BBC reports that the chief finance spokesman for the main opposition party in Japan, the Democratic Party of Japan (DPJ), said in an interview with the broadcaster that Tokyo will only continue to purchase US debt if it is denominated in yen.
"However observers say that, while the move would be a remarkable policy shift, it was unlikely that Mr Nakagawa's party will win the forthcoming election, due before mid-September, despite the unpopularity of the ruling Liberal party."Linda Sieg and Yoko Kubota at Reuters report that former DPJ leader Yukio Hatoyama announced his candidacy to lead the party after Ichiro Ozawa's resignation last week amidst a scandal in an effort to boost the party's chances of winning upcoming elections. The reporters enumerate some key elements of Hatoyama's background, including:
"Hatoyama is known less for economic policies than for his stance on security and diplomacy. He has advocated revising Japan's pacifist constitution to acknowledge the nation's right to defend itself and maintain a military for that purpose. He has also been critical of Japan's foreign and security policies for being too subservient to close ally the United States."The so-called FACTBOX is worth consulting. Nouriel Roubini, professor at NYU made famous by his forecast accurate in many particulars of the current crisis, has an op ed in the New York Times where he dismisses arguments that the euro could replace the dollar as the world's reserve currency, instead suggesting that the renminbi is likely to take its place. Key excerpt:
"If China and other countries were to diversify their reserve holdings away from the dollar--and they eventually will--the United States would suffer. We have reaped significant financial benefits from having the dollar as the reserve currency. In particular, the strong market for the dollar allows Americans to borrow at better rates. We have thus been able to finance larger deficits for longer and at lower interest rates, as foreign demand has kept Treasury yields low. We have been able to issue debt in our own currency rather than a foreign one, thus shifting the losses of a fall in the value of the dollar to our creditors. Having commodities priced in dollars has also meant that a fall in the dollar’s value doesn’t lead to a rise in the price of imports.Well worth reading in full. Victor Zhikai Gao--executive director of the Beijing Private Equity Association and a director of the China National Association of International Studies--also has an op ed in the New York Times which points out that many Chinese actually have a sentimental attachment to the US dollar, known by many as mei jin, or "American gold." The dollar had for many years cache simply because it was illegal to hold them--the law required that all private citizens convert dollar holdings into the renminbi, and thus the notion of the dollar being "gold" long outlasted Nixon's decision to delink the dollar from the yellow metal. Key excerpt:
Now, imagine a world in which China could borrow and lend internationally in its own currency. The renminbi, rather than the dollar, could eventually become a means of payment in trade and a unit of account in pricing imports and exports, as well as a store of value for wealth by international investors. Americans would pay the price. We would have to shell out more for imported goods, and interest rates on both private and public debt would rise. The higher private cost of borrowing could lead to weaker consumption and investment, and slower growth.
This decline of the dollar might take more than a decade, but it could happen even sooner if we do not get our financial house in order."
"Beijing recently called for a greater role in international trade for the special drawing rights currency of the International Monetary Fund. But China is also fully aware that the United States can veto an IMF decision. China’s call was more meant to sound an alarm to the United States.2. THE IEA SAYS CHINESE GDP DATA MAY WELL BE WRONG; KEY CHINESE STATISTICIAN OUTLINES PROBLEMS WITH CHINESE RETAIL SALES DATA
Many Chinese people increasingly fear the rapid erosion of the American dollar. The United States may want to consider offering inflation-protection measures for China’s existing investments in America, and offer additional security or collateral for its continued investments. America should also provide its largest creditor with greater transparency and information.
We still call the dollar American gold. But the United States should not assume that this will never change."
David Winning at the China Journal reports that the Paris-based IEA global energy report today cast doubt on Beijing's official 6.1% GDP growth number for the first quarter, saying it didn't quite reconcile with a 3.5% drop in oil consumption.
"'Admittedly, pinpointing China’s oil demand with accuracy is an exercise fraught with difficulties, given the lack of data and the underlying assumptions analysts must make regarding stocks and refinery output from independent producers,' the IEA said in its latest report on the global oil market.The IEA also mentioned a fall in electricity generation, which I noted in yesterday's Daily Sources 5/13 #2 were supposed to have fallen by as much as 4% in April after experiencing year over year declines in power generation for the last seven months. Chinese statistics have been in for a lot of rubbishing recently Andrew Batson reports in China Journal: a new essay by Xu Xianchun, a top statistician at the National Bureau of Statistics tries to explain why "one can’t simply add up China’s monthly indicators of investment and spending to get an accurate picture of gross domestic product."
