Gleanings II ~ 496 SP ~ Compliments of Nick Rost van Tonningen Posted by John on February 1, 2013

Quote of the Week : “At some point interest rates will go higher again, and all of the money that has piled into fixed income in the past three years, some of it will come out.” (at grievous losses to the owners?) – Goldman Sachs President Gary Cohn at Davos.

It may be worth noting in this context that on January 7^th Howard Marks, the Chairman of Los Angles-based, NYSE-listed Oaktree Capital Management, wrote in a memo to clients “the scramble for returns has brought elements of pre-crisis behavior very much back to life” (Oaktree has AUM of US$80+BN, all of it from large institutional investors, incl. sovereign wealth funds, & Marks was once called “one of the savviest investors in the world” in a Financial Times article). And on January 23^rd, McKinsey & Co. reported the 13 largest investment banks in the world plan to cut US$1.03TR in risk-weighted assets to strengthen their balance sheets & improve their RoE ratios (or perhaps because they are battening down the hatches in case of  another financial conflagration?).

According to Raoul Pal 38 countries now have negative-, or zero-, real interest rates. After working for NatWest, HSBC & Goldman in the hedge fund end of the business, in 2004, at the age of 36,  he quit that to found London-based Global Macro Investor, an ‘elite’ subscription-based research service. He now lives in Valencia, while continuing to write for it, & believes the world is seeing the final years of the current monetary structure, & on the threshold of a big “reset”.

Brazil’s Finance Minister, Guido Mantega, was deemed to be speaking out of turn & raised a few eyebrows back in 2010 when he warned “We’re  in the midst of a currency war.” When he said last February that it was “intensifying”, there were far fewer doubting Thomases & raised eyebrows. And today he is looking more & more to have been prophetic. But one critic recently posed a seemingly germane, common sense question when he asked “Do they (i.e. the various national authorities) really think it is possible for them all to devalue their currencies against each other simultaneously and achieve anything but rampant and universal inflation at some point in time?

The US preliminary Fourth Quarter GDP growth number took the market by surprise. While a tepid 1% had been expected, it was minus 0.1% (due to cutbacks in military spending, substantiated by word from the Pentagon, referenced later, that it had initiated spending cutbacks in case the ‘sequesters’ were to kick in, now slated to do so on March 1^st unless Congress gets its act together – in any case the preliminary number is frequently subject to, often substantial, revision, as this one is likely to be, given the relatively strong private sector employment growth numbers.

As to the near-term outlook for crude oil prices, it may be worth noting that over the past 28 years they have displayed a strong seasonal pattern : on average they declined by 3% in the first six weeks of the year only to rise by 11.3% from the mid-February to mid-October.

The first 25 days of January saw US$55BN flow into equity funds, breaking the US$53.7BN record for the entire month of February 2000. Among the drivers of the current stock market boomlet are cash-rich corporate treasurers buying back their own shares, a growing perception among both institutional & retail investors that the bull market in bonds has run its course & that owning bonds is about to become a money-losing proposition, increased, albeit still modest, concern about the inflation outlook, retail investor optimism boosted by an improving housing market that is dulling the negative wealth effect from its implosion of recent years (in the past year an estimated 1.3MM home owners went from being underwater to having positive equity on their homes, & if prices were to rise another 2MM are expected to do so), & the US$2.3TR ‘parked’ in money market funds earning next to nothing – but all this could be like a Potemkin village, & apt to wilt in the face of even mildly adverse news, the likelihood of which is almost 100%.

Ray Dallio in 1975 founded Westport, Conn.-based Bridgewater Associates that today is the world’s largest hedge fund, with AUM of US$130BN. He said in Davos on January 25^th among others that “liquidity is all over the place, a lot of it” & predicted that, with returns on cash “terrible”, money “will flow into risk assets”, increasingly so as the year progresses – in light of this, it is worth noting that three days later, for the first time in six months, German one-year bills sold at a positive yield.

In the gun control debate, two arguments advanced by the NRA stand out in their irrelevancy. One is that each year more people use guns to commit suicides than to shoot others; what people do to themselves, & the emotions of their families, is not at issue. And the other that gun controls won’t keep guns out of the hands of criminals; no one disputes this & it’s not the issue either : it’s about keeping them out of the hands of mental basket cases who may (mis)use them to hurt others & how much fire gun power citizens need in 21^st century society for self-protection & entertainment.

