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What We Read Today 25 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.

Yiwu, China: The World's Christmas Paraphrenalia Manufacturing Center (Michelle FlorCruz, International Business Times)  Santa's elves are actually Chinese workers.  The overwhelming portion of the world's Christmas décor, whether it be baubles, garlands, bells or glitter, come from Yiwu, an unassuming town on the central coast of China’s Zhejiang province. The community has more than 600 factories producing the yuletide paraphernalia.

merry-christmas-380x180

German author: 'Islamic State brutal and enthusiastic about killing millions'  (BBC, PRI)  The incredible brutality and confidence of ISIS is overwhelming.  They intend to kill all members non-Abrahamic religions (and atheists) and all who follow Judaism, Christianity and Islam who do not believe in a religious state.  Democracy is their enemy because it places the power of man before the power of God.  The PRI story is entitled The so-called Islamic State is even worse than you thought.  The report was written by German writer and political activist Juergen Todenhoefer who recently spent time experiencing life in the so-called Islamic State in the northern Iraqi city of Mosul.  He found that ISIS is enthusiastically supported by those living in captured areas. "I thought I would meet a brutal terrorist group and I met a brutal country." Merry Christmas!

Click to watch video at BBC website.
isis-german-video-bbc


Articles about events, conflicts and disease around the world

Ferguson and Related News

NSA / CIA

Ebola

Israel

Syria

Iraq

Ukraine

Russia

Pakistan

Egypt

South Korea

Dow is Still More than 60% Off Its All-time High (Chart of the Day)

dow-gold-2014-dec


Europe's bond yields lowest since 15th century Genoa on deflation, Russia risk (Ambrose Evans-Pritchard, The Telegraph)  Pre-Colimbian finance has returned to Europe as documented in this article dated 29 July 2014.  On that day German 10-year bonds fell to a record low of 1.11% in intra-day trading, partly on safe-haven flows. French yields dropped1.5%. These levels are far below rates hit during the 1930s or even during the deflationary episodes of the 19th Century. 

Well that was nothing:  German 10-year at 0.60% (MarketWatch)  What do you call a 1000-year flood?  A disaster.  Some other ten-year bond yields across Europe besides Germany are below the level remarked on by Evans-Pritchard at the end of July:  France 0.82%, Netherlands 0.68% and Switzerland 0.22%.  And they could go lower, with no lower bound provided by zero.  See next article.

10-year-german-yield-2014-dec-24


Less Than Zero (Jana Randow, Bloomberg Quick Take)  In 2014 the ECB cut a key short-term rate to -0.2%.  A deposit rate below zero effectively punishes banks that have extra cash but are reluctant to extend loans to weaker lenders.  See next article.  The euro zone is is grappling with a shortage of credit and unemployment near its highest level since the currency bloc was formed in 1999. The ECB (European Central Bank) has particular reason to use negative interest rates because they cannot easily buy sovereign bonds to implement the QE (quantitative easing) programs that have been (are being) used by the U.S. (and Japan). But Mario Draghi (ECB president) is trying to implement QE against objections (most strongly from Germany).

Econintersect:  So what will happen if and when QE starts in Europe and the ECB starts buying up sovereign bonds?  The prices will rise and the yields will fall (except for Switzerland which is not in the eurozone).  Will 10-year bonds get bid up to negative interest? If so forget the thousand-year flood.  The time frame for reference simply will not exist!

europe-rate-below-zero


Underwhelming Surprise (Matthew C. Klein, Bloomberg View)  Klein details the contractionary financial environment in the eurozone and suggests some possible actions:

The biggest problem in Europe is that businesses can’t get credit. Lending to nonfinancial firms has fallen by 2.7 percent in the 12 months through September, with even worse contractions in Spain and Italy -- despite the fact that sovereign borrowing costs have plunged since last summer. There are many possible explanations for this, the most obvious being the weakness of Europe’s banks and continued uncertainty about whether troubled countries will leave the euro area.

