Daily Sources 8/3

NETHERLANDS TO LEAVE NATO

Robert H. Reid at the Washington Post reports that the Netherlands became the first NATO country to withdraw its troops from Afghanistan this Sunday.

"Canada has announced that it will withdraw its 2,700 troops in 2011, and Polish President Bronislaw Komorowski has promised to pull out his country's 2,600 troops the year after."

EURO ZONE MANUFACTURING PMI WAS 56.7 IN JULY

Prieur du Plessis at Investment Postcards from Cape Town reports that

"The Euro Zone Manufacturing PMI of 56.7% for July released by Markit yesterday was even better than the earlier flash estimate of 56.5% − a number that surprised on the upside. Despite all the gloom and doom about the prospects for the euro zone, growth of both manufacturing production and new orders accelerated to the fastest growth since April while employment rose at its fastest rate in 26 months."

For a table of PMIs and their trends, click on the link.

CHINA'S US DOLLAR HOLDINGS NOT OUR PROBLEM

Yves Smith at naked capitalism pours cold water on the notion that Chinese holdings of large amounts of US dollar reserves is somehow the US's problem.

KUWAIT COMFORTABLE WITH $75 - $85 /B OIL

Bloomberg reports that Kuwait is comfortable with oil prices in between $75 and $85/b.

"'We are satisfied with the range of $75 to $85,' Sheikh Ahmad Al Abdullah Al Sabah said in Moscow on Tuesday. 'We don’t anticipate any cuts but we do encourage other OPEC countries to be more compliant.'"

MANUFACTURING PMIs FOR EMERGING ECONOMIES POINT TO GROWTH SLOWING

Prieur du Plessis at Investment Postcards from Cape Town notes that "the Markit Manufacturing PMIs for emerging economies generally point to growth slowing in the manufacturing industries in the respective countries." For a table of PMIs and their trends, click on the link.

TREASURY SECRETARY SAYS THE RECOVERY IS WITH US

Treasury Secretary Timothy Geithner has an op-ed at the New York Times entitled Welcome to the Recovery. My guess is that its more than a tad premature, but it's worth reading.

CONSUMER SPENDING STAGNATED IN JUNE

Timothy R. Homan at Bloomberg reports that consumer spending stagnated in June, with purchases unchanged after a revised downward increase of 0.1% in May. The savings rate increased to 6.4%.

PENDING HOME SALES FELL BY 2.6% IN JUNE

Peter Boockvar at the Big Picture reports that "[a]fter dropping a whopping 30% m/o/m in May after the expiration of the tax credit, Pending Home Sales unexpectedly fell by 2.6% in June vs a forecasted rise of 4%."

WORLD BANK PAPER CONCLUDES THAT BIOFUELS NOT THE CAUSE OF GRAIN PRICE SPIKE OF 2006-2008; WORST DROUGHT IN 50 YEARS IN RUSSIA DRIVING UP GRAIN PRICES AGAIN

Renewable Energy World.com reports that a new white paper from the World Bank concludes that biofuels were not responsible for the spike in grain prices from 2006 - 2008. Although the report concludes that ethanol was a factor, it points to a number of other factors that caused the price spike, including energy prices, speculation in the futures market, and poor weather conditions in certain areaas. Meanwhile, Maria Kolesnikova at Bloomberg reports that Russia is facing the worst drought in fifty years is threatening the winter grain sowing plans.

"Wheat jumped to a 22-month high in Chicago trading yesterday, extending a 38 percent advance in July that was the biggest since 1973."

Daily Sources 8/7

1. BALTIC DRY INDEX FALLS 17% ON REDUCED CHINESE DEMAND FOR COAL AND IRON, FUEL OIL--USED FOR SHIPS AND ELECTRICITY GENERATION--SWITCHING INTO CONTANGO ON INCREASED SUPPLY AND FALLING DEMAND, CRUDE RUNS SLIGHTLY DOWN IN CHINA ON 7% INCREASE IN PRODUCT INVENTORIES IN JUNE, AND THE SECOND-LARGEST CHINESE BANK WILL REDUCE NEW LENDING BY 70% IN 2H 2009

Alaric Nightingale at Bloomberg reports that the Baltic Dry Index fell by 17% this week on reduced Chinese demand for coal and iron.

"'The Chinese have backed off and it’s starting to show in the number of shipments this month,' Gavin Durrell, a Cape Town-based official at Island View Shipping SA, Africa’s biggest commodities shipping line, said by phone today. 'Iron ore and coal seem to be slowing down.'

China’s record coal and iron ore imports in the first half helped the index to advance as much as fivefold this year, reversing some of the record 92% collapse in 2008. Demand rose after the country’s government announced a 4 trillion yuan ($586 billion) stimulus package."

(h/t Yves Smith at naked capitalism.) In that vein, Jonathan Nonis at Platts reports that the 180 CST fuel oil--mostly used for power generation or marine fuel--appears to be set to switch into contango--where the nearby in time price is less than the future price--on increasing supply and less-than-expected demand.

"By 11.00 am Singapore time (0300 GMT) the September/October 180 CST spread was pegged at parity, down 50 cents/mt from the Asian close on Thursday. The last time the prompt 180 CST spread had been in contango at the Asian close was on June 16 at minus 50 cents/mt.

The weaker market structure on the utility grade also dampened the structure for the 380 CST bunker grade with the September/October 380 CST spread narrowing to 1.50/mt, from $2.20/mt on Thursday's close.

The softer fuel oil sentiment is brought about by larger Western arbitrage volumes in August and September, while demand over the same period is expected to decline on higher outright fuel oil prices, traders said.

Between 3.2 to 3.5 million mt of fuel oil is expected to arrive in Singapore in August, while September volumes were said to be in the range of 3.6-3.7 million mt. Meanwhile, the higher fuel oil prices--prompted by the sharp rise in crude prices--in recent weeks has had a negative impact on bunker demand in Singapore as well as regional buyers.

Reflecting this, heavy distillate stocks in landed storage in Singapore recovered from a seven-month low by a massive 5.26 million barrels (800,000 mt) to 19.320 million barrels for the week ended August 5, data from IE Singapore showed."

In late July fuel oil prices rose to nearly the cost of crude--see Daily Sources 7/28 #8. Meanwhile, Jim Bai and Aizhu Chen at Reuters report that Chinese refiners will cut very slightly crude runs in August to

"2.63 mb/d of crude oil in August, down marginally from 2.65 mb/d in July.

The August volume would represent around 88% of their total refining capacity."

