Here's my Top 10 links from around the Internet at 1 pm 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 #1 on the risks a US dollar surge could destabilise China. Buckle up for turbulence.
1. What happens when the US$ surges? - That has what has happened in the last couple of weeks.
Fear (and hope) that US interest rates about to rise from 0-2% to something higher has caused a surge in the US dollar.
That is causing some to wonder might happen next in the so-called 'BRICS' markets of Brazil, Russia, India, China and South Africa, where almost all of the economic growth of the last 5 years has come from.
Ambrose Evans Pritchard has an excellent piece looking at how the US$ surge could puncture the growth booms (or are they bubbles) in these markets.
Where would the growth globally come from then?
This matters for New Zealand, which is now increasingly focused on the IC part of the BRICS. It's also worth noting that South Africa's Current Account Deficit of 6% is now seen as a trigger for capital exodus. NZ's CAD is headed towards that 6% level too.
The stock of capital flowing into emerging markets has doubled from $4 trillion to $8 trillion since the Lehman Crisis, chasing a catch-up growth story that looks tired and has largely sputtered out in Brazil, Russia and South Africa.Much of the money has gone into debt, with falling economic returns. This is the next shoe to drop in the festering saga of global imbalances. All it will take is a gear-shift by the US Federal Reserve and the inevitable dollar surge that follows. It was the Volcker Fed that set off Latin America's defaults in the early 1980s. It was the mighty dollar that set off Mexico's Tequila crisis, and then the East Asian chain-reaction in the 1990s.
"Every emerging market blow-up that I have seen was preceded by a rise in the dollar," said Albert Edwards for Societe Generale.
"Investors overlook how vulnerable these countries are to a dollar shock. The whole process of excess liquidity and foreign reserve build-up goes into reverse. It acts like monetary tightening and turns into a vicious circle. Markets look for the weak link with the worst current account deficit, and then the dominoes start to fall," he said.
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2. The yen's slump matters a lot for China too - Ambrose does a nice job of tieing in the slump in the yen in the last six months and showing how disruptive it was for China in the past. The Yen and the Nikkei's violent moves of the last couple of days suggest something is on the move that's worth watching.
Stripped bare, the BRICS miracle is really about China, and even the Politburo has run into diminishing returns after ramping up credit from $9 trillion to $23 trillion in four years. At best China will have settle for more pedestrian growth, but it too is at the mercy of the Fed.
By pegging its currency to the dollar it risks an exchange rate surge against the rest of Asia, compounding the effects of a 30pc rise against Japan's yen since last summer.
This looks all too like the mid-1990s, when the yen crashed against the dollar and gave China a brutal deflationary shock. China's $3.4 trillion foreign reserves will prove no defence. To deploy reserves the would entail conversion back into yuan, causing the currency to rise. It would exacerbate the shock.
To cap it all, this is happening just as China's trade surplus vanishes and American firms switch plant back to US soil for cheaper power and better labour productivity. The wheel is turning full circle.
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3. 'Vee haf vays of making zee continent ours' - Sorry for the crude stereotype, but there's something in this line from Jim O'Neill at Bloomberg that the Germans have finally established their dominance over Europe after all these years.
He's referring to the European Cup final due this week between Borussia Dortmund and Bayern Munich, but he sees wider lessons.
Fiscal rectitude, as you might guess, comes into it as well. German football has built its success this year on the biggest match-day attendances of the top European leagues, even moving ahead of the British Premier League -- solid revenue. Its clubs, which by the way have to be majority-owned by Germans, operate under tight restrictions on the use of debt for acquisitions -- prudent finance. By global industry standards, wages consume a small share of receipts -- cost control.
By contrast, look at the news from some of the gaudier leagues. Strength in depth? Madridand Barcelona dominate the Spanish game so completely that La Liga almost resembles the Scottish league these days, with about the same degree of boredom over which club might upset the standings. As for fiscal control, I used to joke that you would know the euro crisis was serious once Spanish banks stopped doling out cash so readily to the country’s football clubs. Actually, that moment has arrived.
An English soccer star of the 1980s, Gary Lineker, once defined the sport in a way that still makes sense to Englishmen. Football: a simple game in which 22 men chase a ball for 90 minutes and at the end the Germans win. Must we accept the corollary? European monetary union: a currency system in which 17 countries strive to stay competitive and at the end the Germans win.
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4. Where does it stop? - Jonathan Weill makes some excellent points in this Bloomberg piece about Apple's tax reduction techniques. I wonder how all those non-evil and very bright employees at companies such as Apple/Google/Facebook/Amazon can justify their continued employment at these companies when they know about this stuff?
Or have they caught the sociopath bug too?
Here's Weill:
The Senate report said Apple shifted $74 billion in income to Ireland from the U.S. through its cost-sharing agreement from 2009 to 2012. This helps explain why $102 billion of Apple’s $145 billion of cash and marketable securities was assigned to offshore subsidiaries, as of March 30. Even that comes with a twist: Most of the “offshore” funds are kept at U.S. banks.
Beyond the questions of tax fairness, or how best to simplify and reduce rates, we should ask ourselves: Is this the kind of culture that our laws should be fostering? The people running Apple -- whose board includes former U.S. Vice President Al Gore -- aren’t being dodgy for tax purposes because they are evil. The law encourages them to behave this way, which leads to other uncomfortable questions.
