Top 10 at 10 with NZ Mint: Gareth Morgan blasts advisor reform; The Low Interest Rate Trap; Avoid pregnancy; Dilbert

Here are my Top 10 links from around the Internet at 10 to 1 pm brought to you in association with New Zealand Mint for your luncheon reading pleasure.

I welcome your additions and comments below, or please send suggestions for Thursday's Top 10 at 10 via email to bernard.hickey@interest.co.nz

1. Gareth tees off again - Gareth Morgan, of Gareth Morgan KiwiSaver Investments, has written a scathing piece in the NZHerald attacking the Code Committee for Authorised Financial Advisors as protecting poor performers in the industry, rather than savers.

This will at least spark a debate and is not an encouraging sign of reforms to the sector, although Gareth has his own vested interest here in attacking the others, given he markets direct to savers rather than through financial advisors.

That caveat aside, it's well worth a read.

He picks out the poor performance of members of the committee in Consumers' mystery shopper exercise.

That IFA members, Certified Financial Planners (CFPs) and NZX members are over-represented in these examples of shonky portfolios should have been warnings in themselves.

The Securities Commission didn't have to look far - the whole issue of commissions and brokerage compromising the quality of portfolios from this industry is there to be seen in the advice from the firms of these committee members. And the latest gaff by this committee came last week with its poor quality decision to allow CFPs and NZX members through the gate - reversing their initial recommendation and in direct response to lobbying by the IFA.

There is absolutely no way the public should have any confidence in how the Financial Advisors Act is going to improve matters for the investing public. Industry capture of the process is too strong.  

 2. Milestones - A few months ago China overtook America as the largest market for new car sales in the world and overnight it overtook America as the largest energy consumer. It is already the largest internet market in the world and GM now sells more cars in China than in America. Do people get it yet?

This isn't like the rise of Japan in the 1980s. Japan had half the population of America and it was already starting to age rapidly then. China has three times America's population and it won't start to age for a long time yet. Mandarin anyone?

China's ascent marks "a new age in the history of energy," IEA chief economist Fatih Birol said in an interview.

The country's surging appetite has transformed global energy markets and propped up prices of oil and coal in recent years, and its continued growth stands to have long-term implications for U.S. energy security.

The Paris-based IEA, energy adviser to most of the world's biggest economies, said China consumed 2.252 billion tons of oil equivalent last year, about 4% more than the U.S., which burned through 2.170 billion tons of oil equivalent. The oil-equivalent metric represents all forms of energy consumed, including crude oil, nuclear power, coal, natural gas and renewable sources such as hydropower.

3. Essential reading - I try to ration my 'must read' exhortations. But this piece from Nassim Taleb at The New Statesmen is one of the best I have read in recent times. It saves having to spend a lot of time reading his Black Swan book too.

It talks about the predicament of the developed world in a fascinating way. Old time religions seem to have understood the dangers of too much debt in a very robust way. Is it any surprise the Islamic world bans money lending? Here's a taste. If you do one thing today, click this link.

We currently learn in business schools to engage in borrowing, against all historical traditions (all Mediterranean cultures developed over time a dogma against debt). "Felix qui nihil debet", goes the Roman proverb: "Happy is he who owes nothing."

Grandmothers who survived the Great Depression would have advised doing the exact opposite of getting into debt: have several years of income in cash before any personal risk-taking. Had the banks done the same, and kept high cash reserves while taking more aggressive risks with a smaller portion of their port folios, there would have been no crisis.

Documents dating back to the Babylonians show the ills of debt, and Near Eastern religions banned it. This tells me that one of the purposes of religious traditions has been to enforce prohibitions to protect people against their own epistemic arrogance.

Why? Debt implies a strong statement about the future, and a high degree of reliance on forecasts. If you borrow $100 and invest in a project, you still owe $100 even if you fail in the project (but you do a lot better in case you succeed). So debt is dangerous if you are overconfident about the future and are Black Swan-blind - which we all tend to be. And forecasting is harmful since people (especially governments) borrow in response to a forecast (or use the forecast as a cognitive excuse to borrow).

My "Scandal of Prediction" (bogus predictions that seem to be there to satisfy psychological needs) is compounded by the "Scandal of Debt": borrowing makes you more vulnerable to forecast error.  

Taleb also has an absolutely hilarious commentary on economists and modern business theory.

The reason I tell people to avoid attending an (orthodox) economics class and argue that economics will fail us is the following: economics is largely based on notions of naive optimisation, mathematised (poorly) by Paul Samuelson - and these mathematics have contributed massively to the construction of an error-prone society.

An economist would find it inefficient to carry two lungs and two kidneys - consider the costs involved in transporting these heavy items across the savannah. Such optimisation would, eventually, kill you, after the first accident, the first "outlier".

Also, consider that if we gave Mother Nature to economists, it would dispense with individual kidneys - since we do not need them all the time, it would be more "efficient" if we sold ours and used a central kidney on a time-share basis.

You could also lend your eyes at night, since you do not need them to dream.

4. Fascinating chart - Alistair Helm has done a wonderful job over at uncondtional charting mortgage approvals and property sales to see whether they are linked. He rightly points out they are, but with a twist. As with everything else in the world right now, it's all about leveraging and de-leveraging.

Approvals grew faster than sales from 2004 to 2005  as people withdraw equity, while sales have been stronger than approvals for the last couple of years as people deleveraged. This aptly tells the tale of New Zealand's housing led economy and why I reckon retailers and the consumer economy will struggle in coming years as households deleverage.

The chart I think perfectly demonstrates the history of the NZ property market from the perspective of leveraging the equity in the family home to free up cash for either consumption (cars, holidays, boats etc) or residential investment deposits.

