Ambrose Evans- Pritchard reports that Japan has extracted natural "ice" gas from methane hydrates beneath the sea off its coasts in a technological coup, opening up a super-resource that could meet the country's gas needs for the next century and radically change the world's energy outlook.

'The state-owned oil and gas company JOGMEC said an exploration ship had successfully drilled 300 metres below the seabed into deposits of methane hydrate, an ice-like solid that stores gas molecules but requires great skill to extract safely.

"Methane hydrates available within Japan's territorial waters may well be able to supply the nation's natural gas needs for a century," said the company, adding that the waters under exploration also contain large reserves of rare earth metals.

'Government officials said it was the world's first off-shore experiment of its kind, though Japan been working closely with the Canadians. The US and China have their own probes underway.

'he US Geological Survey said methane hydrates offer an "immense carbon reservoir", twice all other known fossil fuels on earth (illustrated in pie chart below). However, it warned that the ecological impact is "very poorly understood".'

Read on here. 

US recovery

Tiresias writes 'Re your opinions in Monday’s blog ('economic recovery will be helped if people spend more, as they will need to do if recovery is to continue'), I beg to disagree.

I suspect that a lasting economic recovery in the US is not on the cards because the cluster of asset bubbles has confounded price signals, so that many (if not most) investors in the US are at a loss to gauge lasting value. People are also spooked by the increasingly erratic nature of policy decisions, the lack of any apparent principle in US monetary and fiscal policy and the recklessness of printing more dollars. To cap it off the pollies and central bankers have decided to extend public assistance to failed businesses (rather than just ease the predicament of workers in the downturn) thereby making the business cycle more or less useless as far as clearing out deadwood and preparing for a new round of growth. Why invest in marginal businesses or industries that should have been closed down in the first place?

Henry comments: much wisdom in what you say, Tiresias. What I find amazing just now is how strong US equity markets have been when all the issues you list should be causing markets to struggle.

Could it be the effect of Ben Bernanke's printing press?

 Exiting from zero interest rates and massive 'quantitative easing' wis the monetary policy challenge of the 2010s.

My concern is that Fed Funds rate effectively  zero, and allied ‘quantitative easing’, have created serious difficulties not yet totally evident or understood.  The recent small-scale market panic when Fed minutes revealed discussion about the difficulties of the exit from current extremely easy monetary policy illustrates exactly the dilemma facing the US Fed and therefore the health of the global economy.

Tightening monetary policy, as in 1928 and 1929, on top of a general expectation that markets are over-valued, will bring any asset boom to an end. But, as Friedman and Schwartz said in 1963, ‘monetary policy cannot serve two masters’. Policy-makers need to have a clear way to modify asset booms when the evidence suggests the strong risk of the boom getting out of control.

History says that booming share prices combined with low goods and services inflation should ring a loud warning bell.

As we asked last Thursday, 'Que?' 

Equity markets 'have been booming as a result of a deliberate strategy of central banks: by forcing down bond yields, they hope to persuade investors to buy risky assets and thus restore confidence to both businesses and consumers. In much of the developed world, ...'  Precisely, but fortunately for us, Glenn Steves and his merry men (and women) have not joined this gadarene stampede.

So far, so good. Central bank intervention, says the venerable mag, risks encouraging what Alan Greenspan memorably called 'irrational exuberance'. This was the case in the 1980s and 1990s, and there are signs in credit markets of that again being the case. A separate article by Buttonwood makes this case.

'As yet, however, the excesses are not on the scale of the last two bull markets; indeed, the American public is only just regaining its appetite for equity mutual funds. So central banks can be excused for sitting back and enjoying the bull run, especially as any action they could plausibly take to halt it would damage a still-fragile economy'.

But there is a paradox.  Economic recovery will be helped if people spend more, as they will need to do if recovery is to continue. But with bond yields low and equity valuations high, market returns are unlikely to be high. Therefore people need to save more, especially if they wish to keep building a satisfactory retirement fund.

'Balancing the desire for short-term consumption and the need for long-term thrift is one of the trickiest issues for rich countries as they navigate their way out of the crisis.

'Perhaps the Dow will resolve that paradox by continuing to soar', says The Economist. But 'More likely, it will not'.

