32 GAMES LATER...

Time has come now for some musings about this tournament… It is bound to be relatively uncontroversial, and, mind you, it is coming from far afar from any reputable soccer-lands.

My first grown-up decision was not to watch the game with the ubiquitous Irish accent this year. Instead, I am watching “la copa del mundo” led by the inimitable Fernando Fiore and a crew including, among others, the unforgettable Paraguayan goalkeeper Chilavert. Granted, he is no Gunter Netzer, but at least his analysis of goalkeepers’ work is worth its every Guarani-accented syllable.

As much as the initial 16 matches infused me with deep disappointment over the quality of the game (and I am not spoiled by the Champions League – unavailable here unless you pay extra for ESPN), the mid-point is bringing some more constructive thoughts.

I will not dwell here on the quality of the referee work. I think we all agree that a Mali guy permitting Greek-Roman wrestling during Slovenia-USA game and then annulling a US goal to expiate himself was out of his bald-headed depth. A Guatemalan dude whose main job was to be impressed by World Champions’ captain and offer a PK against New Zealand should have his eyes gouged by flightless birds. Allowing Luis Fabiano to score while helping himself with his arm must have occurred only to a guy in awe to his own wet dreams about Gerson and Tostao. And sending off Klose against Serbia was somewhat light-headed, to say the least. But nothing beats referees’ deference to guys who find face-magnets in their fingers. This is how a French referee was conned into sending off Kaka, and a day later another referee sent off Switzerland’s Behrami (whose arms should have been flying a little less ‘free style’, given Kaka’s experience a couple of hours before). These decisions are a disgrace. Does FIFA really have to enlist Mali, Guatemalan and Frogland referees just to make it “international” ? I fear the day when a game is adjudicated by a man from Somaliland.

So let’s get back to the game now.

It was supposed to be Africa’s World Cup. The only true authorities about the beautiful game, such as the revered sports magazines in the United States, had proudly proclaimed that the tournament prefigured “The Rise of the African Soccer”. For anyone who traveled around Africa, this bold statement would have come as a little surprising. Soccer needs not only talent, but also capital, local follow-up system, organization, corruption-limiting third party oversight and a ticket-paying fan base. None of this exists even in the most successful countries of West Africa. To top it all, the highest FIFA-ranking African team has not even qualified for this World Cup (Egypt, starring a new player by the well auguring name: Zidan). The result? Africa is 1-4-7 after the initial games and chances are that not even Ghana will qualify for the next round. Ghana may be the best organized of all the African squads, and the author of the continent’s single win thus far, but even Gyan & Co have trouble with finishing touches and score only on PKs. The only other positive surprises from the host continent were individual – such as Algeria’s stout Boughera or Ivory Coast’s tireless Gervinho.

Yet, the haplessness of Afrikan football is mindboggling. From South Africa’s :”ticky-ticky”, through Etoo’s unbelievable disappearance in the hands (feet?) of Japan’s Nagatomo, to Nigeria’s utter emotionalism (and self-inflicted red cards), all the way to Ivory Coast’s ueber-hard tackle – this tournament is anything but Africa’s. Send your boys to Europe and forget about bringing them back, you losers.

Next in line comes Asia. Despite plucky Japan’s and South Korea’s initial wins, the tiny players somehow can’t rise to the next level. Surely, these two sides have potential, but it never comes anywhere near the high-league level. Australia’s move to Asia’s football association deprived Uzbekistan (or is it Iran?) of the even more pathetic showing. Then, there is Kim Jong Il and his tearful squad stuffed by Japanese-born ethnic Koreans. The fact that they chose to play for the red star team (rather than for South Korea, or Japan) tells us more about Japan’s (and UN’s) problem with sanction-breaking ‘Chosen Soren’ in Osaka, than about the quality of North Korean soccer. Add to this a bunch of Chinese “fans” for whom Kim Jong Il’s regime bought tickets to cheer on the untravelled national side and you have the result. Portugal’s 7:0 comes close to the 1974 records of Yugoslavia-Zaire and Poland-Haiti. Good riddance to the North Korean military. I wonder what they are going to do now? Commit ritual suicide? Defect? Go back to toil on potato fields? The fantastic forward Jong Tae-se will probably go back to being Japan League’s top striker. The commie dream is over. The (real) Asians stand at 2-0-4.

Then we have the (non-European) Anglo-Saxons. This time Australia has disappointed, and the US – always an unknown quality to heavyweights – is yet to clinch the qualification. But the nicest, most unspeakably thrilling surprise came from New Zealand – the only country (next to North Korea) without any professional league. The fact that they could notch 2 points in just as many games is a great testimony to the mates’ dedication to this game. The Anglo-Sax group stands at 0-5-1.

Next comes Eastern Europe. Despite all the oligarch money, Guus Hiddink’s Russia did not make it here. This bodes poorly for the likes of China (or India) which may try to buy their way into future world cups. Instead, we have Slovenia – which is leading its group, the ever-unpredictable Serbia cheered on by fascist-clad fans whose military caps are somehow allowed into the allegedly post-racial South Africa, the dejecting Slovaks and the drab-as-usual Greeks (I know, they were not part of the Eastern Bloc, but they are Orthodox, further east than anything else in Europe and their soccer is the dullest of all). Despite the fact that the best team from this part of the world (Croatia) is not here, the group is actually outperforming the expectations, with 3-2-3. I suspect the 1/8s will be as far as they go. Or have you seen a Stoichkov, or a Hagi, or a Lato? I have not.

This brings us closer to the source of all the moans. Western Europe. With a tally 7-5-6, the score of unfulfilled expectations is brimming. But I guess these sides are firming up. Two of them have a real problem, though. One is France. Bringing to South Africa suspected pedophiles was a bad idea. It now turns out that they (led by their token white bloke – Ribery) terrorize the rest of the squad. Most non-French believe that the team should not be in South Africa in the first place, given Henry’s hand-driven goal against Ireland. Aren’t the French stars apt at destroying their own legacy with last minute outbursts? (think Zidane). In any case, the Afro-French team has a real problem – its coach has lost control. Three pieces of advice. Leave criminals at home. Get a coach who does not understand French (insults addressed to him by Anelka or Malouda). Try to score with any part of your body, except your hands and family jewels.

The next on the list of troubled nations is less surprising in this tournament – the perennial underachiever (and inventor of excuses for its underachievements) - England. A couple of weeks ago, at a European airport, I spotted a British tabloid asking with big titles – “who is the best player in the world: Messi or Rooney”. I beg your pardon? I never knew I would enjoy the British sense of humor that much. What a delicately skewed pique!!! Masterful. By the way, seen Rooney in the last two matches? In a more serious British newspaper this week, a gum-in-chin comment reads: “plucky England holds off mighty US and almost wins against Algeria”. Apt indeed.

Next would be Italy. Here, at least, you can give them some credit. Yes, their penalty area theatrics is risibly passé. Yes, they have the custom of starting out in a rusty manner. And yes, New Zealand are a formidable foe (sorry, I needed three reasons, it’s the style thing). But it is true – spaghetti soccer oldies do not even have a single top 10 world star in the line-up. Doesn’t it make their expectations a little lower this year? I guess so.

Then there are the statisticians. They looked at Spain and concluded that no team ever became a world champion after losing the opening game. And only Germany followed up on the European Championship with the world crown two years later (1972-74). Ergo, Spain is out. Not quite. True, Iniesta is failing and Torres in poor form. But there are countless inferior teams around. The real trouble for Spain and for the soccer spectacle is that the diagonal Barca-style has been deciphered not only by Mourinho’s Inter, but also by Swiss coach Hitzfeld, and possibly by many others (though not Honduras). The side is not infallible. Shame about the timing.

Germany had the only impressive opening among the first 16 games. The Polish-born fronting duo, supported by a new Turkish star in the middle and a young Tommy Mueller seemed to get it all right. Then, reduced to play with one man down, die Mannschaft revealed the weakness in its substitutes. Germany could always boast the depth of its squad. If not Netzer, then Bonhof. If not Voeller, then Bierhoff. If not Ballack, then Ozil. But, in turn, Ozil, Podolski and Klose are hard to replace. Marin has been given blinkers against low-hanging South African sun and thus finds it hard to believe there are any teammates raound, Cacau rams single-mindedly through the middle and Mauro Gomez hardly gets anything spherical in his vicinity. Joachim Low has spent some time cracking Ghana. My bet is that Germany will send the only decent African team home. But later?

