Nick Rost van Tonningen ~ Gleanings II ~ 519 Posted by John on July 12, 2013

The market reacted euphorically to the latest, better-than-expected new job creation numbers, & the upward revision of those numbers for the previous two months. But the Bureau of Labor & Statistics’ Household Survey noted that part-time job numbers had soared by 360,000 to a seasonally-adjusted all-time high of 28,059,000 while the full-time job tally was down 240,000 to 116,238,000. Also that YTD 80% of all jobs created were part-time, in part because 239,000 of them were ‘McJobs’ in the restaurant & bar sector, & only 13,000 in the manufacturing sector.

The USDA is forecasting a 14BN bushel corn crop, a 30% increase over last year’s 10.8BN (on a 1% increase in acres?); this would be a good thing since last year’s poor crop resulted in dangerously low ‘carryover’ levels at the crop yearend. But USDA tends to be optimistic in its forecasts, assuming the best of all possible worlds; thus last year’s initial forecast was for 14.8BN-, & the outturn 10.8BN-, bushels. US farmers this year planted 97.4MM acres to corn, the most ever since 1936, hoping to cash in on the current high prices. Compared to last year the corn crop is in good shape : as of July 7th just 8% was rated “poor” or “very poor”, compared to 30% on the same date last year, & 68% “Good” or “Excellent” compared to 40% a year ago. While drought conditions still prevail in over 40% of the Continental US, their point of gravity has shifted a bit Westward, away from the primary grain-growing areas. But due to cold, rainy weather at seeding time, the crop is late (thus on July 7th only 7% of the corn was in the critical “silking” stage, vs 46% at the same time last year) &, generally speaking, late seeding affects yields negatively & makes crops vulnerable to early frosts. And since the 54¢ tariff on imported ethanol & the 45¢ tax credit for ethanol blenders that expired on December 31st, 2011 have yet to be reinstated, the demand for corn from ethanol producers may remain subdued (bad for corn prices but good for consumers since it reduces feed cost pressure on animal protein products).

Canada’s ruling Conservative Party may be in deep doodoo. For the latest Ipsos Reid found them to be perceived as the most competent of the three major parties but also the least honest. While the Prime Minister all but swore on a stack of Bibles that he had first heard from the media about his then Chief of Staff writing a cheque to a Senator he had appointed who had been ‘dipping his beak’ & had been caught at it, to enable him to pay back his ill-begotten gains, it has now become known that three of the top people in his own office had known about it all along. And known as a control freak, nobody believes they would have dared not to share this news with their boss; that’s the downside, to paraphrase a dictum of the late US President Harry Truman, of having all the “bucks stop on your desk”. And, last but not least, a leading newspaper reported that Foreign Affairs personnel in a Canadian mission overseas which is on a work-to-rule campaign, are actually advising foreigners wanting to visit Canada but needing a visa, not to bother applying & to go elsewhere.

Canada’s home construction building boom is slowing as new home & condo construction is fading. Will Dunning of CAAMP (Canadian Association of Accredited Mortgage Professionals) thinks this will result in a loss of 180,000 construction jobs & Ben Rabidoux, a Canadian analyst at US-based Hanson Advisers (that provides real estate advice on the US, Australian & Canadian markets), is even more pessimistic, expecting it to hit 250,000. There seems to be a dichotomy between the still upbeat numbers of the CREA (Canadian Real Estate Association), that still projects higher sales & prices, & the situation on the ground where developers are slashing prices & promising strong incentives to move their ‘product’. Thus, while in Vancouver house prices are supposedly still climbing, according the the Real Estate Board of Greater Vancouver actual home sales are 19.4%, & listings 7.4%, below their 10-year monthly average. The OECD says Canada has the third-most overvalued real estate market in the developed world (using the ratio of house prices to disposable income as guide, Canada’s housing market is overpriced by 30%). And while the Canadian banks were paragons of virtue in their lending practices prior to 2008, they have since then overleveraged themselves with mortgages to people who cannot really afford them now, never mind when (& not if) interest rates rise (also according to the OECD, inflation in Canada will rise from 0.9% this year to 1.7% in 2014, forcing the Bank of Canada to raise rates).

