Privacy is dead!!

Thanks to an avid reader, I am updating the blog of yesterday Privacy and Shame and Fame.  It was about the commoditisation of privacy and shame.  That both are being bought and sold at ever greater numbers. 

In this article published today, the author Lia Timson attended the RSA 2012 conference.  She writes about the presentation by George Kurtz (and others) whereby they demonstrated that both iPhone and Android are vulnerable to drive by hacking.  

Well we knew that right?  But the scope and scale of the information available through this hacking is the final nail in privacy.  As Kurtz said “If you haven't figured out privacy is dead, this is going to do it for you.”

Privacy and Shame and Fame

Walking over the Scottish Highlands with a Cambridge Professor and discussing the commoditisation of shame.  How within our own generation, what was once only whispered about – say bankruptcy – is now a legislated process.  How what was once kept private is now widely disseminated, as for example pornography as it swept the world wide web.  

That was a decade ago and with hindsight, it was the perfect location to discuss privacy and shame as there could be few more isolated places.  And how in our debate we underestimated the scale to which the commoditisation of both would grow.  

Selective leaking of “sex videos”  to enhance fame and therefore potentially the ability to generate greater wealth.  Fame was within our generation really only attached to people of great accomplishment.  Now it is a destination in and of itself, and the selling of shame to obtain that fame is rarely given a second thought. 

It seems that everything has a price, its just getting less and less as our shame threshold falls. 

However even if we are not of the "selling our shame for fame" demographic, we are giving for nothing our personal and private information to the ubiquitous large corporations for their financial benefit. 

Evan back then though, research shows that privacy was still coveted and wars were being fought in the media.  One of the most cited quotes is by Anna Borzi in a paper published by Privacy International (2002), in which she states “Privacy is over. There are already more things being recorded, coded and monitored than we can poke a stick at. If anybody seriously believes privacy can still be protected they are seriously deluded. That battle has been fought and lost."

And of those that still value privacy, a small amount of angst sits in the back of our conscience, to surface every now and then with a prickle of apprehension, a rise in the blood pressure, and follicle contraction.  Yes anxiety!

And it happens when you read articles like this in an Australian newspaper.  The sheer scale of personal data captured by the oligopolies on the internet, and available to anybody (just about) but certainly all even quasi law enforcement agencies.  

And now we know for sure that Smartphone apps, for example, provide details of your text messages, your calls, and track your location.  Face recognition, is another being practised in many parts of the world, and once in the official system it is available everywhere and to just about anyone.  

And despite the promises to keep your data confidential by officials, we don’t need to go far to find that your information is available to anyone for a price.  News of the World and police data anyone?  Or how about organisations who expressly sell their services in collecting data – such as this horror story.  Wikileaks is about to leak a mother load of emails about one such company.  It appears that they have sources in many high level official sites around the world that provide them with information – for cash or favours.  The report is an excellent read. 

We all know about the ubiquitous CCTV in the UK.  And of course we provide our own private data free of charge to MySpace and Facebook, amongst others.  Yet at the same time that the privacy of the 99% is being commoditised for the wealth of large corporations, governments around the world are hiding more and more data.  

Sex videos, falling out of clubs, clothes so sexualised they shouldn’t be allowed out whilst at home they probably wear flannies to bed;  shame for fame for cash.  There is infinite amounts of the stuff.  And it will continue to debase its value every time we cross another threshold.  

And as of midnight tonight Google’s new privacy policy becomes live.  They already know everything about you, but now they can sell it at the portfolio level for even greater revenue.  

It will soon be the case that if you DO NOT have a massive electronic profile then you will be considered suspicious.

Guns a proxy for the economy

Lawd luv ‘em.   The gun club in the USA. 

This came to me via Zerohedge.  In a release by ammo.net they claim "American firearm sales and concealed handgun permit applications are at all-time highs since the 2008 election of President Barack Obama."

That’s the first sentence of the release.  It then goes on to claim that the massive rises are attributable to the President.  

Aw gee, you know, what else happened at the same time as the election of President Obama?  Could something else have put the fear of massive social tension in the hearts and minds of the population of the USA?  Let me think.

How about a global financial crisis where banks aren’t safe, your jobs aren’t safe, and in every newspaper they are writing of economic Armageddon?  

I mean who believes this stuff?  It would be good for a laugh if it weren’t the fact that guns kill.  

Anyway it is worth having a look at the numbers because it will tell you how the USA population is thinking about there personal security which is a good proxy for the economy.  

