At the ‘Three Amigos’
Summit in Guadalajara, Mexico, Prime Minister Harper ran, as expected,
into criticism by Mexico’s President Felipe Calderon of his government’s
recent decision to require all Mexicans visiting Canada to obtain visas
first (so as to put a stop to a growing inflow of Mexicans seeking
‘political refugee’ status in Canada). What was not expected,
but astounding, was that he sought to defuse the issue by blaming flaws
in Canada’s, admittedly hopelessly idiotic, immigration policies (while
in theory this is within his government’s power to correct, in practice
immigration policy is the ‘third rail’ of Canadian politics since
ethnic minorities are active, & financial stalwarts, in Canadian
party politics at the constituency level.
Earlier this week Gleanings
324SP quoted an official of Moody’s as saying that he expected “most
deferred or delayed oil sands
projects to proceed”, albeit at a more measured pace. This prompted
the following feedback from inside the oil sands services industry :
“CNRL Tranche 2 cancelled last fall, currently out for bid ... Suncor
Firebag stopped last fall, underway again ... Total upgrader cancelled
last fall, proposal package out on the street ... Imperial Kearl
project still proceeding ... PetroCanada Fort Hills North proceeding
once merger with Suncor completed ... NorthWest Upgrading put
on hold spring 08, planning to re-commence engineering this fall.”
While all eyes are focused
on a possible H1N1 flu crisis, another far more critical global
crisis may be sneaking up on us, involving the most basic of all food
stuffs, grain. For demand is growing since each year there are 100MM
or so more mouths to feed, changing dietary habits in developing countries
are boosting the demand for feed grains & more grain is being diverted
in the developed countries into ethanol production. But on the supply
side, Australian grain output continues to be affected by the more than
decade-long drought, the same is happening this year in Argentina &
Western Canada, and a shortage of water for irrigation purposes has
prompted Saudi Arabia to get out of the irrigated wheat farming business
& at some point will start affecting grain output production in
Pakistan, India & China (where half, or more, of all grain produced
is grown on irrigated land). Meanwhile, global grain inventories, in
terms of days of consumption, are at record low levels; so the result
could be similar to that of a truck failing to arrive on time at the
loading dock in a ‘just-in-time-inventory’ environment : sudden
chaos.
GLEANINGS VERSION
II
No. 325 - August
13th, 2009
EMERGING COUNTRIES
TAKE SPENDING LEAD (FP, Alia McMullen)
∙ Goldman Sachs
expects the BRIC countries to replace the once spendthrift US consumer
as the drivers of global export demand & predicts they will account
for half the world’s growth in consumption next year (with that in
China alone exceeding that of the US, Japan & Germany combined -
in the year to June 30th its retail sales were up 17.6% YoY).
Many
Third World countries are better positioned fiscally than their
First World brethren for ‘pump priming’.
B OF A RAISES FORECAST
FOR METAL PRICES (FP, Jonathan Ratner)
∙ The B of A Merrill
Lynch commodity strategists have hiked their US$ price forecasts for
aluminum, copper, lead, nickel & zinc by between 5% & 30% in
the expectation of a global economic recovery & continued demand
from China. They believe that “the structural supply shortages have
not been removed for many of the industrial metals.”
They don’t say to
what extent these price increases may be
due to a lower US dollar.
KEEP SHOVELLING
THAT STIMULUS (G&M, Joseph Stiglitz)
∙ The ‘green shouts’
have turned brown. We need more stimulus to avoid the economy underperforming,
& unemployment staying high, even longer. Obama’s job creation
hopes aren’t being realized. Part of the problem is that only 25%
of the US$800BN was to have been spent this year. It has been hard to
get money out the door, even on “shovel-ready” projects. Many states
cannot run deficits &, faced with major revenue shortfalls, must
raise taxes and/or cut expenditures, offsetting the federal stimulus.
Too much of the package consisted of politically popular tax
cuts that debt-burdened, job-insecure consumers saved, or used to pay
down debt, rather than spent. Obama erred in asking for too small a
stimulus & in giving too much money with too few restrictions too
cheaply to those who caused the mess in the first place. For banks won’t
lend (& people won’t borrow) when times are bad & the favourable
treatment accorded the banks has soured taxpayers’ attitudes. Whatever
the politics, the economics are clear : the world needs the advanced
countries to commit to another big round of real stimulus spending at
next month’s G-20 meeting in Pittsburgh.
