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

November 03, 2011

With the US & Chinese economies seemingly ‘decoupling’ from the Eurozone’s slide into ???, the risk to global economic growth has diminished. And, while doomsayers had predicted that Third Quarter US corporate earnings would be disappointing, this has not been the case : with two-thirds of the S&P 500 companies having reported, the forecast of their collective earnings has been revised upwards by 4% to a level two-and-a-half times that of 2008.  

With all the kerfuffle about the mess in Europe, it has largely escaped public notice that on October 22nd Louisiana’s Republican Governor Bobby Jindal was re-elected in a landslide (with 66% voter support - up from 52% in 2007 -, a 48% lead over his Democratic opponent) in what traditionally has been a heavily Democratic state with a large black population. Jindal is of Indian descent, has just turned 40, and previously served two terms in the House of Representatives, being elected with similarly impressive majorities - may we see the emergence of a “Draft Jindal” movement?      

Luxemburg Prime Minister Jean-Claude Juncker  recently explained “We all know what has to be done; what we don’t know is how to get re-elected once we’ve done it.” - that’s what modern politics is now all about, clinging to power, even at the risk of having to go down with the ship. 

While on the focus remains on Greece, the real ‘tiger in the room’ is Italy : its government  is tottering & while Berlusconi is vowing reform, the calls for his resignation & for the forming of a new government are proliferating. And in 2012 it will have to ‘roll over’ 300BN Euros in outstanding debt,  i.e. almost as much as the entire Greek national debt & close to 2x Portugal’s national debt.  At the time of writing (Tuesday) Italy’s 10-year benchmark bonds traded on a 6.30% yield basis, just short of their level of last August when the ECB started buying them, & a near-record 450 bps over their German counterparts, & its two-year bonds the day before had traded at 6.60%, 3+x the yield on similar maturity bonds issued by Slovakia & the Czech Republic (reflecting a similar disparity in their Debt/GDP ratios). The only saving grace for Italy may be the high proportion of its bonds held by domestic-, rather than foreign-, investors (but its Achilles heel is illustrated by a worker in Fiat’s Italian factories assembling 30 cars a year, while his Polish counterpart, in the plant that recently celebrated the building of the two millionth Fiat Panda model, assembles 3x that many, & gets paid one-third as much (Poland has the EU’s sixth-largest economy, but is not a member of the Eurozone, that is thriving, & has thrived throughout the recessionary period). 

Last week the EU came up with its latest, as usual short-on-detail, ‘plan’ to “deal” with its financial crisis that, among others, would have private investors taking a “voluntary” 50% “haircut”. But this will reduce the Greek national debt by just 20% since it doesn’t apply to the ECB, and to Greek banks & public authorities (mainly pension funds). Another possible fly in the ointment could be that the ISDA (the International Swaps & Derivatives Association) has ruled that those who thought they had hedged themselves against such an event by purchasing CDS (Credit Default Swap) protection are out of luck because, in its opinion, they don’t apply to voluntary haircuts; but the problem with that ruling is that the ISDA governing body is controlled by the big financial institutions, incl. JPMorgan, Bank of America & Morgan Stanley, many of whom have multi, multi trillion dollar exposures to derivatives, whereas Fitch has called any 50% haircut “a payable derivative event”. 

Greek Prime Minister George Papandreou’s surprise announcement that the latest bailout deal will be the subject of a national referendum put the cat among the pigeons;  for regardless of whether it will be held in January as first mooted, or in December as subsequently indicated, Greece desperately needs the next  8BN Euro (US$11BN) bailout instalment due in ten days or so to  survive financially until any referendum can be held (& the market’s assessment of the likelihood of it getting it can be gauged from Greek two-year bonds currently trading at close to a 100% yield basis). So the risk of a “disorderly” default growing, with consequences nobody is sure about. While talk of returning to the drachma, i.e. leaving the Eurozone, is still a dirty word in official Athens, a growing body of economists is arguing it would be the best course “whatever the near-term financial and economic implications.” On the other hand, Papandreou might just be able pull off a favourable result from a referendum, provided he survives that long politically, especially if Ms. Merkel & President Sarkozy were to make some encouraging noises. For while a majority of Greek voters is strenuously opposed to more pain being inflicted on them, an even greater majority of them wants Greece staying in the Eurozone (because they appreciate that the pain would not be less, if not still greater, if Greece were to strike out on its own?) - at last report, after fierce infighting within his own party, Papandreou had abandoned his referendum plans and was rumoured to be planning to resign Friday night regardless of whether he wins the confidence vote in Parliament or not.   

