Daily Sources 1/6

1. Jim Lobe reports on his blog that the Nelson Report last night had the story that Dennis Ross will be made the Obama Administration's Special Envoy for Iran. Ross is someone sure to please hard line Israel supporters, and has some connection to the neo-cons. That said, as I have argued in my post on Law and Revolution in Iran, though we should be open to talks with Iran, there is no reason to have anything other than a hardheaded approach to such talks. Nelson also reported that Richard Haas will be Special Envoy for Israel-Arab affairs, Richard Holbrooke will be Special Envoy for India and Pakistan, and Anne Marie Slaughter head of policy planning.

In the meantime, Azadeh Moaveni in the Wall Street Journal reports that the Ahmadinejad regime is using the conflict in Gaza as cover for the intimidation of Shirin Ebadi. This had been going on for a little while before the Israeli incursion, but have become more aggressive since. The focus on Ebadi really illuminates how threatening she is to the legitimacy of the regime. But her struggle will have to compete with images from the Gaza for now, like the Korean footage of a young woman standing in front of Israeli soldiers to prevent them firing assault rifles at crowds of protesting Palestians linked by Juan Cole:



Brave young woman.

2. Elza Turner at Platts reports that traffic through the Suez canal is down "35-50% in December compared to the previous month and the year-ago month." Though I am unsure what the sentence means, precisely, it would seem to indicate that traffic is down substantially. The traffic reduction is down mostly on piracy in the Gulf of Aden and trade finance issues. Rerouting ships around the Cape of Good Hope can increase transit times by as much as 14 days. The amount of time spent at sea keeps a substantial amount of cargo space off the market. The decision last month by a number of shippers to avoid the Suez does seem to have put a bit of a bottom under the market, given the Baltic Dry Index:



But this does not seem to have been sufficient to create much of a recovery in the market, given the heights from which it fell:



If I remember correctly, the success of the super oil tanker--or Ultra Large Crude Carrier (ULCC)--was ensured by the cut off of the Suez Canal, once upon a time. David Osler at Lloyd's List reports that the international coalition of navies off the Somalian coast is having some success. Issues of jurisdiction and the cost of trying the pirates is still an issue, but the shipping industry appears fairly confident the suppression effort will succeed. The piece gives a useful summary for those interested in the topic.

3. The AP reports that an Iranian Revolutionary Guard commander called on the Islamic world to initiate another oil embargo in retaliation for the West's support of Israel in Gaza. There was a similar call last week from parliamentarians in Bahrain.

4. Dave Ernsberger at The Barrel reports that the Lu'an Group in China produced its first transportation fuels from coal in December at a rate of 160,000 mt/year (or 12.8 kb/d). China is the only country outside of South Africa which has a fully up and running coal to liquids plant. The plant is expected to ramp up production to 3 million metric tonnes/year (~ 60 kb/d) between 2012-2015 and to 15 million metric tonnes/year by 2020 (~ 300 kb/d). Given 7.7 mb/d of total oil consumption in China in 2008, 300 kb/d is 3.9% of that. If you believe that China will be consuming 20 mb/d by 2020, 300 kb/d is 1.5% of that. China, South America, and the United States have huge coal reserves, but so far these technologies produce as much or more carbon emissions than coal burning power plants.

5. MSNBC has footage of Chinese laborers who are protesting outside a factory facing down policemen trying to stop the cameramen from filming the scene:

Visit msnbc.com for Breaking News, World News, and News about the Economy

6. Hugo Restall has an opinion piece in the Wall Street Journal Asia which notes that China has made it public that it is in the market for an air craft carrier. Although the carrier would be technologically behind US versions, it would make China the only East-Asian nation with carrier capacity.

"China hesitated for years before declaring its intent to develop carrier capability because of the potential reaction of its neighbors. A Chinese aircraft carrier prowling the neighborhood could be the final straw that causes Southeast Asian nations to band together to protect their claims, or strengthen ties with the U.S. In particular, Vietnam has periodically hinted that it might put aside the past and form an alliance with Washington."

The announcement may have been made because just now it feels in Asia as if American power is ebbing and unreliable. Restall fears it could touch off a regional arms race. That said, a carrier would be useless to Beijing in any effort to reintegrate Taiwan into China by force, which may mean that Beijing is signaling its commitment to peaceful reunification. Worth reading in full. On Saturday, Galrahn posted a piece on Information Dissemination which noted that a story run in the Japanese paper Asahi Shimbun that China intends to build two 50,000- to 60,000-ton conventional propulsion carriers in Shanghai by 2015. Also worth a gander. The upshot is that the move toward carrier capability is likely with an eye to regional concerns, though I am unclear on how, exactly, China means to obtain them.

