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China’s claim of sovereignty over the South China Sea could lead to armed conflict


China’s claim of sovereignty over the South China Sea could lead to armed conflict

As the Australian Broadcast Corporation recently reported, China has found a way to fortify the South China Sea. The Chinese military have descended on a number of barren atolls and have turned them into artificial islands. The Chinese have then turned these new islands into military bases, with airstrips, port facilities, radar installations, and anti-aircraft gun batteries.

China is undertaking these measures for two reasons. First, the South China Sea lies over valuable deposits of oil and natural gas. The area is also considered a rich fishing ground. Second, control of the region would serve to deny the United States Navy access to an important part of the Western Pacific.

The South China Sea is the subject of competing claims by a number of other countries, including the Philippines, Vietnam, Taiwan, and a number of others. China has maintained a claim of sovereignty over the region, which means that other countries are barred from exploiting its resources or even deploying naval or air units inside it without Beijing’s permission. The claim, not recognized by any other country, could spark a future war between China and the United States and her allies.

The Council on Foreign Relations described a number of scenarios that could lead to a shooting war.

The first scenario involves an incident between an American naval or air unit and the Chinese military deployed in the South China Sea. China regularly intercepts and harasses American aircraft and ships that enter the area where it claims sovereignty. One does not have to have much of an imagination to envision some trigger-happy person on one side or another opening fire, with things spiraling out of control, with the United States moving to eject the Chinese from their artificial island bases and China resisting violently.

The other scenario involves one of the neighboring countries, Vietnam or the Philippines most likely, moving into the South China Sea and setting up drilling operations. The Chinese decide to exercise what they believe are their sovereign rights and move to eject the foreign oil and gas workers militarily. Vietnam or the Philippines resists, leading to war.

If the Philippines gets into an armed conflict with China, the United States would be obligated to come to its aid by treaty. The United States, because relations with Vietnam are warming, might support that country in the event of war with China, as well.  Ironic, when one considers the history of conflict between the two countries.

Clearly it is in the interest of all parties concerned to avoid war if at all possible. China is moving into the South China Sea on the scale it is because it perceives weakness on the part of the United States. It would behoove the administration to disabuse Beijing of the notion that America is disposed to roll over in the face of Chinese imperialism. Patrols over and in the South China Sea should be stepped up, possibly with joint exercises including American and local units, to demonstrate that China’s claim of sovereignty is not recognized. A military build up to back up such an effort and to convince China that war is not an option is crucial part of this strategy,

At the same time the United States needs to use diplomatic and economic pressure to force China to submit to a treaty that would allow it and neighboring countries to share the South China Sea and its resources. The treaty should include a code of conduct involving free passage of civilian and military traffic through the South China Sea. Such a treaty would defuse the potential of armed conflict among the parties concerned.

Music-Streaming Service Deezer Files IPO


Deezer IPOParis-based music streaming service announced Tuesday September 22 that it plans an initial public offering (IPO) later in 2015. The French company plans to list its shares on the Euronext Paris stock exchange. Deezer-CEO Hans-Holger Albrecht declined to say how much the company seeks to raise However, analysts see Deezer’s valuation at around EUR 1 billion (USD 1.12bn). The IPO would mean that investors finally are finally offered a direct way to invest in the subscription based music-streaming industry.

First mover advantage

According to CEO Albrecht the move by Deezer to tap the markets is taken to be the first company listed on a stock exchange. Although US-listed Pandora Media (ticker: P) also offers streaming music, it is not comparable due to the offering of an internet radio service and not subscription based music catalogues. Recently, competitor Spotify was able to raise USD 500 million from investors in a private placement, valuing the market-leader at roughly USD 8.5bn. The interesting thing is that Deezer will place new shares, so existing shareholders will not exit. The most recent shareholder breakdown showed that Access Industries (owned by Len Blavatnik) is the largest shareholder with a 27% stake, followed by telecom company Orange with 11%. The music labels Warner Music, Sony Music and Universal Music together hold 15% of Deezer’s shares. The company has currently 4.8 million paying subscribers, compared to Spotify’s 15 million. The French music-streamer saw its revenue increase with 41% in the first six months of 2015, totaling EUR 93.2 million. It reported EUR 142m revenues in 2014.

