Daily Sources 10/2

1. The Senate also yesterday passed the United States-India Nuclear Cooperation Approval and Nonproliferation Enhancement Act (H.R. 7081), which follows the news yesterday of France's nuclear agreement with India. It seems like the American Indian strategy, which was under a lot of pressure in recent months from other members of the Nuclear Suppliers Group and from domestic politics in New Delhi, has born fruit. The vote passed by 86-13. The bill also encourages India to sign the additional protocol to the non proliferation treaty:

"Congress urges the Government of India to sign and adhere to an Additional Protocol with the International Atomic Energy Agency (IAEA), consistent with IAEA principles, practices, and policies, at the earliest possible date."

2. John Bolton and Nicholas Eberstadt, neoconservative fellows at the American Enterprise Institute, have an op ed in the Wall Street Journal arguing that we should welcome instability in North Korea, because a united Korea would be an American ally. Yes, you read that right, the Wall Street Journal is giving space to people who are actually arguing that we should consider encouraging instability in North Korea. Difficult to believe.

3. Maureen Fan at the Washington Post reports that China will retain the restrictions on car use in Beijing that the government put in place for the Olympics. Beginning October 11, motorists will be prohibited from driving one day a week in the capital as well. There are 3.5 million cars in Beijing and about 1,000 are added to the fleet every day. This should make a significant impact on oil demand for the country.

4. Blaine Harden at the Washington Post gives no numbers, but reports that Japanese car sales to the US have "fallen off a cliff." "North American car sales ... account for more than half of the operating profits of Toyota, Honda and Nissan ...."

5. Carl Hulse and David M. Herszenhorn at the New York Times report that the Senate passed the revamped emergency financial stabilization bill last night at 9:20pm or so, EST. The vote was 74-25 and the bill has grown from the original three page proposal to 451 pages, which I doubt I will read. However, there are hundreds of provisions in the Senate proposal which are just pork, horse-trading, evidently, to get the bill passed. But, again, I have to wonder whether the House, given the intense scrutiny the bill is receiving in the press, will be willing to pass such a larded bill?

6. Alan Bjerga at Bloomberg reported yesterday that the US Agricultural Secretary, Ed Schafer, said that the credit crisis might affect the 2009 harvest. His argument makes sense, farmers may be unable to get credit in order to purchase the seed, etc., required to plant for the 2009 harvest. A major distinction between this crisis and the crisis of 1929, included in the linked article, is that farmers before the Great Depression were unable to sell their product at a profit and thus unable to repay their loans due to low food prices. This time it may be that farmers will be unable to get the credit needed to plant--despite an extremely high price environment and the reasonable expectation of a fair return.

7. Free Exchange at The Economist reports that Warren Buffett has agreed to make a $3 to $6 billion investment in GE in order to shore up confidence in the behemoth.

For an investment of $8 billion (between Goldman and GE), Mr Buffett is guaranteed $800 million in annual dividend payments, in addition to his equity stakes. Not bad. Not bad at all.

It beginning to look like Buffett will own all the cards in this economy soon.

8. John Kingston at Platt's the Barrel had a very interesting post yesterday giving three consequences of the credit crunch on the oil markets. 1) Oil traders are seeing their loan requests receive 10% interest rate offers. 2) In the southeast, where the country is facing gasoline shortages, petroleum marketers (usually small and independent of the majors) are seeing their credit lines tighten, which means that we hypothetically could see some retailers not even be able to purchase the gasoline to relieve the shortage, regardless of the logistical complications. 3) Volume in NYMEX's Clearport has more than doubled over the course of the last two weeks in September, as the clearing facility is backed by a guarantee which regular over-the-counter trades do not feature. In terms of the shortage in the Southeast, Tina Seeley at Bloomberg reported today that the US has approved the release of 900,000 barrels of crude to two unnamed refiners. The refiners will be named if they go ahead with the deal. There are stories of police officers being forced to carpool to work in that part of the country. We may see the south east become blue states if this situation continues.

