Gleanings II ~ 498 ~ Compliments of Nick Rost van Tonningen Posted by John on February 17, 2013

Quote of the week : “We face a broader challenge – to defend the market economy against so many who suffered during the financial crisis … ‘Men begin to question whether the merriment was worth the misery , especially when the misery was worse among the millions who never got in on the merrymaking in the first place.” – Bank of England Governor Mervyn King (who was quoting from a speech made to the Economic Club of New York ……….in 1957 by long-time Fed Chairman William McChesney Martin (whose almost twenty-years in that office is second only to Alan Greenspan’s 23 years).

Trust the Economist to put what Brazilian Finance Minister Guido Mantega over two years ago called the “currency war” that seems to be gathering momentum, rather aptly into perspective in its Buttonwood column in its January 19th issue :

“Many British football grounds have a viewing problem. Although stadiums are all-seaters these days for health- and-safety reasons1, some fans refuse to sit down. They stand during the game, forcing those behind them to follow suit. Eventually everyone in that part of the grounds ends up on their feet. No one’s view has improved but everyone is a lot less comfortable. Foreign-exchange markets face a similar issue at the moment. Just about every country would like to see its currency weaken, so that their exporters have a price advantage and can gain market share. But when one currency falls, others must rise. Those countries react by trying to force their currencies back down and the world ends up where it started.“

This process is not unlike what during the Depression of the Thirties 80 years ago were called “competitive devaluations” (which helped to make it more serious & prolonged than it otherwise might have been). And strangely enough, the current round may have been was started indirectly by none other than America’s greatest expert on that period, Fed Chairman Ben Bernanke.

As to the possibility of ‘sequestration’ kicking in on March 1st, next week Congress will be in recess. And that after it returns to ‘work’, there will only be four business days left to deal with this issue before March 1st – the fact it is taking a week off at this point is illustrative. The only hope now is that when they return to their home stamping grounds, if they do, which is a big if, they get their ears boxed by their constituents.

According to the Public Polling Policy survey firm Americans look upon Congress less favourably than they do colonoscopies, root canals, lice & France – not surprisingly so given the plethora of evidence it is out of touch with the hoi polloi & in pockets of vested interests, and unwilling to do what it is paid to do, i.e. make laws to the benefit & common good of the community.

As things stand now, by 2016 31,000 MW of coal-fired power (10% of the US’ coal-fired generating capacity) will be retired. This has been prompted by three things. Many of the plants involved are long in the tooth, if not well past the end of their useful life. Money is ‘cheap’. And fracking has led to a surfeit of natural gas in Continental North America that has depressed its price. But this raises the question of what might happen to power prices if a few years hence base demand for gas has increased in response to the current low prices faster than production due to the relatively short productive life of fracked wells?

According to TD Economics, US house price affordability, as measured by the ratio of median house prices to median household income, was relatively stable on the 2.4x to 2.8x range from 1979 until a decade ago when it skyrocketed to a high of nearly 4.0x five years ago before crashing back to 2.6x, the midpoint of the historical range.

In Canada a possible bellwether as to where its real estate market is headed may lie in the fact that in January in Toronto condo sales were down 5.1% YoY, & prices 1.2%, while in Vancouver residential property sales were down 23% YoY & prices 2.3% (but condo prices 12.8%).

Morningstar recently did a study on the extent to which the corporate culture, incentive programs, & fees structures of major Canadian mutual funds were aligned with their clients’ interests. Of the 25 funds in its sample it gave only two an “A” grade overall (the top of four grades) & 10 more a “B”. As to the three basic criteria, in corporate culture there were 5 As & 6 Bs, in incentives 7 A’s & 5 Bs, & in fees 2 A’s & 2 Bs. So it’s not surprising that while Canadian investors have been piling into the stock market, they have cashed in $1.2BN of their equity mutual fund holdings. Of Canada’s Big Six banks BMO was not in the sample & most of the other five didn’t do very well, especially when it came to aligning manager incentives with client’s interest, where only one got a B, three a C, & one even a D (for “dismal”?).

