The Island of Hispaniola: Haiti and the Dominican Republic

Article: New York Times, Dominican Republic Grows Weary of Haitian Refugees, Randal C. Archibald

The title of the article says it all.  After the devastating earthquake hit Haiti in January, 2010, Dominicans rushed to help their island neighbors.  There was also an influx of refugees from Haiti (one of the poorest countries in the world) to the DR (a poor but upward-trending country).  Now, the DR is losing patience with the refugees and is deporting many, including through a program which offers Haitians $50 each to return to their home country.  This program has had many takers due to the desperate condition in which many Haitian refugees find themselves.

Although Haiti and the Dominican Republic both are third-world countries with populations around ten million, and they share the same island, the contrast between them is stark.  According the the CIA World Factbook (https://www.cia.gov/library/publications/the-world-factbook/index.html), the DR has a GDP of around $87 billion, or $8,900 per capita.  Haiti's GDP is $11.5 billion, or $1,200 per capita.  In Haiti, 80% of the population lives below the poverty line, and two-thirds of the workforce do not have formal jobs.

The reason for the disparity?  This is complicated, but in his book "Collapse", Jared Diamond points to Haiti as an example of a country that has ruined itself through deforestation and ensuing desertification, largely due to a history of ill-considered agricultural practices.  The Dominican Republic has historically been a better steward of its natural resources, especially its forests, which is at least partly responsible for its higher rainfall and more productive agriculture.  Diamond gives some of the responsibility for this to the much hated brutal dictator Rafael Trujillo, who ran the DR from 1930 to 1961.  Apparently, though he killed and tortured thousands, he had a soft spot for trees, forests and nature.

I visited the Dominican Republic in 2006, a few years before the Haitian earthquake.  It was a poor country, but even then, many Haitians had come across the border to do whatever work they could find, as they have throughout modern history.  During an unplanned detour through a sugar cane plantation, we saw many Haitian workers chopping cane, and loading it into railroad cars.  I asked the guide if he thought the DR and Haiti could ever unite as a single country, since they shared a single island.  He told me no, because there were too many cultural differences.  When I pressed him, he said that Dominicans were proud of their Spanish Catholic roots, and would never be comfortable with the "African" religious practices of the Haitians.

A sad situation, no matter how you look at it.

Can Germany Do Without Nuclear Power?

Article: New York Times, Germany Dims Nuclear Plants But Hopes to Keep Lights On, by Elisabeth Rosenthal

Germany's Biblis Nuclear Plant, from www.spiegel.de

An article in today's NY Times notes that Germany has already shut down 8 of its 17 nuclear reactors, and plans to close the rest by 2022.

This was a reaction to the Fukushima disaster in Japan.  That a mishap of this scope could take place in a developed country has really spooked Germans.

Germany has been aggressively pursuing green energy and today gets 17% of its electricity from renewable sources (wind, solar and bio fuels) although the first two are somewhat unpredictable as they are highly dependent on weather conditions.  Skeptics say that Germany's energy plan will lead to higher energy prices, higher emissions, and has already caused it to import more electricity from France and the Czech Republic--countries that use nuclear plants to generate much of their electricity.

The German plan estimates that electricity from renewable sources will double in the next ten years, but also calls for the construction of additional coal and gas-fired plants.

Japan is already backing off its initial pledges to completely phase out nuclear energy.  It will be interesting to see if Germany will follow through with theirs.

Japan: And the Winner Is...

The next Prime Minister of Japan will be the current Finance Minister, Yoshihiko Noda.

Yoshihiko Noda
from www.dpj.or.jp

Article: Wall Street Journal, Noda Next to Take Up Burden of Rebuilding, Toko Sekiguchi and George Nishiyama

Mr. Noda was elected in a run-off against Trade and Industry Minister Banri Kaieda by 215 to 175.  In a recent poll, Noda and Kaieda had public support of 12% and 9% respectively.  The candidate with the most public support, 48%, was Seiji Maehara, but he was knocked out in the first round of voting.

Politics in Japan

Here are some of the recent headlines coming out of Japan, none of which bode well for this economic giant.

On August 24, Moody's announced that it would downgrade Japan's sovereign credit rating from Aa2 to Aa3.  Here is the press release: Moody's lowers Japan's government rating to Aa3; outlook stable

Moody's cited Japan's huge national debt (around 200% of GDP) and projections that the budget deficits of at least 7% of GDP will continue until at least 2015.  They noted that Japan's recovery from the 2009 financial crisis had been delayed by the March 2011 earthquake and tsunami.

On August 26, Japan's Prime Minister Naoto Kan announced that he would resign, after just 15 months in office, making him the sixth Japanese PM to resign in 5 years.  His approval rating had dropped to the mid-teens, largely based on his handling of the March natural disaster.  Here is the New York Times article: Prime Minister’s Departure Underscores Japan’s Search for Leadership, by Martin Fackler.  Also in The Economist: Politics in Japan: Sixth Time Lucky?

Tomorrow, August 29, the ruling Democratic Party of Japan will have a "leadership vote" to determine Prime Minister Kan's successor.  (Wall Street Journal Article: Japan Race Narrows as DPJ Prepares for Vote, by George Nishiyama and Hiroyuki Cachi.)  Two favorites have emerged: Seiji Maehara, a former foreign minister, and Banri Kaieda, the trade minister.  Kaieda is favored by much-hated (but politically influential) DPJ king-maker Ochiro Ozawa, so may have a better chance of getting the job.   In Japan the view seems to be that most of these politicians are the same, and it does not really matter who gets picked.

