Daily Sources 4/30

1. WHO RAISES ALERT ON SWINE FLU TO CATEGORY 5

Denise Grady and Alan Cowell at the New York Times report that the World Health Organization yesterday raised its alert level on the swine flu to 5, or "sustained community-level outbreaks in at least two countries--a signal that a pandemic is imminent." 5 is just below the highest alert level, 6, which indicates that a global pandemic in underway. Phase 5 activates an intense effort to develop a vaccine. Mark Stevenson and Andrew O. Selsky at the Associated Press report that Mexico has responded by shutting non-essential services for five days and urging businesses to stay closed and citizens to stay home during that time.

"'It really is all of humanity that is under threat during a pandemic,' WHO Director General Margaret Chan said in Geneva. 'We do not have all the answers right now, but we will get them.'

Switzerland and the Netherlands became the latest countries to report swine flu infections. In addition to Mexico and the US, Canada, New Zealand, Britain, Germany, Spain, Israel and Austria have confirmed cases."

Fort Worth, Texas, announced the temporary closure of all school districts to last through May 12, and dozens of schools have been closed across the country. From the New York Times story:

"Most people will not have immunity to this new virus and, as it continues to spread, more cases, more hospitalizations and more deaths are expected. And as the virus spreads, the likelihood grows that it will mutate--possibly into [a] more lethal strain."

Jane Rickards at the Washington Post reports that Beijing gave the green light for Taipei to officially be invited to the WHO's 62nd World Health Assembly, which begins May 18 in Geneva.

"Experts on relations between Taiwan and the mainland said they believed the two sides had been secretly negotiating the matter for months.

'They're finding a way to accept each other,' said Andrew Yang, secretary general of the Chinese Council of Advanced Policy Studies. 'This will provide room for more positive negotiations for future international participation.'"

Donald G. McNeil Jr. at the New York Times reports that Homeland Security Secretary Janet Napolitano was heavily pressured by Congress to officially close the border with Mexico, although at this stage experts do not believe the outbreak is containable via quarantines.

"Closing borders is dangerous because many goods needed in a pandemic are made abroad, said Dr. Michael T. Osterholm, director of the Center for Infectious Disease Research and Policy at the University of Minnesota, including most masks, gowns and gloves, electrical circuits for ventilators and communications gear, and pharmaceutical drugs and the raw materials to make them. ...

'You cut those off and you cripple the health care system,' he said. 'Our global just-in-time economy means we are dependent on others.' Much of our food is from overseas. 'A Kellogg’s Nutri-Grain bar has ingredients from nine countries in it,' he noted."

Further, Mexico has the third largest share of trade with the US, after Canada and China, per the US Census Bureau's foreign trade statistics. It roughly accounts for $350 billion in trade per annum. Kyle Peterson at Reuters notes that "US Commerce Department data shows about 5.9 million US citizens flew to Mexico in 2008." Total global tourism receipts account for about 9% of global GDP, according to 2008 Travel and Tourism Economic Research of the World Travel & Tourism Council (WTTC). Wikipedia's article on tourism indicates that the US is the third most visited country in the world and that Mexico is the tenth-most. Platts reports that Mexico's state oil company, PEMEX, will remain in operation during the suspension of non-essential services. Thus, until this outbreak is contained, it will add to the global economic downturn, with exports likely to be hit hardest, on top of the already dismal numbers continuing to be posted as per Rebecca Wilder's weekly roundup of global economic data:



Global instability could thus potentially sharply increase. Though this particular outbreak is not reportedly as dangerous as the 1918 Spanish Flu, be safe. Apparently the most practical actions you can take are to wash your hands with soap regularly and attempt to limit social interaction.

2. JAPANESE INDUSTRIAL OUTPUT UP 1.6% IN MARCH, BUT ASIAN SPOT LNG DOWN $0.30/MMBTU

Hiroko Tabuchi at the New York Times reports that Japanese industrial output grew by 1.6% in March from the month earlier. The rise follows 10.2% and 9.4% declines in January and February, respectively. "Other recent economic data show a brightening picture. Exports in March rose 2% from the previous month, the first increase in nearly a year." Meanwhile, Jonty Rushforth at Platts reports that Asian spot LNG prices fell by $0.30/MMBtu to $3.80/MMBtu on April 30, per Platt's June Japan Korea marker. Several suppliers have cut production in the face of excess supply in the region, but apparently supplies remain more than abundant. A considerable share of LNG demand is for industrial production.

3. SIGNS OF DEFLATION IN THE UK; SOUTH AFRICA'S RESERVE BANK CUTS BENCHMARK INTEREST RATE

Angela Monaghan and Edmund Conway at the UK Telegraph report that UK weekly wages fell at an annual rate of 5.8% in February, the steepest decline in wages seen in 60 years. (h/t Yves Smith at naked capitalism.) Evidently Pretoria's inflation expectations are also for it to slow, as Nasreen Seria and Mike Cohen at Bloomberg report South Africa's Reserve Bank has cut its benchmark interest rate by a full percentage point to 8.5%.

"'Despite the widening output gap, inflation remains sticky but is expected to continue on its downward path,' [Bank Governor Tito Mboweni] said. 'The most recent central forecast of the bank shows a near-term deterioration in the inflation outlook.'

The Reserve Bank expects inflation to average 5.4% in the final quarter of 2010. Mboweni didn’t say today whether the inflation rate will drop into the target range this year, as he forecast last month."

4. MOSCOW ARRANGES FOR DEFENSE OF GEORGIAN BREAKAWAY REGIONS' BORDERS, BUT EVIDENTLY IS REBUFFED ON BP'S SHARE OF THE CPC PIPELINE

The Associated Press reports that Russia signed a deal with South Ossetia and Abkhazia officially authorizing Moscow to defend their borders. Georgian President Mikhail Saakashvili condemned the deal, telling reporters in Poland:

"We are seeing some kind of legal maneuvering to try to legalize, but you cannot legalize something that is fundamentally illegal. It is very dangerous to everybody, including Russia itself."

Meanwhile, Amanda Rayborn at Platts reports that KazMunaiGaz has purchased BP's stake in the CPC pipeline for $250 million, apparently denying Lukoil's application to purchase the stake--see Daily Sources 4/14 #7.



5. US ECONOMIC DATA MIXED, SOME SEE 'GREEN SHOOTS'

Kelly Evans at Real Time Economics reports that the Labor Department's data on initial unemployment claims fell by 14,000 to 631,000.

"This is still a high level, of course, but the four-week average of new claims--which smoothes out weekly volatility--also declined, to 637,250."

However, Evans notes:

"The total number of workers receiving jobless benefits jumped to nearly 6.3 million for the week ended April 18, a far higher figure than has been previously recorded by the Labor Department. With such high levels of workers on jobless rolls, it could keep a lid on any hopes for a recovery, particularly as the unemployment rate, now 8.5%, is expected to hit double digits."

Meanwhile, Jeannine Aversa at the Associated Press reports that unemployment rates have risen for the third straight month in all the nation's largest metropolitan areas in March.

"In Wednesday's metro unemployment report, the government said 18 regions registered jobless rates of at least 15%. Meanwhile, 15 regions had rates below 5%. They include: Ames, Iowa; Houma-Bayou-Cane-Thibodaux, La.; Iowa, City, Iowa; Manhattan, Kansas; and Lubbock, Texas."

Nonetheless, Phyllis Plitch at Real Time Economics reports that Dow Jones new economic sentiment indicator showed a small upturn in April to 27.6 in April, from 26.3 in March. It had bottomed at 22.2 in November.

"[The new economic sentiment indicator] is reported on a scale of 0 to 100, where higher numbers represent increasingly positive sentiment. In back-testing to 1990, the ESI has proven reliable in identifying nearly every major economic downturn and recovery as they happened, often in advance of other major economic indicators.

Other recent sentiment indicators have suggested the US economy is starting to rebound. The Dow Jones ESI, however, is more cautious. In April, the ESI remained well below where it bottomed during the previous two recessions and has so far only crept off last November’s lows. This suggests the economy continues to contract, albeit at a significantly slower pace."

The full statement following Fed's Open Market Committee meeting for April was posted on Real Time Economics yesterday, and it suggests that inflation remains subdued. Key excerpt:

"Information received since the Federal Open Market Committee met in March indicates that the economy has continued to contract, though the pace of contraction appears to be somewhat slower. Household spending has shown signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. Weak sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories, fixed investment, and staffing. Although the economic outlook has improved modestly since the March meeting, partly reflecting some easing of financial market conditions, economic activity is likely to remain weak for a time."

Providing some support to the housing market and thus the economy overall are 30 year fixed rate mortgages which have fallen to 4.78% in the week ended April 30, the lowest seen since Freddie Mac began tracking the rate in 1971, per David Wessel at Real Time Economics.

Daily Sources 4/29

1. CHINA, INDIA AND SOUTH AFRICA CALL FOR $200 BILLION IN CONTRIBUTIONS TO ADDRESS GLOBAL WARMING

Alex Morales at Bloomberg reports that China, India, and South Africa have called on the industrialized nations to contribute at least $200 billion to help them address global warming in a new proposal to the UN.

