U.S. military report warns 'sudden collapse' of Mexico is possible

By Diana Washington Valdez / El Paso Times

Posted: 01/13/2009 03:49:34 PM MST

Click photo to enlarge

Mexico's President Felipe Calderon announces a new economic stimulus package in Mexico... (AP photo)

EL PASO - Mexico is one of two countries that "bear consideration for a rapid and sudden collapse," according to a report by the U.S. Joint Forces Command on worldwide security threats.

The command's "Joint Operating Environment (JOE 2008)" report, which contains projections of global threats and potential next wars, puts Pakistan on the same level as Mexico. "In terms of worse-case scenarios for the Joint Force and indeed the world, two large and important states bear consideration for a rapid and sudden collapse: Pakistan and Mexico.

"The Mexican possibility may seem less likely, but the government, its politicians, police and judicial infrastructure are all under sustained assault and press by criminal gangs and drug cartels. How that internal conflict turns out over the next several years will have a major impact on the stability of the Mexican state. Any descent by Mexico into chaos would demand an American response based on the serious implications for homeland security alone."

The U.S. Joint Forces Command, based in Norfolk, Va., is one of the Defense Departments combat commands that includes members of the different military service branches, active and reserves, as well as civilian and contract employees. One of its key roles is to help transform the U.S. military's capabilities.

In the foreword, Marine Gen. J.N. Mattis, the USJFC commander, said "Predictions about the future are always risky ... Regardless, if we do not try to forecast the future, there is no doubt that we will be caught off guard as we strive to protect this experiment in democracy that we call America."

The report is one in a series focusing on Mexico's internal security problems, mostly stemming from drug violence and drug corruption. In recent weeks, the Department of Homeland Security and former U.S. drug czar Barry McCaffrey issued similar alerts about Mexico.

Despite such reports, El Pasoan Veronica Callaghan, a border business leader, said she keeps running into people in the region who "are in denial about what is happening in Mexico."

Last week, Mexican President Felipe Calderon instructed his embassy and consular officials to promote a positive image of Mexico.

The U.S. military report, which also analyzed economic situations in other countries, also noted that China has increased its influence in places where oil fields are present.

Trading in gold soars by 60pc

Gold, investors' traditional safe haven in times of financial turmoil, experienced record levels of trading last year.

By Richard Evans
Last Updated: 8:54AM GMT 14 Jan 2009

Trading in gold soars by 60pc

The turnover in gold increased by 58pc in 2008 to a record $20.2 trillion, according to International Financial Services London, a body that promotes the City of London. Silver trading also saw a dramatic increase during the year, rising by 39pc to a new record of $2.6 trillion.

The growth in turnover was partly due to an increase in prices of precious metals during the year, with gold reaching its highest ever price of $1,011 per ounce in March, IFSL said.

Daily reported net trading in gold on the London Bullion Market Association (LBMA) averaged $20bn in the first 11 months of 2008, a rise of 45pc on the same period of the previous year. Daily trading in silver on the LBMA increased by 32pc to $2bn.

"The actual volume of London market turnover is probably three to five times the reported turnover because transactions which are netted out do not appear in the published statistics," IFSL added.

Futures and options trading of gold on exchanges increased by more than 80pc in 2008 to a record $5.1 trillion. Trading of silver also hit a new high, rising by 60pc to a $1.2 trillion.

Exchange traded gold and silver funds have been the strongest source of growth in demand since their introduction in 2003, IFSL said.

The price of gold is expected to average $910 an ounce in 2009, 4.3pc more than last year, according to a panel of 20 analysts, traders and investors surveyed recently by Bloomberg. But silver and platinum prices will decline this year, the survey predicted.

Soaring cost of living drives residents from California

The Californian dream is turning sour for increasing numbers of West Coast residents who are abandoning the Golden State and heading east in search of a better life.

Even the state's celebrated assets - year-round sunshine, sandy beaches and proximity to the glamour of Hollywood - can't compensate for the soaring cost of living in the nation's most populous state, according to those that have decided to leave.

For the fourth year running, more residents left California than moved there from other states. In the year ending July 1, 2008, the state lost 144,000 people, more than any other US state, according to census estimates.

