Lost in all the hullaballoo about the Republican Senate win in Massachsetts is that the fact that the health care reform bill need not be dead. For the Senate has passed a bill, imperfect as it may be, and if Speaker Nancy Pelosi (D.-Cal) could entice, cajole, bribe or otherwise convince enough of her Democratic caucus to pass the Senate bill as is, it could still be a done deal. But we just had the blue moon three weeks ago.
Be that as it may, it is remarkable that the Democratic candidate was able to squander the 20 point lead in the polls she had less than a month ago (a lead wide enough that her loss could not be attributed to bad polling). This is a wake-up call for Obama : for the second time he threw his support very publicly behind a candidate only to have his head handed to him. American voters are in a sour mood : they voted for him since he presented himself as a 21st century man & now they voted against him because, once in the White House, he allowed himself to become captive to a system that is obsolete in 21st century terms.
Last week’s edition mentioned that Profs. Carmen Reinhart & Kenneth Rogoff had found that the average rate of growth when the national debt was < 60% of GDP was significantly higher than when it was > 90% (when it often was negative). Since then the IMF opined the US national debt is on track to rise to 93+% of GDP from 62% in 2007. Draw your own conclusions & always question those who say “This time things are different.”
Last Monday’s Special Edition generated two interesting feedbacks. One on my comment that “Tony Boeckh founded Montreal-based Bank Credit Analyst”. It pointed out that it actually had been founded by Hamilton Bolton (in 1949) & that Tony hadn’t joined the firm until 20 years later. Mea Culpa; I should have checked my facts, rather than depend on my memory (by the way, Bolton’s founding philosophy may be particularly relevant to the present, namely that “national economies and their capital markets are led by shifts in financial liquidity, money supply and credit”).
The other came from a younger reader who represents a lower consumption, hopefully more sustainable future-oriented cohort and who, to the best to my knowledge & to his credit, is trying to live in accordance with that idea to a greater extent to many North Americans. He questioned why I seem to imply that growth is good, & raises the question of whether growth is even ‘good’ at all. This is an issue whose time is coming in North America, even if most Americans don’t know that yet. But he may not have read Gleanings over time as carefgully as he might have; thus part of Monday’s Special Edition read in part as follows : “the US financial sector had doubled its share of GDP to 8% (all of it involving changes of ownership of existing assets,& the syphoning off of corporate cash into private pockets, rather than economy-building’”) - my comment explicitly questioned the real contribution such financial activity makes to the common good.
Another example. A few years ago I mentioned in Gleanings, & since have referred to it in passing, that a State of Florida agency had compared 47 varieties of fruits & vegetables currently widely grown commercially in the state with those in common usage fifty years earlier, & had found that on average their nutrient content was 40% less today than it had been then. If my memory serves me right (while maybe now I should be doubly careful doing so, I have never yet figured out how to retrieve information from the 2,500 or so pages of Gleanings now on my computer), my comment at the time was something like “great for GDP growth but doing little or nothing for productivity” - all fifty years of plant research & breeding seems to have achieved is to create a need for, among others, more fertilizer, pesticides & herbicides to be produced & used, more trucks to haul produce hither & dither, and more handling all the way up the supply chain to get the same nutrient value on store shelves.
