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What We Read Today 03 July 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.

  • Jaitley Denounces Mindless Populism Ahead of India Budget (Siddhartha Singh and Unni Krishnan, Bloomberg) The new budget, the first under Prime Minister Narendra Modi, may see cutbacks in food, fuel and fertilizer subsidies to the poor and an increase capital spending on infrastructure.

  • Finance ministry looking at public banks' consolidation (Vrishti Beniwal, Business Standard) As India moves toward a stronger private banking sector, public banks will be consolidated. Officials say impact on employment should be minimal because of a high number of retirements scheduled over the next few years.
  • Facebook: Its Viral Spread Is About To Reach The Rest Of The Internet (Jeffrey Himelson, Seeking Alpha) Mark Zuckerberg's dream of making ads truly enjoyable came a step closer with the acquisition of LiveRail, a 127 person advertizing publisher which specializes in custom-fitted video presentations. Facebook will integrate this technology with user relevancy to create highly personalized ad exposures.
  • Google Is About To Take Over Your Whole Life, And You Won't Even Notice (Mark Wilson, Fast Company) Not to be outdone by Facebook, Google wants to integrate itself into your life beyond the level of simple advertising messages. Of course they will also be selling things but the focus will be on giving "people choice in how they spend their time". The company sees it's mission to "give back time" to users.

Just when I thought the Supreme Court justices couldn't possibly become more right-wing corporate, they outdo themselves.

You probably thought "a wall" separates our government from religion, so that all religions would be treated equally.

You were wrong.

You probably thought everyone, no matter what their religious beliefs, had to obey the law.

You were wrong.

fed-work-force-bush-obama-wapo-2014-ju-02


There are 11 articles discussed today 'behind the wall'.

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  • Reasons for the spike in M&A activity (Walter Kurtz, Sober Look) Merger & Acquisition activity for the first two quarters of 2014 are higher than any year since 2007, second quarter by a huge margin. The first quarter beat the second best level (2011) by 17%, while the second quarter is ahead of second best 2007 by a whopping 52%. Kurtz attributes the biggest reason for the outsized numbers in 2014 to a "decline in uncertainty ".

MandA-trend-sober-2014-jul-01

From the AFR, at a conference today Jo Stiglitz,

...listed as weaknesses the US's poor educational performance, financial deregulation, a slump in work-force participation, an economy that "socialises losses and privatises gains" and several decades of wage stagnation for low income earners.

..."You have to say that's a failed ­economic model."

Warwick McKibbin wouldn't have a bar of it:

"I don't think the US model has failed. I agree that the income distributional issues are really serious and they will undermine the aggregate story, but the US is still a well-functioning, innovative society," he said.

"And if they fix the politics, they will fix the economics."

I think you've got to define your terms here. "Failure" will mean something different to an American with certain expectations than it will to an Australian surrounded by rent-seeking parasites.

It is clear that the US is broadly functional and vastly more innovative than here. But it is also the case that it's been royally screwed by Wall St and financialisation, especially in its income distribution. On that score, the political problem is also a manifestation of the economic in that certain free-market orthodoxies that Warwick McKibbin would likely endorse have empowered Wall St only for it to then buy more favourable policy. In short, McKibbin is dodging the real question.

  • The Delusion of Perpetual Motion (John Mauldin, Outside the Box) John Mauldin contributes to GEI. In this post John features an article by perma-bull John Hussman. Econintersect cautions those who deride Hussman for being a bear for the past several years: The longer he remains wrong the sooner he will become right. And maybe with a vengeance.

risk-chilton-sa-2014-jul-02

REIT-valuation-metrics-chilton-sa-2013-jul-02

  • Asia vulnerable to oil shock, Australia not (Houses and Holes, Macro Business) Asia gets 76% of oil from the Middle East, Europe and the U.S. only about 10% each. Compared to Asia, Australia is also much less effected by any Middle East disruption. But Australia's trade is predominantly with Asia so an oil shock in Asia will impact Australia exports.
  • The rally rich: Who gained the most from stocks (Robert Frank, CNBC) Hat tip to Marvin Clark. The Dow's total market capitalization has grown by $156.4 billion this year to $4.91 trillion, adding to pension funds, endowments and mutual fund holders. But the biggest beneficiaries are the top 10 percent of Americans who own some 80 percent of the stocks. And within that group, the largest windfalls have gone to corporate founders or big shareholders of certain stocks-especially in tech and energy, including the people listed below:

rally-rich

  • Is This the Worst Congress Ever? (Barry Ritholtz, Bloomberg) Ritholtz thinks there are thousands of examples of Congress' inability to perform basic duties. He says it goes far beyond partisanship; it is a matter of lack of will, intelligence and ability. He says that Congress has been aided and abetted by (1) the Fed with loose money policy which has hidden their fiscal ineptitude; (2) the Supreme Court which has been replacing our Jeffersonian democracy with corporatocracy; and (3) a non-involved American voter that does nothing to improve the plethora of candidates for Congress who are "idiots, unqualified to hold a real job".

house-price-increase

  • Wonderful World of Window Dressing (The Daily Slot, email, no url)
Focusing on the US today, let's start with the concept of "window dressing". If you are a bank or even a money market fund, you probably want your financials to show the maximum amount of your overnight liquidity placed with the Fed's reverse repo program (RRP) rather than with other banks. Your balance sheet looks less "risky" this way. And since most financial reporting is done at quarter end (with mid-year and year-end being the most important dates), you want to place your cash with the Fed on the last day of the quarter for one night and then take it out. And that's exactly what's taking place currently.

Why not leave your liquidity with the Fed for a longer period? Because the Fed's current RRP rate pays 5 basis points, while the private repo market is paying about double that. Of course as cash is pulled out of the repo markets for quarter-end and moved to the Fed or elsewhere, rates in the private markets rise. Once the liquidity comes back to the private markets at the start of the new quarter, the repo rates return to normal.

The larger the RRP program becomes, the stronger this quarter-end effect will be. Welcome to the wonderful world of window dressing.

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