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".).
For the emerging economies, with their relatively illiquid financial markets, such trends encourage over-dependence on low-cost external capital, which can be withdrawn in a heartbeat. Rock-bottom borrowing costs also spur excessive reliance on leverage, weakening the will to undertake reforms needed to boost potential growth – and further exacerbating the economy’s vulnerability to a shift in interest rates or investor sentiment.
Making matters worse for the resource-rich emerging economies, commodity prices have plummeted since 2014. After a prolonged period of accelerating demand growth, notably from China, governments came to regard high commodity prices as semi-permanent – an assumption that caused them to overestimate their future revenues. Now that prices have dropped, these countries are facing huge imbalances and fiscal strain. And governments are not alone; the private sector, too, relied on rosy assumptions to justify imprudently high levels of leverage.
Slower growth in the advanced economies has also weakened trade flows, adding to the headwinds. As Mohamed El-Erian has observed, in the global economy, your neighborhood – the economies to which you have economic or financial links – matters. That is all the more true for the emerging economies, which have become highly dependent on their neighbors.
The Limits of Oil’s Rebound (Project Syndicate) Anatoly Kaletsky argues that the return of Iranian oil and the rise of U.S. shale production will keep crude markets competitive for some time to come. The result will be an extended period of oil priced below the $50s, similar to the period from 1986 to 2005.
How Donald Trump is doing what Hillary Clinton can only dream about (CNBC) Clinton, however, will have to convince her party's most passionate ideologues—people who have already demonstrated their willingness to resort to violence—to rally behind her vision of a pragmatic entrenchment of accomplishments they already consider insufficient. Trump is seemingly waltzing into a unifying position of the GOP behind him. But see next article for details - he's not there yet.
The Donald Trump GOP Unity Tracker (Bloomberg) A party is made of its members. On the question of backing their presumptive nominee for president of the United States, where do Republicans leaders stand? While some say they will support Donald Trump, others say they will support "the nominee". As of this date more than 1/3 are not supporting Trump or "the nominee", with almost 25% opposing Trump.
Fear for civilians as Islamic State halts Iraqi army at gates of Falluja (Reuters) Islamic State fighters halted an Iraqi army assault on the city of Falluja with a counter-attack at its southern gates on Tuesday, while the United Nations warned of peril for civilians trapped in the city and used by militants as human shields. The Iraqi army's assault on Falluja has begun what is expected to be one of the biggest battles ever fought against Islamic State, with the government backed by world powers including the United States and Iran, and determined to win back the first major Iraqi city that fell to the group in 2014.
How G7 can boost the global economy(The Conversation) Are we all becoming Japan? This article suggests the rest of the developed world (as well as China) is following the Japanese historical economic path with unresolved private debt overhangs along with peaking and soon to decline populations. The author suggests:
Solutions to our current economic malaise are more difficult than the leaders at the G7 may want to face up to. They include more progressive taxation (particularly on wealth) and ending offshore tax havens. This would help generate revenues needed to pursue a modern industrial strategy (one that heavily focuses on the transition to renewables). It is also important to return to growth that includes an increase in people’s wages. This will require stronger trade unions working with both government and business.
These polices will obviously need updating for the 21st century. And they will require international cooperation. However, unlike other global problems such as climate change, the proposals outlined here do not require full international cooperation. The G7 acting together would be enough to make a huge difference. But it does require a change in the dominant ideology that binds these “like minded countries” together. The rise of presidential hopeful Donald Trump in the US and the far right in Europe are a warning sign of what might happen if they don’t.
China wants more influence over Taiwan, but it may not matter (CNBC) Beijing threatened over the weekend to end regular communication with Taiwan unless its new president acknowledges the so-called One China principle. But that threat is unlikely to sway Taipei. Some in Taiwan complain that the ties between their island and China have benefited only a handful of major companies and rich individuals — an argument similar to one often made by Americans about the U.S. relationship with China. But Taiwan is not likely to 'divorce' China either so something like the status quo is likely to continue.
