Gleanings II 483 Compliments of Nick Rost van Tonningen -October 26, 2012
Quote of the Week : “In the economic sphere an act, a habit, an institution, a law produces not only one effect, but a series of effects. Of these effects, the first one alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them. There is only one difference between a bad economist and a good one : the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen. Yet this difference is tremendous; for almost always … when the immediate consequence is favorable, the later consequences are disastrous, and vice versa. Whence it follows that the bad economist pursues a small present good that will be followed by great evil to come, while the good economist pursues a great good to come, at the risk of a small present evil” – Frédéric Bastiat.
Bastiat lived in the first half of the 19th century & is best known for developing the concept of ‘opportunity cost’. He wrote these words in 1850. In a somewhat similar vein John Maynard Keynes once observed “Politics is not the art of the possible. It is choosing between the unpalatable and the disastrous”. Today we talk about ‘short term gain for long-term pain’, and vice versa. Bastiat would likely have deemed Bernanke a “bad economist” for doing the same thing over & over again for short-term gain with too little regard for the possible longer-term consequences.
Earlier this month Zha Xiaogang, a researcher at the Shanghai Institute for International Studies, told a seminar on The Geopolitics of Currencies in Bahrain organized by the London-based International Institute for Strategic Studies that “The shortcomings of the current international monetary system pose a big threat to China’s economy … with more alternatives (i.e. a reduced role for the US dollar) the margin for the US would be greatly narrowed, which will certainly weaken the power base of the U.S.” Beijing is getting increasingly frustrated with what it perceives to be the US’ mismanagement of the dollar & has been actively promoting, & making some progress in, the greater use of its currency in trade & investment. At Bill Clinton’s recent Global Initiative gathering, Goldman CEO Lloyd Blankfein warned those assembled that the US dollar could risk losing its status as the world’s reserve currency if Congress failed to prevent the “fiscal cliff” measures from kicking in on January 1st – the stock answer of Americans always is along the lines of ‘the Chinese wouldn’t dare upsetting the apple cart … they would lose too much money if they did’; what they don’t appreciate is that Beijing is already losing buckets of money on its US$ exposure & has been feverishly seeking to convert US dollar “paper” assets into “hard” assets, and that at some point it becomes a matter of losing a lot quickly & get on with life, or slowly bleeding to death, & that in the latter case the loss of money would simply become the acceptable & quantifiable cost of bringing the US to heel.
In light of the above, the China bashing that both Presidential candidates have engaged in & Romney’s megalomaniac perception of the US role in global affairs today, the following observations may be relevant :
The free weekly Epoch Times, which its masthead says is “published in 35 countries, 19 languages, and growing”, is the mouthpiece of the Falun Gong, a spiritual movement among the Han Chinese based on, among others, Buddhist & Taoist teachings. From a standing start in 1992 it has grown to the point where it now may have as many as 100MM adherents (who are persecuted by a state apparatus fearful of its size & growth, its independence & its teachings). Six weeks ago, Vice President & President-in-waiting Xi Jinping cancelled, at the last moment, a meeting with Hilary Clinton when she was in Beijing & disappeared from sight for weeks. The most recent Epoch Times has an interesting story as to what happened which sounds far-fetched but not implausible. It says that Mr. Xi got cold feet about becoming paramount leader (&, if so, who could blame him since the next paramount leader will face more problems on a daily basis than a farm yard hound dog has fleas). Furthermore, that this caused a crisis in the Communist Party hierarchy since he had been the only person on whom both factions in the party had been able to agree [it says that one faction, the Maoist one, is headed by former paramount leader Jiang Zemin & contains a lot of ‘princelings’ who have been getting rich, incl. the now disgraced Bo Xilai, & the other, the more reformist one, is made up of the still President Hua Jintao & the still Premier Wen Jiabao, and their designated successors, Xi Jinping & Li Keqiang, few of whose followers are princelings]. It goes on to say that Jiang Zemin was the one who in 1999, in the face of opposition of the rest of the powerful nine-member Standing Committee of the Politburo, instigated the persecution of the Falun Gong, that the Maoist faction has been fighting tooth & nail to keep sufficient control over things so that they won’t be prosecuted for their personal economic misdeeds & that this group orchestrated the recent dust-up over the Diaoyu (aka Senkaku) islands, hoping this would bring China to the brink of war & necessitate martial law that would further delay the 18th Party Conference that will formalize the leadership transition. And it concludes that, while the date for the Party Congress has now been set for November 8th,Xi Jinping isn’t out of the woods yet since the Maoists haven’t gone away, as witnessed by the fact that in mid-September’s mass anti-Japan demonstrations the slogan “Bo Xilai belongs to the people” was prominently on display, and may seek to shipwreck whatever reforms Xi may hope to introduce (which, as usually the case, will fall well short of what the country really needs, and what the hoi polloi in due course will demand).