If a company’s managers are willing to devise bizarre structures and stratagems to reduce corporate taxes, would they resort to creative accounting to boost the earnings they show investors on their financial statements? What other sorts of liberties might they be willing to take? Where does it stop?
5. Infrastructure capital and social capital - Michael Pettis has a nice piece here (via FTAlphaville) on why heavy infrastructure investment doesn't always lead to a country becoming permanently and sustainably wealthy. He's obviously referring to China, which is why it's important for us.
To me one of the most obvious pieces of evidence that it takes a lot more than increases in capital stock to achieve sustainable wealth is the experience of previously advanced economies that have been laid low by war. It is noteworthy that – excluding trading entrepôts like Hong Kong and Singapore or small, commodity-rich entities like Kuwait or 18th Century Haiti – very few poor and undeveloped economies have made the transition from poor to rich. The exceptions may be South Korea and Taiwan, both under very favorable circumstances during the Cold War. “Poor” but advanced countries, however, like Belgium and Germany after WW1, or Germany and Japan after WW2, saw their GDP per capital soar after devastating wars as they made the transition from newly poor to rich with relative ease.
The reason, it seems to me, is that although war may have destroyed physical capital in these countries, because it did not destroy social capital these countries were able sustainably to increase investment at a rapid pace after the war and see their per capita incomes soar permanently. Why is this so easy for advanced economies made poor by physical destruction of their capital base but so hard for developing economies?
The most plausible reason I can think of is that the advanced economies already had in place the institutions that allowed them to exploit investment fully, and so once they were able to increase capital stock, they quickly became rich again. This argument is reinforced, I think, by the well-known fact that most cross-border capital flows (over 90%, I think) are to rich countries, not to poor ones. This wouldn’t make sense at all if rich countries didn’t have a greater ability to absorb new capital efficiently and profitably than poor countries. If what mattered on the other hand was distance from the capital frontier, the further a country was from that frontier, the more profitable it would be to invest there, and so more capital would flow to poor countries rather than to rich countries. The opposite is true.
So what kinds of institutions might matter? Economies with clear and enforceable legal systems, to take one factor, tend to have higher levels of social capital because it is much easier for entrepreneurs to take advantage of conditions and infrastructure to build profitable businesses. Without a clear legal framework, business opportunities tend to be monopolized by entities that have the political clout to take advantage of the legal system, and not only is it not obvious that more powerful entities are more economically efficient, but in fact the opposite may be true – these are what Acemoglu and Robinson call “extractive” elites.
Green’s suggestions for reform begin with abolishing the one child policy and include instituting a good legal framework, supporting NGOs, allowing citizens to report on corruption via social media, reforming the ‘hukou’ household registration system.
7. 'This time it's different' - James Suroweicki argues at the New Yorker that US stock prices are not over-valued and the bubble whingers are wrong.
Take taxes: one big reason that after-tax corporate profits are much higher than their historical norm is that corporations pay much less in taxes than they used to. In 1951, corporations had to pay almost half of reported profits in taxes. In 1965, they had to pay more than thirty per cent. Today, they pay only around twenty per cent.
Then, there’s globalization. Many of the “American” companies in the S. & P. 500 are multinationals: a study of two hundred and sixty-two of them found that, on average, they got forty-six per cent of their earnings from abroad. This is a relatively new phenomenon. As late as 1990, foreign earnings accounted for only a small fraction of corporate profits in the U.S. Today, they account for almost a third of corporate earnings, and they’ve nearly tripled since 2000. So comparing corporate profits only to American G.D.P. yields a false picture of how companies are doing. The global economy, even with its current woes, is projected to grow more briskly than the U.S. economy over the next decade, so corporations will continue to benefit.
Finally, the decline of unions and the sluggish labor market have enabled corporations to cut payrolls, thus keeping profits high. The result is that labor’s share of the economy has fallen steeply. Skilled workers are still in demand, but most workers have little bargaining power. This could change if there is another economic boom—during the tech bubble, in the late nineties, wages did rise briskly—but, even in that case, corporate profits would likely stay high, as increased sales would make up for narrowing profit margins.
8. Where in the world is Satoshi Nakamoto - Chartgirl documents the hunt for the mythical creator of Bitcoin, who is now the internet's equivalent of Keyser Soze from the film classic "The Usual Suspects".
Here are some sentences that start with 'Satoshi Nakamoto' that we can complete:Satoshi Nakamoto might be one person. Or two. Or more.Satoshi Nakamoto could be a government. A FOREIGN GOVERNMENT. (Seriously, has anyone considered whether North Korea is Satoshi? This is just the kind of crazy stunt those guys would pull.)Satoshi Nakamoto sometimes used UK spellings like "favour", "colour" and "modernised" and phrases like "bloody hard." Also, sometimes he didn't.
9. Totally couldn't resist - Here is a NYDaily news story about a Tiger called Ty who developed the hairballs pictured below that was recently surgically removed by veterinarians in Florida.
10. Totally Clarke and Dawe on a colourful Sydney racing identity.
(Updated with fresh Dilbert and cartoons)
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