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October 22, 2009

The current state of the US housing market was summed up by a Miami real estate agent as follows : “It’s the typical family of four with a dog who’s losing their home now”. 

At the recent IMF/World Bank Annual Meeting in Istanbul the major developing countries, once bit players at these meetings, continued to display how the slippage in the US status has boosted their confidence & impacted on global power relationships. For it has sapped the West’s erstwhile ability to control the agenda to the point where one observer commented “The student has become the teacher” (& they have long had reason to feel slighted; thus while Belgium having more voting power in the IMF than China may have made sense in the immediate post-WW II period when the IMF came into being, perpetuating that today is a sad comment on its ability to adapt, or rather on the developed countries’ willingness to let it adapt, to changing circumstances. And with events in the US having revealed flaws in its ‘free market template’, they are responding to criticism of their buildup of reserves by saying these enabled them to cope better with the recession, of capital controls by pointing out that countries with controls had fared better than those without, and of their reluctance to give foreign banks free reign in their economies by noting that where this had been allowed, as in Mexico, the local economy had experienced more of a setback than where foreign banks had been limited to a more modest role (Brazil, whose global role has been in a sharp ascendancy, since announced plans for a 2% tax on foreign purchases of local securities, a move derided by a former Brazilian central banker since “investors will find a way around it”).   

Recently a rust bucket ship with 76 Sri Lankans aboard was apprehended off Canada’s West Coast. Those aboard purportedly had paid a mysterious Indonesian known as ‘Captain Bram’ $45,000 each for their passage & are currently being held in isolation while being ‘processed’ by the Canadian authorities, among others to find out who they are & whether they have a criminal records. While this has given rise to press comments that such human traffickers should be prosecuted, the sad truth is that the only way to put the Captain Brams of this world out of this business would be to send these people back to where they came from without any further ado. But Canada’s immigration laws being what they are & given the political pressure from their relatives, friends, acquaintances & (former) countrymen already in Canada (most of whom live in the Toronto area where Mr. Harper wants to make inroads in the next election) means that many, most, or all of them will end up being given refugee status (at which point they become eligible for government welfare payments about 50% higher than the Social Security entitlements of Canadian seniors who paid taxes, & made contributions to the Canada Pension Plan, for thirty or more years). 


No. 334 - October 22nd, 2009 


(Vancouver Sun, Don Cayo) 

    ∙ Prior to addressing a Fraser Institute gathering in Vancouver in early October, Nigel Lawson, the UK Chancellor of the Exchequer for Thatcher’s final two terms in office, said in an interview that “What we have seen is a combination of two things - quite an extraordinary degree of greed and folly on the part of a large number of bankers coupled with a wholly inadequate system of bank supervision and regulation in most countries ... When I was chancellor I did, indeed, deregulate in a whole lot of ways. But the one thing I was concerned to strengthen was prudential supervision. And I did strengthen it substantially ... But that system was dismantled by the current government, allowing conservative commercial banks serving local communities to merge with risk-taking investment banks to become huge - & vulnerable - conglomerates ... What I think we should do is have a clear separation between the plain vanilla commercial banks and the buccaneering, creative, speculative, inventive investment banks.” 

At the depth of the Depression the Roosevelt Administration in 1933, following hearings that revealed serious conflicts of interest & fraud in some banks’ securities’ activities, passed the Glass Steagall Act that, among others, barred the mixing of commercial & investment banking activities (but that was reversed in 1999 by a Republican-controlled Congress in the Gramm-Leach-Bliley Act). So while Lawson is advocating simply introducing Glass Steagall 2.0, the Obama Administration seems intent on seeking salvation in tinkering with more regulation in total disregard of the fact that, while both commercial- and investment banking have potentially positive roles to play in making the economy hum, it has now been proven twice that combining the two does more for bank executives egos than for the economy.   


    ∙ Washington is driving Wall Street’s resurgence. Slashing interest rates, bolstering big banks with taxpayers’ money & guaranteeing billions of their debt, and allowing Goldman & Morgan Stanley to become  bank holding companies so that they can access to the Fed’s ‘discount window’ for day-to-day liquidity management purposes, have heralded a new era of prosperity for the big players that has caused them to resume the high risk financial legerdemain that led to the recent crisis, but now with less competition & with confirmation that they have “too big to fail” status (which will increase the “moral hazard” risk). 

