A China credit rating agency, Dagong Global, the equivalent of Moody's and Standard & Poors, came out with a blistering critique of the latest US$600bn quantitative easing manoeuvre by the U.S. Federal Reserve announced on 3rd November.
"Though it is likely for the current loose monetary policy to postpone the occurrence of difficulties, yet in the long run, it will be proven to be a practice resembling drinking poison to quench thirst."
Timed for the Seoul G20 meeting, the drumbeat of anti-American economic policy management is building. Germany weighed in this week with their finance minister pronouncing the U.S. Federal Reserve "clueless".
Based in Beijing and founded in 1994, this is the same agency which in July announced credit downgrades to several western nations stripping them of their AAA status (Germany AA+, USA AA, Britain AA-, France AA-).
Watch for further announcements from Dagong...it is demonstrating to be a robust counterweight to the systemic biases embedded within the western ratings agencies who totally failed to anticipate the risks that unfolded leading up to the 2008 financial crisis.
Time will tell whether it proves to be a good leading indicator of the Chinese government's thought processes on western monetary policy management.
Saturday 13 November 2010
Saturday 16 October 2010
US Foreclosure-gate: Subprime 2 housing crisis coming?
The news broke this week on foreclosure-gate. It has been evident for a while the U.S. banks are drowning in foreclosures and this current crisis is just going to make things a lot worse. Back in 2005, there were approximately 100,000 home repossessions in the United States. In 2009, there were approximately 1 million home repossessions in the U.S. and RealtyTrac is now projecting that there will be an all-time record of 1.2 million home repossessions in the United States this year.
Vast numbers of foreclosures across the United States could be invalid because the securitization process has muddied the chain of ownership. In fact, an increasing number of judges have ruled that the "owners" of the mortgage have no right to foreclose on a property because they lack clear title. This has giving rise to a "Show me the Doc" (document for tile deed) movement to help householders restrain the banks' actions.
8 Investment Implications:
House Buyers
A healthy property market is pivotal for any economy. It promotes labour mobility, greases social development and drives a steadfast flow of consumer spending.
Shorting the US banking sector (symbol:XLF, Financial Select Sector SPDR) seems a reasonable bet until clarity is achieved with this tangle of legal spaghetti. Imagine the financial equivalent of BP having many many small wells gushing oil out into the Gulf all at once and getting confused as to which ones to plug immediately. We know what happened to BP's share price in the first two months of that saga.
Vast numbers of foreclosures across the United States could be invalid because the securitization process has muddied the chain of ownership. In fact, an increasing number of judges have ruled that the "owners" of the mortgage have no right to foreclose on a property because they lack clear title. This has giving rise to a "Show me the Doc" (document for tile deed) movement to help householders restrain the banks' actions.
8 Investment Implications:
House Buyers
- Foreclosure bargains currently on the market may not be the bargains they appear if legal title is not clear.
- How will this affect the middle-upper of the property market with recent social trends to "trading-up"?
- Americans that have recently purchased foreclosed homes may now be facing some serious problems themselves enduring the uncertainty of where legal title actually resides. Managing household budgets will be thrown awry.
- Millions of Americans may now "own" homes that they do not have clear title for. When it comes times to sell those homes, many Americans may find themselves unable to do so, thereby restricting labour mobility.
- For a typical under-water US householder, there may be an incentive to just stay in one's property until a bank or "someone" turns up with the full and proper paperwork to evict. The "Show-me-the-doc" movement is now gaining traction as survival instincts are triggered with social mores thrown out.
- By not paying the mortgage, a householder may gain a "temporary reprieve" to transfer mortgage spending elsewhere.
- It will make it much more difficult for the banks to sell the massive backlog of foreclosed properties they have accumulated.
- Under current FASB accounting regulations, such loans (assets) should be marked to zero if there is no eligible legal title or in the absence of market validity. Massive write-offs could be looming. It distracts management attention from running the core business.
- How will this affect the ability for banks to sell mortgage-backed-securities (MBS) into the market?
- Will banks continue to hoard money and not lend as they consider all conservative means at their disposal to shore up their capital base?
- Should another raising of capital arise to boost their Tier 1 and 2 reserve ratios, this will cause dilution to existing shareholders.
- Do they have any credibility left? What checks did they do to validate any of the paperwork before they issued their ratings on the mortgage-backed securities (MBS)?
- Warren Buffett has sold down a large proportion of his holdings in Moodys over the last 18 months.
- Another test of the big banks are too big to fail may not be far off depending on the size of write-offs and how market confidence is affected.
- Is there political appetite for another bailout?
- The Federal Reserve is holding US$ trillions of MBS on its balance sheet when it bailed out these banks. One day, it has to divest itself of these. Who will want to buy them and at what yields?
- FDIC reserves may not be enough to absorb a wave of smaller bank failures that result from foreclosure inertia. This may necessitate more federal spending to boost their reserves and so further increase the growing fiscal deficit.
- Attorneys general in 50 states will be working together on a joint investigation into this foreclosure crisis. It is going to become much harder to get a mortgage. It is going to become much harder to buy a home. It is going to become much harder to sell a home.
- For a bank, this must be a nightmare. Loans on the books are backed by inadequate documentation. Employing low paid back-end staff to sign off mortgage approvals and which were subsequently "re-packaged" without thoroughly questioning any of the paperwork or ensuring completeness of due legal process. At best it's carelessness, at worst negligence. Defective documentation has created millions of blighted titles that could plague the nation for the next decade. Lawyers smell blood!
- This probably explains why the recent consumer spending indicators have not been worse in the downturn. Is it possible what some foreclosed householders don't pay in mortgages has been "transferred" to other items eg Walmart, iPads etc
- Over time, if this is not quickly resolved, the U.S. housing industry is likely to suffer a significant downturn due to all of this uncertainty. Consumers consume. Housing expenditures and their flow-through to related support industries (eg furniture and furnishings) transmit to the general economy.
- To assess if consumers hold back, Thanks-giving and christmas spending over the next two months will be key indicators to watch.
A healthy property market is pivotal for any economy. It promotes labour mobility, greases social development and drives a steadfast flow of consumer spending.
Shorting the US banking sector (symbol:XLF, Financial Select Sector SPDR) seems a reasonable bet until clarity is achieved with this tangle of legal spaghetti. Imagine the financial equivalent of BP having many many small wells gushing oil out into the Gulf all at once and getting confused as to which ones to plug immediately. We know what happened to BP's share price in the first two months of that saga.
Saturday 2 October 2010
An explanation of how bubbles happen...
This is the most simple and straightforward explanation I've come across on how and why asset bubbles occur. It comes from Thomas Woods, the author of Meltdown which digs into the real causes of the 2008 collapse. He had this to say at a recent speech at Indiana University:
… Asset bubbles, like the housing bubble we’ve just lived through, do not occur spontaneously. If people bought lots of houses on the free market, interest rates would rise as the banks’ loanable funds were depleted. That would put an end to speculation in real estate.
But thanks to the Federal Reserve System, which is no part of the free market, large infusions of money created out of thin air kept interest rates low, and thus perpetuated the bubble. During an asset bubble, demand for the asset in question rises, as does its price. Where would people get the money to keep buying an increasingly costly asset if the government’s officially approved money machine weren’t there to flood the economy with cash?
It was this interference with interest rates, pushing them well below where the free market would have set them, that set in motion the classic boom-bust cycle we’ve just witnessed. F.A. Hayek won the Nobel Prize for showing how central banks like the Federal Reserve, by interfering with interest rates and not allowing them to tell entrepreneurs the truth about economic conditions, divert the economy into unsustainable configurations that inevitably come undone in a crash. (Hayek belongs to a tradition of free-market thought called the Austrian School of economics.)
Adding fuel to the fire was the so-called Greenspan put, the unofficial policy of the Greenspan Fed that promised assistance to private firms in the event of risky investments gone bad. What kind of incentives do you suppose that created?...
Concise, logical and accurate. That's in the USA and they've just learnt a harsh lesson. Let's hope more consumers in China and Hong Kong start paying attention and dispense with the "but this time it's different here" attitude. Nations do not succeed by strenuously defying economic gravity.
… Asset bubbles, like the housing bubble we’ve just lived through, do not occur spontaneously. If people bought lots of houses on the free market, interest rates would rise as the banks’ loanable funds were depleted. That would put an end to speculation in real estate.
But thanks to the Federal Reserve System, which is no part of the free market, large infusions of money created out of thin air kept interest rates low, and thus perpetuated the bubble. During an asset bubble, demand for the asset in question rises, as does its price. Where would people get the money to keep buying an increasingly costly asset if the government’s officially approved money machine weren’t there to flood the economy with cash?
It was this interference with interest rates, pushing them well below where the free market would have set them, that set in motion the classic boom-bust cycle we’ve just witnessed. F.A. Hayek won the Nobel Prize for showing how central banks like the Federal Reserve, by interfering with interest rates and not allowing them to tell entrepreneurs the truth about economic conditions, divert the economy into unsustainable configurations that inevitably come undone in a crash. (Hayek belongs to a tradition of free-market thought called the Austrian School of economics.)
Adding fuel to the fire was the so-called Greenspan put, the unofficial policy of the Greenspan Fed that promised assistance to private firms in the event of risky investments gone bad. What kind of incentives do you suppose that created?...
Concise, logical and accurate. That's in the USA and they've just learnt a harsh lesson. Let's hope more consumers in China and Hong Kong start paying attention and dispense with the "but this time it's different here" attitude. Nations do not succeed by strenuously defying economic gravity.
Sunday 26 September 2010
A History of 50 Investment Bubbles
With the price of gold and silver scaling new heights recently, how does this performance compare against historical bubbles that formed and burst? Tulipmania in Holland during the 1600's and the South Sea bubble of 1720 spring to mind... the graphic below (Sharelynx.com) shows 50 historic bubbles from days gone by.
In this context, the chart shows that this current bull market in the precious metals is barely off the ground compared to other bubbles.
Double click on the image to enlarge...
In this context, the chart shows that this current bull market in the precious metals is barely off the ground compared to other bubbles.
Double click on the image to enlarge...
Sunday 20 June 2010
BP disaster is not in the spill...it's with their PR...and long term Russian manouevres
It's a horrible accident but you don't really have to clean up the entire Gulf of Mexico as the mass media would lead you to believe. The Gulf of Mexico is massive, covering 615,000 square miles and containing 660 quadrillion (660 thousand million millions) gallons of water. Looking at the amount of oil the Macondo well drilled by the Deepwater Horizon rig has been leaking, most estimates are in the 12,000-20,000 barrels per day range, so let's take the high end and also assume that this continues until mid-August, meaning four months since the accident.
Assume that the cap captures no oil (the latest reports are that it may be capturing much of the oil but let's be conservative). 20,000 barrels/day x 120 days x 42 gallons/barrel = 100.8 million gallons of oil released. 100.8 million divided by 660 quadrillion is one gallon of oil for every 6.6 billion gallons of water in the Gulf. That's the equivalent of roughly one-millionth of an ounce of oil in a typical bathtub full of water.
Huge oil spills have happened before and they were not the end of the world. The 1979 incident with PeMex's Ixtoc oil well was far worse than the Deepwater Horizon well. 140 million gallons of oil poured out of the Mexican well. After four months, an oil slick had covered about half of Texas's 370-mile gulf shoreline devastating tourism...and they recovered.
This in itself was nothing compared to Kuwait. During the first day off the 1990 Gulf War, 10 times as much oil spilled into the Persian Gulf which is one-sixth the size of the Gulf of Mexico. What were the long-term consequences? Whitney Tilson, a value-oriented New York hedge fund manager cites a 1993 UNESCO study that reported "little" long-term damage was done to the environment. "Half the oil evaporated, a million barrels were recovered and 2 million to 3 million barrels washed ashore mainly in Saudi Arabia," he said...and they recovered.
So, does that make BP a bargain investment today? Not yet. Four factors are unfolding which could serve as a drag to BP's fortunes. Last week, the major ratings agencies, Standard & Poors, Fitch and Moody's downgraded BP's credit ratings to just above "junk" status as financial liabilities escalate. The US$20bn escrow account set aside for compensation is just a starting point. Soon after a meeting at the White House, it eliminated its dividend for the next three quarters. As a result, some mutual funds may have to sell off their BP holdings due to internal rules on having to maintain only dividend-paying companies within their portfolios.
One company's crisis, however, is someone else's opportunity. Russian President Dmitry Medvedev added further pressure on BP stopping short of saying the disaster would prompt a review of Russia's partnership with BP. He warned that the oil giant might face "annihilation" as a result of the fall-out of the oil disaster. In an interview with the Wall Street Journal, he described the spill as a "wake-up call" and said that "hopefully [BP] can afford the losses". In Russia, BP holds a 50% stake in TNK-BP - a joint venture with AAR (Alfa Access-Renova) which is owned by a group of Russian billionaires. BP is the third largest oil producer in Russia accounting for roughly a quarter of BP's global production. According to analysts at Moscow investment bank Troika Dialog, BP's stake in TNK-BP is worth about US$16-18bn. Relations between BP and the Russian authorities have been strained for many years going back to Putin's leadership over taxes and operating control. The weakened company must be wary operating in partnership with business oligarchs who have forged connections to the highest echelons of central government circles where a nationalistic fervour has recently gained momentum and with energy supply high on its agenda.
