Economische aanraders 12-05-2019
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.
Trump Is Working To Change The Way Economists View Tariffs – Tyer Durden
By now, it is has become a universally accepted “truth” that tariffs and trade wars are bad for economies, at least according to legacy economists and trade experts, Bloomberg recently pointed out. Not only do trade wars make goods and services more expensive due to supply chain disruption, they also invite retaliation and can hurt countless other aspects of an economy. Like any conflict, narrow short-term benefits often come at the expense of longer term concessions.
But increasingly, it’s looking like President Donald Trump may not hold this widely-held “traditional” view on tariffs. As trade pressure has ramped up on China over the last year – and again over the last few days – Trump seems to have increasing confidence in the idea that trade wars are actually boosting US growth and strengthening his hand, according to people familiar cited by Bloomberg.
How stress tests fail – Jeremy Bulow
Bank stress tests in the US were an important tool for bailing out banks in the Great Recession. As this column points out, however, because the tests use regulatory rather than market measures of asset values and risk they have almost nothing to do with whether a bank will be economically solvent under test conditions. This column argues that the thousands of pages of post-crisis bank regulation have largely ignored perhaps the two most needed reforms: measuring asset values and risks in an economically realistic way. Reforming the stress tests is necessary for clearly and credibly placing responsibility for future banking losses in the private sector and for improving incentives for both managing old risks and for investing in new ones.
The Subsistence Fund Is the Heart of Economic Growth – Frank Shostak
What characterizes the modern economy is its complex structure of production that seemingly generates an endless amount, and an endless variety, of goods. It seems that the production structure has, as it were, a self-generating mechanism. Careful examination, however, shows that without a key ingredient, the entire infrastructure could not have emerged. The ingredient that makes it all possible is the subsistence fund. The following simplified example will allow us to ascertain the essence of this fund.
To maintain life and wellbeing, man must have at his disposal an adequate amount of final consumer goods. These goods, however, are not readily available — they have to be extracted from nature. Without tools at his disposal, man can only secure from nature very few goods for his survival.
Manufacturing and Services Out of Sync, Nmot Just in the US – Wolf Richter
Goods producing economy suffers globally. Services expected to keep it all taped together.
“There remained notable differences in performance between the manufacturing and services sectors. Whereas manufacturing production fell for a third successive month, service sector growth was sustained at a solid, albeit slower, rate” – so the IHS Markit Composite PMI this morning about the Eurozone.
And that is a global phenomenon that also is playing out in the US. In Germany, the contrast is particularly sharp: The manufacturing contraction has become steep, even as services are growing strongly.
Financial Inflation? – John H, Cochrane
Torsten Slok sends this lovely picture of the S&P500 and the price index for portfolio management and investment advice services. Torsten explains that “50% of the decline in core PCE inflation since the peak in July has been driven by financial services, and with the stock market rebounding, we should expect to see the financial services component move higher again.”
What’s going on? I think it’s this: Most portfolio management payments are a percent of value — you pay a fee, say 1%, of the total value of the portfolio. When the stock market goes down 10%, you pay 10% less in fees. Now, the BEA’s job is to figure out, did you get 10% less quantity — did you get 10% less “valuable advice” for that fee? You’re not an idiot, so you’re paying 1% off the top of your wealth annually, a third of Senator Warren’s dreaded wealth tax, for something of value, the BEA figures. Or did the “price” of financial services go down 10%? Evidently, the BEA assumes the price, not the quantity changed, so the “price” of financial services tracks the stock market.
Carl Menger on Currency Durability: A Lesson on Cryptos? – Stephan Livera
Carl Menger, the founder of the Austrian school of economics, expressed a fundamental insight in his essay On The Origins of Money: goods compete on the market to become a monetary medium of exchange. The most saleable goods are the likeliest to become used as a medium of exchange and eventually emerge as the money.
In “Chapter V – Concerning the Causes of the Different Degrees of Saleableness in Commodities,” Menger wrote about ways in which different commodities could be distinguished. Can these be applied to distinguish amongst cryptocurrencies to understand which ones are more saleable?
Menger spoke of saleableness through two dimensions, time and space. In terms of space, this includes aspects of how easy the good is to transport, and the local extension of organised markets and inter-communication by arbitrage. In our modern day world of internet connected cryptocurrency exchanges, on these aspects there is not a large distinction between cryptocurrencies in terms of space.
When Does Market-Timing Work? – Nick Magiulli
While I don’t disagree with this advice, it doesn’t actually address what conditions you would need to meet in order to be a successful market timer (without using quantitative approaches). So instead of writing off market timing, let’s ask, “When does market timing work?”
I looked into this, using the S&P 500 (with dividends) since 1990, and discovered that to succeed as a market timer you would have to:
Know when the market is about to decline by some threshold amount (i.e. 20% or more).
Act on this knowledge by selling within 250 trading days (1 year) of the top and re-buying within 250 trading days of the absolute bottom.
If we generalize this, successful market timing requires the ability to anticipate future declines and to act on them within a reasonable time frame. It doesn’t mean that you have to know exactly when the top/bottom is, but it does mean that you need to have a general sense of the market’s direction in the near future.
Perhaps It’s Time to Start Worrying About Global Corporate Debt, Suggests Bank of England – Don Quijones 8 mei
Chinese corporate defaults this year through April are 3.4 times the amount last year.
