Daily Sources 6/22

1. GORDON BROWN ASKS MINISTERS TO FORMULATE PROPOSALS FOR HANDLING OIL PRICE, INCLUDING PLAN TO HAVE IMF ACT AS PRICE REGULATOR; CGES SAYS OPEC SHOULD INCREASE PRODUCTION TO HELP GLOBAL ECONOMIC RECOVERY, BUT WON'T; HAMILTON SHOWS CONSUMER SENTIMENT STRONGLY CORRELATED TO GAS PRICE; AIRLINES COMPLAIN TO OBAMA OF OIL SPECULATION; ANDY XIE ARGUES STIMULUS BACKED LENDING SURGE IN CHINA BEING INVESTED IN COMMODITY SPECULATION

Kate Mackenzie at FT Energy Source reports that UK Prime Minister Gordon Brown asked top ministers at the Treasury and the Department of Business to draw up plans for responding to high oil prices. Apparently the administration is also considering proposals by which the IMF would take a role in monitoring oil prices--and influencing price. (The IEA mostly acts as a data collector and canary.)

"Brown believes that the G20 meeting in London in the spring missed an opportunity to put in place measures to stabilize the oil price, after it fell from a peak of $147 a barrel to less than $35 early this year."

The idea currently being mulled could reportedly form a key element of the UK proposal at the G20 meeting to be held in Pittsburgh in October. In the meantime, Platts reports that the Centre for Global Energy Studies, based in London and led by former Saudi Arabian oil minister Ahmed Zaki Yamani,

"is forecasting that oil prices will rise steadily through the rest of this year, reaching $80/b in the fourth quarter, as OPEC continues to maintain its current levels of quota compliance."

The CGES argues that OPEC should raise production in order to moderate price and gird a potential economic recovery, but is choosing not to do so. James Hamilton at Econobrowser plots the correlation between gasoline price and US consumer sentiment (with the dashed line [RH] being the miles per dollar spent on gasoline and the solid line [LH] representing the Reuters/Michigan index of consumer sentiment):



He comments:

"So how should we assess the likely consequences of the fact that gas prices have now come back up significantly from their lows of December? The Edelstein-Kilian regressions employed in my paper from a recent conference at the Brookings Institution imply that a 20% increase in energy prices would historically be followed within 2 months by a 15-point drop in consumer sentiment and a 1.4% decline (relative to trend) in real consumption spending. From that perspective, the 46% (logarithmic) increase in (seasonally unadjusted) gasoline prices since December is quite worrisome.

On the other hand, since those December prices were 88% (logarithmically) below the July 2008 peak, consumers should have been giddy in December and still be significantly more sanguine now than they had been last summer, if the only thing on their mind was the price of gasoline.

Only problem is, consumers were anything but giddy in December. Credit and employment challenges have weighed far more heavily than gas prices over the last 9 months, and are presumably far more important than gas prices for determining what happens over the next few months as well."

A bit wonky, but nonetheless the must read of the day. And Kyle Peterson at Reuters reports that the Airline Transport Association sent a letter dated June 11 to President Obama, complaining of the role of speculators in the oil market:

"A repeat of last summer's astronomical crude-oil prices will bring the nation's economic recovery to a painful halt. ... Businesses that spend billions of dollars on fuel each year, already dealing with the impacts of decreased consumer spending, are especially vulnerable."

(h/t Kate Mackenzie at FT Energy Source.) In the meantime, Andy Xie on Friday had an opinion piece at Caijin Magazine where he argued that the lending inside mandated by the stimulus program has not been spent on "tangible projects" but in asset markets.

"There's little doubt that China's bank lending since last December has driven speculative inventory demand for commodities. Chinese banks lend for commodity purchases, allowing the underlying commodities to be used as collateral. These loans are structured like mortgages.

Banks usually have to be extremely cautious about such lending, as commodity prices fluctuate far more than property prices. But Chinese banks are relatively lenient. As an industrializing economy, China's support for industrial activities such as raw material purchases for production is understandable. However, when commodities are bought on speculation, lenders face high risks without benefiting the economy.
...
The international media has been following reports of record commodity imports by China. The surge is being portrayed as reflecting China's recovering economy. Indeed, the international financial market is portraying China's perceived recovery as a harbinger for global recovery. It is a major factor pushing up stock prices around the world.

But China's imports are mostly for speculative inventories. Bank loans were so cheap and easy to get that many commodity distributors used financing for speculation. The first wave of purchases was to arbitrage the difference between spot and futures prices. That was smart. But now that price curves have flattened for most commodities, these imports are based on speculation that prices will increase. Demand from China's army of speculators is driving up prices, making their expectations self-fulfilling in the short term."

The other must read of the day.

2. GLOBAL RETAIL SALES NUMBERS DOWN

Rebecca Wilder at News N Economics notes that retail sales are taking a serious hit globally. Here is her graph of retail numbers for Asia:



She observes:

"Out of the 27 countries listed below, 18 posted a positive average annual growth rate in 2008, while just 5 saw the same in 2009 ytd."

Worth reading in full.

3. WORLD BANK SAYS GLOBAL ECONOMY TO CONTRACT BY 2.9% IN 2009, TRADE TO FALL BY 9.7%

Timothy R Homan at Bloomberg reports that the World Bank released a report today forecasting that the global economy will contract by 2.9% in 2009, a rougher contraction than the bank previously forecast of 1.7%. Global trade is expected to fall by 9.7% versus the fall of 6.1% forecast in March.

"'Unemployment is on the rise, and poverty is set to increase in developing economies, bringing with it a substantial deterioration in conditions for the world’s poor,' the World Bank said. While the world is set to return to growth in the second half of 2009, a recovery will be subdued, the report said.

Reduced capital inflows from exports, remittances and foreign direct investment means 'increasingly grave economic prospects' for developing nations, the lender said. After peaking at $1.2 trillion in 2007, inflows this year may fall to $363 billion, it said."

4. SARKOZY TO GIVE "STATE OF THE UNION ADDRESS" IN VERSAILLES, OVERTURN CENTURY OF PRECEDENT

Emmanuel Georges-Picot at the Associated Press reports that French President Nicolas Sarkozy has decided to overturn 136 years of precedent and directly address both houses of the French parliament today at the Chateau of Versailles. Sarkozy means to use the event to establish a platform by which to address the country on big issues along the lines of the American "State of the Nation" address.

"The last presidential speech to France's parliament was in 1873, before lawmakers banned the practice to protect the separation of powers and keep the president in check."

5. MALAYSIA'S CENTRAL BANK TAKES KEY STEP IN DIRECTION OF PURCHASING YUAN-DENOMINATED DEBT AS RESERVE

Denis McMahon at the Wall Street Journal reports that the China Securities Regulatory Commission said on June 12 that it had approved the Malaysian central bank--Bank Negara Malaysia--as a qualified foreign institutional investor [QFII].

"That status allows the Malaysian central bank to invest in China's exchange-traded equities and debt, including Ministry of Finance bonds."

Potentially, therefore, Bank Negara Malaysia could act as the first central bank to buy Chinese debt as a reserve. However, Bank Negara Malaysia has yet to be approved by China's currency regulator to purchase renminbi. In February, China and Malaysia signed a currency swap agreement.

6. RUSSIA INVOLVED IN TAIWANESE JET FIGHTER UPGRADE, BELARUS & RUSSIA ANNOUNCE JOINT MILITARY EXERCISES

Yevgeny Bendersky at the Compass notes the recent report that Russia was involved in the development of the third generation fighter planes for the Republic of Taiwan.

"According to The China Times, Taiwan has begun work on a new military aircraft after appeals to the US with a request for the sale of 66 fighter aircraft F-16C/D. Washington, as previously reported, denied this request, not wanting to spoil relations with Beijing. Chinese journalists also point out that the plane, developed by a public company Taiwan Aerospace Industrial Development Corporation (AIDC), has two engines and has a short take-off capability. Its development, according to The China Times, was completed only after Russia sent its experts to Taiwan--the source did not specify what Russian organization or company they represented.

This is certainly a new turn for the Russian defense industry and presents a dilemma for the United States. Washington and Taipei have a very close defense relationship, even if certain military hardware is not sold to the ROC from time to time. Taiwan is one of the high-tech sources for a great deal of technology that powers high-tech American industry, as well as American military developments. Russians were always keen on seeing first hand how far Western--and US in particular--military development has advanced, since at this time, Moscow can only watch on the sidelines as America and her allies implement next-generation high-tech military gear. Did the Russians get a chance to see first hand the advanced technology that Washington sold to Taipei, and did they take good notes to take back with them? An even larger question is what this news may do to the Moscow-Beijing military cooperation. Russia has sold a wide variety of advanced high-tech aircraft to mainland China recently, including Su-27 multi-role fighter bomber. China, making sure it was able to level the playing field, quickly reverse-engineered the Russian plane and began its indigenous production under J-11 designation.

Russians recently expressed concern that China is making plans to produce its own version of an even more advanced plane that Russia sold to Beijing about 8 years ago--Su-30 Flanker multirole fighter, a more advanced version of Su-27. Since all of Taiwan's military aircraft are designed and fielded against mainland China, Russian know-how now is part of ROC's high-tech air force pointed at the mainland. One has to wonder what Beijing thinks about all this, and whether Moscow's action was a pay back of sorts for China deciding to copy Russian technology."

