What a year….extreme market volatility, a housing bust, $140 oil, federal bailouts of well-known financial institutions and a crazy presidential election. It kind of makes you wonder if, prior to Americans going to the voting booth, we’ll have an October surprise.
As noted in a Sunday Times Magazine piece by Dexter Filkins, “Since 2004, six major terrorist plots against Europe or the United States – including the successful suicide attacks in London that killed 52 people in July 2005 – have been traced back to Pakistan’s tribal areas, according to Bruce Hoffman, a professor of security studies at Georgetown University. Hoffman says he fears that Al Qaeda could be preparing a major attack before the American presidential election. ‘I’m convinced they are planning something.’”
Of course we pray this doesn’t come to pass, but particularly during the next two months caution should be the watchword, particularly if you’re thinking of ‘buying the dips’ in the stock market. It’s not a time to be a hero.
This past week started out being all about Fannie Mae and Freddie Mac, and by week’s end the story was Lehman Brothers and the eventual disposition of the investment bank. Regarding Lehman, as I go to post the only thing that is certain is the Treasury Dept. is working with prospective buyers to see if a rescue plan can be worked out, though this time, as opposed to the Bear Stearns bailout in the spring, the government is emphasizing it won’t be contributing its own cash. On Wednesday, in attempting to prevent the demise of the firm, following its inability to raise capital, Lehman preannounced it would lose $3.9 billion in the third quarter, as it marked down the value of complex debt instruments by almost $8 billion. Lehman then tried to slow the collapse of its shares by announcing it would spin off commercial real estate assets it pegged as being worth $25-$30 billion, but investors were unimpressed, including the Korea Development Bank, which at one time had been rumored to be an acquirer before coming to its senses.
As for Fannie and Freddie, I have to admit I was overwhelmed in how best to tackle this one. For today, this is my best shot.
On Sunday, Treasury Secretary Henry Paulson announced the U.S. government was seizing control of the two mortgage behemoths that not only account for over $5 trillion of a $12 trillion mortgage market, but recently, due to the credit crunch, have comprised 70% of all new mortgage originations. Fannie and Freddie have had combined losses of nearly $15 billion the past four quarters due to surging defaults on the pools of mortgages they either own or guarantee. For example, 47% of Fannie’s losses and 65% of Freddie’s have come from mortgage defaults in just four states; California, Nevada, Florida and Arizona. One can easily project the losses will continue to mushroom, particularly when you have 17% of Freddie’s Alt-A (one level above subprime) mortgages where the loan balance is already greater than the home value.
“Our economy and our markets will not recover until the bulk of this housing correction [ed. crash] is behind us,” said Paulson. “Fannie Mae and Freddie Mac are critical to turning the corner.”
The Federal Housing Finance Agency has placed the two under a ‘conservatorship,’ replacing the CEOs of both and eliminating their dividends. Under the bailout, Treasury receives $1 billion of senior preferred stock, with warrants representing 80% of the combined companies, and the government will receive annual interest of 10% on its stake.
While common stockholders weren’t eliminated, they are last in line when it comes to divvying up any future profits (should the operations eventually turn around), while preferred shareholders are second in line for absorbing losses. Having had their dividends stripped out, the preferred issues lost about 90% of their value in days, a huge blow not just to individual investors, but also many small institutions that held the securities as a significant portion of their assets. There was an ‘implied’ guarantee of some kind of protection, after all, these investors thought, seeing as it was more than just ‘common.’
Paulson’s plan, importantly, doesn’t address the question of the eventual final status of Fannie and Freddie, punting a decision on this to the next president and Congress. Many congressmen, though, were undoubtedly bummed to learn all of Fannie and Freddie’s lobbying activities were immediately suspended.
The goal of the intervention, first and foremost, was to restore some semblance of normalcy to the housing market, and while it’s still very early in the game, mortgage rates did indeed fall sharply (from 6.50% to 6.00% for a 30-year fixed) because the government was making it clear that, while common and preferred shareholders were being abandoned, debt holders were safe as there was now an ‘explicit,’ not just ‘implicit,’ guarantee that the federal government will back it. Recall last week I brought up the example of China and its decision, replicated by many other sovereign governments, to drastically scale back their purchases of mortgage-backed paper.
To placate the foreign buyers critical to keeping interest rates low in this country, as well as large institutions that regularly buy the paper, the U.S. government has agreed to provide capital injections into both Fannie and Freddie of up to $100 billion, on an as needed basis rather than one massive infusion.
“Fannie Mae and Freddie Mac securities are held by central banks and investors around the world. Investors have purchased securities of these enterprises in part because the ambiguities in their congressional charters created a perception of government backing. Because the U.S. government created these ambiguities, we have a responsibility to both avert and ultimately address the systemic risk now posed by the scale and breadth of the holdings of GSE (government sponsored enterprises) debt and mortgage-backed securities.
“This commitment will ensure that the conserved entities have the ability to fulfill their financial obligations” regardless of whatever losses or writedowns they might suffer from the housing crisis.
Fannie and Freddie were created in 1938 and 1970, respectively, to increase the supply and reduce the cost of mortgage loans. Through the government’s implied backing (having been created by the government, after all), Fannie and Freddie could borrow at a lower cost and they then used this access to buy loans from banks and other lenders, thus allowing the two to make further loans.
