Daily Sources 3/31

1. Chris Giles, Ralph Atkins, and Mark Mulligan at the Financial Times reported yesterday that the head of the OECD said Monday that there will be a 10% rate of unemployment by 2010 in all the developed economies, "practically with no exceptions."

"Angel Gurría warned that the ranks of the unemployed in the 30 advanced OECD countries would swell 'by about 25m people, by far the largest and most rapid increase in OECD unemployment in the postwar period.'"

(h/t Yves Smith at naked capitalism for this and a few other pieces listed.)

2. Julie MacIntosh, Francesco Guerrera and Bernard Simon at the Financial Times reported that Canadian Prime Minister, Stephen Harper, told the newspaper yesterday that Canadian banks should capitalize on their solid balance sheets to acquire assets in the US and other foreign nations.

"Mr. Harper indicated Canada’s banks could lead an eventual charge toward consolidation, and said he would support such efforts as 'an opportunity for Canada to expand its role in the world financial sector.'

'I’m not going to try running banks, but I hope our banks will see this as an opportunity to build the brand--the country’s brand, their own brand--and to expand their scope and profitability over time,' Mr. Harper said. 'I can assure you that the steps we’re taking in the financial sector will not be designed to promote greater protectionism.'"

3. Rick Carew at Deal Journal gives some details on the financing terms Aluminum Corp. of China [Chinalco] is getting for its proposed $19.5 billion investment in Rio Tinto.

"An SEC filing released Monday shows that policy lender China Development Bank is leading a syndicated loan by four Chinese banks offering the cash at 0.90 point more than the sixth-month benchmark London interbank offered rate. With sixth-month Libor rates at just 1.75% these days that means Chinalco, as the Chinese aluminum maker is known, is looking at payments starting at 2.65%.

That is cheap money compared with the roughly 9.25% coupon Rio is paying Chinalco on $7.2 billion of convertible bonds Rio issued under the deal. In short, Chinalco will pocket the 6.60-point spread between its cost of capital and coupon payments from Rio, though the spread could narrow if Libor rates rise on a global economic recovery. That demonstrates the government’s desire to keep Chinalco afloat despite it being highly indebted and its publicly traded subsidiary barely profitable."

Meanwhile, Bettina Wassener at the New York Times reports that Australian Treasurer approved a bid by Hunan Valin Iron and Steel Group to take as much as 17.55% in iron ore miner Fortescue for $438 million.

4. Richard K. Green at Richard's Real Estate and Urban Economics Blog drew up a graph of property prices against property rights in Asia:

"The X axis is a measure of property rights by country: property rights are weakest in Vietnam and strongest in Singapore and Hong Kong. Note the correlation. Even though the property rights index is only ordinal, it has a correlation of .78 with the price per square meter of a 120 square meter flat in the national and or financial capital of each country."

India is explained, per Prof. Green, by supply constraints. Well-worth a look. (h/t Mark Thoma at Economist's View.)

5. James Hookway at Real Time Economics reports that Vietnam's economy is managing to avoid the worst of the financial crisis. The Asian Development Bank released its forecast for Asian Pacific nations today and forecast that Vietnam's GDP will grow by 4.5% this year.

"There is now a brand new middle class in the country which didn’t exist before and its spending power has kept Vietnam chugging through the downturn. In fact, the ADB’s Hanoi-based economist Bahodir Ganiev told reporters earlier, 'when it comes to Vietnam, we actually should not use the word "downturn" or "recession". It’s just a slowdown.'"

6. Reuters reports that Ali Asghar Arshi, executive director for international affairs at National Iranian Oil Co (NIOC), told the newswire that Iran has made no allocation for diesel purchases in its budget starting March 21 on the expectation that increased natural gas production will cover the country's requirements.

"'We will substitute with gas from our network,' Arshi told Reuters. 'Because we now have new production from South Pars... and other fields.'

In the first three months of this year Iran imported as much as 5 million barrels of diesel, or around 55,0000 barrels per day (bpd), traders and analysts said."

FACTS Global Energy estimates that Iran imported about 550kb/d in 2007.

"Iran had taken advantage of cheaper prices to build inventories earlier this year, storing as much as 2 million barrels of gas oil [diesel] on ships.

Arshi said Iran had drawn down those inventories and would not continue stockpiling the fuel."

Blockading or otherwise putting a halt to Iranian imports of petroleum products has been mooted by various policy analysts as a way to put pressure on Iran. Meanwhile, Ali Akbar Javanfekr, the presidential advisor for press affairs to Iranian President Mahmoud Ahmadinejad, has an opinion piece in the Los Angeles Times today which is a response to President Obama's Nowruz greeting. Continuing in the vein of the March 22 speech by Leader of the Revolution Ayatollah Ali Khamenei, it begins by insulting the Democratic Party:

"America's Democratic Party has historically been less honest than its rival Republican Party. I hope President Obama can change this approach and that he will turn out to be the most honest US president of all."

He also repeats the message of Khamenei that Iran distrusts the rhetoric of change and will reserve judgment until it sees action--and in fact demands it:

"President Obama has proclaimed a policy of 'change,' and the American people have embraced it. But to remedy its image in the world, the US needs to truly change its past methods.

Change is mandatory for the US administration. For as history demonstrates, either you change, or you are forced to change."

The piece also reiterates the Iranian historical complaint against the US. It further makes the odd claim that Ahmadinejad is loved round the world:

"Mr. Obama expressed his country's willingness to see our Islamic Republic take its true position in the international community. This new approach by the United States is appreciated, but we would note that Iran already occupies a distinguished position in the international community. President Ahmadinejad is one of the most beloved dignitaries in the world, and freedom-loving nations in all corners of the Earth love Iran."

That said, the piece does indicate the willingness to engage in talks,

"The president expressed a willingness to talk openly with Iran's leaders. This willingness is promising. The Islamic Republic of Iran appreciates friendly behavior that stems from respect and courtesy toward other cultures and nations."

and

"Mr. Obama has talked about his commitment to creating constructive diplomatic ties between the US and Iran. He must first begin dressing the deep and old wounds inflicted on the Iranian nation and start to correct the misunderstandings created by the misconduct of previous US administrations in their actions against Iran."

Meanwhile, Mark Landler at the New York Times reports that Secretary of State Hillary Clinton confirmed today that Richard C. Holbrooke met in an unplanned meeting on the sidelines of a conference devoted to Afghanistan with Iran’s deputy foreign minister, Mohammad Mehdi Akhondzadeh. Clinton told reporters:

"It was cordial, unplanned, and they agreed to stay in touch. I myself did not have any direct contact with the Iranian delegation."

and

"The fact that they came today, that they intervened today, is a promising sign that there will be future cooperation.

The questions of border security, and in particular the transit of narcotics across the border from Afghanistan to Iran is a worry that the Iranians have, which we share."

The piece is worth reading in full. The State Department offered further clarification of the US position today:

"MR. DUGUID: I think the Secretary has answered the question that Iranian participation was welcome and that we wanted to make sure that this conference was one that included everyone in the region. Everyone in the region has a role to play to help Afghanistan. We should not look for, at this time, individual and uncoordinated approaches to Afghanistan. We should look for a regionally based and coordinated approach to dealing with the problems in Afghanistan and with Pakistan.

QUESTION: But Iranian action today in the conference criticized increased – troop increase––US troop increase in Afghanistan and kind of confronting this concept.

MR. DUGUID: The Iranians expressed their opinions. That’s what they were there to do. And we were there listening to what they had to say. We have gone through a 60-day intensive review of our strategy. We have come forth and laid that out for everyone. The conference itself was our first foray into an international fora to explain our policy and to show that this is – these are the reasons why we see this as being the best way forward. You cannot have a solely military solution in Afghanistan and our strategy recognizes that. That is why we are looking for an increase in resources not only on the military side, but on the civilian side, on the side of trainers for economic development, for other institutional-building and capacity-building efforts that we see as necessary."

It seems to me that Tehran regards cordial relations with the US as difficult to sustain, given the ideological self-justification of the regime. That said, it does seem that they are feeling the pinch of the growing possibility of being caught by a deal with Moscow regarding their nuclear program--and likely some pressure at home for reconciliation. Insofar as that is the case, they appear willing, as in the past, to cooperate on mutual interests quietly and, as much as possible, out of the public eye, but remain wedded to revanchist rhetoric. Meanwhile, President of Russia, Dmitry A. Medvedev, proffered a much more conciliatory tone in a piece published in the Washington Post today.

