Daily Sources 6/22

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

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

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

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

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

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



He comments:

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

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

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

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

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

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

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

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

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

The other must read of the day.

2. GLOBAL RETAIL SALES NUMBERS DOWN

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



She observes:

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

Worth reading in full.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

7. TALIBAN OPERATIONS IN AFGHANISTAN AND PAKISTAN RE-CENTRALIZING

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

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

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

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

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

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

His ask sounds more like a threat than a plea:

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

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

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

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

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

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



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

Daily Sources 6/15

1. ECB FINANCIAL STABILITY REPORT SUGGESTS EUROZONE FINANCIAL SECTOR MAY LOSE ANOTHER $238 BILLION BY THE END OF 2010; EU SUMMIT THIS WEEK TO PROVIDE ADDITIONAL FUNDING TO IMF

Frances Robinson at Bloomberg reports that the European Central Bank released its June Financial Stability Report today which suggested that eurozone banks may lose another $283 billion by the end of next year. About $365 billion of losses have already been reported by the sector.

"'There is no room for complacency because the risks for financial stability remain high, also bearing in mind that the credit cycle has not yet reached a trough,' ECB Vice President Lucas Papademos said at a press briefing in Frankfurt today. 'Policy makers and market participants will have to be especially alert in the period ahead.'"

That said, Papademos indicated the bank's assessment that the banks were sufficiently capitalized to withstand plausible scenarios including severe downturns. He also indicated that the ECB saw no need to take further measures at this time to address the crisis. In the meantime, Eurointelligence reports that FT Deutschland has acquired a copy of the draft summit declaration by the EU summit this week which includes a promise for additional funds to the IMF.

"The article says the unexpected increase in IMF funds suggest that governments expect more countries to get into financial difficulties. The papers talks about large credits to the Baltic Republics, but also to Poland. The summit text also explicitly rules out any additional stimulus packages."

2. MOSCOW EXPRESSES CONFIDENCE IN THE DOLLAR

Susanne Walker and Dakin Campbell at Bloomberg report that Russian Finance Minister Alexei Kudrin said that Moscow has confidence in the dollar and that the country has no "immediate plans" to switch reserve currencies. I suggested in an earlier post that the decision by the BRIC countries--and possibly Mexico--to purchase SDR-denominated bonds has more to do with accepting more clout within the IMF than deciding to replace the dollar--see Daily Sources 6/12 #1.

3. GEORGIA CONTINUES TO BE BOGGED DOWN BY POLITICAL TURMOIL - BELARUSSIAN TENSIONS WITH RUSSIA CONTINUE TO GROW

Yevgeny Bendersky at the Compass reports that political turmoil continues to bedevil the Russian near abroad in Georgia. Large scale protests are continuing in Georgia as the opposition has resorted to some (unserious) physical attacks on members of the Saakashvili government.

"Saakshvilki's opposition continues to blame him in mismanaging the country's politics and resources. On June 12, Georgian opposition leader David Gamkrelidze accused Mikhail Saakashvili that he sold to Russia the country's only main railroad. Speaking at a meeting held in front of the Parliament of Georgia, Gamkrelidze said: 'What other crime can the country's main official do? We already have a divided territory, strategic objects are sold to Russia...the country lost investments because of President's actions....' Gamkrelidze also noted that the contract for the sale of the rail road has not yet been signed, due to the fact that protests continue in Tbilisi. According to the Interfax News Agency, Chairman of the 'Russian Railroads' Vladimir Yakunin is due to arrive in Georgia, with one of the possible topics for his visit to be the discussion over the sale of the Georgian railway. The representatives of 'Georgian Railways' Joint Stock Company, denied information on the planned visit by Mr. Akunin."

Bendersky also notes that Victor Chernomyrdin was released from his post as Ambassador to Ukraine and that President of Belarus Alexander Lukashenko has instructed his government to prepare proposals to introduce customs and border clearance with Russia. Well worth reading in full. Meanwhile, Ellen Barry reports that Lukashenko decided not to attend the summit meeting inaugurating the Collective Security Treaty Organization in Moscow Sunday, a military alliance originally to include Russia, Belarus, Armenia, Kazakhstan, Kyrgyzstan, Tajikistan, and Uzbekistan. Lukashenko reportedly decided not to sign the agreement due to the recent imposition of a ban on dairy product imports by Russia on Belarus.

"Beginning June 6, Russia banned a list of around 1,200 Belarussian milk and dairy products, saying they violated new packaging rules imposed last year. The ban dealt a crushing blow to Belarus’s dairy industry, which sends 95% of its exports to Russia."

Uzbekistan also declined to become a formal member of the alliance at this time.

4. FDI INTO CHINA CONTINUES TO FALL, STIMULUS NOT TRANSLATING INTO INCREASED DEMAND FOR IMPORTS

Terence Poon at the Wall Street Journal reports that foreign direct investment in China in May fell by 17.8% from a year previous to $6.379 billion, according to data released by the Ministry of Commerce today.

"Actual FDI in China's western and central regions fell more than 30% in the January-May period from a year earlier, sharper than the drop for the overall country. Yao [Jian, spokesman for the Commerce ministry,] said the disparity is because the financial crisis is prompting foreign companies--many of which are based in the more developed coastal regions--to increase their existing investments in China, rather than attract new companies to invest in the country.

Referring to deepening export declines in May, Mr. Yao said the government will double short-term export-credit insurance to $84 billion this year from $43.2 billion in 2008, providing insurance coverage for around 15% of total exports, up from 6.5%. He added the ministry is working to improve trade financing for the export of heavy machinery."

AFP reports that Chinese Premier Wen Jiabao said during a visit to Hunan province that:

"As the outlook of the global economy remains unclear and external demand continues to decline, the recovery of our economy is not firmly rooted yet. We must not underestimate these difficulties."

He indicated that Beijing would adjust the stimulus program to adapt to changing economic conditions. Brad Setser at Follow the Money notes that the industrial production number released Friday of an increase of 8.9% year over year in May combined with the data released on Thursday showing imports and exports down 25.2% and 26.4% respectively leads to some questions.

"Lets do some very rough ballpark math. I’ll start by assuming that about 40% of China’s industrial production--pre-crisis--was exported. I think that is about right, but I don’t have the actual number. Help here would be appreciated. If industrial production for export was 40% of total production and if it fell by around 25%, the 60% of industrial production that is far domestic use would need to be up around 30% to generate 9% y/y growth.

