Daily Sources 6/18

1. BANK OF JAPAN JUNE REPORT INDICATES NO SPENDING GROWTH, HIGH UNEMPLOYMENT, ALMOST CERTAIN DEFLATION

Rebecca Wilder at News N Economics notes that the Bank of Japan released its June report on economic and financial developments today. She notes that the economy is bedeviled by no spending growth and high unemployment ... the one bright spot is that exports appear to be leveling out--her graph:



Ms Wilder notes: "since there is no domestic demand, deflation is all but given." Well worth reading in full. Kyodo News notes that the Bank of Japan report showed that the outstanding balance of financial assets held by households at the end of March fell by 3.7% from the year previous.

"Individual assets held in cash and deposits rose 1.4% to ¥786.50 trillion (~ $8.18 trillion), increasing for the ninth consecutive quarter and underscoring that households favor having their money on hand or keeping it in banks rather than invested in capital markets."

2. WORLD BANK RAISES FORECAST FOR CHINESE GDP IN 2009 TO 7.2%

Liu Li at the Wall Street Journal reports that the World Bank has raised its forecast of Chinese GDP growth to 7.2% in 2009 on the back of the stimulus program. In March, the bank forecast that growth would come in at about 6.5%.

"'The current surge in government influenced investment is welcome, and more domestic demand in China is helpful for the world economy," the bank said in its report. 'However, it is unlikely to lead to a rapid, broad based recovery in China, given the current global environment and the subdued short term prospects for market based investment.'

World Bank senior economist Louis Kuijs said at a press briefing the stimulus is likely to have a smaller impact on the economy next year."

Bank analysts also think that the stimulus this year may constrain the ability of Beijing to respond to events as they develop next year, during which the bank expects GDP to expand by 7.7%. Both numbers are below the "magic eight." It may or not be important in considering this report that some think that the World Bank's next head will hail from China.

3. CHINA RUSSIA'S LARGEST TRADING PARTNER IN FIRST FOUR MONTHS OF 2009

The Wall Street Journal notes that Russia's economy ministry said yesterday that China was Russia's largest trading partner in the first four months of 2009.

4. BANK OF ENGLAND CHIEF MERVYN KING SUGGESTS LIMITING SIZE OF BANKS

Katherine Griffiths at the London Times reports that the head of the Bank of England has indicated in a speech that he supports limiting the size of banks.

"Mr King sought to apply pressure on the Government to award the Bank stronger powers to police lenders that had in the past regularly ignored his warnings. But he admitted that he did not know in what form the Bank would discharge such a responsibility. But such a move would belittle the Financial Services Authority, the official banking regulator, which has been accused of allowing lenders to behave recklessly while on its watch.

The Governor reinforced a suggestion he had made before that retail banks should be split from investment banks and added that there should be a plan for potential winding down of the largest institutions so that there could be an orderly process if they failed."

His suggestions are more radical than suggestions made in either Brussels, Westminster, or Downing St. There is a video report with part of Mervyn King's speech and commentary at the link. (h/t Eurointelligence.)

5. OECD FORECASTS ITALIAN GDP TO CONTRACT BY 5.3% IN 2009

Eurointelligence reports that the OECD yesterday forecast that Italy's economy would contract by 5.3% in 2009, followed by a weak recovery in 2010.

"It warns of a rise in unemployment to over 10% next year, the public-sector deficit will hit 10%, while the level of debt will be approaching 120%. The reports also laments the slow progress Italy has made introducing reforms to free up the service sector, and to reform the administration. The OECD was particularly critical of car subsidies to prop up the country’s ailing auto sector, as this would lead to a misallocation of resources."

6. RUSSIAN ENERGY MINISTRY DRAFTS NEW OIL AND GAS TAX PROPOSAL

Anna Shiryaevskaya at Platts reports that Russia's energy ministry has drafted a new tax proposal with the idea of making production from new oil and gas fields profitable.

"If Russia implements new tax measures to stimulate oil production, the country might increase output to 511 million mt/year (10.2 million b/d) in 2013. Otherwise, production might drop to 450 million mt/year in 2013, [Energy Minister Sergei Shmatko] said. In 2008, Russia pumped 488.105 million mt (9.735 million b/d) of crude, down 0.7% on the year.

Among other incentives, Putin called for a temporary cut in the duty to export Eastern Siberia crude because transportation from the region is expensive and had limited infrastructure."

7. NORGES BANK CUTS BENCHMARK INTEREST RATE TO 1.25%

Josiane Kremer at Bloomberg reported yesterday that the Norges Bank cut the benchmark interest rate by 0.25% to 1.25%. The bank

"said it expects [the benchmark interest rate] to remain between 0.75% and 1.75% until Oct. 28. The assessment that the rate "can remain close to 1 percent for a period ahead still applies,' the bank said in a statement, forecasting a 1.5 percent benchmark in 2010."

The bank forecast that the mainland economy, excluding shipping and oil, will contract by 1.5% in 2009, and expand by 2.5% in 2010. It expects inflation to average 2.5% in 2009 and 1.75% in 2010.

8. BOLIVIA'S LITHIUM RESERVES PRESENT CONUNDRUM TO MULTINATIONALS

Rory Carroll and Andres Schipani at the Guardian UK report on the conundrum facing multinationals that want to become involved in Bolivia's lithium market. Bolivia is thought to posses fully half of the world's total supply of lithium, a key component in batteries for a variety of products, including electric cars. The government of Evo Morales, however, is wary of the influence of multinational corporations.

"'The government of Bolivia will never give away control of this natural resource,' [Morales has] said. He acknowledges, however, that a foreign partner is needed.

The government is talking to France's Bollore Group, South Korea's LG Group and Japan's Sumitomo and Mitsubishi. Bollore has been asked to join the government's scientific commission on lithium, suggesting it has the edge.

The government said it would choose as a partner the company which will help Bolivian industry and not just ­mining."

Morales has strong ties to the government of Hugo Chávez and followed in his footsteps by nationalizing the oil and gas industry in the country in 2006.

9. PERUVIAN AMAZON PROTEST LEADER LEAVES FOR NICARAGUA

The Associated Press reports Peruvian Amazon protest leader Alberto Pizango has left the country for Nicaragua, where he has been granted political asylum.

"Pizango sought refuge in Nicaragua's embassy last week after Peru filed sedition and rebellion charges against him, accusing him of provoking violence when protests over Amazon development proposals turned deadly. The June 5 clash left 24 police dead. Indian leaders say at least 30 civilians died."

Peru granted him safe passage Tuesday.

