Because it's Funny

By Ross MacDonald, courtesy of Vanity Fair:



Maybe a little too close to home, actually.

Daily Sources 2/5

1. Julia Werdigier at the New York Times reports that the Bank of England cut the benchmark lending rate by 0.5% to 1% today. The European Central Bank decided to leave its benchmark lending rate unchanged at 2%.

2. Shai Oster at the China Journal reports that power demand in China is down--the China Electricity Council (CEC) announced yesterday that power consumption grew by 5.23% in 2008, down from 14.8% rate of growth seen in 2007. The CEC expects the growth rate of power consumption to continue to fall in 2009. The electricity grid has been under extreme stress over the last several years, often resulting in brownouts--the let up in demand growth probably signals a tapering off of such difficulties.

"[Beijing] plans to spend just under $85 billion on power projects this year, part of government economic stimulus plans. That is a little bit more than was spent last year.

Spending is likely to focus more on upgrading the national power grid, building an electricity superhighway of high voltage lines to bypass a lot of the aging infrastructure that has bottlenecked power supplies in the past."

Meanwhile, Xinhua Economic News reported today that China will begin the construction of eight more strategic petroleum reserves this year, after the four constructed in 2008 start operations. China's current SPR storage capacity stands at about 136 million barrels or 42.5 days of import demand. The State Council in 2007 suggested that the government ought plan to build 120 days of import demand storage capacity.

3. Keith Johnson at Environmental Capital reports that Sweden has decided to overturn it's old ban on nuclear power, announcing a slew of new nuclear power plant construction plans.

"That’s a big change, because Sweden was an early and ardent opponent of nuclear power, banning new reactors in 1980 even though nuclear power provides about half the country’s electricity. Sweden’s center-right government, which like the rest of the country had been long divided on the nuclear question, just announced an end to the official policy of phasing out nuclear power when the country’s ten reactors reach the end of their life. Most importantly, the government reversed its 2006 campaign pledge not to build any new reactors and ended a ban on nuclear-power research."

4. The IMF announced on Monday that it will seek to boost its capital available for lending to governments to $500 billion from $250 billion.

5. Arijit Ghosh and Shanthy Nambiar at Bloomberg report that Bank Indonesia is seeking to expand its currency swap arrangement with Japan given a fall in its currency reserves of $10 billion since July. This comes as Jakarta negotiates with Tokyo regarding on-going natural gas contracts. (see Daily Sources 2/4 #8.) Indonesia has similar agreements with China and South Korea for $3 billion each under the Chiang Mai Initiative and may well seek further assistance from another, unnamed, country.

"Finance ministers from Japan, China, South Korea and 10 Southeast Asian nations plan to meet on Feb. 22 this month to expand a deal under the Chiang Mai Initiative to boost the pool of foreign-exchange reserves to $120 billion to help defend their currencies."

(see Daily Sources 1/30 #4.)

6. Elisabeth Bumiller and Ellen Barry at the New York Times report that Kyrgyz president, Kurmanbek Bakiyev, announced in Moscow Tuesday that he will ask Parliament to close the US base at Manas.

"About 15,000 personnel and 500 tons of cargo pass through Manas each month. The base is also the home of large tanker aircraft that are used for in-air refueling of fighter planes on combat missions over Afghanistan."

Ms. Bumiller and Barry report that the Kyrgyz Parliament is set to consider the measure next week. However, the State Department's told the media yesterday that no official communication regard the base has been received.

"QUESTION: ... Have the Kyrgyz told you that you have to leave?

MR. WOOD: Look, we have not received any formal communication from the Kyrgyz authorities of any decision to close the base. But as I initially said, we’re having discussions with the Kyrgyz about this, and we’ll continue to do so."

On Tuesday Bakiyev announced that he had secured $150 million in aid from Moscow, the forgiveness of $180 million in debt, and $2 billion in loans. That is a tremendous amount of money for a country with an estimated GDP of $5.05 billion in 2008 (at nominal exchange rates.) The US reportedly provides Bishkek about $150 million in "assistance and compensation" annually, but only "a portion" of that money goes to the government. An anonymous State Department official interviewed by Ms. Bumiller and Barry said that, "fundamentally it comes to money, and the Russians are trying to buy us out."