California, which has lured people throughout history from the Gold Rush to Hollywood, the Dot com boom and beyond, hasn't witnessed such a prolonged period of departures since the downturn of the early 1990s.

Those leaving cite the worsening unemployment rate - 8.4 per cent, the third-highest in the nation - high taxes and rents, rampant foreclosure rates yet property prices still out of the reach of many families.

Most businesses are shedding jobs - even in the entertainment industry - and with the state grappling a budget gap projected to swell to over 41 billion dollars in 18 months, higher taxes and drastic cuts to public services seem all but inevitable.

"You see wages go down and the cost of living go up," Mike Reilly, 38, who is moving his family to Colorado, told the Associated Press.

The engineering contractor, who lives 80 miles north of Santa Barbara, said his move followed years of rising taxes, dissatisfaction with schools, illegal immigration and traffic congestion, all of which had tarnished his image of his home state. In Colorado, his family will pay less than one third of the property taxes they pay in California.

The flow of people leaving dates from the housing bubble, which propelled property prices far higher than most could afford, then continued as the downturn began and recession kicked in.

The most popular destinations for those quitting California are Texas, Nevada, Arizona and Washington state, the U-Haul truck rental company told the Los Angeles Times.

Overall, the number of people leaving remains tiny given the state's population - 38 million - which is actually increasing due to births and immigration from overseas.

Despite this, some believe California's current situation is so dire it will only encourage more to flee. Although it boasts the world's eighth largest economy, the state is facing "financial Armageddon", according to governor Arnold Schwarzenegger, and could soon become the first in the US to go broke.

"Who can blame them?" writes Whittier Daily News columnist Frank Girardot of those leaving the state. "We have traffic problems, crime problems, immigration problems and state and local governments that are completely dysfunctional. Wages are falling. The cost of living is rising - fast.

"The Golden State is quickly becoming something other than the promised land it was since the first Spanish explorers set foot here all those centuries ago."

Others see the situation as calling for re-evaluation rather than rejection.

"I don't think the California dream, per se, is over. It has become and will continue to become grittier," Gregory Rodriguez, New America Foundation senior fellow, told the Associated Press. "Now, perhaps, we have to reassess the California of our imagination."

State Pensions’ $865 Billion Loss Affects New Workers

By Adam L. Cataldo

Jan. 13 (Bloomberg) -- State governments from Rhode Island to California have run up estimated pension-fund losses of $865.1 billion, forcing some to cut benefits for new hires.

Assets for 109 state funds declined 37 percent to $1.46 trillion over the 14 months ended Dec. 16, according to the Center for Retirement Research at Boston College. The Standard & Poor’s 500 Index of stocks fell 41 percent in the period.

“Not a whole lot of people get too excited about pension funds,” Philadelphia Mayor Michael Nutter said in an interview. “But if you have to pay those costs, they do grab your attention.”

After Philadelphia’s fund lost $650 million in the first nine months of last year, Nutter joined the mayors of Atlanta and Phoenix in writing a letter to Treasury Secretary Henry Paulson seeking financial help for U.S. cities. Their November letter cited investment deficits and rising pension costs.

The $865 billion in losses, which exceed the $700 billion Troubled Asset Relief Program that Congress approved in October, comes as states face budget deficits totaling $42 billion.

The Boston College center analyzed holdings reported on financial statements from 2006, when the 109 funds had about 20.4 million members. It didn’t specify which of the 218 U.S. state funds it studied.

To return to 2007 actuarial funding levels by 2010, the 109 funds would need annual returns of 52 percent on assets, the analysis found. Annual returns of 18 percent would achieve the goal by 2013, the center said. The projections are based on a 5.7 percent annual increase in liabilities and a $50 billion increase in assets from contributions above annual payouts.

‘Accelerating Complications’

State funds have enough money on hand to pay benefits for the foreseeable future, said Alicia Munnell, the center’s director. “Even if markets recover, this will be a one-time loss that will have to be made up in the future by taxpayers,” she said.

“We can’t make enough on investments to drive out of this hole if all you do is depend on investments,” said Mike Burnside, executive director of the Kentucky Retirement Systems in Frankfort.

