Daily Sources 10/8

1. Nancy Trejos at the Washington Post reports that $2 trillion has been wiped out of retirement accounts in the US.

According to a survey released yesterday by AARP, 20 percent of baby boomers stopped contributing to their retirement plans in the past year because they have had trouble making ends meet.

This news makes me think I can predict with nearly complete confidence that Barack Obama will be the next President of the United States. In a previous blog I provided an analysis of how his election would affect America's geopolitical situation, but could not have expected that he would have been elected to the position on top of such a tremendous mess. Figuring out just how this crisis will play out geopolitically generally and in terms of specific nations is no small puzzle. But I do think that Obama would return some confidence to the markets worldwide, and as such, may do something to alleviate the situation we have found ourselves in. There was some good news today, AP reported that pending home sales rose 7.4% from July to August as per the National Association of Realtors. The index of pending sales reading is at the highest seen since July 2007.

2. Naked Capitalism has a post on Arvind Subramanian's proposal for a bail out of the American financial system by China published in the Financial Times yesterday. He suggests that the People's Bank of China could lend the US $500 billion (of its $1.8 billion cash reserves) on the condition that the money only be used to recapitalize the banks (as opposed to providing liquidity by purchasing toxic assets, as our current emergency financial stabilization fund is structured to do.) Yves Smith thinks the tongue in cheek plan makes a lot of sense. In today's Washington Post, Subramanian and C. Fred Bergsten have an op ed arguing that a globalized crisis "requires a globalized response." Well, just in time for ...

3. Carter Dougherty and Edmund L. Andrews at the New York Times report that the Fed, the European Central Bank, the Bank of England, and the central banks of Canada and Sweden all coordinated a cut in interest rates of a half percent. Switzerland also cut its benchmark rate and Japan publicly supported the move, though it left its benchmark rate of 0.5% (if I remember correctly.) (The yen is rapidly approaching the landmark 100 per dollar rate (interbank).) China also reduced its benchmark lending rate by 0.27%.

4. Nigel Morris, David Prosser and Sean Farrel at the Independent report that Downing Street has arranged a £50 billion rescue fund for the British banking system.

5. Denis Maternovsky at Bloomberg has the story that Russia, Indonesia and Ukraine shut down their stock markets today in the face of massive sell offs. Russia's RTS bourse will be shut indefinitely. MICEX will be closed until Friday. Jakarta's exchange will shut indefinitely, or so I have been led to believe.

Hungary headed for its worst daily decline since 1999 as the Budapest Stock Exchange fell 6.3 percent. Latvia's OMX Riga Index lost 6.5 percent to its lowest level since January 2004. India's Sensex index slid 2.6 percent and China's CSI 300 Index fell 3.8 percent, its third day of declines. South Korea's Kospi Index lost 5.8 percent.

6. From a panel discussion at the Council on Foreign Relations featuring Nouriel Roubini, Brad Setser, Benn Steil and Mort Zuckerman on September 25:

ROUBINI: So what you have to ask yourself is whether the sharp falling U.S. private consumption demand -- is there enough domestic private demand in the rest of the world in emerging markets that can grow to suspend global economic growth, and my answer is no because, you know, in U.S. the total consumption's about $9.5 trillion. Take the entire consumption of 1 billion Chinese, it's about $1 trillion. Take all of the consumption of almost 1 billion Indians, it's $600 billion. So the sum of the consumption of 2 billion Chindians is about one sixth of the U.S. consumption, right?

So if there's a shortfall U.S. consumption, can their consumption go up by 500 percent in order to compensate for the falling U.S.? The answer is no. The question in this country is whether we're relying especially China some parts of Asia some parts of Latin America on expert to the United States is the main engine of goods, and the rest of the demand is essentially production of investment goods that produce more exportables is the question of whether their policy stimulus in terms of monetary and fiscal policy can be aggressive enough to avoid a hard landing.

And for China -- by the way, a hard landing means a growth that's gone from 11 (percent) to 6 percent because China needs a growth rates of 10 percent in order to move about 15 million--(inaudible)--investment sector every year to maintain social and political stability. And my concern is that while now they're going to have a fiscal stimulus, they cannot so aggressively flow all of the infrastructural spending they want to do over the next five, 10 years over a year or two. And if that's the case actually, their policy response may not be aggressive enough to control the fall out coming from the collapse of demand in the United States and the recession and the rest of the advanced economy. And if China goes into essentially a hard landing, then the two main engines of global growth, that were U.S. and China, one on the consumption, the other one on the production are going to have a recession or a near recession, then you have real trouble for the global economy.

