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

Thursday October 4th, 2012

In the US & Canada retail investors are flocking out of equity funds into bond funds. In the week ended September 19th they did so in the US to the tune of US$8BN (just marginally below preceding week’s US$8.1BN 13-week high). But in so doing they may be jumping from the frying pan into the fire. For while doing so may avoid the volatility of the stock market (the day-to-day gyrations of which ought not concern genuine long-term investors), they expose themselves to the (near) certainty of loss of capital; for bond yields in real terms are negative on an after-tax basis & the market value of bonds declines when interest rates rise (as they will  inevitably start doing at some point in the foreseeable future, regardless of what the Fed says). In contrast, smart investors abandoning bonds are seeking refuge in dividend-paying stocks (income from which for taxable entities gets more favorable treatment from the tax man).


In January 2009 2.4MM Americans were drawing benefits under the Social Security Disability Insurance (SSDI) program. By September 30th, 2011 their number had grown 3½x to 8.3MM, collecting US$119BN in benefits which, if past experience is anything to go by, they will continue doing until retirement age - the growth in their numbers suggests that it now includes a large number of malingerers of a type that Bill Clinton’s welfare reform two decades ago  forced back into the work force by making them “sing for their supper”


The film Won’t Back Down had advanced screenings at both the Democratic & Republican conventions. Released to the public on September 28th, it has the teachers’ unions’ drawers in a knot, one of which has launched an ad campaign against it (which, if anything, is all but certain to ensure more people will want to see it for themselves than otherwise might have been the case). It stars Maggie Gyllenhaal as a crusading single mother who, with the help of a disillusioned teacher (Viola Davis) seeks to rescue a mismanaged school in Pittsburgh in the face of opposition of teachers’ union reps played by Holly Hunter & Ned Eisenberg.


The latest NBCNews/WSJ poll had Obama leading Romney 70-20 among Latino voters, a 15 point hike since August, & better even than his 67-31 spread over McCain in 2008; this will prompt the Obama machine to redouble their efforts to get the Latino vote out. 


In the seven day period ended September 20th, the US Transport Security Administration found 47 guns (38 of them loaded, incl. six with a round in the chamber - one of which the policeman called in to unload it accidentally discharged it without, however, hitting anyone) in air travellers’ carry-on luggage, as well as three hand grenades, and quantities of black powder, hunting knives, timing fuses & a sword. Guns are becoming a problem : YTD the TSA has found 1,105 guns in carry-on luggage, vs. 1,320 & 1,123 in all of 2011 & 2010. One reason given is the proliferation of ‘right-to-carry’ laws (& of concealed weapons licenses) and  the growth of gun sales across the country, from 8.9MM in 2001 to 14.4MM in 2010 & 16.4MM in 2011.


Last week saw Romney in the swing state of Ohio decrying China as a foreign trade “cheater” at the very same time Michael Bell, the (Independent) Mayor of Toledo, a city hard hit by the recession, hosted 150 Chinese investors looking for investment opportunities in the Midwest.  


Canada is in the throes of its biggest food scare ever. A small number of E-coli cases in Alberta were traced back to one of Canada’s largest beef abattoirs, in Brooks, Alberta. So far over 1,500 different products have been recalled, another blow to beef farmers pummeled not  long ago by a few cases of mad cow disease. This event, however, is different from the last, much smaller such event several years ago, a listeria outbreak traced back to a meat processing plant in Toronto. For the latter was due to inadequate cleaning of equipment & was detected locally, whereas this one was brought about by flaws in the slaughtering process itself, the concept of ‘factory farming’ & the Harper government’s attempt to downsize government (in this case by switching to ‘self regulation’ in the food processing industry) & was first identified, not by Canada’s increasingly lax food inspection system, but by US inspectors at the US border in an export shipment (if interested you can find my personal views on this matter at the very end of the main body of Gleanings).


