Egyptian Pound Update

Reuters:  IMF team to arrive in Egypt on Wednesday for loan talks
"(Reuters) - An IMF delegation will arrive in Egypt on Wednesday for talks with the government on a USD 4.8 billion loan...Spokesman Alaa El Hadidi added that Egypt would not seek any emergency loan from the International Monetary Fund and faced no "crisis" in funding the import of essential commodities...Reserves of foreign currency have fallen to critically low levels, threatening Egypt's ability to buy in supplies of wheat, of which it is the world's biggest importer, and fuel...Hadidi, seeking to allay public concerns over power cuts and long queues at petrol stations, ruled out an emergency loan, as suggested by the IMF. He added that the country was still able to buy essential imports..."(The supply) of wheat and loaves of bread is safe," he told reporters. He added that indications of a higher harvest this year meant Egypt would use locally-grown wheat in the place of wheat that would otherwise have been imported."

NYT:  Fuel shortage puts a strain on Egypt
"US officials are warning of disaster unless Egypt soon carries out a package of tax increases and subsidy cuts tied to a USD 4.8 billion loan from the International Monetary Fund. That would persuade other lenders that Egypt was creditworthy enough to obtain billions more in additional loans needed to meet its yawning deficit...Egypt has held two years of unsuccessful talks with the IMF, and the current government is still balking at the politically painful package of overhauls — even as rising prices and unemployment make those measures more difficult with each passing day...“They are operating on the notion that Egypt is too big to be allowed to fail, that the US and the West will step in,” Shimy said. “They think Egypt has a right to get the loan, and I think they will probably keep pushing all the way.”...Officials of the Morsi government have indicated that they prefer to wait until the election of a new Parliament, which might demonstrate broader public agreement on the need for changes. But a court decision striking down the election law has postponed the vote until at least the fall, and many economists say Egypt cannot endure the delay...Energy subsidies make up as much as 30 percent of Egypt’s government spending, said Ragui Assaad, of the Economic Research Forum here."

The official exchange rate has has remained under control  (see here)

 However assuming this report is correct, the market is not really at 6.80 but rather at 7.55 EGP per USD.

"The recent jump in prices is an indication of a black market that is drying up due to higher demand than supply, one banker who declined to be named said...“Clients who work on parallel markets confirm that prices jumped. This is a major leap that happened in the past three days because of the lack of availability,” he said...“It is not dry yet but it is not as liquid as it was ... It is quite possible for the dollar to reach 8 pounds or even higher if the problem continues,” he said.

Is the Morsi government really going to bring their finances to the brink and hope the US / Europe / Gulf States bail them out?   Or is he looking for political cover before making hard budget decisions?

Israel Gas Roundup

NYT:  Israel Begins Pumping Natural Gas From Offshore Field
"Israel’s Ministry of Energy and Water Resources says that the Tamar field will supply 50 to 80 percent of Israel’s natural gas consumption needs over the next 10 years. About 40 percent of electricity in Israel has been generated from natural gas in recent years, and the rate of natural gas consumption is expected to rise to 50 percent by 2015, the ministry said."

As the article notes the Tamar gas field went on line yesterday.  Tamar is estimated to hold 275 MM cubic meters of gas.  The larger Leviathan field (also see here here and here) is estimated to hold up to 700 BB cubic meters of gas, 600MM barrels of oil, and unknown amounts of natural gas condensates.  This is not a huge amount by world standards (less than 0.5% of world proven gas reserves)  but Israel's population is only 0.1% of the world total.  A comparison which brings together two stories that we have been following.  Israel's proven gas reserves are approximately 10% larger than Pakistan's reserves.  However Pakistan's population is approximately 23! times as large as Israel's.

At one time there was discussion of a deal for Gazprom to export LNG from Leviathan but now it appears that Australia's Woodside Petroleum will get that stake (see here).

Iran-Pakistan Pipeline (the US is not pleased)

Over the last few months we have written a few times about

• sanctions against Iran (here here)

•  Pakistan's natural gas shortage   (here here here)

It seems only natural that the two issues would eventually collide ...To review

Iran has the world's fourth largest oil reserves and second largest natural gas reserves and yet says they need nuclear power for civilian purposes.   Most people believe that they are in fact trying to build a nuclear weapon.  The US and EU have imposed an embargo on Iranian oil and threaten to blacklist any banks of any country that does not cut its imports of Iranian oil.

In the early 2000s the Pakistani government made a concerted attempt to shift their automobile energy source from oil/gasoline to compressed natural gas (CNG).  In order to promote this switch the government set the price of CNG very low. The policy succeeded.  80% of their automotive fleet (3.5MM units) now run on CNG.  Pakistan is now running low on CNG and power / industrial users are competing with gas stations for supply.  At current utilization rates Pakistan will exhaust their proven natural gas reserves by 2020.

