Quote of the Week
: “Having a zero interest rate is manipulation. Having quantitative
easing is manipulation of what the market would otherwise do ... They
are delaying the liquidation phase of a bear market.” (Eric Sprott,
a contrarian, but quite successful, Toronto money manager - who says
that, apart from shares in his own company, 90% of his money is invested
in precious metals) – the only thing that ‘rolling a problem forward’
typically achieves is to only make its solution more costly.
The temperature in the
Middle East cauldron is rising. Following is a partial listing of recent
events in the week before last. The Knesset passed the Referendum Bill.
Israeli spy drones overflew Lebanese territory. Turkey’s Prime Minister
vowed to react to any Israeli threat to Lebanon. Lebanon’s Prime Minister
Saad Hariri accused Israeli Prime Minister Binyamin Netanyahu of “not
believing in peace”. Israeli planes & ground forces attacked targets
inside Gaza. Israel destroyed a mosque in the West Bank town of Tubas.
And the 30-vehicle “Road to Hope” convoy arrived in Gaza via the
Egyptian border crossing at Rafah after an eventful six-week journey
from London.
Signs waved in recent
demonstrations in Athens saying “This is far enough, we can’t take
any more “ & “No layoffs. Write off the debt” aren’t good
news, especially since the Greek government is not meeting the conditions
of May’s EU/IMF bailout package.
One analyst recently
observed “By not allowing their loosely regulated banks to fail, countries
themselves are failing. So while Irish keep their banks’ doors open,
schools and hospitals will soon close as the country tries to cope
with a deficit one-third the size of its economy” - while this
may, or may not, prove to have been an exaggeration, the point is nevertheless
well taken.
One columnist described
the state of the hapless Alberta government as “a train wreck that
won’t stop. The lead engine is lying in a smouldering heap, unmoving,
but the cars keep slamming into the wreckage, victims of their own inertia.
Just when you think it couldn’t get any worse, another car smashes
into the pileup.” This is also a fair description of the Eurozone
bailout debacle, except that in that case is not just cars, but whole
trains, that pile into the wreckage as their engineers keep misreading
the signals.
University of Alberta
Prof. John Parkin uses the term “corrosive trust” to describe the
clubby atmosphere that often emerges over time between those representing
the public interest & those with narrowly focused business interests
whom they are supposed to supervise/regulate. This can lead to the former
developing a “trust” in the latter that gets in the way of them
exercising their fiduciary responsibility & of not asking the questions
they should be asking - this was a (major) cause of the financial
crisis; thus the SEC ignored for a decade warnings Bernard Madoff’s
operation was a gigantic Ponzi scheme
After WW I the Treaty
of Versailles required Germany to pay US$64BN in reparations for the
damage the war had caused. After many renegotiations over the years
Germany last month made its final payment, bringing the total amount
it eventually paid to US$36BN. So it took almost 93 years to pay back
a minute fraction, in inflation-adjusted terms, of a debt resulting
from a 4 year, 3½ months’ war, the imposition of which is
generally acknowledged was a major cause of WW II (that did far more
damage than US$64BN).
Some of you may know
of someone who could benefit from the Khan Academy. This is a Gates
Foundation-funded website that provides access, free of charge, to 1,800+
videos on a range of, mostly academic, subjects. This could be a boon
for students & others in developing countries or isolated places,
like Canada’s First Nations, but only if they have access to a computer
& the Internet.
