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December 10, 2009

Two observations about the Tiger Woods saga struck a chord with me.  One originated with a popular magazine that opined : “We thought he was clean and could drive three hundred and fifty yards; now we know that he cheats and can’t drive three hundred and fifty feet.” And Ashley Dupre, the escort who caused Elliott Spitzer’s downfall (who now is an advice columnist for Rupert Murdoch’s New York Post), upon seeing the growing list of Tiger’s paramours (some of whom are said to have been paid up to US$20,000/month for their silence) observed “And they called me a hooker?” 

Copenhagen demonstrated once again that the developing countries, led by China, India & Brazil, are feeling their oats & believe, with growing justification, they have the wind in their sails, a reality the developed world has difficulty adjusting to, primarily because North Americans won’t let their political leaders act on that fact. This first became clear when the Doha Round failed because the developing countries would no longer play by the old rules that they felt favoured the developed countries, and more recently at a public rally in Brazil when President Lula de Silva answered a question about saving the Amazon rain forest by declaring to great applause : “Let the gringos pay!”  

This is just the very beginning of a seminal shift that will extend the concept of progressive taxation so dear to many Western liberals to the cost of running the “global village”. We sometimes wonder how developing countries’ governments can be so short sighted as not to see that it is in their own long-term self-interest not to chop down the Amazonian, Congolese or Indonesian rain forests, or allow industrialization to poison their air and water. But when we do so we conveniently overlook the fact that Canada wiped out the cod and both Canada & the US every day use unnecessarily high amounts of water & pollute much of the rest, and that the difference is that for many people in the developing world the short term alternative to abusing the environment is starvation, while in our case it is a matter of sustaining us in a lifestyle we feel entitled to that is a long, long way from starvation. 



No. 341 - December 10th, 2009 

WWW.JIHAD.COM (NYT, Thomas L. Friedman) 

    ∙ President Obama talks about the many allies in the Afghanistan war, as did President Bush about Iraq, while what we really need is more Muslim allies in the war against the vast network of jihadist websites on the Internet that seek to recruit impressionable young Muslims across the world, incl. the US, for the jihadist cause. For only Muslims can fight the war of ideas within Islam & help kill off the extremist philosophy.  But instead it appears to have a degree of legitimacy in the Muslim community, if only because few of its political & religious leaders dare speak out against it, for fear of retribution. Thus last week the Muslim world was rife with talk about the Swiss vote on minarets and this week will likely be with talk about France’s move to ban the burka, while continuing to ignore the killing of Muslims by other Muslims. Since 9/11 a  mindset has taken hold in the world in which Muslims are never, & the West is always, responsible for whatever happens in the world. 

Worse still, some key US allies, first & foremost Saudi Arabia & Pakistan under Musharraf, are closet jihadist sympathizers, if not outright soul mates. And reverence for human life is a Western middle class affectation, not because in the rest of the world people love their children any less, but because there death is a more common visitor & more generally accepted as a fact of life.



    ∙ Citigroup has been hemoraghing red ink for the past two years, still faces huge loan losses & its share price has cratered 90%. And yet, claiming to be “among the strongest banks in the industry”, it announced on December 14th it will repay its remaining US$20BN in TARP bailout funding. The reason : to get out from under its pay cap & other restraints.

    ∙ President Obama was right in saying the banks owe “an extraordinary commitment” to tax payers. But he would have had more credibility if his Administration hadn’t agreed so readily to release the banks from their bailout obligations. Most of the big banks’ profits now come from the  spread on their US$1+TR in cheap Fed loans secured by their most toxic assets. And if the goal was to end the “too big to fail” phenomenon, we are moving in the wrong direction; for the big banks have gotten still bigger by being encouraged to acquire their weaker brethren in Treasury/Fed brokered deals. This ensures the next bailout will be bigger still; for now, with an implicit assurance of a rescue in their back pocket, the big banks will take still bigger risks (they have a perverse incentive to do so since ‘if we gamble & win, we can keep the proceeds and if we gamble & lose the tax payers will have to bail us out’). If we should have learnt anything from the last couple of years, it is that banks too big to fail are a threat to the system. So any serious effort at reform must ensure no such banks exist or if allowed to exist should be subject to a ‘utility approach’, i.e. tight regulation. Mervyn King, the Governor of the Bank of England who is quite outspoken for a central banker, put it rather aptly when he observed “banks too big to fail are too big to exist.”   