Canadian households are among the most indebted in the world. According to IPSOS, kast December 31st 13.5% of Canadian households met the Bank of Canada’s definition of being “highly indebted” (i.e. had a total household-, & mortgage-, debt load of over 250% of their gross income). And according to BMO Capital Markets’ Doug Peters, Canadians now pay 62% more for housing than Americans : while historically US & Canadian house prices were closely correlated, since 2006 there has been a disconnect between the two, with US house prices declining by 15% & Canadian house prices increasing by 50%, or more.

The derailment of a crude oil-carrying train in Québec’s Eastern Townships and the resultant explosion & fire that leveled the downtown core of a 6,000 inhabitant town, killing over 1% of them & polluting a nearby river that provides drinking water for a dozen other communities, will put the issue of moving oil by rail, which has skyrocketed in recent years, front & centre in the public mind, as it should have long ago. For the the derailment record of American railways is truly appalling & an event like this was simply an accident looking for a place to happen. But the reality of life is that, if people want to drive their cars, heat & cool their homes, and use electricity at will, the implication thereof, with our energy sources far from where consumers live, is that it’s of critical importance to be able move energy somehow from Point A to Point B.

It has since come out that this train was allowed to operate with just a single person in the cab of a five-locomotive, 77 rail tank car train (which the Company’s Chairman, a railroader since his teens, claims is “safer” than a two man crew since it provides less distractions), and that the engineer was involved in another derailment a year ago with his previous employer, CN Rail, has been suspended without pay by his present employer &, according to its Chairman, will “never” work for him again. It also seems mind boggling that it is SOP to leave $25MM of rail equipment & cargo unattended for hours on end during a crew change (and one would think it would make sense not to have trains idling for hours on end during crew changes).

Cancer used to an ‘old people’s disease. But in Canada the 15-29 year age cohort accounts for 22% of the population but for 30% of all newly diagnosed cancer cases. One can only wonder if that may be due, in part at least, to their exposure during a vulnerable stage of their lives, early childhood, to the vastly increased number of, often insufficiently tested & at least potentially carcinogenic, chemicals in common usage in today’s society.

Later on Ken Rogoff will make the case for long-term investors continuing to have some exposure to gold in their portfolios. And while the CW in the West is that the gold ‘bubble has been pricked’, a few real life facts seem to contradict that perception. Demand for physical gold remains strong, especially in Asia where gold refineries are going flat out & where the going price is consistently US$40 above the ‘official’ price. The gold futures market is in “backwardation” (i.e. its spot price exceeds that at which futures contracts are being transacted). There typically are two reasons for this : a scarcity of product available for immediate delivery & a perception of future price weakness. While the latter is consistent with the CW in the West, there is significant evidence that the former is, very definitely, also a factor. Perhaps the strongest piece of evidence of the pressure on gold for immediate delivery is that in the past month ‘gold lease rates’ have jumped, in the case of the one month rate from next to nothing to 30 bps (i.e. 0.30%) & of the six months’ rate from 40 to almost 60 bps (and for all it’s worth, November 2008 was the last time there was backwardation in the gold futures market (at which time the gold lease rates went as high as 2½%), after which the price of gold almost doubled in two years.

GLEANINGS II – 519
Thursday July 11th, 2013

‘THE REAL THREAT TO OUR FUTURE IS PEAK WATER’ (The Observer, Lester Brown)

