Daily Sources 6/17

1. JAPAN TO FINANCE CLEAN ENERGY EXPORTS

Keith Johnson at Environmental Capital notes that Japan plans to underwrite the switch of other countries to clean energy, but only if they use Japanese technology. Johnson quotes from a report from Bloomberg:

"Japan plans to offer loans to power producers in the US and Australia that buy so-called clean coal generators from Japanese manufacturers, according to a government document obtained by Bloomberg News. Funding from state-owned Japan Bank for International Cooperation would help drive sales of the plants that cost about $3.1 billion apiece, said a senior trade ministry official involved in producing the 113-page draft plan, due to be released today."

2. RUSSIA & CHINA RELEASE JOINT STATEMENT EXPRESSING CONCERN RE: NORTH KOREA

Steve Gutterman at the Associated Press reports that Chinese President Hu Jintao and Russia's Dmitry Medvedev issued a joint statement today after meeting in Moscow:

"expressed serious concern in connection with the situation on the Korean peninsula."

"Hu and Medvedev called for the 'swiftest renewal' of the talks involving their countries as well as North and South Korea, Japan and the United States, which broke down months ago.

The statement included no new initiatives on the mounting problem and used language that appeared aimed at avoiding raise North Korea's ire further."

3. US EXPLORING RUSSIAN PARTICIPATION IN MISSILE SHIELD SCHEME

Walter Pincus at the Washington Post reports that Deputy Defense Secretary William J. Lynn III told Congress yesterday that the US is considering ways to incorporate Russia into a missile defense system for Europe.

"Lynn said that a radar installation in Armavir in southern Russia 'would provide helpful early-warning detection in the case of an Iranian ballistic missile attack.' [Lt. Gen. Patrick] O'Reilly [director of the Missile Defense Agency] told the panel that he had visited a Russian radar facility at Gabala, Azerbaijan, and that both Russian radars would be helpful in monitoring Iranian missile tests. The data gained 'would significantly help our development of our missile defenses,' O'Reilly added.

Overall, Lynn said, 'the involvement of Russian assets, particularly Russian radars, would enhance the capability of that kind of European-based system.'

He also suggested another potential advantage of including Moscow in the effort: 'A US-Russian collaboration would have an additional benefit of a diplomatic signaling to the Iranians that this is an unacceptable course for them to pursue and that they will face a concerted international front, should they proceed down that path.'"

Confirmation, as far as I'm concerned, that the Obama administration is putting the squeeze on Iran by pursuing a "reboot" in relations with Moscow.

4. BRIC SUMMIT ENDS WITH JOINT STATEMENT CALLING FOR LARGER SAY IN INTERNATIONAL FINANCIAL SYSTEM, RUSSIA AND CHINA AGREE TO EXPLORE MORE SETTLEMENT IN DOMESTIC CURRENCIES IN BILATERAL TRADE, BUT GAZPROM ANNOUNCES GAS PIPELINE TO CHINA DELAYED BY NO AGREEMENT ON PRICE, AND LUKOIL VP CALLS FOR MOSCOW TO JOIN OPEC

Andrew Osborne at the Wall Street Journal reports that the BRIC countries released a joint statement following their summit yesterday in Ekaterinburg saying:

"The emerging and developing economies must have greater voice and representation in international financial institutions. There is a strong need for a stable, predictable and more diversified international monetary system."

Meanwhile, Lyubov Pronina and Alex Nicholson at Bloomberg report that following their bilateral meeting in Moscow of President Hu Jintao said that they agreed to expand the use of the yuan and ruble in settling bilateral trade between the two countries. Medvedev told reporters:

"We agreed to take further steps in this direction, including, perhaps, by adjusting contracts and laws that already exist."

However, Vladimir Soldatkin at Reuters reports that Gazprom deputy chief executive Alexander Ananenkov told a news conference that construction on natural gas pipelines to China have been delayed, as "it still cannot reach a pricing deal with Beijing." Further differences in perceived interests between Russia and China were illustrated by the comments by Lukoil VP Leonid Fedun made in an interview with the Kommersant newspaper reported in Reuters,

"Russia should join OpEC and move to direct contracts. Then we will jointly control 51% of world output and we can dictate the price by directive."

5. ACCESS TO CHINESE STIMULUS PROGRAM MONIES REQUIRES PREFERENCE FOR CHINESE FIRMS

Ian Johnson at the Wall Street Journal reports that a recent directive issued by various central government agencies, including from the National Reform and Development Commission, seems to require that projects receiving stimulus-mandated funds give preference to Chinese companies.

"The notice, dated May 26 but only posted on the commission's Web site this month, is part of a broader buy-local push in recent months by authorities, who have quietly been indicating that most of the two-year four trillion yuan ($588 billion) in stimulus spending will be aimed at Chinese companies.

'Apart from engineering goods or service that cannot be obtained under reasonable business conditions inside China, domestic products should be purchased for the government investment program,' according to the official notice."

6. LACK OF INDEPENDENT JUDICIARY IN CHINA LEAVES JUSTICE SYSTEM MORE VULNERABLE TO MOB RULE

Sky Canaves at China Journal notes that the lack of an independent judiciary in China works both ways:

"But nowadays, courts also seem to take guidance from below.

Deng Yujiao, a young hotel worker charged with killing a local official (who she alleged tried to rape her), was set free yesterday after a brief trial and the murder charges against her dismissed, a result that is being cited as a 'significant victory of the Chinese Internet users and Chinese democracy.'

The unofficial precedents for the outcome of Deng’s case can be seen in a couple of other cases from last year that pitted the small guy against perceived official privilege. Xu Ting, a young migrant worker who took advantage of a faulty ATM to withdraw a load of cash and then ran away, was tried and sentenced to life in prison. But Internet users noted that officials charged with corruption involving similar sums (175,000 yuan) would face much lighter penalties, sparking a media outcry that resulted in a retrial and a much shorter sentence of five years for Xu."

The problem of course is that the law is supposed to act as a barrier to mob rule, not to simply preside over judgments made by rumor and innuendo.

7. IN CENTRAL ASIA FINANCIAL CRISIS MAY DRIVE IMMIGRATION

Erica Alini at Real Time Economics notes that in a recent report by the Central Asia-Caucasus institute, "anecdotal evidence suggests that since the world economy nose-dived last fall, 'a higher number of young men bought one-way tickets to Russian cities in November 2008 through January 2009.'"

"Russia is a prime destination for migrant laborers from Uzbekistan, Kyrgyzstan, and Tajikistan, where remittances account for between 8% and nearly 50% of the national income. Thus, as the Russian economy started contracting amidst the economic downturn last year, Central Asia felt the pinch.

When the downturn poked the Russian housing bubble, Central Asian migrants were hit particularly hard because many of them work in construction, Willem Van Eeghen, a migration expert at the World Bank, said.

By December 2008 remittances were down by nearly half in Tajikistan and Kyrgyzstan, according Ms. Marat.

Uncharacteristically, though, the plunge in remittances seems to be pushing even more Tajiks, Kyrgyzs and Uzbeks toward Russia. That’s because many of them seem to think that home offers no prospect, even as things get tough abroad. "

8. SOUTH KOREAN LNG IMPORTS DOWN 41% YOY

Jonty Rushforth at Platts reports that South Korean LNG imports are down 41% year on year in May to 1.26 million metric tons from 2.13 million metric tons.

"They were also down 28.6% from April this year, when the country imported 1.76 million mt."

Not a green shoot.

9. NIGERIAN NIGER DELTA MILITANT TO ACCEPT AMNESTY OFFER

The BBC reports that one of Nigeria's militant leaders of the Niger Delta, Ateke Tom, has accepted, with provisions, the offer of the President to extend amnesty to those militants who lay down their weapons.

"'If the government is sincere, we are ready to lay down our arms,' Mr Tom told the BBC's Network Africa program.

'If the government is not sincere, we will not lay down our arms and the struggle will continue.'

President Yar'Adua first made the offer of an amnesty several weeks ago.

'It will be a great pleasure for me to personally accept the first militant leader to take advantage of the amnesty,' he said."

11. IEA CHIEF ECONOMIST SUGGESTS THAT $70/B OIL LIKELY TO TRANSLATE INTO INTEREST RATE HIKES ON INFLATION, BUT CPI DOWN 1.3% IN MAY YOY

Eurointelligence reports that Fatih Birol, the chief economist at the IEA, suggested that $70/b oil will lead to inflationary pressures, which will force central banks to raise their benchmark interest rates and undermine any nascent recovery. In the meantime, Brian Blackstone at the Wall Street Journal reports that the Labor Department announced that the consumer price index rose 0.1% in May from April; core CPI, which excludes both energy and food prices, also rose from May by 0.1%.

