A gold bull whom I respect
because he thinks for himself & has made money doing it, suggested
in a recent radio interview that people may be looking at the gold price
through the wrong end of the telescope; for it may be less a matter
of the value of gold going up than that of paper money going down.
As to oil, here are some
things to consider. In the past year Nigeria ramped up its oil output
by 14.2%; but it is having elections in April & election campaigns
in that country traditionally have been accompanied by rising sabotage
of oil industry installations. The IEA forecasts 2009 oil consumption
of 89.1MM bbld (up 1.6%), & the EIA of 89.0 bbld, but global oil
output is expected to be only 88.1MM bbld. Growing numbers of analysts
believe OPEC’s much-vaunted ‘excess capacity’ is a figment of
someone’s imagination, especially since most OPEC producers have already
been cheating & producing more than they are supposed to (which
makes Libya’s 1.7MM bbld, 75% of it exported, that much more important).
Few people realize that 70% of the daily global oil demand is met by
production from fields discovered 40 or more years ago, i.e. fields
that are well into their second half life) & that, while 40 years
ago over half the world’s oil reserves were controlled by Western
oil companies, today that has shrunk to just 6%. Longer term, it is
worth remembering that in 1978, prior to the Iranian Revolution, Iran
produced 5.2MM bbld but that in the immediate aftermath thereof it cratered
to 1.3 bbld (although it is back up to 4MM bbld albeit slipping again).
Ditto for Venezuela : before Chavez took over it produced 3MM bbld.,
this slid to 1MM bbld & today it is struggling to maintain 2.2MM
bbld. And Iraq produced 2.8MM bbld in 2003 which dipped to, or below,
2.0MM bbld in the aftermath of GW II, although it is now back up to
2.7MM bbld. The reasons are always the same : foreign workers &
foreign oil companies depart, depriving the countries of critical expertise,
& governments strip out so much of the state-owned oil companies’
cash flow to support their budgetary activities that not enough is left
for maintenance and exploration & development.
I listened this week
to an analysis of the North African/Middle East situation by the founder
of STRATFOR, a US-based global intelligence shop. It can be summarized
as follows : 1) forget about North Africa : in geopolitical terms it
is a by-play; what we saw in Tunisia & Egypt was basically a dust-up
in the establishment about the dictators’ plans to have their son-in-law
& son succeed them & 2) the real geopolitical power play is
unfolding in the Persian Gulf where Iran is using Bahrain’s Shiite
population & will try to use Saudi Arabia’s Shiite minority (that
is concentrated in its Northeastern oil producing region), and its relationship
with a sympathetic Iraqi government once the Americans finish pulling
out at the end of this year, to further its plans to become the dominant
force in the region. According to a friend of mine, who has had much
first hand experience in the region, events in Bahrain could prove to
be a ‘major inflexion point in the history of the region, as Archduke’s
Ferdinand’s assassination was for Europe’. But Iran’s timing,
last December, for cutting its fuel- & food subsidies (thus ending
a US$70BN drag on its budget) may have been bad; for local fuel
prices have quadrupled & food prices more than doubled, resulting
in a 70% inflation rate (the question, however, is what it will do with
that US$70BN : the higher fuel prices will hit the upper half of its
social structure hardest, while the money it has freed up could buy
a lot of favour with the lower half and/or fund a significant expansion
of its popular unrest-repressing capability).
The degree of thievery
by the Qadaffi clan can be gauged from the fact that, while Libya’s
per capita GDP in the past five or six years doubled to about
US$14,000, 60% of its hoi polloi must survive on less than US$1.25/day.
