On the supply side of
the UST market the US Treasury is pushing new paper out the door at
an unprecedented rate. But on the demand side, among the world’s biggest
holders of UST securities China has aggressively been seeking to convert
US dollars in its FX reserves into other monetary, or ‘hard’, assets,
Japan after the earthquake cum tsunami will more likely become a net
seller, not a net buyer, the manager of the world’s biggest bond fund
is broadcasting he has sold off his UST security holdings & is shorting
the UST market, & the central banks of the developing world
(incl. China’s) are buying gold as fast as they can lay their hands
on the stuff with dollars that traditionally would have been invested
in UST securities. This raises two questions : who, other than the Fed,
is going to buy the damned things, & how is the US going to fund
its chronic, & now once again waxing, trade deficit.
According to the New
York Post growing numbers of industry players think Goldman CEO Lloyd
Blankfein must step down to get the government off Goldman’s back
& appease Washington (with tens, if not hundreds, of millions
of dollars in his pocket as a booby price?) - in practical terms
they may well be right but realistically this is akin to the occupants
of a horse-drawn sled on the snow –covered
Russian steppes in the olden days throwing pieces of meat over the side
to distract, & slow down, a pursuing wolf pack. Sometimes that worked,
but often it didn’t. The only
real solution to getting Goldman,
& the industry, back in Washington’s good graces would be for
both to reform themselves from the top down, & right now that looks
like a long shot. Jettisoning Blankfein
is a mere Band-Aid solution.
In 2008 IMF Managing
Director Dominique Strauss-Kahn was involved in an “inappropriate
relationship” with a subordinate (who later described him as “a
man with a problem”) but got off easy, merely being reprimanded
by the IMF Board & having to write a letter of apology to his staff
for an “incident concerning a staff member” (in part because, in
the immediate aftermath of Lehman Brothers’ collapse & in the
midst of the ensuing financial crisis, the Board had few options but
to avoid triggering a change in the IMF’s Executive Suite).
I am not a conspiracy
aficionado; but I cannot help but think this latest controversy was
a ‘set-up’ orchestrated by someone with an ulterior motive who expected,
rightly as it turned out, that if the right kind of bait were trolled
by him, he wouldn’t be able to resist the temptation (rumour has it
that one young member of President Sarozy’s centre-right UMP party
was twittering Strauss-Kahn’s arrest twenty minutes prior to him being
taken off the Air France plane). While this removed from the French
political scene a potential Socialist Party candidate in next year’s
Presidential election that the polls said would have routed Sarkozy,
his election chances now are said to have been further enhanced by the
news his 43 year-old wife is pregnant.
DSK, as many called him,
had long had a less than savoury reputation where women were concerned,
but always got away with it. For in France it never was a big issue
& his No. 3 wife, Anne Sinclair told France’s weekly news magazine
L’Express in an interview, when asked if it didn’t bother her that
her husband had “a reputation as a seducer”, “No, I am actually
rather proud of it! It’s important to seduce for a politician”.
Like Conrad Black, having gotten away with dodgy behaviour in other
jurisdictions, Strauss-Kahn made the same fatal mistake of thinking
he could also get away with it in the US. Obviously a bad call &
one that once again validates the concept of ‘hubris’ the great
Greek tragedy writers introduced two-and-a-half millennia ago.
He has since resigned.
But this comes at a most inopportune time & could have far-reaching
consequences. With storm clouds gathering over Europe’s financial
system, & the possibility increasing daily of an unseemly political
dogfight in the US over the budget & the debt ceiling, his resignation
in a best case scenario means that one of the world’s key financial
‘firefighting’ institutions will be deprived of the benefit of his
experience & network of contacts; and, no matter how well qualified
his successor may be, he/she will need time to become equally effective.
And in a worst case scenario his departure will be taken by the developing
country ‘bloc’ as a Heaven-sent opportunity to end the post-WW II
tradition whereby the Managing Director of the IMF is always
a European & the President of the World Bank always an American,
in which case the resultant jockeying for position could get messy at
a critical point in global finance (& possibly accelerate the unhelpful
trend in the US Congress & on the US Main Street towards isolationism).
