A consensus is emerging that Asia, & not the US, the EU or Japan, will be the locomotive to pull the world economy out of this recession (& that the US on this occasion may well be the caboose rather than the locomotive?). So the recent news out of Asia was encouraging : in China the official PMI (Purchasing Managers’ Index) was up to 54.3 in September, from 54.0 in August, despite Beijing’s effort to reduce the availability of credit to some sectors of the economy, and some components of the index were up quite strongly (export orders were up 1.2 to 53.3). And the same held true elsewhere in Asia : in India & Taiwan the PMI was up 1.8 to 55.0 & 2.4 to 57.5 respectively, and Korean exports were up 13.0%. 

For anyone old enough to remember news ‘movie reels’ of parades by the reborn German army in the mid-Thirties, or having seen subsequent documentaries thereof, the military parade in Beijing to commemorate the 60^th anniversary of the People’s Republic brought back memories. For it involved similar massive numbers of soldiers marching twenty or so abreast, and moving their arms & legs in immaculate unison, like automatons. It must have taken endless hours of drill on China’s parade squares by these soldiers to achieve such perfect synchronization. 

Amidst all the hullabaloo about the price of gold hitting new highs, we’d do well to remember this is largely, if not totally, a function of the weakness of the US dollar.  

GLEANINGS VERSION II

No. 333 - October 8^th, 2009 

‘TOO BIG TO FAIL’ STATUS SEEN DISTORTING MARKETS (G&M, Kevin Carmichael) 

∙ Canada’s Finance Minister & bank regulator say singling out the world’s biggest banks for special regulatory treatment will distort the market; for it will them a competitive edge due to the implicit government guarantee it entails (like Fanny Mae & Freddie Mac?). 

Well-intentioned, but inadequately thought-through policy decisions often run into the brick wall called the “Law of Unintended Consequences”. 

CANADIAN AN ECONOMIC ‘PROPHET’ (CanWest, Peter O’Neil) 

∙ Bill White worked for four years at the Bank of England & 22 years at the Bank of Canada before joining the Basle-based Bank of International Settlements in 1995 as Senior Economic Adviser. For the next 13 years, until he retired in 2008, the BIS Annual Reports voiced growing alarm about the many imbalances in the system & the inadequacy of the regulatory framework to contain the drive in the financial community to maximize returns regardless of risk. But is warnings weren’t heeded by the central bankers who meet monthly at the BIS, above all Alan Greenspan & Ben Bernanke. Now, he says, central bankers better get ready to start raising interest rates ‘forcefully’. 

In economic forecasting & investment being right in the past is no guarantee of being right in the future; still, the views of anyone willing to disagree with Alan Greenspan when he had near god-like status in the financial community, & was proven right, are likely worth paying attention to.   

FED CHIEF WARNS GREENBACK’S GLOBAL STATUS AT RISK (G&M, Barrie McKenna) 

∙ He warned the House Banking Committee on October 1^st that the US doesn’t have an unalienable right to be the custodian of the world’s reserve currency & that it must manage its economic affairs with care, among others by reining in its US$1.6TR deficit. This followed a comment by World Bank President Robert Zoellick, a former top Bush aide, that the ascent of China & India is reshaping the global economic order “before our eyes” & that the US shouldn’t take the dollar’s reserve currency status for granted, and a report by the IMF that the dollar’s share of global reserves in the Second Quarter had fallen to its lowest level in 14 years, to 62.8% from 65% in the First Quarter. 

The latter development, however, is largely, if not wholly, due to the lower value of the dollar. 

TREASURY SET ‘UNREALISTIC EXPECTATIONS’ (CNNMoney, Jennifer Liberto) 

∙ A report released October 5^th by Neil Barofsky, the Special Inspector General of the Troubled Assets Relief Program (TARP) says federal officials weren’t entirely honest about the health of the first nine firms that got the initial US$125BN & had created “unrealistic expectations” when they said this money would enable them to lend more.  

