Not every one of you may be interested in the situation in Egypt; but for those who are, there is some interesting stuff attached to the main body of Gleanings.
According to the OECD last year 26 of its 34 member countries hiked taxes – strangely enough this may be the easiest part of the fiscal remediation process they desperately need. But empirical research suggests it is also far less effective in turning unsustainable deficit situations around than spending cuts. And, while people’s annoyance at having their pockets picked can be assuaged by spinning it as a social obligation or, when applied to the “rich” (i.e. anyone who is better off than you), as a matter of social justice, spending cuts will eat into people’s entitlements, which is something that that cannot be spun, no how!
The market was spooked by a sentence in the latest FOMC minutes that “several” members had expressed views monetary policy may have to become less accommodative before yearend - but the rotation in voting power among Regional Fed Presidents has relegated Richmond’s über-hawk Jeffrey Lacker to non-voting status. So here’s the breakdown of voting members for 2013 : super hawks – none, moderate hawks – 2 , “swing” Governors (incl. Bernanke) – 3, moderately dovish Governors 3 & super doves – 4, So the doves will have the upper hand, especially so since they include William Dudley, the President of the NY Fed & Fed Vice Chairman Janet Yellen, formerly of the San Francisco Fed (whose term doesn’t expire until 2024 who supposedly is in line to succeed Bernanke a year from now when his term ends – he has made it clear he doesn’t want to stay, although the possibility cannot be ruled out that events in the next 12 months may make her strong dovish bias work against her).
In December, despite the loss of 13,000 public sector jobs, the US economy created a net 155,000 new ones. And the 34,000 new manufacturing jobs included brought the year’s total of newly created factory jobs to 180,000 which, when added to the 233,000 created in 2011 & the 110,000 in 2010, means that in the past three years over half a million new manufacturing jobs have been created & that the number of such jobs is now is at a post-2009 high – it has gone largely unnoticed that the global competitiveness of US manufacturers has improved.
Back in 2008 cars averaged 20.2 mpg, vs. 23.9 mpg today, & since then vehicle miles driven in the US have declined 3.3% – straightlining such numbers into the future may have underlain the optimistic forecast about US oil consumption by 2030 the IEA recently generated.
For three years ended in late 2011 a group of Georgetown University students, guided by 65 year-old Phillip Karber, a scholar-in-residence at the University’s Institute for Law, Science and Global Security & once a top Pentagon Cold War strategist, have plowed through masses of material from a variety of sources in an attempt to map the (estimated 3,000 mile-long) tunnel system constructed over the years by China’s Second Artillery Corps (a secretive branch of the PLA in charge of deploying & protecting its arsenal of ballistic missiles & nuclear warheads) that the Chinese media refer to as “Our Underground Great Wall”. Its most contentious conclusion was that its nuclear arsenal may be several times greater than estimated by arms control experts, & could be as high as 3,000, a number that has been widely disputed, most recently by the general once in charge of Russia’s strategic forces, who estimates it has 200 ‘strategic’ (long range) missiles & 750 ‘theatre & tactical” weapons (for use on the field of battle). Presumably as a result of this, the latest National Defense Authorization Act, that was signed into law by President Obama on January 2nd, orders the Commander of the US Strategic Command to report by August 15th on the “underground tunnel network used by the People’s Republic of China, with respect to the capability of the US to use conventional and nuclear forces to neutralize such tunnels and what is stored in those tunnels” – a year ago Beijing took offense at the 2011 Act making a reference to Japan’s administration of the Senkaku/Diaoyu islands. This year it will likely react even more negatively to this.
One observer of the Israeli political scene notes that, if Israeli voters elect a government in which Netanyahu is the dove, they may have shot themselves in the foot. For the critical driver of their country’s relationship with the US has long been the US Israeli lobby, & he believes that much of that lobby’s support comes from secular Jews who may grow less enamoured with, & unquestioning of, an Israeli government that is turning its back on the democratic-, & social justice-, principles their parents & grandparents had taught them the State of Israel stood for. According to a prominent dovish politician of long standing, “The world’s Jews want an Israel they can be proud of, and not an Israel that … is considered an occupying state.”
