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What We Read Today 11 June 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:

  • Furor over Tesla S Suspension System

  • Tesla Offers Lower Price Tesla Model S

  • The 60/40 Portfolio Won't Cut It Going Forward

  • The Debt Paradox - Does It Make Sense?

  • Affordable Housing is Disappearing

  • How High Will Second Quarter GDP Go?

  • Brexit Will Cascade

  • Brexit Too Close to Call

  • Are European Banks Crashing?

  • Goldman Loves Duterte

  • Venezuela Voids Opposition Leaders' Signatures on Recall Petitiion

  • And More

Articles about events, conflicts and disease around the world

U.S.

  • Urban sprawl: Did gentrification lead to rent surge, or vice versa? (CNBC)  The relentless search in major cities for affordable yet aesthetically pleasing housing isn't getting any easier.  Affordable housing in cities like San Fransisco and New York is very difficult to find, even extending into the suburbs, as frothy rents ("gentrification") are forcing working class people to flee. 

  • Goldman raises U.S. second-quarter GDP view after trade data (Reuters)  Goldman Sachs economists said on Wednesday they raised their outlook on U.S. economic growth in the second quarter to 3.0% from 2.7% following a smaller-than-forecast widening in goods trade deficit in April.  The Commerce Department said the U.S. goods trade gap grew to $57.5 billion from $56.9 billion in March. Goldman economists had forecast the deficit of $57.9 billion for April.  The date on this article is 25 May.  Goldman has reportedly raised the estimate again since then to 3.2%  See also next article.

  • The Daily Shot And Data - June 10, 2016 (Walter Kurtz, Sober Look, Talk Markets)

atlanta.ny.fed.gdp.est.2016.2q.jun.10

EU

"There is going to be a cascading effect across Europe.  The U.S. is going to be your safe haven — the U.S. currency, the U.S. debt markets, the equity market."

[1frame2]

  • European Banks Are Crashing (Zero Hedge)  From Deutsche Bank to Credit Suisse and from Barclays to Banco Popolare, the European banking system got battered this week with Friday's plunge the biggest in 4 months...  (See first chart below.)  ZH compares the decline of Deutsche Bank stock to that of Lehman Brothers (second chart) and then points out that European banks as a whole are not doing any better than German banks as the German bund yield curve flattens dramatically (third chart).

european.banks.deutsche.bank

bund.yield.curve.european.banks.decline

UK

  • Brexit Decision Too Close to Call in Poll as Stakeholders Lobby (Bloomberg)   British public opinion is too close to call on whether the country should stay in the European Union, with many voters still undecided as interest groups and political leaders make their cases, according to an Opinium survey released on Saturday.  The poll for the Observer newspaper showed 44% support Britain remaining in the 28-nation bloc, up from 43 percent a week ago. Some 42% of respondents backed leaving the European Union, also up 1 point from the previous poll released on June 4, as attitudes start to crystallize ahead of the June 23 referendum, but the differences aren’t statistically significant.

Qatar

  • Dutch woman arrested in Qatar after making rape claim (BBC News)  A Dutch woman is being detained in Qatar on suspicion of adultery after she told police she had been raped.  The 22-year-old, who was on holiday, was drugged in a Doha hotel and woke up in an unfamiliar flat, where she realized she had been raped, her lawyer says.  She was arrested in March on suspicion of having sex outside of marriage. She is due to appear in court on Monday.  The alleged rapist is also being held, but says the sex had been consensual.  A Dutch foreign ministry spokeswoman said the woman, who she named as Laura, had been arrested but not yet been charged.

Philippines

  • Goldman Sachs Comes Out Bullish on a Strong-Willed Duterte (Bloomberg)  Goldman Sachs Group Inc. says the hard man of Philippine politics could prove a boon for the nation’s economy.  President-elect Rodrigo Duterte’s election on a mandate to boost infrastructure spending, cut red tape for business and invest more in farming could lift the country’s potential growth rate, the U.S. bank’s analysts concluded after recent meetings in Manila.

Venezuela

  • Venezuela recall: Opposition leaders' signatures voided (BBC News)    Venezuela's opposition leaders say their signatures on a petition for a referendum to oust President Nicolas Maduro have been invalidated.  Former presidential candidate Henrique Capriles is among those who say their signatures have been ruled out for "failing to meet the requirements".  The Speaker of the National Assembly, Henry Ramos Allup, described the move as "shameful" and "a provocation".  The decision was announced on Friday by the National Electoral Council (CNE).  The electoral body's president, Tibisay Lucena, said more than 600,000 signatures had been invalidated.  The other voters who signed the petition - more than 1.3 million people - will need to turn up at regional electoral offices to confirm their identity later this month.  Voters will have five days from 20 June to have their signatures checked.  Econintersect:  Taking voter ID to the next level?