Stiglitz is the iconoclastic
former Chief Economist of the World Bank who now heads the UN Commission
of Experts that is come up with ways for reforming the international
monetary system & who in recent years has made
some insightful observations. But this isn’t one of them. And
isn’t it amazing how a few billion dollars spent on Cash for Clunkers
is having a bigger immediate impact than the US$787BN stimulus program?
FED BEGINS ROLLING
BACK THE RESCUE (WP, Neil Irwin)
∙ At their regular
two day meeting on August 11th & 12th the
FOMC decided to start winding down its ‘quantitative easing’ program
to buy UST bonds in October since “the economy is leveling out.”
But it made no mention of its sister program to buy mortgage-backed
securities (that is designed to keep mortgage rates down) which has
exactly the same liquidity creation effect.
Note the use of the
word “leveling out”, rather than
‘starting to grow again’. This suggests it has decided to err on
the side of anti-inflationary caution despite the fact that in the 90's
in Japan the premature ending of ‘pump-priming’ policies is now
seen as having prolonged its recession.
U.S. TRADE GAP
WIDENS (EJ, Business Browser)
∙ The 4% MoM gain
in June, to US$27BN, was less than the expected US$28.7BN (& the
US$26BN deficit in May had been the smallest in almost a decade). The
better than expected performance was due to stronger exports that reflected
the pickup in economic activity around the world.
Not long ago,
the trade gap was more than twice this size..
RETAIL SALES POST
SURPRISE DROP FOR JULY (AP)
∙ After two months
of modest gains, 0.7% growth had been expected. Instead they were down
0.1%. And net of the 2.4% higher auto sales, prompted by the Cash for
Clunkers program, they were down 0.6% (although net of the 2.1% decline
in gas station sales, due to lower gasoline prices rather than weak
demand, they were a modest 0.1%).
Some of this no doubt
is due to continued aggressive price cutting by many retailers (which
hides possible increases in unit sales).
WHOLESALE INVENTORIES
DROP (Toronto Star)
∙ The 1.7% decline
was nearly twice the 0.9% decline expected & came after a revision
in the May number from a 0.8% to a 1.2% drop. This was the tenth consecutive
monthly decline, the longest such run in 22 years, & surpassed the
previous record of nine consecutive monthly declines between June 2001
& February 2002.
Sooner or later such
an inventory rundown will come to an end, at which point inventories
will quit having its current ‘boat anchor effect’ on economic growth.
WEEKLY JOBLESS
CLAIMS RISE UNEXPECTEDLY (AP)
∙ Analysts had expected
new claims for unemployment benefits to decline marginally from 554,000
to 545,000. But they rose even more marginally to 558,000. On the other
hand, the number of those getting unemployment benefits declined from
6.34MM to 6.2MM.
The decline in the
latter may be a negative, rather than a positive, development; for it
is likely due in part to people running out of eligibility(which creates
a whole host of new problems) & in part to people simply quitting
to look for work.
STATES MAKE DEEP
CUTS IN FINANCIAL AID PROGRAMS (AP)
∙ Among the hardest-hit
are students. So, according to the US Department of Education, 620,000
more students applied for federal aid in the First Quarter, a 25% more
than in the year-earlier period.
Not only are states
being hit by big tax revenue shortfalls but in states like Georgia,
Florida & West Virginia with lottery-funded student aid programs
also by plateauing or declining gambling revenues
FORECLOSURES RISE
7 PERCENT IN JULY FROM JUNE (AP)
∙ And were up 32%
YoY. Banks repossessed 87,000 homes during the month, 10% more than
in June, and over 360,000 households, i.e. one in every 355, received
some sort of foreclosure-related notice. The mortgage industry has been
slow to respond to the Administration’s prodding to provide mortgage
relief, having extended just 400,000 offers to the 2.7MM eligible home
owners (only about 60% of which were accepted).
According to one industry
insider “the volume of loans …
in distress … overwhelms their efforts.”
‘UNDERWATER MORTGAGES’
RISING (EJ, Business Browser)
∙ In the Second
Quarter 25% of all US mortgage holders owed more on their homes than
they were worth. This may rise to 30% by mid-2010 as job losses continue
to climb.
Deutsche Bank went
one better earlier this month when it predicted that the number may
go closer to 50% by the time it expects the housing recession to end
in mid-2011.
HOME BUYERS MOVE
FROM GRANITE TO LAMINATE
(Bloomberg, Kathleen
M. Howley)
∙ First-time homebuyers
want no-frill houses. In June the share of new homes sold costing <
US$200,000 jumped to 47% of the total, up from 39% in May. So, while
unit sales increased in each of the last four months, incl. an 11% increase
in June that was the biggest in five years, spending on new residential
construction in May fell to a 13-year low. And since their average size
has declined to 2,065 sf, the least in a decade, and they have fewer
interior walls & more spartan finishings, they are being built in
half the time they used to.
