Daily Sources 12/8

1. Max Boot, in the Wall Street Journal, echoes Robert Kaplan's recent call in the Washington Post for placing regions that certain states are having a difficult time governing into international receivership. Boot asks, "The question is: What if anything can outside powers do to bring the rule of law to these troubled lands?" He says not much, although he points, with approbation, to the example of 19th century imperialism. I would point out that much of the problem is that US policy has been to support those who will execute policies that we believe is in our interests, even if to do so the supported actors will violate domestic law and custom. In the case of Pakistan, for example, the US is arguably harvesting the fruit of supporting a dictator--Musharraf--who's response to judiciary challenges to his rule was simply to disband the judiciary. In Somalia, the US found the Islamic Courts Union unpalatable because we felt they were the ideological fellow-travelers of al-Qaeda and the Taleban, and so the US supported an external attempt to assert sovereignty in Somalia by force--which was unsurprisingly regarded as illegitimate by the local population. The problem--if one of three Islamist groups gain control in Somalia soon after the Ethiopian withdrawal as seems likely--is that some expect the Islamists groups to support ideological international terrorism, not that the groups in control would be likely to flout rule of law. Indeed, they would be the first to have imposed it in two years or so.

Perhaps it is time to explore pursuing a policy which supports--either actively or via polite indifference--governments which seek to create rules-based societies, even if some of those rules are distasteful to us. Boot says the best alternative to Kagan's suggestion is ranged attacks via warship or plane. Note well the implication that we have no choice but to wage war (aka politics by other means.) Perhaps it is time to support political solutions to these situations instead. Why not seek out the reasons why elements in any given society which are supported by us cannot rule by law? Once we have done that, it might become plain who can and who thus ought to be made aware of our interests, instead.

2. Rama Lakshmi at the Washington Post reports that the Congress Party won control of three states in local elections. Observers were surprised that the BJP did not do better given their critique of Congress as being lackadaisical in their response to terrorism. I thought so as well, but in retrospect should have realized that an attack on a democratic country almost always at first has the result of increasing the support for the ruling party.

3. Fareed Zakaria at Newsweek has a reasonable op ed pointing out that India's response to the Mumbai attacks has been very restrained, but that that restraint will likely need rewarding if it is to continue. Zakaria argues that Pakistani neighbors China, India, and Afghanistan all are increasingly alarmed by Islamic extremism. He should probably also mention Iran, the other neighbor, which is also concerned about that type of Islamic extremism, given that it is Sunni, and Iran is Shi'a. Zakaria says that the US has a lot of clout in the Pakistani military, which is the center of power that needs to be influenced in this context--and that so does Beijing and Riyadh. These countries are all part of the "Friends of Pakistan" group and so it's a more or less common sense recommendation. Still, I think a lot could be done to encourage the President to reinstate the Chief Justice of the Supreme Court--Zardari is uncomfortable with the idea because Justice Chaudhry ruled in cases where the President was prosecuted for corruption. And perhaps international diplomatic corps would do well to try and switch the gravity of power from the military to elected officials by spending most of their time negotiating with the latter rather than the former.

4. James Fontanella-Khan at the Financial Times reports that India added $4 billion to the nearly $60 billion in stimulus measures on Sunday. New Delhi's additional spending will be geared to supporting the export, real estate and infrastructure sectors.

5. Alex Nicholson and Emma O’Brien at Bloomberg report that Standard & Poor's reduced the rating of Russia's long term debt to BBB from BBB+.

"'The massive accumulation of reserves is the main reason why Russia kept getting ratings increases, so without that it’s only natural that the rating would go down,' said Vladimir Osakovsky, an economist in Moscow for UniCredit SpA. 'This will worsen the already-poor sentiment toward Russia.'"

6. Nadia Rodova at Platts reports that Vitaly Bushuyev, the General Director of Russian Energy Ministry's Institute of Energy Strategy, told an industry conference that the country's crude oil production was likely to peak at about 535 million mt/year (10.7 million barrel/day) by 2020, after which it will begin to decline. These numbers comprise the basic scenario for Moscow's draft energy strategy to 2030. The ministry will submit the draft for approval to the government by the end of the year. The basic scenario shows natural gas production growing to "701 bcm/year in 2010, 800 bcm/year in 2015, 880 bcm/year in 2020, 910 bcm/year in 2025, and 935 Bcm/year in 2030." The article makes no mention of low or high-case scenarios employed by the ministry.