'Still, one would have expected stronger, positive oil demand growth commensurate with the reported economic resilience, unless income elasticities had drastically changed.'
The IEA floated another possibility: Real GDP data aren’t accurate and shouldn’t be taken at face value."
"Yet many economists have long felt that the retail sales figures are not a reliable guide to China’s household consumption. Mr. Xu himself notes these well-known gaps, pointing out that the official retail sales numbers include things that cannot be considered consumer spending.Worth reading in full. The National Bureau of Statistics is attempting to overhaul its data collection and publication methodologies in the face of growing criticism regarding the accuracy of their data--see Daily Sources 5/7 #2 (near the bottom of the item.)
The most important are retail sales to companies and institutions, which of course are not consumers at all, and sales of construction materials for housing, which should be counted as part of household investment. Retail sales also do not include spending on services like education or health care, or rural households’ consumption of produce they grow themselves, he notes.
'Compared with retail sales, using household consumption expenditure obtained from the rural and urban household surveys is closer to consumer spending,' Mr. Xu writes.
Those measures show much slower growth than the headline retail sales figure. Mr. Xu says the bureau’s household surveys put the real growth in urban household consumption in the first quarter at 9.6%, and 9.3% for rural households. That would mark somewhat faster growth than in the second half of 2008 but somewhat slower growth than in the first half, when food prices soared, according to figures previously released by the bureau."
3. PLANS TO ALLOW MAINLAND CHINESE INVESTMENT FLOWS TO TAIWAN CAUSING IRRATIONAL EXUBERANCE IN TAIWANESE MARKETS
Jonathan Adams at the New York Times reports that after announcing plans late last month to sign accords providing for cross-strait exchange in banking, insurance and access to financial markets the Taipei stock markets and dollar have been posting strong gains in the face of horrible economic data.
"[S]ince Ma Ying-jeou was inaugurated as president nearly a year ago, Taiwan has moved rapidly to forge closer commercial links with China to lift its sagging economy. In the past year, it signed deals with China on tourism, airline flights and shipping.For now, Beijing is capping Taiwan-bound investment at 7.2 billion Taiwan dollars (~ $219 million) leading analysts to remark that the market is likely overreacting.
Investment, however, has remained a one-way street, flowing from the island to the mainland. Taiwan has invested $150 billion in the mainland since the 1980s, according to one Taiwan government estimate. Mainland China has until now been barred from directly investing in Taiwan."
4. BANK OF ENGLAND WARNS THAT RECOVERY WILL BE PROTRACTED TO 2012, LONDON COMMERCIAL RENTALS AT PRICES LAST SEEN IN 1991
Julia Werdigier at the New York Times reports that Mervyn King, head of the Bank of England, warned yesterday that "Growth has just as much chance of being positive over the next 12 months as it has of being negative."
"The central bank predicted that inflation would slow to as low as 0.4% this year and then accelerate to 1.5% by the end of 2010, revising upward an earlier forecast. But inflation is still unlikely to hit 2% by 2012, the central bank said."2012. Mr. King said the recovery would likely be "slow and protracted." Meanwhile, Chris Bourke at Bloomberg reports that commercial rent in the city of London, the UK's main financial district, has fallen to levels last seen in 1991.
"The City already has enough empty offices to hold two- thirds of Canary Wharf, the docklands area developed 1 1/2-miles east in the 1980s to lure investment bankers. About 9 million square feet (855,000 square meters) are available in the City and that may climb to 12 million by the end of 2009, according to CB Richard Ellis Group Inc., the biggest commercial property broker. Almost 19% of all City offices may be vacant next year, analysts at CB Richard Ellis estimate."(h/t Barry Ritholtz at the Big Picture.)
5. SPANISH GDP DOWN 1.8% IN Q1, RECOVERY COMPLICATED BY DEBT TO GDP RATIO
Edward Hugh at Fistful of Euros reports that Spanish GDP fell at a rate of 1.8% in the first quarter following a 1% contraction in the fourth quarter of 2008 which, annualized, results in a contraction of 7.2%.
"Over the first quarter of 2008 (that is year on year) GDP decreased by 2.9%, the sharpest decline recorded in almost 40 years. In fact you would need to go back to 1945 to find a year in which the Spanish economy contracted as strongly as it is likely to this year."Hugh argues, in the very long post, that the crisis in Spain is mostly due to excessive bank lending--to get 4% annual GDP growth Spanish households and corporations were apparently increasing their borrowing by a rate of 20% per annum. Hugh concludes:
"So as I say, debt to GDP is most probably rising even now, but it is obviously going to have to come substantially down, which is why I insist on saying, this correction has hardly even gotten underway yet."Long, but with substantial detail and worth reading given time.
