Archive for January, 2008

Olmert, we learn, made a “reasonable” choice in sending 30 Israeli soldiers to die in the last day of the war. His management of the war, also, was “reasonable.”

Judge Eliyahu Winograd, issuing the panel’s final report on the Second Lebanon War, told a packed auditorium in Jerusalem that the war ended without victory and the army did not provide an effective response to Hizbullah’s rocket fire on Israel.

He also said that while the cabinet decision to embark on a ground operation was correct, the last-minute ground offensive did not improve Israel’s position and there were “serious failings” in army command.

He said that both the military and the political echelons were responsible for the tardiness of the ground offensive.

Winograd went on to say that “Israel’s decision to go to war without necessary preparations was a severe failure.”

He went on to say that although the report does not hold specific individuals responsible for the war’s failings, this does not mean there is no personal responsibility.

Earlier, defense officials said that the final report concluded that Prime Minister Ehud Olmert did not fail in his handling of a key battle and that his decisions were reasonable.

Basically, he’s saying Olmert is at fault, without saying so where it matters. Pathetic.

I am about to say something I knew I would never say: The CIA was right. Israel is too myopic to be a credible ally. I am already grappling with schizophrenia as I type: one side of my brain is still telling me that the CIA can never be right about anything. Somehow, contrary to everything I have ever known, the CIA has called the ball perfectly on this.

Anyway, as I posted yesterday, if the Israeli public were serious about allocating responsibility and preventing future failures, it would have already brought down the Olmert government. There was no reason to expect a sheaf of paper to do the Israeli public’s work for it. Israel’s future is much bigger than one much-delayed report, and a nation serious about its future would not have waited eight months before acting on what everyone already knows.

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Required reading

I am a huge fan of Professor Michael Pettis’ “China financial blog“. He has two long but very worthy posts up for anyone interested in a less in-the-clouds, more realistic perspective on the Chinese economy:

  • The new China-Europe-US world order” :: Prof. Pettis heaps scorn upon the latest outbreak of Sinosupremacism, a typically in-the-clouds piece by an NGO baby who (yet again) extrapolates China’s bogus figures out 30 years into the future and prognosticates the end of American hegemony.
    • There is a longish and much-discussed article in this Sunday’s New York Times (“Waving goodbye to hegemony”) by Parag Khanna, a senior research fellow in the American Strategy Program of the New America Foundation, which strikes me as a sort of compendium of a lot of fashionable and muddled thinking about the evolving geopolitical order. […]  when it comes to the hugely symbolic acts of rising powers, I think Japan in the 1980s blows out all of the current contenders – although perhaps Khanna is not old enough to remember.


      Khanna supports his analysis by pointing out that in the past two years he has visited forty countries around the world, but at the risk of sounding like a world-weary snob, this does not impress me much – in fact I am a little worried by the Starbucks school of comparative politics.  It reminds me of something a Canadian China scholar once told me – for him the biggest difference between China experts who have never visited China and those that visit twice a year is that it is sometimes possible to convince the former when they are mistaken.

  • Things have gotten grimmer in China” ::
    •  Last Thursday Premier Wen Jiabao told the State Council that 2008 was going to be an extremely difficult year – an extraordinary admission by some accounts and indicative of how much pressure he is under.  Rising inflation and energy shortages have been made worse by the huge snowstorm that has hit the country, severely damaged crops, and closed train lines just as Chinese families were gearing up for the all-important Spring Festival, driving food inflation before this all-important family holiday much higher.
      Rumors are flying about the possibility of a reversal of the tightening measures announced last October. […]

      … On the other hand overheating has been a serious problem for the Chinese economy and if 2008 were to experience the same breakneck growth as it did last year, the adjustment will almost certainly be more difficult.  If the US slowdown is not as great as some think it might be, or if its impact on Chinese exports is less than many worry, expansionary policies in China may set off one last, crazy bull run.


      On the inflation front the news is even grimmer.  The rate of inflation will almost certainly rise in January. To above 7% from 6.5% in December and 6.9% in November, even in spite of downward pressure put on it by recent government measures to make holiday conditions as good as possible – selling off food reserves and freezing price increases.  That almost certainly means that there will be more inflationary pressure in March and thereafter as these measures are unwound. …

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Supposedly, the Baltic Dry shipping index is a very reliable forward-looking commodities indicator. Basically, if shipping falls, commodities will almost certainly fall in the not-too-distant future. Shipping is a lot like refining: when demand is above capacity, prices soar, and when demand is below capacity, prices plunge. So volatility is the order of the day, and a “Black Monday” does not mean a 3% drop; it means a lot more than that.

