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April 01, 2010

A usually well-informed & highly regarded strategic advisory service recently suggested that at their March 22nd meeting Obama told Netanyahu that if Israel :

    · believes that as a souvereign state it is free to do as it wishes, it must accept that the US has the right to do the same;

    · ceases to be a US ally that supports the US objective of maintaining a balance of power in the region, it moves itself outside the framework of US strategic interests; and

    · expects the American political process to protect it from the consequences of actions that don’t jive with US interests, it is not reading America’s present mood correctly.

This would explain why Netanyahu called for a recess in the meeting to consult with the officials accompanying him & with Cabinet colleagues in Jerusalem & that the next 36 hours failed to produce anything that could have been spun as progress or even as just a meeting of the minds.  

One cynic noted that, while ‘big government’ is the rallying cry of the Tea Party movement, what really drives many of its adherents is the spectacle of a black President, a female Speaker of the House, a Latino Supreme Court Justice & an openly gay  Chairman of the powerful House Financial Services Committee. But they ain’t seen nothing yet : for in the twelve months ended July 31st, 2008 48% of all babies born in the US had Latino or black mothers, & that trend is rising. 

The CBC this week carried a program about Mumbai’s slum dwellers having better mail delivery service than Canadians (Canada Post keeps jacking up its postage rates year after year while cutting back on service - it basically has become a huge employment agency & a deliverer of junk mail). Speaking from personal experience, a while ago someone sent me a parcel by Purolator courier from Toronto : it got to Edmonton overnight, but took Canada Post four days for its notice to travel the seven blocks from Purolator’s office to my home. Small wonder it’s called “snail mail”; this amounts to an average speed of 12.2 cms(5 inches)/minute, not unlike the speed of a moving snail. 

Since the end of the Cold War the US Navy has ‘ruled the waves’. But China is moving to build a “blue water navy”. In 2012 its first aircraft carrier, a Soviet-era vessel purchased from the Ukraine in 1998, is expected to come into service (although it may still not be fully combat-capable) in anticipation of which Beijing has built a concrete mock-up of its flight deck at one of its technical colleges, followed, possibly as soon as 2015, by its first home-built carrier. 

Quote of the week (by a non-Chinese columnist in the South China Morning Post) : “China’s specialty is masquerading weakness as strength”  



No. 354 - April 1st, 2010 

OBAMA PAYS MORE THAN BUFFETT (Bloomberg, Daniel Kruger & Bryan Keogh) 

    · The bond market implies it is safer to lend to Buffett than to Obama; for the yield on the two-year notes Buffett’s Aa2-rated Berkshire Hathaway sold in February are trading at a lower yield than similar maturity USTs, as do bonds of Aa3-rated Proctor & Gamble, A2-rated Lowe’s & A1-rated Abbott Laboratories (despite warnings of a possible downgrade). The spread of double A-rated corporates over UST securities has narrowed dramatically in the past 18 months while German ‘Bunds’ now trade 60 bps (0.60%) lower than USTs while a year ago they traded 50 bps. higher. Moody’s expects the share of US tax revenues spent on debt service to go from 7% now to 11% by 2013 & says it is “substantially” closer to losing its triple-A rating. And S&P says the Administration’s stimulus spending & the Fed’s measures to fix the financial system will cause the corporate default rate to halve by year end; for corporations are paying down debt at a record rate - in the Fourth Quarter alone by US$282BN (3.8%). So corporate balance sheets are improving as Washington’s is deteriorating (in part a function of the past two years’ conversion of private- into public debt). 

Last week, for the first time ever, the US swap spread went negative, implying the market deems UST securities riskier than the banks’. Bloomberg expects the yield on two-year USTs to go from the present 0.99% to 1.77%, & on ten-year USTs from 3.69% to 4.20%, by yearend. In Canada the banks this week boosted their mortgage rates in response to rising bond yields (that suggest it queries Bank of Canada Governor Mark Carney’s ability to keep his vow not to raise rates until mid-year), most significantly in the five year area, which as of mid-April will be the benchmark for gauging the debt-carrying capability of aspiring home owners seeking mortgage funding.  


    · The Conference Board’s Consumer Confidence Index rose to 52.5, regaining half the 11 points it lost in February when it skidded to 46.4. Of the two sub-indices, that for current conditions rose from 21.7 to 26.0 & that for the outlook six months hence from 62.9 to 70.0. 

Reality check : it takes a reading of 90 to indicate health & 100 for growth. 


    · In January the S&P/Case-Shiller 20-city Home Price Index was down just 0.7% YoY, but up 0.3% MoM, its eighth consecutive monthly gain. While now up nearly 4% from its May 2009 low, it is still nearly 30% below its May 2006 peak. 

But the rate of homeowners with mortgages who are under water on their home ‘investment’ is still climbing, and now within sight of 50%. 