Here are the developments over the last few weeks

DAWN:  (March 1, 2013) Groundbreaking of gas pipeline on 11th
'After a wait of almost two decades, the groundbreaking of UD 7.5 billion Iran-Pakistan gas pipeline will be performed on March 11 on the Pak-Iran border by the presidents of the two countries...President Asif Ali Zardari returned on Thursday after a two-day visit to Iran for finalising the gas pipeline deal and sorting out financing and technical issues.  In Tehran, President Zardari, while rejecting the US pressure, had said: “We deeply believe in boosting bilateral ties. The international and regional players have tried in vain to prevent expansion of Iran-Pakistan ties but the people have learnt how to act against the enemies of Islam.”...Tehran has agreed to provide a USD 500 million loan to partially finance construction of the pipeline on the Pakistan side, which will cost USD 1.5 billion. Pakistan will pay the remaining cost from its own resources...If everything else goes well the pipeline will be completed in 15 months. Iran has already completed the pipeline in its territory, while the laying of 785-km-long Pakistani section will commence now. Pakistan plans to import 21.5 million cubic metres of gas daily from Iran via the pipeline."

DAWN: (March 5, 2013) Zardari seeks to allay US concerns
"Allaying concerns of the United States over the USD 7.5billion Pakistan-Iran gas pipeline project, President Asif Ali Zardari said on Monday that Pakistan did not intend to offend anyone by pursuing this project of national importance...“Let me tell you, Pakistan does not want to offend anyone. It is a sovereign country and has every right to pursue projects in its national interest,” ..The US has warned that the pipeline deal, if finalised, would raise serious concerns."

(btw I am sure that his "enemies of Islam.” comment was not meant to offend anyone.)

DAWN: (March 7, 2013) Islamabad to complete Iran-Pakistan pipeline ‘despite US pressure’
Pakistan will complete the USD 7.5 billion gas pipeline from Iran to Pakistan despite pressure from the United States, a spokesman for the foreign office said Thursday...It will be Zardari’s second visit to Iran since February 27 and comes after officials said a consortium would start work on the pipeline on Pakistani territory on March 11 despite American warnings of possible sanctions...Pakistan suffers from a crushing energy crisis, but the United States is pushing Islamabad to use its offered alternative solutions to help avoid sanctions...Although the pipeline on the Iranian side has almost been completed, Pakistan has run into repeated difficulties, both in financing the project and over a US threat of possible sanctions due to Iran’s nuclear activities...Iran eventually agreed to finance a third of the costs of laying the pipeline through Pakistan, with the work to be carried out by an Iranian company."

DAWN: (March 11, 2013) Pakistan stock market plummets over Iran pipeline sanction fears
"The Karachi Stock Exchange (KSE) benchmark 100-index ended 441.62 points, or 2.46 per cent, lower to close at 17,522.56 points...“There was a panic-like situation in the market as investors fear United States may impose economic sanctions on Pakistan because of the gas pipeline,” said analyst Mohammad Sohail of Topline Securities...“The market experienced turmoil all the day. It never recovered till it suspended trading.”..Brokers said selling was witnessed across all stocks...Pakistani analysts said a statement from the US State Department was expected later in the evening, which could determine the future course of the market...US State Department spokesperson Victoria Nuland has warned if the deal is finalised, it “would raise serious concerns under our Iran Sanctions Act.”

Reuters:  (March 11, 2013) Pakistan starts work on Iranian gas line opposed by U.S.
Pakistan's stock market closed lower on Monday after the gas pipeline deal with Iran raised fears the United States would impose sanctions on Islamabad, dealers said...Asked if she wished to calm those worries, U.S. State Department spokeswoman Victoria Nuland bluntly told reporters in Washington: "I would not like to allay those fears.  If this project actually goes forward we have serious concerns that sanctions would be triggered," she added. "All of that said, we've heard this pipeline announced about 10 or 15 times before ... so we'll have to see what actually happens."...Pakistan has pursued the pipeline scheme as a way of alleviating severe energy shortages that have sparked demonstrations and battered a weak government. At the same time, it badly needs the billions of dollars it receives in U.S. aid..."The Pakistani government wants to show it is willing to take foreign policy decisions that defy the U.S., particularly when such crucial issues as energy security are at stake," said Anthony Skinner, a director of British-based Maplecroft risks consultancy.  "The pipeline not only caters to Pakistan's energy needs, but also lodges brownie points with the many critics of the U.S. amongst the electorate," he told Reuters....The project faces security challenges posed by ethnic Baluch militants who have demanded greater control over Baluchistan's natural resources, and by Iranian Sunni insurgents also based in Pakistan who are fighting for greater rights in Iran..."Having a pipeline running through the region makes it particularly vulnerable to bombings and disruption," said Skinner. "Washington could bolster its support for local elements, causing significant disruption to pipeline infrastructure." 

DAWN: (March 13, 2013) ‘Gas pipeline dispute may not lead to US aid cut-off’
"The United States might not stop economic assistance to Pakistan over the Iran gas pipeline but the project would seriously strain relations between the two countries, diplomatic sources told Dawn...“The project will create lot of bitterness towards Pakistan, which Pakistan does not need,” said one source, noting Osama bin Laden’s discovery in Abbottabad had already tarnished Islamabad’s image in the United States...“The worry about Iran’s nuclear programme is real enough — and the perception that Pakistan may be helping them to make more money to evade international sanctions will further damage Pakistan’s stock here,” the source said."

