Monday's Top 10 with NZ Mint: 'The Bank of Allan'; Wellington coffee prices to rise 14% from Oct 1; Bollard's migraines; 105% home loans in Australia; Dilberts

Here are my Top 10 links from around the Internet at 10 to 11 pm, brought to you in association with New Zealand Mint for your reading pleasure. Apologies for extreme lateness. I had to take the day off today. But keen to get this one out.

I welcome your additions and comments below, or please send suggestions for Tuesday'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. 'The Bank of Allan' - Greg Ninness at the Sunday Star Times has an excellent backgrounder on the problems at South Canterbury Finance with some interesting detail on how Allan Hubbard ran 'The Bank of Allan' and how it fell off the rails.

The implication is South Canterbury lost its way when its local experienced managers were stripped of their authority and Timaru took control during frenzied growth into capitalising interest loans to property developers in Queenstown and Auckland.

Ninness reports an unnamed source saying the problems started with the removal/departure of Humphrey Rolleston as a business partner in 2004 and the introduction of Lachie McLeod as CEO.

However the source, a senior executive, wonders whether McLeod led Hubbard or the other way around.

In the year following Rolleston's departure, the company started drawing up a plan to float 75 percent of its shares on the NZX. There was no hiding McLeod's bitter disappointment when that plan was finally canned in November 2005.

A rumour among the company's senior management at the time was that brokers advised Hubbard that if the float proceeded, he would no longer be able to run South Canterbury as "The Bank of Allan", the term executives used behind Hubbard's back to describe his management style.

2. Squeezing in extra inflation from Oct 1 - Wellington's cafes are the first to say they'll be using the October 1 GST increase to increase their prices by just a little teensy, weensy bit more than the GST increase.

I wonder if Allan Bollard buys his own coffee and will notice his price going up 14% when it should only go up 2%. What are you seeing? Claire McIntee at BusinessDay reports.

Cafe L'Affare marketing manager Jessica Godfrey said its coffees would generally jump from $3.50 to $4 once the new GST rate kicked in. The price of raw coffee beans had gone up by 35 per cent in the past three months and was at a 13-year high, while milk prices had also leapt 10 per cent. Cafe L'Affare had been absorbing rising costs for a few years but now had no choice.

"We're going to do what a lot of the coffee industry is going to have to do which is not absorb the costs and put our prices up, and not just by an extra 2.5 per cent, you're probably looking at a whole 50 cents [a cup]," Ms Godfrey said.  

3. 'Migraines and arrogant Aussie bankers' - Rob Stock at the Sunday Star Times has a nice review of Allan Bollard's apparently very pesonal book about the Global Financial Crisis and how media criticism of the big Aussie banks was instrumental in getting them to realise the seriousness of the problems.

The book is the governor's inside story of the financial crisis from the New Zealand perspective, telling just how close the country came to a run on the banks, averted only by the introduction of the deposit guarantee scheme. Bollard reveals that between December 2008 and January 2009, things became so fraught the big banks became intensely worried about the state of their rivals, and suddenly keen on intense dialogue with the Reserve Bank.

"The general message from each was that their own bank was surviving, but we should worry about the others," Bollard writes. System failures at several of the big ones started wildfire rumours of banks withholding payments because they were in trouble. Perhaps even more worryingly: "Several times we had to alert bank chief executives who seemed to be unaware of technical problems in their own systems," Bollard recalls.

At the time, the big Australian-owned banks were no longer borrowing actively on international markets, too scared to seek funding for fear that rejection "would quickly become common knowledge on the rumour mills, staining a bank's reputation".  

4. Ouch - Remember the Commonwealth Bank of Australia's presentation to foreign investors explaining why Australia does not have a dangerous property bubble? I popped it in Friday's Top 10. Now well respected banking analyst, CLSA's Brian Johnson, has written a point by point rebuttal of the presentation in Hong Kong, apparently forcing CBA's CFO to pull a presentation to Hong Kong investors, The Australian reported.

Mr Johnson expressed doubt in a previous July report about the ability of highly subsidised and highly geared first homebuyers to service loans in a rate-rising environment, particularly when they borrowed at a low point in the rate cycle. Responding to CBA's charge of superficial or incomplete analysis, he said in his latest report: "Hmm. CBA's analysis of the underlying valuations on home loans made (in the) Storm Financial collapse appears a tad superficial in retrospect!"

He also takes CBA to task on its claim that the ratio of house prices to income in Australia is not that different to most other comparable countries. Mr Johnson said: "Bank loan losses are not generated by the average quality of the loan portfolio, but extremes within the portfolio.

"The first homebuyer segment looks vulnerable, particularly given that this is likely where the hidden debt burden posed by a negative credit reporting/zero balance transfer credit card product resides."

The CLSA analyst also rejects CBA's argument that population growth and excess demand, relative to supply, has been a key driver of house price growth, and won't reserve soon. He argues house prices fell 12 per cent after the financial crisis, and were likely to fall a lot further until "extreme" intervention by the government with the deposit and wholesale funding guarantees.

5. Someone hasn't learnt a thing - This smacks of very late bubble behaviour. It should be forwarded to every investor in every Australian bank, with a message to bounce it right back to their investor relations people. The Australian reports Australian banks and non-banks are starting to do silly things again in the housing market.