Then we have Holland. Star-studded and famed to be the next best thing after gouda (and Cruyff), the side came here to reclaim its rightful place. The Dutch are soccer mad (though, apparently, Norwegians are madder). My partners in Amsterdam seem to have stopped working 10 days ago. And the results are coming (not in terms of the company’s performance, but in soccer terms). But results only. I do not know if this is down to Robben’s absence, or the dehydrating altitude in Joburg, or the fact that Afrikaans does not conjugate Dutch verbs, but the van Pierse/Sneijder side has been the shadow of its own expectations. And the back does not seem to support the movement as in the eras of Krol, Koeman or de Boer. We want more. Begrijp je me?

Portugal? Still hard to judge them after the second half against North Korea turned into training practice. There is potential here, with Cristiano Ronaldo taking Deco’s directing role with some bravado. But can they beat Chile or Spain?

Of the less fancied teams, both Denmark and Switzerland have a chance. Denmark needs to knock out Japan. Tough, but not impossible. Switzerland needs a high score against Honduras. The Swiss side are the authors of the biggest sensation of the first round and they boast Diego Benaglio – probably the best goalkeeper of this tournament (this is, in any case, Jose Chilavert’s view).

All this brings us to what we quietly expected from a tournament taking place outside Europe. In 70 years, never did a European team win World Cup outside what Norman Davies calls a “Penninsula” – an appendage to Asian landmass. Due to Africa’s meltdown (or rather freeze-up, given the glacial age temperatures in Joburg), the responsibility to edge out Euro-trash teams falls, once again, on Latinos. And indeed, the first 32 games produced an impressive result – 9-2-2, with the two defeats by Honduras (one in the hands of another Latin American team).

There is a lot to celebrate here. Mexicans finally came with a full-control game against the Afro-French disarray. Paraguay almost plucked away Italy. Chile has a consistency and great talent, if not always the finishing execution. From this list, the most impressive is possibly Uruguay. Forlan’s incredible footwork, rat-sneeze shot and midfield command make him into one of the grandest figures of this tournaments so far. Uruguay produces a memorable player every decade: Mazurkiewicz, Francescoli, Recoba. Forlan could yet be the best of them all if he can fully count on the team’s support.

Which leaves us with the two contrasting sides: the touch’n’pass Argentina and the long-cross-ball Brazil. Argentina shocked die Zuschauer back in March, when they beat soporific Germany 1:0. Still nobody cared. After all, a cocaine addict runs the team, so what’s the big deal? But can anyone stop Messi’s uebermenschlich footwork? Hardly. Maybe, by taking the ball from Mascherano, so that it never gets to Messi.

This should be Brazil’s plan. After all, the two are bound to meet in the semi-final and then one of them will head to a final game that could oppose either of these teams against Germany or Holland. Dunga’s team is more like Dunga-the-captain’s team of 1994. Not once since Paolo Rossi trounced the Falcao/Zico/Socrates magicians, did Brazil again try to play for the sake of beauty only. The way Maicon broke through North Korean (Chinese?) wall was the apex of the unexpected. The way soccer should be. Brazil does seem to be a little messy, it breaks the rhythm, it does not dance. But it finds imaginative ways into the net, eventually. That counts. And you have to add to it Gilberto Silva’s astounding long crosses (I always thought Philipp Lahm was the best human in this department, but now he has competition).

The spectacle is improving. We had some spectacular goals – Tschabalala’s (RSA) against Mexico in the opening game. Heintze’s (Arg) header against Nigeria. Park Ji Sung’s (S.Korea) bolt netting against Greece, Forlan’s (Uruguay) first against RSA. Macoin’s acute angle shot into North Korea; two similar rockets – by L.Donovan (US) against Slovenia and by Luis Fabiano (Brazil) against Ivory Coast. But Podolski (Germany), Gerrard (England), Birla (Slovenia), Vera (Paraguay), Tiago (Portugal) and Villa (Spain) also showed flashy and effective execution.

Individually, who were the best players? There are already a couple of stand-outs. In the goal: Enyeama (Nigeria), Sorensen (Denmark), Julio Cesar (Brazil). Among the full-backs – Criscito (Ita), Demel (Ivory Coast), Grichting (Switzerland), Lugano (Uruguay), and Chipperfield (Australia). On the side, the defending stand-outs were Glenn Johnson (England), Zambrotta (Italy), Salcido (Mexico), Cherundolo (US). In the midfield – Mbia (Cameroon), Simon Paulson (Denmark), Gerrard (England), Malouda and Toulalan (France), Mueller (Germany), van Bommel (Holland), Gervinho (Ivory Coast), Riveros (Paraguay), Fabio Contrao (Portugal), Birsa (Slovenia) and Tschabalala (RSA). And up front, we have Tevez (Arg), Robinho and Luis Fabiano (Brazil), Sanchez (Chile), Heskey (England), Podolski (Germany), Gyam (Ghana), Elia (Holland), Honda and Matsui (Japan), Martins (Nigeria), Jong Taese (N.Kor), Cristiano Ronaldo (girl scouts), Villa (Spain) and Altidore (US).

Naturally, this leaves out my own top 11, which goes like this:
Benaglio (CH) – Heinze (Arg), Boughera (Algeria), Nagatomo (Japan), Lahm (Germany) – di Maria (Arg), Gilberto Silva (Bra), Ozil (Germany), Forlan (Uru) – Messi (Arg), Krasic (Serbia).

Can you get a better one?

FROM 2008 TO 2009

For those of us who have made through it, 2008 might well be remembered for personal successes and achievements, but collectively it has certainly set the world back, at the very least in terms of its wealth, health, environment, security and stability. With the possible exception of scientific progress, the faith in linear historical developments has now been duly, albeit belatedly shattered.

This surely makes us wiser. Yet, by itself, this is not a reason to gloat. As Vernon Sanders Law once quipped: "Experience is a hard teacher because she gives the test first, the lesson afterward". And so, let us bid farewell to 2008 without nostalgic sobs. We may in future remember it as those inexplicably 'hard' teachers from schools. In other words, we will remember 2008 better than other years.

Below are THREE LISTS of various events which occurred in 2008 and, deservedly or not, may linger in our memory. I begin with (rather obvious) negative headlines. This is followed by my own very personal view of what was positive throughout 2008. The third list focuses on the absurdities whose copious supply the passing year ensured regardless of the latitude, longitude and season.

The following TWO LISTS shift emphasis to the uncertainty surrounding the upcoming 365 days. I first review the risks of varying impact and probability of occurrence. Finally, to end on a perhaps naively positive note, I outline my wishes for 2009. They range from perfectly possible to nonsensically dreamlike. But then, the beauty of these times is that we are still free to dream. And to blog freely about it.



2008 - THE BAD:
1. Financial crisis deepens (Societe Generale, Bear Stearns, AIG, Freddie and Fannie, Lehman, fund redemptions, Madoff scandal). Severe liquidity breakdown. Volatility at all-time high. Spreads rocket. Markets collapse.
2. Economic crisis begins: US, China, Japan, Europe, emerging markets are all affected. The immediate response stinks socialism, but not (yet) protectionism.
3. Russia invades Georgia
4. China destroys Tibet
5. Cyclone in Burma
6. The situation in Afghanistan worsens
7. Zimbabwe violence, false hopes and misery
8. Terrorist siege of Mumbai
9. Sichuan earthquake
10. Kenya tribal violence
11. Iran is building up its military capability
12. Crude oil at $147/b
13. Rice prices destabilize markets in West Africa and Southeast Asia
14. Irish referendum freezes Lisbon Treaty
15. Iceland collapses
16. Near defaults in Hungary, Argentina, Pakistan, Latvia, Bulgaria and South Korea
17. Sarah Palin’s neo-fascist harangues stigmatize the ‘bad people’
18. Israel attacks Gaza in response to Hamas’ provocations
19. Fighting resumes in eastern Congo
20. China poisons milk, and not only milk
21. Rioting becomes politics in Thailand
22. Youth riots in Greece
23. Somalia’s piracy proves a rare winner in the Year of Losers
24. Al Qaeda successfully destabilizes Pakistan
25. The Jeremiah Wright case raises questions about Obama’s judgment
26. Clinton as a Secretary of State raises such questions a notch further …
27. Governor affairs reveal the corrupt nature of US politics – from Spitzer to Blagojevich
28. China’s Communist-nationalist propaganda nauseates in “Olympic” sauce
29. Power crisis hits South Africa and China. Supply constraints fuel coal price boom.
30. Doha Development Round negotiations fail
31. Venezuelan nationalizations
32. Fascist upbringing for Russian youth intensifies
33. German politics loses its Right
34. Israeli politics loses its Left
35. Sectarian violence in Nigeria
36. Violent riots over alleged election fraud rock Mongolia
37. Typhoon in the Philippines
38. Hurricane in Haiti and Cuba
39. NATO fails to agree a Membership Action Plan to admit Georgia and Ukraine
40. Tensions in the Turkish and Iraqi Kurdistan pit Ankara against PKK’s positions
41. Maoist Sendero Luminoso reappears in remote regions of Peru
42. Polar bears on endangered species list
43. Saddening departures: Edmund Hillary, Mahmoud Darwish, Bobby Fisher, Harold Pinter, Sydney Pollack, Robert Rauschenberg, Alexandr Solzhenytsin, Paul Newman, Hector Zazou and Lars Hollmer



