A serious market letter suggested all the talk about ‘the end of austerity’ should be taken with a grain of salt; for the fiscal stance is ‘snugging’ in the US & Europe while, despite Abenomics, the same will soon be the case in Japan. The reason is that there is really little dispute in political/decision-making circles of the majority of advanced economies that debt is too high (regardless of whether Ken Rogoff & Carmen Reinhart were correct in postulating that the 90% debt-to-GDP ratio was a trigger point) & that current fiscal outturns are unsustainable, and that further deficit reductions are essential. The real argument is not whether deficits should be reduced, but when & how fast (bolding mine). Meanwhile in the US sequestration is slowing down the growth of the economy (& is now reported to be affecting the operation of schools run by DoD), in Japan the consumption tax will go from 5% to 8% next April, & to 10% in October 2015, the UK is seeking to cut its structural deficit by 1% this year, & in the Eurozone the aggregate cyclically adjusted deficit is expected to decline by a similar percentage of GDP this year (as it did in 2012). And the outlook for 2014 is more of the same : thus the IMF expects the cyclically-adjusted deficit of the G-20 countries, that declined by 1% in each of 2011 & 2012, to decline further in 2014 & 2015, by 1.0% & 0.6% respectively -_so GDP growth is likely to remain modest during the immediate future although a base may be being laid for modestly better growth down the road.
South of the border the Bernanke succession race is heating up. The President himself is said to strongly favour Larry Summers, his former White House Economic Advisor. But many leading Democrats oppose that idea since at a conference last April he questioned the benefits of QE for the real economy, during the Clinton era he helped to get Glass-Steagall revoked & in 2010 he opposed the “Volcker Rule” to put the banks on a leash. And within the Fed there are concerns that his modus operandi would not conflict with the FOMC’s consensus-driven policy-decision process. So they are pushing the candidacy of Vice Chairman Janet Yellen, in part because she is not Summers, in part because she is a known “dove”, and in part because, as House Minority Leader Nancy Pelosi put it, “it would be great to have a first woman chairman of the Fed”. The latter has prompted some NYT journalists to dub this contest one of “the California girls against the Rubin boys” (Yellen was appointed Fed Vice Chairman by Obama in October 2010 from being Head of the San Francisco Fed for a couple of years, and having been a Fed Governor from 1994 to 1997 &, Head of the Clinton White House Council of Economic Advisers from 1997 to 1999, while Summers was part of the cabal that under the leadership of then US Treasury Secretary Robert Rubin persuaded President Clinton to de-regulate banking by revoking Glass-Steagall – after which Rubin went on to become a Citigroup Vice-Chairman only to be cut adrift after the 2008 Financial Crisis, albeit with a “golden handshake” in the US$100+ range) – in the end the President may opt, & might be wise to opt, for neither : for many Republicans adore Summers’ views on QE & his hawkish monetary policy sentiments while Yellen has her age (she’s 66), & possibly her Jewishness, against her (Bernanke too is Jewish), her nomination could give the Republicans in the Senate scope for another donnybrook during her nomination hearings. All things being equal, which they, of course, seldom are, he might also be wise to nominate someone with the appropriate credentilas but with a more real world-oriented & less academic background (such as, for instance, PIMCO’s Mohamed El-Erian) – for the sake of transparency, I believe that during his tenure as President of Harvard Summers’ leadership qualities left much to be desired, that during the Glass Steagall episode affair his performance was self-serving (as witnessed by his subsequent peddling his services to the banks he had been instrumental in helping to de-regulate & that the quality of his policy advice to President Obama did indifferent at best.