"'Economic and social development and poverty eradication are the first and overriding priorities of the developing countries,' China said. The statements reiterate demands China has previously made during 16 months of climate talks that most of the climate burden should be carried by the richest nations. Contributions should be additional to existing aid, China said."

$200 billion is about 0.5% of the industrialized world's economic production. The three also called upon the industrialized world to cut greenhouse emissions by at least 40% from 1990 by 2020, twice the cut the EU has agreed to make.

2. CHINESE PREMIERE SAYS GOOD RELATIONS WITH JAPAN IN ITS INTERESTS

Yoko Kubota at Reuters reports that Chinese Premier Wen Jiabao told Japanese Prime Minister Taro Aso during his visit to Beijing today that stable and friendly relations between the two countries "suits the fundamental interests of the people of both countries."

"In their remarks with reporters present, neither leader mentioned North Korea. But Japan's NHK television reported that the two were likely to discuss Pyongyang's threat.

Aso said earlier that swine flu was also likely to feature in his meetings with Chinese leaders."

(h/t Foreign Policy's Morning Brief.)

3. PIETRO GARIBALDI ARGUES THE CONSERVATIVISM OF THE ECB WILL MAKE EURO PREFERABLE TO THE DOLLAR AFTER THE CRISIS EASES

Eurointelligence reports that Pietro Garibaldi has an opinion piece in La Stampa which argues that the financial crisis will strengthen the euro's position relative to the dollar.

"One reason is the likely scenario of higher inflation in the US, post-recovery, as the Fed is unlikely to role back its monetary easing sufficiently fast, and since inflation is highly effective at reduce the real value of debt. Another reason is the European Central Bank’s relative conservativism, in particular its reluctance to cut interest rates to zero."

4. SWINE FLU SPREADS TO GERMANY

Der Spiegel reports that swine flu has spread to Germany.

"Meanwhile, in Spain, authorities have confirmed 10 cases of the disease--including one victim who has not recently visited Mexico. Suspected cases have also been reported in many other countries, including France, Belgium, Switzerland and Chile. In Austria, officials with the Health Ministry in Vienna confirmed that a 28-year-old woman had been infected with H1N1, and a total of five cases were confirmed in Great Britain."

5. RUSSIA SECURES TWO BIG ARMS DEALS WITH TURKEY AND VIETNAM

Yevgeny Bendersky at Real Clear World reports that Russia has recently concluded two major new defense exports deals with Turkey and Vietnam. "Turkey has recently decided to purchase Russia's latest and most advanced air defense system, the S-400." The estimated purchase price for the missile system ranges from $1 to $4 billion.

"Russia's 'Rosoboronexport' also recently announced that it will be building six 'Kilo' diesel-electric submarines for the Vietnamese Navy, to the tune of approximately $1.8 billion."

6. LITHUANIAN GDP FELL BY 12.6% IN Q1, BAD OMEN FOR THE BALTIC GENERALLY

Joel Sherwood and Katie Martin at the Wall Street Journal report that Statistics Lithuania said today that Lithuanian GDP fell by 12.6% in the first quarter from the year previous.

"Economists say that figure suggests expectations of a 10% slump in GDP across the Baltic region this year could be too optimistic. Latvia and Estonia are to release first-quarter GDP growth estimates in early May."

7. UAE PROPERTY MARKET PRICES FALL BY 41%; IPIC SEEKS MORE CAPITAL TO INVEST WITH AT THE BOTTOM


BBC News reports that Colliers International released a new report showing that property prices in Dubai fell 41% in the first quarter of 2009 from the first quarter of 2008. The fall followed the annual 8% decline seen in the fourth quarter of 2008 from 2007. Meanwhile, JGW at Frontier Markets reports that the Abu-Dhabi-based International Petroleum Investment Company (IPIC) announced on Monday that it had received a2/AA/AA long term credit ratings by Moody’s, Fitch Ratings and Standard and Poor’s, respectively, with a stable outlook.

"According to one analyst, the ratings are 'a signal that [state sovereign] funds are eager to keep spending and [are] willing to borrow to increase their buying power.'"

8. US GDP FELL BY 6.1% IN THE Q1, BUT PRODUCTIVITY IS FLAT, AND INVENTORY DRAWDOWNS ACCOUNTED FOR NEARLY HALF OF THAT FALL

Justin Fox at the Curious Capitalist reports that the Bureau of Economic Analysis released data today showing that US GDP fell by an annual rate of 6.1% in the first quarter. That follows the contraction seen in the fourth quarter of 2008 of 6.3%. (Though the data on the first quarter is still likely to be revised.) Fox comments:

"So the worse-than-expected GDP headline number is not going to discourage those economic forecasters who've been predicting a marked easing in the pace of the downturn, or even an end to it within a few months. In fact, the sharp decline in private inventories that accounted for 2.79 percentage points (almost half) of the GDP decline is actually extremely good news, because it means businesses may have already made most the inventory adjustment that's a part of every recession—clearing the way for an upturn."

Brian Blackstone at Real Time Economics notes that in addition nonfarm business value added fell by 8.2% in the first quarter. Evidently, nonfarm business value is used to estimate productivity.

"Still, nonfarm productivity, which is defined as output per hour of labor, will likely come in flat or down only slightly for a second-consecutive quarter — a heroic effort, given the extent of the economic contraction over the past six months.

Productivity shrank just 0.4% in the fourth quarter, at an annual rate, despite a 6.3% contraction in GDP and 8.8% drop in nonfarm value added.
...
To put that in perspective, the last time the U.S. had recessions approaching the current one in severity, in the mid 1970s and early 1980s, productivity posted quarterly drops of as much as 5%."

9. CRUDE IN STORAGE AT 18-YEAR HIGHS IN EUROPE AND US; MARKET SHRUGS

Alaric Nightingale at Bloomberg reports that Rotterdam--Europe's largest port--may be running out of spare storage capacity for crude and oil products.

"Rotterdam can store 11.9 million cubic meters of crude, port data from 2007 show. That’s equal to about 75 million barrels or enough to supply the 27-nation European Union for about five days.

Some on-shore storage tanks for oil products are either full or have no unreserved space available, Pieter Kulsen, a Rotterdam-based refined oils consultant at PJK International BV, said by phone yesterday."

Meanwhile, the EIA reported that US commercial crude stockpiles grew by 4.1 million barrels to 374.7 million barrels in the week ended April 24. The median expectation of a survey of analysts was for a 1.8 million barrel build, according to a Bloomberg survey. The total is the largest commercial crude stock holding seen since September 1990. Gasoline stocks, on the other hand, fell by a whopping 4.7 million barrels, though it is still at the high end of the five year historical range for this time of year and 1.5 million barrels up from a year ago. Analysts had expected a 200,000 barrel build. From Mark Shenk's Bloomberg article:

"'Nobody was looking for a gasoline decline of that size,' said Sean Brodrick, natural resource analyst with Weiss Research in Jupiter, Florida. 'This shows that refineries are keeping processing rates too low because there’s obviously some demand out there for gasoline.'"

Distillate stocks grew by 1.8 million barrels to 144.1 million barrels--38.3 million barrels more than were held a year ago, which is about 36.2% greater than what is historical at this time of year, moving counter-cyclically. Analysts had expected a 1 million barrel gain. From Shenk's article again:

"'The weekly numbers haven’t been kind to the market recently,' said Kyle Cooper, an analyst at energy consultant IAF Advisors in Houston. 'It’s hard to explain why prices aren’t lower because there is plenty of petroleum.'"

That is, taken in isolation, the data are mixed, but should be bearish on the price of oil. So far today the price of front month sweet light on NYMEX has risen by about a buck a barrel.

Daily Sources 4/28

1. NEW CHINESE POSTAL LAW MAY VIOLATE BEIJING'S WTO OBLIGATIONS

Wall Street Journal Asia has an editorial reporting that the Chinese State Council passed a new Postal Law, complaining that the new legislation which raises barriers on entry into the carrier market, and points out that that may violate its WTO commitments.

"Although China Post has always had a monopoly on 'universal mail,' like the US Postal Service does in America, some parts of the courier system are lightly regulated and open to entrepreneurs. Not surprisingly, these sectors now provide some of the best services. For instance, local express couriers, known as 'kuaidi,' pepper Chinese cities and can deliver almost anything within the city for a dollar or two. Under the new law, intra-city express couriers like these face a minimum capital requirement of 500,000 yuan--which will likely wipe many of them off the map."

2. PARIS REJECTS PROPOSED EC HEDGE FUND REGULATIONS AS TOO LAX

Peggy Hollinger, Nikki Tait, and Martin Arnold in the Financial Times reports that Christine Lagarde, the French finance minister, has attacked the most recent proposed legislation being proposed at the European Commission which would regulate the hedge fund industry.

