Top 10 at 10: Deflation looms as US money supply slumps; Peak water?; Chocolate as currency?; Apple beats Microsoft; Dilbert

Here are my Top 10 links from around the Internet at 10 to 12pm. I welcome your additions and comments below or please send suggestions for Tuesday’s Monday's Top 10 at 10 (Queens Birthday holiday on Monday My mistake. Monday June 7 is Queens Birthday. As you were. HT Silas via email. Maybe I need a holiday) to bernard.hickey@interest.co.nz

1. The squeeze goes on - Bloomberg reports that Commercial Paper ('Hot money') issued into the American market by foreign banks slumped in May to a 10 month low. The credit markets are freezing over again. They're not as bad as immediately after the September 2008 calamity, but it's getting harder, particularly for any banks that sound European.

This means it will be more difficult and expensive for our banks to get the 'hot' money they still rely on for more than 30% of their funding. In reality, our banks are not demanding as much of this sort of 'hot' funding because borrowing demand is weak, particularly from consumers who are saving again, and because the Reserve Bank is slowly ratcheting up its Core Funding Ratio to further wean our banks off this 'hot' money. There is a danger, however, that the European banks who rely on this 'hot' stuff may not be able to roll it over or will have curtail their own lending, sending Europe's economy even deeper into recession as many governments cut spending and raise taxes. HT Gareth via email. FT Alphaville also reports on the spike in yields for European Commercial Paper.

Total debt has dropped US$18.6 billion, or 4.8 percent, in May to an eight-month low of US$365 billion, the Federal Reserve said today on its website. The amount outstanding has declined for the past four weeks. Banco Bilbao Vizcaya Argentaria SA, Spain’s second-biggest bank, has been unable to renew about $1 billion of commercial paper this month, the Wall Street Journal reported yesterday, highlighting investor concerns that Europe’s sovereign debt crisis will saddle banks with losses.

“The funds are merely shortening maturities and letting paper roll off, rather than fleeing,” said Peter Crane, president of Crane Data LLC, a money-fund research firm in Westborough, Massachusetts.

Yields on top-rated commercial paper due in 90 days sold by financial companies have doubled in the past six weeks to 0.55 percent, the highest since June 2009, from 0.16 percent in February, according to Federal Reserve data. Issuance of the IOUs due in less than 10 days is the most since February 2009.

2. Phew... - China has denied reports it was abandoning Euro debt as 'groundless', Bloomberg reported. This reassured markets....for now. One concern here, though, is the turmoil in Europe takes the pressure off China to let its yuan float against the US dollar, given there has been a significant appreciation of the yuan versus the euro.

“Europe has been, and will be one of the major markets for investing China’s exchange reserves,” the State Administration of Foreign Exchange said in a statement on its website today. China Investment Corp.

President Gao Xiqing said yesterday that his fund doesn’t plan to reduce investments in Europe as a result of its recent sovereign debt crisis. “We will keep our allocation in Europe,” Gao said at an Organization for Economic Cooperation and Development conference in Paris.

“For a while our people were debating whether we should underweight Europe because of what was happening in the past few months. Our conclusion is that we are not going to underweight it, but we’re not going to overweight it, either.”

The comments came on a day of respite for the euro, which snapped a three-day losing streak after tumbling this month to a four-year low against the dollar. Concern that Europe’s crisis will hamper a rebound in global commerce has spurred traders to reduce bets that China will let its own currency appreciate against the dollar, yuan forwards showed.

3. We need a crash - Noted China watcher Andy Xie reckons in this Bloomberg report that China needs its property market to crash so investors will switch their money back to bombed out Chinese stocks. New Zealanders should watch this Chinese property bubble like hawks. It is one of the major risks to a Chinese-led recovery in global growth. HT Hugh Pavletich

“The property market is sucking in all the money,” said Xie, who correctly predicted in April 2007 that China’s equities would tumble, at a forum in Beijing today.

“Without the property market crashing” a bull market in stocks is “unlikely,” he said. China’s housing prices jumped by a record last month even after the government intensified a crackdown on speculation to limit the risk of asset bubbles and keep housing affordable.

