Gleanings II ~ 506 ~ Compliments of Nick Rost van Tonningen Posted by John on April 5, 2013

Quote of the week : “Small bank depositors in Europe are ‘safe’ only on the proviso that the states are solvent” – Walter Schäeuble, Germany’s Finance Minister – To the extent this discombobulates small depositors in the peripheral economies by making them question the value of their  governments’ deposit guarantees, it might in the short run work to Germany’s advantage by encouraging them to hold more of their cash balances in German banks; this, however, raises an awkward question, longer term, as to whether the Eurozone is moving towards a ‘two-tier’ Euro, with those in some countries being more risk-free, & hence more “equal” (as George Orwell would say) than others. Schäeuble also questioned the desirability of any “radical change” in the terms of the Irish bailout (which Dublin has been pushing for); while he praised the progress made by the Irish government “with the help of European partners and … great engagement of itself”, he said “radical change … will bring with it danger that the trust which has just been won back, could be lost.”  

The Economist has a marvelous way with words. It proved this once again when it described the European authorities’ insistence, after nine months of dawdling, on making its E10BN ‘bailout’ for Cyprus’ banks conditional upon the Cypriot government imposing a E6BN ‘bail-in’ by depositors as “ingeniously loopy”. And in the New York Times Joe Nocera commented that “The henchmen of Russia’s President, Vladimir Putin, who have gotten rich by trampling over the rule of law (when they steal businessmen’s assets using trumped-up, fake tax charges), are getting a taste of their own medicine.” One reason why Moscow is believed to have been so amenable on the Cyprus issue is believed to be that  it sees the cold shower treatment given to Russian depositors in the Cypriot banks as a means of slowing down capital flight from Russia.

Contrary economic signals are emanating from the US economy : in March the ISM Manufacturing Index fell to 51.3 from 54.2 in February, well short of the 54.2 expected, while Markit’s US Manufacturing Purchasing Managers Index rose to 54.6 from 54.3 in February, making the First Quarter the best quarter for the sector in two years.

Beijing is downplaying the deaths in Shanghai of two people from the lesser-known, but more virulent, H7N9 flu virus (that is, however, less easily transmitted to human being than other strains). Meanwhile it doesn’t have a clue where it originated & how it spread although there seemed to a time sequence : one victim fell ill on February 19^th & died eight days later, the second became ill on February 27^th & died five days later, and at last report a third case had fallen ill on March 9^th in Chuzhou City, Anhui Province, 75 miles from Shanghai, but at last report was still alive.

You will see below that US regulators recently proposed fining Exxon US$1.7MM for a July 2011 pipeline break that fouled the banks of the scenic Yellowstone river for 100+ kms. This isn’t even a slap across the knuckles with a wet noodle for a company for whom that represents  just 20 minutes’ profit. The time will come, & possibly sooner than expected, that the public will demand that those responsible for such anti-social events spend time in the “crowbar hotel” (i.e. a real, hard ass-, rather than a country club-, jail) & that any fines levied come out of their own-, rather than  shareholders’-, pockets. For as things stand now, fines are basically shrugged off as “a cost of doing business” &, as such, written of against taxes , and as cheaper in the short run than acting in a more responsible, pre-emptive & long-term sustainable  fashion (thus last October an Italian court found six seismologists guilty of manslaughter & sentenced them to six years in jail for failing to warn the locals of the possibility of an earthquake near the town of L’Aquila that killed 297 people, with the judge ruling their risk assessment as “vague, generic & ineffective”).

In 2005 a mysterious malady hit the US bee keeping industry (& has since reared its ugly head in Europe). Now known as “colony collapse disorder” it causes bees to first start behaving oddly, then  become disoriented &, finally, die. In the last year it has assumed disastrous proportions, with losses of up to 50% as once healthy-looking bee populations were wiped out in matter of months. In one documented case a bee keeper had contracted to rent 13,000 bee hives to a California’s almond grower only to find that, at  the start of the almond pollination season, he had only 3,000 healthy hives to send. And since 25% of Americans’ diets, from apples through cherries & water melons to onions, is bee pollination-dependent, this could have a double whammy impact on food prices, first due to skyrocketing bee hive rental costs & later due to supply shortages (& while the resultant supply problem can sometimes be solved by imports, this often entails additional costs).

