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What We Read Today 13 January 2015

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.

Oil above $100? Never again, says Saudi Prince Alwaleed (William Watts, MarketWatch)  The Suadi billionaire businessman says that $100 a barrel was an artificially high price which will never be seen again.  Furthermore he says that if production levels remain near current numbers and the weak growth in oil demand continues the price of oil has more price decline to come.  He says that the price decline would be occurring with or without a Saudi price cut because of excess global production so it was a "smart strategy" to refuse a production cut to maintain market share.  See also next article.


Oil Producers Betting on Price Drop With OPEC Not Curbing Output (Dan Murtaugh, Bloomberg)  Goldman Sachs is picking the $40 vicinity as a bottom target for WTI Crude oil.  At the time this article was written the price of oil in New York was $46.34.  Goldman is forecasting $65 as the new 12-month forward expectation for WTI crude ($70 for Brent crude).  See Oil’s new normal is lower for longer: Goldman (CNBC) and also next article.


When, and where, oil is too cheap to be profitable (John W. Schoen, CNBC)  These numbers keep changing, mostly continuing to come down,  The latest from CNBC is that if oil drops to $40 a barrel, 98.4% of the wolrd's oil production is still profitable.  But, dropping into the $30s would start making much more production unprofitable.  Those numbers seem a little inconsistent with the figures displayed in the video that accompanies this article (below).

Click to watch video.
oil-production-costs-video


Articles about events, conflicts and disease around the world

AirAsia Flight 8501

Race Relations and Related News

NSA / CIA

Islamic State

Ukraine

Russia

India

China

Brazil

Venezuela

Cuba

As Oil Prices Fall, Banks Serving the Energy Industry Brace for a Jolt (Michael Corkery and Peter Eavis, The New York Times)  Banks have been lending hand over fist to companies in the nation’s energy industry, underwriting bonds, advising on mergers, even financing the building of homes for oil workers. All of this has provided a boon to banks that have been struggling to find more companies and consumers wanting to borrow.  All this activity is sure to slow down with the price of oil more than cut in half in just six months.  But if the rice stays depressed for a long period of time will the banks lose just more than a reduction of current income.  How many loans may default?

banks-oil-business


Borrowers Forgo Billions through Failure to Refinance Mortgages ( Les Picker, NBER Digest)  A retrospective study has found that, as of December 2010, 20% of households which could have refinanced to lower rates did not do so.  The distribution of savings per household that could have been realized and were not is shown in the graph below.  Econintersect estimates from the data the researchers presented that nearly 4 million mortgagors collectively missed more than $40 billion in savings that could have been realized.  The complete paper is Failure to Refinance (Benjamin J. Keys, Devin G. Pope and Jaren C. Pope, NBER Working Paper No. 20401, August 2014)

mortgage-savings-foregone


Bank of America warns of 'lethal' damage to China's financial system as deflation deepens (Ambrose Evans-Pritchard, The Telegraph)  'Deflation, Devaluation, and Default' loom in China this year. The denouement for Shanghai's stock market will not be pretty, says the US bank.  There are lot's of signs of stress in the middle kingdom, but Evans-Pritchard doesn't think there will be a complete disaster:

At the end of the day, China has great economic depth and is likely to muddle through without too much trauma. The challenge for investors is judging how far Xi Jinping intends to go in clamping down on excess debt and over-investment before considering the job done, and then reverting to stimulus. He has not blinked yet.

china-credit-growth


China’s deepening deflation is making its slowdown much uglier (Gwynn Guilford, Quartz)  Did you know that China has been experiencing deflation for nearly three years?

china-ppi-deflation-quartz-2015-jan-13

Did you know that China's industrial sectors are seeing the largest deflation hits?

chiona-sectors-deflation-quartz-2015-jan-13

Did you know that the Chinese consumer has gone through three decades of repression?

china-vs-world-consumption-quartz-2015-jan-13

We have been trying to give these things good coverage.  See for example China: Economic Numbers Weaken, Inflation Slows. Does Deflation Await? (GEI News, 09 June 2012)


