Daily Sources 4/17

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

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

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

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

Underlying weakness in core CPI

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

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

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

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



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

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

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

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



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



Setser notes:

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

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

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

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

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

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

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

Ian Johnson at the Wall Street Journal reports:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

5. ROMANIA OFFERS MOLDOVANS ROMANIAN CITIZENSHIP

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

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

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

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

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

Ernesto Londoño at the Washington Post reports:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

10. US-MEXICAN ENERGY COOPERATION

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

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

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

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

Daily Sources 4/15

1. GERMAN BLOG SUGGESTS THAT GERMAN Q1 GDP MAY HAVE DECLINED BY AS MUCH AS 11.5% AND THE DEBATE ON WHAT NEXT AT THE ECB APPEARS TO HEAT UP

Eurointelligence reports that Herdentrief extrapolated from recent data that German GDP may have fallen by an annual rate of 11.5%.

"This estimate is based on the available data for January and February, and the data for employment and inflation for February, which he explains in a very detailed calcuation. Q2 will start with a huge inventory overhang. The recession, he concludes, is on the verge of turning into a depression."

Joellen Perry at Real Time Economics reports that ECB governors appear to be at odds with each other over whether or not to cut interest rates below 1% (they are currently at 1.25%) as well as whether to engage in "quantitative easing."

"ECB heavyweight Axel Weber, who heads Germany’s central bank, launched the latest broadside Wednesday, saying in a speech that he’s 'critical' of lowering the bank’s key rate below 1%. And as ECB policy makers debate new unconventional steps that could be unveiled at their next rate-setting meeting May 7, Mr. Weber said, 'direct interventions in capital markets should take a backseat.'"

2. CHINESE REFINERS TO RUN MORE CRUDE ON SIGNS OF ECONOMIC RECOVERY AS OPEC CUTS DEMAND FORECAST AND RUSSIAN PRODUCTION FALLS

A Platts survey showed that Sinopec plans to run 3% more crude in April from March while PetroChina plans to run 4% more crude in April from March.

"PetroChina's Jinzhou refinery in northeast China's Liaoning province also restarted a 270,000 b/d CDU early April after having shut the unit in December 2008 due to negative profit margins."

In the meantime, foreign investment in China fell 9.4% in March from a year earlier--sharply, but a much slower rate of decline than had been seen in earlier months. Aaron Back and Victoria Ruan at the Wall Street Journal report that the slowing decline prompted the Ministry of Commerce spokesman Yao Jian to call the March data a sign of economic recovery.That said, the numbers, given a sixth straight month in FDI declines, were grim:

"For the full first quarter, China attracted $21.78 billion in direct foreign investment, down 21% from a year earlier, the Ministry of Commerce said.

Foreign investment fell 16% in February from a year earlier and declined 26% for the first two months of this year."

Conversely, Brad Setser at Follow the Money notes that:

"What is clear is that the slowdown in China’s reserve growth has started to translate--as expected--into a slowdown in China’s direct purchases of US assets."

In the meantime, OPEC today cut its forecast for global oil consumption to 84.18 mb/d in 2009, meaning that it expects oil consumption to decline by 1.37 mb/d from its estimate of 2008 consumption, as per Platts.

"With the downward changes to demand estimates outweighing the revisions to the non-OPEC supply forecast, OPEC also reduced the estimated 'call' on its own crude in 2009 to 28.74 million b/d, down from a previous figure of 29.07 million b/d."

As Russian crude exports to the US increase, RIA Novosti reports that overall crude production is down 1.3% year on year for the first quarter and up 0.5% in March from March 2008. And Nick Tattersall at Reuters reports that the situation in Nigeria is heating up as MEND has indicated it will join youth protests, having abducted two British oil workers, and having warned that it would not take responsibility for the safety of Shell employees. MEND emailed a statement to reporters saying:

"We wish to warn that should any MEND camps be attacked, the entire Niger Delta region will become a theatre of another civil war. The same position will be taken if the military carries out any punitive invasion on the impoverished communities that protested against Shell."

MEND attacks cut Nigerian supply to the market last year by as much as 1 mb/d, contributing substantially to the run up in prices.

3. MEDVEDEV GIVES INTERVIEW WITH CRITICAL PRESS, AHMADINEJAD A CONCILIATORY SPEECH--IS TRIANGULATION BEARING FRUIT?

David Nowak and Jim Heintz at the Associated Press report that President Medvedev had his first interview in a Russian print publication known for its criticisms of the Kremlin. The reporters conclude that Medvedev is beginning to establish his independence from Putin and a more open approach:

"Although Medvedev's interview with Novaya Gazeta did not break new ground, it was symbolic. The newspaper has consistently challenged the Kremlin on matters including human rights, freedom of speech and Russia's alleged backsliding on democracy."

The reporters note that Putin never gave an interview to the publication. Though it is far too soon to tell, I think it is fair to say that Russian and US interests are more similar than many US analysts are prepared to admit. I think this is particularly true of Iran--a historical competitor with Russia in the Caspian--and as Medvedev's publicly expressed concern regarding Tehran's satellite launches indicated fairly well--see Daily Sources 3/18 #2.

In the meantime, Associated Press writer Ali Akbar Dareini reports that in a speech in Kerman, President Ahmadinejad said:

"The Iranian nation is a generous nation. It may forget the past and start a new era, but any country speaking on the basis of selfishness will get the same response the Iranian nation gave to Mr. Bush."

Nazila Fathi at the New York Times reports that he also said:

"[The Americans] have said they want to resolve issues through diplomatic channels and we say that this is excellent. ... Our people favor logic, dialogue and constructive cooperation based on respect, justice and rights of nations."

In the speech, Ahmadinejad indicated that Iran was in the process of preparing new proposals "on ways to secure global peace and justice" and the settlement of "settlement of international crises," which is inferred to mean a resolution to the dispute with the West over Iran's nuclear program.

This comes on top of an arrest of a US journalist, her trial for espionage, a planned satellite launch, and accusations leveled against the Dutch for cyber attempts to instigate a color revolution. The Leader of the Revolution [LOTR] is the final arbiter of Iranian foreign policy, not Ahmadinejad, but I suspect that they are feeling a bit squeezed just now.

4. THE COMPELLING INFRASTRUCTURAL ARGUMENT FOR INDIA IS LAW

The judge presiding over the trial of the lone surviving Mumbai terrorist has dismissed the lawyer appointed to handle his case because she had earlier met with a victim of the terror attack to discuss handling the potentially plaintiff's case. Rhys Blakely at the London Times reports that the judge indicated that the trial would resume once a new lawyer had been appointed, "I don't want to appoint a junior or raw lawyer for him." A key feature of the rule of law--as far as I'm concerned--is that it will present the best defense possible for a suspect even in those instances where the general public wants a summary execution, or worse.

"The Indian judicial system has been grappling with the question of Mr Kasab's defence for several months, in the light of the refusal by several lawyers to represent him."

I imagine that the defendants in the Boston Massacre were hard pressed to find representation as well--and only a man of John Adam's stature could take the case. Of course, in the present case it is clear that the suspect is guilty, having been caught on video. Still, the insistence upon as fair a trial as possible under these circumstances represents an infrastructural advantage that India has in its neighborhood.