7. Ijaz Kakakhel at the Pakistan Daily Times reports that an unnamed energy analyst forecast that the shortfall in natural gas would increase to 0.507 billion cubic feet/day (bcf/d) in 2010 as indigenous production is expected to be 4.309 bcf/d over expected demand of 4.816 bcf/d. Kakakhel quotes analysts as suggesting that the natural gas situation means that plans for the Iran-Pakistan-India pipeline ought to be finalized as quickly as possible. However, Tehran contract offers so far have not seemed reasonable to Islamabad or New Delhi. (see Daily Sources 1/19 #12.)

8. Marianne Stigset and Diana Kinch at Bloomberg report that Petrobras CEO Jose Gabrielli told journalists that the company had made no decision as to whether it would tap the equity markets as it seeks financing for its five year plan. Valor Economico had issued a note to investors that Petrobras might sell as much as 45 billion reals ($19.5 billion) of stock. Yesterday Petrobas sold $1.5 billion in 10 year bonds, a week after saying that debt was too expensive. (see Daily Sources 2/4 #12.) Meanwhile, Phaedra Friend at Rigzone reports that Petrobras confirmed it will begin the first phase of the development of the Tupi field in March--long term testing. The field is thought to hold between 5 and 8 billion barrels of recoverable oil equivalent. "Tupi is Brazil’s largest discovery to date, located in block BM-S-11 in the Santos Basin, 155 miles (250 kilometers) from the southern coast of Rio de Janeiro."



Peak production is expected to be about 200 kb/d of oil equivalent, sometime in the next 10 to 15 years. The Brazilian government indicated today that it had approved the five year plan.

9. Eric Watkins at the Oil & Gas Journal reports that in a visit to Lima by Algerian oil minister Chakib Khelil said that Sonatrach will join Petroperu in hydrocarbon exploration and production activities.

10. Courtney Schlisserman and Timothy R. Homan at Bloomberg report that first time unemployment claims rose to 626,000 for the week ended January 31. The total number of people collecting unemployment now stands at 4.788 million. The Bureau of Labor Statistics will announce the official unemployment totals tomorrow. The Associated Press reported that the Commerce Department announced today that factory orders fell by 3.9% in December. For the year of 2008 factory orders increased at a rate of 0.4%.

Daily Sources 2/4

1. Keiko Ujikane and Kyoko Shimodoi at Bloomberg report that Makoto Utsumi, a former vice finance minister for Japan, hinted in an interview last week in Tokyo that the G-7 was likely to reinstate calls for the renminbi to trade more freely in their meeting in Rome next week.

"Finance ministers and central bankers from the G-7 nations gather on Feb. 14 in Rome. In April, the group said they 'encourage' further appreciation of the yuan, language that was omitted an from October statement."

2. Eurointelligence reports that the EU has warned the US that it will pursue legal remedies should the buy American provisions of the stimulus bill become law.

3. Eurointelligence reports that Paris has decided to offer unlimited guarantees for exports to China, India and Brazil. The guarantees act as partial or full insurance against payment default on the import contract. Though Eurointelligence has a snarky take on the move, it occurs to me that if letters of credit have become difficult to obtain in the shipping industry (see Daily Sources 1/8 # 20 for a recent indication that this is the case), then these guarantees might represent a reasonable way to resurrect trade being put on hold due soley to tight credit requirements being driven mostly by the liquidity concerns of financial institutions. (Export guarantees were removed for exports to Russia, Nigeria and Morocco.)

4. Edward Hugh has a long post on spiking unemployment and falling consumption in Spain at Fistful of Euros. Courtesy of Hugh:



Hugh provides a slew of data demonstrating that the downturn in Spain will be long and deep, but that Spanish consumers still expect inflation. He concludes that it is likely to enter a deflationary period more intense than was seen in Japan.