$ There are substitutes for oil but none for water. We can produce food without oil, but not without water. Grains supply half the world’s caloric requirements. The food we eat takes about 500x more water to produce than what we drink each day. Of the world’s grain output 40% comes from irrigated land. Irrigated land grew from 232MM acres (93MM hectares) in 1950 to 706MM acres (283MM hectares) in 2000 (a 2.25% compound annual rate) while from 2000-2010 it grew by just 9% (a 0.85% compound annual rate).
$ For the past 6000 years irrigation water came almost totally from reservoirs behind dams across rivers. But since 1950, with fewer potential dam sites left, farmers started drilling wells to tap underground water (thereby enabling the late 20th century growth in the world‘s food supply), in India alone over 21 MM of them.
$ Aquifers are of two types. Most are replenished by rainfall over time but a few large ones are “fossil” aquifers that contain water laid down many eons ago, the two most important ones of them underlying the North China Plans & the Western US Great Plains (the Ogallalla aquiver). Today 18 countries with half the world’s population, incl. China, India, the US, Pakistan, Mexico & Iran, are overpumping their aquifers, nowhere more so than in the Middle East. In 2008 Saudi Arabia, after 20 years of pursuing grain self-sufficiency at great cost announced it would be totally out of the grain-growing business by 2016, in Syria grain output peaked in 2002 (& has since declined by 30%) & in Iran in 2007 (& has since shrunk by one-third), while in Yemen grain production today is half of that 35 years ago & in the Arab world generally high population growth rates & water availability are on a collision course. In South Asia water tables have been dropping by 3-6 feet/year &, while China’s water shortage is serious, it’s worse in India where farmers use subsidized electricity to pump water at unsustainable rates from as far down as half a mile, to the point where in North Gujarat the water table is falling 20 feet annually.
$ In Mexico the demand for water outstrips the supply, in agricultural Guanajuato state the water table is dropping by two metres, or more, a year & in the state of Sonora farmers who once pumped water from the Hermosillo aquifer at 35 feet, now must go 400 feet deep. And in the US, wheat-, & especially corn-, farmers who increased yields by overpumping water from the Ogallalla aquifer are now finding their wells drying up. In Texas irrigated acreage peaked in 1975 & has since declined 37%, in Oklahoma the corresponding numbers are 1982 & 25% & in Kansas 2009 & 30%, while in Nebraska it did so in 2007, since when its grain harvest has shrunk 15%. But these outcomes have been obscured to date by higher corn production in the rain-fed Midwest.
$ From a total global food production perspective, all this is being reinforced by erosion, the loss of prime farmland to industrialization & urbanization, the slowing growth of agricultural productivity & climate change.

It may seem odd to be fussing about peak water when there are floods everywhere. But the latter are events and this is a trend. Having said that, none of this should be news. Forty years ago already, when I had my farm, I read in Hoard’s Dairyman about an Arizona corn grower who was depleting his groundwater resources so rapidly he had been able to convince the IRS to let him to depreciate his land over twenty years on the grounds that by then the water table would have dropped so much it would no longer be economically feasible to use groundwater for irrigation (& that was before the First Oil Price Shock). Unless we change our ways, the point Brown makes at the outset about water being the ‘staff of life’ will, before long, prompt mass migrations & nasty water-driven conflicts between nations : thus Egypt believes that, pursuant to some colonial era treaties, it “owns” 82% of the water flow in the Nile & Sudan the rest, and the other dozen or so riparian nations none at all (which will prove an unsustainable idea) and China’s massive South-North water diversion scheme (first advocated by Mao Tse Tung & now finally being implemented, to divert water from its southern rivers to the North China plains will syphon the very life blood of the South-, & Southeast-, Asian economies. Water, or rather the lack thereof, will in the years to come also have a massive impact on global economic trade patterns, with one of the biggest, if not the biggest, beneficiary thereof being Brazil; for it has the lion’s share of the world’s unused potential farmland &, by some accounts, more renewable water resources than all of Asia (Lester Brown id founder & head of the Washington-based Earth Policy Institute).

DOES GOLD PRICE COLLAPSE SIGNAL A VOTE OF ECONOMIC CONFIDENCE?
(The Guardian, Kenneth Rogoff)