5. THE US CRITICIZES SWAT DEAL--THE SWAT TALIBANIS SAY THEY WILL NOT GIVE UP ARMS

The Associated Press reports that White House Spokesman Robert Gives criticized the Swat sharia legislation signed into law yesterday, saying:

"The administration believes solutions involving security in Pakistan don't include less democracy and less human rights. The signing of that [deal] . . . goes against both of those principles."

In the meantime, a Swat Taliban spokesman said that the organization would not give up their guns in apparent contradiction to the terms of the Swat deal, according to Kamran Haider at Reuters:

"'Sharia doesn't permit us to lay down arms,' Muslim Khan said by telephone. 'If a government, either in Pakistan or Afghanistan, continues anti-Muslim policies, it's out of the question that Taliban lay down their arms.'"

The details of the Swat negotiating terms have not been made public, but Islamabad officials have told the media that laying down arms was part of the deal. Although human rights and democracy are best, it is hard to understand the US critique insofar as it provides no means by which to enforce the adoption of democracy of human rights. If the politically active people of Swat cannot enforce a desire for such ends, or democratically-speaking, they prefer sharia, there is little that Islamabad can do outside of try and find a compromise or wage full-scale war on its own people. You can lead a horse to water ... well, first you have to actually lead the horse to water.

6. PROMINENT SAUDI NEWSPAPER BANNED IN IRAQ

Al-Hayat, a well-respected Saudi newspaper which also happens to be consulted often by oil analysts to try and determine what Riyadh's stance at OPEC will be, has been targeted for closure in Baghdad by the Iraqi government. Maj. Gen. Qassim Atta, a top military spokesman in Baghdad, announced yesterday that he was filing a lawsuit to shut down the paper's office in Baghdad as well as the satellite signal of Al Sharqiya, a local television station which is critical of the government. Marc Lynch at the Abu Aardvark's Middle East Blog comments:

"That's not a good sign. Reminds me of the bad old days of 2004-2005 when the Iraqi government and MNF-I were routinely attacking the Arab media for fueling the insurgency and the offices of al-Jazeera and other satellite television stations were shuttered. You would think that they would have learned from the experience of banning al-Jazeera, which didn't prevent it from covering Iraqi politics but did reduce the access that officials had to its airtime."

7. THE THAI GOVERNMENT REVOKES THE PASSPORT OF FMR PM THAKSIN

Michael Casey at the Associated Press reports that the Thai government has revoked the passport of former Prime Minister Thaksin Shinawatra.

"'If we believe the person who holds the passport is doing anything that could undermine the security of the nation, then we have the right to revoke the passport,' Foreign Ministry spokesman Tharit Charungvat said. The document was revoked Sunday, he said. The government has already revoked his diplomatic passport."

I think that perhaps the military is now officially anti-Red Shirt, though it's hard to tell from my remove.

8. SHIPPING DATA MIXED

Calculated Risk reports today that the Port of Los Angeles throughput for March is up slightly from February:

"Inbound traffic was 6% below last March and 35% above last month. Outbound traffic was 9.8% below March 2008, and 25% above February."

Calculated Risk notes that the impact of the Chinese New Year may skew the data. I would add that February is 10% shorter than March and thus daily volume numbers are more telling. In the meantime, the Port of Rotterdam released its first quarter throughput numbers, reporting that "94 million tonnes of goods were handled, 10.8% down on the same period of 2008." By weight, container throughput fell by 18% to 22 million tonnes; by TEUs the decline was 16%, to 2.3 million TEUs. Iron ore imports fell by 50% on the collapse in demand for steel.

Rebecca Wilder examines the available import data on a US$-basis, and plots the following chart:



Her post, part of a weekly series looking at the global data, is well-worth reading.

Daily Sources 4/14

still working on redrafting the format of Daily Sources ... all comments welcome

1. CHINA PUBLISHES HUMAN RIGHTS GOALS

China yesterday published its "National Human Rights Action Plan of China (2009-10)," which emphasized economic, social, and communal rights though it did outline some aims more in line with traditional western notions of individual human rights--most significantly legal rights of defendants.

"The 22,000-word, two-year plan outlines the government's aim for broader access to social security, health care and education. The death penalty will be 'strictly controlled and prudently applied,' it states, adding that defendants will be guaranteed fair trials. Forced confessions by torture and the mistreatment of detainees will be prohibited. These rights are to be 'promoted and protected' within two years, the document said."

Some international human rights groups criticized the document as being vague and simply reiterating commitments already made, but I rather think the point is that Beijing accepts them as goals. Humans are, after all, teleological creatures, and in order to plot a course to B from A, one must first figure out what B is. (Indeed, this feature of human life is what Machiavelli meant by "the ends justify the means.") The fact that the government accepts a) that Enlightenment and Magna Carta-based rights are in fact rights, entitled to legal protection and b)

"'China has a long road ahead in its efforts to improve its human-rights situation,' the document acknowledges"

is a very important step forward for liberty generally--and the step itself potentially undermines the legitimacy of the regime itself. (Loretta Chao in the Wall Street Journal.)

2. NORTH KOREA PULLS OUT OF NEGOTIATIONS ... WITH EVERYONE

North Korea reacted to the official condemnation by the UN Security Council Monday of its satellite launch by announcing its withdrawal from the six party talks--with China, Japan, Russia, South Korea and the US--which aim to denuclearize the nation and restart its nuclear program:

"'We have no choice but to further strengthen our nuclear deterrent to cope with additional military threats by hostile forces,' the statement [published today by the North Korean Foreign Ministry] said. It also hinted that the North would conduct more satellite tests, saying it will 'continue to exercise its sovereign rights to use space.'"

(Associated Press: "N. Korea to boycott six-party nuclear talks.") The response of to the statement by US and the other members of the six party talks has been to refer to the official condemnation. From the US State Department briefing today:

"[L]et me just say I know you all have a lot of questions about North Korea. I don’t have very much at all today that I’m going to give you. And I know you’re going to come at me with a lot of questions from various angles, but I just want to basically refer you back to the UN Security Council presidential statement that was issued. And this presidential statement made very clear the position of the UN Security Council plus Japan. And as you know, the statement calls for an early resumption of the Six-Party Talks, a verifiable denuclearization of the Korean Peninsula, and full implementation of the joint statement of 2005. I don’t have much more for you right now. At some later point, we’ll have more to say, but right now, that’s all I have."

3. TAIWAN LIKELY TO REVERSE NUCLEAR POWER BAN ON EMISSIONS CONCERNS

Taiwan has scheduled a two-day "state conference" beginning tomorrow which will bring together 205 government officials to debate whether Taipei should overturn its eight year old ban on new nuclear power plants:

"'Nuclear power is an inevitable option because we want to cut carbon emissions,' Tu Yueh-yuan, chief engineer of state-run Taiwan Power Co., said on April 2. The company has room to add as many as 10 reactors at its existing nuclear power plants, she said. To authorize that, [Taiwanese President] Ma [Ying-jeou] would have to reverse a decision by his predecessor, Chen Shui-bian."