• 98% increase in Ruger quarterly firearm sales since 3Q08 from $117m to $232m
• 33% increase in Winchester Ammunition’s annual sales since 2007, from $431m to $572m
• $4 billion is the size of the USA commercial gun and ammunition market
• 48.3% rise in Federal excise taxes collected on the sale of new firearms over the past five years (well that IS good news)
• January 2012 is the 20^th straight month of firearm background check increases yoy (so still rising then;  not good for economy then)
• December 2011 1.41 million national instant criminal background checks, most ever for any single month
• 129,166 background checks on November 25^th 2011, the most over in one day and 32% over the prior peak
• 2011 increase yoy background checks are up 14.4%; January 2012 vs 2011 17.3%
• Nobody knows how many gun Americans own as a nation – somewhere between 270- 300 million.  Say, about 9 guns for every 10 citizens
• And permits to carry concealed weapons are up substantially in many states over a similar period
• And Ruger’s stock price is up 510% since Obama took office
• And on and on it goes

You’d think that this group would be rooting for Obama to be re-elected wouldn’t you.  But somehow they are able to attribute the massive increase in guns to Obama [and the resultant wealth creation in this sector] but at the same time twist the tale to make it the reason NOT to elect him again.  Go figure.

This is a country of very frightened citizens.  And this news has just blown a hole in my recent theory that the economy is looking up in the USA.  No, they are looking right down the barrel of a gun.

Someone always says it better

A big thanks to one of my readers for sending me this erudite representation.  Frequent followers will have follwed my comments "trickle up trickle down and squeeze" and "trickle up austerity". 

Trickle up austerity

If you are sitting in the US, UK, Greece, Europe and so on, and you are a member of the middle class, then you are being squeezed.  Indeed the articles are prolific in number that point to a disappearing middle class.  

And they are wrong.  It is not disappearing (well, except in your own back yard) they are in fact expanding exponentially as a global structural shift occurs.  It is expected that the global middle class will have doubled by 2050 as China India and Brazil (etc) middle classes grow.

And of course all that is about polarisation.

Income and wealth polarisation may be the late development stage of unrestrained capitalism.  Unrestrained being the operative word.

For example in the Asian economies it could be argued that as they develop the emerge(d) middle class reflects what occurred in the so called developed economies as they industrialised and the wealth spread more evenly through the economy.    

This late stage polarisation has all sorts of implications.  

Obviously, as has been discussed internationally ad nauseam, the wealth polarisation keeps growing.  As evidence of this graph for the US up to the beginning of the bubble.

And we see a consumption strike occurring by the middle class, which has material impact for retail listed companies.  However, we are also seeing the growth in dollar / euro / pound stores at the one end, and the booming high cost brands at the other.  Which is an extension of the polarisation in incomes and wealth.

So everything is either flipping or polarising; both between economies and within countries.  A disappearing regional middle class, but exploding global middle class.  Within developed economies, a polarisation of wealth at both extremes.  And the resultant polarisation of consumption. 

Now back to the unrestrained part.  The best economic period for the developed economies was when economic equilibrium was achieved as evidenced by the 50’s and 60’.  This is before these countries introduced the “trickle down” policies which we blogged about here. Called "trickle up trickle down and squeeze".

Trickle down policies tax the poor and give to the rich; whilst trickle up policies tax the rich and give to the poor.  “Tax” in one disguise or another. 

We argued that trickle down policies have irrevocably failed and it was time for a trickle up policies to be introduced.  That is, give the money to the poor rather than the rich and the wealth will trickle up through increased consumption.  Proven economic success.

But this blog has introduced another term which we like:  Trickle up austerity.  Using that new term, it can be applied to our trickle up trickly down and (middel class) squeeze theory.  In the developed economies, Trickle up austerity is what you get when you unrestrainedly crush the middle class with trickle down policies and fail to restrain the rich with trickle up policies.  Economic Armageddon.  

Greece please

Russell Short of the John Adams Institute in Amsterdam took an on the ground tour of Greece and published his observations of the effect of its three years of economic grief on the people.  This is real reporting, in the face of those faceless economists and EU policy wonks.  Please read it.

He wrote a balanced and thoughtful piece, filled with stories of people and how they are compromising  / adjusting or indeed thriving in this environment.

However if you want to see what sticking with the Euro can do to a population (think Ireland, Italy, Spain, Portugal, Latvia etc), I have picked out only a few of his words.  

