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What We Read Today 22 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.

BoJ strikes more upbeat view, no fresh measures (AFP, Taipei Times)  Exports "show signs of picking up" and "factory output has started to bottom out".  That is the upbeat view referred to in the headline.  The Bank of Japan (BoJ) voted to "hold off on fresh easing measures".  That means they will continue the current QE (quantitative easing) to pump money into the banking system at the rate of ¥80 trillion (US$670 billion) a year.  Prorated to the size of the Japanese economy, this is the equivalent of $2.3 trillion for the U.S.  The Fed QE3 program, now ended, was at the rate of $1 trillion per year.

Tonight will be the longest night in Earth's history (Joseph Stromberg, Vox, MSN NewsCorrection: Tonight will not be the longest night in the history of Earth. It was in 1972. (Joseph Stromberg, Vox)  The first link may also get corrected by the time you get to it.  The reason for nights (and days) getting longer is the slowing of the earth's rotation.  It's not by a lot:  15 to 25 seconds are added to the nominal 24 hour day every million years, produced by gravitaional effects between earth and the moon.

The reason for the correction is that climate changes on earth can produce affects in a variable pattern that influence the rotation and over the last 42 years the rotation has actually increased in speed slightly.  The long-term effects have changed the rotation time from 6 to 24 hours in the 4.5 billion years since the moon was formed.  The changes in rotation are slowing over time and billions of years in the future the rotation of the earth will slow to the point that it will match the earth orbit speed of the moon and the moon will always be in the same position with respect to any point on the earth's surface - and one half of the earth will never see any portion of the moon again.

Existing Home Sales: A Likely "Miss"  (Calculated Risk)  Bill McBride quotes an estimate from Tom Lawler predicting an annual rate of 4.90 million existing home sales for November compared to the consensus expectation of 5.20 million.  In October NAR (National Association of Realtors) reported 5.26 million homes sales (annualized rate).  Analysis of September and October pending home sales at GEI Analysis suggested that November existing homes sales might be better than October.  We won't have long to wait to find out which (increase or decline) is the case; existing home sales are announced today.

Articles about events, conflicts and disease around the world

Ferguson and Related News









Goldman Sachs Sees ‘Low Return World’ in 2015 With Stocks Rising (Lu Wang, Bloomberg)  Among the predictions for next year are rising U.S. treasury rates, with the 10-year yield rising from 2.35% (19 November when this article was written) to 3% by the end of 2015.  The increase has a little bit more of a hill to climb now since the yield currently is down to 2.17% and has been lower recently.  See following three articles.

Goldman cuts 10-year yield forecast to 2.5% (Katie Little, CNBC)  This report from two months ago cut the year end 2014 projection for the 10-year U.S. treasury yield from 3% to 2.5%.  On 20 October the yield was 2.20%.

Goldman’s Call on Interest Rates, in Two Charts (Steven Russolillo, Goldman Sachs)  In this August 2014 report, Goldman Sachs is projecting 4% Fed Funds rates by 2018.  Unless the yield curve is flat or negative the 10-year treasury note will have to be significantly above 4%, say 4.5% or higher.

Bond Yields Set To Plunge In 2015: Next Year Global Treasury Supply Will Tumble By 20% As ECB Joins The Party (Tyler Durden, Zero Hedge)  With QE committed in Japan and likely in Europe, along with a shrinking deficit in the U.S. there will be a shortage of the top sovereign debt securities in 2015.  Low supply, high demand and prices will rise.  ZH suggests that U.S. Treasuries will go below 2% yield in 2015 and the 10-year bund will head toward 0% (from current 0.6%) .  The Japanese 10-year does not have far to go to get to zero either, right now yielding 0.36%.  At the current rate of QE there will be increase at all in supply for Japanese bonds.


If energy prices remain near current levels, Canada's economy is in trouble (Walter Kurtz, Sober Look)  Canada is a commodity exporting country and the commodity super cycle is ending, according to Kurtz.  The Canadian tar sands bitumen projects produce the world's most expensive oil (unprofitable below $80 a barrel) and gold is still doing poorly (see next article).  The Canadian housing market is one of the most expensive in the world (article discussed here yesterday) and the entire country is leveraged to the hilt.


GLD Breaks, Are We Now Entering That Last Leg Down? (SomaBull, Seeking Alpha)  Mining stocks have much bigger swings than does the price of gold.  Thus investing in mining stocks, and especially junior mining stocks, is like a leveraged play on gold.  Since picking a portfolio of individual stocks may present a challenge to many investors, ETF investing may be useful in gaining exposure to this sector.  Two of the largest precious metals mining ETFs are Market vectors Gold Miners ETF (NYSE:GDX) and Market Vectors Junior Gold Miners ETF (NYSE:GDXJ).  (Note:  A list of precious metals ETFs is available at Yahoo! Finance.)