"Unfortunately, relations soured because of the previous US administration's plans--specifically, deployment of the US global missile defense system in Eastern Europe, efforts to push NATO's borders eastward and refusal to ratify the Treaty on Conventional Armed Forces in Europe. All of these positions undermined Russia's interests and, if implemented, would inevitably require a response on our part.

I believe that removing such obstacles to good relations would be beneficial to our countries--essentially removing 'toxic assets' to make good a negative balance sheet--and beneficial to the world.

This will require joint efforts. The exchange of letters between myself and President Obama this year showed mutual readiness to build mature bilateral relations in a pragmatic and businesslike manner. For that we have a 'road map'--the Strategic Framework Declaration our countries signed in Sochi in 2008. It is essential that the positive ideas in that declaration be brought to life. We are ready for that.

Possible areas of cooperation abound."

Medvedev also asserts:

"Neither Russia nor the United States can tolerate drift and indifference in our relations. I spoke in Washington last November about the need to put an end to the crisis of confidence. To begin with, we should agree that overcoming our common negative legacy is possible only by ensuring equality and mutual benefit and by taking into account our mutual interests. I am ready for such work with President Obama on the basis of these principles, and I hope to begin as early as tomorrow at our first meeting in London before the Group of 20 summit. "

Well worth reading in full. Further, Abdullah Gül, the President of Turkey, has a piece in the Wall Street Journal which argues for stronger efforts to establish law and order in Afghanistan.

"But more troops and more money alone will not be enough. The Afghan government needs military force to operate from a position of strength. But real improvement requires embracing every Afghan ready to work through peaceful means for the good of their country.

Political, diplomatic, economic, and social efforts must be increased and focused on consolidating national unity to bring about tangible improvement to people's lives. To have peace, we must win over the people.

There is a role here for the international community in enabling Afghan officials working to meet the basic needs of their people. Health care and education must both be top priorities. The country's civil service needs work. Its judiciary and police forces need to be strengthened. The people must come to believe that change is underway that will create a sense of normalcy for them."

Also well worth reading in full.

7. Munir Ahmad at the Associated Press reports that the newly reconstituted Supreme Court in Pakistan restored the province of Punjab to the main opposition party, under Shahbaz Sharif, the brother of the head of Pakistan Muslim League (N) Nawaz Sharif.

8. Edward Hugh at Fistful of Euros reports that the EU Economic Sentiment Indicator for the EU27 fell by 0.6 points to 60.3 and for the eurozone fell by 0.7 points to 64.6. The post looks at economic sentiment in most of the major economies in the region as well as Eastern Europe. However, "economic sentiment recovered slightly in the Netherlands (1.3) and (amazingly) in Spain (0.8)." Worth a look.

9. Brian Murphy at the Associated Press reports that Venezuelan President Hugo Chávez, upon setting foot in Qatar, proposed a "petro-currency" as an alternative to the dollar, to be backed by the oil producing nations.

"The idea never reached the full agenda of a summit of leaders from South America and the Arab League--and has little hope of gaining any momentum among the US allies in the Middle East."

Meanwhile, Daniel Cancel at Bloomberg reports that Venezuela, according to a resolution published today in the Official Gazette, will sell 2.68 billion bolivars ($1.2 billion) of bonds in the local market as part of an effort to fund the budget. The bonds will be sold in two tranches, will have a fixed coupon and mature between 2010 and 2016.

10. David M. Herszenhorn and Clifford Krauss at the New York Times report that a bill in the House, sponsored by Representative Betty Sutton of Ohio, seeks to give those trading in a new car for a fuel efficient model a $4,000 voucher if the car gets at least 27 miles per gallon and is assembled in the US. Cars assembled outside the US would qualify if they got at least 30 miles per gallon. Cars assembled inside the US getting 30 miles per gallon would receive a voucher for $5,000.

"Officials said the program could cost $2 billion or more depending on how long it operated. Ms. Sutton said the most important thing was to get the program started quickly. 'The urgency for its initiation is extraordinary,' she said."

The Senate version is slightly less generous. The Obama Administration indicted that it supported an effort along these lines on Monday.

11. Mark Pittman and Bob Ivry at Bloomberg report that the US Government and Federal Reserve have "spent, lent, or committed" $12.8 trillion, close to 2008 GDP.

"New pledges from the Fed, the Treasury Department and the Federal Deposit Insurance Corp. include $1 trillion for the Public-Private Investment Program, designed to help investors buy distressed loans and other assets from U.S. banks. The money works out to $42,105 for every man, woman and child in the U.S. and 14 times the $899.8 billion of currency in circulation. The nation’s gross domestic product was $14.2 trillion in 2008.'

The piece includes a useful balance sheet of commitments and expenditures. Worth a look.

12. Barry Ritholtz at the Big Picture reports that Standard & Poor's Case Shiller 20 city Home Price Index fell at an annual rate of 18.97% in January. Prices have fallen to late 2003 levels as per an S&P graph:



Worth a look. The full S&P Case-Shiller US National Home Price Index can be found here.

13. Simon Johnson at Baseline Scenario notes that CDS spreads are the highs last seen in early February.



14. Jeanne Meserve and Mike M. Ahlers at CNN report that the Federal Aviation Administration released its forecast today which sees the number of travelers using US airlines will fall 7.8% in 2009, the steepest decline seen since the period following 9/11.

"The short-term forecast is downbeat for virtually every segment of the aviation business, the Federal Aviation Administration predicted. Major airlines are expected to bear the brunt of the decline, with a projected 8.8% drop that would return them to passenger levels last seen in 1995.

Regional airlines will see business drop 4.5%, taking them back to volumes they had four or five years ago, while air cargo is expected to slide 2.8%."

Private industry analysts disagree with long-term analysis of the FAA that passenger levels will rebound in 2010.

15. Amartya Sen, in the New York Review of Books, has a piece which points out that historically "capitalism" can only exist in a framework of trust and rule of law--the tradition of keeping one's contracts, of course, obviating the need of recourse to the courts too often. Long, but should you have the time, worth reading. (h/t Justin Fox at The Curious Capitalist.)

Daily Sources 3/30

1. Jason Clenfield at Bloomberg reports that Japanese industrial production fell by 9.4% in February from January, as per the Trade Ministry. "Inventories fell an unprecedented 4.2%."

"There are signs a recovery may be stirring in the US, Japan’s biggest market. US orders for durable goods rose in February for the first time in seven months. Inventories of long-lasting durable goods fell for a second month and new home sales increased for the first time since July.

In Japan, the drop in inventories adds to evidence that the worst of the manufacturing slump may be over. Companies said they would increase production 2.9% this month and 3.1% in April, today’s survey showed."

2. Volkhard Windfuhr and Bernhard Zand at Der Spiegel recently conducted an interview with Sheik Hamad bin Khalifa Al-Thani, the Emir of Qatar in which he addressed a wide range of issues, and indicated that as a member of OPEC Qatar's position was that oil should be at $40/b to help support a global recovery. Key excerpts:

"SPIEGEL: How do you believe oil prices will develop now?

Hamad: I think the oil price should continue (to stay) in the $40 range for at least one or two more years.

SPIEGEL: Why so modest?

Hamad: Because this way we can help the world out of this crisis. If the world economy recovers, it will be good for us, too. Automatically, the price of oil will go up again. I don't see why OPEC countries should continue to cut production just to keep the price of oil high. This will not affect the industrial countries alone, it will also hit poor countries in Africa, Asia and Latin America. Who will look after them?

SPIEGEL: That's not the kind of argument you often hear when talking to oil producers.

Hamad: Yes, but I believe this battle is a battle for the whole world. Everybody should be helping each other for the next two years."

Interestingly, the Emir appears to believe that Europe will not be as badly affected by the economic crisis as the US. The Emir also addressed the issue of the emerging natural gas cartel:

"SPIEGEL: Europe has staked its future on natural gas, but we are concerned about supplies. Can Qatar step in to fill the breach if Russia fails to deliver?

Hamad: We are selling gas to Italy, Spain, Belgium and, starting within the next few weeks, to Britain. I know that the Germans prefer to have their own gas supply, but I think our gas could come to Germany through another European country. However, this depends on the quantities we have on hand and the price.

SPIEGEL: Europeans are also worried about the creation of a so-called Gas-OPEC. Is there another cartel in the making that will be able to set prices at will?

Hamad: With OPEC they have a cartel. Why don't we have this gas cartel as well? And why don't we make a sort of agreement between consumers and producers? I wouldn't mind such a gas cartel, but it will take time because some countries today sell for high prices and others sell for low prices. It will be hard for those selling high to bring their prices down. So we will need time."