"Consumer prices fell 1.3% compared to one year ago, the largest 12-month decline since April 1950. That's way below the 2% annual rate of inflation that most Fed officials think is consistent with their dual mandate of price stability and maximum employment.

Earlier this month, San Francisco Fed President Janet Yellen said that after once favoring 1.5% as an inflation objective, 'I think if I now had to write down a number, I'd probably write 2%.'"

Sarah-Jane Belfield at Platts reports that demand for jet fuel in April fell month over month by 1.67% to 1.418 billion gallons, per the Bureau of Transportation Statistics. The drop from a year previous was 6.96%. Not a green shoot.

12. EIA ANNOUNCES CRUDE STOCKS DOWN, BUT REFINERY UTILIZATION FLAT, ARE STOCKS AT SEA SIMPLY BEING RESTOCKED?

The EIA reported that commercial crude stocks fell by 3.9 million barrels in the week ended June 12 to 357.7 million barrels--well above the historical range for this time of year, but well down from previous highs. Gasoline stocks, on the other hand, built by 3.4 million barrels, and are just below the historical range for this time of year. Distillate stocks grew by 300,000 barrels, and remain at levels well above the historical range. Izabella Kaminska at FT Alphaville asks whether or not floating oil storage has been restocked, and not unloaded due to a shrinking contango.

"This certainly would explain the larger than expected crude draw in the face of unchanged refinery utilization, and only a small rise in imports."

13. DOE DECIDES ON COMPANIES TO RECEIVE $18.5 BILLION IN FEDERAL LOAN GUARANTEES TO BUILD FIRST NEW NUCLEAR REACTORS IN THE US IN 30 YEARS

Keith Johnson at Environmental Capital reports that the Department of Energy has settled on the first companies which will receive $18.5 billion in federal loan guarantees to help build four new nuclear reactors--the first to be built in the US in three decades. The winners are UniStar Nuclear Energy, NRG Energy Inc., Scana Corp and Southern Co.

"As the WSJ notes, 'Foreign partners that might be able to contribute loans or equity were also considered a plus.' For instance, UniStar hopes to get the French government to kick in $10 billion; NRG wants the Japanese government to underwrite one-third of its costs.

The $18.5 billion in loan guarantees is a small fraction of the $122 billion that nuclear companies had applied for."

Daily Sources 6/16

1. IRAN PROTESTS CONTINUE, AHMADINEJAD LEAVES FOR EKATERINBURG, RUSSIA

Protests are continuing. The most interesting data point to me is that President Ahmadinejad either felt the situation secure enough or irrelevant enough to leave the country to observe the goings on at the Shanghai Cooperation Organization's summit today in Ekaterinburg, Russia, per Vladimir Isachenkov at the Associated Press. Will try and put up another post on the ongoing situation a bit later today.

2. MOODY'S DOWNGRADES THE FINANCIAL STRENGTH RATINGS OF 30 SPANISH BANKS, INCLUDING SANTANDER

Izabella Kaminska at FT Alphaville reports that Moody's downgraded the senior unsecured debt and deposit ratings of 25 Spanish banks today, 18 by one notch and seven institutions by two notches.

"At the same time, Moody’s downgraded the Bank Financial Strength Ratings of 30 banks. Among these banks, the rating agency downgraded the dated subordinated debt of 17 institutions, the junior subordinated debt of eight institutions, and the preference shares of 14 banks.

'The rising pressure that many Spanish banks face from a sharp deterioration of their asset quality is reflected in their stand-alone financial strength ratings, a third of which now fall at a “D-” level or lower,' said Maria Cabanyes, a Senior Vice President at Moody’s. 'However, the moderate downgrade of these banks’ senior ratings reflects our expectation that government support would be forthcoming for these institutions should such support become necessary.'"

3. CHINA PROMISES $10 BILLION IN LOANS TO MEMBER STATES OF SCO TO HELP THEM WEATHER ECONOMIC CRISIS, MEDVEDEV CALLS UPON SCO MEMBERS TO SETTLE BILATERAL TRADE IN DOMESTIC CURRENCIES


Lyubov Pronina and Lucian Kim at Bloomberg report that Chinese President Hu Jintao offered to lend $10 billion to member states of the Shanghai Cooperation Organization [SCO] so they might better weather the financial crisis. Jintao made the offer at the regional organization's summit in Yekaterinberg, Russia, today. The other members of the SCO are Kazakhstan, Kyrgyzstan, Tajikistan, Uzbekistan, and Russia.

"Russian President Dmitry Medvedev is hosting back-to-back summits of developing economies in Yekaterinburg, in the Ural Mountains that divide Europe and Asia, as he seeks to lessen the world economy’s dependence on the US dollar. Medvedev and Hu will hold talks later today with Indian Prime Minister Manmohan Singh and Brazilian President Luiz Inacio Lula da Silva in the first summit of so-called BRIC nations.

Hu called for greater coordination among Shanghai members on monetary policy, including regular meetings of finance ministers."

Medvedev reportedly encouraged China and the other SCO members today to conduct bilateral trade in their domestic currencies as opposed to the dollar. He further said,

"There can be no successful global currency system if the financial instruments that are used are denominated in only one currency. Today this is the case and the currency is the dollar."

4. RUSSIA VETOES CONTINUATION OF UN PEACEKEEPING MISSION IN ABKHAZIA, GEORGIA

John Heilprin at the Associated Press reports that Russia has exercised its veto power at the UN Security Council in order to put an end to the 16 year old UN mission to Georgian breakaway region Abkhazia.

"'It is understandable,' Russia's Foreign Ministry said in a statement Monday, 'that in the new political and legal conditions most of the names and terms previously used in the old documents are inapplicable.'"

What the ministry means is that now Abkhazia is recognized by Moscow as a new state, altogether independent of Georgia. Clearly the move will hurt Saakashvili's political chances, the government is currently bedeviled by constant popular opposition protests.

5. INDIAN PM AND PAKISTANI PRESIDENT MEET IN EKATERINBURG

Vladimir Isachenkov at the Associated Press reports that Indian Prime Minister Manmohan Singh met with Pakistani President Asif Ali Zardari met for talks behind closed doors in Yekaterinberg today for the first time since the Mumbai terror attacks of last year.

"'My mandate is to tell you that Pakistani territory should not be used for terrorism against India,' Indian and Russian news agencies quoted Singh as saying after shaking hands with Pakistani President Asif Ali Zardari ahead of their meeting."

Both India and Pakistan have observer status in the SCO.

6. SAMA CUTS REVERSE REPURCHASE RATE BY 0.25% TO 0.25%

The Associated Press reports that the Saudi Arabian central bank, the Saudi Arabian Monetary Authority, or SAMA, has cut its reverse repurchase rate by 0.25% to 0.25%. It is the second reduction made by the fiscal authorities this year.

6. MICRO-POWER IN BANGLADESH MAY HAVE BENEFITS SIMILAR TO MICRO-FINANCE

Shafiq Alam at AFP has an anecdotal account of how Bangladeshis, frustrated by the governments perennial inability to make good on promises to bring the people electricity, have begun installing solar power panels on their homes if they can afford it. One tailor, for example, can now sew well into the night, and has reportedly doubled his income. So, much like micro-finance, micro-power could have the potential to radically transform the lives of many in the developing world.

7. ANALYSTS THINK MEXICO MAY NOT HEDGE OIL FURTHER ... SOVEREIGN MAY HAVE HAD CONSIDERABLE SHARE OF OPEN INTEREST ON NYMEX

Andres R. Martinez and Carlos Manuel Rodriguez at Bloomberg report that some analysts think that Mexico might not hedge the price of oil going forward. The interesting data point, to me, was that Mexico spent $1.5 billion to buy the option to sell crude oil at $70/b. Apparently it has hedged a total of 330 million barrels for the whole of 2009. That is 330,000 contracts on NYMEX, or over 12.7% of total open interest on both futures and options for light sweet crude for the week ended June 9, as per the commitment of traders report.

8. ABERDEEN ASSET MGMT SAYS CORREA PLAYED MARKET FOR FOOLS

Lester Pimentel at Bloomberg reports that Edwin Gutierrez at Aberdeen Asset Management Plc recently said the Ecuadorian President

"'played the market for fools' by defaulting on $3.2 billion of debt six months ago and then repurchasing the bonds at less than 40 cents on the dollar."

"'Ecuador won,' Edwin Gutierrez, who manages $5 billion at Aberdeen and sold his Ecuador holdings before the default, said in a telephone interview from London. Correa’s government 'played the market for fools. Remind me never to play poker with that guy,' he said.