The Nikkei 225 stock index is down to levels seen just after the earthquake.  But paradoxically the yen is stronger than ever, and Japan is able to borrow money for 10 years at just over 1%.  I don't pretend to understand it.

Latin America Overview: More Fun With Charts

While economic growth in the developed world is moderate at best, does the developing world hold more promise?  Today I am taking a look at the countries of Latin America.  The first chart below gives an overview of the countries in the region, which helped me to see the scale of the economies in the region.  By the way, both of these charts are made with data from the International Monetary Fund's World Economic Outlook Database, available on the web at http://www.imf.org/external/ns/cs.aspx?id=28

The second chart gives an idea of GDP growth rates in 2010 and 2011, which might possibly correlate to profitable investment opportunities.

We can see from the chart that the region bounced back vigorously from the 2008-2009 downturn (unlike its giant neighbor to the north), and growth in the major markets: Brazil, Mexico, Argentina, Colombia and Chile continues into 2011.

Peru, a poorer country, may be emerging as a regional success story.  It should be noted that Peru recently inaugurated a new left-wing President, Ollanta Humala.  According to the press, he is attempting to persuade investors that his administration will have more in common with Brazil's pro-growth, pro-labor former primer minister Lula, than with Venezuela's "Bolivarian revolutionary" Hugo Chavez, who among other things recently announced the nationalization of gold mining companies.

Paraguay's record growth rate of 15% in 2010 is interesting to see, but it is a tiny country (see first chart), and the IMF notes that its GDP growth is highly volatile, and largely dependent on agricultural factors.

There were several interesting stories on the region in last week's Economist, including:

• Politics in Brazil: Dilma Tries to Drain the Swamp, about the Brazilian Prime Minister's ongoing fight against government corruption.
• Argentina's President: In Her Prime, about a recent primary in Argentina,which all but guarantees President Cristina Fernandez's re-election in October.
• Mexico's Presidential Race: A Flash in the PAN, about the difficulty of finding a successor to outgoing President Felipe Calderon, and the strong possibility that the country will elect a leader from the left-ish PRI party next year, after many years of being led by the conservative PAN party.
• Venezuela's Economy: Medieval Policies, about attempts by Venezuela's Hugo Chavez to tame inflation by imposing price controls.  According to the article, the country now has the world's highest rate of inflation.

Why Does the SEC Care About Fracking?

Article: Wall Street Journal, SEC Drills Down on Fracking, Deborah Solomon

Interesting article today on page one of the WSJ's Marketplace section.  "Fracking" is short for hydraulic fracturing, the somewhat controversial practice by which shale-based natural gas is extracted by pumping water, chemicals and sand into deep underground wells (see earlier post Natural Gas: Fracking in Europe).

Many environmentalists, and groups living in areas where fracking is being carried out, have raised concerns that the practice pollutes groundwater, and that the chemicals used are not fully disclosed.  Now the U.S. Securities and Exchange Commission (SEC) is stepping in, asking for "detailed information about oil and gas companies' hydraulic fracturing operations, including environmental impacts."

Which raises the question: why the SEC?  The SEC's mission is to: "...protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation."  Wouldn't this be better left to the Environmental Protection Agency (EPA), whose mission is "..to protect human health and the environment"?

SEC Head Mary Schapiro

Perhaps so, but after reading the article I came to a better understanding of the SEC's concern here.  "Government officials said the SEC's interest in fracking is in ensuring investors are being told about risks a company may face related to its operations, such as lawsuits, compliance costs or other uncertainties."  I always wondered how much faith I should put in the part of the annual report where management discusses risks--how can an investor be sure that this discussion is honest and complete?  After all, if management wants the stock price to go up, they might feel a temptation to downplay risks and put a happy face on future prospects.

To the extent that the SEC causes management to be honest about risks, it's good for investors.  On the other hand, to the extent that they require companies to disclose similar information to multiple agencies, it is an inefficient regulatory compliance burden which costs money both for the company being regulated and for the taxpayers who fund the agencies doing the redundant work.

EPA Head Lisa Jackson

It's a tough call.  Oil and gas companies use toxic chemicals in their operations which are to a certain extent undisclosed, because they say the exact formula represents a "trade secret", like the top secret formula for Coca Cola syrup.  I would say the public has a pressing interest in knowing this information.  Ideally, information on practices with potential environmental effects should be disclosed to the EPA, these disclosures should be publicly available, and the SEC should make sure that management is not distorting or downplaying this information on their disclosures to the market.  But if the EPA --which is often accused of being a jobs killer and is funded from the vulnerable "discretionary" budget-- can't get the job done, then I applaud the SEC for stepping up and doing something that protects both investors and the general public.

Many people believe that shale-based oil and especially natural gas will be a resource of major importance to the United States in coming years.  The size of these unconventional reserves is compelling, and will be examined in future posts.  It is already a provider of jobs in some regions (see CNBC report Unemployed? Go to North Dakota).  But the risks to public health and the environment must be addressed.

