Thursday, January 29, 2009

Daily Sources 1/29

1. The Wall Street Journal carries a transcript of Vladimir Putin's remarks at the Economic Forum in Davos today. Sadly, Putin made sure that many of his interlocutors on the US side of the pond were sure to stop paying much attention early on in his speech with:
"In the last few months, virtually every speech on this subject started with criticism of the United States. But I will do nothing of the kind.

I just want to remind you that, just a year ago, American delegates speaking from this rostrum emphasized the US economy's fundamental stability and its cloudless prospects. Today, investment banks, the pride of Wall Street, have virtually ceased to exist. In just 12 months, they have posted losses exceeding the profits they made in the last 25 years. This example alone reflects the real situation better than any criticism."
Not a good start. However, constructive remarks did follow, including the remarkable:
"Although additional protectionism will prove inevitable during the crisis, all of us must display a sense of proportion.

Excessive intervention in economic activity and blind faith in the state's omnipotence is another possible mistake.

True, the state's increased role in times of crisis is a natural reaction to market setbacks. Instead of streamlining market mechanisms, some are tempted to expand state economic intervention to the greatest possible extent.

The concentration of surplus assets in the hands of the state is a negative aspect of anti-crisis measures in virtually every nation.

In the 20th century, the Soviet Union made the state's role absolute. In the long run, this made the Soviet economy totally uncompetitive. This lesson cost us dearly. I am sure nobody wants to see it repeated."
In terms of addressing the financial crisis, Putin had the following to say:
"This means we must assess the real situation and write off all hopeless debts and 'bad' assets.

True, this will be an extremely painful and unpleasant process. Far from everyone can accept such measures, fearing for their capitalization, bonuses or reputation. However, we would "conserve" and prolong the crisis, unless we clean up our balance sheets. I believe financial authorities must work out the required mechanism for writing off debts that corresponds to today's needs.

Second. Apart from cleaning up our balance sheets, it is high time we got rid of virtual money, exaggerated reports and dubious ratings. We must not harbor any illusions while assessing the state of the global economy and the real corporate standing, even if such assessments are made by major auditors and analysts."
He also reiterates the call for the establishment of multiple reserve currencies, which is a fine idea of course, but given market participation it is unclear to me, precisely, how such alternative reserve currencies could be established by fiat.
"Excessive dependence on a single reserve currency is dangerous for the global economy. Consequently, it would be sensible to encourage the objective process of creating several strong reserve currencies in the future. It is high time we launched a detailed discussion of methods to facilitate a smooth and irreversible switchover to the new model.

Fourth. Most nations convert their international reserves into foreign currencies and must therefore be convinced that they are reliable. Those issuing reserve and accounting currencies are objectively interested in their use by other states.

This highlights mutual interests and interdependence.

Consequently, it is important that reserve currency issuers must implement more open monetary policies. Moreover, these nations must pledge to abide by internationally recognized rules of macroeconomic and financial discipline. In our opinion, this demand is not excessive."
Putin also emphasized that interdependence was the best means of pursuing international energy security--and takes aim at "speculators."
"The only way to ensure truly global energy security is to form interdependence, including a swap of assets, without any discrimination or dual standards. It is such interdependence that generates real mutual responsibility.

Unfortunately, the existing Energy Charter has failed to become a working instrument able to regulate emerging problems.

I propose we start laying down a new international legal framework for energy security. Implementation of our initiative could play a political role comparable to the treaty establishing the European Coal and Steel Community. That is to say, consumers and producers would finally be bound into a real single energy partnership based on clear-cut legal foundations.

Every one of us realizes that sharp and unpredictable fluctuations of energy prices are a colossal destabilizing factor in the global economy. Today's landslide fall of prices will lead to a growth in the consumption of resources.

On the one hand, investments in energy saving and alternative sources of energy will be curtailed. On the other, less money will be invested in oil production, which will result in its inevitable downturn. Which, in the final analysis, will escalate into another fit of uncontrolled price growth and a new crisis.

