Daily Sources 7/29

1. EUROPEAN ECONOMIC SENTIMENT HITS 28 MONTH HIGH

Marcin Grajewski at Reuters reports that consumer sentiment in Europe has hit a 28 month high.

"The European Commission said its economic sentiment indicator for the 16-nation currency area rose to 101.3 in July, a 28-month high, from an upwardly revised 99.0 in June."

2. GERMAN UNEMPLOYMENT FALLS FOR 13TH STRAIGHT MONTH

Rainer Buergin and Christian Vits at Bloomberg report that unemployment in Germany fell for the 13th straight month by a seasonally adjusted 20,000 to 3.21 million.

3. BANKS TO PREPARE FOR EUROZONE EXIT SCENARIOS

Eurointelligence reports that banks in Europe are preparing scenarios for eurozone states exiting the euro.

"The International Swaps and Derivative Association asked some of its members to form a group to consider what they may need to do if a eurozone state is ejected."

4. CZECH GOVERNMENT REFUSES TO SET DATE FOR EURO ADOPTION

Peter Laca and Ladka Bauerova at Bloomberg report that the Czech government has said that it refuses to commit to a date for euro adoption.

"[Prime Minister] Necas, 45, said the country will benefit from a flexible exchange rate as consumer prices converge with those in richer European Union-member states, and rapid euro adoption would risk fueling inflation. The koruna has gained 3.7 percent against the euro this month, the most among more than 170 currencies tracked by Bloomberg, making Czech exports more expensive.

'The government program will not include any target date or a promise to join the euro area,' Necas said today in an interview at his office in Prague. 'Exports are important, but this country is not only a country of exporters.'"

5. UK PRODUCTION OF GAS DOWN 14.3%

Platts reports that the UK's production of gas was down 14.3% in 2009 from 2008. "Gross natural gas production has fallen by 45% since its peak in 2000."

6. REGIONAL GROUPING TO DISCUSS COLOMBIA-VENEZUELA RIFT

BBC reports that Unasur, a regional grouping of foreign ministers, is set to discuss the rift between Venezuela and Colombia at its meeting in Quito today.

7. CONOCO WILL SELL ENTIRE STAKE IN LUKOIL

Sheila McNulty at the Financial Times reports that Conoco announced yesterday that it would sell its entire stake in Lukoil.

"Jim Mulva, Conoco chief executive, said the Lukoil investment had been aimed at doing joint deals and these had not happened."

8. IMF TO LEND UKRAINE $15.2 BILLION

Kateryna Choursina and Sandrine Rastello at Bloomberg report that Ukraine has secured a $15.2 billion, 2 1/2-year loan from the IMF.

"The Washington-based institution’s board of directors agreed to disburse $1.9 billion immediately, with subsequent payments subject to quarterly reviews.

“Ukraine is emerging from a difficult period during which the economy was severely hit by external shocks and exacerbated by domestic vulnerabilities,” John Lipsky, the fund’s first deputy managing director, said in a statement. “Authorities are committed to addressing existing imbalances and putting the economy on a path of durable growth, through important fiscal, energy, and financial sector reforms.” "

9. INITIAL UNEMPLOYMENT CLAIMS DOWN 11,000

Calculated Risk reports that

"In the week ending July 24, the advance figure for seasonally adjusted initial claims was 457,000, a decrease of 11,000 from the previous week's revised figure of 468,000. The 4-week moving average was 452,500, a decrease of 4,500 from the previous week's revised average of 457,000."

Daily Sources 5/7

1. CZECH SENATE PASSES LISBON TREATY, ALL EYES TURN BACK TO IRELAND; THE EU TO OFFER ADDITIONAL AID TO A STRANGE MEDLEY OF FORMER SOVIET REPUBLICS; THE ECB LOWERS BENCHMARK INTEREST RATE TO 1% AND ENGAGES IN QUANTITATIVE EASING; THE BANK OF ENGLAND ENGAGES IN ADDITIONAL QUANTITATIVE EASING; AND MANY INDICATORS SEEM TO POINT TO A BOTTOMING OF THE FINANCIAL CRISIS ... BUT OIL LOOKS POISED TO PUT THE KIBOSH ON IT ALL

Jess Smee at Der Spiegel reports that the Czech Senate yesterday approved the Lisbon Treaty, with 54 of 79 voting to ratify. President Vaclav Klaus is a euroskeptic and will ensure that the treaty is reviewed by the Czech Republic's high court, but most expect much of that to be a formality.

"The international treaty--which replaces the ill-fated European Constitution rejected by French and Dutch voters with a slightly altered version of the same document, this time written in legalese, filled with caveats for different member states and sans some of the features of a United Europe such as a flag and an anthem--can only be adopted when it is approved by all members. In addition to Ireland, the Czech Republic, Poland and Germany must all still sign the treaty before it can be officially ratified."

Now attention will turn to Ireland, which rejected the treaty last year. In the meantime, Anatoly Medetsky at the Moscow Times reports that the European Union will offer today at a conference better trade ties and visa rules as well as €350 million ($466 million) in aid over four years for six countries neighboring Russia as part of an initiative known as the "Eastern Partnership."

"The EU names as a flagship project to pursue with the eastern partners the development of the 'southern energy corridor'--a term that describes all pipelines needed to bring Caspian Sea and Central Asian gas to the EU. The main part of the corridor is Nabucco, said Ferran Espuny, an EU energy spokesman.

Talks to secure commitments to supply gas and build pipelines for Nabucco are progressing well, Espuny said Wednesday."

The Eastern Partnership specifically refers to Armenia, Azerbaijan, Georgia, Moldova, Ukraine, and Belarus--with Belarus being the most surprising choice of all. In the meantime, the European Central Bank cut its benchmark interest rate by a quarter percent to 1% today, per a Bloomberg story by Jana Randow and Simone Meier. The bank also indicated it would purchase as much as €60 billion (~$80.5 billion) in bonds.

"ECB officials have spent the past months bickering over whether to fight a recession by purchasing assets, with Bundesbank President Axel Weber leading resistance to such a move. The US Federal Reserve, the Bank of England and Bank of Japan have lowered rates close to zero and are already buying bonds, effectively printing money to reflate their economies in a policy known as quantitative easing."

(h/t reader Charles.) Lukanyo Mnyanda at Bloomberg reports that Bank of England decided today to maintain its benchmark interest rate at 0.5%, but that it also announced it will spend an additional £50 billion (~ $75 billion) "of newly printed money to spur economic growth." Rebecca Wilder's weekly summary of global economic data seems to show that the aggressive stimulus measures are having some effect. She concludes that Chinese manufacturing probably has passed a cyclical low and that the same is true of the US, that export declines have slowed in South Korea, but are falling more steeply in India,



and that lagging indicators unemployment and prices are surging and falling on energy, respectively. I always find her analysis helpful and worth checking out. I would only point out, however, that if inflation is falling mostly on energy prices, then recent events in the oil market, counter intuitive as they might be, could translate into a considerable obstacle to global recovery, with the price of WTI having climbed $6/b over the course of the last week and some predicting a spike to $71/b on the back of cash-strapped traders trying to exit short positions--see Daily Sources 5/6 #7. As I've noted before, $70/b looks more or less to be the price after which demand starts to contract, as you can see in this chart of vehicle miles driven over the price of oil:



2. BEIJING ALLEGEDLY TO INCREASE GOLD HOLDINGS, PERHAPS EVEN FROM ITS PURPORTED NEMESIS THE IMF, AND IN THE FACE OF 10 YEAR EUROPEAN MONETARY AUTHORITIES POLICIES OF SELLING THE RESERVE METAL, CHINESE STATE BANKS MET 92% OF LENDING TARGET SET BY STIMULUS IN FIRST QUARTER, BUT WHERE DID THE MONEY GO? AND CAN BEIJING SECURE THE TRUST OF THE INTERNATIONAL FINANCIAL COMMUNITY (AND DOES THAT MATTER?), WELL MIDDLE EASTERN ARAB NATIONS ARE STICKING TO DOLLAR PEG FOR NOW, THANK YOU VERY MUCH--BUT WHAT WOULD THAT MEAN FOR THE COMMON CURRENCY SET FOR 2010?, ARAB FOREIGN MINISTERS IN CAIRO TO COORDINATE POLICY ON ISRAEL/PALESTINE

Patti Waldmeir at the Financial Times reported yesterday that analysts believe that Beijing has embarked upon a policy of increasing its holdings of gold bullion in order to diversify its foreign reserves.

"Beijing and Shanghai-based gold industry analysts said the country had almost doubled its bullion holdings. But they said China was likely to make as many purchases as possible within its borders, rather than turn to international markets where it could push up gold prices."

If it is state policy, turning to domestic markets for gold may be complicated by private household demand for gold, as evidenced by the 19.6% spike in gold and jewelry sales over the May Day Holiday of May 1 - 3 as reported by the Commerce Ministry--see Daily Sources 5/4 #2.

