Here's to the crazy ones, the misfits, the rebels, the troublemakers, the
round pegs in the square holes... the ones who see things differently -- they're
not fond of rules... You can quote them, disagree with them, glorify or vilify
them, but the only thing you can't do is ignore them because they change
things... they push the human race forward, and while some may see them as the
crazy ones, we see genius, because the ones who are crazy enough to think that
they can change the world, are the ones who do.
Steve Jobs
US computer engineer & industrialist (1955 - 2011)

Thursday, December 18, 2014

Putin Plays the West

It's early days in the battle I often refer to as the "Gold War". Russia and China, having announced their intention to form a new Eurasian economic order, inclusive of India and other BRIC nations, are now fending off blows from the West. The Russian ruble, currently pegged to the US dollar, has been taking a hammering as the US and more specifically its ally Saudi Arabia, glut the world oil market forcing a massive decline in the price per barrel. One has to assume it's part of the "price" Obama said Russia would pay for its intervention to materially support Eastern Ukraine (Novorossyia) separatist forces. That's just on the face of it though.

Consider and remember that China is the bank and Russia is the sword of the new Eurasian alliance. The goal of that alliance is not to do well under the US dollar, but to replace the US dollar as the world's reserve currency with either a new currency or the Chinese yuan. That is important. Both China and Russia have large reserves of foreign currency - in Russia's case nearly $500 billion.

Then consider Russian President Putin. He rose through Russia's power ranks as an intelligence officer. That is one of three important pieces of the pie. That means: he uses deception and part truths to achieve an end; he is disciplined and demands the same of others in his circle; he is ruthless and flexible in achieving his goals; and he will never crack. Secondly, he is a judo master. That means he uses movement and blocking to defend against blows, but most importantly he uses the energy of his enemy as his own to defeat an attack. That part is critically important to remember. Finally, he is Russian. Russians have a proud place in world history due to the massive and brutal sacrifices they have made along the way. The most recent of which was the 25 million Russians who died during World War Two while ensnaring most of Hitler's armies, and giving the other allies time to organize and become engaged. Russians are used to sacrifice, and are super sensitive about the "Motherland" being prosecuted by foreigners.

Putin is using all three of these elements. He is using the Motherland as the force behind him, that will hold him upright in battle. He is using judo to block, move, and use the energy of his foes. He remains disciplined to his cause while apparently allowing his foe to walk into, no run into, his trap.

Why did Putin move into Crimea, and then support (with deniability) Eastern Ukraine separatists? What purpose does a "frozen conflict", as some call it, serve? Well, it's simply a means to an end. On the one hand it's defensive as the US took over influence of Ukraine, on Russia's border. On the other hand it's reason to invite economic conflict with the US. Putin had to know the US would not go to physical war with Russia over Ukraine - especially the quasi occupation of just a part of Ukraine. So the natural deduction would be financial sanctions to try and remove Russia from the US's new ally's territory. The territory of Ukraine being it's only real strategic value. However, its real value to Putin is to not let the US and to a lesser extent Europe escape from a financial battle.

When Obama rushed in to "make Russia pay" for its actions in Ukraine, Putin must have been smiling. Every sanction the US placed against Russia was matched by Western Europe. Western Europe is dependent on Russia for economic survival. The US can't replace the European loss of market in Russia, so anything other than a very short sanction period means severe financial harm for Europe - especially Germany. As Europe slides into recession and worst, Russia can now sit by and watch as Europeans blame US sanctions for destroying their markets. While the US projects strength in Europe with sanctions and military posturing, Europeans suffer the effects. Not dissimilar to the US of Europe as battlegrounds of past wars.

With every new economic sanction waged against Russia, Putin can turn to his own people and make the case that "Western partners" are too unstable and immature to have trading relations with. All the more need for an Eurasian alliance of like-minded, stable countries who want peace and brotherly love. The more the US pushes the faster it loses. Like quick sand.

Today Putin announced that Russia has $500 billion in foreign currency. Enough, according to him, to defend the ruble for two years. However, this is the intelligence officer's half truth. While it may be true that the reserves will defend the ruble, is the purpose to defend the ruble, or is the purpose to use up the foreign currency before Russia and China switch to a gold based currency standard, thus making the US dollar irrelevant as the world reserve currency. I suggest they're using up what they have while it still has a value to them. It gives them 2 years, as Putin partially said, to transform their monetary systems to gold based. After that, they don't care.

Lastly, the US and Saudi flooding of the oil market is also working for Putin and China. China gets to stock its strategic oil reserves on the cheap. Saudi and other major oil producers are losing massive revenue that they can't replace, and they are not meant to transition into the new Eurasian/BRIC alliance - meaning they won't have anywhere of significance to sell their oil in 2 years, and will be infighting with the US and other partners for market share. Meanwhile, in the Eurasian/BRIC alliance Russia, Iran and Venezuela will be selling their oil to China, South America and Africa in a stable market which has no competitors, and controls three quarters of the world's population.

