Daily Sources 6/5

1. BUNDESBANK FORECASTS GERMAN GDP TO CONTRACT BY 6.2% IN 2009

Der Spiegel reports that the Bundesbank expects the German economy to contract by 6.2% in 2009. The bank expects downward pressure on the economy to end by the close of 2009, but only forecasts GDP growth of 0.0% for 2010.

"The low point of the recession could be reached this summer, the forecast noted. Still, Bundesbank President Axel Weber said it was too early to breathe a sigh relief. The report added that unemployment will continue to rise in the coming quarters, and by mid-2010, the number of jobless is expected to be 1 million people greater than it was this spring--reaching a total of around 4.4 million unemployed persons, or 10.5%."

2. DUTCH EUROPEAN PARLIAMENT ELECTIONS BIG WINNER FOR ANTI-ISLAMIST 'PARTY FOR FREEDOM'

Der Spiegel reports that preliminary data on the Dutch European Parliament elections show Geert Wilders' "Party for Freedom" would get four of 25 Dutch seats in the legislature, making it the second largest Dutch party represented in Brussels.

"Wilders, who has become popular in the Netherlands running on an anti-Islam and anti-political establishment platform, promised voters he would be tough on immigration and criticized Turkey's bid to join the EU. 'Should Turkey as an Islamic country be able to join the European Union? We are the only party in Holland that says, it is an Islamic country, so no, not in 10 years, not in a million years,' Wilders said."

3. RUSSIA TO CONSIDER SETTLING CHINESE TRADE IN LOCAL CURRENCIES, GAZPROM AND E.ON FINALIZE ASSET SWAP DEAL

Lyubov Pronina at Bloomberg reports that Russian President Medvedev has joined Brazil and Malaysia in the number of countries considering settling international trade with China in their respective domestic currencies. Meanwhile, Nadia Rodova and Anna Shiryaevskaya at Platts report that Gazprom and Germany's E.ON Ruhrgas have signed an asset swap agreement with E.ON receiving 25% of Severneftegazprom, a Gazprom subsidiary developing the Yuzhno-Russkoye oil and
gas field.

"Following the deal Gazprom will own 50% plus six ordinary registered shares of Severneftegazprom; Germany's BASF will own 25% minus three ordinary registered shares and three preferred shares without voting rights; and E.ON will own 25% minus three ordinary registered shares and three preferred shares without voting rights, Gazprom said.

In turn, the agreement gives Gazprom will take E.ON Ruhrgas' 49% stake in Gerosgaz, which owns 2.93% of Gazprom.

'By implementing this asset exchange transaction, Gazprom and E.ON have once again demonstrated a successful development of long-term Russian-German cooperation in the energy sphere,' [Gazprom CEO] Alexei Miller said in a statement."

The Yuzhno-Russkoye oil and gas field is thought to have 856.2 billion cubic meters of gas and 20.35 million metric tons (~148.6 million barrels) of oil and gas condensate reserves.

4. RIO TINTO BOARD REJECTS CHINALCO BID

David Barboza and Michael Wines at the New York Times report that in a meeting in London Thursday, the board of Rio Tinto rejected an offer of $19.5 billion by the Aluminum Corp. of China, or Chinalco, to take a 15% stake in the company. Chinalco's currently has a 9.3% share of the company. Political opposition to the deal in Australia began early on. In the middle of May, Chinalco revised its offer down from a 18.5% stake to 15--see Daily Sources 5/21 #2.

"Chinalco said it regretted the decision and had worked hard to try to revise the deal to reflect changed market conditions, as well as the response from shareholders and regulators.

'As a result, we are very disappointed with this outcome,' Chinalco’s president, Xiong Weiping, said in a statement."

Rio Tinto will combine its iron ore assets in Australia with those of BHP Billiton.

5. CHINESE MALE-FEMALE RATIO DRIVING UP 'BRIDE PRICES', INCREASINGLY A TARGET OF CONS

Mei Fong at the Wall Street Journal reports that the male-female ratio (120-100) in China has pushed up the dowries--or "bride price"--of potential brides so much that they have become the target of con artists.

"While there are no nationwide statistics, wedding scams have occurred before, but usually isolated cases. Mr. Tang, Xin'an's Communist Party secretary [Xin'an is a village of 14,000 in Shaanxi province], says he has never before seen such clusters of cases. Most of the 11 families involved lost an average of 40,000 yuan (~ $5,862 or roughly GDP per capita in purchasing power parity terms). Officials consider these to be fraud cases. So if caught, the women could serve jail time, according to police."

The story provides more anecdotal evidence for the case made by Shang-Jin Wei of Columbia University and Xiaobo Zhang of IFPRI that the one child policy in China has made the society even more one of saving than in the past--see Daily Sources 5/28 #2.

6. GLOBOVISIÓN PRES TO BE CHARGED WITH 'USURY'

Fabiola Sanchez at the Associated Press reports that Venezuelan prosecutors have charged the president of Globovisión, the sole opposition television station remaining in the country, Guillermo Zuloaga, of "usury."

"Trade Minister Eduardo Saman accused Zuloaga of keeping the cars off the market while waiting for their price to rise--involving a possible violation of foreign exchange rules that give importers access to dollars only if they aren't used to gain a 'disproportionate advantage' over rivals.

It was not clear if Zuloaga received dollars that way from the government, but importers who violate those terms can be prosecuted under Venezuelan usury law."

