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Anonymous Observations on the World Economy

No. 394 - January 27, 2011


(Telegraph, Louise Armitstead) 

    · One London-based hedge fund manager says “The data doesn’t add up. We think we’ve experienced credit bubbles over the past few years but China is the biggest. And yet the global economy is looking to China as not just a crutch but a springboard out of the recession. It’s crazy.” Hugh Henry, a former star at Odey Asset Management, has launched a distressed China fund at Eclectica Asset Management & Mark Hart of Corriente Advisors, the US hedge fund manager who made a bundle predicting both the subprime- & Europe’s souvereign debt crises, has started a fund based on the premise that, rather than being the “key engine to global growth”, China is “an enormous tail-risk”.

    · China is the global price setter for oil, coal & base metals but a recent study by Fitch concluded that a halving of its growth rate would prompt a 20% plunge in global commodity prices. Al-Jazeera last year did a special on China’s “ghost towns”, incl. Ordos Chi in Inner Mongolia that was built for 1MM people but where hardly anybody lives.  And according to Corriente Advisors there is an excess of 3.3BN square metres of floor space in China while nevertheless 200MM of new space is being built each year, & property prices are so high as to be out of reach for most people. 

Under the best of circumstances it would have been surprising if there hadn’t been some dodgy loans made during a ballooning of bank lending such as occurred in China in the past couple of years. And what will compound problems is that the Chinese banks’ balance sheets have long been anything but pristine & held lots of potentially problematic loans. Add onto that wage increases well into the double digits, a demographic profile in sight of a ‘tipping point’ & a leadership change in 2012, and the hedge fund managers’ prognostication may well be proven ‘on the mark’ by, say, 2013. But it is worth remembering that in investment past performance is not necessarily indicative of future success. 


    · A study by the US-based Universal Ecological Fund, a subsidiary of an Argentina-based group of the same name, entitled The Food Gap, predicts that, while climate change may increase Canadian grain production by as much as one-tenth, overall it will have more negative than positive impacts, and “As a consequence, the number of undernourished in the world would inevitably increase” (by as much as 70% over the next decade as the world population increases by < 15%). And FAO predicted in its latest global food outlook report that in the next decade average grain prices could rise by as much as 40%. 

As it is, higher food prices are already creating social unrest across the developing world incl. Tunisia, Egypt, Jordan & Yemen (where food costs account for a far greater share of the average household budget (especially for the poor) than in First World.



    · The number of Americans filing initial claims for unemployment benefits fell more than expected in the week ended January 15th, by 37,000 to 404,000, the biggest decline in almost a year. The Index of Leading Indicators in December rose for the sixth month in a row, also by more than expected (1% rather than 0.6%), and the Indices of Coincident- & Lagging Indicators also rose, albeit by smaller amounts. Sales of previously-owned homes were higher than forecast, by 12% MoM to a 5.28MM annualized rate (although this was due to buyers seeking to lock in the current low mortgage rates, although prices were down 1% YoY, & the share of sales represented by foreclosures climbed).  

Nevertheless, all this doesn’t add up to the kind of ‘robust’ recovery needed to take a bite out of unemployment (& boost government tax revenues)      


    · On January 26th it issued a report forecasting a budget deficit for the current fiscal year (ending September 30th) of US$1.5TR, 9.8% of GDP, a 25% increase from of its August forecast. In nominal terms this would be almost as large as the 2009 deficit, which in real terms had been the highest in 65 years (i.e. the waning days of WW II). The report supports both the case made by the Republicans who argue that the deficit must be cut right now & that of President Obama who says it makes no fiscal sense to repeal the health care law (because, starting in 2014 it will be a net revenue generator).

    · It used the term “unsustainable” to describe the deficit & warned that higher interest rates will cause debt service costs to “sky rocket” to triple their current level by 2021. And in unusually stark language, using the words “Greece” & “Ireland”, it spelled out a scary scenario, saying that other countries’ experience shows the growing debt “would increase the probability of a sudden fiscal crisis, during which investors would lose confidence in the government’s ability to manage its budget , and government ... would lose its ability to borrow at affordable rates.” It also noted that, while the 40-year average for tax revenues as a share of GDP had been 18%, 2011 will be the third year in a row that it is in the 15% range (due to the large number of Americans who aren’t working).

    · It said the deficit would shrink over time to 3.6% of GDP if Congress did three things which both Republicans & Democrats so far have been loath to do (but that if it didn’t in their absence it will average 6% between 2012 & 2021) :

      · allow the minimum tax to apply to more middle class people;

      ·  raise taxes on upper income taxpayers; and

      ·  cut the annual increase in Medicare payments to doctors to the inflation rate. 

