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

January 5th, 2012

One of the more thoughtful market letters I get recently commented on the latest ten-year Budget forecast by the non-partisan CBO (Congressional Budget Office). It calls for revenues to rise from US$2,228BN in 2011 to US$4,961BN & expenditures from US$3,708BN to US$5,726BN, and the deficit to shrink from US$1,480BN to US$763BN & the deficit-to-GDP ratio from 9.8% to 3.2% of GDP, but the debt/GDP ratio to rise rising from 62.1% to 76.7%. The analysts has three problems with. The CBO appears to assume average annual GDP growth in excess of 3% (which is ludicrously unrealistic) & continued low interest rates (which it is equally unlikely). It understates the national debt, & the debt-to-GDP ratio, by 50% by excluding internally-held debt, such as that owed to the SS system which will start being drawn down in the foreseeable future. And it notes that the CBO doesn’t expect a single balanced budget year during the decade.

The Fed will become more dovish/more stimulus-biased this year. For three of the four regional Fed Presidents who rotated out of voting positions this year were the more hawkish ones last year (Minnesota’s Narayana Kocherlakota, Dallas’ Richard Fisher & Philadelphia’s Charles Plosser).

A harbinger : Brazil’s GDP has just surpassed that of the UK. Another : Italy says it will start penalizing primary dealers who fail to participate regularly in its securities’ auctions - it’s not a good sign when a government must resort to browbeating dealers into buying its paper. A third is Adam’s Smith’s observation that there has never been “a single instance” of souvereign debt being repaid once “accumulated to a certain degree” (which according to Ken Rogoff & Carmen Reinhart is a National Debt-to-GDP ratio of 90%) - nothing much has changed in the intervening 235 years. And finally, two years ago Fed Chairman Bernanke refinanced the mortgage on his US$840,000 home; but last September, just after launching Operation Twist to drive mortgage rates down & stimulate the economy, he did so again, switching into a US$672,000 30-year fixed rate at a purported 4% - since he is neither known to be stupid nor to make stupid moves in his personal life, we might all want to sit up & take notice!.

After ‘opting out’ at last month’s EU Summit, David Cameron’s Conservatives have, for the first time in 14 months, pulled ahead of Labour in the polls, at 39% (up 4 points) vs 38% (down one), whereas in January 2011 Labour had outpolled the Conservatives by 14 points. The wisdom of his move, much criticized by Britain’s desperate EU ‘partners’, will be borne out eventually.

According to one analyst ‘Japan is well on its way to becoming a capital importer’. This could cause the last thing the world needs right now, another souvereign debt crisis. For Japan has a debt/GDP ratio that makes Greece’s look modest by comparison (at last report 228% vs. 156%) & a budget deficit that more than doubled in recent years to the 9% of GDP range. It long got away with this because almost all its debt was held internally (so the government didn’t worry much about its rating & the rating agencies left them alone). But many of the mama-sans who traditionally bought lots of Japanese government bonds for their retirement , are now starting to dis-save in retirement. So the rating agencies recently woke up to reality. While not many years ago Japan was solidly triple-A rated, last August, five days before the country got its sixth prime minister in five years, Moody’s dropped its rating a notch to Aa3, thereby bringing it in line with those of S&P & Fitch, except that Moody’s still has a stable-, & the other two a negative-, outlook. And just before Christmas, Japan’s own rating agency, Ratings and Investment Information Inc., cut its rating for JGBs to AA+ on the grounds it could “no longer consider the government’s ability to adjust fiscal conditions on its own to be at a level required for the highest rating.” Longer term, Japan’s demographics are awful. Its population has been shrinking for years due to few births, virtually no immigration (which is unpopular & alien to its culture) and, most recently, evidence that young, well-educated Japanese are emigrating to Brazil (1½ +MM of whose people, i.e. close to 1%, are of Japanese extraction). Its womenfolks’ fertility rate is 1.37, the fifth lowest of the 222 countries for which data are available, ahead only of Taiwan, Singapore, Hong Kong & Macau, and well below China’s 1.61. And it is most severely affected by Asia’s “flight from marriage” (in part because, as young women become better educated, they find it hard to find marriage partners whom they deem their intellectual equal & young men are turned off by women better educated than they are, and in part also, in Japan’s case at least, in rebellion against the traditional attitude of ‘salarymen’ towards their wives). So in Tokyo one-third of women in their 30's have never been married, & nation-wide the ratio is 18%, vs 20% in Hong Kong, 16% in Taiwan, 15% in Singapore, 7% in South Korea & < 1% in India.

In the last month or so winter in Edmonton has been AWOL. While its average daytime high for December is -5°C (23°F) & for January -7.3°C (19°F), for the last month it has consistently been in positive territory, occasionally going as high on 8°C (46°F). It feels more like early spring than mid-winter. And other than having had a 20 cm. dump of snow, one month’s worth, on November 11th, there has been little snow, & what did fall has all but disappeared. But that’s nothing compared to North Dakota : on January 4th temps in Bismarck hit an all-time record high of 55°F (13°C), & the weather forecast calls for highs in the 60+ degree (16°C) range later this week, and where the snow cover is a measly 0.5 centimetre (0.2 inches) vs. a ‘normal’ 45 cms (18 inches). The latter is of great concern to farmers, because of the threat of “winter kill” of perennial forage-, & fall-seeded cereal-, crops due to an insulating snow layer, and to municipal authorities due to the resultant increased grass fire hazard. This seems to be a tiny bit more evidence that, like it or not, climate change is a reality, & that the only question really worth debating is how much of it is be cyclical & how much might be Man-induced.