Commodities hounds have noticed that the Baltic Dry Index has tanked 40 percent since November. Bearish for commodities, right? You would think so … except ….

A recent theory doing the rounds of the shipping and commodities world lays blame for the slide in dry bulk shipping rates – and consequently the BDI – on a single Taiwanese shipping magnate: Nobu Su, whose privately held Taiwan Maritime Transport is the largest participant in shipping futures markets, according to the FT’s transport correspondent Robert Wright.

Wright reported last week that Su denied playing a pivotal role in the past few weeks’ decline of dry bulk shipping rates, saying it resulted from fundamental market changes.

But participants in dry bulk markets have attributed the decline in rates from last year’s record highs partly to TMT’s heavy betting on a fall in futures markets. There have also been claims from competitors that Mr Su, chief executive, has helped to push rates towards his position by chartering out some of his 130 ships at below market rates.

TMT excites strong passions because of its reputation for making large — and often successful — bets on rate movements in the futures market. It is also unique among large futures market players in owning a substantial fleet of ships.

Not surprisingly, Su through his spokesman told Wright he could not have moved the market on his own. “It’s no longer the case that one man could single-handedly influence the direction of the market,” he said.

On the claim that TMT was chartering ships at below market rates to bolster its futures position, Su said he simply aimed to get the best price. Sometimes it’s below the market average, sometimes above,” he said. “It just depends on the price we’re offered.”

In a separate post for FT Alphaville last week which contains a beautifully clear explanation of BDI mechanics and the fallout from the SocGen trading scandal, Wright examined the conspiracy theories about falling commodities prices because, he said:

Before Thursday’s SocGen revelations, analysts had found a new favourite indicator to justify falls in equity prices. It could be, of course, that the many analysts who have talked up in the last fortnight the significance of the plunge in the Baltic Dry Index — it’s down 40 per cent from its record peak in November — are long-term, serious students of freight rates.

A bullish factor for commodities in the medium term.

Furthermore, proprietary research indicates that the rising price of oil will be easily offset within the dry bulk industry by increased coal shipments. The business is still exploding. Credit is still soaring. All levers are reflating. The monolines situation will resolve itself much more efficiently, as Berkshire takes over the business.

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If gold were dumped because of the poor economic numbers (implying lower liquidity expectations) then it should have bounced back somewhat as expectations of a larger Fed cut would have increased.

Seems like somebody expects a lower than anticipated Fed cut today. If history is any guide, that’s a very dangerous bet …

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We now know that the European Central Bank bailed out Spanish banks to the same tune that the UK bailed out Northern Rock (although not nearly as much as the FHLB and Fed have in the United States).

This kind of secretive bailing out reinforces my conviction that central banks must be abolished. European savers were taxed without their knowledge, to save some overspeculative Spanish banks.

When I blew up not so long ago, I didn’t get a dime’s worth of repos, interest-rate basis points, discount FHLB loans, or discount Fed loans. And I didn’t deserve any.

Neither do these people.

The ECB seems to be trying to have it both ways, taking a publicly hawkish stand while quietly funneling bailouts to the worst-afflicted banks. It all amounts to politically driven currency devaluation. It’s yet another reason to go longer on gold. The exporter central banks, with their trillions of depreciating euros and dollars, haven’t even begun to crack.

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Two columns by respectably sentient market commentators today:

Ben Bernanke at Year Two

By John Tamny
This week marks Ben Bernanke’s second anniversary as Chairman of the Federal Reserve. Since his nomination in 2005, the dollar has plummeted against major currencies worldwide, while the price of gold has nearly doubled on its way to an all-time high. And with both domestic and world markets presently gyrating due to monetary and economic uncertainty, his stewardship of the world’s most important central bank is increasingly being called into question.

Unhappiness with Bernanke might surprise some considering the mostly glowing praise he received upon his nomination over two years ago. Though he possessed a conventional academic background, he was thought to be open to classical views suggesting economic growth is inflation’s worst enemy, that marginal tax cuts are useful for facilitating long-term growth, and that the price of gold is an important signal to follow when it comes to understanding the existence (or lack thereof) of real inflationary pressures. Bernanke was seen as a worthy successor to Alan Greenspan, and one who would soothe investors understandably fearful of change at the top of the Fed.