And he warned “Statements that are less than ... forthright ... may ultimately undermine the public’s understanding and support ... damage the government’s credibility and have ...unintended consequences that actually hamper the government’s ability to respond to crises.” 

PROBE FOCUSES ON BEHAVIOUR OF FED IN LEHMAN CASE (WSJ, Jeffrey McCracken) 

∙ A court-appointed examiner investigating the Lehman collapse has been exploring if the Fed improperly cut in front of other creditors in the US$613BN bankruptcy.  

Many creditors have been infuriated by the Fed promptly getting its US$46BN back while they are still in the dark as to how much they may get back, and when.  

AUTO SALES TUMBLE AFTER RUSH FROM ‘CLUNKERS’  (AP) 

∙ September sales were < 746,000, down 41% MoM, despite automakers’ incentives averaging US$2,557, vs. US$83 in August.  

While GM & Ford say the clunkers letdown should pass, October is usually a slow month for new vehicle sales & shoppers remain tight-fisted. 

SEPTEMBER RETAIL SALES IMPROVE BUT ARE STILL WEAK (AP) 

∙ SpendingPulse, a division of MasterCard Advisors, reported that the sale of luxury goods ex. jewelry rose 3.4% but remained below their four year-earlier level, and that sales of electronics & appliances and jewelry were up 5% & 1.2% YoY respectively. 

These seemingly encouraging increases were all from disastrous year-earlier levels.  

SERVICE SECTOR GROWS FOR THE FIRST TIME IN A YEAR (AP) 

∙ In September the ISM’s Service Sector Index, which tracks over 80% of all US economic activity, grew for the first time in 13 months, hitting 50.9, up from 48.4 in August. But employment in the sector slipped in September, for the 20^th time in the past 21 months. 

Most encouragingly, it broke through the 50.0 ‘tipping point’ between growth & contraction  

U.S. WHOLESALE INVENTORIES DROP (G&M) 

∙ In August they declined for the 12^th month in a row while sales at the wholesale level jumped, for the fifth month running, by the largest amount (1%) in 14 months. 

Sooner or later this process has to end and wholesalers will have to start “restocking”, at which point wholesale inventories will turn from being a ‘boat anchor’ for, to a positive influence on, economic growth. But the key question remains : will that create jobs, and how many how fast? 

JOBLESS LOSE LIFELINE AS SENATE STALLS (CNNMoney, Tami Luhby) 

∙ Last month the House passed a bill extending the period of eligibility for unemployment benefits by 13 weeks for those living in high unemployment states. But so far the Senate has failed to follow through as (Democrat) senators squabble how to extend the period of eligibility in a way that will benefit most people in their state. 

Meanwhile, the eligibility of 400,000 people ran out in September & that of an estimated 280,000 more will do so this month. In many respects the debate about by how much to extend the period of eligibility is neither here nor there; for no one seriously believes that the employment picture will improve so much in whatever number of weeks is added to the period of eligibility as to enable those whose eligibility has run out to find a job. And what then? 

HEALTH BILL FATE STILL IN DOUBT (AP) 

∙ The Senate Finance Committee at 2:00 a.m. on October 2^nd finished a draft bill designed to appeal to moderates that was expected to move out of the Committee this week. It would clear a path to health insurance for millions of currently uninsured, and be funded in part by lowering Medicare & Medicaid payments to healthcare providers and in part by new taxes & fees on the insurance companies & the well-to-do that are already meeting resistance. It would also prohibit insurers from turning away those in poor health. But it doesn’t include the ‘public option’ included in the draft bill passed by the Senate Health, Education, Labor and Pensions Committee. And while there may not be enough support in the Senate for a public option, the reverse is true in the House : any bill that doesn’t include it will all but inevitably stall there.  

While the Democrats notionally have the votes in both Houses to pass any healthcare reform bill, the two wings of the party are at loggerheads as to what should, & should not, be in it. 

