Daily Sources 12/29

1. Griff Witte at the Washington Post reports that Isreal continued bombing--for the third day--the Gaza strip on Monday as Hamas fired another round of missiles into neighboring Israeli villages. On NBC's "Meet the Press," Israeli Foreign Minister Tzipi Livni said that Tel Eviv did not intend to reoccupy the strip. Hamas leader Ismail Haniyeh vowed to never retreat in televised comments Sunday.

"The UN Security Council expressed 'serious concern' Sunday over the situation in Gaza and called for 'an immediate halt to all violence." Pope Benedict XVI also urged an end to the violence, saying 'the native land of Jesus cannot continue to be witness to so much bloodshed, repeating itself without end.'"

Israeli officials indicated that they expect military operations to last weeks at the very least. Iran's Supreme Leader, Ayatollah Ali Khamenei, on Sunday called for all Muslims to fight on behalf of the Gazans, saying that anyone who dies in this effort would be received in heaven as a martyr. More credibly, however, as Juan Cole reports, in the eyes of the Shi'a Muslim community, Grand Ayatollah Ali Sistani of Narjaf, Iraq, called on Muslims to support the Gazans with more than lip service. PressTV, an Iranian government program, translated Sistani's statement as follows:

"Condemning what is going on in Gaza and supporting our brothers only with words is meaningless, considering the big tragedy they are facing ... Arab and Islamic nations need to take a decisive stance, now more than ever, to end these ongoing aggressions and to break the unjust siege imposed on the brave people of Gaza ... ."

In the meantime, hospitals and other fundamental services and commodities--such as food--in Gaza are in short supply or being overwhelmed, given that it has been subject to an Israeli blockade for some time now. Sudarsan Raghavan and Islam Abdel Kareem at the Washington Post report that humanitarian aid groups called on Israel to allow supplies through the borders Sunday, saying that medical and food supplies are dangerously short. Both Post articles give good summaries of the situation.

2. David Rosenberg at Bloomberg reports that the Bank of Isreal reduced its benchmark interest rate by 0.75% (or 75 basis points) to 1.75%.

"The rate reduction 'will help strengthen the economy’s ability to cope with the implications of the global economic crisis,' the bank said in its statement. It added that the Gaza fighting increases 'geopolitical uncertainty' in Israel and has the potential 'to impact negatively' on the economy."

3. Robert Birsel at Reuters reports that the chairman of Pakistan's joint chiefs of staff committee, General Tariq Majid, told the visiting Chinese Vice Foreign Minister He Yafei today that New Delhi and Islamabad needed to institute reciprocal de-escalation measures and to avoid "belligerent posturing." Military officials from the two countries held an "unscheduled hotline call" this weekend as the Chinese minister arrived in Pakistan. In a related story, Rama Lakshmi at the Washington Post reports that no clear winner emerged from the election results for Jammu-Kashmir released on Sunday. The National Conference and Congress parties were the largest winners, taking 45 out of 87 constituencies combined. Indian Prime Minister Manmohan Singh, of the ruling Congress Party, welcomed the results, saying,

"I think the large turnout in Kashmir is a vote for democracy and national integration. We are all happy at the turnout, and who wins or loses is a secondary issue."

4. Jeffrey Gettleman at the New York Times reports that the President of Somalia resigned today, blaming the international community for not doing enough to shore up his government.

"Under Somalia’s transitional charter, the speaker of the Parliament will take over the presidency for one month until the Parliament elects a new president. Several moderate Islamists could be candidates.

Over the weekend, fighting broke out between moderate and radical factions in the first obvious sign of tensions within Somalia’s Islamist community.

On Sunday, a powerful, newly militarized Islamist group declared a “holy war” against the more militant Islamist factions, and it seems to have the muscle to back up its threats. The group, the Ahlu-Sunna Wal-Jama, killed more than 10 fighters from a rival Islamist faction that was known as one of Somalia’s toughest in fighting over the weekend."

Worth reading in full.

5. Brad Setser at Follow the Money has a post entitled "the collapse of financial globalization" today which shows that private inflows and outflows of capital to and from the United States have collapsed to near zero in the last few months. But, Setser shows that private inflows and outflows were closely tied to each other, and did not in fact represent an increase in net financing--of US debt. Evidently:

"I think we now more or less know that the strong increase in gross capital inflows and outflows after 2004 (gross inflows and outflows basically doubled from late 2004 to mid 2007) was tied to the expansion of the shadow banking system."

Which means that central banks have been for the past five years responsible for financing the bulk of the US deficit. Outside of Japan, the current account surplus nations were building up their reserves and sovereign wealth funds. Well worth reading in full.

6. David Oakley at the Financial Times reports that emerging markets may find it difficult to find financing as the developed economies are expected to offer as much as $3 trillion in sovereign debt in 2009.

"Mr. [Nick] Chamie[, head of emerging markets research at RBC Capital Markets,] said: 'Governments or companies that are highly rated will still be able to attract buyers, but the very large amount of issuance almost certainly means they will have to pay higher interest rates to get those investors.'"

7. Denis Maternovsky at Bloomberg reports that Bank Rossi has allowed the ruble to depreciate 1.7% against a currency basket of dollars and euros. This is the twelfth time in seven weeks that Bank Rossi has not acted to stop the ruble's fall against the basket peg, which is 55% in dollars and 45% in euros.

"Bank Rossii urged the country’s banks today to avoid buying foreign currencies in the first quarter of 2009 or risk losing access to central bank loans, Chairman Sergey Ignatiev said in a letter to banks that was posted on the central bank’s Web site today. Russian banks shouldn’t increase their holdings of 'foreign currency assets' from the average level between Aug. 1 and Oct. 25, Ignatiev said."

8. Jeffrey Ball at the blog Environmental Capital reports that Russia asked for the following, outside of permanent observer status, at OPEC's meeting in Oran, Algeria, on December 17:

a) Crude benchmarks outside of Brent and WTI,
b) A discussion of whether it would be advantageous to discard oil pricing in dollars in favor of pricing it to a basket of currencies, and
c) New futures trading markets outside of Europe and the US.

