Quote of the week : “Two-thousand and eight was just an overture … The real opera is coming in 2013, 2014.” (Peter Schiff, CEO of Westport, Conn.-based Euro Pacific Capital, who has long been bearish on the US dollar & correctly forecast the US mortgage crisis).
One analyst recently observed “The future of Spain and Europe will be decided in the streets and kitchens and living rooms, not in bank vaults and board rooms. You can squeeze the people only so far. That’s not a political statement … just a basic fact.” – The rapidly rising suicide rate in Greece suggests he might be onto something and that, in the glaring absence of political leadership & the wilful blindness of the Eurocrat community, the probability of a “European Spring” is growing.
In Greece bikes are becoming more of a transportation means of choice (or necessity?). Many commuters have had to park their cars & the bike-riding former Prime Minister George Papandreou has been turned from a cause for derision into a role model.
The fact that YTD North American car sales have grown at a double digit rate to their highest level in five years, and that they have been strong worldwide (despite being dragged down by Western European sales being at their lowest level since 1996), makes one wonder about the ‘gloom & doom’ forecasts of many economic soothsayers.
Once those running for US President didn’t declare their choice of running mate until their party’s convention. But in 2008 John McCain chose Sarah Palin much earlier as a result of which, as her image wilted in the public spotlight, she became a boat anchor for, rather than an asset to, his campaign. One must wonder if the same fate awaits the Romney-Ryan combo. For, regardless of the merits of the latter, he created needless & avoidable controversy by denying he is an Ayn Rand devotee, as he did in a National Review interview last April when he said he had read her books but that rumours his views were inspired by her were an “urban legend”, and that, instead, they had been shaped by his Roman Catholic faith & Thomas Aquinas. Unfortunately, the Atlas Society, that promotes Ayn Rand’s views, taped a speech he made to it in 2005 in which he said, among others, “I grew up reading Ayn Rand and it taught me quite a bit about who I am and what my value systems are and what my beliefs are. It inspired me so much that it’s required reading in my office for all my interns and staff” (Ayn Rand was a Russian-born, best-selling, militantly atheist author who preached self-reliance, celebrated greed & selfishness, and rejected altruism as “evil”, and one of whose books, The Fountainhead, advocated laissez-faire capitalism as the only morally valid social system & featured millionaires & industrialists “oppressed” by government regulation – while these views will resonate with hard-core Republicans, incl. the Tea Party, one must wonder whether they will resonate with independent voters & thus improve Romney’s chances at being elected President on November 6th. If Ryan had just simply acknowledged once having been Ayn Rand believer but having changed his mind since, this ‘doggie would never have hunted’.
In the week ended August 3rd US ethanol production was 5.72MM bbls (819,000 bbld). On an annualized basis this represents a demand for about 5BN bushels of corn. Assuming a 2012 corn crop of 12BN bushels (the high end of the current forecast range), this would take down 42% of this year’s crop, up from 35% last year. The good news is that last December Congress killed the three decades-old 54¢ tariff on imported ethanol that had kept the far more efficiently-produced Brazilian ethanol out (produced from sugar cane, it eliminates the energy hungry-conversion of corn into sugar & thus its energy-efficiency is 9.0 vs. corn’s 1.3). But the bad news is that global demand for ethanol remains strong, that for two years running Brazilian sugar cane output has declined while domestic demand for ethanol has skyrocketed & that Brazil last year commenced work on a 1,300 km., US$3.5BN pipeline that by 2020 is expected to feed as much additional ethanol into world markets as Brazil currently produces; in other words, in the short run there is not much hope for relief in meeting the US demand for ethanol from imports while longer-term there is likely to be more competition for US ethanol producers from imports (the local demand for ethanol cannot help but increase following the August 17th ruling by a Washington Court of Appeal that trade associations representing oil refiners, auto makers & other industries cannot appeal the recent EPA approval of E15 motor fuel (i.e. motor fuel containing 15% ethanol). Meanwhile, as a result of high corn prices squeezing their profit margins, growing number of US ethanol plants are being idled or have curtailed production, or are considering doing so).
On August 15th the Standard Chartered Bank paid the New York Department of Financial Services US$340MM in settlement of the latter’s claim that between 2003 & 2007 the bank has run, but camouflaged, US$250BN in financial transactions for Iran through its New York branch & its threat to take away its license to do business in the state. This makes the State of New York initiative look more like a revenue-generating shakedown than a serious move by a regulator. One side effect of the New York regulator’s move was that the bank was hit that same day with a law suit by the estates of the victims of the 1983 bombing of the Marine barracks in Beirut, which so far have been unable to collect on a multi-billion dollar law suit again Iran for its role in that affair, for aiding & abetting Iran in avoiding having to pay them what was due to them.