"'The Commission wants to create a system of mutual recognition,' Ms Lagarde said in an interview with the French daily Le Figaro. 'This is the kind of system that will open the door to a fund from the Cayman Islands that has never been regulated by Europe. The danger is that this could become the Trojan Horse of offshore funds.'

France and Germany have been the standard bearers in Europe of stricter financial regulation of hedge funds. Nicolas Sarkozy, French president, has repeatedly attacked 'speculative funds' and summoned French banking leaders to the Elysée this month, where he sought undertakings on the transparency of their dealings."

3. DEMAND FOR TREASURIES MOSTLY COMING FROM THE PRIVATE SECTOR

Brad Setser's latest post at Follow the Money demonstrates that the majority of treasuries issued over the last twelve months were purchased by private investors as opposed to sovereign entities.

"Over the last 12 months of data, China bought about $250b of Treasuries, and other central banks bought just about as many. But, by our calculations, the outstanding stock of Treasuries not held at the Fed increased by $1.7 trillion."

Setser notes that reserve managers are likely to purchase even fewer treasuries in the next 12 month period than they did in the last. The Fed will purchase more.

4. PFC ENERGY SAYS DEEP WATER EXPLORATION TO SLOW

Dinakar Sethuraman and Ann Koh at Bloomberg report that PFC Energy partner Michael Waters forecast in an interview that deep water oil production is likely to stay flat on relatively low oil prices.

"'The pace of growth will slow and then become flat for the next few years,' Michael Rodgers, a partner at PFC Energy, said in an interview at the Offshore Vessels conference in Singapore yesterday. 'There were not a whole lot of large commercial discoveries in the last couple of years.'

Production from deep water blocks grew 67% a year between 2005 and 2008 following discoveries off Angola and Nigeria. That beat a growth of 1.3% in total crude oil output during the same period.

Global deep water oil production may peak at 7.5 million barrels a day in 2013, Rodgers said."

5. HOME PRICES CONTINUE TO DECLINE ACROSS THE US

The Case-Shiller home price index continued to post declines in February, according to Phil Izzo at Real Time Economics.

"Phoenix, Las Vegas and San Francisco continued to lead year-over-year decliners, with drops over 30%. Cleveland posted a large month-to-month drop, as the rate of decline accelerated there. The rates of decline also accelerated in Charlotte, New York and Washington."

The post includes a sortable chart of the index's readings for all twenty cities and declines from January and from February last year. Barry Ritholtz at the Big Picture posts a chart of the 20 and 10 city indexes from 1988:

Daily Sources 4/27

1. BANK OF JAPAN CUTS GDP FORECAST TO 3.3% CONTRACTION, GLOBAL LNG EXPORTS DOWN

Michiyo Nakamoto at the Financial Times reports that the Bank of Japan has forecast GDP to fall by 3.3% in the fiscal year beginning April 1.

"In spite of the worsening plight of the world’s second largest economy, the government’s efforts have boosted the popularity of Taro Aso, prime minister. Mr Aso’s approval rating fell to single digits earlier this year but a poll by the Nikkei business daily, published yesterday, found his rating had risen 7 percentage points from March to 32%.

Setting out its revised GDP forecast, the government said it expected exports to fall 27.6% this year and industrial production to decline 23.4%. It had earlier predicted declines of 3.2% and 4.8% in exports and production, respectively."

Dinakar Sethuraman at Bloomberg reports that JPMorgan released a study showing that global LNG exports fell by about 5.5% in the first two months of 2009.

"Last year, LNG exports declined about 2.9% to the equivalent of 23.08 billion cubic feet a day of natural gas, the US bank said.
...
'The decline in global LNG exports in 2009 is driven by reduced exports by six of the 14 largest exporters--Algeria, Nigeria, Qatar, Indonesia, Egypt and Equatorial Guinea,' JPMorgan said in the report. 'Producers are making individual decisions to reduce supply in the face of a weak global gas market.'"

Industrial production accounts for a considerable share of natural gas consumption, in the US in 2007 34% of the natural gas consumed in the country was for industrial uses.

2. SWINE FLU SPREADS TO EUROPE

Der Spiegel reports that the EU's health chief has warned travelers not to visit the US or Mexico except in cases of extreme urgency.

"The disease arrived in Europe as Spanish authorities said on Monday that a male patient had tested positive for the virus and 17 other people were under observation. The man was responding to medication and his infection wasn't life-threatening, Spanish Health Minister Trinidad Jimenez said."

3. POLAND TO DELAY ADOPTION OF THE EXCHANGE RATE MECHANISM

In an interview with Agnes Lovasz of Bloomberg, the Polish Deputy Finance Minister Dominik Radziwill indicated that Poland was unlikely to join the pre-euro adoption exchange rate mechanism in the first half of 2009, though Warsaw still expects to join the eurozone by 2012.

"The Polish zloty is 'too volatile' to consider entering the exchange-rate mechanism 'seriously,' Ludwik Kotecki, another of the country’s nine deputy finance ministers, said on April 1."

In yesterday's interview Radziwill indicated that Warsaw did not intend to use the $20.5 billion flexible credit line it applied for from the IMF earlier this month.

4. PEACE IN SWAT FAILS

Nahal Toosi at the Associated Press reports that the Pakistani military has started a push into southern Swat after the Taliban sent troops to occupy Buner, the province just South. The Taliban has responded by calling the peace deal establishing sharia in Swat "worthless" and the peace talks between Islamabad and the organization have been suspended. In today's Informed Comment, Juan Cole argues that the take on the situation in Pakistan is hugely overblown, noting:

"[T]he Pakistani military is not 'unable' to stop the Taliban in the North-West Frontier Province. The Zardari government is just not desirous of alienating the Pushtuns by being heavy-handed. They only sent in 250 special ops troops to deal with Buner, which is a very light touch for an army with lots of artillery, tanks and fighter jets.

Pakistan now is not like Russia in 1917. Its two main political parties are of old standing, have contested many elections, have millions of supporters and canvassers. The main threat to the PPP government is parliamentary--that it will be unseated by the Muslim League if it fails a vote of no contest and there are new elections."

Prof. Cole's post is worth reading in its entirety.

5. DC MEETING OF BIGGEST EMITTERS TAKES PLACE TO JUMP START DECEMBER COPENHAGEN TALKS

Deborah Zabarenko and Jeff Mason at Reuters report that the Obama Administration pledged to work with the other largest greenhouse gas emitters to reduce their carbon footprints.

"The major economies represented at the meeting include Australia, Brazil, Britain, Canada, China, the European Union, France, Germany, India, Indonesia, Italy, Japan, Korea, Mexico, Russia, South Africa and the United States.

Obama aims to cut US emissions by about 15% by 2020, back to 1990 levels. The European Union and many environmentalists want the United States to go further."

The meeting was scheduled with the idea of jump starting the environmental talks prior to the conference taking place in Copenhagen in December.

"[Secretary] Clinton touched on a major sticking point in international talks--the role that big developing countries should play--by admitting US mistakes in allowing its own emissions to skyrocket.

'As I have told my counterparts from China and India, we want your economies to grow ... We just hope we can work together in a way to avoid the mistakes that we made that have created a large part of the problem,' she said."

Daily Source 4/23

1. EVERYONE SAYS THAT CHINA AND THE US NEED TO WORK TOGETHER TO RESOLVE THE FINANCIAL CRISIS AND OTHER GLOBAL ISSUES, ESPECIALLY GIVEN BEIJING'S HUGE HOLDINGS OF US$ ASSETS, WHICH HAPPENS TO MIRROR FRANCE'S SITUATION IN THE GREAT DEPRESSION ... MEANWHILE CHINESE ECONOMIC DATA MIXED AND BEIJING WARNS TOKYO ON YASUKUNI SHRINE AND US ON DALAI LAMA

Brad Setser at Follow the Money reports that the IMF Global Financial Stability Report implies that going forward the only country with a significant trade surplus globally will be China.

"If oil averages $50 or so this year and $60 or so next year--and if intra-European surpluses and deficits are netted out--the world’s macroeconomic imbalances reduce to the United States external deficit (which the IMF estimates will be under 3% of US GDP in 09), a somewhat smaller EU deficit and China’s 10% of GDP surplus.

On the surplus side of the global ledger, the IMF forecasts that there will soon be China--and almost no one else."

Setser comments:

"[The IMF seems to expect] China’s surplus [will] continue to fuel Chinese reserve growth and thus the buildup of Chinese government claims on the US and Europe. And, implicitly, China’s government would risk ever larger losses on its ever growing foreign portfolio--at least so long as China finances the world by buying dollars and euros, not making yuan-denominated loans."

Sky Canaves at China Journal reports that the latest reading of the Nielsen Global Consumer Confidence Index has 65% of Chinese respondents stating that there is no recession in the Middle Kingdom. However, Ms. Canaves notes:

"Perhaps it is a face-saving gesture, as Chinese consumers appeared more ready to admit declining confidence on a personal, rather than national, level. China’s consumer confidence index also fell by seven points over the last six months, though from 96 to 89, putting it well above the global average. (The survey has a baseline of 100, and by way of comparison, US consumers were slightly more confident than average, at 80)."