If this were to be
the start of a trend, it would have major
implications for the industry & for
the speed with which the economy may
recover in the near term, & for the economy as a whole over the
longer term.
HOME SALES GREW
IN SECOND QUARTER IN 39 STATES (AP)
∙ They rose 3.8%
QoQ to 4.76MM, but were still down 3% YoY (from already depressed
levels). But the median price, US$174,100, was down 16% YoY. And
there were huge differences in sales numbers & prices : the former
ranged from gains of 20% or more in Idaho, New York & Hawaii to
declines of 6% or more in California, Colorado & Michigan and the
latter from a YoY gain of 31% in Davenport, Iowa & 22% in Cumberland,
Maryland to declines ranging between 35% & 53% in Phoenix, Riverside,
Calif., Las Vegas & Fort Myers, Fla.
It is not clear how
much of the decline in the median price number is due to the downsizing
of first-time home buyers’ expectations. And Canadian Boomers flocking
to the Sunny South to buy a ‘cheap’ second home may find they hit
a vein of fool’s gold. For the US Treasury recently changed
its treatment of foreigners who own homes in the US for income tax purposes.
And if they make any improvements to their property themselves, rather
than hiring locals to do so, they risk running afoul of work permit
rules that will make their life difficult the next time they seek to
cross the border. Last but not least, there have been rumours that state
governments desperate for new sources of tax revenues are casting covetous
eyes on the incomes & assets of foreigners in their states because
extracting money from them wouldn’t have the political backlash of
taxing locals
GLOBE-TROTTING
ALBERTANS SCORE LOW ON ‘WORLDLY’
KNOWLEDGE (CanWest)
∙ A survey of 2,500
people in Canada & the US on their knowledge of geography &
their out-of-country travel found that in Alberta & Québec only
16% of interviewees rated their knowledge of the former as ‘solid’,
little more than half BC’s 29% (which was the highest in the
six Canadian & four US regions in which the two countries were divided
for the purposes of the survey), despite 75% of Albertans & 64%
of Québecois reported having made at least one out-of-country trip
within the past three years.
While the size of
the sample may not be of a sufficient size to make it statistically
significant, what was really fascinating was that, while well over half
the Canadians reported having been abroad in the previous three years
(ranging from a high of 85% in BC to a low of 64% in Québec),
less than half of all Americans reported having done so (ranging from
a high of 47% for those in the West & the Northeast through 41%
in the Midwest to a low of 36% for those in the US South).
AFGHANISTAN EXPECTED
TO COST THE US DEARLY (WP, Walter Pincus)
∙ Gen. Stanley A.
McChrystal, the US commander in Afghanistan, will shortly present an
analysis of the situation there that will call for still more US troops.
As the Administration steps up US involvement in Afghanistan, military
experts warn this will involve decade-long military & political
commitments that will cost more than the Iraq War (so far war-related
funding in Afghanistan has cost US$223BN, one-third of that in Iraq
to date, & annual aid expenditures have grown ten-fold since 2003
to US$9.3BN).
Another Bush era legacy
: it is here, not in Iraq, that the War on Terror should have been conducted
FATAH FACES DISSENT
BY REFORMISTS
(G&M, Mohammed
Assadi & Ali Sawafta)
∙ Fatah just held
its first party congress in 20 years. It featured a split between
younger reformists who think that, after the corruption of Yasser
Arafat era, its defeat by Hamas in the 2006 elections & the lack
of progress in the peace negotiations, it needs a thorough overhaul
& relaunch, incl. the removal of an aging, politically discredited
“old guard” to avoid being defeated again by Hamas in next year’s
parliamentary elections. The infighting between Fatah & Hamas, &
within Fatah, prompted Saudi King Abdullah to send an uncharacteristically
blunt open letter to Abbas saying “Even if the whole world agreed
to the establishment of an independent Palestinian state, with all the
needed support and backing, it will not be established as long as the
Palestinian house is divided ... I’ll be honest brothers. The criminal
enemy could not over long years of continued aggression have inflicted
as much damage to the Palestinian cause as did the Palestinians in a
few months.”