Fannie and Freddie sold stock to raise money, but over time they issued preferred stock that had a higher dividend and greater protection from bankruptcy. It’s this last category, some $36 billion in preferred shares outstanding between the two, that is one of the many controversies because of what investors saw as the implied backing of the government. $20 billion of the $36 billion was sold just since last November. Now those investors have effectively been wiped out, while holders of $15 billion in subordinated debentures, such as PIMCO and Goldman Sachs, were bailed out in full. This sub debt was only about 1% of senior debt outstanding (that which is held by foreign banks, for example), so as the editorial board of the Wall Street Journal argued, why cut the sub debt a break? Thank Henry Paulson, former head of Goldman Sachs, and read between the lines.
So let’s close the circle, for today at least. The reason why Treasury felt compelled to act this week when there was no immediate, evident crisis in both Fannie and Freddie was twofold. One, advisers from Morgan Stanley that were hired by the Treasury Dept. to scrutinize the books found that Freddie Mac’s capital position was far worse than they were letting on. Their actions may not have been illegal, but they were overstating true value. Fannie was in the same boat but on a lesser scale, however, it was just the right time to take care of both.
Second, the decision was dictated by the political cycle. To avoid the accusations of partisanship, the Treasury had to act now. Should the final crisis have erupted the last two weeks in October, you can imagine the uproar before the election.
So what happens now? It remains all about the housing market, as has been the case since I first identified the bubble in this sector and the add-on effects…worldwide. No one can tell you when we’ll hit bottom for certainty (though my guess is early next year), but as to how much the Treasury, and the American taxpayer, have to pony up it is totally dependent on how much further home prices drop and the resultant number of foreclosures. And despite the Fannie and Freddie backstops, even as mortgage rates come down the banks still have to lend and there is little evidence they are prepared to do so.
But we need to move on. In the case of the world economy, Japan’s GDP fell 3% in the second quarter, owing to slowing global demand, particularly in the U.S., for exporters such as Toyota, while China’s Q2 GDP rose 10.1%. That sounds good, and is, if true, but it’s a comedown from previous figures around 11.5%, and worrisome. China’s industrial production for August also rose, 12.8%; again, good but a sign of a slowdown from the previous pace of 16%+. The real good news on the China front is retail sales soared 23% in August.
In Europe, the European Commission forecast recessions for Germany, the U.K., and Spain, not that we didn’t already know this, while in Britain’s housing sector, 22% are forecast to be underwater over the coming months and most experts now agree the property market there will stagnate until 2010.
Here in the U.S., retail sales for August were off a dismal 0.3%, -0.7% ex-autos, but thanks to falling commodities, wholesale prices at the producer level for the month fell 0.9%, helping to confirm my theory of this past spring that inflation is not going to be the issue many felt it would be.
But I continue to get a kick out of those who believe the Christmas shopping season isn’t going to be that bad. We’ve had 8 straight months of job losses, let alone the collapse in housing. Tell me how Christmas is going to be merry? Because gasoline is a little cheaper at the pump than record high levels of just a few months ago? Hardly.
Speaking of energy, obviously I am posting as Hurricane Ike slams ashore. It’s a disaster, but too soon for me to comment on the damage to our energy infrastructure.
For its part, OPEC got together this week and said it would honor its old production targets, which it had been cheating on, so, the press played it up as a production cut but it’s really the same final result. Of more import was non-OPEC Russia making waves that it wants to be invited into the cartel, which will never happen because the Saudis want to be kingmakers and not share the role, though nonetheless OPEC’s secretary-general is traveling to Moscow in October to at least catch a concert and pick up a prostitute or two.
What I’m going to be focusing on the next few weeks is the debate in Congress over an energy compromise bill that would appease both sides; the drillers and the alternative energy folks. If it doesn’t get through, your editor is going to be one unhappy camper.
Back to real estate, I do just have to note a headline in the New York Times this week:
Now this isn’t new, but it gives me an excuse to show new readers just how prescient your editor was.
“Remember, the bubble isn’t just a U.S. story, it’s global; whether we’re talking Britain, Spain, Australia, or China.”
It’s nonetheless amazing how many “smart people” failed to see this; like virtually all of Wall Street and its commercial banking brethren.
Lastly, back to the leading topic of the week, Fannie and Freddie, and next week a resolution of Lehman Brothers, one must assume this current mess we find ourselves in is all about the fact no one knows, still, the value of everything that is on the investment banks’ books. Derivatives did indeed become “weapons of mass destruction,” as Warren Buffett once put it.
But another problem these days is that despite all the uncertainty, those of us who like to hold cash aren’t being rewarded for doing so, while at the same time credit has dried up, thus inhibiting our best entrepreneurs and their ideas to a great extent. It’s been a long time since anyone talked of the latest “new thing,” for instance. What is it? Where is it? Laughingly, about seven years ago it was thought to be the Segway. The iPod? You have to be kidding me.
Of course the next “new thing” is going to come from all the innovation on the alternative energy front, but this requires government cooperation until economies of scale can be achieved. And that, sports fans, requires leadership. McCain or Obama? We’re about to find out.
–The Dow Jones rallied for the first time in five weeks, up 202 points or 1.8%, but the S&P 500 rose just 0.8% and Nasdaq managed a gain of only 0.2%. But here’s the bottom line. The overall action was totally irrelevant.
I’ve said for years the U.S. stock market is nothing more than a casino, and as UBS’ Art Cashin has been pointing out with increasing frequency, one or two days a week, at least, the action is totally dominated by program traders, and/or the hedge funds. This isn’t investing. For the average Joe, especially someone without a lengthy time horizon, it’s nothing more than gambling. Folks, our market is a total joke. I’m only in it myself to the extent I believe, long term, in some individual stories.
