In the July 28th edition of his weekly missive John Mauldin makes, as usual, some worthwhile observations, two of which stand out :
• the global banking community has destroyed the sense of trust on which banking has historically been based, & “Without trust, there is no system.” (the same is true for politics);
• LIBOR is based on estimates by 16, mostly non-UK, banks in London of what they expect to pay for money. The four highest & lowest are cast aside & the other eight averaged out to produce LIBOR. But in the banking cum credit crisis of 2008 banks weren’t lending money to anyone at any price; so at that point in time the LIBOR rate was pure fiction!
He since came up with another gem : “Europe is going to end in tears … Their choices are Disaster A and Disaster B … Try and avoid both, and you get Super Disaster C.”
The latest issue of Montreal-based Bank Credit Analyst, aka BCA Research, expresses a similar view : the Eurozone is on the edge of collapse, (and) with bank runs accelerating on the periphery, a ‘muddle-through’ solution is no longer viable.
On July 24th Moody’s announced it was changing the credit ratings of Germany, Holland & Luxembourg from Aaa (stable) to Aaa (negative), & that the Aaa (negative) ratings of France & Austria were under assessment, with a decision forthcoming in early September. This leaves Finland as the sole European sovereign credit with an Aaa (stable) rating – since this bad news for the first three undoubtedly was due, in part, to concerns of them having to bear the brunt of the cost of bailing out their more unfortunate/less well-managed Eurozone brethren, this will likely give Germany, Holland (& Finland) further reason to continue to take a hard line on any of Mario Draghi’s ideas to open the ECB flood gates to a tsunami of Spanish & Italian paper. Nevertheless, one major US bank is expecting a move in the next few months towards a much enlarged ECB balance sheet for monetary policy- & crisis management reasons, with more bond purchases (Spain & Italy need at least 600BN Euros), negative deposit rates, more LTROs (despite bank interest seemingly waning) & easier collateral standards – since none of this really addresses the basic problem, this is all about crisis management, the global inflationary potential of which will be reinforced by that of the currently skyrocketing food grain prices.
August ought to be uneventful in Europe; for it is its traditional holiday month and most decision makers, & many market ‘players’, will be MIA. There will be no Spanish or Italian bond auctions, only those of relatively short terms T-bills. But September will be different. People will be back at their desks. Even assuming the EU will have thrown Greece a another life line by August 20th (which in theory ought to be easy since it just involves lending it money from the EFSF to pay back the ECB, but will shift risk from the ECB onto taxpayers, most of them in Germany, Holland & Finland), Greece has (small) bond issue maturing on September 21st. By then the troika report on the extent to which Greece has met the conditionalities of previous advances will have seen the light of day, & early indications are it won’t be pretty; for government revenues & the proceeds of privatization, the man in charge of which has just resigned, have been well short of target. On September 1st Draghi will address the annual central bankers’ clambake at Jackson Hole, Wyo. Chances are France will be downgraded on September 2nd. The next ECB policy meeting will be on September 6th. On September 12th the German Constitutional Court will rule on the constitutionality of the ESM & Holland will have parliamentary elections in which bailouts are an issue. With the next EU Summit won’t be until October 18th-19th , if Mario Draghi’s bravado last week were to be put to the test in the meantime, the market may find the Emperor is ‘bare-assed naked’ since, despite growing signs of Europe’s economies slowing down & Chancellor Merkel’s soothing noises about Draghi’s plans, German Finance Minister Wolfgang Schaeuble, in their usual ‘good cop, bad cop’ routine, told Die Welt on July 29th that “speculation about Germany’s support for sovereign debt buying is ‘unfounded’ “& a spokesman for the German central bank indicated it regards bond buying by the ECB as “problematic” & “not the most sensible” way of dealing with the crisis since it creates ‘false incentives’ for governments (so rumour has it that the ECB may seek to avoid this by making an unprecedented move into buying private sector securities) – the reasons for Germany’s intransigence are two-fold. The more adamant Chancellor Merkel is on the bailout issue, the more her public approval rating rises. And, with the consensus being that ECB bond buying will hike Germany’s inflation rate, it touches an almost century-old third rail issue in Germany, its paranoia about inflation.
