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What We Read Today 18 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:

  • Smarter Economic Models

  • New Fossil Evidence in Deep Human and Neanderthal History

  • Tesla Powerpack Gets Bid New Order

  • Questions about Sanders and Cruz

  • Lech Walesa Was a Paid Soviet Informer?

  • Kurds Part of a Multi-sided War

  • Russia Warns Syria

  • Venezuela Hikes Prices Gasoline 60X

  • Socialists Less Popular in America than Muslims or Atheists

  • How Simple Things Can Wreck Your Credit Score

  • Is Smart Beta Smart?

  • Whither Bonds?

  • And More

Global

  • The Next Financial Crisis Could Be Predicted By A Smarter Economic Model, Experts Say (International Business Times)  Some economists are calling for a new model that would better incorporate the variety of opinions and relationships that exist within a financial system. Current models rely on a single rational actor, whether an individual or institution, as representative of an entire citizenry or sector.  In reality, it seems that "the interaction of simple parts can give rise to behaviors that are qualitatively different than the parts themselves".  Models such as those applicable to biological systems show much characteristics similar to those of financial crises such as weakness before collapse; these things are not found in traditional economic models.  Econintersect:  Just such behavior is shown by the research models of Steve Keen working from the financial instability theories of the late Hyman Minsky, which we continue to report on a regular basis.  For more detail see Complexity theory and financial regulation (Science)

  • 'Virtual fossil’ reveals last common ancestor of humans and Neanderthals (Science Daily)  The population of last common ancestors was probably part of the species Homo heidelbergensis in its broadest sense. This was a species of Homo that lived in Africa, Europe and western Asia between 700,000 and 300,000 years ago.  The new estimates have been obtained from a 'virtual fossil' modelled from a timeline extrapolation based on the more recent fossil record.  This new estimate is much deeper in time than the estimates from DNA analysis.  See more about even earlier humanoid ancestry research later today below. 

  • Tesla Powerpack Gets a Major Order (Bloomberg)  Techonomy Chief Executive Officer David Kirkpatrick and Bloomberg’s Dana Hull discuss the outlook for Tesla energy with Emily Chang on "Bloomberg West." 

U.S.

  • At Goldman Sachs, Ted Cruz’s Wife Heidi Worked In ‘Wealth Management,’ Not ‘Helping Lift People Out Of Poverty’ (International Business Times)  A questioner at the CNN town hall Wednesday night asked Sen. Ted Cruz what issues his wife would take on as First Lady.  His response:

    “She’s got a real heart for economic development.  Heidi has a real heart here in America for helping lift people out of poverty.”

    According to USA Today, Heidi Cruz served as a managing director at Goldman, and ran “the Houston wealth management unit, which handles portfolios for clients with an average net worth of $40 million." In a CNN interview in January, Heidi Cruz described that work in detail, saying she ran “the private wealth business in the southwest from Houston.”  She added:

    "The job that I have at that firm is, in many ways, in my view, the heart of helping people who have achieved the American dream."

  • Meme Exposes Bernie Sanders Supporters Ignorance of Economics (The Federalist Papers) Econintersect:  Great headline but then a letdown - no connection in the article to the headline.  One inference:  Sanders' supporters show ignorance of economics because they donate small amounts to his campaign?  Another inference:  Sanders' contributors donate even though he runs few fundraiser events?  We just don't get the headine. 

  • I Get Sanders’ Appeal. But He’s Not a Credible President. (Politico)  The author of this Op Ed says that Sanders cannot govern.  Excerpts:

    I have a strange thought about primary voters: They have a choice between sending the country a message and sending it a president.

    The desire of many Democrats to send a message is understandable. As the co-editor of a liberal magazine, The American Prospect, I know that impulse. There’s a lot of anger and frustration among Democrats about entrenched institutions resistant to change. The bankers and other financiers responsible for the 2008 crisis have largely gone unpunished, and the big banks are now bigger than they were then. Although the economy has substantially recovered from the crisis, the gains in income and wealth continue to go mainly to people at the top. Despite the passage of the Affordable Care Act, the prices of drugs and health-care services are exorbitant, and even many of the insured are not well protected against those costs.

    Elizabeth Warren would have been a credible candidate, but Sanders isn’t. The campaign he has been waging is a symbolic one. For example, the proposals he has made for free college tuition and free, single-payer health care suggest what might be done if the United States underwent radical change. Those ideas would be excellent grist for a seminar. But they are not the proposals of a candidate who is serious about getting things done as president—or one who is serious about getting elected in the country we actually live in.

    If he were elected, Sanders would be 75 years old on assuming office, the oldest person to become president in American history by more than five years. (Ronald Reagan was 69.) Some of his supporters were outraged by David Brock’s recent demand that he release his medical records—did they think no one was going to notice how old Sanders is? The presidency is an enormously taxing job, physically and mentally. His age is a legitimate issue, and if he were the Democratic nominee, even many people sympathetic to his views would have reservations about putting him in office.