And regarding some select stocks, aside from Lehman, Fannie and Freddie, by week’s end it was all about AIG, which traded at $70 last October and closed the week at $12, Washington Mutual (see below) and Merrill Lynch, $78 just last September and now $17. It’s all about real estate and the idiots who decided to structure over the top products to wrap around it. I long predicted the recession for 2008, specifically, though I said as measured by the GDP figures it would be mild, but there is a fine line between recession and depression, and there are times it feels as if we’re uncomfortably close to the latter.
–U.S. Treasury Yields
Rates were essentially unchanged despite some extreme volatility mid-week amid all the uncertainty, and then you had the dollar. Early Thursday, the euro had fallen to $1.38, its lowest level since Sept. 2007, but by the close on Friday, it was back up to $1.42, a huge move as investors couldn’t be too optimistic about the U.S. financial system, at least until participants saw what happened over the weekend and early next week.
There was also talk of new federal budget deficit projections. Suffice it to say that with plunging tax receipts (at least one would think so…the government certainly isn’t getting anything from me this year), the deficit for F2009 (which begins Sept. 30) will be in the neighborhood of $500 billion, depending on how much Treasury has to cough up for Fannie and Freddie.
–And speaking of bailouts, I could have easily put the proposed bailout of the U.S. auto industry in my opening remarks, but other events frankly took precedence, at least for now. What is being discussed in Congress, however, is a $50 billion or so loan guarantee program for Ford, GM and Chrysler. Now excuse my French, but what truly sucks about this, even more so than Fannie and Freddie’s bailout, if that is possible, is the fact U.S. automakers already make highly successful cars in Europe…highly fuel efficient ones, to boot. So while I understand they have massive pension and health benefit issues to take care of, the business itself should be more than viable, yet the Big 3 wants help retooling for a ‘new era’ that is really an old one, by overseas standards.
[There was some bad news on the car front in Asia, as preliminary data for August shows that sales in China have declined by as much as 10% year over year, not good for the likes of GM, which are counting on continuing strong overseas sales to cushion the depression in the U.S. And as further proof the slump in this industry like almost everything else is global, Spain’s sales for August were off a whopping 41% from year ago levels.]
–Consumer prices in China rose only 4.9% in August, the slowest pace since June 2007, a good thing, but producer (wholesale) prices rose 7.2% in Japan for the same month. The difference is that Japanese companies won’t be able to fully pass those increases on to consumers, though for Japan, even a core CPI rising 2% to 3% is far higher than past experiences and will lead to lower consumer spending.
–New Zealand’s central bank cut its benchmark interest rate by a half point, saying the economy is in a recession, its first since 1998, though inflation will slow.
–PIMCO celebrated the government takeover of Fannie and Freddie with the biggest payday ever for Bill Gross’-managed Total Return Fund, $1.7 billion, thanks to PIMCO’s huge bet on bonds issued by the two. All year, Gross consistently projected that the government would have to step in to protect debt holders. But as noted in my opening comments, there are some who are none too pleased at PIMCO seemingly having gamed the system. But as you learn when you work there, size matters.
On the other hand, some well-known equity managers such as Legg Mason’s Bill Miller, CGM’s David Dreman and Third Ave Fund’s Marty Whitman were slaughtered owing to their huge positions in Fannie and Freddie equity. Through Thursday, Miller’s flagship Value Trust offering was down a staggering 31.3% year-to-date, this on top of an already disastrous string of returns.
–Shares in Seattle-based Washington Mutual, the country’s biggest savings and loan, plunged on fears the bank might not survive the credit crisis, not just because of its exposure to subprime mortgages but also its massive credit card loan portfolio. CEO Kerry Killinger, who had been at the helm of WaMu for 18 years, was summarily dismissed. At one point on Thursday, the stock was below $2, before finishing the week at $2.75 (from a 52-week high of $39), and the bank announced it expected loss reserves for the 3rd quarter to be below the 2nd quarter’s $5.9 billion, while attempting to reassure investors it had $50 billion of liquidity from “reliable funding sources.” But WaMu also holds $70 billion in dicey mortgages, including over $50 billion in option adjustable-rate garbage, the kind that allows you to make a minimum payment that may not even cover interest, so the loan balance soars. A ticking time bomb.
–Oppenheimer superstar analyst Meredith Whitney observed in a report that revenues for Wall Street firms have declined by a brutal 63% in the first half of 2008, but compensation costs have declined only about 24%. Ergo, there are a ton of layoffs to come before year end.
–Needless to say there is outrage over the termination agreements for Fannie Mae’s CEO Daniel Mudd and Freddie’s Richard Syron. Mudd, who has taken home in excess of $12 million in cash and prizes since he took over in 2004, stands to pocket an additional $9 million in severance pay, retirement benefits and deferred compensation. Syron, who took home $17 million since becoming chief executive in 2003, has an exit package in excess of $14 million.
So John McCain and Barack Obama lead the populist charge because it’s so easy to do, but these guys did have contracts. Of course the right thing to do despite this fact would be for Mudd and Syron to “man up” and forfeit the cash, but I imagine they would argue they are entitled to it because had the government not moved in and booted them out, they would have turned things around over time.
And then you have their wives. Imagine those conversations. “You’re going to give back what?” But I’ll stop here before I get in more trouble than I’m already probably in.
–The London Stock Exchange, the second largest in the world, suffered a seven hour computer failure, a big blow to its efforts to attract some of the more sophisticated trading platforms.
–The Russian government is attempting to prop up its plunging stock market as capital flees. The benchmark RTS Index is down about 45% this year. It’s not just about the country’s war with Georgia, it’s also about crumbling commodity prices and rising government involvement in business, such as in the TNK-BP fiasco. Speaking publicly on the carnage for the first time, Prime Minister Putin denied there was a liquidity crisis and rejected the view the market turmoil was due to the war. [More below.]
