Nick Rost van Tonningen ~ Gleanings II ~ 527 Posted by John on September 7, 2013

The price of gold hit about US$1,200 in late June (down over one third from its late summer 2011 high). Since then two things have stood out. Much of the day-to-day downward price pressure seems to emanate from Hongkong in the middle of the night, New York time, when the market is at its thinnest for the day & modest sell orders can have a disproportionate price effect. And it is remarkable how stubbornly the price has, time and again,  reasserted itself, forcing the powers that be to,  time & again, adjust its “red line” price target resistance levels.

Overnight September 5th/6th the yield on 10-year UST briefly hit 3%, a level not seen since July 11th, 2011, a far cry from the 1.66% yield less than five months ago, last April 22nd, & more than halfway back to the 4% yield from before the 2008 financial crisis. Mortgage rates that are of key importance to Joe & Jill US Consumer have been reflecting this uptrend while the Fed’s undertaking to keep short-term rates low is only benefitting the banks by widening the spread they can make by borrowing ‘short’ (at the expense their customers) & investing the proceeds ‘long’ – this from an Administration purporting to be concerned about the middle class?

Much is said in the media about the unemployment rate dropping. But the US government’s non-farm payroll figures from the Bureau of Labor Statistics & the Census Bureau’s population numbers appear to belie that. For the former rose from approx. 130MM on January 1st, 2003 to 136MM ten years later, while the latter grew from approx. 289MM to 315MM during the same period; in other words, the non-farm payroll grew at a compound annual rate of 0.45% &  population almost twice as fast, by 0.87%.  Another way of putting it is that while in 2003 the non-farm payroll amounted to 45.0% of the population, ten years later this had shrunk to 43.2%. And while growing self-employment (not always by choice) undoubtedly played a role, it’s highly unlikely to have accounted for all, or even the lion’s share thereof (besides, self-employed people with fluctuating and/or for them sub-optimal incomes, have a lower marginal propensity to consume than those with ‘guaranteed’ cash flow – the main reason the unemployment rate has dropped lies in the way it’s calculated it (just as the methodology for calculating inflation rate understates its real impact on people, & for the same reason, to lull them asleep.

Obama’s preference for Summers to be the next Fed Chairman has been described as “the attachment you feel for the heart surgeon after he performs a quadruple bypass on you”, If so, this is a misplaced sentiment. For Summers was a major player in the Clinton Administration cabal that succeeded in having Glass-Steagall revoked, then during the next decade’s resultant free-for-all in the financial world that culminated in the Great Recession made a personal fortune advising banks how to take advantage thereof and, finally, as Obama’s White House Economic Adviser didn’t get him to dump the excessively big bank-friendly Bush 43/Hank Paulson economic/financial policies – Obama’s feeling vis a vis Summers really should be more of that of a patient whose his heart surgeon botched his triple bypass. In any case, it may not matter; for opposition to Summers is building to a point where Obama may start asking himself  “is Summers really worth the trouble”, especially since he has much bigger fish to fry.

Meanwhile, according to Washington-based Politico, Obama is using up a great deal of political capital on Syria he had planned to expend (& would have put to better use?) on the budget & other domestic issues. It also predicts  the coming fall session of Congress will be “bitter, ugly and wildly unpredictable” as it decides “the fates of a president’s powers, a military shake-up (under sequestration the Pentagon must find another US$20BN in cost savings in the next fiscal year), defense contracts, the budget, healthcare implementation (according to Reuters Obamacare’s rollout is plagued by technical glitches), the Fed Chairmanship, illegal immigration … (all that while as) all of us would be hit by a debt default.”

When Israel’s Prime Minister talks about red lines for decisive action, its track record makes this credible. But after a couple of years of doing little more about Syria than hand-wringing, President Obama talked himself into a credibility trap when he started calling any use by the Assad regime of chemical weapons against its own people a red line for action by the US without thinking through the possible consequences for the US’ global credibility and the possibility that his allies might not see things his way). His decision, after a 45 minute walk in the garden last Friday evening with his Chief of Staff, to seek Congressional approval without requiring it to meet in an emergency session (which Secretary of State John Kerry on CNN on Sunday morning said was ‘not necessary because the situation wasn’t urgent’) , while it may look to some as a cop-out and/or a ducking of responsibility, must have looked to him as a win-win-win situation. For he wins, & has a fig leaf for protection, in case of “unintended consequences’, if Congress had approved the idea in the face of lukewarm popular support (& opposition within his own party) & it were to backfire. He also would win if Congress didn’t approve the idea; for then he wouldn’t have to take the blame for not following through on his red line talk. And, thirdly, he would stand to gain among both supporters & opponents of the idea by being able to blame Congress whichever way it decides. But from a military perspective his decision is sub-optimal since it eliminates the element of surprise that limits the enemy’s ability to put its wagons in a circle & plan counter-action. And geopolitically it will confirm the growing  perception among friends & foes alike, incl. Beijing, Tehran, Pyongyang & Moscow, as well as Tokyo, Taipei, Manilla & Ryadh, that the US has become a “Paper Tiger” whose bark is worse than its bite (which isn’t good for global peace & security and  outright dangerous for US national security).

