Friday's Top 10 at 10 with NZ Mint: 'Like WWIII on global currency markets'; America's march to protectionism; Worgl money; Dilbert

'Like WWIII on global currency markets'; America's march to protectionism; Worgl money; Dilbert

Here are my Top 10 links from around the Internet at 10 past 8pm, 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 Monday'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. The biggest news all week - America's Congress and its President are gearing up for big lash out at the big foreign scapegoat -- China.

Congress pass a law this week giving Barack Obama the authority to impose tariffs on all Chinese imports, the NYTimes reports.

While tariffs have been placed on specific products, like steel and tires, because of evidence of unfair export subsidies, the threat of putting sizable tariffs on a country’s entire line of exports to the United States is highly unusual — and, some argue, of dubious legality under international trade law. It reflects both election-year politics over a loss of American jobs and great frustration over unfulfilled promises by China to allow its currency to rise in value, which would make Chinese goods less competitive in the United States.

Eswar S. Prasad, a professor of trade policy at Cornell, called the legislation “a shot across the bow that indicates a clear escalation from overheated rhetoric about Chinese currency policy to more substantive action.” While it is unlikely there will be a trade war, he said, “there is now a real risk that a cycle of tit-for-tat trade sanctions could spin out of control and cause some real, if not lasting, damage.”  

2. A scarcity of suckers? - The always excellent Michael 'The Big Short' Lewis writes at Bloomberg that US banks seem to be dropping their proprietary trading desks despite having fought hard and successfully to keep them in the latest US financial reforms. What gives? Lewis has a few ideas. Firstly, he reckons the suckers, including a few big institutions, have finally cottoned  on to what the banks and hedgies are up to.

The big Wall Street firms have looked anew at proprietary trading and seen a dying business. For a start, their proprietary traders, put off by subpoenas and government inquiries and the new internal aversion to short-term pain on big trading positions, are fleeing for the privacy of hedge funds. But the exodus of trading talent is only part of the problem. A general malaise has come over the world of big time financial risk taking. Everywhere you look hedge funds are either closing or shedding employees or, most shockingly, cutting their fees. At the bottom of this depressing new trend lies a deeper problem: a scarcity of suckers.

The proprietary trading business turns in part on one’s ability to find the fool -- to find people willing to take the stupid side of the smart bets you are placing. One of the side effects of our seemingly endless financial crisis is to wash a lot of fools, many of them German, out of the game.

It’s as if a casino owner awakened one morning to find the tourists had all gone, and the only remaining patrons are pros counting cards at his blackjack tables. As he looked around his casino, for the first time in his life, he couldn’t find the fool. And the first rule of the casino business is: if you don’t know who the fool is, it’s probably you.  

Secondly,  he wonders if the banks are just moving their risk taking and client ripping activities to their regular trading desks that deal directly with customers.

What’s really striking is how little ability the outside world retains to find out what is going on inside these places -- even after we have learned that what we don’t know about them can kill us. It would be nice to know, for instance, if the big banks are making these moves with the tacit understanding that the regulators, going forward, won’t be looking too closely at the activities of the “Client Facing Group.”

And yet news of the death of the Wall Street prop trader has been greeted with hardly a peep. And I wonder: is this the nature of our new financial order? Big decisions, in which the public has a clear interest, being made outside public view, with little public discussion or understanding. If so, it isn’t a future at all. It’s just the past, repeating itself.

3. And you thought I was downbeat - Jim Quinn over at TheBurningPlatform has painted a picture of the next decade or so in America that is less than cheery. He backs it up with a lot of charts and such about the coming deleveraging and the scale of the problem. At least have a look if you're a sceptic. HTKiwidave via email.

The GDP of the country is $14.5 trillion. Over the next decade consumer expenditures as a percentage of GDP will fall from 70% to 65% because it must. With stocks destined to return 5%, bonds yielding 2.5% and no equity left in their houses, consumers have no choice. The annual reduction in consumer expenditures will be north of $700 billion. The annual disposable personal income of Americans is $11.3 trillion. The savings rate is 6%. It will rise to 10% over the next few years. This would be $450 billion more savings and $450 billion less spending. This will not happen overnight. It will take at least a decade. Mass delusion wears off slowly and one person at a time.

Charles McKay summed up the last 30 years in two quotes from his book Extraordinary Delusions and the Madness of Crowds, written in 1841. “Money, again, has often been a cause of the delusion of the multitudes. Sober nations have all at once become desperate gamblers, and risked almost their existence upon the turn of a piece of paper.” “Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.”

Does this paint a picture of an economy roaring ahead? We have at least a decade of low or no growth ahead. Deleveraging after the biggest debt party in history is really a bitch. The industry which is about to be dealt a mortal blow is the retail industry.  

4. 'They always seem to win' - Ian Cowie has done a nice job at The Telegraph of highlighting how fund managers, and hedge fund managers in particular, always seem to do very well out of their funds and often much better than the investors in these funds. How long before investors lose confidence in fund managers generally. It's happening in the United States where the  investors have piled into Exchange Traded Funds, which allow investors to circumvent fund managers and cheaply buy access to a market or index.

There is growing resentment among investors about high charges and low returns. Earlier this year, The Daily Telegraph revealed how fund managers pocket more than £7bn a year from charges despite a decade of falling share prices.

Mr Miller, a founder of Spencer Churchill Miller Private said: “The time is right for exposure of various elements of the industry. “It is riddled with blatant self-interest and conflicts of interest that would never be tolerated elsewhere. Investors have become victims as the charges they have to pay have risen and risen while the returns they get have been consistently below par and the actual cost of managing their money has continued to fall.”

