Friday, October 31, 2008

Daily Sources 10/31

1. The AP reports that the US Commerce Department announced today that consumer spending dropped by 0.3% in September from August. Paul Krugman has an opinion piece in the New York Times analyzing the consequences of the fall in consumer spending (which was at an annual rate of 3.4% in the third quarter. In sum, the citizen can no longer count on growing equity via his home or his stock portfolio, and so has begun to squirrel money away. This comes at a bad time because as less people spend money, the economy will shrink and so too, eventually, will the peoples' incomes. If their incomes fall faster than their savings, you have a scenario known as "the paradox of thrift." The Fed would usually stimulate the economy by cutting interest rates, but there isn't much left of the federal funds rate to go. Therefore, the only way to keep the economy from shrinking given a reduction in consumer spending and no room for further interest rate stimulae is government spending. Worth reading in its entirety.

And it turns out that folks in Congress are getting upset that the bailout funds extended to the banking system aren't being used to make loans, and thus grease the wheels of the economy, but to finance the purchases of other banks. Jessica Holzer at Real Time Economics reports that Rep. Barney Frank (D-MA) and Sen. Christopher Dodd (D-CT), are arguing that funds used by the banks for purposes other than lending are in violation of the terms of the act.

Joellen Perry and Luca Di Leo at Real Time Economics report that Mario Draghi, European Bank board member and head of the Financial Stability Forum--one of the entities asked to play a part in the November 15 financial summit--urged governments to provide further economic stimulus by cutting taxes and/or increasing spending.
"'Given the minimum level reached by America’s official interest rates and the ample liquidity put in circulation by central banks, the room for monetary policy maneuver is reduced,' Mr. Draghi told a meeting of Italy’s top bankers in Rome, noting that EU rules allow for increased spending during tough times. 'To sustain demand on a global level, the anti-cyclical action of budget policy may be required.'"
It sounds as if central bankers are more worried about the prospects of deflation now than they are for inflation. In Forbes, Nouriel Roubini argues that this will be their main preoccupation in the next six months as "a sharp slack in goods, labor and commodity markets will lead to global deflationary trends over the next year." His piece is well-worth reading in its entirety. If his thesis is true, the fall in supply and investment in new supply should not be able to do much to stop the fall of oil prices. That said, they rose considerably today.

2. Barbara Kiviat at the Curious Capital reports that First American CoreLogic released data today showing that in the US 18.3% of homeowners now have mortgages more expensive than the market value of their homes--are "underwater"--and an additional 5% are on the cusp. CoreLogic put out a state-by-state breakdown--the states worst hit are Nevada (47.8%), Michigan (38.6%), Arizona (29.2%), Florida (29.2%), California (27.4%), Georgia (23.2%), Ohio (22.0%).
What's in a way scarier, though, is that First American is also seeing a third group of states emerging—those where a lot of new people moved in and bought houses and simply didn't have much time to build equity before prices started falling. That partly accounts for why Georgia is so high up on the list, as well as growing problems in Texas (16.5%), Arkansas (16.3%) and Tennessee (15.0%)
3. Martin Fackler at the New York Times reports that the Bank of Japan cut its benchmark interest rate 0.2% to 0.3%. This is the first time the BoJ has cut rates in seven years as it also reduced its forecast for growth this year to 0%, "citing higher energy prices and weakening export demand. ... The eight members of the policy board were evenly divided on the cut; the bank governor, Masaaki Shirakawa, cast the deciding vote in favor, the bank said." Most analysts thought the rate cut more of a sign of Tokyo's willingness to coordinate with fiscal authorities internationally than fiscal stimulus given the initial low rate.

4. Eurointelligence has the story that Denmark may decide to join the euro after all as a result of the financial crisis. This is because Denmark has been forced to raise benchmark interbank lending rates in defense of the krone, to 5.5%, which is 1.75% above the rate for the European Central Bank. (Denmark has opted out of the euro, but has pegged the krone to the euro.) The Danish people dislike the notion of being left out of the economic stimulus--and paying more for money than their neighbors--in order to maintain a national currency. There is some hope for the Europeanists in Copenhagen that a referendum to annul the opt out provisions might pass now as early as 2011.

Generally speaking, however, it seems as if the crisis will delay the accession of many of the Eastern European nations to the euro as it will be harder to meet the economic prerequisites to joining the currency. (For example, Hungary is not likely to meet the current account requirement any time soon.) On the other hand, Sweden may find it convenient to join. However, now might be a good time to relax some of the prerequisites to joining the euro given that being part of the eurozone will generally seem more appealing as the financial crisis wears on.

The same issue of Eurointelligence reports that German representatives in Brussels are blocking efforts by the European Commission to raise the maximum insurance for deposits to €100,000 (now about US$130,500 )from €20,000 (~ $26,100). Germany does not want to raise the limit of its own deposit guarantee.

5. Andrew E. Kramer at the New York Times reported yesterday that Russia's bailout plan favored Russia's richest businessmen. Putting aside that our bailout plan surely favored the rich and connected, it might be important to realize that what is meant here is major holders of corporations deemed strategic by the Kremlin. For the most part the folks known as the oligarchs were replaced with Kremlin (perhaps better put as FSB)-friendly personnel. Of the original oligarchs the ones who remain are the ones who have made plain to the Kremlin that they will stay out of politics. It may not ultimately make much of a difference in direction, but today Bloomberg reported that shares in the Russian bourse soared Thursday. Perhaps that is because the taxpayer funds are being used as intended?

Snarkiness aside, and I admit that the jingoistic approach to Russia so favored by the press and pols is a pet peeve of mine, Brad Setser points out that money is leaving the economy faster that it entered it--Russia's reserves fell by $30 billion in the third week of October. $15 billion of that reflects efforts by the Russian central bank to shore up the ruble and to provide credit to companies seeking to service foreign currency denominated debt.
"$15 billion is a result of the drop in value of the ruble versus the euro and dollar. $15 billion is as much as the IMF committed to lend Russia back in 1998. And the IMF actually only disbursed a third of that total.

The most the IMF ever actually lent out to a single country in the past was roughly $30 billion (to Brazil, in 2002-03). At the current rate, Russia will run through that much in two weeks."
Setser suggests that though Russia has its own specific financial weaknesses, their situation is probably similar to what is being seen in the rest of the emerging economies.

6. Insofar as likely action taken by the Chinese with their currency reserves, Vandana Hari at Platts reports that Sinopec has launched a $1.7 billion takeover bid for Canada's Tanganyika Oil, a producer of heavy oil in Syria. Given that there is a fairly large consensus that the world economy will start to percolate in the second half of 2009 and that oil prices will surely follow, it seems at this stage that China is likely to pursue the conservative policy of continuing to purchase a production sharing contracts overseas. Net production from the fields in the first half of 2008 averaged about 6 kb/d. Further news in that vein--Eric Watkins at the Oil & Gas Journal report that Indonesia and China will renegotiate the price of Tangguh LNG to CNOOC's terminal in Fujian. This is after the renegotiation of 2006, where the price was raised to $3.80/MMBtu for 2.6 million tonnes/year on a ceiling price of $38/b (of oil).
"Following this week's agreement in Beijing, [Indonesian President Susilo Bambang] Yudhoyono and [Chinese Premier] Hu [Jintao] said the concessionary loan program China had initiated for Indonesia would continue despite the current global financial crisis.

Yudhoyono wants cooperation with China stepped up in the field of energy, especially in the construction of power plants under China's concessionary loan program"
Jakarta's government is under pressure to use its natural gas production for domestic power plants and for re-injection into oil fields in order to boost production of the more lucrative export. Energy planners in Japan have been especially anxious at language suggesting that contracts will not be renewed once they expire.

7. Julia Werdigier at the New York Times reports that Barclays will seek $11.8 billion from Qatar and Dubai instead of from the UK stabilization program. This comes in the middle of UK Prime Minister Gordon Brown's visit to the Gulf nations in an effort to secure substantial support for expanded IMF loan programs.

8. Al Jazeera reported yesterday that the UN General Assembly on Wednesday approved 185-3 a non-binding resolution calling upon the United States to lift the embargo on Cuba. The US, Israel and Palau voted against. Micronesia and the Marshall Islands abstained. "New" Europe voted for. Noticeably, so did Iraq. From a legalistic perspective, the United States either must strike a security agreement with al-Maliki's government or convince the UN to extend the mandate to operate in Iraq past December 31 of this year or the United States forces will have no more legal standing to be there. Matthew Lee at the Associated Press reports that the Bush Administration is beginning to think that a deal will not be struck with Baghdad. Votes like these make me think it might be difficult to secure an extension to the UN mandate, especially since the US negotiating team would be of a lame duck Administration which is of a party that as of now appears unlikely to win any of the elected branches of government. Failure to do so, however, would put our troops in a difficult position.

Meanwhile, the Oil & Gas Journal reports that Petrobras--Brazil's national oil company--announced today details of its plans to explore block 37 off northwest Cuba.

9. Vandana Hari at Platts reports that Indian Oil Minister Murli Deora met with the Minister of Finance, P. Chidambaram, to seek an increase in the amount of oil bonds the government will issue to compensate the refiners for selling oil products at below-market prices. The refiners' losses due to astronomical oil prices in the third quarter was exacerbated by a rapidly depreciating rupee, as the companies had to purchase dollars on the markets in order to buy the crude. Furthermore, the volatility of the foreign exchange markets and high cost of money has made the refiners especially leery of taking on foreign currency debt.

