For Your Tuesday Morning Food For Thoughts – March 17, 2015
Sunil Sharma
Here is what I read on Monday and early Tuesday around the net. Some are market related, some tare on geo-politics and some are for fun. Hope you will find these useful and informative.
The US Oil Bust Just Got Worse – So there is a very good chance that storage capacity will disappear as a death trap for the price of oil this year. But US oil production is likely to continue to rise, leaving the industry to face an even bigger oil glut and even more price mayhem next year. Yet production won’t start declining until the money runs out.
In Russia, a drying lake threatens an ‘era of water wars’ – Lake Baikal’s dramatic drying already is causing tensions between the two regions that rely on it. In the Buryat Republic, upstream of the lake, wells are running empty and the area’s fishing industry is struggling with decreasing fish populations. Downstream, the people of the Irkutsk Oblast region who depend on the lake for their water and electricity supply are demanding they continue to have access to it despite the falling water level.
The Point: The Keynesian Illusion – The point is that Keynes is as fascinating and tempting as the Escher drawing – and makes as little practical sense. Economists have worked for decades trying to make sense of Keynes theory and use it to explain the facts about depressions, recessions, crises, unemployment and so forth. It is hardly the case that a conservative profession dismissed Keynes and refused to take him seriously, that the economics profession never gave him a fair shot. Quite the opposite: some of the most brilliant minds in the profession convinced of the absolute truth of Keynes ideas spent decades trying to make those ideas work – they and we have failed.
And The Rebuttal: Time for a Rant!: Why Oh Why Cannot We Have Better Economists? – Everybody else believes that the downturn that began in 2008 occurred not because of a supply shock in which workers suddenly became lazy but because of a demand shock in which the financial crisis caused nearly everybody in the economy to try to rebuild their stocks of safe, liquid, secure financial assets. Everybody else believes that the right way to model the economy is not the barter economy of DKL — trading phones for tattoos, etc. — but as a monetary economy, in which people hold stocks of financial assets and trade them for currently-produced goods and services.
Is China’s growth slower than the 7% consensus? – The question however remains: could we see growth that is substantially below even this reduced estimate? The latest fundamental economic reports seem to suggest a sharper slowdown than economists have been forecasting. Here are three examples: fixed asset investment growth, industrial production, and retail sales – all below consensus (see “Act” vs “Forecast”).
Stock Buybacks: Misunderstood, Misanalyzed and Misdiagnosed – Companies that bought back stock had debt ratios that were roughly similar to those that didn’t buy back stock and much less debt, scaled to cash flows (EBITDA), and these debt ratios/multiples were computed after the buybacks.
When to Use High-Yield Bond Funds -Income, while attractive, isn’t the only reason to consider high-yield bonds. They also have a very low correlation with Treasuries – an average of 0.4. Bonds rated single-B have an even weaker link to the Treasury market. Compare that to an almost one-to-one correlation between investment grade bonds and Treasuries, Hudoff says. That being said, says Hudoff, “High-yield bonds aren’t 100% immune from interest-rate risk.” He expects investors to pull back from the category a bit when the economy improves and the Fed starts raising interest rates. Bonus: Biggest High-Yield Bond Funds
Abenomics and the J-Curve – From the time of Alfred Marshall (1842-1924) and Abba Lerner (1903-82), economists and policymakers have believed that a real devaluation of a nation’s currency will lead to an improvement in that nation’s trade balance. The expected trajectory of the trade balance following the currency depreciation looks more or less like the letter J and is hence called the “J-curve theory.” At first the devaluation is likely to lead to a temporary decrease in the trade balance. Import and export prices are in many cases fixed in advance in contracts. However, importers who have not fully hedged their trades will experience an increase in the cost of their imports in their domestic currency, and thus the country’s trade balance will worsen. After a period of time contracts will be renegotiated and traders will adjust quantities demanded, reducing the demand for the more-expensive imports and increasing foreign demand for the less-expensive exports. The trade balance then improves, rising above its level prior to the depreciation.
When Yellen Gets Less Predictable She’s Getting Back to Normal – Beginning in June, and for the first time since 2008, officials would be making rate decisions meeting-by-meeting, based purely on the data in front of them, rather than committing themselves to keeping borrowing costs low.
The Worldwide Deficit of High-Quality Debt – My back-of-the-envelope calculation (that’s the technical term for a fair guess) is that demand exceeds supply by as much as $1 trillion to $2 trillion a year. That is what has been forcing bond prices higher, and driving negative yields.
Some Implications of the Dollar’s Rise – The US trade deficit has shrunk considerably since its peak of 5.9% of GDP in 2005Q4. It was 3.1% of GDP as of 2014Q4 (second release). The non-oil trade deficit has exhibited a much smaller decrease; the 3.8% deficit has shrunk to 2.1% as of last quarter. Notice that the real value of the dollar, lagged two years, has an inverse relationship with the trade balance. Hence, eventually, it makes sense that the deficit will eventually deteriorate (relative to counterfactual) as a consequence of the recent appreciation.
