Nick Rost van Tonningen ~ Gleanings II ~ 513 Posted by John on May 31, 2013

Quote of the week : “The reason for … today’s inaction among Eurozone politicians is not a shortage of things to do, but a shortage of the will to do them. This … is partly caused by elections due in September in Germany, the prime mover in almost any European policy these days. But there is a deeper reason too. Across Europe voters have grown resentful of both their own politicians and the EU. In France the president, François Hollande, is paralysed by scandal and a dismal approval rating of 24%, a record low for France’s Fifth Republic … (and) a recent survey … found that the share of French voters who say that they look favourably on the EU has fallen from 60% in 2012 to 41% now, less even than in Euro-skeptic Britain. Italy is mired in recession, yet it cannot seem to muster a coherent political platform for change. At the same time voters want to keep the single currency … Over the past few years crunch votes in Greece, Ireland, Portugal, Spain and the Netherlands have repeatedly backed staying inside the eurozone … This is a recipe for inaction.” (The Economist of May 25th, page14). This pretty well sums up the state of affairs in Europe : faced with voters who want to have their cake & eat it too, politicians hope that doing nothing will irritate them least. The Economist then goes on to say that “Time was when the bond markets would force politicians to face up to this contradiction … But the financial markets have been anaesthetised ever since Mario Draghi … promised to “do whatever it takes” to protect the eurozone from collapse” (although there is now growing evidence that, led by Bundesbank Governor Jens Wiedman, support for Draghi’s policies within the ECB’s Governing Council is fraying around the edges, in part because the politicians have squandered the time & opportunity to introduce the much-needed, & long-overdue, reforms that Draghi bought them with his declaration).

One of you sent me an apocryphical old farmer’s description of politicians as “post turtles”; for “When you drive down a country road & you see a turtle on top of a fence post, you know he didn’t get up there by himself, that he doesn’t belong there, that he doesn’t know what to do while he is up there & that he is elevated beyond his ability to function, and you wonder what damned fool put him up there!” – in this day & age there is much truth across the world in this bit of what my father used to call “peasant common sense” (which he meant as a compliment).

In October 1994 the S&P 500 was 460. Then over the next five years & three months the dot.com boom drove it up (by 226%) to 1,499 in January 2000 only to have it crash (by 46%) to 815 18 months later. Over the next five years the housing bubble caused it to it recover (by 87%) to 1,527, only to crater again in the next 18 months (by 48%) to 798. And by May 24th, four years & four months later, Bernanke’s policies had driven it back up (by 107%) to 1,650 – the question now is whether history will repeat itself or whether this time “it will be different”? The odds are it won’t (be different), especially now that the Fed has started publicly ruminating (in part at least since it seems to be getting concerned about “excessive speculation”?) about when, & how, to start “tapering off” its QE3 bond purchasing program (which raises questions as to how the US federal deficit might be funded without a significant hike in interest rates).

Since the end of the ‘Great Recession’ in 2009, the US consumer sector has contributed far more to the improvement in the US economy than its business sector (which has preferred to “sit” on its money rather than invest it : at last report zero-yield cash, & cash equivalents that yield next to nothing, accounted for over 11% of corporate balance sheets, twice the 1999 rate & 40% above their 2008 level). Consumers have spent the last five years refinancing their debt at lower rates, and the resultant improvement in their financial situationbalance sheets, along with declining unemployment & a bottoming out of home values, has caused their spending to outpace GDP growth (the flip side of which is that the personal savings rate is now 3%, half of what it was five years ago, albeit still twice the rate before the Great Recession). The most positive development has been that initial claims for unemployment benefits now run at half their peak rate during the recession, & are back in the range prevailing prior to the recession & during much of the 90’s (when the US labour force was numerically much smaller). But some of the ‘good news’ should be treated with caution. Thus while consumer spending has been strong, this has benefited foreign manufacturers more than US ones. While auto sales at their 14.8MM unit annualized rate are now 50% higher than in 2009, they are still 15% off their peak. And while building permit issuance has recovered to a 1MM unit annualized rate, this is still less than half its 2005 peak rate, the average house size has declined, & the share of permits for freestanding homes has shrunk from 78% to 63% of the total issued.