"China’s current gold reserves represent only about 1.6% of total foreign reserves, a vastly smaller percentage than the world’s average of 10.5%. Nevertheless, its percentage is similar to the 2.2% in Japan, the world’s seventh-largest holder. The challenge for Beijing is to attain a similar diversification, requiring large amounts of gold, without disturbing the market."

Ms. Waldmeir indicates that analysts speculate that Beijing may try and increase its holdings via the expected IMF sale of 400 metric tonnes of gold bullion, perhaps in an "off-market agreement." That would be interesting in the context of the speculation that the Chiang Mai Initiative is in effect an attempt to decouple from the IMF and the Western-led international financial system. That said, Javier Blas at the Financial Times also reports that the paper conducted an analysis showing that had several central banks of Europe not embarked upon a policy of selling gold ten years ago, they would be $40 billion richer than they are now. That, in and of itself, is not an astonishingly large number in the context of central banking--or so it seems to me--but the story also notes:

"The proportion of European reserves held as gold remains extremely large even after years of sales, at an average of about 60%, compared with the world average of 10.5%."

Several of the central banks that embarked upon the policy of gold sales had held as much as 90% of their reserves in gold. The move out of gold and into bonds was justified by the notion that bonds are less volatile, and, indeed, it is the case that the so-called "Great Moderation" did not affect commodities, which is why the notion of "core inflation" was invented--or so I surmise.



The FT includes a fascinating and especially informative graphic illustrating global central bank gold holdings and with commentary here. Terence Poon at the Wall Street Journal reports that the People's Bank of China said today that the country had yet to establish a solid economic footing in the crisis, and sounded a note of caution with respect to new lending.

"The central bank reiterated that it will maintain its moderately loose monetary policy and ensure sufficient liquidity in the banking system, but it added that loan quality needs to improve to 'prevent risks of amplifying volatility in the economy and of rebounding nonperforming loans.'

Despite its concerns about the sharp loan growth, the PBOC promised to ensure credit levels will accommodate economic growth. 'If the international financial crisis deepens in the future, credit will need to continue growing at a certain pace,' it said.

China extended 4.58 trillion yuan ($670 billion) of new loans in the first quarter, already 92% of the minimum five trillion yuan target the government set for the full year."

Meaning, I take it, that further strong measures to stimulate domestic demand will be required. Andrew Batson at the China Journal reports that the most recent central bank quarterly monetary policy release gives some hints as to where the loans are coming from and going to:

"China’s state-controlled banks are clearly leading the lending charge, accounting for 50.5% of the new credit extended during the quarter. Foreign banks are, however, behaving more like they are elsewhere, and are not following their Chinese colleagues into the lending surge. Loans by foreign financial institutions declined by 26.4 billion yuan in the first quarter.

The central bank’s breakdown of new medium- and long-term borrowing, the kind most likely to be used to pay for investment, shows that 50.1% went to infrastructure in the first quarter. That clearly reflects how banks are being pressed to give priority to government stimulus projects. But such lending has its own risks. 'Recent bank lending has been concentrated in government projects which, while helping drive rapid investment, also requires evaluation of local governments’ ability to repay the debts,' the central bank said.

Outside of stimulus projects, demand for credit is not as strong. Only 7.9% of new medium- and long-term lending went to manufacturing, and 11.2% to real estate development."

Andrew Batson, in the WSJ, reports that Beijing is responding to concerns about the veracity of the statistics it releases on the economy, by conducting an overhaul of the economic data collection system in the country.

"During the current downturn, China's National Bureau of Statistics has tried to provide more and better information. It is publishing data on food prices more frequently, and promises more detailed figures on output, jobs and wages. New penalties for falsifying statistical reports are also now in force.

But the real test will be whether higher authorities permit the numbers to show politically inconvenient fluctuations in China's economy.

'I think the check is less technical ability and resources, and more whether they are allowed to announce bad news, instead of only good news and okay news,' said Derek Scissors, a fellow at the Heritage Foundation in Washington."

This bit causes just a bit of cognitive dissonance given Beijing's recent decision to allow financial news organizations to operate in the country, but prohibit them from engaging in news gathering operations--see Daily Sources 5/1 #1. Meanwhile, Shanthy Nambiar and Camilla Hall at Bloomberg report that Saudi Arabia, Qatar and Bahrain monetary officials indicated today that they saw no need to move away from the dollar pegs for their currencies.

"A decision on the date for a single currency shared by Saudi Arabia, the UAE, Kuwait, Qatar and Bahrain hasn’t been taken yet, according to [Saudi central bank Governor Mohammed] al-Jasser.

Qatar’s central bank Governor al-Thani said today he still thinks meeting the 2010 target for the currency between Saudi Arabia, the UAE, Kuwait, Qatar and Bahrain is possible.

'We will still continue with 2010 and we’ll be working hard on the schedule to achieve our goals and objectives,' he said."

Meanwhile, the BBC reports that Arab foreign ministers are meeting in Cairo to formulate a common approach to the Middle East process.

"The Arab foreign ministers will also decide whether to send their report on alleged Israeli crimes in Gaza to the International Criminal Court."

3. TEPCO TO RESTART 1.356 GW NO 7 NUCLEAR REACTOR IN THE NEXT COUPLE MONTHS, SHOULD REDUCE DEMAND FOR LNG/CRUDE

Takeo Kumagai and Jonty Rushforth at Platts reports that Tokyo Electric Power Co. is ready to restart the 1.356 GW No. 7 nuclear reactor at the Kashiwazaki-Kariwa nuclear power plant, after receiving approval from the local authorities today.

"All of Tepco's nuclear reactors at the Kashiwazaki-Kariwa nuclear power plant, with a combined capacity of 8.212 GW over seven units, have been offline since they were shut July 16, 2007, following an earthquake.

The earthquake did relatively little damage to units No. 6 and No. 7, which have been repaired, but there is no timeframe for bringing the remaining five units back online. The No. 6 and No. 7 reactors each have a capacity of 1.356 GW."

It can take from two to three months to bring the reactor back on line following the approval of the local authorities. In the absence of the operating plant, Tepco is being forced to directly burn crude, low sulfur fuel oil, LNG, and coal as feedstock replacements.

4. SECTION OF PIPELINE SERVING KURDISH AUTONOMOUS REGION BLOWN UP, JUST AFTER WORLD CLASS GIANT OIL FIELD FIND

Following the news yesterday that a world class giant oil field find was confirmed in the Kurdish Autonomous Region of Iraq, the AFP reports that a section of the oil pipeline running from the large Bai Hassan oilfield near Kirkuk was blown up.

"'We were forced to interrupt pumping in 15 wells' because of the blast, [a North Oil Company, or government,] official said, adding that repairs will take up to seven days.

The North Oil Company produces 650,000-670,000 barrels of oil per day."

5. APPROX. 500,000 FLEE SWAT, BUNER, AND DIR; IS SHARIF PLAYING POLITICS WITH HIS COUNTRY'S SURVIVAL?

Alan Cowell at the New York Times reports that the International Red Cross published a statement today saying:

"[A]lthough figures remain unverifiable at this stage, reports indicated that up to 500,000 Pakistanis have been recently displaced by conflict in Dir, Buner and Swat."

It has been reported that PML-N's leader Nawaz Sharif has rejected an offer to rejoin the coalition government led by the PPP's Zardari, currently in talks with the Obama Administration in Washington, DC. An editorial in the Karachi Dawn suggests:

"Today, rising militancy is the main threat to national security, but the political class is divided on what is the best response. The PPP has shown itself willing to support military action, but the PML-N has baulked at supporting the option. Perhaps cleverly the PML-N has discerned that the electorate is not ready to support the military option because it causes unacceptable losses to local populations without seemingly being able to defeat the militants. And therefore, while sitting in the opposition, the PML-N can cleave to the populist line and not bear the burden of devising a credible and effective counter-insurgency and counter-terrorism policy which will inevitably involve a long-drawn-out and messy fight.

But what is good for the PML-N’s popularity is not necessarily what is best for the national interest. If the PPP and PML-N are nudged, or themselves agree, to join hands at the centre, they can form a formidable political alliance. The PML-N’s popularity in Punjab is unquestioned and Mr Sharif’s bona fides as the representative of the political right and conservative Pakistan are formidable. With the PML-N on board, the government will genuinely be able to claim its position on militancy represents the national will."

6. EL PAÍS ACCUSES CARACAS OF SHELTERING FARC LEADERS

Fausta Wertz at the Compass reports that Spanish daily El País published an article yesterday which speculates that three top FARC leaders are hiding out in Venezuela.

"The article from El País came up after Colombian president Alvaro Uribe urged Chávez to help destroy the FARC. Chávez flat-out refused, saying that it's not his war."