UPI:  (March 13, 2013) Iran pipeline to Pakistan tests U.S. stand
"Although Iran won't feel any economic benefit of the deal for some time, Tehran can chalk up one in the eye for "the Great Satan" as it seeks to throttle the Islamic Republic's energy exports, its economic mainstay...Monday's inauguration of Pakistan's participation in the much-delayed project is the first substantial defiance of Washington's campaign to cripple Iran's economy until Tehran abandons what the Western powers see as a drive to develop nuclear weapons...Middle East analyst Kaveh L. Afrasiabi observed that the pipeline deal is also "a timely break for Tehran, which is reeling under Western economic pressures..."It weakens the politics of leverage at nuclear negotiations with Iran which are currently at a turning point," he wrote in Asia Times Online this week...The dilemma the Americans now face, he noted, "is how to look for a greater stability role from a country that it is now threatening with (collateral) sanctions under the U.S. Sanctions Act."...Lastly, there are U.S. concerns that India, which was part of the project when it was mooted in 1994 but withdrew under U.S. pressure in 2008, might decide to defy the Americans as well...India, like Pakistan, its longtime regional adversary, desperately needs to boost its energy supplies to meet the demand of its burgeoning industrial sector and population."

Here is more from Wikipedia on the Iran-Pakistan Pipeline

In a related note Pakistan's parliament made it through a full five year term without being deposed.  This is a first.

DAWN:  (March 17, 2013) Days of mischief against democracy over, hopes Raja: 
"The PPP-led federal coalition bid a historic farewell on Saturday as Pakistan’s first elected government to complete its parliamentary term, with Prime Minister Raja Pervez Ashraf voicing his confidence that it would mark the end of a “sinister chapter” in the country’s history of ambushes on democracy.  The term of the government was linked to the expiry of the five-year term of the 342-seat National Assembly at midnight, though the prime minister might hang on for about a week until a caretaker successor takes over to oversee the next national elections within two months...The term of the National Assembly, elected in a 2008 vote that dealt a death knell to about nine years of military-led rule of Gen Pervez Musharraf, began with oath-taking by its members on March 17, 2008, though the coalition government, then headed by prime minister Yousuf Raza Gilani and also including PML-N, took office eight days later on March 25."

The Stalking Horse and the Triumphant Return of the Ding Dong!

NYT:  Hostess Sells Twinkies Brand to Investment Firms
"Twinkies and Ding Dongs are back from the dead...Hostess Brands, the now bankrupt owner of the cream-filled confections, agreed on Tuesday to sell the snacks — along with Ho Hos, Sno Balls and Dolly Madison Zingers — to two investment firms with a shared history of corporate turnarounds...The deal, worth USD 410 million...The new owners will be Apollo Global Management and Metropoulos & Company, which owns Pabst Blue Ribbon and Vlasic pickles...Apollo and Metropoulos emerged from what at one point seemed like a crowded field of bankruptcy bidders for the brands. At one point, more than 100 parties had expressed interest in Twinkies...But by 5 p.m. Monday, the deadline for bids, the only qualified offer came from Apollo and Metropoulos. Advisers to Hostess canceled an auction scheduled for Wednesday morning and declared the two the winner.  “It’s not that we lacked interest,” Gregory F. Rayburn, the Hostess chief executive, said in an interview. “Other bidders felt that they could not top the price.”...Hostess is still selling its other remaining brands, including Drake’s snack cakes. Those auctions are expected to conclude by early next month."

How exactly did this auction work?

CNBC:  'Wild and Woolly' Twinkies Auction Expected: Hostess CEO     Jan 31, 2013
"The bids for Twinkies and the other snack cakes of bankrupt Hostess Brands will be intensely competitive, company CEO Greg Rayburn predicted in a "First on CNBC" interview on Thursday.  Hostess has chosen a baseline offer of USD 410 million from private-equity firms Apollo Global Management and Metropoulos & Co. to purchase the brands, five bakeries and certain equipment...The so-called "stalking horse" bid by the private equity firms to buy the 82-year-old baker would serve as the minimum offer...Others bidders could still offer more at an auction that Hostess plans to hold next month — pending authorization from the U.S. Bankruptcy Court for the Southern District of New York. "

so the "stalking horse" Apollo made their bid known and then there was a court run auction to see if any other parties could top that bid?   However in the end no one wanted to top USD 410 MM.   Why do you want to conduct an auction in this manner?

Here is a description of some standard types of auction mechanisms

There are two potential obstacles to using standard auction mechanisms in bankruptcy proceedings (1) there may be a substantial fixed cost for a bidder to value the assets.  Hence a bidder will decrement his valuation by the cost of gathering the information.  Furthermore a potential bidder may choose not to participate at all if the cost of gathering the information is significant and the probability of winning the auction is low.  (2) there may be great uncertainty as to what the assets are worth.  If one conducted a sealed first price auction then bidders would have no opportunity to confirm their valuations from the valuations of other bidders.  Since the risk would be higher bidders would decrement their bids.  If one conducted an English first price auction then there would be an opportunity to see how others value the asset - on the other hand the first bidder is still at risk of going out on a limb and having no one else bid.  The stalking horse mechanism guarantees at least one party will bid on the asset and also sets a public reference price for the asset.

so why would anyone want to go out on a limb and be the first public bidder ie the stalking horse


from here is a description of an auction with a stalking horse

""Incentives for the stalking horse - Potential purchasers may be reluctant to take on the role of the stalking horse for a variety of reasons, preferring instead to wait for another bidder to negotiate the deal and then participate in the auction. The initial bidder typically has to expend greater resources than other bidders in negotiating the deal, performing due diligence, and otherwise setting the "floor" for the terms of the transaction. To compensate the stalking horse for its time and effort, certain incentives are typically negotiated. Without receiving these incentives, the potential purchaser would not otherwise agree to be the stalking horse. These incentives may include expense reimbursements, break-up fees, favorable bidding procedures, and exclusivity arrangements. The incentives requested by the stalking horse are often at odds with the debtor's duty to obtain the highest and best value and the requirements of the bankruptcy code. The negotiations between the debtor and stalking horse must strike an acceptable balance, or the bankruptcy court will likely not approve the stalking horse's proposed terms."

