Monthly Archives: July 2014

Why the Fed Is So Wound Up

There is endless talk about the Fed exiting from the QE-induced asset bubble on its balance sheet. We will show what the Fed can and cannot do to unwind its balance sheet. First some background data from its balance sheet in terms of assets and liabilities. The balance sheet is a wonderful tool for understanding what can happen, what can’t happen, and the corner the Fed has painted itself into.

Gaming Israel and Palestine

By George Friedman

We have long argued that the Arab-Israeli conflict is inherently insoluble. Now, for the third time in recent years, a war is being fought in Gaza. The Palestinians are firing rockets into Israel with minimal effect. The Israelis are carrying out a broader operation to seal tunnels along the Gaza-Israel boundary. Like the previous wars, the current one will settle nothing. The Israelis want to destroy Hamas’ rockets. They can do so only if they occupy Gaza and remain there for an extended period while engineers search for tunnels and bunkers throughout the territory. This would generate Israeli casualties from Hamas guerrillas fighting on their own turf with no room for retreat. So Hamas will continue to launch rockets, but between the extreme inaccuracy of the rockets and Israel’s Iron Dome defense system, the group will inflict little damage to the Israelis.


Be Concerned. Be Very Concerned.

We have been following the Ebola outbreak in Africa, the worst on record. With today’s article Runaway Ebola-Infected Woman Dies As US Doctor Tests Positive For Virus, we have decided to alert our readers and explain the danger that we see. Two days ago it was reported that Man Carrying Ebola Virus In World’s Fourth Most Populous City, Dies In Quarantine. We shall give a bit of information about Ebola and then argue the international danger it presents.


Wikipedia has a description of symptoms of the disease and incubation period:

Symptoms start two days to three weeks after contracting the virus with a fever, throat and muscle pains, and headaches. There is then nausea, vomiting and diarrhea along with decreased functioning of the liver and kidneys. At this point some people begin to have problems with bleeding.

The World Health Organization discusses transmission of the virus as:

Ebola then spreads in the community through human-to-human transmission, with infection resulting from direct contact (through broken skin or mucous membranes) with the blood, secretions, organs or other bodily fluids of infected people, and indirect contact with environments contaminated with such fluids. Burial ceremonies in which mourners have direct contact with the body of the deceased person can also play a role in the transmission of Ebola. Men who have recovered from the disease can still transmit the virus through their semen for up to 7 weeks after recovery from illness.

Airborne transmission is not mentioned but it is reasonable to assume there may be risk of inhaling droplets expelled by an infected person coughing since mucus membranes are one path of entry into the body.

There is no vaccine for Ebola and no treatment other than to try and keep the patient hydrated. Wikipedia notes that The disease has a high death rate: often between 50% and 90%. Treatment is done in special isolation facilities administered by staff wearing full body protection including re-breathing equipment.

High Cost of Treatment and Containment

This is the main deterrent to control of an outbreak in places like Africa. Few hospitals would have the necessary isolation facilities or staff trained in their use. Certainly no hospital will be able to properly handle a large influx of patients for this reason. Then there is the issue of safe disposal of any equipment and materials used to treat patients, especially since such may be highly contaminated by bodily fluids. Disposal of bodies presents a similar problem compounded by cultural practices. The local dump and the local funeral home don’t qualify.

The SARS outbreak in Canada in 2003 revealed how ill-prepared a modem country’s health system was to respond to a major health threat. Canada at least had a system of government and politics that was capable of recognizing the seriousness of the problem and of providing resources and mobilizing a response, even though there were gaps, overlaps and delays. Africa is certainly far from this state of preparedness.

The articles at the beginning cite cultural issues such as the trust of the local medicine man over nurses and doctors. Such beliefs impede any effort to act. Corruption at all levels of government is another problem. But it will remain the high cost per patient in terms of facilities and trained staff that will make any containment difficult, and  in large numbers, impossible.

Come Fly with Me …

… unless you have Ebola. Is the world community prepared to quarantine a country? How about a continent? Assuming such could be done, how long would it take to implement? Would all countries participate? What would a country like Canada do with citizens who hold dual citizenship in Canada and say, Liberia (one of the countries currently participating in the outbreak)?

What are the legal issues? What does international law say? Whatever is done, there would likely be massive dissent in terms of personal rights, human rights, sovereign rights, etc. Would the UN support a quarantine? How many months would the issue have to be debated, hearings held, and for all the processes that accretes around anything in our society that is at all controversial, to be exercised?