Growing pie

There are a number of companies active in the music-streaming business. Recently Apple joined the party with its Apple Music-service, however received lukewarm reviews from users. Next to market leader Spotify and Deezer, other names are Tidal (Wimp) and Qobuz in Europe, which both also offer higher quality streaming. Deezer offers CD-quality streaming in its home country France as well, but not in all other countries where it is active. In most cases, higher quality also means a higher price and therefore these packages are often priced at USD 20 compared to USD 10 for standard, MP3 320kbps subscriptions. Most services are comparable, but have differences in user interface and slightly diverse catalogues. For instance Qobuz holds a strong position in Jazz & Classical (but also offers other genres), whereas others have deeper dance or pop-catalogues. It’s no fighter market (yet), according Deezer CEO Albrecht. “The streaming business will not be ‘winners take all’, so we are confident in our ability to carve out a place”, Mr. Albrecht said to Reuters. According to WSJ, the streaming-music market amounted USD 1.87bn as at end of 2014, triple the revenue compared to 2011. In the same period, revenues in the music industry stayed more or less flat after years of decline. Streaming-music may be the long-sought answer for the music industry to increase its revenues.

Investor opportunity

The streaming-music industry is relatively young and in many countries the market for subscription based services offers a lot of potential. Many music-customers have to become aware of the services and make the switch. Downloading will be less attractive. Also traditional hardware is increasingly adapting to the new trend. Whereas Netflix changed the TV & movie-industry, customers did not embrace the music-streaming services yet, simply due to unawareness. This will probably only a matter of time. It seems a very smart move by Deezer to be the first to float its shares and offer investors an opportunity to join the ride.

Global Warming Adherents Propose To Take Skeptics To Court


The cause of combatting global warming has not gone very well in the past twenty or so years. The Kyoto Accords, rolled out with great fanfare in the 1990s, has done little to reduce the level of carbon dioxide emissions. More recent efforts to hammer out an international deal that would mandate reductions in CO2 emissions will likely be ineffective as well.

A number of reasons exist for this situation.

First, the solutions being offered to combat global warming are either likely to be unproductive or else likely to be catastrophic to the economies of countries that attempt them. Solar and wind technology are advancing, but are not quite ready enough to replace fossil fuels without huge spikes in energy prices. This fact is one reason why developing countries such as China and India are either ignoring carbon mandates or are just giving them lip service.

Second, despite protestations to the contrary by eminent climate scientists such as former Vice President Al Gore, the science of global warming is not settled. Satellite data has shown that there has been little or no warming since 1998. Predictions of catastrophe, such as the disappearance of the arctic ice cap, have not materialized.

Finally, a number of scandals, including the infamous Climategate affair, suggest that at least some climate scientists who adhere to the theory of human-caused global warming have played fast and loose with the data and have used dodgy methods to try to squash dissent in their own ranks. NOAA has been accused of deliberately altering data to cause it to record a rise in global temperature where it did not exist before.

Since simple strategies such as scientific debate and political action have failed to satisfy the adherents of global warming, some are proposing to harken back to tried and true methods that have not been used since the time of Galileo. If global warming skeptics cannot be defeated in the court of public opinion, they can be crushed in actual courts of law.

Senator Sheldon Whitehouse, D-Rhode Island, recently opined in the Washington Post that all of this nettlesome resistance to fighting global warming is a shadowy plot by the oil companies to deny science and to allow themselves to continue raking in what President Jimmy Carter used to call “obscene profits.: Whitehouse’s solution is to unleash RICO on the vast global warming denying conspiracy. Even if no one is actually convicted of a crime, the process of discovery will unveil the extent, if any, that the evil oil companies are alleged to be orchestrating the global warming denial conspiracy behind the scenes. That global warming skeptics would be intimidated into silence would be a happy side effect, from Whitehouse’s point of view.