    The other decisive problem for many voters would be that Sanders is not credible as commander-in-chief. When foreign policy issues have come up in the debates, he seems out of his depth. He sometimes mentions his role in veterans’ legislation, retreating to the nearest social-welfare aspect of national defense.

    The tax implications of Sanders’ proposals provide a particularly rich target. I haven’t yet seen anyone add up the cost of all of Sanders’ proposals, but he is clearly talking about tax increases that have no historical precedent in peacetime.

    Sanders tells us that the political system is rotten and corrupt. But anyone who believes that government is rotten and corrupt has to be worried about making it more powerful, especially in a way that has such personal effects as health care does. This is the contradiction at the root of Sanders’ rhetoric.

    Econintersect: Other than that, Mrs. Lincoln, how did you like the play?  See more about the popularity of socialism in America later, below.

Poland

  • Lech Walesa 'was paid Communist informant' (BBC News)   Poland's history institute says that newly seized documents suggest former president and Solidarity hero Lech Walesa was an informer.  The documents were taken earlier this week from the home of a former communist-era interior minister, Gen Czeslaw Kiszczak.  Lukasz Kaminski, head of the Institute of National Remembrance, said the documents appear authentic.  Mr Walesa has long denied being an informer in the 1970s.  The former president said the new materials could not originate from him, according to Polish radio.  The 279 pages of documents have not yet been properly analysed, and will be made public in due course.

Syria

At it’s core, the war in Syria is not a Kurdish fight though the Kurds do share many of the same enemies of warring parties. The Kurds have had major successes on the ground battling ISIS, but they also have significant tensions with Turkey, a major partner in the U.S. strategy to support rebel groups in Syria. But defeating either of these enemies is overshadowed by the Kurds’ first priority in Syria, which is to secure territory they are able to self-govern. And they are ready to adjust their allegiances in accordance with whichever side is most likely to help them achieve this goal — even the Syrian regime. Kurdish militias aligning closer to pro-regime forces could jeopardize U.S. policy in Syria, which aims for the defeat of both ISIS and Syrian President Bashar Assad.

  • Ankara blast: Turkey accuses Syria Kurds of deadly attack (BBC News)  Turkey's president says there is evidence to prove the Kurdish YPG militia based in Syria were behind Wednesday's deadly bombing in Ankara.  President Recep Tayyip Erdogan said they had been supported by the outlawed Kurdistan Workers Party (PKK) in Turkey. Both groups deny involvement.  He also said there had been 14 arrests over the attack on the military convoy.  Earlier on Thursday, another convoy in south-east Turkey was hit by a bomb, killing at least six troops.

Russia

  • Russia warns Assad not to snub Syria ceasefire plan (Reuters)   President Bashar al-Assad was out of step with the views of his main ally, Russia, when he said he planned to fight on until he re-established control over all of Syria, Russia's envoy to the United Nations was quoted as saying on Thursday.  In the first public sign of cracks in the alliance between Moscow and Damascus, the envoy, Vitaly Churkin, said Russia had helped Assad turn the tide of the war so it was now incumbent on him to follow Russia's line and commit to peace talks.

Cuba

  • Obama to raise human rights during historic trip to Cuba  (Associated Press)  President Barack Obama said Thursday he'll raise human rights issues and other U.S. concerns with Cuban President Raul Castro during a history-making visit to the communist island nation.  The brief visit in mid-March will mark a watershed moment in relations between the U.S. and Cuba, making Obama the first sitting U.S. president to set foot on the island in nearly seven decades. While in the country, Obama plans to meet with groups advocating for change in Cuba, a condition the president had laid out publicly for such a trip.  Word of his travel plans drew immediate resistance from opponents of warmer ties with Cuba — including Republican presidential candidates.

Venezuela

  • Venezuela hikes petrol prices sixty-fold (Al Jazeera)  Venezuela's president announced a currency devaluation and ramped up petrol prices for the first time in about 20 years on Wednesday in an attempt to shield the country's oil-dependent economy from collapse.  President Nicolas Maduro announced that the pump price of premium gasoline would jump from just under 0.1 bolivars per litre to six bolivars (1.5 US cents to 95 cents) - a 60-fold increase from its current level.  Maduro also announced that the strongest of the country's official exchange rates, used for essential goods such as food and medicine, would weaken to 10 bolivars per US dollar from 6.3.  Venezuela has the biggest known oil reserves in the world and has been practically giving gasoline away in recent years. But it has suffered from plunging world oil prices since mid-2014.


In U.S., Socialist Presidential Candidates Least Appealing (Gallup Poll)  In this June 2015 poll more Americans said they would vote for a Muslim or an atheist than said they would vote for a socialist.  See also next article.