2011 was the first year in the thirty years it has been tracked that US spending per public primary & secondary student declined YoY, by < 1% to US$10,560, as total spending shrank 1.1% to US$595BN. This came after two decades during which it had grown, on average, about 1% faster per year than GDP - most of it accounted for by staff costs. Per student spending varies widely by state : New York, Washington D.C. & Wyoming top the chart with US$15,000+, while Utah, Oklahoma & Mississippi bring up the rear with roughly half that. US fracked oil is “light”. As a result, the ‘mix’ of its oil imports has grown steadily more “heavy” & “sour” (i.e. sulfur-laden). This will increase the clamour for more access to cheaper oilsands oil & for approval of the Keystone XL pipeline (which the House Republicans are once again trying to wrest from the President, likely with a similar lack of success as before). China has more shale gas reserves than the US & Canada combined. But there is only one problem : the bulk of them are located in earthquake-prone regions. This worries scientists since there is some evidence that fracking, the key to success in producing gas & oil from shale, increases seismic activity. It will be interesting to see how this will be squared with President Xi on May 24th telling a study session of the Communist Party’s leadership that the environment will not be sacrificed to ensure short-term growth. Wang Qishan is a 64 year-old senior Communist Party member nicknamed “Firefighter” his role as a trouble shooter in problem situations. He now heads the Communist Party’s Central Commission for Discipline Inspection, i.e. he is the country’s anti-corruption czar. Hongkong-based Phoenix TV says he recently ordained that, effective immediately, Ministerial level & above officials with children overseas must have them return to China within one year of graduation or risk losing their positions (and that this rule will be expanded to include Vice-Ministerial level officials next year, & Bureau Director ones in 2015) - developed country universities can expect a flood of graduate studies’ applications from Chinese nationals. The BoJ is now taking down 70% of all new government bond issuance as investors vote with their feet, reasoning that one must be a complete idiot to buy 10-year JGBs yielding < 1% when the government has vowed to drive the inflation rate up to 2%, i.e. is guaranteeing negative real rates of return on bond portfolios. S&P has warned France it must deliver on its promised budget cuts if it is to avoid another downgrade (presumably to AA since in January 2012 it lost its triple-A rating) - this makes a downgrade almost a foregone conclusion since France’s Finance Minister, Pierre Moscovici, earlier this month declared the era of austerity “over”, presumably to revert back to the mob-pleasing, but lame, policy decision-making that created the fiscal hole the country is now in in the first place (that has caused public spending in France, at 57% of GDP, to be the highest in the Eurozone). Forget Greece, Portugal, Spain & even Italy, it will be France, the Eurozone’s second-largest economy, that will pose the greatest threat to the survival of the Eurozone, & ultimate sustainability of the Euro (it is worthy of note in this context that the deficits of France & ten others of the 17 Eurozone member governments last year exceeded the EU’s limit of 3% of GDP, and that the EC recently has extended the deadline for them to meet it for a number of countries, incl. France & the Netherlands, by varying numbers of years). As of December 31st Germany’s largest seven banks were 14BN Euros short of the capital base they will be required to have when Basel III comes into force (which fortunately for them won’t be for a while yet). While on the surface this looks like a big improvement over the 32BN shortfall they had at mid-year, most of this improvement came from what some people might call “gimmicry”, i.e. asset sales & the rejigging of risk weightings (this illustrates the limited scope European banks generally have to take a significant “haircut” on their holdings of peripheral Eurozone government bonds before requiring massive bailouts by their own governments). The Brussels-based EU Secretariat is bound & determined to have tariffs imposed on China-produced solar panels, with Beijing calling on the EU to refrain from doing so, the majority of EU member governments opposing the idea & the EU Trade Commissioner protesting that China has been pressuring countries to head off an EU consensus on the issue. And at their May 25th