Gleanings II ~ 487 Nick Rost van Tonningen Posted by John on November 23, 2012

Quote of the week : “Every war when it comes, or before it comes, is represented not as a war but as an act against a homicidal maniac.” – George Orwell.

There seem to be ‘urban myths’ as to the extent to which Israel depends on the US for financial support. Following is what official records show (which may not, however, tell the whole story) :it is the second largest recipient under America’s US$52.7BN/year foreign aid program (after Afghanistan). In FY2010 (ended September 30^th, 2010) it received US$2.835BN (5.4% thereof), US$2.799 of which was military-, & the remaining US$36MM economic-, aid. So Israel definitely does not account for 30% of the US foreign aid budget;
-on a per capita basis US military aid to Israel, at US$381, exceeds that of the second largest per capita military aid recipient (Afghanistan) by 60+%. And it is unique in not being solely tied to the acquisition of US-made materiel;
-Israel’s total budget at last report was US$74.8BN (& its deficit-to-GDP ratio 10.8%), and its annual defense budget US$14.5BN (i.e. US aid funds roughly 20% thereof). And with its defense budget equal to 6.8% of its GDP, Israel is in a class by itself in the world in this respect (on the same basis US military spending is one-third smaller); and
-since 2009 total US military aid to Israel has totaled, in round numbers, US$11BN.

The Times of Israel quoted an IDF spokesperson as saying that in the eight day Pillar of Defense operation the IDF carried out 1,500+ air strikes against a  range of tactical targets, incl. long-range rocket launch sites & rocket launchers, while Hamas had launched 1,506 rockets. Of the latter 152 had failed, 875 landed in open-, & 58 in urban-, areas, and the Iron Dome system intercepted 421 (for an 84% success ratio, albeit only when excluding those missiles that it supposedly didn’t bother to engage since they were headed for open ground) – the remarkable, & unpleasant, fact is, however, how successful Hamas nevertheless was in sustaining its rocket launching despite the overhead presence of drones directing air strikes against all launch sites.

Development of the truck-mobile, all-weather Iron Dome system started in 2007 with supposedly US$800+MM in US funding support. Its  first battery became operational in March of 2011 & at the outbreak of this latest fracas, Israel has four of them ‘on line’, with a fifth one hastily activated, several months ahead of schedule, during the fighting. A battery costs US$50MM & each missile US$50,000. Each battery consists of a tracking radar unit & three launchers, each holding 20 Tamir missiles guided by the tracking radar unit until close enough to their target for their onboard radar to take over (they are designed not to hit the incoming missile but merely to destroy it by exploding in its vicinity). One neat aspect of the missiles is that they have the ability to determine the optimum time of ‘engagement’ that minimizes collateral damage on the ground. Each battery is supposedly capable of protecting an area of 150 sq. kms (except for the 20 sq. kms nearest the battery site) but is said to be generally less effective against incoming hardware fired at close range, incl. artillery & mortar fire, due to the short launch-to-impact interval & the time needed to get a trajectory reading. According to Prime Minister Netanyahu 15 batteries would suffice to protect Israel; in other words, the official view is that 75% of its 8,000+ sq/kms. landmass isn’t deemed worth protecting (which is consistent with the fact that only 15% of the country is suited to agriculture).

Reactions to the ceasefire in Israel on the one hand, and Gaza & the West Bank on the other, were vastly different. In Gaza it prompted a wall-to-wall party (causing some Israelis to feel shame). Sixteen IDF soldiers marked their dismay in a photo on Facebook that showed them laying in their uniforms on the sand in a manner spelling the Hebrew words for “BIBI LOSER”. Some Israelis are worried that the assault on Gaza, & now the ceasefire, will precipitate a new wave of unrest on the West Bank (as has already occurred to some extent, with the situation being aggravated by the fact that, with all its prime units marking time on the Gaza border, crowd control in the West Bank was in the hands of reservists with little training therein. Palestinians, on the other hand, generally are looking upon the spectacle of rockets landing near Tel Aviv & Jerusalem as proof that the balance of power is being redressed, with one West Bank shop keeper being quoted as saying “After years of going nowhere, we are starting to look as if we have an army” & a counterpart in East Jerusalem, rather gleefully, that “Now it is not only Palestinians who are afraid.”