A quarter of all Greek companies have gone out of business since 2009, and half of all small businesses in the country say they are unable to meet payroll. The suicide rate increased by 40 percent in the first half of 2011. A barter economy has sprung up, as people try to work around a broken financial system. Nearly half the population under 25 is unemployed. Last September, organizers of a government-sponsored seminar on emigrating to Australia, an event that drew 42 people a year earlier, were overwhelmed when 12,000 people signed up. Greek bankers told me that people had taken about one-third of their money out of their accounts; many, it seems, were keeping what savings they had under their beds or buried in their backyards. One banker, part of whose job these days is persuading people to keep their money in the bank, said to me, “Who would trust a Greek bank?”

It’s not uncommon to see decently dressed Greeks discreetly rummaging through garbage bins for food.

The crucial difference is that now well-educated young people — future doctors, teachers and engineers — are leaving, suggesting that what is taking place is the hollowing-out not only of an economy but also of a whole social system.

The loss of young people worsens another problem facing this country: the birthrate is among the lowest in the world — and was even before the crisis manifested itself — making it unable to maintain population levels.

As the Greek government adds new taxes and surcharges onto its citizens, they respond with protest or evasion.

And on a more optimistic take on the events: 

Zacharias says the troubles have rallied like-minded Greek businesspeople. “The crisis gives us the opportunity to clean the market of everyone who was trying to make something out of nothing. Then we can focus on what works: creating a real product, using real methods.”

A lot of people seem to be coming around to Zacharias’s way of thinking. According to the Greek farmers’ union, between 2008 and 2010 — even before the crisis reached its height — 38,000 people lost or gave up their jobs, as their dream of euro-capitalism died, and returned to the land, often to their home villages on the islands. Former accountants and Web designers are growing potatoes on Naxos, collecting resin from mastic trees on Chios and tending wheat fields on Crete.

Many of those who have lost jobs in the city therefore have rural homes to retreat to, though whether there is income once they get there is another matter.

And Ambrose Evans-Pritchard wrote more recently in the Telegraph:

In 2011, the Greek economy contracted, not by the forecast three per cent, but by six per cent. Sixty thousand small firms closed, and unemployment rose to 20 per cent. As bank accounts are emptied, Greeks are reverting to barter. Farmers are bringing eggs and vegetables to their cousins in urban areas. Well-dressed people are to be found discreetly rummaging in bins for food…….Remaining in the euro guarantees a generation of poverty and emigration.

Suicide rate in a country has always been a strong indicator of an economy's performance, sad but true.  But the big trends are decimation of the population with respect to its savings and future prospects as the elite educated youth move off-shore.  Communities and families re-bonding.  Abandonment of the consumption at any price philosophy.  And a return to essentials, of food, health, water and self reliance in the country. 

Which is why I keep banging on about inflation of the essentials.  It is reported elsewhere that in some parts of Greece, even Aspro or equivalent is not available.  Is that inflation?  (Theoretically no).

It is not worth it Greece.  

Default Latvia, Save Yourself

Sometimes when you go looking for trouble you find it.  Poor Latvia!! Wonderful advanced nation, intellectually and culturally,  brought to its knees by these crazy austerity policies.  

And please accept my apologies for not learning of what has been occurring there before.  Mea culpa, too much main stream media. 

So I went out and did some research on the Latvian economy over the last 5 years.  Thriving growth, with systemic flaws built in so that it could not withstand the GFC (See later).  When I think of a growth comparison, I think of China, which successfully (so far?) has avoided the painful contraction experienced by Latvia.  Evan though it is effectively pegged to the US$ (but closed capital flows).  Then when I think of its flaws, I think of Hong Kong, the pegged exchange rate (to the US$) which brought HK to its knees in the late nineties.  (With open capital flows).

Prof Michael Hudson and Prof Jeffrey Sommers of Global Research wrote about it in February 2010, referring to the policies implemented as “Latvia’s Neoliberal Policies”.  They suggest that “It is not only economic, but demographic. Its 25.5 percent plunge in GDP over just the past two years (almost 20 percent in this past year alone) is already the worst two-year drop on record.”

Then this very comprehensive report (well worth a read), speaks to the fact that it is highly unlikely to overcome its economic problems.  Written in May 2011, it first discusses the “BELLS (Bulgaria, Estonia, Latvia and Lithuania) who in their wisdom decided to adopt and then stick "come hell or high water" to a currency peg with to Euro.”

