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Thursday, January 19, 2012

Tonight, Blogger DJ goes operatic...

...with the finale of Wagner's Parsifal

Nur eine Waffe taugt: -
die Wunde schliesst
der Speer nur, der sie schlug.
Sei heil - entsündigt und entsühnt!
Denn ich verwalte nun dein Amt.
Gesegnet sei dein Leiden,
das Mitleids höchste Kraft
und reinsten Wissens Macht
dem zagen Toren gab.

But one weapon serves:
only the Spear that smote you
can heal your wound.
Be whole, absolved and atoned!
For I now will perform your task.
O blessed be your suffering,
that gave pity's mighty power
and purest wisdom's might
to the timorous fool!

For the full text and translation follow this link.

From time to time, even professed Christians need to be reminded of what the Apostle Paul wrote in his first letter to the Corinthians

Paul 1 Corinthians 13

1 If I speak in the tongues of men or of angels, but do not have love, I am only a resounding gong or a clanging cymbal.

2 If I have the gift of prophecy and can fathom all mysteries and all knowledge, and if I have a faith that can move mountains, but do not have love, I am nothing.

3 If I give all I possess to the poor and give over my body to hardship that I may boast, but do not have love, I gain nothing.

4 Love is patient, love is kind. It does not envy, it does not boast, it is not proud.

5 It does not dishonor others, it is not self-seeking, it is not easily angered, it keeps no record of wrongs.

6 Love does not delight in evil but rejoices with the truth.

7 It always protects, always trusts, always hopes, always perseveres.

8 Love never fails. But where there are prophecies, they will cease; where there are tongues, they will be stilled; where there is knowledge, it will pass away.

9 For we know in part and we prophesy in part,

10 but when completeness comes, what is in part disappears.

11 When I was a child, I talked like a child, I thought like a child, I reasoned like a child. When I became a man, I put the ways of childhood behind me.

12 For now we see only a reflection as in a mirror; then we shall see face to face. Now I know in part; then I shall know fully, even as I am fully known.

13 And now these three remain: faith, hope and love. But the greatest of these is love.

International Thursday #3 : China's Growth Story Strictly Fiction ?

That may be too severe a judgment. Still, before you buy the GDP stats recently released by the Chinese, read the fine print, urges Patrick Chovanec in SEEKING ALPHA:

Today, China’s National Bureau of Statistics (NBS) released the end-of-the-year GDP figures of 2011. According to official tallies, China’s GDP grew 8.9% in the 4th Quarter, a steady but modest decline compared to 9.7% in Q1, 9.5% in Q2, and 9.1% in Q3. GDP growth for the full year was 9.2%.
There are two pieces of data I saw today, easily lost in the fine print, that I found particularly revealing. First, the NBS disclosed that real estate investment accounted for 13% of China’s GDP in 2011 (compared to Stephen Roach’s estimate of 10%), and grew at a rate of 27.9%. However, I noticed something that I admit I missed before, in my earlier calculations — that this is a nominal rate (not adjusted for inflation) whereas the GDP growth rate figures are real (they take inflation into account). The real (and therefore comparable) rate of expansion for real estate investment in 2011 was 20.0%. 
So I went back and re-ran the numbers, using these more accurate figures. Given GDP growth of 9.2% (a higher starting point than I used in my initial calculations), a real growth rate of 20.0% for real estate implies a real growth rate of 7.6% for the rest of the economy. If, in 2012, real estate construction were merely to level off at zero growth, and the rest of the economy was unaffected, that would bring overall GDP down from 9.2% to 6.6%. That’s higher than the number I initially came up with, but still well into “hard landing” territory. The fall-off of 2.6% is also closer to the 3.0% drop I initially calculated than the 1% decline predicted by Stephen Roach. I errored in my back-of-the-envelope exercise, but my point remains a valid one. Keep in mind, these calculations assume no impact on dependent industries like steel and cement, no impact on the financial system, and no correlation to related risks in the Chinese economy — the latter two of which I will expand upon in my next post of the series.
Keep in mind, these calculations assume no impact on dependent industries like steel and cement, no impact on the financial system, and no correlation to related risks in the Chinese economy. 
How realistic is a leveling-off of real estate investment? This is where the second piece of data I noticed fits in. The NBS — somewhat curiously– did not publish December figures for property and other fixed asset investment. However, the Financial Times did interview Wei Yao, an economist at Société Générale, who made some of his own calculations. According to him, the growth rate for real estate investment saw a rapid deceleration from 20.1% in November to 12.3% in December (it’s clear from looking at the original source data that these are nominal rates; the real rates to plug into the GDP equation would be substantially lower). 
The FT article also notes a nearly 25% decline in new housing starts in December and a 26% year-on-year rise in unsold property. And it’s not merely real estate investment that’s decelerating. Nominal growth in fixed asset investment as a whole — hitherto the main driver of growth in the Chinese economy — dropped from 25% y-on-y in October to 21.2% in November and 18.5% in December. That’s precisely the kind of broader deceleration I’m going to be focusing on the next installment of my analysis.

