When Giants Fall

Seeing It Again

OK, I guess I'm a little frustrated.

It started with my 2007 book, when those who had failed to see Financial Armageddon coming or who were slow to grasp what was going on were suddenly being treated as knowledgeable "experts" who knew just what was happening and why.

And now we're seeing it again: mainstream analysts suddenly talking about the prospect of growing unrest and heightened instability around the world even though I (and some others) have been forecasting a souring of the social mood for quite some time (as some of you know, the third chapter of When Giants Fall, published in March 2009, is entitled "A Future of Violence.")

Here's one example:

"ANALYSIS-After the Crisis, a Worldwide Rise in Unrest?" (Reuters)

With the Middle East in turmoil, other authoritarian states jumpy and post-crisis economic pain prompting protest in western Europe and elsewhere, some suspect a systemic rise in worldwide unrest might just be beginning.

Instability in the already volatile oil-producing Middle East could produce a feedback loop where unrest pushes up energy prices, fuelling inflation and deepening discontent both in the region and around the world.

In most countries, the so-called "misery index" -- an aggregation of unemployment and inflation long seen as a warning of protest and instability -- is pushing higher.

"After an extended period of economic growth and political apathy across the developed and emerging worlds, we may have reached a new political cycle -- one where populations take out their grievances on their leaders and their associates," wrote Citi political analyst Tina Fordham. "This won't be limited to the emerging world."

In democracies, elections provide a release valve -- Ireland has seen some of the worst post-crisis economic pain but minimal unrest in part because voters knew they could oust the government they blame for the crisis in elections this weekend.

But Greece, Britain and others have seen anger expressed in the streets as their governments push through austerity, arguing they have little choice but to rein in unsustainable deficits even if it means cutting services, pay and benefits.

Most analysts agree North Africa's demographic "youth bulge", relatively high unemployment, long-serving leaders and recent Internet penetration made it particularly volatile. But strains are clearly visible elsewhere.

Almost without exception, authoritarian states around the world appear to have seen at least a modest uptick in protest following the ousting of presidents in Egypt and Tunisia.

Even China, whose breakneck growth has long been seen limiting discontent, has blocked terms such as "Egypt" on social networking sites and stepped-up arrests at small demonstrations.

"PERFECT STORM"

"Two crises are happening at the same time - which is unprecedented I think," said Joel Hirst, International affairs fellow at the US-based Council for Foreign Relations.

"An economic disaster and 'readjustment' of the developed world while the developing world fights for their freedoms. Add in there the oil/energy price, which could be seen as the link between the two, and it makes for a perfect storm."

Ah well, instead of getting worked up about it, maybe I just need a better PR agent.

No Need to Look Far

While all eyes are on the violence overseas, the following CBS News report reveals that there's no shortage of it in a locale that is nearer to our shores:

Revolutionary Jeopardy

 

"Current Events" for 200 points:

Answer:

They will all end the same way.

 

Question:

What do these four developments have in common?

"Yemeni President Vows Not to Quit Despite Tensions Soar" (Xinhua)

"Libya's Gadhafi, Clinging to Power Amid Violence, Says He's in Tripoli" (USA Today)

"Moroccan King Holds Firm After Call For Less Power" (Reuters)

"Ivory Coast: Financial Noose Tightens As Defeated President Clings to Power" (Time)

'Going to the US Is More Unpleasant Than Going to Soviet-Era Russia'

As I've noted here and over at Financial Armageddon, I gather information from a wide range of sources (check out my blogroll in the right-hand column if you don't believe me). Sometimes the views come from bloggers and commenters who keep their identities secret for any number of reasons. Although there is nothing inherently wrong with anonymity, there's probably a greater risk that what is being said is false or misleading, or that reality is being distorted for some less-than-honorable ends. Under the circumstances, I tend to scrutinize such commentary more closely. However, in the case of this posting from reddit, "Why I Stopped Travellig to the US and I Largely Stopped Doing Business in the US," what I and others have experienced first-hand gives me little reason to doubt that the views expressed are accurate -- and reflect a more broad-based perspective:

With every trip I've taken to the US over the past 30 years, things have gotten a little worse every time. Things are now so bad that I have stopped visiting the US and i no longer have any clients in the US. Mostly because having clients in the US means having to go there. And I've grown to really dislike going to the US.