joint press conference China’s Premier Li Keqiang “decisively” rejected the idea & Chancellor Merkel vowed to ensure no such duties will be imposed (rather interestingly, while Li told a Germany business audience Beijing faced “huge challenges” to achieve an average 7% GDP growth rate during the rest of this decade, this was down from the 7½% he mentioned two months ago at a Communist Party gathering). Kenya’s MPs are upset. The country’s new 2010 Constitution took away their ability to set their own levels of remuneration & entrusted it instead to a Salaries & Remuneration Commission. The latter has now ruled that the US$126,000 annual pay (plus significant benefits) that the previous parliament had voted for itself was excessive & cut it to US$78,000, i.e. from roughly 79x to just 52x the official Nairobi minimum wage. To put this in perspective, relative to their minimum wage levels, the old scale was equivalent to US, Canadian & UK lawmakers getting US$1.15MM, C$1.6MM & £1.0MM respectively. Canadian municipal politicians have long been whining that they get too small a slice of the total tax “pie”. But research by the Canadian Federation of Independent Business suggests they have a spending-, not a revenue-, problem. For between 2000 & 2011, while their population grew by 12%, their spending, in real terms, increased by 55%, largely due to the rapid growth in municipal employment & employee remuneration scales, and their mindless horizontal expansion in the suburbs that generates more servicing costs than incremental tax revenues . And, contrary to their claims, during the decade cash transfers from senior levels of government increased substantially, in BC’s case by a 273%! Edmonton’s municipal politicians like to see it become a “world class city” even as their thinking & decision-making often seems stuck in the horse-and-buggy era (in part because, like many Albertans, their first hand exposure to real world class cities has been limited). But there is one area in which Edmonton for unfathomable reasons is already “world class” : garbage disposal. For, when the next, & final, phase of its garbage processing regime, the construction of an ethanol plant, is completed, < 5% of the garbage produced daily by its businesses & its 850,000 citizens will end up in its landfill (which has municipal waste management officials from across the world coming to see how that is done, even though in Europe, which is way ahead of North America in this field, Germany, the Netherlands & Sweden have reduced that residual to as little as 1%). Now, in a new twist in this saga, an East Indian immigrant entrepreneur, in a JV with the city & other investors, has built a $20MM plant at the city’s Waste Management Centre that turns waste paper & discarded textiles into 100% post-consumer recycled paper, using no chemicals & far less water than traditional paper making (the longer, stronger & more durable textile fibres add greater strength to its product than recycled, shorter, easier-to-break-down wood fibres). It is also interesting to note in this context that a Vancouver-based firm, Waste to Energy Canada (WTEC) is carving out a global niche for itself in the energy-generating waste incineration business. For, from a standing start in 2009, it now has 19 plants operating in, among others, the Caymans, Scotland & Iceland, and has starting to try & exploit the pressure on Eastern European governments to move from their Soviet era environmental impact-neglectful waste management practices to the far more demanding EU standards by contracting to build, & in due course operate a $42MM plant in Poland that at full capacity will use gasification technology to turn 180 tons of waste per day into 11MW of electrical power. GLEANINGS II - 513 Thursday May 30th, 2013 SOMEBODY IS MESSING WITH THE GOLD MARKET (Forbes, Addison Wiggins) • “Zero hour” will come when the price of physical gold breaks away, on the upside, from that of paper gold and, more specifically, when a major metals fails to settle a gold or silver contract in kind as Holland’s AMRO Bank did in April & China’s Gold and Silver Exchange almost had to do on April 19th, (& there are already many stories of buyers being charged, & willing to pay, a significant premium for gold & silver for immediate delivery. Eric Sprott believes Zero Hour has been made inevitable by Western central banks leasing gold at 1% per annum to banks that then sell it to re-invest the proceeds in higher-yielding assets. And he thinks US Census Bureau data quantify the extent to which the Fed has done so. For they show that