On November 12^th the Paris-based IEA (International Energy Agency) made public its 2012 World Energy Outlook Report. It made the headlines by predicting that the US will surpass Saudi Arabia’s & Russia’s oil-, & Russia’s gas-, output by 2020, and ten years later will be a net oil exporter. This  forecast is based on two assumptions, an explosive expansion of US shale oil production & a hike in US energy efficiency that will reduce US oil consumption from the current 18MM bbld, a four-year low, by 28% to 13MM bbld by 2020). Both seem hugely optimistic, if not out of touch with reality. Leonardi Maugeri, the highly-regarded ENI Senior Executive Vice President now on sabbatical as a Senior Fellow at Harvard, last summer published a paper that forecast US oil output, largely due to shale oil, to increase by 4.17MM bbld. by 2020, back roughly to its 10MM bbld 1970 peak  (a forecast faulted by his peers for assuming a 15% output depletion rate for shale oil wells in their first five years whereas it more commonly declines by 65% in the first three years & in one isolated case by 75% in the first year, whereas in Saudi Arabia even in 50 year-old oil fields it is just 5%, or less) – in the past the IEA has been more useful as a counter-indicator than prognosticator, i.e. the odds of making money tend to be better by betting against its views than following them.

On a slightly different subject the report also pointed out that in 2011 worldwide subsidies on fossil fuels,  mostly in oil producing-, and/or developing-, countries, amounted to US$523BN,  6x those on renewable energy supplies (most of them in the developed countries).

Thane Gustafson is Senior Research Director at Colorado-based energy consultant IHS Inc. His book Wheel of Fortune : The Battle for Oil and Power in Russia contends there is a real possibility its oil production will be in decline by 2020 even as the state relies ever more on oil revenues to balance its budget. As oil becomes harder to find & more costly to produce, this dependence on oil revenues, & the way it has traditionally managed the industry, will become unsustainable, and as the ‘cheap oil legacy’ inherited from the Soviet Union declines, “They have come to the end of one chapter  and moved on to another. And so far that new chapter is full of blank pages.”

In an interview on CNN, former Fed Chairman Alan Greenspan said that the preoccupation with fiscal cliff misses the real issue, namely that as the level of social benefits rises the domestic savings rate declines (& they are the best way to fund domestic economic growth).

In a recent interview with CNBC’s Maria Bartiromo Erskine Bowles said that “Today, even at these low interest rates we’re spending about $230 billion a year on interest … more than we spent at the Department of Commerce … of Education, Energy, Homeland Security, Interior, State, Justice … combined. And … if we do nothing, by the year 2020 we’ll be spending over a trillion dollars a year on interest … That’s a trillion dollars we can’t spend in this country to educate our children or to rebuild our infrastructure or to do high value-added research. And unfortunately, it is a trillion dollars that’s going to be spent principally in those countries that we’re borrowing from … building infrastructure in Asia … educating those kids over there … building their universities, so that the research is done over there, so the next new thing is created over there, so the jobs of the future are over there, not here.” – this puts the issue in terms anybody who wants to can understand. Rather interestingly his estimate of the 2020 interest bill is twice that of the CBO.

The Federal Housing Administration (FHA) says that its home insurance fund is US$16.3BN in the red as 17% of its loans (but a far smaller proportion in dollar terms) are in arrears; so it plans to raise premiums & start selling delinquent loans to avoid a taxpayer bailout – selling  such  loans could cause other problems; for every sale converts a paper loss into a real one.