'The S&P 500 climbed for its sixth straight day, putting it less than 1 per cent from an all-time closing high. The benchmark S&P index rose for its ninth positive week out of the last 10. All three major US stock indexes racked up their biggest weekly gains since the first week of the year.

US employers added a greater-than-expected 236,000 workers to their payrolls and helping to push the jobless rate to a four year-low of 7.7 % 'in a bright signal on the economy's health'.

Downunder

Meanwhile, in distant Australia, '457 reasons Labor's lost the plot' says Paul Kelly.

The 457 Visa program is the main reason Australia did not have a major wage breakout during the boom.  It also explains why business can cope in the face of Australians reluctant to leave the coffee shops for the mines. 

It is no wonder that the Gillard government is doing its best to hobble such an effective program, following the narrow sectional interest of its militant union backers.

Paul Kelly does not put it so directly, but its all there, gentle readers, and good on the venerable veteran commentator.  Read on here.

Our thoughts from earlier this week, including on 457 visa holders, may be accessed here.

And Paul Kelly seems to be warming to the opposition leader. He concludes his 457 expose as follows: 'Abbott's position is long known. In his speech last April, he tied his support for 457 visas to tough border protection. "These are the best possible immigrants to Australia," Abbott said of 457 visa holders. He put up his values in lights - he stands for stopping boatpeople and welcoming 457 visa holders who come to do a job and pay taxes. Gillard invites the public to see the differences between Labor and Coalition on 457 visas, but this is an invitation that may backfire'.

Excuse me, Miss Gillard, is this a policy-free nay-sayer speaking?

Property

'Property's perking up' sats Michael Stutchbury's AFR.

The front page teaser says last year's interest rate cuts are starting to take effect, with house prices up in all capital cities except ... you got it, Adelaide. Auction clearence rates are rising, and affordability is improving, especially for rich people.

Most analysts expect only single-digit growth in coming years, sadly for us property owners, happily for the kids, it seems the next boom is some way off.

Indeed, the AFR's Christopher Joye has flirted with joining the lonely man who cannot be named who says the next move in interest rates may be up.

'Watch the jobless rate', says Mr Joye. 'An unambiguous decline in the jobless rate, propelled by an aging population that shrinks the pool of productive labor, will force the RBA to remove its extreme stimulus'.  Wow!

The Budget, the wretched bloody budget.

Finally, it seems, the chickens of Rudd-Gillard-Swan's dreadful profligacy are coming home to roost, morphed it seems into vultures, and revealing the Treasurer as ugly duckling.

Our recent thoughts are at this link. 

Oscar awards and Mardi Gras 2013.

She's back. Fiona Prior, creator of the first version of Henry's site and teacher of Henry about html code. Far more importantly, mistress of all things cultural, after a long sabattical while she did, ... well, interesting stuff.

Here is Fiona's take on the Oscars and the Mardi Gras - we especially loved the serviceman and women marching in those lovely uniforms.

Readers can look forward to news and views of movies, exhibitions and any cultural event that catches the lady's eagle eye.

Image of the week

Courtesy The Oz

'WESTPAC'S plain-speaking London economist James Shugg remains as gloomy about the global economy as he was over a year ago, when he said the Australian dollar could plunge to US80c and a break up of the eurozone would prompt a "global catastrophe".

'Mr Shugg said yesterday he thought the renaissance of economic optimism this year was built on a mirage, a result of "quantitative easing" in Europe and Japan, rather than fundamental economic improvements. He suggested Greece, and potentially other European countries, were likely to default next year.

"I stand by every word of what I said in November 2011," he told The Australian from London.

'At a Rockhampton, Queensland, conference in late 2011, Mr Shugg said he had never been so worried about the economic outlook in 25 years.

"I've started smoking; I can't get to sleep at night. Markets are freezing up and things are even worse than you are reading about," he reportedly said then.

As if in response, the diligent team at nab ask three questions, which presumably means they have some concerns.

• The recent capex and exploration expectations data suggest that mining investment may be approaching a turning point. A decline is inevitable: the question is when and how fast.
 
• On the basis of past engineering construction commencements, there are reasons to believe that there is a risk of a decline in 2014 big enough to take 2% points off GDP growth in that year unless another “mega” project starts soon. Lower levels of bulk commodity prices are also likely to be positive for the underlying trend in mining project commencements.