It is necessary to return to a balanced price based on an equilibrium between supply and demand, to strip pricing of a speculative element generated by many derivative financial instruments."
Which means that Russia has now officially joined OPEC in blaming "speculation" for price distortions in the oil market. Although I agree that as an asset class oil futures will attract investment disproportionate to supply and demand in certain situations, I would also note that OPEC and Russian oil industries would both increase control over the oil markets were that to happen. (One of many objections to the speculation is the source of all problems in the oil markets meme.)

Putin also emphasized the benefits to European supply security of Blue Stream, South Stream, Nord Stream, Yamal-Europe and the Baltic Pipeline System. He emphasized that Russia is becoming a key source of energy diversification in the Asia Pacific via the LNG plant under construction at Sakhalin. (Several nations of the Asia Pacific import over 80% of their oil and gas requirements from the Middle East.) The New York Times helpfully produced a map of competing natural gas pipeline proposals in southern Europe:

Near the end of his speech, Putin wishes the Obama administration success and emphasizes the need to develop international cooperation and trust. He also pointedly alludes to the foment of internal unrest elsewhere as a means of distracting domestic constituents at home. Quite long, but worth reading in full nonetheless. Meanwhile, Emma O’Brien at Bloomberg reports that the ruble experienced its worst two-day drop in over a decade versus the dollar. The currency is nearing the exchange rate the government has pledged to defend.
"Russian banks are 'getting cheap funding and shorting the ruble,' said Yefim Pavlotskiy, deputy director-general at Moscow’s Trinfico Group, which manages about $1.3 billion in Russian assets. 'The central bank will have to show the ruble can strengthen on some days so speculators get burned a few times, this way they won’t be so bold.'"
And Anna Shiryaevskaya at Platts reports that Turkmenistan suggested that the proposed capacity of a pipeline carrying Central Asia gas to Europe through Russia should be increased to 80 billion cubic meters/year (bcm/y) from 60 bcm/y.
"Julian Lee, senior energy analyst at the centre for global energy studies, said the proposal shows Turkmenistan wants to boost its production and sees Russia 'as the most viable way of getting its gas to Europe.'"
Turkmenistan has plans to increase its natural gas exports from 50 bcm in 2007 to 125 bcm by 2015 and 200 bcm by 2030.

2. Olesya Vartanyan and Ellen Barry at the New York Times report that opposition parties have gathered to call for new presidential and parliamentary elections in Georgia.
"'Today almost all the political parties agree,' [David Gamkrelidze, a chairman of the New Rights party] said. 'Every day more people and politicians understand that he has no capacity to overcome the crisis and that he is responsible for all these mistakes in Georgia and he must resign.'"
3. Jason Dean, James T. Areddy and Serena Ng at the Wall Street Journal report that Chinese Premier Wen Jiabao squarely placed the blame for the global financial crisis on the United States.That said,
"Frictions between the two countries began to worsen long before Mr. Obama took office. The Chinese central bank last year stopped lending its Treasury holdings for fear the borrowers will go bankrupt, according to people familiar with the discussions -- a decision that disrupted the functioning of the Treasury market. Beijing rejected pleas by Washington to resume its lending of Treasurys, the people said.

Meanwhile, China -- for years the largest foreign investor in bonds from Fannie Mae and Freddie Mac -- has been sharply trimming its holdings of that debt. After making direct net purchases of $46.0 billion in the first half of 2008, China's government and companies were net sellers of $26.1 billion in the five months through November, according to the latest U.S. data.

Weak demand for such debt from China and other foreign investors helped prompt the Federal Reserve to announce in November that it would take the step of buying up to $600 billion in debt from Fannie, Freddie and two other U.S. government-related mortgage businesses."
The journalists note that many in China suspect that the fiscal authorities are too close to Washington.
"Around October, a lengthy Chinese-language essay began circulating on the Internet excoriating Mr. Lou [Jiwei, chairman of China Investment Corp. (CIC)]and other top CIC officials, along with Zhou Xiaochuan, China's central bank governor, for being too close to the U.S. and then Treasury Secretary Henry Paulson. The diatribe quickly gained wide circulation in Chinese financial circles. One passage charged that Mr. Zhou 'colluded with Henry Paulson to buy US bonds, forced [Chinese yuan] appreciation, attached China's economy to the US and broke China's economic independence.'"
Well worth reading in full.

