Geostrategy Channel: Latest Posts
By Richard Alford, a former economist at the New York Fed. Since them, he has worked in the financial industry as a trading floor economist and strategist on both the sell side and the buy side. The need to address and prevent future large global economic and financial imbalances is back on center stage, but [...]
Did you miss me? My apologies for dropping off of the blog cliff, but it’s all for a very good reason, I assure you. I promise however, that this blog will resume its more regular schedule, with all the sage and snarky economic commentary you’ve come to expect from me. Let’s start off with this [...]
Finance & Markets
Too Big to Fail: Why The Big Banks Should Be Broken Up, But Why The White House and Congress Don’t Want To
And now there are five — five Wall Street behemoths, bigger than they were before the Great Meltdown, paying fatter salaries and bonuses to retain their so-called”talent,” and raking in huge profits. The biggest difference between now and last October is these biggies didn’t know then that they were too big to fail and the [...]
Bank of England Governor Mervyn Kings should be applauded for raising the proposition that those bank and presumably insurance companies that are “too big to fail” should be converted into public utilities. His thinking reflects the belief that it is fanciful to expect that new institutions, new laws, new regulations combined with enhanced regulatory enforcement [...]
Finance & Markets
At a conference in London, a Goldman Sachs international adviser, Brian Griffiths, praised inequality. As his company was putting aside $16.7 billion for compensation and benefits in the first nine months of 2009, up 46 percent from a year earlier, Griffiths told us not to worry. “We have to tolerate the inequality as a way [...]
An important conference was held in January at Brown University: “The Present Interglacial, How and When Will it End?” (The October issue of Science had a summary of the it) As a result, the following letter was sent to the President. The media has not reported this, but you should be aware of the letter and its significance.
Dear Mr. President:
Aware of your deep concern with the future of the world, we feel obliged to inform you on the results of the scientific conference held here recently. The conference dealt with the past and future changes of climate and was attended by 42 top American and European investigators. We enclose the summary report published in Science and further publications are forthcoming in Quaternary Research.
The main conclusion of the meeting was that a global deterioration of climate, by order of magnitude larger than any hitherto experience by civilized mankind, is a very real possibility and indeed may be due very soon.
The cooling has natural cause and falls within the rank of processes which produced the last ice age. This is a surprising result based largely on recent studies of deep sea sediments.
Existing data still do not allow forecast of the precise timing of the predicted development, nor the assessment of the man’s interference with the natural trends. It could not be excluded however that the cooling now under way in the Northern Hemisphere is the start of the expected shift. The present rate of the cooling seems fast enough to bring glacial temperatures in about a century, if continuing at the present pace.
The practical consequences which might be brought by such developments to existing social institution are among others:
(1) Substantially lowered food production due to the shorter growing seasons and changed rain distribution in the main grain producing belts of the world, with Eastern Europe and Central Asia to be first affected.
(2) Increased frequency and amplitude of extreme weather anomalies such as those bringing floods, snowstorms, killing frosts, etc.
With the efficient help of the world leaders, the research …
With best regards,
George J. Kukla (Lamont-Doherty Geological Observatory)
R. K. Matthews (Chairman, Dept of Geological Sciences, Brown U)
Important details about this letter:
- It was sent to President Nixon, not Obama.
- The date of the letter: 3 December 1972.
- The text is from “The Origins of a ‘diagnostics climate center“, Robert W. Reeves and Daphne Gemmill (NOAA), posted at the NOAA website, 20 October 2004 — Slide 6. It did not include the text of the penultimate paragraph. The last paragraph warned about Soviet science in this area.
- The October 1972 Science article about the conference was “The Present Interglacial, How and When Will it End?”.
The remaining sections of this post
- What happened next, after the President got the letter?
- The conclusion of the story, results of the letter
- A timeline listing 47 articles before 1980 about climate change (showing the diversity of opinion)
- Links to more recent articles and other sources of information
- An afterword
The release of September trade data earlier this week was pretty interesting, although because of two or three extra working days last month, plus the very big holiday at the beginning of October which might have pushed activity into September, some of the comparisons are misleading. Exports were down 15.2% year-on-year, better than the expected 20-21%. Imports were down 3.5%, much better than the expected 15%. Month-on-month figures showed a rise in both imports and exports.
