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

October 18, 2012

The recent pessimism about the near-term outlook for the US economy is wilting in the face of  counter-indicative economic news. Retail sales have been stronger than expected. The unemployment rate for September came in at 7.8%, down a full 50 bps MoM (causing cynics, Republicans & conspiracy afficionados to sniffle “How convenient”)  - if confirmed on November 2nd by the October outturn, this could affect the election result four days later). In the week ended October 6th new applications for unemployment benefits were down 30,000 WoW to 339,000, their lowest level in 4½ years,  while the Street had expected them to be flat (one state was said to have “accounted for the bulk of the drop”, so this is likely to be revised - as it turned out California, that the week before had reported a large drop in applications, in the latest week reported a large increase, driving the number up to 388,000; wonder what next week might bring?). The widely-followed ThomsonReuters/University of Michigan preliminary October Consumer Sentiment Index jumped from 78.3 in September to 83.1, its highest level in five years, i.e. since before the onset of the Recession (while a marginal decline to 78.0 had been expected). Leading indicators were up a higher than expected 0.6% (whereas they had been down 0.4% in August & economists’ forecasts had been in the 0.2% range).  Housing starts came in at 872,000 (whereas the most optimistic of forecasts thereof had been 850,000). The National  Association of Home Builders/Wells Fargo’s Housing Market Index was up 1 point in September to 41, a post-June 2006 high. Rising stock- & house prices are being given credit for much of this (smart investors in droves are abandoning bonds for dividend-paying stocks & foreclosures are down sharply thereby reducing the glut of pre-owned homes on the market). Add onto that the fact that China’s economy seems to be stabilizing & that the new leadership, that should be in place within the next month, is expected to introduce more “pump priming’. So suddenly  the talk about the economy, & about the retail sales’ outlook for the critical Thanksgiving/Christmas period, has gotten more bullish.


On Sunday October 7th CNBC’s Stephen Liesman had a session (rather tellingly at Goldman’s headquarters!) with Goldman CEO Lloyd Blankfein, former Republican Wyoming Senator Alan Simpson & one-time Clinton Chief of Staff Erskine Bowles (the latter two having co-chaired Obama’s National Commission on Fiscal Responsibility and Reform whose report was soundly trounced in the House last March 382-38, with only 22 Democrats & 16 Republicans supporting it, & never made it into the Senate). The most remarkable thing about this 35 minutes was the degree of cautious optimism displayed by all three. And the two most interesting parts thereof were Bowles’ summary that “Senators and Congressmen in the past have always attempted to bring ‘home the bacon’ (to their constituencies), but now the pig is dead”, & Blankfein’s observation that the past four years have been like the mid-1930's when President Roosevelt was at war with the establishment but when, once the war clouds started to gather, there was a change of heart in the nation that in no time flat made America not only self-sufficient in weapons production but a major supplier to others as well (helped along in this by Pearl Harbour?) - those wishing to see a more complete summary in two, not 35,minutes can find it after the main body of Gleanings. 


Talk of Bowles as a candidate for the Treasury Secretary’s job in any second term Obama Administration first emerged last August. He is a different kettle of fish from Geithner, who was raised in the Third World, speaks Mandarin, has an AB from Dartmouth and an MA in Economics & Asian Studies from Johns Hopkins, and who has been what the Japanese call a “salaryman” all his career at, among others, Kissinger Associates, the US Treasury & the IMF, before becoming President of the New York Fed at age 42 (where, as few people realize, his salary is paid by Wall Street, a potential conflict of interest, if ever there was one). Bowles is more of a “hands-on”, hometown, entrepreneurial & political type. He was born, raised & went to university in North Carolina (but also has an MBA from Columbia). Early in his career he worked at Morgan Stanley. Twice during his career he launched successful regional investment boutiques (the first of which after 20-odd years was bought out to eventually become part of Wachovia’s investment banking operations & the second of which, fifteen years later, is still in business). He served (briefly) as Clinton’s Deputy Chief of Staff during his first-, & as his Chief of Staff during his second-, term. In 2002 & 2004 he ran for the Senate but both times was beaten decisively, but not badly (by 10 points) by higher profile Republicans who campaigned against his having worked for Clinton. He led a North Carolina task force on rural economy prosperity in the late 90's. In 2005 he was Deputy UN Special Envoy for Tsunami-Affected Countries (in South- & Southeast Asia) to Bill Clinton’s Special Envoy after which he was President of the University of North Carolina System for five years. He is now on the Boards of, among others, Morgan Stanley, Norfolk Southern & Facebook.


