Daily Sources 7/27

1. US-CHINA STRATEGIC AND ECONOMIC DIALOGUE KICKS OFF TODAY

Secretary of State Hillary Clinton and Treasury Secretary Timothy Geithner have an op ed in today's Wall Street Journal to outline the aims of the US-China Strategic and Economic Dialogue which kicks off today. Key excerpt:

"To keep up with these changes that affect our citizens and our planet, we need to update our official ties with Beijing. During their first meeting in April, President Barack Obama and President Hu Jintao announced a new dialogue as part of the administration’s efforts to build a positive, cooperative and comprehensive relationship with Beijing. So this week we will meet together in Washington with two of the highest-ranking officials in the Chinese government, Vice Premier Wang Qishan and State Councilor Dai Bingguo, to develop a new framework for US-China relations. Many of our cabinet colleagues will join us in this 'Strategic and Economic Dialogue,' along with an equally large number of the most senior leaders of the Chinese government. Why are we doing this with China, and what does it mean for Americans?

Simply put, few global problems can be solved by the US or China alone. And few can be solved without the US and China together. The strength of the global economy, the health of the global environment, the stability of fragile states and the solution to nonproliferation challenges turn in large measure on cooperation between the US and China. While our two-day dialogue will break new ground in combining discussions of both economic and foreign policies, we will be building on the efforts of the past seven US administrations and on the existing tapestry of government-to-government exchanges and cooperation in several dozen different areas.

At the top of the list will be assuring recovery from the most serious global economic crisis in generations and assuring balanced and sustained global growth once recovery has taken hold. When the current crisis struck, the US and China acted quickly and aggressively to support economic activity and to create and save jobs. The success of the world’s major economies in blunting the force of the global recession and setting the stage for recovery is due in substantial measure to the bold steps our two nations have taken.

As we move toward recovery, we must take additional steps to lay the foundation for balanced and sustainable growth in the years to come. That will involve Americans rebuilding our savings, strengthening our financial system and investing in energy, education and health care to make our nation more productive and prosperous. For China it involves continuing financial sector reform and development. It also involves spurring domestic demand growth and making the Chinese economy less reliant on exports. Raising personal incomes and strengthening the social safety net to address the reasons why Chinese feel compelled to save so much would provide a powerful boost to Chinese domestic demand and global growth."

2. CHINA TO LAUNCH ARABIC-LANGUAGE TV STATION IN MIDDLE EAST AND AFRICA

The AFP reported on Saturday that China Central Television launched an Arabic-language channel which will air in the Middle East and Africa.

"Beijing is carrying out a multibillion-dollar effort to raise the profile of its state media abroad by expanding CCTV, the Communist Party newspaper People's Daily and the official Xinhua News Agency.

The effort has a budget of 45 billion yuan ($6.6 billion), according to a report last month by the Hong Kong newspaper South China Morning Post.

The Arabic channel will carry news, feature stories, entertainment and education programs and will gradually expand its offerings, CCTV said. The network already broadcasts in English, French and Spanish as well as in Mandarin."

It also has plans for a Russian language channel. (h/t Sky Canaves at China Journal.)

3. FIRST PUBLIC PRESIDENT-TO-PRESIDENT EXCHANGE BETWEEN BEIJING AND TAIPEI IN 60 YEARS


Weiyi Lim at Bloomberg reports that China’s President Hu Jintao sent a message congratulating Taiwanese President Ma Ying-jeou on his election to the head of the Kuomintang Party. It was the first public exchange between the leaders of mainland China and Taiwan in 60 years.

4. PETROCHINA BUYS 70.13% OF SINGAPORE PETROLEUM COMPANY

Norazlina Juma'at at Platts reports that PetroChina International on Friday announced it had increased its holdings of Singapore Petroleum Company to approximately 70.13% of the shares outstanding.

"On June 21 PetroChina had completed a deal to buy 45.51% in SPC from Singapore's Keppel Corp. for just over $1 billion and had launched an offer for all remaining shares."

SPC operates one of the three major refining projects in Singapore, which is a major trading and shipping hub for petroleum products in the Asia Pacific. The city state's total refining capacity is about 1.3 mb/d. SPC owns 50% of Singapore Refining Company Private Limited which has a 50% stake in the 273.6 kb/d refinery joint venture with Chevron on Jurong Island.

5. INDIA LAUNCHES FIRST INDIGENOUS NUCLEAR POWER SUBMARINE FOR SEA TEST

Voice of America reports that India has launched its first indigenously built nuclear-powered submarine, the Arihant or "Destroyer of Enemies," for sea trials in the Bay of Bengal. The Arihant was built with the assistance of Russia, has a crew of about 100 men, and will be armed with ballistic missiles.

"India already has fighter aircraft and missiles capable of carrying nuclear warheads. If all goes well with the trials, the Arihant will give India an underwater ballistic missile capability after the tests are conducted.

After launching the submarine, Prime Minister Singh said 'we do not have any aggressive designs nor do we seek to threaten anyone.' But he said that the sea is increasingly becoming relevant in the context of India's security interests, making it necessary to 're-adjust our military preparedness to this changing environment.'"

Galrahn at Information Dissemination comments:

"This beings India closer to becoming the first nation in decades to develop a nuclear triad, and the first nation to do so in the Indian Ocean area. While this development does not shift any balance of power in the region, it certainly gives both Pakistan and China something to think about. There is something else though, it will also give India a case for becoming a permanent member of the UN Security Council, a discussion the current permanent five members are not looking forward to."

6. RUSSIAN ORTHODOX CHURCH PATRIARCH IN KIEV TO TRY AND MEND RIFT WITH UKRAINIAN METROPOLITAN

Maria Danilova at the Associated Press reports that the Russian Orthodox Church Patriarch Kirill led a prayer service in Kiev today in part of a 10-day visit intended to mend the rift between the Russian Orthodox Church and a breakaway Ukrainian Orthodox church.

"Currently, Ukraine's main Orthodox church answers to Kirill, but a breakaway church that has proclaimed itself independent from Moscow in the 1990's has been gaining popularity and political support in this predominantly Orthodox country of 46 million.

[Ukrainian President Viktor] Yushchenko, who has sought to break free from Russia's centuries-old political dominance and integrate with the West, has appealed to the spiritual leader of the world's 250 million Orthodox believers, Patriarch Bartholomew I of Constantinople, to recognize a local Ukrainian church that would be independent of the powerful Moscow patriarchate.

Bartholomew, who visited Kiev last summer, has not given a clear response.

Kirill is to meet with Yushchenko later in the day. He told reporters after the prayers that he had no immediate plans to meet with the representatives of the breakaway church, the Ukrainian Orthodox Church Kiev Patriarchate."

7. TURKMENISTAN SAYS IT WILL HONOR DECISION OF INTERNATIONAL ARBITRATION COURT'S RULING ON CASPIAN BORDER WITH AZERBAIJAN

John Roberts at Platts reports that Turkmen President Gurbanguly Berdimukhammedov on Friday officially asked foreign minister Rashid Meredov to file a request before an international court of arbitration asking it to settle a long-standing dispute between Ashgabat and Baku on their Caspian borders.

"'The issue of demarcation of the sea bed and the sea's mineral resources between Turkmenistan and Azerbaijan, as well as the definition of median line there, remain unresolved for a long time due to Azerbaijan's specific position,' Berdimukhammedov [reportedly said on Saturday].

'Turkmenistan will be ready to accept any ruling to be issued by the International Court of Arbitration on this issue,' he said.