since 1991 the US has exported 5,504 tonnes of gold while its supply from mining & recycling had been 7,532 tonnes. But since domestic ‘disappearance’ was 6,517 tonnes, this left just 1,015 tonnes for export, suggesting to him the official 8,000+ ton US official gold holdings are overstated by half. Gold bulls like Eric Sprott have long claimed the US official gold holdings are overstated. But this is the first time someone, using official data, seems to have been able to substantiate such claims. And if he’s right, the supply side of the global gold market is in far worse shape than the hoi polloi are told. Meanwhile, while hedge funds are short gold in near record amounts & small gold traders, following the media’s lead, are bearish, commercial gold traders, the biggest players in the gold futures market, have quietly been covering their short positions. TOO BIG TO FAIL IS NOW BIGGER THAN EVER (Caixin Online/WSJ, Andy Xie) • A flawed global financial system is holding all major governments hostage. When a crisis erupts, the policy priority has been to stabilize the financial system for the sake of short-term economic reasons. But this favours the too-big-to-fail (TBTF) financial entities that now are bigger than ever, & more numerous as some hedge funds & other non-banks have joined their ranks, thus hiking the risk of a cascade effect that could cause a system breakdown. The root cause of all this is the central banks’ easy money policy; for low interest rates encourage, & reward, speculation. And while policy makers see cheap money as an easy way out, it engenders speculation since one person can manage billions of dollars worth of speculative money as easily as a commercial banker can millions of loans; for credit analysis is labour-intensive. And when the policy interest rate is zero, the spread between it & risk premia becomes simply too tempting. • A major financial entity going TU could prompt a global recession, & more than one doing so could see countries going belly-up. And the inclusion of entities in the shadow banking system in the TBTF category increases that risk because hedge funds, for instance, can, & will, leverage their equity bases to levels (up to 100x) the TBTF banks can only dream about. And technology compounds the problem by facilitating leverage, speeding up the spread of panic & creating a need for split second policy responses. • This is all Alan Greenspan’s doing1. For he pioneered the policies that favoured big banks, & the practice of cutting rates aggressively in downturns but hiking them slowly in recoveries, an asymmetry that over time boosted the money stock-to-GDP ratio, subsidized debtors & made assuming more debt profitable (which was reinforced by the fiscal asymetry from politicians adopting the Keynesian counter-cyclical theory bit they liked, to increase borrowing in bad times, but conveniently forgetting the other half of it (to compensate for that by running surpluses in good times). This is a short-term gain, long-term pain solution that leads to volatility & a concentration of wealth; for when 100 people flip coins for money, eventually one of them ends up with all of it. • The official remedy for TBTFs is more regulation. So Washington is wants to limit what banks can do, Europe how much they can pay their employees & Beijing whom they can lend to. But all this does is incentivize shadow banking. And while Bernanke’s policies are touted as having prompted institutional deleveraging, the reality is that, while the total debt of America’s financial institutions may be down from that at the time of the 2008 financial crisis, it is similar to that at the peak of the 2006 housing bubble; for why deleverage when the cost of money is zero? In the Eurozone the banks’ assets now are 3x that of GDP & in the past five years the flood of cheap liquidity from the developed countries have propelled the asset bases of the banks in the emerging economies to similar heights, increasing the probability of financial crises in the foreseeable future. • While the G-7, G-20 & IMF occasionally produce suitable sound bites, five years after the global financial crisis the world is still stuck with the same (but bigger?) problem of political leaders being short-term solution-focused while ending the crisis once & for all requires serious structural reforms (first & foremost the termination of the TBTF phenomenon), that involve short-term pain, long-term gain solutions politicians abhor. But global stability will only come when governments become willing to sacrifice short-term growth for long-term