So, the best way to view the events of today is to remember that the intelligence officer's mantra is "kill at least two birds with one stone". Cheap oil hurts Russia in the interim, but it solidifies the need for a stable market place in people's minds. Russian peoples minds. Chinese peoples minds. Etc. Where is the stable market? Well obviously not the US as they "ride like cowboys into the China shop", or US allies that let them. As the US proverbially throws a punch at it, Russia proverbially uses that energy to reach its final goal. For the rest of us, it means be prepared to be the collateral damage. Protect yourself, and your investments as best you can, because when big powers fight the little guy is not on the radar.  

Monday, December 8, 2014

In NL the Budget Man Cometh

Danny Williams ' big spin was Newfoundland and Labrador would become Master of its own house. Remember that? He created Nalcor for that purpose. His government acted as if this was somehow possible. It wasn't then, and it isn't now.

There is no better modern example of how every economy in the world is dependent on each other than the world-wide economic war happening right now. It's a war the US thinks it's winning, yet it's a war the US has already lost. Hand-in-hand with Saudi Arabia, the US is flooding the market with oil to devastate economies that depend on its revenue. Russia just happens to be the number one oil producer in the world. The aim is of course to drain Russia, Iran and Venezuela of budget revenue, and ultimately ruin the new Eurasian/BRIC alliance while in its infancy.

The problem with the strategy is the intended victims, Russia and China, have historically proven they can withstand any adversity. The 25 million Russians killed while bleeding the German army white during WW II is one example. Ditto for Napoleon. Etc. The Chinese sent 250 million people back to their villages without jobs or income after the last big world economic collapse in 2008. Not even a bead of sweat creased their brow. These are tough populations, used to adversity, and determined. Our side not so much. In a game of mutually assured economic destruction, as is being played out now world-wide, the only sure bet is the populations of Europe and North America are far less willing or able to withstand economic hardship than our fellow human beings on the other side.

Where its all leading for oil is fairly predictable. Putin hinted as much when he recently commented that ISIS was surviving by selling oil on the international black market for $30 a barrel. I take that comment, in the context it was made, as a direct challenge to the Western powers attempting to empty his coffers: "Russia is prepared to see oil fall as low as $30 a barrel in an international game of chicken". Let's say that's true,  what are the ramifications of that strategy for us?

Oil accounts for 33% of all revenue in our provincial budget each year. We are now fully dependent on oil revenue for our standard of living - government and the population. We have borrowed. We are in debt to our eyeballs. An oil  recession in this province would be far more dangerous here than most places. The government has spent every cent of oil revenue in the last 9 years, except the $2 billion or so that is needed for the Muskrat Falls down payment required by the federal loan guarantee. They borrowed a billion dollars last year on top of that to pay bills. This year the deficit looks to be about $600 million or so. That will have to be borrowed as well. That means our gross debt, the money we actually owe, is almost $1.5 billion higher than when Williams was elected , and the oil money started coming in.

But what will it mean going forward? If oil settles at $60 a barrel, as many economists are predicting, our annual budget will lose about $1.25 billion. That is catastrophic for the provincial economy. That is recession. The reason is that this province relies heavily on government spending to drive the economy. Some examples are Muskrat Falls, hospitals, etc. Without that expenditure, the private companies that relied on it die on the vine. Have no illusion, they will die on the vine. That means much higher unemployment numbers, serious drops in real estate values, and all that spirals from that as usual.

It means massive cuts in government spending on programs and people. It means recession. Now, if Russia carries out its implied intention to ride the oil wave down to $30 a barrel, the consequences are much different. A $30 per barrel drop means Newfoundland and Labrador loses over $2 billion in oil revenue per year. That means depression. That means default on large loans - like the federal loan guarantee on Muskrat Falls. That means Hebron is cancelled. It means an end to all oil exploration, and the end for the many local companies living off servicing the oil industry. It means massive unemployment in the private sector and the public sector. At least in the range of 25%.

Now, you might think this is an exaggeration, but remember that the provincial GDP increases of the last decade have been almost solely based on oil revenue. The economy and society have inflated along with the boom. Personal debt has increased with the expressed idea that oil would keep going up. Government debt ditto. Therefore, the dramatic shock of oil deflation has even more severe consequences than would normally be expected. If you want a really good example, look to the oil bust in Alberta in the 1980's. That was Alberta's first big bust. They were like us. They spent like it would never end. It ended, and when it did people walked away from their houses... Alberta was devastated, and it had a government savings account - the Heritage Fund. We don't have one of those.

At $30 a barrel the refinery at Come-by-Chance is almost certain to close. Ditto for the Hebron development. Those two projects alone would have a massive financial effect in central Newfoundland. Muskrat Falls also comes into focus. Selling power at a loss for the sake of it may be trumped by common financial sense, and that project may be abandoned. As bad as its financial are now, financial arrangements still have not been made with the Nunatukavut or Nunatsiavut governments, which can be expected to be at least $1 billion extra. Then there is the prospect of Hydro-Quebec winning its lawsuit over the water management agreement. That one you can take to the bank. In 2010, the provincial department of Natural Resources estimated such a loss in court would result in billions of dollars in damages being awarded by the courts. It also stated that CF(L)Co would be bankrupted. These are the facts.