9. Patrick Hosking at the London Times reports that France floated the proposal for a €300 ($414.4) billion pan European fund to stabilize banks across the Union. Evidently the plan was dead on arrival, though it's hard to tell definitively, and met with "skepticism" in London and "hostility" in Berlin. German Chancellor Angela Merkel's response was that Germany

could not and would not issue a blank cheque for all banks, “regardless of whether they behave in a responsible manner or not”.

People are now arguing that the situation for the European banks is even worse than they are for those in the US. Ambrose Evans-Pritchard at The Telegraph writes that European regulators allowed more creative accounting than was the case in America. He goes on to argue that the monetary union was fragile to begin with, essentially a means of setting a pace for political union, and that it might fall apart under the pressure of this banking crisis. (I have noted in the past that the Telegraph has a strong alarmist / yellow press streak, so salt is recommended.) A European emergency summit is tentatively scheduled for Saturday to include Italian Prime Minister Silvio Berlusconi, Angela Merkel, British Prime Minister Gordon Brown, and hosted by French President Nicolas Sarkozy. (h/t naked capitalism for both these stories) Vox has an open letter by economists to European leaders calling for a "systemic response" to a "systemic crisis." Political pressure is clearly mounting on both sides of the Atlantic. Carter Dougherty at the New York Times reports that Jean-Claude Trichet, president of the European Central Bank, is hinting at a rate cut. The Economist's View has analysis from Tim Duy which argues that a rate cut is also imminent from the Fed. It points out that "arch-hawk" Philadelphia Fed President Charles Plosser appears to be considering a rate cut, which likely means the rest of the Federal Open Market Committee already thinks one is necessary.

10. Norma Cohen at the Financial Times reports that UK housing prices fell 1.7% in September, which means that in 2008 prices have cumulatively fallen by 12.4%. It is the largest annual drop seen since housing prices were first actively watched and recorded in 1991. Evidently in 2007, fully 40% of home buyers were financing more than 100% of the price of the house purchased!

11. The Wall Street Journal Asia editorial board has a piece today criticizing the EU's evident determination to extend anti-dumping duties on shoes manufactured in Asia. They, however, are encouraged that some in Europe are beginning to think the tariffs are counterproductive. Perhaps, but it may prove difficult in a difficult economic environment to bring down any tariff regime. I would add that most economists argue that protectionist legislation exacerbated the 1929 financial crisis and created the Great Depression.

12. Ellen Berry at the New York Times reports that European monitors have entered the buffer zone in Georgia bordering South Ossetia. Russian President Medvedev has promised that troop withdrawals will take place "on time" in a news conference held with Spanish Prime Minister José Luis Rodríguez Zapatero in St. Petersburg. Medvedev also said:

“Today, we don’t have the kinds of ideological differences which could spark off a cold war or, for that matter, any other war ... .”

and remarked that cooperation was just as important for NATO as it is for Russia.

13. Angela Macdonald-Smith at Bloomberg reports that analysts at Merrill-Lynch have released a study which includes a low-growth scenario which would have oil bottom at $50/b next year. The scenario takes place in the event of a world-wide recession, which the analysts think is unlikely. I'm beginning to think it is likely, but doubt oil would go down that far even in the event of a global recession.

14. The Bahrain Tribune has the story that the although the UAE clearly has the money to pay, international banks may be unwilling to renew $20 billion in loans they have made to the government and businesses of Dubai. The crisis has already reduced enthusiasm for project finance in the region.

15. Jeffrey Fleishman and Saif Hameed at the Los Angeles Times report that operational control over Sunni fighters in Iraq is being transferred from the US to the government of Prime Minister Nouri Maliki. The US paid Sunni fighters about $300/month and that is what the Iraqi government is expected to pay. The Sunni fighters are considerably worried about their chances under the Shia dominated government--it has publicly questioned their loyalty and whether it can afford their services.