Daily Sources 4/17

1. GERMAN ECONOMIC COUNCIL REJECTS A FURTHER STIMULUS PACKAGE, EUROPEAN PARLIAMENT WANTS STRICTER FINANCIAL REGULATION, GLOBAL DEFLATION IN EVIDENCE ... OR NOT ... OR YES

Eurointelligence reports that Wolfgang Franz, head of Germany’s council of economic advisers, has rejected the notion of a third stimulus package, arguing that the economy is likely to bottom in the middle of this year on the back of stimulus beginning to take effect and lower commodity prices. The European Parliament is seeking regulation which would require banks issuing securitized paper to hold a stake of at least 10-15% versus the European Commission's plan to require a 5% stake. "[T]he regulation of rating agencies seems to be a done deal." Gotta give em credit for that last bit.

However, Mike Shedlock at Mish's Global Economic Trend Analysis notes that deflation, defined (incorrectly as it turns out) as sustained widespread price drops has gone global. Japanese wholesale prices have fallen to levels not seen since 2002; Germany sees sharpest decline in wholesale prices in 22 years; the Chinese consumer and producer price indexes have both gone negative; and US producer prices see the sharpest decline in 59 years; consumer prices see the sharpest drop in 55. Mr. Shedlock quotes from David Rosenberg at Merrill Lynch:

"Relative to year-ago levels, overall [Consumer] prices fell by 0.4%, for the first dip into deflationary territory since August 1955. Looking ahead, easy energy comparisons versus a year-ago will be a key factor in leading the overall CPI lower in the months ahead. Food prices, eased to 4.4% Y/Y versus a peak of 6.1% Y/Y in October 2008, will also be a factor. By 3Q, we anticipate annual declines of 2.5%. Core prices were unchanged at 1.8% Y/Y in March, though down from the nearby peak of 2.5% in August 2008. By 3Q, the core CPI is also expected to ease toward 1.0%, with depressed demand and more competitive pricing for a broad array of consumer categories as tailwinds.

Underlying weakness in core CPI

'Owners’ equivalent rent–-a category that accounts for 31% of the core CPI)--rose 0.2% M/M, in part due to falling natural gas prices, which have an inverse relationship to rent prices.'"

Mish points out that owner's equivalent rent is a process by which the Bureau of Economic Analysis estimates what housing would cost if owners' rented from themselves and concludes:

"OER is not a valid pricing barometer. By ignoring housing prices, CPI massively understated inflation for years. The CPI is massively overstating inflation now."

Mish plots the consumer price index if you substitute the Case Shiller housing index for owner's equivalent rate versus regular CPI:



The post is well worth reading in full. (h/t Yves Smith at naked capitalism.) The "proper definition of deflation," per Mish, is "a net decrease in the money supply and credit, with credit being marked to market" ... and by that measure deflation has been global for some time now.

But the wires appear to be crossed, because Real Time Economics reports that consumers see prices rising, which is what we understand as inflation. The number is apparently strongly influenced by gasoline prices, which have indeed risen a fair amount in the last two months.

"The University of Michigan’s latest reading of consumer sentiment showed expectations for inflation over the next year rising in April to 3%, from 2% in March.
...
JP Morgan Chase economist Abiel Reinhart notes that the one-percentage-point increase in inflation expectations has occurred just three times in the past quarter century: in 1990 after the Iraqi invasion of Kuwait, in 2001 after the Sept. 11 attacks and in 2005 after Hurricane Katrina."

In another post on the same consumer sentiment index, Michael S. Derby at Real Time Economics reports that consumer sentiment rose much more than economists had expected in April. In the meantime, Tim Hanrahan at Real Time Economics has a chart of the Fed's expanding balance sheet:



The graphic in the post itself is interactive, noting, via pop-ups, when certain events happen along the time line. Brad Setser has a chart which may provide additional clarification as to why the Fed is purchasing agencies--international demand for them has collapsed:



Setser notes:

"Treasuries are the only US asset foreign investors still want, despite their low yields. Over the past 12 months, the US--rather amazingly--could have financed its trade deficit by just selling Treasuries. And nothing else. At least so long as Americans didn’t move large sums out of the US.

It still could for that matter. The $85.1 billion in Treasuries foreign investors bought in the first two months of 09 (mostly in February) easily exceeds the $62.2 billion January-February trade deficit.

At some point, though, central bank and flight-to-safety demand for Treasuries will fade. That won’t necessarily signal a loss of confidence in US government bonds. It could equally signal renewed confidence in the Agencies--or at least an and to the reallocation of existing reserves toward Treasuries."

Worth reading in full. (Setser also makes the interesting point that it is easier for foreign central banks to shift from agencies to treasuries than it would be to transfer out of US assets altogether.)