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

  • U.S. reviewing suspension complaints in Tesla Model S cars (Reuters)  A federal regulator said on Thursday it is reviewing reports of suspension problems in Tesla Motors Inc's (TSLA.O) Model S sedans, and is investigating whether the company urged customers to sign agreements not to disclose the problem. A spokesman for the U.S. National Highway Safety Administration (NHTSA), Bryan Thomas, said the agency is "examining the potential suspension issue on the Tesla Model S, and is seeking additional information from vehicle owners and the company".  The safety review follows reports of a possible defect in the Tesla Model S that may cause suspension control arms to break, which could cause the driver to lose control of the car.  A review is a step before the agency decides whether to open a formal investigation leading to a potential safety recall.  A Tesla spokeswoman said she was looking into NHTSA's statement, declining to immediately elaborate.

  • Elon Musk suggests complaints about the Model S may have been fabricated (The Verge)  Tesla fiercely defended its Model S sedan today against complaints about its suspension system, and now its CEO says some of those complaints are bogus.  Elon Musk said in a series of tweets today that the vast majority — 37 of 40 — of complaints filed with the National Highway Traffic Safety Administration (NHTSA) regarding concerns with suspension systems in the Model S sedan appear to be fraudulent. Additionally, Musk says that the safety regulator found no safety concerns related to the car’s suspension system.

  • Tesla Offers Lower-Price Model S Sedan (The Wall Street Journal)   Tesla Motors Inc. released a lower-priced version of its Model S electric sedan, a move to tap into the huge enthusiasm for its coming Model 3 and boost flagging sales growth of its existing cars.  On Thursday, it began selling a $66,000 version of its Model S with a battery modified to limit its travel range to about 200 miles on a charge. The price is 9% below the prior lowest-cost model.  Tesla expects to start shipping the Model 3, starting at about $35,000 in the next 18 months.

  • Why the Standard 60/40 Stock & Bond Portfolio Won’t Survive the Next Decade (Wolf Street) Everyone’s familiar with the classic 60/40 investment portfolio. If you’ve ever dealt with financial advisors, this is the standard allocation they’ll recommend. 60% of your money in the stock market, and 40% in bonds.  There’s no doubt this has been a great strategy the past few years. Check out the statistics from Jan. 1 2010 to Jan. 1 2016 below.  The standard 60/40 portfolio grew an average of 9.88% per year. And not only that, but the Sharpe ratio was at a stellar 1.33, indicating an outstanding risk-adjusted return!  Then compare that to 70 years of returns in the second table below.  It looks like the recent period of outperformance has been an anomaly.  To get the Sharpe ratio back near the long-term average for the period 2001 to 2040 would require disastrously low Sharpe ratios over the next 24 years.  Analyst Wolf Richter explains why the risk outlook for bonds is so negative now.  Econintersect:  Using an analogy, there are a few inches of gain left for bonds but a potential mile of losses.

2016-06-10-Alex-M-sharp-ratio

  • The Debt Paradox (Around the Curve)  This author says that economists often lament that too much debt causes financial stress. However in reality, he says, there is no evidence that the indebtedness level of an economy has anything to do with the level of interest rates, the key indicator of financial stress.  Econintersect:  This is a kluge.  The author does make some valid points, such as borrowing to increase consumption isn't such a great idea, and simple judgments based on debt/GDP ratios are not very useful.  But the data used is quite opportunistic and doesn't make a lot of sense.  In the first graph below the author uses total debt as a measure whereas private debt and government debt provide two completely different economic and financial functions.  Also, what is the significance of grouping developing economy currencies with reserve status currencies (IMF special drawing rights basket - U.S. dollar, euro, yen,pound sterling and Chinese yuan renminbi)?  On top of that, why should the euro, which has no fiscal coupling, be plotted with the other reserve status currencies?  In the case of the second chart we see no basis in logic for suggesting that a causative relationship should exist between private sector debt increase being related to aggregate savings.  The exception is, of course, that debt liability for one party creates an asset for another.  If that is the case then Chart 2 is simply showing an accounting tautology.  Steve Keen had a much shorter summary on Twitter


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