Anyone seeing similar things starting again on this side of the Tasman? HT Garry via email.

Next month, non-bank lender Mortgage House will offer a home loan equivalent to 105 per cent of the property's value - the most generous deal since the global financial crisis kicked in three years ago. The company also offers a 99 per cent loan-to-value ratio loan, which it launched last month, and says applications have been flooding in.

"Demand is really strong; people are finding it difficult to save substantial deposits" Mortgage House CEO Ken Sayer said. But it's not just the non-banks that are splashing the cash. Last week, Westpac raised its LVR for new customers from 87 per cent to 92 per cent, reversing the cut it made back in January; while ANZ also last week raised the maximum LVRs from 95 per cent to 97 per cent for existing customers, and from 90 per cent to 92 per cent for new borrowers.

6. Now China is exploring ocean floors for minerals - China is looking to plant its flags in all sorts of places, including underwater via a specially designed ultra-deep submarine, the NYTimes reports. HT Gertraud via email.

The global seabed is littered with what experts say is trillions of dollars’ worth of mineral nodules as well as many objects of intelligence value: undersea cables carrying diplomatic communications, lost nuclear arms, sunken submarines and hundreds of warheads left over from missile tests.

While a single small craft cannot reel in all these treasures, it does put China in an excellent position to go after them.

“They’re in it for a penny and a pound,” said Don Walsh, a pioneer of deep-ocean diving who recently visited the submersible and its makers in China. “It’s a very deliberate program.” The small craft that made the trip — named Jiaolong, after a mythical sea dragon — was unveiled publicly late last month after eight years of secretive development.

It is designed to go deeper than any other in the world, giving China access to 99.8 percent of the ocean floor.

7. Britain's immigration and inflation problem - Nadeem Walayat writes at Market Oracle about the effect on Britain's house prices and inflation of an ageing population and rising migration. HT Micheal via email. 

This analysis concludes towards three competing forces driving UK house price trends - an increasing population that generates ever increasing demand for housing that supply has never been able to keep pace with, several millions who have permanently sat on benefits being forced into the workforce and thus increase demand for housing, against an ageing population that looks set to put downward pressure on the housing market for several decades as many elderly seek to downsize into retirement homes and probably soon to be built retirement villages, the overall implications are for long-term real terms price stagnation as ever more resources will continue to be expended on servicing the demands of an ageing population, whilst high inflation acts to drive up prices in nominal terms. T

his does not mean there will not be future booms in house prices, just that it is highly likely that they will be more subdued in real terms than that which has occurred during the past 10 years as there will be increasing supply overhanging the market ready to sell at higher prices.

In terms of the trend for the next 10 years, the implications are for a real terms stagnating market for the next 2-3 years, followed by weak real-terms growth, with nominal house prices supported by the governments inflationary policies in an attempt to mask the true economic impact of an ageing population through the illusion of increasing wages whilst real purchasing power falls, which again reaffirms the importance of inflation forecasts being accurate as that will be the primary driver for nominal house prices for the next 25 years.

8. Questioning the value of equities - Some fund managers and strategists are starting to wonder if the 'old normal' of getting long term real returns from stocks of around 5% is reliable anymore. They're also wondering what to do in an age where volatility and the risk of losing it all trump any hunt for high returns. The Sydney Morning Herald has this nice piece. HT Rob via email.

One of the most powerful analyses of the situation comes from Michael Schneider, the chief investment officer and co-founder of Melbourne fixed interest fund manager Vianova Asset Management.

"We do not believe the global credit crisis has been resolved by any stretch, and in fact we believe risks in the global system are actually compounding," Schneider wrote in a note to clients this week. Vianova is taking special care constructing its fixed interest portfolios, putting an emphasis on liquidity and short-term positions.

"It's not about being right at the end. It's about being there at the end," says Schneider. For him, the world has entered a period of "asymmetric risk", or unknown consequences from unprecedented events. "This is deeper than a cyclical issue, this is a structural issue and, of necessity, will take a far longer period to resolve."  

9. Australia's connection with China - JP Morgan has done an interesting paper on Australia's economic connection with China and concludes it is now more important to the lucky country than America.

From 1990-99, the correlation coefficient between annual real GDP growth in Australia and the US was a significant 0.92. It since has slid to 0.65.In contrast, China has become increasingly important to the continued prosperity of the Australian economy. Only recently, though, has a close cyclical relationship between the two economies evolved. Between 1990-99, when this relationship was in its infancy, the correlation coefficient between annual real GDP growth in Australia and China was just 0.25.

It nearly doubled to 0.47 between 2000-09, although since 2004, it shot up to 0.74, and since 2007, it has spiked to 0.98. It follows, therefore, that a significant slowdown in China would increase the risk of sub-trend growth in Australia. As a rule of thumb, on our estimates, the direct result of a moderation in China’s GDP growth of 1%oya over any one quarter (which is roughly in line with our forecasts in 2H10) would result in a 0.5% slowing in %oya terms in Australia’s GDP growth.

10. Totally relevant video - The Press reports on some Carmelite nuns who are laughing in the face of the Christchurch quake. HT Hugh via email.