LONDON, Sept 27 (Reuters) – According to the Wikileaks diplomatic cables, China’s powerful Vice-Premier Li Keqiang told the American ambassador he paid little attention to official data on industrial production and GDP — preferring to focus on railroad cargo volumes, power consumption and bank loans as more reliable metrics for growth.

Unlike China’s notoriously unreliable data, the United States spends more than $100 million a year on data collection and analysis by the Bureau of the Economic Analysis and the Census Bureau, and has the most comprehensive, timely and accurate macro data among the advanced economies.

But even for the United States, headline indicators like GDP and industrial production are compiled from a host of estimates, surveys and other micro indicators. The process is slow, sensitive to assumptions, and the data is subject to large revisions as more concrete numbers become available.

So micro indicators on rail freight, power consumption and loan growth can still provide invaluable real-time intelligence about the economy’s health — supplementing and anticipating headline numbers. Micro and macro indicators are complements. In fact, for many decades, the Fed’s widely quoted industrial production numbers were partly inferred from electricity consumption.

Using Li Keqiang’s three indicators, it is clear the U.S. economy stalled in the first half of the year and remains moribund at present.

The rebound in rail freight volumes reported in 2010 and the first three months of 2011 has stopped. Volumes are no higher than a year ago, according to the weekly carload data released by the Association of American Railroads (Chart 1).

Power consumption has stagnated this summer after rebounding from its recession low in 2010 and early 2011, according to weekly generation data from the Edison Electric Institute (Chart 2).

LONDON (Reuters) – Commodities suffered the equivalent of a meteorite strike last Thursday and Friday.

Macro fears triggered an extraordinary plunge across a broad range of futures, with over-extended markets routed amid an acute lack of liquidity and the need to raise cash.

Commodity markets are infamous for violent price moves and lack of liquidity. But in an ironic twist, it was the largest, most liquid and normally well-behaved markets that showed the most abnormal falls — indicating it was a synchronised macro-shock rather than deteriorating micro fundamentals which triggered the selloff.

Highly abnormal price moves were reported in silver, copper, gold, and nickel on Thursday, with lead and zinc making an appearance in the list of unusual discontinuities on Friday. In contrast, often-wild markets for U.S. natural gas, gasoline, heating oil, WTI and Brent showed only slightly elevated volatility and remained well-behaved.

The attached tables show how price moves on Thursday and Friday in the 24 liquid commodity futures included in the Standard and Poor’s Goldman Sachs Commodity Index compare with typical daily volatility since 1990 (or 2005 in the case of the new gasoline blendstock contract).

TABLES: here

GOLD: here

LONDON, Sept 22 (Reuters) – The Fed’s decision to extend the maturity of its government debt portfolio and reinvest the proceeds of maturing mortgage-backed securities in housing bonds had been read as an act of desperation, rather than a decisive measure capable of spurring more investment.

There are sound theoretical reasons for the Fed’s policy, and it has good precedent.

There is nothing in either the Federal Reserve Act or monetary theory requiring the Fed to limit its open market operations (OMO) to short-dated government bills and notes rather than longer-dated Treasury bonds or high-quality notes issued by housing agencies, banks or even highly-rated corporations.

But for all its good intentions, the policy — which has already hit the price of risk assets like oil — is unlikely to have more than a transient and marginal impact, and has instead heightened fears about the outlook, giving the appearance of panic under fire rather than calm control.

It is confidence — not money — that is in short supply. The Fed’s increasingly tortured interventions have done nothing to reassure outsiders.

BILLS ONLY, OR PREFERABLY

The practice of limiting open market operations (OMO) to short-term T-bills (characterised in the 1950s and 1960s as a policy of “bills only”) is purely a convention, born of a desire to restrict the Fed’s interventions in the credit markets to the narrowest possible extent.

LONDON, Sept 22 (Reuters) – Persistent supply shortfalls have kept Brent oil supported around $110 per barrel, even as the economic outlook in Europe and North America darkens and the market prices an increasing risk of recession.

But the relative weakness of forward prices suggests most market participants expect the current tightness to prove temporary, gradually easing in the next 12 months.