Neonicotinoids are now the most commonly used agricultural pesticides. They are known as systemic pesticides : whereas earlier pesticides killed by touch, the systemic ones are absorbed by plants which then poison any insect that partakes of its juices. They have been promoted as being less toxic to humans (although, since they are inside that nice shiny apple, no amount of washing the outside will remove it). And the body of evidence is growing that they are quite toxic to insects & other non-mammals, especially for animals like bees that take pollen back to the hive where, day after day, the entire colony feeds on it (according to Eric Mussen of the UofC Davis analysts have so far documented 150 chemical residues in pollen & wax found in bee hives – so much for the idea that honey is a health food?). So  in Europe the EC has been pushing for a ban on their use in the face of vigorous opposition from  Germany’s Bayer & Swiss-based Syngenta, two of the world’s top pesticide producers, in the US  environmentalists & beekeepers recently sued the EPA for approving their use on the grounds that they had been insufficiently tested & that  neonicotinoids have been “repeatedly identified as highly toxic to honey bees, clear causes of major bee kills and significant contributors to the devastating ongoing mortality of bees known as colony collapse disorder”, and a recent study, yet to be peer-reviewed, by a retired senior research scientist from Canada’s Environment Ministry published by the American Bird Conservancy found neonicotinoids may also negatively impact bird- & water insect populations – this only reinforces my belief that, if Man is to survive in the 21^st Century, he/she had better quit listening to Pied Piper like tunes being played by the Monsantos of this world & get back to working with Nature rather than trying to control it (and the proof of the pudding is in the eating : while Monsanto would like to have everybody believe that the world needs its Frankenfoods to meet its dietary needs, that is utter BS; the truth is much simpler, & less hi-tech:  with 40% of the food produced in the world going to waste, all that is needed to feed all the world’s people today & for a long time to come, if not forever, is to become less wasteful.

GLEANINGS II – 506

Thursday April 4^th, 2013

LOONIE, AUSSIE INCH TOWARD ELITE CURRENCY CLUB (WSJ, Ira Iosebashvili)

• In investing their FX reserves, central banks are now looking beyond the US dollar, the Yen, & the Euro : in the Fourth Quarter the formers’ share of global reserves slipped from 62.1% & 4.1% to 61.9% & 3.9% (and Euros were flat at 23.9%) while “Other” non-traditional currencies, incl. the Aussie & Canuck dollars, hit an all-time high 6.1%. So central banks, many in emerging markets, are expanding the reserve currency club beyond the traditional five (US$, £, ¥, Euro & SF). Australia & Canada remain triple-A rated, unlike the US, UK & Japan. Greg Anderson, a strategist at Citigroup in New York, says demand from central banks has buoyed the Aussie dollar’s value for years & that they “are underneath the market, waiting to buy it, whenever it drops.” So while analysts expected it to drop below par as the non-mining parts of its economy struggled, & in the past year it has dipped several times below US$1.02, it has always bounced back. This has not gone unnoticed at the IMF; so last year it said it might start breaking out their holdings by central banks along with that of the five traditional reserve currencies. When it does, it would be the first time since 1999 (when it added the Euro) it will have designated a new reserve currency.

The question is not when it will add these two but when it will add China’s yuan (especially given the US$30BN currency swap between China & Russia announced at last week’s BRICS Summit  – while in & by itself this was almost immaterial, it is was important as a portend of things to come).

