Daily Sources 8/5

1. CHINESE TRANSPORT DATA SHOW YOY INCREASE IN IRON IMPORTS OF 35%; PROPERTY SALES IN CHINA FALL 4% IN JUNE; UNEMPLOYED MIGRANT WORKER CONCERNS PROVE OVERBLOWN; THE PEOPLE'S BANK OF CHINA WARNS OF THE DANGERS OF QUANTITATIVE EASING

Bloomberg reports that in the Ministry of Transport data released yesterday ships unloaded 35% more iron ore in July from July 2008. "Ships unloaded 56.5 million metric tonnes of iron ore in July at major ports." Meanwhile, China Daily reports that property sales across 30 Chinese cities fell by 4% in July from June. Property prices for 70 major Chinese cities rose by 0.8% in June.

"Property transactions in Guangzhou [formerly Canton, the capital of Guangdong province] fell 36% over June. The figure is only half of that of May, said Guangzhou's official property website.

'The fall has been triggered by high property prices and shrinking supplies in some cities,' said Qin Xiaomei, head of research, Jones Lang LaSalle Beijing. 'Property developers have slowed down the pace of new projects in the second half after robust sales in the first half,' she said."

Meanwhile, Andrew Batson at the China Journal reports that worries regarding large numbers of unemployed migrant workers have proven overstated. The IMF China mission chief, who visited the country in late May early June, told reporters in a conference call:

"I think our sense is that while there is certainly some dislocation in the labor markets as export sectors in the coastal regions have declined, but in general that process of reallocation of labor has been relatively smooth. Part of it has been that labor has returned back to export sectors, perhaps with some reduction in real wages, and been reabsorbed into those areas.

Part of it is that the interior of the country is doing quite well, and so some of that migrant labor has moved geographically across regions to where growth is stronger. And I think we’re seeing right now a dynamic where the historical pattern of very strong growth in the coastal regions and slower than average, national average growth in the interior is reversing, and you’re seeing much stronger growth in rural areas and in the interior provinces. And some of that labor has been reabsorbed into public infrastructure projects."

Meanwhile, Bloomberg News reports that the People's Bank of China yesterday in its quarterly monetary policy report warned that the quantitative easing policies of the developed nations threatens to spark sever inflation and currency volatility.

"Exiting too quickly from such policies, which the Chinese central bank said helped to prevent a repeat of the Great Depression, may undermine an economic recovery, the report said. Waiting for too long may trigger 'a new round of asset bubbles and severe inflation,' the central bank added.

'Central banks in major developed nations face a difficult choice between keeping government bond yields relatively low to promote economic recovery and maintaining currency stability' to protect national creditworthiness, it said."

2. UK ENERGY SECURITY ENVOY TO RECOMMEND TRIPLING NUCLEAR ELECTRICITY GENERATION CAPACITY; JULY SERVICES INDEX SHOWS SIGNIFICANT IMPROVEMENT

Robin Pagnamenta at the Times reports that the UK's Prime Minister’s special envoy on energy security, Malcolm Wicks, will publish a report today arguing that Britain should triple the amount of energy it generates from nuclear power. A Times source familiar with the report said it would argue:

"The question is whether or not the same rigor [that is being devoted to cutting emissions] is being applied to energy security.

The Government has not been good at asking serious questions about whether or not the UK is in the right place ... It’s a dangerous world and when we emerge from recession there will be a global grab for diminishing supplies of energy. Where is it all going to come from?"

Meanwhile, Vanessa Houlder at the Financial Times reports that the Markit Economics purchasing managers survey of the services sector rose to 53.2 in July from 51.6 in June, it's highest reading since February 2008. It is the third consecutive month with a reading above 50--above 50 indicates expansion and below indicates contraction.

"Analysts welcomed the latest figures as providing more evidence the recession was receding. Vicky Redwood, of Capital Economics, said: 'The latest UK data on both services and manufacturing suggest that a decent recovery is continuing across the economy.'

Kevin Daly, of Goldman Sachs, said the 'very strong' services survey was consistent with annualized growth in gross domestic product of between 1.5% and 2%."

3. TWO RUSSIAN SUBS PATROLLING OFF US COAST

Mark Mazzetti and Thom Shanker at the New York Times yesterday reported that two nuclear-powered attack submarines have been patrolling off the eastern coast of the US recently.

"'I don’t think they’ve put two first-line nuclear subs off the US coast in about 15 years,' said Norman Polmar, a naval historian and submarine warfare expert.

The submarines are of the Akula class, a counterpart to the Los Angeles class attack subs of the United States Navy, and not one of the larger submarines that can launch intercontinental nuclear missiles."

Galrahn at Information Dissemination notes that the report suggests that the submarines are staying out of the Economic Exclusion Zone--about 200 miles off the coast. He also asks why this information was leaked.

4. PAKISTAN TALIBAN SEES ITSELF AS PROVIDING GOOD GOVERNMENT

Qandeel Siddique at jihadica summarizes an Urdu-language interview of a Taliban commander in Pakistan. Key excerpt:

"The Swati Taliban claims to have the locals on their side: '… We are children of these people and they are our own. We live like brothers. We have a healthy relationship with them where they give us food and shelter, and we cooperate on matters. We are always in touch with the locals and share with them their burdens/grievances. We have built roads [for the Swati people] where in over 60 years the government could not. The locals are happy with us. They no longer need to pay tax to the government. We have build pipelines and provided water to people. [...] Also we resolved decade-long rivalries that had been going on and which the government failed to bring about peace. The Taliban have appointed ulema to solve these cases and bring peace.'

The Swati Taliban assumes the role of a surrogate government by providing its citizen’s basic amenities--roads and water. And of course justice, which the locals feel deprived of, believing that the Pakistani government time and again ignores the developmental needs of this region. On top of this, the commander conjures a horrific picture of the Pakistani army; he pins the blame for collateral damage during warfare on the military--not only do they take innocent lives, they also steal from peoples’ homes."

5. RUSCORP SIGNS MOU WITH NIGERIAN STATE OIL COMPANY TO PROVIDE SECURITY, MAINTAIN PIPELINE NETWORK

Uchenna Izundu at the Oil & Gas Journal notes that a Russian security and maintenance company, Ruscorp, has signed a memorandum of understanding with the Nigerian National Petroleum Corp. to monitor the country's pipeline network, improve the existing pipelines as well as build new distribution lines.

6. CHÁVEZ ISSUES DECREE NATIONALIZING EQUIPMENT AND WAREHOUSING FACILITIES AT PORTS

Rainbow Nelson at Lloyd's List reports that Caracas has issued a decree effectively terminating all private concessions at the countries ports, with state-owned companies taking over all equipment and warehousing facilities. (Subscription only, but the headline is a decent datapoint.)

7. CREDIT CARD JUNK MAIL BOTTOMS

Barbara Kiviat at the Curious Capitalist notes that Synovate, a firm which tracks junk mail, has produced a chart--available at her blog--which shows that credit card offers going out underwent a sharp fall from the fourth quarter of 2007, but seem to have bottomed out in the second quarter of 2009.

8. CASH FOR CLUNKERS MOSTLY STIMULUS FOR AUTO INDUSTRY; AUTO INDUSTRY RESPONSIBLE FOR MOST OF MANUFACTURING REBOUND IN JULY; MINUS STIMULUS CONSUMER SPENDING MAY WELL HAVE SHRUNK BY 10% IN 2Q; PROBLEMATIC CONSTRUCTION LOANS LIKELY TO UNDERMINE BANK BALANCES GOING FORWARD

To answer what aim was intended by the cash for clunkers program, see Robert Rapier's R-Squared blog, which notes that the US will consume approximately 72 million gallons less gasoline annually because of the program.