GLEANINGS VERSION
II
No. 387 - December
2nd, 2010
NO RISK OF EUROZONE
BREAKUP, LEADERS SAY (Reuters, Paul Carrel)
· After the
Irish situation pushed Portugal’s & Spain’s borrowing costs
to record highs, Eurozone leaders sought to assure investors the Euro
area won’t break up. Chancellor Angela Merkel said Europe was showing
“more solidarity than a year ago”, after earlier having rattled
markets by saying on November 25th the Euro was in an “exceptionally
serious situation”. The Chairman of the Euro Zone Finance Ministers,
Luxemburg Prime Minister Jean- Claide Juncker, told the press he wasn’t
worried about the Euro’s survival, although he was concerned that
“in Germany, the federal and local authorities are slowly losing sight
of the common European good.” And Klaus Regling, Head of the European
Financial Stability Facility, the financial safety net created after
the Greek bailout in May, told the German newspaper Der Bild
“There is zero danger. It is inconceivable that the euro fails ...
No country will give up the euro of its own will : for weaker countries
that would be economic suicide, likewise for the stronger countries.
And politically, Europe would only have half the value without the euro.”
None of this will
have the desired effect. Investors have long since learnt that high
level denials often are counter-indicators; ditto for Angela Merkel’s
assurance that her idea of administering a
“haircut” to bondholders wouldn’t take effect until after 2013.
Resentment is building up among German voters about being made to pay
for other countries’ follies & having a much later retirement
age than those they are expected to bail out. While the next German
election isn’t due until the fall of 2013, the German constitution
provides for that date to be moved up under
“exceptional” circumstances. Having shown such colossal poor judgment
in the recent past, few leaders have much credibility left, while some
of the language they are using in their public utterances is like that
of the Oracle of Delphi in Ancient Greece’s heyday, duplicitous. Last,
but not least, at some point some of the Eurozone’s weaker sisters
may decide that quitting the Eurozone is the lesser of two evils, and
less long-term damaging than trying to live with the conditions imposed
on them for their continued membership in it.
EU LOAN CUPBOARD
LOOKING BARE AFTER IRISH RESCUE
(G&M, David Parkinson)
· Ireland’s 85BN
Euro rescue package will take a big bite out of the EFSF (European Financial
Stability Facility) created last June. While on paper its has 440BN
Euros in loan guarantees available from Eurozone member government for
those in need, over one-third of those guarantees are those of the five
PIIGS countries, the real value of which is zero. And EFSF would not
be expected to bail out Ireland all by itself, if it were required to
also help out out Spain, its cupboard would be pretty bare.
The much-vaunted 750BN
Euro bailout facility put in place last May consisted of 440BN Euros
in loan guarantees from the EFSF, 250BN Euros in loans from the IMF
& 60BN Euros from the European Financial Stability Mechanism (EFSM).
More uncertainty has now been added to the mix by rumours about Belgium
(that so far had stayed below the radar despite being one of only three
Eurozone countries, the others being Greece & Italy,
that had 100+% debt-to-GDP even before the onset of the financial crisis.
CONTAGION SPREADS
TO EUROZONE BANKS (G&M, Brian Milner)
· Investors continue
shunning Greek & Irish bonds, have been shedding those issued by
Portugal & Spain, and now have started to dump Italian, Belgian,
French & even German bonds. So continent-wide banks are now sitting
on hundreds of billions of government bonds that are rapidly falling
in value, many of them pledged as collateral for vital cash infusions
from the ECB, and, to make matters worse, are now increasingly
underwater on their loans to banks & borrowers in various troubled
countries. According to Marco Papic, Senior European Analyst as Austin,
Texas-based Stratfor “There is definitely a banking problem in core
Europe, outside of the peripheral countries.”
Somehow or other US
banks somehow managed to stay clear from this mess
TRICHET DEFENDS
EUROZONE (EJ, Business Browser)
· As European
leaders seek to contain a worsening souvereign debt crisis, ECB President
Jean-Claude Trichet told law makers in Bruxelles on November 30th
“I don’t believe that financial stability in the Eurozone could
really be called at risk ... (Observers) are tending to underestimate
the determination of governments.”
All the determination
in the world comes to naught if ill-directed.
UN HEIGHTENS DOUBLE-DIP
FEARS (AF-P)
· Its World Economic
Situation and Prospects 2011 report said “The road to recovery
from the Great Recession is proving to be long, winding and rocky”.
