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November 26, 2009

Of the 7½MM doses of H1N1 flu vaccine manufactured until recently by GlaxoSmithKline for use on Canadians, one 170,000 dose batch generated a number of cases of anaphylactic shock “a bit higher than usual” although “still small” (the latter is a matter of opinion : the “accepted norm” is one such case per 100,000 doses while this batch caused six such cases before the unknown number of remaining doses was recalled). Anaphylactic shock causes a drop in blood pressure & breathing problems, can be fatal if not treated promptly & is more commonly associated with bee stings). Elsewhere it was reported that the H1N1 flu in one recent week killed more Canadians than the seasonal flu did during last spring’s entire flu season. 

More unfortunate news this week for the US dollar; it is becoming like Job of Old Testament fame, with messenger after messenger bringing bad news. Two weeks ago India bought 200 tonnes of gold from the IMF for 6.7 billion US dollars. This week Russia announced it would start accumulating Canadian dollars in its official foreign exchange reserves & Sri Lanka that it had bought 10 tonnes of gold from the IMF for US$375MM, tripling the share of gold in its exchange reserves to almost 4%  (after its central bank had announced earlier this month that it had been buying gold - presumably from private sources - to diversify its reserves). And it became public knowledge that Mauritius had purchased US$71.7MM worth of gold from the IMF, more than doubling its share to almost 2½% (the IMF decided two months ago to sell one-eighth of its gold holdings - to have more cash to lend - and after these three transactions will have only a little more than 200 tonnes left to dispose of, which it proposes to sell on a “first come, first served” basis, a selling strategy that in a worst case scenario could prompt a free-for all.   

Canada’s immigration/refugee system is so screwed up that it is not inconceivable that, if Osama bin Laden were to wash up on Canada’s coast in some rusting hulk, as recently did some 76 Sri Lankan Tamils, some of them with an alleged background in the Tamil Tigers, an organization officially designated by the Canadian government as “terrorist, he might be set free, provided with housing, told he was entitled to work, if he so desired, & handed a welfare cheque.     



No. 339 - November 26th, 2009 


(G&M, Brian Milner

    ∙ The IMF, World Bank & Hong Kong Stock Exchange have joined those warning of the risk posed by excessive liquidity in the system. Since March emerging equity markets have soared & property prices in China moved back into bubble territory. Much of this is due to a ‘carry trade’ whereby  speculators  borrow low cost US dollars to invest the proceeds elsewhere at higher rates (& possibly gain from a weaker dollar), contributing to the dollar’s weakness. World Bank President Robert Zoellick attributed Australia’s two recent interest rated hikes to bubble fear and warned against prematurely tightening monetary & fiscal policy, Vitaliy Katsenelson of Denver-based Investment Management Associates said “The bottom line is ... If you get off stimulus, you’re going to cause a slowdown. But if you don’t, you’re going to cause bubbles”, and Russia’s Finance Minister on November 25th expressed alarm at the hot money flooding into Russia & said he would support “soft measures” to stop speculators inflating the value of the country’s stock market. 

For politicians bubbles are the lesser of two evils, regardless of their longer-term consequences. 


    ∙ On November 23rd its Managing Director told a Confederation of British Industry audience  that, while the worst is over, “The economy remains very much in a holding pattern - stable and getting better but still highly vulnerable ... It is difficult to claim ... the crisis is over when unemployment is at historic highs and getting higher still.” And he said Asian countries are needed to help drive international growth : “If we are to have sustained global growth someone else than the US consumer needs to step in ... China & other emerging Asian nations are shifting from exports to domestic demand but they have some ways to go.” 

The implication of his comments is that “uncoupling” is a reality. In this context also it is worth noting the November 25th observation by the CEO of Teck Resources Ltd., Canada’s largest base metals producer, that ”We’re seeing strong growth in metal consumption ... in countries such as India, Japan, Korea and of course Brazil ... When these sources of metal demand are added to that of China, it more than makes up for what is clearly a very weak U.S. economy.”   


    ∙ The day after the German government on November 24th bailed out the country’s third-largest bank the Bundesbank said that, while in 2008 the world had narrowly averted a “virtually uncontrollable” collapse of its financial system, the underlying problems “are far from being overcome...  Downside risks remain predominant”, and the IMF’s Managing Director that banks worldwide have only owned up to half their likely US$3.5TR in losses. And the Bundesbank advised the country’s banks to take advantage of the present state of confidence to position themselves for system losses of up to US$135BN in the next year (of which they may account for up to 75%) & said it is concerned that the default rate among lower-tier companies now tops 14% in the US and 12% in Europe.  

The state of many European banks helps to explain the strength of the Euro; for they are liquidating overseas assets & repatriating the proceeds to buttress their capital base. 


(NYT, Edmund L. Andrews) 

    ∙ Treasury debt managers face a mountain of debt, massive debt maturities in the next few months & the reality that interest rates at some point will return to more ’normal’ levels. The government faces a payments shock like that which drove millions of homeowners to default on their mortgages; for “It is on teaser rates ... We are taking out a huge mortgage now but ... won’t feel the pain until later.” With the national debt now US$12TR & rising, the White House expects annual  debt service payments to rise from US$202BN now to US$700+BN in ten years (which many believe is an underestimate). So Americans must dig themselves out of not just one, but two, financial holes, as consumers & tax payers. 

