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Reflections on world economy and more by Nick Rost van Tonningen of Canada

December 22nd, 2011

The bloom may finally be off the rose in China’s long residential housing boom in which people  bought condos by the fistful in the expectation they would be worth more tomorrow than they paid for them today, & that led to the residential housing construction sector accounting for 10% of GDP (vs. 6% at the height of the US housing bubble). Two months ago Shanghai developers started slashing the prices of their latest luxury condos by one-third, infuriating, & causing riots among, those who had not long before paid full price. In Beijing new home prices were down 33% in November alone. Unsold home inventories now are 21 months’ worth of sales in Beijing & 22 months in Shanghai. And in a ripple effect steel production is down 15% since mid-year and  municipal land sales have cratered (& they being a primary source of income for local authorities, this will affect their ability to service the bank loans they took out in better times to make, often over-exuberant & unwise, infrastructure investments). So we may soon see if China’s recent economic path was real, or a mirage, a “Potemkin village”-like structure; some analysts believe  China’s GDP growth rate could implode to zero (which is highly, highly unlikely since the regime knows this would challenge it to the point of its total destruction).   

Some people are fussing about the possibility of adventurism by the immediate post- Kim Jong-il regime (whether run by his inexperienced No.3 son, a caretaker family compact, as was rumoured some time ago, or the military) to unite North Koreans in defence of their homeland against a foreign enemy (with the possible connivance of Beijing which is quite happy to have a piss-poor renegade state as a buffer between its territory & affluent South Korea). But this applies equally, if not more so, to China where at the grass roots public unrest about food inflation, unaffordable house prices & corrupt local officials and, at the macro level, the government change-over due next year & the possibility of the chickens coming home to roost from a many years-long misallocation of resources in banking & real estate may create a far more threatening incentive to international adventurism, with the recent call by Wu Jintao for the Navy to ‘ready itself for battle’ being an worrisome omen (this could, not inconceivably also take a non-military form, by Beijing seeking to fish in troubled waters with some covert action against the US dollar).  

Beijing is starting to make some more environmentally-friendly noises (& has, in typical Chinese fashion, already been diverting significant resources to become the global leader in some alternate energy technology areas). And so are now the Saudis, of all people : last spring they announced plans to reduce domestic energy consumption by mandating the installation of better insulation (air conditioning is said to account for 70-80% of the Kingdom’s energy consumption), and recently others to promote the development of more alternate energy projects to ‘preserve our oil assets’. Meanwhile, Canada’s environmental policy is basically ‘business as usual’.   

The Italian economy shrank at a 0.2% annual rate in the Third Quarter, its first contraction since 2009. And the government is forecasting a 0.4% GDP contraction for 2012 (which the employers’ group CONFINDUSTRIA thinks is way, way too optimistic : it forecasts a 1.6% contraction, 4x the official forecast). With a debt-to-GDP ratio of 116% last year & now North of 120%, and an annual deficit in the 4% of GDP range, that ain’t going to do much for investors’ interest in Italian government bonds at a time it a need to ‘roll over” US$300+BN in already outstanding debt next year and raise US$100BN or so in new money to fund next year’s deficit.    

Ed Clark, the CEO of the Toronto-Dominion Bank, recently said Ottawa should tighten the rules on housing loans by cutting the maximum length of federally insured mortgages to 25-, from 30-, years to slow the growth of rising consumer debt in Canada (the level of which, relative to GDP, hit a new record earlier this month, surpassing that of both the US & UK). This illustrates the extent to which the “nanny-state” idea has permeated even the financial community despite its claims the market should be given free rein (when it suits it); for if this were really a professional concern for him, all he would need to do would be to issue a directive to his mortgage lenders not to ‘do’ any more home mortgage loans with maturities of over 25 years. It also shows why economic & financial crises occur : even those who believe the world is on the wrong path seldom act on that belief, often, as in this case, for short-term profitability reasons. On the other hand, Clark cut his teeth professionally during the Trudeau nanny state era when, as Senior Assistant Deputy Minister of Energy, Mines and Resources Canada, he was derogatively referred to as “Red Ed” in Calgary for his authorship of Trudeau’s, in that city much-hated, “National Energy Policy”.  

Old meets new : the other day my eye was caught by the sight of a young Muslim woman wearing a hijab made of Burberry plaid material. 


No. 440 - December 22nd, 2011 


  • After S&P raised doubts about the sustainability of France’s triple-A rating due to its banks’ exposure to PIIGS countries’ government debt, France’s  Central Bank Governor, Christian Noyer, on December 16th fired a broadside at Britain (& indirectly at S&P) when he said “A downgrade doesn’t strike me as justified based on economic fundamentals. Or if it is, they should start by downgrading the UK, which has a bigger deficit, as much debt, more inflation, weaker growth, and where bank lending is collapsing.” And Finance Minister François Baroin weighed in with “Great Britain is in a very difficult economic situation, a deficit close to the level of Greece, debt equivalent to our own, much higher inflation prospects and growth forecasts well under the  Eurozone average (which is true for France as well) ... you’d rather be French than British in economic terms.” But the market disagrees; for the yield on French 10-year bonds is 3.20%, vs.  2.10% on such UK bonds.