4. Maureen Fan at the Washington Post reports that Beijing has launched raids in Tibet, a "strike hard" campaign raiding thousands of homes and businesses in Lhasa. It is interesting that Beijing chose to begin the raid in the middle of the Economic Forum at Davos--apparently they are worried about the upcoming 50th anniversary of the Tibetan uprising of March 10. Meanwhile, Rebecca MacKinnon at the Huffington Post writes a letter to the President suggesting that Chinese public opinion is important despite the lack of its democratic character. I feel sure that the international relations gurus in the Obama Administration are fully aware of this given the role the German press played in foreign affairs prior to WWI. That said, MacKinnon provides the helpful reminder that,
"It is this young generation born after 1980 who were most vocal on the Chinese Internet last year, lashing out against Western critics and Western media coverage of their government's crackdown in Tibet. In response to international pressure, the Chinese government negotiated with the Dalai Lama, but it didn't feel the need to concede anything meaningful. In maintaining a hard line, the Chinese leadership could feel doubly secure in the fact that, not only did they have the strength of the People's Liberation Army and the People's Armed Police on their side; China's majority Han-Chinese public had no sympathy for the idea of Tibetan autonomy."
She suggests a type internet outreach to the people in a piece which is a strange combination of recognition of differences combined with preference for self.

5. Francois de Beaupuy and Helene Fouquet at Bloomberg report that France's eight largest labor unions went on strike today, disrupting the nation's rail network, airports and school system. The unions are demanding that the government do more about rising unemployment and falling purchasing power.
"About 69% of the French people back the strike, according to a poll by CSA-Opinion for newspaper Le Parisien on Jan. 25. Forty-six percent support the strike, while 23% “sympathize,” with the union call, Le Parisien said. Of those interviewed, 12% were opposed or hostile to the strike."
About half of Paris's subways are operational. Platts reports that 23% of EDF's workforce is taking part in the strike. (EDF provides most of France's power generation.) The FNME energy and mining union told the media that it had cut power output by 10GW, but that it plans to decrease output even further after the morning surge in power demand had passed. The cuts were made in every type of power plant, including nuclear.
"Average half-hourly power prices on France's within-day balancing mechanism rose to almost Eur200/MWh at 0600 CET and were at about Eur190/MWh at 0930 CET, figures from grid operator RTE show.

On Wednesday, day-ahead baseload power closed at Eur75/MWh and peak load
at Eur94/MWh in the OTC market."
Andrew Spurrier at Lloyd's List reports that cargo-handling has been brought to a complete standstill at the ports of Marseilles and Le Havre.
"Bernard Thibault, general secretary of the leading French union confederation, the CGT, warned President Nicolas Sarkozy and the government against behaving as if had nothing had happened after the day of action.

'The head of state cannot not hear us,' he said."
6. John Kingston at the Barrel reports that contract driller Helmerich & Payne has begun idling its rigs in Venezuela because it says PdVSA owes it $100 million in back payments. Kingston notes that this is confirmation of what many suspect, that as cash dries up in the producing countries capacity investment will also dry up. This makes sense, but it worrying in terms of future production needs. Also, I cannot imagine that Venezuela will, given this news and its past tendency to nationalize, be able to attract private corporate interest in its fields without advancing very generous terms. Which of course would be the excuse for a future nationalization, which, were I a private corporation, would make me want terms which would see a return almost immediately. That said, Platts reports that BP CEO Tony Hayward suggested at Davos today that an oil price of $60-80/b would be required for the capacity additions to supply required over the next two decades.
"'Over the next 20-odd years, the global energy industry... will invest of the order of $25-26 trillion, so in the order of $1 trillion/year, to provide the energy the world will need for that time-frame,' Hayward told a session of the World Economic Forum in Davos, Switzerland.

