With the US & Chinese
economies seemingly ‘decoupling’ from the Eurozone’s slide into
???, the risk to global economic growth has diminished. And, while doomsayers
had predicted that Third Quarter US corporate earnings would be disappointing,
this has not been the case : with two-thirds of the S&P 500 companies
having reported, the forecast of their collective earnings has been
revised upwards by 4% to a level two-and-a-half times that of 2008.
With all the kerfuffle
about the mess in Europe, it has largely escaped public notice that
on October 22nd Louisiana’s Republican Governor Bobby Jindal
was re-elected in a landslide (with 66% voter support - up from 52%
in 2007 -, a 48% lead over his Democratic opponent) in what traditionally
has been a heavily Democratic state with a large black population. Jindal
is of Indian descent, has just turned 40, and previously served two
terms in the House of Representatives, being elected with similarly
impressive majorities - may we see the emergence of a
“Draft Jindal” movement?
Luxemburg Prime Minister
Jean-Claude Juncker recently explained “We all know what has
to be done; what we don’t know is how to get re-elected once we’ve
done it.” - that’s what modern politics is now all about, clinging
to power, even at the risk of having to go down with the ship.
While on the focus remains
on Greece, the real ‘tiger in the room’ is Italy : its government
is tottering & while Berlusconi is vowing reform, the calls for
his resignation & for the forming of a new government are proliferating.
And in 2012 it will have to ‘roll over’ 300BN Euros in outstanding
debt, i.e. almost as much as the entire
Greek national debt & close to 2x Portugal’s national debt.
At the time of writing (Tuesday) Italy’s 10-year benchmark
bonds traded on a 6.30% yield basis, just short of their level of last
August when the ECB started buying them, & a near-record 450 bps
over their German counterparts, & its two-year bonds the day before
had traded at 6.60%, 3+x the yield on similar maturity bonds issued
by Slovakia & the Czech Republic (reflecting a similar disparity
in their Debt/GDP ratios). The only saving grace for Italy may be the
high proportion of its bonds held by domestic-, rather than foreign-,
investors (but its Achilles heel is illustrated by a worker in Fiat’s
Italian factories assembling 30 cars a year, while his Polish counterpart,
in the plant that recently celebrated the building of the two millionth
Fiat Panda model, assembles 3x that many, & gets paid one-third
as much (Poland has the EU’s sixth-largest economy, but is not a member
of the Eurozone, that is thriving, & has thrived throughout the
recessionary period).
Last week the EU came
up with its latest, as usual short-on-detail, ‘plan’ to “deal”
with its financial crisis that, among others, would have private investors
taking a “voluntary” 50% “haircut”. But this will reduce the
Greek national debt by just 20% since it doesn’t apply to the ECB,
and to Greek banks & public authorities (mainly pension funds).
Another possible fly in the ointment could be that the ISDA (the International
Swaps & Derivatives Association) has ruled that those who thought
they had hedged themselves against such an event by purchasing CDS (Credit
Default Swap) protection are out of luck because, in its opinion, they
don’t apply to voluntary haircuts; but the problem with that ruling
is that the ISDA governing body is controlled by the big financial institutions,
incl. JPMorgan, Bank of America & Morgan Stanley, many of whom have
multi, multi trillion dollar exposures to derivatives, whereas Fitch
has called any 50% haircut “a payable derivative event”.
Greek Prime Minister
George Papandreou’s surprise announcement that the latest bailout
deal will be the subject of a national referendum put the cat among
the pigeons; for regardless of whether it will be held in January
as first mooted, or in December as subsequently indicated, Greece desperately
needs the next 8BN Euro (US$11BN) bailout instalment due in ten
days or so to survive financially until any referendum can be
held (& the market’s assessment of the likelihood of it getting
it can be gauged from Greek two-year bonds currently trading at close
to a 100% yield basis). So the risk of a “disorderly” default growing,
with consequences nobody is sure about. While talk of returning to the
drachma, i.e. leaving the Eurozone, is still a dirty word in official
Athens, a growing body of economists is arguing it would be the best
course “whatever the near-term financial and economic implications.”