In its first response to the Berdymukhammedov declaration, Azerbaijan made no direct reference to arbitration, but the statement from deputy foreign minister Xalaf Xalafov to Azerbaijan's ANS television Saturday that Baku would defend its position could be interpreted as an indication that it was prepared to submit its case to arbitration."

Any planned natural gas pipeline that would traverse the Caspian would theoretically at least require the demarcation and sea bed issues resolved previous to construction. One potential pipeline to be routed through the Caspian is Nabucco. Worth reading in full.

8. 80-90% VOTER TURNOUT REPORTED IN KURDISH REGIONAL GOVERNMENT ELECTIONS THIS WKEND

Ben Lando, Serage Malik, Rawsam Latif and Istifan Braymok at Iraq Oil Report that turnout in the Kurdish Regional Government's elections this weekend was at, according to early estimates, between 80 and 90% of eligible voters.

"To be sure, there have been complaints, during the campaign and at the polls, and it’s up to the Independent High Electoral Commission in the coming days to determine how serious they are. Preliminary results are expected by Sunday, and final results certified by the IHEC within five days. But in a region specifically and in a country generally where the challenger has seen bullets and prison instead of campaign flyers, the general sentiment is forward looking."

9. IRANIAN PARLIAMENTARIANS CRITICIZE PRESIDENT'S RELUCTANCE TO IMMEDIATELY HONOR LOTR'S INSTRUCTIONS, SOME CALL FOR VOTE OF CONFIDENCE

Press TV reports that more than 200 members of Iran's parliament, the Majlis, have called upon President Ahmadinejad to "fully and promptly comply with the Leader's instructions."

"[T]he president's reluctance to reverse the decision [to appoint his son in law first Vice President] was called into question even by his own ministers. As a sign of protest, three of the ministers--Intelligence Minister Gholam-Hossein Mohseni-Ejei, Culture and Islamic Guidance Minister Mohammad-Hassan Saffar-Harandi and Labor Minister Mohammad Jahromi--walked out of a Cabinet meeting on Thursday.

Although news broke out that the Ahmadinejad administration had sacked the ministers, the government moved to clarify the issue after a senior member of parliament suggested that the administration had lost its legitimacy with the measure as it had removed too many Cabinet members during the first Ahmadinejad tenure.

Only the intelligence minister has been removed, said an official working for the presidential office.

The dismissal has intensified pressures on Ahmadinejad by parliament members who contend that the ninth government is obliged to seek a new vote of confidence in its remaining 7 days in office.

According to parliament Vice Speaker Mohammad-Reza Bahonar, all Cabinet sessions of the current government are 'illegal' until the official second-term inauguration of the president."

Article 136 of the Constitution requires the President to call for a vote of confidence at the Majlis is half or more of his cabinet is replaced.

10. KUWAIT, QATAR, BAHRAIN LINK ELECTRICITY GRIDS

Miriam Amie at Platts writes that KUNA reported today that Sunday Kuwait, Qatar, and Bahrain successfully linked their electrical power grid networks.

"Over a decade ago, the six GCC states agreed at a summit to set up the power grid to cope with the regions rapidly increasing electricity consumption. Draws on electrical power stations throughout the GCC increase dramatically during peak usage times in summer between April and September.

The estimated $1.4 billion electrical network is being initiated one year later than previously expected.

Earlier this month, five of the GCC states, except Oman, signed a power trading agreement setting terms between transmission system operators, and power procurement companies for the purpose of exchanging or trading electrical power."

11. DECOUPLING WAS ALWAYS A MYTH, ARGUES WÄLTI

Sébastien Wälti at VoxEU argues that the notion that the developing economies were decoupling from the developed economies was always a myth, and that the process of globalization leads, intuitively even, to greater business cycle synchronization.

"Figure 2 shows that the degree of business cycle synchronicity between emerging markets and advanced economies has not decreased in recent years. The evidence on individual emerging markets shows that there is no country (except for Peru) which reports a general decline in its degree of synchronicity with all four groups of advanced economies."

12. IEA OIL DEMAND FORECAST AHISTORICAL RELATIONSHIP TO GDP PREDICTION

Mark Shenk at Bloomberg notes that the most recent IEA forecast of a 1.7% increase in oil consumption in 2010 does not fit the historical relationship between GDP growth as forecast by the IMF and oil consumption.

"[T]he IEA’s projections for oil demand growth will trail the World Bank’s forecast for GDP growth by 0.8 percentage points, the least in 14 years. Since 1997, oil use has followed GDP by an average of more than 2 percentage points and in 2006 the spread widened to 3.9 percentage points."

"'There’s been a remarkable correlation between GDP and oil demand growth,' said Edward Morse, head of economic research at LCM Commodities LLC in New York. 'The IEA numbers are implausible.'"

(h/t Joshua Keating at the FP Morning Brief.)

13. NEW SINGLE FAMILY HOME SALES DOWN 21.3% (±11.4%) FROM JUNE 2008

Barry Ritholtz at the Big Picture reports that US Census Bureau and Department of Housing and Urban Development announced today that sales of new one-family homes were up 11.0% (±13.2%) in June from May, which is statistically insignificant. They are down 21.3% (±11.4%) from June 2008, which is statistically significant.

14. 80% OF DERIVATIVE ASSETS AND LIABILITIES HELD BY 5 FIRMS (ENERGY FIRMS USING DERIVATIVES MOSTLY FOR HEDGING) PER FITCH REPORT

In a story picked up on in the econoblogosphere over the weekend, David M Katz at CFO.com wrote on July 24 that a Fitch Ratings report released a week prior to his story indicated that about 80% of derivative assets and liabilities are held by five firms--JP Morgan Chase, Bank of America, Goldman Sachs, Citigroup, and Morgan Stanley.

"Those five banks also account for more than 96% of the companies' exposure to credit derivatives.

About 52% of the companies reviewed disclosed there were credit-risk-related contingent features in their derivative positions. Such features require a company to post collateral or settle outstanding derivative liabilities if there's a downgrade of the company's credit rating.

The Fitch analysts also found that just 22 companies disclosed the use of equity derivatives. Just six nonfinancial firms--IBM, General Motors, Verizon, Comcast, Textron, and PG&E--reported exposure to share-based derivatives.

For the report, the rating agency reviewed first-quarter 2009 filings of the companies, which come from a range of industries and represent almost $6.4 trillion in aggregate outstanding debt. The companies also recorded a total notional amount of derivative positions of more than $296 trillion.

Unlike the financial firms, which both use derivatives and issue them for profit, nonfinancial companies seem mostly to use derivatives just to hedge specific risks, according to Fitch. While 'derivatives trading by utilities and energy companies appear to be very limited,' for instance, 'most of the companies reviewed in both industries report the use of derivatives for hedging commodity risks,' the report found."

It is rather hard to disaggregate hedging from speculative use of derivatives by major energy firms, I would be rather interested to see the methodology for that in this report.

Daily Sources 6/22

1. GORDON BROWN ASKS MINISTERS TO FORMULATE PROPOSALS FOR HANDLING OIL PRICE, INCLUDING PLAN TO HAVE IMF ACT AS PRICE REGULATOR; CGES SAYS OPEC SHOULD INCREASE PRODUCTION TO HELP GLOBAL ECONOMIC RECOVERY, BUT WON'T; HAMILTON SHOWS CONSUMER SENTIMENT STRONGLY CORRELATED TO GAS PRICE; AIRLINES COMPLAIN TO OBAMA OF OIL SPECULATION; ANDY XIE ARGUES STIMULUS BACKED LENDING SURGE IN CHINA BEING INVESTED IN COMMODITY SPECULATION

Kate Mackenzie at FT Energy Source reports that UK Prime Minister Gordon Brown asked top ministers at the Treasury and the Department of Business to draw up plans for responding to high oil prices. Apparently the administration is also considering proposals by which the IMF would take a role in monitoring oil prices--and influencing price. (The IEA mostly acts as a data collector and canary.)

