Nick Rost van Tonningen ~ Gleanings II ~ 525 Posted by John on August 24, 2013

“Faith in central banks is equivalent to faith in the word dot.com in 1999 or faith in the eternal rise of housing prices in 2006 … It is not only the credibility of sovereign nations burdened with debt that can reach a Bang! moment. The credibility of and faith in central banks is just as fragile … The world no longer worries first and foremost about the products corporations make or the services they perform. Rather, it is focused on the amount of easy money the central banks can dish out.” – John Mauldin.

As a follow-up to last week, following are some more factoids about the global water situation :
$    An Economist article entitled Can China Clean Up Fast Enough said that half of China’s urban water supplies are unfit to wash in, never mind drink, & another one, entitled East Is Grey, observed “Half the people and two-thirds of the farmland in China are in the parched North – mainly in the Yellow River Basin … The water table there has fallen by 300 metres in two decades. Wen Jiabao, a former Prime Minister, was barely exagerating when he said that water shortages “threaten the very survival of the Chinese nation”;
$    The Yellow River Conservancy Commission, a government body, says that for one-third of its length its water is too polluted for use in agriculture (which is not stopping many farmers with little option but to use it if they are to grow crops) & the Housing Ministry’s Chief Engineer for Water Safety that only one-half the water in urban areas is fit to drink;
$    According to ABC News, it was first noticed in 1921 that Shanghai was sinking. It has continued to do so since, in the 50’s & 60’s at a four inch annual rate, as its shallow water table collapsed due to a combo of excess water withdrawals & the weight of its growing number of skyscrapers. While a subsequent switch to the greater use of river water has cut the rate to two-fifths of an inch (1 centimetre) per year, Liu Yi, a senior geologist at the Shanghai Institute of Geological Survey, who tracks this phenomenon, believes that, if that hadn’t been done, by now it might be sinking by three feet every decade. Sinking cities are common in, mostly Northern, China. The government says there are now 46 of them. And in areas around Beijing the land has sunk by up to 14 inches over the past decade – the South-North water diversion scheme now being built (that Mao dreamt about) may only download China’s problem onto its neighbours; for it will syphon water out of the headwaters of the three of the four rivers (the Indus -, Brahmaputra- & Mekong all rise in Tibet; only the Ganges doesn’t) that since time immemorial have been the life blood of South-, & Southeast-, Asia ;
$    Closer to home, a Rolling Stone article Goodbye Miami paints a gloomy forecast for coastal cities since, it says, the average global sea level has risen nine inches in the past 90 years. Much drinking water of South Florida comes from the 4,000 square mile Biscayne Aquifer that is so close to the surface that it interacts directly with the water table & surface water, making it vulnerable to contamination which is now increasingly being threatened by a seawater invasion, as witnessed by the fact that on the ocean side of a dam built by the Corps of Engineers in the 50’s to keep the salt sea water at bay it’s now only ten inches below that on the land side whereas, when built, it had been twice that;
$    South Florida, that already has 35 desalination plants, the largest of which, in Tampa, was opened in 2008, cost $158MM & has a capacity of 25MM gallons/day, about 10% of the region’s daily needs, is building seven more.

In June  foreign investors engaged in the biggest US$-denominated bond sell-off in 36 years. They sold US$5.2BN of Fannie Maes, Freddie Macs & Ginnie Maes, another US$5BN in corporate bonds & over US$40BN in USTs. Not surprisingly, given the size of their holdings (US$1.27TR & US$1.08TR respectively), China & Japan were among the biggest sellers. Ditto back home : after 21 straight months of inflows & taking in an astounding US$1.2 TR in the three years ended December 31st 2012, US bond funds & ETF’s in June suffered outflows of US$69.1BN, another US$14.8BN in July & yet another US$30.3BN by Monday August 19th.

Also in this context, one of the more interesting, & seemingly more thoughtful, market letters I get recently opined “Corporate debt has become so well thought of that some high quality corporates have traded through Treasury yields . In recent weeks, even those higher quality US corporates have been hit hard by the market-wide bond sell-off. Still, the growing interest in corporates vs. Treasuries is noteworthy … The deleveraging process which began at the corporate level a decade ago will eventually reach the government sector, just as it reached the consumer in 2007-2009. The root cause is often an inability to find funding.” (As to government deleveraging, he seems unduly sanguine about the implications thereof).

