Daily Sources 5/27

JAPANESE EXPORTS RISE IN 1.9% APRIL FROM MARCH, DOWN 39.1% FROM LAST YEAR

Reuters reports that Japanese exports rose, on a seasonally-adjusted basis, 1.9% in April from March. Exports are down 39.1% in April from a year previous. Shipments to China fell by an annual rate of 25.8% and to the US by an annual rate of 46.3%. I'd expect industrial production to rise slightly as well, given the news in late April that March industrial output had gone up 1.6% from February--see Daily Sources 4/30 #2.

2. MORE DEBATE INSIDE CHINA ON ECONOMIC DATA; CHINESE CORPORATIONS TO ACQUIRE COAL-COKING OPERATIONS OF CANADA'S TECK; KUOMINTANG PARTY LEADER IN BEIJING TO DISCUSS FURTHER OPENINGS

Sky Canaves at the China Journal reports that China's retail sales data is coming under more fire. The State Information Office [SIO]--a government think tank--published a report in the China Securities Journal--also government-owned--which made clear that consumption had also been hit hard by the current slowdown. The SIO reported:

"retail sales numbers 'don’t fully and accurately reflect the changing trends in consumer demand,' in part because they don’t include consumer spending on services and housing, which have seen relatively steeper drops than spending in other areas. Monthly retail sales data should be considered in conjunction with quarterly household expenditure data and year-end total consumer spending growth, which it said are trending downwards. According to year-end data, consumer spending nominally increased by 16.1% in 2008. But with inflation, real growth was only 9.6%, the lowest level of growth since 2005."

The SIO recommended new measures to boost domestic consumption including expanding the current rural car and appliance subsidy program, low interest home improvement loans, increased funding for low income housing, and a reduction in tolls. The critique of household consumption data echoes an earlier official critique by a chief statistician at China's National Bureau of Statistics--see Daily Sources

Meanwhile, Xiao Yu and Steven Engle at Bloomberg report that Canada's biggest base-metals company, Teck Resources, Ltd., is in talks with Chinese companies to sell its coking-coal assets.

"'We are going through a process' of talks with Chinese companies, including steelmakers, to buy as much as a 20% stake in its coking coal business, Chief Executive Officer Donald Lindsay said in a television interview in Beijing today. He declined to name the companies."

And Michael Wines at the New York Times reports that Chinese President Hu Jintao hosted Wu Poh-hsiung, the head of the Kuomintang Party--currently in power--in Beijing for talks regarding increased bilateral trade ties and cross border movement yesterday.

"Last week Chen Chu, the highest-ranking elected official of the Democratic Progressive Party, or DPP, visited Beijing. Ms. Chen, the mayor of Kaohsiung, Taiwan’s second largest city, stressed that she was visiting the mainland to promote her city, not to signal any political retreat from the party’s independence stand. Trips to the mainland by DPP officials are nevertheless rare, and [Taiwanese President] Ma [Ying-jeou] quickly cited it as a sign that cross-straits relations were improving."

3. NORTH KOREA THREATENS ATTACKS ON SEOUL IF ITS SHIPS ARE INTERDICTED

Choe Sang-Hun at the New York Times reports that Pyongyang threatened to launch military strikes on South Korea should any of its ships be intercepted and searched as part of the US-led effort to prevent it from proliferating nuclear weapons or missile technologies. Seoul had agreed to join the US "interdiction effort" (um, i.e., blockade) Monday after North Korea conducted an underground nuclear test blast--its third. A North Korean military spokesman said today in an official statement:

"We consider this a declaration of war against us. Any hostile act against our peaceful vessels, including search and seizure, will be considered an unpardonable infringement on our sovereignty and we will immediately respond with a powerful military strike."

