Monday, January 26, 2009

Daily Sources 1/26

1. Rebecca Wilder at News N Economics argues that the UK and US economies are both facing impending debt disasters. The UK posted a 1.5% contraction in the fourth quarter, roughly a 6% contraction annualized and the US is expected to post a 5.5% decline for the year ended December. She graphs the GDP growth of both countries against each other:

Ms. Wilder also provides graphs of the housing bubbles in the UK and US relative to each other.
"It is obvious that both housing markets were (and still are) overvalued. The peak of the U.S. bubble--1.2--saw a 20% appreciation in home values relative to rents from in just two years (2004-2006)--that is a nice bubble!

At this point, the outlook in for both economies is rather dismal. It probably won't start 'feeling better' until the latter part of this year--and that is far from guaranteed."
Worth a look. Meanwhile, Bob Willis at Bloomberg reports that US house sales were down 3.5% on the year in December, but up 6.5% from November. Home resales were down 13% in December from a year earlier.

Brad Setser at Follow the Money reports that there are no bright spots elsewhere in the global economy. China, he says, is "really slowing."
"Stephen Green of Standard Chartered has constructed an indicator of Chinese economic activity that isn’t based on the government’s reported GDP data. It suggests a far bigger fall in Chinese output than in 1998."
The following graph is courtesy of Setser who reproduced it with permission from Green:

He also reports that South Korean GDP contracted at an annualized rate of 20.8% according to JP Morgan. Brazil, Russia and India, of course, are not doing much better. Worth reading in full. On Sunday, Alan Beattie at the Financial Times reported that the IMF will cut its forecast of global growth to 1 - 1.5% from its current forecast of 2.2% growth.

In the meantime, Tetsushi Takahashi at Nikkei reports that calls are growing in Beijing to reduce holdings of US treasuries, given that the stimulus plans being called for should adversely affect them.
"'China should sell some of its US government bonds and increase its euro and yen assets,' Yu Yongding, a former member of the People's Bank of China's policy board, wrote in a Chinese newspaper earlier this month. Yu warned that the supply of Treasuries may far exceed demand in the future."
(h/t Chuck Butler at the Daily Pfenning.) Meanwhile, James Quin at the UK Telegraph reports that the US might end it biannual economic dialogue with Beijing known as the US-China Strategic Economic Dialogue. The Wall Street Journal wades into the fray with an op ed from Bret Swanson of the Progress & Freedom Foundation, who argues that the dollar-yuan link has been a great boon to world prosperity. Well worth reading in full.

So it is in that context then, that Calculated Risk published a set of trade deficit graphs on Saturday which establish that outside of oil the US trade deficit has been falling since 2006.


The post is well worth a look. I would add that oil costs accounted for 50% of freight costs as of May 2007. It thus stands to reason that as the oil price falls, imports might become more attractive in the US, given that some comparative advantages would re-assert themselves.

2. Osamu Tsukimori and James Topham at Reuters report that Idemitsu Kosan is looking to export surplus petroleum products produced at their domestic refineries to China. Idemitsu figures it will likely need to double its exports in order to exploit its surplus capacity on dropping oil consumption--which is partially due to an aging population.

3. On Friday, the Free Exchange blog hosted by the Economist had a post asking whether or not being part of the European Monetary Union would act as "golden fetters," that is affecting member nations much as the gold standard punished nations during the Great Depression. In summary, in his book Golden Fetters, Barry Eichengreen argues that the need to maintain convertibility for nations on the gold standard constrained their monetary policy responses to the Great Depression. The sooner a nation abandoned the gold standard, the sooner it exited the depression. Martin Feldstein argues that the euro might operate today just as the gold standard did then.
"A single monetary policy for a group of heterogeneous countries that experience different shocks cannot be optimal the problem is that, when it comes to monetary policy, one size cannot fit all. If monetary policy has to consider unemployment as well as inflation, the average cyclical unemployment rate will be higher with a single currency.