Having Bowles as Treasury Secretary would have at least two advantages for a second term President Obama intent on building his “legacy” over the next two years. He is already up to speed on the fiscal challenges the nation & his Administration face. But what may be far more important is that he & Rep. Paul Ryan, Romney’s running mate & the driving force behind much of the mainline-, as opposed to the Tea Party-, GOP’s Budget ideas, seem to have a mutual admiration society going; for Ryan has called Bowles “his favorite Democrat” while the latter has said he “admires” Ryan who “seems smart ... intellectually curious ... honest, straightforward and sincere doesn’t mean I agree with him by any stretch of the imagination. But I am not going to act as if I don’t like him, or that I don’t have some real respect for him.” On the other hand, Bowles has been faulted by some for having “no market experience” (which is pathetically untrue &, in any case, market experience wouldn’t be why Obama would want him in the job), his ‘coziness’ with Ryan wouldn’t sit well with the leftist element in the Democratic Party, & likely has upset much of, the Democratic Part’s establishment by supporting an independent, former Governor Angus King, in a tight three-way race for the Senate seat vacated by three-term (moderate) Republican Sen. Olympia Snowe in Maine (who didn’t run again because she’d had her fill of “hyper partisanship in a dysfunctional Congress”) & that last week he & Sen. Simpson took out one page ads in three local newspapers in neighbouring New Hampshire supporting an eight-term Republican member of the House, Charlie Bass (one of just 16 Republicans - & 22 Democrats - who last March had voted in the House for their plan).


Bowles is likely serious when he said, in response to a direct question by Liesman, that he has no interest in any job outside North Carolina but seemed to leave the door open when he said something like ‘if only the Treasury were in North Carolina’). He is at an age (66) where he doesn’t need the hassle that the Treasury job would entail (why would anyone in his right mind, regardless of age, want that job at this stage?). He is doing financially quite well by his board  memberships (that last year brought him US$1.4MM, albeit only 20% thereof in cash). On the other hand Obama, if he so desired, could challenge him to put his money where his mouth is (i.e. ‘you drew up the plan, now you’d better help us implement as much of it as we can’) for at least the first two years of his second term - if Bowles  were to emerge as Treasury Secretary in any second term Obama Administration this would be a powerful signal that Obama intends to make a clean-out  of the Augean Stables on the Potomac  part of his legacy .


On October 16th the Canadian dollar swooned in early trading because the day before, in a speech in Nanaimo, B.C., Bank of Canada Mark Carney omitted from his circulated text what has in recent months been a signature stock paragraph in his, & his Deputies’, speeches, namely that there might soon be reasons for a “propensity to reduce the level of accommodation it (i.e. the Bank of Canada) had been offering the money market.” The market interpreted this as meaning that  higher interest rates are off the table again; so a bunch of interest-sensitive money skedaddled.


In a recent Angus Reid poll 58% of those interviewed want Ottawa to reject the proposed $15.1BN CNOOC takeover of Calgary-based Nexen (vs. 12% urging the government to give it the green light). Not surprisingly, opposition to the deal was strongest in BC (69%) & Alberta (63%) where more people are directly exposed to the Asian invasion of the Canadian natural resource ‘patch’ and, rather remarkably, quite universal across the political spectrum : 57% of Conservatives  were in the Naye category, as were 65% of NDPers & 69% of Liberals. And when asked if they thought foreign governments should be allowed to gain control over natural resources on Canadian soil, the Nayes soared to 78% (as to the latter, only a small part of Nexen’s assets & operations are domiciled in Canada). This will pose a quandary for Harper who, if he were as smart as he thinks he is, should bring out the “golden share” idea to cretae at least the impression give the impression that CNOOC would be held to its commitments under the deal.


Some Liberal Party insiders must have a death wish for their party (or be desperate beyond belief). For they are prodding Ontario’s soon-to-be-ex Premier, Dalton McGuinty, who suddenly resigned earlier this week, to throw his hat into their party’s leadership race ring. For few, if any Provincial Premiers have ever been very successful at the federal level, & his track record as Premier has been so dismal as to make Bob Rae’s 25 years ago look good by comparison.


At last report only five of the 17 Eurozone countries, Estonia, Finland, Luxemburg, Slovakia & Slovenia were meeting the EU’s standard for current deficit & total souvereign debt levels of 3% & 60% of GDP respectively. 


