Thursday's Top 10 with NZ Mint: Bill Gross sees returns and rates 'lower for longer'; US hedge funds to start advertising to public; How Melbournians are deleveraging; Financial hurricane season; Dilbert

Here's my Top 10 links from around the Internet at 11 am today in association with NZ Mint.

As always, we welcome your additions in the comments below or via email to bernard.hickey@interest.co.nz.

See all previous Top 10s here.

My must read today is #6 from Bill Gross on why rates will stay lower for longer. I agree.

1. Exchange rate theory - Texas University Economics Professor John Harvey talks here at Naked Capitalism about how the neo-classical economists' view on exchange rates is just plain wrong, mainly because they ignore the influence of capital flows.

That sounds remarkably and depressingly familiar.

Most economists in New Zealand, including those at Treasury and the Reserve Bank, focus on the fundamentals of commodity prices and import/export demand as the drivers of exchange rates.

But what if capital flows are actually more important in the short and long terms?

That would certainly explain the over-valuation of the New Zealand dollar.

Here's Harvey, who describes himself as a 'Post Keynesian':

Financialization has meant that currency prices have increasingly become reflections of the volatile and subjective expectations in the financial market rather than prices that serve a useful purpose in the allocation of international resources. Ironically, as they have become more skewed in terms of being relevant economic indicators, so professionals and lay people have treated them as more important.

This of course mimics what we have seen happen with domestic financial markets. And the fact that international financial flows are roughly ten times the size of trade flows means that the latter tend to respond to exchange rate movements rather than cause them. And yet, every major neoclassical currency model assumes the latter to be true at least in the long run!

2. It's the robots - Dylan Matthews writes at The Washington Post about why so many middle class manufacturing and routine-type jobs have been lost in recent years. He cites a study talking about job polarisation.

The loss of an American edge in manufacturing doesn’t explain why we’ve started to have job polarization, and thus jobless recoveries.

What does explain it, Jaimovich and Siu argue, is technological change. Recessions force businesses to cut costs, and one way they do that is by using new technologies to try to produce the same output with fewer workers. Because automation tends to work best at repetitive tasks, the workers replaced are overwhelmingly those in repetitive, middle-income jobs. Think of how touchscreens have replaced clerks at pharmacies, or how automated voicemail systems have replaced secretaries. But menial non-repetitive work, like gardening or janitorial work, is harder to automate, Roombas aside, and so far we haven’t trusted computers to take over non-repetitive cognitive tasks like in law or, er, journalism.

Thus, recessions wipe out repetitive jobs and force the displaced workers to fight over what jobs remain in non-repetitive work. If they’re lucky and have skills, they get high-skilled jobs and benefit. If they’re less lucky, they’re stuck as janitors or farm workers. Of course, the speed with which those fields grow is dependent on the overall size of the economy, so faster growth still helps quite a bit. But this helps explain why even those who’ve found jobs in the current recession are often working below their skill level.

3. Something's up - Xinhua reports China has just suspended foreign exchange services to over 1,500 companies. Strange. It seems some people without the need for actual trade were pulling money out of China...

Wonder where they put it? Auckland property?

This follows reform to the foreign exchange management system for cargo trade in August. The administration found companies were hardly doing any business during its surveys, it said in an announcement Monday. The administration also limited its services to more than 700 companies nationwide for their unlawful acts concerning forex transactions, including arbitration of exchange and evasion of exchange control.

4. The history of hyperinflation - This Cato Institute paper on Hyperinflations by Steve H. Hanke and Nicholas Krus is fascinating. The best thing about it is this table showing the worst bouts of hyperinflation in the last 100 years or so.

Zimbabwe was not the worst. Germany's 'Papiermark' and Greece's Drachma are in the top 10. War is the major trigger. Click through here for a full paper and table.

5. Financial hurricane season - Anatole Kaletsky at Reuters makes some great points about how August, September and October are the prime months for financial crisis.

Most of the great financial crises of modern history have occurred in the two months from mid-August: the Wall Street crashes of Oct. 22, 1907, Oct. 24, 1929, and Oct. 19, 1987; Britain’s abandonment of the gold standard on Sept. 19, 1931; the postwar sterling devaluation on Sept. 19, 1949; the collapse of the Bretton Woods global monetary system on Aug. 15, 1971; the Mexican default that triggered the Third World debt crisis on Aug. 20, 1982; the breakup of the European exchange-rate mechanism on Sept. 16, 1992; the Russian default on Aug. 17, 1998, the bankruptcy of Lehman Brothers on Sept. 15. 2008 – and this list could go on.