Stacks Bower Galleries in New York recently sold what is believed to be one of 1,758 first-ever silver US dollars, minted on October 15, 1754 … for US$1MM.

According to a recent article in The Atlantic in Canada house prices are 80% overvalued vis a vis rents, while in China where many foreigners fuss over a housing bubble they are just 10% or so, & in the US they are slightly undervalued – the Canadian number may be thrown out of whack some by ‘foreign’ (most Chinese) buyers in a few cities (first & foremost Toronto & Vancouver)

Those Canadians who still expect/hope the Keystone bitumen pipeline from Hardisty, Alberta to Cushing, Okla. will materialize must have lost some heart when Jim Flaherty, Canada’s Finance  Minister, told those assembled in Davos “I had reason for optimism before the election that the president would approve it, were he re-elected, but his speech the other day was not encouraging”, & that then, during his confirmation hearings before his own Foreign Relations Committee, Sen. John Kerry, a noted environmental hawk, not only ducked a direct question by Sen. John Barrasso (R.-Wyo) as to whether he agreed with the 53 senators that favour the project,  but also used the occasion to launch into a lengthy defense of clean energy, saying “The solution to climate change is energy policy” – the whole Keystone idea is sub-optimal anyway from the perspective of Alberta’s, & Canada’s, best interests (that requires an outlet on the Pacific access the burgeoning Pacific Rim markets rather than static North American ones). One, we shouldn’t be exporting bitumen; doing so, like exporting live cattle & hogs to the US, or logs to Japan or China, falls into the category of what Walter Gordon half a century ago called a “hewers of wood & drawers of water” economic activity. The push to do so is in part a function of corporate inertia (“this is the way things have always been done”) but to a far greater extent of the fact that the viability of upgrading  in Alberta has always been assessed on the basis of micro-economic level cost-benefit analyses, whereas, if this were done at the macro-economic level, i.e. by factoring the short-, & long-, term opportunity costs to governments from not having it upgraded in Alberta as well, the result would likely be dramatically different. In fact, the current Alberta government might take a leaf out of the book of its last Premier to have worth the powder to blow him to Hell, the recently deceased Peter Loigheed, when he put Alberta’s petrochemical industry on the map by simply telling the oil companies they weren’t allowed to export natural gas liquids, period, full stop (while the Keystone will require diluting the bitumen with higher viscosity hydrocarbons to make it pipelineable) . Two, aspiring to be a captive supplier is always stupid. This project is being promoted by refineries in the Gulf Coast region that want a low cost source of supply of heavy oil feedstock to replace the Maya-grade heavy oil they used to get from Venezuela & Mexico but that has become so scarce that in recent years they’ve had to pay a premium over WTI. Last but not least & to top it all off, there are only half a dozen or so refineries in the Gulf Region that can process this product; so a shutdown in any one of them would reduce demand significantly for an undetermined period of time.

Alberta Premier Alison Redford is showing that, like her three predecessors over the past 28 years, she’s in over her head. She told a local paper, in a follow-up interview to her eight minute address on TV to tell her fellow Albertans on January 24^th the budget was in bad shape,  that she doesn’t yet know if it will be balanced, saying “we are working day to day on that.”. This is errant nonsense given her indication there could be as much as a $6BN revenue gap in the Province’s forthcoming $40+BN budget. Trying to make Albertans believe this came as a surprise is disingenuous; for at the time of her last budget (March 28^th, 2012) the discount from WTI for Alberta crude was not that different from what it is these days, i.e. North of US30 – but that was before last April’s election. And while she & rather unimpressive Finance Minister are coming up with fancy sobriquets for the bonds they are going to have to seel to make ends meet, bonds by any other name are instruments of  indebtedness (this is quite reminiscent of the latter 80’s when I had a ringside seat funding the huge “tab” a clueless Premier Don Getty & his ministers were running up.