2008 - THE GOOD:
1. Obama won !!!!!
2. After 13 years on the run, Radovan Karadzic is caught in Belgrade
3. Ingrid Betancourt freed in Colombia shortly after Bogota hobbled FARC’s operational capability in Ecuador
4. Iraq’s (tentative) improvements in State building
5. Some Olympic glory (mostly Jamaican and in the fish-swimming events)
6. Pervez Musharraf bows out in Pakistan
7. Doha compromise averts further bloodshed in Lebanon
8. Constitutional crisis in Turkey avoided when the Court rejects a call to ban AKP
9. Kosovo declared independent
10. The Dalai Lama meets with Bush and with Sarkozy
11. The President of Sudan Omar al-Bashir indicted by the International Criminal Court
12. John McCain’s concession speech
13.The founding of COPE promises the creation a viable (?) opposition in South Africa
14. The Pope blasts pedophile priests during his trip to the US
15. Liberia’s Charles Taylor is put on trial at the Special Court for Sierra Leone and Rwanda’s Theoneste Bagosora is condemned to life imprisonment by the International Criminal Court for Rwanda
16. Gordon Brown thrives in crisis: not a bad performance at all…
17. After 40 years, Spain wins Euro soccer
18. Relative peace in the Taiwan Straits
19. Nambu, Kobayashi and Masukawa receive Nobel Prize in physics for their work on asymmetry
20. Particle accelerators at CERN are now ready to tell us more about it all…




THE ABSURDITIES OF 2008 (almost funny, except, they were true):
1. Private jets bring CEO beggars from Detroit to Capitol Hill
2. Greenspan spits it out: “I was wrong”
3. From London to Paris to Seoul, the Olympic torch “tour” of shame
4. “President” Dmitry Medvedev learns to walk
5. Sarah Palin’s family (was it Piper, Steeler, Rodder and Plater?) can see far from their window
6. Carla Bruni-Sarkozy mania towers over her husband’s high heels
7. Chinese sports fans “forgive” athlete star Liu Xiang for his failure to run 110m hurdle heat
8. Russian war games in the Caribbean (oh, phleeeze!)
9. Hillary Clinton’s tears in New Hampshire save her campaign (for a while). Then the poor woman suffers from Bosnian amnesia, probably caused by sniper fire.
10. Two Russian sumo wrestlers are banned for life by Japan’s Sumo Association for smoking marijuana. What were they thinking? That it would help them regain slim looks?
11. Joe the Plumber almost wins the US presidential ‘debate’, but in the process he inadvertently turns the 1.5% Americans who make $250’000 or more, into a “middle class”
12. Eureka! Eggheads at National Bureau of Economic Research take a year to recognize that US economy has been in recession.
13. Chinese children pose as ‘adults’ in gymnastic events (not enough baby formula perhaps?)
14. Forecasters’ demise. At the beginning of the year, Goldman Sachs made its 12-month predictions: crude oil at $105 per barrel (it is $38/b), natural gas near $11/mmbtu (it is $5.8), gold falling to $750/oz (instead it went up to $869/oz), Korean Won at 900 to the dollar (it is at 1260)…and the Fed Funds rates were supposed to be at 4% (it’s 0.25%)…
15. 40 years after USSR, China sends a manned rocket for a space walk
16. Helicopter Ben in action. US prints $7.6 trillion in bailout money during the first 11 months of the year. The combined debt is now apparently at $67 trillion.
17. Hugo Chavez sings on TV (and then sends troops to the border with Colombia)
18. It snows, so China can’t go on holiday. The Olympics is over, but China forgets to come back from the holiday.
19. Nearly thirteen centuries after Vikings established the first Russian state, Russia offers to “buy” Iceland (like you buy an aircraft carrier)
20. Rudi Giuliani’s presidential “campaign” founders in Miami. Thumbs down, but no one is thrown to the alligators.
21. North Korean nuclear “negotiations”: now you see it, now you don’t
22. Castro dynasty holds on in Cuba (sign of change: people are allowed to buy cellphones)
23. Hollywood strike saddens the nation, but somehow no one rushes with handouts
24. Education in action. Kindergarten kids in California are asked to pledge never to use anti-LGBT (lesbian, gay, bisexual and transgender) slurs…
25. At the peak of the market in June, famed pundits from Jim Rogers to Don Coxe hail commodity investments and launch new products. But they are young enough to be in it “for the long run”.
26. Mr McCain goes to Washington (to save us from the economic crisis). We are relieved.
27. Silvio Berlusconi is back (no grey hair here)
28. John Edwards’ campaign-financed lovemaking fails to ruffle his hairstyle
29. Having scrapped onboard service, punctuality and courtesy, some US airlines now charge for checked-in luggage, a cup of tea and a glass of water. Lavatory use and pillows will be next.
30. Russia recognizes South Ossetia as “independent”. North Ossetia remains ‘part of Russia’.
31. Paulson’s summertime tale: ‘sorry, children, no shorting allowed now’
32. Anglican Church faces a schism. The world holds its breath.
33. Food fascism invades US schools: a child in Connecticut is suspended for buying a candy bar
34. Oprah Winfrey can’t lose weight and Madonna lives sexless life for six long months…
35. Surprise: O.J. Simpson is a bad man. No SUV chases this time due to political incorrectness of the vehicle.



2009 - THE RISKS:
1. The world plunges into global deflation, hobbling both the deleveraging private sector and the re-leveraging public sector. Oil hits $20 per barrel.
2. Competitive currency devaluations
3. Social instability in China redirects the regime to nationalist adventurism abroad
4. Hillary Clinton derails Obama’s agenda
5. Al Qaeda’s operatives in Algeria and Morocco mount a terrorist offensive in Europe
6. Iran gets the Bomb
7. Israel strikes Iran. Iran retaliates. US navy presence in Hormuz strengthens radicals in Tehran.
8. Impoverishment in China triggers another wave of Avian flu
9. Financial deleveraging and precautionary hoarding of capital continues apace
10. Czech Republic’s Vaclav Klaus chairs EU and derails whatever European cooperation there still is
11. Benjamin Netanyahu wins elections in Israel but depends on Mosche Feiglin’s support
12. Felipe Calderon loses the war on drugs in Mexico
13. Obama’s administration taxes capital, and in a chilling reminder of the 1930 Smooth-Hawley act moves to “protect American jobs” from international competition.
14. Trade financing collapses, leaving strained value chains and empty shelves
15. Hamas does what Hezbollah did in 2006, i.e. strengthens radicals after another Israeli military failure
16. In the wake of the above, Egypt falls into chaos, fuelled by Muslim Brotherhood’s radicalization. Amr Khaled’s televangelism loses audience.
17. Major Internet glitch
18. Al Qaeda wins control in the tribal areas of Pakistan
19. Zulus and Xhosas resort to violent means in the fight for political spoils and sinecures in South Africa
20. India intervenes against ‘terrorist camps’ in Pakistan
21. Russia cuts off gas to Ukraine and Europe
22. From US to France to Slovakia to Russia, global automotive industry dies out, rising jobless rates by millions
23. Collapse of $54 trillion market in credit default swaps
24. Global protectionism kicks in (no trade financing, non-tariff barriers, NAFTA moribund, WTO defanged)
25. Global capital expenditure fails to respond to stimulus. Lack of upstream investment lays the foundations for future hyperinflation.
26. Peer Steinbruck wins elections in Germany and allows Russia to reclaim proxy influence in the Baltic Countries
27. Canada disintegrates
28. Bolivia fractures in a violent manner. Santa Cruz struggles to have its independence recognized internationally.
29. Failure to reform “mark-to-market” rules further undermines confidence in the market
30. The Dalai Lama dies, opening the way to overt (and bloody) independence struggle in Tibet
31. Kim Jong Il dies and leaves unstable vacuum of power in North Korea
32. Western military intervention in Darfur fails
33. Warren Buffett proves to be yet another scam…
34. Populist politicking in US kills a proposal to declare a holiday on payroll tax
35. Cash-strapped local governments raise taxes, offsetting national stimuli…
36. Kosovar mafia and Salvadorian maras shake transatlantic hands after yet another year of rising crime rates