After long denying sanctions’ effectiveness, Iran’s Oil Minister Rostam Qasemi now concedes that “there has been a 40% decrease in oil sales and a 45% decrease in repatriated money”.
Anyone looking for confirmation that the pace in China’s economy has quickened can take heart from iron ore prices, which are a good gauge of its ups & downs. For they started out 2012 at US$150/tonne, nosedived to US$90 at midyear & closed out the year at US$140.
China’s hoi polloi are becoming more agitated with each blogged case of corruption among, & unfettered conspicuous consumption by, public officials. The latest is the wedding banquet put on for his son by Wang Qinsheng, the Deputy Director of Hunan Province’s Bureau of Justice. The 30-table event at a five star hotel was compared to ‘like an imperial palace party’ with the couple gifted with 1MM yuan (US$160,500) in cash in the usual red envelopes.
Pollution is increasingly becoming a front-and-centre issue for the Chinese people (for it is hard to enjoy life when one, or worse still one’s only child, cannot breathe the air or drink the water). In the past five years it has sparked most riots, social disturbances & protests in China (that now average 500 per day). So far this year there have already been two major, headline-grabbing pollution-related events. First a chemical spill into a river caused the authorities in downstream Handan City, Shanxi Province, to shut off the water supply for its 9MM habitants. And then Being’s 20MM inhabitants learnt from a media report, despite attempts to suppress it, that inappropriate sewage treatment & garbage disposal had compromised their tap water quality.
Tuo Zhen (age 53) graduated from Wuhan University in political economics in 1982. After working as an, often crusading, journalist, most recently at Xinhua, he joined the Guandong Province government in 2011 as it propaganda chief. The Southern Weekly is a local publication known for its investigative journalism. Its editorial staff’s front page New Year’s message called for guaranteed constitutional rights for the Chinese people. Without their knowledge, Tuo Zhen replaced it with a shorter one extolling the achievements of the Communist Party. This has since all but spun out of control. The paper’s editorial staff first issued an open letter calling his action “ignorant and excessive” & demanded an investigation, and then went on strike. Ex-employees have demanded he be sacked. The journalism school at Nanjing University called his action a “backward” step to press freedom & demanded an apology. The majority of Chinese media outlets have sided with the publication’s staff in an unprecedented display of opposition to censorship; thus, when all five major web portals were forced to carry a Global Times editorial criticizing the Southern Weekly editors, they added a disclaimer saying the views expressed in it weren’t theirs. One major paper even cleverly arranged the headlines on its front page in such a way that the first characters in each, when read together, said “Go Southern Weekly”. The Communists Party’s People’s Daily counseled the government to be accommodative. Li Chenpeng, one of China’s most famous bloggers, wrote “We don’t need tall buildings, we need a newspaper that speaks the truth. We don’t need the second-highest GDP in the world, we need a newspaper that speaks the truth. We don’t need a fleet of aircraft carriers, we need a newspaper that speaks the truth”. Demonstrators at one protest gathering were shown carrying signs saying “Four courses and a soup are not real reform. Only press freedom is real reform”. Amidst all this, damage control efforts by Foreign Ministry spokesman Hua Chunying (“There is no censorship in China”) & the paper’s management (“the offending editorial was not written by Tuo Zhen”) went nowhere – the local media’s dissatisfaction with the status quo is but one, albeit a critical one, of the many public dissatisfaction problems facing the incoming leaders.