The Emir also stated unequivocally that Qatar would not stand with the US against Iran. But, similarly, he thinks it would be hard for the Arab countries of the Gulf to stand with Iran against the US. He further states that though he welcomes the Obama Administration's new timbre in its approach to the region, that the other conflicts in the region also need to be addressed. He indicates Qatar's continued support for the Arab Peace Plan of 2002, with qualifications:

"Hamad: I think Israel will not accept the return of the Palestinian refugees. But on the issue of dividing the city of Jerusalem (and turning over East Jerusalem to the Palestinians), I think they should accept it."

Which seems reasonably rational to me. He also addressed the issue of the ICC's arrest warrant for Sudan President al-Bashir:

"SPIEGEL: The International Criminal Court has issued an arrest warrant against Sudan's president, Omar al-Bashir. Why are you opposed to this?

Hamad: If anything happened to Omar al-Bashir and Sudan ended up in chaos, the whole of Africa would also sink into chaos. Sudan is a vast land with a lot of borders. Al-Qaida would be happy to see Sudan become like Iraq.

SPIEGEL: Isn't it time for the Arab world to finally do something about the Darfur problem?

Hamad: We have been mediating in Sudan for a long time, particularly because the groups in Darfur do not want the Arab League to get involved. My hope is that we do not see interference from some other Arab countries. We are confident. We need to give the parties time--we have to let them shout and issue their grievances, and finally we need to get the process of negotiations going and discuss the future of their country.

SPIEGEL: Al-Bashir is now in Doha to attend the Arab summit.

Hamad: I sent my prime minister to invite him."

The Emir is extremely frank for the duration of the interview--a must read.

3. Juan Cole at Informed Comment helpfully provided the USG Open Source Center's translation of the March 22nd speech of the Supreme Leader [more accurately Leader of the Revolution or LOTR] Ayatollah Ali Khamenei in response to the overture made directly by President Obama. (The USG Open Source Center paradoxically does not just simply publish their efforts.) This section of the speech begins with a long recitation of historical offenses of the US--real and imagined. (For example, Khamenei indicates that the US green-lighted Saddam Hussein's initial attack on Iran, something I believe is not the case.) The LOTR is not respectful, ironically enough--even if predictably enough--in the way he addresses the President's speech. For example, the LOTR says

"They have the slogan of change. Where is the change? What has changed? Clarify this to us."

Which on one level is fair enough, but also just off kilter, given that the change promised was to the American people, not the Islamic Republic of Iran. He also has a rather different take on the world's reception of the new POTUS than I, insofar as the LOTR remarks that the US is "hated in the world."

"Today, you are hated in the world. You should know this, if you do not already. Nations set fire to your flag. Muslim nations across the world chant 'Death to America.'"

The last bit being true of few nations outside of Iran itself. Just prior to this the LOTR chooses to question whether or not the POTUS is indeed in charge in the US, which seems to me a rather pointed insult.

"I would like to say that I do not know who makes decisions for the United States, the President, the Congress, elements behind the scenes?

He then manages to come quite close to calling the President a liar. (Remember, the US's official position in the IAEA is that Tehran is lying about its nuclear program.)

"You may say that you want to change policies, but not your aims, that you will change tactics. This is not change. This is deceit."

He also brings up the question of translation in a somewhat insulting way--and I might even be inclined to concede this point, so to speak, but Juan Cole, who is clearly a partisan of reconciliation seems to think this is a reasonable translation, so I imagine it is a fair representation.

"This is my advice to US officials, the President, and others. Listen well to these words, and have them translated for you. Of course, do not give it to the Zionists to translate for you. Consult healthy people, and seek their opinions."

(In fact, the government did release an official translation of bits and pieces of the speech in a summary in English here.) That noted, there are a few elements of the speech which could be regarded as an opening.

"But I would like to say that we have logic. Since the beginning, the Iranian nation moved with logic. Regarding our vital issues, we are not sentimental. We do not make decisions based on emotion. We make decisions through calculation."

And he concludes the section of the speech dealing with the Obama Nowruz greeting with:

"If you go on with the slogan of discussion and pressure, saying that you will negotiate with Iran, and at the same time impose pressure, threats, and changes, then our nation will not like such words. We do not have any experience with the new US President and Government. We shall see and judge. You change, and we shall change as well. If you do not change, our people became more and more experienced, stronger, and more patient in the past 30 years."

This could be seen as an opening, though I would note that the change in tone was not reciprocated--and this is from a culture acutely sensitive to matters of politesse. I would also note that the key section which some argue represents an offering was not included in the official translation of key elements of the speech offered on the LOTR's website.

That said, some argue the move is a clear opening. Juan Cole's response is here, and he wrote

"The US corporate media mysteriously interpreted Khamenei's words as a rebuff to Obama, but in light of the phrase I just quoted, I can't understand how they reached that conclusion."

Given the points I mention above, I find it incredibly difficult to understand how it is that Dr. Cole "cannot understand how they reached that conclusion" and how it could even be characterized as "mysterious." In any case, Cole chose to frame the speech as a "grumpy old man's" response to the Obama overture in which he was making his first offer in what he expects to be a long period of haggling toward a grand bargain.

Farideh Farhi--a very well-respected Iran expert--also believes the speech was conciliatory, though she disagrees with the "grumpy old man" characterization and does not think that everything is on the table. Her take is:

"Clearly from [the LOTR's] view, engagement in talks must be accompanied with some concrete steps that show Iran that the United States is interested in a process and give and take and not a process based on 'either deception or intimidation.' Deception because the objective remains the same while the softer language is a mere tactical change. Intimidation because talks are combined with further squeeze of Iran."

It is worth reading the speech for yourself. Meanwhile, on Saturday Ernesto Londoño at the Washington Post reported that the Mujaheddin-e Khalq, or MEK, will be removed from their camp near the Iranian border and that the leaders will be separated from followers who will be "de-brainwashed" or "re-educated" depending on your point of view. The question of US support for the organization is one of the major sticking points addressed by the LOTR's speech.

4. Stuart Williams at AFP reports that the World Bank forecasts that Russian GDP will shrink by 4.5% in 2009.

"The forecast is considerably more pessimistic than that of the Russian government, which is predicting a contraction of 2.2 percent in GDP in 2009."

5. Nadia Rodova and Stuart Elliott at Platts report that Surgutneftegaz informed the press today that it had purchased a 21.2% stake in Hungarian oil and gas company MOL from Austria's OMV.

"This price represents a 93% premium to Friday's closing price, a 27% premium to the 12-month average price, and a 19% discount to the 12-month peak price of Hungarian Forint 23,700, Renaissance Capital said in a research note."

6. Edward Hugh at Fistful of Euros reported Sunday that the Bank of Spain intervened to take over Caja Castilla La Mancha, whose losses are estimated to be as much as €3 billion. Spanish financial shares fell sharply today in reaction to the news.

7. Reuters reports that the Bank of England today released data showing that the number of new mortgages approved in the UK in February grew at the fastest rate seen since May 2008.

"Mortgage lending rose by £1.507 billion, almost double analysts' forecasts for an £800 million rise, and up from just over £1 billion in January."

8. Chris Baldwin and David Sheppard at Reuters report that Europe's oil refining sector is shutting down gasoline units, given the collapse in demand from the US. Topper refineries--simple refineries without additional sophisticated processing units which increase production of certain products like gasoline or diesel--account for about 1 mb/d of Europe's 16 mb/d throughput capacity are the most likely to be decommissioned. Traditionally European surplus gasoline production has often been shipped to the US, serving as an upper boundary, so to speak, on the price of gasoline.

"'Europe's oil demand may never reach its peak again,' Leo Drollas, chief economist at the Center of Global Energy Studies (CGES), said."

9. Eric Watkins at the Oil & Gas Journal reports that Habib Kagimu, chairman of Tamoil Uganda Ltd., has suggested that Kenya's Mombasa-to-Eldoret oil pipeline could eventually be extended to Uganda's Albertine rift basin, where several big crude discoveries have been made recently.







10. Shailagh Murray and Karen DeYoung at the Washington Post reports that at a Capitol Hill news conference slated for tomorrow a bill will be introduced to lift the travel ban to Cuba. If the measure were to pass it would be an extremely significant reversal of long standing US-Cuba policy.

11. Liz Capo McCormick at Bloomberg reports that the Fed purchased $2.499 billion of US treasuries in its third direct purchase of US debt. The number was much less than the market was anticipating given the size of the Fed's program as announced.