Correa, a 46-year-old economist who counts Venezuelan President Hugo Chavez as one of his closest allies, halted payments on the bonds because he said they were issued illegally. He called the bondholders 'true monsters who won’t hesitate to crush the country' when he announced the default on Dec. 12 and said in a national radio address the next day that he wanted to force them to accept a 'big discount.'"

Ecuador stopped making payments on its sovereign debt on December 12 and later in that month pressured its social security system to purchase $1.2 billion in new bonds--see Daily Sources 12/29 #14. Ecuador currently uses the US dollar as its currency.

9. HOUSING STARTS AND PERMITS DOWN 45.2% IN MAY FROM YEAR PREVIOUS, UP 17.2% FROM APRIL

Barry Ritholtz at the Big Picture reports that housing starts and permits increased in the month of May from April with Starts at 17.2% (±14.4%) and Permits at 4.0% (±1.7%)--ie, both above the statistical margin of error. However, "The stunning news was the 45.2% (±5.8%) collapse below the May 2008 rate. That is simply an unbelievable free fall."

Daily Sources 6/10

1. GERMAN EXPORTS FALL BY 29% YOY IN APRIL; THE ECB FORECASTS THAT WEAKNESS IN THE FINANCIAL SECTOR IS LIKELY TO PREVENT ECONOMIC RECOVERY IN THE EUROZONE UNTIL 2010; THE IMF CALLS FOR A REAL ACCOUNTING OF THE EUROPEAN BANKING SECTORS BOOKS

BBC reports that German exports fell by 29% in April from the year previous, per the Federal Statistics Office. (Exports fell by 4.8% in April from March, when they had risen unexpectedly from February.) The economics ministry reported that industrial production fell by 21.6% in April compared with April 2008. On Monday, Walter Münchau noted that it was unlikely, given the current situation, for export-led economies to be able to export their way out of the recession. He further remarked that perhaps the Merkel Administration's apparent decision to push for allowing the euro to appreciate versus the dollar (and other currencies) could exacerbate the situation for Germany--see Daily Sources 6/8 #2. Joellen Perry at the Wall Street Journal reports that officials at the European Central Bank are concerned that financial sector weakness could prevent the eurozone from expanding before the middle of 2010, as per the remarks of Yves Mersch, the head of Luxembourg's central bank and a member of the ECB's Governing Council.

"The ECB expects the euro zone's first quarter--when output contracted by an annualized rate of nearly 10%--to mark the recession's trough, Mr. Mersch said. But he cautioned against overplaying recent signs of stabilization: 'We are reaching the valley, but we have to walk through the valley.'"

Well worth reading in full. A graph plotting the IMF's forecast of eurozone economic growth going forward from the IMF Survey published on Monday:



Meanwhile, Ambrose Evans-Pritchard at the UK Telegraph reports that the IMF's managing director, Dominique Strauss-Kahn, has called on the eurozone countries to take urgent steps to clean up their financial sector.

"To restore confidence, you need total disclosure of possible losses. Not only losses which are linked to the original sub-prime crisis, but also the losses linked to the slowdown in the economy, and impaired assets. There are lots of things that still have to be disclosed."

Strauss-Kahn went on to say that,

"Stresses persist, conditions for access to bank lending are tight, funding costs remain high. Sizeable losses lie ahead as the recession unfolds. The financial sector is hamstrung in fulfilling its vital intermediation role."

The IMF suggested that eurozone banks will need to raise an additional $375 billion as compared to $250 billion for US banks and called for stress tests along the lines of what was imposed by the US Treasury.

2. JAPAN ANNOUNCES GOAL OF REDUCING GREENHOUSE GAS EMISSIONS BY 8% FROM 1990 LEVELS BY 2020; EXPECTED TO ANNOUNCE $2 BILLION IN CLIMATE PROTECTION LOANS TO BANGLADESH, PHILIPPINES, THAILAND, AND VIETNAM

Shingo Ito at the AFP reports that Japanese Prime Minister Taro Aso said today that the government has set as a goal the reduction of greenhouse emissions by 8% from its 1990 levels by 2020.

"Aso said 'Japan must take the initiative in spearheading a global trend,' arguing that the target surpasses US and European goals because, unlike theirs, it does not factor in carbon trading or sequestration through forestry.

Japan's figure is far below the target announced by the European Union, which has said it would slash emissions by 20% from 1990 levels, or by 30% if others set a similarly ambitious goal."

On the other hand, Japanese power consumption has been steadily declining for some time now--in large part because of demographic changes. Mr. Aso also gave Japan's goals for 2050 for a 50% emissions cut, which matches the European Union's goal. In the meantime, Earth Times reports that Japan was expected to announce $2 billion in yen loans to Bangladesh, the Philippines, Thailand and Vietnam over two years for climate protection efforts. On April 29, China, India and South Africa called for at least $200 billion in aid from the developing nations to combat global warming--see Daily Sources 4/29 #1. In late May, African environmental ministers called upon the developed world for aid in combating climate change--analysts have argued that the countries would require at least $1 billion a year in order to effect change--see Daily Sources 5/29 #8.

3. CHINA'S CONSUMER PRICES FALL 1.4% YOY IN MAY, BUT HOUSE SALES VOLUMES INCREASE BY 27% IN JAN-MAY FROM 2008 PERIOD; CHINESE COMMODITIES PURCHASES ARE WELL IN EXCESS OF THE TREND HAD GROWTH CONTINUED AS USUAL FROM 2007

Terence Poon at the Wall Street Journal reports that China's consumer price index fell 1.4% in May from a year previous for the fourth straight month, according to data released by the National Bureau of Statistics today.

"Food prices, a key component of the CPI, fell 0.6% in May from a year earlier, but the decline was smaller than the 1.3% drop in April. The price of grains, a raw material of many food products, has risen sequentially for the past five months, the bureau said, adding 'it remains to be seen if the rise in grain prices will affect future CPI trends.'

China's domestic property market is also showing signs of a sustained recovery. The year-on-year drop in property prices in 70 of China's large and medium-sized cities shrank to 0.6% in May from 1.1% in April, the National Development and Reform Commission said Wednesday."

Further, the volume of housing sales grew by 27% in the period from January to May over the same period in 2008. Meanwhile, MacroMan has a fascinating post on the volume of imports of various raw materials, and notes that they are well-above the trend had China's economy continued to grow at the rates it had previous. His chart for coal:



His chart for copper:



He further notes that Chinese oil imports have returned to trend, and thus suspects that the additional demand is not likely responsible for the boost in price. (I think this reading is wrong, because it has to be taken in the context of OPEC taking a lot of supply off the market and the fact that implied oil consumption is well down, far below what Chinese GDP statistics would imply.) MacroMan summarizes:

"even if China manages to maintain its recent growth path over the next few quarters, its recent commodity buying spree might mean that it buys much less from the rest of the world than one might normally expect, perhaps with the exception of crude oil (the only commodity where Macro Man retains a long exposure.)

For now, the China syndrome giveth....but if Macro Man were long high-beta plays on Chinese growth, he'd be concerned that at some point, the China syndrome may taketh away."

Indeed, and this is the must read post of the day. Again, I think his relative bullishness on oil is misplaced, however, given the director of China's National Energy Administration telling reporters that all available crude storage was full, the State Council Information Office taking reporters on tours of previously secret strategic petroleum reserves apparently so they could confirm this with their own eyes, and the study of satellite images by Sanford Bernstein which suggest that as much as 400 kb/d of additional Chinese oil demand was going straight to those SPRs--see Daily Sources 6/9 #4.

4. US, RUSSIA, AND CHINA AGREE ON DRAFT SANCTIONS ON NORTH KOREA

Colum Lynch at the Washington Post reports that the US, China, and Russia have agreed upon a draft UN resolution which would condemn North Korea's April 5 nuclear test and impose additional military, financial and trade sanctions on Pyongyang. The draft has been presented to the full Security Council and its adoption is expected as early as Friday. In an interesting comment in the Wall Street Journal, Edward N. Luttwak, senior adviser at the Center for Strategic and International Studies, writes that the best diplomatic method of dealing with Pyongyang for the US just now is radio silence. His conclusion:

"The North Korean regime never yielded anything of significance in past negotiations, which have served nobody but them. This time, provocation must not be rewarded. Evidently, the North Korean aim is to evoke more attention, more offers of concessions, more gifts. They must receive nothing at all. Talking has failed utterly. Silence might yet persuade the North Koreans to improve their behavior."

Insofar as North Korea's goal is to have official direct talks with the US, in a way this policy is already in place, though perhaps no response will have the desired effect of moderating Pyongyang's provocative behavior. However, I wonder whether it would be seen as deliberately complicating a "soft solution" desired by Beijing, as evidenced by Tsinghua University professor Sun Zhe's recent interview, where he indicated that China's primary concern regarding North Korean intransigence is that Tokyo will decide to build its own nuclear deterrent--see Daily Sources 6/1 #4. Also, to do so would seem to simply abandon the initiative the US might have in orchestrating "Great Power" coordination on the issue, as per Kissinger's advice--see Daily Sources 6/8 #3.