While this dark cloud looms overhead, BP has stumbled from one PR disaster to another. The CEO, Tony Hayward stated at the end of May he "wanted his life back" having already spent some time in the Gulf in charge of daily operations while many local fishermen and hotel owners have had their earnings potential obliterated this summer as the crisis mounted. Last week their Swedish chairman stated after the White House meeting BP would look after the "small people", an unfortunate slip in translation. It smacked again of an aloof corporate culture. Meantime, he has withdrawn his hapless CEO from the firing line after his weak testimony to Congress for neither being able to articulate anything new over the company's decision-making process in the events leading up to the accident nor any reassurances on the management of the spill. Mr Hayward was subsequently savaged by the US press. After jetting back to the UK, yesterday he was back in the news for taking his 52 foot yacht out to take part in a boating competition attracting yet more biting criticism from the English press. BP accounts for one in six pounds of the FTSE 100 total dividend payout leaving many organisations and individuals out of pocket...and this 53 year old geologist seems to have got his life back...but at what reputational cost to the brand?
The oil community is becoming more concerned with longer term erosion under the seabed within the immediate vicinity of the well spill due to the failure to seal the well head. Why? This is a relatively huge reservoir with an abundance of methane. The oil and gas that are flowing out of the rock are bringing small amounts of that rock (in the form of sand) out with them. Rocks that contain lots of oil are not that strong and are easily worn away by the flow of fluid through them. This leads to cracks in the zone and could be a precursor to more leakages within the area and a worse case scenario could be a gargantuan "volcano-like" eruption as the seafloor collapses due to the unremitting pressure build-up and increasing flow rates. Will this almost certainly lead to the bankruptcy of the company as containment fails at all levels?
Look to see if the relief well being drilled and expected to be completed in August can solve the problem. This will be the first positive fillip to BP's revival.
Assume that the cap captures no oil (the latest reports are that it may be capturing much of the oil but let's be conservative). 20,000 barrels/day x 120 days x 42 gallons/barrel = 100.8 million gallons of oil released. 100.8 million divided by 660 quadrillion is one gallon of oil for every 6.6 billion gallons of water in the Gulf. That's the equivalent of roughly one-millionth of an ounce of oil in a typical bathtub full of water.
Huge oil spills have happened before and they were not the end of the world. The 1979 incident with PeMex's Ixtoc oil well was far worse than the Deepwater Horizon well. 140 million gallons of oil poured out of the Mexican well. After four months, an oil slick had covered about half of Texas's 370-mile gulf shoreline devastating tourism...and they recovered.
This in itself was nothing compared to Kuwait. During the first day off the 1990 Gulf War, 10 times as much oil spilled into the Persian Gulf which is one-sixth the size of the Gulf of Mexico. What were the long-term consequences? Whitney Tilson, a value-oriented New York hedge fund manager cites a 1993 UNESCO study that reported "little" long-term damage was done to the environment. "Half the oil evaporated, a million barrels were recovered and 2 million to 3 million barrels washed ashore mainly in Saudi Arabia," he said...and they recovered.
So, does that make BP a bargain investment today? Not yet. Four factors are unfolding which could serve as a drag to BP's fortunes. Last week, the major ratings agencies, Standard & Poors, Fitch and Moody's downgraded BP's credit ratings to just above "junk" status as financial liabilities escalate. The US$20bn escrow account set aside for compensation is just a starting point. Soon after a meeting at the White House, it eliminated its dividend for the next three quarters. As a result, some mutual funds may have to sell off their BP holdings due to internal rules on having to maintain only dividend-paying companies within their portfolios.
One company's crisis, however, is someone else's opportunity. Russian President Dmitry Medvedev added further pressure on BP stopping short of saying the disaster would prompt a review of Russia's partnership with BP. He warned that the oil giant might face "annihilation" as a result of the fall-out of the oil disaster. In an interview with the Wall Street Journal, he described the spill as a "wake-up call" and said that "hopefully [BP] can afford the losses". In Russia, BP holds a 50% stake in TNK-BP - a joint venture with AAR (Alfa Access-Renova) which is owned by a group of Russian billionaires. BP is the third largest oil producer in Russia accounting for roughly a quarter of BP's global production. According to analysts at Moscow investment bank Troika Dialog, BP's stake in TNK-BP is worth about US$16-18bn. Relations between BP and the Russian authorities have been strained for many years going back to Putin's leadership over taxes and operating control. The weakened company must be wary operating in partnership with business oligarchs who have forged connections to the highest echelons of central government circles where a nationalistic fervour has recently gained momentum and with energy supply high on its agenda.
While this dark cloud looms overhead, BP has stumbled from one PR disaster to another. The CEO, Tony Hayward stated at the end of May he "wanted his life back" having already spent some time in the Gulf in charge of daily operations while many local fishermen and hotel owners have had their earnings potential obliterated this summer as the crisis mounted. Last week their Swedish chairman stated after the White House meeting BP would look after the "small people", an unfortunate slip in translation. It smacked again of an aloof corporate culture. Meantime, he has withdrawn his hapless CEO from the firing line after his weak testimony to Congress for neither being able to articulate anything new over the company's decision-making process in the events leading up to the accident nor any reassurances on the management of the spill. Mr Hayward was subsequently savaged by the US press. After jetting back to the UK, yesterday he was back in the news for taking his 52 foot yacht out to take part in a boating competition attracting yet more biting criticism from the English press. BP accounts for one in six pounds of the FTSE 100 total dividend payout leaving many organisations and individuals out of pocket...and this 53 year old geologist seems to have got his life back...but at what reputational cost to the brand?
The oil community is becoming more concerned with longer term erosion under the seabed within the immediate vicinity of the well spill due to the failure to seal the well head. Why? This is a relatively huge reservoir with an abundance of methane. The oil and gas that are flowing out of the rock are bringing small amounts of that rock (in the form of sand) out with them. Rocks that contain lots of oil are not that strong and are easily worn away by the flow of fluid through them. This leads to cracks in the zone and could be a precursor to more leakages within the area and a worse case scenario could be a gargantuan "volcano-like" eruption as the seafloor collapses due to the unremitting pressure build-up and increasing flow rates. Will this almost certainly lead to the bankruptcy of the company as containment fails at all levels?
Look to see if the relief well being drilled and expected to be completed in August can solve the problem. This will be the first positive fillip to BP's revival.
Saturday 22 May 2010
China's devaluation dilemma: where next with the yuan, dollar and the euro?
The yuan is currently pegged to the US dollar in order to keep Chinese goods comparatively cheap in the key North American markets. As long as the US dollar is weak, the Chinese yuan is weak and therefore competitive in European markets. While complaints abound from the US about this "unfair" trade advantage, is it possible China has been blind-sided by the recent euro woes?
The US$-euro exchange rate is also a pillar to global trade. As the euro falls, countries are also under pressure to weaken their currencies. Specifically, China is under pressure to weaken its currency because Europe is the largest consumer of Chinese goods. In order to remain competitive, Chinese companies must reduce their profit margins or hope to make up reduced profits by increases in volume.
To weaken one's currency, one has to sell it and buy another currency. If you're China, would you rather sell the yuan to buy the euro, yen, or U.S. dollar? In this trio, the US dollar is king because it's the least worst scenario being the global reserve currency.
The Chinese government is now confronted with a policy dilemma because it has painted itself into a corner. Which exchange rate should it "manage" for the long term benefit of its export industries? It can either target the US$-yuan or the euro-yuan. It cannot aim for both as it has no influence over the US$-euro rate. As this chapter unfolds, distant images of how another major economic power blew up in the late 1980s with failed exchange rate targetting, from which it has never recovered, loom ever larger: Japan. This lack of control worries Chinese policymakers. This could be one reason why Chinese entrepreneurs have recently voiced their increasing concerns over their own government's US$-yuan policy. There are now bigger and wider issues at stake because entrepreneurs are not willing to invest in a climate of uncertainty.
Every country desires a weaker currency so it can export more goods. However, the only way to weaken one's currency is to sometimes make bad investments. Such economics make sense to a central banker: more exported goods mean more jobs, social cohesion and a higher GDP. So why would you fundamentally weaken your entire nation for one good year of exports? Imagine breaking all the windows in your city so that you will experience a building boom.
If market forces to allow the exchange rate to find their comfort levels are not the answer for China's zest for "control", then an alternative outlet needs to be created to protect the general Chinese investor community from the future vagaries of their export sectors. A safety valve that can stand the test of time. Precious metals are one such avenue.
The US$-euro exchange rate is also a pillar to global trade. As the euro falls, countries are also under pressure to weaken their currencies. Specifically, China is under pressure to weaken its currency because Europe is the largest consumer of Chinese goods. In order to remain competitive, Chinese companies must reduce their profit margins or hope to make up reduced profits by increases in volume.
To weaken one's currency, one has to sell it and buy another currency. If you're China, would you rather sell the yuan to buy the euro, yen, or U.S. dollar? In this trio, the US dollar is king because it's the least worst scenario being the global reserve currency.
The Chinese government is now confronted with a policy dilemma because it has painted itself into a corner. Which exchange rate should it "manage" for the long term benefit of its export industries? It can either target the US$-yuan or the euro-yuan. It cannot aim for both as it has no influence over the US$-euro rate. As this chapter unfolds, distant images of how another major economic power blew up in the late 1980s with failed exchange rate targetting, from which it has never recovered, loom ever larger: Japan. This lack of control worries Chinese policymakers. This could be one reason why Chinese entrepreneurs have recently voiced their increasing concerns over their own government's US$-yuan policy. There are now bigger and wider issues at stake because entrepreneurs are not willing to invest in a climate of uncertainty.
Every country desires a weaker currency so it can export more goods. However, the only way to weaken one's currency is to sometimes make bad investments. Such economics make sense to a central banker: more exported goods mean more jobs, social cohesion and a higher GDP. So why would you fundamentally weaken your entire nation for one good year of exports? Imagine breaking all the windows in your city so that you will experience a building boom.
If market forces to allow the exchange rate to find their comfort levels are not the answer for China's zest for "control", then an alternative outlet needs to be created to protect the general Chinese investor community from the future vagaries of their export sectors. A safety valve that can stand the test of time. Precious metals are one such avenue.
Friday 21 May 2010
The LIBOR-OIS spread is signalling a credit crisis could be brewing again...
One measure of the fear in the credit marketplace is the interest rate that banks charge each other compared to the safe overnight rate.This is measured by the LIBOR-OIS spread. LIBOR is the London Interbank Offered Rate that banks charge each other for unsecured funds as quoted in London. The OIS is the Overnight Indexed Swap, the interest derived from the central bank’s overnight rate. In the U.S., the OIS is based on the fed funds rate.
The difference between these two rates offers a useful indicator of the risk perceived in the markets and the potential lack of trust banks have with each other. The credit crisis showed that big banks can collapse within a matter of days. No bank wants to be put in a position to recover loans to its peers / counter-parties over protracted periods of time and uncertainty because they have suddenly encountered "difficulties" and may not be able to repay.
The Bloomberg chart above shows how the spread was generally a low 10 basis points (0.1%) until the Credit Crisis. After October 2009, the rate returned to those low levels and has stayed low until this May. Was this recent period the “eye of the storm”?
As you can see, the LIBOR-OIS spread has doubled in just the last two weeks, a clear warning that the new turmoil around the Greek sovereign debt crisis is raising risk levels. Given the inter-connectedness amongst the international financial institutions, those with loans especially in the PIIGS nations may face higher borrowing rates as repayment risks increase. German, French and Spanish bankers with overseas loans in these regions therefore could be subject to more sleepless nights.
US Bonds: a safe haven to diversify away from the PIGS (but for 2010 only) ...
Tuesday 18 May 2010
What is currency debasement and why gold will be the next world currency?
If the 2008 financial crisis was characterised by private debt being bailed out by public debt (ie borne by the long suffering taxpayer), then who will come to the rescue of sovereign debt? Which government(s) is going to foot the tab on another's profligacy? It seems another floor has just been built on the house of cards.With this new set of economic machinations, the chart above points to next year’s sovereign debt estimates for the G7 and other key global economies. The U.S. debt in 2011 would be about equal to GDP (US$15 trillion) while the debt loads carried by Japan, Italy and Greece would exceed GDP.
There is a concern among investors that not all is right with the financial world and they don't fully understand it. They think central bankers might be debasing their currencies and so there is an interest developing in gold. If their personal wealth can be affected by the future inflation spawned by the trillions of dollars and euros created to finance economic rescue plans, then the potential implications for gold are profound.
What is currency debasement and how does one measure it? This may once have been the domain of a few old Germans, Latin Americans and Asians to think about. The recent ferocity in which it has struck Mittel Europa has un-nerved many who are slowly coming round to the view the Euro is heading inexorably towards Argentine peso status. It won't be just clattering pots and pans in the streets...the trade union molly-coddled Greeks can attest to something more vigourous.
Here’s one way to look at currency destruction. 10 years ago this week, US$1,000 bought nearly four ounces of gold and today US$1,000 won’t even get you a single ounce (today's spot price is US$1,215). Gold is money, so when you look at the gold-US dollar exchange rate, the dollar’s value has fallen by a startling 70%+ just in the past decade...and that's the global reserve currency!
To hold gold is not about getting rich, but a means to diversify assets and protect wealth.
Saturday 8 May 2010
Acropolis now...the web of PIIGS debt exposed in technicolour
The following pentagram is from the New York Times. Crafted from the BIS (Bank of International Settlements) data, it shows the total debt load of the PIIGS (Portugal, Ireland, Italy, Greece and Spain) nations as at 31st December, 2009 spotlighting how much is owed:
1. between the PIIGS nations themselves and
2. from the PIIGS to the major trading European partners, France, Germany and the UK
Arrow widths are proportional to debt amounts.