Without going too deeply into it, these are basically just whitewash remarks. There have been plenty efforts to establish other crude benchmarks, mostly which have failed because of lack of volume. (You need investors outside of commercial entities to get involved to make the futures market workable.) There are other futures trading markets outside of Europe and the US which trade crude futures, but they are unpopular for reasons of the opacity surrounding the underlying crude future and other issues of risk. Pricing oil in a basket of currencies would only serve to make price discovery that much more complicated a business--and the currency markets already price in the cost of oil.

However, the report may be evidence that market data is a primary objective of Russia at OPEC. Moscow has indicated it will wait to see whether the cartel members make good on their cuts before instituting any of their own.

9. Henry Meyer at Bloomberg reports that Russia and the Ukraine failed to reach an agreement in their natural gas dispute today, with two days left before the threatened cut off of supply by Moscow--supply to pipelines that carry a considerable portion of Europe's natural gas requirement. The Ukraine owes Moscow $1.662 billion for supplies delivered in November and December, and $450 million in fines for late payments.

"'It isn’t clear who is in charge and who is the right counterpart for Russia to talk to,' said Masha Lipman, an analyst at the Carnegie Moscow Center research group in Moscow. 'Ukraine is in political turmoil and in the midst of a serious economic crisis.'"

Still, Putin told reporters today in Moscow that the Ukraine does not want to pay for the gas. Meanwhile, as Stephen Bierman and Torrey Clark at Bloomberg report, Gazprom is assuring its European customers that it will "completely fulfill its obligations."

10. Wang Ying at Bloomberg reports that Zhang Guobao, the head of China's National Energy Administration wrote in the People's Daily today that it will encourage companies to fill their available oil storage facilities in the low price environment. "Companies will be encouraged to utilize their spare oil-storage capacity while state and commercial reserves of other 'strategic resources' will be set up ...."

11. Charles Lee at Platts reports that the South Korean Energy Ministry announced that the country will spend 6.9 trillion won (~$5.4 billion) over the next 14 years to expand its natural gas storage and distribution infrastructure. Under the ministry's plan, South Korea will transform the Donghae offshore gas field into a storage facility with capacity of 1.7 million metric tonnes of LNG by 2017. Work on the transformation should begin by 2014. The Donghae terminal would increase the country's storage capacity to 24.3% of expected annual demand in 2017.

"In September, state-run Korea Gas Corp. signed a $90 billion deal with Russia's gas giant Gazprom to import 10 Bcm of natural gas annually from Russia's Far East for 30 years beginning 2015 via a pipeline.

The undersea pipeline would reach the Samcheok terminal and the offshore Donghae terminal, the ministry said."

The plan includes increasing the total length of South Korea's natural gas pipelines from 2,739 km to 3,893 km by 2013, which should make natural gas available to 78% of all South Koreans as the infrastructure will be extended into rural areas.

12. Mriganka Jaipuriyar at Platts reports that oil product demand in South Korea was down 12% year over year in November.

"Demand for fuel oil saw the sharpest year on year slump in November, falling 30.4% from 7.1 million barrels to 4.94 million barrels. Gasoil demand fell 11.3% to 11.57 million barrels; naphtha was down 13% to 23.28 million barrels; and LPG was down 10.6% to 7.69 million barrels, KNOC's data showed."

Refining output, meanwhile, was down 6.3%. South Korea imports much more crude than it uses, exporting surplus products refined into the region.

13. Matthew Walter and Daniel Cancel at Bloomberg report that Venezuela's central bank estimates the economy grew by 4.9% in 2008, the slowest rate seen in five years. Oil accounted for 93% of the country's exports according to the bank.

14. Stephan Kueffner at Bloomberg reports that Ecuador's Social Security Institute will purchase another $500 million in government bonds. Ecuador stopped making payments on its sovereign debt on December 12. The Social Security Institute also purchased $700 million in government bonds on December 24. The Social Security Institute is barred by law from investing more than 50% of its money in the public sector and has about $1.2 billion in cash. The government plans to sell an additional $1.5 billion in bonds on the domestic market. (see Daily Sources 12/16 #3 for links on first reporting on the default, social security purchases, and potential de-dollarization of Ecuador as a result.)

15. Seth Mydans and Mark McDonald at the New York Times reports that protests have resumed in Thailand. This time it is the supporters of the party recently ousted from power--former Prime Minster Thaksin Shinawatra's organization. Protesters have surrounded the Parliament, forcing a delay in the legislature's opening under a new government. The pro-Thaksin "red shirts" are calling for the dissolution of the new government and new elections.

16. Ralph Atkins of the Financial Times reports on the paper's survey which showed that a large majority of Europeans, and 48% of Americans, polled believe that the euro will overtake the dollar in "global importance" by 2014. What this means is anyone's guess, I suppose.

17. William Tucker has an op ed at the Wall Street Journal which actually calls the next bubble--alternative energy. While I think his prognostication may well be a tad early, I think his argument for nuclear power is basically the right one.

18. Glenn Kessler on Saturday had a very interesting story in the Washington Post about how in October the International Accounting Standards Board changed its accounting rules to allow European financial institutions to rearrange their books, and fooling the markets into thinking their bottom lines were better than they are. Well worth reading in full, though I still have no idea why anyone would put any faith into any accounting corporation's estimation outside of the absence of any other alternative, at this stage. (h/t naked capitalism)

Daily Sources 12/26

1. Edward Hugh has a post on The Fistful of Euros blog giving a detailed rundown on the economic crisis Ukraine is presently facing. He argues that folks in Kiev will be forced to export their way out of danger:

"Obviously Ukraine is heading into a major recession in 2009 fueled by the nasty cocktail of a credit crunch, a terms of trade deterioration, and a consequent massive slowdown in both internal and export demand. Given the damage to competitiveness caused by two years of double digit inflation, macroeconomic stabilization will require a very large and significant correction, and this will mean a significant tightening of aggregate demand and a shift in its composition away from domestic consumption and towards net exports."

