Gleanings II 475 Compliments of Nick Rost van Tonongen (August 19, 2012) Posted by John on August 20, 2012

Quote of the week : “Two-thousand and eight was just an overture … The real opera is coming in 2013, 2014.” (Peter Schiff, CEO of Westport, Conn.-based Euro Pacific Capital, who has long been bearish on the US dollar & correctly forecast the US mortgage crisis).

One analyst recently observed “The future of Spain and Europe will be decided in the streets and kitchens and living rooms, not in bank vaults and board rooms. You can squeeze the people only so far. That’s not a political statement … just a basic fact.” – The rapidly rising suicide rate in Greece suggests he might be onto something and that, in the glaring absence of political leadership & the wilful blindness of the Eurocrat community, the probability of a “European Spring” is growing.

In Greece bikes are becoming more of a transportation means of choice (or necessity?). Many commuters have had to park their cars & the bike-riding former Prime Minister George Papandreou has been turned from a cause for derision into a role model.

The fact that YTD North American car sales have grown at a double digit rate to their highest level in five years, and that they have been strong worldwide (despite being dragged down by Western European sales being at their lowest level since 1996), makes one wonder about the ‘gloom & doom’ forecasts of many economic soothsayers.

Once those running for US President didn’t declare their choice of running mate until their party’s convention. But in 2008 John McCain chose Sarah Palin much earlier as a result of which, as her image wilted in the public spotlight, she became a boat anchor for, rather than an asset to, his campaign. One must wonder if the same fate awaits the Romney-Ryan combo. For, regardless  of the merits of the latter, he created needless & avoidable controversy by denying he is an Ayn Rand devotee, as he did in a National Review  interview last April when he said he had read her books but that rumours his views were inspired by her were an “urban legend”, and that, instead, they had been shaped by his Roman Catholic faith & Thomas Aquinas. Unfortunately, the Atlas Society, that promotes Ayn Rand’s views, taped a speech he made to it in 2005 in which he said, among others, “I grew up reading Ayn Rand and it taught me quite a bit about who I am and what my value systems are and what my beliefs are. It inspired me so much that it’s required reading in my office for all my interns and staff” (Ayn Rand was a Russian-born, best-selling, militantly atheist author who preached self-reliance, celebrated greed & selfishness, and rejected altruism as “evil”, and one of whose books, The Fountainhead, advocated laissez-faire capitalism as the only morally valid social system & featured millionaires & industrialists “oppressed” by government regulation – while these views will resonate with hard-core Republicans, incl. the Tea Party, one must wonder whether they will resonate with independent voters & thus improve Romney’s chances at being elected President on November 6^th.  If Ryan had just simply acknowledged once having been Ayn Rand believer but having changed his mind since, this ‘doggie would never have hunted’.

In the week ended August 3^rd US ethanol production was 5.72MM bbls (819,000 bbld). On an annualized basis this represents a demand for about 5BN bushels of corn. Assuming a 2012 corn crop of 12BN bushels (the high end of the current forecast range), this would take down 42% of this year’s crop, up from 35% last year. The good news is that last December Congress killed the three decades-old 54¢ tariff on imported ethanol that had kept the far more efficiently-produced Brazilian ethanol out (produced from sugar cane, it eliminates the energy hungry-conversion of corn into sugar & thus its energy-efficiency is 9.0 vs. corn’s 1.3). But the bad news is that global demand for ethanol remains strong, that for two years running Brazilian sugar cane output has declined while domestic demand for ethanol has skyrocketed & that Brazil last year commenced work on a 1,300 km., US$3.5BN pipeline that by 2020 is expected to feed as much additional ethanol into world markets as Brazil currently produces; in other words, in the short run there is not much hope for relief in meeting the US demand for ethanol from imports while longer-term there is likely to be more competition for US ethanol producers from imports (the local demand for ethanol cannot help but increase following the August 17^th ruling by a Washington Court of Appeal that trade associations representing oil refiners, auto makers & other industries cannot appeal the recent EPA approval of E15 motor fuel (i.e. motor fuel containing 15% ethanol). Meanwhile, as a result of high corn prices squeezing their profit margins, growing number of US ethanol plants are being idled or have curtailed production, or are considering doing so).