Who knew that Twinkies and Ding Dongs could be so educational?

India's Golden Years

Economist:  India’s lust for gold - Treasure chest - Love of gold becomes a macroeconomic problem
"Sadly, India’s gold obsession is no laughing matter. India is the world’s largest consumer. Surging gold imports have helped widen the current-account deficit, which was an alarming 5.4% of GDP in the quarter to September (see chart). On January 2nd the finance minister appealed to the nation to buy less gold."

From the Associated Chambers of Commerce and Industry in India this report India's Gold Rush:  It's Impact and Sustainability.   Some of the numbers are staggering.  In terms of consumer demand for gold India stands 50% above the number two country China and miles above any other country.  Data is from the ASSOCHAM report converted to troy ounces (toz).

Gold Demand in toz (1yr ending 2011:III)
	Jewellery	Bar & Coin	Total
India	20,894,285	13,152,565	34,046,850
China	16,361,135	8,384,720	24,745,855
Russia	2,250,500	-	2,250,500
USA	3,835,495	3,028,530	6,864,025
UK	810,180	-	810,180
WORLD	64,885,130	45,305,780	110,190,910

India is the world's second largest country by population so one might expect that in absolute terms they might account for a large percentage of gold demand.  However comparing India to China, Russia, USA, and UK on a per capita basis India still leads the pack with per capita demand for gold nearly 30% greater than the second place country the USA.

Gold Demand Per Capita (1yr ended 2011:III)
	Demand (toz)	Population	Demand Per Capita
India	34,046,850	1,210,193,422	0.028
China	24,745,855	1,354,040,000	0.018
Russia	2,250,500	143,369,806	0.016
USA	6,864,025	315,527,000	0.022
UK	810,180	63,181,775	0.013
WORLD	110,190,910	7,067,000,000	0.016

This result is more dramatic when you normalize by GDP.  Assuming a gold price of USD 1700 per toz.

Gold Demand as a Percentage of GDP
	Gold Demand (USD)		Gold Demand / GDP
		GDP 2012  (USD)
India	57,879,645,000	1,897,608,000,000	3.05%
China	42,067,953,500	7,203,784,000,000	0.58%
Russia	3,825,850,000	1,857,770,000,000	0.21%
USA	11,668,842,500	14,991,300,000,000	0.08%
UK	1,377,306,000	2,429,184,000,000	0.06%
WORLD	187,324,547,000	70,201,920,000,000	0.27%

India's consumer demand for gold as a percentage of GDP is ten times the world average, and nearly forty times that of the US.  However gold is a luxury item so one would actually expect demand share to increase as the country gets richer, so the India case is truly an anomaly.

How did India get to spending nearly 3% of her GDP on gold consumption?
 

Growth of India's Gold Imports
			Imports (assuming $309 / toz)
Year	Imports (USD)	Gold Price per toz
2001-02	4,170,400,000	309.73	4,170,400,000
2002-03	3,844,900,000	363.38	3,277,232,861
2003-04	6,516,900,000	409.72	4,926,485,007
2004-05	10,537,700,000	444.74	7,338,763,819
2005-06	10,830,500,000	603.46	5,558,828,696
2006-07	14,461,900,000	695.39	6,441,398,765
2007-08	16,723,600,000	871.96	5,940,410,831
2008-09	20,725,600,000	972.35	6,601,882,129
2009-10	28,640,100,000	1224.53	7,244,165,658
2010-11	33,875,800,000	1571.52	6,676,562,522

A large part of the problem is that gold prices have increased by a factor of five over the last decade (see here and here).  However even adjusting the price of gold back to 2002 levels of USD 309 per toz India does seem to have increased her import demand over the last decade (imports taken from the ASSOCAM report).

What is the cause of India's ravenous demand for gold?  Per the Economist story  "...the traditional gold consumers are southern peasants buying jewellery. They have no access to formal finance; gold requires no paperwork, incurs no tax and is liquid. But over the past decade the mania has spread. By weight consumption has doubled, for several reasons: a surge in money earned on the black market; investors chasing the gold price; and the dismal returns savers get from deposit accounts. Real interest rates are low, reflecting high inflation and a repressed financial system that is geared to helping the state finance itself."

Is this a bad thing?  Yes it probably is.  A countries productivity is directly proportional to its per capita physical capital stock.  India has a relatively low capital stock per capita.  In many countries household savings are lent to firms either directly through equity purchase or corporate bond purchase or indirectly through bank intermediaries.  Firms use these funds to increase their capital stock and thus the productivity of their workers.  If Indian peasants were to stick their gold in banks and let the banks lend the gold out to firms to buy capital that would be great- but if they instead keep the gold as jewellery or under a mattress then they lose the potential productivity gain.   Anther way to think of it is assume India produces products that are exported  - then it would be desirable for them to use the export earnings to purchase physical capital stock from abroad.  But instead they are importing gold which is then squirreled away under mattresses and does not contribute to increasing the countries capital stock and productivity. 