Bendersky also notes that Belarus and Russia announced their joint military exercises for 2009, on the back of the recent refusal of Minsk to join the Moscow-led Collective Security Treaty--see Daily Sources 6/15 #3.

7. TALIBAN OPERATIONS IN AFGHANISTAN AND PAKISTAN RE-CENTRALIZING

Matthew Rosenberg, Yochi J. Dreazen and Siobhan Gorman at the Wall Street Journal report that Mullah Omar, the head of the Taliban, has been reasserting direct control over the militants in their struggle with NATO in Afghanistan.

"'This is Quetta's answer to Obama's surge,' said a senior member of a militant network led by Gulbuddin Hekmatyar, an independent Afghan warlord who fights alongside the Taliban. He was referring to plans by the administration of President Barack Obama to send an additional 21,000 troops to Afghanistan over the next few months. The Quetta 'are not ready to lay down their weapons,' he said in an interview in the Pakistani city of Peshawar."

Omar is thought to lead the Taliban leadership council from the city of Quetta in south Pakistan. There are some indications that the effort to re-centralize decision-making for the Taliban is upsetting some lieutenants which may make them more amenable to US outreach efforts. Insofar as Omar is directing attacks at Islamic institutions in Pakistan, I suspect he is setting fire to his own bed.

8. ZADARI SAYS US TOO COZY WITH DICTATORS, ASKS FOR MORE MONEY

Pakistan's President, Asif Ali Zardari, has an op ed in today's Washington Post, which sounds more than a little like a rebuke. To wit:

"The West, most notably the United States, has been all too willing to dance with dictators in pursuit of perceived short-term goals. The litany of these policies and their consequences clutter the earth, from the Marcos regime in the Philippines, to the Shah in Iran, to Mohammed Zia ul-Haq and Pervez Musharraf in Pakistan. Invariably, each case has proved that myopic strategies that sacrifice principle lead to unanticipated long-term consequences."

His ask sounds more like a threat than a plea:

"We need immediate assistance. The Obama administration recognizes that only an economically viable Pakistan can contain the terrorist menace. The United States has committed $1.5 billion a year for five years to help stabilize our economy, and the House of Representatives and the Senate Foreign Relations Committee have acted decisively to reorient the Pakistani-American relationship toward not just a military alliance but a sustained economic partnership.

Now, the rest of the world must step up and match the US effort. Pakistan needs a robust assistance package so that we can deliver for the people and defeat the militants. And the rest of the world should again follow the American lead in helping us deal with the millions of internally displaced people who are the most recent victims of terrorism in our nation.

But aid is not enough. In the long term, Pakistan needs trade to allow us to become economically independent. Only such an economically robust Pakistan will be able to contain the fanatics and demonstrate to the 1.5 billion Muslims worldwide that democracy and economic development go hand in hand. Notably, the United States is moving forward with regional opportunity zones in Afghanistan and the Federally Administered Tribal Areas region of Pakistan that will remove trade barriers and provide economic incentives to build factories, start industries, employ workers -- and give hope to the people. This opportunity zone concept should be a model to Europe, as well. Europe must realize that it is in its own self-interest, as the United States has realized, to do everything possible to grow the Pakistani economy and to provide incentives for Pakistani exports to the continent."

I suspect that someone's PR advisers weren't thinking when they composed this. It is not exactly a secret that Zadari is known to his countrymen as Mr. 5% nor that he recently moved to try and bar his main opponent for the office of President from running for office and his brother from running the province he had been elected to govern. Insofar as he backed down in the face of the lawyers' movement, I feel that he is "committed" to rule of law and democracy, but the rhetoric of the piece is rather closer to that of Evita Peron than to Nelson Mandela. Should be read in full, of course.

9. CONTINUED US JOBLESS CLAIMS FALLING MOST LIKELY DUE TO INSURANCE EXPIRING

Barry Ritholtz at the Big Picture observes that the decline reported in continuing claims is not due to the unemployed finding work, but rather to their unemployment insurance expiring. He plots the "exhaustion rate" for jobless benefits:



and notes, "They are now unemployed AND broke. That is hardly a green shoot ..."

Daily Sources 4/2

1. Daniel Pimlott at the Financial Times reports that the G20 agreed today to provide $1.1 trillion to fight the financial crisis. Of that, $750 billion would go to the IMF, $250 billion would go to trade finance, and $100 billion would go to multilateral development banks.

"On financial regulation, the G20 agreed to 'extend regulation and oversight to all systemically important financial institutions, instruments and markets', including for the first time big hedge funds. It also said that credit agencies would be registered and monitored for the first time, after the failing of credit ratings played a big part in exacerbating the credit crisis.

The communique said that the G20 would extend 'regulatory oversight and registration to credit rating agencies to ensure they meet the international code of good practice, particularly to prevent unacceptable conflicts of interest.'"

No globally coordinated stimulus program was agreed upon, nor was a globally coordinated method of addressing the financial sector's balance sheets. The communique did explicitly provide support for Mexico's application for a $47 billion flexible credit line. The communique itself can be found here.

2. Chris Giles, George Parker and Gillian Tett at the Financial Times report that Dominique Strauss-Khan, the managing director of the IMF, argued in an interview with the paper yesterday that the G20 was failing to recognize that in order to resolve the financial crisis, you must first resolve the issues facing the financial sector. Quote:

"[You] never recover before the cleaning up of the banking sector has been done. The US ... is rightly insisting on stimulus and the EU rightly insisting on regulation. They are not yet moving quickly enough in doing the cleaning up of the financial system."

3. Gabi Thesing at Bloomberg reports that the European Central Bank cut its benchmark interest rate by 0.25% to 1.25%, 0.25% less than what most economists had expected.

"'The latest economic data and survey information confirm that the world economy and the euro area is going through a severe downturn,' said ECB President Jean-Claude Trichet at a press conference in Frankfurt after the decision. 'Available indicators of inflation expectations remain firmly anchored.'"

4. Frank-Walter Steinmeier, the German Foreign Minister, has a piece on the future of NATO in today's Der Speigel. Reflecting on the purpose of NATO in anticipation of the organization's weekend summit marking its 60 year anniversary in Strasbourg, Steinmeier argues that the organization is still required. Regarding Afghanistan, Steinmeier says:

"We certainly welcome the new US strategy. We have to work together to ensure that Afghanistan never again becomes a safe haven for terrorists. We have to enable the Afghans to assume themselves the responsibility for security in their country. And there was a broad and common understanding at the recent conference in The Hague that we need to devote more efforts and means to civil reconstruction, and that we have to develop a regional approach that includes Pakistan."

Regarding Russia, he says:

"It's a fact that Russia is and will remain a difficult partner. But at the same time it is true that in the end we can only achieve pan-European security by working with, and not against, Russia. That's why I'm advocating an active NATO policy toward Russia. We must use the instruments we have for dialogue, such as the NATO-Russia Council. And at the same time we have to do more than just formally revive them. We must strive to develop these instruments into a platform for active security cooperation. From Afghanistan to fighting pirates, the list of relevant areas for cooperation is long."

Steinmeier also argues that the return to full-membership of France to NATO is further evidence that NATO is not a competitor of the EU, but a partner. Worth reading in full.

5. Jonathan Weisman at Real Time Economics posts that in a translation of parts of a speech that Russian President Medvedev made at the G20 summit, he suggested that a basket of currencies replace the dollar as the global financial system's reserve currency. The speech was provided to the Wall Street Journal by a Kremlin aide--and so far I have been unable to find a translation of the entire document on the web. The translation also includes the following point:

"It is not our goal to destroy existing institutions or to weaken the dollar, pound or euro. We are simply calling for a joint assessment of how the global currency system can most favorably be developed for the sake of the global economy ... ."

Meanwhile, Stephen Bierman at Bloomberg reports that Russia increased oil output as OPEC pursued cuts.

"March output advanced 0.4% a day in comparison with both the previous year and month to 9.8 mb/d, the Energy Ministry’s CDU-TEK unit said in an e-mailed statement today. It was the first increase on year-on-year production since 2007."

Platts reports that Oil Movements, a London-based consultancy, estimates that OPEC oil exports, excluding Ecuador and Angola, will fall to 22.15 million b/d in the four weeks ending April 18, down 960,000 b/d from the previous four-week period. Rachel Jones at the Associated Press reports that the EIA released data yesterday showing that Venezuela increased oil exports to the United States by about 14% in January from December. Venezuela had promised to cut its exports to the US by 16% starting January 1 to comply with the embargo. The country still sends about half of its oil exports to the US, according to EIA estimates.

6. Alex Morales and Gaurav Singh at Bloomberg reports that Indian and Chinese officials in interviews with the news wire said that global warming policies being considered by Japan and the US are being seen as protectionist measures.

"'If there’s going to be a border tax imposed, that would very much have the danger of triggering a trade war,' Su said in a telephone interview from Beijing. 'That’s not something that we would be happy to see,' he said before the start of United Nations talks running through April 8 in Bonn.
...
'We should be very careful that climate change doesn’t become a peg on which we start hanging protectionist tendencies,' Shyam Saran, India’s special envoy on climate change, said in an interview in New Delhi two days ago."