Remember the ECB’s two earlier LTRO (Long-Term Refinancing Operations) whereby it lent a trillion or so Euros of cheap three year money to the banks (which most used to invest in government securities at a “spread”, rather than, as hoped for, to hike commercial lending). It now appears as if at least some of the bonds then purchased by the banks are finding their way back to the ECB as collateral for new loans. And future LTROs may well be even less effective because banks are said to be less interested in participating in them.
On a happier note Eurostat reported that in 2011 55% of the 502MM people in the EU lived in countries whose GDP was greater than it had been three years earlier, 95% in countries whose real GDP had grown & 46% in countries where unemployment had gone down, and 71% in countries where the cost of borrowing was lower than it had been in 2008, & 64% in countries where GDP is expected to grow this year (“‘far from the maddening crowds”, for instance, countries like Poland have quietly been doing reasonably well all along).
One market letter with a right wing bias opined that the November US election is all about choosing between a “leftward, larger, more intrusive-, and a rightward, smaller less intrusive-, government”. All of us, Americans & non-Americans, should only wish it were that simple. Federal spending as a % of GDP declined under a left-of-centre President Clinton & increased under a supposedly right-of-centre President Bush 43. And never in American history has privacy been more prostituted than under the latter, purportedly for national security reasons. And “larger, more intrusive” governments cost money. This was no problem when the US “full faith and credit” was indubitably credible & when Joe & Jane American Tax Payer could maintain their lifestyle, despite their stagnating incomes, by borrowing. But the string is running out on the former & already has run out on the latter. The real choice for Americans more likely is who is going to bear the brunt of the cost of rationalizing fiscal policy, the well-to-do, the not-so-well-to-do, the not-at-all-well-to-do, or the public servants. Right now Americans are still at the “Après vous, Alphonse” stage, seeking to download that burden onto anyone but themselves, but the time will (hopefully) come that they will realize they’re all in the same boat together. But that, likely & unfortunately so, won’t be until there has been a train wreck since most Americans are still in denial.
The same letter too came up with interesting historical data about the degree of recovery of US GDP three years after the nadir of various recessions : 16%, 14%, 7%, 10%, 8% & 6% for those of 1970, 1975, 1980, 1991, 2001 & 2009 – this may, in part be explained by the US GDP trend growth rate having declined from, say, North of 3% fifty years ago to half that today. But there is also a growing mass of empirical evidence that, as an economy becomes more leveraged, Keynesian-style monetary policy pump-priming becomes less effective.
The state of the US electoral system can be gauged from the fact that back in 2005 a bipartisan commission headed by former US President Jimmy Carter & former Secretary of State James A. Baker found, among others, that 140,000 voters registered in Florida had also registered in four other states, one-third of them in New York City, & that 50% of registered voters lacked photo ID. But since this provides great scope for skullduggery, in the present political environment politicians seem more disinclined than ever to address this issue.
The Conference Board’s Consumer Confidence Index defied economists’ by climbing to 65.9 in July from 62.7 in June (due to a hefty 5.7 point increase in the ‘future expectations’ sub-index while the ‘present situation’ sub-index declined marginally), private sector employment in July grew 167,000, while the economists had expected 120,000, & ISM reported its Chicago Business Activity Barometer in July had risen to 53.7 from 52.9 (while the economists had forecast of 52.5). So don’t take everything economists tell you as the Gospel Truth, & there may be more “green shoots” out there than some ‘talking heads’ would have us believe (because they are Republicans?).
It’s a sign of extent of Asian interest in the Calgary oil patch (& the under-valuation of Canadian oil & gas stocks?) that CNOOC recently sought to acquire Nexen with an offer 61% over market & that Malaysia’s Petronas just had to raise its offer for Progress Energy Resources Corp. from its original $20.45 last month to $22.00, i.e. from a 77% to a 90% premium.
There is currently a bit of a brouhaha in Jonesboro, Ark. For a left-handed man arrested for possession of marijuana supposedly committed suicide while handcuffed in the back of a police car by shooting himself in the right temple with a gun the police had missed in two body searches.