The key problem facing the relatively small island nation vis-a-vis expanding its nuclear power capacity is how to safely dispose of the waste. (Yu-huay Sun: "Taiwan Energy Talks Pit Ma Against Nuclear Opponents," Bloomberg News.)

4. BEIJING'S LATEST ALTERNATIVE CURRENCY MOVE TAKES PLACE IN A WORSENING ECONOMIC ENVIRONMENT--AND IN THE PLACE MOST AFFECTED

The latest move in the question of an alternative to the dollar was made by Beijing last week when it decided to allow five of its largest trading cities--Shanghai, Guangzhou, Shenzhen, Zhuhai and Dongguan (four of which are in Guandong Province)--to settle cross-border trade deals in renminbi.

"The yuan settlement move may be a potentially huge boon to Chinese firms, which can sidestep foreign exchange risk without having to buy derivative products to hedge their currency exposure.

But it could be doomed to failure if Beijing can’t convince foreign counterparties to China’s trade that getting paid in yuan is in their own best interest.

That’s not going to be easy. Under current rules, if firms or individuals outside of China were to hold yuan, they wouldn’t be allowed to directly invest it in China’s capital markets. And as for hedging currency risk, Shanghai’s forwards and swaps markets are equally off-limits."

(See Denis McMahon: "The Yuan Abroad: Useful If Strong," China Journal and Denis McMahon: "Beijing Aims to Expand Foreign Trade in Yuan," The Wall Street Journal.)The State Council has asked for the cities involved to submit regulations proposals for the pilot program. It has yet to announce a date for the program to commence. The news comes on top of the recent story that preliminary estimates of GDP growth for Guandong Province in the first two months of 2009 are at 5% and 5.5% for the first quarter, 5% less growth than seen last year.

"Guangdong’s import and export dropped 25.9%, year on year, in January and February, and 22.9% in the first quarter. Guangdong’s foreign trade dependence is as high as 155%, more than double China’s average."

(China Stakes: "Export Plummet Shock: A Guangdong Tiger Under Water," h/t Yves Smith at naked capitalism.) Meanwhile, Cao Jianhai, a professor at the Chinese Academy of Social Sciences, said that the rebound in Chinese property markets was likely unsustainable and that residential property prices were likely to fall by 40 to 50% from their levels in 2008.

"'Prices may not fall in the near term but I expect a collapse starting next year, followed by many years of stagnation,” said Mr Cao, known as one of the 'three swordsmen' of the real estate market because of his influence as an official economist."

(See The Financial Times: "Property prices in China set to halve.")

5. SINGAPORE AND ASEAN 5 POSTING HORRIBLE ECONOMIC GROWTH NUMBERS

Rebecca Wilder notes that Singapore's Ministry of Trade and Industry today announced that it had downwardly revised its 2009 GDP growth forecast from between -2% and -5% in January to between -6% and -9% in April. The revision was made on the base of an advance estimate for first quarter GDP of a 11.5% contraction. Ms. Wilder helpfully produces a graph plotting the annual GDP growth (on a quarterly basis) of the ASEAN 5:



(Her post is worth a look: "Singapore is dropping quickly; dismal growth expected for the ASEAN countries" at News N Economics.)

6. TOTAL'S VENEZUELA GAMBIT ... RISKY AND SEEMS TO IGNORE THE REFINING PICTURE IN THE ASIA PACIFIC ... MEANWHILE RUSSIA AND BRAZIL TAKING MARKET SHARE ON OPEC CUTS

Following the visit of Hugo Chávez to China, the CEO of CNPC, Jiang Jiemin, said he would submit a plan to establish a joint refinery with the PdVSA in Guangdong province. The refinery would have a throughput of 20 million tonnes a year (~400 kb/d) and be 51%-owned by CNPC and 49% by PdVSA. Given that the refinery would be sophisticated, it could make the import of larger volumes of Venezuelan crude--a major goal of the Chávez administration, more viable as most new sophisticated refining capacity on or coming on line in China already has dedicated supply--mostly from the Saudi Arabia. However, there is reason to doubt that these ideas will go forward as planned:

"In May 2008, Chinese state media reported that CNPC subsidiary PetroChina entered into a joint venture agreement with PDVSA to build a 400 kb/d refinery in Guangdong province, configured to process Venezuelan heavy oil.

Under the agreement, witnessed by Chávez and Chinese Vice Premier Hui Liangyu, the crude is to be sourced from the Junin 4 block in the Orinoco belt.

At the time, officials said that the joint refinery, Venezuela's first such investment in China, would advance Chávez's goal of shipping to China 1 mb/d of oil by 2011, or 13% of current Chinese oil demand.

Reports vary on just how much oil Venezuela actually ships to China. Last May, Ramirez said shipments amounted to 500,000 b/d of oil, while Chinese state media reported 300—380 kb/d of products and 80 kb/d of crude."

(Eric Watkins: "China, Venezuela agree to speed up increased oil shipments," The Oil & Gas Journal.) That said, it is reported that senior officials from CNPC, PdVSA and Total SA are scheduled to meet next month in Caracas to discuss a potential 20 year contract to send 200 kb/d of Venezuelan oil to China, possibly starting in 2013, and with volumes rising beyond that.

"CNPC is talking to Total about a package involving a joint bid for Orinoco oil assets, building an upgrader to process the heavy oil produced in Venezuela and shipping it to a CNPC-PDVSA refinery to be built in Guangdong, southern China, a CNPC official told the news agency.

Total declined to comment, but a company spokeswoman told Dow Jones that the company had extensive links with China and confirmed that 'we are in discussions with CNPC on a variety of projects.'"

(Upstream online: "Caracas lines up three-way Orinoco pact.") In February Total CEO Christophe de Margerie told reporters in London that investment in Venezuela was preferable to Brazil, because there was less competition in Venezuela--see Daily Sources 2/13 #9. The statement was somewhat mystifying because, after all, the reason there is less competition in Venezuela is because Chávez has a habit of nationalizing your investments. However, if a project were done in conjunction with Chinese national oil companies, and increased economic integration with China is a goal of Caracas because Chávez believes Beijing may be able to offer military-political defense of his regime from an inevitably hostile US, then perhaps Total may be able to feel better protected against loss of its assets. Indeed, de Margerie may even feel that Chávez would not just be less likely to alienate Paris because of its habitual gad fly approach to US international policies, but also because of the cultural affinity that his first party--The Fifth Republic Movement--claimed with France (see my first post Venezuela vs ExxonMobil). That would be a reasonable strategy--an extremely risky one in my view, but international oil companies are rather experienced in taking such risks.

In the meantime, Brazil and Russia have taken advantage of the supply cuts made by OPEC to take a larger share of the US oil import market (which itself is shrinking).

"US imports from the Organization of Petroleum Exporting Countries fell 818 kb/d, or 14%, to 5.02 million in January from a year earlier, according to the latest monthly report from the Energy Department. At the same time, imports from Brazil more than doubled to 397,000 and Russia’s increased almost 10-fold to 157,000, a trend that continued in February and March, according to data from each country."