2009 - HOPES AND WISHES:
1. Osama bin Laden and Ayman Al-Zawahiri are captured and tried for their crimes
2. Major breakthrough in combating cancer (through stem cell research?)
3. International financial and economic cooperation is made possible under Obama/Volcker leadership. Counterparty confidence returns and usable collateral reappears in the market. Interbank funding conditions improve.
4. Nicolas Hayek’s companies in Jura accelerate successful commercialization of a fast electric car
5. Low sunspot activity delays climate change and helps extend glaciers
6. A public exchange for credit derivatives is inaugurated with success
7. Russia runs out of foreign reserves due to its ill-conceived defense of the ruble in the environment of low oil prices. Brave Russians bring the end to the decade of Putinism.
8. Governor Bobby Jindal rises to lead the Republicans. The influence of social conservatives marginalized.
9. Mohammad Khatami runs against Mahmoud Ahmadinejad in Iranian elections and wins
10. Zhang Qingli, Secretary of Communist Party of China in Tibet is put on trial at the International Criminal Court
11. The Fed prints even more dollars and when the bond yields rocket, it buys them back, keeping interest rates low and transferring the wealth from creditors to debtors. In the process, inflation cuts down the debt burden and a weakening dollar radically reduces the value of foreign reserves accumulated during the preceding decade thanks to the mercantilist policies of oil producers and China.
12. Gold protects investors exposed to weakening dollar
13. Global airline industry consolidates into a binary market: low cost and high-end, killing hapless US airlines (and ‘rude hostess’ jobs) in the process
14. The Amazon forest conservation system brings first territorial gains in Brazil. Indonesian officials are invited to study the progress.
15. Dick Cheney, former Vice-President of the United States is accused of, and tried for maintaining links with Halliburton while in public office in 2003
16. In a breakthrough initiative, US induces Israel to abandon illegal settlements in the West Bank. A viable Palestinian state is made possible.
17. Israel gives back Golan Heights. Syria becomes a US ally.
18. EU boosts its defense capabilities and cooperation with NATO, with positive impact on the military engagement in Afghanistan and Darfur
19. Further development of the global market in liquefied natural gas (LNG) and EU investments in Central Asia begin to wean Europe of its dependence on Gazprom
20. Further opening of arable land to cross-border investment in agriculture
21. Governments revitalize corporate credit markets
22. Taiwanese hi-tech companies revolutionize touch screen technology, ushering in a new era in notebook development
23. After international navy forces squash the pirates, the former Somalia is officially divided into three states (Somaliland, Somalia, Puntland) in an international conference which also solves Maakhir and Northland issues
24. Germany, Brazil, India and Japan become permanent members of the UN Security Council and begin to reform the organization
25. A modern, multiracial bi-party system is born in South Africa, with COPE building a strong opposition to ANC. Cyril Ramaphosa returns to politics.
26. Supported by international forces, Kinshasa finally cracks down on Interehamwe’s forces. Rwanda’s security is safeguarded and Laurent Nkunda neutralized.
27. Robert Mugabe dies. Structured international assistance helps Zimbabweans rebuild their country
28. Belarus opens up to the West and sucks in investment, offering high rates of return
29. A new technology is developed to denitrify waters contaminated by overferilization
30. Commodity prices stabilize. Saudi Arabia manages to protect the markets from high volatility in oil prices.
31. Serbia swaps the Kosovo emotionalism for EU membership. Hardline nationalists marginalized.
32. Venezuela’s Chavismo turns less rhetorically virulent and more pragmatic, avoiding clashes with Obama’s administration
33. Beijing redirects defense, navy and 'star wars' funds to education and health care reform
34. Music sharing via internet remains free
35. FARC signs an unconditional peace agreement in Bogota. End to decades-long civil war opens up Colombia to investment and tourism.
36. End to the Yushchenko/Tymoshenko political feud in Ukraine helps stabilize the economy
37. Greek government chills out: less anti-Macedonian rhetoric, more labor market reforms
38. Guinea (Conakry) escapes violence in its transition to democracy
39. Good monsoon relieves pressure on agricultural economies of South Asia
40. A post for an infrastructure Czar is created in the White House, helping to channel stimulus funds without subcommittee filibuster
41. US and Germany regulators abandon plans to destabilize the “banking secret” rules in Switzerland
42. A power-sharing deal ends the political stalemate in Thailand
43. Guantanamo Bay detention centers closed
44. With little export dependence and much interest rate firepower, Indonesia joins Brazil to emerge as the most defensive emerging market anchor for global investment
45. Roger Federer beats Pete Sampras’s grand slam record
46. Due to rising populations, polar bears, tigers, snow leopards, black rhinos and Iberian lynxes are taken off the endangered species list
47. China and Iran abolish death penalty
48. Justice and peace in Burma, Xinjiang, Kashmir, Pakistan, Darfur, Afghanistan, Kurdistan, Kivu, Palestine, Abkhazia, Ossetia, Chechnya, Niger Delta, Ogaden, Eritrea, Cote d’Ivoire, Sri Lanka, Northern Uganda, Michoacan, Mindanao, Dagestan, Fiji, PNG’s Highlands, Bougainville, Tibet, Mauritania, Southern Thailand, Crimea, Nagorno Karabakh, Corse and the Basque Country.
49. Atlantis is re-discovered. Religious zealots and fundamentalists of Evangelical, Sunni, Shiite, Judaist and Hindutva ilk are all relocated to live there in their own, pure way.

Postjudice wishes you all the very best for 2009.

FIRST TIME IN 79 YEARS

Over the last several weeks, the focus of the market has shifted from ‘financial crisis’ to ‘global economic crisis’. The surplus savings economies that were supposed to bail us all out have exposed structural weaknesses of their own. For years, the petro-economies and mercantilist Asia plunked their savings in the supposed safety of US Treasuries. This investment inertia has not only led to the relative atrophy of these immature economies’ own capital markets (as a percentage of their GDP), but also crippled any development of their risk management capabilities. If the investment in US Treasuries was, by definition, riskless, then why bother assessing uncertainty of other investments? Risk aversion and paucity of other investment options have now resulted in a new bubble –in cash (mostly US dollar and the Yen) and in US Treasuries, which, at the time of writing yield barely 2.56% on a 10-year note.

When the fabled sovereign wealth funds and other pools of capital were eventually deployed into the Western assets in the late 2007, the subsequent losses proved to be politically unacceptable. Not surprisingly, the massive reserves accumulated by mercantilist China will now most likely be deployed to re-nationalize domestic assets where personal connections allow for building trust networks, an age-old bulwark against risk.

The unfortunate corollary of this collapse in trust is that it not only prevents any rebalancing between the external surplus economies and the external deficit economies, but that it could lead to the collapse of the trading system as we have known it.



GLOBAL TRADE THROTTLES BACK
Since early in this decade, the global trade flourished even if no new trade liberalization round has been achieved. The integration of China into WTO in 2001 was a major step boosting the trade flows. After the move to re-industrialize its economy (2003-2004), China’s trade links to other emerging markets allowed many smaller economies to flourish. On a net basis, the losers were small textile producers. The winners were commodity exporters.

The commodity imports were, next to craved foreign technology, the only form of large scale imports condoned by China’s mercantilist rulers. Instead of growing internal demand and a balance external accounts, China developed an economic system favoring massive exports based, as it was commonly believed, on cheap labor and undervalued currency. But there was a third factor in this extraordinary export boom. For centuries, China’s economy stagnated because of trust deficiency outside of family networks. The clans were broad-based and often spread their merchant tentacles around island South-East Asia. But further out, in the wild, threatening world of non-kin, plagued by greed and exploitation, you could only purchase something if you paid for this up front. Now, this is exactly what most of us do in Carrefours, Walmarts and Ito Yokados if we decide not to pay with a credit card. But it is different in long distance, long term trade. The British excelled early on in global trade networks because of extraordinary expansion of a reliable merchant credit and credit insurance system. Letters of credit (LOC) were introduced by the banking system to facilitate the flow of goods and ensure the eventual payment.