12. An extremely interesting article discussing whether Goldman Sachs deliberately manipulated the price of oil upwards in June-July 2008 in a short squeeze, by Christopher Helman and Liz Moyer at Forbes.

Daily Sources 3/26

1. Eurointelligence reports that the Netherlands CPB Institute yesterday published January's data for global trade, which shows that global trade is down 20% from October. "FT Deutschland quotes a CPB staffer as saying this is faster than during the Great Depression (the estimates there range from 25-35% during 1929 and 1932)."

2. Lucy Hornby at Reuters reports that China estimates that the number of migrant workers that are now unemployed has risen to 23 million since the lunar year holiday in January. (h/t Yves Smith at naked capitalism.)

3. Upstream online.com reports that Liu Qi, deputy head of China's National Energy Administration, told an industry forum that

"Appropriately obtaining global resources is our inevitable choice and legal right...Winning foreign resources is even more important than stepping up domestic production."

Liu told the conference that China will offer oil companies tax and other policy incentives to continue exploring for purchases and concessions abroad. Meanwhile, Lydia Polgreen at the New York Times reports that analysts see Chinese decision makers becoming more conservative about their African investment decisions:

"'We have seen in the recent past Chinese companies wade into countries nobody else would,' said Philippe de Pontet, an analyst at ... a private research firm. 'That may be changing.'"

Meanwhile, Franz Wild and Helene Fouquet at Bloomberg report that Aveda, accompanying French President Nicolas Sarkozy on a two day business junket to central and western Africa, signed a joint venture uranium exploration agreement with the Democratic Republic of Congo.



4. Rebecca Christie at Bloomberg reports that Treasury Secretary Timothy Geithner told a forum hosted by the Council on Foreign Relations yesterday that the recent proposal to replace the dollar as a reserve currency by China is

"designed to increase the use of the IMF’s special drawing rights. And we’re actually quite open to that."

"The dollar slid as much as 1.3% against the euro within 10 minutes of news accounts of Geithner’s remarks. It recouped much of the loss about 15 minutes later, when Geithner then predicted no change in the US currency’s role."

Meanwhile, Eurointelligence reports that Dominique Strauss-Kahn, the head of the IMF, told a parliamentary finance committee in Paris that

"it is absolutely legitimate to discuss the possibility of a new international currency. This is not a new question but the current crisis renews the interest in this question. He also said that he does not consider that the dollar ceases to be an international reserve currency. Even the Chinese don’t think that."

Meanwhile, Mriganka Jaipuriyar at Platts reports that the chief economist of the Paris-based IEA, Fatih Birol, said that the organization is working very closely with Beijing to improve the flow of data, but that there is a long way to go.

"'Both on the IEA's side and the Chinese side, there are strong efforts to harmonize how we collect and analyze the statistics. I should say there are some improvements in that area but we are not yet at a level we would like to see,' Birol told Platts in an interview Thursday.

'We are at the beginning of a very long journey and it would be too premature to say that we have the information we need to make our analysis,' he added.

The IEA is pursuing similar talks with India and hopes to be able to better analyze the situation in these countries and their implication for the rest of the world, Birol said."

Platts reports that OPEC oil exports excluding Ecuador and Angola in the four weeks to April 11 are to fall to 22.23 million b/d, down by 770 kb/d from the previous four week period.

5. Thom Shanker at the New York Times reports that an annual Pentagon study released yesterday--"Military Power of the People’s Republic of China 2009"--argues that China is seeking weapons and technology which counter traditional American advantages. This seems natural enough to me, but China's Foreign Ministry was sufficiently disturbed to have its spokesman say "This report issued by the US side continues to play up the fallacy of China’s military threat." At his regular news briefing in Beijing the spokesman "suggested that the Pentagon stop issuing the annual report to avoid 'further damage to the two sides’ military relations.'" The report can be found here.

6. Wall Street Journal Asia has an editorial piece which points out that the EU and South Korea just signed a free trade agreement on Tuesday.

"Details haven't been released yet, but it's expected to be a comprehensive accord that will reduce or eliminate most tariffs on goods and liberalize European investment in Korea's tightly regulated service sector. Both sides are aiming to iron out the final details at next week's Group of 20 summit in London."

7. Veit Medick at Der Spiegel interviewed Martin Schulz, chairman of the Socialist group in European Parliament and head of foreign policy at the German Social Democratic Party's federal executive committee, about the consequences and causes of the fall of Prime Minister Mirek Topolánek's government in the Czech Republic while he was president of the EU. Key excerpts:

"Schulz: Topolánek was one of George W. Bush's closest allies when it came to the missile-defense system in eastern Europe. Now he uses the platform of the European Parliament to campaign against Bush's successor. He can do that in Prague, but not in the EU.

SPIEGEL ONLINE: Is the Lisbon Treaty now in danger?

Schulz: We'll see. The fact is, the two legislators who caused the collapse of his government were opponents of the treaty. That's not an encouraging sign."

SPIEGEL ONLINE: This fall, the Irish also plan to vote on the Lisbon Treaty. If the Czechs reject the treaty, would the Irish vote still be relevant?

Schulz: If the Czechs reject the treaty, we're going to be in a serious crisis. We might as well then bury the treaty. We'd then be thrown back to the Treaty of Nice, which was passed by 15 member states. But those same 15 governments, not to speak of the new member states, are unsatisfied with the old arrangements. That's why there was supposed to be a constitution. When that failed, we tried to include the essence of the reforms in the Lisbon Treaty. If that also fails, it would be a fiasco.

Worth reading in full. Meanwhile, Reuters reports that Irish GDP fell at an annual rate of 7.5% in the fourth quarter. "GDP fell 2.3% for the whole of 2008, data from the Central Statistics Office showed on Thursday."

8. Der Spiegel reports that in a speech calling for the reform of NATO, German Chancellor Angela Merkel said today:

"It is also in Germany's interest that dialogue between the new US administration and Russia gains momentum again. ... NATO wants Russia as a good partner ... We have not been rivals for 20 years now. The time of the Cold War is irrevocably over."

9. Doris Leblond at the Oil & Gas Journal put the kibosh on the notion, reported in the Russian press, that Moscow had been left out of discussions on how to pay for the modernization and increased transparency of the Ukrainian gas pipeline system. In fact, "Russian Energy Minister Sergei Schmatko and an important delegation was present." This was in addition to representatives from the EU, Canada, the US, World Bank, European Investment Bank, and European Bank for Reconstruction and Development. Meanwhile, RIA Novosti reports that the Russian Ambassador to Ukraine, Viktor Chernomyrdin, told the press that the deal struck Tuesday to modernize the system "looks as if a deaf man and a blind man sat at a table and signed the paper without even understanding what they had signed."

10. Johan Carlstrom at Bloomberg reported that the Norges Bank cut the benchmark interest rate by 0.5% to 2% yesterday.

"'The decline in activity in the Norwegian economy will be more pronounced than previously assumed,' Deputy Governor Jan. F. Qvigstad said in the statement. The bank may cut the rate as low as 1% 'in the course of the autumn.'"

11. Edward Hugh at Fistful of Euros notes that Serbia and the IMF have agreed to a €3 billion, 27 month, stabilization program.

12. Reuters reports that UK retail sales fell by 1.9% in February from January. "The annual rate of growth fell to 0.4%, its weakest since September 1995, the Office for National Statistics said."

13. The Associated Press reports that Ali Larijani, the Iranian Speaker of the Parliament and former nuclear negotiating point man, told the media yesterday that in Najaf that Iran's problems with the US are not a "sentimental issue" soluble with "a blessing and congratulations." "Larijani says the differences stem from 30 years of hostility, including Saddam Hussein's 1980 invasion of Iran which he said was 'instigated by America.'" For the record, it is my understanding that Saddam Hussein's 1980 invasion of Iran was not instigated by the Carter Administration, but never mind.

14. The AFP reports that Turkish President Abdullah Gul in Iraq promised his hosts that the water allocation from the Tigris and the Euphrates would be doubled this year. Juan Cole surmises that this is likely in return for a crackdown by Baghdad on Kurdish Workers Party guerrillas hiding in the mountains in Iraq just outside the Turkish border.

15. Fausta Wertz at The Compass notes that today Hugo Chávez had the military presence increased at the La Fría and San Antonio airports, saying

"we have begun the reversal process over everything that meant the dismemberment of national unity, the territory, and sovereignty, because prior governments fractured the country into pieces."

(Both airports are found in the state of Táchira, a small region on the border of Colombia.)



Chávez also ordered the creation of a new state company to manage the ports which will be required by law to "work under socialist guidelines and seek the development of the regions in which their respective seaports and airports operate." As Wertz notes, after the opposition won several major municipalities and regions in the November elections, Chávez has moved to strip them of control of the various ports, and with it valuable tariff revenues.

