When to intervene in a genocide

A confluence of three events occurred this week with respect to genocides.  The first was the news that France is passing a law that makes it a crime to deny genocide occurred.  It is in particular targeted, reputedly, at the Turks with respect to the Armenian genocide.  The Turks are not happy. 

The second was the replay of an interview with Christopher Hitchens (RIP) in which he referred to Kissinger being within listening distance as the Indonesians considered their invasion of East Timor.  And how this genocide then unfolded and flew in the face of international law.

So I looked up this international law.  On trusty old Wiki.

The Convention on the Prevention and Punishment of the Crime of Genocide came into effect on 12 January 1951 by vote of the UN General Assembly.  It has been adopted by the International Criminal Court. 

In Article II it defines genocide as:

Any of the following acts committed with intent to destroy, in whole or part a national, ethnical, racial or religious group, as such:

(a)    Killing a member of the group

(b)   Causing serious bodily or mental harm to members of the group

(c)    Deliberately inflicting on the group conditions of life calculated to bring about its physical destruction in whole or in part

(d)   Imposing measures intended to prevent births within the group

(e)    Forcibly transferring children of the group to another group

Further, the UN Security Council must, by law (Resolution 1674), take action to protect populations from genocide, war crimes, ethnic cleansing and crimes against humanity.   

Not all are mentioned, but some of the genocides over the past century are all too familiar:  Bosnia; Rwanda; East Timor; Holocaust; Khmer Rouge; Darfur (Sudan); Soviet POWS.  It is unclear why none of the deaths from Japanese in China (Nanjing) or the Pacific are not mentioned.  But there you have it. 

So it is clear, the world is required to act in the face of a genocide as defined. 

The third event was that I watched the film Balibo.  

It illustrates with implacable clarity the malicious brutality of the Indonesian’s invasion of East Timor in 1975.  It tells the true story of crimes that were covered up for over 30 years.  

A friend grew up in Papua New Guinea, a child of an Australian Major.  He often spoke of the very real threat the community felt from a cross border invasion by the Indonesians from Irian Jaya (the left half of the island of New Guinea).  It was a cloud on the horizon at all times, or a flapping flock of vultures.  There were stories too of people fleeing across the border from West Papua, of rampant deaths, whole villages flattened to make way for the millions of Indonesians being supplanted into the country.

It is difficult to know how widespread the abuse of the nationals is, but there has been plenty, and for a long time.   It is ignored by the international press and there is little or no diplomacy records either about this country of 2.6 million people.  Getting news out is almost impossible and journalists fear for their lives.  

Whole villages are being eradicated and there is no question that with the deliberate death of 400,000 nationals this would be considered genocide.  And the massive profits taken out of the resource (and culturally) rich country are not for the Papuans.  And the US company Freeport should hang its head in shame and every shareholder also.  It is the largest publicly traded copper and molybdenum producer in the world, and operates its PT Freeport Indonesia.  Reputedly, many many deaths of the Papuans have occurred in its name.

There are protests of course, but expect to be shot.  There are protest groups as well, such as 

Free West Papua;  and another domiciled in the UK.

There is a detailed and recent published history here.  Titled:  West Papuans Cry for Help. 

Wake up world!! It has been too long already!!

Take losses hard and fast

As any good trader will tell you, take your losses hard and early.  Another is take losses and let your profits run.  Another is the first loss is the best loss.  

A recent report by McKensey Global Institute makes this point (with far greater research) strongly when it comes to turning around collapsing economies after a banking crisis. It considers debt and deleveraging, the pace of same, and the road to recovery depending on its pace and its depth.  

This is the first bit of contemporary research that points the finger directly at what is wrong with the EU response to their problems.  It states the bleeding obvious.  Here, I referred to the single most important symptom.  Once the diagnosis has been made, then the medicine can be taken.  And in this case the medicine is writing off all the bad debt that is unlikely to be repaid.  Do it quickly, and painfully, and then move on.  The report concludes:

“…history shows that, under the right conditions, private-sector deleveraging leads to renewed economic growth and then public-sector debt reduction.”

And again this is not rocket science.  This is what has occurred in most successful economic turnarounds in the past fifty years.  I know because I was there [along with many others of course].  And this is why it is so difficult watching the machinations in Europe.  Not only have the wrong symptoms been identified, but the wrong medicine is being applied in the form of austerity measures.   

