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 is #6 from Reinhart and Rogoff, which I'll leave as the last word on this topic for the week. They make some great points about debt, Keynes, investment and interest rates.
1. China's slowing growth - Peter Hartcher is an old hand when it comes to looking at China from an antipodean point of view.
He has a good look here at SMH.com.au at what the new leaders are up to.
Now that China is our largest export partner, we should care too.
Growth is slowing, and quite quickly.
And it's what their leaders want.
And they often get what they want.
The new era of moderation shocked the world when it turned up in China's economic growth figures two weeks ago. After three decades of extraordinary economic growth, and after a decade at the breakneck pace of 9 per cent a year, outgoing premier Wen Jiabao declared such growth was ''unbalanced, unco-ordinated and unstainable''. The new growth target he announced for last year is 7.5 per cent a year. Yet when the statistician announced two weeks ago that China grew at an annualised rate of 7.7 per cent in the first quarter of this year, share markets worldwide slumped.
The Australian dollar, seen in global markets as something of a proxy for Chinese growth, fell by US1.13¢ against the US dollar. So the economy was doing what China wanted, doing what they had announced, yet investors were shocked and disappointed.
Why? The world investment community had talked itself into expecting that China's new leadership would start a fresh investment binge. But it did not. ''As a result, fears of a hard landing once again regained momentum,'' says Yiping Huang, an economist at Peking University and the ANU.
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2. An Aussie banking bubble - FTAlphaville reports on a UBS research note saying Australia's banks are over-valued.
Here's UBS:
The Aussie banks are very good companies. They are profitable, resilient, well capitalised, well managed, shareholder focused and have a very strong industry and regulatory structure. However, following the significant leveraging of the Australian & NZ households over the last thirty years they are now low growth and remain heavily exposed to housing, funding markets & unemployment risk.
As with all asset bubbles, they can go higher and for longer than many expect. With a solid near term earnings outlook there is nothing stopping the market bidding dividend yields in to ~4.5% (historical lows) implying about 10% share price upside. As Chuck Prince (former CEO of Citi) famously said “As long as the music is playing, you’ve got to get up and dance”. All we can say is buyer beware.
3. A bubble, but not just yet - Here's Shane Oliver from AMP quoted in the Sydney Morning Herald that it's not quite the right time to jump off the bank shares bandwagon.
Yet.
He has a point when saying the banks are very profitable and getting more so by the day...
Careful with that timing though...
For Shane Oliver, chief economist at AMP Capital Investors, there is a risk of its becoming a bubble but "we are not there yet". The banks are well managed and increasing their profits. One risk would be if interest rates were to rise. But markets are expecting the next move in interest rates to be down.
Oliver said economic activity remained weak. Further weakness could increase the banks' non-performing loans and defaults as well as slower lending. But the rise in bank share prices was not even remotely like the bubble in dotcom stocks in the US in 2000, Oliver said. Those technology companies were not even making profits and their shares were trading at astronomical valuations.
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4. Lots of Ms Moneypennies in Takapuna - The Daily Mail has an interesting article about a Welsh phone answering service that has sent four of its workers to live in Takapuna to work the night shift.
It seems there should be a huge opportunity for New Zealand to be a location for these sorts of overnight call centres for British speaking Northern Hemisphere countries.
When customers asked for a 24-hour service, the firm asked its employees to work nights but nearly all proved reluctant. Out of 280 staff members, only four said they be willing to work after hours - but 40 were prepared to relocate abroad.
Bosses also realised that having all employees work in the daytime meant they would stay healthy and have a better attitude to work, meaning they would serve clients better.
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5. Leakage - The Australian Tax Office has issued a research paper on the problem of 'tax leakage' from multinationals using techniques such as the Dutch Sandwich.
''The global reach of multinational enterprises, along with the developments in information and communication technology … provides them with a high degree of flexibility in how to structure their affairs.''
The impact of the global financial crisis on government tax revenues around the world had triggered greater attention to elaborate tax minimisation strategies, such as the so-called ''double Irish-Dutch sandwich'', which companies such as Apple used to avoid corporate tax rates in Australia.
However, it admitted it had insufficient data to measure the scope of tax avoidance committed by multinational firms, which are able to exploit gaps in the international tax system through complex ownership structures. ''These developments raise serious concerns about the efficiency, equity and sustainability of the income tax system.'' It called on submissions that addressed possible solutions to tax erosion and any data that would assist the Tax Office identify profit shifting.
6. The last final word - Here's Reinhart and Rogoff with their final last word at the FT on the government debt debate in the wake of their spreadsheet error. They say they don't mind governments borrowing to invest.
And they make some good points about debt restructuring.
Given current debt levels, enhanced stimulus should only be taken selectively and with due caution. A higher borrowing trajectory is warranted, given weak demand and low interest rates, where governments can identify high-return infrastructure projects. Borrowing to finance productive infrastructure raises long-run potential growth, ultimately pulling debt ratios lower. We have argued this consistently since the outset of the crisis.
Economists simply have little idea how long it will be until rates begin to rise. If one accepts that maybe, just maybe, a significant rise in interest rates in the next decade might be a possibility, then plans for an unlimited open-ended surge in debt should give one pause. What, then, can be done? We must remember that the choice is not simply between tight-fisted austerity and freewheeling spending. Governments have used a wide range of options over the ages. It is time to return to the toolkit.
First and foremost, governments must be prepared to write down debts rather than continuing to absorb them. This principle applies to the senior debt of insolvent financial institutions, to peripheral eurozone debt and to mortgage debt in the US. For Europe, in particular, any reasonable endgame will require a large transfer from Germany to the periphery. The sooner this implicit transfer becomes explicit, the sooner Europe will be able to find its way towards a stable growth path.
“There is a huge tax saving for Apple in borrowing the money rather than bringing it back to the US,” said Kevin Phillips, international tax partner at Baker Tilly. “The company will keep getting that $100m or so tax credit every single year.”
Gerald Granovsky, an analyst at Moody’s, said: “If you assume the statutory 35 per cent corporate tax rate, based on the data available and on a back of the envelope calculation, to generate in the US the equivalent of $17bn the company would need to repatriate $26bn.
“That is less attractive than paying the $300m in interest attached to this bond sale,” he added.
9. Still too big to fail? - Matt Taibbi reckons the momentum may finally be shifted to regulate or break up the really big US banks.
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