Gleanings II ~ 495 SP ~ Compliments of Nick Rost van Tonningen Posted by John on January 26, 2013

Quote of the Week : “We cannot tax ourselves into prosperity … We can, however, deficit spend ourselves into poverty.” – Lacy Hunt & Van Hoisington (of Houston, Texas-based Hoisington Management, a fixed income fund manager with AUM of US$4+BN).

“I rise today to talk about America’s debt problem. The fact that we’re here today to debate raising America’s debt limit is a sign of leadership failure. It’s a sign that the US government can’t pay its bills.” – this was the opening sentence in a speech in the Senate on March 16th 2006 by the then junior Senator from Illinois, Barack Obama (when asked about this, White House spokesman Jay Carney explained on April 11, 2011 “He realizes now … that raising the debt limit is important to the health of this economy and the global economy, that it is not a vote that, when you are protesting the administration’s policies, you can play around with”) – when he made these remarks the debt stood at US$8.6TR & at 69% of GDP, whereas today it’s US$ 16.4BN & North of 100%. And Obama’s declaration at his January 14th White House press conference “We’re not a dead beat nation” resonates badly with those of us who can remember how on November 17th, 1973 Richard Nixon went on nation-wide TV to inform the nation “I am not a crook.” As to his inauguration speech, I have been told that it was great oratory, as could have been expected, but the more I hear & read about it, the more I am reminded of the old adage that “the road to hell is paved with good intentions’; for it suggests he is living in a fiscal fantasy world.

While on the subject of America’s national debt, the deficit incurred during the fiscal year ended September 30th, 2012 increased the national debt by 6.8% to US$16,066TR while interest costs, at US$359.8BN, were down 22.5% YoY to a 7-year low & almost exactly the same level as eleven years earlier when the debt had been almost two-thirds smaller. So the average cost of debt service declined from 3.09% in FY11 to 2.23% in FY12. While the US Treasury has been lengthening the average ‘term to maturity’ of its total debt (by stuffing long-term paper in its ‘captive’ government accounts?), almost one-third of the publicly-held US debt matures in less than one year (which makes its debt servicing costs very sensitive to interest rate changes). And to make matter worse, as of June 2012 the portion of the publicly-held debt maturing in more than one year but less than five had risen to 41.7% of the total from 36.0% at the start of 2007 (both of these make for a more rapid rate of annual debt ‘rollover’ – which could come back to haunt the Treasury when, & not if, the time comes that the market starts having serious concerns about the seemingly untrammeled growth of the debt relative to GDP. It’s also not hard to become concerned about the potential “doubly-whammy” impact of rising interest rate & a rising debt burden on the deficit (by the way, the debt officially reached its mandated US$16.4TR ceiling on December 31st – i.e. it had risen at a monthly average rate of US$100+BN, US$300+ per capita, over the past 20 months).

On January 24th Sen. John Kerry’s nomination process will start with a Q&A session with the Senate Foreign Relations Committee, of which he has been Chairman since 2009 (succeeding Joe Biden), & apparently will remain so until his nomination is confirmed.