Gasoline and diesel stocks held by CNPC and Sinopec rose by 7.7%
and 7.1% respectively at the end of June from the end of May.

"'Demand is not as high as what is being supplied,' a refinery official in east China also said, declining to be named as he is not authorized to speak to the media.

'Some plants may just want to accomplish their full-year plan after a slow start this year,' he added."

Meanwhile, Bloomberg News reports that the President of China's second-largest bank, the China Construction Bank, Zhang Jianguo, said that it would reduce new loans by 70% in the second half of 2009.

"'We noticed that some loans didn’t go into the real economy,' Zhang, 54, said in an interview yesterday at the bank’s headquarters in Beijing. 'I feel that some industries are expanding too rapidly. For example, housing prices are rising too fast, and housing sales are growing too fast.'"

"Construction Bank is one of the main beneficiaries of demand for infrastructure loans induced by China’s 4 trillion yuan economic stimulus package. Established in 1954 to fund building of roads, bridges, dams and other infrastructure, it was the nation’s biggest mortgage lender until the first half of 2008, when ICBC pushed it to second place."

The People's Bank of China in its recent quarterly monetary report announced that it would continue its policy of easy credit--see Daily Sources 8/6 #2.

2. INDONESIA TO CUT SUBSIDIES ON FOSSIL FUELS WITHIN A YEAR

Yvonne Chan at Business Green reports that the head of Indonesia's National Council on Climate Change, Agus Purnomo, told Reuters last week that Jakarta was likely to reduce subsidies for fossil fuels within a year.

"Some economists have forecast that fossil fuel consumption would drop by one-fifth if the subsidy were scrapped entirely. However, the complete removal of the subsidies is highly unlikely, given that previous cuts have led to social unrest.

Purnomo said a subsidy would continue to exist but would be 'below the distortion level that discourages renewable energy'."

Subsidies on propane, for example, which is used for cooking, and especially by the poor, are very difficult to scrap given the consequences.

3.GERMAN EXPORTS UP 7% IN JUNE FROM MAY, DOWN 22.3% FROM JUNE 2008, IMPORTS UP 6.8%

Der Spiegel reports that Germany's Federal Statistics Office announced today that the country's exports were up 7% in June from May, but down 22.3% from June 2008.

"[I]t was the biggest rise in exports since September 2006, when the figure was 7.3%. Experts had only anticipated a 1.1% rise after the figures were seasonally adjusted. The figure in May was a mere 0.2% gain."

"The Federation of German Wholesale and Foreign Trade (BGA) is forecasting an 18% slump in export sales for 2009, the first contraction since 1993 and the largest in postwar history. For 2010, BGA president Anton Börner is anticipating a return to growth of 5 or 10%.

Imports to Germany were also up slightly in June, climbing by 6.8% compared to the previous month. In total, goods valued at €56.3 billion euros were imported--17.2% less than the same period in 2008."

3. RUSSIAN ELECTRICITY DEMAND UP 4.2% IN JULY FROM JUNE ON INCREASING INDUSTRIAL DEMAND

James Allen at Platts reports that Russian electricity demand fell by 6.6% in the first seven months of the year, but have risen 4.2% in July from June. Year over year demand was down 5.7% in July.

"'We think the July increase in consumption may be a sign of economic recovery in Russia given the increasing capacity utilization being observed in some industries, particularly the metals sector,' said analysts at Alfa Bank in a daily briefing Friday.

Consumption in the Southern Russian, Mid-Volga and industrialized Urals Integrated Power Systems rose, respectively, 10.7%, 7.2% and 4.8% month on month while electricity demand in the northwestern region stayed flat after falling 7.6% month on month in June."

4. UKRAINE TO RECEIVE INTERNATIONAL FINANCING TO COVER PAYMENTS FOR GAZPROM GAS

Doris Leblond at the Oil & Gas Journal report that The European Commission, European Bank for Reconstruction and Development (EBRD), European Investment Bank (EIB), and World Bank

"have agreed to cooperate on a support package to help Ukrainian authorities develop 'sustainable solutions to Ukraine's medium-term gas transit payment obligations,' and to continue to 'support Ukraine's economic stabilization reform, including reform of the gas sector and accompanying reform of the social safety net,' according to a joint statement by the organizations."

The EIB and the EBRD are each considering loan packages of as much as $450 million; the World Bank is considering committing as much as $500 million.

5. UK ENERGY SECURITY REPORT

The recent report by Malcolm Wicks commissioned by UK Prime Minister Gordon Brown on British energy security can be found here. I have not been able to read it, but it was reported that it calls for trebling the amount of nuclear electrical generation in the country--see Daily Sources 8/5 #2.

6. INTERNAL ISRAELI MEMO CRITICAL OF NETANYAHU'S PUBLIC STAND ON SETTLEMENTS

Mark Lavie at the Associated Press reports that an internal memo by the Israeli Consul to Boston which criticized the Netanyahu administration for taking a combative stance with Washington regarding the settlements issue was leaked to an Isreali TV station, which read the report on air. The memo said the disagreement was causing "strategic damage to Israel." It goes on to say:

"In the distance created between us and the US administration, there are clear implications for Israel's deterrent capabilities. ...

There have always been differences between the governments, but coordination was always maintained. Now there is the feeling in Washington that Obama has to deal with obstinacy from the governments of Iran, North Korea and Israel. ...

The US administration makes efforts to lower the profile of the disagreements, but ironically, we are the source of the public disputes. ...

The standing of American Jews is also being damaged ... . The perception of confrontation between the governments of Israel and Obama puts the American Jewish community, which is so important to us, in a problematical position. The confrontation is distancing many from Israel."

7. KUWAIT BECOMES NET NATURAL GAS IMPORTER

Chris Stanton at the National reports that Kuwait's first cargo of LNG has arrived at its terminal, making it for the first time a net natural gas importer.

"Officials say LNG is an interim solution to plug the summer deficit, when consumption of gas at power stations spikes. Domestic supplies under development by Kuwait Oil Company (KOC) will eventually supplant the imports, the government said in June when it signed a supply contract.

But imports could be necessary for years to come, given the difficulty Kuwait will face in raising domestic production, said Raja Kiwan, an analyst at PFC Energy, a US-based consultancy."

8. 32 MEMBERS OF MEND MEET WITH NIGERIAN PRESIDENT ON AMNESTY PROGRAM

Felix Onuah at Reuters reports that

"[t]hirty-two members of the Movement for the Emancipation of the Niger Delta (MEND) led by the group's leader in Bayelsa state--Ebikabowei Victor Ben, known locally as Boyloaf--met Yar'Adua at the presidential villa in the capital Abuja.