It believes the US jobless rate could rise from its current 9.6% to
10+%, that it could take five years before employment returns to its
pre-crisis levels, that the US, Japan & Europe may face a new (double
dip) recession, & that the global economic recovery will be
driven by China, India & Brazil, although they too face slower growth
in 2011 (China from 10.1% to 8.9%, India from 8.4% to 7.1% & Brazil
from 7.6% to 4.5%), before accelerating again in 2012.
Its 2011 forecast
for various countries doesn’t quite jive with
its “double-dip” warning. For it foresees 2011 growth of 2.2% for
the US, 1.1% for Japan & 1.3% for the Eurozone (which, while not
impressive numbers, are a) positive & b) not that far out of line
with their long-term trend rates.
U.S. AUTO SALES
SURGE AS JAPAN, EUROPE SLUMP (EJ, Business Browser)
· GM’s November
sales were up 11.4% YoY, Ford’s 24.3% & Chrysler’s 17% (albeit
from low year-earlier levels). But Japan’s slumped for the third
month in a row, Italy’s were down 21.1% YoY, Spain’s 25.5% &
France’s 10.8%.
A
US auto industry analyst recently told a Detroit audience he expects
pent-up demand & population growth to drive US auto sales back to
its record 17+MM annual rate by 2015 (which, if the US dollar
declines enough in the meantime, could give the US economy a powerful
shot in the arm, albeit possibly not soon enough to save President Obama’s
bacon in 2012.
POLITICIANS TARGET
U.S. MORTGAGE INTEREST DEDUCTION
(G&M, Kevin Carmichael)
· The MID (Mortgage
Interest Deductability) was introduced in 1913. It inflates house prices,
favours the rich, costs the government dearly & distorts resource
allocation in the US economy. It has survived several attempts to
end; for politicians view it as so key to the American Dream of home
ownership as to be a “Third Rail” issue. Nevertheless, President
Obama’s Deficit Commission is about to recommend a curtailing thereof
(by limiting it to primary residences only & to only the first
US$500,000 of mortgage principal).
According to the Tax
Policy Center, MID will cost the US Treasury US$130BN in 2012.
PAY FREEZE PLAN
TARGETS DEFICIT (AP, Julie Page)
· President Obama
on November 29th called for freezing the pay of 2MM federal
employees saying “The hard truth is that getting this deficit under
control is going to require some broad sacrifice, and that sacrifice
must be shared by the employees of the federal government.” The two-year
freeze wouldn’t apply to military personnel, and would save US$5BN
over two years, US$28BN over five years & US$60MM over 10 years.
While it wouldn’t apply to Congress (which must approved any freeze),
lawmakers last April voted to freeze their own pay by forgoing an automatic
US$1,600 annual COL Increase.
This is mostly optics,
designed to mollify Jack & Jill American Taxpayer many of whom look
upon federal public servants as a pampered, over-paid & over-benefited
but underworked bunch of parasites who live high of the hog at their
expense. For US$5BN barely makes even the tiniest of dints
in a US$1.3TR deficit
U.S. INDICATORS
UP (EJ, Business Digest)
· Despite September’s
faster-than-expected fall in single home prices, the Conference Board’s
Index of Consumer Confidence Index rose to 54.1, the highest since June,
up from an upwardly revised
49.9 in October & well above
the analysts’ consensus forecast of 52.6.
The devil is in the
detail. The Current Conditions Sub-Index was up marginally from 23.5
to 24.0 while the Expectations Sub-Index (that measures consumers’
assessment of conditions six months out) soared from 67.5 to 74.2.
