One of you sent me a
market letter warning that the credit crisis indicators that had correctly
forewarned of the 2008 stock market meltdown were flashing red once
again :
· the two year fixed
-to-floating swap rate had exploded from 9.6 bps last March to a 13-months’
high of 64 bps - indicative of less confidence in the quality of
souvereign credits;
· three months dollar-based
LIBOR rates had more than doubled from 25 bps last December to 54 bps
– suggesting that banks are having less faith in each other’s
creditworthiness); and
· credit default
swap rates have surged - in other words, the cost of insuring against
the risk of default generally has risen sharply.
Reems has been written
about the Gaza flotilla incident, some of it by people smarter and/or
better informed than I (such as Nicholas Kristof in the article summarized
below). So I will limit my comments.
Israel was clearly “set
up”, but walked into a trap of its own making that was due to it overplaying
its hand & once again not properly evaluating the potential risks
inherent in its contemplated actions (thus in this case the IDF apparently
operated on the assumption its soldiers would not meet resistance. What
is now likely to happen is that it is going to face wave after wave
of Gaza flotillas until it has to fold, or at least moderate, its embargo
tents (which will be interpreted by its detractors as indicative of
it having become a ‘Paper Tiger” (reinforcing the impression created
about the IDF by the outcome of the Lebanon War & that the IDF is
only good at is beating up the vulnerable).
When the Gaza flotilla
incident occurred Netanyahu was in Ottawa & scheduled to go on to
Washington to meet with Obama pursuant an invitation conveyed to him
unexpectedly on May 20th by White House Chief of Staff Rahm
Emanuel when the latter was in Israel on a family visit for his son’s
Bar Mitzvah. While the reason given for his cancelling the Washington
leg of his journey was that he was needed at home ‘to take charge
of the situation’, the more likely reason was that he didn’t want
to have his ears boxed in private by Obama. Unfortunately this has been
a key problem in Obama’s policy vis a vis Israel, an assumption that
the Netanyahu crowd is amenable to reason & can be prevailed upon
to do ‘the right thing’ by cajoling them in private. But it has
become increasingly evident that Netanyahu c.s. interpret this approach
as giving them license to become ever more intransigent. So, unfortunately
for Obama, the time has come, & likely is long overdue, for Tough
Love, dealing harshly with Israel like a parent would with a wayward
teenager who thinks he/she has the world by the tail & can get away
with everything, for the sake of the individual involved.
Thomas Friedman in his
latest column quotes an old friend & Israeli university professor
as noting that “It’s time we start using our wits (something
the Jewish people historically were very good at). If we had used
even a tiny fraction of the brain power and resources we put into ‘defence’
into finding a way forward in terms of living with the Palestinians,
we would have solved the problem long ago. The Arabs are scared of the
Iranians, the Saudi peace plan is still on the table and the Palestinians
are beginning to act rationally. But we lack the leadership to make
real change.” (perhaps he is onto something : the
Israelis could always count of the Palestinians to act irrationally
& now that this assumption may
no longer bevalid, they are at a loss as to what to do, except to become
irrational themselves).
GLEANINGS VERSION II
No. 363 - June 3rd,
2010
IS GREECE JAPAN’S
FUTURE? (Project Syndicate, Heizo Takenaka)
· The problem of
excessive government debt is not confined to the EU. Japan’s Debt-to-GDP
ratio stands at 170% (vs. Greece’s 110%). But Japan’s government
isn’t taking the problem seriously. In fact the Hatoyama government
is focused on boosting spending to meet its grandiose election promises;
so the ratio of tax revenue to spending has fallen below 50% for the
first time since WW II, & next year’s budget deficit likely will
exceed this year’s.
· But Japanese government
bonds (JGBs) have historically been purchased mostly by domestic institutions
& households, thereby avoiding the risk of the capital flight that
brought Greece to its knees. But there are two reasons why this is about
to change. In three years the volume of JGBs outstanding will exceed
total household monetary assets (currently 1,100TR yen, i.e. US$12TR,
85% of the US national debt, with 40% of its population). And with
Japan aging fast, household savings will decline, & fiscal pressures
from higher pension & healthcare costs rise, dramatically. This
too will start to bite in three years.
· Between 2001 &
2006, Prime Minister Koizumi aggressively tackled Japan’s fiscal problem
by advocating smaller government & setting numerical targets for
fiscal consolidation, incl. a primary budget balance in ten years. And
he almost succeeded : the latter declined from 28TR yen in 2002 to 6TR
yen by 2007. But since then Japan has had three Prime Ministers in three
years (& now, with Hatoyama’s resignation after eight months
in office, supposedly to atone for his failure to keep his promise to
have a US base on Okinawa moved off the island but in reality, due to
his slumping popularity, more likely to give his party a better chance
in the Upper Chamber elections a few weeks away, that has made it four
in less than four years), giving rise to a populist spending
bias in fiscal policy.