The plot since thickened. For three days before Citigroup made public its TARP repayment plans, the IRS announced it would allow it to preserve a US$38BN tax benefit that repayment would otherwise have caused it to lose. And Treasury’s planned sale of its 34% equity interest in the bank, acquired by converting the other US$25BN of Citigroup’s US$45BN in bailout funding (about which sale it has since had second thoughts) would yield less but for this IRS decision. 


    ∙ On December 15th Citigroup announced receipt of an arbitration claim from the Abu Dhabi Investment Authority (ADIA) alleging “fraudulent misrepresentations” in a two year-old deal. In November 2007, when Citigroup badly needed capital, the ADIA bought US$7½BN in high dividend-paying securities convertible into common shares between March & September 2010 at prices up to US$37.24. But since then Citi has been hard hit by the credit crisis & rising loan defaults, got US$45BN in bailout funding & protection against losses on US$300+BN in dodgy assets, and & its shares plunged from US$33 to US$3.56. 

What may have really grated Abu Dhabi was Kuwait’s announcement, & the Singapore’s wealth fund’s in September, of having booked a big profit on the sale of Citigroup shares, that it/they had bought a great deal cheaper after Abu Dhabi had done its deal.


GREEN SHOOTS GO BAD (NW, Rana Foroohar) 

    ∙ According to London-based Capital Economics, while in past US recessions small business accounted for half of all job losses, this time it has been two-thirds, due to a lack of bank credit. Since October 2008 business loans have declined 17%, & are still falling, and small business depends more on bank credit than large firms that can access capital markets.  While surveys indicate a growing optimism among America’s multinationals, they derive 60%, or more, of their revenue from abroad (& will enjoy FX gains from a weaker dollar), while small business must depend 100% on the local economy. This is not good news for employment, given the dominant role of small business in new job creation. 

This lends support to the emerging two-tier theory of US economics & finance : a small “High Street” tier that is starting to improve & a much bigger “Main Street” tier that’s still in the dumpster. 


    ∙ As of December 31st, 2007 24 banks had ‘troubled asset ratios’ of over 100 (i.e. their loans  90 or more days past due plus those no longer paying interest plus their foreclosed real estate exceeded their capital plus their loan loss reserves). One year later there were 163, last June 30th there were 297 & on September 30th 369. 

There are at least half a dozen states with one in five of their banks in that category.    


    ∙ Wholesale prices jumped 1.8% in November, triple the 0.6% analysts had expected, & were up 2.4% YoY after eleven straight months in negative territory. More worrisome, core inflation was up 0.5%. These will be issues at the December 14th & 15th FOMC meetings; for, if inflationary pressures were to mount, the Fed may have few options but to start raising interest rates sooner than planned (although not at this meeting) &  sooner than the still shaky economic situation may warrant. 

Consumer prices in November were up 0.4% after rising 0.3% in October. And Alan Greenspan told Meet the Press on December 13th that the US faces a serious long-term threat of inflation unless the Fed begins to pull back “all the stimulus it put into the economy.”  


    ∙ US retail sales rose 1.3% in November, more than twice the 0.6% expected, & consumer confidence rose to 73.4 from 67.4 in October, well above the 68.5 expected.  

73.4 is still a long ways from the 100 level that constitutes the tipping point into growth, or the 110 indicative of robust growth. 


    ∙ Every Republican in the House, & 27 Democrats, on December 9th voted against a modest effort to rein in Wall Street. America came out of the Great Depression with a tightly regulated banking system that lasted until the Reagan wave of deregulation. While the latter led to the S&L crisis of the late 80's that cost taxpayers US$300BN (2% of GDP), it didn’t stop politicians in both parties from buying into the idea that bank regulation was needless red tape. So, with fewer legislative constraints & regulators who didn’t believe in regulation, banks loosened lending standards, causing a crisis that required unprecedented government bailouts & Fed lending. But conservatives blame bureaucrats, not bankers, for the meltdown, government-sponsored lenders like Fanny Mae for the proliferation of sub-prime loans & regulators for coercing banks to lend to unqualified borrowers & conveniently ignore the impending catastrophe in commercial loans. With  the House having failed to act in a meaningful way & the Republicans committed to a bankrupt ideology, it’s now up to Senate Democrats to bring about real financial reform. The question is : will they? 