In Israel the jockeying for position in the next Israeli coalition government has started. The only sure thing is that Netanyahu will be Prime Minister for a third (& likely final?) term. Following are his basic building blocks. Of the 120 seats in the new Knesset (53 occupied by newcomers, an unusually high number), the three Arab parties, that have never been included in any coalition government will have 11 seats. That reduces his potential coalition partner universe to 109. The left-of-centre parties will have 31 seats (fifteen held by Labor, that has said it won’t participate in the proposed ‘broad coalition’, six each by Tsipi Livni’s Hatnuah Party, who has indicated a similar sentiment, & the socialist Meretz Party, and two by Kadima). So Netanyahu is left  with parties with 78 seats from which to constructs his ‘broad coalition’. Of them his own right-of-centre Likud/more right-of-centre Yisrael group has 31 (20 & 11 from its Likud & Yisrael Beitenue branches respectively), the having-come-from-nowhere centrist/secular Yesh Atid party, led by Yair Lapid, 19, Naftali Bennett’s further-right Jewish Home Party 12 (almost double its previous total, but far short of the 16, or more, the polls had predicted), and the far-right, haredi Shas & United Torah parties 11 & 7 respectively.

Then the hard work begins. Yair Lapid has said he will participate in Netanyahu’s contemplated (right-of-centre) broad coalition government. But he wants (& for PR reasons Netanyahu wants him to have) the Foreign Ministry portfolio (that Lieberman wants to hang on to), as well as the Housing & Construction, and Education Ministries, and the Chairmanship of the powerful Knesset Finance Committee (that approves all government spending) previously has long been held United Torah member, on thr grounds that with a haredi in the Chair it can block all reforms, first & foremost the one that would end the exemption from compulsory military service for young haredis (& can keep shoveling welfare money into the pockets of the economically non-productive elements in their midst), the very reason the UTJ, with Shas‘ help will fight to hang on to it. The Jewish Home Party wants the Justice portfolio (to further undermine the already waning power of the Supreme Court), the Housing Ministry, also coveted by Likud & Yesh Atid, as well as the Ministry of Religious Services (that was scrapped in 2004 but re-established after the 2008 elections as a condition for Shas’ participation in Netanyahu’s coalition) that Shas has held since then & has no intention of relinquishing to Jewish Home since it doesn’t like what it believes is Jewish Home’s interpretation of the Jewish identity & out & out detests its candidate for the Minister’s post. Meanwhile the two haredi parties are accusing Yesh Atid & Jewish Home parties of conspiring  to end the exemption from military service for their young people (in which they are absolutely right since this featured prominently in both their election platforms), and are considering forming a ‘bloc’ to try & ‘head this idea off at the pass’ (& to gain more leveraged in Netanyahu’s proposed coalition by reducing his scope for his favourite ‘divide & comquer’ strategy . So Netanyahu has his work cut out for him& any ‘broad coalition’ that results from his efforts might be inherently unstable.  

According to the al-Arabiya news channel, the “defection” of Bashar al-Assad’s mother to the UAE is a sign the regime is “falling apart”. If so, this would not be the beginning of the end, but a (dangerous) end of the beginning. For the rebels side is united only in its desire to depose al-Assad and, if it were to be successful in doing so, chaos could ensue in which the al-Qaeda sympathizers could, or more likely would, prove to be the most focused, disciplined & effective. At that point the West will come to rue its indecisiveness that gave them the time to get organized; for in that case Israel could be in great danger & a major conflagration in the Middle East would be a distinct possibility, if not a high probability.

Many people have seen pictures of Beijing shrouded in heavy smog, but not so many similar ones of smog enveloping the Acropolis in Athens. But their causes are diametrically opposed. In Being it‘s due to ‘progress’-driven industrial pollution & vehicle exhaust gases, whereas in Greece it’s  economic malaise-driven. Greeks have little money & the price of heating oil has risen dramatically as it is taxed heavier as part of the government’s effort to reduce the deficit & meet its foreign lenders’ conditionalities. So Athenians are burning any wood they can find to heat their homes and, in the process, releasing wood ash particles into the air that attract the water droplets needed to cause smog – the Law of Unintended Consequences strikes again!

According to China’s National Bureau of Statistics (NBS) in 2012 the size of the country’s working age (15-59) population declined for the first time ever, by 3.45MM – while the resultant estimated 0.3% decline in the working age population is ominous enough, the fact that it boosts the size of the 60 year & over age cohort by perhaps 6x that much makes it doubly so.

In Japan Prime Minister Abe’s government has revealed its draft budget for the year ending March 31^st, 2014. For the first time in seven years it is slightly smaller than the prior year’s, although still at near record levels. It envisages spending the equivalent of US$1.02TR & borrowing 46.3% thereof, the implication thereof is that its debt-to-GDP ratio, which is already in the 230-250% range, will go up another 20 basis points – it has historically been able to get away with this because its high domestic savings rate enabled the government to fund itself solely in the domestic market (so the rating agencies didn’t care much). But with population now aging rapidly, the mama-sans are now becoming net sellers-, rather than net buyers-, of bonds, & a day of reckoning nears, no matter how many of the new bonds to be issued the BoJ takes on its books by creating more fiat money.  