Also relevant in this context may be Bill Gross’ recent comment “This is a Bond War and it could get bloody” to which he added “it’s no longer about making money, but about protecting capital.”

Existing home sales in June jumped to an annualized 5.39MM rate, a post-November 2009 high & well ahead of the expected 5.15MM – the optimists will see this as ‘the universe unfolding as it should’ in the residential housing market, and the pessimists as demand borrowed from tomorrow, as a last gasp of demand by buyers rushing in before mortgage rates go higher still, and as a good reason as any to ‘get out of Dodge’ while the getting is still good.

While most people are rooting through the entrails of the minutes of the FOMC’s July 31st minutes for signs as to when, how & to what extent the Fed may start ‘tapering’, they are missing what may well be a far more important sentence in it, namely that keeping the Federal Fund rate at “exceptionally low levels” remains appropriate “at least as long as the unemployment rate remains above 6½% (a level which the Committee discussed lowering), inflation between one & two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-term goal, and long-term inflation expectations remain ‘well-anchored’.” – this phrasing isn’t clear on whether a change in any one of the three would trigger a change of policy, or whether all three would be required to do so – since, like most central banks, the Fed is better at making its monetary policy decisions on a johnie-come-lately, reactive-, rather than  pro-active-, basis (i.e. too late) it likely would require the latter.

Vasco Cúardia & Andrea Ferrero are economists at the San Francisco Fed (Janet Yellen’s eralier domain). In a recent paper entitled How Stimulating are Large Scale Asset Purchases? they conclude that the latest round of QE really hadn’t been all that effective & that  “interest rate guidance probably has greater effects than signals about the amount of assets purchased.”

JPMorgan that, along with Goldman, told its clients last April to sell gold, thereby contributing to its precipitous price decline that month, is said to have been buying gold since mid-July. Now that it has stocked up, it is advising its clients to go long both gold and gold & silver mining stocks (for a “short-term bounce”). Among the reasons it is giving them to do so are the weakness of the paper gold price, the unprecedented demand for physical gold, seasonal positives & physical supply constraints (for physical gold?). And to bolster its case  it noted “The World Gold Council reported today (August 20th?) that physical gold demand remains strong, questioning the price weakness seen in paper gold markets. Additionally, gold supplies could be constrained in September if labour strikes are initiated in South Africa. There’s typically some positive seasonality to the gold price in August & September helped by India, which is still the largest (28%) gold market.” And John Bridges, its gold analyst (who in all fairness to him has been bullish on gold throughout) said on August 9th that despite its then 6% rally gold had still room to go higher, noting the strong demand for physical gold in China & India & saying that “if you are uncertain about whether the financial crisis is truly over, then having some gold in the portfolio makes a lot of sense … gold is a currency that is no one’s liability.” He referred to it as being in some people’s eyes a ”wealth protection device” & noted “scared” retail doesn’t want gold shares or other paper gold but the real stuff”.

On August 20th Goldman made a large number of erroneous options’ trades that disrupted trading  across all US exchanges. The next day it said a computer “glitch” had been the cause of this & that it will cost it nothing, while the Financial Times quoted a number of markets sources saying its losses would exceed US$100MM – if so, five, or more, days’ profit for Goldman can hardly be called nothing; for credibility purposes they would have been better off coming clean (but that would have been contrary to the Goldman ‘culture’).

Since 1996 NYSE margin debt (money borrowed to speculate on stocks) relative to GDP per capita has only twice broken out of a fairly narrow, modestly upward-sloping channel. First in late 1999 (during the dot.com bubble) before peaking at 8x in early 2000, one year before the onset of the 2001 recession, after which it slid to 3x by late 2002 before starting to climb again. The second time was six months before the 2008-2009 recession, after which by early 2009 it had dropped once again to 3x. Now at 7x, it now appears ready to break anew out of the channel. Bulls may  conclude from this that the market still has room to go higher but bears as a warning signal. And the latter have two things on their side. On a trailing 12-months’ basis the Russell 2000 trades on a stratospheric 48x P/E basis and the S&P 500 at 19x, almost one-third above the long-term average. And bank profits distorted the reported Second Quarter S&P 500 profits : for while officially up 3.3%, net of the banks they would have been down 1.2% (with the WSJ opining this suggests  companies are ‘tapped out’ in terms of their ability to squeeze more profit out of layoffs & cost cutting, while the banks can always find more ways to skin their clients).