China was conspicuously absent from this week’s US Treasury auctions of 3-, & 10-, year notes, causing a below average participation rate by “indirect bidders”, an investor class that includes, if not is dominated by, foreign central banks. While officially explained away by this being “Golden Week” in China, the fact remains this has seldom, if ever, happened before.

The regime of the supposedly still breathing but still in a Cuban hospital Hugo Chavez has devalued the Bolivar from 4.3 to 6.3 to the dollar, making its oil that much more valuable in local currency terms but imports much more expensive, thereby increasing its already high inflation rate (that in the past two years has range from a high of 28.7% to a low of 17.9% last November, from which it has since risen to 22.2% (and which the regime will have more reason than most to officially ‘lowball’). When Chavez was elected President in 1998 (after having attempted, while still a lowly Lt-Col, to seize power in a coup in 1992 – for which he spent two years in jail), the Venezuelan currency was worth almost two dollars, compared to 16¢ now. So the result of seven devaluations (in 2002, 2003, 2004, 2005, 2010, 2011 & 2013) has been to erode its external value by an average compound annual rate of 15.4%, the living proof of gross financial mismanagement & living beyond one’s means. And while currency devaluations can be a useful tool is restoring a country’s global competitiveness, this does not apply to a one-product economy like Venezuela’s.

Over the past four months the CEOs of four major multi-national mining companies, Xstrata, BHP, Anglo-American & Rio Tinto, lost their jobs. They had two things in common. They all became the top dog in their company in 2007. And, in view of the growing demand for their products, they were given a mandate to ‘grow’ the business” at the very time that, with the benefit of hindsight, we can now see they should have been tasked with making it more efficient, something their successors now have a mandate to do. One must wonder if their Boards of Directors have gotten it right this time, or whether they are compounding the error of their earlier ways.

A Letter to the Editor in a recent Globe and Mail made an interesting point about GM foods. It referred to work done by Ralph Martin, the Loblaw Chair in Sustainable Food Production at Guelph University, that showed “we could feed 9BN people with no new productive capacity by addressing underlying issues” (incl. postharvest handling & food waste) & noted that the FAO has gone on record as saying that agro-ecology, not “biotechnology” is the way to meet the food demands of the next hundred years, to make the case that GM technology is not about helping farmers grow more food or feeding the world, but about control.

GLEANINGS II – 498
Thursday February 14th, 2013

AMERICAN GUN LOBBY CONFIDENT (AP)

• NRA President David Keene, in Colorado for meetings with its Governor & law makers, told reporters all congressional measures related to guns, incl. expanded background checks, will fail since they “are feel-good proposals, because at the end of the day, what do they do to prevent a mass shooter?”. And he predicted “political peril for Democrats who support such bills.”

He may be right when he refers to them as “feel-good proposals”, for what is being proposed seeks to address symptoms rather than underlying causes. But that doesn’t mean that they should not be passed anyway (& for the very reason that they are”feel-good proposals”); for Job No. 1 on the road to recovery for addicts is the realization that there is a problem. And comments by his boss, NRA CEO Wayne LaPierre, on February 13th at the Wild Turkey Conference in Nashville didn’t seem to exude the same confidence; for he found it necessary to attack President Obama’s proposals in his State of the Union Speech as a “charade” that had nothing to do with safety in the schools & everything with the decades-long campaign to dismantle gun rights.

THE PRESIDENT’S CHALLENGE TO CONGRESS (NYT, Editorial)

• Americans are weary of Congress’ endless squabbles over spending & taxes, and the stagnating economy it has led to. Obama’s State of the Union message was that it doesn’t need to be so, that there is no need to defer commitments in education & public works, and that the poor don’t need to be poor & the middle class can aspire to something better. The President said his proposals to bring about growth with government action does not have to raise the deficit (that he said is starting to decline anyway), and that all it would take is some political will (that has long been MIA) & some closing of tax loopholes for corporations & the wealthy, the kind of tax reform the Republicans say they would support.
• But on every issue that he said most Americans want, immigration, an improved voting system, modest gun controls &, investment in education, the Republicans stand in the way, with Sen. Marco Rubio, their designated responder, mindlessly repeating that ancient cliché that all the President wants is bigger government, whereas, according to the President, “Every dollar we invest in high quality education will save us $7 later on … by boosting graduation rates, reducing teen pregnancy, even reducing violent crime.”
• His second-term agenda is impressive; his task now is to turn widespread public support into a wedge to break Washington’s gridlock.