Forecast growth in non-OPEC oil supplies in 2011 has been cut from 600,000 barrels per day to just 200,000, exactly offsetting IEA downgrades in projected consumption, according to a thoughtful note published by my colleague Javier Blas at the Financial Times on Tuesday (“Supply-side support keeps Brent over $100″).

Blas examines in detail the knife-edge split between hedge funds and other macro traders concentrating on the deteriorating economic environment, and contrasts it with the views of physical crude traders and funds who focus more on the extreme tightness in cash markets at present.

But shift the focus further forward along the curve and it is clear supply shortfalls are expected to be temporary as Libyan exports resume and other problems are resolved, while the probability of recession and stagnating demand weighs on futures prices for December 2012 and December 2013.

SPOT AND FORWARD

Observers point to big premiums for nearby futures contracts over those for deferred delivery (backwardation) as an indication the market is worried about the availability of physical supplies.

LONDON, Sept 14 (Reuters) – External Monetary Policy Committee (MPC) Member Adam Posen on Tuesday delivered a passionate appeal for the Bank of England to ignore “policy defeatism” and engage in more quantitative easing and even consider direct lending to small and medium-sized enterprises unable to get credit elsewhere.

In a counterblast against “unduly influential voices” who claim aggressive monetary responses would be ineffective, counter-productive or corrupting, Posen demanded policymakers refuse to be “slowed, confused or intimidated by such false claims”.

Since October 2010, Posen has been a lone voice calling for the Bank to undertake more quantitative easing by doing another 50 billion pounds of asset purchases. Largely ignored by colleagues and the media during the first half of the year, when attention focused on rising consumer prices, Posen’s calls have gained more attention as oil prices have peaked and economies in the United Kingdom and elsewhere have stalled.

Posen’s description of recent economic developments in the United Kingdom and elsewhere is contentious, and his policy prescriptions are flawed. But it is valuable to examine why they are wrong because it sheds light on the roots of the current problem, and policies that might be more successful.

MONEY, CREDIT, INFLATION

The central problem with Posen’s speech is his persistent confusion between the quantity of money and the availability of credit. It is the same misunderstanding that has bedevilled policy in the United States.

In both countries, the banking system is awash with excess reserves yet credit remains expensive and hard to come by for households, as well as small and medium-sized enterprises (SMEs) unable to tap the capital markets directly.

LONDON, Sept 13 (Reuters) – Learning from the Yorkshire adage about making money from waste (“where there’s muck there’s brass”) U.S. refiners are making big profits from processing the poorest crudes and unwanted residues from other countries’ refineries.

Importing low-value oils from refineries in Europe and Africa that cannot process them further to wring out additional fuel oil and gasoline has become an increasingly important and profitable business for the biggest and most complex refineries on the U.S. Gulf Coast.

Problems for European and U.S. East Coast refineries unable to reduce sulphur or crack large molecules have become an opportunity for Gulf Coast refiners, buying crudes and residues others cannot process at rock bottom prices.

U.S. refiners have actively sought out heavier crudes and discounted refinery by-products from other countries to capitalise on their greater investment and better technology.

SPECIALIST MARKET

Trade in heavy fuel oils and the residuum from atmospheric and vacuum distillation towers remains a niche market, restricted to a handful of players. But it has been the fastest-growing segment of U.S. refinery inputs over the last decade and plays a vital role supporting the profitability and viability of Gulf refineries.

In 2000, U.S. refineries imported 63 million barrels of heavy gas oils and 24 million barrels of resid compared with 3.3 billion barrels of crude, according to the Energy Information Administration (EIA), the statistical arm of the U.S. Department of Energy. Heavy unfinished oils accounted for just 2.6 percent of the crude and unfinished feedstock imported by U.S. refiners.

LONDON, Sept 7 (Reuters) – Sunoco’s decision to put its East Coast Philadelphia and Marcus Hook refineries up for sale has probably condemned both to closure.

In a world where seaborne light sweet oils are much more expensive than landlocked U.S. crude and heavier and sourer imports, Philadelphia and Marcus Hook are the two worst refineries to own in the United States.

Both will struggle to find buyers, unless someone can be found willing to invest large sums of money to upgrade their desulphurisation and coking capacity, enabling them to improve margins by processing cheaper heavier and sourer crudes.