On August 15^th the Standard Chartered Bank paid the New York Department of Financial Services US$340MM in settlement of the latter’s claim that between 2003 & 2007 the bank has run, but camouflaged, US$250BN in financial transactions for Iran through its New York branch & its  threat to take away its license to do business in the state. This makes the State of New York initiative look more like a revenue-generating shakedown than a serious move by a regulator. One side effect of the  New York regulator’s move was that the bank was hit that same day with a law suit by the estates  of the victims of the 1983 bombing of the Marine barracks in Beirut, which so far have been unable to collect on a multi-billion dollar law suit again Iran for its role in that affair, for aiding & abetting Iran in avoiding having to pay them what was due to them.

Jordan’s King Abdullah recently told Charlie Rose on PBS that in Syria “sectors of society are going

against each other. Syria is different from Iraq or other countries in the region because there is a mosaic of Syrian societies … Alawites … the Sunni merchant elite … Christians, Kurds and Jews. When you put all those minorities together, you get a majority. And when there is chaos, you get to a point where those sometimes have a go at each other. And we’ve seen that level of deterioration … I still think there is hope. But what I’m worried about is the longer it takes to find a political solution, then we will be pushing Syria into the abyss. I mean conference after conference is great; international forums where we get Russia and China involved is fine; but we can’t afford the time…The abyss is utter and complete civil war which will take us years to come back from.”

A red flag for China, a green flag for Mexico & an orange one for international trade flows? In 2000 hourly manufacturing wages in China were US$1.00 & in Mexico US$2.20. Fast forward to 2005 (US$1.40 vs. US$2.60), to 2010 (US$2.65 & US$3.05), and, according to the Boston Consulting Group, US$5.30 & US$3.50 by 2015 – leading to “reshoring”, instead of “offshoring” (& to the US developing a huge, chronic trade deficit with Mexico)?

In the first post-war Summer Olympics in London in 1948, 4104 athletes competed in 136 events in 17 sports ( they were called the “Austerity Games” because in the aftermath of  WWII there was no money for frivolities & all events took place in existing facilities). The 1976 Summer Olympics in Montreal  were the first held after the word “amateur” had been struck from the Olympic lexicon & the first to spend serious money building facilities specifically for the Games. By then the number athletes had risen to 6,028, and the number of sports & events to 21 & 198 respectively; like this year’s it was opened by a then much more youthful, but also much more formal, Queen Elizabeth II. And at the 2012 Games there were 10,820 athletes in 326 events in 26 sports.

But despite all the media hoopla, we may well be near  the apex of the Olympic Games as they have evolved over the past 36 years. Montreal took three decades to pay off its Games-related debt. Athens in 2004 spent money  we now know it didn’t have, & couldn’t afford, on facilities for the 2004 Games that it no longer has the money, if it ever really did, to maintain, never mind utilize. Beijing went all out in 2008 but many of the facilities built for its Games are now empty & going to pot. And now Britain may be entering a post-Games ‘hangover’ period.

The next two sets of Olympic Games, the Winter Games in 2014 in Sochi, Russia, & the 2016 Summer Games in Rio may prove ‘the Last Hurrah” for the Olympic Games as we have come to known them. For they complete a  round robin in which all four of the BRIC nations will have hosted a  ‘marquee’ international sports event (India hosted the Commonwealth Games in 2010 which involved 6.081 athletes, 21 sports & 272 events), possibly bringing on ‘been there, done that & have the tee shirt’ attitude with regard to blowing one’s brains out to host a two-week event – and things might be complicated in Sochi because the average temperature there in February ranges between 4 & 10 degrees Celsius, whereas they are between one & eight degrees in Vancouver.

GLEANINGS II – 475

Thursday August 16^th, 2012

A STAR-SPANGLED DEBT WISH (Reuters, Martin Hutchison)

• In 1992 the outstanding indebtedness of the US domestic non-financial sector was 182% of GDP. By the time the financial crisis hit it stood at 232%, & today it is 250%. So no deleveraging has occurred. But the debt’s make-up has changed. Business debt has kept pace with the GDP growth & household debt gone from 97% to 83%, but the government’s share has gone from 57% to 89%. Deleveraging from these levels will be painful & require major cuts in consumption at all levels (incl. the federal budget)

The idea of getting US consumption levels back to the 70% of GDP range is fanciful thinking. Much of the past four years’ economic growth has been artificial. Keynesian pump-priming no longer works : for each US$2.33 increment in US federal government debt GDP now grows by US$1.00.