The nation’s stocks have been among the world’s worst performers this year, with the Shanghai Composite Index entering a bear market on May 11 after falling 20 percent from a Nov. 23 high. The government has restricted banks from extending loans for purchases of multiple homes, increased mortgage rates and raised down payment requirements. The central bank ordered lenders this month to set aside more deposits as reserves for a third time this year.

4. The banks aren't lending all the printed money - Ambrose Evans Pritchard has struck again at The Telegraph with this cracker on how US banks are contracting credit despite all the cash thrown at them by Ben Bernanke. HT Kokila Patel, Colin and Gareth via email. This is all about de-leveraging. It will take decades. The other ominous thing that Pritchard has picked up is the move for yet another stimulus package in the United States. A must read I reckon. Pritchard's prescription is for mass money printing to stave off deflation. I don't necessarily agree, but clearly the Americans have to do something to avoid a Japanese style debt-deflationary spiral.

The M3 money supply in the United States is contracting at an accelerating rate that now matches the average decline seen from 1929 to 1933, despite near zero interest rates and the biggest fiscal blitz in history. The M3 figures - which include broad range of bank accounts and are tracked by British and European monetarists for warning signals about the direction of the US economy a year or so in advance - began shrinking last summer. The pace has since quickened.

"It’s frightening," said Professor Tim Congdon from International Monetary Research. "The plunge in M3 has no precedent since the Great Depression. The dominant reason for this is that regulators across the world are pressing banks to raise capital asset ratios and to shrink their risk assets. This is why the US is not recovering properly," he said.

The US authorities have an entirely different explanation for the failure of stimulus measures to gain full traction. They are opting instead for yet further doses of Keynesian spending, despite warnings from the IMF that the gross public debt of the US will reach 97pc of GDP next year and 110pc by 2015.

Larry Summers, President Barack Obama’s top economic adviser, has asked Congress to "grit its teeth" and approve a fresh fiscal boost of $200bn to keep growth on track. "We are nearly 8m jobs short of normal employment. For millions of Americans the economic emergency grinds on," he said.

5. Fidelity has spoken - Giant fund manager Fidelity has taken the rare step of warning the British government not to sharply increase Capital Gains Tax there. The Pain in Europe goes on and on. The Telegraph has launched a campaign against the tax hike. Beggars can't be choosers, I'm afraid. HT Gareth via email.

The Government confirmed in the Queen's Speech on Tuesday that it planned to increase CGT on non-business assets from its present rate of 18 per cent to "closer to income tax" levels, possibly to 40 or even 50 per cent. But Fidelity International, which manages £150 billion of individual and company savings plans, said it had "serious concerns" about the proposed tax change and said it was "urging the Government to listen before it is too late".

6. A new currency - Maybe when the money is worthless and no one will take gold the next currency will be chocolate? It is portable, durable and dividable. It's also edible, unlike gold...or paper money. You could even shave bits off to pay for small things. Here's a story that caught our attention. A British chocolate company aims to raise 5 million pounds through a bond issue that returns boxes of chocolate instead of interest, Reuters reports. 

Rather than standard cash coupons that bonds usually pay, chocolate lovers will be paid out in their favourite indulgence: monthly Tasting Club chocolate boxes.

For an initial layout of 2000 or 4000 pounds, the prospective "bondholders" can expect an annual yield of 6.72 per cent or 7.29 per cent respectively on the three-year bonds based on the value of the boxes of confectionery.

"We have ambitious plans for the future and, when it came to considering the funding of these plans, we decided to think somewhat differently," said Angus Thirlwell, co-founder and chief executive of the Hotel Chocolat family of companies. The transaction is an alternative to bank loan financing as its size is too small for a typical bond issue, even one targeted at retail as opposed to institutional investors. "Rather than borrow in the traditional way and pay interest to a big bank, we would much prefer to provide a return to our customers - in chocolate - through a Chocolate Bond."

7. 'Focus on term deposits' - The Australian has revealed an interesting internal email from Westpac CEO Gail Kelly that shows how focused the big 4 banks are on raising money from term deposits rather than from 'hot' money markets. This reinforces the trend we've seen in recent months for banks to pay much more for term deposits than the Official Cash Rate and for lending growth to be constrained as the banks find it much harder (and more expensive) to find funds. HT Kevin via email.

In an email to staff, Mrs Kelly said wholesale funding markets would further fracture as a result of the European debt crisis sending shock waves through international credit markets.