Prime Minister Papandreou’s referendum announcement, which he apparently made without consulting his Cabinet colleagues, was the equivalent of a “Hail Mary Pass” in American football, “pulling the goalie” in ice hockey, & “rolling the dice” in gambling. The Greek situation is not unlike the US Wall Street/Main Street split : on the one hand there are the numerous public sector workers seeking to protect their ‘rice bowl’ who demonstrate almost continuously in a desperate effort to do so, & on the other the masses of non-privileged who see their world crumbling around him, most visible in the country’s empty restaurants, but who, the Prime Minister has all along maintained, accept the need for unpleasantness & could be sold on accepting a deal that  may look worse in prospect than it may prove in the rear view mirror).       

As one observer put it recently, the problem in Europe has been that European leaders have insisted on treating the symptoms rather than the disease : disparate growth rates & degrees of competitiveness. 

The state of European financial markets can be gauged from the following. The EFSF (European Financial Stability Fund), the Eurozone bail-out facility, had planned to do a 5BN 15-year Euro bond issue on Monday October 31 to help fund some of the earlier Irish bail-out. First it was forced to scale it back to a less ambitious 3BN 10-year issue and then, on November 1st, the issue was “delayed” because of market conditions until the “near future”, albeit not this week. Borrowing money is likely the only way out for the EFSF since on October 28th the German Constitutional Court made a ruling questioning the constitutionality of a Bundestag panel of lawmakers being mandated to make quick decisions on the EFSF’s use of German taxpayers’ money to bail out other souvereign governments & issued a temporary injunction on them doing  so, thereby setting the stage for a possible, & likely ugly, confrontation (she is most unlikely to win) between Chancellor Merkel on the one hand, and the German judiciary & the Bundesbank (that never liked the idea of the EFSF), on the other, with German taxpayers being in the latters’ corner.     

Back in 1991, the now head of the ECB, Mario Draghi, was a senior official in the Italian Treasury  who represented his country at the talks leading up the establishment of the common monetary zone in Europe. But at that time Italy’s high debt levels & runaway deficits got it into deep financial doo-doo, causing one of Draghi’s MIT class mates, Francesco Giavazzi, an electrical engineer with a Ph.D. in economics from MIT who now teaches at Milan’s Bocconi University but at the time was  one of Draghi’s henchmen at the Italian Treasury, to observe, looking back at that era, “We came close to default ... The lesson is that rather than waiting for help, you need to regain the confidence of the markets through your own actions, and that if you do not do the right thing, no outside help is enough. You will have a solvency problem.” Too bad the Eurozone decision makers ignored that age-old market wisdom when the PIIGs crisis started to unfold.

The decision of the ECB on November 3rd, on his third day as ECB president, lower its base rates can means one, or more, of three things : Mario Draghi wanted to tell the market he was his own man, that he was going to be less paranoid about inflation than his predecessor and/or that he was concerned about the near-term economic outlook for Europe.  

The bankruptcy of Chicago-based MF Global suggests Wall Street & the regulators haven’t learnt a doggone thing in, & from, the past three years. For it had piled, & was allowed to pile, US$40+BN in debt on a US$1.5BN equity base (producing a 27x leverage ratio) & to amass a US$6.3BN exposure to Europe’s most dodgy souvereign debt. And now, after the fact, it has come to light that it hadn’t kept its own & its clients’ money separate, as it was legally required to do, & that there may be as much as US$700MM of their money “missing”. Obviously everyone had been dazzled by the fact that its Chairman was none other than Jon Corzine, who at various times had been Co-CEO (with Hank Paulson) of Goldman Sachs (from 1994 to 1999), the (very liberal) junior Democratic Senator from New Jersey (2001-2005) & the equally liberal Democratic Governor of New Jersey (2006-2010). One must wonder what motivated a number of well-known Wall Street traders, who now find themselves jobless & tainted, to join its fast-growing employee ranks in recent months : hubris, blind greed or simply a failure to remember that, as the long-term CEO of a  successful upstate New York commercial bank that is sticking to its knitting, taking deposits & making loans, recently pointed out, namely that ‘two plus two makes four, not five, never mind six or seven’).  

Continental Airlines will be the US ‘launch customer’ for Boeing’s new 787 Dreamliner passenger jet. Some of its systems are apparently so different from other Boeing planes as to make pilot training more complicated & costly. As usual, pilots clamour to be among the first to fly a new type of plane and, since they are selected by an auction-like system based on seniority, this means that its new planes’ initial batch of pilots will be those closest to retirement, thereby needlessly pushing up the airline’s training costs.     