5. 'Gee thanks Glenn' - Talk is bubbling up in Australia that Reserve Bank Governor Glenn Stevens could increase the Official Cash Rate there again in the middle of the election campaign. Julia Gillard will be thrilled, given the hike during the last election campaign is widely believed to be the thing that killed off John Howard and the hikes last year slaughtered Kevin Rudd in the polls. Businesday has the story.

THE Reserve Bank has prepared the way for an extraordinary mid-campaign rate rise, spelling out in unprecedented detail the triggers that would make it move when its board next meets in 13 days' time.

The board's minutes - released as the Coalition declared interest rates central to its campaign - for the first time include a staff forecast of the June-quarter inflation rate the bank expects when the figures are released next Wednesday and say if it is not met a rise is on the cards.

6. 'I recommend you panic' - Hugh Hendry is the genuinely eclectic fund manager who said a few months ago: 'I recommend you panic.'. Here is a New York Times profile on the guy.

With a sharp wit and a sharper tongue, Mr. Hendry, a plain-spoken Scot, has positioned himself as the public contrarian thinker of this city’s very private hedge fund community.

The euro? It’s finished, Mr. Hendry proclaims. China? Headed for a fall. President Obama? “If there was a way to short Obama, I would,” Mr. Hendry said.

Mr. Hendry runs the successful hedge fund firm Eclectica Asset Management. It is an old-school macroeconomic fund company with a big-think, globe-straddling style more akin to the Quantum Fund, of George Soros fame, than to the high-tech razzle-dazzle of Wall Street’s math-loving quant analysts. “Hugh is an anachronism,” said Steven Drobny, a founder of Drobny Global Advisors. “He reminds one of the original hedge fund managers from the ’70s and ’80s.”

At 41, Mr. Hendry is also emerging from the normally secretive world of hedge funds to captivate fans and foes with a surprising level of candor. Last May, on British television, he verbally sparred with Jeffrey D. Sachs, director of the Earth Institute at Columbia and perhaps the best-known economist writing on developmental issues. Before that, he took on Joseph E. Stiglitz, the Nobel laureate, about the future of the euro.

“Hello, can I tell you about the real world?” Mr. Hendry interjected at one point. Video of the encounter was a huge hit on YouTube.

And here's that video.

7. 'Just don't get pregnant' - This is an interesting side-effect of the stress in banking and real estate in the United States. Now the New York Times is reporting lenders are being very careful about borrowers who may or may not be pregnant or are about to get pregnant. Maybe that becomes one of the questions on the loan form: are you having protected sex or have you had a vasectomy?

Anyone seeing similar issues in New Zealand with banks and family potentialities? HT Michael Bryan via email.

That is what happened to Elizabeth Budde, a 33-year-old oncologist who lives in Kenmore, Wash.

She nearly lost her mortgage after a loan officer learned she was home with her newborn. With stellar credit and a solid job, Dr. Budde said she had been notified via e-mail that she was approved for a loan on June 15.

But that note prompted an automatic, “out of the office” e-mail reply from Dr. Budde’s work account, which said she was out on maternity leave. The next day, Dr. Budde received a second e-mail message from the lender, this time denying her loan approval. Since “maternity leave is classified as paid via short-term or temporary disability income,” the e-mail message said, it could not be used because it would not continue for three years. The message also said the lender could not consider her regular, salaried income because she was not on the job.

“I was really shocked,” Dr. Budde said. “At the time, they didn’t know how I was getting paid for my leave.”

8. 'It's not so bad' - The financial situation is so desperate for many US cities and councils that they are firing all their workers and outsourcing everything. The interesting thing in some places is that the services actually got better. Now there's an idea... Here's the New York Times article on this phenomenon. HT Brendon Waugh via email.

The apocalypse never arrived.

In fact, it seems this city was so bad at being a city that outsourcing — so far, at least — is being viewed as an act of municipal genius.

“We don’t want to be the model for other cities to lay off their employees,” said Magdalena Prado, a spokeswoman for the city who works on contract. “But our residents have been somewhat pleased.”

That includes Mayor Ana Rosa Rizo, who was gratified to see her husband get a parking ticket on July 1, hours after the Police Department had been disbanded. The ticket was issued by enforcement clerks for the neighboring city of Bell, which is being paid about $50,000 a month by Maywood to perform various services. The reaction is all the more remarkable because this is not a feel-good city.

City Council hearings run hot, council members face repeated recall efforts and city officials fight in public. “You single-handedly destroyed the city,” the city treasurer told the City Council at its most recent meeting.

9. The Low Interest Rate Trap - The economists at VoxEU have written an excellent piece questioning the use of inflation targeting and how it could increase the risk of future financial crises, particularly in a deflationary era like the one we're about to embark on. It's all about low interest rates. This is another reason why I reckon the RBNZ needs to keep hiking. Yep, that's right. I really am Hike-y Hickey. Especially for you Chris_j.

There is a fundamental flaw in the way central banks set official interest rates. This flaw has created what might be called the “low-interest-rate trap”. Low rates induce excessive risk taking, which increases the probability of crises, which in turn, requires low interest rates to keep the financial system alive.

The flaw behind all this is the failure of central banks to take account of the probability of financial crises when setting interest rates.

Crises, in turn, require low interest rates to prop up the financial system. In a weakened financial system raising rates becomes extremely difficult, so central banks remain stuck in a low-interest-rate equilibrium, which in turn induces excessive risk taking.

What we have experienced in the past few years closely resemble this paradigm. A more resilient financial system requires better regulation, but it also requires some fresh thinking on the way central banks set interest rates.

10. Totally irrelevant video - Here's King Leonidas, the brave King of Sparta who defied a 'God' of Persia at the assault for the invasion of Sparta, vs Chuck Norris. Guess who wins.