The number of those who judged business conditions
“bad” rose from 42.5 to 43.6 while
that of those who thought them “good” slipped from 8.3 to 8.1,
& although those who said jobs were
“plentiful” rose from 3.5 to 4.0, those who said they’re
“hard to get” rose from 46.3 to 46.5
U.S. ECONOMY CREATED
FEWER JOBS THAN EXPECTED IN NOVEMBER (msnbc)
· The Labor Department
reported on December 3rd that just 39,000 new jobs were created
in November & the unemployment rate rose to 9.8% (which some
analysts now expect to soon surpass 10%). On the other hand, the
50,000 rise in private sector employment suggests the economy is still
gaining momentum (although it will take 200,000 - 300,000 new jobs
a month to make a sizeable dint in unemployment).
Another bit of good
news is that the number of new applications for unemployment benefits
last month dropped to a two-year low. And to the extent the higher unemployment
rate is due to more people looking for work, it
actually is positive).
SIDEWAYS MARKETS
WILL PUT INVESTORS TO THE TEST
(G&M, David Rosenberg)
· The political
shift in the US from Left to Right & the growing bias towards budget
cutting at both federal- & state levels signify voters want governments
to practice the same of frugality as forced onto them. With economic
life support from Washington ending, the negative fiscal shock from
less government spending could trigger close to zero growth in the First
Quarter & renewed talk of a double dip recession. The housing market
cannot get out of its own way. Gasoline prices are high. The end of
extended unemployment benefits will take a US$70BN bite out of potential
consumer spending. And holiday shopping surveys show a marked fall-off
in the spending plans of low-end households.
Congress is moving
slowly towards another (last-minute) extension of unemployment benefits,
although this it may not have much of a
pump-priming effect since the Republicans insist it must be spending-neutral.
AS CANADA’S ECONOMY
SLOWS, EXPORTS TO U.S. BECOMING MORE CRUCIAL (G&M, Jeremy Torobin)
· Canada’s Third
Quarter performance was the slowest in a year, growing at a 1% annualized
rate, vs. 2.3% in the Second-, & 5.6% in the First-, Quarters. Held
back by weak demand from abroad & a drop in housing even as business
investment surged & consumer spending held steady, exports to the
US will be crucial in the months ahead.
This is just about
the dumbest, most myopic & traditionalist front page headline the
paper has carried in a long time. For the US is economically not a paragon
of rapid growth & politically becoming
more protectionist. And all the growth these days, that Canada should
try & tap into far more aggressivelllan
than it has in the past, is concentrated in non-traditional markets
in Asia, Latin America & Africa.
‘MORE POPULAR
THAN BEER AND WINGS’ (Postmedia, Richard Foot)
· This is how one
Newfoundland newspaper described the Province’s retiring Premier,
Danny Williams, whose approval rating during his seven years in office
seldom went below 80%.
In Newfoundland terms
greater praise is inconceivable. A former Rhodes scholar, he founded
the Province’s first cable TV network (& later sold it for $232MM)
as well as one of the province’s most successful law firms, and as
Premier donated his stipend to charity. He took on the oil industry
with considerable success, as he did Ottawa. On one occasion he
became so incensed with the then Prime Minister that he
ordered an end to the flying the Canadian flag from public buildings
(which got attention). And following a run-in with Prime Minister Harper
he launched a campaign in the last election to vote
“ABC” - Anything But Conservative
– (despite himself heading a Conservative government), that resulted
in his fellow Newfoundlanders not electing a single Conservative MP,
thereby robbing the Prime Minister of a majority in Parliament. And
his parting shot was to negotiate a deal with Nova Scotia to become
the Province’s partner in a project to move power generated in Labrador
under water to Newfoundland & hence under water to Nova Scotia,
so as to cut the Province of Quebec out of
the loop (which for several decades has benefited more from the Labrador-produced
power exported to the US via than Newfoundlanders think is fair &
reasonable, & that has steadfastly refused to renegotiate the existing
arrangement (that has several more decades
to run).
