Gleanings II 480 Compliments of Nick Rast van Tonningen Posted by John on October 6, 2012

Gleanings II 480 Compliments of Nick Rast van Tonningen on October 5, 2012

In the US & Canada retail investors are flocking out of equity funds into bond funds. In the week ended September 19^th they did so in the US to the tune of US$8BN (just marginally below preceding week’s US$8.1BN 13-week high). But in so doing they may be jumping from the frying pan into the fire. For while doing so may avoid the volatility of the stock market (the day-to-day gyrations of which ought not concern genuine long-term investors), they expose themselves to the (near) certainty of loss of capital; for bond yields in real terms are negative on an after-tax basis & the market value of bonds declines when interest rates rise (as they will  inevitably start doing at some point in the foreseeable future, regardless of what the Fed says). In contrast, smart investors abandoning bonds are seeking refuge in dividend-paying stocks (income from which for taxable entities gets more favorable treatment from the tax man).

In January 2009 2.4MM Americans were drawing benefits under the Social Security Disability Insurance (SSDI) program. By September 30^th, 2011 their number had grown 3½x to 8.3MM, collecting US$119BN in benefits which, if past experience is anything to go by, they will continue doing until retirement age – the growth in their numbers suggests that it now includes a large number of malingerers of a type that Bill Clinton’s welfare reform two decades ago  forced back into the work force by making them “sing for their supper”.

The film Won’t Back Down had advanced screenings at both the Democratic & Republican conventions. Released to the public on September 28^th, it has the teachers’ unions’ drawers in a knot, one of which has launched an ad campaign against it (which, if anything, is all but certain to ensure more people will want to see it for themselves than otherwise might have been the case). It stars Maggie Gyllenhaal as a crusading single mother who, with the help of a disillusioned teacher (Viola Davis) seeks to rescue a mismanaged school in Pittsburgh in the face of opposition of teachers’ union reps played by Holly Hunter & Ned Eisenberg.

The latest NBCNews/WSJ poll had Obama leading Romney 70-20 among Latino voters, a 15 point hike since August, & better even than his 67-31 spread over McCain in 2008; this will prompt the Obama machine to redouble their efforts to get the Latino vote out.

In the seven day period ended September 20^th, the US Transport Security Administration found 47 guns (38 of them loaded, incl. six with a round in the chamber – one of which the policeman called in to unload it accidentally discharged it without, however, hitting anyone) in air travelers’ carry-on luggage, as well as three hand grenades, and quantities of black powder, hunting knives, timing fuses & a sword. Guns are becoming a problem : YTD the TSA has found 1,105 guns in carry-on luggage, vs. 1,320 & 1,123 in all of 2011 & 2010. One reason given is the proliferation of ‘right-to-carry’ laws (& of concealed weapons licenses) and  the growth of gun sales across the country, from 8.9MM in 2001 to 14.4MM in 2010 & 16.4MM in 2011.

Last week saw Romney in the swing state of Ohio decrying China as a foreign trade “cheater” at the very same time Michael Bell, the (Independent) Mayor of Toledo, a city hard hit by the recession, hosted 150 Chinese investors looking for investment opportunities in the Midwest.

Canada is in the throes of its biggest food scare ever. A small number of E-coli cases in Alberta were traced back to one of Canada’s largest beef abattoirs, in Brooks, Alberta. So far over 1,500 different products have been recalled, another blow to beef farmers pummeled not  long ago by a few cases of mad cow disease. This event, however, is different from the last, much smaller such event several years ago, a listeria outbreak traced back to a meat processing plant in Toronto. For the latter was due to inadequate cleaning of equipment & was  detected locally, whereas this one was brought about by flaws in the slaughtering process itself, the concept of ‘factory farming’ & the Harper government’s attempt to downsize government (in this case by switching to ‘self regulation’ in the food processing industry) & was first identified, not by Canada’s increasingly lax food inspection system, but by US inspectors at the US border in an export shipment (if interested you can find my personal views on this matter at the very end of the main body of Gleanings).