stability, & that will only happen when the short-term situation is beyond repair (which will take a situation far worse than the present one). Meanwhile bubbles are emerging everywhere, incl. in the high yield bond market and the London & New York property markets, and may be about to do so in the stock market. • The only other solution will be an inflation crisis, to prompt a shift in political focus from short-term growth to price stability. Today the global inflation rate is 50% higher than its real GDP growth rate, & heading for 100%. But reforms are likely to remain a matter of talking the talk rather than walking the walk until inflation reaches 5% in the developed-, & 10% in the emerging-, economies (which could happen within the next two years). The author is an MIT alum, first in engineering & then with a Ph.D. in economics. Now a Shanghai-based independent economist, he was Morgan Stanley’s star Chief Asia-Pacific Economist, whose views on the Chinese economy caused Beijing to denigrate him as an “American parrot”, until in 2006 his internal email was leaked that panned Singapore as a money-laundering centre for corruptees from Indonesia & other ASEAN countries. Be that as it may, he correctly foresaw the Japanese bubble of the 80's (while still a student), the 1997 Asian currency crisis, the 2000 dot.com bubble & the 2008 US sub-prime crisis. ECONOMY NEEDS BOTH REFORM AND INVESTMENT (WP, Fareed Zakaria) • The US Tax Code, rulings, regulations & all, is 4MM words-, & 74,000 pages-, long (90x the number of pages in the Old-, & 320x those in the New-, Testament) & would take 3,000 hours to read end to end. A radically simplified tax code would be good politics & good economics. For the present one is at the heart of the current campaign funds-for-favours system of institutionalized legal corruption that in the private sector would be decried as “crony” capitalism”. Secondly, the more complex the code, the greater the arbitrary powers of the bureaucracy. And, finally, it breeds inefficiency & waste : in 2010 Americans spent US$168BN, over 1% of GDP, & 3MM man years, complying with it, & in 2011 taxpayers made 90+MM calls to the IRS toll-free help line. • The data increasingly suggest the Keynesians are right in promoting the need for serious ‘pump priming’. But Keynesians like Paul Krugman, who dismiss all talk of reform as attempts by greedy capitalists to hurt workers, are now turning the case against austerity into a case against structural reform. History, however, shows that crisis-induced reforms have in the past often proven the road to growth, as in, among others, Asia after its 1997 currency crisis, Chile & Mexico. And they have been one reason why Canada, Germany & Sweden fared relatively well in recent years; for after their economic crises in the 90's they undertook market-friendly reforms that made their welfare states more sustainable. And countries like Greece & Italy (and France?) with rigid labour markets, high labour costs, and protected industries & professional guilds, need more than stimulus spending; for without serious structural reform no amount of that will make them globally competitive. Ditto for Japan : its two decade-long failure to sustain growth is in large part due to the fact it never reformed its protected industries, first & foremost agriculture & retail. And while the pump priming aspects of Abenomics have received lots of media attention, what has received far less, if any, are his plans to push through the reforms the nation has long been unwilling to make, or even consider (which he cannot launch, however, until after this summer’s Senate elections, since they will cause his continued astonishingly high approval rating to quickly evaporate. Jean-Baptiste Colbert, France’s King Louis XIV’s long-time Minister of Finance, once famously said, well over three centuries ago, that “The art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the smallest amounts of hissing.” Modern politicians have ignored this to the point where they now face what is, for all intents & purposes, a first cousin of a tax revolt. And it is amusing, but sad, to see politicians on both sides of the Atlantic deriding taxpayers’ machinations to optimize their tax payment obligations when they themselves have set, & can change at will, the very rules that enable those taxpayers to do so (& it is no accident they use the words “tax avoidance” to describe this practice, rather than “tax optimization”; for the former implies distasteful behaviour by taxpayers whereas the latter would put the blame where it belongs, i.e. on