Tuesday's Top 10 with NZ Mint: Barack Obama's trade double-speak; An Irish Dr Doom; Why QE II won't work; Aussie house auction flop; Dilbert

Here are my Top 10 links from around the Internet at 10 to 11 am, 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 Wednesday'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. What Barack Obama really thinks about trade reform - Here's what Barack Obama wrote in a New York Times Op Ed about his plans for US trade reform and his strategy for economic growth.

He made it clear trade reform is all about increasing US exports, it's not about increasing US imports.

Those who think New Zealand might receive any meaningful concessions in any Trans Pacific Partnership trade deal should read this.

They should also remember that Australia's sugar and beef farmers got done over in the Australian free trade deal with America and there's a big risk for us that the pharmaceutical, movie and farm lobbies will do us over too in any FTA.

Here's Obama.

We want to be known not just for what we consume, but for what we produce. And the more we export abroad, the more jobs we create in America.

In fact, every $1 billion we export supports more than 5,000 jobs at home. It is for this reason that I set a goal of doubling America’s exports in the next five years.

To do that, we need to find new customers in new markets for American-made goods. And some of the fastest-growing markets in the world are in Asia, where I’m traveling this week.

We want to expand our trade relationships in the region, including through the Trans-Pacific Partnership, to make sure that we’re not ceding markets, exports and the jobs they support to other nations.

2. An Irish Dr Doom - University College Dublin Economics Professor Morgan Kelly has written this compelling piece on how Ireland is insolvent and about to be taken over by German central bankers. HT Robert.

For a country or company, insolvency is the equivalent of death for a person, and is usually swiftly followed by the legal process of bankruptcy, the equivalent of a funeral. Two things have delayed Ireland’s funeral.

First, in anticipation of being booted out of bond markets, the Government built up a large pile of cash a few months ago, so that it can keep going until the New Year before it runs out of money. Although insolvent, Ireland is still liquid, for now. Secondly, not wanting another Greek-style mess, the ECB has intervened to fund the Irish banks.

Not only have Irish banks had to repay their maturing bonds, but they have been haemorrhaging funds in the inter-bank market, and the ECB has quietly stepped in with emergency funding to keep them going until it can make up its mind what to do. Since September, a permanent team of ECB “observers” has taken up residence in the Department of Finance. Although of many nationalities, they are known there, dismayingly but inevitably, as “The Germans”. So, thanks to the discreet intervention of the ECB, the first stage of the crisis has closed with a whimper rather than a bang.

Developer loans sank the banks which, thanks to the bank guarantee, sank the Irish State, leaving it as a ward of the ECB. The next act of the crisis will rehearse the same themes of bad loans and foreign debt, only this time as tragedy rather than farce. This time the bad loans will be mortgages, and the foreign creditor who cannot be repaid is the ECB. In consequence, the second act promises to be a good deal more traumatic than the first.Ireland faced a painful choice between imposing a resolution on banks that were too big to save or becoming insolvent, and, for whatever reason, chose the latter.

Sovereign nations get to make policy choices, and we are no longer a sovereign nation in any meaningful sense of that term. From here on, for better or worse, we can only rely on the kindness of strangers.  

3. 'The real reason QE II won't work' - The US Federal Reserve may try to lower market interest rates to boost lending out to businesses and households, but it won't work because US banks are still repairing their damaged balance sheets through a government guaranteed 'carry trade' where they borrow from the Fed at 0.25% and lend back to the government at 2%.

It's much easier and less risky than lending to businesses.

Essentially it's a massive transfer of private debt to the public sector with a bunch of juicy bonuses being paid to bankers on the way through.

Bloomberg has a nice piece explaining the problem of reluctant lenders and borrowers castrating the Fed.

Rather than providing money to businesses and consumers, U.S. commercial banks are increasingly using the cash available at interest rates set by the Federal Reserve that are next to zero and lending it back to the government. Since June, the biggest banks bought about $127 billion of Treasuries, compared with $47 billion in the first half, according to the central bank. Commercial and industrial loans outstanding have fallen by about $68.5 billion this year, central bank data show.

Between November 2008 and March 2010 the Fed bought $1.7 trillion of mortgage-related and Treasury debt. Over that time, banks bought $226 billion of government and related debt, while commercial and industrial loans outstanding fell by $367.4 billion.