German Finance Minister Wolfgang Schäuble has finally conceded that a third financial rescue package for Greece is inevitable. But he keeps insisting there can be no question of another ‘haircut’ for bondholders, only some lowering of the interest rates the Greeks must pay.

GLEANINGS II – 525
Thursday August 22nd, 2013

CLIMATE PANEL CITES NEAR CERTAINTY ON WARMING (NYT, Justin Gillis)

$    The Intergovernmental Panel on Climate Change has hundreds of scientist members. It publishes a report every five years that is perhaps the most definitive assessment around of the risks of climate change & that, despite being pooh-poohed by the climate change ostriches as self interest-driven after discovering minor errors in its 2007 edition, influences much policy thinking around the world. A draft of its latest  report, the fifth since 1988, leaked earlier this month, dismisses the relevance of the recent slowdown in global warming, often cited by climate change doubters, as due to short-term factors. It emphasizes the basic facts about future climate change now seem more firm than ever & that “It is extremely likely that human influence on climate caused more than half of the observed increase in global average surface temperature from 1951 to 2010 … There is high confidence that this has warmed the ocean, melted snow and ice, raised global mean sea levels and changed some climate extremes in the second half of the 20th century.”
$    In the matter of sea levels, an issue it largely sidestepped in 2007, it goes well beyond its assessment at that time; for it says that in a best case scenario, i.e. if governments inthe future were more successful in getting emissions under control than in the past, it may rise as little as 10 inches by 2100 whereas in a worst case scenario it might do so by at least 21-,  & possibly by as much as 36-, inches, with serious implications for the hundreds of millions of people living near current sea levels, incl. the inhabitants of New York, London, Shanghai, Venice, Sydney, New York & Miami.
$    As to how much the average temperature would rise by 2100, if CO2 emissions were to double  as they may if present trends were to continue, it retreated somewhat from its 2007 view that ruled out anything below 3.6 F to return to the pre-2007 scientific consensus of 2.7 F (a move attributed by some to the climate doubters’ criticism) .

According to a spokesman for the group the draft document “is likely to change in response to comments from governments received in recent weeks and will also be considered by governments and scientists at a four-day approval session at the end of September … It is therefore premature and could be misleading, to attempt to draw conclusions from it.”

SUMMERS, YELLEN ALLIES WAGE BEHIND THE SCENES EFFORT TO WIN FEDERAL RESERVE NOD (WP, Zachary A. Goldfarb)

$    According tp people in know earlier this month some of Summers’ colleagues from his Obama Administration White House days, incl. former Treasury Secretary Timothy Geithner, caucused with him in a private strategy conference call. They compared notes on what reporters had been asking about him in the ongoing assault from liberals who deem him soft on bank regulation, so as to map out a line of response thereto. Rarely in history has the appointment of a Fed Chairman created such commotion in Washington, particularly in the (usually somnambulant?) summer recess period in Washington.

Summers invokes strong sentiments in friend & foe alike. Obama being Obama may in the end well gravitate to a decision to bypass both since the nomination of either may prove difficult to pass through the Senate without an unhealthy & unhelpful knock-them-down-and-drag-‘em-out fight.

NSA BROKE US PRIVACY RULES THOUSANDS OF TIMES PER YEAR, AUDIT FINDS
(WP, Barton Gellman)