That is a big increase. And it isn’t totally implausible. Lending and investment are way up. So are stimulus driven auto sales. But it also raises the question of why it took China so long to really stimulate domestic demand if it had such latent capacity to grow without relying on exports."

Setser notes that if such domestic demand is supporting industrial production, then it hasn't spilled over into demand for the world's goods, plotting a graph of South Korean and US exports to the country--both of which are down:



Well worth reading in full.

5. SOUTH KOREA TO ASK US FOR WRITTEN DECLARATION OF NUCLEAR PROTECTION

Blaine Harden at the Washington Post reports that South Korean President Lee Myung-bak is en route to Washington DC for a meeting with President Obama where he is expected to ask for a written promise of US nuclear protection.

"Lee and Obama, in what will be their second meeting, will also discuss a free trade agreement between their two countries.

It was signed in 1997, but has not been ratified by the Senate, primarily because of concerns about imports of South Korean cars into the United States and strict limits in South Korea on imports of US beef."

6. IRANIAN LEADER OF THE REVOLUTION CALLS FOR INVESTIGATION INTO ELECTION, TNES OF THOUANDS DEFY BANS ON PROTESTS, MOUSAVI CALLS FOR CALM, AHMADINEJAD SEEKS TO LINK UNREST TO FOREIGN INFLUENCE

Thomas Erdbrink at the Washington Post reports that Ayatollah Ali Khamenei, Leader of the Revolution [LOTR], ordered the Guardian Council on Sunday to launch an investigation into the election results this Friday which showed President Ahmadinejad winning with 63% of the vote. The Guardian Council was instructed by the LOTR to issue its findings within 7-10 days. His instructions followed a meeting with opposition candidate Mousavi on Sunday, where the LOTR urged him to use legal avenues to challenge the election, and the two then jointly urged calm. Riots had broken out over the weekend.

"Pro-reform candidate Mir Hossein Mousavi attended the rally at Tehran's Revolution Square on Monday afternoon, making his first public appearance since the election. Another opposition candidate, Mehdi Karroubi, also planned to attend.

Thousands of Mousavi's supporters went ahead with the demonstration despite an Interior Ministry ban. There was virtually no police presence in the area as the protesters marched from Revolution Square, along Azadi Street to Freedom Square. They chanted slogans against Ahmadinejad, denounced what they charged was vote rigging and vowed to keep protesting. They also appealed to police monitoring the demonstration to join them."

Ali Sheikholeslami and Ladane Nasseri at Bloomberg report that "hundreds of thousands" of protesters defied the ban on the protest to rally in Tehran. Mousavi appeared at the protest and urged the crowd to remain calm. President Ahmadinejad postponed a trip to Moscow today--a sure sign that the situation is unstable. In a news conference yesterday, Ahmadinejad sought to link the opposition to foreign influence, saying that Iran is "not afraid of threats." Obviously the political environment is very tense in Iran just now, here is Italian TV footage of protests in the country yesterday:



(h/t Juan Cole at Informed Comment.) Footage from the 1979 revolution:



The Old Guard clearly will notice similarities. How it will play out is awfully difficult to see, but I believe that the situation may get out of hand if the regime is unable to reassert legitimacy under the Iranian Constitution ... I will try and post on that a little later today.

7. NETANYAHU SPEECH ENDORSES TWO STATE PRINCIPLE

Isabel Keshner at the New York Times reports that the prime minister of Israel, Benjamin Netanyahu, in a speech on Sunday endorsed the principle of a two-state solution.

"But he firmly rejected American demands for a complete freeze on Israeli settlements in the West Bank, the subject of a rare public dispute between Israel and its most important ally on an issue seen as critical to peace negotiations.

And even his assent on Palestinian statehood, given the caveats, was immediately rejected as a nonstarter by Palestinians.

In a half-hour speech broadcast live in Israel, Mr. Netanyahu, the leader of the conservative Likud Party, laid out what he called his 'vision of peace': 'In this small land of ours, two peoples live freely, side-by-side, in amity and mutual respect. Each will have its own flag, its own national anthem, its own government. Neither will threaten the security or survival of the other.'

But Mr. Netanyahu insisted on 'ironclad' guarantees from the United States and the international community for Palestinian demilitarization and recognition of Israel’s Jewish character."

Hamas has recently adopted a policy shift allowing for a peace agreement along the lines of the 1967 borders, but it seemed at the time that Netanyahu could not maintain a coalition if he accepted the principle of a two state solution--see Daily Sources 6/12 #9. The full text of the speech was carried by Haaretz. (h/t Joshua Keating at FP Passport's Morning Brief.)

8. SAUDI ARABIA CALLS FOR MORE INVESTMENT IN PRODUCTION CAPACITY FROM REST OF WORLD

Nadim Kawach at Emirates Busines 24/7 reports that in an address to an oil industry conference in Beijing, Mohammed Madi, Chief Representative in Beijing of Aramco's Saudi Petroleum, said:

"We must recognize that depressed oil prices are not only detrimental to the economies of petroleum producing nations but also to the interests of consuming countries. That may seem counterintuitive, but consider that sustained and timely investments in petroleum projects and infrastructure are essential for maintaining future supplies at adequate levels.

Current oil prices do little to encourage the necessary massive investments, and without them we may experience supply shortages once demand picks up in the future. Unfortunately, our industry may already be sowing the seeds for future problems. If others do not begin to invest similarly in new capacity expansion projects, we could see within two to three years another price spike similar to, or worse than, what we witnessed in 2008."

Well worth reading in full.

9. UGANDAN OFFICIAL OIL RESERVES UPPED TO 2 BILLION BARRELS, WORRIES ABOUT POTENTIAL CONFLICT WITH THE DEMOCRATIC REPUBLIC OF CONGO

Eric Watkins at the Oil and Gas Journal reports that the Ugandan Finance Minister Syda Bumba announced that Ugandan confirmed oil reserves were at 2 billion barrels as of June, up from 300 million barrels in 2006. The announcement came

"amid concerns about a military confrontation between Uganda and its neighbor, Congo (former Zaire).

According to newswire reports, Congo has established a border post in the disputed region of Goli near the northwestern Ugandan district of Nebbi, near Lake Albert and along the oil-rich Albertine rift.

'I believe this is just aggression,' said Betty Adima, commissioner for Nebbi district. 'It is provocation. That is the simplest way I can put it,' Adima told the Agence France Presse.

The Ugandan government has sent a protest note to Congo over the incursion, but has no plans to deploy troops of its own in the disputed region at the moment, according to a spokesman for the Ugandan defense ministry."