8. David Jolly and Julia Werdigier at the New York Times reports that in a press conference in Londong Aleksandr I. Medvedev, a deputy chief executive of Gazprom, said, "The flow [of natural gas] to Europe through the Ukraine is now about seven times less than the norm and the situation continues to deteriorate." He said that Gazprom was ready to go to the negotiating table at any time and called upon Europe to "go after Ukraine." Russia has accused Ukraine of siphoning off gas meant for delivery to Europe and has decided to reduce supply through the pipeline by the amount it figures has been siphoned. Philip P. Pan at the Washington Post reports that Bulgaria is preparing to restart a shuttered nuclear reactor as two cities were left without natural gas for heating in freezing weather, given Bulgaria's total dependence on Russian gas delivered via Ukraine. (These ongoing disputes may well yet convince Berlin to do a turnabout on its policy of zero nuclear power.) Of the eastern European nations, Bulgaria historically has been close to Moscow.

Meanwhile, Verena Peternell at Platts reports that petroleum product futures on ICE have climbed substantially on the geopolitical situation in Gaza and the Russo-Ukrainian natural gas dispute.

"The January ICE gasoil futures contract was $36.25 higher on the day at $515/mt, trading above the $500/mt for the first time since December 15, fueled by cold weather across Europe and the gas dispute."

Gasoil is the term in Europe used for heating oil which has very similar characteristics to diesel. $515/mt roughly corresponds to $69.59/b or $1.66/gallon. Front month heating oil is trading at about $1.6263/gallon on NYMEX as I write.

9. Thomas R. Keene and Whitney Kisling at Bloomberg report that Robert Feldman, head of economic research at Morgan Stanley Japan in Tokyo, told Bloomberg TV that he expected the yen to head to 85 to the dollar, perhaps even stronger, by the Summer.

"Feldman said the yen’s real effective exchange rate is not as strong as current market rates may suggest. The rate, a measure of its value against the currencies of 15 of Japan’s trading partners after adjustment for inflation, rose 5.1 percent in December from a month earlier to the highest level since November 2001, the Bank of Japan said today in Tokyo."

10. Reuters reports that eurozone inflation dropped to an annual rate of 1.6% in December, down from 2.1% in November. The European Central Bank target inflation rate is just under 2%.

"'It makes it even more likely for the ECB to cut interest rates further in the next few months, starting in January and going to 1.5 percent in March,' said Holger Schmieding, co-head of Europe economics at Bank of America. 'Next week, the cut will probably be 50 basis points.'"

11. Ambrose Evans-Pritchard at the Telegraph UK argues that central banks everywhere will do everything they can to combat debt deflation, including Germany.

"The geopolitical landscape will look different. Cohesive states with a rule of law and old democracies – the Anglosphere, Holland, France, Scandies – will muddle through. They will start to enjoy a political premium in investor psychology, despite horrendous debts.

Obama's America will shine. The country will reemerge as undisputed top dog, the only one with real demographic, scientific, and strategic depth. As first into the crisis, it will be the first to hit bottom. Those expecting the dollar to collapse will have to wait.

The damage to core Europe will take longer, but run deeper. Belgium will face a break-up scare. Markets will test highdebt states as they try to roll over bonds – €200bn (£191bn) for Italy and €40bn for Greece. Spain's corporate debts will turn bad.

Germany's economy will contract by 3pc as exports collapse, and the delayed effects of the strong euro and tight money feed through."

Evans-Pritchard argues that analysts will be shocked by the depth of the downturn in Asia, the Russia will become more totalitarian in the face of below $50/b oil, and that authoritarian states generally will turn toward repression as their promises of growth falter. In the end, he argues everyone will be convinced that the reflation caused by the central banks is just as dangerous as the deflation they averted. Worth reading in full. David Hale in the Financial Times argues that every country will want to avoid an appreciating currency and thus will be forced to finance the American stimulus and financial stabilization program. He thinks that there will be a flocking to precious metals as investors begin to suspect, as Evans-Pritchard thinks will happen at the end of 2009, that inflation will be the policy choice of hugely indebted nations. Also worth reading in full.

12. Eurotintelligence reports that wage inflation is receding in Spain, the average rate was 4.1% in 2008, and the rate in December was 1.5%.

13. Andrew Sullivan in the Daily Dish links to an interview of General Petreaus in Foreign Policy where they asked whether the conflicts in Afghanistan and Iraq are fundamentally different from earlier wars. He says that the current counter-insurgency operations are different in that

a) the internet is new, and thus control over information distribution is impossible and recruitment prevention complicated,
b) the use of suicide bombing has much increased, and
c) the religious component of these conflicts is much enhanced as compared to earlier counterinsurgency campaigns which mostly faced nationalist opposition.

14. Paul Krugman notes that in a survey conducted by the Wall Street Journal of economists between November 7-10, unemployment will reach 8.1% by the end of 2009 and peak in 2010 at 8.4%. Some time has passed since then. The average prediction for first half consumer inflation was 0%, with the majority of economists predicting slight deflation (between -0.1% and -0.7%). The average of predictions for second half consumer inflation is 1.5%. The average GDP growth expectation for 2009 is 0%, though there is quite a range of expectations. The WSJ survey results can be found here.

15. Kelly Evans at the Wall Street Journal reports that American families are saving again, which is hurting the economy. Calculated Risk reports that credit indicators are showing signs of recovery:

# The yield on 3 month treasuries has increased to 0.08%. I suppose this is an improvement (better than zero).

# The three month LIBOR has decreased to 1.42%. The three-month LIBOR rate peaked (for this cycle) at 4.81875% on Oct. 10. (improved)

# The TED spread is at 1.34, sharply lower. (improved)

# The A2P2 spread has plunged to 1.92%. This peaked at 5.86 after Thanksgiving. (better).

# The two year swap spread from Bloomberg: 77.75. (Improved)

Worth reading in full.

