Daily Sources 9/16

1. The Federal Reserve announces it will keep the Federal Funds Rate at 2%. Given the financial environment, probably the most significant news today. "Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth." "The downside risks to growth and the upside risks to inflation are both of significant concern to the Committee. The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability."

My sense is that this provides little support to the dollar, the consequences / desirability of which I am still thinking on. Paul Krugman mentions the strong v weak dollar debate in a recent blog post, and refers to how a weak dollar strengthens the American balance sheet vis-a-vis foreign governments and provides impetus to US exports, but ignores the savings of the elderly (and most unsophisticated--read not wealthy--investors who quite rationally tend to choose "safer" "fixed income" investments like Treasuries). My question is whether or not a weak dollar policy forces export-based economies in Asia to pursue a strong dollar policy by purchasing more US debt? If the Asian tigers (and the EU) begin to avoid US debt, who will they sell to? I dunno; I'm not an economist. I do know something about the oil markets, though, and I can tell you that the notion of 25% of your customer base all of a sudden going broke is likely not viewed as good news in the Middle East, even if their Sovereign Wealth Funds can go bottom fishing.

From a geopolitical perspective, the consequences of a worldwide financial system breakdown are ... um ... not good. The most famous antecedent of course is the Great Depression, on which many blame WWII. The comparison, on the face of it, is alarming to say the least. Joseph Stiglitz, Economics Professor at Columbia, appears, given his piece in the Guardian, to think the comparison to the Great Depression relatively apt. (I am not sure of the helpfulness of Stiglitz's arguments here, but liked the way he pointed out once upon a time that the neo-liberals were, in large part, responsible for the mess Russia got into as a result of its transition from communism.)

That this is big is indisputable, Bred Setser points out that in terms of sheer size, Lehman's bankruptcy is larger than Argentina's default of 2001. He also mentions that a large percentage of those being burned just now are financiers in Asia. Michael Lewis also thinks American financial credibility, and likability, in Asia is approaching zero.

Ralph Atkins and Chris Giles at the Financial Times report that on Tuesday the Bank of Japan injected $24 billion into the international money markets, the New York Federal Reserve Bank $50 billion, the European Central Bank €70 billion (~ $100 billion), the Bank of England £20 billion (~ $36 billion). In the meantime, the Associated Press writes that the Labor Department reported Tuesday that consumer prices were down 0.1% in August.

2. Reuters reports that OPEC cut its forecast for oil demand growth in 2008 to 880 kb/d in its Monthly Oil Market Report for September. That is 120 kb/d less than its previous forecast. In the meantime, according to Ayesha Daya and Maher Chmaytelli at Bloomberg, the OPEC governors from Libya and Iran both said today that an emergency OPEC meeting was not warranted by the current situation. But the chief economist at the British Saudi Bank said in an interview with Juan Pablo Spinetto and Grant Smith at Bloomberg that Saudi Arabia would likely cut production in advance of the December OPEC meeting. (Saudi Arabia is currently producing more than its quota. Just how much more is a subject of much debate.)

Meanwhile, Austin Ekeinde at Reuters reports that the Nigerian "oil war" by MEND continues to heat up, with several facilities coming under attack. Over the last four days, the militants have shut in as much as 110 kb/d. Also, Alexander Kwiatkowski at Bloomberg reports that Angola will cut its crude oil exports by 10% in November. Moreover, AP reports that Brazil has turned down the offer of OPEC membership.

Deisy Buitrago at Reuters also reports that Hugo Chavez said today that oil will settle at $90-100/b. This comes on top of news that Chavez is planning to visit China next month and renewed alarms about China becoming the destination for Venezuelan oil. And as part of the poisonous rhetorical mix, it is worth having a look at Maria O'Grady's opinion piece in the Wall Street Journal yesterday which argues that Chavez's dalliance with Russia is a good sign of his difficulties.

3. Dan Bilefsky and Stephen Castle at the New York Times report that the US Ambassador to NATO is arguing that Georgia's conflict with Russia regarding Abkhazia and South Ossetia should not prevent Georgia from becoming a NATO member. Also, Free Exchange at the economist has a little piece on how the Georgia conflict has punished Russia's economy. Given the fall in the price of oil, this is a double whammy.

All that aside, William Schomberg at Reuters reports that the EU has approved the purchase of an Italian electric energy producer by a unit of Gazprom. And the AP reports that the governing (pro-Western) coalition in Ukraine collapsed today. President Viktor Yushchenko accused Russia of attempting to destabilize the Ukraine by encouraging ethnic Russian separatists in the Crimean peninsula.