I suspect we’re seeing the heyday of the Olympic Games. They have come a long way since Pierre de Coubertin re-invented them 116 years ago. Once the purview of amateurs at both the management & participant level, it has at an accelerating rate become a huge commercial undertaking at all levels. But in the years ahead, when people in the West will have to start living in an either/or world, & the US will lose its past, post-WW II Alpha male position therein, much of the current financial underpinning for the Games’ present format will evaporate.
GLEANINGS II – 472
Thursday August 2nd, 2012
ONLY MARIO DRAGHI’S ECB CAN AVERT GLOBAL CALAMITY BEFORE THE YEAR IS OUT (The Telegraph, Ambrose Pritchard-Evans)
• He has promised the moon & he’d better deliver. For if he doesn’t, the crisis will soon escalate out of control. We are beyond the point where a quarter point rate cut will achieve anything. Nor will it suffice to launch a fresh round of “temporary and limited” bond purchases – to use the self-defeating language Mr. Draghi was forced to utter.
• The only issue at this late stage is if Germany, after two years of ideological posturing, will let the ECB take all risk of souvereign default by Spain & Italy off the table. Given the economic uncertainties elsewhere, if he can’t this would tip the system into a downward spin, triggering a negative feedback loop similar to that in late 2008.
Most remarkable about this article is that it seems to take Spanish & Italian defaults for granted. But Chancellor Merkel for domestic reasons is unlikely to blink & will justify this with a less gloomy (& more correct?) view on the global economic situation. And one should keep Draghi’s ideas in perspective. He is a bureaucrat, not a politician who has to deal with voters, and true bureaucrats build empires, and no Euro, no ECB. And his years at Goldman must have taught him to move when opportunity knocks, & he likely sees an opportunity to build a powerful central bank that can dictate to politicians, not the other way around.
CROPS KEEP SHRINKING IN HISTORIC DROUGHT (NBS News)
• The USDA reported on July 30th that 48% of the corn crop in 18 states is now “Very Poor” or “Poor”, vs 45% a week earlier & 14% one year ago. Ditto for soybeans (37%, 35% & 12%) & pasture lands (60%, 55% & 36%). While there is rain in the forecast, none will be of the soaking variety that might help salvage the drop, only of the kind that will reduce crop stress but not halt its further deterioration. And temperatures are forecast to go higher. All this is bad news for food processors, livestock producers & ethanol makers (for crops “Very Poor” is defined as “Extreme degree of loss in yield potential, complete or near-complete crop failure” & for pasture land “Very little to no feed, considering the time of year.”)
In just one month the corn crop forecast has gone down from 14.7BN bushels by as much as 25% to 11BN bushels, prompting an as yet small, but growing, chorus of voices calling for revisiting the (heavily subsidy-protected) corn-to-ethanol idea. What is now also causing growing concern is that the drought has started to affect soybeans as well. And the global food outlook is further darkened by a lack of rain having damaged grain crops all over the former Soviet Union & excessive rain those in much of Europe, while Indian monsoon rains have been unusually light. So the World Bank is warning that high grain prices will hurt the world’s poorest citizens for at least three years (raising the potential for widespread social unrest). And given the higher grain prices & the state of pastures, North American consumers can expect higher meat prices six months out, although in the short run they may be under pressure as farmers & ranchers flood the market with animals they can no longer (afford to) feed – a “risk-free” investment with a higher-than-market rate of return therefore likely would be to fill your freezers with meat!
LAWMAKERS ANNOUNCE DEALTO FUND GOVERNMENT THROUGH EARLY 2013
(NBC, Luke Russert)
• On July 31st Senate Majority Leader Harry Reid (Dem.- Nev) & House Leader John Boehner (R.-OH) agreed on a six months’, US$1.47TR extension of government funding to avert a September 30th government shutdown. The Republicans gave way on their demand for government spending cuts & the Democrats on a 12-months’ term. While the absence of spending cuts mat rankles some Republicans, a Romney aide told NBC News “Taking this issue off the table will keep the large focus on jobs, the economy, and President Obama’s failed economic policies … That’s where Republicans win and Democrats lose.”
That is a “housekeeping”-, but not a “fiscal cliff” issue.