Whatever the reason, the ECB’s policy changes haven’t been flowing through to the real economy. Frustratingly, it seems as if Mario Draghi, the ECB’s president, believes that more can be done, yet refuses to do any of those things. We know this because Draghi said that “we continue to monitor closely money market conditions and their potential impact on our monetary policy stance” and that “we are ready to consider all available instruments” at the press conference following today’s meeting. The time for considering all available instruments is now.

One option would be outright purchases of government debt, particularly focusing on those sovereigns that face higher borrowing costs than Germany and the Netherlands. While this would be strenuously opposed by German politicians as well as the technocrats at the Bundesbank, the ECB hasdone it before and should consider doing so again.

Another, more radical, approach would be a facility that subsidized the borrowing costs of the small and medium enterprises that depend on bank loans for financing. Perhaps it could copy elements of the Bank of England’s Funding for Lending Scheme, which gives banks unusually cheap financing on the condition that they make more loans to the real economy.

A 'Troublesome Commonality' During Two Recent Bouts Of Global Market Volatility (Sam Ro, Business Insider)  It looks like we got away with skating on thin ice in the last two stock market pullbacks.  Major global asset classes all declined together during the declines in May-June and September-October of 2014.  Portfolios depend on lack of correlation between asset classes to maintain more stable total value when some asset classes fall in value.  A characteristic of major declines is panic that arises when everything falls at the same time.  Not every period of "lock step" correlation leads to a market crash but failure of offsetting correlations does occur for every crash.  So diversification failure is a necessary but not sufficient condition for a market crash.  That failure happened twice this year but the ice didn't break.

synchronized-stock-declines


Candlestick and Candelaabra Reversal Patterns Signaled Push To New High (William Kurtz, WINvesting)  William Kurtz contributes to GEI.  Good article to get a compact but complete summary of the candlestick metrics and supporting factors that Kurtz uses in his advisory service.  He reviews the market reversal pattern that he reported to clients at the close on 16 October 2014, one day after the market bottomed on 15 October.  This call captured an 11% gain (for those who followed the instructions he supplied) over the following five weeks.

In addition to the candlestick signals discussed, Kurtz also explains the "crimps" and "blimps" he tracks using commonly followed stochastic, Bollinger and momentum indicators.  These combine with candlestick patterns to define especially critical junctures in market flows.

bill-kurtz-call-16-oct-2014


Pound drops as figures reveal 'unsustainable' current account deficit (Szu Ping Chan, and Denise Roland, The Telegraph)  Great Britain has a less robust recovery than previously thought:  GDP growth for the last five quarters has been revised downward (see graphic below).  Other trouble signs include a current account deficit which has expanded to tie the record as a percent of GDP and a sudden turn to the negative for business investment growth.  The UK trade deficit has held constant around 2% of GDP but capital outflows have approximately tripled from 3Q/2013 to 3Q/2014.

gdp-growth-uk-telegr-2014-dec-24


Pound Continues Precipitous Drop (Investing.com)  Since the end of June the pound sterling has dropped from near $1.72 t0 $1.55.  This is sharpest and largest decline in more than four years.

gbpusd-five-years-2014-dec-24


Here's What The Pros Are Predicting For Oil Prices (Sam Ro, Business Insider)  According to this nobody thinks Brent crude oil will be lower a year from now.

oil-forecasts
 


Other Economics and Business Items of Note and Miscellanea

CBO’s Elmendorf and Supply-Side Economics (The Wall Street Journal)  The Republican controlled Congress will want a supply-sider.

Correcting Scrooge’s Economics (Mises.org)

Fuel Economics Will Drive 2015 U.S. Power Markets (PowerMagazine)

Revisiting the State of Economics Education (Royal Economic Society)

The economics of newly graduated veterinarians (Phys.org)

Need a Raise in 2015? Try Changing Jobs (The Wall Street Journal)


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