Meanwhile, P O Neill at Fistful of Euros notes the stories on the schism in opinion at the European Central Bank, writing:

"The latest Eurostat inflation data might concentrate minds, showing annual Eurozone inflation of 0.6% and several countries already in deflation. But if the cautious EU countries thought that the G20 enhancements to the IMF would bail out them out any further anti-crisis measures, that money to eastern Europe needs to start flowing soon. Note: the only big announcement since the G20 is the facility for Poland, and that’s a precautionary facility. The ECB can’t dodge this issue forever."

2. CHINESE RAILWAYS TO GET ADDITIONAL $2 BILLION IN SPENDING FROM STIMULUS, AND LOOKS READY TO GET AN AIRCRAFT CARRIER, TOO

Ian Johnson at the Wall Street Journal reports:

"Wang Yongping [the Ministry of Railways' chief spokesman] said the funding will come from government bonds issued late last year to bolster China's economy. The new spending could create 150,000 jobs, he said, based on the ministry's experience. The entire Chinese railway system employs about 2 million. 'The government considered the economy when it invested in the railway,' Mr Wang said."

Galrahn at Information Dissemination notes that the PLA will likely announce its intention to build its first two air craft carriers next week. Infrastructure and defense--I suspect Beijing's own military industrial complex will become much more of a political headache to China, just as it is in the US, as efforts to combat the global financial crisis unfold.

3. SPANISH PROSECUTORS OFFICIALLY RECOMMEND AGAINST PROSECUTING US OFFICIALS FOR WAR CRIMES

In a move which contradicts my post linking to Prof. Juan Cole on the matter yesterday, Paul Haven at the Associated Press reports that Spanish prosecutors today formally recommended against investigating allegations against Bush Administration figures. The prosecutors also formally recommended that Judge Baltasar Garzon should not oversee any such investigation should one be ordered given another judge's superior competence in these types of investigations, and Garzon formally stepped aside from the case a few hours later.

"Prosecutors said any such investigation ought to be conducted in the United States, not Spain. They also questioned the idea of bringing charges against lawyers and presidential advisers who neither carried out the alleged torture themselves, nor were ultimately responsible for ordering it.

The prosecutors wrote that going after lawyers who wrote nonbinding recommendations for the president and his senior staff, rather than targeting higher-ranking officials who authorized the alleged torture, 'raises important problems from a legal standpoint.'

It also questioned the appropriateness of a case that would effectively put on trial 'all of the policies of the past US administration (as reproachable as they may be),' saying such an endeavor was beyond the scope of the Spanish legal system."

Although Spanish law asserts universal jurisdiction in instances of torture, war crimes, and other "heinous offenses," it seems clear from the recommendation that the government wants to put limits on its usage.

4. CHECHEN ANTI-TERRORIST OPERATIONS DECLARED OVER, POSSIBLE RUSSIAN-AZERBAIJAN GAS DEAL, GAZPROM ENTERS BOLIVIAN UPSTREAM WITH PDVSA

Michael Schwirtz at the New York Times reports that Russia officially ended its counter-terrorism operations in Chechnya yesterday.

"Russia’s National Antiterrorist Committee said in a statement that the decision was made 'to guarantee conditions for the further normalization of the situation in the republic and for the development of its social and economic spheres.'

The committee did not mention troop withdrawals, though Russian officials said they would now have more legal leeway to scale down the number of federal military and security forces. While the violence in Chechnya has declined, it seemed likely that many troops and security forces could remain for some time."

Catrina Stewart at the Associated Press reports that following a meeting with Azeri President Ilham Aliyev, Russian President Dmitry Medvedev told reporters that ""We have a very high chance of entering a full-blown agreement" on natural gas supply from Azerbaijan through Russia. Baku would likely be hoping to balance a bit out of the Western orbit via such a deal. Moscow is continuing a policy of deepening interdependence with Western Europe.

Meanwhile, Moscow marked the beginning of the Americas Summit by announcing, via the prospectus of its upcoming bond issue, to take a 20-24.5% stake in upstream gas join venture Petroandina. Anna Shiryaevskaya at Platts reports that Petroandina is 51% owned by Bolivia's state-owned YPFB and 49% by Venezuela's PdVSA.

"Gazprom had not previously revealed how large a stake it was considering taking in Petroandina, which owns licenses for the development of 12 blocks in Bolivia. The blocks include Aguarague, Iniguasu and Inau with potential reserves of up to 300 billion cubic meters of gas, Gazprom said."

5. ROMANIA OFFERS MOLDOVANS ROMANIAN CITIZENSHIP

In a move rightly regarded as destabilizing, Der Spiegel reports the Romanian President Traian Basescu this week offered Moldovans with Romanian blood citizenship.

"'We are not going to allow a new Iron Curtain on the Prut (River)," said President Traian Basescu on Wednesday, referring to the river that separates the two nations. 'We cannot accept that the Romanians across the Prut are isolated from the rest of Europe.'

'Reunification' with Romania was a Moldovan election issue. Romania has always been an ethnic big brother to Moldova, and the smaller country even belonged to modern Romania until 1940, when Moldova was annexed by the Soviet Union. Some ethnic Romanians in Moldova now think reunification would be a quick way to join the European Union, since Romania has been a member since 2007."