10. Amanda Rayborn and Nadia Rodova report that Kazakhstan has reached a new agreement with the seven corporations operating the Kashagan field--the largest single oil concession in decades. The agreement doubled the government owned company's stake and stressed that if the companies do not begin producing oil by year end 2013, they will not be allowed to recoup their investments in the project.
"Commercial production at Kashagan will start at 75,000 b/d in December 2012 and gradually to rise to 370,000 b/d, KazMunaiGaz executive director Aman Maksimov was quoted by Russia's Prime-Tass as saying in Astana after the project partners signed the new agreements.

'The third stage -- in two-three years -- [will see output] at 450,000 b/d,' Maksimov said.
In early October, company officials told Platts the revamped development plan for Kashagan aims for commercial production to begin in the fourth quarter of 2013 with a rapid ramp-up to an initial maximum production capacity of 370,000 b/d within a year. By late 2016, the consortium plans to take production to 730,000 b/d."
11. Sam Fletcher at the Oil & Gas Journal provides further evidence that the drop in oil prices has put the kibosh on new Canadian oil sands production.
"Some analysts are anticipating a 10-15% drop in capital spending in western Canada next year as producers try to remain within their cash-flow expectations. To many observers, this is a sign that low oil prices are starting to discourage new investment. Projects that were feasible a year ago no longer seem economic in the current environment. Other companies, including the Nexen Inc.-OPTI Canada partnership and privately held BA Energy Inc., announced delays at smaller projects in recent weeks."

Thursday, October 30, 2008

Daily Sources 10/30

1. Daniel Gros and Stefano Micossi argue that until the European Union introduces bonds denominated in euros backed by all euro-member states, the
"US will continue to dictate the agenda in international monetary affairs .... To add insult to injury the US government is now paying 2-3 percentage points less on its short term debt than even the most virtuous EU member states."

2. Phil Izzo at Real Time Economics reports that the majority of economic analysts think that the economy will begin to recover in the second half of 2009, assuming further stimulus and citing Abiel Reinhart at JP Morgan Chase, Macroeconomic Advisors, Richard Moody at Mission Residential, and David Greenlaw at Morgan Stanley.

3. Shobhana Chandra of Bloomberg reports that GDP contracted by 0.3% year over year in the third quarter.
"GDP was forecast to drop at a 0.5 percent pace in the third quarter, according to the median forecast of 75 economists surveyed by Bloomberg News. Estimates ranged from a 1.2 percent rate of expansion to a contraction of 1.9 percent."

4. Yesterday the Federal Market Open Committee decided to reduce the federal funds rate by 50 basis points (0.5%) to 1%: "the Committee expects inflation to moderate in coming quarters to levels consistent with price stability." The Fed also opened dollar swap lines with the the Banco Central do Brasil, the Banco de Mexico, the Bank of Korea, and the Monetary Authority of Singapore. The decision was made in order to allow dollar purchases outside of the international currency markets, " to mitigate the spread of difficulties in obtaining U.S. dollar funding in fundamentally sound and well managed economies," and which had been part of the reason behind the huge rise in the dollar. The move affords for some emerging markets the same mitigation abilities it had extended to the developed markets and for which it had therefore been criticized. The swap lines were extended earlier to the Reserve Bank of Australia, the Bank of Canada, Danmarks Nationalbank, the Bank of England, the European Central Bank, the Bank of Japan, the Reserve Bank of New Zealand, the Norges Bank, the Sveriges Riksbank, and the Swiss National Bank. In a coordinated move reported by Mark Landler at the New York Times, the IMF has anounced it will lend as much as $100 billion to emerging markets with healthy economies stressed by current credit crisis. Landler suggests that the countries that qualify include the countries which just received the new swap lines from the Fed.

5. Grant Smith at Bloomberg reports that consultants Petrologistics released preliminary data suggesting that OPEC supply increased in October by 0.5% to 31.85 mb/d from 31.7 mb/d. Evidently, Angola and Iraq, both of which until the October 24 meeting had no production quotas--now Angola does--increased production during the month. Angola's shipments crept up to 1.995 mb/d from 1.805 mb/d. Iraq's crude shipments were up to 2.315 mb/d in October from 2.145 mb/d.

6. Edward Cody at the Washington Post reports that Sarkozy has submitted a budget which increases the military budget of that country by an average of $1.8 billion per annum through 2014. The bill would provide the French military $230 billion for the period.
"Defense Minister Hervé Morin said the decision illustrated Sarkozy's determination, even amid financial turmoil, to conduct activist policies in Afghanistan, Africa and other trouble spots around the globe.
Morin said the expenditures also will permit France's defense industries to remain competitive. 'France is among the three or four biggest countries when it comes to the arms industry,' he said. 'I did everything so that we can maintain those industrial icons and the 350,000 jobs they generate in France.'"

7. Blaine Harden at the Washington Post reports that Japan has announced a new stimulus package for the economy of $275 billion. The stimulus package mostly comes in the form of tax breaks, though $20 billion will be send directly to families. A familiy of four will receive a check for $600.

8. David Osler at Lloyd's List reports that British shipping employers and employees have agreed to designate the Gulf of Aden a "warlike operations area," a move which will have the effect of doubling the pay of ships operated out of the UK near Somalia. This does not seem likely to help the British industry at a time when shpping rates are tanking.

9. Ambrose Evans-Pritchard at the UK Telegraph reports that trouble in the shipping industry is beginning to have an effect upon the finances of the country.
"It is also beginning to cause strains in Greece, where the yield spread between Greek 10-year bonds and German Bunds rocketed to a post-EMU record of 123 basis points yesterday.
[T]his is the first time its debt has broken its tight linkage with Italian bonds – which traded at spreads of 100 yesterday. The markets are now clearly singling out the country as the most vulnerable of the EMU members.
'Shipping has overtaken tourism to become the country's biggest industry. They get their finance from other countries, so I think there are going to be a lot of worried bankers in London,' [Chris Pryce, a director of Fitch Ratings,] said.
Greek shipping families control a third of the global freight market for bulk goods, with operations split between London and Pireaus.

Mr Pryce said Greek banks had expanded rapidly in the Balkan region and Turkey, with heavy exposure to Serbia and Macedonia. "They saw this as a growth region, but they may be thinking differently about it now," he said."
The article is well-worth reading in its entirety. (h/t Yves Smith at naked capitalism)

10. The EIA yesterday released This Week in Petroleum reporting the stocks of crude ending October 24 were up 0.5 million barrels and a little bit above the historical range. Gasoline stocks fell 1.5 million barrels putting them back at the very bottom of the historical range.

11. The AFP reports that UK Prime Minister Gordon Brown has embarked on a mini-tour of the Gulf States to encourage them to participate more fully in the IMF and its financial stabilization efforts.

12. Venezuelan Oil Minister Rafael Ramirez reportedly said that OPEC would need to cut its production quota again at the next meeting. Chavez said he would support a second cut in Ecuador on Tuesday.

Tuesday, October 28, 2008

Daily Sources 10/29

1. Nicholas Burns, former Under-Secretary of State for Political Affairs under President George W. Bush, has a piece in this week's Newsweek that argues that We Should Talk To Our Enemies. It seems so obvious that making a case for it is almost like arguing that one's feet are put to good use by walking. Somehow political street wisdom has it different. So, I hereby link, wash, repeat: "To jaw-jaw is always better than to war-war."

2. This week's Newsweek also carries a book review by Henry Kissinger of "Lessons in Disaster: McGeorge Bundy and the Path to War in Vietnam" by Gordon M. Goldstein. Kissinger, arch-appeaser, also stresses the importance of diplomacy in the few observations he thought were "in order":






Perhaps it was forgivable that Bundy did not reach those conclusions in time. How it is that this wasn't clear to US policymakers prior to the second Gulf War--and that rhetoric in the 2008 presidential campaign deliberately controverts it still--I think can only be called calculated negligence.

3. Eurointelligence reported on the 24th that President Sarkozy, on the 23rd, announced the creation of a French "Strategic Investment Fund", established to prevent French companies from falling into the hands of foreign "predators." The fund will be operated by Caisse des Dépôts et Consignations, that is by France's existing Sovereign Wealth Fund, but it will be "more active, more offensive, more mobile" in defense of national assets. I imagine that the folks in the Kremlin are amused. I do not think it is impossible that some folks in Paris desperately mean to prevent the successful conclusion of a Reinsurance Treaty II.

4. The Eurointelligencer reports that in an interview with with Frankfurter Allgemeine Zeitung, German Finance Minister Peer Steinbruck said
"a euro area wide rescue plan was not acceptable to Germany, because Germany would have to pay the lion share, and have only limited controls. ... He said one should ensure that euro area summits remain the exception, not the rule. He gave two reasons. The first is that such summits raise expectations. The second is that Europe gets divided into a euro area, and the remaining 12 member states."
5. Tunku Varadarajan has an op ed in yesterday's New York Times discussing how Indian Hindus, who worship the moon, are undisturbed by any theological consequences of the country's unmanned mission to the satellite. Very interesting--the mission appears to have helped the country from falling into the dour mood that prevails in the West. (As the CERN rap proved so dramatically, ambitious scientific programs have more than one kind of utility. If the markets are driven more by psychology than by fundamentals, then they might prove an important part of any economic stimulus plan. Just so, but then why did Bush's Mars Mission fall flat? Perhaps because Bush and co appear to have no faith in science and, well, because you can't just promise the moon? Let's hope that CERN's experiments go through without a hitch come next Summer.)

6. Walter Pincus at the Washington Post reports that in response to a question fielded after a speech at the Carnegie Endowment for International Peace, Secretary of Defense Robert Gates said he would counsel the incoming President to pursue further nuclear missile reductions with Russia. However, he also defended the Administration's call for a next generation of nuclear warhead. In an interview with John Barry of Newsweek this week, Gates responded to the assertion that the US should unilaterally drastically reduce its nuclear arsenal:
"The reality is that there are probably two dozen, perhaps 30, countries out there that would seriously consider their own nuclear deterrent if they couldn't rely on ours."
Perhaps, but which ones? Perhaps the US should not cut its number of nuclear weapons significantly below the numbers in Russia, but we should lead the way. 5,000 strategic nuclear weapons is far more than would be required to destroy any offending nation, indeed the earth, many times over. As it stands, there is only one nation which has even a putative capability to launch an attack which would destroy our ability to respond. But such an attack would by its very nature destroy all human life on earth anyway.

