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What We Read Today 25 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:

  • Brexit Odds

  • Brexit Doomsday Scenarios

  • UK GDP Growth is Stalled

  • Debt Today Worse than 2007

  • Financial Sector = Hedonistic Sector

  • Finance has become the Tail that Wags the Dog

  • Top 10 Utility Companies

  • 5 Famous Companies that have been Dropped from the S&P 500

  • The Times Negative Interest Rates have been Used this Century

  • New Rules for ETFs?

  • Dangerous ETFs

  • Hot U.S. Housing Markets

  • U.S. IPOs Drying Up

  • Exploding Global Data Flows

  • Camera Control Laws?

  • World Trade Collapse = Dollar's Gain

  • And More

Articles about events, conflicts and disease around the world

Global

  • World trade records biggest reversal since crisis (Financial Times)  Weaker demand from emerging markets made 2015 the worst year for world trade since the aftermath of the global financial crisis, highlighting rising fears about the health of the global economy.  The value of goods that crossed international borders last year fell 13.8% in dollar terms — the first contraction since 2009 — according to the Netherlands Bureau of Economic Policy Analysis’s World Trade Monitor. Much of the slump was due to a slowdown in China and other emerging economies.  The new data released on Thursday represent the first snapshot of global trade for 2015. But the figures also come amid growing concerns that 2016 is already shaping up to be more fraught with dangers for the global economy than previously expected.  Econintersect:  The 13.8% decline is close to the increased value of the dollar last year.  The first graph below shows the dollar value of global trade.  But the second graph shows the volume of trade was little changed (actually slightly increased) from 2014.

 

  • OECD's William White: In Terms of Debt, the Situation Is Way Worse than 2007 (Financial Sense)  William White, chairman of the Economic and Development Review Committee at the OECD and former chief economist at the Bank for International Settlements (BIS), says the risks posed by global debt levels are greater today than they were in 2007 and that central banking monetary policy has lost its effectiveness. He also explains the crucial differences between modern macroeconomic modeling and complexity theory (or viewing the economy as a complex adaptive system) and the key lessons this has for policymakers, both fiscal and monetary.  Below are some excerpts from his recent interview by Financial Sense.  Note his failure at times to distinguish between sovereign debt and corporate debt.

... on the corporate side in the US, things have gotten significantly worse—the debt ratios for corporations have gone up very substantially as has government debt...

... in 2007 this debt problem was essentially confined to the advanced market economies. Since then, the debt ratios—the private debt ratios in particular—have exploded in the emerging market countries and so we now have in a sense a global problem.

There are a lot of reforms that could be carried out that in the fullness of time would increase growth, increase potential, and increase the capacity to service debt so there's a lot of things that might be done but it all starts off with a recognition, which we do not have, that monetary policy is not the solution to this particular problem and that it may, in fact, be making it worse. 

To put it in a nutshell, if it's a debt problem we face and a problem of insolvency, it cannot be solved by central banks through simply printing the money. We can deal with illiquidity problems but the central banks can't deal with insolvency problems...

I think the economists have made what the philosophers would call a profound ontological error. They have assumed that the economy is understandable and they have therefore assumed that if they can understand it they can control it. 

if you look at the economy as a complex adaptive system basically you end up with a bunch of assumptions about how it works that are absolutely at the opposite end of the spectrum of the assumptions made in modern macroeconomics...

U.S.

  • Republican Sandoval withdraws as possible Supreme Court pick (Reuters)  Nevada Governor Brian Sandoval, a moderate Republican, took himself out of consideration for appointment to the U.S. Supreme Court on Thursday as Senate Republicans dug in on their vow not to act on any nominee by President Barack Obama.  Asked if the White House was disappointed by Sandoval's decision, Obama spokesman Josh Earnest told reporters, "He's obviously entitled to make decisions about his own career".  Sandoval, a Mexican-American who was Nevada's first Hispanic governor, did not offer a reason for his withdrawal.

  • Federal Court Rules There Is No Right to Record Police (Foundation for Economic Education)  (Econintersect:  What will be next?  Camera control Laws?)  Here's the story of a Federal Court decision that appears on the surface to be fundamentally flawed on several counts:

In recent years, lower federal courts have generally held that the First Amendment protects a right to videorecord (and photograph) in public places, especially when one is recording public servants such as the police. [...]  But Friday’s federal trial court decision in Fields v. City of Philadelphia takes a different, narrower approach: There is no constitutional right to videorecord police, the court says, when the act of recording is unaccompanied by “challenge or criticism” of the police conduct. (The court doesn’t decide whether there would be such a right if the challenge or criticism were present.)

Therefore, the court held, simply “photograph[ing] approximately twenty police officers standing outside a home hosting a party” and “carr[ying] a camera” to a public protest to videotape “interaction between police and civilians during civil disobedience or protests” wasn’t protected by the First Amendment.

  • The Elites Are Worried (5 Min. Forecast)  The real-world job indicator of federal income taxes withheld has been declining for three months. 

  • The 20 Hottest Housing Markets This Month (Realtor Mag)  Econintersect:  The ever bubbly NAR (National Association of Realtors) has their seasonal cheerleaders out in force.  This article uses words like "pent up demand", "high buyer demand" and buyers who are "frustrated".  What more do brokers need to fire up their real estate agents?