What occurred last August was a liquidity crisis.  That has now been appeased by the ECB.  But the underlying illness is massive losses sitting on the balance sheets of all the banks.  The deleveraging the McKinsey report refers to, is not just people / companies paying off loans.  It is includes massive write-off of bad debts. 

McKinsey concludes that “deleveraging proceeds in two stages. In the first, households, the financial sector, and nonfinancial corporations reduce debt, while economic growth remains very weak or negative. During this time, government debt typically rises as a result of higher social costs and depressed tax receipts. In the second phase, economic growth rebounds and then the longer process of gradually reducing government debt begins.”

Their examples illustrate that an “economy is ready to resume sustained growth after private-sector deleveraging when certain conditions are in place: the financial sector is stabilized and lending volumes are rising; structural reforms are in place to boost productivity and enable GDP growth; credible medium-term public deficit reduction plans have been adopted and restore confidence; exports are growing; private investment resumes; and the housing market is stabilized and residential construction is reviving.”

As mentioned here, austerity programs don’t work.  Governments increase debt during the difficult times – when markets have failed – and decrease debt during the good times.  

There are some other conclusions to draw as well from the report.  USA has been pretty swift in taking losses, and indeed continues to do so right at the retail level.  Indeed, its economy looks to be far more advanced than I anticipated and suggests an earlier recovery than many realise.

Frankly, the UK looks very troubling; however this was covered comprehensively by The Telegraph.  And especially as its debt level has just passed GBP 1 trillion for the first time.

And another standout is Australia.  It has the lowest government debt by far (21%), but it has a jaw-dropping 105% household debt to GDP.  Substantially greater than Spain (82%), Italy (45%) and Greece (62%) and ranks second only to Ireland at 124%.  And as Macrobusiness analyses in some depth, since the GFC, household debt has increased A$222 billion.   Makes that aussie dollar look a little wobbly frankly. 

Back to the EU.  Let the banks stop fiddling their balance sheets and go bust. 

Carbon companies still a SELL

One of the best organisations analysing and reporting about the international systemic risk of listed companies concentrated in resource extraction is Carbon Tracker.  

Its reports are startling in their simplicity and the scale of the research.

We wrote about an earlier report of theirs “….the outstanding issue for me is that credit [debt] and equity analysts around the world have not picked up on this.  Where are they?” and “Why would anyone want to invest in companies whose assets are highly likely to be impaired, and whose product is also killing their children and grandchildren.”

Their report illustrated as clear as day follows night (well, for the moment, give it a few decades and it may not) that there are substantial number of listed commodity companies on international stock exchanges whose assets will be substantially impaired in the near term.  With a high probability.

Now they have delivered another critical report about listed coal companies on the London Stock Exchange: 

New analysis from Carbon Tracker endorsed by WWF shows how the growing number of coal mining companies listing in London exposes the financial market to a significant systemic risk. Investors tracking the FTSE AllShare Index are facing increasing efforts across the world to regulate the carbon dioxide (CO2) emissions from coal-fired power generation, most recently in Australia.­­­Carbon Tracker estimates that coal reserves equivalent to 44.56 GtCO2 are held by companies listed on the London Stock Exchange. This is equivalent to 400 years of emissions from coal power stations in the UK, which currently stand at around 0.1Gt CO2 per annum.

Where are the reserves? A third of coal listed in the UK is actually located in Australia, where the government has recently agreed to deliver a carbon tax and emissions trading scheme.  So “UK” investors are potentially exposed to climate change regulatory risk in Australia.  However, Australia and Indonesia export around three-quarters of their coal production.  So, in fact, around half of the coal owned by UK-listed companies is supplying developing economies in China, Russia, India and South Africa.

They call for regulators “Now is the time for them to also ask financial regulators to deliver a 2°C degree capital market system.”

Essentially the problem is two fold – actually more, but dealing with these.  When considering global strategic issues, there is an agreed limit of 2°C rise in temperature.  That is the world has agreed to cut its carbon emissions so that the temperature rises no further than that.  Beyond that are unknown and frightening climate consequences.

BUT, the amount of (in this report) coal as an asset listed on the world’s stock exchanges is far in excess of the amount of coal allowed to be burnt under the Durban climate agreement of 2°C.  

So in effect, the Directors & Officers, the regulators, the auditors, the CFO’s, and all the investors of these listed companies are wilfully blind to the fact that they are probably reporting false information with respect to assets;  are wilfully blind to regulating that false reporting;  and wilfully blind to investing in it.  