10. GLOBOVISIÓN CALLS FOR DIALOGUE WITH CHÁVEZ, LLOYD'S LIST PUTS VENEZUELA ON LIST OF MOST RISKY COUNTRIES FOR SHIPPING

Patrick Markey at Reuters reports that Globovisión owner Alberto Ravell on Saturday appealed for a dialogue with the Chávez administration, saying:

"The president should know that if he wants to talk we are ready. We should have a dialogue like in any civilized country. Our door is always open, now it is up to the president to decide. ... The president has called and told us to behave correctly or he'll close us down, but what is behaving correctly? Not informing people?"

Meanwhile, Jerry Frank at Lloyd's List reports that the Lloyd’s and London company insurance markets’ Joint War Committee has reacted to Chávez's renewed nationalization drive by placing the country on its list of most risky places for shipping. The list includes Somalia, Nigeria, Ivory Coast, Pakistan, Sri Lanka, the southern coast of Thailand, Georgia and parts of Indonesia, Malaysia and Philippines. In March, the National Assembly passed a law transferring the administration of ports from state and municipal authorities to the federal government--see Daily Sources 3/16 #11. In April, the Chávez administration began a campaign to oust those governors that opposed his move to federalize the ports--see Daily Sources 4/22 #7.

"[Neil] Roberts [the Lloyd’s Market Association-based secretary of the JWC, said]: 'The US has also raised its fears over the substandard implementation of the International Ship and Port Facilities Security Code.'

Most of the world’s marine hull war risk insurance business is written out of London, and Venezuela’s new status will mean shipowners operating in the country could face new terms and conditions and/or additional premiums.

'Ultimately, this is an advisory note and it up to underwriters to decide how they wish to act on this decision,' added Mr Roberts.

The JWC’s decision covers the whole of Venezuela, including all of its offshore installations stretching 200 nautical miles off the coast that as part of its international law of the sea Exclusive Economic Zone."

Meanwhile, Robert Mayer at Platts reports that Venezuelan oil minister Rafael Ramirez said Friday that it has entered into negotiations to acquire a 49% stake in the Dominican Republic's Refidomsa 34 kb/d refinery. "Refidomsa gained 100% control of the refinery in June 2008 upon buying Shell's 50% stake in the company for $110 million." The purchase reportedly would include plans for expanding the refinery.

11. US HOUSEHOLD NET WORTH FELL AT 16.25% ANNUAL RATE IN Q1

Rebecca Wilder at News N Economics reports that the Federal Reserve's flow of funds report for the first quarter of 2009 indicates that household net worth fell at an annual rate of 16.25%. She plots a graph of the ratio of net wealth to disposable income from Q1 1951 to Q1 2009:



and comments:

"Between 2005 and 2007, this ratio averaged a whopping 6.2. During the period 2005-2007, tangible asset values fell almost 1%, while financial assets grew a huge 16%! Liabilities likewise grew almost 18%, mostly on accumulated mortgage debt. Oh man."

Well worth reading in full.

Daily Sources 5/14

1. JAPANESE OPPOSITION PLATFORM TO CONTINUE PURCHASING U.S. DEBT, BUT DENOMINATED IN YEN; ROUBINI SAYS DIFFICULT MEASURES MUST BE TAKEN IF THE DOLLAR IS NOT TO LOSE ITS POSITION AS RESERVE CURRENCY TO THE YUAN; FORMER TRANSLATOR FOR DENG XIAOPING SAYS CHINESE SENTIMENTAL ATTACHMENT TO THE DOLLAR IS ON THE WAY OUT

BBC reports that the chief finance spokesman for the main opposition party in Japan, the Democratic Party of Japan (DPJ), said in an interview with the broadcaster that Tokyo will only continue to purchase US debt if it is denominated in yen.

"However observers say that, while the move would be a remarkable policy shift, it was unlikely that Mr Nakagawa's party will win the forthcoming election, due before mid-September, despite the unpopularity of the ruling Liberal party."

Linda Sieg and Yoko Kubota at Reuters report that former DPJ leader Yukio Hatoyama announced his candidacy to lead the party after Ichiro Ozawa's resignation last week amidst a scandal in an effort to boost the party's chances of winning upcoming elections. The reporters enumerate some key elements of Hatoyama's background, including:

"Hatoyama is known less for economic policies than for his stance on security and diplomacy. He has advocated revising Japan's pacifist constitution to acknowledge the nation's right to defend itself and maintain a military for that purpose. He has also been critical of Japan's foreign and security policies for being too subservient to close ally the United States."

The so-called FACTBOX is worth consulting. Nouriel Roubini, professor at NYU made famous by his forecast accurate in many particulars of the current crisis, has an op ed in the New York Times where he dismisses arguments that the euro could replace the dollar as the world's reserve currency, instead suggesting that the renminbi is likely to take its place. Key excerpt:

"If China and other countries were to diversify their reserve holdings away from the dollar--and they eventually will--the United States would suffer. We have reaped significant financial benefits from having the dollar as the reserve currency. In particular, the strong market for the dollar allows Americans to borrow at better rates. We have thus been able to finance larger deficits for longer and at lower interest rates, as foreign demand has kept Treasury yields low. We have been able to issue debt in our own currency rather than a foreign one, thus shifting the losses of a fall in the value of the dollar to our creditors. Having commodities priced in dollars has also meant that a fall in the dollar’s value doesn’t lead to a rise in the price of imports.

Now, imagine a world in which China could borrow and lend internationally in its own currency. The renminbi, rather than the dollar, could eventually become a means of payment in trade and a unit of account in pricing imports and exports, as well as a store of value for wealth by international investors. Americans would pay the price. We would have to shell out more for imported goods, and interest rates on both private and public debt would rise. The higher private cost of borrowing could lead to weaker consumption and investment, and slower growth.

This decline of the dollar might take more than a decade, but it could happen even sooner if we do not get our financial house in order."

Well worth reading in full. Victor Zhikai Gao--executive director of the Beijing Private Equity Association and a director of the China National Association of International Studies--also has an op ed in the New York Times which points out that many Chinese actually have a sentimental attachment to the US dollar, known by many as mei jin, or "American gold." The dollar had for many years cache simply because it was illegal to hold them--the law required that all private citizens convert dollar holdings into the renminbi, and thus the notion of the dollar being "gold" long outlasted Nixon's decision to delink the dollar from the yellow metal. Key excerpt:

"Beijing recently called for a greater role in international trade for the special drawing rights currency of the International Monetary Fund. But China is also fully aware that the United States can veto an IMF decision. China’s call was more meant to sound an alarm to the United States.

