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.