–The other week I told the story of a 3rd Irish tour operator that had gone under, stranding travelers. This week a British outfit, XL Leisure, declared bankruptcy, grounding 21 aircraft and stranding 80,000 travelers in more than 50 destinations around the world. Once again it’s all about high fuel costs and not being able to institute surcharges to cover the added expenses.
–The Journal had a blurb on the recent pain in some of the Middle East markets, some of which have fallen about 30% since early in the year. No one should be surprised, this is yet another bubble and not just because of oil. Try real estate.
For example, if you received the Sunday New York Times Magazine, Sept. 7, I hope you glanced through a large advertising supplement concerning “The latest boomtown for investment, lifestyle and tourism,” Ajman.
Now I feel like I’ve been around and keep up on things, but I had never heard of the place. Turns out it is the smallest of the United Arab Emirates, but “also one of the fastest growing and most ambitious.”
If you haven’t thrown it out, spend a few minutes looking at this. I’m guessing 90% of you will just shake your head, as in ‘there simply isn’t enough demand for another Dubai (which is next to Ajman) when we all know that Dubai itself will crash.’ It has to. Trust me. These guys aren’t that smart either. Or to put it another way, they’ll prove to be as stupid as our own financial leaders have been.
[Friday’s Wall Street Journal had a headline “Dubai Bank Seizes Developer’s Assets.” It’s a murky case but also just the beginning…pop goes another bubble.]
–Roger Lowenstein, who literally wrote the book on the collapse of Long-Term Capital Management 10 years ago this month, had the following thoughts in the New York Times this week.
“The Long-Term Capital fiasco momentarily shocked Wall Street out of its complacent trust in financial models, and was replete with lessons, for Washington as well as for Wall Street. But the lessons were ignored, and in this decade, the mistakes were repeated with far more harmful consequences. Instead of learning from the past, Wall Street has re-enacted it in larger form, in the mortgage debacle cum credit crisis.
“In the wake of Long-Term Capital’s failure, Wall Street professed to have learned that even models designed by ‘geniuses’ were subject to error and to the uncertainties that inevitably afflict human forecasts. It also professed a newfound respect for the perils of borrowing. Whether this wisdom endured may be judged by events of the past year, when not only Bear Stearns but also scores of banks and financial institutions have written off hundreds of billions of dollars – a result of blithe* faith in models of the housing industry, not to mention a voracious hunger to do business on credit.
“Regulators, too, have seemed to replay the past without gaining from the experience. What of the warning that obscure derivatives needed to be better regulated and understood? What of the evident risk that intervention from Washington would foster yet more speculative behavior – and possibly lead to a string of bailouts?”
–A Senate investigation has concluded Wall Street’s “Dirtballs Gone Wild” concocted tax schemes for overseas hedge fund clients that, among other abuses, allowed the funds to avoid up to $100 billion a year in taxes. The brokerage firms are beginning to step forward and admit they were wrong, particularly with regards to failing to withhold proper taxes in shady swap transactions.
–You have to feel sorry for United Airlines. Around 11:00 a.m. on Monday, shares suddenly plunged, from $12 to a low of $3 in an instant, at which point trading was halted as executives at United tried to figure out what happened.
It turns out a six-year-old article from the South Florida Sun-Sentinel, which originally appeared in the Chicago Tribune on Dec. 10, 2002, the day after United declared bankruptcy, reemerged. As Frank Ahrens of the Washington Post described:
“The bizarre chain of events began…when a reporter at Income Securities Advisors – a Miami area investment service that disseminates news about distressed companies – typed in a Google search: ‘bankruptcy 2008.’”
The six-year-old story then popped up, so how did Google find it?
“Largely because it was undated in the Sun-Sentinel Web archive. The Google Web crawler assigned the article the date it was found – Sept. 6, 2008. The reporter from Income Securities Advisors saw the Saturday date and assumed it was a new article.”
Well, Tribune and Google disagree what happened next, but the bottom line is the reporter posted it to the Bloomberg Professional service at 10:53 a.m. and five minutes later Bloomberg blared “UAL Shares drop 33%.”
At 11:16 a.m., Bloomberg posted a correction in several languages, highlighted in red on the company’s proprietary monitors: “UAL SAYS IT HASN’T FILED FOR CHAPTER 11.”
This isn’t the first time Google’s Web crawler caused a stink, and it won’t be the last. UAL shares had recovered almost in full by week’s end.
–Gulf fishermen have been pounded by Hurricanes Gustav and Ike. Particularly along the Mississippi and Louisiana coasts, if their vessels survived their catches rotted due to the lack of ice when the power went out. Many of the fishermen were still struggling to recover from Katrina in 2005.
–You’ve gotta love McDonald’s. It reported global sales at restaurants open at least 13 months rose 8.5% in August. The Olympics didn’t hurt, as same-store sales rose 10% in Asia/Pacific, 11.6% in Europe and a still solid 4.5% in the U.S.
–If you live in Alaska, you’re receiving a record $3,269 check as a result of the state’s oil wealth and its royalty program. But $1,200 of it is really designed to take care of the coming winter and projected soaring heating bills, a boost proposed by Gov. Palin. The dividend fund was first established in 1976.
–In Barron’s latest survey of the world’s most – and least – respected companies, the 100 largest publicly traded ones as measured by market value, money managers selected Johnson & Johnson No. 1, Procter & Gamble No. 2, and Toyota No. 3. On the other side, Citigroup was No. 99 and Russia’s Gazprom No. 100. Only 11% of those surveyed respected Citigroup, compared to 97% for JNJ.