On January 30, Pyongyang unilaterally declared all peace agreements with Seoul null and void, including the armistice ending the Korean War in 1953 and the 1991 agreement on non-aggression and reconciliation--see Daily Sources 1/30 #3. North Korea reiterated its view that the peace deals between it and the South were a dead letter in its statement today. Former Secretary of Defense William J. Perry, Former National Security Adviser Brent Scowcroft and Council on Foreign Relations Senior Fellow Charles D. Ferguson have an op ed in today's Wall Street Journal on how best to approach the impasse with Pyongyang. Key excerpt:

"An effective strategy to reduce nuclear dangers must build on five pillars: revitalizing strategic dialogue with nuclear-armed powers, particularly Russia and China; strengthening the international nuclear nonproliferation regime; reaffirming the protection of the US nuclear umbrella to our allies; maintaining the credibility of the US nuclear deterrent; and implementing best security practices for nuclear weapons and weapons-usable materials worldwide."

Worth reading.

4. EUROZONE OVERNIGHT LENDING RATES RECOVERING, COULD PRESENT THE ECB WITH A DILEMMA

Joellen Perry at Real Time Economics reports that the euro-zone overnight index average rate rose to 1.146% Wednesday, after having hit a low of 0.486% on May 11, and above the European Central Bank's target of 1%.

"Keeping the overnight rate steady is a central bank’s main raison d’être. Central banks manage growth and inflation by setting a target rate for the overnight loans banks make to one another. The overnight rate guides other key interest rates--such as the benchmark for the rates banks charge one another for three-month loans. That rate, a reference point for many consumer and business loans across the euro zone, has been rising in tandem with the overnight rate. On Wednesday, it hit 1.270%, up from Tuesday’s 1.266%."

As Perry points out, this is a good thing because it suggests that the credit crunch has relaxed its grip on the markets, but that on the other hand it could reduce the ECB's options in dealing with the financial crisis because,

"If the overnight rate stays higher than the ECB’s target rate, then the ECB’s monetary policy is more restrictive than the central bank wants. That could end up putting a brake on the economy in the midst of a deep recession."

5. RUSSIAN OFFICER CORPS UNHAPPY WITH RESTRUCTURING IN MIDST OF FINANCIAL CRISIS

Philip P. Pan at the New York Times has a very interesting anecdotal account of discontent rising in the Russian military--particularly among its officer corps--as it undergoes the process of modernizing.

"Low morale over pay and housing has afflicted the Russian military since the fall of the Soviet Union, but grumbling in the ranks is rising sharply as President Dmitry Medvedev attempts to carry out the most ambitious restructuring of the nation's armed forces since World War II in the face of a severe economic downturn.

The plan seeks to transform an impoverished, unwieldy conscript army built to fight a protracted war in Europe into a more nimble, battle-ready force that can respond quickly to regional conflicts. Key to the overhaul is a drastic reduction in the number of officers, who now account for nearly one in three Russian servicemen.

By eliminating thousands of officer-only units that were designed to call up draftees in wartime, and moving to a leaner, brigade-based structure, Medvedev intends to cut Russia's officer corps from 355,000 to 150,000, dismissing more than 200 generals, 15,000 colonels and 70,000 majors."

The question is whether or not the current economic environment is a better or worse time to continue to carry out the restructuring plan, from a political perspective.

6. PAKISTAN'S SUPREME COURT READMITS SHARIF BROTHERS TO ELECTED OFFICE

Nasir Iqbal at Dawn reports that Pakistan's Supreme Court ruled that the Sharif brothers who lead the main opposition party--PML-N--were illegally barred from elected office.

"The decision paved the way for former Prime Minister Nawaz Sharif to return to parliament after nearly 10 years.

‘The June 23, 2008, judgment of the Lahore High Court and the Feb 25 order of this court are ex-parte on account of which certain factual aspects and legal provisions were not brought to the notice of the court and, therefore, were not considered, leading to miscarriage of justice which has been found by us to be errors apparent on the face of record warranting review,’ a five-judge bench ruled unanimously in a packed courtroom."

Encouraging, in my view--see The Law in Pakistan.