10. TOTAL US UNEMPLOYMENT INSURANCE ROLLS FALL, BUT INITIAL CLAIMS RISE, RISING OIL COSTS LIKELY TO UNDERMINE US TRADE SITUATION, NORTH AMERICAN TRAIN FREIGHT CONTINUES TO SHOW STEEP FALL

The Associated Press reports that the Labor Department announced that total unemployment insurance rolls fell last week by 148,000 to 6.76 million, for the first time since January. Initial claims, however, rose by 3,000 to a seasonally adjusted 608,000. "The four-week average, which smooths fluctuations, fell by 7,000 to 615,750." Phil Izzo at Real Time Economics reports that Panjiva, Inc. remarked in a research note that there was a 2% uptick in manufacturers exporting to the US in May. But,

"'Looking forward, with the price of petroleum skyrocketing, it is likely that we will see a further deterioration in our trade situation and that will not help us as we try to get out of this recession,' Naroff Economic Advisors said in a research note last week."

The railfax report for total North American freight by rail volumes for the week ended June 13 were down 19.2% from a year earlier.

11. US TOTAL NAT GAS RESERVES ESTIMATION UP 35%

Jad Mouawad at the New York Times reports that the Potential Gas Committee released a report today showing that natural gas reserves in the US have increased by 35%.

"Estimated natural gas reserves rose to 2,074 trillion cubic feet in 2008, from 1,532 trillion cubic feet in 2006, when the last report was issued. This includes the proven reserves compiled by the Energy Department of 237 trillion cubic feet, as well as the sum of the nation’s probable, possible and speculative reserves."

The New York Times provides a helpful illustration.



The report calculates all gas that one could conceivably get out of the ground, however, not the amount that would be economical to get out of the ground (which is one reason, for example, why reserves calculated by oil companies can fluctuate rather wildly with price.) Near term this will prove an important difference, front month natural gas is trading at a $46.36/b discount to front month sweet light on NYMEX on a BTU basis.

12. SOUTHERN CALIFORNIA EDISON REACHES AGREEMENT FOR AS MUCH AS 726 MWs FROM SOLAR-THERMAL TROUGH GENERATORS

Dow Jones reports that Edison International's Southern California Edison utility has reached agreements

"with wind and solar power suppliers on four pacts for as much as 960 megawatts of power from renewable-energy sources ... include a potential 726 megawatts of power from solar-thermal trough generators."

All for the good, but the water requirements of solar-thermal trough generators may prove a problem in the future--see Daily Sources 6/8 #16.

Daily Sources 5/27

JAPANESE EXPORTS RISE IN 1.9% APRIL FROM MARCH, DOWN 39.1% FROM LAST YEAR

Reuters reports that Japanese exports rose, on a seasonally-adjusted basis, 1.9% in April from March. Exports are down 39.1% in April from a year previous. Shipments to China fell by an annual rate of 25.8% and to the US by an annual rate of 46.3%. I'd expect industrial production to rise slightly as well, given the news in late April that March industrial output had gone up 1.6% from February--see Daily Sources 4/30 #2.

2. MORE DEBATE INSIDE CHINA ON ECONOMIC DATA; CHINESE CORPORATIONS TO ACQUIRE COAL-COKING OPERATIONS OF CANADA'S TECK; KUOMINTANG PARTY LEADER IN BEIJING TO DISCUSS FURTHER OPENINGS

Sky Canaves at the China Journal reports that China's retail sales data is coming under more fire. The State Information Office [SIO]--a government think tank--published a report in the China Securities Journal--also government-owned--which made clear that consumption had also been hit hard by the current slowdown. The SIO reported:

"retail sales numbers 'don’t fully and accurately reflect the changing trends in consumer demand,' in part because they don’t include consumer spending on services and housing, which have seen relatively steeper drops than spending in other areas. Monthly retail sales data should be considered in conjunction with quarterly household expenditure data and year-end total consumer spending growth, which it said are trending downwards. According to year-end data, consumer spending nominally increased by 16.1% in 2008. But with inflation, real growth was only 9.6%, the lowest level of growth since 2005."

The SIO recommended new measures to boost domestic consumption including expanding the current rural car and appliance subsidy program, low interest home improvement loans, increased funding for low income housing, and a reduction in tolls. The critique of household consumption data echoes an earlier official critique by a chief statistician at China's National Bureau of Statistics--see Daily Sources

Meanwhile, Xiao Yu and Steven Engle at Bloomberg report that Canada's biggest base-metals company, Teck Resources, Ltd., is in talks with Chinese companies to sell its coking-coal assets.

"'We are going through a process' of talks with Chinese companies, including steelmakers, to buy as much as a 20% stake in its coking coal business, Chief Executive Officer Donald Lindsay said in a television interview in Beijing today. He declined to name the companies."

And Michael Wines at the New York Times reports that Chinese President Hu Jintao hosted Wu Poh-hsiung, the head of the Kuomintang Party--currently in power--in Beijing for talks regarding increased bilateral trade ties and cross border movement yesterday.

"Last week Chen Chu, the highest-ranking elected official of the Democratic Progressive Party, or DPP, visited Beijing. Ms. Chen, the mayor of Kaohsiung, Taiwan’s second largest city, stressed that she was visiting the mainland to promote her city, not to signal any political retreat from the party’s independence stand. Trips to the mainland by DPP officials are nevertheless rare, and [Taiwanese President] Ma [Ying-jeou] quickly cited it as a sign that cross-straits relations were improving."

3. NORTH KOREA THREATENS ATTACKS ON SEOUL IF ITS SHIPS ARE INTERDICTED

Choe Sang-Hun at the New York Times reports that Pyongyang threatened to launch military strikes on South Korea should any of its ships be intercepted and searched as part of the US-led effort to prevent it from proliferating nuclear weapons or missile technologies. Seoul had agreed to join the US "interdiction effort" (um, i.e., blockade) Monday after North Korea conducted an underground nuclear test blast--its third. A North Korean military spokesman said today in an official statement:

"We consider this a declaration of war against us. Any hostile act against our peaceful vessels, including search and seizure, will be considered an unpardonable infringement on our sovereignty and we will immediately respond with a powerful military strike."

On January 30, Pyongyang unilaterally declared all peace agreements with Seoul null and void, including the armistice ending the Korean War in 1953 and the 1991 agreement on non-aggression and reconciliation--see Daily Sources 1/30 #3. North Korea reiterated its view that the peace deals between it and the South were a dead letter in its statement today. Former Secretary of Defense William J. Perry, Former National Security Adviser Brent Scowcroft and Council on Foreign Relations Senior Fellow Charles D. Ferguson have an op ed in today's Wall Street Journal on how best to approach the impasse with Pyongyang. Key excerpt:

"An effective strategy to reduce nuclear dangers must build on five pillars: revitalizing strategic dialogue with nuclear-armed powers, particularly Russia and China; strengthening the international nuclear nonproliferation regime; reaffirming the protection of the US nuclear umbrella to our allies; maintaining the credibility of the US nuclear deterrent; and implementing best security practices for nuclear weapons and weapons-usable materials worldwide."

Worth reading.

4. EUROZONE OVERNIGHT LENDING RATES RECOVERING, COULD PRESENT THE ECB WITH A DILEMMA

Joellen Perry at Real Time Economics reports that the euro-zone overnight index average rate rose to 1.146% Wednesday, after having hit a low of 0.486% on May 11, and above the European Central Bank's target of 1%.