OBAMA’S APPROVAL RATING JUMPS (AP) 

∙ For the first time since January 20^th it rose, from 50% in September to 56%, as the country’s mood starts to brighten & people start to feel better about his handling of the economy & his proposed healthcare overhaul. While support for the war in Afghanistan is waning, it ranks only seventh among people’s priorities. Among Democrats 88% approve of him and, while only 18% of Republicans do, that’s well up from September’s 12%. And 53% of independent voters now support him (vs. 44% in September) while only 37% do not, down from 53% last month. 

While the healthcare kerfuffle seems to have died down somewhat, the outlook for the economy may be darkening as the once vocal proponents of a V-shaped recovery have fallen silent. 

FATAH, HAMAS CLOSE TO RECONCILIATION (Jerusalem Post, Khaled Abu Toameh) 

∙ Fatah & Hamas have accepted in principle Egypt’s proposal for elections to be held under Arab & Western supervision in the first half of 2010. With Fatah favouring proportional- & Hamas district- representation, it proposes that 75% of the candidates be elected on a ‘list’- (i.e. proportional) & 25% on a district- (i.e. ‘first-past-the-post) basis. 

There is no reason, of course, to expect the losers not to cry foul. 

GOLDSTONE ... SO FAR (Jerusalem Post) 

∙ He would apply fanciful notions of international legality to stymie Israel from protecting its people while they aren’t applied to the fighting in Afghanistan and weren’t to Roosevelt & Churchill when they fought fascist fanaticism. He wouldn’t allow quarantining enemy territory, embargoing Iran to block it from fielding an atom bomb, imprisoning captured terrorists, using sophisticated weapons against a less well-armed terror infrastructure & bringing non-lethal pressure on non-military targets such as flour factories, sewage treatment plants or roads.  And he expects us to pay reparations to Hamas for defending ourselves. As to him giving Hamas hell, all he said was that attacks against Israeli civilians “would constitute war crimes and may amount to crimes against humanity.” 

Hamas has warned that unless Mahmoud Abbas quits supporting the US initiative to shelve the Goldstone report until at least next March it may not sign the ‘unity deal’ in Cairo on October 26^th (which likely would suit Netanyahu c.s. just fine). So he has distanced himself from it. 

IRAQ BARS CHINA’S SINOPEC FROM SECOND OIL ROUND (Reuters) 

∙ The al-Maliki government is upset about it buying Addax Petroleum Corp. which is pumping oil from Kurdestan’s Taq Taq field without reference to Baghdad. 

A foolhardy move? 

ANTI-COED CLERIC SACKED AT NEW SAUDI UNIVERSITY (AF-P) 

∙ On October 5^th King Abdullah fired Sheik Sa’ad al-Shethry from the Council of Senior Ulema, the country’s religious policy-making body, after he criticized on TV the coed nature of the new US$7BN King Abdullah University of Science and Technology which the King hopes will advance his nation’s status in the international scientific community. 

The King is in his mid-80's. One of these days he will die. And then what? 

EGYPT CLERIC “TO BAN FULL VEILS” (BBCNews) 

∙ Sheik Mohamed Tantari is Dean of al-Azbar University & Egypt’s highest cleric. On a visit to a girls’ school, was surprised at one girl’s attire, asked her to remove her niqab (full veil) & lectured her that wearing it had no connection to her religion or to the Koran. He later announced he would issue a religious edict against its wear (& has done so). 

More & more Egyptian women are wearing it, suggestive of a trend towards Islamic radicalism. 

GERMAN MANUFACTURING REBOUND GATHERS STRENGTH (FT, Ralph Atkins) 

∙ In August industrial orders rose by 1.4% due to orders from outside the Eurozone. 

For Germany at least a V-shaped recovery may be in the cards. 

RUSSIA’S OIL OUTPUT TOPS 10 MILLION B/D (Reuters) 

∙ After the state-controlled industry leader Rosneft’s massive Vankor field in the Arctic came on stream, Russia in September for the first time ever produced over 10MM bbld. 