I'm a photographer. I mainly do street photography now, but i still do the odd bit of contract work. I travel with expensive gear though not that much of it. I like to travel light. The INS do not like that. If I turn up with just my camera backpack and a small bag of clean underwear for a one week stay I usually have to spend a lot of time being interrogated for my lack of a huge suitcase. (I guess they suspect I live in the US illegally. Which borders on comical since nobody knows more about my travel patterns than the US government. Besides, my passport is usually filled with stamps that should tell them that I travel a lot and that even if I lived in the US, I spend most of my time flitting around the world)

Paranoid as the INS are, the TSA are even worse. Mostly because they are a huge bureaucracy where nobody seems to be accountable and their on-the-ground personnel are mostly people who had to choose from a range of other low paying jobs. On several occasions I've had expensive gear disappear from my carry-on during security checks and last year a TSA agent dropped my Canon 1D Mk3, smashing both the lens and the camera body. No apology, but more importantly: I was never compensated. I'm not rich and that camera (and the lens) was important to my livelihood. An expensive piece of kit lost that meant that I basically didn't make any money that month.

Oh, and of course, now you have all this nonsense with pat-downs and backscatter X-rays which increases security with exactly zero percent and makes an already tense atmosphere even more tense. Well played.

Taking pictures in the US is another hassle. After 9/11 everyone is utterly paranoid and everyone from security guards to police, and even random passers-by, have hassled me. Claiming that I am breaking the law (I am not) or demanding I explain why I am taking pictures. Believe me, I have spent a lot of time figuring out what laws apply to photography in various states, but on the ground and with a camera in your hand, that means absolutely nothing. Explaining the laws in effect to a law enforcement officer only gets you into more trouble.

I've been to Russia before the cold war ended. I've been all over the middle east. I've been to China. I've travelled all over Europe. I've been to Cuba and I've been to Argentina, Brazil, Uruguay, Nicaragua.

What all of these places have in common is that going there was a far more pleasant experience than going to the US. Yes, you read correctly: going to the US is more unpleasant than going to Soviet era Russia or even Iran 10 years ago. Sure, you sometimes have to bribe people, but at least I've not had gear stolen off me during security checks or had people break my gear without at least compensating me.

And taking pictures. Well, let me put it like this: you are 20 times more likely to get hassled for whipping out your camera anywhere in the US than in, say, downtown Teheran.

I offer this as an observation from the outside. The US is isolating itself and it is becoming a very, very unpleasant place to visit. I often talk to fellow travellers and even a lot of business types in nice suits often relate how they'd rather not travel to the US if they could help it and that they'd rather work with people in Europe or Asia. I can relate to that.

More to It

Some might describe it as MTV-generation myopia: the notion that the sweeping events that grab headlines for days on end can readily be explained by near term developments.

A politician is caught red-handed doing something he shouldn't; members of a minority group are victimized in a random attack; a protestor sets himself on fire -- and suddenly things go haywire. But is that all there is to it?

While such events can serve as catalysts or wake-up calls, history suggests the disruptive forces have usually been brewing for some time. Then, as with the build-up between two tectonic plates, the pressure erupts into an earthquake.

With that in mind, the following Christian Science Monitor report, "West Africa Rising: Could Rising Food Prices Spark Egypt-Style Revolt in Africa?" gives a better sense of where things stand nowadays than one can find in other mainstream publications:

Soaring food prices – such as wheat, which has hit a 2-1/2-year high – could feed political tumult in Africa, despite earlier proclamations that an Egypt-style revolt would not spread to sub-Saharan Africa.

Egypt's revolution was triggered by many sparks, one of which was bread; or rather wheat, a staple whose soaring price and insufficient supply could become the dry wood for political tumult across the African continent this year.

Prices for that staple crop now sit at a 2 1/2-year high, and Egypt – currently the world's biggest exporter of televised scenes involving young men waving flags – just happens to be wheat's biggest importer. And while academics will have semesters ad infinitum to weigh the relative importance of Twitter vs. bread in the fall of ousted President Hosni Mubarak, the more immediate question could be what comes next across Egypt's backyard: sub-Saharan Africa.

Thirty African countries are scheduled to hold elections over the next 12 months. The list includes food-scarce nations like Chad and Madagascar, alongside terminally unstable lands like Nigeria or the Democratic Republic of the Congo.

Think you know Africa? Take our geography quiz.

And yet, as of last month, food prices are already sitting on a record high. Last week, the United Nations announced average food prices climbed 25 percent in the past year, including a 3.4 percent jump in January alone.

"It's easy to see how the food supply can translate directly into political unrest," Lester Brown, founder of the Earth Policy Institute think tank in Washington, told The Guardian.

