China's Giga-Cities

A mega city is one with a population of 10 million or more. What do you call a combination of mega-cities? A giga-city. And China has 4.

Yangtze River Delta City. Population: 92 million. Area: 99600 sq. km (38400 sq mi.). Components: Shanghai, Nanjing, Hangzhou, Ningbo, Suzhou, Wuxi, Changzhou, Zhenjiang, Yangzhou, Taizhou, Nantong, Huzhou, Jiaxing, Shaoxing, Zhoushan

Pearl River Delta City. Population: 64 million. Area: about 20,000 sq. mi. Components: Guangzhou, Shenzhen, Hong Kong, Huizhou, Dongguan, Foshan, Jiangmen,Zhongshan, Zhuhai, Macau. "The Shenzhen-Hong Kong Metropolis will become by 2020 the third largest in the world in GDP terms, behind only New York and Tokyo."

Bohai City. Population: 66 million. Area: about 15,000 sq. mi. Components: Beijing, Tianjin, Dalian, Tangshan, Shenyang, Jinan, Qingdao, Weihai

Chongquin City: Population: 32 million. Area: 82400 sq. km. (31800 sq. mi). Components: 19 districts, and 21 counties

Megacities

Megacities are cities with more than 10 million people. Despite the rarity of cities with this many people, there is some dispute over the number of these huge urban areas. Here is my list.

China:
Pearl River Delta City (Guangzhou/Shenzhen/Dongguan) 42 million (details)
Chongqing 31.4 million (details)
Shanghai 20 million
Beijing 18 million
Tianjin 12 million

Other Asia:
Tokyo, Japan 34.2 million
Seoul, Korea 24.5 million
Delhi, India 23.9 million
Mumbai, India 23.3 million
Manila, Philipines 20.1 million
Karachi, Pakistan 16.9 million
Osaka, Japan 16.8 million
Kolkata, India 16.6 million
Dhaka, Bangladesh 14 million
Tehran, Iran 13.1 million

Africa:
Cairo, Egypt 15.3 million
Lagos, Nigeria 12.1 million

Europe:
Moscow, Russia 14.8 million
Istanbul, Turkey 13 million
London, UK 12.5 million
Paris, France 10.2 million

North America:
Mexico City 22.8 million
New York City 22.2 million
Los Angeles 17.9 million

South America:
Sao Paulo, Brazil 20.8 million
Buenos Aires, Argentina 14.8 million
Rio de Janeiro, Brazil 12.5 million

Another showdown on Sept. 30

The government will shutdown on October 1 unless Congress passes a continuing resolution before then. More drama on the horizon. It is likely that the government will shut down for a few days, since the stakes aren't as high as defaulting on the debt.

"At the same time, they [Republicans and Democrats] face another flashpoint when the current budget expires on Sept. 30, to be replaced either by a 2012 budget or a series of continuing resolutions that would keep the government functioning until an agreement is reached or talks end in a shutdown".
-- From: http://topics.nytimes.com/top/reference/timestopics/subjects/f/federal_budget_us/index.html

"At the same time, this episode has made it more likely that the federal government will shut down on October 1, 2011, perhaps for several weeks. ..we'll see a government shutdown, perhaps a prolonged one, before we get a budget for FY2012."
-- From: http://www.angrybureaucrat.com/2011/07/boehner-gives-up-bizarre-48-hours-in-dc.html

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Update: Eric Cantor has taken a shutdown off the table:
http://news.firedoglake.com/2011/08/17/cantor-satisfied-with-level-of-appropriations-for-fy2012-reducing-the-threat-of-government-shutdown/

Shutting down ... NOT

I started this blog to warn about the collapse of our economy. Well, it seems that I am wrong. I don't foresee any such collapse within the next 30 years, so I will shut down this blog.

The CBO is projecting a budget deficit as low as 205 billion in 2015. While I am not as optimistic, it does seem like the deficit is under control. If the deficit is under 1 trillion in 2015, then I think the danger of hyperinflation is tamed, at least for now.

While there are problems in Europe, particularly in Greece, I think these will be contained.

I will leave this up for another week or so, to allow me to change my mind, but I expect that this is the last post.

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Update: Bruce Krasting thinks the CBO report is overly optimistic. I guess I should look at it some more before accepting it.

Greece being thrown to the wolves

The yield on the 2 year Greek bonds in now 43.19%. The yield on the 10 year Greek bonds is now 17.94%.

The 2 year yield on Portuguese debt is 13.28%, and on Irish debt is 8.88%.

So the expectation is that Greece will default, but the contagion will not spread.