Many Chinese people increasingly fear the rapid erosion of the American dollar. The United States may want to consider offering inflation-protection measures for China’s existing investments in America, and offer additional security or collateral for its continued investments. America should also provide its largest creditor with greater transparency and information.

We still call the dollar American gold. But the United States should not assume that this will never change."

2. THE IEA SAYS CHINESE GDP DATA MAY WELL BE WRONG; KEY CHINESE STATISTICIAN OUTLINES PROBLEMS WITH CHINESE RETAIL SALES DATA

David Winning at the China Journal reports that the Paris-based IEA global energy report today cast doubt on Beijing's official 6.1% GDP growth number for the first quarter, saying it didn't quite reconcile with a 3.5% drop in oil consumption.

"'Admittedly, pinpointing China’s oil demand with accuracy is an exercise fraught with difficulties, given the lack of data and the underlying assumptions analysts must make regarding stocks and refinery output from independent producers,' the IEA said in its latest report on the global oil market.

'Still, one would have expected stronger, positive oil demand growth commensurate with the reported economic resilience, unless income elasticities had drastically changed.'

The IEA floated another possibility: Real GDP data aren’t accurate and shouldn’t be taken at face value."

The IEA also mentioned a fall in electricity generation, which I noted in yesterday's Daily Sources 5/13 #2 were supposed to have fallen by as much as 4% in April after experiencing year over year declines in power generation for the last seven months. Chinese statistics have been in for a lot of rubbishing recently Andrew Batson reports in China Journal: a new essay by Xu Xianchun, a top statistician at the National Bureau of Statistics tries to explain why "one can’t simply add up China’s monthly indicators of investment and spending to get an accurate picture of gross domestic product."

"Yet many economists have long felt that the retail sales figures are not a reliable guide to China’s household consumption. Mr. Xu himself notes these well-known gaps, pointing out that the official retail sales numbers include things that cannot be considered consumer spending.

The most important are retail sales to companies and institutions, which of course are not consumers at all, and sales of construction materials for housing, which should be counted as part of household investment. Retail sales also do not include spending on services like education or health care, or rural households’ consumption of produce they grow themselves, he notes.

'Compared with retail sales, using household consumption expenditure obtained from the rural and urban household surveys is closer to consumer spending,' Mr. Xu writes.

Those measures show much slower growth than the headline retail sales figure. Mr. Xu says the bureau’s household surveys put the real growth in urban household consumption in the first quarter at 9.6%, and 9.3% for rural households. That would mark somewhat faster growth than in the second half of 2008 but somewhat slower growth than in the first half, when food prices soared, according to figures previously released by the bureau."

Worth reading in full. The National Bureau of Statistics is attempting to overhaul its data collection and publication methodologies in the face of growing criticism regarding the accuracy of their data--see Daily Sources 5/7 #2 (near the bottom of the item.)

3. PLANS TO ALLOW MAINLAND CHINESE INVESTMENT FLOWS TO TAIWAN CAUSING IRRATIONAL EXUBERANCE IN TAIWANESE MARKETS

Jonathan Adams at the New York Times reports that after announcing plans late last month to sign accords providing for cross-strait exchange in banking, insurance and access to financial markets the Taipei stock markets and dollar have been posting strong gains in the face of horrible economic data.

"[S]ince Ma Ying-jeou was inaugurated as president nearly a year ago, Taiwan has moved rapidly to forge closer commercial links with China to lift its sagging economy. In the past year, it signed deals with China on tourism, airline flights and shipping.

Investment, however, has remained a one-way street, flowing from the island to the mainland. Taiwan has invested $150 billion in the mainland since the 1980s, according to one Taiwan government estimate. Mainland China has until now been barred from directly investing in Taiwan."

For now, Beijing is capping Taiwan-bound investment at 7.2 billion Taiwan dollars (~ $219 million) leading analysts to remark that the market is likely overreacting.

4. BANK OF ENGLAND WARNS THAT RECOVERY WILL BE PROTRACTED TO 2012, LONDON COMMERCIAL RENTALS AT PRICES LAST SEEN IN 1991

Julia Werdigier at the New York Times reports that Mervyn King, head of the Bank of England, warned yesterday that "Growth has just as much chance of being positive over the next 12 months as it has of being negative."

"The central bank predicted that inflation would slow to as low as 0.4% this year and then accelerate to 1.5% by the end of 2010, revising upward an earlier forecast. But inflation is still unlikely to hit 2% by 2012, the central bank said."

2012. Mr. King said the recovery would likely be "slow and protracted." Meanwhile, Chris Bourke at Bloomberg reports that commercial rent in the city of London, the UK's main financial district, has fallen to levels last seen in 1991.

"The City already has enough empty offices to hold two- thirds of Canary Wharf, the docklands area developed 1 1/2-miles east in the 1980s to lure investment bankers. About 9 million square feet (855,000 square meters) are available in the City and that may climb to 12 million by the end of 2009, according to CB Richard Ellis Group Inc., the biggest commercial property broker. Almost 19% of all City offices may be vacant next year, analysts at CB Richard Ellis estimate."

(h/t Barry Ritholtz at the Big Picture.)

5. SPANISH GDP DOWN 1.8% IN Q1, RECOVERY COMPLICATED BY DEBT TO GDP RATIO

Edward Hugh at Fistful of Euros reports that Spanish GDP fell at a rate of 1.8% in the first quarter following a 1% contraction in the fourth quarter of 2008 which, annualized, results in a contraction of 7.2%.

"Over the first quarter of 2008 (that is year on year) GDP decreased by 2.9%, the sharpest decline recorded in almost 40 years. In fact you would need to go back to 1945 to find a year in which the Spanish economy contracted as strongly as it is likely to this year."

Hugh argues, in the very long post, that the crisis in Spain is mostly due to excessive bank lending--to get 4% annual GDP growth Spanish households and corporations were apparently increasing their borrowing by a rate of 20% per annum. Hugh concludes:

"So as I say, debt to GDP is most probably rising even now, but it is obviously going to have to come substantially down, which is why I insist on saying, this correction has hardly even gotten underway yet."

Long, but with substantial detail and worth reading given time.

