Daily Sources 2/12

1. Rebecca Wilder reports that the US Census Bureau's release today shows that world demand for US exports is shrinking dramatically, and includes a graph demonstrating the decline in the top 12 US export markets:

"This chart illustrates monthly goods (not including services) shipped to the US' top twelve export markets spanning Jan 2000 to December 2008. The obvious export plunge is underway across the US primary export markets. The top six export markets by share are Canada (20% in December), Mexico (11.3%), and China (5.4%), Japan (5.06%), the UK (4.3%), while next six biggest export markets by share are France (2.03% in December), Singapore (2.31%), Belgium (2.35%), Brazil (2.36%), the Netherlands (2.84%), Republic of Korea (2.92%), and Germany (4.25%)."

Worth a look.

2. Salman Masood at the New York Times reports that Rehman Malik, the senior security official in Pakistan's Interior Ministry, gave a televised news briefing today in which he said, "Part of the conspiracy was done in Pakistan ... and I want to assure our nation, I want to assure the international community, that we mean business." Malik indicated that six new suspects had been arrested, including "the main operator," presumably meaning the mastermind or logistical coordinator.

3. David Morgan at Reuters reports that the US is moving military "assets," including naval vessels, into areas near North Korea. This is apparently in response to Pyongyang's possible decision to test-fire another of it missiles. (h/t Galrahn at Information Dissemination.) Meanwhile, State Department acting spokesman Robert Wood in the daily press briefing yesterday seemed to suggest that deliberations over how best to negotiate with Pyongyang regarding the situation would take place via the Six Party framework meeting hosted in Moscow Thursday-Friday next week:

"MR. WOOD: I’d have to refer you to the Russians because they are chair of this Six-Party working group on – I think it’s peace and security in North Asia. But I believe it’s supposed to take place February 19 and 20, but I – we’ll be sending a team.

QUESTION: Do you know who is going to represent the U.S.?

MR. WOOD: Let me see if I’ve got anything on this. Looks like we’re sending Deputy Assistant Secretary of State Alex Arvizu, who will lead – it’s an interagency delegation. And that’s all I have.

QUESTION: And what’s on the agenda?

MR. WOOD: Well, again, I’ll refer you to the Russian Government. But again, it has to do with the Six-Party framework."

The Six Parties are the United States, South Korea, China, Japan, Russia and North Korea.

4. Marlise Simons and Neil MacFarquhar at the New York Times report that the International Criminal Court has issued a warrant for the arrest of the president of Sudan--Omar Hassan al-Bashir. This is the first time the court has ordered the arrest of a sitting head of state. The question, of course, is who, exactly, will carry out the arrest? Although the move will likely be greeted by many as a step forward for justice for the people of southern Sudan being genocided by the Janjaweed, I have to wonder about the efficacy of such a move. Clearly, al-Bashir will remain a welcome visitor to, for example, Beijing. Efforts to negotiate a working long term peace agreement between the fighting parties in Sudan will likely be complicated. That said, apparently a majority of UN Security Council members (who could order the court to suspend its proceedings) think al-Bashir is such a disingenuous interlocutor that there is little point in pursuing a negotiated solution to the ongoing conflict.

5. Jose de Cordoba at the Wall Street Journal reports that a panel of former presidents of Mexico--Ernesto Zedillo, Colombia--César Gaviria, and Brazil--Fernando Henrique Cardos--released a study which argues that the US "drug war" is pushing Latin and South American societies to the breaking point.

"The report warned that the US-style antidrug strategy was putting the region's fragile democratic institutions at risk and corrupting 'judicial systems, governments, the political system and especially the police forces.'

The report comes as drug violence is engulfing Mexico, which has become the key transit point for cocaine traffic to the US."

The panel made a series of recommendations including the decriminalization of marijuana. Obviously the second great Prohibition has been an abject failure and in effect exports instability globally. What the report does not appear to address are the constituents who benefit so hugely from the current drug policy, including, for example, the prison industry just as much as criminal cartels. Politically, ending the drug war would be a very, very big job.

6. Juan Forero at the Washington Post reports that Chávez supporters have destroyed the offices of municipal and regional offices the opposition won in recent elections, as part of an effort to thwart, apparently, their exercise of the authority of those offices. This news comes as Chávez's referendum which would allow him to run for president indefinitely is scheduled to come for a vote again this Sunday.

"In November's elections, for the first time since Chávez took power, opposition candidates scored wins in populous, economically key states and cities. In the days that followed, they began to pay the price.

In the western border state of Tachira, the government-controlled assembly refused to swear in the governor-elect, César Pérez Vivas, for two months. He has since taken office but still does not have control of the police. In Miranda state, the new governor, Henrique Capriles Radonski, saw oversight of hospitals transferred to the state.

No one, though, has faced as many obstacles as [newly elected Mayor of Greater Caracas Antonio] Ledezma, who oversees a $1.2 billion budget and four large municipal districts. Among the frustrated officials is Ángel Rangel, who oversees civil protection operations in Caracas. He said he and his staff found city vehicles, paperwork and computer files missing. And then they were ousted from their offices.

'They destroyed the building, all the contents inside. They destroyed the previous information for the last four years,' he said."

Chris Hawley at USA Today reports that goods are becoming sparse in Caracas markets--probably not due, as Hawley suggests, to a reduction in oil revenues, but perhaps as political punishment for choosing the wrong candidate.

