Daily Sources 5/4

1. MEXICO TO LOWER SWINE FLU PRECAUTIONS, JAPAN TAKES EFFORTS TO KEEP IT OUT ALTOGETHER, AND RICHARD POSNER ARGUES THAT THE RELATIVELY HIGH PROBABILITY OF SUCH AN EVENT ARGUES FOR A GLOBAL CRISIS FUND

Elisabeth Malkin and Sharon Otterman at the Washington Post report that Mexico will relax its efforts to counter swine flu given that there has been a reduction in the number of cases coming to light and the assessment that it is only slightly more contagious than regular flu.

"Across the country, most factories and offices will reopen on Wednesday, Health Minister José Ángel Córdova said in a news conference. A decision has not yet been made to reopen schools, which have remained shuttered for well over a week."

Meanwhile, Blaine Harden at the Washington Post reports that Tokyo has taken strong measures to try and prevent the swine flu from spreading to the island.

"As long as the threat of a flu pandemic persists, anyone who flies into this country from North America while experiencing any flu-like symptoms or ailments will not be allowed to walk off an airplane and infect the country. Last week, inspectors began boarding every flight from Mexico, Canada and the United States. They take the temperature of about 6,000 passengers a day. Near Tokyo's Narita airport, 500 rooms have been secured by the Health Ministry to quarantine infected passengers."

Meanwhile, Judge Richard Posner estimates on The Becker-Posner Blog that were swine flu to end up being similar to the 1918 influenza pandemic worldwide costs would be around $20 trillion.

"([T]his estimate excludes the narrowly economic costs, but they would probably be lower, in part because thinning out populations can raise per capita incomes, especially if the very young and the very old, and poor people in overpopulated countries, are the principal victims), and if we indulge a further guess that there is a 1% annual probability of such an event, the annual expected cost would be $600 billion."

Judge Posner concludes:

"We need an overall 'catastrophe budget' that would match expenditures to the net expected benefits of particular measures targeted at particular catastrophic threats."

Worth reading in full.

2. CHINESE REAL ESTATE MARKET LOOKS BAD, BUT RETAIL SALES APPEAR TO BE RECOVERING (PARTICULARLY IN RURAL AREAS TARGETED BY THE STIMULUS PROGRAM--AND PARTICULARLY OF GOLD), THE NDRC DECIDES TO SHUTTER ALL SMALL INDEPENDENT REFINERIES BY 2011 AND SETSER NOTES THAT BEIJING'S PURCHASES OF TREASURIES WELL IN EXCESS OF THE VALUE OF US IMPORTS FROM CHINA

Richard Brubaker at All Roads Lead to China noted yesterday that the most recent edition of the JLL Property Market Monitor reported:

"Total prime retail stock in 21 major Chinese cities will grow at a CAGR of 20.2% through the next three years, while retail sales are only projected to grow at 9.2%. The divergence between stock growth and retail sales growth will drive up the national vacancy rate from 7.2% at end 2008 to a projected 13.9% at the end of 2011."

Mr. Brubaker comments that the report outlines the difficulties facing the residential, commercial, and retail sectors, but sees a bright spot in infrastructure. The post includes a link to the full report. (h/t Yves Smith at naked capitalism.) Meanwhile, Xinhua reports that Chinese retail sales climbed 9% year-over-year during the May Day Holiday, which lasted from May 1 - 3.

"The [Chinese Ministry of Commerce] said robust sales were reported for gold, jewelry, home appliances and autos, as retailers launched promotion campaigns.

Sales of gold and other jewelry rose 19.6%, the ministry said, without giving specific figures."

I'm not sure of the cultural context here, but generally large increases in gold sales wouldn't indicate great confidence in the future. Sales of products targeted by stimulus programs grew at about half the rate for gold and jewelry. (h/t Joshua Keating at FP Morning Brief.) Juliana Liu at BBC News has a report which suggests that a considerable portion of the upswing in retail sales is taking place in rural areas, where electronics purchases increased by 70% in March from February.

"But in an effort to get thrifty Chinese to spend more money, Beijing expanded a pilot program to subsidize electronics purchases for farmers in February.

The government pays 13% of the retail price for designated models of refrigerators, washing machines, colour television sets, mobile phones and personal computers."

Meanwhile, the National Reform and Development Commission Sunday announced plans to shut down all refineries operating in the country with crude distillation units with a capacity of 20 kb/d or less by 2011, per Platts.

"The commission will also prevent the development of new refining units under the guise of heavy oil and bitumen processing facilities."

Although over three quarters of Chinese refining capacity is controlled by the state oil firms, there are a large number of independent small refineries of this sort in operation.