While press reports talk about there being a “consensus” his successor
will once again be a European because he/she would be more familiar
with its evolving debt cum banking crisis, it is equally, if not more,
likely that those favouring a break in that tradition will argue, with
considerable justification, that appointing someone other than a European
would ensure that the IMF’s role in that situation will be based on
facts & an objective assessment of what’s best for the system
rather than on personal prejudices (& considering the mess the EU
& the European-led IMF made of its first phase, they may well be
right), which may enhance the validity of rumours of the Governor of
the Bank of Canada becoming a possible compromise candidate to succeed
Strauss-Kahn.
Canada’s rail car manufacturer
Bombardier Inc. recently won a $96MM contract to provide & maintain
an automated monorail system for Saudi Arabia’s Jeddah International
Airport from none other than ...........................................................the
Saudi Binladin Group.
Milan has traditionally
been the stronghold of Silvio Berlusconi’s party. But the fact that
now, for the first time in 15 years, that city’s Mayor after the recent
municipal elections faces a second-round run-off election at the end
of the month, suggests Italians are finally getting fed up with his
histrionics. That’s the good news. But the bad news is that any political
upheaval this may give rise to will lead to Italy, the EU’s third-largest
economy with a GDP almost equal to that of Greece, Ireland, Portugal
& Spain combined & a Debt-to-GDP of well over 100%, no
longer being able to fly under the radar of the world’s investors
& currency speculators. If so, that could further discombobulate
a system that, no matter what soothing noises may emanate from some
‘experts’, already seems to have one foot in the grave & the
other on a banana peel.
GLEANINGS VERSION
II
No. 410 - May 19th,
2011
CHINA CUTS HOLDINGS
OF U.S. TREASURYS (AP)
- In April it trimmed its holdings
for the fifth month running , by US$9.2BN to US$1.14BN, while Japan,
contrary to expectations in the post-earthquake cum tsunami era, boosted
its holdings by US$17.6BN to US$907.9BN. Overall foreign holdings increased
by US$4.9BN to US$$4.48BN.
So on a net basis
the nearly 200 countries in the world other than China & Japan,
cut their holdings of UST securities during the month by US$3.5BN, i.e.
1.4%. One can only wonder about the vulnerability of the US when two
countries, each with reasons to cease being a net buyer, account
for 42% of its externally-held debt. Finally, net foreign purchases
of US$4.9BN barely covered 10% of the US trade deficit for the month.
SURGING COIN SALES
SAY BULLION’S BULL RUN HAS LEGS
(Bloomberg, Nicholas
Larkin)
- The US Mint’s sales of American
Eagle gold coins & South Africa-based Rand Refinery Ltd.’s sales
of Krugerrands are the strongest they have been for some time, the American
Precious Metals Exchange, an online bullion dealer, had its three best-ever
sales weeks in April & May and expects to sales to double this year,
and Switzerland’s UBS AG on May 9th had its second-best
day for physical sales YTD & its sales to India, the world’s top
bullion consumer, are up over 10% YoY. On the other hand, George Soros’
hedge fund during the First Quarter cut its gold ETF positions by 99+%
to US$7MM). According to Ross Norman, CEO of London-based bullion brokerage
Sharps Pixley, “What drives people toward physical metal, as opposed
to an ETF or futures, is fundamental insecurity.”
The US Mint sold 62,000
American Eagle gold coins in the
first week of May, 57% of its
total April sales (& 701,000 American Eagle silver
coins, slightly ahead of April’s 2.82MM monthly rate); if this rate
of sales were to continue, the Mint’s May sales of gold coins could
reach the 250,000 level, a rate second only to March 2009's 269,000.
It attests to the strength of the demand for gold that the gold ETF
market was as strong as it was in the First Quarter despite Soros’
(& other hedge funds’) sales. Investors buying coins & central
banks buying gold has a fundamentally different market impact than purchases
by hedge funds & ETF’s; for they are long-term holders rather
than short-term profit chasers, and the precious metals they purchase
are more or less permanently removed from the
‘float’ in the precious metals’ market. And while not a chartist,
I can not help but be impressed by the fact that in the past two years
the price of gold has bounced off its 150-day moving average line on
no fewer than six occasions.
