Monday, December 22, 2008

Daily Sources 12/22

1. Robert Lindsay at the London Times reports that the Ernst & Young ITEM Club expects China's economy to be the world's largest within a decade, due to the credit crunch.
"Brazil, Russia, India and China, the “Bric” nations, will account for 40 per cent of global economic growth between next year and 2020, according to ITEM. Of this, China will account for a quarter."
I cannot help but be just a tad snarky about the credibility of accounting corporations these days, as in, oh, an accounting company said so, its account thus must have a likelihood of coming to pass of, oh, say, precisely zero. How's that for a number?

2. Ambrose Evans-Pritchard at the UK Telegraph reports that a variety of countries have begun to raise tariffs in response to the financial crisis. Russia has imposed 30% import tariffs on cars, 15% on agircultural equipment and 95% on poultry imports.
"'It is possible during the financial crisis to support domestic producers by raising customs duties,' said Premier Vladimir Putin. ... India and Vietnam have imposed steel tariffs. Indonesia is resorting to special 'licenses' to choke off imports."
In the meantime, China has moved towards subsidizing its steel industry and appears to be maintaining its currency peg to the dollar, as opposed to allowing the renminbi to appreciate. Anthony Faiola and Glenn Kessler at the Washington Post have a similar story--if less alarmist--which notes that Argentina and Brazil are seeking to raise tariffs on a wide variety of products, and that France is providing its sovereign wealth fund with additional monies to prevent the foreign takeover of "strategic" industries. Faiola and Kessler note that on Friday the US announced it was going to take China to task within the WTO framework for providing illegal subsidies to its export sector. Robert Samuelson in the Washington Post notes that much of the fiscal stimulus coordination between the major industrialized and developing economies is mostly for the press releases.
"Countries agree on broad principles but then go their separate ways. Germany's 'stimulus' program, for instance, is much smaller than the one apparently planned by the Obama administration. Countries renounce protectionism, but there are signs that China -- with a massive trade surplus -- might relax its policy of currency appreciation. By making the yuan cheaper, China would give its exports an added price advantage. If the United States inserted "Buy American" provisions in any stimulus legislation, it, too, would be embracing economic nationalism."
Yves Smith provides her own analysis, which more or less concludes that many nations have begun instituting beggar thy neighbor policies. All four pieces are worth reading in full.

3. Li Yanping and Kevin Hamlin at Bloomberg report that China has cut its benchmark interest rate by 27 basis points (0.27%) to 5.31%. This is the fifth time Beijing has cut its benchmark interest rate in three months.

4. Martin Fackler at the New York Times reports that Toyota announced that it expects an operating loss of ¥150 billion (~ $1.7 billion) for the fiscal year ending March 31. This is the first operating loss Toyota would experience in its 70 year history.

5. Yuriy Humber and Torrey Clark at Bloomberg report that many of the so-called "oligarchs" in Russia are approaching the government for bridge loans to weather the financial crisis.
"More than 100 business leaders are vying for loans from Putin and the administration of President Dmitry Medvedev because Russian companies have about $110 billion of foreign obligations due next year, according to the central bank, double the total owed in Brazil, India and China."
The government is taking voting shares and requiring representatives on corporate boards in return for capitalization. Many of the corporations will therefore revert to state control. Well worth reading in its entirety.

6. Lucian Kim at Bloomberg reports that Russian Prime Minister Vladimir Putin will personally open the next meeting of the Gas Exporting Countries Forum (GECF) in Moscow tomorrow. Many worry about the GCEF as a new OPEC, but there are too many differences between natural gas and oil business realities for GCEF to really have the same kind of influence on the market as OPEC does. (I might write something explaining this further later.) In any case, the members of GCEF include Algeria, Bolivia, Brunei, Egypt, Indonesia (which may soon cease to be a natural gas exporter), Iran, Libya, Malaysia, Nigeria, Qatar, Russia, Trinidad & Tobago, the UAE, and Venezuela. Norway and Equatorial Guinea both have observer status with the organization. It's website can be found here.