As China slowly integrated into the world economy, the letter of credit system appeared also in its dealings with overseas trade partners. Buyers’ banks would issue an LOC to the seller, whose own bank would subsequently discount it. The growth was extraordinary. By 2007, almost 70% of China’s exports were financed with LOCs, leaving a smaller percentage to government-led insurance discounting, as well as traditional up-front payments and down payments. Two-point factoring, another form of international trade financing did not expand as fast in China as this system may easily fall victim to a fraud.

On the import side, so vital for supplying China with raw materials, letters of credit were practically the only avenue for trade financing. It is in the current collapse of China’s LOC system that we should see the roots of the devastating, deeply deflationary, catastrophic slump in most commodity prices. It is devastating and catastrophic because unknown in its depth and extension, or so we hear from Australia’s largest company whose ships full of bulk materials float aimlessly in search of an eventual buyer.

Throughout China’s boom years, Beijing failed to develop alternatives to the LOC system, which are necessary to keep the trade flowing during periods of credit stress. Factoring could have been one way to deal with the issue. It is astounding that in an economy of 1.3 billion people, the Chinese government issued only two import factoring licenses over the last 30 years. Even worse - the lack of proper reform of the credit system in China means that exporters into China cannot properly assess credit worthiness of the buyers. 30 years since the opening of China’s economy there still is NO proper credit system in place which would allow you to track information about the buyers, regulate disputes and collect insurance! You do not know who you deal with through proper credit assessment (and risk assessment). You ‘know’ it by holding lengthy, MSG-sprinkled dinners in one of Chinese restaurants. We are back to the limited circle of trust, and away from the modern, albeit never infallible, credit system.



This stunning revelation is coming to our attention only now, when Chinese importers default on ‘long-term’ contracts or disappear into the thin air. Chinese banks are equally fearful of discounting letters of credit for the country’s exporters. This is risk management in the form of risk aversion. Chinese banks do not trust their counterparties overseas, fearing massive bank failures and complicated recourse procedures. Although fear has gripped many corners of the global credit market since September, no single trade financing institution has collapsed as yet. Chinese banks’ risk aversion is, therefore, a self-fulfilling prophecy leading to the ultimate collapse of the trade links. Only yesterday did we hear that the world’s largest container producer, based in Shenzhen, had stopped production since October due to lack of demand. And although it should be expected that the government intervenes in export promotion through more wide-ranging use of insurance discounting, for now many Chinese exporters require up-front payments from overseas importers, which is highly damaging to these partners’ working capital. At a time when equity and credit markets send a deflationary signal that “cash is king”, parting with your current assets to secure imports is a finite solution at best. And after that? Empty shelves at Walmart?

EMPTY LECTURING
All the hopes that the global crisis will concentrate the minds around a global solution have now been dashed. Mr Wang Qishan and Mr Medvedev are barking at Washington, faulting the US economy’s recession not only for their fast evaporating riches, but also for undermining the very basis of their power, this implicit pact with the local populations that a quest for freedoms is but a secondary, and easily dismissed footnote under the universal desire to live in opulence. Russia’s rapid impoverishment is unprecedented. Within only two months the country which last summer postured with military swagger has lost a staggering $123bn of reserves trying to shore up the rouble, an effort eventually abandoned. China’s growl is even more ominous. Beijing angered EU by executing an Austrian citizen’s father for allegedly ‘spying for Taiwan’ (read: revealing secrets about Chinese leaders’ health). In a huff, China has now also called off a high level summit with European Union after President Sarkozy agreed to meet with the Dalai Lama. Beijing had recently rejected Tibetan envoys’ proposals for regional autonomy (which is enshrined in PRC’s constitution). Yes, the Communists intend to run Tibet’s allegedly ‘Autonomous Region’ directly from Beijing, in a blatant breach of their own constitution. But the economic collapse and 70m unemployed Chinese workers (and counting) are clearly making Beijing fearful, increasingly angry and paranoiac. The country has cornered itself into overdependence on US Treasuries’ performance, but this is only the latest bubble of many that formed over the last 15 years. Since the dollar bottomed in mid-July, yields on 10 year Treasuries have fallen 21%. This is exactly equivalent to gain in US dollar index. This rally, and an even stronger appreciation in the Yen would mean that the world bracing for a deep deflation. Yet, at the same time, in dollar terms, gold has lost only 21% since that mid-July anchor. This means that the yellow has stayed flat in constant dollars. And gold-buying is a sign of inflationary insurance further down the line, which could be brutal when the velocity of money picks up again and the Fed will rue the extraordinary expansion of its balance sheet from $100bn in September to $750bn sixty days later…



FROM DEEP DEFLATION TO SHARP INFLATION?
The thesis of a very sharp inflation following the impending deflationary spiral is increasingly being hushed about. Someone calculated that, at $7.5 trillion of new bailout money, a stack of $1000 bills would build a tower 760 miles high….

Meanwhile no concomitant expansion has taken place in gold, or indeed in other commodities. There is no doubt in my mind that dollar-denominated assets will again, as they did in the late 1970s, overshoot on the upside, powered not only by this extraordinary expansion in liquidity, but also by the unprecedented contraction in capital expenditure and new project development. The combined effects of collapsing demand, declining corporate profits and surging corporate bond spreads leads not only to shutdown of marginal production, but to outright destruction of future productive capacity. Already, OPEC is warning that the current oil prices are discouraging investment into new capacity. As the Russian oil production ebbs away from the next year on, significant capacity constraints may hit again in the upcycle, even before the global transportation eventually weans itself of its overdependence on diesel, gasoline, jet fuel and bunker fuel. In the mining industry, an estimated $200bn worth of capital expenditure has been taken off the table for the next 4 years. Essentially, the miners are telling China: “you do not want our stuff? Well, you won’t get it when you need it”. Mothballed projects, closed smelters, silent refineries, cold blast furnaces and idle berths do not augur well for the global economy in 2009. But when the tide turns, there will not be enough “stuff” to satisfy the reinvigorated global demand. The investment cycle has been quick to drop to near-zero levels. It will eventually come back, but with a lag. And when it does, brace for mass inflation and high interest rates. But in the meantime, pity Greek shippers.

So are we all going for a long vacation, nesting at home with a new Wii? Maybe not. There are pockets of capital and pockets of activity. Very few people made money in the highly volatile 2008. But there are those whose activity was never too fond of cycles and volatility. Family estates and private operators will pick up listed assets on the cheap. Cash-heavy Japanese trading companies will expand again just as their more market-sensitive competitors need to protect their balance sheets and shrink their portfolios. Drug cartels will thrive in the economic slump and benefit from increased crime rates. What was boring and unexciting in the boom may turn out to be highly rewarding and promising in the slump. And whoever can properly time a ‘long oil, short US Treasury’ trade will be celebrated as the brightest man on the planet.



IT’S NOT ONLY THE ECONOMY, STUPID
But there is also a danger. A danger of such a deep socio-economic dislocation that the world re-emerging from this recession could be radically different from the world of allegedly benign ‘global imbalances’. Thai middle class’s anti-democratic street activism could set a dangerous precedent whereby privileged elites fail to take responsibility for the welfare, education and social advancement of other social groups which happen to share the confines of the same international borders. This indifference and latent antagonism, common to many fast growing economies, may, in economic slump, turn into open hostility. It could pit city vs countryside, as it does in Thailand. But it could pit religion vs religion. Majority vs ethnic minority. Nationals vs foreigners. Our nation vs that wicked neighbor. Scapegoating could easily gain traction among vast numbers of unemployed, young and increasingly angry males. And if they do not have enough money to get married or to pay for sex, their anger may boil over. Watch out for skilled demagogues harnessing that frustrated energy.

Fault-finding, angry talk and competitive currency depreciations by Moscow and Beijing will not help resolve this crisis. Rebalancing global demand patterns, on the other hand, would. There are, alas, no global institutions that could constitute a suitable forum for such a solution. Integrating the superficially capitalist economies into the global trade and investment network worked wonders in the boom. It can pin us down to the bottom in the recession. This morning we received data on China’s electricity production. It fell 7% year on year. China is really shrinking. The world should shudder.

WINTER IS COMING

Last weekend we decided to travel towards the Arctic Circle to see migrating polar bears. Although we had had such a vague plan for a long time, we finally pushed the button on it after hearing alarmist reports about these largest land carnivores were becoming endangered species.

