Tuesday's Top 10 with NZ Mint: Bill Gross; German housing demand; weak Aust. service sector; NZ$77.1 bln in debt; Chinese Madoffs; multiplier debate; Dilbert, and more

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

Bernard is on his summer break and will be back on January 22, 2013, from Wellington.

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

See all previous Top 10s here.

1. Money for nothin' 
Bill Gross, the PIMCO boss, worries that purchases of 'paper' shares as opposed to investments in tangible productive investment assets become the likely preferred corporate choice.

Those purchases may be initially supportive of stock prices but ultimately constraining of true wealth creation and real economic growth.

At some future point, risk assets – stocks, corporate and high yield bonds – must recognise the difference, he says. 

He is worried about a Bernanke quote: "Like gold, US dollars have value only to the extent that they are strictly limited in supply. But the US government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many US dollars as it wishes at essentially no cost."

It's that 'no cost' bit that gets Gross exercised.

Investors and ordinary citizens might wonder then, why the fuss over the fiscal cliff and the increasing amount of debt/GDP that current deficits portend? Why the austerity push in the U.K., and why the possibly exaggerated concern by US Republicans over spending and entitlements? If a country can issue debt, have its central bank buy it, and then return the interest, what’s to worry? Alfred E. Neuman for President (or House Speaker!).

Well ultimately government financing schemes such as today’s QE’s or England’s early 1700s South Sea Bubble end badly. At the time Sir Isaac Newton was asked about the apparent success of the government’s plan and he responded by saying that "I can calculate the movement of the stars but not the madness of men." 

The future price tag of printing six trillion dollars’ worth of checks (cheques) comes in the form of inflation and devaluation of currencies either relative to each other, or to commodities in less limitless supply such as oil or gold.

While they are not likely to breathe fire in 2013, the inflationary dragons lurk in the 'out' years towards which long-term bond yields are measured. You should avoid them and confine your maturities and bond durations to short/intermediate targets supported by Fed policies.

2. Now Germany
Few Western countries are as conservative about home ownership as Germany, where less than half the country's citizens own property. But they too are now being seduced by low interest rates. America's NPR has the story:

Stefan Mitropoulos, an analyst with Germany's Helaba bank, says the buying spree has sent German property prices soaring in recent years, leading buyers to take on large loans that many can't afford.

That means Germany, which has footed much of the bill for Greek and other European bailouts, could soon face tough financial times of its own.

Mitropoulos recalls a similar rise in property prices at the time of German reunification. That paralyzed the housing market here for more than a decade, he says. But, he adds, Germany's traditionally conservative banking practices should help reduce the risk of widespread financial disaster experienced by other countries where real estate bubbles have burst.

Riney, the Berlin real estate agent, agrees, adding that German banks already take steps to protect against property devaluations.

"They take the market value and knock 20 percent off it, and use this as their value for orientation," Riney says. "They usually give a loan for 80 percent of that."

3. Out of thin air
Whether streaming from the exhaust pipes of cars or the chimneys of power plants and factories, carbon dioxide emissions keep growing around the globe.

Now a Canadian company has developed a cleansing technology that may one day capture and remove some of this heat-trapping gas directly from the sky. And it is even possible that the gas could then be sold for industrial use. More from the NY Times:

Carbon Engineering, formed in 2009 with $3.5 million from Bill Gates and others, created prototypes for parts of its cleanup system in 2011 and 2012 at its plant in Calgary, Alberta. The company plans to build a complete pilot plant by the end of 2014 for capturing carbon dioxide from the atmosphere, said David Keith, its president and a Harvard professor who has long been interested in climate issues.

The carbon-capturing tools that Carbon Engineering and other companies are designing have made great strides in the last two years, said Timothy A. Fox, head of energy and environment at the Institution of Mechanical Engineers in London.

"The technology has moved from a position where people talked about the potential and possibilities to a point where people like David Keith are testing prototype components and producing quite detailed designs and engineering plans," Dr. Fox said. "Carbon Engineering is the leading contender in this field at this moment for putting an industrial-scale machine together and getting it working."


4. Today's raw market data ...
A quick holiday update:

as at 11:10am Today
9:00 am
Monday Four
weeks ago
year ago
NZ$1 = US$ 0.8355 0.8308 0.8348 0.7794
NZ$1 = AU$ 0.7969 0.7920 0.7958 0.7638
TWI 75.20 74.86 74.54 69.92
Gold, US$/oz 1,645 1,648 1,702 1,617
Dow 13,414 13,384 13,174 12,363
Copper, US$/tonne 8,006 8,026 8,047 7,515
Volatility Index 14.12


17.06 20.63

5. In retreat
The Australian service sector is going backwards, according to their PSI. And this is not just a recent or one-off trend. But gues which sub-sector actually grew? Without that, the tailoff would have been pretty sharp. More from the ABC:

The monthly Performance of Services Index by the Australian Industry Group and Commonwealth Bank shows the sector shrank every month last year, except for January.

Even more concerning was an acceleration in the pace of decline, with the PSI falling 3.9 points to 43.2 in December, further away from the 50-point level that separates expansion from contraction.

Finance and insurance was the only sub-sector to record growth last month, with retail trade and communications services recording two of the weakest results.


