Here's my Top 10 links from around the Internet at 10 to 6 pm in association with NZ Mint.
I welcome your additions in the comments below or via email to bernard.hickey@interest.co.nz.
I'll pop the extras into the comment stream. See all previous Top 10s here.
Back on stream properly next week.
Think about this for a minute.
A guy who is the manager of the most bonds in the world says the world's most powerful government in the world's biggest economy will eventually not be able to service its debt.
And he's saying America is likely to get away with it because the default will be done through inflation and currency devaluation.
It's astonishing really. This guy is the most qualified in the world to know these things. He has hundreds of researchers at his fingertips. He could and does pick up the phone to the most powerful people in the world. He is playing with US$1.2 trillion of savings on behalf of American savers. He cares and knows.
And he is saying out loud that America is trying to trick the world into buying what will be worthless (or at least devalued) paper.
Yet bond yields remain near record lows.
Either he is off his rocker or he is the only one saying the emperor has no clothes.
When the bond vigilantes (and he is the chief of the vigilantes) truly awake we should all be a little fearful.
Rising interest rates will be the thing that ends any pretence about the Global Financial Crisis being over.
Here's Gross:
Medicare, Medicaid and Social Security now account for 44% of total federal spending and are steadily rising.
Previous Congresses (and Administrations) have relied on the assumption that we can grow our way out of this onerous debt burden.
If I were sitting before Congress – at a safe olfactory distance – and giving testimony on our current debt crisis, I would pithily say something like this:
“I sit before you as a representative of a $1.2 trillion money manager, historically bond oriented, that has been selling Treasuries because they have little value within the context of a $75 trillion total debt burden.
Unless entitlements are substantially reformed, I am confident that this country will default on its debt; not in conventional ways, but by picking the pocket of savers via a combination of less observable, yet historically verifiable policies – inflation, currency devaluation and low to negative real interest rates.
Our clients, who represent unions, cities, U.S. and global pension funds, foundations, as well as Main Street citizens, do not want to be shortchanged or have their pockets picked.
It is incumbent, therefore, in order to preserve the integrity of the U.S. Treasury market along with its favorable global interest rates, and to promote a stable U.S. economy, that entitlement spending be reduced, and that future liabilities be addressed in terms of healthcare and Social Security cost containment. You must attack entitlements and make ‘debt’ a four-letter word.”
2. What about the goodwill? - Massey University Banking Professor David Tripe asks a good question in this piece at TVNZ's AMP Business about the NZ$3.5 billion of goodwill attached to National Bank that is on ANZ's books in New Zealand.
Tripe told AMP Business today he expects a lot of the National branches would have to be re-branded and some may be closed if the bank did move to one identity.
He says National Bank has managed to keep up its popularity despite eight years of ownership by one of the "big Aussie banks", but that could now be at risk.
"(Ditching) it would seem to be risky at the best of times and it's not something you would do in a rush," he said.
The other cost is likely to be financial with ANZ's purchase including approximately $3.5 billion of goodwill. Tripe warns that goodwill may have to be written off if the National Bank brand is ditched.
3. Why was South Canterbury Finance renewed? - Frogblog asks a good question about why the government allowed South Canterbury Finance to remain guaranteed for so long and renewed that guarantee for the extended scheme. It could have been allowed to lapse.
Here’s John Key, at a public meeting in Timaru last night, talking about (audio) the Government’s knowledge of the financial woes of South Canterbury Finance:
"But for the entire time I’ve been Prime Minister I’ve had the Treasury in my office, week after week, month after month, telling me South Canterbury Finance was going bankrupt."
Okay, John Key and Bill English may have a case to be forgiven for the first sign-off of South Canterbury Finance into the Retail Deposit Guarantee scheme – it was the day they took office as Ministers. They would have been so excited about the enhancement of their political careers that perhaps the details may have passed them by. But the guarantee was renewed on December 11 2009, updated on All Fools’ Day 2010, and amended on June 17th 2010, all signed off on behalf of Bill English.
4. Problems in Muni land - Along with the European Sovereign debt crisis, the other one to watch is 'Muni' or Municipal debt in America. Towns, cities, counties and states in America are big borrowers, but many have balanced budget rules and are struggling to finance previous debt as the economy struggles to recover.
Now the CEO of JP Morgan reckons a hundred munis could fall over, Bloomberg reports.
“I wouldn’t panic about what I’m about to say,” Dimon, 55, said today at a U.S. Chamber of Commerce event in Washington. “You’re going to see some municipalities not make it. I don’t think it’s going to shatter America, I just think it’s a part of the credit cycle.”
JPMorgan, the second-biggest U.S. bank by assets, said in February its commercial bank’s municipal-debt holdings are diversified enough to handle a likely increase in defaults. The number of issuers that can’t manage debts may be about a hundred, Dimon said today.