16. Juan Forero at the Washington Post reports that in January, Ecuador enacted a number of provisions to try and reduce the number of imports coming into the country.

"'What is the objective? To dampen demand for imported good and to increase consumption of domestic goods,' said Diego Borja, minister of economic policy. 'It was a difficult measure, but necessary and indispensable. We know that there are costs to getting out of a crisis.'

Borja said that because Ecuador's currency is the U.S. dollar, the country has been particularly exposed as imports rose in relation to exports. Unable to print money, or devalue to help Ecuadoran companies that export, the government decided to levy tariffs that reach 35%, decrease import volume as much as 35% and implement a range of surcharges. In all, 627 products fall under the new measures, including furniture, cellphones, electronic parts, shoes, alcohol and food products such as cookies and pastas. The government said the restrictions would reduce imports this year by nearly $1.5 billion compared with 2008.

Without the restrictions, officials here say, Ecuador could run out of money -- leading to economic collapse and political instability. 'We depend on dollars,' Borja said. 'If we don't have a revenue of dollars, then we have a very, very big problem.'"

In December Ecuador defaulted on its debt--see Daily Sources 12/15 #1--and then had its social security system purchase $1.2 billion in new sovereign debt--see Daily Sources 12/29 #14. The CIA estimates that Ecuadoran GDP was $107 billion in 2008 and that government expenditures (which were less than revenues) were about $17.79 billion.)

17. Ronald Buchanan at Platts writes that Mexican oil export revenues in February fell 56.4% year on year on $1.66 billion, according to a report by the National Statistics Institute, or Inegi, released yesterday. WTI on NYMEX averaged $95.35/b in February 2008 versus $39.26/b in February 2009, which at a 58.8% decline is consistent with a 56.4% decline. According to the EIA, Mexican sales of Isthmus crude--a medium sour crude with an APIº33.3 and 1.492 sulfur wt/%--averaged about $89.48/b in February 2008 and $39.22/b in February 2009. Sales of Maya crude--a heavy very sour crude with an APIº22.2 and 3.3 sulfur wt/%--averaged about $78.35/b in February 2008 and $37.17/b in February 2009. But in November, the Associated Press reported that the Mexican Treasury Secretary announced that the country had spent $1.5 billion to buy put options to sell 330 million barrels of Mexican crude--or about a third of its total 2008 output--at $70/b. Even considering the decline in total output, how does this add up?

18. Mary Beth Sheridan at the Washington Post reports that in a speech in Mexico Secretary Clinton said of the anti-narcotics effort:

"Clearly what we've been doing has not worked ... . Our insatiable demand for illegal drugs fuels the drug trade. Our inability to prevent weapons from being illegally smuggled across the border to arm these criminals causes the deaths of police, of soldiers and civilians.'"

19. Derek Sands at Platts reports that Scott Borgerson, a fellow for ocean governance at the Council of Foreign Relations told the House Committee on Foreign Relations that:

"It would be a mistake to assume that all these flashpoints [of new resource opportunities opening up due to melting ice in the Arctic] will remain sleeping dogs. The combination of new shipping routes, trillions of dollars in possible oil and gas resources and a poorly defined picture of state ownership make for a toxic brew."

Sands elaborates:

"US ratification of one mechanism to deal with Arctic resource issues--the UN Law of the Sea Treaty -- has been blocked by a small group of senators because of sovereignty concerns. That refusal could contribute to the US missing out on some of the Arctic's resources, according to the witnesses.

Other Arctic countries have ratified the treaty, and former President Bill Clinton signed it, but it still awaits Senate ratification.

Among other things, the treaty sets up a mechanism for countries to arbitrate disagreements over claims to undersea territory."

20. Bob Willis at Bloomberg reports that initial unemployment benefits applications grew by 8,000 in the week ended March 14 to 652,000, per the Labor Department release today. The total number of people receiving unemployment benefits jumped by 122,000 from the week prior to 5.56 million.

21. Shobhana Chandra at Bloomberg reports that the Commerce Department further revised its initial estimate of fourth quarter GDP to a 6.3% annual rate of contraction (from 3.8% and then 6.2% rates of decline).

"For all of 2008, the economy grew 1.1%, the same as previously estimated, as exports and government tax rebates in the first six months helped offset the slump in consumer spending that followed.

Consumer spending, which accounts for about 70 percent of the economy, fell at a 4.3% pace last quarter, marking the first back-to-back decreases in excess of 3% since record-keeping began in 1947.

Retailers are doing better so far this year. Sales fell less than forecast in February and January’s 1.8% gain was the biggest in three years, Commerce reported earlier this month."

Brian Blackstone at Real Time Economics notes that GDI--Gross Domestic Income, another measure of national economic activity--fell in the fourth quarter by 7.5% from 4Q2007.

"GDP is consumption driven: consumer spending, investment, government spending and the like. GDI is income based, meaning things like income and corporate profits. In theory, the two should line up — but not always. In the case of the fourth quarter, a severe slide in corporate profits was likely the root of the discrepancy. Employee compensation, the other main GDI component, held up much better."

22. Barry Ritholtz at the Big Picture takes aim at the news yesterday that new home sales increased by 4.7% in February from January, noting, to start with, that on an annual basis new home sales fell by 41% in February.

"Note that the month over month data at 4.7%--plus or minus 18.3%--is statistically insignificant. (i.e., meaningless). The reported data does not inform us if sales improved month-over-month or not. It is a range, from down -13.6% to plus 23%. Since 'zero' is part of that range, we can draw no conclusion. As the Census Department itself notes, “the change is not statistically significant; that is, it is uncertain whether there was an increase or decrease.”

The data does however, tell us that the year-over-year sales fell 41.1% plus or minus 7.9% gives us a range of -49% to -33.2%. The entire range is negative, therefore we can conclude sales fell year-over-year."

The Census Bureau noted that the seasonally adjusted estimate of new houses for sale indicates a 12.2 month supply at February sales rates.

23. Brian K. Sullivan at Bloomberg reports that the flooding in North Dakota is forecast to exceed 112 year records and thus may well significantly delay the planting of the spring wheat crop.

"Republican Governor John Hoeven declared a flood emergency across the state, while the federal government declared the state a major disaster area and said a public health emergency exists there. Rain and snow blanketed the area this week, covering ground already saturated by snow and rain earlier in the season."

The US is a major global supplier of wheat.

24. Keith Johnson at Environmental Capital posts the very useful observation that water consumption is a key issue--and perhaps the key issue--in evaluating the relative value of various forms of power generation.

"The water issue affects all kinds of power generation—coal, natural gas, and nuclear power; the nuclear industry’s water appetite in particular has become a flashpoint for criticism. The US Geological Survey figures power plants are the second-biggest users of water in the US, behind agriculture."

25. In an interesting side-note, it appears that the online musings of Paul Krugman have struck a nerve in Germany, whose press has taken note of Krugman's disrespectful tone and whose Finance Minister Peer Steinbrück has sent Krugman an invitation to visit him in Berlin to discuss their differences of opinion mano a mano.

Daily Sources 3/25

1. Jason Clenfield at Bloomberg reports that Japanese exports fell 49% in February year-over-year. Shipments to the US fell 58.4%. Automobile exports fell 70.9%. "Exports to Europe dropped a record 54.7%, shipments to Asia declined 46.3% and goods sent to China slumped 39.7%." Imports fell 43%.

2. Geoffrey A. Fowler at China Journal reports that Beijing's decision to shut down access to youtube.com coincided with the release on March 20th of a video by the Tibetan government in exile of Chinese security forces beating Tibetan protesters. This is the offending video:



Karin Brulliard at the Washington Post reports that a peace conference which was to publicize the role of sports in unity and the reconciliation of differences was canceled today because the South African government had denied the Dalai Lama the visa required for his attendance.

"Two of three South African Nobel peace laureates who had invited the Tibetan leader, retired Archbishop Desmond Tutu and former president FW de Klerk, said Monday that they would boycott the event, and organizers said the third, former president Nelson Mandela, would probably do the same. The Norwegian Nobel Committee also backed out."

A spokesman for South African President Kgalema Motlanthe told the media that South Africa would not welcome the Dalai Lama under any circumstances nor at any time.

3. Peter Stein at China Journal reports that Fan Gang, the head of China's National Economic Research Institute and a member of the People's Bank of China's monetary policy committee, responded to President Obama's televised remarks yesterday today by saying:

"Of course [an alternative is necessary] in the long run, if we want to avoid the cyclical problems associated with the dollar standard."