–NBC, which has the Super Bowl this year, claims it has already sold more than 80% of the spots, with “about a dozen or so” agreeing to pay $3 million for 30 seconds.
–My portfolio: I just have to note that my China holding issued a solid update on progress with its new plant. But sentiment is just so awful these days, the stock hardly reacted. This is about the worst environment ever for the micro-caps I dabble in.
Russia: In Italy over the weekend, Vice President Cheney warned Russia it could not use “brute force” and still hope to build economic progress. Cheney also warned Europe over the dangers of its over-reliance on Russia as an energy supplier, as well as talking of Russian arms-dealing “endangering prospects for peace” in the Middle East. [For the full text, see “Hot Spots.”]
But as the Russian stock market tanked, President Dmitry Medvedev and Prime Minister Vladimir Putin were clearly puzzled that international reaction to the invasion of Georgia wasn’t so sanguine. Both were defensive, with Putin reemerging after about a week in the shadows to tell an international press corps on Thursday that not only were western institutions withdrawing funds from Moscow’s markets because of the “mortgage crisis” in both the U.S. and Europe, but that with regards to Georgia:
“Should we have wiped the bloody snot off and bowed our heads again this time? What did you expect us to do – defend ourselves with catapults?” said Putin, trying to convince the West that Russia was only responding to Georgia’s actions in the breakaway territories of South Ossetia and Abhkhazia. Continuing:
“When tanks, multiple rocket launchers and heavy artillery are used against us, are we supposed to fire with sling shots? When an aggressor comes into your territory, you need to punch him in the face – an aggressor needs to be punished.”
Very nice. Aside from lying about the facts, Putin tried to convince us Russia was not out to steal the two republics who have declared their own independence. At first the South Ossetian leader Eduard Kokoity had said he wanted his territory to be incorporated into Russia, but by week’s end both Moscow and Tskhinvali said South Ossetia should remain independent when they realized how poor it looked for Russia to be putting the squeeze on at this early date.
For his part, President Medvedev reiterated “Russia has zones where it has its interests. It is senseless to deny this, because we will defend our interests and the interests of Russian citizens. The world has changed and it occurred to me that August 8, 2008 has become for Russia as September 11, 2001 for the United States.” You just can’t make this stuff up.
Earlier in the week, Medvedev met with French President Sarkozy and vowed Russia will comply with the ceasefire agreement and pull its troops from secured areas outside South Ossetia and Abkhazia, dismantling checkpoints like that at the port of Poti in the process.
But then Russia announced it would keep 7,600 troops in the two republics, twice the level before the war, and that they would stay there “forever,” while there were few signs checkpoints were actually being dismantled. On Wednesday, a Georgian policeman was gunned down at one. Additionally, Medvedev once again accused the U.S. of rearming Georgia.
For his part, Georgian President Saakashvili said “Our territorial integrity will be restored, I am more convinced of this than ever.”
But I have to note an anecdote from the Moscow Times concerning the Sarkozy / Medvedev meeting on Monday.
“After Sarkozy replied that it was not Russia’s place to determine Georgia’s borders, Medvedev simply exchanged smiles with (Russian) Foreign Minister Sergei Lavrov, who stood nearby.”
I find that chilling, and depressing, because it’s already over, no matter what you hear from the U.S., Georgia and Europe. Georgia will never regain South Ossetia and Abkhazia, and as you all understand now the Kremlin isn’t about to stop there. Next up, Ukraine, though Putin and Medvedev must know they need to chill out for a bit in an effort to rally the stock market, retain foreign capital and lull Europe back to sleep.
The other day the BBC had a report on the rape of Georgia. In South Ossetia’s capital of Tskhinvali, not a single home or business belonging to a Georgian escaped being burned down or bulldozed. No doubt, for Georgia it was a brief but brutal war with catastrophic consequences.
Lastly, a word about the relationship between Moscow and Caracas. The two nations are slated to hold a joint naval exercise in November, while a pair of Russian strategic bombers touched down in Venezuela on Wednesday to participate in further exercises, thus marking the first known deployment of nuclear-capable planes to the Western Hemisphere since the collapse of the Soviet Union.
[Separately, President Hugo Chavez expelled the U.S. ambassador, as a sign of support for his Bolivian friend, President Evo Morales, who had done the same, saying “That’s enough…from you, Yankees,” using an expletive and telling Washington to “go to hell.” Chavez continues to claim the Bush administration is backing a coup plot and planning to assassinate him, while the U.S. will be expelling Venezuela’s envoy to Washington and levying sanctions on senior Venezuelan officials suspected of aiding Colombian rebels. I’m sure there will be far more to discuss next time. I would just request that President Chavez clean up his language.]
Iran: Russia, which has been helping Iran build the nuclear reactor at Bushehr, said it would launch it by year end, though experts believe that’s not enough time to complete construction and the start-up phase for the fuel. The Kremlin is just looking for any excuse to get under the White House’s skin these days. But Russia also said it would begin to train more Iranian scientists and engineers on the nuclear process.
Also in Iran, inflation hit 27.6% in August, with lower-income families having to spend up to 80% on food each month. President Ahmadinejad, elected in 2005 on a platform promising help for the poor, is ripe for being toppled, perhaps before the 2009 vote.