The story puts the data in a very strange way, but the latest monthly import data on the EIA website shows that Russian imports grew to 516 kb/d in January from 382kb/d in December (or 35%) and Brazilian imports grew to 450 kb/d in January from 225 kb/d in December (or 100%). (That said, imports from Brazil had been as must as 354 kb/d as recently as October and imports from Russia had been as much as 490 kb/d in August, so although there may be a trend, it is not as pronounced as those percentages would imply. See: EIA: "US Imports by Country of Origin.")

"Russian overall exports climbed 6.3% in February and 2.2% in March, according to the Energy Ministry. Brazilian total exports more than doubled in both February and March, according to Brazil’s Trade Ministry."

(Mark Shenk: "OPEC Cuts Thwarted as Brazil, Russia Grab US Market," Bloomberg News.) Beyond that, Saudi Arabia has put a hold on its two new major export refinery plans--for Tanbu and Jubail--of 800 kb/d in total throughput, but still has a fairly aggressive schedule of capacity addition downstream. Reuters ran the numbers in a series of tables:





As you can see, a fair amount, 440 kb/d is inside China itself--and we can expect a considerable portion of the domestic export refinery plans to target the Chinese market. This is probably true of any excess capacity produced from its JV refineries in Japan and South Korea as well:



7. TURKMEN PIPELINE BLAST ALLEGEDLY DUE TO GAZRPOM'S RELUCTANCE TO HONOR CONTRACT TERMS ... MEANWHILE LUKOIL SEEKS BP'S STAKE IN CPC AND IS DRILLING OVERSEAS DUE TO MOSCOW'S RELUCTANCE TO GRANT MORE DRILLING RIGHTS

Turkmen President Gurbanguli Berdymukhamedov has accused Moscow of being behind the recent natural gas pipeline blast which cut off its exports through Russia to eastern Europe and wants an international investigation into the causes of the pipeline blast.

"'Turkmenistan's president [Gurbanguly Berdymukhamedov] has ordered the government to carry out...an international study to investigate the causes of the incident,' the [Turkmen Foreign] ministry said in a statement."

In a televised speech at a Cabinet meeting the President said:

"We won't allow them to hurt our image as a reliable supplier of energy resources to global markers."

Gazprom has refused to comment on the issue, but Russian Foreign Minister Sergei Lavrov described the explosion as "purely technical." Evidently, Gazprom reduced intake by a full 90% without informing their Turkmen counterparts in advance. This was allegedly done because Gazprom at this time cannot recoup the cost of Turkmen gas, which it reportedly contracted for on December 31, 2008 at $340/tcm (~$9.61/MMBtu.) Yesterday, UK front month natural gas contracts closed at £0.2934/therm (~$4.31/MMBtu). Front month Brent closed at $52.14/b or about $8.99/MMBtu. Urals spot on Friday closed at $50.34/b or about $8.68/MMBtu. (The actual terms of the Turkmen contract are unknown, but it is thought they are tied by some formula to the price of oil, with a floor and a ceiling price.) (See: Alexander Vershinin: "Turkmen leader: Russia must pay for pipeline blast," Associated Press and Nadia Rodova: "Turkmenistan wants international experts to study gas line blast," Platts.) Meanwhile, Lukoil CEO Vagit Alekperov told Bloomberg in a televised interview that the company will seek to buy out BP's stake in the Caspian Pipeline Consortium.

"'Now we need to tie up the formalities and receive permission from the Kazakh government,' Alekperov said. 'I plan to be in Kazakhstan from April 25-30 where I’ll meet with the Kazakh president and I’ll raise that question in the hope of getting a positive answer.'"

Chevron, the operator of the Tenghiz field which is supplies much of the CPC pipeline's throughput, said in February that it intends to increase output in the field to 400 kb/d this year. Shareholders in the consortium plan to invest $1.6 billion to double pipeline capacity to 1.3 mb/d from 2013. (Stephen Bierman and Ellen Pinchuk: "Lukoil to Seek Kazakh Approval to Buy BP’s CPC, Tengiz Stakes," Bloomberg News.)Lukoil also is planning to drill for oil offshore the Ivory Coast and Ghana.

"'After the outstanding discoveries made in the recent years on the sea shelf of Ghana, this area is one of the most promising for exploration in West Africa,' Andrei Kuzyaev, head of Lukoil Overseas Holding Ltd., said in a statement on April 2."

Evidently a part of the thinking behind Lukoil's overseas acquisitions is that Moscow is slowing down the number of licenses to drill it is offering domestically. The number of auctions for oil licenses offered by Moscow last year fell to 147, or by half.
(Stephen Bierman and Ellen Pinchuk: "Lukoil to Drill in Africa as It Urges Russia to Offer Licenses," Bloomberg News.)



8. POLAND TO SEEK $20.5 BILLION CREDIT LINE FROM IMF

IMF Managing Director Dominique Strauss-Khan send an email statement to reporters saying that Poland was seeking a one-year credit line from the institution of $20.5 billion.

"Poland will become the second country after Mexico to use the flexible credit line as its economy faces the sharpest slowdown in almost a decade. The zloty lost almost a third of its value from a record high in July as investors sold riskier emerging-market assets amid the global credit crunch.

'This is the reflection of our cautious and responsible economic policy,' Finance Minister Jacek Rostowski told journalists after the government’s weekly meeting. 'This will help protect the zloty against uncontrolled depreciation that we saw during the first two months of this year. The consequences will be very positive for Poland.'

The loan will raise foreign reserves by almost a third, help cut Poland’s debt-servicing costs and facilitate access to international financing, he said.

'If Poland follows Mexico, maybe other countries would be willing to arrange a credit line,' said Ralph Sueppel, chief economist and strategist at London-based hedge fund BlueCrest Capital Management Ltd., which manages about $2 billion in emerging-market assets. 'The advantage for the Poland is that it provides support at a time when dollar funding is short.'"

(Marta Waldoch and Ewa Krukowska: "Poland to Ask IMF for Credit to Shield Economy, Zloty," Bloomberg News.)

9. CAIRO LOSING PATIENCE WITH HIZBULLAH ... HIZBULLAH MAKES OUT THAT CAIRO IS SUPPORTER OF TEL AVIV

The BBC reports that Egypt has accused 49 suspects of being agents of Hizbullah and planning hostile operations on its soil. Egyptian security forces are searching for 13 additional suspects on the Sinai Peninsula. Michael Collins Dunn comments:

"Part of the surprise here — actually a clever tactical move — is that Nasrullah did not offer the usual flat denial of involvement, but portrayed Hizbullah as trying to relieve the siege of Gaza, thus reminding the world that Egypt's keeping the Rafah crossing closed is as much responsible for Gaza's suffering as Israel's closure of the other crossings. Popular opinion inside Egypt has generally been critical of the government's policies on Gaza, and Hizbullah is playing to that.

Of course, there's a certain disingenuousness to Hizbullah claiming it does not carry out operations in other countries and admitting that it had agents operating in Sinai. But by rationalizing their presence rather than denying it, Nasrullah subtly shifts the debate from one of violating Egyptian sovereignty to one of spotlighting Egypt's keeping Rafah closed."

