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.
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Topics today include:
Experienced Bond Traders Losing Jobs
Oil Enters Seasonal Slack Demand Period
Supreme Court Front and Center in Presidential Race
EU Banks Stress Tests are Actually Relaxations
China Systemic Risks
China Trade Numbers Still Sinking
Fed Interest on Reserves
Why Buy a Negative Interest Bond?
Articles about events, conflicts and disease around the world
Banks Cutting Most-Experienced Bond Traders in Fixed-Income Cull (Bloomberg) Banks are taking a hatchet to their bond-trading businesses and the biggest casualties are proving to be the people with the most experience. About 70 percent of credit traders cut in London last year at the 12 largest investment banks had worked in the financial industry for more than 10 years, according to data compiled by headhunters Michelangelo Search, which specializes in sales, trading and research roles. That’s increasingly leaving trading desks manned by more junior colleagues.
Supreme Court vacancy highlights stakes in presidential race (Associated Press) The unexpected death of Supreme Court Justice Antonin Scalia — and the immediate declaration from Republicans that the next president should nominate his replacement — adds even more weight to the decision voters will make in November's general election. For months, the candidates have espoused theoretical, sometimes vague, policy proposals. Now, the prospect of President Barack Obama's successor nominating a Supreme Court justice immediately after taking office offers a more tangible way for voters to evaluate the contenders. Candidates in both parties moved quickly to reframe the election as a referendum on the high court's future.
Banks' Relaxing Stress Tests (Bloomberg) European bank stress tests are still using $30 a barrell as a stress test. Well, that might be called stress relief - oil has been below that price and futures are below $30 now.
China Systematic Risk: Probability Will Be Very Small For The Next 2 Years (Seeking Alpha) According to George Soros and Kyle Bass, there will be a 40% Chinese currency devaluation over the next three years. They base this belief on two assumptions: 1) the Chinese banking system has grown too fast and too much, and 2) it has an enormous amount of non-performing loans. The author argues these opinions are misguided because for China there is (are) 1) continued economic restructuring, 2) a strong banking system, 3) overstated corporate debts, and 4) strong foreign reserves and trade surpluses. With regard to 4) Econintersect sees some problems - see the next two articles.
China's Exports Decline as Trade Surplus Swells to Record (Bloomberg) A slide in China’s exports in January was eclipsed by an even bigger tumble in imports, leaving a record trade surplus for the world’s biggest trading nation. Overseas shipments declined 11.2% in January in U.S. dollar terms from a year earlier, the customs administration said on Monday, compared with a 1.4% drop in December. Imports extended a stretch of declines to 15 months, tumbling 18.8%, leaving a record trade surplus of $63.3 billion. Econintersect: The strong trade balance surplus for China must necessarily weaken if exports keep declining. See graph following video showing the year-long contraction of exports and imports. Note: In the following video some of the numbers quoted are year-over-year. The trade surplus above is for the month of January only.
China's Foreign-Exchange Reserves Decline to $3.23 Trillion (Bloomberg) China’s foreign-exchange reserves shrank to the smallest since 2012, indicating that the central bank sold dollars as the yuan’s retreat to a five-year low exacerbated depreciation pressure. The world’s largest currency hoard decreased by $99.5 billion in January to $3.23 trillion, according to a People’s Bank of China statement released on Sunday.
Other Economics and Business Items of Note and Miscellanea
Should The Federal Reserve Be Paying Interest On Excess Reserves? (Seeking Alpha) The discussion suggests that paying interest on excess reserves reduces the propensity of banks to make loans. The author says that by raising the IOER (interest on excess reserves), "the Federal Reserve is paying banks not to perform their work". Econintersect: The only problem with this statement is that banks do not lend reserves, excess or otherwise. See Money and Banking Series by Eric Tymoigne: Part 2 and Part 4.
The Archaeologist Who Studies Mardi Gras Beads (The Atlantic) Before humans wrote their histories in words, many of them told stories with beads. Some archaeologists believe that a scatter of pea-sized shell jewelry more than 75,000 years old are evidence that prehistoric humans had well-developed language, including advanced grammatical structure—communication at least sophisticated enough so that they could have described the symbolism of these beads to one another. Neolithic figurines were made to wear necklaces, and in ancient Egypt, beads were offered in exchange for the promise of an afterlife. Across many cultures, they have been used as wearable tokens—small but powerful adornments believed to encourage vitality, fertility, and wealth. The ancient Chinese hoisted heavy cash strings over their shoulders, with coins threaded like beads on a necklace. Humanity’s earliest computers can be traced back to the abacus, which used beads to make sense of complex data. More recently, Native Americans used beads to write stories.
"...the purchaser of a negative yielding bond is betting on deflation and even lower rates. It’s not a whole lot more complex than that if you ask me.
Of course, in the long run the issuer of the bond will get their negative yield. In this sense, negative interest rates are a tax on the private sector as they directly remove interest income. I am still baffled as to why any economist thinks this is a good idea. We are venturing into theoretical territory that is very dangerous in my opinion…."
UMass economist paints a rosy picture of Sanders economics (Pittsburgh Post Gazette) An analysis, prepared by economics professor Gerald Friedman, came in at $14.5 trillion over 10 years as the cost of the Sanders' economic program. But that, the report concludes, is money well spent — a conclusion not shared by many Sanders opponents. Sanders' staff predict that they will raise the median household income by 37% by 2026, as opposed to the 10% growth projected by the Congressional Budget Office.
The Wall Street Journal’s Kim Strassel asked Donald Trump in tonight’s CBS debate about how he can both fix the deficit and ”not touch” entitlements, as he’s promised. “I’m going to save Social Security,” Trump replied. “I’m going to bring jobs back from China. I’m going to bring jobs back from Mexico and Japan, where every country throughout the world – now Vietnam, that’s the new one – they are taking our jobs, they’re taking our wealth.” When challenged how he’ll actually “save” Social Security, Trump said he’ll target the program’s “waste, fraud, and abuse.”
Econintersect comment: UMass, the CBO, political media and candidate statements alike are not likely to reflect accurately on outcomes for any economic program.
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