"Keeping the overnight rate steady is a central bank’s main raison d’être. Central banks manage growth and inflation by setting a target rate for the overnight loans banks make to one another. The overnight rate guides other key interest rates--such as the benchmark for the rates banks charge one another for three-month loans. That rate, a reference point for many consumer and business loans across the euro zone, has been rising in tandem with the overnight rate. On Wednesday, it hit 1.270%, up from Tuesday’s 1.266%."

As Perry points out, this is a good thing because it suggests that the credit crunch has relaxed its grip on the markets, but that on the other hand it could reduce the ECB's options in dealing with the financial crisis because,

"If the overnight rate stays higher than the ECB’s target rate, then the ECB’s monetary policy is more restrictive than the central bank wants. That could end up putting a brake on the economy in the midst of a deep recession."

5. RUSSIAN OFFICER CORPS UNHAPPY WITH RESTRUCTURING IN MIDST OF FINANCIAL CRISIS

Philip P. Pan at the New York Times has a very interesting anecdotal account of discontent rising in the Russian military--particularly among its officer corps--as it undergoes the process of modernizing.

"Low morale over pay and housing has afflicted the Russian military since the fall of the Soviet Union, but grumbling in the ranks is rising sharply as President Dmitry Medvedev attempts to carry out the most ambitious restructuring of the nation's armed forces since World War II in the face of a severe economic downturn.

The plan seeks to transform an impoverished, unwieldy conscript army built to fight a protracted war in Europe into a more nimble, battle-ready force that can respond quickly to regional conflicts. Key to the overhaul is a drastic reduction in the number of officers, who now account for nearly one in three Russian servicemen.

By eliminating thousands of officer-only units that were designed to call up draftees in wartime, and moving to a leaner, brigade-based structure, Medvedev intends to cut Russia's officer corps from 355,000 to 150,000, dismissing more than 200 generals, 15,000 colonels and 70,000 majors."

The question is whether or not the current economic environment is a better or worse time to continue to carry out the restructuring plan, from a political perspective.

6. PAKISTAN'S SUPREME COURT READMITS SHARIF BROTHERS TO ELECTED OFFICE

Nasir Iqbal at Dawn reports that Pakistan's Supreme Court ruled that the Sharif brothers who lead the main opposition party--PML-N--were illegally barred from elected office.

"The decision paved the way for former Prime Minister Nawaz Sharif to return to parliament after nearly 10 years.

‘The June 23, 2008, judgment of the Lahore High Court and the Feb 25 order of this court are ex-parte on account of which certain factual aspects and legal provisions were not brought to the notice of the court and, therefore, were not considered, leading to miscarriage of justice which has been found by us to be errors apparent on the face of record warranting review,’ a five-judge bench ruled unanimously in a packed courtroom."

Encouraging, in my view--see The Law in Pakistan.

7. VENEZUELA AND BOLIVIA DENY ABSURDIST CLAIM THAT THEY ARE PROVIDING IRAN WITH URANIUM; HOUSEHOLD GOODS IN SHORT SUPPLY IN VENEZUELA

Carlos Valdez at the Associated Press report that Caracas and La Paz issued official denials today regarding the Israeli report which accused the two countries of supplying uranium to Iran.

"Bolivian Mining Minister Luis Alberto Echazu said his country doesn't even produce the radioactive metallic element, though he acknowledged that officials believe the country has some untapped uranium deposits.

'There isn't even a precise geological study of uranium deposits, and much less can there be talk of export' to another country, he said."

Venezuela also has estimated uranium reserves of some 50,000 metric tons, but currently has no mining operations. I am unclear as to why strategists in Israel, at this stage, would be anxious for a US scrap with Venezuela just now, given the drums still beating for war with Iran. A full-bore conflict with either could ill be afforded by the US just now and absurd-ist accusations, though creative, are not likely to burnish their credibility. Iran has a contract for enriched uranium supplies from Russia to feed the Bushehr nuclear power plant and, as has been widely reported, now has the capability to enrich uranium, of which it has proven reserves of about 3,000 metric tons and expected reserves of 20,000-30,000 metric tons.

Meanwhile, Tyler Bridges at McClatchy Newspapers has a story on consumer goods shortages in Venezuela. (The story is not the first in some anecdotal accounts of shortages faced in the cities due to the fall in the price of oil--see Daily Sources 2/2 #10.)

"'Today, there's no milk, no rice, no beans, no chicken, no meat, no butter and no cooking oil,' Francisco Quintero said as he shopped at a government store that sells subsidized staples for the poor."

Bridges reports that prices for pharmaceuticals and home appliances are skyrocketing as car manufacturers have decided to stop their production lines.

"'We're expecting the government to raise prices for rice, milk, meat and chicken by 40%," said Marlon Barragan, who manages a Mercal in Catia. He said that the prices 'will still be low.' The only question is whether the goods will be available.

The government is three to four months behind in providing dollars to drug producers to pay for their imports of goods and raw materials, said Edgar Salas, who heads a pharmaceutical trade association in Caracas. In all, the companies are owed about $250 million, he said."

8. FEDERALES ARREST 10 MICHOACAN MAYORS

E. Eduardo Castillo at the Associated Press reports that Mexican federal forces, in a raid that began Tuesday morning, have put under arrest ten mayors of ten cities in the central state of Michoacan.

"Most of the mayors were from towns in a mountainous region where there have been numerous beheadings and federal agents recently found 22 methamphetamine laboratories. Among those detained was the mayor of Uruapan, where La Familia gunmen dumped five human heads on a bar dance floor in 2006, the Attorney General's Office said in a statement.

The mayors came from different parties, including Calderon's own conservative National Action Party.

The detentions of elected officials show how Mexican cartels have infiltrated the country's political structure and how far-reaching their control is in rural Mexico, said Victor Clark, an expert on trafficking based in the drug-plagued northern border city of Tijuana.

It also marks a first for the federal government, which has arrested scores of corrupt police officers in the past but has never gone after such a large group of mayors."

9. G8 MEETING CREATES "PARTNERSHIP" TO SHARE ENERGY EFFICIENCY DATA

Platts reports that at the G8 meeting in Rome this weekend a International Partnership for Energy Efficiency Cooperation was created. Members will include the G8--Canada, France, Germany, Italy, Japan, Russia, the UK, and the US--as well as Brazil, China, India, Mexico and the South Korea. The agreement is intended "to make it easier for their governments to share information on curbing energy consumption."

10. TROUBLED U.S. BANKS NOW 21% OF TOTAL

Margaret Chadbourn and Alison Vekshin at Bloomberg report that the number of distressed banks, per the FDIC, has climbed to 21% of the total--the largest share of the US banking sector "troubled" in 15 years.

"Funds set aside by banks to cover loan losses rose 64% to $60.9 billion in the first quarter from $37.2 billion in the year-earlier quarter. [FDIC Chair] Sheila Bair said 97% of banks were 'well-capitalized' at the end of the first quarter."