(see BBC News: "Egypt 'hunts Hezbollah suspects'," and Michael Collins Dunn, "Egypt/Hizbullah Feud Heating Up," MEI Editor's Blog.)

10. IRAN EMBARKS UPON STRATEGY OF MAKING AMICABLE NEGOTIATIONS AS POLITICALLY DIFFICULT TO PURSUE AS POSSIBLE

The US is continuing its strategy of engagement with Iran, as evidenced by yesterday's US Press Briefing:

"QUESTION: Separate issue. On Iran, Javier Solana spoke to Mr. Jalili and it seems that Iran is welcoming what they say – you know, they hope to be a constructive dialogue with the P-5+1. I just wondered whether you had any details on Solana’s call and whether you, you know, welcomed their welcoming of talks?

MR. WOOD: Yeah, I mean, of course, we welcome the fact that they’re, you know, interested in having a dialogue. And you know, I would refer you again to the sincere offer of the P-5+1 to provide Iran with what we believe is a very good, substantive package of incentives. We want to deal with Iran on this issue. It’s an important issue to the international community. And Iran needs to show the international community that its nuclear program is a peaceful one. Right now, the international community is very skeptical about that. But as I’ve said, we want to directly engage Iran on a range of issues, and we encourage Iran to continue – well, we encourage Iran to come forward and provide the international community with all of the assurances that it requires to be convinced that Iran is pursuing a peaceful nuclear program. But as I said, we remain skeptical about it."

And David Sanger at the New York Times reports that the US and its European allies are preparing "proposals" to drop the former US insistence on a rapid shut down of nuclear facilities in the early stages of negotiations with Tehran. But, in the meantime, Tehran appears to be doing much to make the realization of such negotiations more difficult. It has tried Roxana Saberi, a US-Iranian dual citizen and reporter, for espionage in a closed door trial with the verdict expected in two weeks. She has been imprisoned since late January for charges of purchasing alcohol originally. The charges have swiftly escalated to espionage. (The Associated Press: "Iran Says U.S. Journalist Has Been Tried Behind Closed Doors.") Today President Mahmoud Ahmadinejad has announced Iran will launch a satellite soon--on a missile with a range of up to 1,500 km (930 miles). Satellites pose a concern because they can be fitted with weapons and the technology is the basis for ICBMs. (And satellites have also proven to be of particular concern to Moscow.) (Hossein Jaseb and Hashem Kalantari: "Iran Plans to Send Bigger Satellite Into Space," Reuters.) And the Islamic Revolution Passdaran Guards Corp (IRGC) published a statement accusing Amsterdam (!) of attempting to instigate a "color revolution" in Iran via its support of internet websites.

"The statement, released by the 'IRGC Center for Organized Cyber Crimes,' claims, ‎‎'Hostile countries have demonstrated increasing interest in utilizing cyber space with the ‎expansion of the Internet, supporting the creation of websites, blogs and internet radio ‎and television networks.'

The IRGC’s statement identifies the 'Dutch Project' as one of the main soft overthrow ‎threats against the Islamic Republic, noting, 'One such country, which has supported the ‎opposition movement financially in recent years, is the Netherlands, which passed a ‎budget addendum in 2005 sponsored by Farah Karimi, an Iranian-born representative in ‎the Dutch parliament and a member of the leftist Green Party.' ‎

In another part of the IRGC statement, it is claimed that the Dutch budget is part of the ‎‎'long-term and strategic planning along the ideology of NATO,' which is 'pursuing the ‎agenda of global imperialism by absorbing vast capital, expert human resources and ‎political networks, setting up a group of expert journalists from the domestic and foreign ‎opposition with the help of the British, political and diplomatic support from the Dutch, ‎and with planning and secret budgets from the United States.'"

(Rooz online: "Revelations against Dutch Projects‎--Passdaran Guards Corp’s Statement on 'Media Overthrow'.) And Tehran has also given Shell and Repsol until May 20 to "clarify their involvement" in the Phase 13 of the South Pars project.

"'If subsequent to the expiry of the deadline these companies do not make clear their involvement in the Persian LNG project, talks will begin directly with Chinese (companies),' Seifollah Jashnsaz, managing director of the National Iranian Oil Company (NIOC), told the ISNA news agency.

'Presently not much remains to the end of this deadline,' he said, without giving further detail."

(Hashem Kalantari and Jonathan Gleave, "Iran gives Shell/Repsol deadline on LNG project," Reuters.)

11. SWAT VALLEY ADOPTS SHARIA ... TALIBAN EXPANDING TO PUNJAB

Pakistani President Asif Ali Zadari has signed into law legislation which introduces sharia law into the Swat Valley. The Taliban has been de facto in control of the region for some time now. The agreement, it should be noted, maintains the federal judiciary as the court of appeals--and thus superior to the Sharia courts. (See: BBC News, "Pakistan passes Swat Sharia deal.") Meanwhile, Sabrina Tavernise, Richard A. Oppel Jr. and Eric Schmitt at the New York Times report that the Taliban is making inroads in Punjab, the most populous region in Pakistan and the region at the heart of the recent dispute with Nawaz Sharif.

12. RED SHIRT PROTEST IN THAILAND SHUT DOWN BY MILITARY

The Red Shirt protests in Thailand have reportedly come to a halt after a large military presence intimidated the bulk of the protesters.

"'I want to save the people,' Jatuporn Phromphan, one of the protest leaders, said as he walked up to surrender to police with a grim-faced band of supporters. 'But I will continue to fight for democracy.'"

Evidently the military has either decided that it needs to create a sense of stability or it is backing the so-called Yellow Shirts. (Tim Johnston: "Thai Protesters Give Up to Avoid Further Violence Troops, Protesters Clash in Bangkok," The Washington Post -- includes a slide show.)

13. US MARITIME STRATEGY GOING FORWARD

Professor Tom Fedyszyn gave a copy of his power point presentation illustrating the evolution of the thinking behind US grand naval strategy going forward to Steve Clemons at The Washington Note, who made it available to all. Key excerpt:

"Today’s Maritime Strategy “Bottom egg” = Obama Direction

- Maritime security
- Maintenance of global commons
- Promotion of free trade
- Building partnerships
- Anti-piracy
- Humanitarian assistance
- Greatest threat to world instability is economic recession
- Need for US to cooperate and build partnerships
- World trade is cornerstone of strong economy
- US provides strong moral leadership
- Less implied concern over international power rivalries"

Very much worth a look.

14. RETAIL SALES DOWN, CORE CONSUMER PRICES FLAT ... SO MONEY SUPPLY AIN'T GROWING ALL THAT MUCH ... IN THE MEANTIME THE EIA FORECASTS INDUSTRIAL DEMAND FOR NATURAL GAS WILL DROP BY 7.4% IN 2009

The Commerce Department announced today that retail sales had fallen by 1.1% in March from a year earlier.

"Excluding autos, retail sales fell 0.9% after a 1% rise in February. That also was worse than analysts' forecasts of a flat reading for last month.