Niagara MP Rob Nichols is in Prime Minister Harper’s Cabinet. His Chief of Staff has long been Maureen Murphy, a serious Conservative Party insider whose husband, Rick Morgan, is a Vice President at Tactix Government Relations and Public Affairs, an Ottawa lobbying firm that advertises “our officials know how governments make decisions”. When Nicholson was Minister of Justice this wasn’t much of an issue & merely required her to operate behind a public “conflict of interest screen”. But in the recent Cabinet shuffle Nichols became Defense Minister while her husband is working with Pratt & Whitney on the huge & hugely controversial CF-18 replacement program. So, according to a spokesperson for the Prime Minister’s Office, she is now “working with the ethics commissioner to ensure that the ethical wall that is currently in place is updated to reflect her new responsibilities.” But while the Justice Department had few major procurement contracts, the Defense Department is shot through with tens of billions of dollars of them & in the Cabinet shuffle the Prime Minister eliminated the post he created not long ago of Associate Minister of Defense for Military Procurement. This creates two problems : her usefulness to her boss will be reduced by her need to recuse herself from politically highly sensitive files key to her Minister’s performance and, far more importantly, no matter how high or how updated the “ethical wall” is going to be, in taxpayers ’ eyes it is unlikely to pass the conflict of interest ‘smell test’.
Rob Carrick has a regular column in the Globe & Mail entitled Personal Finance. Last week it was entitled Think Small & was devoted to spending less money on monster homes & fancy cars so as to have more money to spend on other quality of life-enhancing things, like holidays, hobbies, travel, investing etc.; so it’s not about hoarding money but about altering spending patterns at a time that after-tax income growth is modest to the point of non-existence & there is increasingly less left after covering the necessities of life & meeting debt service payment obligations, and when one way to afford life’s luxuries is to think small & spend rationally. This week he reported that it had resulted in terrific response on Twitter, in his Facebook & in the financial community, and in a number of emails of support – by sheer coincidence this week McDonalds attributed its disappointing Second Quarter earnings to people’s greater reluctance to spend money on its products (you & I both know that we can put better food on the table for a fraction of the cost of what McDonalds charges for its products (yesterday by coincidence I had one of my semi-annual McDonald repasts : $7.89, incl. tax for a double cheeseburger, chips & milk – a bun retails for 35¢, two patties for 80¢, a slice of cheese for 20¢, potatoes for 30¢ & milk for $1.00, total $2.65 (at retail prices, not those McDonald pays); i.e. food costs in this case accounted for 35% of its billing whereas in top notch restaurants it tends to be in the 40% range & in one institutional kitchen with which I was once familiar, the chef’s bonus didn’t kick in until he got his food cost below 28%) .
On July 3rd former Chinese President (from 1993 to 2003) Jiang Zemin, who will celebrate his 86th birthday next month, & the now 90 year-old Henry Kissinger (who was National Security Adviser to President Nixon & then Secretary of State under Presidents Nixon & Ford) met in Beijing. With the former seldom seen outside his own home, speculation raged as to whether this should be taken as a sign of support for President Xi Jinping, a sign of weakness for him, an attempt by Jiang to remind others he still mattered, or an effort by both men to send a signal to Washington that positive relations between their two countries are feasible. On July 22nd the Foreign Ministry sought to put an end to all this (& make sure a positive spin was put on their meeting) by releasing a statement that said in part that Jiang had told Kissinger that “After 1989 (i.e. Tiananmen Square) Sino-US relations certainly went through a difficult period and then, with hard work on both sides, myself and President Clinton were able to visit each other … My personal understanding is that although at present there are certain contradictions which exist between China and the United States, as long as our leaders have a frank exchange of views many problems can be resolved.” – and elsewhere it was reported Jiang had told Kissinger XI was a “strong leader”. The consensus of Weibo users was interesting; they were “awed these men were still able to stand upright’.
According to the Shanghai Daily, Wang Fang, a 14 year-old girl in Zhengzhou City, Henan Province, walked into a local Audi dealer wanting to use her 380,000 yuam (US$62,000) life savings to buy a car for her boyfriend. The salesman alerted the police. It turned out that she’d only met the boy (online) three months earlier & that he had threatened to dump her if she didn’t buy him a car, and that she had been attending a residential school but had run away from it & that her parents, who hadn’t seen her in four years, had routinely & faithfully been transferring as much as 40,000 yuan per year into her bank account.
In Japan there is growing pessimism that, given the slowdown in the Chinese economy & the pending increases in the national sales tax, Abenomics may not be enough to rev up the economy. Elsewhere it was reported that in the Second Quarter the country’s biggest three banks had cut their holdings of JGBs (Japanese Government Bonds) by 20% – might this, along with the massive encashment of US of bond fund securities be a harbinger of a bond buyers “strike” that will ratchet up interest rates world-wide, whether the central banks liked it, or not?