Ms. Wertz also notes that Chávez blamed the US for the recent crash of a helicopter, saying that the cost of patrolling the border with Colombia was beyond the financial resources of Caracas and that the conflict within Colombia itself is fueled to a great extent by the drug war. Fair points in my view, after all even the US with the largest federal government budget in the world finds cross-border traffic driven by the drug war impossible to police--and the precipitous decline in oil prices has put a serious crimp in Chávez's discretionary funds. (The proposed US budget includes $27 billion for "border and related security," an increase of 8% from last year. $27 billion is more than 8% of Venezuela's total GDP $331.8 billion and a little less than 27% of the 2008 budget in Caracas. It is 0.7% of the US proposed budget. Just sayin'.) However, it is also interesting in the context of Chávez's recent claim that Venezuela will not tolerate incursions by FARC into its territory--see Daily Sources 5/1 #2. Anyone who has been following my thinking on Chavez knows I don't think there's much chance of reconciliation, but in this particular instance I think that El País and Wertz are overstating the shock, just a bit.

7. OBAMA PROPOSES $3.4 TRILLION BUDGET PLAN

Lori Montgomery, Amy Goldstein and William Branigin at the Washington Post have the story on the Obama $3.4 trillion budget plan.

"The new budget documents, totaling more than 1,500 pages, fill in the details of a broad outline that Obama released in February. They include a massive appendix listing program-by-program information on the roughly 40% of the fiscal 2010 budget that constitutes discretionary spending, which will be set by Congress in what is expected to be a contentious appropriations process."

Under the plan, spending on operations in Afghanistan would exceed spending for Iraq for the first time since the second Gulf War began.

8. FED FUNDS RATE SINCE 1955

Barry Ritholtz at the Big Picture posts a graph plotting the Federal Funds Rate from 1955 on:



9. RETAIL DATA LOOKS BAD FOR ALL BUT APPAREL AND DISCOUNTERS--THE DATA TO BECOME EVEN MORE MURKY GOING FORWARD

Phil Izzo at Real Time Economics reports that a number of large retailers have released their sales data for April today, and RTE has posted a sortable table of the numbers on their site. Luxury retailers fared the worst. Discount and youth apparel firms seem, after a quick look, to have done relatively well. In a related story, Phil Izzo also reports that Wal Mart will no longer publish monthly sales data.

"The change also will remove an important piece for forecasters looking to get a handle on monthly retail sales. Wal-Mart is the nation’s largest retailer with $29.85 billion in sales just for April. An index for retail sales published by Thomson Reuters for April came in up 1.2% for the month, but excluding Wal-Mart’s results it posted a drop of 2.7%."

An already murky picture is thus going to become murkier--almost certainly at the advice of the corporation's investor relations team.

Daily Sources 4/3

1. Reuters reports that the Markit Eurozone Composite PMI employment index for the eurozone showed that corporations continue to fire workers in response to the crisis, falling to 40.3, down from February's 40.8. Edward Hugh at Fistful of Euros reports that unemployment in Spain rose by 123,543 in March, a slower rate of increase than what was seen in February and March. But if you look at the annual rate, unemployment in March grew by 56.69%. His chart:



Worth reading.

2. Jane Baird and Douwe Miedema at Reuters note that after yesterday's European Central Bank decision, Governor Jean Claude Trichet indicated that the bank was preparing to consider "non-standard measures," by which he is understood to mean "quantitative easing."

3. In a very helpful analysis, Simon Johnson at Economix argues that the Obama Administration managed to pull of a coup by getting the European members of the G20 to agree to make the selection process for the head of the IMF open transparent and competitive.

"The managing director of the IMF is very powerful, with a great deal of authority and discretion, and has always been a European--in effect, appointed by European governments to represent their interests. The G-20 made it clear that this will stop--the communiqué says the selection process will be open, transparent and competitive. But really this is code for saying they will pick someone from an emerging-market country, such as India or Brazil (and there are some excellent candidates). The right person in this job could have a huge positive effect on the IMF’s legitimacy.

To make things matters more interesting, the IMF’s managing director is expected by insiders to resign within a year, to resume his (promising) pursuit of the French presidency. The leadership race for the next managing director effectively starts today; the stakes are high, and competition will be intense.

How did the Obama administration pull this off? In a brilliant move, they took the lead by volunteering to open up the selection process for the World Bank, the IMF’s sister organization, which has always been run by an American. The next president of the World Bank is very likely to be Chinese."

C. Randall Henning at the Peterson Institute for International Economics drew attention to the worries that the nations of the Asia Pacific were going to basically abandon the IMF via the Chiang Mai Initiative [CMI] in a paper published on February 27:

"Steve Weisman: Do you see any danger of them going separately from the IMF and having their own deals to bail out countries in times of crises?
C. Randall Henning: That of course is what a number of people are worried about. I’m not worried about that at this point. First of all, there are differences of view within Asia about how to construct and administer these arrangements, and I don’t
think that they are willing to break with the IMF right now. They’re aware that they have to make more progress in the development of their regional surveillance mechanism. Before East Asia is going to be in a position to define any conditionality that would flow through a multilateralized CMI, until they develop a regional capacity for analysis and surveillance, they’re going to continue to rely on the IMF to help define the conditions that should be attached to the financing. So the way it’s structured now in the bilateral swap arrangements under the CMI is that most of that money would not flow to a borrower in Southeast Asia unless that borrower also negotiated an IMF program. So it’s designed as a parallel line of defense. But that will continue under a multilateralized CMI, although they may change the ratio between the linked portion and the unlinked portion in these arrangements."

(h/t RGE Monitor)

4. Czech Prime Minister Mirek Topolánek has a piece in today's Wall Street Journal which argues that NATO is indispensable.

"When thinking about the further development of NATO, I try to imagine a world without it. I imagine countries threatened with terrorism (and which country would dare say that it is not?) left alone to defend themselves. I imagine invaded countries scrambling to find allies too late. I imagine Afghanistan or another unstable country becoming the center of militant organizations and drug cartels. I imagine countries in strategic locations becoming toys in the hands of powerful neighbors.

As President Barack Obama rightly said in his recent speech unveiling a new strategy on Afghanistan and Pakistan, 'the very idea that free nations can come together on behalf of our common security . . . was the founding cause of NATO six decades ago, and that must be our common purpose today.' If such a world without NATO indeed existed, I would be the first to call, on the basis of historical experience encompassing the Munich Treaty and the end of democratic Czechoslovakia, for the creation of an alliance that would protect freedom, equality and respect for human dignity and life."

One suspects that Topolánek, whose coalition was recently ousted by a no confidence vote, is trying to undo some of the damage done by framing US fiscal policy as "the way to hell"--see Daily Sources 3/25 #4. Meanwhile, Edward Cody at the Washington Post reports that the Europeans are unlikely to commit more troops to Afghanistan in support of the new US plan for addressing the situation there.

"European officials said Obama is likely to come away from the summit Saturday with a broad endorsement of his idea that stabilizing Afghanistan is a strategic goal for NATO and support for his decision to devote more civilian as well as military resources to eliminating al-Qaeda havens there and in Pakistan. But they also said that summit pleasantries are unlikely to mask Europe's refusal to commit to major new troop deployments.

Europe's main new contribution for now, French officials said, will be a 300-member corps of paramilitary gendarmes to mentor Afghan policemen in the provinces. France, Italy, Spain and Portugal have expressed interest in participating, the officials said, but the project is still under discussion and, in any case, the force would be deployed only in areas considered pacified enough for NATO soldiers to turn the area over to Afghan authorities."

That said, the Washington Post has published the transcript of a joint press conference of Chancellor Angela Merkel and President Obama in which she said,

"Well, what is indeed gratifying to note is that the new approach of the new administration of the United States as regards Afghanistan is very much in step with what Germany is envisaging, the sort of networked security, as we call it, or an integrated security, where you have a civilian component of rebuilding, training, and last, but not least, obviously, also, the capacity of the Afghans to really defend themselves.

That is actually what we were after with our mission to Afghanistan."

The transcript is worth reading in full. It seems to me that Obama's commitment to transition the US effort out of Iraq into Afghanistan will remind many in Europe of the original reasons for their support for the US effort in Afghanistan--and may well produce more cooperation in that effort than we have seen so far. I find this line of thinking convincing in part because of the US's decision to include Iran in the recent negotiations. In the meantime, a Spanish magistrate, Baltasar Garzon, has asked a Spanish prosecutor to file charges against Douglas Feith. I believe this is the same magistrate who pursued a case against Pinochet. Feith has written an op ed in the Wall Street Journal, serving as his own defense attorney.

5. Xinhua reports that Russian Prime Minister Vladimir Putin indicated that Moscow supported continuing talks with Ukraine regarding natural gas transit.

"At the corporate level, of course, the dialogue must continue in all areas. Ukraine is our important partner from the standpoint of gas transit."

Meanwhile, CJ Chivers at the New York Times reports that Russia has maintained troops in the breakaway regions of Abkhazia and South Ossetia in violation of the cease fire agreement which called for both sides to withdraw their troops to the positions held before the war broke out.

"Gilles Janvier, deputy head of the European monitoring mission, said in an interview that Russia had told diplomats that it had entered its own military agreement with the two breakaway regions in Georgia, which the Kremlin recognizes as independent states, and that these newer arrangements rendered the troop withdrawal component of the cease-fire plan obsolete."