LEAKS REVEAL SECRETS OF THE RICH WHO HIDE CASH OFFSHORE

(The Guardian, David Leigh)

• A former Chief Economist at McKinsey believes wealthy individuals across the world are hiding up to US$32TR in overseas tax havens (i.e. 2x US GDP, 2½x the assets of all US-, & 3x the deposit base of all Eurozone-, banks – which seems high). And the Washington-based International Consortium of Investigative Journalists is about to make public millions of internal records of Britain’s offshore financial industry, a data ‘dump” 100x the 2010 Wikileaks’ cornucopia of secret military & diplomatic files.  Prominenti who will be spotlighted include President Hollande’s 2012 campaign manager, Mongolia’s former Finance Minister, Azerbaijan’s President, Russia’s Deputy Prime Minister’s wife, former Philippine dictator Ferdinand Marcos’ eldest daughter, the ex-wife of Marc Rich who was, rather controversially, pardoned by President Clinton from tax evasion charges during the dying days of his Administration, & Canada’s Tony Merchant, the spouse of Sen. Pana Merchant, (a Chrétien appointee), & in his own right a Regina-based lawyer specializing in high profile class action suits who, twice during his career, was charged with  “conduct unbecoming” a member of the Law Society.

Only the stupid and/or greedy seek to “evade” taxes; the clever ones “optimize” them by having  their lawyers, accountants and/or tax advisers utilize, & take advantage of, the maze of tax treaties & other potential tax optimization initiatives that politicians in various countries have created over the years for reasons that, even if sometimes well-intentioned, quickly get perverted.    

OBAMA ADMINISTRATION PUSHES BANKS TO MAKE HOME LOANS TO PEOPLE WITH WEAKER CREDIT

(WP, Zachary A. Goldfarb)

• In his State of the Union address he pledged to have more Americans benefit from the housing recovery. So now his officials are pushing banks to provide mortgages to less-than-prime house buyers so as to ‘power the housing recovery’ (& because ‘the housing rebound is leaving too many people behind’, incl. young first-time home buyers & individuals with recession-weakened credit) & to make greater use of taxpayer-backed programs, such as FHA, that insure loans against default, and the Justice Department to reassure ‘overly cautious’ banks they won’t face legal or financial recrimination if they make loans to riskier borrowers who meet government standards & yet subsequently default.

Enough to leave one speechless. Nevertheless, how about ‘Stu…pid’?  If it ain’t broke, don’t fix it?  Einstein’s definition of insanity as “Doing the same thing over and over and expecting different results”?  Pouring gasoline on a moral hazard fire? Been there, done that, have the T-shirt?

FED COULD START TO PARE BOND BUYING (Reuters)

• The Fed has been buying US$85BN of UST- & MBS securities a month to push down long rates, vowing to continue doing so until there is a substantial improvement in the labour market outlook. But on April 3^rd San Francisco Reserve Bank President John Williams said in a speech that “Assuming that the economy gains more momentum in the next year or two, I expect we will meet the test for substantial improvement in the outlook for the labour market by this summer. If that happens, we could start tapering our purchases then.”

His speech, at a Town Hall Los Angeles event, was a typical economist’s ‘on the one hand & on the other’ one; having said that, it nevertheless seems to position him on the hawkish end of the spectrum (although that won’t matter much in real terms since this year he doesn’t have a vote). But the section in the above quote starting with “Assuming” & ending with “year or two” was not part of it. The paragraph that the article purports to quote from ran as follows :

“So what does that mean? (i.e. the FOMC statement the Fed will continue its securities purchases “until the outlook for the labour market has improved substantially in a context of price stability”). I see the benefits of our asset purchases continuing to outweigh the costs by a large margin. I expect that continued asset purchases will be appropriate well into the second half of this year. In making this assessment I don’t have a specific unemployment or job-gain threshold in mind for cutting back or ending these purchases.  I’m looking for convincing evidence of sustained, ongoing improvement in the labour market and economy. The latest economic news has been encouraging. But it will take more solid evidence that it’s time to trim our asset purchases. An important rule in both forecasting and policy making is not to overreact to what may turn out to be just a blip in the data. But, assuming my economic forecast holds true, I expect we will meet the test for substantial improvement in the outlook for the labour market by this summer. If that happens, we could start tapering our purchases then. If all goes as hoped, we could end the purchase program sometime late this year.”