So all the frenetic activity by Fed & Treasury policy makers over the past two years achieved was is to sanction more of the short-sighted, short-term profit-driven activities with limited benefits for the real economy by a select few on Wall Street who brought on the crisis in the first place, while on Main Street thousands of banks that stuck to their knitting by engaging in traditional banking activities that make the economy tick were caught in the backwash & now have less capacity/appetite for the kind of grass roots lending that powers the real economy & would help it to get back on its feet quicker.    


    ∙ Small companies account for over half of America’s job growth but even owners of such companies with long-term profit track records are having their home equity loans cut, their credit lines withdrawn & their credit card limits slashed. 

President Obama since announced plans to shift  the focus of the US$700BN TARP program from Wall Street’s big financial institutions to small businesses on Main Street, telling employees of a small warehousing operation near Washington that they “are the engine of job growth in America ... (and) fuel our prosperity.” But this won’t satisfy the liberals in his own party who want him to use TARP to reduce home foreclosures nor the Republicans who want him to just kill it. 


    ∙ In his quarterly report published October 21st the Special Inspector General for TARP in unusually blunt language said “Despite the aspects of TARP that could ... be viewed as a substantial success ... Treasury’s (& the Fed’s) actions ... have contributed to damage the credibility of the program and of the government itself, and the anger, cynicism and distrust created must be chalked up as one of the substantial, albeit unnecessary, costs of TARP.”  

In other words, short-term gain (bailing out the all but criminally foolhardy and/or stupid) for long-term pain (boosting grass roots’ cynicism about the political process). 


    ∙ Those that received the bulk of the bailout funding (AIG, Citigroup & Bank of America, and GM & Chrysler and their financing arms) will have to cut the annual salaries of their five top executives & their 20 other highest-paid employees by an average 90% from last year (reducing their total compensation, incl. bonuses & retirement contributions, by about half). And any executive seeking over US$25,000 in perks (for things like country club memberships) must obtain government approval. And the now 85% government-owned AIG has been told that it must cut the US$198MM in bonuses promised to employees in its financial products division (which was Ground Zero for most of its problems

One supposed early ‘success’ of this hard line was the decision of the Bank of America’s former CEO to forgo his 2009 salary & bonus (although he still walked away with US$50+MM in his jeans). 


    ∙ He said in an interview “The government has to think twice about intervening in exchange rates ... (there are) fundamental reasons why the dollar is weak and trying to keep it up from where the market level is, would be very costly.” He cited the US gargantuan fiscal deficit, exacerbated by the stimulus measures to underpin an economy in recession, as one reason for the market’s bearish stance on the US dollar & warned that while “It [a weak dollar] does help to redress global imbalances”, only an orderly decline will help the US economy. 

A Nobel laureate who now teaches at Columbia, he is a former Chief Economist of the World Ban and an iconoclast who was the first to question Alan Greenspan’s walk-on-water reputation. Among his recent prognostications have been that the US banking system’s problems are now greater than pre-Lehman (a view shared by Paul Volcker & Bank of Israel Governor Stanley Fisher, a former Deputy Managing Director of the IMF), that the US economy is headed for a protracted period of Japan-like malaise & that the expected 3% annual rate of growth for the Third & Fourth Quarters won’t be sustainable, and that GDP growth is ‘not a good measure of economic performance’. While in forecasting past success does not guarantee future success, his views are nevertheless worth paying attention to. 


    ∙ Prices of non-fuel imports rose 0.6% in September, the most in over a year & twice the rate economists had expected. YTD they have risen 7.3% but are still down 12% YoY. 

With the US$ down 15% on a trade-weighted basis, there is likely more to come. 


(G&M, Jeffrey Simpson) 

    ∙ The Federal & Provincial governments are giving Transalta & Shell $1.6BN of taxpayer’s money for projects to capture & store (CCS) CO2 produced by their coal-fired power plants in Alberta.  And what we may get in return is a 2.1MM tonne/year cut in their greenhouse gas emissions (the announcements leave one with the impression that the 2.1MM tonne number is a hoped-for target, not a hard number). So, since Canada produces 720MM tonnes of CO2 annually & the Prime Minister has pledged to cut that by 20% by 2020, the governments are spending $1.6BN to achieve 1.4% of the pledged reduction (& cut Alberta’s emissions by 1%). Using taxpayers’ money in this manner is utter madness.  

