Tuesday, October 30, 2012

Rebounding Economies And Other Fairy Tales

It says something when CNBC reports, even third hand, the possibility of systemic failure. However the failure is possible within a decade thus postponing the inevitable to a comfortable distance down the road. There is also a way out even if the numbers quoted don't add up (Greece rebounding by 65 percent! Huh?). Its not alarmist that way for people who think things can only proceed as they have proceeded thus far. Change scares people.  

The debt burden in the U.S. and other Western countries will continue to increase, Marc Faber, author of the Gloom, Boom and Doom report told CNBC on Monday, leading to a “colossal mess” within the next five to 10 years.

“I think the regimes will try to keep the system alive as it is for as long as possible, which means there’s no “fiscal cliff,” there’s a fiscal grand canyon,” Faber told CNBC’s “Squawk Box.”

Faber argued that the political systems in place in the West would allow the debt burden to continue to expand. Under such a scenario of never-ending deficits, the Western world would rack up huge deficits.

One day, the system would break, he said.

“Eventually, you have either huge changes occurring in a peaceful fashion through reforms, or, usually, through revolutions,” he said. The U.S. is getting closer to such a revolution, he said, as is Europe.

“I think the timeframe would be within five to ten years you have a colossal mess … everywhere in the Western world,” Faber said. “I think the deficit here (in the U.S.) — irrespective of who is in the White House — will stay above a trillion dollars per annum for at least as far as the eye can see.”

Bureaucracies in the U.S., as well as Europe, are far too big, he said, and are a burden on the economy.

“My medicine for the U.S. is: Reduce government by minimum 50 percent,” he said. “The impact would be immediately an improvement in the economy.”

Oulook for Stocks

Faber believes the Chinese and Japanese stock markets could see a rebound, while in the U.S. the S&P 500 [.SPX 1413.11 --- UNCH (0) ] is likely to see a 20 percent downward move.

"I think here we’re going to go down 20 percent from the recent top at 1,470. The technical position of the market is poor and the corporate earnings are worsening. And I believe that if the statistics were precise – which they aren’t – (…) I think there’s hardly any growth," Faber said.

Four months ago, Faber turned his attention to European stock markets, attracted by the low valuations.

"Greece, Italy, Spain, France, Portugal, they were four months ago at the 2009 lows or even lower," he said.

Faber recommended buying European stocks at the time and for the first time in his life bought them himself.

"I did it simply because the valuations were low. Since then, Greece is up 65 percent," he said.

He would no longer buy European stocks, he said. "I expect a correction but no new lows," Faber said.

Now he is focusing on Asia.

"In Asia, Thailand from the 2009 lows is up 250 percent. Other markets like the Philippines, Indonesia, Malaysia, Singapore, are up by a similar amount," he said. The Chinese benchmark index on the other hand was at 6,000 in 2007, now it is at 2,000.

"I think China and Japan could have a rebound here. If Greece could rebound by 65 percent the greatest garbage could rebound by 65 percent," Faber said.

Monday, October 29, 2012

Israel Attacks Sudan

This story from Time World is a bit tentative when it comes to laying blame for the explosion but the blogs are rattling on about how Osrael needed us help to get a missile that far from home and how this is a dry run for a bombing run on Iran. None of which seems preposterously unlikely
Fire engulfs al-Yarmouk ammunition factory in Khartoum, Sudan, on Oct. 24, 2012
Late on Oct. 23, an enormous explosion erupted around a government-run ammunition factory on the outskirts of Sudan’s capital, Khartoum. Terrified residents in the area reported a blackout, the whizz of a rocket, then a huge blast that sent white sparks into the night sky and matériel flying in all directions. While the first official report suggested it was due to an accidental explosion in a storage room, Khartoum later blamed Israel for launching the attack. “We believe that Israel is behind it,” said Information Minister Ahmed Belal Osman, adding that the planes had approached from the east.
The Sudanese government claims that four Israeli strike planes launched the attack, which partially destroyed al-Yarmouk ammunition factory and killed two civilians. “The main purpose is to frustrate our military capabilities and stop any development there and ultimately weaken our national sovereignty,” Osman said, adding that “Sudan reserves the right to strike back at Israel.” Meanwhile, the spokesperson of the Sudanese army (SAF), al-Sawarmi Khalid Saad, suggested there could be spies within the SAF as well; the military had had plans to relocate the factory. He also said that Israel had previously voiced its concern about the factory but acted on false information that it was producing heavy weapons.
The strike could be the latest incident of a long-standing clandestine war between Sudan and Israel — spurred by the latter’s desire to thwart the alleged supply of weapons from or via Sudan to Hamas, the Islamist group ensconced in the Gaza Strip. It’s believed that, with a growing number of seaborne arms shipments from Iran, a Hamas ally, being seized and confiscated, Tehran has used Sudan as a staging ground to supply Hamas’ fighters overland.
Still, analysts have voiced skepticism over Khartoum’s latest accusations. “The Sudanese officials’ accounts seem a bit far-fetched,” Richard Cochrane, a Sudan expert at Jane’s Intelligence, tells TIME. “If the aircraft were supposedly radar-evading, then how did they know there were four?” Cochrane also highlights the possibility that it was an accidental explosion in the storage room, as had initially been reported by the Khartoum state governor. “There has been a lot of pressure on the Sudanese regime internally. Military campaigns in the South are not going well, there’s social unrest on the streets, a declining economy,” says Cochrane. “These are times of internal pressure when the regime would be keen to deflect attention outward, and Israel has always been a prime candidate.”
Sudanese political analyst Alhajj Hamad challenges claims that there were four planes that conducted the attack. Instead, Hamad concludes from speaking with military sources that there was only one plane, which was a drone. He also says that his military sources say the air strike did not target the factory but was actually very specific. “It was targeting a drone-ammunition store next to the factory, which in turn affected the factory,” he tells TIME. “As usual, there is an official story and another story.” Fueling rumors of further obfuscation, local reporters say they were prevented from viewing the attack site.
While Sudan’s Information Minister stated that the factory made “traditional weapons,” it appears there might have been something more valuable. According to Israeli military analyst Alon Ben-David, it must have been a considerably high-value target for Israel. “You don’t send four strike fighters 1,900 km to destroy a factory that produces Grad rockets,” Ben-David tells TIME. “It also puts into question whether strike aircraft were actually used.” It would have been a major operation requiring refueling, support aircraft, electronic mission aircraft and rescue support, explains Ben-David. “A lot to just prevent arms smuggling.”
Israeli Defense Minister Ehud Barak refused to comment on Channel 2 News, saying, “I have nothing I can say about the matter.”
If Khartoum’s allegations are correct, this would not be the first time Israel has struck out at Sudan. In 2011, Israel launched an attack on a car in Port Sudan that killed two people. Rumors say one of the people killed was a high-ranking Hamas official. At the time, Ali Karter, Sudan’s Foreign Minister, said Israel launched the attack to ruin Sudan’s chances of being removed from the U.S. list of state sponsors of terrorism. It was been placed on the list in 1997 for supporting various terrorist groups and harboring Osama bin Laden during the 1990s. In 2009, Israel was blamed for reported drone attacks on weapons-smuggling convoys in northeastern Sudan. In 2010, Mahmoud Mabhouh, a key Hamas arms smuggler, was assassinated in Dubai. Israel declined to comment on all these incidents.
Sudan appears to be taking this latest attack seriously. Its envoy to the U.N. Security Council, Daffa-Alla Elhag Osman, has said he intends to file an official complaint. And Khartoum has said it’s planning decisive actions against Israeli interests, adding that it now has the right to do so when and how it chooses. Whether or not Sudan has the capability, though, is far less certain. For all the bluster, analysts aren’t expecting much of a retaliation. Although it might have only been an ammunition-storage depot, its attack could mean much more for Tel Aviv. “These kinds of attacks are always an example of one’s abilities,” says Ben-David. “If you go the same distance east, they have demonstrated their capability to reach Tehran at a crucial time.”