Perhaps some respondents were afraid of angering the authorities as well. On the other hand, in her weekly roundup of global economic data, Rebecca Wilder at News N Economics notes that Chinese retail sales are up 14.7% year on year in March. Her graph:



Returning to the first hand,China Stakes reports that the China Electricity Regulatory Commission expects a 4% decline in power generation in April (from March, or so I infer).

"According to statistics from the State Grid, power generation dropped 0.7% year on year in March, after a rise of 5.9% in February and a fall of 12.3% in January. Experts believe the fallback indicates economic uncertainties. State Grid figures also show that power generation in the first quarter of this year dropped 2.25%, year on year."

And Olivier Accominotti has the especially interesting post at VOX which points out that China's huge volume of dollar reserves is paralleled by the situation facing France as it entered the Great Depression:

"Economic history offers one striking example of a country being trapped by the huge volume of its foreign reserves. This country was France, the period was the early 1930s, and the currency at stake the pound sterling. The episode ended up dramatically. Sterling suffered a major currency crisis, French authorities lost a lot of money, and their subsequent policy largely contributed to the Great Depression.

The origin of the problem lay in the government’s decision of 1926 to peg the franc to the sterling and dollar, two years before re-establishing the gold standard. Since the trade balance was in surplus and capital was flowing into the country, this goal was achieved through public purchases of foreign exchange. The Bank of France therefore accumulated a bulging portfolio of foreign holdings. At the end of the 1920s, the country held more than half of the world’s volume of foreign reserves."

At the time, the Bank of France room for action was limited by the size of its position, it could not sell large amounts of Sterling without causing a collapse in its value and thus its key holding. The bank was eventually forced to reverse its sales and support the Pound.

"When the pound eventually collapsed, the Bank of France was put into a state of technical bankruptcy. It was only able to survive thanks to a state’s rescue, obtained under tough conditions. Moreover, there were now rising fears over the dollar. The will to avoid further losses therefore led authorities to convert all their dollar assets into gold, a policy that heavily contributed to the global monetary contraction of the 1930s."

Well worth reading in full. And Former Secretary of Defense, William Cohen, has an opinion piece in the Wall Street Journal arguing that "Virtually no global challenge can be met without China-US cooperation." Key excerpt:

"The most immediate opportunity for cooperation is in confronting the international financial crisis. China currently holds $2 trillion worth of largely US dollar-denominated foreign exchange reserves, and it is by far the world's largest holder of US government debt. As the Obama administration increases that debt to finance its economic stimulus plan, China will almost certainly be called upon to purchase the lion's share of new US debt instruments. China also has an interest in working with the US to ensure those efforts succeed, because it depends on economic growth in the US (still its largest single trading partner) to ensure stability at home.

There is a compelling need to create a new dialogue on finance and economics. This conversation began with President Barack Obama and Chinese President Hu Jintao's discussions at the G-20 summit this month in London. Meetings between US and Chinese leaders have been dubbed the 'G-2' by some to reflect the crucial role of economic negotiations between our two countries. This first meeting between the two men, and the agreement reached by world leaders at the close of the summit, mark a positive beginning to the effort to harmonize our financial management and banking regulatory practices, and explore ways to expand bilateral trade opportunities in areas such as energy and environmental technologies."

Cohen also makes special mention of greenhouse gas emissions, the nuclear dilemma in North Korea, and efforts to put an end to the opium trade originating in Afghanistan. Well worth reading in full. In the meantime, the Associated Press's Gillian Wong reports that the Chinese Foreign Ministry Spokesperson stated that it would take umbrage were President Obama to meet with the Dalai Lama when he visits the US in October.

"We firmly oppose the Dalai's engagement in separatist activities in any country under whatever capacity and under whatever name. We have made representations to the United States urging the U.S. to honor its commitments and not allow the Dalai to engage in separatist activities in the United States."

In addition, AFP reports that the Foreign Ministry Spokesperson "expressed concern" over Japanese Prime Minister Taro Aso's Tuesday visit to the Yasukuni shrine:

"The Chinese side has already expressed to the Japanese side through diplomatic channels our serious concern and dissatisfaction. [We] reiterated that the question of history is highly sensitive, that any mistaken action by the Japanese side will bring a serious and negative influence to bilateral relations."

2. JAPANESE DEMOGRAPHY PRESENTS SPECIAL DIFFICULTIES IN RECESSION, LOOKING FOR STRATEGIC OIL SUPPLY BASED IN BRAZIL

Hiroko Tabuchi at the New York Times reports that the Japanese government is offering to pay foreign workers thousands of dollars to return home and pay for their airfare if they promise never to return.

"In 1990, Japan--facing a growing industrial labor shortage--started issuing thousands of special work visas to descendants of these emigrants. An estimated 366,000 Brazilians and Peruvians now live in Japan.

The guest workers quickly became the largest group of foreign blue-collar workers in an otherwise immigration-averse country, filling the so-called three-K jobs (kitsui, kitanai, kiken--hard, dirty and dangerous).

But the nation’s manufacturing sector has slumped as demand for Japanese goods evaporated, pushing unemployment to a three-year high of 4.4%. Japan’s exports plunged 45.6% in March from a year earlier, and industrial production is at its lowest level in 25 years."

The demographic challenge of producing economic growth solely via boosts in productivity as population declines remains a dilemma for Tokyo. In the meantime, Takeo Kumagai at Platts reports that Petrobras is in talks with the Japan Bank for International Cooperation about establishing a "strategic oil supply."

"'We do not have a clear structure yet. We are still discussing a framework, conceptions of transaction,' [Petrobras CFO Almir] Barbassa said. 'As JBIC has been an important finance source for Petrobras, we are leading further development, an opportunity where Japan can be supplied if they need oil.'

'This is not to sell crude oil right now,' Barbassa said. 'This is the strategic oil supply in five years for example if there is lack of oil. We can grant some volume of oil.'"

Japan sources the vast majority of its crude imports from the Middle East and has nearly no domestic production.

3. BANK ROSSI CUTS ITS BENCHMARK LENDING RATES; ARMENIA AND TURKEY ESTABLISH FRAMEWORK FOR THE NORMALIZATION OF RELATIONS, WHICH MAY CAUSE BAKU TO CHOOSE TO SEND MORE NATURAL GAS THROUGH RUSSIA, AS OPPOSED TO WESTERN BACKED CAUCASIAN ROUTES

Emma O’Brien and Alex Nicholson at Bloomberg report that Bank Rossi cut its key benchmark interest rates today, effective tomorrow. It cut the refinancing rate by 0.5% to 12.5% and the repurchase rate charged on central bank loans by 0.5% to 11.5%. "Rates could be reduced further should inflation continue to slow, First Deputy Chairman Alexei Ulyukayev said today, according to the Interfax newswire."

And in a surprising development, Thomas Grove at Reuters reports that Turkey and Armenia have agreed on a framework to normalize ties after Ankara cut them and closed the border in 1993 in solidarity with Azerbaijan in its dispute with Armenia over Nakorno-Karabagh.

"'The two parties have achieved tangible progress and mutual understanding in this process and they have agreed on a comprehensive framework for the normalization of their bilateral relations,' the foreign ministries of both countries said late on Wednesday, without elaborating."

Nagorno-Karabagh is an ethnic enclave of Armenians inside Azerbaijan.



War erupted between Armenian secessionists and Baku in 1991 with the result that the Armenians wresting control of the region. A cease fire was signed in 1994 with Armenia continuing to exercise its control over the area.

"Some analysts have warned a Turkey-Armenia thaw may put at risk gas deals to boost exports to Europe.

'If Azerbaijan feels that Turkey is betraying them, then why would Azerbaijan not move in a Russian direction? And the Russians are offering to buy all their gas at European prices,' Svante Cornell, research director at the Central Asia-Caucasus Institute said.

A key supplier of oil and gas to Turkey and Europe, Azerbaijan said Armenian troops should be withdrawn from Nagorno-Karabakh during the normalization process.

'The opening of the Armenian-Turkish border cannot take place without a process to resolve the conflict over Nagorno-Karabakh,' Azeri Foreign Ministry spokesman Elkhan Polukhov said."

On April 17, following a meeting with Azeri President Ilham Aliyev, Russian President Dmitri Medvedev told reporters "We have a very high chance of entering a full-blown agreement" on natural gas supply from Azerbaijan through Russia--see Daily Sources 4/17 #4.

4. SWAT MILITANTS TAKE ADVANTAGE OF SHARIA DEAL TO OCCUPY ITS SOUTHERN NEIGHBOR

In a very worrisome development, the Associated Press reports that Taliban militants who have recently struck a deal to impose Sharia on Swat Valley have entered neighboring Buner Province in large numbers. Inside Buner they have set up checkpoints and started patrolling roads.



Government paramilitaries are being rushed to the region to protect federal government buildings and infrastructural nodes and have reportedly exchanged gunfire with the militants.