Iraq: President Bush announced a troop withdrawal of 8,000 by February, meaning when a new president takes office there would still be some 138,000 troops in Iraq. Bush and the generals then plan on shifting 4,500 of the 8,000 to Afghanistan. As for the Bob Woodward book, “The War Within…,” who writes of the U.S. spying extensively on Prime Minister Nouri al-Maliki, after an initial flurry of outrage from Iraqi officials, the issue quickly died down. Separately, former Rumsfeld/Cheney butt boy Ahmad Chalabi survived an assassination attempt on his convoy, with six of his body guards killed in the suicide attack.
[And a fascinating story out of Germany. According to Stern magazine, two German spies acted as the Bush administration’s eyes and ears in Baghdad in the days leading up to the Iraq war and in the initial attack, including developing coordinates for the bombing campaign because the U.S. didn’t have any intel sources of its own inside. What makes this even more interesting is that, according to the report, German Chancellor Gerhard Schroeder approved this. Recall, it was Schroeder who was vehemently against the war, but Schroeder and his chief of staff Frank-Walter Steinmeier cut a deal to provide the intelligence while being allowed to protest U.S. actions during the height of Schroeder’s election campaign of 2002. Saying ‘No’ to the Iraq war was a popular sentiment in Germany then. Later, the two chief German agents were awarded the Meritorious Service Medal by the White House. This revelation creates a huge problem for Steinmeier who is running against Chancellor Angela Merkel in the next general election.]
Afghanistan/Pakistan: Two U.S. soldiers were killed in Afghanistan on Thursday, bringing the U.S. death toll here to 113 for 2008, the most of the 7-year war. As recently as 2002 and 2003, the figure was as low as 37, further proof of the Taliban’s resurgence and a flood of foreign fighters into both Afghanistan and the safe havens of Pakistan.
In Pakistan itself, it’s come to light that President Bush has ordered strikes and assaults inside the country without prior approval of the Pakistani government. The number of drone attacks in the tribal areas appears to be picking up significantly and no doubt some high value targets are being eliminated.
But that also means there is collateral damage and Pakistan’s new president, Asif Ali Zardari, finds himself under the gun in just his first week in office as many here protest each attack is a violation of Pakistani sovereignty. Zardari talks of combating terrorism, but how far is he willing to go when his chief rival, Nawaz Sharif, says the U.S. attacks should be stopped?
Israel: The White House continues to urge restraint on the issue of Iran and its nuclear weapons program, while Prime Minister Olmert has vowed to step down immediately after his Kadima party chooses a successor, Wednesday, though he must stay on while a new coalition is being formed so it could still be weeks. Opponents are wondering why Olmert nonetheless continues to negotiate with the Palestinians and Syrians, especially as police announced he should be indicted as a result of the intensive corruption investigation.
Separately, an Israeli rights group reported Israel has now settled 450,000 in the West Bank, including land beside the security barrier it is building, far in excess of what is deemed necessary. Palestinians, who still own the land, are denied access to it.
Lebanon: Just one day after reconciliation talks between the rival factions here, including Hizbullah, a pro-Syrian opposition figure was killed in a car bomb attack. There are fears this first assassination in months on a political figure will lead to a return to widespread violence.
North Korea: Experts now agree Pyongyang has built a second missile base that would be capable of launching weapons armed with nuclear warheads, this while the health of leader Kim Jong il took center stage. No one knows for sure what has transpired, but the consensus view in Seoul, who you would expect has the best intelligence in this regard, is that Kim suffered a stroke but is not near death.
So we potentially have the feared power vacuum as Kim’s neighbors and the likes of the United States try to figure out just who is in charge amongst the military leaders and are they more hardline than Kim or less so? It’s obviously of particular interest to South Korea, because should the government in Pyongyang collapse, millions of refugees would likely stream across the border (as well as that with China), creating chaos of a different kind and possible armed conflict. Meanwhile, a respected Japanese journalist said he has proof Kim died in 2003 and the North has been using doubles ever since, including comic Marty Allen. [OK, I’m not so sure on this last one, but Marty has similar hair.]
China: Beijing is clamping down on financial websites that express pessimistic views of the Chinese economy in an attempt to tamp down public ire, this as the Shanghai Composite is off some 60%, but then you have another disaster where hundreds are feared dead in a landslide when a reservoir of iron ore waste overflowed its boundaries.
Meanwhile, while China is making nice with Taiwan these days, the Financial Times reports it is using its massive currency reserves to buy the favor of the remaining countries that have diplomatic relations with Taipei. Such as in the case of Costa Rica, which severed ties with Taiwan last year. China purchased $150 million in Costa Rican government bonds as part of the agreement to switch allegiances from Taipei to Beijing. Such a policy, though, calls into question the investment portfolio for China’s State Administration of Foreign Exchange that oversees the $1.8 trillion in reserves.
Japan: Former prime minister Junichiro Koizumi backed Yuriko Koike in her bid to become Japan’s first female leader, though former foreign minister Taro Aso is the frontrunner to replace Prime Minister Fukuda who quit suddenly last week.
Thailand: Prime Minister Samak had an interesting week. First he was ousted on Tuesday when a court ruled he had violated the Constitution by accepting payments of $2,350 to appear on a cooking show while in office. Samak had been the host for seven years but gave it up more than two months after being sworn in.
But on Thursday, the ruling party endorsed Samak to return to office, only to abandon the effort on Friday as a coalition of support couldn’t be assembled. Protesters, who have been asking for Samak’s removal, may now be placated.
India: The critical nuclear suppliers group lifted a three-decade ban on atomic-energy equipment to India as the government vowed to continue its moratorium on nuclear-bomb tests. This clears the way for the U.S.-India deal on sharing nuclear technologies as well as access to atomic fuels. But, ironically, companies in France, Russia and Japan could be the prime beneficiaries, not, for example, General Electric, because U.S. companies have to wait until Congress approves a 2006 trade agreement between Delhi and Washington.