Read more: http://world.time.com/2012/10/25/did-israel-bomb-a-sudanese-ammunition-depot/#ixzz2Adnqlucw

Sunday, October 28, 2012

Water As Money

When Forbes magazine notices water has become a commodity its time for even the most sceptical to start worrying about what is happening to natural resources on our stressed planet. "New business opportunities"  should be the least of our concerns where water is the commodity, but greed leads the way as usual. 

Billions of dollars worth of water infrastructure upgrades are needed in the United States to stop major water losses each year. There will soon be too many people on this planet for everyone to consume as much water as they do today. Earlier this month, as U.S. newspapers warned of a drought-induced bacon shortage, international scientists cautioned that pending water shortages could result in food shortages of all kinds, urging people to eat fewer water-intensive foods (namely, meat). Everyone seems to agree that water shortages are coming, they could bring with them huge and widespread problems touching everything from food to energy, and that there are business opportunities and risks associated with water, but still nothing seems to have changed since the first headlines touted water as “the new oil” over a decade ago.

The Carbon Disclosure Project (CDP) released its Global Water Report this week, compiled from information received from 470 investors representing US$50 trillion in assets, and 318 companies listed on the FTSE Global Equity Index Series (Global 500) that operate in sectors which are water-intensive or exposed to water-related risks. The report reveals that although the risks of droughts and floods are clear, and investors are beginning to care more and more about water, corporate boardrooms continue to be slow to move.

There has been a 33 percent increase in the number of investors asking for corporate water disclosure through CDP, but the response rate from the Global 500 has remained stagnant since last year (at 60%). The report’s authors say the increased investor interest is likely to do with a growing understanding of water-related risks such as drought, scarcity, quality, excess, all of which are increasing, as is the number of companies that have already been detrimentally affected by water. This year, U.S. droughts have rocked the food and biofuels industries. Last year, Intel issued a US$1 billion profit warning and the Japanese automotive industry were expected to lose around US$450 million of profits as a result of the interruption floods caused to their Thailand-based operations and value chain. CDP analysis indicates that current “business as usual” water management practices and levels of water productivity will put at risk approximately US$63 trillion, or 45 percent of the projected 2050 global GDP (at 2000 prices), equivalent to 1.5 times the size of today’s entire global economy. More than half of Global 500 respondents (53%) have experienced detrimental water-related business impacts such as business interruption and property damage from flooding, with associated financial costs for some companies as high as US$200 million; this figure is up from 38% last year.

Despite all of this, the percentage of companies disclosing water information through CDP has stagnated, there has been little increase in the companies citing board level oversight of water and a third of businesses are unable to state whether water poses a risk to their supply chains. Energy companies fared particularly poorly in the report, coming in last amongst the industries with only 44% of companies responding.

“The Energy sector has recorded the lowest response rate of any sector for each of the past two years,” the report states. “This is surprising considering that the proportion of respondents reporting exposure to risk has risen significantly to 87% from 72% in 2011 and is markedly higher than the Global 500 average (68%). Despite widespread exposure to risk, relatively few respondents report board-level oversight of their water policies, strategies or plans (39%), and even fewer report setting concrete targets or goals (30%).”

On the plus side, all this water-related risk equates to business opportunities as well. The CDP calls water a strategic opportunity to improve financial and brand performance with 71% of respondents reporting a total of 319 water-related opportunities, such as the sale of new products or services. Of the opportunities reported, 79% are expected to materialize now or within the next five years, some with a sales potential of more than €800 million by 2020. And while water may not be getting the C-suite attention it deserves, many more companies are beginning to look at water-related supply chain risks (71%, up from 62% in 2011).

Saturday, October 27, 2012

Lasers And The Military

From the website wired (http://www.wired.com/dangerroom/2012/10/lasers/) this story about laser technology expected to be deployed soon by the US Navy. Combined with the recent story that appeared here about President Obama approving the deployment of 30,000 surveillance drones over the US, one has to wonder  how different from Blade Runner our future might be. I hope for the best and expect the worst when our Democrat President approves futuristic nightmares to be set in motion.

Never mind looming defense cuts or residual technical challenges. The Navy’s chief futurist is pushing up the anticipated date for when sailors can expect to use laser weapons on the decks of their ships, and raising expectations for robotic submarines.

“On directed energy” — the term for the Navy’s laser cannons, “I’d say two years,” Rear Adm. Matthew Klunder, the chief of the Office of Naval Research, told Danger Room in a Monday interview. The previous estimate, which came from Klunder’s laser technicians earlier this year, was that it will take four years at the earliest for a laser gun to come aboard.

“We’re well past physics,” Klunder said, echoing a mantra for the Office of Naval Research’s laser specialists. Now, the questions surrounding a weapon once thought to be purely science fiction sound almost pedestrian. “We’re just going through the integration efforts,” Klunder continued. “Hopefully, that tells you we’re well mature, and we’re ready to put these on naval ships.”

Klunder isn’t worried about the ships generating sufficient energy to fill the laser gun’s magazine, which has been an engineering concern of the Navy’s for years. “I’ve got the power,” said Klunder, who spoke during the Office of Naval Research’s biennial science and technology conference. “I just need to know on this ship, this particular naval vessel, what are the power requirements, and how do I integrate that directed energy system or railgun system.”

That’s a relief for the Navy. It means that the Navy’s future ships probably won’t have to make captains choose between maneuvering their ships and firing their laser weapons out of fear they’d overload their power supplies.

But shipboard testing is underway. Klunder wouldn’t elaborate, but he said that there have been “very successful” tests placing laser weapons on board a ship. That’s not to say the first order of business for naval laser weaponry will be all that taxing: In their early stages, Pentagon officials talk about using lasers to shoot down drones or enable better sensing. Klunder alluded to recent tests in which the Navy’s lasers brought drones down, although he declined to elaborate.

Then come the unmanned submarines. Current, commercially available drone subs typically swim for several days at a time, according to Frank Herr, an Office of Naval Research department head who works on so-called unmanned underwater vehicles, or UUVs. That’s way behind the capabilities that successive Navy leaders want: crossing entire oceans without needing to refuel. So Klunder wants to raise the bar.

“The propulsion systems that I think you’re going to see within a year are going to [give] a UUV with over 30 days of endurance,” Klunder said. By 2016, a prototype drone sub for the office’s Long Duration Unmanned Underwater Vehicle program should be able to spend 60 days underwater at a time: “That’s ahead of schedule of what we told the secretary of the Navy a year ago.”

That’s a challenge for the subs’ propulsion and fuel systems. Typically, Herr explains, the commercially available batteries built into prototype drone subs take up a lot of the ship; but building bigger subs just increases the need for power. The nut that the Office of Naval Research has to crack is using more efficient fuel cells while designing subs that don’t need as much energy to run. “We’re thinking about power requirements for these systems as well as the power [sources] available for them,” Herr says.

“The breakthrough,” Klunder explains, “was really on getting past your more traditional lead-acid battery pieces to more technically robust but also mature lithium ion fuel cell technology and the hybrids of that.”

None of that is to say the lasers will be actually on board by 2014 or the drone subs will disappear beneath the waves for 60 days by 2016. That depends in part on the Navy’s ability to afford it — and at the conference this morning, Adm. Mark Ferguson, the Navy’s vice chief, warned that “research and development is part of that reduction” in defense budgets currently scheduled to take effect in January. But it might not be long before Klunder is finally able to hand over a battle-ready laser cannon to Big Navy.

Friday, October 26, 2012

Greece Depressed

This  story by Angelos Tzortzinis of Bloomberg suggests Greece may be headed toward a 1930s  style Depression. It seems odd to me that they cannot see that Greece already is in a depression and more countries are headed that way right now. Spain with more 25%  unemployment is already there. The US has similar figures calculated by sceptics, if not by the Federal Government which massages the bad news numbers to a degree that would make a con artist blush. This is what Greece looks like today according to the mainstream press. Read it and figure for yourself if this is the past revisited:

Wage and pension cuts have heightened tensions in Athens and other Greek cities as the economy shrivels and an anti-foreigner party flaunting a swastika-like insignia won 18 seats in Parliament.