* * *

Paul Santos, also in SEEKING ALPHA, sees a Chinese downturn already occurring. Beyond the drop in the Baltic Dry Index, Santos points to "a serious slowdown in demand, and that, too, is already registering on public statistics, pertaining to cement consumption, automobile production or pig iron ", whose broader implications are as follows :
First, it's perhaps not a coincidence that commodities have shown to be on a downtrend for months now. But given that the real time impact that still seems to be happening now, one would expect such a downtrend to continue. Crude has managed to avoid most of the brunt of this downtrend, but taking into account the magnitude of China's importance, one would expect that Crude, too, will be hit.
This trend will obviously not only hit commodities, it will also hit commodity producers hard, both countries and companies, with a special emphasis on iron producers like VALE, BHP Billiton BHP and Cliffs Natural Resources CLF, given China's position as the world's largest producer of steel by far, as well as steel's importance to the Chinese investment boom. It is no coincidence that these companies are trading at such low multiples, this is what happens in these kinds of cyclical industries when they are about to face a negative cycle.
Beyond iron and other commodities, one would expect coal to also be hit hard. Not only will it be facing a huge slowdown on the steel industry, but it also faces incredibly low natural gas prices as well, which will pressure coal prices on electricity generation. Here, too, the shares have already taken a huge impact, yet if this slowdown continues one would expect that impact to extend further and for prices and estimates to plunge a lot more. Some names that might be hit further include Peabody Energy Corporation BTU, CONSOL Energy CNX, Alpha Natural Resources ANR, Arch Coal ACI, Patriot Coal Corporation PCX and others. This trend was actually in the news on Friday, with Patriot Coal speaking of lower exports for coal used in steel making.
The Chinese economy slowdown is no longer some speculative story. It's real and already showing in the economic statistics. This slowdown can have broad market impact, and will hit some sectors particularly hard. While I highlighted commodities in general, and iron plus coal in particular, the impact will certainly be much broader.

International Thursday #2 : It's the Falklands--or the Malvinas--Again !

What's the big deal about the Malvinas, or if you prefer, the Falkland Islands ?  What's at stake there, besides national pride and maybe a few tons of fish, in the year 2012 ?

Glad you asked.

Oil, baby, oil.

As BLOOMBERG's Brian Swint reports,
Oil explorers are targeting 8.3 billion barrels in the waters around the islands this year, three times the U.K.’s reserves. Borders & Southern Petroleum Plc (BOR) will drill the Stebbing prospect next month, one of three Falkland wells that Morgan Stanley ranks among the world’s top 15 offshore prospects this year. Meanwhile, Rockhopper Exploration Plc (RKH) is seeking $2 billion from a larger oil company to develop the Sea Lion field, the islands’ first economically viable oil find.  
“The area is underexplored and highly prospective,” said New York-based Morgan Stanley analyst Evan Calio. “These could be like the high-impact wells in Ghana and Brazil a few years ago that opened up a whole host of basins.” 
A major drilling success will further raise the political temperature as Argentina maintains its claim over the U.K’s South Atlantic territory, 300 miles (483 kilometers) from the Latin American coast. President Cristina Fernandez de Kirchner said Britain is taking her country’s resources, while Thatcher’s successor David Cameron yesterday accused Argentina of a “colonialist” attitude that didn’t account for islanders’ rights.  
[Prime Minister] Cameron has approved contingency plans to bolster U.K. troops on the islands, and Prince William, a search and rescue pilot and the second in line to the British throne, may spend six weeks there this year, the Times reported today in London.
Tensions between the Brits and Argentinians over this oil have been building for some time, exacerbated as plans by a British company to drill in the area advanced, according to Rory Carroll and Annie Kelly of the GUARDIAN (Feburary, 2010) :
"What they are doing is illegitimate," said Jorge Taiana, the foreign minister. "It's a violation of our sovereignty. We will do everything possible to defend and preserve our rights."
Last week the government summoned Britain's chargé d'affaires – the ambassador was out of the country – to receive a protest note. Buenos Aires has reportedly warned Argentina-based oil companies against exploring waters around the Falklands and there are rumours it may use civilian vessels to disrupt the rig.
British diplomats brushed aside the protests and said it was longstanding UK policy to let the Falkland Islands government develop a hydrocarbons industry within its waters. They did not expect any Argentinian military forays.
Authorities on the islands were also unconcerned. "There will be quite a bit of rhetoric and Argentina has every right to protest if it wishes. But it will no doubt conduct itself in a proper manner," said Rendell. She was unaware of any plans by Buenos Aires to disrupt drilling.
And in December of 2011, Sara Miller Llana of the CHRISTIAN SCIENCE MONITOR reported that the nations of South American trading bloc Mercosur--Brazil, Paraguay, Uruguay and Argentina -- announced they would bar Falklands-flagged vessels from their ports.