Whitehouse has been joined by a group of pro-global warming scientists who have written a letter urging President Obama to prosecute global warming skeptics, according to the Daily Caller.

Across the pond, according to the Guardian, Professor Phillipe Sands, a professor of international law at University College, London, suggests that the UN International Court of Justice be asked to issue a ruling that global warming is “settled science,” which would make the matter “authoritative and could well be dispositive on a range of future actions, including negotiations.” This is despite the fact that global warming is being challenged, as Sands admits, by “scientifically qualified, knowledgeable, and influential persons.”

Essentially, what Whitehouse and Sands propose is the setting up of an inquisition, the criminalization of scientific dissent. At least the original inquisitors who persecuted Galileo and others thought they had God on their side. The modern inquisitors want to force people to bow down to the god of the State, sacrificing the search for truth to the imperative of power.


Are the paths of the Fed and ECB diverging further?


The Federal Reserve (Fed) and European Central Bank (ECB) both have a near zero interest rate policy (ZIRP). While the Fed ended purchases in its aggressive balance sheet expansion policy, or Quantitative Easing (QE), the ECB only started a similar program earlier this year. Last week, the Fed decided to keep interest rates on hold, although mentioning a lift-off later this year. The ECB is reportedly considering increasing its QE-program. How likely is a further diverging path of both central banks? And what will this mean for investors?

Are the paths of the Fed and ECB diverging further?

Statements Fed officials don’t make sense

During the recent months, a number of Fed officials indicated that the September FOMC-meeting would be a good date to decide in favor of a first rate hike. We all witnessed last week that the FOMC could not pull the trigger. Fed officials Bullard and Williams declare now, a few days later, that a rate hike is still ‘appropriate’ (Williams) and that holding the rate in the last meeting was a ‘close call’ (Bullard). One might be surprised by these hawkish words just a couple of days after a much anticipated meeting. If it was really a close call, why was there only one vote in favor of a lift off? If a rate rise is really the right thing to do in 2015, why stressing the Fed’s inflation mandate in the recent FOMC-statement? The elaborations of Fed-chair Yellen after the meeting on inflation in particular offered a somewhat different picture. Also a blue dot in the economic projections which showed a negative interest rate raised some eyebrows. Despite all words indicating a lift off (probably more will follow the next days and weeks), we can seriously doubt 2015 will see a lift off. There are simply no data to expect in the coming time which may cause the FOMC to become ‘reasonable confident’ about rising inflation.

ECB ready to act

While the statements by Fed-officials could be nothing more than rhetoric, the words of ECB-board members may prove to have more substance. A number of central bankers came out this weekend and today to underline the ECB’s ‘readiness & decisiveness’ to act in expanding its QE program. Peter Praet, ECB’s chief economist reiterated that the central bank is ready to modify the program if further action is needed and referred to economic turbulence. Bank of Italy’s top economist Gaiotti said the ECB should not fall behind the curve in the battle against inflation. This matches with the words of fellow countryman and ECB-president Draghi during the press conference. The inflation data in the Eurozone remains very weak. We could see new measures announced in the ECB’s next meeting on October 22.

Impact for EURUSD and stock markets

But what does this all mean for investors? Probably the EURUSD will stay relative volatile, with movements of at least 100 pips per day. While statements by central bankers may have impact, counter moves could occur if US data stays weak. So a cautious position is required. The potential further diverging paths doesn’t mean it’s a one-way street of a weaker EUR compared to USD. In addition, a tightening stance of the Federal Reserve could drive US stocks lower. On the other hand, further stimulus by the ECB could be a driver for European stocks to move higher. The rotation of funds from US stocks to Eurozone stocks, which we saw in the first half of 2015, could get new traction. But there’s another player in the game: China. If data from this country remains poor, stimulus might not help for stocks…

What Could Thaw Canada’s Frozen Economy?