"In the context of the amount of gasoline we use--140 billion or so gallons per year (a bit less now because of the recession)--this amounts to only 0.05% of our annual gas usage. Experts have suggested that making sure tires are properly inflated could save 3% on gas usage, or 60 times the amount saved by "Cash for Clunkers" if the majority of people are driving around on under-inflated tires.

So, for $1 billion invested in the program, a savings of 72 million gallons means we taxpayers paid $13.89 for each gallon of gasoline/yr saved. Readers know that I am a big fan of much higher fuel efficiency, but $13.89 to save a gallon of gasoline per year? While this benefit will be spread over several years of gasoline savings, surely we can do better than this.

Even if--as one reader suggested--those cars would have been on the road for another 10 years, you are still paying over a buck a gallon for the savings."

Which nicely dovetails with James Hamilton's post on whether there be an economic recovery in the offing, writing:

"Americans bought 995,000 light vehicles in July, a 16% increase over June and the best monthly report since August 2008. Domestically manufactured light trucks (which includes SUVs) lost market share but still achieved an 8% monthly sales gain. Sales of domestic cars, imported cars, and imported light trucks were all up more than 20% month to month.

If we'd seen these kinds of numbers in the absence of the cash for clunkers incentives, I would have viewed it as a strong suggestion that the economic recovery has begun. As is, I'm left wondering, and fundamentally not knowing, whether the auto figures signal the shift we've all been watching for, or sales stolen from September and October and delivered to July."

John Maudlin at the Big Picture quoted from David Rosenberg analysis yesterday:

"The details in today’s report left something to be desired. Consumer spending came in at -1.2% annualized, twice the decline expected by the consensus. This occurred in the face of gargantuan fiscal stimulus and leaves wondering how this critical 70% chunk of the economy is going to perform as the cash-flow boost from Uncle Sam’s generosity recedes in the second half of the year. Imagine, government transfers to the household sector exploded at a 33% annual rate, while tax payments imploded at a 33% annual rate and the best we can do is a -1.2% annualized decline in consumer spending in real terms and flat in nominal terms? What do we do for an encore? In the absence of the fiscal largesse, it is quite conceivable that consumer spending would have shrunk at a 10% annual rate last quarter! Nonresidential construction action sagged at an 8.9% annual rate and this was on top of a 44.0% detonation in the first quarter. Ditto for equipment & software ‘capex’ spending, also down at a 9.0% annual rate and this too followed a 36.0% collapse in the first quarter. Residential construction slumped sharply yet again, this time at a 29.0% annual rate. These are the guts of private sector spending and collectively, they contracted at a 3.3% annual rate--the sixth decline in a row. So while there are many calls out there for the recession’s end, it remains a forecast as opposed to a present-day reality."

And Barry Ritholtz, also at Big Picture, notes the recent Deutsche Bank report which suggests that construction loans are likely to become a larger problem for the banks over time.

"Construction loans are structured with upfront reserves--meaning that it takes much longer for [Commercial Real Estate] defaults to occur. Low short-term interest rates also means reserves can last longer--BUT, as DB notes, Once reserves are exhausted, defaults will skyrocket."

9. COMMERCIAL CRUDE STOCKS BUILD MORE THAN EXPECTED, GASOLINE PRICES RISE, REFINING UTILIZATION DOWN

The EIA reports that crude oil commercial stocks built by 1.7 million barrels to 349.5 million barrels in the week ended July 31--above the five year historical range for this time of year. A Bloomberg survey had the median expectation of analysts at a 600,000 barrel build. Gasoline stocks fell by 200,000 barrels, are at the top of the historical range, and versus analyst expectations of a 800,000 barrel draw. Distillate stocks fell by 1.1 million barrels and at 161.5 million barrels are 28.2 million larger (or 21.2% more) than the comparable stock level seen last year--well above the five historical range. Analysts had expected a 1.23 million barrel build. Refining utilization fell to 84.54% from 84.57% the previous week. The national average of regular gasoline prices rose 5.4¢ to $2.557/gallon in the week ended August 3. (People tend to start driving less at prices between $2.50-$3.00/gallon.) The report also includes a helpful explanation of why refinery outages on the Gulf Coast have a large effect upon national prices.

10. POTATOES MAY ACCOUNT FOR AS MUCH AS 22% OF POPULATION GROWTH AND 47% OF URBANIZATION IN THE 18TH AND 19TH CENTURIES

Nathan Nunn and Nancy Qian at VoxEU argue that the introduction of new world crops to the old world--and in particular the potato--is in great part responsible for the population explosion and urbanization from 1800:

"The traditional explanation for the rise in population is that medical advances, such as the understanding of the germ theory or the innovation of vaccinations, and improvements in public sanitation greatly decreased infant and child mortality, which in turn led to an increase in population (e.g. Preston, 1975, 1980, 1996; Cutler, Deaton and Lleras-Muney, 2005, 2006). However, in recent years, scholars such as Thomas McKeown (1976) and Robert Fogel (1984, 1987, 1994, 2004) have argued that the increase in population was mostly due to an improvement in nutrition rather than the advances in medicine or sanitation. McKeown argued that the decline in mortality began to occur well before the most important innovations such as antibiotics or vaccinations, which did not become prevalent until the 20th century, and therefore, there is scope for other factors to contribute to the rise in population. Fogel argued that since height is positively correlated with nutritional investment during childhood as well as lower mortality rates, then the observation that heights in America and the UK were increasing is evidence that nutrition was improving during this period.

If Fogel is right, then we have to ask what caused the improvements in nutrition. Certainly, improvements in agricultural technology are part of the story. During this time, a number of productivity-enhancing technologies were developed. Examples include the seed drill, the threshing machine, and the Rotherham swing plough.

In recent research, we argue that another main contributor was the discovery of New World food crops, namely, the potato (Nunn and Qian 2009). Potatoes are extremely nutritious and a very 'cheap' source of calories. They produced much higher yields per acre relative to pre-existing Old World staple crops. Historical survey data from England show that if a family of four were to subsist on only one crop, it would require 66% less land if it were to plant potatoes rather than staples such as barley, wheat, or oats (Young, 1771). Potatoes are also easy to store and were popular as fodder for livestock through the winter. Therefore, cultivating potatoes also indirectly improved protein intake. The diffusion of potatoes also had a tremendous impact on nutrition in the Old World because vast land areas in Northern Europe, Asia, and high altitude areas of Africa were suitable for cultivating potatoes. Figure 2 maps suitability for potato cultivation. Yellow and brown colored regions are suitable. Darker colored regions are more suitable."

Daily Sources 7/2

1. JAPANESE HAWK CHOSEN TO LEAD IAEA

Sharon Otterman at the New York Times reports that Japanese diplomat, Yukiya Amano, was elected to head the UN's atomic watchdog--the IAEA.

"Depicted by experts as the candidate favored by the United States and other wealthy nations, Mr Amano favors maintaining the current approach toward controlling nuclear proliferation in Iran, which Western countries suspect of trying to build nuclear weapons. Iran says its nuclear program is purely for civilian purposes to generate energy.

'He’s a nonproliferation and disarmament guy, and he believes in it,' said David A Kay, a former IAEA official and senior fellow at the Potomac Institute for Policy Studies. 'He has been around in trying to keep the inspections in Iran going, and I expect him to continue very much in that line. He will not want to create a situation in which military action is the only alternative.'"

2. CHINA TO RESUME ALLOWING IMF REVIEWS OF ECONOMY

Andrew Batson at the Wall Street Journal reports that China next week will take a step toward reconciling with the IMF, which it has blocked from reviewing its economy for the last three years.

