Tuesday, January 6, 2009

Daily Sources 1/6

1. Jim Lobe reports on his blog that the Nelson Report last night had the story that Dennis Ross will be made the Obama Administration's Special Envoy for Iran. Ross is someone sure to please hard line Israel supporters, and has some connection to the neo-cons. That said, as I have argued in my post on Law and Revolution in Iran, though we should be open to talks with Iran, there is no reason to have anything other than a hardheaded approach to such talks. Nelson also reported that Richard Haas will be Special Envoy for Israel-Arab affairs, Richard Holbrooke will be Special Envoy for India and Pakistan, and Anne Marie Slaughter head of policy planning.

In the meantime, Azadeh Moaveni in the Wall Street Journal reports that the Ahmadinejad regime is using the conflict in Gaza as cover for the intimidation of Shirin Ebadi. This had been going on for a little while before the Israeli incursion, but have become more aggressive since. The focus on Ebadi really illuminates how threatening she is to the legitimacy of the regime. But her struggle will have to compete with images from the Gaza for now, like the Korean footage of a young woman standing in front of Israeli soldiers to prevent them firing assault rifles at crowds of protesting Palestians linked by Juan Cole:

Brave young woman.

2. Elza Turner at Platts reports that traffic through the Suez canal is down "35-50% in December compared to the previous month and the year-ago month." Though I am unsure what the sentence means, precisely, it would seem to indicate that traffic is down substantially. The traffic reduction is down mostly on piracy in the Gulf of Aden and trade finance issues. Rerouting ships around the Cape of Good Hope can increase transit times by as much as 14 days. The amount of time spent at sea keeps a substantial amount of cargo space off the market. The decision last month by a number of shippers to avoid the Suez does seem to have put a bit of a bottom under the market, given the Baltic Dry Index:

But this does not seem to have been sufficient to create much of a recovery in the market, given the heights from which it fell:

If I remember correctly, the success of the super oil tanker--or Ultra Large Crude Carrier (ULCC)--was ensured by the cut off of the Suez Canal, once upon a time. David Osler at Lloyd's List reports that the international coalition of navies off the Somalian coast is having some success. Issues of jurisdiction and the cost of trying the pirates is still an issue, but the shipping industry appears fairly confident the suppression effort will succeed. The piece gives a useful summary for those interested in the topic.

3. The AP reports that an Iranian Revolutionary Guard commander called on the Islamic world to initiate another oil embargo in retaliation for the West's support of Israel in Gaza. There was a similar call last week from parliamentarians in Bahrain.

4. Dave Ernsberger at The Barrel reports that the Lu'an Group in China produced its first transportation fuels from coal in December at a rate of 160,000 mt/year (or 12.8 kb/d). China is the only country outside of South Africa which has a fully up and running coal to liquids plant. The plant is expected to ramp up production to 3 million metric tonnes/year (~ 60 kb/d) between 2012-2015 and to 15 million metric tonnes/year by 2020 (~ 300 kb/d). Given 7.7 mb/d of total oil consumption in China in 2008, 300 kb/d is 3.9% of that. If you believe that China will be consuming 20 mb/d by 2020, 300 kb/d is 1.5% of that. China, South America, and the United States have huge coal reserves, but so far these technologies produce as much or more carbon emissions than coal burning power plants.

5. MSNBC has footage of Chinese laborers who are protesting outside a factory facing down policemen trying to stop the cameramen from filming the scene:

6. Hugo Restall has an opinion piece in the Wall Street Journal Asia which notes that China has made it public that it is in the market for an air craft carrier. Although the carrier would be technologically behind US versions, it would make China the only East-Asian nation with carrier capacity.
"China hesitated for years before declaring its intent to develop carrier capability because of the potential reaction of its neighbors. A Chinese aircraft carrier prowling the neighborhood could be the final straw that causes Southeast Asian nations to band together to protect their claims, or strengthen ties with the U.S. In particular, Vietnam has periodically hinted that it might put aside the past and form an alliance with Washington."
The announcement may have been made because just now it feels in Asia as if American power is ebbing and unreliable. Restall fears it could touch off a regional arms race. That said, a carrier would be useless to Beijing in any effort to reintegrate Taiwan into China by force, which may mean that Beijing is signaling its commitment to peaceful reunification. Worth reading in full. On Saturday, Galrahn posted a piece on Information Dissemination which noted that a story run in the Japanese paper Asahi Shimbun that China intends to build two 50,000- to 60,000-ton conventional propulsion carriers in Shanghai by 2015. Also worth a gander. The upshot is that the move toward carrier capability is likely with an eye to regional concerns, though I am unclear on how, exactly, China means to obtain them.

8. David Jolly and Julia Werdigier at the New York Times reports that in a press conference in Londong Aleksandr I. Medvedev, a deputy chief executive of Gazprom, said, "The flow [of natural gas] to Europe through the Ukraine is now about seven times less than the norm and the situation continues to deteriorate." He said that Gazprom was ready to go to the negotiating table at any time and called upon Europe to "go after Ukraine." Russia has accused Ukraine of siphoning off gas meant for delivery to Europe and has decided to reduce supply through the pipeline by the amount it figures has been siphoned. Philip P. Pan at the Washington Post reports that Bulgaria is preparing to restart a shuttered nuclear reactor as two cities were left without natural gas for heating in freezing weather, given Bulgaria's total dependence on Russian gas delivered via Ukraine. (These ongoing disputes may well yet convince Berlin to do a turnabout on its policy of zero nuclear power.) Of the eastern European nations, Bulgaria historically has been close to Moscow.