7. Matt Rosenberg at the Wall Street Journal reports that the Pakistani Foreign Ministry released a statement today saying that the unauthorized US missile strikes on forces inside Pakistan "were a violation of Pakistan's sovereignty and should be stopped immediately."

8. Nazila Fatih at the New York Times reports that Iran has opened a new naval base near the Gulf of Oman which could be used to block the passage of ships through the Hormuz Strait--the strait with the largest percentage of oil shipments worldwide. The naval base is in the port city of Jask, which you can see on the map linked below. The move is of a gadfly.

9. If you thought the Somali pirate problem a tempest in a teapot, you were wrong. David Osler at Lloyd's List reports that the UK is considering revising their law of the sea to provide British warships with the right, under severely circumscribed situations, to search and detain ships flying another country's flag. The new law will need to be ratified by 12 nations before it comes into force. The British hope to pass it by the end of next year; so far five other nations have ratified 2005 Protocol to the Convention for the Suppression of Unlawful Acts Against the Safety of Maritime Navigation. "[If passed, the legislation] will effectively replace the Piracy Act 1837 as the main framework for the Royal Navy’s fight against piracy." The legislation is "vying for a spot in this year’s Queen’s Speech."

10. Jeb Blount at Bloomberg reports that a consortium of British, Spanish, Brazilian and Persian Gulf investors have announced they will build a refinery near Aracaju, in northeast Brazil. U.K.-based South Atlantic Refining Co. has received approval to build the refinery from Brazilian regulatory authorities and, as such, will be the first foreign country to build a refinery there. The company's operations director told Blount that the refinery will have a capacity of 200 kb/d and will be able to process heavy and light crudes into low-sulfur diesel, lubricants and naphtha at a cost of about $3 billion. Brazil is a more attractive destination for a greenfield refinery than, say, China because Brazil's product prices float freely on the market and the feedstock is nearby. 80% of the refined product is slated for export. This refinery is being built into what analysts expect will be a huge refining capacity glut starting from 2011 or so (and heralded by the 600 kb/d Jamnagar refinery.)

11. Vladimir Soldatkin at Reuters reports that Lukoil Vice President Leonid Fedun surprised an oil industry conference today by saying that Russia's future hinges on close cooperation with OPEC and that the country should cut prices in support of the October 24 move.

12. Diana Elias of the Associated Press reports that the the Kuwaiti Parliament passed a law fully guaranteeing all bank deposits in Kuwait as well as foreign bank operations there.

13. Carola Hoyos and Javier Blas at the Financial Times report that the as-of-yet unpublished Paris-based IEA World Energy Outlook forecasts a natural crude oil output decline of 9.1%. If all "necessary" investments were made in boosting output worldwide, the natural decline rate would fall to 6.4%.
"The IEA ... forecasts that China, India and other developing countries’ demand will require investments of $360bn each year until 2030."
I'm unclear on what that means, exactly, given the currency situation just now, perhaps it means that about 0.6% of global GDP (of $54 trillion) will need to be spent on new production in order to establish a natural decline rate of 6.4%. Gregor MacDonald provides a good discussion of the matter (in language somewhat a la Nouriel Roubini). This kind of news should push up prices as it essentially means that new supply will not be commensurate to new demand. And so far today front month futures prices for light sweet crude have gone up, though whether that is in response to currency news, yesterday's stock market bounce, or some other factor is totally unclear. Joe Brock at Reuters yesterday reported that BP's chief economist, Christof Ruhl, told the Oil & Money conference in London
"We should expect oil price volatility and low oil prices for 12-18 months until economic recovery helps prices to rise."
However, he does not think that prices will be sustainable at levels seen five or six years ago because of strong demand additions from the emerging market nations.

14. I think it is probably significant that the US Treasury Inflation Protected Securities (TIPS) now yield as much as regular Treasuries, as noted at Jesse's Cafe Americain. TIPS are basically bonds which guarantee that the principle will be adjusted for inflation when they return. So, no matter what the actual inflation rate is over the life of the instrument, you will receive the principle invested, plus whatever the rate of inflation was over that course of time, plus whatever the yield is. Is this a sign that the market expects deflation? Maybe. Eric Dash at the New York Times reports that credit card companies are in the process of cutting back lending sharply. Since America is a consumer society, a sharp cut back in credit card debt should, as I understand it, mean a deep drop in money supply ... deflation. If the banks try to blow out their riskier customers--which, ironically in the most un-businesslike fashion they are likely to do--you will see defaults go up, which will lead to rates going up on less risky customers and so on ... until the Congress is called in to legislate the matter.

On the other hand, Jesse's Cafe Americain also warned on the same day that the US will be forced to selectively default and devalue its debt.
"Once the deleveraging of the markets subsides, the dollar and Treasuries will drop, perhaps with some momentum, as the rest of the world realizes that the US has no choice but to default. This can be resolved in several ways, including continued subsidies from foreign sources in the form of virtual debt forgiveness, devaluation of the dollar, raising of taxes, and higher interest rates on debt.

The problem now is that the US has breached the point where it can service its debt out of real cash flows, and turning this around will require a severe devaluation of the US dollar.
This is the fundamental situation. Everything else is speculation and commentary."
That argues that we will see inflation, does it not? So far today the dollar has taken a pounding, as per Ye Xie and Daniel Kruger at Bloomberg. My expertise is too far removed from this to give a strong opinion one way or another. Nonetheless, it will be critical, I think, to predicting possible realignments in international affairs going forward.

For example, today RIA Novosti reported yesterday that Prime Minister Putin suggested in talks with Chinese Prime Minister Wen Jiabao that Russia and China switch over to national currency payments in their bilateral trade arrangements.

15. Li Yanping and Wang Ying at Bloomberg report that the People's Bank of China cut the benchmark one year lending rate from 6.93% to 6.66%, effective tomorrow. This is the third time the PBoC has cut interest rates in two months.

16. Sharon Otterman at the New York Times reports that the DOW climbed 889.35, or 10.8%, to 9,065.12 in late trading on Tuesday. Otterman's piece says it was due to rate cuts and the freeexchange blog has a snarky take on the major financial press's takes here which I admit made me chuckle.

17. Timothy R. Homan at Bloomberg reports that orders for US durable goods (excluding transportation equipment) in September fell 1.1%. Michael Grymbaum at the New York Times reports that orders for US durable goods (including transportation equipment) in September grew 0.8% from August. "Orders for August were revised lower, to minus 5.5 percent, the Commerce Department said Wednesday."

Daily Sources 10/28

1. Farhan Bokhari and Chris Bryant at the Financial Times write that Frank-Walter Steinmeier, the Foreign Minister of Germany, warned after meeting Pakistan’s president Asif Ali Zardari and foreign minister Shah Mehmood Qureshi that an agreement to help shore up Pakistan's solvency had to come soon, "It won’t help to have it in six months, or six weeks. Rather, we need it in the coming six days."
"Pakistan needs $4bn-$5bn for the financial year to June 2009 to meet debt payments and other liabilities, according to finance ministry officials in Islamabad.

An official at the central bank said the country’s foreign currency reserves stood at $4bn and were likely to run out by the end of November. 'We have a very narrow space to put the country back on the rails,' he said.

An IMF programme is expected to last till June 2010 and could be worth a total of $12bn-$15bn, officials say."
Mr. Steinmeier pledged to support Pakistan's case in the IMF and in the "Friends of Pakistan" donor conference--an association formed at the UN General Assembly meeting last month including the US, the European Union, the UAE, and China.

2. In an op-ed at the Financial Times Jeffrey Sachs prescribes the following:
"Now China must make a policy U-turn, to boost its internal demand and support a co-ordinated expansion throughout east Asia.

Any co-ordinated expansion should include the following actions. First, the US Federal Reserve, the European Central Bank and the Bank of Japan should extend swap lines to all main emerging markets, including Brazil, Hungary, Poland and Turkey, to prevent a drain of reserves. Second, the International Monetary Fund should extend low-conditionality loans to all countries that request it, starting with Pakistan. Third, the US and European central banks and bank regulators should work with their big banks to discourage them from abruptly withdrawing credit lines from overseas operations. Spain has a role to play with its banks in Latin America.

Fourth, China, Japan and South Korea should undertake a co-ordinated macroeconomic expansion. In China, this would mean raising spending on public housing and infrastructure. In Japan, this would mean a boost in infrastructure but also in loans to developing nations in Asia and Africa to finance projects built by Japanese and local companies. Development financing can be a powerful macroeonomic stabiliser. China, Japan and South Korea should work with other regional central banks to bolster expansionary policies backed by government-to-government loans.

Fifth, the Middle East, flush with cash, should fund investment projects in emerging markets and low-income countries. Moreover, it should keep up domestic spending despite a fall in oil prices. Indeed, the faster a global macroeconomic expansion is in place the sooner oil prices will recover.

Sixth, the US and Europe should expand export credits for low and ­middle-income developing countries, not only to meet their unfulfilled aid promises but also as a counter-cyclical stimulus. It would be a tragedy for big infrastructure companies to suffer when the developing world is crying out for infrastructure investment.