'We on our part in the spirit of fair bargain hereby declare and agree to lay down our arms for this administration to immediately commence the other part of the bargain,' Ben said."

9. US TO PROVIDE $10 BILLION IN FINANCING FOR BRAZIL'S EXPLOITATION OF PRE-SALT FIELDS, BRAZIL AND PERU CONSIDERING $15 BILLION IN HYDROELECTRIC PROJECTS

EFE News Services reports that Brazilian Planning Minister Paulo Bernardo da Silva on Wednesday indicated that the US National Security Advisor, Gen. James Jones, indicated that the US was prepared to offer $10 billion in loans to develop the country's sub-salt reserves off its coast.

"He said the US Export-Import Bank already has signed a letter of intent in that regard with Brazilian state oil company Petrobras.

The loan is equal in value to a similar credit line agreed to with the China Development Bank, also for exploiting Brazil's 'pre-salt' area, so-named because the estimated 80 billion barrels of high-quality crude in that new oil frontier lie far beneath the ocean floor under layers of rock and an unstable salt formation."

Meanwhile, Andre Soliani Costa and Alex Emery at Bloomberg report that the Brazilian Energy Minister, Edison Lobao, told reporters that Brazil and Peru are considering five hydroelectric projects that may cost as much as $15 billion.

"'We need to have energy, to ensure Brazil’s energy security,' Lobao said. 'Whatever exceeds Peruvian needs will be exported to Brazil, which may re-ship the energy to other neighboring countries.'

Brazil is expanding its electricity grid to link jungle dams to industrial centers and reduce costly diesel-fuel generation. Latin America’s largest economy needs to boost its generating capacity by 50% in 10 years to 150,000 megawatts, Lobao said in March."

10. NEW ENHANCED RECOVERY TECHNOLOGY DEVELOPED BY CHEVRON MAY SUBSTANTIALLY INCREASE THEIR BOOKABLE BARRELS

Sheila McNulty at FT Energy Source reports that Chevron has invented an innovative carbonated steam flood technology to enhance recovery from oil fields--Berstein Research says it could several times over.

"It notes in a new report that the Middle East has many other examples of large scale heavy and intermediate oil accumulations trapped within carbonate reservoirs, and the role of steam assisted recovery in accessing these resources is only just getting started.

Chevron’s technology works by pumping steam into the carbonate reservoir, which heats up the heavy oil in the reservoir, reducing its viscosity so that it can more easily flow. At the same time it creates a pressure gradient, which pushes the oil towards vertical production wells.

Chevron this year began testing the technology in the partitioned neutral zone between Saudi Arabia and Kuwait, in which Chevron owns a 50% share of the resources."

Berstein estimates that the new method of enhancing recovery could increase Chevron's booked barrels quite substantially,

"this could equate to an additional 600-1,800 million barrels of oil equivalent of booked reserves being added over a number of years. This equates to approximately 5%-16% of Chevron’s 2008 end of year reserve base."

Worth reading in full.

11. UNEMPLOYMENT DOWN TO 9.4% IN JULY FROM JUNE, PRIVATE SECTOR HAS ADDED ZERO NEW JOBS IN 10 YEARS

Justin Fox writes that the July monthly employment report by the Bureau of Labor Statistics showed that non-farm employment was

"down 247,000 in July—compared with 395,000 in June and an average of 645,000 during the dark months of November through April."

The official unemployment rate fell to 9.4% from 9.5% in June. The U-6 number, for "marginally attached workers," also fell.

"Without the seasonal adjustments, employment fell a whopping 1.3 million in the month. And there were 5.9 million fewer jobs in July 2009 than in July 2008.'

Floyd Norris at the New York Times reports that for the first time since the Great Depression, the US has added virtually zero jobs in the private sector.

"Until the current downturn, the long-term annual growth rate for private sector jobs had not dipped below 1% since the since the early 1960s. Most often, the rate was well above that."

12. NEW FED REPORT SHOWS RATE OF GLACIERS MELTING IN NORTH AMERICA ACCELERATING

Jim Tankersley at the Los Angeles Times reports that the federal government yesterday released its most comprehensive study yet of melting glaciers in North America which showed that their rate of shrinkage is accelerating.

"For five decades, USGS researchers have periodically measured the glaciers' size with tools including measurement stakes and photographic surveys. Their data include tallies of winter snow accumulation and summer melt.

In each case, the data show that summer melting accelerated in the last 20 years. At the same time, winter snowpacks have tapered off. The reduced accumulations and increased melts have resulted in shrinking glaciers.

South Cascade Glacier, for example, had a volume of nearly 0.06 cubic mile of water in 1958, Josberger said. By 2008, it was down to 0.03 cubic mile.

When glaciers shrink, water runoff declines, setting the stage for drier conditions in the region, particularly at the end of summer, when other supplies of water dwindle."

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 5/11

1. GLOBAL BUSINESS SERVICES INDICATORS SHOW SIGNS OF STABILIZATION

In a long and comprehensive post, Edward Hugh at Fistful of Euros reports that the rate of contraction in business services is stabilizing globally in parallel with production manufacturing index indicators.

"The JPMorgan Global Serices Report is based on the results of surveys covering around 3,500 executives in countries which taken together account for an estimated 60% of global service sector output."

Hugh notes that stabilization is not the same as recovery. His post gives some detail on the Eurozone, Spain, Italy, Germany, France, Russia, and the US, where the story is in outline fairly similar, though the devil is always in the details. For example, he touches on price indicators for Europe:

"All eurozone countries reported significant downward price pressures, and these are reflected in producer prices (which fell over 5% year on year in March, lead mainly by energy and commodities) and consumer price disinflation, where year on year price increases were only 0.6% in April, for the second month running."

Worth a look.

2. ICELAND LIKELY TO BEGIN PROCESS OF JOINING THE EU, SEEMINGLY CONFIRMING PREDICTIONS THAT THE CRISIS WILL BROADEN THE UNION

Eurointelligence reports that Iceland's new government has "formally decided to start a process leading to full EU accession, a decision to be backed up a parliamentary vote next Friday."

"The government wants to make a formal request for EU accession by July. The latest polls suggest that over 60% of the population is in favor of accession negotiations, with 27% against."