There is a clear yawning gap between a target limit of 2°C with respect to climate change, and unlimited degrees Celsius as amassed on the balance sheet of these listed companies.  And no amount of carbon credits / or trading can offsett the consequences of burning their assets.  If this was a company with internally competing strategies you would sack the board.  

The second problem is that many of these assets are listed on the London Stock Exchange.  Therefore that exchange carries a significant systemic risk when like a flood all these companies start amending their asset values.  Especially for all those pension managers who blindly invest to the index.  

For this I have very little sympathy.  England is fighting tooth and nail to be the global financial centre.  When you are, what you get is the world’s systemic risks in a concentrated form.  

As I have written elsewhere.  The directors of these listed companies are in my opinion wilfully blind to their impaired assets; and regulations already exist for them to commence reporting their assets in a true and fair manner.  After considering all the risks.  Publicly.

We need the regulators to act.  And that is what Carbon Tracker is doing.  

Water Anyone?

On the cusp of the year of the water dragon, a Chinese sovereign fund has acquired 8.68% of Thames Water for a reported GBP500 million. The UK Chancellor, Mr Osbourne, said “This investment is good news for both the British and Chinese economies”.

We have been doing a fair amount of writing on Peak Water, resource depletion, and especially so in China.  As some of the smartest strategists in the world, it should come as no surprise that China sees value in water where others don’t.  

Maslow’s Heirachy of needs places water third after breathing and food.  Odd, it makes more sense to be second.  We can survive weeks without food, but only days without water.  And obviously only minutes without air. 

But if it is something that the Chinese government gets, it is the pending, if not present already, water shortage problem around the world.  So far China has been out buying agricultural land, commodities and now water (amongst other assets).

So I thought, okay, who is this Thames Water.  Wiki reports it is the third largest water and wastewater services company in the world, and supplies 2.6 Gigalitres of drinking water a day.  Thames Water is regulated under the Water Industry Act 1991 and is reputedly owned by Kemble Water Limited.

So far pretty simple.  From here on it becomes as obtuse as an orange.  The media reports that Abu Dhabi owns 9.9% of Kemble Water Holdings, the parent of the utility.  A completely different company and apparently purchased not that long ago. 

Then if we go to the web site, we learn that there it is much more complex.  

Thames Water was acquired by Kemble Water Limited on 1 December 2006 for GBP 8 billion. So far so consistent.  Kemble Water Limited is 100 per cent owned by Kemble Water Holdings Limited. The investors in Kemble Water Holdings Limited comprise Macquarie's European Infrastructure Funds 1 & 2 (MEIFs), certain other Macquarie-managed funds and various non-Macquarie investors made up largely of pension funds and other institutional investors from Europe, Canada and Australia (and Abu Dhabi above). The MEIFs are managed by Macquarie Infrastructure and Real Assets (Europe) Limited; a member of the Macquarie Group, a global investor and manager of infrastructure businesses.

Thames Water Utilities Ltd is known as “Thames Water” in case you are getting confused.

Then we had a look at the financial statements for the period ended September 2011 and we find that there are many other companies now leaching off poor old Thames Water.  

Suddenly we have Thames Water Utilities Holdings Limited, which is reported in the financial statements as the immediate parent company;  and then there is Kemble Water Finance Limited reported in the financial statements as an intermediate parent company.  Huh!!

Then there is this statement:  Kemble Water Holdings Limited is the ultimate and controlling party, the directors consider it to be so.  Don’t they know? 

Two paragraphs later, the reports states “The Directors do not consider there to be an ultimate parent or controlling party.”   

Then we have all the interparty transactions in just this set of financial accounts.  You can read it for yourself, but there were many.

But one thing worth noting is that the cash cow in the middle of this complex corporate structure, Thames Water, is paying more in dividends in the reporting period than it earned in net profit.  Profit was GBP146.6 million and dividends for the period were GBP155.1 million.  I thought this dividend payment policy went out with the GFC.  

But there is more.  Thames Water owes Thames Water Utilities Finance Limited.  GBP2,713.9 million in long term finance, and Thames Water Utilities Cayman Finance Limited GBP4,152.2 million also longer than 12 months.  Unneccesary corporate structuring usually delivers risk complexity; which in turn should demand higher returns.  A red flag!