'From the perspective I have, for OPEC countries to be able to balance their budgets, sustain their social investment programs and invest for the future, it would appear that a price somewhere between $60 and $80 is appropriate.'"
Meanwhile, Maher Chmaytelli and Juan-Pablo Spinetto at Bloomberg report that OPEC general secretary Abdalla el-Badri told the forum that the cartel would not hesitate to cut supply further if prices remain low. He said that prices below $50/b were too low and suggested yesterday that the organization's target band was between $70-$100/b. Bloomberg carries video of his remarks at Davos:

7. Kartik Goyal at Bloomberg reports that Indian Commerce Secretary G.K. Pillai said in an interview that exports fell 1% in December and, "The job losses are very substantial and are likely to be of the order of 700,000 to 1 million, including temporary staff."
"India’s exports tumbled 9.9 percent to $11.5 billion in November from a year earlier after contracting 12.1% in October, the first decline in seven years. Industrial production rose 2.4% in November, after dropping 0.3% in October, the first contraction in 15 years.

Export growth may slow to 17% in the 12 months to March 31, compared with 25 percent a year ago, Trade Minister Kamal Nath told Bloomberg Television in an interview in Davos today. 'There will be job losses due to the global recession but I think domestic demand is going to help us.'"
Bloomberg carries video of the Nath interview.

8. The Associated Press reports that the Iraqi finance minister appealed to international financiers to open branches in Iraq at a conference on international banking held in Baghdad yesterday.
"Since the 2003 US-led invasion that toppled the previous regime, the Central Bank of Iraq has licensed some international banks to open branches in Iraq but security concerns prevented them from opening their branches."
The minister, Bayan Jabr, promised banks that the government would take special pains to clear any obstacles to operating in Iraq, including revisiting any laws that might be complicated things. Baghdad wants to attract international capital to the reconstruction effort, but Jabr encouraged international banks to develop joint ventures with local entities to help provide credit to investors.
"Iraq has seven state-run banks and 33 private banks. But only four of the banks have substantial capital, ranging between $40 million and $100 million."
Ahmed Rasheed at Reuters reports that at the conference Jabr also announced that Iraq would shortly issue government debt of about $5 billion. The issue would be the first since the fall of Saddam Hussein. Meanwhile, Juan Cole at Informed Comment carries a US Open Source Center translation of a recent Kurdish newspaper article which warns that the Patriotic Union of Kurdistan (PUK) has formed an emergency action committee in response to central government plans to put Kirkuk under national army control. A PUK official told the press that in terms of Iraqi military control of Kirkuk, "Our final word is that we don't accept that at all." Professor Cole notes: "This dispute has the dark potential to kick off another civil war in Iraq, this one not Sunni-Shiite but rather Arab-Kurdish." The monopoly of force issue was complicated from another side, as Timothy Willimans reports in the New York Times, Baghdad has refused to grant Blackwater a license to operate in the country. Blackwater had been operating without a license through much of 2008, but applied for one recently. A spokesman for the company noted that it had not received official notice of the denial yet. Peter Baker and Alissa J. Rubin report that President Obama visited the Pentagon for the first time yesterday and appears to be seeking a plan from the armed forces which would responsibly reduce our military commitment to Iraq.
"Among those consulted by the president was Gen. Ray Odierno, the top commander in Iraq, who has developed a plan that would move slower than Mr. Obama’s campaign timetable, by pulling out two brigades over the next six months. In an interview in Iraq on Wednesday, General Odierno suggested that it might take the rest of the year to determine exactly when United States forces could be drawn down significantly.Among those consulted by the president was Gen. Ray Odierno, the top commander in Iraq, who has developed a plan that would move slower than Mr. Obama’s campaign timetable, by pulling out two brigades over the next six months. In an interview in Iraq on Wednesday, General Odierno suggested that it might take the rest of the year to determine exactly when United States forces could be drawn down significantly."
9. Keith Weir at Reuters reports that the Guardian UK today ran the story that the Obama Administration is drafting a letter to the Supreme Leader of Iran--Ayatollah Ali Khamenei--which may well suggest opening direct and official lines of communication between DC and Tehran to be published as an open letter.
"In Washington, a State Department official said the policy on Iran was under review and declined to comment on whether a letter was possibly being prepared to send to the Iranians."
10. Keith Johnson at Environmental Capital reports that the EU yesterday announced plans to spend €1.25 billion on research on how best to store and capture carbon emissions at existing coal burning plants in Europe. Some in the coal industry had hoped for more, though many were quite pleased.