On October 15th Greece’s Prime Minister Antonis Samaris reassured his compatriots struggling with a 25%, & still rising, unemployment rate (which is shortening the fuse on an incendiary social time bomb), & who three days later  were once again rioting,  that “Greece will soon get the next tranche of the bailout. Its economy needs liquidity like a desert needs rain.” - he may well be right because rumours are ‘the fix is in’ even though everyone knows Greece has fallen far short of the loan conditionalities; be that as it may, this was an unfortunate bit of imagery since deserts that green up overnight after a rain, a few weeks later back to being well ..... deserts.


In his eight months as Spain’s Prime Minister Mariano Rajoy has raised income taxes, cut spending drastically, most notably in healthcare & education, raised the VAT from 18% to 21%, watched the unemployment rate go to 25% (over twice that for young people), & presided over a nation suffering what in people would be called ‘depression’. So his party likely won’t fare well in this weekend’s election in his home province of Galicia (in Spain’s very Northwest corner, bordered to the South by Portugal, and to West & North by the Atlantic). And next month’s election in Catalonia is becoming ever more a referendum on independence, or at a very least a great deal more local autonomy. And just as at the national level Germany is loath to become the fairy godmother for the Southern European countries, at the sub-national level serious separatist movements aregaining traction all over the place, & not just in Catalonia or Basque country in Spain  (most recently so in Belgium & Venice, and for the same reasons : charity starts at home & ‘loyalty to the clan’.   


A decade ago the US produced 77MM tones of soybeans, 83% more than Brazil; this year the former is also expected 77 MM tonnes, while Brazil has doubled its out put to 80MM tonnes. Since, despite some serious concerns along the way, this appears to be turning out to be a pretty decent year for US bean growers, the trend seems unmistakable. Argentina’s soybean production also went up significantly, by  40%, during the same period (despite being down 20% YoY this year due to drought). Rather interestingly, of the three Brazil is the only one to produce significant amounts of non-GM soybeans (30+% of its entire crop) for which the market for which is expanding in relative terms. Brazilian farmers say non-GM bean crops are more profitable & complain a shortage of seed is caused by Monsanto constraining the supply thereof (which seems like a bit of nonsense since nothing stops them from reverting to the age-old practice of propagating their own own seeds).


On a more general note regarding the global food situation, in the past decade global wheat stocks have declined over 30%, rice stocks over 40%, & corn stocks 50%.


The Yakusuni (Shinto) Shrine is located in Chiyoda, one of the smaller of Central Tokyo’s 23 ‘special wards’ & is also home to the Imperial Palace. It is dedicated to almost 2½ MM Japanese citizens who died in the service of their Emperor (& is the only place in the world where the Emperor will actually bow), many of them in WW II (incl. 14 convicted war criminals, one of them Gen. Tojo, Japan’s Prime Minister from before Pearl Harbour until mid-1944, who, after the war was sentenced to death, & hung, by the Allies), & it also houses one of the few musea in Japan dedicated to WW II. So it is not surprising it is a powerful, carefully nurtured emotional symbol in China & Korea of their countries’ suffering at Japanese hands during WW II, & that whenever a Japanese politician makes a pilgrimage there, the reaction in Beijing (& Seoul) is swift & Pavlovian. Last Wednesday the leader of Japan’s Official Opposition, Shinzo Abe (who has a good chance of becoming the next Prime Minister) used the occasion of the Autumn Festival to visit the Shrine, giving rise to Beijing huffing & puffing that this would ‘further poison bilateral ties” & the Xinhua News Agency proclaiming this was a “rightist show of militarism”. Then the very next day, in a show of double defiance (of both Beijing & their boss), two government ministers, one belonging to the ruling party & the other to its  junior coalition partner, did likewise, despite having been instructed earlier by Prime Minister Noda to “stay away” from Yakusuni.            



Thursday October 18th, 2012





The latest bit of possible fiscal legerdemain by First World governments & their central bank satraps mooted in the Financial Times would involve central banks cancelling part of their government bond holdings. For economic theoreticians this may  make sense, but outside their ivory towers it would diminish confidence in the system & be seen as just another way of ‘rolling the problem down the road’, rather than addressing its root causes. Three or four  generations after Germany’s post-WW I hyperinflation Germans remain obsessed with it; but this may now serve them very well indeed if it were to put them in the van of a “Let’s get the hell out of Dodge while the getting is still good” movement. The Krugmans of this world pooh-pooh the risk of inflation on the grounds there is too much spare capacity & unemployment, and corporations have too little pricing power. But they are making a mistake they wouldn’t tolerate in an Economics 101 student (if they ever saw, or dealt with, one these days), failing to distinguish between “demand-pull” & “cost-push” inflation, &  ignoring the possibility of serious inflationary expectations emerging (at which point sellers gain a great deal of pricing power  - an example thereof was recently reported in the press : an Iranian was haggling with a supplier over the price of a large quantity of wheat, the phone rang & the seller answered it, and after a brief one-sided conversation he turned to the aspiring buyer & told him “My price is now 10% higher” - it’s that simple when an inflation mentality gains a foot hold, one doesn’t, &shouldn’t, haggle) Finally, it is a sign of the times that the bastion of the German corporate establishment, the Deutsche Bank, now has an Indian Co-CEO who lives in London & whose remuneration last year, as Head of it’s global corporate finance operation, was 60% greater than the measly 8.8MM Euros his then boss, Swiss-born CEO Joseph Ackerman, took home).