5. RUSSIA COMMITS TO CONTINUING CURRENT LEVELS OF OIL PRODUCTION, APPARENTLY HAS NO INTENTION OF COORDINATING WITH OPEC; KUWAITI OIL MINISTER SAYS THAT $60-75/B OIL OK FOR WORLD, BUT THAT OPEC WOULD NOT CUT UNLESS PRICES HIT $100/B

The Associated Press reports that Russian Deputy Prime Minister Igor Sechin told Interfax that:

"We are not planning to cut the production in the next three years, but it may happen afterward if there is no investment in exploration and production."

Sechin also indicated that Russia was not interested in capping exports, saying "Exports have become more economically reasonable. So why cut it?"--apparently putting the nail in the coffin of the notion of Russia joining OPEC, worrisome at the time as it would have signified a tectonic shift in Russian foreign policy strategy--see Daily Sources 12/10 #8. Meantime, Fiona MacDonald at Bloomberg reports that Kuwait's Oil Minister Sheikh Ahmed al-Abdullah al-Sabah told reporters that OPEC would only consider increasing production if the price of oil hit $100/b.

"Oil prices have increased because investors have bought crude as a hedge against a weakening US dollar, not because demand is rising, Sheikh Ahmed said.

'The numbers, in terms of economic recovery, are not with the rise of oil,' he said. OPEC is seeing signs of an increase in demand for oil in Asia, Sheikh Ahmed said, 'but overall we don’t see any rise in demand. That’s why we should be cautious not to be driven by the market.'"

This statement is on top of the report by Miriam Amie at Platts yesterday where Sheikh Ahmed indicated that the market was not being driven by fundamentals, but that prices between $60-75/b were acceptable.

"But Sheikh Ahmed warned that a return to $100/b oil would harm the global economy and fuel inflation.

'Hopefully it will not jump to the hundreds, because this will fuel recession,' he said, adding that it would be like 'going back to square one.'"

6. BRAZIL AND RUSSIA ANNOUNCE PLANS TO PURCHASE $20 BILLION IN SPECIAL DRAWING RIGHTS-DENOMINATED BONDS FROM THE IMF, SAY CHINA PLANS A $50 BILLION PURCHASE, INDIA MAY FOLLOW SUIT

Alex Nicholson and Andre Soliani at Bloomberg report that Brazil and Russia announced plans to purchase $20 billion in bonds from the IMF denominated in special drawing rights.

"Alexei Ulyukayev, first deputy chairman of Bank Rossii, said today Russia will cut the share of US Treasuries 'because a window of opportunity for working with other instruments is opening,' according to Interfax news wire. Russia may also place more of the reserves in deposits with foreign banks, he said. The remarks were confirmed by a Bank Rossii official who declined to be named, citing bank policy."

Brazil’s Finance Minister Guido Mantega said of the move:

"For us, there is no interest in weakening the dollar, because when the dollar weakens the real gets stronger and when the real get stronger the exchange rate trips our exports up a bit. What we really want is that other currencies are also behind international transactions."

Mantega also indicated that China will purchase $50 billion of the IMF bonds and that India may well announce something along the same lines.

7. CNPC REPLACES TOTAL IN PHASE 11 OF IRAN'S SOUTH PARS

Reports of Total's ouster from Phase 11 of South Pars were not premature after all, or so I take it given Sanchez Wang at Bloomberg's report that NIOC released a statement saying that it had signed a $5 billion contract with CNPC for that stage of the natural gas development.

8. RAFSANJANI PUBLISHES OPEN LETTER TO LEADER OF REVOLUTION CALLING ON HIM TO CURB PRESIDENT AHMADINEJAD AS TENS OF THOUSAND SUPPORTERS OF PRESIDENTIAL CANDIDATES HIT THE STREETS IN TEHRAN, BRINGING CITY TO A HALT

Thomas Erdbrink at the Washington Post reports that Ayatollah Rafsanjani, former President of Iran and head of the Council of Experts (which determines who is qualified to be the Leader of the Revolution [LOTR]) as well as the Expediency Council (which settles legislative disputes between the Iranian Parliament and the Guardian Council), published an open letter to LOTR Ayatollah Khamenei complaining the he had not acted in the face of President Ahmadinejad's "insults, lies and false allegations" in a televised debate between the President and presidential candidate, former prime minister Mir Hossein Mousavi. Rafsanjani, and by implication other members of the revolutionary old guard in Iran such as Mousavi himself, were called "corrupt" by the President in the televised debate. Rafsanjani wrote:

"If the system cannot or does not want to confront such ugly and sin-infected phenomena as insults, lies and false allegations made in that debate, how can we consider ourselves followers of the sacred Islamic system?"

The letter was published as tens of thousands of supporters for both candidates filled the streets in Tehran, reportedly bringing the city to a halt. Juan Cole at Informed Comment links to reports that Mousavi appears to have detached key support from the Iranian Revolutionary Guards Corps from Ahmadinejad, the main basis of Ahmadinejad's power--a struggle over which may have led to Ahmadinejad's louder than usual complaints of corruption. Michael Collins Dunn at the Middle East Institute Editor's Blog notes that every incumbent president who has run again in Iran has won, so a Mousavi victory would indeed be an upset. He remarks:

"if Ahmadinejad is voted out in Iran, we should not try to claim a great victory: nothing would taint a President Mousavi more, and Khatami never recovered from being portrayed as too soft toward the West."

The links and commentary by both Cole and Dunn are well worth going through, should you have time.

9. RICHMOND FED CHIEF SAYS GROWTH IS WHAT WILL TRIGGER FED FUND RATE HIKES; TIPS YIELDS AND GOOGLE TRENDS SUGGEST INFLATION IS OVERTAKING DEFLATION AS GEN PUBLIC'S CONCERN RE: ECONOMY

Judith Burns at Real Time Economics reports that Richmond Federal Reserve Bank President Jeffrey Lacker told reporters today that

"I think growth is likely to warrant rates as low as they are now for some time. We’ll just have to wait to see how the growth process unfolds for some time."

Lacker added:

"I think the growth process needs to govern our rate decisions and I think the growth process is more important in governing our rate decisions than the unemployment rate per se."

On Friday, Atlanta Fed President Dennis Lockhart suggested that the FOMC should be "anticipatory," and not wait too long to raise the federal funds rate following even more hawkish remarks by Kansas City Fed President Thomas Hoenig, who warned of "significant" inflationary pressures. On that news, the yields on two-year treasuries shot up to an eight-month high on speculation that the FOMC would raise rates in its November meeting--see Daily Sources 6/5 #12. In the meantime, Kelly Evans, also at Real Time Economics, reports that:

"This morning, the 'breakeven' or expected inflation rate for securities [TIPS or Treasury Inflation Protected Secutires] maturing next April moved into positive territory for the first time since the financial crisis intensified in mid-September. That essentially means investors in these securities of any maturity no longer expect deflation to set in by next spring--or indeed at any other point in the future. The 'breakeven' rate on ten-year securities is now over 2%; earlier this year, it was 0%. For 30-year investments, expected inflation is even higher, at about 4.7%."

Evans remarks on another, "unscientific"--though I'm not sure what's so scientific about implied inflation expectations via TIPS, indicator recently was that the number of google searches for "hyperinflation" look set to pass the number of google searches for "deflation":



Both measures seem, to me at least, to be barometers of speculation regarding future conditions--though perhaps, and just perhaps--for there is no precise way to measure this, the expectations inferred from the treasury markets are better informed expectations.

10. HOMEOWNER EQUITY IN HOUSEHOLD REAL ESTATE HAS FALLEN BY NEARLY 50% OF GDP; US IMPORTS AND EXPORTS CONTINUE TO FALL IN APRIL; GASOLINE PRICES RISING ENOUGH TO BEGIN TO SIGNIFICANTLY EAT AWAY AT STIMULUS

Felix Salmon at Reuters notes that homeowner equity in household real estate has declined nationally by nearly 50% of GDP.



Yves Smith, at Naked Capitalism, through whom this piece came to my attention, points out that the bubble begins in 1997. Salmon notes:

"It’s easy to see why this recession is so severe, if you think about the unsustainable consumption boom fueled by mortgage equity withdrawals between 1997 and 2006. The loss in wealth during the dot-com bust might have been similar, but the effect on consumption wasn’t nearly as big: people weren’t borrowing against their tech stocks in order to buy new kitchens."