A while ago the Economist
had a feature on Brazilian agriculture. It noted that it is using only
50MM of its 400MM hectares of potential farm land outside the Amazon
rainforest. It pointed out that the value of its farm output quadrupled
between 1996 & 2006 with relatively low levels of farm subsidies
(they account for only 5.7% of Brazilian farm incomes vs. 12%, 26% &
29% for the US, the OECD & the EU). It said it now has a 40%
share of the global soybean trade, second only to the US, but has come
in relatively few years from 14% to 85% of US soybean exports, &
that it now accounts for 80% of global orange juice-, and 40% of global
sugar- & poultry-, exports, and is the world’s largest exporter
of sugar & ethanol. With < 200MM people, it has as much renewable
water resources as all of Asia with 20x that many people, its driest
region in the Northeast gets more rainfall than the US corn belt, it
has 25% of the world’s farm land with an annual rainfall > 975
mm/38 inches, its annual renewable fresh water supplies are tops in
the world, greater than the Nos 2 & 3, Russia & Canada, combined
& its per capita water availability is 5x the global average.
This peaked my curiosity.
So here are some other things I have found out since. 48% of Brazilian
households have a computer, vs. 76%, 25% & 13% in the US, India
& China. It has a literacy rate of 91%, on a par with China but
well ahead of India’s 61%. It has a total dependency ratio (children
14 years & under plus those 65 & over relative to the total
work force) of 33.1% vs. 35.7% for India & 36.2% for China (low
dependency ratios are conducive to fast GDP growth) even though these
numbers may not give a true picture of what the future holds; for China’s
ratio will start sky rocketing by as early as 2013 to 65% by mid-century
while the total dependency ratios of Brazil & India will stay relatively
stable for some time, or may even decline (their populations’ median
age is much lower than China’s, - 24.9 years & 28.9 years respectively
vs. 35.2 years).
Going forward, only three
things will really matter : water, food & fuel. Brazil has ample
water, albeit not always in the right places. Its farm sector has the
potential to become the global food export power house. With
an 8 : 1 energy efficiency ratio (i.e. it contains 8x the energy
it took to produce it) sugar cane-based ethanol has a huge competitive
edge over of the 1.5 : 1, or less, of grain-based ethanol. It has discovered
vast amounts of oil offshore around which it appears intent to build
a world class offshore oil industry; while at record ocean depths beneath
a geological structure that makes this oil difficult & costly to
access & produce, this may in the long run prove a blessing by requiring
unparalleled offshore drilling technology. Add to that a diversified
resource base & companies like Vale, that since its privatization
in 1997 has turned itself from a sleepy state-owned diversified company
into the world’s second-largest mining company with operations on
six continents, and we may have been underestimating the “B” in
BRIC.
In September 2010 the
Dutch Actuarial Society issued new ‘longevity tables’. Three months
later Holland’s Philips Electronics, Europe’s largest investment
grade company, warned that, given the now longer life expectancies of
its pensioners, it might not be possible, next April, to adjust their
pensions to compensate for inflation, since doing so would drop its
pension fund’s asset/liability ratio below the 106% threshold set
by the central bank, the country’s pension fund regulator. Recently
pensioners got the bad news : there will indeed be no indexing for 2011
(which in this case is of an ‘ex gratia’ nature, awarded, or withheld,
annually at the Board’s discretion).
GLEANINGS VERSION
II
No. 400 - March
10th, 2011
WORLD FOOD PRICES
HIT RECORD (EJ, Business Browser)
· For the second
month in a row the FAO’s Food Price Index hit a record in February.
And FAO economist Abdolreza Abbassian says food prices will likely to
stay close to current highs until the condition of the new crops is
known, adding that the higher oil price will also impact on grain markets
which have already seen its benchmark US wheat price jump 60% in the
past year. And the UN warned on March 3rd that the oil price spikes,
& stockpiling by importing countries trying to head off popular
unrest, will also affect volatile cereal markets .
Higher food prices
= more potential for social unrest outside the developed world.
INFLATION HEATING
UP (G&M)
· The most recent
annual rates are : Argentina 10.6%, Russia 9.6%, India 9.3%, Brazil
5.99%, China 4.9%, South Korea 4.5%, the UK 4%, Poland 3.8%, Australia
2.7%, Sweden 2.5%, Italy 2.4%, Canada 2.3%, Germany 2%, France 1.8%
& the US 1.6%.