· And, compared
to the current European problem, the effect of a fiscal crisis in Japan
will be huge, not just on neighbouring countries but on the world economy;
for Japan still is the world’s second-largest economy, accounting
for one-third of Asia’s GDP & 8% of global GDP, whereas Greece’s
share of the EU’s GDP was just 3% (i.e. <0.1% of global GDP).
And when that happens,
people will ask again : “How come we didn’t see this coming?”
THE TRANS-ATLANTIC
CRISIS (NYT, Editorial)
· Europe’s woes
are only one of many risks still facing the US economy. And they are
made only worse by an increasingly incoherent response by Congress (the
Senate left town on May 28th for a week’s break without
passing the bill to extend unemployment benefits the House had passed
- albeit after deleting provisions for health insurance subsidies
for jobless workers & more aid to states - on the specious grounds
they must now act to cut the budget deficit). The biggest risk
is the high jobless rate : 15.3MM people are out of work (nearly half
of them for over six months, and even at last month’s job creation
rate it would take five years to cut the unemployment rate to half its
current 9.9%). State budgets are collapsing, necessitating tax hikes
& spending cuts that will prompt layoffs in the public sector
& in businesses providing services to state- & local governments.
Weaker house prices will result from millions of foreclosure-
& distressed home sales. And credit will stay tight as small
banks are dragged down by soured commercial real estate loans,
· While so far Europe’s
troubles haven’t affected US banks because they own little Greek,
Spanish or Portuguese debt (although they hold US1.2TR of other
European debt, an amount similar to the subprime residential mortgage
debt outstanding at the end of 2008), the two financial systems are
tightly intertwined & it isn’t clear whether the former is prepared
for the worst that could happen in the latter. While the EU bailout
package has bought time, it will depend for its success on deep
budget cuts in countries in, or teetering on the edge of, recession,
several of them with weak governments that may, or may not, be able
to carry through the required changes & that, if they do, may well
be weakened further by them. So debt restructuring may well be inevitable
if the weaker countries are to start growing again; but
this would require European banks to raise more capital : for German
banks, for example, are already leveraged over 20x (vs. the US banks’
8x) while sitting on US$650BN of debt of the four most stricken countries.
The US external risks
will be less amenable to management by Washington, or anyone else, than
the US domestic ones.
LIVING
‘RENT-FREE’ THE JOY OF FORECLOSURE (NYT, David Streitfeld)
· Quitting to make
mortgage payments last summer has enabled Alex Pemberton & Susan
Reboyras to stabilize their family business, go to Outback occasionally
for a steak, take their gas-guzzling airboat out for the weekend &
visit the Hardrock Casino. He says that “Instead of the house dragging
us down, it’s become a life raft ... It’s really been a blessing.”
People like them are resorting to a home-made mortgage modification
that cuts their payments to zero & challenges lenders to ‘force
me out if you can’. Traditional moral qualms have been rationalized
away by blaming lenders for snookering them into taking out home loans
they couldn’t afford. According to Alex’s mother Wendy, whose house
a few blocks from her son’s is in foreclosure after she quit making
her mortgage payments two years ago, “I tried to explain my situation
(a bout with lung cancer) to the lender but they wouldn’t help ...
They’re all crooks.” While there are no hard data on the number
of households on the Robertson path of passive resistance, industry
insiders say the number of those taking the “rent-free” approach
is growing & starting to extend among the estimated one in four
households ‘underwater’ on their mortgages that can afford to pay
but see increasingly less sense in throwing good money after bad.
· Foreclosure procedures
have been launched against 1.7MM US households. But the process is slow
& getting slower due to legal challenges, foreclosure moratoria,
government pressures & lenders’ inability to cope with their unprecedented
numbers. So in the last 27 months the average time between a borrower
becoming delinquent & being evicted has gone from 251 to 438 days
(in other words, extending the period of
‘free’ accommodation from 8½ to 14½
months). And for almost 20% of the over 650,000 households that
have not made a mortgage payment in 18 months, lenders have yet to initiate
repossession procedures, double the year-earlier rate.
This is myopia cum
instant gratification in the extreme : every one of the benefits quoted
above falls into the ‘wants’ rather than
‘needs’ category. But as noted earlier, the resultant
‘savings’ on mortgage payments have helped to sustain consumption.
CONSUMER SPENDING
WEAKEST IN 7 MONTHS (msnbc.com)
· In April it was
flat on an MoM basis (after a 0.6% rise in March) despite personal incomes
rising 0.4%, resulting in 3.6% higher savings. Meanwhile economists
expect 425,000 new jobs to have been created in May, well in excess
of the 290,000 April number (but the May number will be inflated
by temporary hiring for the Census).
On Main Street, people
still lack confidence about the near term outlook.