The joint EU/IMF rescue package this week of euro 111 billion or US$145 billion (bn) to bail-out Greece has triggered a burning fuse which will have global ramifications. It will leave the much maligned 1990s Asia currency contagion in the dust. There is simply too much interlinked debt in the European financial system at alarming proportions of national GDPs, one wonders how they will ever be rolled-over, never mind paid off.
After Greece, like dominoes, the other PIIGs are about to topple.
It's a sobering thought. EU leadership has been virtually non-existent. The world got a glimpse of this when the Eyjafjallajökull volcano erupted in April and paralysed European airspace for days costing the airlines billions. The Greece situation has merely amplified this.
The value of fiat paper money is waning. We are still some distance from the devastation wrought by hyperinflation in 1920s Germany, 1990s Argentina and 2000s Zimbabwe. It will take magical healing powers for the European financial system to untangle itself and escape the dark forces of dislocation building up within this pentagram.
The watershed moment has finally arrived to fully recognise gold and silver are real alternatives to holding paper money as a store of value.
1. between the PIIGS nations themselves and
2. from the PIIGS to the major trading European partners, France, Germany and the UK
Arrow widths are proportional to debt amounts.
The joint EU/IMF rescue package this week of euro 111 billion or US$145 billion (bn) to bail-out Greece has triggered a burning fuse which will have global ramifications. It will leave the much maligned 1990s Asia currency contagion in the dust. There is simply too much interlinked debt in the European financial system at alarming proportions of national GDPs, one wonders how they will ever be rolled-over, never mind paid off.
After Greece, like dominoes, the other PIIGs are about to topple.
It's a sobering thought. EU leadership has been virtually non-existent. The world got a glimpse of this when the Eyjafjallajökull volcano erupted in April and paralysed European airspace for days costing the airlines billions. The Greece situation has merely amplified this.
The value of fiat paper money is waning. We are still some distance from the devastation wrought by hyperinflation in 1920s Germany, 1990s Argentina and 2000s Zimbabwe. It will take magical healing powers for the European financial system to untangle itself and escape the dark forces of dislocation building up within this pentagram.
The watershed moment has finally arrived to fully recognise gold and silver are real alternatives to holding paper money as a store of value.
Thursday 6 May 2010
Today the UK is at a crossroads. A general election with a vital decision to make and action urgently required...
In the tightest United Kingdom general election since 1974, the three main political parties are slugging it out to carve out a mandate to govern this island nation of circa 62 million, the 6th biggest economy in the world.
Speaking on Wednesday at Bradford University, the last day of campaigning, the Prime Minister, Gordon Brown said: "I know there are people who say, or hope, the election is already over. But I tell you that tomorrow is the time for the thousands of people to speak for themselves.
"Tomorrow doesn't belong to the press, to the commentators, to the insiders, to the vested interests or even to the political parties. Tomorrow your voice shall be heard and your vote will determine the direction of this country."
The right to vote in an open and transparent manner is commonly taken for granted in the western hemisphere. In Asia today, with perhaps India, Indonesia and the Philippines excepted, this is still very much a work-in-progress. We should genuflect on the millions of people who aspired and struggled to achieve this vision and did not live to realise their dreams.
During this momentary interlude in the daily heartbeat of a nation, the attention on the economy will rightfully and respectfully take a back seat while the heeled populace makes a beeline to the ballet box and cast a life influencing decision. Today nobody, including the Prime Minister, need be “primus inter pares” (first amongst equals). Amen to that…
Speaking on Wednesday at Bradford University, the last day of campaigning, the Prime Minister, Gordon Brown said: "I know there are people who say, or hope, the election is already over. But I tell you that tomorrow is the time for the thousands of people to speak for themselves.
"Tomorrow doesn't belong to the press, to the commentators, to the insiders, to the vested interests or even to the political parties. Tomorrow your voice shall be heard and your vote will determine the direction of this country."
The right to vote in an open and transparent manner is commonly taken for granted in the western hemisphere. In Asia today, with perhaps India, Indonesia and the Philippines excepted, this is still very much a work-in-progress. We should genuflect on the millions of people who aspired and struggled to achieve this vision and did not live to realise their dreams.
During this momentary interlude in the daily heartbeat of a nation, the attention on the economy will rightfully and respectfully take a back seat while the heeled populace makes a beeline to the ballet box and cast a life influencing decision. Today nobody, including the Prime Minister, need be “primus inter pares” (first amongst equals). Amen to that…
Wednesday 5 May 2010
Australia's new 40% mining super profits tax...the "Greater China tariff "
On Tuesday, the Australian government levied a 40% Resource Super Profits Tax on its mining industry to take effect from July 2012. The company tax rate would be cut from 30 percent to 29 percent in July 2013 and to 28 percent a year later.
In one stroke, the cost of doing business shot up overnight. The Australian mining sector accounted for $94 billion in exports during 2009, 38% of the total.
Multinationals like Rio Tinto and BHP Billiton were left scrambling in their wake as Australia is a vital cog in their global mining operations. Resource mining is a capital intensive industry and long term planning is essential, sometimes with payback taking many years.
Perversely, is this otherwise a Great China Tariff, a tax to soak the Chinese? The resource sector comprises 9% of Australia's economy. Australia exports 80% of its resources. Who is the biggest buyer of those resources? China. The Chinese bought US$42.4 billion of resources from Australia in 2009.
China is scouring the world for oil, natural gas, copper, coal, and iron ore supplies. It has a desperate need for the raw materials ... and lots of money to toss around in order to get it. Plus…China doesn't just buy products from Australia, it buys mining companies too (US$$20 billion worth in the last 18 months or so).
The proposed Australian super-profit tax reinforces the lesson China learned in 2005 and 2006: the resources aren't yours unless they are in your house. Instead of sending more money on taxes to foreign governments, China will spend that money in its domestic mining and energy infrastructure. Right now, China has no choice but to "pay up" for Australian resources. It has to have them to continue building. But stories like this are huge drivers for China's domestic exploration programs...
China can't replace Australian supplies of iron ore, tin, and oil with domestic deposits tomorrow... but the country does have some excellent prospects.
In one stroke, the cost of doing business shot up overnight. The Australian mining sector accounted for $94 billion in exports during 2009, 38% of the total.
Multinationals like Rio Tinto and BHP Billiton were left scrambling in their wake as Australia is a vital cog in their global mining operations. Resource mining is a capital intensive industry and long term planning is essential, sometimes with payback taking many years.
Perversely, is this otherwise a Great China Tariff, a tax to soak the Chinese? The resource sector comprises 9% of Australia's economy. Australia exports 80% of its resources. Who is the biggest buyer of those resources? China. The Chinese bought US$42.4 billion of resources from Australia in 2009.
China is scouring the world for oil, natural gas, copper, coal, and iron ore supplies. It has a desperate need for the raw materials ... and lots of money to toss around in order to get it. Plus…China doesn't just buy products from Australia, it buys mining companies too (US$$20 billion worth in the last 18 months or so).
The proposed Australian super-profit tax reinforces the lesson China learned in 2005 and 2006: the resources aren't yours unless they are in your house. Instead of sending more money on taxes to foreign governments, China will spend that money in its domestic mining and energy infrastructure. Right now, China has no choice but to "pay up" for Australian resources. It has to have them to continue building. But stories like this are huge drivers for China's domestic exploration programs...
China can't replace Australian supplies of iron ore, tin, and oil with domestic deposits tomorrow... but the country does have some excellent prospects.
Saturday 17 April 2010
In with Mars and out with the moon - Obama's new frontier
On Thursday, 15th April, President Obama announced at Cape Canaveral the scrapping of the moon programme which he had inherited from George Bush. Understandly this drew consternation from the Apollo astronauts who flew the 1960s and 1970s moon missions as a sign of American demise.
Instead Obama delivered a US$6 billion boost in NASA's budget, then offset the cancellation of a mission that would once again send men to the moon by announcing a new program to land astronauts on Mars... and drop in on an asteroid as well.
Over the course of my days on this remarkable planet of ours, I have had the opportunity to get to know all manner of personality types. One of the most troubled have been the serial spenders... deluded individuals that simply can't help but buy all that their hearts desire, no matter how much pain results from their debt-financed spending. That describes today's political class.
Click below for Obama's personality trait as analysed by a world personality expert:
Dr Sam Vaknin, narcissism, Obama and the fate of the world economy
Instead Obama delivered a US$6 billion boost in NASA's budget, then offset the cancellation of a mission that would once again send men to the moon by announcing a new program to land astronauts on Mars... and drop in on an asteroid as well.
Over the course of my days on this remarkable planet of ours, I have had the opportunity to get to know all manner of personality types. One of the most troubled have been the serial spenders... deluded individuals that simply can't help but buy all that their hearts desire, no matter how much pain results from their debt-financed spending. That describes today's political class.
Unless and until you start hearing the president making speeches about not going to Mars, followed by wishing legions of negative-equity houseowners who bought over their heads and government employees the best of luck as they start to toss away their their credit cards and enter the private sector, the only conclusion to be drawn is that a space ship isn't the only thing headed for outer space, but government debt as well.
This spending is unsustainable...
Click below for Obama's personality trait as analysed by a world personality expert:
Dr Sam Vaknin, narcissism, Obama and the fate of the world economy
Saturday 20 March 2010
There is no US consumer recovery...implications for China
Last week's Flow of Funds report from the US Federal Reserve showed that US total credit expansion, or the relative lack of it, continued to disappear down the plughole despite the government's mighty efforts to put the country back on the path to prosperity (see chart below).
The current recovery, based in very large part to manufacturers starting to ramp up their inventories, simply cannot be sustained while credit is disappearing at this debilitating rate.
The recently released Q4 Flow of Funds data allowed economists to get a full view of the 2009 data. It was ugly. Most shockingly, the household sector shrank its borrowing for the seventh quarter in a row.
Combined with continued rapid balance sheet shrinkage in both the corporate and financial sectors, total domestic debt contracted for the fourth quarter in a row. The government's creation of credit, or stimulus, as big as it has been is barely propping up the whole economy overall.
Now, we might be getting used to such news, but it is always worth remembering that, prior to the global meltdown, even one quarter of total domestic debt shrinkage was enough to stir the government into rapid response mode with quick relief measures.
The omens are not good for China's exporters. 15 months after the height of the financial crisis, the trend is now clear. US consumers who make up 70% of US GDP are just not in the mood to spend. No wonder the Chinese premier is reluctant to let the value of the yuan appreciate significantly. This will put pressure on the exporters to raise their prices to the buyers and could be the final straw that leads to bankruptcy and spills more unemployed factory workers onto the city streets.
With demand conditions probably permanently stuck in a rut, who dares to prick any of the current China bubbles ranging from property to stockmarkets?
The current recovery, based in very large part to manufacturers starting to ramp up their inventories, simply cannot be sustained while credit is disappearing at this debilitating rate.
The recently released Q4 Flow of Funds data allowed economists to get a full view of the 2009 data. It was ugly. Most shockingly, the household sector shrank its borrowing for the seventh quarter in a row.
Combined with continued rapid balance sheet shrinkage in both the corporate and financial sectors, total domestic debt contracted for the fourth quarter in a row. The government's creation of credit, or stimulus, as big as it has been is barely propping up the whole economy overall.
Now, we might be getting used to such news, but it is always worth remembering that, prior to the global meltdown, even one quarter of total domestic debt shrinkage was enough to stir the government into rapid response mode with quick relief measures.
The omens are not good for China's exporters. 15 months after the height of the financial crisis, the trend is now clear. US consumers who make up 70% of US GDP are just not in the mood to spend. No wonder the Chinese premier is reluctant to let the value of the yuan appreciate significantly. This will put pressure on the exporters to raise their prices to the buyers and could be the final straw that leads to bankruptcy and spills more unemployed factory workers onto the city streets.
With demand conditions probably permanently stuck in a rut, who dares to prick any of the current China bubbles ranging from property to stockmarkets?
Saturday 6 March 2010
China's global shopping spree for oil
China is hunting for resources from Canada to Nigeria to support expansion in the world’s fastest growing major economy. It's global pursuit of oil and gas has grown to a crescendo. China's state oil giants are stepping up their pursuit of overseas assets as domestic oil output stagnates and supply of natural gas fails to keep pace with the growth in demand. Yet their aggressive moves are getting precious little media attention.
Since 1993, right about the time that China started importing oil, the big three petroleum companies have started a major push in foreign countries through equity-type investment and contractual management. The first salvo was on September 6, 1994 when CNOOC (China National Offshore Oil Corporation) acquired 33% of Arco’s share at the Malacca oil field in Indonesia. After the Chinese oil companies became publicly traded in 2000 and 2001 their acquisition of foreign oil and gas assets has become more vigorous. By September 2009, China’s oversea oil and gas investments were spread among 28 countries and 73 projects.
China’s latest purchase came last month in February when PetroChina (part of CNPC)paid US$1.7 billion to buy a 60% stake in a Canadian oil sands operation from Athabasca Oil Sands Corp. The production from the oil sands investment is expected to be as high as 500,000 barrels per day under full development. The Canadian acquisition is among the latest in China’s shopping spree for global oil and gas assets. Those purchases are further increasing the size of China’s biggest oil companies - CNPC (China National Petroleum Corporation), Sinopec and CNOOC which are now among the largest oil companies in the world. Last November, Petroleum Intelligence Weekly published its list of the world’s 50 biggest petroleum companies. China’s three biggest energy companies were ranked, respectively, as number 5, 25, and 48.
China has seized the opportunity of the global economic crisis and the decline in oil prices to solidify its energy security. It sees access to foreign oil as a crucial element of its economic future. Last year, the country imported 50% of its oil for the first time.