The NYT of October 25th, carried a lengthy article by David Barboza entitled Billions in Hidden Riches for Family of Chinese Leader (which has since been blocked by the Chinese censors). It’s an interesting read. Suffice to say that it notes at the outset that just one investment of Yang Zhiyun, the 90 year-old mother of still Premier Wen Jiabao, who started life as a school teacher, five years ago was valued at US$120MM & that his extended family controls assets worth, at last report, at least US$2.7BN.
In the year ended July 31st, 2012 foreign central bank holdings of UST securities increased 15% to US$5,349BN (i.e. one-third of the national debt). Of the 37 countries listed in a table, 30 had increased their holdings, most notably, in % terms, Norway (195% to US$69.9BN), Switzerland (60% to US$190.1BN – it has been piling up FX reserves like there is no tomorrow in a desperate effort to keep the SF exchange rate from going through the roof), Japan (26% to US$1,117.1BN) & the oil exporting countries 8% to US$262.3BN. Germany & the UK were basically flat at US$63BN & US$141BN respectively. And there were five who decreased their holdings : Sweden (-1% to US$28.2BN), Thailand (-9% to US$53.0BN – it has been buying gold fairly steadily), Poland (-8% to US$29.4BN, China (-13% to US$1,149.6BN) and Turkey (-30% to 30.0BN).
One observer of the American political scene (with a definite Republican bias) opined Romney had achieved what he set out to do in the debates: like Reagan in the 1980, not to convince people to vote for him, but to gain enough credibility so they wouldn’t vote against him.
In the US the unemployment rate among young, education-shy Afro-Americans is 48% while that for college-educated white women is 3.7% – the former is a recipe for serious social unrest.
After seemingly inexorably climbing for decades, but for a couple of hiccups after the 1973 & 1979 oil prices spikes, the population-adjusted number of vehicle miles driven in the US started flatlining in June 2005 and then declining to the point where as of mid-August of this year it was 7.2% off its 2005 peak & back to its June 1998 level – this suggests an real attitudinal change at the grass roots that is not yet fully appreciated by most people.
In 2011 Germany slashed its budget deficit to 0.8% of GDP, from 4.1% in the year-earlier period; on the other end of the spectrum Greece’s debt-to-GDP ratio rose to 170.6% even as it reduced its deficit-to-GDP ratio to 9.4%, from 10.7% in 2010 & 15.6% in 2009 – this will strengthen its hands in the Eurozone horse-trading, and likely increase th, still small, possibility that the whole affair will end up parting ways with the Euro.
The Nigerian government has a 2.4MM bbld oil output target for 2012. But it just announced that two months of flooding in the Niger Delta (that saw both Shell & Total declare ‘force majeure”) cut output to 2.1MM bbld, from an earlier 2.6MM bbld. Meanwhile, the Finance Ministry reported that up to 400,000 bbld are being “stolen” (a number Shell disputes, saying it’s only 150,000 -180,000 bbld – still enough to fill 230-280 large railroad tank cars per days, or a VLCC carrier every week or so). And this is only part of the story. In the past decade the government is said to have lost US$29BN on a natural gas price-fixing scam & the Treasury to have been shortchanged by as much as US$6BN/year (on a US$28BN national budget) by various nefarious means (incl. companies simply not paying what they owe) – and Prime Minister Harper wants to make this sad-sack country a Canadian foreign policy priority target in sub-Sahara Africa when there are several better-run countries in the sub-continent that could use help & use it effectively, and that are of a size where Canada could make a difference (one of them Ghana, which is almost next door)? On a happier note, in what may well be a first for the region, Liberia’s President Ellen Johnson Sirleaf, the 2011 Nobel Peace Price laureate, just suspended 46 senior officials, incl. the Chief of Protocol in her own office & her son Charles, a Deputy Governor of the central bank, for failing to reveal their assets to anti-corruption officials.