7. Keith Bradsher at the New York Times reports that Beijing has adopted a plan to become one of the leading producers of hybrid and all-electric cars within three years. I would add that all electric cars mean, in China, more coal consumption--the dirtiest carbon-based fuel of all.

8. On March 27, China and Myanmar agreed to the construction of pipelines to transport African and Middle Eastern crude oil from Myanmar's Arakan coast to Kunming. Construction is expected to commence on the pipeline soon and scheduled to be complete in 2013. The oil pipeline is expected to cost $1.5 billion and the natural gas pipeline $1 billion. The pipeline will create an alternative to the Strait of Malacca for African and Middle Eastern crude en route to China. (I've drawn a rough idea of the route on the map below--it has no relationship to the actual route, it only connects the start and end points.)



15 million barrels pass through the Strait of Malacca every day, on average--the article gives no sense of the throughput planned for the two pipelines. About 80% of Chinese crude oil imports of about 3.3 mb/d pass through the Strait.

"Over the past few years, Chinese analysts and leaders have been describing the strait, as a strategic vulnerability, drawing attention to the consequences for China if this shipping channel were to fall into the hands of 'hostile powers' or pirates or terrorists. What if the US were to block China's access to the strait in the event of a China-Taiwan conflict?

In November 2003, Chinese President Hu Jintao articulated this fear when he declared that 'certain major powers' were bent on controlling the strait. Analysts have been discussing the country's 'Malacca dilemma' since then and exploring options to overcome it. One proposal, partially undertaken, is to develop a port and pipeline terminal at Gwadar, in southwest Pakistan, from where Middle East fuel could also be pumped to western China."

Perhaps, but the project actually extends the arena which China's navy might be called upon to be able to project force to from the Malaccan Strait to the coasts of Arakan--well into the Indian Ocean. So it doesn't really obviate the possibility of a naval disruption to supply.

9. Jeff Stein at Spy Talk reports that a Uighur dissident, Rebiya Kadeer, in the US is being harassed by Chinese agents.

"Her accusations are backed up by other dissidents, the FBI and a Virginia congressman whose own files were infiltrated by Chinese hackers."

"Information management" is clearly a priority of many closed societies, but allegations of intimidation on US soil are especially serious--proof would absolutely have the effect of souring the view of the PRC by many in Congress and the Administration. Meanwhile, Dennis C. Wilder, China director and then senior director for East Asian affairs at the National Security Council from August 2004 to January 2009, has an op ed in the Washington Post which argues that we would do well to reassure our allies in the Asia Pacific that we are not seeking to partner with China in such a way as to subordinate their interests to a "G-2".Key excerpt:

"A more realistic Chinese goal may be to create a partnership with the United States in which our Asian allies, such as Japan, South Korea, Australia, Thailand and the Philippines, are relegated to a subordinate status and the United States and China would share Asian preeminence--at least for a time.

The G-2 moniker worries Asians for just this reason. From Japan to India, there are concerns that America's search for a solution to its worst economic crisis since the Great Depression may lead the Obama administration into not only expanded strategic economic and political dialogues with China but a full-blown strategic partnership. As the center of gravity of US economic interests moves from Europe to Asia, they worry, the United States could become enamored of a 'China first' approach. Notably, the career Indian diplomat MK Bhadrakumar recently lamented that 'the US-India relationship is entering a phase of lull' while Washington engages in 'Chinamania.'"

A very worthwhile read in full.

10. Blaine Harden at the Washington Post reports that Pyongyang warned via a radio broadcast yesterday that it "will relentlessly shoot down" reconnaissance aircraft of the US and allied nations seeking to monitor its satellite launch.

"Experts who have examined recent satellite photographs of the rocket said its payload is probably a satellite-like device."

BR Myers, a researcher of North Korean ideology and propaganda at Dongseo University in Busan, South Korea, has a very useful opinion piece in today's New York Times, despite it's very misleading and rather unhelpful title (decided upon by the editors, not the author) "To Beat a Dictator, Ignore Him."Instead, what the piece argues is that a regime considers its ideological self-justification and propaganda regarding its own accomplishments and stature as critical to its survival--"information management."

"This means demanding changes where they matter most, and can be immediately verified — on the propaganda front — before putting our faith in some grandiose timetable of disarmament. If Kim Jong-il will not cease referring to himself as a 'military first leader,' or stressing that America and North Korea 'can never share the same sky,' we can be certain, without letting yet another deadline elapse, that he is negotiating in bad faith. For far too long, American diplomats have treated Kim Jong-il’s political culture as his business. It is ours as well."

Well worth reading in full.

11. Muriel Boselli and Ikuko Kao at Reuters report that the CEO of Total, Christophe de Margerie, told a conference today that the investment terms offered by Iran for the development of South Pars were commercially unattractive.

"It is very important to reduce the costs of energy projects, we will see if we can get acceptable terms, but frankly today the terms offered today (in Iran) are not attractive enough. Because of the unsatisfactory conditions, Total was never able to strike a real deal for the South Pars project."

12. Nick Bunkley at the New York Times reports that at an annual rate GM's sales were down 45% in March; Chrysler’s were down 39%; Toyota's were down 9%; Nissan's were down 38%; and Honda's were down 36 percent.

"Over all, industry sales fell 37% in March from a year ago, but they rose nearly 25% from February’s 27-year low, the biggest February-to-March increase since 2005."

13. The Associated Press reports that initial claims for jobless insurance rose to a seasonally adjusted 669,000. 5.73 million are continuing to claim benefits.

Daily Sources 3/24

1. President Barack Obama has an op ed in the Los Angeles Times today which urges the leaders of the G20 to strong measures and to continue to coordinate their response to the financial crisis with the US in the upcoming London summit. Key excerpts:

"My message is clear: The United States is ready to lead, and we call on our partners to join us with a sense of urgency and common purpose. Much good work has been done, but much more remains. Our leadership is grounded in a simple premise: We will act boldly to lift the American economy out of crisis and reform our regulatory structure, and these actions will be strengthened by complementary action abroad. Through our example, the United States can promote a global recovery and build confidence around the world; and if the London summit helps galvanize collective action, we can forge a secure recovery, and future crises can be averted."

The President stresses that the US has pursued two basic means of addressing the crisis, fiscal stimulus and the restoration of credit, and that these efforts will be enhanced by global coordination:

"This must continue to be amplified by the actions of our G-20 partners. Together, we can embrace a common framework that insists on transparency, accountability and a focus on restoring the flow of credit that is the lifeblood of a growing global economy. And the G-20, together with multilateral institutions, can provide trade finance to help lift up exports and create jobs."

The essay also specifically calls for greater contributions to the IMF:

"Third, we have an economic, security and moral obligation to extend a hand to countries and people who face the greatest risk. If we turn our backs on them, the suffering caused by this crisis will be enlarged and our own recovery will be delayed because markets for our goods will shrink further and more U.S. jobs will be lost. The G-20 should quickly deploy resources to stabilize emerging markets, substantially boost the emergency capacity of the International Monetary Fund and help regional development banks accelerate lending. Meanwhile, America will support new and meaningful investments in food security that can help the poorest weather the difficult days that will come."

The Administration chose the Los Angeles Times as the delivery vehicle for this message, which suggests that it is primarily directed at the members of the G20 that reside in Asia and will make more sense after the next item. Worth reading in full.

2. Andrew Batson at the Wall Street Journal reports that China's central bank governor Zhou Xiaochuan on Monday published a proposal to create a new currency to replace the dollar as the global reserve currency.

"In his paper, published in Chinese and English on the central bank's Web site, Mr. Zhou argued for reducing the dominance of a few individual currencies, such as the dollar, euro and yen, in international trade and finance. Most nations concentrate their assets in those reserve currencies, which exaggerates the size of flows and makes financial systems overall more volatile, Mr. Zhou said.

Moving to a reserve currency that belongs to no individual nation would make it easier for all nations to manage their economies better, he argued, because it would give the reserve-currency nations more freedom to shift monetary policy and exchange rates. It could also be the basis for a more equitable way of financing the IMF, Mr. Zhou added. China is among several nations under pressure to pony up extra cash to help the IMF."

The US has a 15% vote at the IMF which requires a 85% consensus in order to approve a change, meaning that every nation but the US has to agree in order for a proposal to be accepted.

"Mr. Zhou's idea is to expand the use of "special drawing rights," or SDRs--a kind of synthetic currency created by the IMF in the 1960s. Its value is determined by a basket of major currencies. Originally, the SDR was intended to serve as a shared currency for international reserves, though that aspect never really got off the ground.

These days, the SDR is mainly used in the IMF's accounting for its transactions with member nations. Mr. Zhou suggested countries could increase their contributions to the IMF in exchange for greater access to a pool of reserves in SDRs.

Holding more international reserves in SDRs would increase the role and powers of the IMF. That indicates China and other developing nations aren't hostile to international financial institutions -- they just want to have more say in running them. China has resisted the US push to make an immediate loan to the IMF because that wouldn't give China a bigger vote. "

The official translation of Zhou's speech can be found on the People's Bank of China's website here. Justin Fox at the Curious Capitalist argues, interestingly, that it would be in US interests to accept the proposal:

"Zhou's proposal was treated in the WSJ and the NYT as another Chinese attack on the dollar, and I guess it is. But it also points the way toward a global monetary regime that, in theory at least, would better serve the long-term interests of the US than the current dollar-denominated one.

