Thursday's Top 10 with NZ Mint: Towelling your car to make money; China's hidden inflation; Has there ever been a more brazen Ponzi scheme?; Dilbert

Here are my Top 10 links from around the Internet at 10 past 1 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 Friday'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. 'America is sitting on a vast Ponzi scheme' - So says America's biggest bond fund investor. Seriously.

Bill Gross, the managing director of PIMCO, says in his monthly newsletter that the US Federal Reserve is creating a giant Ponzi scheme with its plan to print money. PIMCO manages US$1.3 trillion worth of funds, which is about 9 times NZ GDP. Gross is a very serious player at the highest levels and is closely watched.

For him to accuse the Fed of creating a Ponzi scheme is extraordinary. I suspect this will create some waves.

This would be like the head of AMP here saying Alan Bollard is ruining the economy by running a fraudulent scheme. In public.

It shows how disillusioned and worried many serious players are with the US and global economic situation.

It's today's must read from someone who is no nutter.

We are, as even some Fed Governors now publically admit, in a “liquidity trap,” where interest rates or trillions in QEII asset purchases may not stimulate borrowing or lending because consumer demand is just not there. Escaping from a liquidity trap may be impossible, much like light trapped in a black hole.

Just ask Japan. Ben Bernanke, however, will try – it is, to be honest, all he can do. He can’t raise or lower taxes, he can’t direct a fiscal thrust of infrastructure spending, he can’t change our educational system, he can’t force the Chinese to revalue their currency – it is all he can do, and as he proceeds, the dual questions of “will it work” and “will it create a bond market bubble” will be answered.

Check writing in the trillions is not a bondholder’s friend; it is in fact inflationary, and, if truth be told, somewhat of a Ponzi scheme. Public debt, actually, has always had a Ponzi-like characteristic. Sovereign countries have always implicitly acknowledged that the existing debt would never be paid off because they would “grow” their way out of the apparent predicament, allowing future’s prosperity to continually pay for today’s finance.

Now, however, with growth in doubt, it seems that the Fed has taken Charles Ponzi one step further. Instead of simply paying for maturing debt with receipts from financial sector creditors – banks, insurance companies, surplus reserve nations and investment managers, to name the most significant – the Fed has joined the party itself. Rather than orchestrating the game from on high, it has jumped into the pond with the other swimmers. One and one-half trillion in checks were written in 2009, and trillions more lie ahead.

The Fed, in effect, is telling the markets not to worry about our fiscal deficits, it will be the buyer of first and perhaps last resort. There is no need – as with Charles Ponzi – to find an increasing amount of future gullibles, they will just write the check themselves.

I ask you: Has there ever been a Ponzi scheme so brazen?  

2. Let's play the dirty little game - John Armstrong at NZHerald is uncomfortable with the deal John Key struck with Warners to keep The Hobbit, but he is right that Key's street fighting is the only way forward amid the increasingly ugly Currency Wars. We have to do whatever necessary to keep and grow exports.

We should be just as ruthless in discouraging consumption and encouraging investment locally. Key hasn't gone that far yet. If he was really serious he'd be introducing a land or capital gains tax.

What kind of a country, however, sells its democratic soul for 30 pieces of silver? The answer is a small one. And one where the economy shows little sign of recovery in the short term.

Warner Bros apparently also wanted a lot more in terms of tax relief, although that was a secondary matter. The Government has made the right decision for the film industry and for the wider economy.

Such high stakes bring out the money-trader best in John Key. He may have sacrificed a small piece of New Zealand's sovereignty, but putting laws through Parliament does not cost any extra cold hard cash. 

3. American house prices tank - Clear Capital reports that US house prices slumped 5.9% in September and October.

“Clear Capital’s latest data through October 22 shows even more pronounced price declines than our most recent Home Data Index market report released two weeks ago,” said Dr. Alex Villacorta, senior statistician for Clear Capital. “At the national level, home prices are clearly experiencing a dramatic drop from the tax credit-induced highs, effectively wiping out all of the gains obtained during the flurry of activity just preceding the tax credit expiration.”

The company says this significant drop in prices, in advance of the typical winter housing market slowdowns, “paints an ominous picture” that will likely show up in other home data indices in the coming months. Clear Capital gathers market data on home prices in near real-time and as a result, reports its analysis ahead of other industry gauges (typically two months in front of other indices).  

4. 'Towelled down when driven in the wet' - The key to making money on any investment to make sure you dry off your asset with a towel after it is rained on.

This is the moral I take from the amazing story of the VW Kombi Dormobile CamperVan that has just been sold on TradeMe for NZ$55,700. Six years ago it sold for NZ$4,000. Three years ago it sold for NZ$35,000. Here's the owner Bryce via email below. Congrats to him by the way.

Although he does say in the listing he towelled it down whenever wet. Fair enough then.

Remember that Kombi. It sold for $55,700. So for me from $35,000 to $55,000 in three years is a 16.5% annual rate of return.