DEBT-DOGGED AMERICANS
STRESSED OUT (msnbc.com)
· Forty-six percent
of those surveyed in an AP/GfK poll said they were suffering from debt-related
stress, while 53% said they didn’t, and half the former group described
their stress as a “great deal” or “quite a bit”.
While the macro numbers
suggest people should feel better, with the economy growing & creating
jobs, credit card debt down significantly & household balance sheets
improved, it just doesn’t feel like much of a recovery yet on Main
Street with unemployment remaining stubbornly high & more households
at risk of foreclosure.
MALIA FOR PRESIDENT
(NYT, Thomas L. Friedman)
· There are three
schools of thought in America’s energy conversation. The petro-determinists
never tire of warning we will remain dependent on oil for a long time
to come, the same notion they have been peddling since the First Oil
Price Crisis in 1973 & one intended to brainwash people into believing
that breaking our oil addiction isn’t just difficult but impossible.
The eco-pessimists say it is too late since we cannot rewire
ourselves, & the billions in China, India & elsewhere in
the Third World who aspire to our lifestyle, to want & expect
less growth; they may be sincere but underestimate the power of innovation
& the ability of billions of people to solve problems. And the
Obama realists, the political pros, who advise Obama this is not
the time to lay out a big new ‘Obama End to Oil Addiction Act’ because
Democrat lawmakers are suffering from “legislative fatigue”.
· Obama told a recent
press conference that that morning, while he was shaving, his daughter
Malia had asked him “Did you plug the hole yet, Daddy?” He should
listen to her rather than his advisers & start thininking like a
child (who still has 360 vision); for they get it & wonder
if it makes sense to continue to depend on an energy source that will
destroy many animal species, beaches & ecosystems before future
generations can enjoy them.
It’s easy for a
newspaper columnist to make this case, & even easier for the rest
of us to agree with him in principle. But Obama is faced with the reality
of politics still being ‘the art of the possible’ & that, unless
there is a groundswell of change at the US political grassroots, all
one can reasonable expect of him, & all he can hope to achieve,
is to introduce a marginally greater bias in US energy policy-making
in a long-term common sense direction. Having said that, the question
does arise if he is doing all he can to encourage the emergence of such
a groundswell of grass roots emotion (& the likely answer is that
his ‘measured approach’ to problems falls short on that count).
JET DIVERTED AS
U,S, DENIES ACCESS TO AIRSPACE (msnbc.com)
· Aeromexico Flight
006 from Paris to Mexico City was diverted to Montreal after being denied
access to US air space because one of its passengers was on a US “no-fly”
list. But after Canadian police arrested what a Mexican State Senator
described on Twitter as “a dark, Muslim-looking person”, the plane
& passengers were allowed to resume their journey.
The individual, travelling
on a US passport, was subsequently turned over to US authorities.
SAVING ISRAEL FROM
ITSELF (NYT, Nicholas D. Kristof)
· When I first heard
rumours on Twitter of an Israeli attack on the Gaza flotilla, I ignored
them on the grounds that “Israel wouldn’t be so obtuse as to use
lethal force on self-described peace activists in international waters
with scores of reporters watching”.But it turned out that not only
was it so obtuse as to shoot itself in the foot, for good measure
it also blasted American toes in the process & undermined its own
long-term strategic objectives.
· Back in 1973 Abbe
Eban, then Israel’s long-time Foreign Minister noted “The
Arabs never miss an opportunity to miss an opportunity.” But now a
rabbi told me on my Facebook page that “it is now israel
that never misses an opportunity to miss an opportunity.” For under
Benjamin Netanyahu Israel has locked itself onto a path that undermines
its own interests, & one that could prove catastrophic. Storming
a Turkish-flagged ship in international waters (one month after Turkey
had - ill-advisedly? - voted for Israeli membership in the OECD)
was a huge setback to its efforts to win new sanctions on Iran (circumscribing
the nuclear ambitions of which are purportedly Israel’s top priority),
in the process making the latter the big winner in this fiasco, especially
since it also antagonized its main support base in the US where, as
Peter Beinart recently pointed out in an article in the New York
Review of Books young Jews in America identify much less with Israel
than their elders did (while in US domestic political terms the Muslim
voting block is growing,& becoming increasingly pro-actively anti-Israel,
by leaps & bounds, especially in key Midwestern states).
The most startling
startling thing about israeli policies vis a vis its neighbours under
Netanyahu &, before that Ehud Olmert, has been a seemingly complete
inability to see things beyond the end of their nose & a tendency
to react to provocations in a manner not in Israel’s long-term interests.