• If mining investment retreats spectacularly in 2014, non-mining investment will need to fill the gap quickly if employment growth is to be maintained.

And in the wider world ...

The US economy is defying its fiscal deadlock to produce stronger than expected signs of life, though it seems it is a close run thing.

 '340,000 initial claims for jobless benefits were filed in the latest week, less than the 350,000 expected. The reading comes ahead of Friday's closely watched jobs report. On Wednesday, Automatic Data Processing and Moody's Analytics said private-sector job growth was higher than expected in February.

"Five of the last nine [jobless claims] reports have come in better than economists had anticipated ... It is much more indicative of a trend," said Eric Wiegand, senior portfolio manager with US Bank Wealth Management's Private Client Reserve.

In another shot in the 'currency wars', China has warned Japan to desist in forcing the yen lower, correction, throwing out its garbage.

'BEIJING—The president of China's giant sovereign-wealth fund warned Japan against using its neighbors as a "garbage bin" by deliberately devaluing the yen, joining growing international griping about a potential currency war.

In unusually strong language, Gao Xiqing, president of China Investment Corp., echoed alarms from Latin America to Europe that the new Japanese government is aiming to boost its exports at other countries' expense via a weaker currency—allegations often leveled at China itself by the U.S. and others.

In Euroland 'Fading hopes of growth have helped push the euro lower. The eurozone downturn in the fourth quarter was larger than expected, with a contraction of 0.6 per cent on the quarter.

'Exports fell 0.9 per cent, the biggest drop since late 2009. Hopes of a rapid bounce back in the first quarter only seem justified in Germany. Economic survey data for February show a Continent still stuck in recession.

'Meanwhile, the Italian election results, with a surprisingly strong showing for activist Beppe Grillo's anti-austerity Five Star Movement, have moved growth up the political agenda in Europe once again. Euro-area unemployment hit a record 11.9 per cent in January'.

Aussie politics

Graham Richardson says Julia Gillard's trip to Western Sydney was a grave mistake, and whoever thought up the idea should be shot.

Henry's resident colorful racing identity, T.P. Mahar, has devised a delicious plan - Ted Baillieu contesting the Federal seat of Melbourne Ports, thereby ridding the parliament of the pesky little green man.

The latest Morgan poll shows this is not an entirely mad idea, so read on here.

Mrs Thornton's tennis pals have started the weekly tennis game and yapathon early today to beat the heat. (Surely this long run of autumn heat is proof positive that the planet is cooling?)

This week's yap is mainly about politics, which is at least better than the various affairs/badly behaved kids that make up the ladies' usual fare.  'The [Victorian] Libs are too short of talent and were not ready to govern' seems to be the verdict.

The sensible Rudd-Gillard-Swan government initiative is to allow people on the dole to earn more before ripping the dole off them.

There is no way to avoid the fact of a high effective marginal tax rate on dole recipients who earn money in the real (tax-paying) community, but so long as that rate is less than 50 % it is still better for dole recipients to earn more.

Such people presumably already earn money, but in most cases it is in the black economy, where the marginal rate of tax is zero, so we should not expect too much to change.  But the idea is 'directionally correct' as one of Henry's old mates put it overnight.

Ultimately, if western civilisation lasts, everyone, regardless of income or wealth, will be able to claim a minimum amount for frugal living, subject only to their names being listed on a website (or the twenty-second century equivalent) to discourage well-to-do folk from bludging on the rest of society.

While the Rudd-Gillard-Swan team are about it, why not let boat people released into the community earn their keep? First because we need every person available to do their bit, and secondly, far more important, if we do not do this such people will be forced to join the black economy, making them minor criminals.  If punishment is required, or deterrence, make them work for local councils, just about the most unloved jobs going around.

Incarceration makes many such people mentally damaged, and living on sub-dole welfare payments will make them desperate, ripe for enrolling in criminal gangs.

Far better to stop the flow of boat people at the source, which is Tony Abbott's plan.

While the Rudd-Gillard-Swan team is at it, please rethink your negative attitude to 457 visa workers.  Such people provide much-needed skills, and we (and the visa holders) get a good hard look at each other, making successful 457 visa holders who wish to stay excellent migrants, not unlike Tony Abbott and Julia Gillard.  In fact, we are all immigrants, aboriginal Australians some 40 thousand years ago, the rest of us one to nine (or is it 10?) generations ago. 