4. Esteban Israel at Reuters reports that Cuba has conditionally accepted the resumption of a formal political dialogue with the EU this month. This comes on top of the interesting news reported by Karen DeYoung at the Washington Post that the Bush Administration has asked Cuba to reconsider its rejection of aid the US has proposed in response to Hurricanes Ike and Gustav's devastation of that country. Cuba has rejected aid via an airlift by commercial aircraft, but asked the United States to temporarily drop certain provisions of the embargo which prevent it from purchasing reconstruction materials on credit. (Credit? If Lehman can't get any, ... .) The US has rejected this counter-proposal.

5. Stephen Graham at the Associated Press reports that Pakistan has authorized its troops to fire on coalition forces should they cross over into Pakistan from Afghanistan.

6. Jeff Wilson at Bloomberg reports that corn and soybeans fell precipitously on the CBOT today. This comes on top of a study that argues high grain prices are here to stay from the University of Illinois at Urbana-Champaign.

7. If you wanted to quantify--outside of the difference between eating well and starvation--what pollination is worth, the Helmholtz Association of German Research Centres released a study today which posits that the worldwide economic value of pollination is €153 billion (~$220 billion). I would think this is a ginormous underestimation.

Daily Sources 8/28

1. As per Yves Smith at Naked Capitalism, Credit Suisse recently released a report on the Chinese slowdown concluding that it is mostly not due to the Olympics. (Which is the big question in the oil markets, too.)

2. Kunda Dixit of the Nepali Times writes in the Wall Street Journal that the new Mao-ist government of Nepal is looking to Beijing for ideas on how to approach their economy. Interesting. Likely somewhat troubling to New Delhi.

3. The Wall Street Journal Editorial Board says that the government offensive against Tamil Tiger held areas in Sri Lanka appears to be succeeding, but that the Tamils will likely just fade into the jungle. It offers some good advice as to how the government might proceed with the hopes of bringing the 25 year conflict to an end.

4. Emily Wax at the Washington Post writes that heavy handed responses to peaceful protests in Kashmir is creating more problems than it is solving, and that the independence movement there is gaining substantial momentum.

5. AFP reports that Muqtada al Sadr has suspended the activities of the 60,000 strong militia, the Mahdi Army, in a statement from Najaf. Sadr has set a cultural agenda for the members of the militia and promises that those who don't abide by its precepts will be expelled from the organization.

6. CNPC and the Iraqi Government have renewed their deal on developing the Ahdab oil field, reportedly at $3 billion, as per Elaine Kurtenbach of the AP.

7. Blaine Harden at the Washington Post writes that North Korea is threatening to resume its nuclear program after not being removed from the state sponsor of terrorism list.

8. David Pallister at the Guardian reports that following the withdrawal of the Muslim League from the government coalition, lawyers have renewed their protests calling for the reinstatement of Supreme Court Justice Chaudhry and the conflict in the northern region with extremists continues to spin out of control. The Muslim League withdrew from the coalition because, they argue, the Pakistan People's Party is dragging its feet on the reinstatement of Chaudhry because its leader, Nawaz Sharif, is afraid that charges against him will be resurrected should he do so.

9. Mansoor Ahmad of Pakistan's The International News reports that power generation outages have increased this year, mostly due to inefficiency and lack of fuel. The Pakistan Electric Power Company cannot pass through increased feedstock costs to its customers--its thermal generators run on furnace oil and natural gas.

10. Jim Lobe, of the IPS, in the Asia Times gives a better analysis of how Iran might react to the Georgia crisis than most of what I've seen. However, I think Lobe understates, by a long shot, Iran's view of Russia in its backyard, especially as a supporter of secessionist regions. To begin with, Iran has a long history of trying to push back Russian aggression ... indeed, many of the countries in the Caucasus were part of Persia prior to Russian interference. Iran's biggest oil producing region--Khuzestan--is majority Arab, not Persian aka Aryan, the main ethnic group of Iran. A very large portion of north-western Iran by the Caspian is majority Azeri--indeed two neighboring provinces are known as East Azarbaijan and West Azarbaijan. And there are a large number of Kurds in the western portion of the country. For Iran to lend legitimacy to self-determination efforts by secessionist-minded minorities is a difficult choice for them to make. Farideh Farhi, who Lobe quotes, is especially interesting/useful/credible, on Iranian parliamentary politics.