The advantage of having your country's currency as the world's reserve currency is that you don't really have to play by the rules: You can run big deficits financed by the rest of the world, you can spend more than you earn, and to a certain extent you can escape the consequences of your profligacy by devaluing your currency when you run into trouble. The obvious disadvantages are that running big deficits and spending more than you earn aren't really great long-term economic strategies."

Worth reading in full. Meanwhile, Rebecca Wilder has the very useful post demonstrating that the quantitative easing by the Fed and the Bank of England have resulted in less growth in money supply than one might imagine, because the multiplier is collapsing as the banks and consumers hoard cash. She concludes that the European Central Bank and Bank of Japan are lagging in terms of growth in money supply, and that the ECB has actually allowed the money supply growth to go negative. Her graph illustrating this:



Worth a look.

3. Alex Morales and Mathew Carr at Bloomberg report that China, as well as dozens of developed nations, will be asked by the UN to accept "binding" targets on their carbon emissions in six days at negotiations to be held in Bonn.

"The UN whittled down hundreds of proposals circulating to get poor and rich countries to focus on closing a gap that threatens to derail a deal. Nations are closer to agreeing on a year for a long-term emissions target, 2050, and on how to fund greenhouse-gas reductions in poor countries, the UN said today.

'In a number of areas there is a very clear convergence and countries are quite close to each other,' Yvo de Boer, the UN’s top climate official, said in a telephone interview from Germany. Still, 'there are a number of areas where a lot of blanks need to be filled in."

China and India are among developing countries that have rejected adopting any targets until industrialized nations first make reductions. They argue that countries in North America and Europe were responsible for most of the buildup of heat-trapping emissions in the atmosphere blamed for warming the planet, dating to the beginning of the industrial age."

4. The Associated Press reports that Ukrainian Prime Minister Yulia Tymoshenko yesterday signed an agreement with European Commission President José Manuel Barroso which pledged to provide financing for the upgrade of Ukraine's 40 year old natural gas pipeline system in return for "embracing market economy practices."

"[The agreement] aims to improve both the safety and capacity of Ukraine's pipeline network and revamp its management so Western investors can put up money without fear of losing any of it to endless red tape or corruption."

Meanwhile, Edward Hugh at Fistful of Euros reports that "Ihor Burakovsky, the director and board chairman of the Institute for Economic Research and Policy Consulting says that 'experts' have forecast a 12% drop in Ukraine’s GDP in 2009 and an 18% inflation rate."

"In fact [industrial] output was up slightly month on month (by 5.4%) in February, in part as a result of the demand for steel exports produced by the sharp Hyrvnia devaluation, and February output was “only” down by 31.6%, following January’s 34.1% annual fall, so you could say that things were getting better, but frankly, and at this stage of the game, such finesse is a little but lost on me."

Ukraine is still yet to receive the second installment of the $16.4 billion IMF loan, as the IMF refuses to disburse the monies until certain measures are passed by the government.

"Lawmakers need to pass two more bills to qualify for the $1.9 billion installment of the IMF loan, which originally was expected on Feb. 15, according to Oleksandr Shlapak, the first deputy head of the president’s staff, with the central bone of contention being the 5% budget deficit projected for 2009, and on a lot lower contraction forecast than the current 'most realistic case' scenario."

Meanwhile, Upstreamonline.com reports that Russia responded to the EU-Ukrainian agreement by suspending talks with Kiev. Apparently, Moscow was upset it was not included in the talks between the EU and Ukraine in the first place.

"Prime Minister Vladimir Putin threatened to review ties with the European Union and officials warned that the risk of gas supply disruptions would rise if Russian interests were ignored."

RIA Novosti quoted the Prime Minster as saying,

"If Russia's interests are ignored, we will also have to start reviewing the fundamentals of our relations. We would very much like for things not to reach this point."

Putin indicated that Moscow had proposed to the European Commission that the two jointly allocate funds to Kiev, but at the time the EC indicated that they had no funds available for the Ukraine. Meanwhile, Vladimir Soldatkin at Reuters reports that Russian energy minister Sergei Shmatko told the media that Russia could maintain and raise oil output if prices remain above $50/b.

5. Uwe Klussmann at Der Spiegel reports that the television appearance of General Kurashvili, who was in charge of the Georgian peacekeeping forces in South Ossetia on August 7, 2008, is playing a key role in the EU's investigation into the causes of the Russo-Georgian conflict at that time.

"This is because Kurashvili may have been quoting directly from Order No. 2 from Aug. 7, a Georgian document that could shed light on the question of who started the war. When the commission questioned the Russian deputy head of the general staff, Anatoly Nogovitsyn, in Moscow, he quoted from the very same Georgian order. According to Nogovitsyn, the document also contained the phrase "reestablishment of constitutional order." If the order, which Russian intelligence intercepted, is authentic, it would prove that Saakashvili lied [and that Tblisi had chosen to mass troops by South Ossetia and then use a Russian response as an excuse for an attack]."

Tblisi refuses to allow EU investigators access to Order No. 2 of August 7, which seems awful close to an admission of guilt. Greg Scoblete at Real Clear World notes the Hill story by Kevin Bogardus on the 19th that Georgia had spent $300k on a six month contract and $470k on an eleven-month contract with lobbyists with contacts with the Democrats. Apparently Randy Scheunemann, Tblisi's old main PR man in the US (and foreign adviser to GOP presidential candidate Sen. John McCain--see Daily Sources 12/2 #1.) has been thrown over.

6. Eurointelligence notes that the FT Deutschland reports that the German Foreign Ministry has established a task force to explore potential threats to security posed by the financial crisis. "The scenarios include state defaults in politically unstable regions such as the Caucasus."

7. Scott Peterson at Japan Economy Watch notes that Japanese household financial assets fell by an annual rate of 5.7% in December--the sharpest drop on record. Peterson adds

"this is not good news for a country where a large proportion of the population is expecting to live off of savings fairly shortly. Further, Japanese consumers are unlikely to provide a boost to GDP as they are not going to increase discretionary spending in the face of investment losses."

8. Seyoon Kim at Bloomberg reports that Seoul plans to append 17.7 trillion won (~$13 billion), or 1.9% of GDP, on cash "handouts," cheap loans, infrastructure and job training to its 51 billion won already allocated. "The stimulus will boost economic growth by 1.5 percentage points and help create 552,000 new jobs, the finance ministry said in Gwacheon today." The government hopes to get the measure passed by parliament in April.

9. Platts reports that Nigerian oil and gas labor unions have rescinded their threat to strike tomorrow.

"'We have decided to suspend plans to call a strike following our meeting with the national security adviser Monday, which we believe was favorable,'deputy general secretary of the Petroleum and Natural Gas Senior Staff Association of Nigeria, or Pengassan, Lumamba Okugba, told Platts."

10. Nasreen Seria and Vernon Wessels at Bloomberg report that South Africa's central bank--the Reserve Bank--decided today to cut benchmark interest rates by 1% to 9.5%.

"The Reserve Bank is not 'necessarily at the end of the cycle' of rate cuts, [Monetary Policy Committee] member Brian Kahn said in a televised interview with the South African Broadcasting Corp. today. The risks to inflation are now 'more on the downside because of the softening economy.'"

Governor Tito Mboweni also indicated that the decision to accelerate the schedule of monetary policy committee meetings should not be misconstrued to mean that there will be changes in the repurchase rate at every meeting.

11. Valerie Rota at Bloomberg reports that Moody's Investor Service has said that Mexico's credit rating is safe.

"'Despite heightened anxiety about the escalation of violence and organized crime activity, Mexico does not fit the general profile of countries identified as failed states,' Moody’s said in a report released today. 'The general foundations of its investment-grade rating remain solid.'"

While I would usually be happy to hear of calm-headed assessments of situations distant, I imagine the first thought in a lot of heads today was much the same as mine: "Last time Moody's rated something ... sell, sell, shit, SELL SELL SELL!!!!" But then, today also Enrique Krauze has an op ed in the New York Times which points out that the failed state meme is best described as a caricature of the situation in the country. Key excerpts:

"Mexico is a tolerant and secular state, without the religious tensions of Pakistan or Iraq. It is an inclusive society, without the racial hatreds of the Balkans. It has no serious prospects of regional secession or disputed territories, unlike the Middle East. Guerrilla movements have never been a real threat to the state, in stark contrast to Colombia.

Most important, Mexico is a young democracy that eliminated an essentially one-party political system, controlled by the Institutional Revolutionary Party, that lasted more than 70 years. And with all its defects, the domination of the party, known as the P.R.I., never even approached the same level of virtually absolute dictatorship as that of Robert Mugabe in Zimbabwe, or even of Venezuela’s Hugo Chávez.
...
Our national institutions function. The army is (and long has been) subject to the civilian control of the president; the church continues to be a cohesive force; a powerful business class shows no desire to move to Miami. We have strong labor unions, good universities, important public enterprises and social programs that provide reasonable results."