$    According to an internal audit & other top secret documents, the National Security Agency  broke privacy rules, or overstepped its legal authority, thousands of times ever since Congress granted it broad new powers in 2008. The audit, dated May 2012, counted 2,776 incidents in the preceding 12 months of unauthorized collection, storage, access to or distribution of legally protected communications, with the most serious incidents including a violation of a court order & the unauthorized use of data about more than 3,000 Americans and green card holders. While most involved the unauthorized surveillance of Americans or foreign intelligence targets in the US, there were also some cases of typographical errors that led to unintended interceptions of US emails & phone calls (one such case occurred in 2008 when a programming error confused Washington’s 202 area code with 20, the international dialing code for Egypt, as a result of which a “large number” of phone calls from Washington was intercepted, a fact never passed on to the NSA’s oversight staff).  And in another (more serious?) case the Foreign Intelligence Surveillance Court, which has authority over some NSA operations, was never told about a new collection methodology until after it had been used for many months (at which point it ruled it unconstitutional).
$    The Obama administration has provided little information about the NSA’s compliance record and in June, after promising to explain the NSA’s record in “as transparent a way as we possibly can”, Deputy Attorney-General James Cole said in congressional testimony that “Every now and then, there may be a mistake”, while a senior NSA official, speaking anonymously with White House permission, took a similar line when he explained “We’re a human-run agency operating in a complex environment with a number of regulatory regimes; so that at times we find ourselves on the wrong side of the line.”

In another area of surveillance, the use of location tracking devices, the Justice Department at one time revealed that, after the Supreme Court had ruled in 2012 in United States vs. Jones that placing a hidden tracking device on a suspect’s car constituted a “search’ under the Fourth Amendment, it had prepared memos outlining its policies on the use of GPS & other potentially invasive technologies. But when the American Civil Liberties Union (ACLU) asked for copies thereof under the Freedom of Information Act, all it got were copies with almost every word in them blanked out, with the Department arguing the memos were exempt from disclosure since they were a lawyer’s work product. This got it back in court recently, trying to defend this claim, with a NYT editorial opining “It is distressing that the administration, which claims to welcome debates over the government’s surveillance practices, time and again refuses to be transparent over those practices”
THE CASH COMMITTEE (NYT, Editorial)

$    The House Financial Services Committee has grown so large (61 members) as to require the installation of a fourth row of seats in their committee room. This is less due to a burning interest among its members in Wall Street and/or bank regulation but to the fact that interest groups donate more money to its members than to those of any other House Committee (YTD US$10+MM from among others the big accounting-, & insurance-, firms, and from ‘employees of’ Goldman, BankAmerica, Wells Fargo, the Credit Union National Association & the Investment Company Institute). So it is becoming known as “the cash committee” whose members are being well paid for the favors they do their donors. Thus Andy Barr, a freshman Republican from Kentucky, promised to protect a tax break worth $500MM to credit unions & got US$15,000, and then introduced a bill to allow banks to give mortgages to people who cannot afford them (to undo an existing federal rule prohibiting that) & got another US$47,000; in fact the US$150,000 he has received from the financial sector in the nine months that he has been a lawmaker is just about as much as it gave to Speaker John Boehner & other leaders. And they’re all in on it, most hypocritically the Tea Partiers who claim to be populists.

While a  bank lobbyists told a journalist “We make an investment, and we are hopeful that investment produces a return”, an “investment” in a freshman lawmaker who typically doesn’t carry much weight doesn’t seem like the wisest of investments.

THE MOST ELITE VIP-ONLY CLUB AROUND (NP, Rex Murphy)

$    Following the October 2008 federal election in which first-term MP, & professional politician at all levels of government since his mid-twenties, Fabian Manning lost his Newfoundland seat, Prime Minister Harper appointed him, at age 44, to the Senate (a not unusual gesture to defeated MPs). Then on March 28, 2011, Sen. Manning resigned his sinecure to run in the May 2nd election, only to lose again. Nevertheless, sixteen days later, the Prime Minister re-appointed him to the Senate (thereby implying there was no other person of merit among the other half a million Newfoundlanders than a ‘public trough feeder’ of twenty years standing who had twice been rejected by his neighbours?). This illustrates that the Senate is less a check on the House of Commons than a taxpayer-funded slush bucket of partisan largesse for Prime Ministers & their friends.

And this was not the only such case. For on December 18th, 2010 the Prime Minister appointed Larry Smith, an ex-jock & former Commissioner of the CFL (Canadian Footbal league), to the Senate, only to have him too resign on March 25, 2011, just 97 days later, to run in the same election with the same result : defeat at the polls & re-appointment to the Senate (on the same day as Fabian Manning), despite Smith having declared on election night that he had “no illusion of returning to the Senate because I resigned and that was a condition of my running.”