Greece is spiraling into the kind of decline the U.S. and Germany endured during the Great Depression, showing the scale of the challenge involved in attempting to regain competitiveness through austerity.

The economy shrank 18.4 percent in the past four years and the International Monetary Fund forecasts it will contract another 4 percent in 2013 as Greece struggles to reduce debt in exchange for its $300 billion rescue programs. That’s the biggest cumulative loss of output of a developed-country economy in at least three decades, coming within spitting distance of the 27 percent drop in the U.S. economy between 1929 and 1933, according to the Bureau of Economic Analysis in Washington.

“Austerity has been destroying tax revenue and therefore thwarting the intended effect,” said Charles Dumas, chairman of Lombard Street Research, a London-based consulting firm. “There’s no avoiding austerity, though, because these people have no borrowing power. The deficits are there.”

Greece’s restructured bonds have benefited amid speculation that creditors are poised to release more bailout funds. Greek bonds maturing in 2023, which yielded more than 30 percent at the end of May, now yield about 16.4 percent. The next block of aid is slated to total 31 billion euros ($40.5 billion), mostly to recapitalize the nation’s banks.

1930s Experience

Wage and pension cuts have heightened tensions in Athens and other Greek cities as the economy shrivels and an anti- foreigner party flaunting a swastika-like insignia won 18 seats in Parliament. Polls suggest Golden Dawn is the third-most popular party in Greece, backed by about 14 percent of the electorate. That pits it against Marxist-inspired Syriza, the main opposition grouping, in a standoff recalling that between Nazis and Communists in Weimar Germany.

“The experience of the 1930s says you need to stimulate the economy,” said Vassilis Monastiriotis, a senior lecturer in political economy at the London School of Economics. “The rise of the far-right in Greece isn’t something ephemeral that will go away when the crisis ends. And it’s very dangerous if the rise of the right causes relations with neighbors like Turkey, Macedonia, say, to deteriorate.”

The German economy contracted by about 34 percent between 1929 and 1933, the year Adolf Hitler became Chancellor, according to data from the Federal Statistical Office in Wiesbaden. Even after growth resumed in Germany beginning in 1934, it took until 1937 for output to exceed the level enjoyed in 1929, the data show.

Yield Moves

In Spain, where unemployment is running at 25 percent, Catalonia is demanding independence, while in Italy anti-euro populists led by former comedian Beppe Grillo may garner 18 percent of the vote in elections due by May, polls suggest.

Yields on Italy’s 10-year securities were little changed at 4.77 percent today, after dropping 32 basis points this month. Spanish 10-year note yields rose 2 basis points to 5.39 percent after falling 26 basis points last week. Moody’s Investors Service affirmed the nation’s Baa3 rating after previously signaling the grade would probably fall to junk.

The IMF’s prediction for a 4 percent contraction next year suggests Greece may surpass Latvia as the nation suffering the deepest recession in the European Union. The Baltic country’s output started to shrink in 2008, erasing 20.7 percent of the economy in three years. The country, which has a 7.5 billion- euro lifeline from the IMF and the EU, has now resumed growth.

Broken Banks

“Getting the banks lending again is the key thing,” said Gabriel Sterne, an economist at brokerage Exotix Ltd. in London. “Right now, the Greeks don’t have a banking system like anyone else understands it. Greek banks hardly do any new lending.”

Growing evidence that cutting for growth isn’t working as intended, combined with the ability of large economies such as Spain and Italy to resist pressure to deflate, is forcing European leaders to scale back demands for increased austerity.

“The German stance has softened,” said Holger Schmieding, chief economist at Berenberg Bank in London. “The German stance is now that fiscal shortfalls caused by an unexpectedly deep recession are largely acceptable if countries stay on the right reform track.”

French President Francois Hollande said Oct. 19 he’s open to loosening budget-deficit rules, explaining that “EU rules do say we must think in terms of structural deficit.”

Domino Effect

The IMF also has reviewed its assumptions, saying that the knock-on effects of cuts to government spending, called fiscal multipliers, may be more than three times greater than previously estimated. That means that a given spending reduction risks erasing a larger amount of output, causing revenue to fall and deficits to increase.

Greece joined the euro in 2001, when gross domestic product at constant prices was about 165 billion euros, according to the IMF. The nation could borrow for 10 years at an average yield of about 5 percent. GDP peaked at 209.7 billion euros in 2007. It will slump this year to 171.2 billion euros, about the same level achieved in 2002, the IMF estimates. Public debt will climb to 182 percent in 2013 from 171 percent this year, the IMF said.

The IMF forecasts that government expenditure this year will fall to levels last seen in 2006, while unemployment will reach almost 24 percent of the labor force, more than double the pre-crisis average, and the government’s debt will be 344 billion euros, higher than in 2010 and about double the level Greece claimed in 2003.

The government has agreed on another 13.5 billion euros of budget measures for 2013 and 2014 after pushing through 3.1 billion euros of additional cuts in February to persuade creditors to release a 130 billion-euro second bailout package. The government also implemented a reduced pay scale for civil servants, lowered pensions paid by the state and hacked 576 million euros from its medicines bill. It is now expected to follow those cuts with measures including raising the retirement age to 67 from 65.

“Greece has done all that without achieving anything,” said Barbara Ridpath, chief executive of the International Centre for Financial Regulation in London, who headed Standard & Poor’s ratings activities in Europe until 2008. “That’s the sad thing.”

Thursday, October 25, 2012

An Unexpected Endorsement

M t brother-in-law sent me this unexpected endorsement of the President from, of all places the Salt Lake Tribune which is annoyed by Romney the Mormon enough to reluctantly support the Presidential bid for a second term. It's quite the reasoned editorial.

Nowhere has Mitt Romney’s pursuit of the presidency been more warmly welcomed or closely followed than here in Utah. The Republican nominee’s political and religious pedigrees, his adeptly bipartisan governorship of a Democratic state, and his head for business and the bottom line all inspire admiration and hope in our largely Mormon, Republican, business-friendly state. But it was Romney’s singular role in rescuing Utah’s organization of the 2002 Olympics from a cesspool of scandal, and his oversight of the most successful Winter Games on record, that make him the Beehive State’s favorite adopted son.

After all, Romney managed to save the state from ignominy, turning the extravaganza into a showcase for the matchless landscapes, volunteerism and efficiency that told the world what is best and most beautiful about Utah and its people. In short this is the Mitt Romney we knew, or thought we knew, as one of us. Sadly, it is not the only Romney, as his campaign for the White House has made abundantly clear, first in his servile courtship of the tea party in order to win the nomination, and now as the party’s shape-shifting nominee.

From his embrace of the party’s radical right wing, to subsequent portrayals of himself as a moderate champion of the middle class, Romney has raised the most frequently asked question of the campaign: "Who is this guy, really, and what in the world does he truly believe?" The evidence suggests no clear answer, or at least one that would survive Romney’s next speech or sound bite.

Politicians routinely tailor their words to suit an audience. Romney, though, is shameless, lavishing vastly diverse audiences with words, any words, they would trade their votes to hear. More troubling, Romney has repeatedly refused to share specifics of his radical plan to simultaneously reduce the debt, get rid of Obamacare (or, as he now says, only part of it), make a voucher program of Medicare, slash taxes and spending, and thereby create millions of new jobs. To claim, as Romney does, that he would offset his tax and spending cuts (except for billions more for the military) by doing away with tax deductions and exemptions is utterly meaningless without identifying which and how many would get the ax.

Absent those specifics, his promise of a balanced budget simply does not pencil out. If this portrait of a Romney willing to say anything to get elected seems harsh, we need only revisit his branding of 47 percent of Americans as freeloaders who pay no taxes, yet feel victimized and entitled to government assistance. His job, he told a group of wealthy donors, "is not to worry about those people. I’ll never convince them they should take personal responsibility and care for their lives."