And the way food-
& oil prices are going, you likely
ain’t seen nothing yet.
“NO WAY” OUT
OF DEBT TRAP, GROSS SAYS : U.S. LIVING STANDARDS DOOMED TO FALL
(Yahoo Finance Tech Ticker, Stacy Curtin)
• US states face
a US$125BN shortfall in fiscal 2012, & Congress one 10x that size
(a conservative estimate?). Pimco’s Bill Gross says that if the US
were a company no one in his right mind would lend it any money &
that for the past decade “we’ve been relying on the kindness of
strangers” to help us cover our debts. He sees two options : keep
spending or balance the Budget by cutting entitlements (while the Democrats
& Republicans feud about how much & where to cut spending from
only a tiny part of the Budget, neither is serious about reforming entitlements
which account for one-third of the Budget). Under Option 1 foreigners
will lose faith in the US dollar causing it to weaken further causing
foreign goods to become more costly & all Americans’ standards
of living to drop. And under Option 2 also many Americans, the older
& disadvantaged, will experience a drop in their standard of living.
He says “There’s really no way out of this trap” & advises
investors to stay clear of “bonds in dollar-denominated terms”,
and to be “wary of high interest rates going forward.”
So the
issue as defined by Gross is whether the burden of adjustment will be
shared by all or ‘offloaded’ onto those least able to defend themselves.
Meanwhile, in Washington pressures are building for a QE3 program to
“avoid the US economy being dragged down by the high cost of gasoline”;
if so, this will bring the day one step closer to the world realizing
that the US Treasury now operates a gigantic Ponzi scheme rather than
a debt management program (the definition thereof being
“an investment fraud that involves the payment of purported returns
to existing investors from funds contributed by new investors”
- the latter in this case being future generations of taxpayers).
EMPIRE AT THE END
OF DECADENCE (NYT, Charles M. Blow)
• We should quit lying to ourselves
about our country. It is great in many ways but In others it has become
the laggard in the industrial world, something hard to accept for Americans
who prefer to bathe in platitudes about its grandeur. The draconian
budget cuts the Republicans are seeking to make in the tiny vein of
non-security (& non-entitlement?) spending would prove devastating
to the poor & the working class : at the very time they are trying
to get out of a very deep hole, the Republicans would simply throw more
dirt on top of them. Financing for education & social services isn’t
about handouts but about building infrastructure for the future and,
with one of President Obama’s new catch phrases being “win the future”,
we can’t do so by ceding the present & romanticizing the past.
- Of nine criteria surveyed
by the IMF among the 34 OECD members, America was among the “worst
of the worst” in four (income inequality, food security – have you,
at some point in the past 12 months, been without enough money to buy
food for you & your family?” -, prison population & PISA achievement
in Math tests), just bad in two (unemployment & life expectancy
at birth), average for the other three (level of democracy, the Gallup
Poll Wellbeing Index & PISA achievement in Science), and above average
in none.
The problem with well-intentioned
types as Blow is that they don’t appreciate that, as one respected
European intelligence shop recently put it,
“It is naive to try and solve a crisis with the same means that caused
it, i.e. an expansive monetary policy.
IF IT’S SOLVENT
UNTIL 2037, WHY PICK ON SOCIAL SECURITY?
(msnbc.com, Tom Curry)
• A bipartisan group
of six Senators, led by Sens. Mark Warner (D.-Va) & Saxby Chambliss
(R.- Ga), is struggling to keep alive the recommendations of President
Obama’s bi-partisan Commission on Fiscal Responsibility (that he has
since distanced himself from). It recommended slowing the growth of
future SS retirement benefits, particularly for higher earners, increasing
taxes on higher earners, & raising the eligibility age for collecting
benefits. But the skeptics say “Why pick on SS now since it is solvent
until 2037 … it has $2.6TR in reserves ... and that $2.6TR doesn’t
add to the deficit”.
