I have long since learnt
that it is often better to be lucky than smart (although it helps to
be both). This was proven again late last night when my computer for
some reason I have yet to fathom ‘ate’ part of this week’s Gleanings
including what was the most valuable part thereof, an article by David
Cho in the Washington Post entitled Rapid Bank Growth Alarms Regulators
that, despite my best efforts I was unable to retrieve from anywhere,
including my own files (at which point I gave up & went to bed).
Then this morning in a telephone conversation with one of you I was
told about Beijing’s warning about unauthorized hedges entered into
by Chinese SOEs (State-Owned Enterprises) that let me to build some
of its salient points into the following three paragraphs from memory.
Earlier this year three
Chinese airlines took a US$2BN hit on jet fuel hedges that went against
them. So recently Beijing issued a warning to a handful of major
banks that it was reserving the right to unilaterally terminate all
commodity & other hedges they had entered into with a couple of
dozen Chinese companies not on its list of those authorized to do such
transactions. In doing so, Beijing may actually be doing the system
a favour (while enhancing its own position in the global financial system).
For these banks obviously had bet that Beijing wouldn’t let these
companies, whether they were on the list or not, default if these hedges
went against them. So if Beijing were to disillusion of that notion,
that it will put a whole new complexion on the ‘moral hazard’ issue
(i.e. the expectation, and now in the US the knowledge, that
certain financial intermediaries are ‘too big to fail’ and hence
will be bailed out if they are at risk of going TU due to bad and/or
stupid financial decisions - turns capitalism into a ‘heads I win,
tails you lose’ affair).
This is potentially a
lose-lose situation for the banks; for Beijing obviously only would
do so if these hedges were underwater. And the banks have no leverage;
for China’s importance in the system has now grown to the point where
they can play hardball with banks to their heart’s content with
the latter having little choice but to dance to Beijing’s tune &
‘suck it up & take it’ since they cannot risk being excluded
from any business Beijing may generate now, or more importantly, in
the future. But the news is not all bad for them; for they now know
that, if push came to shove, Washington would have but one option :
bail them out some more, since the potential implications of not doing
so for the multi-trillion dollar global derivatives market, that
in notional value terms dwarfs the US economic & financial system,
& for the US economic & financial system itself, would be deemed
too horrendous to even contemplate.
For as a result of Washington’s
past bailouts & orchestrated shotgun marriages among major US financial
institutions, the ‘moral hazard’ risk (that brought on the recent
crisis) in the US financial system has actually increased. This
is due to the fact that in the past year the asset base of Wells Fargo
has grown rose 40+% from its merger with Wachovia, that of JPMorganChase’s
by 50+% from its takeovers of Bear Stearns & Washington Mutual &
that of BankAmerica by a whopping 130+% due to its absorption of Countrywide
& Merrill. So now these companies & Citigroup, all of them beneficiaries
of dollops of bailout money, each account for one-tenth, or more, of
the nation’s deposits & between them control half of the mortgages,
& two-thirds of the credit cards, in the US; this means that, if
they were once deemed ‘too big to fail’, they now are even more
so.
The increases in the
unemployment rates in both the US & Canada may actually be good
news. For the way these rates are calculated does not
include those who have become sufficiently disheartened to quit looking
for a job. By all accounts the rise in the rates is in both cases due
to at least some of those people rejoining the legions of job-seekers,
with the optimists’ interpretation being that they now believe doing
so would not be totally futile & the pessimists that they were driven
to do so by sheer desperation.
GLEANINGS VERSION
II
No. 328 - September
3rd, 2009
CRISIS ISN’T
OVER : BANKER (EJ, Business Browser)
∙ Ewald Nowotny,
the Governor of Austria’s central bank & a member of the ECB’s
Governing Council, on August 31st warned an economic conference
in Alpbach, Austria against believing the financial crisis is over,
saying “We did manage to prevent a collapse, but I must strongly warn
against the end of difficult economic times.”
