Daily Sources 3/16

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Opponents have pledged to resist the law.

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

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

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

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

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

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



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

Daily Souces 3/2

1. Tony Barber at the Financial Times reports that the EU promised in its summit Sunday that it would provide financial assistance to eastern European nations in order to help them weather the crisis. However, the ministers rejected Hungary's appeal for a €180 billion package for the entire region, saying that it would consider financial aid on a case by case basis. (For the Hungarian appeal, see Daily Sources 2/27 #1.) Der Spiegel reports that Chancellor Merkel led the rejection of a region-wide bailout. "'I see a very different situation here,' she said on her way into the meeting. 'You cannot compare Slovenia or Slovakia with Hungary.'" There has been repeated speculation that the crisis would drive member states out of the monetary union, which has caused some to argue that the requirements for entry should be lowered. Chancellor Merkel apparently also led the rejection of that idea,

"Dutch Prime Minister Jan Peter Balkende said that if a nation wants to join 'it must meet the minimum economic criteria.' While Luxembourg Prime Minister Jean-Claude Juncker, who chairs the group of euro zone countries, said 'I don't think we can change the accession criteria to the euro overnight. This is not feasible.'"

2. Christian Neef and Jan Puhl ofDer Spiegel interview Polish Prime Minister Donald Tusk in today's international edition. An excerpt:

"SPIEGEL: There are also other conflicts. German Foreign Minister Frank-Walter Steinmeier, for example, rejects the American plan to install a missile defense shield in Eastern Europe and has conveyed this position to US Secretary of State Hillary Clinton.

Tusk: Poland will ensure that its interests are taken into consideration within the European Union and NATO. We need good relations with our western neighbors when it comes to questions of national security.

SPIEGEL: What does that mean in terms of the missile defense issue?

Tusk: We should speak openly about what best serves our security on the Continent. If the US and Poland are convinced that a missile defense shield will enhance the security of both countries, the other NATO members should accept this. Even Germany.

SPIEGEL: And if the project is abandoned, will the Poles again say that the major powers have cut a deal over their heads?

Tusk: If the stationing of the missile defense system is postponed, it will be an American decision. But then the remaining passages of the agreement -- i.e., the option of establishing other defense components in Poland -- should be immediately implemented. For us, it is important that we obtain American Patriot missiles.

SPIEGEL: Will Poland continue to strive for a special relationship with Washington?

Tusk: We are interested in pursuing close military cooperation with the US."

Well-worth reading in full.

3. Edward Hugh at Fistful of Euros reports that on Friday Sweden announced that its economy had officially contracted by 2.4% in the fourth quarter from the third--an annualized decline of 9.3%. Denmark officials reported that their economy had contracted by 3.9% in the fourth quarter over the year previous. Finnish GDP also fell by 1.3% in the fourth quarter.

"Unlike Denmark, Finland’s recession started with exports, and has now spread to areas like services and retail sales. Finance Minister Jyrki Katainen said last month that the Finnish economy may contract as much as 4.4% in 2009. The unemployment rate rose to 7% in January from 6.1 percent in December as companies cut jobs in the face of the slowdown."

4. Reuters reports that the Russian Finance Ministry said today that its Reserve Fund--oil revenues reserved for making up shortfalls in the budget--is currently worth over 4.8 trillion rubles (~ $136.3 billion) and the National Wealth Fund stands at 3.0 trillion rubles (~ $83.7 billion).

5. Seyoon Kim at Bloomberg reports that South Korea's Ministry of Knowledge Economy announced that exports fell again in February by 17.1% from a year earlier.

6. Eric Watkins at the Oil & Gas Journal reports that China's National Development and Reform Commission has approved CNPC's plan for a new 10 million tonne a year (~ 200 kb/d) refinery in Jieyang in Guangdong province. This is partially significant because CNPC's current refineries are all in the north of China, and so it indicates the breakdown of the informal divvying up of the nation's markets by the big three national oil companies. The NDRC also approved the following refinery expansions and construction:

"-- The capacity of the 400 kb/d Zhenhai refinery in Ningbo will be increased to 460 kb/d by September of this year and eventually to 600 kb/d.

-- In Shanghai, the combined capacity of the 280 kb/d Jinshan and the 220 kb/d Gaoqiao refineries will be boosted by 100 kb/d to 600 kb/d.

-- In Nanjin, the combined capacity of the 260 kb/d Jinling refinery and the 160 kb/d Yanzi refinery will be boosted to levels similar to those in Ningbo or Shanghai.

-- The cities of Maoming, Guangzhou, Huizhou, Quanzhou, and Tianjin will each see refinery capacity boosted to 400 kb/d.