No. 433 - November 3rd, 2011 


  • The day after the Head of Europe’s rescue fund, the EFSF, was in Beijing on October 29th to try & entice China into investing in the fund, the state-run Xinhua news agency issued an English language commentary saying China could not stand by while its largest trading partner foundered but that Europe should nevertheless not expect China to ride to the rescue as its “saviour” from the debt crisis.

And the next day President Hu Jintao, after meeting with Austrian President Heinz Fisher while on a state visit to that country prior to attending the Cannes G-20 meeting, told reporters “We are following the economic development under current difficulties with attention ... (but) are convinced that Europe has the wisdom and ... the competence to overcome the current difficulties.” Nevertheless, China has a vested interested in the outcome since an estimated 25% of its US$3.2TR FX hoard is composed of Euro-denominated assets (incl. Greek government bonds).



(Postmedia News, Derek Abma)   

  • The Governor of the Bank of Canada, who is expected to be named tomorrow, November 4th, at the end of the G-20 session in Cannes, to succeed fellow Goldman alum & now ECB President Mario Draghi as Head of the Financial Stability Board, told the Canadian House of Commons Standing Committee on Finance on November 1st that “In times of difficult structural adjustment ... tough decisions that governments such as the Greek government is contemplating, it is important that there is widespread support for those measures ... And if it is the judgment of the Greek government that (a referendum) is the best way to validate that support, we fully respect that.”

This is a more rational approach than the panicked hissy-fit Chancellor Merkel & President Sarkozy seem to be throwing (the latter recently pontificated that “last week’s plan is the only way to fix Greece” although the word “fix” is open to many interpretations). While this is easier for a non-elected official like Carney to say than for the elected officials involved, his pragmatism augurs well for the future, provided his appointment to head the FSB is still on after him saying this.    


  • The IATA reported on October 31st that worldwide airline passenger traffic in September was up 5.6% YoY but cargo traffic down 2.7% (compared to 4.6% & -2.4% in August).

Cargo traffic in September being down for the fifth month in succession is not a bullish sign.  


  • A growing number of US lawmakers don’t think another downgrade of the country’s triple-A rating (by Moody’s and/or Fitch) will harm the US economy, causing analysts to fear  complacency on Capitol Hill will threaten efforts to cure America’s long-term fiscal health.

Their thinking is based in part on the fact that last August’s S&P downgrade confounded dire predictions it would result in higher borrowing costs for the Treasury. 


(Politico, Jake Sherman) 

  • After two months the gulf between the Democrats & Republicans on the Committee is as deep & wide as ever. Both sides are dug to defend their priorities, with the Democrats insisting on the need to boost revenues & seeking to protect the entitlement programs, and the Republicans refusing to even consider raising taxes & increasingly averse to cuts in defense spending. Intra-party fighting has been growing as rank & file lawmakers on both sides snipe at their leaders’ proposals, with the House having just 8 legislative days in November to deal with both the Supercommittee’s report & the government funding issue. And talk is emerging from the House Democratic caucus that perhaps the so-called “triggers”, that mandate specific across-the-board cuts if the Super Committee cannot agree on US$1.2TR in savings over the next decade, ought to be dismantled.

Connect the dots & what does one get : elected officials’ total abandonment of their fiduciary responsibilities, a totally disfunctional government, & credit rating downgrades as far as the eye can see. Fortunately, the soup is never eaten as hot as it is served (we hope).



  • Consumer spending in September was up 0.6% MoM, 3x the August rate (largely due to a rise in consumer durables such as cars) while incomes grew at 0.1% in nominal-, & declined at 0.1% in real-, terms. So the savings rate hit at 3.6%, a post-December 2007 low.

Two possible explanations. A new concept in the retail lexicon, ‘retail therapy’, people buying stuff to feel better. And the fact that the top 20% of income earners, those who make US$100,000 or more & are surviving very well, account for over 50% of all household spending. 


(U.S. Bureau of Labor Statistics) 

  • After being positive in 2009 & 2010, productivity growth turned negative in the first half of this year. But in the Third Quarter it turned positive again, with labour productivity in the non-farm business sector growing at a 3.1% annual rate (made up of a 3.8% increase in output & a 0.6% rise in hours worked). Manufacturing productivity was up 5.4% (4.7% plus 0.8%) & 9.9% in the durable goods-, but only 0.7% in the non-durable goods-, sectors. And unit labour costs in the non-farm business sector were down 2.4% as a result  of the higher growth in output (3.1%)  than in hourly compensation (0.6%).

Together with a generally weaker US dollar this augurs well for the US’ global competitiveness (but is bad news for Canada, where productivity growth has seriously lagged that in the US).  