Doesn't the same argument hold for China though?  China exports goods to the US and in return buys US Treasury bonds.  To some degree yes it is the same argument.  By China holding US Treasuries instead of importing physical capital they are not increasing their capital stock as much as they could and  hence reducing productivity and their future income.  However US Treasuries do have one advantage over gold.  If China holds USD 1 Billion of US Treasuries which expire in 10 years then they know that in 10 years they will be able to purchase USD 1 Billion in goods from the US.  Whereas if they instead owned USD 1 Billion in gold they are at risk that the price of gold falls and they lose purchasing power.  Which do you trust more the USD or gold?   Yes China has an analogous problem but that doesn't mean that India doesn't have a problem.

The ASSOCHAM report (pages 23-24) suggests the following solutions to the problem of India's gold hoarding

1. Increase the reach of banks - India is estimated to have a 30% savings rate of which 10% is being invested in Gold.  However the World Gold Council reports that in rural India only 21% of household have access to formal financial sector - hence the gold purchases.
2. Consider innovative means of alternative investments - apparently it is very difficult to open a bank account in India?  However purchasing gold jewellery is easy.  Perhaps the government could create alternative savings options.
3. Liquidity quotient of alternative investments instruments - in rural areas of India gold is highly liquid while other assets may not be.  Perhaps the government could introduce liquid instruments with a guarantee of buyback.
4. Massive education campaign

Interestingly the history of banking in London dates back to goldsmiths who evolved from artisans to depositories to banking.  See Wikipedia here

"The main developers of banking in London were the goldsmiths, who transformed from simple artisans to becoming depositories of gold and silver holdings. Events such at the appropriation of £200,000 of private money by King Charles I from the royal mint, in 1640 caused merchants to lose trust in the existing institutions and drive them to find more trusted alternatives such as the goldsmiths...Goldsmiths soon found themselves with money they had no immediate use for, and they began to lend it out at interest to merchants and the government. Finding substantial profit in this business, they began to solicit deposits and pay interest on them. The goldsmiths eventually discovered that the deposit receipts they provided were passing from person to person in lieu of payment in coin. This prompted them to begin lending paper receipts rather than coins. By promoting acceptance of the receipts as a means of payment, the goldsmiths discovered they could lend more than the gold and silver coin they had on hand, a practice that became known as fractional-reserve banking.[187]"

Also see here.

One wonders if the Indian government could establish a network of gold depositories which would effectively act as banks.  Peasants could deposit their gold in the depository.  The depository would then lend out a portion of the gold to firms who could use the funds to purchase capital.  The Indian government could promise to insure the gold deposits much like our banking deposit insurance. 

Heckman on early childhood education

Interview with Nobel Laureate James Heckman on early childhood education

PBS:  It Pays Off to Invest in Early Education, Says Nobel Economist Who Boosts Kids' IQs

Here is a summary of his work

David Warsh:  Early Childhood: the Nub of the Problem

and here is his website

Heckman

this is important stuff.

Likely the first and last time that I blog about NASCAR..

NBC Sports:  Danica's Daytona impact important off the track
Joe Posnanski writes that a Danica Patrick win at this year's Daytona 500 (she has the pole position) will mean much more than a notable "first woman to win Daytona".  Patrick serves as a role model to his eight year old daughter Katie.  Not because Katie will grow up to be a race car driver but because by Patrick being one of (and perhaps the) best at she does she is serving as a model for Katie that she can aspire to do anything she wants with her life.  I have never been a NASCAR fan but I may even watch some of tomorrows race.  I now have a personal interest in it.  I want to see Patrick win ...because of what a win will mean to thousands or millions of young girls like Katie.

This got me to thinking.  What has a Barack Obama presidency meant for millions of young African American children?  What would a Hillary Clinton presidency mean for millions of young girls?  How much impact do role models have on a child's future achievement?  Looking around the internet it is surprisingly difficult to find polls of children's role models.

Here is a poll of 845 readers of Highlights Magazine asking "who is a person you admire and respect".  Top responses were friends (28.4%), teachers (17.2%), and family members (12.9%).  Celebrities got less than 5% of the vote.  Here is a discussion of these results.

Here are the results from a poll of school children (no age range or sample size) as to who their favorite movie role model is.  Number one is Hermione Granger from Harry Potter.

Here is a poll of 1,121 children ages 8-12 on their favorite celebrity role model.  Taylor Swift edges out Justin Bieber.  I can't find the original poll and the article does not make clear what the question asked was exactly.

Here is a poll of 13-17 year olds asking them to identify the person whom they admire most today as a role model, other than their parents.  This is targeting a slightly older group but we do get detailed results.  To summarize the results; another family member (37%), teachers and coaches (11%), friends (9%), religious leaders they know personally (6%), entertainers (6%), sports heroes (5%), political leaders (4%), faith leaders (4%), business leaders (1%), authors (1%), science and medical professionals (1%), other artists (1%), and members of the military (1%).  "The high-profile leaders most commonly named were President Obama (3%) and Jesus Christ (3%). Other “celebrities” mentioned by multiple teenagers in the study included entertainers Tyra Banks, Rob Dyrdrek, Lady Gaga, Demi Lovato, Paul McCartney, Taylor Swift, Steven Spielberg and Oprah Winfrey. The only athletes who earned multiple mentions were LeBron James, Peyton Manning, Michael Phelps, Mike Tyson and David Wright. In the spiritual domain, besides Jesus, teens were most likely to admire Mahatma Gandhi and the Pope. Social and business leaders garnering teen attention included Walt Disney, Bill Gates, and Martin Luther King, Jr. The writers who captured the imagination of teens included Yumi Tamura (Japanese Manga artist) and Alan Moore (English comic book writer)."