Profs. Michael Moore, André Turcotte & Jennifer Winter of the University of Calgary’s School of Public Policy earlier this year surveyed 1,500 Canadians to determine their understanding of energy issues. As part thereof they asked them for their perception of the trustworthiness of energy industry executives & spokespersons, and that of politicians & various professionals on a scale of zero (not all) to ten (full trust). The results were revealing : 67+% gave energy industry people a failing score, governments didn’t fare much better with a 62% failure rate, while Chambers of Commerce were failed by 53%, community groups & activists by 49%, environmental groups by 47%, economic experts by 43% & academics by 34%.

The CW about China, based on a belief that four of the seven-member all-powerful Standing Committee of the Communist Party are in the Jiang Zhemin camp, is that the hardliners beat the reformers at the 18^th Party Congress. On the other hand, the prevailing view among Chinese elites is said to be that the only way forward is through more reform.  And in the Congress’ aftermath three things happened that seem to give weight to the latter. Hu Jintao relinquished to Li Jinping all three of his offices (General Secretary of the Communist Party, Head of the Military Commission & President), a move for which he received much praise, whereas a decade ago Jiang Zhemin  kept the important Militant Commission post for two years after retiring, thereby weakening his early effectiveness. On Thursday November 15^th the official farewell party for Hu Jintao was attended by many retired illuminati, including the 95 year-old Song Ping, a Standing Committee alum (& Hu’s mentor), 85 year-old Li Peng, Premier under Jiang Zhemin & Chairman of the Standing Committee from 1998-2003 & 85 year-old former Deputy Premier Zhu Rongji, while Jiang Zhemin was conspicuous by his absence. And Li Jange, the Chairman of the China International Capital Corp. (CICC) & Vice-Chairman of state-owned Central Huijin Investment Co., told the Caixin Media’s Annual Conference on November 17^th that the new leaders will probably, in late 2013, unveil market-oriented reforms focused on reducing government intervention in the economy & breaking up state monopolies (whereas the CW holds that incoming leaders wait until halfway through their term – when they have consolidated their position? – before introducing changes).

One well-respected firm of analysts noted recently that “The last two decades of China’s growth were predicated on two assumptions : Beijing was an authoritarian regime concerned primarily with economic growth and the US and its Asian allies would see China’s economic rise as geopolitically neutral. The persistence of these assumptions is now in question and we will likely be spending quite a bit of time in 2013 trying to figure out whether Cold War 2.0 is upon us.”

December 16^th will be (Lower House) Election Day in Japan. Calling an election was the price the Democratic Party Prime Minister, Yoshihiko Noda, had to pay for opposition support for passage of a national sales tax to help fight the deficit. And the Liberal Democratic Party’s Shinzo Abe lost no time after its call (that is expected to return him to the Prime Minister’s office he briefly occupied in 2006/07, as its seventh occupant in as many years) to make clear he would make the Bank of Japan open the monetary policy floodgates so as to ‘drive’ inflation up to a 2-3% annual rate & weaken the Yen (which, if elected, he will unquestionably succeed in doing since the current Governor’s term ends in April, and those of his two Deputies one month earlier). While the exact election outcome is not a foregone conclusion since a number of, mostly right-wing, ‘mini-parties’ have emerged & there are unprecedented numbers of undecided voters, few people expect Abe as Prime Minister to be able, or willing, to distance himself from the flawed policies of previous Liberal Democratic Prime Ministers who held sway, with one 11-month exception in the mid-90’s, from 1955 – 2009. So credit rating downgrades may come fast & furiously after the election (thereby reducing Tokyo’s ability to deal with any territorial challenges by China)  – rather uncharacteristically the Governor of the Bank of Japan, Masaaki Shirakawa, took the opportunity during the question period following the press briefing after the two-day meeting of the bank’s monetary policy committee (in which it didn’t ease its monetary stance) to refute every single one of Mr. Abe’s ideas.