On the other hand, Papandreou might just be able pull off a favourable
result from a referendum, provided he survives that long politically,
especially if Ms. Merkel & President Sarkozy were to make some encouraging
noises. For while a majority of Greek voters is strenuously opposed
to more pain being inflicted on them, an even greater majority of them
wants Greece staying in the Eurozone (because they appreciate that the
pain would not be less, if not still greater, if Greece were to strike
out on its own?) - at last report, after fierce infighting within his
own party, Papandreou had abandoned his referendum plans and was rumoured
to be planning to resign Friday night regardless of whether he wins
the confidence vote in Parliament or not.
Prime Minister Papandreou’s
referendum announcement, which he apparently made without consulting
his Cabinet colleagues, was the equivalent of a “Hail Mary Pass”
in American football, “pulling the goalie” in ice hockey, &
“rolling the dice” in gambling. The Greek situation is not unlike
the US Wall Street/Main Street split : on the one hand there are the
numerous public sector workers seeking to protect their ‘rice bowl’
who demonstrate almost continuously in a desperate effort to do so,
& on the other the masses of non-privileged who see their world
crumbling around him, most visible in the country’s empty restaurants,
but who, the Prime Minister has all along maintained, accept the need
for unpleasantness & could be sold on accepting a deal that
may look worse in prospect than it may prove in the rear view mirror).
As one observer put it
recently, the problem in Europe has been that European leaders have
insisted on treating the symptoms rather than the disease : disparate
growth rates & degrees of competitiveness.
The state of European
financial markets can be gauged from the following. The EFSF (European
Financial Stability Fund), the Eurozone bail-out facility, had planned
to do a 5BN 15-year Euro bond issue on Monday October 31 to help fund
some of the earlier Irish bail-out. First it was forced to scale it
back to a less ambitious 3BN 10-year issue and then, on November 1st,
the issue was “delayed” because of market conditions until the “near
future”, albeit not this week. Borrowing money is likely the only
way out for the EFSF since on October 28th the German Constitutional
Court made a ruling questioning the constitutionality of a Bundestag
panel of lawmakers being mandated to make quick decisions on the EFSF’s
use of German taxpayers’ money to bail out other souvereign governments
& issued a temporary injunction on them doing so, thereby
setting the stage for a possible, & likely ugly, confrontation (she
is most unlikely to win) between Chancellor Merkel on the one hand,
and the German judiciary & the Bundesbank (that never liked the
idea of the EFSF), on the other, with German taxpayers being in the
latters’ corner.
Back in 1991, the now
head of the ECB, Mario Draghi, was a senior official in the Italian
Treasury who represented his country at the talks leading up the
establishment of the common monetary zone in Europe. But at that time
Italy’s high debt levels & runaway deficits got it into deep financial
doo-doo, causing one of Draghi’s MIT class mates, Francesco Giavazzi,
an electrical engineer with a Ph.D. in economics from MIT who now teaches
at Milan’s Bocconi University but at the time was one of Draghi’s
henchmen at the Italian Treasury, to observe, looking back at that era,
“We came close to default ... The lesson is that rather than waiting
for help, you need to regain the confidence of the markets through your
own actions, and that if you do not do the right thing, no outside help
is enough. You will have a solvency problem.” Too bad the Eurozone
decision makers ignored that age-old market wisdom when the PIIGs crisis
started to unfold.
The decision of the ECB
on November 3rd, on his third day as ECB president, lower
its base rates can means one, or more, of three things : Mario Draghi
wanted to tell the market he was his own man, that he was going to be
less paranoid about inflation than his predecessor and/or that he was
concerned about the near-term economic outlook for Europe.
The bankruptcy of Chicago-based
MF Global suggests Wall Street & the regulators haven’t learnt
a doggone thing in, & from, the past three years. For it had piled,
& was allowed to pile, US$40+BN in debt on a US$1.5BN equity base
(producing a 27x leverage ratio) & to amass a US$6.3BN exposure
to Europe’s most dodgy souvereign debt. And now, after the fact, it
has come to light that it hadn’t kept its own & its clients’
money separate, as it was legally required to do, & that there may
be as much as US$700MM of their money “missing”. Obviously everyone
had been dazzled by the fact that its Chairman was none other than Jon
Corzine, who at various times had been Co-CEO (with Hank Paulson) of
Goldman Sachs (from 1994 to 1999), the (very liberal) junior Democratic
Senator from New Jersey (2001-2005) & the equally liberal Democratic
Governor of New Jersey (2006-2010). One must wonder what motivated a
number of well-known Wall Street traders, who now find themselves jobless
& tainted, to join its fast-growing employee ranks in recent months
: hubris, blind greed or simply a failure to remember that, as the long-term
CEO of a successful upstate New York commercial bank that is sticking
to its knitting, taking deposits & making loans, recently pointed
out, namely that ‘two plus two makes four, not five, never mind six
or seven’).