Sales at appliance stores fell 5.9% last month and furniture stores reported a 1.7% decline. Sales at specialty clothing stores fell 1.8% and dipped 0.2% at general merchandise stores, a category that includes Wal-Mart Stores Inc., Target Corp. and Macy's."

"Meanwhile, the Labor Department reported that wholesale prices plunged 1.2% in March as the cost of gasoline, other energy products and food fell sharply.

Gas prices fell 13.1%, the steepest drop since December, while food costs dipped 0.7%. Excluding volatile food and energy prices, the Producer Price Index was unchanged, below analysts' forecasts of a 0.1% rise."

(Associated Press: "Retail sales tumble unexpectedly in March; Consumer spending subdued amid rising unemployment.") IN the meantime, the EIA released its forecast today that natural gas consumption by the industrial sector is expected to decline by 7.4% in 2009 from 2008. The new forecast cut the average price forecast for natural gas delivered to Henry Hub at $4.24/Mcf.

"[The] EIA said it expects LNG imports to increase to about 480 Bcf this year, from 352 Bcf in 2008. Lower global economic activity and new liquefaction capacity in the Middle East and elsewhere should boost US imports."

(Joel Kirkland: "Industrial sector gas use could decline 7% in 2009: US EIA," Platts.) Not an especially rosy picture of near term economic growth from an official government agency, in other words.

Daily Sources 4/13

Trying a different way of organizing the daily sources ... all thoughts welcome.

SIGNS OF DEFLATION APPEARING IN EUROPE AND JAPAN ... JAPAN TAKES ADVANTAGE OF THE PRODUCTS AND CRUDE PICTURE IN THE PACIFIC TO ESTABLISH A PRODUCTS SPR

Ambrose Evans-Pritchard notes that Ireland's finance minister, Brian Lenihan, recently remarked that consumer prices were set to fall by 4% this year, indicating that the country is facing a serious bout of deflation.

"This is torture for a debtors' economy. You can survive deflation; you can survive debt; but Irving Fisher taught us in his 1933 treatise 'Debt Deflation causes of Great Depressions' that the two together will eat you alive."

Pritchard argues that the European Central Bank is serving the interests of Germany above those of Europe by continuing to pursue an anti-inflationary monetary regime, noting that both France and Spain are beginning to "tip" into deflation.

"If the ECB continues to serve as the instrument of German tastes, keeping German inflation near zero, then Club Med and Ireland must necessarily deflate into Hell with all their debts. Unless Germany accepts inflation of 4%, 5% or 6% for a while, the only way the South can claw back lost competitiveness is through outright wage cuts, and that is not a macro-economic option for debtors. Is anybody facing up to this core reality in euroland?"

(h/t Yves Smith at naked capitalism.) Worth reading in full.(1) Meanwhile, the Japanese government announced today that wholesale prices fell by 2.2% in March from a year earlier.

"The latest figures follow a revised 1.6% fall in the year to February. It was the third month in a row of annual declines.

Analysts say it is inevitable that changes in consumer prices will soon turn negative after flat annual figures for the years to January and to February.

Overall final goods prices, which track prices of final products charged to businesses, fell 2.6% in March from a year earlier. Domestic final goods prices fell 1.7%."(2)

In the meantime, Japan's METI is planning to introduce strategic storage of refined products for the first time this year.

"Japan first began considering stockpiling refined products in April 2006, after Hurricane Katrina wrought major destruction on the US Gulf producing and refining facilities in August 2005, and global oil consumers concluded what they needed to relieve supply shortages immediately was oil products rather than crude.

METI's priority products for emergency stockpiling are gasoline, gasoil, kerosene, and A-fuel oil (a blend of gasoil and fuel oil in a 90:10 ratio)."(3)

Given the relatively low price of crude just now, and the huge addition of refining capacity over the course of 2008 and slated for 2009, the upward pressure on products prices caused by meeting stocks requirements is not likely to be too severe. John Kingston echoes much of the industry's view when he writes that the recent addition of the 580 kb/d capacity refinery at Jamnagar, India, and throughout the Asia Pacific is making refinery closures more likely.

"The consensus? Refining capacity in Japan is at risk, given the weak economy there and an aging, shrinking population with a demand for petroleum that is destined to keep dropping (and without a tradition of being a significant exporter of products)." (4)

Indeed, this comes on top of the news that the IEA expects Asian crude supply additions to come to 218 kb/d this year in the midst of declining demand globally.(5) Kingston notes that Reliance, the Jamnagar refinery's owner, is not only aiming for the Asian market, but also expects to sell into the US. "About a month ago, Platts' Esa Ramasamy reported that Reliance USA, a subsidiary of Reliance Industries, has taken taken 1.3 million barrels of clean product storage in the New York harbor area.

"We concluded a deal with Hess to take storage at the Port Reading and First Reserve terminals," a Reliance source told Platts. The Port Reading terminal is located in Port Reading, New Jersey, and the First Reserve terminal is in Perth Amboy, New Jersey.

The acquisition of storage at the Port Reading and First Reserve terminals will enable Reliance to participate in the New York Harbor barge and Buckeye gasoline and diesel markets. "Now Reliance can be expected to be a supplier of heating oil to the US Northeast too," said a New York Harbor trader at the time."

CANADA IN A RELATIVELY GOOD FISCAL POSITION

Rebecca Wilder notes that Canada is in a much stronger position to pursue stimulus spending than much of the OECD given a much better balance sheet. Her chart of Canada's debt to GDP ratio:

"2009 will be in sharp contrast to the recent past. Deficit spending of federal and provincial governments is expected to total $57 billion CAD--3.7% of GDP or the biggest ever--on stabilization spending and the stimulus bill. However, compared to other governments, whose economies are in worse shape, the Canada's prudent attention to finances puts it in a better position to respond to the economic downturn." (6)

CHINA CONSIDERING A NEW STIMULUS PLAN ALONG WITH NEW OVERSEAS RESOURCE ACQUISITIONS

China's State Council will reportedly meet on April 15 to discuss an additional stimulus plan.

"On [April 11], Premier Wen Jiabao, said in an interview with state media that China will 'closely' monitor changes in the domestic and world economy and 'hammer out' new response plans when needed."(7)

The government will issue guidelines and use further fiscal and taxation measures in order to boost consumption. Real Time Economics hosts a translation of a selection of the People's Bank of China's recent Monetary Policy Committee's press release indicating that bank liquidity in the country is ample:

"To cope with the serious impact of the international financial crisis, and promote stable and rapid economic development, China adjusted its macroeconomic policy orientation in a timely manner, and adopted a series of measures to expand domestic demand and promote economic growth. At present, the measures taken have obtained some initial results and there have been some positive signs. Liquidity in the banking system is ample, money and credit are growing rapidly, and the financial system is running smoothly."

The markets have reportedly responded enthusiastically to the news, but central bank adviser Fan Gang was quoted in the media today as saying that "My basic judgment is, the recession in the global economy will last at least three or four years."(8) Brad Setser produces a graph showing that Chinese foreign asset reserves growth has basically come to a halt:



He comments:

"But there is some evidence that the pace of the 'hot' outflows has started to slow. Indeed, the evidence showing a turn here--assuming the data on the state banks’ doesn’t have any surprises--is better than the evidence showing a turnaround in trade flows. The non-deliverable forward market is no longer pricing in a depreciation of China’s currency, and in the past, changes in the NDF market have corresponded reasonable well with hot money flows.

