Wednesday's Top 10 with NZ Mint: 220 year record; Brazil; Steve Jobs to give evidence; flaws of finance; trade to get hit; lawyers as moralists; slipping competitiveness; Dilbert

Here's my Top 10 links from around the Internet at 10:00 am today in association with NZ Mint.

Bernard will be back with his version tomorrow.

We welcome your additions in the comments below or via email to

See all previous Top 10s here.

1. Prepared
Apparently, banks have been planning for 'Grexit' for quite a while. And one thing they are worried about is that the Greeks could exact some major revenge of the banking system in the transition. Lebanon is one place that would be badly affected by a Greek collapse and The Daily Star has been following the issue:

If Greece forced an exchange rate of, say, one euro to one new drachma, this could impose huge losses on foreign banks because such a rate would not hold on the markets.

Controls on the movement of capital could be a nightmare for banks with loans in Greece, potentially making it illegal for companies to repay debt in euros.

Banks have studied several options to protect themselves as best they can, including switching to U.S. law for new derivative transactions or loans. So far few have taken such steps due to doubts about how effective they would be, and also because they are afraid to add to market concerns. "Banks are very, very reluctant to start shouting 'fire!'. They know what happens and what panic looks like," said one London-based lawyer advising financial firms.

Instead, most are simply checking the governing law of their contracts, hedging against defaults and running through every legal argument a Greek euro exit could throw up.

With such questions unanswered, stuffing cash machines with enough drachma banknotes is almost an afterthought. For Greece itself, it certainly won't pose a problem. The country's national bank has its own banknote printing press and mint and has continued to print euro banknotes ever since joining the single currency in 2001.

2. 220 year record
One of these days, the bond vigilantes will show up. Today was not that day though. Tomorrow's not looking good either. The chart below shows the nominal yield on 10-year US Treasury bonds the past ten+ years. Thursday's midday 1.54% yield was the lowest it's been over that period. That was also the lowest it's been the past 50 years. Actually, 100 years. No, 220 years. The lowest ever.


3. Bearish on Brazil
We think we know what the impact on Australia will be if Chinese growth stalls (and it looks like it is doing just that). But the impact will be even harder on Brazil. Brazil is big and a global player. It has a US2.2 trillion economy, two and a half times larger than Australia.  Ruchir Sharma looks at what might happen there.

Until recently, there seemed plenty of reasons to be bullish on Brazil. Having posted record growth for a decade and weathered the financial crisis well, the country looked poised to become a global economic leader. But the would-be giant stands on feet of clay. The economy depends too much on high commodity prices, and as demand falls, so may Brazil.

4. Steve Jobs speaks; Apple squirms
Steve Jobs gave a lot of juicy quotes before he died, and Apple has failed to keep some of them out of an upcoming patent trial against Google's Motorola Mobility unit, according to a court ruling. Apple and Motorola are scheduled for a high profile patent trial in a Chicago federal court this month, one of several intellectual property cases between tech giants over smartphones and tablets using Google's Android operating system.

Apple also has said it would ask a California federal judge to keep Isaacson's book out of its upcoming patent trial against Samsung Electronics, scheduled for July.

In a separate order on Thursday, Posner forbid Apple from arguing that jurors should be predisposed to favor Apple over Motorola if they like Apple products, or admire Jobs. "I forbid Apple to insinuate to the jury that this case is a popularity contest," Posner wrote.

5. Low and stable is good
House prices are low and staying down in the US. What's not to like, asks Edward Glaeser.

I see no reason to think that this period of housing-price stagnation will be shorter than the six-year stagnation of the 1990s. I hope that housing prices continue to be modest for decades so that ordinary Americans can afford to buy, and I see little good in government policies, like the homebuyer tax credit, intended to artificially boost housing prices.

My greatest hope, however, is that prospective buyers have learned the lesson of the past decade: Housing prices go down as well as up. The right reason to buy a home is not as an investment, but as a place to live a fulfilling life.

6. One the one hand ...
Stephen Franks is worried our lawyers are vying to become the new high priests of morality.

One of the Law Society reps gave orthodox lawyerly analysis. The other offered worthy sentiment couched as economics and legal theory. If it was either it was from schools unknown to me. I think I heard Rajan Prasad  cited as an economic sage, but I must have been mistaken. And it must have been hard for the other lawyer to sit politely when the committee was told that they should over-ride freedom of contract by competent adults because "law should mimic what a perfect system would produce if everyone was acting fairly and in each other's best interests".

That is theology not law. It could only be administered by priests, with god-derived powers to know more than the parties to contracts. Perhaps that is the point. Now we have no priests there are plenty of candidates to fill their supple shoes.

