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Reflections on world economy and more by Nick Rost van Tonningen of Canada
December 22nd, 2011
The bloom may finally
be off the rose in China’s long residential housing boom in which
people bought condos by the fistful in the expectation they would
be worth more tomorrow than they paid for them today, & that led
to the residential housing construction sector accounting for 10% of
GDP (vs. 6% at the height of the US housing bubble). Two months ago
Shanghai developers started slashing the prices of their latest luxury
condos by one-third, infuriating, & causing riots among, those who
had not long before paid full price. In Beijing new home prices were
down 33% in November alone. Unsold home inventories now are 21 months’
worth of sales in Beijing & 22 months in Shanghai. And in a ripple
effect steel production is down 15% since mid-year and municipal
land sales have cratered (& they being a primary source of income
for local authorities, this will affect their ability to service the
bank loans they took out in better times to make, often over-exuberant
& unwise, infrastructure investments). So we may soon see if China’s
recent economic path was real, or a mirage, a “Potemkin village”-like
structure; some analysts believe China’s GDP growth rate could
implode to zero (which is highly, highly unlikely since the regime knows
this would challenge it to the point of its total destruction).
Some people are fussing
about the possibility of adventurism by the immediate post- Kim Jong-il
regime (whether run by his inexperienced No.3 son, a caretaker family
compact, as was rumoured some time ago, or the military) to unite North
Koreans in defence of their homeland against a foreign enemy (with the
possible connivance of Beijing which is quite happy to have a piss-poor
renegade state as a buffer between its territory & affluent South
Korea). But this applies equally, if not more so, to China where at
the grass roots public unrest about food inflation, unaffordable house
prices & corrupt local officials and, at the macro level, the government
change-over due next year & the possibility of the chickens coming
home to roost from a many years-long misallocation of resources in banking
& real estate may create a far more threatening incentive to international
adventurism, with the recent call by Wu Jintao for the Navy to ‘ready
itself for battle’ being an worrisome omen (this could, not inconceivably
also take a non-military form, by Beijing seeking to fish in troubled
waters with some covert action against the US dollar).
Beijing is starting to
make some more environmentally-friendly noises (& has, in typical
Chinese fashion, already been diverting significant resources to become
the global leader in some alternate energy technology areas). And so
are now the Saudis, of all people : last spring they announced plans
to reduce domestic energy consumption by mandating the installation
of better insulation (air conditioning is said to account for 70-80%
of the Kingdom’s energy consumption), and recently others to promote
the development of more alternate energy projects to ‘preserve our
oil assets’. Meanwhile, Canada’s environmental policy is basically
‘business as usual’.
The Italian economy shrank
at a 0.2% annual rate in the Third Quarter, its first contraction since
2009. And the government is forecasting a 0.4% GDP contraction for 2012
(which the employers’ group CONFINDUSTRIA thinks is way, way too optimistic
: it forecasts a 1.6% contraction, 4x the official forecast). With a
debt-to-GDP ratio of 116% last year & now North of 120%, and an
annual deficit in the 4% of GDP range, that ain’t going to do much
for investors’ interest in Italian government bonds at a time it a
need to ‘roll over” US$300+BN in already outstanding debt next year
and raise US$100BN or so in new money to fund next year’s deficit.
Ed Clark, the CEO of
the Toronto-Dominion Bank, recently said Ottawa should tighten the rules
on housing loans by cutting the maximum length of federally insured
mortgages to 25-, from 30-, years to slow the growth of rising consumer
debt in Canada (the level of which, relative to GDP, hit a new record
earlier this month, surpassing that of both the US & UK). This illustrates
the extent to which the “nanny-state” idea has permeated even the
financial community despite its claims the market should be given free
rein (when it suits it); for if this were really a professional concern
for him, all he would need to do would be to issue a directive to his
mortgage lenders not to ‘do’ any more home mortgage loans with maturities
of over 25 years. It also shows why economic & financial crises
occur : even those who believe the world is on the wrong path seldom
act on that belief, often, as in this case, for short-term profitability
reasons. On the other hand, Clark cut his teeth professionally during
the Trudeau nanny state era when, as Senior Assistant Deputy Minister
of Energy, Mines and Resources Canada, he was derogatively referred
to as “Red Ed” in Calgary for his authorship of Trudeau’s, in
that city much-hated, “National Energy Policy”.