Continental Airlines
will be the US ‘launch customer’ for Boeing’s new 787 Dreamliner
passenger jet. Some of its systems are apparently so different from
other Boeing planes as to make pilot training more complicated &
costly. As usual, pilots clamour to be among the first to fly a new
type of plane and, since they are selected by an auction-like system
based on seniority, this means that its new planes’ initial batch
of pilots will be those closest to retirement, thereby needlessly pushing
up the airline’s training costs.
GLEANINGS VERSION
II
No. 433 - November
3rd, 2011
NOT EUROPE’S
SAVIOUR, CHINA WARNS (Reuters)
- The day after the Head of
Europe’s rescue fund, the EFSF, was in Beijing on October 29th
to try & entice China into investing in the fund, the state-run
Xinhua news agency issued an English language commentary saying China
could not stand by while its largest trading partner foundered but that
Europe should nevertheless not expect China to ride to the rescue
as its “saviour” from the debt crisis.
And the next day President
Hu Jintao, after meeting with Austrian President Heinz Fisher while
on a state visit to that country prior to attending the Cannes G-20
meeting, told reporters “We are following the economic development
under current difficulties with attention ... (but)
are convinced that Europe has the wisdom and ... the competence to overcome
the current difficulties.” Nevertheless, China has a vested interested
in the outcome since an estimated 25% of its US$3.2TR FX hoard is composed
of Euro-denominated assets (incl. Greek government bonds).
CARNEY BACKS GREEK
CALL FOR REFERENDUM ON BAILOUT
(Postmedia News, Derek
Abma)
- The Governor of the Bank of
Canada, who is expected to be named tomorrow, November 4th,
at the end of the G-20 session in Cannes, to succeed fellow Goldman
alum & now ECB President Mario Draghi as Head of the Financial Stability
Board, told the Canadian House of Commons Standing Committee on Finance
on November 1st that “In times of difficult structural
adjustment ... tough decisions that governments such as the Greek government
is contemplating, it is important that there is widespread support for
those measures ... And if it is the judgment of the Greek government
that (a referendum) is the best way to validate that support, we fully
respect that.”
This is a more rational
approach than the panicked hissy-fit Chancellor Merkel & President
Sarkozy seem to be throwing (the latter recently pontificated that
“last week’s plan is the only way to fix Greece” although the
word “fix” is open to many interpretations). While this is easier
for a non-elected official like Carney to say than for the elected officials
involved, his pragmatism augurs well for the future, provided his appointment
to head the FSB is still on after him saying this.
AIRLINE PASSENGER
TRAFFIC UP (Montreal Gazette)
- The IATA reported on October
31st that worldwide airline passenger traffic in September
was up 5.6% YoY but cargo traffic down 2.7% (compared to 4.6% &
-2.4% in August).
Cargo traffic in September
being down for the fifth month in succession is not a bullish sign.
U.S. LAWMAKERS
UNFAZED BY DOWNGRADE RISK (Reuters)
- A growing number of US lawmakers
don’t think another downgrade of the country’s triple-A rating (by
Moody’s and/or Fitch) will harm the US economy, causing analysts
to fear complacency on Capitol Hill will threaten efforts to cure
America’s long-term fiscal health.
Their thinking is
based in part on the fact that last August’s S&P downgrade confounded
dire predictions it would result in higher borrowing costs for the Treasury.
