In his West Point speech
President Obama said, among others, that “Afghanistan & Pakistan
are the epicentre of the violent extremism as practiced by al-Qaeda”.
He was right, but only up to a point; for, while it may the ‘sharp
end’ thereof, if one ‘follows the money’, one ends up in Saudi
Arabia. A more fatal flaw in what was, within its limitations, a well-written,
well-balanced &, of course, well-delivered speech was the fact he
concentrated unduly on being a conciliator & not enough on being
a political leader presenting a vision, as he did in his campaign (&
selling a vision is far less hard than trying to please everyone). On
the other hand, conciliation had to be perhaps his prime short-term
domestic priority, given the split in his country, his party & his
Cabinet.
In this ‘war’ the
US has relied unduly on its military might. That worked in Iraq;
for it is flat ‘tank country’ as were the West- & North European
plains in WW II. But it doesn’t in mountainous terrain; it blunts
the edge of traditional military might & hands one to guerillas
(thus over the centuries no one ever attacked Switzerland & in WW
II a few ‘maquis’ could tie up entire divisions of German soldiers
in France’s Massif Central). The US, like Moscow before it, took the
wrong page out of Mao Tse Tung’s play book (i.e “Political power
grows out of the barrel of a gun”) & ignored his admonition that
“The guerilla must move among the people as a fish swims in the sea.”
The battle for the “hearts
& minds” is not an option, it is the only option, especially
in a country with a long history of suspicion of & hostility to,
and a track record of successfully warding off, foreigners. And it isn’t
won by flashing more foreign (camo) uniforms and depending on air superiority
& local allies that don’t provide a modicum of good governance.
General McCrystal recognized this when he recently told an audience
about an American patrol that, after being alarmed by a couple of Afghans
digging alongside the road they were on, relaxed when they found out
it was just routine farm-related activity, to the point where they ended
up helping them with it.
Development is critical
to the winning the hearts’ & minds’ battle. But it is a non-started
when the other guts can destroy the schools as fast as they are built,
kill the teachers staffing them & disfigure the girls attending
them by throwing acid in their faces. And it requires public confidence
that the changes are permant - which is why the President’s emphasis
on a schedule for withdrawal was not helpful). All now depends on General
McCrystal’s use of the new troops placed at his disposal, & of
those already in place, and on the training that both the new troops
& those ‘rotating in’ receive before leaving for Afghanistan.
Ideally he should seek to turn the mountainous terrain to his advantage
by concentrating his military capability on the security of the relatively
limited number of prime ‘developable’ parts of the country, i.e.
the cities & the key agricultural areas, & let the guerillas
stew in their juice in the mountains. For if he can be successful in
such a limited way, this in time will limit their ability ‘to swim
like fish in the sea’ among the local population in a country where
young men currently are said to be ‘volunteering to be suicide bombers
in order to support their families’ (in contrast to Pakistan where
a deep-seated dislike & distrust of government & the Americans,
and a widespread resentment of the perceived US perversion of the country’s
national identity & souvereignty, enable the insurgents to hide
in the general population).
The Globe & Mail
published data on Canada’s provincial- & federal government targets
for emission reduction targets by 2020 & those put forward by Obama
& the EU (from 1990 levels) :
The Washington-based
Pew Center calculates the average industrialized countries’ emission
target to be in the 13-19% range while the UN Intergovernmental Climate
Change Panel has called for a 25-40% reduction off 1990 levels by 2020.
Small wonder that the developing countries aren’t convinced the developed
countries are serious & that some Albertans are embarrassed .
A propos Prime Minister
Harper’s visit to Beijing, one commentator noted that the Chinese
leaders have a unique way of simultaneously giving others the back of
their hand as well as ‘face”. Thus they made him first endure
what amounted to a public tongue-lashing for his past China policies
& then handed him a prize, Approved Tourist Destination status (Canada
was among the first to apply for it a decade ago but its tourist industry
has been gnashing its teeth ever since while dozens of johny-come-latelies,
incl. the US, were given such status & Canada wasn’t).
Yesterday’s Globe and
Mail carried a headline in its Business Section “When fear strikes,
we turn to the U.S. dollar - Investors don’t like the greenback’s
weakness, and they’d love an alternative, but they haven’t found
it yet.” This is the common wisdom; unfortunately it tends to be guided
by what it sees in the rearview mirror rather than through the windshield.