$ In recent years its price has often been portrayed as a weathervane of global economic insecurity; so does this mean its recent price plunge constitutes a vote of confidence in the global economy?
$ Throughout the ages gold has been a hedge against war, financial Armageddon & currency debasement. But recently other factors have come into play; thus a decade ago it was selling below its long-term inflation-adjusted average & the entry onto the market of 3BN emerging economy consumers with a cultural bias for buying & holding gold was positive for the demand for gold. The global financial crisis & the inflation fears the subsequent liquidity creation engendered only added to its allure.
$ Lately the gold frenzy has cooled as China’s economy continues to soften, India’s growth rate is down & the apparent Fed’s anti-inflation bias has reduced the appeal of gold as an inflationary hedge. Still, the basic reason for holding gold hasn’t changed. For high net worth investors, incl. souvereign wealth funds (& central banks?), it never was a speculative investment but a portfolio diversification tool, & for the Chinese & Indian middle class, apart from their cultural bias, it remains attractive due to a lack/scarcity of alternate investments. The collapse in the gold price hasn’t changed the case for investing in it & policy makers shouldn’t assume its recent plunge was a vote of confidence in their performance.

He makes no mention at all of any official legerdemain with respect to the price of gold, nor of the fact that China’s gold purchases remain high, that Indian demand has only been curtailed by higher taxes & a weaker rupee, that gold in Asia trades at a big premium over the ‘official’ price & that the gold futures market is in “backwardation”, all market distorting factors that ought to be relevant to an economist (Rogoff was educated at Yale, once taught at Princeton, from 2001 to 2003 was the IMF’s ‘Economic Counsellor’/Chief Economist & now teaches at Harvard. A while ago some of his more left-of-centre academic colleagues attacked him for supposedly using flawed arithmetic in the latest paper he co-authored with Carmen Rinehart, Growth in a Time of Debt, that sought to use empirical data to prove that the 90% National Debt to GDP ratio is the trigger point level for lower economic trend growth (an outcome that wasn’t to their liking).

JERRY BROWN STANDS ATOP CALIFORNIIA’S COLLAPSING HOUSE OF CARDS
(Forbes, Thomas Del Beccaro)
$ He soon will be California’s longest-serving Governor. And the media love him because he has ‘balanced the state’s budget’. Only he hasn’t. For its US$1+TR “Wall of Debt” (Brown’s own words) doesn’t include its hundreds of billions of dollars of unfunded pension & medical liabilities. Also , the Democrat-controlled state legislature is planning to increase spending by 26.2% over the next four years, despite the state having the highest income-, & gasoline-, taxes and the most regulations, & the fourth-highest unemployment rate, of any state in the union. And Brown himself, thinking ‘legacy’, is hell bent on funding High Speed Rail in the state, which will cost more each year than the entire state university system (which is sort of ironic since it was his father, the one-time Gov. Edmond G. Brown, who put the state education system on solid footing.

He may well be right, but as a one-time Chairman of the California Republican Party Del Beccaro has an axe to grind.

INSUFFICIENT OUTRAGE (NYT, H. Gilbert Welch)

$ The objective of medical care is to help people, not to enrich providers. But the way it’s practiced makes it look like highway robbery than a helping profession. There have been reports about the exorbitant cost of American health, but since Medicare sets its own prices & insurers negotiate discounts, the burden thereof falls mostly on those least able to afford it, the young, the uneducated and/or the poorly employed.
$ In recent years hospitals have been buying private physicians’ practices. For Medicare pays them more for the same procedure than doctors in private practice to ‘compensate’ them for their public service in caring for those with the most complex health care needs. So in their private practices they get the higher hospital rate.
$ It’s a matter of quantity, not just price, and costly procedures appear to be done more often than needed. There is also undue focus on building; thus two new proton beam facilities were approved for Washington, 40 miles from one in Baltimore. And the three of them will be capable of serving 10x the number of children in the region who need their services; and yet one of them is expected to make US$16MM profit by 2016.
$ We could try & make the system better but we can never make it foolproof in the absence of appropriate ethical standards on the part of those operating it. And in medicine those standards seem to have become pretty low.

Those standards have been declining for years, & not just in medicine (the author is a professor of medicine at the Dartmouth Institute for Health Policy and Clinical Practice).

IMF BOOSTS CANADIAN OUTLOOK AMID GLOBAL UNCERTAINTY (G&M, J. Beltrame)

$ Canada’s 2½% First Quarter GDP growth topped expectations. In its wake the IMF revised its April forecast for Canada’s 2013 GDP growth by 0.2% to 1.7%, while cutting next year’s rate by the same amount to 2.2%, saying that while “the U.S recovery will support growth … high household debt and moderation in the housing sector are likely to weigh on private consumption and residential construction.”

