Top 10 at 10: China's Euro problem; Germany's gold rush; Still Too Big To Fail; Dilbert

Here are my Top 10 links from around the Internet at 10 past 11. I welcome your additions and comments below or please send suggestions for Wednesday’s Top 10 at 10 pm to bernard.hickey@interest.co.nz I hate software upgrades too... 1. Chinese stocks plunge - Shanghai stocks fell 5.1% last night on fears a crackdown on the property market in China and Europe's slowdown could hammer the Chinese economy. Remember, New Zealand is a suburb of Australia, which is a province of China, so this stuff matters to us more than it ever has. Bloomberg has the report.

“Investors are increasingly fearful of policy miscalculation on China’s part,” said Daphne Roth, Singapore- based head of Asian equity research at ABN Amro Private Banking, which oversees about $21 billion in the region. “With the European crisis, the risk is that China over-tightens and the economy goes into a hard landing.” Premier Wen said the government will “decisively” contain excessive increases in housing prices in some cities and curb growth of industries with overcapacity, the official Xinhua News Agency reported May 15. China should keep the strength of macroeconomic controls “reasonable” and boost policy coordination, Xinhua said, citing Wen. Prices of reinforcing steel bars used in construction fell 4.7 percent last week, the most in at least eight months, according to data compiled by Beijing Antaike Information Development Co.

2. Euro spanner in the Chinese works - It's easy to forget that the yuan does float (sort of) against the euro. Could a European implosion derail the China miracle too? The New York Times has a good look at the weakening euro versus the Yuan and how it might stifle any move for the yuan to be revalued higher vs the US dollar, which had been seen as a done deal until now. Also, the tightening credit markets in Europe may make life difficult for exporters, who rely on letters of credit from banks.

Chinese policy makers reached a consensus last month about breaking the dollar peg, agreeing to let it rise in value somewhat, which would make American goods more competitive against Chinese products. But Chinese officials have not yet put that intended policy into place. And in light of the euro’s nose dive, allowing China’s renminbi to rise against the dollar now would also mean a further increase in the renminbi’s value against the euro, creating even more problems for Chinese exporters to Europe. The steep rise of the renminbi, also known as the yuan, prompted a Commerce Ministry official in Beijing to warn Monday that China’s exports could be threatened. The official’s comments were the most explicit yet on the implications for China of Europe’s recent financial difficulties. The comments also suggest that even China — the world’s fastest-growing major economy and increasingly the engine of global growth — is not immune to the crisis that started in Greece and threatens to spread across much of Europe. Some economists warn that China may face more problems to come. The biggest reason Chinese exports plunged early last year was not weakening demand in industrialized countries but a sudden, temporary disappearance of trade finance from Chinese and foreign banks. The availability of trade finance could easily become a serious problem again soon, said Dong Tao, the chief Asia economist at Credit Suisse. Chinese exporters rely very heavily on bank letters of credit to finance their shipments. The availability of the letters of credit is closely linked to overnight lending rates between banks. When banks have trouble borrowing money themselves — as has been happening as a result of worries about European banks’ possible losses from the region’s sovereign debt crisis — they tend to cut sharply the issuance of letters of credit for trade finance.

3. Watch the Libor - We all got used to watching Libor (London Interbank Offer Rate), the TED spread (the gap between 3 month Libor and 3 month Treasury bill yield) and the OIS spread (Libor minus Overnight Interest Rate Swaps) immediately after the Lehman crisis. These spreads are measures of how nervous banks are about lending to each other and the higher these rates go the more frozen the interbank markets are. They are starting to get a tad chilly again as banks worried about the euro debt crisis stop trusting each other. This is a bad sign because when these credit markets froze in late 2008 global trade collapsed 20-30% overnight because exporters weren't able to get letters of credit. Bloomberg reports here on the growing stress in the Northern Hemisphere credit markets.

Bank lending “conveys a lack of trust in the system,” said Robert Baur, chief global economist at Des Moines, Iowa- based Principal Global Investors, which manages $222 billion. “Banks are a little reluctant to lend overnight as they don’t know the full extent of what is on the bank balance sheets.” The three-month London interbank offered rate in dollars, or Libor, climbed to 0.46 percent today, the highest since Aug. 7, from 0.445 percent on May 14 and 0.252 at the end of February, according to the British Bankers’ Association. The spread between the three-month Libor rate and the overnight indexed swap rate, a barometer of the reluctance of banks to lend that’s known as the Libor-OIS spread, increased to 24 basis points, the most since Aug. 17, from 22 basis points.

4. Early retirement envy and anger - AP reports on the growing tensions within the Euro zone as hard-up taxpayers in Germany, which has just extended its retirement age, look at the various public servants who can retire as early as 50 in Greece. Again, the euro is broken because its monetary union is not backed up by fiscal and political union. No amount of bailouts will change that. This story just underlines the political pressures threatening to blow up the whole caboodle. HT Gareth via IM.

In Greece, trombone players and pastry chefs get to retire as early as 50 on grounds their work causes them late career breathing problems. Hairdressers enjoy the same perk thanks to the dyes and other chemicals they rub into people's scalps. Then there are masseurs at steam baths: they get an early out because prolonged exposure to all that heat and steam is deemed unhealthy. Until the Greek debt crisis, northern Europeans looked at Greek early retirement with an amused roll of the eyes. But more and more such loopholes are angering them: they bristle at being asked to pay for their laggard southern neighbours' early retirement.