Buffet Buys a Stake in Bank of America

Story: Yahoo News, Warren Buffet to Invest $5 Billion in Bank of America, Ben Berkowitz and Joe Rauch

One of the big stories of the day was the announcement by Warren Buffet that his company, Berkshire Hathaway would make a $5 billion investment in Bank of America.  Over the last several weeks we have watched shares of BofA go down to levels not seen since the financial crisis, due to its ongoing exposure to liability from bad mortgages from Countrywide Financial, which Bank of America bought in 2008.  There have also been rumors that BofA has large amounts of exposure to European banks.  Other financial institutions have followed BofA down, though to a lesser extent, with Citigroup in particular (which I hold in my portfolio) taking on the appearance of a "BofA lite".  (See below chart from Yahoo Finance: BofA is the blue line; Citi is green).

3 month chart from finance.yahoo.com

The announcement of the deal, which Buffet --now said to be the third richest man in the world with a net worth over $50 billion-- thought up while in the bathtub, caused BofA stocks to jump considerably, along with the other financials.

5 day chart from finance.yahoo.com

As of this writing, the Dow Jones Industrial average has followed the European markets downward, and is now off by about 130 points or just over 1% -- which used to be a lot, but could change in the blink of an eye  in these recent weeks of high volatility.  But the financials are a bright spot, at least today, with BofA up by over 10%, and Citi up by just under 5%.

OECD Announces Slower Growth in Second Quarter: 0.2%

OECD Press Release: http://www.oecd.org/dataoecd/42/9/48539187.pdf

Yesterday the Organisation for Economic Cooperation and Development, which represents 34 countries, announced that GDP growth among these more developed economies had slowed to 0.2% during the second quarter, down marginally from 0.3% during the first quarter -- a very anemic growth rate overall.

Although latest rates were not announced for all of the OECD countries, I made the following chart, with the countries sorted by GDP size, to get a picture of growth on a per-country basis.

data from www.oecd.org

According to this data, the following countries had negative economic growth:

• Japan
• Australia*
• Norway*
• Portugal*
• Denmark*

* Based on Q1 data

Details Revealed of $1.2 Trillion in Secret Loans

Articles:
Bloomberg.com, The Fed's Secret Liquidity Lifelines, Bradley Keoun, Phil Kuntz et al, graphic by David Yanofsky

Bloomberg.com, Wall Street Aristocracy Got $1.2 Trillion in Secret Fed Loans, Bradley Keoun and Phil Kuntz

The Atlantic Monthly (April, 2010), Inside Man, Joshua Green
Data: http://www.federalreserve.gov/newsevents/reform_transaction.htm

My favorite part of the Bloomberg report was the beautiful interactive Adobe Flash graphic, by David Yanofsky.  It gives a list of all the banks that participated in the lending program (407 of them!), with the peak lending amount and date.  If you click on an individual bank, you are taken to another graphic which gives you the bank's borrowing over time, as well as their market value, plus some additional description.  It also lets you graph multiple banks together in order to do a comparison.

Click on the image below to take a look.    

from Bloomberg.com -- click for original graphic

Where would we be without the Fed?

Among the Federal Reserve Bank's most important functions is serving as lender of last resort for the U.S. banking system.  In ordinary times this function is used sparingly, through the Discount Window.

New York Fed headquarters, from www.newyorkfed.org

But during the liquidity crisis of 2007-2009, a lot of financial institutions borrowed money from the Fed, under the guise of various lending programs with names like: Term Securities Lending Facility (TSLF), Primary Dealer Credit Facility (PDCF), Commercial Paper Funding Facility (CPFF), Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF), etc.

Today, Bloomberg.com released a report giving many details of the lending programs, based on databases released by the Fed under the Dodd-Frank Act, as well as information obtained under the freedom of information act.  Some of this information can be seen on the Fed's website.

The lending reached a peak of $1.2 trillion in December 2008, a number which Bloomberg reporters note was:

• 3 times the size of that year's U.S. budget deficit
• 25 times the previous lending peak reached on September 12, 2001
• More than the total earnings of all federally insured banks from 2001 - 2010
• Enough to fill 539 Olympic-sized swimming pools if denominated in $1 bills (which it certainly was not)

It should be noted that these programs were not exactly bailouts.  All the loans were collateralized (though the quality of the collateral varied) and repaid for the most part.  Still, it gives a sobering picture of the extent to which the Fed, and by extension the U.S. government was propping up the banks at that time.

Why did we do it this way anyway?  I think Joshua Green's April 2010 Atlantic Monthly article gives a pretty good idea of the thinking at the time.  Basically, propping up (and reforming) the existing financial institutions was the cheapest option.  There would have been some justice in letting banks fail, and wiping out the bastards who played fast and loose with our trust and destroyed our economy.  But it would have been even more disruptive of the economy, and probably would have caused deficits to balloon even more than they did.  Basically, both administrations --Bush and Obama-- were taking a conservative, low-cost approach, provocative statements by Republican candidates and Fox News commentators notwithstanding.  But what a shame that they had to leave the same people who caused the mess in charge of Wall Street, and that those people proceeded to fight tooth and nail against any meaningful reform.

