Category: Economy

Analysis of the global economy

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Ending Too Big to Fail | The Big Picture

From an address by William C. Dudley, President of the NY Fed, to the Global Economic Policy Forum, November 8, 2013:

There is evidence of deep-seated cultural and ethical failures at many large financial institutions. Whether this is due to size and complexity, bad incentives or some other issues is difficult to judge, but it is another critical problem that needs to be addressed. Tough enforcement and high penalties will certainly help focus management’s attention on this issue. But I am also hopeful that ending too big to fail and shifting the emphasis to longer-term sustainability will encourage the needed cultural shift necessary to restore public trust in the industry.

Dudley calls for increased capital requirements to reduce the risk of failure as well as more robust procedures to reduce the impact of a single large failure:

The major initiative here is the single point of entry framework for resolution proposed by the Federal Deposit Insurance Corporation. Under this framework, if a financial firm is to be resolved under Title II of the Dodd-Frank Act, the FDIC will place the top tier bank holding company into receivership and its assets will be transferred to a bridge holding company. The equity holders will be wiped out and sufficient long-term unsecured debt will be converted into equity in the new bridge company to cover any remaining losses and to ensure that the new entity is well capitalized and deemed creditworthy. Subsidiaries would continue to operate, which should limit the incentives for customers to run. By assigning losses to shareholders and unsecured creditors of the holding company and transferring sound operating subsidiaries to a new solvent entity, such a “top-down” resolution strategy should ensure continuity with respect to any critical services performed by the firm’s subsidiaries and this should help limit the magnitude of any negative externalities.

Read more at Ending Too Big to Fail | The Big Picture.

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Transport: Fedex improving outlook

Bellwether transport stock Fedex has risen dramatically in recent weeks, reflecting the improving outlook for economic activity.
Fedex

UPS has enjoyed a similar surge, as has Deutsche Post AG (which owns DHL).

Deutsche Post AG

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Druckenmiller Sees Storm Worse Than ’08 | Bloomberg

Stan Druckenmiller, George Soros’ former partner and one of the best-performing hedge fund managers of the past three decades, warns of the real long-term threat to the US economy:

Druckenmiller, 59, said the mushrooming costs of Social Security, Medicare and Medicaid, with unfunded liabilities as high as $211 trillion, will bankrupt the nation’s youth and pose a much greater danger than the country’s $16 trillion of debt currently being debated in Congress…… unsustainable spending will eventually result in a crisis worse than the financial meltdown of 2008…

Read more at Druckenmiller Sees Storm Worse Than ’08 as Seniors Steal – Bloomberg.

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Household Debt to Income ratio

Barry Ritholz highlights the alarming debt to income ratio for Canada compared to the USA:
Household Debt to Income ratio

How does Australia compare?
Australian Household Debt to Income ratio
Australian household debt to income is similar to Canada’s. There has been discussion recently about whether Australia is in a housing bubble. As Anna Schwartz (joint author of A Monetary History of the United States, 1867-1960 with Milton Friedman) pointed out: there is only one kind of bubble and that is a debt bubble. It may manifest through rising real estate, stock or other asset prices, but the underlying driver is the same: a rapid expansion of the money supply through easy credit.

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Claiming the $1 trillion prize in US health care | McKinsey & Company

Even within a single local market, we have found that the cost to deliver the same “episodes of care” [medical situations characterized by a relatively clear outcome and relatively predictable start and end points (for example, most hospitalizations, pregnancies, upper respiratory infections, and hip replacements)] typically varies by 30 percent to well over 100 percent, even after we held constant the prices that hospitals, physicians, and other providers charge and risk-adjusted the costs to reflect patients’ health status. The cost differences were unrelated to any discernible variation in care quality or outcomes. These results make it clear that some providers are dramatically more successful than others in addressing patients’ needs. The strong providers achieve good results not by cutting corners but by developing (or adopting) best practices that enable them to deliver high-quality outcomes at lower cost.

Read more at Claiming the $1 trillion prize in US health care | McKinsey & Company.

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Here’s A Disturbingly Astute Line From When S&P Downgraded The US Credit Rating | Business Insider Australia

From S&P’s historic downgrade of the US credit rating on August 5, 2011:

More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011.

Read more at Here's A Disturbingly Astute Line From When S&P Downgraded The US Credit Rating | Business Insider Australia.

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Pro-nuclear greenies? Thinking outside the box with Pandora’s Promise

Ben Heard and Prof. Corey Bradshaw highlight the environmental and economic damage caused by pursuit of nuclear-free power.

Had Australia deployed a modest nuclear program starting in 1965, to build slowly to around 20% of electricity provided (as done in the USA), over 876 million tonnes of carbon dioxide equivalent (CO2-e) would have been avoided to this day.

…..In the OECD, three yes, only three countries have achieved success in all but eliminating fossil fuels from electricity supply. They are France, Sweden and Switzerland Finland will soon join them. All did it by embracing nuclear power generation. These nations deliver reliable, large-scale electricity supply with less than 1/10th the emissions of Australia. France in particular delivers the cheapest electricity in Western Europe, and is the second-highest net exporter of electricity in the world…..

Read more at Pro-nuclear greenies? Thinking outside the box with Pandora's Promise.

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China recovery

China’s Shanghai Composite Index is testing support at 2150 and the lower trend channel. Recovery above the descending trendline would suggest another rally, while failure of support would warn of a correction to primary support at 1950. The index hints at long-term recovery but further confirmation is necessary.
Shanghai Composite Index

The Harper Petersen Index, from ship brokers Harper Petersen & Co., indicates that shipping rates for container vessels remain depressed, suggesting a sluggish global trade in manufactured goods. Exporters like China would be severely affected.

Harper Petersen Index

The Baltic Dry Index — reflecting dry bulk shipping rates for commodities like iron ore and coal — jumped sharply, however, reflecting an upturn in demand for bulk commodities.
Baltic Dry Index

Bulk commodity prices remain depressed according to the RBA.
RBA Bulk Commodity Prices
But export volumes are rising, in step with the Baltic Dry Index, reflecting strong demand from infrastructure development.
RBA Bulk Commodity Exports

WSJ reports that monthly electricity consumption has reached a new high:

China on Tuesday posted an all-time record-high electricity output level of 498.7 billion kilowatt-hours in August, rising 13% from a year earlier.

Monthly fluctuations should largely be ignored because of weather variation — excessively hot months like August can boost electricity demand — but the rising long-term trend in electricity consumption (chart from IndexMundi) suggests a robust recovery. A recovery led primarily by infrastructure investment rather than manufactured exports may well prove unsustainable in the long-term, but should provide welcome relief to the resources sector in the next few years.
Electricity Consumption

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