The results above suggest that youngsters do not model themselves on celebrities but instead look to parents, relatives, and friends for role models.  I tend to think that the result understate the impact of famous people on children - but I don't really have any hard evidence.  While looking through Highlights State of the Kid Poll 2011 I did find the below.  Perhaps after Sunday it will change.  Go Danica!

JFK and the civil rights movement

AP:  Despite questions, JFK holds important role in history of civil rights movement
Interesting article about about JFKs relationship to the civil rights movement and specifically about how his legacy is perceived within the black community.  Here is an article by Robert Dallek which describes the evolution of JFKs stance on civil rights.  One point the AP does not fully address is the mixed support for civil rights within the the Kennedy administration.  J. Edgar Hoover was openly hostile to racial integration and the civil rights protesters.  Robert Kennedy - like his brother - alternated between political pragmatism and veiled moral support for the protesters.  However  others within the administration - notably Harris Wofford, John Seigenthaler, and Burke Marshall - were firmly on the side of Dr. King and the civil rights movement.

Eminently sensible?

New Yorker:  Letter From California - Home Economics
 Mortgage Resolution partners has an idea for solving the foreclosure crisis - localities should condemn underwater properties (properties whose market value is below the principle of the mortgage on the property) and then reissue the mortgages at a lower principle value.  Their argument goes something like this:

A homeowner gets a USD 300,000 mortgage to finance a home purchase.  After he buys the house the value of the home falls to USD 200,000.  Who is now at risk?  Answer - whoever is the current holder of the mortgage.  Should the homeowner continue to pay the mortgage then eventually the mortgage holder will get paid back.  However should the homeowner default and be foreclosed upon then the mortgage holder will take possession of an asset only worth USD 200,000 and will hence realize a USD 100,000 loss - at least.  The process of foreclosing and reselling incurs some cost as well so the loss to the mortgage holder is greater than USD 100,000.

From the above argument it is easy to see that if a property goes underwater then it is in the mortgage holders interest to keep the homeowner in the house and paying the mortgage.  In fact faced with an imminent default by the homeowner it should be in the mortgage holders interest to reduce the principle value of the loan down to the market value of the home rather than foreclose and realize the same loss plus some additional charges.  Some banks have in fact been reducing principle values (see here) but there are three outstanding problems:

1. The bargaining problem.  If a homeowner know that a mortgage holder will reduce the principle value of his loan if the homeowner is about to default then it is in the homeowners interest to threaten to default.  How does the mortgage holder distinguish between a homeowner who really is about to default and one who would continue paying the existing mortgage?
2. Many mortgages (especially recent troubled vintages) are not currently held by a single party but were sold off to SPVs who sliced and diced the cash flows into RMBS and sold the resulting securities off to many investors.  Modifying these mortgages prior to an actual default may be very difficult.
3. If a mortgage issuer reduces the principle then he must realize the loss from an accounting standpoint.  If the homeowner defaults and the mortgage issuer sells off the property at market value below principle value then the mortgage issuer must realize the loss from an accounting standpoint.  However if the mortgage issuer can keep the homeowner paying the original mortgage then he does not need to realize any loss - at least not yet.  This clearly produces a bad incentive to push the problem off into the future.

Mortgage Resolution Partners plan goes like this.  The locality would use its power of eminent domain to seize the mortgage.  They would pay the current mortgage holder ( SPV / bondholder / ) 80% of the current market value of the property (which would be USD 160,000 in the above example).  The locality would then arrange for a new mortgage with principle value equal to 95% of the current market value of the property (which would be USD 190,000 in the above example).  The 15% difference between the value of the new mortgage and what was paid to the former mortgage holders would be divided between the locality, the issuers of the new mortgage, closing costs for the new mortgage, and USD 4,500 for MRP.  Mortgage holders hate this plan for two reasons

1. The bargaining problem again.  Why reduce the mortgage for a homeowner who would have paid the full principle value off anyways.  The homeowner purchased an asset that declined in value and now the mortgage holder is being penalized for it.
2. The mortgage holder only receives 80% of the current market value of the property.  MRP argues that 80% is where Fannie and Freddy have marked their own portfolio.  The mortgage issuers argue that MRP and the localities are just stealing 20% of the principle value for themselves.
3. The mortgage issuers are forced to realize the loss today.  They don't come right out and say this but it is obviously a disincentive.