Nationally, buyer demand is high, despite a stubbornly low inventory of homes for-sale. This month saw list prices move up 1 percent over January, reaching $230,000. That is an 8 percent increase over a year ago, according to realtor.com®’s latest housing report.

UK

UK GDP growth was 0.5 per cent in the fourth quarter of last year compared with the same period in 2014, according to a second estimate by the Office for National Statistics (ONS) - bang on expectations, and the same as previous estimates. 

The ONS said that while there had been speculation the figure could be revised down, the buoyancy of the services sector - which increased 2.1 per cent in December, compared with the same month last year - had offset "relative sluggishness" in the rest of the economy. 

The news comes just hours after the International Monetary Fund (IMF) became the latest organisation to warn of a downturn if the UK votes for a Brexit at the EU referendum in June.

In a report published last night, it said the UK must remail "vigilant to the challenges ahead", adding that uncertainty over the UK's future in the EU could weigh on investment.

  • 3 Brexit Doomsday Scenarios (Investopedia)  The British government has set the wheels in motion for a popular referendum on June 23rd over whether to leave the European Union (EU). A British exit, or Brexit, would be the first such departure from the EU, despite the lingering possibility that a peripheral Eurozone economy, such as Greece or Spain, would be forced out.  There is a wide variety of opinion (see graphic below) but three possible negatives seem to emphasize the following risks:  currency collapse, recession and loss of employment.

brexit.impact.opinions 

Iran

  • Iran elections highlight deep divisions (BBC News)  Iranians will vote on Friday in elections for their country's parliament and the Assembly of Experts, a clerical body that appoints the supreme leader.  This event will be the most visible of the battle going on inside Iran:  the deep divisions within Iranian society between the people who want to uphold and protect the values of the Islamic revolution, and those who are challenging it and want Iran to modernize.


The international monetary and financial system: Its Achilles heel and what to do about it (Claudio Borio, Bank for International Settlements, Institute for New Economic Thinking)  Econintersect:  This is an illustration of the tail that has grown to wag the dog. Before the middle 1980s the financial cycle and the business (economic) cycle showed comparable amplitudes of fluctuation, and, also were somewhat correlated.  For the last 30 years the two cycles have little correlation (possibly even small negative correlation) and the cyclical fluctuation in credit prices (financial economy) has grown to be much bigger than the cyclical fluctuation in GDP (real economy).  The financial sector now has little connection to the goods and services economy represented by GDP.  It exists for its own gratification - we could call it the hedonistic sector.

Click for larger image in a new window.
cycles.financial.vs.realeconomy.600x450

Other Scientific, Health, Political, Economics and Business Items of Note - plus Miscellanea

  • 5 Famous Companies Dropped from the S&P 500 (Investopedia)  Find out why Retail giant Sears, 137-year-old investment bank Lehman Brothers, Dell Computer, Avon Products and Radio Shack have all left the S&P 500 in recent years.

  • Are New Rules Needed for ETFs? (Financial Planning)   Exchange-traded funds may be so complex and volatile that they require a distinct set of rules from equities, SEC Commissioner Kara Stein suggested last Friday.  In remarks at the annual SEC Speaks conference, Stein acknowledged that ETFs have been a boon for many investors. Still, the average retail client doesn't understand the risks they carry and the features that distinguish them from common stock and mutual funds, she says.  Stein said that some ETF products may not be suitable for buy-and-hold investors.  If that is the case then restrictions on marketing should be observed.

  • 3 Times Negative Yields Were Instituted This Century (Investopedia)  Discussion of the three major central banks to have instituted negative interest rates and what the results have been.

  • The US IPO market has almost completely dried up (Business Insider)  According to data from FactSet's Andrew Birstingl, the number of initial public offerings (IPOs) on the US Stock market this year is at its lowest level since 2009.

  • The World's Top 10 Utility Companies (Investopedia)  Utility companies provide energy, one of the most basic needs of households and industrial enterprises. The costs to build and maintain the infrastructure necessary to produce and distribute energy is one of the greatest challenges facing emerging countries. Nine of the top 10 largest utility companies based on market value are based in either the U.S. or Europe.  The three U.S. companies on the list are all in the southeastern states.

  • Recession sign is in play and has 81% accuracy (CNBC)   Since corporate profits turned negative in mid-2015, Wall Street has pondered whether it's just a passing phase or a signal of something worse. History strongly suggests the latter.  Recessions have followed consecutive quarters of earnings declines 81% of the time, according to an analysis from JPMorgan Chase strategists, who said they combed through 115 years of records for their findings.  The news gets worse: Of the remaining 19% of the time, recession was only avoided through either monetary or fiscal stimulus. With the Federal Reserve holding limited easing options and a deeply dysfunctional Washington thwarting a fiscal boost, the prospects for help are not good.

  • Digital globalization: The new era of global flows (McKinsey)   Coventional wisdom says that globalization has stalled. But although the global goods trade has flattened and cross-border capital flows have declined sharply since 2008, globalization is not heading into reverse. Rather, it is entering a new phase defined by soaring flows of data and information.


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