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What We Read Today 14 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.

  • Iraq disintegrating as insurgents advance toward capital; Kurds seize Kirkuk (Loveday Morris and Liz Sly, The Washington Post) Will the U.S. - Iraq story of the 21st century be that G.W. Bush invaded Iraq with the fallacious claim of Al Qaeda presence and Barack Obama did not invade Iraq with the correct knowledge of Al Qaeda presence? The map below could be used to define the three new countries: Sunnistan, Shiastan and Kurdistan. See next article for more questions.

iraq-ethno-religious-map

  • ISIS: The first terror group to build an Islamic state? (Tim Lister, CNN) Hat tip to Sanjeev Kulkarni. Is Abu Bakr al Baghdadi the new bi Laden? Will he succeed in creating the first Islamic state through terrorism? Is he a terrorist or a revolutionary? What is the difference? The aim of ISIS is to form the Islamic State of Iraq and Syria, hence the acronym. But al Baghdadi does have at lest one significant distinction from bin Laden: His video and photographic presence has him dressed like a modern businessman, no traditional Arab desert attire like bin Laden wore.

isis-leader-video

There is no way that the UK can stand aside at Iraq's moment of greatest need. We have a responsibility to those whose democracy we created. Those who are not utterly silent are sullen, muttering that Blair and Bush caused all this, that there was no al-Qaida in Iraq before 2003. Let's be clear what that statement really is - bloodless, amoral pragmatism of the type Henry Kissinger excelled in. You might as well say: "Saddam may have been a fascist who inflicted genocide on the Kurds, but at least that kept Iran and the jihadists at bay." That remark would have the merit of being honest.

The truth is that if we do not act now, we will surely act later. Having protected the freedom and autonomy of the Kurds since the Kuwait war, we cannot abandon them now, or leave them dependent on protection from Iran. We have to go back to Iraq to rescue democracy. After all, as Margaret Thatcher said at the time of the Falklands, why else do we have armed forces?

  • British-Controlled Monarchy (1917-58) (Worldology) Hat tip to Sanjeev Kulkarni. The 20th century history of the Middle East following the break-up of the Ottoman-Turkish Empire following World War I. Today's problems are rooted in the incorrect partitioning of the region after World War I.

middle-east-1923-worldology

  • The Economics of the Iraq War (John Aziz, Pieria) It's a cruel joke that we went to war in Iraq on the pretext Saddam Hussein was in league with al-Qaeda, and now a splinter group of al-Qaeda - the Islamic State in Iraq and the Levant (ISIS) - controls swathes of the north of country, and is advancing on Baghdad. At least a million deaths, and the opportunity cost of at least $3 trillion dollars allocated by the West to that war. War is, above all, an economic decision. It is a decision to commit economic resources - money, time, energy, resources expertise, technology - to the battlefield. And for what? To make Iraq a freer, stabler, more successful country? To liberate the Iraqi people from oppression and spread democracy in the region? This endless sectarian bloodshed - foreseen by many of those who understood Iraq's sectarian nature - is not that.

Today there are 11 articles discussed 'behind the wall'.

Six of the articles discussed today are related to investing topics.

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  • Public Pension Plans: Boom and Bubble Forever Or Bust (Wolf Richter, Testosterone Pit) Even if an unreasonable assumption of average annual returns of 7.7% the average of all public pension funds is 72% underfunded. On top of that, for the past ten years the average for all these funds has been that only 84% of the annual required contribution has been paid. For the three years 2010-2012 only 81% and for 2013 82% of required contributions were made. With the 7.7% return assumption public plans are underfunded by $1.1 trillion. If a more realistic average annual return of 5% is achieved the shortfall will be $3 trillion (50% underfunded).

public-pension-funding-testos-2014-jun-11

  • The Modern Portfolio Theory Flat Earth Society (Vitaliy Katsenelson, Institutional Investor) In short, Katsenelson says MPT is an academic theory not use by analysts or portfolio managers. "In other words, by studying MPT your brain cells have died for nothing."
  • Ford lowers fuel ratings on hybrids and Fiesta, will reimburse customers (Alisa Priddle, Detroit Free Press) Ford is retracting mileage ratings for five hybrids and the fuel efficient Fiesta. The biggest "correction" is a drop of 7 mpg for the Lincoln MKZ hybrid from 45 to 38 mpg. Ford said they had found "an anomaly" in testing last fall which has been rechecked and then verified by the EPA (Environmental Protection Agency) which oversees mileage testing. Buyers of the effected vehicles will receive "good will payments" from Ford to offset some of the higher fuel expenses resulting from the lower mileage ratings.
  • Wasted potential (The Economist) The output gap, what might have been minus what is, amounts to wasted potential. And The Economist opines "this weakness may last". See also next article following this one.

output-lost-global-economist-2014-jun-12

  • Cash Deposited at ECB Plunges as Negative Rate Starts (Alessandro Speciale, Bloomberg) The first day that the new 0.1% negative interest rate went into effect overnight cash deposits at the ECB (European Central Bank) dropped by 65% to just 13.6 billion. Could it be that banks discovered they make more money just putting their cash in a mattress?
  • Eurozone industrial production bounces back in April (AFP, DW) After dropping by 0.4% in March, Industrial Production bounced back and rose by 0.8% in April, more than wiping out the previous month decline. Positive numbers were generally widespread across the Eurozone with the exception of France which continues to be a laggard.

oil-wti-sober-2014-june-13

Then came the consumption tax hike, a broad-based tax that impacts consumers and businesses across the economy. The months before the effective date of April 1, consumers and businesses binged to save that extra 3% in taxes on big-ticket items, and businesses rang up sales faster than they could count. That binge stopped on March 31.

A discerning reader will notice that March 31 comes before April and the wording inferring that the tax hike came on top of the inflation is entirely inappropriate. Once the tax hike is subtracted the net inflation is less than 0.4% for all items and 2.2% for goods prices. But 3% is a nominal tax increase. As pointed out in a GEI News article last year (and mentioned by Richter), this is a "broad-based tax that impacts consumers and businesses across the economy". GEI News reported that it functions like a value added tax and compounds through the entire production chain, starting with the cost of raw materials. Using a hypothetical model of production chain cost distributions it was calculated that the final cost of goods would be increased by 7.4% with a nominal 5% tax and by 14.8% with a nominal 10% tax. With a nominal 8% tax (the current new level) the effective tax for goods at retail is about 11.8%, which is 4.4% above the old 5% effective level of 7.4%.

Not all of the new taxes should have accrued in the month of April (some levels of production occurred under the old tax), but if they had the net inflation for all items would have been negative (price deflation before tax) and for goods would have been 0.8%. Thus Japanese inflation for all items actually was down or nearly flat in April, net of the added tax costs.

  • Govt steps on fiscal pump (Wei Tian, China Daily) According to data from the Ministry of Finance released on Wednesday 11 June 2014, fiscal spending jumped 24.6% year-on-year in May to 1.3 trillion yuan ($208 billion). The surge in growth was in sharp contrast to the 9.6% rise in the first four months. Spending was focused on projects intended to raise living standards. Does China think it can rebalance by simply giving more money to those who consume without reigning in those that have been over investing?

china-fiscal-expend-and-revenue


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