So much ink has been spilled in discussing these numbers that I won’t try to summarize, but it is worth noting that for many analysts the numbers were a very positive surprise. Typical was this Reuters report reprinted in the New York Times:
China reported surprisingly strong trade figures on Wednesday, providing fresh evidence that the world’s third-largest economy is firmly on the path to recovery and that global demand is improving too.
…Brian Jackson, an economist at Royal Bank of Canada in Hong Kong, said the slower pace of decline was good news for China’s recovery because growth this year has depended too much on the government’s 4 trillion yuan ($585 billion) stimulus package.
But even in this article there were hints that the numbers, especially the import numbers, might not be as positive as expected.
Commodities were a driving force behind the sharp improvement in imports. China bought a record 64.55 million tons of iron ore in September, up 30 percent from August; imports of copper rose 23 percent.
Merrill Lynch’s October 14 research report puts it this way: “Commodity import growth was stunning.” Andrew Batson in an article in today’s Wall Street Journal explains why the high commodity share of imports might not be as positive an indicator of surging demand as the headline numbers suggest:
A pickup in China’s metal imports in September is stoking debate about how much of the nation’s commodity intake this year is driven by demand and how much is stockpiling that will soon end.
…The trade figures issued Wednesday showed China’s imports of copper rebounding from July and August slowdowns to post a 87% rise from a year earlier. Iron-ore imports also hit a monthly record, at 64.55 million tons in September, up 65% from a year earlier. The gains in imports defied many forecasts that purchases would slow after China took advantage of low prices early this year to build up stocks of many commodities. The data could be a signal that underlying demand for raw materials is stronger than first thought.
I read the data differently – not so much as evidence that demand is stronger then we thought but rather that real imports are weaker than we thought. According to the October 14 research report by Mark Williams, of Capital Economics, “We do not expect the trend to last. China’s recovery is being driven by investment, but the recent pace of commodity import growth has been much faster than justified by the rise in current demand. Inventories of many metals have more than doubled since the start of the year (copper inventories are up 500%).”
I think I agree with Mark. I already discussed in last week’s entry the recent conversations I have had with chemical and steel analysts and investors who were puzzled by their inability to match China’s imports with any reasonable estimate of the end use of these products. One place where we might see the discrepancy is in a rise in inventories, but although these have been rising, they haven’t been rising fast enough to account for the differences.
Are investors stockpiling?
It seems that there may be another explanation, and that is stockpiling by private investors. From what I am being told, it seems that a number of wealthy Chinese investors have been speculating directly in commodities, and so some of this inventory buildup is occurring not at the company level but at the investor level. The Wall Street Journal article mentions this possibility:
Copper stockpiles also have increased. Royal Bank of Scotland analysts estimate that as much as 900,000 metric tons of unreported copper stocks have built up in China this year. There has been some official purchasing by the State Reserves Bureau, but also a lot of private traders buying imported copper because it could be resold for a higher price domestically.
I have no information about how these positions might be financed, if this is true, but I would worry if they were debt financed, and I would worry even more if corporations were financing them indirectly by lending to principles. Shang Ning, the very smart secretary of the PBoC Shadow Committee seminar I run at Peking University, has been trying to figure out ways of indirectly measuring this kind of stockpiling, but frankly we don’t as of yet have any very good ideas.
Clearly a lot of policymakers are worried about excess commodity stockpiles. Earlier this week Bloomberg reported on plans to curb steel production.
China, the world’s largest steel producer, is working on plans to curb excess capacity as the nation faces “severe oversupply,” according to the nation’s third-largest mill. The government may have detailed plans on how to close obsolete mills, advance mergers and reduce the number of iron ore importers by the end of the year, Deng Qilin, the general manager of Wuhan Iron & Steel Group, said in an interview.
…“The government will impose strict measures to effectively close outdated mills and boost consolidation,” Deng, also the chairman of the China Iron and Steel Association, said while attending the World Steel Association annual meeting in Beijing yesterday. “We bigger players will surely benefit from such a move.”