GLEANINGS II – 521
Thursday July 25th, 2013
FISCAL ARMAGEDDON COULD REMAKE HILL IN 2014 ELECTIONS (Politico, Alex Isenstadt)
$ The President c.s. are eager to be able to tag the GOP as the root cause of Washington’s dysfunctionality. This is causing some Republican strategists to warn those Republicans hellbent on, & chomping at the bit for, another fiscal food fight in the fall over the debt ceiling to cool it, saying the party can ill afford another high stakes game of brinkmanship. Thus Rep. Tom Cole (R.-Okla), a former National Republican Congressional Committee Chairman, opined “The only way the Republicans will lose the House is to shut down the government or default on the debt … Shutting down the government is not in the best interests of the Americans people and makes you look politically irresponsible.”
Amazing. Just a few weeks ago there was talk that in 2014 the Republicans might gain control of the Senate as well as retain that of the House. They must be starting to get worried that some of the ultra-right dogmatist Tea Party types will persist in their attitude of ‘rather dead than red’.
FRACKING DOESN’T CONTAMINATE AQUIFERS : STUDY (AP, Kevin Begos)
$ According to US Department of Energy geologist Richard Hammack the preliminary results of a year-long landmark federal fracturing study done for the Department by the Pittsburgh-based National Energy Technology Laboratory at a drilling site in Greene County, Penn., Southwest of Pittsburgh & adjacent to West Virginia, showed no evidence that fracking chemicals from natural gas drilling had moved up to contaminate drinking water aquifers. For researchers found the chemical-laden fluids used to free gas trapped deep below the surface had stayed thousands of feet below the shallower areas that supply drinking water; more specifically, drilling fluids tagged with unique markers injected 8,000 feet below the surface had not been detected in monitoring zones at 3,000 foot depths. This was deemed “good news” by scientists not involved in the study & by a natural gas industry that has been fighting calls by environmental activists & affected property owners that fracking is dangerous (without often knowing what chemicals are used since companies deem the names of those chemicals to be “trade secrets’, although some that are known are known to be toxic & capable, in significant enough doses, of causing health problems).
The wheels of Nature grind inexorably …. but slowly, and one year would seem hardly enough for underground pollution to travel a mile upward. So while this study may give those with a vested interest in fracking reason for jubilation, it is unlikely to do much to convince the opponents of fracking that they are wrong & its proponents right.
‘RIVERS’ IN THE AIR COULD BOOST FLOODING (BBCNews, David Shukman)
$ In the 1970’s scientists discovered the presence of ‘conveyor belts’ of moisture in the atmosphere. Two decades later further research expanded the concept into what are now known as “atmospheric rivers”. A new study by a group of scientists led by Dr. David Lavers of the University of Iowa made public by the Institute of Physics in Environmental Research says that warmer conditions may create intense bands of moisture flowing invisibly up to 2½ kms above the earth’s surface that are up to 300 kms wide & 2,000 kms long, that may be moving up to 300,000 tonnes of water per second (vs. the Thames River’s 65 tonnes) & that, if they stayed on the same course for a day, could deliver continuous & massive rain
Meanwhile, scientists at Cambridge & at Holland’s Erasmus University have raised a warning flag in the journal Nature that melting Arctic ice & permafrost could release so much methane gas (a 25x more potent air pollutant than CO2) as to cost US$60TR (one year’s global GDP) in flood damage, protective measures against. rising sea levels, agriculture losses & human health costs.