Meanwhile, Verena Peternell at Platts reports that petroleum product futures on ICE have climbed substantially on the geopolitical situation in Gaza and the Russo-Ukrainian natural gas dispute.
"The January ICE gasoil futures contract was $36.25 higher on the day at $515/mt, trading above the $500/mt for the first time since December 15, fueled by cold weather across Europe and the gas dispute."
Gasoil is the term in Europe used for heating oil which has very similar characteristics to diesel. $515/mt roughly corresponds to $69.59/b or $1.66/gallon. Front month heating oil is trading at about $1.6263/gallon on NYMEX as I write.

9. Thomas R. Keene and Whitney Kisling at Bloomberg report that Robert Feldman, head of economic research at Morgan Stanley Japan in Tokyo, told Bloomberg TV that he expected the yen to head to 85 to the dollar, perhaps even stronger, by the Summer.
"Feldman said the yen’s real effective exchange rate is not as strong as current market rates may suggest. The rate, a measure of its value against the currencies of 15 of Japan’s trading partners after adjustment for inflation, rose 5.1 percent in December from a month earlier to the highest level since November 2001, the Bank of Japan said today in Tokyo."
10. Reuters reports that eurozone inflation dropped to an annual rate of 1.6% in December, down from 2.1% in November. The European Central Bank target inflation rate is just under 2%.
"'It makes it even more likely for the ECB to cut interest rates further in the next few months, starting in January and going to 1.5 percent in March,' said Holger Schmieding, co-head of Europe economics at Bank of America. 'Next week, the cut will probably be 50 basis points.'"
11. Ambrose Evans-Pritchard at the Telegraph UK argues that central banks everywhere will do everything they can to combat debt deflation, including Germany.
"The geopolitical landscape will look different. Cohesive states with a rule of law and old democracies – the Anglosphere, Holland, France, Scandies – will muddle through. They will start to enjoy a political premium in investor psychology, despite horrendous debts.

Obama's America will shine. The country will reemerge as undisputed top dog, the only one with real demographic, scientific, and strategic depth. As first into the crisis, it will be the first to hit bottom. Those expecting the dollar to collapse will have to wait.

The damage to core Europe will take longer, but run deeper. Belgium will face a break-up scare. Markets will test highdebt states as they try to roll over bonds – €200bn (£191bn) for Italy and €40bn for Greece. Spain's corporate debts will turn bad.

Germany's economy will contract by 3pc as exports collapse, and the delayed effects of the strong euro and tight money feed through."
Evans-Pritchard argues that analysts will be shocked by the depth of the downturn in Asia, the Russia will become more totalitarian in the face of below $50/b oil, and that authoritarian states generally will turn toward repression as their promises of growth falter. In the end, he argues everyone will be convinced that the reflation caused by the central banks is just as dangerous as the deflation they averted. Worth reading in full. David Hale in the Financial Times argues that every country will want to avoid an appreciating currency and thus will be forced to finance the American stimulus and financial stabilization program. He thinks that there will be a flocking to precious metals as investors begin to suspect, as Evans-Pritchard thinks will happen at the end of 2009, that inflation will be the policy choice of hugely indebted nations. Also worth reading in full.

12. Eurotintelligence reports that wage inflation is receding in Spain, the average rate was 4.1% in 2008, and the rate in December was 1.5%.

13. Andrew Sullivan in the Daily Dish links to an interview of General Petreaus in Foreign Policy where they asked whether the conflicts in Afghanistan and Iraq are fundamentally different from earlier wars. He says that the current counter-insurgency operations are different in that
a) the internet is new, and thus control over information distribution is impossible and recruitment prevention complicated,
b) the use of suicide bombing has much increased, and
c) the religious component of these conflicts is much enhanced as compared to earlier counterinsurgency campaigns which mostly faced nationalist opposition.
14. Paul Krugman notes that in a survey conducted by the Wall Street Journal of economists between November 7-10, unemployment will reach 8.1% by the end of 2009 and peak in 2010 at 8.4%. Some time has passed since then. The average prediction for first half consumer inflation was 0%, with the majority of economists predicting slight deflation (between -0.1% and -0.7%). The average of predictions for second half consumer inflation is 1.5%. The average GDP growth expectation for 2009 is 0%, though there is quite a range of expectations. The WSJ survey results can be found here.

15. Kelly Evans at the Wall Street Journal reports that American families are saving again, which is hurting the economy. Calculated Risk reports that credit indicators are showing signs of recovery:
# The yield on 3 month treasuries has increased to 0.08%. I suppose this is an improvement (better than zero).

# The three month LIBOR has decreased to 1.42%. The three-month LIBOR rate peaked (for this cycle) at 4.81875% on Oct. 10. (improved)

# The TED spread is at 1.34, sharply lower. (improved)

# The A2P2 spread has plunged to 1.92%. This peaked at 5.86 after Thanksgiving. (better).

# The two year swap spread from Bloomberg: 77.75. (Improved)
Worth reading in full.

16. David Jolly and Jack Healy at the New York Times report that today:
"The Institute for Supply Management’s services sector index rose to 40.6 in December from 37.3 in November as the sector contracted less slowly. Orders to factories declined 4.6 percent in November, nearly double the 2.5 percent drop economists expected, for a record fourth consecutive month in November, and the National Association of Realtors said that pending home sales fell 4 percent to 82.3 from a downwardly revised October reading of 85.7."
17. Yves Smith reports that over 150 hedge funds are limiting redemptions--or the amount of their investment that investors in the funds can redeem. This includes some of the most renowned, like Citadel, Tudor, and Cerberus. That sure is a nice trick, ain't it? Either way, it would seem to telegraph further forthcoming pain in the securities markets.

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