"Brown believes that the G20 meeting in London in the spring missed an opportunity to put in place measures to stabilize the oil price, after it fell from a peak of $147 a barrel to less than $35 early this year."

The idea currently being mulled could reportedly form a key element of the UK proposal at the G20 meeting to be held in Pittsburgh in October. In the meantime, Platts reports that the Centre for Global Energy Studies, based in London and led by former Saudi Arabian oil minister Ahmed Zaki Yamani,

"is forecasting that oil prices will rise steadily through the rest of this year, reaching $80/b in the fourth quarter, as OPEC continues to maintain its current levels of quota compliance."

The CGES argues that OPEC should raise production in order to moderate price and gird a potential economic recovery, but is choosing not to do so. James Hamilton at Econobrowser plots the correlation between gasoline price and US consumer sentiment (with the dashed line [RH] being the miles per dollar spent on gasoline and the solid line [LH] representing the Reuters/Michigan index of consumer sentiment):



He comments:

"So how should we assess the likely consequences of the fact that gas prices have now come back up significantly from their lows of December? The Edelstein-Kilian regressions employed in my paper from a recent conference at the Brookings Institution imply that a 20% increase in energy prices would historically be followed within 2 months by a 15-point drop in consumer sentiment and a 1.4% decline (relative to trend) in real consumption spending. From that perspective, the 46% (logarithmic) increase in (seasonally unadjusted) gasoline prices since December is quite worrisome.

On the other hand, since those December prices were 88% (logarithmically) below the July 2008 peak, consumers should have been giddy in December and still be significantly more sanguine now than they had been last summer, if the only thing on their mind was the price of gasoline.

Only problem is, consumers were anything but giddy in December. Credit and employment challenges have weighed far more heavily than gas prices over the last 9 months, and are presumably far more important than gas prices for determining what happens over the next few months as well."

A bit wonky, but nonetheless the must read of the day. And Kyle Peterson at Reuters reports that the Airline Transport Association sent a letter dated June 11 to President Obama, complaining of the role of speculators in the oil market:

"A repeat of last summer's astronomical crude-oil prices will bring the nation's economic recovery to a painful halt. ... Businesses that spend billions of dollars on fuel each year, already dealing with the impacts of decreased consumer spending, are especially vulnerable."

(h/t Kate Mackenzie at FT Energy Source.) In the meantime, Andy Xie on Friday had an opinion piece at Caijin Magazine where he argued that the lending inside mandated by the stimulus program has not been spent on "tangible projects" but in asset markets.

"There's little doubt that China's bank lending since last December has driven speculative inventory demand for commodities. Chinese banks lend for commodity purchases, allowing the underlying commodities to be used as collateral. These loans are structured like mortgages.

Banks usually have to be extremely cautious about such lending, as commodity prices fluctuate far more than property prices. But Chinese banks are relatively lenient. As an industrializing economy, China's support for industrial activities such as raw material purchases for production is understandable. However, when commodities are bought on speculation, lenders face high risks without benefiting the economy.
...
The international media has been following reports of record commodity imports by China. The surge is being portrayed as reflecting China's recovering economy. Indeed, the international financial market is portraying China's perceived recovery as a harbinger for global recovery. It is a major factor pushing up stock prices around the world.

But China's imports are mostly for speculative inventories. Bank loans were so cheap and easy to get that many commodity distributors used financing for speculation. The first wave of purchases was to arbitrage the difference between spot and futures prices. That was smart. But now that price curves have flattened for most commodities, these imports are based on speculation that prices will increase. Demand from China's army of speculators is driving up prices, making their expectations self-fulfilling in the short term."

The other must read of the day.

2. GLOBAL RETAIL SALES NUMBERS DOWN

Rebecca Wilder at News N Economics notes that retail sales are taking a serious hit globally. Here is her graph of retail numbers for Asia:



She observes:

"Out of the 27 countries listed below, 18 posted a positive average annual growth rate in 2008, while just 5 saw the same in 2009 ytd."

Worth reading in full.

3. WORLD BANK SAYS GLOBAL ECONOMY TO CONTRACT BY 2.9% IN 2009, TRADE TO FALL BY 9.7%

Timothy R Homan at Bloomberg reports that the World Bank released a report today forecasting that the global economy will contract by 2.9% in 2009, a rougher contraction than the bank previously forecast of 1.7%. Global trade is expected to fall by 9.7% versus the fall of 6.1% forecast in March.

"'Unemployment is on the rise, and poverty is set to increase in developing economies, bringing with it a substantial deterioration in conditions for the world’s poor,' the World Bank said. While the world is set to return to growth in the second half of 2009, a recovery will be subdued, the report said.

Reduced capital inflows from exports, remittances and foreign direct investment means 'increasingly grave economic prospects' for developing nations, the lender said. After peaking at $1.2 trillion in 2007, inflows this year may fall to $363 billion, it said."

4. SARKOZY TO GIVE "STATE OF THE UNION ADDRESS" IN VERSAILLES, OVERTURN CENTURY OF PRECEDENT

Emmanuel Georges-Picot at the Associated Press reports that French President Nicolas Sarkozy has decided to overturn 136 years of precedent and directly address both houses of the French parliament today at the Chateau of Versailles. Sarkozy means to use the event to establish a platform by which to address the country on big issues along the lines of the American "State of the Nation" address.

"The last presidential speech to France's parliament was in 1873, before lawmakers banned the practice to protect the separation of powers and keep the president in check."

5. MALAYSIA'S CENTRAL BANK TAKES KEY STEP IN DIRECTION OF PURCHASING YUAN-DENOMINATED DEBT AS RESERVE

Denis McMahon at the Wall Street Journal reports that the China Securities Regulatory Commission said on June 12 that it had approved the Malaysian central bank--Bank Negara Malaysia--as a qualified foreign institutional investor [QFII].

"That status allows the Malaysian central bank to invest in China's exchange-traded equities and debt, including Ministry of Finance bonds."

Potentially, therefore, Bank Negara Malaysia could act as the first central bank to buy Chinese debt as a reserve. However, Bank Negara Malaysia has yet to be approved by China's currency regulator to purchase renminbi. In February, China and Malaysia signed a currency swap agreement.

6. RUSSIA INVOLVED IN TAIWANESE JET FIGHTER UPGRADE, BELARUS & RUSSIA ANNOUNCE JOINT MILITARY EXERCISES

Yevgeny Bendersky at the Compass notes the recent report that Russia was involved in the development of the third generation fighter planes for the Republic of Taiwan.

"According to The China Times, Taiwan has begun work on a new military aircraft after appeals to the US with a request for the sale of 66 fighter aircraft F-16C/D. Washington, as previously reported, denied this request, not wanting to spoil relations with Beijing. Chinese journalists also point out that the plane, developed by a public company Taiwan Aerospace Industrial Development Corporation (AIDC), has two engines and has a short take-off capability. Its development, according to The China Times, was completed only after Russia sent its experts to Taiwan--the source did not specify what Russian organization or company they represented.

