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What We Read Today 08 February 2016

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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Topics today include:

  • Bond Fund Leverage Alarms IMF

  • GPS:  The Jammable War Machine

  • Global Stock Losses of More than $6 Trillion

  • EU Finance Ministry?

  • UK Fiscal Surplus?

  • German, Turkey Work on Refugee Crisis

  • Syria Exterminating Detainees

  • Taiwan Death Toll Could Exceed 100

  • Lumber Prices and Chinese Housing

  • New Social Security Rules

  • Chesapeake Bankruptcy?

  • Roth Conversion Strategy

  • North American Extinction from Comet Impact 12,000 Years Ago

Articles about events, conflicts and disease around the world

Global

  • High level of bond fund leverage alarms IMF (Financial Times)  The International Monetary Fund (IMF) is calling for fund managers to be more transparent about the amount of leverage they use in bond mutual funds, amid concerns those levels might be high enough to cause a crash.  According to IMF research, bond funds have increased their use of derivatives significantly since the global financial crisis.  Econintersect:  Effective leverage can increase the yield from 1% to 3% (if 3:1 leverage) but magnify the capital loss potential dramatically.  Reaching for yield can lose loads of principal when a market turns. 

  • GPS and the World's First "Space War" (Scientific American)  Starting with the Gulf War in 1991, military operations have become very dependent on GPS (global positioning system) technology for ever more automated forms of warfare.  What's the problem with that?  It is very "jammable" rendering the military automatons useless or possible even a danger to their originators, 

  • Global stocks have already lost over $6 trillion in 2016 (Business Insider)  A lot of money has been lost in stocks in 2016.  Six trillion dollars is approximately 1/3 of U.S. annual GDP and 80% of China's.  It is just shy of 150% of Japan's estimated 2015 GDP.  And this chart doesn't include today's huge sell-off in Europe and the U.S.  At least Asia Pacific stocks were fairly calm today - but those markets can be reactive so watch out for a sell-off Tuesday. 

In the US, stocks had their worst start to a year ever. In Europe things haven't been much better with bad news coming out of Berlin, London, and Athens.  And a crash in Chinese stocks to start the year sort of got this all going on the wrong foot. 

global.stocks.since.2015.jan

U.S.

EU

  • German, French central bankers call for euro zone finance ministry (Reuters)  The euro zone needs to press ahead with structural reforms and closer integration, including an euro zone finance ministry, to deliver sustainable growth, the heads of the French and German central banks wrote in a German newspaper on Monday.  In a guest article for the Sueddeutsche Zeitung entitled "Europe at a crossroads", they said the European Central Bank (ECB) was not in a position to create sustainable long-term growth for the 19-country single currency bloc.  Econintersect:  This is either code-talk for a fiscal union (centralized control of taxation, like the U.S., or meaningless babble.

UK

  • Osborne May Need More Cuts to Achieve U.K. Surplus, IFS Says (Bloomberg)  U.K. Chancellor of the Exchequer George Osborne may be forced to cut spending further or raise taxes should the fiscal outlook deteriorate if he is to meet his goal of achieving a budget surplus by 2020, the Institute for Fiscal Studies (IFS) said.  Econintersect:  This proposal is sheer idiocy.  A fiscal surplus is a net removal of money from the economy and it simply will deepen the budgetary shortfall by shrinking the economy if a surplus is achieved.  This can only be done without a recession (or worse) when the economy is absolutely booming.

Germany

  • Merkel, Turkey agree to refugee plan as more drown at sea, amass at border (Al Jazeera)  At least 33 more refugees are believed to have drowned off Turkey's coast as they tried to make their way to a Greek island, underscoring the migrant crisis facing Europe’s leaders on the day German Chancellor Angela Merkel agreed on a set of measures with her Turkish counterpart to help ease the plight of Syrian refugees.

Syria

Taiwan

  • More rescued two days after Taiwan quake; toll could exceed 100 (Reuters)  Rescuers pulled out alive an eight-year-old girl and her aunt from the rubble of a Taiwan apartment block on Monday, more than 60 hours after it was toppled by a quake, as the mayor of the southern city of Tainan warned the death toll could exceed 100.  The official death toll from the quake rose to 38, with more than 100 people missing. 


Update: Framing Lumber Prices down Sharply Year-over-year (Bill McBride, Calculated Risk)  Framing lumber has two market metrics:  Random Lengths prices are down about 17% from a year ago, and CME futures are down around 22% year-over-year.