Finally, there is scope for expansionary fiscal policy in the US and Europe, despite large budget deficits. The US expansion should focus on infrastructure and transfers to cash-strapped state governments, not tax cuts. This package will not stop a recession in the US and parts of Europe, but could stop a recession in Asia and the developing countries."
I've mentioned that some might consider Americans giving financial prescriptions to other countries at this stage a bit of a faux pas in yesterday's post, but I suppose at least Jeffrey Sachs does have a lot of experience doing so. And from a rhetorical perspective stressing, even if it is in the final paragraph, how it would help those being asked to make the largest policy shifts--as opposed to the West--is probably wise.

On the other hand, officials in Beijing, Seoul, and Tokyo might be somewhat reluctant to accept the advice of Sachs, who is held responsible by many for the state of affairs in Russia where a pell mell privatization program led to an economy dominated by an oligarchy of crooks and finally, at the advice of Paul Volcker and Graham Allison's Special Economic Task Force on Russia at the Council on Foreign Relations, to the (re)-nationalization of strategic corporations which is today what causes so much gnashing of teeth in opinion pieces throughout the land.

It is already clear that the Gulf nations are scratching their heads, so to speak. AFP reports OPEC Secretary General Abdalla Salem El-Badri exclaimed at an oil industry conference today: "What is surprising me is everybody looking at OPEC to bail out this crisis. In Opec, we are most of us very poor countries, we cannot bail out this crisis." Though this might be in response to the news reported by Laurence Norman at the Wall Street Journal that UK Prime Minister Gordon Brown is seeking support from France and Germany for a plan to boost IMF resources with monies from oil-rich nations and other countries with strong current account balances, as well.

3. Anton Doroshev and Robin Paxton at Reuters report that China and Russia struck a deal today where Transneft and CNPC would build a spur of the trans-Siberian pipeline to China, carrying 300 kb/d from 2009 in return for multi-billion dollar loans to Russian companies. 300 kb/d represents about 4% of projected total consumption in China and about 8.5% of projected average daily crude imports in 2008.
"The new export-backed loan would come at a time when Russian companies find it difficult to refinance Western loans they have amassed to fuel growth at home and abroad in the past years. Rosneft owes over $20 billion to creditors.

Transneft also needs cash to finish construction of Russia's first pipeline to Asia, which will have a spur to China and a link to the Pacific.

The 600,000-barrels-per-day pipeline is estimated to cost over $14 billion and it needs to be finished by the end of next year. It will become the main link for exports of crude from East Siberia, mainly from Rosneft's fields, to China."
Igor Sechin, First Deputy Prime Minister in charge of oil, refused to give exact loan numbers, the breadth of Russian industry involved, or a sense, beyond the spur of the pipeline, of how much oil supply Moscow committed in return.

4. Martin Fackler at the New York Times reports that finance ministers from the G7 issued a joint statement yesterday saying that the association was "concerned about the recent excessive volatility in the exchange rate of the yen and its possible adverse implications for economic and financial stability." However, the yen continued to appreciate against the dollar and other world currencies. Most analysts ascribe the rise in the yen to the "unwinding of the carry trade," where investors purchased debt in yen--because interest rates in Japan were low--and then used the capital to invest in high yielding financial instruments in other countries.

5. David Wethe at Bloomberg reports that analysts believe the credit crunch will take 20% of the orders for new offshore drilling rigs off the books as prospective purchasers cancel the deals. The company's plans most likely to be hit by financing difficulties is Petrobras, which is set to add 63 deepwater rigs by 2018 to develop the Tupi field in the Santos Basin. Takeo Kumagai at Platts reports that the volatile market has forced Petrobras to review domestic and international investments. Already plans to upgrade two 100 kb/d refineries in Texas and southern Japan look as if they are being reconsidered. The two refineries would have been upgraded to handle heavy crudes like Marlim and Roncador with an average API of around 18-25 and the products sold into the Chinese and American markets. Petrobras had been hoping to reroute the 2 million tonnes / month (471-487 kb/d) of heavy crudes it was selling directly to Sinopec in China to those refineries. Even with demand dropping in the US, I would guess that plans for refinery expansions in Japan would be dropped before expansions in America, given a large product import market in the US and price controls--which probably killed the SK Energy refinery as reported yesterday--in China.

6. Jamie Dale at Lloyd's List reports that the rate for very large crude carriers is falling, but not as steeply as the Baltic Dry Index would imply. Rates from the Middle East to Japan for very large crude carriers fell to about 67% of the standard industry rate. There are rumors that Iran is about to, or already has, leased some very large crude carriers for offshore storage. (Iran has done this in the past to take supply off the market, waiting for prices to firm before selling their heavier crudes.) As of June, Iran had as many as 15 VLCCs offshore, but by August all had been released to the spot market, which likely helped bring prices for them down.

7. Juan Cole writes that an Arabic paper is reporting that the high Shia clergy in Najaf--the refuge from which Ayatollah Khomenei crafted most of his rhetorical barbs at the Shah--is signaling that they are not backing any one party, but that followers are encouraged to vote for any party, so long as they believe it competent to address Iraq's problems. Previously, Najaf's grand ayatollah's, and most significantly Grand Ayatollah Sistani, had urged voters to back the United Iraqi Alliance, a coalition of Shiite fundamentalist parties. As Prof. Cole notes, if this report is correct, this is a very important shift away from Iran. Mary Beth Sheridan at the Washington Post reports that the political difficulty facing the Iraq Security Pact with the US is driven by al-Maliki's reluctance to alienate the Islamic Supreme Council of Iraq--an organization which until recently accepted Iran's Supreme Leader as their ultimate chief--because without their support he cannot sustain a majority. In that context, Alissa J. Rubin at the New York Times reports that the Iraqi Parliament's refusal to pass the oil law is a result of a legislative slow down instigated by the Kurdish leadership which wants its borders to include Kirkuk and the right to develop oil independently of the central government.

8. Saeed Ali Achakzai at Reuters reports that Afghani and Pakistani officials have agreed to set up joint talks with Talibani representatives regarding peace. The Taliban apparently refuses to join such talks as they have been endorsed by General Petraeus as per Yochi J. Dreazen, Siobhan Gorman and Jay Solomon at the Wall Street Journal. Remember that Pakistani President Zadari is more or less in a family feud with elements of the Taliban in Pakistan and that those same elements have pissed off, so to speak, the Pakistani military. The talks themselves in Pakistan have been supported by opposition leader, Nawaz Sharif. Still, support for Zadari in the US has not appeared to be tempered by his refusal to reinstate the Chief Justice of Pakistan's Supreme Court.

9. Ann Scott Tyson and Ellen Knickmeyer at the Washington Post report that DC officials have called the recent incursion into Syria by US troops as a warning to Damascus. Whether or not this is the genuine purpose, the timing is suspicious and will be regarded as so in the region. To what purpose? I dunno.

10. Reuters reports that Iceland's central bank lifted benchmark lending rates by 6% to 18% today! This follows the easing of fiscal policy two weeks ago when Iceland's central bank relaxed benchmark lending rates by 3.5% to 13%. Some believe the move today was part of what the IMF required in return for the recent loan made to the island nation.

11. (The Emergency Food Alliance Program) TEFAP Alliance blog reports that the Congress is considering a new stimulus plan for the economy. Members are reportedly considering two central moves: 1) an extension unemployment benefits and 2) an increase in Supplemental Nutrition Assistance Program (SNAP) or food stamp benefits. The notion is to increase consumption immediately by funneling money to folks who will likely immediately turn around and use it on a retail level. I also hear tell that food banks are empty in major cities across the US, however, and suspect this is an initial go at increasing food security. (h/t Parke Wilde at U.S. Food Policy)

12. Michael M. Grymbaum at the New York Times reports that Standard & Poor's Case-Shiller Home Price Index showed a 16.6% fall in August versus a year ago. "Phoenix and Las Vegas were hit hardest, with prices down 31 percent in both cities. Prices declined more than 25 percent in Los Angeles, Miami, San Diego and San Francisco." The Conference Board released new consumer confidence survey findings today with confidence readings falling 38.0 in October from 61.4 in September.

Monday, October 27, 2008

Daily Sources 10/27

1. In a delicious bit of irony I missed, al-Qaeda reportedly prefers a McCain Presidency, as per Nicholas D. Kristof at the New York Times.

2. Brian Blackstone at Real Time Economics reports that most analysts believe that the Federal Open Market Committee will reduce the federal funds rate by 50 basis points (0.5%) at its Tuesday-Wednesday meeting, bringing it down to 1%. The political will to reduce it even further allegedly exists. Also at Real Time Economics, Henry J. Pulizzi, Jeffrey McCracken and John D. Stoll report that White House Spokeswoman Dana Perino told journalists that the Administration has been "working 'as quickly as we possibly can' to release $25 billion in recently approved loans to the auto makers. But she declined to elaborate on other specifics steps that could be taken to help the ailing companies." Also, Jean-Claude Trichet told reporters in Madrid today that the ECB may cut interest rates again at its next meeting on November 6, as per Ben Sills and Gabi Thesing at Bloomberg. William Sim and Seyoon Kim, also of Bloomberg, report that the Bank of South Korea cut the benchmark lending rate 75 basis points (0.75%) to 4.25%.
"'More aggressive cuts are on the way,' said Lee Sang Jae, an economist at Hyundai Securities Co. in Seoul, who expects Korea's key rate will be slashed to around 3 percent by the first half of 2009. 'The government would need to expand tax cuts and increase fiscal spending to support the economy.'"
Chris Bryant at the Financial Times reports that Peer Steinbrück, the German finance minister, told the media on Sunday that "The danger of a collapse is far from over. Any attempt to give the all clear would be wrong."