According to the World Bank, in 2011 Libya had the most cell phones per capita (172 per hundred), followed by Gabon (165) & Botswana (144 – an almost five-fold increase in six years). Others with high per capita cell incidence included Germany (140), the UK (130), South Africa (128), Namibia (110), the US (106) & Japan (95) – the high rate of cell phone ownership in emerging economies is due to the simplicity of a cell phone network : it requires minimal infrastructure &, if run on a pay-as-you-go basis, minimal back office operations. According to Royce Funds, a research firm, 73% of Africans now have a mobile phone, a number that it expects to grow to 85% in three years (up from just 4% in 2002). And yet another source showed that, while China & India have the most cell phones (1.1BN & 900MM respectively), their per capita rates are still relatively low (in the 75 per hundred range).
GLEANINGS II – 483
October 25th, 2012
BUNDESBANK DISAGREES WITH AUDIT COURT’S VIEW OF GOLD RESERVES
(Bloomberg, Stefan Riecher)
This could be more important than the Eurozone crisis, the fiscal cliff & the slowdown in China’s economy put together. For it implies that the Audit Court thinks there could be a risk the central banks are double counting their gold holdings or, worse still, ‘salting’ them (i.e. messing around with its purity – why else a “thorough examination”). This is an issue that has been raised from time to time by gold bulls in light of the known proclivity of central banks to ‘short’ gold by lending it & of the big increase in the amount of “paper gold” in the past decade. Such questioning of the integrity of the central banks impugns the entire global monetary system & could lead more investors to conclude that “what’s good for the goose, is good for the gander”, i.e. ‘if the Bundesbank should have physical control of its gold, maybe I should too of mine’. One can only hope it won’t come to that.
MITT ROMNEY’S GEOGRAPHY GAFF (HuffPostWorld)
IN POLLS ROMNEY’S MOMENTUM SEEMS TO HAVE STOPPED (FiveThirtyEight.com)
PROVINCES’ SPENDING ‘UNSUSTAINABLE’ (G&M, Gordon Isfeld)
In the 70’s, when the price of oil went in two leaps in seven years from US$2-3 range to US$30-40, Alberta experienced a massive boom. When the oil prices then crashed in the early-to- mid-80’s, so did the boom, and cars in Calgary started sporting bumper stickers along the lines of ‘Please God, give us another boom & we promise we won’t piss it away again’. But that was then & this is now, and 30 years has been long enough for that nasty experience to have been erased from the corporate memory of Alberta’s current generation of decision makers. So they are once again building castles in the sky & counting their chickens before they’re hatched, seemingly bound & determined to prove those bumper stickers wrong. For in recent years the government has started running deficits again, not because, as it would like the hoi polloi to believe, of external factors, but because revenues have flat-lined while expenditures have grown by one-third. Meanwhile the oilsands, the rapid output growth of which underlies everything that masquerades for planning in Alberta, are at risk of becoming a ‘stranded asset”, with disastrous consequences for the local (& Canadian) economy, and for Alberta government revenue expectations & spending plans based on a Jack & the Beanstalk scenario (when I recently confronted the current Alberta Finance Minister – the fourth in 33 months – with this in the context of the pitiful growth of the Alberta Heritage Trust Fund compared to Norway’s Souvereign Fund, he could no better than to come up with that hoary old stock answer ‘Yah, but there taxes account for half of GDP’ (an exaggeration) while as Minister of Finance he should appreciate better than most that taxes there are high because the Norwegian government insists, & the Norwegian people appreciate & accept, that services provided today should be paid for from today’s cash flow, & not by eroding the heritage husbanded, & passed on to this generation, by past generations. All of his government’s revenue forecasts & spending plans are predicated on a level of oilsands output by 2020 that will require four pipelines to get it to market, any market, with the Alberta balloon likely to be pricked once again if one or more fail to materialize on time, or at all. For those interested, a (rather pessimistic) update on their status can be found following the main body of Gleanings.
BAIRD SLAMS IRAN, SYRIA AT EVENT (CP)
The Speaker of the Ugandan Parliament, Ms. Rebecca Kadaga subsequently read him the riot act for displaying a “colonial attitude” & meddling in her country’s souvereign affairs. Baird had signaled his hand last month when he told a Montreal audience he was aggressively pursuing a “principled, values-based” foreign policy in which the promotion of homosexual rights abroad was a priority. There are at least three things wrong with this picture. He should talk to his boss about the latter’s efforts to cozy up to a Chinese regime whose human rights record in general, & its dealings with the Falun Gong, the Tibetans & the Uighurs in particular, doesn’t in any way meets the parameters of such a foreign policy. And what Canadians expect him to do, & pay him to do, is to maintain the best possible relations with all other countries, regardless of his personal feelings, & to promote Canada’s image abroad, not to pursue a personal agenda that may give other governments reason to lower their regard for Canada. When he speaks as Foreign Minister, he doesn’t do so as Mrs. Baird’s little boy but as a spokesman for all Canadians regardless of race, creed, sex or skin colour &, if he cannot handle that assignment on an impersonal basis, he should ask his boss to be re-assigned to another job in which his pit bull temperament can be more gainfully employed.
