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 dayin the early am at GEI News (membership not required for access to "The Early Bird".).
Changes in Oil Price and Economic Impacts (Stockholm School of Economics) A policy paper examining the effects oil price on economic activity asserts that uncertainty about future energy prices is a dominant factor in the global economy. Some "players" are hurt by lower oil prices and some by higher prices, but everyone is hurt by uncertainty, which is very high right now:
Never Mind $35, The World's Cheapest Oil Is Already Close to $20 (Bloomberg) As oil crashes through $35 a barrel in New York, some producers are already living with the reality of much lower prices. A mix of Mexican crudes is already valued at less than $28, an 11-year low, according to data compiled by Bloomberg. Iraq is offering its heaviest variety of oil to buyers in Asia for about $25. In western Canada, some producers are selling for less than $22 a barrel. Ehsan Ul-Haq, senior consultant at KBC Advanced Technologies Plc, said by e-mail:
“More than one-third of the global oil production is not economical at these prices. Canadian oil producers could have difficulty in covering their operational costs.”
Crude Falls Below $35 per Barrel in New York for First Time Since 2009 (Bloomberg) Oil rebounded after prices dipped below $35 a barrel in New York for the first time since 2009, prompting traders to buy back some of their record bearish bets. West Texas Intermediate futures rose for the first time in seven days. U.S. Senate negotiators are nearing a deal to allow unfettered crude oil exports for the first time in 40 years, though differences remain on renewable-energy tax credits that Democrats are demanding in return, according to people close to the discussions. Prices fell earlier on remarks from an Iranian oil official who said there’s “absolutely no chance” his country will delay its plan to boost shipments, even as prices slip. According to Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, which oversees $3.4 billion:
"We’re seeing short covering after an impressive run lower. WTI has the bigger move because investors believe that a deal to lift the export ban may be close."
Bank of England Inflation Anxiety Mounts With Oil Below $40 (Bloomberg) The Bank of England’s inflation worries may already be coming to fruition. Brent futures dropped to a seven-year low on Friday, a day after Mark Carney and the Monetary Policy Committee said low oil prices and subdued wage gains are increasing the risk that price growth will take longer to pickup than they currently anticipate. Data this week will shed more light on the outlook, with the statistics office due to publish reports on consumer prices and pay.
Teenager predicted the collapse of Spain's green energy giant Abengoa (The Local) Spanish energy giant Abengoa is currently trying to avoid chalking up Spain’s biggest ever bankruptcy, but it has emerged the company's downfall was predicted over 12 months ago by a teenage economics student in Barcelona. Pepe Baltá, a 17-year-old secondary school student, discovered Abengoa had some serious accounting discrepancies and predicted it would end in bankruptcy while doing his economics coursework. He has now seen that predication come true after the group filed for protection from its creditors on November 27th. The firm now has four months to find a solution to its astronomical debt or go bankrupt and become Spain's biggest-ever corporate failure.
Knesset Economics C'ttee finds against gas agreement (Globes) The Knesset Economics Committee headed by MK Eitan Cabel (Zionist Union) has told Prime Minister Benjamin Netanyahu that there is no justification for approving the gas agreement (see next article) and bypassing the Israel Antitrust Authority head's powers because there are no economic or security reasons to support such a decision. Netanyahu is expected to ignore the committee action and cite national security reasons.
Egypt and Israel Corporations Sign Preliminary Natural Gas Agreement (Egyptian Streets) Egyptian Dolphinus Holdings Limited entered negotiations on Tuesday to import natural gas from Israel’s Leviathan offshore gas field. According to a statement by the Leviathan project’s four partners, the two sides signed a non-binding letter of intent to supply Egypt with 4 billion cubic meters (BCM) per annum for a period of 10-15 years.
Kerry to explore Assad's future, Syria peace process in Kremlin talks (Reuters) U.S. Secretary of State John Kerry will use talks in Moscow on Tuesday to try and narrow differences with Russian leader Vladimir Putin over the role of Syrian President Bashar al-Assad in any political transition, a senior State Department official said on Monday.
China says it will keep 2016 economic growth in ‘reasonable’ range (Hurriyet Daily News) Chinese leaders, meeting ahead of an agenda-setting conference, pledged on Dec. 14 to keep the country’s economic growth in a “reasonable range” in 2016 by expanding domestic demand and making supply-side improvements. The pledge was reported by the official Xinhua news agency, which said the Politburo, a top decision-making body of the ruling Communist Party that President Xi Jinping chairs, convened today (14 December). No numbers were reported for what leaders see as “reasonable”. The target of 6.5% GDP growth has been mentioned in recent weeks but there are analysts who maintain that target is too high.
China's basket case: Renewed depreciation or reform? (CNBC) Beijing wants you to know that the yuan—already at four-and-a-half-year lows against the dollar—may fall further. Just that you shouldn't worry too much about it. Late on Friday, the China Foreign Exchange Trade System (CFETS), a sub-institutional organization of the People's Bank of China (PBOC), introduced a new exchange rate index that will see the yuan (CNY), or renminbi, valued against a basket of 13 trade-weighted currencies. It isn't clear if the PBOC will ever formally tie the yuan to this gauge but CFETS did say the basket includes both G3 and Asian currencies, such as the Singapore dollar, Thai baht and Hong Kong dollar. Noticeably, it excludes the Korean won, Indian rupee and Taiwan dollar.