5. Paying their fair share - The British body politic is stirring about the way many of the globalised companies operating and/or based in Britain avoid paying tax there.
The Guardian reports a bunch of MPs plan to investigate corporate tax avoidance.
The inquiry, by the Treasury select committee, will raise the political temperature around the issue – already under scrutiny after questions over the tax bills of multinationals such as Vodafone and Barclays – and senior executives face the prospect of explaining their companies' tax structures to the committee.
George Mudie, the Labour MP for Leeds East and the chairman of the Commons Treasury sub-committee, told the Guardian that there was growing public interest. "When people see their standards of living fall and are paying their tax, and see huge salaries and questions over tax avoidance, then quite rightly they are interested in the issue," he said.
6. Worth watching - A bunch of Australian councils who bought a bunch of toxic sub-prime bonds called 'Rembrandt notes' are taking legal action against Standard and Poor's in Australia on the grounds that S&P had a duty of care to do a decent job (but didn't). This is a world first and could create an opening for grumpy pension funds the world over to destroy the ratings agency.
Here's Elisabeth Sexton from BusinessDay:
The councils allege misleading and deceptive conduct by the ratings agency, which is owned by McGraw-Hill International.
Other parties in the case are Local Government Financial Services Pty Ltd and ABN Amro Bank. It is being funded by IMF (Australia) Ltd, whose executive director, John Walker, said the 10-week trial, due to start in October, would be ''the first time worldwide that a ratings agency will have been taken to task''.The councils were among 75 investors who put $45 million into ''Community Income Constant Proportion Debt Obligation Notes'', known as Rembrandt notes, in 2006. The notes were rated AAA by Standard & Poor's.
7. 'Send lawyers, guns, money and a private jet' - Private jet sales and rentals are booming in the Middle East and Africa as airlines cut back flights in areas with civil unrest and as dictators, royalty and business people scramble for ways to get the hell out of dodge in a hurry.
Banned by many firms as an extravagance after the global downturn, jets -- some with gold-plated interiors, bedrooms and bathrooms -- are vital for businessmen, diplomats, politicians and families wanting quick, discrete exits from trouble spots.
Airspace over the world's No. 1 oil exporting region is buzzing, with passengers doling out as much as $18,000 for an hour-long flight on an 18-seater, after protests toppled rulers in Tunisia and Egypt this year and the unrest spread to Gulf states including Bahrain, Yemen, Kuwait andSaudi Arabia.
"During the peak of the Egypt unrest, we were flooded with calls," said Shane O'Hare, president and chief executive of Royal Jet, based in Abu Dhabi. "We had corporate customers, individuals, families, diplomats and others calling for our service," he said.
8. 'So that's where the copper went' - The copper price is one of the few commodities falling in price at the moment.
One of the reasons is the recent uncovering of massive copper stockpiles in China which are effectively being used as collateral by property developers to borrow money at super low rates from London and New York.
Yes. This one is for Wolly.
Property developers are using copper as collateral to borrow newly printed US dollars and pounds cheaply.
They are getting around intransigent Chinese banks to use the near zero interest rates in London and New York to borrow to invest in Chinese property developments.
Now you see why I'm such a big grump about low interest rates in America and Europe (and here for that matter)?
Here's the detail via FTAlphaville:
The scale of the refined inventory casts into doubt the size of the expected refined deficit in the copper market this year, and raises the prospect of a balanced market, or even a small surplus.
• More worryingly however is that the primary use of copper in bonded warehouse appears to be as a financing mechanism to provide cheap working capital for various types of business often unrelated to the metallic industry.
Initially via a letter of credit and then by using deferred payment LC, they create a borrowing vehicle. Estimates for the amount of metal tied up in such a way range from 40-80% of total bonded stocks. Our estimates are towards the upper end of this range.
• Property developers (or the property developing arms of conglomerates), appear to be behind the lions share of this type of activity, driven by an unwillingness by domestic banks to extend finance, or the imposition of interest rates of anything from 10-20% when they do. On that basis, interest rates on metal of LIBOR + cost of funding look very attractive indeed.
9. Ain't history fascinatin' - Texas State Economics Professor David Beckworth points out on his blog that America used to have three separate currencies. During the Civil War the Union under Lincoln went off the gold standard and started printing 'Green backs'. Meanwhile California stayed on the gold standard and its dollars were known as 'Yellow backs'. The South printed its own money that rose in fell in value depending on how the Rebel army was going.
Here's one of the more interesting currency charts I've seen in a while that shows rampant inflation/develuation that fluctuated depending on the outcome of battles.
Gettysburg was a bad day for holders of confederate money.
10. Totally relevant video today as the Irish face up to yet another bailout of its banks and impending default.
11. Totally bonus weekly video on John Clarke and Brian Dawe.
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