The rest of the world didn’t fare so well : it cut its 2013 global growth forecast for the fifth time in a row from 3.3% to 3.1% (& for 2014 from 4.0% to 3.8%), the US from 1.9% to 1.7% (& 2014 from 3.0% to 2.7%), China from 8.0% to 7.8%, & the Eurozone from -0.3% to -0.6%.

OUSTER COULD EMBOLDEN THE BROTHERHOOD (G&M, Doug Saunders)

$ In President Morsi’s year in office, he & the Brotherhood’s Freedom & Justice Party proved economically incompetent, sexually discriminatory, tolerant of violence against minorities, inarticulate & autocratic. But by pushing him out, the army may have strengthened their hand; for, even though many of them believe democracy is against the teachings of the Koran, they can now accuse their opponents of a non-democratic military ouster of the President (which may gain them support across the Middle East).
$ When Islamist parties have won elections, they have done so due to the failings of their opponents rather than to popular support for their religious views. And in Egypt the Brotherhood, despite its past year’s failings, may do better in the election the military has pledged to hold since the opposition is divided, disorganized & effectively leaderless. And the coup may convince Islamists all over the region that politics is pointless & the only way forward is through jihad; thus Somalia’s al-Shabaab responded to events in Egypt by twittering “change comes by the bullet alone, NOT by the ballot” & “the Muslim Brotherhood “should … learn … from the lessons of history … in Algeria [where an Islamist electoral victory led to a brutal crackdown] or even Hamas [whose election in Gaza led to a boycott by world governments]…” (the latter is incorrect, Hamas didn’t just win in Gaza but also in the West Bank). Meanwhile in Egypt a senior Brotherhood leader announced on July 4th “We reject participation in any work with the usurper authorities.”

One wonders if this was not a Brotherhood set-up; for in the short run the military may be not be any more adapt at dealing with Egypt’s problems than Morsi et. al. (while the US$12BN in aid Saudi Arabia & other oil producers have pledged should, in theory at least, help, there are two provisos : pledging is one thing & following through another, and they have already been injecting billions ever since Mubarrak’s overthrow. And the masses want results right now and in their absence are likely to turn as quickly on the military as they did on Morsi (another interesting aspect of the assistance offered by Saudi et. al. is that it largely eliminates the Washington’s leverage on the Egyptian military from its US$1.3BN in military aid). .

DESPITE CHAOS AND COMPLICATIONS, TIMING’S RIGHT FOR MIDEAST TALKS
(G&M, Shira Herzog)

$ The gap between the official Israeli & Palestinian positions remains as large as ever. The latest polls show that 68% of Israelis & 69% of Palestinians believe the chances of the establishment in the next five years of two states existing side-by-side are all but non-existent. And last month Israel’s Central Command chief warned that in that in the absence of progress the West Bank may implode & the Palestinian security forces may quit collaborating with his troops. But both leaders realize time is running out. Abbas’ days are numbered & his successor may not have the same commitment to a two-state solution & to non-violence, while Netanyahu recently told a Knesset committee he doesn’t want a solution along the lines of a binational state.
$ There are at least four reasons for serious serious negotiations in the near future. One, in the absence of progress Abbas is likely to seek membership in the International Criminal Court and if that were to result in Israel being officially blamed for the talks having failed, Israel may no longer be able to take automatic US vetoes in the Security Council for granted while punitive action by the Europeans will increase. Two, Netanyahu recently lost control of the Likud Party to hardliners who want no truck or trade with any two-state talks, and getting to the table again would help keep him alive politically at home. Three, Hamas has been weakened by Morsi’s ouster. And finally, the Arab Peace Initiative first proposed in 2002 is still on the table but its latest shift from a rigid insistence on a return to the 1967 border to a provision for land swaps may just be enough for Netanyahu to accept it as the basis for negotiations.