"For instance, around 12 of 37 private refineries in eastern Shandong province have less than [20 kb/d] of oil refining capacity each, according to industry sources.

Despite having an overall processing capacity of over 45 million mt/year (900,000 b/d), Shandong's independent refineries get only 1.79 million mt/year of domestic crude allocation from the state oil majors, barely 4% of their total capacity.

Difficulty in securing crude feedstocks for their refining needs has forced Chinese independent refiners to process fuel oil and bitumen instead in order to stay afloat."

Now would be a good time for Beijing to undertake this effort, given a decline in demand, an incoming surplus of refining capacity in the Asian-Pacfic region (though I suspect that China intends to refine as much of its consumption as possible domestically in the long term), and its aim of reducing carbon emissions (given that these topper refineries tend to be unsophisticated and thus especially polluting.)

In the meantime, Brad Setser puts the kibosh on the notion that Beijing has been acting as "a friendly neighborhood grocer" who provides credit so that its customers can purchase his goods.

"China’s rise as a true banker shows up cleanly in the most recent US balance of payments data. The detailed data tables include a table on China. And it turns out China’s $419 billion in purchases of US assets over the last four quarters exceeded the United States $308 billion bilateral balance of payments deficit with China."

Well worth reading in full.

3. JAPAN OFFERS $100 BILLION IN CURRENCY SWAPS TO ASIAN NATIONS STRUGGLING WITH THE CRISIS

Raphael Minder at the Financial Times reports that Tokyo yesterday at the meeting of finance ministers at conference of the Association of South-East Asian Nations in Indonesia that it would offer $100 billion in assistance to Asian countries dealing with the current financial crisis. Specifically, Japan would arrange a ¥6,000bn (~$61.5 billion) bilateral currency swap scheme on top of a $38.4 billion commitment to the Chiang Mai Initiative.

"Kaoru Yosano, the Japanese finance minister, when asked if Japan could afford to deal with its own economic woes while helping fellow Asian strugglers, said the latest offers underlined Tokyo’s firm belief that the crisis required a more concerted international response.

'The financial crisis is not something hitting only a handful of countries ... That is why we believe it is an issue that can only be solved with international co-operation.'"

4. THE SPANISH PROPERTY MARKET IS SERIOUSLY TANKING

Lluías Pellicer at El País reports that the Spanish property market is going through a period of bloodletting, with properties being advertised at discounts of up to 55%. Discounts in Madrid and Barcelona are currently at between 30-35% whereas in Valencia and Andelusia are offering discounts of up to 55%. Even so, the surplus real estate is not coming off the market, with sellers reporting sales of about a third of their inventories. (In Spanish. h/t Eurointelligence.)

5. SOUTH AFRICAN MANUFACTURING DECLINES FOR 12TH STRAIGHT MONTH

Mike Cohen at Bloomberg reports that South African manufacturing declined for the twelfth straight month in April per the latest Investec Purchasing Managers Index, which fell to 35.6 from 36. (A reading below 50 indicates contraction; a reading above 50 indicates expansion.)

"An index measuring new sales orders rose to 33.7 last month from 32.6 in March, while a business activity index advanced to 32.8 from 31.2, Investec said. An employment index fell to 36.2 from 49.2 and an inventory index slumped to 28.7 from 37.1 while a purchasing commitment index declined to 29.9 from 34.3."

South Africa is the largest economy in Africa with nominal GDP estimated to have been about $300 billion in 2008.

6. RUSSIAN CRUDE PRODUCTION UP

Nadia Rodova at Platts reports that the Russian Energy Ministry released data over the weekend showing the oil production had increased 1.3% in April from a year previous, to 40.315 million mt (9.81 million b/d).

"In March, the year-on-year rise of 0.4% was the first in more than a year as crude output registered a fall throughout 2008 as well as the first two months of 2009.

On a month-on-month basis, average daily crude output rose by 0.5% in April from 9.76 mb/d in March."

Crude deliveries to Russian refineries also rose slightly.

7. BUT OPEC SUPPLY DOWN 0.3% IN APRIL, WITH IRAN, ALGERIA, ANGOLA AND NIGERIA UPPING PRODUCTION AS BRAZIL ANNOUNCES ITS ENERGY POLICY GOING FORWARD

Reem Shamseddine at Maktoob reports that Saudi Aramco intends to release 15 oil rigs by the end of the year, citing a large production capacity surplus and falling demand in the global oil market.

"When the kingdom [completes] projects to boost capacity to 12.5 mb/d in June, it would have had spare capacity of 4.5 mb/d. That is more than double the 1.5 to 2.0 mb/d cushion it aims to keep to meet any surprise outages in the global oil supplies."