Zimbabwe: Well whaddya know, President Robert Mugabe and opposition leader Morgan Tsvangirai have agreed to a power-sharing deal whereby Mugabe would become a ceremonial president, with immunity from prosecution, while Tsvangirai would hold the real power, including control of the security services. South African President Thabo Mbeki will deserve credit if on Monday the deal comes to fruition, but any rational observer has to conclude the damage done the last five years of Mugabe’s rule is almost irreversible.
Britain: After an exhaustive investigation lasting two years, jurors were unable to render a verdict on a group of British Muslims who were accused of being part of a plot to blow up a number of transatlantic airliners. Three men were convicted of conspiracy to commit murder, but the jury deadlocked on the central allegation that terrorists planned to use liquid bombs to destroy the planes in mid-air. Prosecutors will seek a retrial in an incredibly depressing development. I mean think about it. This was the case where six defendants had even filmed martyrdom videos, yet the jury couldn’t decide they were actually terrorists.
Hungary: Like so many other countries in Europe, Hungary’s population is plunging, a projected 13% by 2060. There obviously is no way to grow an economy without population growth, long-term, and the related costs in terms of benefits for a rapidly aging population will soar. Thus, Hungary needs a huge influx of immigrants, which creates its own problems.
–Friends, I need to remind you that while I have my own opinion on the political scene, and express it freely, where appropriate I will continue to present both sides. This is a running history, not Michael Savage, Sean Hannity or Rachel Maddow’s show.
Post-conventions the polls show a dead heat between John McCain and Barack Obama. Zogby has it 50-46 McCain, Washington Post/ABC News 47-46 Obama, and USA Today/Gallup 50-46 McCain, to state a few. A NBC/Wall Street Journal survey has McCain winning over women under 50, 49-47, following the selection of Sarah Palin, a huge increase from the last data that had McCain losing this critical group 54-35. The Washington Post/ABC News survey had McCain with a 12-point advantage among all white women.
But as I plowed through my various sources, I couldn’t help but note that when it comes to voter registration, the Democrats have registered 2 million compared to the Republicans’ 344,000.
As for Sarah Palin and her interview with Charles Gibson of ABC [we used to jog at the same time of day at the Summit High School track and I’d always go “Hello, Mr. Gibson,” to which he’d merely grunt…he\’s a jerk], she was underwhelming, especially on national security, but it being her first such appearance you have to cut her some slack. If she doesn’t improve by the Oct. 2 vice presidential debate, though, she won’t get off so easy.
As for the lipstick debate, give me a freakin’ break. This campaign has largely been a joke and the feigned uproar over Obama’s use of a common phrase further proved it.
Editorial / Washington Post
“It’s hard to think of a presidential campaign with a wider chasm between the seriousness of the issues confronting the country and the triviality, so far anyway, of the discourse. On a day when the Congressional Budget Office warned of looming deficits and a grim economic outlook, when the stock market faltered even in the wake of the government’s rescue of Fannie Mae and Freddie Mac, when President Bush discussed the road ahead in Iraq and Afghanistan, on what did the campaign of Sen. John McCain spend its energy? A conference call to denounce Sen. Barack Obama for using the phrase ‘lipstick on a pig’ and a new television ad accusing the Democrat of wanting to teach kindergartners about sex before they learn to read.”
Charles Krauthammer / Washington Post
“The Democrats are in a panic. In a presidential race that is impossible to lose, they are behind. Obama devotees are frantically giving advice. Tom Friedman tells him to ‘start slamming down some phones.’ Camille Paglia suggests, ‘be boring!’
“Meanwhile, a posse of Democratic lawyers, mainstream reporters, lefty bloggers and various other Obamaphiles are scouring the vast tundra of Alaska for something, anything, to bring down Sarah Palin….
“But Palin is not just a problem for Obama. She is also a symptom of what ails him. Before Palin, Obama was the ultimate celebrity candidate. For no presidential nominee in living memory had the gap between adulation and achievement been so great…. Obama’s meteoric rise was based not on issues – there was not a dime’s worth of difference between him and Hillary on them – but on narrative, on eloquence, on charisma.
“The unease at the Denver convention, the feeling of buyer’s remorse, was the Democrats’ realization that the arc of Obama’s celebrity had peaked – and had now entered a period of its steepest decline.”
“If John McCain can win this election race with a 50-pound ball called ‘George W. Bush’ wrapped around one ankle and a 50-pound ball called ‘The U.S. Economy’ wrapped around the other, then he deserves to represent America in the next Olympics in any race he wants – swimming, cycling or track – I don’t care how old he is. He would be the Michael Phelps of politics.
“I confess, I watch politics from afar, but here’s what I’ve been feeling for a while: Whoever slipped that Valium into Barack Obama’s coffee needs to be found and arrested by the Democrats because Obama has gone from cool to cold.
“Somebody needs to tell Obama that if he wants the chance to calmly answer the phone at 3 a.m. in the White House, he is going to need to start slamming down some phones at 3 p.m. along the campaign trail. I like much of what he has to say, especially about energy, but I don’t think people are feeling it in their guts, and I am a big believer that voters don’t listen through their ears. They listen through their stomachs.
“If you as a politician connect with voters on a gut level, they will follow you anywhere and not fret about the details. If you don’t connect with them on a gut level, you can’t show them enough details. Obama early on, and particularly with young people, connected on a gut level like no other politician since Ronald Reagan.