Last week Hugo Chávez said that the Supreme Court, attorney general, and telecommunications chief should take action against "poisonous media" or resign. Meanwhile, Platts reports that PdVSA said in a statement that it had taken over 45% of all private oil services companies operations in the country since nationalizations began again two weeks ago. "So far, around 76 companies have been nationalized, including the local units of Williams International."

7. CHILE TO COMMISSION LNG GASIFICATION PLANT BY END OF MONTH, EXXON SIGNS CONTRACTS TO BUILD LNG EXPORT FACILITY IN PAPUA NEW GUINEA

SAI reports that Chile will commission its 2.5 million tonne/year LNG-10 million cubic meter natural gas liquefaction plant in Quintero at the end of the month.

"The first vessel carrying LNG to Chile from Atlantic LNG’s facilities in Trinidad & Tobago is due to arrive at the plant owned by Chilean energy company ENAP, Endesa Chile, Metrogas and BG Group before the end of June."

Meanwhile, Russell Gold at Environmental Capital reports that Exxon Mobil has signed two construction contracts in the last 24 hours which lay the groundwork for building an LNG export facility in Papua New Guinea.

"Exxon didn’t cut its capital expenditures program during the oil-price drop, but it’s still noteworthy when they push a couple big high-cost projects ahead. And while Exxon didn’t really slow its spending, others did. But projects are looking more financially robust now because costs are falling. The big energy consultant IHS/CERA updated its upstream operating cost index today: it’s down 8% from six months ago. Meanwhile, capital costs are down 9%.

The question haunting oil circles is whether enough new investment will be undertaken to head off a major supply crunch in coming years as demand for black gold grows in Asia and elsewhere. The McKinsey Quarterly, a publication from the consulting group, recently warned that the 'tight demand–supply balance seen at the end of 2007 could return sooner than many observers might have anticipated' as oil companies--state owned and publicly traded--ease up on capital spending."

All of which may be true, but even if there is a supply shortfall does duly develop in 2010, that shouldn't have the effect of pushing up price on oil for delivery next month.

8. NEW U.S. EMISSIONS REGULATIONS PUSHING CANADIAN OIL SANDS PRODUCERS TOWARD ASIAN MARKET

Gary Park at Platts reported (on May 13) that Canadian oil sands operators are looking for Asian participation as the US Congress considers legislation which could limit the purchase of fuels produced by large carbon emitting processes. There are three key competing pipeline plans for taking oil sands products to the Pacific--Enbridge's 525 kb/d Northern Gateway pipeline, Kinder Morgan's 400 kb/d expansion to its 300 kb/d Trans Mountain pipeline and Kinder Morgan's 400 kb/d Northern Leg Expansion to Kitimat.



As Park reports:

"There has been no more public display of those problems than the roller-coaster efforts since 2005 by Canadian pipeline giant Enbridge to open the door to Asia through its 525 kb/d Northern Gateway pipeline, with 80% of volumes targeted for Asia and the rest for California, although the California option may disappear if the state bans fuels derived from 'dirty oil,' such as oil sands.

The initial plan involved a memorandum of understanding with PetroChina to aggregate 200 kb/d of oil sands production in return for a possible 49% equity stake in the C$5.2 billion venture.

It came to an acrimonious end in mid-2007, with PetroChina refusing to extend its MOU with Enbridge and accusing the Canadian government and producers of not doing enough to support Northern Gateway and allow energy trade between Canada and China.

Enbridge CEO Pat Daniel refused to abandon an idea that had already cost about C$100 million to develop a regulatory application.

'We decided enough of this fun ... we need to have customer support,' he said.

So he embarked on frequent selling trips to Asia, pointedly excluding China, shifting his focus to potential customers in South Korea, Japan, Taiwan and Singapore.

In the process, Enbridge secured financial commitments from unidentified producers and refiners to carry the proposal through Canada's National Energy Board and pay for the initial development costs.

Daniel said Northern Gateway is now a 'broad-based, industry-wide initiative ... we offered 50% of the equity to those companies supporting the project and we've had very good uptake on that.'"

Well worth reading in full. Perhaps the story can be said to put the recent report by the Council on Foreign Relations explaining that the "well-to-wheel" carbon footprint of developing bitumen deposits is "only" 17% more than conventional oil in context--see Daily Sources 5/22 #8.

9. ICAP SHIPPING SAYS 7 SUPERTANKERS USED AS STORAGE TO UNLOAD

Alaric Nightingale at Bloomberg reports that Simon Chattrabhuti, a London-based analyst at ICAP Shipping, in an email note today said that a notice of redelivery had been issued for seven supertankers currently being used for oil storage. In late May, Frontline Ltd. estimated that as many as 60 supertankers had been chartered for oil storage.

10. SOVEREIGN DEBT ISSUES TO CLIMB PRECIPITOUSLY, MAY EXPOSE COUNTRIES FAVORING SHORT-TERM DEBT TO "ROLL-OVER" RISK

Gillian Tett at the Financial Times notes that the projected amount of debt to be issued by OECD countries this year is at $12 trillion, up from $9 trillion in 2008.

"So deep in the bowels of western [Debt Management Offices, or DMOs], some officials are now scanning the calendar and wondering how they can organize all those looming debt sales. Most governments hold auctions on particular days of the week and there are only 52 weeks in the year.

Thus, even if the DMOs cancel their summer holidays--which some will--it may be tough to schedule all these looming sales. No wonder some western government officials are starting to mumble about the risk of 'auction fatigue', or the chance that investors get so overwhelmed with these sales that they go on strike. Nor is it little surprise that some western government officials are quietly debating whether they can can dramatically expand the size of individual auctions, to get these bonds sold, without creating a market glut, or panic.