Old meets new : the other
day my eye was caught by the sight of a young Muslim woman wearing a
hijab made of Burberry plaid material.
GLEANINGS VERSION
II
No. 440 - December
22nd, 2011
FRENCH CENTRAL
BANK ATTACKS BRITISH ECONOMY AS EUROZONE RESCUE PLAN STARTS TO DISINTEGRATE
(Elliott Wave International, Nadeem Walayat)
- After S&P raised doubts
about the sustainability of France’s triple-A rating due to its banks’
exposure to PIIGS countries’ government debt, France’s Central
Bank Governor, Christian Noyer, on December 16th fired a
broadside at Britain (& indirectly at S&P) when he said
“A downgrade doesn’t strike me as justified based on economic fundamentals.
Or if it is, they should start by downgrading the UK, which has a bigger
deficit, as much debt, more inflation, weaker growth, and where bank
lending is collapsing.” And Finance Minister François Baroin weighed
in with “Great Britain is in a very difficult economic situation,
a deficit close to the level of Greece, debt equivalent to our own,
much higher inflation prospects and growth forecasts well under the
Eurozone average (which is true for France as well) ... you’d
rather be French than British in economic terms.” But the market disagrees;
for the yield on French 10-year bonds is 3.20%, vs. 2.10% on such
UK bonds.
This
‘dialogue’ was started by Britain’s Chancellor, George Osborne,
when he compared market concern about the French debt with the Greek
situation, with the gauntlet then picked up by French Prime Minister
François Fillon, albeit less aggressively so (although, after Britain’s
Europhile Deputy Prime Minister Nick Clegg called this escalation in
rancour “unacceptable”, Fillon called Clegg from Rio de Janeiro
to assure him it hadn’t been his intention to question Britain’s
credit rating). But there are at least three major differences between
the two countries. Britain has its own currency of which it can print
as much as it can get away with & which it can devalue to make its
economy more competitive (which is not to say it should, merely that
it can). Secondly, France’s debt is denominated in
Euros which inextricably ties its lot to the Greeces of the Eurozone.
And the UK government seems to have more of the
‘political will’ needed to get its fiscal house in order than Sarkozy
(who faces an election next year) and, while its deficit/GDP ratio is
closer to Greece’s than France’s, it’s nowhere near
“the level of Greece” as the French allege).
EUROPE CHANNELS
$195 BILLION TO IMF (Bloomberg, Stepani Bodoni)
- After hours of conference
calls, the Eurozone on December 20th bolstered its anti-crisis
arsenal by channeling 150BN Euros into the IMF as the ECB widened its
support for sagging bond markets (buying 5x as many government bonds
in the week ended December 16th as in the week before). Four
non-Eurozone countries (Czech Republic, Denmark, Poland &
Sweden) kicked in some money, Britain refused to pledge, saying it “will
define its contribution” in early 2012, and three countries (Greece,
Ireland & Portugal) were excused from contributing. A former UBS
Chairman called this “obviously a small scale solution”, Germany
continued to oppose an earlier decision to raise the limit on overall
emergency aid to 500BN Euros & the Bundesbank made its 41.6BN Euro
contribution contingent on a promise by the IMF that it not be earmarked
for Europe (which was of course pure ‘window-dressing’) on the grounds
this would violate Eurozone rules forbidding central banks from funding
government deficits.
Since then Norway
has come to the aid of the party with a US$9.4BN loan to the IMF. But
the Europeans keep ignoring the age-old proof that in a confidence crisis
half measures merely feed speculation & that only putting
really overwhelming amounts of money (in this case
several trillion) can overcome it. This falls well short of the 200BN
Euros Europe’s leaders themselves earlier suggested was needed to
convince investors that a souvereign default or major bank collapse
wouldn’t lead to a catastrophic event. It may not constitute the
‘significant financial commitment” needed to extract serious support
for the IMF from the cash-rich BRIC countries; for since the G-20 had
earlier agreed to a need to almost triple the IMF’s (current
290BN Euro) spare lending capacity, this leaves a 300+BN Euro hole for
them to fill. In any case, in the overall scheme of things, 150BN Euros
is a picayune amount; for in the First Quarter alone 300+BN Euros of
sovereign-, as well as 230BN of bank-, bonds are maturing, and over
the next two years Italy, Spain & Belgium alone will have 711BN
Euros-worth of their debt maturing.