16. David Jolly and Jack Healy at the New York Times report that today:

"The Institute for Supply Management’s services sector index rose to 40.6 in December from 37.3 in November as the sector contracted less slowly. Orders to factories declined 4.6 percent in November, nearly double the 2.5 percent drop economists expected, for a record fourth consecutive month in November, and the National Association of Realtors said that pending home sales fell 4 percent to 82.3 from a downwardly revised October reading of 85.7."

17. Yves Smith reports that over 150 hedge funds are limiting redemptions--or the amount of their investment that investors in the funds can redeem. This includes some of the most renowned, like Citadel, Tudor, and Cerberus. That sure is a nice trick, ain't it? Either way, it would seem to telegraph further forthcoming pain in the securities markets.

Because it's Funny

Simon Schama Spoof



(h/t reader trexbean who pointed out this at crookedtimber)

Daily Sources 1/5

1. Justin Lahart at Real Time Economics reports that Martin Feldstein, who until last year was head of the National Bureau of Economic Research, maintains that the European Monetary Union will cause conflict within the euro zone. Feldstein argues that the last decade has been pretty smooth sailing for Europe, and the eurozone hasn't, until now, been tested by fire.

"But now, economic conditions are deteriorating rapidly, and some countries are being much harder hit than others.

In Spain for example, the unemployment rate has risen to 12.8% and industrial production has fallen by 11% in the past year. Germany, in contrast, has an unemployment rate of 7.5% and industrial production has fallen by 3.9%. Spain would probably prefer a much looser monetary policy than it’s getting from the ECB."

He thinks that the current stresses have some likelihood of compelling one or more country to decide to withdraw from the monetary union.

2. Jill Treanor and David Hencke at the Guardian UK report that banks bailed out by the government are being accused of not making loans, which was part of the bailout agreement. A Bank of England survey revealed that less credit was made available in the final quarter of 2008, despite the terms of the bailout. Halifax--the UK's largest mortgage lender--separately released data showing that there was a record low for new mortgages in December.

"Major banks claimed that they were heeding the government's demands to maintain lending. They put the blame on the departure of Icelandic and Irish banks from the market for the reduction in credit reported by the Bank of England.

"The banks and Nationwide are approving one-third more loans as 12 months earlier but specialist lenders and small building societies have virtually disappeared from the market," the British Bankers' Association said."

One of those situations where it would be useful to have trusted independent accountants about. Too bad. Either way, surely no one would believe the accounting of the banks.

3. Taghreed el-Khodary and Isabel Kershner at the New York Times report that Israel has sent infantry and armor to cut the Gaza strip in half, supported by naval and air bombardment. Tel Eviv has rebuffed peace initiatives of which there have been many. French President Nicolas Sarkozy met with Egyptian President Hosni Mubarak in Cairo today and was scheduled to visit Jerusalem, Damascus and the West Bank city of Ramallah. Russian President Dmitri Medvedev called Israeli Prime Minister Olmert to stress the importance of a cessation of hostilities. Tony Blair, now the envoy for the Quartet Group--the US, EU, Russia, and the UN--met the Palestinian President Mahmoud Abbas in the West Bank and called for an immediate cease fire. Karl Schwarzenberg, the Czech foreign minister--the Czech Republic took over the EU presidency on Thursday--also led a delegation on Sunday, as per Stephen Castle and Katrin Bennhold at the New York Times.

4. Jérôme Guillet, a French investment banker who specializes in structured finance for energy projects and began his career financing the Russian oil and gas industry, writing under the pen name "Jerome a Paris" has a useful analysis of the perennial Russia/Ukraine natural gas disputes at the Oil Drum. Though I am suspicious his ultimate conclusion is unlikely, he makes many very worthwhile observations, including:

a) the dispute between Ukraine and Russia over gas did not begin in 2006, but in 1992, immediately after the break up of the Soviet Union and perennially ever since.

b) Russia cannot win a gas war against the Ukraine not only because Ukraine possesses a great portion of the old Soviet natural gas pipeline infrastructure, but also because "Ukraine controls most of the storage capacity of the Russian export system, something rather important when you know that winter gas demand is 2-3 times summer demand and pipelines can be made smaller if you can ship gas all year long and store it close to markets for winter use." The storage equivalent to 35% of Ukrain's yearly requirement is right on the Ukrainian border with Poland and Slovakia.



c) One reason that the perennial Moscow Kiev natural gas dispute has only recently caused waves in the West is because it was the middle of this decade that ten Central and Eastern European countries joined the EU. All of those countries are especially dependent upon Russian natural gas because most of their natural gas infrastructure was built during the Soviet era. The Soviet dominated past of those countries leads them to be extremely wary of Russian influence over their affairs. (They are also natural allies of American interests who want to expand NATO eastward in order to put the kibosh on any Russian renaissance leading to renewed western ambitions.)

and

d) "In Ukraine, political infighting can largely be understood, in my view, by the fight over who will be the Ukrainian counterparty to that Trade. (It's no coincidence that Yulia Timoschenko made her fortune in gas trading in the 90s, and that Yanukovich represents some of the largest gas-users from heavy-industry in Eastern Ukraine). In Russia, similarly, one has to go beyond the image of a monolithic Kremlin with its faithful Gazprom arm - both are rife with infighting and coalitions within both centers of power that come and go (as an example, just look how the 50% of Gazprom formally owned by the Russian State is split between at least two public bodies controlled by different senior Kremlin insiders)."