The irrationality of the Harper government’s drive for downsizing government is illustrated nowhere better than in the forced retirement of a four-legged public servant, a seven year-old Chocolate Labrador Retriever called Bailey. Her job, along with her colleague Brodie who has also been declared redundant, was to sniff out firearms & narcotics hidden in shipping containers arriving in the port of Vancouver (in  2011 she sniffed out, among others, seven kilos of opium). She is being replaced by machines that, says her handler, in the past didn’t find stuff that the dogs subsequently did find - the nice thing about canine employees is that they don’t draw a salary, don’t cost much to feed & don’t require a benefit package, and that, upon their retirement they go to a “good home”, often their handlers’, at zero, cost to the tax payer And the machines that replace them like will have a shorter useful life & a higher cost of maintenance.


More trouble for Israel? The former Greenpeace ship Estelle is expected to set sail from Naples for Gaza on October 6th, carrying humanitarian goods & the usual complement of activists sympathetic to the pro-Palestinian group sponsoring this venture.


A developer has unveiled plans to build a replica of the Taj Mahal in Dubai, 4x the size of the original, to serve as “the world’s grandest wedding venue”. 


In Italy, for the first time since WW II, in 2011 bike sales just outstripped new car sales, 1,750,000 to 1,748,000 - a harbinger of things to come for the rest of the developed world - albeit perhaps less so for North America where ‘urban sprawl’ has long reigned supreme?


In Spain the VAT (Value-Added Tax) is going from 18% to 21%. So a municipal theatre in the Catalonian town of Bescanó has quit selling tickets & … started selling carrots, at 13 - 15 Euros each, for admission to its performances since as a ‘staple food’ carrots are VAT-exempt. - there is never any end to human ingenuity where money is concerned, especially where government is involved. And the Governor of Spain’s central bank put the cat among the pigeons when he told Parliament’s Budgetary Committee recently that the government’s proposed 2013 budget assumptions are “certainly optimistic in comparison with the outlook shared by the majority of international organizations and analysts”, and that, to achieve the 4½% of GDP deficit target would require further cutbacks, over & above those proposed by Prime Minister Rajoy.



Thursday October 4th, 2012





Why bother giving the banks more money if they aren’t going to onlend it? As to whether or not  the Fed is fueling inflation, time will tell; the markets seem to think it will & the old market adage is “Don’t fight the tape”. And by having monetary policy pick up the slack from the politicians, he certainly is aiding & abetting irresponsible behaviour on their part (the minutes of the last FOMC meeting showed that several of its members had serious reservations about launching QE3..


GREENBACK’S SUPREMACY IN DOUBT (Reuters, Martin Hutchison)



gathering in New York on September 24th that the higher taxes & spending cuts kicking in on January 1st if Congress doesn’t act (the notorious “fiscal cliff”) could jeopardize the US dollar’s global supremacy, as could any alternative path that fails to cut US deficits & slow federal borrowing. Furthermore that, with the Euro, the Yen & the Yuan having problems of their own, for the first time in several centuries we may face a world order with no single currency of denomination to facilitate global trade & investing


The Common Wisdom is that the ‘lame duck’ Congress will rough out a temporary solution to the fiscal cliff problem, leaving the details to be filled in by the next Congress - one flaw with this is that the devil is always in the details, a second that there is no reason to assume that the Tea Partiers have any intention of abandoning their position of “Read my lips : no tax increases & a smaller government but be sure you don’t touch my entitlements” & a third that evidence is lacking that politicians are willing to accept the US is deep into fiscal doo-doo.  





The problem with our system is that the politicians are now being elected to bribe people with their own money, not to make hard decisions that might see them tarred & feathered, and run out of town on a rail.






This is only a harbinger of things to come. Washington may not be in great fiscal shape but many sub-national governments are hardly any better off (although they tend to be much less debt-laden); this is what has helped to hold back job growth, public sector job shedding.



