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What We Read Today 18 December 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.

Obama Announces U.S. and Cuba Will Resume Relations (Peter Baker, The New York Times)  After a year and a half of talks, hosted by Canada and encouraged by Pope Francis, the United States and Cuba will restore diplomatic relations for the first time since they were abandoned by the Eisenhower administration in January 1960.  For more details see articles in the reading list below.

Drought situation improves slightly, but water shortage remains (Hata El Nasser, Al Jazeera)  December rains has helped but there is still a long way top go for drought-stricken California.  It would take 50% more than the normal average precipitation or about 75 inches of rainfall (or snow equivalent) over the next several months to end the drought conditions.  The above normal rainfall for December has totaled up to 19 inches so far with another 1-3 inches expected in the next day or two.  So there is a long way to go.


McSally win gives GOP historic majority in House (Sean Sullivan, The Washington Post)  Republicans clinched their 247th U.S. House seat on Wednesday when GOP challenger Martha McSally officially defeated Rep. Ron Barber (D-Ariz.) after a recount. Republicans will begin the 114th Congress with a 247-188 advantage over Democrats in the House of Representatives. It is the largest GOP majority since Republicans claimed 270 seats in the 1928 election.

Articles about events, conflicts and disease around the world

Ferguson and Related News

NSA / CIA

Ebola

Russia (more 'behind the wall')

Pakistan

Cuba

Mexico

Russian ruble firms sharply as government pressures exporters (Vladimir Abramov and Alexander Winning, Reuters)  Great news for Russia, right?  Well, this story is like the weather - if you don't like what you've got wait five minutes.  This article is tome stamped 1:08 pm Wednesday 17 December 2014.  Below is the latest chart on the ruble from Investing.com.  If you follow the link, depending the time you are looking, you may have to change the time scale to see the USD/RUB exchange rate hit its minimum (60) between noon and 1 pm Wednesday 17 December.  By the time the trading closed for the day the exchange rate was back up to 65, as shown by the snapshot below.  The 9% firming for the ruble was mostly gone in just a few more hours.

usd-rub-midnight-gmt-2014-dec-18


German business warns rouble plunge will 'affect us all' (AFP, The Business Times)  At this point in time a German business group,  Committee on Eastern European Economic Relations, expects a 20% decline in German exports to Russia due to reduced exchange value of the ruble.  "But if the current situation continues, we could experience a bigger fall."  Based on August numbers the cutback may already be much greater than 20%.  See the next article.


German exports to Russia tumble as sanctions bite (Jeevan Vasagar and Roger Blitz, Financial Times)  German exports to Russia in August were 26.% less than in August 2013.  Year to date, January through August, German exports to Russia were 16.6% less than for the same period in 2013.  The first economic sanctions against Russia were imposed by the EU in July.  Autos were the hardest hit product, down 27.3% year to date through August.  The direct hoy to the German economy is more psychological than financial:  Russia comprises less than 3% of German exports.


Russia Needs to Increase Rates `Much Further': Baweja (Bloomberg TV)  Sixteen years ago Russia hiked rates way above 100%.  That is a long way to go from the current 17% and very doable for Russia which has very low sovereign debt (13% of GDP) and one of the strongest foreign currency debt profiles of any country (less than $700 billion for government, banks and companies in total).  For a less sanguine view see the next article.

Click to watch video at Bloomberg TV.
russian-interest-rates-bloomberg-tv


Russia’s Economic Pain Is Just Beginning, Bank Group Warns (Ian Talley, The Wall Street Journal)

Russia’s economy is likely already in recession with the ruble tumbling to new lows. But the country’s pain is just starting, says one of the world’s largest banking groups.

There is complete panic in the financial markets” in Russia, said Lubomir Mitov, chief Europe economist at the Institute of International Finance, a banking industry group in Washington that represents more than 500 of the world’s largest private financial firms.

The central bank has hours or days probably to get this under control because if the population runs to the banks to get their deposits, then it’s game over,” Mr. Mitov said in an interview.

The Big Drop: Cheap oil burns green energy (Pilita Clark, Financial Times)  Green energy companies have declined by up to 3X (and a few even more) compared to the broader stock market.  This article points out that the cost of oil should not affect the prospects for green energy companies because little oil is used for generating electricity today and wind is competitive with oil at $30 a barrel.  The article suggests that the market has got this wrong and lower oil prices will not affect continued investment in wind and solar.


Are Bonds Really Less Risky than Equities? (Petrick Rudden, Pragmatic Capitalism)  If you follow the investment axiom that bonds are less volatile than equities you are probably relying on nominal data and not recognizing how inflation impacts investment returns.  If you are depending on you investments for income and want to have some degree of protection of purchasing power you will want to maintain a significant part of your portfolio in stocks.  Otherwise, if 100% in bonds, you may have some painful decades.  The author does point out that lack of strong correlation between stock and bond returns does support the idea that one should keep both asset classes in a portfolio.

dividends-vs-bond-interest-100-years-prg-cap-2014-dec-17   


Are We Witnessing a Melt-Up In Long-Term Bonds? (Ben Carlson, A Wealth of Common Sense)  It is amazing how many things happen when we are not really paying attention.  Did you know that this year is on track to be the fourth best year for bonds over the last 88 years?

treasury-top-ten-returns-since-1926

Carlson asks what might be expected going forward and suggests we should look at the last time in our history when long-term bond yields were in the 2% to 4% for a large number of years.  Such an era was seen from 1026-1960.  The ten best return years during that 35 year span were:

treasury-top-ten-returns-1926-1960

Is this the outlook for the next 20-30 years?


Treasury Snapshot, Six Weeks after QE and with the FOMC in Focus (Doug Short, Advisor Perspectives dshort.com)  Doug Short contributes to GEI.  Short provides a very instructive 10-year treasury interest rate chart with trend channels provided by Bob Bronson of Bronson Capital Markets Research, who comments:

The blue dashed lines are much more closely parallel to the all-data, log-linear best fit line – very similar to the high-low mid-channel line - since 1980. Then there is the even more currently relevant downtrend (black dashed line) since the 2007 high."

Econintersect note:  The support line for the trend channel from 1980, if touched again in 2015 or 2016, would have a 10-year yield below 1.3% or 1.2%, respectively.  Think that is impossible?  As a point of reference, 10-year yields right now in Germany are just below 0.6% and in Japan are less than 0.4%.

10-year-treasury-yield-since-1965


Other Economics and Business Items of Note and Miscellanea

Joseph Stiglitz: Economics Has to Come to Terms with Wealth and Income Inequality (INET)

Let’s get fiscal (The Economist)  Review of new book by Richard Koo.

Economics turn against Keystone  (The Columbus Dispatch)

Cheap oil: Better for airline passengers or shareholders? (CNBC) Hat tip to Marvin Clark.

Obama Imports and Immunizes Banksters Who Donate to the Democratic Party (William K. Black, New Economic Perspectives)  Much better than any of the news articles (or editorials) we have seen on this.

Economics is Onesided and Reactionary (indybay.org)

An Interview With ECB Executive Board Member Benoît Coeuré (The Wall Street Journal)  A European lost generation?

TD Economics: Full Steam Ahead for America's Economy (CNN Money) 3.0% GDP for 2015?


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