"[A] meeting between tribal elders and the Taliban on Thursday in Daggar, Buner's main town, ended without any indication that the Taliban would withdraw.
...
Two Taliban representatives declined to comment after the meeting, driving away in a pickup truck full of gun-toting associates. However, a Taliban leader who goes by the name Commander Khalil said the militants had agreed to stop patrolling in Buner, though they would still keep armed guards in their vehicles.

'We are here peacefully preaching for Sharia. We don't want to fight,' Khalil told an AP reporter by phone.

Another Taliban leader, Maulana Muhammad Bashir, said the militants had agreed not to target those who had opposed them in the past in Buner--a key demand of local leaders, some of whom had raised tribal militias to fight the Taliban."

Clearly if the Taliban cannot be convinced via compromises to pursue its political aims peacefully, then Islamabad has little option but to allow the civil war to spread.

5. THE UN DELIVERS ITS RECOMMENDATIONS RE: KIRKUK; IRAQI SECURITY FORCES CLAIM THEY HAVE CAUGHT AL-QAEDA IN IRAQ LEADER

Corinne Reilly at McClatchy Newspapers reports that the UN's recommendations on how to resolve the dispute of Kirkuk was distributed to all parties yesterday. The details of the recommendations were not made public, but reportedly included four options for handling Kirkuk. Analysts were skeptical it would produce any solutions:

"'I think everyone will reject the report's findings,' said Joost Hiltermann, the International Crisis Group's senior Iraq analyst. 'I think it presents a brilliant opportunity for compromise, but I'm not convinced either party is ready for that. Both likely think they can win more if they fight.'"

In the meantime, Mark Lynch at the Abu Aardvark's Middle East blog reports that Iraqi security forces have claimed they have captured Abu Omar al-Baghdadi, the Emir of the Islamic State of Iraq (al-Qaeda in Iraq). Lynch comments:

"How much does it matter, if true? Depends on how much you think 'al-Qaeda' is responsible for the recent uptick in violence and the ongoing hot conflict in the northern cities. My guess is that some portion of the recent wave of violence has to do with the disintegration of the Awakenings experiment -- either actively, through the return to the fray of some of the "former" insurgents who populated its ranks than by the remnants of AQI, or passively as they stop working as vigilantly to prevent attacks. Such Sunni groups are not part of AQI or the ISI, and indeed have been fighting against them bitterly for several years. To the extent that a significant portion of the recent violence is driven by their political struggles, then damping it back down requires a political solution with the Iraqi government. Hurting AQI by getting Baghdadi won't do a thing to address the mounting complaints of these non-AQI Sunnis over the Maliki government's foot-dragging on integration of the Awakenings into the security forces, selective repression of various Awakenings leaders, and so forth."

6. EGYPT OFFICIALLY INVITES NETANYAHU FOR A VISIT

BBC reports that Cairo has officially invited Israeli Prime Minister Benjamin Netanyahu to visit Egypt.

"During the Jerusalem talks [between Mr. Netanyahu and Egyptian intelligence chief Omar Suleiman], Mr. Netanyahu told Mr. Suleiman that 'Israel and Egypt have common interests, and the most important one is peace,' Israel's Haaretz newspaper reported."

7. THE CONTANGO IN OIL JUST WON'T GO AWAY

Jonathan Saul at Reuters reports that nearly 100 million barrels of oil is being stored in supertankers at sea per Frontline, the highest level seen since 1991--mirroring the stocks data in the US where commercial crude in storage is at the highest levels seen since September 1990.

"One London-based analyst estimated that the current rate for 30-90 days storage using vessels was $37,500 a day, down from $55,000-$60,000 a day during the first quarter of 2009, making storing oil a cheaper option now."

For VLCCs (which hold about 2 million barrels of oil) that works out to about a $1.68/b for 90 days and $0.56/b for 30. The month 3 contract for sweet light at NYMEX closed yesterday at a $3.34/b premium to front month. The month 2 contract closed at a $1.85/b premium to front. Daily global oil consumption is running at about 84 mb/d, so 100 mb represents about a 1 1/5 days of global consumption.

8. MORE DISMAL NEWS ON THE US ECONOMY

Tom Krisher at the Associated Press reports that GM is set to idle nearly all of its factories in the US for 9 weeks this Summer to reduce inventory.

"One of the people briefed on the plan said details are still being worked out. Some of the closings could be staggered between mid-May and the end of July, but the exact number of plants to be idled has not yet been determined."

In addition, Jeff Bater and Maya Jackson Randall at the Wall Street Journal reports that existing home sales, or "home resales," fell by an rate of 3% for annual sales ended March over annual sales ended February per data released today by the National Association of Realtors. The median price was down 12% from a year earlier. Meanwhile:

"Initial claims for state jobless benefits grew 27,000 to 640,000 in the week ended April 18, the Labor Department said in a weekly report Thursday.

Wall Street economists had expected a 30,000 rise, according to a Dow Jones Newswires survey. The prior week's level was revised to 613,000, which is 2,000 higher than the 610,000 level initially reported."

Daily Sources 4/22

1. IMF RELEASES GLOBAL FINANCIAL STABILITY REPORT, CHARTING CURRENT FINANCIAL CRISIS VERSUS PREVIOUS RECESSION ... PERHAPS IT UNDERESTIMATES THE AFFECT ON OIL CONSUMPTION GIVEN THAT THE LAST SHOCK SAW A LARGER DROP AND INDIA AND CHINA, LARGEST CONTRIBUTORS TO INCREMENTAL DEMAND IN RECENT YEARS, APPEAR TO BE SEEING SIGNIFICANT REDUCTIONS IN DEMAND

The IMF has released its Global Financial Stability Report, the first chapter of which can be found here. I have not had time to read it--it comes in at 72 pages--but from all accounts it is sobering reading. Bob Davis at Real Time Economics comments:

"By that definition [a decline in real per-capita world GDP, backed by industrial production, trade, capital flows, oil consumption and unemployment data], this is the fourth global recession since World War II, and deepest by a long shot. The earlier recessions were in 1975, 1982 and 1991. All were one-year recessions when measured by purchasing power parity, which the IMF favors for global comparisons. Those stats take into account the different cost of goods and services in different countries — for instance, a haircut costs a lot less in Beijing than Boston. Looking at global GDP by the more traditional method using exchange rates, the 1991 recession lasted until 1993.

In 2009, the IMF estimates per-capita GDP will decline 2.5%, using purchasing power parity, compared to a 0.4% contraction, on average, during the three previous recessions. Industrial production, trade, capital flows and oil consumption in the 2009 recession will fall much more sharply than in the previous global recessions, while unemployment will increase more."

The post has a helpful (sortable) chart of the recessions of 1975, 1982, 1991, and the forecast for 2009 showing the percentage declines for the indicators of per capita output (PPP weighted), industrial production, total trade, capital flows, oil use, and the jobless rate. My own first impression of the oil use indicator is that it is an under-estimation, given the decline seen in 1982, though, as I've said, I haven't had time to investigate the IMF's analysis of that particular indicator.

In that vein, Vandana Hari at Platts reports that Indian total oil demand rose to 132.4 million tonnes (~ 2.648 mb/d) in the fiscal year ending March 31, or 3.9% from the fiscal year prior.

"The industry had projected a 7% rise in Indian oil consumption in fiscal 2008-09, but the economic downturn that set in during the latter half of 2008 put a damper on consumption, [a senior industry official said late Tuesday.] The 1.5% drop in the combined demand for furnace oil and low sulfur heavy stock to 11.7 million mt in the year ended March 31 was directly related to an industrial slowdown, he said. These heavy products are used as secondary fuel for thermal power plants, as fuel for industrial units and feedstock for fertilizer plants in India."

Haris Zamir at Platts reports that Pakistani petroleum products imports were flat for the period from July 2008 to March 2009 over the same period a year earlier, and crude oil imports were down 11.5% for the same period from a year earlier. The story suggests that the fall in prices may support consumption levels from this point on. Winnie Lee at Platts reports that Chinese apparent oil demand is down about 4.5% in the first quarter from a year earlier. China and India are the two places where most incremental demand growth had been seen in recent years.



Platts also published the oil and production data for March over February and from March a year earlier, as per the official government data. I have changed the reporting to a daily basis, as the March over February data can be misleading given that February is about 10% shorter than March:



The 0.7% increase in crude throughput is the first increase seen since November of last year. Further, Eugene Tang and Dinakar Sethuraman at Bloomberg report that China has resumed spot LNG imports on lower prices for the first time in six months.

"China paid about $493 a metric ton, equivalent to about $9.4/MMBtu, on delivered terms for a spot cargo of 58,064 tons from Trinidad & Tobago last month, customs data released today showed.

Spot supplies of conventional-sized LNG cargoes to China ceased in October after China National Offshore Oil Corp. paid $20.43.MMBtu, a record, in September for a cargo from Algeria. The emergence of China may prop up spot prices that have fallen 70% from last year’s peak because of the global recession, and divert tankers from the US and Europe.