HOUSE PASSES ONE-YEAR EXTENSION OF BUSH TAX CUTS (WSJ, Siobhan Hughes)
• On August 1st, in one of the last votes before it goes on a five-week summer recess, the House passed, 256-171, a US$403BN bill to extend the Bush tax cuts for one year (a bill that is at odds with what the Senate passed last week, 51-48, & what the House had rejected earlier by a vote of 170-257 – with, in both cases, 17 Democrats voting with the Republicans – that would have extended them for the first US$250,000 of household income only). Once again there were no spending cuts to make up for the revenue lost, but with Rep. Tom Price (R.-TX) told reporters “We don’t believe that keeping tax rates as they are now will cost money.”
Lawmakers say that the real effort to avoid the looming ‘fiscal cliff’ won’t get underway until after the election, and some, incl. Sen Charles Schumer (D.-NY) have such limited ambitions in this respect that he has expressed the view that it might just be a matter of turning it into a fiscal ‘slide’.
IDAHO BILLBOARD COMPARES OBAMA TO COLORADO THEATER SUSPECT
• An electronic billboard in Idaho, sponsored by a group known for its anti-Obama views, features side-by-side photos of the President & Colorado movie house killer James Eagan Holmes. Beneath the latter’s picture it says “Kills 12 in movie theater with assault rifle, everyone freaks out” & below the President’s “Kills thousands with foreign policy, wins Nobel Peace Price.” The group’s spokesman told The Idaho Statesman “We’re all outraged over that killing in Aurora, Colo., but we’re not outraged over the boys killed in Afghanistan”; but when questioned about the (largely negative) reaction to its billboard, shrugged & said “That’s a technique of trying to make a point, and maybe it was poorly done.”
Giving Obama the Nobel Peace Prize was premature & he has failed to live up to many people’s (likely unreasonable) expectations. But the Republicans’ selective memory is mind-boggling; for it was on a Republican President’s watch that the Iraq/Afghanistan military adventure, & the poor response to the financial crisis, was hatched, and under Romney that the template for Obamacare was launched, & assault rifles were banned, in Massachusetts. But even more staggering is the failure, or refusal, of many Americans to appreciate this, thereby validating Goebbels’ notion that a misrepresentation of facts will assume the trappings of truth if repeated often, & loudly, enough. And a critical difference between the two situations the bill board’s sponsor ignored is that those who voluntarily join the army thereby assume the risk they may at some point find themselves in harm’s way while the Aurora victims just happened to be in the wrong place at the wrong time .
THE WORLD AS SEEN BY REPUBLICANS, IN A LAND OF MYTH AND AMNESIA
(Guardian News Service, Gary Yonge)
• At one time in the new hit drama The Network Will McAvoy, played by Jeff Daniels, was just it’s inoffensive network anchor. But then, on June 26th, the script called for him to respond to a question, by a supposedly naive, blond & early twentyish coed, why America is the greatest country in the world with a rant that “there is absolutely no evidence to support this statement … we’re seventh in literacy, 27th in math, 22nd in science, 49th in life expectancy and 178th in infant mortality”, & that ‘the only things in which we are first are in the number of people incarcerated, the number of adults who believe angels are real & in defence spending that exceeds that of the next 27 countries combined, 26 of whom are allies, before waxing melancholic, telling his audience “we used to be great” & why.
• The notion America is in decline has grown in the last decade to the point where 45% of Americans now believe it. But what is different is why they think so : Democrats blame domestic causes like growing income inequality, religious zealotry & the corporatization of the media & politics, while the Republicans fault external factors such as immigrants, Islam, foreigners & foreign trade. And there is a core group among the latter that seeks to blur the distinction between non-American, un-American, liberal, non-Christian & non-white; thus John Sununu recently said he wished “this president would learn how to be an American” & Romney that “the president espouses a philosophy in some respect foreign to the American experience … while this president takes his inspiration from the capitals of Europe … we look to the cities and small towns of America.”