Data from Morningstar, a research company, shows the average investment fund has an annual charge of 1.25 per cent. But lesser known administrative fees amount to 0.45 per cent. And trading costs total another 1.35 per cent, according to the Financial Services Authority and Financial Express. When this 1.8 per cent is deducted from the total £406 billion invested, that amounts to £7.3bn being “skimmed off” each year.  

5. Currency Wars bulletin board - Ambrose Evans Pritchard has a nice lap around the various skirmishes in the currency wars.

Brazil, Mexico, Peru, Colombia, Korea, Taiwan, South Africa, Russia and even Poland are either intervening directly in the exchange markets to prevent their currencies rising too far, or examining what options they have to stem disruptive inflows.

Peter Attard Montalto from Nomura said quantitative easing by the US Federal Reserve and other central banks is incubating serious conflict. "It is forcing money into emerging market bond funds, and to a lesser extent equity funds. There has truly been a wall of money entering many countries," he said.

"I worry that we are on the cusp of a competitive race to the bottom as country after country feels they need to keep up."  

6. Currency Wars  bulletin board - Pheonix Capital Research writes at Zerohedge about how the Japanese and the Swiss are intervening in the currency wars to protect the Yen and the Swiss franc. The detail is ominous. It starts off looking at the Yen intervention in the last couple of weeks, the first done since 2004 and first done openly and nakedly.

The Japanese Yen is one of the primary carry trade currencies to borrow in (the US Dollar being the other). It marks a major turning point in the financial crisis. Going forward, the key issue for the financial markets will be currency interventions.

Japan’s move can, in a sense, be seen as an open declaration of war between the BoJ, the Federal Reserve, and other Central Bankers. Indeed, we can’t leave the European Central Banks out of this. Indeed, the most noted currency intervention prior came from the Swiss Nation Bank which bought Euros by the billions in an attempt to keep the Swiss France/ Euro trade low. And Germany and other European countries want the Euro low to boost their exports. In plain terms, the currency war has officially begun.

Since Japan’s announcement, numerous other countries have begun intervening in the currency markets including Brazil, Colombia, Peru, Russia, South Korea, Serbia, Romania, and Thailand.

In plain terms, WWIII is already being staged in the currency markets. Predicting exactly how this will all play out is impossible, but the clear result is that market volatility will be increasing and we are absolutely guaranteed heading for a Crash.

7. Currency Wars bulletin board - The type of currency intervention is also ramping up. Tyler Durden at ZH points to Mexico's latest move, which effectively is betting on a lower dollar. HT Troy.

The FX war recently launched by every central bank in the world, just entered its modern warfare stage: we have learned that the Mexican Central Bank has just sold $600 million worth of USD options. That's right - the central bank of our southern neighbor has moved beyond merely pedestrian cash interventions and has entered the derivatives game, in their attempt to raise the US peso and lower its Mexican equivalent.

Either way, the incremental systemic complexity introduced by this action will make plain vanilla interventions increasingly more unpredictable, and it is a likely validation that many other central banks also engage in this kind of synthetic trading. Also, who is to stop the counterparty on such trades to suddenly ramp up colletaral requests, very much in the fashion that Goldman and JPM destroyed AIG and Lehman, respectively?

8. The next landmine - Meredith Whitney, the analyst that picked the banking implosion in 2007 and 2008, reckons the US government will have to bail out bankrupt state governments within the next year to stop the implosion of the US$2.8 trillion municipal bond market.

While saying a bailout might not be politically viable, Whitney joined investor Warren Buffett in raising alarm bells about the potential for widespread defaults in the $2.8 trillion municipal bond market. She said state and local issuers have taken on too much debt and that the gap between public spending and revenue is unsustainable.

“People will think the federal government will bail these states out,” Whitney, 40, the founder of Meredith Whitney Advisory Group Inc., said in an interview on Bloomberg Television’s “In the Loop.” “It’s going to be an incredibly divisive issue.”

9. Worgl money - This is a fascinating story of a town in Austria in 1932 that invented their own money to solve the problems of the depression. It worked, until the Austrian central bank shut it down. Then the depression came back then a short man with a small moustache took over. Remember him? HT Les via email.

Worgl money was a stamp script money. The Worgl Bills would depreciate 1% of their nominal value monthly. To prevent this devaluation the owner of the Bill must affix a stamp the value of which is the devaluation on the last day of the month. Stamps were purchased at the parish hall.

Because nobody wanted to pay a devaluation (hoarding) fee the Bills were spent as fast as possible. The reverse side of the Bills were printed with the following declaration: “To all whom it may concern ! Sluggishly circulating money has provoked an unprecedented trade depression and plunged millions into utter misery. Economically considered, the destruction of the world has started.

- It is time, through determined and intelligent action, to endeavour to arrest the downward plunge of the trade machine and thereby to save mankind from fratricidal wars, chaos, and dissolution. Human beings live by exchanging their services. Sluggish circulation has largely stopped this exchange and thrown millions of willing workers out of employment.

- We must therefore revive this exchange of services and by its means bring the unemployed back to the ranks of the producers. Such is the object of the labour certificate issued by the market town of Wörgl : it softens sufferings dread; it offers work and bread.”

The Central Bank panicked, and decided to assert its monopoly rights by banning complimentary currencies. The case was brought in front of the Austrian Supreme Court, which upheld the Central Banks monopoly over issuing currency. It then became a criminal offence to issue “emergency currency”. Worgl quickly returned to 30% unemployment. Social unrest spread rapidly across Austria. In 1938 Hitler annexed Austria and many people welcomed Hitler as their economic and political savior.  

10. Totally irrelevant video - Jon Stewart makes jokes about Belgians and waffles.