Thus far, thankfully, there is little sign of any such panic."

"[T]he average US maturity in late 2007, was just 4.7 years and will almost certainly decline further. This year, the OECD projects that no less than 70% of US issuance will be short term. That leaves the treasury market now exposed to a mild version of the same problem that plagued conduits or structured investment vehicles that relied on short-term funding in the commercial paper market: namely 'rollover risk'."

Tett also notes that a number of European countries have average debt maturities of less than five years, including Norway and Hungary. A must read.

11. U.S. UNEMPLOYMENT CLIMBS TO 9.4%, FALL IN TEMP EMPLOYMENT SLOWS, BUT 12 MO MOVING TREND STILL DOWNWARD

Peter S Goodman and Jack Healy at the New York Times report that the US lost another 345,000 jobs in May, pushing the headline unemployment rate to 9.4%.

"[W]age growth has been stagnating even as gasoline and medical costs rise, putting pressure on household finances. Wages were 3.1% higher in May than a year ago, but that growth slowed drastically this year. In April and May, average hourly wages grew just 0.1%, to a seasonally adjusted $18.54, from $18.52, according to the Labor Department. Wages for manufacturing workers fell 0.1%."

The broader U-6 unemployment rate, which includes "marginally attached" workers, rose to 16.4%. Barry Ritholtz at the Big Picture notes that the fall in temporary help has flattened out, though the year over year loss for May is of 26.9%.



Jesse's Café Américain plots a chart of the 12 month moving averages of job growth from the middle of '04:



Jesse comments: "We will get a little more optimistic when the longer term trend turns higher."

12. REGIONAL FED PREZES GETTING NERVOUS ABOUT POTENTIAL INFLATION, TRADERS SEE 67% CHANCE FOMC WILL RAISE FED FUNDS RATE IN NOV MEETING

Sudeep Reddy at Real Time Economics reports that there are signs that some Federal Reserve policy makers are becoming nervous about the potential for inflation. Atlanta Fed President Dennis Lockhart recently told Market News that the central bank must be "anticipatory" and shouldn't wait too long to tighten monetary policy. Earlier this week, Kansas City Fed President Thomas Hoenig warned of "significant" inflationary pressures.

"Mr. Lockhart has suggested that the Fed eventually could start raising rates--he says it’s not time yet--while maintaining an expansionary policy through other programs. The Federal Open Market Committee’s most recent policy statement said the federal funds rate is likely to remain at 'exceptionally low levels ... for an extended period.' The FOMC may soon be discussing what constitutes an extended period."

Susanne Walker and Dakin Campbell at Bloomberg report that US treasuries fell, driving two year yields to an eight month high, on speculation that the FOMC will raise rates later this year.

"Traders see a 67% chance the Fed will raise its target rate for overnight loans between banks at its November policy meeting. The bets increased from 25% a week ago, according to futures traded on the Chicago Board of Trade. 88% of traders see no change in the rate at the central bank’s meeting this month."

Daily Sources 12/15

1. Platts reports that the Centre for Global Energy Studies--a petroleum consulting outfit founded by former Saudi oil minister Zaki Yamani--released a report today arguing that were OPEC to cut supply by one million barrels, and fully implement the allocation reduction, that would be enough to arrest the fall in oil prices in 2009. Full compliance would likely provide the foundation for a rise in price, the report argues, but not to $75/b levels. However, the report also argues, critically:

"A bigger output cut, in pursuit of much higher prices, risks undermining the already fragile global economy, sending oil demand down further and undermining the very price rally it was meant to stimulate."

CGES also expects global oil demand to fall by 500 kb/d next year. In a related story, Jim Bai at Reuters reports that Chinese apparent oil demand fell by 2.3% year over year in November.



China exported a little over 79.6 kb/d of gasoline in the month of November. It imported no gasoline in November. Platts reports that Chinese refiners have cut throughput further in December after a 13% decrease in throughput November. Managers told reporters that Sinopec and PetroChina expected to reduce throughput by 810,000 metric tonnes in December combined, or about 191.5 kb/d. Total throughput by the two refiners--and Sinopec affiliates--is expected to be 24.73 million tonnes of crude in December, or 5.84 mb/d.

Nadia Rodova at Platts reports that Peter O'Brien, Vice President at Rosneft, told journalists today that the company--which expects no natural decline in production in 2009--stands ready to implement any cut coordinated by Moscow with OPEC. Rosneft is expected to negotiate a $1-1.5 billion bridge loan from Western banks in early 2009 to refinance its debts. Jacob Gronholt-Pedersen at Dow Jones reports that Vagit Alekperov, CEO of Lukoil, said today that OPEC expects Moscow to reduce production by between 200-300 kb/d. Such a cut itself may not be regarded as part of an overall OPEC production cut, because some in the market have already priced in a 400 kb/d decline in Russian production for 2009.

For Russia, supporting crude prices should have the effect of supporting the price of the ruble, which has been falling precipitously of late. William Mauldin and Alex Nicholson at Bloomberg report that Bank Rossii has widened the rate at which the ruble is allowed to trade against a basket of dollars and rubles for the second time in a week by 1%. (The currency basket is 55% dollars and 45% euros.) Traditional austerity measures to defend the currency appear to be unpopular in Moscow, especially given the results of the first privatization efforts after the fall of the Soviet Union. In that context, there is a piece in the Economist pointing out that several developing countries are asking themselves whether they ought to be pursuing counter-cyclical policies to shore up demand at the expense of their currencies. Doing so reduces international appetite for new debt, but reduces the country's current debt burden.