It is also interesting to note how much we depend on the Fed even today.  While our elected officials fight endlessly over fiscal matters, generating unprecedented volatility in the stock market, statements from the Fed that rates will remain low for the next two years and bond purchases by the European Central Bank seem to be the only thing that have made the markets feel any confidence lately.

U.S. Energy Sources and Uses

Here is a very interesting chart from the Lawrence Livermore National Laboratory, that gives a great panoramic view of how energy flows in the U.S (click on it to expand).  Note that a quad means 1 quadrillion Btu -- that's 1 with 15 zeros.

Bloomberg.com also has an interactive version of the same graphic, with links to additional information, created by John Tozzi and David Yanofsky --most interesting: U.S. Energy: Where It’s From, Where It Goes, and What’s Wasted

Fossil Fuel Production and Use: Lots of Fun With Charts

This chart is a combination of three that I posted previously which give an overview of which countries produce and consume the most coal, oil and natural gas.

To make the above chart, I had to convert the coal, oil and gas numbers--which were denominated in short tons, barrels per day, and cubic feet--into the common unit of BTUs (British Thermal Units).  Arriving at the conversion factors can be a fairly technical exercise, of which there is good discussion here: http://www.aps.org/policy/reports/popa-reports/energy/units.cfm

I used the following factors, which were suggested as averages:
Oil: 1 barrel = 5.8 MBtu
Coal: 1 short ton =  25.2 MBtu
Natural Gas: 1 cubic foot = 1000 Btu

Global Natural Gas Production and Consumption

Over the last couple of weeks I published charts based on data from the U.S. Energy Information Administration that showed various countries' production and consumption of coal and oil.  Today I turn to the third fossil fuel, one which is gradually growing in importance in the U.S.: Natural Gas.

Natural gas is a resource which is mainly used for heating homes, industrial uses, and electrical power generation.

The chart shows that the U.S. and Russia are the largest producers of natural gas.  Russia exports a great deal of natural gas, while the U.S. consumed slightly more than it produced in 2010, although this may change in coming years, as the U.S. taps its huge supply of unconventional shale-based natural gas.  China is a surprisingly modest consumer of natural gas, and instead has an over-sized reliance on coal.

Change to U.S. Immigration Policy

Article: Wall Street Journal, U.S. Alters Policy on Deporting Immigrants, Miriam Jordan

from www.texastribune.org

As if in response to my post from earlier this week, Illegal Immigration and the Need for Reform, the Wall Street Journal reported today that the Obama administration would review the cases of 300,000 illegal immigrants and might allow some of them to apply for work permits, and remain in the country while the applications are pending.

According to the article, the number of deportations has increased under the Obama administration, but this new stricter policy is overwhelming immigration courts, which now have a backlog of around one year.

Part of the justification for changing the policy may be political (Obama needs the Hispanic vote), but it is also practical.   A draconian crack-down on illegal immigration is expensive, and I guess the politicians who push for this approach are to some degree playing to the xenophobia of their electorate.  Our agricultural industry, especially, needs these workers.  Immigration reform that works is what is needed, not more cops, jails and courts.

Bland Message from Patty, Max & John

Article: Wall Street Journal, Together We Can Beat the Deficit, by Patty Murray, Max Baucus and John Kerry

Senator Patty Murray

Senator John Kerry

Senator Max Baucus

Today's Wall Street Journal contained a rather bland article by the 3 Democratic Senators who are on the Joint Select Committee on Deficit Reduction.  What they say in the article is: we can do this; we have done it in the past; we need to work together.

I suppose it is only appropriate to start with a cordial, hopeful message.  I do hope they are right.

The committee's mandate is to find $1.5 trillion in deficit reduction over the next ten years.  If not, there will be mandatory across-the-board spending cuts in defense and non-defense spending--but not entitlements like Social Security and Medicare spending, which are the real long-term threats to the budget.  The idea is that the automatic cuts will be so distasteful to both parties that they will be forced to reach a consensus and propose a more practical set of measures (cost cuts and revenue enhancements) to help reduce the debt.

Joint Select Committee on Deficit Reduction

	Democrats	Republicans
Senate members	Patty Murray, Washington, Co-Chair Max Baucus, Montana John Kerry, Massachusetts	Jon Kyl, Arizona Pat Toomey, Pennsylvania Rob Portman, Ohio
House members	Jim Clyburn, South Carolina Xavier Becerra, California Chris Van Hollen, Maryland	Jeb Hensarling, Texas, Co-Chair Dave Camp, Michigan Fred Upton, Michigan

(thanks, Wikipedia)

One major problem is that many Democrats have vowed to not touch entitlements, which is unrealistic and irresponsible, and many Republicans (all of the members of the committee, as I understand) have vowed not to raise taxes, which is unrealistic, irresponsible and unfair to boot.  Both of these stances may be largely based on political posturing, but my opinion is that the Republicans may be acting on a partial understanding that irresponsible actions on their part will hurt the economy and jobs, which will make it nearly impossible for President Obama to win the election in 2012.

The other problem, of course, is that economic growth is slowing, and massive ill-considered short-term cuts may be just the thing to tip the economy back into recession.  Of course, this is exactly what candidate Michele Bachmann is calling for when she says repeatedly that there is no need to raise the debt ceiling.  (Conservatives point out that Barack Obama said nearly the same thing when he was a junior Senator).  It's hard to know if Bachmann's statements are based on her own ignorance of economics, or if she knows better, and is simply pandering to a disgruntled electorate which is ignorant of economics.  I suppose it is the latter--she must know better.