7. Platts reports that Petrobras issued a statement today saying that it would spend $47.8 billion by 2013 on downstream projects as part of its five year plan's budget of $174.7 billion. The plan calls for the construction of six new refineries plus upgrades. The statement also said that its $1.5 10 year bond issue completed yesterday was three times oversubscribed. "The notes, which have a yield of 8.125%, were distributed to over 230 investors."

8. Muklis Ali at Reuters reports that the President of Indonesia, Susilo Bambang Yudhoyono, urged today the national oil company, Pertamina, to build refineries to cut imports of petroleum products. There have been many reports of various national and international oil firms partnering with Pertamina to build refineries, including Iran, China, and--most recently in the news--Royal Dutch Shell via an Indonesian offer made to the Dutch Prime Minister during a visit to Jakarta.

9. Bob Willis at Bloomberg reports that retails sales went up 1% in the month of January.

Daily Sources 2/11

1. Kevin Hamlin at Bloomberg reports that Chinese exports fell by an annualized rate of 17.5% in January while imports fell 43.1% as per the customs office.

"'It’s a very eye-catching trade surplus [of $39.1 billion] and people will ask how it can be so high at a time that everybody else’s economy is suffering,' said Dariusz Kowalczyk, chief investment strategist at SJS Markets Ltd in Hong Kong. 'What’s happening here is really dramatic, underscoring plunging global demand.'"

Brad Setser at Follow the Money notes that historically the correlation between Korean, Japanese, and Taiwanese exports to China and Chinese exports to the rest of the world have been tight. Given that the correlation continues, Setser and CFR colleague Paul Swartz drew up a graph demonstrating that the future looks bleak:



Setser concludes:

"In some sense, it is hard to imagine a worse combination. China’s export are falling, making China understandably reluctant to allow its currency to appreciate. But China’s trade surplus is also rising … certainly in nominal terms and quite possibly in real terms. … At a time when the world is short demand, China seems to be subtracting from global demand not adding to it."

Meanwhile, Yves Smith at Naked Capitalism speculated yesterday that the recent email response by former adviser to the People's Bank of China Yu Yongding to Bloomberg reporter questions that suggests the US should guarantee Beijing's holdings of US sovereign debt represents the government view.Yves comments:

"What is weird is this particular threat is empty. Stop buying Treasuries? Great! The dollar will tank (which is what the Fed should want, the 40% depreciation of the dollar in 1934 played a major role in reviving the US economy) which would hurt China export competitiveness (Stephen Roach, a Morgan Stanley economist who now heads their Asian operations, contends that China needs to devalue its currency. It thus needs to buy even more dollar assets to effect that).

Or this may simply be an effort to blow smoke. 'We want assurances you won't weaken the dollar because it will hurt our FX reserves.' That is one way of dismissing Tim Geither's demand that China quit manipulating its currency, and the result would be that the dollar would fall relative to the yuan.

So this broadside seems either to be a retort to US demands ('you want us to let the yuan rise? Not unless you improve the quality of the guarantees on the paper we hold') or part of a long-term effort to move towards a new currency regime (China resents the way the US has abused its reserve currency standing, and also wants a fixed price currency regime, seeing that as producing more stability, which in turn is more conducive to trade)."

Although Smith's characterization of a non-government official response to an emailed query by a wire reporter as a "demand" seems, well, a tad wound up, I think that at this moment in time there are likely more than a few governments who suspect that Beijing's putative notion of fixed currency regimes would indeed ensure more stability and thus better encourage trade.



As you can see from the graph above, many governments with currencies clearly tied to the fate of oil printed prodigious amounts in order to prevent appreciation and, so I infer, inflation. The reserves so acquired have not been enough to really halt the reverse slide, however. (This is not true of some of the currencies in the Middle East--for example the Saudi riyal--though their foreign exchange reserves must be coming under pressure, even given a shallower market. The situation appears to have been aggravated in Russia by the recipients of government largess using said largess to short the ruble.)

2. Daniel Pimlott and Peter Garnham at the Financial Times report that Bank of England governor Mervyn King said the bank will probably begin quantitative easing next month as the UK economy is in deep recession.

"He was speaking as the Bank unveiled its latest inflation report that suggested inflation will fall to 0.5% and may remain well below the Bank’s 2% target for much of 2010 and 2011."

Quantitative easing is defined a creating money with which to purchase assets. The Bank of England expects the economy to contract throughout 2009, hitting a low of -4% in the second quarter.

3. Bruno Waterfield at the UK Telegraph reports that the paper has been given access to a confidential European Commission document which was discussed by EU finance ministers yesterday warned that estimates of asset writedowns by European banks are large relative to GDP of EU member states.

"In line with the risk, and the weak performance of some EU economies compared to others, investors are demanding increasingly higher interest to lend to countries such as Italy instead of Germany. Ministers and officials fear that the process could lead to vicious spiral that threatens to tear both the euro and the EU apart."

(h/t Jesse's Café Américain.)

4. Christopher E. Smith at the Oil & Gas Journal reports that the Wintershall Chairman, Reinier Zwitserloot, told the CERA conference in Houston yesterday that the likelihood of completing the Nord Stream natural gas pipeline was 100%.

"The Nabucco pipeline could be built, Zwitserloot allowed, but the only realistic supply source is Iran. Gas from Turkmenistan is not crossing the Caspian, he said. It will go instead either to Russia or Iran. Azerbaijani supplies could reach Europe, but that is by no means certain; 'so, your choices for gas from the region are either Iraq or Iran,' Zwitserloot said.