Nuclear power in Saudi Arabia

From: http://news.scotsman.com/world/Saudi-Arabia-announces-details-of.6778139.jp

"SAUDI Arabia plans to build 16 nuclear power reactors by 2030 which could costs more than $100 billion (£60bn), a Saudi-based newspaper reported yesterday, citing a top official."

Also, in the Emirates:
"Neighbouring United Arab Emirates awarded a South Korean consortium the contract to build four nuclear power plants worth $20.4 bn in December 2009."

The Roller Coaster Stock Market

On 8/2/2011, the Dow was DOWN -265.87 (-2.19%)
On 8/3/2011, the Dow was UP 29.82 (+0.25%)
On 8/4/2011, the Dow was DOWN -512.76 (-4.31%)
On 8/5/2011, the Dow was UP 60.93 (+0.53%)
On 8/8/2011, the Dow was DOWN -634.76 (-5.55%)
On 8/9/2011, the Dow was UP 429.92 (+3.98%)
On 8/10/2011, the Dow was DOWN -519.83 (-4.62%)
On 8/11/2011, the Dow was UP 423.37 (+3.95%)

It doesn't take a genius to notice the pattern. Look for the Dow to fall about 500 points tomorrow.

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Update 8/12/2011. Oops, the Dow was UP 125.71 (+1.13%) today.

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Update 8/18/11

On 8/12/2011, the Dow was UP 125.71 (+1.13%). (Breaking the pattern)
On 8/15/2011, the Dow was UP 213.88 (+1.89%).
On 8/16/2011, the Dow was DOWN 76.97 (-0.67%).
On 8/17/2011, the Dow was UP 4.28 (+0.00%)
On 8/18/2011, the Dow is DOWN almost 500 points.

So, the pattern continues, except for 8/12. Look for the market to be up tomorrow.

Why interest rates should increase

The Fed recently announced that interest rates should be kept low through at least mid-2013. The discount rate is at 0.75% and was last increased by 0.25% in February 2010. Instead the Fed should increase the rate to at least 2.50%.

Lower rates make it cheaper to borrow, but the last thing we need right now is more debt. Higher rates reward saving and maintain the value of the currency, which keep commodity prices, such as gasoline, lower, in dollar terms.

If you want to help the big banks, keep interest rates low. If you want to help the average person, raise them. It is obvious which side the Fed is on.

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From: http://peterschiffblog.blogspot.com/2011/08/ultra-low-interest-rates-are-among.html

"By committing to keeping them near zero for the next two years, the Fed has actually lengthened the time Americans will now have to wait before a real recovery begins. Artificially low interest rates are the root cause of the misallocation of resources that define the modern American economy. As a direct result, Americans borrow, consume, and speculate too much, while we save, produce, and invest too little.

This reckless policy, designed to facilitate government spending and appease Wall Street financiers, will continue to starve Main Street of the capital it needs to make real productivity-enhancing investments."

Minor good news on deficit

There is so much bad news floating around I want to point out good news where I see it. At one point the 2011 deficit was projected to be 1.65 trillion. Now, based on YTD figures extrapolated through the end of the year, I project it to be only 1.32 trillion. That would put the debt on 9/30/2011 at "only" 14.88 trillion.

Projections I have made previously put this as high as 15528 billion, so this number is 650 billion less.

Insurance companies downgraded

From: http://www.reuters.com/article/2011/08/08/us-sp-berkshire-idUSTRE77745K20110808

"S&P downgraded five insurers to "AA+" from "AAA," as it had warned it would do: Knights of Columbus, New York Life, Northwestern Mutual, TIAA and USAA."

The next step is the expected downgrade of state and municipal bonds. This will leave only the big 4 companies with AAA ratings.

Black Monday coming

I'm just repeating this: Black Monday crash certain as S&P downgrades US treasuries

"Clearly the insiders of Wall Street knew exactly what was coming after the close on Friday, so they sold the market down. However, with everybody else kept in the dark the real selling will start on Monday.

How bad will the panic be? Well, it is hard to get over the significance of the US losing its top credit rating. US treasuries are the most widely held financial instrument in the world and the S&P downgrade will force those institutions wedded to triple-A to seek an immediate divorce"

Weiss & Dagong Ratings

Weiss Ratings is an independent ratings agency. It rates sovereign debt on an A to E scale. Here is its analysis of the sovereign debt ratings:

China A
Thailand A
Malaysia A-
Saudi Arabia A-
South Korea A-
Switzerland A-
Austria B+
Chile B+
Norway B+
Sweden B+
Denmark B
Netherlands B
Russia B

I'm not going to repeat the whole list, but everyone else gets a C or a D. The US gets a C on this scale.