Put that in the context of Rebecca Wilder's observation that consumer credit is retrenching for pretty much the first time ever in the US both on the back of savings, but also credit card companies slashing credit lines--see Daily Sources 6/8 #15 for an excellent graph of hers--and the average number of work week hours declining to levels not seen since 1964 combined with expectations of more layoffs--see Daily Sources 6/9 #7--it is hard to see the economy recovering on the back of consumption any time soon. (Household consumption is said to account for about 70% of US GDP.) And, in what could be interpreted as evidence backing this concern, Rebecca Wilder at News N Economics reports that the Census Bureau today reported that April imports were down $2.2 billion from March and April exports were down $2.8 billion from March. She plots a graph of US trade since January 2008 showing that trade is down 20-30% from then:



Her blog is always worth a look. The EIA reports that for the week ended June 8, the national average price of gasoline was up $0.10/gallon to $2.624/gallon--at the bottom of the range at which I deduce Americans start driving less, or at which you see further declines in oil demand.

Peter Boockvar at the Big Picture comments on the price of gasoline:

"To quantify, the US uses about 9mm barrels of gasoline per day with 42 gallons in each barrel, thus 378mm gallons per day and almost 140b per year. Therefore, for every $1 move in the price of gasoline, it’s an extra $140b more in consumer spending at the pump. If gasoline prices stay elevated, it will dramatically dilute the tax cut portion of the Obama stimulus plan. On Feb 17th, Pres Obama signed the $787b stimulus plan that included $237b of ‘tax relief’ for individuals, $116b of which was a temporary payroll tax credit for income earners under a certain level."

Chief US economist at IHS Global Insight Nariman Behravesh's rule of thumb is that a $0.10 drop in gas prices equates to about a $12 billion tax cut--see Daily Sources 11/18 #2.

11. US COMMERCIAL CRUDE STOCKS FALL

The EIA reported that for the week ended June 5, commercial stocks of crude oil fell by a whopping 4.4 million barrels. They are still well above the historical range for this time of year, but the move was in contrast to analyst expectations of a 100k stock build, per a Bloomberg survey. Gasoline stocks also fell by 1.6 million barrels,are below the historical average for this time of year, and in contrast to analyst expectations of a 750k barrel build. The surprise however, was that distillate stocks also fell by 300k barrels. Stocks are well above the historical range for this time of year, but the draw was counter-cyclical--and surprising given recent rail and truck freight data--see Daily Sources 6/8 #14.

12. REPORT ARGUES THAT OIL SHALE WATER USE WILL COMPETE WITH WATER DEMAND FOR URBAN GROWTH AND AG USE, MAY RESULT IN "CALL" PROTECTING DOWNSTREAM CONSUMPTION RIGHTS; WATER SHORTAGE IN SAN JOAQUIM VALLEY

Jeremy Miller at Green Inc. writes that a report by the non-profit Western Resource Advocates released in March argues that increased water use for oil shale in the Colorado’s Piceance Basin:

"could hamper urban growth in the Rocky Mountain Front Range, threaten agriculture and critical habitat for endangered fish and increase the likelihood that Lower Basin states like Nevada, Arizona and California would issue a 'call'--a legal decree that forces junior upstream water rights holders to reduce, or eliminate altogether, water use until senior downstream rights are met."

The Western Resource Advocates report can be found here. Meanwhile, the Western Farm Press reports that legislation to protect Delta smelt has reduced water deliveries to San Joaquin Valley farmers by 90% and may cost the area as much as 45,000 jobs. (h/t Aquafornia.)

Daily Sources 6/8

1. ELECTIONS FOR THE EUROPEAN PARLIAMENT END IN VICTORY FOR THE CENTER-RIGHT, LOW TURN OUT HELPS FRINGE RIGHT

Eurointelligence reports that the results of the European Parliament elections basically resulted in a win for the center-right, though it was marred by low participation.

"Overall, the winners are the center-right--and Jose Manuel Barroso, who with this vote will almost certainly stay on as president of the European Commission. Europe’s most successful national leader, in electoral terms, was Silvio Berlusconi, who managed to shrug off, or perhaps even benefit, from a string of scandals. He took 36% of the vote."

Eurointelligence provides the share of votes via this illustration:



However, Eurointelligence notes that voter participation was down to 43%, and has steadily fallen from 62% in 1979, which may lead to some questioning the body's legitimacy. Low participation also seems to have helped the fringe right. As Der Spiegel reports:

"Far-right and right-wing populist parties also did well in the election. In the Netherlands, the anti-Islam Freedom Party of the filmmaker Geert Wilders won around 17% of the vote, making it the second strongest party. The right-wing populist party True Finns won around 14 percent of the vote in Finland, up from just 0.5% in 2004. In Denmark, the right-wing populist DVP increased its share of the vote from 6.8% in 2004 to around 15 percent. Italy's right-wing populist Northern League won around 10% of the vote, giving it 8 seats, while in the UK the far-right British National Party won four seats."

It would seem that there will not be enough political support for Turkish membership in the EU any time soon. Worth reading in full.

2. GERMAN INDUSTRIAL ORDERS FLAT IN APRIL FROM MARCH, MÜNCHAU ARGUES THAT EXPORT LED ECONOMIES WILL NOT BE ABLE TO EXPORT OUT OF RECESSION, E.C.B. FISCAL POLICY MAY EXACERBATE THE PROBLEM

Ralph Atkins at the Financial Times reports that German industrial orders were flat in April from March, and the economic ministry revised upwards the growth in orders seen in March over February to 3.6% from its earlier estimate of 3.3%.

"The economics ministry noted that comparing April and March with the previous two months, industrial orders were up by 2%--the first such increase since December 2007."

Wolfgang Münchau at the Financial Times argues that export-led economies will not be able to rely on their export sectors to pull themselves out of the current economic crisis. Key excerpt:

"Global current account surpluses and deficits add up to zero. So if everybody is saving more, who will be dissaving? It will have to be the corporate sector in the countries with large net exports. So if the US, the UK and Spain are heading for a more balanced current account in the future, so will the surplus countries.

The current account balance can also be expressed as the sum of the trade balance, net earnings on foreign assets, and unilateral financial transfers. In several countries, including the US and Germany, the gap between exports and imports serves as a good proxy for the current account. A fall in the trade deficit in the US, UK and Spain implies a fall in the combined trade surplus elsewhere. And as some of the shifts in the US and the UK are likely to be structural, this will have long-term effects on others. In particular, it means the export model on which Germany, China and Japan rely, could suffer a cardiac arrest."

Münchau notes that the Merkel Administration's apparent decision to allow the euro to appreciate versus the dollar (and other currencies) could exacerbate the situation for Germany. A must read.

3. NORTH KOREA CONVICTS JOURNALISTS IN BID TO GET DIRECT TALKS WITH THE U.S.

Blaine Harden at the Washington Post reports that North Korea's Pyongyang Central Court this weekend sentenced two US journalists to 12 years of "reform through labor."

"'Now that they are sentenced, we can think and talk about making arrangements for their release,' said Han Seung-soo, a former South Korean foreign minister. 'It is ironic but with the sentencing we now have something more tangible to negotiate about.'"

Essentially it appears that the expert view is that Pyongyang expects the US to send a high-level envoy, the verdict being a way to force as direct bilateral negotiations as possible. Henry Kissinger has an op ed at the Washington Post in which he argues that North Korean nuclear non-proliferation is an especially apt issue for the "Great Powers" to cooperate on, given that it borders China, Russia, and is a neighbor of Japan. Key excerpt:

"Too much of the commentary on the current crisis has concerned the deus ex machina of Chinese pressures on North Korea and complaints that Beijing has not implemented its full arsenal of possibilities. For China, the issue is not so much a negotiating position as concern about its consequences. If the Pyongyang regime is destabilized, the future of Northeast Asia would then have to be settled by deeply concerned parties amid a fast-moving crisis. They need to know the American attitude and clarify their own for that contingency. A sensitive, thoughtful dialogue with China, rather than peremptory demands, is essential.

The outcome of such a dialogue is difficult to predict, but it cannot be managed unless America clarifies its own purposes to itself. A new argument in favor of acquiescence in North Korea's nuclear program contends that Pyongyang's conduct is really a cry for assistance against Chinese domination and thus deserves support rather than opprobrium. But turning North Korea into a ward of the United States is neither feasible nor acceptable to the countries whose support is imperative for a solution of the nuclear issue.

Furthermore, some public statements imply the United States will try to deal with specific North Korean threats rather than eliminate the capability to carry them out. They leave open with what determination Washington will pursue the elimination of the existing stockpile of North Korean nuclear weapons and fissionable materials. It is not possible to undertake both courses simultaneously."

Well worth reading in full.