So far I have counted seven entities related to Thames Water Utilities Limited;  excluding the investing companies.  Only an investment bank could find so many ways to leach profits out of this one utility.  That provides the second most crucial resource to much of England after oxygen.  

And yet the UK does not see water as a strategic asset?

Over in Australia they had these headline news on the same day.  “ASIO watch on Chinese money”.  For ASIO read FBI, MI5, etc.  It reports that “Documents released to The Saturday Age under freedom of information reveal that the country's two peak security and intelligence committees - the National Security Committee of Cabinet and the National Intelligence Co-ordination Committee - have recently focused their attention on foreign investment policy.”

They seem to have more departments and security services considering Chinese investment than you can poke a stick at.  The overall impression is that the Aussie government is keeping a keen eye on its resources.  Including water.  

Although the article does note that Australia has been the single biggest destination for Chinese money over the past six years, with investments totaling A$37 billion.  

A few years ago a Macquarie Group related entity attempted to buy the Snowy Mountain Hydro Electric Scheme and the Australian federal government jumped on that like a ton of bricks.  

Wiki reports its strategic importance (although this may no longer be accurate, it is close):

The Scheme is the largest renewable energy generator in mainland Australia and plays an important role in the operation of the national electricity market, generating approximately 67% of all renewable energy in the mainland National Electricity Market. The Snowy Scheme's primary function is as a water manager, however under the corporatised model must deliver dollar dividends to the three shareholder governments - the NSW, Commonwealth and Victorian Governments.

The Scheme also has a significant role in providing security of water flows to the Murray-Darling Basin. The Scheme provides approximately 2,100 gigalitres of water a year to the Basin, providing additional water for an irrigated agriculture industry worth about $5 bn per annum, representing more than 40% of the gross value of the nation's agricultural production.

As I have written before, it will be interesting to watch over the next few decades as government around the world, and companies, vie for the vanishing critical resources.  

For the UK, it is important to understand the character of a country’s elite .  At home the Elite are renowned for expecting the populace, all 1.3 billion of them, and those they deal with, to “Do as you are told”.  And they do.  Imbued with this expectation, they may expect the same elsewhere.  Nothing wrong with that, just the way it is.  UK, you’ve been warned.

Italy beggared

If you glanced at Ambrose Evans-Pritchard’s column today (The Telegraph), you would have felt your blood pressure rise.  What an absolute shocking graph – with data that would make most central bankers and knowledgeable pollies sick with worry.

The graph shows that Italian M1, M2 and M3, all measures of money supply, at the end of last year were all negative.  In fact severely negative.

A E-P calls this horrendous; and that Italy is forced into this position, criminal.  And I agree.  He superbly summarises in one sentence the entire scope of the problems and causes of the Euro crisis  “This is a direct result of the misguided pro-cyclical austerity polices imposed by Angela Merkel and the ECB – the infamous Trichet letter – without offsetting monetary and exchange stimulus.”

As an international investment banker, if a client sought advice about investing in Italy, I would say “never”.  It was renowned as a wholly insider traders market [what ever the assets or market or region] and lawless.  It was impossible to obtain all the relevant information required for a successful investment – that is – to make a fully informed investment decision.  It was the only country about which I had this point blank refusal to deal.

A little over a week ago, Confesercenti (a prominent employers association in Italy) released a report outlining how the mafia is now the country’s biggest business, including with cash reserves of 65 billion Euro.  The Telegraph outlined all the horrific details.  And this goes to the heart of why I would never deal in Italy.  The mafia, who is now gobbling up legitimate assets by the truck load, on the cheap, at the expense of the local populace.

Also railing against the country, is Ms Merkel and her cohorts:  Dumb and dumber!!  She actually praises Italy publicly for implementing its tough austerity reforms;  that we know are driving the country's assets into the arms of the mafia at a faster pace than any other strategy / policy could.  

Or maybe she and Sarkozy are keen to buy up Tuscany on the cheap for themselves. 

This austerity policy exercised in the EU – to crush everything so that in the end it is forecast everything comes out okay  - has been definitively disproved as a policy on numerous occasions.  That statement can be confirmed by back testing:  no other countries has successfully done this.

In Asia during the late 1990’s crisis, the Asian crisis as it became known, several countries were forced into a similar horrific austerity policy by the World Bank, or was it the IMF, before they would receive a bailout.  It crushed the economies, the people, and heads of governments (think Suharto) and Indonesia, Thailand and the Philippines are only now really gaining traction.  More than a decade later.