WITH DEBT CEILING
REACHED, TENSIONS RISE IN WASHINGTON
(National Journal,
Tim Fernholz)
- On May 16th the
Treasury auctioned off its last legally permissible chunk of government
debt, setting the stage for it to launch a series of “extraordinary”
accounting measures to keep funding Washington’s US$125BN monthly
deficit (until August 2nd). While the market hadn’t
expected the debt ceiling crisis to be solved by this date, this nevertheless
shifted discussion of an US default somewhat from the possible to the
probable. While on Friday May 13th Treasury Secretary Geithner
sent a letter to Sen. Michael Bennet (D.-Col) warning of a double dip
recession if investors were to lose confidence in the US’ creditworthiness,
two days later House Speaker John Boehner (R.-Ohio) & Senate Minority
Leader Sen. Mitch Mconnell R.- Ky) reiterated their demands for major
budget reforms & spending cuts in exchange for a higher debt limit,
& remained adamant in ruling out tax cuts. And, while the business
community is united & experts worry about the failure to raise the
debt limit, a Gallup poll found that 47% of interviewees believe their
members of Congress should vote against, & only 19% that they should
vote for, increasing the debt ceiling.
The longer this nonsense
continues, the greater the potential
damage to the credibility of the US dollar, the Fed & the US Treasury
(& the more it plays into the hands of those
developing country governments who, after the onset of the last financial
crisis, started saying ‘Why should we pay any attention
whatsoever to people who want to tell us how to run our economy &
our finances, when they don’t seem to be able to
manage their own?’). .
HOMEBUILDER SENTIMENT
UNCHANGED AT LOW LEVELS IN MAY (Reuters)
- In May the National Association
of Homebuilders Sentiment Index remained at 16 rather than rising to
17 as expected. In April new housing starts were down 10.6% MoM to a
523,000 annual rate (vs. a market expectation of 568,000) after the
March number was revised upward from 505,000 to 549,000. At this level
the rate is down 23.9% YoY, with multifamily unit starts down 28.3%
but single family homes only 5.1%.
It’s irrelevant
if the reading is 16 or 17 when anything less than 50 - last seen in
April 2006 - is deemed “poor”.
DIGGING DEEPER
INTO WHAT CAUSED JOB LOSSES (NYT, Casey B. Mulligan)
- The bank bailouts were rationalized
on the grounds that they would enable employers to maintain their payrolls
(which didn’t happen since both the banks & employers chose
to “sit on” their cash rather than pass it on). And the latest
Census Bureau data further discredits that notion. For they show that
in the year after the Lehman collapse the number of employees making
over US$2,000/week increased while the number of those making less than
that declined by several million. Hiring, or keeping,
more highly-paid staff is not the optimum way to cut payrolls. The country’s
total payroll now exceeds its pre-recession level, while total employment
remains very significantly lower.
Them that has, gets,
& them that hasn’t doesn’t! This further evidences a polarization
of American society that, left unchecked, will in due course lead to
social unrest (the writer teaches at the University of Chicago).
OBAMA APPEALS FOR
MIDEAST PEACE TALKS (G&M, Paul Koring)
- The President is expected
to use the occasion of a major policy address on May 19th
to deliver an update to his Cairo “new beginnings” speech two years
ago, try & jumpstart the moribund Palestinian-Israeli peace talks,
and create semblance of order in what has been a jumble of ad hoc responses
to events in Tunisia, Egypt, Yemen, Bahrain & Syria, with White
House spokesman Jay Carnie telling journalists this “is an opportunity
not to be missed, in the President’s view.” And after meeting
with Jordan’s King Abdullah on May 17th, the first in a
week-long series of diplomatic efforts he is planning to try & recast
US policy in the region, he said “Despite the many changes - or perhaps
because of the many changes - that are taking place in the region, it’s
more vital than ever that both Israelis and Palestinians find their
way back to the negotiating table and begin negotiating a process whereby
they can create ... two states that are living side by side in peace
and security.”
