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What We Read Today 21 March 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".).

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

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Here Is Why The Fed Can't Hike Rates By Even 0.25% (Zero Hedge) The $30 trillion U.S. shadow banking system is very highly leveraged and even small and gradual rate hikes would produce massive debt defaults. Mike Haltman has discussed this article at LinkedIn: The Shadow Banking System And Why The Fed CAN'T Raise Interest Rates! and Steve Hansen has covered more general reasons why the Fed is boxed in: The Fed Is Scared and Will Not Raise Rates Anytime Soon (GEI Analysis).


Articles about events, conflicts and disease around the world

U.S.

Islamic State calls on backers to kill 100 U.S. military personnel (Reuters) Islamic State has posted online what it says are the names, U.S. addresses and photos of 100 American military service members, and called upon its "brothers residing in America" to kill them.

UK

Britain's national bird should be awesome, not ordinary (Simon Constable, Market Watch) From GEI Discussion Group, LinkedIn. Britain is having a National Bird Campaign and Simon is promoting the "terrifying" hippogriff. Follow the link to read his arguments and see a picture of the beast.

Germany

Exclusive: Deutsche Bank revamp plan to hit retail hardest - sources (Reuters) Looks like it is really happening - a mega bank split up.

Iran

Iran nuclear talks: Deal can be reached, says Rouhani (BBC News) President Hassan Rouhani is hopeful a final deal can be reached.

Iran voices mistrust as Kerry meets with European counterparts (Reuters) Supreme Leader Ayatollah Ali Khamenei denounced U.S. "bullying" in the negotiations.

Georgia

Georgians hit by fallout from trouble in Russia, Ukraine (Associated Press, Yahoo! News) Georgia, a mountainous nation in the South Caucasus, relies heavily on wine exports and on tourists attracted to the mountains and beaches. Tourists, normally heavily from Russia, Ukraine and Poland, are absent.

Ukraine

Ukraine's Government Debt Projections: Smiling IMF, Whinging Private Lenders (true economics) Constantin Gurdgiev is a GEI contributor. Gurdgiev projects that Unkraine will reach a debt/GDP ratio above 100% in 2016-2017. The IMF forecast is a peak of 94% in 2015.

'There are no madmen in EU' to send peacekeepers to Ukraine – Lavrov (RT) Russian Defense Minister Sergey Lavrov:

"I believe there are no madmen in the EU. [Previously the EU deployed peacekeepers] only in situations in which, as in the Balkans, all sides of a conflict agreed to it. The EU would never go to any region – be it southeastern Ukraine or anywhere else – unless the conflicting sides agree to such a mission."

Econintersect: So where are the mad men then?

Russia

Russia warns Denmark its warships could become nuclear targets (The Telegraph) Russia tells Denmark not to join NATO missile shield or face becoming a target for Russian missiles.

Drills for me but not for thee: NATO launches war games near Russian border (RT) This Russian supported news agency accuses the U.S. of a double standard. They say: "Despite being quick to condemn Russian military manoeuvers, NATO is conducting wide-scale war games in the Baltic states and creating a “line of troops” across Eastern Europe."

Russian Banks Latest Stats: January-February 2015 (true economics) Constantin Gurdgiev is a GEI contributor. Gurdgiev seems to support the CBR (Central Bank of Russia) projection that the Russian banking sector will experience losses round RUB400 billion in 2015. (Some estimates have been as high as RUB1 trillion.) The banking sector had profits of of RUB589 billion in 2014 and RUB990 billion in 2013. The CBR is working to establish bail-in procedures to be used if needed.

India

India arrests hundreds over Bihar school cheating (BBC News) Number of expulsions are up to at least 750 and now 300 people have been arrested.



Lower Commodity Prices Menace Benign Outlook (John Lonski, Moody's Analytics) The drop in commodity prices reflects a slower growth rate for the global economy ("subpar" in Moody's terms). The additional supply glut for oil is reflected by the greater drop for crude than for industrial metals. Moody's says that because a strengthening dollar reinforces price disinflation, "a higher fed funds rate is hardly imminent".

oil.metals.moodys.2015.mar.20


The diminishing returns of fuel efficiency (Walter Kurtz, Sober Look) Once you get to 30 mpg how much more would you spend to get a car with 40 mpg. Using the Kurtz cost parameters ($3.50 per gallon and 12k miles per year) the savings for making that change is about $300 per year. Would you pay $3,000 more for that car if you planned to keep it for five years. If you did you would be $1,500 out of pocket (assuming equivalent trade-in value). But what if the experience of the 1970s was repeated and gasoline increased 3x or 4x during those five years? The $3,000 extra cost would be returned with probably some to spare. And certainly the trade-in value of the 40 mpg vehicle would be much more improved over the lower gas price scenario.