The RBA board did the sensible thing and left interest rates on hold.  That bright young man whom Henry cannot name for fear of inflicting on him the kiss of death syndrome has now opined that the 'easing bias' he and others discern in Glenn Stevens' carefully polished utterances may be designed to talk the dollar down.

No hints about the introduction of a tax on capital inflow, despite a leading economist's assertion to Henry: 'Yes, I understand the argument - very logical - and I expect the RBA  is considering this policy option (as are other countries, eg Brazil)'.

More here from those who have commented on Henry's plan. 

And the good people at nab said overnight 'Retail sales bounce 0.9 % in Jan; some gloss taken away by downwardly revised December.

'Most categories rose in January, department stores the exception this month

'Net exports contribute 0.6 % points to GDP growth, a touch shy of our 0.9 % forecast

'Net exports and terms of trade both to reverse in Q1

 'Public spending in Q4 about flat, no growth as fiscal restraint continued though Q4.

'Sticking with our 0.3 % GDP pick for tomorrow'.

Watch this space, and don'tcha love the terse style - designed for the busy banker who hates to read redundant words.

This will be cold comfort if the cuts send the US economy back into recession, but if they have the cleansing effects believed likely by the Tea Party Republicans/IPA our grandchildren will be grateful.

A weekend report looked on the dark side: 'The scale and reach of the sequestration spending cuts that will hit the US has been laid bare by government officials who warn that the order for the cuts, which was signed by president Barack Obama late Friday, would be "deeply destructive" to the economy and national security.

'The Office of Management and Budget has compiled an official report on the breakdown of the $85bn cuts package, which was triggered by a failure to reach a broader political consensus on deficit reduction. The document reveals a detailed list of how the cuts will hurt spending at every level of government. It shows that research spending at the Department of Agriculture will be hit by $55m of cuts, while $150m will go from the immigration system at the Department of Homeland Security.

'The long list of cuts includes relatively smaller sums – like $1m being lost for a dam project on the Colorado River and $6m cut from the Leaking Underground Storage Tank Trust Fund – to larger budgetary swipes, including $30m being removed from cultural exchange programs at the State Department. The Pentagon faces widespread cuts. It is losing some $2.6bn from its Defense Health Program and $3.4bn dollars from the navy's operation and maintenance budget. The Army faces losing $4.6bn from its equivalent budget.

'The OMB issued a stark analysis of the impact of the cuts in a letter to Congress that was issued with the report and signed by Jeffrey Zients, deputy director for management. "The cuts required by sequestration will be deeply destructive to national security, domestic investments and core government functions," Zients wrote'.

A Tea Partier said (or might have said): 'This action rolls back decades of overspending by commie front persons like President Obama.  America will be great again, with ninety-nine per cent of jobs in the private sector.  Next step is to privatize the military, then the legal system'.

Meanwhile, trouble-makers at Macroeconomics, a consultancy, (soon to be banished to a work camp in Western Sydney), have drawn attention to Australia's 'decades of deficits', and more particularly the large and growing 'structural deficit'.

'When changes due to the economic cycle and high commodity prices are removed, it projects that the underlying structural budget deficit could be as high as $36bn this year.

'The structural budget balance calculated by Macroeconomics takes out the "cyclical" components of the budget, such as the revenue boon from high commodity prices and the economic cycle from the forecast level of the budget'.

If Henry's google work is accurate, the report was compiled with one of the brave persons on this page, or by a group of them. More power to their pens.

The work resulting in these stark conclusions was commissioned by the Minerals Council of Australia, a group also much loved in the nation's capital.

Here is a link to the Mining Council's movers and shakers - a cheery lot, being miners in the midst of a massive boom playing the government off a break.

Front page - 'Clear the path to surplus' - ACCI has asked the Treasurer to 'outline a "clear, detailed and credible" pathway back to surplus, declaring the May budget must include a root-and-branch review of spending to identify opportunities to lower the overall tax burden'.

(Here is Henry's answer, free to air and with previous application in a corporate setting.)

