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Draghi Dodges QE Disappointment With Plan That Might Work (Jeff Black and Scott Hamilton, Bloomberg) If the value of the euro can be depreciated enough then maybe inflation can be increased as people will spend what they have before it will buy less. And of course imports will cost more if they come from countries with less weak currencies. And the euro is depreciating: Just 36 hours ago the EUR/USD was $1.162; about 12 hours before this was being written (1:20 am EST) the exchange was at $1.137; at 7:27 am EST it was $1.117; and at 1:20 pm EST it was slightly firmer at $1.124. Get the latest at EUR/USD Overview, Investing.com. There is more about the euro below. Sign up for free newsletter to become an Econintersect member with access to the latest on what we find important around the internet today.
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Currency war: Who will be the casualties? (Sara Eisen, CNBC) Central bankers may say they're ramping up the fight against worryingly low inflation, exacerbated by the dramatic plunge in oil prices. But the immediate, and perhaps most effective, impact of the easier monetary policy moves is being felt in the foreign exchange market and will soon be impacting global debt and equity markets - See next two articles below.
What Draghi’s Bond Buying in Europe Means for U.S. Debt Markets (Sridhar Natarajan, Bloomberg) With increased financial liquidity in the Eurozone and the large yield spread between European and U.S. government bonds (U.S. 10-year above 1.8%) there is likely to be considerable leakage from the euro to the dollar to buy American Treasury securities which will drive U.S. yields lower. Right now the U.S.10-year pays more than Italy (1.69%) and Spain (1.53%). And the U.S. 10-year is well over 100 basis points (1%) higher than the corresponding durations in France, Germany, Netherlands and Switzerland. As long as the EUR/USD continues lower selling the low yielding European bonds and buying in the U.S. is a very profitable carry trade.
The exception to this generalization may be the Swiss bond. Since that is not denominated in euros the relative strength of the franc vs the dollar will determine if the carry trade there is attractive. With the current yield on the Swiss 10-year negative (a previously unheard of - 0.27%) the market is obviously pricing in serious deflation for Switzerland and significant appreciation for the franc. If the franc appreciated more than 2.1% a year against the dollar the yield difference of that amount produces a break-even deal and that is not an attractive carry.
If the euro depreciates 10% against the dollar over the next year and the yield is 1.2% or more higher in the U.S., the carry trade produces a 1-year gain greater than 11%. If the U.S. yield declines during that year toward 1% then the 1-year carry could produce up to 20% or higher returns in euro terms.
This Bloomberg article discusses the similar favorable spreads between high quality European corporates and those in the U.S., currently seeing a 1.9% spread, close to the decade high 2.1% spread last month. And the junk bond spreads are even higher, around 2.9%. The ECB action may produce major debt instrument asset inflation in the U.S. rather than the desired increase in European borrowing and investing. "As long as it takes" to raise inflation in Europe may be very long.
See next article below and also US Treasury yields fall after ECB unveils bond-buying (Jenny Cosgrove, CNBC)
What ECB QE means for US policy, stocks: Strategist (Tom DiChristopher, CNBC) This article does not consider the effects of the ECB action on bond markets which were discussed above, but does indicate a positive effect on European stocks is to be expected and, to a lesser extent, U.S. stocks as well. Headwinds for U.S. stocks are mentioned: (1) high valuations; (2)reduced overseas earning s as the dollar rises in value; (3) reduced U.S. exports as the dollar rises; and (4) the likelihood that stress in a market approaching full employment may finally produce the inflation the Fed has been looking for and prompt U.S. rate hikes which would not be stock-friendly.
This Chart Shows Why the Oil Bust Will Last (Wolf Richter, Wolf Street) Speculators are storing oil waiting for the price to go up, using any available storage including tanker ships. The more they store the further away the price rise becomes likely. Storage was already near, at or above 5-year maximums before the price fell and now it is about 11% above the previous 5-year max. Richter says things will only get worse over the next year as producers scramble to recover as much as they can, as fast as they can from their heavily indebted wells trying to avoid bankruptcy. See Why the Great American Oil Bust Will Be Long & Painful. See also next article.
The Phantom Oil Glut (Jim Collins, TheStreet Real Money) This article from two months ago is a classic example of correct data and incorrect interpretation. Collins tracks the demand for oil tankers and sees that tanker demand ran well above 2012 and 2013 in Q3 2014 and then surged to 4X the rental price in early November. Collins' interpretation was that the surge represented a spike in the demand for oil. Now we know it was a surge in demand for oil storage.
Collins says the decline of oil "was manufactured by hedge fund trading desks, who eviscerated the December contract before it expired last Thursday". The WTI crude price on 24 November closed at 74.09, down 1.69. This article was posted at noon 25 November, a Tuesday. With regard to the first quote below, oil closed at 64.31 four days later, down 11.47 (15%) for the week:
"A funny thing happened on the way to $70 per barrel oil. It didn't."
Collins' had a reason for the failure for oil to drop any further and used data to back it up:
"But remember, the narrative was that Chinese demand was imploding, and that U.S. unconventional production was overdone and would exceed demand. If that were the case shipping rates wouldn't have moved the way they have."
Better U.S. housing market makes it easier to trade up (Beth Pinsker, Reuters) The theme of this article is that more people are now in a position to trade up from a current home to a more expensive one because (1) the housing market has improved and fewer people are under water on their mortgages so they are able to consider selling without a negative cash flow and (2) there are more people with liquid assets available for down payments due to six years of stock market advances. But not all opinion is positive here. GEI contributor Keith Jurow is quoted:
Keith Jurow, a housing market analyst who writes the Capital Preservation Real Estate Report, is something of a doomsayer and thinks talk of a housing recovery "is phony and only an illusion," he says.
Read Jurow's most recent post this week in GEI Investing about current risks in commercial real estate: Is the Commercial Office Market Recovery a Mirage?
See also the latest GEI Housing Report (23 January): December 2014 Existing Homes Sales Had a Relatively Strong Month for a Change.
Plundering Pemex: Mexico looks the other way as contractors fleece oil giant Pemex ( Elinor Comlay, Mica Rosenberg and M.B. Pell, Reuters) Mexico is dealing with government watchdogs who are lapdogs to those plundering the national oil company Pemex. Reuters estimates that at least 8% of the contracts awarded by Pemex result in payment for actions or goods that never happen or do not exist. The investigation does not address the question of how much "padding" is included in the other 92%. There is a Mexican congressional oversight audit of Pemex and that appears to be competent as far as Reuters has investigated so far. But nothing happens once those auditors report problems to the company. From the article:
From 2008 to 2012, the most recent year of available data, the congressional auditors issued 274 recommendations that Pemex take serious action over contract irregularities – either press criminal charges, discipline employees or claw back money.
Other Economics and Business Items of Note and Miscellanea
Jihadists will prosper using the methods of America’s entrepreneurs. (Fabius Maximus) FM contributes to GEI.
How Has the World Warmed Where You Live? (Frontline) Interactive global map presents temperature history anywhere selected.
The Senate is pretty clearly a hoax (Vox) Relates to article immediately above.
Why Google's Eric Schmidt says the 'Internet will disappear' (CNBC) When everything is connected the internet will become invisible.
Surprise Lake Sheds Light on Underbelly of Greenland's Ice (Scientific American)
Discovery: Fish Live Beneath Antarctica (Scientific American)
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