After its initial success in China, Apple is now being outsold there by a company one-hundredth its size (albeit at a serious cost to the latter’s bottom line) as China Wireless Technologies’ Coolpad 8060 retails for 619 Yuan (< US$100), less than one-fifths the price of the cheapest iPhone (& CWT is only one of four local smart phone manufacturers, as well as Samsung, that are eating Apple’s lunch in the world’s biggest cell phone market). Anyone who still has still doubts where inflation is headed might take note of the growing pressures on Britain’s Chancellor of the Exchequer to have the Bank of England dump its inflation-targeting in favour of economic growth promotion & to ‘put the the (now electronic) money printing presses’ into high gear (see below in the main body), just as Prime Minister Abe is doing rather heavy-handedly in Japan. This could turn into a “race to the bottom”, a 21st century version of the ‘beggar-thy-neighbour policies’ & ‘competitive devaluations’ of the Great Depression; for high rates of money creation debase currencies, as intended, to give the countries in question a new global competitive edge that other countries can feel compelled to respond to in kind. The elections in Lower Saxony & Israel are two more nails in the coffin of pollsters’ credibility. For in the former they completely missed the swing to the Free Democrat Party & in the latter they overestimated voter support for the Jewish Home party by, say, 25% & underestimated that for Yesh Atid by almost 100%. While on the subject of the Israeli election, the voter turnout was high, 66.6%, almost two percentage points higher than in 2008 (which tends to be bad news for sitting governments). There has also been a huge turnover in personnel : fifty of the members of the old Knesset will, for various reasons, not be returning & forty of their replacements are political newcomers, many of them younger women with strong opinions. And the seriously right-of-centre coalition government that had been taken for granted would be the result from the election is likely no longer an option; for it can muster only 60, or at best 61, seats in the 120-seat Knesset. But, while Netanyahu has been talking of, & is supposedly working on, putting together, a “broad” coalition of the centre to ‘moderate right’, he is already running into problems. For the Jewish Home Party covets the Religious Affairs Ministry that has ‘belonged’ to Shas since 2003 & that it doesn’t want to give up. And while he wants Yair Lapid as his Foreign Minister for global public image reasons (& presumably to give him a freer hand in domestic affairs), Lieberman is refusing to surrender the post & has suggested having Lapid as Finance Minister, likely the last thing Netanyahu wants, would a better match for him). And even if he succeeded in hammering together such a coalition, it might be short-lived since it would contain too many prima donnas with their own, & often conflicting, agendas, none of whom would be beholden in any way, shape or to Netanyahu. What, in theory at least, would be Netanyahu’s best option, if he could retain the loyalty of all, or most, of the 20 Likud members on the Likud/Yisrael Beitenu list, would be to dump Lieberman & create a center-to centre-left coalition from most, or all, of the 20 Likud members, 19 from Yesh Atid, Labour’s 15, six each from Tsipi Livni’s Hatnua Party & Meretz (one of whose predecessor paties, Shinui, was headed twenty years ago by Tommy Lapid, Yair’s father), & Kadima’s remaining two. It would make him the kingmaker to whom all the other leaders would be beholden to some degree. It would be internationally most acceptable & domestically most in tune with the mood of the secular middle class. And all his junior coalition partners would be united on at least one pivotal point, the desire to keep power out of the hands of the extreme right wingers (if he cannot retain the loyalty of the Likud ‘bloc’, he is dead meat politically, no matter the makeup of the coalition, & the only question then remaining will be the timing of his political burial, & what will trigger it). A few days ago I heard my old friend John Embry, Chief Strategist at Toronto-based Sprott Securities, reclassify government bonds from being ‘Widows’ & Orphans’ investments to “Guaranteed Certificates of Confiscation”; for, with government bond yields in record-low territory, real returns on an after-tax basis go negative & the longer one holds them, the more purchasing power one loses. Interestingly enough a not dissimilar sentiment was expressed by one of the speakers at the January 22nd Edmonton Financial Analysts’ Society Annual Forecast dinner, the CEO of fund manager with AUM of $70+BN, when he opined “Having a big bond portfolio is a real bad