That said, Krauze does call on readers to consider how much instability America's drug war is exporting. Worth reading.

12. R. Colin Johnson at the EE Times reports that US Navy researchers claimed to have found experimental evidence of cold fusion at the American Chemical Society's annual meeting.

"Cold fusion was first reported in 1989 by researchers Martin Fleischmann and Stanley Pons, then with the University of Utah, prompting a global effort to develop the technology. Normal fusion reactions, where hydrogen is fused into helium, occur at millions of degrees inside the Sun. If room temperature fusion reactions could be realized commercially, as Fleishchmann and Pons claimed to have achieved inside an electrolytic cell, it promised to produce abundant nuclear energy from deuterium--heavy hydrogen--extracted from seawater.

Other scientists were unable to duplicate the 1989 results, thereby discrediting the work."

Italian and Japanese researchers also reportedly presented evidence of cold fusion.

Daily Sources 3/16

1. Real Time Economics carries the full text of the G20 communique released on Saturday. Key excerpts:

"2. Our key priority now is to restore lending by tackling, where needed, problems in the financial system head on, through continued liquidity support, bank recapitalisation and dealing with impaired assets, through a common framework (attached). We reaffirm our commitment to take all necessary actions to ensure the soundness of systemically important institutions.
...
5. We are committed to helping emerging and developing economies to cope with the reversal in international capital flows. We recognise the urgent need to pursue all options for mobilising International Financial Institution (IFI) resources and liquidity to finance countercyclical spending, bank recapitalisation, infrastructure, trade finance, rollover risk and social support. We agreed on the urgent need to increase IMF resources very substantially. This could include further bilateral support, a significantly expanded and increased New Arrangements to Borrow (NAB), and an accelerated quota review. We should also ensure that all Multilateral Development Banks have the capital they need, beginning with a substantial capital increase for the Asian Development Bank, and put it to best use to help the world’s poorest.
...
7. We have also agreed to: regulatory oversight, including registration, of all Credit Rating Agencies whose ratings are used for regulatory purposes, and compliance with the International Organisation of Securities Commissions (IOSCO) code; full transparency of exposures to offbalance sheet vehicles; the need for improvements in accounting standards, including for provisioning and valuation uncertainty; greater standardisation and resilience of credit derivatives markets; the FSF’s sound practice principles for compensation; and the relevant international bodies identify non-cooperative jurisdictions and to develop a tool box of effective counter measures."

2. Michael Wines, Keith Bradsher, and Mark Landler at the New York Times reported on Friday that Chinese Prime Minister Wen Jiabao aired some of Beijing's worries with regard to their holdings of US debt ahead of the G20 meeting in London.

"'President Obama and his new government have adopted a series of measures to deal with the financial crisis. We have expectations as to the effects of these measures. ... We have lent a huge amount of money to the U.S. Of course we are concerned about the safety of our assets. To be honest, I am definitely a little worried.'

He called on the United States to 'maintain its good credit, to honor its promises and to guarantee the safety of China’s assets.'"

3. Xinhua reports that the Chinese Ministry of Finance announced on Friday that the 5 billion yuan (~$732 million) stimulus plan directed at subsidizing the purchase of automobiles and motorcycles in rural areas will translate into a 10-13% discount, respectively.

"Farmers who buy light trucks and minivans from March 1 to Dec. 31, would get a 10 percent discount, with the ceiling subsidies of 5,000 yuan (~$732.29).

Subsidies of 2,000 and 3,000 yuan (~$292.92 and ~$439.37) can be use to replace old three-wheeled and four-wheeled vehicles respectively.

From this Feb. 1 to Jan. 31 in 2013, farmers who buy motorcycles would get 13 percent of the purchase price back, with ceiling subsidies of 650 yuan (~$95.20)."

4. Borzou Daragahi at the Los Angeles Times reports that Iranian state television on Saturday carried an announcement by government officials that a $3.2 billion deal to develop the South Pars natural gas fields had been stuck with China.

5. Marcus Hand at Lloyd's List reports that Singapore port container cargo traffic fell by an annual rate of 20% in February. The number of containers that went through the port fell by 6% from January to 1.85m teu. Singapore's port is the world's largest container port.

6. Pamela Constable at the Washington Post reports that Pakistani President Zadari announced early today that he would reinstate a number the judges deposed by Pervez Musharraf in 2007, including former Chief Justice Iftikhar Mohammed Chaudhry.

"Zardari's turnabout came after thousands of demonstrators poured into the streets of this leafy capital of Punjab province [Lahore] Sunday, throwing rocks at police and cheering wildly. A wide cross section of Pakistan's political, social and religious sectors joined the day-long protests.

As the demonstrations escalated, police first responded with volleys of tear gas. But by mid-afternoon they suddenly withdrew from the streets, while numerous city and provincial officials were reported to have resigned. The swift collapse of authority signaled the end of Zardari's bid to seize control of Punjab, the most politically influential region of the country, and raised serious questions about his ability to remain president."

Worth reading in full. Includes links to fascinating pictures of hordes of lawyers protesting in Pakistan.

7. Haig Simonian at the Financial Times reports that on Friday Switzerland's finance minister, Hans Rudolf Merz, "said Bern would abolish the strict distinction between tax fraud, a crime in Swiss law, and tax evasion, a civil offence." Merz stressed that customer accounts would remain secret in all but exceptional cases, meaning that a specific request from an investigative body would be required in order to obtain the data, or so I infer. As I've said before, changes of 500 plus year traditions are better indicators, to me, of what kind of stresses the financial system is under than most. (h/t Yves Smith at naked capitalism.)

8. Eurointelligence notes a media report that Finnish manufacturing orders are down 38% year over year in January.

9. OPEC decided in its meeting Sunday to maintain the current quota allocations, and called on its members to fully comply with them. Current compliance is 79% according to the cartel--the producers which are probably the largest over-suppliers are Iran and Venezuela, ironically usually the biggest hawks in the group. The OPEC press release following the meeting can be found here. Key excerpt:

"The Conference, however, welcomed, some initial signs reported of a reversal in crude oil-stock trends, and a narrowing of the contango in the front price structure, indicating that the adjustment process instigated through OPEC measures vis-à-vis excess supply in the market is gradually helping to redress balance, and was also pleased to observe that following the decision taken by the 151st (Extraordinary) Meeting of the Conference in December 2008 to cut 4.2 mb/d from the actual September 2008 OPEC-11 production level with effect from 1st January 2009, compliance for the month of February, according to secondary sources, was 79%, which has contributed to balancing the price of the OPEC Reference Basket at around US$40/b since the beginning of the year, despite the critical economic outlook.

The Conference therefore emphasized its commitment to comply fully with its decision of December 2008, in order to further contribute to market stability. The Secretariat will monitor very closely developments in the market. Furthermore, the Conference will convene in Vienna, on Thursday 28th May 2009, to consider any further actions deemed necessary."

On a side note, the cartel decided to lengthen Abdullah Salem el-Badri's (of Libya) stay as Secretary General of the organization for another three year term. At Environmental Capital, Spencer Swartz reports that Russia decided not to join the organization or coordinate any serious production cuts.

"[Russian deputy prime minister Igor Sechin] proposed a slew of things for Russia and OPEC ministers to work on together, such as coordinating (i.e., raising) taxes on foreign oil firms’ crude production and refining operations."

Moscow had indicated that it would consider to what extent OPEC was complying with headline cuts before it joined in cooperation. Even so, this has to be considered good news in the West, given recent noise from Moscow and hints from Tehran.

10. Rania El Gamal at Reuters reports that Sheikh Nasser al-Mohammad al-Sabah told al-Watan newspaper that the country would officially cancel the al-Zour 615 kb/d export refinery construction project today in remarks published Sunday. In May, KNPC awarded $8.4 billion in construction tenders to four South Korean and one Japanese firm to build the refinery.

11. Rainbow Nelson at Lloyd's List reports that the Chavez administration expects the Venezuelan Congress to pass a law tomorrow which would transfer the administration of ports from the regional to the state level.

"'We are going to recover the ports and airports in the whole republic, oppose it whoever wants to, this is the law of the republic,' Mr Chavez said on his weekly television program ‘Alo Presidente’.

He warned Henrique Salas, who governs the department of Carabobo and oversees Venezuela’s most important port, Puerto Cabello, and Manuel Rosales, the governor of Zulia, which oversees the port of Maracaibo, that the navy and army would be used to quell any opposition to the move."

Opponents have pledged to resist the law.

12. The Associated Press reports that Mexico has slapped import duties on 90 US products in retaliation for the cancellation of a program that had allowed Mexican trucks to trasnport goods within the US.

13. Mary Williams Walsh at the New York Times reports that AIG issued a press release Sunday which provided the names of the institutions and governments which received payments via the bailout monies provided to the insurance company.

"Financial companies that received multibillion-dollar payments owed by AIG include Goldman Sachs ($12.9 billion), Merrill Lynch ($6.8 billion), Bank of America ($5.2 billion), Citigroup ($2.3 billion) and Wachovia ($1.5 billion).

Big foreign banks also received large sums from the rescue, including Société Générale of France and Deutsche Bank of Germany, which each received nearly $12 billion; Barclays of Britain ($8.5 billion); and UBS of Switzerland ($5 billion).