Rather than referring to the label Neoliberalism, the report refers to the country adopting an “internal devaluation”.  It used to be known as “wage and price deflation”, and is widely disparaged. This is the alternative to an “external devaluation”, ie breaking the peg to the Euro.  In the former the collective population suffer and it is severe and long.  In the latter, the pain is spread far more widely around the world, and is shallow and brief.  

We get an update on the above, with it being reported that “Latvian GDP expanded by a quarterly 1.5% in Q3 2010, by 0.9% in Q4 and by 0.2% in Q1 2011. Thus Latvian GDP has been steadily slowing, and this despite the fact that the export environment in the first three months of this year was exceptionally positive, and Latvian exports were booming. Latvian GDP fell by around 25% during the crisis, and has subsequently rebounded by 5% (over 5 quarters). We are far from a "V" shaped recovery, and pardon me if I mention it, but it is precisely the sort of thing most macroeconomists were imagining would happen.”

But it also provides the most horrific data of all, that 85% of Latvian mortgages are in Euro denominated currency.  So in effect, Latvia may not use the mechanism of an external devaluation – which is a proven successful policy path or 85% of its mortgagors will default and potentially lose their homes.

This report (again, May 2011) then goes on to show that CPI and PPI is rising, as GDP “rebound” – more like a dead cat bounce – is slowing.  That is called stagflation:  rising CPI and falling GDP.  And for growth it is reliant on exports, which represent only 10% of the economy, and of which 70% go to Europe – itself a mess.  Almost hopeless.  It is locked into a boom bust economy with a downward spiral. 

And official data shows that the population fell by 13% from 2000 and 2011.  As its youth look overseas for better paid work.  Unemployment is high at around 14%.  This WSJ also reports, that the IMF lowered its forecast GDP to 1.5% because of the worsening outlook in Europe.  

In this recent interview on the BBC of the Latvian Prime Minister gives a seemingly rational argument for internal devaluation, but who in the end wears the cost?  It has been horrific.  “Low government spending has kept unemployment high, at over 16%, which is more than in Greece. And even those still in work say that wages are often too low to survive on.  "Over the last two years, 200,000 people have left the country, and a lot of households remain deeply in debt, unable to pay," says economist Alf Vanags. "Huge numbers of people are at risk of poverty when they otherwise wouldn't have been."  Also the people seemingly have virtually no effective trade unions, so no one other than the government to fight their corner.  And it is locked into do or die EU relationship.  

Default I say, forgive % of the mortgages or go 1:2 conversion so the relationship to earnings and loans is reasonable, and let the banks go bust.  They are mostly Nordic or Swedish anyway.  Then set up banking co-operatives:  they are always more successful (well there are some bad stories, but if managed to the spirit of co-operative financial services, they are the best model.  AND they are owned by the people, not the global institutions).  

And as with many things there is an unlikely precedent.  In the late 90's Asian crisis, the South Korean economy remained in the doldrums.  The government introduced through its banking system [local] credit cards for all, and I recall there were tax deductions for interest rates.  This policy was intended to encourage consumption to give the economy a boost.  And it did.  But of course it then went too far, and people could not repay the new debts - being a country of savers and few debts, they were not prepared for the discipline of debt.  So the debt recovery experts for the banks started to get heavy with the defaulters, there was mass outrage from the people, then there was mass defaults.  Effectively a credit card repayment strike across the country.  You guessed it.  The banks in the end had to write off massive losses. 

I mean, if 85% of Latvian mortgages are in Euros to external banks, what's the loss?  If you all go on strike, then some resolution will have to be reached. 

85% of mortgages in EURO is a significant systemic flaw.  Currency risks should always only sit with those that have the wherewithal to manage them.  That is not the general population.  Default Latvia I say.  Let go of the peg, and let the losses fall where they may.  And you will have a vibrant economy again real soon.

Which is of course the last thing the French / German doom mongers want.  Because you would then be competing for their business. 

Inflation inflation everywhere

We have been writing about the quickest way to resolve the Euro crisis, and in the UK and increasingly less so, in the USA.  There is a long history of taking your losses within a broken economy hard and fast.  There is then generally a real hit to GDP, many people out of work, government steps in with funding to finance new job growth as the private sector contracts, and within a short space of time there is a turnaround in the economy and it starts moving up.  Not rocket science.

During this period the central bank cleans out those banks that have made the lending mistakes, supporting those that will survive by pumping funds into the financial system for liquidity purposes, and pushes down official interest rates with the intention that lower rates will flow through the financial system into the economy to bolster consumption. 