21 banks have collapsed in the first quarter, the most since late 1992. The FDIC has taken over 36 this year.

11. PRE-EXISTING HOME SALES RISE 2.9% IN APRIL FROM MARCH, DOWN 3.5% ON THE YEAR; RISING UNEMPLOYMENT COULD AUGUR 1-3 MILLION ADDITIONAL FORECLOSURES AS RECESSION DRAGS ON

Barry Ritholtz reports that the recent National Association of Realtors data shows that existing home sales increased 2.9% in April from March (at seasonally adjusted rates), and down 3.5% from a year previous. Total inventory in April rose 8.8%--"The increase in inventory is somewhat worrisome, and supports our thesis that any stabilization in sales or prices will bring out more shadow inventory." In the meantime, in a post by Ritholtz yesterday, he outlined why more unemployment equals more foreclosures:

"• Foreclosure rates among prime borrowers have been growing fastest in states with higher unemployment.

• Economy.com expects mortgage defaults in 2009 caused by unemployment to double, from 29% in 2008 to 60% in 2009;

• Prime mortgages that are distressed (90 days delinquent, foreclosure, REO) are greater than 1.5 million;

• Alt-A loans--those given to people with slightly tainted credit--rose to 836,000.

• Subprime mortgages that were 'distressed' reached 1.65 million;

• From February 2008 to Feb 2009, total dollar value of distressed mortgages increased 60% in dollar terms;

• More than four million loans worth $717 billion were 'distressed' in February."

I'm not sure that his linear projection makes sense, given that arguably those most at risk of foreclosure due to job losses were hit first, but he predicts 500,000 to a million additional foreclosures--from February--in the next six months if the recession ends now. If the recession continues for another six months, Ritholtz argues that we should see two to three times that number.

12. HIGHER EDUCATION BUBBLE LIKELY TO POP NEXT

Former Massachusetts secretary of educational affairs, Joseph Marr Cronin, and president of New England College of Business and Finance Howard E. Horton argue in the Chronicle of Higher Education that the higher education sector is likely to get hit next. Key excerpt:

"According to the National Center for Public Policy and Higher Education, over the past 25 years, average college tuition and fees have risen by 440%--more than four times the rate of inflation and almost twice the rate of medical care. Patrick M. Callan, the center's president, has warned that low-income students will find college unaffordable.

Meanwhile, the middle class, which has paid for higher education in the past mainly by taking out loans, may now be precluded from doing so as the private student-loan market has all but dried up. In addition, endowment cushions that allowed colleges to engage in steep tuition discounting are gone. Declines in housing valuations are making it difficult for families to rely on home-equity loans for college financing. Even when the equity is there, parents are reluctant to further leverage themselves into a future where job security is uncertain.

Consumers who have questioned whether it is worth spending $1,000 a square foot for a home are now asking whether it is worth spending $1,000 a week to send their kids to college. There is a growing sense among the public that higher education might be overpriced and under-delivering."

Worth reading in full (h/t Yves Smith at naked capitalism.) UNESCO estimates that the US has over 14 million higher education students, which suggests that the represent a considerable share of the economy. Meanwhile, Jonathan D. Glater at the New York Times has an anecdotal account of teachers being faced with smaller loan forgiveness packages as the recession hits those state and federally budgeted programs.

"From Kentucky to Iowa to California, loan forgiveness programs are on the chopping block. Typically founded by their states to help students pay for college, the state agencies and nonprofit organizations that make student loans and sponsor these programs are getting less money from the federal government and are having difficulty raising money elsewhere as a result of the financial crisis.

The organizations say the repayment programs have been hurt by a broader effort by Congress to tackle the high cost of the federal student loan program by reducing subsidies to lenders.

Curbing the programs will make it harder to lure college graduates into high-value but often low-paying fields like teaching and nursing."

Daily Sources 4/17

1. GERMAN ECONOMIC COUNCIL REJECTS A FURTHER STIMULUS PACKAGE, EUROPEAN PARLIAMENT WANTS STRICTER FINANCIAL REGULATION, GLOBAL DEFLATION IN EVIDENCE ... OR NOT ... OR YES

Eurointelligence reports that Wolfgang Franz, head of Germany’s council of economic advisers, has rejected the notion of a third stimulus package, arguing that the economy is likely to bottom in the middle of this year on the back of stimulus beginning to take effect and lower commodity prices. The European Parliament is seeking regulation which would require banks issuing securitized paper to hold a stake of at least 10-15% versus the European Commission's plan to require a 5% stake. "[T]he regulation of rating agencies seems to be a done deal." Gotta give em credit for that last bit.

However, Mike Shedlock at Mish's Global Economic Trend Analysis notes that deflation, defined (incorrectly as it turns out) as sustained widespread price drops has gone global. Japanese wholesale prices have fallen to levels not seen since 2002; Germany sees sharpest decline in wholesale prices in 22 years; the Chinese consumer and producer price indexes have both gone negative; and US producer prices see the sharpest decline in 59 years; consumer prices see the sharpest drop in 55. Mr. Shedlock quotes from David Rosenberg at Merrill Lynch:

"Relative to year-ago levels, overall [Consumer] prices fell by 0.4%, for the first dip into deflationary territory since August 1955. Looking ahead, easy energy comparisons versus a year-ago will be a key factor in leading the overall CPI lower in the months ahead. Food prices, eased to 4.4% Y/Y versus a peak of 6.1% Y/Y in October 2008, will also be a factor. By 3Q, we anticipate annual declines of 2.5%. Core prices were unchanged at 1.8% Y/Y in March, though down from the nearby peak of 2.5% in August 2008. By 3Q, the core CPI is also expected to ease toward 1.0%, with depressed demand and more competitive pricing for a broad array of consumer categories as tailwinds.

Underlying weakness in core CPI

'Owners’ equivalent rent–-a category that accounts for 31% of the core CPI)--rose 0.2% M/M, in part due to falling natural gas prices, which have an inverse relationship to rent prices.'"

Mish points out that owner's equivalent rent is a process by which the Bureau of Economic Analysis estimates what housing would cost if owners' rented from themselves and concludes:

"OER is not a valid pricing barometer. By ignoring housing prices, CPI massively understated inflation for years. The CPI is massively overstating inflation now."

Mish plots the consumer price index if you substitute the Case Shiller housing index for owner's equivalent rate versus regular CPI:



The post is well worth reading in full. (h/t Yves Smith at naked capitalism.) The "proper definition of deflation," per Mish, is "a net decrease in the money supply and credit, with credit being marked to market" ... and by that measure deflation has been global for some time now.

But the wires appear to be crossed, because Real Time Economics reports that consumers see prices rising, which is what we understand as inflation. The number is apparently strongly influenced by gasoline prices, which have indeed risen a fair amount in the last two months.

"The University of Michigan’s latest reading of consumer sentiment showed expectations for inflation over the next year rising in April to 3%, from 2% in March.
...
JP Morgan Chase economist Abiel Reinhart notes that the one-percentage-point increase in inflation expectations has occurred just three times in the past quarter century: in 1990 after the Iraqi invasion of Kuwait, in 2001 after the Sept. 11 attacks and in 2005 after Hurricane Katrina."