EMIR OF QATAR VISITS HAMAS-RULED GAZA STRIP (NBC News)
The Emir brought US$400MM in ‘development aid’ (up from an earlier promised US$250MM) which Hamas desperately needs since its former sponsor, Tehran, (in a move that may prove a mistake of classic proportions) quit funding it for refusing to support the al-Assad regime in Syria (whereas Hezbollah in Lebanon is doing so pro-actively by despatching jihadist fighters). The Emir once was friendly with Bashir al-Assad but turned against him when he, early in the civil war, ignored the Emir’s advice to make concessions & cut a deal with the rebels; so he’s now the Arab ruler pushing hardest for military intervention in Syria. The group entered Gaza via the Egyptian border crossing point at Rafah, suggesting Egypt is about to end its collaboration with Israel to keep the 1.7MM Gaza inhabitants bottled up, & isolated from the outside world, in their 141 sq. mi. (365 sq. km.) plot of land. Since being thrown to the wolves by Iran, Hamas has been reaching out to Egypt’s Muslim Brotherhood & achieved a breakthrough when President Morsi, who ran as its (second choice) candidate in Egypt’s presidential election, but who since has been making noises he wants to be the President of all Egyptians (to facilitate getting money out of the Americans) welcomed the Emir’s visit, saying it fitted with his country’s effort to “break the siege on the people of Gaza” (after independence Egypt continued to rule Gaza with a military governor, even though it wasn’t part of Egypt proper, until Israel seized it in the 1967 War, a move it must have rued ever since). And the presence of the Emir’s wife should also not be overlooked. She is not a typical Muslim wife that stays in the background but a high profile individual in her own right. At home & abroad she is an education activist. In recent weeks she addressed UN Secretary-General Ban Ki-moon’s Education First gathering on September 26th on the sidelines of the 67th UN General Assembly session in New York & she is slated to become his adviser on its Steering Committee wince when she has addressed, among others, gatherings of the movement in Norway & the Netherlands. And it cannot have been lost on anyone, & there likely was a message in the fact, that while at home she often sports a hijab, during this visit to a region ruled by a conservative Muslim lot, she didn’t, & instead covered (most of) her hair with a close-fitting hat that wouldn’t have been out of place in a Parisian salon. This could be the opening of a door for Washington (but only if it can shed its Bushite distaste for Hamas) that would represent a setback for Iran & potentially generate scads of brownie points for America among the Sunni Muslim leaders & hoi polloi in the region but would also mean cutting loose the fatuous Fatah & having to take a harder line with Israel which, on balance, would be plus for America interests in the region.
PALESTINIANS REBUFF ABBAS’ FATAH IN 5 OF 11 WESTBANK TOWNS (AP)
The primary reason Fatah fared so badly was that it has been in a cash bind for months as Israel has been slow to remit the taxes they collect for the PA & donor funds have also been slow in coming; so 150,000 public servants (in a population of 2 ½ MM) have been underpaid.
PM VOWS TO KEEP BUILDING ON OCCUPIED LAND (AP)
ISRAELI POLL FINDS MAJORITY IN FAVOUR OF ‘APARTHEID’
(Guardian, Harriet Sherwood)
A poll of 503 people (in a population of 6MM, i.e. a much higher percentage of the population than the 1000+ samples used in North America) for the Haaretz newspaper found that :
33% wants Arab citizens living in Israel to be denied voting for the Knesset;
42% don’t want to live in the same building as Arabs or have their children go to school with Arab children;
49% agreed that Jewish citizens should be treated better than Arab ones;
58% believes their country practices apartheid (& see nothing wrong with that?);
60% agreed that Jews should be given preference for government jobs;
66% thinks that, if the West Bank were annexed by Israel, the 2½ MM Arabs living there should not be given the vote; and
75% favour segregated roads for Jews & Arabs.