But there may be more to this than meets the eye. Guangdong Province, up the road from Hongkong, is China’s economic development ‘poster child’. Since 2007 it has been run by Wang Yang (often portrayed as a reformist since his priority was economic growth, in contrast to the now disgraced “conservative” Bo Xilai, who succeeded him as party chief in Chongquin, whose priority was income distribution, especially into his wife’s bank account). A year ago, both were deemed prime prospects to become members of the Politburo’s all-powerful Standing Committee at the recent 18th Party Congress that thrust Xi Jinping into the Presidency. But neither made it. Bo Xilai due to his, & his wife’s, doings, and Wang Yang because he likely fell victim to the power struggle, & subsequent horse trading, between the ‘Maoist’ & the ‘reformist’ wings of the Communist Party during the 18th Party Congress. Moreover, in mid-December Wang was replaced as the chief poobah in Guangdong by Hu Chunhua who, at age 49, is deemed a ‘comer’, being groomed for election to the Standing Committee in 2017 &, by some accounts, to succeed Xi Jinping in 2022. His was a ‘cross posting’ with Wang, with the latter being the loser by being effectively banished to, & replacing Hu in, Inner Mongolia. And, while Wang had displayed a conciliatory side & ‘interpreted’ Beijing’s instructions liberally, Hu, in his 19 years in Tibet & three in Inner Mongolia, both home to restive minorities, gained more familiarity with “stick”, rather than “carrot”, methods of dealing with law & order situations.
It seems unlikely that Tuo Zhen, especially given his track record as a journalist, acted on his own, but was motivated by the ‘nod-nod, wink-wink’ encouragement of, if not outright instructions from, Hu. If so, there are two possibilities. He acted on his own to make it clear to the locals who was now in charge in Guangdong Province and/or raise his profile in the Party; if so, he may have bitten off more than he can chew by creating a major problem, if not precipitating a crisis at a inconvenient time, for XI while he is still in the early stages of consolidating his hold on power. Or, he did so at the instigation of the Maoist faction in the Party so as to embarrass Xi at a time he is still vulnerable & to remind him to mind his manners & not stray too far from the Party’s doctrinal base. Either way, Hu may not have done his future prospects any favours; for by all appearances the ‘reformists’ are in the ascendancy. .
Lin Yifu was the World Bank’s Chief Economist for four year stretch ended last year & now teaches at Beijing’s Peking University. On January 8th he told an NYSE-sponsored conference on China that if Beijing were to reduce its support for SOEs, unshackled the banks, widened income distribution (rather than disparity) & dealt with “widespread” corruption, its economy had the potential to grow at a sustained 8% annual rate for the next 20 years (but it remains to be seen how successful the Xi Linping will be in dealing with any of the above, never mind all four) – He grew up in Taiwan where he got an MBA on a defense scholarship in 1978 but then, less than a year after rejoining the Taiwanese Army with the rank of captain, defected to the Mainland, leaving his pregnant wife, Chen Yunying & a three year-old child behind. In 1982 he graduated from Peking University with an MA in Marxist political economy & in 1986 with a Ph.D. in economics from the University of Chicago (while in the US he re-united with Chen Yunying & their now two children) who was in the US taking a Ph.D. in special education. Later they both returned to the Mainland where his wife is now a member of the People’s National Congress & widely known as the founder of special education in China (according to the Second China National Sample Survey in 2006 China had 83MM handicapped people, i.e. 6½% of the population, 75% of whom live in the rural areas. But this may be a lowball number; for the corresponding number, albeit likely using quite different criteria, in the US is 12%, & according to the UN 10% of the world’s population is handicapped (80% of them living in developing countries & only 3% of them literate), with their number is growing in relative terms due to medical advances & the aging population.
At some point between January 5th & 8th Google blinked & removed the feature that had informed its Chinese users of censored key words, and & deleted the help feature that explained how to get around the censor – allegedly for fear of a loss of advertising revenues.
On January 5th Japanese fighter jets were scrambled when, for the third time in a month, a Chinese state-owned plane (i.e. not an air force jet fighter) flew near (120 kms) the Senkaku/Diaoyu islands. Tokyo is now said to be thinking of allowing its Air Self Defense Force jets to fire warning shots at (Chinese) planes getting too close to the islands. Needless to say, this didn’t sit well with Beijing. Xinhua called it “dangerous and irresponsible”, & the Global Times warned “Japan’s tracer bullets will bring war closer” & cranked up its war mongering rhetoric – this all but challenges Beijing to call Tokyo’s ‘bluff’, deeming it a win-win situation.
