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What We Read Today 14 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.

  • WTI Crude Oil Heading Below $100 (Barry Norman, FX Empire) The U.S. has a glut of oil and gas and even the threat of Middle East chaos can't keep the price of crude up. Now if the U.S. only had the refinery capacity to handle all the crude the price of gasoline would go much lower.
  • Budget has brought in tax policies: Finance Ministry (The Hindu) The Modi government is clarifying the tax code and reducing taxes. The budget is predicted "to bring the growth impulses back into the economy" and to do so "amidst fiscal restraints" which are expected to limit the deficit to 4.1% of GDP.
  • If Iraq must be divided, hereís the right way to do it (Michael O'Hanlon and Edward P. Joseph, Reuters) The authors argue that a federalism arrangement makes the most sense, but if harder partitioning is done there must still be some consideration of oil revenue sharing because "Sunnistan" would be resource deficient.
  • Comments tell us much about America, its peril and hope (Fabius Maximus) Fabius Maximus has contributed to GEI. This is a very worthwhile compendium of articles on the FM site with interesting comments. The graphic indicates a seemingly very pessimistic view of the quality of comments overall (the little triangle in the center indicates that only 1-2% of those leaving comments are both thoughtful and readers of the entire article). But Econintersect has observed some comment threads where 1-2% might actually be a quantity significantly too high and time spent there is largely wasted. Every once in a while we have followed a comment stream where the triangle is expanded, even well into double digits. Those are places where one's time is very well spent.


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

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  • U.S. Hiring More, Canada Less (The Daily Slot, email, no url) Canada suffered far less employment loss than the U.S. during the financial crisis and resulting recession but for most of the last three years they have also been hiring at a lower level.


  • Gross's Colleagues, Beating Their Boss, Challenge His Gloomy Gus Outlook (Bloomberg News, Financial Advisor Magazine) Bill Gross has reportedly been encouraging his deputies at PIMCO (Pacific Investment Management Co.) to challenge his views. Perhaps emboldened by the fact that other portfolio managers have been outperforming Gross in recent years, he has gotten contentious feedback in spades:
At investment committee meetings in April and May, four of his six newly appointed deputy investment chiefs questioned whether their boss, manager of the world's biggest bond fund and an investing legend, was too pessimistic about the economy.

Perhaps PIMCO is progressing from a top down management structure to one involving a broader management committee. It is certainly time for a change in that regard since Bill Gross has now entered his 70s and cannot reasonably be expected to continue a young man's workload forever. However, the changes are coming too late to rescue the fate of Mohamed El-Erian who was the apparent successor to Gross and clashed with his boss over stronger management by committee practices. El-Erian resigned last year.

  • QE To Propel Market Treacherously Higher After Taper Ends (James A. Kostohryz, Seeking Alpha) The author suggests that the accumulated liquidity from QE will keep driving the market higher ("sharply higher") for another 1-2 years. He sees this creating "an unprecedented and treacherous time in US history".
  • Wage Inflation Is Coming (Sam Ro, Business Insider) Sam is showing some graphs produced by Deutsche Bank economist Torsten Slok. The first purports to show that wage uptrends last for 4-5 years. Econintersect has added a red ellipse right in the middle of the graph to show that statement is not always true. The second graph suggests that unit labor costs and rates "historically have correlated so well". We have added a green ellipse right in the middle of that graph to show that the correlation is far from perfect at all times. Precedence can be a bitch! The jury must remain out on the divergences to see which precedence will be followed. See also two Taylor Rule articles later below.



  • C.D.C. Closes Anthrax and Flu Labs After Accidents (Donald G. McNeil, Jr., The New York Times) The U.S. CDC (Center for Disease Control) has temporarily closed the flu and anthrax laboratories in Atlanta and halted shipments of all infectious agents from the agency's highest-security labs after a series of accidents and improperly stored dangerous materials were discovered over a period of several weeks. The labs will remain closed until new procedures have been implemented.
  • Shackling the Fed with the Taylor Rule (Gavyn Davies, Financial Times) Davies suggests that implementing a rules-based interest rate policy (say based on the Taylor Rule) would actually increase the level of political interference with the Fed. The reason is that monetary policy is not prescribed by such relationships, but is merely informed by then. Thus every action becomes subject to debate and this brings in the politicians. The following graph shows Taylor Rule defined interest rates, a modified ("balanced") approach and the most likely course for the Fed based on current policy (called "optimal control"). See also next article.



  • More moves to slow credit in China (Houses and Holes, Macro Business) A Reuters report of tightening regulation of the country's private wealth management services is discussed. China appears serious about getting speculation under control.
  • Is There Insufficient Supply of Collateral? (The Dail Slot, email, no url) Insufficient liquidity is indicated by the rising amount of "fails to deliver", the failure of institutions to present Treasury securities to meet settlement dates.


  • Gold Tops and Reverses (William Kurtz, email, no url) William Kurtz is a GEI contributor. Here is a call made just at the time Kurtz sees it happening on Sunday evening:

Gold has thrusted upward into our target area, with a High so far this evening at $1346.60 (XK-201408), and appears to have turned Down.

If this move this evening did not mark the top of Wave "C" of the A-B-C upside countertrend correction, it was very close. I'm inclined to think that the top is in.

At the moment, the Candlestick price bar in the Daily Gold chart is a "Shooting Star," which is a bearish signal.

All countertrend moves eventually are retraced to the point of beginning of the move, and beyond; which means that the next major move in Gold will be Down, to a point below the June 3 Low of $1238.80, which is where countertrend wave "A" of the "A-B-C" countertrend correction began.

Editor's note: Two hours after this was sent out gold has dropped almost $14 to $1.332.74.


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