ECB LENDS BANKS
$645 BILLION, EXCEEDING FORECAST (Bloomberg, Gabi Thesing)
- In its latest attempt to keep
credit flowing during Europe’s souvereign debt crisis, on December
21st it lent Euro area banks a record 489BN Euros/US$645BN
(66% more than expected) for 1,134 days at an rate of interest of roughly
1% (116BN Euros - 23.7% - accounted for by Italian banks).
A total of 523 banks put in requests for money that was “obviously
an offer the banks could not refuse.” With banks wary of lending to
each other (for perceived credit quality risk reasons), the ECB
is trying to ensure they will have enough cash to continue their normal
business- & consumer lending activities.
The unexpectedly high
demand was in part due to governments & central banks pushing their
banks to do some ‘pre-emptive borrowing’ (i.e. borrowing more than
they needed, if only to pre-fund 2012 maturities). But with 296BN Euros
(60%) of it accounted for by rollovers, the notional loan amount far
exceeds its potential impact on the economy. And with the ECB having
‘widened the range of collateral securities’ it will accept as security
for these loans, more dodgy private sector debt, & their embedded
risk, is being offloaded onto the public sector balance sheet.
ECB’S STARK DISCUSSES
RESIGNATION (AP)
- ECB Executive Board member
Juergen Stark told Germany’s Wirtschaftwoche magazine he had
resigned last September 10th, effective
December 31st, because he “wasn’t satisfied
with the way this currency union has developed.” He said that, while
the ECB had done its part by keeping inflation under control, some Eurozone
governments had run into financial problems by letting labour costs
rise, thereby making their economies less competitive, & had failed
to rein in excessive real estate booms, the collapse of which
had contributed to the debt crisis
While at the time
on his resignation he gave his opposition to its bond-buying program
as his reason for leaving (& recently criticized the idea of the
IMF having a key participatory role in the debt crisis), the ECB continues
to refer to “personal reasons”. A five-year member of the ECB Executive
Board, he was often referred to as its
‘Chief Economist’, even though there is no such position. His successor
is a senior official of Germany’s Finance Ministry, not the Bundesbank.
US REJECTS EUROPEAN
COURT RULING ON AIRLINE EMISSIONS (BBCNews)
- As part of its climate change
combat effort the EU has an Emissions Trading System under which it
charges installations such as oil refineries, power stations & steel
mills for their CO2
emissions. On December 20th the European Court of Justice
rejected attempts by the US to stop the EU from applying it to airlines
as well, arguing it was an issue that should be dealt with by the international
aviation body, IATA, & that it violates various
climate change-, & aviation-, acts & agreements. The Court ruled
that “application of the emissions trading scheme infringes neither
the principle of customary international law at issue or the Open Skies
Agreement ... It is only if the operators of such aircraft choose to
operate a commercial air route arriving at, or departing from, an airport
situated in the EU that they are subject to the emissions trading scheme.”
So as of January 1st 2012 all airlines flying into or out
of airports in the Eurozone must pay the tax, even though US, Canadian
& other airlines continue to oppose doing so, four Chinese airlines
complain it will cost them 95MM Euros (US$125MM) a year, the US House
of Representatives passed a measure two months ago directing the US
Secretary of Transport to prohibit US carriers from participating in
the scheme if it were to come into force, & US Secretary of State
Hilary Clinton warned on December 16th the US would respond
with “appropriate action”.
With the EU dug in
on the issue, & having made it quite clear it won’t to back off
for anyone, it looks as if it holds all the trump cards. For it is not
a discriminatory, but rather an across-the-board measure, & it can
therefore ignore all mindless Washington bluster (for what is the US
going to do : have its airlines quit flying to Europe, or not allow
European airlines to fly to the US?)