But to whom will they export? He goes on to point out that Urkaine is thus especially vulnerable to external variables, and I infer by that he means in part Moscow's decisions.

"The danger of total financial meltdown (which would be in this case in the private banking sector, not sovereign debt) is real and significant. The economic downturn has only just started and further downside risks are large and depend critically on the size of external shocks and the limitations imposed by inadequate policy responses."

Worth reading in full. (The piece came to my attention via Krugman's blog.)

2. Ta Bao Long at Bloomberg reports that Vietnam's central bank has allowed the dong to depreciate against the dollar over the last few days in an effort to gird exports.

"'The new reference rate will help increase exports, narrow the trade deficit, and also ensure the stability of balance of payments,' the central bank said on its Web site yesterday."

3. Stephan Kueffner at Bloomberg writes that the newspaper Diario Hoy reported that Ecuador sold $700 million in bonds to the country's social security organization on December 24, and that it will sell an additional $750 million to the organization on December 29. Ecuador decided to default on its debt in the middle of December. (see Daily Sources 12/15 #1) Ecuador, a member of OPEC, does not have a national currency, but uses US dollars which is what contracts for crude oil is mostly priced in globally. The decision has led some analysts to predict that Quito will introduce a national currency and drop the dollar. (see Daily Sources 12/17 #5)

4. Erwan Quintin and Edward Skelton of the Federal Reserve Bank of Dallas report that Mexico is better positioned to weather the financial crisis than it has been in the past. They point out that Mexico has tamed inflation and their sovereign debt held by institutions outside the country is down to 40% from 85% at the time of the Tequila Crisis. Large dollar reserves held by the government and the decision by the Fed to provide $30 billion to help Mexico manage demand for the dollar are also signs that Mexico is better equipped to handle the crisis than most. (On October 29 the Fed established dollar swap lines with Banco de Mexico and three other emerging markets central banks--see Daily Sources 10/30 #4) Skelton and Quintin's piece is worth reading in full. (h/t Mark Thoma at Economist's View)

5. Mark Shenk at Bloomberg reports that Adnoc, the Abu Dhabi National Oil Co., will reduce the supply of the Murban crude by 15% and the Upper Zakum crude by 3% as part of its effort to meet its obligations under the December 17 OPEC oil allocation cut. Production capacity for Upper Zakum is about 500 kb/d. Murban production capacity is about 1.5 mb/d. The UAE produced about 2.35 mb/d in November. MEES estimated the UAE's total production capacity to be about 2.55 mb/d in 2003 and expected total capacity to be about 2.85 mb/d by now--at the time of their writing.

6. The head of Saudi Intelligence from 1977 to 2001 and Riyadh's Ambassador to the United States from 2005-7, Turki al-Faisal, urges President-elect Obama to pursue peace in the Middle East via the plan outlined in the Arab peace initiative of 2002. Four main points:

"· Call for an immediate withdrawal of Israeli forces from Shebaa Farms in Lebanon. This would remove the issue of "national liberation" from the arsenal of Hezbollah's propaganda and mitigate Syrian and Iranian interference in Lebanon.

· Work with the U.N. Security Council for a resolution guaranteeing Iraq's territorial integrity. This would dampen Iraqi politicians' ambitions for dismembering Iraq and force them to negotiate for national reconciliation, putting their interests as Iraqis before their interests as Arabs, Kurds, Shiites or Sunnis. It would also stop any ambitions -- economic or territorial -- that Iraq's neighbors may be considering.

· Encourage Israeli-Syrian negotiations for peace. This would engage Syria and diminish Iranian obstructionism. It would also force Palestinian groups based in Syria to follow the Syrian example.

· Declare America's intention to work for a Middle East free of weapons of mass destruction, with a security umbrella and other incentives for countries that sign up and a sanctions regime for those that don't. This would remove the issue of double standards that the Iranian government uses to raise support among its people for its nuclear policy. It would also resolve the security concerns with which Israel's leaders justify their possession of nuclear weapons."

Well worth reading in full.

7. Alissa J. Rubin at the New York Times gives a decent summary of the political situation in Baghdad.

8. Richard A. Oppel Jr. in the New York Times writes that 20,000 or so troops in Pakistan are being deployed away from the Northwest province where the struggle with the Taliban is taking place as tensions with India continue to build. Pakistani officials would not indicate where these troops were being sent. The military is also denying soldiers leave.

9. Min Zin asks that we not forget the struggle for freedom in Burma in a piece in the Wall Street Journal.

10. Ann Zimmerman, Jennifer Saranow and Miguel Bustillo at the Wall Street Journal write that MasterCard Advisors report that consumer spending fell 8% in December from a year earlier, more steeply than the 5% fall they saw in November from a year earlier. Not being in possession of the report, I cannot intelligently critique it. But, if the numbers, as would be plausible, are the result of aggregated credit card receipts, then they may be partially a result of people choosing--for reasons of thrift or of new credit limits--to use cash. The Commerce Department on December 24 reported that consumer spending had actually increased by 0.6%, after adjusting for inflation, in November from the month earlier. On the 23rd, the Commerce Department reported that consumer spending had fallen by 3.8% from a year earlier in the third quarter. (see Daily Sources 12/24 #14)

Daily Sources 12/24

1. Dexter Filkins at the New York Times reports that US military commanders and Afghan leaders are preparing to arm local militias to assist them in the fight against the Taliban. US officials would rather fund the Afghan army and gendarmes, but they are unprepared to undertake the necessary tasks. On the other hand, there are worries that Pashtun-dominated militias will use their new found power to terrorize local populations, and potentially turn against the government itself.

"'There will be fighting between Pashtuns and non-Pashtuns,' said Salih Mohammad Registani, a member of the Afghan Parliament and an ethnic Tajik. Mr. Registani raised the specter of the Arbaki, a Pashtun-dominated militia turned loose on other Afghans early in the 20th century.

'A civil war will start very soon,' he said."