By the end of 2009, the number of rigs operating in Saudi Arabia would thus fall to 100 from 115. In the meantime, Karyn Peterson and Mark Shenk at Bloomberg report that a survey conducted by the wire service showed that OPEC oil output was cut by 0.3% in April.

"Oil output averaged 27.58 mb/d last month, down 75,000 from March, according to the survey of oil companies, producers and analysts. The 11 OPEC members with quotas, all except Iraq, pumped 25.255 mb/d, 410,000 more than their target of 24.845 million."

Saudi Arabia cut output by 25 kb/d, the UAE cut 40 kb/d, and Kuwait cut output by 20 kb/d, according to the survey. Nigeria, Angola, Iran, and Algeria increased output. Meanwhile, Eric Watkins at the Oil & Gas Journal reported Friday that Brazil's Environment Minister Carlos Minc announced at the G8 meeting in Italy--which Brazil attended as an observer--the country's energy policy going forward which would increase the production of renewable transportation fuels (such as ethanol) and increase its petroleum refining capacity primarily to meet domestic demand with an eye to exporting the surplus.

"The Brazilian government said only 1% of the land suitable for agriculture in Brazil is used to grow sugarcane. As a result, the government plans to step up the recovery and use of degraded land to plant sugarcane.

Brazil and the US contribute 70% of the world's ethanol output. The Brazilian government's energy policy aims to produce 23.3 billion liters/year of ethanol and to export five billion liters. For biodiesel, the goal is to reach production of 3.3 billion liters/year by 2010.

Petrobras has three new biodiesel plants and plans to produce 640 million liters/year by 2013. Including ethanol, the company plans to spend $2.8 billion on biofuels up to 2013."

Brazil currently produces 1.9 mb/d of oil, but due to its sub salt finds offshore expects to produce as much as 3.2 mb/d by 2020. The plan thus has Petrobras increasing its refining capacity to 3.1 mb/d by that year.

8. MARK LYNCH ASKS WHY SADR IS IN TURKEY

Mark Lynch at the Abu Aardvark's Middle East Blog wonders what Moqtada al-Sadr is doing in Turkey.

"What does his public appearance portend for the role of the Sadrists in Iraqi politics in the coming period? Is this a bid for prominence in the upcoming national elections? How would a Sadrist political revival affect the escalating tension between Maliki and his Shia rivals such as ISCI? Or is this about security, whether the U.S. withdrawal plan or the recent uptick in attacks on Shia targets? Does Sadr's choice of Turkey as the place to re-emerge send any message about the movement's approach to the ever-hotter Kurdish issue?"

I would add the question of how this will play out in terms of the notion of the Iranian theocratic notion of "rule by the just jurist"--a question I took a stab at early last year in my post on Law and Revolution in Iran. Lynch's post is worth a look.

9. CONFLICT BETWEEN ISLAMABAD AND THE TALIBAN HEATS UP, THE WEST PUBLICLY AFRAID OF IMMINENT COLLAPSE

Kamran Haider at Reuters reported yesterday that the Pakistani military has redoubled its efforts to oust Taliban fighters in Bruner:

"In the Buner valley, 100 km (60 miles) northwest of the Pakistani capital, security forces backed by helicopter gunships and artillery attacked militants in three hamlets on Monday, residents and security officials said.

'There's been heavy firing going on since morning. It's very scary. Troops are using heavy artillery and gunships,' resident Nasir Khan told Reuters by telephone."

Meanwhile, Zarar Khan at the Associated Press reports that the Taliban has resumed armed patrols of the Swat Valley, in apparent violation of the peace deal whereby sharia law would be imposed in the region in return for the Taliban laying down their weapons. The patrols came even as regional authorities announced the creation of a sharia appeals court, which was rejected by a high ranking cleric who protested that he had not been consulted on its makeup.

"As tensions mounted Sunday, the government ordered a curfew for Swat from 9 p.m. to 6 a.m., said Khushal Khan, a top administrator, who confirmed the patrols. He said officials were discussing what to do if the insurgents violate the order."

Susanne Koelbl and Gabor Steingart at Der Spiegel have a useful analysis of the situation where they underscore the increasing alarm with which US foreign policy policymakers are viewing the situation in Pakistan.

"The mood is one of borderline panic in Washington these days when conversation turns to Pakistan. US Secretary of State Hillary Clinton said that the possibly crumbling state poses 'a mortal threat' to the world: 'I think that the Pakistani government is basically abdicating to the Taliban and to the extremists.' These fears were echoed by her special representative to the region, Richard Holbrooke: 'Pakistan is in an emergency situation.' And the 'collapse of the state' is likely to happen within six months, warns David Kilcullen, an influential counter-terrorism advisor to the US military.