UNEMPLOYMENT FELL
IN 43 STATES IN NOVEMBER (AP, Martin Krutsinger)
- This was the most states with
such results in eight years; so the national unemployment rate fell
to 8.6%, a post-March 2009 low. The economy has now generated 100,000+
new jobs for five months in a row, for the first time since 2006 (but
needs to generate twice that many, if not more, month after month, to
take a serious bite out of unemployment). New York & Texas had
the largest job gains (29,500 & 20,800 respectively), Wisconsin
the most job losses (14,600), Nevada, with 15%, the highest UE rate
(for the 18th month in a row) & California the second
highest, with 11.3%, and North Dakota the lowest, with 3.4%.
North Dakota’s stellar
performance can be explained with two words : Bakken oil. Boom conditions
there are said to be almost beyond comprehension. But this has been
made possible by, & will continue to depend on,
“fracking”, the technology that has environmentalists in a tizzy,
in part because the oil industry, with its usual short-term profit maximization
focus, hasn’t minded its p’s & q’s in its use thereof (but
its importance from a national job creation- & energy independence
point of view is so immense that it is going to have to change that,
if not spontaneously for self-evident self-interest reasons, then by
government fiat for national economic & security reasons, and to
knock most popular support out from under the hard core environmental
‘purists’).
SIGNS POINT TO
ECONOMY’S RISE, BUT EXPERTS SEE FALSE DAWN
(NYT, A. Lowrey)
- The recent unexpectedly good
economic data suggest the fastest growth since the recovery started
in 2009. But it may not last. For there was a one-time n inventory-building
catch-up, consumers cut back on their savings, & gasoline prices
declined. And going forward, there may be fallout from Europe’s debt
crisis, a stronger dollar making exports less competitive, some mandatory
fiscal tightening &, if the payroll tax isn’t extended, US$150BN
of spending power taken out of, mostly middle class, consumers’ pockets.
But consumer confidence
could conquer all. And it came in at 69.9 this month, up from
64.1 in November & well above the median forecast of 68 (although
this is still well below the average of 89 for the five years preceding
the Great Recession).
AFTER THE U.S.
HOUSING CRASH, A NATION OF RENTERS EMERGES
(G&M, Steve Ladurantaye)
- Small home builders are keeping
their head above water, & maintaining a presence in the industry,
by building a house here & there, and renting it. Data released
by the Commerce Department showed that, while building permit issuance
in November was up 9.3% MoM, this was made up of a 2.3% increase in
single home permits & a 32% increase in those for apartment construction.
As Americans turn their backs onto home ownership, “rental vacancy
rates have fallen faster than they ever have, and rents are rising across
the country - even in some of the hardest-hit areas.” And the huge
overhang of foreclosed home has prompted Morgan Stanley to start mooting
the idea of institutional investors buying residential real estate for
rental purposes.
While definitely a
departure from the decades-long idea that home ownership is an
integral part of the ‘American Dream’, it remains to be seen whether
this is a permanent or temporary shift.
US WATCHDOG EYES
ZERO INTEREST MORTGAGE PLAN
(FT, Shahien Nasiripour)
- The FHA, the regulator supervising
Fannie Mae & Freddie Mac is considering a plan that would enable
them to allow homeowners in Chapter 13 bankruptcy & underwater on
their mortgages to pay zero interest for five years. This “principal
paydown plan”, however, would apply only to mortgages owned or guaranteed
by the two agencies, half the total outstanding, & one in four homeowners
with mortgages (i.e. 11MM) is currently underwater with an aggregate
negative equity of US$700BN.
- The Treasury is compiling
a “major package of recommendations”, incl. this principal paydown
proposal, on ‘fixing the housing market’ (again?) for the
President’s consideration. And, while the White House so far has been
“cool” to the idea, the FHA can go ahead with it without formal
White House-, or for that matter, Congressional-, approval.
With 44MM home owners
with mortgages in the US & total US home mortgage debt of US$14-15TR,
the average mortgage size is US$320,000. Half the 1.5MM borrowers in
Chapter 13 since 2008 had mortgages & one in four home owners with
mortgages were underwater on them. So,
with Fannie & Freddie having exposure to half of the home mortgages
outstanding in the US, between them they may have 375,000 borrowers
that are both in Chapter 13
and underwater on their mortgages , which means that
this measure, if implemented, would benefit < 2% of their clients
while, in a best case scenario, adding US$3.6BN to the Federal deficit.