Where, we ask, is the pragmatic, inclusive Romney, the Massachusetts governor who left the state with a model health care plan in place, the Romney who led Utah to Olympic glory? That Romney skedaddled and is nowhere to be found. And what of the president Romney would replace? For four years, President Barack Obama has attempted, with varying degrees of success, to pull the nation out of its worst financial meltdown since the Great Depression, a deepening crisis he inherited the day he took office.

In the first months of his presidency, Obama acted decisively to stimulate the economy. His leadership was essential to passage of the badly needed American Recovery and Reinvestment Act. Though Republicans criticize the stimulus for failing to create jobs, it clearly helped stop the hemorrhaging of public sector jobs. The Utah Legislature used hundreds of millions in stimulus funds to plug holes in the state’s budget. The president also acted wisely to bail out the auto industry, which has since come roaring back. Romney, in so many words, said the carmakers should sink if they can’t swim.

Obama’s most noteworthy achievement, passage of his signature Affordable Care Act, also proved, in its timing, his greatest blunder. The set of comprehensive health insurance reforms aimed at extending health care coverage to all Americans was signed 14 months into his term after a ferocious fight in Congress that sapped the new president’s political capital and destroyed any chance for bipartisan cooperation on the shredded economy.

Obama’s foreign policy record is perhaps his strongest suit, especially compared to Romney’s bellicose posture toward Russia and China and his inflammatory rhetoric regarding Iran’s nuclear weapons program. Obama’s measured reliance on tough economic embargoes to bring Iran to heel, and his equally measured disengagement from the war in Afghanistan, are examples of a nuanced approach to international affairs. The glaring exception, still unfolding, was the administration’s failure to protect the lives of the U.S. ambassador to Libya and three other Americans, and to quickly come clean about it.

In considering which candidate to endorse, The Salt Lake Tribune editorial board had hoped that Romney would exhibit the same talents for organization, pragmatic problem solving and inspired leadership that he displayed here more than a decade ago. Instead, we have watched him morph into a friend of the far right, then tack toward the center with breathtaking aplomb.

Through a pair of presidential debates, Romney’s domestic agenda remains bereft of detail and worthy of mistrust. Therefore, our endorsement must go to the incumbent, a competent leader who, against tough odds, has guided the country through catastrophe and set a course that, while rocky, is pointing toward a brighter day. The president has earned a second term. Romney, in whatever guise, does not deserve a first.

Tuesday, October 23, 2012

Manufacturing In The US

I am curious to see if economic reporting changes in tone after the presidential election is over. I remain convinced that things aren't as rosy as they are made out right now and will change after President Obama gets a second term. It is possible i suppose that Mitt Romney might win but it seems to me President Obama has delivered everything the one percent could have hoped for, including health care reform that benefits insurance companies as much as anyone.

NEW YORK (CNNMoney) -- At the end of Tuesday night's presidential debate, CNN's Candy Crowley asked both candidates a question that has plagued Apple since the beginning of the year.

"IPad, the Macs, the iPhones, they are all manufactured in China, and one of the major reasons is labor is so much cheaper there," Crowley said. "How do you convince a great American company to bring that manufacturing back here?"

Mitt Romney said the solution is "very straightforward." The United States must pressure China to stop manipulating its currency, he said, and the federal government needs to "make America the most attractive place for entrepreneurs" by lowering taxes. He supports reducing the top corporate tax rate to 25%, down from its current 35%.

President Obama offered a starker answer: "Candy, there are some jobs that are not going to come back, because they're low-wage, low-skill jobs."

Speaking strictly for Apple, Obama's assessment is likely correct. Apple (AAPL, Fortune 500) has said that it directly employs thousands of its own workers in China, and about 700,000 assembly workers at manufacturing contractors like Foxconn put together Apple products. It would be almost impossible to bring those jobs to the United States.

Foxconn -- China's largest private employer and the manufacturer of an estimated 40% half of the world's consumer electronic devices -- pays its assembly workers far less than American labor laws would allow. A typical salary is 2500 RMB (U.S. $400), or about $18 a day.

But pay isn't the biggest obstacle. Various economists have estimated how much an all-American labor force would add to the cost of an iPhone and come up with figures ranging from $65 to $100 per device.

Related story: Foxconn workers strike over iPhone 5 demands

The real stumbling block is speed. Unlike U.S. plants, Foxconn and other Chinese manufacturing operations house employees in dormitories and can send hundreds of thousands of workers to the assembly lines at a moment's notice. On the lines, workers are subjected to what most Americans would consider unbearably long hours and tough working conditions.

That system gives tech companies the efficiency needed to race products out the door. Plus, most of the component suppliers for Apple and other tech giants are also in China or other Asian countries. That geographic clustering gives companies the flexibility to change a product design at the last minute and still ship on time.

There's another catch, and it's one that politicians don't like to talk about: China has many more skilled engineers than the United States does.

Steve Jobs, Apple's late CEO, brought the issue up during an October 2010 meeting with President Obama. He called America's lackluster education system an obstacle for Apple, which needed 30,000 industrial engineers to support its on-site factory workers.

"You can't find that many in America to hire," Jobs told the president, according to his biographer, Walter Isaacson. "If you could educate these engineers, we could move more manufacturing plants here."

In a May interview with AllThingsD, Apple CEO Tim Cook said he agreed with Jobs' assessment.

"There has to be a fundamental change in the education system to bring back some of this [labor]," he said.

When asked if the day would ever come when an Apple product is made in the United States, he said: "I want there to be ... and you can bet that we'll use the whole of our influence on this."

That's a much more upbeat tone than the one his predecessor struck. During their meeting in 2010, Obama asked Jobs how to bring all the iPhone manufacturing jobs back to the United States, according to the New York Times.

"Those jobs aren't coming back," Jobs replied.

Monday, October 22, 2012

Sustainable Energy Tax Credits

This story from Mother Jones struck me as amusing considering how tax subsidy fossil fuels get and yet the oil sector continues to fight alternative energy subsidies, as modest as they are.  Which says something (not very pleasant) about the fossil fuel  people. Dinosaurs making  energy from dead dinosaurs  you could say. This article explains why the subsidy is so necessary even as alternative fuel struggles to make inroads in a world still dominated by oil (and it's  subsidies!):

Jacob Susman is frustrated again. Sitting in the bright green conference room of his company's trendy industrial office, overshadowed by the Brooklyn Bridge, he's a clean-cut poster child for the "green economy": Since 2007, Susman's OwnEnergy, which installs wind turbines, has grown to be one of the nation's most prominent wind installers. But he's plagued by a recurring nightmare: "Every few years the industry has to drop everything for six or nine months and focus exclusively on having the credit passed."

He's talking about the Production Tax Credit, the federal subsidy for renewable energy that gives a 2.2-cent per kilowatt hour break to wind energy producers. Those pennies add up to about $1 billion per year, no chump change for the burgeoning industry. Proponents of wind energy say since its inception in 1992, the PTC has been a crucial driving force behind the industry's rapid growth; critics of the PTC (including the fossil-fuel funded American Energy Alliance) say the industry has had ample time to take off its training wheels (never mind that fossil fuel subsidies historically run about 13 times higher than renewables).

The subsidy has become a touchstone issue in the presidential campaign for windy swing states like Iowa and Colorado: Mitt Romney has referred to the PTC as a "stimulus boondoggle" and vowed to kill it, while President Obama has promised to give the credit his support. Every one to three years, as the PTC reaches its expiration date, it must be taken up, re-debated, re-tweaked, and re-approved by Congress, exposing it to shifting political whims particularly in a general election year where the future party spread is far from certain.

The PTC is set to expire at the end of this year, and uncertainty about whether Congress will extend it has led to layoffs and much anxiety in the industry. And while 2012 was a big year for wind, with 10 gigawatts installed nationwide by August and another gigawatt predicted by year's end (only 0.9 percent of total new power in the US, but nearly double the wind installed in 2011), projections for 2013 are grim: Estimates range from half to a tenth of that.