11. The Federal Open Market Committee decided to leave interest rates unchanged yesterday at 0-.25%. In its public statement, the FOMC stated that it expected inflation to remain subdued in the near to medium term. It went on to say:
"The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. The focus of the Committee's policy is to support the functioning of financial markets and stimulate the economy through open market operations and other measures that are likely to keep the size of the Federal Reserve's balance sheet at a high level. The Federal Reserve continues to purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand the quantity of such purchases and the duration of the purchase program as conditions warrant. The Committee also is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets. The Federal Reserve will be implementing the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses."
12. Shobhana Chandra at Bloomberg reports that orders for US durable goods fell by 5.7% in 2008. The Commerce Department announced that orders in December fell for the fifth straight month, by 2.6%. The Labor Department announced that initial jobless claims grew by 3,000 to 588,000 last week. GDP contracted by a 5.5% annual rate in the fourth quarter.

13. Rebecca Wilder at News N Economics has a post which notes the correlation between GDP growth and consumer spending. She points out that analysts expect consumption will fall by a full 2% in the first quarter of 2009.

Consumption, she says, has been affected by high oil prices before, but that the culprit for such a steep fall in consumption must, at least in part, be put at the feet of another cause.
"The qualitative evidence is incontrovertible: this cycle is marked by serious adverse real estate wealth effects. On average (as measured by the Case-Shiller composite 20 index), home values have been declining since July 2006 - over two years - but households saw their biggest declines in home equity in just eleven months of 2008. The associated pull-back by consumers will set records, as households retrench amid record housing equity losses."
Worth reading in full.

14. The Oil & Gas Journal reports that Valero--the major refiner--reported a $3.3 billion loss in the third quarter.
"Calling the sluggish economy 'a headwind against demand growth for refined products,' Bill Klesse, Valero's chairman and chief executive officer, said Valero will manage its refinery run rates according to market demand.

'For example, we will shut down the entire Texas City refinery instead of running portions of it during scheduled maintenance this quarter,' Klesse said. 'At our Corpus Christi East plant, we have shut down the fluid catalytic cracking unit, which primarily produces gasoline. Across our system, the average utilization rate at our fluid catalytic cracking units is currently in the range of 70% to 75% of capacity.'"
The Texas City refinery has a capacity of 225 kb/d. The news comes on top of the news that Big West is shutting down its 66 kb/d refinery in Bakersfield, as it is finding it impossible to find alternative sources of crude.

15. Katherine Harmon at Scientific American reports that the American Society of Civil Engineers released a "report card" on US infrastructure yesterday which suggested that "The nation's roads, bridges, levees, schools, water-supply and other infrastructure are in such bad shape that it would take $2.2 trillion over five years to bring them up to speed."
"Following are the ASCE infrastructure grades, which were based on an analysis of government records by a panel of engineers.

Aviation D
Bridges C
Dams D
Drinking Water D-
Energy D+
Hazardous Waste D
Inland Waterways D-
Levees D-
Public Parks & Recreation C-
Rail C-
Roads D-
School D
Solid Waste C+
Transit D
Wastewater D-

Overall: D"
Drinking water is among the worst scoring categories. Schools do better, which should give us some idea of just how bad the situation is. Water is pretty important. Just saying.

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