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 (and sometimes longer ones) 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.
Argentina Declared in Default by S&P as Talks Fail (Camila Russo and Katia Porzecanski, Bloomberg) It's official! Argentina has failed to pay interest on $13 billion of restructured bonds (out of the $200 billion total foreign currency debt. See also Today's the Day for Argentina and Its Vultures (Matt Levine, Bloomberg View) says today really isn't any different than any other day because their is no legal definition of sovereign bankruptcy. There is another article and further discussion of this 'behind the wall'.
The Brics bank is a glimpse of the future (David Pilling, The Financial Times) The new international bank may present a competitor to the World Bank and the IMF (International Monetary Fund) as the five participating BRICS countries (Brazil, Russia, India, China and South Africa) can operate independently for financing infrastructure and in dealing with global financial stresses. The possibility is arising that the post World War II world order defined at Bretton Woods in 1944 is being upended. Pilling mentions the hypocrisy of the IMF in forcing reforms on developing countries in financial distress while endorsing bail-outs when the big boys got in trouble in 2008. He says the BRICS Bank was "born out of frustration". The article is worth a lot, but the caption graphic is priceless (below). See also GEI Opinion 28 July article The BRICS Bank is a Game-changer (by Ali Burak GŁven, The Conversation).
Flipkart's Bansals nearly as rich as Infosys co-founders (Samidha Sharma and Anshul Dhamija, The Times of India) Hat tip to Sanjeev Kulkarni. The two co-founders of India's online marketing start-up Flipkart now have a combined net-worth approaching $1 billion. Sachin Bansal and Binny Bansal (not related) originally worked for Amazon before starting their own business in 2007. By 2011 their annual sales revenue had grown to $11 million to a current sales rate that annualizes to $2 billion. The founders project a potential annual revenue 50x larger in less than ten years, at $100 billion. But the road to the goal is not going to be traveled without competition. In response to a $1 billion fund-raise announced by Flipkart on Tuesday, Amazon has announced it will see the India company $1 billion and raise $1 billion. Amazon announced Wednesday (30 July) plans to invest $2 billion in India in an effort to boost the current annualized sales rate of $500 million and challenge the Klipkart revenue. See Amazon to invest $2 billion in India (The Times of India). Hat tip to Sanjeev Kulkarni. Amazon announced it will add five more warehouses in India to add to the two existing fulfillment centers in Mumbai and Bangalore.
Turning Points: The Impending Taper, Japanís Troubled Economy (Ron Rimkus, CFA Institute, Enterprising Investor) Hat tip to Michael Hartig, GEI Discussion Group, LinkedIn. This article has an outstanding bibliography of current macro trends and relationships to investments. But Econintersect also found interesting the Rimkus observation in relationship to the Argentina default. Historical comparisons suggests that economies strengthen after defaults, contrary to all the warnings that are propagated to the contrary in advance. Rimkus concludes (as criticism?) that "many defaulters 'get away with it'". If that is a criticism then isn't it based on an assumption? Is it assuming that bad debt should have an asymmetry whereby the borrower should pay for the poor judgment of the lender? The counter argument is, of course, that the creation of the debt created a legal "bond", a contract for repayment with interest. But there may not be the capability for completion of all contracts. When that failure happens is anybody getting away with anything? The process for resolving debts that can't be paid must start with the recognition that such debts won't be repaid (apologies to Michael Hudson) and that recognition needs to start before the loans are made.
China should set less ambitious 2015 growth target, refrain from stimulus - IMF (Koh Gui Qing and Kevin Yao, Reuters) The IMF (International Monetary Fund) has told China that it should set 2015 growth objective below 7%, perhaps as low as 6.5%. China GDP has been in the range of 7.4% to 7.9% for the last 2 1/2 years. The IMF has also said China should refrain from additional stimulus unless "the economy threatens to slow sharply" below 6.5%. Reuters says that some IMF directors felt China should target growth at less that 6.5% but they were in the minority. Michael Pettis, a financial industry consultant in China and professor at the University of Beijing, has maintained that China must reduce GDP growth to 3% in order to have an orderly rebalancing of its economy to a sustainable ratio of consumption to investment. See GEI OpinionThe Challenges for Chinaís New Leadership.
A small and significant problem (Dan McCrum, FTAlphaville) One time-honored investing guideline is that small caps hit market tops before large caps. Of course small caps can underperform at other times as well so seeing this happen should not be considered a sufficient reason to call a market top. But it should heighten awareness and caution.
Unemployment, and the 'Skills Shortage' Myth (Gary Burtless, Real Clear Markets) Hat tip to Ian R. Campbell, LinkedIn, GEI Discussion Group. Burtless maintains that the lack of wage increases argues against a significant skills shortage. If the reason jobs aren't being filled was because of skills shortfalls, the wages offered would be increasing to try to capture the few available candidates with the needed skills. He suggests that the problem is inefficient human resource functions that are failing to hire the necessary number if people to fill open positions.
Euro zone policymakers may feel they can afford to relax this summer. That would be a terrible error. The euro crisis is sleeping, not dead.
The region is suffering from stagnation, low inflation, unemployment and debt. The crisis could easily rear its ugly head because the euro zone is not well placed to withstand a shock.
What's more, it's not hard to see from where such a blow could come. Relations with Russia have rapidly deteriorated following the downing of the Malaysia Airlines flight over Ukraine. If Europe imposes sanctions that make Moscow think again, these will hurt it too.
The euro zone needs to take measures to insure itself against disaster: looser monetary policy by the European Central Bank to boost inflation; a new drive for structural reform, especially in France and Italy but also in Germany; and some loosening of budgetary straitjackets.
Hangover from Americaís Latest Credit Binge (Dave Gonigham, 5 Min. Forecast) The amount of debt for student loans plus auto loans has more than doubled in ten years. Real median household income has declined more than 5% during the same time period. What is wrong with this picture?
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