"Next year is already going to be a crash year for the wind industry," said Michel Di Capua, an analyst with Bloomberg Energy Finance.

But what happens next year is only the next iteration of a boom-bust cycle that has been the bane of the US wind industry for over a decade. The PTC has been allowed to expire three times in the past, and the industry has consistently tanked; even the possibility of expiration sends shivers up the spines of everyone from blue-collar factory workers to Manhattan investors. Breaking free of that cycle, Susman and other industry leaders interviewed by Climate Desk agree, is the industry's only hope for sustained long-term growth, and it starts with weaning the industry off the PTC once and for all.

"The industry doesn't need the PTC forever," Susman said. "We're ready to start talking about how to phase it down."

But they still have a ways to go. Thanks to fracking, natural gas prices are through the floor. Although the cost of power from wind has dropped 90 percent since 1980, some investors are still spooked by the upfront expenses. And aside from a few exceptions, the state-level standards that mandate how much renewable energy must be brought into the mix are too low and thus oversupplied, meaning there's little incentive for utilities to seek out new wind projects. For those reasons, a swath of groups including the American Wind Energy Association and the Union of Concerned Scientists have been pushing hard for Congress to extend the PTC once again.

"It's miserable. All the projects we've been working on for the last three years are hanging in the balance."Still, said Andy Bowman of Austin-based wind installer Pioneer Green Energy, "I do think there's more speculation than there ever has been that this might be the last extension." Bowman agreed with Susman that even worse than competing on uneven ground with fossil fuels was being handcuffed to a mercurial legislative process whose sights rarely reach farther than a few years. "It's miserable," he said. "All the projects we've been working on for the last three years are hanging in the balance."

Bowman is among the wind industry veterans who have worked through several boom-bust cycles in the past. With just 14 employees, his small company is at the mercy of venture capitalists who are loathe to back any enterprise that lacks long-term stability; the PTC, he said, has never been more than a piecemeal solution.

"The expiration of the PTC casts a long shadow," he said. "Removing it would provide a great deal more certainty, since we wouldn't have this big question mark."

Industry leaders are counting on a combination of rising natural gas prices, tightening coal regulations, and ever-cheaper and more efficient turbines to give wind the competitive edge it would need to kick the PTC. They're also lobbying for a far-sighted national energy policy that favors wind, and higher targets for states' renewables goals. But it's not clear how long those goals will really take to achieve. So for now, all they can do is cross their fingers for one more shot.

"We're seeing the light at the end of the tunnel," Susman said. "Wind should be able to stand on its own in a few years."

Sunday, October 21, 2012

Algae Fuel

It's not widely discussed publicly but behind the scenes alternatives to conventional oil fuel are coming, albeit slowly. Deriving fuel from algae was once touted as a way to get around peak oil but so far there is no sign of that happening. Cost is the problem according to this article in the fuel industry newsletter:

Producing biofuels from algae is a concept dating back to the oil shocks of the 1970s. At the time, the US Government created an algae research program which analyzed the thousands of strains of algae in hope of offsetting the shortage of fossil fuels. In 1996, the Department of Energy shut down the program, concluding that algal biofuels could not compete with fossil fuels in cost. One decade later, President Bush declared that the US was addicted to oil. After that, the algae research program was started again, and capital began flowing into dozens of algae startups. So where is all the algae biofuel? Where is the "green crude" that was hyped up with so much potential? The answer is the same now as it was in 1996. Algae biofuel is expensive to produce and fossil fuel prices are still sufficiently low-cost.

According to a 2010 research study by the Lawrence Berkeley National Laboratory, producing fuel from algae grown in ponds at scale would cost between $240 and $332 per barrel. The current price of a barrel of crude oil is only about $92, no comparison.

Right now, the only hope for algae taking off is for crude price to go up. The algae industry has suffered from "fantastic promotions, bizarre cultivation systems, and absurd productivity projections," according to John Benemann, industry consultant and Ph.D. biochemist with over 30 years' experience working with algae. "Algae biofuels cannot compete with fossil energy based on simple economics... The real issue is that an oil field will deplete eventually, while an algae pond would be sustainable indefinitely."

Even with its economic disadvantage, it is hard to overlook algae's amazing potential. It is incredibly easy to grow and grow quickly. Any homeowner with a pool can attest to that. In days, algae reaches maturity, thriving in all waters: fresh, brackish, and saline. Algae is a terrific absorber of the greenhouse gas, carbon dioxide. They can be grown in arid and semi-arid areas so as not to compete with food crops for land.

Most importantly, they yield more oil than other biomass feedstocks. In fact, it produces up to 30 times more oil per unit of land compared to oilseed crops like palm and soy.

The problem is the costs in the systems used to cultivate algae, harvest it, and extract its oil. Startups around the world are working on these problems, but the R&D is slow going. These companies are trying all different things, looking for the most cost-effective method. Some grow their algae in ponds, others in clear plastic containers. Some grow their algae in sunlight, others feed them sugars instead. Some use conventional breeding, others use genetic engineering.

The upshot is that from all the experimenting taking place, we will inevitably produce the world's first designer oil. Algae can be grown for a variety of purposes, from transportation fuel to oils for food, from oils for personal care products to industrial lubricants, perhaps even plastics.

Over time, algae costs will go down and fossil fuels will go up. Some algae startup may even come through with a real game-changing breakthrough. Then, hopefully one day, the age of green crude may begin.

By David A Gabel of ENN.com

Saturday, October 20, 2012

European Fuel Shortages

This may seem  like a parochial little issue but there are fears that this winter may see huge problems in fuel deliveries across Europe. Just to add to their miseries.

Edinburgh airport said jet fuel supplies were being rationed on Tuesday because of a glitch discovered last week at a Scottish refinery owned by Ineos INEOSG.UL, a further sign Europe could be heading towards a supply crunch this winter.

Refinery maintenance and closures both in Europe and the U.S. is limiting the availability of oil products, making retailers and other consumers vulnerable to supply shocks.

A similar shortfall in wholesale oil product supplies in California had motorists gasping at record $5 a gallon prices at the pump earlier this month.

The Grangemouth refinery halted supplies of jet fuel to Scottish airports last week, forcing them to rely on contingency stocks to avoid cancelling flights.

"There has been a shortage of aircraft fuel across Scottish airports caused by quality issues at Petroineos' Grangemouth refinery which has meant we have had to ration our supplies" Edinburgh airport said in a statement, adding it was still rationing fuel.

PetroIneos Trading is a joint venture between Petrochina and Ineos to supply crude to Ineos refineries in France and Scotland and market their fuel.

Elsewhere in Scotland, Glasgow airport said it had been able to maintain its flight schedule by using stocks held on site.

Fuel was still being rationed at Edinburgh airport on Tuesday, despite Ineos resolving the glitch at the refinery and restarting deliveries to Scottish airports on Monday.

Analysts say supply problems could become the norm this winter as inventories are low and there are fewer refineries operating in Europe and the U.S. than a year ago.

Earlier this month, a spike in California gasoline wholesale prices caused by shortages forced petrol stations to shut. Wholesale prices of distillate products like heating oil are already significantly higher in the region than a year ago, indicating distillate markets could be hit by similar supply problems.

Stocks are typically built up ahead of the winter, but are low this year because of a backwardated market structure which makes it expensive to hold product in storage. This is because product prices in a backwardated market fall further ahead, and are most expensive in the near term.

Distillate product stocks held in Europe's Amsterdam-Rotterdam-Antwerp were at the lowest since January on Thursday, while inventories in the U.S. have also fallen more sharply than expected.

High and volatile oil prices have also contributed to reluctance to build up storage supplies either side of the Atlantic.