The former is likely to be the easier, & quicker, to extricate from. 


    ∙ The minutes of the November 3rd/4th FOMC meeting show that it doesn’t expect the recovery to be vigorous enough to quickly drive down the unemployment rate and accepts that its efforts to keep the rebound going risks a new speculative bubble & could cause people to start worrying about inflation. 

This is ‘central bankers’ speak’  for “Full Speed Ahead & Damn the Torpedoes”. 


    ∙ After the minutes of the FOMC meeting revealed its intention to keep interest rates at “exceptionally low” levels for an “extended period” & its perception that the dollar’s decline had been “orderly”, the US dollar slid on November 25th to a 15-months’ low against the Euro, to close to a 14-year low against the Yen & to below parity against the Swiss Franc (for only the second time in history). There is speculation that from this level the Euro may move “rapidly” higher against the dollar in the typically thin markets from now until yearend.


Meanwhile new claims for unemployment benefits fell by 35,000 to  466,000, the first time since January that they went below 500,000, consumer spending was up 0.7% MoM, after declining 0.6% in September (i.e. it was flat compared to August), new home sales were up 6.2% to 430,000 (solely due to a 23% rise in the South - everywhere else they were down), the savings rate declined from 4.6% to 4.4% & economists expect 145,000 job losses this month (while 125,000 new jobs are needed each month to keep the unemployment rate from rising). 


    ∙ The preliminary Third Quarter 3.5% annual GDP growth rate was revised to 2.8% since consumers spent less, commercial construction was weaker, the trade deficit was more of a drag & business inventories fell more than first thought.  

At the initial recovery stage a 70 point downward revision is huge.  


    ∙ In November the Conference Board’s Consumer Confidence Index rose to 49.5 from 48.7 in October. But it warned that consumers’ income expectations are “very pessimistic” & that they are in “a very frugal mood”. 

It takes an index of 90 to indicate growth & of 100 to indicate substantive growth. And in September the index was in the lower mid-fifties. 


    ∙ In October they surged for the second month in a row, to a 6.1MM annual rate, well above the 5.65MM annual rate expected & 36% above the January low but still 16% below that in the fall of 2005. Prices were down 2% MoM & 7% YoY.  

This cut the inventory of houses for sale to a seven months’ supply, down 50% from its peak but twice that at the top of the market. With this torrid pace expected to peter out over the winter, it is likely to rise again. And with one out of four US home owners now underwater on their mortgages, the worst in foreclosures may well be yet to come. 


    ∙ GM & Chrysler planned on IPOs in 2010 to repay much of the US$75BN various governments advanced them earlier to keep them afloat. But next year’s total US vehicle sales may nix that idea; for, while sales peaked four years ago at 17+MM, the forecast for 2009 is 10.3MM (a mere 1% over the 1982 volume of sales - that had been the lowest since 1970 & 2010 forecasts range from Ford’s 12.3MM to Fitch Rating Agency’s 11.1MM. And while GM’s CEO Fritz Henderson still talks about taking his company public in 2010, both Fitch & Merrill Lynch’s John Murphy’s doubt the feasibility thereof). 

Chrysler is now even mooting the postponement of its IPO until 2014.    


(WSJ, Rebecca Smith) 

    ∙ Duke Energy & others are teaming up with Chinese partners (thus giving them an otherwise hard-to-obtain foothold in the US market). In August it agreed with China’s biggest state-owned utility, China Huaneng, to share information on clean coal technology (both get the lion’s share of their power from coal & are building coal gasification plants - except that Duke’s plant will take eight years to build & Huaneng’s three). Duke’s CEO says this is just a start since ‘Chinese companies are more likely than their US counterparts to develop the new technologies needed to wring carbon out of the economy’ & suggests he may seek Chinese funding for his five-year US$25BN capital investment program.  

US companies going to China for cash & new technology? Sic transit gloria! 


    ∙ President Obama will propose in Copenhagen to cut US greenhouse gas emissions 17% by 2020. While not a binding commitment, for it lacks Congress’ approval, this is the number in the bill passed earlier in the House & less than the 20% the Senate is considering in its bill. While the Obama Administration says the cost of such a 17% cut would be US$173 annually for a family of four, the Republicans of course say it will be much higher.  

This is not as good as it sounds; for it is a 17% cut from 2005 levels (which were up almost 17% from 1990) while the EU is targeting 20% off 1990 levels. Now that the President & six members of his Cabinet are going, Stephen Harper can presumably justify in his own mind going as well, rather than have Environment Minister Jim Prentice carry the can (his office has since announced that he will, in fact, go to Copenhagen).   


    ∙ The State’s Oil & Gas Department on November 9th asked oil companies for exploration bids on an offshore section of the Beaufort Sea but warned them it falls within a area claimed by both the US & Canada. 