Note that the above map was published in 1972 and that it is important to realize that the ethnicities represented by the map key only indicate that that is where a certain group is thought to predominate. In fact, many different ethnic groups cohabit throughout the country. (Sadly the more up-to-date maps proved difficult to link to, but they all suffer from inaccuracies. This is just to give an idea.) The article is well-worth reading in full.

2. Mark Bowden has an opinion piece in the Wall Street Journal which argues that Bush could do much for America's image at large--and his own--by a simple act of magnanimity: urge the Iraqi government to pardon Muntazer al-Zaidi, the journalist who attempted to hit the President with his shoes. Excellent idea.

3. Yves Smith endorses the idea by Akio Mikuni, president of the Japanese rating agency Mikuni & Co., reported on in Bloomberg that Japan should write off its holdings of US Treasuries as the US will struggle to finance the debt required to dig out of the recession, in a kind of reverse Marshall Plan. She points out that the Germans seem reluctant to pursue stimulus programs of their own, and provides their reasoning, which is reasonable. But that perhaps a reverse Marshall Plan would be more politically palatable in Berlin. It might also be regarded as in their interests, which is useful. Well-worth reading.

5. Megumi Yamanaka at Bloomberg reports that Idemitsu Kosan Co., Japan’s second-largest oil refiner, will reduce throughput by 7% in the first quarter of 2009. This probably means that they do not expect there to be much of a market for exporting petroleum products at that time, given perennial reduction in demand from the Japanese market since 1996, give or take.

6. Rama Lakshmi at the Washington Post reports that Indian Prime Minister tried to tamp down tensions Tuesday by saying, "Nobody wants war."

"'The issue is not war. The issue is terror and territory in Pakistan being used to provoke, to aid and abet terrorism. Nobody wants war,' Singh told reporters outside Parliament."

Singh made the comments amidst growing political pressure for military action inside India.

7. David Ignatius of the Washington Post interviewed the President of Syria, Bashar al-Assad, who indicated that he was interested in cooperating with the United States in stabilizing Iraq. Well-worth reading in full.

8. Colum Lynch at the Washington Post reports that Russia, and members of the Group of 77 representing developing nations in the UN, are seeking to stop the retention at the UN of members of the anti-corruption UN Procurement Task Force after its mandate expires December 31. In short, the developing world appears to feel that the anti-corruption effort was pursued without regard to due process and that it is against their interests.

9. Denis Maternovsky reports that Bank Rossi has allowed the ruble to depreciate by 1% against a basket of dollars and euros (55% dollars, 45% euros) for the third time in a week. This is the tenth time the bank has allowed depreciation since November 11.

10. John Kemp has an interesting analysis in Reuters looking at how oil futures markets are being attacked as a malfunctioning price discovery mechanism. It is well-worth reading, though the notion of the oil producing nations attacking the oil futures markets as opaque is a bit hard to swallow. Furthermore, Kemp suggests that the US consumes the bulk of light sweet crudes, when light sweet crudes represent about 60% of global consumption. In fact, the US takes much of the worlds heavier and sour crudes, as it has the sophisticated refineries to do so. The other large taker? Europe. Japan and South Korea take a considerable portion of light sour crudes as well. There are good reasons to establish other crude benchmarks, especially given that Tapis is no longer available as a benchmark--having been replaced in contracts for Asian volumes, therefore, by Dated Brent. (Another light sweet crude.)

But you cannot force the private sector to use them in private, bilateral, contracts--which is how Saudi Arabia, and the bulk of all physical contracts are arranged. Various attempts to establish other benchmarks have failed, due to lack of volumes on the market. In part this is because non-commercial players have not been attracted to those exchanges, in part because the underlying commodity is being produced by especially opaque organizations--governments in the Middle East and, well, Caracas. Beyond that, Kemp presents futures markets as primarily forward markets, when they are primarily financial instruments for hedging--or speculating--against financial risks.

Moreover, most trading of oil futures is now being conducted bilaterally off the exchanges, which has made them inscrutable, for the most part, to the regulatory agencies. Still, the piece is worth reading.

11. May Tham reports that new crude production from Vietnam will come close to replacing the lost volumes to the market as the Bach Ho stream is directed to the new Dung Quat 130 kb/d refinery--Vietnam's first.

12. Jeff Wilson at Bloomberg reports that corn prices continue to fall, after a short rally, as demand for ethanol is shrinking in tandem with demand for oil.

"Corn futures for December delivery fell 0.75 cent, or 0.2 percent, to $3.94 a bushel at 10:29 a.m. on the Chicago Board of Trade. The price climbed 3.7 percent in the previous two sessions. Before today, the most-active contract dropped 51 percent from a record $7.9925 on June 27.
...
Corn is the biggest U.S. crop, valued at a record $52.1 billion in 2007. U.S. export sales since Sept. 1 are down 46 percent from a year earlier, Department of Agriculture data show. "

13. The EIA's This Week in Petroleum reports that there was a draw on crude oil stocks of 3.1 million barrels in the week ended December 19, leaving 318.2 million barrels in storage, still at the top of the historical range. This contrasts with the analyst predictions as per a survey by Bloomberg, which forecast a build of 500 kb. There was a build in gasoline stocks of 3.3 million barrels to 207.3 million, versus expectations of a 750 kb build. Gasoline stocks are now more or less what we have seen on average at this time of year. Distillate stocks also built by 1.8 million barrels and are at about the middle of historical levels. Analysts had expected a 700 kb build. Taken in isolation, the news is somewhat mixed, but the overall healthy stockpiles would place downward pressure on price.

14. Bob Willis at Bloomberg reports that consumer spending fell by 0.6% in November, but increased by 0.6% when accounting for inflation. Thus consumer spending in November was healthier than forecast. Lower gasoline prices are thought responsible for the small bump in consumption. The chief US economist at IHS Global Insight, Nariman Behravesh, has the rule of thumb that a $0.10 drop in gas prices equates to about a $12 billion tax cut. (see Daily Sources 11/18 #2)

15. Annys Shin at the Washington Post reports that seasonally-adjusted first-time claims for unemployment rose 5.4% to 586,000 for the week ended December 20. Unadjusted first-time claims were 715,496, up 13.6% from the week ended December 13.