As of June 30, Kentucky’s largest fund for state workers held about 52 percent of the assets needed to pay current and future benefits to its 117,000 members. The plan had an unfunded liability of $4.8 billion at that time, while the entire system’s liabilities totaled about $16 billion.

‘Negative Cash Flow’

“When we are experiencing a negative cash flow and we are having to eat capital to make payroll, we are accelerating the complications,” Burnside said.

Increasing taxes to fill the pension gap has little support, said Frank Karpinski, executive director of the Employees’ Retirement System of Rhode Island in Providence.

“I don’t think anybody wants to do that, likes to do that or would say it would be an easy sell anywhere, especially given the current economic situation,” he said.

State and local governments contributed $64.5 billion to pension plans in fiscal 2005-06, according to data from the U.S. Census Bureau. That’s about 57 percent of the $113.2 billion spent on police and fire services.

Attempts to reduce benefits also face opposition.

“I believe that our members will oppose such initiatives in collective bargaining or in state legislatures,” said John Adler, a director with the Capital Stewardship Program in New York for the Service Employees International Union, which represents public workers. The union’s 850,000 members were in retirement plans with more than $1.5 trillion in assets as of Jan. 1, 2008, Adler said.

Two-Tiered Plans

To cut pension costs, some states are creating two-tiered systems offering less to new hires.

Kentucky lawmakers this year set the state’s first minimum retirement age, 57, for employees hired after Sept. 1, and required 30 years of service, up from 27, to receive full benefits. They capped cost-of-living adjustments, which had been tied to the Consumer Price Index, at 1.5 percent. The system had an unfunded liability of about $16 billion as of June 30, executive director Burnside said.

New York Governor David Paterson, trying to close a $15.4 billion budget gap over 15 months, wants to reduce new workers’ benefits and raise the retirement age to 62 from 55. New York’s pension system was over funded, with assets of $153.9 billion, as of March 30.

‘Weakest Cases’

Of the 109 state funds, 43 were funded at 79 percent or less of estimated current and future costs. Those below 80 percent “constitute the weakest cases,” said Ted Hampton, an analyst with Moody’s Investors Service Inc. in New York. The average level is 85 percent, according to an analysis prepared for a Moody’s report published in July 2008, Hampton said.

A survey of state funds found they owed $2.35 trillion to pension payments over 30 years, a December 2007 report by the Pew Center on the States found.

Company pension funds have also lost assets in the stock- market decline. The value of so-called defined benefit plans fell to $1.2 trillion at Dec. 31 from $1.6 trillion a year earlier, according to Mercer LLC, a New York-based pension consulting unit of Marsh & McLennan Cos.

Last month, after Pfizer Inc., International Business Machines Corp., United Parcel Service Inc. and dozens of other companies said losses could force them to make unexpectedly large contributions, Congress voted to delay provisions of the Pension Protection Act of 2006. The law would have penalized employers that didn’t cover at least 94 percent of their liabilities this year.

Membership Growth

For state plans, which weren’t covered by that mandate, the funding issue is complicated by 12 percent growth in membership since 2002, with 23.1 million now participating, according to census data.

Excluding Social Security, public employers’ pension costs are three times the retirement costs of their private counterparts, according to a June 2008 report by the Washington- based Employee Benefit Research Institute.

Some state retirement systems have seen losses in derivatives as well as stocks. Public pension funds bought more than $500 million in so-called equity tranches of collateralized debt obligations, according to public records compiled by Bloomberg in 2007. CDOs are packages of securities that are backed by bonds, mortgages and other loans. Their equity tranches are considered their riskiest portions.

The Missouri State Employees’ Retirement System invested $25 million in half the equity portion of the BlackRock Senior Income Series 2006 collateralized loan obligation, managed by New York-based BlackRock Inc. Moody’s last month cut ratings on parts of the debt, saying a drop in value of the underlying collateral may cause “an event of default.”

Finding Funds

Chris Rackers, the manager of investment policy and communication for the Missouri fund, didn’t return calls seeking comment.

In Rhode Island, state and local governments were scheduled to make contributions equaling 25 percent of their payroll expenses to retirement plans in 2010, said Karpinski, the executive director. Barring a recovery, the contributions may increase to as much as 30 percent in 2011, he said.

“That is kind of the elephant in the room,” he said. “Where are the funds going to come from to make these kinds of required contributions?”