    · In March the ISM Index of Industrial Activity rose to 59.6, vs. 56.5 in February & a 57 forecast, with only one of the 18 industries in the ISM survey, plastics & rubber, reporting contraction. This was its eighth month of expansion & its highest level since July 2004's 59.9. Manufacturers’ inventories were up after 46 months of contraction (with a similar trend apparent in China, the UK & the Eurozone). But while overseas orders & business spending on capital equipment continue to grow, the rate of growth is decelerating..

    · On the other hand, construction remains weak, declining a greater-than-expected 1.3% in February to a US$846.2BN annual rate, its lowest level since November 2002, eliciting an observation by Julia Coronado of BNP Paribas that “there are few indications this decline is reaching bottom.” 

It is believed it will take the creation of 400,000 new jobs/month for 4 years to replace the 8+MM jobs lost during the recession & accommodate normal labour force growth.  


    · Over 25% of Americans believe neither side made a good faith effort to cooperate on the healthcare issue. In a Washington Post poll 46% support the end product & 50% oppose it, little changed from last summer when the country first became polarized on the issue. But while the Democrats have started to rally, with 56% of them now “strongly” supporting it, up from 41% a month ago, & eight in ten Democrats now approving of the way Obama handled the issue, the most since last summer, overall his approval rate is stuck at 53% with independents, who strongly supported Democratic candidates in 2006 & 2008, now split 42% for GOP candidates & 39% for Democrats. And 60+% of seniors think Medicare has been weakened; as a result opponents among them outnumber strong supporters 2-to-1.    

The elections are still seven months away. A lot can happen in that time. It likely is premature to count out the Democrats, especially if there were to be more visible signs of an economic recovery 


    · On March 27th he made 15 “recess appointments” (from the 217 Presidential nominations hung up in the Senate), incl. two top Treasury officials (the Under-Secretary for Domestic Finance & the Assistant-Secretary for Tax Policy) which he lamented had been held up for nearly six months “at a time of economic emergency” (which raises the question why it took him six months to nominate them) & three senior Commerce Department officials in export/international trade area (who presumably are critical to his goal of doubling exports in five years). But his most controversial appointment was that of union lawyer Craig Becker to the five-member National Labour Relations Board (which has had three vacancies for two years, raising questions about the legality of its decisions); Republicans saw this as a pay-off for union support in the dying days of the healthcare debate (& during his run for the Presidency) which they fear will skew the Board’s decisions in a pro-union direction & which all 41 Republican Senators had urged him in a letter two days earlier not to make. 

Recess appointments can be made by a President when the Senate is not in session, are good for one Congressional session - in this case until late 2011-, & enable him to circumvent the Senate vetting process. Despite all the hooting & hollering by the Republicans, Obama has shown restraint in this respect : these were his first recess appointments despite the fact that the appointment of these 15 had been held up for an average seven months (Bush made 170 such appointments, incl. that of neo-conservative icon John Bolton as US Ambassador to the UN, & Clinton 140). 


    · IDF troops & tanks left Northern Gaza on March 27th, leaving two Israeli soldiers & one Palestinian dead, having entered the day before to “dismantle a mine”.

    · After what analysts called a “bruising” encounter between Obama & Netanyahu on March 22nd, & after the latter reiterated Israel wouldn’t quit building in East Jerusalem, the Secretary-General of the Arab League, Amr Moussa, told Arab leaders meeting in Sirte, Libya that “It is time to face Israel. We have to have alternate plans (to our earlier support for ‘proximity talks’) because the situation has reached a turning point.”   

Why should the Israelis give a damn about a mine on the other side of its border? 


    · On March 30th Finance Minister Yuval Steinitz of the Likud Party told public radio “Sooner or later we will liquidate the military regime of the pro-Iranian Hamas which controls the Gaza strip ... I am not setting a time table, but we will not tolerate this regime to strengthen itself militarily and provide itself with an arsenal of rockets that threaten our territory.” 

Either he is conceding the blockade of Gaza has been futile & ineffective (Egyptian police recently seized 41 brand new cars awaiting transfer into Gaza through one of the myriad of tunnels honeycombing beneath the Egypt-Gaza border) or he is just looking for an excuse. This also suggests that extreme views in the Netayahu cabinet are not limited to the extreme right wingers.



    · Foreign Minister Avigdor Lieberman told Maariv on March 29th “In Operation Cast Lead, he (Mahmoud Abbas) called us ..., applied pressure and demanded that we topple Hamas and remove it from power ... A month after the operation ended, he filed a complaint against us with the International Court of Justice at The Hague for war crimes. Is that a partner?” An Abbas aide commented “This is not true. It is a continuation of the (Israeli) campaign of defamation ... to create an atmosphere that would destroy any chance of salvaging the peace process”, & Hamas that “The ... statement reaffirms the fact Mahmoud Abbas is no longer fit to represent our people, who conspired against his people during a war.”

