Top 10 at 10: China's dollar trap; 'Flash' trading risk; Third of bailout spent on bonuses; Dilbert; Daily Show

Here's my Top 10 links from around the Internet at 10am. I welcome your additions in the comments below or please send your suggestions for Monday's Top at 10 to bernard.hickey@interest.co.nz Ever wanted to punch your work colleagues? We don't do that sort of thing here at interest.co.nz. 1. Martin Hutchinson at PrudentBear.com has an interesting think-piece here on China's policy of using its US$2 trillion pile of foreign reserves to buy resources assets elsewhere. He says China appear to be following a recipe devised by 17th century British mercantilist Thomas Mun. HT AndrewJ

Mun (1571-1641) wrote a classic magnum opus "England's Treasure by Foreign Trade." Published only after his death in 1664, it was nevertheless very influential. Mun had been a Director of the East India Company, and, unlike earlier theorists, believed that foreign trade was beneficial. However he didn't hold with any high-faluting nonsense like comparative advantage, or maximization of global economic welfare. For Mun the purpose of foreign trade was to export more than you imported and, consequently, amass a huge store of foreign "Treasure," which you could then use to found colonies that would take control of natural resources. To further this objective, countries should: cut back domestic consumption as far as possible; increase the use of land and other domestic resources to reduce imports; encourage the export of goods made with foreign raw materials; and export goods with price-inelastic demand because profits would be greater. Mun's theory made sense in the 17th Century economic jungle "” and today it obviously makes sense to China.

2. Tyler Durden at Zero Hedge has again proven the worth of financial bloggers. He has single-handedly set the agenda for the debate on High Frequency Trading (HFT) and 'Flash' trading. Day after day for months he has toiled on his own publishing details about this type of trading done by various hedge funds using algorithms to trade in microseconds and how potentially dangerous it is.

'Flash' trading involves trading done in the nano-seconds before large orders hit electronic exchanges. They are a very sophisticated type of front-running. High frequency trading is simpler algorithm trading on these exchanges, again all done in extremely short periods of time. Many think Goldman Sachs has made a killing with this form of trading and a Russian programmer is facing charges for stealing the algorithims. All these types of trades are made possible by electronic trading platforms and high powered computerised trading programmes. It's a dark place where mathematicians meet geeks and bankers to make oodles of cash. One version of it is actually called 'dark pools'. Mostly I didn't understand it, but eventually I could see he was onto something. Now everyone is onto it. Tyler believes the proliferation of this trading presents large systemic risks if the algorithm driven traders all 'flash' or micro-trade in the same direction at once. Yikes. That could be a big flash followed by a financial mushroom cloud. Here he quotes from a very experienced HFT trader.

It's high time for the Securities and Exchange Commission, the Commodity Futures Trading Commission and overseas securities regulators to start working together now to assess the potential systemic risks posed by high frequency trading before a problem occurs.

Tyler concludes:

We hope that this time, unlike the Flash case, the SEC won't wait until a senator actually reminds it to do its bloody job.

3. Here's a nice backgrounder on 'flash' trading in Reuters. It is now being investigated by the SEC, but HFT trading has yet to be understood or noticed by the regulators. The innovators always beat the regulators. Here's another great piece on 'flash' trading in the New York Times. 4. Peter Garnham at the FT has an excellent analysis of China's 'dollar trap' and its options to extricate itself. China will have to tip toe its way out of the US economy without breaking the porcelain on the way through. Here's a few ideas around the area of 'internationalising the renminbi' so China's trading partners can use it instead of the US dollar.

In order to kick-start the process of internationalisation, China has begun an ambitious scheme to raise the role of the renminbi in international trade and finance and reduce reliance on the dollar. Earlier this month, China announced a pilot initiative that expanded settlement agreements between Hong Kong and five big trading cities, including Guangzhou and Shanghai. On top of this, to provide seed money to its trading partners, this year the People's Bank of China has signed a total of Rmb650bn ($95bn) in bilateral currency swap agreements with six central banks: South Korea, Hong Kong, Malaysia, Indonesia, Belarus and Argentina. HSBC says China is still in talks with other central banks to form additional swap agreements and was likely to expand them to cover all the country's trade with Asia, excluding Japan. This would be followed by an expansion to take in other emerging market countries, including those in the Middle East and Latin America, that needed renminbi to pay for their imports of Chinese manufactured goods.