Ohio Unemployment Fund Runs Out

COLUMBUS, Ohio -- Ohio's unemployment compensation fund has been depleted, forcing the state to begin borrowing federal funds.Officials said no disruptions in benefits are expected.The Ohio Department of Job and Family Services said Monday the federal government has already approved $500 million to be borrowed by Ohio to pay benefits in January and February.The state has requested that it be able to use $50 million of that amount to pay benefits this week.Agency spokesman Dennis Evans said Ohio is committed to preventing the unemployed fund from missing any payments.Ohio and many other states have seen their unemployment funds decrease drastically as the number of unemployed workers has surged amid the recession.

New tipping-point in March 2009: 'When the world becomes aware that this crisis is worse than the 1930s crisis'

LEAP/E2020 anticipates than the unfolding global systemic crisis will experience in March 2009 a new tipping point of similar magnitude to the September 2008 one. According to our team, at that period of the year, the general public will become aware of three major destabilizing processes at work in the global economy, i.e.:

• the length of the crisis
• the explosion of unemployment worldwide
• the risk of sudden collapse of all capital-based pension systems

A whole range of psychological factors will contribute to this tipping point: general awareness in Europe, America and Asia that the crisis has escaped from the control of every public authority, whether national or international; that it is severely affecting all regions of the world, even if some are more affected than others (see GEAB N°28); that it is directly hitting hundreds of millions of people in the “developed” world; and that it is only worsening as its consequences reveal throughout the real economy. National governments and international institutions only have three months left to prepare themselves to the next blow, one that could go along severe risks of social chaos. The countries which are not properly equipped to cope with a surge in unemployment and major risks on pensions will be seriously destabilized by this new public awareness.

In this 30th issue of the GEAB, the LEAP/E2020 team describes these three destabilizing processes (two of them are described in this public announcement) and gives recommendations to cope with the surge in risks. In addition, this issue also provides the opportunity to make an objective assessment of the reliability of LEAP/E2020's anticipations and specifies a number of methodological aspects of the analytical process used. In 2008, LEAP/E2020's success rate reaches 80%, and even 86% when it comes to strictly socio-econimic anticipations. In a year of major upheavals, our teal ise altogether quite proud of this result.

The crisis will last at least until the end of 2010

Evolution of the US money base and indications of related major US crisis periods (1910 – 2008) - Source: Federal Reserve Bank of Saint Louis / Mish’s

Global Economic Analysis

As we already explained in GEAB N°28, the crisis will affect in different ways the different regions of the world. However, and LEAP/E2020 wishes to be very clear on that aspect, contrary to the dominant stance today (coming from those experts who denied the fact that a crisis was coming up three years ago, who denied that it was global two years ago, and who denied the fact that it was systemic six months ago), we anticipate that the minimum duration of the decanting phase of the crisis is 3 years (1). It shall be finished neither in spring 2009, nor in summer 2009, nor at the beginning of 2010. It is only towards the end of 2010 that the situation will start stabilizing again and improving a little in some regions of the world, i.e. Asia and the Eurozone, as well as in countries producing energy, mineral and food commodities (2). Elsewhere, it will continue; in particular in the US and UK, and in all the countries depending on their economy, were the duration could approximate a decade. In fact these countries should not expect any real return to growth before 2018.

Moreover no one should imagine that the improvement at the end of 2010 will correspond to a return of high growth. The recovery will take long. For instance, stock markets will take a decade to return to levels comparable to 2007, if they ever return to that. Remember that it took twenty years before Wall Street resumed its 1920 levels. Well, according to LEAP/E2020, the present crisis is deeper and longer than in the 1930s. The general public will gradually become aware of the long-term aspect of this crisis in the coming three months and this situation will immediately trigger two tendencies carrying with them socio-economic instability: fear of the future and enhanced criticism towards leaders.