Additional gas from Russia will have to be part of the path forward and will require additional infrastructure. 'The Yamal system is full, full, full,' said Zwitserloot. 'The system through the Ukraine is in very bad condition even without the political problems and will require large investments just to keep capacity from shrinking year by year.' Nord Stream should therefore be seen not as an alternative or bypass route but as a needed additional path for energy supplies to reach Europe, he said."

BASF oil and gas division Wintershall has a 20% stake in Nord Stream, Gazprom holds 51%, E.On Ruhrgas 20%, and NV Nederlandse Gasunie 9%.

5. Upstream Online reports that the Canadian statistics office today posted the country's first trade deficit in 33 years.

"Exports to the US--which takes around 75% of all Canada's exports--dropped by 10%.

'With the real deficit widening as well, Canada's trade sector remains a drag on economic growth,' said Derek Holt and Karen Cordes of Scotia Capital Research.

Finance Minister Jim Flaherty said the deficit was partly due to past strength of the Canadian dollar, but that recent weakness in the currency should help the situation.

'It has a lot to do with the currency,' he told reporters. 'The dollar has adjusted. It will make a difference going forward.'"

6. Garth Theunissen and Paul Okolo at Bloomberg report that interbank currency trading has halted in Nigeria after the central bank there mandated that all foreign exchanges banks are unable to sell within five days of its acquisition must be handed over to the central bank. The central bank also prohibited the banks from buying or selling currencies for more than a 1% price differential from which it auctions dollars to commercial lenders.

"Foreign exchange 'shall be for the use of customers and shall not be used for inter-bank transactions,' the central bank said in a statement on its Web site. It also prohibited banks from buying and selling foreign currency at levels diverging by more than one percent from the rate it auctions dollars to commercial lenders.

'They’ve effectively banned their interbank currency trading market,' Hugman said in a telephone interview. 'This places significant restrictions on the interbank foreign-exchange market.'"

In early December the Nigerian central bank limited sales of US dollars to $100 million from the sales being seen at that time of $800 million (see Daily Sources 12/4 #10.)

7. John Kingston at the Barrel reports that at the CERA meeting in Houston this week, analyst James Placke described the upcoming Iraqi bidding round as "very, very, onerous"--"The Iraqis set the targets, they control the operations and the companies pay the bills." Another CERA analyst, Andy Barrett, thought that 2009 Iraqi production would average around 1.9 mb/d, as against Placke's forecast of 2.3-2.4 mb/d and Platt's estimate of 2.3 mb/d.

8. Walter Pincus at the Washington Post reports that on Monday the Krygyz Parliament decided to delay voting on President Kurmanbek Bakiyev's decision to shut the Manas base until Russia provides the $450 million in aid and loans Moscow promised in a recent meeting.

9. Salman Masood at the New York Times writes that a Pakistani government report was leaked to local television networks allowed that at least 5 of the 10 gunmen in the Mumbai attacks were from Pakistan.

"But officials here have rejected India’s assertions that the assault was conceived and planned inside Pakistan. According to the television networks, the government report says that investigators have concluded that the attacks were planned in a European country and Dubai over the Internet, and that the planners used Bangladesh for logistical support."

My read is that Islamabad is working to prepare its constituents for closer cooperation with the US and India on this matter.

10. Judy Dempsey at the New York Times reports that Jaap de Hoop Scheffer--the secretary general of NATO--said today that the organization will follow international law as it pursues its new strategy of bombing poppy processing plants in order to deny the Taliban those revenues.

11. John Fund at the Wall Street Journal reports that the outgoing CIA director, Michael Hayden, has told the journalist that Mexico represents the second-largest security threat to the US after al-Qaeda. The Western world--and especially the US--exports instability by targeting supply and not consumption. The other solution is to legalize the offending drugs and regulate their production--unlikely, given the political complications, and a longer road to cutting off the export of political instability, given that the illicit drugs would remain illicit elsewhere.

12. Ethan Bronner and Isabel Kershner at the New York Times report that the election results in Israel basically indicate a draw, with some increase in leverage for the far right. Kadima (left) took the most seats so far with 28. The Likud (right) took 27. Far-right Yisrael Beitenu took 15 seats. Labor (left) took 13. The Arabs took 9. Both Kadima and Likud had indicated that they wanted to include Labor in any governing coalition, but the rise of Yisrael Beitenu suggests a sense of embattled-ness in Israel--a further radicalization.

13. Grant Smith at Bloomberg reports that the IEA today cut its forecast for 2009 oil demand by 570 kb/d to 84.7 mb/d, down 1 mb/d from 85.68 mb/d in 2008. Platts reports that the IEA expects Chinese demand growth to slow to 0.7% in 2009, forecasting demand of 7.92 mb/d in 2009 over 7.86 mb/d in 2008.

14. Shobhana Chandra at Bloomberg reports that US exports in December fell 6%, while imports fell 5.5%. The trade deficit fell 4% to $39.9 billion from November, a smaller change than most economists had expected.

15. The EIA reported today that crude stocks built by 4.7 million barrels in the week ended February 6 to 350.8 million barrels. A Bloomberg survey had analysts expecting a build of 2.75 million barrels. Though well above the historical five year average, the stocks number is still below the numbers seen in July 2007:



Gasoline stocks, however, fell by 2.6 million barrels versus Wall Street expectations of a 500 kb build. Gasoline stocks are now at about the middle of the historical range. Distillate stocks fell by 1 million barrels. Though mixed, the data, taken in isolation, should put downward pressure on prices.

