Top 10 at 10: Time for NZX to capitulate?; PGG/PGC/SCF scheming?; Podmore's pothole; Dilbert

Here are my Top 10 links from around the Internet at 10am. I welcome your additions in the comments below or please send your suggestions for Tuesday's Top 10 at 10. I'm back with a vengeance this week after a week on leave. It's early! We love show-offs at interest.co.nz. 1. Here is my NZHerald blog post on how we're not demanding high enough yields from finance companies offering speculative grade debentures, regardless of the deposit guarantee.

In the United States, investors are more used to investing in speculative or "junk" investments. Currently, these bonds offer around 9 per cent over the safest type of bonds, such as US Treasuries. A three-year junk bond is therefore currently trading at around 11 per cent, which is around 9 per cent above the safest bonds there. Given our safest three-year government bonds are trading at around 4.5 per cent, a margin of 9 per cent should take the total offered to at least 13.5 per cent. Yet most finance companies in this category are still only offering around 7 per cent to 8 per cent. Why are New Zealanders accepting this?

2. Kiwibank is trialling the use of mortgage brokers, Susan Edmunds reports in a useful Herald on Sunday piece about the pros and cons of using mortgage brokers. 3. Brian Gaynor laments again in his NZHerald column the complete lack of confidence in the stock market from retail investors. He says the Capital Markets Taskforce's recommendations are a last chance for the New Zealand market. His historical perspective is interesting. He points out we've been here before in the late 1980s and early 1990s when the Business Roundtable, he says, blocked moves to treat smaller investors fairly. My gut feel is that it's too late for our stock market. It may well be time to capitulate to the inevitable of joining up with Australia. Brian is still fighting the good fight though.

After the 1987 crash there were a number of these inquiries which made recommendations to improve the regulatory structure of the sharemarket and tighten enforcement. One of the aims of these recommendations was to re-establish the trust between issuers and investors. But the Business Roundtable was at the zenith of its power and was strongly promoting the idea that there was a small group of businesspeople who created most of the economic wealth of the country and ordinary investors were free-riding on their expertise. The proposed Takeovers Code was the symbolic battleground for this issue with the Roundtable arguing that minority shareholders should not be automatically entitled to receive the same price in a takeover because they were little more than freeloaders. The Roundtable received strong support from two powerful government ministers, Ruth Richardson and Bill Birch. Virtually none of the post-1987 crash proposals were introduced, including the Takeovers Code, and the trust between issuers and investors was not repaired. The assertion that individual investors were free-riders reflected the attitude that the top end of town had towards retail investors.

4. Tim Hunter at the Sunday Star Times has highlighted market speculation that Marac's parent, Pyne Gould Corp, may be manoeuvring to build a bigger stake in PGG Wrightson. Someone appears to have been short-selling PGG Wrightson shares, Hunter suggests, in an effort to make any capital raising unattractive for others.

A deeply discounted capital raising would then allow one committed buyer to emerge with a bigger chunk of stock on the cheap. Its current biggest shareholder, Craig Norgate and Baird McConnon's Rural Portfolio Investments with 28%, is in poor financial shape and will struggle to take part fully in a rights issue. As a result, market speculation has focused on the identity of a new cornerstone shareholder with sufficiently deep pockets to provide PGG Wrightson with the support it needs. Sources say there are few options, but one being discussed is Pyne Gould Corp's proposed agrifund as part of its Perpetual Asset Management subsidiary. "The proposition is they would recapitalise [PGG Wrightson], partly underwritten by PGC who would end up with 30-50% ownership as a seed asset for an agri fund," said a source. "Now, that's not a seed asset, it's a subsidiary company."

Hunter also points out this unholy mess involves South Canterbury Finance. All three, PGC, PGG Wrightson and South Canterbury, are now looking to raise hundreds of millions of dollars from a sceptical market. At some point someone new will have to join this game of musical chairs. None of these shenanigans inspire confidence.

The inter-relationships are such that South Canterbury owns 4.2% of PGC and has loaned PGG Wrightson $25m.

5. Susan Pepperell at the Sunday Star Times has an interesting piece on the hoops that candidates for Fonterra directorships have to jump through before they get a chance to be voted for by farmers. The hoops are high and appear to favour the encumbents that back the current management. Candidates can't even campaign and are vetted by Fonterra's handpicked 'experts' before their nominations are put forward. The comments in the article from the Fonterra establishment are extraordinary. It's certainly no democracy.

Fonterra Shareholders' Council chairman Blue Read said farmers were electing people to direct a company and it was not tenable to vote for someone based on their popularity. "We want farmers to think along co-operative commercial lines rather than think here's a bloody good bloke who knows how to talk to people. When we set up the system, the aim was to remove as much of the politics from something that is supposed to be about governance."