PARTIES STILL APART
ON SUPERCOMMITTEE DEFICIT DEAL
(Politico, Jake Sherman)
- After two months the gulf
between the Democrats & Republicans on the Committee is as deep
& wide as ever. Both sides are dug to defend their priorities, with
the Democrats insisting on the need to boost revenues & seeking
to protect the entitlement programs,
and the Republicans refusing to even consider raising taxes &
increasingly averse to cuts in defense spending. Intra-party fighting
has been growing as rank & file lawmakers on both sides snipe at
their leaders’ proposals, with the House having just 8 legislative
days in November to deal with both the Supercommittee’s report &
the government funding issue. And talk is emerging from the House Democratic
caucus that perhaps the so-called “triggers”, that mandate specific
across-the-board cuts if the Super Committee cannot agree on US$1.2TR
in savings over the next decade, ought to be dismantled.
Connect the dots &
what does one get : elected officials’ total abandonment of their
fiduciary responsibilities, a totally disfunctional government, &
credit rating downgrades as far as the eye can see. Fortunately, the
soup is never eaten as hot as it is served (we hope).
AMERICANS SPENT
MORE IN SEPTEMBER, BUT SAVED LESS (msnbc.com)
- Consumer spending in September
was up 0.6% MoM, 3x the August rate (largely due to a rise in consumer
durables such as cars) while incomes grew at 0.1% in nominal-, &
declined at 0.1% in real-, terms. So the savings rate hit at 3.6%, a
post-December 2007 low.
Two possible explanations.
A new concept in the retail lexicon, ‘retail therapy’,
people buying stuff to feel better. And the fact that the top 20% of
income earners, those who make US$100,000 or more & are surviving
very well, account for over 50% of all household spending.
U.S. PRODUCTIVITY
AND COSTS, 3RD QUARTER 2011
(U.S. Bureau of Labor
Statistics)
- After being positive in 2009
& 2010, productivity growth turned negative in the first half of
this year. But in the Third Quarter it turned positive again, with labour
productivity in the non-farm business sector growing at a 3.1% annual
rate (made up of a 3.8% increase in output & a 0.6% rise in hours
worked). Manufacturing productivity was up 5.4% (4.7% plus 0.8%) &
9.9% in the durable goods-, but only 0.7% in the non-durable goods-,
sectors. And unit labour costs in the non-farm business sector were
down 2.4% as a result of the higher growth in output (3.1%)
than in hourly compensation (0.6%).
Together with a generally
weaker US dollar this augurs well for the US’ global competitiveness
(but is bad news for Canada, where productivity growth has seriously
lagged that in the US).
GALLUP FINDS ...
DROP IN UNEMPLOYMENT DURING OCTOBER
(Gallup, Denis Jacobe)
- Not seasonally adjusted it
found it to have been 8.3% in the 30 days to October 23rd,
down sharply from the previous 30 days. Since during year-earlier period
the rate, as measured by Gallup, had been steady or increasing, the
recent improvement is not explainable by seasonable factors; so it expects
the official October unemployment rate to be < 9%.
Coming, as it does,
on top of decent, albeit not stellar, Third Quarter GDP growth number
& a drop in initial claims for unemployment benefits, for the fourth
time in the past six weeks & for the first time in a long time to
below 400,000 claims,this could have major political & public confidence
implications.
MANUFACTURING SECTOR
GROWTH EASED IN OCTOBER (msnbc.com)
- The ISM’s Index of National
Factory Activity slipped from 51.6 in September to 50.8 in October,
instead of edging up to 52.0, as expected; for while its New Order Index
rose from 49.6 to 52.4, its Prices Paid Index cratered from 56.0 to
41.0, a post- April 2009 low. But the Commerce Department reported that
in September construction spending had risen for the second month in
a row, by 0.2% MoM to a seasonally-adjusted US$7.87.2BN, as
slightly stronger home construction offset lower public sector construction
spending.
On balance, a mildly
positive set of numbers.
BATTLE RAGES OVER
OHIO’S UNION-LIMITING LAW (G&M, Konrad Yakabuski)
- Facing a US$8BN deficit &
up to US$166BN in unfunded pension- & healthcare liabilities, Ohio’s
Republican-controlled legislature earlier this year rolled back
benefits for its 360,000 unionized public sector workers, limiting collective
bargaining to wages only, eliminating binding arbitration, allowing
state & local government entities to dictate contract terms in case
of no agreement, forcing public workers to pay more for their pensions
& healthcare, allowing for the unilateral roll back of benefits,
eliminating mandatory union dues & easing the decertification threshold.
So the unions gathered the 1.3MM signatures needed to have a referendum
on ‘Senate Bill 5', & next Tuesday, November 8th, the
state will vote on whether to keep, or repeal, it.