11. Silly intro analysis from Judy Dempsey at the International Herald Tribune regarding the prospects of the so-called Nabucco pipeline--a proposed gas pipeline which would deliver gas from Azerbaijan and / or Iran to the heart of Europe via Turkey. Russia's move in Georgia hardly kills the project, but has the likely effect of making it more attractive. Iranian gas becomes a more attractive feedstock choice, but the real problem with Iranian gas for Europe has always been that Iran itself can't quite seem to figure out what it wants to do with its gas. (Pipe it to India and Pakistan? Pipe it to Turkey and Europe? Reinject it into oil fields? Ship it as LNG? Use it to fuel fleet of CNG cars? Power generation? So much gas ... so expensive to develop ... so difficult to figure out how to maximize the bang for your buck. Of course, if Iran made a solid commitment to Europe on the gas then it would have a lot of clout in terms of the IAEA/NPT negotiations. But then Russia is building their nuclear plants, and that would surely upset Moscow.) If Georgia enters NATO, which it might have a better chance of doing now, then Nabucco would surely be pushed, and pushed hard, by the US ... even though this would obviously be extremely provocative from the Russian perspective. (This last assumes that old Sovietologist thinking will remain par for course in the US.)

12. NATO Ships in Black Sea Raise Alarms in Russia by Andrew E. Kramer at the New York Times.

13. Reuters FACTBOX: Russian oil and gas export interruptions. In 2006 a Swedish Defense Agency put together a report on Russian oil and gas export interruptions. This factbox lists a few of them (selectively, I would add.) It noted, at the end, that there have been half as many interruptions under Putin than there were under Yeltsin.

14. Yesterday Fabiola Sanchez of the Associated Press reported that Venezuelan lawmakers were ready that day to put a bill through their legislature which would give private fuel retailers 60 days to negotiate the sale of their businesses or face nationalization. PdVSA controls 51% of the retail market. BP has a 9% share; Exxon: 5%; Chevron 3%. I don't imagine that this is an especially lucrative business given that gasoline sells for $.15/gallon in Venezuela, but imagine it is distressing to the IOCs nonetheless.

15. Andrew Downie at the New York Times writes that Brazil has responded to high food prices internationally by providing a subsidy for further planting, while Argentina--the other major agricultural powerhouse in South America--has placed large tariffs on exports, thus ensuring cheap food at home.

16. Todd Benson at Reuters writes that Brazil is in the midst of a difficult political debate over how to approach the exploitation of the new find in the Santos Basin, which may have as much as 80 billion barrels of commercially extractable crude. The government has already suggested creating a new national oil company to handle the new find, which has been nicknamed Petrosal--or Petro Salt--as the oil lies under underwater salt beds.

17. Sam Fletcher of the Oil & Gas Journal writes that Guy Caruso predicted that crude prices will fall to below $100/b in the next 18 months. Caruso also reiterates that drawing from the Strategic Petroleum Reserve would be unproductive--which is counter to the, rather rudely put, advice given by Philip Verleger to the US Senate last December.

18. US GDP grew at 3.3% in the 2nd quarter according to the Commerce Department, rather more than the 1.9% original estimate, as per Michael M. Grynbaum at the New York Times.

19. Jenny Anderson at the New York Times writes that cities are beginning to accept private financing for various infrastructure projects. This financing is coming from large investment banks like Credit Suisse, Carlyle Group, Goldman Sachs and Morgan Stanley. I agree that infrastructure needs to be invested in. I agree that the government has done a poor job of this (outside of the fact that it built it in the first place--private industry thought it too expensive with too low a return.) But, my gut reaction to someone attached to the industry responsible for the current credit and housing crisis saying that infrastructure in ten to twenty years is gonna be bigger than real estate is ... do what we need to, but keep those guys the hell away from anything that strategically important to America.

20. Sabine Vollmer at the News Observer reports that Bayer in under increasing pressure from German authorities for putting a new type of insecticide--known as clothianidin--on the market. The EPA approved clothianidin in 2003 on the condition that Bayer provide additional data on the product, but the EPA has not made any further public statement on the insecticide, and it is not clear if Bayer even submitted the extra data. European environmental regulators suspect that insecticides like clothianidin are responsible for the colony collapse disorder that bee populations worldwide have seen in recent years. Over a third of the bee population in the United States has died off. Bees pollinate about a third of our foods. From a geopolitical standpoint, of course, mass starvation is not good.

21. A report by Konstantinos Giannakouris at EUROSTAT was just released with a set of population predictions for Europe through 2060 which surprisingly give a slight increase in population over that time. Nearly all the population growth will take place in the richer countries in Europe, with Cyprus, Ireland, and Luxembourg showing the most growth, percentage-wise. However, in 2060, for EU27 as a whole, there will be 50 million less people of working age than there are now in 2008. The report projects that, taken as a whole, births will not outnumber deaths from 2015 on, meaning that all population growth will come from immigration--and it looks like from 2035 on immigration will not be able to make up the difference either. Obviously, many things will change between now and then, but useful data nonetheless.