Furthermore, in 2009, production by Chinese companies operating overseas oil and gas fields exceeded 800 million barrels (2.2 million barrels per day, about 57% of total imports). Meanwhile, China has become the biggest buyer in the global oil and gas M&A (mergers & acquistions) market. Chinese companies announced 11 acquisitions with a total value of $16 billion. The biggest deal was Sinopec’s purchase of Swiss-based Addax Petroleum for US$7.5 billion in June 2009, by far the biggest acquisition in China’s oil and gas trading history.
Other important highlights of recent Chinese overseas oil and gas purchases include:
- 2006-09: CNOOC and Sinopec’s acquisition of three blocks in Angola for US$1.8 billion
- Apr.2009: Xinjiang Guanghui Group US$44 million acquisition of 49% stake of Kazakhstan TBM Co. to jointly develop the eastern Kazakh oil and gas blocks in the Zaysanskaya region;
- May 2009: China Development Bank’s $10 billion contract with Brazilian state oil company Petrobas for “petroleum and loan exchange” which allows China to get 150,000 barrels per day for 10 years;
- May 2009: PetroChina’s US$ 1 billion acquisition of 45.5% percent of Singapore Petroleum Co., Ltd;
- Sept./Oct. 2009: China Investment Co.’s US$939 million for a 11% stake of global depositary receipts of Kazakhstan's national oil company and US$300 million for a 45%stake of the Russian Nobel Oil Group;
Through these deals, China has steadfastly increased its potential oil supply by about 1.5 million barrels per day.
To facilitate oil and gas imports, China is building pipelines. Under construction or already under partial operation are the China-Russia crude oil pipeline, China-Myanmar oil and gas pipelines, and Central Asia gas pipelines. It is clear that the building of the necessary infrastructure, coupled with China’s aggressive global acquisition spree is part of a deliberate effort to increase the country’s energy security.
Since 1993, right about the time that China started importing oil, the big three petroleum companies have started a major push in foreign countries through equity-type investment and contractual management. The first salvo was on September 6, 1994 when CNOOC (China National Offshore Oil Corporation) acquired 33% of Arco’s share at the Malacca oil field in Indonesia. After the Chinese oil companies became publicly traded in 2000 and 2001 their acquisition of foreign oil and gas assets has become more vigorous. By September 2009, China’s oversea oil and gas investments were spread among 28 countries and 73 projects.
China’s latest purchase came last month in February when PetroChina (part of CNPC)paid US$1.7 billion to buy a 60% stake in a Canadian oil sands operation from Athabasca Oil Sands Corp. The production from the oil sands investment is expected to be as high as 500,000 barrels per day under full development. The Canadian acquisition is among the latest in China’s shopping spree for global oil and gas assets. Those purchases are further increasing the size of China’s biggest oil companies - CNPC (China National Petroleum Corporation), Sinopec and CNOOC which are now among the largest oil companies in the world. Last November, Petroleum Intelligence Weekly published its list of the world’s 50 biggest petroleum companies. China’s three biggest energy companies were ranked, respectively, as number 5, 25, and 48.
China has seized the opportunity of the global economic crisis and the decline in oil prices to solidify its energy security. It sees access to foreign oil as a crucial element of its economic future. Last year, the country imported 50% of its oil for the first time.
Furthermore, in 2009, production by Chinese companies operating overseas oil and gas fields exceeded 800 million barrels (2.2 million barrels per day, about 57% of total imports). Meanwhile, China has become the biggest buyer in the global oil and gas M&A (mergers & acquistions) market. Chinese companies announced 11 acquisitions with a total value of $16 billion. The biggest deal was Sinopec’s purchase of Swiss-based Addax Petroleum for US$7.5 billion in June 2009, by far the biggest acquisition in China’s oil and gas trading history.
Other important highlights of recent Chinese overseas oil and gas purchases include:
- 2006-09: CNOOC and Sinopec’s acquisition of three blocks in Angola for US$1.8 billion
- Apr.2009: Xinjiang Guanghui Group US$44 million acquisition of 49% stake of Kazakhstan TBM Co. to jointly develop the eastern Kazakh oil and gas blocks in the Zaysanskaya region;
- May 2009: China Development Bank’s $10 billion contract with Brazilian state oil company Petrobas for “petroleum and loan exchange” which allows China to get 150,000 barrels per day for 10 years;
- May 2009: PetroChina’s US$ 1 billion acquisition of 45.5% percent of Singapore Petroleum Co., Ltd;
- Sept./Oct. 2009: China Investment Co.’s US$939 million for a 11% stake of global depositary receipts of Kazakhstan's national oil company and US$300 million for a 45%stake of the Russian Nobel Oil Group;
Through these deals, China has steadfastly increased its potential oil supply by about 1.5 million barrels per day.
To facilitate oil and gas imports, China is building pipelines. Under construction or already under partial operation are the China-Russia crude oil pipeline, China-Myanmar oil and gas pipelines, and Central Asia gas pipelines. It is clear that the building of the necessary infrastructure, coupled with China’s aggressive global acquisition spree is part of a deliberate effort to increase the country’s energy security.
Sunday 28 February 2010
What's all the fuss about with the Toyota car recall?
The Japanese Toyota president was compelled to fly over to Washington from Tokyo and make a grovelling public apology under intense media scrutiny inside the US Congress. Politicians know they can get a lot of free press by stoking the popular perception that Toyota somehow knew the gas pedals were "dangerous," but installed them anyway, violating U.S. laws and regulations. U.S. automakers are doing everything to encourage this hysteria. This was just plain old fashioned bullying...
However, let's look at the facts so far. The probability these accidents resulted from the use of an ill-designed component of accelerator pedals getting stuck and causing fatal crashes, I had to consider the numbers: 34 people died in accidents blamed on the pedals. That's a pretty small number, but maybe enough to raise some concerns... until you realize that's the total number of fatalities since 2000.
Toyota has recalled more than 8.5 million vehicles in the U.S. Assume the owners drive those vehicles an average of 10,000 miles a year (that's less than 30 miles round-trip a day...conservative in the vast spaces of the US - and a factor of 10 makes the maths simpler). This means Toyotas are logging more than 85 billion miles a year in the U.S. or 850 billion miles during the last 10 years.
By dividing 34 deaths into 850 billion miles and the odds of a Toyota owner having one of these accidents is one in 25 billion for each mile driven...or your cahnces of being are a fatality are one in 2.5 million. That's a random event. If Toyota were using faulty equipment, we would have seen thousands more accidents and deaths...and you can bet in a litigious society like the United States, claims would have been filed by savvy lawyers and piled high in the law courts by now, on par probably with cigarette-induced diseases.
You're more likely to get killed by lightning: 60 people died from lightning in the United States just in 2009. The odds of a hole-in-one in golf are only 5,000 to 1.
Statistics aside, the allegedly defective accelerator part is made in Canada by Indiana-based CTS Corp. Many makes and models use this same part. For example, the Pontiac Vibe uses it. Ford sells a van in China with the component. Why aren't we hearing about those cars? None of the drivers with American cars that use identical parts ever experienced a stuck accelerator? US Transportation Secretary Ray LaHood told people to stop driving Toyotas... and then retracted it saying it was "obviously a misstatement."
I'm confident those parts are safe. It makes sense for those driving recalled Toyotas to get the pedal replaced and ignoring the recall voids the warranty.
Look for Toyota to be one of the consistent performers of the decade too...
However, let's look at the facts so far. The probability these accidents resulted from the use of an ill-designed component of accelerator pedals getting stuck and causing fatal crashes, I had to consider the numbers: 34 people died in accidents blamed on the pedals. That's a pretty small number, but maybe enough to raise some concerns... until you realize that's the total number of fatalities since 2000.
Toyota has recalled more than 8.5 million vehicles in the U.S. Assume the owners drive those vehicles an average of 10,000 miles a year (that's less than 30 miles round-trip a day...conservative in the vast spaces of the US - and a factor of 10 makes the maths simpler). This means Toyotas are logging more than 85 billion miles a year in the U.S. or 850 billion miles during the last 10 years.
By dividing 34 deaths into 850 billion miles and the odds of a Toyota owner having one of these accidents is one in 25 billion for each mile driven...or your cahnces of being are a fatality are one in 2.5 million. That's a random event. If Toyota were using faulty equipment, we would have seen thousands more accidents and deaths...and you can bet in a litigious society like the United States, claims would have been filed by savvy lawyers and piled high in the law courts by now, on par probably with cigarette-induced diseases.
You're more likely to get killed by lightning: 60 people died from lightning in the United States just in 2009. The odds of a hole-in-one in golf are only 5,000 to 1.
Statistics aside, the allegedly defective accelerator part is made in Canada by Indiana-based CTS Corp. Many makes and models use this same part. For example, the Pontiac Vibe uses it. Ford sells a van in China with the component. Why aren't we hearing about those cars? None of the drivers with American cars that use identical parts ever experienced a stuck accelerator? US Transportation Secretary Ray LaHood told people to stop driving Toyotas... and then retracted it saying it was "obviously a misstatement."
I'm confident those parts are safe. It makes sense for those driving recalled Toyotas to get the pedal replaced and ignoring the recall voids the warranty.
Look for Toyota to be one of the consistent performers of the decade too...
Saturday 20 February 2010
Linking 1 trillion dollars to the founding of modern Rome...
When I was at school, it wasn't long before I was drawn to the fascinating subject of history. With great teachers who were quick to engage young minds, I was quick to absorb all the best and worst achievements of mankind... nothing quenches the thirst for knowledge more than anchoring a few memorable dates, the names of kings and queens from ancient Egypt to modern Britain, titanic battles fought on land, sea and air plus the rich tapestry of discoveries and inventions stemming from the plain wheel to the rocket engine.
I was trying to figure out what a trillion dollars (one milllion million or thousand billion) mean to people nowdays. It can be hard to get one's head around this (unless you live in Zimbabwe where they have issued a trillion banknote in 2009). There were two ways I approached this:
1. If one were to print and spend 1 million a day, how long would it take to go through a 1 trillion...
- The maths would be 1,000,000,000,000 (that's a whopping twelve zeroes) divided by 1,000,000 = 1 million days. That would be 2,740 years.
- Another way to look at this is, you would have had to go back to 730 BC (before Christ) and keep spending a million dollars a day non-stop up to today. That goes back to the era of the founding of Rome by Romulus and Remus in 753 BC! Staggering!
[The insignia of the Roman Standard was SPQR: Senatus Populusque Romanus - "The Senate and the People of Rome", or should that be Spending Plentifully Quickly Redux, because it was spending over-reach that led to the demise of the empire in the end.]
2. What does US$ trillion physically look like?
Below are graphics from the Centre for Research on Globalisation (California) / pagetutor.com on what US$ 1 trillion looks like.
Let's start with a humble US$100 note, the largest denomination in general circulation:
A packet of one hundred $100 bills is less than 1/2" thick and contains $10,000. Fits in your pocket easily and is more than enough for week or two of shamefully decadent fun:
This next little pile is $1 million dollars (100 packets of $10,000). You could stuff that into a carrier bag and walk around with it:
While a measly $1 million looked a little unimpressive, $100 million is a little more respectable. It fits neatly on a standard pallet:
And $1 BILLION dollars... now we're really getting somewhere...
Now, figure this out...US$ 1 TRILLION...a million million or one thousand billion and notice it's double stacked.
This has convinced me the US government with its US$100+ trillion debt mountain (I guess you can picture this now) of liabilities (eg. from current and projected annual fiscal deficits, Medicare & Medicaid healthcare programmes for an increasingly aging population and massive military commitments overseas) is already bankrupt and will never be able to settle in full with its creditors China, Japan, Middle-east oil nations. Given the hard choice between a reality that is hard to accept and a delusion that is impossible to trust, I will pick the reality. The US dollar will descend from current reserve currency status to "Monopoly" money and not be worth the paper it's printed on. The last refuge for stores of value will be in physical commodities like precious metals, crude oil and farmland.
How to plan for and protect yourself against the implications:
How the Greenspan Guidotti Rule foretells a currency crisis?
I was trying to figure out what a trillion dollars (one milllion million or thousand billion) mean to people nowdays. It can be hard to get one's head around this (unless you live in Zimbabwe where they have issued a trillion banknote in 2009). There were two ways I approached this:
1. If one were to print and spend 1 million a day, how long would it take to go through a 1 trillion...
- The maths would be 1,000,000,000,000 (that's a whopping twelve zeroes) divided by 1,000,000 = 1 million days. That would be 2,740 years.
- Another way to look at this is, you would have had to go back to 730 BC (before Christ) and keep spending a million dollars a day non-stop up to today. That goes back to the era of the founding of Rome by Romulus and Remus in 753 BC! Staggering!
[The insignia of the Roman Standard was SPQR: Senatus Populusque Romanus - "The Senate and the People of Rome", or should that be Spending Plentifully Quickly Redux, because it was spending over-reach that led to the demise of the empire in the end.]
2. What does US$ trillion physically look like?
Below are graphics from the Centre for Research on Globalisation (California) / pagetutor.com on what US$ 1 trillion looks like.
Let's start with a humble US$100 note, the largest denomination in general circulation:
A packet of one hundred $100 bills is less than 1/2" thick and contains $10,000. Fits in your pocket easily and is more than enough for week or two of shamefully decadent fun:
This next little pile is $1 million dollars (100 packets of $10,000). You could stuff that into a carrier bag and walk around with it:
While a measly $1 million looked a little unimpressive, $100 million is a little more respectable. It fits neatly on a standard pallet:And $1 BILLION dollars... now we're really getting somewhere...