The risk of sudden collapse of all capital-based pension systems

Finally, among the various consequences of the crisis for dozens of millions of people in the US, Canada, UK, Japan, Netherlands and Denmark in particular (3), there is the fact that, from the end of the year 2008 onward, news about major losses on the part of the organizations in charge of managing the financial assets supposed to finance pensions will multiply. The OECD anticipates that pension funds will lose 4,000 billion USD in 2008 only (4). In the Netherlands (5) as well as in the United Kingdom (6), monitoring organizations recently blew the whistle asking for an emergency contribution reappraisal and a State intervention. In the United States, growing numbers of announcements call for contribution increases and benefit reductions (7), knowing that it is only in a few weeks time that most of these funds will start calculating their total losses (8). Most of them are still deluding themselves about their capacity to build up again their capital after the markets turn around. In March 2009, when pension fund managers, pensioners and governments will become simultaneously aware of the fact that the crisis is there to last, that it coincides with the « baby-boomer » generation’s age of retirement and that the markets will not resume their 2007 levels until many long years (9), chaos will flood this sector and governments will reach the moment when they will be compelled to nationalize all these funds. And Argentina, who took this decision a few months ago already, will appear a pioneer.

All the trends described above are already at work. Their combination and the public becoming aware of the consequences they could entail, will result in the great collective psychological trauma of Spring 2009, when everyone will realize that we are all trapped into a crisis worse than in the 1930s and that there is no possible way out in the short-term. The impact on the world’s collective mentalities of people and policy-makers will be decisive and modify significantly the course of the crisis in its next stage. Based on greater disillusion and fewer beliefs, social and political instability will settle down worldwide.

Shipping rates hit zero as trade sinks

Freight rates for containers shipped from Asia to Europe have fallen to zero for the first time since records began, underscoring the dramatic collapse in trade since the world economy buckled in October.

By Ambrose Evans-Pritchard, International Business Editor
Last Updated: 3:39PM GMT 14 Jan 2009

The cost of shipping goods from Asia to Europe has tumbled

"They have already hit zero," said Charles de Trenck, a broker at Transport Trackers in Hong Kong. "We have seen trade activity fall off a cliff. Asia-Europe is an unmit­igated disaster."

Shipping journal Lloyd's List said brokers in Singapore are now waiving fees for containers travelling from South China, charging only for the minimal "bunker" costs. Container fees from North Asia have dropped $200, taking them below operating cost.

Industry sources said they have never seen rates fall so low. "This is a whole new ball game," said one trader.

The Baltic Dry Index (BDI) which measures freight rates for bulk commodities such as iron ore and grains crashed several months ago, falling 96pc. The BDI – though a useful early-warning index – is highly volatile and exaggerates apparent ups and downs in trade. However, the latest phase of the shipping crisis is different. It has spread to core trade of finished industrial goods, the lifeblood of the world economy.

Trade data from Asia's export tigers has been disastrous over recent weeks, reflecting the collapse in US, UK and European markets.

Korea's exports fell 30pc in January compared to a year earlier. Exports have slumped 42pc in Taiwan and 27pc in Japan, according to the most recent monthly data. Even China has now started to see an outright contraction in shipments, led by steel, electronics and textiles.

A report by ING yesterday said shipping activity at US ports has suddenly dived. Outbound traffic from Long Beach and Los Angeles, America's two top ports, has fallen by 18pc year-on-year, a far more serious decline than anything seen in recent recessions.

"This is no regular cycle slowdown, but a complete collapse in foreign demand," said Lindsay Coburn, ING's trade consultant.

Idle ships are now stretched in rows outside Singapore's harbour, creating an eerie silhouette like a vast naval fleet at anchor. Shipping experts note the number of vessels moving around seem unusually high in the water, indicating low cargoes.

It became difficult for the shippers to obtain routine letters of credit at the height of financial crisis over the autumn, causing goods to pile up at ports even though there was a willing buyer at the other end. Analysts say this problem has been resolved, but the shipping industry has since been swamped by the global trade contraction.

The World Bank caused shockwaves with a warning last month that global trade may decline this year for the first time since the Second World War. This appears increasingly certain with each new batch of data.

Mr de Trenck predicts Asian trade to the US will fall 7pc this year. To Europe he estimates a drop of 9pc – possibly 12pc. Trade flows grow 8pc in an average year.

He said it was "illogical" for shippers to offer zero rates, but they do whatever they can to survive in a highly cyclical market.

Offering slots for free is akin to an airline giving away spare seats for nothing in the hope of making something from meals and fees.