the politicians’ doorstep for enabling taxpayers to engage in behaviour that, while portrayed as despicable, is within the law. This is pure “spin” designed to create an impression of action where none exists, & to shame others, i.e. the offending tax payers, to do what they don’t have the balls to do themselves, even while being paid to do so. THE ECONOMY IS HOLDING UP SURPRISINGLY WELL (NYT, Neil Irwin) • For an economy that was supposed to just hang on in the face of tax hikes & spending cuts, it’s looking remarkably robust. The causes for this include house prices that in April were up 10.9% YoY, the most in seven years, consumer confidence that is at a five year high, an S&P 500 that is just short of it’s all-time high & lower gasoline prices : high income Americans benefit from the strong stock market, middle income earners from stronger house prices & lower-to-middle-income consumers from lower gasoline prices. First Quarter GDP growth was 2.5%, slightly higher than the past few years’ average & monthly new job creation YTD has averaged 196,000, up from 180,000 in last year’s Second Half. But Michelle, RBS’s Chief Economist warns “All other things being equal, growth in 2013 should be better than in 2012 because the headwinds holding it back are diminishing ... The impact of fiscal drag isn’t getting things worse, it’s the absence of things getting better.”, & Gus Faucher, a senior economist at PNC Bank “Over the long run, households still need to save more, and that is going to be a restraint on growth.” The positive spin put on a 2.5% growth rate is a sign of the times (& a sign of a growing acceptance of the reality of a lower ‘trend growth rate?). Meanwhile, there is tons of empirical evidence that consumers always lag in their response to changing externalities, federal cuts have barely even begun to bite, gasoline prices may not stay where they are (the spring months traditionally are a period of seasonally weak gasoline prices & the summer months of seasonally strong ones) and the evidence is building the Fed may become less “accommodative” in the months to come. KEYNES NEVER MET THE EUROZONE (G&M, Kenneth Rogoff) • There is no magic Keynesian bullet for the Eurozone; still, the muddle-headed argument that too much austerity is killing Europe is not surprising. For the “anti-austerity” crowd appears (or rather wants?) to believe there are easy cyclical solutions to tough structural problems long in the making. For the Eurozone’s difficulties stem from its financial & monetary integration having gotten way ahead of its political, fiscal & banking integration, a situation Keynes was neither familiar with, nor sought to address. • Any realistic strategy for dealing with the Eurozone crisis must include massive write-downs of peripheral countries’ debt (without which rapid sustained growth will remain a pipe dream for them) And in any such debt restructuring Northern European banks will see hundreds of billions of their assets evaporate & Northern European taxpayers be forced to pay for the massive bailout even if, a la Cyprus, the authorities impose significant pain on the banks’ other stakeholders, as well they should (a gentler way to achieve a reduction in debt burdens would be a period of ‘sustained but moderate’ inflation). The next thing needed would be significant economic restructuring at the national-, & political integration at the supranational-, level. And that’s where France must play a central role; for it must become a second source of growth & stability in the Eurozone since Germany cannot, all by itself, carry the Euro on its shoulders (but there is little, if any, evidence it would be willing, or able, to assume such a role). And while Keynesian pump priming may help France in the short run, it cannot solve its long-term competitive problems (which will require painful policy decisions that French voters are unlikely to be willing to accept).. As noted earlier, the basic practical problem with Keynes’ countercyclical budgeting theory is that the politicians took the bit they liked but conveniently forgot about the part that held less appeal for them. Something similar would almost certainly happen now as any short-term benefits from pump-priming wouldn’t be taken as a window of opportunity to introduce changes but as one to sustain the old bad habits a bit longer. Earlier there was talk about how Canada’s structural reforms in the 90's enabled it to survive the Great Recession better than most. But the reality is that when the Liberals regained power in Canada in 1993, both politicians & bureaucrats