He let his biases get in the way of his objectivity, even if his conclusion is right. For the Regulation Q cap on interest rates was terminated, and disintermediation & interest rate swaps were facts of life, before the Reagan era, banks were pressured since the Carter days to enable more (lower income) Americans to own their homes & the sub-prime phenomenon wouldn’t have had the ‘legs’ it did but for Fannie Mae & Freddie Mac relieving mortgage-originators from  risk. His Upton Sinclair quote “It is difficult to get a man to understand something when his salary depends on him not understanding it” fits the occasion : the financial industry has more lobbyists in Washington than Congress has members who in the first nine months of this year cost it, ex-political contributions & advertising, US$344MM in salaries & out-of-pocket expenses for dinners & junkets (on top of what the banks’ major corporate clients - purportedly in part at their urging - spent lobbying members of Congress that serious financial reform will be bad for their business).



    ∙ The compromise solution developed in the Senate to break the healthcare reform logjam was to drop the so-called “public option” & make those in the 55-64 year age bracket eligible for Medicare coverage. Now, in order to have the Senate pass a health reform bill before the Christmas break, this Medicare buy-in is about to be tossed, apparently at the President’s urging that any deal was better than no deal

All this for the vote of the once Democrat Vice-Presidental candidate & now independent Connecticut Sen. Joe Lieberman (whose state hosts several insurance companies & who over the years has received more money from the industry than any other member of Congress but one).  One feature that has survived is a prohibition on health insurers refusing coverage on the grounds of previous medical conditions (which they will likely find a way around with ease). While this may not necessarily make it as bad as Howard Dean, a physician himself, for twelve years Governor of Vermont, a 2004 Presidential hopeful & Democratic National Committee Chairman from 2005 until 2009, makes it out to be (he calls it “an insurance company’s dream” & says the bill ought to be abandoned), the liberal Democrats’ anger is not without foundation.



    ∙ The new US$75BN stimulus bill introduced in the House on December 16th contains the same controversial Buy America restrictions of the original US$787BN version. But this isn’t good enough for key members of the House, incl. Mike Michaud (D.-Me), who heads its trade working group, and Peter DeFazio (D.-Ore), the Chairman of its Highways Sub Committee, who want to see far stricter on foreign purchases incorporated in it.  

And some keep prattling about Ottawa ‘negotiating its way around’ the already existing ones. 


    ∙ Iraq held its second oil field auction on December 11th & 12th. Lukoil & 15% partner Statoil walked away with one of the biggest prizes, the 13BN bbl West Qurna 2 field, and Shell & Malaysia’s Petronas with the other, the 12½BN bbl Majnoon field. Lukoil will be paid US$1.15/bbl & Shell US$1.39. Elsewhere CNPC, Petronas & Total were successful with their US$1.40 bid for the 4.1BN bbl Haifaya field, Petronas & Japex will get US$1.49 for the 900MM bbl Gharraf field, Gazprom, Turkey’s TPAO, Korea’s KOGAS & Petronas US$5.50 (down from its US$6.00 target) for the Badra field (the only field in Central Iraq to get a bid) & Angola’s Sonangol was successful in its bid for the Nejma field in the North but only after lowering its price expectation from US$8.50 to US$6.00. 

Bids for the fields in the relatively ‘safe’ Shiite South came in lower than what the Iraqis would have settled for, while interest in those elsewhere was minimal. The auction was noteworthy for the lack of success of the US oil companies, the fact that with this auction well over half the known Iraqi reserves (the magnitude of which, however, is based on three decade-old 2D technology - the consensus is that modern technology could as much as double them) has been taken off the market, and finally that, if the output commitments by successful bidders materialize, Iraq could be one of the world’s largest oil producers, a decade or more hence..   

IRAN’S PRICE WARS (NW, Rana Foroohar & Babak Dehghanpisheh) 

    ∙ Iran may cease subsidizing gas, food & other basic goods not as a move to greater economic orthodoxy but to preserve cash & prepare for possibly more stringent sanctions. 

The subsidies sought to, & did, secure popular acquiescence. Ending them will likely cause political unrest since over half the population is under the age of thirty & wants a better life, and ending the subsidies will alienate them, & widen the gap, further between them & the increasingly long-in-the-tooth Revolutionary Guards coterie around President Ahmadinejad & the ‘grey beard’ ayatollahs. 

