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What We Read Today 20 October 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.

  • Why an $80 barrel of oil is bad (Alex Russell, The Conversation) The price of oil has dropped suddenly by 20% or more in recent months and that may have negative consequences for North Sea crude. Investment had been increasing recently to increase production in the waters around Scotland but, at $80 a barrel the economics don't support continuing.

So, if oil remains at $80 (or goes even lower), North Sea production may continue to slide as it has in recent years as the increased investment will be curtailed.

brent-crude-price-2014-may-oct

This flood of money, arriving from China despite strict currency controls, has helped the city build a $20 million high school performing arts center and the local Mercedes dealership expand. "Thank God for them coming over here," says Peggy Fong Chen, a broker in Arcadia for many years. "They saved our recession." The new residents are from China's rising millionaire class-entrepreneurs who've made fortunes building railroads in Tibet, converting bio-energy in Beijing, and developing real estate in Chongqing. One co-owner of a $6.5 million house is a 19-year-old college student, the daughter of the chief executive of a company the state controls.
  • Why the Republicans will Win the 2014 Elections (Walter Kurtz, The Daily Shot email, no url)

2014-voters

  • Articles about conflicts and disease around the world

Ebola

CDC Updates Ebola Protocol as Anxiety Rises (NBC News)

Ebola crisis: Nigeria set to be declared free of virus (BBC News)

Nigeria

Boko Haram announces truce to release kidnapped schoolgirls but deal is plagued by doubts (The Conversation)

Turkey

Islamic State foiled in attempt to kidnap Syrian rebel leader in Turkey Attempted kidnap of top Syrian rebel commander inside Turkey suggests the Islamic State is operating inside this Nato country with relative impunity (The Telegraph)

Syria

U.S. Humanitarian Aid Going to ISIS (The Daily Beast) Hat tip to Sig Silber.

US drops arms, ammunition to Kurds fighting ISIS in Kobani (Fox News)

Iraq

Iraq approves Australian anti-Islamic State forces (BBC News)

Ukraine

Ukraine steels itself for winter as Novorossiya forges ahead (The Conversation)

Pro-Russian rebels using seized Ukrainian missile downed MH17 passenger plane, says Germany (The Sydney Morning Herald)

Russia

Russiaís borders: Romania strengthens ties with NATO as old anxieties return (The Conversation)

Hong Kong

Hong Kong crisis deepens after weekend clashes, talks set for Tuesday (Reuters)

Hong Kong protest clashes leave 20 injured (Al Jazeera)


There are 12 articles discussed today 'behind the wall'.

Do not miss "Other Economics and Business Items of Note", the final section every day.

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  • What the Dollarís Rise Tells Us About the Global Economy (Neil Irwin, The New York Times) For the U.S. a rising dollar creates winners (importers) and losers (exporters). In the global economy it is a reflection of weakening growth elsewhere compared to the U.S. But this is all temporary adjustment and ultimately weakening of the euro, yen and other currencies will create a better global balance - and that will benefit the U.S. too, according to Irwin, even if U.S. exporters do lose ground in the near term. Read also Overseas Stimulus Moves Drive Yen, Euro and Renminbi Down Against Dollar (Binyamin Appelbaum, Jack Ewing and Neil Gough, The New York Times).

dollar-strength-NYT-2014-oct-09

  • Reality = Normal + Fat-Tail Distributions (The Capital Spectator) You run your investment model assuming normal distribution of results (bell curve) and everything looks wonderfully attuned with expectations. The one day disaster strikes. You've been "gob-smacked" by a "fat tail". The graph below shows the tens of thousands of days sitting right on the line that results from bell shaped distributions. Of course you congratulate yourself for being brilliant when one of the few dozen days in the upper right hand corner delivers you an unexpected windfall but how do you deal with one of the "black swans" in the lower left? You are probably saying that it couldn't have happened, it was one in 10 million probability event and you curse your luck that it happened during your 10,000 day investing career. But you are just lying to yourself because for the 63 years of data there are less than 16,000 market days and the one in 10 million event happened several dozen times. The message here is that data which follows a bell curve 99% of the time can destroy you on the 1% occasions when it does not if you are assuming the bell curve applies for every day you are invested.