So far so normal.  The key point is that there is a sharp contraction, and then a quick turnaround.  The McKensey Global Institute report ran the numbers and proved what us old hands already knew.  

This time round though, there have been a few problems.  First of all the GFC was bigger than previous crisis, so the pain to be taken deeper.  And the central bank in the USA, EU and UK ran out of short term rates to bolster the economy.  In the UK, it was so bad the government stepped in to take over the broken system.  And in Europe, they are taking the proven wrong road of actually taking no losses at all and saving all the financial institutions whether or not they are rotten or not. Plus counter growth policies of austerity. 

And that is how we got the new “normal” central bank economic bolster of Quant Easing.  

Well we all know this right? 

But this will be the outcome.  Inflation.  Written so eloquently by Nick Carn in Prospect Magazine.  He says it is either “bad debts or inflation”.  Meaning, Europe especially, either write off the bad debts and take the pain or expect rampant inflation as you pump money into the system.

And he is not alone, including your scribe.  But the central banks using quant easing (or derivatives of) are all playing along the yield curve, pushing down market expectations of inflation, and inflation is also not being seen in the official data.  As I have written previously.

I believe that the inflation genie is still there.  With the central banks dancing up and down the yield curve, one thing is very obvious:  the extensive money being pumped into the system is not leaving the balance sheets of the banks and entering the whole economy.  Yet.  But it will.  For the moment there is a serious credit crunch in most developed countries.  

Instead, for example, in Europe, UK and USA, the quant easing money is being used by the banks to buy up government debts / gilts.  Some suggest this is for better liquidity buffers within the system.  But that will not fix the broken economies.  Nor the banks for that matter.  The weak should fail.  

So in our view it is inflation delayed not averted.  And there are a host of problems waiting to emerge.  

Of course, as Lord Molson said (1903-1991): "I will look at any additional evidence to confirm the opinion to which I have already come." So I would agree.

So let’s look at another perspective.  Very interesting analysis here on the blog Macrobusiness.

In the blog he applies futurist Ray Kurzweil’s exponential IT curve to the financial sector.  When it has entered other sectors (than IT) it has seen the costs of products reduced to near zero.  Think the music industry and recordings, the price of which are now nearly negligible.

The problem he observes is that the problem with this effect in finance, is that it leads to self referring feedback loops that don’t occur in other industries.  Because the product in financial sector is of course:  money. This is because we measure the value of money, with money.  “And because something cannot be measured by itself, then we have lost the most important role of money — its function as a store of value. To measure the value of something effectively, by definition you have to have something else with which to measure it. “

Well I agree with the latter, and fall into the camp bemoaning the loss of gold as a store of value against which the production of money could be measured.  But it is all too late now, the genie is out of the bottle and being printed like there is no tomorrow.  We are literally drowning in money.

So I am going to take his argument further.  What does this mean for inflation?  If the price of money (unfortunately measured against itself) is going to fall and fall and fall as the price of other sectors that have experienced the IT exponential curve, then there is no inflation unless it can then be measured against what money can buy you.  So you would then expect that it would take more and mroe money to buy the same things, ergo inflation.  But this inflation is not showing up in the official statistics (yet?).

Of course another way to describe that is just devaluing the savings of the population; or deflating values of assets and income.  And we know that is already happening in most developed economies. 

It explains a lot about finance and its massive growth without seeming inflationary effect (so far).  But again I think that this is also illusory. As the value of everything in monetary terms falls in price, so then does the value of essentials rise in my view.  Especially with the rising middle class (in this generation to be 4.8 billion) and the shift in dietary wants to protein dense food.  

So I am going to return to the essentials.  Here I wrote about the potential bubble in farmland prices.  But what of the price of food, water, energy, and health?

I will end on this graph from good old trusty Investmenttools.com for the feeder cattle futures in the USA.  That looks like food price inflation to me.  Click on the graph to see a larger version.

And another tip.  If you put a US$1,000 in the bank you will earn interest rate of maybe 1%.  If you buy a cow for that amount, you will get an 80% annual return from each calf.  Now that is real investment returns, huh!

And social instability rising from this devaluation of all our money?  This erudite summary of what occurs, what has occurred, and the timing, is another of those “why write what has already been written so well”.  But it is not good news.  Although he does argue that there is a consumption strike by the general population who have been so unfairly treated in the distribution of the wealth of the economies in trouble.  That could suggest why inflation is benign, indeed in the assets and revenue of the general population there is deflation.  But he warns so clearly that this dissatisfaction will soon grow into collapses of those economies, whereby the elite also suffer. 