Like Argentina, which we profiled here last week, Canada is another country facing a world of economic woes with upcoming elections.

What Could Thaw Canada's Frozen Economy?Unlike Argentina, Canada doesn’t appear to be on the precipice of a major crisis. But that doesn’t mean the country’s current recession will be overcome anytime soon. Canada made a big bet and then doubled down hard on a questionable idea.

It’s hard to blame Canada for investing so heavily on its heavy crude oil resources, investing tens of billions in the sector and tying the economy’s fortunes firmly to the outlook for petroleum. Unlike its southern neighbor, however, Canada has a weaker hand.

Canada’s oil resource is of a much lower quality than what the fracking boom has brought about in the United States. The Canadian oil sands have extremely high costs of production, require the land to be strip mined, uses vast amounts of water, and release far more emissions than other forms of oil production.

Between the higher economic costs and the greater environmental damage caused by the exploitation of oil sands properties, it is difficult to imagine this sector having much success with oil prices at their current lows. Even if oil were to recover soon, Canada may well choose to rethink tying its economic outlook to such an unpredictable and cost-ridden sector.

Canada has a second problem as well. Its housing industry, particularly in Toronto and Vancouver has gone to extreme heights. For one example of this, see this site, where you must divine whether each pictured Vancouver house is worth more than a million dollars or not.

These prices are not reasonable given any of the traditional metrics. Normally housing is determined with a general ratio between the borrower’s income and the monthly mortgage payment. That, and that houses typically sell at a ratio, often around 3-4x as expensive as the buyer’s household income.

Median Vancouver income is around $67,000 a person. So figure even with two earners, one of these dumpy million dollar houses is worth 8x the family’s household income. Only with a long mortgage and very low interest rates can a family possibly service that debt.

Should interest rates go up or someone loses a job, look out, foreclosure is likely. Though in recent years, Canadians haven’t primarily been driving the market to crazy heights.

It’s been the influx of Chinese money, looking to escape the dangers of their volatile domestic economy that has been bidding up the value of foreign real estate as a way to shelter their wealth and buy citizenship abroad. Vancouver, at nearly 50% Asian, is a most logical place for Chinese people to park their money in local real estate.

Now with the Chinese economic surge taking a big pause, it appears the influx of hot money flooding into Canadian real estate has waned. Prices have plateaued and in some areas are starting to move significantly lower.

Folks calling for a US-style housing bust in Canada are off-target. Canada’s mortgage market is backed up by the central government, meaning that Canadian banks are unlikely to end up eating large losses such as the ones that nearly toppled the US’ banking system. Besides, much of the monetary losses will be taken by wealthy immigrants and foreigners. A much smaller part of the Canadian boom is in lending to lower class folks wanting to buy out of their league, which should contain the damage for the bubble popping.

Still, even assuming the losses end up at the government rather than on the big banks’ balance sheets, it will be another drag to the economy. That brings us to the election.

There are three main parties, and two of them, conservative and liberal. The liberal party wants to run a stimulus program, but at just a $10 billion deficit per year, it represents less than 1% of GDP. That won’t do much. And if losses from the housing bust hit the government’s balance sheet, that would limit the scope of the stimulus. The conservative party is campaigning on a prudent but entirely unstimulatory balanced budget plan.

And the third party, the NDP, is planning to hike corporate taxes in order to spend more on transfer programs. That may be a good idea, but it will do nothing to help the economy. Particularly in tax-sensitive industries such as auto manufacturing that move from Ontario to the US and back again based on tax rates, higher Canadian corporate taxes would likely just kill jobs.

For Canada to get back to a better footing, it needs more investment in sectors that have been overlooked during the last decade’s tar sands mania. Manufacturing, the film industry, and tourism all offer solid opportunities for the country, particularly with its currency falling and thus raising competitiveness against the US.