Dani Rodrik, professor of Political Economy at Harvard's Kennedy School of Government, published an article Friday arguing that developing nations should institute a tax on currency exchanges, "at a low enough level – say, 0.25% – [so that] such a tax would have little adverse effect on the global economy while raising considerable revenue" ... and discourage excessive speculation or capital flows profiting from tiny differences in currency exchanges. (Rodrik also argues that developing nations should lobby for lending rules by international government creditors which correctly value redundancies and subsidies designed to support critical stability arenas, like food security, are compatible with rational international credit policies. I couldn't agree more.)

And, as recrimination grows, Ecuador has, according to Lester Pimentel and Stephan Kueffner at Bloomberg, decided to default on its national debt.

"[President] Correa, a 45-year-old economist who won election in 2006 promising to spend on the poor before paying debt, said Dec. 13 that his government is preparing to defeat legal challenges from 'vultures.' The day before, he ordered officials not to make the $30.6 million interest payment due today on $510 million of 12 percent bonds maturing in 2012.

The bonds were 'always structured for the benefit of the creditors, trampling on the national interests, dignity and sovereignty of our countries,' Correa told reporters in Guayaquil. 'It is now time to bring in justice and dignity.'

Ecuador, of course, is a member of OPEC, and the fall in the price of crude has hurt it.

In a related piece, Kenneth Rogoff, Professor of Economics and Public Policy at Harvard University and former chief economist for the IMF, writes that inflationary policy is the only way forward for the Project Syndicate. This as Yves Smith approvingly quotes in full a post by "London Banker", a former central banker who blogs, which argues that deflation is now inevitable. Also, Jonathan House at Real Time Economics reports that Dominique Strauss-Kahn, head of the IMF, said in a speech in Madrid today that "Actions taken so far aren’t enough. We are facing an unprecedented decline to output."

"Strauss Kahn said governments need to take measures to support financial markets - by, for example, recapitalizing banks - and they need to ramp up spending to stimulate domestic demand.

The IMF recently recommended a fiscal stimulus effort equivalent to 2% of world GDP. Strauss-Kahn said some countries face external financial difficulties or have high debt burdens that will constrain their efforts."

(Strauss-Kahn also encouraged member countries to increase their contributions to the fund, saying that he was not sure whether in 6 months' time there would be enough to finance financial stability projects.) And Michael Hudson and Jeffrey Sommers in a piece in Counterpunch calling for the end of the Washington Consensus argue:

"Today’s desperate U.S. attempt to re-inflate post-crash prices cannot cure the bad-debt problem. Foreign attempts to do this will merely aid foreign bankers and financial investors, not the domestic economy. Countries need to invest in their real economy, to raise productivity and wages. Governments must punish speculation and capital gains that merely reflect asset-price inflation, not real value. Otherwise, the real economy’s productive powers and living standards will be impaired and, in the neoliberal model, loaded down with debt."

All four of the pieces just mentioned are well-worth reading in their entirety.

The argument with Germany about coordinating a European stimulus package seems, from my limited experience in monetary economics, to be part of the same agon as the pro and cons of counter-cyclical economic policies for developing nations. Paul Krugman, in an op-ed in today's New York Times, argues that there is little time for Germany to join the stimulus crowd. In his blog Krugman provides the math behind his assumptions, arguing that a coordinated stimulus program has a significantly higher multiplier effect upon GDP and much more bang for the euro. Wolfgang Münchau in the Financial Times argues that the global trade slowdown will hit Germany especially hard, and that therefore to maintain an independent stimulus package of only 0.5% of GDP is likely to hurt. But he also says that household consumption is providing the economy with some support, and Eurointelligence reports that in a meeting with industrial representatives, Chancellor Merkel was promised no layoffs until the general elections, which I believe is scheduled to take place in September 2009. Münchau goes on to say,

"The electoral timetable in the US has delayed an effective policy response and I fear that the new economics team of President-elect Barack Obama will be too much focused on domestic stimulus and not enough on global co-ordination. The Europeans and Asians, meanwhile, are unbelievably complacent. Even a US stimulus at 10 per cent of GDP will not miraculously pull the world economy out of recession. It will most likely focus on domestic infrastructure investment rather than private consumption. US households, meanwhile, will continue to adjust their balance sheets, which will take some time."

Again, I am not competent to give intelligent criticism of these analyses, but have some, I hope, pertinent comments.

It is clear that the US response will be delayed until next year, this puts the major exporting countries with large current account balances in a dilemma, because it is not clear where the dollar will go. (See arguments about deflation versus inflation. I suspect that if dollar denominated debts have mostly been unwound, it will not require further stimulus to push devaluation of the dollar versus international currencies.) If Beijing wants to support its economy via exports, it will want to buy dollars to maintain US purchasing power--as long as the stimulus programs result in US and developed world inflation. This is probably true of Germany and Japan as well. If we see dollar deflation despite a stimulus, then Beijing might want to unwind its position in US debt as quickly as it can before an inevitable default. In any case, would it be irrational in a US dollar deflationary spiral for Beijing to provide extra domestic stimulus, as exports should recover?