“But in recent weeks, I feel as though he has lost that gut connection….
“Because, while the pollsters tell us it is still really close, my own totally unscientific, seat of the pants poll tells me this: When you say Obama’s name today and ask people for their first impression – a quick, flash, gut, first impression – no single word or phrase or policy comes to mind. His opponents will fill that vacuum if he doesn’t. They already are.”
As my friend Jimbo put it, “If the Democrats cannot put a candidate in the White House following the Bush administration they need to cease to exist; raise their hands and vote themselves out of existence.”
May I suggest the Democrats appropriate the old Whig Party label, or the 1840s Free Soil Party. Then again, it was Millard Fillmore who formed the Know-Nothing Movement, so that’s a possibility, seeing as party members of this last one could then adopt the slogan best exhibited by Sergeant Schultz of “Hogan’s Heroes” fame who first said “I know nothing!”
–Many of us enjoyed seeing the news item that MSNBC’s Keith Olbermann was stripped of his election anchor chair, following his outrageous political bias for one in such a position. Co-anchor Chris Matthews was also done in (in favor of David Gregory), though here I’m more sympathetic. As it developed, NBC News stalwarts Brian Williams and Tom Brokaw were totally embarrassed by the cable arm.
–Oprah has made a big mistake in going so partisan, but then she’s made her gazillions so what does she care?
–Jann Wenner, a huge supporter of Barack Obama and whose Wenner Media owns US Weekly, was responsible for the latter’s slam job of Sarah Palin. Ordinarily I wouldn’t give a damn except this is the same Wenner who kept the Dave Clark Five from being inducted into the Rock and Roll Hall of Fame in 2007 when, as Fox News first reported, he fixed the ballot. After he was exposed, he was then forced to admit my favorite DC Five earlier this year. Wenner is one of the truly detestable people on the planet.
–The Commission on the Prevention of Weapons of Mass Destruction Proliferation and Terrorism, chaired by two former senators, Bob Graham and Jim Talent, says the chief focus should be on preventing a biological attack because it is easier to launch than the nuclear variety since the components are more readily available.
–Following up on my bit last time concerning Democratic Cong. Charles Rangel of New York, on Wednesday, Rangel said that he was prevented from understanding the finances of his Dominican Republic beachfront home because “Every time I thought I was getting somewhere, they’d start speaking Spanish.” Rangel believes we’re all chumps and buying this.
–I respectfully submit that if our nation’s drug addicts would take just one day off from snorting stuff up their nose, perhaps we could help our Mexican neighbors deal with their drug-related crime problem. Just one day….like maybe next Thursday.
–The Interior Department’s inspector general’s office found that more than a dozen employees involved in the agency’s oil royalty program accepted gifts, steered contracts to favored clients and engaged in sex, drugs and rock and roll with employees of the very energy firms they were working with. The investigation cited one e-mail from a Shell Pipeline representative asking a woman in the royalty office to attend “tailgating festivities” at a Houston Texans football game: “You’re invited…have you and the girls meet at my place at 6 a.m. for bubble baths and final prep. Just kidding.”
Personally, I’m poring through newspapers at that time of day, but….
–Yet another Russian tycoon has shown his true colors. Andrei Vavilov filed a lawsuit against the revamped Plaza Hotel in New York, claiming that the penthouse he agreed to purchase for $53.5 million resembles an attic. He is demanding the developer return his $10 million deposit, plus $20 million in damages. If company execs don\’t comply, I imagine they’ll be poisoned.
–If you’re a cow in India, you’re increasingly looking over your shoulder. You see, cows are no longer as sacred as they used to be as Indians have developed more of a taste for beef, according to a U.S. Dept. of Agriculture report. While 80% of the population is Hindu and still believes the cow to be untouchable, many Muslims and Christians are thinking, “Hey, this stuff tastes pretty good! And thanks to our rising incomes, we can afford it!” Another problem cows face is they can’t easily hide.
–Sarah Palin’s former pastor, Ed Kalnins (she left his church in 2002), believes in the Rapture and that the end of time is coming soon. In an interview with the London Times (nice to see they still have the resources to send a reporter to Alaska), Kalnins said “I’m looking out the window and I can see it’s going to rain.”
I’m thinking India’s cows, hearing this, probably wouldn’t be so stressed out over the potential for being slaughtered because they’re history anyway.
–Then again, cows really are in trouble. The UN Food and Agriculture Organization has estimated direct emissions from meat production, including front and rear, account for about 18% of the world’s total greenhouse gas emissions. [I apologize for citing about ten different studies on this topic over the years.] So Dr. Rajendra Pachauri, who chairs the Intergovernmental Panel on Climate Change, is calling for the world to eat less meat as a way of combating global warming.
Omaha Steaks is running a sale now, by the way, in case you want to stockpile a couple years’ worth should the rest of the world decide to go meatless.
–Lastly, congratulations to all of us for surviving the first circuit of the Hadron Collider. Eventually, as the experiment proceeds, two proton beams will be steered in opposite directions around the track at close to the speed of light, completing about 11,000 laps each second. Then again, scientists could substitute Usain Bolt for a few protons and obtain even more explosive results.
Gold closed at $765…its lowest weekly close since last October
Oil, $100.93…its lowest since February
Dow Jones +1.8% [11422]
S&P 500 +0.8% [1251]
S&P MidCap +0.4%
Russell 2000 +0.2%
Nasdaq +0.2% [2261]
Have a great week. I appreciate your support.
Next week from the beautiful Jersey Shore.
*One of these days I\’ll get the podcast going. I\’ll explain next time.