  • The good, the bad and the ugly of falling energy prices (Walter Kurtz, Sober Look) Falling energy prices may hurt employment in the energy sector but it frees up money for other expenditures in the general economy. U.S. GDP will he negatively affected as well if lower oil prices force cutbacks in the production of high-cost crude. First graph shows how cheaper oil frees up consumer spending on other items. The second graph shows how falling oil prices have dramatically drive up the cost of credit for the oil industry.

oil-cost-consumer-spending

credit-cost-energy-2014-oct

  • Blame the Fed for the coming wealth destruction (Thomas H. Kee Jr, MarketWatch) Hat tip to Seth Mason, GEI discussion group, LinkedIn. Kee sees the QE policies of the Fed starting in September 2012 (QE3) as accomplishing nothing more than bubble pumping (primary securities and housing) and the only result that will be achieved is another bubble collapse. See also next article.
  • Janet Yellen is Wrong About the Cause of Wealth Inequality (Sy Harding, Market Oracle) Hat tip to Rob Carter. Harding sees the cause of the transfer of wealth form the middle class to the wealthy the repeated asset bubbles of recent decades wherein the "professional" management of assets by the most wealthy repeatedly gained at the expense of the "amateur" wealth management skills of the middle class. See also previous article.
  • States Most & Least Dependent on the Federal Government (John S. Kiernan, Wallet Hub) Delaware is the state to which the U.S. is most beholden, with only $0.50 of each tax dollar sent to Washington returning to the state. The most beholden state is South Carolina which receives $7.87 from Washington for every Federal tax dollar collected. In this study the states were ranked not only by the return on taxes paid to the federal government, but also on federal funding as a percentage of state revenue and the number of federal employees per capita. In that ranking South Carolina doesn't even make the top ten most dependent list (it comes in 11th). The most dependent states are in a tie for top spot: New Mexico and Mississippi. The rest of the top ten most dependent states (in order, starting with #3): Alabama, Louisiana, Maine and Montana (tie), Tennessee, West Virginia and South Dakota (tie), Arizona and Kentucky.

The ten least dependent states are (starting with the least dependent): Delaware, Illinois, Minnesota, New Jersey, Connecticut, Kansas, California, Nevada, Massachusetts and Colorado. The "Live Free or Die" state, New Hampshire doesn't make the top ten for independence - it is 11th.

Pass your cursor over the map to view data for each state.

WalletHub

The scatter plot for tax rates vs. dependency on the Federal government shows two trend lines (not drawn in the first graph below): For states that fall in the low tax and low dependency plus those in the high tax and high dependency category the trend line is positively sloped from lower left to upper right. Of course this is what it is, by definition! All the other states have a negatively sloping trend line from upper left to lower right. Again that characteristic is forced by the data segregation when there is no correlation for the entire 51 point data set: If you divide a randomly scattered data set into four quadrants you force two subsets of data with opposite sloping trend lines.

WalletHub

Below we have reproduced the graph above with the two trend lines discussed and with lines showing a four quadrant definition. The questions that should be studied are:

  • What is the difference between the green quadrant states and the gray quadrant above them that produces different tax rates for the same federal dependency?
  • What is the difference between the green quadrant states and the gray quadrant to the right that produces different federal dependency for the same tax rates?
  • What is the difference between the red quadrant states and the gray quadrant below them that produces different tax rates for the same federal dependency?
  • What is the difference between the red quadrant states and the gray quadrant to the left that produces different federal dependency for the same tax rates?

state-dependency-state-taxes-annotated

The final graph below shows one variable that should have a bearing on the questions asked above. Here we see a clear correlation between higher state GDP and lower state dependency. This is at least part of the explanation for the random scatter in the first graph (taxes vs. dependency): The two variables (state taxes and dependencies) do not have primary relationships, while the last graph shows that lower GDP correlates with higher dependency. Who would have guessed - more productivity is correlated with greater independence.

state-dependency-state-gdp-annotated

Note that the gray states, although they can be included in the total distribute without disturbing the slope of the trend line much, would significantly detract from the correlation coefficient (if calculated) that would be obtained for the red-green states only. That is because the gray states still describe an oppositely sloped trend line of their own. That means for some states (gray states) higher GDP correlates with greater dependency. This is a demonstration of a common problem in economics (the ceteris paribus problem): There is much more going on in this system than just taxes and GDP defining the level of economic independence for a state.

Yet this type of observation is often attempted as a defining economic relationship. It clearly is not and a lot more work needs to be done to characterize (all) the other variables involved in defining state - federal interdependencies.

Earlier this year Sig Silber had an interesting discussion about the economic difficulties that the state of New Mexico would have if it were to secede from the U.S. and become The Nation of New Mexico.

  • Other Economics and Business Items of Note and Miscellanea

10 Most Corrupt Countries in the World (Rant Political)

Retirement Strategy: Avoiding The Pitfalls Of Fear And Winning The 'Game' (Seeking Alpha)

Why The Stock Market May Have Found A Bottom And What To Buy Now (Seeking Alpha) Hat tip to Trang Ho.

Happiness economics is bollocks. Oh, UK.gov just adopted it? Er ... (The Register)

7 Credit Myths You Thought Could Hurt Your Score, but Don't (Nasdaq.com)

Hereís What the Secret Goldman Sachs Tapes Really Mean (Wall Street Insights & Indictments)

The Need For Solar Panels Is Greater Than Ever, Fortunately The Economics Couldnít Have Been Better (Inquisitr)

Buddhist economics (ekantipur.com)

Comment: Modi adds firepower to economic policymaking (sbs.com.au)


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