I consequently wouldn’t be totally surprised if the pace of China’s reserve growth started to pick up again over the next couple of quarters. The fall in reserve growth over the past two quarters has corresponded to rise in capital outflows — not with a sustained fall in China’s trade surplus.

But even if reserve growth picks up a bit, China’s government will likely buy fewer US assets than it did in 2008. Some of those assets though were in a sense bought with 'borrowed' money-—the hot inflow. This adjustment though isn’t a bad thing; we all should want China to buy more of the world’s goods and fewer of the world’s bonds."(9)

A CNPC official yesterday said that China may agree this week to take a $10 billion minority holding in Kazakhstan's AO Mangistaumunaigas from state-run KazMunaiGaz National Co. when Kazakh President Nursultan Nazarbayev is in Beijing on April 15. (10)



China's customs office announced Friday that its March oil imports had declined 5.5% to 16.34 million metric tonnes of crude (~3.84 million b/d) from 17.3 million mt in March 2008.

"Despite falling from a year ago, the March crude import volume represented a 39.3% rebound from the 11.73 million mt imported in February, which was the lowest in 26 months.

Refined product imports crept up 2.2% from a year ago to 3.2 million mt in March, according to the preliminary customs data, released on April 10. However, the figure was lower than the 3.38 million mt of products imported in February.

Chinese crude exports in March totaled 470,000 mt, 17.5% higher than a year ago. But the figure paled in comparison with the 610,000 mt of crude exported in February."(11)

INDIA TO REJECT BINDING CARBON EMISSIONS REDUCTIONS

Meanwhile, the Indian delegation at the just finished UN conference in Bonn indicated that New Delhi is unlikely to agree to binding carbon emissions cuts:

"'If the question is whether India will take on binding emission reduction commitments, the answer is no. It is morally wrong for us to agree to reduce when 40 percent of Indians do not have access to electricity,' said a member of the Indian delegation to the recently concluded UN conference in Bonn, Germany, which is a prelude to a Copenhagen summit in December on climate change. 'Of course, everybody wants to go solar, but costs are very, very high.'"(12)

THAI PROTESTS SPREAD

The "Red Shirts" protests in Thailand have spread with at least three clashes with security forces in Bangkok and major highways shut down in the provinces just outside the city.(13) The government has announced a state of emergency, and the armed forces have said that they will take every measure to restore order.

"'We will not use weapons unless it is necessary to defend ourselves,' said Gen. Songkitti Jaggabatara, the supreme commander of Thailand’s armed forces. 'We will not use them excessively.'"(14)

(Both of the linked stories include slides of the clash with the military.) The ASEAN summit scheduled to be held in Bangkok this week has been canceled as a result of the protests.

ISREAL TO RESTART PEACE NEGOTIATIONS WITH PALESTINE

Israeli Prime Minister Benjamin Netanyahu said on Sunday that he would start peace talks with Palestine, after taking a phone call from Palestinian President Mahmoud Abbas on Sunday made to extend Passover greetings. "The two had a 'friendly and warm' conversation, according to a statement from Netanyahu's office."(15)

MEXICO TO CONSIDER DECRIMINALIZING MARIJUANA CONSUMPTION

The Mexican Congress's Chamber of Deputies is scheduled to begin debating the decriminalization of marijuana consumption today.

"The forum will bring together experts from around the government and private sector. The forum is being called mainly because of the belief of many experts in Mexico that the prohibitionist policies have not produced the desired effects."

The post also provides the most recent news on the recent killings in Mexico in the fight between the military and the drug cartels. There were at least eight "narco executions" in Chihuahua last week. Worth reading.(16)

OBAMA TO LIFT TRAVEL RESTRICTIONS TO CUBA

The Obama Administration is reportedly set to announce that it is lifting travel restrictions for Cuban Americans who want to travel to Cuba.

"The decision does not lift the trade embargo on communist Cuba but eases the prohibitions that have restricted Cuban Americans from visiting their relatives and has limited what they can send back home."(17)

TEXAS LEADS COUNTRY IN WIND POWER ADDITIONS

The wind power industry association released a report stating that the US is ahead of schedule to generate 20% of its electricity from wind power by 2020. Texas is at the head of the class, having installed almost 2,700 megawatts of wind power in 2008. Only two countries installed more wind power last year than the lone star state. "In fact, if Texas were a country—an idea never entirely out of fashion in the Lone Star state—it would rank 6th in the world in wind power capacity."(18)

1. "Ireland is ECB's sacrifical lamb to satisfy German inflation demands," Ambrose Evans-Pritchard, UK Telegraph, 12 April 2009.
2. "Falling Prices in Japan Feed Deflation Fears," Reuters, Sunday, 12 April 2009.
3. "Japan set to introduce oil products in strategic stocks: sources," Takeo Kumagai, Platts, Monday, 13 April 2009.
4. "New refineries in the US? More likely, a closure," John Kingston, The Barrel, 9 April 2009.
5. "Asia to see bumper oil harvest," Reuters, Monday, 13 April 2009.
6. "Canada: a relatively strong fiscal position," Rebecca Wilder, News N Economics, Monday, April 13, 2009.
7. "China Mulls New Stimulus to Boost Consumption, Bolster Recovery," Paul Panckhurst, Bloomberg News, Monday, 13 April 2009.
8. "China economy won't bottom out soon -c.bank adviser," Aileen Wang and Edmund Klamann, Reuters, Monday, 13 April 2009.
9. "China’s reserves are still growing, but at a slower pace than before," Brad Setser, Follow the Money, Monday, 13 April 2009.
10. "China, Kazakhstan May Sign $10 Billion Accord for Oil," Eugene Tang and Chen Shiyin, Bloomberg News, Saturday, 11 April 2009.
11. "China Mar crude imports down on year but rebound from Feb," Vandana Hari, Platts, Monday, 13 April 2009.
12. "India Rejects Calls For Emission Cuts; Officials Say Growth Will Be Compromised," Rama Lakshmi, Washington Post, Monday, 13 April 2009.
13. "Anti-Government Protests Spread Throughout Thailand," Tim Johnston, Washington Post, Monday, 13 April 2009.
14. "Thai Army Chief Vows to End ‘Chaos’ as Protests Widen," Seth Mydans and Thomas Fuller, New York Times, Monday, 13 April 2009.
15. "First contact between Netanyahu, Abbas," Egypt News, 12 April 2009.
16. "Mexico: Drug Armies vs. Calderon's Army," Paul Talley, The Compass, Saturday, April 12, 2009.
17. "Obama to Lift Cuba Travel Restrictions," Michael D. Shear, 44 The Obama Presidency, 13 April 2009.
18. "Wind Power: Everything’s Bigger in Texas," Keith Johnson, Environmental Capital, Monday, April 13, 2009.

Daily Sources 4/8

Chag Pesach Sameach or Happy Passover!