scenario”. And this context, a third financial professional, thus one with a long, successful & creative career as an asset manager in the days they still ‘added value’, noted recently that the financial system is being turned upside down; for whereas traditionally government bonds were on top of the heap in safety terms, & corporate securities (& hard assets) the purview of the more venturesome with higher risk tolerances, the reverse now seems to be becoming the order of the day (a view seemingly validated by the growing talk of central banks, for whom equities traditionally have been an abomination, following the lead of the Swiss National Bank & investing in them). The reason for this is that the basis for government bonds’ previous exalted status, their ‘unlimited taxing power’, has become questionable (this reminds of when, in the late 70's, I was for two years involved in a study of the Canadian retirement income system. The chap that ran it was highly intelligent & well-educated, and left leaning. So his pre-conceived notion was that the public pension arrangements should be the bedrock of one’s financial retirement planning, & everything else icing on the cake. But after three years’ exposure to the issue, he reluctantly concluded that prudence called for the reverse, to rely first & foremost on one’s own savings & then hope that, when the time came, the promised third party retirement income entitlements would still be there, as a top-up. Reuters carried a story quoting an Algerian source as saying that documents had been found on the bodies of two of the terrorists killed at the site of its Sahara gas plant attack cum kidnapping indicating they were Canadians (one of whom supposedly had played a leading role in the undertaking). Other unconfirmed news ‘bytes’ were that one of the terrorists, one of the more pro-active ones in shooting people, had blond hair & blue eyes, that the intention had been to blow up the plant, Algeria’s largest, & that this attack had been carefully planned over an extended period of time - Canada’s Foreign Minister reacted seeming injudiciously to the reference of Canadian involvement, denying its possibility & demanding proof, rather than keeping quiet & having a game plan in case it is turns out to have been the case. At a time politicians in many developed countries face credibility crises, the “well-past-its-Best Before”-date Conservative government of Alberta seems intent on setting a new record for inanity. It faces a financial crunch because its spending habits have been based on revenue forecasts that assumed massive increases in oilsands output for as far as the eye could see, forecasts that now seem to be becoming more iffy by the day. For the pipelines taking Alberta’s oil to market are at capacity & proposals to increase pipeline capacity have run into hurricane-strength, well-funded environmental opposition, based on a by no means wholly incorrect but easy to market contention that “tar sands oil is dirty oil”. So among the things that it is purportedly considering is to ‘cut red tape’, i.e. lower the environmental bar, for current & aspiring oilsands operators. Don’t these dunderheads understand that even mentioning this is counter-productive in a pipeline expansion context by playing into the environmentalists’ hand in the short run, and thereby, longer-term, increasing the possibility of much the province’s potential oilsands wealth becoming a ”stranded asset”? Oil in the ground is just that, oil in the ground & oil at the wellhead has value only when there is a market for it. So getting more pipeline capacity is Job No. 1. Job No.2 is not making the achievement of Job No. 1 more difficult by playing into the hands of the environmentalists. And Job No. 3 is to super-aggressively encouraging, & helping, the industry to develop operational methodologies that will make its present & future environmental footprint less invasive, thereby making it more difficult for the environmental lobby to peddle its view of the oilsands. It recently came out that when Prime Minister Harper traveled to China in February, the Government of Canada picked up some of the tab for the 30 private sector senior executives accompanying him - the companies could have paid for it & have the government pick up part of the tab indirectly & less conspicuously by claiming it as a business expense so it’s hard to know which was the greater, the companies’ greed or the government’s stupidity. Ma Jiantang heads China’s National Statistics Bureau, & hence is its Chief Statistician. He recently surprised reporters by talking freely about usually sensitive issues, China’s dwindling labour pool, and the resultant need to “adjust” the one-child policy & the low mandatory retirement age (60 for