Daily Sources 2/10

1. Tony Barber at the Financial Times reports that relations between EU member states are fraying given the latest bid for comparative advantage by one of its own--France's 6 billion aid package to its car industry. Mirek Topolanek, Czech prime minister and current president of the EU, reportedly said:

"If the member states continue to prefer an individualistic and protectionist approach, and if they choose to continue breaking the stability and growth pact rules, then there is a big danger of watering down the whole project."

Sarkozy had also called on French car makers to shut manufacturing plants in Eastern Europe and step up production at home. Worth reading in full. Eurointelligence reports that Le Monde has an article on Franco-German maneuvering at the Munich conference:

"... Merkel and Sarkozy met to discuss the crisis, and agreed, with Topolanek, to hold a crisis summit at the end of the month. The German apparently believe that the worst of the crisis will not come until the autumn (which is when they hold federal elections!), while the French are relatively more optimistic, believing that the crisis will end in the summer. Mr Sarkozy still favours a euro area head of government meeting, which Merkel strictly rejects. She does not want to come under pressure to authorise fiscal transfers as she heads into an election campaign. The article also says that Paris believes that the recession will be followed by a strong recovery with an upsurge in inflation, and that Paris wants the ECB to tolerate that increase in inflation, which is not acceptable for Germany."

2. Lukanyo Mnyanda at Bloomberg reports that French industrial production fell by 1.8% in December from November. In Italy, industrial production fell by 2.5% in December from November.

3. Alan Cowell at the New York Times reports that president Sarkozy of France made an unannounced visit to Baghdad today, as part of a trip to the Middle East which includes Oman, Bahrain and Kuwait.

"'We say to French companies that the time has come to return to Iraq,' Mr. Sarkozy told a news conference, according to Reuters."

4. Thomas Erdbrink at the Washington Post reports that Iranian president Mahmoud Ahmadinejad told a crowd celebrating the revolution's 30 year anniversary that

"The new US government has announced that it wants to create change and follow the path of talks. ... These talks should be held in a fair atmosphere in which there is mutual respect."

("Mutual respect" is a motif of Iranian rhetoric vis a vis the US, right up there with "Death to America.") That said, the language suggests that Tehran is open to the notion of direct talks, which is obviously in the interests of both nations. Erdbrink quotes Mohammad Marandi, head of the North American studies department at the University of Tehran, as saying,

"Iran can help the US in Iraq, Afghanistan. Pakistan is unraveling, Iran also wants security and stability in those nations. The fact that they now work separately makes it impossible to get things done."

The implication is that Iran is already trying to help stabilize the situation in both of its neighbors, but the lack of coordination and mutual suspicion is an unbridgeable complication. Though the Iranians publicly suggest that the US can gain more from them than the reverse, clearly serious instability in two neighboring countries is a much more pressing concern for Tehran than Washington, DC. The direct exposure to the mercy of events as they unfold in one is about to be seriously limited. So time is likely tight in the Iranian calculation, given a strong inclination by the current administration to unwind our military engagement in the region as quickly as possible. That said, as I have pointed out in a long analysis in April (Law and Revolution in Iran), the government's raison d'etre is that it represents a rebellion against colonial influences, for which you can read the US. Or, in the words of Ayatollah Ahmad Jannati, head of the Guardian Council:

"If pro-American tendencies come to power in Iran we have to say goodbye to everything. After all, anti-Americanism is among the main features of our Islamic state."

The Guardian Council is an assembly of twelve clerics and jurists appointed by the Supreme Leader who have the power to vet laws and election candidates.

5. Shimon Peres, the president of Israel, has an opinion piece in the Washington Post which rejects a single state solution, establishing that a two state solution is the only politically acceptable outcome for Israel. Peres argues that it is not only the only feasible solution, but also "within reach."

"The one-state solution has enough intrinsic flaws to render it no solution at all. From Israel's perspective, it is not possible for the Jewish people to accept an arrangement that signifies the end of the existence of a Jewish state. From the Palestinians' perspective, they should not be denied the opportunity to take their national destiny into their own hands."

Peres refers to Gaddafi's op ed in the Post on January 22 advocating a single state solution, or Isratine (see Daily Sources 1/22 #7), and, although he rejects the solution proffered, does welcome Gaddafi's premise that the Jews deserve a homeland. Worth reading in full.

6. Rama Lakshmi and Shaiq Hussain at the Washington Post report that the Pakistani cabinet's defense committee yesterday registered the Mumbai attacks as a crime with the police, but released a statement saying that, "without substantial evidence from India it will be exceedingly difficult to complete the investigation and proceed with the case." The defense committee also signaled that Islamabad has rejected New Delhi's demand that the suspects be extradited to India.

7. Bettina Wassener at the New York Times reports that Temasek Holdings, Singapore's sovereign wealth fund, announced today that the total value of its investment portfolio fell by 31%, or about $39 billion, between March and November last year. "Temasek’s portfolio was worth 127 billion Singapore dollars, or $85 billion, at the end of November."

8. Allan Cullison at the Wall Street Journal yesterday reported that the IMF is likely to suspend payments to Ukraine as Kiev is failing to meet the terms of the agreement.

"Faced with a cash shortage, Kiev is passing the hat around to global powers. Talks were held in Moscow last week over a $5 billion loan to help plug Ukraine's budget deficit.

Ukraine Prime Minister Yulia Tymoshenko said her government also sent letters to the US, European Union, China and Japan, and that 'Russia is ready to help with the credit agreement's signing.'

President Viktor Yushchenko criticized the talks with Moscow. 'It's a dangerous policy and poses a threat to Ukraine's national interests,' he said."