Two years of back-to-back US$1.5TR deficits mean that in two years the national debt increased by over 25%. Be that as it may, this does still not seem frightening enough to have prodded Congress to quit doing “business as usual”. Thus Treasury Secretary Timothy Geithner told an audience at the Davos World Economic Forum that drastic spending cuts are not, & spending more money on “education, innovation and investment is, “the responsible way forward” to cut the national budget deficit (the problem with the latter approach is that the time may have run out for it to be an option any longer). 


    · The 75-seat Utah House of Representatives on January 26th, after 20 minutes of debate, voted 51-19 to pass a Republican-sponsored bill to make the semi-automatic Browning M1911 handgun an official state emblem, along with its flower & its bird. Standard issue for the US armed forces until 1985, it was crafted by Utah native John Moses Browning (whom the Browning Company refers to “the Father of Automatic Fire.”)  

It will now go the State Senate, in which the Republicans have a 22-7 majority, & then for signature to (Republican) Governor Gary R. Herbert.      


    · Al-Jazeera recently leaked documents about the concessions Abbas had offered Israel, but that Israel had turned down, that, among others, included an acknowledgment that a large scale implementation of the “right to return” was “illogical. For 30 years, Mohammad Khalifa,  a resident of the Shatila refugee camp in Lebanon (the site of mass killings in 1982 by Christian militiamen sponsored by Israel), was a PLO guerrilla fighter who put for all those years put his trust in his Palestinian leaders but now he feels betrayed by Abbas’ abandonment of his ‘right of return’.  

Abbas was likely only being realistic on the right of return issue. But the al-Jazeera documents also show he had offered to surrender claims to parts of Jerusalem that had been settled by the Israelis. And that’s where he is really vulnerable on Arab Street. And the amount of delusionary thinking among Israel’s right wingers can be gauged from Avigdor Lieberman’s comment that (despite these concessions) the documents released by al-Jazeera show that “there’s no way for Israel to reach a comprehensive peace agreement with the Palestinian. (he is right of course, but due to Israeli-, rather than Palestinian, intransigence.  


    · US$100 oil, which OPEC blames on Western speculators, has enabled the Iranian regime  to contain domestic discontent & take the sting out of sanctions intended to put a squeeze on its domestic economy. While Washington says they are working, Simon Henderson of the Gulf and Energy Program at the Washington Institute says “A particular challenge for the United States is that rising oil prices undermine its policy on Iran”, citing US Department of Energy figures showing that Iran’s oil revenues during the first eleven months of 2010 were US$64BN, 17% higher than in all of 2009. According to Lexington, Mass.-based IHS Global Insight, with exports of over 2MM bbld. Iran needs an oil price of just US$60-70 to balance its budget. And as the holder of the rotating presidency of OPEC, Iran has done its best to talk up the price of oil, saying the world can cope with oil at this level & that there is no need to boost output (but is by no means alone in saying so).

    · Iran’s gasoline imports have all but come to a standstill as government-set prices last month rose seven-fold after President Ahmadinejad drove through what none of his predecessors had dared to, namely to cut subsidies on food, fuel & other necessities of life that had been costing the government US$100BN/year, without precipitating the social unrest some analysts had predicted. For according to Bill Farren-Price of Winchester, UK-based Petroleum Policy Intelligence “International sanctions are ... having the perverse result of allowing the government to push through austerity measures on fuel and food subsidies that were simply unthinkable in the last two decades.” 

Much of Iran’s oil ends up in China & India, both of whom have been conniving with Iran to find ways to pay it for its oil without breaching the restrictions on dealing with Iranian banks. 


    The day after Prime Minister Samit al-Rifai, following a number of smaller protests  against rising food prices, had announced wage increases for civil servants & the military, and pledged that, to cushion ordinary Jordanians from the rising cost of living, there would be no new taxes this year (thereby increasing the pressure on an already cash-strapped budget), thousands of Islamists & activists marched through the centre of Amman on January 21st calling for his resignation & protesting against soaring food prices & eroding living conditions (which they blame on corruption spawned by free market reforms). They want the government to roll back austerity steps such as the higher taxes imposed to repair the public finances that have been strained by the global financial crisis.  Among them were hundreds of members of Jordan’s Muslim Brotherhood, the country’s largest opposition group, who chanted “O people of Jordan, revolt against poverty and hunger” and “The government must leave”. 

Many Jordanians hold successive governments responsible for the prolonged recession & the rising public debt (that hit a record US$15BN this year in one of the Arab world’s smaller economies most heavily dependent on foreign aid). 


    · Protests against Mubarak’s 30-year rule extended into a third day on Thursday (January 27th), with promises of even bigger demonstrations of Friday, the Egyptian weekend. Interior Minister Habib al-Adli (whose resignation the protesters are demanding) dismissed the demonstrators saying “Egypt’s system is not marginal or frail. We are a big state, with an administration with popular support ... our country is stable and not shaken by such actions.”. On the other hand, Muhamed el-Baradei, former long-term head of the UN’s nuclear watchdog agency & a Nobel Peace Prize laureate, announced “I am going back to Cairo (from Vienna where he has been living) and back on the streets because, really, there is no choice.” He also said that many Egyptians would no longer tolerate Mubarak’s government for even a transitional period, & dismissed as “obviously bogus” claims that authoritarian regimes like Mubarak’s are the only bulwark  against Islamic extremism. Meanwhile, the US, which views Mubarak as a vital ally critical to Middle East peace has called for calm & urged him to make reforms to meet the protesters’ demands.     

