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What We Read Today 01 August 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 (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.

  • Euro Inflation Slowed to 0.4% in July, Lowest Since 2009 (Catherine Bosley, Bloomberg) The Eurozone has recorded the lowest inflation numbers is almost five years with 0.4% (annual rate) for June. This is happening while the 18-member euro area still suffers with double digit unemployment, 11.5%. Unemployment was improved slightly, having been 12.0% in June 2013. There is more discussion 'behind the wall'.

  • How to Lose the Robotics Revolution (Paul Scharre, War on the Rocks) Hat tip to Roger Erickson. The author claims that scholars think that the U.S. could be surpassed in military robotics applications because so much of commercial automation is adaptable. Foreign Policy calls it the "looming robotics gap."
  • 10 Things Americans Have Suddenly Stopped Buying (Brad Tuttle, Money) There are some surprises on this list, but none is more surprising than guns. There seems to be a rising belief that Obama is not going to take your guns away after all.

There are 13 articles discussed today 'behind the wall'.

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  • Euro area staring at deflation as it waits for TLTRO (Walter Kurtz, Sober Look) The persistent disinflationary trend in the Eurozone doesn't have much further to go to become deflationary. The 18-month disinflation from over 2% has correlated with the reduction of the ECB (European Central Bank) balance sheet contraction from €3.1 trillion to €2.05 trillion. Kurtz says that it is urgent that the ECB weaken the euro with monetary expansion and reverse the established trend.

inflation-germany-italy-2014-june

  • With Microsoft in Sights, China Starts to Squeeze U.S. Tech Companies (Andrew Jacobs, Chris Buckley and Nick Wingfield, The New York Times) Doing business in China is becoming much more difficult for technology companies as the spying -anti spying wars heat up. Recently Chinese authorities made surprise "visits" to four Microsoft offices. The agency visit was from an office that enforces China's anti-monopoly laws and other business regulations. American technology firms are having greater concerns about expanding into China.
  • Rhode Island Treasurer Gina Raimondo Wants To 'Minimize Attention' To Wall Street Managers' Compensation (David Sirota, International Business Times) Hat tips to Edward Siedle and Roger Erickson. Rhode Island is not the only state that has been putting more of its assets with expensive Wall Street money managers. And they are not the only state not transparent regarding payments to those money managers. But the state may be the most brazenly flippant. In response to a public records request from the Providence Journal, the treasurer declined to reveal compensation information for management of state pension funds on the grounds (among others) that the state was acting to protect the lives and personal security of the money managers. Unions, whose members' pensions funds are controlled by the state, and the Providence Journal have been investigating why the state has made many investment changes which greatly increased costs and expenses but still has below average returns. From IBT:

Upon assuming office in 2011, Raimondo spearheaded a plan to move billions of dollars of pension money into higher-risk, higher-fee alternative investments. That has coincided with Rhode Island paying higher fees to Wall Street.

The Providence Journal reports that the move has generated roughly $70 million in fees for the financial industry -- the same industry that has made major contributions to Raimondo's political campaigns. According to GoLocalProv, documents from the Treasurer's office show that before Raimondo took office, Rhode Island "investment fees were among the lowest of any state pension fund in the country," but that "under Raimondo, the cost of investment fees has nearly tripled." A union-financed investigation estimated that fees have increased almost 700 percent in recent years.

According to the Journal, some of those fees from the $7.7 billion Rhode Island pension system are paid to Point Judith, a financial firm created by Raimondo that Rhode Island invested in under the previous treasurer, Frank Caprio (D). Raimondo's personal blind trust fund still periodically earns income from its Point Judith holdings. Raimondo's spokesperson told IBTimes that the Treasurer has taken all "recommended steps to assure that potential conflicts of interest would be avoided during her administration."