4. PAKISTANI POSSE FORMS TO TAKE ON TALIBAN MOSQUE BOMBERS, MUSHARRAF SAYS THE U.S. DOES NOT UNDERSTAND THE EXTENT TO WHICH PAKISTAN'S SECESSIONIST FORCES ARE DUE TO SITUATION IN AFGHANISTAN

Riaz Khan at the Associated Press reports that as many 1,600 tribesmen have joined a citizen's militia in the Upper Dir district and are retaliating against the Taliban following the group's recent bombing of mosques.

"'The lashkar [aka citizen's militia] has destroyed 25 homes of Taliban commanders and their fighters in various villages,' [Khaista] Rehman [a local police chief] told The Associated Press by phone. 'The Taliban had set up their offices in those villages but the local residents and the lashkar have attacked them, and we hope the lashkar will succeed.'"

Meanwhile, Susanne Koelbl and Britta Sandberg at Der Spiegel conducted an interview with former Pakistani President Pervez Musharraf in which he suggests that the US doesn't understand the extent to which Pakistan's centrifugal inertia is driven by the situation in Afghanistan. Key excerpt:

"SPIEGEL: Are you disappointed by Obama?

Musharraf: No, he is aiming at the right things. He is showing intentions of improving the dialogue with the Muslim world, which is good. He is right when he says that more forces must be deployed in Afghanistan. There is an intention of increasing funding for Pakistan, which is also good. But he also has to understand the reality in Pakistan and I am not sure he does.

SPIEGEL: And how is the situation?

Musharraf: One of the realities is that the Indian intelligence service RAW is interfering in our country. For example in Balochistan, our largest province bordering Iran and Afghanistan. One of the most brutal insurgents against our forces, Brahamdagh Bugti ...

SPIEGEL: ... the grandson of Nawab Bugti, a tribal leader who was killed three years ago in a battle with the Pakistani army ...

Musharraf: ... he is sitting in Kabul, protected by the Afghan government and provided with weapons and money by the Indian intelligence agency RAW. He has his own training camps and sends his fighters to Balochistan where they terrorize people and damage the civil infrastructure. RAW is also interfering in the Swat Valley, I know that. Where do all these Taliban fighters in Swat get their arms and money from? From Afghanistan. The Indian consulates in Jalalabad and Kandahar only exist to be a thorn in the side of Pakistan."

Well worth reading in full. Meanwhile, also in Der Spiegel, German intelligence agencies have warned that al-Qaeda plans to launch attacks on Germans abroad, and perhaps in Germany itself, around German elections on September 27 in retaliation for Berlin's participation in the NATO mission in Afghanistan.

5. CITY OF PARIS MAKES DALAI LAMA AN HONORARY CITIZEN IN FACE OF SARKOZY'S EFFORTS TO RECONCILE WITH BEIJING, REPORTS OF TOTAL LOSING SOUTH PARS PHASE 11 PREMATURE

The BBC reports that the Dalai Lama has been made an honorary citizen of Paris.

"China on Monday called the Paris honor to the Dalai Lama a 'grave interference' in Sino-French ties."

In the beginning of April, the Chinese Foreign Ministry's website published a joint statement by Paris and Beijing intended to resolve tension over the perceived support for the Tibetian independence movement in advance of a meeting between Chinese President Hu Jintao and French President Nicolas Sarkozy on the margins of the G20 summit in London--see Daily Sources 4/1 #5. That meeting appeared to yield results when on April 9, Beijing announced it would send a purchasing junket to France--see Daily Sources 4/9 #2. And a bit later in the month, it looked as if the thaw was well under way when it was reported that France intended to invite Chinese President Hu Jintao to Paris for an official state visit--see Daily Sources 4/22 #3. (h/t Joshua Keating at FP's Passport Morning Brief.) Kate McKenzie at FT Energy Source notes that earlier stories reporting that Total had lost its role in Iran's South Pars phase 11 natural gas project to CNPC were premature, with the French oil and gas company reporting that it is still in negotiations. (For the original story of the switch, see Daily Sources 6/3 #10.)

6. CHINESE MAY POWER GENERATION DATA FOR MAY DOWN 4% Y.O.Y., STILL DOESN'T JIBE WITH G.D.P. DATA, INDONESIAN COAL EXPORT CONTRACTS TO CHINA FOR 2009 ALREADY EXCEED THOSE OF 2008

China Stakes reports that the according to figures from the Chinese State Grid, power generation in the last 11 days of May fell by 5.7% year over year,

"higher than the decline in the second 10 days of May, mainly because working days in the last 11 days of May this year are lower than that in the previous year, as the Dragon Boat Festival occurred at the end of May."

Zhao Guobao, vice director of the National Development and Reform Commission and director of the National Energy Administration, said that power generation fell by about 4% altogether in May, year over year.

"Zhao Bingren [ex-chairman of China Electricity Regulatory Commission] said statistics reported by some local governments representing drastic economic growth might not be true. 'I visited two provinces, and think their statistics are not true. They can never make up two important figures: power consumption and transportation.'"

In the middle of May, the IEA's global energy report cast doubt on China's official GDP numbers, saying that they did not match up with the drop in oil and electricity consumption--see Daily Sources 5/14 #2. In late May, the China Electricity Council, or association, reacted to the criticism by ceasing to publish its data on electricity consumption--see Daily Sources 5/29 #3. Meanwhile, Frontier Markets reports that PT Adaro Energy, Indonesia’s second-largest coal company, has already contracted for more coal sales to China in 2009 from 2008, or 3.5 million tons in 2009–up from roughly 2 million tons last year.

"Australian coal prices on the globalCOAL Newcastle index, a benchmark for Asia, ended Friday at $74.31/ton, while port coal prices at China’s top coal port Qinhuangdao remain around $92 a ton. 'As long as there is a difference between domestic and import prices, China will still be buying coal from overseas,' commented Apimuk Taifayongvichit, chief marketing and logistics planner at PT Indo Tambangraya Megah, the Indonesian unit of Thai Banpu ...."

Indonesia is the second largest exporter of coal globally.

7. CHINA CONSTRUCTION BANK HEAD SUGGESTS U.S. SHOULD SELL YUAN DENOMINATED BONDS IN HONG KONG AND SHANGHAI MARKETS

Martin Howell at Reuters reports that in an interview with Guo Shuqing, the chairman of state-owned China Construction Bank, he suggested that the US government and the World Bank should consider selling yuan-denominated bonds in the Hong Kong and Shanghai markets.

"Guo said it was in American interests to see the yuan, also known as the renminbi, become a currency that is traded across the globe. He said that is largely because of the symbiotic relationship between US purchases of Chinese goods and China's purchases of US assets with the proceeds."

He said that developing the Chinese debt markets would help US companies and international financial institutions fund investments in China--tapping into the Chinese savings, I take it.

"He said that foreign currency risk, particularly the risk that the yuan would continue to appreciate against the US dollar as it has in recent years, could be hedged."

And make folks in DC much more leary of a floating renmimbi. (In May the Japanese opposition platform included the notion of continuing to purchase US debt, but in yen-denominated bonds, so called "samurai bonds."--see Daily Sources 5/14 #1.)

8. SOUTH KOREAN MAY EXPORTS DOWN 28% Y.O.Y.

Brad Setser at Follow the Money reports that South Korea's May export data has exports down 28% year over year. He plots a graph for us:



He notes that exports fell a bit from their April levels, but I think that he puts a little undue emphasis on that, as April is 3.2% shorter than May. As the Reuters article he links notes:

"Exports value per working day--a measure that analysts and government officials use to assess the monthly change in exports--rose slightly to $1.28 billion in May from $1.27 billion in April."

Meaning perhaps the data doesn't exactly provide evidence of a "green shoot," though it may well be a sign that the export situation has bottomed. Setser goes on to note:

"Taiwan also reports its data quickly. Year over year, its exports are still down more than Korea’s (31% v 28%). But May’s exports were a bit higher than April’s exports. That at least hints at a recovery."

Well worth reading in full, as usual.

9. B.R.I.C.S ADD $60 BILLION IN FOREIGN RESERVES IN MAY

Shanthy Nambiar and Lilian Karunungan at Bloomberg report that the BRIC countries added $60 billion in foreign reserves in May in order to protect their export sectors.

"The BRICs are buying dollars at the fastest pace since before credit markets froze in September, protecting exports even as leaders of the biggest emerging markets consider alternatives to the US currency.

... Brazil bought the most dollars in a year, India’s reserves gained the most since January 2008 and Russia added the most foreign exchange since July."

10. IRAQ SAYS IF TURKEY DOESN'T RELEASE MORE WATER IT FACES AN ENVIRONMENTAL AND HUMANITARIAN CATASTROPHE

Aseel Kami at Reuters reports that Iraq's Water Resources Minister Abdul Latif Rasheed on Sunday called on Turkey to increase the flow of water in the Euphrates by 500 cubic meters a second.

