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What We Read Today 25 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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More evidence that we’re losing America. It’s not too late to act. (Fabius MaximusFM contributes to GEI.  There is a lot of recent news covered in this artcile but we want to highlight two illustrations:

Click on images for larger images at Fabius Maximus website.


Articles about events, conflicts and disease around the world








  • Can China manage its debt crisis? (China Spectator)  China is finally taking steps to manage the risk posed by its colossal debt pile, but it still might not be enough.



Time Again for T Bonds? (  Biiwii sold bonds when the optimism indicator exceeded 70 for the first time since the summer of 2012.  That peak occurred just over three weeks ago and bonds corrected sharply right after that.  He says here:

Now, it looks like bonds are settling down and while I am not taking chances on the longer end, I am back aboard with ‘cash equiv’s’ in the 1-7 year range (SHY and IEI).  Last time around this repository provided dividend income and a mark up on principle.


One More Stock To Build A Retirement Portfolio Upon At Any Age (Alan Saltzman, Regarded Solutions, Seeking Alpha)  From GEI Discussion Group, LinkedIn.  Saltzman is high on this stock which has record over more than 20 years of annual dividend increases.  The stock is a REIT, Realty Income (NYSE:O).  This article is loaded with analyst assessment data but an important message is seen in one of the graphics which shows the power of dividend reinvestment:  An original $8,000 investment in 1994 is today worth more than $47,000 (not adjusted for taxes paid on dividends).

Click for larger image.

The “Plucking Model” of Recessions and Recoveries (Gregory Claeys and Thomas Walsh, breugel)  This article looks at a model proposed by Milton Friedman more than 50 years ago by Milton Friedman and discussed by him again in 1993:  The "Plucking Model" of Business Fluctuations.  The basic thesis is that the size of a recovery from a recession is proportional to the depth of the recession.  These authors look at the EU countries that experienced recessions in 2007-09 and finds that the regression plot for size of recovery versus size of recession supports the Friedman hypothesis (left hand graph below).  While it is not part of the Friedman proposal, the authors also looked at size of the recessions compared to size of the preceding booms.  As seen in the right hand graph below, there is no correlation whatsoever for these two metrics.

Click for larger image.

How addiction to debt came even to China (Martin Wolf, Financial Times, CNBC)  Hat to to Apekshit Mulay via LinkedIn. Martin Wolf says balance sheets matter and the world has balance sheets out of balance.  He discusses where the problems have been the biggest and where they may be in the future.

In an update of work on debt and deleveraging, McKinsey notes that between 2000 and 2007, household debt rose as a proportion of income by one-third or more in the US, the UK, Spain, Ireland and Portugal. All of these countries subsequently experienced financial crises. Indeed, huge increases in private sector credit preceded many other crises: Chile in 1982 was an important example of this connection.

Ruchir Sharma of Morgan Stanley argues that the 30 most explosive credit booms all led to a slowdown, often a crisis. A rapid change in the ratio of credit to gross domestic product is more important than its level. That is partly because some societies are able to manage more debt than others; it is partly because a sudden burst in lending is likely to be associated with a sudden collapse in lending standards.

Wolf finds the next credit boom that might be a problem exists in China.  He also mentions that, while some of the private debt bubble has been unwound somewhat in countries such as the US, UK and Spain (with transference to public debt increases), other private sector bubbles have continued to grow (Canada and France are mentioned).  But China is his focus:

China's huge credit boom has several disquieting features. Much of the rise in debt is concentrated in the property sector; "shadow banking" — that is lending outside the balance sheets of the formal financial institutions — accounts for 30 per cent of outstanding debt, according to McKinsey; much of the borrowing has been put on off-balance-sheet vehicles of local governments; and, above all, the surge in debt was not linked to a matching rise in trend growth, but rather to the opposite.

This does not mean China is likely to experience an unmanageable financial crisis. On the contrary, the Chinese government has all the tools it needs to contain a crisis. It does mean, however, that an engine of growth in demand is about to be switched off. As the economy slows, many investment plans will have to be reconsidered. That may start in the property sector. But it will not end there. In an economy in which investment is close to 50 per cent of GDP, the downturn in demand (and so output) might be far more severe than expected.

Wolf comes to a conclusion without mentioning specifics.*  He sdays the world needs a mechanism to create demand without "without creating unmanageable rises in indebtedness".  He has hopes for China avoiding a full blown crisis as seen in the rest of the world, but it does mean that "an engine of growth in demand is about to be switched off" as China rebalances.

*Wolf has become a proponent of the creation of debt-free money as a parallel means of supporting economic growth along with the traditional means using credit and debt.  This has been a Documentary of the Week.

Other Economics and Business Items of Note and Miscellanea

Financial Planning Association Responds to President Obama Announcement on DOL Fiduciary Rule (Financial Planning Association)  FPA supports the president's efforts to get a meaningful fiduciary standard enacted.

Lenovo’s security debacle reveals blurred boundary between adware and malware (The Conversation)  Lenovo's public whipping for serving up malware in its default installs should be a lesson to all.

Why one analyst is bearish on Apple long term (CNBC)  Hat tip to Marvin Clark.

6 reasons why you should visit Aspen this winter (Business Insider)  The Managing Editor has several members of his family going to Aspen next week and he is not. :-(

Bowser: Legal pot possession to take effect at midnight in the District (The Washington Post)

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