It all made sense. After all, polar bears do not prey on land creatures, but mostly depend on ice cover to hunt ringed seals and bearded seals, which must surface through breathing holes. The bears’ extraordinary sense of smell helps them detect the doomed pinnipedia. Their massive forward paws have evolved to make ice breaking look easy. But if there is no more ice, then the bears will be in trouble, forced to swim over large distances between isolated ice floes in the hope of catching the faster and more agile marine mammals. Or so the story goes…

The locals quickly disabused us. People who have been watching bears for decades are quick to laugh off the naiveté of the somewhat uniformist reports. Apparently, bears migrate through the region as they always have, and in large numbers. Watching these white giants stomp, face off, encroach on each other’s territory, fight, wrestle, play and frolic, as we did, it was difficult to think about them as a population in distress. Granted, such casual observations of ecological health are anecdotal at best and carry no statistical validity. The enthralling tundra safari experience, as well as locals’ elucidating comments, focuses only on one of some 20 polar bear populations that inhabit the deep north of our globe but interbreed very rarely. But it is the population in question – the Hudson Bay bears –that has, after only a few years of warmer climes developed an astounding level of adaptation to the changing conditions.




To be fair, these bears still favor the yummy staple of ringed seal fat and will slip adorably on the first ice, through which they are led by the irresistible olfactive call. But the relative unreliability of the freezing seasons has turned these animals to seek substitutes. Woe to caribous. Woe to rodents. Woe to the arctic fox. On land, the fluffy, round giant is able to bolt at incredible speed of a hunting feline. So, who knows? Should winters remain warm, within several years we could even expect to watch exciting NHK, BBC or Discovery Channel documentaries, showing the white beasts charging through petrified caribou herds in a way lions poach wildebeest in East Africa.

Or may be, we will not.



Once in the tundra, north of the tree line, you have enough time to ponder the non-linear enigmas of the climate change. Hudson Bay folks still shudder at the thought of the winter’07/08, the coldest in recent memory since 1993. Indeed, last year the northern hemisphere suffered in an unprecedented way, with deep frost gripping most of Eurasia. Villagers froze in Iran and in Afghanistan. Homebound holidaymakers in China got stuck for days at railroad stations. Power distribution systems broke down. This year’s winter in the southern hemisphere was also unusually cold. Was the whole brouhaha about global warming somewhat premature?

There is no satisfying answer to it as there is no easy explanation for the cold snap in 2007/08. It is possible that Western Europe’s temperatures suffered from increased melting rates of the Arctic ice cap. This mass of lighter, fresh water pumped from the northern latitudes into the Atlantic may have pushed the warm Gulf Stream lower or off its course, depriving Europe’s coast of its moderating role.
As I am writing it, we are already hearing reports about another cool La Niña system approaching America’s shores from the Pacific. Such a phenomenon could mean another dry spell in the Andes, and colder weather in the northern hemisphere, especially in America’s northwest and Asia’s northeast. If this turned out to be true, Southeast Asia and south-western Pacific should brace for another season of floods, with potentially considerable impact on several key agricultural and coal markets.



And yet, if there is anything we can learn from a chaotic system, such as weather, is that no year resembles exactly the previous one. Like in the securities markets, changes make sense only in hindsight and only in the longer term. Not surprisingly, humans are fascinated by what they cannot fathom. Multifactor models do not exhibit monotone relations. Unfortunately, this is what happens when you plug in all the modifications in albedo, Arctic, Greenland and West Antarctic ice sheets, southern oscillation (el Niño and la Niña), Atlantic Thermohaline Circulation, Indian summer monsoons, West African monsoons, the impact of Amazon and Southeast Asian rainforests, Boreal forests, sun flares, cosmic rays, changes to magnetic poles, Greenhouse Gas emissions and the effects of crop overfertilization. Good luck modeling!



But there are certain things we do know. Holocene is bound to be climatically unstable. With the end of the last glacial period some 12000 years ago, temperature anomalies have been commonplace, at least for as much as we can learn from the ice accumulated in polar regions (data from lower latitudes are spotty). But there has been a striking regularity since at least the so-called Maunder Minimum, which lasted for about 200 years and has been often labeled as “little ice age”. This period, immortalized in wintertime canvases of Dutch painters, ended in early 19th century. Since then, a fairly regular succession of 11-year long sunspot cycles provided for a fairly predictable guide to longer term solar activity. Although no scientific proof exists, high sunspot activity has been associated by most casual observers with warmer weather.

But somehow the measurements of recent sunspot activity do not quite fit the cycle predictions. For one, the unprecedented solar flares during the stormy 2005 were not supposed to happen in a cycle that was expected to bottom out in 2006. Nor should the late 2008 qualify, a priori, for a solar activity of low intensity as observed at the moment. The proton storms usually travel from the sun to earth within about two days, causing engrossing auroras in the polar regions. But I caution against travel plans to the frigid Arctic this winter. If you expect to see spectacular celestial displays, you could be sorely disappointed.




What surprises sunwatchers in this uneasy solar lull is that it breaks the regularity of a relatively high sun flare activity that had prevailed during the postwar period. Modern, industrial agriculture has been built around the assumption of consistent temperature and rainfall cycles, but this stability appears unwarranted if longer historical periods are taken into consideration. Some observers even believe that the period of the last 60 years was a climatic anomaly. The problem is that, historically, sudden shifts in sunspot activity seem to have been correlated with dramatic dislocations in food production, as evinced by the starving Chinese cannibals in the 1700s. Conversely, the period following the First Millennium was, apparently, associated with high solar activity. It underwrote sufficient safety in food production to favor pre-industrial exploration (New Foundland), long distance travel (Iceland) and a colonization drive (Greenland) that remained unmatched until the Portuguese ventures five centuries later. Encouragingly, all of these examples point to increased human activity in the higher latitudes, where warming temperatures are mostly beneficial. But should sunspot inactivity truly break away from its predictable 11-year cycles, lower temperatures in tropical regions could, in fact, increase the soil’s capacity to store water and nutrients.

This is not to say that alarmed polar bear fans should not worry about human impact on climate change and long term implications of eventual, higher temperatures. But, like in the markets, the near term weather misbehavior could be the exact opposite of long term consequences. This is what October snowfalls from London to Idaho could signal. The American prairies are now (early November) lying under 2ft snow. And before we realize, our favorite bears could show some mettle and catch the cattle.

THE US ELECTIONS

Only several days are left till the final verdict is passed on the relative merits of two finalists in America’s most expensive ever electoral circus. It has been so much fun this time: we have enjoyed a parade including a liberal shrew, a token preacher, a plastic equity guru, a dallying populist, a septuagenarian grouch, a half-black upstart and finally a puck-loving but animal-hating diva.

THE CIRCUS COMES TO TOWN (AND THEN DISBANDS)
The onset of the financial crisis messed up the strategies which, amidst fear mongering, would have perkily punted the same “values” message that had brought George W. Bush to power. But the slump in measurable values of homes and pensions has since shifted the rules of the game considerably. So much so that most of the intellectual elite of the country has now embraced a candidate whose official stance on trade would, in other circumstances, make any economically literate voter squeamish.

Will Obama win? The common view is now that the result will hinge on the voting decisions of the independents. Sarah Palin was supposed to rally Hillary’s troops, and she aptly appealed to them in her first public appearance as a vice-presidential nominee. As we now know, the thrust proved short-lived and she instead galvanized the numerically important, yet ideologically isolated minority whose voting record had helped to run the country aground. The independents may be displeased with Obama’s ‘otherness’ as much as with Palin’s increasingly Fascist, ‘shrill, baby, shrill’ wailing tones. Palin’s rallying calls point to an ‘enemy within’, whereby she utilizes sliding signifiers and exploits connotations of fear and alienation. These speeches would make a poor reading as a propaganda piece. But chopped up into an engrossing “call and response” ritual, they confirm the troops in their conviction that someone, somehow must prevent the inevitable.

But is Obama’s win really inevitable? He is close to victory, even though a well-timed video tape from Osama bin Laden could, yet again, help the Republicans and mire the US troops for years to come. Barring such a catastrophic development, the odds against Palin and her presidential running mate are high. Many independents may have now fallen under Obama’s unquestionable personal charm, his calm demeanor, and smooth-as-silk delivery in the otherwise inconclusive debates. Obama’s supporters stress the professionalism of the faultless campaign as a proof of his considerable managerial skills. Yet there are still many others who need another ‘ticking point’ to mark the Obama-Biden slot at the top of the ballot. Will the fear of Obama’s “past associations” trump the genuine fascination with this ambitious young man? Will the scare mongering of a “socialist” tax policy really frighten the middle class?