Moscow clearly wants to support its currency in order to avoid defaults on dollar-denominated debts, but does not want to institute pro-cyclical policies--such as high interest rates on government debt--because that would slow down growth even further, likely causing political instability. (Their last experience with default was ugly and the source of many of the political outcomes DC is so unhappy with today.) This is probably true of every member of OPEC that has not pegged its currency to the dollar. (And, perhaps there are some OPEC members who have pegged to the dollar which would like to see their dollar or domestic currency denominated debt burden eased as well versus crude.) That said, OPEC is almost certain to cut, by at least one million barrels, with a supporting coordinated cut coming from Russia. They may overshoot--and further cripple a hobbling global economy--but their policy will be to inflate the dollar to support the financing of their current obligations. Beijing and Berlin may want to see how OPEC's decisions will pan out and what the eventual stimulus package from the Obama Administration will be before they decide where to commit the bulk of their available financial resources and fiscal policy options.

2. Kevin Hamlin and Li Yanping at Bloomberg write that the Chinese statistics bureau report that industrial production grew by 5.4% in November, a rate much lower than seen in a long time. Analysts worry that if GDP grows by less than an annual rate of 8% in China, there will not be enough job growth in order to absorb new entries to the labor market, which could result in social unrest.

3. Simeon Djankov at the Crisis Talk blog hosted by the International Finance Corporation of the World Bank writes that export growth nations are seeing steeper falls in trade than China. In November, Chile's exports fell at an annual rate of 19.1%, South Korea's fell by 18.3%, Taiwan's fell 21.6%, and Isreal's fell 17%. Chile's imports fell by an annual rate of 14%, Korea's fell by 14.6%, Taiwan's fell by 11.3%, and Vietnam's fell by 7.8%. Global air cargo in October fell by 8% year-over-year, "with a 12% decline in Latin America, 11% decline in East Asia, and 5.4% in Europe."

4. Bertrand Benoit and James Wilson of the Financial Times report that the German Parliament's Financial Committee has written a letter to the Finance Minister--Peer Steinbrück--stating that the €400 billion fund set up to guarantee bank debt has not resulted in the resumption of lending, and thus failed.

5. Bettina Wassener at the New York Times reports that the Bank of Japan's quarterly Tankan survey of manufacturer sentiment was released Monday showing a fall in the index from -3 to -24. "The deterioration in sentiment was in line with what economists had expected."

6. Joellen Perry at Real Time Economics reported Friday that the European Central Bank is considering additional ways to get credit flowing again.

"One idea the ECB would consider is a clearinghouse to guarantee the short-term loans euro-zone banks make to one another. How such a clearinghouse might work remains unclear, but a working group at Germany’s central bank is studying whether the central bank itself or other authorities could guarantee such loans for terms of three months or less.

The ECB’s main goal: ensuring that any measures taken to guarantee bank-to-bank loans aren’t national."

The ECB is also considering directly purchasing corporate or government debt. Of course, given 15 different countries with corporations with different financing traditions, the question is which corporations, which debt instruments, and/or whose government debt? Worth reading in full.

7. In a press release dated Friday, December 12, WTO Director-General Pascal Lamy said that in his judgment there was not sufficient political will to spend the political capital required for further trade openings at this time to justify a ministerial meeting next week.

8. Keith Wallis at Lloyd's List reports that Taiwanese shipping companies launched direct services to mainland China today.

"Five vessels, one from [Evergreen Marine, Yang Ming Marine, Wan Hai Lines, Taiwan Navigation, and Huarong Marine] each, took part in the historical reconnection of direct links across the Taiwan Strait that were severed in 1949 when the communists took control of China and nationalists fled to Taiwan."

Mark McDonald at the New York Times reports on the establishiment of direct air routes as well:

"As many as 108 direct passenger charters are scheduled to operate each week across the strait, state media reported Monday, as well as 60 direct cargo flights a month. The flights will come and go from 21 cities on the mainland and 8 cities in Taiwan."

9. Mohamed Olad Hassan at the Associated Press reports that Somalia's President fired the Prime Minister Sunday, accusing him of ""corruption, inefficiency and treason." The Prime Minister will contest his ouster as unconstitutional as Islamist insurgents assert their control over most of the country. Colum Lynch at the Washington Post reports that the Bush Administration will launch an effort this week in the UN to garner international backing for a small peacekeeping force in Somalia, in an effort to put down piracy and prevent the assumption of control of the country by Islamists. The proposed group would be restricted to the area around Mogadishu in southern Somalia and has support from China as well as some key African nations like South Africa. However, it seems to me that the notion of putting yourself in between several competing factions which have support in the country, while attempting to arrest the growth of all, is unlikely to have much success. Perhaps quietly backing an Islamist group other than al-Shabaab--which has the support of the international Islamist community--would be a way of tamping down international Islamist ambitions in the country while re-establishing law and order. The Post article is worth reading in full.

10. Richard A. Oppel Jr. and Salman Masood at the New York Times report that the Prime Minister of the United Kingdom, Gordon Brown, shuttled from India to Pakistan in efforts to try and reduce the tensions between the countries in the wake of the Mumbai attacks.

"Three-fourths of serious terrorist plots investigated in Britain have links to Al Qaeda in Pakistan, Mr. Brown said at a news conference with Pakistan’s president, Asif Ali Zardari, in Islamabad. 'The time has come for action, and not words' from Pakistan, he said."

11. Deborah Haynes at the London Times reports that the UK will withdraw its troops by July 31, 2009. The Times characterized this deal as humiliating because their presence was negotiated with the Iraqi government en bloc with other relatively smaller armed force contributors, such as Romania, El Salvador and Estonia. (On Thursday the Washington Post reported that the English media was mooting rumors that the UK contingent would leave Iraq come March. See Daily Sources 12/11 #12.)

