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ECONOMIC GLEANINGS


October 29, 2009

SHIPPING MARKET ‘UP SLOWLY’ (EJ, Business Browser) 

    ∙ In an October 26th interview Wei Jiafu, Chairman of China Costco Holdings Co., one of the world largest container ship operators, said that “The container market is going up slowly.” 

Not a particularly ringing endorsement by a key figure in an industry that until not long ago had experienced nearly half a century of double digit growth. 

DR. DOOM FORESEES MORE BUBBLE TROUBLE ((G&M, Brian Milner) 

    ∙ New York University professor Nouriel Roubini became famous for his accurate prediction of the global financial meltdown. He recently told a Capetown, South Africa audience that a new asset bubble triggered by rock-bottom interest rates & a disastrous fall in the US dollar could bring on another financial crisis, saying “The risk is that we are planting the seeds of the next financial crisis.” For investors everywhere are borrowing cheap dollars to buy assets of every kind around the world & driving their prices far beyond that justifiable by economic fundamentals & growth prospects.” He believes this could prompt “the mother of all carry trades” & that matters are being made worse by just about every other major central bank  giving away all but free money. And he received a sort of endorsement from PIMCO’s Bill Gross dismissing the possibility of a traditional V-shaped recovery & warning the US faces a “new normal” of tight credit, higher inflation, slow growth & elevated unemployment levels (a la Japan in the 90’s).  

One recent newspaper headline said “Only economists believe the recession is over”. 

STANDOFF OVER FERTILIZER PRICES IMPERILS WORLD FOOD PRODUCTION

(G&M, Jessica Leeder) 

    ∙ Farmers are on a buyers’ strike against skyrocketing fertilizer prices & cutting their overhead by buying less of it. But Potash Corp’s CEO doesn’t think they can make it stick much longer; for he told analysts recently : “Food production is too important to put at risk. Farmers know this ... The question is not if it will happen (i.e. that they will start buying fertilizer again), but when the rebound will begin.” While his firm claims that it already has evidence of lower yields in Brazil & China (the world’s largest potash consumer), soil experts say a year of lower fertilizer won’t have a dramatic impact on yields. 

Bill Doyle was Canada’s highest-paid CEO in 2007 with total compensation of $430MM (close to double that of RIM’s founders), most of it, however, due to the meteoric rise in the value of his, often long-held, stock options as his company’s share prices soared over 500% in three years. The credibility of his view is lessened by his own earlier  admission that he did “a horrible job of forecasting this year”. The declines in fertilizer prices & fertilizer producers’ earnings have been colossal : the latter are down by 80% or more YoY, and nitrogen-, phosphate- & potash prices by 65%, 75% & 55% respectively.  But farmers across the world may be less interested in boosting yields than in keeping their overhead down (according to one industry insider “Farmers are still sitting on their wallets”), & more interested in surviving than in avoiding a world food crisis (especially since it would result in higher prices). And there are huge differences between the short-term pickup in yields in response to any increase in the use of fertilizer : in the case of nitrogen up to 90% of the response thereto shows up in the current & next year’s crops, but only 20% in the case of phosphate, with Doyle’s potash somewhere in between. 

INSTITUTIONAL INVESTORS WARY OF RECOVERY (OC, Keith Woolhouse) 

    ∙ TheMarkets.com, a research entity supported by a majority of North America’s & Europe’s largest asset managers & hedge funds, surveyed 103 of its members in 20 countries & found that 73% thought the market’s had bottomed & 27% didn’t. 

Historically the professional managers’ bull/bear split has been a counter-indicator; in other words, the more are bullish, the more likely the market is to head South, and the more are bearish, the more likely it is to head higher. In any case, the real question is less whether the market is going to test its March lows (& it might actually be a good thing if it did), but whether the economy’s path forward will be U-shaped or L-shaped. 

RECESSION OVER? READERS DON’T BELIEVE IT (MSNBC, John W. Schoen) 

    ∙ Larry van Sant owns a heating & plumbing business in Maryland. His business is so slow he has had to let 68 of his 168 employees go, while “Normally we can look and tell it’s over before anyone announced it was over.” And he is only one of hundreds of readers who sent us emails taking issue with the view of many mainstream economists that the recession that started in December 2007 may  have run its course over the summer. 

The hoi polloi equate recovery with growing employment while in reality it is a lagging-, not a coincident-, indicator, i.e. while they think that when the recession is declared “over” unemployment will magically start to decline, in reality that doesn’t happen until several, sometimes many, months into the recovery when employers like Larry van Sant star to get better vibes. The concern for some economists now is if this will turn out to be a W-shaped recovery, with a couple of good quarters followed by more dismal ones.  

CONSUMER CONFIDENCE SLIPS UNEXPECTEDLY (AP) 

    ∙ The Conference Board’s Consumer Confidence Index declined in October to 47.7 from 53.4 in September with the two sub-indices, Present Situation, going from 23.0 to 20.3 and the Expectations (six months out) down to 65.7 from 73.7. 

While almost double February’s record low of 25.3, it is still a long ways from the 90 that signals a turnaround & the 100 level that signifies strong growth. 