7. Slipping
The latest measure of relative international competitiveness from the IMD has New Zealand falling from 21st to 24th - a drop of three places. Australia fell faster, from ninth to fifteenth. Improving five places is Iceland, improving four places is Ireland. Greece just pipped Venezuela for last place in the 59 nation survey.

8. The flaws of finance
James Montier is on to it. This paper is worth the time to read especially if you have a finance background. And he includes the chart below tracking UK bank leverage over a long period. Observant readers will be able to see that when leverage is allowed to rise to ridiculous levels, bad things happen to the economy - and it has happened over and over again. Not a lot of learning going on here. (HT DanH.)

The US National Rifle Association is well-known for its slogan "Guns don’t kill people; people kill people." This sentiment has a long history and echoes the words of Seneca the Younger that "A sword never kills anybody; it is a tool in the killer’s hand." I have often heard fans of financial modeling use a similar line of defence. However, one of my favourite comedians, Eddie Izzard, has a rebuttal that I find most compelling. He points out that "Guns don’t kill people; people kill people, but so do monkeys if you give them guns." This is akin to my view of financial models. Give a monkey a value at risk (VaR) model or the capital asset pricing model (CAPM) and you’ve got a potential financial disaster on your hands.

That bank leverage was allowed to get this high is just appalling in my view. In New Zealand, our banks are leveraged about 13 times and that is way more conservative than what you see in the chart. But I still reckon that 13 times is still dangerous; see my earlier opinion piece here ».

9. 'Trade'll get hit'
For most readers, the PMI index is a technical thing. But its relevance to New Zealand just got more important because this same index is tracking southward in most countries now. That is not a good thing. HSBC has been tracking the trends. (This opens a .pdf) (HT SelwynP)

Data is turning. Hard. The latest round of PMIs, whether from Asia or the West, provides a sobering picture. The economic impact of Europe's financial turmoil is now spreading far and wide. China, too, is slowing again rapidly after a quiet uptick earlier in the year. Two things. First, the trade cycle is about to take a hit. Globally, new export orders have started to contract for the first time since December. Second, and more encouragingly, inflation pressures are easing. The latter will help cushion local demand and may provide a bit - though not necessarily much - more room for officials to ease. Bumpy summer.

10. The last laugh
'We're all poor now'

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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FYI. Looks like the QE III drums are beating again:
The WSJ's Jon Hilsenrath -- whom Cardiff Garcia has dubbed "Fedwire" -- reports that more Fed action is now officially on the table due to the slew of weak incoming data.
There's no gaurantee that it will happen, or that if it did happen it would be at the June 20 meeting, but the presses are being warmed up.
Top Fed officials have said that they would support new measures if they became convinced the U.S. wasn't making progress on bringing down unemployment. Recent disappointing employment reports have raised this possibility, but the data might be a temporary blip. Moreover, the Fed's options for more easing are sure to stir internal resistance at the central bank if they are considered.
Their options include doing nothing and continuing to assess the economic outlook—or more strongly signaling a willingness to act later if the outlook more clearly worsens. Fed policy makers could take a small precautionary measure, like extending for a short period its "Operation Twist" program—in which the Fed is selling short-term securities and using the proceeds to buy long-term securities. Or, policy makers could take bolder action such as launching another large round of bond purchases if they become convinced of a significant slowdown.

Well the data looks at best pathetic,
at worst dire,
On  the plus side
we have GBH who thinks it looks like a recovery........

Any Fed action is just a tempoarary kick the can down the road exercise.  As Einstein stated "Insanity is doing the same thing repeatedly and expecting different results"

And Moody's cuts the credit ratings for a bunch of German banks...
Today's rating actions are driven by the increased risk of further shocks emanating from the euro area debt crisis, in combination with the banks' limited loss-absorption capacity. The key drivers of today's rating actions on German banks are:
- Increased risks to asset quality for the banks affected by today's actions due to their exposures to asset classes prone to further deterioration if downside risks from the euro area debt crisis and the weakened global economic outlook materialise.
- Limited loss-absorption capacity, given the comparatively small equity cushions relative to total assets (not risk-weighted) and low pre-provision earnings. As a result, many German banks have limited capacity to absorb losses out of earnings, raising the potential that capital could diminish in a stress scenario.

Hard to put much credence in rating cuts as they have beeen consistently well behind reality. Ditto all the stress testing. Rememember Dexia not long ago? Several German banks have failed the stress tests that Dexia passed. They also had to bail out several banks in recent years including Hypo. Germans aren't financially infallible.
"The tests have proved to be meaningless even quicker than they were in 2010 when Ireland's banks were given a clean bill of health, only to be bailed out four months later. In July, 2011 the EBA had been reckoning that the capital shortfall of the banks that failed was just €2.5bn. Now the markets reckon that the hole is more like €300bn."