The flaw in the latters’
argument, appealing as it might be to the hoi polloi & the willfully
uninformed who are disinclined to look beyond the end of their noses,
is that those reserves are invested in UST securities. So when they
are cashed in (which is now expected to start happening later this decade),
they will boost the Treasury’s borrowing requirements (and
to make matters worse there are growing numbers of forecasts that put
the time the system will become insolvent
much closer to the present than 2037).
THE CASE FOR A
NO-FLYZONE (NYT, Nicholas D. Kristof)
- General Merrill McPeak is
a former Air Force Chief of Staff who was involved in overseeing the
operation of the no-fly zones over (the Kurdish part of) Iraq and, prior
to that, Serbia. He is mystified by all the hand-wringing in Washington
over a no-fly zone over Libya, saying “ I can’t imagine an easier
military problem ... If we can’t impose a no-fly zone over not even
a third rate military power like Libya, then we ought to take a hell
of a lot out of our military budget and spend it on something usable.”
He also doubts the need to maintain 24/7 surveillance on the grounds
that, if Libyan pilots knew there was a risk of interception they would
be less motivated to drop bombs & more inclined to defect. He also
believes US Air Force aircraft should be used to jam Libyan military
communications. And while he acknowledges that at a time like this it’s
a good thing to have a President who counts to 10, he hopes “he won’t
count to a googleplex” (whatever that might be).
Meanwhile, NATO has
taken ‘decisive action’ in support of a no-fly zone, but only if
approved by the UN, full well knowing that both China & Russia oppose
the idea. So this is nothing but cheap posturing. And as far as the
deployment of America’s military resources, the burden of enforcing
a no-fly zone would fall on the two branches of the US Armed forces
that have either been lightly used in Iraq & Afghanistan (the Air
Force) or not at all (the Navy).
DISCORD GROWS IN
WASHINGTON OVER POSSIBLE LIBYA INTERVENTION (NYT, David Sangster
& Tom Shanker)
- The President worries about
the US being seen as again meddling in the Middle East & keeps reminding
his staff “the best revolutions are completely organic.”
- Some in Congress, & even
in the Administration, argue he’s moving too slowly, contend there
is too much concern about perceptions & say a military already caught
up in two wars is exaggerating the risk & difficulty of a
no-fly zone.
- The military is skeptical
of humanitarian gestures that put the lives of its troops at risk for
a “cause of the moment” which it deems of only marginal national
interest.
- Sen. John Kerry (D.-Mass),
who chairs the Senate Foreign Relations Committee & who is one of
the President’s closest allies, warns of repeating the mistakes made
in the Kurdish part of Iraq, in Rwanda & in Serbia, that of failing
to step in to avoid a massacre. And he worries about what he calls “The
Spectre of Iraq 1991” when Bush 41 “urged the Shiites to rise up
and, when they did, was nowhere to be seen.”
- The most vocal camp is led
by Sens John McCain (R.-Ariz) & Joseph Lieberman (Ind.-Conn) who
say that establishing a no-fly zone is justified because the rebel leaders
have asked for it, with the latter arguing in a media interview on March
7th that doing so would not be a matter of imposing the American
will on the Muslim world. And while some say that the best outcome would
be an international effort involving NATO, the Arab League and/or the
AU, Lieberman et. al. argue that the risk of waiting far exceeds that
of early decisive military intervention, while conceding that Libya’s
future is far from clear if Qadaffi is overthrown.
This is a time when
democracy has it drawbacks. It tends to talk
issues to death (in the hope they will go away- which
they seldom do?), and when having a dictatorship has its advantages
: thus while various Western nations diddled & doodled about getting
a few hundred of their citizens out of Libya, China got 35,000
of its citizens out in a week!