Banca Monte del Paschi di Siena is the world’s oldest bank (founded in 1472) & Italy’s third largest.  It is also in enough trouble, unsuspected until a new management team took over, to warrant the government bailing it out by buying a US$6BN 9% (twice its market cap) convertible bond issue, causing its shareholders, as The Economist puts it, to be “confused, shocked and furious”. This is, quite inconveniently, causing it to become a hot issue in the February 25^th election campaign. While huge, & hitherto hidden, losses on derivatives were the main cause of its downfall, a contributing factor was its US$14BN purchase, just before the onset of the financial crisis, of a Venice-based bank at 20x earnings, twice the going rate, a transaction approved by none other than ECB head Mario Monte, when he headed Italy’s central bank. Be that as it may, Italy’s Economy Minister, Vittorio Grilli assured the parliamentary finance committee on January 29^th that there was “no need to put it under special administration – it’s the counterpart risk aspect of such ‘black swan events’ that could put the entire US$600+TR derivatives house of cards at risk.

GLEANINGS II – 496

Thursday January 31^st,  2013

CORPORATE BOND PERPLEXITY SPREADS (Barron’s, Michael Aneiro)

 -Nearly a month into 2013, investors aren’t sure what to expect from corporate bonds this year. Last year it was (with the benefit of hindsight?) an easier call. Then, while the benchmark 10-year UST yielded< 2%, investment grade corporates yielded 3.8% & high-yield’ (aka ‘junk’) bonds 8.2%. And fueled by capital gains from investors bidding up their prices, in 2012 they produced returns of 9.8% & 15.6% respectively. But now the UST bond is still yielding < 2%, and the others just 2.7% & 5.6%, the latter an all-time low that’s not really “high-yield” anymore. And the market expects their spreads to get tighter still.

While any rational person can see is that the downside risk in bonds at these yield-, & spread-, levels far outweigh their upside potential, the market is in a manic, ‘risk-on” phase.

THAT UNEASY FEELING (Barron’s, Kopin Tan)

 -Despite one bad Apple, large stocks have rallied in five of the last six weeks & small stocks in nine of the past ten. The quickest January start since 1987 has lifted the DJIA to a five-year high & the DJTA (Transportation Average) 20% in ten weeks, to an all-time high. The S&P hasn’t seen a 10% correction in 480 days (although long from a record, it is still the 10^th longest ever). 52% of investors are now bullish, twice that six months ago. Even half-baked fiscal initiatives, like the three months’ debt ceiling extension, are received positively. None of this is surprising given the lavish central bank support & the as yet scant inflation. But we need China to cooperate, and US job & housing numbers to keep improving, economists’ forecasts are becoming more restrained, the automatic federal spending cuts could kick in March 1^st,& the bond market doesn’t match the stock market’s bluster.

Investor sentiment is a counter-indicator : the more bullish investors, the more likely the market is about to head South, & vice versa (although 52% is still well below the 70% flashing red level). And while 1987 may have had a quick January start, it also had the biggest one day stock market drop up to that point in history on Black Monday, October 19^th .

THE SEQUESTER IS GOING TO HAPPEN (Business Insider, Grace Wyler)

–Thus spake House Budget Committee Chair Paul Ryan on NBC’s Meet the Press on January 27^th : “We think these sequesters will happen … the Democrats have opposed our efforts …  twice … (to) replace those sequesters with cuts in other areas of government spending … we’ve shown … how .. (to) protect defense spending by cutting in other areas.”

This is all about the US$1.2TR in automatic spending cuts over 10 years, equally divided between defense-, & day-to-government-, spending, that the President & Congress agreed, in August 2011 as part of the solution to the then debt ceiling crisis, would kick in on January 1^st of this year in the absence of action by Congress to constrain spending (the onset of which was delayed by two months under the January 2^nd deal  between Vice President Joe Biden & Sen. Mitch McConnell to kick the debt ceiling issue down the road for a few more months). Estimates of their negative effect on GDP growth range as high as 2%. And the Pentagon announced on January 25^th (possibly to motivate  those Republicans for whom spending is sacrosanct) that as a precaution it had started laying off its 46,000 temporary-, & term-, employees, and cutting maintenance work on ships & airplanes (so that, in fairly short order there will be fewer planes in the air & more Navy ships in dry dock or tied to piers, going nowhere – the truly frightening part of all this is that U$120BN/year is only one-fifth of the amount needed to keep the debt-to-GDP ratio from continuing to rise.  