(Foreign Policy, Mark Perry)



Massive bombing runs on key nuclear installations - aerial attacks coordinated with submarine-launched missile strikes and cyber & electronic warfare attacks. But the Pentagon believes Israel lacks the military capability for more than a “one time there & one time back” effort which would at best set Iran’s nuclear program back one of two years – Its biggest drawback is that Israel doesn’t have MAPs (Massive Ordnance Penetration bombs), like the 20 or so GBU-57s the US is believed to possess - that even Bush 43 wouldn’t let Netanyahu have - capable of penetrating 200 ft of concrete before exploding their 5,300 lbs warheads) nor the B-2s needed to carry them to their target;

Regime decapitation - bombing and/or commando raids to wipe out the regime’s leadership. This is deemed the most dangerous option for the US since it would leave the Republican Guard in charge, who would likely respond with attacks on US ‘assets’ in the region, thereby drawing it into a conflict it didn’t start - the US military’s attitude toward Israel has been changing : “We’ve ... been as solid an ally as they’ve ever had ... so they can defend themselves. Not so they can start World War III ... If Israel starts a war ... America’s first option will be to stop it ... as will be its second and third (option)”

An Iranian Entebbe - Named after the 1976 rescue of the passengers on a hijacked El-Al plane parked at the Entebbe, Uganda airport (when the only casualty on the IDF side was Netanyahu’s brother Yonathan). This would involve landing six C-130 freighters, each carrying 70 members of the Sayeret Matkal (the IDF’s Special forces, of which both Netanyahu & Defense Minister Barak are alums) in the desert near the main Iranian nuclear establishment at Fordow, attacking it & overcoming its defenders, removing as much nuclear material as they could carry & mining the place to blow it up as they left - while this option would utilize the IDF’s greatest asset, its Special Forces (a unit of which is said to have been training for just such a ‘deep penetration’ raid), it’s also by far the most risky. The logistical support on the ground in Iran for such a mission would have to be intense. It would require neutralizing Iran’s anti-aircraft defense system. Keeping the element of surprise critical to the success of such a raid would be hard, if not impossible. This could easily turn into a suicide mission and/or embarrassing failure with Israeli dead & military materiel all over the Iranian desert and, possibly, Israeli prisoners in Iranian hands, and would deal a death blow to Netanyahu’s political career & possibly be the beginning of the end for the survival to the Jewish state of Israel.


Netanyahu’s red line argument, at the UN & elsewhere, has been all about trying to pressure Obama to commit the US to ‘when they start shooting, we’ll start shooting as well’. One retired USAF type’s assessment : “Bottom line? We can do it and they can’t (i.e. bomb Iran), because we have what they don’t” (i.e. bunker-busting bombs and a surfeit of aerial refueling tankers & of pilots experienced in aerial refueling).





Netanyahu had two interlinked problems : he lacked the support at home of much of his Cabinet & his people for unilateral action against Iran that would have made it difficult for Obama to ignore him & he needed Obama ‘onside’ to override his lack of domestic support.





He likely got off easy because the very next day six others convinced on similar charges were executed, thereby joining the other 96 that YTD have suffered a similar fate.



(The Independent, Carina Stewart)



In June Iran’s oil output hit a 20-year low of 3.2MM bbld (i.e. less than Iraq’s, and down from 3.7Mbbld in 2011 & 4.2MM bbld in 2010) & is continuing to slide to the point where the EIA expects an ‘exit rate this year of 2.7MM bbld (this hurts disproportionately with domestic oil consumption steady in the 1.6MM bbld range). But this decline in output is only in part due to the sanctions (i.e. to developments on the demand side); for on the supply side the need to divert revenues into the Budget to support social programs that seek to ‘buy’ the loyalty of the hoi polloi, deprives its oil sector of funds it needs to develop new productive capacity to offset the production drop-offs in its aging fields. As to the rial, in early 2011 it took 10,000 of them to buy one US dollar, two weeks ago this had grown to 24,600 & most recently it was North of 37,500 (i.e. it has lost 40% of its value in 10 days) as people sought refuge in the dollar from an inflation rate said to be 70% per month, well above the official 23% per year).





The economy may be the “weakest link”, but demography is its most dangerous : over one-quarter of Iranians is 15-29 years of age, many of them relatively well-educated but with few meaningful career prospects & with as yet no serious stake in society. This is the very same age cohort that launched and gave critical mass to the Arab Spring movement (nothing is more dangerous than first educating people to expect better things & then disappointing them.                     