The first step towards solving a problem is recognizing there is one. The fact this was scripted into a popular show may be a first step in that direction. If so, America may be on the cusp of an epiphany, & the current, rather reprehensible, election campaign may be ‘the darkest part of the night before the dawn’ (& McAvoy/Daniels was too modest : the US also leads in things like obesity, divorce, illegal drug use, cheese production, roads, billionaires & Olympic medals, (although the latter two may be under threat; in fact, at last report China was only trailing the US in the total medal count because it had fewer bronze medals & China had 1.02MM reported millionaires – with there supposedly being twice as many who operate ‘under the radar’). In a way it could be great if China were to beat the US in the medal count; for that would enable Obama, if he so desired, to try & change the tone of the election campaign away from polarization onto a more unifying path by creating a ‘defining moment’ for the nation with a knockoff of John F. Kennedy’s “We’re going to the moon by the end of the decade” speech, six weeks after Yuri Gagarin on April 12th had become the first man to orbit Earth, promising Americans that on his watch America would be back on top in the medal standings at the 2016 Rio Olympics.
SEN. SCHUMER : USE CNOOC BID TO FIX TRADE ISSUES (Reuters, Roberta Rampton)
• China’s state-owned CNOOC last month made a $15.1BN friendly takeover bid (at a 61% premium over market) for Calgary-based Nexen, subject to Ottawa’s approval. And since 10% of its oil & gas comes from the Gulf of Mexico, it also asked, voluntarily, the Committee on Foreign Investment in the US (aka the CFIUS) to review it. So on July 27th Sen. Charles E. Schumer (D.-NY) wrote Secretary Geithner (who chairs the CFIUS) that he wants him to make its approval conditional upon China addressing some thorny bilateral trade & investment issues, & he subsequently elaborated “It’s rare that we have so much leverage to exert in China. We should not let this window of opportunity pass us by … at some point we have to put our foot down over China’s refusal to play by the rules of free trade.”
As Hilary Clinton once observed when she was still the junior Senator from New York “You don’t pick a fight with your banker.” This is not CNOOC’s first foray into the Calgary oil patch : it already owns 100% of OPTI Canada, 60% of Northern Cross (Yukon) Ltd., 35% of Long Lake & three other oilsands prospects, & 14.2% of MEG Energy. But where was Sen. Schumer when CNOOC bought its way into South Texas’ Eagleford-, & Colorado/Wyoming’s Niobrara-, shale plays? The chances of Ottawa turning this deal down for failing the “net benefit” test of Brian Mulroney’s Investment Canada Act are minimal. In the 27 years since, of the almost 1,650 foreign takeover applications only two were turned down (both on Harper’s watch) – MacDonald Detweiler in 2008 & Potash Corp. in 2010; but both were Canada’s premier companies in space technology & potash respectively, and Nexen doesn’t fit into Canada’s first of anything category. Secondly, this is only the latest in a wave of Asian money into the Calgary oil patch & into the various shale oil & gas plays in the US, albeit none of this magnitude nor one involving an outright buyout of a company of this size. Thirdly, while the company is Calgary-based & TSE-listed, well over half its daily production is sourced abroad (the lion’s share in the North Sea) & only about 10% from the US Gulf of Mexico (& the lion’s share of that as a minority partner of people like Shell, Chevron & BP) although it has also a significant promising ‘land’ position there. Fourthly, Prime Minister Harper recently was in China promoting the idea ‘the welcome mat is out’ & he (& Canada) would lose ‘serious face’ there if he now backtracked). Fifthly, because the Conference Board recently issued a report purporting Canada was missing out on foreign capital investment compared to Australia due to its ill-defined foreign investment rules (although the real reason Australia got more Chinese money was because its coal & iron ore resources fitted better with Beijing’s earlier priorities).
POSTAL SERVICE SET TO DEFAULT (Huffington Post, Harry Bradford)
• According to the New York Times, unless Congress acts promptly (which is unlikely since it is too busy getting ready for its August recess), the US Postal Service will default on a US$5.5BN retiree health fund payment to the US Treasury on August 1st (& conceivably on another US$5BN payment in September), although it says it will be able to pay its workers & deliver the mail. In an age of email & other electronic communications it is bleeding red ink, at last count US$6BN in the first five months of the current year. While it recently abandoned earlier plans to close 3,700 rural offices across the nation, it severely cut their hours of business (in one case to 30 minutes/day). Its biggest problem is a 2006 Congressional decision requiring it to pre-fund its employees’ retirement benefit each year.