This came on the heels
of similar warnings by the Head of the ECB, the President of the German
central bank & Russia’s Deputy Minister of Economic Development,
and ahead of those by the Prime Ministers of the UK & Germany, and
France’s President, Nicolas Sarkozy, prior to this weekend’s meeting
of G-20 policy makers on London. And it is also consistent with earlier
warnings from the IMF that the world’s banking system is still be
covering up half, or more, of its losses. And while the central bankers
may not know where all the bodies are buried, they certainly have a
better knowledge of the whereabouts of many
than the ‘talking heads’ who are talking up the end of the troubles.
STIMULUS FEEDING
INFLATION (EJ, Business Browser)
∙ Many business
economists doubt the Fed will be able to prevent the trillions in stimulus
spending pumped into the US economy from stoking inflation over the
next decade. A National Association for Business Economics’ poll
found their median estimate of consumer price inflation to be 3% p.a.
for the 2014-2018 period. This confirms consumer surveys that expect
the Fed to have its work cut out for it dampening inflationary expectations.
At turning points,
like the 2009-2013 period, change occurs in leaps
& bounds, not the forecasters’ smooth paths.
And unless the Fed can pull a rabbit out of the hat, fighting inflation
will involve less liquidity, higher interest rates & fiscal tightening,
all of them inimical to economic growth.
BERNANKE THE RISK
TAKER (CCNMoney.com)
∙ In nominating
him for another term as Fed Chairman President Obama compared his recent
efforts to FDR’s “bold, persistent experimentation” to get the
country out of the Great Depression. For on his watch to date the Fed
has taken on unprecedented risk by taking on a trillion dollars of toxic
assets (more than doubling the size of its balance sheet in just
three months), slashed interest rates, bailed out financial industry
titans & launched more than a dozen costly lending programs.
According to Lyle Gramley, a former Fed governor from the 80's era
when Paul Volcker ‘wrestled inflation to the ground’, “The
problem with all of the risk is that it created an unhappiness with
Congress ... It’s going to create problems for Bernanke in his confirmation
(especially now that the crisis is considered by many as abating),
but these things had to be done to prevent an absolute meltdown in the
economy.”
∙ Gramley believes
Bernanke is the best man for the job if only because he created the
situation (which is not entirely true : Greenspan created it &
Bernanke was left to deal with the consequences just as Obama inherited
a whole bunch of Bush-created problematic situations, although he has
since added some of his own), saying that “Obama’s nomination
is not just a reward for Bernanke’s past performance ... He is the
most well-qualified person to deal with the problems that the Fed has
created for itself by doing what it had to do...”. But he added a
proviso : “What we need now is a lot of prayer.” Lakshman Achutan,
Managing Director of the Economic Cycle Research Institute, on the other
hand, is less sure, saying “it’s about when they exit from this
: If they leave too early, we get deep deflation, and we get spiraling
inflation if they leave too late ... It’s a high-wire act ... (and
while ) Bernanke has demonstrated that he is skilled at high-drama,
emergency surgery ... it’s not at all clear ... he is good at preventative
medicine to avoid the need to visit the ER ... We are all hopeful that
they get the timing right, but I wouldn’t bet on that heavily.”
The timing of the
onset of the doubling of the Fed’s balance sheet & the launch
of the flood of new lending programs that monetized banks’ toxic
assets is noteworthy; for it coincided with ill-fated September 15th
decision to let Lehman Brothers go TU.
U.S.NUMBERS UPBEAT
(EJ, Business Browser)
∙ In August the
ISM (Institute for Supply Management) Index of National Factory Activity
rose to 52.9, up from 48.9 in July, well in excess of the 50.5 expected.
This was the highest level since June 2007 & the first time since
January 2008 that it has been above the 50.0 reading indicative
of expansion. And the National Association of Realtors reported that
its Pending Home Sales Index, based on contracts signed in July, rose
3.2% to 97.6, its highest level since June 2007, and has now risen for
a record six months in a row.
On the other hand,
August retail sales were down 2.9% YoY.