6. RUSSIA PROPOSES RENEGOTIATING THE CONVENTIONAL FORCES IN EUROPE TREATY, BELARUSSIAN PRESIDENT COMPLAINS THAT RUSSIA HAS NOT WORKED FOR RENUNION, GEORGIAN OPPOSITION LEADER SAYS SAAKASHVILI IS TRYING TO CREATE AUTOCRATIC STATE

Vladimir Isachenkov at the Associated Press reports that Russian Foreign Ministry spokesman Andrei Nesterenko told the media that Moscow is proposing to renegotiate the Conventional Forces in Europe Treaty, and would honor the agreement if the changes were accepted by Washington and its NATO allies.

"The 1990 treaty limits the number of tanks, aircraft and other heavy non-nuclear weapons that could be deployed west of the Ural Mountains--the edge of European Russia. A new revised version was signed in 1999, but NATO countries have not ratified it and in 2007 Russia suspended its participation."

The West has insisted that Moscow remove troops from the breakaway regions of South Ossetia and Abkhazia as a prerequisite for reconsidering the CFE treaty. Meanwhile, Yevgeny Bendersky at the Compass reports that Belarussian President Aleksandr Lukashenko last week blamed Moscow for failing to reunite Russia with Belarus.

"'The fact that we have not progressed in constructing a federal partnership is not our fault. It is their (Russia's) fault... Who does not fulfill the contract on the construction of the Unified State? We had to hold a joint referendum on that. Why didn't we? Because the Russians did not want to,'--said Lukashenko, advising Moscow to 'look at the internal causes of turmoil in our relationship.'"

Although the Belarussian reunification with Russia would likely be regarded with serious alarm in the West, the standard take on this, if I recall correctly, is that United Russia, the party of Medvedev and Putin, doesn't particularly want Lukashenko as a political challenger for the presidency and that Moscow doesn't particularly want to bear the costs of reintegrating the Belarussian economy, which has been basically destroyed by Lukashenko.



Prime Minister Putin is, by the way, Chairman of the Council of Ministers of the Union of Russia and Belarus. Belarus was one of the nations explicitly targeted by the EU's "Eastern Partnership" initiative, which would offer better trade ties, relaxed visa rules and aid over four years for six countries neighboring Russia--see Daily Sources 5/7 #1. Meanwhile, Benjamin Bidder at Der Spiegel conducted an interview with Georgian opposition leader Salome Zurabishvili in which she calls President Sakaashvili "insane." Key excerpt:

"SPIEGEL ONLINE: But during the war between Russia and Georgia in August of 2008 you united the entire opposition in support of Saakashvili. You even forbade any criticism of the president.

Zurabishvili: That was following the national tragedy! We stood united so that we could prevent Russia from using the situation to their advantage after the war.

SPIEGEL ONLINE: Why is the opposition so set on seeing Saakashvili as the bogeyman?

Zurabishvili: There is simply no one to turn to in other state institutions because none of them have any power anymore. That's the situation in which we find ourselves. The situation is serious and very dangerous. Because if, after these peaceful protests, we don't get any results--not even a small concession--then things could get out of control, as they did on May 6th."

Zurabishvili also accuses the President of faking the mutiny at the Mukhrovani tank camp--see Daily Sources 5/5 #4--saying that he is attempting to intimidate the armed forces as opposition to his administration grows. In short, she accuses the President of trying to establish an autocratic state.

7. TURKISH CENTRAL BANK CUTS BENCHMARK RATE TO 9.25%, CONSUMER PRICES RISING AT SLOWEST RATE SINCE 1970

Steve Bryant at Bloomberg reports that the Turkish Central Bank has reduced its benchmark interest rate by 0.5% to 9.25%.

"Bank Governor Durmus Yilmaz has shaved 7.5 percentage points from the benchmark rate in seven months, joining policy makers worldwide in trying to pull economies out of recession as inflation slows. Turkish consumer prices rose an annual 6.1% in April, the slowest pace since July 1970."

Unemployment rose to 15.5% in January, the highest rate seen since records were inaugurated in 2005.

8. 735 CARGO SHIPS ANCHORED OFF SINGAPORE ON COLLAPSE IN GLOBAL TRADE, 300 OFF ROTTERDAM, 150 OFF GIBRALTAR

Keith Bradsher at the New York Times reports that as many as 735 cargo ships, some weighing as much as 300,000 dead weight tonnes, have anchored off the coast of Singapore in the Strait of Malacca on the global fall in international trade. Charles Pertwee captured a beautiful picture of the situation for the Times, illustrating the concern shipping lines have as the parked behemoths are creating an obstacle course in one of the busiest shipping channels in the world:

"The gathering of so many freighters 'is extraordinary,' said Christopher Pålsson, a senior consultant at Lloyd’s Register-Fairplay Research, the consulting division of Lloyd’s Register-Fairplay. 'We have probably not witnessed anything like this since the early 1980s,' during the last big bust in the global shipping industry.

The world’s fleet has nearly doubled since the early 1980s, so the tonnage of vessels in and around Singapore’s waters this spring may be the highest ever, he said, cautioning that detailed worldwide ship tracking data has been available only for the last five years."

Ships are anchoring off other ports too with about 300 off Rotterdam and 150 off the Strait of Gibraltar.

9. THE IEA CUTS GLOBAL OIL DEMAND FORECAST TO A 3% REDUCTION FROM 2008, WORST DEMAND REDUCTION SINCE THE OIL SHOCK OF 1981, BUT OIL INVENTORIES MAY HAVE STOPPED BUILDING

Mark Shenk at Bloomberg reports that the Paris-based IEA cut its estimate of global oil demand to 83.2 mb/d in 2009, down 3% from 2008 and the steepest fall since the oil shock of 1981. This is triple the decline forecast by the IMF in Global Financial Stability Report of a decline in oil use of 1.5%--see Daily Sources 4/22 #1. (The IMF records an oil use decline of 2.87% in 1982.) OPEC and the EIA also lowered their global demand forecasts this year. John Kingston at The Barrel gives three reasons why the global build in inventories that has happened over the last months has, in his view, probably come to an end. Key excerpt:

"Platts' Sheela Tobben reported that the volume of foreign crude sitting aboard floating storage in the US Gulf has declined to around 20 million barrels Wednesday, from 30-35 million barrels at the end of April, according to market sources. This follows sales that began last week by holders of that oil under pressure from a narrower NYMEX crude contango, a stronger WTI/Brent and the incentive provided by healthy gasoline margins, they said. 'Last count sweet and sour total about 20 million barrels in the USG but seems a little high given many stems moved last week,' said a trader with a major, referring to several sales of Russian Urals last week.