6. John Roberts at Platts reports that the Georgian government signed a memorandum of understanding with the GUEU-White Stream Pipeline Company to support a natural gas pipeline which would pass through Georgia, the Black Sea, to Romania and onwards towards the rest of Europe. Romania has yet to sign an MOU in support of the project. White Stream corporate development director Giorgi Vashakmadze told Platts that "It will take us five years to start laying the first pipeline after we have completed all the necessary agreements," and that the planned pipeline is meant to be complementary with the Nabucco pipeline. Alternatively, the pipeline might pass through the Ukraine, though recent events would seem to make that an unlikely choice. The two proposed paths of the pipeline are indicated in the map below.



7. UPI reports that IRNA reported that Iranian Oil Minister Gholamhossein Nozari in talks with his Syrian counterpart, Sufian Allaw, in Damascus argued that natural gas export deals to Syria should be concluded as quickly as possible. "'Iran will transfer gas to Greece and Italy through Iraq, Syria and the Mediterranean Sea,' Nozari said." The Turkish Weekly reported on Iran's case for an alternative to the Nabucco Pipeline today:

"Safe transit routes will be determined based on political and strategic realities. The Nabucco pipeline will pass through Turkey and the Balkans. The Persian Pipeline might pass through Iraq, Syria and the Mediterranean to Europe. These alternative routes will be discussed by the buyers, suppliers and transit countries."

Up until now, the Persian Pipeline, aka Pars Pipeline, has been envisioned as passing through Bazargan, a city on the Turkish border--completely bypassing Syria and Iraq. Bazargan is about where I indicate on the map below.



The "haste" so "urged" sounds to me like Iran is beginning to get worried about the fact of potential Russian cooperation with US efforts to put the kibosh on the nuclear power program.

8. Shamal Aqrawi and Ahmed Rasheed at Reuters report that South Korea's SK Energy has yet to withdraw from contracts with the Kurdish Regional Government, which Baghdad insists it must cancel in order to be approved as a bidder for the central government's oil concessions.

9. Zhou Xin at Reuters reports that the official Chinese PMI for March indicates expansion, moving from 49.0 in February to 52.4 in March.

"'The continuous increase in PMI, along with positive signs I can witness from different places, showed that the Chinese economy may have started to warm up,' Ma Jiantang, the head of China's National Bureau of Statistics, told the China Information Daily, the statistics bureau's mouthpiece."

The official index stands in contrast to the private CLSA China PMI, which fell to 44.8 in March, down from 45.1 in February--see Daily Sources 4/1 #6. (Readings above 50 imply expansion; below 50 implies contraction.)

10. Robert Campbell at Reuters reports that in a report delivered to the US Congress on Wednesday states that the Mexican finance ministry expects crude oil production to fall below 2.5 mb/d in 2011.

"The finance ministry estimated oil exports would drop to 1.125 mb/d in 2010 from 1.370 mb/d forecast for this year."

11. Jens Erik Gould at Bloomberg reports that Manuel Marrero Faz, senior oil adviser at Cuba's Ministry of Basic Industries, said that the country would welcome US participation in its offshore oil fields were the embargo ended.

"We are open. ... We’re very close to each other. We’re neighbors. Why not do business?"

"The US Geological Survey estimates Cuba’s North Basin region, one of three offshore areas believed to hold oil, has 4.6 billion barrels." To put that in context, 4.6 billion barrels is about 55 days of global oil consumption (at a rate of 84 mb/d).

12. Barry Ritholtz at the Big Picture reports that the non-farm payroll employment number out today from the Bureau of Labor Statistics fell by 663,000 in March, bringing the headline unemployment number to 8.5%, from 8.1% in February. Calculated Risk plots the trajectory of the decline in employment against the post war recessions in a useful graph:



The U-6 number, or total unemployed plus the total of "marginally attached" workers plus total employed part-time for economic reasons has reached 15.6% in March from 14.8% in February.

13. Rebecca Wilder at News N Economics has a post showing that although the number of bank failures due to this financial crisis have been high, at 46, the number is not especially large historically-speaking, "the Fed and the Treasury likely enabled the economy to skirt a depression-sized disaster."



She argues that the financial situation will require consolidation, sooner or later. Well worth a look.

14. James Hamilton at UCSD has authored a very important report for the Brookings Institution which shows--to his own disbelief, evidently--that the oil shock of 2008 was a primary cause of the current financial crisis. As Justin Lahart's post on the piece in Real Time Economics summarizes:

"[Maybe] what happened to oil prices had something to do with credit markets seizing up. The housing bubble saw people of lesser means traveling further afield to buy homes. That gave them long commutes that they were able to afford when gas was $2 a gallon, but maybe they couldn’t at $3. Housing in the exurbs got hit hardest, and one reason why is that high gasoline prices made it hard for people to lived in them to keep up with their mortgage payments, and hard for them to sell their homes without taking a steep loss. In some meaningful way, that has to have contributed to mortgage problems."

Hamilton's own summary is here. The report--quite long at 70 pages, is here.

15. Charles Abbott and Russ Blinch at Reuters reported yesterday that 32.2 million Americans received food stamps in January, or 1 in 10, 10%.

"The average benefit was $112.82 per person in January. ... Food stamp benefits get a temporary 13% increase, beginning with this month, under the economic stimulus law signed by President Barack Obama. The increase equals $80 a month for a household of four."

Seriously worrisome stuff. I personally feel--strongly--that more should be offered ... especially given that food stamps produce the largest "multiplier" of all stimulus measures, as they must be spent in a set time--see Menzie Chinn's post on October 27, 2008. Food security is the most critical measure of stability, always. As Bob Marley put it, "A hungry man is an angry man."

Daily Sources 3/26

1. Eurointelligence reports that the Netherlands CPB Institute yesterday published January's data for global trade, which shows that global trade is down 20% from October. "FT Deutschland quotes a CPB staffer as saying this is faster than during the Great Depression (the estimates there range from 25-35% during 1929 and 1932)."

2. Lucy Hornby at Reuters reports that China estimates that the number of migrant workers that are now unemployed has risen to 23 million since the lunar year holiday in January. (h/t Yves Smith at naked capitalism.)

3. Upstream online.com reports that Liu Qi, deputy head of China's National Energy Administration, told an industry forum that

"Appropriately obtaining global resources is our inevitable choice and legal right...Winning foreign resources is even more important than stepping up domestic production."

Liu told the conference that China will offer oil companies tax and other policy incentives to continue exploring for purchases and concessions abroad. Meanwhile, Lydia Polgreen at the New York Times reports that analysts see Chinese decision makers becoming more conservative about their African investment decisions:

"'We have seen in the recent past Chinese companies wade into countries nobody else would,' said Philippe de Pontet, an analyst at ... a private research firm. 'That may be changing.'"

Meanwhile, Franz Wild and Helene Fouquet at Bloomberg report that Aveda, accompanying French President Nicolas Sarkozy on a two day business junket to central and western Africa, signed a joint venture uranium exploration agreement with the Democratic Republic of Congo.



4. Rebecca Christie at Bloomberg reports that Treasury Secretary Timothy Geithner told a forum hosted by the Council on Foreign Relations yesterday that the recent proposal to replace the dollar as a reserve currency by China is

"designed to increase the use of the IMF’s special drawing rights. And we’re actually quite open to that."

"The dollar slid as much as 1.3% against the euro within 10 minutes of news accounts of Geithner’s remarks. It recouped much of the loss about 15 minutes later, when Geithner then predicted no change in the US currency’s role."

Meanwhile, Eurointelligence reports that Dominique Strauss-Kahn, the head of the IMF, told a parliamentary finance committee in Paris that

"it is absolutely legitimate to discuss the possibility of a new international currency. This is not a new question but the current crisis renews the interest in this question. He also said that he does not consider that the dollar ceases to be an international reserve currency. Even the Chinese don’t think that."

Meanwhile, Mriganka Jaipuriyar at Platts reports that the chief economist of the Paris-based IEA, Fatih Birol, said that the organization is working very closely with Beijing to improve the flow of data, but that there is a long way to go.

"'Both on the IEA's side and the Chinese side, there are strong efforts to harmonize how we collect and analyze the statistics. I should say there are some improvements in that area but we are not yet at a level we would like to see,' Birol told Platts in an interview Thursday.

'We are at the beginning of a very long journey and it would be too premature to say that we have the information we need to make our analysis,' he added.

The IEA is pursuing similar talks with India and hopes to be able to better analyze the situation in these countries and their implication for the rest of the world, Birol said."

Platts reports that OPEC oil exports excluding Ecuador and Angola in the four weeks to April 11 are to fall to 22.23 million b/d, down by 770 kb/d from the previous four week period.

5. Thom Shanker at the New York Times reports that an annual Pentagon study released yesterday--"Military Power of the People’s Republic of China 2009"--argues that China is seeking weapons and technology which counter traditional American advantages. This seems natural enough to me, but China's Foreign Ministry was sufficiently disturbed to have its spokesman say "This report issued by the US side continues to play up the fallacy of China’s military threat." At his regular news briefing in Beijing the spokesman "suggested that the Pentagon stop issuing the annual report to avoid 'further damage to the two sides’ military relations.'" The report can be found here.