This ‘dialogue’ was started by Britain’s Chancellor, George Osborne, when he compared market concern about the French debt with the Greek situation, with the gauntlet then picked up by French Prime Minister François Fillon, albeit less aggressively so (although, after Britain’s Europhile Deputy Prime Minister Nick Clegg called this escalation in rancour “unacceptable”, Fillon called Clegg from Rio de Janeiro to assure him it hadn’t been his intention to question Britain’s credit rating). But there are at least three major differences between the two countries. Britain has its own currency of which it can print as much as it can get away with & which it can devalue to make its economy more competitive (which is not to say it should, merely that it can). Secondly, France’s debt is denominated in Euros which inextricably ties its lot to the Greeces of the Eurozone. And the UK government seems to have more of the ‘political will’ needed to get its fiscal house in order than Sarkozy (who faces an election next year) and, while its deficit/GDP ratio is closer to Greece’s than France’s, it’s nowhere near “the level of Greece” as the French allege).


EUROPE CHANNELS $195 BILLION TO IMF (Bloomberg, Stepani Bodoni) 

  • After hours of conference calls, the Eurozone on December 20th bolstered its anti-crisis arsenal by channeling 150BN Euros into the IMF as the ECB widened its support for sagging bond markets (buying 5x as many government bonds in the week ended December 16th as in the week before). Four non-Eurozone  countries (Czech Republic, Denmark, Poland & Sweden) kicked in some money, Britain refused to pledge, saying it “will define its contribution” in early 2012, and three countries (Greece, Ireland & Portugal) were excused from contributing. A former UBS Chairman called this “obviously a small scale solution”, Germany continued to oppose an earlier decision to raise the limit on overall emergency aid to 500BN Euros & the Bundesbank made its 41.6BN Euro contribution contingent on a promise by the IMF that it not be earmarked for Europe (which was of course pure ‘window-dressing’) on the grounds this would violate Eurozone rules forbidding central banks from funding government deficits.

Since then Norway has come to the aid of the party with a US$9.4BN loan to the IMF. But the Europeans keep ignoring the age-old proof that in a confidence crisis half measures merely feed speculation & that only putting really overwhelming amounts of money (in this case several trillion) can overcome it. This falls well short of the 200BN Euros Europe’s leaders themselves earlier suggested was needed to convince investors that a souvereign default or major bank collapse wouldn’t lead to a catastrophic event. It may not constitute the ‘significant financial commitment” needed to extract serious support for the IMF from the cash-rich BRIC countries; for since the G-20 had earlier agreed to a need to almost triple the  IMF’s (current 290BN Euro) spare lending capacity, this leaves a 300+BN Euro hole for them to fill. In any case, in the overall scheme of things, 150BN Euros is a picayune amount; for in the First Quarter alone 300+BN Euros of sovereign-, as well as 230BN of bank-, bonds are maturing, and over the next two years Italy, Spain & Belgium alone will have 711BN Euros-worth of their debt maturing.



  • In its latest attempt to keep credit flowing during Europe’s souvereign debt crisis, on December 21st it lent Euro area banks a record 489BN Euros/US$645BN (66% more than expected) for 1,134 days at an rate of interest of roughly 1% (116BN Euros - 23.7% - accounted for by Italian banks). A total of 523 banks put in requests for money that was “obviously an offer the banks could not refuse.” With banks wary of lending to each other (for perceived credit quality risk reasons), the ECB is trying to ensure they will have enough cash to continue their normal business- & consumer lending activities.

The unexpectedly high demand was in part due to governments & central banks pushing their banks to do some ‘pre-emptive borrowing’ (i.e. borrowing more than they needed, if only to pre-fund 2012 maturities). But with 296BN Euros (60%) of it accounted for by rollovers, the notional loan amount far exceeds its potential impact on the economy. And with the ECB having ‘widened the range of collateral securities’ it will accept as security for these loans, more dodgy private sector debt, & their embedded risk, is being offloaded onto the public sector balance sheet. 