7. Sam Fletcher at the Oil & Gas Journal reports that in a report for the London Energy Meeting, Cambridge Energy Research Associates wrote that the global oil market is being hit hard by a global "recession shock."
"At the start of this year, some analysts estimated global demand growth as high as 2.1 million b/d. CERA's current global demand estimate for 2008 is a 300,000 b/d decline and for 2009, an additional 660,000 b/d drop. 'The last time demand dropped this much was in the deep recession of 1981,' it said."
The report also appears to claim that the oil markets have been in the grip of unprecedented price volatility in 2008, which is odd given my recent analysis of front month price volatility which showed, for example, more instances of 5% price moves in front month oil in 1986 than I had seen so far in 2008. (see Spot Life CL Jan 09 pt 2, which was posted on 12/11.) I'll take a look at the data again, but I don't think my last account is much off. Mathew Carr at Bloomberg writes that the CERA report stresses that more data transparency would do much to smooth the price volatility we see in the oil markets.
"I think it would be hard to find anyone who would disagree with that. A US Securities Exchange Commission redefinition of reserves may prove to be a model for the world, [Daniel] Yergin said. 'The definition of reserves for financial reporting purposes needs to be updated.'"
I think it would be hard to find anyone who would openly disagree with that, but, it was just recently that Russia was reported to have delayed the introduction of more transparent oil reserves data accounting methods. (see Daily Sources 12/16 #1) The reasons that producing countries have an interest in opacity need to be better explored, clearly, as they do not appear to be especially anxious to provide it. Just saying following Western accounting "best practices" does not have much persuasive power these days given the obvious lack of credibility the Western accounting powerhouses have in pretty much every market sector they happen to cover.

8. Richard Meade at Lloyd's List writes that increased transparency is currently being considered by the shipping industry as a way to combat chronic woes.

9. John Kingston at the Platts blog "The Barrel," notes
"In its monthly report this week, OPEC said OECD stocks currently stand at 56.3 days of forward cover, about four days more than the average for the past five years. But given the steepness of virtually all forward curves for crude and major products, and given antecdotal reports from individual markets, it's tough to find anybody who really believes that number. Almost everyone believes it is much higher. It's that number that will keep oil depressed for the foreseeable future, unless just about every barrel of OPEC's cuts takes hold."
Steve Gelsi at Marketwatch has the related story that oil stored at Cushing, Oklahoma, is approaching the record level of 28 million barrels set earlier this year. (h/t reader trexbean) Given the huge contango, it seems that folks in the market are having a hard time financing storage deals but that all available storage is about to be gone even with such difficulties.

10. The AFP reports that on Sunday it interviewed a PKK spokesman and, in it, he openly worried about Ankara's relationship with the Kurdish Regional Government in Iraq.
"'Since they failed in their military campaign in the border region over the past year, they have come up with the policy of trying to divide the Kurds and provoke infighting among them,' Kamal Kheyri told AFP by telephone."
(h/t informed comment)

11. The BBC reported that the Iraqi Parliament on Saturday rejected the draft law which would have allowed coalition forces not covered by the Status of Forces Agreement, ie everyone but the US, to remain in Iraq beyond 2008. The Parliament in effect called for individual agreements with each coalition member. The al-Maliki cabinet has until the new year to craft a new bill and get it through Parliament or there will be no legal mandate for the British presence there. Somewhat ironic given the English media's response to the blanket legislation, considering the fact that the UK did not have an individual agreement a "national humiliation." (see Daily Sources 12/15 #11)

12. Ernesto LondoƱo at the Washington Post reports that the al-Maliki government is threatening to expel from Iraq members of the anti-Iranian opposition fighters--or terrorists, depending on your point of view--group the MEK. There are about 3,500 Iranian members of the MEK residing in a refugee camp, more or less, in northern Iraq. The US State Department designated them a terrorist group some time ago. Danny Postel provides some links to neoconservative support for the MEK over the years, including Daniel Pipes, David Horowitz, Max Boot, and Patrick Clawson. If I remember correctly, Pipes was involved in a controversy a few years ago when he was to speak at an MEK rally to be held openly in Washington, DC.