Now, figure this out...US$ 1 TRILLION...a million million or one thousand billion and notice it's double stacked.
This has convinced me the US government with its US$100+ trillion debt mountain (I guess you can picture this now) of liabilities (eg. from current and projected annual fiscal deficits, Medicare & Medicaid healthcare programmes for an increasingly aging population and massive military commitments overseas) is already bankrupt and will never be able to settle in full with its creditors China, Japan, Middle-east oil nations. Given the hard choice between a reality that is hard to accept and a delusion that is impossible to trust, I will pick the reality. The US dollar will descend from current reserve currency status to "Monopoly" money and not be worth the paper it's printed on. The last refuge for stores of value will be in physical commodities like precious metals, crude oil and farmland.
How to plan for and protect yourself against the implications:
How the Greenspan Guidotti Rule foretells a currency crisis?
Sunday 14 February 2010
Valentine's Day distilled...funnies on love
It's Valentine' Day today...and New Year's Day too in the Chinese calendar. That puts some Oriental folks in a bit of a quandary...what gives?...attending to the New Year well-wishing rituals centering around their close families and joyfully dispensing & receiving red laisee packets...or being attentive to their lovers' needs. It was Mao who stated "Women hold up half the sky..." in recognition of their pivotal importance in society, albeit spelling out the blindingly obvious, but an anachronism that blights modern China today.
Since the dawn of the human race, understanding your partner or new-found-love has been the ultimate voyage to self-discovery. Moving right along, we will enter the risky theme of the differences between Mars and Venus. Political correctness and economic reality will therefore be temporarily suspended...
ROMANCE MATHEMATICS
Smart man + smart woman = romance
Smart man + dumb woman = affair
Dumb man + smart woman = marriage
Dumb man + dumb woman = pregnancy
OFFICE ARITHMETIC
Smart boss + smart employee = profit
Smart boss + dumb employee = production
Dumb boss + smart employee = promotion
Dumb boss + dumb employee = overtime
SHOPPING MATHS
A man will pay $2 for a $1 item he needs.
A woman will pay $1 for a $2 item that she doesn't need.
GENERAL EQUATIONS & STATISTICS
A woman worries about the future until she gets a husband.
A man never worries about the future until he gets a wife.
A successful man is one who makes more money than his wife can spend.
A successful woman is one who can find such a man.
HAPPINESS
To be happy with a man, you must understand him a lot and love him a little.
To be happy with a woman, you must love her a lot and not try to understand her at all.
LONGEVITY
Married men live longer than single men do, but married men are a lot more willing to die.
PROPENSITY TO CHANGE
A woman marries a man expecting he will change, but he doesn't.
A man marries a woman expecting that she won't change, and she does.
DISCUSSION TECHNIQUE
A woman has the last word in any argument.
Anything a man says after that is the beginning of a new argument.
Love makes the world go round, sends women dizzy and puts men in a spin. That's what I call manna from the orbital heavens!
Since the dawn of the human race, understanding your partner or new-found-love has been the ultimate voyage to self-discovery. Moving right along, we will enter the risky theme of the differences between Mars and Venus. Political correctness and economic reality will therefore be temporarily suspended...
ROMANCE MATHEMATICS
Smart man + smart woman = romance
Smart man + dumb woman = affair
Dumb man + smart woman = marriage
Dumb man + dumb woman = pregnancy
OFFICE ARITHMETIC
Smart boss + smart employee = profit
Smart boss + dumb employee = production
Dumb boss + smart employee = promotion
Dumb boss + dumb employee = overtime
SHOPPING MATHS
A man will pay $2 for a $1 item he needs.
A woman will pay $1 for a $2 item that she doesn't need.
GENERAL EQUATIONS & STATISTICS
A woman worries about the future until she gets a husband.
A man never worries about the future until he gets a wife.
A successful man is one who makes more money than his wife can spend.
A successful woman is one who can find such a man.
HAPPINESS
To be happy with a man, you must understand him a lot and love him a little.
To be happy with a woman, you must love her a lot and not try to understand her at all.
LONGEVITY
Married men live longer than single men do, but married men are a lot more willing to die.
PROPENSITY TO CHANGE
A woman marries a man expecting he will change, but he doesn't.
A man marries a woman expecting that she won't change, and she does.
DISCUSSION TECHNIQUE
A woman has the last word in any argument.
Anything a man says after that is the beginning of a new argument.
Love makes the world go round, sends women dizzy and puts men in a spin. That's what I call manna from the orbital heavens!
Friday 12 February 2010
Black clouds gather over Europe...a Greek tragedy playing out...
Greece is in trouble. At first gradually, and then with alarming speed, the country has lost credibility with investors because it borrowed too much money and now it can't afford to service its debt. Greece's problems don't directly influence most Chinese and American businesses, but they remind us of the greater issue that's still out there...
The whole world is carrying too much debt. Years and years of artificially low interest rates, lax lending standards, and a belief that assets can't fall have clogged our arteries with bad investments and unserviceable debts. We had a heart attack in 2008. It hurt, but it didn't kill us. We should have learned from it. Instead, we ordered the world's biggest plate of pancakes and bacon. We took on another huge slab of debt and we supported all the malinvestments. Greece's problems are like chest pains after you've just left the hospital. They make your family nervous... Given the massive debt levels, investors are demanding a very high rate of return at 7% because the risk of default is high, compared with 4.5% a few months ago.. If Greece is not able to raise capital, it won t be able to meet its obligations.
If Germany bails out Greece, it just makes the problems in Europe worse. Greece stops trying to fix itself, and now every other broke European country knows they can have a bailout, too. They also stop austerity measures. And meanwhile, the debt burden is still there. It hasn't gone away. They've just pushed the default farther into the future.
Greece, in other words, is the fiscal Petri dish that reveals in gory detail what could happen if soveriegn governments fail to maintain the confidence of investors. It is not merely that those interest rates are already inflicting an awful toll on borrowers in Athens and beyond. It is that they are sending the national government towards a full-blown debt spiral, in which the cost of its annual interest bill becomes so unmanageable that it can hardly afford to supply its citizens with basic services.
But on the bigger matter of what this euro collapse country by country means: in the usual sequence, if Greece were still using its own drachma, the world would write down the currency, devaluing it in exchange terms. The holders of Greek bonds would take a big capital loss and the system would eventually regain a better trade balance as Greece wouldn’t be able to afford to import as much at the same time that exports would increase thanks to cheaper labor. But with the European Union in place, the exchange rate can't move, so Greek interest rates have jumped.
Greece is not a major economic power. It only represents 2% of Europe s GDP. The market is paying close attention to this situation because Greece is a microcosm of Europe. Many other nations are in a similar situation (Portugal, Ireland, Italy, Spain, Bulgaria, Latvia, Lithuania and even the United Kingdom). Enormous debts have resulted from liberal social programs (national healthcare, pensions, welfare) and many governments have been spending beyond their means for decades. A year ago, they were not in a financial position to spend billions of dollars on bailouts and stimulus programs but they did. Now, they are dangerously close to the breaking down completely.
The situation in Greece might be resolved in the next two weeks, but the next problem is just around the corner. Last week, Portugal tried to raise $1 billion in a one-year auction and they had to cancel it due to low demand. When a country can t even auction short-term maturities, it is in dire straits. Spain s unemployment rate is 19.5% and their debt has been downgraded. Spain is a much bigger problem as the country represents 13% of Europe s GDP. All countries are struggling with their own deficits and they can t jeopardize their own well being to help other nations. The dominos are lined up and wobbling, and almost anything – even a concerted push by speculators – could set them in motion. It seems to me that the euro is turning out to be much more complex to manage than the US dollar and could be very vulnerable for years to come.
To play offense, you can short the Euro ETF "ProShares UltraShort Euro" (EUO:NYSE). Block-tackling through defence, consider going switching to US Treasury bonds as a safe haven this year.
US Bonds: a safe haven to diversify away from the PIGS (but for 2010 only) ...
The whole world is carrying too much debt. Years and years of artificially low interest rates, lax lending standards, and a belief that assets can't fall have clogged our arteries with bad investments and unserviceable debts. We had a heart attack in 2008. It hurt, but it didn't kill us. We should have learned from it. Instead, we ordered the world's biggest plate of pancakes and bacon. We took on another huge slab of debt and we supported all the malinvestments. Greece's problems are like chest pains after you've just left the hospital. They make your family nervous... Given the massive debt levels, investors are demanding a very high rate of return at 7% because the risk of default is high, compared with 4.5% a few months ago.. If Greece is not able to raise capital, it won t be able to meet its obligations.
If Germany bails out Greece, it just makes the problems in Europe worse. Greece stops trying to fix itself, and now every other broke European country knows they can have a bailout, too. They also stop austerity measures. And meanwhile, the debt burden is still there. It hasn't gone away. They've just pushed the default farther into the future.
Greece, in other words, is the fiscal Petri dish that reveals in gory detail what could happen if soveriegn governments fail to maintain the confidence of investors. It is not merely that those interest rates are already inflicting an awful toll on borrowers in Athens and beyond. It is that they are sending the national government towards a full-blown debt spiral, in which the cost of its annual interest bill becomes so unmanageable that it can hardly afford to supply its citizens with basic services.
But on the bigger matter of what this euro collapse country by country means: in the usual sequence, if Greece were still using its own drachma, the world would write down the currency, devaluing it in exchange terms. The holders of Greek bonds would take a big capital loss and the system would eventually regain a better trade balance as Greece wouldn’t be able to afford to import as much at the same time that exports would increase thanks to cheaper labor. But with the European Union in place, the exchange rate can't move, so Greek interest rates have jumped.
Greece is not a major economic power. It only represents 2% of Europe s GDP. The market is paying close attention to this situation because Greece is a microcosm of Europe. Many other nations are in a similar situation (Portugal, Ireland, Italy, Spain, Bulgaria, Latvia, Lithuania and even the United Kingdom). Enormous debts have resulted from liberal social programs (national healthcare, pensions, welfare) and many governments have been spending beyond their means for decades. A year ago, they were not in a financial position to spend billions of dollars on bailouts and stimulus programs but they did. Now, they are dangerously close to the breaking down completely.
The situation in Greece might be resolved in the next two weeks, but the next problem is just around the corner. Last week, Portugal tried to raise $1 billion in a one-year auction and they had to cancel it due to low demand. When a country can t even auction short-term maturities, it is in dire straits. Spain s unemployment rate is 19.5% and their debt has been downgraded. Spain is a much bigger problem as the country represents 13% of Europe s GDP. All countries are struggling with their own deficits and they can t jeopardize their own well being to help other nations. The dominos are lined up and wobbling, and almost anything – even a concerted push by speculators – could set them in motion. It seems to me that the euro is turning out to be much more complex to manage than the US dollar and could be very vulnerable for years to come.
To play offense, you can short the Euro ETF "ProShares UltraShort Euro" (EUO:NYSE). Block-tackling through defence, consider going switching to US Treasury bonds as a safe haven this year.
US Bonds: a safe haven to diversify away from the PIGS (but for 2010 only) ...
Thursday 11 February 2010
US Bonds: a safe haven to diversify away from the PIGS (but for 2010 only) ...
A revealing analysis by Bloomberg has found US bonds haven’t declined in consecutive years since the 1950’s. Given 2009's 11% decline and the continuing low inflation environment bonds just might have history on their side:
“Last year’s return, based on the note’s price change and interest payments, was negative 11 percent. This was the worst performance ever recorded by the St. Louis Fed, whose data goes back to 1928. The previous mark was set in 1999, when the 10-year security posted a negative 8.3 percent return. In the following year, the note returned 17 percent. Similarly, the total return swung from negative 8 percent in 1994 to 23 percent in 1995.”
The financial hurricane unleashed into the equity markets during 2008 followed by the bounce in 2009, which now increasingly looks this was merely the eye of the storm passing, has opened in 2010 with a slow brewing crisis in Greece, the birthplace of western civilisation. This is going to be much bigger than the Dubai debacle in December. It also threatens to draw in Portugal, Ireland and Spain whose economies are in equally if not worse shape. This grouping is colloquially known as the PIGS. The European Union's constitution does not allow for bailouts of member states. Individual states must keep their deficits below 3.5% of GDP or administer their own harsh fiscal medicine. If they do not have the political will, the Euro will be in big trouble. Greece is now in this predicament. The markets sensing blood will pick off the weak states first before moving inwards towards the core like France, Germany and UK. Contagion will spread quickly...just like the 1998 Asia financial crisis.
Strange as it may seem, the US Treasury bond market inspite of the fiscal calamity wrought by the extreme rescue measures of the Obama administration in 2009, may yet prove a temporary safe harbour as the winds ratch up a few more knots in 2010.
Sunday 7 February 2010
A government cover-up bigger than tobacco and asbestos? Your mobile phone...
"The machine has got to be accepted, but it is probably better to accept it rather as one accepts a drug—that is, grudgingly and suspiciously,...like a drug, the machine is useful, dangerous and habit-forming. The oftener one surrenders to it the tighter its grip becomes." George Orwell.
Though the scientific debate is heated and far from resolved, there are multiple reports, mostly out of Europe's premier research institutions, of cell-phone and PDA use being linked to "brain aging," brain damage, early-onset Alzheimer's, senility, DNA damage, and even sperm die-offs (many men, after all, keep their cell phones in their pants pockets or attached at the hip).
In contrast, any research that connects cell phones to increased cancer rates is not widely reported in the U.S., which reminds one of the non-disclosure tactics once used in tobacco, asbestos, and Agent Orange research. Even if there’s no real danger here, the above recent article (click on the image) by GQ shines light on things you probably didn’t know about cell phones.