Mr. Fan also addressed the question of managing the renminbi.

"Fan says while China is eager to keep its currency stable, there is pressure to let the yuan fall-—'not just domestic pressure, but regional pressure,' as other Asian currencies weaken, making them more competitive. Rather than let the yuan fall against the dollar, he suggests that China should make reference more to the other currencies in the basket it uses to set the yuan’s exchange rate. 'Eventually, China’s currency should be related to other currencies, not just the dollar,' he says.

Fan worries that the Fed’s quantitative easing is raising the risk of dollar inflation and devaluation, which 'is a concern not just for China but for everyone.'"

(By the way, the Federal Reserve Bank of Atlanta's macroblog had a post yesterday by SVP in charge of research for the Atlanta Fed, David Altig and Daniel Littman, an economist at the Cleveland Fed, which was at pains to show that the Fed's move is not, strictly speaking, "quantitative easing." The reason (basically): quantitative easing is about increasing liabilities only--or quantity of bank reserves from the perspective of central banks--whereas the FOMC's most recent move was also explicitly about increasing the number of assets on the Fed's balance sheet. h/t Mark Thoma at Economist's View.)

Meanwhile, Phil Izzo at Real Time Economics reports that in a conference hosted by the Wall Street Journal yesterday Paul Volcker seemed to be both reassuring to Beijing while simultaneously dismissive of the primary complaint. The former head of the Fed and current chair of the White House’s Economic Recovery Advisory Board, said that the US's greatest strengths were its history and reputation, and that that shouldn't be put at risk by deliberately inducing inflation:

"One historic way of getting yourself out of this situation—-or trying to—-is to inflate. Either you do it deliberately or you allow it to happen. And if we permit that to happen then I think all these dollars will come tumbling down on us. I get a little nervous when I see the Federal Reserve announcements that they want have the amount of inflation that’s conducive to recovery. I don’t know what ‘the amount of inflation that’s conducive to recovery’ would be appropriate. I’d much rather they say that they want to maintain stability in the currency, which is conducive to confidence and recovery."

All of which would seem to reassure Beijing. On the other hand, Volcker appeared unmoved by the naif taken advantage of by slick Uncle Sam act coming from Beijing:

"I think the Chinese are a little disingenuous to say, ‘Now isn’t it so bad that we hold all these dollars.’ They hold all these dollars because they chose to buy the dollars, and they didn’t want to sell the dollars because they didn’t want to appreciate their currency. It was a very simple calculation on their part, so they shouldn’t come around blaming it all on us."

Indeed, were Chinese long term strategy to include dislodging the dollar from its reserve currency status, perhaps the policy of overloading the US with debt long after it was clear that the debt was unsustainable would be a reasonable policy.

Meanwhile, China Daily News today reported that the government raised "the benchmark retail prices of gasoline by 290 yuan (US$42.46) per ton, or 5%, and diesel by 180 yuan per ton, or 3.7%." The National Reform and Development Commission did not specify whether the increases were for factory gate prices or retail prices. Either way, the decision should put downward pressure on demand for gasoline and diesel. The prices are well above comparable US prices.

4. Eurointelligence notes that the vote of no confidence removing Czech Prime Minister Mirek Topolánek from office yesterday basically means that the largest obstacle to the Lisbon Treaty is now the Czech Republic.

"[The] really worrying aspect of the Topolanek resignation lies in the politics of Lisbon ratification. The Czech parliament’s lower house has accepted the Treaty, but the Senate has yet to vote. [Jean] Quatremer quotes MEP Elmar Brok as saying that this could mean the end of the Lisbon Treaty."

P O Neill at Fistful of Euros reports that in a speech to the European Parliament today, Topolánek said:

"that President Barack Obama’s massive stimulus package and banking bailout 'will undermine the stability of the global financial market.' … Topolanek bluntly said that 'the United States did not take the right path.'

He slammed the US’ widening budget deficit and protectionist trade measures — such as the 'Buy America'-—and said that 'all of these steps, these combinations and permanency is the way to hell.' 'We need to read the history books and the lessons of history and the biggest success of the (EU) is the refusal to go this way,' he said.

'Americans will need liquidity to finance all their measures and they will balance this with the sale of their bonds but this will undermine the stability of the global financial market,' said Topolanek."

5. Anna Shiryaevskaya at Platts reports that Gazprom may exercise its option--which expires in April--of purchasing a majority stake in gas fields in West Siberia and a 20% stake in oil production company Gazprom Neft from Italian oil and gas companies Eni and Enel. The assets were purchased by Eni and Enel in the April 2007 tender of Yukos properties. A deal to purchase the assets might be announced in Italian Prime Minister Silvio Berlusconi's April 6-7 visit to Moscow.

6. Simone Meier at Bloomberg reports that Munich's Ifo Institute's business climate index, based on a survey of 7,000 executives, fell to 82.1 from 82.6 in February.

"Ifo’s gauge of current conditions declined to 82.7 from 84.3. Still, the measure of expectations increased to 81.6 from 80.9.

'The Ifo’s absolute level is still depressingly low,' said Carsten Brzeski, an economist at ING Group in Brussels. 'Nevertheless, the gradual improvement of the Ifo’s expectation component is at least a tender green shoot of stabilization.'"

7. Doris Leblond at the Oil & Gas Journal reports that at a press conference yesterday meant to officially launch France's adoption of countrywide 10% ethanol requirement in gasoline in fact let the public know that the initiative would take longer to complete than previously thought. Jean-Louis Schilansky, president of the oil trade group UFIP, said at the conference that he expected 75% of the country's retail station network would offer 10% ethanol gasoline by the end of the year.

"The government's purpose in introducing the E10 at least 5 years ahead of the EU is that is should reduce carbon dioxide emissions in France by 1 million tonnes/year by 2010."

8. David Jolly at the New York Times reports that the IMF announced via a communique from Washington that it would provide a $17.5 billion loan to Romania under a two-year stand by arrangement. An additional $9.7 billion loan from the European Union and other bodies will be forthcoming as part of an international stabilization package.

9. A post of Willem Buiter, which originally appeared on his Maverecon.com blog, was reposted on VOX EU arguing that the eurozone is vulnerable because there is no single fiscal organization that can recapitalize either the European Central Bank or cross border financial institutions when they make systemically dangerous decisions.

"When the Bank of England develops an unsustainable hole in its balance sheet, Mervyn King knows he only needs to call one person: Alistair Darling, the UK Chancellor of the Exchequer. If the Fed were to become dangerously decapitalised, Ben Bernanke also needs to call just one person, Timothy Geithner, the US Secretary of the Treasury.

Whom does Jean-Claude Trichet call if the Eurosystem experiences a mission-threatening and mandate-threatening capital loss? Does he have to make 16 phone calls, one to each of the ministers of finance of the 16 Eurozone member states? Or 27 phone calls, one to each of the ministers of finance of the 27 EU member states whose national central banks are the shareholders of the ECB? I don’t know the answer, and I doubt whether Mr. Trichet does.

This situation is intolerable. We need a fiscal Europe ... ."

10. Travis Pantin at the UAE National reports that the Gulf Cooperation Council secretariat decided at a conference in Manama yesterday that the original deadline for a common currency for the member nations of January 1, 2010, is untenable.

"Although the GCC states still plan to complete preliminary steps to prepare for introducing the common currency by December, the process will not be finalised until a dedicated GCC monetary council is created towards the end of this year.

'As soon as the monetary council is ratified by the member states, one of its tasks is to set the new timetable for introducing the physical currency,' said Nasser al Kaud, the deputy of the assistant secretariat general for economic affairs at the GCC."

The GCC, minus Oman, agreed to create a monetary council as a prelude to a joint central bank and monetary union in an accord late last year--see Daily Sources 12/30 #4. The GCC originally decided to form a monetary union by 2010 in 2001.

11. Upstream online.com reports that Oil Minister Hussain Shahristani told the media today that the Kurdistan Regional Government refuses to allow oil to be exported from the country via the national oil pipeline network.

"'Work is continuing to connect the (northern oilfields) to the Iraqi network. But there are objections from the KRG to handing over the oil, claiming that companies that developed the oilfields should be rewarded,' Reuters quoted Shahristani saying in an interview published in today's pan-Arab Asharq al-Aswat A newspaper."

12. The AFP reports that Morocco has begun a clampdown on Shia worshipers in the primarily Sunni country.

"The independent Arabic-language newspaper Al Jarida Al Aoula has reported that dozens of people suspected of having Shiite sympathies have been arrested since Friday in Tangiers in the north, Essaouira in the south and Ouyazze 120 kilometres (75 miles) north of Rabat."