3. There are a slew of articles on the crisis spreading to the emerging market countries, including this one from Credit Writedowns. The upshot is that European banks invested much more than their American counterparts in the emerging markets. Often loans and investments made by European banks were made in dollars, which means that if you want to cash out, you cash out in dollars, putting more upward pressure on the dollar. Laura Cochrane and Fabio Alves at Bloomberg report that emerging market markets were hit hard this morning. Margaret Coker and Chip Cummins at the Wall Street Journal report on the financial crisis as it hits the Persian Gulf states, hitherto deemed immune from the credit crunch. Investors are liquefying their assets in the region.

See Yves Smith's analysis and links at naked capitalism here, here, and here.

4. Carlos Caminada, Shruti Singh and Jeff Wilson at Bloomberg report that analysts are predicting that the credit squeeze--as well as falling commodities prices--is likely to reduce global production of staple foods worldwide.
"Global production of wheat, the most-consumed food crop, may drop 4.4 percent next year, said Dan Basse, president of AgResource Co. in Chicago ....
Futures contracts on the Chicago Board of Trade show wheat will jump 16 percent by the end of 2009, corn will rise 15 percent and soybeans will gain 3 percent.
'The net effect of the financial crisis may end up being lower planting, lower production,' [Abdolreza] Abbassian [secretary of the of the Intergovernmental Group on Grains at the UN Food and Agriculture Organization] said. 'More people will go hungry.'

In Brazil, the world's third-biggest exporter of corn after the U.S. and Argentina, production may fall more than 20 percent because farmers can't get loans to buy fertilizer, said Enori Barbieri, a National Corn Producers Association vice president. The nation's coffee harvest, the world's largest, may drop 25 percent for the same reason, said Lucio Araujo, commercial director at farmer cooperative Cooxupe, located in Guaxupe.
Minnetonka, Minnesota-based Cargill and Decatur, Illinois-based Archer Daniels, the world's largest grain processors, are among the crop buyers to halt financing for growers in Brazil, said Eduardo Dahe, who represents the companies as president of the National Association of Fertilizer Distributors.
In Russia, loan rates for farmers have jumped by half in some cases to more than 20 percent in the past few months, Arkady Zlochevsky, president of the Russian Grain Union, said in an interview earlier this month.
The value of the collateral farmers use to secure loans -- crops and land -- is diminishing. Lenders are demanding more equity for farm loans used to run operations or acquire land and equipment.

'We need two to three times the amount of money we used to need with the same collateral,' said Bo Stone, 37, a seventh- generation farmer in Rowland, North Carolina. 'It means we have way more risk than we've ever had. This is a time where one bad crop year, with the amount of money and input tied up, could potentially cost you your equipment, land and livelihood.'"
(h/t In a related story, Javier Blas and Tim Johnston of the Financial Times report that Thai officials plan to barter rice for oil with Iran. The UNFAO believes that we should see more government-to-government deals like this going forward given the credit crunch and volatility in the commodities market.

5. Joshua Partlow at the Washington Post reports that President Luiz Inácio Lula da Silva's Party--the Workers' Party--lost the race for governor of the largest city in Brazil (and South America, for that matter), Sao Paulo. Sometimes it's bad to be king. That is, I'd expect a worldwide financial crisis to dim the hopes of incumbents everywhere.

6. Jeffrey Gettleman at the New York Times report that angry crowds in Congo are forming and throwing rocks at UN peacekeeping forces, apparently taking out frustration on them because they are unable to keep the peace as renegade general Laurent Nkunda's rebel forces advance Westwards. As far as I know, no one doubts that the constant warfare in the Congo is a humanitarian disaster, veering toward the genocidal. The problem is that there is no power sufficiently strong whose interests are threatened by it. It must be a pan-sub-Saharan-African solution, but who in the industrial world will pay for the inevitable political compromises (and thus human suffering) that would be required for a stable state to be incorporated? It's not an especially appetizing option, is it? If you don't have a dog in the fight, you aren't likely to want to force a settlement one way or another.

7. In a somewhat strange--to my eyes--development, I am seeing more and more suggestions as to what China should do to save the industrialized world from this financial crisis. The most recent is a piece by the editorial board of the New York Times. In a piece which I'm sure policymakers in Beijing were at pains to decipher, the Times suggested that Beijing's recent policy efforts were insufficient and misguided ... China should spend its cash reserves on converting from an export economy to an import economy! This follows on the suggestion by Brad Setser for Beijing to increase its purchases of Agency debt!--which, as the government has gone out of its way to publicize, are not backed by the full faith and credit of the US. And the other notion--almost wistful hope--that China should spend its cash on greening the energy infrastructure of Europe and the US! Being free with advice is considered by some to be an American trait, and I guess if you're a financial adviser, you advise those who happen to still have some cash. And maybe China's leaders are listening to the American punditocracy, who knows? But, were I Chinese, I would wait to see what happens to the dollar after this technical unwinding phase plays out before I would undertake something on that scale. In the meantime, Beijing appears to be using its cash in the traditional way overseas. The latest news is that it is working to provide a $1.5 million soft loan--ie, a loan with below market rates of interest--to Pakistan, after all.

8. Winnie Lee at Platts has a different read than the Bloomberg story of October 13 on what government statistics indicate in terms of crude imports, and thus demand. Ms. Lee reports that net crude imports for September were 14.45 million tonnes (3.53 mb/d), a 1.7% decline from imports of 15.25 million tonnes (3.59 mb/d) in August. Year-over-year net crude imports grew by 7.4% September. (On the 13th, Winnie Zhu and Wang Ying had suggested crude imports had surged 46% to 20 million tonnes in September.) China's apparent petroleum demand in September was 29.42 million tonnes (7.16 mb/d), 5.4% more than September 2007. However, demand growth numbers have been steadily been trending down, July saw 9.6% y-o-y growth and August saw 8.3% y-o-y growth as refiners draw down stocks built up to provide energy security for the Olympics.

9. Platts reports that Iran's OPEC governor Mohammad Ali Khatibi said on Sunday that OPEC is prepared to make further quota cuts in the December meeting, if the quota adjustment agreed to on Friday fail to stabilize the markets. Reuters reports that Qatari Prime Minister Sheikh Hamid bin Jasim told the media Monday that "The current prices are a bit low. We are talking about prices ranging from $70 to $90 which we think are fair for consumers and producers." Saudi Oil Minister Ali Naimi told reporters on Friday that the Khurais oil field will be operational--at 1.2 mb/d--in mid-2009. The field produces varieties of Arabian Light, a fairly high quality crude with between 33 and 36 API and with a sulfur content of 1.9% by weight.

10. Angela Moon at Reuters reported that SK Energy has dropped plans to build a refinery in China. SK had eyed the naphtha market in China given that the product is not as rigorously price-managed by the government as others. Evidently the losses seen by refiners in China over the last year caused SK to reconsider. (This is especially interesting because South Korea's energy security policy is to be a refining center. If you have more refining capacity than you need, and export the excess product, you are likely to have enough crude imports at any given time to weather a shortage. South Korea's policy has been copied in Singapore and is in the process of being instituted in India. Also, as Japanese refining capacity becomes more sophisticated and demand, due to an aging population structure, continues to decline, is also entering the market of product exports in Asia. Clearly the competition is stiff. Thus some, especially Saudi Arabia, some international oil companies, and, until now, South Korea decided that the best way to beat the competition is to actually produce "export" product inside the export destination country, ie China. That strategy might be especially difficult to pursue in a highly volatile international price environment while operating within the product prices market centrally managed by Beijing. Either way, the stakes involved are huge.)

11. Juan Cole has an analysis of some of the fighting in northwest Pakistan. He has some observations--and links--on the effectiveness of arming tribal levies against the Taliban in Pakistan and Pakistani armed forces proper efforts.
"Maulvi Faqir Muhammad and his Tehrik-i Taliban frontally attacked Pakistani military checkpoints and started a feud with the Pakistani army. The Tehrik-i Taliban has been blamed for the assassination of Benazir Bhutto last December, and it is said that as her widower, Asaf Ali Zardari, rose to the presidency, he pressured the military to destroy the movement, with which he now has a family feud."
Very interesting.

12. Patrick Ugeh at Nigeria's This Day reports that two major Nigerian oil unions called off proposed strikes after the government retracted a statement saying it planned to privatize the Nigerian Gas Company and Pipeline and Product Marketing Company.

Friday, October 24, 2008

Daily Sources 10/24

1. Maher Chmaytelli and Margot Habiby at Bloomberg reports that OPEC decided to cut production quotas by 1.5 mb/d in their emergency meeting today.Per OPEC's press release individual country quotas will be reduced by the following amounts:
Algeria: 71 kb/d
Angola: 99 kb/d
Ecuador: 27 kb/d
I. R. Iran: 199 kb/d
Kuwait: 132 kb/d
Libya: 89 kb/d
Nigeria: 113 kb/d
Qatar: 43 kb/d
Saudi Arabia: 466 kb/d
U.A.E.: 134 kb/d
Venezuela: 129 kb/d
Saudi Arabia rejected the suggestion put forth by Venezuela that OPEC re-establish a target price band. Reaction from industrialized governments was negative. UK Energy Minister Mike O'Brien called the decision "disappointing," as per David Sheppard at Reuters. White House Spokesman Tony Fratto called it "anti-market," as per the AFP.

Also at Bloomberg, Ayesha Daya reported that Saudi OPEC Governor told journalists after today's meeting that:
"'We don't know what's going to happen in December,' [al-Naimi] said, referring to OPEC's next scheduled meeting in Oran, Algeria, on Dec. 17.

'This is a moving target and as it stands now we see no reason to take another cut,' al-Naimi said.

Asked if the group would be ready to increase output if prices surged again in the future, al Naimi said, 'The answer is yes.'

'Our interest is not where the price is, as much as a stable price, a stable inventory and stable supply and demand,' he told reporters.