I know better

Committees, aggressive time-frames, and automatic mechanisms aside, here is what is needed, and in this order:

Step 1 should be relatively easy: massive tax simplification and reform.  The Economist said that by one measure the tax compliance industry in the U.S. is 7 times the size of the automobile industry.  The government obviously needs to take our hard-earned money, but can't they do it in a simple straightforward way, which the average citizen can understand?  The first step to tax fairness is tax transparency and simplicity.  This is something both sides should be able to agree on, and it would go a long way to showing voters that government actually is capable of getting something right.  Obama should get behind this.  It will increase his credibility and will certainly be simpler to do than healthcare was.

Step 2 is harder: massive reform of entitlements, especially health care related entitlements like Medicare.  In his plan, Representative Paul Ryan noted that the average Medicare recipient puts just over $100 thousand into the system, and gets out somewhere around $300 thousand.  This is obviously unsustainable.   Fixing it will be difficult, and may have to be phased in over the long term.  I suspect it will have to entail a re-working of Obama-care, probably including the famous "public option" which may be the only way to have meaningful cost reductions.

Simple as that...

Illegal Immigration and the Need for Reform

Article: Wall Street Journal, Immigration Audits Drive Illegal Workers Underground, Miriam Jordan

Interesting article on the front page of today's Wall Street Journal, about the effect that the Obama administration's immigration policy --focusing on those who hire illegals instead of the illegals themselves--has had on undocumented immigrants.  Miriam Jordan's article centers on one Mexican couple, Alba and Eugenio, and their journey from "...prosperity to the economic margins."

from Wikipedia

It is painfully obvious that this country needs immigration reform.  We depend on undocumented workers from Mexico for too much of what gets done here (90% of harvest workers is what I read) to pretend that they are not vital to our economy and we can simply shut them out.  The vast majority of undocumented workers are here to help their families back home and are interested in working hard and staying out of trouble, not getting a free ride or stressing our healthcare, education or law enforcement systems.  Even President George W. Bush understood the importance of immigration reform.  But this one is a political hot potato, endlessly exploited by politicians who are willing to play on the small-minded suspicious nature of some voters who ignore that there is no practical way to draw a 2,000 mile long line down the center of the North American continent and say "you stay on your side and we'll stay on ours."

Unfortunately, Obama's policy of cracking down on employers who hire illegals is much more efficient than previous policies that focused more on border patrols and random crack-downs.  I wonder if Bush, a Texan, had a deeper understanding of this issue than Obama, and sabotaged his own party's ill-conceived attempts at a sealed border by allowing a lax enforcement mechanism.

This country needs to recognize reality.  There is work to be done, much of it unpalatable to U.S. citizens, and there is a large pool of neighbors to our south who are more than happy to do it.  There is no natural border between the United States of America and the United States of Mexico and there never has been.  On both sides of the line there is America, a complicated, racially-mixed, resource-rich continent with long traditions of immigration, migration and freedom.  Attempts to deny who we are will only result in misery, wasted effort and economic hardship on both sides of the imaginary line.

Tough Times for U.S. Coal

Article: WSJ, Coal Strikes a Tough Vein Over Costs, Natural Gas, Kris Maher
The Economist, Natural Gas: Cleaner, Not Cooler

The above article in Friday's Wall Street Journal notes that coal company stocks are down 30% over the last three weeks.  As a shareholder in Patriot Coal (PCX) I can attest to that.  The article cites higher costs due to declining coal seams in Apalachia, as well as increased competition from an increasingly abundant and inexpensive supply of natural gas.  Although coal is still the U.S.'s leading source for electricity generation, it's share has been declining for years, while natural gas' share has been increasing.

from the Wall Street Journal

My main hope for the shares in Patriot Coal is demand from China which is much larger than any other country in the world, and which continues to increase (see my article, Global Coal Consumption and Production, Fun with Charts).

As far as the replacement of coal with natural gas, I think it is a positive development for the country, given that the U.S. has an enormous supply of gas, and it is much cleaner than coal.  There are three articles on natural gas  in last week's Economist magazine, with one noting that while the burning of natural gas is relatively innocuous for human health, especially as compared to coal, which releases harmful soot into the atmosphere, coal actually contributes slightly less to global warming than natural gas.  This is not because coal emits less carbon than natural gas (in fact coal emits almost twice as much CO2 per kilowatt hour as natural gas) but because coal also emits sulphates into the atmosphere, which actually block the sun, and has a cooling effect that partially offsets the warming caused by CO2 emissions.

Shocking! Big Global Custody Banks Don't Give Competitive FX Rates

Article: WSJ, Two States Go After Big Bank on Forex, Tom McGinty and Carrick Mollenkamp

An article in today's Wall Street Journal reports that two states --Virginia and Florida-- are suing their pension funds' custodian bank, BNY Mellon,  for applying unfairly disadvantageous rates to their foreign exchange executions.

Perhaps based on the custody agreement that they signed with BNY Mellon, the states are right, and should get some money back.  But I think there is a significant element of "buyer beware" in these types of transactions.  If you are running an internationally invested pension fund that converts millions of dollars on a regular basis, you need to make sure on a regular basis that you are getting competitive rates.  You need to negotiate and shop around until you get them--not accept your bank's daily rate because (perhaps) it is operationally convenient.