It’s true that investors, from governments through central banks &
corporations to individuals, can’t find a single alternative to the
US dollar. But they certainly are piling with great abandon & diversifying
into a lot of different ones, incl. gold & other commodities,
other currencies, the ownership of US ‘real assets’, and farm land
& real estate generally (I write this as gold is having a weak spell
this morning, slumping 3% from US$1205 at the opening in the first two
hours of trading, on sudden (& unwarranted?) expectations the Fed
will start raising interest rates sooner than hitherto expected (&
without regard for the implications for the global economy if the Fed
were to do so).
GLEANINGS VERSION II
No. 340 - December
3rd, 2009
EARTH COULD PLUNGE
INTO SUDDEN ICE AGE (LiveScience, Charles Q. Choi)
∙ The common wisdom
has been that the 1,300 year-long ice age in the Northern Hemisphere
that got underway 12,800 years ago took a decade or more to get going.
But mud core samples from Ireland’s Lake Monreach, which are unusually
neatly layered, now cause some scientists to wonder if it may have happened
almost overnight, or over at most two years. For when Lake Agassiz in
Northern Canada broke its banks, it spilled more water than is now in
the five Great Lakes into the Atlantic Ocean, cooling off the Gulf Stream
in short order. They now worry about the rapid melt of Greenland’s
ice cap.
While most people
believe ‘The soup is never eaten as hot as it is served’, risk management
must assume ‘that whatever can go wrong, will go wrong - & will
do so at the most inopportune time’).
DUBAI WORLD DEBT
TO TEST ISLAMIC LAW (NYT, Heather Timmons)
∙ A significant
part of this debt is ‘sharia law-compliant’ (i.e. it pays no interest
but joins lenders & borrowers into a sort of partnership). But there
are no established rules for such debt as to who gets repaid first in
a bankruptcy. Bondholders believe they have a secured position with
respect to the underlying assets & should be repaid before the banks
(rather than the other way around, the traditional order of things in
bankruptcies). But the 237-page prospectus for a bond issue by Nakheel,
Dubai World’s real estate subsidiary, specifies bondholders have no
guarantee of “repayment of their claims in full or at all”, and
under Dubai law no debt of the ruler or the government can be recovered
by seizing their assets.
Investors buying Dubai
bonds assumed (rather foolishly?) that the emirate’s government would
stand by them, no matter how riskythey might be, even there was no explicit
guarantee. Big Mistake! The time is long overdue that investors are
re-educated on the reality of risk; for it has historically been
shown over & over again that this is a key aspect of a period of
deleveraging such as the global financial system is now egoing through.
So once risk-insensitive investors are likely in for some rude shocks;
for ‘debt destruction’ is a key aspect of deleveraging. Elsewhere
JPMorganChase said the Royal Bank of Scotland was the biggest underwriter
of Dubai loans & HSBC has the “largest absolute exposure” in
the UAE. A sign of things to come may lie in the comment by Saudi
Arabia’s richest individual, Prince Alwaleed bin Talal, to Bloomberg
that “These banks are very mature banks and they have to differentiate
between a corporate loan and a sovereign loan ... When things go sour,
you can’t have some banks in the West going to Dubai and saying
‘oops’ and crying wolf and saying :
‘You should have guaranteed those loans.’
“
FED SURVEY FINDS
RECOVERY GAINING MOMENTUM (AP)
∙ On December 2nd
it made public the results of its most upbeat survey in two years, which
reported that in eight of its twelve Federal Reserve Districts there
had been improved conditions and/or some pickup in activity and/or even
some new hiring. With inflation still believed
tame, the rate-setting FOMC is expected at its mid-December meeting
to keep interest rates at their record lows in the hope this will entice
consumers & business people to step up their spending. But the overall
employment picture remains dismal & the commercial real estate market
is continuing to deteriorate even though the housing market may be starting
to improve somewhat (albeit from rock bottom levels) across the
country.
Averages often obscure
realities, in this case that there’s still a lot of pain out there,
as well as problems not owned up to in the banking system. Economies
are like car engines; both need to operate on all cylinders to perform
satisfactorily. And while interest rate policy enables the central banks
to choke off economic growth when public sentiment is euphoric, it is
much less effective in reinvigorating economic growth when public confidence
is in the dumpster when people are reluctant to take on new debt, even
if it is free. This is basic economics : borrowing money makes sense
only when the returns thereon, be they financial or emotional, exceed
the cost thereof; so when people’s outlook is negative, even free
money has little appeal.