One market letter deems Germany’s position to be much weaker than generally perceived. Like China, 40% of its GDP is export-dependent (vs. 20% for Japan & 13% for the US) but the lion’s share thereof goes to other EU countries. Its debt level is rising; now over 80%, the Bundesbank recently said it will likely stay at that level “for many years” to come. Its population is aging & becoming less productive. Its banks have gone from being well-capitalized & a source of national pride to being repositories for paper issued by dodgy governments & banks, and the Bundesbank’s influence has waned following the creation of the ECB. And Chancellor Merkel’s right-of-centre Free Democrat Party junior coalition partner has been losing so much voter support that in next fall’s election it may well fall short of the 5% needed to get any seats in the Bundestag (which would result into a leftward shift in government policy either moderately so in a “Black-Green” (Christian Democrat/Green Party)-, or more so in a “Red/Green” (Social Democrat/Green)-, coalition.

Moody’s has downgraded France from Aaa to Aa1 while maintaining its negative outlook, citing its declining economic prospects & contingent liabilities from potential Eurozone bailouts. This caused one market letter to observe that S&P had done so ten months ago (for which the then newly-elected President Hollande had severely chastised it upon taking office), that since then French bonds had nevertheless outperformed Bunds & US Treasuries, but that Moody’s move, coming just after Hollande had put the strongest structural reforms in place France had seen in many years, implies doubt they will be enough for meaningful change in the country’s fortunes.

In September the Spanish banking system’s bad loan ‘book’ rose to 10.7% (US182.2BN) of their total, up from 10.5% in August & 42% YoY. With unemployment at 25%, & youth unemployment over twice that, borrowers can’t keep up with their mortgage payments. And the foreclosure  of homes whose owners can’t became a headline issue after a woman killed herself by throwing herself out of the window of her fourth story apartment when the bailiff was at her door.

According to Montreal-based BCA the EM (Emerging Market) corporate component of the international bond market grew from a near-standing start in 2002 to the equivalent of nearly US$100BN by 2005, & has  increased nearly ten-fold since (due to a similar mindless search for incremental yield as led to the US financial crisis in 2007?).

During the apartheid era South Africa’s household savings rate was in the 6% range. It has since declined & since 2006 has been zero or negative. So the country has become dangerously dependent on foreign capital for its development &, with unit labour costs having risen, & continuing to rise, astronomically, as its unions are exclusive rather than inclusive (i..e more interested in gains for their members rather than in general employment growth) & more focused on wealth distribution  than wealth creation, and the educational system failing to meets the needs of a modern economy, the country’s economic prospects may be nowhere near as rosy as generally surmised.

GLEANINGS II – 487

Thursday November 22^nd, 2012

ISRAEL’S SHORTSIGHTED ASSASSINATION (NYT, Gherson Baskin)

Israel’s says its current campaign is to ensure no more rockets will be fired its way. But killing military & political leaders has never worked before. When we negotiated Gilad Shalit’s release the Israeli officials didn’t expect al-Jabari to  make a deal since they thought he looked up him as his “insurance policy” against  assassination; if so, Shalid’s release in October 2011 started its termination phase, & on November 14^th it expired. Killing him was a strategic mistake. He wasn’t a man of peace & was so opposed to Israel’s existence he wouldn’t have direct dealings with Israelis, although he approved Deputy Foreign Minister Ghazi Hamad dealing with me. As a result of the latter I learnt he was interested in a long-term ceasefire & prepared to enforce it in Gaza (as he had other Egypt-brokered ones), if Israel would halt its attacks on Gaza (all talk about Israel having the right to defend its citizens ignores that, prior to recent escalation of hostilities, YTD its attacks had killed 76 Gazans while the rockets fired into Israel hadn’t killed a single Israeli, although they did significant psychological harm). In fact, the morning he was killed he had received a document proposing an extended ceasefire with mechanisms for compliance that would have him deal with extremists operating in Gaza, rather than have Israel do so with pre-emptive attacks. Al-Jabari’s motivation, & that of other Hamas  leaders supporting a ceasefire idea, was a growing conviction of the futility of rocket attacks that do Israel little damage but cause misery in Gaza. And this proposal differed from all its predecessors in that it provided for enforcement, for a definition of what constituted a breach of the ceasefire & for how Hamas, not Israeli airstrikes, was to deal with them. But with him gone, this opportunity is lost & someone is going to succeed him who may not be as realistic as he had become.