To me, using standing instructions with your global custodian to convert large amounts of funds "automatically" at their daily rate is like using the valet service at the Hyatt Hotel to do 30 pounds of laundry.  Everyone knows its a rip-off and a cash cow for the provider.  If you're in a pinch, let them wash one or two pairs of underwear for you, but unless you have money to burn, don't give them the whole sack.  OK, maybe this is not common knowledge, but if you are managing big money and hiring custodian banks it should be.

BNY Mellon is the largest of a handful of huge players in the global custody world (along with State Street, JP Morgan Chase and Citi).  They now have over $25 trillion in assets under custody.  Since the 1990's they have been at the forefront of what has been a massive shake-out in the global custody business -- small and middle-sized providers have all but disappeared as  BNY have used their "economies of scale" to aggressively lower their prices and either take clients, or buy competitors out wholesale.

data from BNY Mellon annual reports

But asset servicing (another word for custody) is not free.  It costs money to settle trades, to collect and record dividends, to wire money, to issue statements, to withhold taxes, to report to government regulators.  Clerks have to do most of this.  You can try to save money by cutting the number of clerks you hire and automating these processes as much as possible, but then you have to hire more skilled and expensive staff to do the automation, and to solve the messy problems that result when the automation doesn't work as expected.  

The fact is, by marking down their fees so aggressively (they average around 1 basis point or 0.01% of assets under custody), banks like BNY Mellon have put themselves in a situation where there is a constant hunger for costs reduction (ie, cutting heads) and revenue enhancement.  Foreign exchange has been an important revenue source for global custodian banks, at least since I first studied the topic back in the early 1990s.  They need the revenue, the same way that a bar that gives away free food needs to sell drinks.  No, their rates are not competitive, and their method of calculating them is not transparent.  But if you are an investor in international markets you should know what a fair rate is, and there is nothing stopping you from going out and negotiating your own forex deals, either with the custodian's own funds desk or with a different counter-party.

Now, whether BNY Mellon's rock bottom fees are an example of monopoly pricing is a completely different issue.

Education: States Fail to Raise Bar

Article: Wall Street Journal, States Fail to Raise Bar in Reading, Math Tests, Stephanie Banchero

A page 2 article in today's WSJ mentions a troubling report published yesterday by the National Center for Education Statistics.

According to the report (which admittedly is based on 2009 data), 35 states have passing grades on their standardized reading and math exams which are below the "basic" level on the national NAEP exam, including my home state of New York.

from www.wsj.com

I am no expert on this topic, but it seems to point to a dumbing down of standards in most of the fifty states, at a time when many developed countries, and some emerging ones, have more literate and numerate populations than we do.   Joanne Weiss, chief of staff to Secretary of Education Duncan said it showed that "low expectations are the norm" in too many states.

This may be the most important issue for the long term health of our nation.  Are we arrogant enough to think that we can pay off 14 trillion in debt, build health care and retirement systems that can handle the growing demographic overhang without bankrupting us, and reverse global warming, and do it all without the help of the upcoming generations?

Education is a big complicated issue.  I have heard that part of the solution may be finding the "secret sauce" that certain teachers have that allows them to reach students and motivate them to learn.  Apparently the Gates foundation has been funding such "R&D" efforts.  But can this secret sauce really be identified and applied?  Or is it the result of commitment, experience and hard work, like any other professional expertise?

Conservatives say that more school choice through voucher programs and the like is the answer.  It is tempting to think that freeing up individual families to vote with their feet will lead the magic hand of the market to throw up educational solutions that work.  But I wonder: of the 13 OECD countries who outscored us in reading,and the 24 who outscored us in math, how many had free-market voucher programs?  Any?  Wouldn't a good starting point be to look at other countries, see what actually works, and try going with that?

My opinion, for what it's worth, is that to turn around our public education system we must attract the best and the brightest to teaching.  This may have been what happened generations ago, when many exceptional women went into teaching for lack of better choices.  Now, with a wide open labor market, I fear few of the best people want to dedicate their lives to public school teaching.  Sure, low salaries may be part of the problem, but salaries for university professors are also low, and somehow this doesn't deter extremely bright people from going into academia.  People from all over the world come to the USA to attend our universities, and young, talented academics are willing to accept a sub-standard living standard to teach in them.  Why should public primary schools be so different?

One friend with teaching experience told me that the problem with teaching as a career is not the salaries, but the manner in which we educate our teachers.  According to her, teaching colleges focus very little on the subject matter being taught, in favor of a focus on softer theories of education.  This psychological / sociological focus suits many of the budding teachers --who were not all that passionate or knowledgeable about literature, math, or science to begin with-- but does not serve the children well.  If we want to create a more rigorous, hard-core education system, do we need to start with our teaching colleges?