6. Wall Street Journal Asia has an editorial piece which points out that the EU and South Korea just signed a free trade agreement on Tuesday.

"Details haven't been released yet, but it's expected to be a comprehensive accord that will reduce or eliminate most tariffs on goods and liberalize European investment in Korea's tightly regulated service sector. Both sides are aiming to iron out the final details at next week's Group of 20 summit in London."

7. Veit Medick at Der Spiegel interviewed Martin Schulz, chairman of the Socialist group in European Parliament and head of foreign policy at the German Social Democratic Party's federal executive committee, about the consequences and causes of the fall of Prime Minister Mirek Topolánek's government in the Czech Republic while he was president of the EU. Key excerpts:

"Schulz: Topolánek was one of George W. Bush's closest allies when it came to the missile-defense system in eastern Europe. Now he uses the platform of the European Parliament to campaign against Bush's successor. He can do that in Prague, but not in the EU.

SPIEGEL ONLINE: Is the Lisbon Treaty now in danger?

Schulz: We'll see. The fact is, the two legislators who caused the collapse of his government were opponents of the treaty. That's not an encouraging sign."

SPIEGEL ONLINE: This fall, the Irish also plan to vote on the Lisbon Treaty. If the Czechs reject the treaty, would the Irish vote still be relevant?

Schulz: If the Czechs reject the treaty, we're going to be in a serious crisis. We might as well then bury the treaty. We'd then be thrown back to the Treaty of Nice, which was passed by 15 member states. But those same 15 governments, not to speak of the new member states, are unsatisfied with the old arrangements. That's why there was supposed to be a constitution. When that failed, we tried to include the essence of the reforms in the Lisbon Treaty. If that also fails, it would be a fiasco.

Worth reading in full. Meanwhile, Reuters reports that Irish GDP fell at an annual rate of 7.5% in the fourth quarter. "GDP fell 2.3% for the whole of 2008, data from the Central Statistics Office showed on Thursday."

8. Der Spiegel reports that in a speech calling for the reform of NATO, German Chancellor Angela Merkel said today:

"It is also in Germany's interest that dialogue between the new US administration and Russia gains momentum again. ... NATO wants Russia as a good partner ... We have not been rivals for 20 years now. The time of the Cold War is irrevocably over."

9. Doris Leblond at the Oil & Gas Journal put the kibosh on the notion, reported in the Russian press, that Moscow had been left out of discussions on how to pay for the modernization and increased transparency of the Ukrainian gas pipeline system. In fact, "Russian Energy Minister Sergei Schmatko and an important delegation was present." This was in addition to representatives from the EU, Canada, the US, World Bank, European Investment Bank, and European Bank for Reconstruction and Development. Meanwhile, RIA Novosti reports that the Russian Ambassador to Ukraine, Viktor Chernomyrdin, told the press that the deal struck Tuesday to modernize the system "looks as if a deaf man and a blind man sat at a table and signed the paper without even understanding what they had signed."

10. Johan Carlstrom at Bloomberg reported that the Norges Bank cut the benchmark interest rate by 0.5% to 2% yesterday.

"'The decline in activity in the Norwegian economy will be more pronounced than previously assumed,' Deputy Governor Jan. F. Qvigstad said in the statement. The bank may cut the rate as low as 1% 'in the course of the autumn.'"

11. Edward Hugh at Fistful of Euros notes that Serbia and the IMF have agreed to a €3 billion, 27 month, stabilization program.

12. Reuters reports that UK retail sales fell by 1.9% in February from January. "The annual rate of growth fell to 0.4%, its weakest since September 1995, the Office for National Statistics said."

13. The Associated Press reports that Ali Larijani, the Iranian Speaker of the Parliament and former nuclear negotiating point man, told the media yesterday that in Najaf that Iran's problems with the US are not a "sentimental issue" soluble with "a blessing and congratulations." "Larijani says the differences stem from 30 years of hostility, including Saddam Hussein's 1980 invasion of Iran which he said was 'instigated by America.'" For the record, it is my understanding that Saddam Hussein's 1980 invasion of Iran was not instigated by the Carter Administration, but never mind.

14. The AFP reports that Turkish President Abdullah Gul in Iraq promised his hosts that the water allocation from the Tigris and the Euphrates would be doubled this year. Juan Cole surmises that this is likely in return for a crackdown by Baghdad on Kurdish Workers Party guerrillas hiding in the mountains in Iraq just outside the Turkish border.

15. Fausta Wertz at The Compass notes that today Hugo Chávez had the military presence increased at the La Fría and San Antonio airports, saying

"we have begun the reversal process over everything that meant the dismemberment of national unity, the territory, and sovereignty, because prior governments fractured the country into pieces."

(Both airports are found in the state of Táchira, a small region on the border of Colombia.)



Chávez also ordered the creation of a new state company to manage the ports which will be required by law to "work under socialist guidelines and seek the development of the regions in which their respective seaports and airports operate." As Wertz notes, after the opposition won several major municipalities and regions in the November elections, Chávez has moved to strip them of control of the various ports, and with it valuable tariff revenues.

16. Juan Forero at the Washington Post reports that in January, Ecuador enacted a number of provisions to try and reduce the number of imports coming into the country.

"'What is the objective? To dampen demand for imported good and to increase consumption of domestic goods,' said Diego Borja, minister of economic policy. 'It was a difficult measure, but necessary and indispensable. We know that there are costs to getting out of a crisis.'

Borja said that because Ecuador's currency is the U.S. dollar, the country has been particularly exposed as imports rose in relation to exports. Unable to print money, or devalue to help Ecuadoran companies that export, the government decided to levy tariffs that reach 35%, decrease import volume as much as 35% and implement a range of surcharges. In all, 627 products fall under the new measures, including furniture, cellphones, electronic parts, shoes, alcohol and food products such as cookies and pastas. The government said the restrictions would reduce imports this year by nearly $1.5 billion compared with 2008.

Without the restrictions, officials here say, Ecuador could run out of money -- leading to economic collapse and political instability. 'We depend on dollars,' Borja said. 'If we don't have a revenue of dollars, then we have a very, very big problem.'"

In December Ecuador defaulted on its debt--see Daily Sources 12/15 #1--and then had its social security system purchase $1.2 billion in new sovereign debt--see Daily Sources 12/29 #14. The CIA estimates that Ecuadoran GDP was $107 billion in 2008 and that government expenditures (which were less than revenues) were about $17.79 billion.)

17. Ronald Buchanan at Platts writes that Mexican oil export revenues in February fell 56.4% year on year on $1.66 billion, according to a report by the National Statistics Institute, or Inegi, released yesterday. WTI on NYMEX averaged $95.35/b in February 2008 versus $39.26/b in February 2009, which at a 58.8% decline is consistent with a 56.4% decline. According to the EIA, Mexican sales of Isthmus crude--a medium sour crude with an APIº33.3 and 1.492 sulfur wt/%--averaged about $89.48/b in February 2008 and $39.22/b in February 2009. Sales of Maya crude--a heavy very sour crude with an APIº22.2 and 3.3 sulfur wt/%--averaged about $78.35/b in February 2008 and $37.17/b in February 2009. But in November, the Associated Press reported that the Mexican Treasury Secretary announced that the country had spent $1.5 billion to buy put options to sell 330 million barrels of Mexican crude--or about a third of its total 2008 output--at $70/b. Even considering the decline in total output, how does this add up?

18. Mary Beth Sheridan at the Washington Post reports that in a speech in Mexico Secretary Clinton said of the anti-narcotics effort:

"Clearly what we've been doing has not worked ... . Our insatiable demand for illegal drugs fuels the drug trade. Our inability to prevent weapons from being illegally smuggled across the border to arm these criminals causes the deaths of police, of soldiers and civilians.'"

19. Derek Sands at Platts reports that Scott Borgerson, a fellow for ocean governance at the Council of Foreign Relations told the House Committee on Foreign Relations that:

"It would be a mistake to assume that all these flashpoints [of new resource opportunities opening up due to melting ice in the Arctic] will remain sleeping dogs. The combination of new shipping routes, trillions of dollars in possible oil and gas resources and a poorly defined picture of state ownership make for a toxic brew."

Sands elaborates:

"US ratification of one mechanism to deal with Arctic resource issues--the UN Law of the Sea Treaty -- has been blocked by a small group of senators because of sovereignty concerns. That refusal could contribute to the US missing out on some of the Arctic's resources, according to the witnesses.

Other Arctic countries have ratified the treaty, and former President Bill Clinton signed it, but it still awaits Senate ratification.

Among other things, the treaty sets up a mechanism for countries to arbitrate disagreements over claims to undersea territory."

20. Bob Willis at Bloomberg reports that initial unemployment benefits applications grew by 8,000 in the week ended March 14 to 652,000, per the Labor Department release today. The total number of people receiving unemployment benefits jumped by 122,000 from the week prior to 5.56 million.

21. Shobhana Chandra at Bloomberg reports that the Commerce Department further revised its initial estimate of fourth quarter GDP to a 6.3% annual rate of contraction (from 3.8% and then 6.2% rates of decline).