The author is a well-known Israeli peace activist & was a key player in the negotiations that led to the release of Gilad Shalit after five years in Hamas captivity. But he may have been suckered by the Israeli security establishment. For it seems an odd coincidence that al-Jabari was successfully targeted within hours from receiving this document after having successfully eluded being targeted for a year or more. One bit of ‘evidence’ supporting this notion is the fact that the document envisaged Israeli intelligence sharing with al-Jabari what it knew about planned attacks they had learnt about so he could deal with them (sharing intelligence with the ‘enemy’ is alien to a security subculture often loath to share it even with ‘friendlies’)

GAZA WITHOUT END (NYT, Roger Cohen)

-The prelude to Operation Pillar of Defense included a Palestinian killed near the border on November 4^th, three Israeli soldiers wounded by a bomb blast at the border on the 6^th, a Palestinian boy killed by Israeli machine gun fire on the 8^th, and on the 10^th four Israelis wounded by an anti-tank missile & four Palestinian teenagers killed when the Israelis returned fire. So Prime Minister Netanyahu had a choice between escalation or the behind-the-scenes ceasefire negotiations (with help from Egypt & the same Israeli intermediary involved in Gilad Shalit’ release) with Ahmed al-Jabari, head of Hamas’ military wing, who in 2006 was said to have been behind Shalit’s abduction.
-He chose to have al-Jabari eliminated. So we are back in the old pattern. 90 Palestinians & three Israelis killed (both numbers have since doubled), Palestinian government buildings blown to bits, diplomats scrambling for a ceasefire, the US Congress in blanket approval & Israel casting about for an end game as regional fury mounts.
-This is good for Israel only if the objective was to radicalize the situation, erode the middle ground, demonstrate the impossibility of agreement, facilitate more settlement building in the West Bank & eclipse the idea of a two-state peace. According to Aluf Benn, the Editor-in-Chief of Haaretz, “The assassination of al-Jabari will go down in history as another showy military action initiated by an outgoing government on the eve of an election” (although he reversed his field a few days later when his editorial proclaimed “Israel’s Pillar of Defense achieved its Goals”). Hamas won’t go away. It will have to be dealt with, just as the US now deals with the Muslim Brotherhood & the Salafis in Egypt (but still won’t with Hamas). Israel must quit looking upon its repetitive security operations as “grass cutting”, an unpleasant & endless, but necessary, task that in Gaza’s case merely fertilizes the grass of hatred.

The big winner in all this is Egypt’s President Morsi. He had three phone conversations with President Obama in one day, & six over several days, during which he impressed him with his “pragmatic confidence” (as behooves a partly US-trained engineer), but who in recent weeks has been grabbing more & more dictatorial powers at home. This article prompted a vituperative, diatribal  reaction by The American Thinker that did a disservice to its masthead claim of presenting “thoughtful exploration of issues of importance to Americans.”  

UNTIL THE NEXT TIME (The Times of Israel, David Horowitz)