AIG also named the 20 largest states, starting with California, that stood to lose billions last fall because AIG was holding money they had raised with bond sales."

14. Justin Fox at the Curious Capitalist dug up the Bureau of Economic Research data on unemployment in the Great Depression to compare them to the financial crisis of 2008.



As Fox notes, nonfarm employment accounts for a much larger share of total employment in the US today than it did in 1929. Still, nonfarm employment accounted for about 78% of all private sector hours worked at that time, according to Robert Higgs at the Independent Institute.

Daily Sources 3/12

1. Edward Cody at the Washington Post reports that France will return to a full membership in NATO after a 43 year departure.

"'The time has come,' [President Nicolas Sarkozy] said in a speech to France's Strategic Research Foundation, adding, 'Our strategy cannot remain stuck in the past when the conditions of our security have changed radically.'"

I never thought I'd see it happen.

2. Platts reports that Prime Minister Putin said today that Russia will not fine Naftogaz for not taking the contracted for volumes of natural gas from Gazprom. Quote:

"[We] forgive these fines because we understand the reality--they have nothing to pay with. They are on the verge of bankruptcy, and you understand perfectly well that you can't kill your partner, because it will then not be capable of anything."

3. Eurointelligence reports that the US is calling for the tripling of funds available to the IMF in preparation for the G20 meeting in London this weekend. "Geithner also said that each G20 country should set a target of spending 2% of GDP for 2009 and 2010 in fiscal stimulus, and that the IMF should monitor progress towards that goal." David Cho and Anthony Faiola at the Washington Post reports that the Administration will ask Congress for nearly double the US commitment to the IMF to $100 billion.

4. Edward Wong at the New York Times reports that China has officially protested the passage of non-binding resolution H. Res. 226 passed by Congress yesterday. In a news conference today, Chinese foreign ministry spokesman Ma Zhaoxu, said that the resolution "makes groundless accusations against China’s religious policies" and "rudely intervenes in China’s internal affairs." HR226 was introduced on Monday and passed on Wednesday with a roll call vote of 422-1. Key language:

"Resolved, That the House of Representatives--

(1) recognizes the Tibetan people for their perseverance in face of hardship and adversity in Tibet and for creating a vibrant and democratic community in exile that sustains the Tibetan identity;

(2) recognizes the Government and people of India for their generosity toward the Tibetan refugee population for the last 50 years;

(3) calls upon the Government of the People's Republic of China to respond to the Dalai Lama's initiatives to find a lasting solution to the Tibetan issue, cease its repression of the Tibetan people, and to lift immediately the harsh policies imposed on Tibetans, including patriotic education campaigns, detention and abuses of those freely expressing political views or relaying news about local conditions, and limitations on travel and communications; and

(4) calls upon the Administration to recommit to a sustained effort consistent with the Tibetan Policy Act of 2002, that employs diplomatic, programmatic, and multilateral resources to press the People's Republic of China to respect the Tibetans' identity and the human rights of the Tibetan people."

5. Tracy Withers at Bloomberg reports that the Reserve Bank of New Zealand cut its benchmark rate by 0.5% to 3%.

6. Seyoon Kim at Bloomberg reports that the Bank of South Korea today decided to leave its benchmark interest rate unchanged at 2%.

"South Korea’s government said today it will provide cash, loans, school fees and other financial incentives valued at 6 trillion won to help those on lower incomes cope with rising unemployment. The aid package will use funds from the extra budget being proposed this month, the finance ministry said.

Bank of Korea Governor Lee said he expects the government to propose 'a significant' extra spending package, financed through bond sales. The central bank will watch the effect of debt sales on financial markets as it decides whether to purchase bonds, he added.

'The Korean economy is likely to remain in recession due to the persistent weakness of both domestic and overseas demand.'"

7. Juan Cole at Informed Comment has a pretty good overview of the situation in Pakistan as the government there rounds up lawyers involved in this year's long march under Section 144 of the Criminal Procedure Code. Cole concludes that the situation is rapidly becoming an open invitation to the military to take over again.

8. Andre Soliani and Joshua Goodman at Bloomberg report that the policy makers at the Brazilian central bank unanimously voted to cut the benchmark interest rate by 1.5% to 11.25% last night.

"The central bank, in a statement accompanying its decision, said it would evaluate the 'magnitude and speed' of 2.5 percentage points in cuts since January and their cumulative effect before deciding on its next steps."

9. Daniel Cancel at Bloomberg reports that Barclay's analyst Alejandro Grisanti said in a speech today in Caracas that Venezuelan GDP was likely to contract by 4.1% in 2009.

10. Vanessa Ronsisvalle and Beth Evans at Platts reports that the EU imposed anti-dumping duties on imports of US biodiesel today.

"The anti-subsidy duty, designed to offset financial incentive offered to US producers by the US government has been set at rates varying from €211.2/mt-€237/mt [$270-$303/mt or ~$36.00-$40.40/b], according to the Commission's decision published in the official journal of the European Union.

The anti-dumping duty has been set at rates varying from €23.6/mt to €208.2/mt [$30.02-$264.81/mt or ~$4.00-$35.31/b]. The anti-subsidy duties specified by the commission vary less, ranging from a low of €211.2/mt to a high of €237/mt [$268.63-$301.44/mt or ~$35.82-$40.19/b].

Details of the EC's decision showed some companies were given individual anti-dumping duties, ranging from as little as €23.60/mt (~$4/b) for Archer Daniels Midland and €60.50/mt (~$10.26/b) for Cargill to a high of €208.20/mt (~$35.31/b) for Peter Cremer North America.

All other companies listed in the commission's statement, including ED&F Man, Louis Dreyfus, Trafigura, Vinmar and Vitol, face an anti-dumping duty of €122.90/mt (~$20.84/b), while imports from companies not named in the document are subject to a €182.40/mt (~$30.93/b) duty."

11. Shobhana Chandra at Bloomberg reports that the Commerce Department today announced that retail sales fell by 0.1% in February from January. The decline was much less than had been expected by most analysts and if you exclude automobile sales from the numbers retail sales climbed by 0.7%.

Daily Sources 3/10

1. Hadi Soesastro, the head of Indonesia's Center for Strategic and International Studies, has a post at Vox EU which calls for proactive engagement by east Asian nations in the G20.

"There is now no better forum than G20. Essentially, it will act as a 'steering committee for the world economy', as Barry Eichengreen aptly said, and this forum should now replace the G7 or G8 for good."

Soesastro appears to regard the preoccupation with the expanded Chiang Mai Initiative as parochial and not broad enough to really address the economic concerns in the Asia Pacific. Worth reading.

2. Keith Bradsher at the New York Times reports that the National Bureau of Statistics announced the consumer prices in China fell by an annual rate of 1.6% in February. Producer prices fell 4.5% for the same time period.

"In yet another possible hint of deflation, an index of real estate prices in 70 Chinese cities also fell in February, inching down 0.3% from January and down 1.2% from a year ago."

3. Zhou Xin at Reuters reported yesterday that the head of the Chinese National Energy Agency, Zhang Guobao, made comments in the China Reform Daily yesterday which argued that China should use its nearly $2 trillion in foreign exchange reserves to buy more gold, oil, uranium and other strategic commodities.

"[Mr. Zhang] added that agencies such as China's National Oil Reserves Centre should be allowed to issue foreign exchange bonds to obtain money from China's forex reserves for overseas purchases."

(h/t Chuck Butler at Daily Pfenning.) Meanwhile, Judy Chen at Bloomberg reports that Wang Jian, secretary general of the China Society of Macroeconomics which itself is a division of the National Development and Reform Commission, said in an interview that a weaker yuan "won't help exports. Foreign consumers still won’t have enough money to buy."

"'A three percent in appreciation would attract more foreign capital into China to help us acquire assets overseas,' said Wang. 'We should take advantage of the low prices and use reserves to buy more commodities, oil fields and valuable assets in the US.'"

4. Janet Ong at Bloomberg reports that Taiwanese exports fell at an annual rate of 28.6% in January.

"Exports, which are equivalent to about 70% of GDP, fell 37.2% over the first two months of 2009, the largest decline on record. China and the US are Taiwan's biggest overseas markets.

The economy contracted 8.36% in the fourth quarter, pushing the island into its first recession since the technology bubble burst in 2001. The jobless rate climbed to a seven-year high of 5.33% in January.
...
Taiwan's shipments to China fell 32.6% compared with a 63.5% plunge in January. Exports to the U.S. declined 24.7% from a year earlier and sales to Europe fell 34.7%, more than January's 32.6% decrease."

February's export decline was Taiwan's sixth consecutive month of exports contraction.

5. Gordon Fairclough at the Wall Street Journal reports that the Dalai Lama delivered a speech in Dharamsala, India, to mark the 50th anniversary of his exile in which he condemned Chinese control of the region in especially harsh terms.

"The Dalai Lama said China's Communist government had subjected Tibet and its people to 'untold suffering and destruction' over the past five decades, turning the Himalayan region into 'hell on earth.' He also called for 'meaningful autonomy' for Tibetans."

Edward Wong at the New York Times reports that the Dalai Lama said,

"Today, the religion, culture, language and identity, which successive generations of Tibetans have considered more precious than their lives, are nearing extinction."