Critically, Guillet points out that both Moscow and Kiev are dependent on revenues from natural gas delivered to Europe. Guillet, who was at the Gaz de France Kiev office in 1994, argues that the contest in the press is a charade to hide a different contest, used by elites in all the affected capitals to pursue hard line agendas. Though I am not convinced by Guillet's ultimate conclusion, the piece is worth reading in full.

Either way, both Moscow and Kiev are essentially looking to Europe to apply pressure on the other to resolving the dispute. (And on Saturday, Jan Korselt at Reuters reported that European Union president Alexandr Vondra said that the EU did not "intend to become a participant or mediator in gas contract disputes between Russia and Ukraine, but urged both sides to reach an agreement soon.") Isabel Gorst, Chris Bryant, Roman Olearchyk, and Jan Cienski at the Financial Times reported Sunday that Poland reported an 11% drop in natural gas deliveries via Ukraine, and appeared to be the worst affected by the cut off. The reporters were unable to verify the contractual claims of either party with legal experts, as the contracts remained privileged information. That said, Alexander Medvedev, deputy CEO of Gazprom embarked on a tour of European capitals, looking to drum up support.

In order to guarantee that Turkmen natural gas goes through Russian-controlled infrastructure, ITAR-TASS reported on Friday that Gazprom agreed to a price of $340/thousand cubic meters (tcm). That more or less corresponds to the price of $9.63/MMBtu or $55.86/b on a BTU basis. Steve LeVine at BusinessWeek reported Saturday that "Russia is clearly of the consensus view that oil will average somewhere in the neighborhood of $60 a barrel this year." (LeVine writes that the majority of gas sent to Europe is produced in Turkmenistan and send on to Europe, which is false. According to the EIA, in 2006 Russia exported 5.4 trillion cubic feet (tcf) to nations outside the former Soviet Union and the Baltic and Turkmenistan produced a total of 2.2 tcf.) Natural gas contracts are typically tied to the price of crude and $60/b would roughly correspond to $365/thousand cubic meters. $250/tcm roughly corresponds to $7.08/MMBtu or $41.08/b on a Btu basis. The most recent offer of $418/tcm roughly corresponds to $11.84/MMBtu or $68.68/b on a Btu basis. Europe has reportedly been paying prices of $500/tcm, which roughly corresponds to $14.16/MMBtu or $82.15/b on a Btu basis, which is significantly less than the average price of sweet light in 2008, which was around $100/b. Ukraine has reportedly offered as much as $235/tcm which roughly corresponds to $6.66/MMBtu or $38.61/b on a Btu basis. Sweet light is trading above $48/b as I write.

5. Xinhua reports that Iran's OPEC governor Mohammad Ali Khatibi said that Iran would welcome an emergency meeting to review cut compliance in February, ahead of the next meeting scheduled for March. The story says Iran's allocation cut committed to on December 17 was for 545 kb/d, which may imply a target of 3.272 mb/d. Meanwhile, Kate Dourian at Platts reports that a Kuwaiti source told her that Kuwait was not planning for a February meeting of the cartel. He also indicated that Kuwait had already reduced supply to fully comply with its allocation set on December 17.

6. Reuters reports that Iran's Oil Minister, Gholamhossein Nozari, was quoted by local media as saying that the budget for 2009 is assuming $37.50/barrel prices.

7. Xinhua reports that Nigeria's Central Bank announced in its monthly report Friday foreign currency reserves of $52.7 billion at the of December, down from $57.4 billion in November. (In early December it had reported foreign currency holdings of $55.9 billion for November. see Daily Sources 12/4 #10)

8. Steven Bodzin at Bloomberg reports that Citgo has decided to halt the delivery of subsidized heating oil to poor neighborhoods in the US given the new low price of crude. On NYMEX Friday, heating oil for delivery in February sold at a $15.83/b premium to light sweet crude for delivery in February.

9. Christian Schmollinger and Alexander Kwiatkowski at Bloomberg report that Saudi Aramco raised the prices of Arab Medium and Arab Heavy for European and Asian customers.

10. Kartik Goyal at Bloomberg reports that the deputy head of India’s Planning Commission, Montek Singh Ahluwalia, told the wire that New Delhi plans to abandon government pricing for petroleum products and link them to prices found on the international markets. He also indicated that gasoline and diesel prices may be shortly cut again, quickly following cuts made on December 6.

"'There would be a systemic shift and as and when the prices go up, local prices will also need to be adjusted,' Ahluwalia, who worked as an economist with the World Bank, said on Jan. 2. 'We are pushing. That’s what the government should do and I hope the government will make an announcement to that regard soon.'"