Argentina’s Eternal Debt Problem (Project Syndicate) Not only must the national government avoid excessive debt, especially denominated in external currencies like the dollar and the euro at high interest rates, profligate provinces must also restrain indebtedness. In this article Carmen Reinhart reviews the troubled debt history of Argentina which extends back to the late 19th century.
The turmoil within Brazil's government only gets deeper (Business Insider) Brazil's Transparency Minister Fabiano Silveira resigned on Monday after leaked recordings suggested he tried to derail a sprawling corruption probe, the latest cabinet casualty impacting interim President Michel Temer's administration.
Overdosing on Heterodoxy Can Kill You (Ricardo Hausman, Project Syndicate) RH is the former minister of planning of Venezuela and former Chief Economist of the Inter-American Development Bank and is Professor of the Practice of Economic Development at Harvard University. He argues that Argentina's problems are the result of market regulation (price fixing and subsidies). Econintersect: His arguments make sense. What doesn't make sense is his broad brush designation of the problems as a result of "heterodox" economics. We have read many works by heterodox economists and, with the exception of hard-core Marxists, do not see any who argue against the use of markets to establish prices. The exceptions are use of direct cash payments to subsidize people directly or selectively taxing transactions, according to Hausman. We agree. But Hausman's misrepresentation of "heterodox" gives "orthodox" a bad name. And orthodox economics doesn't need any more help with that.
Other Scientific, Health, Political, Economics and Business Items of Note - plus Miscellanea
McKinsey Assesses Future Stock and Bond Returns: Are the good times really over for good? (Advisor Perspectives) Are stocks’ glory days behind us? What about bonds? A widely circulated McKinsey Global Institute (MGI) report, Diminishing Returns: Why Investors May Need to Lower Their Expectations, suggests that they are. The report makes the case that both stock and bond returns over 1985-2014 were exceptional and that investors should expect lower returns in the future. McKinsey forecasts a real (inflation-adjusted) stock market total return, including dividends, that ranges from 4% to 5% in their low-growth scenario to 5.5% to 6.5% in their higher-growth scenario; those compare to a historical average of approximately 5.9% (since 1926). Both scenarios acknowledge the currently low growth rate of the U.S. economy – approximately 2% over the last several years, versus a historical average of 3.3% – but the second scenario has the growth rate gradually rising to its historical average. This article points out that the McKinsey forecasts are actually better than recent returns for stocks:
The really high returns in the equity market were earned over 1985-1999, not 1985-2014; the 2000-2014 period was far below average and below what MGI is forecasting, so they’re actually forecasting an increase in returns relative to the last 15 years. (My analysis goes through 2014 because that is what MGI’s did, even though 2015 data are now available.)
The discount rates used by pension funds, cited by MGI as indicative of investor expectations for asset-class returns, are manipulated and are not an accurate guide to what investors really expect.
Future returns on bonds will be much worse than they were historically; the report gets this right.
In 1954, President Dwight D. Eisenhower laid out a bold vision that would revolutionize transportation in our nation—an interstate highway system that crisscrossed the country, speeding cars and trucks from city to city and everywhere in between as a way of connecting our growing nation. At the time, critics said it was too expensive and highway costs should be shouldered by the states. But the president's vision proved to be right and is now credited with creating jobs and spurring the post-war economic boon.
Sixty-two years later, it's time for a refresh—as our nation continued to grow, so too has its innovation. Now is the moment to modernize the interstate highway system so it can accommodate the latest technology and take advantage of new funding approaches. Our nation needs a coast to coast network of high-speed charging stations along our interstate highways. Best estimates suggest they should be spaced 70 miles apart, co-located at spots along the highway where we already stop for meals, snack and rest breaks.
Technically Speaking: What Has The Fed Wrought (Lance Roberts, Real Investment Advice) LR contributes weekly to GEI. He says that while the short-term trend has become more bullish, longer term (14 months) a downtrend is still in place. He is particularly concerned at how volume has fallen sharply during the recent rally.
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