were bound & determined to “keep the pedal to the metal”, even it that meant risking ‘hitting the wall at 90 mph’ until David Dodge, then the Deputy Minister of Finance, & later Governor of the Bank of Canada, to his ever-lasting credit convinced Paul Martin, his then boss as Finance Minister, that doing so would be bad economics & more importantly, bad politics (Rogoff has had a bad rap lately because his, & Carmen Reinhart’s, work on the history of government debt has been attacked for not having been sufficiently “academically rigorous” but one must wonder how much of that was driven by a dislike of their message. THE IRANIAN THREAT ISN’T NUCLEAR - IT’S POLITICAL (G&M, Doug Saunders) • A decade ago Iran was a hopeful place, seemingly moving away from the excesses of its theocratic revolution towards somewhat greater normalcy & cooperation with the world. But Ahmadinejad’s eight-year Presidency has produced poverty, mismanagement, paranoia & isolation. Every Iranian now feels the effect thereof. Inflation is out of control, in part due to botched reforms, & the price of staple foods is out of reach for many working people. Its currency’s value has plummeted. Unemployment is endemic. Economic activity is limited to the dysfunctional state apparatus & the army-controlled enterprises. Heroin addiction is the world’s worst. Crime is widespread. The state spends too much of its (shrinking?) revenues subsidizing gasoline & other (non-essential?) commodities. And, while an oil exporter, it must import fuel. • Iranians will be voting in anger. They have seen their fortunes plummet due to the Ahmadinejad’s policies & sabre rattling at Israel & the West, and have lost patience with their clerical masters. There were already indications of this in the 2009 presidential election when the Green Movement became such a force the regime sought to crush it, & jail its leaders. Earlier this month, just before the deadline for doing so, former President Akbar Hashemi Rafsanjani declared his candidacy in next June’s Presidential election. He who once persuaded the clerics to end the Iran-Iraq war & to modernize the economy is now an outspoken supporter of the Green Movement & has a decent chance of winning; for many moderate conservatives will vote for him. And, while the Supreme Leader, Ayatollah Ali Khamenei doesn’t like him but is said not to distrust him, removing him from the ballot would create social unrest. But even Rafsanjani would be unlikely to end Iran’s nuclear programme, recognize Israel & commit to a more cooperative relationship with the US (as the reformist president Mohammad Khatami sought to do ten years ago until Bush 43 rebuffed him). For Iran is too deeply ensconced in its cold war. The best to be hoped for is that his economic sense would reduce militancy from being an alternative to economic success to its no longer needed ugly cousin. If Iran can stop threatening itself, it will stop threatening the world. The regime must see Rafsanjani’s chances of success to be better than “decent” & the Supreme Leader must have deemed the risk of turning up the heat under the pressure cooker of potential social unrest the lesser of two evils; for he instigated, or at least did not overrule, the decision of the Guardians’ Council last week to bar Rafsanjani (& an Ahmadinejad protege) from running, thus limiting voters to a choice between eight regime acolytes. This prompted the 78 year-old Rafsanjani to accuse Iran’s leadership of incompetence & ignorance, telling his campaign team “I don’t think the country could have been run worse ... if it had been planned in advance.” Furthermore that, while he had not foreseen his candidacy would create such a wave in the country, he took this as evidence of people’s despair. Nonetheless, he counseled ‘staying calm’ (since) “There will be a day when those who must come, will come.” ABYSS OF AUTOCRACY: A PROTEST MOVEMENT SIMMERS IN KUWAIT (Spiegel Online, Alexander Smolczyk) • Much to the distress of its neighbours a citizens’ movement is waking in Kuwait, the only country in the region with a relatively freely elected parliament. It’s being driven by “The Speech”, a handful of thoughts expressed by a former MP, Musallam al-Barrak, last fall that last month earned him a five-year prison sentence, which led to a protest demonstration outside a Kuwaiti that resulted in warning shots, tear gas & injuries, but got al-Barrak out on bail. The sentence that seems to have particularly unnerved Emir Sheikh Sabah, despite its supposedly deferential delivery is “We will not allow you, Your Highness, to take