This is certainly a new turn for the Russian defense industry and presents a dilemma for the United States. Washington and Taipei have a very close defense relationship, even if certain military hardware is not sold to the ROC from time to time. Taiwan is one of the high-tech sources for a great deal of technology that powers high-tech American industry, as well as American military developments. Russians were always keen on seeing first hand how far Western--and US in particular--military development has advanced, since at this time, Moscow can only watch on the sidelines as America and her allies implement next-generation high-tech military gear. Did the Russians get a chance to see first hand the advanced technology that Washington sold to Taipei, and did they take good notes to take back with them? An even larger question is what this news may do to the Moscow-Beijing military cooperation. Russia has sold a wide variety of advanced high-tech aircraft to mainland China recently, including Su-27 multi-role fighter bomber. China, making sure it was able to level the playing field, quickly reverse-engineered the Russian plane and began its indigenous production under J-11 designation.

Russians recently expressed concern that China is making plans to produce its own version of an even more advanced plane that Russia sold to Beijing about 8 years ago--Su-30 Flanker multirole fighter, a more advanced version of Su-27. Since all of Taiwan's military aircraft are designed and fielded against mainland China, Russian know-how now is part of ROC's high-tech air force pointed at the mainland. One has to wonder what Beijing thinks about all this, and whether Moscow's action was a pay back of sorts for China deciding to copy Russian technology."

Bendersky also notes that Belarus and Russia announced their joint military exercises for 2009, on the back of the recent refusal of Minsk to join the Moscow-led Collective Security Treaty--see Daily Sources 6/15 #3.

7. TALIBAN OPERATIONS IN AFGHANISTAN AND PAKISTAN RE-CENTRALIZING

Matthew Rosenberg, Yochi J. Dreazen and Siobhan Gorman at the Wall Street Journal report that Mullah Omar, the head of the Taliban, has been reasserting direct control over the militants in their struggle with NATO in Afghanistan.

"'This is Quetta's answer to Obama's surge,' said a senior member of a militant network led by Gulbuddin Hekmatyar, an independent Afghan warlord who fights alongside the Taliban. He was referring to plans by the administration of President Barack Obama to send an additional 21,000 troops to Afghanistan over the next few months. The Quetta 'are not ready to lay down their weapons,' he said in an interview in the Pakistani city of Peshawar."

Omar is thought to lead the Taliban leadership council from the city of Quetta in south Pakistan. There are some indications that the effort to re-centralize decision-making for the Taliban is upsetting some lieutenants which may make them more amenable to US outreach efforts. Insofar as Omar is directing attacks at Islamic institutions in Pakistan, I suspect he is setting fire to his own bed.

8. ZADARI SAYS US TOO COZY WITH DICTATORS, ASKS FOR MORE MONEY

Pakistan's President, Asif Ali Zardari, has an op ed in today's Washington Post, which sounds more than a little like a rebuke. To wit:

"The West, most notably the United States, has been all too willing to dance with dictators in pursuit of perceived short-term goals. The litany of these policies and their consequences clutter the earth, from the Marcos regime in the Philippines, to the Shah in Iran, to Mohammed Zia ul-Haq and Pervez Musharraf in Pakistan. Invariably, each case has proved that myopic strategies that sacrifice principle lead to unanticipated long-term consequences."

His ask sounds more like a threat than a plea:

"We need immediate assistance. The Obama administration recognizes that only an economically viable Pakistan can contain the terrorist menace. The United States has committed $1.5 billion a year for five years to help stabilize our economy, and the House of Representatives and the Senate Foreign Relations Committee have acted decisively to reorient the Pakistani-American relationship toward not just a military alliance but a sustained economic partnership.

Now, the rest of the world must step up and match the US effort. Pakistan needs a robust assistance package so that we can deliver for the people and defeat the militants. And the rest of the world should again follow the American lead in helping us deal with the millions of internally displaced people who are the most recent victims of terrorism in our nation.

But aid is not enough. In the long term, Pakistan needs trade to allow us to become economically independent. Only such an economically robust Pakistan will be able to contain the fanatics and demonstrate to the 1.5 billion Muslims worldwide that democracy and economic development go hand in hand. Notably, the United States is moving forward with regional opportunity zones in Afghanistan and the Federally Administered Tribal Areas region of Pakistan that will remove trade barriers and provide economic incentives to build factories, start industries, employ workers -- and give hope to the people. This opportunity zone concept should be a model to Europe, as well. Europe must realize that it is in its own self-interest, as the United States has realized, to do everything possible to grow the Pakistani economy and to provide incentives for Pakistani exports to the continent."

I suspect that someone's PR advisers weren't thinking when they composed this. It is not exactly a secret that Zadari is known to his countrymen as Mr. 5% nor that he recently moved to try and bar his main opponent for the office of President from running for office and his brother from running the province he had been elected to govern. Insofar as he backed down in the face of the lawyers' movement, I feel that he is "committed" to rule of law and democracy, but the rhetoric of the piece is rather closer to that of Evita Peron than to Nelson Mandela. Should be read in full, of course.

9. CONTINUED US JOBLESS CLAIMS FALLING MOST LIKELY DUE TO INSURANCE EXPIRING

Barry Ritholtz at the Big Picture observes that the decline reported in continuing claims is not due to the unemployed finding work, but rather to their unemployment insurance expiring. He plots the "exhaustion rate" for jobless benefits:



and notes, "They are now unemployed AND broke. That is hardly a green shoot ..."

Daily Sources 5/27

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Worth reading.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

8. FEDERALES ARREST 10 MICHOACAN MAYORS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

12. HIGHER EDUCATION BUBBLE LIKELY TO POP NEXT

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

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

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

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

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

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

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

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

Daily Sources 5/14

1. JAPANESE OPPOSITION PLATFORM TO CONTINUE PURCHASING U.S. DEBT, BUT DENOMINATED IN YEN; ROUBINI SAYS DIFFICULT MEASURES MUST BE TAKEN IF THE DOLLAR IS NOT TO LOSE ITS POSITION AS RESERVE CURRENCY TO THE YUAN; FORMER TRANSLATOR FOR DENG XIAOPING SAYS CHINESE SENTIMENTAL ATTACHMENT TO THE DOLLAR IS ON THE WAY OUT

BBC reports that the chief finance spokesman for the main opposition party in Japan, the Democratic Party of Japan (DPJ), said in an interview with the broadcaster that Tokyo will only continue to purchase US debt if it is denominated in yen.

"However observers say that, while the move would be a remarkable policy shift, it was unlikely that Mr Nakagawa's party will win the forthcoming election, due before mid-September, despite the unpopularity of the ruling Liberal party."

Linda Sieg and Yoko Kubota at Reuters report that former DPJ leader Yukio Hatoyama announced his candidacy to lead the party after Ichiro Ozawa's resignation last week amidst a scandal in an effort to boost the party's chances of winning upcoming elections. The reporters enumerate some key elements of Hatoyama's background, including:

"Hatoyama is known less for economic policies than for his stance on security and diplomacy. He has advocated revising Japan's pacifist constitution to acknowledge the nation's right to defend itself and maintain a military for that purpose. He has also been critical of Japan's foreign and security policies for being too subservient to close ally the United States."