To be true, the red flag of “socialism” in America is an argument that is just inane and vacuous as Western Europeans’ congenital rejection of “religion” in politics.
Just as Europe’s political ethics is rich in references drawing on religious traditions, so did the US government, on occasion, assume a larger role in the country’s economy than it has been the case since Ronald Reagan’s presidency. As the turbulent Paulson era is now drawing to a close, the battle against “socialism” appears to have been lost without a single shot, regardless of Republican distaste for the ‘Swedish’ solution. Indeed, despite triumphant anti-Americanism on the European left, we may now all be in the same, centrist, boat, whether in America, Sweden or elsewhere. In the third quarter of 2007, the Swedish automaker Volvo received 41000 orders for its trucks. This year, in the corresponding quarter, the same company received barely 115 orders. The collapse of transaction flows in the ‘real economy’ - in America, in Asia and in Europe - should serve as a timely wake-up call against any exploitation of the allegedly contrasting interests of the Wall St and the Main St, la rue, la calle, dajie and die Strasse.



A BIG RISK OF A SMALL GOVERNMENT
It is the market circumstances, still not fully recognized by the proverbial Joe in the street, that have radically altered the plausibility and feasibility of the grand fiscal plans touted by either party with relation to health care, education and other policies. In an effort to save its financial market, the US government has so far only injected an equivalent of about 6% of GDP. When Japan hit the curb in the early 1990s, the country spent closer to 25% of its GDP to finally put the economy back on track. But Japan’s asset values have never recovered to pre-bubble levels and it might, just as well, take a lot longer than commonly assumed for America to return to the 2007 level of asset wealth.

The comparisons with Japan’s balance sheet recession are ubiquitous, but misinformed. For one, unlike Japan, the US is not a net saver, which will make all the talk of ultimate rescue of its economy reliant on external sources. Japan’s stagnant demography made its growth highly dependent on its trade account and on income from overseas investments. The United States, even at dollar’s low last summer, still had nothing much to export. It will not be able to solve its current conundrum through the turnaround in the current account.

Equally importantly, America does not benefit from the social cohesion that characterizes the racially united and monolingual Japan. Over centuries the Japanese society has perfected a team spirit that only island nations can aspire to (shimaguni konjo). I still recall the shock of the sudden confrontation with homeless people around Shinjuku station and in Ueno Park in Tokyo. Yet at the depth of the economic slump and labor market losses, local shops organized distribution of foodstuffs within 48 hours of expiration. In a country ravaged by periodic natural disasters, a sense of common destiny was just too strong for anyone to remain indifferent.



THE “R” ISSUE
As I visited poor black neighborhoods in the American South last weekend, the memories of Japan’s deflationary decade loomed again. Persuaded by committed friends, I participated in a last ditch pre-electoral “canvassing” effort. Our role consisted in knocking on doors that we would have otherwise never knocked on. And these were ‘doors’ that barely knew the fruits of America’s economic boom of the last 16 years.

Granted, these are not slums. Many of these modest houses are ‘owned’, which, as we now know means little more than a call option of ownership of the mortgaged property. Many others have been foreclosed. Yet something else struck us when we tried to elicit the response from behind those rickety doors. Many pre-electoral statistics rely on a somewhat automated arithmetic and plug in the numbers of African American population as ‘natural’ Obama’s supporters. They could yet prove mistaken.

Race is a big factor in this election – for better or worse. Many so-called ‘liberals’ (a term curiously referring to left-wingers in the US, but denoting free market apostles in continental Europe) would probably care much less for a Democratic candidate, were it not for the racial symbolic of his rise and a potentially cathartic impact of the election on the depressed black population. Similarly, most, if certainly not all African Americans would rather vote for a black candidate if given a choice. A numerically more important, though less vocal group of white voters may have an issue with a candidate representing a racial or a linguistic minority.

The racial divide remains one of the defining factors of the Democratic Party’s predicament in the Southern United States. Jimmy Carter’s parenthesis notwithstanding, the conservative vote swung away from the Democrats since Lyndon Johnson signed the Anti-Segregation Act in 1964. And whereas before African Americans were not allowed to board the bus through the same door as the whites, today they do not share public buses with white folks at all. The Civil Rights movement may have triumphed. The not so civil economic wrongs could not be so easily unwound.



DON’T MOPE COZ THERE IS THE HOPE
Walking from door to door and listening to the deeply accented lingo transported directly from the pages of ‘Huckleberry Finn’, I could not escape the feeling that, for many of my accidental interlocutors, an act of voting for an abstract, Washington DC-based position will require an extraordinary personal effort. An effort to switch on the ubiquitous TV blare. An effort to lurch out of the dark bedroom. An effort to leave the familiar neighborhood. An effort to profess a view.

This is not a population accustomed to, or indeed required to make an effort in the first place. We are far, very far from Emersonian self-reliance. As we tried to explain to these half-illiterate people how to mark the ballot, it dawned on me that an act of INDIVIDUAL effort in an abstract (as opposed to physical) task is without precedent in their personal experience. The vote will take place only if and when the organized groups, the local churches, the campaigners or the community organizers provide the necessary assistance to the people who do not, in usual circumstances, take the extraordinary initiative to leave the ghetto.

And then there was hope. A 7-year-old girl opened the door and dragged her mom to the porch. While we were trying to make sure that her mother could understand the intricacies of the arguably confusing presidential, senatorial and gubernatorial ballot, the little girl flourished, flaunting with pride her experience of the ‘vote’ she had already exercised at school. The school game was supposed to prepare the young Americans for their future rights. Flushed, but proud, the little lady confirmed to us that she had ‘voted’ for O-ba-ma. There was no sense of otherness in her scintillating voice. But there was more hope in this statement than in the raucous mass rallies.

GREENSPAN 'MADE A MISTAKE', BUT CHINA IS CREATING ONE NOW

Last week, China announced a number of moves to ease the stress in the real estate market. Down payments have been lowered, interest rates on first home mortgage cut and tax exemption extended. Although these policies should improve home sales in the coming months, they betray the overdependence of the Chinese economy on the government’s continued support for the real estate bubble.

URBANIZATION WITH CHINESE CHARACTERISTICS
The extraordinary expansion of real estate investment in China created a self-reinforcing loop with accelerated urbanization patterns. Migrations have taken people from Western provinces to Central provinces, from Central provinces to Coastal regions, from Coastal regions to Beijing and Shanghai, and from Beijing and Shanghai to America. Some reverse movement of talent (from US to China’s main cities) and low cost labor (from coastal areas to home provinces) has already begun, but does not yet reverse the overall trend.

The official urbanization rate has reached 43%, growing at 1% every 2 years. The unofficial “target” is 65%, but it could be affected by further trends in FAI and migration policies. Key to understanding the nature of China’s vertiginous growth is not migration, but physical expansion of the cities’ outer rings; much of the statistical “urbanization” took place not through immigration and birth rates, but by swallowing the land around the municipal boundaries, along with the local population. As much as 40% of increase in urban population (120m) has been achieved this way since 1990. In theory, assuming a 2% population growth, the cities could expand by another 350m people (including 240m migrants) by 2025. But that would assume a rate of growth even faster than over the last 18 years, would require funding for health and education services for the migrants who would constitute as much as 40% of urban population.

The population density and wide dispersion of incomes invites comparisons between EU and China. Europe’s 550m inhabitants are but a little less than a third of China’s, but Chinese urbanization plans saw 221 cities of at least 1m population, almost seven times as many as in Europe. However, the same plans see only 170 mass transit systems in China, as compared to 85 in Europe. Clearly, something is just not right.



URBAN GORILLA
This process allowed for an unprecedented expansion of wealth in the provinces. Contrary to common misperceptions, it is the local government that retains taxes, subsidizes local industry and licenses retail. Theoretically, during the last four years all the land sales were supposed to proceed through auctions, but in practice much real estate investment was done in hand-to-hand deals (“want to build a clinic in the 4th ringroad? I’ll do it for you. 1m renminbi, please”).

Land in China belongs to “the state”. In rural areas farmers are allowed to own a house, but not their land, which is leased out for 30 years from the state. But in urban areas, leases are for 70 years and people are allowed to “sell” on their apartments as if they owned them. This dichotomy leads to instant profits from land reclassification from “rural” – where no value transfer is possible to “urban” or “industrial”, where long term leases allow the land to accrue commercial value. Since the budgetary de-centralization earlier this decade, such land “reclassification” has constituted an important source of provincial income, ranging from 10% to as much as 40% of the budget, second only to VAT.