-At the outset Netanyahu & Barak made it clear Operation Pillar of Defense aimed at degrading Hamas’ rocket launch infrastructure, damaging Gaza’s terror cells & reducing the potential for attacks on Israel’s citizenry, not to retake Gaza seven years after leaving it.  But from the get-go it was clear Hamas would hail victory, no matter what the outcome, since for it mere survival is victory. But it has now done more than survive & the question for Israel now is whether its ‘successes’ outweigh the boost the Islamists have clearly received.
-There is no doubt Hamas’ terror-wreaking capacity has been weakened.Israeli intelligence’s success in pinpointing the location of people & installations in Gaza has exposed a Hamas vulnerability. The Iron Dome system has shown that missiles, once launched, can be intercepted before they can do damage. And Israel’s citizenry showed remarkable discipline in following Home Front Command orders on how to stay safe.
-On the other hand, Hamas proved itself ‘robustly capable’ of continuing to fire missiles into Israel right up to the ceasefire & to extend their range to the big cities. Its ‘resistance’ has enhanced its status among Palestinians everywhere, marginalizing, if not rendering irrelevant, Mahmoud Abbas’ Palestinian Authority. It has gained legitimacy from the visits of regional leaders & by forcing Israel to negotiate with it, albeit indirectly, even while publicly maintaining its aim of destroying the Jewish state. Israelis should also worry that Netanyahu’s dithering about making even limited use of his ground forces was due to heavy American pressure. Those on the left should be concerned that Hamas’ greater popularity will reduce the prospect of progress on any Israeli-Palestinian accommodation. And the most nightmarish possibility is that, ceasefire or not, Hamas will re-arm & next time have an even more potent arsenal to throw at Israel.
-In the short run Netanyahu’s credibility will hinge on whether Hamas will stick to the ceasefire between now & the election on January 22^nd. But, while this may suffice for his electoral prospects, in Southern Israel, that now extends all the way to Tel Aviv & Jerusalem, there is scant hope of tranquility lasting a lot longer than that.

Israel’s Channel 2 reported on November 22^nd, that, via Mossad Chief Tamir Pardo, who represented Israel in the Cairo ceasefire talks, Israel had received warnings from Washington & Cairo that its peace treaties with Egypt & Jordan would be jeopardized if it sent ground forces into Gaza. Furthermore, that Morsi had refused Obama’s request he speak with Prime Minister Netanyahu or even with his Israeli counterpart, Shimon Peres, whom in the ’letter of credence’ the newly appointed Egyptian Ambassador to Israel (who was recalled to Cairo on November 14^th) had presented to Peres on October 15^th, he had addressed him as “Great and dear friend”.

ISRAEL AGAIN LACKS EXIT STRATEGY (WP, David Ignatius)

• An Israeli official exploded when criticized for Israel having no Gaza strategy other than occasionally attacking it, yelling “That is our strategy … We don’t have any choice except to punch our adversary in the face every few years.” I first saw this movie in 1982 when Operation Peace for Galilee sought to stop rockets from being fired from Lebanon into Northern Israel & the IDF went as far as Beirut, but when the Palestinians, rather than cutting & running as Arab armies had always done, stood their ground. Lacking an end game Israel settled for US mediation that made the PLO leave South Lebanon (since proven a mixed blessing since it was replaced by the more disciplined Shiite Hezbollah). Suicide bombings led to another invasion of Lebanon (Operation Grapes of Wrath) in 1996 that culminated in an Israeli withdrawal four years later, only to have it take another crack at Hezbollah in 2006 in Operation Change of Direction. Ditto for Gaza. Each cycle of violence buys a few years of relative peace & then more violence. Israel withdrew from Gaza in 2005. But having 12,000 rockets & mortar rounds subsequently hurled in its direction, Operation Cast Lead was initiated in 2008 & another ceasefire ensued. Then Hamas fired 3,000 more projectiles into Southern Israel which prompted Operation Pillar of Defense during the eight days of which Hamas fired half as many pieces of ordnance in Israel’s direction as it had in the entire four previous years, many of them longer range & more lethal than anything before.
• This kind of warfare corrodes decent people’s characters to the point where they start revelling in their adversaries’ misery. It creates anger among Israelis who think their closest ally is too even-handed, and begets cynicism & bitterness among Arabs when America promises but fails to deliver. So at the beginning of his second term Obama needs to take the bull by the horns once again, as he sought to do at the start of his first term, but this time he must follow through, using his new relationships with the leaders of three of Hamas’ most important backers, Egypt, Turkey & Qatar, with the benefit of having even the Israelis think Egypt’s Muslim Brotherhood government acted constructively in this crisis.

