Economische aanraders 21-10-2018
Economische aanraders: Veren of Lood biedt u op zondag wekelijks een inkijkje in (minstens) 15 belangrijke of informatieve artikelen en interviews die vooral de voorafgaande 7 dagen op economisch terrein verschenen op onafhankelijke sites.
De kop is de link naar het oorspronkelijke artikel, waarvan de samenvatting of de eerste (twee) alinea’s hier gegeven worden. Er zijn in deze rubriek altijd verschillende economische scholen vertegenwoordigd, en we streven er naar die diversiteit te handhaven.
We nemen wekelijks ook een paar extra links op naar artikelen die minder specialistische kennis vereisen. Deze met *** gemerkte artikelen zijn ons inziens ook interessant voor lezers met weinig basiskennis van economie.
Germany Clashes With The U.S. Over Energy Geopolitics – Tsvetana Paraskova
The United States and the European Union (EU) are at odds over more than just the Iran nuclear deal – tensions surrounding energy policy have also become a flashpoint for the two global powerhouses.
In energy policy, the U.S. has been opposing the Gazprom-led and highly controversial Nord Stream 2 pipeline project, which will follow the existing Nord Stream natural gas pipeline between Russia and Germany via the Baltic Sea. EU institutions and some EU members such as Poland and Lithuania are also against it, but one of the leaders of the EU and the end-point of the planned project—Germany— supports Nord Stream 2 and sees the project as a private commercial venture that will help it to meet rising natural gas demand.
“Perfect Storm” – The (Ominous) Problem With Global Liquidity – Tuomas Malinen
Market liquidity is crucial for well-functioning capital markets. There has been a quite lot of talk about diminished market liquidity and the role of machines in it (see, e.g. Q-review 4/2017, this and this). These are worrying developments.
However, while market liquidity is crucial for markets, global financial flows, i.e. liquidity, is also essential to the real economy and for global economic growth. The availability of credit on a global basis fuels investments and growth around the world. Such financial flows fell by a massive 90 % during the 2008 crisis, which quickly translated into a global recession. Investment and consumption collapsed almost everywhere, with the exception of China where a massive credit stimulus was enacted.
Since then, there has been an uneven recovery. Cross-border bank lending has never really recovered (see Q-review 1/2017), but the issuance of vast amounts of government and corporate debt has taken its place. This creates a serious risk for the global real economy if highly over-valued capital markets crash.
The ‘real’ illusion: How monetary factors matter in low-for-long rates – Claudio Borio, Piti Disyatat, Mikael Juselius, Phurichai Rungcharoenkitkul
Has the decline in real (inflation-adjusted) interest rates over the last 30 years been driven by variations in desired saving and investment, as commonly presumed? And is this a useful way of thinking about the determination of real interest rates more generally, at least over long horizons? This column finds that this is not the case by systematically examining the relationship between several saving-investment drivers and market real interest rates (as well as estimates of natural rates) since the 1870s and for 19 countries. By contrast, a clear and robust role for monetary policy regimes emerges. The analysis has significant implications for the notion of monetary neutrality and policymaking.
Implosion of Stock Market Double-Bubble in China Hits New Lows, Authorities Busy Elsewhere Keeping China Miracle from Unraveling – Wolf Richter
Bigger issues than propping up the stock market beckon.
Today, the Shanghai Composite Index dropped another 2.9% to 2,486.42. In the bigger picture, that’s quite an accomplishment:
Lowest since November 27, 2014, nearly four years ago
Down 30% from its recent peak on January 24, 2018, (3,559.47)
Down 52% from its last bubble peak on June 12, 2015 (5,166)
Down 59% from its all-time bubble peak on October 16, 2007 (6,092)
And back where it had first been on December 27, 2006, nearly 12 years ago.
The chart of the Shanghai Stock Exchange Composite Index (SSE) shows the 2015-bubble and its implosion, followed by a rise from the January-2016 low, which had been endlessly touted in the US as the next big buying opportunity to lure US investors into the China miracle.
***China’s Next Revolution Is on the Horizon – Charles Hugh Smith
The Mandate of Heaven will be withdrawn, and the autocratic regime overthrown.
The absolute confidence that China’s political structure is permanent and forever is reminiscent of the absolute confidence in the 1980s that the USSR’s political structure was permanent and forever. But the social contract that undergirds the Communist Party’s absolute power in China is fast-eroding, and those who understand Chinese history sense the winds of change have shifted and the next revolution in China is already darkening the horizon.
The story starts in the Song Dynasty, which reached its zenith in the mid-1200s.
Italy’s Debt Crisis Thickens – Don Quijones
But outside Italy, credit markets are sanguine, and no one says, “whatever it takes.”
Italy’s government bonds are sinking and their yields are spiking. There are plenty of reasons, including possible downgrades by Moody’s and/or Standard and Poor’s later this month. If it is a one-notch downgrade, Italy’s credit rating will be one notch above junk. If it is a two-notch down-grade, as some are fearing, Italy’s credit rating will be junk. That the Italian government remains stuck on its deficit-busting budget, which will almost certainly be rejected by the European Commission, is not helpful either. Today, the 10-year yield jumped nearly 20 basis points to 3.74%, the highest since February 2014. Note that the ECB’s policy rate is still negative -0.4%
The international use of the euro: What can we learn from past examples of currency internationalisation? – Emmanuel Mourlon-Druol
The recent State of the Union speech by Jean-Claude Juncker sparked a discussion about the potential wider use of the euro on the international stage. Historically, it is not the first debate of this kind. Emmanuel Mourlon-Druol analyses four previous cases of debates on international currencies to reveal the different scenarios associated with their greater use, as well as the need to have a clear objective for a currency’s internationalisation.