A single currency also means that a country that experiences an increased trade deficit caused by a reduced demand for its export products cannot be helped by a natural i.e. automatic -- exchange rate adjustment."
Feldstein thinks that the stresses this situation will put on the monetary union will get some members to choose to jump ship. But, the post argues, if investors were to see that they were in a country whose cash holdings were about to be converted back to a national currency, they would quickly convert their holdings to other sovereign debt in the monetary union. (Because the purpose of leaving the union would be to exit the relatively strict monetary policy.) In such a situation, the state which proposed to leave would be unable to borrow in order to buy back its debt. Moreover, the European Central Bank provides a means of coordinating international monetary policy which didn't exist at the time of the Great Depression. Well worth reading in full.

4. Eurointelligence reports that Paris intends to inject €7 billion into the banking system conditioned on export contracts to aeronautic companies, of which €5 billion is slated for Airbus alone.

5. Balazs Penz at Bloomberg reports that Russian deputy prime minister Viktor Zubkov told journalists in Hungary today that Moscow has "no aversion" to the construction of the Nabucco pipeline. In a Bloomberg television interview with Putin, the prime minister suggested that the Russo-Ukrainian gas dispute was to a great extent precipitated by decisions in Europe and Washington, DC. He also refused to give advice to the Obama Administration, saying that he "didn't think [he] has the right," but that he was very encouraged by initial contacts with the Obama team.

6. Upstream online reported that TNK-BP announced via its website that it added 460 million barrels of oil equivalent to its estimated reserves in 2008 solely as a result of geological exploration. Last year the company produced about 566 million barrels of oil equivalent, meaning that it would need to demonstrate further additions to reserves--by acquisition or the review of current holdings--of 106 million barrels in order to have completely replaced their holdings.
"TNK-BP replaced its oil and gas reserves by 179% in 2007, the fifth consecutive year it added more to reserves than it produced. In 2006, it replaced 129%, compared to 137% in 2005, 127% in 2004 and 133% in 2003."
The story may be somewhat misleading, however, for as the price of oil and gas goes up--as in from the years 2003 through the middle of 2008--the amount of reserves that are economically extractable goes up. But the price of oil has dropped rather precipitously since July, suggesting that oil and gas which was economical to produce under the price environment prevailing at the time is no longer economically viable.

7. David Ibison at the Financial Times reports that Oslo announced a NKr20bn (~ $3bn) stimulus program today. Taken together with the previously announced expansionary budget, the program would be equivalent to about 2.3% of GDP. The government will use assets in the Oil Fund to finance the stimulus. Oslo also announced today that it expects GDP to fall 0.5% in 2009 and for unemployment to rise a full percentage point to 3.5% in 2008. Most analysts regard the forecast as rather optimistic.

8. Reuters reports that Baghdad will ask foreign corporations to bid on a $1 billion contract to add a fluid catalytic cracker (FCC) to the country's largest refinery. The Baiji refinery has a nameplate capacity of about 320 kb/d. The Baiji refinery just had a hydro-cracking unit added--hydrocrackers are used to maximize the output of distillates, usually diesel. FCCs are used to maximize the output of gasoline. An isomerization unit is also in the process of being added and is expected to be commissioned in 2010. Given the sophistication of these units, which are reportedly complicated enough to make gasoline and diesel to European and American specs, there is some reason to think that Baghdad expects to export the products produced at Baiji ... perhaps relying on the other refineries to supply the domestic market.

Meanwhile, Juan Cole at Informed Comment has a round up of the news regarding the Iraqi provincial elections which will be held this weekend. 14 of 18 provinces will hold elections--the three Kurdish provinces will not, nor will Tamim province, or the seat of Kirkuk.

9. David Rosenberg at Bloomberg report that Israel cut its benchmark interest rate by 0.75% to 1% today. Inflation has slowed to about 0.4% according to a survey of economists.