-- Construction on a refinery is scheduled in Caofeidian.

Meanwhile, CNOOC—after a 6-month delay for unspecified reasons—is set to commission its 240 kb/d refinery at Huizhou, in Guangdong province, to operate on a trial basis when it goes online in March."

Many analysts have already remarked upon the huge addition of refining capacity in the Asia Pacific. Much of the refining additions were premised on China as an petroleum product market, for example in Saudi Arabia, India, South Korea, and even Japan. But if China moves ahead with all of its refining capacity addition plans--and usually Beijing makes good on its infrastructural construction plans--it is hard to see, given the trajectory of demand growth in an unsubsidized petroleum products market in both India and China and continued economic doldrums, where this additional potential supply would go. In addition, Winnie Zhu at Bloomberg reports that CNPC and Rosneft may begin construction on a 200 kb/d, $3 billion, refinery in Tianjin according to the municipal authorities there. The municipal authorities hope to get approval from the NDRC for the plant by the end of this year. Given the strong ties between Rosneft and CNPC--Rosenft has repeatedly gone to CNPC for large loans to deal with capital requirements for situations inside Russia--there is a fair likelihood that this will go forward. I would add that culturally, the Communist Party in China has few remaining vestiges of its original ideological goals, but that I suspect the import of finished or manufactured goods is still considered akin to the days of colonial exploitation and that Beijing will go to some lengths not to become the major market for imports of petroleum products, preferring to produce them internally.

7. Maureen Fan at the Washington Post reports that the US and China concluded on Saturday their first inter-military consultations after Washington OK'd an arms sale of $6.5 billion to Taiwan in October which had prompted Beijing to cut official military ties.

"'These were the best set of talks that I have ever been part of,' said David Sedney, deputy assistant secretary of defense for East Asia, who co-chaired the annual Defense Policy Coordination Talks. 'Not because we pretended that everything was fine and everything was resolved, but because we worked very seriously to address the obstacles while at the same time engaging in some discussions in some of the new areas like counterpiracy.'"

Tim Bowler at the BBC reports that in an interview with Chinese Commerce Minister Chen Deming said that "Given such a high degree of openness it is impossible for China to survive in an isolated way from the financial crisis. ... All countries in the world are in the same boat, and we share the same destiny."

"[Mr. Chen] ruled out major changes in the value of China's currency, despite pressure from the United States.

The US has long been angered that China does not allow the yuan to float freely, saying the artificially low currency makes Chinese exports unfairly cheap.

Mr Chen said he did not think 'for the next period of time' there would be a 'remarkable change' in the value of the yuan."

(h/t Yves Smith at naked capitalism.)

8. Fareed Zakaria at PostGlobal argues, as I have, that the compromise in Swat is not an unmitigated disaster, but rather that we should differentiate between Islamists bent on destroying the West and Islamists seeking a semblance of an operational justice system locally.

"The Swat Valley was historically a peaceful area that had autonomy within Pakistan (under a loose federal arrangement) and practiced a moderate version of sharia (Islamic law) in its courts. In 1969, Pakistan's laws were formally extended to the region. Over the years, the new courts functioned poorly, with long delays, and were plagued by corruption. Dysfunctional rule eroded government credibility. Some people grew
nostalgic for the simple, if sometimes brutal, justice of the old sharia courts. A movement demanding their restitution began in the early 1990s, and Benazir Bhutto's government signed an agreement to reintroduce some aspects of the sharia court system with Sufi Muhammed, the same cleric with whom the current government has struck a deal. (The Bhutto arrangement never really worked, and the protests started up again after a few years.) Few residents of the valley would say that the current truce is their preferred outcome. In the recent election, they voted for a secular party. But if the secularists produce chaos and corruption, people settle for
order.

The militants who were battling the army (led by Sufi Muhammed's son-in-law) have had to go along with the deal. The Pakistani government is hoping that this agreement will isolate the jihadists and win the public back to its side. This may not work, but at least it represents an effort to divide the camps of the Islamists between those who are violent and those who are merely extreme."

"'We won the war in Iraq chiefly because we separated the local militants from the global jihadists,' says Fawaz Gerges, a scholar at Sarah Lawrence College, who has interviewed hundreds of Muslim militants. 'Yet around the world we are still unwilling to make the distinction between these two groups.'"

Well-worth reading in full. I would add that sharia itself is not incompatible with existing Pakistani law--and that the possibility of appeal included in the agreement is a de juris acceptance of the supremacy of the federal courts. Reincorporating the major political organizations of Swat into the federal umbrella is a reasonable strategy on the part of Islamabad. For my earlier remarks on the swat agreement, see Daily Sources 2/19 #10 and Daily Sources 2/17 #4.)