Recent Findings:
- Interphone researchers reported in 2008 that after a decade of cell-phone use, the chance of getting a brain tumor—specifically on the side of the head where you use the phone—goes up as much as 40 percent for adults. (Study sponsored by the International Agency for Research on Cancer, in Lyon, France. Scientists from thirteen countries took part in the study, the United States conspicuously not among them.)
- In the summer of 2006, a super-Wi-Fi system known as WiMAX was tested in rural Sweden. Bombarded with signals, the residents of the village of Götene—who had no knowledge that the transmitter had come online—were overcome by headaches, difficulty breathing, and blurred vision, according to a Swedish news report. Two residents reported to the hospital with heart arrhythmias, similar to those that, more than thirty years ago, a US neuro-scientist Allen Frey, induced similar frequency micowaves in frog hearts. This happened only hours after the system was turned on, and as soon as it was powered down, the symptoms disappeared.
- In a study by researchers associated with the venerable Karolinska Institute in Stockholm, which hands out the Nobel Prize for medicine, the massive expansion of mobile phones in Sweden during 1997 was found to have coincided with a marked but subtle decline in the overall health of the population. Might it be, the Karolinska researchers asked, that Swedes fell victim to the march of the first big microwave mobile phone systems? The number of Swedish workers on sick leave, after declining for years, began to rise abruptly in late 1997, according to the study, doubling during the next five years.
Where is all this going for big business? There are massive vested telecoms and digital infrastructure interests at stake in all developed and developing countries. Military-industrial complexes are built upon such platforms. Government communication strategies are also starting to deploy digital platforms. With the relentless march of mobile telephony and wi-fi networks, instances of urban living with huge mobile antennae perched on the tops of buildings, a walk down the street to your local super-market, entering public buses and descending down to mass transit trains will inevitably subject you to this constant "low-level" barrage of microwaves. Is modern society starting to be dumbed-down overall? Education authorities increasingly report instances of short attention spans for today's youngsters perhaps due to the prevalence of personal video games. Perhaps we should look no further than across our living rooms to that humble mobile phone and the Wi-Fi modem which is silently emitting non-stop microwave signals.
Back to the neuro-scientist, Allen Frey, "It just so happens that the frequencies and modulations of our cell phones seem to be the frequencies that humans are particularly sensitive to. If we had looked into it a little more, if we had done the real science, we could have allocated spectrums that the body can't feel. The public should know if they are taking a risk with cell phones. What we're doing is a grand world experiment without informed consent."
I'm reminded of the closing scenes from The Terminator (1984)movie.
Sarah Connor asks the gas attendant: "What did he just say?"
Gas Station Attendant: "He said there's a storm coming in."
Sarah Connor: [sighs] "I know."
Though the scientific debate is heated and far from resolved, there are multiple reports, mostly out of Europe's premier research institutions, of cell-phone and PDA use being linked to "brain aging," brain damage, early-onset Alzheimer's, senility, DNA damage, and even sperm die-offs (many men, after all, keep their cell phones in their pants pockets or attached at the hip).
In contrast, any research that connects cell phones to increased cancer rates is not widely reported in the U.S., which reminds one of the non-disclosure tactics once used in tobacco, asbestos, and Agent Orange research. Even if there’s no real danger here, the above recent article (click on the image) by GQ shines light on things you probably didn’t know about cell phones.
Recent Findings:
- Interphone researchers reported in 2008 that after a decade of cell-phone use, the chance of getting a brain tumor—specifically on the side of the head where you use the phone—goes up as much as 40 percent for adults. (Study sponsored by the International Agency for Research on Cancer, in Lyon, France. Scientists from thirteen countries took part in the study, the United States conspicuously not among them.)
- In the summer of 2006, a super-Wi-Fi system known as WiMAX was tested in rural Sweden. Bombarded with signals, the residents of the village of Götene—who had no knowledge that the transmitter had come online—were overcome by headaches, difficulty breathing, and blurred vision, according to a Swedish news report. Two residents reported to the hospital with heart arrhythmias, similar to those that, more than thirty years ago, a US neuro-scientist Allen Frey, induced similar frequency micowaves in frog hearts. This happened only hours after the system was turned on, and as soon as it was powered down, the symptoms disappeared.
- In a study by researchers associated with the venerable Karolinska Institute in Stockholm, which hands out the Nobel Prize for medicine, the massive expansion of mobile phones in Sweden during 1997 was found to have coincided with a marked but subtle decline in the overall health of the population. Might it be, the Karolinska researchers asked, that Swedes fell victim to the march of the first big microwave mobile phone systems? The number of Swedish workers on sick leave, after declining for years, began to rise abruptly in late 1997, according to the study, doubling during the next five years.
Where is all this going for big business? There are massive vested telecoms and digital infrastructure interests at stake in all developed and developing countries. Military-industrial complexes are built upon such platforms. Government communication strategies are also starting to deploy digital platforms. With the relentless march of mobile telephony and wi-fi networks, instances of urban living with huge mobile antennae perched on the tops of buildings, a walk down the street to your local super-market, entering public buses and descending down to mass transit trains will inevitably subject you to this constant "low-level" barrage of microwaves. Is modern society starting to be dumbed-down overall? Education authorities increasingly report instances of short attention spans for today's youngsters perhaps due to the prevalence of personal video games. Perhaps we should look no further than across our living rooms to that humble mobile phone and the Wi-Fi modem which is silently emitting non-stop microwave signals.
Back to the neuro-scientist, Allen Frey, "It just so happens that the frequencies and modulations of our cell phones seem to be the frequencies that humans are particularly sensitive to. If we had looked into it a little more, if we had done the real science, we could have allocated spectrums that the body can't feel. The public should know if they are taking a risk with cell phones. What we're doing is a grand world experiment without informed consent."
I'm reminded of the closing scenes from The Terminator (1984)movie.
Sarah Connor asks the gas attendant: "What did he just say?"
Gas Station Attendant: "He said there's a storm coming in."
Sarah Connor: [sighs] "I know."
Tuesday 26 January 2010
The curse of Time magazine's Person of the Year Award
Ben Bernanke cannot catch a break at the moment. Just when employment and retail sales were better than expected and the dollar bounced off its lows, he was saddled with Time magazine’s Person of the Year award for 2009. The diligent student of the 1929 Great Depression and Japan's lost decades, he turned on the US printing presses and flooded the economy with dollars to stave off a panic in late 2008 as first class institutions toppled like dominoes around him (witness Fannie Mae, Freddie Mac, Lehman Brothers, Merril Lynch, Citigroup, AIG and General Motors) earning worldwide accolades. Making it to a magazine cover doesn’t seem fair. In case you’ve forgotten, let’s take a look at the last three recipients of Time’s Person of the Year award.
2008:
Barack Obama. How’s he doing? According to one of the most recent polls of U.S. voters:
President Obama’s 45% approval rating has plummeted below where George Bush’s was in 2001.
69% of Americans say they are worried about the increasing role of government in the U.S. economy.
55% of Americans feel the country is on the wrong track.
...and he lost the ultra-safe Democratic seat of Massachusetts held for 50 years, the previous incumbent being Ted Kennedy, one of the US aristocrats. This means his ambitious legislative agenda (healthcare, cap and trade...) is at risk without an absolute party majority in Congress.
2007:
Vladimir Putin won the award two years ago. How’s he doing? Russia has been unable to turn its massive oil reserves into political clout. Putin’s attempt to restore Russian influence over the former Soviet republics has dismally failed. Russia’s relationship with the EU hit new lows as a result of the natural gas wars. Russia’s TV censors cut scenes from an episode of “South Park” that ridiculed Putin.
2006:
Who won the award in 2006? It was "YOU"… remember? Meaning everybody. So, how are you doing?
Over the last weekend, President Obama was ringing up senators before Bernanke's term expires on 31st January, to ensure he achieves the 60 votes required for re-nomination as Fed Chairman for a second term. Before Massachusetts, Bernanke was deemed bullet-proof but a backlash is rippling through the country that he has been too cosy with bailing out the big banks at taxpayers' expense without listening to the needs of small businesses. This is unsettling the senators who are up for re-election this November and could torpedo his renomination...plus riling the financial markets which detest policy uncertainty.
Bernanke will win the re-nomination for a four year term but probably with the highest ever "No" votes cast for re-appointing a Fed Chairman in the Senate this week. The next four years' economic conditions in the US, and indeed around the globe, will truly define the mettle of this man and his place in history. In one corner wieldeth the visible hand of the Fed; in the other standeth Adam Smith's "invisible hand" with the tide of history in its favour. Let the battle begin...
2008:
Barack Obama. How’s he doing? According to one of the most recent polls of U.S. voters:
President Obama’s 45% approval rating has plummeted below where George Bush’s was in 2001.
69% of Americans say they are worried about the increasing role of government in the U.S. economy.
55% of Americans feel the country is on the wrong track.
...and he lost the ultra-safe Democratic seat of Massachusetts held for 50 years, the previous incumbent being Ted Kennedy, one of the US aristocrats. This means his ambitious legislative agenda (healthcare, cap and trade...) is at risk without an absolute party majority in Congress.
2007:
Vladimir Putin won the award two years ago. How’s he doing? Russia has been unable to turn its massive oil reserves into political clout. Putin’s attempt to restore Russian influence over the former Soviet republics has dismally failed. Russia’s relationship with the EU hit new lows as a result of the natural gas wars. Russia’s TV censors cut scenes from an episode of “South Park” that ridiculed Putin.
2006:
Who won the award in 2006? It was "YOU"… remember? Meaning everybody. So, how are you doing?
Over the last weekend, President Obama was ringing up senators before Bernanke's term expires on 31st January, to ensure he achieves the 60 votes required for re-nomination as Fed Chairman for a second term. Before Massachusetts, Bernanke was deemed bullet-proof but a backlash is rippling through the country that he has been too cosy with bailing out the big banks at taxpayers' expense without listening to the needs of small businesses. This is unsettling the senators who are up for re-election this November and could torpedo his renomination...plus riling the financial markets which detest policy uncertainty.
Bernanke will win the re-nomination for a four year term but probably with the highest ever "No" votes cast for re-appointing a Fed Chairman in the Senate this week. The next four years' economic conditions in the US, and indeed around the globe, will truly define the mettle of this man and his place in history. In one corner wieldeth the visible hand of the Fed; in the other standeth Adam Smith's "invisible hand" with the tide of history in its favour. Let the battle begin...
Saturday 23 January 2010
Is it all sweet with sugar prices in 2010?
A sugar crisis is developing in global markets. This deepened on Thursday after Indonesia, one of the world’s leading importers, failed to buy a single pound of the sweetener in its latest tender. The setback sent the price of white sugar in London to a record high of $760 a tonne. Sugar prices have surged 150 per cent since January 2009.While sugar is no longer a key food commodity in developed countries, it remains a crucial source of calories in emerging countries, making its price a political issue. Shortages are already emerging in some Asian countries, according to local reports. Among the main importers, only Egypt appears to have covered its needs. “If they (Indonesia) don’t buy soon, the next stop is an empty shelf,” said Peter de Klerk at London-based sugar merchant Czarnikow.
This shortage has prompted the European Union to consider how to legally export more sugar under World Trade Organisation rules. “We are in an exceptional situation in the world market,” said an official in Brussels. Europe’s sugar exports are capped at about 1.37m tonnes after an agreement in 2004 when Brazil, Australia and Thailand – all big exporters – filed a legal complaint. European beet farmers have sufficient surpluses to export an additional 600,000-800,000 tonnes this year.
According to the Financial Times, the sugar crisis has been caused by a large supply deficit due to disappointing crops in Brazil and India, the world’s top producers, due to bad weather. Meanwhile, sugar demand has continued to grow. In India, the world’s largest consumer, a dry monsoon due to the El Niño weather phenomenon has damaged the cane crop. Sugar production has dropped to around 15m tonnes in 2009-10, down more than 40 per cent from a normal year. Meanwhile, El Niño brought rains to the dry season in Brazil, which accounts for 60 per cent of world exports. The wet weather has cut the number of days that farmers can cut cane and also reduced the amount of sucrose that refiners can extract, resulting in lower production.
Other producers, including Mexico, China, Russia and several central American countries have also harvested a lower than expected crop. There is a sugar Exchange Traded Note (SGG) to capitalise on this trend.
Sunday 17 January 2010
Inside the real Iran? A business viewpoint
The first casualty of war is the truth. "It's a good idea to get to know people before you start bombing them" remarked Rick Steves, a US businessman who brought a film crew under a UN mandate into the heart of Iran and set the cameras rolling at street level. It has just been aired by the Public Broadcasting Service in the US, a non-profit organisation.
The video below highlights him delivering an open lecture to a US audience back home. During filming, he openly admitted he was stunned by his shortcomings as an American looking in. Although there was a government minder attached to the crew, there were no onerous restrictions on what they were prohibited from filming (only government buildings, banks, clubs and nuclear sites were forbidden).
Why is the country not open for business? Iran has been under a US trade embargo since 1979, following the Iranian revolution. The sabre-rattling has polarized into a battle between the Great Satan and the Axis of Evil. Iran has a population of 66 million people - twice of Iraq's. Over 50% of the population is under 30. Iran is not three separate peoples - Sunni, Shiite, and Kurds. It's one people and they are Persians, not Arabs.