men & 50-55 for women) - the latter obviously doesn’t apply to top party & government officials. A new word has been trotted out front & centre in China’s economic/political lexicon in the aftermath of the 18th Party Congress. “Institutional Dividend” is being promoted as the replacement for the “Population Dividend” as the driver of economic growth. This concept goes back to work done half a century ago by Nobel laureate Robert Coase, a now centenarian economics professor emeritus at the University of Chicago, & holds that an economy’s efficiency & productivity is enhanced by reducing the cost of business by cutting red tape & letting market forces & competition thrive (this idea won’t sit well with , & will be strenuously opposed if not sabotaged by, the SOEs). On January 22nd, in a speech to the 130-member Central Commission on Discipline Inspection, headed by former China Construction Bank chief & now member of the seven-member, all-powerful, Central Committee of the Politburo, Wang Qishan, President designate Xi Jinping issued a call for a war on corruption among both the “tigers” (senior officials) & flies (minions). He called on all Party organs & members to set an example by keeping a frugal lifestyle, & opposing ostentation, extravagance & hedonism. He said that the leftovers in restaurants (& at official functions?) would feed 200MM people for a year, that unscrupulous public spending has long been a major source of power abuse & corruption, that the money involved could have been put to better use improving infrastructure & people’s livelihoods, and that leaders & officials must not be allowed to ‘snatch taxpayers’ money to feed their own lusts’. For all these things, he said, are undermining the public trust of the Party & the government (just as they do everywhere else). The WHO recommends that for health reasons levels of airborne particles measuring 2.5 microns or less (that can penetrate deep into people lungs & lead to heart disease, cancer & respiratory diease) - the PM2.5 level - shouldn’t exceed 25 per cubic metre. In Beijing on January 23rd the official readings were in the 200-300 range & the day before had reached 441 on the sensors on the US Embassy roof (which it regularly & routinely makes public). The “Beijing cough” is becoming a common affliction- the great thing about these smogs is that they have no respect for rank; so government policy makers can see them, & to a lesser degree suffer from them, just like ordinary folk, and nothing motivates policy makers more than being personally inconvenienced. “It’s all in the eye of the beholder” So, according to Senior Colonel Liu Mingfu of China’s National Defense University, America’s “orchestration” & Japan’s “militarism” are causing the tensions over the Diaoyu islands. “America”, he said, “is the global tiger and Japan is Asia’s wolf and both are now madly biting China ... Of all the animals, Chinese people hate the wolf the most.” - while he doesn’t use the word “paper” in conjunction with “tiger”, he might as well have done (it came as a surprise to learn that not only are there still wolves in China, but in places there is a ‘wolf problem’). Yachi Shotaro, Prime Minister Abe’s top foreign policy adviser, used the occasion of a regional forum, the Third Sino-US Colloqium, in Hongkong on January 20th, to deliver, via a stand-in, an inflammatory speech accusing China of asserting territorial claims by force & breaching the international order (needless to say, Beijing was not amused). That same day the official voice of the PLA, The PLA Daily, ran an article highlighting problems encountered by a PLA unit during recent exercises in Inner Mongolia & warning the PLA had better shake the ‘bad habits’ cultivated during decades of peace, & prepare itself to be ready for war on a moment’s notice. The Phillippine government announced on January 21st that “after exhausting almost all political and diplomatic avenues”, it plans to take its maritime dispute with China over the Scarborough Shoal (located 200 miles West of Subic Bay & roughly 4x that far from China) to a UN Law of the Sea arbitration tribunal, in the hope this will produce a “desirable solution”. China’s ambassador to the Phillippines lost no time reiterating the Beijing line that “China has indisputable sovereignty over the islands in [the] South China Sea and its adjacent waters.” Since November Beijing has been issuing passports with a map showing the entire South China Sea as Chinese territory in an attempt to force other nations to ‘endorse’ its claims when their officials stamp them. GLEANINGS II - 495 Thursday January 24th, 2013 BACKDOWN ON AUSTERITY, OSBORNE URGED (The Guardian, Heather Stewart) • Preliminary figures later this week are expected to show the UK economy