13. Thomas Erdbrink at the Washington Post reports that on Sunday police in Tehran shut down the office of Shirin Ebadi's human rights organization. The article is well worth reading in full.
"In a telephone interview, Ebadi called the closure of her organization's office 'illegal' and "unacceptable." She vowed to reopen the center, saying that 'the police actions are against the law.'"
The fact that the government is going out of its way to impede the operation of Ebadi is important because it shows that Tehran regards this human rights lawyer as a significant threat to the credibility of the regime. It is just as important that the reason given is that Ebadi's organization did not possess the appropriate license for operations in Tehran, that is, the government is using "the letter of the law" to oppose, in Ebadi's view, the spirit of it. I go into great length about the unique vulnerability of the Islamic regimes to a disregard for rule of law in a piece I wrote in April, Law and Revolution in Iran.

14. Stephanie McCrummen has an interesting account of conditions in Somalia. As the situation deteriorates, many apparently feel they have no choice but to join one militant group or another. In this case, mostly al-Shabaab. Worth reading.

15. Nicholas Winning at Real Time Economics reports that the European Union’s Eurostat statistics agency released figures today showing that in October new industrial orders in the eurozone fell 4.7% on the month and 15.1% on the year. This is the worst decline seen since records were first kept in 1997. Also,
"The Belgian National Bank [released the results of a survey today with] its main confidence index [plunging] to -31.3 from -23.7 in November. The drop was most noticeable in the manufacturing sector, where confidence fell to -36.5 from -27.1."
16. Bloomberg reports that the Irish government announced a plan to recapitalize its three largest domestic banks by purchasing preferred shares and underwriting the issue of further shares in the companies. The government will take a controlling stake in Anglo Irish Bank Corporation with preferred shares representing 75% of the corporation's voting rights in return for an investment of €1.5 billion (~ $2.087 billion). Dublin will pay €2 billion (~ $2.783 billion) each for preferred shares with voting rights in Allied Irish Banks and Bank of Ireland. "Irish financial shares have fallen on average 92% this year, led by Anglo Irish, which has plunged 97%." You'll recall that Ireland began a sort of race toward upping state insurance of domestic financial institutions, thus putting their European financial competition at a disadvantage, in late September early October, presaging the disunity in the European fiscal response to the financial crisis seen of late. (see Daily Sources 10/6 #1)

17. David Smith at the London Times reports that revised third quarter GDP figures for the UK will be released this week showing a contraction of at least 0.5%.
"The Centre for Economics and Business Research, a consultancy, predicts that Britain will contract by 3% in 2009 and a further 0.7% in 2010, implying a long, deep recession.

Capital Economics, another consultancy, now predicts a fall of 2.5% in GDP next year, with a further drop of 1% during 2010.

This compares with the Treasury’s prediction of a decline in GDP of between 0.7% and 1.25% next year, followed by a recovery in 2010, when it expects to see the economy grow by between 1.5% and 2%."
18. George Soros, writing for the interesting non-profit organization--the Project Syndicate--makes the following observation:
"The US consumer can no longer serve as the motor of the world economy. To avoid a global depression other countries must also stimulate their domestic economies. But periphery countries without large export surpluses are not in a position to employ countercyclical policies. It is up to the IMF to find ways to finance countercyclical fiscal deficits. This could be done partly by enlisting sovereign wealth funds and partly by issuing Special Drawing Rights so that rich countries that can finance their own fiscal deficits could cede to poorer countries that cannot."
He also has a sort of neo-Kantian notion of the markets, saying that they do not honestly reflect the conditions of the organizations in which they invest. Worth reading.

19. Matthew Brown at Bloomberg reports that the TED spread--the difference between what banks and the US government pay to borrow money--has dropped to below 150 basis points (1.5%) for the first time since the demise of Lehman Brothers. The indicator suggests that interbank lending has not increased as a result of the financing efforts of various governments.

20. Fareed Zakaria has an opinion piece in today's Washington Post which says, in tones laden with hysteria, that, for Obama to have done his job well, he will have to "do nothing less than rescue capitalism." I tend to like Zakaria's analyses, which are generally extremely well informed, nuanced, and sly. This piece, however, suggests that Zakaria should take a break from the press and its sensationalist ways. The troubles we face are serious, indeed, and require measured un-sensational, in short serious, analysis. There is no need to deify the moment any further. You can almost hear the ghost of Heidegger chuckling in the wings.

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