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

March 24th, 2011

Two amber-flashing lights on the US inflation front : the velocity of money has started to accelerate & US airline fares are up 18% YoY. 

At the recent session of China’s National People’s Congress Prime Minister Wen Jiabao told those assembled China’s development is neither balanced, coordinated or sustainable. He said its economy is overly dependent on investment & swallowing natural resources, and insufficiently driven by consumer spending. And that there are too many imbalances, between profits & wages, rich & poor, coastal- & inland regions, and urban & rural, and state-owned banks lend too much too cheaply & too easily to SOEs (state-owned enterprises),  and too little to smaller companies. . 

One observer in the Middle East recently noted that “the demonstrations in Syria are a potential milestone. For it’s for the Levant what Egypt is to the Arab world as a whole, a lynchpin country that influences all countries around it.” 

The New York Times’ Nicholas A. Kristoff made an interesting point when he said that, despite the growing controversy in the US about its involvement in enforcing the Libyan no-fly zone, “this looks less like Iraq in 2003 than like Kuwait in 1991.” (If only because in 1991 & today the US had a President who had a different perspective on violence than the gun-slinging incumbent in 2003). 

At last report there were now over 6,000 farmers’ markets in the US, about half as many as there are McDonald’s, except that they multiplying much faster. Urban farming is on the rise, green roofs are growing in popularity, as is the old-fashioned ‘canning’ of fruit & vegetables (and even things like stew, municipal governments are relaxing restrictions on things like keeping chickens & bees and there are even some who believe that farming is becoming “hip”. The food pendulum is starting to swing back!    

It looks like Canada is heading into another federal election, the optimum outcome of which would be another minority Conservative government which hopefully would result in Mr. Harper personally falling victim, like a California petty criminal, to a “Three times & you’re out” rule. While the quality of government/politics at the federal level in Canada has been going downhill for years, on his watch it has sunk to new lows in terms of nastiness, anal behaviour, secretiveness & undue concentration of power in the Prime Minister’s Office. But what was most distressing to hear was that in a CBC interview with three Ottawa voters all of them discarded charges levied against his government of corruption & contempt of Parliament as being irrelevant to their decision whom to vote for since their attitude was ‘all politicians are the same & all politicians do it if given the opportunity’. And it’s amazing that the Liberals have been so inept as failing to capitalize on the opportunity presented to them by Conservative claims that what they aren’t doing is no different than what the Liberals did in the Quebec sponsorship scandal a decade or so ago, by thundering (a la Mulroney in his famous 1984 TV debate with John Turner that proved the turning point in that election) “You’re absolutely right, that’s why we were turfed out of office and now, sir, it’s your turn to meet the same fate!” But the truly sad part is that there seem to be few, if any, people, in any of the three national parties of Prime Ministerial timber, and few, if any, with more interest in scoring points, and often low blows, than in getting the system to operate in a better & more responsible manner; in that aspect Canada is becoming like a Latin American banana republic of the 1960's , when elections were contests between the “ins” that wanted to stay in & the “outs” that wanted to get in, without much attention being paid to the common good.      


                                                              GLEANINGS VERSION II  

No. 402 - March 24th, 2011 


  • Western nuclear experts are now worrying about another possible problem : salt buildup. For as the sea water pumped in boiled away, its salt content stayed. Richard T. Leakey Jr., GE’s Chief of Safety Research for Boiling Water Reactors when GE installed them at Fukushima, estimates that 57,000 lbs. of salt has accumulated in the No. 1 reactor, and 99,000 lbs. in each of the larger No. 2 & No. 3 units. If this salt were to coat the fuel rods (a problem of long standing, even with fresh water), it would insulate them from the cooling water, causing them to heat up, their zirconium cladding to ignite & their uranium centers to melt, possibly leading to the release of radio-active material.
  • Quite ironically, after TEPCO & government officials during the morning of March 23rd had expressed optimism things were getting closer to being gotten under control, later that day the No. 3 unit, one of the more dangerous ones since it is fueled by a uranium/plutonium mix that will produce a more dangerous radioactive ‘plume’ if scattered by fire or an explosion, began belching black smoke, prompting TEPCO to evacuate its crew, while at the No. 5 unit, that had automatically shut down when the earthquake hit & had so far presented no problems, the cooling tower quit working.

One problem is that the work crews’ effectiveness is reduced by having to go about their business in heavy, clumsy radiation-protective suits & can work for only limited periods of time. And another that, with the focus on dealing with the problems at hand, there is limited scope for doing anything much but fighting symptoms, rather than causes.  