With the world markets seeing tighter inventories, the most visible sign of it is in the spread among different calendar months delivery of crude. Following the release of the API inventories, the spread between June and July crude had narrowed to 70 cts, with July about that much higher than June. At one point in mid-April, the front month to second month spread was more than $3. That sort of movement only occurs when inventories are being drawn down, and the numbers, and stories from the market, are beginning to confirm that."

Worth reading in full. Keith Johnson at Environmental Capital also notes that Barclays' Paul Horsnell thinks that inventories will now start drawing down, which means it is only a question of when, not if, oil goes back above $70/b. (JBC Energy predicted oil would start coming out of storage at sea on May 5th as Goldman Sachs predicted all available oil storage would be full by June, see Daily Sources 5/5 #5.) In the meantime, al-Hayat, a Saudi paper widely watched by the oil patch, reported that in a recent meeting with French Economy Minister Christine Lagarde Saudi King Abdullah and Oil Minister al-Naimi said factors other than supply and demand had pushed the price above $60/b in the first place, according to Reuters.

10. CARBON TAXES WILL MAKE SUPER-POLLUTING CANADIAN OIL SANDS LESS ECONOMICAL

It is an old story, but it bears repeating. Ben Casselman at Environmental Capital reports that carbon taxes will make oil sands production in Canada that much more difficult to make economical. Oil sands production releases huge amounts of carbon into the atmosphere via current technology, and the Canadian Energy Research Institute thinks that new emissions regulations would likely push the price of economically producing oil from oil sands to $105/b. "As a result, CERI expects growth in the oil sands to be as much as 40% lower in the coming years than previous projections." Oil sands represent a considerable portion of Canadian production--and Canada is the largest exporter of oil to the US.

11. OBAMA BLOCKS RELEASE OF ADDITIONAL PRISONER ABUSE IMAGES

Peter Wallsten and Janet Hook at the Los Angeles Times reports that the Obama Administration decided yesterday to block the release of additional images depicting the abuse of prisoners by US military personnel in Iraq. The decision, which may be reversed by the courts, will surely make some rethink their view that the administration represents a clear break with its predecessor. On the other hand, the visceral reaction that people have to pictures of people abusing captives is much more emotional, and potentially explosive, than to a decision to go back on campaign promises of transparency. I suspect that the decision is with the safety of US personnel overseas foremost in mind. That said, the decision begins the process of erosion of the Administration's credibility--perhaps inevitable, but ultimately the load-bearing pillar of soft power for any Administration.

12. S&P INDICATED EXPECTATION FOR BANKING CRISIS TO CONTINUE FOR 3 - 4 MORE YEARS, AIG TELLS CONGRESS IT WILL TAKE 3 - 5 YEARS TO COMPLETELY RESTRUCTURE, US SENATE OK'S 41% INTEREST RATES ON CREDIT CARDS

Jonathan Stempel at Reuters reports that Standard & Poor's Managing Director Tanya Azarchs said--though it did not mention via which medium--"There's nothing to say that this banking crisis can't go on for another three or four years."Stemple writes that the Managing Director indicated that the rating agency thinks the banking crisis has merely entered into a new phase, which should last some time. He writes:

"While efforts to spur lending, take bad assets off banks' balance sheets, and restart the market for packaging and selling securities may help the sector, S&P said banks will have a tough time surviving absent a bigger capital cushion than regulators require."

I'm not sure why anyone would pay attention to the ratings agencies given their total failure to warn the market prior to its meltdown, but, hey, you know what they say in the financial sector--"past performance is no indication of future performance"--so perhaps some credence ought to be extended to Ms. Azarchs. Meanwhile, Edmund L. Andrews at the New York Times reports that the Chairman of AIG, Edward M. Liddy, told the House Committee on Oversight and Government Reform that it would likely take the company three to five years to restructure and fully repay its obligations to the US taxpayer.

"'We must take the time and exercise the diligence to do this restructuring properly,' [Liddy] told lawmakers. 'Let me be clear: our plan is explicitly designed to avoid having to divest A.I.G. assets at fire-sale prices.'"

When pushed for more detail on the restructuring plan, Liddy reportedly "balked," but indicated he would do so under conditions more likely to preserve the plan's confidentiality. In the meantime, Carl Hulse at the New York Times reports that the US Senate has rejected a bill which would cap credit card interest rates at 15%, 33-60. Apparently the US Senate has determined that credit card companies must be allowed to charge its customers rates as high as 41% if they are to remain viable entities. Senator Bernie Sanders (I-VT) introduced the bill arguing that over a third of all credit card holders pay interest of over 20% on their debts to the companies.

13. SEASONALLY-ADJUSTED INITIAL JOBLESS CLAIMS UP TO 637,000 FOR WK ENDED MAY 9, CHRYSLER AND GM SENDS LETTERS LETTING GO THOUSANDS OF RETAIL FRANCHISES

Bob Willis and Shobhana Chandra at Bloomberg report that the Labor Department today released data showing that seasonally-adjusted initial jobless claims grew by 32,000 to 637,000 in the week ended May 9.

"The total number of people collecting unemployment insurance surged in the prior week to 6.56 million, setting a record for the 15th straight week and indicating companies are still not hiring. The lack of jobs may restrain consumer spending, the biggest part of the economy, and put off a return to growth that economists project for later this year."

The unadjusted for seasonality advance number of actual initial claims under state programs totaled 565,395, up 27,856 from the previous week. There were 325,480 initial claims in the comparable week in 2008. The previous week's initial unemployment claims number was revised slightly upwards to 605,000 from 601,000. Nick Bunkley at the New York Times reports that Chrysler filed a list of the car dealers it is cutting from roster in bankruptcy court today. 789 of its 3,200 dealers will lose their franchise with the company as of June 9.

"[S]ome dealerships could be saved by rulings from Chrysler’s bankruptcy judge or if other dealers decide to sell their franchises."

Tomorrow 1,000-1,200 dealers are expected to receive a similar letter from GM. The National Automobile Dealers Association are meeting today with members of the Obama Administration to urge them to reduce the letting as much as possible.

14. PRODUCER PRICES UP 0.3% IN APRIL FROM MARCH, DOWN 3.7% FROM A YEAR PREVIOUS

Jack Healy at the New York Times reports that the Labor Department released data today showing that producer prices rose by 0.3% in April from March, but down 3.7% from a year previous. Most of the price increase came from food prices--which rose by 1.5%--and oil prices. If you exclude energy and food prices from the index it rose 0.1% in April from March.

