Here's my Top 10 links from around the Internet at 7 pm in association with NZ Mint.
I'll pop the extras into the comment stream. See all previous Top 10s here.
I welcome your additions in the comments below or via email to bernard.hickey@interest.co.nz.
It's all Greek and Chinese to me today...
1. Extend and pretend - The Greek government will live for another few days at least, but the debt hasn't gone away.
Europe's leaders are determined to avoid a default.
It just delays the inevitable restructure or inflation to deal with the debt.
The Eurozone remains in peril.
Markets are still largely betting on default.
As Rachel Hunter says, it won't happen overnight, but it will happen.
As Jamie Dinan, the founder of York Capital, told CNBC this May, it is now obvious that the Eurozone is "determined to keep the euro in tact, and they will bail out Greece." A Greek default at this time, with interest rates and CDS prices leaping, would prove calamitous. The ensuing chaos would give the market an opportunity to hammer other weak Eurozone countries like Spain and Portugal. And a default in the current environment would give French and German banks no time to come up with plans to salvage their own hides, larded up as they are with Greek debt. While it's true that Greece's obligations will eventually need to be restructured and that the euro itself may also need to change, now is absolutely the worst time to make those moves.
"Everyone in the fund community bought CDS on Greece assuming that there would be a default," says Chris Whalen, a banking analyst with Institutional Risk Analytics. "The guys still holding those positions will get stuffed because politicians have decided that we can't find out whether the Europe's big banks can withstand a default. And the amount of credit swaps is so big that no one wants to test whether those counterparties can all pay in the event of a default."
2. Socialism works best for capitalists - Ryan Chittum at Columbia Journalism Review finds this chart below showing share market returns in socialist France have been better than those in America in the last 25 years.
The ascent of laissez-faire economic policies in the U.S. during the first quarter century following the Reagan Revolution wasn’t enough to outdo French stocks, which faced the heavy hand of government.
Take it for what a single datapoint is worth, but it’s interesting, non? You don’t and won’t hear much about this one in the American business press. And you don’t even want to look at truly socialist Sweden’s stock returns, which have outpaced even France’s.
3. Capitalism or managerialism - Harvard Law Professor Mark Roe points out America's version of capitalism seems more about companies being run by and for managers rather than by and for the owners of capital -- shareholders.
Roe points out contested elections for directors are rare and an attempt to make them easier was beaten back by lobbyists.
The lesson is that the US is less capitalist than it is “managerialist.” Managers, not owners, get the final say in corporate decisions.
Perhaps this is good. Even some capital-oriented thinking says that shareholders are better off if managers make all major decisions. And often the interests of shareholders and managers are aligned.
But there is considerable evidence that when managers are at odds with shareholders, managerial discretion in American firms is excessive and weakens companies. Managers of established firms continue money-losing ventures for too long, pay themselves too much relative to their and the company’s performance, and too often fail to act aggressively enough to enter new but risky markets.
When it comes to capitalism vs. socialism, we know which side the US is on. But when it’s managers vs. capital-owners, the US is managerialist, not capitalist.
4. Not so soft - Houses and Holes at Macrobusiness.com.au reports Credit Suisse reckons there's just a one in three chance that China can engineer a soft landing for its economy.
Our analysis shows China’s credit-to-GDP has risen to alarming levels in the past two years due to massive off-balance-sheet financing. Market has only focused on banking system loans which do not capture this. This raises a red flag for future asset quality problems in banks. Further, based on a bottom-up approach, interestcoverage of some 1,000 non-financial companies in 1Q11 declined nearly to2008-crisis levels.
5. Why the euro might survive - Simon Johnson at The Baseline Scenario thinks both the IMF and China are desperate enough to help the Euro survive.
While the EU leadership is surely tired of Greek politicians at this point, they also fear greatly the implications for other eurozone countries if Greece says it can’t pay or won’t pay. The realization that spreads on Spanish government debt will rise sharply concentrates the mind wonderfully.
And the damage would not be limited to Spain – do not underestimate the smugness with which the eurozone has completely and utterly failed to prepare for any kind of sovereign default. The lack of loss-absorbing capital in major European banks is a first-order scandal that could bring down governments.
Fortunately for the undeserving European policy elite, the IMF has plenty of money it can lend at low rates and the Europeans have plenty of votes at the IMF. The IMF can also access considerably more funding as needed, with the agreement of the United States – which really does not want another short-term shock to the world economy. And funding is available from China and other emerging market countries with large stockpiles of foreign exchange reserves.
China has every interest in making sure that the euro survives and prospers as a major reserve currency – to make sure that, over a longer period of time, the US dollar will decline as the primary place in which to hold public and primary rainy day funds.
6. Here's some fun - Australia may start using their Do It Yourself compulsory super schemes to invest in leveraged residential property, Leith van Onselen points out at Macrobusiness.
Call me cynical, but from where I am sitting, the super changes look like another government policy aimed at supporting the housing market. As with all demand-side policies, without a corresponding liberalisation of the supply-side of the housing market, this measure (other things equal) is likely to make housing even less affordable, as the extra demand would feed predominantly into higher prices rather than new construction.
Given that housing already comprises the lion’s share of household assets – 62% as at September 2010 (see below chart) – one also has to wonder about the efficacy of a policy that encourages households to concentrate even more of their assets in housing.
7. Slowing consumer spending in China - Bloomberg has an anecdote-rich report on a slowdown happening in Chinese consumer spending, which is really the last thing the economy needs.
Analysts at Capital Economics, a London-based research group, estimate that private consumption may have fallen to 34 percent of gross domestic product last year, the lowest level since China began opening its economy to market mechanisms more than three decades ago. Just 10 years ago, the share was 46 percent, Capital Economics calculates.
“Just at a time when the government in China and a lot of people elsewhere are hoping to see Chinese consumers step up to the plate, actually they’ve been staying away from shops,” said Mark Williams, an economist in London with Capital Economics and a former adviser on China to the U.K. Treasury. “The trend over the past couple of years has been relentlessly downward.”
China’s leaders have vowed to boost consumption’s share of GDP since at least 2006, so far to no avail. The ratio is about half that of the U.S., and about 60 percent of both Europe and Japan, according to Credit Agricole CIB.
8. Why China may not keep growing fast - Patrick Chovanec makes the case here at the Globe and Mail. China's growth is unstable and the wrong type of growth.
Chinese consumption has been growing, but not nearly enough to tilt the balance. In fact, according to the IMF, consumption as a percentage of China’s GDP has steadily declined, from 42.2 per cent in 2003 to 35.5 per cent in 2009. In the meantime, the investment-led “boom” produced by printing money has all but eliminated the motivation for the Chinese to tackle the kind of challenging reforms – to its banking system, its currency, its social safety net – needed to develop a strong consumer-based economy.
There is no question that China has the potential to be a driver of global economic growth. It will never be able to realize this potential, however, without profound changes to the way China runs its economy.
9. Why Greece needs another 110 billion euros - Robert Peston at the BBC does a nice job of explaining Greece's problems. He says the voluntary restructuring proposed by the Europeans is pointless and won't work.
A voluntary private-sector contribution to Greece's rescue may be a beautiful creature, a unicorn of financial succour. But it may be as real as a unicorn.
Which leads to a difficult conclusion for eurozone ministers: they've either got to accept the case for a formal, orderly default by Greece (which they are not minded to do); or eurozone taxpayers are probably going to have to stump up even more money to keep Greece afloat (for the time being, at least).
10. Totally The Muppets - Here's the trailer for the new movie.
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