  • The crisis in Japan has laid bare an ever-growing problem for the US, the piling up of radioactive waste at commercial nuclear reactor sites. There now are 71,862 tons of it on US soil, growing by 2,200 tons annually, that will be a dangerous for thousands of years (while once the Department of Energy used to make public the amounts of spent nuclear fuel in storage, it doesn’t anymore & AP had to assemble these numbers on its own). Plans to store it inside Nevada’s Yucca Mountain have been abandoned although approved by Congress in 2002; funding was withdrawn in 2009 after US$9BN had been spent on it & the NRC recently withdrew its application. And even it had been built, it would now have been full to overflowing; for its capacity was 69,444 tons of commercial- & 7.716 tons of military waste. Meanwhile, 75% of the spent fuel rods is stored in cooling pools at the reactor sites, just as at Fukushima where this caused problems, with some holding up to 4x the amount of radioactive waste they were designed for (& the more tightly spent fuel rods are packed in these pools, the greater the risk of them overheating). The remaining 25% is stored outside on concrete pads in multi-walled “casks” 20' tall & weighing 190,000 lbs each, paid for by tax payers, each of which is licensed for 20 years subject to renewal(s), with assurances they are designed to have a useful life “in excess of 100 years”. Of the total 12.9% is located in Illinois, 9% in Pennsylvania, 6% in South Carolina & 5.3% in each of New York & North Carolina.

Other countries (incl. France, Japan, Russia & the UK) reprocess spent fuel into new nuclear fuel. While this can only be done once & produces plutonium, it cuts storage needs by 75%. 


  • In February they dropped for the third month in a row, to an annual rate of 250,000, one-third of what economists deem ‘healthy’. And in 2010, after five years of declines, sales of new homes were only 323,000 (while in 1963, when the US had 190MM fewer people, there had been 560,000). There are 183,000 new homes on the market (an 8.7 months’ supply, 3x the that when the market was at its peak). Although the  median price of new homes continues to slip, now to US$202,000 - an eight year low, the price spread between “new” & “previously-owned” homes is twice the ‘norm’, prompting buyers to go “used”, especially if they can latch onto a foreclosure or ‘short sale’.

Another problem putting a damper on the new home market is that people who normally would be ‘upgrading’ cannot sell their current homes at an acceptable price &, even if they can, run into lenders applying tougher credit standards & demanding bigger downpayments.  


  • Starting in late April Fed Chairman Ben Bernanke, for the first time in its nearly century-old history, will start holding regular media briefings on monetary policy, & thereafter will do so four times a year to coincide with his staff’s quarterly economic update.

This is not a novel idea; other major central banks, incl. the ECB & the Bank of England, have long been doing something similar. And while the official reason given is to create greater transparency, cynics think it may have more to do with an attempt to “spin the news”   


  • Goldman CEO Lloyd Blankfein was a witness for the prosecution on March 23rd in the insider trading case against Galleon Group founder Raj Rajaratnam on charges he had made US$45MM in ‘illegal profits’. One of his alleged sources was Rajat Gupta, a Director of Goldman Sachs in 2008. Asked by a prosecutor if one item that Mr. Gupta allegedly leaked in September 2008, that Warren Buffett was about to invest US$5BN in Goldman Sachs, “Was big news or small news?”, he replied “Big news.”

Big news indeed. Buffett made this investment at the time of the Lehman bankruptcy when Goldman had a huge derivatives’ counterpart exposure to AIG which then had one foot in the grave & the other on a banana pool, until rescued at great expense by Washington - which to this day owns 80% of AIG -, thereby indirectly bailing out Goldman, the company Treasury Secretary Hank Paulson had previously headed. So his investment was akin to the Good Housekeeping Seal of Approval. But he extracted his pound of flesh, a big, fat 10% coupon on US$5BN in preferred shares that he says has since generated income at a rate of $15 per second.  But what an odd marriage of convenience between the King of Long-Term Value Investors with his almost Puritan attitude to life & the Wall Street firm that best personifies its single-minded, self-serving ‘smash & grab’ mentality. Goldman is now planning to call these high-cost preferreds, so Buffett, prior to leaving on a business trip to Asia told reporters jokingly, “I’m going to be the Osama bin Laden of capitalism. I’m going to an unknown destination in Asia where I’m going to look for a cave ... If the U.S. Armed forces can’t find Osama in ten years, let Goldman Sachs try to find me.”      


  • tracks airline ticket prices. It says YTD US airlines have raised fares 6x, vs. 3x in all of last year. And Bing Travel says tickets for travel in late May through early June are up 18% YoY. And some have been very volatile; thus a roundtrip for travel in mid-March from Seattle to London on United Airlines was priced at US$718 on February 15th, jumped 35% to US$966 on February 19th, later in the month dropped back to US$722 but by March 13th was back up to US$976. The CEO of says fares are on a trajectory similar to 2008 when the airlines raised them 5x by early March, after which they sought to boost them by US$10 a week.

