A roundup of what The Globe and Mail's market strategist Scott Barlow is reading this morning on the World Wide Web.
FT Alphaville's enviably brilliant Izabella Kaminska outlines how international bank regulation is sowing the seeds for the next financial crisis. It seems ridiculous to talk about liquidity issues when central banks are frantically pumping money into national economies but there is a distinct problem. Large banks, including Canadian banks, no longer carry large inventories of bonds and equities because of new regulations. In the past, these inventories would support markets during a sell-off. This can't happen next time,
"For years investment banks have made a business of carrying liquidity risk on their balance sheets, mainly by internalising the inventory nobody else is prepared to hold… it's becoming increasingly obvious that post-2008 regulation has restricted the banks in such a way that has meaningful and thus far under-appreciated consequences for their ability to make markets in volatile times.
And, most worrying, it's unclear if the asset management industry has as yet realised that the liquidity they take for granted might in fact be a bit of an illusion."
"The liquidity monster that awaits" – Kaminska, FT Alphaville (registration but not subscription required)
The People's Bank of China executed a surprise interest rate cut overnight that immediately shoved commodity-based currencies like the loonie higher. The PBoC is clearly attempting to stem the tide of rising loan defaults which, while growing quickly, are nowhere near a serious problem in terms of percentage of the total.
"China surprises with interest rate cut to spur growth" – Reuters
Just as important as the cut: "China has squeezed banks by letting deposit rates float higher. A key market reform." (chart) – Rabinovitch, Twitter
"China: Non-Performing Loans on the Rise" (chart) – McDonough, Twitter
Six months ago I would have put these fascinating reports on obesity in the diversion section but nutrition and health are rapidly becoming an economic issue in the developed world. The Atlantic's online finance site Quartz published a great piece on how economic inequality leads to obesity,
"there might be a psychological mechanism at play here linking poverty to obesity. If so, it would mean that health campaigns are ineffective—and would certainly explain why the obesity numbers keep rising.
Many creatures exhibit an instinct when faced with scarcity, namely to pile up calorie reserves to help them outlive potential hunger. Could it be that in the same way as a bear prepares for the winter by consuming amounts of food far exceeding its daily needs, people who are exposed to poverty and recession consume excessive amounts of food…?"
"Economic gloom makes stockpilers of us all" – Quartz
"21 maps and charts that explain the obesity epidemic" – Vox
"Foolishness, Poverty, Mobility" – Stoker Breunig
Paul Krugman and his legion of acolytes often characterize anti-stimulus arguments as the domain of dispassionate crackpots and they have the distinct advantage of being correct in almost every case. But that specific discussion has drowned out more academically grounded opposition to quantitative easing and other monetary measures from reputable sources like Nomura's Richard Koo and Canadian-born economist William White.
In Friday's Financial Times, Mr. White argues that Japan's current economic path is not only destined for failure but dangerous for the rest of the world. He notes,
"[more monetary stimulus] it is not needed. Japan's recent slow growth has been largely driven by demographic trends. Since 2000 growth in GDP per person of working age has been significantly above that in the US. As for anxieties over persistent deflation, the level of Japanese consumer prices has fallen less than 4 per cent in the past 15 years. There is no evidence of an accelerating deflationary trend, nor of consumers delaying spending in anticipation of lower prices. Indeed, the household saving rate has fallen since the 1990s from a traditionally high level to zero.
Second, why it will not work. The underlying intention is to induce businesses to invest and export. Neither seems likely to happen."
"Japan's stimulus plan is not courageous but foolhardy" – White, Financial Times (subscription may be required)
"Ultra Easy Monetary Policy and the Law of Unintended Consequences" – William White , Dallas Federal Reserve (academic paper. h/t to @m_c_Klein again for uncovering)
Tweet of the Day: "@ladyfohf @katie_martin_FX Markets: Don't leave us! There's vol, we're scared! Central banks: we didn't mean it! There there, have some free money."
Diversion: Kubrick and Scorcese's most iconic images in one video - Sploid
Scott Barlow