Yesterday's Market Excitement

In case, you haven't heard, the U.S. stock market was down big time yesterday.  The Dow Jones Industrial average dropped 634.76 points, or 5.5%.  This had something to do with Standard & Poor's downgrade of the U.S.'s credit rating from AAA to AA+ on Friday evening, but exactly how much is an open question.  The Wall Street Journal's front page headline this morning was: Downgrade Ignites a Global Selloff, but the unavoidable irony is that prices of Treasury bonds were up yesterday (yield on the 10-year note, which moves inversely to price, was down to 2.339%, its lowest rate since January 2009).  And repo markets, the main wholesale funding market by which Wall Street banks lend each other money using U.S. securities as collateral, were largely unaffected.

The sell-off seemed to be caused by a general flight from risky assets into safer ones, such as U.S. treasuries, gold and Swiss Francs, which in the past has been the result of fear of a double-dip recession and default and contagion in Europe.  Perhaps the downgrade just added an extra element of panic to the equation.  Or perhaps large market participants were afraid that the downgrade would cause politicians to do something stupid in reaction to what should be a non-event, what philosophers call an epi-phenomenon, like the smoke from a passing train, or the after-the-fact commentary by a sportscaster.  President Obama's speech certainly did nothing to stem the downturn.

Based on the Wilshire 5000 Total Index, which represents the total value of the U.S. stock market, the market has lost about $2.6 trillion since late July.  Unless you are an S&P sovereign debt analyst, this is quite a chunk of change--about $8,500 for each man, woman and child in the U.S.

data from finance.yahoo.com

Certain stocks were especially hard-hit in yesterday's sell-off: Bank of America and Citi were both down over 15%.  I lost quite a bit on the latter, not to mention Caterpillar, a Germany ETF and others.  Despite stern warnings from CNBC commentators --like lifeguards at Jones Beach--  that it is extremely risky for individuals to trade in such market conditions, I nibbled, and bought a bit more Citi at its new marked-down price.  Of course it dropped as soon as I bought it.  This morning, I saw that Citi was trading at less than half of its book value, and bought some more, using up the bulk of my available cash.   As of this writing, Citi is back up 12% on the day, so maybe I made a good decision -- for now.

Petroleum Consumption and Production: More Fun with Charts

Do we really consume that much oil?

Last Thursday's post Global Coal Consumption and Production: Fun with Charts made one conclusion unmistakably obvious: China uses several times more coal than any other country.

Today I used more data from the U.S. Energy Information Administration to make a chart representing global petroleum consumption and production, and the conclusion is different, but just as obvious.  The U.S. uses a lot of oil -- also several times more than any other country.

Just to sniff-test the numbers a bit: the data says the U.S consumes about 20 million barrels of oil a day.  At $80 per barrel, this comes to $1.6 billion per day, or over $500 billion per year.  Is this right?  Guesstimating a little more, we know that in the U.S., the primary use of oil is to make gasoline, which is mainly burned in cars.  Out of a population of 300 million Americans, if 100 million spend an average of $10 on gas each day, this comes to $1 billion every day, without even counting other uses of petroleum.   From another perspective, Exxon Mobil reported $384 billion in revenue in 2010.  Based on this, the figures in the chart look "reasonable".  And we do use an awful lot of oil.

Debt Deal: The Aftermath

from www.whitehouse.gov

Although pendulums swing both ways and there is still plenty of time until the 2012 elections, it seems clear that the debt deal hammered out last week, and the subsequent Standard and Poor's downgrade of the United State's credit rating was a serious political set-back for President Obama.    Here are some memorable words from the press:

Kurt Anderson

Kurt Andersen, New York Times: Of course, a lot of us swooned over Obama partly because he seemed so prudent, straightforward and even-keeled. But now, with Republicans spectacularly applying the Madman Theory for the first time in domestic politics, Obama’s nonconfrontational reasonableness isn’t looking like such a virtue. [brilliant article, compares Obama to Nixon]

Joe Nocera

Joe Nocera, New York Times: I still think it was terribly wrong for the Republicans to use the threat of default to  insist on massive spending cuts, though President Obama also deserves blame for playing his hand so poorly.






Lexington, The Economist: Any assessment of Mr. Obama needs to acknowledge that when he was elected he inherited the in-box from hell.... Now he faces the opposition from hell....But Americans want their Presidents to be winners, not victims.

Peggy Noonan

Peggy Noonan, Wall Street Journal: ...speeches aren't magic.  A speech is only as good as the ideas it advances.  Reagan had good ideas.  Obama does not.

Holman Jenkins

Holman W. Jenkins, Jr., Wall Street Journal: Tax reform is the political fulcrum for addressing the growth shortage, the fiscal crisis, and our runaway health-care prices problem.  It's the one idea that reaches across the partisan divide.  It might be the only thing that can save the Obama presidency. [Good point!]

Stock Market Revisited

Following up on Wednesday's post, How to Lose $1 Trillion in Nine Days, let's take a look at how much wealth was destroyed as a result of yesterday's "interesting" market --a gut-wrenching drop of over 500 points (4.3%) in the Dow Jones Industrial Average. (See WSJ's, Stocks Nose-Dive Amid Global Fears)

Data from finance.yahoo.com

The grand total is ... a loss of $1.6 trillion in the U.S. stock market -- approximately $5,000 for each man, woman and child in the country, to give some kind of idea.

The good news is that gold and T/Notes have increased in value -- I wish I had more than a sliver of my portfolio in these instruments.

As of this writing, the market is down again, after beginning the day with a sizable increase on the back of the weekly jobs report.  The main concerns that are causing people to sell are weak economic news, and worries about fiscal deterioration in Italy and Spain.

