London Irvine Report - August 19, 2008.
The Resource Wars.
“To be an enemy of America can be dangerous, but to be a friend is fatal.”
Henry Kissinger.
We open today with a relaxed German view of the first resource war of the 21st century. Below, Der Spiegel tackles the new reality of the revival of the Russian Federation. But was it a resource war at all? Below that, former Chancellor Schroeder’s view of the 3 day war pretty much sums up Europe’s indifference to Georgia’s case. Trading with Russia will always trump trading with Georgia, and high principles, in our cheap energy dependent world.
With no vital European interest at stake in Georgia, nor a single voice that speaks for Europe, Georgia’s success or failure was always going to be dependent on American intervention. In the event US intervention never came, and was never promised according to the US government, making Georgia’s actions now look the height of folly. 150,000 refugees is the result. Officially US policy still proposes Georgia for NATO membership, but is it wise for NATO to risk nuclear war over unstable new members? Stay long gold and silver. Wrong footed at the start, the west is now attempting a high stakes comeback against Russia. Sooner or later, the attention will move on to the Ukraine and a much bigger more convoluted fight.
“Who do I call if I want to call Europe?”
Henry Kissinger.
Vladimir Putin Takes on a Powerless West
Russian Prime Minister Vladimir Putin approached the crisis in Georgia coolly and efficiently, prompting admiration even from some American observers. But Moscow's brutal strike against Georgian President Saakashvili has divided the Western world, with the split running straight through the European Union.
------While prospering major power China celebrates the Olympic Games in Beijing with an iron fist, while a president stages his departure in the United States, while a divided European Union argues over the Georgian question and NATO sends ambivalent signals, Russia is busy working on its imperial renaissance. As endless columns of its tanks rolled across Georgia's streets, powerful Washington could do little more than fly in tents and blankets for its friends in Tbilisi.
The West is powerless in the face of Russia's imperialism. The Baltic states and Ukraine, still within Moscow's gravitational field, clearly have good reason to fear that they could be next to feel the brunt of Putin's capriciousness.
"We are bidding final farewell to the Soviet Union," Saakashvili called out to 70,000 supporters on Rustaveli Boulevard in Tbilisi, after Russia formally declared the armed conflict over on Tuesday of last week. It was a naïve sentence, though. Polish President Lech Kaczynski, standing next to him in front of the presidential palace, together with the leaders of the Baltic states and Ukraine -- who had also hurried to Tbilisi to demonstrate solidarity with Georgia -- could do little more than smile at Saakashvili's remarks. Kaczynski chose not to mention Putin's name, but he did venture a grim prediction: "If the world abandons Georgia, Ukraine will be next."
------When the hotheaded Saakashvili got carried away and attacked the South Ossetian capital Tskhinvali, Medvedev -- the diminutive man with his friendly smile and relaxed posture -- was apparently not up to the task of commanding a military campaign, at least from Putin's perspective. Putin, 6,000 kilometers (3,737 miles) away in Beijing, became the first to appear before the television cameras, not Medvedev. And it was Putin, not the president, who traveled to the border to meet with the refugees and portray himself as their protector.
-----In the wake of last week's war, international law experts are now debating a decisive question: Do wannabe states like South Ossetia and Abkhazia enjoy the UN Charter's protections against military intervention, even against forced reintegration into Georgia? If so, were the South Ossetians entitled to request assistance from their Russian friends to fend off the attacks from Tbilisi?
There is no doubt that the breakaway regions are still part of the territory of the sovereign Georgian nation. And any nation can, as a rule, use force to preserve national unity if necessary. But international law experts take a pragmatic approach: If the Georgian government has in fact been replaced by a secessionist power structure in South Ossetia and in Abkhazia -- that is, if the home country has allowed its separatist region to become de facto foreign states -- then community of free nations must respect this act of self-determination. The home country's hands are essentially tied.
------In contrast, it is beyond dispute that the example of Kosovo has played a crucial role in shaping Russia's Caucasus policies. In February, for the first time since the signing of the Helsinki Final Act in 1975, part of a nation's territory was separated from it against its will when Serbia lost the breakaway province of Kosovo despite its own and Russian protests. Since then, Moscow diplomats have argued slyly, the principle of territorial integrity apparently no longer applies quite as absolutely for the West.