REVIVAL OF U.S. MANUFACTURING MORE MYTH THAN REALITY (G&M, Timothy Aeppel)

• The idea US manufacturing is on the cusp of a renaissance is everywhere these days, except in the numbers. Sure, industrial production has been growing twice as fast as the economy, & manufacturers have added over 500,000 jobs since early 2010. But economists say these gains are small potatoes compared to what was lost in previous years (when manufacturers shredded 5.7MM jobs in a decade). While the rate at which factories are closing has been declining, the rate at which new ones are being opened has been going down even faster. US manufacturers haven’t been selling more goods abroad (as they would if they were truly becoming more competitive). And the share of manufactured goods sold in America that are made abrod, that declined during the recession, has started to rise again. And while Goldman Sachs economist Jan Hatzius recently said in a note to investors that “rising productivity, subdued labour costs, low energy prices and cost increases abroad have made the United States a much more attractive place to produce”, even he can see no evidence that a broader revival is underway & opined that “U.S. export performance … remains middling at best.”

Economists, with a few honourable exceptions, seek to project the past into the future & are not visionaries; so they tend to miss turning point until well after the fact. As often the case, the truth likely lies somewhere in the middle. Thus from the other side of the Atlantic the low US energy prices are a dream come true. If anything is to hold the US economy back, it will be a lack of people with STEM educational backgrounds (especially now that many of them who once came to the US to make a career now believe their prospects are better back home & often just come, & stay, long enough to gain experience they can leverage into bigger & better things back home.

BUST CITIES CAN’T CODDLE PENSIONS (Reuters, Reynolds Holding)

• Stockton, Calif. is seeking bankruptcy protection. Its plan to right itself is to administer an 83% “haircut” to some of its bond holders but to continue paying US$30MM/year to Calpers to leave its pensioners “whole”. It is helped in this by California, like many other states, prohibiting public sector pension cuts. Wells Fargo & others owed US$300+MM have cried foul, arguing that they should have equal status with Calpers & that the city hasn’t even tried to negotiate a deal with it, and have asked the judge supervising the affair to reject the city’s filing for protection. There is a precedent : Central Falls, R.I, exited bankruptcy last September after slashing retirement benefits without creating a political & legal firestorm. And bankruptcy law likely invalidates the argument pension reductions are unconstitutional. The reality is that cities & states (& the federal government?) cannot fix their entitlement liability problems by themselves. Workers must step up to the plate too. And voters seem to agree; for last June they overwhelmingly approved San Jose’s & San Diego’s plans for retirement sacrifices.

The pension entitlement beneficiaries morally & ethically don’t have a leg to stand on. They didn’t look after their elders the way they now expect the next generation to look after them. Their pension contributions fell far short of paying for the fat benefit packages they were told to expect. They voted for politicians who promised far more than they themselves were prepared to pay for from their taxes (hence the endless deficits). And they fouled the environment & used infrastructure paid for by earlier generations while barely paying for its upkeep, never mind its replacement.           

EXXON MOBIL PIPELINE BREAK SPILLS CANADIAN CRUDE IN ARKANSAS (Reuters)

• Its 848 mile, 20-inch Pegasus pipeline carries 100,000 bbld of Canadian heavy crude from Patoka, Ill. via Nederland, Texas to Gulf Coast refineries. On March 25^th it ruptured at Mayflower, Ark., spilling 10,000+ bbls of product. This came just days after federal regulators proposed, on March 25^th, fining Exxon US$1.7MM for safety violations linked to a pipeline break in July 2011 that spilled 238,000 litres (1,500 bbls) of crude in the Yellowstone River, despoiling 100+ kilometres of its banks.