Malaysia could see that the cost to the people would be too harsh, and effectively closed its borders, implemented capital controls,  and told the IMF and its austerity policies to f-off.  How the world leaders jumped up and down spitting fire.  Its recovery was faster, its people less distressed, and its international standing returned to its former glory.  Indeed it had only one year of GDP contraction.

Sarkozy and Merkel could learn from Asia.  But they won’t.  Elitism at its finest. Instead they will beggar the Italian population, hand their assets to the mafia, and have cheap holidays.  Poor Italy!!

Fat or Fuel?

In some cases the above title is a tautology of course.  But here we are going to do a small mea culpa.

In this blog I discussed the recent news that the USA was experiencing a bumper crop in corn this season, and how this is then fed to cattle in feed lots, and then people eat this meat, which has a higher fat content, and then we all get fatter.  Further that the cattle feed lots are a dastardly environment for the cattle in any event.  Bad for people, bad for the environment, and bad for sustainability.

Well all true, but less so than I thought.

Bloomberg has published a very interesting chart that suggests a couple of interesting things for Peak Food and Peak Oil. (And thanks for bringing it to my attention)

The heading is that ethanol is now eating more corn than cows in the USA.  It then goes on to suggest that this is because herd numbers have dropped.  The chart shows that corn for cattle vs ethanol is now negative apparently for the first time with the share of the corn crop used for ethanol at 40%;  (note other uses would be for feed lots, direct consumption and building future capacity).

Apparently farmers are turning to cheaper sources of feed (oh no!!) because of the price of corn (which has now dropped from all time highs); at the same time that fuel consumption is rising, and oil prices are not falling (for the first time ever in a recession).  It is also occurring as the price of meat is at an all time high (futures on feeder cattle).  So maybe feed lots are selling into this boom and thus reducing herd numbers.

Interestingly I was speaking to a farmer a couple of weeks ago, and then a stock agent, and they believed that high cattle prices are here to stay based on international demand and limited resources for production. 

Does this confirm the issues raised in Peak Food, Peak Oil, and indeed Bumper Corn Crop?  The competition for food from the fuel industry; the unsustainability of feed lots; the hunt for water and the hunt for ever more unsustainable ways to meet resource depletion covered in many of these blogs.

I think it does.  My blog on everybody getting fatter from the bumper corn crop this year is directionally wrong, however give me some license on the fact that the corn is actually going into ethanol rather than feed.  I can feel a blog on ethanol versus fuel for carbon purposes coming on.

Peak Water and Hong Kong

Hong Kong SAR is a study in miniature for Peak Water problems.  As discussed in Peak Water Threshold has passed, it has many of the key issues confronting the rest of the world in its fight for water.

First its water is transboundary with its “motherland” mainland China.  It has almost no intra border water resources of its own.  It uses highly sophisticated water purification methods to cleanse its water.  It relies on aging infrastructure to deliver its water.  And it has a thriving and growing population density so growing demand, the latter being one of the highest in the world.  

It is also one of the most wonderful cities in which to live. Vibrant, contemporary, funny, with magnificent culture of the people.  As many an expatriate will tell you of which I was one for many years.  

As an aside, I will also mention another experience with Hong Kong and water.  After a deluge, walking to work in your v expensive suit along the cramped sidewalks,  avoid all puddles near the curb.  The taxis and buses are sure to drive through it at speed spraying water all over your business garb.  Anyway......

However overtime it became increasingly obvious that you could not eat the food with security as to its source, you could not breathe the air for pollution, and this raised questions about the water.  All of this especially so when SARS, the terrible epidemic, became apparent (but before the known source) in 2003.  

When researching Peak Water thresholds, I came across this report from China Water Risk called 8 Things You Should Know about Hong Kong Water.  It is a great read, but here are the headlines:

1. Hong Kong uses more water per capita than most first world cities
2. Hong Kong Water Tariffs are one of the Lowest in the World
3. Hong Kong relies on mainland China for 70-80% of its Water
4. Hong Kong’s Water (supply) is only Guaranteed to 2014
5. Hong Kong will face increasing Competition for Water (from mainland China)
6. Hong Kong’s Water is good enough to Drink
7. Hong Kong drinks enough bottled water per year to fill IFC Two (an Hong Kong landmark tower) and pays 1,000 times more for the privilege
8. Water embedded in Hong Kong’s meat imports from China is greater than water suppled by Guangdong (the supplier of the water as mentioned in 3. above)

This report has extensive details and graphs with international comparisons and I would recommend it.  And it shows that Hong Kong is facing all the challenges for water, notwithstanding price, that it stands out as a microcosm of coming water wars elsewhere in the world.