"When [Spain’s Economy Secretary David] Vergara was asked about whether falling inflation would make it more likely that the European Central Bank would cut rates at its meeting next week, he replied: 'We are convinced the ECB will take all available data into consideration and act accordingly.' But the point is, if we are entering deflation here, and looking at the rate of contraction in the economy, which I am forecasting will be in the region of 5% of GDP this year, we certainly are. And Spanish deflation is likely to be much deeper than anything Japan has experienced, due to the severity of the contraction, which means that what we should be talking about is not simply a half point, or three quarter point, trimming in the ECB repo rate, what we should be asking for is the immediate introduction of Quantitative Easing, but Spains leaders are a long, long way from accepting this reality, and when they do finally accept it it will, unfortunately be too late to find any kind of rapid exit strategy. The issue is expectations. Spanish people still have inflationary expectations, but this will turn, and expectations will change to the anticipation of price decreases, postponement of consumption, and when we do reach this point it will be the devils own work to get them out of that pit."

Worth reading in full, though quite long.

5. The AP reports that Bulgarian foreign minister Ivailo Kalfin said in a TV interview today that Sofia wants to renegotiate its natural gas contracts with Gazprom to reduce the number of intermediaries which deliver gas to the country to one from three. The interview was given just prior to leaving on a state visit to Moscow led by Bulgarian president Georgi Parvanov.

6. Candace Rondeaux at the Washington Post reports that the Taliban has destroyed an iron bridge near Peshawar, effectively shutting off the main supply line to NATO forces being employed by US quartermasters. Marla Dial at Stratfor has a podcast reporting that US General Craddock said Monday that NATO member states were free to discuss opening supply routes for forces in Afghanistan with Iran. (Registration required.) Prior the primary alternative supply route under discussion was via Russia, through Kazakhstan, to Uzbekistan, and onwards Afghanistan. (see Daily Sources 1/21 #1) Meanwhile, George Friedman, the CEO of Stratfor, has an op ed in the New York Times which frames the geostrategic question of supply in terms of Moscow's probable unwillingness to permit supply through its borders without some sort of assurance that NATO will not expand further in Eastern Europe. What he leaves unanswered is a) why it is in US--or NATO--interests to expand NATO and b) why any such interests trump the clear US and NATO interest in integrating Moscow into its defensive framework. That said, it is interesting that some advocates of rapprochement with Tehran have picked up this meme of Iran being a potentially critical partner in resisting Russian encroachment in Central Asia. I personally think that concern is overblown, given that Russian demographics will undermine, on their own, any truly expansionist policy--though certainly Moscow will try and strengthen its influence in the region. It seems to me that the regional balance of power is being slowly upset from other directions, even if with less bluster, and as a result of historical trends as opposed to policy.

7. Nariman Gizitdinov at Bloomberg reports that Kazakhstan has devalued the tenge by 18%, abandoning attempts to shore up the currency. On February 2, the government agreed to bail out its largest bank--BTA--exchanging 251 billion tenge for 78% of the company's shares. Astana has reportedly offered OAO Sberban, Russia's largest bank, half of its new stake.

8. Eric Watkins at the Oil & Gas Journal reports that in a state visit to Japan, Indonesian Vice-President Jusuf Kalla has reiterated Jakarta's determination to prioritize natural gas for domestic consumption against exports.

"I have spoken to the Japan Bank for International Cooperation (JBIC) that we will help Japan (meet their gas demand) as long as (the transactions) are under a win-win solution," Kalla said.

"We need gas for domestic consumption, but we also need to export gas for foreign exchange reserves," said Kalla who did not detail Indonesia's plans to export gas to Japan this year."