Given recent analysis which argues that the euro will end up benefiting most from the current debate over whether a new reserve currency is required as an alternative, at this stage it appears that Martin Feldstein's argument that the financial crisis will be a centrifugal force causing member nations to leave the European monetary union--see Daily Sources 1/5 #1--is proving less prescient than Wolfgang Münchau's that it is more likely to enlarge both the eurozone and the EU--see Daily Sources 11/13 #1.

3. POLLING SHOWS THAT MERKEL LIKELY TO HEAD WHICHEVER COALITION ENDS UP WINNING FUTURE GERMAN ELECTION; IN THE MEANTIME FRIDAY CONFERENCE HIGHLIGHTS HOW ABANDONING NUCLEAR WILL INCREASE GERMAN ENERGY DEPENDENCE

Eurointelligence also reports that the likely outcome of the elections in Germany this year will either be a coalition of the Christian Democratic Union and the Free Democratic Party--with a tiny majority--or a "grand coalition" of the CDU and the Social Democratic Party. Eurointelligence notes that Angela Merkel would remain Chancellor in either case. Meanwhile, on May 8 Mark Hibbs at Platts reported that

"Germany's planned phase-out of nuclear power generation will raise the country's natural gas demand between 12.6% and 23% by about 2023, according to a statement on energy security policy submitted to the EU summit in Prague on Friday by the co-ruling Christian Democrats."

The Russo-Ukrainian contract dispute which shut off natural gas supplies to much of Europe at the beginning of the year is expected by many to convince a majority of Germans that the decision to abandon nuclear power was a mistake. Lars Jossefson, CEO of Vattenfall--an electric utility which serves a number of states within Germany, told Reuters in January that he expected the discussion over nuclear to re-open shortly--see Daily Sources 1/15 #1. A global survey by Accenture published in March suggested that the general view of nuclear power was becoming more positive, with the exception of France, where it provides 80% of the country's nuclear power or thereabouts--see Daily Sources 3/17 #8.

4. NORWEGIAN OIL PRODUCTION DOWN 7% IN APRIL FROM MARCH; BRENT EXPORTS TO FALL 12% IN JUNE ON REPAIRS AND MAINTENANCE

Spencer Swartz at Environmental Capital reports that Norwegian oil production was down 7% in April to 1.99 mb/d from 2.15 mb/d in March. Meanwhile, Alexander Kwiatkowski at Bloomberg reports that Dated Brent crude exports will drop by 12% in June to 1.257 mb/d from 1.427 mb/d in May as field operators carry out maintenance and repairs.

5. IRANIAN, ALGERIAN AND KUWAITI OIL OFFICIALS INDICATE THAT THEY DO NOT THINK NEW OPEC CUTS LIKELY, SAUDI ARAMCO MAINTAINS SUPPLY CUTS TO ASIAN REFINERS, IRAN INDICATES IT WILL NEED WESTERN FINANCING IN ORDER TO MAINTAIN OIL EXPORT LEVELS GOING FORWARD, THE UAE EXPECTS GDP GROWTH ON OIL BTW $50-53/B, WHILE WESTERN ANALYSTS BECOME WORRIED ABOUT EFFECT OF COMMODITIES PRICE INCREASES ON RECOVERY

Tamsin Carlisle at the UAE's National reports that Iranian, Algerian, and Kuwaiti oil officials all have indicated in recent days that they expect OPEC not to opt for further supply cuts in the upcoming meeting. Christian Schmollinger at Bloomberg reports that refiners in Japan, Taiwan and South Korea told the journalist on condition of anonymity that Saudi Aramco was maintaining supply reductions to Asian refiners in June.

"Saudi Arabia produced 7.925 mb/d of crude in April, down 25 kb/d from March, according to a Bloomberg News survey of analysts, oil companies and producers. That’s 126 kb/d under its OPEC production target of 8.051 million barrels a day."

Upstream online reports that Seiffolah Jashnsaz, managing director of the National Iranian Oil Company, told a conference that Iran needed to increase its investment in oil and gas sector development if it is to maintain its status in OPEC through 2025. He indicated that investment requirements would run at about $25-30 billion per annum in order to do so and that Tehran would need to access financing from the West to carry out the required efforts, indicating that the country's earnings were not sufficient to cover the costs. Geoff King at Platts reports that department acting director Ahmad Abu Ghaida at the Abu Dhabi Department of Economic Planning told a conference that they expect economic growth to return to the UAE in the second half of 2009 on the back of oil prices of $50-53/b.

"Despite the ongoing global financial crisis causing 'economic turmoil and uncertainty worldwide,' Abu Ghaida said there are a number of factors providing a positive outlook for the UAE, including a 'relatively positive outlook for oil prices of 'around $50-$53/b in 2009 and around $60/b in 2010.' The UAE currently produces around 2.2 mb/d."

James Hamilton has a post at Econbrowser where he argues that the US Fed--and I'd expect other monetary authorities to be as well--is likely concerned about the rebound in commodities prices over the last couple months. He plots a graph of their prices from March 17:



And comments:

"Some increase in relative commodity prices is certainly to be expected if we are indeed about to see a recovery in real economic activity. But this is a trend the Fed needs to watch closely from here, and could prove to be a significant limiting factor on how much the Fed can hope to achieve from monetary stimulus.

Because I for one do not think it's a good idea to call for a replay of the 2008:H1 commodity market show."

Worth reading in full.

6. CHINESE OIL IMPORTS UP 13.6% IN APRIL YOY AND CONSUMER PRICES DOWN, MOSTLY ON FOOD, AND PORK, IN PARTICULAR

Eadie Chen and Tom Miles at Reuters report that China imported 16.17 million tonnes (3.93 mb/day) of crude oil in April, a 13.6% increase from the year prior.

"If confirmed, the daily rate would surpass last month's 3.85 mb/d and comes next only to a record import level of 4.07 mb/d in March 2008 when Beijing drummed up for the Beijing Olympics and would also be the first positive yearly growth this year."

Reuters provided a graph of oil imports from 2006:



Liu Li and Terrence Poon at the Wall Street Journal report that China's consumer price index fell at an annual rate of 1.5% in April, marking the third straight month in consumer price declines. "The producer price index was down 6.6% following March's 6.0% fall, the fifth straight month of deepening declines." Further, new loans extended in April fell to 591.8 billion yuan, down from 1.89 trillion yuan in March, but up 409 billion yuan from April 2008. In a related story, Shen Hong at China Journal reports that pork prices in major Chinese cities fell by 10% in April from a year previous.

"If prices continue to fall, farmers will start killing pigs because it makes no sense for them to buy the feed for hogs that are worth little when sold.