It appears that were it not for the political stance of mainland China to protect its high profile and internationally renowned finance and trade protectorate, then Hong Kong would be in severe water shortage and fighting to survive.  

Peak Water has arrived and passed

There is apparently no Peak Water, because it is ubiquitous.  However, for all the water in the world, only 0.007% of all water on earth is accessible for direct human use; lakes, rivers, reservoirs, and underground aquifers.  

In these blogs we considered these issues at length, in Peak Water. And the research done concluded that there is in fact a peak water threshold, and that it had been passed.  

Lasts week there was a little reported announcement about one of the key sources of water, a source in great peril:  underground aquifers.  First, it is worth considering a bit of history, because it shows the slow pace of reform whilst Rome burns [and everywhere else, without any water to sate the fires].  

In 1999, UNESCO and WMO formed an international groundwater centre, IGRAC, launched in 2003.  Netherlands is involved, which seems odd as it would appear that the Netherlands is almost entirely water (and magnificent scenary and people).

In August 2011 it published its second assessment of the status of transboundary waters: covering more than 140 rivers, 25 lakes, and 200 groundwaters (underground aquifers), and 25 other sites of importance. In essence this report identifies and lays the framework for governments to collectively manage joint (transboundary, or my preferred term – cross border) water resources rather than go to war when it is too late.  Especially for countries at different stages of development.  And it is not pretty reading for any region, whether about pollution, river straightening, salt intrusion, or over use (etc).  

The full report can be read here, but it notes that ”there seems to be less information available about aquifers, compared to surface waters in terms of quality and quantity.”  

Now to focus on groundwater.  A new project by this group was launched in September 2011.  It focuses on increasingly unsustainable groundwater use and degradation of aquifers.  On 12 January it launched a Regional Consultation Workshops for the Groundwater Governance Project.  Note this is now 13 year since the founding initiative.

However despite all this time the details on groundwater reserves appear to be scarce.  Almost no media reported the above release despite it being a critical issue, and as I have suggested we are past the peak of use and on the slippery slope down.   

The Australian National Centre for Groundwater Research and Training issued a statement full of facts on 9 January.  Prof.  Craig Simmons says “The world has experienced a boom in groundwater use, more than doubling the rate of extraction between 1960 and 2000.” And   “Groundwater currently makes up about 97 per cent of all the available fresh water on the planet and presently accounts for about 40 per cent of our total water supply. It provides drinking water to cities, is needed to grow much of our food and sustains many industries – yet almost everywhere, there is clear evidence that water tables are falling,” Professor Simmons says. “This means humanity is extracting groundwater much faster than it is naturally replaced.”

And then it gets worse:   “Not many people think of groundwater as a key driver of the global economy – yet it is. If it becomes depleted, entire industries may be forced to shut down or move. Whole regions could face acute water scarcity.”  My underline.

And worse than worse:   “The blunt fact is that most countries and local regions did not know the size of their water resources when then began extracting them, nor how long it took to recharge. In some cases this can take centuries or even millennia. As a result they are now extracting their water unsustainably.”

The release then outlines the risk in China, as our blog referred using the research site China Water Risk, which shows the depletion of groundwater in China, mainly in the north;  and also mentions the land grabs in Africa by Middle Eastern countries.  And more facts:

·         Groundwater supplies 40% of China’s food and 70% of its drinking water – yet water levels in aquifers in some regions are sinking by a metre or more a year.

·         In India the number of wells grew from less than one million in 1960 to 19 million by 2000

·         Groundwater now comprises one-quarter of the US supply and more than half of all Americans rely on groundwater for drinking. Unconstrained drilling of new wells, as many as 800,000 per year, has put incredible strain on aquifers around the US

And of course then there is Bangladesh, where groundwater tables are being plundered out of extinction.