With so much pressure on margins and surplus refinery capacity in North America and Western Europe, the prospect of a saviour emerging seems remote.

Now the question is which refinery might be next up for sale or closure, with ConocoPhillips’ facilities at Bayway and Trainer seemingly most vulnerable.

TERRIBLE ASSETS

The best way to understand why Marcus Hook and Philadelphia are such terrible assets to own is to look at a snapshot of the crudes they were processing in June (the latest month for which detailed data is available) compared with other refiners across the country.

LONDON, Sept 5 (Reuters) – A raft of eminent economists have called for a short, sharp, controlled burst of inflation to solve the problem of over-indebtedness and pull the advanced economies out of a protracted slump.

But even if monetary policy could produce just the right amount of inflation (not too little, not too much), rising prices will compound the misery for consumers across North America and Western Europe, and do nothing to ease the burden of paying down mortgage debts or bolster confidence.

The problems underlying the debt crisis and slump are structural, and require structural solutions. Fiddling with the value of the currency will not cure them.

The notion of restoring confidence by threatening just the right amount of inflation is based on a series of logical misunderstandings. In particular, advocates confuse prices with wages, and miss the fundamental insight of John Maynard Keynes’ “General Theory”, which put confidence and expectations at the heart of growth and employment.

The call for more inflation to stimulate growth recalls the wedding scene from the film Flash Gordon in which Emperor Ming orders “All citizens will make merry … on pain of death”. Threatening price increases without comparable wage rises will heighten uncertainty, depressing rather than increasing confidence and activity.

THE 4-6 PERCENT SOLUTION

Harvard Economics Professor Kenneth Rogoff has been the leading proponent of what might be termed the “inflationist” solution to the Second Great Contraction.

LONDON, Sept 1 (Reuters) – For the second month running, U.S. manufacturing registered little or no growth in August, according to the Institute of Supply Management’s monthly survey.

But it is more important than ever to keep a sense of historical perspective and avoid becoming despondent about the lacklustre nature of the present recovery in the United States.

Expansions are almost always fitful in their early stages and typically lose much of their early momentum by the start of the third year.

The attached charts show the behaviour of the ISM’s composite manufacturing index in the course of the first 36 months after each recession since 1949 (Chart 2 shows the most recent recoveries in more detail).

The National Bureau of Economic Research dates the last trough to June 2009. Some 26 months later, the composite index stood at 50.6 in Aug 2011, not significantly above the 50-point threshold dividing expanding activity from a contraction.

That might seem low. But the average reading at this point during the previous 10 post-war recoveries was only 52.6 (with a range from 38.8 to 72.1 and a standard deviation of 10.0). So the current slowdown is not particularly unusual.

No doubt the slowdown has disappointed policymakers and forecasters, who were hoping for a V-shaped recovery after a deep downturn as payback for the aggressive fiscal and monetary policies pursued to speed the return to growth.

LONDON (Reuters) – Uncertainty about the future is normal, but how households, businesses and policymakers deal with it determines whether the economy grows or stagnates.

Reactions to uncertainty determine whether the economy booms as in the 1920s or the 1990s or stalls as in the 1930s or the advanced economies after 2007.

Earlier generations of economists and investors understood the central role played by uncertainty in asset prices and growth.

Economist Frank Knight devoted an entire book to explaining the role of entrepreneurs organizing production and guaranteeing payment to suppliers, workers and lenders in order to meet the highly uncertain future demand for products, interposing their own credit in the process (“Risk, Uncertainty and Profit”, 1921).

John Maynard Keynes focused on the “animal spirits” governing investment behavior and gave a whole chapter of his most famous work to the impact of uncertainty on decision-making (“General Theory of Employment, Interest and Money”, Chapter 12, 1936).

The Great Depression taught policymakers the fundamental role of uncertainty and expectations in determining whether the economy would remain paralyzed in a slough of despond or could recreate the dynamism of the previous decade.

Not for nothing did President Franklin Roosevelt begin his 1933 inaugural address with the warning but also rallying cry that “the only thing we have to fear is fear itself — nameless, unreasoning, unjustified terror which paralyses needed efforts to convert retreat into advance”.