In Syria Washington may now be hoisted on its own petard. For in the 2½ years that it sat on its hands on the Syrian issue, the rebel movement has become radicalized, & infested with Islamist & al-Qaeda elements, to such a degree that, if Assad were in fact overthrown, any resultant regime (or regimes if the country were to break up) would likely be anything but US-friendly. So its least worst option now is some modified version of the survival of an Assad-controlled regime, & its problem how to square that circle.

It seems somewhat ironic that among those prattling the US has no business seeking to police global governmental behaviour are often many who in the past made a big deal about the lack of human rights’ protection in some foreign countries; for is there any human right more basic than expecting one’s government to protect its citizens’ physical safety & wellbeing?

Desalination  has become a growth business : total global daily desalination capacity (75% of it in the Middle East) now is 78MM cubic metres/20.5BN US gallons (more than twice New York City’s daily water usage & 6x Beijing’s), up from 48MM cubic metres (12.6BN gallons) on December 31st, 2008. So during the past five years it grew at an 11% compound annual growth rate, much faster  than nominal GDP, & met approx. one-third of the annual growth in global water consumption. There are currently close to 16,000 desalination plant in operation worldwide, up 25% in the past five years, and they’re getting  bigger.
There are basically two desalination technologies : flash distillation – boiling water (at low pressure to save energy) & letting the steam condense & reverse osmosis – pressurizing water through membranes that won’t let the salt through. While the former used to be the technology of choice, most plants being built now use the latter’ because it is more energy-efficient (helping to reduce the cost of desalination, increasingly so as better membranes are developed). So the cost of desalination is now as low as 50¢ per cubic metre (compared to municipal water cost in developed countries that can be a multiple thereof). And innovation is rife. Cogeneration plants are being built in which the power plant generates the energy needed for desalination & the desalination plant the waste water needed by the power plant as coolant. Perth, Australia now has a partly solar-powered desalination plant & Sydney, Australia one that is solely renewable energy-powered. And there is much research aimed at developing more efficient membranes.

In the US, El Paso, Texas is said to have the world’s biggest inland desalination plant, with a capacity of 27.5MM gallons per day & Tampa, with a 25MM daily capacity, the country’s largest sea water-based desalination plant. But both are dwarfed by the Victoria Desalination Plant in Melbourne, Australia with its 100MM gallon daily capacity, and Algeria’s Magtaa-, & Israel’s Soreq-, plants that are 12.6% & 14.8% bigger still (all of them using reverse osmosis), with he latter in turn dwarfed by Saudi Arabia’s 200MM gallon per day Shoaiba 3 plant & its US$6.1BN,  230MM gallon daily capacity Ras Al Khair plant now under construction that will come on stream in 2014, one year later than expected (both of them thermal, i.e. flash distillation, plants) – but to put all this in perspective, even the Ras Al Khair plant will meet only 0.001% of current global water consumption.

US oil refiners are increasingly starting to discount the probability of the (Northern leg of) the Keystone pipeline ever being built, in part because of the growing volume of rail-, & Enbridge’s  expanding pipeline infrastructure-, moving oil South – this would be be both good-, & bad-, news for the Harper government, the latter because it has expended much political capital at home & in Washington promoting it, & the former because it will enhance the likelihood that the ‘National Pipeline’ from Alberta to Ontario & points East will go ahead (even though it will leave a big hole in the pipeline infrastructure needed to move all the oil to market that the industry has been planning to produce from the oil sands in the years to come, & that the Alberta economy & the provincial treasury need to maintain their recent growth path.