What's not easy to see, he added, is how the economy of what we eat will fundamentally improve over decades and elections to come.

To be sure, some of 2011's costly cuisine has been caused by short-term disasters, like erratic weather in Russia or bad crops in Canada.

But the affordability of food is also being undermined by longer-term trends, such as the growing chunk of farmland now dedicated to cultivating biofuels, or the emergence of China as a net food importer.

Underground water reserves in drylands like Saudi Arabia, Mr. Brown added, are on the wane. Plus, given the vagaries of climate change, Russia's wheat-withering changeable weather could prove to be a new norm.

"This isn't just about the Muslim Brotherhood and it isn't just about politics," the economist Jefferey Sachs told Reuters. "This is about hunger, about poverty, about food production, about a change of world economy. This is one large swathe of 10,000 miles of potential instability."

Further Evidence

In a Wall Street Journal interview, "Former Sun CEO Worries About Region's Prospects," Scott McNealy discusses what has happened to an area of the country that has -- had? -- long been seen as a hotbed of high tech innovation:

I see a migration from the early days of the Valley. We aren't doing manufacturing; we aren't doing design; we aren't doing computers. It's all moving to Asia and other places where there are lots of technical engineers who are willing to work at a more reasonable salary because they don't have to spend $3.5 million on a home and pay half of it to taxes.

I think every new transition has created less job opportunity as technology has become very leveraged. I don't think our education system, our regulations, our government policies have kept pace with the changes that technology is driving.

Maybe I'm sounding like an old guy, but [Silicon Valley] ain't what it used to be. I, for one, don't think this is the best place in the world to start a company.

Unfortunately, these are not the only issues, and they are not confined to the West Coast. Many parts of America have seen changes in perspectives and operating conditions that favor getting things done -- or produced -- anywhere but here, as the The New York Times suggests in "When Factories Vanish, So Can Innovators":

American manufacturers are importing more of the components that go into their products. The imported portion has risen to more than 25 percent from 17 percent in 1997, according to Susan Houseman, a senior economist at the W.E. Upjohn Institute in Kalamazoo, Mich. The Boeing Company, to consider one striking example, once bought all of its components from American suppliers, or made them in its factories here. Now the wings of several of its airliners are manufactured by Japanese subcontractors and shipped across the Pacific in giant cargo planes.

Foreign-made parts might also be infiltrating the sleek business jets that the Gulfstream Aerospace Corporation makes at its United States factories. Joseph T. Lombardo, Gulfstream’s president, says he isn’t sure, although Gulfstream buys components exclusively from American suppliers. “What I don’t know,” he says, “is how many of the parts in those components were imported by our American suppliers.”

It is certainly more than we measure, Ms. Houseman says. An accurate count would reduce manufacturing’s share of the gross domestic product, or total national output, to less than the 11.2 percent that the Bureau of Economic Analysis has reported through 2009, the latest figure available.

That 11.2 percent would be closer to 10.5 percent, if all of the imported components were counted as imported instead of domestically made. Even the 11.2 percent figure is down sharply from the 14.2 percent share of just a decade earlier, and the nearly 30 percent of the heyday 1950s, when almost every product bought by Americans was also made here.

Concern is increasing that this decline has gone too far. “I think there is a growing recognition that a diminished manufacturing sector will undermine our economy,” says Mark Zandi, chief economist for Moody’s Analytics.

In fact, as Mandel on Innovation and Growth reveals in "The Health-Education Decade," we seem to have kissed goodbye many years ago to the notion of developing an economy geared towards producing the things we need:

We might as well put the 2000s to bed completely.  From 2000 to 2010, health sector jobs grew by 3.3 million; Education sector jobs rose by 1.8 million; The rest of economy lost  -7.1 million jobs.

Here’s some more detail if you want it.

 

Here’s some more detail if you want it.

 

 All further evidence, I reckon, of an empire in decline.

Which Country Is Next?

For those who've been paying attention, it's clear that the upheaval we've seen in Egypt and elsewhere stems from a globally contagious shift in the social mood. Given that, most people would probably find it helpful (or even essential) to know which country or countries might be next. Thanks to The Economist, we now have a reference source, "The Shoe Thrower's Index," that attempts to answer that question.

An index of unrest in the Arab world

The chart below is the result of ascribing a weighting of 35% for the share of the population that is under 25; 15% for the number of years the government has been in power; 15% for both corruption and lack of democracy as measured by existing indices; 10% for GDP per person; 5% for an index of censorship and 5% for the absolute number of people younger than 25. Jordan comes out surprisingly low on the chart, which suggests the weighting might need to be tweaked.