Front page - 'In this climate, one department's not safe'. We loved to hear of the ridiculous 'extras' that are needed to keep people working happily in the Department of Climate Change. You'd think these folk would be happy just working to save the planet.

Editorials - 'Light on the hill or warm inner glow', 'Another cup of tea, Mr Swan' and 'Dead, buried and dug up again', by Ms Gillard.

Things are little different in Washington. 'Spending sun that spins Obamaian Universe' says Daniel Henninger in The Wall Street Journal.

'The Obama administration is trying to pull us back into what astronomers would call the pre-Copernican world. Copernicus' heliocentric system overthrew what was known as geocentrism -- the belief that everything in the universe revolved around the Earth. Beautiful maps exist depicting geocentrism.

'Economic thinkers since at least the time of, well Copernicus, have understood that national wellbeing derived from private individuals going out into the private world to produce goods and trade goods, an activity that for centuries has created wealth for many nations. No longer. Obama and his circle divide the economy into separate parts'.

And Greg Sheridan says 'For security's sake JSF is way of the future'.

In particular: 'The airforce has a saying: know first, shoot first,kill first. That's what the JSF will do every time'.

Henry's major contribution this week is a review of a fine new book about Australia's economic history, linked here.

WHY MEN ARE NEVER DEPRESSED:
 
Men Are Just Happier People --
What do you expect from such simple creatures?
Your last name stays put.
The garage is all yours.
Wedding plans take care of themselves.
Chocolate is just another snack...
You can be President.
You can never be pregnant.
You can wear a white T-shirt to a water park.
You can wear NO shirt to a water park.
Car mechanics tell you the truth.
The world is your urinal.
You don't have to stop and think of which way to turn a nut on a bolt.
Same work, more pay.
Wrinkles add character.
Wedding dress $5000. Tux rental-$100.
People never stare at your chest when you're talking to them.
New shoes don't cut, blister, or mangle your feet.
One mood all the time.
Phone conversations are over in 30 seconds flat.
You know stuff about tanks.
A five-day vacation requires only one suitcase.
You can open all your own jars.
You get extra credit for the slightest act of thoughtfulness.
If someone forgets to invite you,
He or she can still be your friend.
Your underwear is $8.95 for a three-pack.
Three pairs of shoes are more than enough..
You almost never have strap problems in public.
You are unable to see wrinkles in your clothes..
Everything on your face stays its original color.
The same hairstyle lasts for years, even decades.
You only have to shave your face and neck.
You can play with toys all your life.
One wallet and one pair of shoes -- one color for all seasons.
You can wear shorts no matter how your legs look.
You can 'do' your nails with a pocket knife.
You have freedom of choice concerning growing a mustache.
You can do Christmas shopping for 25 relatives
On December 24 in 25 minutes.

Image of the week

 Courtesy The Oz

Yet there are aspects of the generally positive achievements that fall short of what could have been. Modern capitalism has become overly dependent on deeply embedded consumerism. And modern governments have nurtured a deep sense of entitlement among their peoples. Government spending generally, and welfare outlays especially, have exceeded taxation to a point that merely servicing current debt levels will create intergenerational stress for an aging population. Private spending in excess of income has raised private debt to uncomfortable levels. Households have recently rediscovered saving, which is a highly desirable development, but there is little or no encouragement of this trend by governments, and no serious preparation of people for attacks on unsustainable entitlements except in the bankrupt nations of Southern Europe. 

Australia is in better shape than most capitalist nations, thanks in large part to the 'China boom' fostering a great increase in Australia’s terms of trade. But we have spent too much of the largesse provided by the current mining boom, and ham-fisted attempts to tax the mining companies have involved serious conflict with the creators of the greatest single source of Australia's prosperity.  Australia's productivity surged after the reforms if the 1980s and early 1990s, but has tailed off again since then.

We can and should do better. Our natural handicap is a relatively small population, so we should not waste too many resources on industries requiring large scale production and cheap labor, both requirements more available elsewhere. Instead, we need to focus on things we do especially well.  Mining and agriculture are two industries that have prospered here with very little government assistance for almost all of Australia's history.  Other areas of promise include medical science, education, tourism, sport (rapidly becoming a global business of influence) and various other services. One of the conclusions in the debate on the 'mystery of economic growth' is that R&D spending, funded by government or assisted by suitable tax policies, is a prominent cause of above average productivity growth. Yet successive governments have not accepted this important finding.