Realtors realize that there always is an official and an unofficial price for the land. Although in theory land auctions have been mandatory, there are many ways to go around it. Unlike in Singapore, Chinese bureaucrats are routinely underpaid and this form of ‘urbanization’ has been a very important source of grey income. The worst corruption occurs at the lowest level, where the officials are very poorly paid. It is among this group that one finds full size replicas of the White House and entire Audi fleets. In practice, passive corruption is punishable, but active corruption is not and investors may $cement their guanxi with impunity.

The other main driver of urbanization has been the Dong Qian process of inner city rehabilitation (2004-08). This process has now come to an end in the largest urban centers.



REAL ESTATE MARKET
The real estate market is not entirely dependent on immigration as there is still potential demand for housing among existing urbanites, over at least 4 years, should the market conditions remain healthy. Prior to 2006, supply of residential units outstripped demand. The market shot up in 2007, with the average price running up 50%, with some cities registering even higher jumps. So far this year we have seen an average of 60% drop in transaction volume, and 40% fall in price in the main cities. Floor area sales usually improve in summer (Jul-Aug), which was not the case this year.

China’s downcycles usually last between 12 and 18 months, but could last longer if purchasing power deteriorates for some reason. That could be the case if GDP growth contracts considerably. Although household incomes still rose faster in 2007 than house prices, this reflected mean incomes, not median incomes.

Beijing has currently 15 months’ worth of inventory, so it could be surprising that price per sq meter is not falling yet. But the capital is home to an estimated army of 400000 bureaucrats from the central government many of whom are literally maintained by private entrepreneurs in order to keep up good guanxi. Nor is there any other reason for the $1000/night rooms at Ritz Carlton with herds of available girls always ready for the hot shots. The three Chinese status symbols (apartment, car, prostitutes) find a well structured demand in Beijing, making this market less volatile than the coastal areas.

The other reason why Beijing market will hold up better is the prestige and social standing accruing from a family member who moved to the capital and owns an apartment there. Many cousins in the countryside will scrap funds together to be linked, by extension, to such a status symbol. Over the past 7 years, some 0.5m people immigrated into Beijing every year (including the above-mentioned graduates). There is no consensus to what extent this trend may be sustained, but the only natural boundary is formed by the mountain range in Hebei, to the north of the capital.
In Beijing, on the 5th ringroad, a 90 sq m apartment costs around $175k. Usually property developers would target a 6/1 annual income ratio, so a two-person family with an income of $29k pa qualifies easily. That translates into 8300 renminbi per month – right in the middle of the urban middle class bracket. Statistically, some 15 - 20% of Beijing’s population within the 5th ringroad makes this amount of money.

The above figure of 20% would, on paper, clash with the current ownership rate of 80% (in Beijing). However, 80% of available units are purchased by the companies and allocated to their employees (similar to the now defunct Japanese kaisha system). Among the owners, 30% are first time buyers, a further 40% upgrade to larger units (or more appropriate location) and 30% are well-off investors who upgrade even further or hold multiple residences. Although many hold speculative property in expectation of higher prices (apartments are empty, not rented), some are suffering wealth effects (cash is tied up in the stock market and won’t realize losses and are priced out of the market due to liquidity problems).

A 120 sq m (2 bedroom) apartment in central Shanghai costs around $730k. This could appear pricey, but Shanghai and Beijing dominate China in the war for talent. 150’000 graduates from Beijing universities end up staying there after graduation. 28% of Shanghai’s workforce has tertiary education, but there are not enough graduates for 2nd tier cities.

The impact of the US credit crisis has been limited on the big four (state owned) banks as most of them trade only RMB-denominated debt. FX bonds are a tiny (and highly regulated) part of their business.



BANKING
China’s property bubble should not be understood as a fallout from past credit excesses. In fact, if China does experience an increase in non-performing loans, it will probably be on the manufacturing side, rather than in real estate. Loans to realtors and loans to property owners have been a relatively small portion of banks’ portfolios. Overall, developers’ loans account for only 7% of bank assets and real estate companies’ liability to asset ratio is 73%. This is why the impact from the property slump on overall consumption will be limited (no home equity loans here).
The bubble was pricked by two regulatory moves initiated as far back as September 2007, when the government banned lending for land purchase purposes and land hoarding period was shortened through revised land auction rules. However, due to the huge fiscal boost injected on the occasion of the new 5-year plan, the effects were not immediately apparent in the market. Not surprisingly, after years of heady growth, the realtors were still very cash-rich.

Banks are under guidelines that limit lending to property developers who wish to build profitable (i.e. larger units). However, if the realtor complies with the 70/90 rule and agrees to build smaller units, the bank will release the loan immediately. For all other types of residential property, the realtor will have to be 1 year advanced into the development and post a 30%-40% margin (“equity”, not necessarily cash), which severely limits leverage. Importantly, the recent relaxation of lending quota did not apply to property development.

In the absence of bank lending for property development, realtors turn to wealthy backers. But here the lending costs are very onerous. The bill comes with a 20% interest, plus the cost of protection from renminbi appreciation, and access to 60% of value of the property. Such a “loan” is only extended to those who hold all the 5 property certificates (land, ownership, construction, inspections and – most coveted – sale permit).



DEBT AVERSION LIMITS THE BUBBLE’S TOXICITY
The second reason why Chinese property bubble will not transform into a severe credit crunch lies in the economic behavior of investors. The population is generally risk and debt averse. Consumer loan to savings ratio is 24% and 80% of banks’ funding comes from retail deposits. Still, some youngsters who use corporate credit cards are beginning to apply for revolving credit. Remarkably, there has been a credit growth expansion this year (up 5% year on year), with expected loan growth of $0.5tr this year, with total loan portfolio of $4.18tr. The government does not encourage revolving credit. As usual, the expectation is that if something goes wrong, the government will ‘save’ them.

A sizable 3 bedroom house in suburban Shanghai may cost as much as $430k. Debt aversion is so high among Chinese homeowners that when uncertainty grows his/her economic behavior will be exactly the opposite to the American model. Rather than refinancing the mortgage, the Chinese homeowner will accelerate the repayment schedule. Until last week, with a 35% down payment and 5.4% interest rate, it was not uncommon to see these mortgages repaid within 4 or 5 years. Importantly, the price of such a piece of property is still up 80% over the last 5 years, which not only increases labor mobility but also leads to wealth concentration high net worth in the areas determined by school quality, where “emperor moms” tend to congregate.

The buyers of a second unit face steeper hurdles. It is very difficult to obtain a loan for the second apartment. Such buyers need to put 40% down payment and have to pay higher interest premium (7.7%).

The subprime problem is a distant abstraction for the Chinese. Buyers of their first apartment pay a 30% down payment and mortgage is only offered to clients whose income is above $10.5k pa per person (one needs to earn at least 6000 renminbi per month in order to service repayments of 3000 renminbi per month). These figures apply to second tier cities.

Although interest rates were cut by 0.27% in early September and again a month later, the transmission of this measure makes it little more than a symbolic measure and no impact on residential investment. The recent relaxation of lending applies only to a 10bp reduction in reserve requirement among the smaller banks (which account for 40% of the market). Lending quotas were increased by 5%, applying to all state-owned banks and their JVs. The government’s priority is to target small and mid sized enterprises, energy saving businesses, green technology and Sichuan rebuilding, not the property market. The government dissects the prospective loan recipients into 3 categories: “actively promoted” (renewable energy, transportation, grid, rail, ports), “prudently promoted” (health care, power generation), and “restricted” (highly polluting, energy-intensive, overcapacity – like glass, steel, aluminum, cement).

Capital growth could even become negative. Although loan to retail deposit ratio is 57%, as profits are fall and unemployment rises, non performing loans (NPLs) would return as a feature of China’s financial system. An 8% GDP growth (official) translates into 4% NPL. A 6% GDP growth (official) would lead to NPL expansion to 6.8%. Disposable income growth trails GDP growth by 2%, so losses could be made worse.

With asset prices falling (depressing artificial price earnings ratios), price competition will intensify again in the conditions of overcapacity (assuming continued slow demand overseas). Production costs may appear less flexible than in the past (labor, energy, quality control, environmental costs) and capacity utilization rates are bound to fall. Production scale-backs are possible and bankruptcies would spread among small and midsize enterprises with low working capital.