THE SILVER RUSH
AT MF GLOBAL (Barron’s, Erin E. Arvedlund)
- When the Company went bankrupt
some customers held ‘warehouse receipts’ for specific, identifiable
bars of gold & silver held by it for them in safekeeping (for which
they paid storage fees which they have continued to have to pay to
the Bankruptcy Trustee). Now the latter is proposing pooling all
assets of, or held by, the Company, incl. those gold & silver bars,
to fund a 72¢ on the dollar distribution to all customers whose money
had ‘disappeared’. But the warehouse receipt holders believe this
is unfair since their claims are based not on “paper-”, but on “real”
assets that are readily identifiable. They call the Trustee’s proposal
a “radical redistribution of property” (a euphemism for
“theft”).
One can only surmise
that, whereas the warehouse receipt holders are smaller industry players,
those holding “paper” assets include entities like JPM and/or Goldman
that would get a higher payout under the Trustee’s proposal than would
have otherwise been the case. If this proposal is implemented, it will
further erode the already waning confidence in the US financial system
VIOLENCE IS NO
LONGER ‘PRIMARY OPTION’ FOR HAMAS (G&M. Patrick Martin)
- Following reports Hamas was
swearing off violence, Taher al-Nounu, a spokesman for Hamas Prime Minister
Ismail Haniya, told reporters in Gaza on December 18th “Violence
is no longer the primary option ... But if Israel pushes us, we reserve
the right to defend ourselves with force.” And Palestinian President
Mahmoud Abbas is said to deem this part of Hamas’ commitment to reconcile
with his Fatah movement (this week Abbas & Hamas leader Khaled Meshaal
will meet in Cairo to flesh out their latest reconciliation deal).
- The group has always had
its non-violence advocates; thus during the first intifada, its founding
years, it merely threw stones at IDF troops. And after Mr. Meshaal became
its leader in 2005, it renounced suicide bombing as having given it
“nothing but a bad reputation’. Nevertheless, Barry Rubin, Director
of the Herzliya-based Global Research in International Affairs Center,
says this is just a ploy & that “Hamas is building support bases
and arms manufacturing facilities including those for building rockets”
in Egypt’s Sinai Desert, and noting the strength of Islamist parties
in Egypt asks “Who is going to order Egypt’s army to crack down
on Hamas and to close those facilities?”
- While Israel would be wise
to be skeptical, it would be unwise to dismiss Hamas’ claim out of
hand. For Hamas insiders say it seeks to meet one of the conditions
for negotiations set out in 2006 by the ‘Quartet’, & claim it
will accept the creation of a Palestinian state along the 1967
borders provided it won’t have to acknowledge the state of Israel.
And this move is coming at a time that Hamas, to the dismay of Syrian
President Bashar al-Assad, is severing most of its ties with Syria by
moving its offices to Cairo, Amman (& Qatar), and learning
to live without support from Iran, while Mr. Haniya is planning to travel
to Turkey, Bahrain, Qatar & Tunisia to demonstrate the movement’s
shift to new allies.
To an objective observer,
this could be a breakthrough. But for Prime Minister Netanyahu &
his right-wing coalition partners this is the nightmare scenario : a
Hamas that could become globally respectable & seemingly willing
to work with Fatah.
CHINA SEEKS 536
BILLION OF INVESTMENTS TO PROTECT ENVIRONMENT (Bloomberg)
- As part of its policy to
shift the economy from its overdependence on export-led growth, it plans,
by 2015, to cut SO2
emissions by 8%, raise the share of non-fossil fuels in total energy
use, reduce the use of coal & add 42MM tons of daily sewage treatment
capacity. But it expects most of this to be done & paid for by businesses
& local governments, and says that, while it will continue to spend
heavily on traditional infrastructure expansion, it won’t be at the
US$640BN rate since the 2008 credit crisis.
Grass roots pressures
are building to do something about air- & water quality. But Beijing’s
proposed funding model may be fundamentally flawed. For having business
pay for part of it will add to their cost of doing business. And Beijing
has far less control over how local governments spend their money than
often appreciated (& with their main source of income being real
estate-related, this could add to the cost of housing, already is somewhat
of a ‘third-rail’ issue).
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