The Middle Class Loses Out

In "We Don't Need No Stinkin' Jobs (in the U.S.)," Charles Hugh Smith, publisher of the Of Two Minds blog, highlights a development that's gone hand-in-hand with the polarizing and destabilizing rise in U.S. income and wealth inequality over the past several decades:

Global Corporate America has been decoupling from its country of origin for a long time, and the last weak bonds appear to be snapping.

Longtime correspondent Cheryl A. recently submitted this snippet from a recent The Atlantic article The Rise of the New Global Elite and this summary: "This is disturbing on so many levels."

The U.S.-based CEO of one of the world’s largest hedge funds told me that his firm’s investment committee often discusses the question of who wins and who loses in today’s economy. In a recent internal debate, he said, one of his senior colleagues had argued that the hollowing-out of the American middle class didn’t really matter. "His point was that if the transformation of the world economy lifts four people in China and India out of poverty and into the middle class, and meanwhile means one American drops out of the middle class, that’s not such a bad trade," the CEO recalled.
 
The growing dependence of Global Corporate America on non-U.S. growth and profits, and the concurrent rise of its political power at the expense of the middle class, is displayed in this chart:

Click here to read the rest.

Short-Changed

One theme I discuss in When Giants Fall is the geographical mismatch between supply and demand for many essentials, including energy, food and water.

Simply put, the biggest consumers aren't necessarily the biggest producers.

Knowing this, it's not hard to see why Africa, the "source of at least one-third of the world’s commodities," has attracted the interest of nations like China, where domestic consumption of various resources is outstripping what can be produced locally.

Unfortunately, that doesn't necessarily mean the people living there are reaping great rewards, as The Christian Science Monitor reports in "Hunger and Food Security: Is Africa Selling the Farm?"

Foreign investors see Africa as a breadbasket. Done well, investment could help with African hunger but create food security for the rest of the world.

In March 2009, civilian protesters led by a baby-faced former disc jockey swarmed through the streets of this hilly capital city. They were calling for the ouster of then-President Marc Ravalomanana for what they saw as literally giving away the farm, selling out his impoverished nation.

The anger was about food. Mr. Ravalomanana reportedly had leased 3.2 million acres – nearly half the island nation's arable land – to a South Korean conglomerate, Daewoo, for 99 years. In theory, it should have been a win-win deal: Daewoo would pay Madagascar $6 billion to grow corn and oil palm, helping South Korea meet both its food-security and bio-fuels needs, while providing Madagascar with revenues and desperately needed jobs.

But the protests, ultimately backed by the military, showed that the Madagascan people – 70 percent of whom live in rural areas and nearly 50 percent of whom suffer chronic malnutrition – saw the deal as a "land grab" and a threat to their country's survival. Ravalomanana fled the country within days, and a military-backed junta led by the young DJ, Andry Rajoelina, took control. The Daewoo deal was promptly scuttled.

"There was no process," says Hajo Andrianainarivelo, Madagascar's new minister for land management. "The head government official of the region just received an order from the president of the country to help the Korean people to find the most fertile land. That was it. You can't do that in Madagascar."

Perhaps not. But the attraction of Africa's last great resource – its fertile land – is drawing dozens of foreign corporations and even national governments to the African mainland, developing the same kind of agricultural plots contemplated by Daewoo in Madagascar.

Africa is drawing dozens of corporate giants like Daewoo and even governments of such nations as Saudi Arabia, the United Arab Emirates, Brazil, Japan, and even India (which is food self-sufficient) to grow the food and biofuel crops they need back home. The coup in Madagascar and food riots in Mozambique last August – which followed news of a similar food and biofuels deal with the European Union and Brazil – are a warning sign of the volatility of the global balance of wealth and poverty that foreign investors and African leaders face.

Click here to read the rest.

Hard to Argue About Mexico's Future

Richard Proctor of Cassandra's Hypothesis asks: "Will Mexico Follow Egypt into Collapse?":

Mexico seem likely follow Egypt into collapse within two years based on falling oil revenue and rising food prices:

• Mexicans spend about 22% of their disposable income on food. In 2010 corn prices increased 52% and wheat 47%. With the floods in Australia, ethanol in the U.S. and higher fuel prices it seems likely food will consume 50% of disposable income within a year. That is an average. There will be a critical percent of the population where food costs will exceed their disposable income. Hunger will amplify risks.
• Mexico's government gets about 40% of its revenues from oil. As noted in BP [Mexico-related] data complied at Energy Export Database, Mexico's domestic consumption (black line) will force its oil revenues (green area) to drop to zero within a few years. Egypt's oil revenues dropped to about zero in 2010.