The testing period begins this week with Thursday’s ECB meeting and Friday’s U.S. job figures. Further challenges to financial confidence are likely from the German constitutional court verdict on euro bailouts on Wednesday and the Federal Reserve decision on quantitative easing the following day.

But rather than focusing again on these familiar issues, it is worth considering some worrying developments recently in other parts of the world. In China, economic activity has failed to accelerate as expected, despite repeated attempts at monetary and fiscal stimulus. This could mean simply that the government and the central bank have not yet done enough. It is possible, however, that the Chinese economy has become too complex to be managed and fine-tuned as effectively as in the past. Or perhaps the disappointing results of Chinese stimulus thus far reflect a broader failure of monetary policy, which is becoming evident around the world.

6. Lower for longer - Bond fund supremo Bill Gross has some interesting views via Bloomberg about why investment returns of 10% plus are a thing of the past, and why the cult of equity is dead.

“Our credit-based financial system is burdened by excessive fat and interest rates that are too low,” Gross wrote. “Central banks are agog in disbelief that the endless stream of” liquidity pumped into the banking sector has not stimulated lending, Gross wrote.

Structured impediments such as regulator capital risk standards for banks and fear of losing money among household investors has prevented so-called zero boundinterest rates from sparking the economic recovery that central bankers anticipated through the policies, Gross wrote.

“Too much debt leads to forced diets and deleveraging, a process that has been going on since Lehman in 2008,” Gross wrote, referring to the bankruptcy of Lehman Brothers Holdings Inc. in September of that year. “Not only households, but financial institutions as well as many countries have reduced their caloric intake which in turn has promoted slow growth and in some countries near recession and/or depression.”

7. What deleveraging in Melbourne looks like - Leith van Onselen at Macrobusiness.com.au has some great charts showing how Melbourne's property market is changing and how homebuyers are beginning to deleverage.

Between 2003 and 2005, there were around 11 mortgages created for every 10 mortgages discharged. In the 12-months to August 2012, however, the number of mortgages lodged has slipped just below the number of mortgages discharged, signalling that Victorians are deleveraging.

8. Brilliant - US regulators are loosening restrictions on US hedge funds advertising to the public, reports Jesse Eisinger at ProPublica.

Fresh from having declined to constrain money market funds, the Securities and Exchange Commission has moved to loosen marketing constraints on hedge funds.

Two weeks ago, the agency threw up its hands and said it would not be able to defend millions of investors from money market funds that do things like invest in dodgy European bank bonds yet proclaim themselves to be perfectly safe.

Instead, the S.E.C. — mandated by Congress through its misnamed and harmful JOBS Act — proposed rules last week to lift advertising restrictions for hedge funds and other kinds of private investment offerings. The rules haven’t been finalized, but we can look forward to an ad featuring a wizened couple in matching tubs overlooking a sunset, holding hands and talking about how they just put money with the next George Soros.

9. Candor - Interesting piece here from Epicurean Dealmaker about what life as an investment banker is really like, apart from all the money.

I'm interested in the detail about lack of sleep and simply mad work practices. No wonder bad decisions that hurt us all are made.

And yet, as I regale you with this litany of woe (to the tune of an orchestra of thousands of tiny violins, no doubt), it occurs to me that this situation is not much different than the situation most people face in their lives. Perhaps investment bankers have more money, and nicer toys, but it is not clear that our quiet desperation is much different from yours. People who have to work for a living, whatever their profession, have to work. And, as my old grandpapa told me, the reason they call it work is because no-one could mistake it for play. I suppose the envious can take comfort that my industry will likely suffer severe secular decline for many years. By the end of it, our calculus of misery may look very similar to yours.

But whatever your chosen path, Children, don’t buy the old canard that money buys you freedom. Money always comes with strings attached. If you are not careful, you just might find those strings have wound themselves into steel cables before you notice.

10. Totally an interview with Kim Kardashian on CNBC. Genius. If only we could get her on Interest.co.nz to ask whether she's a fixer or a floater, and what she thinks will happen with Auckland house prices.