Hilary Clinton called on the regime to meet the “legitimate needs” of the people. But it seems to have no answers other than violence (which so far has failed to scare off the demonstrators). While the latter are still a minority, they have proven remarkably determined & their activities resonate with many other Egyptians who have been hit by the rising food prices, especially bread, a staple of poor people’s diets. Things at one point got so tenuous that the regime found it necessary to “categorically deny” that President Mubarak’s family had left Egypt for points unknown (the problem with Clinton’s argument of course is that throughout history in similar political upheavals after a certain point concessions by the ruling clique merely whet the demonstrators appetite for more. While Mubarak may be able to keep his head above water in the short, it remains to be seen, & it is questionable, whether the situation in Egypt is salvageable for his regime and that his handing off the reins of power to his son will be as much a ‘done deal’ as expected only a few weeks ago.  


    · Prompted by soaring unemployment (and dwindling oil & water supplies), thousands of protesters at Sanaa University shouted “The people want a change of President.” One banner read “Enough playing around, enough corruption, look at the gap between poverty and wealth” (one-half its 23MM people live on less that US$2/day & one-third suffer from chronic hunger).

    · President Ali Abdullah Saleh, a key US ally in the war against a resurgent local branch of al-Qaeda, has ruled this impoverished state for 30 years. In response to recent events he has proposed constitutional amendments that would, among others, impose presidential term limits, & has promised salary increases for civil servants & the military. 

Such promises made under pressure in the face of public demonstrations more often than not prove counter-productive by encouraging, rather than mollifying, the demonstrators.



    · The expected 6% inflation rate has turned into 17%. Milk, a staple in much Indian cooking, in December was up 18% MoM & 24% YoY. Fuel prices have risen 8% in the last six months. And while vegetable prices are up significantly, onion prices have doubled in the past year (& onions, along with garlic & ginger, constitute the base of much Indian cuisine), sparking street protests & creating tension with Pakistan. It all started last fall when a fungus ruined the onion crop in Maharashtra state, the nation’s onion belt. But neither the government’s agricultural board (which was expecting a record crop) or the farmers picked up on this soon enough; so last year’s onion stocks were sold cheaply for export. But with no new crop, their price skyrocketed, prompting protests at the village level & angry tweets in this  Twitter-crazy country. So the government decided to import onions from Pakistan. But they were left to rot at the border, with each side blaming the other, officials exchanging angry words, & India in retribution halting the export of tomatoes to Pakistan (which got the flow of onions going again).        

Widespread popular beliefs hold that onions have healing properties, cool the body during the searing hot summers, & keep fungal infections away during the muggy monsoon season. 


    · On January 26th in Geneva Prime Minister Stephen Harper predicted that the US$40BN UN initiative on maternal care will create a “wave of hope” across the developing world. No one doubts that this initiative is urgently needed; for a woman’s lifetime risk of dying in pregnancy or during childbirth is one in 16 in Nigeria, vs. one in 5,600 in Canada.  But if recent history is any indication, the maternal health initiative is likely to give rise to yet another wave of fraud, theft, waste & organized crime that will rob the very people it is designed to help from the help they need so desperately. 

It’s relevant in this context that Germany has just cut off its financial support for the Global Fund  to Fight AIDS, Tuberculosis & Malaria because of the rampant corruption in its administration.  


  • A study published in the US-based journal Environmental Research Letters reported  Greenland’s three kilometre-thick ice sheet had shed a record amount of melted snow, twice the annual average over the previous three decades & surpassing the record set in 2007. According to lead researcher Marco Tedesco, Head of the Cryosphere Process Laboratory at the City College of New York, the total run-off was 530 gigatonnes (billions of tonnes), vs an average 274 during the period 1958-2009, & 285  from 1979-2009. While researchers don’t agree on how fast the ice pack is melting, they do agree that warmer temperatures are largely to blame for this phenomenon : over the last 40 years temperatures in the Arctic have risen, on average, 2x or 3x as fast as the global average, in Greenland summer temperatures have been 3 C above average, and Greenland’ capital, Nuuk, this year had the warmest spring & summer since records began to be kept in 1873. The study also said that melting in some areas occurred during as much as 50 more days than the average & that the area in which melting is taking place is growing at a rate of 17,000 kilometres/year.

The nightmare scenario, of course, is that, if Greenland’s ice sheet were to melt completely, it could raise ocean water levels by up to seven metres (23 feet), with dire consequences for many coastal regions & major cities.

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