(Gallup, Denis Jacobe) 

  • Not seasonally adjusted it found it to have been 8.3% in the 30 days to October 23rd, down sharply from the previous 30 days. Since during year-earlier period the rate, as measured by Gallup, had been steady or increasing, the recent improvement is not explainable by seasonable factors; so it expects the official October unemployment rate to be < 9%.

Coming, as it does, on top of decent, albeit not stellar, Third Quarter GDP growth number & a drop in initial claims for unemployment benefits, for the fourth time in the past six weeks & for the first time in a long time to below 400,000 claims,this could have major political & public confidence implications. 


  • The ISM’s Index of National Factory Activity slipped from 51.6 in September to 50.8 in October, instead of edging up to 52.0, as expected; for while its New Order Index rose from 49.6 to 52.4, its Prices Paid Index cratered from 56.0 to 41.0, a post- April 2009 low. But the Commerce Department reported that in September construction spending had risen for the second month in a row, by  0.2% MoM to a seasonally-adjusted US$7.87.2BN, as  slightly stronger home construction offset lower public sector construction spending.

On balance, a mildly positive set of numbers. 


  • Facing a US$8BN deficit & up to US$166BN in unfunded pension- & healthcare liabilities, Ohio’s Republican-controlled legislature  earlier this year rolled back benefits for its 360,000 unionized public sector workers, limiting collective bargaining to wages only, eliminating binding arbitration, allowing state & local government entities to dictate contract terms in case of no agreement, forcing public workers to pay more for their pensions & healthcare, allowing for the unilateral roll back of benefits, eliminating mandatory union dues & easing the decertification threshold. So the unions gathered the 1.3MM signatures needed to  have a referendum on ‘Senate Bill 5', & next Tuesday, November 8th, the state will vote on whether to keep, or repeal, it.

The outcome will be interesting. For while public sector workers may feel hard done by, many of the far more numerous tax payers see them as ‘fat cats’ living ‘high off the hog’ at their expense. Earlier Wisconsin under similar circumstances took similar action & faced a similar union response; but after having stared down the opposition, its budget is now balanced & its rate of job creation leaves that of the other 49 states in its dust.   


  • On October 31st the UNESCO membership voted 107-14, with 52 abstentions, to admit  Palestine to full membership with, somewhat surprisingly, France voting YES and, not surprisingly, the US, Canada & Israel voting NO, as well as, somewhat more surprisingly, Germany, the Netherlands & Sweden. Shortly after, the Obama Administration announced it would not make the US$60MMM contribution it had been slated to make this month to the UNESCO budget (& Canada’s Foreign Minister followed suit by saying that Canada is reconsidering how much support to give UNESCO, but that Canada will continue to make its regular $10MM annual contribution to the UNESCO budget but won’t respond to appeals to boost it to fill UNESCO’s US-prompted revenue gap). Prime Minister Netanyahu’s reaction was “Unfortunately, the Palestinians continue to refuse to negotiate with us. Instead of sitting around the negotiating table, they have decided to form an alliance with Hamas and take unilateral steps at the UN, including today.”

While the US provides 22% of UNESCO’s budget, it survived before when the US pulled out under President Reagan, only rejoin it under President Bush 43. And Netanyahu’s reaction was predictable; for he knows he cannot control the agenda when the Palestinians go the UN route the way he thinks he can at the negotiating table. And it is interesting to see how the world’s major proponent of democracy reacts when the exercise of a democratic vote doesn’t turn out the way it thinks it should have (as President Bush 43 did when the Palestinians elected a Hamas government, with the benefit of hindsight with likely unfortunate consequences).     


  • On November 2nd, both expressed “deep” disappointment at Israel’s decision to accelerate settlement building (with the approval of 2,000 more units, four-fifths of them in East Jerusalem) following UNESCO’s (overwhelming) vote supporting Palestinian membership in the organization, with the EU foreign policy chief, Catherine Ashton saying “Israeli settlement activity is illegal under international law including East Jerusalem and an obstacle to peace. We have stated that many times before ...” In response, in an ‘up yours’ response, Prime Minister Netanyahu said Israel “has the right” to build & expand in an undivided Jerusalem, which he referred to as “our eternal capital”.

Israel is also suspending the flow-through of US$100MM in tax revenues it has collected on behalf of the Palestinian Authority, a move that Mahmoud, somewhat over the top, described as “theft”. The western powers should have learnt by now that Netanyahu c.s. operate on the basis that “Sticks & stones may break my bones, but words will never hurt me.”  