The irrationality of the Harper government’s drive for downsizing government is illustrated nowhere better than in the forced retirement of a four-legged public servant, a seven year-old Chocolate Labrador Retriever called Bailey. Her job, along with her colleague Brodie who has also been declared redundant, was to sniff out firearms & narcotics hidden in shipping containers arriving in the port of Vancouver (in  2011 she sniffed out, among others, seven kilos of opium). She is being replaced by machines that, says her handler, in the past didn’t find stuff that the dogs subsequently did find – the nice thing about canine employees is that they don’t draw a salary, don’t cost much to feed & don’t require a benefit package, and that, upon their retirement they go to a “good home”, often their handlers’, at zero, cost to the tax payer And the machines that replace them like will have a shorter useful life & a higher cost of maintenance.

More trouble for Israel? The former Greenpeace ship Estelle is expected to set sail from Naples for Gaza on October 6^th, carrying humanitarian goods & the usual complement of activists sympathetic to the pro-Palestinian group sponsoring this venture.

A developer has unveiled plans to build a replica of the Taj Mahal in Dubai, 4x the size of the original, to serve as “the world’s grandest wedding venue”.

In Italy, for the first time since WW II, in 2011 bike sales just outstripped new car sales, 1,750,000 to 1,748,000 – a harbinger of things to come for the rest of the developed world – albeit perhaps less so for North America where ‘urban sprawl’ has long reigned supreme?

In Spain the VAT (Value-Added Tax) is going from 18% to 21%. So a municipal theatre in the Catalonian town of Bescanó has quit selling tickets & … started selling carrots, at 13 – 15 Euros each, for admission to its performances since as a ‘staple food’ carrots are VAT-exempt. – there is never any end to human ingenuity where money is concerned, especially where government is involved. And the Governor of Spain’s central bank put the cat among the pigeons when he told Parliament’s Budgetary Committee recently that the government’s proposed 2013 budget assumptions are “certainly optimistic in comparison with the outlook shared by the majority of international organizations and analysts”, and that, to achieve the 4½% of GDP deficit target would require further cutbacks, over & above those proposed by Prime Minister Rajoy.

GLEANINGS II – 480

Thursday October 4^th, 2012

BERNANKE TAKES AIM AT POLICY CRITICS (G&M, Kevin Carmichael)

• In a speech to the Economics Club of Indiana he criticized those who contend the Fed’s monetary policy is sowing the seeds of inflation, enabling profligate politicians & debasing the US dollar, and postulated that, rather than the recent weak economic indicators heralding a recession, they merely signalled a rate of economic growth too slow to lower the unemployment rate, & that the Fed “will take care not to raise rates prematurely”, so long as there is no threat of inflation. He explained that he isn’t flooding the US economy with cash since, when the Fed buys financial assets, it creates credits on the balance sheets of private banks which are loath to lend & therefore recycle it back into their accounts at the Fed. Finally, he expressed confidence that, if the banks start lending more freely, the Fed will have the tools to squeeze excess liquidity out of the financial system.

Why bother giving the banks more money if they aren’t going to onlend it? As to whether or not  the Fed is fueling inflation, time will tell; the markets seem to think it will & the old market adage is “Don’t fight the tape”. And by having monetary policy pick up the slack from the politicians, he certainly is aiding & abetting irresponsible behaviour on their part (the minutes of the last FOMC meeting showed that several of its members had serious reservations about launching QE3..

GREENBACK’S SUPREMACY IN DOUBT (Reuters, Martin Hutchison)

• Goldman CEO Lloyd Blankfein told a panel at the high-powered Clinton Global Initiative

gathering in New York on September 24^th that the higher taxes & spending cuts kicking  in on January 1^st if Congress doesn’t act (the notorious “fiscal cliff”) could jeopardize the US dollar’s global supremacy, as could any alternative path that fails to cut US deficits & slow federal borrowing. Furthermore that, with the Euro, the Yen & the Yuan having problems of their own, for the first time in several centuries we may face a world order with no single currency of denomination to facilitate global trade & investment.

The Common Wisdom is that the ‘lame duck’ Congress will rough out a temporary solution to the fiscal cliff problem, leaving the details to be filled in by the next Congress – one flaw with this is that the devil is always in the details, a second that there is no reason to assume that the Tea Partiers have any intention of abandoning their position of “Read my lips : no tax increases & a smaller government but be sure you don’t touch my entitlements” & a third that evidence is lacking that politicians are willing to accept the US is deep into fiscal doo-doo.