Iran->Turkey Gas For Gold Trade

Reuters:  Turkey to Iran gold trade wiped out by new U.S. sanction
"Turkey, Iran's biggest natural gas customer, has been paying Iran for its imports with Turkish lira, because sanctions prevent it from paying in dollars or euros.  Iranians then use those lira, held in Halkbank accounts, to buy gold in Turkey, and couriers carry bullion worth millions of dollars in hand luggage to Dubai, where it can be sold for foreign currency or shipped to Iran.  Halkbank had also been processing a portion of India's payments for Iranian oil.  A provision of U.S. sanctions, made law last summer and implemented from February 6, effectively tightens control on sales of precious metals to Iran and prevents Halkbank from processing oil payments by other countries back to Tehran, bankers said...Trade in Turkish gold bars to Iran via Dubai was already drying up as banks and dealers declined to buy the bullion to avoid sanctions risks associated with the trade...Turkey like China, India and Japan is heavily dependent on imported energy and, while it has cut back on oil from Iran, has made clear it cannot simply stop buying Iranian oil and gas.  "With so many restrictions, Iran's cash may accumulate in Halkbank accounts... they may have difficulty getting some of that money out of Turkey," another senior Turkish banker said." "

per here (see chart reproduced below) it appears that Turkey is getting 20% of their natural gas imports from Iran.  That is their second largest import source behind Russia.  I did not realize that Turkey was so dependent on Iranian gas...hmmm I wonder if Israel could export natural gas from the new Leviathan field to Turkey.  That would be a win win for Israel as they get a new export market and simultaneously stick it to Iran...A quick Google of "Israel Leviathan exports Turkey" and it seems I am not the only one thinking this....

TodaysZaman:  Turkey's Zorlu Group pushing Israel to approve gas exports
"The Zorlu Group, one of Turkey's biggest holdings, is lobbying Israeli authorities to approve a possible gas sale to Turkey despite icy relations between the two nations.  Israel's Haaretz claimed on Thursday that the Zorlu Group is planning to build an undersea pipeline from Israeli-owned offshore gas rigs to Turkey's south coast, which will be shortest and cheapest gas pipeline project Turkey has ever been part of.  The daily reported that the Turkish conglomerate has been working in recent months to convince the Israeli government and Israel's Leviathan gas field partners to approve energy exports to Turkey...Zorlu's plan is to lay an undersea pipeline from the Leviathan field 130 kilometers off Haifa to Turkey's south coast. The pipeline would deliver between 8 billion and 10 billion cubic meters of gas annually. The Zorlu Group has assets worth $1 billion in Israel...The Leviathan gas drill, 130 km (80 miles) off the port of Haifa, is the world's biggest deepwater gas find in the past decade. Israel could earn at least $150 billion in gas revenues."

By country of origin (in mcm)	2006	2007	2008	2009	2010	%Total 2010
Azerbaijan	..	1258	4580	4960	4521	11.89%
Iran	5594	6054	4113	5252	7766	20.42%
Russia	19316	22752	22962	19473	17575	46.21%
Algeria	4130	4205	4148	4487	3907	10.27%
Egypt					270	0.71%
Nigeria	1100	1396	1017	903	1189	3.13%
Qatar					1845	4.85%
Trinidad & Tobago					240	0.63%
Other	76	1425	333	781	724	1.90%
Total	30219	35832	37153	35856	38037	100%
%Total Consumption	96.91%	97.90%	101.39%	102.11%	99.78%
c = confidential; - = nill; ..= not available
Source: Natural gas information 2011 & OECD/IEA, 2011

Filiblather

Washington Examiner:  In Hagel filibuster, all eyes on McCain
"Hagel opponents will also seek to convince McCain’s allies, Sens. Lindsey Graham and Kelly Ayotte, that they should continue to filibuster Hagel even if their demands on Benghazi have been (somewhat) satisfied.  Indeed, in the absence of any Democratic defections, the anti-Hagel group needs to keep McCain, Graham, and Ayotte — plus every other Republican who voted against Hagel on Thursday — in the fold if they expect to use the filibuster to actually stop the Hagel nomination."

Strange article by Byron York.  It focuses on the Republicnans strategy for stopping the Hagel nomination.  However nowhere in the article is there any reference as to "why" the Senate Republicans would want to stop the Hagel nomination.  It seems to be taken for granted that they would want to stop his nomination.

My opinion.  Hagel always seemed like a - shoot straight and let the chips fall where they may - type of guy which can be rare in Washington - for that he deserves a lot of respect.  Would he be a good Secretary of Defense?   It is not obvious to me that he would or would not be.

Comings and Goings...

Bloomberg:  Michael McGlone, Commodity Director, Left S&P Dow Jones Indices
Mike McGlone is a smart and creative guy.  I worked with him at ABN AMRO and always found his takes on the market well thought out.  Hope he lands on his feet.

But I ask...

TPMMuckraker:  Feds File Charges Against Jacksons, Husband And Wife
"After months of rumors and reports, the federal charges against former Rep. Jesse Jackson Jr. (D-IL) and his wife, former Chicago Ald. Sandi Jackson, became official on Friday.  A document filed in U.S. District Court for the District of Columbia alleged that Jackson Jr. used about USD 750,000 in campaign funds for his personal benefit...In detailing the charges against Jackson Jr., prosecutors alleged, among other things, that the former lawmaker used campaign credit cards to make USD 582,773 in personal expenses, and directly used USD 57,793 in campaign money for personal expenses. Among the items purchased were a USD 43,350 gold-plated Rolex watch, USD 9,588 worth of children’s furniture, and USD 5,150 worth of fur capes and parkas purchased by an unnamed co-conspirator. Other items purchased include tens of thousands of dollars worth of Bruce Lee memorabilia, Michael Jackson memorabilia, Malcolm X memorabilia, and Jimi Hendrix memorabilia, plus items described by prosecutors simply as “Michael Jackson hat,” “Michael Jackson fedora,” and “Michael Jackson and Eddie Van Halen guitar.” "

If true this is very disappointing.  I worked on his first campaign and he always seemed like a pretty good guy.  But I ask...what sort of Bruce Lee memorabilia?   That actually sounds pretty cool.