9. Steven Bodzin at Bloomberg reports that US refiner NuStar Energy LP told the media that PdVSA has canceled shipments of 1.2 million barrels of Boscan crude to its Texas refinery in February and March so as to comply with OPEC imposed supply cuts.

"Venezuela said it has cut daily output by 364,000 barrels since September to 3.01 million barrels, putting it in full compliance with the OPEC cuts. Bloomberg estimates that Venezuela reduced output by 210,000 barrels a day in the period to 2.15 million barrels. "

Boscan is an extremely heavy and sour crude with an APIº10.1 (just APIº0.1 lighter than water) and 5.4% sulfur by weight requiring very complicated refineries to produce profitable cuts of more expensive petroleum products.

10. Mark Shenk at Bloomberg reports that the EIA reduced its forecast of global oil demand to 84.7 mb/d for 2009, down 1.17 mb/d from projected global demand for 2008.

11. The University of Maryland's Program on International Policy Attitudes released the findings of a survey of perceptions of countries worldwide on February 5.

"Public opinion in Russia relative to public opinion in Europe and the US seems to be polarizing. Americans and Europeans have both grown more negative toward Russia, and Russians have become more negative toward the US, the EU, and less positive toward Germany and the UK (but not France). Russia's military action against Georgia and increasing limitations on civil rights may be affecting American and European attitudes, and US and European criticism of Russia may be affecting Russian attitudes. [Note that the polling was done before Russia's cut-off of natural gas supplies to Ukraine and parts of Europe.]

To some extent this polarizing trend seems to be appearing in relations between China and the West as well. Europeans have become more negative toward China, while the Chinese have become more negative toward the US (negative views have risen from 46% to 58%), the EU (16% to 28%), and France (positive views dropped from 64% to 44%--perhaps in reaction to French demonstrations regarding the Tibet issue).

However, Chinese views of the UK have grown more positive (rising from 56% to 67%), as have views of Germany (58% to 65%). And Americans have not grown more negative toward China, with negative views essentially unchanged at 52 per cent.

The US for the first time since 2005 has surpassed Russia in positive ratings (an average of 40% for the US as compared to 30% for Russia), but their negative ratings are similar as are the number of countries giving them predominantly positive or negative ratings."

Long, but well worth reading.

12. William Branigin and Michael D. Shear at the Washington Post report that the US Senate passed a $819 billion economic stimulus bill. $819 billion is 5.7% of 2008 GDP (of $14.264 trillion.) The vote was 61 to 37, with GOP Senators Susan Collins (ME), Olympia Snow (ME), and Arlen Specter (PA) joining with Democrats and Independents to pass the measure. Meanwhile, Edmund L. Andrews and Stephen Labaton at the New York Time report on Secretary Geithner's outline of a new plan to marshal as much as $2 trillion in public, Federal Reserve, and private funds in defense of the financial sector's stability.

13. Rebecca Wilder at News N Economics reports that spreads on non-financial commercial paper are returning to normal.

"The spread is returning to normal levels, indicating that investor confidence is returning - at least in nonfinancial paper. This is a good thing, especially since the Fed has unwound 22% of its holding of commercial paper since 1/14/09, when it held $334.6 billion of the commercial paper market."

14. Joe Carroll at Bloomberg has a useful article on why charter rates for deepwater drilling rigs have not been particularly hit by the financial crisis or the current glut of crude. The upshot is that it is punitively expensive to simply cancel an ongoing charter and it will take some time for contracts already in place to unwind.

"All of Transocean’s most-sophisticated rigs are booked until at least mid 2010, with some committed through November 2016. The company had a $41.1 billion backlog of orders as of Sept. 30."

Anadarko indicated that it could make a 10% profit on deepwater fields when oil is at $30/b.

Daily Sources 2/9

1. Peter Boone, Simon Johnson, and James Kwak at Baseline Scenario have a long and detailed post on the likely direction of the global economy, which they say faces an economic environment similar to the one faced by Japan in the 1990s and a "lost decade" for the global economy is a likely outcome.

"[The] situation in emerging markets is moving sharply towards near-crisis, particularly as global trade contracts and there are immediate effects on both corporates and the financial system. Currency collapse and debt default will be averted only by fiscal austerity. The current IMF strategy - most clearly evident in East-Central Europe - is to protect creditors fully with programs that do not allow for nominal exchange rate depreciation. This approach increases the degree of contraction and social costs faced by domestic residents, while also making economic recovery more difficult. These programs will likely prove more unpopular and less successful than were similar programs in Latin America in the 1980s and in Asia in the 1990s. As East-Central Europe slips into deeper recession, there are severe negative consequences for West European banks with a high exposure to the region (including Austria, Sweden and Greece)."

Quite long and detailed, but worth reading if you have the time.

2. Marcus Hand at Lloyd's List reported Friday that the Thursday surge seen in the Baltic Dry Index of 14% was driven by a jump in Chinese iron ore imports. Given that there will be limited demand for steel in the near term--though the stimulus program should provide some sort of bottom--the recovery in the BDI could be short-lived. But, so far anyway, the BDI continues to show signs of recovery, so much so that you can even discern it from a year's-eye view:



Another potential reason for the recovery, however limited, indicated by the BDI has been the Chinese New Year. I don't see how the New Years would have an affect now; clearly the BDI couldn't have fallen all that much farther from its low.

3. David Pearson at Real Time Economics reports that Bank of France governor Christian Noyer said in a radio interview Saturday that there was no risk that any eurozone countries would leave the monetary union.

"There has been some speculation in recent weeks that one or two countries might seek to leave the system to escape its rigid policy rules. But Noyer observed that recent investment rating downgrades of sovereign debt by some rating agencies have been 'very excessively exaggerated.'"