The President seems
to have learnt something : his speech was deliberately timed to
‘front run’ next week’s address to Congress by Netanyahu the latter
had arranged with the Republican Congressional leaders. On Friday, within
24 hours of making his speech, Obama will meet with Prime Minister Netanyahu
at the White House. Prior to leaving for Washington, the latter made
a hawkish speech in the Knesset in which he said he
wouldn’t deal with a Palestinian unity government that included Hamas
& basically told the Palestinians they’d better forget about their
dream of having East Jerusalem as the capital of any future state (&
then, as if to rub salt in the wound, his government authorized the
building of 1,550 more housing units in the West Bank).
Obama, in his speech formally endorsed the
idea that negotiations for a peace treaty must be based on the 1967
borders (something which, although
Israel has not denied it in the past, Netanyahu
now sought to prevent in an angry last minute phone call to Secretary
of State Hilary Clinton, saying this
“indefensible” since it would leave major Israeli settlements
“outside Israel” – thus once again acting like a
teenager who, after killing his parents, seeks mercy because he is an
orphan). But Obama also indicated little love for the new, Hamas-inclusive
unity government idea & chastised the Palestinians for their push
for statehood recognition by the UN (which he seemed to suggest the
US would veto if it were to come before the Security Council). The Israeli
reaction was wholly predictable : according to one Israeli official
Obama doesn’t “understand the reality of the situation”. But one
cannot help but wonder who doesn’t. For the ground shifting under
the Israelis’ feet in ways, & at speeds, not imagined possible
as recently as six months ago. The Arab Spring is changing the region’s
power relationsships. With the Rafah border crossing point into Egypt
now open, the blockade of Gaza is no longer effective. Support for Israel
in the global community is slipping (to the point Netanyahu in his speech
sought to appeal to President Obama to lean on his European allies to
quit being so supportive of the Palestinian push for statehood). Israel
has lost the once all but automatic
support of Egypt & alienated Turkey, two key Muslim regimes in the
region. The EU is losing patience with Israel’s intransigence vis
a vis the Palestinians & increasingly less susceptible to appeals
to its Holocaust guilt complex. The Palestinians are making headway
gathering global support for their quest for statehood (which would
turn the Israeli occupation of the West Bank from a debatable breach
of international law into an indisputable one). Netanyahu’s divide
& conquer policy vis a vis Fatah & Hamas has sprung a leak.
And the switch in Palestinian tactics from terrorism to peaceful demonstrations
will make harsh countermeasures more difficult to justify (which may
well come to a head if the rumoured second
“peace flotilla” to Gaza next month were to materialize, even though,
with opening of the Rafah border crossing it would no longer be necessary).
The questions now are whether Netanyahu can recast himself as a statesman
who makes the best of a bad situation (& early indications are not
encouraging) & whether Obama can
stick to the idea that diplomacy sometimes requires seemingly undiplomatic
behaviour, i.e. telling someone in no uncertain terms where to get off
(while early indications are encouraging, it remains to be seen whether
he on this occasion will display more sticktoitiveness than in the past).
.
PALESTINIANS TEST
TACTIC OF UNARMED MASS MARCHES (AP)
- Activists call the peaceful
mass marches coordinated via Facebook, descending on Israeli border-
& military posts, & daring Israeli soldiers to shoot, a new
tactic to pressure Israel & gain world support for Palestinian statehood.
The first such march, that sought to breach the Israeli borders with
Syria, Lebanon, Jordan & Gaza on May 15th, led to the
death of 15 Palestinians. Israeli officials seem at a loss how to deal
with this new approach : on the one hand Defence Minister Ehud Barak
acknowledged rather pragmatically
that “The Palestinians’ transition from terrorism and suicide bombings
to deliberately unarmed mass demonstrations is a transition that will
present us with difficult challenges” while on the other retired general
Yossi Peled, a former commander of Israeli troops on both the Lebanese
& Syrian borders, rather dogmatically
maintained that attempts at border breaches must be stopped at any cost
- regardless of the political consequences - since they pose a direct
challenge to Israel’s souvereignty.