"But a team of IMF officials visited China about a month ago, and have completed a draft review that is now being circulated for comments.

The IMF's draft report says China's exchange rate 'continues to be substantially undervalued,' according to a person who has seen the document, called an Article IV consultation. That's in line with what senior IMF officials have repeatedly said in public. China has kept its currency, the yuan or renminbi, basically fixed against the US dollar since July last year, though it has risen, along with the dollar, against other currencies since then.

That description nonetheless marks a climbdown from an earlier push to label China's exchange rate as 'fundamentally misaligned,' a designation that would suggest the country is in violation of the IMF charter. The draft report also states that Chinese authorities 'disagreed with the staff's assessment' of the exchange rate, and notes their argument that the global turmoil calls for 'a policy of stability.'"

Simon Johnson argued in April that the Obama Administration had pulled off a coup at the G20 meeting, effectively getting Europe to make the selection process for the head of the IMF transparent in return, more or less, for opening up the process at the World Bank, the next head of which Johnson thinks is likely to be Chinese--see Daily Sources 4/3 #3. Clearly in order to clear the field for their own candidates and a larger role generally, Beijing will first be forced to work with the organizations they want to influence or lead.

3. PBOC TO ENCOURAGE CROSS-BORDER SETTLEMENT IN YUAN

Bob Chen and David Yong at Bloomberg report that the People's Bank of China will encourage cross border settlement in the renminbi starting today, per regulations posted on the central bank's website.

"Transactions inside China will take place in Shanghai and four cities in southern Guangdong province, including Guangzhou and Shenzhen, while those outside China will occur in Hong Kong, Macau and the Association of Southeast Asian Nations, it said."

(h/t Jesse's Café Américain.)

4. CNPC MAY REVIVE BID ON ARGENTINE UNIT OF REPSOL-YPF, CNOOC MAY JOIN IN

Sui-Lee Wee at Reuters reports that CNPC plans to revive its $17 billion bid for the Argentinian unit of Repsol-YPF, reportedly planning to make an offer for as much as 75%. CNOOC also may enter a bid for the remaining 25%. "Goldman Sachs is advising YPF on the sale, while Morgan Stanley and JP Morgan are advising CNPC and CNOOC respectively." YPF, or Yacimientos Petrolíferos Fiscales, was the national oil company of Argentina until 1991, when it was privatized and then purchased by Repsol. (h/t Carola Hoyos at FT Energy Source.)

5. SPANISH CONSUMER CREDIT DOWN 33.7% IN Q1

Edward Harrison at Credit Writedowns reports that consumer credit in Spain fell by 33.7% in the first quarter, according to the National Association of Financial Credit Institutions (Asnef).

"Asnef stressed that the fall in the consumer sector has been mainly due to losses on personal loans, due to the sharp decline in the credit available for consumer goods and by the contraction of revolving credit associated with credit card usage."

Harrison says he expects more failures or bailouts of Spanish banks in coming months. Worth reading in full.

6. RIKSBANK CUTS BENCHMARK INTEREST RATE TO 0.25%

Malin Rising at the Associated Press reports that the Riksbank cut its benchmark interest rate by 0.25% to 0.25% today.

"The central bank said it now expects Swedish gross domestic product to decline by 5.4% in 2009 -- a sharper drop than its previous forecast of a 4.5% fall. However, it raised its outlook for 2010 GDP to a growth rate of 1.4% from 1.3% previously.

It said the economic outlook is still uncertain and that although GDP is expected to be positive in 2010, employment will not begin to rise until 2011."

7. FINAL SECTION OF SINO-KAZAKH CRUDE PIPELINE COMPLETED

Naubet Bisenov at Platts reports that Kazakhstan's KazStroyService has finished the 10 million metric ton/annum (200 kb/d) Kenkiyak-Kumkol pipeline and will begin test runs on it shortly.

"The Kenkiyak-Kumkol link is the final section of the Sino-Kazakh crude pipeline which runs from Atyrau on the Caspian Sea coast of the Central Asian nation, to Atasu near Kazakhstan's eastern border, then onwards to Alashankou in China's northwestern Xinjiang Uygur autonomous region.

The Sino-Kazakh crude pipeline is jointly developed by Kazakh state oil company KazMunaiGaz and Chinese state oil giant China National Petroleum Corp."

8. TALIBAN HAS WORN OUT ITS WELCOME IN PAKISTAN

In another interesting report by World Public Opinion, an institute based out of the University of Maryland, Pakistani opinion has turned sharply against the Taliban.

"Large majorities express confidence in the government (69%) and the military (72%) to handle the situation [in Swat]. Retrospectively, the public leans (by 45% to 40%) toward thinking the government was right to try to make an agreement in which the Pakistani Taliban would shut down its camps and turn in its heavy weapons in return for a shari'a court system in Swat. But now 67% think the Pakistani Taliban violated the agreement when it sent its forces into more areas, and 63% think the people of Swat disapprove of the agreement.

On the Afghan Taliban, an overwhelming 87% think that groups fighting to overthrow the Afghan government should not be allowed to have bases in Pakistan. Most (77%) do not believe the Afghan Taliban has bases in Pakistan. However, if Pakistan's government were to identify such bases in the country, three in four (78%) think it should close the bases even if it requires using military force.

Public attitudes toward al Qaeda training camps follow the same pattern. Those saying the 'activities of al Qaeda' are a critical threat to Pakistan are up 41 points to 82%. Almost all (88%) think al Qaeda should not be allowed to operate training camps in Pakistan. Though 76% do not believe there are such camps, if the Pakistani government were to identify them, 74% say the government should close them, with force if necessary."

Unsurprising, to me, but still well worth reading in full. (h/t Juan Cole at Informed Comment.)

9. PETROBRAS STRIKES MORE OIL ONSHORE IN THE ESPIRITO SANTO BASIN

Tom Hennigan at Platts reports that Petrobras struck oil onshore in the Espirito Santo basin.

"The Espirito Santo basin has seen a string of strikes in recent months. Last week the company reported strikes in blocks ES-T-390 and BT-ES-15. Since March it has also made four oil strikes in the onshore ES-T-364 block alone.

The company also announced a gas and an oil and gas find in the onshore ES-T-505 block."

The block block is 100% owned by Petrobras. Seems like every other week they make a new announcement of new oil.

10. HONDURAN CRISIS IN PART DUE TO NO PROCESS FOR REMOVING PRESIDENT IN CONGRESS & HIS RELATIONSHIP WITH CHÁVEZ, SAY EXPERTS

Kevin Sullivan at Real Clear World posts the quick analysis of several Honduras experts. Juan Carlos Hidalgo at the CATO Institute makes the interesting observation:

"The Honduran constitution does not provide an effective civilian mechanism for removing a president from office after repeated violations of the law, such as impeachment. Honduras’ Supreme Court nonetheless ordered Zelaya’s removal and Congress bestowed the presidency on the civilian figure--the president of Congress--next in the line of succession according to the constitution. "

Jesus Rios at Gallup World Poll makes another interesting observation:

"The latest remarks by interim leader Micheletti suggest Zelaya’s increasing alignment to President Hugo Chavez’s regime is at the core of the crisis. So, if Zelaya does in fact return to power before the November presidential election, the question then becomes: how will he manage to govern amidst an adverse public opinion environment and among institutions that backed his ousting, including his own political party? And, what role, if any, will Chávez play in Honduran politics from now on? Will Zelaya drop or moderate his pro-Chávez stance to regain political support? According to the 2008 Gallup survey, just 20% of Hondurans approve of President Hugo Chávez."