The Keystone to Cushing, Okla. – It will get done at some point (even though its sponsor, Trans-Canada, is currently in the glare of public attention because a year ago a six months-new gas pipeline in Wyoming had a blow-out. But Cushing is a sub-optimal market for Alberta oil. Currently the WTI price is US$25 below Brent (& some believe Keystone may widen that by adding to the glut at the Cushing ‘choke point’). In any case the case for this pipeline is driven by Gulf Coast refiners wanting a cheap replacement for the cheap heavy oil they used to get from Venezuela & Mexico (CIBC World Markets said earlier this year that the WTI discount had cost Alberta oil producers US$16BN in 2011 &, by implication, the Alberta government US$5BN).
The Kinder Morgan expansion to Burnaby, B.C. – Some work is underway on its right-of-way between Edmonton & Burnaby. But even if completed as the Company proposes, it would, at best, move only less than one-third of the forecast increase in oilsands output, and hurdles abound before any increased amount of oil can start flowing through it. Vancouver’s Mayor has raised the spectre of an oil tanker going aground near, & polluting the shores of, the city’s iconic Stanley Park. Burnaby’s mayor has gone on record as saying “There is nothing in it for us”. A few years ago the existing line had a spill in Burnaby that has created enduring local ill will (which conveniently overlooks the fact the break was caused by a contractor working for the city). It would require expansion of both the Company’s Burnaby tank farm cum terminal (the current capacity of which would be less than two days of the line’s increased throughput) and of Vancouver’s Westridge Terminal. Dredging would be required if tankers greater than 120,000 dwt were to be used (which is almost inevitable since a) a 120,000 dwt tanker can carry only about 1MM bbls, i.e. little more than one day of the line’s planned new throughput & b) the most popular, commonly used-, & readily available & cost-effective tankers are far bigger than that).
The Northern Gateway to Kitimat B.C. – This project is even deader than the proverbial dodo bird, at least in its present form & under its present sponsorship. Enbridge (& behind the scenes Prime Minister Harper) in continuing to flog this idea are literally ‘looking up a dead horse’s a***hole. BC’s current Premier is unhelpful on good days & outright hostile on bad ones; and this will, if anything, only get worse if, as expected, her government is replaced by an NDP one next year. A column by a former BC civil servant in one of the newspapers recently suggested that from Day One Enbridge had displayed “hubris” & done everything wrong that it possibly could have done wrong so that, as a result, the project is now beyond redemption. For, he said, it had underestimated the leverage the Indians have because, after a century, their land claims remain largely unsettled (with, he said, progress having all but totally stalled since Harper came to power), had sought to orchestrate the project from its office towers in Calgary with no consideration given to secure local input or to local sensitivities, and, worst of all, operating all through the piece on the basis that British Columbians were a bunch of rubes that, as it is used to in Alberta, had no government willing to stand up for the rights of its citizens.
A ‘National Pipeline’ to Central-, & possibly even Eastern-, Canada – This is being touted as a nation-strengthening exercise, a reincarnation in reverse of, & throwback to, the building of the CPR 140 years ago. In a way such a pipeline would make sense since the traditional North-South flows of trade on which Canada’s well-being historically has depended [& that were boosted further in the past 25+ years by Mulroney’s FTA (Free Trade Agreement)] seem to be subsiding & Canada’s future economic salvation likely lies in developing more East-West networks. But times have changed since the latter 1800’s. Then the West was a backwater & now Central Canada fears it could become one. This project is being promoted by a Central Canadian establishment just about as ignorant of Alberta sensitivities as Enbridge was of British Columbia’s (& its project therefore likely to meet the same fate as the Northern Gateway : DOA). There is no shortage of oil East of the Manitoba border. But it comes at Brent prices. And the denizens of Ontario & Québec are being led to believe that, as fellow Canadians, they are entitled to share in Alberta’s oil bonanza by getting its oil on the cheap on a WTI-price basis, whereas Albertans feel strongly that a) they are already doing more than their fair share of spreading the wealth through things like equalization, b) Alberta’s oil ‘belongs’ to Albertans, just as Québec’s hydro power ‘belongs’ to the Québeçois (& Manitoba’s to the Manitobans?), & must be to benefit them, not the buyers, & c) if they want to share in the wealth, they can always move to Alberta. The well for this baby in the proposed format was poisoned long ago by the still much-hated Trudeau/Lalonde “National Energy Policy” (NEP) thirty years ago & cannot help but founder on a perception in Alberta that it is nothing but NEP 2.0, or the ’NEP’ in drag’.