Daily Sources 2/2

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

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

The Economist reported:

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

The piece goes on to say,

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

And includes the following illustration:



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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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



Worth a look.

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

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

Financial analysts expect utilization rates to continue to shrink drastically.

Daily Sources 1/2

1. Philip P. Pan at the Washington Post reports that the political leadership in the Ukraine have been put aside in a joint statement yesterday offering Gazprom $201 per thousand cubic meters of natural gas, up 11.7% from the $180 per thousand cubic meters paid in 2008. The negotiations between Moscow and Kiev have been hobbled somewhat by the fact of the longstanding and bitter feud between Ukrainian president, Viktor Yushchenko, and its prime minister, Yulia Tymoshenko. That said, Gazprom at 10am yesterday cut off all shipments of natural gas through the Ukrainian pipeline system. Also yesterday, Gazprom withdrew its offer of natural gas for $250 per thousand cubic meters to Ukraine after Ukraine rejected it and is now asking for $418, more or less the price paid by Western European customers. Stephen Bierman and Henry Meyer at Bloomberg report that Russia has reacted by boosting the amount of natural gas to Europe via the Belarussian pipeline network. Russia provides about a quarter of Europe's natural gas requirement, 80% of which has historical been sent via Ukraine.

"'The Belarus option is certainly viable and they could put some of the gas through Belarus,' Jonathan Stern, director of gas research at Oxford Energy, said today. 'But it certainly is not the solution. There is some spare capacity within the Belarus corridor but it is probably within the order of 10 percent from Ukraine capacity.'"

Ukraine receives 70% of its natural gas requirement from Russia and is facing temperatures in Kiev of as low as 14ºF. It has natural gas supplies in storage equivalent to about 35% of yearly consumption and so it would seem that the crisis is not likely to be resolved just yet. The Bloomberg article is worth reading in full.

In a related story, Tom Barkley at the Wall Street Journal reports that the IMF plans to lend Belarus $2.5 billion to help the country weather the financial crisis. "Following news of the deal, the Belarus central bank said it will devalue its currency by 20% as of Jan. 2 and raise its key refinancing rate." Belarus paid about $129 per 1,000 cubic meters of gas from Russia in 2008 and may have negotiated a lower price for 2009, but is a staunch ally of Moscow with which it has been mooting the idea of reunification for many years now.

2. Nadia Rodova at Platts reports that Russian crude oil production was down 0.7% in 2008 from 2007, to 488.105 million metric tonnes (9.735 mb/d). Average daily output, as opposed to total tonnage, was down 1% on the year from 9.83 mb/d. Crude output in December was 40.87 million tonnes (roughly 9.62 mb/d.)

3. Alexander Kwiatkowski and Candido Mendes at Bloomberg report that Angola assumed the Presidency of OPEC yesterday.

"Oil from Angola accounted for about 5 percent of total U.S. crude imports in 2007, or 496,000 barrels a day, according to the Energy Information Administration. China imports 500,000 barrels of day of oil from Angola, according to Glencore International AG, the world’s largest commodity-trading company."

4. Li Yanping at Bloomberg reports that manufacturing in China contracted for the fifth straight month in China, as indicated by the CLSA China Purchasing Managers’ Index. The index stood at 41.2 at the end of December, slightly up from the 40.9 seen in November. (Anything above 50 indicates growth; anything below 50 indicates contraction.)

"China’s economic growth may have slipped to 5.5 percent last quarter, the weakest pace in at least 15 years, according to Shanghai-based Industrial Bank Co."

Anything below 8% is considered below the rate required to absorb new additions to the labor market and thus likely to cause instability. In the vein, Lauren Keane at the Washington Post has an atmospheric, finger testing the wind, story about the situation facing migrant workers in China. China's People's Daily reported Wednesday that the People's Bank of China released a report on Tuesday showing that non-cash payments declined by 8.3% year over year in the third quarter.

"The amount of money involved in non-cash payments, including commercial papers and bank cards, was about 157.3 trillion yuan ($22.97 trillion) in the third quarter ...."

Catalan economist Edward Hugh has another analysis at Fistful of Euros more or less calling the latest Chinese data a leading indicator for a second Great Depression.

"Well China isn’t quite in Great Depression mode yet, but manufacturing activity - which forms the core of the Chinese economy and accounts for 43% of all activity - is already very close to a technical recession ...."

Hugh's piece is a long analysis friendly to economic laymen worth reading in full. Brad Setser at Follow the Money argues that the latest data suggests that China is clinging to its traditional export-led growth policy, which flies in the face of the growing evidence that there will export markets are in the process of shrinking, protectionist trade policy or not. Mostly the same argument Setser has been making for a while, but still worth reading.

6. Eric Watkins at the Oil & Gas Journal reports that Indonesia will continue its price renegotiations for natural gas from Tangguh with China this month. The original 25 year contract for the gas had been for $2.40/MMBtu (~ $13.92/b on a BTU basis.) China later offered $3.80/MMBtu (~ $22.04/b on a BTU basis), but Indonesia declined. (The contracts are sometimes linked to benchmark crude prices on a futures exchange with ceilings and floors, Watkins did not indicate whether the contract was based on a formula or a flat price.) Yesterday the NYMEX natural gas contract for delivery at Henry Hub in February was $5.622/MMBtu (~ $32.60/b on a BTU basis) the UK price was £5.7/MMBtu (~ $8.34/MMBtu or ~ $48.37/b on a BTU basis.)

7. Kartik Goyal and Anil Varma at Bloomberg report that the Reserve Bank of India lowered its benchmark lending rate by 1% to 5.5% today.

8. Ravi Nessman of the Associated Press reports that the Sri Lankan military captured the Tamil Tiger's main headquarters Friday. It is the latest episode in the 25 year long civil war and celebrations erupted in Colombo after the capture was reported. The Tigers immediately signaled they would continue the fight by exploding a suicide bomb near the air force headquarters in Colombo.

9. Amit R. Paley in the Washington Post reports that the US handed over control of the "green zone" yesterday to Iraqi authorities.

The Green Zone was in the heart of Baghdad, the capital city, and as such the transfer was a symbol of the transfer of sovereignty.

10. Mohamed Ibrahim and Jeffrey Gettleman at the New York Times report that the Ethiopian army began pulling out of Somalia's capital, Mogadishu, today.

"It is not clear whether the Ethiopian troops are leaving Somalia entirely or simply redeploying from Mogadishu to other areas of the country. Western diplomats estimate there are still several thousand Ethiopian troops inside Somalia, and many Somalia analysts have predicted that the Ethiopians will linger for some time inside the country or along the border as a buffer against Islamist militants."