WHAT OBAMA DIDN’T
LEARN FROM FDR (LAT, Nancy J. Altman)
∙ Obama should have
been better prepared for the hyperbolic claims & heated invective
emanating from the opponents of meaningful healthcare reform. For 74
years ago similar denunciations were used to try & kill Social Security,
now the nation’s most cherished social program. Then too critics claimed
it would bankrupt future generations, and warned it would “destroy”
private pension plans & unfairly compete with insurance companies
(as is now claimed of the public option). But FDR was prepared for the
charges of “fascism”, “socialism” & “communism”
& before these ‘got legs’ had framed Social Security as a matter
of “fairness”& of giving Americans the security in their
old age they deserved. Unfortunately Obama failed to define the
terms for the national debate on healthcare & now is on the defensive
to the point where it may be “too late” for a really positive
outcome.
Harsh, but not entirely
undeserved. On the other hand, FDR through his
‘fireside chats’ on radio had a national communications monopoly
that is no longer feasible in the age of TV, Internet chat rooms, cell
phones, Blackberries & text messaging (although, given the way he
utilized these media during his run for the Presidency, Obama ought
to have been able to turn them to his advantage).
OBAMA TO TAKE HEALTH-CARE
FIGHT TO CONGRESS
(CanWest, Sheldon
Alberts)
∙ He will address
a rare joint session of both houses of Congress on September 9th
to outline his priorities for reform
in detail in an attempt to regain control of the debate. For August
witnessed such an awful decline in support for both the President &
healthcare reform, that his liberal
critics charge his hands-off approach had enabled opponents to gain
the upper hand & saw lawmakers, instead of negotiating a bilateral
approach, come up with no fewer than five different proposals, none
of them with any measure of Republican support.
Obama’s challenge
now is to rescue what he can by getting the conservatives in his own
party too fall in line (which is going to be an extreme exercise in
leadership & political arm-twisting).
THE MASSACHUSETTS
MODEL (The Week)
∙ The state requires
everyone to have health insurance through private insurance, employer
plans or subsidization for low income individuals (from a fund partially
financed by the US$1,000 annual fines on those who don’t get insurance),
but has no ‘public option’. As a result, the state now has the least
uninsured, 2.6% vs. a 15% national average.
∙ Costs have been
far exceeded forecasts, in part, but only in part, since the higher
numbers of unemployed has made more people eligible for subsidization.
To eliminate the fund’s resultant US$9BN shortfall by next June, its
board eliminated dental coverage, and the state cut payments to hospitals
& boosted cigarette taxes by US$1/ pack, but nevertheless will have
less money available for other programs such as education & public
safety.
∙ But the program
hasn’t been able to address the problem of rising healthcare costs;
for ‘one person’s cost is another’s income’. And the expectation
that, once poor people had coverage, they would use emergency rooms
less failed to materialize; in fact they now use them more, which has
made the cuts in hospitals’ reimbursement more of an issue.
∙ The Massachusetts
experiment demonstrates the political & logistical difficulty of
fixing a healthcare system, even in a state with a high percentage
of already insured residents & above-average personal incomes. Polls
now suggest that only 26% of residents deem it a success with the remaining
74% evenly divided between those who call it “a failure” & those
who aren’t sure (with those who describe themselves as conservatives
calling it “a flop” by a 55-18, & ‘liberals’ calling
it a success by a smaller 37-17, margin).
Nobody should have
ever expected such a ‘download’ of healthcare costs from the private-
onto the public sector to be easy or achievable without the
‘money following the user’, i.e. higher taxes. Otherwise it would
have entailed a major crypto tax cut.
DUCKING THE DEFICIT
(NW, Robert J. Samuelson)
∙ The problem of
the burgeoning national debt is political, but the fallout, if any,
will be economic. But since no one knows what that might be, when it
might show up, if it does, & even whether it will occur at all,
politicians from both parties recoil from doing anything unpopular that
could bring the budget back into balance over the next, say, six or
seven years : they are not in the business of anticipating, or preempting,
future problems.