The TV report warned the government is already considering boosting the country’s pork reserves and offering subsidies to pig farmers, in a bid to ensure future supply.
...
Food constitutes nearly 33% of China’s CPI, and pork’s weight in the food category is estimated to be at least 10%."

With so many workers migrating back to the country, it makes intuitive sense that food in the major cities would be facing a decline in demand. The subsidies targeting the rural areas so far do not include food, as far as I understand.

7. CHINA AND KUWAIT TO BUILD 300 KB/D REFINING COMPLEX IN GUANGDONG

Joanna Hartley at Arabian Business.com reports that the Kuwaiti and Chinese governments signed yesterday five deals incorporating oil, gas and environmental sectors. John Duce and Eugene Tang at Bloomberg, on the other hand, report that the deal includes an agreement between Sinopec and the Kuwait national oil company to build a $9 billion refining complex in Guangdong province.

"[T]he Kuwaiti venture in Guangdong will have a refining capacity of 300 kb/d, Kuwait News Agency reported April 28, citing the country’s oil minister. No other details were available.

The project’s location may be moved to Zhanjiang from an earlier plan of Guangzhou, Zhang [Guobao, the head of China’s National Energy Administration] told reporters yesterday, adding talks between the companies are still continuing. The plant will include an oil refinery and an ethylene plant and the complex should be built away from 'big cities,' he said."

Mr. Zhang indicated that there will be a third investor in the project, and mentioned either BP or Shell. (There is some confusion about the deal, with some reporting that the complex is to be built in Kuwait, but I suspect that it would be built in China, as my guess is that Beijing wants to minimize products imports given an anti-colonialist ideology.)

8. ROXANA SABERI TO BE RELEASED TODAY

BBC reports that Roxana Saberi has had her sentence commuted and will be freed, and able to leave Iran, today. She has been banned from reporting in the country for five years.

9. CANADIAN NEW HOME PRICES FALLING, BUT NOT AT THE PRECIPITOUS RATE OF THE US

Rebecca Wilder at News N Economics reports that the Canadian new homes market is weakening slightly, but that this is a result of weakening economic fundamentals, not overly-indebted households. She plots a graph of Canadian vs US home prices from 1997:



10. HAS THE NEW SOMALI TRANSITIONAL FEDERAL GOVERNMENT GIVEN PIRATES WARNING THAT THEIR DAYS OF FREELY OPERATING ARE OVER?

Eagle1 at the Eagle Speak blog reports that:

"two leaders of Somali pirate groups (at least 30 hijacks between them, I am told) are under pressure from the Islamic courts to stop all hijacking by the end of this month, when the monsoon normally slows pirate activities anyway."

Further, mosque leaders in Puntland have reportedly been told to preach to their female parishioners that pirates bring shame to Somalia and are not good Muslims. It is an odd story, does "Islamic courts" refer to the ICU--Islamist Courts Union--defunct as an organization, as I understand it, but a former head of which is now putative President? They should have some more control in Puntland than al-Shabaab, which is the group which has international Islamist backing, though al-Shabaab, if memory serves, did threaten pirates operating out of Harardere, well north of Mogadishu, but they are not in charge there.

If "Islamic courts" refers to the "governing" coalition, that may well make sense ... and they could put an end to it, though they are much more moderate in their Islamist views (even though the US decided they were too Islamist once upon a time leading to the Ethiopian invasion) than al-Shabaab. (h/t Galrahn at Information Dissemination.) From a May 8 story at the New York Times by Jeffrey Gettleman also linked to in Galrahn's post:

"The new president [of Puntland, not the Transitional Federal Government], Mr. [Mohamed Mohamud] Abdirahman, is a technocrat who had been living in Australia and came back with many Western-educated advisers--and an ambition to be Somalia’s first leader to do something substantive about piracy. He formed an antipiracy commission and even issued a 'First 100 Days' report.

Yet, Puntland officials are doing precious little about the pirate kings under their noses00reluctant, perhaps, to provoke a war with crime lords backed by hundreds of gunmen. When asked why they weren’t arresting the big fish, Mr. Abdirahman said, 'Rumors are one thing, but we need evidence.'"

11. PIMCO LOWERS EXPOSURE TO US GOVERNMENT-RELATED DEBT

In what may be a leading indicator, Dakin Campbell at Bloomberg reports that Bill Gross, manager of Pacific Investment Management Co.’s [PIMCO] $150 billion Total Return Fund, has reduced the funds holdings of US government-related debt since March. In his May investment outlook, Gross wrote:

"The Obama cannon shot will have financial consequences. Investors should recognize that this grassroots trend signals--most importantly--an increasing uncertainty of cash flows from financial assets.
...
Do not be deceived by the euphoric sightings of ‘green shoots’ and the claims for the new bull markets in a multitude of asset classes."

Campbell reports that Gross concluded: "Investors should partner with the government but do so at the 'senior level of the balance sheet.'"

12. THE NEW FANGLED DERIVATIVES WERE MOSTLY USED BY FINANCIAL INSTITUTIONS, NOT BY THE BUSINESSES THEY WERE PRESUMABLY DESIGNED FOR

Adam S. Posen and Marc Hinterschweiger at Realtime Economic Issues Watch argue that the recent financial innovations in derivatives provided little, if any benefits, to any sector of the economy outside finance.

"Between 2003 and 2008, US gross fixed capital increased by about 25%, a reasonable number during an economic expansion, but hardly a boom. During the same five-year period, the global amount of over-the-counter (OTC) derivatives increased by 300%, while derivatives held by the 25 largest US commercial banks rose by 170%. Clearly, growth in new financial products has outpaced fixed capital formation both globally and in the United States by a large margin. This has been especially true since 2006, when investment stagnated, but derivatives continued to grow at a rapid rate. There only seems to be a weak link, if any, between the growth of the newest complex--and now proven dangerous if not toxic--financial products and real corporate investment."

Posen and Hinterschweiger further note that only 11% of the counterparties in OTC derivatives transactions were not financial institutions--meaning that the non-financial institutions for which the derivatives were presumably designed didn't, on the whole, use them. Worth reading in full.

13. HOTEL SECTOR BEING HIT HARD

Ed Harrison at Credit Writedowns reports that the hotel industry is being hit hard in conjunction with the commercial real estate market. Harrison remarks:

"[W]e should expect the cost cutting to continue unabated in terms of non-residential property investment--and this includes the travel & leisure sector as well as commercial real estate. Obviously, this will be a drag on GDP. Investment levels at least thirty percent below today’s investments are not an unreasonable expectation as I argued in a recent post (see the section on fixed investment)."