For an example of the "leverage" power obtained with the miners, look at what happened between 11 July and 05 November of this year.  The gold ETF SPDR Gold Shares (NYSE:GLD) lost 14% over that interval.  The two mining ETFs lost almost 40% (GDX) and 50% (GDXJ).  But the response of the miners to changes in the price of gold is not always prompt.  Since 05 November GLD has risen 4.5% as of 19 December, while GDX has risen 11.6%, much as might be expected, but GDXJ has barely beaten GLD itself, returning a gain of 5.8%.  And the changes from 25 November to 19 December show much weaker performance for the miners (GDX -6% and GDXJ -18%) while GDX is nearly unchanged (-0.5%).

The author of this article is asking if the recent weakness of the miners may be preceding one more decline in the price of gold.  He is hoping for such a decline to be the final leg down.  To understand his thinking we can look at two graphics he presents.  The first is the chart for GDXJ which shows a negative pattern of lower lows over the past two months.

GDXJ-2014-dec-19The second chart shows the most recent 14 year history of the Philadelphia Gold/Siver Sector Index (^XAU).  The author asks how much lower can the index go?  Can it go below the 2001 minimum in the low 40s?  That is the 30-year low (as far back as the Yahoo! Finance data goes).  (Econintersect caution:  If the ^XAU did go to that 2001 low it would be about a 50% decline from the current level.)  The author uses the "small" decline left to the minimum as a justification for only one more leg down.


How did Germany become powerful for World War II after it was devastated economically in World War I? (Harold Kingsberg, Quora)  The question is based on a false premise.  Germany came out of World War I with its economy intact.  It wasn't the war that destroyed the German economy; it was the Treaty of Versailles which specified reparation payments that were impossible to meet.  So the destruction of the German economy was not a military act but a political one.  This discussion is a great example of how a false initial assumption can seal the fate of all that follows.

Goldman sees little systemic risk for banks from oil price drop (Greg Robb, MarketWatch)  According to a report from Goldman Sachs there is little systemic risk to the financial system from loans made to the energy sector by U.S. commercial banks.  Of the $14.3 trillion in bank assets, a "bit more than $200 billion" (about 1.4%) is in loans to the energy sector.  There is a lot of capital invested from other sources that could be facing losses, however,  Goldman says that about $1 trillion in new investment in oil projects planned for 2015 is not profitable with oil below $70 a barrel and presumably will not be made .  A caveat:  There is an innocuous little sentence at the end of the article:  "The analysis excluded U.S. shale."

The Baltic Dry Index Has Never Crashed This Fast Post-Thanksgiving (Tyler Durden, Zero Hedge)  The Baltic Dry Index (BDI) is an indicator of the demand for shipping compared to the supply of dry bulk carriers available.  A higher index is representative of a high demand for shipping and a growing economy; a low index is correlated with lower economic activity.  The index has a tendency to decline at the end of each year (but does not always do so).  However there has never been a decline as large as this year.  The monthly reports at GEI Analysis reflect the (BDI) decline as U.S. exports have contracted sharply in October and November.


Other Economics and Business Items of Note and Miscellanea

Climate change, soil salinity, and the economics of high-yield rice production in coastal Bangladesh, Volume 1 (The World Bank)

Economics Professor Breaks Down Holiday Shopping Trends (Buffalo Time Warner News)

Bring back big gov, right? If only the economics, STUPID, could tell us more (The Register)

Government Guarantees Encourage Banks To Take More Risks, Not Lend Money, Study Finds (Macro Insider)  Econintersect has not been able to locate a copy of the paper.

2014 was a bad year for Bitcoin and 2015 is unlikely to be much better (The Conversation)

GOP lawmaker proposes Obamacare replacement: Rely on Jesus for health care (Raw Story)  Hat tips to Tom Hickey and Roger Erickson.  There is also a 1 1/2 minute video to watch.

Why Google's next big thing could be a warp-speed supercomputer (CNN)  Hat tip to Alun Hill.

Katie Couric and the Net Petroleum Exporter Myth (Calculated Risk)

US Labor Agency Accuses McDonald's Of Violating Labor Rights Over Fast Food Workers Movement (International Business Times)

Real World Economics: Falling oil prices have their down side (Twin Cities Pioneer Press)

Dark pools don’t deserve shady reputation (The Conversation)

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