The so-called FACTBOX is worth consulting. Nouriel Roubini, professor at NYU made famous by his forecast accurate in many particulars of the current crisis, has an op ed in the New York Times where he dismisses arguments that the euro could replace the dollar as the world's reserve currency, instead suggesting that the renminbi is likely to take its place. Key excerpt:

"If China and other countries were to diversify their reserve holdings away from the dollar--and they eventually will--the United States would suffer. We have reaped significant financial benefits from having the dollar as the reserve currency. In particular, the strong market for the dollar allows Americans to borrow at better rates. We have thus been able to finance larger deficits for longer and at lower interest rates, as foreign demand has kept Treasury yields low. We have been able to issue debt in our own currency rather than a foreign one, thus shifting the losses of a fall in the value of the dollar to our creditors. Having commodities priced in dollars has also meant that a fall in the dollar’s value doesn’t lead to a rise in the price of imports.

Now, imagine a world in which China could borrow and lend internationally in its own currency. The renminbi, rather than the dollar, could eventually become a means of payment in trade and a unit of account in pricing imports and exports, as well as a store of value for wealth by international investors. Americans would pay the price. We would have to shell out more for imported goods, and interest rates on both private and public debt would rise. The higher private cost of borrowing could lead to weaker consumption and investment, and slower growth.

This decline of the dollar might take more than a decade, but it could happen even sooner if we do not get our financial house in order."

Well worth reading in full. Victor Zhikai Gao--executive director of the Beijing Private Equity Association and a director of the China National Association of International Studies--also has an op ed in the New York Times which points out that many Chinese actually have a sentimental attachment to the US dollar, known by many as mei jin, or "American gold." The dollar had for many years cache simply because it was illegal to hold them--the law required that all private citizens convert dollar holdings into the renminbi, and thus the notion of the dollar being "gold" long outlasted Nixon's decision to delink the dollar from the yellow metal. Key excerpt:

"Beijing recently called for a greater role in international trade for the special drawing rights currency of the International Monetary Fund. But China is also fully aware that the United States can veto an IMF decision. China’s call was more meant to sound an alarm to the United States.

Many Chinese people increasingly fear the rapid erosion of the American dollar. The United States may want to consider offering inflation-protection measures for China’s existing investments in America, and offer additional security or collateral for its continued investments. America should also provide its largest creditor with greater transparency and information.

We still call the dollar American gold. But the United States should not assume that this will never change."

2. THE IEA SAYS CHINESE GDP DATA MAY WELL BE WRONG; KEY CHINESE STATISTICIAN OUTLINES PROBLEMS WITH CHINESE RETAIL SALES DATA

David Winning at the China Journal reports that the Paris-based IEA global energy report today cast doubt on Beijing's official 6.1% GDP growth number for the first quarter, saying it didn't quite reconcile with a 3.5% drop in oil consumption.

"'Admittedly, pinpointing China’s oil demand with accuracy is an exercise fraught with difficulties, given the lack of data and the underlying assumptions analysts must make regarding stocks and refinery output from independent producers,' the IEA said in its latest report on the global oil market.

'Still, one would have expected stronger, positive oil demand growth commensurate with the reported economic resilience, unless income elasticities had drastically changed.'

The IEA floated another possibility: Real GDP data aren’t accurate and shouldn’t be taken at face value."

The IEA also mentioned a fall in electricity generation, which I noted in yesterday's Daily Sources 5/13 #2 were supposed to have fallen by as much as 4% in April after experiencing year over year declines in power generation for the last seven months. Chinese statistics have been in for a lot of rubbishing recently Andrew Batson reports in China Journal: a new essay by Xu Xianchun, a top statistician at the National Bureau of Statistics tries to explain why "one can’t simply add up China’s monthly indicators of investment and spending to get an accurate picture of gross domestic product."

"Yet many economists have long felt that the retail sales figures are not a reliable guide to China’s household consumption. Mr. Xu himself notes these well-known gaps, pointing out that the official retail sales numbers include things that cannot be considered consumer spending.

The most important are retail sales to companies and institutions, which of course are not consumers at all, and sales of construction materials for housing, which should be counted as part of household investment. Retail sales also do not include spending on services like education or health care, or rural households’ consumption of produce they grow themselves, he notes.

'Compared with retail sales, using household consumption expenditure obtained from the rural and urban household surveys is closer to consumer spending,' Mr. Xu writes.

Those measures show much slower growth than the headline retail sales figure. Mr. Xu says the bureau’s household surveys put the real growth in urban household consumption in the first quarter at 9.6%, and 9.3% for rural households. That would mark somewhat faster growth than in the second half of 2008 but somewhat slower growth than in the first half, when food prices soared, according to figures previously released by the bureau."

Worth reading in full. The National Bureau of Statistics is attempting to overhaul its data collection and publication methodologies in the face of growing criticism regarding the accuracy of their data--see Daily Sources 5/7 #2 (near the bottom of the item.)

3. PLANS TO ALLOW MAINLAND CHINESE INVESTMENT FLOWS TO TAIWAN CAUSING IRRATIONAL EXUBERANCE IN TAIWANESE MARKETS

Jonathan Adams at the New York Times reports that after announcing plans late last month to sign accords providing for cross-strait exchange in banking, insurance and access to financial markets the Taipei stock markets and dollar have been posting strong gains in the face of horrible economic data.

"[S]ince Ma Ying-jeou was inaugurated as president nearly a year ago, Taiwan has moved rapidly to forge closer commercial links with China to lift its sagging economy. In the past year, it signed deals with China on tourism, airline flights and shipping.

Investment, however, has remained a one-way street, flowing from the island to the mainland. Taiwan has invested $150 billion in the mainland since the 1980s, according to one Taiwan government estimate. Mainland China has until now been barred from directly investing in Taiwan."

For now, Beijing is capping Taiwan-bound investment at 7.2 billion Taiwan dollars (~ $219 million) leading analysts to remark that the market is likely overreacting.

4. BANK OF ENGLAND WARNS THAT RECOVERY WILL BE PROTRACTED TO 2012, LONDON COMMERCIAL RENTALS AT PRICES LAST SEEN IN 1991

Julia Werdigier at the New York Times reports that Mervyn King, head of the Bank of England, warned yesterday that "Growth has just as much chance of being positive over the next 12 months as it has of being negative."

"The central bank predicted that inflation would slow to as low as 0.4% this year and then accelerate to 1.5% by the end of 2010, revising upward an earlier forecast. But inflation is still unlikely to hit 2% by 2012, the central bank said."

2012. Mr. King said the recovery would likely be "slow and protracted." Meanwhile, Chris Bourke at Bloomberg reports that commercial rent in the city of London, the UK's main financial district, has fallen to levels last seen in 1991.

"The City already has enough empty offices to hold two- thirds of Canary Wharf, the docklands area developed 1 1/2-miles east in the 1980s to lure investment bankers. About 9 million square feet (855,000 square meters) are available in the City and that may climb to 12 million by the end of 2009, according to CB Richard Ellis Group Inc., the biggest commercial property broker. Almost 19% of all City offices may be vacant next year, analysts at CB Richard Ellis estimate."

(h/t Barry Ritholtz at the Big Picture.)

5. SPANISH GDP DOWN 1.8% IN Q1, RECOVERY COMPLICATED BY DEBT TO GDP RATIO

Edward Hugh at Fistful of Euros reports that Spanish GDP fell at a rate of 1.8% in the first quarter following a 1% contraction in the fourth quarter of 2008 which, annualized, results in a contraction of 7.2%.

"Over the first quarter of 2008 (that is year on year) GDP decreased by 2.9%, the sharpest decline recorded in almost 40 years. In fact you would need to go back to 1945 to find a year in which the Spanish economy contracted as strongly as it is likely to this year."