Two years later stock markets and the economy are as mentioned uncertain, and contrary to assumptions from the past suggesting he was open to classical ideas, his public utterances since then have shown him to be every bit the conventional academic so many investors hoped he was not. Perhaps owing to the latter, investors are disappointed, but they should not be surprised.


Some might say we should be surprised by the state of things, but that’s unfair. Bernanke gave fair warning of who he was long before his nomination. Instead, blame lies with a Bush Administration that failed to do its homework on Alan Greenspan’s replacement. And with that same administration lacking any dollar policy other than one of “benign neglect,” it has essentially outsourced its policy to Ben Bernanke, a Fed Chairman whose seeming countenance of dollar weakness weighs on the Administration’s approval ratings like no other policy today.

To which I say, “Dead on.”

There was also this bit by Robert Samuelson:

Hordes of money managers, commentators and economists have joined Cramer in ridiculing Bernanke and other Fed officials. They’re “clueless” and “behind the curve.” The blunt message: Cut interest rates; revive the economy; boost stock prices. …

… Whenever either seems threatened, there’s a clamor for action. Last week, Bernanke’s Fed seemed to capitulate by cutting its overnight Fed funds rate from 4.25 percent to 3.5 percent (as recently as mid-September, it had been 5.25 percent). Another cut could come this week. Of course, the Fed doesn’t think it was surrendering to critics. Instead, it was trying to avert a financial stampede. … The trouble is that this may be a distinction without a difference, because market sentiment — what sends prices up or down — is heavily shaped by the financial populists operating through the business cable channels, Internet-distributed commentaries and print press. There is a vast echo chamber in which if something is repeated often enough, it becomes its own reality. …

The “echo chamber” is in full force because the traders know what a weakling Bernanke is. It’s not any kind of grand conspiracy; it’s just something that they all understand — that Bernanke lacks the private sector standing and experience to stand up to apocalyptic fearmongering from traders who had made the wrong trades. The traders also know that Bernanke is tacitly auditioning for a reappointment under a Democratic administration, and he is going for broke.

Greenspan knuckled under a lot of the time, but there were also (a few) times when businessmen would whine for rate cuts, and Greenspan would, in so many polite words, tell them to shut up. Bernanke can’t even do that much.

And, well, this is a pointless request, but I am so tired of hearing academics pontificate about liquidity. Larry Summers, Bernanke, Mishkin, and the lot of them have never executed a single trade in their respective lives. Unless you have executed trades, or overseen trade execution, you are almost certainly clueless about liquidity. It’s obvious that Mishkin, Summers and Bernanke don’t.

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The one rationalization I have gotten from the National Intelligence Estimate, a revolt by the CIA, DNI and probably the Navy which crushed America’s negotiating leverage with Iran over the future of Iraq, is that Israel cannot be a credible linchpin of American foreign policy after Hezbollah defeated them in 2006. Adding insult to injury, Israel further wrecked its credibility by allowing Ehud Olmert to keep power after the Israeli military’s biggest institutional failure since the Yom Kippur War of 1973. Basically, Olmert’s coalition partner, Labour, must put off a new election for as long as possible in the hope of turning its abysmal poll numbers around. Binyamin Netanyahu’s strategy of bolting from Ariel Sharon’s Kadima party has paid off, and Likud is poised to return to power in the coming election. Labour’s ideology of diplomacy with the Palestinians has fallen completely out of favor with the Israeli public. Their mooring to Olmert, combined with Labourite Defense Minister Amir Peretz’s shambolically politicized performance during the Lebanon war, have crippled Labour’s credibility.

Israel established a “blue-ribbon commission,” the Winograd committee, to ruthlessly analyze the what, when and why of Israel’s 2006 failures. Somehow, Olmert has apparently suppressed its findings for over a year, with the tacit support of Israel’s discredited Labour establishment. Israelis have not waited with such baited breath on one set of findings since they waited for Moses at the bottom of Mount Sinai.

Every “political analyst” thinks that the Winograd report will destroy Olmert, whenever it comes out. But everyone already knows Olmert and his clique performed disastrously. I am not sure what this changes, really. It’s analogous to publishing the number of bullets that hit somebody a year and a half after s/he was murdered. Everyone has already moved on.

