Frontrunning: July 9

• Immediate leak to refute that Postbank, or any other bank, will fail stress tests. Can't have a failure of confidence in a massively insolvent bank can we (Bloomberg)
• Computerized stock trading leaves investors vulnerable (USA Today)
• Biggest defaulters on mortgages are the rich (NYT)
• US will not brand China a currency manipulator, US exports now have no excuse to continue sucking (Reuters)
• Google says China renews its internet license (Google), sending Google stock higher, BIDU lower
• Dumbest money clinging to shattered V-shaped dreams like Moody's to AAA rating of subprime (Reuters)

Daily Highlights: 7.9.10

• Asia stocks rise to two-week high, Won gains on rate increase.
• Australia delays proposed mandatory Internet filter; 3 ISPs agree to block child porn.
• Bank of Korea unexpectedly raises its policy rate by a quarter point, cites rising inflation.
• China reduces rare earth export quota by 72%, may cause U.S. trade dispute.
• China shares rebound on government pledge of easy credit, end week up 3.7 percent.
• China weighing nationwide resource tax to channel funds to help develop impoverished western regions.

The Latest Fake Sugar High From Jim O'Neill

Does Jim O'Neill take sugar with his tea? No thanks Turkish, he is sweet enough.

Guest Post: I Smell A Vat

The good folks over at numismaster.com report that, starting on January 1st in 2012, U.S. federal law will require coin and bullion dealers to report to the Internal Revenue Service all gold and silver coin purchases and sales greater than $600. The report is written by David L. Ganz and is headlined "$600 Sale? Get Ready for Tax Form." Apparently this little jewel was an add-on to the national health care legislation. But there’s a new bill being introduced by Rep. Dan Lungren (H.R. 5141), which has gathered over 80 members of Congress as co-sponsors to repeal this section... so we'll see how that turns out. According to the author of the article Ed references, the rationale for the new regulations is that the taxocrats believe that people conducting off-book trading in precious metals are chiseling them out of $17 billion in lost revenue annually. The net result, however, will be that the government will soon know who’s got the gold. We reached out to another well-informed source who confirmed that the new regs would apply to all businesses. For example, under the new regime a plumber who does work for you in excess of the $600 threshold would be required to file a 1099 report. The implications of this move transcend just the precious metals. Rather, this is a deliberate step in the direction of implementing a VAT – once the government has everyone reporting essentially every transaction, taking the next step is a snap.

Must Read Reflections From GMO's Edward Chancellor On The Sovereign Debt Crisis

GMO's Edward Chancellor has written what is arguably the coup de grace of papers analyzing the dynamics of soveriegn default, together with the conditions required to succumb to this terminal condition, and is the functional equivalent of months of research and combing through all the recent literature on the topic. By initially highlighting the reasons for government default, which include i) a reversal of capital flows, ii) unwise lending, iii) excessive foreign debts, iv) a poor credit history, v) unproductive lending, vi) rollover risk, vii) weak revenues, and viii) rising interest rates, Chancellor presents the frame of reference in which every potential sovereign default situation should be analyzed. Chancellor also highlights several examples where a sovereign default was all but assured (Britain post the Napoleonic wars, Sweden in the 1990s), analyzes the opportunity cost of hyperinflating instead of pursuing default (when inflation is more convenient, when it resolves political conflicts, when avoiding inflation is a low priority, and when there has been a public credit flameout), and makes an exhaustive analysis using historical parallels of today's sovereign debt crisis. He summarizes the different view of the current sovereign fiasco as follows: i) this time is (really) different, ii) we are not all Greek, iii) posits that the US is not on the verge of a default, iv) that inflation is more likely than default. He concludes by analyzing potential tipping points, which in a herd mentality market such as ours, are all that matters, and suggests that Japan is precisely on the verge of such a tipping point. Yet his two most critical conclusions, in our opinion, are the following: "public finance is a ponzi scheme" and, for all those who are fans of Rosie's thesis that bonds are the go to investment currently, "Current yields on government bonds in most advanced economist are at very low levels. Under only one condition - that the world follows Japan's experience of prolonged deflation - do they offer any chance of a reasonable return. But this is not the only possible future. For other outcomes, long-dated government bonds offer a limited upside with a potentially uncapped downside. As investors, such asymmetric pay-off profiles don't appeal to us." Must read for everyone who wants to have an intelligent opinion on the matter.

Appeals Court Refuses Obama Demand For Stay Of Deepwater Drilling

Fresh from Reuters:

A U.S. appeals court on Thursday rejected the Obama administration's request to put on hold a ruling that lifted a temporary moratorium on deepwater oil drilling in the wake of the BP Plc oil spill.

The U.S. Court of Appeals for the Fifth Circuit, based in New Orleans, ruled about an hour after hearing arguments over the administration's request to put on hold a lower court ruling that lifted the six-month moratorium.

Another slap in the face for a president who believes the constitution is something that has to be taught but not really followed. Of course, the appeals court ruled against Obama in the Chrysler case too, only to have the most corrupt "judicial" organization in the US, the Supreme Court, rule in favor of abolishing creditor rights at the end of the day.

Harrisburg Chapter 9 Imminent As Controller Tells Debtwire Bankruptcy Best Option

In what will likely be the first major municipal bankruptcy of the New Normal, Harrisburg is likely about to shut the gates. In an interview conducted with restructuring site Debtwire, the City's controller Dan Miller said Harrisburg would be better off filing for Chapter 9 than trying to restructuring finances under Act 47, the Financially Distressed Municipalities Act. He added that the latter has never solver the problems of any municipality that entered the program and the institution of a commuter tax in Harrisburg to avoid a Chapter 9 would be unworkable. On the other hands, "when reached for comment, long-time opponent of a Chapter 9 filing for the city, PA governor Ed Rendell said Harrisburg officials have not given him any indication that they will seek Chapter 9 protection. Rendell said he hopes that the city "will either sell assets or seek Act 47" before making a Chapter 9 filing." Alas, it appears the nearly bankrupt city has run out of options.