On Tuesday of last week the US National Security Council held an unscheduled meeting under the leadership of its chairman, General James Jones. The only topic on the agenda was the situation in Pakistan."

Some Western analysts have concluded that the interests of the West and Pakistan are at cross purposes in the region, which explains Islamabad's apparent reluctance to take on the Islamic militants inside the country.

"A British regional expert with top intelligence agency connections recently told an exclusive circle of members of parliament in London: 'The ally Pakistan does not share our interests.' He said Islamabad 'is antipathic to Karzai's government and to any administration in Afghanistan which is indulgent of Indian influence. Pakistan thus wants the end of Karzai, a pro-Pakistani Pashtun government in Afghanistan and wants the British, the Americans and NATO out of Afghanistan.'"

Though it is very hard to tell from my far remove, I have difficulty with the logic of this argument. While it is true that Islamabad would likely prefer Western forces out of its backyard and certainly does not regard an India-friendly government in Kabul as in its interests, the country would have an incredibly difficult time reigning in centrifugal forces were it to lose the financial support of the West. Indeed, it would likely go bankrupt.

Moreover, I doubt that many policymakers in Islamabad would regard a chaotic Afghanistan as in its interests. Perhaps it considers a Taliban-run Afghanistan as stable and malleable, or at least relatively benign, but I find it hard to see how it would given the ties it has to nascent secessionist movements in the Northwest Frontier, Swat, and Baluchistan--which are directly challenging their putative patrons in military intelligence. Further, the success of the lawyers' movement has, I take it, strengthened the legitimacy of the central government even if the view of the populace regarding the mores of justice is likely much more tolerant of the views of Muslims more draconian than the West, or even elites in Islamabad, are comfortable with.

Either way, though jaw jaw is preferable to war war, the Taliban is refusing a negotiated solution to the problem, wanting to take for itself the monopoly of force in more regions. I cannot see how the elites in Islamabad would, under any conditions, find that an acceptable outcome, though they will likely try negotiations preferable in nearly all scenarios than outright war on a portion of their own population. Before taking military action, it is good sense to see if disputes can be solved politically, if you want to maintain the support of as wide a constituency as possible. But until the Taliban seems more amenable to a real structured and long-term solution I would expect Islamabad to up the pressure on them incrementally. The article is well worth reading in full.

10. MARYLAND AND VIRGINIA, THE DE FACTO HOSTS OF THE CAPITAL, APPEAR TO ANTICIPATE FURTHER REDUCTION IN THE EMBARGO ON CUBA

Fredrick Kunkle at the Washington Post reports that Maryland and Virginia are hustling to take advantage of what they believe will be further reductions of tensions between the US and Cuba.

"Virginia agriculture has already benefited from the relaxation of the 47-year-old trade embargo with Cuba, increasing exports from less than $1 million to $40 million in five years. Maryland has been developing farm trade in Cuba, though so far on a more modest scale. Last year, Maryland spent $6,000 on a trade mission that sewed up a $12.8-million deal on soybeans.

'There's just a lot of excitement,' said Todd P. Haymore, commissioner of the Virginia Department of Agriculture and Consumer Services. 'We feel certain that things are going to happen based on what the Obama administration has already done -- just the fact that we're talking about changing policies in place for 40 years or more.'"

The article gives a pretty good overview of the political state of affairs--worth a look.

11. 'GREAT RECESSION' LIKELY TO INCREASE 'NATURAL RATE' OF UNEMPLOYMENT GOING FORWARD

Matthew Benjamin and Rich Miller at Bloomberg report that the current recession will likely result in a higher "natural rate" of unemployment in the US.

"Fallout from the recession implies a 'markedly higher' natural rate of unemployment, says Edmund Phelps, a professor at Columbia University in New York and winner of the 2006 Nobel Prize in economics. 'It was 5.5%; maybe it will be 6.5%, maybe 7%.'

That has implications for policy makers as well as workers. The Obama administration and the Federal Reserve are counting on the jobless rate to fall to a medium-term equilibrium of about 5% as the economy recovers. A natural rate significantly above that would drive up the annual budget deficit--which will top $1 trillion for the first time this year--by reducing tax revenue and pushing up spending on unemployment benefits.

A higher rate would also require the Fed to make a choice: Accept an economy with more Americans permanently out of work, or try to boost employment at the risk of heating up inflation."

A Scylla and Charybdis situation indeed. A must read.