WITH CENTRAL BANKERS HUMBLE, THE MARKETS STUMBLE (G&M, Kevin Carmichael)

• Prior to Christine’s Lagarde’s coronation as the new IMF Managing Director there were many who felt she lacked the necessary expertise (she is a lawyer by trade). But when she warned on September 24^th it would be a mistake to assume the recent stock market rally driven by the further easing moves by the ECB, the Bank of Japan & the Fed would last, the market took her at her word & swooned. And while her message to politicians was ‘the central banks have done their bit & now it is up to you to do yours, the best that can likely be hoped for is that they won’t do anything to make matters worse.

The problem with our system is that the politicians are now being elected to bribe people with their own money, not to make hard decisions that might see them tarred & feathered, and run out of town on a rail.

TO FIGHT CRIME, A POOR CITY WILL TRADE IN ITS POLICE FORCE (NYT, Kate Zernike)

• Camden, NJ., pop. 77,283, across the river from Pittsburgh, Pa., is the US’ poorest & most dangerous city : 40% of its residents live below the poverty line &, at last report, had a violent crime rate 5x the national average, & a murder rate 18x New York’s. In November, it will start letting the remaining 273 members of its current police force go & replace them with 400 mostly new non-unionized police officers, a move that, somewhat surprisingly, has created little union-driven public hue & cry in this solidly Democratic city because the current force is perceived as incompetent, corrupt & ineffective.
• There are two reasons for this. In 2011 the city had a US$167MM budget but collected only US$21MM in property taxes; it has long depended on the state to make up the diff but it has turned off the spigot. And the police budget accounted for US$65MM, one-third of the total, & officials say it’s financially impossible to keep enough officers on the street with union contracts that provide for salaries ranging from US$47,000 to US$81,000 & a wealth of perks, incl. shift differentials, ‘longevity’ bonuses for officers with only five years’ service, and liberal sick-, & family-, leave provisions that have resulted in absentee rates of 30% (‘normally’ they would be in the lower single digit range).

This is only a harbinger of things to come. Washington may not be in great fiscal shape but many sub-national governments are hardly any better off (although they tend to be much less debt-laden); this is what has helped to hold back job growth, public sector job shedding.

HOW THE US MILITARY THINKS ISRAEL MIGHT STRIKE IRAN

(Foreign Policy, Mark Perry)

• Israel & the US have always shared their military intelligence. But that hasn’t applied to the former’s plans for attacking Iran, despite repeated requests by Defense Secretary Leon Panetta. So the Pentagon has been scenario building, “a kind of reverse engineering … We take a look at their assets and capabilities … and ask ourselves how we would act if we had what they have.” This has identified three options :

Massive bombing runs on key nuclear installations – aerial attacks coordinated with submarine-launched missile strikes and cyber & electronic warfare attacks. But the Pentagon believes Israel lacks the military capability for more than a “one time there & one time back” effort which would at best set Iran’s nuclear program back one of two years – Its biggest drawback is that Israel doesn’t have MAPs (Massive Ordnance Penetration bombs), like the 20 or so GBU-57s the US is believed to possess – that even Bush 43 wouldn’t let Netanyahu have – capable of penetrating 200 ft of concrete before exploding their 5,300 lbs warheads) nor the B-2s needed to carry them to their target;

Regime decapitation – bombing and/or commando raids to wipe out the regime’s leadership. This is deemed the most dangerous option for the US since it would leave the Republican Guard in charge, who would likely respond with attacks on US ‘assets’ in the region, thereby drawing it into a conflict it didn’t start – the US military’s attitude toward Israel has been changing : “We’ve … been as solid an ally as they’ve ever had … so they can defend themselves. Not so they can start World War III … If Israel starts a war … America’s first option will be to stop it … as will be its second and third (option)”;