IS THE GOP MOVING TO THE CENTER? (National Journal, Ron Fournier)

 -President Obama is moving left, demanding “collective action” (decried by conservatives as a ‘big government in drag’) on global warming, and on buttressing the middle class, regulating guns & ammo, defending entitlements & extending gay rights. The Republicans have capitulated on the debt ceiling with Rep. Paul Ryan (R.-Wisc) urging the rank & file to eat crow, Sen. Mark Rubio (R.-Fla) is quietly lobbying influential Republicans for immigration reforms that not long ago would have been heresy, & Louisiana Governor Bobby Jindal telling the Republican National Committee on January 24^th “A debate about which party can better manage the federal government is a very small and shortsighted debate … If our vision is not bigger than that, we don’t deserve to win.” These are bows to reality & steps away from the far right script. For mainstream Republicans realize their party must adapt or perish, or as Rep. Charlie Dent (R.-Pa) says “The American people are not fearful of solutions to the big problems facing our country … they are fearful … American leaders don’t have the capacity to act.” So, if Obama overestimates his post-reelection strength, not uncommon for second term Presidents, & gets too liberal, thereby alienating moderate & independent voters, he may create a vacuum at the centre for the Republicans to fill.

All three of the aforementioned are young (41/42) & potential 2016 Republican standard bearers. Meanwhile the CW in Democratic circles is that the party’s standard bearer in 2016 will be either Hilary Clinton (currently age 65) & Joe Biden (ditto age 70). The latter by then will have had 57 years as Washington insiders between them vs. 24 years for the other three (75% of it accounted for by Paul Ryan), which, if Americans’ perception of Washington insiders by then hadn’t changed from today’s, could give any one of the ‘youngsters’ a serious competitive edge.

CAMP BILL WOULD PUNISH OBAMA-FRIENDLY CEO’S (Huffington Post, Ryan Grim)

 -Rep. Dave Camp (R.-Mich) is Chairman of the House Ways and Means Committee. He is considering legislation to significantly hike taxes for the largest banks while providing tax breaks for struggling home owners. Wall Street has only itself to blame. For it has been lobbying heavily for personal tax hikes & cuts to entitlements to help cut the deficit but equally, if not more, heavily for tax breaks for itself. But Camp & Sen. Orrin Hatch (R.-Utah), the ranking Republican on the Senate Finance Committee, last December 14^th sent a letter to the Business Round Table (a politically conservative association of major US companies that employ 16+MM people & have US$7.2TR in revenues – i.e. close to 50% of GDP – that was founded it 1972 at the advice of Nixon’s then Secretary of the Treasury John Connally & then Fed Chairman Arthur Burns & that is typically chaired by the CEO of a mega company, currently Boeing’s Jim McNerney) that said in part “The practical reality is that there is simply not enough money on the individual side of the tax code to achieve the size of tax increases the President, with your encouragement,  is seeking”.

-Camp’s bill would seek to harvest tax revenues from the US$600+TR in derivatives on the banks’ books, some of which figured prominently in the 2008 financial crisis, by having the banks ‘mark them to market’ at the end of each year & add the (book) profit to their taxable income, rather than only having to do so after they are sold (which leads to the selling of losers before yearend to generate tax losses, only to buy them back right after the New Year. His bill would strengthen the effect of the ‘Volcker Rule’ (the implementation of which has been delayed by heavy bank lobbying). And it would make permanent the one year suspension, that the now retired Rep. Brad Miller (D.-NC) managed to get attached to the latest debt ceiling extension bill, of the tax provision that taxes mortgage relief by banks for struggling home owners(that can reduce the net benefit thereof for struggling home owners by as much as one-third, that of course would have to paid promptly.

Taxing mortgage relief defies common sense. And the former, while at the margin it may reduce the risk banks would be willing to take, would likely not work as well as he seems to envisage; an annual flat ad valorem tax would have been more effective & easier to collect/administer.