4. Andrew Batson at Real Time Economics looks at the analyst disputes over the extent to which Beijing's official economic data represents reality. He includes a list of estimates by several banks regarding what the 6.8% official GDP growth for the fourth quarter represents in terms of annual GDP growth.



The story also quotes the head of China's National Bureau of Statistics--Ma Jiantang--as throwing water on the notion that electricity consumption growth is a good proxy for GDP growth, "‘You have negative growth in electricity consumption, so how can GDP be growing by 6.8%?’ People who hold this view do not actually understand the internal relationships of different factors in the economy." Fair enough, still I'd appreciate an explanation of those "internal relationships of different factors in the economy."

Meanwhile, Zhang Dingmin at Bloomberg reports that China's Ministry of Finance’s research institute published a report Saturday calling for depreciation of the renminbi to about 6.93 per dollar (or about $0.1443/renminbi, about a 1.5% depreciation from the current interbank rate.)

5. In a series of post, Edward Hugh at Fistful of Euros reports that the Latvian economy contracted by 10.4% in the fourth quarter, that the Bank of France expects a contraction of 0.6% in the first quarter, which would mean that it will have technically entered a recession, and that the German Federal Statistics Office announced this morning that December exports were up 3.7% in November and down 7.7% from a year before.

6. The Spanish finance minister, Pedro Sobles, has an opinion piece in Wall Street Journal Europe calling for further economic cooperation in the face of the financial crisis.

7. Joaquín Almunia--European commissioner for economic and monetary affairs--has an opinion piece at Wall Street Journal Europe which argues that the reluctance to moderate the excesses of the laissez faire system are gone, suggesting a new consensus.

"The period we are entering will be characterized by a more active involvement of the public sector in the economy and, in particular, by a more abundant and extensive regulation of the financial system. That system will have to be more transparent, its supervision more rigorous, cross-border coordination of supervisory authorities more efficient, and risk management more cautious. Consensus on all these aspects is very broad: The roadmaps which have been drawn up listing the initiatives to make this possible, at the European and global levels, are detailed and lay down a strict timetable. Europe has started delivering: We have taken steps to strengthen capital requirements, to have stricter regulation for credit rating agencies and to protect bank deposits. We have changed accounting rules and taken steps to bring the credit default swaps market into central clearing in the EU.

But we have no illusions about the scale of the task ahead. We need to deliver more and do so quickly, all while coordinating action at the international level. This requires urgently involving the emerging economies in this task and in the relevant international forums such as the International Monetary Fund and the Financial Stability Forum."

8. Edward Hugh at Fistful of Euros reports that the great bulk of the speculative attacks on the ruble have apparently been funded by the government itself! It turns out that Moscow had extended credit to the banks in an effort to combat the credit crunch, and that the banks had used the funds to finance speculative attacks on the ruble.

"Kommersant reported (Friday) that policy makers planned to reduce bank loans in an attempt to limit bets on the ongoing ruble devaluation. As a result the ruble remained safely within the target band all day Friday, and there was no need for any kind of intervention."

Meanwhile, Hugh lists a long roster of indicators showing that the Russian economy is going through a brutal contraction.

"If we look at the monthly contraction rate as a reflection of the current quarter on quarter contraction, we find a rate of minus 1.6%, which means that the present rate is something like a 6.5% annualized [rate of contraction]. At present this is stationary and not accelerating, but it is quite strong, especially for an economy which only six months ago was expanding at a 6.5% annualized rate."

Long, but worth a look.

9. Philip P. Pan at the Washington Post has an interesting piece which argues that recent moves by Russian President Medvedev suggest that he is increasingly asserting independence from Putin and that a break is developing between the two men.

"In a sign of tensions in the relationship, one Russian official, also speaking on the condition of anonymity, said Putin and Medvedev recently decided that a note-taker should keep minutes of their discussions because 'misunderstandings' had arisen following past meetings. 'It's a very bad sign,' the official said, arguing that a rift in the leadership could destabilize the government."

Tea leaves aside, the narrative that Putin is the absolute ruler of Russia with Medvedev as his pawn has been way oversold. That said, the notion that there is a real break between the two looks like wishful thinking to me at this stage. Either way, the article is well worth reading. Craig Whitlock, also at the Washington Post, on Sunday reported that Vice President Biden, said at an international security conference in Munich on Saturday that the Administration seeks to "reset" relations with Moscow.Biden said,

"The last few years have seen a dangerous drift in relations between Russia and members of our alliance. The US and Russia can disagree but still work together where its interests coincide."

Angela Merkel echoed the need to incorporate Russia into European security projects, but Nicholas Sarkozy and Polish prime minister Donald Tusk both appeared convinced of hostile intentions on the part of Moscow. Long, but also worth reading.

10. Shigeru Sato at Bloomberg reports that Japanese refiners have told the media that Saudi Aramco has slashed the amount of crude it will supply them by 11 to 14% from their annual contracted levels.

11. Jim Jelter at Market Watch on Saturday reported that Iraqi Oil Minister, Hussain al-Shahristani, told journalists that he expected OPEC to cut supply again in the March meeting. Al-Shahristani said that Baghdad thinks the price should be at least $70/b. (Revenues from the oil and gas sector account for about 90% of the government's budget.) Margaret McQuaile and Stuart Elliott at Platts report that OPEC's secretary general--Abdalla el-Badri--suggested that OPEC needs to comply completely with the current 4.2 mb/d supply cut before another cut could be agreed to. Badri said that 897 kb/d of supply needs to come offline before the 4.2 mb/d target is met. He also urged non-OPEC producers to join in the cut, saying "We urge Norway, Russia and Mexico to give a hand, because the situation is very difficult and we cannot handle it by ourselves." He also said that OPEC currently has 8 mb/d of surplus capacity shut in.