16. Heidi Przybyla has the depressing news that those state project wish lists for potential stimulus spending which have been made public are mostly geared for highways spending, and not on mass transit. Missouri, for example, wants to spend $750 million on highways and nothing on mass transit. Well worth reading in full.

17. Martin Feldstein argues in the Wall Street Journal that defense spending would be a good way to allocate stimulus funding. He allows that spending on weapons programs and new hardware like ships would likely take too long to put in motion in order to provide the economy an immediate boost, but

"Now is also a good time for the military to increase recruiting and training. Because of the current very high and rising unemployment rates among young men and women, it would make sense to depart from the military's traditional enlistment rules and bring in recruits for a short, two-year period of training followed by a return to the civilian economy. As a minimum this would provide education in a variety of technical skills -- electronics, equipment maintenance, computer programming, nuclear facility operations, etc. -- that would lead to better civilian careers for this group. It would also provide a larger reserve force that could be called upon if needed by the military in the future."

I think the idea has some merits and shouldn't be dismissed offhand. However, as I have indicated before, I, for one, do not think that the move away from a citizen army in the armed forces is healthy for the union. (see Daily Sources 12/19 #7) Worth reading.

Daily Sources 12/23

1. Wall Street Journal Europe yesterday published an opinion piece by the finance minister of Germany, Peer Steinbrück, in which he outlined Berlin's view of how to approach the crisis. This is probably in response to the heavy criticism he has recently received in the opinion pages of the New York Times, by Paul Krugman, and the Financial Times, by Martin Wolf and Wolfgang Münchau, that Germany's stimulus package is in effect a "beggar thy neighbor" policy. Much of his position can be restated, in my view, as that the way forward is to implement the five goals iterated in the global financial summit of November 15th. They are:

"- Strengthening Transparency and Accountability: Financial-market participants must provide comprehensive information, including for complex financial products. There must be no more excessive risk-taking.

- Enhancing Sound Regulation: In the future, the G-20 will ensure that all financial markets, products and participants are regulated or subject to oversight (including rating agencies).

- Promoting the Integrity of Financial Markets: This includes better protecting investors, avoiding conflicts of interest and taking measures against market manipulation and fraud.

- Reinforcing International Cooperation: The cooperation among national regulators for crisis prevention, crisis management and crisis resolution must be better coordinated.

- Reforming International Financial Institutions: : The IMF should, in cooperation with the FSF, enhance its early warning capabilities and play a key role in coping with crises. Developing countries and emerging economies should be given a greater say in the IMF and World Bank, while the FSF should be enlarged to include leading emerging market economies."

Steinbrück goes on to say that he thinks that the G-20 has gone a long way toward implementing these reforms, which seems fairly counterfactual to me. That said, the three top points are in my view variations on one theme: that we need to have a credible way of investigating what it is we are being asked to invest in. As long as no one trusts the books of the various financial institutions, no one is going to be all that anxious to loan to them or invest in them. This might especially be true of banking institutions which have a very good idea of the kind of financial instruments which could be in their competitors' books and how they might be hidden. Still, it's not clear it would be in their interest to provide a light onto how best to determine the risk posed to other institutions, because that would serve to shine a light on their own risk-taking. But, whether or not you think strong, medium, weak, or even non-Keynesian methods should be applied to the financial crisis, it seems that more needs to be done about the primary issue of transparent book keeping. In any case, Steinbruck states that the stimulus programs being considered by other capitals around the world are not suitable to Germany's situation:

"It is more than likely that such large-scale stimulus programs -- and tax cuts as well -- would not have any effects in real time. It is unclear whether general tax cuts can significantly encourage consumption during a recession, when many consumers are worried about losing their jobs. The history of the savings rate in Germany points to the opposite. Targeted measures are clearly preferable to scattershot ones."

And, he concludes with:

"Governments can reduce the likelihood of the emergence of financial-market crises and mitigate significant declines in economic activity. No more, no less. Anybody who claims otherwise is deliberately pulling the wool over people's eyes and thus undermines confidence in the political process. That is the last thing we need now."

Well worth reading in full.

2. Platts reports that a study conducted by a committee of the Gas Exporting Countries Forum found that it would be impractical to abandon pricing mechanisms for natural gas contracts which links natural gas prices to the price of oil.

"'Due to inter-fuel competition, it is impossible to eliminate the link to the oil price [in gas markets], where gas consumers are able to switch to oil products,' the committee said."

As a larger percentage of natural gas is available for spot purchases due to liquefaction capabilities, the market will become more global. However, as it stands, the high capital costs, fixed production and transportation options, and consequent long-term contracting will continue to fragment the market. In that vein of thought, Platts reports that Algerian oil minister Chakib Khelil said today there were no plans to turn GECF into a cartel operating along the lines of OPEC.

"Asked whether the organization would be reshaped along the lines of oil exporters group OPEC, Khelil replied: 'Really, it is different. The OPEC of oil looks at today. For gas, today is already there. Gas is sold for the next 10-15 years.'"

(Contracts for natural gas usually are very long term contracts lasting for 10 to 20 years and linked by specific bespoke formula to the price of oil--usually as expressed by the front month price of light sweet crude on either NYMEX or ICE.)

"'We are not going to spend too much time looking at today, we will be spending a lot of time looking at tomorrow, looking how we can cooperate among us, how markets can evolve, how legislation in consuming countries will evolve, regulations,' [Khelil] said."

That said, Lucian Kim at Bloomberg reports that the Venezuelan Oil Minister, Rafael Ramirez, told the GECF meeting in Moscow that the forum should organize along the same principles as OPEC. The organization also announced that its headquarters will be based in Doha, Qatar, the least politically divisive position of the potential choices mooted of Russia, Iran, or Algeria. Platts also reported that Russian Energy Minister Sergei Shmatko at the meeting urged close cooperation by energy producers with an end to market stability, saying Russia is ready for "very close cooperation."Moscow is still waiting on data on OPEC member compliance with the cut announced December 17.