History is full of examples of economic activity that boost GDP growth but do nothing for a society’s real wellbeing but are marketed as “progress”. In his (in)famous speech to the 20th Congress of the Communist Party of the Soviet Union in 1956, Nikita Krushev mentioned as one example of the poor use of resources that one ministry had tug- & barge fleets going loaded downstream the river Volga & ‘deadheading’ back upriver while another had fleets going loaded upstream & deadheading downstream. About the same time in Holland, to get around a wage freeze, construction firms in The Hague only hired workers in Rotterdam who were picked up at, or near, their homes, punched their time clocks upon getting on the bus & spent the next 45 minutes riding the bus & getting paid for it, before starting a shorter work day, while their Rotterdam counterparts did all their hiring in the Hague & followed the same practice in reverse (with at night both repeating the whole process in reverse order). It was a boon to GDP growth, creating more jobs for construction workers & bus drivers, adding to the gasoline consumption & increasing bus usage, but adding nothing to real output. Another wonderful example of more recent vintage is the Calgary Airport : located wonderfully close to the city, its terminal buildings are on the side of the airport furthest away from the city : great for the taxi business but nonsensical from a purely economic efficiency perspective. And look what we have done, & and are continuing to do, with our cities’ infamous ‘urban sprawl’ (which, however, may be starting to reverse itself)
While he raises a good point, there is nothing inherently wrong with growth provided the real marginal benefit thereof outweighs the real marginal cost (& much of our post WW II “growth” was based on cost-benefit analyses that were deeply flawed because they were not holistic. Globally growth will remain inevitable as long as there are billions of people with standards of living that are unacceptable in absolute terms. But is growth, as traditionally defined, really necessary in the First World in general, & North America in particular? May our traditional deification of GDP growth not now be obsolete even if it were sustainable? How much of the “stuff” that North Americans buy (& often discard long before its useful life is ended) really adds to their quality of life? (But there may be hope in this respect if Monday’s observation is correct that “today’s young people’s status symbols appear to have shifted from cars to electronic gadgets, and there are 20% fewer teenagers with drivers’ licenses now than there were 30 years ago when the population was 25% smaller”). Do Americans & the rest of the First World really think that 16% of the world’s people can continue to consume ad infinitum 75% of the world’s resources? Ought we not be ashamed when the remote Himalayan kingdom of Bhutan, home to fewer people than the developed world has Ph.Ds, may be setting an example for the world in general, & the West in particular, in how to define economic & social wellbeing in a new, more sustainable, and possibly more edifying & satisfying, way than merely counting who “ends up with the most marbles”? Why, if having ‘stuff’ is good & having more ‘stuff’ is better, is unhappiness, depression & mental illness such a common occurrence among North Americans? How many two-income couples are working more for the tax man than for themselves and/or to buy stuff that doesn’t really add to their quality of life? ? The list is endless & the answer always the same : we have been led astray by marketing pied pipers.
FORUM GLOBAL RISK REPORT
· The Secretariat
of the Davos-based World Economic Forum each year, ahead of its
five day meeting (this year from January 27th -31st)
issues a Global Risk Report on the greatest risks facing the global
economy. Introducing it on January 14th, its Managing Director
& Chief Business Officer said the financial crisis & economic
recession had created “a more vulnerable environment where unaddressed
risks may become tomorrow’s crises” & in a discussion of the
economic side of the global risk situation Daniel M. Hofman, Group Chief
Economist of Zurich Financial Services, was critical of “unsustainable”
country debt levels since “when a country’s debt level exceeds 90%
of GDP, it reduces growth by one percent”.
This year’s 2,500
attendees will include 900 corporate CEOs & 30 presidents/prime
ministers; the latter will include many peripheral leaders, incl. those
of Brazil, Canada, France, Israel, Jordan, Palestine, Spain, South Africa
& South Korea but none of the heavyweights, those of the US &
China, nor those of Afghanistan, Israel & Russia.
IMF WARNS OF EMERGING
MARKET BUBBLES (AP)
· Managing Director
Dominique Strass-Kahn suggested on January 18th the IMF will
raise its forecast of global economic growth for 2010 from October’s
estimate of 3.1% as Asian economies are returning to their pre-crisis
growth even as the advanced economies remain “sluggish”, but warned
the money rushing into emerging markets could cause asset bubbles
Forecasts of quarterly
growth rates for China this year range as high as 16-17% & those
for the US as high as 5+% - both look optimistic, the latter more so
than the former.
IEA SEES WORLD
OIL USE IN 2010 HIGHEST SINCE 2007 (Reuters)
Its impact on oil
prices may be limited, given Saudi Arabia’s level of shut-in capacity
& its policy of adjusting output to ensure the development of alternate
energy sources isn’t unduly encouraged.
GOLD PRICE SEEN
RETURNING TO RECORD HIGH THIS YEAR (Reuters)
· London-based GFMS
expects the price of gold in the First Half of 2010 to average US$1,050,
vs. last year’s $972, with Chairman Philip Klapwijk saying “what
we see in 2010 is that there is a fair chance that investors will temporarily
drive prices above US$1,300 an ounce” (vs. a December 2009 high
of US$1,226.10 & US$1,228 on January 13th).