7. VENEZUELA AND BOLIVIA DENY ABSURDIST CLAIM THAT THEY ARE PROVIDING IRAN WITH URANIUM; HOUSEHOLD GOODS IN SHORT SUPPLY IN VENEZUELA

Carlos Valdez at the Associated Press report that Caracas and La Paz issued official denials today regarding the Israeli report which accused the two countries of supplying uranium to Iran.

"Bolivian Mining Minister Luis Alberto Echazu said his country doesn't even produce the radioactive metallic element, though he acknowledged that officials believe the country has some untapped uranium deposits.

'There isn't even a precise geological study of uranium deposits, and much less can there be talk of export' to another country, he said."

Venezuela also has estimated uranium reserves of some 50,000 metric tons, but currently has no mining operations. I am unclear as to why strategists in Israel, at this stage, would be anxious for a US scrap with Venezuela just now, given the drums still beating for war with Iran. A full-bore conflict with either could ill be afforded by the US just now and absurd-ist accusations, though creative, are not likely to burnish their credibility. Iran has a contract for enriched uranium supplies from Russia to feed the Bushehr nuclear power plant and, as has been widely reported, now has the capability to enrich uranium, of which it has proven reserves of about 3,000 metric tons and expected reserves of 20,000-30,000 metric tons.

Meanwhile, Tyler Bridges at McClatchy Newspapers has a story on consumer goods shortages in Venezuela. (The story is not the first in some anecdotal accounts of shortages faced in the cities due to the fall in the price of oil--see Daily Sources 2/2 #10.)

"'Today, there's no milk, no rice, no beans, no chicken, no meat, no butter and no cooking oil,' Francisco Quintero said as he shopped at a government store that sells subsidized staples for the poor."

Bridges reports that prices for pharmaceuticals and home appliances are skyrocketing as car manufacturers have decided to stop their production lines.

"'We're expecting the government to raise prices for rice, milk, meat and chicken by 40%," said Marlon Barragan, who manages a Mercal in Catia. He said that the prices 'will still be low.' The only question is whether the goods will be available.

The government is three to four months behind in providing dollars to drug producers to pay for their imports of goods and raw materials, said Edgar Salas, who heads a pharmaceutical trade association in Caracas. In all, the companies are owed about $250 million, he said."

8. FEDERALES ARREST 10 MICHOACAN MAYORS

E. Eduardo Castillo at the Associated Press reports that Mexican federal forces, in a raid that began Tuesday morning, have put under arrest ten mayors of ten cities in the central state of Michoacan.

"Most of the mayors were from towns in a mountainous region where there have been numerous beheadings and federal agents recently found 22 methamphetamine laboratories. Among those detained was the mayor of Uruapan, where La Familia gunmen dumped five human heads on a bar dance floor in 2006, the Attorney General's Office said in a statement.

The mayors came from different parties, including Calderon's own conservative National Action Party.

The detentions of elected officials show how Mexican cartels have infiltrated the country's political structure and how far-reaching their control is in rural Mexico, said Victor Clark, an expert on trafficking based in the drug-plagued northern border city of Tijuana.

It also marks a first for the federal government, which has arrested scores of corrupt police officers in the past but has never gone after such a large group of mayors."

9. G8 MEETING CREATES "PARTNERSHIP" TO SHARE ENERGY EFFICIENCY DATA

Platts reports that at the G8 meeting in Rome this weekend a International Partnership for Energy Efficiency Cooperation was created. Members will include the G8--Canada, France, Germany, Italy, Japan, Russia, the UK, and the US--as well as Brazil, China, India, Mexico and the South Korea. The agreement is intended "to make it easier for their governments to share information on curbing energy consumption."

10. TROUBLED U.S. BANKS NOW 21% OF TOTAL

Margaret Chadbourn and Alison Vekshin at Bloomberg report that the number of distressed banks, per the FDIC, has climbed to 21% of the total--the largest share of the US banking sector "troubled" in 15 years.