The outcome will be
interesting. For while public sector workers may feel hard done by,
many of the far more numerous tax payers see them as
‘fat cats’ living ‘high off the hog’ at their expense.
Earlier Wisconsin under similar circumstances took similar action
& faced a similar union response; but after having stared down the
opposition, its budget is now balanced & its rate of job creation
leaves that of the other 49 states in its dust.
U.S. CUTS OFF UNESCO
AFTER PALESTINE VOTE (AP)
- On October 31st
the UNESCO membership voted 107-14, with 52 abstentions, to admit
Palestine to full membership with, somewhat surprisingly, France voting
YES and, not surprisingly, the US, Canada & Israel voting NO, as
well as, somewhat more surprisingly, Germany, the Netherlands &
Sweden. Shortly after, the Obama Administration announced it would not
make the US$60MMM contribution it had been slated to make this month
to the UNESCO budget (& Canada’s Foreign Minister followed suit
by saying that Canada is reconsidering how much support to give UNESCO,
but that Canada will continue to make its regular $10MM annual contribution
to the UNESCO budget but won’t respond to appeals to boost it to fill
UNESCO’s US-prompted revenue gap). Prime Minister Netanyahu’s
reaction was “Unfortunately, the Palestinians continue to refuse to
negotiate with us. Instead of sitting around the negotiating table,
they have decided to form an alliance with Hamas and take unilateral
steps at the UN, including today.”
While the US provides
22% of UNESCO’s budget, it survived before when the US pulled out
under President Reagan, only rejoin it under President Bush 43. And
Netanyahu’s reaction was predictable; for he
knows he cannot control the agenda when the Palestinians
go the UN route the way he thinks
he can at the negotiating table. And it is interesting to see how
the world’s major proponent of democracy reacts when the exercise
of a democratic vote doesn’t turn out the way it thinks
it should have (as President Bush 43 did when the Palestinians elected
a Hamas government, with the benefit of hindsight with likely unfortunate
consequences).
U.S., EU CRITICIZE
ISRAELI PLANS TO SPEED WEST BANK BUILDING (JP)
- On November 2nd,
both expressed “deep” disappointment at Israel’s decision to accelerate
settlement building (with the approval of 2,000 more units, four-fifths
of them in East Jerusalem) following UNESCO’s (overwhelming)
vote supporting Palestinian membership in the organization, with the
EU foreign policy chief, Catherine Ashton saying “Israeli settlement
activity is illegal under international law including East Jerusalem
and an obstacle to peace. We have stated that many times before ...”
In response, in an ‘up yours’ response, Prime Minister Netanyahu
said Israel “has the right” to build & expand in an undivided
Jerusalem, which he referred to as “our eternal capital”.
Israel is also suspending
the flow-through of US$100MM in tax revenues it has collected on behalf
of the Palestinian Authority, a move that Mahmoud, somewhat over the
top, described as “theft”. The western powers should have learnt
by now that Netanyahu c.s. operate on the basis that
“Sticks & stones may break my bones, but words will never hurt
me.”
KEYSTONE
CALL TO TAKE ‘SEVERAL MONTHS’ : OBAMA
(Postmedia News, S.
Alberts)
- He indicated on November
1st that it could be “several months” before he would
decide whether or not to approve the now increasingly controversial
Keystone pipeline (that would carry oil
sands bitumen from Alberta to Southern US refineries), & that
environmental concerns would weigh just as much in his decision as energy
security or economic growth.
In so doing he is
making a liar out of Prime Minister Harper who not long ago called the
decision a “no-brainer”. And with the passage of each day the chances
of the pipeline materializing as presently proposed are getting slimmer,
if only because the US can enhance its energy security & job creation
more effectively from Bakken oil from North Dakota & Montana
& shale gas from Texas. This delights the likes of me who believe
that the priority should be on gaining greater access to world markets
for oil sands oil through pipelines to the Pacific Coast..
AUDITOR’S STAFF
TRAVELLED TO TEXAS FOR F-35 UPDATE
(Postmedia News, Lee
Berthiaume)
- They did so in September
to review progress in the F-35 stealth fighter program for a report
due next spring tentatively to be titled “Replacing Canada’s fighter
jets”. This news comes at a time that Australia is preparing to ask
Canada & others to join it im a study of the program’s delays,
& amidst concerns by the Pentagon’s chief weapons tester over
the speed with which the project is being pushed through safety checks.