It’s never hard to start a war; but dealing with its aftermath is always more time-consuming & gets a lower priority.

MAJORITY FAVORS MILITARY, ENTITLEMENT CUTS (Newsmax, Stephen Feller)

• On November 15^thRasmussen said that a survey of 1,000 randomly-selected US voters had revealed that :
  -42% agreed defense- & entitlement spending had to be cut to get the budget deficit under control, 31% that “major cuts” weren’t needed” &  27% that it wasn’t sure; and
  -51% expected a deal to be reached to avoid going over the ‘fiscal cliff’ & 41% didn’t with equal numbers (15%) saying it was “very likely” or  “not likely at all”.These aren’t exactly numbers that would motivate politicians, quite the contrary.

GOVERNMENT AIR STRIKE DESTROYS HOSPITAL (G&M, David McDougall)

• On November 21^st doctors at the overcrowded, poorly equipped emergency facilities at  Aleppo’s Dar al Shifaa hospital were busy treating wounded people, many of them bystanders picked off by government snipers, when at about 3:45 p.m. a Syrian government air strike blew what was left of the building apart. In the past four months, ever since it started treating opposition fighters as well as civilians, government attacks had demolished its upper floors, forcing hospital staff to relocate its emergency to the main floor & basement where they did the best they could, hampered by damaged equipment, shortages of supplies & frequent power outages. When fighting cut the city in half, the hospital became the sole refuge for wounded civilians cut off from the government side of the city & it is unclear where they can now go for treatment.

This came three days after the rebels, after a two months-long siege, overwhelmed the home base of the Syrian army’s 46^th Regiment in the North of the country, thereby gaining possession of a treasure trove of weaponry, ”the most booty ever” according to the general in charge, incl. tanks, armoured vehicles, rocket launchers & artillery pieces, and several truck loads of small arms & ammunition.

PURPLE PALACE ABANDONED SHOWS CHINA SHADOW BANKING RISK (Bloomberg)
-Ordos is a 1.9MM inhabitant Inner Mongolia city rich in coal, natural gas & cashmere. Work at most of its 2,000+ major construction sites has been halted, & 300,000 construction workers have left, in the past year. One construction site gone dormant is the Purple Palace hotel cum residential complex in which investors across China have invested 445MM yuan (US$70+MM) of two year 10% trust paper due next March.
-China’s 64 trusts, with major foreign banks involved in at least 10 of them, are the fastest growing segment of its ‘shadow banking’ system but still only account for 5+% of its entire  US$3.35TR (45% of GDP) shadow banking sector (which, according to the Basle-based Financial Stability Board chaired by Bank of Canada Governor Mark Carney is a US$67TR industry worldwide). They are thriving because most of China’s 42MM small businesses cannot get bank loans, are overtaking insurance as China’s second largest financial services sector (after banks) after expanding 16x in the past five years, and their AUM grew by 47% in the year ended June 30^th & their profits by 56% in the first nine months of this year, to 28.8BN yuan (US$4.6BN), after being up 88% in 2011 (at a time when the authorities were supposedly clamping down on them). Unlike other shadow banking activities they’re supervised by the China Banking Regulatory Commission & the Governor of the People’s Bank of China said at a press conference during the 18^th Party Congress that “China’s non-banking financial institutions are under strict regulatory supervision, rather than free of regulation as in some countries.” (such a firm denial by such a high level official has in the past almost invariably been akin to the hoisting of a red flag).
-The trusts may face a repayment crisis. They have 560BN yuan (US$90BN) maturing in the next 13 months & expectations are that many of those linked to property deals will  default. Thus the Purple Palace complex is backed by Chonqquing-based New China Trust Co. (in which Barclays has had a 20% interest since 2007) which in an ‘investor update’ last month didn’t bother to mention that all work at the Purple Palace had been halted six months earlier. And prior to that, Shanghai AJ Trust in September, to enable a developer to buy land in the city of Wenzhou, raised 300MM yuan (US$48MM) for three years on a notional  11% yield basis, while holding out the prospect of returns as high as 17.4% if the selling prices of the flats to be built were to exceed 12,100 yuan (US$1,925) per square metre, even though Wenzhou house prices that month, after their seventh monthly decline, had been down 16% YoY.
-These trusts target ‘millionaire households’ (in US dollars) with at least 1MM yuan (US$160,000) to invest, of which there were 1.4MM in 2011 (a number expected to double by 2015). But there are two potential flies in the ointment. First, the number of millionaire households could grow less fast, if not outright decline, & the willingness of the remainder to invest in trust paper diminish, if there serious defaults (thereby causing roll-over problems for the trusts as well), & well-to-do Chinese have started to invest more abroad (for both security- & diversification reasons), a process facilitated, if not outright encouraged, by a government anxious to cut its exposure to the US dollar.

