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What We Read Today 10 April 2014

Econintersect: Every day our editors collect the most interesting things they find from around the internet and present a summary "reading list" which will include very brief summaries of why each item has gotten our attention. Suggestions from readers for "reading list" items are gratefully reviewed, although sometimes space limits the number included.

  • Could The Fair Tax Movement Ever Replace The IRS? (Mark P. Cussen, Investopedia) A continuation of the "mini-article" length discussion 'behind the wall' yesterday. This article discusses aspects not covered yesterday but is in agreement about some of the regressive taxation characteristics of taxing consumption rather than income.

  • U.S. Tries Candor to Assure China on Cyberattacks (David E. Sanger, New York Times) The U.S. has been forthcoming in revealing that they will increase the number of cyber warriors in the U.S. to 6,000. China has not reciprocated. See next article.

Near a banner offering him a "warm welcome," Defense Secretary Chuck Hagel urged officers at China's premier military university to work toward a new era of cooperation between the world's top military rivals.

But during his first trip to China as Pentagon chief, icy body language and barbs telegraphed a relationship utterly devoid of warmth and very much saddled by suspicion.

Today there are 14 more articles discussed 'behind the wall'. Eight of the articles are on investing topics.

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  • Shale revolution reverses global energy flow (John Kemp, Reuters) The reduction in petroleum imports by the U.S. over the past five years is an amount equal to the entire production of Saudi Arabia. See also last article discussed today.


  • How High-Frequency Trading Benefits Most Investors (Gary Halbert, Advisor Perspectives) Article in two parts - skip the first to get to the second which is a defense of HFT (high frequency trading). Halbert claims the high volumes introduced by HFT improve liquidity for the small retail investor while making it harder for the institutional investor to get its prices. See also Shah Gilani's article today GEI Investing.
  • The Most Important Difference Between 2007 and 2014 (Joshua M. Brown, The Reformed Broker) While there are a lot of similarities now to the last peak in 2007, there is one outstanding difference: corporate leverage is way down and at a time of much lower interest rates as well.


  • Falling off the bond ladder (William Droms, MarketWatch, The Wall Street Journal) Hat tip to Rob Isbitts. For many individual investors constructing a bond ladder is costly (bid/ask spreads, commissions); using mutual finds (or ETFs) may still better in a rising interest rate environment. Droms says that interest rate risk is limited if fund durations are kept short. Econintersect would point out that if an investor can be assured that the bonds will be held to maturity, a low cost ladder can be constructed with Treasuries with as-issued bonds purchased at Treasury Direct. The negative factors of bid/ask spreads and commissions are essentially eliminated. Of course interest coupons for Treasuries will be lower than corporates but default risk is also lower (actually nil).
  • Chart of the Day - NASDAQ Tech stocks have corrected significantly over the past month. As a result the tech-laden Nasdaq is currently down over 5% from its March 5th peak. The Nasdaq has just broken below support of its 17-month uptrend channel.


  • No One Will Ring The Bell At The Top (Lance Roberts, Pragmatic Capitalism) Lance Roberts contributes to Global Economic Intersection. There are signs of market extremes but you won't know that any indicated a top until the top is well past. One extreme today is market leverage.


  • Risk On, Regardless (Gary Shilling, John Mauldin, Outside the Box) Nice review of investing history and outlook with a cautionary near-term tone. One of the most interesting retrospectives is the following graph which demonstrates the golden age of bond investing. The graph is realistic for qualified savings (like IRAs and 401(k)s) but buy and hold stocks would have a relative tax advantage in taxable accounts. For an IRA, $10,000 in the zero-coupon bond would have grown to approximately $2 million today. The stock account would be $400,000. In a taxable account with 35% annual tax rate (25% long-term capital gains) - both tax rates assuming a nominal 5% state income tax, the bond account would have grown to $340,000 and the stock account to $300,000 (both after-tax values). The golden age of bonds was only massively golden for qualified tax-deferred savings. The advantage was quite modest for non-qualified money. In case you are confused, zero coupon bonds pay ordinary income tax on imputed interest each year even though none is received until maturity.


... the "banking union" may soon exist on paper, in practice the eurozone banking system is likely to remain fragmented along national lines and divided between a northern "core," where governments continue to stand behind local banks, and a southern "periphery," where governments have run out of money.


  • Output Gap, RIP (Chris Dillow, Stumbling and Mumbling) Dillow has two problems with output gap.

1. Estimates of potential GDP are parasitic upon our observations of actual GDP. Fair enough - economists are all together too prone to linear projections.

2. The concept of output gap lacks micro foundations. He's off-base here. Macro having micro-foundations is a wet dream of a subgroup of neoclassical economists that cannot stand the scrutiny of logic. There is no way it is logical to expect that macro can have any relationship to any simple combination of individual micro factors. The number of degrees of freedom in each micro factor outruns the computational capability to determine even a small number of the interrelationships between just of them. If you go to multiple micro factors the number of independent variables in the form of cross terms goes far beyond the realm of any macro model ever attempted.

Darrow should have stopped with the first problem. It is sufficient by itself to make his point. The second problem is merely a straw man.

  • Flu Drugs May Do More Harm Than Good, Researchers Find (Oliver Staley, Bloomberg) Tamiflu and Relenza, antiviral drugs stockpiled by governments to tame influenza outbreaks, haven't been proven to prevent pandemics and may cause more harm in some patients than good, researchers said in a journal article after reviewing 170,000 pages of clinical-trial data. The editor of the journal said that drug companies have an irreducible conflict of interest - It's not in their interest to create a clear picture of a drug.

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