Friday, January 13, 2012

SKYNET Alert : Aerial Drones Coming to a Police Department Near You ?

That depends, reports Larry Copeland in USATODAY, on how the FAA responds to requests from domestic law enforcement to use UAV's, unmanned aerial vehicles such as those employed in Afghanistan and Pakistan for various missions.

The FAA is expected this year to propose new rules for smaller unmanned aircraft, a process that will include input from the public, says FAA spokesman Les Dorr. The agency also is talking with the Justice Department and national law enforcement groups "about possibly trying to streamline the process of applying for certificates of authorization" to operate such planes, he says. 
The FAA authorized the Physical Science Laboratory at New Mexico State University to research the issues involved. "We're extremely interested in being able to pave the way to integrate unmanned aircraft into the civil airspace," says Doug Davis, deputy director of the Technical Analysis and Applications Center at NMSU.
One of the chief obstacles to widespread use of UAVs is their inability to "see and avoid" other aircraft as required by federal regulations, a key to flight safety. Davis says he believes operators on the ground can comply with federal rules if they can see the aircraft and the surrounding environment.
That's not to say such drones aven't been tested, or even employed within the confines of the U.S. on police business.
As  Copeland notes...
Drones have flown in the USA for several years but have been limited to restricted airspace and to portions of the borders with Canada and Mexico.
The Miami-Dade Police Department has tested two 18-pound UAVs equipped with a camera for about 18 months, Sgt. Andrew Cohen says. The department has been licensed to operate the craft up to 200 feet in the air, but the drone must remain within 1,000 feet of the operator.
Moreover,  Brian Bennett of the L.A. Times' Washington Bureau reported that in June of last year, police in North Dakota's Nelson County "made the first known arrests of U.S. citizens with help from a Predator [B]", one of two such UAV's which are based at Grand Forks Air Force Base and which, according to Bennett, had flown two dozen surveillance missions since June [2011]. 
Whose drones are they, and what are they doing in North Dakota ? Glad you asked.
The drones belong to U.S. Customs and Border Protection, which operates eight Predators on the country's northern and southwestern borders to search for illegal immigrants and smugglers. The previously unreported use of its drones to assist local, state and federal law enforcement has occurred without any public acknowledgment or debate.
Congress first authorized Customs and Border Protection to buy unarmed Predators in 2005. Officials in charge of the fleet cite broad authority to work with police from budget requests to Congress that cite "interior law enforcement support" as part of their mission.
In an interview, Michael C. Kostelnik, a retired Air Force general who heads the office that supervises the drones, said Predators are flown "in many areas around the country, not only for federal operators, but also for state and local law enforcement and emergency responders in times of crisis."
But former Rep. Jane Harman (D-Venice), who sat on the House homeland security intelligence subcommittee at the time and served as its chairwoman from 2007 until early this year, said no one ever discussed using Predators to help local police serve warrants or do other basic work.
Using Predators for routine law enforcement without public debate or clear legal authority is a mistake, Harman said.
"There is no question that this could become something that people will regret," said Harman, who resigned from the House in February and now heads the Woodrow Wilson International Center for Scholars, a Washington think tank.

Thursday, January 12, 2012

"It's the Economy, Stupid !" Second of Three : If the Fed Says It's Time to Panic, Housing-Wise, It's Time to Panic

suggests Bruce Judson, in his piece, "The Foreclosure Crisis: A Nation In Denial".  

