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What We Read Today 17 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.

  • Russia cuts off gas supplies to Ukraine (Jack Farchy, Kathrin Hille, Roman Olearchyk and Christian Oliver, Financial Times) For the third time in eight years Russia has shut of gas deliveries to Ukraine. Russian energy gient Gazprom says they are owed $4.6 billion for past deliveries and will only deliver in the future for payment in advance. Gazprom has insisted that supplies to Europe will not be disrupted but prices did rise by about 2% in Europe where natural gas had been in a downtrend (-40% just in 2014).

  • 'Bionic Pancreas' Astonishes Diabetes Researchers (Maggie Fox, NBC News) The Apple iPhone 4 is the controller for a new, still experimental automated pancreas function. This system has been used by 52 patients with 100% success for 24/7 monitoring and automatic pumping of insulin and glucagon to maintain blood sugar levels in an acceptable zone every instant, even when sleeping. In testing thus far patients have been closely observed during the course of the experiments. This week 10 patients will use the system under real life, go-to-work conditions with out direct medical supervision. In this case the data will be sent by the iPhone controller to a hospital but intervention will occur only if there is an emergency. Another experiment will be run this summer with 30 young patients (age 6-11) attending three different summer camps. Two more years of testing will be needed before this technology will be generally available. During that time costs will be under pressure to make the treatment widely affordable.

Click on graph for larger image at Calculated Risk.
existing-home-inventory-cr-2014-jun-16

Click on picture of John Kerry for interview segment with Katie Couric.
kerry-tv


Today there are 14 articles discussed 'behind the wall'.

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  • Still extrapolating the bubble (Walter Kurtz, Sober Look) Kurtz says that the growth potential trend line commonly used is an extrapolation of a bubble. He suggests the real trend line is the one we are currently on. In other words, the "new normal" is the "old normal" and everything from the mid-1990s to 2007 was growth bubble.

growth-bubble-sober-2014-jun-15

  • Fed Prepares For Bond-Fund Runs, Looking At Imposing "Exit Fee" Gates (Tyler Durden, Zero Hedge) The Fed is looking at ways to diminish a possible panic should interest rates shoot up (producing collapsing bond prices). There is more than $10 trillion in corporate bond funds and several trillion more in Treasuries. Bond funds are essentially demand deposits for multi-year instruments in a generally illiquid market. For additional discussion see Fed looks at exit fees on bond funds (Tom Braithwaite, Tracy Alloway, Michael Mackenzie and Gina Chon, Financial Times)
  • With the Americas running out of IPv4, itís official: The Internet is full (Iljitsch van Beijnum, ars technica) Not only America but the world is running out of 32-bit IP addresses (IPv4). The upgrade will be to 128-bits (IPv6). The problem is logistics. The two addresses are incompatible and system limitations are not relieved until everyone changes to IPv6. Some countries have essentially not gotten started. Additional difficulties arise because some networked applications (like Skype) simply don't work with IPv6. This sounds like a big deal.
  • The Lack of Major Wars May Be Hurting Economic Growth (Tyler Cowen, The New York Times) Hat tip to Stephanie Kelton. The hypothesis is that governments are more efficient when the possibility of war increases. It does seem a little strange coming from someone who is noted by many to be a free market economist with positions centered on limiting government interference with private endeavors. The article comes with only one graph (below) which implies an unstated relationship between deaths in wars and GDP growth. Econintersect comment: Tenuous.

war-deaths-since1950-Tyler-Cowen-NYT-2014-jun-13

  • Clever piece of code exposes hidden changes to Supreme Court opinions (Jeff John Roberts, Gigaom) There are many Supreme Court decisions that have been amended surreptitiously after the fact, sometimes long after the fact. In some cases the law has been substantially changed from the original ruling. A new software tool will now detect any future changes made to Supreme Court Decisions and make them public based on repeated scans of the document base every 15 minutes. Unfortunately, apparently past alterations will still be detected only by painstaking manual work. See also Final Word on U.S. Law Isnít: Supreme Court Keeps Editing (Adam Liptak, The New York Times).
  • Those Chinese trusts have been awful quiet (David Keohane, FTAlphaville) Extend and pretend, Chinese style. The headline says "quiet" but the numbers say "exponential bubble". The investment vehicles known as "trust funds" and "bank wealth management products" pay above market interest and invest in public works debt (from overextended local governments), real estate and real estate development (with a market entering a short-term correction or a longer-term slump), industries facing over-capacity issues and similar limited visibility situations.