Demand for jewelry
is “weak” as the strong Yuan-lessened demand in China more than
offsets growth in the India & the Middle East markets. And while
there will continue to be central bank buying, the US$ gold price will
likely be largely a function of the dollar’s strength or weakness.
OF U.S. ASSETS RISES (AP)
· Despite the US$1.42TR
US deficit for the year ended last September 30th (&
a forecast US$1.5TR deficit for this fiscal year), in November foreigners
were net buyers to the tune of US$128.6BN, the most in two years, although
China was a US$9.3BN net seller.
Monthly numbers be
damned; it’s the trend, & the confidence in the US dollar’s
intrinsic value that matters & there the news is less positive (Russia
since announced it was buying Canadian dollars).
FED SPLIT OVER
RATE IMPACT OF MORTGAGE PURCHASES (FT, Krishna Guha)
· Fed policy makers
are divided over the possible impact on mortgage rates when it quits
buying MBS (mortgage-backed securities) as scheduled on March 31st.
While Boston Fed President Eric Rosengren told the Hartford Courant
newspaper it would boost them 0.25% to 0.75%, most private sector economists
expect (hope?) it will be at the low end of that range, as do
other Fed officials (apparently incl. Chairman Bernanke), many of whom
want to keep the option open to buy more such securities if the rate
were to spike.
Such programs are
easy to launch but sometimes hellishly hard to extricate from.
RATE RISE FEARS
TRIGGER RUSH TO ISSUE BONDS (FT, Jennifer Hughes)
· Bond issuance
in the first six business days of the new year exceeded US$75BN. While
much involved financial institutions seeking to repair their balance
sheets, concerns interest rates are about to jump are prompting an attitude
of ‘let’s get our money while it is still cheap even if we hadn’t
planned to come until later in the year”. And fears abound of market
turbulence when the authorities start unwinding last year’s emergency
liquidity injections & real estate companies must start rolling
over their maturing loans.
None of this suggests
the presence of high levels of confidence.
TO MANY, BERNANKE’S
BUBBLE THEORY A BUST (WSJ, Jon Hilsenrath)
· He maintains,
& told Congress, that the Fed’s post-2000 low interest policy
wasn’t to blame for the housing boom & bust, instead blaming it
on exotic mortgages, foreign money coming in and a failure of
regulators & industry supervisors to do their job. But 42 of Wall
Street & business economists surveyed by Bloomberg said it was at
least partly to blame, vs. 12 who agreed with him (although 27 academic
economists were evenly split, 13 to 14).
A partial truth, repeated
often & loudly enough, eventually will gain the status of the whole
POWER TUMBLED IN 2009 (MSNBC)
· American families’
inflation-adjusted incomes declined 1.6% in 2009, the most since 1990,
as the CPI rose 2.7%, the most in over 50 years (i.e. since the aftermath
of the Korean War), after declining 0.1% in 2008.
A year ago oil prices
were plummeting but since have almost doubled & food prices are
now rising. Despite weak retail sales, the market too seems to be pricing
in higher inflationary expectations.
RISE IN BUILDING
PERMITS COULD HERALD BUILDING RAMP-UP (AP)
· Building permit
applications were up 11% in December to an annual rate of 653,000, more
than expected & the highest number since October 2008, while housing
units under construction were off 4% to a 557,000 annual rate, which
undershot forecasts. Builders worry about the unemployment situation
& the number of foreclosures flooding the market & find credit
harder to come by than 18 months ago.
Any rise in mortgage
rates ain’t going help things any.
INFLATION AT WHOLESALE
LEVEL EDGES HIGHER (AP)
· It was up 0.2%
in December, a fraction of November’s 1.8%, as 1.4% higher food prices,
up for the second month in a row, more than offset 0.4% lower energy
prices. This brought the rise in wholesale prices for 2009 as a whole
to 4.4%, 5x 2008's 0.9%, the very reverse of ‘core’ wholesale prices
that were up 0.9% in 2009, one-fifths of 2008's 4.5%.
You can’t eat,
& warm/cool yourself with, the core basket of goods (& while
many of the latter involve goods the purchase of which can be delayed,
this isn’t true for food & energy).
