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What We Read Today 26 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.

Japan Inflation Slows in Blow to Abe (Tatsuo Ito and Kosaku Narioka, The Wall Street Journal)  Inflation has been slowing across the world and a massive monetary easing (QE) program in Japan has been unable to overcome that tide.  The Japanese CPI registered its lowest increase in 14 months with an annual rate of only 0.7% in November 2014.  This is down from 0.9% in October  and far below the government's target rate of 2%.

2015 Outlook: Overvalued Markets, Strong USD, Oil Will Hit Bottom (Investing.comGEI Publisher and economic analyst Steven Hansen leads a panel of ten Investing.com contributors with a discussion of insights to markets for 2015.  He expects strengthening of the dollar to continue in 2015, with a mediocre year for stocks (unless there is a global contraction, which he does not anticipate).


Market Outlook 2015, Part II: Contrarian Perspectives (Investing.com)  In a continuation of the collection of 2015 outlooks started above, a few "off-the-beaten-track" expectations are found.  Among them falling U.S. interest rates through the end of 2015, a significant decline in U.S. stocks, big gains for investors in the energy sector and a big year for gold miners.


For Recent Black College Graduates, a Tougher Road to Employment (Patricia Cohen, The New York Times)  Things have been tough for recent college graduates in the job market.  But for whites age 22-27 the unemployment rate is now down to 4.9%, although some of the employed are working below the level of their training.  But for minorities things are still bad.  Blacks with college degrees in the same 22-27 age group have a 12.4% unemployment rate (and those that are employed also have the over-qualfied-for-what-they-are-doing problem).  This is a Great Recession induced problem - in 2007 the corresponding unemployment rates were more similar, 3.2% for whites and 4.6% for blacks.


Oh my, Paul Krugman edition (Steve Keen, Business Spectator)  Steve Keen has contributed to GEI.  Keen is celebrating the apparent discovery by Paul Krugman that the "loanable funds" model of money and banking theory is not applicable to real world financial operations.  As recently early 2013 that was not the case and a rather rough exchange occurred between the two K's over the role of credit in increasing demand and economic growth.  See GEI News:  Krugman Answers Keen  and references linked at the end of that article.


Articles about events, conflicts and disease around the world

Ferguson and Related News

NSA / CIA

Ebola

Iraq

Ukraine

Russia

North Korea

Pakistan

Greece

401(k) Plans: A 25-Year Retrospective (Investment Company Institute)  This report tracks the growth and changes of U.S. workers' retirement plans for the first 25 years of 401(k) plan existance which started in 1981.  See also History of 401(k) Plans: An Update (Employee Benefit Research Institute).

pension-plans-us-1975-2005


Supreme Court could redefine ERISA (Nick Thornton, Benefits Pro) This case involves California utility Edison International and the company's employees who sued with claims that the company violated responsibilities defined by ERISA (Employee Retirement Income Security Act of 1974) - See next article.  The outcome of this case will affect dozens of other cases for companies whose employees have sued for lack of suitable fiduciary action for 401(k) plans sponsored by the various companies.

In essence there are two fundamental issues involved:  (1) Does fiduciary responsibility require that a sponsoring company assure that the fund options offered in its plans are the lowest cost options available when otherwise identical funds are available; and is the statute of limitations for employer fiduciary responsibility not apply to funds added more than six years before the suit was filed?

With regard to the first question, lower courts have ruled that the company does have responsibility to assure that costs paid by the employees on investment options are the lowest that could be obtained.  In question was the choice of retail funds with higher fees and expenses when identical institutional offerings of the same funds were available.  Lower courts ruled that ERISA requires the company to chose the lower cost institutional funds.  Note:  Edison ultimately received "kick-backs" from the fund companies which Edison applied against their administrative costs for the 401(k) plan.

The lower court outcome of the second question was that the plaintiffs had no case for all funds put in the Edison 401(k) plan more than six years before the suit was filed because of the ERISA law statute of limitations on employers' failures to perform according to the law's stipulations.  The counsel for the employees has maintained that the company has an ongoing responsibility for fiduciary actions and each year an inferior option remained in the plan should be regarded as a new decision subject to fiduciary action.  Read also: Plaintiffs make their case in Edison 401(k) suit and  Supreme Court to hear Edison 401(k) fee appeal (both by Nick Thornton, Benefits Pro)


What is ERISA? (Legal Information Institute, Cornell University School of Law)  Employee Retirement Income Security Act of 1974 (ERISA) is a federal statute which defines minimum standards for the administration of private industry's pension plans.  It also determines the impact that federal income taxes will have on transactions associated with management of such pension plans. Under this statute are defined causes of action for employee plan participants and their beneficiaries. Under ERISA, employers receive fiduciary responsibilities, and employee plan participants can sue the employers in cases of fiduciary breach. ERISA provides equity as the remedy for breach of fiduciary duty. However, if a plan participant selected certain choices within a given plan and suffers from a plan manager's failure to take action, the participant can seek equity in the form of "make whole money" to replace the amount lost.Because ERISA demands a higher-than-marketplace quality of plan administration, a plan manager cannot have both the responsibility of determining a participant's eligibility to receive benefits and the responsibility of paying the benefits. See MetLife v. Glenn, (06-923) (2008). This type of situation creates a conflict of interest. Thus, when reviewing the reasonableness of an administrator's decision, the court can consider the conflict of interest as a factor in its calculus.


