Wednesday's Top 10 with NZ Mint: Hubbard probe a fizzer?; Call for Allied statutory manager; QE too lite?; America turning Japanese; Dilbert

Here are my Top 10 links from around the Internet at 10 past 3 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 under the Top 10.

1. Hubbard probe a fizzer? - The New Zealand Herald reckons (from ministerial sources) that the Serious Faud Office investigation into Allan Hubbard may prove to be a fizzer and an embarassment for the government.

The government is apparently preparing to back down.

It quotes the SFO hedging its bets.

A lot.

We'll see.

SFO director Adam Feeley would not comment last night on the outcome of his office's investigations.

"I expected a preliminary report will be with me by next week, and I stress preliminary report," said Feeley. "

This will state there is no offending, or we still need to do more work on this or there are matters that will be charged.

"I cannot give an indication - but we are well advanced."  

2. Call in the Statutory manager? - Fran O'Sullivan at NZHerald reckons the government should call in the statutory manager to fix the Allied Farmers/Allied Nationwide/Hanover Finance mess. Your view? She's not happy with Jane Diplock. It's a long queue.

At this point of the game a sensible Government - let alone the regulators - might ask whether it would be prudent to put Allied Farmers and Allied Nationwide Finance into statutory management. Not because of fraud - or even reckless behaviour - the two potential issues that the Government cited when it put Hubbard, Aorangi Securities and other Hubbard entities into a form of commercial in loco parentis.

But to find out if Allied can be rehabilitated by allowing a statutory manager to manage the companies to the exclusion of all others, to pay creditors and compromise claims, carry on the business of the corporation, or sell any business undertaking of the corporation.  

3. It's not enough - Zerohedge points to some Bank of America research showing the Fed's maturing mortgage bonds will generate around US$340 billion in cash over the next year for the Fed to re-invest in US Treasuries. It won't be enough to make a dent, ZH reckons.

BofA's Jeffrey Rosenberg provides the breakdown of the total amount of securities that roll off (MBS, Agency and USTs) over the next 12 months: the total is $340 billion, including the $230 billion (and possibly more) in MBS.

Alas, this means that on a straight line monthly basis (and the finally outcome will likely be far more jagged), there will be on average just under $30 billion a month in incremental 2-10 Year Treasury Purchases. As Joseph Abate said earlier, this is not nearly enough to be considered a new stimulus, and at best seeks to retain the status quo.  

4. Is America turning Japanese? - This is the question on everyone's lips today. In the wake of the US Federal Reserve's comments about slowing growth and deflationary pressures, many are wondering if the American economy is headed for a decade or two of slow to no growth coupled with deflation.

Obviously America wants to avoid that, but can it? Today's decision to embark on QE II lite seems like the prelude to something more substantial.

Scott Maher at Pimco, the world's largest bond investor, has done a nice analysis on whether America might turn Japanese. There are some similarities. America and Japan shared real estate bubbles and high debt. They have low growth outlooks. But there are differences. America has a low savings rate and a high current account deficit, while Japan had the reverse. America's population is also ageing, but it is still growing through migration. Japan's is not. Maher's charts are well worth a look.

The Japanese stock and house price falls since 1990 are startling. No wonder the Japanese housewives invested in Uridashi bonds in New Zealand. They got 100% of their money back and got interest too!. The comparison was a 20 year slide in other asset prices of 55%. Yikes.

The inflation tracks look surprisingly similar at the equivalent stages.

Maher has a nice summary of America's problems. They sound vaguely similar to New Zealand's problems.

Too much of the U.S. economy is geared toward consumption and has become globally uncompetitive. Much of the capital stock has been mal-invested, and the industrial base that traditionally served as a breeding ground for innovation has been depleted and thereby lowered the potential growth rate of the economy. Far too much human capital is unproductively employed or completely idled while looking for jobs that do not exist. The social and economic costs of this lost potential are enormous and very deflationary.

Structural economic changes are needed to increase the growth profile of the U.S. Large-scale infrastructure projects involving sustainable energy would move the needle away from oil imports while also creating much-needed jobs. We need to take the global initiative on solar, wind and clean coal; China alone is expected to do more than the U.S. this year on clean energy. Major investment in air and rail travel would also help improve U.S. productivity and competitiveness over a long horizon.

But locked in an ideological political quagmire, the U.S. risks heading down the same path that Japan followed. Deflation risks continue to rise. In this scenario, and just as with Japan, the monetary authority ends up being forced to do some heavy extended lifting. It is likely the Federal Reserve will have no choice but to keep rates on hold for a very long period. Perhaps the Fed will ultimately specify a longer extended period or commit to capping rates at a very low level until a certain level of inflation is reached (as did Japan, with only partial success). Ultimately, more experimental monetary policy may be called for. As a first step this might involve more purchases of Treasuries by the central bank, as suggested recently by Fed President Bullard.

5. Sound familiar? - Jonathan Weil at Bloomberg has picked up on a bank in America that borrowed US$300 million from the government and blew it all. Nothing has happened to the perpetrators.

Meanwhile, an employee stole US$235,000 from the same bank and has been jailed. Weil asks the obvious question. HT Kevin via IM.

As we approach the second anniversary of the Treasury Department’s oft-maligned Troubled Asset Relief Program, here’s a trivia question to see just how much you have learned about the way justice is meted out in Bailout Nation. If you were a banker, which of the following activities would be more likely to land you a quick trip to the federal penitentiary?