RISE IN LATEST WEEK (WSJ, Michael S. Derby)
· They were up 36,000
to 482,000, rather than declining by 4,000, as expected.
Part of this may have
been the result of a “processing backlog due to the Christmas and
New Year’s holidays” (which doesn’t give one nice, warm feelings
about quality of this data series).
HIT THE ROAD AS GAS PRICES EASE (EJ, Business Browser)
· In November US
highway travel was up 1.4% YoY, as more Americans who stayed home last
year for Thanksgiving this year went somewhere. YTD highway travel was
Either people are
feeling better about themselves or they had just plain, old-fashioned
cabin fever. But the jury will be out on the trend, or lack thereof,
until gasoline prices start rising again.
HOW THE U.S. HIRING
FREEZE IS WORKING FOR INDIA (AP, Erika Kinetz)
· India’s outsourcing
sector gets 60% of its global sales from the US. And US corporations,
are sending more work offshore to cut costs. So India’s top
three outsourcing firms (Tata Consultancy Services, Infosys & Wipro)
in the Fourth Quarter expanded their global work forces by an average
It won’t to help
the US recovery when government entities are among those doing the outsourcing.
OBAMA CAN PUT THE
BRAKES ON BIG BANK BONUSES (CSM, David Francis)
· Prof. Peter Morici
of the University of Maryland, College Park says he just needs to warn
the big banks (without a need for Congressional approval) that those
paying undue bonuses risk losing their highly-profitable
“primary dealer” status and/or access to the Fed’s discount window
(Prof. Raghavendra Rau of the University of California, Berkeley
found that during the period 1994-2006 companies that overpaid had lower
RoIs than those that didn’t).
& unquestionably 100% effective. And hence doomed to
BANK OF CANADA
PUZZLES OBSERVERS (FP, Paul Vieira)
· The global outlook
is getting better, Canada’s job market stabilizing, real
estate rocking & the stock market doing well. So why did the Bank
of Canada on January 19th keep its benchmark rate at 0.25%
& said it expects to maintain that until at least July? Because
“embedded in the accompanying statement is [a] note of caution
... that there remains a huge question on what happens when the steroids
(i.e. the stimulus) are taken away.”
A spectre haunts central
bankers, that of Japan post-1989 now being seen as having nipped several
incipient recoveries in the bud by prematurely yanking the cookie jar
off the table.
ALBERTA TO EXAMINE
PACE OF OIL SANDS GROWTH
(G&M, Nathan Vanderklippe)
· Alberta’s new
Energy Minister, Ron Liepert, told a press conference ‘there is a
need to examine ways to moderate oil sands development to ensure that
future oilsands development does not again overstretch the capacity
of the province’s infrastructure’.
If genuine, this would
be a long-overdue departure from Alberta governments’ traditional
‘let-her-rip’ & ‘planning = socialism’ attitude that he
himself alluded to just two months ago when, as Minister of Health,
he was asked why there had been no prioritizing of who should get H1N1
FOR DRESSING DOWN TURKISH ENVOY (Reuters)
· After Turkish
TV carried a program offensive to Israel, Deputy Foreign Minister Danny
Avalon on January 11th summoned the Turkish ambassador to
his office, seated him on a uncomfortable low couch, invited the media
in & then, after pointing out he hadn’t shaken hands with him,
launched into a diatribe in Hebrew the ambassador couldn’t understand.
Even though the next day he conceded his behaviour had been inappropriate,
Turkey threatened to recall its ambassador. So on January 14th
Israel sent a formal letter of apology which Turkey’s Prime Minister,
Tayyip Erdogan told the press was “the expected, desired answer”
(even though Netanyahu’s office called Avalon’s action ‘correct,
just badly handled’) but added “Israel ... must be more and more
on the side of peace in the region”.
Asked what he would
have done if he had understood what Avalon was saying, the ambassador
answered : “I would have walked out.” Israel for years sought closer
ties with Turkey, and had succeeded to the point where it had become
a key ally for it in the Middle East & the two had joint military
exercises. But in recent years it became concerned Erdogan was getting
too cosy with Iran & their relationship really soured when he publicly
criticized Israel last year over its attack on Gaza.
