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What We Read Today 20 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.


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China shares end down 7.7%, biggest fall in six years (AFP, The Business Times)  The benchmark Shanghai Composite Index tumbled 260.15 points to 3,116.35 (- 7.70%) on turnover of 409.9 billion yuan (Singapore $87.6 billion, U.S. $70.1 billion), after falling as much as 8.33% at one point. The sell-off was precipitated by a crackdown by regulators on several brokerages for violating regulations concerning marhins.   The decline was the biggest since 10 June 10 2008, when the index closed down 7.73%.  See following chart from  TheShanghai composite is now up more than 40% since 26 October 2014.  Before the sell-off it had been up 47.58%.


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Treasury Snapshot: Where Are Yields Headed? (Doug Short, Advisor Perspectives  Doug Short is a regular contributor to GEI.  Short doesn't really answer the question with a definitive answer but says that "a flight to safety could push Treasury yields yet lower in 2015."  Looking at his chart, we observe that the support level at the end of 2015 for the 10-year Treasury is around 1.2%.  Bond guru Jeff Gundlach has suggested that the bottom could be around 1%:  Gundlach says benchmark 10-year Treasury yield could fall to 1 percent (Jennifer Ablan, Reuters).  That outlook was given when the yield was 2.3%.   See also Treasury Yields in Perspective (Doug Short, Advisor Perspectives, updated every weekend.

Click for large image at Advisor Perspectives

ECB May Deliver $635 Billion to Steer Euro Away From Deflation (Alessandro Speciale and Andre Tartar, Bloomberg)  A survey by Bloomberg found 93% of respondents expect a QE (quantitative easing) program to be started this month by the ECB (European Central Bank).  The median estimate of size of the program is €500 billion ($635 billion).  For comparison, the total of all QE programs form the U.S. Federal Reserve exceeded $3 trillion.  This article says that the challenge for Draghi will be to convince the world that this is  "a strategy big and bold enough to reinvigorate the moribund economy."  If the perception is that the program is too little (or too late, or both) the devaluation of the euro and mounting European deflation could accelerate.  Econintersect:  If the result is further deterioration then critics will say:  'See, QE doesn't work.'  See also next article.

BOJ Showing Liquidity Trap Holds Warning for ECB: Japan Credit (Wes Goodman, Bloomberg Businessweek)  Goodman says those who predict the European Central Bank will start buying government bonds this week to fight deflation shouldn’t expect too much if Japan is any guide.  Yusuke Ito, a senior fund manager for Mizuho Asset Management in Tokyo, is quoted:

We are in a liquidity trap.  They’re [the ECB] expecting too much. Even if you provide lots of liquidity to the market, banks do not increase the liquidity to their customers. We are pretty much doubtful about the effect of QE.”

  And the bond markets are endorsing the idea that ECB is not going to defeat inflation with QE as the German government bund interest is negative from six years on down and Germany has the strongest economy in the 18 nation monetary union.  The following chart is from John Mauldin's Thoughts from the Frontline for this week which will appear in GEI Analysis in a few days.  See also next article.


Germans perceive deflation for first time since 2009, study says (Rene Wagner and Michelle Martin, Reuters)  A survey by UniCredit found that Germans think that prices dropped by 1.2% in December, following the perception that there was no inflation in November.  The official CPI numbers showed increases of 0.1%.  Falling food and petroleum prices have led to the perception of overall deflation, according to Andreas Rees, economist at Unicredit.  Rees feels that the end result of the perception with rising wages and record employment will allow consumption to drive the economy in 2015.  Meanwhile the overall eurozone is actually recording deflation.

The global deflation shock – how big and how bad? (Gavyn Davies, Financial Times)  Hat tip to Rob Carter who points to a comment on th article by Dan Mclaughlin (second excerpt below).  From the article:

What will be the impact of this decline in US and eurozone inflation on the global economic outlook? After much debate, a consensus is now emerging that the decline in price inflation, with wage inflation remaining roughly unchanged, will result in a major boost to real consumers’ expenditure in the developed economies.

The comment by Dan Mclaughlin:

If deflation is a sustained period of falling prices and wages then a temporary period of negative inflation due to falling oil prices is not deflation.

In the graphs accompanying the article hypothetical inflation number are projected in to first quarter 2016.


No One Was Supposed to Lose This Much Money on Swiss Francs (Matt Levine, Bloomberg View)  Why was no one supposed to lose as much money as some lost on the Swiss france revaluation by 15% on Friday?  Becuase the loss control processes (hedging) was based on the historical volatility and it had been vanishingly small.  Of course this was an inappropriate reference since th Swiss franc was a "pegged" currency and the daily valuation had nothing to do with any judgments about how much the franc was worth relative to any other currency.   Nonetheless the available data on price fluctuation was all that could be used to calculate how to protect against loss.  And the hedging was therefore entirely inadequate because the 15% change had a probability of occurrence once every billion years.  So this was a real Black Swan Event, but only because of the lack of insight by the "swan observers".  They were victimized by the assumption that the peg would not be removed, not by action falling outside the real of reasonable probability.

As goes early-January, so goes Nothing (Salil Mehta, Statistical Ideas) Salil Mehta has contributed to GEI.  Mehta has looked at the negative start to the year (8 of the first 11 trading days down) and considers the maxim "As goes January, so goes the year."  While the last time that there were 8 or more days down out of the first 11 was 37 years ago and it has only happened in 4 years out of the last 64, there is no justification in making a forecast for all of 2015 on that basis.  there is a thorough discussion of the statistical principles involved but Econintersect would make one simple observation that makes clear the lack of connection:  The historical data for ther past 64 years finds 40% of the time more than half of the first 11 days of the year are down yet only 27% of those 64 years were negative.  Mehta calls this conditon one of "false positives".  There are more "signals" than "occurrences".  The last two times that saw negative Januaries were 2009 (up 19% for the entire year) and 2014 (up 11% for the year).

Click for large image at Statistical Ideas.

Other Economics and Business Items of Note and Miscellanea

Oil price floor could be a long way down (Reuters)  Hat tip to Rob Carter.

America's Going to Lose the Oil Price War (Bloomberg View)  Hat tip to Rob Carter

Crushing The U.S. Energy Export Dream (Naked Capitalism)

 Don’t Bet on a Stronger Dollar (Barry Eichengreen, Project Syndicate)  Barry Eichengreen has contributed to GEI.  Hat tip to Rob Carter.

A step to getting an effective military. We might it need soon. (Fabius MaximusFM has contributed to GEI.

Sixth Extinction Proves Slower at Sea (Brittany patterson, ClimateWire, Scientific American)

Rating your professor: five myths about university teaching quality (The Conversation)

Cruz Immigration Crusade Has Republicans Fretting Over Backlash (Bloomberg)

Long May You Run (Slate)  The next growth area in energy has nothing to do with oil, wind, or solar. It’s batteries.  (Econintersect:  Actually all forms of energy storage.)

Soaking the rich (The Conversation)

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