∙ While the size
of the current deficit is due to the savage recession (which is only
partially true), it’s real cause is political. For deficits enable
liberal & conservative politicians alike to hang on to their self-serving
positions. So we have had deficits in 43 of the last 48 years, although
none as large relative to GDP as they are now & are predicted to
be as far as the eye can see in the absence of drastic changes in spending
and/or taxation policies. The liberals preach we can have more of
everything while taxing only “the rich” and the conservatives that
taxes can be cut & yet leave everybody with all, or even more
of, the government services & benefits they enjoy now, &
take for granted. But neither claim is even remotely believable;
for over time all government benefits must be paid for by taxes
One way to explain
a deficit in a way that all but the intentionally deaf can understand
is by describing it as the gap between what tax payers
want & what they are prepared to
pay for.
GERMAN VOTERS DELIVER
A SLAP AT MERKEL’S CDU (Bloomberg)
∙ On Sunday August
30th her bid for a second term in the September 27th
elections suffered a possible
setback when her right-of-centre Christian Democrat party lost support
in regional elections in three states. But her ‘Grand Coalition’
partner, the left-of-centre SPD, didn’t emerge as a big winner, despite
the claim by her SPD Foreign Minister/aspiring Chancellor-in-waiting
that “Whoever wrote off the SPD in the last few weeks is in for a
surprise”, although the head of the Berlin-based Psephos polling firm
opined that as a consequence of these results ”alarm bells should
be ringing at CDU headquarters.”
For almost nine months
the polls have given Merkel’s CDU & her preferred ally, the Free
Democrat Party, a clear majority, which would enable her to drive
the SPD, her current coalition partner, into opposition & like reduce
the time for her to form a government from the months it did last time.
PETROCHINA IN FOR
$1.9 BILLION (CH, Dina o’Meara)
∙ It plans to buy
a 60% working interest in two undeveloped oilsands properties owned
by Athabasca Oil Sands Corp. that hold an estimated 5BN of bitumen reserves
in Northeastern Alberta. The company has already filed for provincial
approval to develop them, at an estimated cost of as much as $20BN,
with the first oil flowing by 2014.
This alarmed Washington.
Carolyn Bartholemew, Chair of the US-China Economic and Security Review
Commission, a Congress watchdog, said Petrochina is a vehicle of Beijing’s
Communist government & urged Ottawa to subject the deal to a thorough
review, incl. ‘sensitive national security issues’. The question,
of course, is whose national security she’s talking about; for it’s
in Canada’s national interest to have its exports flow into global
markets rather than those where ‘transfer prices’ are determined
by corporate interests (these have long been an issue for both the US
& Canadian tax authorities). Moreover, this involves a Canadian
company, not Unocal.
FOUR SENTENCED
TO DIE FOR DEADLY IRAQ BANK ROBBERY (AF-P)
∙ On July 28th
a gang executed Iraq’s bloodiest bank robbery ever, absconding with
US$3.8MM & killing eight police guards. The cash was since recovered
& two former guards of Iraqi Vice-President Adel Abdel Mahdi implicated.
On September 2nd four of the gang were sentenced to hang,
incl. two who were bank guards themselves who claimed to have told the
authorities about the planned heist in advance, but not to have taken
part in it. Meanwhile, four others, incl. a captain & a lieutenant
in the Presidential Guard, who supposedly masterminded, & participated
in, the robbery, and another army officer, are nowhere to be found (&
according to the judge will be dealt with at a later date), and the
fifth man on trial, a guard at Mahdi-owned newspaper, was released due
to ’insufficient evidence’. The Supreme Iraqi Islamic Council, the
Iran-oriented party to which Mahdi belongs and that, along with Mustaqa
al-Sadr’s party, recently withdrew its support from Prime Minister
Nouri al, Maliki ahead of next January’s general election, has accused
its political opponents of blowing this matter ‘out of proportion’
to harm its election prospects.
At least some of those
sentenced to death may be ‘targets of convenience’.