He notes that owners across the entire spectrum of the real estate market are cutting back on maintenance in order to meet cash flow requirements--which has economic cascading effects.

Daily Sources 3/19

1. Zhang Xin at China Daily reports that Wu Zhuang, director of China's Administration of Fishery and Fishing Harbor Supervision of the South China Sea, told the media that Beijing will step up patrols of China's exclusive economic zone in the South China Sea.

"Faced with a growing amount of illegal fishing and other countries' unfounded territorial claims of islands in China's EEZ, it has become necessary to step up the fishery administration's patrols to protect China's rights and interests. China will make the best use of its (retired) naval ships and may also build more fishery patrol ships, depending on the need."

On March 5, Malaysian Prime Minister Abdullah Ahmad Badawi claimed the Nansha Islands (aka the Spratley Islands) despite Chinese counterclaims. On March 10, Philippine President Maria Gloria Macapagal-Arroyo signed into law a bill which claimed Huangyan Island (aka the Scarborough Shoals) and the Nansha Islands as Philippine territory over Beijing's objections.



(h/t Carlos Tejada at China Journal.)

2. Fu Chenghao at Shanghai Daily reports that he China Iron and Steel Association said in a statement on its website yesterday that steel exports may fall as much as 80% in 2009 from 2008, a sharper contraction than the 50% the organization had previously predicted.

"A survey showed China's 28 largest steel exporters would ship only 299,100 tons this month and 129,600 tons in April, and China would probably become a net importer of steel products in March, it said."

(h/t Yves Smith at naked capitalism, who also notes that the Baltic Dry Index has fallen 20% in the last five days.)



Meanwhile, Tian Ying at Bloomberg reports that the Chinese cut in retail taxes has resulted in GM's Chinese minivan venture increasing sales by 32% in the first two months of 2009. The government has also announced the details of a rural auto subsidy program--see Daily Sources 3/16 #3.

"'Every farmer in China wants a new vehicle, all 800 million of them,' said Yale Zhang, a consultant at CSM Asia in Shanghai. 'It looks like the government wants to make that happen.'
...
Vehicle sales in China may rise between 5 percent and 10 percent this year, according to GM, the largest overseas automaker in the country. It had previously forecast sale growth of less than 3 percent. The automaker expects to outperform the wider market by as much as 3 percentage points, helped by sales at SAIC-GM-Wuling Automobile Co., the largest minivan-maker in China. The venture accounts for at least half of GM’s China sales."

3. Charles Lee at Platts reports that Korea Gas February sales fell by 22.9% from February 2009.

"Of the total, [LNG] sales to power generators plunged 35.5% to 731,692 mt, while retail gas companies accounted for 1.7 million mt, down 16.1% from the same month last year."

It was the fifth consecutive month of sales contraction.

4. Agence France Presse reported that Kuwaiti Emir Sheikh Sabah al-Ahmad al-Sabah dissolved Parliament yesterday, calling for a snap election in the next two months. The Emir is expected to issue by decree a stimulus bill that had been held up in Parliament for the last six weeks.

5. Takeo Kumagai at Platts reports that Japan's Minister of Economy, Trade and Industry, Toshihiro Nikai, signed today a memorandum of understanding with the Venezuelan Oil Minister, Rafael Ramirez, in Tokyo regarding broad cooperation in the energy sector.

"Details of the MOU were not made public, but sources close to the matter said Japan and Venezuela will form a joint committee to consider opportunities Venezuela's upstream and downstream oil and gas sectors."

An unnamed official told Platts that in the light of Japan's downstream investment, Tokyo would likely be looking for upstream natural gas opportunities.

"Earlier this month, Venezuela's state-owned PDVSA, US major Chevron, Japan's Mitsubishi and Mitsui, and a few other oil companies signed an agreement to develop the Delta Caribe LNG project.

The $12 billion project will comprise two 4.8 million mt/year gas liquefaction plants and includes development of dedicated gas fields."

Ramirez also indicated to the media in Tokyo outside METI that it was the position of Caracas that the market was 1 mb/d oversupplied. Bloomberg reports that Chávez will visit Japan on April 6. Meanwhile, Matthew Walter and Daniel Cancel at Bloomberg report that Venezuela is postponing payments to foreign contractors as the low price of oil cuts into the budget. Brazil's Odebrecht SA indicated last week that it was engaging in a work slowdown on the Caracas subway system because the government was late in payments. The government also is estimated to still owe $10.2 billion on nationalizations it has carried out in pursuit of Chávez's revolution.

"[PdVSA] has amassed at least $7.86 billion in back payments to oil service companies and suppliers, according to its third-quarter earnings statement. Dallas-based Ensco International Inc. and Helmerich & Payne Inc., headquartered in Tulsa, Oklahoma, idled rigs in Venezuela this year because of payment problems."

One wonders what kinds of assurances Ramirez gave Nikai that Japan's investments wouldn't be simply expropriated at a later date--especially given Tokyo's close ties to the US. Are Chevron, Mitsubishi and Mitsui simply betting that Chávez will not be encouraged by future high prices to go on another nationalization spree? That we will not see high prices again any time soon ... and that they will outlast Chávez?

6. The Associated Press reported that Iranian Oil Minister Gholam Hossein Nozari said yesterday in Vienna that Iran was diverting funds from other sectors of its national budget to oil production. The comments suggest that the oil sector, which supplies about 60% of the Tehran's budget, is losing money. In a conversation with AP reporters later, Nozari indicated that a substantial enough share of its oil production is unprofitable at current prices that it is making a net loss. It is unclear why, under those circumstances, that Iran would fail to comply fully with its OPEC quota as of December 17.

7. Platts reports that Eni CEO Paolo Scaroni told reporters in Vienna today that it had been tendered Iraq's Nassiriya field in a no-bid contest with Japan's Nippon Oil and Spain's Repsol. The field, which is estimated to have sustained production capacity of about 300 kb/d and 4.4 billion barrels of proven reserves, would be developed by the winner on a an engineering, procurement and construction (EPC) basis. Meanwhile, Upstream online reports that Scaroni told the conference that industry needs oil prices above $60/b to maintain investments, but that economic growth cannot be maintained at prices above $75/b. Meanwhile, Keith Johnson at Environmental Capital reports that Saudi Oil Minister Ali al Naimi told that $40/b oil only affects the investment plans of marginal producers.

"Despite the current economic situation and other challenges to the energy sector, Saudi Arabia will stay the course with our long-term capital investments for oil and gas expansion."