10. Adam Schreck at the Associated Press reports that Noor Financial Investment Co.--an investment company in which Kuwait's National Industries Group Holding holds a controlling stake--will form two join ventures with Gazprom, one in Russia and the other in Kuwait. Both entities will provide oil and gas production, repair, and maintenance services to their regions. In a related story, N. Raghu Raman at Daiji World reports that Indian expats in the Gulf are abandoning automobiles at Gulf airports as they cannot afford their financing terms and many have lost their jobs.

11. Thomas Hegghammer at jihadica reports that the Saudi and Yemeni branches of al-Qaeda have decided to merge. The Yemeni branch seems to have the initiative and is much more aggressive than the Saudi branch.

12. Alonso Soto at Reuters reports that the Ecuadorian oil minister, Derlis Palacios, said in a radio interview today that Quito expects WTI to average around $55/b in 2009, which translates into something along the lines of $40/b for Ecuadorian crude.

13. Carlos Caminada and Jeb Blount at Bloomberg report that Petrobras has released its five year plan today, which slates $174.4 billion for investment over that period. It expects reducing costs to be the primary challenge as it wants to continue to develop the deep water sub salt fields off the eastern coast.
"'This plan had a major political component, with Petrobras effectively becoming the pillar of the government’s anti-cyclical-investments speech,' [Itau Corretora analyst Paul] Kovarsky wrote today in a report to investors. 'This is certainly not good news.'"
13. Mary Anastasia O'Grady reports on how Mexican law enforcement authorities are outgunned by the drug cartels.
"How is it that these gangsters are so powerful? Easy. As Gen. McCaffrey notes, Mexico produces an estimated eight metric tons of heroin a year and 10,000 metric tons of marijuana. He also points out that "90% of all U.S. cocaine transits Mexico" and Mexico is 'the dominant source of methamphetamine production for the US.' The drug cartels earn more than $25 billion a year and "repatriate more than $10 billion a year in bulk cash into Mexico from the U.S."

To put it another way, if Mexico is at risk of becoming a failed state, look no further than the large price premium the cartels get for peddling prohibited substances to Americans."
14. Admiral Jim Stavridis of the US Southern Command has a blog post on the successes so far of the recently reconstituted--just eight months ago--Fourth Fleet. The re-institution of the fleet has been greeted by some in South America, in particular Brazil and Venezuela--with some alarm. Stavridis' most recent post seems to be an effort to calm any concerns about the fleet's purpose:
"There are zero permanently assigned ships in the Fourth Fleet, nor is there any intention of permanently basing ships in the region. The Fourth Fleet headquarters will have no permanent deployable forces and certainly no aircraft carrier. The staff, commanded by a Rear Admiral, realized an increase of only 40 personnel from its previous level of approximately 80 personnel, all based in Mayport, Florida. There are liaison officers in the Fourth Fleet headquarters from Brazil, Chile, Colombia, Ecuador and Peru. We also have representatives from Argentina, Mexico and Uruguay on the Inter American Naval Telecommunications Network (IANTN), the message trafficking system shared among all Latin American navies. All nations in the region are invited to have liaisons working on the Fourth Fleet team. Quite simply, this headquarters staff will be in charge of conducting operations and activities that promote and strengthen coalition building, develop partner nation capabilities, and enhance maritime cooperation."
I have to admit that I am also fairly impressed the an Admiral charged with responsibility for Southern Command would maintain a blog (even if he's only signing it.) But then I suppose that's further evidence that the Fourth Fleet's purpose is to a great extent a means of engaging, and building cooperative networks, with South and Latin America.

15. John M. Broder at the New York Times reports that President Obama has directed the EPA to move quickly on the application by California and fourteen other states to waive any objections it might have to the imposition of emissions standards for cars and trucks substantially stricter than the federal specifications. He also directed the Transportation Department to begin work on suggesting new CAFE standards.

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