SETSER: If I could just make one small amendment to what Nouriel said which is that over the last two years, Europe has been a bigger engine of demand growth for most of them, the emerging world than the United States because our net exports have been contributing to growth and so for much of the emerging world, the economic trajectory of Europe over the next 12 months will matter as much if not more than that of the United States, which is a significant change from the world of, say, five years ago.

STEIL: And in terms of the so-called--very briefly, in terms of the so-called BRIC countries--Brazil, Russia, India, and China--I'm particularly concerned about Brazil and Russia. The reason is that we really haven't seen fundamental reforms in those economies, their boom has been very much based on the rise in commodities prices. If global demand really does take a deep hit, I think Brazil and Russia go down with it.

I'm pretty convinced by these remarks that we are likely to see a significant slowdown in China and India. Continuing in that vein, Steve Mufson at PostGlobal reports that Chinese gasoline demand fell 5.6% (470 kb/d) in August from July and 2.7% (or 200 kb/d) in July from June. Chinese gasoline prices averaged about $3.62/gallon in September, as compared to the US average of $3.72/gallon. Diesel prices are still 21% lower in China than the US (and China "dieselized"), but clearly these prices can be expected to put a damper on Chinese demand. Paul Cavey has an op ed in today's Wall Street Journal Asia which states that China's domestic real estate market has contracted by 50% over the last few months. Cavey, head of China economics at Macquarie Capital Securities, argues that domestic real estate and exports are the two central drivers of Chinese economic growth.

7. Isambard Wilkinson at the Telegraph reports that Pakistan has enough reserves to purchase about 30 days worth of food and fuel, after which the country faces bankruptcy.

Pakistani President Zardari told the Wall Street Journal that Pakistan needed a bail out worth $100 billion from the international community.

Evidently talks with Riyadh to defer payments on the daily delivery of 100,000 barrels of oil have not born any fruit at this stage. Islamabad has been unable to secure loans at favorable terms from friendly countries. The rupee has lost 21% of its value so far this year and Standard & Poor's rates Pakistani debt at CCC+. (Well, whatever else you think of governments, at least they are transparent enough that you can rate their debt with some accuracy!) The problem here is that Zadari is known in Pakistan as "Mr. 10%." The government of Musharraf fell, from what I can tell, in great part as a result of the "lawyers revolt" there, caused by the removal by Musharraf of Supreme Court Justice Chaudhry. Even though the lawyers' movement brought down the general, Zadari has refused so far to reinstate the Justice--who presided over the corruption trials brought against the President. It might be difficult to go around the world, hat in hand, asking for $100 billion--no matter how genuine Pakistan's need is--if the general response is going to be how much of that money is actually going to be "... um ... and so what's your cut?" I know I'd be pretty reluctant. But then we have to consider that Pakistan is a nuclear power where food and fuel shortages could create serious unrest and even potentially a total state failure. Is the US about to be subjected to nuclear blackmail by their key ally in the war against terror?

8. Kelly Zang at Xinhua reports that Russia did not include the Altai gas pipeline project in its recently published blueprint for gas sector development to 2030. The Altai pipeline would have shipped 30 billion cubic meters of natural gas from Western Siberia to China. China was hoping for first shipments in 2011. There are plenty of customers vying for Russian gas. In the east, Tokyo offered a $14 billion subsidy for a pipeline to the Pacific. (Japan is looking at cuts in supply from traditional suppliers Indonesia and Malaysia.) Europe also is likely to want more gas going forward. It would be significant if Moscow decided not to integrate their energy complex too tightly to Beijing, choosing a line to Japan or more to Europe.

9. Henry Kissinger and George Schultz have an important and thoughtful op-ed in the Washington Post today which argues, much as I have in my own little way, that:

We believe that the fundamental interests of the United States, Europe and Russia are more aligned today -- or can be made so -- even in the wake of the Georgian crisis, than at any point in recent history. We must not waste that opportunity.

Though perhaps it was necessary to do given military exercises with Venezuela--and though I believe Secretary Gates is a pragmatic realist--Peter Finn in the Washington Post reports that he re-emphasized American support for Kosovan independence in a visit to the province today.