An Iranian Entebbe – Named after the 1976 rescue of the passengers on a hijacked El-Al plane parked at the Entebbe, Uganda airport (when the only casualty on the IDF side was Netanyahu’s brother Yonathan). This would involve landing six C-130 freighters, each carrying 70 members of the Sayeret Matkal (the IDF’s Special forces, of which both Netanyahu & Defense Minister Barak are alums) in the desert near the main Iranian nuclear establishment at Fordow, attacking it & overcoming its defenders, removing as much nuclear material as they could carry & mining the place to blow it up as they left – while this option would utilize the IDF’s greatest asset, its Special Forces (a unit of which is said to have been training for just such a ‘deep penetration’ raid), it’s also by far the most risky. The logistical support on the ground in Iran for such a mission would have to be intense. It would require neutralizing Iran’s anti-aircraft defense system. Keeping the element of surprise critical to the success of such a raid would be hard, if not impossible. This could easily turn into a suicide mission and/or embarrassing failure with Israeli dead & military materiel all over the Iranian desert and, possibly, Israeli prisoners in Iranian hands, and would deal a death blow to Netanyahu’s political career & possibly be the beginning of the end for the survival to the Jewish state of Israel.

Netanyahu’s red line argument, at the UN & elsewhere, has been all about trying to pressure Obama to commit the US to ‘when they start shooting, we’ll start shooting as well’. One retired USAF type’s assessment : “Bottom line? We can do it and they can’t (i.e. bomb Iran), because we have what they don’t” (i.e. bunker-busting bombs and a surfeit of aerial refueling tankers & of pilots experienced in aerial refueling).

HOW NETANYAHU’S ‘BOMB IRAN’ PLAN FAILED (al-Jazeera, Gareth Porter)

• The world can stop worrying about Netanyahu’s threats to bomb Iran. For journalist Jeffrey Goldenberg, whom Netanyahu twice used to convey to the US his purported readiness to go to war, called his speech at the UN a “concession speech” : in his eyes Netanyahu in effect conceded in it that his effort to force the US to accept his “red line” had failed completely, due to an unexpectedly strong pushback by President Obama against his antics. And nowhere in his alarmist portrayal (at the UN) of Iran being at the final stage of uranium enrichment next summer was there even the slightest hint that in the absence of US support he was prepared to go it alone; in fact, looking back there is good reason to doubt that he & Defense Minister Ehud Barak ever intended to do so.

Netanyahu had two interlinked problems : he lacked the support at home of much of his Cabinet & his people for unilateral action against Iran that would have made it difficult for Obama to ignore him & he needed Obama ‘onside’ to override his lack of domestic support.

US CITIZEN SENTENCED TO LIFE IMPRISONMENT IN IRAQ (Khaleej Times)

• Omar Rashid Khalil, age 53, is an architectural engineer of Palestinian descent but a US citizen who first came to Iraq a decade ago. On October 3^rd Baghdad’s central criminal court sentenced him to life in prison for having assisted al-Qaeda & for having helped to fund terrorist activities, after he allegedly ‘confessed’ to having done so.

He likely got off easy because the very next day six others convinced on similar charges were executed, thereby joining the other 96 that YTD have suffered a similar fate.

IRAN ERUPTS AS OIL EMBARGO SENDS CURRENCY PLUNGING

(The Independent, Carina Stewart)

• The Iranian regime blames the recent sharp decline in the rial’s value on speculators & has started cracking down on the black market money changers, prompting protests that closed down the Grand Bazaar whose merchants played a key role in the downfall of the Shah in 1979. And there are signs of dissension within the regime; while Ahmedinajad, whose term ends next June, denies his ‘economic mismanagement’ is at fault, & blames “psychological pressure” by the West, Parliament’s Speaker, Ali Larijani, says the sanctions are to blame only in small part for Iran’s economic problems.

In June Iran’s oil output hit a 20-year low of 3.2MM bbld (i.e. less than Iraq’s, and down from 3.7Mbbld in 2011 & 4.2MM bbld in 2010) & is continuing to slide to the point where the EIA expects an ‘exit rate this year of 2.7MM bbld (this hurts disproportionately with domestic oil consumption steady in the 1.6MM bbld range). But this decline in output is only in part due to the sanctions (i.e. to developments on the demand side); for on the supply side the need to divert revenues into the Budget to support social programs that seek to ‘buy’ the loyalty of the hoi polloi, deprives its oil sector of funds it needs to develop new productive capacity to offset the production drop-offs in its aging fields. As to the rial, in early 2011 it took 10,000 of them to buy one US dollar, two weeks ago this had grown to 24,600 & most recently it was North of 37,500 (i.e. it has lost 40% of its value in 10 days) as people sought refuge in the dollar from an inflation rate said to be 70% per month, well above the official 23% per year).