Friday, October 19, 2012

Game Of Spies In Afghanistan

China’s entry into Afghanistan’s evolving security paradigm is indicative of a reshaping of policy in Beijing. By Faryal Leghari, Deputy Editor Opinion of Gulfnews.com :

Afghanistan’s history bears witness to many a proxy war being fought between great powers and regional players on its dusty battlefields over centuries. Not surprisingly, that tradition is still being honoured today. With regional states busy carving out their respective spheres of influence, it is the Afghans who have to ultimately decide on how best to maintain a balance and who to extend and develop relations with nations as the political road map of the country is redrawn once again. A road map, that cannot be confined to a flat, one-dimensional aspect of juggling power between the tribal and ethnic groups that are the fundamental stakeholders, but one that takes into consideration the regional dimension and the wider international one. Each of these dimensions are in themselves host to complex intertwining narratives that are often contradictory and hard to define. Moreover, both the intermeshing and clashes, of economic and political interests, between the regional and international players adds yet another layer of complexity. The ultimate responsibility is on Afghanistan and how it evolves its future policy that has to ultimately absorb, repel and shape all these narratives.

Not an easy task when there is a dearth of leadership and indecision on developing a coherent policy on how to deal with the insurgency, the blame for which is equally shared by the world powers who have taken on the roles of being the custodians of the war-torn country. It may be worthwhile to integrate negotiations in the counter-insurgency strategy more fully as they remain pivotal. These must not be relegated to the back burner if a lasting solution is being genuinely sought.

As for the regional powers, some interesting developments are in the offing. China’s entry into Afghanistan’s security paradigm is indicative of a reshaping of policy in Beijing. Securing the vast economic investments China has made to the tune of $3 billion (Dh11 billion) in the Aynak copper mines — among at least a trillion dollar investments in the pipeline, as estimated by the US — is not the only justification for the recent strategic agreement signed between Kabul and Beijing. This deal, though one among other economic and security cooperation agreements signed during the visit of China’s Home Security Chief, Zhou Yongkang, to Kabul is aimed to help “train, fund and equip Afghan police”. Yongkang’s visit is incidentally also the first high-ranking official visit to the country since 1966.

Beijing may be seeking a long-term security relationship with Afghanistan for a number of reasons.

First, China is quite concerned about the export of ideological militancy, especially as it fears an alleged militant Islamist threat in its restive Xinjiang province. Bolstering a moderate Afghan regime to lessen or prevent cross-border militancy is in the interests of China.

Second, it may also be paving the way to strengthen its relationship with Afghanistan by fulfilling the country’s more urgent needs of security and economic investments to enable any future transcontinental conduits for much-needed energy resources like oil and gas. Minerals and precious earths also constitute a major need for China that is investing heavily in tapping these natural resources in countries as far flung as Africa and Latin America. Afghanistan’s wealth of natural resources make it a potential gold mine and a lucrative investment zone, despite the current conflict environment.

Beijing has already invested heavily in Pakistan’s Arabian Sea port of Gwadar that was purposely built to become the hub for energy trade and investments for South West Asia, the Gulf states, China and Central Asian states. Apprehensions in neighbouring India about China using the Gwadar port to establish a future military presence are likely to be compounded by Beijing’s developing security ties with Kabul, even though India’s relations with Afghanistan remain on an upswing. Further strengthening of security cooperation between Beijing and Kabul may even compel New Delhi to be concerned enough to seek similar or deeper strategic cooperation with Kabul. It is not improbable to assume that Beijing may well have served a deliberate reminder to India that it is not the only regional heavyweight in the country.

Finally, Beijing’s intrusion into a US-West dominated arena could be interpreted as a move to counter growing American assertiveness in support to East Asian nations against China in the ongoing maritime and territorial disputes as witnessed over the past many months.

Question is if Kabul would have forged ties with China without US approval? President Hamid Karzai has shown increasing independence and seems to have taken a more decisive role in his capacity as president to secure key national interests. His critiques of Nato and US military actions in Afghanistan had assumed a more strident tone as civilian casualties in Coalition-led operations mounted, boosting his image at home.

Thus, even as the regional powers flex their muscles while conducting respective reconnaissance as part of a future calculus, the US and western allies have to contend with a deterioration in security. While the International Security Assistance Forces (ISAF) keep issuing reassurances of improved security and things going according to plan vis-a-vis the transfer of security to the national forces, the facts on ground speak a different story. There is rising insecurity among the coalition forces as the number of “insider” or “green-on-blue” attacks spiral upwards, demoralising combat troops that now have to be ever watchful — to the extent of paranoia — for attackers from within the Afghan National Army. At least 51 such attacks have already taken place this year. As a result, Nato-ANA Joint combat operations have been scaled down.

In an obvious haste to speed the transfer of security to the national forces and police, Nato and US military officials may have overlooked a vital aspect — a more time consuming but critical, rigorous vetting of recruits. Training the national forces remains a top priority, without which the transfer of security by 2014 cannot come about. And considering the current circumstances, that objective is far from being realised anytime soon. No doubt there has been progress in boosting the national forces whether police or military, but much more needs to be done in terms of recruitment profiling, retaining new recruits and training. Despite the security pact signed earlier this year between Washington and Kabul, that spans a 10-year period post withdrawal, there is wide spread apprehension in the country that the Taliban-led insurgency will continue to pose a credible threat.
Moreover, the Nato states and the American public are war weary.

Not only is the war in Afghanistan a drain on the exchequer, it has placed tremendous pressure on the coalition members in terms of domestic ire at the loss of every soldier in combat. Even as the last of the 33,000 US surge troops left for home, weeks before the US presidential election, Secretary of Defence Leon Panetta’s statement that the surge troops’ return marked a milestone as the objectives which they had been sent for were achieved, echoed hollow across the Afghan landscape. A question whispered in response across this desolate terrain, however, strikes a more poignant note: What is the purpose of this protracted military engagement if many of the objectives of this war have been met?

Wednesday, October 17, 2012

IMF May Re-Think Austerity

While deathbed conversions might earn you a spot in heaven in some religions, they don’t carry you very far here on Planet Earth.

Christine Lagarde has taken too small a step in the right direction far too late to do much good. At the current IMF annual meeting in Tokyo, she’s made dramatic-sounding pronouncements consistent with the rather embarrassing admission in the Fund’s latest quarterly report that austerity is working less well than voodoo (I’ve never tried it myself, but some correspondents give it high marks).

As we stressed, the IMF has admitted what observers have already reported on, at some length, by looking at economic outcomes in Latvia, Greece, Ireland, Portugal, and Spain: its tender ministrations are leaving its patient worse off. Cuts in fiscal deficits (ex in special circumstances, such as being able to trash your currency at a time when your trade partners have good levels of growth) lead to even greater falls in GDP levels, resulting in higher debt to GDP ratios, the exact opposite of what this exercise was intended to accomplish. The bureaucratese is “fiscal multipliers.” When fiscal multipliers are greater than 1 deficit cutting makes matters worse. The IMF’s ‘fessing up to a problem without releasing country by country data suggests it is showing fiscal multiplies greater than 1 in pretty much all of the countries now wearing the austerity hairshirt.

And don’t try arguing that the IMF was blindsided. Numerous observers have railed against the all too obvious failure of “destroy the village to save it” posture of the Eurocrats. Paul Krugman points out even if you start with theory rather than practice, it was similarly not reasonable to expect small fiscal multipliers in the wake of a financial crisis.

While Lagarde’s willingness to buck her fellow Troika members a tad is a welcome development, it is too little, too late. It looks more like an effort to assuage guilt and burnish her record for posterity than do the right thing and seek to break with the IMF’s sorry history of breaking countries on the rack out of fealty to bankster-friendly but otherwise fundamentally wrongheaded policies. As we indicated, the Fund is late to recognize the failure of these policies. And on top of that, despite the dramatic headlines, Lagarde is not in fact calling for a rethinking of austerity. All she is suggesting is that when it becomes evident it is not working (as in countries miss their targets) that they not be required to make deeper cuts. This is tantamount to loosening a tourniquet once gangrene has set in. From the Financial Times:

Christine Lagarde has urged countries to put a brake on austerity measures amid signs that the IMF is becoming increasingly concerned about the impact of government cutbacks on growth.