All it would take
would be for a few ‘agents provocateurs’ despatched by the Mossad,
the settlers and/or Palestinian hardliners firing a few shots to set
the stage for a bloodbath.
YOUTHS RUSH MINEFIELD
(AF-P)
- On Sunday May 15th
thousands of demonstrators massed on Israel’s Northern border with
Syria & Lebanon waving flags to mark the anniversary of the creation
of the state of Israel ([which for the Palestinians is a national day
of mourning known as “Nakba” (catastrophe)]. Police deployed on
the Syrian side to stop them were overwhelmed as more & more of
them arrived. Then to one bystander’s surprise they started running
across the heavily-mined border zone towards a similarly unprepared
Israeli border post, which prompted the few soldiers in it to open fire,
killing four & wounding hundreds more. Meanwhile, residents of the
nearby largest Druze town in the Golan Heights, many of whom still hold
Syrian passports, had come out to welcome the aspiring border crossers.
Once your adversaries
lose their fear of minefields, you have a real problem; for
the barrier they create is more psychological than real since,
unless literally laid side by side, mine fields
reduce, not eliminate, the numbers
of those crossing it and, if there are large enough numbers of
people on the other side willing to risk their lives, dangerous numbers
will get through.
MUBARAK TO APOLOGIZE
TO EGYPT (AF-P)
- According to the May 17th
edition of the independent daily newspaper al-Shorouk he is “drafting
a letter which will be broadcast on Egyptian and Arabic channels, apologizing
on behalf of himself and his family for any offense caused to the people
... and for any behaviour which may have stemmed from false information
passed on to him by his advisers.” It also said military sources had
indicated that several Egyptian & Arab parties had suggested an
amnesty for the 83 year-old, and that he was ready to hand over his
assets in a bid to have the ruling Supreme Council of the Armed Forces
“look into an amnesty”. This came the day after his wife, Suzanne
Mubarak (who is only 70 & half Welsh) had pledged to turn over to
the state two bank accounts & a luxury villa in Cairo.
While their ambition
is to have such an amnesty extend to
their two sons, Alaa & Gamal (the latter of which the couple had
been grooming as his successor), the latter
are cooling their heels in Cairo’s Tora prison, accused of corruption
& unlikely to be part of any amnesty deal.
CHINESE TO INCREASE
BRAZIL INVESTMENTS (AP)
- As Chinese business interests
met in Brasilia with Brazil’s Foreign- & Trade Ministers, China’s
Commerce Minister Chen Deming announced on May 16th that
his nation will increase its investment in Brazil. While he wouldn’t
say by how much, in 2010 China dramatically ramped up it up to US$17BN,
from US$300MM in 2009.
China is now Brazil’s
biggest trading partner, having replaced the US two years ago.
SAUDI DIPLOMAT
SHOT DEAD IN PAKISTAN (AF-P)
- On May 16th a
(relatively junior) official in the security department of the
Saudi consulate in Karachi was waylaid, shot & killed in an upscale
neighbourhood by a couple of guys on motorbikes while on his way to
work. This came less than a week after motor bike riders threw hand
grenades at the building housing the consulate.
The Pakistan Taliban
denied responsibility, saying “We support the action but we are not
afraid. Had we done it, we would have claimed it.” There is likely
more to this than meets the eye; for Saudi Arabia has long funded much
of the Islamic extremist movement in that country.
IMF MISSION CHIEF
SAYS GREEK BAILOUT PACKAGE IS FAILING
(The Guardian, L.
Elliott)
- Poul Thomson told a conference
in Athens on May 18th “The view that seems to be taking
hold is that the government program (of economic & social)
reform isn’t working ... The program will not remain on track without
a determined reinvigoration of structural reforms. Unless we see this
invigoration, I think the program will run off the track”. This caused
the Euro to weaken. While Athens is committed to reduce its deficit
to GDP ratio to 7.6% this year, the consensus is that it is more likely
to end up being closer to 10%.