12. The Editorial Board at the Wall Street Journal praises the courage of students openly criticizing the regime in Tehran. The Journal suggests that the choice the US has is to engage these brave students or engage the regime they criticize. The problem is that the Journal presumes that the students are any less critical of the United States' role in the world than they are of their own leadership. They are not, and most are actually afraid that the American government might decide to engage with them, because they think it will de-legitimize them in their eyes of their colleagues.

13. The Baltic Dry Index appears to be rebounding slightly recently, as you can see from this one month chart:



Possible reasons for this include the rerouting of ships away from the Suez Canal and around the Cape of Good Hope--a much longer haul--and several ships being mothballed, including as use for storage for companies wanting to capture the profits of the super-contango in oil. I'd guess that a further cut in OPEC supply would have the short-term effect of reducing shipping rate indices, given less demand for tankers, but a medium-term effect of increasing them, given increases in cost of fuel. (Also, apparently higher fuel costs apparently push captains to sail more slowly, to conserve on those costs, which reduces the amount of cargo space available at any given time due to increased time at sea. An effect which would be multiplied by avoidance of the Suez Canal.)

14. Jack Healy at the New York Times reports that US industrial production fell by 0.6% in November. Estimates of industrial production for October were revised upwards to growth of 1.5% in October, from initial estimates of 1.3%. "Capacity utilization, the percentage of plants in use, fell to 75.4% from 76% in October."

Daily Sources 11/10

1. Andrew Batson at the Wall Street Journal reports that China unveiled a $586 billion stimulus plan this weekend. The sum is equal to about 16% of China's GDP in 2007. "The plan includes spending in housing, infrastructure, agriculture, health care and social welfare, and features a tax deduction for capital spending by companies." US Treasury Undersecretary for International Affairs David McCormick responded to the initiative Sunday, calling it "a welcome step." (The move to stimulate domestic demand had been recommended by various American economists, perhaps most significantly in an op-ed by the New York Times.) Chinese President Hu Jintao will be in Washington this Saturday for the G-20 summit and is expected to meet with President-elect Barack Obama at some point during his stay.

Brad Setser at Follow the Money has a post today arguing that the stimulus is a move in the right direction. He points out that large booms are often followed by big busts, and that China has been in a sustained export boom for six years. Thus, the Chinese needed to do something to offset a large export bust. Setser asks two questions. One: Is the announced stimulus package entirely new money or were already planned infrastructure expenditures part of the announced number? If it is all money on top of regular budgeted infrastructure developments, it should have an effect, he argues, if not, it will likely fall short. Two: Given that it is new money, can the stimulus be implemented quickly enough to offset the coming, large, downturn? The post is worth reading in its entirety.

These stories come on the back of an article by Leo Lewis published Saturday in the London Times that the chief economist of CLSA, an Asia specialist brokerage firm, argued that even with aggressive government action, growth in China could fall to as low as 5.5%.

"More than 70 per cent of the electricity generated in China is consumed by industry and according to reports, monthly national power output in October fell for the first time in a decade.

Traders in Singapore said it could be a slump that would have a huge negative impact on global commodity demand: ferrous and nonferrous metal-processing industries are among the heaviest consumers of electricity in China and it is their slowdown that is reflected in the drop in power usage."

Nonetheless, Julie Crust at Reuters reports that base metals are up on news of the stimulus plan. Copper jumped 9.7% on the London Metals Exchange. Nickel rose 13%, aluminum 4.1%, zinc 7.2%, lead 6.2% and tin 4.8%. The currencies of major commodity exporting countries also rose on news of the plan, with Adriana Brasileiro at Bloomberg reporting on the rise in Brazil's real and Andrea Jaramillo and Drew Benson also of Bloomberg reporting on rises in the currencies of Chile, Colombia, Argentina, and Venezuela.

2. Alexei Barrionuevo at the New York Times reports that the Brazilian President, Luiz Inácio Lula da Silva, blamed the developed world for the current financial crisis at the G20 meeting in Sao Paolo this weekend. The Brazilian delegation was at pains to urge the developed world to give the emerging markets a larger say in forthcoming international economic decisions and institutions. Many at the meeting suggested that the developed world should offer more money to the emerging economies in order to help them weather a crisis they argue originated in the developed world. In particular, India has argued that the US should be willing to shoulder more of the burden, as reported by Joshua Partlow in the Washington Post.

3. Edward Cody writes in an article published by the Washington Post Saturday that on Friday the leaders of the European Union released a statement urging the United States to implement strong regulatory measures within 100 days.

"Chief among the demands agreed on by the EU heads of state and government was tighter regulation of banking and investment markets. 'No financial institution, no market segment and no jurisdiction must escape proportionate and adequate regulation or at least oversight,' they said in a statement. The regulations must also cover rating agencies and speculative hedge funds, they added."

February 15--100 days from now--will be 26 days into Barak Obama's presidency. Cody reports that the 100 day time limit is designed to prevent the Bush Administration from passing off hard politically unpalatable choices to the Democrats.

I suspect that time limit is mostly aimed at the rest of the world, joining it in labeling the US as the cause of the problem, and demonstrating some solidarity with the notion of removing the US from its position as lynchpin in the international financial world--and signaling to Obama that his election has not changed their determination to create a more multipolar world. Obviously domestic political considerations are also in operation, and the possibility of selling to their publics the notion that the coming economic slide as the sole fault of the Americans and no doing of their own is probably very attractive. A 100 day deadline has the neat quality of being very unlikely of being met.

