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...

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.

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.

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.

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.

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)

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.