The country simultaneously began a clampdown on homosexuality. Morocco cut ties with Iran a few weeks ago in response to the statement by a former speaker of the Majlis calling Bahrain the 14th province of Iran.

13. Mary Beth Sheridan at the Washington Post reports that Secretary of State Hillary Clinton today begins a trip to Mexico, the first of three cabinet level visits to the country which will precede President Obama's scheduled visit there from April 16-7.

"A senior State Department official said Clinton's trip will highlight the broad range of issues on which the neighbors interact. Mexico is the United States' third-largest trading partner and maintains close contacts with U.S. officials in areas ranging from agriculture to immigration.

'The idea of this trip is to not allow Mexico to be pigeonholed by one or two issues,' the official said Tuesday, briefing reporters on condition of anonymity. That approach will undoubtedly please Mexican authorities, who have angrily rejected suggestions by US military officials that the country could increasingly become ungovernable or even turn into a 'failed state.'"

Spencer S. Hsu and Joby Warrick at the Washington Post report that yesterday the Obama Administration announced that it would move 450 law enforcement officers to the border of Mexico to help combat violence erupting from conflicts with the drug cartels.

"Instead of proposing a costly new package, federal officials said they will redirect resources to cut off the financial lifelines supporting the cartels, in particular the estimated $18 billion to $39 billion in cash, wire transfers and other smuggled payments moving each year from the United States to Mexico.

The other US focus is 'to get its own house in order,' O'Neil said, increasing enforcement against the 90% of guns from the United States that are used in crimes in Mexico and acknowledging a $65 billion domestic market for illegal drugs that drives demand."

"Acknowledging" that US demand is the reason for the drug cartels' success in Latin and South America does nothing. Either steps towards ending this Prohibition need to be taken or the US needs to seriously target consumption. What does it mean to have outlawed cannabis and cocaine when our current and the last two presidents--at the very least--have admitted to their consumption?

14. Bryan Keogh and Andrea Jaramillo at Bloomberg report that Peru will sell 10 year dollar denominated bonds yielding 4.5% more than US treasuries. It is the first dollar-denominated debt the country will have sold in two years and Lima has hired Goldman Sachs and JP Morgan Chase to manage the sale. In September it was reported that foreign banks account for about 51% of Peru's financial system--see Daily Sources 9/30 #4. In January, two months after hosting an APEC conference, Peru's finance minister told the press that Lima was in talks with both the Fed and the People's Bank of China to arrange dollar swaps for the sol--see Daily Sources 1/15 #14.

15. Courtney Schlisserman at Bloomberg reports that US durable goods orders rose by 3.4% in February from January. "Excluding transportation equipment, orders gained 3.9 percent, the most since August 2005."

16. The EIA reported that for the week ended March 20 crude stocks grew by 3.3 million barrels to 356.583 million barrels, the largest commercial stockpile of crude seen in the US since July 23, 1993. According to a Bloomberg survey, Wall Street analysts had expected a 1.1 million barrel build. Gasoline stocks fell by 1.1 million barrels versus analyst expectations of a 650 kb drop, and are at the top of the historical range for this time of year. Distillate stocks fell by 1.6 million barrels versus Wall Street expectations of a 100 kb drop, and are well above the historical range for this time of year.

Daily Sources 3/24

1. President Barack Obama has an op ed in the Los Angeles Times today which urges the leaders of the G20 to strong measures and to continue to coordinate their response to the financial crisis with the US in the upcoming London summit. Key excerpts:

"My message is clear: The United States is ready to lead, and we call on our partners to join us with a sense of urgency and common purpose. Much good work has been done, but much more remains. Our leadership is grounded in a simple premise: We will act boldly to lift the American economy out of crisis and reform our regulatory structure, and these actions will be strengthened by complementary action abroad. Through our example, the United States can promote a global recovery and build confidence around the world; and if the London summit helps galvanize collective action, we can forge a secure recovery, and future crises can be averted."

The President stresses that the US has pursued two basic means of addressing the crisis, fiscal stimulus and the restoration of credit, and that these efforts will be enhanced by global coordination:

"This must continue to be amplified by the actions of our G-20 partners. Together, we can embrace a common framework that insists on transparency, accountability and a focus on restoring the flow of credit that is the lifeblood of a growing global economy. And the G-20, together with multilateral institutions, can provide trade finance to help lift up exports and create jobs."

The essay also specifically calls for greater contributions to the IMF:

"Third, we have an economic, security and moral obligation to extend a hand to countries and people who face the greatest risk. If we turn our backs on them, the suffering caused by this crisis will be enlarged and our own recovery will be delayed because markets for our goods will shrink further and more U.S. jobs will be lost. The G-20 should quickly deploy resources to stabilize emerging markets, substantially boost the emergency capacity of the International Monetary Fund and help regional development banks accelerate lending. Meanwhile, America will support new and meaningful investments in food security that can help the poorest weather the difficult days that will come."

The Administration chose the Los Angeles Times as the delivery vehicle for this message, which suggests that it is primarily directed at the members of the G20 that reside in Asia and will make more sense after the next item. Worth reading in full.

2. Andrew Batson at the Wall Street Journal reports that China's central bank governor Zhou Xiaochuan on Monday published a proposal to create a new currency to replace the dollar as the global reserve currency.

"In his paper, published in Chinese and English on the central bank's Web site, Mr. Zhou argued for reducing the dominance of a few individual currencies, such as the dollar, euro and yen, in international trade and finance. Most nations concentrate their assets in those reserve currencies, which exaggerates the size of flows and makes financial systems overall more volatile, Mr. Zhou said.

Moving to a reserve currency that belongs to no individual nation would make it easier for all nations to manage their economies better, he argued, because it would give the reserve-currency nations more freedom to shift monetary policy and exchange rates. It could also be the basis for a more equitable way of financing the IMF, Mr. Zhou added. China is among several nations under pressure to pony up extra cash to help the IMF."

The US has a 15% vote at the IMF which requires a 85% consensus in order to approve a change, meaning that every nation but the US has to agree in order for a proposal to be accepted.

"Mr. Zhou's idea is to expand the use of "special drawing rights," or SDRs--a kind of synthetic currency created by the IMF in the 1960s. Its value is determined by a basket of major currencies. Originally, the SDR was intended to serve as a shared currency for international reserves, though that aspect never really got off the ground.

These days, the SDR is mainly used in the IMF's accounting for its transactions with member nations. Mr. Zhou suggested countries could increase their contributions to the IMF in exchange for greater access to a pool of reserves in SDRs.

Holding more international reserves in SDRs would increase the role and powers of the IMF. That indicates China and other developing nations aren't hostile to international financial institutions -- they just want to have more say in running them. China has resisted the US push to make an immediate loan to the IMF because that wouldn't give China a bigger vote. "

The official translation of Zhou's speech can be found on the People's Bank of China's website here. Justin Fox at the Curious Capitalist argues, interestingly, that it would be in US interests to accept the proposal:

"Zhou's proposal was treated in the WSJ and the NYT as another Chinese attack on the dollar, and I guess it is. But it also points the way toward a global monetary regime that, in theory at least, would better serve the long-term interests of the US than the current dollar-denominated one.

The advantage of having your country's currency as the world's reserve currency is that you don't really have to play by the rules: You can run big deficits financed by the rest of the world, you can spend more than you earn, and to a certain extent you can escape the consequences of your profligacy by devaluing your currency when you run into trouble. The obvious disadvantages are that running big deficits and spending more than you earn aren't really great long-term economic strategies."

Worth reading in full. Meanwhile, Rebecca Wilder has the very useful post demonstrating that the quantitative easing by the Fed and the Bank of England have resulted in less growth in money supply than one might imagine, because the multiplier is collapsing as the banks and consumers hoard cash. She concludes that the European Central Bank and Bank of Japan are lagging in terms of growth in money supply, and that the ECB has actually allowed the money supply growth to go negative. Her graph illustrating this:



Worth a look.

3. Alex Morales and Mathew Carr at Bloomberg report that China, as well as dozens of developed nations, will be asked by the UN to accept "binding" targets on their carbon emissions in six days at negotiations to be held in Bonn.

"The UN whittled down hundreds of proposals circulating to get poor and rich countries to focus on closing a gap that threatens to derail a deal. Nations are closer to agreeing on a year for a long-term emissions target, 2050, and on how to fund greenhouse-gas reductions in poor countries, the UN said today.