Before companies borrow to expand, they will likely tap into their cash, said Art Steinmetz, the chief investment officer in New York at OppenheimerFunds Inc., which manages about $165 billion.

“A credit crunch caused the recession; it is not accurate to run the logic in reverse and say an extension of credit will get us out of recession,” Steinmetz said. “The banks will lend to good credit, but good credit is not interested in borrowing.” 

4. 'Oops. It didn't sell. Wonder why...' - Bloomberg reports the much hyped auction of Australian luxury properties at the Sydney Opera House yesterday was a big flop as the nerves grow in Australia about the bubble that is the housing market.

The banks are whistling with increasing shrillness that there's nothing to see here and we can all move along, but the foreign investors and a few smart locals such as Steve Keen know the score.

An auction of Australian luxury homes held at the Sydney Opera House raised A$4.1 million ($4.1 million), less than the A$30 million of properties that were put up for sale, less than a week after borrowing costs increased. Only two out of the 11 homes on offer were sold. The auction was a test of demand for a housing market the International Monetary Fund said may be overvalued by as much as 15 percent. The event took place less than a week after the Reserve Bank of Australia raised its benchmark interest rate by a quarter of a percentage point to 4.75 percent and said it welcomed a cooling in house prices.  

5. Not a popular policy - Ben Bernanke's printathon is taking a real hammering in the debate-o-sphere. Here's fund manager and former Economics Professor John Hussman calling Bernanke ignorant. It is today's Must read.

Hussman also makes some ominous points about the long term returns on the S&P 500 likely to be less than 5% over the next decade.

While the announcement of QE2 itself was met with a rather mixed market reaction on Wednesday, the markets launched into a speculative rampage in response to an Op-Ed piece by Bernanke that was published Thursday morning in the Washington Post. In it, Bernanke suggested that QE2 would help the economy essentially by propping up the stock market, corporate bonds, and other types of risky securities, resulting in a "virtuous circle" of economic activity.

Conspicuously absent was any suggestion that the banking system was even an object of the Fed's policy at all. Indeed, Bernanke observed "Our earlier use of this policy approach had little effect on the amount of currency in circulation or on other broad measures of the money supply, such as bank deposits." Given that interest rates are already quite depressed, Bernanke seems to be grasping at straws in justifying QE2 on the basis further slight reductions in yields.

As for Bernanke's case for creating wealth effects via the stock market, one might look at this logic and conclude that while it may or may not be valid, the argument is at least the subject of reasonable debate. But that would not be true. Rather, these are undoubtedly among the most ignorant remarks ever made by a central banker.  

It is difficult to interpret Bernanke's defense of QE2 as anything else but an attempt to replace the recent bubble with yet another - to drive already overvalued risky assets to further overvaluation in hopes that consumers will view the "wealth" as permanent. The problem here is that unlike housing, which consumers had viewed as immune from major price declines, investors have observed two separate stock market plunges of over 50% each, within the past decade alone.

While investors have obviously demonstrated an aptitude for ignoring risk over short periods of time, it is a simple fact that raising the price of a risky asset comes at the sacrifice of lower long-term returns, except when there is a proportional increase in the long-term stream cash flows that can be expected from the security. As a result of Bernanke's actions, investors now own higher priced securities that can be expected to deliver commensurately lower long-term returns, leaving their lifetime "wealth" unaffected, but exposing them to enormous risk of price declines over the intermediate (2-5 year) horizon. This is not a basis on which consumers are likely to shift their spending patterns.

What Bernanke doesn't seem to absorb is that stocks are nothing but a claim on a long-term stream of cash flows that investors expect to be delivered over time. Propping up the price of stocks changes the distribution of long-term investment returns, but it doesn't materially affect the cash flows. This reckless policy has done nothing but to promote further overvaluation of already overvalued assets. The current Shiller P/E above 22 has historically been associated with subsequent total returns in the S&P 500 of less than 5% annually, on average, over every investment horizon shorter than a decade.

6. Trade finance worries - FT.com reports HSBC and Standard Chartered are now lobbying for rewrite of the Basel III rules around trade finance, arguing world trade could be severely hampered without changes. Here's Gareth Vaughan's story from October 12 reporting the risk of a five-fold increase in trade finance costs because of Basel III.