Alternative Histories

Alternative history is "a genre of fiction consisting of stories that are set in worlds in which history has diverged from the actual history of the world."  Like what would have happened if the South had won the Civil War or if the US did not enter World War II."

And then there is this.  Yeah it was three years ago when she said this - but it is still as idiotic today as it was then.

Just for the record

• it was "Smoot-Hawley" not "Hoot-Smalley".  
• Smoot-Hawley was not enacted under FDR.  It was enacted under Hoover - two years prior to FDR's election.  
• Senator Reed Smoot and Rep. Willis Hawley were both Republicans.
• In the Senate 39 Republicans and 5 Democrats voted for Smoot-Hawley.  In the House 244 Republicans and 20 Democrats voted in favor of the bill.  (see here)  
• As part of FDR's 1932 campaign he pledged to reduce tariffs.  In 1934 the Democratic House and Senate passed the Reciprocal Trade Agreements Act to roll back the tariff.
• Coolidge became president in August of 1923.  Roosevelt  took office in March 1933.  From the graph below of Industrial Production its pretty clear that Roosevelt inherited a much worse situation.

So she got everything correct in the story..except for all of the facts.  As a work of alternative history this one seems kind of bland.  I am not seeing a best seller here.

A hopeful sign?

Bloomberg:   Egypt Pound Drop Slows as Central Bank Curbs Move, Boosts Supply
"The Egyptian pound weakened the least in almost six weeks at an auction today after the central bank introduced new curbs to slow the depreciation and offered more U.S. currency. The benchmark dollar bonds rose...The regulator auctioned USD 49.2 million at a weighted average price of 6.7043, compared with 6.702 a dollar yesterday, according to its data on Bloomberg. Banks received 43 percent on average of what they sought, up from 24 percent yesterday, the data show. The central bank sold USD 172 million at this week’s sales, a three-week high, according to the data."

or maybe just a breather?

"“The central bank’s measures this week have helped reduce the gap between the official and parallel exchange rates and lower the panic on the street with respect to the currency,” Mohamed Kotb, regional asset management director at Cairo-based Naeem Financial, said by phone...“Fundamentally, nothing has changed as far as Egypt’s macroeconomic situation, which remains dire,” Kotb said."

I am not so sure about that. If the Central Bank has engineered a devaluation without a run on the currency that is certainly a positive.  It may not cure the overall macro situation but it prevents a bad situation from getting significantly worse.

USD 10 Trillion is a big number...

FT:  Crunch feared if collateral rules enforced
"New clearing regulations could suck in USD 10tn of safe assets...European parliamentarians this week debated plans to make safer the financial derivatives industry – an essential cog in the global economy – where the notional amounts outstanding on over-the-counter deals exceed USD 600tn. Regulators want more trades processed through transparent exchanges and cleared through “central counterparties”, back office institutions that stand between two parties in a trade, ensuring they are completed even if one side defaults...Regulators are pushing for non-centrally cleared trades to be backed by high levels of collateral, such as cash or government bonds. This is where the USD 10tn figure comes in. It is the amount of extra collateral that could be required according to estimates by the International Swaps and Derivatives Association...A separate IMF paper published last week by Manmohan Singh, ...puts the total additional collateral requirements resulting from regulatory changes at between USD 2tn and USD 4tn – less than the USD 10tn figure cited by the ISDA derivatives lobby, but still the same order of size, for instance, as the European Central Bank’s balance sheet...
But central banks are also, inadvertently, restricting collateral supplies. Mr Singh points out that bond purchases by the Swiss National Bank to prevent its currency’s appreciation “withdraw the best and most liquid collateral from the [neighbouring] eurozone”. Similarly, Fed purchases of US Treasuries and mortgage backed securities “could silo over USD 1tn additional good collateral in 2013”.

Quoting myself from a September 9, 2012  post

"My second thought was:   Centralized clearing has huge advantages in terms of risk mitigation.  However if some of our current economic problems are due to a shortage of high grade collateral (see link and abstract below) then the move to centralized clearing may also have some significant negative consequences as it further strains the supply of high quality collateral.

Ricard Cabellero - On the Macroeconomics of Asset Shortages

Abstract:   The world has a shortage of financial assets.  Asset supply is having a hard time keeping up with the global demand for store of value and collateral by households, corporations, governments, insurance companies, and financial intermediaries more broadly.  The equilibrium response of asset prices and valuations to these shortages has played a central role in global economic developments over the last twenty years.  The so-called "global imbalances", the recurrent emergence of speculative bubbles (which recently have transited from emerging market, to the dot-coms, to real estate, to gold...), the historically low real interest rates and associated "interest rate conundrum," and even the widespread low inflation environment and deflationary episodes in parts of the world, all fall into place once one adopts the asset shortage perspective. "

I am not sure that I would attribute as much as Cabellero does to the demand for high quality assets but there probably is something to his story.  And in case you were wondering, threatening to default on US Treasury debt does not help the situation.