Jordan’s King Abdullah recently told Charlie Rose on PBS that in Syria “sectors of society are going
against each other. Syria is different from Iraq or other countries in the region because there is a mosaic of Syrian societies … Alawites … the Sunni merchant elite … Christians, Kurds and Jews. When you put all those minorities together, you get a majority. And when there is chaos, you get to a point where those sometimes have a go at each other. And we’ve seen that level of deterioration … I still think there is hope. But what I’m worried about is the longer it takes to find a political solution, then we will be pushing Syria into the abyss. I mean conference after conference is great; international forums where we get Russia and China involved is fine; but we can’t afford the time…The abyss is utter and complete civil war which will take us years to come back from.”
A red flag for China, a green flag for Mexico & an orange one for international trade flows? In 2000 hourly manufacturing wages in China were US$1.00 & in Mexico US$2.20. Fast forward to 2005 (US$1.40 vs. US$2.60), to 2010 (US$2.65 & US$3.05), and, according to the Boston Consulting Group, US$5.30 & US$3.50 by 2015 – leading to “reshoring”, instead of “offshoring” (& to the US developing a huge, chronic trade deficit with Mexico)?
In the first post-war Summer Olympics in London in 1948, 4104 athletes competed in 136 events in 17 sports ( they were called the “Austerity Games” because in the aftermath of WWII there was no money for frivolities & all events took place in existing facilities). The 1976 Summer Olympics in Montreal were the first held after the word “amateur” had been struck from the Olympic lexicon & the first to spend serious money building facilities specifically for the Games. By then the number athletes had risen to 6,028, and the number of sports & events to 21 & 198 respectively; like this year’s it was opened by a then much more youthful, but also much more formal, Queen Elizabeth II. And at the 2012 Games there were 10,820 athletes in 326 events in 26 sports.
But despite all the media hoopla, we may well be near the apex of the Olympic Games as they have evolved over the past 36 years. Montreal took three decades to pay off its Games-related debt. Athens in 2004 spent money we now know it didn’t have, & couldn’t afford, on facilities for the 2004 Games that it no longer has the money, if it ever really did, to maintain, never mind utilize. Beijing went all out in 2008 but many of the facilities built for its Games are now empty & going to pot. And now Britain may be entering a post-Games ‘hangover’ period.
The next two sets of Olympic Games, the Winter Games in 2014 in Sochi, Russia, & the 2016 Summer Games in Rio may prove ‘the Last Hurrah” for the Olympic Games as we have come to known them. For they complete a round robin in which all four of the BRIC nations will have hosted a ‘marquee’ international sports event (India hosted the Commonwealth Games in 2010 which involved 6.081 athletes, 21 sports & 272 events), possibly bringing on ‘been there, done that & have the tee shirt’ attitude with regard to blowing one’s brains out to host a two-week event – and things might be complicated in Sochi because the average temperature there in February ranges between 4 & 10 degrees Celsius, whereas they are between one & eight degrees in Vancouver.
GLEANINGS II – 475
Thursday August 16th, 2012
A STAR-SPANGLED DEBT WISH (Reuters, Martin Hutchison)
The idea of getting US consumption levels back to the 70% of GDP range is fanciful thinking. Much of the past four years’ economic growth has been artificial. Keynesian pump-priming no longer works : for each US$2.33 increment in US federal government debt GDP now grows by US$1.00.
TEMPERING THE SHALE POTENTIAL (FP, Yadullah Hussein)
Some industry people have long warned about the high production “decline rates” of shale oil wells (while globally in the 4½%-5½% range, a typical Bakken oil well’s output declines by 65%, 35% & 15% in its first three years & by Year Six is a” stripper well”, with a daily production in the single digits that needs a high oil price to remain viable (North Dakota’s January 2012 546,000 bbld came from 6,617 wells, i.e. average well output was 82 bbld). So maintaining output in the Bakken is a matter of “Drill, Baby, Drill”. And while in the eight months to May 1st US shale gas production grew despite a 50% decline in the number of rigs drilling for gas, the reason for this is that output lags drilling rig numbers by six to nine months; so production may start dropping by the start of the winter heating season, possibly giving rise to a serious fillip to natural gas prices in mid-to-late winter).
OBAMA GAINS POINT ON ROMNEY IN NEW POLL (Reuters, Deborah Charles)
And Romney looking like an inarticulate George W. Bush clone may not help either.