Father of modern 401(k) says it fails many Americans (Scott Tong, MarketPlace)  In this 2013 article, Ted Benna, the person who designed the first 401(k) plan (although the client he did it for did not implement it), criticizes the amount of fees embedded within the 401(k) plan offerings available.  He also says that the size of the accounts for many individuals falls far short of what will be needed in retirement in a world that has fewer and fewer defined benefit pensions from corporations.

401k-median-balances-2007-2010


Let’s get fiscal (The Economist)  This is more of a brief commentary than a book review for Ricard Koo's new book The Escape From Balance Sheet Recession and the QE Trap: A Hazardous Road for the World Economy.  Even Richard Koo, who has gotten so much right about the balance sheet recession (his terminology) that we have experienced is still showing defects in his thinking because the end of QE has not created the economic stresses that he anticipates in this book.  Or maybe we just have to wait a while longer?


Oil Price Crash Triggered by the Fed? Amazing Chart (Wolf Richter, Wolf Street)  Richter has a correlation between oil price movements and QE.  But can he support causation?  He asks questions throughout this article rather than giving answers, except to caution that correlation isn't causation.  The questions include linking to another article (which he wrote) at the very end which has another question for its title:  Great Unwind of Oil-and-Gas Junk Bonds to Defund Fracking?  See also the following two articles.

oil-vs-qe


First Oil, now US Natural Gas Plunges off the Chart, “Negative Igniter” for New Debt Crisis  (Wolf Richter, Wolf Street)  How many have noticed that while oil has fallen another 24% from 25 November to 24 December 2014, natural gas has collapsed by even more?  Perhaps you were too busy watching your equity portfolio go up as if filled with helium to notice.  Richter suggests that financial firms are "already lining up to profit" from the collapse of prices in oil and gas that seems certain to lead to large scale defaults on the junk bonds which have funded this activity.  Read also next article in this regard. 

nat-gas-2014-nov-25-dec-23


Wolf Richter: First Oil, Now US Natural Gas Plunges, “Negative Igniter” for New Debt Crisis  (Yves Smith, Naked Capitalism)  Yves Smith has contributed to GEI.  Smith agrees that there will some serious financial pain from the fallout of collapse in prices for projects that were not profitable even at the former higher prices.  But she disagrees with the thought that a new financial crisis will be triggered.  In the present case we do not have much lower financial system exposures with much of the risk residing with private equity.  In addition to an order of magnitude less bank credit at risk now compared to 2008, there is also absent the overload of derivatives like CDS (credit default swaps) which amplified the risk in the sub-prime housing market collapse by "4-6 times the real economy exposures".  Smith doesn't think the fallout will be free of problems:

"However, the sudden fall in energy prices creates additional dislocations, such as among financial speculators who sold price protection, investors in emerging market equity and debt. So the cumulative impact of the oil price reset could well be greater than you’d think based on the sum of its parts."

The 'Internet of Things' Will Be The World's Most Massive Device Market And Save Companies Billions Of Dollars (John Greenough, Busines Insider)  The growth rate of devices connected to the internet will peak in 2015 but there will be less than 25% of the number of such devices estimated to exist on the internet by 2019.  The growth rate of attached devices will still be growing by 40% a year five years from now.  The annual global GDP produced from building the Internet of Things (IoT) will reach $1.7 trillion by 2019, but little of that will come from the "things".  Most will come from systems, software, infrastructure and economic efficiencies produced by the technology.  The future world continues to evolve and less and less human activity is needed every year.

iot-2019
 


Other Economics and Business Items of Note and Miscellanea

How the Recession Reshaped the Economy, in 255 Charts (The New York Times)

Commie commie commie commie commie K-Keynesian (Noahpinion)

2015 Predictions Concerning The State Of The New York City Housing Market (LinkedIn)  By Michael Haltman, GEI contributor.

Why Christmas Is Huge in China (The Atlantic)  Not only does China make most of our Christmas decorations they are actually using them as well.

Science Journal Fraud: Paying for Placement (Yves Smith, Naked Capitalism)  Services will even write the paper to be published under your name.

The Authenticity Paradox (Harvard Business Review)

Christmas economics: Challenging some common beliefs (Voxeu.org)


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