6. Greg Ninness at the Sunday Star Times has dissected the debacle inside St Laurence's moratorium and finds that assets put up by founder Kevin Podmore personally to guarantee the moratorium have been slashed in value. It is now unlikely that St Laurence will be able to meet its moratorium payment schedule. Perpetual Trust should stop mucking around and put both St Laurence and Strategic into receivership and end the nightmare slow motion car crashes that these moratoriums have become. Time will not heal the problems.

The size of that write-down so soon after the moratorium was agreed raises questions about the oversight applied to the transaction by St Laurence's board and the quality of the valuations it relied on. St Laurence chairman Jim Sherwin believes the board adequately scrutinised the proposal. "The exercise was robust, there were valuations at the time. It's just that the market has moved," he said.

7. This chart from Bloomberg is a cracker showing how the S&P 500 has tracked the Nikkei 225 when you have different start points of 1980 for the Nikkei and 1990 for the S&P 500. The obvious implication is that US stocks are in for another decade (at least) of stagnation and falling. HT Felix Salmon from Reuters who picks nits in the chart. 8. Along a similar line, this graphic from the Wall St Journal shows what happened to Japan's key economic indicators after it spent a decade fighting overcapacity and a property bubble by using fiscal and monetary stimulus. Rolfe Winkler at Reuters drives home the knife.

Keynesians point to Japan's experience as evidence that the U.S. government can borrow much more before interest rates rise. I suspect they're right. But what's the point if, at the end of all of that, we're saddled with unpayable debts? Sure, deficit spending prevented more violent economic upheaval last year. But the more debts we build up, the longer and deeper the downturn will prove to be over time. My hope is that America finds the political will to deal with debt. If we don't, even matching Japan's sorry trajectory will be tough.

9. Nobel laureate Joseph Stiglitz talks in the Washington Post about the eventual need for the US dollar to lose its reserve status and the obscenity of a bankrupt America borrowing from developing countries to try to reinflate its bubbles.

The current system is not only bad for the world, it is bad for the United States, too. In effect, as other countries hold more dollar reserves, we are exporting T-bills rather than automobiles, and exporting T-bills doesn't create jobs. We used to offset this drag on the economy by running a fiscal deficit. But going forward, we won't find it as easy to do this. And the Fed may not be able to do the trick -- as we have learned, expansionary monetary policy poses its own risks. Like it or not, out of the ashes of this debacle a new and more stable global reserve system is likely to emerge, and for the world as a whole, as well as for the United States, this would be a good thing. It would lead to a more stable worldwide financial system and stronger global economic growth. The current system entails developing countries putting aside hundreds of billions of dollars a year -- only weakening global demand and contributing to our economic difficulties. Also, there is something a little unseemly about poor countries lending the United States trillions of dollars, now at an interest rate of close to zero.

10. Here is an interesting idea. China is in exactly the same place now that Japan was in 1989, just before its bubble burst. Everyone thinks China has found a magic formula for world domination, but has some massive structural weaknesses that could plunge it into a lost decade or two. That's the view from Vitaliy N. Katsenelson at Morningstar. The chart below is taken from an article by Jim Grant of Grant's Interest Rate Observer. (My hero) HT Yves Smith at Naked Capitalism.

China today is where Japan was in the late '80s, except with the greater political instability that comes with a semi-controlled economy and the lack of a social safety net (read: jobless, hungry people don't write angry letters, they riot). Since China can do nothing wrong, everything I write about it is met with skepticism.  Today China projects to the world a similar image as Japan did in the 1980s. Lately, the Chinese economy has been impressing us with its growth: it was growing when the rest of the world was contracting, fast.  But Chinese economic structure is not superior to the West's; the Chinese can just cook GDP numbers better and control their economy more effectively through forced lending and spending. However, these short-term advantages come with long-term consequences "“ there will be a steep price to pay for them; there always is.

In a second piece Vitaliy Katsenelson spells out the consequences.

Today, Chinese economic growth is the force pushing the global economy. The quality of this growth, however, is low as it is predicated on massive (forced) lending and thus unsustainable.  As Chinese growth slows, China will turn from a wind into sails of global economy to its anchor.  The impact will be felt in many, often unsuspected places. It will tank the commodity markets, commodity producers and commodity exporting nations.  Let's take oil, for instance.  As incremental demand from China collapses, oil prices will follow, taking the Russian economy with it, as Russia is for the most part a one-trick-petrochemical-pony.  According to GavKal Research China accounts for 15% of Brazil's exports (up from 1.5% a decade ago), significantly impacting the economy of that South American nation.

You could add Australia to that list.