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What We Read Today 08 May 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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Articles about events, conflicts and disease around the world

Global

  • The Longest Cycle on Record (ThinkAdvisor)  Krishna Memani, Chief Investment Officer Oppenheimer Funds, is predicting the current business cycle will ultimately be the longest global expansion on record.  See data from Oppenheimer discussed below.

U.S.

  • Freddie Gray was Neurologically Poisoned (Washington Monthly)  Lead is extremely poisonous, and cumulative in the body. It messes with brain function. Generations of birds are yet to die from eating the thousands of tons of shot we sprayed across marshes and fields.  It probably had something to do with the decline of Rome (storing wine in lead vessels), and we are only now coming out of five decades of mass poisoning from leaded gasoline.  We’re not putting leaded paint on any more, but it was so durable and useful that tons are still where it was put in the first place, which is why repainting your local bridge involves elaborate and expensive dust collection.  Freddie Gray, like many kids raised in old houses, was neurologically damaged and lived in a social environment where there was insufficient support ot help him compensate.
  • Obama Administration Improperly Denies Student Loan Debt Relief (Huffington Post)  A lot of public relations from the administration but little follow-through.

UK

Germany

  • Of rules and order (The Economist)  German thinking on economics has long differed from the mainstream in other countries, including other euro-zone members. In the past six years of euro crisis, the gap has become larger, more visible and more controversial.

Pakistan

Vietnam

  • Images show Vietnam's South China Sea land reclamation (Al Jazeera)  China is not the only country engaged in expansion od landarea in the South China sea.  Although Vietnam has a much smaller project, they too are reclaiming additional land according to images released by the U.S. based Asia Maritime Transparency Initiative at the Center for Strategic and International Studies.

Australia

Brazil

  • The Betrayal of Brazil (Bloomberg)  As a massive corruption scandal unfolds, Brazilians are facing some stark truths: The powerful and connected are still dividing the country’s riches among themselves. The past decade’s economic miracle was in large part a mirage. And the future is again on hold.  Econintersect:  Sounds like another country we know?

Rolling correlations reveal more: 20 and 60-day rolling correlations between VSTOXX® and VIX tell a deeper story (Mark Shore, Eurex Group)  Portfolio construction depends on the use of correlations to reduce volatility by incorporating uncorrelated and negatively correlated assets.  While this sometimes is helpful, there are times when the expected results simply are not realized.  The reason is that correlations are time variant and tend to deviate the most from average values in times of economic crisis,just when the investor is most vulnerable and needs then the most.  The first graph below gives the general impression that the VIX volatility index and the SPY 500 Index are negatively correlated.  There is a visually identical graph (not shown here) for European volatility index (VSTOXX) and European stocks.

The implication is that the volatility indexes for U.S. and European stocks should be positively correlated and the author reports they are, with a value of correlation 0.54 (Econintersect characterization:  weak positive correlation) over the time period 1999 to 2013 and 1999 to current date.  But when one looks at the time variation of correlation by tracking the 60-day rolling average, we see a lot of time variable structure.  If one was depending on a weak positive correlation for portfolio stability, that failed in 2000, 2002, 2003 and 2005 when the correlation was negligible at times (R < 0.2).  And from late 2008 to late 2013 the correlation was higher (good strength several times, with R near 0.8).  See second graph below.

The bottom line:  Use correlations for general guidelines but don't depend on them to be there when you may need them the most.

vix.eustoxx50.1999.2014

volatility.us.eu.correlation.1999.2014


The Longest Cycle on Record (Krishna Memani, Oppenheimer Funds)  The current business cycle recovery and expansion is already almost 6 years old and shows few signs of overheating.  Memani thinks the expansion is still in its early stages.  He says the global macroeconomic environment is highly conducive to risk asset outperformance.  Globally he sees continued private sector deleveraging and rising savings rates which are muting growth and leading to an unprecedented cycle of worldwide monetary policy accommodation.  He offers a number of interesting graphs, including the following showing the deep contraction and long period of slow credit growth following the Great Financial Crisis.

credit.growth.cycles


Other Economics and Business Items of Note and Miscellanea

House Flippers Are Back Together With Wall St.  What Could Possibly Go Wrong? (Bloomberg)  Colony Capital Inc., Blackstone Group LP and Cerberus Capital Management are among the companies that have started making bridge loans to investors who buy homes to sell them quickly for a profit. Borrowing costs -- traditionally the highest in residential lending -- are tumbling as the firms compete for customers.

Judaism: The Economics of Liberty (Arutz Shiva)  You can have one or the other but not both: the more economic freedom, the less equality; the more equality, the less freedom.

Grand Central: This Is Not An Irrational Exuberance Moment (The Wall Street Journal)
Education’s Magic Capitalism Problem (Washington Monthly)  Are schools effective if managed like corporations?



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