fuel-efficiency-savings


Emerging Markets Corporate Debt Maturity Squeeze (Constantin Gurdgiev, true economics) Constantin Gurdgiev contributes to GEI. Emerging markets face a daunting burden in the coming years. Corporate debt maturing will reach dollar levels close to double what have occurred in the past couple of years. The bulk of this debt is denominated in dollars and for many emerging market countries that means the debt will have to be repaid (or rolled over) with large capital losses in the local currency. Dollar denominated loans looked like great deals a few years ago. In 2010 the U.S Dollar Index was below 75 nearly half the year and in 2011 and 2012 it was between 79 and 84. Today the index is in the upper 90s. For example, if a Brazilian company took on a dollar denominated debt in 2010 or 2011 when the real was trading above 0.60 to the dollar and that comes due five years later it may have to repay nearly twice the principal borrowed in reals because the BRL/USD couple is trading near 0.30 today. For an Indian corporation the increase can be up to 40%. For South Africa up to 70%. And for Russia up to 100%. Borrowing from China served the emerging markets no better since the yuan renminbi is effectively pegged to the dollar. 

Over the next ten years emerging market corporations will have nearly $1 trillion in debt come due. At current exchange rates most will pay in local currency between 40% and 100% more than they borrowed. The U.S. liquidity and favorable interest rates of the post-finacial crisis era does not look like a good deal now, to say the least. The lesser economic pain would be economic growth strangulation in emerging markets. The greater economic pain would be massive debt defaults and a new financial crisis. The greatest economic pain is arguably the most likely: Both.

em.dollar.debt.2015.2025.


Bizarro World: U.S. Has Declining Real Wages but Rising Home Prices (Secular Stagnation) (Anthony B. Sanders, Confounded Interest) The author took two graphs to make the connection advertized in the headline and we don't know why - it could have been done with one graph.

house.prices.fed.bal.sheet

Hourly.earn.fed.ball.sheet


Dollar Collapse Starts in Late 2014-Charles Nenner (Greg Hunter, Watchdog USA) Greg Hunter has contributed to GEI. In an interview Chuck Nenner tells Greg Hunter he is still "holding on to the deflation scenario". Then he says "inflation will start in 2014" and "the dollar is going to collapse by the end of 2014". Eventually he expects high inflation because sovereign debts need them or "deficits are going to be huge". This was shown 'Behind the Wall" about ten months ago. We'll ask the same question today that we asked back then: Do you think this analysis has the right take?


Other Economics and Business Items of Note and Miscellanea

Study raises questions about cause of global ice ages (Phys.org) This was forwarded by GEI climate and weather economist Sig Silber who tracks global weather and climate data weekly, reported overnight Monday to Tuesday in a special GEI Feature. One theory that has wide credibility is that ice ages advance when the earth orbit wobbles so that one pole or the other experiences abnormal cooling. What research just published has found is that southern hemisphere glaciers (in New Zealand) reached maximum extent about 20,000 years ago at the same time northern hemisphere glaciers did the same. This suggests that there are other factors involved besides (or instead of) orbit wobble because that could not account for both poles cooling at the same time.

Why retirees don't need international stocks (MarketWatch) Authro feels that income investors( read that as dividend investors) need far less international exposure for good diversification because of lower volatility of domestic dividend stock portfolios and because the currency exchange volatility can damage the value of foreign dividneds at times in the forex cycle (like right now).

The End of History, the Third Way, and the Ukrainian Civil War (Fort Russ) Hat tip to Rob Carter. The author suggests we are near a George Orwellian world a la "1984".

Should You Make Portfolio Decisions Based Upon Historical Correlations? (ETF Guide) If your investment decisions are based on past correlations between sectors, asset classes or any other classification you need to keep tracking correlations in real time to avoid risk that they will change.

During extreme market conditions, correlations that seemed to exist between two assets can suddenly vanish and correlations that didn’t seem to exist can suddenly appear.

An excellent resource to understand what is involved is a book by GEI contributor Clive Corcoran: Systemic Liquidity Risk and Bipolar Markets: Wealth Management in Today's Macro Risk On / Risk Off Financial Environment.

PAUL TUDOR JONES: Income inequality will end in revolution, taxes, or war (Business Insider) Legendary hedge fund manager Paul Tudor Jones II gave a dire warning about the growing gap between the rich and the poor in the US during a sold out TED Talk in Canada this week.



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