US COMMERCIAL PROPERTY
LOAN DEFAULTS SOAR (Reuters)
∙ In the Third Quarter
the default rate for commercial real estate loans held by banks was
3.40%, up 0.52% QoQ, the highest since 1993's 4.1%, & the outlook
is said to be “. And for CMBS (commercial mortgage-backed securities)
the situation is far worse : in October US$32.55BN worth was in default,
a 2.6% MoM, & 504% YOY, increase & 14x their low point of US$2.1BN
in March 2007. This is expected to go to US$40-50BN by March 2010
& the default rate to rise from its current 4.01% to up to 8% as
some loans made in 2006 & 2007 are showing “signs of stress”
& maturing loans are difficult to roll over.
Everybody & his
brother who knows anything about the state of the financial system,
other than the ‘talking heads’, has been warning commercial real
estate would be the next domino to fall (& possibly thereafter credit
cards, car loans & ultimately the entire derivatives’
structure).
THE ALBERTA STORY’S
NEXT CHAPTER (G&M, Preston Manning)
∙ Many Albertans
are asking questions about the political state & direction of their
province & about Premier Stelmach’s ability to reinvigorate a
long-serving government that seems to have lost its way &
its vision. The historical pattern of Alberta politics has
seen decades of one-party rule during which the ruling party remakes
itself several times, followed by its downfall when it fails to continue
doing so, & its replacement, not by the traditional opposition but
by something & someone new. The question now is if the far right-wing
Wildrose Alliance Party will be that something & its leader, Danielle
Smith, that someone. A Conference on Alberta’s Future is now being
organized to address three key questions (that may well have relevance
for every Western democracy) : What is your vision of Alberta’s
future, How well is Alberta performing in key areas, and What policies
& actions should be pursued if performance in any of the areas is
deemed inadequate? And those key areas identified are the handling
of public money, balanced economic growth (incl. the responsible development
of the energy sector), environmental conservation, health & education,
democratic participation & leadership on the national (&
international?) level.
Manning was the moving
force behind the evolution, & the spiritual father, of Harper’s
Conservative Party. He had firsthand experience with the Alberta phenomenon
he describes : his father was a long-serving Premier of Alberta whose
party succumbed to it under his successor when in 1971 Peter Lougheed
became the first of what now have been have been four provincial conservative
premiers in the past 38 years.
IRAN’S OFFER
TO RUSSIA COULD DERAIL SANCTIONS (CanWest, Steven Edwards)
∙ While Moscow claims
it is “concerned” about Iran’s nuclear ambitions, it can nevertheless
block any UN sanctions to bring it to heel by exercising its veto in
the Security Council (as can China). Seeking to ensure it will continue
to do so, during the November 30th visit of Russian
Energy Minister Sergei Shmatko to Iran’s Bushehr nuclear power plant
that Russia is building, Ali Akbar Salehi, the head of Iran’s Atomic
Energy Organization, told reporters “Iran will need 20,000 megawatts
of new (power) capacity within the next 15 to 20 years
and, for these projects, Russia will have a priority.”
This came in response
to a November 27th 25-3 vote on a motion by
the 35-member Board of Governors of the UN’s International Atomic
Energy Agency (with both Russia & China voting Aye) that censured
Iran for covertly constructing a second (underground) uranium enrichment
plant near the holy city of Qom. But on December 1st
a ‘senior Russian diplomatic source’ in Moscow said that,
while Moscow wouldn’t move as fast on harsher sanctions as the US
& the EU, it would join any consensus on more sanctions against
Iran (leaving it an out if China failed to join such a
‘consensus’). And this in turn, later that same day, prompted President
Ahmadinejad to bluster on state television, criticizing Russia’s position
and declaring sanctions would have no effect & no more talks with
the West on the nuclear dispute were needed.
DESPITE THE CONSTANT
CRITICISM, NETANYAHU IS MAKING INROADS
(G&M, Patrick
Martin)
∙ Driving through
West Bank towns one can see & feel the difference from a few months
ago. Jenin has become a shopping destination for Israeli Arabs, Nablus’
historic market is packed with Palestinians
from all over the West Bank, and Ramallah & Hebron are bustling
cities where people enjoy normal lives. All this is due to the withdrawal
of Israeli soldiers, & the removal in recent months of many checkpoints
between Palestinian communities.
