liabilities must balance, growing financial asset markets find their counterpart in a growing debt burden. They also swell payment flows of debt service and financial fees. Flow-of-funds models quantify the sustainability of the debt burden and the financial sector‟s drain on the real economy. This allows their users to foresee when finance‟s relation to the real economy turns from supportive to extractive, and when a breaking point will be reached.

Unfortunately, most economists adhere to the conventional neoclassical school of thought and do not adopt the type of thinking described by Bezemer. Over the last several years, however, there has been greater interest in the theories of Minsky due to the economic crises that have occurred in some countries. These crises were not predicted by most conventional economists for the reason that the

unrealistic neoclassical economic theory they have been taught and, in turn, continue to teach, does not permit economists to understand that asset bubbles and subsequent debt-deflations can occur within market economies. Therefore, it would be beneficial for the public and economy at large if economists were to adopt the dynamic thinking of Minsky and the other economists who possess the foresight and competence to predict asset bubbles and debt-deflations of recent times.

by andyh | 21st Sep 11, 10:21am 1316557313

Interesting - Republicans fire shot across the bows of the Bernanke about more stimulus:

http://www.cnbc.com/id/44601008

Methinks the markets will tank if the Bernanke does not pull something out of the hat.

by steven | 21st Sep 11, 10:56am 1316559402

Me thinks that's what the republicans want.....ie a dire situation that they can blame on Obama and get an extremist Republican in backed by a half-wit like Palin....

My hope is Obama is as bright as he appears and can think enough moves ahead and wont get cornered....and it backfires on the GOP....

However the USA will be such a basket case that it maybe better to "lose" and walk away.......sometimes you just cut your losses.

If I was Obama I'd seriously consider not going for re-election.....let the two sides have a clear field.....

Let Americans chose and walk away un-defeated....

regards

by goNZ | 21st Sep 11, 11:04am 1316559864

yeah - go Rick Perry - he will sort out the vacuum of leadership and get USA back to basics