1. V. Phani Kumar at Marketwatch reports that Japan's current account surplus shrank by nearly 56% in February from the year prior.

"Japan's exports tumbled more than 50% to ¥3.31 trillion [in February] as demand for Japanese products was hit sharply. At the same time, imports slowed 44.9% to ¥3.11 trillion, resulting in a trade surplus of ¥202.1 billion for the month, compared to a deficit of ¥844.4 billion in January."

2. In an op ed in the Wall Street Journal, Alexandros Peterson, a fellow at the Atlantic Council, reports that Gazprom recently signed a memorandum of understanding which would slate the production of two new Azeri natural gas fields for Russian consumption--even though the fields are "required" for the planned initial throughput of the Nabucco pipeline. Peterson's tone is just a tad alarmist, which perhaps is what is required to get his piece picked up by the papers, but, as he notes, the MOU is hardly binding.



Baku's interests still include becoming a key source of natural gas for European consumption, though perhaps the MOU is a way of maintaining their options--and reminding Europe that they have them. Beyond that, Azerbaijan is not required for alternative natural gas routes to Europe in any case. If Iran is ultimately to be a source for Nabucco, the Pars pipeline, which could bypass Turkey altogether, is another source. The South Pars/North Dome natural gas field is the largest in the world with an estimated 51 trillion cubic meters of natural gas in place.



Qatar owns the southern section of it, and is fairly amicable with the West. Iran clearly would like to become a critical source of Europe's energy supply. Peterson seems argue that Europe has no options, and this should push it to admit Turkey to the union. But he ignores the obvious:

a) Under any foreseeable scenario, Europe will not become independent of Russian natural gas ... it will be vulnerable for at least the long term to a cut off, should Moscow decide--for unfathomable reasons short of war--to.

b) There are alternatives to Turkish transit for natural gas--not least being LNG.

c) Natural gas supply is a long term issue in Europe, to be sure, but presently demand is down. Indeed, at £0.3062/therm, ICE natural gas for delivery in May is only trading at $0.99/MMBtu premium to NYMEX Henry Hub for delivery in May, which yesterday closed at $3.562/MMBtu. Consider that Europe is vulnerable to a supply cut off in the way that the US is not--and that US is facing a huge surplus, on December 24, 2008 same month natural gas sold at a just a $1.02/b discount to front month WTI on a Btu basis. Yesterday it closed at a $28.49/b discount to front month WTI on a Btu basis ... and much of the curve is selling at a $30/b or more discount on a Btu basis. (Indeed, today Platts reported that GDF Suez released data showing that French LNG injections for the week ending Sunday were down 32.4% year over year.)

d) His arguments would do little to convince the European public that entry of Turkey into the union is an encouraging option given that it is pitting a nationalistic aversion to a future compromise versus nationalistic disgust with a current compromise (with an entity with which most of Europe has a closer identification).

3. Borzou Daragahi at the Los Angeles Times reports that the managing director of the National Iranian Oil Company [NIOC]--Seyfollah Jashnsaz--said in remarks broadcast on state radio that the company had found several huge new oil fields, and that "Billions of barrels of oil will be added to the country's existing oil reserves."

"Even if we make calculations based on the minimum 12% recovery rate, it means that 1 billion barrels of oil can be recovered from this field alone."

Very important if true.

4. Aluf Benn at Haaretz reports that the Obama Administration is preparing for a confrontation with the government of Benjamin Netanyahu over his refusal to accept a two-state solution for Palestine by "briefing Democratic congressmen on the peace process."

"In recent weeks, American officials have briefed senior Democratic congressmen and prepared the ground for the possibility of disagreements with Israel over the peace process, according to information recently received. The administration's efforts are focused on President Barack Obama's Democratic Party, which now holds a majority in both the Senate and the House of Representatives. The preemptive briefing is meant to foil the possibility that Netanyahu may try to bypass the administration by rallying support in Congress."

(h/t Michael Collins Dunn at the MEI Editor's blog.)

5. Seth Mydans and Mark McDonald at the New York Times report that "tens of thousands" of supporters of former Thai Prime Minister Thaksin Shinawatra have massed in central Bangkok, demanding the resignation of the current administration which had been put in office after demonstrators had toppled Thaksin's government last year. Reports are of as many as 100,000 demonstrators, though they have not moved to stop all travel by occupying the air ports and roads, which is what precipitated the government's fall last time.

6. Sudeep Reddy at Real Time Economics reports that Richard Fisher, the head of the Federal Reserve Bank of Dallas, delivered a speech in Japan today where he forecast that US unemployment "could surpass" 10% by the end of the year. Fisher indicated that the key risk the Fed was addressing was "deflationary job destruction." He also dismissed the argument that the US was preparing for a sharp devaluation, saying,

"[D]emand for Treasuries and other official paper of U.S. government issuers will be determined by their attractiveness relative to alternatives, and they may well be judged more, rather than less, attractive under most reasonable future scenarios."

Worth reading.

7. Brad Setser's most recent post at Follow the Money includes a graph which plots the fall in industrial production in the current financial crisis versus that of the average of the other post-war recessions:



8. Hui-yong Yu at Bloomberg reports that vacancies at US retail centers--malls and shopping centers--rose to the highest level seen in 10 years.

"More empty stores and lower rents are ahead 'unless conditions change dramatically,' said Victor Calanog, director of research at the New York-based real estate research firm. He forecast the declines would last through next year.

'This outlook assumes positive job growth and an increase in consumer spending beginning in early 2010,' Calanog said in a statement."

9. Keith Johnson at Environmental Capital reports that the Future Combat System, a program to reinvent the way the military fights wars one thrust of which would be to utilize lighter transport vehicles which require less fuel, has been effectively killed by recent comments by Secretary of Defense Gates.

"I am ... concerned that, despite some adjustments, the FCS vehicles–-where lower weight, higher-fuel efficiency and greater informational awareness are expected to compensate for less armor–-do not adequately reflect the lessons of counterinsurgency and close-quarters combat in Iraq and Afghanistan."

10. Nassim Nicholas Taleb in the Financial Times points out what every engineer, quartermaster, and military planner has known since the inception of their professions: you must create redundancies to make something structurally sound, efficiencies often make systems especially vulnerable to complete breakdown. Thus unfettered markets are especially efficient and their efficiencies are based on structures especially vulnerable to catastrophic breakdowns. I suppose it bears repeating, but how many times must it be repeated? That, I suppose, is a question of how much repetition a meme requires before it is just felt instinctively to be true. Are there instances where certain memes are so unpleasant--and defer rewards for too long--for them to ever prove cultural bedrock even if they are indisputably true?

11. The EIA reported today that for the week ended April 3 commercial stocks of crude grew by 1.7 million barrels to 361.1 million barrels, the most recorded since 1993. The number is well above the historical average in the last five years and were fairly close to analysts expectations of a 1.5 million barrel build indicated in a Bloomberg survey. Gasoline stocks build by 600,000 barrels and are above the historical average for this time of year. Distillate stocks fell by 3.4 million barrels, but are still 20 million barrels above the historical average at this time of year. Taken in isolation, the news is mixed to bearish on the price of crude.