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What We Read Today 26 May 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.

  • BP, Rosneft to Jointly Seek Russian Shale Oil (Reuters, The Moscow Times) Sanctions? What sanctions! Russia needs western technology to extract hard-to-get tight oil out of their shale formations. Although the agreement for the joint venture gives the government owned Rosneft a 51% stake, BP actually is in control because the already company owns 20% of Rosneft.

  • Billionaire Poroshenko declares victory in Ukraine (Laura Smith-Spark, Nick Paton Walsh and Radina Gigova, CNN) Pro-EU Petro Poroshenko declared victory Sunday in Ukraine's presidential election, following preliminary exit polls that suggested he got 56% of the vote. His leading challenger had already conceded defeat with exit polls indicating that she had received less than 14% of the vote. Splinter candidates divided the remainder. Voting in the two eastern regions, Donetsk and Luhansk, where Russia-supporting separatists have been conducting a wave of violence, was very low, estimated by local officials to be less than 12% of eligible voters. Observers indicated that there were apparently no polling places open in the city of Donetsk where pro-Russia militias are concentrated.

Today there are 9 articles discussed 'behind the wall'.

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  • The Greenspan Housing Bubble Lives On: 20 Million Homeowners Can’t Trade-Up Because They Are Still Underwater (David Stockman, Contra Corner) Hat tip to John O'Donnell. When you combine these 20 million who are "not in the market" with the several million first-time home buyers whose college debt precludes them from getting a mortgage, plus the millions more who have gone through foreclosures in the last several years and the declining median income level since 2000, is it any any wonder that the housing market is weak? And the "smoke blowers" who attribute poor sales to "obsolete inventory" not meeting a selective buying market are simply embarrassing themselves. See the next article repeated from yesterday's 'behind the wall'.


  • A Growing Number Of American Homes Are Now 'Obsolete' (Matma Badkar, Business Insider) A house may be obsolete for many reasons, among these: (1) it doesn't have the "fit and function" that buyers want (old and needs updating, (2) it's in a location buyers don't want to live (area blight, poor school district, etc.) or (3) it may lack the utilities that buyers demand (water, sewer, cable service, broadband, etc.). Thus housing experts such as Mark Fleming at CoreLogic say that true inventory is much tighter than the nearly 2.3 million homes listed for sale. A significant number (not specified) are not what buyers want, he says.

DOM (days on market) is presented as a measure of obsolescence: the higher the ratio of DOM for homes not sold to the DOM for homes that are sold is supposedly a measure of obsolescence. When they are the same (ratio 100%) most homes are "desirable". The higher above 100% the greater the number of obsolete homes according to the theory.

Econintersect sees a problem with this logic: No evidence is presented (other than population growth) that demand for homes should be higher than what is sold. The "theorists" have not removed the possibility that a high DOM is reflecting a glut of houses for sale. The unsatisfied buyer theory of CoreLogic is a continuing theme: See latest GEI News report from CoreLogic.