Al-Naimi said that OPEC was not to blame for the financial crisis.

'We are not responsible for high prices, they were driven by people who were buying long futures and speculating on the market,' he said. 'Now that they are out of the market prices have come down to the levels they are today.'"
2. Uchenna Izundu at Platts reports that the "Gas Troika" of Russia, Iran and Qatar will hold their first meeting in Doha on October 27--next Monday. The three believe that they will find means to better cooperate in discussions at the Gas Exporting Countries Forum (GECF) and thus push the organization into a more OPEC-like mold. My sense is that so far this is mostly a public relations effort designed to support oil prices.

3. In another interesting post today, Brad Setser at Follow the Money pointed out that the renmimbi has risen along with the dollar versus world currencies.
The net effect, I suspect, is that the US will still run a significant — though smaller — deficit. And once the deleveraging process is over and the US deficit cannot be financed by the sale of US foreign assets, China’s government will continue to finance a large share of the US deficit.

The dollar block will be in balance: The oil exporters that peg to the dollar will be in rough current account balance, and the US deficit will roughly match China’s surplus.

That at least is my best current guess.
Worth reading in its entirety. The appreciation of the yuan should make oil consumption growth in China less painful, however. In a related story, Platts reports that China might cut guideline prices for petroleum products, given the fall in crude costs. Refiners reportedly stopped hemorrhaging money this month.

Also, Liz Mak at Asian Investor reports that Taiwan has decided to institute a 50% ceiling on the percentage of offshore investment limit Taiwanese insurance companies can hold in Fannie, Freddie, Ginnie and Mortgage Backed Securities. The companies will be required to limit their investment in any one of the agency's (Fannie Mae, Freddie Mac, or Ginnie Mae) debt to 25% of their total offshore investment limit. It is my sense that even if a move like this makes tremendous fiscal sense that it must have been approved at the highest levels, and that it is a message to Beijing and Washington. Taipei is probably anticipating a future fall in the dollar, and perhaps signaling openness to closer ties to Beijing. Perhaps Taipei has calculated that the US ability to project a defense umbrella that far out has become critically undermined by the fiscal crisis--and subject to the Achilles Heel of PBoC's dollar holdings. (h/t Yves Smith at naked capitalism)

4. The US Department of Transportation released new data showing that vehicle miles traveled in August fell by 15 billion from a year ago, a reduction of 5.6%. This is a considerable acceleration from the 9 .6 billion vehicle mile drop seen in July--a 3.6% drop in miles driven from a year earlier. Cumulative road travel in the US has dropped by 3.3% for 2008. Andrea Rothman at Bloomberg reports that the International Air Transport Association released data today suggesting that "global air traffic, or the number of passengers multiplied by the distance flown, declined 2.9 percent from a year earlier, with freight traffic dropping 7.7 percent." This is the steepest fall in global air traffic since the SARS outbreak in 2003. The Baltic Dry Index continues to fall. All of these are indicators of demand destruction for oil ... and the range of its products ... but also of drastic reduction in trade, which as several others have pointed out, will exacerbate the current financial crisis.

5. Alexander Kwiatkowski at Bloomberg reports that options to sell oil at $50/b rose 143% (to $1.50) today.

6. Christopher Swann and Tasneem Brogger at Bloomberg report that the IMF is considering a plan to offer member countries credit of as much as five times the amount of their quota contributions.
"South Korea's IMF quota is $4.4 billion, meaning it could get as much as $21.8 billion under the potential program. Mexico might qualify for $23.5 billion, with $22.6 billion for Brazil and $10 billion for Poland."
Other countries reported to be looking to IMF for support include Russia, Turkey, Hungary, Belarus, Ukraine and Pakistan, as per Terence Roth and Christopher Emsden at Real Time Economics.

7. Mary Beth Sheridan at the Washington Post reports that the US has handed over security responsibility to the Iraqi Government in the "triangle of death" south of Baghdad. Juan Cole reports that the Sadr Movement has begun a protest of the draft security agreement between the al-Maliki government and the Bush Administration.
Al-Hayat also chronicles the failure of the visit to Iran of Iraqi Kurdish leader Massoud Barzani, who was seeking to reassure his Iranian colleagues about the status of forces agreement. President Mahmoud Ahmadinejad, Speaker of the House Ali Larijani, and Expediency Council head Akbar Hashemi-Rafsanjani all denounced the proposed agreement as a humiliation for Iraq and an infringement against it sovereignty. Larijani compared it to the agreement between the Shah of Iran and the US over troops and bases in Iran, which restricted GIs from being tried in Iranian courts.
8. Warren P. Strobel at McClatchy Newspapers reports that anonymous sources within the Bush Administration say that it will announce an agreement to establish an interests section in Iran in the middle of November, after the election. The Fars News Agency reports that the US Treasury Wednesday imposed additional sanctions on the Export Development Bank of Iran (EDBI), essentially seizing any assets they might hold in US jurisdiction. The same article remarks on the electricity shortage in the country just now:
Iran currently suffers from an electricity shortage that has forced the country into adopting a rationing program by scheduling power outages - of up to two hours a day - across both urban and rural areas.
9. Qaiser Khan Afridi at Pakistan's The News reports that people in major cities throughout the country have taken to publicly burning their power bills in protest over the brown and black outs plaguing the country.

10. Kurt Achin at Voice of America reports that UN officials believe that the situation in North Korea has deteriorated so much that a substantial portion of the population is facing starvation in the near future.

11. Maya Jackson Randall at the Wall Street Journal reports that the National Association of Realtors released statistics which suggest that "existing-homes" sales--or home resales--rose to a rate of 5.18 million per annum, a 5.5% increase on August's reading.

12. Ye Xie and Agnes Lovasz at Bloomberg report that the Yen has risen to a 13 year high versus the dollar as the carry trade unwinds. That is, investors sold high-yield financial products worldwide and paid back the low cost Yen-based loans they used to finance the original purchases.

13. Asia News reports that the pogrom targeting Christians in Iraq continues.

14. Editors at Wall Street Journal Asia argue that the land rights reforms China has announced it will introduce to combat the economic slow down do not go far enough and that full-fledged property rights need to be introduced.

15. Polina Devitt at Reuters reports that Mechtel, the coal mining company which Vladimir Putin attacked a month or so ago leading to a steep drop in its share price and then to shares in Russian companies generally, has announced a decision to reintroduce the plan to sell preferred shares on the market, the plan which led to Putin's criticism in the first place. Well, I guess Moscow can snap em up cheap now.

Bureau of Unintended Consequences

Turns out that Daylight Savings Time may increase electricity consumption, as per a National Bureau of Economic Research paper written by Matthew Kotchen and Laura Grant of the University of California, Santa Barbara. (h/t Brian Blackstone at Real Time Economics.)

Thursday, October 23, 2008

Daily Sources 10/23

1. Former US Senators Daniel R. Coats and Charles S. Robb have an op-ed in the Washington Post--"Stopping A Nuclear Iran"--which essentially advertises the conclusions of a study recently published by the Bipartisan Policy Center entitled "Meeting the Challenge: US Policy Toward Iranian Nuclear Development." The documents urge the President-elect to move immediately after the elections have been decided to increase pressure on Tehran. I have a lot of difficulties with the arguments made in these two publications, but will hold off until I have read the entire report, which comes in at 117 pages.

My less conservative response is that this report is in the business of peddling fear. The final line of the op ed says it all, "Time may be shorter than many imagine, and failure could carry a catastrophic cost to the national interest."

Anything is possible, but there is nothing in the Op Ed or what I've read of the report which actually demonstrates what that catastrophic cost would be, unless they mean a unilateral nuclear strike by Israel on Iran--something the authors suggest is likely should Tehran acquire nuclear capability although it is clearly unlikely. Indeed, there is almost zero chance Tel Aviv would do something so utterly self-defeating. Indeed, former Israeli PM Olmert recently told a newspaper that the notion of unilaterally attacking Iran was an example of "megalomania." (Which suggests that there are some hotheads in Israel, but that is true everywhere, and there are plenty of sang-froid individuals in that country.)

It is such an odd assertion that it puts the neutrality of the report in question, an analysis by Glenn Greenwald at has done an excellent job of skewering the notion of its bipartisanship.

Furthermore, their analysis of the economic and security benefits to Iran of nuclear power--irrespective of whether Tehran intends to build the bomb--is misleading and based on straw man theories.

They suggest that since Iran does not have more than 20 years of uranium supply domestically, Tehran cannot be honestly pursuing an alternative energy source for energy security reasons. Since Tehran could not rely completely on domestic reserves, the authors argue, the argument that Iran's interest in nuclear power is peaceful must be a disingenuous cover for weapons research.

But it doesn't take too much sophistication to imagine the folks in Tehran might prefer, under normal conditions, to purchase nuclear power feedstock via the market. Since they do not want their thermal generation capacity--you know, heating for grandmothers who keep their money in their mattresses--to be at the mercy of the nuclear suppliers group. They thus might genuinely want to be able to produce the entire nuclear fuel cycle domestically.

That is, should an international conflict arise--a reasonable contingency as history has demonstrated--Tehran wants the ability to be able to produce energy from any nuclear power plants they might have without being hostage to the West. To do otherwise would be to put a considerable part of their planned energy generation at the mercy of the West, which they regard as a committed enemy to their regime likely to take the first opportunity available to cut off their supplies. As a member of OPEC whose historical rise was the direct cause of the second oil shock, Tehran might conceivably have a fear of being beholden to foreign suppliers.

And, in fact, this very report points out Tehran's vulnerabilities with respect to their gasoline imports and natural gas supplies and recommends a blockade of their gasoline imports as a means of coercion. So, whether or not Tehran is an ingenuous interlocutor--and it most clearly is not--what advantage is accrued to US policymakers internationally when obviously bogus analysis is added to the pot??!!!