China's foreign ministry spokesman responded to the criticism by dismissing it as lies and claiming that Beijing's policies are "blazing a new path for Tibet's prosperity."

6. Der Spiegel reports that Jean-Claude Juncker, prime minister of Luxembourg and the chairman of 16 finance ministers from the eurozone, told reporters yesterday that the EU has rejected an appeal by the US to launch further economic stimulus coordinated internationally. He said, "We're not prepared to increase the economic programs."

7. Ben Hall at the Financial Times reports that French industrial production fell by an annual rate of 13.8% in January.

"January’s plunge was the sixth consecutive monthly decline in industrial output, the longest continuous contraction in the 29-year old statistic series."

8. Emma O’Brien at Bloomberg reports that Ukraine's central bank--Natsionalnyi Bank Ukrainy--has issued warnings to a set of domestic banks not to sell the hryvnia below the rate it sets.

"'This is a tussle between the banks and the NBU,' said Dmitry Gourov, a Ukraine economist in Vienna at UniCredit SpA, Italy’s largest bank. 'The central bank could easily make a scapegoat of one particular bank, there’s always that risk.'"

The hryvnia has fallen 39% versus the dollar in the past six months.

9. RIA Novosti reports that the Russian Finance Ministry will cut its export duty on crude from $115.3 to $108-$112 per metric tonne (~$14.79-$15.34/b) starting April 1. The ministry reportedly expects the Urals blend price to average between $41.54-$42.54/b in March.

10. Anthony DiPaola and Glen Carey at Bloomberg report that Abdullah bin Hamad al-Attiyah, Qatari minister of oil, said in an interview that "We cannot discuss another [OPEC] cut until we see the compliance at 100%." Al-Attiyah indicated that neither a price target nor a price band was in the works. Shigeru Sato and Yuji Okada at Bloomberg report that Saudi Aramco kept supply to Japanese refiners at the same level seen in March for April.

"'The Saudis seem to have avoided a deeper reduction in April supplies to Japan, hinting that the kingdom may oppose an additional reduction,' said Ken Hasegawa, a commodity derivatives sales manager at Newedge in Tokyo."

11. Ladane Nasseri at Bloomberg reports that Iran's energy ministry announced that the Bushehr nuclear plant will be producing 500 megawatts by August 22, per a press release by Energy Minister Parviz Fattah. The other 500MW of the 1,000 MW plant is scheduled to be linked to the grid by March 2010.

12. Michael Collins Dunn at the Middle East Institute Editor's blog posted yesterday on the decision of Morocco to cut relations with Tehran. Tehran had criticized Morocco for expressing support for Bahrain after a former speaker of the Iranian parliament called it the 14th province of Iran--see Daily Sources 2/20 #6. Morocco may have felt singled out by Iran given that the rest of the Arab Muslim nations also backed Bahrain.

"[The] Moroccan announcement breaking relations also spoke of Iranian attempts to 'alter the religious fundamentals of the kingdom, to attack the roots of the Moroccan people's ancestral identity.' Iran called the charges baseless, but it seems the Moroccans are alleging direct interference with their internal affairs.

Morocco has complained in the past that the Iranian Embassy in Rabat was seeking to spread Shi'ism in the Sunni Kingdom, where the King also claims religious leadership and the title Amir al-Mu'minin or Commander of the Faithful."

13. Borzou Daragahi and Ramin Mostaghim at the Los Angeles Times reports that the arrival of Turkish Foreign Minister Ali Babacan in Tehran has sparked speculation that Ankara is looking to serve as a mediator for talks between the US and Iran.

"'The term "mediation" is used at times,' Babacan told reporters in Ankara ... before departing for Iran, according to the Turkish newspaper Sabah. 'This will only be realized if a concrete request is made by both sides. We could contribute to the furthering of relations between the two nations to a positive level.'
...
Clinton told Turkey's Kanal D television last week that the Obama administration welcomed any Turkish efforts to help sway the Islamic Republic. 'You know the Iranians better than we do,' she said. 'You have shared a border for--I think I was told over 350 or so years. So we are going to ask for your help in trying to influence Iranian behavior.'"

14. Ismail Khan at the New York Times reported yesterday that the Mamoond tribe, which resides in the Bajaur region of Pakistan and in Afghanistan, signed an agreement with Islamabad to hand over several Taliban leaders, lay down their arms, and stop harboring foreign militants. "The entire Taliban leadership in Bajaur comes from the Mamoond, which has also been accused of harboring al Qaeda operatives."

15. Lydia Polgreen at the New York Times reported yesterday that President Omar Hassan al-Bashir released from prison Hassan al-Turabi today. Turabi was originally arrested two months ago because he came out in favor of the ICC trying al-Bashir. When he was released, he reiterated that support, "We must accept all international policies, especially if they address justice." (Turabi is Sudan's most prominent Islamist, and as such puts a premium on jurisprudential thinking.) Analysts say the move might be to bridge political divisions in Sudan now that the regime is under new pressure, which makes sense. I would add, however, that Turabi, an old colleague of Osama bin Laden, and prominent Islamist is not exactly considered friendly by most of the West.

16. Joshua Goodman and Andre Soliani at Bloomberg reports that Brazil's GDP shrank by 3.6% in the fourth quarter from the third. However, Brazil's GDP grew by 1.3% in the fourth quarter of 2008 from 4Q 2007.

"Brazil’s economy expanded 5.1% last year, compared with 5.7% in 2007. Industrial activity fell 7.4% from the previous quarter. Household consumption fell 2%."

17. Christine Cordner at Platts reports that the EPA today proposed a comprehensive national system for monitoring carbon dioxide and other greenhouse gas emissions which would begin reporting in 2011.

"EPA said that about 13,000 facilities, accounting for about 85-90% of US GHG emissions emitted, would be covered under the proposal. The new reporting requirements would apply to suppliers of fossil fuel and industrial chemicals, manufacturers of motor vehicles and engines, as well as large direct emitters with emissions equal to or greater than 25,000 metric tons/year."

Daily Sources 3/9

1. Edmund L. Andrews at the New York Times reports that the World Bank released a new report Sunday which forecasts that the global economy and the volume of global trade will shrink in 2009 for the first time since World War II.

"The bank’s assessment for 2009 was grimmer than those of most private forecasters. It did not provide a specific estimate, but bank officials said its economists would be publishing one in the next several weeks."

2. Sean O'Grady at the UK Telegraph reports that the latest data from the Bank of England shows that there has been a $1 trillion decline in the accounts held by foreigners in the UK.

"Some $597.5 billion was lost to the banks in the last quarter of last year alone, after a modest positive inflow in the summer, but a massive $682.5 billion hemorrhaged in the second quarter of 2008–-a record. About 15% of the monies held by foreigners in the UK were withdrawn over the period, leaving about $6 trillion."

One reason behind the outflow is the decline in sterling--most financial instruments held in the UK are priced in sterling, as it falls losses are increased for foreign accounts with currencies rising relative to it.

3. The Associated Press reports that Chinese ships shadowed and harassed a UN Navy vessel--the USNS Impeccable--with a civilian crew conducting surveys in international waters of the South China sea.

"The [Pentagon] statement said the Navy sprayed one ship with water from fire hoses to force it away and the Chinese crew members stripped to their underwear and continued closing within 25 feet."

The Obama Administration has made an official protest about the incident. (h/t Galrahn at Information Dissemination.)

4. Kumar Malhotra at the BBC reports that the Indian defense establishment has become concerned about strengthening ties between Nepal and China. The Hindu nationalist party, Bharatiya Janata Party, raised the issue in parliament last month. Beijing is likely strengthening ties with the Maoist government in Kathmandu as the 50th anniversary of the exile of the Dalai Lama approaches in an attempt to tamp down protests by Tibetians in Nepal this year.

5. Geoff King at Platts reports that OPEC secretary general Abdalla el-Badri said today that cartel compliance with the December 17 production allocations was at 85%. He indicated OPEC will encourage further compliance given fears of new price slides on the back of large stocks of crude and products on land and at sea. "'This price [$40/b] is not suitable for any future investments,' Badri said, referring to what he said was the International Energy Agency's preferred price level."


6. Edward Luce and Chrystia Freeland of the Financial Times report that in an interview, Larry Summers made the case for coordinated stimulus globally:

"'The old global imbalances agenda was more demand in China, less demand in America. Nobody thinks that is the right agenda now,' said Mr Summers.

'There’s no place that should be reducing its contribution to global demand right now. It is really the universal demand agenda.'

While the US and other western nations should return to living within their means in the medium term, everyone should raise spending sharply now.

'The right macro-economic focus for the G20 is on global demand and the world needs more global demand,' said Mr Summers."

7. Michael Cooper at the New York Times reports that there was a 4% increase in ridership on public transportation systems nationally in 2008.

"Ridership was up on all modes of public transportation in 2008; it grew on subways by 3.5%, on buses by 3.9% and on commuter rail by 4.7%. Light-rail use increased by 8.3%, spurred in part by a new system in Charlotte, N.C., and growth in New Orleans, which is still recovering from Hurricane Katrina."