11. WTO WARNS ON INCREASING PROTECTIONISM, SAYS GLOBAL TRADE VOLUMES WILL CONTRACT BY 10% IN 2009

Joshua Chaffin at the Financial Times reports that the WTO published a report today which warns that

"[g]overnments around the world have continued to push up trade barriers in spite of high-profile pledges at the G20 summit and other forums to resist protectionism"

The organization lowered its forecast for world trade to a contraction of 10% in the volume of goods and services.



12. BLS REPORTS 476,000 JOB LOSSES IN JUN, STATE FISCAL RESPONSIBILITY MEANS STATE ECONOMIC POLICY CONTRACTIONARY IN RECESSION

Barry Ritholtz at the Big Picture reports that the Bureau of Labor Statistics announced today that there were 467,000 job losses in June. The unemployment rate rose by 0.1% to 9.5%. The U-6 measure--marginally attached and involuntary part time workers--rose to 16.5%. Temporary employment fell by 37,600.

"Hours worked fell 0.8%, bringing the average workweek down 0.1 hours to 33; This is a record low going back to 1964."

Peter Boockvar, also at the Big Picture, also notes that initial jobless claims totaled 614,000. Continuing claims fell by 58,000 from last week.

"While there is no question benefits are expiring without one finding a job, as evidenced by the rising exhaustion rate, many losing those benefits now started getting them when initial claims were running in the 400k range last summer. Now its running above 600k, so there are still more people filing initial claims than getting removed from the continuing claims data, thus continuing claims still should trend higher assuming no sudden change in hiring trends."

Meanwhile, Free exchange makes the important observation:

"[S]tate budget policies are sharply contractionary at this point. Despite allocations of federal aid to states, services are being cut, state employees are being laid off, and taxes are being raised in order to balance the budgets of local governments constitutionally unable to run deficits. It's not at all clear that the federal stimulus will entirely compensate for state-level fiscal tightening, which means that American fiscal policy could, on net, be contractionary."

13. BARCLAYS EXPECTS WTI TO AVG $71/B IN W3

Yee Kai Pin at Bloomberg reports that Paul Horsnell's commodity team at Barclays has lifted its third quarter forecast for WTI to $71/b from $62/b. Horsnell increased his Q3 forecast for Brent to $69/b.

"'Among all the changes that have kept commodities on the boil in recent years, the key factor is that 'normal' is not what it used to be,' the analysts said in the report. 'Oil prices below $70 or copper prices below $3,000 are no longer normal.'"

I think he's wrong, but he does know of what he speaks.

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 6/12

1. RECENT MOVES TO PURCHASE IMF SDR BONDS MAY BE MORE ABOUT DEVELOPING NATION PARTICIPATION IN THE IMF THAN CHALLENGE TO THE DOLLAR: JAPAN'S TRUST IN THE US UNSHAKABLE, MEXICO MAY PURCHASE BONDS

Susanne Walker at Bloomberg reports that in an interview with the news wire Japanese Finance Minister Kaoru Yosano said

"The US dollar’s position as the world’s reserve currency isn’t under threat. Our trust in US Treasuries is absolutely unshakable."

Meanwhile, Jens Erik Gould, also at Bloomberg reports that Mexican central bank Governor Guillermo Ortiz said in an interview that Mexico would contribute more to the IMF either by purchasing special drawing rights bonds or by directly lending to the institution. He went on to say:

"The IMF has to be re-energized and revitalized and that of course involves changes in the governing structure, and at the center of those changes is a greater participation from the emerging markets. The other side of the coin is that they also have to contribute."

He further indicated:

"The dollar will remain the central reserve currency probably for some time. I am not really worried about the status of the dollar at the present time."

Simon Johnson's analysis of the April 2 G-20 meeting provides, I think, some insight into what is taking place here--see Daily Sources 4/3 #3. In short, he argued that the Obama Administration convinced the Europeans, who traditionally have led the IMF, to make the selection process for its chief open and transparent. "Insiders" believe the current IMF managing director to resign within the year, meaning that the campaign for the next MD has already begun.

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

2. CHINA'S NBR SAYS INDUSTRIAL PRODUCTION UP 8.9% IN MAY YOY, TURNS OUT THAT CAR STATS ARE NOT FOR PURCHASES, BUT FOR DELIVERIES FROM FACTORIES TO RETAIL OUTLETS, FITCH RATINGS SKEPTICAL OF CHINESE FINANCIAL SECTOR DATA

Terence Poon and Juan Chen at Dow Jones report that China's National Bureau of Statistics announced that value-added industrial production rose by 8.9% in May from a year previous. And Yves Smith at Naked Capitalism says she feels like she's being gaslighted, given the recent revelation that the data on car sales from China are not for cars that people have bought, but for a shipment from a factory to a retailer. She quotes from MetalMiner:

"There are some apparently contradictory numbers coming out of China at the moment. Take those car sales as an example. Our man on the ground tells us BYD, a noted Chinese car maker, reported 30,000 car sales of one model by end of last year, but the number plate agency recorded only 10,000 new cars of that model registered for use on the road. What happened to the other 20,000 are they running around without number plates? In a police state, I don’t think so. Our understanding is auto sales are recorded in China when they leave the factory, not when they are registered on the road, so dealers can build up inventory while car 'sales' are rising."

So maybe sales of cars in China aren't quite outstripping those in the US. Which is perhaps more reason to doubt the official GDP and industrial production numbers, given electricity generation and consumption and apparent oil demand numbers, as per the IEA--see Daily Sources 5/14 #2. In late May, the China Electricity Council, or association, announced it would stop publishing electricity consumption numbers--see Daily Sources 6/8 #6. Of course, the number of cars on the road have a large effect on oil consumption. (But it would be inadvisable to mount a high horse on this issue, lest it die underneath you--see Michael J. Panzner's elucidation of how the US government cooks its own statistics at Financial Armageddon.) That said, James T. Areddy at China Journal notes that Charlene Chu, a Fitch Ratings analyst in Beijing,

"has compiled numbers that seem to suggest that when credit policy in China has gotten tighter and stock prices have gone lower, banks have started peddling more wealth management products to their rich clients — and in doing so piled up hidden risks for themselves.

After Wall Street collapsed last year and US government was prompted to bail out its biggest banks, China’s financial institutions gained recognition as among the world’s largest and healthiest. After all, nonperforming loan ratios in China were near 2% on average last year from about 15% in 2003.

Chu, a former China watcher for the Federal Reserve Bank of New York, isn’t sanguine about such figures. The Fitch analyst has long argued that NPL ratios and other basic indicators of banking-system health favored by China’s policymakers sometimes mask other concerns. She sees evidence that local banks are downgrading their assessment of loans within the five categories of loan quality, without boosting NPLs, and notes that Chinese banks’ profit margins are getting pinched."

Chu says the sector suffers from "high information risk." Worth reading in full.

3. EUROZONE INDUSTRIAL PRODUCTION DOWN 1.9% IN APRIL MOM, 21.6% YOY

Ralph Atkins at the Financial Times reports that Eurostat announced that eurozone industrial production fell by 1.9% in April from March, down 21.6% since April 2008.

"Economists pointed out that the latest fall in industrial production was noticeably less severe than around the turn of the year, and that other 'hard' data--for instance, German industrial orders figures--have shown a marked improvement.

Still, the sharp contraction in activity has left the eurozone economy badly wounded. Industrial production in April was down to a level not seen for almost 12 years, and the latest monthly fall offered scant hope of an early return to economic growth.

'We are definitely in the recovery phase but today’s data confirm that it will be fragile and there will be negative surprises,' said Marco Annunziata, chief economist at Unicredit. 'Policymakers should not be in any hurry to withdraw [economic] policy stimulus.'"