"'We are passing through an emergency and the country is threatened with an environmental and humanitarian catastrophe,' said Karim al-Yaqubi, a member of a parliamentary committee that oversees water issues.

He said water purification plants in parts of the country like the province of Diwaniya, southeast of Baghdad, could not pump in water because it was too muddy.

Yaqubi said Turkey had briefly increased the river flow to serve its hydroelectric operations, but had then closed the sluice gates."

The AFP in May reported that experts were predicting an "agricultural disaster" in Iraq if Turkey continues to withhold water from the Tigris and Euphrates--see Daily Sources 5/21 #6.



Turkish President Abdullah Gul promised in March to double the flow of water allocated to Iraq during his visit to Baghdad--see Daily Sources 3/26 #14. It has been suggested that the promise was made in return for a crackdown on Kurdish guerrillas operating out of northern Iraq. On Saturday, farmers and fisherman protested in Najaf, calling on the government to demand the release of more waters from neighboring countries. (h/t Ben Lando at Iraq Oil Report.)

11. OBAMA ADMINISTRATION BACKS NUCLEAR FUEL BANK IDEA

Bryan Bender at the Boston Globe reports that the Obama Administration has thrown its support behind an international nuclear fuel bank, controlled by the IAEA. In his speech in Cairo last week, Obama expressed support for the right guaranteed by the Nuclear Non-Proliferation Treaty whereby every signatory has the right to develop a peaceful nuclear power program, saying "any nation--including Iran--should have the right to access peaceful nuclear power."

"Russia and Kazakhstan have offered to house an agency-supervised fuel bank, while Germany has called for the creation of a multinational enrichment company under the auspices of the IAEA."

(h/t Leanon at the Oil Drum's Drumbeat.)

12. 'MARCH 14' BLOC PREVAILS IN LEBANESE ELECTIONS

Nadim Ladki at Reuters reports that the Lebanese elections this weekend yielded a surprise victory for the anti-Syrian coalition.

"Results declared by Interior Minister Ziad Baroud showed Saad al-Hariri's pro-Western bloc had won 71 of parliament's 128 seats, against 57 for an opposition alliance that groups Shi'ite factions Hezbollah and Amal with Christian leader Michel Aoun.

Hariri's total includes three independents who ran on his lists in Sunday's election, which many had predicted would produce a slim victory for Hezbollah and its partners.

The vote was a blow to Syria and Iran, which support Hezbollah, and welcome news for the United States, Saudi Arabia and Egypt, which back the 'March 14' bloc, named after the date of a huge rally against Syria's military presence in 2005.

The United States had no immediate comment, but France, another backer of the bloc, praised the 'smooth functioning' of the election, which went off in mostly peaceful style."

13. CANADIAN OIL SANDS PRODUCTION COULD GROW TO 3.3 MB/D BY 2025

Platts reported on Friday that the Canadian Association of Petroleum Producers said that Canadian oil sands production could grow by 175% to reach 3.3 mb/d by 2025.

"If growth is confined to projects already operating or under construction, the oil sands will add only 800,000 b/d to the 2008 output of 1.2 mb/d, the report said.

By rolling in conventional and Atlantic Canada offshore volumes, CAPP projects that current total Canadian crude production could, under the minimum outlook, rise from 2.7 mb/d in 2008 to 3 mb/d in the 2015-2020 period, then slip to 2.8 mb/d.

Applying the 'growth case' scenario, the total volumes would reach 3.3 mb/d in 2015, 4 mb/d in 2020 and 4.2 mb/d in 2025."

14. AMERICAN TRUCKERS ASSOCIATION SEES DECLINE IN VOLUMES OF 2.2% YOY IN APRIL, MIRRORS RAIL DATA, I.E., DEMAND FOR DIESEL IS WEAK

Barry Ritholtz at the Big Picture reports that the American Truckers Association Tonnage Index declined a seasonally adjusted 2.2% in April, better than the 4.5% fall seen in March, but still down. Ritholtz quotes the chief economist of the association, Bob Costello, as saying:

"'While most key economic indictors are decreasing at a slower rate, the year-over-year contractions in truck tonnage accelerated because businesses are right-sizing their inventories, which means fewer truck shipments,' Costello said. 'The absolute dollar value of inventories has fallen, but sales have decreased as much or more, which means that inventories are still too high for the current level of sales. Until this correction is complete, freight will be tough for motor carriers.'"

Ritholtz notes that the Association of American Railroads' US rail carload traffic reports are mirroring the trucker results, unsurprisingly, showing a 24.7% year over year decline in May. Atlantic Systems Inc. plots the decline in volume for all North America for the week ended May 30:



Given that much of freight rail is powered by diesel, and most trucks burn it as well, you can see why US commercial distillate stocks are building at rates way above the historical norm:



15. CONSUMER CREDIT IS CONTRACTING FOR THE FIRST TIME EVER

Rebecca Wilder at News N Economics notes that consumer credit is "doing something that it hasn't done in a long, long time (ever)....retrenching."



Ms. Wilder notes:

"Consumers are actively paying down debt because they 'want to' (i.e., demand side), but likewise, they are being forced to as credit card companies slash credit limits."

Worth a look.

16. SOLAR POWER PLANTS WILL COMPETE WITH AG AND CITIES FOR WATER IN THE AMERICAN WEST

Robert Glennon has an opinion piece at the Washington Post which notes that the current technology for large scale solar power plants consumes large amounts of water.

"[M]ost large solar power projects use a system called concentrating solar power, or CSP, that heats a fluid that boils water to turn a turbine. CSP, just like any thermal power plant, produces waste heat as a byproduct. In most cases, cooling towers release the heat to the atmosphere through evaporation, a process that uses gobs of water. In fact, CSP uses four times as much water as a natural gas plant and twice as much as a coal or nuclear plant."

He notes that the water for these plants will have to come from other customers, especially in the American West.

"Over the last year, Arizona Public Service Company, the state's largest electric utility, has partnered with solar power companies to build two large-scale CSP projects on private land. The land, more than six square miles, has been used to grow alfalfa and cotton. These wet-cooled plants will use less water than the farms are already using.

This reallocation of water--from farming to power generation--offers a lesson for the country as a whole. As the United States confronts inevitable water shortages, we need to insist that power companies, developers and others who need water offset the impact of their new uses by persuading existing water customers to use less."

Last week, the Central Valley Business Times reported that three Congressman from California's Central Valley have written a letter to the House Natural Resources Committee saying that water shortages are being exacerbated by Federal decisions:

"They say the San Joaquin Valley and southern California face 'crippling job losses and economic disaster' because of federal decisions involving both the Delta smelt, a minnow-like fish that lives only in the Sacramento-San Joaquin Delta, and a proposal to curtail further water deliveries to California farms and cities to save salmon, steelhead, green sturgeon, and killer whales.

'Very little has been done to help California’s San Joaquin water-starved communities in the last few months,' the congressmen with in their letter to US Rep. Nick Rahall, the chairman of the committee, and US Rep. Doc Hastings, the senior Republican on the panel."

Orange County has reportedly fallen into a "severe drought," just as Summer begins. Connie Lewis at the San Diego Business Journal reports that:

"According to the San Diego County Water Authority, the amount of water it receives from the Metropolitan Water District of Southern California will be reduced by 13% starting July 1.

The county imports 71% of its supply from Metropolitan."

(h/t for these last two items to Aquafornia.)

Daily Sources 10/27

1. In a delicious bit of irony I missed, al-Qaeda reportedly prefers a McCain Presidency, as per Nicholas D. Kristof at the New York Times.

2. Brian Blackstone at Real Time Economics reports that most analysts believe that the Federal Open Market Committee will reduce the federal funds rate by 50 basis points (0.5%) at its Tuesday-Wednesday meeting, bringing it down to 1%. The political will to reduce it even further allegedly exists. Also at Real Time Economics, Henry J. Pulizzi, Jeffrey McCracken and John D. Stoll report that White House Spokeswoman Dana Perino told journalists that the Administration has been "working 'as quickly as we possibly can' to release $25 billion in recently approved loans to the auto makers. But she declined to elaborate on other specifics steps that could be taken to help the ailing companies." Also, Jean-Claude Trichet told reporters in Madrid today that the ECB may cut interest rates again at its next meeting on November 6, as per Ben Sills and Gabi Thesing at Bloomberg. William Sim and Seyoon Kim, also of Bloomberg, report that the Bank of South Korea cut the benchmark lending rate 75 basis points (0.75%) to 4.25%.

"'More aggressive cuts are on the way,' said Lee Sang Jae, an economist at Hyundai Securities Co. in Seoul, who expects Korea's key rate will be slashed to around 3 percent by the first half of 2009. 'The government would need to expand tax cuts and increase fiscal spending to support the economy.'"