This makes it the world’s largest producer by a 25% margin over Saudi Arabia  (which is labouring under OPEC-imposed output constraints intended to prop up the price of oil). It will be interesting to see what will happen to the price of oil in the next few weeks; for the premium over the spot price that speculators are prepared to pay for oil for future delivery has shrunk to the point where keeping it in storage for future delivery is no longer profitable. So some of this oil is going to hit the spot market with, potentially, a depressing price effect. 

SOCIALISTS TROUNCE CONSERVATIVES IN GREECE (AP) 

∙ Voters were angered by the faltering economy & a host of government scandals, and attracted by promises of, among others, above inflation rate salary raises for public servants. The new Prime Minister is US-born & will be a third-generation Prime Minister. 

He has since announced a 100-day 3BN Euro spending spree despite Greece having been downgraded early this year to A- due to its inability to get the deficit under control (it may hit 8% this year, a multiple of the EU’s 3% “cap”) & the fact that its national debt is about to surpass 100% of GDP, and is second in the EU only to Italy. This is reminiscent of the attitude displayed by Mitterand in France upon coming to power in the 80's when he too worked on the premise that economic realities didn’t apply to Socialists.  

‘WORST FLOODS IN 100' YEARS RAVAGE SOUTHERN INDIA (Reuters) 

∙ Heavy rains caused rivers to top or breach their banks, affecting the lives of 5MM people & causing 2½ MM to lose their homes, and inundating millions of acres of farm land. 

This won’t help the world food situation & raise further havoc with global sugar output. 

BILLIONS IN AID NEVER REACHED PAKISTAN ARMY (AP) 

∙ Two Pakistan army generals claim just US$500MM of the US$6.6BN in US aid to the army from 2002 to 2008 went to the military, the rest being diverted by  President Musharraf, who also was army chief of staff, to other uses. So the army “got peanuts” & had to fund the War on Terror out of its own budget. This revelation came after Congress approved tripling aid to Pakistan to US$1.5BN/year for five years & after a Pentagon spokesman conceded  “We don’t have a mechanism for tracking the money after we have given it to them”. 

In recent weeks Pakistan rejected as “incomplete” hundreds visa requests for the US military & civilian  personnel that was to implement the expanded aid program. And the bill passed by Congress has become controversial in Pakistan since it is purported to involve a humiliating violation of Pakistan’s sovereignty by making the aid conditional on Pakistan continuing to help fight “terrorists” & requiring its cooperation in dismantling nuclear supplier networks & supplying “relevant information from or direct access to Pakistani nationals associated with such networks.” 

PAKISTAN READY TO GO AFTER TALIBAN STRONGHOLD (NYT, Ismail Khan) 

∙ The military says that after months of planning & studying past campaigns it is now poised for a big push into South Waziristan, “the epicentre” of the Taliban in Pakistan. 

In past operations the army got bogged down there & ended up negotiating agreements with the insurgents that basically gave them free reign. But the military thinks this time it will succeed, given its success in regaining control of other insurgent strongholds, incl. the Swat Valley. 

AUSTRALIA CENTRAL BANK RAISES RATES (Reuters) 

∙ On October 6^th it raised its key rate by 25 bps to 3.25%. For it deems the worst danger to the economy over, enabling it to throttle back stimulus, & warned of more increases to come as its economy benefits from a sound banking system & China’s demand for commodities.  

It is experiencing considerable inflationary pressure, fueled by low unemployment. 

BRAZIL BECOMES AN IMF LENDER (AF-P) 

∙ In a move illustrating its changing status in the world, it bought US$10BN in IMF bonds. 

Its Finance Minister told reporters “We have gone from being debtors to creditors.”  (just seven years ago Brazil had to borrow US$30.4BN from the IMF’s, its largest loan ever, to forestall a massive default).