Thursday's Top 10 with NZ Mint: Japan's war on deflation starts today; Dutch homeowners 'onder water'; China's Weapons of Mass Ponzi; Tiwai Pt data centres?; Dilbert

Here's my Top 10 links from around the Internet at 10 am in association with NZ Mint.

As always, we welcome your additions in the comments below or via email to bernard.hickey@interest.co.nz.

See all previous Top 10s here.

My must reads today are #5 and #6 on China's version of finance companies known as Wealth Management Products, or 'Weapons of Mass Ponzi.' Jon Stewart's view on the North Korean tapdancing on the brink is very funny.

1. War of Deflation - Here's a nice CNN backgrounder on the new Bank of Japan Governor's first decision today and his direction to create some inflation.

This is what happens in an ageing economy with no inward migration that is struggling to cope with the collapses of real estate and asset bubbles.

Japan has been in recession with low to no inflation for decades.

Only now is it getting incredibly desperate.

Desperate enough to print like there's no tomorrow.

They're hoping it will create a tomorrow.

This just reinforces to me the power of demographics and how damaging asset bubbles can be. 

The rest of the developed world faces the same ageing problem, albeit with the help of migration and in most cases a higher birth rate.

Here's CNN:

Skeptics abound, however, and even Abe has acknowledged that hitting the 2% target before the deadline could be difficult. In particular, economists are worried about sustained downward pressure on wages in Japan, a trend that makes inflation difficult to achieve.

Economists expect the bank to, at the very least, ramp up its buying of bonds. It is already buying short-term debt and could expand its balance sheet by buying longer-term debt or more exotic assets like corporate bonds, "commercial paper" and ETFs. The bank could also move up the start date for asset purchases.

2. Could Invercargill become a data centre capital? - An idea raised by Paul Brislen from the Teleccommunications Users' Association via NZ Herald is that the Tiwai Pt power could be used to run a rash of data centres in Southland.

Big data - the ability to sift through massive data sets to seek out trends and analyse information on a global scale - is the next big wave to hit the ICT industry and New Zealand could be well placed to take advantage of it.

We have cheap electricity and cheap land. We have a trained, capable workforce and we have political stability and a remote location - all very desirable attributes for a data centre. We also have sustainable, green electricity.

Oregon data centres are typically 60 per cent coal-fired, with 40 per cent nuclear and the companies that build them are under tremendous pressure to clean up their act.

We can absolutely help with that. All it takes is a vision and a willingness to walk away from a smelting business which doesn't make money and which requires corporate handouts to keep going.

3. Yes, but.... - Here's Lance Wiggs explaining why the Tiwai Pt power is way too much to be used by data centres alone.

Data centers do like power (and the cold), but not nearly as much as aluminium smelters. The NYTimes reported, in September 2011, that Google itself uses a continuous 260 MegaWatts of electricity worldwide. 

Impressive as it sounds, all of Google’s demand for data center power is still less than half the freed up capacity from Tiwai. So no – we cannot replace Tiwai’s electricity demand with a data center. Or even 2,354 of them.

4. Portugal no confidence motion - This is one of the themes of the European debt crisis. The Eurocrats are obsessed with using austerity to fix the debt problem. The trouble is the high multipliers for government deficts in recessions driven by private sector deleraging means austerity is failing. 

And now the voters are revolting. Understanding Europe's economy and where it goes is now all about watching the politics.

Here's the reliably euro-sceptic Telegraph with its take.

Although the motion is almost certain to be defeated by the ruling coalition, which enjoys a comfortable majority, the move exposes growing dissent over the austerity policies imposed on Portugal since it received a €78bn international bailout agreed in May 2011.

"The time has come to put an end to the austerity policies that are impoverishing our country and demand heavy sacrifices from the Portuguese people without them seeing any results," the Socialist Party said in the motion.

5. China's Weapons of Mass Ponzi - FTAlphaville's Kate McKenzie has written an excellent summary here of the detail of a crackdown announced in China last week on banks' use and promotion of Wealth Management Products (WMPs).

These are the finance company style vehicles set up by China's banks to circumvent restrictions on term deposit rates and to offer higher returns to savers by lending out money to property developers willy nilly.... Now where I have heard about that type of thing...

This can't end well and as McKenzie says and the chart shows, the numbers are now very big. See my bolding. Just reeks of Ponzi.

As Capital Economics’ Mark Williams and Qinwei Wang write, around 60 per cent of WMPs were of less than three months duration, far shorter than the underlying assets:

WMP issuers have adopted two main strategies to deal with this problem. One is to repay maturing WMPs using money raised from new WMPs. This would leave any given product highly exposed to a downturn in confidence in whichever asset class it was invested in.