Throw in the fact that the country is rife with corruption and suffers from extreme inequality, and I'd say it's hard to argue with the good professor's assessment.

Nothing to Worry About?

According to the Wall Street Journal, more investors are positioning for the possibility of a U.S. default:

The net notional amount of derivatives used to hedge or speculate against a default on U.S. government debt rose 12% in late January, according to Depository Trust & Clearing Corp. figures.

The increase suggests investors are becoming more nervous about the quality of U.S. debt. It also threatens to cast a pall over the notion that Treasurys are risk-free assets investors should run to for haven from other instruments.

The net notional of credit default swaps bought and sold on U.S. debt rose from $2.67 billion to just over $3 billion between Jan. 14 and Jan. 21, according to DTCC data updated Tuesday. The gross notional rose from $16.1 billion to $17.2 billion, or 6.8%.

When it comes to credit default swaps—more commonly known as CDS—gross notional refers to the amount of protection bought or sold in the aggregate. Net notional values are a more precise reflection of the amount of money that would change hands between net sellers of CDS protection and net buyers in a default.

Meanwhile, the cost of CDS on U.S. debt has risen 25% over the past month, to around 0.50 percentage point from 0.40 percentage point in early January, according to data provider Markit. A price of 0.50 percentage point translates to €50,000 (about $70,000) a year to insure €10 million of U.S. sovereign debt for five years, meaning the cost has risen by €10,000 a year over that period.

U.S. sovereign CDSs are quoted in euros, just as European sovereign CDSs are quoted in dollars, because swap buyers want to avoid the risk of a correlation between the value of their hedge and currency swings. If the U.S. economy nosedived, the dollar would likely fall as well.

CDSs in the U.S. have mostly traded around 0.40 percentage point since the credit crisis, but hit 0.50 percentage point in mid-August and late August last year and also in early February 2010.

The current CDS price implies a AA sovereign rating, not the AAA rating the U.S. enjoys, according to Markit.

Of course, if we assume that those investors who are betting that America will eventually be unable to pay its bills are of the same ilk as those who are buying stocks like there's no tomorrow, this development may prove to be little more than a storm in a teacup.

See, nothing to worry about. Right?

A War By Any Other Name

(Image: source.)

A rose by any other name would smell as sweet.
-- Romeo and Juliet, William Shakespeare

It's not a pleasant aroma, but it smells like something big is brewing near the Mexican border. In "Pinal Sheriff Expects Armed Conflict With Cartels Soon," The Arizona Republic reports on a development that may well mark the next phase of the so-far-undeclared war on our southern flank.

Pinal County Sheriff Paul Babeu is anticipating an armed conflict between his deputies and cartel members within the next 30 to 60 days.

Babeu made that prediction last week as he addressed an Ahwatukee Foothills Republican women's club, and reiterated it Tuesday on the heels of a speech by Homeland Security Secretary Janet Napolitano asserting that border communities are safer than ever.

A gunbattle is all but certain, Babeu told The Arizona Republic, because his deputies and members of a regional SWAT team are now routinely working to stop smugglers from pushing cargo through Pinal.

 "We have had enough," Babeu said. "That's why we're going into these areas and sending a very clear message to the cartels: We see you and we're not going to let you through."

An outspoken critic of U.S. immigration policy, Babeu said cartels have stepped up their tactics in Pinal County by reinforcing smuggling routes with armed guards to ward off potential bandits, in addition to stationing more lookouts on high points of the landscape. Some bandits are impersonating police, Babeu said, and he worries that smugglers won't know the difference.

"When we announce ourselves in Spanish, 'This is the sheriff, drop your weapons, this is an arrest,' I pray every time they will surrender," Babeu said. "In the event that any of them decide to point their weapons at our deputies . . . my directive is there had better be rounds going downrange to neutralize that threat."

Summing Things Up

I think this snippet from Some Assembly Required pretty much sums up where things stand when it comes to today's geopolitical realities:

One Size Fits All:  US State Department Press Release: “We continue to monitor the situation and are very concerned about recent events in ______. We call for restraint on both sides. We urge President/Prime Minister/King ______ to facilitate dialogue and provide concrete steps towards a peaceful resolution.”

Not exactly the words of leadership and authority you'd expect to hear from the world's sole superpower during a crisis. Right?