shrank in the final quarter of 2012; if this were to persist into the First Quarter of 2013, Britain will be in an unprecedented ‘triple-dip’ recession. This is hiking the pressure on the Chancellor of the Exchequer to have the Bank of England jettison its inflation targeting & kick start growth. The Ernst & Young Item Club forecasting group is among those advocating more drastic action to lift the economy out of its slump, saying “The target has passed its sell-by date” In case her readers hadn’t gotten her message on the first go, Heather Stewart the next day had a second article headlined even more alarmingly “British Economy faces Lost Decade”. The Ernst & Young group is the only non-government entity to use the Treasury’s model of the UK economy &, interestingly enough, its latest forecast is for “sluggish” growth in 2013 & 2014, accelerating thereafter as confidence returns to the financial & business community (which may suit David Cameron since the next general election will be on May 7th, 2015). What those promoting the pro-active approach ignore (as does Krugman in the US) is that, while most recessions are (lack of) demand-driven, in 2008 it was balance sheet-driven (& these recessions engender in people a ‘negative wealth effect’ that causes them not to respond to the usual government ‘pump-priming initiatives, designed to reinvigorate demand). Balance sheet recessions require a full-fledged restructuring of balance sheets & flushing out of excesses in the economy before a sound basis can emerge for the next (more sustainable) leg up in economic growth. The previous two recessions, in 1990 & 2001, were also of an, albeit less severe, balance sheet type &, while they did respond to traditional treatment by the powers-that-be, in each case this laid the seeds for the next turn of the screw to be more severe than the last one, & less responsive to conventional treatment. A not dissimilar phenomenon can be seen in charts tracking government debt-to-GDP ratios in the past four decades : in every successive business cycle the minimum & maximum ratios are higher than in the one preceding it. Another parallel is with sick people who resume their normal activities prematurely : they increase the possibility of a relapse. So the only real path forward in, & after, a balance sheet recession, is to ‘grin & bear it’ until the system has healed itself. But this can be politically difficult, if not impossible, and it is hard to find a ‘Goldilocks’ solution in which the level & length of austerity is “just right” & falls just short of the level that would give rise to a violent popular reaction - the Irish government was lucky in this respect, it got away with bringing in harsher austerity quicker than anyone else, with the hoi polloi hardly demurring, because many of them still remembered, or had been told about, the bad old days of the early 80's. WHAT’S INSIDE AMERICA’S BANKS? (The Atlantic. Frank Partnoy & Jesse Eisinger) • For four years America’s political leaders have sought to help restore trust & confidence in its financial system. But the big banks have frustrated their efforts by growing ever bigger & more opaque, by behaving as if they haven’t learnt a bloody thing from their near-death experience, and by limiting their lending activities [with the Fed accommodating the latter by paying them 0.25% interest on their “excess cash” deposited with it - that at last report had, since 2008, grown 30x (from 0.4% to 12.1% of their total, 4.8% greater, asset base), whereas the ECB pays its banks zip & the Danish central bank actually charges them 0.20% for warehousing excess cash). Take JPMorgan. Before the 2008 crash it was deemed one of America’s safest & best-managed corporations & its CEO, Jamie Dimon, capable of walking on water. But we now know better; for the “Whale” affair has shown it had ‘feet of clay’ & a flawed risk management system, and Dimon was not up to the job. •Back in the late 70's three out of five Americans trusted banks “a great deal”, or “quite a lot”. But last October SEC Commissioner Luis Aguilar said today “79 percent of investors” don’t (trust hem). And while 30 years ago the 40% of Americans who didn’t trust them were mostly the less sophisticated, today that distrust has spread to institutional investors who can make such a call based on personal experience or observation. Thus last summer Paul Singer of New York-based Elliott Associates, a hedge fund with US$16BN AUM, who with a first degree in psychology & an LL.D from Harvard is hardly an unsophisticate, wrote his investors “There is no major financial institution today whose financial statements provide a meaningful clue” (as to their risk exposure). Several one-time big bank executives, incl. former CEOs of Morgan