And the investment total is still increasing rapidly. See graphs below.

Making matters worse, these are typically short-term (one or a few years to maturity) for projects that have many years for possible completion. Thus the structure depends on substantial roll-over and refinancing (typical market structure for financing long-term projects with short-term debt).

There have only been a few defaults and those have been made good via non-transparent bail-outs and shadow banking company mergers and acquisitions. But the numbers are increasing with "at least a dozen new defaults ... in May..." And many more, according to this article, not yet at maturity, have stopped paying interest. When it comes time to roll-over and refinance this road kill, how many takers will there be?

The government and its wholly owned national bank have the capability of fixing this entire problem by simply stepping in with new money and protecting the "private wealth" that resides in these trust instruments. While this may buoy the renminbi in the short run, it is masking underlying structural weakness and a piper with a tin cup will be waiting. Some estimates are that the renminbi needs to devalue by as much as 15-25% (going from current 6.2 to the dollar to 7 or 7.5). See Renminbi rise masks fears of deeper issues (Josh Noble, Financial Times).

Click on graphics for larger images at FTAlphaville.com.
china-trust-funds-ft-2014-jun-16

  • China Bigger Than U.S. With $14 Trillion in Company Debt (Katrina Nicholas and Sridhar Natarajan, Bloomberg) Company debt in China reached $14.2 trillion at the end of 2013, more than a trillion arger than U.S. corporate debt ($13.1 trillion). A new S&P report (15 June) calculates that China will have $20 trillion in company debt in another 3 1/2 years. That will be 1/3 of global corporate debt by the end of 2018.
  • Euro shorts surge (Chris Becker, Macro Business) The recently evolving easing by the ECB has traders turning negative on the euro. The commitment of traders (COT) turned net short one month ago and has dropped sharply to levels of shorting not seen for a year.

eurusd-cot-mb-2014-jun-17

  • Banks Fear Missing Collateral in China (Peter Eavis and Neil Gough, The New York Times) We have discussed this problem before with respect to China's financial institutions but it appears the problem is global. Physical material such as commodities like aluminum and copper which has been pledged as security for loans may not actually exist. The most common scam is the pledging of the same quantity of material as security for multiple loans.
  • A story too controversial for the mainstream press (Dwight Haskins, person of conscience) A former senior financial analyst for the FDIC reveals that hundreds of his reports prepared from 2003 to 2010 about the off-balance sheet risks of insured institutions. He was subjected to reprisals ("both overt and often subtle") from management that "escalated over time". Starting in 2006 he had disagreement with his annual performance report and that was a basis for reprisals. "Supervisors began to ignore me and treated me as an outcast..." He says he was told to "turn a blind eye" and "not maker waves". Curiously, by the time he was forced to leave the FDIC in 2010 his 2006 recommendations were starting to be implemented.
  • Topping Pattern for Banks? (Chis Kimble, Advisor Perspectives dshort.com) Chris Kimble has contributed to GEI. Picking a top when the trend is still up (ie before the top is in) can be an endeavor with many more attempts than successes. In this case Kimble sees a potential "head-and-shoulders" and suggests this should be watched:
Both the Bank Index (BKX) and Regional Banks ETF (KRE) "may" be forming a head & shoulders topping pattern with a bearish wick taking place this past week at the potential right shoulder.

banks-top-kimble-2014-jun-16


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