THOUSANDS OF IRANIANS DISPLAY RARE PROTEST OVER ECONOMY (AP)

• For weeks a manifesto circulated in secret in factories & workshops reflecting the growing anxiety of Iran’s working classes as the regime struggles with the latest sanctions that target oil exports & disconnected Iran from global banking networks. In the end, 10,000 individuals in a wide range of industries except oil signed a petition to the Labour Minister that said, among others, “a staggering increase in prices has been biting over the past year as wages of workers have only increased 13% this year … millions of workers cannot afford their housing costs.”
• The economy is suffering the double whammy effect of sanctions imposed from abroad & the mismanagement of the economy by President Ahmadinejad’s government at home. While Iran’s leadership still has broad-based public support for its nuclear program, this petition & the sporadic street demonstrations over the economy suggest a growing split between the national pride over the country’s nuclear achievements & the increasing day-to-day economic hardships. According to Sami al-Faraj, the Director of the Kuwait Center for Strategic Studies, “It’s not ideology that is the weakest link for Iran’s ruling system … It’s the economy. This, of course, was also an important element of the Arab Spring, and that fact is definitely not lost on Iran.”

The economy may be the “weakest link”, but demography is its most dangerous : over one-quarter of Iranians is 15-29 years of age, many of them relatively well-educated but with few meaningful career prospects & with as yet no serious stake in society. This is the very same age cohort that launched and gave critical mass to the Arab Spring movement (nothing is more dangerous than first educating people to expect better things & then disappointing them.                      

MASSIVE TRAFFIC JAMS AS CHINA DROPS TOLLS (DT, Malcolm Moore)

• Sunday September 30^th was the first day of the country’s nationwide Mid-Autumn Festival holiday. For the first time in a decade Beijing suspended toll collections on its 24 expressways in 16 provinces. So 86MM people rushed to take advantage thereof, causing a 40% boost in traffic volumes that turned expressways into huge parking lots with 10 km line-ups just to get on them. The police set up 14,000 temporary service booths and put 16,000 tow trucks & ambulances on standby but there were few accidents since no one was going anywhere fast. Frustrated drivers were walking their dogs on the shoulder, doing push-ups on the pavement, snoozing in their cars & even playing tennis, and the thousands of cell phone pictures posted on the Internet soon went viral on Weibo, China’s version of Twitter. According to the China Daily one driver wanting to go from Beijing to Lianyungang, Jiangsu Province, had covered just one-quarter of his 745 kms journey in 7½ hours, even after leaving home at 7:00 a.m. & the Shanghai Morning Post reported the 300 km. journey from Shanghai to Nanking was taking over 10 hours. And Li Daokui, one of China’s leading economists, commented that “making highways toll-free on holidays … (was) making a world record of stupidity.”

Pictures of 12+ lane highways chockablock with cars going nowhere are a sight to behold. If this was an attempt by Beijing to curry public favour amidst an economic slowdown & a once-in-a-decade leadership transition made dodgier than usual by the Bo Xilai affair & what it revealed about the goings-on in the upper echelons of the Communist Party, it likely backfired big time.  

SOUTH AFRICA’S ZUMA ACCUSED OF CORRUPTION (DT, Aislinn Lang)

• The 70 year-old President spent US$20MM of taxpayers’ money on his rural home in Nkandla, KwaZulu Natal, where his four wives & children live, with public records showing he will pay just 5% thereof. The ‘renovation’, which started in 2010, included a helipad, underground living quarters & parking, children’s playgrounds, a medical clinic, houses for security-, air force- & police staff (& their families?) & a visitors’ centre.
• This isn’t going over well in a country with widespread grinding poverty & unemployment in which the police recently killed 44 striking miners (leading to criticism of the Zuma government by leaders of unions that have been his core support base). It won’t help him in December when the ANC National Conference will meet to elect its leader for the next five years. Lindiwe Mazibuko, the leader of the opposition Democratic Alliance opined that, given the poverty surrounding his home, he should be ashamed of such “lavish personal enrichment” & wondered “How can a leader ask the country to make sacrifices and tighten belts in hard times when he leads such publicly funded extravagance?”. And his biographer, Jeremy Gordin, said that “This fits with Zuma’s habit of stumbling from victory to disaster…”

