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.
Plant Gets Tesla Closer to Electric Car for Masses (Justin Pritchard and Scott Sonner, ABC News) Tesla Motors will announce today that it will build its giant battery factory in the Nevada desert outside of Reno. The facility will eventually build each year enough batteries to power 500,000 electric cars.
Failed Experiment at the SEC (Bob Veres, Financial Planning) This is a succinct history of the fiduciary responsibility issue that has been fumbled through the years by the SEC (Securities and Exchange Commission). Veres holds out some hope that Mary Jo White may be the SEC head who finally resolves the problem.
There are 12 articles discussed today 'behind the wall'.
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Which Assets Deliver the Steadiest Returns? (Craig L. Israelsen, Financial Planning) Some other authors might have used the term "risk" instead of "steady". The topic is actually volatility which is really different from risk; risk of loss of principal (loss risk) in some cases and risk of failure to gain principal (opportunity risk) in other cases. Thus the term "steady" is actually a correct choice because it refers to volatility of returns over time and does not address either kind of risk. The author considers 12 asset classes and also an equally weighted portfolio of the 12. We have added annotations to his table to identify the four bets (green) and the four worst (red) for some of the characteristics across the 12 asset classes and the 12-asset portfolio. Some interesting patterns emerge:
Four assets have no red: Real Estate, Natural Resources, Commodities and the 12-asset Portfolio.
Three assets have no green: Large U.S. Stocks, Developed Non-U.S. Stocks and TIPS.
Four assets have only green: Same as 1.
Three assets have only red: Same as 2.
Two assets have 1 green and 1 red: Midcap U.S. Stocks and U.S. Bonds.
Two assets have 2 green and 1 red: Small Cap value U.S. Stocks and Emerging Countries Stocks.
Two assets have 1 green and 2 red: Non-U.S. Bonds and Cash.
In some of the most bleak predictions economists have made about independence, the Wall Street bank said a "Yes" vote on September 18, while looking unlikely, "could have severe consequences" for both the Scottish economy and the UK overall.
Goldman warned that public services would have to be cut if Scotland goes it alone, and that the country would face much higher borrowing costs.
But the most worrying consequence, the bank predicted, would be that uncertainty over a currency union would cause a run on sterling and a capital flight with echoes of the eurozone crisis.
Multifamily Housing is Booming, and It Doesn’t Look Like a Bubble (David Schawel, Enterprising Investor) In the housing bubble single-family housing starts peaked at 1.8 million a year in late 2005, about 4x the peak month for multi-family starts that year. In fact there was no bubble in multi-family housing with starts averaging around 330,000 - 350,000 a year every year from 1997-2007. Single-family starts fell by more than 75% when the bubble burst but multi-family starts fell even further, by more than 80%. Then a funny thing happened on the way to the housing forum: While single-family starts have recovered to only about 36% of the peak number multi-family starts are currently at 440,000 rate annually, exceeded by only two months in the last 20 years. See also GEI News.
Wayfaring on CAPE’s edge (Salil Mehta, Statistical Ideas) Salil Mehta has contributed to GEI. A thorough examination of the 120-year data history of the Shiller cyclically adjusted P/E ratio (CAPE) finds no statistical justification of using it as a market timing tool. This is consistent with Prof. Shiller's own statements on the matter.
More Workers Are Claiming ‘Wage Theft’ (Steven Greenhouse, The New York Times) There have been a flood of recent cases that accuse employers of violating minimum wage and overtime laws, removing work hours from their records and wrongfully taking employees' tips. Worker advocates call these practices "wage theft," insisting it has become far too prevalent. Some federal and state officials agree. They assert that more companies are violating wage laws than ever before, pointing to the record number of enforcement actions they have pursued. They complain that more employers - perhaps motivated by fierce competition or a desire for higher profits - are flouting wage laws. Many business groups counter that government officials have drummed up a flurry of wage enforcement actions, largely to score points with union allies. Businesses say the charges are political posturing and frivolous employee suits. According to employers, they have become more scrupulous in complying with wage laws in response to the much publicized lawsuits about so-called off-the-clock work that were filed against Walmart and other large companies a decade ago.
The Medicare Miracle (Paul Krugman, The New York Times) Is Paul Krugman trying to become the Karl Rove of the Democratic Party? He has some correct facts and some reasonable conclusions interspersed with wild political rantings. If there still are any "two handed economists" left? Paul Krugman certainly doesn't qualify.
Democracy in the Twenty-First Century (Joseph Stiglitz, Project Syndicate) Prof. Stiglitz writes that the protections of government for corporate giants and real estate ownership have introduced distortions that have created an "ersatz capitalism".
Sometimes an increase in measured financial wealth corresponds to little more than a shift from "unmeasured" wealth to measured wealth - shifts that can actually reflect deterioration in overall economic performance. If monopoly power increases, or firms (like banks) develop better methods of exploiting ordinary consumers, it will show up as higher profits and, when capitalized, as an increase in financial wealth.
But when this happens, of course, societal wellbeing and economic efficiency fall, even as officially measured wealth rises. We simply do not take into account the corresponding diminution of the value of human capital - the wealth of workers.
Subprime Blows up on Retailer, CEO Warns on ALL Subprime, Hits Auto Sales (Wolf Richter, Wolf Street) An appliance and furniture chain, Conn's (NASDAQ:CONN), has revealed in its quarterly earnings report that bad debt charges have climbed to 10% of its loan portfolio. (Conn's store-finances much of what it sells to low-credit rated customers.) But, perhaps the most telling part of the Conn's report was that:
The issue was much broader. Late stage delinquency rose for "all FICO scores, markets, product categories, years of origination, and customer groups," Wright said. It went beyond appliances and mattresses and beyond even Conn's:
Customers are under pressure from the number of directions. Inflation of rents is one example. Increased sub-prime issuance for vehicle purchases are also pressuring customers' ability to pay Conn's. Car loans and rent will generally rank ahead of Conn's in customers priority to pay.
Wright was speaking about the strung-out American consumer who'd been keeping up consumption by getting subprime financing. Now an increasing number of consumers can no longer service the subprime loans they took out to buy products they couldn't afford, and they're defaulting on Conn's loans first, before they'll default on their subprime car loans and before they stop paying for inflated rents.
Once again we wait for "shock and awe" from the ECB (Walter Kurtz, Sober Look) Kurtz points out that the ECB (European Central Bank) is getting Japanese-like negative real yields in a close to zero inflation environment while sharply contracting its balance sheet. This is not what was wanted or expected. Kurtz says dramatic action is needed from Mario Draghi or the unexpected may see a "sharp reversal" and the unexpected lower rates and lower euro may go the other way at the wrong time, when the eurozone is sliding into recession.
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