Even the IMF agrees;
for its has been forecasting a rate of economic growth for the West
Bank that would make developed country politicians turn green with envy.
But while the Chairman of the Canada-Israel Committee declared this
was Netanyahu “signalling to his camp, and to
the enemy, that he’s serious about the negotiations” (an interesting
choice of words - ”enemy” rather than
“Palestinians”
- about as helpful as Bush 43's use of the word
“crusade” in his initial post-9/11 public comment). But it may be
too little too late; for both Israeli hardliners & Palestinians
now have ‘the bit in their teeth’, and to the latter these improvement
may matter less than his intransigence on Jerusalem & continuing
construction in the West Bank settlements (rather interestingly the
article was accompanied by a photo of labourers
on a construction site in the Gilo settlement near the town of Bethlehem,
with the town itself in the distant background), and his insistence
that any Palestinian state should not be given all the trappings of
a souvereign state.
And the observation that people in Hebron
“enjoy normal lives’ is hard to reconcile with a situation in which
600 harline Jewish settlers protected by a strong IDF force lord it
over 160,000 Palestinians.
SOMALI SEAGANGS
LURE INVESTORS (Reuters)
∙ Four months ago
the Somali pirate community launched an around-the-clock sort of stock
exchange in Haradheere, 400 kms. Northeast of Mogadishu, to enable the
population as a whole to share in the pirates’ success by investing
in cash or in kind in their endeavours & to make “piracy a community
activity” (the local government already gets a cut to spend on infrastructure
items like schools. Starting with 15 ‘companies’, it is now said
to have 72, ten of whom “have so far been successful at piracy.”
While every week gang members & equipment are lost at sea, business
has been good : recently ransoms collected have ramped up from US$2-3MM
to US4MM/month & one woman claimed to have collected US$75,000
in 38 days on her ‘investment’ in kind, a rocket-propelled grenade.
This sounds like the
early stages of a Ponzi scheme. Still, truth is often stranger than
fiction. And this is how Lloyd’s of London got its start & what
English merchants did in the 17th century when
they invested in ships’ captains setting out for foreign lands or
on piracy voyages : while they often were lost at sea, if they did make
it back, the payoffs often were sweet.
MILITARY AIRCRAFT
IN DEMAND AT DUBAI AIRSHOW (Reuters)
∙ The first day
of the Dubai Air Show saw most interest in military hardware. The UAE
is talking to France’s Dassault about buying Rafale combat jets, Kuwait
& Oman are looking to update their fighter fleets & Saudi Arabia
is thinking about boosting its order for Eurofighter Typhoons &
has been talking to Boeing about buying F-15s. The only order for civilian
aircraft came from Ethiopian Airliners that confirmed the purchase of
12 Airbus 350s for US$2.9BN, helping to move the order book for
the mid-sized jet above the 500 mark.
This demand for military
hardware is indicative of, & will do little to ease, the rising
tensions in the region (caused by Iran’s quest for regional hegemony
& nuclear superiority, and Israel’s hard line vis a vis the Palestinains
&, rather ironically, its musings of perhaps having to take out
Iran’s nuclear facilities).
RUSSIA AND FRANCE
GET DOWN TO BUSINESS (G&M, Darya Kprsunskaya)
∙ After meeting
with his French counterpart, François Fillon (President Sarkozy was
on a trip to Trinidad & Brazil to prepare for Copenhagen), Putin
proclaimed a breakthrough in the economic ties between Russia &
France after he offered Électricité de France a 10% share
in the hitherto 50-50 Gazprom/ENI-owned
South Stream natural gas pipeline
project that, when completed, will move as much as 4.5BCFD
of Russian natural gas to Central & Western Europe
& received help for the heavily
indebted Soviet-era car giant OAO Avto-Vaz. France is already one of
Russia’s top energy investors, due to Gazprom’s partnership with
Total in the ‘elephant’ US$15BN Shtokman gas field. Also discussed
was Russia’s interest in Mistral-type warships with amphibious assault-
& tank-carrying capabilities.