"Funds set aside by banks to cover loan losses rose 64% to $60.9 billion in the first quarter from $37.2 billion in the year-earlier quarter. [FDIC Chair] Sheila Bair said 97% of banks were 'well-capitalized' at the end of the first quarter."

21 banks have collapsed in the first quarter, the most since late 1992. The FDIC has taken over 36 this year.

11. PRE-EXISTING HOME SALES RISE 2.9% IN APRIL FROM MARCH, DOWN 3.5% ON THE YEAR; RISING UNEMPLOYMENT COULD AUGUR 1-3 MILLION ADDITIONAL FORECLOSURES AS RECESSION DRAGS ON

Barry Ritholtz reports that the recent National Association of Realtors data shows that existing home sales increased 2.9% in April from March (at seasonally adjusted rates), and down 3.5% from a year previous. Total inventory in April rose 8.8%--"The increase in inventory is somewhat worrisome, and supports our thesis that any stabilization in sales or prices will bring out more shadow inventory." In the meantime, in a post by Ritholtz yesterday, he outlined why more unemployment equals more foreclosures:

"• Foreclosure rates among prime borrowers have been growing fastest in states with higher unemployment.

• Economy.com expects mortgage defaults in 2009 caused by unemployment to double, from 29% in 2008 to 60% in 2009;

• Prime mortgages that are distressed (90 days delinquent, foreclosure, REO) are greater than 1.5 million;

• Alt-A loans--those given to people with slightly tainted credit--rose to 836,000.

• Subprime mortgages that were 'distressed' reached 1.65 million;

• From February 2008 to Feb 2009, total dollar value of distressed mortgages increased 60% in dollar terms;

• More than four million loans worth $717 billion were 'distressed' in February."

I'm not sure that his linear projection makes sense, given that arguably those most at risk of foreclosure due to job losses were hit first, but he predicts 500,000 to a million additional foreclosures--from February--in the next six months if the recession ends now. If the recession continues for another six months, Ritholtz argues that we should see two to three times that number.

12. HIGHER EDUCATION BUBBLE LIKELY TO POP NEXT

Former Massachusetts secretary of educational affairs, Joseph Marr Cronin, and president of New England College of Business and Finance Howard E. Horton argue in the Chronicle of Higher Education that the higher education sector is likely to get hit next. Key excerpt:

"According to the National Center for Public Policy and Higher Education, over the past 25 years, average college tuition and fees have risen by 440%--more than four times the rate of inflation and almost twice the rate of medical care. Patrick M. Callan, the center's president, has warned that low-income students will find college unaffordable.

Meanwhile, the middle class, which has paid for higher education in the past mainly by taking out loans, may now be precluded from doing so as the private student-loan market has all but dried up. In addition, endowment cushions that allowed colleges to engage in steep tuition discounting are gone. Declines in housing valuations are making it difficult for families to rely on home-equity loans for college financing. Even when the equity is there, parents are reluctant to further leverage themselves into a future where job security is uncertain.

Consumers who have questioned whether it is worth spending $1,000 a square foot for a home are now asking whether it is worth spending $1,000 a week to send their kids to college. There is a growing sense among the public that higher education might be overpriced and under-delivering."

Worth reading in full (h/t Yves Smith at naked capitalism.) UNESCO estimates that the US has over 14 million higher education students, which suggests that the represent a considerable share of the economy. Meanwhile, Jonathan D. Glater at the New York Times has an anecdotal account of teachers being faced with smaller loan forgiveness packages as the recession hits those state and federally budgeted programs.

"From Kentucky to Iowa to California, loan forgiveness programs are on the chopping block. Typically founded by their states to help students pay for college, the state agencies and nonprofit organizations that make student loans and sponsor these programs are getting less money from the federal government and are having difficulty raising money elsewhere as a result of the financial crisis.

The organizations say the repayment programs have been hurt by a broader effort by Congress to tackle the high cost of the federal student loan program by reducing subsidies to lenders.

Curbing the programs will make it harder to lure college graduates into high-value but often low-paying fields like teaching and nursing."