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Dagong Credit Rating is a Chinese rating agency that has performed its own independent analysis. Here are the best countries under its analysis:

Norway AAA
Denmark AAA
Luxembourg AAA
Switzerland AAA
Singapore AAA
Hong Kong AAA
Finland AAA
China AAA
Australia AA+
New Zealand AA+
Sweden AA+
Canada AA+
Netherlands AA+
Germany AA+
Macao AA+
Austria AA+
Saudi Arabia AA
Korea AA-
Taiwan AA-
Chile AA-
France AA-
Japan AA-
Belgium A+
Malaysia A+
US A+
UK A+

The US was downgraded to an A on July 14. No mention of the Isle of Man.

Update: The above list shows the local currency ratings, but the important rating is for foreign currency. "A sovereign foreign currency rating reflects its opinion of the sovereign's willingness and ability to service debt issued in currencies of foreign jurisdictions."

Update 2 (11/25/11):  Denmark is now an AA+.  So now there are only 7 AAA countries left.

Triple A Ratings

The US is no longer rated AAA. These are the countries left with AAA ratings, per S&P:

Australia
Austria
Canada
Denmark
Finland
France
Germany
Guernsey
Hong Kong
Isle of Man
Lichtenstein
Luxembourg
Netherlands
New Zealand
Norway
Singapore
Sweden
Switzerland
United Kingdom

5 states are AAA rated by Moody's: Maryland, New Mexico, South Carolina, Tennessee and Virginia. In addition there are about 300 US public agencies and local governments with AAA ratings, including these in Colorado: Colorado Housing and Finance Authority, City of Denver, El Paso County School District, and Jefferson County. There is one university with an AAA rating, the University of Washington. These are all likely to be down-graded to AA+.

The European Financial Stability Fund (EFSF) has been rated AAA.

How many companies are rated AAA? Only these:
Non-financial: Automatic Data Processing, Exxon Mobil, Johnson & Johnson and Microsoft
Insurance: NY Life, Northwestern Mutual Life, Teachers Insurance, USAA, and Knights of Columbus

There are no banks in the US that are rated AAA. The best banks in the US are: Bank of New York Mellon (AA-), JP Morgan Chase (A+), Wells Fargo (AA-), US Bankcorp (A+), and Northern Trust (AA-).

Globally there are only 5 banks in the world that are AAA rated by all the credit agencies as of Oct. 2010 (source):
KfW (Germany)
Caisse des Dépôts et Consignations (CDC)(France)
Bank Nederlandse Gemeenten (BNG) (Netherlands)
Zürcher Kantonalbank/Zurich Cantonal Bank (ZKB) (Switzerland)
Landwirtschaftliche Rentenbank (Germany)

Other banks that have an AAA rating from at least 1 agency are:
Rabobank Group (Netherlands)
Landeskreditbank Baden-Wuerttemberg - Foerderbank (Germany)
Nederlandse Waterschapsbank (Netherlands)
NRW.Bank (Germany)
Royal Bank of Canada (Canada)
Toronto-Dominion Bank (Canada)
Municipality Finance PLC (Finland)

These are the only other non-financial companies worldwide with AAA ratings:
Imperial Oil (Canada)
SMRT (Singapore)
Singapore Tech Engineering (Singapore)
MTR (Hong Kong)

Japan has no AAA companies, but has 4 which are AA rated: NT&T, NT&T Docomo, Takeda Pharmaceutical, and Canon.

So in conclusion, entities with AAA credit ratings form a very exclusive club.

Update (11/25/2011):  Guernsey, Isle of Man, and New Zealand are no longer AAA rated.
Update (8/7/12):  If you look at the Foreign Currency rating, the most important one, Austria and France are now longer AAA rated.  So to recap, the only AAA countries are:

Australia, Canada, Denmark, Finland, Germany, Hong Kong, Lichtenstein, Luxembourg, Netherlands, Norway, Singapore, Sweden, Switzerland, United Kingdom.

Only 4 of these are in the eurozone: Finland, Germany, Luxembourg, Netherlands.

Has the crash begun?

In mid-June, I posted something about technical indicators stating that a 20% crash would occur if the mid-March lows were breached. The Dow is now at 11588, below the March 16 low of 11613. If this theory is correct, then look for a crash to below 9500 and for it to stay down there until the Fed intervenes with QE3. I could be wrong, I hope I am wrong, but read this article again.

Debt ceiling increase

The new debt limit increase bill is essentially a modification of the McConnell plan. The new plan has a 3 step process for increasing the limit. First, the limit is increased by $400 billion. Second, the limit is increased by another $500 billion, subject to a "resolution of disapproval". Third, the limit is increased by $1.2 trillion (or $1.5 trillion if a balance budget amendment is submitted), again subject to a "resolution of disapproval". Since the BBA is unlikely to be submitted, this increases the debt limit by a total of $2.1 trillion, to $16.394 trillion.