TEMPERING THE SHALE POTENTIAL (FP, Yadullah Hussein)

• Bob Brackett, an analyst at New York-based Bernstein Research, says too many people look at shale oil & gas through rose-coloured glasses. In Montana daily oil production has declined 38% since 2006 as output per well dropped from 400 bbld in 2003-05 to 250 bbld today, and the CEO of Occidental Pete, an early entrant in the Montana Bakken, recently told analysts “We got a lot better places to put money right now than the Bakken”.

Some industry people have long warned about the high production “decline rates” of shale oil wells (while globally in the 4½%-5½% range, a typical Bakken oil well’s output declines by 65%, 35% & 15% in its first three years & by Year Six is a” stripper well”, with a daily production in the single digits that needs a high oil price to remain viable (North Dakota’s January 2012 546,000 bbld came from 6,617 wells, i.e. average well output was 82 bbld). So maintaining output in the Bakken is a matter of “Drill, Baby, Drill”. And while in the eight months to May 1st US shale gas production grew despite a 50% decline in the number of rigs drilling for gas, the reason for this is that output lags drilling rig numbers by six to nine months; so production may start dropping by the start of the winter heating season, possibly giving rise to a serious fillip to natural gas prices in mid-to-late winter).     

OBAMA GAINS POINT ON ROMNEY IN NEW POLL (Reuters, Deborah Charles)

• Three months before the November 6^th election the latest monthly Reuters/Ipsos poll (of 1,168 adults) showed two-thirds of Americans think the country is heading the wrong way & yet the President led Mr. Romney 49-42 among registered voters (up slightly MoM). It also showed 46% of registered voters think Obama is stronger on jobs & the economy (vs. Romney’s 44%) and in tax matters his edge was 49-38%. While most voters say the economy is the key issue, the Obama campaign’s efforts to paint Romney as out of touch with middle class Americans is keeping him from gaining traction (as Ipsos’ Chris Jackson puts it “Even if it not necessarily hurts Romney, it’s given him no opportunity to build a lead”)

And Romney looking like an inarticulate George W. Bush clone may not help either.

THE FORGOTTEN HISTORY OF RYAN’S MEDICARE REFORM (WSJ, Joseph Rago)

• In 2008 a  then-obscure Wisconsin Congressman Paul Ryan released a 71-page Roadmap to America’s Future that took arithmetic seriously. And he told the Journal “I want to be the Paul Revere of the fisc”. He knows as well as anyone that, with Medicare taking a huge share of spending, & growing fast, fiscal reform must include the popular entitlement program. Medicare,, he wrote in the Road Map, must be adapted to “the realities of the new century … not to retreat from the commitments made over the past eight decades , but to fulfill them” (italics his). So he wants to turn it from a “defined benefit” into a “defined contribution” program via “premium support”, i.e. government would compensate Americans for the cost of insurance for basic health services, leaving it to each to decide if he/she wanted to spend their own money on more than that. Stanford’s Alain Enthoven originated this idea in the New England Journal of Medicine in 1978, and was picked up in the early 90’s by Henry Aaron of Brookings & Bob Reischauer of the Urban Institute, neither conservative stalwarts,. &  in 1999 by President Clinton’s Medicare Commission chaired by Louisiana Sen. John Breaux. And while it  was lauded for its sincerity by liberals, & by Pres. Obama in 2009 as  “worthy of healthy debate”, when he include it in his Budget proposals, the former reacted with hysteria & Obama savaged it as “social Darwinism”.

The objection to premium support is that it won’t keep pace with rising health costs. But that’s the  objective : hike ‘user pay‘. And proponents think healthcare cost growth will slow if this led to  greater efficiency in the system & to lower healthcare professionals’ income expectations.

CALGARY OIL PATCH GEARS DOWN (G&M, Nathan Vanderklippe)

• The billion dollars oil companies spend every 17 days in their rush to boost their oilsands capacity is slowing as some large players trim their capital budgets & start questioning some of their biggest projects. The latest blow came when CNRL announced on August 9^th it had cut capital spending for this year by 10% ($680MM), saying new projects needed US$80 oil to produce acceptable profits & that it intended to apply “rigorous scrutiny” to its three most important projects, worth over $20BN. This is part of a “big rethink” of the oilsands driven by rising costs, the growing controversy surrounding the pipelines needed to get the projected higher oilsands output to market & the recent fracking-driven growth in light oil production that have shaken the industry’s optimism about the oilsands.