U.S. EXISTING HOME SALES SPIKE 

    ∙ In September they were the highest in over two years, up 9.4% MoM to a 5.57MM annual rate, as first time home buyers sought to beat the November 30th expiry date for the US$8,000 credit for first-time home buyers. 

The Administration is being pressured to extend this program since it is argued that otherwise the pre-owned home market will fall off the cliff this winter, take the new home market with it & limit the ability of banks to dispose of homes they have foreclosed on. 

U.S. AFGHAN PLAN MOVING TOWARD PROTECTION OF POPULATION CENTRES

(NYT, Thom Shanker et. al.)   

    ∙ While Obama advisers say the question is no longer whether or not to send additional troops to Afghanistan, they are coalescing around a strategy that would seek to protect 10 major population centres (to which military planners want to add major agricultural areas), accelerate the training of Afghan troops, expand economic development, reconcile with less radical components of the Taliban, and would continue to use drones & Special Forces to keep the pressure on insurgents in remote regions. But their critics argue that this will give the Taliban effective control over large swaths of the country in which it could  establish mini-states & al-Qaeda new training camps. 

This is the opposite of the British ‘boots on the ground’ philosophy that has had good track record & similar to the US ‘fortified location’ strategy of Vietnam days that didn’t. And it is contrary to a military maxim that operations should always be launched with maximum force (which Bush I observed in the First Gulf War & Bush II didn’t in the Second & in Afghanistan). And it will likely prove impossible to promote economic development, which is key to any ‘hearts & minds’ strategy, without control 24/7 of the countryside. In this business half-measures seldom work.  

‘CRITICAL HABITAT’ SET ASIDE TO SAVE POLAR BEARS (G&M, Paul Koring) 

    ∙ The Obama Administration has designated over 500,000 square kilometres, an area larger than the Yukon, along Alaska’s northern & western coasts as critical habitat for polar bears. 

Surprising that there has not yet been a reaction from that mighty hunter, Sarah Palin.   

COST OF STIMULUS SPENDING STARTING TO WORRY CANADIANS

(G&M, Campbell Clark) 

    ∙ A poll by The Strategic Council found that, while in January 61% of Canadians said economic recovery was their number one issue, by October that had declined to 43%, and that, while in January only 1% picked government spending as the number one issue, & in July still only 3%, by October this had risen to 8%. Canadians now rank this as the fourth most important issue (after the overall economy, health care & the environment).

    ∙ Deficits & government spending haven’t been much of an issue for Canadians since the 90's but stimulus spending that officially is expected to result in a $56BN deficit, but according to non-government sources could be closer to, or even close in on, $100BN, may be starting to change that. 

While 8% is not a big number in absolute terms, this could be like the old mariners’ tale about the small cloud on the horizon the size of a fist on the horizon. 

ARCTIC HEAT WAVE ‘UNIQUE IN HISTORY (G&M, Martin Mittelstaedt) 

    ∙ This week’s on-line version of the Proceedings of the National Academy of Sciences reported on a study by researchers at five US & Canadian universities that concluded “the last few decades have been the most ecologically unique in 200,000 years”. Past tracking of historic climatic conditions studied ice cores from Greenland going back 120,000 years. But the discovery of a tiny (one square kilometre), shallow (10 metre deep) lake on Baffin Island allowed that time frame to be pushed back another 80,000 years. For in past ice ages the lake’s bottom was frozen solid, and not underneath, & scoured clean by, moving glaciers. So scientists were able to analyze the sediment on its bottom,  layer by layer, going back 200,000 years (during which there were two ice ages & three warming periods) & reconstruct life at the site by looking at the fossilized remains of algae & insects therein. Their conclusion : “The lake has followed a trajectory through the 20th century towards increasingly exceptional environmental conditions with no analogues in the past 200,000 years.”  

According to John Smol, a biologist at Queen’s University in Kingston, Ont., “This historical record proves that we are dramatically affecting the ecosystems on which we depend. We have started uncontrolled experiments on this planet.”, a conclusion the willfully blind are unlikely to share. 

GROUP : ISRAEL WITHHOLDS WATER FROM PALESTINIANS (AP) 

    ∙ London-based Amnesty International on October 27th released a report accusing Israel of pumping disproportionate amounts of water from an aquifer it controls in the West Bank & of throwing road blocks in the way of infrastructure projects that would improve the water situation for Palestinians in Gaza & the West Bank. Water is a major bone of contention between the Israelis & Palestinians that must be addressed & solved before there can be peace. For Israelis consume over 4x as much water per capita as the Palestinians (whose water consumption is actually below the WHO-recommended minimum). The aquifer in question is the so-called Mountain aquifer in the West Bank of which the Israelis use 80% (despite the fact that, according to the report, Israel has alternate sources of supply of water & the Palestinians don’t) enabling the 450,000 Israeli settlers in the West Bank & East Jerusalem to consume more water than the 2.3MM Palestinians.

    ∙ An Israeli spokesman called the AI claim “ludicrous” & said Israel holds the legal right to the aquifer because it discovered & developed it, and produces from it. 

Anyone with any knowledge of the situation knows that water is a big issue here. 