A GLOBAL CRISIS LURKS IN DUBAI (Vancouver Sun, Jonathan Manthorpe) 

    ∙ Dubai’s cheap credit-fuelled explosive growth sucked in an estimated 4½MM foreign workers (who ended up accounting for 90% of Dubai’s total population). Two-thirds of them came from Asian countries & each year sent home tens of billions of dollars in remittances; thus the Indian state of Kerala depends for 22% of its gross income  on remittances from people working in the seven member UAE, and the 250,000 Filipinos working in Dubai (out of a total 10MM working abroad) accounted for half the US$600+MM  sent home to the Philippines each year from the UAE.  

Worldwide, remittances far exceed foreign aid flows, even before the recent down turn in the latter.     


    ∙ In November exports were the best in over a year. They were down only 1.2% YoY (vs. 13.8% YoY in October & even more in the months prior to that). And retail sales, factory output & investment grew robustly. But prices rose 0.6% after nine months of declines. 

And GDP growth in the Third Quarter, at 8.9%, up from 6.1% in the First Quarter, is once again above the 8.0% level that Beijing believes critical to avoid social unrest. 


    ∙ On December 12th the Presidents of China, Kazakhstan, Turkmenistan & Uzbekistan officiated at the official opening of the new “Silk Road” natural gas pipeline from Eastern Turkmenistan through Kazakhstan & Uzbekistan to China’s Northwestern Xinjiang province  (possibly extended later to Shanghai, Guangzhou & Hongkong). Deliveries will commence in 2010 at a 13BN cubic metre annual rate (approx. 1.3BCF/day) & by 2013, at full capacity, will reach 40 BN cubic metres annually (over half of China’s current consumption). 

What actually did take place was the opening of a US$6.7BN, 1,300 km section, that took less than two years to build, of what will in due course be a 7,000 km. gas pipeline. It is of great interest to Turkmenistan; for it traditionally has sold most of its gas to Russia (which then resold at least some of it to Western Europe). But last April there was an explosion in the pipeline to Russia for which Turkmenistan blames Gazprom; so it suspended, & has yet to resume, shipments to Russia although the pipeline has long since been repaired. While everyone has been casting covetous eyes on Central Asia’s cornucopia of energy riches, this development gives China the inside track on accessing them. Moscow will (rightly) see it as loosening its grip over the Central Asian ‘Stans’ that once were part of the Soviet Union. The Europeans have been counting on accessing Central Asian gas via the Nambucco pipeline that would bypass Russia to reduce their dependence on Russian gas. And the Americans have for well over a decade been talking about a gas pipeline from Central Asia across Afghanistan to the energy-hungry markets of South Asia (in the early negotiations of which, now President Karzai was a member of the US ‘team’). But as one observer put it, “China started building a pipeline while the others were still debating routes.”  


    ∙ After 23 years in which Pepsi Cola made the Superbowl the centrepiece of its marketing strategy it won’t be there this year, creating a void that Coca Cola intends to fill. 

It believes that there are better ways, like ads on the Web, to reach its young target market.  

    ∙ The Eurozone may soon face a critical challenge. Several of its 16 member countries are in  breach of its 3% limit on budgetary deficits (most prominently Greece & Ireland whose deficits are more like 12%, the same size as that of the UK, a non-Eurozone member). Their high unit-wage costs will impede the recovery they need to generate the tax revenues to improve their fiscal situation and, locked inside the Euro, the traditional solution to this problem, currency devaluation, is no longer an option. 

Its unitary monetary policy is the Achilles heel of the Eurozone concept. For in a group of countries with such diverse economies (that has been worsened by enlargement), there will never be a ’Goldilocks’ monetary policy, one that’s ‘just right’ for everyone. This may be why all 16 Eurozone member countries still have central banks with no monetary policy to administer, i.e. as a fallback.  



Given the hype a couple of years ago about Toyota replacing GM as the world’s largest auto make, it’s surprising that it has gone largely that since then its market share has been flat or declining in every market except its (shrinking) home market & that in the First Quarter of this year it lost even more money than a GM about to go into bankruptcy. 

Toyota’s success was based on an operational philosophy that expected assembly line workers to stop the line if they saw anything untoward happening. But its global expansion has moved assembly operations into countries in which that idea was anathemous to the local culture. Ergo : more recalls.

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