4. SPAIN TO DECIDE ON RENEWING NUCLEAR POWER LICENSE IN COMING WEEKS

Elisa Santafe at the AFP reports that Madrid will either come down for or against nuclear power in the coming weeks as it decides whether to renew the operating licenses of the oldest of its six nuclear power plants.

"Prime Minister Jose Luis Rodriguez Zapatero, whose socialist government has backed the development renewable energy sources such as solar and wind power, has said he wants to phase out nuclear energy in the country when the life span of its six nuclear plants expires.

But on Monday the five-member board of the country's nuclear watchdog unanimously agreed to recommend that the Garona nuclear plant in northern Spain should get a new 10-year operating license if it upgrades its safety equipment.

Nuclear Safety Council chairwoman Carmen Martinez Ten said the decision was taken on technical and security grounds and not for reasons of 'energy policy, economics or another nature'."

Phasing out nuclear energy doesn't make a lot of sense from the perspective of Spain's energy security--it provides about 20% of the country's electricity generation--be interesting to see. (h/t Leanon at Drum Beat.)

5. ITALY TO RECEIVE PREFERENTIAL TREATMENT IN LIBYA

Adam L. Freeman and Flavia Krause-Jackson at Bloomberg report that Libyan leader Muammar Qaddafi promised today to give Italian companies preferential treatment.

"Qaddafi is visiting Italy for the first time after the country agreed last year to pay the North African nation $5 billion (3.5 billion euros) over 25 years to compensate for the occupation from 1911 to 1943. That paved the way for closer commercial ties and increased efforts by Libya to contain illegal immigration."

"Libya, Africa’s third-largest oil producer, is studying further investment in Italy’s Enel SpA and Eni SpA, Shokri Ghanem, chairman of Libya’s National Oil Corp., said on June 1 in Abu Dhabi. The Libyan Investment Authority, the country’s investment arm, has $80 billion in liquid assets. Libya owns almost 5 percent of UniCredit SpA, Italy’s biggest bank.

'Libya is an important country for us,' Fulvio Conti, chief executive officer of Enel, told reporters in Rome today, news agency Radiocor reported. 'We have always had excellent relations and we will continue to do so in the future.'

Libya accounted for 31% of Italy’s oil imports in the first quarter while the North African country’s gas met 13% of Italian demand, according to the Italian statistics agency."

Italy is also moving to integrate its energy sector more closely with Russia, following, it seems, Berlin's lead in that area.

6. UN SECURITY COUNCIL ANNOUNCES NEW SANCTIONS ON NORTH KOREA

Colum Lynch at the Washington Post reports that the UN Security Council today voted unanimously to impose new financial, military and trade sanctions on North Korea in response to its recent decision to restart its nuclear program, nuclear test blast, and missile launches--as well as its decision to call the 1953 Armistice a dead letter.The sanctions do not provide for a comprehensive trade embargo, however, and China specifically inserted an exception which would allow for continued sales of small arms and light weapons.

"The resolution calls for UN members to inspect all shipments entering or leaving North Korea if there is a reasonable suspicion that the cargo contains banned nuclear or missile technology. Member nations would be given the right to search ships suspected of carrying banned materials on the high seas and to seize any contraband.

The resolution, however, includes important caveats, such as the need for the flag state--the country in which a ship is registered--to approve the searches. If the flag state does not allow inspections on the high seas, it would be required to direct the ship to a nearby port for a search. But council members would not be authorized to use force to ensure that happens."

Galrahn at Information Dissemination notes that a resolution was introduced in Japan yesterday to allow for naval intercepts, ie participation in a blockade:

"Japan may change its laws to allow its navy to inspect North Korean vessels on the high seas if the UN Security Council approves such a step, the government said on Thursday.

'Once the resolution is adopted, we have to clear the issue of enacting a domestic law,' to pave the way for naval intercepts by officially pacifist Japan, said Chief Cabinet Secretary Takeo Kawamura."

Some analysts believe that the recent measures taken by Pyongyang are the result of the question of succession--the USDOS Press Secretary answered some related questions in the briefing today:

"QUESTION: When South Korea media, at the beginning of this month, first started reporting on the existence of documents in which North Korean diplomats stationed overseas were apparently being foresworn to allegiance to Kim Jong-un as the successor of Kim Jong-il, the spokesman for this Department at the podium on June 2, who shall remain nameless, but whose initials are Robert Wood, said – (laughter) – that such reports were speculative. I wonder whether the Department today still regards the reporting surrounding the apparent anointment of Kim Jong-un to be purely speculative.

MR. CROWLEY: Obviously, we have heard the same reports that you have heard, and we know there are questions of succession in North Korea, given the questionable health of Kim Jong-il. As to--as far as we know, Kim Jong-il is still the leader of North Korea. I believe his--he is in firm control of the country. What happens down the road, we don’t know. That is up to North Korea.

QUSTION: So you are no more illuminated on the subject of whether or not Kim Jong-un has been anointed the successor today than the Department was when this question was raised on June 2?

MR. CROWLEY: It is something that we are conscious of. We are looking at it. We don’t know that it necessarily influences what is happening now.

QUESTION: But you don’t question that the anointment has occurred?

MR. CROWLEY: I don’t--I mean, who the--we know who the current leader of North Korea is. Who the next leader of North Korea is is up to North Korea. We are more conscious of what they are doing and for whatever reason, obviously, the actions that North Korea has taken recently are provocative, unhelpful. We expect sometime today there will be a vote on a new Security Council resolution. And at the end of this vote, should the resolution be adopted, North Korea will be facing a sanctions regime unlike any other on earth.

And in that regard, we will continue close consultations with the members of the Security Council, those in the five-party process, for the moment. We will implement those sanctions aggressively. As I think Ambassador Bosworth said in testimony yesterday before the Senate Foreign Relations Committee, we are taking appropriate defensive measures. But he made clear also that the door is still open to negotiations, and we hope that North Korea will, at some point in the future, come back to that process."

7. TALIBAN TARGETS ISLAMIC INSTITUTIONS IN PAKISTAN

Shaiq Hussain and Haq Nawaz Khan at the Washington Post report that a top anti-Taliban cleric was killed in a suicide bomb attack on a religious seminary in Lahore today. An apparently coordinated attack took place in a mosque in the northwestern garrison town of Nowshera, where another bomb killed four and wounded many others. I doubt that the decision by the Taliban to target Islamic institutions will be likely to bolster its reputation in Pakistan, nor cow the population at large. Sounds like they're getting desperate to me.

8. KYRGYZSTAN REBUFFS APPEAL TO KEEP MANAS OPEN ... THE UZBEK CONNECTION

Michael Schwirtz at the New York Times reports that Kyrgyzstan yesterday rebuffed an appeal from the Obama Administration to allow the US to continue to operate from the Manas airbase.

"On Thursday, Foreign Minister Kadyrbek Sarbayev said there were no plans to reverse that decision, despite the appeal by Mr. Obama, who, according to the Kyrgyz government, sent a letter to Mr. Bakiyev seeking greater cooperation between the countries. American officials in the region had no immediate public comment on the Kyrgyz government’s statement."

In May, Uzbek President Islam Karimov announced during a state visit of South Korean President President Lee Myung-Bak that the Navoi cargo airbase is being used for non-lethal supply to NATO forces in Afghanistan. The announcement coincided with a number of agreements with KNOC--Korea's state oil company--and seemed an indication that South Korea was coordinating energy security policy with the US--see Daily Sources 5/13 #8. The Kyrgyz parliament voted to approve its President's measure to end the lease of the Manas base to US forces on February 19. A former Kyrgyz Ambassador to the US published an opinion piece at the time which stated that Russian pressure was not the primary reason for the closure--and that the original reason for allowing the US access was Bishkek's conflict with the Islamic Movement of Uzbekistan and sympathy for the US following 9/11. That said, Russia's offer of aid was almost half of Kyrgyz GDP--$150 million in aid, forgiveness of $180 million in debt, and $2 billion in loans--see Daily Sources 2/20 #4.