Still, the confluence of new investments, increased fees, below-average returns for Rhode Island taxpayers and Wall Street campaign contributions inevitably raised questions. Seeking to investigate the pension investment shift initiated by Raimondo, the Providence Journal in April of 2013 asked Rhode Island's government to release details of deals between the state's public pension system and major financial firms. Raimondo's office denied the request. With national headlines swirling about hedge fund managers' billion-dollar payouts, the newspaper filed an appeal with Rhode Island Attorney General Peter Kilmartin (D), who arbitrates such open-records disputes under state law. The Journal argued that "without access to specific information about performance fees of hedge funds, which make up 15 percent of [Rhode Island's] portfolio, neither the Journal nor the public can evaluate those investments."

It may help explain the situation in Rhode Island that The Rhode Island Treasurer, Democrat Gina Raimondo, founded one of the financial firms that manages Rhode Island's pension fund accounts. Read the incredulous letter sent by the Rhode Island Treasurer's office to the Assistant Attorney General in response to the complaint by the providence Journal.

  • Let's Hope the GAO Report Ends the Too-Big-to-Fail Subsidy Distraction (Mike Konczal, Next New Deal) Mike Konczal has contributed to GEI. Konczal cites a recent GAO report that determined TBTF (too big to fail) banks no longer have an advantage via implicit subsidy from government backup which yields lower rates for them in the market. He says that this is a good thing because the entire idea was merely a distraction from the real issues because it made it seem like bailouts was the only problem with the financial sector. Konczal goes on to discuss what the real problems are.
  • A Tipping Point in Europe? Would It Impact the US? (Chris Kimble, Advisor Perspectives dshort.com) We have seen this type of pattern recently with other sectors such as U.S. small cap stocks and high yield bonds. Now the rising flag support lines are being breached in Europe.

Click on graphic for large multi-chart display at Advisor Perspectives dshort.com.
europe-support-breach-kimble-2014-jul-31

The general counsel of the National Labor Relations Board ruled on Tuesday that McDonald's could be held jointly liable for labor and wage violations by its franchise operators - a decision that, if upheld, would disrupt longtime practices in the fast-food industry and ease the way for unionizing nationwide.

Business groups called the decision outrageous. Some legal experts described it as a far-reaching move that could signal the labor board's willingness to hold many other companies to the same standard of "joint employer," making businesses that use subcontractors or temp agencies at least partly liable in cases of overtime, wage or union-organizing violations.

The ruling comes after the labor board's legal team investigated myriad complaints that fast-food workers brought in the last 20 months, accusing McDonald's and its franchisees of unfair labor practices.

  • Traders Are Blaming Thursday's Big Sell-Off On 1 Stat (Sam Ro, Business Insider) A jump of 0.7% in the second quarter (and 2% year-over-year) of the employment cost index has been suggested as the cause of yesterday's big sell-off. Economists had been expecting 0.5% for the quarter and 1.8% y-o-y. It is argued that this is both a sign of inflation as well as labor-market tightness. These factors could put put pressure on the Federal Reserve to tighten monetary policy sooner than later. Econintersect: What? Employment costs rising at about the same rate as CPI is a market buster? NO way. The market is simply ready for a correction. (But probably won't get the healthy 10% to 20% that it needs to get properly shaken out.)

employment-cost-index-2014-2q

  • Goodnight Vietnam (William H. Gross, Investment Outlook) William H. Gross has contributed to GEI. Gross says we can say goodnight to capital gains as a significant portion of gains from equities; it is all going to be about income (earnings flowing through to dividends) where most will be made and the returns will be low single digits for an extended period.
  • The Brookings forecast misunderstanding (Walter Kurtz, Sober Look) Kurtz doesn't buy the Brookings Institute's unemployment forecast for the rest of the year. Brookings assumes that the labor force will grow as employment grows and the unemployment rate will remain above 6% even as strong job grow continues. Kurtz argues that the consensus numbers from surveys of economists, which show the unemployment rate moving below 6%, are more accurate. He says that he endorses the opinion that many of these folks are not "coming back any time soon".


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