7. Robert Tuttle at Bloomberg reports that Saudi Arabia's oil minister, Ali al-Naimi, told 60 minutes yesterday that the country had the potential to increase its reserved by 77%. He said, "The truth is here is the kingdom with more than 260 billion barrels. And I firmly believe that the potential to add another 200 billion barrels of oil are there to be found." Of course, Riyadh just changes these numbers at whim, more or less, there has never been any independent confirmation of its reserves claims and all calls for them have been resisted.

8. Maher Chmaytelli at Bloomberg reports that Shokri Ghanem, Libya's OPEC governor and head of the Libya’s National Oil Corp, told her in a telephone interview that "Everyone at OPEC agrees that the market needs support, I think that our action should be substantial."

9. Liam Denning at the Wall Street Journal argues that the budget requirements of the OPEC states will drive Saudi Arabia to go for market share as opposed to production allocation cuts. He argues that the budget requirement of Saudi Arabia is $38/b--as per the 2008 budget, which doesn't make much sense as we're nearly in 2009. (PFC Energy estimated a little more than $50/b as the budget requirement for 2009.) Either way, the argument goes that a 2 million barrel production cut--half of which would be provided by Riyadh--will open up, even with higher prices, a budget deficit. The bonuses, per Denning, of going for market share instead, would be to keep China using oil and to take market share from Iran and Russia. We saw this argument before, you might remember, in the Economist, which argued that the price of oil was going to go down to $5/b on a market share grab by Riyadh. But I cannot see why it would be in the interests of Saudi Arabia to destabilize its neighbor to the north--which is locked in a war of wills with the West over nuclear power--nor to needlessly alienate Russia, which was just recently asked to join OPEC. Calculated Risk talks of how OPEC nations have been reducing supply in 2008 as a way of investing in oil revenues. Because oil revenues are now below budget requirements, it also argues that production will increase. Maybe, but all the data shows that oil production went up in 2008--in part due to intense pressure from DC on Riyadh--not down. I think that these folks are suffering from a case of wishful thinking, and you are almost certain to see a large production allocation cut on December 17. This is especially the case given that stocks are high and once they are full, the contango being driven by the credit crunch will only deepen until supply falls below the rate of consumption.

10. Robert Tuttle and Alexander Kwiatkowski at Bloomberg give a fairly decent summary of the giant contango of 2008 story we've been watching for some time now.

11. Eurointelligence reports that Gordon Brown, Nicholas Sarkozy, and Jose Manuel Barroso have reacted to Chancellor Angela Merkel's constant refusal to consider pan-European responses to the financial crisis by holding a summit in London this week without her in order to consider strategy in the weekend EU summit.

12. Richard Milne and Anousha Sakoui at the Financial Times report that Allianz forecasts that a record number of companies will go bankrupt next year in Europe and the United States. The German insurer expects there to be 200,000 corporate bankruptcies in Europe next year, up from 149,000 in 2008, and 62,000 in the US, up from 42,00 this year.

13. Norma Cohen at the Financial Times reports that the UK Office of National Statistics show that producer prices fell by 0.7% in October and November.

14. Sudeep Reddy at Real Time Economics reports that the Conference Board expects job losses--which it estimates are at 1.9 million through November--to exceed 3 million by the middle of 2009.

15. Justin Fox at the Curious Capitalist determines that we have not seen stock index volatility like this since the Great Depression:



Brad Setser also concludes that the "Great Moderation," or the period since the mid-1980s where growth has been fairly constant and volatility low, is over. And high volatility makes leverage much less attractive because it is much more risky. Which suggests to me that the volatility by itself will reduce the amount of capital available to invest, which in turn increases volatility, because the fewer participants in the market there are, the more volatility, which in turn will reduce the amount of capital available to invest, and so on.

16. Alison Vekshin at Bloomberg reports that nearly 53% of the mortgages that were voluntarily modified in the first quarter of 2008 were delinquent within 60 days of the modification. The data does not demonstrate why.