3. Uchenna Izundu at the Oil & Gas Journal reports that Gazprom Chairman Viktor Zubkov has warned that the dispute over natural gas price with Ukraine may force Gazprom to shut off supply, which would affect European supply as much of their natural gas is shipped via pipelines through the Ukraine. "Ukraine wants to pay $100/Mcm for Russian gas in 2009, while Gazprom is demanding international prices of $250/Mcm to $300/Mcm." In short, Kiev wants a subsidized price of natural gas to a government which is fairly openly hostile to Moscow--including efforts to join NATO which have even been proposed in such a way as to appear hostile to Moscow--as opposed to the market price for that gas.



4. Dorota Bartyzel and Ewa Krukowska at Bloomberg report that the Polish central bank--the Narodowy Bank Polski--cut its benchmark interest rate by 0.75% (75 basis points) to 5%. This was a sharper cut than any of the analysts surveyed by Bloomberg expected.

5. Charles Lee at Platts reports that the Korean National Oil Corp. (KNOC) has recently completed the expansion of oil storage facilities at Yeosu which can now hold 49.75 million barrels of oil in both underground and ground tanks, up from 30.75 million barrels when the project began 11 years ago. 49.75 million barrels represents about 23 days of South Korean oil consumption, about 36% of the country's current storage capacity of 138 million barrels. Yeosu is a coastal city in the southernmost province of South Jeolla.



South Korea plans to have storage facilities for 146 million barrels of oil by the end of 2009 and to add an additional 6 million barrels of storage to Yeosu by 2011, bringing the total to 152 million barrels. South Korea's energy strategy revolves around importing vastly more than the domestic requirement and exporting the refined surplus. It also stores foreign crudes for states looking to store oil so they might capture profit opportunities from price spikes or other market irregularities. Over 35 million barrels are stored by KNOC for Algeria, Norway and China. The terms of the storage provides that South Korea has first access to the oil should there be a supply crisis.

6. Jay Lefkowitz argues that now is the time to take the regime in North Korea to task for its human rights abuses. And just now South Korea is no longer pursuing quite so enthusiastically its sunshine policy. Still, I think that Lefkowitz, who was a Bush envoy to the country, might consider that the only real time when the US possessed to requisite international political will to address the problem of North Korea was just subsequent to 9/11. If at all.

7. Rama Lakshmi of the Washington Post reports that Pakistan scrambled jet fighters yesterday over several of its cities Monday as tensions slowly boil between the two countries. Indian Foreign Minister Pranab Mukherjee told a meeting of over 120 foreign envoys to New Delhi that "We have so far acted with utmost restraint, [but we] will take all measures necessary as we deem fit to deal with the situation." He also suggested that India might strike at camps inside Pakistan unilaterally, if Islamabad is not seen to be making progress against extremist elements inside its borders. On Monday the Chairman of the US Joint Chiefs of Staff, Admiral Michael Mullen, arrived in Islamabad to meet with Pakistan's army chief, Gen. Ashfaq Kiyani, and the head of its Inter-Services Intelligence agency, Lt. Gen. Ahmed Shuja Pasha. Worth reading in full.

8. Sam Dagher and Graham Bowley at the New York Times report that the Iraqi Parliament accepted the resignation of its speaker, Mahmoud al-Mashhadani, and then immediately passed a resolution allowing the troops of those troops not covered by the Status of Forces Agreement to stay in Iraq past the new year.

9. Keith Bradsher at the New York Times reports that Indonesia is planning an economic stimulus plan and summarizes an interview he conducted with the governor of Indonesia’s central bank, Mr. Boediono. Worth reading in full.

10. Reuters reports that Iranian state radio has announced that Tehran has sent a warship, of unspecified class, to the Gulf of Aden in order to contribute to the fight against piracy off Somalia. (h/t Galrahn at Information Dissemination.)

11. Alan Cowell at the New York Times reports that the death of long-time President Lansana Conté of Guinea has sparked a coup attempt by the military of that country.

12. Bob Willis and Shobhana Chandra at Bloomberg report that sales of new and existing single-family houses fell by 7.6% in November. Median sales prices fell by 13%, which is the sharpest decline seen since records were first kept in 1968.

13. Aaron Clark at Bloomberg reports that the EIA's Market Assessment of Upcoming Planned Refinery Outages was released today showing that Petroleum Administrative Defense District 1--the East Coast--is expected to take much more refining capacity offline than the historical norm. Historically on average about 30 kb/d of fluid catalytic cracker refining capacity is taken offline in February for maintenance and repairs. The EIA report forecasts that 164 kb/d of FCC capacity will be taken offline. (To simplify, fluid catalytic crackers units are sophisticated distillation units at refineries designed, generally speaking, to maximize the output of gasoline versus other products like diesel.) PADD 1 is one of the larger consuming regions of the country (which was divvied up into 5 petroleum administration defense districts in World War II as the government managed production as part of the war effort.) Last year on average PADD 1 ran 1.387 kb/d of crude through its refineries in February. That said, for the country as a whole, crude distillation unit outages (or outages for all refineries) are expected to be about 28 kb/d more than is historical, not an especially sharp divergence from the norm. However, the EIA also expects distillate production--by distillate the EIA means diesel for the most part--to be much higher over the next few months than it has been over the course of the last three years. Heating oil--which is almost identical to Diesel No 2--margins over crude are quite attractive if you consider NYMEX futures as opposed to gasoline, where the crack spread is clearly negative. This would seem, in isolation, to presage continued low crude prices through March.

Daily Sources 12/22

1. Robert Lindsay at the London Times reports that the Ernst & Young ITEM Club expects China's economy to be the world's largest within a decade, due to the credit crunch.

"Brazil, Russia, India and China, the “Bric” nations, will account for 40 per cent of global economic growth between next year and 2020, according to ITEM. Of this, China will account for a quarter."