Japan’s November exports to China (20% of the total) were down 14.5% YoY – not altogether surprisingly so since two out of three Chinese interviewed recently indicated they will shun Japanese products because of Diaoyu/ Senkaku Islands’ dispute.
One strategist noted “Japan has been stimulated so often it is a wonder it is not in a permanent state of excitement. If the government debt load gets any higher, it will block the sun.”
Japan’s new Finance Minister, Taro Aso, told reporters his government plans to buy bonds out of the portfolio of the EU bailout facility – to help drive the price of the Yen down in FX markets (& prop up the Euro) &, incidentally, to earn some brownie points with the EU.
Lower Saxony is a State in Germany’s very Northwest, bordering to the West on Holland & to the Northwest on the North Sea. It is the German State with the second largest landmass & fourth largest population (8MM), but, despite five Volkswagen establishments on it territory, incl. its World Headquarters in Wolfsburg, with a below average per capita GDP (& only slightly above the EU 27 average). It will have an election on Sunday January 20th that is a dress rehearsal for the election Ms. Merkel faces in September. For in both cases the leaders outpoll the their ruling Christian Democratic party, their party has ve a comfortable 40% plurality, vs. the Social Democrat’s 27% at the federal level & 34% in Lower Saxony, and the Green Party’s 14% % 13%. Both currently have the libertarian Free Democrats as their junior coalition partner; but the latter is polling just 4% in both places & under German electoral law if a party doesn’t get 5% voter support, its get no seats at all, nada! (& even if it did pass that hurdle, it would be unlikely to be able to bring enough seats to the table to give the Christian Democrats a working majority. With a Red/Green (i.e. Social Democrat/Green) coalition a long shot at best, it then becomes a question as to whether the outcome will be a Red/Green or a Black/Green coalition (by the way, the current First Minister in Lower Saxony is young (41), telegenic, popular & a rising star in the CD party with the unlikely German name of David McAllister).
According to Bryan Wiley, Rabobank’s grains analyst, “There have been terrible grain harvests around the world. Russia is in the throes of a 100-year drought … but bigger harvests next year … should provide some relief” (unfortunately, just as a but a bird in the hand is better than ten in the bush, grain supplies only count when they’re in the bin) – meanwhile Britain’s wheat crop was hit by adverse weather that cut yields & made most wheat harvested unfit for bread making, thus necessitating the biggest wheat imports in 30 years, Australia-based MacQuarrie believes most major wheat exporters will largely deplete their exportable supplies in the First Quarter, Argentina & Australia had sub-standard wheat crops, the outlook for the US winter wheat crop is worrisome, and relative prices being what they are American farmers will be better off growing grains next year other than wheat.
GLEANINGS II – 493
Thursday January 10th, 2013
GIVE CHUCK A CHANCE (NYT, Thomas L. Friedman)
NETANYAHU TRIES TO HOLD BACK FAR-RIGHT SURGE (Reuters)
FORMER SECURITY CHIEF TEARS A STRIP OF NETANYAHU (NYT), Jodi Rudoren)
The best the Prime Minister’s Office could do to deal with his criticism was to accuse him of being a sore lose, having been passed over by Netanyahu for the leadership of the Mossad.
ISRAEL’S SHIFT TO THE RIGHT WILL ALIENATE THOSE IT NEEDS MOST
(The Guardian, Jonathan Freedland)
Feiglin goes to the Temple Mount, Judaism’s holiest site, monthly to pray in disregard of a rule that Jews are not to pray, or bring religious accoutrements, there to avoid confrontations with Muslims at the nearby Al-Aksa mosque. Occasionally he gets arrested for doing so, but let go after a couple of hours with no charges being laid, most recently on New Year’s Day. It seems strange though, to limit the rights of the Jews on the site, & not that of the Muslims.
