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What We Read Today 18 July 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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Today we have a section which examines what has been driving stock market valuation growth.  Is it earnings?  Is it the Fed QE?



Articles about events, conflicts and disease around the world

Global

  • How 3D Printing Changes The Economics Of Outsourcing And Globalization (Forbes)  3D Printing is a revolution that changes two important economic equations – insourcing/outsourcing, and theglobalization/localization equation. It tips the balance between insourcing and outsourcing of manufacturing in favor of insourcing. And it tips the balance between globalization and localization in favor of localization.  Old ideas of economy of scale can be turned on their collective heads.

U.S.

Greece

greece.and.germany


Actual vs. Estimated Earnings Growth 2005-2015 (Barry Ritholtz, The Big Picture)  The first graph below might well be titled "Setting the Bar Low".  How else can actuals always exceed estimates?  The second graph shows why investors need to pay attention to earnings growth trends.

earnings.growth.share.prices


From Spain with Foreshadowing (Peter Coyne, Daily Reckoning)  Here is one of the correlations that is widely quoted as representing a causation:  as the Fed doubled its balance sheet the S&P 500 doubled in value.  Econintersect:  But we have yet to see any corroborative analysis.  Let's consider what happens when the Fed increases its balance sheet.  It buys assets from banks (treasuries and mortgaged backed securities - MBS) and increases the reserves of those banks held by the Fed.  Where do the banks get the securities they sell to the Fed?  Well, some they hold as bank capital assets but not all.  That which they need to complete the sales to the Fed they acquire from the public.  To make these purchases from the public they create money as a bank liability offset by the values of the assets purchased.  After sales to the Fed the bank balance sheet shows money distributed as a liability offset by excess reserves as assets.  So far everything indicates that it could well be that the Fed is driving the stock market by growing its balance sheet.  For the rest of this discussion see next article.   

fed.balance.sheet.and.stocks.


Market Cap to GDP: A New Interim High for the Buffett Valuation Indicator (Doug Short, Advisor Perspectives dshort.com)  DS is a regular contributor to GEI.  Doug says:  Market Cap to GDP is a long-term valuation indicator that has become popular in recent years, thanks to Warren Buffett. Back in 2001 he remarked in a Fortune Magazine interview that "it is probably the best single measure of where valuations stand at any given moment."  Econintersect:  This graph gives us the data to determine total market capitaization for U.S. stocks at the two end dates in the graph from the preceding article.  Using nominal GDP data from Google, total market cap for U.S. stocks in 2009 was approximately $10 trillion and for 2014 approximately $22 trillion.  The growth in valuation of U.S. stocks from 2009 to 2014 was of the order of $12 trillion.  The increase in value of the Fed balance sheet was about $2 trillion.  So if all the money was created by the banks to buy assets to sell to the Fed in return for increased excess reserves was used to buy stocks, it was done with 6:1 leverage (or higher if some of the assets sold to the Fed were already bank capital assets) by the private sector entities that previously owned the treasuries or the MBS that ended up on the Fed balance sheet.  We suggest that most of the market rise had little to do with the Fed balance sheet growth.

equities.gdp    

Other Economics and Business Items of Note and Miscellanea

  • Time to get the economics of environment right (The Sydney Morning Herald)  In many cases the adverse environmental consequences of economic activity aren't reflected in the costs faced by producers and their customers, a classic instance of "market failure" – where the operation of market forces does not produce satisfactory outcomes for the community.
  • Real World Economics: Wealth of nations changes over time (Twin Cities Pioneer Press)  Why are some countries poor and others rich? That is the most basic question in economics and the focus of Adam Smith's seminal book, "An inquiry into the nature and the causes of the Wealth of Nations."  This work is often cited as the point at which economics became a separate discipline rather that a minor branch of philosophy. Yet, 239 years since the insightful Scot argued that extensive government control of economic activity often hurt, rather than helped, productivity, answers to the basic question remain elusive.  Capital accumulation, the flip side of high savings rates, certainly is key. So is government provision of key public goods, such as education and infrastructure for transportation and communication. Moreover, at least to those of us who have worked in developing countries over the years, culture, institutions and historical pasts are enormously important -- yet even raising the question in that context can be fraught with pitfalls of racism and religious bigotry.

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