Allowing prices to float freely should make Indian demand--and thus incremental global demand--much more responsive to price. (This move would follow China's decision to allow some products to float more freely while taxing consumption. see Daily Sources 12/5 #1 and Daily Sources 12/19 #1) Weilyn Loo at Platts writes that the Moody's rating agency surmises in a report released today that now would be a good time for China, India, Malaysia, and Indonesia to reform their petroleum product price subsidy programs. Moody's suggests that now might be a good time to link prices to international markets as prices are low, given that prices may rise and even further complicate already shaky budgets. Moody's endorses China's recent desubsidization plan over Malaysia's because China's product prices will be explicitly tied to international market prices. (Or perhaps it's because Moody's wouldn't want at this stage to lose Beijing's business. So nice to hear from Moody's on fiscal austerity and honest accounting. I think their findings are reasonable, but still.)

11. Xinhua reports that the Xinjian Uyghur Autonomous Region became the largest crude oil producing region in the county in 2008 at 27.4 million metric tonnes (~548 kb/d). There is an independence movement in Uyghur. After the Communists took over the region in 1949, there has been a policy of encouraging Han Chinese to settle there, which has made the Uyghurs a minority. In 1990, the region produced 7 million metric tonnes of crude oil (~140 kb/d). (In 2006, China produced altogether 3.9 mb/d of oil and consumed about 7.6 mb/d.) The more the region produces, the less likely independence for the region becomes. However, the more potentially profitable rebellion becomes, too.



Consistent with that conclusion is the report today by Edward Wong in the New York Times that 1,295 arrests were made in the Xinjiang region in 2008 on the charge of "endangering state security," up from 742 in 2007, or up 75%. In 2007, prosecutors indicted 619 of the 742 arrested.

12. Li Yanping at Bloomberg reports that the China Federation of Logistics and Purchasing Purchasing Managers' Index rose to a seasonally-adjusted 41.2 in December from 38.8 in November. (A reading above 50 indicates growth; below 50, contraction.) Beijing's PMI shows that in December manufacturing contracted for the third straight month, versus the CLSA PMI released on Friday which indicated December had been the fifth month of contraction for manufacturing in China. (See Daily Sources 1/2 #4)

13. Rama Lakshmi at the Washington Post reports that Shiv Shankar Menon, India's Foreign Secretary, announced that its evidence on the Mumbai terrorists was forwarded on to Pakistan Monday and that it expected action against the suspects named therein "as quickly as possible."

14. The Times of India reports that on January 1 the Indian government inked a $2.1 billion dollar contract for eight Boeing P-8I long-range anti-submarine warfare, anti-surface warfare, and reconnaissance aircraft.

"Sources said the P-8I contract was 'a direct commercial agreement with Boeing', with 'some issues of end-use verification yet to be fully sorted out" with the US government.'"

The contract is the largest defense contract India has ever signed. (h/t Feng at Information Dissemination)

15. Will McCants at jihadica reports that the Shabaab movement in Somalia has greatly accelerated its Arabic propaganda efforts in the last two weeks. Apparently the movement is especially concerned with targeting its more moderate Islamist competitors, the Alliance for the Re-Liberation of Somalia--an assembly arranged by former Islamic Courts Union leaders for negotiations with the Transitional Federal Government--or the folks installed by Ethiopia and recognized by the UN. Perhaps there is a contest for funds. Moderate Islamists may prove more palatable to most, if not all, of the governments in the Gulf, as well as Cairo, and thus worth funding. Meanwhile, Galrahn at Information Dissemination reports that the EU Operation Atalanta's rules of engagement now appear to be to pursue, engage, and sink ships suspected of piracy.

16. Retail analytics firm Precima recently released findings of a survey asking consumers what they are spending gasoline savings on.

"48% said they’re spending it on groceries, followed by saving (42%), holiday gift-buying (37%), paying off credit cards (30%), entertainment (10%), and other (14%)."

Since I'm not sure how consumers could instantly disaggregate gasoline savings from other forms of income, I take this as an indication of what people are spending on, generally. If IHS Global Insight is right and every $0.10 drop in gasoline equals $12 billion in reduced costs generally across the economy, then (given regular gas prices of $4.10/gallon versus ~$1.60/gallon today) Americans have received a $300 billion stimulus package in terms of gas prices or about 2% of GDP (given nominal GDP in 3Q of $14.4 trillion).

17. Keith Johnson at Environmental Capital reports that at Ford the SUV was the worst performing sales category in December, and sales were lower than November. At both GM and Honda light trucks sales fell farther than car sales. But,

"the same dismal economy spells even worse news for more expensive, fuel-efficient hybrid cars. Honda sold just over 1,000 hybrids in December, a 69% decline, while sales of the iconic Toyota Prius tumbled 45% last month. If shouldering the extra upfront costs for a hybrid was already a stretch with pricey gasoline, cheap gas seems to make it a no-brainer, for now at least."