SYRIA OPTIONS COSTLY, RISKY (Politico, Juana Summers)
$ Last week Sen. Carl Levin (D.-Mich), the Chair of the Senate Armed Services Committee, asked the Chief of Joints Staffs, Gen. Martin Dempsey, to provide information on the state of affairs, & on the implications of the use of US military force, in Syria (where a two year-old civil war has killed 150,000 people & internally displaced millions more – in a country of 21MM people). In a three-page letter dated July 19th, & released by the Senator’s office of July 22nd, Gen. Dempsey told Sen. Levin (& Sen. John McCain, who had earlier threatened to hold up the hearings to extend his term unless he became more forthcoming) that the Pentagon was planning for five contingencies (train, advise & assist the opposition, limited stand-off strikes, a no-fly zone, buffer zones & controlling Syria’s chemical weapons) but warned each would be risky & costly (North of US$1BN/month). And he warned “It is not enough to simply alter the balance of military power without careful consideration of what is necessary in order to preserve a functioning state (i.e. the mistake made in the early stages after the Second Gulf War) . We must anticipate and be prepared for the unintended consequences of our actions. For should the regime’s institutions collapse in the absence of a viable opposition, we could inadvertently empower extremists or unleash the very chemical weapons we seek to control.”
There seems to be a growing consensus among observers that the tide may be turning in Bashar’s favour (which could prove a Pyrrhic victory since a) the country is in ruins & b) he may lose parts of it (for instance the Kurdish region – which could cause problems for both Turkey & Iraq.). One reason for this is that the opposition is divided six ways from the middle, with the Kurds in the Northeastern part of the country having enjoyed all but near autonomy. But more important has been the support he has received from abroad, from Iran from the outset (with Iranian army officers acting as advisers & Republican Guard foot soldier support on the firing line), from Russia at both the official level with materiel & political support at the UN, and at the informal level with anti-Moscow rebel fighters from Muslim regions in Russia like Chechnya (to the point Moscow is getting concerned about what may happen when they return home &, most recently, in numbers large enough to increase his army’s striking power, from Hezbollah fighters from Lebanon.
PROTESTERS, ARMY CLASH OVER MORSI’S FATE (AP, Maggie Michael)
$ Since being deposed three weeks ago President Morsi has been held without charge. His family accuses the military of “kidnapping” him. European diplomats have been urging the release of the country’s first-ever democratically elected leader. Human rights groups say he should either be charged or freed. The Brotherhood has tried to use his incarceration to restore its badly damaged popularity (that has suffered from those who voted for it without being die-hard supporters having concluded they had voted for a wolf in sheep’s clothing). And the military has sought to use his release asa carrot to get his supporters to stop their protests (which turned violent once again on July 22nd near Tahrir Square, with at least four people killed). But his detention seems to have resonated only with his supporters & to have failed to bring out significant numbers people to the ongoing rallies protesting against it.
$ Millions of Egyptians in the streets started on June 30th to demand his removal after just one year in office, resulting within days in the coup that ousted him. Anti-Brotherhood remains strong. While Mohammed Aboul-Char, the head of a liberal political party that backed his overthrow, says that behind the scenes talks have been taking place to release Morsi & other leaders of the Brotherhood, he told AP the military fears releasing him “would only increase protests and make them more aggressive.” And the Brotherhood seems so disinclined to make a deal it has denied back-channel talks have taken place & says it won’t negotiate until Morsi is reinstated. And on July 22nd it released a plan for resolving the crisis that differed little from what he had proposed in his final days in office, and that called those who ousted Mr. Morsi “putschists” & accused them of seeking, with foreign support, to overthrow “all the hopes in a democratic system”, while that same evening interim President Adly Mansour repeated calls on TV for reconciliation & for turning “a new page in the nation’s book … (with) no contempt, no hatred, no divisions and no collisions.”.
On July 24th General Abdel-Fattah-el-Sissi, now the de facto leader of the government, told military cadets at their graduation ceremony for military cadets that he expected the public to take to the streets to give him & the police a mandate to tackle “violence and terrorism” (generally interpreted as a first step to move against Morsi supporters & the Brotherhood). This is not a good sign; for it remains to be seen whether the billions promised by the Gulf States will be forthcoming sufficiently promptly, & will be enough, to enable his regime to make enough change in the everyday life of urban Egyptians to continue to enjoy their support. For if it isn’t, and/or the new government is unable to put it to good use, which is likely, all bets are off as to what may happen next.