In another post on the same consumer sentiment index, Michael S. Derby at Real Time Economics reports that consumer sentiment rose much more than economists had expected in April. In the meantime, Tim Hanrahan at Real Time Economics has a chart of the Fed's expanding balance sheet:



The graphic in the post itself is interactive, noting, via pop-ups, when certain events happen along the time line. Brad Setser has a chart which may provide additional clarification as to why the Fed is purchasing agencies--international demand for them has collapsed:



Setser notes:

"Treasuries are the only US asset foreign investors still want, despite their low yields. Over the past 12 months, the US--rather amazingly--could have financed its trade deficit by just selling Treasuries. And nothing else. At least so long as Americans didn’t move large sums out of the US.

It still could for that matter. The $85.1 billion in Treasuries foreign investors bought in the first two months of 09 (mostly in February) easily exceeds the $62.2 billion January-February trade deficit.

At some point, though, central bank and flight-to-safety demand for Treasuries will fade. That won’t necessarily signal a loss of confidence in US government bonds. It could equally signal renewed confidence in the Agencies--or at least an and to the reallocation of existing reserves toward Treasuries."

Worth reading in full. (Setser also makes the interesting point that it is easier for foreign central banks to shift from agencies to treasuries than it would be to transfer out of US assets altogether.)

Meanwhile, P O Neill at Fistful of Euros notes the stories on the schism in opinion at the European Central Bank, writing:

"The latest Eurostat inflation data might concentrate minds, showing annual Eurozone inflation of 0.6% and several countries already in deflation. But if the cautious EU countries thought that the G20 enhancements to the IMF would bail out them out any further anti-crisis measures, that money to eastern Europe needs to start flowing soon. Note: the only big announcement since the G20 is the facility for Poland, and that’s a precautionary facility. The ECB can’t dodge this issue forever."

2. CHINESE RAILWAYS TO GET ADDITIONAL $2 BILLION IN SPENDING FROM STIMULUS, AND LOOKS READY TO GET AN AIRCRAFT CARRIER, TOO

Ian Johnson at the Wall Street Journal reports:

"Wang Yongping [the Ministry of Railways' chief spokesman] said the funding will come from government bonds issued late last year to bolster China's economy. The new spending could create 150,000 jobs, he said, based on the ministry's experience. The entire Chinese railway system employs about 2 million. 'The government considered the economy when it invested in the railway,' Mr Wang said."

Galrahn at Information Dissemination notes that the PLA will likely announce its intention to build its first two air craft carriers next week. Infrastructure and defense--I suspect Beijing's own military industrial complex will become much more of a political headache to China, just as it is in the US, as efforts to combat the global financial crisis unfold.

3. SPANISH PROSECUTORS OFFICIALLY RECOMMEND AGAINST PROSECUTING US OFFICIALS FOR WAR CRIMES

In a move which contradicts my post linking to Prof. Juan Cole on the matter yesterday, Paul Haven at the Associated Press reports that Spanish prosecutors today formally recommended against investigating allegations against Bush Administration figures. The prosecutors also formally recommended that Judge Baltasar Garzon should not oversee any such investigation should one be ordered given another judge's superior competence in these types of investigations, and Garzon formally stepped aside from the case a few hours later.

"Prosecutors said any such investigation ought to be conducted in the United States, not Spain. They also questioned the idea of bringing charges against lawyers and presidential advisers who neither carried out the alleged torture themselves, nor were ultimately responsible for ordering it.

The prosecutors wrote that going after lawyers who wrote nonbinding recommendations for the president and his senior staff, rather than targeting higher-ranking officials who authorized the alleged torture, 'raises important problems from a legal standpoint.'

It also questioned the appropriateness of a case that would effectively put on trial 'all of the policies of the past US administration (as reproachable as they may be),' saying such an endeavor was beyond the scope of the Spanish legal system."

Although Spanish law asserts universal jurisdiction in instances of torture, war crimes, and other "heinous offenses," it seems clear from the recommendation that the government wants to put limits on its usage.

4. CHECHEN ANTI-TERRORIST OPERATIONS DECLARED OVER, POSSIBLE RUSSIAN-AZERBAIJAN GAS DEAL, GAZPROM ENTERS BOLIVIAN UPSTREAM WITH PDVSA

Michael Schwirtz at the New York Times reports that Russia officially ended its counter-terrorism operations in Chechnya yesterday.

"Russia’s National Antiterrorist Committee said in a statement that the decision was made 'to guarantee conditions for the further normalization of the situation in the republic and for the development of its social and economic spheres.'

The committee did not mention troop withdrawals, though Russian officials said they would now have more legal leeway to scale down the number of federal military and security forces. While the violence in Chechnya has declined, it seemed likely that many troops and security forces could remain for some time."

Catrina Stewart at the Associated Press reports that following a meeting with Azeri President Ilham Aliyev, Russian President Dmitry Medvedev told reporters that ""We have a very high chance of entering a full-blown agreement" on natural gas supply from Azerbaijan through Russia. Baku would likely be hoping to balance a bit out of the Western orbit via such a deal. Moscow is continuing a policy of deepening interdependence with Western Europe.

Meanwhile, Moscow marked the beginning of the Americas Summit by announcing, via the prospectus of its upcoming bond issue, to take a 20-24.5% stake in upstream gas join venture Petroandina. Anna Shiryaevskaya at Platts reports that Petroandina is 51% owned by Bolivia's state-owned YPFB and 49% by Venezuela's PdVSA.

"Gazprom had not previously revealed how large a stake it was considering taking in Petroandina, which owns licenses for the development of 12 blocks in Bolivia. The blocks include Aguarague, Iniguasu and Inau with potential reserves of up to 300 billion cubic meters of gas, Gazprom said."

5. ROMANIA OFFERS MOLDOVANS ROMANIAN CITIZENSHIP

In a move rightly regarded as destabilizing, Der Spiegel reports the Romanian President Traian Basescu this week offered Moldovans with Romanian blood citizenship.

"'We are not going to allow a new Iron Curtain on the Prut (River)," said President Traian Basescu on Wednesday, referring to the river that separates the two nations. 'We cannot accept that the Romanians across the Prut are isolated from the rest of Europe.'

'Reunification' with Romania was a Moldovan election issue. Romania has always been an ethnic big brother to Moldova, and the smaller country even belonged to modern Romania until 1940, when Moldova was annexed by the Soviet Union. Some ethnic Romanians in Moldova now think reunification would be a quick way to join the European Union, since Romania has been a member since 2007."

However, Moldova has a significant Slavic population, which tends to identify with Russia, and Russia tends to regard as its ethnic little brother. Worth raeding.