5. The trust is gone - Europeans are swamping gold merchants to buy gold in the wake of the European Central Bank's decision to buy bonds to stabilise the euro. They are worried the Bundesbank/ECB's hard-won inflation fighting credibility just went up in smoke. Der Spiegel, which is doing a wonderful job in English, has the story. Der Spiegel points to gold trader Pro Aurum in Munich being run off its feet last Friday. Weimar and several versions of the deutschemark are hard to forget. Even NZMint, which sells golden Kiwis, has reported an influx of Europeans wanting to buy gold. HT Andrew Wilson via email.

Business has been booming for a week now. Clients receive coffee and newspapers to make their wait more pleasant. They all want to buy gold bars or coins, Canadian Maple Leafs, Australian Kangaroo Nuggets and Austrian Vienna Philharmonic coins -- anything, as long as it's made of gold and will retain its value. Pro Aurum boss Robert Hartmann and his 45 employees at the Munich headquarters have barely been able to handle the rush. Hartmann even had to temporarily shut down Pro Aurum's online shop. "We are all working to the hilt," he says.

6. Baby steps - Simon Johnson at The Baseline Scenario is as close as anyone to what is happening in the US Congress with banking reform. He sees nothing much changing and the recipe for future disaster remaining intact. Plus ca change.

More broadly, of course, all of these reforms add up to little more than “baby steps”.  The big mistake was made long ago, when the administration decided not to push the megabanks when they were politically weak (the argument of 13 Bankers).  This was only compounded and confirmed when Treasury and the White House came out against the Brown-Kaufman amendment. As a result, the financial system will remain largely the same as it was before September 2008 – perhaps the megabanks will be slightly constrained in their activities, most likely not (at least for Goldman, JP Morgan Chase, and Morgan Stanley.) As we argued in our start-of-the-year piece on Bloomberg, all of this sets us up for another boom-bust cycle, this time centered around emerging markets.  Savings will be recycled out of emerging markets through “too big to fail” banks and similar institutions in the US and some parts of Western Europe – generating debt-based capital flows back into other parts of those same emerging markets. “China can only go up”, “Russia is back”, and “Brazil and India are now different” are the siren calls.  And of course, to some extent there is truth in this rhetoric – but the expectations are already becoming exuberant. All great bubbles begin with a truly convincing shift in fundamentals.  And many of them are all kept going by reckless lending on the part of Citigroup and its competitors – remember emerging markets in the 1970s and 1990s, US commercial real estate in the 1980s, and US residential real estate in the last decade.

7. In video form - Here's a great PBS video that includes Johnson's comments on banking reform. It's well worth the 8 minutes. There's a great history lesson on US banking. Watch it and weep. 8. The worst and the brightest - Simon Johnson reviews here The Big Short by Michael Lewis (a must read I reckon) and The Quants by Scott Patterson. Johnson has a nice discussion on group-think in the finance sector and how really bright people did really dumb things with derivatives.

You will never see the likes of finance in any other industry; Patterson and Lewis make this quite clear. Modern quantitative finance presents unique opportunities for smart people to run amok. But we have not fixed our financial system, or reined in the havoc that it can wreak. And there remain countless innovative ways for genius—stimulated by greed and groupthink and an open unregulated field—to lead us seriously astray and into more great danger.

9. Nuclear powered fridge - Well, not quite. US manufacturer Hyperion has announced plans to start selling fridge-sized nuclear power generators, Bloomberg reports. Your thoughts? Is this the solution to peak oil and our energy problems. Or is it just the perfect size for a terrorist to pop in the back of a truck?

The Santa Fe, New Mexico-based company and Japan’s Toshiba Corp. are vying for a head start over reactor makers General Electric Co. and Areva SA in downsizing nuclear technology and aim to submit license applications in the next year to U.S. regulators. They’re seeking to tap a market that has generated about $135 billion in pending orders for large nuclear plants. “We’re building iPhones when the nuclear industry has traditionally built mainframe computers,” said Deal. Hyperion has more than 150 purchase commitments from customers such as mining and telecom companies, provided its technology gets licensed for operation, he said. A generation after the Chernobyl and Three Mile Island accidents wiped reactor construction off the agenda of many governments, developers are pressing ahead with designs to satisfy demand for power that doesn’t pollute the skies. While utility-scale reactors cost about $2.3 billion apiece and produce 1.2 gigawatts of power, Hyperion’s price tag is $50 million for a 25-megawatt reactor more comparable to a diesel generators or wind farms. Transportable by truck, the units would come in a sealed box and work around the clock, requiring less maintenance than a fossil fuel plant, the developers say. They’d cost 15 percent less per megawatt of capacity than the average full-scale atomic reactors now in on the drawing board, according to World Nuclear Association data.

10. Totally relevant video - This video gives you a real feel about what's happening in California's bombed out economy and housing market. So many houses have been abandoned that skaters are now cleaning out the pools in the backyards to use them for skating. Very evocative. Cannonball from California is a place. on Vimeo.