EX-POLITBURO MEMBER EXPECTED TO FACE IMMINENT TRIAL (WSJ, Jeremy Page)
$ Bo-Xilai, the former Communist Party high-flier who has been in detention for two years, whose wife was last year convicted of murdering a British businessman who had once served her purposes but then threatened to cross her, will be put on trial in mid-to-late August in the People’s Court of Jinan, the capital city of Shandong Province. An internal document of the party’s General Office supposedly says he will be tried on charges of taking 20MM yuan (US$3.4MM) in bribes via his wife & of embezzling another 5MM, and of abusing power. This has been, & will continue to be, a delicate balancing act for President Xi between his need not to unduly upset Bo’s many followers, and yet satisfy public demands for justice & maintain the credibility of his anti-corruption crusade.
If these are the charges he is going to be tried on, the prosecution is going to show little more than a bit of a tip of the iceberg; for Bo & his ilk were disinclined to think in mere millions of US dollars; hundreds of millions, if not billions, were more their style. But these charges would likely be enough to sideline him &, hopefully, discredit the “back to Maoism” crowd of which he was a, if not the, leading member. And getting it “just right” will send a powerful message up & down the party & officialdom that if Bo, once one of the most powerful 25 men in China, can get his hide nailed to barn door, more ordinary mortals better keep their noses clean.
CHINESE SHIPYARDS HURT BY LOW DOWNPAYMENTS (Bloomberg)
$ During the shipbuilding boom a few years ago, they demanded, & typically got, as much as 60% of the cost of a vessel upfront, whereas today as little as 2% is often enough to close a deal. Thus gives shipyards with access to government cash a real competitive advantage.
A few years ago the Chinese yards could compete with the much larger & efficient South Korean yards on price but now the combination of the stronger yuan & rising wage levels in China has eroded that competitive edge. And with millions of employees any, all but inevitable, consolidation of the 1,600+ yard Chinese ship-building sector could create massive headaches for Beijing.
NEW CHINESE AIRCRAFT WILL ‘GIVE THE ENEMY NERVOUS BREAKDOWNS’
(South China Morning Post, Jeremy Blum)
$ According to the Global Times the (four engine, propellerdriven) Gaoxin-7 plane is loaded with electronic devices for psychological combat assignments. It says it will be able to disrupt normally scheduled broadcasts of television, radio & wireless communications to “limit the spread of enemy propaganda, affect the morale of the enemy’s army, sow seeds of rumour and confusion … and thereby send all enemy troops from soldiers to officials into a state of nervous breakdown, achieving victory without soldiers even having to fight.” This, it said, is what the US had done with its C-130s in Kosovo, Afghanistan & Iraq,
$ But China’s Weibo users weren’t impressed. One said “This … is propaganda … to brainwash its own people … They should not make such an exhibition of themselves”, a second “The Global Times is a weapon of mass information”, a third “Who writes this ignorant stuff?”, a fourth “After I read this news, I think I had a nervous breakdown myself”, and still others that “they were wary of the deadly nature of psychological warfare … but simply could not take the article’s … words seriously.”
Where there is smoke, there invariably is at least some fire. And while the Chinese claims seem hugely overblown, there is little doubt that the military everywhere is playing with such ideas, the only real defense against which is to reduce extreme dependence on modern technology.
EUROZONE DEBT RISES TO A RECORD 92.2% OF GDP (AP)
$ Eurostat, the EU’s statistics office reported on July 22nd that the aggregate national debt of the Eurozone’s 17 member countries at the end of the First Quarter had, despite all the austerity, risen to 92.5% of their total GDPs, up from 90.6% QoQ & 88.2% YoY (with Greece, at 160.5%, having the highest ratio, but also one of the smallest GDPs, of them all). Even though many of the countries involved are in recession, some of their annual budget deficits have started to fall after years of in some cases savage austerity that has kept the lid on economic growth (& contributed to the rise in the debt-to-GDP ratio).
Austerity is now said to be ‘passé’. While in the medium term (let’s say 24-30 months) any resultant pickup in growth will boost the denominator of the debt/GDP fraction (thus decreasing the ratio), in the short-term the result will be to boost the numerator, i.e. to hike the ratio.