Camp Ashraf is located in Iraq’s Diyala province, 40 kms North of Baghdad & 80 kms West of the Iranian border. It was founded almost 40 years ago, following the Iraq-Iran War & with the full knowledge of Saddam Hussein, as a refuge for opponents to the Iranian regime, and as the political & military venue for the ‘People’s Mujahedin of Iran’ rebel movement. After the downfall of Saddam its existence became more & more problematical, despite having been designated a UN ‘camp for protected persons’ under the Geneva Convention in 2003. Since then  it has been subject to periodic attacks by both Iraqi forces & government-affiliated irregulars, as result of which its population over the years dwindled to a relatively small number ‘hard core’ individuals.  While Obama was otherwise occupied with Syria, the latest such attack occurred on Sunday September 1st, this one by the Baghdad’s Shiite, Iran-friendly regime’s 36th Army Brigade, seemingly intent on arresting and/or killing all remaining residents, so as to end, once & for all, the existence of this thorn in the side of the Tehran regimel.

While most major automakers are working on self-driving cars, Nissan was the first out of the gate last week when it announced it will have commercially viable “Autonomous Drive” vehicles for sale by 2020. They will require three things. The first, & easiest one, is activation, i.e. control of the gas pedal, the brakes, etc., something all cars already have, except that it still takes a human being to operate it. The second, & more difficult one, are sensors to gauge what is happening in a vehicle’s environment, i.e. around it, some of the technology for which already exists. And, finally, the most challenging, & still largey undeveloped need is for what’s called ‘logic’, the ability to process the facts generated by the sensors into commands for activation.

The German elections will take place on Sunday September 22nd. Going into their one & only leaders’ debate on TV, the leader of the left-of-centre Social Democrat (SD) Leader Peter Steinbrück faced the unenviable task of trying to eat into Chancellor Merkel’s seemingly unsurmountable 16 point lead in the polls. In their debate on September 1st he appears not to have done so, but to have performed well enough that he is believed to have improved the probability that the final outcome of the election will be a “Grand Coalition” between the ruling right-of-centre Christian Democrats & the SD, which would be to make the resultant, still Merkel-led government somewhat less ‘pro-austerity’ & somewhat more ‘pro-Europe’.

Each year the Global Footprint Network calculates the date Mankind’s resource consumption starts exceeding the planet’s ability to replenish them (i.e. when it starts living beyond its means, drawing down resource stocks & spewing more CO2 in the atmosphere than plant life can absorb). This year it says “Overshoot Day” occurred on August 20th, with the sobering thought for its supporters being that this day has started to arrive earlier each year; thus 20 years ago it was October 21st & a decade ago September 22nd.

GLEANINGS II – 527
Thursday September 5th, 2013

HACKERS CAN NOW TAKE OVER CARS (AP)

$    Cars now contain networks of between 20 & 70 computers, controlling everything from braking to acceleration, & even the power windows. To demonstrate their growing vulnerability to being ‘hacked’, a group of computer experts recently spent time seeking, & finding, ways to hack into car computers; in other words, to determine how hackers might suddenly slam the brakes on a car driving down the highway at 70 mph or, worse still, to have it suddenly accelerate out of control in a built-up neighbourhood.

Just imagine the potential of this for terrorists intent on bringing down the latest generation of ‘no-longer-fly-by-wire’ jet airliners!

CHASING JPMORGAN CHASE (NYT, Editorial)

$    Once upon a time JPMorganChase & its CEO, Jamie Dimon, were the financial community’s poster children for having navigated so well through the 2008 financial crisis & its aftermath that struck down some other big banks. But now that lustre has faded as this supposedly best-managed of all big banks finds itself increasingly up to its ass in alligators. Over and above earlier (& costly, out-of-court) settlements that avoided admissions of guilt or inappropriate behaviour of allegations of abusive foreclosures & a tainted municipal deal, it now faces an increasing number of other problems tarnishing its reputation. It just paid US$410MM of shareholders’ money to avoid prosecution on charges of manipulating energy markets in California & Michigan. Federal prosecutors are building both criminal & civil cases of it having knowingly sold suspect quality MBS to unsuspecting investors. Two of its employees are facing criminal charges in London in connection with the ‘London Whale fiasco’ (that cost JPM shareholders another US$6+BN). New York is investigating its retail banking practices in that state. And two federal agencies are about to seek damages for its alleged abuse of its credit card customers. And yet officials, lawmakers & regulators remain divided on implementing the Volcker Rule & other reforms that, if done properly, would curb the size & complexity of the big banks (& have, in fact, allowed them the big banks to get bigger, & more obtuse, than ever) . And prosecutors have consistently been loath to press criminal charges against banks & their senior executives, or even to seek to extract admissions of wrongdoing in civil settlements.
$    Meanwhile to make real change the federal authorities must be willing to set examples & get on with reforming the financial system.

The reason for this namby-pamby approach is simple : for every lawmaker in Congress the (big) banks have five paid lobbyists pressuring them to move glacially, if at all, on bank reform, and/or promising to provide them with, or deny them, funding support in their next election.