But Netanyahu also knows that a (vast?) majority of Israelis want peace at almost any price & may be speculating that if he can come to the table & agree to the outline of a deal & Abbas cannot, Israel will no longer be blamed for a breakdown of the talks – remember the observation by a US diplomat early on in the Iraq War that ‘everywhere in the world except the Middle East the shortest distance between two points is the straight line connecting them’.

CHINA SIGNALS IT WILL CUT OFF CREDIT TO REBALANCE ECONOMY (Reuters)

$ On July 5th the China Rongsheng Heavy Industries Group asked for help from the government & big shareholders, after cutting its work force & delaying payments owed to suppliers. But it may be too late for that. For that same day Beijing announced it will cut off credit to industries with overcapacity to force consolidation (but will ensure it will continue flowing to businesses with competitive products & work with banks to arrange a gradual wind-down of others). This prompted Li Huiyong, an economist with Shanghai-based Shenyin Wanguo Securities, to note “China’s policy makers will focus more on economic restructuring to stabilize the economy … than on providing more liquidity to support economic growth.” (thereby taking the, in the short-term more painful, but longer-term more effective, opposite tack of Western governments).

Rongsheng, located in Rugao City, Jiangzu Province, on the lower reaches of the Yangtze, will provide Beijing with an immediate (but easy?) test case. For there are 1,600 shipyards in China (of which Rongsheng, founded in 2005, is the largest), new ship orders are off 50% YoY & YTD Rongsheng hasn’t received a single one; so it’s a prime candidate for consolidation. Like many others it has three problems : overleverage, overstaffing & excess capacity, & too much debt due in the near future (in its case over half of its US$4.1BN is due by yearend). Being a privately-owned, listed company it may be easier to put in the tank than an SOE whose staff sees itself as government-employed. And its founder, Zhang Zhirong (age 44), is a Hongkong property developer, who last year paid a US$14MM fine in the US for “front-running” CNOOC’s takeover of Canada’s Nexen (causing his resignation as Rongsheng Chair & a plunge in his wealth, although at last report he was still worth US$2BN & 736th on the Forbes’ list).

THE WHEELS ARE COMING OFF THE WHOLE OF SOUTHERN EUROPE
(The Telegraph, Ambrose Evans-Pritchard)

$ The Eurozone strategy is untenable but everyone hopes it will hold until Germany’s September elections (as if that is going to make a difference). Greece is missing its targets & nevertheless gets money, and its economy is in freefall. Italy’s debt crisis is flaring up again. Spain’s crisis got a new twist when the ruling party got caught in a slush fund scandal that will prevent imposing more scorched earth cuts on its already rebellious people. Portugal, like Greece, is chasing its tail in a downward spiral, while Finance Minister Vitor Gaspar, its high priest of austerity, has thrown in the towel. And, to top it all off the Fed’s actions have driven borrowing costs up by 70 bps while Draghi, by not doing enough the counteract them, is aiding & abetting “passive tightening”.

In contrast Beijing now seems willing to grab the tiger by the tail & accept short-term pain for long-term pain, in line with the old stock market adage that “The first loss is the easiest to take.”
And there are others who are not quite as gloomy; thus Eric Reguly in the G&M recently noticed ‘green shoots’ all over Europe, with hirings in Greece exceeding firings, French manufacturing bottoming out & Spain’s unemployment rate declining (ever so slightly), although he too conceded that in Italy every number is “going in the wrong direction”.

S&P CUTS ITALY’S CREDIT RATING (Reuters, Luciana Lopez)

$ It cut it from BBB+ to BBB & kept its outlook at “negative”, quoting its “further weakening growth … and its impaired monetary transmission mechanism” (i.e. its banks stink), the forecast 1.9% GDP decline this year, and the fact that ‘low growth stems in large part from rigidities in Italy’s labour and product markets’.”

Small wonder the EU’s Finance Ministers were jubilant about Latvia deciding to still join the Eurozone after several years of financial hardship have left it in a stronger economic growth-, & lower debt-, position than many of its current members – the Latvian government obviously never heard of Groucho Marx & his not wanting to join clubs that would take him as a member.