(Postmedia News, S. Alberts) 

  • He indicated on November 1st that it could be “several months” before he would decide whether or not to approve the now increasingly controversial Keystone pipeline (that would carry oil sands bitumen from Alberta to Southern US refineries), & that environmental concerns would weigh just as much in his decision as energy security or economic growth.

In so doing he is making a liar out of Prime Minister Harper who not long ago called the decision a “no-brainer”. And with the passage of each day the chances of the pipeline materializing as presently proposed are getting slimmer, if only because the US can enhance its energy security & job creation more  effectively from Bakken oil from North Dakota & Montana & shale gas from Texas. This delights the likes of me who believe that the priority should be on gaining greater access to world markets for oil sands oil through pipelines to the Pacific Coast..



(Postmedia News, Lee Berthiaume) 

  • They did so in September to review progress in the F-35 stealth fighter program for a report due next spring tentatively to be titled “Replacing Canada’s fighter jets”. This news comes at a time that Australia is preparing to ask Canada & others to join it im a study of the program’s delays, & amidst concerns by the Pentagon’s chief weapons tester over the speed with which the project is being pushed through safety checks.

I wonder why it never occurred to me before, but Canada, as a supposedly peace-loving nation, has no business of spending untold billions on offensive weaponry like stealth fighters just to stroke the egos, & enhance the supposed status among their peers, of a few backward-looking Air Force ‘jet jockeys’. And chances are that Canada’s acquisition thereof at some point will be proven moot since even a former jet jockey & defense hawk like Sen. John McCain (R.Ariz) has raised the possibility, as he did last August, of cancelling the entire F-35 project because of its continually rising costs & the need to constrain government spending. And even if the US government doesn’t cancel it completely, it will almost inevitably drastically cut the size of its originally envisaged order (causing the unit price per plane to sky rocket). And there are two other possible nails in the coffin of the F-35 program : a growing sense that it a throwback to the Cold War era & not a 21st century piece of weaponry, and the fact it is increasingly starting to look as if unmanned aircraft & drones can perform many militarily important tasks far more cost-effectively than manned jet fighters. 



  • Recently it completed a large-scale drill with Italian & NATO planes over Sardinia, details  of which were made public amidst media reports over a possible Israeli attack on Iran.

This came after reports of the successful test launch of a (supposedly nuclear-capable) rocket from the Palamachim air force base that could reach Iran. What message are we sending Netanyahu when telling him he is a bad boy while at the same time engaging in joint military exercises?  


  • Netanyahu has ordered an investigation into alleged leaks of his plans to attack Iran nuclear facilities. According to the Kuwaiti newspaper al-Jarida he is suspecting the former heads of the Mossad, Israel’s foreign intelligence agency & of Shin Beth, its domestic counterpart, of having done so to torpedo the plans that he & Defence Minister Ehud Barak had drawn up to hit Iranian nuclear sites. And Tsipi Livni, head of the opposition Kadima Party is said to have been persuaded to come out of the chute to attack Netanyahu for “adventurism” & “gambling with Israel’s national interest.

Last January, the then recently retired head of Mossad, a hawk when he was running the agency, called an attack on Iran “the stupidest idea I’ve ever heard.” 


  • The Shenzhou-8 craft launched on November 1st has docked successfully with the already orbiting Tiangong-1 module in a step towards China having its own manned space station. The Shenzhou craft is scheduled to return to earth in a couple of weeks and Beijing is planning two more docking missions for 2012, one of them manned.

China launched its own space program after being kept by the US out an international collaborative project in disregard of the 2,500 year-old advice of the Chinese military strategy icon Sun Tzu “to keep your friends close & your enemies closer.”  


  • Friis Arne Peterson, Denmark’s Ambassador to China, said in Beijing on October 28th that China has “natural and legitimate economic and scientific interests in the Arctic”, even though it lacks a coast line in the polar region. And that his government would like to see China given permanent observer status in the Arctic Council (whose membership is now limited to riparian nations). While some think the Danes are trying to leverage their  influence on the Council & attract Chinese investment in Greenland, others believe that “what we’re seeing here is the changing geopolitical realities in terms of the arrival of China as a much more assertive country in the international system” Be that as it may, China has for several years already had a permanent oceanic & climatological research presence on the Svalbard  Islands in the Barents Sea, well inside the Arctic Ocean, and plans three Arctic expeditions during the next four years & to build an 8,000 tonne icebreaker by 2013.

The Europeans certainly were also sucking up to Beijing when the Head of the EFSF went there to try & inveigle the Chinese government into helping Europe to extract itself from the mess it has gotten itself into. 

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