6. UN REPORT ON KIRKUK ADMINISTRATION TO BE RELEASED NEXT MONTH UNLIKELY TO PLEASE EVERYONE

Ernesto Londoño at the Washington Post reports:

"In Kirkuk, the crown jewel of the 300-mile strip of disputed territories, Arab politicians announced over the weekend the creation of a political group that includes Sunni leaders who gained prominence in 2006 and 2007 when, with financial backing from the United States, they took up arms against the group al-Qaeda in Iraq in the western part of the country.

The Kurds, meanwhile, have been aggressively collecting signatures in the oil-rich city for a nonbinding petition with which they hope to demonstrate that the majority of Kirkuk's residents want the city annexed to the autonomous Kurdish regional government."

7. PAKISTAN SECURES $5 BILLION IN ADDITIONAL AID FOR ITS ELITE TO DISTRIBUTE, WHILE THE TALIBAN APPEALS TO THOSE THEY EXPLOIT

Chisa Fujioka and Yoko Kubota at the Washington Post reports that more than $5 billion in new aid was pledged to Pakistan in a conference today. President Zadari is reported to have said, "If we lose, you lose. If we lose, the world loses." The US matched a pledge by Japan for $1 billion over the course of two years, subject to Congressional approval.

Jane Perlez and Pir Zubair Shah at the New York Times argue that the Taliban's success in Swat and elsewhere has been to appeal to landless peasants in their struggle against the landed elite.

"In Swat, accounts from those who have fled now make clear that the Taliban seized control by pushing out about four dozen landlords who held the most power.

To do so, the militants organized peasants into armed gangs that became their shock troops, the residents, government officials and analysts said.

The approach allowed the Taliban to offer economic spoils to people frustrated with lax and corrupt government even as the militants imposed a strict form of Islam through terror and intimidation.

'This was a bloody revolution in Swat,' said a senior Pakistani official who oversees Swat, speaking on the condition of anonymity for fear of retaliation by the Taliban. 'I wouldn’t be surprised if it sweeps the established order of Pakistan.'"

I reiterate my suspicion that this is not just about money, and that the inequitable access to justice and security is a major driver here, but clearly the inequitable distribution of wealth contributes to inequitable access to justice and security. From my far remove.

8. ASSASSINATION ATTEMPT ON THAI 'YELLOW-SHIRT' LEADER

The Canadian Broadcasting Company reports that Sondhi Limthongkul, a media tycoon and founder of Thailand's "yellow-shirt" protest movement, was shot at by gunmen in a pickup track today as he was on his way to work. A bullet fragment entered his skull and Sondhi is in stable condition at the hospital after having surgery to remove it.

"The pre-dawn attack came hours before Thailand's government held a special cabinet meeting to discuss the recent violence that left two demonstrators dead.

After the meeting, Prime Minister Abhisit told reporters cabinet members agreed to extend the country's state of emergency for a sixth day in order to control rioting.

'We have to make sure peace and order truly returns,' he said.

It's not clear when the state of emergency will be lifted."

The bad blood is building. (h/t The FP Morning Brief.)

9. ANGOLA'S CRUDE EXPORTS TO RISE IN APRIL, PETROBRAS SEEKING OIL RIGS

Angola is increasing its crude exports by 7% in June, per Alexander Kwiatkowski at Bloomberg, who writes that loading programs for BP Plc, Total SA, Chevron Corp., Exxon Mobil Corp. and other companies are scheduled to load 1.85 mb/d that month. Meanwhile, Florence Tan and P.R. Venkat at Dow Jones Newswires report that Petrobras will begin the process of accepting bids for new oil drilling rigs in the next couple of months.

"The company, which awarded contracts for 12 rigs last year, still needs 28 more over the next five years as part of its expansion.

'We will divide them (28 rigs) into lots of 5-7,' Chief Financial Officer Almir Barbassa told a news conference Thursday, adding the company will seek bids for the first lot in 2-3 months."

The company expects first oil from Tupi, an oil field thought to hold between 5 and 8 billion barrels of recoverable oil equivalent, on May 1.

10. US-MEXICAN ENERGY COOPERATION

President Obama and Mexican President Felipe Calderon announced yesterday that the two countries would initiate a cross border dialogue on energy and climate change. Alexander Duncan at Platts reports:

"The 'Bilateral Framework on Clean Energy and Climate Change' is similar to an effort which Obama helped launch when he visited with Canadian Prime Minister Stephen Harper in February.

Obama also backed Mexico's bid to host next year's UN climate change negotiations. The negotiations this December, to be held in Copenhagen, will set the stage for a new international climate treaty to replace the Kyoto Protocol."

If I remember correctly, such a dialogue was a key recommendation by Sen. Lugar and as such represents an example of bi-partisanship.

Daily Sources 2/17

1. Hiroko Tabuchi at the New York Times reported on Monday that the Japanese government announced that GDP had shrunk by 3.3% in the fourth quarter from the third. The annualized rate is a 12.7% contraction.

2. Eurointelligence reports that Le Monde has a story on the recent four country tour of the Austrian finance minister, Josef Pröll, to Bucharest, Sofia, Kiev and Zagreb in support for a €150 billion plan to support the eastern European economies. He has been arguing that the Austrian financial sector is solvent. However, as Yves Smith at Naked Capitalism notes, Austrian banks have apparently lent as much as €230 billion, or 70% of Austrian GDP, to the ex-Soviet bloc. She quotes at length from a piece by Ambrose Evans-Pritchard at the UK Telegraph:

"Stephen Jen, currency chief at Morgan Stanley, said Eastern Europe has borrowed $1.7 trillion abroad, much on short-term maturities. It must repay–-or roll over-–$400 billion this year, equal to a third of the region's GDP. Good luck. The credit window has slammed shut. …

'This is the largest run on a currency in history,' said Mr Jen.

In Poland, 60% of mortgages are in Swiss francs. The zloty has just halved against the franc. Hungary, the Balkans, the Baltics, and Ukraine are all suffering variants of this story. As an act of collective folly – by lenders and borrowers – it matches America's sub-prime debacle. There is a crucial difference, however. European banks are on the hook for both. US banks are not.

Almost all East bloc debts are owed to West Europe, especially Austrian, Swedish, Greek, Italian, and Belgian banks. En plus, Europeans account for an astonishing 74% of the entire $4.9 trillion portfolio of loans to emerging markets. …"

Ms. Smith reports that the Austrians are allegedly confident that Berlin will bail them out. Meanwhile, today Eurointelligence reports that the Narodowy Bank Polski said it was difficult to justify entering the European monetary union, pushing the zloty to its lowest level since joining the EU, and presumably exacerbating the losses of those banks invested in the country. Laura Cochrane at Bloomberg reports that emerging-market stocks today took a beating on the growing fears around the eastern European economic troubles, led by eastern European mining and financial companies.