9. OBAMA'S CAIRO SPEECH MAY HAVE INSPIRED HAMAS POLICY SHIFT, NETANYAHU GOVT SEEMS UNLIKELY TO ACCEPT TWO-STATE SOLUTION

Middle East Pulse reports that according to Assaf Gabor in Makor Rishon-Hatzofe Obama's Cairo speech may have inspired a shift in Hamas policy:

"Hamas Political Bureau Director Khaled Mashal: 'Hamas will not be an obstacle to a peace agreement in the 1967 borders, Hamas will be a positive element helping to reach a solution that is fair to the Palestinians and will enable them to realize their rights.'

In response, high-ranking Hamas figure Salah Bardawil told Makor Rishon-Hatzofe, 'Mashal disclosed the first details of Hamas's new policy, as a factor that will act in the framework of a Palestinian government, after there is Palestinian unity, and in the framework of the Mecca agreement.'

Bardawil explained Hamas's strategy, which is dealing with a situation of being globally ostracized: 'The change is a response to Israeli pressure to make Hamas irrelevant and to disregard it as representing the Palestinian majority.' He said that the new compromising American policy had an effect: 'Khaled Mashal, after Obama's visit and the change in policy being led by Obama, said this with the goal of showing the world the real problem, which is Israel's attitude."

Bardawil further suggested that the condition for Hamas recognizing Israel is a Palestinian state. Gil Hoffman at the Jerusalem Post seems to suggest that a two-state solution is something that the Netanyahu administration cannot politically accept, however. (h/t to Michael Collins Dunn at MEI's Editor's Blog for both of these.)

10. OPEC SUPPLIED 118KB/D MORE IN MAY THAN APRIL, REDUCES GLOBAL DEMAND FORECAST BY 200 KB/D, UPBEAT ON GLOBAL ECONOMY

Alexander Kwiatkowski at Bloomberg reports that OPEC reported that it supplied 118 kb/d more oil in May than it did in April.

"OPEC reduced the forecast for demand for its crude as global consumption shrinks. The group estimates it will need to produce 28.6 mb/d in 2009 to balance global supply and demand, 2.2 mb/d less than last year. Last month it estimated that it would need to pump 28.8 mb/d."

The report indicated the organization's view that:

"In light of the considerable challenges the world economy and commodity market, particularly the oil market, have undergone, the worst appears to be behind us. Prices have not only remained steady, but have even moved higher."

Kate Mackenzie at FT Energy Source puts that in the context of the IEA's decision yesterday to up its demand forecast for 2009 by 120kb/d and the EIA's earlier slight increase in projected world demand--by 5kb/d IIRC. She notes that OPEC indicated that the contango in oil has flattened some as OECD inventories fell in parallel with falling production.



11. BRAZIL'S SENATE TO SET UP NEW OIL COMPANY FOR SANTOS BASIN

Kate Mackenzie at FT Energy Source reports that new regulations are being introduced quickly which, in sum, will create a 100% state-owned company to lease Brazil's pre-salt fields, or Santos basin, to Petrobras and others.

"Petrobras, although state-controlled, is 60% owned by mostly foreign shareholders, and the country’s left-wing government is unenthusiastic about sharing the huge gains from the pre-salt fields with others--hence the creation of the new company. The plan is that the new state-owned company will be able to grant concessions without going to tender, which industry observers believe will favor Petrobras. For international oil companies, however, the outlook is less certain."

12. CHÁVEZ THREATENS TO SHUT GLOBOVISIÓN--A BIT MORE DIRECTLY THIS TIME

Christopher Toothaker at the Associated Press reports that Hugo Chávez yesterday urged executives at Globovisión "to reflect" upon their critical stance towards the government, or the station "won't be on the airwaves much longer."

"Globovisión--a Caracas-based all-news network--has been the only anti-Chavez channel on the open airwaves since 2007, when Chavez refused to renew the broadcast license of another opposition-sided channel, Radio Caracas Television. That network moved to cable."

The best summary of the recent efforts to silence opposition in Venezuela I've seen recently was Fausta Wertz's--see Daily Sources 6/1 #10.

Daily Sources 6/9

1. PAKISTANI ARMY JOINS POSSE EFFORTS TO PUNISH TALIBAN, TALIBAN RESPONDS BY KILLING MORE PAKISTANIS

Griff Witte at the Washington Post reports that a truck bomb exploded outside a hotel at the provincial capital of Pakistan's North-West Frontier Province, Peshawar, killing 11 people and wounding at least 50.



Alamgir Bitani at Reuters reports that the Pakistani army is coordinating attacks with the citizen's militias:

"[O]n Tuesday, the army came to the help of a pro-government militia fighting the Taliban in a northwestern district after outrage over a suspected Taliban bomb attack at a mosque last week that killed about 40 people.

The villagers' action is the latest in a series of examples of people turning on the Taliban in recent weeks, underscoring the shift in public opinion away from the Islamists.

Army helicopters had attacked militants surrounded by militia fighters in a village in the Upper Dir district, senior police officer Rahim Gul told Reuters by telephone.

Gul said more people were joining the militia and it was making advances after heavy clashes. Paramilitary soldiers set up mortars on high ground above the village. About 25 militants were killed in the fighting, police and the military said."

2. HERITAGE TO AQUIRE TURKEY'S GENEL ENERJI, KNOC, SINOPEC, CNPC, CNOOC ALL MAY BE BIDDING FOR ADDAX--IS ANKARA EDGING TOWARDS COOPERATING WITH THE KRG AS OPPOSED TO BAGHDAD--IS TEHRAN WORRIED ABOUT THIS POTENTIAL?

Ben Lando at the Iraq Oil Report writes that Canada's Heritage Oil is likely to acquire Turkey’s Genel Enerji, which has a 44% share in a joint venture with Addax, the Taq Taq Operating Co. (TTOPCO).

"If shareholders approve, Heritage will purchase Genel for about $2.5 billion in stock, forming the new company HeritaGE Oil.

Genel is spread throughout the KRG, beyond its 44% stake in TTOPCO. It owns a 25% share in DNO’s Tawke project--the other field to begin exports earlier this month--as well as 40% in the Norwegian firm’s Dohuk project. It owns 40% and 20%, respectively, in two other young projects in the KRG.

And, it has a 25% stake in Heritage’s Miran project."

KRG's Minister of Natural Resources Ashti Hawrami has estimated that the field has recoverable reserves of one billion barrels. Miran is thought to have a 2.3-4.2 billion barrels of recoverable oil--see Daily Sources 5/6 #4. Tawke is thought to have total volumes of oil in place are ranging from 0.9 to 1.9 billion barrels, with an estimate of 1.3 billion barrels in place, and total recoverable oil from 150 million barrels to 370 million barrels, as of 2007. Genel Enerji is a subsidiary of Çukurova Holdings Group, a Turkish conglomerate which has roots dating back to the foundation of the Turkish Republic in 1923 with interests in automotive, paper, chemicals, textiles, telecommunications, construction, banking, insurance, media and services to maritime transportation and information technology services. It has foreign operations in Azerbaijan, Spain, Germany, Switzerland, the Netherlands, Northern Cyprus, the UAE, Moldova, Georgia, Kazakhstan, Qatar, and Ukraine as well as Iraq. Çukurova's business dealings in Iraq date back to 1979, when it worked on water projects for the Hussein government. Ed Crooks and William Macnamara at the Financial Times report that Korea National Oil Corp. (KNOC) is considering a takeover or asset deal with Addax, a partner in the TTOPO joint venture with several interests in Africa. As Lando reports, SK Energy, a South Korean refining firm, was cut off from Iraq's crude supply when it joined a consortium of South Korean firms operating in Kurdish Iraq. It left the consortium, and now is receiving crude as normal. Sinopec, CNPC, and CNOOC are also reportedly considering some sort of participation with or acquisition of Addax, but their participation could jeopardize their potential participation in bidding via Baghdad. For example, Sinopec and CNPC are in a joint bid agreement with Shell for developing the Kirkuk oil field.