It didn’t carry heavy crude but dilbit (diluted bitumen), the same product the controversial Keystone XL pipeline would carry. And pictures on the Internet of small rivers of black crud flowing through nice middle class suburban neighbourhoods will help the cause of its opponents. Once this line carried foreign oil from the Gulf Coast to Middle America. But in 2006 Exxon reversed it to carry Canadian oil to the Gulf Coast refineries, & in 2009  doubled its capacity. The cause of the break is being investigated by the authorities. But they won’t have to look very far, or hard; for what they will immediately encounter is a poisonous combo of 50 year-old pipe, capacity expansion that involved boosting the pressure in the line, & a product, dilbit, with a viscosity requiring higher-than-average pipeline pressures, that  is chemically-, & physically-, more corrosive than lighter products (the latter since it contains more sand particles).  And while, in all fairness, none of this may apply to a brand new, purpose-built pipeline like the Keystone XL, this won’t matter a fig to opponents intent on using this incident to whip up popular sentiment against it. As usual, the oil industry is its own worst enemy; in this case because pipeline pipe typically has a rated 30-year useful life & continuing to use it past its “Best Before” date is a sub-optimal, increasingly-higher-risk-with-age management practice, especially so when combined with high pressure in the line. But, being fully depreciated, continuing to use 30+ year-old pipe is so delightfully profitable. The last week in March was a bad one for Alberta; for, apart from this, earlier a 94-car, dilbit-laden CP Rail train derailed near Parkers Prairie, Minn., spilling an estimated 750 bbls, thereby demonstrating that moving oil by rail, the recently much-touted alternative to pipelining, is not only more costly than pipelining, but also not risk-free (& giving the safety record of North American railroads likely more prone to spills).

CANADA’S MOVE ‘REGRETTABLE’, UN SAYS (CP, Mike Blanchfield)

• Canada was one of 195 countries that signed the Convention to Combat Desertification (UNCCD) in 2007, a 10-year program to study & find scientifically sound ways of minimizing the impact of drought (& was, in fact, instrumental in promoting the idea). On March 26^th the Harper government announced on an obscure website, rather than in a press release, its decision to withdraw from it because ‘it wasn’t worth the money ($350,000/year) & had proven too bureaucratic’. This was done upon the recommendation of Foreign Minister John Baird, days ahead of an April 9^th UNCCD meeting in Germany that would have forced Canada to face scientific facts on the effects of climate change, droughts & encroaching deserts. While Ottawa says it served formal notice to the Bonn-based UNCCD Secretariat & the UN Secretary-General on March 25^th, the former says it only received such notice on March 28^th & disputed the $350,000 cost claim, saying Canada’s share of its budget was $291,000 (i.e. 3.1%, roughly in line with Canada’s contribution to the UN’s total budget). It apparently first got wind of the Harper government’s decision when Canadian Press, after stumbling on it on the website, phoned it on March 26^th for confirmation.

Meanwhile, John Baird was spending taxpayers’ dollars in Iraq to ‘promote trade’, the first Canadian minister to visit there in 37 years. It’s Amateur Hour’ in Canadian foreign policy-making by a government that appears increasingly anti-science when scientific evidence doesn’t suit the Prime Minister’s pre-conceived notions. And while it de-emphasizes sub-Sahara Africa, that usually well-informed people now believe has a bright future, it has just appointed its first-ever full-time ambassador to Myanmar, a country of little, if any, geopolitical value to anyone, incl. Canada. 

CHINESE NAVY MAKES PRESENCE FELT AT DISPUTED SHOAL (Stars & Stripes, E. Slavin)

• On March 25^th a Chinese amphibious task force conducted patrol & training missions at the uninhabited James Shoal in the South China Sea. It was led by the 19,000 ton, 700 foot-long Jinggangshan, one of the most sophisticated & newest ships in the Chinese Navy (commissioned just a year ago), capable of carrying helicopters, marines & air-cushion landing craft. According to Xinhua & the People’s Daily Online Beijing “is determined to safeguard the country’s sovereignty with their services in the South China Sea.”