Global Coal Consumption and Production: Fun with Charts

There is a lot of interesting data freely available on the web.  The data I used to produce the below chart comes from the U.S. Energy Information Administration, which is full of data, statistics and reports on the United State's and world's energy usage.

This time I have concentrated on coal, an old-fashioned and dirty energy source, which is still hugely important in the economic activities of much of the world, including the USA.

The sky-blue and burgundy bars on the chart represent total production and consumption of coal, in billions of tons, and match up to the left-hand scale.  The orange line represents the net over or under-production of each country (ie, production minus consumption), and matches up to the right-hand scale, which is in hundreds of millions of tons.  The graph does not include all of the countries that are in the EAI database; to make it legible  I only selected those that had some kind of significant production or consumption of coal.

So what can we glean from the above?

• China is by far the largest producer and consumer of coal in the world.  In fact, I had to scale back the size of China's bars in order to keep them from making the smaller countries' unreadably small. 
• China is relatively self-sufficient when it comes to coal, but for the last couple of years have had to import a small percentage of their demand.  Because of the huge size of this demand, it has led to economic opportunities for countries such as Australia and Indonesia.
• India appears to be a similar story to China, on a smaller scale, though with an even larger coal "deficit" than China's.
• USA, which gets about 50% of its electricity from coal, is the second largest producer and consumer, but still less than a third of China in both production and consumption.  In recent years it has gone from being a net consumer to being a net producer.
• Besides India and China, the largest net consumers of coal are the developed export-led economies of East Asia --Japan, South Korea and Taiwan-- which consume moderate amounts of coal but have virtually no production of the mineral.
• The developed countries of Western Europe -- including Germany, France, UK, Italy, Spain-- are all net importers of coal, with modest consumption but very little production, though  Germany, which produces and consumes more than the others is a bit of an exception.
• The largest net producers (exporters) of coal are: Australia, Indonesia, Russia, South Africa, Colombia, Vietnam, Kazakhstan, USA and Canada.
• I had some difficulty arriving at absolute dollar equivalents for the tons of coal represented here.  I read that coal prices are relatively stable, but can vary greatly depending on the type and grade of coal, and the location and method of shipment.  To get a ballpark figure, we can put a value of $20 on each ton of coal, which basically implies flows in the tens of billions of dollars for the largest markets.

How to Lose $1.1 Trillion in Nine Days

As I started writing this, it seemed clear that the U.S. stock market would be down for its ninth consecutive day. However, by the time I finished the market was nearly flat for the day, and it remains to be seen if the losing streak will be 8-days long, or 9+ days long (the latter not being seen since 1978).

There are numerous articles and commentaries about the reasons for this downturn (see today's WSJ: Economic Fears Hit Global Markets), some key ones being:

•  low numbers in several economic indicators (the ISM Manufacturing Numbers, ADP payroll figures, recent lowering of GDP growth figures)
• seemingly endless worries about the fiscal situation of several European countries
• growing inflation in emerging markets.

Those of us who were expecting a jump in the market as a result of the debt compromise at the beginning of the week have been disappointed; the markets seemed to have expected this to happen all along, and any positive effect was overshadowed by the weak economic data.

data from finance.yahoo.com

In an attempt to get a handle on exactly how much wealth is involved in this market downturn, I put together the above chart with Excel, using data on the Wilshire 5000 Total Market Index, which is a good proxy for  the size (i.e., market cap) of the U.S. stock market.  Bottom line: just over $1 trillion in value lost (much of it on paper only) in just over 1 week.  This is in the U.S. alone -- globally I would guess it is closer to $2 trillion.  Numbers that get kicked around during Washington debt negotiations aside, $1 trillion is a LOT of money -- think $3,000 for each man, woman and child in the U.S.  

Of course, the market could bounce back up just as fast as it fell, which would be nice, though I doubt it.  Meanwhile, such a loss cannot be good for the economy; people with money in the market will tend to spend less as they see their wealth diminished.  

Advances in Facial Recognition Technology

Articles:
The Economist, Face Recognition: Anonymous No More
The Wall Street Journal, Face-ID Tools Pose New Risk, Julia Angwin

from HuffingtonPost.com

Imagine if you could instantly find out the name and identity of a stranger on the street simply by taking a photo of his or her face.  Imagine if you could take a photo of a roomful of people, upload it to your computer, then run software which would give you a list of names, home towns, birth-dates, and possibly even Social Security numbers.  It appears that in the not-so-distant future, using Facebook and commercially available facial recognition software, this could be a reality.

The two above articles refer to a study done at Carnegie Mellon University by Alessandro Acquisti, Ralph Gross and Fred Stutzman, in which they were able to identify faces with 30% accuracy, using PittPatt facial recognition software to compare them to faces on Facebook profiles.  This modest success rate is sure to improve as facial recognition software and overall computing power improve, and as the use of social networks becomes more ubiquitous.  And this is just with freely available commercial software: who knows what police and security forces are capable of doing today?  Will we see the end of privacy and anonymity in our lifetime?  Is this something to be concerned about, or just one more feature of modern life?  Or is the sad reality that for most of us who are not wanted criminals, celebrities or great beauties, no one would bother trying to identify us anyway?