There is more than just steel. An article in yesterday’s Xinhua reports the following:
The National Development and Reform Commission (NDRC) will mainly redress production overcapacity in six sectors, said Chen Bin, director of the Department of Industry of the NDRC, Thursday. The six sectors include steel, cement, plate glass, coal-chemical industry, polycrystalline silicon and windpower equipment.
The NDRC also warns of obvious production overcapacity in sectors like electrolytic aluminum, ship manufacturing and soybean oil extraction, said Chen during an on-line interview on www.gov.cn., the website of China’s central government. He said China would fight serious overcapacity in sectors like steel industry and offer guidance for new-born industries like windpower equipment to avoid low level repetitive construction.
China has achieved preliminary progresses in fighting the global economic downturn, but the foundation for economic recovery is not stable yet and overcapacity might lead to bankruptcy, unemployment and bad bank loans if it was not checked in time, he said.
Industrial policies create overcapacity
On the night of October 11th, the federal police surrounded the headquarters and power plants of Luz y Fuerza del Centro (LFC), the decentralized supplier of electricity. The move was part of a takeover plan ahead of the Oct 12th announcement regarding the elimination of the state-owned electricity company.
The reason for a surprise takeover by federal police was to prevent any resentful workers from barricading inside the building in an effort to resist the decision. More importantly, it prevented unionized workers from interrupting service, as they had often recurred to this threat in order to negotiate their yearly salary increases. The takeover was strategically planned to catch LFC workers unprepared as they celebrated Mexico’s soccer victory over El Salvador, which granted the national team its pass to the 2010 World Cup in South Africa.
Subsequently, President Calderon published a decree in the official journal listing the considerations behind the decision to close down LFC. The Executive’s decree provided a summary of the company’s economic inefficiencies, managerial discrepancies, and failure of the union to abide by the series of agreements signed with the government to improve its competitiveness. The latter constituted the legal case against Luz y Fuerza:
“The Law of State-Enterprises establishes a cause for extinction of a decentralized agency created by the federal government, if this agency stops fulfilling the goals for which it was created, or its functioning is no longer viable from the point of view of the national economy and the public interest.”
In conclusion, the decree stated the effects of the global financial crisis have left the Mexican government with few options to avoid a further deterioration of public finances, and it was imperative for the government to make the right decisions to ensure an efficient use of public resources.
Needless to say, the decision to close down LFC was repudiated by the Sindicato Mexicano de Electricistas (SME), the company’s union. Martin Esparza, the union’s de facto leader, immediately began organizing a resistance movement while exploring other alternatives to challenge the Executive’s decision and exert pressure on the government of Felipe Calderon.
On October 13th, the Ministry of Energy confirmed it would be the Federal Electricity Commission (CFE), also a state-owned enterprise (SOE), that will take over the operations of Luz y Fuerza in Mexico City and other serviceable zones.
The closing down of Luz y Fuerza is no doubt one of the boldest if not most difficult political decisions taken by President Calderon during his term. Successive administrations have failed to reform LFC, given the threat of a frontal clash with its powerful union and the political and economic ramifications.
For more than two decades, LFC was Mexico’s worst performing state-owned company. While the CFE has become a world-class electricity company, LFC increasingly deteriorated. In spite of this, LFC was able to maintain one of the most advantageous collective contracts, given the constant danger of a clash with the union and the possibility of interrupted service.
Regardless of any political benefits for President Calderon, the decision opens a battle front of social discontent which could instigate political instability.
Although there were rumors about the closing down of LFC a few weeks before it actually happened, these had been dismissed by the union’s leadership as a government strategy to induce fear among the SME, as it was believed the government of Felipe Calderon would not dare to take such action given its background of yielding to unions. As such, the decision to take over the headquarters was received as a big surprise nationwide.
Finance & Markets
Earnings season is in full swing, with Goldman Sachs, Citigroup, Banc of America, and JP Morgan out last week and more on the way. The problem is, there is still so much noise left over from the crisis and the myriad government bailout programs that it is difficult to disentangle financial fundamentals from hype. It [...]
OK, that’s too good to be true. There has been a search for sixty years for the right answer. Now most economists confess ignorance how to raise the rate of economic growth — how to progress more rapidly towards development and the end of poverty. To get out of this dead end, I would respond [...]