We must hope that the editorial writer will be proven right. But he may looking at the world through rose-coloured glasses. Obama is a great orator. But he may have dug his political grave when, early in his first term, he didn’t put daylight, lots of daylight, between himself and his predecessor’s flawed policies, and by being overly reluctant to use the still awesome power of the US President to make people see things his way. The US economy may well keep rolling along at a modest clip, but if it does it’s more likely despite his policies, rather than because of them. Pity; he had a dream but blew it by allowing himself to be lead down a fiscal garden path!

REVOKING THE FEDERAL FREE PASS ON PENSIONS (WSJ, Carl Demaio)

• On top of all else Congress is ignoring a gathering financial tsunami, the unaffordable pension promises of state and local governments. In California 10 individuals will collect US$50MM in pensions from state & local governments over the next 25 years, some 30,000 retired state employees have pensions > US$100,000, one retired librarian in San Diego has US$234,000 pension, and in Orange County life guards are retiring at age 51 with a US$108,000 pension, plus healthcare benefits. And a 2011 Congressional Research Service study pegged the aggregate pension liabilities of state & local governments at US$3+TR, more than their total bonded debt (which casts a different light on their, officially quite modest, debt-to-GDP ratios). While Washington tightly regulated private pension systems in the 1974 Employee Retirement Income Act, it exempted those of state-, & local-, governments. With the benefit of hindsight, that was a huge mistake.

California is only the tip of the iceberg. While its US$230BN CalPers pension fund says it’s underfunded by US$80BN, this assumes a 7.5% rate of return while in the year ended June 30th, 2012 it realized only 1% & in the past five years averaged minus 0.1%, as a result of which, by its own calculation, its unfunded liability has grown by US$31BN since 2009 (a 6.2% rate of return assumption would jack the unfunded liability up to US$170BN & a 4½% assumption to US$290BN – to put this in perspective the state’s annual budget is in the US$100BN range & the successful Norway Fund uses a 4% annual rate of return assumption). Elsewhere Illinois has a budget in the US$33BN range & an unfunded liability of US$100BN in its various pension funds (that use 7.5% to 8.5% rate of return assumptions while last year they made just 0.1%), and the Texas Employees Retirement system (that uses 8%, & 8.5% for firefighters) has US$11BN in assets & projected payouts until 2045 of US$110BN which, to leave it whole, would require either an annual rate of return of 21½% or a US$5BN annual subsidy from a state government that has a US$30BN annual budget (the author was the primary mover behind the San Diego Pension Reform Initiative. That city for years systematically underfunded its pension plans while equally systematically buying labour peace by enriching its pension benefits, in the process creating a US$2BN unfunded liability that threatened to bankrupt it. The Initiative, that among others eliminated all pensions for new hires, offering then 401(k) retirement benefits instead, & froze pensionable pay until 2019, was overwhelmingly, with 69% support, approved by San Diego voters on June 5th, 2012. But it has not just one, but two, Achilles heels. In the short run it does little to reduce the city’s pension bill, that will amount to US$231MM next year, one-fifths of its operating budget. And secondly, under California law, as in most states, governments cannot cut retirees’ pensions (which may apply to current employees’ pension entitlements as well). So the unions didn’t bother to fight the Initiative, preferring to keep their powder dry until they could challenge it in court. And, lo & behold, they won a small victory last Tuesday, February 12th, when an administrative judge with the State Public Employment Relations Board (whose pension likely also might be affected) ruled that the city should have negotiated with its unions on pensions before taking the matter to the ballot box.