4. David Osler's blog at Lloyd's List has a very interesting post on how Warsaw is furious that Brussels has ruled that it must sell the Gdynia and Szczecin shipyards. Poland then must take the proceeds and "repay" the Union for illegal subsidies distributed to the two shipyards. The situation is exacerbated by French President Sarkozy's decision to take stakes in companies it regards as strategic, in order to defend them from foreign investors, looking to purchase them on the cheap. One of those companies is STX France, in which Paris has taken a 33% blocking minority, and which owns Chantiers de l’Atlantique--a major shipyard by the French port city of Nantes, the "Venice of the West." I think that Osler is right to think that the Poles will probably not let this happen and suspect they might try the "strategic industry" angle. Worth reading in full.

5. Ingrid Melander and Mark John at Reuters report that the European Union has agreed to deploy an air and sea anti-piracy force off the coast of Somalia. The force will be led from Northwood, England. Michelle Wiese Bockmann at Lloyd's List reports that the world’s leading shipping companies, "traders and charterers will gather in London for an urgent meeting on November 19 to discuss the financial crisis enveloping the dry bulk shipping industry." Shipping rates have fallen sharply since the commodity peak seen in June-July, "spot rates for capesize bulk carriers are around $4,500 per day -- less than half the accepted breakeven cost of around $12,000-$13,000 per day."

6. Anna Shiryaevskaya at Platts reports that the five largest oil and gas companies in Russia officially joined an exploration and production consortium for Venezuela on Saturady. Rosneft President Sergei Bogdanchikov told reporters over the weekend that Rosneft, Gazprom, Lukoil, TNK-BP and Surgutneftegaz will each take 20% and that the company will have a rotating operatorship. Rosneft has sent a request to Caracas for rights to develop the Delta Centro block in Orinoco province, a concession with much lighter oil than most of the Orinoco belt and which wouldn't require a bitumen upgrader. PdVSA will join the consortium in another vehicle before any operations begin.

7. The Wall Street Journal's Mary Anastasia O'Grady has a piece on the Miami trial of Venezuelan businessman Franklin Durán and what it has revealed about Chavez's foreign policy. Evidently Chavez made available considerable sums to Peronist candidate Cristina Kirchner during the 2007 presidential campaign in Argentina. The Venezuelan ambassador to Bolivia is alleged to have said he had $100 million to spend on that country in support of Evo Morales. In El Salvador, the FLMN receives petroleum products at large discount to market from PdVSA and then sells it at a small discount, capturing a large profit and filling its campaign coffers. Venezuela is evidently supplying 60-70% of Nicaragua's crude oil requirements via a scheme whereby Nicaragua pays for half of the shipments directly, and the other half via a 25 year loan from Caracas on very favorable terms. Since the main oil company in Nicaragua is the state-owned company, Petronic, Sandanista party officials control the revenues. What O'Grady omits from this story is that the program allowing the governments of El Salvador and Nicaragua to profit so handsomely is a joint program with Mexico--a close ally of the United States of course--under the San Jose accord. Both countries provide crude under favorable terms to Barbados, Belize, Costa Rica, El Salvador, Guatemala, Haiti, Honduras, Jamaica, Nicaragua, Panama and the Dominican Republic.(1) Still, the direct involvement in its neighbors' internal politics is an embarrassing revelation for Chavez--anti-imperialist rhetoric doesn't jive so well with overseas political slush funds--and O'Grady's piece is well-worth reading in full.

8. Michelle Faul at the Associated Press reports that Angolan troops have reportedly joined Congolese troops in the defense of the city of Goma in eastern Congo against the rebels. As the map below demonstrates, Goma is quite far from the Angolan/Congo border, and large troop movements from Angola to Goma would represent a serious logistical feat demonstrating very strong resolve to support Kinshasa.



"The involvement of Angolans could spread the conflict beyond Congo's borders. Neighboring Rwanda probably would consider Angolan troops a provocation. Rwanda's government is accused of supporting the Congolese rebels."

9. Pakistan's Online International News Network reports that Saudi Arabia guaranteed six months of oil supplies to Islamabad recently. Prime Minister Yousuf Raza Gilani told reporters that he hoped that the guarantee added to additional economic aid promised by the "friends of Pakistan" group meant that Pakistan would not be forced to go to the IMF for aid. The Prime Minister also announced that the government will fix wheat prices to ensure profitable planting. However, Sahar Ahmed at Reuters reports that Pakistani government officials are giving reporters an idea of the potential IMF deal, which would include a $15 - 20 billion loan for two years against a rise in the discount rate of at least 1 to 1.5%.

10. Aresu Eqbali at Platts reports that the Iranian oil minister, Gholamhossein Nozari, told reporters there was a "probability that we will have another meeting before December," if oil continues its downward trajectory. The next OPEC meeting is scheduled for December 17.

(1) EIA country analysis of Nicaragua: Discounted Oil Programs.

Daily Sources 9/30

1. Ethan Bronner at the New York Times has the story that the former Prime Minister of Israel, Ehud Olmert, said in an interview that Israel must withdraw from the West Bank and East Jerusalem if it wants peace with the Palestinians. He also rejected as “megalomania” the notion that Israel would or even should attack Iran on its own in order to disrupt its nuclear program.