He is merely following in the foot steps of past Zulu chiefs; but this is the 21^st, & not the 19^th, century. The tragedy of South Africa is that the (unrealistically) high hopes of its people, & the expectations abroad that it would become a ‘shining beacon’ template for the rest of sub-Sahara Africa to follow, have foundered on the inadequacies of three presidents that were in turn a weak administrator (Mandela), a dolt  (Mbeki) & now a buffoon. As to the outcome of the National Conference vote, it’s a good news, bad news story for Zuma. The good news is that due to a sudden 36% surge in ANC members in his home province of KwaZulu- Natal it will have 974 votes at the Conference (out of a total 4,500), vs. 608 at the last one in 2007. But the bad news is that his likely, but as yet undeclared, rival, Deputy President Kgalema Motlanthe, led him 51-48 in a recent poll & has gained the support of the ousted former Leader of the ANC Youth Wing, Julius Malema (a real slimeball, if there ever was one); for, although the Youth Wing has only 45 votes, Malema’s home province of Limpopo has 574. And more generally speaking, tribal & provincial allegiances still count for much in South Africa, & the other tribes don’t care much for their traditional overlords, the Zulus, who account for only about 20% of the population (albeit for a somewhat bigger part of the ANC membership).

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Much North American beef is “finished” by feeding cattle grain in huge feedlots. But cattle were genetically engineered to be ‘hay burners’, not to be fed a predominantly, if not exclusively, grain diet. Nor were they designed to live in as close proximity to each other as they are in feed lots for several months in a row. So in feedlots they are under stress on two counts that Nature did not genetically equip them to cope with. Sixty years ago already, when I ‘worked my way through school’ in a meat packing plant, my colleagues on the beef killing floor always knew when a car load of feedlot cattle was going through (& in those days feedlots were nowhere near as massive as today); for as many as half the beef livers passing through the line were picked out of the product flow, & ‘condemned’, by Government of Canada inspectors, operating on a hands-on basis cheek-to-jowl with plant employees, due to a condition similar to cirrhosis of the liver. The stress on cattle in feed lots also interferes with the proper functioning of their immune systems; then, to top it all off,  comes an stressful trip to, & brief stay in, the killing plant, with lots of noise & heat, & even more crowding with other, often strange, cattle.

E-coli’s natural home is in the entrails of all warm-blooded creatures incl. ourselves. There are many strains of it, some of which are helpful to the host’s well-being. But like all organisms that live in, or invade their, hosts’, weakened immune systems can enable the nasties among them to proliferate. And by the time feedlot cattle end up on the killing floor many of them are covered with, often runny, cowshit which can be home to potentially harmful organisms, like ‘bad’ E-coli strains that are hard, if not impossible, to completely prevent from entering the food chain. And then, on the consumers’ receiving end, modern life styles with undue stress on ‘cleanliness’ result in people having underutilized immune systems that give such harmful organisms greater scope to do their worst.

A UBC microbiologist a decade ago invented a vaccine that would eradicate E-coli & the Government of Canada helped fund a facility to produce the vaccine. But its availability has not engendered much response in the industry, in part because of its cost ($6/head) even though the cost of vaccinating every cattle beast in Canada supposedly would be far less than the cost of fighting the incidence, & paying for the after effects, of periodic E-coli outbreaks. From my, common sense, rather than scientific, perspective, there are at least two possible problems with vaccination : what might be the “Unintended Consequence” for warm-blooded creatures of presumably wiping out large swaths of, if not all, E-coli strains in their gut (some of which might actually be ‘good’ for their host) & would this not be a way of addressing the symptoms, rather than the disease (in this case the way we raise & process our beef?