And it did! The 2006 decision was fiscally correct; for today’s costs should be expensed today, not rolled forward as has been de rigueur in the past half century. But USPS was sideswiped by the Law of Unintended Consequences to the Fed’s low interest rate policy; for with a zero discount rate a $1 liability 20 years hence requires a $1 set-aside today, while with a discount rate of, say, 5%, it would be < 38¢. This is the same bind that pension funds & insurance companies are in.
S&P CUTS OUTLOOK ON 7 CANADIAN BANKS (G&M, Tara Perkins)
• On July 27 it confirmed the ratings of, but cut the outlook to negative for, seven Canadian financial institutions (BNS – AA-, Central 1 Credit Union – A+, Home Capital – BBB, Laurentian Bank – BBB+, National Bank of Canada – A+, RBC – AA- & TD – AA-). It justified this by referencing the long run-up in house prices & consumer indebtedness, and the fact that the projected weakness in the global economy could create more income-constraining unemployment in Canada that could make debt service potentially more problematic & amplify the country’s potential vulnerability to a housing market correction.
In perusing its ratings of the major US banks, it was striking none are rated triple-A any more (Wells Fargo is AA- & JPM A+, and BoA, Citigroup, Goldman & Morgan Stanley all are A).
ISRAEL BRIEFED ON IRAN ATTACK PLANS (AP, Amy Teibel)
• The prominent left-liberal Israeli Haaretz on July 29th cited an unidentified senior US official as saying Tom Donilon, the US National Adviser & the Obama Administration’s top security official, had earlier this month during a visit to Israel briefed Prime Minister Netanyahu over dinner on US plans for a possible attack on Iran to reassure him that Washington will act militarily, should diplomacy & sanctions fail to convince Tehran to abandon its nuclear enrichment program. Furthermore, that he had also briefed him on the weapons to be used in such an attack & on the US military’s ability to reach facilities buried deep underground. But it also cited another US official involved in the talks with Israel as saying that “the time for a military operation against Iran has not yet come.” All this came as Mitt Romney was reported as telling Israel he would back an Israeli military strike against Iran.
So one seeks to pour fuel on the fire, unaware of, or disregarding, the fact Israel (still?) lacks the ‘bunker-busting’ bombs needed to have a reasonable change of success, while the other seeks to both send a message to Iran and to get Netanyahu (& Barak) to tone down belligerent posturing that might trap them into doing something stupid. Romney’s visit to Israel had two purposes. The general one was to try & bleed off the traditional Jewish support for the Democrats (which may a flawed strategy since there are more & more Muslim voters in the US, especially in critical “swing” states & since many younger US Jews don’t have quite the same emotional attachment to Israel that the Holocaust generation had. And more specifically, to raise money, not just from locals attending his US$50,000/plate dinner but from the man on his right at the dinner, gambling multi-billionaire Sidney Abelson who, under the campaign funding rules put in place by the Supreme Court in 2009, can shovel tens, if not hundreds, of dollars into his campaign coffers without ever missing them (in the event, a few days later, with US Defense Secretary Leon Panetta at his side Netanyahu criticized US policy on Iran & hinted that Israel might take unilateral action).
CHINESE POLLUTION PROTESTERS TURN VIOLENT IN CLASH WITH POLICE
• On July 28th thousands of protesters marched through the streets of the coastal city of Qidong, one hour North of Shanghai, occupied a government office, destroyed computers & overturned cars. They object to plans to build a pipeline from a nearby Japanese-owned paper mill to the sea to enable it to get rid of its waste. This is the latest of a string of protests in a number of Chinese cities that have been driven by fears of environmental degradation, that is adding to latent social tensions in a national leadership transition year.
Beijing since promised not to let it be built (after earlier having folded when residents of the southwestern city of Shifing in Sichuan Province protested plans to build a copper refinery in their community). As they become better-off, the Chinese are becoming sensitized to the often very tangible & visible environmental cost of the past development path. So the era of “let-her-rip” economic development, mindless of longer-term consequences, may be ending in China; if so, this could have two consequences : a higher cost structure for the Chinese economy & Chinese companies seeking to ‘export’ their historical development methodology to places like Africa.