FATAH CELEBRATION IN GAZA SIGNALS EASING OF RIFT WITH HAMAS
(NYT, Jodi Rudoren)
So far their “reconciliations” has always been short-lived. But there have been indications that, while Hamas’ official ‘line’ on Israel will remain as dogmatically negative as ever, it has in practice become more realistic about accepting its presence in the region (possibly since, with Sunni Hamas having fallen out with Shiite Iran due to its refusal to support the Alawite/Shiite regime of Syria’s Bashir al-Assad, it now needs, & is getting, funding support from the Sunni Arab regimes. If so, this could be a good news, bad news story for Israel, the former since it may make Southern Israel safer & the latter because Netanyahu will no longer be able to play divide-and-conquer with the Palestinians. And what ought to be of real concern to Netanyahu is that, while Palestinian Prime Minister Salam Fayyad is complaining that his government is in “extreme jeopardy” because the Arab governments have failed to send the hundreds of millions of dollars they had promised, Qatar, for one, is shoveling loads of money into Hamas’ coffers in Gaza). And while the European countries have held up their end, Congress last year held up US$200MM in aid, although Obama has said he ‘hopes’ to be deliver it this year, with another US$250MM thrown in for good measure.. .
TURKEY TO HALT OIL DATA BREAKDOWN (DJ)
Its government in the past regularly provided a breakdown of where its oil imports originated which proved Turkey has long been a major buyer of Iranian oil,. But its monopoly oil refiner, Tupras, recently requested the Turkish Statistics Institute (TUIK), & it agreed, to quit detailing imports & just provide aggregate numbers.
UNEMPLOYMENT IN EUROZONE HITS RECORD HIGH(G&M, Eric Reguly)
-At last report unemployment was a record high 11.8% in the Eurozone but stable, at 10.7%, in the entire 27-country EU (implying it had eased a bit in the 10 non-Eurozone countries). With two-thirds of the EU’s population, the Eurozone countries now are home to almost three-quarters of its unemployed. But the real story is youth (15-25 year) unemployment; in the EU as a whole it was up to 23.7% (from 22.2%), in the Eurozone to 24.4% (21.6%), in Greece 57.6%, Spain 56.5%, & in Italy 37.1%, up from 32.2% (although many of these officially unemployed may be working in the underground economy). But there was also some good news : in Germany unemployment was steady at 5.5% even though exports were down 3.4%, & the EC reported that its economic sentiment index was up in December for the second month in a row, to its highest level in six months, in part due greater strength in its consumer confidence component.
And apart from Germany’s 5.5%, the unemployment rate was 4.5% in Austria, 7.8% in the UK & 10.5% in France.
ROUSSEFF BETS ON COUNTRY’S RECOVERY (Reuters, Brian Winter)
Left-of-centre economists love tinkering & have an exaggerated faith in their own ability not to let things get out of hand; unfortunately more often than not they have been proven wrong in this regard. Brazil has so much going for it, incl. a wealth of resources, more unused arable land than the rest on the world combined & huge renewable water supplies that, if left alone, it would very probably return fairly quickly to a higher growth track. And while there has been some political unrest about the economy being more sluggish than before, this seems like an ill-advised gamble at this time, with her not even being halfway in here five-year term.
With media coverage of Egypt has focused largely on the political situation, it hasn’t adequately covered that economically & financially the place may be coming apart at the seams, with potentially dire consequences for the geopolitical situation in the region (some observers expect youth unemployment to reach Greece/Spain-like 50+% levels later this year). President Morsi & the Brotherhood may yet come to rue the day democratic elections propelled them into office.