I strongly  believe that excessive and unnecessary regulations, including industrial regulations designed to help union members at the expense of non-unionised workers and contractors, capitalists and pensioners, the massive and complex income tax regulations, proliferation of other taxes, including the ridiculous mining tax, and burgeoning welfare dependency, are all matters we would be wise to review and reform.  And the psychological aspect of all these matters requires careful thought by Australia's leaders. Fostering a false view that governments will provide, which was so big a part of the current government's response to the global crisis, is to send a deeply dysfunctional message. The modern world is highly competitive, a fact that our sportsmen and women accept and deliver strong results at the highest level. Winning is fun, and in my view that applies to the world of work. Leaders can and should do better.

It is also worth reminding ourselves that Australia is a lonely outpost of Anglo-American culture in a region that is far from naturally well disposed to our dominant culture and economic endowments. Trading freely and avoiding traditional ugly Australian behaviour is highly desirable, as is the generally accepted  immigration programs that are rapidly creating a more multicultural Australia. But despite our wealth we are vulnerable and the world is a tough place. Defense spending is now at the inadequate 1938 levels in relation to GDP. Now, of course, with greatly advanced technology and a much diminished domestic industrial infrastructure, we are in no position to mount the massive effort in our own defense that we did in World War II, a matter that deserves much debate and decisive resolution. And in that war, as well as its wonderful industrial effort, it took the great courage of our soldiers in PNG and the American fleet in the Coral Sea to push back a determined enemy.

This is a meditation as part of a long review of Ian McLean, Why Australia Prospered, Princton University Press, 2013.

A more explicit plan for reform of Australia's economic performance is available here.

Currently, on the negative front, equity investors, bond and currency traders are focused on Italy. Italy is in trouble yet once again with another election gone pearshape. The recent election failed to prevent a deadlock with no party taking the upper house. In Italy, a majority is required in the lower and upper house to from a government. The uncertainty over the election and the prospects of yet another new election saw Italy’s borrowing costs rise sharply, which resulted in European stock markets taking a hammering.

Across the other side of the Atlantic, the stock indexes on Tuesday night raised a tad versus around 2 % falls in Europe, and Wednesday night saw a positive surge. On a further positive note, investors seem preoccupied with an improvement in housing and higher auto sales in the US, and that good times are ahead. Only today, the talking heads in the USA predict a housing led recovery. It is just too bad that key indicators do not support jolly times ahead. Rather, that the business cycle is at, or very close to, a peak.

It is prudent to recall that industrial production is a coincident indicator and reflects orders placed 6-9 months ago, and sometimes longer for long lead items like certain aircraft.

The trend in orders has not given a false signal over the 34 years that the Raff Report has had an interest in US statistics. Before PCs, data was hand graphed from Survey of Current Business and Business Conditions Digest. Unless the trend in US orders through 2012 is the first wrong signal, the US will not look very rosy by the end of 2013; neither will most commodity prices.
 
Commodity prices look as though they are in a firm downward trend, as depicted in the picture of the CRB Index. It is a good idea for investors to become acquainted with www.investmenttools.com. On this website, readers will find important data to ponder before plunging into investments.

Not only are commodity prices under pressure, but the Baltic Dry Index of freight prices for bulk commodities like iron ore and coal is down for the count. This is an important index because it rises and falls with changes in global trade and to a lesser extent by changes in the numbers of bulk carriers in the global fleet. Investors should be aware that there are forecasts from more than one stockbroker for a big fall in the price of iron ore. The price of iron ore has bounced back to around US$150 per tonne, yet the big producers in Aussie produce the stuff FOB for around A$30 per tonne. Could the price fall 50% to US$75? The answer is: absolutely.

Figure 1: CRB Commodity Price Index

 Figure 2: Baltic Dry Index (bulk shipping prices)

The Raff concludes: 'It is tempting to think that the CRB Index and the Baltic Dry Index signal the bottom of the cycle. However, the share prices of major miners suggest that investors are not yet convinced; and nor should they be. The data from the US with respect to New Orders for Durable Goods is indicative of a cyclical peak with softening industrial production towards the backend of 2013'.

Read on here for the evidence from equity markets.