2. AFP has the story that France and India have signed a major nuclear deal by which France would eventually be able to sell nuclear reactors to Delhi. Looks like the American-led deal is making progress with other members of the Nuclear Suppliers Group.

3. Archana Chaudhary at Bloomberg reports that the Indian Oil Company has predicted that their oil import costs will grow to $45 billion this year. India's Oil Secretary R.S. Pandey said in an interview September 25 that Indian Oil and its state-run counterparts may lose $37 billion in 2008 from the selling fuels at prices fixed by the government in order to reduce the pain to consumers. The company is paying for the outlay via short term foreign currency loans.

4. Edward Cody and Mary Jordan at the Washington Post report that the financial crisis is spreading across the world's markets. Markets in Asia continued to fall after they opened Tuesday morning. The European Central Bank President met with several European finance ministers on Sunday to discuss relaxing the rules governing bank lending in the EU. Latin America is expected to suffer from credit shortages soon, given that "Foreign banks account for 80% of the financial system in Mexico, 51% in Peru, 29% in Chile and 22% in Brazil." "Nicolas Véron, a research fellow at the Bruegel center in Brussels, said concern has risen about strains in the banking system spreading to the Baltic countries and Eastern Europe, where several nations also have experienced property bubbles." Useful survey of the situation. The two journalists also have the story on the French and Belgian authorities have stepping in to rescue Dexia today, a Franco-Belgian bank. The two governments injected $9.2 billion into the bank, which was facing a run on its assets as its stock collapsed by 30% yesterday. (Much of the analysis is identical to the first article linked.)

5. Wolfgang Reuter and Thomas Tuma at Spiegel published an interview with German Finance Minister Peer Steinbrück yesterday which carries more details on the remarks reported on earlier. Among other revelations, the G7 evidently discussed the possibility of world wide market meltdown should AIG fail, and prevailed upon American fiscal authorities to save them.

SPIEGEL: The German government is unwilling to participate in America's $700 billion bailout package. Is this your final word?
Steinbrück: I see neither the need for nor the possibility of taking on the responsibility for American banks. Besides, our situation is more robust.

Prisoner's dilemma anyone?

6. Blaine Harden at the Washington Post reports that Japan has fallen into a recession. The Nikkei stock average fell 4.12% and unemployment rose to a two-year high of 4.2%. Car shipments to the US are down 30%. As I noted yesterday, Japan reported a trade deficit in the second quarter. More evidence: Takeo Kumagai at Platts reports that Japanese gasoline demand was down 14% in August year over year. August gasoline consumption in Japan was 4,689,280 kl or 1.29 mb/d, down from about 1.5 mb/d in August 2007.

7. Ariana Eunjung Cha at the Washington Post reports that the Chinese are anxiously watching the American response as they watch their orders shrink drastically. One anecdote has orders from the US to a shipping company dropping by 40%.

"In the U.S., the workers at the gold-chip companies are carrying out their desks in boxes," Xiong [Ming, a marketing manager at Dragontrade Logistics, said. "But in China, the jobs are still here because they are more protected."

8. Dave Ernsberger at Platts blog The Barrel speaks of the erosion of faith in the oil futures markets: "You can see that people are losing faith in the ability of free markets to deliver what we all look to the markets to give: a clear and rational valuation." And people would be right to be skeptical, but I do not think we should blame the futures markets for the extremely opaque, fragmented, and politically distorted nature of the business underlying the contract. Getting rid of the futures markets wouldn't change the fact that traders must guess at all and sundry variables given the opaque nature of national oil companies producing more than 70% of the resource. Of course, the end of the futures markets would be a boon to Platts, returning to them the role of price discovery.

9. The Associated Press published excerpts of an interview with Iraqi Prime Minster Nouri al-Maliki Monday, where he said that Iraq wanted to assert more of its sovereignty going forward (h/t informed comment). In particular, he wants American servicemen who are not specifically acting under orders and not inside official US military encampments to be subject to the jurisdiction of the Iraqi courts. He also argued that the most effective way that Iraq can help with the American financial crisis is to bear more of the burden of policing the country.

10. Platts has the story that Eni will give Gazprom a stake in Libya's Elephant field in return for Eni and Gazprom jointly developing Arcticgaz, a former Yukos subsidiary. By Eni taking a piece of a former Yukos property they put another barrier in the way of any eventual recovery of its assets by its former shareholders, much less Michal Khodorovsky. The Elephant field produced about 140 kb/d last year.

11. Topnews has the story that the Pakistani government has hiked the minimum purchase price of wheat by 45% in an attempt to boost domestic production there. Pakistan has been wracked by food riots in the last year due to the soaring inflation in basic food commodities. The government's actions also were designed to ensure an ample supply of urea and fertilizers as well as fuel for generators given frequent brownouts which shut down electric water pumps.

12. Erin Voegele at Ethanol Producer Magazine reported that a bill designed to increase energy cooperation in the Western Hemisphere and in particular between Brazil and the United States was approved by the Senate Foreign Relations Committee on September 23. The bill was sponsored by Richard Lugar (R-IN) and directs the Secretary of State to work with Brazil and other nations to accelerate the development of biofuels production, research, and infrastructure.

13. The Chicago Climate Exchange (CCX) on September 25 announced the opening of the Tainjin Climate Exchange (TCX) not far from Beijing. TCX is a joint venture of a subsidiary of the China National Petroleum Corporation (CNPC), CCX, and the city of Tainjin. TCX will design carbon trading instruments by which the Chinese government hopes to reduce sulphur oxide emissions and water pollutants as per the 11th Five Year Plan.