THE OUTLOOK FOR GOLD
In late August/early September 2011 the gold price hit US$1,900. But it has since come down & in recent months been in the US$1,550-US$1,625 range. This makes some people wonder if ‘the bloom might be off the rose’ for gold. Part of the answer on the demand side lies in India. It produces < 1% of the world’s newly-mined gold. But the yellow metal has a special place in the Indian psyche & has long been the gift of choice at religious festivals & weddings (among others, because gold baubles give Indian women a sense of financial security & because, as has been true through the ages, gold is easy to hide & impervious to spoilage). So as the rapidly-growing Indian moneyed middle glass became wealthier, demand for gold skyrocketed, in 2010 alone by 69% YoY to about 900 tonnes, roughly one-third of global newly-mined production. But as 2011 wore on the Indian government made moves to constrain the demand for gold for balance of payments’ reasons & Indians became nervous their economy might not grow as fast as they had been led to believe. Then their currency cratered by 20% vis a vis the US dollar; as a result of which, while in the past year the price of gold in US dollar terms didn’t change much on a point-to-point basis, in rupee terms it rose by 30%. Finally, & most recently, in the last couple of months the monsoon rains have been less plentiful than expected & the world food price outlook has darkened. So, while for 2011 as a whole Indian gold demand was down only marginally YOY, in the Fourth Quarter it was down 56%, & this month it is expected to have been down 35%,YoY (the Fourth Quarter number is particularly significant since it is the peak period for festivals & weddings).
Meanwhile, the world is in as much, if not more, of a fiscal & financial mess as ever. Europe, & Germany first & foremost but not exclusively, cannot make up its mind whether to salvage its Eurozone experiment or see it swept into the dustbin of history, hoping against hope for a miracle. The US’ crisis of political leadership is driving it into a morass of fiscal irresponsibility, if not insanity, and has turned its debt management operation into the largest-ever Ponzi scheme. The Fed & the ECB keep doing the same thing over & over again, expecting different results. Confidence in the world’s big banks has evaporated on the back of more & more evidence that their historical fiduciary responsibilities have fallen victim to chicanery, and unbridled megalomania, greed & self-interest. Emerging economies’ central banks are continuing to accumulate gold at a hefty clip (& the developed country ones that used to sell the stuff because it was a ‘barbaric’ relic of days gone by, are now sitting on their hands where further gold sales are concerned, and their governments – & sophisticated investors everywhere- are falling all over themselves to convert ‘paper/financial’- into ‘hard/real’ assets). And overhanging it all is an inverted pyramid of derivatives equal to 10+x global GDP, details of which are known to few, if any, people, but that some well-informed & not-given-to-panic people fear contain enough ‘snakes in the grass’ to make the 2008 financial crisis look like a Tea Party.
And on the supply side, the former CFO of Barrick, the world’s largest gold producer with an 8+% market share, who recently became its third CEO in four years, in announcing it’s, rather ugly, Second Quarter results, gave notice that on his watch the focus will be on growing the bottom-, not the top-, line (as one wag put it “chase returns rather than ounces”). But at the same time he also let it be known that the final cost of the flagship of its new mine development program, the Pascua-Lama open pit mine high up in the Andes on the Argentina-Chile border, that already had skyrocketed from the original US$ 3BN to US$4.7- US$5.0BN, could end up being US$8BN, with its start-up delayed by a year to mid-2014. And after a decade of living in a bubble, as the price of gold went up & up, and more & more marginal ore bodies became economically viable, the gold mining industry has now been hit by a ‘double whammy’ : a stagnant gold price & rising costs, especially labour costs (in the Second Quarter Barrick’s cash cost per ounce of gold produced was up 38% YoY to US$613/ounce). So Pascua Lama, that was intended to boost Barrick’s gold output by almost one-eighth , & global newly mined output by nearly 1%, may well fall victim to the new CEO’s ‘bean-counting’ approach, especially since it has become increasingly environmentally controversial in Argentina. And since other producers face similar cost pressures & growing shareholder pressure for more cash in the till to pay dividends to current-, rather for exploration & development budgets that would benefit of future-, shareholders, & rapidly aging mines & ore bodies, there may less newly-mined supply forthcoming during the foreseeable future than expected a few short months ago.