The James Shoal is located in the Southern-most periphery of the South China Sea on the Continental Shelf of Malaysia’s North Borneo territory, just 50 miles off its coast but 1,100 miles from the nearest China landfall. While the rest of the world considers much of the South China Sea  international waters, Beijing purports it is an “inland sea” & claims souvereignty over just about all of it. Meanwhile the PLA’s navy also has a fleet of three, almost brand-new, vessels, the Haijian 50, 26, & 66, on patrol in the Diaoyu/Senkaku Island waters, telling Japanese ships there that the islands belong to China & they’d better skedaddle.

CHINA’S LOSING BATTLE AGAINST STATE-BACKED POLLUTERS (Reuters)

• Local authorities, hugely dependent on the taxes & jobs generated by, & hence in the pockets of, large, polluting SOEs, are among the biggest obstacles to Beijing’s promises to reverse decades of environmental damage. In March Xinhua, in a strongly-worded editorial, said “blame lies in government at different levels … for chasing growth and letting environmental problems fester”. Last month the National People’s Congress was told of 30+ serious incidents of heavy metal pollution in the past three years, many due to “regional governments blindly pursuing economic development … (and) law enforcement and supervision not being strong enough.” According to Ma Jun, Head of the Institute of Public and Environmental Affairs, a non-profit monitoring pollution country-wide, “People want growth. People want development, but they don’t accept that this should happen at the expense of their quality of life, and even the health of their children. But it’s very hard to hold local governments accountable.” While China has environmental laws, enforcement is weak, especially in the face of giant firms pouring money into otherwise financially bereft local governments’ coffers. Vice-Environmental Minister, Wu Xiaoqing told reporters in mid-March “We must improve our legal system and raise environmental standards, and prevent pollution and environmental damage” &  blamed  “the low cost of breaking the law and the high cost of complying with it.”

China is not alone in having the latter problem, as witnessed by the US$1.7MM fine, referenced earlier, it is proposed Exxon should pay for polluting the Yellowstone River. And Vice-Minister Wu has only part of the solution; for the more critical flaw in China’s system is the lack of a local government revenue base; for the absence thereof leaves even honest officials open to being bribed by corporations with offers to pay for local infrastructure, like parks & highways, that could, & should, have paid for with public funds if local governments had a revenue base of their own.

SHORT OF MONEY, EGYPT SEES CRISIS IN FUEL & FOOD (NYT, David Kirkpatrick)

• A shortage of fuel is causing food prices to soar. It’s not even summer yet & the electricity is already blacking out. Recently in a two week period, five people were killed, & dozens more injured, in gunfights at gasoline pumps. Egypt is short of hard currency with which to pay for essential imports of fuel & wheat (both of which are highly subsidized, even for those who don’t need help – the going price for diesel fuel is 16¢/litre, less than one-tenth of what Europeans pay). To make matters worse, fuel shortages are affecting farmers’ ability to irrigate crops & will affect their ability to harvest their wheat next month. Egypt has been talking with the IMF for two years about a loan that would provide much needed foreign exchange  & reassure foreign lenders & investors that it remains in relatively good standing. But President Morsi has been dragging his feet on this issue, hoping not to have to agree to its highly unpopular terms until after the next election which was to have been held this spring but  now, due to judicial wrangling, has been postponed until at least fall.

But the real reason is two-fold. One is a belief Egypt is “too big to be allowed to fail” & that, once things really ‘go off the rails’, the US, & the West generally, will have no choice but to come to its rescue (on more attractive terms that those offered by the IMF). And secondly, a, possibly mistaken  bet that, in a worst case scenario, the Brotherhood will benefit at the pol