"For all of 2008, the economy grew 1.1%, the same as previously estimated, as exports and government tax rebates in the first six months helped offset the slump in consumer spending that followed.

Consumer spending, which accounts for about 70 percent of the economy, fell at a 4.3% pace last quarter, marking the first back-to-back decreases in excess of 3% since record-keeping began in 1947.

Retailers are doing better so far this year. Sales fell less than forecast in February and January’s 1.8% gain was the biggest in three years, Commerce reported earlier this month."

Brian Blackstone at Real Time Economics notes that GDI--Gross Domestic Income, another measure of national economic activity--fell in the fourth quarter by 7.5% from 4Q2007.

"GDP is consumption driven: consumer spending, investment, government spending and the like. GDI is income based, meaning things like income and corporate profits. In theory, the two should line up — but not always. In the case of the fourth quarter, a severe slide in corporate profits was likely the root of the discrepancy. Employee compensation, the other main GDI component, held up much better."

22. Barry Ritholtz at the Big Picture takes aim at the news yesterday that new home sales increased by 4.7% in February from January, noting, to start with, that on an annual basis new home sales fell by 41% in February.

"Note that the month over month data at 4.7%--plus or minus 18.3%--is statistically insignificant. (i.e., meaningless). The reported data does not inform us if sales improved month-over-month or not. It is a range, from down -13.6% to plus 23%. Since 'zero' is part of that range, we can draw no conclusion. As the Census Department itself notes, “the change is not statistically significant; that is, it is uncertain whether there was an increase or decrease.”

The data does however, tell us that the year-over-year sales fell 41.1% plus or minus 7.9% gives us a range of -49% to -33.2%. The entire range is negative, therefore we can conclude sales fell year-over-year."

The Census Bureau noted that the seasonally adjusted estimate of new houses for sale indicates a 12.2 month supply at February sales rates.

23. Brian K. Sullivan at Bloomberg reports that the flooding in North Dakota is forecast to exceed 112 year records and thus may well significantly delay the planting of the spring wheat crop.

"Republican Governor John Hoeven declared a flood emergency across the state, while the federal government declared the state a major disaster area and said a public health emergency exists there. Rain and snow blanketed the area this week, covering ground already saturated by snow and rain earlier in the season."

The US is a major global supplier of wheat.

24. Keith Johnson at Environmental Capital posts the very useful observation that water consumption is a key issue--and perhaps the key issue--in evaluating the relative value of various forms of power generation.

"The water issue affects all kinds of power generation—coal, natural gas, and nuclear power; the nuclear industry’s water appetite in particular has become a flashpoint for criticism. The US Geological Survey figures power plants are the second-biggest users of water in the US, behind agriculture."

25. In an interesting side-note, it appears that the online musings of Paul Krugman have struck a nerve in Germany, whose press has taken note of Krugman's disrespectful tone and whose Finance Minister Peer Steinbrück has sent Krugman an invitation to visit him in Berlin to discuss their differences of opinion mano a mano.

Daily Sources 3/25

1. Jason Clenfield at Bloomberg reports that Japanese exports fell 49% in February year-over-year. Shipments to the US fell 58.4%. Automobile exports fell 70.9%. "Exports to Europe dropped a record 54.7%, shipments to Asia declined 46.3% and goods sent to China slumped 39.7%." Imports fell 43%.

2. Geoffrey A. Fowler at China Journal reports that Beijing's decision to shut down access to youtube.com coincided with the release on March 20th of a video by the Tibetan government in exile of Chinese security forces beating Tibetan protesters. This is the offending video:



Karin Brulliard at the Washington Post reports that a peace conference which was to publicize the role of sports in unity and the reconciliation of differences was canceled today because the South African government had denied the Dalai Lama the visa required for his attendance.

"Two of three South African Nobel peace laureates who had invited the Tibetan leader, retired Archbishop Desmond Tutu and former president FW de Klerk, said Monday that they would boycott the event, and organizers said the third, former president Nelson Mandela, would probably do the same. The Norwegian Nobel Committee also backed out."

A spokesman for South African President Kgalema Motlanthe told the media that South Africa would not welcome the Dalai Lama under any circumstances nor at any time.

3. Peter Stein at China Journal reports that Fan Gang, the head of China's National Economic Research Institute and a member of the People's Bank of China's monetary policy committee, responded to President Obama's televised remarks yesterday today by saying:

"Of course [an alternative is necessary] in the long run, if we want to avoid the cyclical problems associated with the dollar standard."

Mr. Fan also addressed the question of managing the renminbi.

"Fan says while China is eager to keep its currency stable, there is pressure to let the yuan fall-—'not just domestic pressure, but regional pressure,' as other Asian currencies weaken, making them more competitive. Rather than let the yuan fall against the dollar, he suggests that China should make reference more to the other currencies in the basket it uses to set the yuan’s exchange rate. 'Eventually, China’s currency should be related to other currencies, not just the dollar,' he says.

Fan worries that the Fed’s quantitative easing is raising the risk of dollar inflation and devaluation, which 'is a concern not just for China but for everyone.'"

(By the way, the Federal Reserve Bank of Atlanta's macroblog had a post yesterday by SVP in charge of research for the Atlanta Fed, David Altig and Daniel Littman, an economist at the Cleveland Fed, which was at pains to show that the Fed's move is not, strictly speaking, "quantitative easing." The reason (basically): quantitative easing is about increasing liabilities only--or quantity of bank reserves from the perspective of central banks--whereas the FOMC's most recent move was also explicitly about increasing the number of assets on the Fed's balance sheet. h/t Mark Thoma at Economist's View.)

Meanwhile, Phil Izzo at Real Time Economics reports that in a conference hosted by the Wall Street Journal yesterday Paul Volcker seemed to be both reassuring to Beijing while simultaneously dismissive of the primary complaint. The former head of the Fed and current chair of the White House’s Economic Recovery Advisory Board, said that the US's greatest strengths were its history and reputation, and that that shouldn't be put at risk by deliberately inducing inflation:

"One historic way of getting yourself out of this situation—-or trying to—-is to inflate. Either you do it deliberately or you allow it to happen. And if we permit that to happen then I think all these dollars will come tumbling down on us. I get a little nervous when I see the Federal Reserve announcements that they want have the amount of inflation that’s conducive to recovery. I don’t know what ‘the amount of inflation that’s conducive to recovery’ would be appropriate. I’d much rather they say that they want to maintain stability in the currency, which is conducive to confidence and recovery."

All of which would seem to reassure Beijing. On the other hand, Volcker appeared unmoved by the naif taken advantage of by slick Uncle Sam act coming from Beijing:

"I think the Chinese are a little disingenuous to say, ‘Now isn’t it so bad that we hold all these dollars.’ They hold all these dollars because they chose to buy the dollars, and they didn’t want to sell the dollars because they didn’t want to appreciate their currency. It was a very simple calculation on their part, so they shouldn’t come around blaming it all on us."

Indeed, were Chinese long term strategy to include dislodging the dollar from its reserve currency status, perhaps the policy of overloading the US with debt long after it was clear that the debt was unsustainable would be a reasonable policy.

Meanwhile, China Daily News today reported that the government raised "the benchmark retail prices of gasoline by 290 yuan (US$42.46) per ton, or 5%, and diesel by 180 yuan per ton, or 3.7%." The National Reform and Development Commission did not specify whether the increases were for factory gate prices or retail prices. Either way, the decision should put downward pressure on demand for gasoline and diesel. The prices are well above comparable US prices.

4. Eurointelligence notes that the vote of no confidence removing Czech Prime Minister Mirek Topolánek from office yesterday basically means that the largest obstacle to the Lisbon Treaty is now the Czech Republic.

"[The] really worrying aspect of the Topolanek resignation lies in the politics of Lisbon ratification. The Czech parliament’s lower house has accepted the Treaty, but the Senate has yet to vote. [Jean] Quatremer quotes MEP Elmar Brok as saying that this could mean the end of the Lisbon Treaty."

P O Neill at Fistful of Euros reports that in a speech to the European Parliament today, Topolánek said:

"that President Barack Obama’s massive stimulus package and banking bailout 'will undermine the stability of the global financial market.' … Topolanek bluntly said that 'the United States did not take the right path.'

He slammed the US’ widening budget deficit and protectionist trade measures — such as the 'Buy America'-—and said that 'all of these steps, these combinations and permanency is the way to hell.' 'We need to read the history books and the lessons of history and the biggest success of the (EU) is the refusal to go this way,' he said.

'Americans will need liquidity to finance all their measures and they will balance this with the sale of their bonds but this will undermine the stability of the global financial market,' said Topolanek."

5. Anna Shiryaevskaya at Platts reports that Gazprom may exercise its option--which expires in April--of purchasing a majority stake in gas fields in West Siberia and a 20% stake in oil production company Gazprom Neft from Italian oil and gas companies Eni and Enel. The assets were purchased by Eni and Enel in the April 2007 tender of Yukos properties. A deal to purchase the assets might be announced in Italian Prime Minister Silvio Berlusconi's April 6-7 visit to Moscow.