But they will still need food, energy, health services and shelter.  The essentials.

Australia economic decline confirmed

Whilst on the subject of Australia, we wrote about the dramatic rise in Australia’s unemployment rate in our blog.

Now this is being confirmed in other areas.  There is quire a severe credit crunch occurring.  It is either from lower demand, or it is from banks adjusting their lending criteria so that the hurdle is higher.  Either way this is going to seriously hurt the economy.

Credit is growing at the slowest rate in recorded history, 34 years.

Property prices are also off, in some areas by more than 30%, a psychological threshold for mortgage lenders.  Like they used to say in the USA, house prices have never fallen in all states before.  Well Australia’s rule of thumb is house prices have never fallen 30%.  Official data shows that they are down 8% nationally in real terms in the past 12 months. 

And the RBA has now cut the economic forecasts, but not lowered its interest rate as many expected.  The latter lack of action is simply to enable it to have big firing power should the global economy tank, with rates presently at 4.25%, one of the highest rates in the developed world.  If it has to fire the gun, then it has ample room to do so to recharge and protect the economy.

However, this action is less and less a successful tool for the RBA, as the banks grapple with rising cost of funds and pass it on to borrowers.  Just as with Asia before the Asian crisis, much of the banks borrowing is from offshore, and they are wearing the margin expansion caused by the Euro Crisis.  They are price takers in the global financial system, and despite the government guarantee, their costs of financing are rising.  Who knows what they would be without the guarantee, but the government is unlikely to allow that to be learnt.

And household borrowers in Australia have the highest debt in developed economies of 105% of GDP.   Substantially greater than the European countries about which we are all so worried.

After all, it is pretty obvious what happens if the RBA shoots that interest rate bullet and fails.  The next step is Quant Easing and who knows what future.  If there has been any benefit to UK, USA and Europe from QE, it is hard to find.  

So all you European and Brittish people wanting to move to Australia for work and sunshine, take a good look before leaping.

QBE a Shocker

The statement:  “I am not a scientist so I really cannot comment on the science of climate change.  …….Maybe there is and maybe there isn’t climate change – let us be honest, there are always going to be changes in climate no matter what happens or what it is caused by.  ……I’ve heard Professor Penny Sackett (Australia’s former chief scientist) and others talk about climate change, [saying] this is all happening, its going to be terrible.  And then you get to hear from people like (James Cook University adjunct professor) Robert Carter, and he says well actually that’s all a load of rubbish…….And so I am just none the wiser.  Who Knows?  I don’t have a crystal ball.”

The speaker:  Chairman, Belinda Hutchinson

The business:  risk taker, global insurer operating in 52 countries

The company:  listed on the Australian stock exchange operating internationally with 80% of its business internationally derived.  90% is commercial insurance

Share price:  Halved in the last 12 months, and only one third of its peak in the last five years

Profits 2011:  Halved

Climate catastrophes 2011: A$380 billion with a cost to the insurance industry of A$105 billion.  More than double of that for most years of this past decade except 2008.  

There is of course a real difference between the science of climate change and resource depletion, about which I have written exhaustively (see headlines below blog).  

If there is one thing a director is paid to do, it is to have a firm view and set strategy accordingly.  And for an insurance company whose business is to price risk based on frequency and severity of risk events, this is critical.   Clearly the QBE chairman does have a view:  because QBE was not re-insured (sufficiently?) against the losses from catastrophes last year.  But this is undisclosed to shareholders.

To say as she does in the quote above “Who knows?” is an absolute shocker.  

Find out or leave. 

Pear Shaped in AU

Travelling in the EU last year, it was difficult to avoid the Euro crisis and the recession in the UK.  Everybody had both on their minds.

Especially in the UK, young people were speaking of moving to Australia for jobs.  And probably the weather.

In the meantime, over late summer things deteriorated evan further in Europe and the UK, just as things appeared to be settlng down in the USA. 

The Aussie dollar is rising again as the boom to gloom sentiment in China is now back to boom.  As China goes, so goes Australia.  But what my compatriots in the UK failed to realise is that Australia is experiencing a two speed economy.  It is being hollowed out by the resources boom / China.  Not dissimilar to the hollowing out of other countries' economies when China turns up.  Think Asian crisis.