Stanley, Merrill & Citigroup (two of them), and a former Citigroup CFO, have called for big bank breakups, tighter regulation & a return to Glass Steagall (that since the Depression had separated commercial- from investment banking until jettisoned in Clinton’s second term at the instigation of some in his Administration who then went on to accumulate tens, or in at least one case hundreds, of millions of dollars in personal wealth as big bank executives). And Bill Ackman, who runs the US$11BN Pershing Square hedge fund & last year made waves in Canada with his, eventually successful, effort to dethrone CP Rail’s stodgy management & replace them with the retired CEO of its archrival CN (since when its share price has risen 50%), in 2010 bought US$1BN-worth of Citigroup shares in the belief it had cleaned up its act & its shares represented good value, only to sell them last year at a US$400MM loss, wistfully noting “I thought you could trust the carrying values on bank books.” A longish article that’s worth reading, even though it may ruin your day; but then so did the little boy ruin the King’s day, & that of his “tailors”, by shouting “The Emperor ain’t wearing no clothes.” WALL STREET EMPLOYEES ARE ‘WELL-REWARDED FOR NOT DOING A GOOD JOB’ (Huffington Post, Gillian Berman) • In an interview with Bloomberg at Davos, Morgan Stanley CEO James Gorman noted Wall Street employees may have been pulling in more money than they are worth. And in relative terms he has put his money where his mouth is : last year he sent a message from Davos to employees disgruntled about possibly lower year-end bonuses saying “If you are unhappy, just leave”, he has deferred bonuses for top earners (which can be a good way to ‘nail their feet to the floor’ if collecting them is made contingent on them still being with the firm when the period of deferment ends - an old Salomon Bros. trick), cut investment banking pay by 7.6% this year, let 6,000 staff members go, and in 2011 took only US$10.5MM home (less than half Jamie Dimon’s $23.5MM which this year, however, was cut in half for him failing to rein in the “London Whale” before he lost the bank US$6+BN). Davos at one time was a great idea. But it has degenerated into a massive ‘photo-op” & status symbol phenomenon, not unlike ownership of a car in a developing country. Thus this year, when income inequality is becoming increasingly an issue world-wide, the theme for this gathering of beneficiaries of that inequality is “resilient dynamism”, seemingly a contradiction in terms. CARGILL CLOSES PLANT DUE TO DROUGHT (Environmental Leader) • Effective February 1st, Cargill will idle its Plainview, Texas beef processing plant, throwing 2,000 out of work in a town of less than 25,000. According to the President of Cargill Beef, John Keating, high feed costs & herd liquidation have reduced America’s cattle herd to a post-1952 low. Its seven other plants in the US, & two in Canada, won’t be affected. The FAO says the worst US drought in five decades (on January 10th USDA declared ‘drought natural disaster areas’ in 597 counties in 17 states, incl. much of the central & southern wheat belt) was a factor in its Global Food Price Index being up 6% YoY last July (it has since eased off some). MISSISSIPPI GOVERNOR SAYS NO AMERICAN LACKS HEALTHCARE (Huffington Post, Jeffrey Young) • Republican Phil Bryant, the governor of the state with the fifth-highest rate of residents without health insurance, told Kaiser Health News that universal healthcare isn’t necessary. The reason for him, & others like him, incl. Mitt Romney (briefly) during the campaign, saying this is because in 1986 Congress passed a law saying that all hospitals in receipt of Medicare money, i.e. just about all, must treat & stabilize anyone with an emergency medical condition that presents him/herself at their emergency departments, regardless of their ability to pay. Partly due to this US hospitals in 2011 alone had US$41.1BN in unpaid bills (with bill collectors often chasing those owing them for years afterwards). It takes someone who is wilfully blind to equate stabilizing an emergency condition with healthcare. Anyway, even this minimal modicum of “healthcare” may disappear when Obamacare comes into force since it assumes a priory that everybody has have health insurance. REPUBLICANS TO BACK HIGHER DEBT LIMIT (AP, Andrew Taylor) •To avoid, at least for a little while longer, a ‘market-rattling confrontation’ with President Obama, Rep. Eric Cantor (R.-Va), the second-ranking Republican in the House, said on January 18th the Republican-controlled House will give the President another three months more borrowing authority without the one-for-one spending cuts promised their followers by the Republican leadership. The idea is to force the Democrat-controlled Senate to come up with a Budget Bill of its own (as it hasn’t done since 2009, to protect Democratic Senators from having to vote in a way that would alienate their political base). But the price for that would be what Speaker John Boehner (R.