THE FORGOTTEN HISTORY OF RYAN’S MEDICARE REFORM (WSJ, Joseph Rago)
The objection to premium support is that it won’t keep pace with rising health costs. But that’s the objective : hike ‘user pay‘. And proponents think healthcare cost growth will slow if this led to greater efficiency in the system & to lower healthcare professionals’ income expectations.
CALGARY OIL PATCH GEARS DOWN (G&M, Nathan Vanderklippe)
Given the source, it’s hard to know if this is reality or a bargaining ploy. As yet there doesn’t seem much of a slowdown discernable on the front lines in Fort McMurray. On the other hand, the concern about pipelines is justified; for without them the oilsands would become a “stranded asset”. But if such a slowdown were in the making it could quickly leave the Alberta government in a fiscal pickle, & negatively impact on Canada’s economy (which could be a blessing in disguise if it were spike the guns of some of the more mindless critics of pipelines to the Pacific, although it might also lead to a greater Asian presence in the Calgary oil patch).
ISRAELI PM WANTS TO ATTACK : REPORT (Reuters, Dan Williams)
Few, if any, credible sources believe the Iranians are actually building nuclear weapons & the key area of disagreement is how close they are to doing so. Meanwhile, the Israeli Shekel took a 2% pounding on August 13th (to a level 10% below April’s), following reports on Israel’s Channel 2 that the Prime- & Defense Ministers saw the window to hit Iran closing within months & in Haaretz that the Eitan long-range reconnaissance drones were being re-activated, and that national text-messaging system to warn of a possible attack would be tested during the week.
NETANYAHU’S DANGEROUS DEMAGOGUERY ON IRAN (Haaretz, Editorial)
Netanyahu is frustrated by the opposition to an attack at this time by much of the upper echelons of his military & security establishment, incl. both the heads of the IDF & Mossad. Despite the recent visit by US Defense Secretary Leon Panetta to update Netanyahu on Washington’s plans for Iran, Deputy Foreign Minister Danny Ayalon, a hawkish member of Avigdor Lieberman’s right-wing Yisrael Beitenu Party, said on Israeli radio on August 12th : “the ’diplomatic efforts to rein in Iran are dead’ & gave it only weeks to abandon its nuclear program. All this makes it all but inevitable Israel will attack Iran before November 6th, putting Obama in the unenviable position of being dragged into a military adventure in which US ‘has no horse’. And Netanyahu seems willing to ignore the fact that in modern history wars have seldom, if ever, produced the results its instigators envisioned & not to have learnt a damned thing from Israel’s experience in Lebanon a few years back, when the aura of the IDF’s invincibility was needlessly thrown on the trash heap of history.
CHINA SENDS SIGNAL IN ARCTIC WITH ICEBREAKER (Reuters)
Beijing has its eyes on the oil & gas wealth of the Arctic & is going to use Iceland as a pawn in its game. And its expansionist strategy is being pursued on numerous other fronts; thus recently a boat load of pro-China activists sailed from Hongkong to (briefly) occupy the Senkaku/Diaoyu islands in the East China Sea that have long been under Japanese control, contested by China, & Taiwan, because of fish in-, and the oil & gas reserves under-, the seas around it. This prompted boat loads of Japanese nationalists to sail there to & moor offshore while six of them swam ashore, after being denied permission to do so by Tokyo, with plans to plant a Japanese flag on the highest point on the islands, a move which Beijing said violated its territorial integrity.
CHINA’S HOT SAVINGS PRODUCTS RAISE CONCERN ABOUT U.S.-STYLE PROBLEMS (G&M, Scott Barlow)
This differs in two critical ways from the US template: it targets retail-, not institutional-, investors & is focused on the short-term end of the yield curve. The former increases its potential long-term damage to China’s financial system & the latter the risk of an all but instantaneous implosion.
INDIA POISED TO LAUNCH NUCLEAR SUB (DT)
Putin has a Soviet Union-like Superpower-, Beijing a “Middle Kingdom”-, dream but in the end both will likely founder on a rock of demographic realities.
MERKEL’S PARTY WARNS GREECE TO GET IN SHAPE (Reuters)
Despite being in the fifth year of a depression, Greece’s primary budget (i.e. before debt service costs) is close to being in balance. So if it defaulted, the outcome may surprise the ‘talking heads’. The New Drachma wouldn’t be worth much which would a) discourage locals from buying imports, b) blow new life into the tourism sector & c) possibly start sucking in foreign-, and/or bringing back local- capital. As to the hit French & German banks would take, they’ve had four years to prepare for this eventuality & may therefore be less adversely affected that the CW has been assuming.
RUSSIAN PM WARNS OF CHINESE ‘EXPANSION’ (Reuters)