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What We Read Today 20 February 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.

This feature is published every day late afternoon New York time. For early morning review of headlines see "The Early Bird" published every day in the early am at GEI News (membership not required for access to "The Early Bird".).


Every day most of this column ("What We Read Today") is available only to GEI members.

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Map: Cease-fire pull back lines (The Washington Post)  Thursday's cease-fire deal stipulates the withdrawal of heavy weapons from the front lines 14 days after it goes into on Sunday. Longer range weapons are required to move back further than short range systems.  Go the WaPo for graphic descriptions of the heavy weapons involved and their ranges.

Articles about events, conflicts and disease around the world



Islamic State




David Rosenberg doesn't know how to feel about this force anchoring 90% of the industrialized world  (Sam Ro, Business Insider)  Rosenberg doesn't know what the implications are and neither do we.  Some people will tell you it is a prelude to the end of the world.  Is it?

A new crop of candidates discovers the father of supply side economics (Jim Tankersley, The Washington Post)  Economis Art Laffer, who invented the "Laffer Curve", is again being consulted by GOP presidential hopefuls.  From this article:

Laffer's core philosophy starts with the idea that lower taxes, lighter regulation and less government regulation are the keys to a strong economy. A generation of Republican candidates have endorsed those ideas. President George W. Bush drew on them for his signature tax cuts. The 2012 GOP nominee, Mitt Romney, ran on a Laffer-style tax reform plan.

Those plans have long come in for criticism from many Democrats and some economists. In a 1999 study, the University of Chicago's Austan Goolsbee, who would go on to advise President Obama, concluded that cutting marginal tax rates appears to have little effect on how much people work. "As a testable hypothesis," he wrote, "the Laffer curve has not fared well."

Econintersect:  Goolsbee's comment is essentially correct.  For every empirical citation that supports the Laffer proposition there is another that does not.  The primary difficulty here is the failure to recognize that taxation and spending do not have to be joined at the hip for a government which ihas monetary sovereignty.  Government spending and taxation policies should better be defined by economic need and control of inflation.  See for example Lawrence J. Kramer:  We Have a Deficit of Logic (GEI Opinion).

The four major energy ETFs (Liam Odalis, Market Realist)  Part 8 of a 10 part series.  The S&P Oil & Gas Exploration SPDR ETF (XOP) could be interpreted as being more levered to oil prices, and as a result, a more commodity-sensitive and riskier investment.  As a result it has a larger beta and suffered larger losses than the other three ETfs over the last 12 months.  But for the same reasons it has also had a much stronger advance so far this year as oil prices have rebounded from recent lows.


The Vanguard Energy ETF (VDE) Is Much Cheaper than Peers (Liam Odalis, Market Realist)  Part 9 of a 10 part series.  The Vanguard Energy ETF is much cheaper than its peers.  It is also better managed, with very low operating expenses (near 12 bps*) and less index tracking error and less historical deviations for NAV (Net Asset Value).  The four peers compared are in the previous article above.

*100 bps is 100 basis points which equals 1.00%. 

What is XLE? Exploring Energy Services Exposure (Liam Odalis, Market Realist) Part 7 of a 10 part series.  Energy services companies are highly sensitive to rig counts, as the number of rigs highly correlates to the amount of services and equipment these companies can deliver and what prices they can charge for these services. Below, you can see Baker Hughes’ estimates for this down cycle in rig counts due to a sharp fall in the price of oil since June of last year.  Based on recent cycles, the decline in number of operating rigs may only have reached about 1/3 of the eventual amount to be taken out of service.


Low Yields Entice Corporate Debt Issuers (Weekly Market Outlook, Moody's Analytics)

Historically low global interest rates have fueled strong volumes of corporate debt issuance so far in 2015, keeping pace with the robust totals of last year. Investment grade corporate borrowers able to access the lowest debt yields in generations have a strong incentive to continue borrowing. And the significant narrowing of high yield bond spreads will give some lift to riskier offerings. These trends will find added strength from the Federal Reserve’s recent signals that it will be exceedingly cautious with regard to lifting policy rates.

Econintersect:  What is evident in the graph below is that total bond issuance is greater than the peak in 2007 before the Great Financial crisis and has been at this high level for the last couple of years.  That is a concern in that it has been happening at a time of modest economic growth.  Is easy money allowing inefficient debt to be issued?  One area that has been discussed a lot in the past several months is the use of debt to increase the amount of stock buybacks that corporations undertake.  Is it ever a good idea to increase debt and decrease equity?

Another area of concern is the high level of financial debt.  Except for a couple of dips the amount of financial debt has been above historical levels before 2005.  Although financial debt has remained below the very top of the 2007 peak, the levels seem to be excessively hogh on a historical basis.  What is the justification for this high debt?  What is it used for?  We suggest it is simply "play money" for the banks to do financial engineering in which instruments are created for the purpose of making more money rather than for increasing output of real goods and services.  This looks like another debt bubble to us, both corporate and financial.

Other Economics and Business Items of Note and Miscellanea

Behavioral economics and social exclusion : can interventions overcome prejudice?, Volume 1 (World Bank)

Gold Price Not As Sensitive To ‘Calendar Events’ As Many Believe - Capital Economics (Kitco News)

Endogenous Unrestricted Locations in Markets with Network Effects (Economics e-journal)

Walmart: More Surprises Coming (Forbes)

NHTSA hits Takata with $14,000 daily fine for airbags (USA Today)

Second Chance to Avoid a Second Tax Penalty Over Obamacare (The New York Times)

A simple reason why Apple won't buy Tesla for $75B (USA Today)

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