Stevenson-Yang is sceptical that these measures are intended to seriously curtail the volume of shadow financing activity. She writes:

The elephant in the room is that the shadow institutions are the co-dependent evil twins to the commercial banks. This is true in two ways: banks are reliant on the shadow institutions to supply their liquidity, and shadow institutions get a lot of their capital from the banks.

6. More excellent background on China's shadow banking system - This is another excellent piece from McKenzie from late February on China's fast growing shadow banking system and the risk that much of China's growth since 2009 has been debt fueled and that debt is rising far too fast to be sustainable.

It also raises the question: how is all this extra cash in China leaking out into the rest of the world? How much of it is ending up here to inflate our own property bubble?

There are clear signs, for example, that the central Chinese authorities are again worried about excessive property prices. And the pace of innovation in unregulated products is at times astounding.

There are numerous reasons to think China’s credit growth is at unsustainable levels. Morgan Stanley’s Ruchir Sharma sums up some of these reasons in a WSJ op-ed, citing a BIS paper by Mathias Drehmann and Mikael Juselius which finds that if the private debt-to-GDP ratio increases by 6 per cent or more above its 15-year average, that is a “very strong indication that a crisis may be imminent”.

The risks are huge. These investment properties and their derivative financial products make up the life savings of many Chinese people. If the credit growth contracts, what happens to the asset values?

7. 'Onder Water' - Here's Der Spiegel pointing to a housing slump in Holland and how many are 'onder water'.

More than a decade ago, the Dutch central bank recognized the dangers of this euphoria, but its warnings went unheeded. Only last year did the new government, under conservative-liberal Prime Minister Mark Rutte, amend the generous tax loopholes, which gradually began to expire in January. But now it's almost too late. No nation in the euro zone is as deeply in debt as the Netherlands, where banks have a total of about €650 billion in mortgage loans on their books.

Consumer debt amounts to about 250 percent of available income. By comparison, in 2011 even the Spaniards only reached a debt ratio of 125 percent.

New Zealand's household debt to disposable income ratio is around 145%.

8. 'The Fed's nuclear reactor' - The CFA Institute reports that hedge fund manager James G Rickards is worried about the Fed's efforts to 'tweak' the economy. HT Nikki

”The Fed thinks they are playing with a thermostat,” Rickards said. “They think, ‘If the economy is too cool, you dial it up a little bit. If the economy is too hot, you dial it back down. It’s linear, it’s reversible, it’s all good. Everything is under control.’”

But in reality, he continued, “capital markets and financial markets are complex systems, which respond and correspond to complex dynamics, including critical state dynamics.” The metaphor is not in fact a thermostat, Rickards said. It is a nuclear power plant: “You can dial a nuclear power plant up and down,” he said, “but you had better get it right. Because if you get it wrong, you will cause a catastrophic meltdown, and it is an irreversible process. There’s no such thing as a melt-up; if you destroy it, it stays destroyed.”

Rickards believes the Fed, its staff, and its economists “misapprehend the statistical probabilities of risk” because they don’t understand how risk works in complex systems. “They are using Keynesianism, they are using monetarism, they are using modern financial economics,” he said. “Most of this stuff is deeply flawed, if not completely junk science.” He believes the right way to think about risk is by using complexity theory. “When you start looking at things that way, you will see that this is a system that is bordering on the critical state and potentially prone to collapse.”

9. Will Obama be remembered for widening inequality? - The FT's Edward Luce thinks so.

In June the US will enter its fifth year of post-financial crisis recovery. However, each year has brought slightly lower middle-class incomes than the last. According to data from Sentier Research, US median household income dropped by 1.1 per cent from January to February, to $51,404. It is now 5.6 per cent below where it was in June 2009, when the recovery began ($54,437). And it is 8.9 per cent below where it was at the start of the century. At this rate – and for all Mr Obama’s efforts – the middle class could suffer a double-digit fall during his presidency.

It is a different story at the top. According to David Cay Johnston of Syracuse University, the wealthiest 10 per cent of Americans have taken 149 per cent of the growth since 2009 (the bottom 90 per cent have seen their incomes shrink). The top 1 per cent – those earning $366,623 or more – have taken 81 per cent of the fruits of the recovery. And the top one in 1,000 – those starting at $7.97m a year – hogged an astonishing 39 per cent of the growth. That means America’s top 15,837 households have gained almost as much as the remaining 158.4m.

10. Totally Jon Stewart on the 'Nuke Kid on the Block'

It seems North Korea wants to blow up Austin Texas.

Hugh Pavletich is going to be very unhappy... ;)

And Part 2. I laughed a lot.