DETROIT EDGES CLOSER TO BANKRUPTCY (NBCNews, Nick Carey)

 -With its population down 30% to 700,000, its now America’s eighteenth-, rather than fifth-,  largest city. But it must still provide services to an area larger than that of San Francisco or Boston. Democratic mayor Dave Bing, a retired Hall of Fame basketball player, & his City Council, all of them Afro-American, have cut spending but not fast enough to suit the Republican majority in the State Senate. While labour costs have dropped from US$1.14BN in FY/11 (that ended on June 30^th) to US$968MM last year, they grew from 45.5% to 49.5% of its operating budget as its cumulative deficit rose by US$30MM to US$326.6MM. There are blocks upon blocks of abandoned building, the jobless rate is 18%, last year its murder rate was 11x New York’s, & its bonds are deep in junk territory.

-Republican Gov. Rick Snyder last month appointed a team to go through its books, in preparation to appointing an emergency financial manager who could propose bankruptcy as the least worst option. But it would be messy. While it would allow the city to toss out the collective bargaining agreements with its 10,000 employees in 48 separate bargaining units, the unions will seek to protect their members’ interests. And bankruptcy will have racial overtones; 83% of its citizens are Afro-American (the most of any US city) & vote overwhelmingly Democrat, while the state government is run by white Republicans.

This isn’t the first-, & won’t be the last-, municipal bankruptcy but would be the biggest to date. While Detroit shares other cities’ & towns’ legacy cost’ problems, the primary factor in its case is its precipitous population decline; for overhead costs don’t shrink in line with population. 

U.S. SHIP GROUNDS ON MARINE SANCTUARY (NYT, Floyd Whaley)

 -The USS Guardian is stuck on the Tubbataha Reef, a UNESCO World Heritage site as a “pristine coral reef” home to 350+ species of coral & 500 types of fish. The Philippine government plans to fine the US Navy for damages & for intruding into a marine sanctuary.

This is not helpful at a time the US military is increasing its presence in the country as part of the Obama Administration’s ‘pivot strategy’.  The US Navy is now said to have abandoned plans, ‘in order to minimize further damage to the reef’, to salvage the ship  in its entirety in favour of cutting it into pieces (as a damage control genuflex to the rising popular anger in the Philippines?). 

ONTARIO COULD BECOME THE NEXT GREECE (G&M, Scott Stinson)

 -A 66-page report by the Vancouver-based Fraser Institute entitled The State of Ontario’s Indebtedness : Warning Signs to Act says that straighlining the Province’s current policy regime would result in its debt-to-GDP ratio doubling over the next decade. And it says that, rather than acting on the recommendations of its own Commission on Public Service Reform in the so-called Drummond Report (which called for an immediate reform of, i.e. cutback in, the province’s spending), it just tweaked the rate of growth of its spending a bit, without any serious attempt at reform. And Finance Minister Dwight Duncan, who is expected to resign his seat shortly, warned in his speeches during the recent leadership race that the Province will have to double its current rate of spending cuts if it is to curb the deficit by 2017-18 (note his choice of words : “curb” rather than “eliminate”). The report argues that debt-wise Ontario is far worse off than California ever was; for while the latter has a far larger population & economy (roughly one-third so in each case) it had almost $240BN in bonds outstanding vs. Califonia’s 144BN (making for debt-to-GDP ratios of 38.6% & 7.7% respectively, the former being almost exactly that of Greece in 1984, that today it is more than 4x that).

It makes a nice headline, but the soup is never eaten as hot as it is served. Ontario faces some serious fiscal challenges, & its citizens some nasty ‘surprises’, but comparing Ontario with Greece doesn’t enhance the Fraser Institute’s reputation.  

ISRAEL STRIKES AT SYRIAN-LEBANESE BORDER (Reuters)

 – On January 30^th Israeli airplanes attacked a truck convoy on the Syrian side of the Damascus-Beirut highway supposedly laden with arms destined for Hezbollah.