3. Andrei Batrak, Martin Doerry, Christian Neef and Matthias Schepp of Der Spiegel conducted an interview of Russian foreign minister Sergei Lavrov recently, where he evinced optimism regarding US-Russian relations. In part his optimism is an outgrowth of the crisis; apparently in his view wealth created the luxury for certain conflicts to bloom:

"Lavrov: We can no longer afford the luxury of little geopolitical games, because we all face challenges that directly affect our citizens. So we should no longer ideologize problems, we should instead honestly express our own national interests, understand the legitimate interests of our partners, and have no more hidden agendas, where one thing is said while something else is done behind someone's back. The signals that we are receiving indicate that our Western partners are aiming for the same objectives."

He also indicated that Russia has already agreed to allow the transit of supplies to US troops in Afghanistan, though I infer that Moscow may look for some further quid pro quo for permitting the transit of munitions.

"SPIEGEL: Let's look ahead. The war in Afghanistan is the greatest foreign policy challenge that the new US administration faces. Russia must also have an interest in preventing the West from failing in the Hindu Kush. How can you help?

Lavrov: In April 2008, we signed an agreement with NATO concerning the transit of nonmilitary goods over Russian territory to Afghanistan. Up until now, such agreements have only been made with Germany and France, and recently one was concluded with Spain. In late January, the US asked us to apply the NATO agreement as the basis for supplying the American contingent. We immediately consented and have also agreed with NATO to make Russian military transporters available to the peacekeeping troops in Afghanistan. We could also work more closely together to curb drug trafficking."

Lavrov was Russia's Ambassador to the UN from 1994 until he was appointed Foreign Minister in 2004 by Vladimir Putin. Worth reading in full.

4. Pamela Constable at the Washington Post reports that Islamabad has announced it has agreed with the Taliban to introduce sharia courts into the Swat valley.

"'There was a vacuum . . . in the legal system. The people demanded this and they deserve it,' said Amir Haider Khan Hoti, chief minister of the North-West Frontier Province. The new system will include an appeals process, something the Afghan Taliban justice system did not allow for."

Jane Perlez at the New York Times reports that the new accord puts into effect agreements made by Benazir Bhutto in the early 1990s and Prime Minister Nawaz Sharif in 1999. The agreements to put in place sharia courts had never been honored. Despite the clear desire for a means of legal redress of issues, the lawyers movement appears to regard the decision as a jurisdictional challenge.

"'This means you have surrendered to a handful of extremists,' said Athar Minallah, a leader of a lawyers’ movement that has campaigned for an independent judiciary. 'The state is under attack; instead of dealing with them as aggressors, the government has abdicated.'"

That said, historically the modern nation state was been built in part via competing jurisdictions, and the general desire for rule by law is something that it is in the US interest to encourage. (see The Law in Pakistan.) That said, the Associated Press reports that NATO immediately criticized the decision, with spokesman James Appathurai saying:

"It is certainly reason for concern. We should all be concerned by a situation in which extremists would have a safe haven. Without doubting the good faith of the Pakistani government, it is clear that the region is suffering very badly from extremists and we would not want it to get worse."

5. India's Economic Times reports that today Russia and China signed a $25 billion energy deal whereby Beijing would lend $15 billion to Rosneft and $10 billion to Transneft in return for 20-years supply of 300 kb/d.

"Russian crude will be supplied through a long-delayed pipeline project agreed to late last year. The pipeline, which extends from western Siberia to the Pacific coast, is to be linked to China from the Siberian city of Skovorodino, 70 kilometers (44 miles) north of the Sino-Russian border."

The deal is very similar to the $6 billion loan CNPC provided Rosneft to purchase remaining Yukos assets in 2005. Meanwhile, Michelle Wiese Bockmann at Lloyd's List reports that Lukoil Trading and Shipping Supply chief executive Gati Al-Jebouri told journalists that the company expects to supply more crude to the international markets, given a reduction in domestic consumption.

6. Carola Hoyos at the Financial Times reports that Christophe de Margerie, Total SA CEO, told the media that he doesn't believe the world will ever be able to produce more than 89 mb/d of oil. It was not clear from the story whether Mr. Margerie included biofuels or NGLs in his definition of oil. He noted that in the current financial environment, national oil companies--which control about 70% of the world's proven reserves--will have a hard time financing new investments. He expects more than 1.5 mb/d of potential supply from the Canadian oil sands and Venezuelan Orinoco belt to have been shut in by low prices. Hoyos implies that Margerie expects prices to rebound in the medium term, which make some sense of his decision to focus on development in Venezuela as opposed to Brazil as per reports on Friday. (see Daily Sources 2/13 #9.) Meanwhile, Simon Romero at the New York Times reports that Hugo Chávez's referendum to abolish presidential term limits passed over this weekend. If the economic indicators recently published by the Center for Economic and Policy Research are facts, then it is easy to see why.

"- The current economic expansion began when the government got control over the national oil company in the first quarter of 2003. Since then, real (inflation-adjusted) GDP has nearly doubled, growing by 94.7% in 5.25 years, or 13.5% annually.
- Most of this growth has been in the non-oil sector of the economy, and the private sector has grown faster than the public sector.
- During the current economic expansion, the poverty rate has been cut by more than half, from 54% of households in the first half of 2003 to 26% at the end of 2008. Extreme poverty has fallen even more, by 72%. These poverty rates measure only cash income, and does take into account increased access to health care or education.
- Over the entire decade, the percentage of households in poverty has been reduced by 39%, and extreme poverty by more than half.
- Inequality, as measured by the Gini index, has also fallen substantially. The index has fallen to 41 in 2008, from 48.1 in 2003 and 47 in 1999. This represents a large reduction in inequality.
- Real (inflation-adjusted) social spending per person more than tripled from 1998-2006.
- From 1998-2006, infant mortality has fallen by more than one-third. The number of primary care physicians in the public sector increased 12-fold from 1999-2007, providing health care to millions of Venezuelans who previously did not have access. - There have been substantial gains in education, especially higher education, where gross enrollment rates more than doubled from 1999-2000 to 2007-2008.
- The labor market also improved substantially over the last decade, with unemployment dropping from 11.3% to 7.8%. During the current expansion it has fallen by more than half. Other labor market indicators also show substantial gains.
- Over the past decade, the number of social security beneficiaries has more than doubled.
- Over the decade, the government’s total public debt has fallen from 30.7 to 14.3% of GDP. The foreign public debt has fallen even more, from 25.6 to 9.8% of GDP.
- Inflation is about where it was 10 years ago, ending the year at 31.4%. However it has been falling over the last half year (as measured by three-month averages) and is likely to continue declining this year in the face of strong deflationary pressures worldwide."

The source primarily used in the CEPR paper is the Banco Central de Venezuela. That said, the paper argues that one shouldn't look at the time prior to the government's reorganization of PdVSA as a guide to economic performance. Perhaps, but Caracas can only loot PdVSA for so long--consumption driven growth provided by subsidies via oil revenues and nationalizations can only run as long as production remains normal and there are remaining oil companies willing to make large investments in the country. The nationalization of a national oil company's project would probably put an end to any international interest whatsoever.

Joshua Partlow at the Washington Post has an especially interesting article emphasizing the legal nature of the leftist turn in South America.