U.S. SMALL BUSINESS BORROWING RISES TO SIX-YEAR HIGH (Reuters, Ann Shapir)

$    Despite the higher-trending borrowing costs, in July the ThomsonReuters/PayNet Small Business Lending Index was up 11% MoM & 12% YoY to 117.7, a post-2007 high. Since the Index historically has led overall economic growth by one or two quarters, this is  being taken as further evidence the economy is on the mend, or as PayNet President Bill Phelan put it “As long as interest rates are within reasonable boundaries  … a strong  economy with demand is better than a weak economy with low interest rates.”
$    PayNet, that collects real-time information, incl. delinquencies, from 250+ US lenders, says the delinquency rate in July was an all-time low 1.48% of all loans, having steadily fallen from a high of 4.73% in August 2009.

The risk in the US banking system no longer lies in the corporate-, but the government-, sector. This kind of mostly, if not exclusively, Main Street bank lending tends to generate long-term benefits for both borrowers & the economy as a whole, whereas much of Wall Street’s activities merely generates short-term income benefits for those directly involved &, as Goldman CEO Lloyd Blankfein once conceded, little by way of benefits for the real economy. So it would be interesting to see a breakdown as to how much of the new small business borrowing is accommodated by Wall Street-type institutions, and how much by Main Street banks (and a likely good guess would be likely be little, if any at all, of the former). In this context it was intersting to come across the following observation in one of the more useful market letters I receive : “I am now hearing the US government is selling buildingsall over the country and Federal employment is just starting to fall. Asset sales at the city level will occur as well (often at  fire sales prices?) … government at all levels has too many facilities and too many people. Their downsizing has just started. Funding, or rather the lack thereof, is what hurries restructurings along and it is at the municipal level where … this will happen first.”

OBAMA SET TO MEET WITH ACTIVISTS DURING THE G20 SUMMIT IN RUSSIA (AP)

$    Obama & his administration have voiced concern over a law passed recently by the Russian Parliament targeting “homosexual propaganda”. So it is not altogether surprising that lesbian, gay, bisexual & transgender rights’ activists announced on September 3rd that they had been invited to meet with President Obama on Thursday September 6th while he is in St. Petersburg to attend the G-20 Summit. Igor Kochetkov of the LGBT Network confirmed it will accept, while another invitee, the St. Petersburg-based advocacy group Coming Out, was still sitting on the fence. Obama has on other occasions met with (foreign) civil society groups, inc. a group of Russian civil rights activists when he visited Russia in 2009 (of which the LGTB wasn’t one).

A time he needs his support more than ever on, among others Syria, doesn’t seem like a particularly opportune time to so publicly poke a stick in Putin’s other eye (the first one having so administered when the White House announced a while ago he wouldn’t be meeting Putin one-on-one during the Summit). And can one imagine the uproar in Washington if Putin on his next visit to the US were to confab very publicly with the NRA, or with “right-to-Life groups”? (By all accounts the Summit was less of the non-event the media had predicted it would be, with Putin said to have come out of it much better than Obama).

AN ENERGY CAPTURE TECH TO POWER THE LARGEST SEAWATER DESALINATION PLANT IN THE US (Forbes, Ucilia Wang)

$    After fourteen years of legal wrangling construction finally started late last year on a US$1.0BN, 100MM gallon/day seawater desalination plant in Carlsbad, Cal that, when finished, will be the state’s largest. This breakthrough may facilitate the approval process for the state’s 18 other desalination projects in various planning stages.
$    Back in 1991 the San Diego County Water Authority (SDCWA) relied for 95% of its water supply on the Metropolitan Water District of Southern California (MWDSC) which in turn sources itself from rivers in Colorado & Northern California (the security of supply of which could become increasingly iffy in the not too distant future), & it still buys 48,000-56,000 acre/feet of water from it (which it wants to reduce by 30% by 2020).
$    But a drought in the 90’s & an MWDSC threat to cut its water supply (its relationship with it has often been stormy), prompted the SDCWA started thinking of alternatives. The new plant, that will meet 7% of its water needs, is slated to come on stream in 2016. And while it expects the initial cost of its desalinated water to be twice what it is currently paying  the MWDSC, it expects that to become less of an issue over the life of its 30-year contract as the latter must price its water higher & higher as it grows scarcer.

Not surprisingly, it has been criticized by ‘short-termists’ for ‘making a bet’ that water prices will go higher in the years to come (the SDCWA’s forecast price ‘cross over point’ occurs in 2024). It recently also bought 48,000 acre/feet of water at twice the price it’s paying the MWDCS.