Hugh argues, in the very long post, that the crisis in Spain is mostly due to excessive bank lending--to get 4% annual GDP growth Spanish households and corporations were apparently increasing their borrowing by a rate of 20% per annum. Hugh concludes:

"So as I say, debt to GDP is most probably rising even now, but it is obviously going to have to come substantially down, which is why I insist on saying, this correction has hardly even gotten underway yet."

Long, but with substantial detail and worth reading given time.

6. RUSSIA PROPOSES RENEGOTIATING THE CONVENTIONAL FORCES IN EUROPE TREATY, BELARUSSIAN PRESIDENT COMPLAINS THAT RUSSIA HAS NOT WORKED FOR RENUNION, GEORGIAN OPPOSITION LEADER SAYS SAAKASHVILI IS TRYING TO CREATE AUTOCRATIC STATE

Vladimir Isachenkov at the Associated Press reports that Russian Foreign Ministry spokesman Andrei Nesterenko told the media that Moscow is proposing to renegotiate the Conventional Forces in Europe Treaty, and would honor the agreement if the changes were accepted by Washington and its NATO allies.

"The 1990 treaty limits the number of tanks, aircraft and other heavy non-nuclear weapons that could be deployed west of the Ural Mountains--the edge of European Russia. A new revised version was signed in 1999, but NATO countries have not ratified it and in 2007 Russia suspended its participation."

The West has insisted that Moscow remove troops from the breakaway regions of South Ossetia and Abkhazia as a prerequisite for reconsidering the CFE treaty. Meanwhile, Yevgeny Bendersky at the Compass reports that Belarussian President Aleksandr Lukashenko last week blamed Moscow for failing to reunite Russia with Belarus.

"'The fact that we have not progressed in constructing a federal partnership is not our fault. It is their (Russia's) fault... Who does not fulfill the contract on the construction of the Unified State? We had to hold a joint referendum on that. Why didn't we? Because the Russians did not want to,'--said Lukashenko, advising Moscow to 'look at the internal causes of turmoil in our relationship.'"

Although the Belarussian reunification with Russia would likely be regarded with serious alarm in the West, the standard take on this, if I recall correctly, is that United Russia, the party of Medvedev and Putin, doesn't particularly want Lukashenko as a political challenger for the presidency and that Moscow doesn't particularly want to bear the costs of reintegrating the Belarussian economy, which has been basically destroyed by Lukashenko.



Prime Minister Putin is, by the way, Chairman of the Council of Ministers of the Union of Russia and Belarus. Belarus was one of the nations explicitly targeted by the EU's "Eastern Partnership" initiative, which would offer better trade ties, relaxed visa rules and aid over four years for six countries neighboring Russia--see Daily Sources 5/7 #1. Meanwhile, Benjamin Bidder at Der Spiegel conducted an interview with Georgian opposition leader Salome Zurabishvili in which she calls President Sakaashvili "insane." Key excerpt:

"SPIEGEL ONLINE: But during the war between Russia and Georgia in August of 2008 you united the entire opposition in support of Saakashvili. You even forbade any criticism of the president.

Zurabishvili: That was following the national tragedy! We stood united so that we could prevent Russia from using the situation to their advantage after the war.

SPIEGEL ONLINE: Why is the opposition so set on seeing Saakashvili as the bogeyman?

Zurabishvili: There is simply no one to turn to in other state institutions because none of them have any power anymore. That's the situation in which we find ourselves. The situation is serious and very dangerous. Because if, after these peaceful protests, we don't get any results--not even a small concession--then things could get out of control, as they did on May 6th."

Zurabishvili also accuses the President of faking the mutiny at the Mukhrovani tank camp--see Daily Sources 5/5 #4--saying that he is attempting to intimidate the armed forces as opposition to his administration grows. In short, she accuses the President of trying to establish an autocratic state.

7. TURKISH CENTRAL BANK CUTS BENCHMARK RATE TO 9.25%, CONSUMER PRICES RISING AT SLOWEST RATE SINCE 1970

Steve Bryant at Bloomberg reports that the Turkish Central Bank has reduced its benchmark interest rate by 0.5% to 9.25%.

"Bank Governor Durmus Yilmaz has shaved 7.5 percentage points from the benchmark rate in seven months, joining policy makers worldwide in trying to pull economies out of recession as inflation slows. Turkish consumer prices rose an annual 6.1% in April, the slowest pace since July 1970."

Unemployment rose to 15.5% in January, the highest rate seen since records were inaugurated in 2005.

8. 735 CARGO SHIPS ANCHORED OFF SINGAPORE ON COLLAPSE IN GLOBAL TRADE, 300 OFF ROTTERDAM, 150 OFF GIBRALTAR

Keith Bradsher at the New York Times reports that as many as 735 cargo ships, some weighing as much as 300,000 dead weight tonnes, have anchored off the coast of Singapore in the Strait of Malacca on the global fall in international trade. Charles Pertwee captured a beautiful picture of the situation for the Times, illustrating the concern shipping lines have as the parked behemoths are creating an obstacle course in one of the busiest shipping channels in the world:

"The gathering of so many freighters 'is extraordinary,' said Christopher Pålsson, a senior consultant at Lloyd’s Register-Fairplay Research, the consulting division of Lloyd’s Register-Fairplay. 'We have probably not witnessed anything like this since the early 1980s,' during the last big bust in the global shipping industry.

The world’s fleet has nearly doubled since the early 1980s, so the tonnage of vessels in and around Singapore’s waters this spring may be the highest ever, he said, cautioning that detailed worldwide ship tracking data has been available only for the last five years."

Ships are anchoring off other ports too with about 300 off Rotterdam and 150 off the Strait of Gibraltar.

9. THE IEA CUTS GLOBAL OIL DEMAND FORECAST TO A 3% REDUCTION FROM 2008, WORST DEMAND REDUCTION SINCE THE OIL SHOCK OF 1981, BUT OIL INVENTORIES MAY HAVE STOPPED BUILDING

Mark Shenk at Bloomberg reports that the Paris-based IEA cut its estimate of global oil demand to 83.2 mb/d in 2009, down 3% from 2008 and the steepest fall since the oil shock of 1981. This is triple the decline forecast by the IMF in Global Financial Stability Report of a decline in oil use of 1.5%--see Daily Sources 4/22 #1. (The IMF records an oil use decline of 2.87% in 1982.) OPEC and the EIA also lowered their global demand forecasts this year. John Kingston at The Barrel gives three reasons why the global build in inventories that has happened over the last months has, in his view, probably come to an end. Key excerpt:

"Platts' Sheela Tobben reported that the volume of foreign crude sitting aboard floating storage in the US Gulf has declined to around 20 million barrels Wednesday, from 30-35 million barrels at the end of April, according to market sources. This follows sales that began last week by holders of that oil under pressure from a narrower NYMEX crude contango, a stronger WTI/Brent and the incentive provided by healthy gasoline margins, they said. 'Last count sweet and sour total about 20 million barrels in the USG but seems a little high given many stems moved last week,' said a trader with a major, referring to several sales of Russian Urals last week.

With the world markets seeing tighter inventories, the most visible sign of it is in the spread among different calendar months delivery of crude. Following the release of the API inventories, the spread between June and July crude had narrowed to 70 cts, with July about that much higher than June. At one point in mid-April, the front month to second month spread was more than $3. That sort of movement only occurs when inventories are being drawn down, and the numbers, and stories from the market, are beginning to confirm that."