She said Westpac's international shareholders had questioned management on the bank's funding position and funding sources in briefings held offshore following the bank's first-half results were announced.

"Everywhere we went, Phil (Coffey) and I were asked about funding as well as proposed regulatory changes and their impacts on Australia," Mrs Kelly said. "The importance of deposits is not a new theme for us and a vital part of what we need to do to earn all of our customers business. "The competition for retail deposits is really ramping up and it's clear that our competitions also have a similar focus. They too recognise the importance of deposits as a funding source."

8. Peak water? - We've had peak oil and peak gold. Now do we have Peak Water. John Timmer at Ars Technica investigages. HT Troy via email.

The general concept of peaking has also been valuable, as it applies to just about any finite resource. A new analysis suggests that it may be valuable to consider applying it to a renewable resource as well: the planet's water supply. The analysis, performed by staff at the Pacific Institute, recognizes that there are some significant differences between petroleum and water. For oil, using it involves a chemical transformation that won't be reversed except on geological time scales.

Using water often leaves it in its native state, with a cycle that returns it to the environment in a geologic blink of an eye. Still, the authors make a compelling argument that, not only can there be a peak water, but the US passed this point around 1970, apparently without anyone noticing. They make their case based on three ways in which water can run up against limits on its use.

The first is peak renewable water, for sources that rapidly replenish, like river basins or snow melt. The classic example here is the Colorado River where, for most years since 1960, essentially no water has reached the ocean. Although actual water use is governed by a series of interstate and international agreements, these simply serve to allocate every drop of water. Similar situations are taking place in other river basins, such as the Jordan.

The second is what they term peak nonrenewable water, as exemplified by the use of aquifers that replenish on time scales that make them closer to a finite resource. (This issue is so well recognized that it has a Wikipedia entry.) At the moment, the Ogallala and Central Valley Aquifers in the US, along with a number in China and India, are being drained at a rate that far exceeds their recharge. Ultimately, usage will necessarily peak and start dropping, as it gets harder to get access to the remainder. Eventually, these water supplies will tail off to something in the neighborhood of their recharge rate.

The final issue the authors consider is peak ecological water. The gist here is that we've accepted the elimination of the Colorado near its terminus. For a wide variety of other water sources—think the Hudson or the Rhine—we'll never tolerate the equivalent. This is because of the potential economic impact of eliminating the use of the waterway, and because we're no longer likely to accept wiping out species that rely on the habitats created by the rivers. Combined, these three peaks set a hard limit on the sustainable water use. We can exceed them for a while, but we will eventually have to drop down to something near the limit, unless we're willing to start paying substantially more for our water supply.

9. OMG - I try to avoid discussion of stocks because most New Zealanders don't care and aren't exposed. But this is too big to ignore. Apple overtook Microsoft in market value terms overnight. Who would have thunk it 20 years ago that Apple, the biggest underdog, would overtake Microsoft, the biggest bastard on the planet? Now it has. Maybe Apple is the biggest bastard now? Your view? Touch paper lit. Standing back now.  Darrell Etherington at GigaOM has the story. Also, here's ReadWriteWeb's view on the megashift.

Apple, for a long time, was the David to Microsoft’s Goliath. It was a dynamic that suited Apple, as the company used its underdog status to attract customers who saw themselves as different and apart from the mainstream. It was the iPod that first signaled a change in this arrangement. The iPod dominated. It became synonymous with “MP3 player” in the mind of the buying public. And that would start in motion the rise of Apple into the tech giant it is today.

A tech giant, might I add, that as of yesterday is worth more in terms of market value than Microsoft. At the close of Wednesday’s trading, Apple was valued at $222 billion, while Microsoft was worth $219 billion. Apple’s shares ended the day at $244.11, while Microsoft’s finished at a seven-month low of $25.01. And it isn’t only Cupertino’s successes, but also Redmond’s failures that are responsible for the new power dynamic between the two companies. Overall, Microsoft stock is down 20 percent compared to 10 years ago, while the value of Apple’s has grown tenfold over the same period.

10. Totally irrelevant video - Google has come up with a new mobile ad service that whispers ads in your ear when the phone hears you talking about certain subjects. Theonion has the scoop.

New Google Phone Service Whispers Targeted Ads Directly Into Users' Ears