Jakarta wants to utilize gas for domestic power consumption in part due to environmental concerns, but largely due to a desire to export crude oil as opposed to natural gas. Oil is currently a considerable part of its power generation consumption mix, and gas can additionally be used to boost the production of oil fields via reinjection. The shift in priorities had raised alarm bells in Tokyo because they have long depended on natural gas imports from Indonesia for power generation--and because their long term contracts were originally made at what were, for the time, generous contract terms. However, the dilemma may, in part, be resolved over the course of the year by new LNG plants being commissioned, which has caused some to argue that the US will face a natural gas glut. (see Daily Sources 2/2 #11)

9. Peg Mackey and Alex Lawler at Reuters report that an OPEC source told them in an interview that OPEC may well cut another 1 mb/d in the upcoming meeting scheduled for March 15.

10. Grant Smith at Bloomberg reports that Saudi Arabia has raised the price of all crude grades for export in March.

"Saudi Arabia bolstered the cost of its Arab Light crude for US customers by $3/b to a premium of $1/b to the West Texas Intermediate benchmark. For buyers in Asia, it was increased 70 cents to a 25 cent premium to Oman and Dubai crude. In northwest Europe Arab Light was raised $1.70 to a discount of $3.75 against Brent crude."

Prices for Arabian Heavy to US customers were raised the most, by as much as $4.70/b.

11. Juan Cole at Informed Comment posts that according to statements made to the Iraqi Media Center, Prime Minister Nuri al-Maliki said, "The new US Administration has sent messages on its plans to withdraw the US forces ahead of the agreed upon schedule which is something we consider to be good." Meanwhile, Ernesto Londoño at the Washington Post reports that there have been serious allegations of election fraud committed by the Iraqi Islamic Party in Anbar province.



Voter turnout in Anbar was 42%, among the lowest in the country. The Iraqi Islamic Party currently holds 26 of 29 seats in the provincial council.

12. Elzio Barreto at the Reuters reports that Santander, JPMorgan, and HSBC have been hired to manage the sale of 10 year bonds by Petrobras to the international capital markets. On January 28, the CEO of Petrobras asserted that the cost of credit was too steep for the company to, at this stage, issue new bonds, saying "We don't need more funds." (see Daily Sources 1/28 #11)

13. Craig Whitlock at the Washington Post reports that Chancellor Merkel has strongly criticized the Pope's decision to rescind the excommunication of four bishops, given that one is a holocaust denier and doing so gives the impression that denial of the holocaust is tolerable. Merkel told reporters that, "The pope and the Vatican should clarify unambiguously that there can be no denial and that there must be positive relations with the Jewish community overall." Benedict XVI is of German descent.

14. Nick Bunkley at the New York Times reports that new vehicle sales fell by 37% in January. Hyundai and Subaru reported sales increases. Chrysler sales fell by 55%. GM sales fell by 49%; Ford: 40%; Toyota: 32%; Nissan: 30%; and Honda's sales fell by 28%.

"In general, carmakers and analysts expect sales this year of 10 million to 11 million vehicles, down from 13.2 million in 2008. Until last year, automakers had been selling about 17 million vehicles annually for nearly a decade."

For the first time last month, more cars were sold in China than in the US.

15. Phil Izzo at Real Time Economics reports that ADP released data today suggesting that the private sector lost 522,000 jobs in January. The Bureau of Labor Statistics is set to announce its unemployment data on Friday. ADP does not include public sector employment in its numbers, which is some cause of different unemployment projections from the more complete BLS reports.

16. The EIA reported today that crude stocks grew by another whopping 7.2 million barrels to 346.1 million barrels for the week ended January 30, above the historical range, but just a bit below the most recent high in 2006 of 352.6 million barrels. A Bloomberg survey of Wall Street analysts had expectations of a 3 million barrel build. Gasoline stocks built by 300 kb, are near the top of the historical range, and versus analyst expectations of a 800 kb build. Distillate stocks fell by 1.4 million barrels, but are still above the historical range. Linda Rafield at Platts reports that crude stocks at Cushing, Oklahoma, the nominal delivery point for CL contracts, grew by 832 kb to 34.335 mb. Stocks were at 17.88 million barrels above last year's levels. Taken in isolation, the news is very bearish for price.