6. Simone Meier at Bloomberg reports that Munich's Ifo Institute's business climate index, based on a survey of 7,000 executives, fell to 82.1 from 82.6 in February.

"Ifo’s gauge of current conditions declined to 82.7 from 84.3. Still, the measure of expectations increased to 81.6 from 80.9.

'The Ifo’s absolute level is still depressingly low,' said Carsten Brzeski, an economist at ING Group in Brussels. 'Nevertheless, the gradual improvement of the Ifo’s expectation component is at least a tender green shoot of stabilization.'"

7. Doris Leblond at the Oil & Gas Journal reports that at a press conference yesterday meant to officially launch France's adoption of countrywide 10% ethanol requirement in gasoline in fact let the public know that the initiative would take longer to complete than previously thought. Jean-Louis Schilansky, president of the oil trade group UFIP, said at the conference that he expected 75% of the country's retail station network would offer 10% ethanol gasoline by the end of the year.

"The government's purpose in introducing the E10 at least 5 years ahead of the EU is that is should reduce carbon dioxide emissions in France by 1 million tonnes/year by 2010."

8. David Jolly at the New York Times reports that the IMF announced via a communique from Washington that it would provide a $17.5 billion loan to Romania under a two-year stand by arrangement. An additional $9.7 billion loan from the European Union and other bodies will be forthcoming as part of an international stabilization package.

9. A post of Willem Buiter, which originally appeared on his Maverecon.com blog, was reposted on VOX EU arguing that the eurozone is vulnerable because there is no single fiscal organization that can recapitalize either the European Central Bank or cross border financial institutions when they make systemically dangerous decisions.

"When the Bank of England develops an unsustainable hole in its balance sheet, Mervyn King knows he only needs to call one person: Alistair Darling, the UK Chancellor of the Exchequer. If the Fed were to become dangerously decapitalised, Ben Bernanke also needs to call just one person, Timothy Geithner, the US Secretary of the Treasury.

Whom does Jean-Claude Trichet call if the Eurosystem experiences a mission-threatening and mandate-threatening capital loss? Does he have to make 16 phone calls, one to each of the ministers of finance of the 16 Eurozone member states? Or 27 phone calls, one to each of the ministers of finance of the 27 EU member states whose national central banks are the shareholders of the ECB? I don’t know the answer, and I doubt whether Mr. Trichet does.

This situation is intolerable. We need a fiscal Europe ... ."

10. Travis Pantin at the UAE National reports that the Gulf Cooperation Council secretariat decided at a conference in Manama yesterday that the original deadline for a common currency for the member nations of January 1, 2010, is untenable.

"Although the GCC states still plan to complete preliminary steps to prepare for introducing the common currency by December, the process will not be finalised until a dedicated GCC monetary council is created towards the end of this year.

'As soon as the monetary council is ratified by the member states, one of its tasks is to set the new timetable for introducing the physical currency,' said Nasser al Kaud, the deputy of the assistant secretariat general for economic affairs at the GCC."

The GCC, minus Oman, agreed to create a monetary council as a prelude to a joint central bank and monetary union in an accord late last year--see Daily Sources 12/30 #4. The GCC originally decided to form a monetary union by 2010 in 2001.

11. Upstream online.com reports that Oil Minister Hussain Shahristani told the media today that the Kurdistan Regional Government refuses to allow oil to be exported from the country via the national oil pipeline network.

"'Work is continuing to connect the (northern oilfields) to the Iraqi network. But there are objections from the KRG to handing over the oil, claiming that companies that developed the oilfields should be rewarded,' Reuters quoted Shahristani saying in an interview published in today's pan-Arab Asharq al-Aswat A newspaper."

12. The AFP reports that Morocco has begun a clampdown on Shia worshipers in the primarily Sunni country.

"The independent Arabic-language newspaper Al Jarida Al Aoula has reported that dozens of people suspected of having Shiite sympathies have been arrested since Friday in Tangiers in the north, Essaouira in the south and Ouyazze 120 kilometres (75 miles) north of Rabat."

The country simultaneously began a clampdown on homosexuality. Morocco cut ties with Iran a few weeks ago in response to the statement by a former speaker of the Majlis calling Bahrain the 14th province of Iran.

13. Mary Beth Sheridan at the Washington Post reports that Secretary of State Hillary Clinton today begins a trip to Mexico, the first of three cabinet level visits to the country which will precede President Obama's scheduled visit there from April 16-7.

"A senior State Department official said Clinton's trip will highlight the broad range of issues on which the neighbors interact. Mexico is the United States' third-largest trading partner and maintains close contacts with U.S. officials in areas ranging from agriculture to immigration.

'The idea of this trip is to not allow Mexico to be pigeonholed by one or two issues,' the official said Tuesday, briefing reporters on condition of anonymity. That approach will undoubtedly please Mexican authorities, who have angrily rejected suggestions by US military officials that the country could increasingly become ungovernable or even turn into a 'failed state.'"

Spencer S. Hsu and Joby Warrick at the Washington Post report that yesterday the Obama Administration announced that it would move 450 law enforcement officers to the border of Mexico to help combat violence erupting from conflicts with the drug cartels.

"Instead of proposing a costly new package, federal officials said they will redirect resources to cut off the financial lifelines supporting the cartels, in particular the estimated $18 billion to $39 billion in cash, wire transfers and other smuggled payments moving each year from the United States to Mexico.

The other US focus is 'to get its own house in order,' O'Neil said, increasing enforcement against the 90% of guns from the United States that are used in crimes in Mexico and acknowledging a $65 billion domestic market for illegal drugs that drives demand."

"Acknowledging" that US demand is the reason for the drug cartels' success in Latin and South America does nothing. Either steps towards ending this Prohibition need to be taken or the US needs to seriously target consumption. What does it mean to have outlawed cannabis and cocaine when our current and the last two presidents--at the very least--have admitted to their consumption?

14. Bryan Keogh and Andrea Jaramillo at Bloomberg report that Peru will sell 10 year dollar denominated bonds yielding 4.5% more than US treasuries. It is the first dollar-denominated debt the country will have sold in two years and Lima has hired Goldman Sachs and JP Morgan Chase to manage the sale. In September it was reported that foreign banks account for about 51% of Peru's financial system--see Daily Sources 9/30 #4. In January, two months after hosting an APEC conference, Peru's finance minister told the press that Lima was in talks with both the Fed and the People's Bank of China to arrange dollar swaps for the sol--see Daily Sources 1/15 #14.

15. Courtney Schlisserman at Bloomberg reports that US durable goods orders rose by 3.4% in February from January. "Excluding transportation equipment, orders gained 3.9 percent, the most since August 2005."

16. The EIA reported that for the week ended March 20 crude stocks grew by 3.3 million barrels to 356.583 million barrels, the largest commercial stockpile of crude seen in the US since July 23, 1993. According to a Bloomberg survey, Wall Street analysts had expected a 1.1 million barrel build. Gasoline stocks fell by 1.1 million barrels versus analyst expectations of a 650 kb drop, and are at the top of the historical range for this time of year. Distillate stocks fell by 1.6 million barrels versus Wall Street expectations of a 100 kb drop, and are well above the historical range for this time of year.

Daily Sources 2/13

1. Brian Swint at Bloomberg reports that the European Union’s statistics office announced today that GDP in the Eurozone fell by 1.5% in the fourth quarter from the third. GDP in the fourth quarter fell at a rate of 1.2% from the fourth quarter in 2007, the only drop for a full year period on record since the inception of the monetary union.

"[European Central Bank] board members Lucas Papademos, Juergen Stark and Jose Manuel Gonzalez-Paramo as well as Spanish central bank Governor Angel Fernandez Ordonez and Belgian Governor Guy Quaden said this week that the Frankfurt-based bank may cut rates next month."

2. Edward Hugh at Fistful of Euros reports that official German statistics released today show a 2.1% contraction of German GDP in the fourth quarter.

"A 2.1% quarterly contraction, for those who are confused by the way we economists do things is equivalent to an 8.4% annualized rate of contraction, which is quite something (although in fairness some of this comes from Q3 when there was a big build up in inventories, which has now unwound)."

Hugh also posts that the Estonian Finance Ministry released data showing that the economy shrank by an year over year rate of 9.4% in the fourth quarter."The contraction was 4.2% quarter over quarter. That is 16.8% annualized." Analysts are calling the contraction the worst economic crisis in the history of the country since its independence in 1991. Hugh also posts that the Czech Statistical Bureau announced today that GDP dropped by 0.6% in the fourth quarter from the third. At an annual rate it grew by 1% in the fourth quarter. And in a final bit of bleak news from Hugh today, preliminary government estimates are that Italian GDP fell by a seasonally-adjusted rate of 1.8% from the third quarter to the fourth.

"Across 2008 as a whole, the Italian economy fell 0.9%, ISTAT said, the most pronounced decline recorded since 1993.The Italian economy officially fell into recession in the third quarter of 2008. And one more interesting detail, Italian GDP is now back at the same level it was in Q4 2005, and falling. This is pretty worrying, and even more so given there are quite a lot more people in Italy then there were in 2005."