CANADA’S PROBLEMS ARE ABOUT TO BEGIN (The Guardian, Larry Elliott)

• The chances of the Canadian economy continuing to outperform that of its much bigger neighbour to the South look remote. While the latter was affected in late 2012 by fiscal cliff-prompted uncertainty & will be held back in early 2013 by the higher payroll taxes, it seems to have worked its way through its problems & now looks in relatively good shape. Canada’s problems on the other hand may be about to begin. High commodity prices helped it in the past, as did the fact that its banks were better positioned to cope with the financial storm. But the real driver of its strong growth was property prices. And this looks as if it is just about to end; for just as in the US a downtrend in building permits & housing starts heralded the end of the party, so they will likely in Canada.

Somewhat surprisingly he makes no specific reference to the effect on the national economy of the boom times in Alberta. Mark Carney may well have jumped ship just in time, with his messianic image still intact & ready to be leveraged on a much bigger pitch, on which the potential upside/downside trade-off looks far more promising.

ETHICS COMMISSIONER APROVES JUSTIN TRUDEAU’S SPEAKING ENGAGEMENETS THAT EARNED HIM $277,000 AFTER HE BECAME AN MP
(Postmedia News, Jonathan Hayward)

• An Ottawa Citizen February 7th report on Justin Trudeau’s personal finances revealed he had earned a six figure income from paid speaking engagements before being elected to Parliament & had continued this lucrative sideline in the four years he has been an MP. But he says he had continuing to do so as an MP cleared in advance with the Ethics Commissioner (according to a spokesperson for whom there is nothing in the rules against MPs undertaking paid speaking engagements). But the cheques weren’t made out to him; instead they went to a federally-incorporated company, JPJT Canada Inc., which then ‘flowed through’ the proceeds (for tax reasons?) in the form of salary payments to him. His audiences included educational groups, professional organization & charities (he had the ‘bad form’ to charge charities?). And he seemed to speak ‘with a forked tongue’ on whether he had marketed himself for his speaking engagements as an MP; for on the one hand, while defending himself against charges by a Conservative MP that he had done so, he said he had ‘never marketed himself as an MP’, on another occasion he said it would have been “odd” not to identify himself as an MP in his speaker’s biography. And he claimed ‘he didn’t want to trade on his family name’. This man is currently running for the leadership of the Liberal Party &, worse still, polls suggest that, with him as leader, it would get a majority if an election were held today (presumably with the help of most, if not all, of Québec’s now 78 constituencies).

It’s hard to know whose behaviour is more appalling, his or the Commissioner’s. To make matters worse, somewhere along the way Justin Trudeau fell heir to a $1.2MM inheritance; so his behaviour wasn’t even a matter of need, but of greed, one of the seven original sins. This revelation comes at both a bad & a good time for Prime Minister Harper, the former since there is already controversy over two Senators he appointed who may not meet the basic requirement for the job (that their primary residence is in the province they represent), both former journalists who have forgotten their past when given a chance to get both feet in the trough, one of whom has been racking up monstrous travel bills while the other has developed a profitable sideline peddling ‘political insights’ to anyone who can come up with the money, & the latter because this may prompt the press corps to turn the spotlight from two of their own, who are members of his own party, onto a member of the opposition who was born with a silver spoon in his mouth, & making the most of it. But all this is part of much more serious North American phenomenon, the growing numbers of senior office holders in both the public & private sectors who are willing to subordinate their fiduciary responsibilities to the untrammeled, single-minded pursuit of their self-interest, and who have lost their moral & ethical moorings.