17. Jim Tankersley at the Los Angeles Times reports that Steven Chu, Secretary of Energy, said in an interview that global warming could have dire consequences for California if it is not arrested. In the worst case scenario, 90% of the Sierra snowcap could disappear, severely cutting the supply of water to Californian cities and farms. Water shortages brought on by global warming would be seen throughout the American West and Upper West according to Dr. Chu. Worth reading in full.

Daily Sources 2/3

1. Maya Jackson Randall at Real Time Economics reports that the Federal Reserve plans to continue its dollar swap arrangements through the Fall.

"The Fed said the extension applies to the temporary reciprocal currency arrangements it has with each of the following banks: the Reserve Bank of Australia, the Banco Central do Brasil, the Bank of Canada, Denmark’s Nationalbank, the Bank of England, the European Central Bank, the Bank of Korea, the Banco de Mexico, the Reserve Bank of New Zealand, the Norges Bank, the Monetary Authority of Singapore, the Sveriges Riksbank and the Swiss National Bank.

The Fed said the Bank of Japan will consider the extension at its next monetary policy meeting."

2. Sophie Tedmanson at the London Times reports that the Reserve Bank of Australia yesterday cut its benchmark interest rate by 1% to 3.25%, the lowest in 45 years. Prime Minister Kevin Rudd also announced a new stimulus package of $42 billion to be known as the "Nation Building and Jobs plan."

"Mr. Rudd said that $28.8 billion would be invested in schools, housing and roads and a further $12.7 billion will provide cash support for lower-income families to be paid next month. This means low-income earners such as farmers, students and stay-at-home mothers will receive a one-off payment of $950."

Stimulus measures announced since September 2008 amount to $78 billion, nearly 8% of Australian GDP.

3. Keith Bradsher, the longtime China journalist for the New York Times, reports that currency flows are reversing and now moving out of China.

"In Shanghai, cash-rich Chinese companies are buying high-yield bonds issued by distressed American companies at a time when many Western investors are steering clear of bonds even from solid companies.

All over the world, Chinese companies are sending home fewer of the billions of dollars they earn from exports, parking them in overseas bank and brokerage accounts instead.

And in Hong Kong, wealthy mainlanders are turning up at jewelry stores in growing numbers seeking diamonds, big ones."

Total outflows in the fourth quarter of 2008 were as much as $240 billion. The "accumulation in China’s foreign exchange reserves plunged 74% over the course of last year" to $40.45 billion in the fourth quarter. Mostly anecdotal, but worth reading.

4. In a post Sunday on his Maverecon blog, Willem Buiter takes aim at the buy American provisions in the House version of the $819 billion stimulus plan. The prevailing theory regarding the Great Depression is that protectionist measures were responsible for deepening and lengthening the downturn. At Davos, Buiter reports that the finance ministers of the rest of the world were quick to threaten retaliation should the provision become law. But, Buiter is quick to note, protectionism is on the rise globally. Worth reading in full.

5. Niall Ferguson at the Financial Times argues that the banks must be nationalized and new banks established from their ruins. He goes on to say,

"The second step we need to take is a generalized conversion of American mortgages to lower interest rates and longer maturities. The idea of modifying mortgages appalls legal purists as a violation of the sanctity of contract. But there are times when the public interest requires us to honor the rule of law in the breach. Repeatedly during the course of the 19th century governments changed the terms of bonds that they issued through a process known as 'conversion'. A bond with a 5% coupon would simply be exchanged for one with a 3% coupon, to take account of falling market rates and prices. Such procedures were seldom stigmatized as default. Today, in the same way, we need an orderly conversion of adjustable rate mortgages to take account of the fundamentally altered financial environment."