And now Russia has also invalidated that principle. After the battle over Tskhinvali, Russian Foreign Minister Lavrov said that Georgia “can forget about” its territorial integrity. On Thursday, Russian President Medvedev received the "presidents" of the two de facto republics of South Ossetia and Abkhazia in the Kremlin, almost as if they were already members of the UN.
Losing the war has only aggravated Georgia's problem with the separatist provinces. The country lacks the political and military strength to win back the regions. As a result Russia, in the wake of the recent war, stands a good chance of retaining control over the two provinces as protectorates -- possibly even with unilateral diplomatic recognition, following the example set by Turkey when it recognized the "Turkish Republic of Northern Cyprus."
http://www.spiegel.de/international/world/0,1518,572811,00.html
'Serious Mistakes by the West'
Former German Chancellor Gerhard Schröder discusses the war in the Caucasus, the possibility of Germany serving as an intermediary in the conflict and his belief in a constructive role for Russia.
SPIEGEL: Mr. Schröder, who is at fault for the Caucasus war?
Gerhard Schröder: The hostilities undoubtedly have their historic causes, as well, and the conflict has had several historic precursors. But the moment that triggered the current armed hostilities was the Georgian invasion of South Ossetia. This should not be glossed over.
SPIEGEL: You see no partial fault on Moscow's part, no lack of proportionality in the actions of the Russian military?
Schröder: That is something I cannot and do not wish to judge. But we know, of course, that military conflicts develop their own dynamics. The crucial issue now is that all parties involved will take advantage of the French president's six-point plan.
SPIEGEL: Do you believe that the American military advisors stationed in Tbilisi encouraged Georgia to launch its attack?
Schröder: I wouldn't go that far. But everyone knows that these US military advisors in Georgia exist -- a deployment that I've never considered particularly intelligent. And it would have been strange if these experts had not had any information. Either they were extremely unprofessional or they were truly fooled, which is hard to imagine.
----SPIEGEL: You see no reason, in light of the harsh actions in the Caucasus, to terminate the special German-Russian "strategic partnership," or at least to put it on ice?
Schröder: No. I don't see why this concept should be jeopardized because of Georgia. Mutual dependencies also create mutual securities. I am also opposed to criticism of Russian investments in Germany. Who should have a problem with Mr. (Alexei) Mordashov investing in the (tourism company) TUI, Mr. (Oleg) Deripaska owning 10 percent of (the construction company) Hochtief or another oligarch owning a share of the fashion house Escada? I would like to see more and not less investment in the German economy. Historically speaking, such economic integration has proven to be politically beneficial.
SPIEGEL: Now you sound like (former US Secretary of State) Henry Kissinger. Have you always thought this way?
Schröder: Certainly not in my Young Socialist days. But ever since I became professionally involved in foreign policy as chancellor, this sober approach has always been my preference -- and it's certainly the most reasonable one.
------SPIEGEL: With all due respect to cool-headed realpolitik: Don't we have to draw a red line now, one that Moscow cannot cross if it wants to continue playing a role in international institutions and as a partner of the West? Immediate withdrawal of all troops from Georgia, for example, and recognition of its territorial integrity, as US Secretary of State Rice has vehemently demanded?
Schröder: I do not believe that Russia is pursuing a policy of annexation. And I also do not believe that there can be a return to the status quo ante in South Ossetia or Abkhazia. It's out of the question. In my opinion, this has less to do with supposed Russian expansionist interests than with the wishes of the civilian population.
http://www.spiegel.de/international/world/0,1518,572686,00.html
Below, the West tries to rattle some sabres. Tough talk, or do we really intend to go to war with Russia as part of the resource wars? We now seem to be making policy ad hoc. Are we about to miscalculate our way into an unprepared war?
Russia will not draw a new Iron Curtain after Georgia, promises Condoleezza Rice
Condoleezza Rice, the US Secretary of State, has vowed that Russia will not be allowed to draw a new Iron Curtain around Eastern Europe, as Moscow showed no sign of withdrawing from Georgia.
By Adrian Blomfield near Gori and Jon Swaine
Last Updated: 7:47AM BST 19 Aug 2008
Speaking after Moscow promised, and failed, to begin pulling its troops out of the country on Monday, Miss Rice said: "It didn't take that long for the Russian forces to get in and it really shouldn't take that long for them to get out."
Russia is playing a "very dangerous game" but Nato will not allow it to overpower Georgia, or destabilise Europe by drawing a "new line" through the continent, Miss Rice said on her way to an emergency meeting in Brussels with Nato foreign ministers.