LAPID VOWS NOT TO JOIN COALITIONWITH SHAS (JP, Gil Hoffman)

• Yair Lapid has been careful for months not to rule out being part of any coalition government of which the haredi (Shas & United Torah) parties were also part. But he was recently reported to have said in a private conversation that “I am not even considering (being) in a government with Shas … If I will be in the traditional photograph at the President’s Residence the day the government is sworn in standing next to a minister from Shas, my political career is over.” (but what if they were separated by two or three others?). According to one an official of his Yesh Atid Party, they are targeting him for the Foreign Minister’s portfolio since he is entitled to one of the three most senior Cabinet posts & doesn’t feel not qualified for either of the other two, Finance or Defense, despite the fact Avigdor Lieberman is insisting on retaining the post while Netanyahu would like to have Lapid there both in the belief that he would add to the country’s respectability abroad & because it would keep him removed from a major role in domestic affairs. And Lapid’s position has been strengthened by a deal with Naftali Bennett, the rising star in Israeli politics & head of the Jewish Home Party with whom he is of one mind on the haredi issue, that neither will join a coalition without the other (which was quickly put to the test by Netanyahu when he ran the idea by Bennett of him getting the Education Ministry – which the haredi believe is rightfully theirs – in a coalition that would also involve Shas, United Torah, Tsipi Livni’s group & Kadima). Meanwhile a leading United Torah MK has gone on record that there is a strong possibility of his party ending up in the opposition.

Netanyahu would like to have at least one of the haredi parties in his coalition so he can play the ‘divide & conquer’ game excels at. But is is starting to look a bit more like he may have to reach out to those left-of-centre to get a coalition with an unassailable majority in the Knesset.

THE PEOPLE’S REPUBLIC OF PLASTIC (BW)

• Shanghai-based Union Pay credit cum debit card payments system has grown from a standing start in 2002 to having almost 3BN cards in circulation today , 45% of the global total. This is twice the number it had in 2007, since when the number of VISA cards grew by just 25% to 2.3BN. On the other hand, with a 23.8% market share it is still a distant second to VISA in transaction volume. Outside China it now has as many US merchants in its system as VISA and Mastercard.

Its cards can now be used, to varying degrees, in 105 countries, nowhere more so than in Canada where they can be used on any Interac-affiliated ATM.

EU LEADERS AGREE TO BUDGET DEAL (AP)

• On February 8th, after two days of around-the-clock haggling, they agreed on a seven-year (2014-2020) 960BN Euro (US$1.28TR) budget, down 40BN Euros (4%) from the amount originally proposed by the EU Secretariat. The first ever budget cut in EU history, EC President Herman Van Rompuy told reporters was because “We simply could not ignore the extremely difficult economic realities across Europe … it had to be a leaner budget.”

By comparison the 2007-2013 budget was 976BN Euros. So, while nowhere near as drastic as the budget cuts in some EU member countries, it was at least a ‘real’ cut while in the US all budget “cut” talk is from where the budget might otherwise have been, i.e. they’re not cuts in absolute terms.

MILLIBAND ACCUSES GOVERNMENT OF ABANDONING MIDDLE CLASS
(Daily Mail, Rachel Richard Strauss)

• Average earnings have sunk to the level of ten years ago, workers are squeezed by pay freezes & the higher cost of living, and the Resolution Foundation (a think tank dedicated to improving the lives of those with low to middle incomes that are “broadly independent of state support” that is funded in its entirety by 49 year-old “rags to riches” insurance tycoon Clive Cowdery) predicts that it could take years for living standards to return to pre-crash levels. According to the Office of National Statistics the average hourly real wage peaked in 2009 at £12.25 & has since slid back to the 2003 level 0f £11.23. So Labour Party leader Ed Millbank told Prime Minister Cameron on February 13th during the Prime Minister’s Questions that “We have a faltering economy and – this will be the question for the next two years – declining living standards as a result “.

More often than not at election times what matters most is not the absolute level of wellbeing, but its level today relative to what it was six months or a year earlier. Be that as it may, this is what the Western World as a whole can look forward to : being squeezed between slower growth & the nedd to start paying for past excesses.