Well worth reading. I certainly think nationalization will be more politically viable than a "bad bank"--and obviously restructuring mortgages will be politically popular generally, and have the potential benefit of improving the debt-equity ratio of a great number of people, thus potentially increasing consumption via a resurrection of disposable income. Barry Ritholtz at the Big Picture posts that he has been led to understand that Goldman Sachs representatives effectively lobbied the senior staff of Senate Banking, House Financial Services, the Joint Economic Committee late last week. Ritholtz highlights the following points of the alleged Goldman presentation:

"'- Government actions to date have prioritized interacting with banking institutions rather than directly influencing troubled asset prices;
- 'To date, banks have executed minimal de-risking, have not attracted meaningful additional common equity capital or sufficiently increased lending'; and
- 'A government program which provides non-recourse loans for asset markets should have a material impact on addressing these current challenges and could be an attractive alternative for the "aggregator bank" to explore'"

He includes a copy of the complete bullet points allegedly presented to the staffers. Both are worth reading in full.

6. Fredrik Dahl and Parisa Hafezi at Reuters report that Iran placed its first satellite in orbit today. It is a telecommunications and research satellite, but the analyst community has noted that putting a satellite in orbit requires some of the same science needed for intercontinental ballistic missiles. The launch also should have the effect of bolstering morale of the regime as well. (The launch coincides with the 30th anniversary of the Islamic Revolution in Iran.) The Reuters piece notes that Iran is the ninth country in the world to be both capable of domestically manufacturing a satellite and launching it into space. Meanwhile, Thomas Erdbrink at the Washington Post reports that in a visit to Tehran, Hamas leader Khaled Meshal was told in a Sunday meeting with the Supreme Leader, Ayatollah Ali Khamenei, that "Islamic resistance needs to be ready for every eventuality, even for another war in Gaza." Meshal is on a regional tour to drum up support for Hamas, and in a speech at Tehran University Monday thanked Iranian supporters, "Thank you for all your support--the financial, political and media and popular support which you gave to us."

7. In light of recent pronouncements by Russian US analysts Andrew Pronin and Igor Panarin about the incipient break up of the United States (see Daily Sources 12/30 #12 and Daily Sources 1/22 #5) it is interesting to see, via an anonymous comment to yesterday's post, that the New Hampshire House of Representatives State-Federal Relations and Veteran's Affairs Committee will consider a bill which would deem any act not explicitly authorized by the US Constitution as a nullification of the compact itself. HCR 6--text here--is sponsored by four GOP state representatives, was introduced on January 8, and is scheduled to be considered by the committee next on Thursday. Not likely to go anywhere, but surely will be seen as grist for the mill overseas.

8. Ben Block at the World Watch Institute reports that the The International Renewable Energy Agency (IRENA) was launched yesterday. 75 nations have signed the treaty establishing the international agency, which would be dedicated to help governments and private industry expand renewable energy installments in the developed world and assist the developing world acquire the expertise to develop domestic alternative energy industries. The agency was an initiative of Germany, Spain and Denmark, and signatories include France, India, the UAE, and Kenya, though the US, UK, Japan, Australia, and China have chosen so far to remain observers. (An official from the US Embassy in Berlin served as the US representative at the meeting.) At this stage it is difficult to see how much clout this organization could potentially hold, but an interesting development nonetheless. 25 nations will need to ratify the treaty prior to their final accession to it.

9. Lydia Polgreen at the New York Times reports that the President of Libya, Muammar el-Qaddafi, was named chairman of the African Union yesterday.

"Colonel Qaddafi is an ardent supporter of a long-held dream of transforming Africa, a collection of post-colonial fragments divided by borders that were drawn arbitrarily by Western powers, into a vast, unified state that could play a powerful role in global affairs. He has repeatedly proposed immediate unity and the establishment of a single currency, army and passport for the entire continent. He pledged Monday to bring up the issue for a vote at the African Union’s next summit meeting, in July."

Quixotic, but those member nations which would be made uncomfortable by some of Qaddafi's more explosive announcements have apparently been outvoted.

10. Rebecca Wilder at News N Economics reports that 34.6% of national home sales were sold at a loss in 2008. In the fourth quarter, 42.2% were at a loss. In 2008 as a whole, 19.9% of the houses sold were in foreclosure. Ms. Wilder drew up a graph tracking sales at a loss from the first quarter of 2004:



Worth a look.

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.