Some corporations expect upstream costs--which are about 2.2 times higher than they were in 2000--to fall precipitously in 18 months or so. Their investment plans are centered around that forecast.

"Just one problem with those hopes, says OPEC secretary general Abdullah Salem El-Badri: 'We have not seen costs coming down.'"

8. The Associated Press reports that al-Qaeda has posted a new tape by Osama bin Laden which urges Somali militants to overthrow the new government in Mogadishu. Bin Laden's 11 1/2 minute message was entirely focused on Somalia.

9. Sangar Rahimi and Carlotta Gall at the New York Times report that a spokesman for the Afghan National Security Directorate said in a news briefing yesterday that the February 11 attack on the Justice Ministry in Kabul was organized in Pakistan's tribal areas. The spokesman also

"suggested that Pakistani intelligence had a role in planning the attacks. 'I would like to say specifically that the intelligence agency of our neighboring country is involved and behind these attacks and organizing these activities.'"

Sens. John McCain and Joe Lieberman have an op ed in today's Washington Post arguing that a "minimalist" strategy in Afghanistan would be a mistake. Key excerpt:

"Loose rhetoric about a minimal commitment in Afghanistan is counterproductive for another reason: It exacerbates suspicions, already widespread in South Asia, that the United States will tire of this war and retreat. These doubts about our staying power deter ordinary Afghans from siding with our coalition against the insurgency. Also important is that these suspicions are a major reason some in Pakistan are reluctant to break decisively with insurgent groups, which, in a hedging strategy, they view as integral to positioning Pakistan for influence 'the day after' the United States gives up and leaves Afghanistan. That is why it is so important for the president to reject the temptations of minimalism in Afghanistan and instead adopt a fully resourced, comprehensive counterinsurgency strategy, backed by an unambiguous American commitment to success over the long term. In doing so, he must invest the political capital to remind Americans why this fight is necessary for our national security, speak openly and frankly to our nation about the difficult path ahead, and--most of all--explain clearly to our fellow citizens why he is confident that we can prevail."

Well worth reading in full.

10. Platts reports that Nigerian militants sabotaged a second Shell-operated pipeline in the Niger Delta today. The volume of oil lost has yet to be confirmed.

11. Matthew Saltmarsh and David Jolly at the New York Times reports that French unions have gone on strike today in the rail, airports, utilities and public sector.

"Two-thirds of the country’s high-speed TGV trains were canceled. Air France said most of its flights were operating normally from Roissy Charles de Gaulle International Airport, while about one-third of its flights from Orly Airport had been canceled. Traffic on the Paris Métro and bus networks were close to normal, according to transit officials, but suburban rail line service was disrupted."

The unions are calling upon the government to protect jobs and worker purchasing power. A poll has found that 78% of the French support the strikes. Workers have stopped six Total refineries, but the company claims that the impact on production is limited. Eurointelligence reports that the French Parliament has proposed a rider which would place a tax surcharge of 5% on top income earners for the next two years.

12. Tracy Rucinski at Reuters reports that Spain will withdraw its 600 troops in Kosovo. Spain has yet to recognize Kosovo as an independent nation. Spain, once known as Las Españas, or "the Spains," has several secessionist movements of its own to contend with--especially in the Basque region and Catalonia.

13. Tony Barber at the Financial Times reports that European Commission president, José Manuel Barroso, told reporters that EU member nations should spend more on stimulus programs if they could afford to.

14. Rebecca Wilder at News N Economics has a weekly world economic update for March 12-18 which has graphs demonstrating that the unemployment rate is "surging in every corner of the world," that industrial production is similarly "cliff diving," that retail sales are "anemic" globally, and that inflation is in full retreat. Worth a look. She also points out that Canada and the US, each others largest trade partners by far, are reporting extremely limited demand for imports.



15. Christine McGourty at BBC News reports that the UK's chief scientist forecast that by 2030 global resource demand will create a crisis akin to a "perfect storm."

"Demand for food and energy will jump 50% by 2030 and for fresh water by 30%, as the population tops 8.3 billion, he told a conference in London.

Climate change will exacerbate matters in unpredictable ways, he added."

Grim reading.

Daily Sources 3/16

1. Real Time Economics carries the full text of the G20 communique released on Saturday. Key excerpts:

"2. Our key priority now is to restore lending by tackling, where needed, problems in the financial system head on, through continued liquidity support, bank recapitalisation and dealing with impaired assets, through a common framework (attached). We reaffirm our commitment to take all necessary actions to ensure the soundness of systemically important institutions.
...
5. We are committed to helping emerging and developing economies to cope with the reversal in international capital flows. We recognise the urgent need to pursue all options for mobilising International Financial Institution (IFI) resources and liquidity to finance countercyclical spending, bank recapitalisation, infrastructure, trade finance, rollover risk and social support. We agreed on the urgent need to increase IMF resources very substantially. This could include further bilateral support, a significantly expanded and increased New Arrangements to Borrow (NAB), and an accelerated quota review. We should also ensure that all Multilateral Development Banks have the capital they need, beginning with a substantial capital increase for the Asian Development Bank, and put it to best use to help the world’s poorest.
...
7. We have also agreed to: regulatory oversight, including registration, of all Credit Rating Agencies whose ratings are used for regulatory purposes, and compliance with the International Organisation of Securities Commissions (IOSCO) code; full transparency of exposures to offbalance sheet vehicles; the need for improvements in accounting standards, including for provisioning and valuation uncertainty; greater standardisation and resilience of credit derivatives markets; the FSF’s sound practice principles for compensation; and the relevant international bodies identify non-cooperative jurisdictions and to develop a tool box of effective counter measures."

2. Michael Wines, Keith Bradsher, and Mark Landler at the New York Times reported on Friday that Chinese Prime Minister Wen Jiabao aired some of Beijing's worries with regard to their holdings of US debt ahead of the G20 meeting in London.

"'President Obama and his new government have adopted a series of measures to deal with the financial crisis. We have expectations as to the effects of these measures. ... We have lent a huge amount of money to the U.S. Of course we are concerned about the safety of our assets. To be honest, I am definitely a little worried.'

He called on the United States to 'maintain its good credit, to honor its promises and to guarantee the safety of China’s assets.'"

3. Xinhua reports that the Chinese Ministry of Finance announced on Friday that the 5 billion yuan (~$732 million) stimulus plan directed at subsidizing the purchase of automobiles and motorcycles in rural areas will translate into a 10-13% discount, respectively.

"Farmers who buy light trucks and minivans from March 1 to Dec. 31, would get a 10 percent discount, with the ceiling subsidies of 5,000 yuan (~$732.29).