His observations? The consequences of misreading a culture are expensive. The country is a theocracy. It’s a cash society with no international banking. Unlike the Arab world, the country is “dry” – there really is no alcohol, not even in the top international hotels (although he probably could have got some if he had dug The Lonely Planet). He has spent about a fortnight capturing images and conversations of modern day urban and rural Iran, answering questions ranging from the motivations and fears that confront everyday people he openly came across, why junctions have no traffic lights, the presence of women-only carriages in the underground system and why family houses can have two knockers. He attended a mosque, criss-crossed the bazaars and happened upon parts of the old Silk Road in the country.
This is not like the Discovery or National Geographic channels putting on a dash of soundbite bombast plus technicolour gloss to one side of a story. While Steves acknowledges the answers are complex, it is just one team’s raw unfiltered insight to the fundamentalist Muslim faith which the outside world, to date, has not had much access to. It strives to bridge the perceptions gap greatly needed to get to the cultural roots of how this proud country lives alongside its massive oil reserves, projects its power and has so far not been allowed to realise its economic potential.
The video below highlights him delivering an open lecture to a US audience back home. During filming, he openly admitted he was stunned by his shortcomings as an American looking in. Although there was a government minder attached to the crew, there were no onerous restrictions on what they were prohibited from filming (only government buildings, banks, clubs and nuclear sites were forbidden).
Why is the country not open for business? Iran has been under a US trade embargo since 1979, following the Iranian revolution. The sabre-rattling has polarized into a battle between the Great Satan and the Axis of Evil. Iran has a population of 66 million people - twice of Iraq's. Over 50% of the population is under 30. Iran is not three separate peoples - Sunni, Shiite, and Kurds. It's one people and they are Persians, not Arabs.
His observations? The consequences of misreading a culture are expensive. The country is a theocracy. It’s a cash society with no international banking. Unlike the Arab world, the country is “dry” – there really is no alcohol, not even in the top international hotels (although he probably could have got some if he had dug The Lonely Planet). He has spent about a fortnight capturing images and conversations of modern day urban and rural Iran, answering questions ranging from the motivations and fears that confront everyday people he openly came across, why junctions have no traffic lights, the presence of women-only carriages in the underground system and why family houses can have two knockers. He attended a mosque, criss-crossed the bazaars and happened upon parts of the old Silk Road in the country.
This is not like the Discovery or National Geographic channels putting on a dash of soundbite bombast plus technicolour gloss to one side of a story. While Steves acknowledges the answers are complex, it is just one team’s raw unfiltered insight to the fundamentalist Muslim faith which the outside world, to date, has not had much access to. It strives to bridge the perceptions gap greatly needed to get to the cultural roots of how this proud country lives alongside its massive oil reserves, projects its power and has so far not been allowed to realise its economic potential.
Wednesday 13 January 2010
US Employment Trends - Growth & Recovery?
The following two graphics neatly sum up the stalled growth engine that is the US locomotive economy in recent years.
First up: US Job Growth by Decade
Take any post-war decade and the US boomed. It was virtually unchallenged in terms of non-farm employment growth, GDP and household net worth. Suddenly, it ambled aimlessly (the red line) after 2000. What caused it? Improved technology that reduced the dependency on labour, outsourcing to Asia, stringent new (green)regulatory hurdles that were not conducive to business investment?
Second up: The Length of Recovery
The latest job losses in this recession are much deeper (the red line again) and this revival is on course to be much longer, comparable at best to the post 2001 recovery. That is, unless there are new extraordinary measures by Obama to bend the curve steeply back up over a shorter timespan.
The US consumer is becoming a rarer species...exporting nations will need to rethink that lucrative market which has served them so well in the last decade...they will have to seek deeper from within their domestic markets.
First up: US Job Growth by Decade
Take any post-war decade and the US boomed. It was virtually unchallenged in terms of non-farm employment growth, GDP and household net worth. Suddenly, it ambled aimlessly (the red line) after 2000. What caused it? Improved technology that reduced the dependency on labour, outsourcing to Asia, stringent new (green)regulatory hurdles that were not conducive to business investment?
Second up: The Length of Recovery
The latest job losses in this recession are much deeper (the red line again) and this revival is on course to be much longer, comparable at best to the post 2001 recovery. That is, unless there are new extraordinary measures by Obama to bend the curve steeply back up over a shorter timespan.
The US consumer is becoming a rarer species...exporting nations will need to rethink that lucrative market which has served them so well in the last decade...they will have to seek deeper from within their domestic markets.
Friday 8 January 2010
How the Greenspan Guidotti Rule foretells a currency crisis?
Currency speculators have it figured out when a currency will default. This is the equivalent of a government going bankrupt. The US will be going bankrupt in 2010 and this little known rule is the leading indicator that will predict an external currency crisis. The rationale is that countries should have enough reserves to resist a massive withdrawal of short term foreign capital.
In a 1999 academic paper, Alan Greenspan and Pablo Guidotti, the Argentine finance minister surmised "To avoid a default, countries should maintain hard currency reserves equal to at least 100% of their short-term foreign debt maturities." PIMCO, the world's largest money management firm, explains the rule this way: "The minimum benchmark of reserves equal to at least 100% of short-term external debt is known as the Greenspan-Guidotti rule. Greenspan-Guidotti is perhaps the single concept of reserve adequacy that has the most adherents and empirical support." That is to say, if you can't pay off your foreign debts over the next 12 months, you're a diabolical credit risk. The traditional rule of thumb was to maintain reserves equal to three months of imports. In failing to meet this threshold, speculators will have you in their sights, target your bonds and currency, making it virtually impossible to refinance your debts. A default becomes a self-fulfilling prophecy.
This is How The Maths Works
2010 US financing needs:
- US$2,000 billion short term debt that rolls over - this is the equivalent of your bank reviewing, extending and guranteeing your overdraft limit - you are gambling they will not withdrawing support for you all at once
- 2010 budget deficit of US$1,500 billion
- Total of US$3.5tn (US$3,500 billion) that has to be met by selling Treasury bills at auctions to willing domestic and overseas buyers
Is this covered adequately by reserves?:
- The US has 8,133.5 metric tonnes of gold or 261 million troy ounces which at the 31st December gold price of US$1,096 is worth US$287bn.
- The US strategic petroleum reserve currently holds 726 million barrels as at 29th December which at a current oil price of US$79/barrel is valued at US$57bn.
- The IMF warrants the US has US$136bn of currency reserves
- This puts the US reserves at close to US$500bn
Thus the reserves do not cover anything near the US$3.5tn that needs to be financed in 2010. The fact the US$ is a "reserve currency" currently enjoying the status of the preferred currency for internationl trade may encounter stiff headwinds as overseas confidence in it is challenged.
Watch for signs of trouble in Latvia and Ukraine first. These have failed the Greenspan Guidotti test. Contagion is by its nature unpredictable. A series of events in Thailand in June 1997 triggered the Asian currency crisis.
Mindful of the speed bumps ahead...you can short the US$ ie. cast your vote of no-confidence in the US currency and protect against the decline in the pegged Hong Kong dollar by buying the ETF called UDN (PowerShares DB US Dollar Index Bearish Fund) as part of a defensive strategy.
In a 1999 academic paper, Alan Greenspan and Pablo Guidotti, the Argentine finance minister surmised "To avoid a default, countries should maintain hard currency reserves equal to at least 100% of their short-term foreign debt maturities." PIMCO, the world's largest money management firm, explains the rule this way: "The minimum benchmark of reserves equal to at least 100% of short-term external debt is known as the Greenspan-Guidotti rule. Greenspan-Guidotti is perhaps the single concept of reserve adequacy that has the most adherents and empirical support." That is to say, if you can't pay off your foreign debts over the next 12 months, you're a diabolical credit risk. The traditional rule of thumb was to maintain reserves equal to three months of imports. In failing to meet this threshold, speculators will have you in their sights, target your bonds and currency, making it virtually impossible to refinance your debts. A default becomes a self-fulfilling prophecy.
This is How The Maths Works
2010 US financing needs:
- US$2,000 billion short term debt that rolls over - this is the equivalent of your bank reviewing, extending and guranteeing your overdraft limit - you are gambling they will not withdrawing support for you all at once
- 2010 budget deficit of US$1,500 billion
- Total of US$3.5tn (US$3,500 billion) that has to be met by selling Treasury bills at auctions to willing domestic and overseas buyers
Is this covered adequately by reserves?:
- The US has 8,133.5 metric tonnes of gold or 261 million troy ounces which at the 31st December gold price of US$1,096 is worth US$287bn.
- The US strategic petroleum reserve currently holds 726 million barrels as at 29th December which at a current oil price of US$79/barrel is valued at US$57bn.
- The IMF warrants the US has US$136bn of currency reserves
- This puts the US reserves at close to US$500bn
Thus the reserves do not cover anything near the US$3.5tn that needs to be financed in 2010. The fact the US$ is a "reserve currency" currently enjoying the status of the preferred currency for internationl trade may encounter stiff headwinds as overseas confidence in it is challenged.
Watch for signs of trouble in Latvia and Ukraine first. These have failed the Greenspan Guidotti test. Contagion is by its nature unpredictable. A series of events in Thailand in June 1997 triggered the Asian currency crisis.
Mindful of the speed bumps ahead...you can short the US$ ie. cast your vote of no-confidence in the US currency and protect against the decline in the pegged Hong Kong dollar by buying the ETF called UDN (PowerShares DB US Dollar Index Bearish Fund) as part of a defensive strategy.
Sunday 3 January 2010
Why you should know about Bautou in China and its monopoly on rare earths metals...
Bautou is located in Inner Mongolia. It was unknown to the outside world for millenia and not on the Silk Road, set up during the Han Dynasty (206BC - 220AD). It was described as "a little husk of a town in a great hollow shell of mud ramparts" when one of the first visitors came across this place in 1925.
Today, this once barren outpost has been transformed into the powerhouse of China's dominance of the market in some of the globe's most sought-after minerals. The Baotou Rare Earth Research Institute is home to some 400 scientists whose work has put China at the pinnacle of research into a group of 17 metals which sound as if they were dreamt up as poisons for superheroes. Discovered by a Swedish scientist in 1787 and despite their name, they are relatively abundant in the Earth's crust but the high cost of extraction means only areas with rich deposits, in particular China, are worth exploiting. The arrival of new technology means that global production has risen from less than 5,000 tonnes in 1955 to the current level of about 120,000 tonnes a year. Since 2000, demand for rare earth elements (REEs) has ballooned from 40,000 tonnes to a predicted 200,000 tonnes by 2014. Their unique properties of luminescence, magnetism and conductivity make them indispensable to industries reliant on REEs estimated to be worth US$5 trillion.
*Cerium (Ce) - catalytic converters for diesel engines
*Praseodymium (Pr) – an alloying agent for aircraft engines
*Neodymium (Nd) – key component of high-efficiency magnets and hard disc drives
*Lanthanum (La) – a major ingredient for hybrid car batteries
*Samarium (Sm) – lasers and nuclear reactor safety
*Promethium (Pm) – portable X-rays and a nuclear battery
*Gadolinium (Gd) – shielding for nuclear reactors, compact discs
*Dysprosium (Dy) – improves the efficiency of hybrid vehicle motors
*Terbium (Tb) – a component in low-energy light bulbs
*Erbium (Er) – fibre optics
*Europium (Eu) – used in flat screen displays and lasers
*Holmium (Ho) – nuclear control rods, ultra-powerful magnets
*Thulium (Tm) – lasers, portable X-rays
*Ytterbium (Yb) – monitoring equipment for earthquakes
*Lutetium (Lu) – oil refining
Two more elements, Scandium and Yttrium, are considered rare earths as they tend to occur in the same ore deposits and have similar chemical properties.
The development of Baotou into the global capital of REES is due to two factors: its proximity to the Baiyunebo mine, a vast open pit that is the world's largest rare earth mine, and Beijing's deliberate policy of at least two decades to turn this "Mother Lode" into a stepping stone towards status as an economic superpower. China, which by accident of geography holds about 50 per of the world's rare earth deposits and currently produces 97 per of global supplies, has made no secret of the nature or scale of its ambitions, summarised by former premier Deng Xiaoping when he said: "The Middle East has oil. China has rare earths." In 1999, President Jiang Zemin went further on a visit to Baotou when he summed up Beijing's strategy as being "to improve the development and applications of rare earth, and change the resource advantage into economic superiority".
Above all, REEs are an integral part of the technologies that politicians are relying on to try to avert the worst effects of global warming. From the generators of wind turbines to catalytic converters, and the batteries on hybrid cars to alloys that dramatically reduce leakage from overhead power cables, rare earths are at the heart of the green revolution.
During the past seven years China has reduced by 40 per cent the amount of REEs available for export. The result is that the rare earth industry in China is rapidly moving from a role as a provider of rare earth extracts for export, worth a few hundred million dollars a year to Chinese GDP, to a producer of finished REE components worth billions. In response to Chinese reductions in exports, global manufacturers are forced to move factories making rare-earth rich components to China to ensure continued production.
REEs are relatively cheap at about US$32 per kg. But others are far less abundant. Terbium, which is soft enough to cut with a knife, is an irreplaceable component of low-energy light bulbs. It sells for up to US$300 per kg and China needs its entire production to meet domestic demand. Dysprosium, whose Greek name translates as "hard to get at", allows lightweight magnets to function at high temperatures and costs about US$125 per kg. China is responsible for 99 per cent of the global output of both. In October 2009, an internal report by China's Ministry of Industry and Information Technology disclosed proposals to ban the export of five rare earths and restrict supplies of the remaining metals. China's control over rare earth supplies has sparked unease over their availability. Senior players in the rare earths industry are anxious to avoid suggestions that Beijing is using its commanding position to hold the world to ransom.