And in another bit of frankly exhausting bad economic news, Eurointelligence reports that French industrial production was down 1.6% quarter over quarter in the fourth, 8.6% year over year.

3. The G7 meeting in Rome began today, and in that context Rebecca Wilder at News N Economics produced an analysis and set of illustrative graphs showing that G7 growth rates are falling across the board while unemployment soars across the board. Here is her graph of G7 economic performance:



Worth a look. Eurointelligence reports that France will seek greater controls over hedge funds in the meeting this weekend--while publicly accusing Berlin of protectionism.

4. Kevin Hamlin at Bloomberg reports the much ballyhooed news that a survey of economists conducted by the wire service produced a median expectation of growth of 6.6% in China in the second quarter following expansion of 6.3% in the first quarter of 2009.

"The value of new loans in January was more than double the record set a year earlier, according to figures released by the People’s Bank of China yesterday.

The lending multiplies the effect of the government’s spending in ways that wouldn’t be possible in the U.S. and Europe, where banks are burdened by toxic assets, said Dwyfor Evans, a strategist with State Street Global Markets in Hong Kong."

Analysts have also taken note of the surge in iron ore imports in China, possibly due to restocking needs, potentially due to the infrastructure spending Beijing announced in December. (The rebound in iron ore imports has been named the primary cause of the rebound in the Baltic Dry Index, an index of shipping which is considered by many economists to be a good indicator of global trade.) Juliet Ye at the China Journal also notes that vouchers which various cities have introduced are spurring some consumption.

"In Hangzhou, capital city of eastern Zhejiang province, civil servants are to get 5% to 10% of their salaries in the form of consumer vouchers, according to one report. The vouchers are intended to be spent at local shops. Unlike actual money, they can’t be deposited at the bank for a rainy day, forcing consumers to spend."

Apparently vouchers are at the center of a discussion in which policymakers are considering how best to goose consumption--and the fact that Beijing is beginning to consider a boost in consumption an important goal is encouraging, from the American perspective.

"Local governments say the results are encouraging. The municipal government of Chengdu said that almost all shopping vouchers have been consumed. In Hangzhou, over 44 million of the 100 million yuan coupons have so been used by Feb. 5, 13 days after delivery of the vouchers, according to the Southern Metro Daily newspaper. On Monday, Jiang Zengwei, China’s vice minister of commerce, said in a press conference that issuing shopping vouchers is a effective way to spur consumption."

Still, some are pessimistic about the extent to which a vouchers program can spur consumption. I have, on the other hand, seen somewhere an analysis showing that in the US food stamps have the largest multiplier effect in terms of stimulus, because they cannot be horded. That said, Yves Smith at Naked Capitalism was at some pains to throw cold water on the estimates in a post today.

"Consider some basics. China's economy is not as export dependent as many believe, but exports have made a significant contribution to growth. Commercial real estate development has been another big driver. Those two have gone into reverse.

Let's deal with the notion of "stimulus" making up for the slack. The famed half trillion dollar plus package announced some months ago was largely spending already budgeted and planned. Analyst views vary (and further input welcomed) but from what I have seen, only 1/6 to 1/3 was new spending, and most of that occurred in the second year of this two-year program."

She also notes that Michael Pettis, one of the more prominent China-watchers, is very skeptical about the loan growth numbers, who argues they are the result of bad lending practices driven by the desire to keep Beijing happy, and thus a credit bubble, likely to burst quickly given the current global economic situation.

5. Alexander Kwiatkowski at Bloomberg reports that OPEC has reduced its forecast for 2009 oil demand by 530 kb/d to 85.13 mb/d. It now predicts a decline in demand in 2009 from 2008 of 580 kb/d or 0.7%. OPEC's numbers are somewhat higher than the EIA and IEA's forecasts for 2009 which are both 84.7 mb/d. However, as Keith Johnson at Environmental Capital notes, OPEC sees new demand destruction coming from Asia as opposed to the developed world. This is especially interesting because OPEC is in a place to know as oil imports for the major economies in Asia are overwhelmingly dominated by Middle Eastern crudes. From OPEC's analysis:

"The Chinese economy is dependent on exports and the slowing world economy is imposing a large burden on Chinese industrial production, which is leading to less use of oil products, particularly diesel. Hence, China’s oil demand is forecast to show a growth of only 2.3% this year down from 4.9% last year, a loss of 210 thousand barrels per day."

6. The January data from the California port of Long Beach shows a 23% decline year over year in container traffic.



Long Beach is the second busiest port in the United States, the 15th busiest container cargo port in the world, and about 13% of total US container cargo passes through it. And in further evidence of a gloomy economic outlook, the port of Marseilles reported a 24% decline in overall traffic in January year over year:



(The graph somewhat confusingly labels 2008 data 2009, but I think demonstrates the point well enough.) Some of the decline in the port is due to strikes, first by the oil workers, and later by nearly all the transportation unions. Still, the numbers from both ports do seem to indicate a weak global economy.

7. Marc Santora at the New York Times reports that a suicide bomber blew herself up in a crowd of Shiite pilgrims south of Baghdad today.

"It was the latest in a series of attacks directed at Shiite pilgrims in recent days, which Iraqi and Western officials said were aimed at stoking sectarian violence."

8. Ethan Bronner at the New York Times reports that Hamas today told the media that an agreement for an 18-month long cease fire was just days away. A senior Israeli official told the journalist that nothing had been agreed upon yet, however.

"The new prospective accord, again being mediated by Egypt, is aimed at rebuilding Gaza after the war and involves both reconstruction and reconciliation between Hamas and the West Bank-based Palestinian Authority, according to Ismael Ridwan, a Hamas spokesman, who spoke by telephone after extensive talks between Egyptian and Hamas officials.

He said among the materials that would be allowed to flow into Gaza in the new arrangement were cement and steel, which Egypt would monitor. Those materials are desperately needed for rebuilding, but the agreement would not allow pipes, cables and chemicals that Israel fears could be used for bombs."

Clearly, Tel Eviv will be unlikely to make deals prior to the formation of a government.

9. In an especially interesting note, Eduard Gismatullin at Bloomberg reports that the CEO of Total, SA, Christophe de Margerie, told reporters in London today that the company plans to expand activities in Venezuela as opposed to Brazil. He said that there was plenty of competition in Brazil and that therefore Venezuela provides a better opportunity.

10. Platts reports that Indonesia has concluded a deal to supply LNG from 2011 to 2020 to the Japanese consortium of Kansai Electric, Osaka Gas, Kyushu Electric, Chubu Electric, Toho Gas and Nippon Steel. However, the contract would be for 3 million tonnes a year from 2011-15 and 2 million tonnes a year from 2016-2020. The current contract through 2011 was for 12 million tonnes a year at $8-9/MMBtu (~ $46.40-$52.20/b on a Btu basis.)

11. James Morgan at the BBC reports that global warming may reduce the number of fish in the oceans by as much as 50% by 2050 according to a report first published at a meeting of the American Association for the Advancement of Science today.

"Thirty-three nations in Africa, Asia and South America are highly vulnerable to the impact of climate change in fisheries, according to scientists from the World Fish Centre.

Of these, 19 were already classified by the United Nations as 'least developed' because of their particularly poor socioenomic conditions.

'Economically, people in the tropics and subtropics likely will suffer most, because fish are so important in their diets and because they have limited capacity to develop other sources of income and food,' said Edward Allison, director of policy, economics and social science at WorldFish. "

(h/t Yves Smith at Naked Capitalism.)

12. Walter Pincus and Joby Warrick at the Washington Post reports that the Director of US National Intelligence, Dennis C. Blair, told the Congress yesterday that the financial crisis is the primary near-term security threat facing the US.He said, "Roughly a quarter of the countries in the world have already experienced low-level instability such as government changes because of the current slowdown." He also indicated that were the financial crisis to continue for a year to two that the world would likely witness "high levels of violent extremism" as well as "regime-threatening instability."

"In answer to a question about whether he was shifting assets to cover the financial downturn, Blair said that by leading off with the economic situation he "was trying to act as your intelligence officer today, telling you what I thought the Senate ought to be caring about." He said he was not refocusing the intelligence community's basic collection and analytic work from traditional concerns such as terrorism, Afghanistan, Pakistan, Iran, North Korea, Russia and China."

Very informative article well-worth reading. I personally am heartened to read that the head of US intelligence has such a clear-headed approach to the analysis of the evolving global environment. That said, perhaps diverting assets to developing scenarios for how the financial crisis in a variety of nations critical to the national interest would be an especially reasonable and wise allocation of funds.

13. Justin Lahart, Timothy W. Martin and Janet Adamy at the Wall Street Journal report that the Commerce Department released data showing that consumer spending fell by the inflation-adjusted rate of 3.7% in the fourth quarter. Apparently a great deal of that reduction is coming out of food purchases:



14. Brian Blackstone at Real Time Economics reports that the latest Fed survey shows that average household worth declined "by 22.7% from 2007 until October 2008. The median, or midpoint, fell a more modest 17.8%, suggesting declines were centered among wealthier families."