No. 442 - January 5th, 2012


Never mind terrorists & governments. What about hackers replicating Fouchier’s work as a challenge, or Julian Assange-types doing so for misguided ego-tripping reasons?


(WSJ, Gerald P. O’Driscoll Jr.)

Now a Senior Fellow at the Cato Institute, the writer once served as Vice-President & Economic Adviser at the Dallas Fed, and as Citigroup’s Director of Policy Analysis.


(Reuters, John Stoll)

Note the reference to legacy costs. They are, & will increasingly become, the prime headache of governments large & small, the prime target for budgetary axe wielders & the source of social unrest that pits hard-pressed tax payers against public sector retirees seeking to protect their tax payer paid-for entitlements. At its 1950 peak Detroit’s population was 1.85MM. Between 2000 & 2010 it shrank from 951,270 to 713,777; so while its population declined by 25%, its police department’s staff was cut 45%. On the other hand, in 2001 its ratio of police per 1,000 population was 5.8, vs. a national average for big cities of 2.0, & at 3,000 still is 4.2 per 1,000 (vs. 1.2 in Flint, 1.6 in Grand Rapids, & 1.9 in Lansing, all cities with populations < 200,000, which typically have higher police to population ratios). And yet Detroit has one of the US highest crime rates.


Interesting! Cattaneo usually comes across as somewhat of an industry shill. What Canadians do think about the Keystone is irrelevant; for they don’t vote in US elections. The Northern Gateway line, however, which is far more important from a national Canadian perspective, is another issue. And there ‘public’ interest is immense (over 4,000 people have registered to address the Panel that will soon start holding public hearings on it) &, while the Indians have yet to be bought off, the most recent polls show a majority of people in BC supporting the Northern Pipeline concept.


The helicopters’ greatest potential usefulness may well be in internal-, rather than external-, security activities. By 2014/2015 the Middle East could, & will, be a different place; already US influence there is on the wane for local & US domestic reasons, and because Obama’s foreign policy focus is shifting from the Middle East to the Asia-Pacific. Meanwhile, Israel has just reneged on a hitech defence-related contract with Turkey for fear it would in the end benefit its enemies, & it should not surprise anyone if, despite Shapiro’s comment, this sale will prompt Israeli demands to have its Air Force’s capability “up gunned” as well (egged on to do so by the military-industrial complex).


(G&M, Brian Milner)

This is ‘too little, too late’. It also somehow doesn’t jive with his earlier view that at their current levels his government’s bonds are “good value”. And a “united, joint and convincing response” would be a real departure from what so far has been a disunited, disjointed & unconvincing one.


(Bloomberg, Patrick Donahue)

No doubt Europe will survive in some way, shape or other. But “stronger than ever”? As noted above, Brazil is in the process of surpassing the UK in terms of the size of its GDP & before too long will be snapping at Germany’s heels. The impact of 5-7% compound annual rate of growth vs. 2-3% is awesome but often lost on many people.


Happiness is relative. It was a much better, & slightly cheaper, outcome than last November. But the plan had been to raise 5, not 4, BN Euros-worth, total bids were only 1.3x the amount sold, the government’s bond agency was active in the aftermarket, & the Euro weakened afterwards.


Bad headline. The meeting produced zilch. It was a dumb, Quartet-sanctioned, anti-Hamas move orchestrated by Israel to try & shipwreck the earlier-announced, but still very tentative, rapprochement, & agreement to hold elections by mid-year, between Fatah & Hamas. As should, have been expected, Hamas’ reaction was “We demand a boycott of this meeting ... Going to such a meeting is only betting on failure”. And those expecting anything positive to have come from this were self-delusionary; for PLA President Mahmoud Abbas has no room to manoeuvre since anything short of an end to the Israeli settlement-building frenzy would result in him, & his Fatah party, being run out of town on a rail, handing any subsequent election to Hamas (an outcome that no one supposedly wants).


It is starting to look as if over time the extremists could possibly start posing a greater threat to the survival of the state of Israel, as presently constituted, than the Palestinians.


In this age of grass roots mass media there have been videos of monitors ignoring people trying to show them childrens’ bodies & of a monitor saying he had seen snipers on roofs only to have the Sudanese general heading the mission telling the press he had been misquoted (only then, a couple days later, reversing himself & starting to talk about the danger of rooftop snipers). And there have been reports the government is now using artillery against demonstrators to cut the risk of defection among soldiers on foot & in close contact with demonstrators.


This is not good news for North American & European, and Japanese & Korean, auto makers who have been counting on the (expanding Chinese market to boost their global sales & more fullyutilize more of their excess capacity.


(G&M, Edward Wong)

So one advances as the other retreats. The wisdom of either depends whether one views a space program as a good use of resources. Remember how President Reagan helped bring the Soviet Union to its knees by making it overreach? In China’s case, its demographic time bomb (fewer young people, dramatically fewer women of child-bearing age & an aging population) and its people’s rising expectations could lead it down the same garden path if it were to use its resources in a sub-optimal manner on a host of ‘marquee-type’ projects.