NETANYAHU : ISRAEL
NEEDS WEST BANK PRESENCE (AP)
· On January 20th
Mahmoud Abbas proposed that, due to the two parties’ irreconcilable
positions on the settlements, the Obama Administration should negotiate
the final borders of the Palestinian state with Israel (on the basis
of those of 1967 with the possibility of an exchange of up to 3% thereof).
Later that day Netanyahu said that Israel must continue to have
a presence on the West Bank, even after a peace agreement is achieved,
to prevent rockets from being brought in from the outside, for “We
are surrounded by an ever-growing arsenal of rockets in the Iranian-supported
enclaves to the north and to the south”, conceding the anti-rocket
defense system Israel is planning is “prohibitively expensive.”
First it was an all
but total demilitarization with a third party military supervisory presence
to ensure that no weapons would be brought in from the outside. Now
even that apparently isn’t good enough any more. This is Israel’s
interpretation of coming to the negotiating table
REACHES OUT TO OPPOSITION (FT, Najmeh Bozorgmehr)
· A parliamentary
committee has publicly blamed Saaed Mortazavi, Tehran’s prosecutor-general,
a hardline fundamentalist & ally of President Ahmadinejad, for the
death of three prisoners at a detention centre. Throwing him, for a
decade the public face of the regime’s repression, to the wolves is
deemed an attempt by senior ‘moderate’ supporters of the regime
to reconcile with the opposition Green Movement. While Ahmadinejad immediately
countered by naming Mortazavi to head the regime’s anti-drug &
anti-smuggling unit, state television did begin to show debates between
radical & moderate supporters of the regime in which the President
was blamed for causing the crisis situation since the June election.
This move towards reconciliation came after similar moves by leading
opposition figures : Mir-Hossein Moussavi, the runner-up in the presidential
election, refrained in his latest public statement from calling for
the overthrow of the government & Mohammed Khatami, a former reformist
president, condemned radicalism on both sides & distanced himself
from calls for the establishment of a secular state by saying “The
radicals should not be allowed to reign and we should all defend the
The clerics &
moderate leaders have one thing in common, self-preservation. They are
all “old” in a country with a
young, increasingly well-educated population (one
in 20 Iranians is currently attending one of Iran’s 54 universities
& 42 medical schools, vs. is one in 25 in the US - & the latter
number is swollen by the recession). Since 1979 university enrolment
has grown six-fold but the population only two-fold, but the annual
‘brain drain’ of 150,000 of Iran’s
‘best & the brightest’ indicates the regime isn’t meeting
their needs. It is interesting in thisw context that in both authorized-,
& unauthorized cell phone-, videos on TV, the pro-regime crowds
are predominantly in the 35+ year-, & the crowds of protesters largely
in the under 35 year-, age bracket.
DELIVERY RECORD FOR 2009 (AP)
· It reported on
January 11th that, despite the problematic global car market,
it had delivered 6.29MM vehicles in 2009,vs. 6.23MM in 2008, with strong
sales in its home market (1,24MM vehicles delivered, up 17.5% YoY),
China (1.4MM, up 36.7%) & Brazil (688,300, up 8.7%)
Especially in bad
markets it helps to have the right product at the right price.
PUTIN TELLS U.S.
TO OBSERVE POULTRY SAFETY RULES (Reuters)
· He said in Moscow
on January 14th that after January 19th Russia
must find alternate sources of poultry imports if the US cannot meet
its new food safety regulations that Washington has complained will
have a ”devastating effect” on the U.S. poultry industry.
Easier said than done
: commercial-scale animal husbandry practices are similar everywhere.
HEAP PRESSURE ON CHAVEZ (FT, Benedict Mander)
· His hopes for
a recovery from last year’s deep recession are being jeopardized by
low water behind the Guri hydroelectric dam, the source of 75% of Venezuela’s
power, due to last year’s lowest rainfall in decades. This has caused
power outages that, among others, will affect output in the local steel
& aluminum industries that are the source of most of its non-oil
exports (& his domestic situation will be worsened by the January
8th devaluation of the bolivar, by refueling inflation just
as it had started to fall marginally to 25%).
While Chavez blames el Niño, his
critics blame insufficient new investment & spending on maintenance,
and an erstwhile deputy minister for electricity a level of corruption
that has less than one-third of the funds earmarked for power projects
actually being used for the purpose intended.