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What We Read Today 27 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.

  • Barclays Manipulated Gold as Soon as It Stopped Manipulating Libor (Matt Levine, Bloomberg) Hat tip to Roger Erickson. The UK Financial Conduct Board has sanctioned Barclays for manipulating the gold market just one day after the same bank was fined £290 million (US$450 million) for their role in the Libor manipulation. You couldn't make up a story like this and have any credibility. So this really is an incredible event.

  • With London 'fix' under fire, China seeks bigger sway in gold trade (A. Ananthalakshmi, Reuters) The country with the largest gold imports plans to start a global gold exchange in Shanghai. The PBoC (People's Bank of China), the country's central bank, approved the formation of the exchange last week. China wants more say in the benchmark pricing of gold and could challenge New York and London for leadership in trading and pricing.
  • Vietnam accuses China of sinking fishing boat (Demitri Sevastopulo, Financial Times) Vietnam has accused China of sinking one of its fishing boats in disputed waters near a Chinese oil rig that is at the center of a dangerous maritime stand-off between the two Asian neighbors.
  • Hanoi says Chinese boat sinks Vietnamese fishing vessel in disputed waters (Nguyen Phuong Linh, Reuters) The head of Vietnam's coast guard says that the fishing vessel from Hanoi was "deliberately encircled" by 40 Chinese fishing vessels before it was rammed by a "Chinese ship". The incident took place 17 nautical miles from the oil rig according to the Vietnamese coast guard.
  • How Long Can the “Modi Bump” in Indian Markets Last? (Zachary Fillingham, Geopolitical Monitor) If Modi does deliver on his promises for economic development, the author says progress will be slow - the stock market may have gotten ahead of itself. He reports that Deutsche Bank downgraded India's from "neutral" to "neutral - underweight", "warning of possible economic pain in the short term and the pressing need for economic reform."
  • The Wall Street Pension Scam (Dean Baker, Truth-Out.org) Dean baker has contributed to GEI. Part of the shortfall in public pension funds can be attributed to above average management fees to advisors, many of which obtain their position through political patronage.

Today there are 12 articles discussed 'behind the wall'.

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  • Great Rotation, Interrupted (Josh Brown, Reformed Broker) In early 2013 a six-year movement out of stocks and into bonds ended and reversed. Brown calls this the start of a great rotation out of bonds and into stocks. Now comes the interruption: So far on 2014 bonds have seen more inflows than have equities. Brown asks if the word should really be interrupted or could it possibly be a 'not truly "Great" rotation has ended.

stock-bond-flows-2006-2014-ref-broker-2014-may-25

  • Europe's Secret Success (Paul Krugman, The New York Times) Steven Hansen will be taking a critical look at the data in his weekly economic review article (GEI Analysis and multiple syndicated outlets) this weekend. Meanwhile, here is a summary statement from Prof. Krugman's column:
"The truth is that European-style welfare states have proved more resilient, more successful at job creation, than is allowed for in America's prevailing economic philosophy."
  • How to Build Annuity Ladders (Donald Jay Korn, Financial Planning) While fixed annuities (paying interest on the principal with no stock market risks) are increasingly popular with retirees seeking to assure a lifetime income, contracts purchased today are locking in historically low interest rates. Just a few years ago annuities earning 5% and 6% were the rule. Today it is difficult to do much better than 3%. A retiree buying a lifetime income stream with the purchase of a fixed immediate annuity will not be a happy camper if inflation is higher in a few years and new annuities then are paying 6%. The author discusses two planning techniques to protect against the future high interest rate risk:

1. "Ladder" annuities. If the retirement account to be annuitized has $200,000, divide into four "parcels" of $50,000 each, buy one annuity now, a second in 3 years, a third in 6 years and the fourth in 9 years. If the annuitant is younger than 70 the intervals could be increased to 4 years or longer, depending on age. The author estimates that even if interest rates are not changed, a couple starting this process at ages 67 and 65, with a five year laddering could have somewhere around 25% higher monthly income at ages 82 and 80 than if they did a single purchase initially.

2. Some annuity products are now offering an 'income enhancement option' that will make an upward interest rate adjustment if interest rates are at least 2% on the fifth anniversary. The older the annuitant is at the time of purchase the more attractive this option can become.

cars-old

  • Stark warning from Europe’s voters (Editorial, Financial Times) The FT observes that as significant as populist anti-EU party victories were in the European Parliament elections, pro-EU reformists gained even more that did the "extremists".
  • Black swan sightings tipped for China, U.S. (Yvonne Chan, AsianInvestor) The black swans discussed are credit market failures in China and a bond market collapse resulting from QE taper in the U.S. Econintersect notes the latter would be a true black swan (totally unexpected event) because bond auctions have been well oversubscribed and interest rates falling in the U.S. since tapering began.

china-iron-ore-sober-2014-may-25

  • Policy, not capitalism, is to blame for the income divide (James Galbraith, Financial Times) James Galbraith has contributed to GEI. He discusses the work and criticism of the work of Thomas Piketty but does not point any fingers as has been done by others in the past few days. Instead he discusses what a 20-year project at the University of Texas (Austin) has found for income inequality in the U.S. and other countries. He points out that economic knowledge,especially in this area, is forged in long hours of work with sketchy data and ambiguous statistical sources. One specific excerpt:
Our data on pay inequality, with estimates of income inequality, now cover most of the world from the early 1960s until (in some cases) as recently as 2012. We also find that inequality, measured within countries, rose in recent decades. But we do not find anything inexorable about this. We think that global circumstances and national policies were largely at fault. When policies and circumstances change, the rise of inequality can be stopped. Our data show that rich countries are more equal than poor countries. No surprise: to be rich is to have a large middle class. Communism defied this rule for a while, but not any more.
  • Global income distribution: From the fall of the Berlin Wall to the Great Recession (Christoph Lakner and Branko Milanovic, Voxeu,org) Hat tip to Roger Erickson. The 21 years 1988-2008 has seen rapid growth in Asia lift billions out of poverty. Incomes at the very top of the world income distribution have also grown rapidly, whereas median incomes in rich countries have grown much more slowly. This column asks whether these developments, while reducing global income inequality overall, might undermine democracy in rich countries. The following graph shows the 21-year growth for global incomes ranked by percentiles with no identification as to country (hence "anonymous" in the term of the authors). The bump from 10-70 percentiles arises from gains in emerging economy countries. The hole from 70-99 percentiles is the lack of income gains for the majority in developed countries. The top 1% growth occurred across all global geographic areas. A second graph is shown in the paper where the growths were normalized relative to the initial income starting points by country in 1988. The graph is less dramatic, much smoother but still displays the same overall shape.

global-inomegrowth-1988-2008-lakner-milanovic


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