Kuwait into the abyss of autocracy.” All this is said to be about rights, not wealth, about being treated like “little boys”, not grown-ups, & about the need for a constitutional monarchy to replace the paternalism of the ruling family (& its corrupt hangers-on). Or as al-Barrak puts it in an interview, “I simply said the same thing that every woman says to her husband, and every child asks his father” (although he went on to say “The country is being robbed … (and) The worst of the fraud is committed by the ruling family.” Another potential source of conflagration in the Middle East, that could flare up & upset the apple cart at any moment without much warning to upset Western complacency & potentially lead to an “Arab Winter” . CHINA SEALS FIRST FREE-TRADE DEAL, WITH SWITZERLAND (BBCNews) • Last week, during Premier Li Keqiang’s stop-off in Switzerland as part of his first trip abroad as Premier (after visiting India & Pakistan, and before going to Germany & returning home), the two countries agreed to a framework for a free trade agreement. China is Switzerland’s third-largest trading partner; their bilateral trade amounts to US$26BN, US$22BN of it, however, made up of Swiss exports of watches, pharmaceuticals & machinery to China (an imbalance the latter wants to redress by selling it more textiles & agricultural products). Beijing’s choice of Switzerland is in line with its earlier hints that, if & when the Yuan is allowed to trade freely offshore, it would be its financial centre of choice for doing so. Regardless of the hype, this just involved a MoU (Memorandum of Understanding) signed by Gao Hucheng, China’s Minister of Commerce, & his Swiss counterpart, although the former did say that it marks a significant achievement for China’s accelerating implementation of its ‘free trade strategy’ & is one of most comprehensive high level accords China has ever signed with any foreign country. Representatives of the two countries also signed several other agreements, incl. one for a “financial dialogue mechanism”. And on May 23rd Li himself, in a signed article in the Neue Züricher Zeitung, said this agreement will ‘set a good example for others to follow’. Its timing was interesting; for at his next stop in Germany, Li was expected to run into flak about his country’s ‘dumping’ of photovoltaic products & mobile telephone equipment. Last but not least, this also seems to represent the next step in a strategy to build a relationship with Europe via peripheral countries where it carries a big stick, first Iceland, then Ireland & now Switzerland. CHINESE PRESIDENT TO SEEK NEW RELATIONSHIP WITH US (NYT, Jane Perlez) • President Obama’s National Security Adviser, Tom Donilon, made a two-day visit to Beijing on May 27th & 28th. He met, among others, with President Li Jinping who for his meeting with Donilon broke tradition by discarding the overstuffed chairs traditionally used in such meetings in favour of meeting him, Western business style, face-to-face across a table. And he wasted no time telling Donilon the two countries’ relationship is at a critical juncture & requires a “new type of great power relationship” that presumably entails (more) equal status for China. The two Presidents (& their wives - Li’s wife, Peng Liyuan, is a famous folk singer) will meet on June 7th & 8th on an estate East of Los Angeles, far from the hustle & bustle, and distractions, of both Washington, D.C. & Beijing. While not their first meeting (they met previously at the White House in February 2012), the circumstances now will be quite different. For Xi is now President, rather than just Vice-President, & feeling his oats, and made it clear to Tom Donilon he will a more pro-active & hands-on foreign policy President than his predecessors & deems himself Obama’s-, & China the US’-, equal. Beijing believes the US owes it a “big one” for having taken the North Korean regime ‘to the woodshed’ over its latest nuclear tests. On the other hand, Obama will have a serious bone to pick with Xi over this week’s revelations that Chinese hacking has seriously compromised many of the US’ most advanced, important & sensitive weapons’ programs. Having said that, given his foreign policy aspirations & his country’s growing confidence about its role in global affairs, China observers expect Xi to prove more willing to ‘cut deals’ than either of his predecessors, Hu Jintao & Jiang Zemin, especially so knowing he can afford to be more patient & have a more long-term perspective than Obama since his term in office won’t end until almost three US Presidential elections hence.