Nick Bunkley at the New York Times reports that Ford's F-series pickup truck held onto its position as the best-selling model in the US for the 27th consecutive year.The F-150 is a big truck with a V-8 engine and at best gets 14 miles/gallon in the city and 19 on the highway. It's curb weight is 5,628 pounds. It's basically one of the biggest pickups on the market and, even with gasoline at $4/gallon, it remains the most popular.



The LA Times estimated that Ford would sell about half a million in 2008.

18. Ros Krasny at Reuters reports that the president of the Chicago Fed, Charles Evans, told reporters in San Francisco that, "based on the outlook for rising unemployment, falling industrial production and a wider output gap, economic models suggest rates should be below zero." He also said, "Quantitative easing, a way to flood the banking system with large amounts of money, 'is a way to mimic below-zero rates and provide support to the economy ....'" Evans is a voting member of the FOMC in 2009.

J Curve Conflicts

Antonio Ciccone, Macroeconomist in Department of Economics and Business, Universitat Pompeu Fabra, and CEPR Research Fellow, has a very interesting piece on whether sudden impoverishment causes civil conflict.

It seems pretty intuitively true that they would do so, but in various theories of revolution and rebellion there are a variety of theories.

Ciccone took a look at sub-Saharan Africa and correlated the level of rainfall to civil conflicts over the last 10 years. He found that civil conflicts were very likely to correspond to years where there was a drought, and incomes in Africa's heavily agriculture-based societies, fell. He writes:

"the data show almost twice as many conflict onsets during low-rainfall-years – 23 conflicts started following low-rainfall years and 12 following high-rainfall years. Put differently, 2/3 of civil conflicts started in the 10 years with lowest rainfall and 1/3 in the 10 years with highest rainfall."

And he concludes:

"My estimates indicate that a negative 5% income shock raises the likelihood of civil conflict by 15 percentage points."

However,

"When I consider only civil wars – defined as civil conflicts with more than 1000 annual battle deaths – I do not find a link with droughts ...."

Very interesting work well worth having a look at if you have the time.

The question of what starts revolutions has in the past described in terms of a J-Curve. James C. Davies posited that social revolutions happened after there was a large increase in expectations followed by a sharp reversal. You can think of it as an upside-down J, where you have rising prosperity and expectations of those times to continue--similar, to say, the US housing market--followed by a sharp reversal in fortune, corresponding to the inverted lip of the J.

The counter-theory, which I think was posited by Theda Skocpol in her States and Social Revolutions--but I am not sure--is that you have a J-curve, where the J is turned backwards. That is, after a steep fall in prosperity you begin to have a recovery, it is after society has begun to recover that revolutions take place.

We may see some new data in many places around the world quite soon.

Daily Sources 1/2

1. Philip P. Pan at the Washington Post reports that the political leadership in the Ukraine have been put aside in a joint statement yesterday offering Gazprom $201 per thousand cubic meters of natural gas, up 11.7% from the $180 per thousand cubic meters paid in 2008. The negotiations between Moscow and Kiev have been hobbled somewhat by the fact of the longstanding and bitter feud between Ukrainian president, Viktor Yushchenko, and its prime minister, Yulia Tymoshenko. That said, Gazprom at 10am yesterday cut off all shipments of natural gas through the Ukrainian pipeline system. Also yesterday, Gazprom withdrew its offer of natural gas for $250 per thousand cubic meters to Ukraine after Ukraine rejected it and is now asking for $418, more or less the price paid by Western European customers. Stephen Bierman and Henry Meyer at Bloomberg report that Russia has reacted by boosting the amount of natural gas to Europe via the Belarussian pipeline network. Russia provides about a quarter of Europe's natural gas requirement, 80% of which has historical been sent via Ukraine.

"'The Belarus option is certainly viable and they could put some of the gas through Belarus,' Jonathan Stern, director of gas research at Oxford Energy, said today. 'But it certainly is not the solution. There is some spare capacity within the Belarus corridor but it is probably within the order of 10 percent from Ukraine capacity.'"

Ukraine receives 70% of its natural gas requirement from Russia and is facing temperatures in Kiev of as low as 14ºF. It has natural gas supplies in storage equivalent to about 35% of yearly consumption and so it would seem that the crisis is not likely to be resolved just yet. The Bloomberg article is worth reading in full.

In a related story, Tom Barkley at the Wall Street Journal reports that the IMF plans to lend Belarus $2.5 billion to help the country weather the financial crisis. "Following news of the deal, the Belarus central bank said it will devalue its currency by 20% as of Jan. 2 and raise its key refinancing rate." Belarus paid about $129 per 1,000 cubic meters of gas from Russia in 2008 and may have negotiated a lower price for 2009, but is a staunch ally of Moscow with which it has been mooting the idea of reunification for many years now.

2. Nadia Rodova at Platts reports that Russian crude oil production was down 0.7% in 2008 from 2007, to 488.105 million metric tonnes (9.735 mb/d). Average daily output, as opposed to total tonnage, was down 1% on the year from 9.83 mb/d. Crude output in December was 40.87 million tonnes (roughly 9.62 mb/d.)