The South Stream gas
pipeline will run from Beregovaya in Southern Russia 900 kms on the
bottom of the Black Sea (through Turkish territorial waters so as to
bypass the Ukraine) to Bulgaria, then across Bulgaria before splitting
into two branches, one North across Serbia & Hungary to Austria,
and the other West across Greece & underneath the Ionian Sea to
the boot of Italy. First conceived in 2007, construction is to start
next year & be completed in 2015. It appears designed to pre-empt
the European market for the US-backed Nabucco pipeline, the idea for
which was conceived in 2002 by five gas companies fro Austria, Bulgaria,
Hungary, Romania & Turkeyas a way to move 2.3BCFD of Central Asian
gas from the Caucasus across the territories of their countries to the
same endpoint in Austria, bypassing Russia. So much for Europe becoming
less dependent on Russian gas; but then, money talks & France always
marches to its own drummer.
CHINA’S CLOUT
GROWS THE MORE IT LENDS U.S. (G&M, Carolynne Wheeler)
∙ China’s economic
clout is growing. It is the world’s third-largest economy, on the
way to becoming the second & owns more US debt than anyone else.
This is shifting the dynamic between the two countries toward one of
greater equality. In evidence thereof Chinese officials have started
hitting back at pressures to ease its currency controls; thus Liu Mingkang,
Chairman of the China Banking Regulatory Commission, on November 15th
told a finance forum : “The continuous depreciation in the dollar,
and the U.S. government’s indication, that in order to resume growth
and maintain public confidence, it basically won’t raise interest
rates for the coming 12 to 18 months, has led to massive dollar arbitration
speculation ... (which has) seriously affected global asset prices,
fuelled speculation in stock markets and property markets, and created
new, real and unsurmountable risks to the recovery of the global economy,
especially emerging-market economies.”
Liu’s comment sounds
as if the Beijing doesn’t have a high
level of confidence that China’s current rate of economic growth is
sustainable. This seemed also implicit in an announcement emanating
from the Communist Party’s Politburo on November 27th
that it had decided to “maintain the continuity and stability of economic
policies, and continue to implement the pro-active fiscal policy and
loose monetary policy” (a matter of the pot calling the kettle black?).
Having China on an equal footing with the US will be only one of several
bitter pills Americans are going to have to swallow during the foreseeable
future, the only question being if they will react negatively by retrenching
inside a ‘Festung America’ or positively by shaking off their indolence.
INDIA’S ECONOMY
SHOWS SURPRISING GROWTH
(Dow Jones, Neelabh
Chaturvedi)
∙ Third Quarter
GDP was up 7.9% YoY (vs. 6.1% in the Second) & an estimated 13.9%
QoQ. India’s factories & mines have been busy as interest rate
cuts & fiscal stimulus measures, and pay increases & bonuses
for civil servants, have lifted the demand for automobiles, steel &
cement. Even the agricultural sector, that employs 60% of the country’s
work force but accounts for just 17% of its GDP, surprised analysts
by chalking up a small gain despite adverse weather conditions in
many of the country’s primary farm regions.
Another straw in the
wind that Asia is leading the global economic recovery. But it may also
prompt the Reserve Bank of India to start raising interest rates to
head off a possible burst of inflation.
THE SINO-ANGLOSPHERE
(G&M, Editorial)
∙ There is evidence
that China is surpassing India in the ability to speak English. In the
wake of Prime Minister Harper’s visits to India & China, Canadians
may be underestimating the potential of business opportunities in China
due to an assumption of India’s quasi-membership in the Anglosphere
(& a shared history as part of the British Empire?) For David
Graddol, a British linguist, recently made public some of the results
of a study done for the British Council that will be released in January
which concludes that there may already be more people in China than
in India who are conversant in English because it is being taught in
China across a far larger socio-economic range than in India.
India has at least
two competitive advantages & one possible disadvantage for Canadian
business : it has a modicum of a functioning democratic & legal
system but on the other hand, its economy is far more domestically-,
& less foreign trade-, oriented than China’s.
STRAWS IN THE WIND
∙ In the first ten
months of 2009 remittances from Mexicans working abroad to their families
back home were down 16% YoY to US$18.1BN & in October 36%, to US$1BN,
from US$1.7BN a year earlier.
Even in a US$1.1TR
economy this annualized US$8½
reduction in remittances is going to
hurt; for much of this money goes to grass roots consumers & has
a big ‘multiplier’ effect.