China imported at least three spot cargoes in April and paid less than $5 per million Btu on a free-on-board basis for a shipment from Russia, according to AIS Live ship-tracking data compiled by Bloomberg and an official. That’s a drop of at least 75 percent from the September record high.

Spot LNG sells for $4.60/MMBtu, a 47% discount to crude oil, JPMorgan Chase & Co. said in a note on April 3. LNG sold for a premium to oil in 2008."

2. SACHS ASSESSES REPORTS ON WATER ECONOMICS

Jeffrey Sachs has an opinion piece in Today's Zaman which argues takes stock of a series of recent studies of the water economies of various countries--The UN World Water Development Report 2009, The World Bank's India's Water Economy: Bracing for a Turbulent Future and Pakistan's Water Economy: Running Dry, and the Asia Society's Asia's Next Challenge: Securing the Region's Water Future--and concludes that the leaders from those societies likely to be most affected need to brainstorm in concert on how best to address the coming problems. Key excerpt:

"[T]he precise nature of the water crisis will vary, with different pressure points in different regions. For example, Pakistan, an already arid country, will suffer under the pressures of a rapidly rising population, which has grown from 42 million in 1950 to 184 million in 2010, and may increase further to 335 million in 2050, according to the UN's 'medium' scenario. Even worse, farmers are now relying on groundwater that is being depleted by over-pumping. Moreover, the Himalayan glaciers that feed Pakistan's rivers may melt by 2050, owing to global warming.

Solutions will have to be found at all 'scales,' meaning that we will need water solutions within individual communities (as in the piped-water project in Senegal), along the length of a river (even as it crosses national boundaries), and globally, for example, to head off the worst effects of global climate change. Lasting solutions will require partnerships between government, business and civil society, which can be hard to negotiate and manage, since these different sectors of society often have little or no experience in dealing with each other and may mistrust each other considerably."

Worth reading in full.

3. FRANCE TO INVITE CHINESE PRESIDENT TO VISIT

Carlos Tejada at China Journal links to a China Daily story stating that Paris intends to invite Chinese President Hu Jintao for a state visit, though the link appears broken. The move is part of a thawing of relations between Paris and Beijing after the two released a joint statement stating that "France refuses to support any kind of 'Tibet independence'"--see Daily Sources 4/1 #5.

4. UK DEBT AT HIGHEST LEVEL SEEN SINCE WWII


Julia Werdigier at the New York Times reports that British sovereign debt is slated to reach £175 billion (~$255 billion) in 2009, the highest level since World War II.

"Britain’s net borrowing is expected to reach 11.9% of gross domestic product in 2010 and finances would only balance by 2016. The dismal outlook and rising debt pushed the pound lower against all major currencies on Wednesday and government bonds dropped."

5. RUSSIA FURTHER INTEGRATES INTO ITALIAN ENERGY SECTOR

Svetlana Kovalyova at Reuters reports that Gazprom announced that it will purchase downstream assets in Italy from Chevron.

"Gazprom Neft will buy a plant in Bari, southern Italy, which produces 36,000 tonnes of lubricants a year for cars, trucks and other industrial uses, and fuel marketing and sales operations in Rome, the companies said."

The move does seem to represent an especial affinity for integration with the Italian energy infrastructure.

6. EGYPT'S FEUD WITH HIZBULLAH WIDENS

Michael Collins Dunn at the MEI Editor's blog reports that Egypt's feud with Hizbullah has now expanded to include official protests to the head of Iran's interests section in Cairo as well as allegations that Lebanon was involved in the plot. In the meantime, Nazila Fathi at the New York Times reports that Tehran made an official announcement via the IRNA news agency that it welcomed talks over its nuclear program, and that it had a proposal ready to resolve the dispute over it.

"The statement also said that Iran would continue its ongoing nuclear work in 'active collaboration' with the United Nations nuclear agency and in the framework of the main international treaty that aims to halt the spread of nuclear weapons and promote peaceful uses of nuclear power.

'The Islamic Republic of Iran will continue its nuclear activities in an active collaboration with the International Atomic Energy Agency in the framework of the NPT, along with other member nations,' it said ... ."

7. CHÁVEZ FURTHER CONSOLIDATES POWER

Fausta Wertz at The Compass reports that Hugo Chávez is now moving to oust those governors that have opposed his move to federalize national ports. Manuel Rosales, mayor of Maracaibo, has fled the country and is seeking political asylum in Peru.

"Retired General Raúl Baduel, who brought Chávez to power following the 2002 attempted coup and later was instrumental in defeating Chávez's constitutional referendum in 2007, was arrested at gunpoint on April 7, pending corruption charges. He issued from prison a plea for Venezuelans 'to save democracy,' which was recorded by his son, Raúl Emilio Baduel, with his cell phone. You can watch the video (in Spanish) here."

The governor of the state of Miranda, Henrique Capriles Radonski, is being investigated for corruption; Henrique Salas Feo, governor of the state of Carabobo, is being investigated for "promoting secession;" and César Pérez Vivas, governor of the state of Táchira, is having his election challenged. Further, the mayor of Caracas, Antonio Ledezma, has been forced out of his offices by squatters and Chávez has appointed a vice mayor in his place. Well worth reading in full.

8. MEXICAN CRUDE PRODUCTION CONTINUES TO DECLINE

Robert Campbell at Reuters reports that Mexican oil production declined by 7.8% in the first quarter of 2009 from the first quarter of 2008 to 2.667 mb/d.

9. ZIMBABWE STOCKS REBOUND ON RE-DENOMINATION IN DOLLARS, IS THAT, COMBINED WITH RECORD DOLLAR DENOMINATED DEBT ISSUES, A COUNTERPOINT TO THE ALTERNATIVE TO THE DOLLAR MOVEMENT?

In an interesting story vis-a-vis the global movement for an alternative to the dollar on top of record debt issues denominated in dollars, Janice Kew at Bloomberg reports that Zimbabwean stocks have doubled after shares were re-denominated in dollars and the new coalition government took office two months ago.

"'In an economy which continues to be devoid of dollar liquidity the rise has come as a surprise,' Harare-based Danha wrote in the note. 'Interestingly there is still no evidence of significant foreign portfolio inflows, and much of the trade can be attributable to locals.'

The central bank shut down the exchange in November as inflation estimated at 89.7 sextillion percent, a plunge in the Zimbabwe dollar to 12.6 trillion per US dollar and international sanctions against President Robert Mugabe’s regime caused the economy to collapse. A new coalition government was sworn in on Feb. 11 in a power-sharing agreement between Mugabe and opposition leader Morgan Tsvangirai.

Gains have been led by Innscor Africa Ltd., producer of crocodile skin for Gucci Group NV and Prada SpA, Delta Corp., Zimbabwe’s largest beer and beverages maker, and Econet Wireless Holdings Ltd., the country’s biggest mobile-phone operator, according to Renaissance, a Moscow-based brokerage with offices in Africa."

10. GEITHNER'S SPEECH BEFORE THE ECONOMIC CLUB FAIRLY GLOOMY

The full text of Secretary of Treasury Tim Geithner's remarks today before The Economic Club of Washington can be found here. Key excerpt:

"The International Monetary Fund now expects the world economy to decline this year for the first time in more than six decades. The 1.3% decline forecast by the IMF represents a sharp deterioration from the roughly 4% annual rate at which the world economy normally would be expected to grow. The lost output could be as high as three to four trillion dollars this year alone.

And those numbers mask grave damage to economies around the world.

Only 17 of the 182 economies followed by the IMF are expected to grow faster this year than they did last year. Some 71--including 30 of the world's 34 advanced economies--are expected to shrink. The collapse of world trade is will likely be the worst since the end of World War II.

Several crucial lessons flow from the simultaneous nature of this crisis.

The rest of the world needs the US economy and financial system to recover in order for it to revive. We remain at the center of global economic activity with financial and trade ties to every region of the globe.

Just as importantly, we need the rest of the world to recover if we are to prosper again here at home. Before the crisis, US exports were among our economy's fastest-growing sectors, accounting for more than 6 million American jobs, or about 5% of total private sector employment in the US. Now, they are one of its fastest-shrinking."

(h/t David Wessel at Real Time Economics.) Worth reading in full.

11. MORE SHOES TO DROP IN HOUSING MARKET

The New York Times posts a very illustrative interactive graphic plotting homes prices versus median incomes for twenty cities from the first quarter of 1979 to the second quarter of 2009. In the accompanying article, David Leonhardt notes:

"The glut of foreclosed homes creates a self-reinforcing cycle. Falling prices lead to more foreclosures. Foreclosures lead to an excess supply of homes for sale. The excess supply then leads to further price declines. Jan Hatzius, the chief economist at Goldman Sachs, says that the 'massive amount of excess supply' means that home prices nationwide will probably fall an additional 15%.

This estimate hides a lot of variation, too. In Miami, Goldman forecasts, prices could drop an additional 33%, which is pretty amazing since they’ve already fallen 50% from their 2006 peak."