That said, last month Addis Ababa indicated that it would withdraw more or less entirely. An Ethiopian official told the AFP that the withdrawal process will take some time, meaning, I suppose, that they may decide to use troops to tip the contest for power in Somalia in favor of one faction or another.

11. Simon Romero of the New York Times reports that Cuba held celebrations yesterday to mark the 50th anniversary of its revolution. In the Washington Post Eugene Robinson argues that it is time for the US to abandon the 50 year policy of embargoing Cuba, which has clearly not produced the intended result.

"US policy for dealing with the rest of the communist world was always to push for more contact and exchange, on the theory that exposure to Western ideas, freedoms and prosperity would hasten communism's demise. It worked.

I'm convinced that it would have worked in Cuba, too. At the very least, if the U.S. government had treated Cuba the way it treated other communist nations, the onus would have been on Castro. If he wanted to keep Cuban society from being infected by democracy, consumerism and other yanqui diseases, he would have had to justify measures to keep Americans and American products out. Instead, he has been able to portray his revolution as a noble David, menaced by a hulking, aggressive Goliath to the north."

This argument has been being made with little practical effect for some time now, with the exception of lifting the ban on sales and donations of food and medicine to Cuba in the late 90s. The difference is that there is evidence that the Cuban-American community is finally coming round to this point of view. Once support for the policy collapses in the Cuban-American community, the embargo will lose nearly all of its political appeal. I suspect, like Robinson, that the only reason Castro has managed to maintain his hold on Cuba is the embargo.

12. In an unusual move, The Wall Street Journal's editorial board today endorsed Sarkozy's remark that "the monetary system should be rethought [within] fixed exchange rates." The board argues that the euro has been a signal success for Europe, but that its volatility against the dollar has traumatized global trade.

"But the world could ... harness the benefits of exchange-rate stability if its political and economic leaders began to discuss how better to coordinate monetary policy. Mr. [Robert] Mundell[, the Nobel laureate and intellectual father of the euro,] suggests, for starters, a mechanism for close coordination among the Fed, the ECB, and the Banks of England, China and Japan."

Mundell also argues that the escalation of financial panic of September 2008 was catalyzed by the sudden rise of the dollar versus the euro. Well-worth reading in full.

13. Daniel Goldstein at Platts reports that the US Department of Energy may begin purchasing crude for the Strategic Petroleum Reserve again in February. The DOE announcement follows calls from Congress that the Administration do just that. The SPR currently holds somewhat more than 700 million barrels of crude oil and has a capacity of 727 million barrels. Prior to the decision in May last year to cut off additions to the SPR, the complex was receiving about 70 kb/d in crude deliveries--mostly of light sweet crude.

14. Bernard Simon at the Financial Times reports that "US hybrid petro-electric sales in November shrank 53 per cent from a year earlier, compared with a 37 per cent drop overall, according to Autodata, a market-research firm. December sales, to be announced on Monday, are to show a similar trend."

"Sales of most hybrid models have dropped sharply. Demand for Toyota’s Prius hatchback, the top-selling hybrid, fell by almost half in November from a year earlier. The Camry sedan was down 57 per cent, and the Ford Escape crossover 35 per cent."

15. Howard Schneider at the Washington Post reports that the Institute for Supply Management's index of industrial production fell by 3.8% in December from November to 32.4. It is the fifth consecutive month in which the index has fallen. (A number above 50 indicates manufacturing growth; below 50 indicates contraction.)

"The group's index of new orders and prices showed them at their lowest levels since the late 1940s. ... The ISM has conducted its survey since 1931."

16. Andrew Martin, at the New York Times, has a very interesting story on the huge surplus of milk on the market.

"Other agricultural sectors are also struggling with a slowdown in demand from foreign buyers because of the global recession and an increase in the value of the dollar, which has made American exports more expensive abroad. The Agriculture Department is expecting steep declines in exports of corn, wheat, soybeans and pork.

But while the government has price-support programs for about two dozen agricultural products, so far milk powder is the only commodity that has sunk low enough to start the flow of government dollars. Some expect that taxpayers will soon be buying blocks of cheese, too, given the plunging price."

It might be inefficient, but ensuring a surplus of food is a very good thing for political stability. That said, countries which are net food importers will have a tough time if surplus producing nations have expensive currencies. Well worth reading in full.

17. Robert Rosenkrantz, the Chairman and CEO of Delphi Financial Group, has an opinion piece in the Wall Street Journal where he argues that capital reserve requirements for bond holdings should not be determined by law on the basis of credit rating agencies.

"For every dollar of equity that insurance companies are required to hold for bonds rated AAA, $3 is needed for bonds rated BBB, and $11 is needed for bonds rated just below investment grade (BB). For banks, the sensitivity of capital requirements to ratings is generally even more extreme.
...
Since the ratings determine required capital, they have a profound influence on how financial institutions invest their assets -- in effect, the regulatory reliance on ratings makes the rating agencies the de facto allocators of capital in our system. And every actor in the financial system has every incentive to group and slice assets in ways that maximize not their fundamental soundness but their rating."

Given that the ratings agencies have been shown to be in the pocket of the financial industry, this certainly makes sense to me. However, it still seems to me that in order for the financial system to regain some footing, consumers will need to have a reliable sense of what assets and liabilities public corporations hold. Taking the rating agencies out of the law might be reasonable, but it would not resolve this particular problem at all. Worth reading in full.

18. Yves Smith at Naked Capitalism reports on a study by Carmen Reinhart and Kenneth Rogoff which suggests that the on the basis of past financial crises that the economic contractions that follow as a result are usually much larger than normal--non-financially catalyzed--recessions.

"Their latest piece looks at how crises generally progress and resolve themselves. The usual outcomes are worse than most commentators forecast for the US (save the fall in average real estate prices):

1. Real housing price declines average over 35% over a six year period. Note in other crises, residential real estate was not necessarily a focus of the bubble. Even excluding Japan (which has suffered a 17 year housing price decline) the average is over 5 years.
2. Equity prices fall 55% over three and a half years.
3. GDP fall an average of 9% (read that twice)
4. Unemployment increases 7% over previous norms.
5. Government debt "explodes", increasing an average of 86%, but the cause is typically not a banking industry recapitalization, but maintaining services in the face of collapsing tax revenues and counter-cyclical measure ex financial system measures."

Well worth reading in full.