The Big Picture |
- Contagious Herding and Endogenous Network Formation in Financial Networks
- S&P: Widening Inequality Bad for GDP, Good for Boom/Bust Cycles
- 10 Wednesday PM Reads
- Europe Is Highly Dependent On Russian Gas
- 10 Wednesday AM Reads
- Murdoch Market Indicator (or, has Rupert Signaled a New Bull Market?)
- BBRG TV: Retail, Cellular, Valuations, Russia
- How Quantitative Easing “Works” – The Mainstream Still Doesn’t Get It
- Out Foxed: Who Else Will Buy Time Warner?
- Presidents and the U.S. Economy: An Econometric Exploration
| Contagious Herding and Endogenous Network Formation in Financial Networks Posted: 07 Aug 2014 02:00 AM PDT |
| S&P: Widening Inequality Bad for GDP, Good for Boom/Bust Cycles Posted: 06 Aug 2014 10:30 PM PDT Standard & Poor's: Runaway Inequality Dampens GDP Growth, Leads to Boom/Bust Cycles and Discourages Trade, Investment and HiringInequality Also Dampens Social Mobility, Increases Political Pressure and Produces a Less Competitive WorkforceStandard & Poor's released a report on inequality today, concluding:
S&P joins many others in concluding that runaway inequality hurts the economy, including:
Even the father of free market economics – Adam Smith – didn't believe that inequality should be a taboo subject. Numerous investors and entrepreneurs agree that runaway inequality hurts the economy, including:
Indeed, extreme inequality helped cause the Great Depression, the current financial crisis … and the fall of the Roman Empire . And inequality in America today is twice as bad as in ancient Rome, worse than it was in Tsarist Russia, Gilded Age America, modern Egypt, Tunisia or Yemen, many banana republics in Latin America, and worse than experienced by slaves in 1774 colonial America. (More stunning facts.) Bad government policy – which favors the fatcats at the expense of the average American – is largely responsible for our runaway inequality. And yet the powers-that-be in Washington and Wall Street are accelerating the redistribution of wealth from the lower, middle and more modest members of the upper classes to the super-elite. |
| Posted: 06 Aug 2014 02:30 PM PDT My afternoon train reads:
What are you reading?
Investors Retreat From Junk Bonds
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| Europe Is Highly Dependent On Russian Gas Posted: 06 Aug 2014 09:00 AM PDT |
| Posted: 06 Aug 2014 06:30 AM PDT My morning train reads (continues here):
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| Murdoch Market Indicator (or, has Rupert Signaled a New Bull Market?) Posted: 06 Aug 2014 05:26 AM PDT Last month, I spilled a considerable number of pixels explaining why Rupert Murdoch's Time Warner bid had no significance to whether or not this is a market top. My short list included complaints of cherry picked data that somehow ignored most of Murdoch's M&A activity over the past half century; a laughably small sample size of just two; and every statistician's favorite foible, assuming correlation equals causation, and not a merely random outcome. We get to revisit that exercise in debunking that silly chart this morning on the news that wily ole Rupert has withdrawn his bid for Time Warner. And just to show how serious he – that his offer is really off the table – 21st Century Fox announced a $6 billion buyback, disposing of the cash that could have used to purchase Time Warner. Its as if he is saying: "Stop me before I acquire again!" Forget the M&A news for a moment, and think about the arc of this takeover bid, and withdrawal relative to the claim that the bid itself was proof a top was imminent. What implications does the withdrawal of the bid have?
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| BBRG TV: Retail, Cellular, Valuations, Russia Posted: 06 Aug 2014 04:30 AM PDT On today's "The Roundup," Trish Regan, Barry Ritholtz, Olivia Sterns and Eric Chemi wrap up the day's top market stories on Bloomberg Television's "Street Smart."
