Friday's Top 10 at 10 with NZ Mint: Stress test chaos; 60 mln empty Chinese apartments; Unintended consequences; Dilbert

Here are my Top 10 links from around the Internet at 10 past 12pm brought to you in association with New Zealand Mint for your luncheon reading pleasure.

I'm in Wellington today for this conference on Retirement Policy and Intergenerational Equity.

I'll publish more reports from it later today.

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

1. 'Rowdy negotiations about cod quotas' - The results of the European bank stress tests are out later tonight and have the potential to either quieten down the European Financial Crisis or make it much worse.

The Economist has a nice preview of the stress test results, suggesting it's all a bit of a mess that will struggle to repeat the 'success' of the American stress tests, which quietened things down in early 2009.

It compared the EU approach to 'rowdy negotiations over cod quotas'. Not reassuring.

Whereas America’s tests were run in military style, Europe’s efforts have been chaotic—more akin to a rowdy negotiation about cod quotas than the recapitalisation of the world’s biggest banking system. With just days to go regulators must redouble their efforts to make the tests work. The task is huge. Europe’s banking system is far bigger than America’s: 91 banks are being tested, compared with 19 on Wall Street.

Politics has made things harder. Lacking a single body with the authority and resources of the Fed, the tests are being run by a tangle of national regulators, the European Commission, the European Central Bank and a quango called the Committee of European Banking Supervisors. Consistency and credibility seem to have been sacrificed.

Germany’s banks, which are in poor shape but which can continue to borrow cheaply because they have the backing of a government with strong finances, have given the nod that they expect to pass. The tests may fudge the issue of sovereign defaults by assuming haircuts on assets held in trading books, and not on loans.

And unlike America, Europe seems keen to use a lax definition of capital that is no longer viewed by the market as the best benchmark for solvency.

2. Asset rich but cash poor - Portugal is seen as one of the worst of the PIGS, but it does have a lot of gold. The problem for Portugal is that it can't do much with it. It's hard to believe, but it has 6.8% of its GDP stuck in vaults. It hasn't helped its credit rating either. This is one of the problems with gold. When you desperately need it it can be tricky to ... er ... liquidate. Bloomberg has the story.

Gold’s 26 percent advance in the past year leaves Portugal holding an increasingly valuable asset, though one the indebted government can’t touch because the law prevents proceeds from going to state coffers. “With the increase in the price of gold, you have some nice booked gains, but you can’t cash them in,” said David Schnautz, a strategist at Commerzbank AG in London.

“It’s a buffer for an extreme-case scenario.”

Portugal’s budget deficit is three times the limit for euro members and its debt will equal 84 percent of gross domestic product this year. Standard & Poor’s gives Portugal the second- lowest credit rating after Greece among the 16 euro countries. Portugal’s gold is managed by the Bank of Portugal, whose law says proceeds from sales must be placed in a reserve account and can’t be transferred to the state treasury.

3. The amazing Photoshop - BP has been criticised over many things in recent months and now it can add lying very badly to the list. A PR image it distributed of its people working hard to fix the disaster was photoshopped, Gizmodo reports. HT Troy via email. It was first revealed by Americablog.

This image was posted on BP's main website until yesterday. Look at all of those people working so hard to stem the oil disaster! Now look a little closer.

Now be appalled that it's egregiously—and very poorly—photoshopped. And as if all that weren't bad enough, the file's metadata suggests the original shot was taken way back 2001

4. Echoes of the 1930s - The unintended consequences of government regulations are legendary. As were the moves in the 1930s by US President Franklin Delano Roosevelt to compulsorily acquire private gold holdings. Now a bizarre clause in Obama's health care legislation is forcing people buying gold coins worth more than US$600 to report this to the Inland Revenue Service (IRS). You wouldn't read about it. But you can here courtesy of ABC news. Not surprisingly, the Tea Party types in America are up in arms. It's FDR stealing the gold all over again. Not quite. But this will bubble along.

This provision, intended to mine what the IRS deems a vast reservoir of uncollected income tax, was included in the health care legislation ostensibly as a way to pay for it. The tax code tweak is expected to raise US$17 billion over the next 10 years, according to the Joint Committee on Taxation.

Every time a member of the public sells more than $600 worth of gold to a dealer, the transaction will have to be reported to the government by the buyer.

Pat Heller, who owns Liberty Coin Service in Lansing, Mich., deals with around 1,000 customers every week. Many are individuals looking to protect wealth in an uncertain economy, he said, while others are dealers like him. With spot market prices for gold at nearly $1,200 an ounce, Heller estimates that he'll be filling out between 10,000 and 20,000 tax forms per year after the new law takes effect.

5. How many homes are empty? - China's housing boom is being watched closely. Now some evidence is emerging that many of the apartments built lately and selling for millions of dollars in Beijing and Shanghai are not actually occupied. Sounds like a bubble to me. It seems many Chinese are using these things as 'stores of value.' Global Times has the story that up to 60 million homes in China are vacant. HT Hugh Pavletich via email.