Australia:  Boom in resources, gloom in all other sectors.  Which are in contraction.  This is confirmed by the central Bank, the RBA, dropping interest rates twice over the past few months.

Which has not affected the Aussie dollar oddly enough.

If any further data was necessary, Australia got it overnight.  Unemployment has reached a high of 10.3%.  That is 1,278,000 people out of work.  Australia's highest ever number of unemployed, and the highest unemployment rate for a decade.

It gets worse.  A further 7.5% of the workforce were under employed:  937,000 people.   Yep, that makes a total of 2,215,000 un/deremployed, 17.8% of the workforce.

This data is provided by Roy Morgan, a renowned research company in Australia, and the graph of the last ten years is here.  With further analysis.

As goes unemployment so goes property values.  And Australia had its first national decline in 2011 in many years.  There are many doomsayers about the property market in Australia.  And certainly at a price of 5.6 times average salary (down from over 6 times) it is one of the priciest in the world.  But those analysts overlook the oligopoly banking sector in Australia, that has a much greater capacity to manage the downside because of the closely held nature of the mortgage risk.  Just four banks, more than 80% of mortgage lending, and they all learnt the lesson of the early 1990's when they all four rushed to dump their security [homes] on the market at the same time.  Since then, it has been a seemingly collusive approach to loss management.  And consumer laws are far more restrictive when compared to USA for example.

All the same, odd that everybody sees what they want to.

Also overnight, the USA unemployed rate fell to 8.3%.  Well below that of Australia (although the measure above is unofficial).  Yet in my travels I still here how well Australia is doing. 

Maybe it is all that vitamin D from too much sunshine?

Ethanol, its complex

That’s the tricky thing isn’t it?  If the production and use of ethanol emits more carbon in aggregate than the production and use of gasoline, then what’s the point?  We may replace the falling oil production, but at what price to the planet?

Then there are the other externalities to consider.  Land used for fuel instead of food.  Excess water usage.  Land degradation.  Capacity limits to scaled up production.  Biodiversity depletion from monoculture production.  Poison from the different gases released.

As outlined here, it is time to find out if ethanol is worth its weight in oil relative to carbon emissions.  Information usually obtained by plundering publications on the internet.  And what is found, is, it’s complicated. 

So there is good news and bad news.  However, to round out the debate it is interesting to note that ethanol is produced by various crops.  In the USA it is mostly corn;  in Europe it is rapeseed;  in Brazil (for example) it is sugar cane; in China it is seaweed; and in Australia it is soy bean.

Production of each of these has different carbon footprints and externalities, and even within each specific crop, there are differences that can make it carbon neutral or carbon (eq) intensive.

For example the (subsidised) corn production in the US and rapeseed in EU is causing the prices to rise internationally, and directly affecting food security for the rest of the world.  Especially poverty stricken countries, for which maize and edible oils are a large part of their diet.  The UN’s FAO called for a reduction in production of both.  Further they produced a study that shows in Latin America only Argentina, Brazil, Paraguay and Columbia could sustainably produce biofuel without affecting food security.  

Then there is this article, which suggests that depending on how the corn is produced it could be 20-30% less carbon intensive / 20-30% more carbon intensive than gasoline.  It is land usage that makes the biggest difference.  Quoting: 

“if you assume that all the land used to produce the ethanol feedstock is already in production, you tend to find a carbon footprint at the low end of the range, since there is little net reduction in the carbon sink, and ethanol looks pretty good. If you assume that all the land used to produce the ethanol feedstock came from forests that had been chopped down, or marginal land that produces very low yields, you tend to find a carbon footprint at the high end of the range, and ethanol looks bad. Thought about another way, ethanol made from corn or sugar that displaces human or animal food production is likely to be relatively greenhouse gas friendly compared to ethanol made from corn or sugar that comes from new land put into production just for ethanol.”

Then there is this report, that compares the cost of subsidising corn ethanol versus sequestering the land used for the subsidised corn as carbon sinks.  The latter trumps the former in dollar cost to the taxpayer.  And this report shows how corn is produced at the farm level, may / may not produce substantial amounts of nitrous oxide, a GHG 300 times worse than carbon.  

And then there is this study “Ethanol as Fuel: Energy, Carbon Dioxide Balances, and Ecological Footprint”.  Really, it was the most comprehensive. 

It compares the production of corn in the USA versus sugar in Brazil, as inputs for biofuel.  US comes out looking not so good, and Brazil very good (as in reports above).  