However there is some good news.  On the basis of:  if you can measure it you can manage it. The New York Times reported that : “Scientists have been using small variations in the Earth’s gravity to identify trouble spots around the globe where people are making unsustainable demands on groundwater, one of the planet’s main sources of fresh water. They found problems in places as disparate as North Africa, northern India, north eastern China and the Sacramento-San Joaquin Valley in California, heartland of that state’s $30 billion agricultural industry.”

This article is a great read with too much detail to put in here.

 The takeaway on all this is first, the press couldn’t care less because groundwater is not sexy.  Carbon is.  But it will be when they get thirsty, when whole industries collapse, when wars start. 

Yet we have passed the point of no return, as our blog suggested.  Peak Water has arrived and passed.  But finally there is hope.  Increasingly we can measure it with accuracy; the framework is emerging to manage cross border groundwater; and let’s hope it all happens before the grandkids ask us what we were thinking when we ignored all the warning signs.  

Now they are eating their young

Having successfully picked the pockets of every man woman and child around the world (the 99%ers),  Bloomberg reports that Wall Street firms are considering whether to freeze pay increases for its young bankers.  

Your blogger was parachuted into investment banking at the grand old age of 30 so did not have to suffer the early years of slog and grog.  However the work habits and pressures were observed;  it was not unusual for junior analysts and capital markets guys to sleep under the desk during company reporting seasons or big IPO’s rather than take the long commute home.  Indeed, they were and are worked like mules. 

It was also an intense period as young bankers were being moulded into the culture of whichever firm for which they worked.  Regular culling hung like the Sword of Damocles over their heads as well.  Typically not always related to individual performance and often the result of economic shifts or the whims of a new boss shutting down whole divisions.  Throwing the baby out with the bath water, was literally correct.

Apparently the amounts of the pay increases were always transparent.  Bloomberg reports that pay increases have traditionally been automatic because “there are traditionally very long hours in terms of the amount of work and this is another way to try to boost their morale and signify that they’re a strong part of the firm and that they’re appreciated,”.

How do you feel appreciated if your pay increase is both transparent - so that one can observe it is the same as everybody else’s - and also automatic?  Taking this further, when even the dill down the hall (the son of a friend of an executive director, who can barely read or write) got the same pay rise as you?  

And how does that compensate for the health damage being done.  One young investment banker I knew one year took more than 100 cross border flights in the pursuit of business for his bank.  I am not sure what the limits are on pilots and stewards air kilometres, but it would seem to be a lot less than that.  

Profits at investment banks, before compensation, are typically split 50/50 with shareholders as a rule of thumb.  Bloomberg reports that around 75% of staff at an investment bank are junior bankers – let’s call them the drones – and salaries are around US$200,000 in the USA.  Which seems a lot until you consider their working and living conditions.

Looking at the big one, Goldman Sachs, Bloomberg reports that profit margins were negative for the 3Q of 2011.  It has approximately 30k staff internationally. And mid 2011, banks everywhere were rolling their staff.  Always the juniors, not the seniors, who are well seasoned.  

Bloomberg also reports for Tiffany, the eponymous trinket destination, “Sales in November and December increased about 7 percent to $952 million worldwide. That was slower than the 11 percent gain Tiffany recorded in the same period a year earlier.”

Of course it would be fairer if all staff took a pay freeze, or even a 10% cut across the board would be fairer on shareholders and staff alike.  But then they wouldn’t be investment bankers would they?  Times are tough when the elite start eating from the hands of their own youth.  

Eating meat and carbon answered

Some people favour grass fed cattle, and some favour grain fed.  The flavours outcomes of the meat are quite distinct, with the latter considered more tender after cooking due to the increased fat distributed throughout the flesh.

Of course the meat production chain has different issues attached to it as well.  Cattle feed lots are the main source of meat production in the USA, and increasingly elsewhere.  However if you have ever watched Food Inc you will know that feed lots appear to be grossly inappropriate for the welfare of the animals.  And, also become potential for ghettos of e-coli multiplication.

Intuitively it would seem that feed lots would also be producing greater methane and other gases, or carbon equivalents.  Think of all the production of grains, then the transporting of that feed to the lot, and then the carbon generated by all that compared to a bunch of cows on a paddock eating grass.  

But this study says that feed lots actually produces “lower GHG emissions than grass fed production”  claiming “the additional effort in producing and transporting feeds is effectively offset by the increased efficiency of meat production in feedlots.”  