The benefits of shadow banking in accommodating larger retirement needs – Guillermo Ordoñez, Facundo Piguillem
As life expectancy has increased, so has the need for retirement savings. New financial instruments have been important in meeting the increasing demand for safe assets. This column shows that shadow banking has played a crucial role in meeting the higher demand for insurance by lowering the financial sector’s liquidity costs. Despite its role in the Great Recession, shadow banking has done more good than harm.
US-China Trade War, “Hard” Brexit Give Germany Inc. the Willies – Wolf Richter
No economy is as dependent on a trade surplus as Germany.
The Center for European Economic Research (ZEW) named names and pointed fingers: Its Indicator of Economic Sentiment for Germany in October dropped by 14.1 points, to a level of negative -24.7, matching July 2018, both the lowest levels since August 2012, when the Eurozone was still trying to not dig itself deeper into its euro debt crisis. The indicator has been in the red since April:
China’s Economy Is Not Crashing, It’s Worse Than That – Jeffrey P. Snider
China’s economy is not crashing. Hyperbole works both ways. Last year and this, the smallest increment above a prior number was broadcast out as the greatest thing ever (US wage growth in particular), irrefutable proof of globally synchronized growth. Now that that’s over with, largely, there will be a tendency toward the other extreme.
The latest Chinese economic statistics are for several of them the lowest in some time. Starting with real GDP, at just 6.5% in Q3 2018 it’s the slowest pace since the first quarter of 2009. That’s not good especially for a statistic of such dubious practices often specifically crafted to be the best it can be.
What matters to individual investors? We ask them – James Choi, Adriana Z. Robertson
Economists typically try to infer investors’ motives and beliefs by observing prices, quantities, and choices, but the lack of randomised experiments makes drawing convincing conclusions difficult. This column presents the findings from a different approach – directly asking investors about their motives and beliefs. Rather than a small number of dominant factors, it finds substantial support for many of the leading theories of what drives portfolio equity shares.
How Many Households Qualify as Middle Class? – Charles Hugh Smith
By the standards of previous generations, the middle class has been stripmined of income, assets and purchasing power.
What does it take to be middle class nowadays? Defining the middle class is a parlor game, with most of the punditry referring to income brackets as the defining factor.
People tend to self-report that they belong to the middle class based on income, but income is not the key metric: 12 other factors are more telling measures of middle class membership than income.
***Top firms and the decline in local product-market concentration – Esteban Rossi-Hansberg, Pierre-Daniel Sarte, Nicholas Trachter
Recent literature has documented increasing US product-market concentration at the national level. This column argues that when measured at the more relevant local level, concentration has actually decreased over the last 25 years on average and in all major sectors. In the many industries with diverging national and local trends, top firms are bringing down local concentration even as they increase national concentration. These findings support the idea that top firms expand their national market share by opening establishments in new locations, thereby increasing local competition.
***What Truckers & Railroads Are Saying About the US Economy – Wolf Richter
They’re a measure of the goods-based economy.
Freight shipment volume across all modes of transportation – truck, rail, air, and barge – rose 8.2% in September, compared to a year earlier, according to the Cass Freight Index. While this is still a big jump, it’s down from the five double-digit increases earlier this year. The index covers merchandise for the consumer and industrial economy but does not include bulk commodities, such as grains or chemicals.
Italy’s Problem Is Not The Euro, It’s Political Spending – Daniel Lacalle
The Italian government has created another massive turmoil in European markets with its 2019 budget proposal.
With a huge increase in spending, it estimated a deficit of 2.4% for 2019 compared to its previous target of 0.8% and the 1.6% announced by the finance minister.
Not only does it represent a huge increase in a country that already has 131% of debt over GDP, but a brief analysis of the tax revenue estimates shows that the figure presented is simply unattainable. Most independent analysts pointed the evidence of over-optimistic estimated revenues, raising fears of an additional 14 billion euro financial gap.
The Milan stock market collapsed, banks had to be suspended from trading after falling 6-7%, bond yields soared and the 10-year Italian bond fell to the worst level in a year despite the interventions of the European Central Bank.
The “World’s Most Bearish Hedge Fund” Reveals How It Will Trade The Next Crash – Tyler Durden
After a painful stretch of five consecutive down months, September couldn’t come fast enough for Horseman Global, which we previously dubbed “the world’s most bearish hedge fund”, due to its exposure which, while fluctuating, has been bearish for the past 6 years even as it generated significant alpha, and most recently had a net short position of -47.33%, even more bearish than its -43.5% net last month.
In September, the fund finally rebounded, rising 1.8% – its first up month since March – bringing its YTD return to -8.79%, with “gains coming from the long book and the short book. The currency book lost money” according to CIO Russell Clark’s latest monthly letter.
So after what is setting up to be Horseman’s most painful year since 2016 in which the fund lost 24%, is Clark ready to throw in the bearish towel, stop “fighting the Fed”, and join the countless ranks of momentum chasers?
How Gibson’s paradox has been buried – Alasdair MacLeod
Until the 1970s, all recorded history showed that bond yields were tied to the general price level, not the rate of price inflation as commonly believed. However, since then, the statistics say this is no longer the case, and bond yields are increasingly influenced by the rate of price inflation. This article explains why this has happened, and why it is important today.
This paper is a follow-up on my white paper of October 2015.[i] In that paper I explained why, based on over two-hundred years of statistics, long-term interest rates correlated with the general price level, and not with the rate of inflation. I now take the analysis further, explaining why the paradox appears to no longer apply.
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