12. The Gulf Times reports that Iran's National Audit Office reported that $1.058 billion in surplus oil revenues for the 2006-7 budget has not been returned to the national treasury by the Ahmadinejad administration.

13. Shai Oster at the Wall Street Journal reported Friday that Chinese President Hu Jintao and Premier Wen Jiabao ordered the State Council on Thursday to make every effort to combat the drought now afflicting China. The drought is the worst seen since 1951 in some areas, and is likely to severely affect the wheat crop.

"The affected area is primarily in central and eastern China, covering the country's breadbasket where much of the winter wheat crop is raised. The area also includes the region surrounding Beijing, the capital, which hasn't had precipitation in more than 100 days. In all, 1.85 million livestock are short of water."

The International Grains Council forecast a sharp reduction in the world wheat 2009-2010 harvest in late January (see Daily Sources 1/30 #8.) In November, China's National Development and Reform Commission set grain self-sufficiency as a national security goal of 2020 (see Daily Sources 11/4 #5.)

14. Joshua Partlow at the Washington Post reports that the drought in Argentina has killed at least 1.5 million cattle there. The drought started a couple of years ago near Buenos Aires and has spread through the pampas--Argentina's breadbasket. The cattle are so starved that the government has recently reduced the minimum weight allowable for the market to 575 lbs from 615 lbs.

"Agricultural groups estimate that Argentina, one of the world's top grain exporters, has lost more than $5 billion from the weather and that it could significantly slow the nation's economic growth. The 2008 harvests of several crops came in far smaller than those of the previous year."

Daily Sources 2/6

1. The OECD released their latest set of economic indicators for the developed world and BRIC countries. This set of graphs top the report:



The report indicates a "strong slowdown" in Canada, France, Japan, Germany, Italy, UK, India, and Russia as well. It further indicates a slowdown in Brazil. (h/t Paul Hannon at Real Time Economics.)

2. In a series of posts Edward Hugh at Fistful of Euros is now referring to the financial crisis as the "Second Great Depression," and says that it has spread West from Ukraine to Hungary, where industrial production fell 23.3% from a year earlier in December. December was the seventh consecutive month to decline, after a contraction of 9.9% in November, and the country's manufacturing purchasing manager index (or PMI) has fallen to 38.6 in January from 40.8 in December. (For PMI surveys a reading above 50 indicates expansion; readings below 50 indicate contraction.) Spanish industrial production fell 19.6% in December, following a contraction of 15.3% (revised downward) in November. The Spanish PMI, however, was slightly up from November when it read 28.2 to 31.8 in January. And industrial production in Germany fell by 4.6% in December, following a contraction of 3.7% in November. German PMI fell to 32.0 in January from 32.7 in December.

3. The Associated Press reports that Gazprom has indicated to Polskie Gornictwo Naftowe i Gazownictwo (the main natural gas company in Poland, PGNiG) that it is ready to supply additional gas to the country. Poland is only receiving 76% of its contracted for gas, as following the Russo-Ukrainian gas dispute a key intermediary--RosUkrEnergo--half-owned by Gazprom, has not resumed deliveries. "PGNiG has covered the shortfall so far by drawing from strategic reserves, which currently stand at around 50% of capacity."

4. Yuriy Humber and Archana Chaudhary at Bloomberg report that Russia will become the first supplier of nuclear fuel to India after the nuclear suppliers group decided to lift their ban on supplying India under the NPT.

"A unit of Rosatom Corp., Russia’s holding company for all nuclear assets, will sign a contract with Indian atomic energy monopoly Nuclear Power Corp. on Feb. 11 in Mumbai to deliver 2,000 metric tons of uranium pellets, both companies said.

India will pay $780 million for the fuel, Rosatom spokesman Sergei Novikov said by phone from Moscow today."

5. Nirmala Menon at Real Time Economics reports that Statistics Canada announced labor data as well today, showing unemployment numbers growing from 6.6% to 7.2%. Net 129,000 jobs were lost in January.

6. Laura Santini at China Journal reports that China's decision to make swap arrangements under the Chiang Mai Initiative in renminbi--as opposed to the dollar--as well as in the three year $29.3 billion swap line extended to Hong Kong has sparked speculation that Beijing wants to establish China's currency as a trading currency internationally.

"Still, the swap lines are a step toward making the yuan more available outside China, particularly to policy makers navigating the eddies of the world-wide currency markets. Indonesia, for example, would typically buy back its own currency using its stash of U.S. dollars if the rupiah suddenly dropped in order to keep the currency steady. Under the swap agreement, Jakarta could instead turn to yuan.

Chinese officials may be simply playing good politics with its neighbors, or acknowledging the yuan’s use outside its borders rather than actively promoting its currency. To some extent, China’s moves serve to rubber stamp activity that is already underway outside the mainland, where gray-market yuan trade briskly in Southeast Asia. Some Asians are warming to alternatives after borrowing in U.S. dollars, then seeing their debt loads swell when the dollar rose sharply amid volatility late last year."