HONDA WAGE HIKE
‘TIP OF ICEBERG’ IN CHINA? (Bloomberg)
· China’s
manufacturing job growth has accelerated to the fastest pace in five
years, with the Average Factory Employmeny Index reaching 52.7 in May
despite the Manufacturing Purchasing Managers Index slipping to 53.9
from 55.7 in April. This news came the day after Honda offered a 24%
pay raise to striking workers at a plant that had shut down its other
three Chinese plants. While faster job growth & higher wages will
help Beijing’s efforts to shift the world’s third-largest economy
away from export dependence, but will also stoke inflation, making it
that much more important to help contain domestic price pressures by
ending the yuan’s peg to the dollar. According to Huang Yiping, an
economics professor at Peking University & once Chief Asia Economist
at Citigroup, “After three decades of rapid growth partly driven by
cheap labour, China must adjust” to higher wages.
· After halting
minimum wage increases last year, provincial governments have resumed
raising them, as have companies from Dell Inc. to the Taiwan-owned
Hon Hai Group (the assembler of Apple’s iPhones which has been
plagued by a string of suicides at its Shenzen plant to the point where
it it is now installing nets all around the plant to intercept those
jumping off the roof). A People’s Bank of China survey found that
one in four workers interviewed expected at least a 10% pay hike this
year & Credit Suisse in Hongkong expects “double digit wage growth
a year for the migrant workers over the next few years.”
Rather significantly,
while Hon Hai had indicated a week earlier it it was considering a 20%
pay hike for workers at its Shenzen plant, it subsequently offered them
30% (presumably under pressure from Apple that has been embarrassed
by claims the suicides were prompted by poor working conditions, with
Apple CEO Steve Jobs’ claim that it is
“not a sweat shop” being accorded just about as much credibility
as Richard Nixon five decades earlier when he declared on TV
“I am not a crook”). But even in a country like China the
news of such pay hikes will spread quickly, so 20-30% could soon become
the “norm”, rather than the 10% indicated in the central bank’s
survey. One positive aspect of such pay hikes will be, however, that,
since the estimated 145MM migrant workers originate largely from the
rural and/or poorer Western parts of the country & send most of
their earnings home to their families, such wage hikes will help to
“spread the wealth” from the industrializing coastal regions into
the boonies and, in the process, broaden the geographic base
for a domestic consumption ‘boom’, which is a stated Beijing &
global objective.
.
RUSSIA MOVING QUICKLY
TO FILL POWER VACUUM LEFT BY U.S.
(EJ, David Marples)
· After two decades
of setbacks, Russia has become an activist player on the European stage
again, anxious to reassert its influence in its ‘neighbourhood’.
It has been aided by three unrelated factors. While the Bush program
of enforcing democracy by threats or military action alienated its allies
& caused acute anxiety in Russia, Obama’s failure to offer any
new foreign affairs’ initiatives has been tantamount to isolationism.
With NATO pre-occupied with the struggle against the Taliban in Afghanistan,
Moscow knows first hand this likely will end in failure; so that longer
that takes, the better it expects that to be for Russia. And the change
in the Ukraine's presidency : Viktor Yanukovych has been pressured from
the get-go by Moscow seeking to exploit its economic weakness
to wring out concessions that already have included an extension
of the Sevastopol naval base lease until 2042, the reintroduction of
its security forces - the FSB - in the Crimea (a potential tinderbox
& Yanukovych stronghold), the Crimean parliament decision
to elevate Russian to the status of an official language alongside Ukrainian
& now Putin’s push to merge the Ukraine’s Naftohaz with Gazprom
(that would give the latter control not just over the Ukraine’s energy
supplies but also over movement of gas to Western Europe).
· Earlier this year
Russia formed a customs union with Kazakhstan & Belaurus, both states
ruled by authoritarian leaders for two decades, although neither is
a Moscow acolyte & both pursue strategies that can best be described
as “evasive action” to avoid being sucked back into the Russian
sphere. But Moscow’s biggest recent setback also originated with Belaurus
& involved the former Kyrgyz president Kurmanbek Bakiyev. For it
had long been scheming to get a more friendly regime in Kyrgyztan than
Bakiyev’s (who came to power in 2005 after the “Tulip Revolution”
removed Askar Askayev, who now lives in Moscow). But Bakiyev is now
in Minsk where Belaurus President Alyaksandr Lukashenka has ignored
requests for his extradition & incensed Moscow by declaring he should
be allowed to return to Kyrgyzstan to take part in a referendun on his
presidency.
· And Russia is
punching above its weight. It is overstretched militarily; while it
could beat up on the Georgians in 2008, it couldn’t handle anything
much bigger. Its machinations are so transparent as to make its neighbours
wary. Although its economy has recovered from the recession, it remains
overdependent on oil & gas & helplessly vulnerable to fluctuations
in their prices. Its population has declined at an alarming rate
since 1991 (although it grew slightly in 2009). But while its resultant
deep social problems thus seem to preclude a return to superpower status,
it remains deeply dissatisfied withe the status quo.
Like it or not, Moscow may have to
get used to its superpower days being over.