I cannot help but be just a tad snarky about the credibility of accounting corporations these days, as in, oh, an accounting company said so, its account thus must have a likelihood of coming to pass of, oh, say, precisely zero. How's that for a number?

2. Ambrose Evans-Pritchard at the UK Telegraph reports that a variety of countries have begun to raise tariffs in response to the financial crisis. Russia has imposed 30% import tariffs on cars, 15% on agircultural equipment and 95% on poultry imports.

"'It is possible during the financial crisis to support domestic producers by raising customs duties,' said Premier Vladimir Putin. ... India and Vietnam have imposed steel tariffs. Indonesia is resorting to special 'licenses' to choke off imports."

In the meantime, China has moved towards subsidizing its steel industry and appears to be maintaining its currency peg to the dollar, as opposed to allowing the renminbi to appreciate. Anthony Faiola and Glenn Kessler at the Washington Post have a similar story--if less alarmist--which notes that Argentina and Brazil are seeking to raise tariffs on a wide variety of products, and that France is providing its sovereign wealth fund with additional monies to prevent the foreign takeover of "strategic" industries. Faiola and Kessler note that on Friday the US announced it was going to take China to task within the WTO framework for providing illegal subsidies to its export sector. Robert Samuelson in the Washington Post notes that much of the fiscal stimulus coordination between the major industrialized and developing economies is mostly for the press releases.

"Countries agree on broad principles but then go their separate ways. Germany's 'stimulus' program, for instance, is much smaller than the one apparently planned by the Obama administration. Countries renounce protectionism, but there are signs that China -- with a massive trade surplus -- might relax its policy of currency appreciation. By making the yuan cheaper, China would give its exports an added price advantage. If the United States inserted "Buy American" provisions in any stimulus legislation, it, too, would be embracing economic nationalism."

Yves Smith provides her own analysis, which more or less concludes that many nations have begun instituting beggar thy neighbor policies. All four pieces are worth reading in full.

3. Li Yanping and Kevin Hamlin at Bloomberg report that China has cut its benchmark interest rate by 27 basis points (0.27%) to 5.31%. This is the fifth time Beijing has cut its benchmark interest rate in three months.

4. Martin Fackler at the New York Times reports that Toyota announced that it expects an operating loss of ¥150 billion (~ $1.7 billion) for the fiscal year ending March 31. This is the first operating loss Toyota would experience in its 70 year history.

5. Yuriy Humber and Torrey Clark at Bloomberg report that many of the so-called "oligarchs" in Russia are approaching the government for bridge loans to weather the financial crisis.

"More than 100 business leaders are vying for loans from Putin and the administration of President Dmitry Medvedev because Russian companies have about $110 billion of foreign obligations due next year, according to the central bank, double the total owed in Brazil, India and China."

The government is taking voting shares and requiring representatives on corporate boards in return for capitalization. Many of the corporations will therefore revert to state control. Well worth reading in its entirety.

6. Lucian Kim at Bloomberg reports that Russian Prime Minister Vladimir Putin will personally open the next meeting of the Gas Exporting Countries Forum (GECF) in Moscow tomorrow. Many worry about the GCEF as a new OPEC, but there are too many differences between natural gas and oil business realities for GCEF to really have the same kind of influence on the market as OPEC does. (I might write something explaining this further later.) In any case, the members of GCEF include Algeria, Bolivia, Brunei, Egypt, Indonesia (which may soon cease to be a natural gas exporter), Iran, Libya, Malaysia, Nigeria, Qatar, Russia, Trinidad & Tobago, the UAE, and Venezuela. Norway and Equatorial Guinea both have observer status with the organization. It's website can be found here.

7. Sam Fletcher at the Oil & Gas Journal reports that in a report for the London Energy Meeting, Cambridge Energy Research Associates wrote that the global oil market is being hit hard by a global "recession shock."

"At the start of this year, some analysts estimated global demand growth as high as 2.1 million b/d. CERA's current global demand estimate for 2008 is a 300,000 b/d decline and for 2009, an additional 660,000 b/d drop. 'The last time demand dropped this much was in the deep recession of 1981,' it said."

The report also appears to claim that the oil markets have been in the grip of unprecedented price volatility in 2008, which is odd given my recent analysis of front month price volatility which showed, for example, more instances of 5% price moves in front month oil in 1986 than I had seen so far in 2008. (see Spot Life CL Jan 09 pt 2, which was posted on 12/11.) I'll take a look at the data again, but I don't think my last account is much off. Mathew Carr at Bloomberg writes that the CERA report stresses that more data transparency would do much to smooth the price volatility we see in the oil markets.

"I think it would be hard to find anyone who would disagree with that. A US Securities Exchange Commission redefinition of reserves may prove to be a model for the world, [Daniel] Yergin said. 'The definition of reserves for financial reporting purposes needs to be updated.'"

I think it would be hard to find anyone who would openly disagree with that, but, it was just recently that Russia was reported to have delayed the introduction of more transparent oil reserves data accounting methods. (see Daily Sources 12/16 #1) The reasons that producing countries have an interest in opacity need to be better explored, clearly, as they do not appear to be especially anxious to provide it. Just saying following Western accounting "best practices" does not have much persuasive power these days given the obvious lack of credibility the Western accounting powerhouses have in pretty much every market sector they happen to cover.

8. Richard Meade at Lloyd's List writes that increased transparency is currently being considered by the shipping industry as a way to combat chronic woes.

9. John Kingston at the Platts blog "The Barrel," notes

"In its monthly report this week, OPEC said OECD stocks currently stand at 56.3 days of forward cover, about four days more than the average for the past five years. But given the steepness of virtually all forward curves for crude and major products, and given antecdotal reports from individual markets, it's tough to find anybody who really believes that number. Almost everyone believes it is much higher. It's that number that will keep oil depressed for the foreseeable future, unless just about every barrel of OPEC's cuts takes hold."

Steve Gelsi at Marketwatch has the related story that oil stored at Cushing, Oklahoma, is approaching the record level of 28 million barrels set earlier this year. (h/t reader trexbean) Given the huge contango, it seems that folks in the market are having a hard time financing storage deals but that all available storage is about to be gone even with such difficulties.