HSBC, among the banks that dominate the trade finance market, said last week that it was not prepared to forecast its future capital ratios under the Basel III regime, mainly because of the unfairness of the rules’ treatment of trade finance, one of its core businesses.

Last month Karen Fawcett, head of transaction banking at StanChart, told a conference: “If the regulations are implemented as they are currently written, we could be seeing a 2 per cent fall in global trade and a 0.5 per cent fall in global GDP.”

7. 'Back it with gold' -  Reuters reports The new chair of the House subcommittee for monetary policy in the new Republican-dominated US congress, Ron Paul, thinks the US dollar should be backed by Silver and Gold. He has also written a book called 'End the Fed'. Paul's son Rand, a Tea Party favourite will be a Republican senator.

Paul said his subcommittee would also push to examine the country's gold reserves and highlight the views of economists who believe that economic downturns are caused by bad monetary policy, not the vagaries of the free market.

Global organizations like the International Monetary Fund also will come under scrutiny, he said. "Eventually we're going to have monetary reform. I do not believe the dollar can be the reserve standard of the world," said Paul, who has called for returning the United States to a currency backed by gold or silver.  

8. Bubble, bubble, toil and trouble - Reuters reports a bubble in farmland prices may be developing in the US midwest. I wonder how all this will end.

Bernanke is suppressing interest rates and printing money which is squeezing out the sides of a flattened US economy into asset prices in commody markets and emerging economies.

This will not end well.

Sales of everything from compact tractors to combines have jumped at Jim Lichtenberg's Nebraska store this year as farmers try to make the most of a boom in corn and soybean prices. "Yields were good this year and crop prices are real good right now, so guys have been spending some money," said Lichtenberg, who has worked as a salesman for Johnson Farm Equipment in Fremont for 10 years. He estimates sales have risen by as much as 40 percent this year.

Surging grain prices and growing investor interest are lifting farmland prices in the Midwest, and bank regulators fear that another U.S. bubble may be inflating. Farmland prices are 58 percent above their 2000 levels in inflation-adjusted terms, according to the Federal Deposit Insurance Corp. That's about how much residential real estate prices rose in the United States from 2000 through 2004.

Grain prices are rising because of demand for grain-fed meat from emerging middle classes in India and China, and crop production problems globally, including a drought in Russia. Investors like farmland because they see it as a safe asset that generates income. They also benefit from the Federal Reserve's low interest rates, which are prompting investors to seek high yields in commodities.  

9. American food subsidies - The Onion reports that a misplaced decimal point in the Farm Relief and Reform Act of 2010 has unleashed a wave of soy bean production across America.

Days after the accidental passage of a bill allocating $30 trillion in federal subsidies to soybean producers, a massive tide of the protein-rich legumes has flooded the nation, crippling transportation networks, commerce, and public utilities, and profoundly disrupting American life. "Soybeans are everywhere," Agriculture Secretary Tom Vilsack said Wednesday, noting that all 406 million acres of arable land in the United States have been converted to soybean cultivation as farmers sought a share of funds worth more than twice the gross domestic product.

"Many citizens have shoveled out their driveways only to find that schools and businesses have been shut down. Millions more remain trapped indoors as windblown soybean drifts cover entire houses."

"For most, simply getting to the grocery store has become impossible," Vilsack continued. "Not that grocery stores have much in them besides soybeans at this point." According to sources within the House Appropriations Committee, a misplaced decimal point deep inside the 279-page Farm Relief and Reform Act of 2010 increased the soy subsidy by roughly 1.75 million percent, precipitating the nationwide glut. Damage from the continent-spanning blanket of soybeans—which ranges in depth from five feet in the nation's heartland to six inches along the coasts and in Hawaii—has been severe.

All major metropolitan areas are reporting clogged sewers and streets; several counties in Nebraska have become invisible beneath towers of soybeans; and a dense patch in the Gulf states has begun fermenting into a thick, pungent soy sauce.

Obviously it's not true. ;) But there's an element of truth in this...

10. Totally irrelevant video - How to do an internet startup. "This time it's different. It will go viral," she said.

"OMG. You make me want to commit to Seppuku with a butter knife and strangle myself with my own intestines..," he said.

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