ISRAEL AND US ARE
WASTING TIME OVER SETTLEMENTS (Telegraph)
· On November 25th
former Israeli Prime Minister Ehud Olmert told foreign journalists Prime
Minister Netanyahu should agree to the US demand to halt settlement
construction in the West Bank so as to restart the Middle East peace
talks. He said Netanyahu & Obama are wasting valuable time by focusing
on such a “marginal” issue instead of tackling core issues (like
the final borders, the ‘right of return & the status of Jerusalem).
He also revealed that during his time as Prime Minister he had made
the Palestinians an offer that would have given them control over 94%
of the West Bank, & be compensated for the remaining 6% through
a ‘land swap’, and that would have turned the Arab neighbourhoods
of Jerusalem over to Palestinian control, with the Old City governed
jointly by Israel, the Palestinians, Jordan, Saudi Arabia & the
US.
That is close to what
everyone involved knows an eventual peace agreement, if ever there is
one, will look like (except for the
“right of return”, that will likely be monetized, with
Saudi Arabia funding most of the cost thereof). The timing of his comments,
coming after him having lain low since being turfed out of office, suggests
this may be a step in an evolving campaign to replace the current right
wing coalition with a more dovish centrist one (rumour has it that Defence
Minister Ehud Barak, who also heads the left-of-centre Labor party,
a while ago put Netanyahu on notice that
he would quit the coalition, in which he is the
‘odd man out’ anyway, absent serious progress in the peace negotiations
by year-end).
CHINA WARNS U.S.
AGAINST MILITARY ACTION IN KOREA (NYT)
· On November 26th
China’s Foreign Ministry issued a statement warning against “any
military acts in our exclusive economic zone without permission.”
By Beijing’s definition that includes the waters to the West of the
Korean peninsula in which major US/Korean naval exercises are about
to take place & in which in the past US naval traffic has been quite
common. And rather than Beijing using its influence over North Korea
to rein it in, as Washington had hoped it would, the statement even
failed to criticize North Korea for its November 23rd shelling
of a South Korean island near their common border.
While this
intended, in part at least, as a way to further international acceptance
of its unilateral definition of its
‘exclusive economic zone, it may backfire. For the naval exercises
go ahead as planned. And then what can/will Beijing do?
FOOD PRICES SEND
CHINA’S INFLATION RATE SOARING
(G&M, Mark MacKinnon)
· October’s 10.1%
jump in food prices drove its overall inflation rate to 4.4% YoY, the
highest in 25 months & well above the government’s 3% target (although
China Business News reported recently the government was considering
raising this target for 2011 to 4%, which is, however, still well short
of the 5½% economists at the Standard Chartered Bank are forecasting).
Even the price of a Big Mac was recently raised by 8%. The rising cost
of food is causing growing discontent among food shoppers many of whom
must spend half their incomes on food, & growing concerns among
Beijing decision makers who fear social unrest & are now talking
about food subsidies for poor people, and price controls.
· While part of
the higher food prices are due to floods in some parts of China’s
agricultural heartland & drought in others, concerns are growing
it also may be a sign of the economy starting to overheat after two
years of government stimulus which led to a 54% in the money supply
& to much real estate speculation.
China today &
the rest of the world tomorrow?
A TALE OF TWO EUROPES
(G&M, Doug Saunders)
· Both the ECB &
the EU Statistics Office this week released data showing the continent
is split into one group that is experiencing dramatic recoveries &
shrinking unemployment (with GDP growth rates this year of 2.9% or more)
& another group that is having the opposite experience (with negative
growth rates as high as -4.2% in the case of Greece). Be that as it
may, these two groups are joined at the hip; for the rising debt of
the ‘have-nots’ is mostly owed to the banks of the ‘haves’,
and the ‘haves’ economic growth has in the past
been to a major extent been a function of their exports to the ‘have-nots’.
The challenge for
the ECB now will be to try & find a monetary policy that can accommodate
a situation in which half its members’
economies may be at risk of overheating while those of the other half
are ‘tanking’.