Given the source, it’s hard to know if this is reality or a bargaining ploy. As yet there doesn’t seem much of a slowdown discernable on the front lines in Fort McMurray. On the other hand, the concern about pipelines is justified; for without them the oilsands would become a “stranded asset”. But if such a slowdown were in the making it could quickly leave the Alberta government in a fiscal pickle, & negatively impact on Canada’s economy (which  could be a blessing in disguise if it were spike the guns of some of the more mindless critics of pipelines to the Pacific, although it might also lead to a greater Asian presence in the Calgary oil patch).  

ISRAELI PM WANTS TO ATTACK : REPORT (Reuters, Dan Williams)

• A front page article in the biggest Israeli daily, Yedioth Ahronoth, which is no fan of Netanyahu), says “were it up to Benjamin Netanyahu & Ehud Barak, an Israeli military strike on the nuclear facilities in Iran would take place in the coming autumn … before the November election in the United States.” But it also said that they couldn’t win over their Security Cabinet colleagues & had run into objections by the armed forces which are concerned about the strategic & tactical hurdles facing such an operation. While in March a Reuters survey found most Americans supporting an attack if there was evidence Iran was building nuclear weapons, even if that were to mean higher gas prices,  President Obama has counseled against premature Israeli unilateralism, unlike Mitt Romney who has cast himself as a more reliable bulwark for Israeli security. This is causing the paper to speculate that some government advisers in both countries fear/believe a pre-November strike may embarrass Obama & improve Romney’s chances.      

Few, if any, credible sources believe the Iranians are actually building nuclear weapons & the key area of disagreement is how close they are to doing so. Meanwhile, the Israeli Shekel took a 2% pounding on August 13^th (to a level 10% below April’s), following reports on Israel’s Channel 2 that the Prime- & Defense Ministers saw the window to hit Iran closing within months & in Haaretz that the Eitan long-range reconnaissance drones were being re-activated, and that national text-messaging system to warn of a possible attack would be tested during the week.

NETANYAHU’S DANGEROUS DEMAGOGUERY ON IRAN (Haaretz, Editorial)

• The decision on a military operation against Iranian nuclear targets is the purview of an eight member group of ministers, a majority of whom Netanyahu & Ehud Barak have been unable to get the support the idea. So now they are doing an end run around them by appealing directly to the 7MM Israeli citizens (15% of them Arabs) to choose between the lesser of two evils, an ongoing threat of Iranian nuclear weapons or a war resulting from an operation against Iran. The goal is democratic but the methodology demagogic. For the issue is not whether to live in the shadow of Iranian nuclear weapons controlled by an extremist  regime committed to Israel’s destruction, thus leaving no choice but to attack forthwith, but if all peaceful means to achieve Iran’s denuclearization have been exhausted,. And the information Netanyahu et al. are releasing, directly or through proxies, confuses that issue; while taking action against Iran may become imperative in the future, it isn’t an urgent necessity. Iran’s possession of nuclear weapons may be dangerous but so is demagoguery!

Netanyahu is frustrated by the opposition to an attack at this time by much of the upper echelons of his military & security establishment, incl. both the heads of the IDF & Mossad.  Despite the recent visit by  US Defense Secretary Leon Panetta to update Netanyahu on Washington’s plans for Iran, Deputy Foreign Minister Danny Ayalon, a hawkish member of Avigdor Lieberman’s right-wing Yisrael Beitenu Party, said on Israeli radio on August 12^th : “the ’diplomatic efforts to rein in Iran are dead’ & gave it only weeks to abandon its nuclear program. All this makes it all but inevitable Israel will attack Iran before November 6^th, putting Obama in the unenviable position of being dragged into a military adventure in which US ‘has no horse’. And Netanyahu seems willing to ignore the fact that in modern history wars have seldom, if ever, produced the results its instigators envisioned & not to have learnt a damned thing from Israel’s experience in Lebanon a few years back, when the aura of the IDF’s invincibility was needlessly thrown on the trash heap of history.