-Ohio) calls the “no budget, no pay” principle”, i.e. if either house fails to pass a budget resolution by April 15th, its members’ pay would be suspended, but not foregone since it would go into an escrow account (begging the question as to what would happen if the two budget resolutions were different as they likely will be). While Senate Majority Leader Harry Reid (D.-Nev) welcomed this, his office appeared to suggest that the Senate’s Democrats would not accept it due to its pay suspension provision. Be that as it may, this measure does nothing to prevent the mandated sharp across-the-board spending cuts in defense -, & domestic-, spending slated to kick in on March 1st, nor the possibility of a partial government shutdown upon the expiration of a temporary budget measure on March 27th. On January 21st the Republicans tabled the necessary bill in the House (which passed 285-144, with 109 Democrats voting No but that the White House says the President will sign if the Senate also passes it); it provides for the debt ceiling to be suspended until mid-May (when it would be hiked by the amount the debt had grown since December 31st). OLD FOREIGN POLICY PROBLEMS HAUNT OBAMA’S NEW TERM (Toronto Star, Editorial) • He is still struggling to forge a coherent foreign policy, in part because Bush 43 had left an economic & geopolitical mess. And he has been limited in what he can do by Congress, & has had to balance his foreign policy-, with his electoral-, goals at home. But now, with his enemies (not opponents) vanquished, he has more manoeuvring room, although the war fatigue & empty treasury that kept the US out of the Libyan conflict will limit his options. • But Bush is not solely to blame. Obama pulled out of Iraq & then ordered a troop surge in Afghanistan to burnish his non-dovish credentials. Even though now re-elected & Afghanistan being no better off than before the surge, he remains gung-ho to get out of there. He has cut America’s military foot print abroad but undone most of the benefit thereof with his stepped-up drone campaign that kills more civilians than bad guys. He was slow to back the Arab Spring in Egypt. He has abandoned the people of Syria to the tender mercies of a ruthless dictator. But, while he has time & again demanded an end to Israeli settlement building but has always backed off, now, since 70% of American Jews voted for him last November, he has, in theory at least, another change to end a 45-year old occupation that infuriates many countries & causes many others, incl. more & more Jews, to quit supporting Israel, although the window of opportunity for doing so, that has been closing in his first four years, could slam shut if the January 22nd election throws up a really right wing government. Despite the ‘take-out’ of Osama bin-Laden, Obama has acquired a reputation for being a foreign policy ‘wuss”. But the Kerry/Hagel tag team could change that. And while the US military establishment may be awe-inspiring in absolute terms, it has never used its resources efficiently, thereby undermining its credibility & its value as a deterrent. In nominating Kerry & Hagel, Obama has picked people who share his prudence where military adventures are concerned, & his desire to quit feeding a military-industrial complex that America can no longer afford. A SPECIAL PLACE IN HELL (Haaretz, Bradley Burston) • For someone like Netanyahu, the one thing more lethal than weakness is proof of it. In a few months his political invulnerability aura has evaporated. Getting 31 seats, down from the 42 Likud & Yisrael Beitenu had before, was even worse than the polls had predicted. Sharks at home & abroad are smelling blood in the water. His big mistake (& for that matter everyone else’s) was to assume Israel’s political centre was dead. So he repeated his mistake of 1999 &, instead of presenting himself as the leader of all Israelis, cast himself as that of the bible-thumping, settlements-or-die hard right, thereby hoisting himself on his own petard, with the left seeing him as a stooge for the settlers, the centre as one for the tycoons & the settlers as a weak waffler a second-term Obama could wrap around his little finger. One should never count Bibi out. He is wily & a survivor of many political battles. But with his aura of political invincibility gone, he has, more than ever. his work cut out for him. WHY NETANYAHU FAILED AND LAPID SURPRISED (Haaretz, Aluf Benn) • He failed since he had, & chose to have, little to say. With no serious