We hope this outbreak is quickly contained. If it’s not, then there is a good chance that any global response will be too little too late. The results would not be good.

Genesis and Ideology of the Cold War

This essay is the second in a new series on Jerusalem and Moscow, Genesis and Ideology of the Cold War. We present this essay reprinted by permission of Paul and from The Bayview Review. See the links at the end for direct access to the rest of Paul’s work.

After Hitler’s tyranny was crushed, the world did not enter onto those “broad, sunlit uplands” that Winston Churchill had foreseen. Instead, the world found itself in another war: the “Cold War”.

The “Cold War” began in late 1945 when President Truman responded with harsh words to Stalin’s attempts to restrict the rights of U.S. British and French military assigned to what was supposed to be a shared occupation of Germany. Then, during 1946 and 1947 it became necessary for Truman to respond to Stalin’s intimidation of the governments of Greece, Turkey and Iran, actions that were obviously intended to pave the way for imposition of governments as servile to the USSR as were the governments of Czecho-Slovakia and Poland. Truman’s response took the form of the Greek and Turkish Aid bill.

The rationale for these actions can be found in an article, “The Sources of Soviet Conduct,” written by X – who was in reality George F. Kennan, a senior State Department official — and published in Foreign Affairs, January, 1947. The crux is in this famous line: “The main element of any United States policy toward the Soviet Union must be that of long-term, patient but firm and vigilant containment of Russian expansive tendencies.”

Truman’s gestures of “containment” inspired general admiration throughout the Western world and confidence in America’s readiness for sacrifice of its money and of the lives of its young men in defense of the fundamental values of Western civilization. By June 1950, when Truman managed to rally majority support in the United Nations for collective military response to North Korea’s invasion of South Korea, the Western democracies had reluctantly given up the last vestiges of hope for resumption of the wartime spirit of comradeship with Russia. In the meantime, the United States offered the Marshall Plan — “the most unsordid act of recorded history,” Churchill called it (inventing an ugly word for the purpose) — as a framework for Europe’s economic recovery, and the North Atlantic Treaty Organization (NATO) for its collective defense.

The Sunni/Shia Divide in a Picture

We maintain that the Sunni/Shia divide is the most important sectarian conflict in geopolitics. It keeps the energy of Islam inwardly focused. If the rift is ever healed then the focus and the energy will be on the rest of the world. Click on image to enlarge in a new window.

Source: Zero Hedge.

Can Putin Survive?

By George Friedman

There is a general view that Vladimir Putin governs the Russian Federation as a dictator, that he has defeated and intimidated his opponents and that he has marshaled a powerful threat to surrounding countries. This is a reasonable view, but perhaps it should be re-evaluated in the context of recent events.

Ukraine and the Bid to Reverse Russia’s Decline

Ukraine is, of course, the place to start. The country is vital to Russia as a buffer against the West and as a route for delivering energy to Europe, which is the foundation of the Russian economy. On Jan. 1, Ukraine’s president was Viktor Yanukovich, generally regarded as favorably inclined to Russia. Given the complexity of Ukrainian society and politics, it would be unreasonable to say Ukraine under him was merely a Russian puppet. But it is fair to say that under Yanukovich and his supporters, fundamental Russian interests in Ukraine were secure.

Jobs in Ontario

added emphasis ours

Three Case Studies

The H.J. Heinz Company built its first factory located outside the US in Leamington Ontario in 1909. It became their second largest factory. They closed the plant in Feb. 2014 and sold it to an investor’s group (Investor group to acquire Ontario Heinz plant) in May 2014. This followed Warren Buffet’s acquisition of Heintz, taking it private through his company Berkshire Hathaway. Such privatizations are generally followed by pruning or consolidating marginal and unprofitable operations. As Global News notes in Buffett keeps word, Heinz strikes ‘fair’ deal with Ont. ketchup workers:

A soaring loonie in recent years has made plants across the country ripe for cutbacks or closures by multinational firms who can easily shift production to cheaper regions. More than 30,000 factory jobs were lost in Ontario alone in 2013.