According to al-Arabaya news their cargo included Russian-made SA-17 anti-aircraft missiles that some said would be a “game changer in any future Israel-Hezbollah confrontation since they are a) very effective against low-flying aircraft & b) hard to defend against since they are  highly mobile. This came three days after Netanyahu told his Cabinet “In the east, north and south, everything is in ferment, and we must be prepared, strong and determined in the face of all possible developments.” Apparently this didn’t involve transfers of new weaponry from the Syrian-, or Iranian-, governments to Hezbollah, but rather materiel that Hezbollah had in storage on Syrian soil that it didn’t want to fall into Syrian rebel hands (another, equally, if not more plausible, reason is that Hezbollah is starting to doubt the al-Assad regime’s survival, a theory lent more credibility by Bashar al-Assad’s late-septuagenarian & very hardline mother having gone into exile in the UAE, where she has joined other rich regime sympathizers, incl. her daughter, Bashar’s sister, who left Syria last year after the targeted killing of her husband, Syria’s Deputy Defense Minister (although Bashar’s supposedly pregnant wife is sticking it out with him in Damascus).

GALLOWS HUMOUR & SMOG ENGULF CHINA (IHT, Didi Kirsten Tatlow)

 -The South China Morning Post reported that almost one-seventh of China was shrouded in smog this week, resulting in hundreds of airline flights being cancelled & highways closed. The China Daily reported smog levels were “severe”, the country highest level (& by EPA standards they would have been rated “hazardous”). In a rare interview published last week Qu Geping, now aged 83 but from 1987 until 1993 China’s first-ever environmental protection chief, was quoted as saying “I would not call the past 40 years’ efforts of environmental protection a total failure … But I have to admit that governments have done far from enough to rein in the wild pursuit of economic growth … and failed to avoid some of the worst pollution scenarios we, as policy makers had predicted.”

-According to the paper China has experienced three waves of pollution. The first, in the 80’s, was caused by a boom in “township enterprises” run by rural fold that led to a “chaotic spreading of pollution”, the second commenced in 1992 as the rush to develop industrial-, & infrastructure-, projects poisoned lakes & rivers, and degraded urban air quality, and the third occurred in the past decade under Pres. Hu Jintao amidst a wave of building energy-intensive, & highly polluting-, heavy industries.

-A sick joke making the rounds in my ten year-old son’s primary school in Beijing goes as follows. A new arrival from China in the US goes to a doctor complaining about not feeling well. The doctor hooks him up to a breathing apparatus that, in turn, is hooked up to a car exhaust. This elicits a reaction from the patient “Yes, that feels much better.”

Mr. Qu appears to have made no specific reference to the fact that China’s vehicle fleet  has increased more than twenty-fold in a decade, from < 3MM in 2000 to > 60+MM today, (at which level it is still less than one-quarter of that of the US), nor of the fact that electricity output has more than doubled since then (which coal-generated accounting for 80% thereof).

INDIA STILL BAFFLED BY HARPER’S ARMOURED SUV (G&M, Stepahie Nolen)

 -In the planning for Prime Minister Harper’s four day state visit to India last November, the Indian government offered him an armoured Mercedes Benz car, the one the President normally uses, for his use during the duration of his visit. But after a “threat assessment” by the RCMP it was decided to have an Air Force C-17 fly an armoured Cadillac & an armoured SUV for him to use while in India, at a $1MM cost to the Canadian taxpayer.

What did the RCMP think it knew that the authorities in the host country didn’t. Secondly, this was what the British would have called “bad form” & would have been particularly offensive to this particular government. On the other hand, a not insignificant share of the $1MM price tag likely was  what would be called “sunk” costs for DND, with there being a bit of a bonus to it in being able to “offload” some of its normal operating costs onto the PM’s Office.             

SAMSUNG TOTAL PETROCHEMICALS RESUMES IRANIAN OIL IMPORTS (Reuters)

 -Stringent US & European sanctions have made the shipping & paying for Iranian hard, but the company, a JV of South Korea’s Samsung & France’s energy giant Total, driven by the paper-thin margins in plastics has revived, after a year’s hiatus, a contract for Iranian oil.

-South Korean companies’ global competitiveness is being threatened by the Abe plans to drive down the yen’s exchange rate (which will drive up the cost of its oil imports, the need for which has grown following the shutdown of its nuclear power industry – which Abe is expected to reverse). So both think they have found  ways to buy the now dirt-cheap Iranianoil flowing without violating the sanctions. And they are not alone. The world’s largest oil trader, Geneva-based Vitol, has developed an elaborate scheme that involves ship-to-ship ocean transfers, & the mixing of cargoes, to obfuscate its origin, with much of the oil ending up in China. And Turkey, Switzerland & Abu Dhabi are said to have been acting as front men for Iran’s purchases of gold with which to pay for needed imports. There is never any end to human ingenuity where money is concerned !