“Socialism” Not So Negative, “Capitalism” Not So Positive (Pew Research)  In this poll taken in 2010, Pew found that some words evoke strong political reaction.  The variations among liberal, moderate, conservative, Democrat and Republican self-identifications are as one might expect.


Democrats more divided on socialism (YouGov)  Polling on the subject of socialism in America has changed little as Bernie Sanders' campaign has progressed, even among Democrats.  See first graphic below.  Why is he holding up so far in primaries?  Because of his young supporters.  See second graphic below.

Other Economics and Business Items of Note and Miscellanea

"Our new research supports early divergence: 10 million years ago for the human-gorilla split and 8 million years ago for our split from chimpanzees.  That's at least 2 million years earlier than previous estimates, which were based on genetic science that lacked fossil evidence.

"Our analysis of C. abyssinicus fossils reveals the ape to be only 8 million years old, younger than previously thought. This is the time period when human and African ape lines were thought to have split, but no fossils from this period had been found until now,"

  • The #1 Secret Behind George Soros's Investment Success (Seeking Alpha)  Very simply, he isn't afraid to change his mind.  In otherwords he never "falls in love" with an investment.  If he invests in what he is thinks is a "sure thing" he can dump it if it doesn't follw the expected path.  It's called "living to fight another day" and "making sure you never wake up broke".  But the aura surrounding Soros has become something different from the cautious nature of his philosophy.  The author says:

Although now long retired, the octogenarian George Soros is widely considered the greatest speculator of all time. Other investors such as Ray Dalio may have made more money for their investors than Soros. Activists such as Carl Icahn may have briefly exceeded Soros's net worth.

But Soros will always remain the man who "broke the Bank of England" in 1992, thereby exemplifying a gunslinging style of trading that has been largely confined to the history books.

  • Smart Beta’s Big Threat to Active Management (Wealth Management)  The rise of strategic beta investment products is a threat to active asset managers who are not participating in the space, according to a new Cerulli Associates analysis. Strategic beta products are capturing a lot of the assets going into passive investments as well as investors looking for lower-cost products.  When you look at managers who have predominantly offered these type of strategic beta, “they’ve been more passive-like managers who are looking to offer a premium product above purely passive strategies,” said Jennifer Muzerall, associate director at Cerulli.  Instead of weighting companies in underlying indexes by market capitalization (like most ETFs), strategic beta, or smart beta, products either weight companies using rules-based criteria such as cash flow or targeted volatility levels, or equally weight them. In this way, strategic beta ETFs combine elements offered by actively managed mutual funds with the lower fees and transparency associated with ETFs.  Econintersect:  You might call this the automation of active management, the advantage being that robots are cheaper than real people.  But is it worthwhile?  For some time periods passive indexing has been reported to outperform active management.  See the following articles. 

  • Active Versus Passive Management: Which Is Better? (Forbes)  This author suggests that smart investors should embrace both active and passive management, due to the strong but variable cyclical history of relative performance.  Econintersect:  The author doesn't use the term, but having both some indexed investments (passive) and some actively managed investments is just another layer of risk diversification. 

In the past couple of decades, index-style investing has become the strategy of choice for millions of investors who are satisfied by duplicating market returns instead of trying to beat them. Research by Wharton faculty and others has shown that, in many cases, “active” investment managers are not able to pick enough winners to justify their high fees.

Passive management generally works best for easily traded, well-known holdings like stocks in large U.S. corporations ... because so much is known about those firms that active managers are unlikely to gain any special insight. “You should almost never pay for active management for those things.”

But in certain niche markets ... like emerging-market and small-company stocks, where assets are less liquid and fewer people are watching, it is possible for an active manager to spot diamonds in the rough.

  • Smart Beta: Sometimes Smart, But Not Exactly Beta (The Huffington Post)  If you already understand the difference between "alpha" and "beta" this is a good read.  If not, skip this one.

  • Active vs. passive: Finding the best fund management fit (CNBC)   When it comes to whether investors should put their money in passively managed funds or those that are actively managed, financial advisors voice a range of opinions.  But if even the pros can't reach a consensus, how is the average investor supposed to decide which is best?  The decision is often quite personal.  The video below features an active manager who (surprise) is plugging active management. 

To nail down a strategy that works for you, begin by making sure you fully grasp the differences between the two investing approaches.

In simple terms, actively managed funds are those with professional stock pickers at the helm. This kind of fund strives to beat its benchmark — an index — by relying on sophisticated research and human judgment calls to determine which stocks the fund should buy and sell.

  • Whither Bonds? (CNBC)  Treasury rates were supposed to rise after the December Fed rate hike but they have gone in the opposite direction as questions about the economy have come to the forefront.  What's next?


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