So how long will the $2.1 trillion increase in the country's credit card last? Well, the $400 trillion will be used immediately, because the Treasury hasn't stopped spending, and instead has used accounting tricks, such as borrowing from Federal pension funds, to keep from exceeding the limit, and these funds will be replenished. In addition to this, I project they will spend an additional $300 billion by Sept. 30, the end of the fiscal year. The FY 2012 deficit should be about $1.2 trillion. So this is total of $1.9 trillion by 9/30/2012. At the rate of $100 billion per month, this means the country will bump up against the limit by 11/30/2012, so the new president will immediately be facing another debt crisis.

As a follow-up, the news states that "Just before 5p.m. Tuesday, President Obama sent a certification to Congress that, under the newly signed debt deal, triggers an automatic $400 billion increase in the debt ceiling."

The default of 1575

From: http://www.bloomberg.com/news/2011-07-31/default-more-than-400-years-ago-leaves-scars-christophe-chamley.html

The House Republicans, many of them opposed to raising the federal government’s borrowing ceiling, might take a lesson from the first sovereign debt crisis: Spain’s default in 1575. What events more than 400 years ago suggest is that it’s easy to ignite a dangerous chain reaction in financial and credit markets and inflict lasting damage on the economy.
Republicans today are playing the part of the cities of Castile, whose delegates to the Cortes (the Spanish parliament) opposed raising taxes to service King Philip II’s long-term bonds.
Spain, at the time, was the world’s sole superpower. Contemporaries described it as an empire “over which the sun never sets.” Yet the king needed the cities’ consent to borrow at a reasonable rate. And he needed it for a reason: The cities collected the taxes.
Each of the 18 main cities of Castile levied a special tax earmarked for long-term debt service. The level of this tax was set every six years through negotiation with the king. Tax collections were used first to pay off local long-term bondholders, with the rest sent to the central government. The local long-term bondholders were, in large part, the elderly living in the area. So local taxpayers realized that if they didn’t pay, their parents would be hurt. Thus, this precursor to Social Security had an effective enforcement mechanism -- the ire of the elders.

Confluence of Interests

But the king could only exploit this confluence of interests so far. The Cortes set the earmarked tax rate by majority rule, and that limited the king’s issuance of what were, in effect, his AAA securities. The king also issued other bonds secured by other, non-earmarked revenue. These securities were of a lower grade and sold at lower price.
Thanks to Philip’s expensive military adventures in the Netherlands and the Mediterranean, Spain’s debt had reached half of gross domestic product by 1573. At that point, the cities balked at paying higher taxes. For the next two years, they refused to budge in their confrontation with the king.
Finally, in September 1575, Philip took a circuitous route to outmaneuver the Cortes. He suspended payments not on the long-term debt, but on the short-term debt, which was owed primarily to Genoese bankers. The people cheered. Resentment against bankers ran as high then as now -- perhaps higher, because the bankers were foreigners. The upshot, however, was default and a full-blown credit crisis.
Why did the Cortes and the king play this game?

Stop the Spending

The cities wanted to stop Philip’s spending. They knew that bonds not explicitly backed by dedicated taxes would be very tough to sell, that a default would make it even harder for Philip to borrow without their help, and that his lack of direct taxing authority would force his hand in a standoff. But after the payments stopped on the short-term debt, things careened in an unexpected direction, much as they did after Lehman Brothers Holdings Inc. failed in September 2008. Many bankers who had lent to the king were, themselves, leveraged. The payment halt froze the funds deposited by local merchants to the bankers.
At that time of costly communications, periodic commercial fairs were essential events for the economic activity throughout Europe. Credit was rolled over from fair to fair by bankers, and lending agreements were renegotiated. With the Spanish commercial credit market frozen, the fairs couldn’t be held. Indeed, the main fair that was held twice a year at Medina del Campo was canceled. In sort, the default caused a banking collapse, which led to a severe recession.

Caving on Taxes

After two years, in November 1577, the cities caved, agreeing to a very large tax increase. The king resumed debt payments to the bankers. As the king explained in the settlement agreement, called Medio General, the bankers were joined in their demands “by the petition of the delegates of the cities with particular urgency about the same business.” In other words, the cities were begging the king to restore the business of trade. The fairs at Medina del Campo resumed late in the next year, but they had lost their preeminence forever.
What’s the message for the House Republicans today? First, don’t overestimate your power. Second, history stays with us. Spain’s default is 424 years old, but its story is still being told and may, to this day, be affecting that nation’s perceived creditworthiness and cost of capital.