Since the global financial crisis, the total value of outstanding corporate bonds has doubled, from around $37 trillion in 2008 to over $75 trillion today. But the growth has been far from even, with non-financial debt growing much more rapidly in certain jurisdictions. As the volume and price of this debt has grown, so too has its riskiness. And that could be a recipe for disaster, warns Sir John Cunliffe, deputy governor for financial stability at the Bank of England.
In the US, non-financial debt is up 40% on the last peak in 2008. Cunliffe expressed even greater caution concerning emerging markets, where corporate debt as a proportion of the global debt pile has grown the most over the past 10 years. “Emerging market debt now accounts for over a quarter of the global total compared to an eighth before the crisis,” Cunliffe said.
At The End Of The Day, It’s All About Confidence – Adam Taggart
While many factors contribute to their creation, market reversals only happen when a shift in sentiment occurs.
That’s why bull markets can go on for much longer than reason merits. As long as the marginal buyer is keeping the faith that he can sell to someone else for more, prices will remain elevated no matter how ugly the underlying fundamentals:
But at some point, the once-bulletproof euphoria becomes exhausted. And at the critical margin, net buyers become net sellers. (For a reminder of the supreme importance the margin plays, revisit our report The Marginal Buyer Holds The Pin That Pops Every Asset Bubble)
Lending cycles and real outcomes: Costs of political misalignment – Çağatay Bircan, Orkun Saka
Government ownership of banks can help solve credit market failures and stabilise the supply of credit over the business cycle. However, it can also end up serving political interests and lead to a misallocation of financial resources. This column provides new evidence that state-owned banks systematically engage in tactical redistribution of credit in line with the political incentives of those in power. Analysing the geographical distribution of all lending and economic activity in Turkey, it shows that the central government may use commercial lending by state-owned banks to support allies in local elections.
What Would It Take to Spark a Rural/Small-Town Revival? – Charles Hugh Smith
There are many historical models in which the spending/investing of wealthy families drives the expansion of local economies.
The increase in farm debt while farm income declines is putting unbearable financial pressure on American farmers, who must be differentiated from giant agri-business corporations. This is placing immense pressure on farmers, pressure which manifests in rising suicide rates.
If this isn’t the nadir of rural America, it’s certainly close.
This decline of financial viability and sharp rise in stress isn’t limited to rural America. The decline of rural regions and small towns is a global phenomenon, and the causes are many but boil down to two primary dynamics:
Estimating the cost of capital for wind energy investments in Turkey – Gustav Fredriksson, Simone Tagliapietra, Georg Zachmann
Wind power represents a key component of Turkey’s national energy strategy. Based on data collected on 138 installations in the country, this paper provides an estimation of wind power’s cost of capital in Turkey. This analysis finds that the cost of capital for wind power in Turkey compares with the one of South-east European countries. On this basis, continued governmental commitment to current support schemes for wind power must be considered as crucial to further promote wind power deployment in the country, even if the recent devaluation of the Turkish lira raises the feed-in-tariffs cost for the government.
China Has Propped Up Global Markets Since December – Is This About To End? – Brandon Smith
Global stock markets and some treasury markets have become a rather spectacular farce over the past ten years, so much so that there are many people in the investment world that actually believe the long running bull market rally will “never end”. My view of stock markets has always been the same – they are an economic placebo; a psychological crutch that is exploited by central banks and governments to dupe the public into thinking our financial system is stable, even while the rest of the economy is in steep decline.
Stock markets are one false indicator, among a few (such as rigged GDP numbers, rigged inflation, as well as rigged unemployment stats), which keep the masses in the dark… at least, for a while. In every bubble in modern history, there comes a moment in time when central banks are either forced to let the fraud collapse, or, they deliberately allow the fraud to collapse. Banks and countries can only fake a recovery for so long, and very often, global elitists gain political and social advantages by simply letting the system crash for a time.
Economic Models vs. The Real World – Frank Shostak
The government’s releases of various economic indicators such as GDP, CPI and unemployment receive wide coverage in the media. In a measured and authoritative voice, various economists and other experts who are interviewed discuss their views regarding the health of the economy. A rise in an indicator such as GDP is interpreted as good news while a decline is seen as pointing to troubles ahead.
What are the tools that economists and financial experts utilize in their assessments of the economy? What is the basis of their framework of thought?
In order to make the data “talk,” economists utilize a range of statistical methods that vary from highly complex models to a simple display of historical data. It is generally held that by means of statistical correlations one can organize historical data into a useful body of information, which in turn can serve as the basis for the assessments of the state of the economy. It is held that through the application of statistical methods on historical data, one can extract the facts of reality regarding the state of the economy.
China’s Export Story Is Everyone’s Economic Base-Case – Jeffrey P. Snider
The first time the global economy was all set to boom, officials were at least more cautious. Chastened by years of setbacks and false dawns, in early 2014 they were encouraged nonetheless. The US was on the precipice of a boom (the first time), it was said, and though Europe was struggling it was positive with a more aggressive ECB emerging. Even Japan was looking forward to a substantial QQE-based pickup – after the VAT tax hike.
For much of the rest of Asia, things were looking up. Global growth wasn’t that time synchronized, but it was just enough. In April 2014, in its Regional Economic Outlook, the IMF wrote:
Asia is well positioned to meet the challenges ahead provided it stays the course on reforms. The region has strengthened its resilience to global risks and will continue as a source of global economic dynamism. Recent actions taken to address vulnerabilities are starting to bear fruit.
The organization’s Economists also warned there were still vulnerabilities, though they never did figure out why.
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