6. RUSSIA PROPOSES RENEGOTIATING THE CONVENTIONAL FORCES IN EUROPE TREATY, BELARUSSIAN PRESIDENT COMPLAINS THAT RUSSIA HAS NOT WORKED FOR RENUNION, GEORGIAN OPPOSITION LEADER SAYS SAAKASHVILI IS TRYING TO CREATE AUTOCRATIC STATE
Vladimir Isachenkov at the Associated Press reports that Russian Foreign Ministry spokesman Andrei Nesterenko told the media that Moscow is proposing to renegotiate the Conventional Forces in Europe Treaty, and would honor the agreement if the changes were accepted by Washington and its NATO allies.
"The 1990 treaty limits the number of tanks, aircraft and other heavy non-nuclear weapons that could be deployed west of the Ural Mountains--the edge of European Russia. A new revised version was signed in 1999, but NATO countries have not ratified it and in 2007 Russia suspended its participation."The West has insisted that Moscow remove troops from the breakaway regions of South Ossetia and Abkhazia as a prerequisite for reconsidering the CFE treaty. Meanwhile, Yevgeny Bendersky at the Compass reports that Belarussian President Aleksandr Lukashenko last week blamed Moscow for failing to reunite Russia with Belarus.
"'The fact that we have not progressed in constructing a federal partnership is not our fault. It is their (Russia's) fault... Who does not fulfill the contract on the construction of the Unified State? We had to hold a joint referendum on that. Why didn't we? Because the Russians did not want to,'--said Lukashenko, advising Moscow to 'look at the internal causes of turmoil in our relationship.'"Although the Belarussian reunification with Russia would likely be regarded with serious alarm in the West, the standard take on this, if I recall correctly, is that United Russia, the party of Medvedev and Putin, doesn't particularly want Lukashenko as a political challenger for the presidency and that Moscow doesn't particularly want to bear the costs of reintegrating the Belarussian economy, which has been basically destroyed by Lukashenko.
Prime Minister Putin is, by the way, Chairman of the Council of Ministers of the Union of Russia and Belarus. Belarus was one of the nations explicitly targeted by the EU's "Eastern Partnership" initiative, which would offer better trade ties, relaxed visa rules and aid over four years for six countries neighboring Russia--see Daily Sources 5/7 #1. Meanwhile, Benjamin Bidder at Der Spiegel conducted an interview with Georgian opposition leader Salome Zurabishvili in which she calls President Sakaashvili "insane." Key excerpt:
"SPIEGEL ONLINE: But during the war between Russia and Georgia in August of 2008 you united the entire opposition in support of Saakashvili. You even forbade any criticism of the president.Zurabishvili also accuses the President of faking the mutiny at the Mukhrovani tank camp--see Daily Sources 5/5 #4--saying that he is attempting to intimidate the armed forces as opposition to his administration grows. In short, she accuses the President of trying to establish an autocratic state.
Zurabishvili: That was following the national tragedy! We stood united so that we could prevent Russia from using the situation to their advantage after the war.
SPIEGEL ONLINE: Why is the opposition so set on seeing Saakashvili as the bogeyman?
Zurabishvili: There is simply no one to turn to in other state institutions because none of them have any power anymore. That's the situation in which we find ourselves. The situation is serious and very dangerous. Because if, after these peaceful protests, we don't get any results--not even a small concession--then things could get out of control, as they did on May 6th."
7. TURKISH CENTRAL BANK CUTS BENCHMARK RATE TO 9.25%, CONSUMER PRICES RISING AT SLOWEST RATE SINCE 1970
Steve Bryant at Bloomberg reports that the Turkish Central Bank has reduced its benchmark interest rate by 0.5% to 9.25%.
"Bank Governor Durmus Yilmaz has shaved 7.5 percentage points from the benchmark rate in seven months, joining policy makers worldwide in trying to pull economies out of recession as inflation slows. Turkish consumer prices rose an annual 6.1% in April, the slowest pace since July 1970."Unemployment rose to 15.5% in January, the highest rate seen since records were inaugurated in 2005.