We would note that during the plant’s 104 year history, the Canadian dollar has been as high or higher on several occasions and the plant was not shut down then. The key issue is the second point – there are many regions in the US where labour, taxes, energy and regulatory costs are lower than in Ontario. Further to this, Blackburn  News reports in Heinz Plant In Leamington Closing that:

The letter says the decision is not a reflection of the commitment of employees or quality of product, but primarily based on excess capacity in its North American manufacturing system. Leamington Mayor John Paterson says consolidation and efficiency are the reasons he’s been given from Heinz for the closure.

The second case is that of the 89-year old Kellogg Co. plant in London Ontario. The company announced its closure in Dec. 2013 as noted in Canadian Business (The province is partly to blame for Kellogg’s plant closure in London, Ont.: Mike Moffatt). The article points out several reasons for the plant closure:

On the surface it would appear that at least some of the lost London production went to Belleville, Ont., thanks to a $9.7-million interest-free loan in 2008 from the province and $4.5 million in additional provincial funding in 2011 … from higher wage employees in London to lower wage employees in Belleville

With the U.S. population gradually moving south and west, Ontario lacks a geographic advantage when it comes to mass consumer manufacturing. … Ontario’s transport-cost competitive advantage over areas such as the U.S. southeast and Asia diminishes, making those areas more attractive due to their lower labour costs.

It would appear that in the Kellogg case, economics favoured moving production from an old London facility to a new Belleville plant. London may be marginally closer to markets in the south and west but both have good rail and road links to the US. That leaves labour costs as the other Belleville advantage. The Winsor Star summarized the reasons (Kellogg, Heinz plant closures part of a trend) for the closure of Kellogg and other agribusinesses as:

the fallout of corporate consolidation, changing consumer tastes, labour costs and government regulations that have conspired to create a $6.5 billion trade deficit in the Canadian food processing industry.

“When the Heinz owners, for example, see a plant operating at 30 per cent of capacity, it’s an easy decision to absorb that production elsewhere, shutter a plant and save millions of dollars,” said Boecker. “There’s a great deal of global competition in every marketplace and anytime there are dollars to be saved, those are relatively easy decisions.” Economies of scale also play a role in production decisions, he said.

integration of the North American economy left Canada with little more than branch plant status and a decline in capital investment made some Canadian plants less competitive.

The final case is the closure of the Unilever Brampton plant

under construction

Fix, Build or Burn


A Tale of Two Cities

In rural Southern Ontario we find two towns about 3 km apart. The first is the town of Jarvis located in Walpole Township, Haldimand County, in the agricultural heartland of Southern Ontario. The second is the town of Townsend also in Haldimand County, created by the government of Ontario  in 1976. The purpose short essay is to compare two  towns geographically closely located, one that evolved naturally and one that was created by a central planning authority.

Update on the Canadian Housing Bubble

When we were doing our monthly update of Tracking Canadian House Prices, we found (Teranet – National Bank House Price Index  –  Communiqués, research tab, Economic News, click for more information) a link to a monthly 2-page newsletter that Teranet publishes for the National Bank Financial Markets. It had a graph that showed the marked divergence between the Teranet house price index for Canada and the Case-Schiller house price index for the US. Through research we found a comparable graph shown in Figure 1 (multiple source attributions shown on the chart).

Figure 1. Canadian and US house price indices.

We took this graph from an April 29 newsletter from Otterwood Capital Management titled: Canadian housing crash? Not yet. Otterwood’s argument is that the strong Canadian housing market is a product of a strong economy (more or less) that is a product of a recovering American economy. One might infer the reverse from this: a US in recession would drive Canada into a recession which would pop the Canadian housing bubble.

RE: Eric Crouse’s essay, “Israel and the Hard Truth of Security,” July 10,

This essay is Paul’s response to the article Israel and the Hard Truth of Security that appeared on the Bayview Review. We present Paul’s essay reprinted by permission of Paul and from The Bayview Review. See the links at the end for direct access to the rest of Paul’s work. The essay follows.

This essay is brilliantly timed so as to be read as “UN Secretary-General calls, “With Gaza on knife’s edge, for restraint, urges parties to avert ‘full-blown war.’ ” (, July, 13, 2014) – which, being translated, means that the world is again demanding that Israel surrender its right of self-defense against its terrorist neighbours. Dr. Crouse has put his finger on the reason why Israel always wins its wars, at enormous cost, and invariably loses the peace that follows these wars. He proposes that this cycle can be broken, but only if Israelis finally take to heart the central message of the life and work of Vladimir Ze’ev Jabotinsky (1880-1940.)

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