Worth reading in full. Keith Johnson at Environmental Capital also notes that Barclays' Paul Horsnell thinks that inventories will now start drawing down, which means it is only a question of when, not if, oil goes back above $70/b. (JBC Energy predicted oil would start coming out of storage at sea on May 5th as Goldman Sachs predicted all available oil storage would be full by June, see Daily Sources 5/5 #5.) In the meantime, al-Hayat, a Saudi paper widely watched by the oil patch, reported that in a recent meeting with French Economy Minister Christine Lagarde Saudi King Abdullah and Oil Minister al-Naimi said factors other than supply and demand had pushed the price above $60/b in the first place, according to Reuters.

10. CARBON TAXES WILL MAKE SUPER-POLLUTING CANADIAN OIL SANDS LESS ECONOMICAL

It is an old story, but it bears repeating. Ben Casselman at Environmental Capital reports that carbon taxes will make oil sands production in Canada that much more difficult to make economical. Oil sands production releases huge amounts of carbon into the atmosphere via current technology, and the Canadian Energy Research Institute thinks that new emissions regulations would likely push the price of economically producing oil from oil sands to $105/b. "As a result, CERI expects growth in the oil sands to be as much as 40% lower in the coming years than previous projections." Oil sands represent a considerable portion of Canadian production--and Canada is the largest exporter of oil to the US.

11. OBAMA BLOCKS RELEASE OF ADDITIONAL PRISONER ABUSE IMAGES

Peter Wallsten and Janet Hook at the Los Angeles Times reports that the Obama Administration decided yesterday to block the release of additional images depicting the abuse of prisoners by US military personnel in Iraq. The decision, which may be reversed by the courts, will surely make some rethink their view that the administration represents a clear break with its predecessor. On the other hand, the visceral reaction that people have to pictures of people abusing captives is much more emotional, and potentially explosive, than to a decision to go back on campaign promises of transparency. I suspect that the decision is with the safety of US personnel overseas foremost in mind. That said, the decision begins the process of erosion of the Administration's credibility--perhaps inevitable, but ultimately the load-bearing pillar of soft power for any Administration.

12. S&P INDICATED EXPECTATION FOR BANKING CRISIS TO CONTINUE FOR 3 - 4 MORE YEARS, AIG TELLS CONGRESS IT WILL TAKE 3 - 5 YEARS TO COMPLETELY RESTRUCTURE, US SENATE OK'S 41% INTEREST RATES ON CREDIT CARDS

Jonathan Stempel at Reuters reports that Standard & Poor's Managing Director Tanya Azarchs said--though it did not mention via which medium--"There's nothing to say that this banking crisis can't go on for another three or four years."Stemple writes that the Managing Director indicated that the rating agency thinks the banking crisis has merely entered into a new phase, which should last some time. He writes:

"While efforts to spur lending, take bad assets off banks' balance sheets, and restart the market for packaging and selling securities may help the sector, S&P said banks will have a tough time surviving absent a bigger capital cushion than regulators require."

I'm not sure why anyone would pay attention to the ratings agencies given their total failure to warn the market prior to its meltdown, but, hey, you know what they say in the financial sector--"past performance is no indication of future performance"--so perhaps some credence ought to be extended to Ms. Azarchs. Meanwhile, Edmund L. Andrews at the New York Times reports that the Chairman of AIG, Edward M. Liddy, told the House Committee on Oversight and Government Reform that it would likely take the company three to five years to restructure and fully repay its obligations to the US taxpayer.

"'We must take the time and exercise the diligence to do this restructuring properly,' [Liddy] told lawmakers. 'Let me be clear: our plan is explicitly designed to avoid having to divest A.I.G. assets at fire-sale prices.'"

When pushed for more detail on the restructuring plan, Liddy reportedly "balked," but indicated he would do so under conditions more likely to preserve the plan's confidentiality. In the meantime, Carl Hulse at the New York Times reports that the US Senate has rejected a bill which would cap credit card interest rates at 15%, 33-60. Apparently the US Senate has determined that credit card companies must be allowed to charge its customers rates as high as 41% if they are to remain viable entities. Senator Bernie Sanders (I-VT) introduced the bill arguing that over a third of all credit card holders pay interest of over 20% on their debts to the companies.

13. SEASONALLY-ADJUSTED INITIAL JOBLESS CLAIMS UP TO 637,000 FOR WK ENDED MAY 9, CHRYSLER AND GM SENDS LETTERS LETTING GO THOUSANDS OF RETAIL FRANCHISES

Bob Willis and Shobhana Chandra at Bloomberg report that the Labor Department today released data showing that seasonally-adjusted initial jobless claims grew by 32,000 to 637,000 in the week ended May 9.

"The total number of people collecting unemployment insurance surged in the prior week to 6.56 million, setting a record for the 15th straight week and indicating companies are still not hiring. The lack of jobs may restrain consumer spending, the biggest part of the economy, and put off a return to growth that economists project for later this year."

The unadjusted for seasonality advance number of actual initial claims under state programs totaled 565,395, up 27,856 from the previous week. There were 325,480 initial claims in the comparable week in 2008. The previous week's initial unemployment claims number was revised slightly upwards to 605,000 from 601,000. Nick Bunkley at the New York Times reports that Chrysler filed a list of the car dealers it is cutting from roster in bankruptcy court today. 789 of its 3,200 dealers will lose their franchise with the company as of June 9.

"[S]ome dealerships could be saved by rulings from Chrysler’s bankruptcy judge or if other dealers decide to sell their franchises."

Tomorrow 1,000-1,200 dealers are expected to receive a similar letter from GM. The National Automobile Dealers Association are meeting today with members of the Obama Administration to urge them to reduce the letting as much as possible.

14. PRODUCER PRICES UP 0.3% IN APRIL FROM MARCH, DOWN 3.7% FROM A YEAR PREVIOUS

Jack Healy at the New York Times reports that the Labor Department released data today showing that producer prices rose by 0.3% in April from March, but down 3.7% from a year previous. Most of the price increase came from food prices--which rose by 1.5%--and oil prices. If you exclude energy and food prices from the index it rose 0.1% in April from March.

Daily Sources 4/30

1. WHO RAISES ALERT ON SWINE FLU TO CATEGORY 5

Denise Grady and Alan Cowell at the New York Times report that the World Health Organization yesterday raised its alert level on the swine flu to 5, or "sustained community-level outbreaks in at least two countries--a signal that a pandemic is imminent." 5 is just below the highest alert level, 6, which indicates that a global pandemic in underway. Phase 5 activates an intense effort to develop a vaccine. Mark Stevenson and Andrew O. Selsky at the Associated Press report that Mexico has responded by shutting non-essential services for five days and urging businesses to stay closed and citizens to stay home during that time.

"'It really is all of humanity that is under threat during a pandemic,' WHO Director General Margaret Chan said in Geneva. 'We do not have all the answers right now, but we will get them.'

Switzerland and the Netherlands became the latest countries to report swine flu infections. In addition to Mexico and the US, Canada, New Zealand, Britain, Germany, Spain, Israel and Austria have confirmed cases."

Fort Worth, Texas, announced the temporary closure of all school districts to last through May 12, and dozens of schools have been closed across the country. From the New York Times story:

"Most people will not have immunity to this new virus and, as it continues to spread, more cases, more hospitalizations and more deaths are expected. And as the virus spreads, the likelihood grows that it will mutate--possibly into [a] more lethal strain."