If the volatility in the dollar increases the risk of borrowing in it, then the relative stability of more managed currencies might present an attractive alternative. Would that stability apply if the renminbi became the international currency of account? (For more on the Chiang Mai Initiative, see Daily Sources 2/5 #5 and 1/30 #4)

7. The State Department announced Secretary of State Clinton's first scheduled international trip yesterday,

"departing Washington, DC, on February 15. She will visit Japan, February 16 through 18; Indonesia, February 18 through 19; the Republic of Korea, February 19 through 20; and China, February 20 through 22. In all capitals, the Secretary will be discussing common approaches to the challenges facing the international community, including the financial markets’ turmoil, humanitarian issues, security, and climate change."

As a reporter present was sure to ask, Pyongyang is nowhere on the list. Gordon Fairclough at the China Journal posts that the Federation of American Scientists reported Tuesday that US Intelligence counted 12 "patrols" by Chinese submarines in 2008, double the number seen in 2007. "It is unclear what constitutes a patrol, but it is thought to mean an extended voyage." Apparently military to military dialogue between the US and China have been frozen since DC approved an arms sale to Taiwan last year, prompting Admiral Timothy Keating to tell Reuters yesterday, "We would much prefer it to be a more formal, a more regular and a more frequent dialogue than it is right now."

8. Jim Lowe's Iraq Oil Report has confirmed that there will be a conference on federalism and oil and gas management in Iraq, organized by the European Union and United Nations.

9. Shinhye Kang at Bloomberg reports that KNOC and Ecopetrol have agreed to purchase Petro-Tech Peruana SA of Peru for $900 million with each taking a 50% stake. Petro-Tech produces about 12 kb/d and holds the deeds to concessions holding estimated reserves of 100 million barrels. Seoul's energy policy has over the last few years been modified to target overseas oil field acquisitions, and

"South Korean companies will increase spending on overseas oil fields and mines by 23 percent this year to more than $7 billion as falling crude prices make commodity assets cheaper, Lee Jae Hoon, a vice minister for the Knowledge Economy, said in January."

KNOC wants to begin drilling off shore Peru to bring up production from the acquisition to 45 kb/d by 2015.

10. Brian Blackstone at the Wall Street Journal reports that the Bureau of Labor Statistics released data showing that 598,000 non farm jobs were lost in January, bring the official unemployment rate to 7.6%. The New York Times published a good illustration of the news:



The rate including marginally attached and involuntary part time workers rose by nearly 5% to 13.9% in January. The Wall Street Journal has a publicly available interactive graphic which you can use to chart the job losses by state.

11. Clarisse of Les Carnets de Clarisse has pointed out that the House of Representatives of the State of Washington has a memorial in committee which would petition the Federal Government to consider whether it has overstretched its authority vis-a-vis the State's rights. (The text of the memorial is here.) This comes on top of the recent bill introduced in the House Assembly of New Hampshire--and predictions by Russian US analysts that the US faces imminent disintegration into a variety of states. (see Daily Sources 2/3 #7.)My off the cuff response to the head's up:

"This is slightly different from the bill presented to the NH House, because the Washington State legislative instrument would be, if passed, a petition as opposed to a resolution which is what is being considered in the New Hampshire Assembly, ie a bill that would go into law.

The right of petition is a First Amendment right in the US Constitution. It is not given much note these days, generally, though historically it has had a very important role. For example, the abolitionist movement in the US was radicalized after 1835 when the House agreed to simply not consider any petitions to abolish slavery.

(Many northerners--mostly from more radical Protestant congregations--were constantly sending in petitions to abolish slavery. It was taking a lot of time out of the business of the House to consider the petitions, so a compromise was reached by which all such petitions would be automatically put aside. This triggered the wrath of John Quincy Adams, who had formerly been President and at that time Congressman representing his district from Massachusetts, who began a campaign to force the House to address the petitions--even if to deny them--as it was a Constitutional right. His efforts did not go anywhere for over a decade, but over time he slowly built a coalition to hear the petitions, and eventually the Gag Rule was overturned. But most importantly, over time the news that the rights of Northerners under the Constitution were being violated to protect the sentiments of Southerners who wished to continue their practice of slavery angered, and radicalized, the Northern population, turning many into serious abolitionists.)

So the power of petition isn't much more than a right to be heard ... it doesn't necessarily translate into other action. A resolution is law.

All of the sponsors of this bill are also members of the Republican party.

(Lincoln, of course, is the President who emancipates the slaves. It is also argued that he strengthened the Federal Government at the expense of the Tenth Amendment, which is what both of these bills refer to. The Tenth Amendment reserves to the states all the rights not given to the Federal Government.)

So, that said, I do not think that these bills are likely to be passed. (I am not that familiar with the local politics of either of these states ... but I still doubt it.)

But it looks like it is probably being coordinated by the US Republican Party. They are in a process of reinventing themselves after Bush. I suspect they want to publicize the nature of state rights and become identified with them more in the general public's mind, especially given that now there is more and more anger with Washington DC. They are probably trying to exploit the provincial divisions of the country--which are many--as part of a move to try and catapult themselves to power (in DC ironically) as people become more and more unhappy with the economic fall out of the financial crisis."

Clarisse asks whether this heralds a new turn towards regional nationalism, like that which we are currently seeing in the EU in response to the financial crisis. Well, no, in part because nationalism in the US is nationalism for the US, not a state. And by adopting such a stance, the GOP exposes itself to accusations of being unpatriotic. On the other hand, it is not new, in the sense that the GOP has for a long time now been wrapping itself in the mantle of being "outside the Beltway" and appealing to the regional chauvinism of its constituents everywhere. They really ought to rein in the outside the beltway nonsense, but, if not, I expect they will be hoisted on their own "we're the biggest patriots" petards.