CORRUPTION RATTLES FRAGILE STATE (NYT, Mark Santora) 

    ∙ Corruption is pervasive from the top to the lowest security force member on the street, and the spokesman for the Higher Judicial Council intimated the latter when, after the Ministry of Justice was carbombed, he said “These car bombs didn’t come from the sky ... They must have been driven in the streets until they reached their target. And if there were no corruption, the attackers wouldn’t risk passing through these checkpoints.”  But it really runs much deeper, endangering the fragile sense of security in Iraq as US forces are withdrawn & the security forces seem as more interested in enriching themselves than in protecting the hoi polloi. A recent report by the Interior Ministry points out that some security personnel has criminal records, ghost officers are on the payroll, money budgeted for food disappears in someone’s pocket, officers skim off part, or all, of lower-ranked soldiers’ pay, and criminals are let go after bribes are paid & prisoners abused to get their families to pay protection money. 

Those fighting it face an uphill battle & are sidelined in the security forces & bureaucracy  

SHOWDOWN LOOMS OVER WHO WILL RULE OIL-RICH KIRKUK

(G&M, Patrick Martin) 

    ∙ A showdown looms between Arabs & Kurds over oil-rich Kirkuk province. Saddam pushed an Arabization program there to drown the Kurdish population in a sea of Arab immigrants. And after the 1991 uprising many Kurds migrated from Kirkuk to behind the safety of the so-called ‘Green Line’ (where the Kurds enjoyed the luxury of a US aerial umbrella), leaving the province under Arab control. But after April 10th, 2003 the Kurds took back much of their traditional territory beyond the Green Line & replaced the latter with what they call their “trigger line” from which they say they won’t withdraw & behind which are most of the disputed territories. And since the local Kurdish population has grown by 50+% to over 1.2MM (which the Kurdish head of the regional council calls “a perfectly normal growth rate ... when you take into account both natural growth and the return of thousands of families.”)

    ∙ Local Arab & Turkoman leaders want a power-sharing arrangement allotting 32% of the provincial council seats to each of the Kurdish, Arab & Turkoman ethic groups, and the remaining 4% to small, mostly Christian, minorities so that “no one feels like a second class citizen.” The province’s Kurdish leaders say they would happily share power, but only after an election determined how many seats each group should get, and they want a referendum to decide whether the province should join the other three provinces in the semi-autonomous Kurdistan Regional Government (the outcome of such a referendum would be a foregone conclusion, since daily more Kurds are moving in & Arabs out).  

This is as much, if not more, about oil as about ethnicity. But while possession may be ‘nine points of the law’, oil in the ground is worth nothing unless it can be moved to markets which in this case would have to involve pipelines through non-Kurdish territory. So the Kurds hold a weak hand.

 

THE MISTRUST BEHIND PAKISTAN’S CLASH WITH THE TALIBAN

(G&M, Saeed Shah) 

    ∙ The Pakistani army’s latest offensive against the Taliban in South Waziristan has failed to convince locals that it is serious; for three times in recent years did it launch an offensive there only to subsequently cut a “peace deal” with the Taliban that was followed in short order by bloody Taliban reprisals against those who has sided with the state. So even the few local anti-Taliban militias don’t trust the army because, as their leader said in an interview, “The government has used the people like toilet paper, used them and thrown them away.”

    ∙ While the army argues that never before was it given a solid mandate by the politicians to rout the Taliban, & that never before had Pakistani public opinion supported it fighting a movement claiming to act in the name of Islam, its critics allege that the army, & especially its Inter-Services Intelligence spy agency, had been happy to have the Taliban guard the country’s northwestern border. 

The army’s argument doesn’t reflect well on President Bush’s erstwhile key ally in the region in his War on Terror, General Musharraf. 

KARZAI’S BROTHER SAID TO RECEIVE CIA PAYMENT (NYT, Dexter Filkins et. al) 

    ∙ According to current & former US officials Ahmed Wali Karzai, a suspected key player in the country’s opium trade, has been on the CIA’s payroll for the past eight years, and some say US reliance on him, the most powerful figure in a large area of Southern Afghanistan where the Taliban is strongest, undermines the US push to develop an effective central government. According to Major-General Mike Flynn, the senior US military intelligence official in Afghanistan, “If we are going to conduct a population-centric strategy in Afghanistan, and we are perceived as backing thugs ... we are ... undermining ourselves.” 

Ahmed Karzai denies being in the drug trade & getting money from the CIA (and since the latter likely involves ‘black money’  there is no way of proving if he did or didn’t). 

ZIMBABWE : UN TORTURE INVESTIGATOR STOPPED (AP) 

    ∙ Manfred Nowak was invited to Zimbabwe by Prime Minister Morgan Tsvangirai to investigate allegations of attacks on his supporters by militants linked to President Mugabe’s ZANU-PF party. But when he got to Johannesburg he was told by someone in the Zimbabwean government not to bother going any further; and when he tried to do so anyway he was turned back by immigration staff not under control of the Prime Minister. 

The unity government idea always was just a ploy by Mugabe of getting donor money in the door while the ZANU-PF crowd continues to hold the effective reins of power.

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