Subsidies of 2,000 and 3,000 yuan (~$292.92 and ~$439.37) can be use to replace old three-wheeled and four-wheeled vehicles respectively.

From this Feb. 1 to Jan. 31 in 2013, farmers who buy motorcycles would get 13 percent of the purchase price back, with ceiling subsidies of 650 yuan (~$95.20)."

4. Borzou Daragahi at the Los Angeles Times reports that Iranian state television on Saturday carried an announcement by government officials that a $3.2 billion deal to develop the South Pars natural gas fields had been stuck with China.

5. Marcus Hand at Lloyd's List reports that Singapore port container cargo traffic fell by an annual rate of 20% in February. The number of containers that went through the port fell by 6% from January to 1.85m teu. Singapore's port is the world's largest container port.

6. Pamela Constable at the Washington Post reports that Pakistani President Zadari announced early today that he would reinstate a number the judges deposed by Pervez Musharraf in 2007, including former Chief Justice Iftikhar Mohammed Chaudhry.

"Zardari's turnabout came after thousands of demonstrators poured into the streets of this leafy capital of Punjab province [Lahore] Sunday, throwing rocks at police and cheering wildly. A wide cross section of Pakistan's political, social and religious sectors joined the day-long protests.

As the demonstrations escalated, police first responded with volleys of tear gas. But by mid-afternoon they suddenly withdrew from the streets, while numerous city and provincial officials were reported to have resigned. The swift collapse of authority signaled the end of Zardari's bid to seize control of Punjab, the most politically influential region of the country, and raised serious questions about his ability to remain president."

Worth reading in full. Includes links to fascinating pictures of hordes of lawyers protesting in Pakistan.

7. Haig Simonian at the Financial Times reports that on Friday Switzerland's finance minister, Hans Rudolf Merz, "said Bern would abolish the strict distinction between tax fraud, a crime in Swiss law, and tax evasion, a civil offence." Merz stressed that customer accounts would remain secret in all but exceptional cases, meaning that a specific request from an investigative body would be required in order to obtain the data, or so I infer. As I've said before, changes of 500 plus year traditions are better indicators, to me, of what kind of stresses the financial system is under than most. (h/t Yves Smith at naked capitalism.)

8. Eurointelligence notes a media report that Finnish manufacturing orders are down 38% year over year in January.

9. OPEC decided in its meeting Sunday to maintain the current quota allocations, and called on its members to fully comply with them. Current compliance is 79% according to the cartel--the producers which are probably the largest over-suppliers are Iran and Venezuela, ironically usually the biggest hawks in the group. The OPEC press release following the meeting can be found here. Key excerpt:

"The Conference, however, welcomed, some initial signs reported of a reversal in crude oil-stock trends, and a narrowing of the contango in the front price structure, indicating that the adjustment process instigated through OPEC measures vis-à-vis excess supply in the market is gradually helping to redress balance, and was also pleased to observe that following the decision taken by the 151st (Extraordinary) Meeting of the Conference in December 2008 to cut 4.2 mb/d from the actual September 2008 OPEC-11 production level with effect from 1st January 2009, compliance for the month of February, according to secondary sources, was 79%, which has contributed to balancing the price of the OPEC Reference Basket at around US$40/b since the beginning of the year, despite the critical economic outlook.

The Conference therefore emphasized its commitment to comply fully with its decision of December 2008, in order to further contribute to market stability. The Secretariat will monitor very closely developments in the market. Furthermore, the Conference will convene in Vienna, on Thursday 28th May 2009, to consider any further actions deemed necessary."

On a side note, the cartel decided to lengthen Abdullah Salem el-Badri's (of Libya) stay as Secretary General of the organization for another three year term. At Environmental Capital, Spencer Swartz reports that Russia decided not to join the organization or coordinate any serious production cuts.

"[Russian deputy prime minister Igor Sechin] proposed a slew of things for Russia and OPEC ministers to work on together, such as coordinating (i.e., raising) taxes on foreign oil firms’ crude production and refining operations."

Moscow had indicated that it would consider to what extent OPEC was complying with headline cuts before it joined in cooperation. Even so, this has to be considered good news in the West, given recent noise from Moscow and hints from Tehran.

10. Rania El Gamal at Reuters reports that Sheikh Nasser al-Mohammad al-Sabah told al-Watan newspaper that the country would officially cancel the al-Zour 615 kb/d export refinery construction project today in remarks published Sunday. In May, KNPC awarded $8.4 billion in construction tenders to four South Korean and one Japanese firm to build the refinery.

11. Rainbow Nelson at Lloyd's List reports that the Chavez administration expects the Venezuelan Congress to pass a law tomorrow which would transfer the administration of ports from the regional to the state level.

"'We are going to recover the ports and airports in the whole republic, oppose it whoever wants to, this is the law of the republic,' Mr Chavez said on his weekly television program ‘Alo Presidente’.

He warned Henrique Salas, who governs the department of Carabobo and oversees Venezuela’s most important port, Puerto Cabello, and Manuel Rosales, the governor of Zulia, which oversees the port of Maracaibo, that the navy and army would be used to quell any opposition to the move."

Opponents have pledged to resist the law.

12. The Associated Press reports that Mexico has slapped import duties on 90 US products in retaliation for the cancellation of a program that had allowed Mexican trucks to trasnport goods within the US.

13. Mary Williams Walsh at the New York Times reports that AIG issued a press release Sunday which provided the names of the institutions and governments which received payments via the bailout monies provided to the insurance company.

"Financial companies that received multibillion-dollar payments owed by AIG include Goldman Sachs ($12.9 billion), Merrill Lynch ($6.8 billion), Bank of America ($5.2 billion), Citigroup ($2.3 billion) and Wachovia ($1.5 billion).

Big foreign banks also received large sums from the rescue, including Société Générale of France and Deutsche Bank of Germany, which each received nearly $12 billion; Barclays of Britain ($8.5 billion); and UBS of Switzerland ($5 billion).

AIG also named the 20 largest states, starting with California, that stood to lose billions last fall because AIG was holding money they had raised with bond sales."

14. Justin Fox at the Curious Capitalist dug up the Bureau of Economic Research data on unemployment in the Great Depression to compare them to the financial crisis of 2008.



As Fox notes, nonfarm employment accounts for a much larger share of total employment in the US today than it did in 1929. Still, nonfarm employment accounted for about 78% of all private sector hours worked at that time, according to Robert Higgs at the Independent Institute.