This is likely to prove extremely disruptive for the rest of the world. A sudden cut in supply is going to have painful knock-on effects for many high-technology industries in developed countries. The obvious response is to seek other suppliers. And rare earth mines are being developed in South Africa, Australia,Canada and Greenland. Questions remain as to whether mines outside China, such as the Mountain Pass site in California, which closed in 2002 and is being reopened, can be operated at economically sustainable levels. Nearly all operators outside China closed soon after 2000 when cheap Chinese REEs flooded the market, using highly polluting but cheap mining methods.
Jack Lifton, an independent consultant and a world expert on REEs, said: "A real crunch is coming. In America, Britain and elsewhere we have not yet woken up to the fact that there is an urgent need to secure the supply of rare earths from sources outside China. China has gone from exporting 75 per cent of the raw ore it produces to shipping just 25 per cent, and it does not consider itself to be under any obligation to ensure supplies of rare earths to anyone but itself. There has been an effort in the West to set up new mines but these are five to 10 years away from significant production."
For those who wish to climb the wall of worry that lies ahead, the race is still very much in its infancy. While both Western countries and China are already dashing to secure new sources of rare earths, last September, Australian regulators signalled they have got ahead of the curve by imposing restrictions and preventing a Chinese company (China Non-Ferrous Metal Mining Group) from taking a US$400m controlling stake in the Lynas Corporation, owner of one of the country's richest rare earth mines.
The above article includes excerpts from The Independent newspaper (UK)
Today, this once barren outpost has been transformed into the powerhouse of China's dominance of the market in some of the globe's most sought-after minerals. The Baotou Rare Earth Research Institute is home to some 400 scientists whose work has put China at the pinnacle of research into a group of 17 metals which sound as if they were dreamt up as poisons for superheroes. Discovered by a Swedish scientist in 1787 and despite their name, they are relatively abundant in the Earth's crust but the high cost of extraction means only areas with rich deposits, in particular China, are worth exploiting. The arrival of new technology means that global production has risen from less than 5,000 tonnes in 1955 to the current level of about 120,000 tonnes a year. Since 2000, demand for rare earth elements (REEs) has ballooned from 40,000 tonnes to a predicted 200,000 tonnes by 2014. Their unique properties of luminescence, magnetism and conductivity make them indispensable to industries reliant on REEs estimated to be worth US$5 trillion.
*Cerium (Ce) - catalytic converters for diesel engines
*Praseodymium (Pr) – an alloying agent for aircraft engines
*Neodymium (Nd) – key component of high-efficiency magnets and hard disc drives
*Lanthanum (La) – a major ingredient for hybrid car batteries
*Samarium (Sm) – lasers and nuclear reactor safety
*Promethium (Pm) – portable X-rays and a nuclear battery
*Gadolinium (Gd) – shielding for nuclear reactors, compact discs
*Dysprosium (Dy) – improves the efficiency of hybrid vehicle motors
*Terbium (Tb) – a component in low-energy light bulbs
*Erbium (Er) – fibre optics
*Europium (Eu) – used in flat screen displays and lasers
*Holmium (Ho) – nuclear control rods, ultra-powerful magnets
*Thulium (Tm) – lasers, portable X-rays
*Ytterbium (Yb) – monitoring equipment for earthquakes
*Lutetium (Lu) – oil refining
Two more elements, Scandium and Yttrium, are considered rare earths as they tend to occur in the same ore deposits and have similar chemical properties.
The development of Baotou into the global capital of REES is due to two factors: its proximity to the Baiyunebo mine, a vast open pit that is the world's largest rare earth mine, and Beijing's deliberate policy of at least two decades to turn this "Mother Lode" into a stepping stone towards status as an economic superpower. China, which by accident of geography holds about 50 per of the world's rare earth deposits and currently produces 97 per of global supplies, has made no secret of the nature or scale of its ambitions, summarised by former premier Deng Xiaoping when he said: "The Middle East has oil. China has rare earths." In 1999, President Jiang Zemin went further on a visit to Baotou when he summed up Beijing's strategy as being "to improve the development and applications of rare earth, and change the resource advantage into economic superiority".
Above all, REEs are an integral part of the technologies that politicians are relying on to try to avert the worst effects of global warming. From the generators of wind turbines to catalytic converters, and the batteries on hybrid cars to alloys that dramatically reduce leakage from overhead power cables, rare earths are at the heart of the green revolution.
During the past seven years China has reduced by 40 per cent the amount of REEs available for export. The result is that the rare earth industry in China is rapidly moving from a role as a provider of rare earth extracts for export, worth a few hundred million dollars a year to Chinese GDP, to a producer of finished REE components worth billions. In response to Chinese reductions in exports, global manufacturers are forced to move factories making rare-earth rich components to China to ensure continued production.
REEs are relatively cheap at about US$32 per kg. But others are far less abundant. Terbium, which is soft enough to cut with a knife, is an irreplaceable component of low-energy light bulbs. It sells for up to US$300 per kg and China needs its entire production to meet domestic demand. Dysprosium, whose Greek name translates as "hard to get at", allows lightweight magnets to function at high temperatures and costs about US$125 per kg. China is responsible for 99 per cent of the global output of both. In October 2009, an internal report by China's Ministry of Industry and Information Technology disclosed proposals to ban the export of five rare earths and restrict supplies of the remaining metals. China's control over rare earth supplies has sparked unease over their availability. Senior players in the rare earths industry are anxious to avoid suggestions that Beijing is using its commanding position to hold the world to ransom.
This is likely to prove extremely disruptive for the rest of the world. A sudden cut in supply is going to have painful knock-on effects for many high-technology industries in developed countries. The obvious response is to seek other suppliers. And rare earth mines are being developed in South Africa, Australia,Canada and Greenland. Questions remain as to whether mines outside China, such as the Mountain Pass site in California, which closed in 2002 and is being reopened, can be operated at economically sustainable levels. Nearly all operators outside China closed soon after 2000 when cheap Chinese REEs flooded the market, using highly polluting but cheap mining methods.
Jack Lifton, an independent consultant and a world expert on REEs, said: "A real crunch is coming. In America, Britain and elsewhere we have not yet woken up to the fact that there is an urgent need to secure the supply of rare earths from sources outside China. China has gone from exporting 75 per cent of the raw ore it produces to shipping just 25 per cent, and it does not consider itself to be under any obligation to ensure supplies of rare earths to anyone but itself. There has been an effort in the West to set up new mines but these are five to 10 years away from significant production."
For those who wish to climb the wall of worry that lies ahead, the race is still very much in its infancy. While both Western countries and China are already dashing to secure new sources of rare earths, last September, Australian regulators signalled they have got ahead of the curve by imposing restrictions and preventing a Chinese company (China Non-Ferrous Metal Mining Group) from taking a US$400m controlling stake in the Lynas Corporation, owner of one of the country's richest rare earth mines.
The above article includes excerpts from The Independent newspaper (UK)
Friday 1 January 2010
From the excesses of 2009 to a moderation in 2010?
A happy New Year to you and may your health be secure and hopes realised in 2010!
2009 will be a year to forget. Governments were still reeling from the 2008 financial firestorm that threatened to engulf the established economic order that had successfully underpinned the lifeblood of world commerce since 1945. They stared into the abyss, decided they did not like what they saw and coordinated on a worldwide scale to inject trillions of dollars to primarily re-liquify the functioning of the banking system. That was the story for the first three months of the year...
It worked...or so it would appear. Very quickly, financial and stock markets regained their footing and emerged like a phoenix from the ashes of despair. In April, a change in accounting standards by the US Financial Accounting Standards Board (FASB) gave the big banks a free pass not to "mark-to-market" the value of their assets, effectively amounting to another covert bailout by not needing to fully disclose the paper losses of their shredded investments (eg residential and commercial estate mortgages). The much publicised "stress-tests" which virtually every bank passed in May were but a charade behind the more critical FASB decision. By the end of June, stimulus money triggered new asset bubbles from US Treasuries to China residential property as the world banking system quickly set about liquifying the entrails of a battered private sector. Today, the US banking system still prefers to hoard much of the stimulus money and not lend out nearly as much to the private sector as the US government would like. 140 US banks have failed in 2009. In contrast, China's banks have been lending with gay abandon, albeit mandated by central government dictates.
The major industrialised world economies have been bingeing on a sugar-high. Towards the last three months of 2009, there has been an emerging, though so far relatively sedate, groundswell of opinion that all is still not well. Troubles are brewing with the PIGS (Portugal, Ireland, Greece and Spain). Latvia and Ukraine have not followed through with the IMF medicine and remain a tinderbox in Eastern Europe. Dubai's crisis briefly threatened...and then disappeared. At some point, governments will have to withdraw the stimulus and interest rates have to go up because there is simply too much money sloshing around the world financial system and the fear is some external (unforeseen?) factor can trigger off a new inflation that will spark out of control (recall 1920s Germany, 1980s Argentina and 2000s Zimbabwe).
We enter 2010 on a more hopeful note but caution still reigns. The US being the engine of the world economy is now characterised by unprecedented government debt levels which will span generations to pay off :
The financial markets may have shrugged off this awesome multi-trillion US$ cashflow deficit generated in just one year but the voices of wise old heads linger. The following clip is a montage, by popular vote, of Yahoo Finance Tech-Ticker's favourite pundit in 2009 and he does not mince words.
How does this translate at the street level? In China, even with authoritarian measures to spur and maintain "social harmony", mass riots by the populace can go largely unreported in the mainstream media. In downtown US cities, there are new stirrings as increasing numbers find themselves homeless through housing foreclosures and now seek social assistance. The following is a media nugget on how one of Obama's new welfare stimulus programmes affected Detroit, spiritual home of Motown and today's GM (General Motors).
The message for 2010 must be for governments to slow down, rein in their profligacy and educate their people on self-reliance and taking personal responsibility. Easier said than done... Paul Volcker, a Fed Chairman from 1979-1987 did it before Alan Greenspan replaced him. The guy had the courage to raise the Fed funds rate from 11% in 1979 to 20% in 1981 (its at 0 - 0.25% today under Bernanke). This policy brought on the highest unemployment since the Great Depression but he tamed the economy and its string of historic malinvestments. As the current head of the President's Economic Recovery Advisory Board, his is the lone voice of wisdom that must carry the message thru to Obama's ear in 2010.
2009 will be a year to forget. Governments were still reeling from the 2008 financial firestorm that threatened to engulf the established economic order that had successfully underpinned the lifeblood of world commerce since 1945. They stared into the abyss, decided they did not like what they saw and coordinated on a worldwide scale to inject trillions of dollars to primarily re-liquify the functioning of the banking system. That was the story for the first three months of the year...
It worked...or so it would appear. Very quickly, financial and stock markets regained their footing and emerged like a phoenix from the ashes of despair. In April, a change in accounting standards by the US Financial Accounting Standards Board (FASB) gave the big banks a free pass not to "mark-to-market" the value of their assets, effectively amounting to another covert bailout by not needing to fully disclose the paper losses of their shredded investments (eg residential and commercial estate mortgages). The much publicised "stress-tests" which virtually every bank passed in May were but a charade behind the more critical FASB decision. By the end of June, stimulus money triggered new asset bubbles from US Treasuries to China residential property as the world banking system quickly set about liquifying the entrails of a battered private sector. Today, the US banking system still prefers to hoard much of the stimulus money and not lend out nearly as much to the private sector as the US government would like. 140 US banks have failed in 2009. In contrast, China's banks have been lending with gay abandon, albeit mandated by central government dictates.
The major industrialised world economies have been bingeing on a sugar-high. Towards the last three months of 2009, there has been an emerging, though so far relatively sedate, groundswell of opinion that all is still not well. Troubles are brewing with the PIGS (Portugal, Ireland, Greece and Spain). Latvia and Ukraine have not followed through with the IMF medicine and remain a tinderbox in Eastern Europe. Dubai's crisis briefly threatened...and then disappeared. At some point, governments will have to withdraw the stimulus and interest rates have to go up because there is simply too much money sloshing around the world financial system and the fear is some external (unforeseen?) factor can trigger off a new inflation that will spark out of control (recall 1920s Germany, 1980s Argentina and 2000s Zimbabwe).
We enter 2010 on a more hopeful note but caution still reigns. The US being the engine of the world economy is now characterised by unprecedented government debt levels which will span generations to pay off :
The financial markets may have shrugged off this awesome multi-trillion US$ cashflow deficit generated in just one year but the voices of wise old heads linger. The following clip is a montage, by popular vote, of Yahoo Finance Tech-Ticker's favourite pundit in 2009 and he does not mince words.
How does this translate at the street level? In China, even with authoritarian measures to spur and maintain "social harmony", mass riots by the populace can go largely unreported in the mainstream media. In downtown US cities, there are new stirrings as increasing numbers find themselves homeless through housing foreclosures and now seek social assistance. The following is a media nugget on how one of Obama's new welfare stimulus programmes affected Detroit, spiritual home of Motown and today's GM (General Motors).
The message for 2010 must be for governments to slow down, rein in their profligacy and educate their people on self-reliance and taking personal responsibility. Easier said than done... Paul Volcker, a Fed Chairman from 1979-1987 did it before Alan Greenspan replaced him. The guy had the courage to raise the Fed funds rate from 11% in 1979 to 20% in 1981 (its at 0 - 0.25% today under Bernanke). This policy brought on the highest unemployment since the Great Depression but he tamed the economy and its string of historic malinvestments. As the current head of the President's Economic Recovery Advisory Board, his is the lone voice of wisdom that must carry the message thru to Obama's ear in 2010.
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