  • ECB Executive Board member Juergen Stark told Germany’s Wirtschaftwoche magazine he had resigned last September 10th, effective December 31st, because he “wasn’t  satisfied with the way this currency union has developed.” He said that, while the ECB had done its part by keeping inflation under control, some Eurozone governments had run into financial problems by letting labour costs rise, thereby making their economies less competitive, & had failed to rein in excessive real estate  booms, the collapse of which had contributed to the debt crisis

While at the time on his resignation he gave his opposition to its bond-buying program as his reason for leaving (& recently criticized the idea of the IMF having a key participatory role in the debt crisis), the ECB continues to refer to “personal reasons”. A five-year member of the ECB Executive Board, he was often referred to as its ‘Chief Economist’, even though there is no such position. His successor is a senior official of Germany’s Finance Ministry, not the Bundesbank. 


  • As part of its climate change combat effort the EU has an Emissions Trading System under which it charges installations such as oil refineries, power stations & steel mills for their CO2 emissions. On December 20th the European Court of Justice rejected attempts by the US to stop the EU from applying it to airlines as well, arguing it was an issue that should be dealt with by the international aviation body, IATA, & that it violates various climate change-, & aviation-, acts & agreements. The Court ruled that “application of the emissions trading scheme infringes neither the principle of customary international law at issue or the Open Skies Agreement ... It is only if the operators of such aircraft choose to operate a commercial air route arriving at, or departing from, an airport situated in the EU that they are subject to the emissions trading scheme.” So as of January 1st 2012 all airlines flying into or out of airports in the Eurozone must pay the tax, even though US, Canadian & other airlines continue to oppose doing so, four Chinese airlines complain it will cost them 95MM Euros (US$125MM) a year, the US House of Representatives passed a measure two months ago directing the US Secretary of Transport to prohibit US carriers from participating in the scheme if it were to come into force, & US Secretary of State Hilary Clinton warned on December 16th the US would respond with “appropriate action”.

With the EU dug in on the issue, & having made it quite clear it won’t to back off for anyone, it looks as if it holds all the trump cards. For it is not a discriminatory, but rather an across-the-board measure, & it can therefore ignore all mindless Washington bluster (for what is the US going to do : have its airlines quit flying to Europe, or not allow European airlines to fly to the US?)   


  • This was the most states with such results in eight years; so the national unemployment rate fell to 8.6%, a post-March 2009 low. The economy has now generated 100,000+ new jobs for five months in a row, for the first time since 2006 (but needs to generate twice that many, if not more, month after month, to take a serious bite out of unemployment). New York & Texas had the largest job gains (29,500 & 20,800 respectively), Wisconsin the most job losses (14,600), Nevada, with 15%, the highest UE rate (for the 18th month in a row) & California the second highest, with 11.3%, and North Dakota the lowest, with 3.4%.

North Dakota’s stellar performance can be explained with two words : Bakken oil. Boom conditions there are said to be almost beyond comprehension. But this has been made possible by, & will continue to depend on, “fracking”, the technology that has environmentalists in a tizzy, in part because the oil industry, with its usual short-term profit maximization focus, hasn’t minded its p’s & q’s in its use thereof (but its importance from a national job creation- & energy independence point of view is so immense that it is going to have to change that, if not spontaneously for self-evident self-interest reasons, then by government fiat for national economic & security reasons, and to knock most popular support out from under the hard core environmental ‘purists’).     


(NYT, A. Lowrey) 

  • The recent unexpectedly good economic data suggest the fastest growth since the recovery started in 2009. But it may not last. For there was a one-time n inventory-building catch-up, consumers cut back on their savings, & gasoline prices declined. And going forward, there may be fallout from Europe’s debt crisis, a stronger dollar making exports less competitive, some mandatory fiscal tightening &, if the payroll tax isn’t extended, US$150BN of spending power taken out of, mostly middle class, consumers’ pockets.

But consumer confidence could conquer all. And  it came in at 69.9 this month, up from 64.1 in November & well above the median forecast of 68 (although this is still well below the average of 89 for the five years preceding the Great Recession).   


(G&M, Steve Ladurantaye)   

  • Small home builders are keeping their head above water, & maintaining a presence in the industry,  by building a house here & there, and renting it. Data released by the Commerce Department showed that, while building permit issuance in November was up 9.3% MoM, this was made up of a 2.3% increase in single home permits & a 32% increase in those for apartment construction. As Americans turn their backs onto home ownership, “rental vacancy rates have fallen faster than they ever have, and rents are rising across the country - even in some of the hardest-hit areas.” And the huge overhang of foreclosed home has prompted Morgan Stanley to start mooting the idea of institutional investors buying residential real estate for rental purposes.

While definitely a departure from the decades-long idea that home ownership is an integral part of the ‘American Dream’, it remains to be seen whether this is a permanent or temporary shift.  