'In a number of areas there is a very clear convergence and countries are quite close to each other,' Yvo de Boer, the UN’s top climate official, said in a telephone interview from Germany. Still, 'there are a number of areas where a lot of blanks need to be filled in."

China and India are among developing countries that have rejected adopting any targets until industrialized nations first make reductions. They argue that countries in North America and Europe were responsible for most of the buildup of heat-trapping emissions in the atmosphere blamed for warming the planet, dating to the beginning of the industrial age."

4. The Associated Press reports that Ukrainian Prime Minister Yulia Tymoshenko yesterday signed an agreement with European Commission President José Manuel Barroso which pledged to provide financing for the upgrade of Ukraine's 40 year old natural gas pipeline system in return for "embracing market economy practices."

"[The agreement] aims to improve both the safety and capacity of Ukraine's pipeline network and revamp its management so Western investors can put up money without fear of losing any of it to endless red tape or corruption."

Meanwhile, Edward Hugh at Fistful of Euros reports that "Ihor Burakovsky, the director and board chairman of the Institute for Economic Research and Policy Consulting says that 'experts' have forecast a 12% drop in Ukraine’s GDP in 2009 and an 18% inflation rate."

"In fact [industrial] output was up slightly month on month (by 5.4%) in February, in part as a result of the demand for steel exports produced by the sharp Hyrvnia devaluation, and February output was “only” down by 31.6%, following January’s 34.1% annual fall, so you could say that things were getting better, but frankly, and at this stage of the game, such finesse is a little but lost on me."

Ukraine is still yet to receive the second installment of the $16.4 billion IMF loan, as the IMF refuses to disburse the monies until certain measures are passed by the government.

"Lawmakers need to pass two more bills to qualify for the $1.9 billion installment of the IMF loan, which originally was expected on Feb. 15, according to Oleksandr Shlapak, the first deputy head of the president’s staff, with the central bone of contention being the 5% budget deficit projected for 2009, and on a lot lower contraction forecast than the current 'most realistic case' scenario."

Meanwhile, Upstreamonline.com reports that Russia responded to the EU-Ukrainian agreement by suspending talks with Kiev. Apparently, Moscow was upset it was not included in the talks between the EU and Ukraine in the first place.

"Prime Minister Vladimir Putin threatened to review ties with the European Union and officials warned that the risk of gas supply disruptions would rise if Russian interests were ignored."

RIA Novosti quoted the Prime Minster as saying,

"If Russia's interests are ignored, we will also have to start reviewing the fundamentals of our relations. We would very much like for things not to reach this point."

Putin indicated that Moscow had proposed to the European Commission that the two jointly allocate funds to Kiev, but at the time the EC indicated that they had no funds available for the Ukraine. Meanwhile, Vladimir Soldatkin at Reuters reports that Russian energy minister Sergei Shmatko told the media that Russia could maintain and raise oil output if prices remain above $50/b.

5. Uwe Klussmann at Der Spiegel reports that the television appearance of General Kurashvili, who was in charge of the Georgian peacekeeping forces in South Ossetia on August 7, 2008, is playing a key role in the EU's investigation into the causes of the Russo-Georgian conflict at that time.

"This is because Kurashvili may have been quoting directly from Order No. 2 from Aug. 7, a Georgian document that could shed light on the question of who started the war. When the commission questioned the Russian deputy head of the general staff, Anatoly Nogovitsyn, in Moscow, he quoted from the very same Georgian order. According to Nogovitsyn, the document also contained the phrase "reestablishment of constitutional order." If the order, which Russian intelligence intercepted, is authentic, it would prove that Saakashvili lied [and that Tblisi had chosen to mass troops by South Ossetia and then use a Russian response as an excuse for an attack]."

Tblisi refuses to allow EU investigators access to Order No. 2 of August 7, which seems awful close to an admission of guilt. Greg Scoblete at Real Clear World notes the Hill story by Kevin Bogardus on the 19th that Georgia had spent $300k on a six month contract and $470k on an eleven-month contract with lobbyists with contacts with the Democrats. Apparently Randy Scheunemann, Tblisi's old main PR man in the US (and foreign adviser to GOP presidential candidate Sen. John McCain--see Daily Sources 12/2 #1.) has been thrown over.

6. Eurointelligence notes that the FT Deutschland reports that the German Foreign Ministry has established a task force to explore potential threats to security posed by the financial crisis. "The scenarios include state defaults in politically unstable regions such as the Caucasus."

7. Scott Peterson at Japan Economy Watch notes that Japanese household financial assets fell by an annual rate of 5.7% in December--the sharpest drop on record. Peterson adds

"this is not good news for a country where a large proportion of the population is expecting to live off of savings fairly shortly. Further, Japanese consumers are unlikely to provide a boost to GDP as they are not going to increase discretionary spending in the face of investment losses."

8. Seyoon Kim at Bloomberg reports that Seoul plans to append 17.7 trillion won (~$13 billion), or 1.9% of GDP, on cash "handouts," cheap loans, infrastructure and job training to its 51 billion won already allocated. "The stimulus will boost economic growth by 1.5 percentage points and help create 552,000 new jobs, the finance ministry said in Gwacheon today." The government hopes to get the measure passed by parliament in April.

9. Platts reports that Nigerian oil and gas labor unions have rescinded their threat to strike tomorrow.

"'We have decided to suspend plans to call a strike following our meeting with the national security adviser Monday, which we believe was favorable,'deputy general secretary of the Petroleum and Natural Gas Senior Staff Association of Nigeria, or Pengassan, Lumamba Okugba, told Platts."

10. Nasreen Seria and Vernon Wessels at Bloomberg report that South Africa's central bank--the Reserve Bank--decided today to cut benchmark interest rates by 1% to 9.5%.

"The Reserve Bank is not 'necessarily at the end of the cycle' of rate cuts, [Monetary Policy Committee] member Brian Kahn said in a televised interview with the South African Broadcasting Corp. today. The risks to inflation are now 'more on the downside because of the softening economy.'"

Governor Tito Mboweni also indicated that the decision to accelerate the schedule of monetary policy committee meetings should not be misconstrued to mean that there will be changes in the repurchase rate at every meeting.

11. Valerie Rota at Bloomberg reports that Moody's Investor Service has said that Mexico's credit rating is safe.

"'Despite heightened anxiety about the escalation of violence and organized crime activity, Mexico does not fit the general profile of countries identified as failed states,' Moody’s said in a report released today. 'The general foundations of its investment-grade rating remain solid.'"

While I would usually be happy to hear of calm-headed assessments of situations distant, I imagine the first thought in a lot of heads today was much the same as mine: "Last time Moody's rated something ... sell, sell, shit, SELL SELL SELL!!!!" But then, today also Enrique Krauze has an op ed in the New York Times which points out that the failed state meme is best described as a caricature of the situation in the country. Key excerpts:

"Mexico is a tolerant and secular state, without the religious tensions of Pakistan or Iraq. It is an inclusive society, without the racial hatreds of the Balkans. It has no serious prospects of regional secession or disputed territories, unlike the Middle East. Guerrilla movements have never been a real threat to the state, in stark contrast to Colombia.

Most important, Mexico is a young democracy that eliminated an essentially one-party political system, controlled by the Institutional Revolutionary Party, that lasted more than 70 years. And with all its defects, the domination of the party, known as the P.R.I., never even approached the same level of virtually absolute dictatorship as that of Robert Mugabe in Zimbabwe, or even of Venezuela’s Hugo Chávez.
...
Our national institutions function. The army is (and long has been) subject to the civilian control of the president; the church continues to be a cohesive force; a powerful business class shows no desire to move to Miami. We have strong labor unions, good universities, important public enterprises and social programs that provide reasonable results."

That said, Krauze does call on readers to consider how much instability America's drug war is exporting. Worth reading.

12. R. Colin Johnson at the EE Times reports that US Navy researchers claimed to have found experimental evidence of cold fusion at the American Chemical Society's annual meeting.

"Cold fusion was first reported in 1989 by researchers Martin Fleischmann and Stanley Pons, then with the University of Utah, prompting a global effort to develop the technology. Normal fusion reactions, where hydrogen is fused into helium, occur at millions of degrees inside the Sun. If room temperature fusion reactions could be realized commercially, as Fleishchmann and Pons claimed to have achieved inside an electrolytic cell, it promised to produce abundant nuclear energy from deuterium--heavy hydrogen--extracted from seawater.

Other scientists were unable to duplicate the 1989 results, thereby discrediting the work."

Italian and Japanese researchers also reportedly presented evidence of cold fusion.