Teachers from Beijing Union University conducted a survey in 50 communities sold between 2004 and 2006 in Beijing and found that 27.16 percent of the electric meters did not move in 2007. "The figures go higher as you move from the inner city, with the suburbs registering around 30 percent vacancy," said the writers of the survey quoted by 21st Century Business Herald.

Their figures did not include unsold properties. The occupancy rate in new communities in Nanjing, capital city of Jiangsu Province, is nearly 50 percent, and in Hebei's capital city, Shijiazhuang, the rate is between 40 and 60 percent, said the report. Experts attributed the vacant housing to a lack of investment alternatives as "people in China uses housing as store of value".

"Moreover, people may be over-optimistic, for they've never seen the housing market go down in the past years," Patrick Chovanec, associate professor of Tsinghua University's School of Eco-nomics and Management, told the Global Times .

6. 'Gold should be US$54,000/oz' - ZeroHedge points out the views of Adrian Douglas about fractional reserve banking and the price of gold. He has a startling conclusion. Gold's true worth is US$54,000 in the absence of fractional reserve banking. Iain Parker. Are you still around?

The problem with this analysis is that returning to the gold standard is off the agenda...just a tad. Here's what he says:

* the gold price is suppressed through fractional reserve bullion banking

* the gold market is selling on average 45 ounces of gold for every one ounce of real physical gold via “unallocated gold” (fractional reserve bullion banking). In other words the gold market is backed by only 2.3% gold

* The true price of physical gold is currently around $54,000/oz if fractional reserve bullion banking did not exist. In the presence of fractional reserve banking with 2.3% gold backing the market price of “gold” is reduced to $1200/oz

* The US dollar has a purchasing power that is 45 times over valued The way to end gold price suppression is for investors to ensure they have allocated physical bullion preferably held outside of the bullion banking system

7. Back up to their old tricks - General Motors, which went bankrupt because American consumers couldn't afford and didn't want its trucks/cars, was taken over by the US government and is now recovering. It is recovering so well that it has just paid US$3.5 billion for a sub-prime borrower so it can offer cheap finance to 'damaged' borrowers again... Has anyone learnt anything? Here's the New York Times article. Start shaking your head and sighing now. HT David via email.

The transaction, expected to close in the fourth quarter, gives G.M. a captive financing arm for the first time since 2007, when it sold control of GMAC Financial Services. G.M. recently considered starting a new financing arm or reacquiring GMAC, now known as Ally Financial, to strengthen its lending capabilities and to raise the carmaker’s value ahead of a public stock offering.

“Our dealers have been telling us that not having an in-house finance arm hurt our ability to finance certain loans and leases,” Edward E. Whitacre Jr., G.M.’s chief executive, said in a conference call.

“It hurt our ability to meet rising customer demand for G.M. cars and trucks. Now we’re going to fix that.” Analysts said G.M. and Chrysler, which lost its own captive financing arm, Chrysler Financial, during last year’s bankruptcy reorganization, have been at a disadvantage because they no longer had as much of a say in which customers could get approved for loans as rivals like the Ford Motor Company and Toyota.  

8. Government payday loans? - The just passed Dodd-Frank US Financial Regulations bill has all sorts of juicy details within its 2,315 pages, including plans for the government to start offering pay day loans. This is the type of loan sharking that preys on the poor. Is the US government this desperate to restart the economy?    Zerohedge has the story.

As payday loans tend to be the most usurious of all short-term credit instruments for the lower classes, will the government's intervention into this most recent arena result in the obliteration of the existing business model for payday lenders?

But far more importantly, will the government use this platform as a means to provide cash to virtually anyone in exchange for shoddy collateral and mere promises to repay the loan? And nowhere in the text is it said the loans are even collateralized with something like a deferred paycheck: these loans could very easily be on par or even worse than NINJA loans, in which the ability to breathe and walk at the same time is sufficient for eligibility, while the ability to actually repay never even figures in the loan officer's mind? And lastly, what will be the penalties for delinquency and/or charge offs?

Since this will come straight from the government's balance sheet (i.e. the Treasury), without bank intermediation, this will be the perfect forum for the government to lend out at any terms it desires, with the implicit understanding that it has no interest in getting paid back. Is Ben loading up the chopper for one more flight in which he will start handing out non-recourse, no-collateral, no interest rate loans to all of America in one final, valiant attempt to reflate the economy?

9. Unintended consequences - Remember the article I mentioned yesterday about the ratings agencies pulling their ratings after the Dodd Frank bill forced them to acknowledge legal liability? Now it appears the asset backed securitisation market has shut down. Here's the Reuters report.

At least two issuers, including Ford Motor Credit, have pulled planned asset-backed bond sales from the market this week, as issuance remains paralyzed by a twist in the new financial reforms, traders and fund managers said. Rating agencies have indicated they will no longer allow their ratings to be used in bond prospectuses for asset-backed securities issues.

That's because the regulatory overhaul imposes new liabilities for the agencies if they consent to use of their ratings in public offering documents. As a result, on Wednesday, Ford Motor Credit indefinitely postponed a potential asset-backed securities issue that could have been between $1 billion and $3 billion in size, market sources said.

10. Totally irrelevant video - IPhone4 vs HTC Evo. For geeks, but still funny