9. Mary O'Grady has an opinion piece in the Wall Street Journal which argues that federal policy not to target medical marijuana distribution in the US de facto gives producers in Mexico--and Latin and South America--a stimulus, and thus exporting instability to the country. If you are familiar with my blog, you know I tend to disagree with Ms. O'Grady, but in this instance I believe she is right. If we intend to have prohibition, then we must target consumption in order to stop the export of instability to producing nations. If we cannot credibly target consumption, then we should take prohibition off the books. Worth reading in full.

10. Irene Tang at Platts reports that Malaysia will institute stricter specifications for gasoline and diesel in the middle of 2009. "Malaysia will introduce a new 95 RON gasoline grade in July 2009 and will
fully implement Euro-II compliant gasoline and diesel a month later." The new specifications, which mainly make the products more environmentally-friendly, are more expensive to make, and given that costs will be passed on to consumers, they will put upward pressure on price in Malaysia, and thus downward pressure on demand.

11. The Bureau of Economic Analysis said today that personal consumption grew by 0.4% in January from December in chained 2000 dollars, by 0.6% in nominal terms. Personal consumption accounts for 70% of US GDP.

12. Courtney Schlisserman at Bloomberg reports that the Institute for Supply Management’s factory index rose slightly to 35.8 in February from 35.6 in January. Anything below 50 indicates a contraction.

13. Reuters reports that semiconductor chip sales fell by 29% in January from a year ago.

14. Jeff Rubin, chief economist at CIBC World Markets, has published a research report which argues that car sales in the US will likely fall another 30-40% before bottoming. Rubin argues that about half of the 51 light vehicle plants in the US will be forced to close.

"Easy credit is already gone. The credit bubble wasn't just about sub-prime mortgages. It was just as much about car sales. Some two-thirds of vehicle sales in America over the last decade were debt financed. The leasing market has all but dried up and the securitization market for car loans isn't far behind. If you buy a car these days, try paying cash, which of course isn't superabundant, particularly for the over three-and-a-half million Americans who have already lost their jobs."

Rubin goes further and argues that car sales will never recover to the heights seen this decade, because Americans will adopt European driving habits as energy prices recover:

"The only reason gasoline is cheap, is because no one can afford to drive. When the recession is finally over, and Americans start filling up their SUVs, pump prices will go right back up to the $4/gallon price they were last Memorial Day."

Perhaps, but US population density is much smaller than Europe's, and to a certain extent, until cities west of the Mississippi radically restructure, circumstances will require that people will drive much more than Europeans.

15. Former Secretary of the Treasury under Reagan and State under Bush I, James Baker, writes in the Financial Times:

"During the 1990s, American officials routinely urged their Japanese counterparts to kill their zombie banks before they could do more damage to Japan’s economy. Today, it would be irresponsible if we did not heed our own advice."

A must read.

16. Warren Buffet's letter to Berkshire Hathaway shareholders has the chattering classes all abuzz. Barry Ritholtz's Big Picture carries the complete text. Scott Patterson at the Wall Street Journal has a story on the letter, which discusses the costs Berkshire faced in unwinding the exposure of reinsurance acquisition General Re to complex derivatives of particular interest:

"Berkshire's substantial insurance holdings haven't needed to take the massive write-downs on toxic subprime securities that have plagued much of the financial industry in the past two years. One reason is Mr. Buffett's longstanding dislike of complex derivatives, which he famously called 'financial weapons of mass destruction' in his 2002 shareholder letter and which he railed on again in his latest letter. He pushed General Re, the large reinsurance company Berkshire acquired in 1998, to disentangle itself from a vast web of derivatives -- financial instruments tied to the value of other securities, such as stocks or bonds -- over the course of five years, winding down its book of 23,218 derivatives contracts at a loss of about $400 million, he said in the letter. The losses may have been far more substantial if General Re had held onto to the contracts, Mr. Howard said.

'Upon leaving, our feelings about the business mirrored a line in a country song: "I liked you better before I got to know you so well,"' Mr. Buffett wrote, referring to General Re's derivatives book."

17. From Bloomberg, a graph of US meat consumption since the collapse of Lehman Brothers:



Meat is ethically problematic--newspeak, I guess, for a sector built on industrialized murder--but it has also historically viewed as a barometer of wealth. (I love meat and think humans are not especially more culpable than other predators for its consumption. Still, I find the industrialized slaughter of innocents troubling in a way that, say, an individual hunting or fishing--or even small scale farming--is not. As consumption goes down, and fewer are able to afford the expense of meat--not to mention hunting--however, the economics of industrial meat will only become more competitive. If transportation fuels costs rebound, this effect will only be strengthened.)