Pictures of 12+ lane highways chockablock with cars going nowhere are a sight to behold. If this was an attempt by Beijing to curry public favour amidst an economic slowdown & a once-in-a-decade leadership transition made dodgier than usual by the Bo Xilai affair & what it revealed about the goings-on in the upper echelons of the Communist Party, it likely backfired big time.   





He is merely following in the foot steps of past Zulu chiefs; but this is the 21st, & not the 19th, century. The tragedy of South Africa is that the (unrealistically) high hopes of its people, & the expectations abroad that it would become a ‘shining beacon’ template for the rest of sub-Sahara Africa to follow, have foundered on the inadequacies of three presidents that were in turn a weak administrator (Mandela), a dolt  (Mbeki) & now a buffoon. As to the outcome of the National Conference vote, it’s a good news, bad news story for Zuma. The good news is that due to a sudden 36% surge in ANC members in his home province of KwaZulu- Natal it will have 974 votes at the Conference (out of a total 4,500), vs. 608 at the last one in 2007. But the bad news is that his likely, but as yet undeclared, rival, Deputy President Kgalema Motlanthe, led him 51-48 in a recent poll & has gained the support of the ousted former Leader of the ANC Youth Wing, Julius Malema (a real slimeball, if there ever was one); for, although the Youth Wing has only 45 votes, Malema’s home province of Limpopo has 574. And more generally speaking, tribal & provincial allegiances still count for much in South Africa, & the other tribes don’t care much for their traditional overlords, the Zulus, who account for only about 20% of the population (albeit for a somewhat bigger part of the ANC membership).




Much North American beef is “finished” by feeding cattle grain in huge feedlots. But cattle were genetically engineered to be ‘hay burners’, not to be fed a predominantly, if not exclusively, grain diet. Nor were they designed to live in as close proximity to each other as they are in feed lots for several months in a row. So in feedlots they are under stress on two counts that Nature did not genetically equip them to cope with. Sixty years ago already, when I ‘worked my way through school’ in a meat packing plant, my colleagues on the beef killing floor always knew when a car load of feedlot cattle was going through (& in those days feedlots were nowhere near as massive as today); for as many as half the beef livers passing through the line were picked out of the product flow, & ‘condemned’, by Government of Canada inspectors, operating on a hands-on basis cheek-to-jowl with plant employees, due to a condition similar to cirrhosis of the liver. The stress on cattle in feed lots also interferes with the proper functioning of their immune systems; then, to top it all off, comes an stressful trip to, & brief stay in, the killing plant, with lots of noise & heat, & even more crowding with other, often strange, cattle.


E-coli’s natural home is in the entrails of all warm-blooded creatures incl. ourselves. There are many strains of it, some of which are helpful to the host’s well-being. But like all organisms that live in, or invade their, hosts’, weakened immune systems can enable the nasties among them to proliferate. And by the time feedlot cattle end up on the killing floor many of them are covered with, often runny, cowshit which can be home to potentially harmful organisms, like ‘bad’ E-coli strains that are hard, if not impossible, to completely prevent from entering the food chain. And then, on the consumers’ receiving end, modern life styles with undue stress on ‘cleanliness’ result in people having underutilized immune systems that give such harmful organisms greater scope to do their worst.


A UBC microbiologist a decade ago invented a vaccine that would eradicate E-coli & the Government of Canada helped fund a facility to produce the vaccine. But its availability has not engendered much response in the industry, in part because of its cost ($6/head) even though the cost of vaccinating every cattle beast in Canada supposedly would be far less than the cost of fighting the incidence, & paying for the after effects, of periodic E-coli outbreaks. From my, common sense, rather than scientific, perspective, there are at least two possible problems with vaccination : what might be the “Unintended Consequence” for warm-blooded creatures of presumably wiping out large swaths of, if not all, E-coli strains in their gut (some of which might actually be ‘good’ for their host) & would this not be a way of addressing the symptoms, rather than the disease (in this case the way we raise & process our beef?