As it turned out,
the 2,300 delegates voted out most of the old timers, many of whom lived
abroad, & voted in younger men who
had grown up under Israeli occupation & were local residents
(except for Marwan Barghouthi, a possible successor to Abbas, who is
serving a life sentence in an Israeli jail accused of organizing the
killing of Jews). This outcome may
facilitate an accommodation with Hamas since
the younger generation’s thinking is closer to Hamas’ than
the old guard’s & since Hamas’ strength was in part at least
derived from the power vacuum created by a divided
& discredited Fatah.
IN EUROPE, ECONOMY
SHOWS SIGNS OF RECOVERY (AP)
∙ Europeans are
returning to the shops & venturing back into the housing market,
companies are slowing their downsizing & lending conditions are
easing. So economists are forecasting just a 0.5% Second Quarter GDP
decline for the Eurozone, vs. 2.5% in the First.
But there still is
“good reason to be cautious”, especially since Eurozone industrial
output declined in June by 0.6% from May instead of the 0.3% increase
expected.
FRANCE & GERMANY
EXIT RECESSION (BBC News)
∙ Both their economies
grew by 0.3% in the Second Quarter due to stronger exports (Germany’s
grew by 7%, the most in three years, on strong demand from still fast-growing
economies like China) & consumer spending, and the
effect of government stimulus packages. So Eurozone GDP declined only
by a better-than-expected 0.1%.
While encouraging,
there continue to be lingering worries about the fragility of the European
banking system & the continued dependence on finite stimulus packages.
BoE TO PUMP
£50B INTO TEPID ECONOMY (AF-P, Roland Jackson)
∙ It shocked markets
on August 6th by announcing it will create another £50BN
(US$90.5BN) of new liquidity, raising the total from £125BN to £175BN,
through ‘quantitative easing’ even though it says it appears that,
after five consecutive quarterly contractions, Britain’s economy is
bottoming out (with many economists predicting it could return to growth
this quarter - new car sales were up in July, by 2.4% YoY, for the first
time in 15 months).
Contrary to Germany
& France, its economy is still in a dumpster; and with an election
due no later than next June, the polls remain unfavourable for Prime
Minister Brown’s Labour Party.
TURKEY, RUSSIA
SIGN GAS PIPELINE DEAL (AP)
∙ On August 6th
Turkey’s Prime Minister Recep Tayyip Erdogan & his Russian counterpart
Vladimir Putin signed an agreement endorsing Russia’s ‘South Stream’
pipeline to move Central Asian gas to world markets. While they sought
to portray it as positive for European energy security, in reality it
will compete with the so-called ‘Nabucco’ pipeline backed by the
US & the EU that seeks to bring out that gas over non- all Russian
territory.
On this issue Turkey
appears to be ‘working both sides of the street’.
INDIAN SHORTFALL
SENDS SUGAR SOARING (Bloomberg, M. Shankar)
∙ India is the world’s
largest sugar consumer & its second largest sugar producer. But
its monsoon rains have been as much as 64% below normal & poor rains
last year are expected to result in a 44% YoY drop in sugar output,
to 14.7MM tonnes, during the year ending September 30th.
So it may turn into the world’s largest sugar importer from having
been a significant sugar exporter as recently as last year, importing
5MM tonnes next year (almost double the 2.7MM tonnes will import this
year - although the actual production shortfall is expected to decline
to 4MM tonnes next year, half that for the current year).
And excessive rainfall
has damaged the sugar cane crop in Brazil, the No. 1 producing country.
CLINTON URGES S.
AFRICA TO TAKE LEADERSHIP ROLE (AP)
∙ In a speech in
Pretoria to local business leaders on August 7th the US Secretary
of State told them that despite setbacks their country is “uniquely
positioned” to propel growth throughout Africa if it sticks to sound
financial principles, embraces open trade & promotes foreign investment,
saying that “The economic success of Africa hinges ... to a great
extent on the economic success of South Africa ... This is both a responsibility
and an opportunity.”
This is a delusion
: South Africa may be the most industrialized country but the reality
of life is that it has more than its hands full meeting its own people’s
expectations.
SHARP DROP IN REMITTANCES
TO LATIN AMERICA (FT, Naomi Mapstone)
∙ The Inter-American
Development Bank says they will decline this year by 11% YoY to US$62BN
affecting over 1MM households, half of them in Mexico.
US$60,000 per household?
STRAWS IN THE WIND
∙ One hedge fund
manager recently observed that “China needs to be able to depend on
China for its growth, not on soccer mums in Wal-Mart.’
And as Japan did four
decades ago, China may soon start moving into higher value-added exports
(which could have major implications for Wal-Mart’s business plan).