On May 6th
there was an ad hoc meeting of European Finance Ministers that concluded
last year’s 110BN Euro aid package wasn’t working & that the
terms of the EU’s 80BN share thereof would have to be eased further
(after having earlier already cut the rate
to 4% & extended its term from 3 to 7
½ years). Since then IMF & EU officials have been in Athens to
prepare the ground for a fresh dose of financial assistance to keep
Greece from defaulting after it became evident it was having difficulty
servicing its debt. But the facts speak for themselves : the country
is now in the third year of a serious recession, its debt-to-GDP ratio
has now risen to the 150% range, and
according to the IMF Mission Chief
“the tax burden is already very high” (& the Prime Minister’s
faith in reducing tax evasion as a means of addressing that problem
ain’t going to pay off in the short term & neither will the IMF’s
preferred solution of privatizing government assets, even if it were
politically feasible). The approach taken by the IMF & EU
to date has been akin to a medical
practice in a bygone era of “bleeding” seriously ill patients to
make them better. So the EU is slowly but surely is backing its way
into a restructuring of Greece’s debt. And this is going to be problematic
& unsettling to the system; for Beijing has already indicated
it will object to having to take any hair cut on its Greek bond holdings,
the German banks will be big time in the line of fire in any restructuring
(with Angela Merkel at risk of being tarred & feathered, and run
out of town on a rail, by German voters who see no reason why they should
pay taxes & work until age 72, to enable the cosseted Greeks to
retire as early as age 50), and last, but by no means least this could
set a bad precedent for Ireland & now Portugal. It becomes more
& more evident the Argentinas & Icelands of this world
were right when they told foreign investors to get stuffed.
A SOUTH AFRICAN
YOUTH LEADER REVIVES THE POLITICS OF RACE
(G&M, G. York)
- Julian Malema is the 30 year-old
leader of the ruling ANC’s youth wing. He has been ridiculed by the
media as a buffoon who failed Grades 8 & 9 and his highschool woodworking
& math classes, and only got a high school diploma at age 21 (all
of which he attributes to his involvement in activist politics which
made him, at age 14, leader of the ANC youth branch in his home town).
He has praised Zimbabwe’s farm seizures, called an opposition leader
a “cockroach”, accused a British journalist of having “rubbish”
in his pants & is mysteriously wealthy, owning two houses, driving
Mercedes Benzes, wearing a US$34,000 watch, & favouring US$100 champagne
& whiskey, all of which he rationalizes by saying “We are the
elite that has been deliberately produced by the ANC as part of its
policy to close the gap between whites and blacks in this country”).
- Already wildly popular with
an angry black youth resentful of black unemployment & white wealth,
he boosted his standing with them further last year when he started
singing a song at Youth League rallies that referred to Africaners as
“dogs” who “rob” us, with a refrain of “Shoot the Boer, kill
the farmer”. This prompted an Africaner rights group to take him to
court (where he came & went accompanied by submachine-toting body
guards) for hate speech & promoting discrimination; while initially
successful, on appeal this backfired when its lawyers patronized black
witnesses, incl. Mr. Malema (enabling him to make like a victim of racial
persecution, forcing the ANC to support him & strengthening his
position in it). He is now well-positioned to be a kingmaker at next
year’s ANC convention that will decide whether Jacob Zuma will remain
President after 2014 &, ahead of the forthcoming municipal elections,
has helped to create one of the most racially-charged political climates
since the death of apartheid. So, as one Johannesburg political writer,
Deon de Lange, puts it “He knows how to feed on the disaffection at
the grassroots of South African society ... For the ANC Malema has now
become too big to fail ... Malema is firmly in the driving seat of the
ANC’s campaign ... the joke’s on us.”
For two decades many
deluded souls have expected South Africa to be the engine driving sub-Sahara
Africa’s growth. And recently it was accorded the (wholly undeserved)
honour of turning the BRIC country quartet into a BRICS quintet. This
totally disregards the fact that since 1994
the country has vastly underperformed its potential, due to post-apartheid
public expectations that even star administrators might have had difficulty
meeting, while its three post-apartheid leaders were nothing of the
kind (while this applies to Mandela as well, who was more of a visionary
& an icon, he was a rock star in that respect compared to the two
Presidents since).