3. Alexander Kwiatkowski and Candido Mendes at Bloomberg report that Angola assumed the Presidency of OPEC yesterday.

"Oil from Angola accounted for about 5 percent of total U.S. crude imports in 2007, or 496,000 barrels a day, according to the Energy Information Administration. China imports 500,000 barrels of day of oil from Angola, according to Glencore International AG, the world’s largest commodity-trading company."

4. Li Yanping at Bloomberg reports that manufacturing in China contracted for the fifth straight month in China, as indicated by the CLSA China Purchasing Managers’ Index. The index stood at 41.2 at the end of December, slightly up from the 40.9 seen in November. (Anything above 50 indicates growth; anything below 50 indicates contraction.)

"China’s economic growth may have slipped to 5.5 percent last quarter, the weakest pace in at least 15 years, according to Shanghai-based Industrial Bank Co."

Anything below 8% is considered below the rate required to absorb new additions to the labor market and thus likely to cause instability. In the vein, Lauren Keane at the Washington Post has an atmospheric, finger testing the wind, story about the situation facing migrant workers in China. China's People's Daily reported Wednesday that the People's Bank of China released a report on Tuesday showing that non-cash payments declined by 8.3% year over year in the third quarter.

"The amount of money involved in non-cash payments, including commercial papers and bank cards, was about 157.3 trillion yuan ($22.97 trillion) in the third quarter ...."

Catalan economist Edward Hugh has another analysis at Fistful of Euros more or less calling the latest Chinese data a leading indicator for a second Great Depression.

"Well China isn’t quite in Great Depression mode yet, but manufacturing activity - which forms the core of the Chinese economy and accounts for 43% of all activity - is already very close to a technical recession ...."

Hugh's piece is a long analysis friendly to economic laymen worth reading in full. Brad Setser at Follow the Money argues that the latest data suggests that China is clinging to its traditional export-led growth policy, which flies in the face of the growing evidence that there will export markets are in the process of shrinking, protectionist trade policy or not. Mostly the same argument Setser has been making for a while, but still worth reading.

6. Eric Watkins at the Oil & Gas Journal reports that Indonesia will continue its price renegotiations for natural gas from Tangguh with China this month. The original 25 year contract for the gas had been for $2.40/MMBtu (~ $13.92/b on a BTU basis.) China later offered $3.80/MMBtu (~ $22.04/b on a BTU basis), but Indonesia declined. (The contracts are sometimes linked to benchmark crude prices on a futures exchange with ceilings and floors, Watkins did not indicate whether the contract was based on a formula or a flat price.) Yesterday the NYMEX natural gas contract for delivery at Henry Hub in February was $5.622/MMBtu (~ $32.60/b on a BTU basis) the UK price was £5.7/MMBtu (~ $8.34/MMBtu or ~ $48.37/b on a BTU basis.)

7. Kartik Goyal and Anil Varma at Bloomberg report that the Reserve Bank of India lowered its benchmark lending rate by 1% to 5.5% today.

8. Ravi Nessman of the Associated Press reports that the Sri Lankan military captured the Tamil Tiger's main headquarters Friday. It is the latest episode in the 25 year long civil war and celebrations erupted in Colombo after the capture was reported. The Tigers immediately signaled they would continue the fight by exploding a suicide bomb near the air force headquarters in Colombo.

9. Amit R. Paley in the Washington Post reports that the US handed over control of the "green zone" yesterday to Iraqi authorities.

The Green Zone was in the heart of Baghdad, the capital city, and as such the transfer was a symbol of the transfer of sovereignty.

10. Mohamed Ibrahim and Jeffrey Gettleman at the New York Times report that the Ethiopian army began pulling out of Somalia's capital, Mogadishu, today.

"It is not clear whether the Ethiopian troops are leaving Somalia entirely or simply redeploying from Mogadishu to other areas of the country. Western diplomats estimate there are still several thousand Ethiopian troops inside Somalia, and many Somalia analysts have predicted that the Ethiopians will linger for some time inside the country or along the border as a buffer against Islamist militants."

That said, last month Addis Ababa indicated that it would withdraw more or less entirely. An Ethiopian official told the AFP that the withdrawal process will take some time, meaning, I suppose, that they may decide to use troops to tip the contest for power in Somalia in favor of one faction or another.

11. Simon Romero of the New York Times reports that Cuba held celebrations yesterday to mark the 50th anniversary of its revolution. In the Washington Post Eugene Robinson argues that it is time for the US to abandon the 50 year policy of embargoing Cuba, which has clearly not produced the intended result.

"US policy for dealing with the rest of the communist world was always to push for more contact and exchange, on the theory that exposure to Western ideas, freedoms and prosperity would hasten communism's demise. It worked.

I'm convinced that it would have worked in Cuba, too. At the very least, if the U.S. government had treated Cuba the way it treated other communist nations, the onus would have been on Castro. If he wanted to keep Cuban society from being infected by democracy, consumerism and other yanqui diseases, he would have had to justify measures to keep Americans and American products out. Instead, he has been able to portray his revolution as a noble David, menaced by a hulking, aggressive Goliath to the north."