challenger he coasted until it was too late & offered no hope to Israelis. While he may keep his post, it will be at the cost of a serious slap in the face. While voters were concerned about the economy, housing prices & Haredi draft evasion (a few years back his nephew too, without any religious excuse, ducked the draft) & overuse of social welfare, he campaigned on the Iranian threat, an indivisible Jerusalem (a view that, by the way, Lapid shares, & campaigned on) & more settlements, while Lapid listened to voters & adapted to their interests, thereby proving voters want hope & respect those with a platform rather than a personality cult. Politicians are headed for a fall when they start believing their own press releases; for, as an Ontario judge wrote in a judgment a decade ago, it’s naive to believe anything a politician says. ISRAEL’S POLITICS OF FEAR (DT, Matt Hill) • In 1993 Rabin believed Israelis were tired of war & its young people, secular & pragmatic as they were, dreamt of prosperity & normalcy such as their parents had never known. But in this election, twenty years later, the agenda was set by a fanatical hardline right wing, interested only in annexing Judea & Samaria. Part of the answer is demographic : in the past two decades Israel’s Jewish population has grown by two-thirds from mostly three sources - religious nationalists, the ultra-Orthodox & immigrants from the former Soviet Union - who have little in common but anti-Arab chauvinism & a disdain for the idea of territorial compromise (what about democracy?). And the country has gone from one of the most egalitarian to one of the most inegalitarian in the Western world. And whereas three decades ago 64% of Israelis valued the good of society over their own, today that has sunk to 28%. And the more the country has become fractured, the greater have been the efforts to hold it together by a belligerent form of nationalism, while in reality the threat of terrorism today is at an all-time low. This was published the day of the election. MERKEL’S PARTY LOSES LOWER SAXONY VOTE (Bloomberg, Rainer Buergin) • The Social Democrat (SPD)/Green combo got 69 seats (with 46.3% voter support) & the Christian Democrat (CDU)/Free Democrat (FDP) one 68 (45.9%) although the CDU still had the most voter support (36.0%), vs. the SDP 32.6%, the Green’s 13.7% & the FDP’s 9.9%. Compared to the 2008 election, the CDU & the Party of the Left were the big losers : the former went down 6.5-, & the latter 4.0-, percentage points in the popular vote (causing the latter to drop below the 5% threshold needed to get any seats at all), while the other three were gainers (the SPD by 2.3-, the FDP by 1.7-, & the Greens by 5.7-, percentage points). The big surprise was the surge in FDP support to its highest-ever level; for the pre-election polls had placed it consistently below the 5% threshold. This is what must have prompted the state’s CDU leader, David McAllister, to declare on January 3rd, something he must now rue, that he would understand it if conservative voters were to vote for the FDP instead of for him (to keep it above the 5% level). For about 100,000 of his supporters, about half the decline in the CDU’s popular support, took him at his word & voted FDP (as it turned out, needlessly so since the polls were wrong). This will cause Merkel problems at the national level, albeit perhaps not so much in next fall’s national elections (for at last report her personal standing had risen 11 points to 65% as that for her SDP opponent, the gaffe-prone Peer Steinbrueck, declined 11% to 25%, & because her tougher line on Greece will resonate with voters at election time, especially now that more & more Greeks are coming to Germany to find the work they cannot find at home) But it stems from the fact that in Germany members of the Upper House, the Bundesrat, are not elected, but “delegated” by the state governments. BUSINESS INVESTOR CONFIDENCE SURGES TO PRE-CRISIS LEVELS (BBC News) • ZEW is a Mannheim-based think tank. In January its Investor Sentiment Index rose to a 32-months’ high 31.5 (from 6.9 in December), after having been being in negative territory for 14 of the 18 months before that (historically in recoveries readings have been in the 40-80 range). But another of ZEW’s indices, based on what 272 analysts & investors think of the current economic situation relative to their expectations of the future, that as recently as 18 months ago had been North of 80. was up only modestly, from 5.7 to 7.1. These indices are volatile. For they subtract the percentage of those with negative-, from those with a positive-, outlooks (so they have a theoretical range of +100 to -100) & are leveraged (i.e. a 1% change in sentiment gives rise to a two point change in the index).