(FT, Shahien Nasiripour) 

  • The FHA, the regulator supervising Fannie Mae & Freddie Mac is considering a plan that would enable them to allow homeowners in Chapter 13 bankruptcy & underwater on their mortgages to pay zero interest for five years. This “principal paydown plan”, however, would apply only to mortgages owned or guaranteed by the two agencies, half the total outstanding, & one in four homeowners with mortgages (i.e. 11MM) is currently underwater with an aggregate negative equity of US$700BN.
  • The Treasury is compiling a “major package of recommendations”, incl. this principal paydown proposal, on ‘fixing the housing market’ (again?) for the President’s consideration. And, while the White House so far has been “cool” to the idea, the FHA can go ahead with it without formal White House-, or for that matter, Congressional-, approval. 

With 44MM home owners with mortgages in the US & total US home mortgage debt of US$14-15TR, the average mortgage size is US$320,000. Half the 1.5MM borrowers in Chapter 13 since 2008 had mortgages & one in four home owners with mortgages were underwater on them. So, with Fannie & Freddie having exposure to half of the home mortgages outstanding in the US, between them they may have 375,000 borrowers that are both in Chapter 13 and underwater on their mortgages , which means that this measure, if implemented, would benefit < 2% of their clients while, in a best case scenario, adding US$3.6BN to the Federal deficit.    

THE SILVER RUSH AT MF GLOBAL (Barron’s, Erin E. Arvedlund) 

  • When the Company went bankrupt some customers held ‘warehouse receipts’ for specific, identifiable bars of gold & silver held by it for them in safekeeping (for which they paid storage fees which they have continued to have to pay to the Bankruptcy Trustee). Now the latter is proposing pooling all assets of, or held by, the Company, incl. those gold & silver bars, to fund a 72¢ on the dollar distribution to all customers whose money had ‘disappeared’. But the warehouse receipt holders believe this is unfair since their claims are based not on “paper-”, but on “real” assets that are readily identifiable. They call the Trustee’s proposal a “radical redistribution of property” (a euphemism for “theft”).

One can only surmise that, whereas the warehouse receipt holders are smaller industry players, those holding “paper” assets include entities like JPM and/or Goldman that would get a higher payout under the Trustee’s proposal than would have otherwise been the case. If this proposal is implemented, it will further erode the already waning confidence in the US financial system   


  • Following reports Hamas was swearing off violence, Taher al-Nounu, a spokesman for Hamas Prime Minister Ismail Haniya, told reporters in Gaza on December 18th “Violence is no longer the primary option ... But if Israel pushes us, we reserve the right to defend ourselves with force.” And Palestinian President Mahmoud Abbas is said to deem this part of Hamas’ commitment to reconcile with his Fatah movement (this week Abbas & Hamas leader Khaled Meshaal will meet in Cairo to flesh out their latest reconciliation deal).
  • The group has always had its non-violence advocates; thus during the first intifada, its founding years, it merely threw stones at IDF troops. And after Mr. Meshaal became its leader in 2005, it renounced suicide bombing as having given it “nothing but a bad reputation’. Nevertheless, Barry Rubin, Director of the Herzliya-based Global Research in International Affairs Center, says this is just a ploy & that “Hamas is building support bases and arms manufacturing facilities including those for building rockets” in Egypt’s Sinai Desert, and noting the strength of Islamist parties in Egypt asks “Who is going to order Egypt’s army to crack down on Hamas and to close those facilities?”
  • While Israel would be wise to be skeptical, it would be unwise to dismiss Hamas’ claim out of hand. For Hamas insiders say it seeks to meet one of the conditions for negotiations set out in 2006 by the ‘Quartet’, & claim it will accept  the creation of a Palestinian state along the 1967 borders provided it won’t have to acknowledge the state of Israel. And this move is coming at a time that Hamas, to the dismay of Syrian President Bashar al-Assad, is severing most of its ties with Syria by moving its offices to Cairo, Amman (& Qatar), and  learning to live without support from Iran, while Mr. Haniya is planning to travel to Turkey, Bahrain, Qatar & Tunisia to demonstrate the movement’s shift to new allies.

To an objective observer, this could be a breakthrough. But for Prime Minister Netanyahu & his right-wing coalition partners this is the nightmare scenario : a Hamas that could become globally respectable & seemingly willing to work with Fatah. 


  • As part of its policy to shift the economy from its overdependence on export-led growth, it plans, by 2015, to cut SO2 emissions by 8%, raise the share of non-fossil fuels in total energy use, reduce the use of coal & add 42MM tons of daily sewage treatment capacity. But it expects most of this to be done & paid for by businesses & local governments, and says that, while it will continue to spend heavily on traditional infrastructure expansion, it won’t be at the US$640BN rate since the 2008 credit crisis. 

Grass roots pressures are building to do something about air- & water quality. But Beijing’s proposed funding model may be fundamentally flawed. For having business pay for part of it will add to their cost of doing business. And Beijing has far less control over how local governments spend their money than often appreciated (& with their main source of income being real estate-related, this could add to the cost of housing, already is somewhat of a ‘third-rail’ issue).

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