Since Mubarrak’s resignation Egypt’s GDP growth rate has plummeted (thereby reducing potential, & much needed, job creation). For the political unrest has interfered with the day-to-day operation of the economy. Tourism has dropped off. And the well-to-do locals, fearing a massive devaluation, & foreign investors, fearing both a devaluation & continued political turmoil, have been selling Egyptian pounds with a vengeance. So, following Mubarrak’s resignation in February 2011, as the government sought to avoid a precipitous decline in the external value of its currency, Egypt’s FX reserves declined 50% YoY, to US$18BN, by December 31st, 2011. And while the official December 31st, 2012 figure of US$15BN (only three months’ imports) suggests the situation had sort-of stabilized, netting out the fact that in June Saudi Arabia sent US$1.5BN to Cairo, and since then Qatar another US$2BN & Turkey US$500MM (with another $500MM scheduled to arrive from Turkey later this month), suggests that on an apples-to-apples basis Egypt’s FX reserves in 2012 declined another 40% YoY to US$11BN (i.e. two months of imports). Meanwhile, its fiscal deficit is soaring, in part due to the impact of slower growth on tax revenues (last July’s deficit forecast by the Minister of Finance of US$21.2BN, 9.2% of GDP, for the year ending June 30th, 2013, was recently revised to US$31.7BN, 13.8%). And in the year to June 30th, 2012 its (chronic) balance of payments’ deficit widened by 15% to US$11.3BN, in part because tourism receipts, a major FX earner for Egypt, have crashed.
Last November the Morsi government agreed in principle with the IMF on the terms for a US$4.8BN loan. Then the political situation forced a suspension of discussions, which are resuming this week. But the conditionalities for such a loan include highly unpopular tax hikes (albeit mostly on the well-to-do) & spending cuts (incl. a rationalization of its US$5.5 BN subsidy program for a number of food stuffs, of which bread is the most high-profile even though it accounts for only US$1BN thereof). Three quarters of Egyptians can buy bread at 1¢/loaf; but, while cheap bread is critically important to the 42% of Egyptians having to make do with < US$2.50/day, there are many others for whom cheap bread doesn’t fill a need but rather constitutes an entitlement). Such conditions to an IMF loan risk launching Egypt on a similar seemingly ‘road to nowhere’ economic trajectory as Greece, with major potential political consequences. And while Greece is a geopolitical zero, Egypt is a key player in an important region.
The bread subsidy is Egypt’s ‘third rail issue’. Proposals to reduce it got Anwar Sadat into trouble three decades ago & marked the beginning of the end for Mubarrak (the rallying cry of the anti-Mubarrak forces was “Bread, Dignity & Social Justice” – note the order!) On a per capita basis Egyptians are alleged to eat the most bread in the world (200 kg/year). But the country’s per capita arable land base is tiny, 0.04 hectares, i.e. a plot 20m x 20m (which, as is the case everywhere, is increasingly encroached upon by urban spread while any replacement arable land brought on stream tends to be less productive), although this is not uncommon in a region where several other Arab nations have none at all, & Israel has the same 0.04 hectares (by comparison, Australia has 2.15 hectares, Canada 1.34, Argentina 0.77 & the US 0.53) And in part due to the shift of people from the country side to the cities, in part to the loss of prime arable land, & in part because, with the natural fertility of the soil exhausted long ago, growing wheat is expensive in Egypt (the government’s recent 10% increase in the price paid for locally-grown wheat means local farmers now get twice what imported wheat costs), local wheat output has grown slowly, at a 1.36% compound annual growth rate in the last five years (compared to the population’s 1.04%), while, with a dietary shift among the upper classes towards more meat consumption, wheat consumption has soared at a 3.35% compound annual rate. So Egypt’s wheat imports in the last five years have soared to an average 10.4MM tonnes (13% of the global total), representing a 6.47% compound annual growth rate over the preceding five year period, a trend which can only continue. This will make Egypt increasingly vulnerable to any further ‘wheat price shocks’ that the underlying global supply situation seems to make almost inevitable (thereby compounding the already substantial economic management-, fiscal-, & balance of payments’-, challenges facing the Egyptian government). One, but not the only, risk in all this is that the Brotherhood regime may seek to divert public attention from these domestic challenges by creating an external enemy, i.e. Israel