However, the KRG effectively presented Baghdad with a fait accompli when it said that oil would begin to flow through the Kirkuk pipeline to Turkey on June 1 from these fields, given that they control the fields and part of the pipeline--see Daily Sources 5/12 #8--and so the oil has begun to flow. In the middle of May, Austria's OMV, Hungary's MOL and UAE-based Crescent Petroleum and Dana Gas entered a partnership to invest as much as $8 billion into the Kurdish Autonomous Region--see Daily Sources 5/18 #4. Russia's Putin-connected Surgutneftgas has recently purchased a 21.2% stake of MOL from OMV and Gazprom signed a deal in March with MOL to establish a 1.3 billion cubic meter natural gas storage facility in Hungary, nearer to Gazprom's potential market than western Ukraine--see Daily Sources 3/18 #4. Of course, no one wants to upset Baghdad, but the KRG is manifestly capable of providing security for operations, and Baghdad is not.

Add to the mix the recent reporting by Delphine Strauss posted at FT Energy Source that Turkey appears to have resurrected the demand that 15% of any gas being sent through Anatolia by the potential Nabucco pipeline be reserved for Turkish consumption.

"Turkey’s ongoing bilateral negotiations over the price and quantity of the gas it buys from Azerbaijan will certainly influence its stance on Nabucco--which could soften if it secures its own share of gas to be pumped from Azerbaijan’s Shah Deniz field.

But analysts say the stubborn negotiating tactics are less about supply concerns and more about Turkey’s ambition of becoming an energy hub, not just a transit country. Turkey is already able to re-export gas it buys from Azerbaijan and is seeking the same right from Russia.

Mr Morningstar puts it differently, saying 'Turkey does have to satisfy internal gas demand but it also has a strategic vision--I believe it wants to play a major role in the Caucasus and Central Asia and this project is a way to do it.'"

Of course, in the middle of May Gazprom's Alexei Miller told Bloomberg TV that the company stood ready to purchase all of the gas from the second phase of the development of the Shah Deniz field--see Daily Sources 5/15 #7.



Clearly Iraq could eventually provide feedstock for Nabucco, but just now only the Kurdish Regional Authority appears ready to provide the relative security required for such a project to really begin. Further, Iran has lately suggested that it's Pars Pipeline could obviate Turkey altogether, going through Iraq to the Syrian Mediterranean Coast--which would make sense, perhaps pressure Anakara, but most likely go directly through KRG-controlled territory, also obviating Baghdad.



Without saying it's gonna happen, it does strike me as ironically possible that Ankara could be considering the KRG a better partner in terms of its goal of regional energy hub than Baghdad. I can't imagine, for example, that folks in Ankara were especially thrilled with the news reported by the Associated Press' Hamza Hendawi and Qassim Abdul-Zahra today that there are negotiations ongoing between al-Maliki's Dawa Party and the Supreme Iraqi Islamic Council to reform the so-called United Iraqi Alliance. The UAE's participation in the Kurdish Autonomous Region [KAR] may well also be designed to off-set the so-called "Shia Crescent." Moscow now may be part of the natural gas troika with Iran and Qatar--see Daily Sources 10/24 #2--but they are still competitors. The fact that MOL--and by extension Surgutneftgas and Gazprom--is also getting involved in the KAR underscores the potential calculation on the part of Ankara that one key bit of leverage they might like to have, vis-a-vis, getting closer to EU acceptance, would likely be being a larger node in their energy supply picture. I further would not be surprised if US diplomats quietly made this point to folks in Ankara, and pointed out how helpful good relations with the KRG might be in terms of Ankara's long-term goals.

Hell, even Tehran's talk of having begun construction of the Pars Pipeline without having actually figured out where it will eventually go--see Daily Sources 6/4 #6--though the first assumption is Turkey, may be an attempt to try and secure a more secure role in European energy supply via supplying Nabucco, pace what Baghdad, even a Shi'a Baghdad, thinks. All speculation, I guess, but interesting speculation.

3. ISRAELI MINISTER URGES SANCTIONS ON U.S.--BOOK SAYS ATTACK ON THE 1967 USS LIBERTY WAS DONE WITH KNOWLEDGE THAT IT WAS AMERICAN

In a fascinating bit of news, Gil Hoffman and Hilary Leila Krieger at the Jerusalem Post report that Likud Minister-without-Portfolio, Yossi Peled, wrote a letter proposing sanctions on the US to the Israeli cabinet this Sunday! Apparently Peled believes that the Obama Administration has an activist agenda which does not mesh with Israel.

"[T]he minister suggests reconsidering military and civilian purchases from the US, selling sensitive equipment that the Washington opposes distributing internationally, and allowing other countries that compete with the US to get involved with the peace process and be given a foothold for their military forces and intelligence agencies.

Peled said that shifting military acquisition to America's competition would make Israel less dependent on the US. For instance, he suggested buying planes from the France-based Airbus firm instead of the American Boeing."

(h/t Michael Collins Dunn at MEI Editor's Blog.) And, Jeff Stein at Spy Talk reports that a new book by James Scott, The Attack on the Liberty: The Untold Story of Israel's Deadly 1967 Assault on a US Spy Ship, alleges that Israeli pilots which were involved in the attack on the US spy ship were told "two times" that the ship was American after radioing the hull number back to air control.

"'There clearly were individuals inside Israel's chain of command who knew this was an American ship in time to prevent the fatal torpedo boat attack that left more than two dozen of the Liberty's sailors dead," Scott says.

Yet the Israelis informed Johnson administration officials that they were innocent--and outraged by such suggestions.

That prompted the State Department's number two official, Nicholas B. Katzenbach, to summon Israel's ambassador Abraham Harman, Scott writes.

'The secret memo of the meeting,' Scott writes, 'declassified 33 years later, records Katzenbach telling the Israeli ambassador' that Tel Aviv's initial protest 'contains some statements they might find hard to live with if the text some day became public.'"

At the time the Johnson Administration was a bit too preoccupied with the Vietnam War and pushing forward the civil rights movement to want to focus on the attack.

4. CHINA DRIVING UPTICK IN BALTIC DRY INDEX / IRON ORE RATES, DOES BEIJING'S BINGE COMMODITIES PURCHASES POLICY UNDERMINE LIKELIEST SOURCE OF RECOVERY?; CHINESE STIMULUS MAY FORCE LOCAL GOVTS INTO BANKRUPTCY; CHINESE SUPREME COURTS INSTRUCTS LOWER COURTS TO COOPERATE WITH AUTHORITIES TO CATCH MASS INCIDENTS BEFORE THEY HAPPEN

Maritime Global Net reported yesterday that Thailand-based Precious Shipping has said that the current rise in the Baltic Dry Index is unsustainable, given binge iron ore purchases in China. The post quotes Precious Shipping as arguing that the:

"rise in iron ore imports is despite the fact that steel production in China in the first four months of 2009 has been roughly at the same levels as we had seen in 2008. An explanation for these increased iron ore imports could be the fact that domestically produced iron ore in China is of a rather poor quality and quite expensive when compared to spot imported prices. Another explanation could be that of speculators getting into the import market to try and get hold of 'cheap' iron ire that would possibly be required under the Chinese government's US$586bn stimulus plan. And a third could be the impending conclusion of the iron ore contract price negotiations."