BOYS’ DEATH IN TRASH BIN SPARKS ANGER (Dow Jones)
-The discovery on November 16^th in the city of Bijie, in Guizhou Province, one of China’s poorest, of five dead boys aged nine to 13 in a garbage container has sparked anger in China’s online community about the country’s wealth gap. Street children all, they died from carbon monoxide poisoning after lighting a fire to stay warm in the bitter cold.

Part of this anger is due to the fact generations of Chinese primary school kids have had Hans Andersen’s Little Match Girl story crammed down their throats (about a little girl selling matches dying from exposure on the street on New Year’s Eve) to illustrate the evils of capitalism.       

MULTIPLE VETO THREATSLOOM OVER BUDGET MEETING (Dow Jones)
-EU leaders will meet in Brussels on November 22^nd in a potential donnybrook over the EU budget for the next seven years that pits East against West, poor against  rich, & the UK against everyone else. Basically the richer countries, with the Netherlands, Austria & Sweden in the van, seek to limit their contributions as a loose alliance led by Poland, Hungary & Portugal is fighting hard to prevent growth-promoting funds earmarked for their less-developed regions from being slashed, with the UK being the outlier in demanding a “complete freeze” of the EU budget. At issue are spending proposals worth US$1.2TR over seven years, roughly 1% of the 27 member countries’ aggregate GDP. Should these discussions fail, there is still a ‘window’ to reach unanimity until February, after which a Sword of Damocles-like, fiscal cliff-like arrangement will kick in that would automatically set the next seven years’ budgets at the approved 2013 level plus cumulative inflation, an arrangement far costlier than that currently on the table.

Given the latter fact, the ‘have” countries’ bargaining position is weak & made still weaker by the fact any proposed solution can be vetoed by any one of the 27 member countries; on the other hand, the have-nots’ position is constrained by the fact that any member countries can walk away from the whole EU business on fairly short notice (& there are actually growing sentiments to call the UK’s bluff & dare it to walk). So it’s a bit of a Mexican standoff.

WORLD GOLD DEMAND SLIPS 11 PERCENT (EJ)

• The World Gold Council reported on November 15^th that Third Quarter global gold demand was down 11% YOY to 1,085 tonnes as retail investors bought fewer bars & coins, buyers in China held back due to their slowing economy & YTD demand in India was down 24% due to gold’s record high price in rupees (although it has since picked up some during the key gold–buying pre-Diwali season), while über-sophisticated US investors, like John Paulson & George Soros, added substantially to their holdings (the latter so despite having called gold two years ago, when its price was much lower, the “ultimate bubble”).

Two questions : what explains the fact that the price of gold was nevertheless up 10+% during the quarter, & from where, since newly mined gold production is about 2,800 tonnes/year, the resultant 350-400 tonne “gap” was sourced (it’s too much to be accounted for by scrap, the supply of which declined in 2011 for the second year in a row) especially since the central bank complex as a whole supposedly also  added to its gold holdings (for the 19^th month in a row) – might some central banks be including in their holdings gold they have lent to others, thus allowing it