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What We Read Today 02 June 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.

  • Indian power. Mr Modi must centralise it (Nick Butler, Financial Times) In two decades China has lifted 680 million people out of poverty; India can do the same, says Mr. Butler. The key is to give everyone access to electricity and Prime Minister elect Narendra Modi is on the right track with announced plans to consolidate three energy ministries and to replicate throughout India his successful Gujarat state initiative for solar power both on and off the grid. But Modi has a rough road to travel: See GEI News.

  • China's millionaire machine slows (Robert Frank, CNBC) Hat tip to Marvin Clark. Another sign of slower economic growth in China: After years of increasing the number of millionaires by about 10% per annum, in 2013 the number increased by only 3.6% (up 100,000 to 2.9 million). But the Chinese economy is still stubbornly hanging in there: See GEI News.

Today there are 13 articles discussed 'behind the wall'.

The final four articles discuss the disappearing growth in number of U.S. households.

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  • Fed Officials Downplay Financial Stability Concerns (Pedro de la Costa, The Wall Street Journal) The Neros are tuning their fiddles. Why should they worry, leverage still has another 9-12 months before the late 2007-2008 levels of madness might be repeated. See graph above.
  • Driving California Forward (Environmental Defense Fund / American Lung Association in California / Tetra Tech) With transportation contributing almost 70 percent of smog-forming gases and 40 percent of California's climate change pollution every year, the authors stated that some of the many impacts of pollution include an increased risk of asthma attacks, heart attacks, cardiovascular disease, respiratory ailments, cancer, and shortened lifespan-adding that air pollution has been estimated by the California Air Resources Board to cause 9,200 deaths in California per year. Other recent research actually estimates that approximately 21,000 deaths per year in California are caused by roadway pollution.
  • Here Comes QE In Financial Drag: Draghi’s New ABCP Monetization Ploy (David Stockman, Contra Corner) Stockman says that the ECB is about to launch a "QE program" which will involve "purchasing or discounting" ABCP (asset-backed commercial paper). He says it will be "energetically trying to revive the a market [....] that allegedly nearly took down the financial system during the panic of September 2008". By doing this, he says, the ECB will boast they are restoring liquidity without monetizing sovereign debt. (Will they be monetizing potentially toxic private debt instead?) Stockman remarks on how far the ABCP market has collapsed in the U.S., a development he thinks is healthy because banks are now issuing loans to borrowers that they are willing to carry on their own books rather than repackaging to hand-off to suckers investors.


  • How serious is China’s property slump? (Gavyn Davies, Financial Times) The Chinese real estate slump is real and it is serious, resulting from significant over-development and over-building. But is will be far less damaging than the 2008 U.S. crash, according to Gavyn Davies, and possibly even a relatively minor event as a result of a far smaller shadow banking system (relative to the U.S.) and a strong government hand on the liquidity strings. Two charts show the bubble that will be deflated, built up with a decade with a cumulative building up to 3-5 times more than was sold. (Note: The 3-5 number would apply if construction was started and completed within one year. If it took two years then the over-building would be up to 1.5 to 2.5 times what was sold.



  • IMF warns Japan against over-reliance on monetary policy (Anthony Rowley, The Business Times) Japan was warned yesterday by the IMF (International Monetary Fund) not to rely too heavily on monetary policy to underpin its economic recovery, at risk of courting possible financial sector problems and asset inflation while also pushing the yen down to levels where this could damage other countries.

The following four articles discuss the alarming decline (some months actually contracting) in growth of the number of U.S. households. After a totally misguided article from 18 months ago, we review three current articles which lament the decline in household formations but the first 2 of the 3 actually understate the seriousness of the problem (last article breaks down the data).

  • The Most Overlooked Statistic in Economics Is Poised for an Epic Comeback: Household Formation (Derek Thompson, The Atlantic) This article was written 18 months ago (December 2012). The graph below shows the "household formation gap" that started in 2007. The last data point on that graph is estimated by Econintersect to be about 11.64 , rising at about 0.0046 (460,000) per year since 2007. The trend line has a slope of about 0.0126 (1.26 million) per year, 2.7x as fast as the rate for the six years 2007-2012.


  • This Ain’t Your Father’s Keynesian Jalopy: Household Formation Rate Plunges To 30-Year Low (David Stockman, Contra Corner) David Stock man has added an additional year to the data of the immediately preceding article and finds that the projection of an "epic comeback" was far off the mark (see graph below). He further reports the data for 1Q 2014 (not on graph) which saw household formation for the previous 12 months declining to only 200,000! Stockman attribute the poor data to "monetary planning" but does not offer any counterfactual hypothetical to justify that statement. See also next article.


In equilibrium, home supply (new completions + excess vacant properties for sale + manufactured homes) should equal home demand (household formation + demolitions + second home purchases), assuming that builders were able to gauge market trends and build to meet the changes in demand. We can derive an equilibrium measure of household formation by solving for the variable based on the assumption that supply equals demand. It shows a clear downward trajectory in household formation with little recovery thus far, similar to the trend in the actual data.

  • US Household Formation: 197.00K for Mar 2014 (YCharts) The first chart below shows the 10-year monthly record for household formations (annualized). The second graph shows the record for the most recent 24 months which more clearly shows that within the last 12 months there have been months with no household formation or net negative numbers. The March rate of household formation cited by Stockman and Zero hedge was actually the largest number in ten months.

US Household Formation Chart
US Household Formation data by YCharts


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