This argument has been being made with little practical effect for some time now, with the exception of lifting the ban on sales and donations of food and medicine to Cuba in the late 90s. The difference is that there is evidence that the Cuban-American community is finally coming round to this point of view. Once support for the policy collapses in the Cuban-American community, the embargo will lose nearly all of its political appeal. I suspect, like Robinson, that the only reason Castro has managed to maintain his hold on Cuba is the embargo.

12. In an unusual move, The Wall Street Journal's editorial board today endorsed Sarkozy's remark that "the monetary system should be rethought [within] fixed exchange rates." The board argues that the euro has been a signal success for Europe, but that its volatility against the dollar has traumatized global trade.

"But the world could ... harness the benefits of exchange-rate stability if its political and economic leaders began to discuss how better to coordinate monetary policy. Mr. [Robert] Mundell[, the Nobel laureate and intellectual father of the euro,] suggests, for starters, a mechanism for close coordination among the Fed, the ECB, and the Banks of England, China and Japan."

Mundell also argues that the escalation of financial panic of September 2008 was catalyzed by the sudden rise of the dollar versus the euro. Well-worth reading in full.

13. Daniel Goldstein at Platts reports that the US Department of Energy may begin purchasing crude for the Strategic Petroleum Reserve again in February. The DOE announcement follows calls from Congress that the Administration do just that. The SPR currently holds somewhat more than 700 million barrels of crude oil and has a capacity of 727 million barrels. Prior to the decision in May last year to cut off additions to the SPR, the complex was receiving about 70 kb/d in crude deliveries--mostly of light sweet crude.

14. Bernard Simon at the Financial Times reports that "US hybrid petro-electric sales in November shrank 53 per cent from a year earlier, compared with a 37 per cent drop overall, according to Autodata, a market-research firm. December sales, to be announced on Monday, are to show a similar trend."

"Sales of most hybrid models have dropped sharply. Demand for Toyota’s Prius hatchback, the top-selling hybrid, fell by almost half in November from a year earlier. The Camry sedan was down 57 per cent, and the Ford Escape crossover 35 per cent."

15. Howard Schneider at the Washington Post reports that the Institute for Supply Management's index of industrial production fell by 3.8% in December from November to 32.4. It is the fifth consecutive month in which the index has fallen. (A number above 50 indicates manufacturing growth; below 50 indicates contraction.)

"The group's index of new orders and prices showed them at their lowest levels since the late 1940s. ... The ISM has conducted its survey since 1931."

16. Andrew Martin, at the New York Times, has a very interesting story on the huge surplus of milk on the market.

"Other agricultural sectors are also struggling with a slowdown in demand from foreign buyers because of the global recession and an increase in the value of the dollar, which has made American exports more expensive abroad. The Agriculture Department is expecting steep declines in exports of corn, wheat, soybeans and pork.

But while the government has price-support programs for about two dozen agricultural products, so far milk powder is the only commodity that has sunk low enough to start the flow of government dollars. Some expect that taxpayers will soon be buying blocks of cheese, too, given the plunging price."

It might be inefficient, but ensuring a surplus of food is a very good thing for political stability. That said, countries which are net food importers will have a tough time if surplus producing nations have expensive currencies. Well worth reading in full.

17. Robert Rosenkrantz, the Chairman and CEO of Delphi Financial Group, has an opinion piece in the Wall Street Journal where he argues that capital reserve requirements for bond holdings should not be determined by law on the basis of credit rating agencies.

"For every dollar of equity that insurance companies are required to hold for bonds rated AAA, $3 is needed for bonds rated BBB, and $11 is needed for bonds rated just below investment grade (BB). For banks, the sensitivity of capital requirements to ratings is generally even more extreme.
...
Since the ratings determine required capital, they have a profound influence on how financial institutions invest their assets -- in effect, the regulatory reliance on ratings makes the rating agencies the de facto allocators of capital in our system. And every actor in the financial system has every incentive to group and slice assets in ways that maximize not their fundamental soundness but their rating."

Given that the ratings agencies have been shown to be in the pocket of the financial industry, this certainly makes sense to me. However, it still seems to me that in order for the financial system to regain some footing, consumers will need to have a reliable sense of what assets and liabilities public corporations hold. Taking the rating agencies out of the law might be reasonable, but it would not resolve this particular problem at all. Worth reading in full.

18. Yves Smith at Naked Capitalism reports on a study by Carmen Reinhart and Kenneth Rogoff which suggests that the on the basis of past financial crises that the economic contractions that follow as a result are usually much larger than normal--non-financially catalyzed--recessions.

"Their latest piece looks at how crises generally progress and resolve themselves. The usual outcomes are worse than most commentators forecast for the US (save the fall in average real estate prices):

1. Real housing price declines average over 35% over a six year period. Note in other crises, residential real estate was not necessarily a focus of the bubble. Even excluding Japan (which has suffered a 17 year housing price decline) the average is over 5 years.
2. Equity prices fall 55% over three and a half years.
3. GDP fall an average of 9% (read that twice)
4. Unemployment increases 7% over previous norms.
5. Government debt "explodes", increasing an average of 86%, but the cause is typically not a banking industry recapitalization, but maintaining services in the face of collapsing tax revenues and counter-cyclical measure ex financial system measures."

Well worth reading in full.