There is no bright side to the economic war being waged by the big powers in the world. Not even for them. It's the kind of "battle to the last man" that by necessity means no one else survives. We are and will remain casualties of the "greater good". We are also casualties of a foolish and irresponsible spending policy of the Williams' regime. We are also casualties of our own acquiescence to the Williams' vision.  The problem, and it's a very serious problem, is Newfoundlanders and Labradorians are not being informed of the reasons for it all. It's put down to "lower oil prices" and that's about the extent of the explanation by government. They say only two things are certain: death; and taxes. Add a third: ignorance is no excuse.  

Wednesday, November 26, 2014

The Death of the PC Empire in Newfoundland and Labrador

Seven by-elections later, without success, the ruling Tories in Newfoundland and Labrador resemble the old Iraq war slogan "shock and awe". Last night it was clearly visible on the faces of the defeated candidates and the cabinet ministers that campaigned on their behalf. It's not that they don't understand what's happening to them, it's just that they don't understand what happened to them.

For the PCs all roads lead to Muskrat Falls. After previously sacred Danny Williams got his Muskrat Falls deal he resigned - mere weeks later. That shattered the "God" image so carefully crafted. The population was left unstable as if it had lost its father, and its foundation had been shaken. Such is the danger of iron man rule - all men are mortal.

Then there was the viscous battle on the airwaves and in the social media over the wisdom and value of the project. The PCs hired expensive communication firms, and stalled requests for information on the project. When that strategy appeared to crack the Tories turned to their normal practice: legislation. They created Bill 29 to amend the Access to Information Act.  Typically that would be shuffled off as no big deal. It's not as if the public are filing access requests. However, the press, smelling a rat, went ballistic. Muskrat Falls opponents and the opposition parties grabbed onto the issue, backed by the press, and even forced a multi-day filibuster. More importantly the image was sealed. The PCs couldn't sell the bill as just normal legislation, and the public began seeing it as an act to cover-up Muskrat Falls dealings. That was when the trust was violated.

Thereafter the PCs, generally speaking, lost public trust in their word, but not necessarily in the project. Newly appointed leader Dunderdale and her team, which included Williams' brother, decided to attack the Muskrat Falls opponents rather than address the core public trust issue. She termed opponents as "nay-sayers, known critics of the government" etc... Her arrogance, and that of her colleagues, was so palpable the public became repulsed. When the PUB refused to give the project an unfettered endorsement, the PCs went crazy with indignation - including Williams who derided not just opponents, but also the PUB. It was war in a way. The problem for the PCs was their guns were focused in the wrong direction. As distrust grew, the people began taking opponents accusations seriously, and so an attack on the assertions of proponents began to be an attack on the people themselves.

It always was, and remained a battle for hearts and minds. The PCs refusal to alter their strategy of arrogantly attacking those opposed to their vision, and instead addressing the core issue of trust, resulted in a solidification of the view that "the PCs were out of touch". A natural result when a government can't see the core issue and instead shoots the messenger. So great was the vitriol that Dunderdale became almost detested by the public. The PC caucus decided their poll numbers were bad enough to fire Dunderdale, and they did just that. However, by this time, the public considered them, rightly so, as all infected by the same affliction - arrogance.

As if to emphasize the point the PCs, led on the outskirts by Williams, attacked leadership candidate Bill Barry (a reformist-type candidate) and coronated a pro-Muskrat Falls businessman - Frank Coleman. At one time an endorsement by Williams would have guaranteed a candidate acceptance among the public, but this time it back fired. The endorsement hung around Coleman's head like a guillotine, and in the end the blade came down. Coleman's company, HVP, was quietly released from a money losing government contract in Labrador, and the $18 million dollar performance bonds that were meant to guarantee it. After months of agony, and accusations "Danny's Man" was simply implementing "Danny's Will", Coleman resigned before he was even sworn in.

That led to another leadership race, after the first one was quietly swept under the carpet like it never happened, and Paul Davis was anointed the new PC leader. Davis immediately came under scrutiny for political ties to his old employer, the RNC provincial police. At the core of the issue were campaign donations that were banned by the RNC Act. (to this day the 2013 Political Contribution List has not been released publicly - although it has been ready for 7 months I'm aware of). Furthermore, an apparent political deal reached between himself and perennial political opportunist Steve Kent still hung in the air as Kent was appointed Deputy Premier. The public smelled the same-old Tory contempt for democracy that had its roots in the Muskrat Falls battles, and Davis was labelled. Then came consummation of another apparent political deal when Senator Manning's (a Davis leadership supporter)  niece was appointed to cabinet as an unelected Justice Minister.

Every action has a reaction. Every move the PCs made over the last four years did the exact opposite of what they intended. They reinforced the perception created by the Muskrat Falls battles that secrecy and power were the poison of choice for the PCs. They never adjusted from having a front man that could sell ice to Eskimos. They never saw the effect of the 5th column that battled them at every turn over Muskrat Falls. They never realized that the core issues with Muskrat Falls would stick and become the core issues against the government. There are none so blind as those that refuse to see. So it went with the PCs. All their roads led to Muskrat Falls.