"[F]rom the Venezuelan charter in 1999 to the new constitutions in Ecuador last year and Bolivia last month, a team of Spanish legal scholars influenced the conception, drafting or implementation of the documents, which have stirred domestic class tensions and harmed relations with the US government. The leader is Roberto Viciano Pastor, an author and constitutional law professor at the University of Valencia whose technical, and some say ideological, assistance in writing the constitutions is generating new scrutiny across South America."

The effort to win political dominance via democratic appeals to revamp the legal landscape--whatever the criticisms of the protagonists and their true intentions--demonstrates an interest in legitimizing change via established rule of law, and in itself should be encouraging. Partlow quotes Brazilian president Luiz Inácio Lula da Silva who said last month:

"What we have achieved in these last years was, in truth, the result of the deaths of many people, many young people, who decided to take up arms to bring down the authoritarian regimes in Chile, in Argentina, in Uruguay, in Brazil, in almost all the countries. They died, and we are doing what they dreamed of doing--and we have won this by democratic means."

Vis-a-vis the on-going struggle with Exxon-Mobil, Platts reports that Exxon today announced it had a 103% replacement rate for oil produced in 2008. Most of those bookable barrels come from Canada's oil sands--which require expertise to exploit similar to what is found in Orinoco. But, in news consistent with Mr. Margerie's predictions, Matthew Cook at Platts reports that federal agency Statistics Canada announced over the weekend that Canadian oil production fell 3.31% to average about 2.68 mb/d in 2008.

Meanwhile, Spencer Swartz at Dow Jones reports that IEA chief Nobuo Tanaka told reporters:

"If OPEC is aiming at rapid increases by cutting supply maybe it would not be good for economic recovery. We think OPEC countries should take a closer look at the market and make a flexible decision."

And Luke Pachymuthu at Reuters reports that Iraqi Oil Minister Hussain al-Shahristani told journalists that OPEC should make further cuts should prices not recover. Such noise should be taken with more than a grain of salt, given that Iraq is not subject to OPEC supply quotas.

7. Shobhana Chandra at Bloomberg reports that the Federal Reserve Bank of New York’s general economic index fell to minus 34.7% in January from minus 22% in December. The index measures manufacturing activity in New York.

8. Phred Dvorak at Real Time Economics posts the extremely worrisome story that Littler Mendelson, a leading employment-law law firm consulted on roughly half of all layoffs in the US, is currently working on roughly an additional two million layoffs this quarter.

"Applying his admittedly unscientific methodology, Mr. Mathiason estimates the US could lose around three million jobs from January through March, or one million a month."

Worth reading in full.

Daily Sources 9/12

1. The Financial Times published a series of articles yesterday--including an editorial--on China's evident willingness to use its foreign exchange holdings to further political ends. Jamil Anderlini reported that China's State Administration of Foreign Exchange (SAFE) purchased $150 million in Costa Rican government bonds in January in return for Costa Rica essentially de-recognizing Taiwan as a sovereign nation. The deal was originally arrived at in an agreement signed on June 2007, which stipulated the switch in Chinese recognition in return for the purchase of $300 million in Costa Rican bonds and a $130 million grant. Evidently, this information came to light because La Nacion, Costa Rica's largest newspaper, won last Friday a court case which resulted in a judge ordering the government to make the information public.

In a companion piece, Jamil Anderlini noted that while the establishment of the China Investment Corporation (CIC) in September 2007 caused much consternation worldwide, SAFE, through a Hong Kong subsidiary, was quietly establishing stakes of less than 1% in corporations worldwide. It took stakes in companies as diverse as: BP, Total, BHP Billiton, Rio Tinto, Unilever, Tesco, British Gas, Cadbury, Royal Bank of Scotland and Barclays Bank. The Financial Times has helpfully provided a list of SAFE investment in British corporations here.

The FT also editorialized that sovereign wealth funds should be more transparent about their aims and that China should allow the renminbi to appreciate further against the dollar. Brad Setser at Follow the Money has used the imbroglio to announce the publication of a 60 page or so (of actual text) report on Sovereign Wealth and Sovereign Power: the Strategic Consequences of American Indebtedness. I have yet to read the tome, but it will likely be influential.

On one key level, my response to this is "I'm shocked! Just shocked!" Perhaps it is worrying that China is willing to use its foreign exchange reserves to meet foreign policy goals, but I suspect the only difference between that and the de rigeur behavior of economic powerhouses worldwide is that it was a direct, as opposed to an indirect effort. China and Taiwan have been playing this game for years now and it is hardly surprising to me, at least, that China would use any financial asset they have at their disposal to legitimize their claim to Taiwan. (Though I do feel sympathy for Taipei.)

I would also note though the text of the FT's editorial is fairly calm, the series and the headlines are fairly obviously designed to elicit worry and upset nationalists--which is pretty annoying to see from the FT, though I suppose it is arguably meant as an object lesson. Obviously, the financial world wants to encourage "unregulated" access to Chinese assets and a freely floating renminbi. Though some--in Wall Street anyways--view FDI into China and free exchange as unambiguous in its benefits and ends, it seems hard to argue this to Beijing when its overseas investments are regularly responded to as if they were efforts at colonization. The distinctions seem awful fine.

In any case, we will see how the West responds to CIC possibly being a part of the consortium riding to the rescue of Lehman, as per Henny Sender, Francesco Guerrera and Peter Thal Larsen in the Financial Times today. Barclays, beneficiary of SAFE funds, is also a potential suitor. Also related: a paper published today at Vox arguing that the renminbi is not significantly misaligned.

2. China Daily announces that China may cut its dollar holdings. (h/t Jesse's Cafe Americain.)

3. Naked Capitalism notes that both Japan and China have posted declining growth. In order to protect export to the US, China will have to purchase dollars. Also, per Real Time Economics, US consumer spending dropped 0.3% in August, leading many to conclude that that engine of American and international economic growth will remain dormant at least through 2009, which may mean that China needs to buy a lot of dollars.

4. David Barboza at the New York Times writes that corporations in China are under intense pressure from the government to allow their workers to unionize.

5. Saul Hudson at Reuters has an analysis of potential future, given the recall today of Venezuela's Ambassador to the US, and the expulsion of the US Ambassador to Venezuela.

6. Jeremy McDermott at the Telegraph reports that Evo Morales has expelled the US Ambassador to Bolivia.

7. Aleya Begum at Upstream Online writes that Colombia has pledged, despite all the contretemps with Venezuela, to maintain flows of gas to Venezuela through pipeline opened this January at reduced rates.

8. Simon Romero at the New York Times has more on this story, with the US expelling the Venezuelan Ambassador and declaring that the top two intelligence officials in Caracas were involved in FARC operations in Colombia. Sanctions are being considered, I believe.

9. Hurricane Ike appears to have nudged a little north, satellite courtesy the NOAA:



It is a category 2 now. A bunch of refineries have shut down in response. As a result, the cash market is heading north, while the futures market is heading south, as per The Barrel at Platts. Expect higher prices at the pump.