The idea of first creating CO2 & then having to try & dispose of it, rather than not producing it in the first place always seemed irrational. This quantifies how irrational.  


    ∙ A 74 year-old Winnipeg manufacturer of hydraulic cylinders wants to triple its annual sales to $300MM over the next decade & generate 80% of them from outside, rather than inside, North America. So it has mandated eight people to crack the Chinese market. Traditionally Canadian exporters have almost exclusively focused their export activities on the US, with the result that Canada became the US’ most important trading partner. But times have changed : Canadian exports to the US YTD have been a mere 75% of China’s. 

Kudos to a company willing the face up to changing realitiesrather than whine.  


    ∙ After two days of debate the UN Human Rights Council on October 16th voted to refer the Goldstone Report to the Security Council. Twenty-six  countries, incl. China & Russia - both permanent Security Council members with vetoes, voted in favour & six (the US, Hungary, Italy, Netherlands, Slovenia & Ukraine) against, with eleven mostly European & African countries abstaining & the remaining five, incl. Britain & France, declining to vote. The US delegate told the Council afterwards that Washington was disappointed since  “We’re focused on moving forward in the peace process and we feel that this is a distraction from that.”  

Another potential lose-lose decision in the making for Obama? If Washington used its veto in the Security Council to ensure this will go nowhere, it will be taken by the Arab world as a sign his peace process “walk” is not up to his “talk”. And while not vetoing, unlikely as that would be, would send a useful signal to Israeli hardliners, it would be so at the cost of an unhelpful signal to Palestinian hardliners. The ideal outcome would be a veto by China and/or Russia that would enable the US to abstain from voting. 


(Reuters, Jeffrey Heller) 

    ∙ In his speech at the start of the Knesset’s winter session he gave no indication that President Obama’s efforts to re-start Israeli-Palestinian peace talks, now suspended for almost a year, are having any effect. For he said ”There is no alternative to Palestinian leaders showing courage by recognizing the Jewish state ... This has been and remains the true key to peace” but made no mention of the fact that a main issue holding up a return to the talks on Palestinian statehood continues to be the ongoing construction in the Jewish settlements in the West Bank, that the Palestinians maintain must stop completely in accordance with the 2003 “road map.”  

The courage bit cuts both ways; for the 1967 border has just as emotional a quality for Palestinians  as recognition of the Jewish state has for the Israelis. In a contest between an immovable object & an irresistible force the former eventually tends to lose out.  


(Jerusalem Post, Jeremy ben-Ami) 

    ∙ You have spoken publicly of the need for Israeli officials to engage with progressive elements in the American Jewish community that have traditionally not been attracted to pro-Israel lobbying. Hence we wish to reiterate our invitation for you to address the first National Conference of the new pro-Israel J Street lobby. It will be attended by over 1,000 people, representing 20+ organizations, who are united by their liberal & progressive political activism in other aspects of their lives and who are coming together as pro-Israel activists to discuss the best  path forward for Israel & the US in troubling circumstances.  

J Street is attracting growing numbers of mostly younger American Jews with less connection to Israel, & fewer pre-conceived notions, than their Holocaust- & post-Holocaust generation grandparents & parents. This letter was prompted by a comment by an spokesman for the Israeli Embassy in Washington following the initial invitation that it had “concerns over certain policies [of J Street’s] that could impair Israel’s interests” (i.e. that the current hard line policies are not in Israel’s long-term interest).



    ∙ On October 20th, with Mahmoud Abbas enroute to Cairo for talks with President Mubarrak, Hamas’ military wing announced “Dismantling Al-Qassam Brigades (Hamas’ military wing), or any other wing of the Palestinian resistance as part of any Egypt-brokered unity deal is a fantasy that will never materialize ... It is easier to dismantle the Palestinian Authority than it is to dismantle us.”  

Cairo has been labouring for months to broker the unity deal between Fatah & Hamas that was to have been signed by October 25th (& that Abbas has already signed although he has since apparently had second thoughts about its military aspects). It provides for both Presidential & parliamentary elections next June (Abbas’ term expired last January so in strictly legal terms his Presidential status is bogus) & for the Palestinian territories to be de-militarized for all intents & purposes.