Chris Bryant at the Financial Times reports that Peer Steinbrück, the German finance minister, told the media on Sunday that "The danger of a collapse is far from over. Any attempt to give the all clear would be wrong."

3. There are a slew of articles on the crisis spreading to the emerging market countries, including this one from Credit Writedowns. The upshot is that European banks invested much more than their American counterparts in the emerging markets. Often loans and investments made by European banks were made in dollars, which means that if you want to cash out, you cash out in dollars, putting more upward pressure on the dollar. Laura Cochrane and Fabio Alves at Bloomberg report that emerging market markets were hit hard this morning. Margaret Coker and Chip Cummins at the Wall Street Journal report on the financial crisis as it hits the Persian Gulf states, hitherto deemed immune from the credit crunch. Investors are liquefying their assets in the region.



See Yves Smith's analysis and links at naked capitalism here, here, and here.

4. Carlos Caminada, Shruti Singh and Jeff Wilson at Bloomberg report that analysts are predicting that the credit squeeze--as well as falling commodities prices--is likely to reduce global production of staple foods worldwide.

"Global production of wheat, the most-consumed food crop, may drop 4.4 percent next year, said Dan Basse, president of AgResource Co. in Chicago ....
...
Futures contracts on the Chicago Board of Trade show wheat will jump 16 percent by the end of 2009, corn will rise 15 percent and soybeans will gain 3 percent.
...
'The net effect of the financial crisis may end up being lower planting, lower production,' [Abdolreza] Abbassian [secretary of the of the Intergovernmental Group on Grains at the UN Food and Agriculture Organization] said. 'More people will go hungry.'

In Brazil, the world's third-biggest exporter of corn after the U.S. and Argentina, production may fall more than 20 percent because farmers can't get loans to buy fertilizer, said Enori Barbieri, a National Corn Producers Association vice president. The nation's coffee harvest, the world's largest, may drop 25 percent for the same reason, said Lucio Araujo, commercial director at farmer cooperative Cooxupe, located in Guaxupe.
...
Minnetonka, Minnesota-based Cargill and Decatur, Illinois-based Archer Daniels, the world's largest grain processors, are among the crop buyers to halt financing for growers in Brazil, said Eduardo Dahe, who represents the companies as president of the National Association of Fertilizer Distributors.
...
In Russia, loan rates for farmers have jumped by half in some cases to more than 20 percent in the past few months, Arkady Zlochevsky, president of the Russian Grain Union, said in an interview earlier this month.
...
The value of the collateral farmers use to secure loans -- crops and land -- is diminishing. Lenders are demanding more equity for farm loans used to run operations or acquire land and equipment.

'We need two to three times the amount of money we used to need with the same collateral,' said Bo Stone, 37, a seventh- generation farmer in Rowland, North Carolina. 'It means we have way more risk than we've ever had. This is a time where one bad crop year, with the amount of money and input tied up, could potentially cost you your equipment, land and livelihood.'"

(h/t Gregor.us) In a related story, Javier Blas and Tim Johnston of the Financial Times report that Thai officials plan to barter rice for oil with Iran. The UNFAO believes that we should see more government-to-government deals like this going forward given the credit crunch and volatility in the commodities market.



5. Joshua Partlow at the Washington Post reports that President Luiz Inácio Lula da Silva's Party--the Workers' Party--lost the race for governor of the largest city in Brazil (and South America, for that matter), Sao Paulo. Sometimes it's bad to be king. That is, I'd expect a worldwide financial crisis to dim the hopes of incumbents everywhere.

6. Jeffrey Gettleman at the New York Times report that angry crowds in Congo are forming and throwing rocks at UN peacekeeping forces, apparently taking out frustration on them because they are unable to keep the peace as renegade general Laurent Nkunda's rebel forces advance Westwards. As far as I know, no one doubts that the constant warfare in the Congo is a humanitarian disaster, veering toward the genocidal. The problem is that there is no power sufficiently strong whose interests are threatened by it. It must be a pan-sub-Saharan-African solution, but who in the industrial world will pay for the inevitable political compromises (and thus human suffering) that would be required for a stable state to be incorporated? It's not an especially appetizing option, is it? If you don't have a dog in the fight, you aren't likely to want to force a settlement one way or another.

7. In a somewhat strange--to my eyes--development, I am seeing more and more suggestions as to what China should do to save the industrialized world from this financial crisis. The most recent is a piece by the editorial board of the New York Times. In a piece which I'm sure policymakers in Beijing were at pains to decipher, the Times suggested that Beijing's recent policy efforts were insufficient and misguided ... China should spend its cash reserves on converting from an export economy to an import economy! This follows on the suggestion by Brad Setser for Beijing to increase its purchases of Agency debt!--which, as the government has gone out of its way to publicize, are not backed by the full faith and credit of the US. And the other notion--almost wistful hope--that China should spend its cash on greening the energy infrastructure of Europe and the US! Being free with advice is considered by some to be an American trait, and I guess if you're a financial adviser, you advise those who happen to still have some cash. And maybe China's leaders are listening to the American punditocracy, who knows? But, were I Chinese, I would wait to see what happens to the dollar after this technical unwinding phase plays out before I would undertake something on that scale. In the meantime, Beijing appears to be using its cash in the traditional way overseas. The latest news is that it is working to provide a $1.5 million soft loan--ie, a loan with below market rates of interest--to Pakistan, after all.

8. Winnie Lee at Platts has a different read than the Bloomberg story of October 13 on what government statistics indicate in terms of crude imports, and thus demand. Ms. Lee reports that net crude imports for September were 14.45 million tonnes (3.53 mb/d), a 1.7% decline from imports of 15.25 million tonnes (3.59 mb/d) in August. Year-over-year net crude imports grew by 7.4% September. (On the 13th, Winnie Zhu and Wang Ying had suggested crude imports had surged 46% to 20 million tonnes in September.) China's apparent petroleum demand in September was 29.42 million tonnes (7.16 mb/d), 5.4% more than September 2007. However, demand growth numbers have been steadily been trending down, July saw 9.6% y-o-y growth and August saw 8.3% y-o-y growth as refiners draw down stocks built up to provide energy security for the Olympics.

9. Platts reports that Iran's OPEC governor Mohammad Ali Khatibi said on Sunday that OPEC is prepared to make further quota cuts in the December meeting, if the quota adjustment agreed to on Friday fail to stabilize the markets. Reuters reports that Qatari Prime Minister Sheikh Hamid bin Jasim told the media Monday that "The current prices are a bit low. We are talking about prices ranging from $70 to $90 which we think are fair for consumers and producers." Saudi Oil Minister Ali Naimi told reporters on Friday that the Khurais oil field will be operational--at 1.2 mb/d--in mid-2009. The field produces varieties of Arabian Light, a fairly high quality crude with between 33 and 36 API and with a sulfur content of 1.9% by weight.

10. Angela Moon at Reuters reported that SK Energy has dropped plans to build a refinery in China. SK had eyed the naphtha market in China given that the product is not as rigorously price-managed by the government as others. Evidently the losses seen by refiners in China over the last year caused SK to reconsider. (This is especially interesting because South Korea's energy security policy is to be a refining center. If you have more refining capacity than you need, and export the excess product, you are likely to have enough crude imports at any given time to weather a shortage. South Korea's policy has been copied in Singapore and is in the process of being instituted in India. Also, as Japanese refining capacity becomes more sophisticated and demand, due to an aging population structure, continues to decline, is also entering the market of product exports in Asia. Clearly the competition is stiff. Thus some, especially Saudi Arabia, some international oil companies, and, until now, South Korea decided that the best way to beat the competition is to actually produce "export" product inside the export destination country, ie China. That strategy might be especially difficult to pursue in a highly volatile international price environment while operating within the product prices market centrally managed by Beijing. Either way, the stakes involved are huge.)

11. Juan Cole has an analysis of some of the fighting in northwest Pakistan. He has some observations--and links--on the effectiveness of arming tribal levies against the Taliban in Pakistan and Pakistani armed forces proper efforts.

"Maulvi Faqir Muhammad and his Tehrik-i Taliban frontally attacked Pakistani military checkpoints and started a feud with the Pakistani army. The Tehrik-i Taliban has been blamed for the assassination of Benazir Bhutto last December, and it is said that as her widower, Asaf Ali Zardari, rose to the presidency, he pressured the military to destroy the movement, with which he now has a family feud."

Very interesting.

12. Patrick Ugeh at Nigeria's This Day reports that two major Nigerian oil unions called off proposed strikes after the government retracted a statement saying it planned to privatize the Nigerian Gas Company and Pipeline and Product Marketing Company.