Canada claims the boundary in the Beaufort Sea follows the 141st meridian 200 nautical miles (370 kilometres) out to sea while the US believes it runs the same distance along a line perpendicular to the coast. The area in dispute measures 21,436 square kilometers.     


    ∙ Canada has so far spent $150MM to help fund development of the US Joint Strike (stealth) Fighter aircraft, is committed to spend as much as $500MM, and has been considering spending between $3.8BN & $10BN buying it to replace its aging CF-18 fighters. But it has now been told that it & the other countries involved in funding its development (Australia, Britain, Denmark, Italy, Netherlands, Norway & Turkey), if they were to purchase them, won’t be given the software codes for its electronic systems needed to maintain and/or upgrade them & would have to depend on the US to do so for them. While Britain has  threatened to cancel its 138-plane order Canada’s Defence Department says this won’t in any way impact on its involvement in the program. 

This is impractical & a break from past practice, attributable to security concerns & to Congressional pressure to protect US aerospace jobs. But it could be a blessing in disguise if it were to lead to a re-evaluation by the government of Canada as to whether jet fighters, & stealth fighters at that, really rank high, if at all, among its military priorities. For they have no role at all in peace keeping & in Afghanistan have been shown to do more harm than good in the kind of unconventional local conflicts that are likely to hallmark the 21st century (in which, if aerial ground support is required, helicopter gunships can provide it far more effectively & cost-effectively).  


    ∙ A study by the Edmonton-based Pembina Institute & the Vancouver-based David Suzuki Foundation commissioned by the TD Bank concluded Canada could meet both the Harper government’s- & the more ambitious Kyoto targets without job loss, & would actually experience modest incremental job- & GDP growth. But both would require major government intervention and fundamentally alter the economy & cause interregional friction since Central Canada would have GDP- & employment gains at the expense of the West. 

The report would have been less easy to ignore by Harper c.s., & thus more useful, if done by others than the Tweedledee & Tweedledum of Canadian environmentalists.  


(G&M, Rhéal Séguin)  

    ∙ Premier Jean Charest announced on November 23rd that the province will cut greenhouse gas emissions 20% below their 1990 levels by 2020, a goal similar to that of the EU. This is the latest in a series of environmental moves by provincial governments, led by Québec & BC, that are making the Harper government look silly. And he warned that Canada could pay a heavy price if it didn’t cut its emissions significantly since Europe is set to enforce aggressive  cuts & threatening to impose duties on imports from countries that don’t. 

Québec’s emissions have declined for several years to the point where, on a per capita basis, they are now half the Canadian average (helped by its electric power being largely hydro-generated). So its total emissions are almost back to their 1990 level while those of Canada as a whole are now 25% higher than in 1990. 


    ∙ On November 22nd, after meeting Egypt’s President Hosni Mubarrak, Israeli President Shimon Peres said progress had been made towards a prisoner exchange (later confirmed by Hamas). It would exchange Sergeant Gilad Shalid (kidnapped three years ago near the Israeli-Gaza border) for 1,000 Palestinians held in Israeli  jails, many of them serving long terms for deadly attacks on Israelis. Both Netanyahu & Hamas want a deal; so the former was willing to compromise on the number of militants to be released (Ehud Olmert had drawn the line at 400) & the latter to vouch to end the rocket attacks on Southern Israel. 

Among those to be freed is Marwan Barghouti, a Fatah leader serving five life sentences for killing Jewish settlers. Well-regarded by Hamas, he could be a shoo-in as the Palestinians’ next President. And if anyone can promote the concept of a government of national unity, it would be him (which would knock the wind out of the sails of the Israelis’ traditional ‘divide & conquer’ strategy). 


    ∙ Prime Minister Netanyahu announced on November 25th that Cabinet had taken a “painful” step in approving a freeze on new residential construction in West Bank settlements. While Hilary Clinton praised this move since it helped “to move forward toward resolving the Israeli-Palestinian conflict”, the Palestinians refused to accept it as such (as Netanyahu knew they would since they had said they would when the idea had been informally trolled by them by the US). For as often the case with Israeli moves, ‘the devil was in the fine print’, in this case a limited term (10 months) and the exclusion of East Jerusalem, of all construction already started and of all public structures like schools & community centres. Even Israeli TV news anchors commented that this move seemed aimed more at making peace with the US than with the Palestinians. Be that as it may, it angered the pro-settlement crowd, incl. members of his coalition government.  

Israel’s diplomatic status has declined in line with a growing international focus on its conduct of the war in Gaza & the violation of international law that the settlements represent. And the Palestinians feel their oats because they believe, rightly or wrongly, that time in their favour, that world opinion is increasingly tilting their way & that Washington’s ability to be an effective godfather for Israel is slipping. 


    ∙ On November 26th it announced plans to boost its economy’s energy efficiency so as to cut CO2 emissions per unit of GDP by up to 45% by 2020 from 2005 & reiterated that it will continue pushing for binding pollution targets for the developed countries (while rejecting them for itself) because ‘most of the environmental damage done to date  has been the result of their industrialization over the past 100-200 years’. 

Energy intensity targets are a step in the right direction, but only a step. With GDP growth at current rates, China’s total emissions would still increase a great deal by 2020.

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