10. The AFP reports that on Sunday it interviewed a PKK spokesman and, in it, he openly worried about Ankara's relationship with the Kurdish Regional Government in Iraq.

"'Since they failed in their military campaign in the border region over the past year, they have come up with the policy of trying to divide the Kurds and provoke infighting among them,' Kamal Kheyri told AFP by telephone."

(h/t informed comment)

11. The BBC reported that the Iraqi Parliament on Saturday rejected the draft law which would have allowed coalition forces not covered by the Status of Forces Agreement, ie everyone but the US, to remain in Iraq beyond 2008. The Parliament in effect called for individual agreements with each coalition member. The al-Maliki cabinet has until the new year to craft a new bill and get it through Parliament or there will be no legal mandate for the British presence there. Somewhat ironic given the English media's response to the blanket legislation, considering the fact that the UK did not have an individual agreement a "national humiliation." (see Daily Sources 12/15 #11)

12. Ernesto Londoño at the Washington Post reports that the al-Maliki government is threatening to expel from Iraq members of the anti-Iranian opposition fighters--or terrorists, depending on your point of view--group the MEK. There are about 3,500 Iranian members of the MEK residing in a refugee camp, more or less, in northern Iraq. The US State Department designated them a terrorist group some time ago. Danny Postel provides some links to neoconservative support for the MEK over the years, including Daniel Pipes, David Horowitz, Max Boot, and Patrick Clawson. If I remember correctly, Pipes was involved in a controversy a few years ago when he was to speak at an MEK rally to be held openly in Washington, DC.

13. Thomas Erdbrink at the Washington Post reports that on Sunday police in Tehran shut down the office of Shirin Ebadi's human rights organization. The article is well worth reading in full.

"In a telephone interview, Ebadi called the closure of her organization's office 'illegal' and "unacceptable." She vowed to reopen the center, saying that 'the police actions are against the law.'"

The fact that the government is going out of its way to impede the operation of Ebadi is important because it shows that Tehran regards this human rights lawyer as a significant threat to the credibility of the regime. It is just as important that the reason given is that Ebadi's organization did not possess the appropriate license for operations in Tehran, that is, the government is using "the letter of the law" to oppose, in Ebadi's view, the spirit of it. I go into great length about the unique vulnerability of the Islamic regimes to a disregard for rule of law in a piece I wrote in April, Law and Revolution in Iran.

14. Stephanie McCrummen has an interesting account of conditions in Somalia. As the situation deteriorates, many apparently feel they have no choice but to join one militant group or another. In this case, mostly al-Shabaab. Worth reading.

15. Nicholas Winning at Real Time Economics reports that the European Union’s Eurostat statistics agency released figures today showing that in October new industrial orders in the eurozone fell 4.7% on the month and 15.1% on the year. This is the worst decline seen since records were first kept in 1997. Also,

"The Belgian National Bank [released the results of a survey today with] its main confidence index [plunging] to -31.3 from -23.7 in November. The drop was most noticeable in the manufacturing sector, where confidence fell to -36.5 from -27.1."

16. Bloomberg reports that the Irish government announced a plan to recapitalize its three largest domestic banks by purchasing preferred shares and underwriting the issue of further shares in the companies. The government will take a controlling stake in Anglo Irish Bank Corporation with preferred shares representing 75% of the corporation's voting rights in return for an investment of €1.5 billion (~ $2.087 billion). Dublin will pay €2 billion (~ $2.783 billion) each for preferred shares with voting rights in Allied Irish Banks and Bank of Ireland. "Irish financial shares have fallen on average 92% this year, led by Anglo Irish, which has plunged 97%." You'll recall that Ireland began a sort of race toward upping state insurance of domestic financial institutions, thus putting their European financial competition at a disadvantage, in late September early October, presaging the disunity in the European fiscal response to the financial crisis seen of late. (see Daily Sources 10/6 #1)

17. David Smith at the London Times reports that revised third quarter GDP figures for the UK will be released this week showing a contraction of at least 0.5%.

"The Centre for Economics and Business Research, a consultancy, predicts that Britain will contract by 3% in 2009 and a further 0.7% in 2010, implying a long, deep recession.

Capital Economics, another consultancy, now predicts a fall of 2.5% in GDP next year, with a further drop of 1% during 2010.

This compares with the Treasury’s prediction of a decline in GDP of between 0.7% and 1.25% next year, followed by a recovery in 2010, when it expects to see the economy grow by between 1.5% and 2%."

18. George Soros, writing for the interesting non-profit organization--the Project Syndicate--makes the following observation:

"The US consumer can no longer serve as the motor of the world economy. To avoid a global depression other countries must also stimulate their domestic economies. But periphery countries without large export surpluses are not in a position to employ countercyclical policies. It is up to the IMF to find ways to finance countercyclical fiscal deficits. This could be done partly by enlisting sovereign wealth funds and partly by issuing Special Drawing Rights so that rich countries that can finance their own fiscal deficits could cede to poorer countries that cannot."

He also has a sort of neo-Kantian notion of the markets, saying that they do not honestly reflect the conditions of the organizations in which they invest. Worth reading.

19. Matthew Brown at Bloomberg reports that the TED spread--the difference between what banks and the US government pay to borrow money--has dropped to below 150 basis points (1.5%) for the first time since the demise of Lehman Brothers. The indicator suggests that interbank lending has not increased as a result of the financing efforts of various governments.

20. Fareed Zakaria has an opinion piece in today's Washington Post which says, in tones laden with hysteria, that, for Obama to have done his job well, he will have to "do nothing less than rescue capitalism." I tend to like Zakaria's analyses, which are generally extremely well informed, nuanced, and sly. This piece, however, suggests that Zakaria should take a break from the press and its sensationalist ways. The troubles we face are serious, indeed, and require measured un-sensational, in short serious, analysis. There is no need to deify the moment any further. You can almost hear the ghost of Heidegger chuckling in the wings.