I recommend you read it.  But for a summary of US:  to produce sufficient ethanol in 2012, all the available cropland in the US must be turned over to corn.  By 2036, add in the entire range and pasture areas as well.  And by 2048, every bit of land except for the cities.  So, ethanol is not an option.  And they give many other reasons as well.

In Brazil, only 10% of cropland is required to run the total fleet for the next 30 years.  Starting to consider the complexity? They conclude:

In the Brazilian case, for carbon sequestration, it seems to be more effective to reduce the rate of deforestation than to plant sugarcane.

In the US case, the use of ethanol would require enormous areas of corn agriculture, and the accompanying environmental impacts outweigh its benefits. Ethanol cannot alleviate the United States' dependence on petroleum.

Finally, there is this recent report.  Seaweed, that has been grown at a commercial scale for more than a century in China, is now producing biofuel in small trials.  As with sugarcane, and corn, it is the sugar that is the key ingredient. And it doesn’t compete with food crops, it does not require land, plus it is a pollutant cleanser not polluter.  On a per acre basis it produces 50% more ethanol than sugarcane, and 3 times that of corn.   There is more info here.

So there it is.  No rah!! rah!! or slaps on backs for using ethanol.  It is not all the same.  Indeed much production is creating worse environmental and carbon problems than it is fixing.  The seaweed biofuel seems to be the answer.

But if I can’t get my sushi, I‘ll be cross.  

Baffling Belief in Government Promises

It is election year in the USA and elsewhere and, again, we will vote for the leaders of the free world.  Politicians will make promises, and depending on our age, we will believe them.  Then the politicians will break those promises, sometimes because there has been a dramatic change in circumstances.  But inevitably, promises are more often than not broken. 

And the USA and Japanese governments, and elsewhere, will issue their government bonds.  To pay for the fiscal deficits or to repay (rollover) previous bond issues.  Or in the case of the UK, gilts.  These bonds are a “promise” to repay the principal and interest (coupons) at some time in the future to the investors that buy the bonds.  They are unsecured. 

Given that governments have an overt track record in “not” keeping their promises, why do we keep believing them?  Its baffling.

Japan has recently experienced its first balance of trade deficit for 31 years, or since 1981.  That is, the value of its imports was greater  than its exports.  Its current account remains in surplus, because international investments made over time continue to pay returns.  This latter means its income from exports and offshore investments in aggregate are still greater in value than its imports.  However the balance of trade is a big indicator of its future capacity.    

In mid 2011, its debt to GDP was 512% and most of that is the government’s with 226% of GDP.  By way of contrast, USA is 80%, Ireland 85% and UK 81%.  However it owes approximately 95% of that to its own population so it does not have to stare down the international investing community as Greece and Italy do.  The Japanese believe their government will repay the debts. 

What has stirred up the hornets nest however is the expectation that Japan over the near term will develop current account deficits (“CADs”) as well as trade deficits.  And then they will need to use the investment capacity of international investors to fund those deficits.  There are many reasons for this and it is covered well by Reuters and The Japan Times.

CADs are not necessarily a bad thing if you have the future capacity to repay the debt used to fund the deficits.  This could come from raising taxes, economic growth, or printing new money.  However, Japan is not in this position.  Hence the raging debate that it may soon not be able to pay as promised.

Yet it is not alone.  Over decades in international banking, many countries have defaulted on their debt.  Wikipedia has a comprehensive list of the defaults going back centuries, but would it shock you to know that of all the countries in the world only 8 have not defaulted in the last century.  They are:  Sweden, Portugal, The Netherlands, France, England, Malaysia, Denmark and Australia.

Countries that have defaulted, in some cases multiple times include Africa (22 nations), Americas (27), Asia (14) and Europe (22).  So when considering the EU crisis, or the Japan potential crisis, and government defaults, remember that it is easier to list those that have not defaulted than those who have.

Pesek of Bloomberg wrote last week of a debate occurring between Krugman and Fingleton about Japan.  What is extraordinary about this article is that he ends it with this statement “It doesn’t take a Nobel Prize to know that paying off debt gets harder when you’re running out of people”.  Referring to Krugman, of course, whom he supports in the debate.

There it is.  There is the red flag.  We know today that Japan already has little hope of paying on its promises.  Yet merrily we go on our way believing the promises of governments all over the world.  

Given the extraordinary number of defaults over the centuries, the probability is that governments are not going to pay it back by honouring their promises.  Is it a case of get out or get over it?