8. 735 CARGO SHIPS ANCHORED OFF SINGAPORE ON COLLAPSE IN GLOBAL TRADE, 300 OFF ROTTERDAM, 150 OFF GIBRALTAR
Keith Bradsher at the New York Times reports that as many as 735 cargo ships, some weighing as much as 300,000 dead weight tonnes, have anchored off the coast of Singapore in the Strait of Malacca on the global fall in international trade. Charles Pertwee captured a beautiful picture of the situation for the Times, illustrating the concern shipping lines have as the parked behemoths are creating an obstacle course in one of the busiest shipping channels in the world:
"The gathering of so many freighters 'is extraordinary,' said Christopher Pålsson, a senior consultant at Lloyd’s Register-Fairplay Research, the consulting division of Lloyd’s Register-Fairplay. 'We have probably not witnessed anything like this since the early 1980s,' during the last big bust in the global shipping industry.Ships are anchoring off other ports too with about 300 off Rotterdam and 150 off the Strait of Gibraltar.
The world’s fleet has nearly doubled since the early 1980s, so the tonnage of vessels in and around Singapore’s waters this spring may be the highest ever, he said, cautioning that detailed worldwide ship tracking data has been available only for the last five years."
9. THE IEA CUTS GLOBAL OIL DEMAND FORECAST TO A 3% REDUCTION FROM 2008, WORST DEMAND REDUCTION SINCE THE OIL SHOCK OF 1981, BUT OIL INVENTORIES MAY HAVE STOPPED BUILDING
Mark Shenk at Bloomberg reports that the Paris-based IEA cut its estimate of global oil demand to 83.2 mb/d in 2009, down 3% from 2008 and the steepest fall since the oil shock of 1981. This is triple the decline forecast by the IMF in Global Financial Stability Report of a decline in oil use of 1.5%--see Daily Sources 4/22 #1. (The IMF records an oil use decline of 2.87% in 1982.) OPEC and the EIA also lowered their global demand forecasts this year. John Kingston at The Barrel gives three reasons why the global build in inventories that has happened over the last months has, in his view, probably come to an end. Key excerpt:
"Platts' Sheela Tobben reported that the volume of foreign crude sitting aboard floating storage in the US Gulf has declined to around 20 million barrels Wednesday, from 30-35 million barrels at the end of April, according to market sources. This follows sales that began last week by holders of that oil under pressure from a narrower NYMEX crude contango, a stronger WTI/Brent and the incentive provided by healthy gasoline margins, they said. 'Last count sweet and sour total about 20 million barrels in the USG but seems a little high given many stems moved last week,' said a trader with a major, referring to several sales of Russian Urals last week.Worth reading in full. Keith Johnson at Environmental Capital also notes that Barclays' Paul Horsnell thinks that inventories will now start drawing down, which means it is only a question of when, not if, oil goes back above $70/b. (JBC Energy predicted oil would start coming out of storage at sea on May 5th as Goldman Sachs predicted all available oil storage would be full by June, see Daily Sources 5/5 #5.) In the meantime, al-Hayat, a Saudi paper widely watched by the oil patch, reported that in a recent meeting with French Economy Minister Christine Lagarde Saudi King Abdullah and Oil Minister al-Naimi said factors other than supply and demand had pushed the price above $60/b in the first place, according to Reuters.
With the world markets seeing tighter inventories, the most visible sign of it is in the spread among different calendar months delivery of crude. Following the release of the API inventories, the spread between June and July crude had narrowed to 70 cts, with July about that much higher than June. At one point in mid-April, the front month to second month spread was more than $3. That sort of movement only occurs when inventories are being drawn down, and the numbers, and stories from the market, are beginning to confirm that."
10. CARBON TAXES WILL MAKE SUPER-POLLUTING CANADIAN OIL SANDS LESS ECONOMICAL
It is an old story, but it bears repeating. Ben Casselman at Environmental Capital reports that carbon taxes will make oil sands production in Canada that much more difficult to make economical. Oil sands production releases huge amounts of carbon into the atmosphere via current technology, and the Canadian Energy Research Institute thinks that new emissions regulations would likely push the price of economically producing oil from oil sands to $105/b. "As a result, CERI expects growth in the oil sands to be as much as 40% lower in the coming years than previous projections." Oil sands represent a considerable portion of Canadian production--and Canada is the largest exporter of oil to the US.