  • This Wall Street Insight Leads Us Into “Maybe” Territory (Shah Gilani, Wall Street Insights & Indictments) Shah Gilani has contributed to GEI. With the Fed tapering down LSAP (large scale asset purchases, aka QE - quantitative easing), stocks were supposed to take a breather, pull back a little or even make a significant "correction". And bonds were supposed to go down (interest rates rising). Well, stocks made a stutter step and have gone on to new highs and bonds dropped quickly but have since recovered 2/3 of the decline. Gilani says these divergences from expectations indicate there are some things that we don't understand about the markets and the economy. He says we had better "keep a close eye on the stock market and the bond market."
  • Why Risk Is a Good Thing in Multiple Roth Conversions (Allan S. Roth, Financial Planning) Because ROTH conversions can be reversed (called "recharacterizing"), in some cases up to 21 months later, doing conversions into risky assets allows (1) the removal of gains from future taxation if the asset appreciates or (2) recharacterizing to the original deferred tax vehicle if the asset has a loss. This is similar in effect to having a put from the government to protect against having paid tax on the conversion to the Roth which subsequently declines in value. Think of this as avoiding the possibility of paying taxes on money you ended up not having while also avoiding having to pay taxes on the appreciation if the asset goes up.
  • Options for Europe – Part 89 (Bill Mitchell, billy blog) Hat tip to Roger Erickson. This article is from the final chapter of a book of the same title ("Options for Europe") scheduled to be published in 2014. The point of Mitchell's discussion is that the EU/ECB/eurozone policies are the ultimate in anti-Keynesian action. "Pro-cyclical in times of stress" means that fiscal contraction is prescribed when the economy is contracting. This is the essence of the philosophy of Andrew Mellon who, as Herbert Hoover's Secretary of the Treasury, said: "Liquidate labor, liquidate stocks, liquidate the farmers. ... It will purge the rottenness out of the system." This was philosophy shared by noted economist Joseph Schumpeter ("creative destruction") during the same era and remains the theory of some in the Austrian School today. See also next article following this. Here is Mitchell's critique summary:
None of the reforms proposed since the crisis have altered the fact that the euro-zone rules bias fiscal policy to be pro-cyclical in times of stress, which violates any sensible ambitions that are the ambit of responsible fiscal management. It is often said that the European economies are sclerotic, which is usually taken to mean that their labour markets are overly protected and their welfare systems are overly generous. However, the real European sclerosis is found in the inflexible macroeconomic policy regime that the euro countries have chosen to contrive. The rigid monetary arrangements conducted by the undemocratic ECB and the irrational fiscal constraints that are required if the SGP is to be adhered to, render the nation states within the Eurozone incapable of achieving low levels of unemployment and increasing income growth.
  • Recent Changes at the Margin Suggest Bulls May Be Gaining Ground (Chris Puplava, Financial Sense) Watch the small caps, and the NASDAQ for signs of strength. Puplava thinks if the softness in those sectors firms than the rest of 2014 could be better for stocks than what we have seen so far. He sees the recent NASDAQ move at the first part of this possible reversal favoring the bulls. See chart below.
There are times to be agnostic towards the market and not beholden to either the bull or bear camp. This often occurs when investors are dealt a weak hand with a large number of conflicting signals. It is probably best for both the bears and the bulls to go easy until the weight of the evidence leans more strongly to either camp. The bears have a loss in financial liquidity to support their case while the bulls have solid economic data and strengthening bank liquidity at their backs. Given the riskiest areas of the market like the Russell 2000 small cap index and the NASDAQ have shown the greatest declines with the loss in financial liquidity, should these areas show further stabilization and then advance that would suggest the bulls are gaining the upper hand. Given the NASDAQ has reclaimed its 50-day moving average and the S&P 500 closed above 1900 for the first time (while credit default swaps on junk bonds improved significantly this week as well) it appears risk appetites are building again. Will the bears be forced to cover their shorts and head back to their caves? We shall see.

Click on chart for larger image at Financial Sense.

  • Online Upstarts Challenge Chinese Banks (Richard Gao, Matthews Asia, Advisor Perspectives) Author explain (in a very straightforward way) what is going on with online shadow banking in China and how this is hastening the loosening of control of interest rates by the Chinese government in the traditional banking sector.
  • Maastricht and All That (Wynne Godley, London Review of Books - written in 1992) Hat tips the Michael Hoexter and Roger Erickson. Godley severely criticized the euro monetary union at the outset as a fiscally flawed concept. He called the Maastricht proposals "seriously defective". This is a very preceptive and prescient description of the problems to come from the Maastricht Treaty. An excerpt:

The central idea of the Maastricht Treaty is that the EC countries should move towards an economic and monetary union, with a single currency managed by an independent central bank. But how is the rest of economic policy to be run? As the treaty proposes no new institutions other than a European bank, its sponsors must suppose that nothing more is needed. But this could only be correct if modern economies were self-adjusting systems that didn't need any management at all.

I am driven to the conclusion that such a view - that economies are self-righting organisms which never under any circumstances need management at all - did indeed determine the way in which the Maastricht Treaty was framed. It is a crude and extreme version of the view which for some time now has constituted Europe's conventional wisdom (though not that of the US or Japan) that governments are unable, and therefore should not try, to achieve any of the traditional goals of economic policy, such as growth and full employment. All that can legitimately be done, according to this view, is to control the money supply and balance the budget. It took a group largely composed of bankers (the Delors Committee) to reach the conclusion that an independent central bank was the only supra-national institution necessary to run an integrated, supra-national Europe.

But there is much more to it all. It needs to be emphasized at the start that the establishment of a single currency in the EC would indeed bring to an end the sovereignty of its component nations and their power to take independent action on major issues. As Mr Tim Congdon has argued very cogently, the power to issue its own money, to make drafts on its own central bank, is the main thing which defines national independence. If a country gives up or loses this power, it acquires the status of a local authority or colony.

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