Lost in the various MSM whirlwinds surrounding the New Hampshire Primary, NFL Playoffs, and the usual welter of celebrity riff-raff stories were (1) the fact that Hellicopter Ben Bernanke sent an unsolicited memo warning Congress' finance committees about how housing imperils the economy and (2) the fact that three Fed grandees echoed Bernanke's concerns in separate speeches.

What to make of all this ? Glad you asked. Excerpts from Judson's enlightening article [where all emphases are mine] appear below.

* * *

This memo is notable for several reasons. First, it's important to remember that when the Fed speaks, it does so in sober, limited terms. So an unprompted Fed warning suggesting "a persistent excess of supply" and a "resultant drag on the economy" is comparable to the Secretary of Homeland Security holding a press conference to warn of the risk of an imminent national emergency. Second, an unprompted memo from Bernanke to the House means that he is so deeply worried he felt the need to speak out in as strong a voice as his position permits. Third, the Fed rarely speaks on issues unrelated to its direct activities. Indeed, The Wall Street Journal subsequently wrote that, "For an institution that jealously guards its independence, the Federal Reserve is wading into treacherous political waters." This further underscores the severity of the risks the Fed foresees.

Finally, a further indicator of the depth of the Fed's concerns is what may be an apparently unprecedented set of coordinated speeches by three top Fed officials. On Friday, the presidents of the New York and Boston Fed banks, and Betsy Duke, a Fed Governor, all gave speeches detailing the need for aggressive action to spur a housing recovery.

Today, an estimated 29 percent of all homes with mortgages are underwater. In addition, at least one respected analyst estimates that a total of 14 million homes will be foreclosed on from 2007 to the end of the crisis [emphasis mine]. This represents a hard-to-imagine one in every four mortgages. With foreclosures increasing, there is now such a looming imbalance of supply and demand that, as the Fed notes, further decreases in home prices are likely. Some believe home price reductions of another 20 percent are likely. This would, in all likelihood, have disastrous consequences on at least three fronts--and ripple effects that are impossible to predict.

First, many homeowners would be so far underwater that massive walkaways would be likely. The negative impact on consumer spending of such price declines would almost certainly lead to a vicious cycle of more job losses, leading to further walkaways by struggling consumers.

Second, the mortgage securities market would be in chaos. Nonperforming loans would lead to the forced recognition that bank capital (based on the value of mortgages in bank portfolios) is weak or insufficient.

Third, it is almost impossible to imagine foreclosures on the massive scale anticipated without dire social consequences or even some form of social unrest.

Detailed proposals for addressing this extraordinary risk do exist [see above]. However, they will require a determined effort. There are solutions, but they are not simple.

Thursday, January 5, 2012

Debt Bomb's Ticking even in Germany !

Per capita world debt,  illustrated in DER SPIEGEL
In part 3 of a 5-part DER SPIEGEL article on the world debt crisis, Alexander Jung details just how profligate German politicos have been, and what the nation's actual liabilities are. Some excerpts follow.

* * *

In addition to the official national debt of roughly €2 trillion, there are €4.6 trillion in future benefit promises to retirees, the sick and people requiring nursing care -- commitments that are not documented anywhere. When these commitments are included, Germany's real debt is not 80 percent of GDP, as quoted officially, but 276 percent.

As a result, an invisible mountain of social insurance debt rests on every German citizen's shoulders. According to Raffelhüschen [Bernd Raffelhüschen, an economist at the Market Economy Foundation] , to pay off this debt, each citizen would have to pay the government €307 a month throughout his life -- all because the government makes financial promises it cannot keep. It even touts its promises as benefits, and yet citizens are the ones paying for them in the end. The method has been part of the system for generations.

Wednesday, January 4, 2012

Abundant Natural Gas From Shale, Without Water Pollution ?

Apparently it is possible for the U.S. to have its energy cake and eat it too : abundant natural gas from shale without having to consume or pollute large quantities of water through the process of hydraulic fracturing or 'fracking' ( see figure to the right).

In place of water, gas fracturing or 'Gasfrac' employs LPG (liquid petroleum gas) in the extraction process, is nearly pollution-free, and far less destructive to the geological formations involved than its hydraulic counterpart, as Nawar Alsaadi explains in a recent SEEKING ALPHA post, Gasfrac Energy Services: Fracturing Game Changer .

For more on this technology, check out Anna Driver's article in REUTERS, Propane substitutes for water in shale fracking.