Is it: (a) Misrepresenting your dying bank’s financial condition in order to secure almost $300 million in TARP bailout cash and then quickly proceeding to lose it all,

or (b) Embezzling about $235,000 from your employer to support your compulsive-gambling addiction and pay off personal debts?

The correct answer, naturally, is “b.” In this country, when it comes to matters of high-finance crime and punishment, little pigs get slaughtered, while hogs get fat -- convicted Ponzi schemer Bernard Madoff being this rule’s most notable exception.

6. Did he really say that ? - Here's the New York Times Op-Ed piece from US Treasury Secretary Timothy Geithner titled 'Welcome to the Recovery'. Here's what he thinks. Methinks he doeth protest too much. But for balance's sake, here it is...

The recession that began in late 2007 was extraordinarily severe, but the actions we took at its height to stimulate the economy helped arrest the freefall, preventing an even deeper collapse and putting the economy on the road to recovery.

From the start, President Obama made clear that recovery from a crisis of this magnitude would not come quickly and that the recovery would not follow a straight line. We saw that this past spring, when the European fiscal crisis posed a serious challenge to the markets and to business confidence, dampening investment and the rate of growth here.

While the economy has a long way to go before reaching its full potential, last week’s data on economic growth show that large parts of the private sector continue to strengthen. Business investment and consumption — the two keys to private demand — are getting stronger, better than last year and better than last quarter.  

7. Chinese banking stress - Bloomberg reports that China's banking regulator has ordered banks to transfer off balance sheet loans onto their balance sheets and make provisions for non-performing loans. Could be ugly.

The move may increase pressure for capital-raising at Chinese banks, which Fitch Ratings last month said had more than 2.3 trillion yuan ($339 billion) of off-balance sheet assets.

It also underscores concerns about the health of the banking industry after a person with knowledge of the matter said regulators last month ordered lenders to conduct stress tests to gauge the impact of home prices falling as much as 60 percent.

The regulator’s order “will plug the loophole that more and more banks now employ to get around government lending curbs,” said Liao Qiang, a Beijing-based analyst at Standard & Poor’s. Bringing loans back on to the balance sheet will restrict banks’ ability to expand lending while “their capital requirement will increase,” Liao said.

8. Just the beginning - Ambrose Evans Pritchard wrote a nice summary before the Fed's statement on the scale of the deflationary problem in America. He, and others, expect that today's announcement of bond buybacks with the proceeds from previous bond buys is just a baby step towards inevitable full blown Quantitative Easing II. He picks out this startling factoid. 41 million Americans are on food stamps.

Over 1.2m people have dropped out the work force over the last three months, which is the only reason why the unemployment rate has not vaulted back into double digits. A record 41m Americans are on food stamps. This is unlike anything since the Second World War. It screams Japan, our L-shaped destiny.

"Unprecedented monetary and fiscal stimulus has produced unprecedentedly weak recovery", said Albert Edwards from Societe Generale in his latest "Ice Age" missive. That stimulus is now fading fast before the private economy has clasped the baton.

After digesting Friday's jobs report, Goldman Sachs' chief economist, Jan Hatzius, thinks the Fed will abandon its exit strategy and relaunch QE this week, taking the first "baby step" of rolling over mortgage securities. Future asset purchases may be "at least $1 trillion". He is not alone. Every bank seems to be gearing up for QE2, even the inflation bulls at Barclays. The unthinkable is becoming consensus.  

Pritchard also points out a basic problem. The only solution is for the government to spend money borrowed from the Fed that has been printed. But there are two very large blocks to this plan.

The global markets are ready to pounce on any signs of a deliberate debasement of the global currency. And the Congress is dead against any form of mass deficit-driven spending or money printing. The Republicans are blocking appointments to the Fed and new spending plans. Hence America seems stuck in no-man's land, unable to go forward to Fed-funded deficit spending or back to stimulus withdrawal and fiscal rectitude..

The Senate has delayed confirmation of all three appointees for the board, who all happen to be doves and allies of Fed chairman Ben Bernanke. The Fed is in limbo until mid-September. So the regional hawks who so much misjudged matters in 2008 have unusual voting weight, and now they have a commodity spike as well to rationalise their Calvinist preferences.

Whatever Dr Bernanke wants to do this week - and I suspect he is eyeing the $5 trillion button lovingly - he cannot risk dissent from three Fed chiefs: one yes, two maybe, but not three. He faces a populist revolt from the Tea Party movement, with its adherents in Congress and the commentariat. And China simply hates QE, which may or may not be rational but cannot be ignored.  

9. Inflation AND Deflation at the same time - Chris Martenson is always worth watching and listening to. An independent banking analyst, he has a suitably caustic view of the world.

"I am absolutely in the camp that we are seeing inflation in some areas and deflation in others. The continuous commodity index is absolutely screaming inflation at this point in time, but at the same time we are seeing houses decline in price, we are seeing a number of other thing decline which I think is what the Fed is most concerned about at this point in time. I think we are going to see both."

So stagflation? "England is already in stagflation and we are dangerously close to it ourselves. We are experiencing both inflation and deflation, and that is squeezing workers even harder than any other condition you can experience because wages are stagnant while the price of goods and services rises"

Does this sound familar?

10. Totally irrelevant video - This is a truly beautiful video about numbers. My daughter is a huge fan of numbers and maths and she loved it. HT @starrjulie via twitter.

Nature by Numbers from Cristóbal Vila on Vimeo.