China Stocks Rally as Miners Gain on Output Cuts, Economic Data (Bloomberg) China’s stocks rallied the most in five weeks as miners rallied on the prospect of production cuts to bolster prices and data showed the world’s second-biggest economy is stabilizing. The Shanghai Composite Index climbed 2.5 percent to 3,520.67 at the close. Gauge of material producers and financial companies jumped the most among industry groups. China’s aluminum smelters pledged Friday to halt new mills and forecast that the nation’s idled capacity would rise by the end of the year.
Other Economics and Business Items of Note and Miscellanea
Third Avenue fund collapse may be 'much bigger problem' for bond ETFs (Investment News) Third Avenue Management's abrupt freezing of investor redemptions from its high-yield bond fund may be an early warning signal for bond exchange-traded funds. Investment strategists say that Third Avenue's troubles may be the latest test for bond ETFs, which trade throughout the day like individual stocks, and are more liquid than their underlying assets. Some market watchers have long feared that any kind of rush of investor selling would expose a major flaw in the ETF design. Econintersect: The fund that has restricted redemptions is not at EFT, but a traditional mutual fund, the Third Avenue Focused Credit Fund (TFCVX), which announced it was shutting down, but that investors might have to wait months for their money. ETFs are not subject to redemption like mutual funds. So it is hard for us to see what "flaw" could be exposed by the Third Avenue problem. If there is a panic in bonds and a bond EFT sells crashes, that is exactly as the system was defined. Holders of the ETF suffer losses and, if the sell-off is overdone buyers of shares from the panicked sellers will profit. If there is contagion in the bond market the only design flaws that would be unveiled would be with mutual funds that invested in illiquid assets (as the case with Third Avenue), not with ETFs.
Trump is the most liberal Republican on economics since Nixon (MarketWatch) One presidential candidate wants to get rid of loopholes that help the “very rich” and “special interests.” He’s against foreign “sweatshops” that steal American jobs. He backs “prevailing wages” for U.S. positions filled by foreigners with special H-1B visas. And he says he’s the guy to rebuild America’s infrastructure, a job that could cost hundreds of billions of tax dollars. Bernie Sanders? Nah. Try Donald Trump. This author (Jeffrey Bartash) says Trump'sapproach a throwback to old-style populism.
Weather and Economics (Huffington Post) This column, written by the former President of the National Association of Manufacturers makes a comparison: "Weather and economics are similar in that they are difficult to forecast in the near term but the job gets easier the further out you look." In other words fluctuations may produce the unexpected but in the long run trends dominate the averages. The author (Jerry Jasinowski) goes on to lament the costs in the future of aging demographics and argues that fiscal policy changes those costs should be instituted. Econintersect: If there are costs of maintaining a society with a greater proportion of older and less productive people how does reducing the funding needed to meet those costs solve the problem? We think the social and economic model that calls for impoverishment of people needs some rethinking. If more productivity is what is needed from the larger geriatric cohort, how about incentives that would encourage such production? And while we are at it, how about a system that keeps people displaced by automation somehow involved in the economy?
Top tools for understanding economics (The Adam Smith Institute) This is a simple list of eight propositions which involve very basic concepts that are all too often not considered thoroughly when economic problems are addressed. Econintersect: The major criticism we would make of this list is that is perhaps too oversimplified. That is displayed in the 8th "tool" which consists of the fallacy of composition what considers the macro economy to be described by the linear sum of actions of individual agents. The macro is far more complex than that, with many second and further derivative order interactions often dominant over the linear sum. Here is the 8th tool:
8) To properly understand economics you have to understand incentives. When one person goes out to complete a transaction based on self interest, he (or she) adds a little bit of value not just to his own circumstances, but to every agent involved in the transaction (the seller, the transporter, the manufacturer, those mining for raw materials, and so on). Multiply that one transaction by the billions that have been going on every day in the past century and a half (in particular) and the result is the Smithian invisible hand mechanism that aggregated to all the increased prosperity and well-being the world has seen.
Ecological economics (The Economist) A key source for this article is Kenneth Boulding, a British economist, in an essay published in 1966. The Economist writes:
We have run our economies, he warned, like cowboys on the open prairie: taking and using the world’s resources, confident that more lies over the horizon. But the Earth is less a prairie than a spaceship—a closed system, alone in space, carrying finite supplies. We need, said Boulding, an economics that takes seriously the idea of environmental limits. In the half century since his essay, a new movement has responded to his challenge. "Ecological economists", as they call themselves, do not want to fiddle at the margins of economics, but to revolutionise its aims and assumptions. What do they say—and will their ideas achieve lift-off?
To its practitioners, ecological economics is neither ecology nor economics, but a fusion of both. Their starting point is to recognise that the human economy is part of the natural world. Our environment, they note, is both a source of resources and a sink for wastes. But it is ignored in conventional textbooks, where neat diagrams trace the flows between firms, households and the government as though nature did not exist. That is a mistake, say ecological economists. The "natural capital" of the Earth provides important services, from water supply to pollination: in a landmark paper from 1997, researchers valued the annual supply of such "ecosystem services" at $33 trillion, or 1.8 times global GDP at the time.
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