5. This piece in CFO.com highlights the risk of institutions being 'too big to fail'. A Fitch report shows that 80% of derivatives risk is held by just 5 firms.

About 80% of the derivative assets and liabilities carried on the balance sheets of 100 companies reviewed by Fitch were held by five banks: JP Morgan Chase, Bank of America, Goldman Sachs, Citigroup, and Morgan Stanley. Those five banks also account for more than 96% of the companies' exposure to credit derivatives. About 52% of the companies reviewed disclosed there were credit-risk-related contingent features in their derivative positions. Such features require a company to post collateral or settle outstanding derivative liabilities if there's a downgrade of the company's credit rating. The Fitch analysts also found that just 22 companies disclosed the use of equity derivatives. Just six nonfinancial firms "” IBM, General Motors, Verizon, Comcast, Textron, and PG&E "” reported exposure to share-based derivatives.

Here's the SeekingAlpha version of the same Fitch report. 6.  Now the US housing disaster disease is spreading from the old, young and sick to the healthy. Housing distress is now spreading out of the 'boom' states of Arizona, Nevada, California and Nevada and into the rest of the United States as rising unemployment becomes the major factor, rather than just plain dumb subprime lending and crazy speculation, Reuters reported. HT Alex.

Mortgages have failed the fastest in the areas with the greatest overbuilding, purchases by speculators and reliance on riskier loan products to improve affordability. But the source of the mortgage trouble has swung from lax lending standards to unemployment. Some of the areas with the most severe foreclosure activity have started to show improvement as price cuts and first-time buyer tax credits lure purchasers. With the unemployment rate near a 26-year high and many employers cutting wages, more consumers in areas that were initially spared in the foreclosure explosion are now behind in their home loan payments. More than 20 percent of areas with above-average foreclosure activity were in Oregon, Idaho, Utah, Arkansas, Illinois and South Carolina in the first half of the year. That shift points to growing unemployment more than to fallout from subprime and adjustable-rate loans, RealtyTrac said in its midyear metropolitan foreclosure market report.

7. This article from Bloomberg is bound to anger US taxpayers. A third of the bailout money was paid out in bonuses. Read it again. A third of the bailout money was paid to bankers as bonuses. Now hit something, but not your colleague...

Citigroup Inc., Merrill Lynch & Co. and seven other U.S. banks paid $32.6 billion in bonuses in 2008 while receiving $175 billion in taxpayer funds, according to a report by New York Attorney General Andrew Cuomo. Cuomo analyzed 2008 bonuses at nine banks that received Trouble Asset Relief Program financing from the U.S. government. New York-based Citigroup and Merrill, which has since been taken over by Bank of America Corp., received TARP funding totaling $55 billion, Cuomo said. "When the banks did well, their employees were paid well. When the banks did poorly, their employees were paid well," Cuomo's office said in the 22-page report. "When the banks did very poorly, they were bailed out by taxpayers and their employees were still paid well. Bonuses and overall compensation did not vary significantly as profits diminished."

8. I'm a cyclist. This cartoon is funny in a dark and satisfying way. HT RolfeWinkler 9. Here's the letter to the Queen from the British Academy explaining why few people saw the Credit Crunch coming. The Queen famously asked when visiting the London School of Economics in November why nobody saw it coming. She's onto it now. There was a collective failure...

So in summary, Your Majesty, the failure..., while it had many causes, was principally a failure of the collective imagination of many bright people, both in this country and internationally, to understand the risks to the system as a whole. ... We have the honour to remain, Madam, Your Majesty's most humble and obedient servants

10. This is another sharp piece of humour from Jon Stewart's crew at The Daily Show on how Timothy Geithner can't sell his house in New York. Yes THAT Timothy Geithner, the US Treasury Secretary. Real estate guru Robert Shiller gets the treatment too.