£8 MILLION A YEAR? THAT’S MODEST SAYS RBS CHIEF
(The Independent, James Moore)

• Stephen Hester, the CEO of the 82% government-owned Royal Bank of Scotland, gets a base salary of £1.2MM, plus a maximum annual bonus of £2.4MM, plus a further £4.2MM through the bank’s long-term incentive schemes. On February 11th RBS Chairman Sir Philip Hampton told the Parliamentary Committee on Banking Standards that in his opinion Hester is only “modestly paid.” And Hester himself told the Committee that he had no intention of giving up his bonus (as a number of people have suggested he should) and that “we have done huge things to rescue the company for society and for its stakeholders … It is extremely proper for me to be assessed on what we have done. I believe this nation is off the hook for a lot of things.”

He has only been with the Bank since September 2008 & since November 2008 as its CEO; so he cannot be held responsible for the management blunders that necessitated the government bailout of the bank not long before he got the CEO’s job. And in all fairness it should also be noted he refused his bonus last year (albeit only after a lot of pressure all but shamed him into doing so), But it takes unmitigated gall to take this line five days after the bank was fined US$390MM by US regulators for the role played by his traders in manipulating the Libor rate (which they had started to do long before he became CEO but had continued on his watch, even after being made aware that the regulators were onto them), especially since he himself had called his traders’ actions “disgraceful” & said they “had brought shame onto the bank”, thereby becoming the poster boy for the very “hubris” he had earlier claimed had pervaded the entire banking industry. It’s also interesting that the politicians had far more questions for Mark Carney about his compensation package, which is a mere fraction of Hester’s, for a job that, while perhaps not bigger, is certainly far, far more important. And as usual the politicians were long on words but short on action; for as the 82% owner of the bank, albeit with only 75% voting power, & the supposed guardians of the public purse, they were in an unassailable position to cut his compensation package to ribbons if they had really wanted to do so (or perhaps to decide he would be paid, say, 75% in shares in the bank so as to align his personal interest with that of its shareholders). It is interesting to note in this context that Zurich-based UBS, a bank that in recent years likely has been in more trouble than most, recently adopted a new bonus payment system that seeks to reward employees for keeping the bank in business, rather than endangering its survival by taking outside risks; for employees earning over US$250,000 will now have 30%, or more, of their bonuses for 2012 paid in the form of “contingent capital” bonds that will be wiped out if key measures of the bank’s financial wellbeing dip below certain levels. And furthermore that Morgan Stanley will quit paying bonuses for high-flying employees in cash on the barrel head, & start paying them spread over three years in a mix of cash & stock.

AUSTRALIA TAXED CARBON AND THE SKY DIDN’T FALL (G&M, Jeffrey Simpson)

• Since July 1st, 2012 Australia has had a $23/tonne carbon tax that in three years will become a cap-and-trade system integrated with that of Europe (which right now ain’t working so well). Half of its proceeds are returned to homeowners, 40% to business & the remaining 10% earmarked for investment in clean technology & assistance to emitting industries exposed to job losses. Critics of course said the sky would fall : industries would leave, consumers revolt, unemployment skyrocket & China eat Australia’s lunch. None of this happened & its economy has remained stronger than most, incl. Canada’s.
• The climate debate split Australia. It led to leadership changes in both major parties & an upsurge in support for the Green Party, and inflamed farmers & business leaders. The big emitters fought it tooth & nail while others, incl. the technology & finance sectors, & most economists, favoured it. And droughts, floods & wildfires since then appear to bear out that the continent’s climate is changing. But in the election now called (prematurely) for September 14th the climate change policies of the Labour Party & of the Greens will be a big issue, with opposition (Conservative) leader Tony Abbott vowing to dismantle them (like Canada’s Prime Minister Harper he believes a carbon tax is “a big new tax on everything”). Then we’ll see how Australian voters really feel about the issue. The irony in this is that a Labor government in Australia is using a free market tool, a carbon tax, to attack emissions while in Canada a Conservative government, & in Australia a Conservative opposition, spouting free market rhetoric, chooses to depend on government regulations, the least economically effective tool.

A carbon tax, especially a revenue-neutral one, makes a great deal more sense than a cap-and-trade system, as evidenced by the current boondoggle in the EU.