I wonder why it never
occurred to me before, but Canada, as a supposedly peace-loving nation,
has no business of spending untold billions on offensive weaponry like
stealth fighters just to stroke the egos, & enhance the supposed
status among their peers, of a few backward-looking Air Force
‘jet jockeys’. And chances are that Canada’s acquisition thereof
at some point will be proven moot since even a former jet jockey &
defense hawk like Sen. John McCain (R.Ariz) has raised the possibility,
as he did last August, of cancelling the entire F-35
project because of its continually rising costs & the need to constrain
government spending. And even if the US government doesn’t cancel
it completely, it will almost inevitably drastically cut the size of
its originally envisaged order (causing the unit
price per plane to sky rocket). And there are two other possible nails
in the coffin of the F-35 program : a growing sense that it a throwback
to the Cold War era & not a 21st century
piece of weaponry, and the fact it is increasingly starting to look
as if unmanned aircraft & drones can perform many militarily important
tasks far more cost-effectively than manned jet fighters.
IAF COMPLETES MAJOR
DRILL IN ITALY (JP, Yaakov Lappin)
- Recently it completed a large-scale
drill with Italian & NATO planes over Sardinia, details of
which were made public amidst media reports over a possible Israeli
attack on Iran.
This came after reports
of the successful test launch of a (supposedly nuclear-capable) rocket
from the Palamachim air force base that could reach Iran. What message
are we sending Netanyahu when telling him he is a bad boy while at the
same time engaging in joint military exercises?
ISRAELI PM ORDERS
INVESTIGATION INTO IRAN LEAK (The Guardian, Ian Black)
- Netanyahu has ordered an
investigation into alleged leaks of his plans to attack Iran nuclear
facilities. According to the Kuwaiti newspaper al-Jarida he is
suspecting the former heads of the Mossad, Israel’s foreign intelligence
agency & of Shin Beth, its domestic counterpart,
of having done so to torpedo the plans that he & Defence Minister
Ehud Barak had drawn up to hit Iranian nuclear sites. And Tsipi Livni,
head of the opposition Kadima Party is said to have been persuaded to
come out of the chute to attack Netanyahu for “adventurism” &
“gambling with Israel’s national interest.
Last January, the
then recently retired head of Mossad, a hawk when he was running the
agency, called an attack on Iran “the stupidest idea I’ve ever heard.”
CHINA SPACE STATION
TEST MODULES IN HISTORIC RENDEZ-VOUS (AP)
- The Shenzhou-8 craft launched
on November 1st has docked successfully with the already
orbiting Tiangong-1 module in a step towards China having its own manned
space station. The Shenzhou craft is scheduled to return to earth in
a couple of weeks and Beijing is planning two more docking missions
for 2012, one of them manned.
China launched its
own space program after being kept by the US out an international collaborative
project in disregard of the 2,500 year-old advice of the Chinese military
strategy icon Sun Tzu “to keep your friends close & your enemies
closer.”
DANES
HELP CHINA JOIN ‘GREAT GAME’ IN ARCTIC (OC, Robert Sibley)
- Friis Arne Peterson, Denmark’s
Ambassador to China, said in Beijing on October 28th that
China has “natural and legitimate economic and scientific interests
in the Arctic”, even though it lacks a coast line in the polar region.
And that his government would like to see China given permanent observer
status in the Arctic Council (whose membership is now limited to
riparian nations). While some think the Danes are trying to leverage
their influence on the Council & attract Chinese investment
in Greenland, others believe that “what we’re seeing here is the
changing geopolitical realities in terms of the arrival of China as
a much more assertive country in the international system” Be that
as it may, China has for several years already had a permanent oceanic
& climatological research presence on the Svalbard Islands
in the Barents Sea, well inside the Arctic Ocean, and plans three Arctic
expeditions during the next four years & to build an 8,000 tonne
icebreaker by 2013.
The Europeans certainly
were also sucking up to Beijing when the Head of the EFSF went there
to try & inveigle the Chinese government into helping Europe to
extract itself from the mess it has gotten itself into.