6. Not a record
Governments around the world are getting good at issuing new debt, and ours is no different. Data out yesterday shows that Government securities on issue at the end of 2012 were worth $77.1 billion. That is up $11.7 billion from the start of the year, a rise of almost 18% in one year. We took on that much more debt because we felt that not to would be too socially disruptive.

We rejected austerity. Either our kids can pay it back or they can inflate it away (upsetting our retirement savings).

The general idea is that "when the economy recovers we will go back to a balanced budget". To be fair, we do have a track record of paying some back (see chart). We also have a good track record of accepting inflation (baby boomers will remember). What's it going to be? (Don't forget there are folks out there who want billions more for their pet train projects.)

7. Is the real Bernie Madoff hiding in China?
Chinese 'wealth management products' have a huge following, precisely because Chinese official interest rates are so low. Investors chasing yield may have been caught up in very murky products. Its been more than five years now since these WMPs started to be issued in huge volumes. If there is nothing behind them - even some of them - the crisis of confidence could be explosive. Here is the opening para. from a Reuters story: Read the whole thing here ».

The default of a Chinese investment plan has handed Beijing a tough choice: bail out investors and endorse moral hazard or let it fail and risk unnerving those who hold at least US$1 trillion in so-called wealth management products.

8. What food price crisis?
The latest FAO food price index shows that since 1990 the average real rise in food prices is only 1.45% cumulative. It was lower than that early in the period, higher later. I am not sure we actually have a food price crisis - more likely a 'removal of subsidies' reaction.


9. Getting it right
Economists get criticised for issuing forecasts that aren't accurate. The results are obvious. A number of professionals are working on the problem and a few high-profile ones (including the IMF gurus) have decided that it is their 'multipliers' that weren't sensitive enough. But not everyone is convinced. Some think that 'multipliers' are "estimates of central bank incompetance". Nice line, but is it true? TVHE has been following the explanations:

Obviously the illustrious authors of the multiplier studies aren’t unaware of this problem. The general theme of their arguments is that we are currently in a liquidity trap and monetary policy has little traction in these circumstances. Central banks are thus unable to counteract the effects of fiscal policy, which is only doing what the central bank would do itself if it could: boosting demand.

10. Today's quote
"Money is better than poverty, if only for financial reasons." - Woody Allen

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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David re number 6 and your comment - Don't forget there are folks out there who want billions more for their pet train projects.

You make no mention of the $1.4 billion already being spent on the Waterview connection (a huge 4km of new road), where there isn't even a hill to tunnel through....

Yes, the Waterview tunnel is a disgrace. Only done so an ex PM didn't disturb a few hundred of her voters. Plus, the on-going costs to keep the air clean in those tunnels will be obscene. Worst roading decision in our lifetime.

Nonetheless, an essential expenditure underpinning the recent valuation level of the NZX 50 index.

The government spends money like a drunken sailor and you focus on the waterview tunnel and the pet rail projects?


Where is the breakdown on where they spent the money?

Where is the breakdown on where they spent the money?

A good starting point would be the nonsense of price fixing around the ultra fast broadband rollout - it now seems we will have to pay twice -once to build it and again to use it. 

It beggars belief, really. Not to mention beggaring consumers. Prime Minister John Key's willingness to overrule the Commerce Commission's reduction of wholesale broadband pricing is gobsmacking. Let's count the ways.

No you are wrong there David.  There are much worse roading decisions such as the holiday highway and transmission gully.  Actually \most of the other roads of national significance as well.  Made worse by the stupidity of not spending more on rail (gets cars and trucks off roads) especially the auckland central rail link.

Or do you prefer grid lock in 10 years?

that's Ok then, it's all HER fault. nothing to do with the current National Government at all. whew.

Under 9, TVHE point to a paper by Vox; http://www.voxeu.org/index.php?q=node/4036

where the effects of a fiscal multiplier in any economy have been studied and explained. In other words, how much does that economy benefit by large government deficits after an economic shock.

The crystal clear results show that the multiplier is pretty much nil when the exchange rate is left to freely float, as the extra spending is blown as a free gift to foreigners. It is greater than one when the exchange rate is managed.

Am afraid I don't really credit our guys being clever enough to have planned the deficit as a stimulus- rather, revenues collapsed, and welfare and other payments and obligations went up, and closing the gap was rightly too hard politically. The paper clearly shows that if the government and or Reserve Bank had leant on the exchange rate (as nearly every country other than Australia and NZ has done), so that it didn't go up as a direct result of the extra government borrowing, the money would not have been wasted as a free gift to the rest of the world, and would have boosted our own economy.

Given the $40 billion deficits in the last 4 years, that looks like $40 billion blown where it didn't need to be.

You'd get a lot of Waterview tunnels for that.

Good points, Stephen and given extra fuel by the higher income tax reduction - result: very little actual stimulus to the real Kiwi economy. We can see it in the stats. - record new car purchases, overseas travel and a housing bubble in the better suburbs. What happened to the "export led recovery", Bill?

We can now guarantee that, surprise, surprise, the current account deficit will be much worse and deteriorate quicker than forecast - and that's with low interest rates and profits flowing to our foreign owners.  What the hell is it going to look like if we get a jump in confidence and higher speculative ponzi borrowing leading to a rise in interest rates? We're risking having double digit CA deficits - a complete and utter disaster IOW.