    ∙ The semi-autonomous Kurdish region has been cutting its own deals with international oil companies, bypassing Baghdad. But its oil can only flow into world markets through Iraqi government-owned pipelines.  After a Norwegian- & a Turkish company last year struck oil in Kurdistan’s Tawke field, Baghdad initially refused it access to its pipelines but later relented. Since then, however, it declared it “is not willing to pay” for this oil because it regards the companies’ contracts with Kurdistan as illegal. So on October 12th the Kurdistan government decided, in concert with the companies concerned, to stop all oil exports.  

Kurdistan holds all the deuces & Baghdad all the aces. While for Kurdistan pipeline access is critical, for Baghdad the revenue stream produced by moving 100,000 bbld or so of Kurdistan oil to world markets is a mere bagatelle (& could actually be revenue-negative if it pre-empted pipeline capacity that could have been used more profitably to move its own oil to the export terminals).  


    ∙ On October 21st Tzahi Hanegbi, the Kadima Party member who chairs the Knesset’s Foreign Affairs & Defence Committee, on a visit with his committee to Beijing slammed China for voting on October 16th in the UN Human Rights Commission in favour of referring the Goldstone Report to the Security Council. But he explained later on Israel Radio that “the Arabs did something clever, they included in the resolution issues other than the Goldstone Report ... supported by the majority of UN member states, such as the importance of preventing violations of the rights of Arabs in Jerusalem and including the Palestinians in international dialogue on the establishment of a Palestinian state ... Both Russia and China have stressed that they wouldn’t have voted in favor of the resolution if it had dealt only with the Goldstone report ... China, Russia and other states that endorsed the report understand that this must be the end of the road because progress on this issue [i.e. a Security Council referral of the matter to the International Criminal Court] would have dire consequences for the peace talks.” Asked if the delegation had explained Israel’s difficult position regarding the Palestinians, he said the Chinese were less interested in the peace process than in Iran because “China and Iran have very strong ties ... China imports 14% of its gas from Iran.” 

A flagrantly flawed headline : the Chinese told him to get stuffed. 


    ∙ The IMF on October 8th in its World Economic Outlook adjusted its 2010 forecast of global economic growth for 2010 from 2½% to 3.1%, led by 9.0% growth in the Chinese economy (up from 8.5% this year), and 6.8% in “emerging Asia” (up from 5.0% this year), with the rebound in Asia fueled by three factors : expansionary fiscal & monetary policies, a rebound in financial markets & capital flows, and extensive inventory rebuilding. 

The IMF numbers imply minimal US growth in 2010. And of the factors credited for Asia’s rebound two are temporary impulses & the third can turn, & often has turned, on a dime  


    ∙ It is grabbing export market share in a trend with potentially long-term consequences. It has displaced Germany as the world’s biggest exporter and Canada as the largest supplier of US imports (while in the first seven months of 2008 Canada provided nearly 17% of US imports & China < 15%, during the same period this year China’s grew to 19% & Canada’s shrank to 14½%). And in knit apparel, US imports from China during the period jumped 10% while those from Mexico, Honduras, Guatemala & El Salvador slipped from 24% to 19%. So, while China’s exports in the first half of this year were down 22% YoY, this compared favourably with Japan’s 37% & Germany’s 34% respectively.

    ∙ One factor has been Chinese manufacturers’ ability to slash prices in response to foreign buyers’ demands by cutting wages. Another the expiration this year of textile quotas in many parts of the world. And the third Beijing keeping its currency weak against the dollar, and subsidizing exporters through tax credits & low cost loans from state-owned banks.   

The Bush Administration agitated for China to appreciate its currency against the US$ & Beijing eventually responded by letting it do so in minute steps starting in July 2005. But, while recently it has informally re-pegged it again to the dollar, which has to date given it an average 15% competitive edge over other exporters, the Obama Administration has been remarkably silent on the issue since, according to Credit Suisse economist Dong Tao, “Obama’s interest/priority is not to push China to appreciate the currency, but to get them to pay the bills” (i.e. to keep on buying US$ debt to fund the US trade deficit).

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