Barry Ritholtz at the Big Picture quotes from Bloomberg:

"Fannie Mae and Freddie Mac mortgage delinquencies among the most creditworthy homeowners rose 50 percent in a month as borrowers said drops in income or too much debt caused them to fall behind, according to data from federal regulators . . .

Of all borrowers who ended up in default, 34 percent told Fannie and Freddie they were earning less money, about 20 percent cited excessive debt as a reason for missing mortgage payments, and 8.1 percent blamed unemployment, FHFA said."

Ritholtz links to a chart from the Field Check Group plotting the climb in default notices, remarking: "Note once again these are not Sub-prime or alt-A--they are Prime, the highest quality borrowers possible."



12. CARBON TO BE PRICES AT BETWEEN $13-26 A METRIC TON

Simon Lomax at Bloomberg reports that a proposed law to issue carbon emissions permits as a way to reduce greenhouse gas emissions would price carbon dioxide at about $13 to $26 a metric ton by 2015.

"The price range of $13 to $26 a permit was the result of five rounds of economic modeling that each used different assumptions. For 2020, the estimated permit price range is $17 to $33, the agency said. Each permit, also known as an allowance, would give the holder the right to emit the equivalent of one metric ton of carbon dioxide."

13. COMMERCIAL CRUDE AND PRODUCTS STOCKS CONTINUE TO GROW

The EIA reports that for the week ended April 17 crude stocks grew by 3.9 million barrels to 370.6 million barrels, the largest stock holdings seen since September 1990. Gasoline stocks grew by 800 kb, and are well above the historical range for this time of year. Distillate stocks grew by 2.7 million barrels, and are behaving completely counter-cyclically. A story by Mark Shenk at Bloomberg quotes Tim Evans, an energy analyst with Citi Futures Perspective in New York:

"There are a large number of financial professionals trading oil who are paying more attention to the equity markets and the U.S. dollar, while ignoring the fundamentals of the oil market. There is nothing subtle about the numbers in today’s report."

14. KISSINGER ARGUES THAT FINANCIAL CRISIS FAVORS CONCERT DIPLOMACY

Henry Kissinger has an opinion piece in the Washington Post which argues that the economic crisis favors "concert diplomacy," "in which groupings of great powers work together to enforce international norms." Key excerpt:

"Proliferation is perhaps the most immediate illustration of the relationship between world order and diplomacy. If North Korea and Iran succeed in establishing nuclear arsenals in the face of the stated opposition of all the major powers in the UN Security Council and outside of it, the prospects for a homogeneous international order will be severely damaged. In a world of multiplying nuclear weapons states, it would be unreasonable to expect that those arsenals will never be used or never fall into the hands of rogue organizations. A new, less universal approach to world order would be needed. The next (literally) few years will be the last opportunity to achieve an enforceable restraint. If the United States, China, Japan, South Korea and Russia cannot achieve this vis-à-vis a country with next to no impact on international trade and no resources needed by anyone, the phrase 'world community' will become empty."

Whether you agree with him or not, he is always worth reading in full.

Because it's Awesome

The Great Wall is even longer than we thought it was:

"The Great Wall of China is even greater than once thought, after a two-year government mapping study uncovered new sections totalling about 180 miles, according to a report posted on the website of the country's national mapping agency.

Using infrared range finders and GPS devices, experts discovered portions of the wall concealed by hills, trenches and rivers that stretch from Hu Shan mountain in northern Liaoning province to Jiayu Pass in western Gansu province, the official China Daily reported on Monday.

The newly mapped parts of the wall were built during the Ming dynasty (1368-1644) to protect China against northern invaders and were submerged over time by sandstorms that moved across the arid region, the study said."

Daily Sources 4/21

1. MORE GRIM FORECASTS FROM JAPAN AND THE IMF

MarketWatch reports that Tokyo is expected to cut its forecast for GDP growth to a 3% contraction for the year starting April 1. Mark Landler at the New York Times reports that the IMF released its global financial stability report today, estimating that banks and other financial institutions will suffer $4.1 trillion in aggregate losses in their holdings due to the financial crisis.

"In its global financial stability report, released Tuesday, the fund estimated that financial institutions would have to write down an estimated $2.7 trillion in loans and securities originating in the United States from 2007 to 2010. That estimate is up from $2.2 trillion in the fund’s report in January, and $1.4 trillion last October."

The story finishes by noting that the response to the crisis has been uneven:

"The fund estimates that in the United States, for example, banks reported $510 billion in write-downs by the end of 2008 and face an additional $550 billion in 2009 and 2010. In the euro zone, banks reported just $154 billion in write-downs by the end of last year and still face $750 billion. British banks are in somewhat better shape: having written down $110 billion, they face $200 billion more, the fund said."

2. KNOW YOUR CHICKEN: CHINA TO CONSIDER NEW RULES ON LENDING, CONSIDERED BY SOME ANALYSTS THE KEY TO BOTTOMING THE GLOBAL CRISIS; BUT IF THEY'RE COUNTING ON US CONSUMPTION, THE PROGNOSIS DON'T LOOK GOOD ... DEFLATION IN GERMANY, BUT LOW INTEREST RATES SUPPORTING ITALIAN REAL ESTATE MARKET; SWEDEN, THE ECB, AND CANADA LOOK SET TO BOARD THE QE BUS

The Wall Street Journal reports that the China Bank Regulating Commission is considering rules which would ensure that new loans are going to the real economy as opposed to the asset markets or bank accounts.

"A sharp cutback in credit would run the risk of derailing the nascent improvement, and is precisely what officials aren't planning to do. But they aren't pushing on the accelerator, either. The central bank has put interest-rate cuts on hold since December. The government is also expressing concern that the lending surge could be adding to financial risks or isn't directly aiding businesses in need of cash.

'Banks ought to fully realize that dealing with the impact of the crisis is a long-term task, and should pay close attention to risks accumulated from a burst of lending,' the head of China's banking regulator, Liu Mingkang, said at the agency's quarterly meeting last week."

A chart of loan growth by the WSJ:



The loan growth is what Brad Setser identified yesterday as a potential "green shoot" in the global economy--see Daily Sources 4/20 #1. Jesse's Café Américain reproduces a chart from contrary investor.com which shows how "falling aggregate demand and the weaker dollar" has undone the import market in the US--with the EU the largest market for Chinese imports:



Beijing appears to be placing some trust, therefore, in soon to recover American consumer demand. However, as Jesse comments:

"This is the worst decline in retail sales in the post World War II era.

The US consumer has finally hit the wall. The folks in DC think they can crank this Frankenstein monster of reckless consumption back up again, given the right jolts of liquidity and spin.

To think that consumers will start borrowing and buying again without a meaningful change in the dynamic of their cashflows implying an increase in the median wage, is a hard to believe. Even for the reckless American consumer, this episode has been daunting to their over-confidence, and rightfully so."

Rebecca Wilder at News N Economics adds that bank lending has stalled at an annual rate of growth of about 2.2% and that the credit crunch is now fully evident in the data. She points out:

"However, there is one exception: as of March, real estate lending is still rising slightly, but only because households are drawing on existing home equity lines of credit. I see this as another shoe to drop on consumer spending."

Her comments:

"The chart illustrates lending on revolving home equity lines of credit (HELOC). Lending (blue line) is still rising through March at a 20% annual rate. Households are using these lines of credit (presumably) to finance consumption needs, and a 20% annual growth rate is likely unsustainable.

Eventually, the lines of credit will run dry; and households will be forced to cut back on spending, taking another leg down. Not shown here is non-revolving real estate lending, which is down 1.3% in March since its peak in January 2008."

Well worth a look. In the meantime, Karey Wutkowski and Juan Lagorio at Reuters report that the credit card companies are scheduled to meet with the White House Thursday to discuss fees and interest rates.

"Scott Valentin, an analyst at Friedman, Billings, Ramsey, said credit card companies could also eliminate some late payments, or over-limit fees, to please Washington.

'The card companies are sensitive to what is going on around them, and public perception, and the government actions that are being contemplated, and are trying to put on a good face,' he said.

Credit card issuers have received over $120 billion in taxpayer funds since October, money the government has asked them to use to expand lending.

But with US credit card defaults at record highs, lenders are trying to protect themselves by tightening credit limits and closing accounts, actions that have infuriated lawmakers, consumers, and even triggered a New York state attorney general inquiry.

'Some of the very banks we rescued compound the hardships of ordinary Americans with unfair fees and interest charges,' said Senator Carl Levin, a Michigan Democrat who has co-authored credit card legislation.

Citigroup Chief Financial Officer Ned Kelly said in a conference call Friday with analysts to discuss the bank's quarterly results that the credit card business has shifted from growth to risk management.

He added that higher prices on credit cards helped the bank, one of the largest US credit card issuers, to cushion its losses."

The piece, well worth reading in full, concludes:

"'The administration clearly wants to keep the money flowing to the consumer, and the credit card companies are trying to protect themselves, hopefully there will be a middle ground some place,' said Anton Schutz, president of Mendon Capital."