10. Peter Finn at the Washington Post reports that Secretary Gates in Macedonia asked Europe for 10 - 12,000 more troops for action in Afghanistan.

11. Platts reports that the Iraqi oil minister Hussain Al-Shahristani told reporters in Turkey that OPEC was ready to convene an emergency meeting should oil fall much below $90/b. Their next meeting is currently scheduled for December 17 in Oran, Algeria.

12. Nick Tattersall and Thomas Grove at Reuters report that the Nigerian Oil Minister Odein Ajumogobia has expressed concern about the drop in oil, suggesting that OPEC should consider production cuts.

13. Sabrina Tavernise at the Washington Post reported that the Turkish Parliament voted by 497 to 18 to reauthorize projection of force by the Turkish military against Kurdish separatists in Iraq.

14. Dan Scotto told Energytechstocks.com that,

"At best, the Wall Street meltdown has probably set back the timetable for constructing a new generation of nuclear power plants in the U.S. by three years."

Nuclear is difficult to provide security for, but it does burn clean.

15. Dorothy Kosich at Mineweb reports that the US emergency financial stability fund bill (HR 1424) included a fair amount of concessions to the coal lobby.

H.R. 1424 and the short-term budget bill Congress also contained the following provisions supported by National Mining Association (NMA):
- Extension of the mine safety equipment and training tax credit;
- Additional tax credits for advanced coal electricity projects and coal gasification, including gasification in Coal-to-Liquid (CTL) production;
- New tax credits for carbon capture and storage or reuse in enhanced oil recovery
- An extension of the alternative fuels credit applicable to CTL;
- Funding to support the Department of Defense's ongoing CTL testing.

Coal is probably part of the solution to America's energy security, but why such provisions needed to be added as pork to an emergency financial stabilization bill is beyond me. It should be added that of all the fossil fuels, coal is by far the dirtiest to extract and to burn. Coal-to-liquid processes have potential, but just now the climate costs of CTL production are prohibitive. We have Sens. Max Baucus (D-Montana), Mitch McConnell (R-Kentucky), and Jay Rockefeller (D-West Virginia) and Reps. Roy Blunt (R-Missouri--the Minority Whip) and Artur David (D-Alabama) to thank for this particular piece of pork, as per the NMA.

16. Frank Ahrens at the Washington Post reports that the NY Fed will borrow $37.8 billion in investment grade securities from AIG in return for cash. This comes on top of reports that following the government's $85 billion bailout of the insurance company top execs went on a week-long stay at a California spa resort. The new CEO defended this action, saying it was de riguer in the insurance industry. Yeah, maybe, but it ain't de riguer in the government industry, which is what AIG is nowadays.

17. Norval Scott in yesterday's Globe and Mail has a story on how the credit crisis is killing plans for new oil sands upgrading plants in Canada. The story says that an upgrader--essentially a refinery that upgrades the tar in the sands into synthetic crude which can then be refined by another refinery into oil products--now requires $90/b oil to be profitable. Just three years ago I heard prices ranging from $40-$60/b. Given the reader comments, apparently much of the price increase is coming from a scarcity of skilled labor as much as the cost of money.

18. Claire Leow and Yoga Rusmana at Bloomberg reported that government estimates in Jakarta are that palm oil exports will likely drop by as much as 1.5 million tonnes next year due to the biodiesel mandate which came into force late September. The regulations stipulate that all transportation diesel sold in the country must be 1% biodiesel. The country is expected to produce more than 19 million tonnes of palm oil next year and as much as 20 million tonnes in 2010.

Indonesia's biofuel industry can produce between 1.3 million [tonnes] to 1.5 million [tonnes] annually. Capacity may double to 3 million [tonnes] by 2010.

19. The EIA's Week in Petroleum reported that crude stocks built by 8.1 million barrels last week against analyst expectations (as per the Platts survey) of a 1 million barrel draw. (Crude stocks are now a bit above the historical average.) Gasoline stocks increased by 7.2 million barrels versus the 2 million barrel build expected on Wall Street. Stocks are still well below the historical average, but that is a big build against the lowest levels seen since 1967. Distillates saw a 0.5 million barrel draw down against the 1 million barrel increase expected by most Wall Street analysts. Some of this is continuing fall out from the refinery closures caused by Hurricanes Ike and Gustav. I think, even given the shortages, that it is a signal of more demand destruction, and thus, taken in isolation, lower crude prices.