AN UPDATE ON ALBERTA
Alberta’s Premier Redford is being accorded high praise by Canada’s medical profession for promoting the idea the provinces should harmonize the pay scales of their medical professionals. Small wonder; for in practice that means bringing them all up the most generous level in the country. But from an economic point of view it’s utterly nonsensical. This is the same godawful trap Ottawa let itself be sucked into with nationwide bargaining with its unions (for a salary that allows a postal worker in Buttf***, Saskatchewan to live like a king, would provide a much lower standard of living for his union ‘brother’ in Toronto. Harmonization is a politically correct-, but an economics-defying cum circumventing idea that, in reduces labour mobility, & hence national productivity. The interest of her province might be better served by her launching an investigation into the reason for Alberta peak power prices last week being about half of Ontario’s thirty-some dollars & then on July 30th jumping $282.57 per MWh to $306.62 as the Ontario peak price rose 18¢ to $33.89, only to drop $287.06, back to $19.56 on July 31st) – can anyone be expected to run a business with those sort of fluctuations in the cost of a basic production input? And a propos her hissy-fit reaction to BC Premier Christy Clark’s demand for more of the financial upside & more protection from potential environmental downside of the proposed Northern Gateway bitumen pipeline, the former is really no different in principle from what any farmer in Alberta is legally entitled to when a pipeline crosses his land. And she may have put words in Premier Clark’s mouth when she refused even to consider the possibility of Alberta sharing “royalties” with BC; for, at least in her article in the Globe and Mail of July 28th entitled Development, but not at any price, Premier Clark talks about BC receiving a “fair share” of the fiscal and economic benefits of the Enbridge project and other proposals for heavy oil” pipelines, not about royalties per se (& might her choice of the words “heavy oil”, intentionally or not, have left the door open for her to take a less dogmatic stance on pipelines carrying “light”, i.e. upgraded, oil?). The other thing interesting in Premier Clark’s article is her insistence in her restatement of her second & third preconditions for talks about the pipelines, on the need for a commitment to “world-leading standards” in marine- & onland oil spill prevention & response systems, about the first of which at least Alberta can be expected to be clueless.
The latest bit of evidence of what Alberta taxpayers perceive to be the mismanagement of their money came on August 1st with the revelation by the CBC that the one-time CFO of Capital Health (the former Edmonton Health Region) &, more recently of Alberta Health Services, had been living high off the hog at their expense. While being paid a $478,000/year salary, he had also been booking expense accounts in the $120,000/year range. It makes one wonder how a person can be so cheap as to make almost half a million dollars a year & still have the gall to claim the cost of his morning tea & muffin on his expense account. While this has prompted questions as to how this can be prevented, the answer is simple : eliminate sub-standard top-down management; and in that respect it is doubly embarrassing for Premier Redford’s government that the then $932,000/year CEO of Capital Health, who signed off on her CFO’s expense accounts is now on the Board of Alberta Health Services (she has since resigned). And what is now creating some public furor is that the individual concerned will walk away, after in effect having been fired, with one year’s salary in his jeans (while presumably a solid case can be made for him having been fired “for cause”.
I was lucky enough to have started my career in 1963 in Ottawa in the Department of Finance when what was then called Canada’s “civil service” was a class act, run by people who all but perceived public service as a priesthood; as J.L. Granatstein puts it in his book The Ottawa Men – The Civil Service Mandarins, “there was not one who could not have made more money in the private sector. The mandarins did not stay in Ottawa because of the pay … They remained because they liked their work and because they believed that what they were doing was the most important job in the country, but primarily because they shared a belief that public service was a civic virtue…” None of these people ever had to be told what was morally or ethically correct &, as a result, there was never as much as a fly on any of their reputations. But in today’s world, as a result of the mantra that “you have to pay up to get good people” & of a general decline in rectitude, far too much unprincipled riffraff from the instant gratification, ‘you are your own best friend’ generation has slipped through the cracks into positions of great political & economic leverage.