Analysts do not expect ridership to continue to increase in 2009, as states will be forced to raise fares and cut back on service in order to compensate for declining tax revenues.

Daily Sources 2/2

1. Kevin Hamlin and William Sim at Bloomberg report that South Korean exports fell by 32.8% from a year earlier in January, according to the the Ministry of Knowledge Economy. CLSA Asia-Pacific Markets said that their "Chinese purchasing managers’ index rose to a seasonally adjusted 42.2 from 41.2 in December." Anything below a 50 indicates contraction.

"Japan’s factory output slumped by a record in December from November, the government said last week, and Australia’s manufacturing contracted for an eighth month in January, a report showed today. Australia faces a 'collapse in government revenues,' according to Prime Minister Kevin Rudd, as the global and domestic economies slow."

The Economist reported:

"In the fourth quarter of 2008, real GDP fell by an annualized rate of 21% in South Korea and 17% in Singapore, leaving output in both countries 3-4% lower than a year earlier. Singapore’s government has admitted the economy may contract by as much as 5% this year, its deepest recession since independence in 1965."

The piece goes on to say,

"Asia’s richer giant, Japan, has yet to report its GDP figures, but exports fell by 35% in the 12 months to December. In the same period, Taiwan’s dropped by 42% and industrial production was down by a stunning 32%, worse than the biggest annual fall in America during the Depression."

And includes the following illustration:



The Financial Times carries a summary of an interview it had with Chinese Premier Wen Jiabao, where he indicated that China was unlikely to use significant amounts of its reserves to shore up the IMF and that Beijing might rethink its investment strategy once this crisis is over. He also rejected the notion that its appetite for treasuries is at all responsible for the current mess:

"'It is completely confusing right and wrong when some countries that have been overspending then blame those that lend them money for their spending,' he argues. Mr Wen points to a famous proverb in China about Zhu Ba Jie, a fictitious character in the 16th-century Chinese fable, Journey to the West , who always blames others who try to help him. 'When I shared this view at Davos with the world business leaders, they all agreed with me on that,' he says."

Things have become interesting when the leader of a nominally Communist country ends up defending creditors versus debtors. Well worth reading in full. Meanwhile, Eswar Prasad, a professor at Cornell, borrows from the Iranian diplomacy meme to suggest that the US and China need a grand bargain at The Economists' Forum. Prasad suggests the two countries need to coordinate efforts to stimulate domestic demand, Beijing must allow the Renminbi to float more freely while the US tackles new debt, and, finally, the US should actively promote a larger role for China in international lending institutions. It seems that Mr. Web effectively put the kibosh on the last two suggestions, though perhaps that should be seen as the opening negotiating position.

2. Eurointelligence reports that President Sarkozy has called for a euro zone summit to discuss fiscal stabilization plans and tactics for combating speculative attacks on member states. Apparently Sarkozy is dissatisfied with the Czech presidency of the EU's less aggressive approach to the financial crisis, and this particular call would have been spurred on by a recent conversation with Barack Obama which led Sarkozy to believe the crisis is even worse than he thought. Sarkozy proposed that the summit take place in Berlin on February 22 where European leaders were to meet ahead of the G 20 meeting, which suggests to me an effort to set the agenda of that meeting more than anything.

3. Joellen Perry at the Wall Street Journal on January 31 reported that the European Commission and European Central Bank are jointly drawing up guidelines for European governments which are considering setting up "bad banks." The institutions hope to prevent one-upmanship competition between member states should bad banks be resorted to.

"The ECB is also working on guidelines for governments that hope to offer insurance against the toxic assets that remain on banks’ books. One key question: how to price the toxic assets."

4. Platts reports that Belarus has agreed to pay about $200-205/thousand cubic meters (tcm) of natural gas from Russia in the first quarter of 2009. (That is about $32.86-33.68/b on a Btu basis.) Evidently, the price is tied to average cost of crude on some futures market by some means, as the price Belarus is expected to pay beyond the first quarter is $148-150/tcm ($4.19-$4.24/MMBtu, roughly $24.32-24.65/b on a Btu basis.)

5. Edward Hugh at Fistful of Dollars reports that Russia's foreign currency reserves no longer cover foreign debt, while the ruble continues to crash, and unemployment soars. Hugh thinks that the most pertinent cause of the recent difficulties is Moscow's soft stance on inflation.

6. Fred Pals at Bloomberg reports that Nobuo Tanaka, IEA executive director, told the journalist in an interview, "It is likely that a downwards revision happens. The global economic growth projections are very pessimistic." Tanaka specifically said that the IEA would factor in the new IMF global growth forecast. (see Daily Sources 1/28 #4)

7. Tom Fowler at the Houston Chronicle reports that as many as seven natural gas liquefaction export terminals are expected to commission in 2009, expanding global capacity by 20%. LNG imports are expected to grow by 30% to 456 billion cubic feet this year. Sounds huge, but the current LNG imports of 300 billion cubic feet a year account for just 3% of the US market--significant, but not huge. The new export terminals will help to make the market for natural gas global, but it will still remain regional for some time going forward. As the economies of the world are shrinking, the fuel will be in less demand, however, pushing down the price of the marginal cubic foot, as it were. Wood MacKenzie wrote in an analysis:

"We don’t believe Asia and Europe will be in a position to absorb this new production, and the US is the only market that can take it, that has a large amount of storage."

Perhaps, but Japan had been facing reduced volumes from Indonesia and an increasingly uncertain relationship with that source of supply might, even with a shrinking GDP, present a market opportunity.

8. Felicia Loo and Luke Pachymuthu at Reuters reports that Saudi Aramco has agreed to purchase 3 million barrels of gas oil (diesel)--0.5% sulfur--from Itochu Corp from March through December. Aramco has avoided term contracts for products of late as the country has several refineries under construction which should eventually meet domestic demand. The shut down of the 120 kb/d Riyadh refinery from February through March may have contributed to the decision to strike the deal.

9. Alissa J. Rubin at the New York Times reports that al-Maliki's Dawa Party and several "secular" parties are thought to have made gains in Saturday's provincial elections in Iraq, according to preliminary data. The Dawa Party appears to have done especially well in Baghdad and Basra (the only littoral province of Iraq, with a great deal of its oil and gas reserves.)

"The turnout appeared to reflect confusion over voting procedures as well as voter apathy. There were complaints across the country from Iraqis who had tried to vote but were unable to do so. Most were prevented either because a strict curfew prevented them from reaching their polling center or because their names were not on the center’s voter roll when they got there.

Part of the problem was caused by the large number of internally displaced Iraqis who no longer live in the province where they are registered to vote. About one million Iraqis were displaced as a result of sectarian and ethnic fighting over the past five years, and while some have returned the majority are living outside their home province."

10. Mary Anastasia O'Grady has an analysis of Chavez's most recent attempt to change the Venezuelan Constitution to allow him to run again to be President. The referendum is to take place on February 15th and Chavistas appear to be using violence to intimidate people organizing around a no vote. But Chavez's fiscal policies seem likely to worsen an already difficult budgetary situation.

"Venezuela imports most everything it consumes. The bill is paid with the foreign exchange earned through oil exports. But prices for Venezuelan crude are now below $40 per barrel, and the central bank has recently been asked to hand over $12 billion to a government development fund. The bank's international reserve position is now just below $30 billion--if government figures can be believed.

The bank's position is not in crisis yet, but the rate at which reserves are shrinking is worrisome. If it continues, Venezuela could have trouble paying for its food. Mr. Chávez also has used the bank as his own political slush fund. His "democratic" survival depends heavily on largess for the poor masses and palm-greasing for not-so-poor political backers."

Ms. O'Grady's analysis needs to be taken with a grain of salt, but she is one of the few in the US press, at least, who actually closely follows the issue. Lester Pimentel at Bloomberg reports that the average differential between the yield of Venezuelan 10 year dollar denominated sovereign debt and US 10 year treasuries has risen from 14.74% to 17.4% since Chavez took office ten years ago.

11. Barry Ritholtz at the Big Picture points out that the GDP figure announced last week of -3.8% was artificially goosed by a build in inventory, deflation, and TARP--which apparently was a major factor in the Bureau of Economic Analysis' final GDP estimation for Q4. "Change in capital transfers" were recorded as net $271 billion from Q3 to Q4 due to TARP, about 8-10% of GDP for the period. Worth a look.

12. Timothy R. Homan at Bloomberg reports that US consumer spending in December fell by 1%. Consumer spending fell by 0.8% in November. "Today’s report also showed incomes fell 0.2% in December, the third straight decline, after a 0.4% decrease the prior month." Menzie Chinn at Econbrowser points out that if consumption is falling because the propensity to spend disposable income is falling, then direct purchases of goods and services by the government would have a larger effect, dollar for dollar, than tax cuts. She also posts a useful graph of consumer spending from the late 1960s:



Worth a look.

13. The Oil & Gas Journal reports that the US rig count is down ~2.8% or 43 working rigs from the week earlier on Sunday, at ",472 rotary rigs working this week."

"That's the lowest US rig count since the week ended Jan. 20, 2006, when exactly the same number of rotary rigs were working and drilling activity was on the rise. A year ago at this time there were 1,763 rigs making hole."

Financial analysts expect utilization rates to continue to shrink drastically.