"Overall the decline in prices is probably due to more supply, and less demand from China."
(Econintersect:  See next article.)

framing.lumber.2004.2016.600x450


 

Understanding Residential Real Estate in China (IMF)  Even in 2008 when the U.S. residential real estate market was collapsing, spikes in Chinese housing starts coincided (or were followed within a year) with spikes in framing lumber prices and futures.

china.residentialreal.estate.1996.2015

Other Economics and Business Items of Note and Miscellanea

1. Paint the front door. Try out a bold color – such as red – to get buyers’ attention focused on the door.

2. Paint the mailbox. Try either red or black. Anthony says since she painted the home’s door red in the video example, she painted the mailbox the opposite color – black.

3. Paint the railings. Use black to add depth.

4. Change out the light fixture. Make sure the new light fixture matches the aesthetics of the home’s exterior, but this can dress up the outside while also brightening the space.

  • Social Security Administration releases details of rule on new spousal benefits claiming strategy (Investment News)   The Social Security Administration issued an emergency message late Friday to its field offices explaining how to implement changes that will ban future retirees from claiming only spousal benefits at full retirement age.  The changes are the result of the Bipartisan Budget Act of 2015 that President Barack Obama signed into law Nov. 2. The ability to file a restricted claim for spousal benefits will disappear for anyone born on or after Jan. 2, 1954. But there is another provision without clarification as yet:

The agency has not yet issued any guidance on another key rule change that will prohibit future retirees from filing for their retirement benefits at full retirement age and then immediately suspending them in order to trigger spousal or dependent benefits for an eligible family member. Under existing file-and-suspend rules, the worker's own retirement benefits continue to grow by 8% per year up until age 70, boosting benefits by up to 32%.

But the Bipartisan Budget Act of 2015 prohibits anyone from collecting Social Security benefits during the suspension period and eliminates the option of requesting a lump sum payout of suspended benefits.

The elimination of the file-and-suspend claiming strategy is expected to take effect around April 30, 2016, but the Social Security Administration has not yet issued any guidance on this change. Anyone who is 66 or older before the deadline would still be able to file and suspend their benefits under existing rules. 

  • Chesapeake Stock Falls 50% On Bankruptcy Rumor, But Management Denies Chatter (Oil Pro)  Chesapeake Energy lost half its value Monday after a report by Debtwire that the company recently hired restructuring attorneys from Kirkland & Ellis to discuss "balance sheet solutions" in restructuring its $9.8 billion debt load. Chesapeake then issued a statement denying that it's pursuing bankruptcy.  The plunge this morning extended Chesapeake's 12-month loss to 93%.  But the stock then rebounded from it's low of $1.55 to $2.10, a 36% gain.  Nice trade if you caught it.  But after the bounce the stock was still down 34% for the day and 90% over 12 months.

  • Defacto Divestment: Patterson's 2016 Depreciation Expense Is 3x Its Capex (Oil Pro)   If capex is below depreciation expense, then a company is essentially divesting. In other words, new investments are not compensating for the annual decline in the fixed asset base.  When capex is below depreciation, the under-investment implied can be thought of as defacto divestment, which is essentially out of business if sustained.  This is reflective of the experience across the oil patch.

oil.rig.counts.2011.2016.jan

  • Market volatility signals it's time to take another look at Roth conversions (Investment News)  If a Roth conversion was made in 2015 when stock prices were higher it can be reversed now.  That allows the tax bill due for the conversion to be cancelled, making the individual eligible for a lower tax cost for a conversion at lower current prices.  Econintersect:  For some individuals there is a higher fter-tax return for Roth investments (made with after tax dollars but never taxed again) with other retirement plans made with before=tax dollars but fully taxed when withdrawn.

  • The Comet That Battered Jupiter, and Shook Congress (Scientific American)  After Shoemaker–Levy 9 wrecked havoc on the solar system’s largest planet in 1994, for a rare moment on Earth politics were not parochial, but astronomical. Its political and scientific legacy still shines today as worry about a similar event on earth holds sway.  And maybe it has actually happened in very recent geologic time - see next article.

  • Did a Comet Hit Earth 12,000 Years Ago? (Scientific American)  Nanodiamonds found in the sediments across North America from this time period point to a possible massive explosion or explosions by a fragmentary comet, similar to but even larger than the Tunguska event of 1908 in Siberia.  Roughly 12,900 years ago, massive global cooling kicked in abruptly, along with the end of the line for some 35 different mammal species, including the mammoth, as well as the so-called Clovis culture of prehistoric North Americans. Various theories have been proposed for the die-off, ranging from abrupt climate change to overhunting once humans were let loose on the wilds of North America.  But an alternative possibility is a large comet impact.


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