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What We Read Today 22 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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There are two ''What We Read Today' columns in today's newsletter.  Yesterday (21 July) the column was published too late to catch the newsletter collection window.  We apologize for that.

Articles about events, conflicts and disease around the world


  • IMF Appoints White House Economic Adviser as Chief Economist (ReutersFox Business)  The International Monetary Fund (IMF) on Monday named as its new chief economist Maurice Obstfeld, an academic and White House economic adviser known for his work on money flows and international finance.  Obstfeld, currently on leave from the University of California, Berkeley to serve on President Barack Obama's Council of Economic Advisers, will take over from the retiring Olivier Blanchard in September, the IMF said in a statement.


The shares of Chesapeake Energy, second largest natural-gas driller in the US, crashed nearly 10% today, to $9.29, the lowest price since August 2003, down nearly 70% since oil began to plunge a year ago. The company’s $1.1 billion of 5.75% notes fell to an all-time low of 84.88 cents on the dollar. And its 4.875% notes dropped to 81.25 cents on the dollar, from 86 last week, according to S&P Capital IQ LCD.

All this in the wake of its announcement that it would suspend its dividend for the first time in 14 years. It’s trying to conserve cash, and that dividend costs $240 million a year. It’s dumping assets as fast as it can, including some Oklahoma fields that will save it another $75 million a year in preferred dividends. It’s cutting operating costs and capital expenditures. It’s trying to stay alive.

It has been cash-flow negative in 22 of the past 24 years, according to Bloomberg.

The only thing surprising is that it took so long, that Wall Street kept funding its cash-flow negative operations and dividends for all these years.

  • Americans' Air Conditioning Habit Is Eco-Friendly (Bloomberg)  The headline is actually misleading as a direct argument.  Megan McCardle argues that Americans use less energy air conditioning as population density has shifted south than they would have spent on winter heating had they stayed in the frigid north.  'Eco-friendly' applies to the population shift, not to the air conditioning.  This is a sloppy transference in logic.  There is a useful graphic provided which shows the cooler average summer temperatures for many European cities compared to many American cities: 


  • BOE Minutes Show Rate Rise Debate Intensifying (The Wall Street Journal)  Minutes of the Bank of England (BOE) Monetary Policy Committee’s July policy meeting published today, show all nine members of the rate-setting panel voted to keep the BOE’s benchmark rate at a record low of 0.5% earlier this month. All nine also voted to leave the BOE’s bond portfolio at £375 billion ($583.5 billion).  The minutes record that for “a number” of officials, the decision not to raise rates was a close call. For these unnamed officials, the debt crisis in Greece, was “a very material factor” in voting to keep rates on hold.


  • How Does Euro Membership Help Germany? (The Wall Street Journal)  The relative weakness of the euro versus a hypothetical Deutschmark is an advantage for Germany. The currency union also includes countries like Italy, Spain, France and Greece all of which haven’t been as successful as Germany in recent years.  This weighs on the euro’s strength, which helps German exporters. As is well known, exports are a key driver of Germany’s economy. A stronger currency would almost certainly make life harder for German exporters by making products more expensive on a global market.  ING economist Carsten Brzeski says that the European Central Bank’s monetary policy has tended to have a bias toward helping weaker countries and that this policy orientation benefits exporting countries like Germany.


In an article by Mark Blyth titled “A Pain in the Athens: Why Greece Isn’t to Blame for the Crisis” and published on July 7th 2015 in the magazine Foreign Affairs, one discovers surprising statements, which are all the more surprising when one knows that this magazine is published by the Council on Foreign Relations that gathers the American élite, the New-Yorker banking élite being there for the most part (about this subject, see: Laurence H. Shoup and William Minter, Imperial Braintrust: The Council on Foreign Relations and United States Foreign Policy, 1977).

European banks’ asset footprints (loans and other assets) expanded massively throughout the first decade of the euro, especially into the European periphery. Indeed, according the Bank of International Settlements, by 2010 when the crisis hit, French banks held the equivalent of nearly 465 billion euros in so-called impaired periphery assets, while German banks had 493 billion on their books. Only a small part of those impaired assets were Greek, and here’s the rub: Greece made up two percent of the eurozone in 2010, and Greece’s revised budget deficit that year was 15 percent of the country’s GDP—that’s 0.3 percent of the eurozone’s economy. In other words, the Greek deficit was a rounding error, not a reason to panic. Unless, of course, the folks holding Greek debts, those big banks in the eurozone core, had, over the prior decade, grown to twice the size (in terms of assets) of—and with operational leverage ratios (assets divided by liabilities) twice as high as—their “too big to fail” American counterparts, which they had done. In such an over-levered world, if Greece defaulted, those banks would need to sell other similar sovereign assets to cover the losses. But all those sell contracts hitting the market at once would trigger a bank run throughout the bond markets of the eurozone that could wipe out core European banks.  

Clearly something had to be done to stop the rot, and that something was thetroika program for Greece, which succeeded in stopping the bond market bank run—keeping the Greeks in and the yields down—at the cost of making a quarter of Greeks unemployed and destroying nearly a third of the country’s GDP.

A “Tsipras” had to happen somewhere eventually, because there’s only so long you can ask people to vote for impoverishment today based on promises of a better tomorrow that never arrives. If voting for impoverishment brings only more impoverishment, eventually people will stop voting for it—and the timing of “eventually” will depend on when people’s assets run out.

The Real Defense Budget (The Atlantic)  Hat tips to Daniel Flemming and Roger Erickson.  A Republican, numbers-compulsive defense wonk at the Center for Defense Information, Winslow Wheeler, has published a great summary of what America's defense budget 'really' is: Nearly $1 trillion per year.


Gold Miners Slaughtered (The Short Side of Long)  Is this a generatiuonal opportunity? The last time the Philadelphia Gold Silver Index was down around this level (2000) it proceed to start a 400% bull market which peaked in 2008.  And the five-year rolling return for the index has never been this low.  Jesse Felder says It’s Time To Get Greedy In The Gold Market.

Click for large graphic at The Short Side of Long.

Breakout for Financials? (Josh Brown, Twitter)

Other Economics and Business Items of Note and Miscellanea

  • Apple Faces Old Question of What’s Next After Record Profit (Bloomberg Business)  Apple Inc., after posting its best fiscal third-quarter profit ever, is facing fresh questions over whether it can keep making hit products.  Econintersect:  Is the 6% decline in stock price a case of having bought the rumor and then selling the news?
  • Obama nominates U-M economics professor to Fed board (Detroit Free Press)  President Obama announced he will nominate Kathryn Dominguez, 54, an economics and public policy professor at the University of Michigan, to join the Board of Governors of the Federal Reserve System.  The Fed’s board is made up of seven members, though there are currently five serving. Early this year, Obama nominated former Bank of Hawaii CEO Allan Landon to one of the seats but his nomination hasn’t been acted on yet in the U.S. Senate.  Econintersect:  Republicans may well not act on many nominations over the next 18 months holding out for the possibility of a Republican president after January 2017 and the prospect of Republicans being appointed.
  • 'Economics is in need of a sexual revolution' Dr Victoria Bateman on the failings of economists (Cambridge News)  Cambidge economics professor Victoria Bateman says that economics is need of a revolution. The subject need to achieve more balance.  She says that means "becoming less isolated from other disciplines and attracting more women".  Econintersect:  We agree with Prof. Bateman that a revolution is needed but we would suggest "intellectual" is what is needed more than "sexual" even though greater numbers of women in the discipline would be a positive change.  And more than just becoming less isolated from "other disciplines" we would use the term "less isolated from reality".

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