EUROZONE PRICE
SLIDE SLOWS (EJ, Business Browser)
∙ In August consumer
prices in the 16-member Eurozone fell for the third month in a row (by
0.2% YoY, slightly less than expected, and compared to 0.7% in July
& 0.1% in June), but economists are expecting them to start growing
again in the months to come.
So, inflation-paranoid
as it may be, ECB won’t change interest rates at its September
3rd meeting.
BLACK SEA DISPUTE
ERUPTS (Reuters)
∙ Russia’s Black
Sea fleet on August 27th barred Ukrainian bailiffs from seizing
navigation equipment at the two century-old Russian Navy base near the
Crimean city of Sevastopol that the Ukranian government has told Moscow
it must vacate in 2017 upon the expiry of the current 20-year lease
negotiated following the meltdown of the Soviet Union.
The relationship between
the Ukraine & Russia is tricky. The former’s hope to join NATO
doesn’t fit Putin’s dream of restoring for Russia the Soviet Union’s
sphere of influence. The Ukraine’s population is a mix of ethnic
non-Russians in the West of the country & a larger number of ethnic
Russians in the East (who Putin uses as leverage over the Ukraine’s
government). And the Ukraine sometimes gets behind in its payments for
its natural gas purchases from Russia which twice in the past few years
has led to Moscow halting the flow of all gas through the pipelines
across the Ukraine to Central & Western Europe (although this
problem may have been alleviated, if not eliminated, by Moscow’s September
1st decision to allow the Ukraine to pay only
for whatever gas it consumes, rather than what it is contractually obligated
to take down - this will reduce the financial pressure on the Ukraine
since its domestic gas consumption has declined by 50%).
KENYAN INFLATION
HITS 18.4% IN JULY (EJ, Business Browser)
∙ This compares
to June’s 17.8% annual rate. Much of the increase is due to higher
prices for food stuffs & non-alcoholic drinks.
While no doubt due
in part to drought conditions in large swaths of it’s more productive
regions (four-fifths of the country is rated
‘semi-arid’ or ‘desert’ & has little or no food-production
potential), this is by no means an isolated case in the Third World.
Thus inflation in Ghana is running at a similar 18+% annual rate &
in Vietnam at 27%. These rates of inflation, especially when driven
by rising food prices, are a recipe for social unrest in countries in
which at the best of times many people’s lives already are only marginally,
if at all, above subsistence levels.
NIGERIA CHARGES
BANKERS AFTER $2.6 BILLION BAILOUT (Reuters)
∙ On August 31st,
two weeks after a government $2.6BN bank bailout of five Nigerian banks,
a number of their senior executive were paraded in a federal court in
Lagos, charged with offenses ranging from recklessly granting
loans without adequate security or approval to conspiring to drive their
banks’ shares higher.
The optimistic view
is that there must be hope for this notoriously corrupt country if it
can set an example for those with far more sophisticated & transparent
financial & judiciary systems & the cynical view that
they simply failed to pay off the right people.
STRAWS IN THE WIND
∙ The US Cash for
Clunkers program resulted in 690,000 gas guzzlers heading for the scrap
yard with their engines seized. This contributed to new car sales in
August topping a 14MM annual rate, Ford’s sales of cars & light
trucks being up an impressive 58% YoY & GM’s inventory levels
hitting an all-time low of 379,000.
This obviously was
a very fast-acting stimulus move. Initially, Congress earmarked US1BN
for this program for a ten week period ending September 30th
but quickly raised that to US$3BN. But it was all gone before the end
of August, i.e. within six weeks. The question now is to what extent
these sales were ”stolen” from future months and/or how they will
ll affect the car-buying public.
∙ A total of 416
regional banks with a total of US$300BN assets was recently reported
to have flunked the regulators’ tests for liquidity & asset quality.
While in macro terms this is as significant
as a speck of fly shit on a window, at the micro level the well-being
of banks lower down the banking food chain is critical to that of the
communities in which they operate & to consumer confidence.