CHINA SENDS SIGNAL IN ARCTIC WITH ICEBREAKER (Reuters)

• The icebreaker Xuelong (Sea Dragon) arrived in Iceland recently after having sailed the Northern Route along the coast of Russia. The expedition leader told Reuters “to our astonishment … most part of the Northern Route is open.”

Beijing has its eyes on the oil & gas wealth of the Arctic & is going to use Iceland as a pawn in its game. And its expansionist strategy is being pursued on numerous other fronts; thus recently a boat load of pro-China activists sailed from Hongkong to (briefly) occupy the Senkaku/Diaoyu islands in the East China Sea that have long been under Japanese control, contested by China, & Taiwan, because of fish in-, and the oil & gas reserves under-, the seas around it. This prompted boat loads of Japanese nationalists to sail there to & moor offshore while six of them swam ashore, after being denied permission to do so by Tokyo, with plans to plant a Japanese flag on the highest point on the islands, a move which Beijing said violated its territorial integrity. 

CHINA’S HOT SAVINGS PRODUCTS RAISE CONCERN ABOUT U.S.-STYLE PROBLEMS (G&M, Scott Barlow)

• The government has kept interest rates low to spur the economy. As a result, with the banks paying 3% when inflation is  twice that, a mass of ‘wealth management products’ paying 6-8% has emerged that slice high risk loans into pieces small enough to attract small savers’ attention. Marketed by banks, most buyers don’t have a clue what they are buying & concern is growing an economic slowdown could prompt widespread defaults that will hurt the country’s savers & ripple through the economy (& foment widespread social unrest?). To make matters worse, many have short maturities & hence must frequently be ‘rolled over’. Prof. Patrick Chovanec, who teaches economics at Tsinghua University, either the best or second-best university in the country, says this is a Ponzi scheme, Fitch that they account for 11.5% of all Chinese bank deposits & Reuters that of the 50 of the most popular ones it studied “all, except two, failed to explain or even display the underlying asset”.

This differs in two critical ways from the US template: it targets retail-, not institutional-, investors & is focused on the short-term end of the yield curve. The former  increases its potential long-term damage to China’s financial system & the latter the risk of an all but instantaneous implosion.

INDIA POISED TO LAUNCH NUCLEAR SUB (DT)

• Admiral Nirmal Verma, the Indian Navy’s Chief of Staff, says the  INS Arihant will soon start sea trials. It will be first of a class of five vessels armed with the K-15 ballistic missile that carries a nuclear warhead (but has only an 800 km. range).  The idea to make India the leading naval power in the Indian Ocean (thereby escalating the arms race with China & Pakistan – not long ago China warned India against “arrogance” after its successful launching of the Agni IV ICBM – which can hit any city in China).

Putin has a Soviet Union-like Superpower-, Beijing a “Middle Kingdom”-, dream but in the end both will likely founder on a rock of demographic realities.

MERKEL’S PARTY WARNS GREECE TO GET IN SHAPE (Reuters)

• Michael Fuchs, the Deputy Parliamentary Leader of the Christian Democratic Party, told the newspaper Handelsblatt on August 13^th that “Even if the glass is half full, that won’t be sufficient for a new aid package Germany cannot and will not agree to that … We have long reached the point where the Greeks must show they are capable of delivering a shift. A policy of last, last, last chance won’t work any more and must come to an end.”
• While in the past Ms. Merkel maintained that cutting off aid to Greece carried too many risks, in recent weeks senior members of her party have been saying that its exit would be tolerable, with one of them going as far as predicting it will be outed before yearend.

Despite being in the fifth year of a depression, Greece’s primary budget (i.e. before debt service costs) is close to being in balance. So if it defaulted, the outcome may surprise the ‘talking heads’. The New Drachma wouldn’t be worth much which would  a) discourage locals from buying imports, b) blow new life into the tourism sector & c) possibly start sucking in foreign-, and/or bringing back local- capital. As to the hit French & German banks would take, they’ve had four years to prepare for this eventuality & may therefore be less adversely affected that the CW has been assuming. 

RUSSIAN PM WARNS OF CHINESE ‘EXPANSION’ (Reuters)

• Prime Minister Dmitri Medvedev recently warned about China’s rising influence in Russia’s resource-rich Far East, saying that it was essential to defend the region against “excessive expansion by bordering states” & that it was “important not to allow negative manifestations … including the formation of enclaves made up of foreign citizens.”