The experts are divided on whether it would be best to buy now before fares go still higher, or wait in the hope airlines will find themselves with empty seats & offer bargains later on.



  • Worried about the fragile recovery & their own political wellbeing, politicians seem to be moving towards agreement on how much to cut from federal spending during this year (that ends September 30th) once House Budget Committee Chairman Paul Ryan (R.-Wisc) unveils his plans for cuts for the next fiscal year. The latest short-term federal funding deal expires on April 8th & neither party is anxious to risk the political fallout from a government shut down if no deal is done & no further short-term accommodation were forthcoming. In recent weeks Congress & the President have agreed to US$10BN in cuts &, while the Republicans still push for US$50BN more, they would likely feel able to declare victory if they could get half that. House Speaker John Boehner is already taking credit for the Republicans having managed to slow down spending, saying “When was the last time you saw the government here in Washington cut anything?”

Despite the latest CBO’s deficit forecast for this year being US$1.48TR, up 40% from its last forecast, the Republicans must have noted Sarah Palin’s approval rating dropping precipitously, & her “strongly unfavourable” rating skyrocketing, among Republicans. 


  • He was reported, on March 21st during a visit to Moscow, to have urged Foreign Minister Sergei Lavrov to pressure Israel to end the escalation of the air strikes on Gaza. He  criticized Netanyahu for his comments on a possible Fatah/Hamas reconciliation, saying that “Israel had no right to object to Palestinian reconciliation” (during a speech in the Knesset on March 15th, Netanyahu said  Abbas had to choose between peace with Israel & peace with Hamas), noting that in the past Netanyahu had often complained to the US that he “couldn’t negotiate with divided Palestinians.”


Moscow typically schedules Abbas & Netanyahu visits close together. So Abbas had barely left Moscow before Netanyahu arrived just  a day or two after Abbas had presided over the official renaming of several Moscow streets & public squares after Palestinian terrorists. And according to the Voice of Russia Kremlin aide Sergei Prikhodko had said Israel could freeze the construction of Jewish homes in the occupied Arab lands (!!!) following mass unrest and revolutionary upheavals in the Middle East and Africa.” 



  • Following the explosion of a bomb near a bus stop in Jerusalem in the afternoon of March 23rd that killed one person & wounded dozens, he delayed his departure for Moscow for a few hours to meet with his military & security advisers, and afterwards declared “They are trying to test our will and our determination, and they will discover that this government and the army and the Israeli people have an iron will to defend the country ... Israel will act aggressively, responsibly and wisely to preserve the security that has prevailed here over the past two years.”
  • While every militant Palestinian faction has denied involvement, one Islamic Jihad leader said a Palestinian attack would be a “natural response” to this week’s Israeli strikes in Gaza (the latest one, the day before, had killed 8, incl. a family with two children). 

This latest series of escalating tit-for-tat revenge initiatives seems to have started with the brutal murder earlier this month of a five member Israeli settler family (that lived in Itamar near Nablus, a settlement illegal even by Israeli standards). This prompted the Netanyahu government to announce approval of 400 more housing units, as well as & several “Days of Rage” by  settlers (that supposedly included two Palestinian children on foot being deliberately run down by Israeli drivers) despite rumours the killings were due to a pay dispute with Thai labourers. This was not a suicide bombing but a case of a suitcase containing an estimated 4 lbs. of explosives being left near a bus stop [suggesting the possibility of it being not an organized terrorist event but an act of revenge by one (or more) individual(s)]. It also suggests that after a long period of quiet the Israeli security apparatus had let its guard down. During an interview with CNN’s Piers Morgan on March 19th Prime Minister Netanyahu, who has always demanded the Palestinians come to the peace negotiations without pre-conditions, seemed to have pre-conditions of his own; for he dismissed criticism of the 400 housing unit decision by saying they will be built in settlements that will ‘remain part of Israel under any peace agreement’ & that of the possibility of a renewed division of Jerusalem. 


  • He did so on March 22nd when the opposition again rejected his earlier offer to step down at year end. Meanwhile, in the capital city of Sanaa tanks from a unit commanded by his son (whom he had been grooming to succeed him) protected the Presidential palace & other tanks from disaffected army units the tens of thousands of protesters demanding his ouster. The defection, the day before, of a regime insider commanding Yemen’s First Armoured Division is seen as likely the beginning of the end for his 32-year rule; this was reinforced when that same day the colonel commanding a key air base in the western Red Sea coastal city of Hodeida, a member of the President’s own clan, declared for the opposition. The only question remaining is whether there will be a relatively peaceful transition as in Egypt (although nobody knows to what), or whether Saleh will take a leaf out of Qadaffi’s book & launch a bloody, to-the-last-man fight.