THE (RUSSIAN) ARCTIC IS OPEN FOR BUSINESS (G&M, Michael Byers)

$    Russia takes its Arctic seriously. Its nuclear-powered subs can sail under the sea ice while Canada’s diesel-powered ones cannot (assuming these Royal Navy hand-me-downs are in any state to leave dry dock, never mind the harbour). It wants to turn its Arctic coast line into a commercially viable alternative to the Suez Canal whereas Canada seems content to let ‘nature take its course’ in the Northwest Passage & has no vision for it competing with the Panama-, or Suez-, Canals. Russia uses icebreakers to escort commercial vessels, & charges for doing so, and its newest icebreaker can break through 2.5 metres of ice, while Canada’s are older & smaller (& mostly venture North only during the summer) and has only long-delayed plans to build a new one, seldom escort commercial vessels and, even when it does, does so for free. Russia in building 10 search &rescue stations in the Arctic, each with its own ships & aircraft while Canada is woefully ill-equipped to deal with any Arctic emergency, since with its main rescue resources are located thousands of miles South of the Arctic Circle.

And while Russia has numerous military bases in the Arctic, Canada’s much-vaunted & outlandishly expensive $35BN naval-, & coastal protection-, ship building program (that really is a regional cum Irving family subsidy/pocket-lining program in drag) is moving forward at an, even for government, snail’s pace, & Canada depends for enforcing its Arctic sovereignty on a few hundred Indian & Inuit hunters cum part-time soldiers armed with 1895 vintage Lee Enfield rifles acquired in 1946 as war surplus. All this despite the Prime Minister’s having acknowledged that Arctic souvereignty is a matter of “use it or lose it”.

EGYPT : HOW REGIONAL PLAYERS ARE RESPONDING (BBCNews, Roger Hardy)

$    Some of the US’ key allies in the region are rushing in to fill the policy void left by the West in Egypt. Saudi Arabia is positioning itself to become the primary supporter of the military regime in a calculated snub of the West, to the point it has said it will offset any cut in US aid to it (hard on the heels of having, along with Kuwait & UAE, pledged US$12BN to support it). For, after having funded the activities of the Brotherhood (& other Islamist movements) for years around the world, the Saudis recently have come to look upon it as a threat (which became a paranoia after Mubarrak’s overthrow). They believe Obama didn’t just ditch a loyal friend but actually delivered Egypt to the Brotherhood & that, having conquered much of North Africa, the Brotherhood will now target them (and that, with the US now eyeing ‘energy independence’, they could suffer the same fate).
$    Turkey & Qatar have from the start of the Arab Spring sided with the Islamists; so recent events in Egypt were a shock & a setback for them. Ditto for Tunis where the Islamist-dominated regime is in the same position the Brotherhood was in Egypt, waning popularity due to a failure to deal with the nation’s problems & an inability/unwillingness to meet the, likely unwarranted, expectations of many Tunisians. And Israel expects the new regime to put more pressure on Hamas in Gaza, so much so that when a Republican Senator called on Obama to end all military aid to Egypt, the pro-Israel lobby in Washington immediately declared war on him.

This week’s court ruling that the now 85 year-old Mubarrak had to be released from prison may be a straw in the wind (& result in a miraculous improvement in his health?).

ACTIVISTS INSPIRED BY THE OUSTER OF MORSI LAUNCH CAMPAIGN TO OVERTHROW HAMAS IN GAZA (JP, Khaled Abu Toameh)

$    Tamarod is the grass roots movement that led the campaign to oust President Morsi. On August 19th a copycat movement in Gaza, that Hamas claims is Fatah-backed, came out with a video announcing a series of anti-Hamas activities by November 11th & saying that “Repression and tyranny have reached their peak and we can no longer remain silent … The time has come to reject death under Hamas’ security club”, denouncing it as “medieval gangsters”, & accusing it of “torture, sabotage, smuggling, bribery and thuggery.” Meanwhile, the day before, during a meeting in Gaza City of Fatah & Hamas officials to set a date for the long-overdue elections in both the West Bank & Gaza, Hamas rejected all Fatah proposals, with one senior Hamas official saying Fatah was trying to “cover up from the scandal of rising peace talks.”

Israel clearly has a vested interest in stirring this particular pot; be that as it may, it is beginning to look increasingly as if the Kerry-prompted peace talks will prove DOA.