    · While Lieberman was not in the (Olmert) government during the Gaza War, a senior Israeli who was said his account was “essentially accurate.” 

Lieberman heads the far right Yisrael Beiteinu party, is known for his uncompromising hardline positions, & has a vested interest in derailing the peace process. 


    · On March 27th, reflecting frustration with the US failure to bring Israel to heel, Amr Moussa told the Arab leaders meeting in Sirte that continued Israeli construction on land claimed by the Palestinians could scuttle the Mideast peace process for good & urged the 22-nation group to engage Iran in direct talks about its growing influence in the region & its nuclear program, as a possible first step towards creating a forum for regional cooperation & conflict resolution that would include Turkey & Iran, both non-Arab states.  

This runs counter to US efforts to isolate Iran & have more serious sanctions imposed. The importance of this meeting was undermined by the absence of two key Arab leaders cum US allies, Egypt’s President Mubarrak & Saudi Arabia’s King Abdullah. 


    · Hilary’s promise of “crippling sanctions” & Obama’s of “aggressive” penalties increasingly look like just talk. For they cannot get a critical mass of nations to join it. Candidate Obama told us engagement would be his byword. And he extended a generous hand to Tehran. And even if it perhaps stayed extended too long, the world never faults an US President for this even if this puts America’s national security at risk. So as the failure of Mr. Obama’s Iran policy becomes manifest to all but the president, we drift toward war. The only questions now, a Washington politico tells me, are who will start it & how it will end. 

Ms. Pletka is a prominent neoconservative & an official of the American Enterprise Institute that just made David Frum ‘walk the plank’ for pointing out that much of the healthcare bill traced its parentage to Republican ideas going back to 1989 & questioning the wisdom of, in practical political terms, of hitching the Republican Party’s star to people like Russ Limbaugh & Sarah Palin who, polls show, are loathed by a majority of American voters. Interesting how she equates China’s unwillingness to go  along with sanctions with “a critical mass of nations.” Be that as it may, this should enhance the appeal of an approach such as I suggested a few weeks ago that would use the US Navy to bar or seize the export of Iranian oil, because doing so would take control of the agenda away from the Israelis, send a message that being reasonable in dealing with one’s opponents can be a sign of weakness, but of strength (which will be a particularly important message to convey at this time given the high level, bilateral US-China talks scheduled for next month), use a unique US military capability that has ‘excess capacity’ & defuse Republican claims the President is soft on foreign policy (& by implication, homeland security), but wouldn’t require Congressional approval. 


    · On March 29th three economists were named to the Bank of China’s monetary policy committee & the next day attended their first meeting. One of them,  Xia Bin, a researcher at the Development Research Centre was quoted as saying that “[China] should resume the pre-crisis managed float exchange rate as quickly as possible” & Li Dao Kui, an economist at Tsinghua University, that “one way of relieving pressure on the yuan exchange rate is to make an adjustment on China’s own initiative” (& to do so by September so it wouldn’t become an issue in the November US mid-term elections). 

In China sensible officials secure official blessing for everything they say on policy matters; so this looks Being signaling that it wants to avoid being named a “currency manipulator” by Secretary Geithner in his annual report to Congress due in mid-April. But it faces two problems. It must avoid losing face by appearing to give in to foreign pressure. And while in due course it may be able to return to a “managed float”, it must first make a one-time adjustment for which there is no Goldilocks ‘just right’ solution, especially since Congress had been told ad nauseam that nothing but 40% will do (which would make the cumulative change since Beijing started its managed float several years ago almost 50% which would be all but unprecendented in international monetary history).


GREECE PLANS GLOBAL BOND ISSUE (WSJ, Nick Skrekas & Costas Paris) 

    · On March 29th it sold 5BN Euros (US$6.71BN) of 6%, 7-year bonds & on the 30th 390MM Euros of 20-year bonds at a similar yield (an add-on to an existing issue). Neither were great successes : the oversubscription for the former  was modest & it had targeted selling a billion Euros-worth of the latter. On the 31st Moody’s downgraded five Greek banks due to “the country’s weakening macro-economic outlook.” Athens now is planning a US$-denominated global issue since ‘there are lots of Asian investors who haven’t yet bought our bonds’ 

Greek officials are frustrated. They still have about 20BN Euros of refinancing left in the next two months, had expected the EU support package to move the spread over German Bunds from the current 3.3% to closer to 2%, & blame the ‘vagueness’ of the package for this not happening. In Real Politik terms, the size of the spread is significant for more than just cosmetic and/or ego reasons; for the more costly the funding, the more difficult the Greek government will find it to meet everyone’s spending cut targets.

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