Take your pick as to whom to believe, Bernanke, who hopes it will work & Krugman who knows how it should work, or these two fellows who know firsthand how it will work (and at least one of whom is well-positioned to imbue a broad spectrum of decision makers with his concerns).





In El-Erian’s eyes, the economy is “healing” & the priority is to keep the healing process “on track”. And that, while Democrats believe Americans are in the throes of a paradigm change such as their economy hasn’t seen in a century & need the social safety net to help them through it, the GOP  holds  that, if government just got out of their way, individuals would adjust on their own (which seems like little more than the largely discredited concept of “trickle-down economics’ in drag).   





This doesn’t have much credibility with many Republicans who believe that, having blinked twice, he will do so again. And those around House Speaker John Boehner (R.-Ohio) refer to this as a “Thelma and Louise” strategy (after the 1991 movie of that name in which the two main characters drive their 1966 T-bird convertible over a cliff rather than surrender to the cops). 






This analysis ignores the fact Netanyahu is positioning himself for an election (which has now been set for January 22nd - earlier than anyone had expected) in which he hopes to be able to shift Israeli public opinion slightly rightward (in part by undermining Barak’s credibility). His UN speech was made when it increasingly looked Romney was a dead duck (i.e. before the first debate blew some life back into his campaign) & when it had looked wise to quit antagonizing Obama. Recently, there were cyber attacks on large US banks, for which Washington now blames Iran; if so, the Iranians might just deem them tit-for-tat since in recent  years there have been cyber attacks on Iran’s pride & joy, its nuclear program, so sophisticated as to have been deemed to have required souvereign government involvement (incl., this article suggests, that of the US). If so, no one should have been surprised by Tehran launching retaliatory attacks on what it deems the core of the “Great Satan” empire, Wall street, especially since it plays a key part in the sanctions regime





The dog that bites the hand that feeds it tends to come to an evil end : this came the day after his Prime Minister had  praised the EU for increasing its sanctions that target Iran’s  banking-, shipping- & industrial sectors, a move Tehran called “an error in calculation” & Beijing denounced.





The best thing to be said about this is that every missile fired is one less in Hezbollah’s hands.    


ONLY ONE MAN CAN BEAT NETANYAHU (Haaretz, Bradley Burston)



Burston is an LA-born Jew who emigrated to Israel in the mid-70's after graduating of UC (Berkely). He is a columnist for, & Senior Editor at, Haaretz, and his Leit Motive is “it is important to criticize Israel when it deserves criticism ... and to strongly defend it when it deserves to be defended.” Last August 13th his column was entitled Mr. Netanyahu, before you bomb Iran, say goodbye to all you know (for “you won’t be able to protect all of them from the retaliation that will surely come”). The attorney making the claims against Netanyahu once was Barak’s closest associate until fired  in late 2007 with Barak claiming “he abused my trust” after he had  changed the Labor Party’s constitution but not in the way Barak had told him to. Be that as it may, he now charges that once he was at a meeting at Netanyahu’s father’s house before tha last election when Netanyahu pulled a wad of cash from his sock & handed it to his Chief of Staff, & that Netanyahu frequently met with people at his father’s house that “he didn’t want his (third) wife to know about” (who, not long after her husband had become Prime Minister, made the headlines for being sued by a former housekeeper for humiliating her, paying her less than the minimum wage & making her work on the Sabbath (to which Netanyahu responded by suing the paper that printed the story for defamation) & a little while later for firing an elderly gardener (whom she had also being paying less than the minimum wage) whose son had died in the service of his country - which is a big issue in Israel . She has also been accused of meddling in affairs of state to the point where one of Israel’s most prominent journalists once alleged that “He - i.e. Bibi- is there to satisfy her, not to work for us.”    




Noteworthy observations from Stephen Liesman’s programme with Messrs. Blanfein, Bowles & Simpson included :included :