More video after the jump
~~~ Is the Selling in U.S. Stocks Just Getting Started? ~~~ Stratfor’s Lauren Goodrich, Greylock Capital Management’s Andrey Popel and Bloomberg’s Barry Ritholtz discuss the rising tensions between Russian and Ukraine. They speak with Trish Regan on “Street Smart.” Are Russia and Ukraine on the Brink of War? |
| How Quantitative Easing “Works” – The Mainstream Still Doesn’t Get It Posted: 06 Aug 2014 03:00 AM PDT How Quantitative Easing “Works” — The Mainstream Still Doesn’t Get It
I'm not going to lie to you. I have had a mild case of writer's block the past month. I have found that there is nothing better to summon my muse than to read what mainstream economic analysts/commentators are writing about current issues. Typically, I can find something they are saying that I vehemently disagree with. Sure enough, it worked. While thumbing through my most recent copy of The Economist (August 2nd – 8th), I came across the Free Exchange section entitled "The Exceptional Central Bank." The header on the article is: "The European Central Bank should adopt quantitative easing now rather than as a last resort." I don't have any disagreement with this header other than I would argue that the ECB should have adopted quantitative easing (QE) five years ago. No, what lit my fuse was the following: "One of the main ways that QE has boosted the American economy is by lowering corporate borrowing costs. As the Federal Reserve bought Treasuries and government-guaranteed mortgage securities, pushing down their yields, investors turned to corporate bonds, in turn driving down their yields (emphasis added)." Really? This is how QE has boosted the American economy, by lowering corporate bond yields? I disagree with this analysis on both empirical and theoretical grounds. Let's start with the empirical evidence. Let's observe how the yield on corporate bonds has behaved in relation to Fed purchases of Treasury coupon and agency mortgage-backed securities. These data are shown in the chart below. The Fed stepped up its securities purchases early in 2009. By the second quarter of 2010, its first phase of QE had ended. Corporate bond yields fell as the Fed ended QEI. The Fed again stepped up its securities purchases in the fourth quarter of 2010, terminating QEII in the second quarter of 2011. As the Fed initiated QEII, corporate bond yields trended higher. Following the termination of QEII, corporate bond yields plummeted. With the initiation of QEIII in the fourth quarter of 2012, corporate bond yields started rising. So, Fed purchases of securities in recent years have tended to be positively correlated with corporate bond yields. That is, when the Fed has stepped up its purchases of securities, corporate bond yields have tended to rise; when the Fed has cut back on its securities purchases, corporate bond yields have tended to fall. I guess the editors of The Economist hold to the maxim, "never let the facts get in the way of a good story". Except that it is not even a "good story" on theoretical grounds. Suppose one morning, all households decided to cut back on their spending by 10% and use these saved funds to purchase corporate bonds. Corporate bond yields would surely fall. For the sake of argument, assume that businesses in the aggregate increased their borrowing and spending by an amount equal to what households cut back on their spending (increased their lending). In this extreme case, the decline in corporate bond yields would elicit a net change in total spending in the economy of zero. In a more likely case in which the saving behavior of households was positively correlated with the level of interest rates (i.e., the supply curve of household lending sloped upward and to the right), all else the same, the increase in business borrowing/spending resulting from an outward shift in the household lending supply curve would be less than the cut in household spending (increase in household lending). So, a decline in corporate bond yields, in and of itself, is no guarantee of a net increase in aggregate spending on goods and services. But what if there were an increase in credit that did not entail households cutting back on their current spending? What if some entity could create credit, figuratively, out of thin air? That is exactly what the Fed does when it purchases securities. Suppose the Fed purchases $100 worth of securities from a pension fund. The Fed pays for these securities by crediting the pension fund's bank account by the amount of the securities purchase, $100. The pension fund has $100 more of deposits and $100 less of securities. The Fed has $100 more of securities, an asset to the Fed, and $100 more of reserves, a liability the Fed, owned by the pension fund's bank. The pension fund's increase in deposits and the increase in reserves owned by the pension fund's bank were created by the Fed, figuratively out of thin air. If the pension fund decides to purchase some securities to replace those it sold to the Fed, then it will be using funds created by the Fed out of thin air to increase the supply of credit. Assume that the pension fund purchases $100 of newly-issued corporate bonds to replace the $100 of securities it sold to the Fed. Further assume that the corporation issuing these bonds uses the proceeds of the bond sale to purchase $100 of new equipment. In this case, the increase in credit will result in a net increase in aggregate spending on goods and services because the increase in credit was created out of thin air, not as a result of households cutting back on their current spending in order to purchase the newly-issued corporate bonds. The main way QE has boosted the American economy has been by the Fed creating credit out of thin air, enabling some entities to increase their current spending without requiring any other entities to cut back on their current spending. Contrary to what the editors of The Economist and many mainstream economic analysts assert (but don't verify), QE has not boosted the American economy by lowering corporate bond yields. Note: The views expressed in this commentary solely reflect those of Econtrarian, LLC.
Paul L. Kasriel |
| Out Foxed: Who Else Will Buy Time Warner? Posted: 06 Aug 2014 02:30 AM PDT I was on Bloomberg TV yesterday when the news broke that Murdoch was withdrawing hid bid for TWX. Rupert Murdoch's 21st Century Fox withdrew its $75 billion takeover offer for Time Warner Inc., the owner of HBO and Warner Bros. Bloomberg’s Trish Regan, Julie Hyman, Jon Erlichman, Cory Johnson and Barry Ritholtz have more on “Street Smart. Murdoch Backs Down: Fox Won’t Buy Time Warner ~~~ Rupert Murdoch's 21st Century Fox withdrew its $75 billion takeover offer for Time Warner Inc., the owner of HBO and Warner Bros. Bloomberg’s Barry Ritholtz reflects on the proposed deal and speculates about who may be next to make an offer for Time Warner on “Street Smart.” Out Foxed: Who Else Will Buy Time Warner? |
| Presidents and the U.S. Economy: An Econometric Exploration Posted: 06 Aug 2014 02:00 AM PDT |
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