In the meantime, Eurointelligence notes that Il Sole 24 published a story today noting that the one-month Euribor fell to below 1% this month for the first time ever. Euribor is the the rate at which euro interbank term deposits within the euro zone are offered by one prime bank to another prime bank. This is reportedly goosing the Italian real estate market as about 42% of new mortgages are based on one-month Euribor.

"The savings in mortgage payments to Italian mortgage holders are indeed substantial (the same applies almost to the same extent to the 3-month Euribor based mortgages, which are popular in Spain)."

In the meantime, Lukanyo Mnyanda and Anna Rascouet at Bloomberg report that the German Federal Statistics Office announced today that German producer prices fell by an annual rate of 0.5% last month, after rising 0.9% in February. German bonds prices rose on that news and the news yesterday that European Central Bank policy maker Christian Noyer indicated there was "room" for further interest rate cuts by the organization. In addition, Johan Carlstrom at Bloomberg reports that the Riksbank cut its benchmark interest rate by 0.5% to 0.5% and indicated that it stands ready to take further measures to resuscitate Sweden's economy. And the Bank of Canada also today cut its benchmark rate to 0.25% from 0.5%, indicating that it will leave the rate at that level through 2009, according to Bloomberg's Greg Quinn.

"'Conditional on the outlook for inflation, the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010,' the central bank said in a statement from Ottawa today. The central bank will provide updates at each future policy decision, starting June 4, on its commitment to leave the key rate unchanged."

3. THE EU IS TRAINING DIPLOMATS IN ANTICIPATION OF LISBON TREATY RATIFICATION

Der Spiegel reports that "hundreds of bureaucrats" at the European Commission are taking courses in political analysis and public relations in preparation for the new role the commission would take should the Lisbon Treaty come into force.

"Among the key provisions of the treaty is the creation of a European External Action Service and the appointment of a 'foreign minister,' though the title has been renamed as the 'high representative of the Union,' as well as an EU president. The idea is to groom an EU diplomatic service so it can start its work the day the treaty--once known, and rejected by voters in France and the Netherlands, as the 'EU constitution'--goes into effect."

4. CHINA WORKING TO DEFUSE INTERNATIONAL WORRIES

Javier Blas at the Financial Times reports that Niu Dun, China’s Deputy Agriculture Minister, told the journalist Monday that "We cannot rely on [investments in] other countries for our own food security. we have to depend on ourselves." In November, Zhang Xiaoqiang, Vice Chairman of China's National Development and Reform Commission, has announced that the country will set as a strategic priority domestic production of 95% of their grain consumption through 2020--see Daily Sources 11/14 #5. Obviously food security trumps all other resource security concerns, but Beijing's recent change in strategy in terms of overseas oil and gas resource acquisitions--via joint ventures and loan agreements--and its decision to veer away from the strategy pursued by other food deficit nations like Saudi Arabia to purchase overseas agricultural production seems to demonstrate recognition in Beijing that its resource security policies as set forth so far have ignited worries globally about their intentions. Obviously, if your resource security is dependent upon overseas holdings, their security would require the projection of force overseas. The notion that China is slightly adjusting the cut of its jib is also reinforced by the news today--via Jeb Blount at Bloomberg--that Petrobras Chief Executive Officer Jose Sergio Gabrielli said in an interview with the news wire that the company is not offering crude as collateral for the $10 billion in loans coming from China.

In that vein, there was an interesting comment made yesterday noting the story picked up by the US Naval Institute's blog that there has been heavy trading in options for McDermott International on rumors that CNPC is considering purchasing the company. McDermott is, among other things, the US Navy's sole provider of nuclear fuel and nuclear fuel assemblies as well as a manager of the US Strategic Petroleum Reserve. I doubt it is happening as rumored, but should it prove the case, it surely would be a huge story. In the meantime, Edward Wong at the New York Times notes that Beijing is clearly attempting to manage global concerns about China's rise, most recently deciding to unveil its nuclear submarines to public scrutiny in an international review of the country's fleet.

"The officer, Vice Adm. Ding Yiping, deputy commander of the Chinese Navy, told Xinhua in an interview on Monday that 'suspicions about China being a "threat" to world security are mostly because of misunderstandings and lack of understandings about China.'

He added: 'The suspicions would disappear if foreign counterparts could visit the Chinese Navy and know about the true situations.'"

Military analysts have most recently been concerned by the Chinese decision to retrofit ballistic missiles with warheads designed to take out air craft carriers. The recent news that supertanker companies expect the global fleet to contract in the medium term on the back of dismal demand is met, today, by the report by Toby Anderson at Lloyd's List that 35 additional very large crude carriers will be required if Venezuela is to meet its plans for increased crude supplies to China. (I'm afraid all I have access to is the snippet advertising the story, for the previous forecasts about the shape of the global supertanker fleet, see Daily Sources 4/16 #8.)

5. JAN 12 LETTER FROM KURDISH LEADER BARZANI TO OBAMA INCLUDED PLEA FOR SUPPORT FOR KRG OIL POLICIES

Ben Lando at Iraq Oil Report writes of a previously undisclosed letter from Kurdistan Regional Government of Iraq's President Massoud Barzani urging the Obama Administration to support the KRG's oil policies, whereby they would lease concessions to international oil companies without the explicit assent of the central government in Baghdad.

"He is blunt in pressing for U.S. support for controversial oil contracts signed by the KRG, which have been condemned as 'illegal' by Iraq Oil Minister Hussain al-Shahristani, criticized by Prime Minister Nouri al-Maliki and referred to by Bush administration officials as unhelpful in the reconciliation process."

The Obama Administration has declined, as of yet, to take sides in the matter.

6. THE BUSH ADMINISTRATION OFFERED TO DROP OIL SANCTIONS ON IRAN IN 2008

Kate Dourian at Platts reports that Hooshang Amirahmadi, speaking at the Middle East Petroleum and Gas conference in Dubai, said he was party to negotiations with Tehran in 2008 where the US offered to suspend sanctions on Iranian oil and gas in return for a six week suspension of uranium enrichment.

"'The bottom line is that the US offered to suspend sanctions on oil and gas in return for Iran freezing uranium enrichment for six weeks,' [Amirahmadi] said.

The offer was rejected by Tehran and the response to the US request for a 'wish list' from the Iranian leadership was: 'Leave us alone.'

Amirahmadi said when asked what type of sanctions the US was offering to suspend that it applied to executive orders dating back to the Clinton era, which imposed a trade ban against Iran, including trade in oil and gas, and prohibiting US investment in Iran's energy sector.

Other sanctions which were legislated, such as the Iran-Libya Sanctions Act (ILSA) of 1996--later amended to drop Libyan sanctions--was not included in the offer as it would require a congressional vote."

7. SAUDI ARABIA PUTS ANOTHER OIL PROJECT ON HOLD

Kevin Baxter at Reuters reports that Saudi Aramco has put the $9 billion Manifa offshore oilfield project on hold for six months.

"The Manifa project is in line to become Saudi Arabia’s largest offshore field, capable of producing 900,000 barrels of crude. However, the heavy sour crude the field holds makes it expensive to process and not economically viable in the current financial climate."

This delay is on top of delays for a number of domestic Saudi Aramco projects slated for export--see Daily Sources 4/14 #6.

8. VIETNAMESE ECONOMY EXPANDING!

Jason Folkmanis and Nguyen Dieu Tu Uyen at Bloomberg report that Vietnamese Prime Minister Nguyen Tan Dung told investors at a conference in Hong Kong yesterday that Vietnam's economic growth is rebounding after slowing in the first quarter.

"'The stimulus package has already had a good effect on the economy, and we believe it will have more impact,' he said. 'Growth will accelerate in the second, third and fourth quarters. We are targeting 5% to 5.5% growth for the year.'

Vietnam’s economy expanded 3.1% in the first quarter from a year earlier, the slowest pace on record, according to figures from the General Statistics Office in Hanoi.

Stimulus money will be invested in projects in areas including transportation and energy, Dung said. The $8 billion amount includes money from the government budget, according to the prime minister, who didn’t specify if any of the funds he was referring to had been included in the budget prior to the creation of stimulus plans."

9. HOW TO HELP MOLDOVA

Louis O'Neill, former OSCE ambassador and head of mission to Moldova, has an opinion piece in today's Wall Street Journal where he suggests a way to bolster Moldovan sovereignty in the current circumstance. To wit:

"With all these forces still tugging at a relatively new, unconsolidated and poor nation, it seems a proper time and in everyone's interest to give Moldovan sovereignty a boost. After all, every nation recognizes Moldova's territorial integrity and sovereignty, but also the right for Transdniestria to have a special status within a unified country. A serious restart of the '5+2' talks on Transdniestria comprising Russia, Ukraine, the Organization for Security and Cooperation in Europe, the EU, the US as well as Moldova and Transdniestria, could lead to a real settlement. Such a deal could open important new areas of trust in a reinvigorated US-EU-Russian relationship and improve the lives of people on both sides of the Dniester."

Well worth reading in full.