None, clearly. Unless it is an effort to send a message to Iran and the rest of the world that the American political elite is dedicated to building the political will for war on Iran, willy-nilly, and soon.

For the record, I don't think it's going to happen. I didn't think so three years ago, two years ago, last year, or this year. It would be incredibly self-defeating. Still I think there needs to be "pushback"--as it appears to be called--to these "narratives". (I curse the day French deconstruction entered into the American curricula.)

2. Karen DeYoung at the Washington Post reports that Pakistan is planning to arm anti-Taliban tribal fighters in a bid to put down unrest--and al Qaeda sympathizers--in that region. The tribal fighters will be armed with Chinese-made AK-47s in a purchase arranged during Zadari's visit to Beijing last week! Apparently the strategy is endorsed by the US military. The Dawn reports on another difficult region for Islamabad, as Zadari said that Baluchistan must be made safe for oil and gas exploration. Baluchistan has been another area of Pakistani unrest for some time, with secessionist groups blowing up oil and gas infrastructure in a bid for more autonomy or more largesse from the central government. Zadari suggested that Chinese E&P firms should be looked to to partner in the exploitation of oil and gas fields and underscored the current fuel troubles Pakistan's shaky energy security situation has put it in. In a related story, the Oil & Gas Journal reports that Pakistan had cut tariffs places on petroleum product exports to Afghanistan last month. I suppose the move was seen as conciliatory and irrelevant, given the facts on the ground where Pakistan doesn't have much fuel to export. Pakistan exported $500 million-worth of petroleum products to Afghanistan last year.

3. Linda Rafield at Platts reports that Saudi Oil Minister Ali Naimi said, "who said anything about a cut?" Another Platts article today reported that "Earlier Thursday, Saudi-owned pan-Arab newspaper al-Hayat quoted Attiyah as saying an oil price range of $70-$90/barrel reflected market fundamentals." Al-Hayat has been pretty much the only thing that the market has had to go on with respect to Riyadh's position on production cuts until today. Sam Fletcher at the Oil & Gas Journal reports that after meeting with Russian President Medvedev yesterday, "OPEC Secretary General Abdalla Salem al-Badri said he will not ask Russia to cut production." Benoit Faucon at Dow Jones reports that Chekib Khelil said the banking ciris will hurt the prospects of new supply additions --which is almost tautological, but bears repeating.

Interestingly, he said that Algerian oil projects will not be affected by the credit crisis, because they are mostly funded by domestic banks which do not have the same exposures as the banks at risk internationally.
OPEC's president said he doesn't think a return of oil prices to $90 a barrel would curb economic growth. On the other hand, he said, international oil companies need high oil prices to continue to finance their projects.

Projects such as Canada's Athabasca oil-sands development need oil prices to be at least $90 a barrel to proceed, Khelil said.

OPEC member Angola's deepwater oil projects 'need around $70'-a-barrel oil prices, Khelil said.

'OPEC countries that have resilient banking systems haven't been affected by the financial crisis because most of those projects have been locally financed,' Khelil said. 'Those OPEC countries whose projects are being financed by foreign banks definitely will be affected.'

Referring to fellow OPEC member Nigeria, Khelil said, 'I think most projects in Nigeria are financed by foreign banks. Whenever you have a foreign company operating in a country, they will be affected.'"
Khelil also took a shot at Gordon Brown who was publicly "shocked" that OPEC might cut in the current economic environment, saying "An OPEC of finance is being created" and
"U.K. Prime Minister Gordon Brown and U.S. President George Bush 'had to inject (public) capital in private banks' to stop the panic in financial markets, Khelil said. 'That's unheard of - the antithesis of capitalism, of the market economy.'"
Khelil also hoped that non-OPEC producers Mexico, Norway, and Russia would join the cut, somewhat ironically I suspect given that production is falling in all three naturally. (The AP reported today that the head of Russia's Energy Ministry's department for oil and gas industries Vitaly Karaganov confirmed analyst expectations saying, "Compared to 2007, when 490 million tonnes of oil was produced, we forecast a 1 million tonne drop (this year)." (1 million tonnes/annum = approx 20 kb/d.)

4. David Osler at Lloyd's List reports that at least one major bulk shipping company has instructed its captains to avoid the Suez Canal and sail around the Cape of Good Hope in order to avoid Somali pirates. It is not clear if this is due to insurance concerns or if in reponse to resistance from crews who refuse to sail the Gulf of Aden. Either way, rerouting will add considerably to the costs of the shipper and if other shippers join, it will have an affect on Egyptian revenues and the availability of ships for short shipping times from Europe to Asia.

5. Ambrose Evans-Pritchard at the UK Telegraph reports that Hungary has raised it benchmark interest rates by 3 full percentage points in an attempt to defend its currency. Evans-Pritchard argues that the rest of Eastern Europe will be forced to follow suit. In this context, Russia's debt was downgraded by Moody's today. (Whatever a rating by Moody means.)

6. Eurointelligence caught the very interesting news that Sarkozy suggested yesterday to the EU that France should continue its Presidency next year, replacing the Czechs. I mentioned the Gaullist proposal yesterday, but had no idea the extent of his propositions, and, of course Germany opposes. It seems to me France is trying to use to opportunity of the financial crisis to seize the leadership of the Union movement. Evidently, a large majority of the European Parliament favors Sarkozy's proposal for centralized euro area financial governance. Le Monde argues that Sarkozy doesn't expect all of his proposals to get through--including extending the Presidency--but the notion is that some will. (h/t Yves Smith at naked capitalism)

7. Dan Levy at Bloomberg reports that US foreclosure filings increased by 71% in the third quarter.

8. Norma Cohen at the Financial Times reports that the British Bankers Association released data suggesting that lending to non-financial institutions in September was a third less than the average seen over the last six months.

9. Scott Lanman and Steve Matthews at Bloomberg report that Greenspan urged more regulation in statements prepared for the US House Committee on Oversight and Government Reform today. The sneering and hisses this move has elicited in the media is pretty overwhelming. I start to sympathize, as the man is evidently saying his mind--what does he have to gain at this stage?--but then I remember that he endorsed variable rate loans on broadcast media, oh, three or so years ago.

Wednesday, October 22, 2008

Open Sources 10/22

1. William Branigin at the Washington Post report that President Bush will host a global summit November 15th to discuss the reformation of the international financial system. G-20 members will be invited as well as the officials from the IMF, the World Bank, U.N. Secretary General Ban Ki-moon, and the chairman of the Financial Stability Forum.

2. Katrin Bennhold at the New York Times reports that President Sarkozy of France urged European leaders to establish sovereign wealth funds in order to prevent European companies from being purchased via foreign capital when they are at their lowest market value. This is kind of an odd position given Sarkozy being at the forefront of calls for an international response to the financial crisis. What this underscores is that Sarkozy, in a way consistent with a history of Gaullism, is a European-ist, and not particularly an internationalist. Germany opposed a pan-European response to the financial crisis on what appeared to be nationalist grounds--that is, they didn't want German banks to fall as other European ones soldiered on--and opposes this suggestion as well, apparently because Berlin just doesn't want to let France look like its leading the European charge. Wall Street Journal Europe's editorial board also came out against the idea today.

3. Ann Scott Tyson and Philip P. Pan of the Washington Post report that Gen. Nikolai Makarov, head of the Russian general staff, told reporters in Moscow following his meeting with his American counterpart in Helsinki that:
"We agreed that on fundamental military issues, we will periodically hold dialogues by phone and, when necessary, at personal meetings that I think will be held on a systemic and routine basis."
This followed the first visit ever by an American Chair of the Chiefs of Staff in Serbia, which perhaps should be seen as the first move in a ... much needed ... "listening tour." The establishment of routine and systemic meetings between Russian and US military establishment chiefs is a very welcome development. In a related story, the Washington Post's Thom Shanker reports that US Chairman of the Joint Chiefs of Staff Adm. Mike Mullen said the NATO was considering increasing the number of military exercises in the Baltic. Adm. Mullen said it was a response to Russia's military action in Georgia. (I suspect it might also serve as a response to military exercises off the coast of Venezuela.)

4. Eric Watkins at the Oil and Gas Journal reports that Russia and Japan have signed an accord to cooperate on oil and gas development.
"The document stressed that the Japanese government promotes participation of Japanese companies in energy projects in Russia, including the establishment of gas processing and gas chemical production facilities in eastern Russia.

The two sides also hailed the start of joint exploration for oil in eastern Siberia, which they said would help to drive the East Siberia-Pacific Ocean pipeline."
Japan has been encouraging Moscow to build a pipeline from the Caspian, essentially, to the Pacific Ocean for some time. Tokyo offered $14 billion to help build the structure, but Russia seemed to have bet on China's market at that time. Chris Buckley has a related story at Reuters, that Chinese Premier Web Jiabao will visit Moscow next weeks in an attempt to jump start plans to build pipelines to deliver Russian natural gas to China. Russia has been reluctant to divert gas away from its main customer--and region with which it wants most to integrate--Europe. (It also has plans to ship LNG to the US East Coast from gas fields in the Barents Sea.)

The Wall Street Journal reports that Iran, Qatar, and Russia agreed to form a natural gas cartel yesterday in a meeting at Tehran. Together the three countries control about 60% of the world's natural gas reserves. Natural gas is relatively difficult to sell at spot, and tends to be sold on very long term contracts given the immense capital requirements for building the requisite infrastructure. Thus there is a bit of a shrug in the oil and gas world's response (pace the response in the papers, which is sure to be shrill.) That said, the Associated Press reports that the European Commission has said it will have to rethink it's energy security policy if the three countries go ahead with plans for the gas cartel. There may be some bite to this threat as some of Europe had abandoned nuclear power and is in the process of reconsidering it. (Natural gas is burned for power generation in Europe--it isn't really used as a transportation fuel.) The most notable countries reconsidering nuclear are Germany and Italy.