Krugman on newsnight,
Really interesting, 2 right wing voodoo economics entrenched mind sets on one side v krugman on the was funny (head shaking in disbelief over the rubbish the right came out with) if not so desperate for those they seem to want to impact....

So at what stage do you think that more Gov't borrowing and spending will actually solve the debt problem? 

(Taking out peak oil of the equation).
Short  answer,
Is as per PK...when the recovery has occured.
Long answer
The point is if you look at 2008 when the Govn's income collapsed there was / is no way we can sustain current Govn expenditure if its income stays there (without tax increases).  Yet  going back pre-2007 HC's govn did pay down public debt. So Krugman's argument is while the private sector contracts and pays down debt if the Govn doesnt continue spending we will see a depression and 2008's lack of govn income will be repeated (but worse).....
If on the other hand we can get the economy going again, there will again be the Govn income and there will again be surpluses to pay down the Govn debt....
Putting Peak oil back into the equation...however........but thats another long post I dont have time for.

I still don't see how your solution of more Gov't borrowing is going to solve a debt problem.  In NZ, by no means the worst example, the Gov't is borrowing approx. 6% of GDP to get an overall increase in GDP of about 2%.  How is this "getting the Gov't going again" and how long can it go on for?   As Margaret Thatcher prophetically stated "eventually you run out of other people's money"  

Not unless the government has the power to print the money...which it does...

Bernard - I don't think that printing money is a solution to the problem, it will only cure the symptoms for a short period of time.  If this was the solution I am certain the Gov't would have tried it before now.  Have you read "Paper Money Collapse" by Detlev Schlichter? 

Because its not a debt problem right now....
Our debt is 25% of GDP....The problem will be if our Govn revenue falls to 2008/9 levels or worse....then we wont be able to pay back what we owe now.....If on the other hand we continue Govn spending then private busineses will see that money and start to invest.......creating demand which creates more demand....Govn spending then drops back and increased revenue pays off the debt...
Just look at Greece, spain and the UK for how Govn austerity matching private austerity goes...Or look to Sweden to see how non-austerity high costs welfare state is going......somewhat better.   So even if you cant understand/stand the keynesian ideas/models note the results v the (say) von mises / hayek ideas and those results......

How can you compare Sweden, which doesn't have a major debt problem, to Greece,Spain & UK which do have high debt problems.  As I have repeatedly asked, without any suitable answer, how can you solve a problem of too much debt by adding more debt? The major  reason that the southern european countries have these high debt problems is because ever since the formation of the ERM they have used the majority of the borrowed money to fund welfare spending,  In the Greek case to pay superannuation benefits to people in their 50's.  These countries will never be able to escape their problems of ever increasing debt because they are using the proceeds to pay for welfare instead of production.

The NZ economy doesn't have a government debt problem, duh. What is going 'wrong' with the economy is the correction to a non-government debt problem, and there is bugger all the government can do to prevent it. The point of government intervention in the economy is that the government can ease this process by keeping peoples incomes up,
Naturally this trend really kicked off during the Thatcher era.
Looked interesting till the LAST line....
>> The changes will not be introduced before 2018.

Regarding (6), Stephen Franks has wisely cottoned onto the fact that our judiciary have now become a compliant part of the slave state. Rather than a safeguard in a classical liberal society protecting the individual from the abuse of state power, they've become complicit in the abuse.

So true.

One word, mist42nz: Gramsci.

Make yourself a stiff drink and then go have a read of this....
sleep well....

Great Top 10 today David.
Working on mine for tomorrow now...


How Bank of America Execs Hid Losses—In Their Own Words

Ta 29 "they were different"'d only wonder how many times that exercise was repeated on so many levels.......just contempt in it's purest form.

Yep Ta David...just got to wade through it now.....some really good reading ...The HSBC PMI charts n accompaning commentary worth saving for a wee look back in say 6 months.
P.S. David and Bernard ,Worth the short read if time allows......
This is a fascinating analysis that runs counter to common perception: "This shows that not even the Fed can dominate the pricing of the world’s largest, most liquid, asset market. What explains the seemingly perverse reaction of Treasury markets to the Fed’s actions? Simple: it was the swing in macro data (Exhibit 5). The swing in macro likewise explains much of the swing in equities through the past few years, as suggested by Exhibit 6. We think Mr. Bernanke got lucky with QE2: macro data improved almost from the moment it was flagged at Jackson Hole in August 2010. That improvement, not QE2, was in our view the key to the subsequent rally".