However, Moldova has a significant Slavic population, which tends to identify with Russia, and Russia tends to regard as its ethnic little brother. Worth raeding.

6. UN REPORT ON KIRKUK ADMINISTRATION TO BE RELEASED NEXT MONTH UNLIKELY TO PLEASE EVERYONE

Ernesto Londoño at the Washington Post reports:

"In Kirkuk, the crown jewel of the 300-mile strip of disputed territories, Arab politicians announced over the weekend the creation of a political group that includes Sunni leaders who gained prominence in 2006 and 2007 when, with financial backing from the United States, they took up arms against the group al-Qaeda in Iraq in the western part of the country.

The Kurds, meanwhile, have been aggressively collecting signatures in the oil-rich city for a nonbinding petition with which they hope to demonstrate that the majority of Kirkuk's residents want the city annexed to the autonomous Kurdish regional government."

7. PAKISTAN SECURES $5 BILLION IN ADDITIONAL AID FOR ITS ELITE TO DISTRIBUTE, WHILE THE TALIBAN APPEALS TO THOSE THEY EXPLOIT

Chisa Fujioka and Yoko Kubota at the Washington Post reports that more than $5 billion in new aid was pledged to Pakistan in a conference today. President Zadari is reported to have said, "If we lose, you lose. If we lose, the world loses." The US matched a pledge by Japan for $1 billion over the course of two years, subject to Congressional approval.

Jane Perlez and Pir Zubair Shah at the New York Times argue that the Taliban's success in Swat and elsewhere has been to appeal to landless peasants in their struggle against the landed elite.

"In Swat, accounts from those who have fled now make clear that the Taliban seized control by pushing out about four dozen landlords who held the most power.

To do so, the militants organized peasants into armed gangs that became their shock troops, the residents, government officials and analysts said.

The approach allowed the Taliban to offer economic spoils to people frustrated with lax and corrupt government even as the militants imposed a strict form of Islam through terror and intimidation.

'This was a bloody revolution in Swat,' said a senior Pakistani official who oversees Swat, speaking on the condition of anonymity for fear of retaliation by the Taliban. 'I wouldn’t be surprised if it sweeps the established order of Pakistan.'"

I reiterate my suspicion that this is not just about money, and that the inequitable access to justice and security is a major driver here, but clearly the inequitable distribution of wealth contributes to inequitable access to justice and security. From my far remove.

8. ASSASSINATION ATTEMPT ON THAI 'YELLOW-SHIRT' LEADER

The Canadian Broadcasting Company reports that Sondhi Limthongkul, a media tycoon and founder of Thailand's "yellow-shirt" protest movement, was shot at by gunmen in a pickup track today as he was on his way to work. A bullet fragment entered his skull and Sondhi is in stable condition at the hospital after having surgery to remove it.

"The pre-dawn attack came hours before Thailand's government held a special cabinet meeting to discuss the recent violence that left two demonstrators dead.

After the meeting, Prime Minister Abhisit told reporters cabinet members agreed to extend the country's state of emergency for a sixth day in order to control rioting.

'We have to make sure peace and order truly returns,' he said.

It's not clear when the state of emergency will be lifted."

The bad blood is building. (h/t The FP Morning Brief.)

9. ANGOLA'S CRUDE EXPORTS TO RISE IN APRIL, PETROBRAS SEEKING OIL RIGS

Angola is increasing its crude exports by 7% in June, per Alexander Kwiatkowski at Bloomberg, who writes that loading programs for BP Plc, Total SA, Chevron Corp., Exxon Mobil Corp. and other companies are scheduled to load 1.85 mb/d that month. Meanwhile, Florence Tan and P.R. Venkat at Dow Jones Newswires report that Petrobras will begin the process of accepting bids for new oil drilling rigs in the next couple of months.

"The company, which awarded contracts for 12 rigs last year, still needs 28 more over the next five years as part of its expansion.

'We will divide them (28 rigs) into lots of 5-7,' Chief Financial Officer Almir Barbassa told a news conference Thursday, adding the company will seek bids for the first lot in 2-3 months."

The company expects first oil from Tupi, an oil field thought to hold between 5 and 8 billion barrels of recoverable oil equivalent, on May 1.

10. US-MEXICAN ENERGY COOPERATION

President Obama and Mexican President Felipe Calderon announced yesterday that the two countries would initiate a cross border dialogue on energy and climate change. Alexander Duncan at Platts reports:

"The 'Bilateral Framework on Clean Energy and Climate Change' is similar to an effort which Obama helped launch when he visited with Canadian Prime Minister Stephen Harper in February.

Obama also backed Mexico's bid to host next year's UN climate change negotiations. The negotiations this December, to be held in Copenhagen, will set the stage for a new international climate treaty to replace the Kyoto Protocol."

If I remember correctly, such a dialogue was a key recommendation by Sen. Lugar and as such represents an example of bi-partisanship.