WITH SENATE SET
TO VOTE ON COMPETING BUDGET BILLS, MANCHIN RIPS OBAMA (NBC, Ken
Strickland)
• The Senate was
expected to vote March 8th on two budget-cutting bills, neither of which
were expected to get the 60 votes needed to pass. The Republican bill
would cut US$60BN from the current spending basis & the Democratic
one US$6BN. Sen. Joe Manchin D.-WV), up for re-election in 2012, announced
he would vote against both on the grounds that “the latter doesn’t
go far enough” & the former ”blindly hacks the budget with no
sense of our priorities or our values as a nation.” And he believes
nothing serious will happen about the Budget until the President himself
gets involved in the necessary “tough negotiations”.
On the
Budget most, if not all, lawmakers are sleepwalking, and the Republicans
& Democrats like “ships passing in the night.” The only thing
that will change that is a Titanic-like event. And Obama’s remark
on Saturday March 5th that ‘spending cuts to narrow the US Budget
deficit must not be politically motivated or threaten the economy as
it climbs out of recession” suggest he is prepared to engage in a
game of chicken with both lawmakers & the rest of the world. If
so, he will likely come out second best
since he lacks the ‘killer instinct’ needed to be successful in
such an endeavour.
UNDERWATER MORTGAGES
IN U.S. RISE (Third Age.com, Janis Esch)
• California-based
CoreLogic reported on March 8th that they rose sharply in the Fourth
Quarter to 23.1% of all homes with mortgages, up from 22.5% in the Third
Quarter. This broke a three quarter-long decline in underwater mortgages
(which had been driven by more homes going into foreclosure). In Nevada
two-thirds of all homes with mortgages are underwater and in Arizona,
California, Florida & Michigan up to 50%. On the other hand, in
Oklahoma it was only 5.8%.
Part of the higher
underwater rate was due to house prices in 11 of the US’ 20 major
metropolitan areas hitting their lowest point since real estate started
heading South.
POLICE FLOOD SAUDI
CAPITAL, PREVENTING PROTESTS (AP, Hassan Ammar)
• Hundreds of police
were deployed in Riyadh on March 11th to prevent demonstrations, inspired
by the wave of unrest sweeping across the Arab world, calling for democratic
reform. But midday no protesters had shown up. This came the day after
violence had erupted in the country’s East where police had opened
fire to disperse demonstrators in the mostly Shiite city of Qatif. Officials
said later that security measures around Saudi Aramco’s headquarters
in Dharan & its various facilities in the Eastern part of the country
had been beefed up.
• Shiites account
for one-tenth of Saudi Arabia’s 23MM people. Most of them live in
the country’s main oil producing region in the East and have long
complained about being discriminated against & shut out from senior
positions in government & the military, and about not getting their
fair share of the country’s oil wealth.
They and just about
every Saudi, Sunni or Shiite, outside the Royal Family;
that’s why the government recently threw US$34BN of freebies at them.
TAIWAN’S COMMONSENSE
CONSENSUS (Economist)
· Exchanges between
China & Taiwan have been booming for over 20 years. China &
Hongkong now take over 40% of Taiwan’s exports & the latter recently
reported a 2010 surplus on bilateral trade with the former of US$70+BN.
Taiwanese businessmen have invested at least US$90BN in China &
800,000 Taiwanese now live in China. Beijing’s hope was that such
economic interdependence would win hearts & minds. But it hasn’t
worked out that way. In the November local elections the pro-independence
party won more votes than the one more congenial to Beijing. And polls
show that support for unification, at 1.2%, is now as low as it has
ever been & that support for “the status quo now/unification later”
has flatlined at 17.6%, while support for independence now or later
has risen from 30.5% to 35.5%. The increased contacts appear to have
made the Taiwanese aware of how lucky they are to be prosperous &
free.
The pro-independence
party accuses the others of being Chinese stooges wanting to lead Taiwan
blind-folded towards absorption, while the latter accuse the former
of risking a Chinese invasion if the country moved towards independence
(thereby suggesting that they too prefer the status quo & don’t
want to put it at risk). In its planning
Beijing overlooked the fact that, human nature being what it is, people
usually can see no reason ‘to buy the cow, if they can get the milk
through the fence”