Jane Rickards at the Washington Post reports that Beijing gave the green light for Taipei to officially be invited to the WHO's 62nd World Health Assembly, which begins May 18 in Geneva.

"Experts on relations between Taiwan and the mainland said they believed the two sides had been secretly negotiating the matter for months.

'They're finding a way to accept each other,' said Andrew Yang, secretary general of the Chinese Council of Advanced Policy Studies. 'This will provide room for more positive negotiations for future international participation.'"

Donald G. McNeil Jr. at the New York Times reports that Homeland Security Secretary Janet Napolitano was heavily pressured by Congress to officially close the border with Mexico, although at this stage experts do not believe the outbreak is containable via quarantines.

"Closing borders is dangerous because many goods needed in a pandemic are made abroad, said Dr. Michael T. Osterholm, director of the Center for Infectious Disease Research and Policy at the University of Minnesota, including most masks, gowns and gloves, electrical circuits for ventilators and communications gear, and pharmaceutical drugs and the raw materials to make them. ...

'You cut those off and you cripple the health care system,' he said. 'Our global just-in-time economy means we are dependent on others.' Much of our food is from overseas. 'A Kellogg’s Nutri-Grain bar has ingredients from nine countries in it,' he noted."

Further, Mexico has the third largest share of trade with the US, after Canada and China, per the US Census Bureau's foreign trade statistics. It roughly accounts for $350 billion in trade per annum. Kyle Peterson at Reuters notes that "US Commerce Department data shows about 5.9 million US citizens flew to Mexico in 2008." Total global tourism receipts account for about 9% of global GDP, according to 2008 Travel and Tourism Economic Research of the World Travel & Tourism Council (WTTC). Wikipedia's article on tourism indicates that the US is the third most visited country in the world and that Mexico is the tenth-most. Platts reports that Mexico's state oil company, PEMEX, will remain in operation during the suspension of non-essential services. Thus, until this outbreak is contained, it will add to the global economic downturn, with exports likely to be hit hardest, on top of the already dismal numbers continuing to be posted as per Rebecca Wilder's weekly roundup of global economic data:



Global instability could thus potentially sharply increase. Though this particular outbreak is not reportedly as dangerous as the 1918 Spanish Flu, be safe. Apparently the most practical actions you can take are to wash your hands with soap regularly and attempt to limit social interaction.

2. JAPANESE INDUSTRIAL OUTPUT UP 1.6% IN MARCH, BUT ASIAN SPOT LNG DOWN $0.30/MMBTU

Hiroko Tabuchi at the New York Times reports that Japanese industrial output grew by 1.6% in March from the month earlier. The rise follows 10.2% and 9.4% declines in January and February, respectively. "Other recent economic data show a brightening picture. Exports in March rose 2% from the previous month, the first increase in nearly a year." Meanwhile, Jonty Rushforth at Platts reports that Asian spot LNG prices fell by $0.30/MMBtu to $3.80/MMBtu on April 30, per Platt's June Japan Korea marker. Several suppliers have cut production in the face of excess supply in the region, but apparently supplies remain more than abundant. A considerable share of LNG demand is for industrial production.

3. SIGNS OF DEFLATION IN THE UK; SOUTH AFRICA'S RESERVE BANK CUTS BENCHMARK INTEREST RATE

Angela Monaghan and Edmund Conway at the UK Telegraph report that UK weekly wages fell at an annual rate of 5.8% in February, the steepest decline in wages seen in 60 years. (h/t Yves Smith at naked capitalism.) Evidently Pretoria's inflation expectations are also for it to slow, as Nasreen Seria and Mike Cohen at Bloomberg report South Africa's Reserve Bank has cut its benchmark interest rate by a full percentage point to 8.5%.

"'Despite the widening output gap, inflation remains sticky but is expected to continue on its downward path,' [Bank Governor Tito Mboweni] said. 'The most recent central forecast of the bank shows a near-term deterioration in the inflation outlook.'

The Reserve Bank expects inflation to average 5.4% in the final quarter of 2010. Mboweni didn’t say today whether the inflation rate will drop into the target range this year, as he forecast last month."

4. MOSCOW ARRANGES FOR DEFENSE OF GEORGIAN BREAKAWAY REGIONS' BORDERS, BUT EVIDENTLY IS REBUFFED ON BP'S SHARE OF THE CPC PIPELINE

The Associated Press reports that Russia signed a deal with South Ossetia and Abkhazia officially authorizing Moscow to defend their borders. Georgian President Mikhail Saakashvili condemned the deal, telling reporters in Poland:

"We are seeing some kind of legal maneuvering to try to legalize, but you cannot legalize something that is fundamentally illegal. It is very dangerous to everybody, including Russia itself."

Meanwhile, Amanda Rayborn at Platts reports that KazMunaiGaz has purchased BP's stake in the CPC pipeline for $250 million, apparently denying Lukoil's application to purchase the stake--see Daily Sources 4/14 #7.



5. US ECONOMIC DATA MIXED, SOME SEE 'GREEN SHOOTS'

Kelly Evans at Real Time Economics reports that the Labor Department's data on initial unemployment claims fell by 14,000 to 631,000.

"This is still a high level, of course, but the four-week average of new claims--which smoothes out weekly volatility--also declined, to 637,250."

However, Evans notes:

"The total number of workers receiving jobless benefits jumped to nearly 6.3 million for the week ended April 18, a far higher figure than has been previously recorded by the Labor Department. With such high levels of workers on jobless rolls, it could keep a lid on any hopes for a recovery, particularly as the unemployment rate, now 8.5%, is expected to hit double digits."

Meanwhile, Jeannine Aversa at the Associated Press reports that unemployment rates have risen for the third straight month in all the nation's largest metropolitan areas in March.

"In Wednesday's metro unemployment report, the government said 18 regions registered jobless rates of at least 15%. Meanwhile, 15 regions had rates below 5%. They include: Ames, Iowa; Houma-Bayou-Cane-Thibodaux, La.; Iowa, City, Iowa; Manhattan, Kansas; and Lubbock, Texas."

Nonetheless, Phyllis Plitch at Real Time Economics reports that Dow Jones new economic sentiment indicator showed a small upturn in April to 27.6 in April, from 26.3 in March. It had bottomed at 22.2 in November.

"[The new economic sentiment indicator] is reported on a scale of 0 to 100, where higher numbers represent increasingly positive sentiment. In back-testing to 1990, the ESI has proven reliable in identifying nearly every major economic downturn and recovery as they happened, often in advance of other major economic indicators.

Other recent sentiment indicators have suggested the US economy is starting to rebound. The Dow Jones ESI, however, is more cautious. In April, the ESI remained well below where it bottomed during the previous two recessions and has so far only crept off last November’s lows. This suggests the economy continues to contract, albeit at a significantly slower pace."

The full statement following Fed's Open Market Committee meeting for April was posted on Real Time Economics yesterday, and it suggests that inflation remains subdued. Key excerpt:

"Information received since the Federal Open Market Committee met in March indicates that the economy has continued to contract, though the pace of contraction appears to be somewhat slower. Household spending has shown signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. Weak sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories, fixed investment, and staffing. Although the economic outlook has improved modestly since the March meeting, partly reflecting some easing of financial market conditions, economic activity is likely to remain weak for a time."

Providing some support to the housing market and thus the economy overall are 30 year fixed rate mortgages which have fallen to 4.78% in the week ended April 30, the lowest seen since Freddie Mac began tracking the rate in 1971, per David Wessel at Real Time Economics.