I spoke with the guy who I bought it off in 2007, he bought it in 2004 for $5,000. For the both of us from 2004 to 2010 from $5,000 to $55,000 that's a 49% annual rate of return. Oh,and what did the previous owner before that buy it for............? He was given it :-)

I had a new gearbox put in ($4,000). Previous owner had it painted - not sure of exact cost but say ($10,000). Still a 42% annualised return over the last 6 years :) 

5. Hidden inflation surge - Patrick Chovanec is always worth watching on China.

He is an associate professor at Tsinghua University’s School of Economics and Management in Beijing and is much like Michael Pettis in that he is an independent analyst not tied to a government or a bank that can talk authoritatively on China because he lives there and understands what's happening on the ground there..

Here he talks at Bloomberg about a hidden inflation surge going on in China. The tone of the comments is most interesting. HT Hugh via email.

Money, money everywhere. At least that’s what it feels like at the moment in China. Awash in luxury cars, condos and expensive jewelry, the Chinese are enjoying what looks to be an unstoppable boom. But inflation figures due to be released should give pause to those who assume China’s economy is on sound footing.

To an extent few fully appreciate, China’s astonishing growth rates these past two years have been fueled by an even more astonishing expansion of its money supply, by more than 50 percent. Until now, the inflationary consequences have been largely camouflaged in the form of rising asset prices. High-end property prices in dozens of Chinese cities have doubled during the global financial crisis.

Sales of gold bars have done the same this year. Fine pieces of jade are selling at $3,000 an ounce, up 50 percent in the past couple of months, while packets of certain types of dahongpao tea are going for $30,000 a kilogram. Art and wine auctions in China are pulling in record prices. there is rampant inflation in China. It’s just showing up in asset prices. The new money that was created entered the economy as loans, mainly to fund investment in fixed assets. When it finally reached consumers, they bought tangibles, like property, instead of spending on consumer goods.

Asset-price inflation is tricky because it doesn’t feel like inflation. When the price of bread doubles, it feels like it’s getting harder to make ends meet. When condo prices double, it looks like smart investors are getting rich. But it’s only a matter of time before asset inflation starts working its way through the rest of the economy as broader price inflation -- and puts China’s policy makers in a serious bind.  

6. It's a plutocracy now - Here's how American corporates are secretly buying US democracy, according to the Chicago Tribune. The recent Supreme Court ruling on corporates making political donations has unleashed a tidal wave of anonymous spending on campaign ads in the lead-up to the mid term elections on November 2. HT Troy via email.

More than anything else, this is waking up Americans to the fact their democracy is actually a plutocracy, particularly in the wake of the bank bailouts and weak banking reforms.

Big corporate America bought Washington and won't give it up. It's yet another reason not to agree to a Free Trade deal with America.

The Public Campaign Action Fund, a group that advocates for public financing of campaigns, issued a report Tuesday predicting that House candidates alone could spend as much as $1.5 billion by the end of the campaign.

This year's election marks the first time in 100 years that corporations and unions are free to spend their money on election ads. In the past, both companies and unions could encourage their employees or members to give money to political action committees, which in turn could pay for election ads.

But in January, the Supreme Court, by a 5-4 vote, struck down the legal ban on the use of corporate and union funds for direct election ads. In Citizens United vs. Federal Election Commission, the justices said that corporations had the same right to free speech as individuals, and for that reason the government could not stop corporations from spending to help their favored candidates.

In the same decision, however, an 8-1 majority upheld the disclosure laws as vital to democracy. That part of the ruling has gone largely ignored.

7. Where's the money gone? - One of the reasons QE II will struggle to work and is likely to eventually lead to QE III and QE IV is the banks aren't lending out the newly printed money and companies are too scared to invest and hire new staff. Here's Bloomberg on how much is sitting on the sidelines.

U.S. companies are hoarding almost $1 trillion of cash, an amount Moody’s Investors Service says shows borrowers are still concerned the economy may tip back into recession. Cisco Systems Inc., Microsoft Corp. and Google Inc. account for the biggest portion of the $943 billion stockpile, Moody’s said yesterday in a report. That’s up from $937 billion at the end of 2009 and $775 billion in the prior year. Companies have a ratio of cash to capital expenditures of 1.64 times, possibly an all-time high, the New York-based ratings firm said, compared with 1.1 times in December 2008.

Borrowers have bolstered their finances by slashing spending and raising cash, selling $945.8 billion of U.S. corporate bonds this year, following a record $1.23 trillion in 2009, according to data compiled by Bloomberg. While that’s helped corporate credit quality improve, a reluctance to use the money for hiring and investing until more signs of growth emerge isn’t helping shorten a “jobless recovery,” Moody’s said.

“The mantra is better safe than sorry,” said Mark Luschini, chief investment strategist at Philadelphia-based Janney Montgomery Scott LLC, which has $50 billion of assets under management. “Companies have been very aggressive in finding ways to do business without having to hire.”

9. 2010 contraction in US worse than 2008/9 'Great Recession' - Econintersect reckons the contraction in consumer demand in the United States in 2010 has just gotten worse than what was seen during the Great Recession of 2008/09, going from this Consumer Metrics Institute Contraction Watch chart below, which is a leading indicator.

Anything under zero suggests contraction. It's the biggest economy in the world and 70% of it is in consumption... HT Rob via email.

10. Totally irrelevant video - Here's a spoken word song called The Sweater by Meryn Cadell, a Canadian performance artist who later switched gender. Sort of fun.

HT My wife. Not sure what's she's hinting at. Perhaps she wants me to wash my own clothes... Fair enough.