NorthYemen gained independence from the Ottoman Empire in 1918 whereas South Yemen was a British colony until 1967. The two joined in 1990 to become one of the poorest of Arab nations. Its population is young & unemployment sky high, feeding tribal differences & the South’s resentment about having to share its oil wealth (although the latter soon won’t matter since its oil & gas production has been declining for years & its reserves are expected to run out within ten years without leaving the country much to show for it). Like Mubarrak, Saleh was long propped by US dollars (& in his case also by the multi-national agencies), but like another former US ally, Pakistan’s former dictator Musharraf, he did little to deal with local anti-America elements.  


  • Bombs (& earthquakes) make better headlines than bonds. So with so much going on elsewhere, it has hardly been noticed that the Eurozone countries have been busy stoking the crisis machine. On Tuesday the yields on Greek-, Irish- & Portuguese bonds skyrocketed, suggesting the market thinks defaults are likely. And that same day Ireland’s Allied Irish Bank had to deny rumours it would miss a bond payment (which, since it is a ward of the Irish state, would have amounted to a souvereign default). Then to top it all, on Wednesday Portugal’s Prime Minister resigned, all but guaranteeing a bailout of that country. The EU is accelerating the euro zone’s debt crisis by insisting that under the ESM (European Stability Mechanism), the permanent souvereign bailout mechanism to be launched in mid-2013, bond holders will be made to “take a haircut”. So on Tuesday the yield on three-years bonds of Portugal, Ireland & Greece rose to 7.25%, 10.50% & 16.40% respectively. And the market for credit default swaps implies a risk of default for Ireland of 40% within five years (vs 30% one month ago), for Portugal of 36% & for Greece of 57%.
  • The ESM’s haircut provision has driven up yields. But the 90BN Euro bailout of Ireland was absurd since it kept bond holders whole while whacking the Irish tax payers. These three countries will have to restructure their debt; for their economies are too uncompetitive, their deficits too big & their debt loads too high. The EU’s insistence bond holders take some losses is morally, economically & financially correct. All the EU did this week was to accelerate the day of reckoning.

From the outset, especially in Ireland’s case, this has been all about saving European, especially German & France, banks from the consequences of their own follies.     

SURPRISE U.K.TAX HITS OIL FIRMS (G&M, Nathan Vanderklippe) 

  • On March 23rd the UK government announced it will start levying a new windfall tax on oil companies’ revenues that will bring in £2.0BN (US$3.2BN) & at the same time will cut the tax on gasoline by a penny. Chancellor of the Exchequer George Osborne said that this will “put fuel in the tank of the economy.”

This won’t be the last raid by a cash-strapped government on oil company treasuries. But the writer didn’t get his facts right. For the Budget raised the tax on oil & gas production from 50% to 62% (thereby doubling its take in less than 10 years) to fund a 6 pence (almost 10¢) drop in its fuel duty. UK drivers have been hammered by high  gasoline prices : back in November 2008 they paid 93 p. (US$1.50) for a litre of gasoline (US$5.67 per US gallon) of which 64.17 p. (US$1.03) was tax, while earlier this month they were paying 111.89 pence (US$ 1.90 per litre/US$7.18 per gallon) of which 72.85 p. (US$1.17) was tax.  As one analyst noted, at these prices it is surprising anybody still drives (so by collecting from the oil companies, rather than at the pump, the government is eliminating the downside revenue of high gasoline prices causing people to drive less.  


  • On March 23rd, the day after Prime Minister Jose Socrates announced a deal to boost competitiveness with employers & some unions by cutting redundancy pay, Portugal’s Parliament is to vote on the government’s latest austerity package of budget cuts, freezes on pensions & tax increases, the day before an EU Summit to beef up the EFSF (European Financial Stability Fund). While the Prime Minister is threatening to resign if it isn’t passed the main opposition Social Democratic Party is talking about a snap election. This will complicate efforts to avoid being forced to go the bailout route, like Greece & Ireland.

In the event Parliament rejected the package with all five opposition parties voting against it, since “it hurt the poor”, the Prime Minister resigned saying “ every opposition party rejected the measures proposed to prevent that Portugal resort to external aid” & the EU Summit deferred a final, final decision on the EFSF until June. After the Portuguese Parliament’s decision the yield on its ten-year bonds rose to 7.71%, a level which the government had earlier called “unsustainable”, making it all but inevitable it will have to seek an 80BN (US$114BN) bailout package (which will all but exhaust the funding available to the EFSF since the remainder of its asset base consists of obligations of the very governments it has been bailing out). 

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