"We have to deny Russian strategic objectives, which are clearly to undermine Georgia's democracy, to use its military capability to damage and in some cases destroy Georgian infrastructure and to try and weaken the Georgian state," she said.
Her comments came as David Miliband, the Foreign Secretary, said that Nato would be giving "serious co-operation - militarily and politically" to Georgia in the wake of the crisis in the region, as part of a route to their full membership of the alliance.
Moscow still controls a number of Georgian towns and its east-west highway, and no significant withdrawals of Russian troops has taken place. An American defence official said that Russia was actually sending more troops to South Ossetia and another pro-Russian enclave in Abkhazia. "We're seeing them solidify their positions," the official was quoted as saying
Washington has also confirmed that more than a dozen SS-21 missile launchers have been moved into the breakaway province of South Ossetia, within striking range of Tblisi, the Georgian capital. The SS-21 was used with devastating consequences during Russia's military campaign against separatist rebels in Chechnya.
http://www.telegraph.co.uk/news/worldnews/europe/georgia/2583304/Russia-will-not-draw-a-new-Iron-Curtain-after-Georgia-promises-Condoleezza-Rice.html
Below, the NY Times points out the west’s rising vulnerability in the most important commodity of all. With resource nationalism rising in the world, the G-7’s position is only likely to deteriorate further in the decade ahead. Like it or not, the west is almost totally dependent on middle eastern and Russian oil to maintain our modern lifestyle. No amount of posturing in Washington, London or Brussels will change it. A war with Russia risks collapsing the West's lifestyle.
As Oil Giants Lose Influence, Supply Drops
By JAD MOUAWAD Published: August 18, 2008
Oil production has begun falling at all of the major Western oil companies, and they are finding it harder than ever to find new prospects even though they are awash in profits and eager to expand.
Part of the reason is political. From the Caspian Sea to South America, Western oil companies are being squeezed out of resource-rich provinces. They are being forced to renegotiate contracts on less-favorable terms and are fighting losing battles with assertive state-owned oil companies.
And much of their production is in mature regions that are declining, like the North Sea.
The reality, experts say, is that the oil giants that once dominated the global market have lost much of their influence — and with it, their ability to increase supplies.
“This is an industry in crisis,” said Amy Myers Jaffe, the associate director of Rice University’s energy program in Houston. “It’s a crisis of leadership, a crisis of strategy and a crisis of what the future looks like for the supermajors,” a term often applied to the biggest oil companies. “They are like a deer caught in headlights. They know they have to move, but they can’t decide where to go.”
The sharp retreat in all of the commodities’ prices over the last month, about 20 percent, reflects slowing global growth and with it reduced demand for more oil in the short term. But over the next decade, the world will need more oil to satisfy developing Asian economies like China. The oil companies’ difficulties suggest that these much-needed future supplies may be hard to come by.
Oil production has failed to catch up with surging consumption in recent years, a disparity that propelled oil prices to records this year. Despite the recent decline, oil remains above $100 a barrel, unimaginable a few years ago, causing pain throughout the economy, like higher prices at the gas pump and automakers posting sizable losses.
The scope of the supply problem became more clear in the latest quarter when the five biggest publicly traded oil companies, including Exxon Mobil, said their oil output had declined by a total of 614,000 barrels a day, even as they posted $44 billion in profits. It was the steepest of five consecutive quarters of declines.
While that drop might not sound like much in a world that consumes 86 million barrels of oil each day, today’s markets are so tight that the slightest shortfalls can push up prices.
----- Even in places where they are allowed to operate, the Western oil companies face growing problems. Countries like Russia, Algeria, Nigeria and Angola have recently sought to renegotiate their contracts with foreign investors to capture a bigger share of the profits.
http://www.nytimes.com/2008/08/19/business/19oil.html?_r=1&hp&oref=slogin
We close for today with a forecast of serious trouble ahead for the US economy. Latest money figures suggest that a 1987 style sell-off is becoming more likely. Reconstituted US broad money measure M3 has dropped into collapse. Bad things usually follow along behind.
Sharp US money supply contraction points to Wall Street crunch ahead
By Ambrose Evans-Pritchard Last Updated: 6:02am BST 19/08/2008
The US money supply has experienced the sharpest contraction in modern history, heightening the risk of a Wall Street crunch and a severe economic slowdown in coming months.