Rising deflationary risks in the United States (Walter Kurtz, Sober Look)  Repeated from yesterday.  Kurtz does not think the U.S. faces the same serious deflation threat as does the eurozone, but he says

"risks of such an occurrence have increased materially. This for example can be seen in the intermediate-term market-based inflation expectations":

inflation-expectations-sober-2015-jan-10

One of the factors that is increasing deflation concern is the recent jobs report with a one-month reading of sharply falling hourly wages.  (Caution:  Don't bet the farm on one month of data.)  Of cource commodity prices continue to decline and Kurtz discusses that as well.  See next article for more on deflation.

hourly-wage-sober-2015-jan-10


The global deflation shock – how big and how bad? (Gavyn Davies, Financial Times)  Repeated from yesterday.  Davies calculates that if oil stays at $50 a barrel the US will have a brief four months this summer of (shallow) year-over-year deflation before returning to the trend level of 1.5% by the end of the year (actually in the text he says 1.5-2.0%).  But notice how little the core inflation changes in the graphs below.  This analysis seems to be exposed to ceteris paribus risk.   Davies sees a longer period (about 12 months) of slightly deeper deflation for the Eurozone, reflecting the weakened state of the 18 nation monetary union's economy.  See second graph below. 

Click for larger image at the Financial Times.
core-headline-inflation-us-2012-2016-davies-2015-jan-11

Click for larger image at the Financial Times.
core-headline-inflation-eu-18-2012-2016-davies-2015-jan-11


Combatting Eurozone deflation: QE for the people (John Muellbauer, Voxeu.org)  Why not have helicopters drop money on people instead of banks?  That is the question that this article considers.  In fact, versions of this have been tried before and they have always worked, but only temporarily.  Most of the money delivered to the people is spent in the first two quarters and does little to raise GDP further thereafter. Is there another solution to one-time money fading? See four more discussions from WWRT 12 January (yesterday).  Muellbauer reviews the positives and negatives and suggests that for the current edge-of-deflation condition of Europe the positives outweigh.  Read also Helicopter money (Stephen Grenville, Voxeu.org


Dividend stocks that could yield big returns in 2015 (Kelley Holland, CNBC)  Brian Hennessey, portfolio manager of Alpine's Dynamic Dividend Fund, has the following picks:

  • The GEO Group, one of two publicly traded prison REITs. He believes the private prison business is a good one, and that GEO is undervalued relative to comparable health care-related REITs. GEO has 6% dividend.
  • Two Harbors Investment, a mortgage REIT, pointing to a conservative balance sheet and a valuation below book value. He thinks Two Harbors should trade at book value and, even without any appreciation, it offers a 10% dividend.

Josh Peters, director of equity income strategy at Morningstar, picks:

  • Public Service Enterprise Group, the New Jersey utility, and the company's shift toward the steady, regulated part of the business, as opposed to wholesale generation. "My only qualm is valuation, and it's certainly not unique to them" among utilities, Peters said. Nonetheless, he plans to hang on to the stock.  Dividend is 3.60%.
  • General Electric, which has faced headwinds because of its exposure to the energy sector.  Dividend yield is 3.8%.
  • Coca-Cola is another global player Peters is somewhat bullish on.  Currency exchange rates will be a challenge because of the rising U.S. dollar but long-run he expects 7% to 8% dividend and earnings growth.  Current dividend is 2.80%.

The following video addresses the general concern of sustainability of dividends.

dividends-sustainable-video


Other Economics and Business Items of Note and Miscellanea

53 Historians Weigh In on Barack Obama’s Legacy (The New Yorker) On average 53 historians are not complimentary.

Americans Protest Obamacare by Refusing Health Insurance Subsidies (U.S. News & World Report, MSN News)

We Figured Out If Juicing At Home Is Really Worth It (Business Insider)

Why economic happiness is no guarantee of election success (The Guradian)

Stossel: In Economics, Right and Left a Matter of Education (The Tribune)  The conservative right is educated.


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