ELDERLY WOMAN FALLS, FRACTURES HIP AFTER BEING TASERED (CP)

$    At 3:30 a.m. on August 28th three Peel Region  police officers approached her as she was walking on a road in Mississauga. After speaking with her, “at some point” one of them tasered her (rather ironically the day after the Province had announced that all front-line officers would henceforth be allowed to carry stuns guns, whereas hitherto only specially trained ones could). In falling to the ground she broke her hip & the Province’s SIU (Special Investigations Unit), that is responsible for investigating all cases of injury or death with police involvement & that claims to be so overworked as to require more staff (which is a story in itself), is investigating the matter.

While there is usually more to such stories than meets the eye (perhaps the woman was a 350-pound Amazon armed with an Uzi & the officers 99-pound weaklings?), it raises serious questions as to the training these officers received in the peaceful settling of human conflicts.

ISRAEL PREPARES FOR SYRIAN RETALIATION (Epoch Times, Marlene-Aviva Grunpeter)

$    After the Israeli Cabinet met on August 27th to determine a plan of action if the US & NATO attack Syria, Prime Minister Netanyahu declared “The State of Israel is ready for any scenario. We are not part of the civil war in Syria but if we perceive any attempt whatsoever to harm us, we will respond and we will respond in strength”. And, while Brig.-Gen. (Res.) Gen. Yossi Kuperwasser, Director General of the Israeli Ministry of Intelligence and Strategy, said Bashar al-Assad has no interest in attacking Israel knowing it would illicit a harsh response, the IDF is nevertheless getting prepared. It is installing another Iron Dome missile battery, a Patriot missile system, along its Northern border & putting on alert its Arrow system, an anti-ballistic missile system jointly funded & produced by the US & Israel. But while the IDF Home Front Command distributed CBRN (chemica, biological, radiological) kits to all Israelis during the Lebanon War, it estimates that today just 60% of all Israelis still have them, although demand in recent days has been growing with the growing concern about a possible US attack on Syria.

On September 3rd Russian radar detected two ballistic missiles fired from the Eastern Mediterranean in an Easterly direction. While first denied by the Israelis, they subsequently conceded this had happened but claimed it had been part of a joint US-Israeli “target practice missile launch” and, while the US Navy denied any involvement, the Pentagon subsequently admitted there had been a degree of “technical support” involvement.

EGYPT’S PRO-MORSI LOSING MOMENTUM (Middle East Online, Haitham El Tabei)

$    August 30th was the second Friday in a row the Islamists were unable to rally huge crowds to their cause. For Morsi’s Muslim Brotherhood seems to have lost its ability to bring out people in large numbers following the arrest of 2,000 of its leaders since August 14th (the day the police broke up two pro-Morsi protest camps in Cairo), most recently, on August 29th, that of Mohamed Beltagi, one of most of the most vociferous critics of the popularly-backed military coup.

The reaction to the deposition of president Morsi doesn’t seem to have had the same “legs” as the Arab Spring movement that culminated in Mubarrak’s downfall.

TO GROW SWEETER PRODUCE, CALIFORNIA FARMERS TURN OFF THE WATER
(The Salt, Alistair Bland)

$    “Dry farming” is catching on among small California producers of tomatoes, apples, grapes, melons & potatoes. The theory is that when the plants get less water this reduces the water content of their fruits, thereby concentrating their content of natural sugars & other flavour compounds, & forcing the plants to root deeper. But there is a downside to this : lower yields; thus dryland apple trees produce just 12-15 tons of apples per acre/year, one-third the yield of irrigated trees, & in the case of tomatoes the yield of dry-farmed plants can be as little as one-tenth the 40 tons or so of those  traditionally grown. The exception appears in wine making, where dry-framed grapes have a lower juice to skin ratio, making for richer-tasting, more intensely flavoured wines

But the loss in yield is not a total loss. For there are offsetting savings from the cost of irrigation & the handling of lesser volumes of product, and ongoing revenue generation from the proceeds of the sale of water allotments (some California farmers have found it to their advantage to quit farming altogether & sell their water allotments, and start clipping coupons from, or collecting dividends on, their resultant financial assets). Thus in not dissimilar fashion a Southern Alberta Irrigation Districy found it to its advantage a few years ago to sell part of its water allotment to the new Racing Entertainment Centre being built North of Calgary (that thereby obtained a secure source of water supply since this was an “old” water allotment and since in case of water scarcity the johny-come-latelies are the first to be hit with cutbacks.