Anyway, the FT thinks this will be a big deal.

Lebanon verdict puts Olmert in line of fire

By Tobias Buck

Published: January 29 2008 01:02 | Last updated: January 29 2008 01:02

They call him the “Houdini of Israeli politics”, but Ehud Olmert may well need more than the skills of the famous escape artist if he is to survive the latest challenge to his embattled tenure as prime minister.

On Wednesday, the high-profile Winograd committee will publish its findings into the government’s handling of the disastrous war in Lebanon in July and August 2006.

The report is widely expected to criticise Mr Olmert’s leadership both in the planning and execution of the war. Even before publication, it has triggered a wave of protests by the prime minister’s domestic opponents and families of soldiers who died.

The report will focus on the final two days of the conflict, when Israel threw its troops into a last-ditch battle against Hizbollah forces in southern Lebanon. The final assault was intended to inflict severe damage on the militia before a UN-sponsored ceasefire took effect on August 14. But the poorly executed attack changed little on the ground, and Hizbollah’s tough resistance killed 33 Israeli soldiers.

The episode came as a shocking blow to an Israeli public that is deeply attached to its revered armed forces and expects elected leaders to show a high degree of military competence.

Mr Olmert has declared that he will not step down in the wake of the report, and the Winograd committee is not expected to issue a direct call for the prime minister to leave office.

… But the man who may feel the pressure of the Winograd report even more intensely than Mr Olmert played no role in the war at all. Ehud Barak, the defence minister and leader of the Labour party, returned to politics only last year, joining Mr Olmert’s government more than 10 months after the last shot of the Lebanon war was fired.

In a promise that has come back to haunt him, Mr Barak at the time vowed to pull Labour out of the coalition government headed by Mr Olmert’s Kadima party after the publication of the Winograd committee’s findings.

The former prime minister now finds himself facing an unenviable choice. He can stick to his pledge, bring down the government, and force new elections.

But according to all opinion polls, a fresh vote would further reduce Labour’s seats in the Knesset, the Israeli parliament, and return his arch-rival, Benjamin Netanyahu of the right-wing Likud party, to the prime minister’s office.

To make matters worse, that outcome would almost certainly put an end to the Israeli-Palestinian peace talks – which enjoy the support of Labour voters.

Or Mr Barak can break his promise, and retain Labour’s crucial backing for the Olmert government. The defence minister knows, however, that this would deal a severe blow to his credibility and expose him to harsh attacks from both inside and outside the party.

Moreover, staying in the government may merely prolong the inevitable, with Mr Olmert’s fragile coalition already crumbling at the fringes.

Some officials and analysts point to a middle way. According to their scenario, Mr Barak could either force Mr Olmert to agree to early elections maybe a year from now, allowing the government to continue the peace talks and giving Mr Barak time to reverse Labour’s standing in the polls.

Or he could call on the Kadima party to replace Mr Olmert with another leader – most likely Tzipi Livni, the foreign minister – in return for staying in the coalition.

The ambitious Ms Livni has made no secret of her desire to replace the prime minister, and she and Mr Barak are said to have a good working relationship.

Without knowing the precise content of the report Israel’s political scene has entered a phase of fevered speculation. Mr Barak has so far refused to clarify his position, stressing that he will read the report first before deciding on a course of action.

For Mr Olmert, however, one thing is already clear. No matter how ingeniously he performs over the coming days, the fate of his government is now at least partly in the hands of Mr Barak.

The damage has already been done. Israel’s pathetically myopic execution of the war, and irresponsible aftermath, have damaged its credibility permanently. The United States’ Middle Eastern policy can now be summarized as “sustainable withdrawal.” Israel is a credible investment only insofar as it can exert vastly disproportionate leverage over Middle Eastern affairs, and it was manhandled by one arm of the Iranian state. Meanwhile, its politicians prefer throwing away the lives of Israeli soldiers to assuming responsibility.

Israel will be fine without the United States. It will always be a Jewish Switzerland, and Russia’s perpetually insecure Jewish oligarchs, e.g., Lev Leviev (diamonds), Roman Abramovitch (oil) and others, will always need a haven. (That was why Russia and Israel agreed to mutually unfettered immigration — russki have no interest in Israel, and Russian Israelis have no interest in going back, but Russian Jewish oligarchs need a place to go on very short notice.)

But the American-Israeli romance is drawing to a close.

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