11. OBAMA BLOCKS RELEASE OF ADDITIONAL PRISONER ABUSE IMAGES
Peter Wallsten and Janet Hook at the Los Angeles Times reports that the Obama Administration decided yesterday to block the release of additional images depicting the abuse of prisoners by US military personnel in Iraq. The decision, which may be reversed by the courts, will surely make some rethink their view that the administration represents a clear break with its predecessor. On the other hand, the visceral reaction that people have to pictures of people abusing captives is much more emotional, and potentially explosive, than to a decision to go back on campaign promises of transparency. I suspect that the decision is with the safety of US personnel overseas foremost in mind. That said, the decision begins the process of erosion of the Administration's credibility--perhaps inevitable, but ultimately the load-bearing pillar of soft power for any Administration.
12. S&P INDICATED EXPECTATION FOR BANKING CRISIS TO CONTINUE FOR 3 - 4 MORE YEARS, AIG TELLS CONGRESS IT WILL TAKE 3 - 5 YEARS TO COMPLETELY RESTRUCTURE, US SENATE OK'S 41% INTEREST RATES ON CREDIT CARDS
Jonathan Stempel at Reuters reports that Standard & Poor's Managing Director Tanya Azarchs said--though it did not mention via which medium--"There's nothing to say that this banking crisis can't go on for another three or four years."Stemple writes that the Managing Director indicated that the rating agency thinks the banking crisis has merely entered into a new phase, which should last some time. He writes:
"While efforts to spur lending, take bad assets off banks' balance sheets, and restart the market for packaging and selling securities may help the sector, S&P said banks will have a tough time surviving absent a bigger capital cushion than regulators require."I'm not sure why anyone would pay attention to the ratings agencies given their total failure to warn the market prior to its meltdown, but, hey, you know what they say in the financial sector--"past performance is no indication of future performance"--so perhaps some credence ought to be extended to Ms. Azarchs. Meanwhile, Edmund L. Andrews at the New York Times reports that the Chairman of AIG, Edward M. Liddy, told the House Committee on Oversight and Government Reform that it would likely take the company three to five years to restructure and fully repay its obligations to the US taxpayer.
"'We must take the time and exercise the diligence to do this restructuring properly,' [Liddy] told lawmakers. 'Let me be clear: our plan is explicitly designed to avoid having to divest A.I.G. assets at fire-sale prices.'"When pushed for more detail on the restructuring plan, Liddy reportedly "balked," but indicated he would do so under conditions more likely to preserve the plan's confidentiality. In the meantime, Carl Hulse at the New York Times reports that the US Senate has rejected a bill which would cap credit card interest rates at 15%, 33-60. Apparently the US Senate has determined that credit card companies must be allowed to charge its customers rates as high as 41% if they are to remain viable entities. Senator Bernie Sanders (I-VT) introduced the bill arguing that over a third of all credit card holders pay interest of over 20% on their debts to the companies.
13. SEASONALLY-ADJUSTED INITIAL JOBLESS CLAIMS UP TO 637,000 FOR WK ENDED MAY 9, CHRYSLER AND GM SENDS LETTERS LETTING GO THOUSANDS OF RETAIL FRANCHISES
Bob Willis and Shobhana Chandra at Bloomberg report that the Labor Department today released data showing that seasonally-adjusted initial jobless claims grew by 32,000 to 637,000 in the week ended May 9.
"The total number of people collecting unemployment insurance surged in the prior week to 6.56 million, setting a record for the 15th straight week and indicating companies are still not hiring. The lack of jobs may restrain consumer spending, the biggest part of the economy, and put off a return to growth that economists project for later this year."The unadjusted for seasonality advance number of actual initial claims under state programs totaled 565,395, up 27,856 from the previous week. There were 325,480 initial claims in the comparable week in 2008. The previous week's initial unemployment claims number was revised slightly upwards to 605,000 from 601,000. Nick Bunkley at the New York Times reports that Chrysler filed a list of the car dealers it is cutting from roster in bankruptcy court today. 789 of its 3,200 dealers will lose their franchise with the company as of June 9.
"[S]ome dealerships could be saved by rulings from Chrysler’s bankruptcy judge or if other dealers decide to sell their franchises."Tomorrow 1,000-1,200 dealers are expected to receive a similar letter from GM. The National Automobile Dealers Association are meeting today with members of the Obama Administration to urge them to reduce the letting as much as possible.
14. PRODUCER PRICES UP 0.3% IN APRIL FROM MARCH, DOWN 3.7% FROM A YEAR PREVIOUS
Jack Healy at the New York Times reports that the Labor Department released data today showing that producer prices rose by 0.3% in April from March, but down 3.7% from a year previous. Most of the price increase came from food prices--which rose by 1.5%--and oil prices. If you exclude energy and food prices from the index it rose 0.1% in April from March.