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What We Read Today 11 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.

  • India poised to return to high growth path: OECD (PTI, The Economic Times) While the other three BRIC countries (Brazil, Russia and China) appear to be in below-trend growth rates, the OECD (Organization for Economic Co-operation and Development) says their indicators point to India making a "return to faster growth".

  • Calif. court rules teacher tenure creates unequal conditions (Lyndsey Layton, The Washington Post) A Los Angeles Superior Court judge ruled Tuesday that tenure, seniority and other job protections for teachers have created unequal conditions in public schools and deprive poor children of the best teachers. This ruling, if upheld by the Supreme Court where it is likely to end up, would be a major blow to the power of teachers' unions.
  • Consumption, Real Interest Rates, And Habit (Robert Waldman, Angry Bear) Hat tip to TalkMarkets. A short and thoroughly well-grounded analytical dissection of the commonly asserted model assuming correlation between high interest rates and high economic growth. In the conclusion:
There is essentially no sign of a high long term correlation between real interest rates and consumption growth, that is no sign that the low quarterly correlation is due to habit formation.
  • Obama Cuts Student Loan Costs! Can Broke Grads Be “Saved”? (Mike Larson, Money and Markets) Yesterday, President Obama issued an executive order that will dramatically expand programs aimed at reducing the student loan debt burden. As a result, some 5 million additional borrowers will qualify for a program that limits debt payments to 10 percent of their income. That benefit was previously available only to borrowers who took out their loans after October 2007.
  • Young Whale Rescued by Snorkelers Shows Immense Gratitude (Jill Bond, Blue Nation Review) Hat tip to William Kurtz. Watch the efforts of a group of snorkelers to free a young humpback whale entangled in a fishing net in the Sea of Cortez, Baja California. And then watch the amazing display of the whale after she is freed.

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  • QE, Bailouts, And Families Struggling To Buy Food (Wolf Richter, Testosterone Pit) Since 2007 the number of individuals struggling to afford food in the OECD (Organization for Economic Co-operation and Development, the 34 richest countries in the world) has increased by 40-50%. The sixth ranking country (starting with the worst) is the U.S.
On average, this is what happened to the difficulties families in the 34 OECD countries faced in buying food once central banks took over running the economy and bailing out the wealthy who owned the largest portion of the assets:


  • Fed’s Bullard: ‘The Bubble Was Developing Under Our Noses’ (Wolf Richter, Testosterone Pit) Monday Bullard talked about the 2004-2007 bubble that was "developing under our noses". Richter wants to know if they can see under their noses right now and lists 12 data points that should have the Fed quite alarmed. Especially since the "wealth" that has been created is enough to eliminate poverty in the U.S. and hasn't made a dent in it. (In fact poverty has intensified, see immediately preceding article.) Instead Richter says the current bubbles have "far outgrown the ones of yore". But, he says, the Fed doesn't seem to be concerned:
Yet the Fed is still printing money. And raising interest rates just a tiny bit won't even be discussed seriously until next year. But unlike the prior bubbles that blew up the financial system, today's bubbles are different. They're a sign, apparently, that the economy is healing and getting back to normal. (Turn on sarcasm detector.)


  • Analyzing the AAII Sentiment Survey Without Hindsight (Charles Rotblut, CFA, AAII Journal, June 2014) It is widely believed that sentiment is best used as a contrary indicator (high bullishness before market declines and high bearishness before market advances). This study found that the best time to buy was actually when there was an unusually large neutral sentiment for an extended period of time. And although high levels of pessimism good times to but, better results followed low optimism, slightly less than for the high neutral sentiment. But using this information for market timing can yield some major disappointments. Rotblut points out that the averages hide some disastrous results such as low bullish sentiment in July 2008 which was followed by losses around 30% 26 weeks later for the S&P 500.
Unusually high levels of neutral sentiment have been followed by a median 26-week rise in the S&P 500 of 8.6% and a median 52-week rise in the S&P 500 of 17.7%. In contrast, the S&P 500 had a median return of 5.2% and 10.7%, respectively, over all 26-week and 52-week periods throughout the survey's history. Equally notable, the large-cap index was up 83.3% of all 26-week periods and 88.1% of all 52-week periods following an unusually high neutral sentiment reading.
  • Google buys satellite start-up for $500m (Sarah Mishkin and Tim Bradshaw, Financial Times) Google Earth is investing in technology to improve its coverage from space. In this case it is acquiring Skybox, a company that makes and launches satellites. The technology will also eventually be used to extend and improve satellite coverage for the entire planet. This will add to the high altitude balloon work (Project Loon) and the drone technology acquired via Titan Aerospace purchased in April.
  • Labor force participation and the skills gap in America (WalterKurtz, Sober Look) The Beveridge Curve is a function that has historically related the jobs opening rate to the U-5 unemployment rate. Only a funny thing happened on the way to the forum - th last 3.5 years have shown a different Beveridge Curve than what has been observed historically. In the plot below 10 years of data are shown with the time line progressing in the direction indicated by the red arrows. What this indicates is there are too many job openings currently considering the high level of unemployment. Why aren't the unemployed taking the jobs? Best guess is that there are structural issues in the labor market. One possibility: Job openings and high levels of unemployment are not co-located. Another possibility: Job openings require skills that the unemployed do not possess.


  • Gross Raises Government-Related Debt to 50% of His Flagship Fund (Susanne Walker, Bloomberg) Has Bill Gross made his move after the market moved away from him? Or has he positioned in a timely way to take advantage of the next leg up in bond prices? From the beginning of the year the long-term Treasury Bond ETF (NYSE:TLT) shot up more than 12.5% before recently pulling back 3.5%. Will this turn out to be a successful buy-the-dip move or a losing buy-just-after-the-top move?

The only legitimate reason why bond U.S. bond yields would be falling even as the Fed is getting out of the bond-buying business is that we are facing a contraction in global growth. It is not because of "technical reasons", "geopolitical concerns" or, especially not because "there are no bonds to buy."

And you can also throw away the argument that European bond yields are currently at or below those in the U.S.; therefore, global investors are simply doing a yield arbitrage. This reasoning really only serves to underscore the reality of declining economic growth throughout the developed world; and fails to explain how the U.S. economy can function with impunity from a globalized funk.

Unless Mario Draghi is about to make the ECB launch a QE program that would make the Fed blush, there is only one reason why the bond bubble has gone into hyper drive.

The truth is that the world is awash in sovereign debt. And the credit, currency and inflation risks associated with owning that debt has never be more elevated. Therefore, the only reason why yields are at historic lows is because they are predicting the chances of a meltdown in the global economy is extremely elevated at this time.

Econintersect suggests that Pento is off-target with respect to the debt that is the problem; it is private debt that risks the meltdown. To understand this one needs to add two things to Pento's discussion: (1) Irving Fisher's Theory of Debt Deflation and (2) the existential difference between sovereign debt and private debt. (Note: In the second case sovereign debt of members of a monetary union like countries in the eurozone or states within the U.S. has more in common with private debt than with the sovereign debt of currency issuing countries like UK, U.S. Japan and China.)

So Pento has an argument that is suspect on the details but he does get to a debt deflation conclusion without clearly defining the logical pathway.

  • This Chart May Drive A Stake Through Austerity Cheerleaders (Rob Wile, Business Insider) This data set needs to be tracked through time. The pro-austerity argument is that pain now will equal joy later. So, to discredit or support austerity it is necessary to know how the "sufferers" today (Italy, Spain, Portugal and Greece) compare with positive employment change countries 2, 5 and 10 years down the road.


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