This seems nigh on impossible.  Then, speaking with a cattleman last evening I was told of a product called Rumensin.  It is a supplementary feed that increases energy for each mouthful of feed in cattle, by changing the microbal population in the rumen of cattle.  This then increases the efficiency of meat production.

That is, this enables cattle to get larger on the same amount of feed.  Great for cattle ranchers, because for the same feed resource, they earn more [assuming that the price per kilo remains constant].  And this Rumensin can be fed to grazing or lot fed cattle, and also dairy cattle [so as to produce greater milk quantity for the same amount of feed].

Interestingly, it also claims that the product “reduces the production of waste gasses, carbon dioxide and methane”.  Hmmm!!

Unfortunately, if accidently ingested by horses it appears that it is fatal.

There is also a sheep version which was tested by the Australia Pesticides and Veterinary Medicines Authority. They have strict limits on ingestion of this product by sheep that produce milk (nil) and 7 days limits pre-slaughter for export meats.  It appears that 1 day limits apply for the local market, but the paper does show limited acceptance by most continents of any tainting whatsoever.

And another piece of research says that “eating red meat three times a week results in between 164kg* to 258kg**of carbon dioxide equivalent emissions a year - vastly different to figures quoted that claim up to 1.5 tonnes.”

So I guess the take on this is that eating the meat from cattle has a much lower production of carbon equivalents than previously thought.  So eat up, the effect on the climate is lower than we thought.  But I will be ordering the grass fed organic version.  

Saving for that rainy day

So what is the forecast for food inflation? One of our needs, not wants.

The agriculture total return index on the Dow Jones [an ETF] is down 20.16% on a year ago.  This suggests that there is an expectation that the returns within listed companies in agricultural segments in the USA are going to drop in the near term or should have already.  This belies the reported data of the USDA that I reported here, where it showed that farm gate takings have increased over 2011. Of course that is not comparing apples with apples, but it does suggest that focussing on the part of the agricultural value chain that is making the money is critical.  

Another important forecast is that farm inputs, which are reliant on commodity prices especially oil, have been falling and that this will do two things.  Either increase the returns to farmers if prices stay constant or, (more likely) the prices of agricultural commodities will drop.  This of course doesn’t mean that the farmer’s returns will fall, because their costs are also falling with the prices on their produce. However when we consider the price of crude oil, it remains elevated and rising, and oil prices and food prices have a strong co-relation.   

FAO Food Outlook, November 2011 sees the food inflation remaining benign during 2012, after allowing for a necessary increase in production to meet rising demand. It also says:  “However, if this demand were to rise faster than currently envisaged, which is a possibility even assuming a slow economic recovery, then a more significant production expansion will be required.”

It also reports that the cost of food purchases to the least developed economies have increased 30% in 2011. 

In other news, it is reported that India’s annual food inflation had dropped to 9% in November, but turned negative in December 2011.  However, this could be relative to the very high peaks of the previous corresponding period.  

Inflation remains high in southern Africa as food pressures remain high.

Quoting The Grocer Magazine, the BBC reports that groceries in the UK today cost one thirteenth of 150 years ago, and represents approximately 10% of income vs 30% back then.  Of course that 30% is what the vast majority of the world population continue to pay. 

And the US reports that food price inflation has dropped to 4.6% in November compared to 4.7% in October. This is after one of the highest food price inflation years on record.

For much of developing Asia, food is an important part of the household income, ranging between 30-40%.  So food price inflation is a major problem when it arises, and hence the riots in Thailand in 2008 when rice prices peaked.  

So when you read about falling inflation in 2012, as forecast by nearly everybody, there are several things to remember.  First, that is not good news, because the slower inflation overall may not reflect price of food inflation.  Second, even a slower rate of inflation in food, should it occur, is still occurring on a higher base rate in the first place.

It is further bad news because inflating food prices, in most countries are well above income, or wage, inflation.  By which is meant, wages and returns on investments are not rising at the same inflationary pace as food (except in China and other boom economies).  And the gap continues to widen. 

Food inflation is here to stay, as the growing middle classes in the new global boom economies switch their consumption ingredients to more protein dense food.  That's why we have a spending strike in most developed economies. 

People usually save more when they think that prices are going to fall.  That is, a recession, and the costs of goods are going to be lower in the future than they are today.  In the converse, they also save when they know that the price of things that they will need to buy - such as food, energy and health services - in the future are going to increase faster than their wages.  Saving for that rainy day is the new mantra.