In any case, the company expects iron ore cargoes to level off. (h/t Yves Smith at naked capitalism.) In the meantime, Michelle Wiese Bockmann at Lloyd's List reports that Chinese steelmakers have accepted contracts on iron ore (from Rio Tinto) at a 33% discount to last year's prices, apparently abandoning allegedly holding out for a 40% discount. Dow Jones reports that the Chinese Ministry of Transport estimated that 3.26 mb/d of crude were delivered to China via seaports in May, up 5.1% from the same month last year.

"However, seaborne imports fell 9.8% from April, according to calculations by Dow Jones Newswires, which may indicate crude demand is slowing from the high levels recorded earlier this year."

On June 1, Zhang Guobao, the director of China's National Energy Administration, told reporters that crude storage facilities in the country had been completely filled--see Daily Sources 6/1 #2. A few days later, journalists were taken to heretofore secret strategic petroleum reserves by the State Council Information Office, apparently to show them that the tanks were indeed full to the brim--see Daily Sources 6/4 #2. All of which followed a report by Sanford Bernstein which used satellite images to deduce that about 400 kb/d of oil was being added to China's SPRs--see Daily Sources 5/22 #2. I wonder to what extent Beijing's central planners' decision to green light large purchases of commodities as the complex's prices have collapsed is based on an effort to provide some economic support to the commodity producing nations, with which Beijing wants a good long-term relationship looking forward. On the other hand, I wonder whether the decision to purchase counter-cyclically may support commodity producing nations while simultaneously undermining the main potential source of recovery: it's export market, or the developed world. Michael Pettis at China Financial Markets wonders whether the stimulus package will bankrupt China's local governments, quoting from Australian paper the Age:

"Beijing will have to jam on the economic brakes to save cities from bankrupting themselves, says a top Chinese adviser. He Fan, an assistant director at the Chinese Academy of Social Sciences who frequently advises top leaders, says as much as two-thirds of Beijing’s 4 trillion yuan ($A773 billion) stimulus program will be spent by local governments, financed mainly by state-owned banks.

'Some local governments will virtually go bankrupt,' Professor He told BusinessDay. 'Previously, local governments got all their money from selling land. This is not sustainable. Some areas have already sold quotas from the next 30 years.' A number of large cities are thought to be at risk, including Kunming and Hangzhou, with their funding problems exacerbated by a slump in real estate sales."

Of the monies already committed to the stimulus, the great majority has come from the central government, while local governments have reportedly lollygagged. In any case, the Professor He notes that the lending institutions can apply for a bailout if their loans go bad--and pretty much expect one--given that they were asked to make the loans by Beijing. Meanwhile, Xie Chuanjiao at China Daily reports that the Supreme People's Court has released guidelines to local courts which requires them to cooperate closely with authorities to reduce "mass incidents."

"'The courts will focus on dealing with a sharp increase in mass incidents especially in the mediation of demonstrations. If there is any trend seen in "mass petitions", the courts should also work closely with local administrative departments,' the document said.

Judicial departments should 'establish an early warning mechanism' and direct their resources in line with law enforcement, the SPC said."

Worth reading in full. In late May, apparently as a warning and part of an effort to anticipate and ward off incendiary cases, Beijing bgean denying license renewals to law firms which practice human rights law in the country--see Daily Sources 5/28 #1.

5. SEOUL PLACES FINANCIAL SANCTIONS ON 3 NORTH KOREAN COMPANIES NOT OPERATING IN SOUTH KOREA

Choe Sang-Hun at the New York Times reports that Seoul has imposed its first financial sanctions on North Korea.

"On Tuesday, the Ministry of Strategy and Finance in Seoul said that it has banned trading with three North Korean firms--Korea Mining Development Trading Corporation, Tanchon Commercial Bank, and Korea Ryongbong General Corporation--and will freeze their assets. But officials said that these firms have no trading with South Korea or assets in the South."

6. JATROPHA TREE WATER GUZZLER

Phil McKenna at MIT Technology Review reports that a recent study done by researchers at the University of Twente, in the Netherlands, shows that the jatropha tree

"requires five times as much water per unit of energy as sugarcane and corn, and nearly ten times as much as sugar beet--the most water-efficient biofuel crop, according to the same study."

Jatropha had been touted as a potential solution because it does relatively well in arid situations. But, according to the research, the Jatropha only really thrives in extremely wet conditions.

"The team calculated that jatropha requires an average of 20,000 liters of water for every liter of biodiesel produced in India, Indonesia, Nicaragua, Brazil, and Guatemala--the only countries for which jatropha production figures were available. For all the other crops, the researchers used much more comprehensive--and thus truly global--data from the Food and Agriculture Organization of the United Nations. Soybeans and rapeseed, the two other biodiesel crops considered in the study, were next highest in terms of water consumption, each requiring roughly 14,000 liters of water per liter of fuel."

India has bet heavily on the jatropha, and apparently the Energy and Resources Institute (TERI)--an Indian research group--began a $9.4 million project to produce genetically altered jatropha with a higher oil content. Protests have taken place in parts of India over government plans to reclassify lands for the seeding of jatropha; unrest over reduced food crop yields due to biodiesel programs via the jatropha tree have also broken out in the Philippines and Myanmar--see Daily Sources 5/6 #6.

7. AVERAGE US HOURS PER WORK WEEK TO 1964 LOW, MEANS NEW HIRING UNLIKELY ANY TIME SOON, POSSIBLY MEANS HOUSING MARKET GOT A LONG WAY TO GO TO RECOVER

Jeff Frankel, a member of the National Bureau of Economic Research's Business Cycle Dating Committee, on his blog argues that the labor market has yet to signal a turnaround, contra much of the reporting last week. Frankel explains why average hours worked is a better indicator of direction, in his estimation, than jobs added or lost:

"I like to look at the rate of change of total hours worked in the economy. Total hours worked is equal to the total number of workers employed multiplied by the average length of the workweek for the average worker. The length of the workweek tends to respond at turning points faster than does the number of jobs. When demand is slowing, firms tend to cut back on overtime, and then switch to part-time workers or in some cases cut workers back to partial workweeks, before they lay them off. Conversely, when demand is rising, firms tend to end furloughs, and if necessary ask workers to work overtime, before they hire new workers. (The hours worked measure improved in April 1991 and November 2001 which on other grounds were eventually declared to mark the ends of their respective recessions.) The phenomenon is called 'labor hoarding' and it is attributable to the costs of finding, hiring and training new workers and the costs in terms of severance pay and morale when firing workers."

By that metric the latest data from the Bureau of Labor Statistics is not so encouraging as the length of the average workweek fell to it's lowest since 1964.



Worth reading in full. Barbara Kiviat at the Curious Capitalist adds the observation that the number of temporary layoffs is low, while the number of people who are involuntarily working part time is "uncharacteristically" high. Thus,

"When sales pick back up, businesses don't have to go out and hire more people--they simply return their workers to full-time schedules.

Put those two things together, and you've got an economic recovery without a particular jump in job growth. The implication, according to the economists: 'a longer and slower recovery path for the unemployment rate.'"

Mark Thoma at Economist's View links to a graph from a report from the Atlanta Fed by Melinda Pitts and Menbere Shiferaw which raised some animal spirits on the job data front:



Note that the only sector hiring since the beginning of 2008 has been the government and that manufacturing has been shedding jobs from the beginning of the data set at the start of '07.