Though Iran has huge natural gas reserves, how it will participate in a gas cartel for the near term, at least, is a bit of a puzzle. Just now it is barely exporting to any country, and, in fact, is importing from Turkmenistan for power generation needs. As per Siamak Adibi of FACTS Global Energy, South Pars--the largest gas field in the world (shared with Qatar)--phase 6 is scheduled to come on line this winter, and phases 7-8 next year. (The field is being developed over the course of 24 phases, the completion of phase 6 is already two years late.) But the natural gas from these phases, 3.6 bscf/d's worth, is all slated to be reinjected into oil fields in order to boost the crude oil production from it. Phases 9-10 are slated for first gas this month and December, if they are not flowing at that time, Abidi fears there will be a heating crisis in Iran this winter as there will not be enough gas to meet the energy generation needs of the country.

Also today, Amie Ferris-Rotman and Vladimir Soldatkin at Reuters report that Russian First Deputy Prime Minister in charge of oil, Igor Sechin, told an industry conference that Russia was considering building a large oil reserve in order to serve as a second swing producer. It's an interesting idea guaranteed to produce headlines. But the critical item is this:
"OPEC Secretary General Abdullah al-Badri, who arrived in Moscow on Tuesday for a two-day trip, met with Russian President Dmitry Medvedev to discuss the exchange of market data."
The thing which bedevils the oil markets the most, of course, is the horrible data. Whether or not OPEC is honest even within itself, and thus likely to be with Russia, really is inconsequential if they are simply more honest with each other, and thus with Russia, than with the rest of the world.

5. China Chon at the Wall Street Journal reports on Iraqi Ministry of Finance officials' struggles to retool the 2009 budget on the back of lower oil prices. The budget was based on a $80/b assumption for oil price, and, as you know, oil is now below that. Evidently the budget already envisioned running at a deficit as the government would only have broken even had the price of oil averaged $111/b over the course of 2009. Running a deficit may be difficult for Baghdad, but one likely consequence of the fall in price is that small operators who have secured concessions from the Kurdistan Regional Government will find financing much more difficult to secure from international financial sources. If Kurdish areas become insecure as a result of conflict, as is possible in areas like the province of Diyala, the security costs might bring up the cost of production beyond what the price of oil would bear. Given that Baghdad has an interest--and believes the Kurds have violated the Constitution by selling concessions--in asserting control over all oil resources in the Kurdish regions, Baghdad may decide to incite conflicts in the north. Larger companies will be reluctant to bail out smaller entities engaged in the Kurdish regions as they will want to maintain good relations with Baghdad and thus continue to have a shot at much more lucrative potential concessions.

6. Emad Mekay at Bloomberg reports that Shokri Ghanem, chairman of Libya's National Oil Corp, told reporters a cut of 1 million barrels will not be sufficient and that "We are in agreement that the market is flooded and oversupplied." On the other hand, Felix Onuah at Reuters reports that Nigerian Oil Minister Odein Ajumogobia told reporters it was not in Nigeria's interest to cut oil production as it needed the revenues. If, as CGES has suggested, all countries but Saudi Arabia have made the cuts that their budgets can take already, then it really is up to Riyadh. Carola Hoyos reported in the Financial Times that the only primary signal the market has had to go on
are anonymous comments published this week by Al-Hayat, the Saudi-owned paper, which appear to reflect Riyadh's more conservative thinking.

The paper quoted an unnamed source expressing "doubt that demand for oil will adjust [downwards] requiring a substantial cut in production", adding that it was still uncertain whether even 500,000-1m b/d needed to be cut.
AP reports that Venezuela's budget for 2009 is assuming an oil price of $60/b and inflation of 15%/annum.
"The budget predicts next year's economic growth will be 6 per cent and inflation 15 per cent, despite the fact inflation was estimated at 36 per cent in Caracas in September."
Budget difficulties make it difficult for the major price hawks, ie Iran and Venezuela (and Iraq), to cut supply as a bloc within OPEC, because it would cut their market share, and thus net revenues given the time it will take for prices to recover. Indeed, generally the ability of price hawks in OPEC to cut independently as opposed to allowing Riyadh to act has been their perennial decision to include high oil price assumptions in their budgets.

7. Faiza Saleh Ambah and Candace Rondeaux at the Washington Post report that Saudi Arabia hosted a meeting between Taliban and Afghan officials in Mecca last month. Saudi Foreign Minister Saud al-Faisal made the revelation after a meeting with EU Foreign Policy Chief Javier Solana in Jiddah on Tuesday. The talks centered on the deteriorating situation in Afghanistan and Pakistan.
"Abdul Salam Zaeef, the former Taliban ambassador to Pakistan, attended the meeting and said there was no discussion of peace talks. Zaeef said Karzai's government missed an opportunity when it failed to engage the Taliban in talks three years ago. Since then, he said, the Taliban has grown stronger. 'Before, the Taliban had no hope that the American rule would collapse here,' he said. 'Now, they have hope.'"
The talks included Nawaz Sharif, former Prime Minister of Pakistan and head of the largest opposition bloc in the country's Parliament. Sharif is an advocate of negotiations with the Taliban.

It is critical that Sharif withdrew the support of his party--the Pakistan Muslim League (Nawaz)--for President Zadari because Zadari refuses to reinstate former Chief Justice Chaudhry. The summary dismissal of Chaudhry was the key rallying point in the lawyers' revolt in that country, which is credited with the fall of Musharraf. I wrote an analysis of the potential benefits of supporting the lawyer revolt, and the further development of the rule of law therefore, in Pakistan previously, should you be curious. It is my view that it is a disaster for the US if their positions are conflated with the political forces in Islamabad which flout the rule of law, especially given the obvious potency of both the lawyer revolt there and sympathy for tribal sentiment in the north.

8. Emily Wax of the Washington Post reports that the trade route connecting Jammu-Kashmir with Pakistan, and thus to the most convenient port city of Kashmir, was opened after 61 years of being shut. It is only open 2 days a week and just 21 products are allowed to be transported via the route, but surely it is a step in the right direction. Especially after the commissioning of the dam in Jammu-Kashmir earlier this month has exacerbated the fuel crisis in Pakistan.

9. Mongolia Web News has the story that India is looking to source uranium from Mongolia.
"Currently, India’s nuclear power plants are only running at half their capacity due to a shortage of uranium-based fuel."
10. Re: jboss's suggestion yesterday on Follow the Money, Winnie Lee at Platts reports that Chinese oil companies PetroChina and CNPC are interested in purchasing foreign oil companies hit by the financial crisis. Angolan assets owned by Marathon were mentioned.

11. Peter Fritsch at the Wall Street Journal reports that new oil from Africa may be too expensive to be produced at current prices. The article mentions that Angolan production has gone down, and sources the country's oil minister as stating that this was a result of an accident at an offshore block. Maybe, but we knew as early as September 16th that this was going to take place--I suspect compliance with the OPEC directive at the September 9th meeting. But the article cites many other issues--exogenous from the technical issues of the geology--most especially security, which has been an endemic issue throughout the continent. Some new oil is inland, which requires the construction of pipelines, which are especially expensive to build and maintain ... providing for their security is notoriously difficult (see all the speculation regarding the BTC recently.) Also, in the absence of a strong national state structure, oil wealth tends to exacerbate difficulties in securing the King's Peace further. Fritsch mentions a case in Uganda where the E&P company, UK's Tullow Oil, analysis has the project--which would require a 750 mile pipeline--profitable only at $80/b or more. (h/t

12. Chris Giles and Neil Dennis at the Financial Times report that the Governor of the Bank of England, Mervyn King, said that the UK was entering a recession likely to be prolonged. The rate setting committee of the Bank of England also announced it had voted unanimously to reduce the benchmark lending rate by 50 basis points to 4.5%. Mr. King said, “The age of innocence – when banks lent to each other unsecured for three months or longer at only a small premium to expected policy rates – will not quickly, if ever, return.”

13. Lisa Baertlein at Reuters reports that an analysis released by Wal-Mart shows that purchases are spiking around the time shoppers receive their paychecks. This appears to be the case even for baby-formula, which suggests that increasing numbers of people are finding it hard to pay for food. Eduardo Castro-Wright, Wal-Mart's CEO, said that the company's most recent poll of shoppers found that personal financial security was the number one issue for the vast majority--80%. (h/t Yves Smith, Naked Capitalism)

14. Meena Thiruvengadam at Real Time Economics reports that the Federal Reserve will increase the interest rate it will pay on funds deposited at the bank in excess of the deposit insurance requirement from 0.75% below the Federal Funds Rate to 0.35% below. The passage of the emergency financial stabilization bill allowed the Fed to pay interest on excess deposits immediately. Apparently this was ahead of schedule, as the Fed was slated to begin doing so come 2011. The linked post includes the full statement from the Fed. Neil Irwin at the Washington Post reports that yesterday the Fed established a program which will make up to $540 billion available to buy assets from money market funds so as to prevent the funds from experiencing any cash crunches and thus being short squeezed.

15. Eric Dash at the New York Times reports that Wachovia reported a $23.9 billion loss today.

16. The EIA reported that stocks of crude oil were up 3.2 million barrels, somewhat above the historical average. Stocks of gasoline were up 2.7 million barrels and distillate were up 2.2 million barrels, both now at about the bottom of the historical average. Analysts expected a 2.9 million barrel build in crude stocks, according to Platts' survey Tuesday. Taken in isolation, this would put downward pressure on prices.