Ms Lagarde, IMF managing director, cautioned against countries front-loading spending cuts and tax increases. “It’s sometimes better to have a bit more time,” she said…

“It’s much more appropriate to apply the measures and let the [automatic] stabilisers operate,” Ms Lagarde said. Automatic stabilisers allow for the lower tax revenues and higher benefit payouts associated with a weak economy. “That applies to pretty much all the countries, particularly in the eurozone, that are applying that policy mix.”

The Telegraph gave a clearer sense of how far Lagarde has retreated from the IMF’s past position, which is some but not all that much:

She also reiterated the softening of the IMF’s position on austerity, saying that governments should no longer pursue specific debt reduction targets but focus on implementing reforms.

If borrowing rises as a direct result of growth-sapping measures, the IMF now thinks it should be tolerated rather than addressed with even more tax rises or spending cuts. “We don’t think it’s sensible to stick to nominal targets. We think it’s much more sensible to apply measures and let the stabilisers operate,” she said.

One has to wonder if part of the reason for the public shift in posture is the way Spanish Prime Minister Rajoy has refused so far to have Spain submit to the Troika’s yoke, even as the silent run on Spanish banks accelerates. As Ambrose Evans-Pritchard points out:

Olivier Blanchard, the IMF’s chief economist, said Madrid was courting fate by trying to muddle through without a bail-out – and without the tough terms it would bring – now that borrowing costs had fallen on hopes of bond purchases by the European Central Bank…

The IMF said capital flight from Spain reached €296bn (£238bn) in the 12 months to June, or 27pc of GDP. It matches the intensity of “sudden stop” crises seen in emerging markets.

Banks in Spain, Italy, and the EMU fringe cannot easily make up the shortfall by turning to the ECB because they are short of usable collateral.

The biggest risk is that Europe’s banks will have to slash balance sheets by €4.5 trillion by the end of 2013, largely concentrated in the Club Med bloc.

The fund said Europe’s failure to flesh out promises for a banking union – needed to break the “vicious circle” between banks and states – risked a violent credit crunch, slashing an extra 4pc off output in southern Europe next year. Most economists say a shock of this magnitude would push Spain into a death spiral.

And in case you missed it, Spain is playing a game of brinksmanship over the “conditionality” terms with the surplus bloc countries. The sketchily-outlined plan over the summer left everyone thinking they had a deal for rescuing Spain’s underwater banks. But even though the Spanish sensibly wanted the banks rescued directly rather than having the borrowing channeled through the government and thus added to official debt, the northern countries appear to have retraded the deal and want Spain on the hook. Again from the Telegraph:

Mr Rajoy and French president Francois Hollande seized on the warning, demanding the AAA core stands behind its pledge to let the ESM recapitalise Spain’s banks directly. “We have to show we’re serious people and that we do what we say we are going to do,” said Mr Rajoy . Germany, Austria, Finland, and Holland reneged on the accord two weeks ago.

What is desperately needed to buy more time would be a Eurozone deposit guarantee, but so far, there seems to be no willingness to implement that in advance of a banking union, which will take time to hammer out (and that assumes that considerable differences can indeed be bridged).

While the Eurocrats have, again and again, managed to implement the bare minimum needed to stave off a full bore crisis, each intervention is buying less and less relief and the differences in underlying positions appear to be hardening. While I’d be delighted to be proven wrong, Yanis Varoufakis has said the Eurozone is on a path to dissolution, and it’s hard to see how the politics can shift enough to alter the current trajectory.

Read more at http://www.nakedcapitalism.com/2012/10/imf-suddenly-decides-it-might-be-ok-to-loosen-austerity-tourniquets-now-that-gangrene-is-setting-in.html#B8MMWCtbA7VU5lHW.99

Tuesday, October 16, 2012

Europe's Dominos Tumbling

While we're all watching Spain and Greece, their alleged saviors in the rich core of the eurozone are starting to show serious signs of corrosion. This makes all the hollow words and promises coming from the world of troikas and politics sound even emptier than they already did. Not that anyone in Holland or Germany seems to even be prepared to think their economies are in for a big fall; for them, all the bad stuff is temporary, and soon it will all be better. Our proverbial Martian might be tempted to think denial is a river in northern Europe.
To wit: after a slew of reports on the housing situation in Holland earlier this year, by the Dutch government's Central Statistics Bureau, the Dutch Central Bank and the Central Plan Bureau (CPB) - got to love the name -, the real estate sector itself issued a paper today, which, despite the obvious bias, makes everything look worse. Again.
As I wrote in Those Dutch Tulips Ain't Looking All That Rosy last month, home prices in Holland rose some 20% annually around the turn of the century/millennium, for a total of 228% from 1985-2007.

The slump in the Dutch housing market deepened in July as prices posted the steepest drop on record, highlighting the challenges facing the Netherlands ahead of next month's general elections. With prices now plumbing levels last seen in 2004, the downturn is weighing heavily on household consumption and has raised concern about the country's huge mortgage debt pile, among the largest in Europe
House prices fell 8% from a year earlier, statistics bureau CBS said Tuesday, the largest decline in the 17-year history of the agency's house-price index. Prices fell 4.4% in June and 5.5% in May. [..] House prices have fallen about 15% since their peak in August 2008 amid a stagnant economy, more stringent bank-lending criteria and weak consumer sentiment.

Today, the NVM (Dutch Real Estate Brokers Association) announced that among its members (good for 86% of transactions), Q3 sales were down 17.2% (!) from Q2. Home prices fell 2.2% from that quarter, and 7.5% from Q3 2011. Average home prices are now down 21% compared with 2008, from €265,000 to €209,000. 700,000, or over 20%, of Dutch homeowners are now underwater. The NVM expects 100,000 homes to be sold in 2012, and labels this the "absolute bottom".
Still, in Q3 just 18.664 homes actually were sold, so this looks like just another case of false bottom calling. The NVM may not be as bad as the NAR, but the bias is the same. One difference may be that the former still expects the government to step in with subsidies and law changes to stimulate the anemic market, so it has less incentive to make things look better than they are; it walks a bit of a tight rope in that regard.
The Dutch government itself would love for the market and price levels to recuperate, since it's on the hook for a major part of the potential losses through a national mortgage guarantee scheme. At the same time, it's planning to counter the overwhelming subprime character the market has obtained through the past two decades (people could borrow 125% or so, over 50% of loans are interest-only, and even that interest is deductible).
Hence, the Dutch will be able to borrow less after January 1, and under less favorable conditions. That doesn't add up to stimulus, but to even fewer sales. And that in turn adds up to even lower prices. Rinse and repeat. Still, peering through the reports, and the media coverage they get, one still doesn’t get any sense of alarm. Complacency dictates that the negative numbers are seen as a fleeting phenomenon, and everything will soon be alright again, the housing market as well as the economy as a whole.
But if you take that 228% price rise from 1985-2007, you find that this means a home that cost €100,000 in 1985 sold for €328,000 in 2007, lost about 21% since, and is still "worth" $260,000 today. General price levels (what many incorrectly call inflation) may have risen by 56%, but even when including that, you're still roughly €100,000 off the mark. That is, unless you believe that things are going well and have just temporarily slid off the rails. The Amsterdam stock exchange is up 1% today in the face of this really bad housing report: what more do you need? The line between optimism and delusion is at least as thin as the one between love and hate.
Of course, Northern Europeans find support for their optimism in the fact that they don’t have the over 25% overall and over 50% youth unemployment that Greece and Spain have. Yet. But let's remind ourselves that, as I wrote in the article quoted above, retail sales in Holland fell 11% in April alone (vs 9.7% in Spain). That's serious stuff, the kind that costs jobs. And that's not going to recover and get back to whatever people think is "normal", and then keep growing on giddily forever.
But it will take a while yet before this reality sinks in. These are people who've gotten used to taking 3-4 holidays per year on top of buying overpriced real estate with subprime-like mortgage loans. They've had it all and then some for over a decade, and that's a hard addiction to shake. Optimism, illusion, delusion are much easier for now. Still, if you look at those numbers, and you add to them the fact that Holland is one of the rich core countries that has tens of billions of euros, and counting, at risk in the bailouts of southern Europe, PIIGS, Cyprus, Slovenia, it's hard not to wonder where this is going.
And it's not just Holland. Germany too is starting to show cracks. And how could it not? Both countries rely to a large extent for their economic success on exports, of which a substantial part stays in the eurozone. That was the whole idea, after all. With Greece, Spain, Italy, Portugal, Ireland et al in trouble, these exports can only go one way. The effects of this shrinking may be somewhat delayed in the richer countries, but of course they must be felt at some point. That is, unless other exports markets are found, conquered and developed, but that hasn't happened.
One of the things hitting Germany is a pan-European phenomenon: the demise of the car industry. From Der Spiegel last week:

On Tuesday, the Federal Motor Transport Authority (KBA) announced that new car registrations in Germany were down some 11% in September against the same month last year.[..]
On Monday, France indicated that car registrations there dropped by 18% in September against the same month a year ago. In Italy, the drop was 25.7%, whereas Spain saw registrations plummet by a whopping 37%. Overall, the European Union has seen a 7.1% drop in new registrations over the first eight months of the year, with final numbers for September still pending.
[..] most of the industry agony has been felt by mass producers such as Fiat, Renault, Ford and Peugeot. Indeed, the latter two carmakers are on track to lose €1 billion each in Europe this year. Renault expects to sell 7 to 8% fewer cars in Europe this year than last, having suffered a 36% sales plunge in France in September. And Fiat factories in Italy are operating at just 50% capacity, according to Marchionne. [..]
Italian media is reporting on Tuesday that some 1.75 million bicycles were sold in the country in 2011. It was the first time ever that cycle sales exceeded that of automobiles.

This week, Der Spiegel even had this to say about GM's main longtime subsidiary: The End Might Be Near for Opel. Sure, not all German carmakers are as down and out as Opel is. BMW, Audi, Mercedes can keep growing for a while longer in China, for example. And part of the whole thing is a natural selection type survival of the best and brightest. But the overall net effect of those plunging sales is very negative for the German economy. And the French. And eastern European, where the Czech Republic, Hungary, Romania, Slovakia rely on car factories for a substantial segment of their economies.
There's a vicious circle somewhere in there that will draw down the core countries as well as the peripheral ones. But the periphery will be much faster in accepting and realizing that simple truth than the core will. Which means, it doesn't get simpler than this, that the core will have no time to prepare; it's all illusion all the way, until one day there's a loud sucking sound.
Anything nations like Germany and Holland do these days seems to have a short term objective only. And that is not the sort of attitude that restores confidence in markets. The Germans, of course, know this, so we are left to conclude that confidence is not their primary goal. Here's another future thorn in the northern European side, courtesy of Jeremy Warner:

One of the most mind-boggling debates going on in euroland right now – only one of many, but particularly guaranteed to make the head spin, this one – is over the build-up of so-called “Target 2” claims and liabilities. Target 2 is the mechanism by which money is transferred around the euro area to ensure that each national central bank has sufficient euros to fund its banking system.
Accumulated cross border claims are now so extreme that they threaten to leave German taxpayers with huge losses should the euro break up, or if any one of its members leaves.
What makes this debate of particular importance is that it is German opposition to debt pooling in the eurozone that is generally thought, at least among the periphery nations, to be the biggest barrier to crisis resolution. If only the Germans would agree to treat Europe’s debts as one, rather than the separate responsibility of 17 different sovereign nations, then all this nastiness would go away.
Well, through Target 2, it can reasonably be argued, these debts are already being shared, only many Germans don’t yet know it and it certainly hasn’t cured the crisis. The euro has stuffed the Germans just as much as the Spanish, Italians and Greeks.
The economist who has done the most to raise the profile of this issue is Hans-Werner Sinn, head of the Munich-based Ifo Institute. Germany would lose the thick end of a €1 trillion, he has written, should Greece, Ireland, Portugal, Spain and Italy leave the euro, or around a quarter of GDP.
Now, the sums he refers to are only contingent liabilities that wouldn’t crystalise except in the event of default. It is, in any case, impossible to think Germany would get nothing back at all in the event of euro exits. If the euro holds together, moreover, the debate around Target 2 becomes somewhat irrelevant. The liabilities would never crystalise, so their relative size would only be of interest to monetary anoraks.
The longer these imbalances persist, however, and the bigger they grow, the more unstable the whole system becomes. So to argue, as some economists do, that they are unimportant is a bizarrely complacent way of looking at the problem.
All money systems are a version of Europe’s Target 2, which is merely an interbank payments system for cross border transactions. When contained within countries, nobody even bothers to think about the way the system works. It’s plainly not going to matter, for instance, if a big trade and capital imbalance develops between the north-east of England and the South East, if only because there is a unified banking and fiscal system to intermediate. If there is a sudden rush of deposits out of the North East to the South, it makes no difference to the banks involved; their net position in terms of assets and liabilities is unaffected.
Yet when these flows are between nations with different banking and fiscal systems, then there is potential for big trouble. Go back to the origins of the eurozone crisis and, in broad outline, this is what occurred.

Hey, at least it seems to make it easier to understand why Merkel says she would like to keep Greece in the eurozone. Even though the fear of a (domino of) credit event(s) as a result of a member leaving will always be in the number one spot. So what then are we to think when the IMF says European banks need to sell $4.5 trillion in assets? What assets will they sell? Who are supposed to be the buyers, and what discounts will they demand? What will then be left of these banks? What if another round of writedowns is necessary on Greek debt? What about writedowns on Spanish debt?

The International Monetary Fund said European banks may need to sell as much as $4.5 trillion in assets through 2013 if policy makers fall short of pledges to stem the fiscal crisis. Failure to implement fiscal tightening or set up a single supervisory system in the timing agreed could force 58 European Union banks from UniCredit SpA (UCG) to Deutsche Bank AG (DBK) to shrink assets, the IMF wrote in its Global Financial Stability Report released today. That would hurt credit and crimp growth by 4 percentage points next year in Greece, Cyprus, Ireland, Italy, Portugal and Spain, Europe’s periphery. [..]
“There is definitely a need for deleveraging in Europe,” said Michael Seufert, an analyst at Norddeutsche Landesbank in Hanover, Germany, with a “negative” rating on the European banking sector. “The danger is that this produced a downward spiral as the regulation gets stricter and stricter and the global economy cools, potentially meaning more writedowns for banks. States in the periphery are hit hardest.”
In April, the IMF forecast asset sales of $3.8 trillion in a “weak policies scenario.” Since then, policy makers’ delay in taking decisions to solve the crisis worsened funding pressures while the relief provided by the ECB’s program of unlimited three-year loans faded.

Whether the core like it or not, the deleveraging continues. That means there will be less money to spend, and it also means more money will have to be spent on "saving" the banking industry, and the periphery. We're on no road to no where.
You know, Merkel may go to Athens, and soon to Madrid, and anywhere else she wants, and the other "rich" core countries may pretend they're wearing all the rich garments they want, but in the grand scheme of things it doesn't really matter. Let them open their books, and if the numbers in the books look good, they may survive. If they refuse to open them, they won't.
They'll be fish in a barrel, in the exact same way that Greece and Spain are today. Market confidence in the latter will return only when all issues and problems are on the table, not when €100 billion left or right are handed over while the table stays empty. That just moves money from the public to the private sector. And that in turn weakens the public sector, which, of course, destroys confidence instead of strenghtening it. Things are not always what they seem.
We can live in illusions for a period of time, but those periods are always limited. All of Europe's countries would do better to recognize their real predicaments, and prepare for their real futures. But that's not the kind of platform that politicians get elected on, and so it will not happen. People will vote for those who feed their illusions, not those who tear them apart. Our proverbial Martian might say that is one of the perils of democracy.