Data compiled by Lombard Street Research shows that the M3 ''broad money" aggregates fell by almost $50bn (£26.8bn) in July, the biggest one-month fall since modern records began in 1959.
"Monthly data for July show that the broad money growth has almost collapsed," said Gabriel Stein, the group's leading monetary economist.
On a three-month basis, the M3 growth rate has fallen from almost 19pc earlier this year to just 2.1pc (annualised) for the period from May to July. This is below the rate of inflation, implying a shrinkage in real terms.
The growth in bank loans has turned negative to a halt since March.
Monetarists say it is the sharpness of the drop that is most disturbing, rather than the absolute level. Moves of this speed are extremely rare.
The overall debt burden in the US economy is currently at record levels, raising concerns that a recession - if it occurs - could set off a sharp downward spiral.
----- Household income is now 131pc of disposable income, compared with 93pc at the top the dotcom bubble, 79pc in the property boom of the late-1980s, and 62pc at the end of the 1970s.
The M3 data measures both cash and a wide range of bank instruments. It tends to provide an early warning signal of major shifts in the economy, although the US Federal Reserve took the controversial decision to stop reporting the statistics in 2005 on the grounds that the modern financial system had rendered the data obsolete.
Monetarists insist that shifts in M3 are a lead indicator of asset prices moves, typically six months or so ahead. If so, the latest collapse points to a grim autumn for Wall Street and for the American property market. As a rule of thumb, the data gives a one-year advance signal on economic growth, and a two-year signal on future inflation.
---- The University of Michigan's index of consumer sentiment has fallen to the lowest level since the 1980s recession.
http://www.telegraph.co.uk/money/main.jhtml?view=DETAILS&grid=&xml=/money/2008/08/19/cnusecon119.xml
Sunspot cycle 24. The next two global cooling cycles perhaps. The next “Dalton Minimum?”
Smoothed sunspot numbers (SSN). Oct. 0.9. The end of cycle 23.
Nov 1.7. Dec 10.1. Jan 3.4. Feb 2.2. Mar 9.3 April 2.9. May: 2.9.
June 3.1. July 0.5.
At the Comex silver depositories there was no movement yesterday. Final figures were: Registered 83.90 Moz, Eligible 54.39 Moz, Total 138.29. Moz.
The NYSE WIN system is now flat. The NASDAQ system is also flat. We will resume trading the quant system with the next sell signal generated on the NYSE system. More details on the WIN system are available at link below.
The monthly Coppock Indicators finished July:
DJIA: -51 down. NASDAQ: -44 down. SP500: -79 down. All 3 indicators reversed in November 07, ending long term buy signals and have now dropped into negative numbers and are accelerating to the downside.
This week’s featured link: Cornerstone Capital Resources Inc.
TSX.V: CGP. Excellence in Mineral Exploration. Cornerstone Capital Resources Inc. has a strong and dedicated technical team who are focused on generating new projects that have great potential for discovery. Cornerstone leverages its own exploration funding through joint venture and strategic partnerships, providing shareholders with potential for success at lower risk. Cornerstone has a diversified portfolio of gold, silver, copper, nickel, VMS, and uranium properties in Canada and Ecuador.
http://www.cornerstoneresources.com/s/Home.asp
http://www.cornerstoneresources.com/s/CorporateUpdate.asp?ReportID=314853&_Type=Corporate-Update&_Title=July-Update
A Personal Disclosure.
Over the last few months, many of the stocks we’ve linked to have made some interesting moves. Possibly because of the LIR link, more likely because of the underlying company and good management. Going forwards, I expect the commodities demand cycle to last another couple of decades due the economic rise of Asia. But the immediate economic picture looks very threatening.
To me owning most stocks at this time offers a poor risk-reward balance, accordingly I will sit out developments in cash and precious metals stocks. This summer looks particularly dangerous for longs, with the unfortunate possibility of more major large international financial companies failing. Accordingly beginning yesterday July 7, I have started liquidation of my remaining holdings. There ought to be ample opportunity to re-enter the market nearer the year end, when the result of the US election will be known, and hopefully by then, the end of the credit crisis in 2009 will be coming into view.
Junior resource companies are not suitable for everyone, but for those who are interested in that sector, we aim to provide companies of merit. As the new century unfolds and natural resource demand soars, I think, that there will be big money to be made from prudent investment in the sector. As always, it’s important to do one’s own due diligence if thinking about making an investment. No one has more at risk in an investment than you do yourself.
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