Mish's Global Economic Trend Analysis

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• S&P Revises Italy's Credit Outlook to Negative; Italy Heads for Recession; Expect ECB to Hold Rates
• Live Feed of Madrid Protests
• Charts of the Day: TrimTabs Consumer Spendables Index, Dependency Ratio II
• Norway, Iceland Suspend $42 Million in EEA Greek Development Funds; Euro-Zone Friction, Protectionism, Mistrust; Why Shouldn't There be Mistrust?
• Spain's Icelandic Revolt; Protests Spread to Italy

S&P Revises Italy's Credit Outlook to Negative; Italy Heads for Recession; Expect ECB to Hold Rates Posted: 20 May 2011 08:52 PM PDT In a move that is guaranteed to have Italy, the EU, and the ECB howling, Italy Outlook Revised to Negative by S&P; Ratings Affirmed Italy had its credit-rating outlook lowered to negative from stable by Standard & Poor's, which cited the nation's slowing economic growth and "diminished" prospects for a reduction of government debt. S&P affirmed the country's A+ long-term rating, the fifth highest, and its top-ranked A-1+ short-term rating, the company said in a statement today. "Italy's current growth prospects are weak, and the political commitment for productivity-enhancing reforms appears to be faltering," S&P said. "Potential political gridlock could contribute to fiscal slippage. As a result, we believe Italy's prospects for reducing its general government debt have diminished." The Italian economy expanded 0.1 percent in the first quarter, less than economists forecast, as gains in exports failed to offset weak domestic demand. The euro region's third- biggest economy won't return to its pre-recession level for at least another two years, and the $2.3 trillion economy needs to raise productivity, the Organization for Economic Cooperation and Development said this month in a report. Fitch Ratings today cut Greece's long-term debt rating to B+, four notches below investment grade, and placed it on rating watch negative. Even a voluntary extension of the country's bond maturities would be considered "a default event," the rating company said in a statement. Greek 10-year bond yields surged to a record 16.6 percent. Italy Heads for Recession Italy is the Euro-Zone's third largest economy and it is on the verge of recession with a mere 0.1 percent GDP advance in the first quarter. ECB Hikes Likely on Hold Will Trichet hike into that? I think not, and if not, that will pave the way for another leg lower on the Euro. When Greece defaults and when Spain or Italy gets in serious trouble, the Euro will come under even more pressure. Notice I said "when" not if. The Euro-Zone economy is on the edge of a cliff and it will not take much to send it over the edge. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Live Feed of Madrid Protests Posted: 20 May 2011 02:11 PM PDT My friend Bran who lives in Spain just pinged me with a live feed link. Hello Mish, briefly : SOL TV has a continuous direct broadcast from Puerto del Sol in Madrid, where today's gathering has just started. Bran More information and additional links (in Spanish) can be found here: http://www.soltv.tv/soltv2/index.html Use Google Translate to translate any of the links. You can use a link, not just portions of text. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Charts of the Day: TrimTabs Consumer Spendables Index, Dependency Ratio II Posted: 20 May 2011 11:39 AM PDT I received an email today from TrimTabs regarding their Consumer Spendables Index and a new measure called Dependency Ratio II The Consumer Spendables Index consists of three components. Cash Extracted from Real Estate After Tax Income from Other Sources After Tax Income from Wages and Salaries click on chart for sharper image If you see a "+" sign click a second time for higher resolution without further increasing the size. TrimTabs reports ... The Federal Reserve discontinued its data on cash-outs in Q3 2008, but we use another source of refinancing data from Freddie Mac to estimate cash-outs and thus consumer spendables. According to the Fed, cash-outs peaked at $804 billion in the four quarters ended in Q2 2006 (we refer to four-quarter periods to smooth quarterly volatility). At that time, cash-outs were equal to 13.6% of the $5.9 trillion in after-tax income. We estimate that cash-outs amounted to only $62 billion in the four quarters ended in April, down $742 billion, or 92.2%, from the peak. Consumer spendables peaked at $7.06 trillion in the four quarters ended in Q4 2007, more than a year after cash-outs began to decline. Then consumer spendables began to decrease, bottoming at $6.06 trillion in Q2 2010. In the past year, consumer spendables rose an estimated $245 billion, or 4.0%, to $6.31 trillion. This increase is not impressive given that it was accompanied by the payroll tax cut and $1.5 trillion in federal deficit spending. Note that the recession ended in the second quarter of 2009. The Consumer Spendables Index is below that point now. Moreover, it has taken three full years (12 quarters) for the Wages and Salaries component to match the pre-recession high. This is in spite of record amounts of fiscal stimulus by Congress, and record amounts of liquidity maneuvers including two rounds of Quantitative Easing by the Fed. TrimTabs Dependency Ratio II TrimTabs is alarmed by the rapid rise in government benefits and has a new calculation to measure consumer dependency on government. From TrimTabs .... We have been alarmed at the rapid growth in government social programs. Several months ago, we introduced the TrimTabs Dependency Ratio, which compares income from government social benefits to income from wages and salaries. The ratio increased from 9% in 1960 to 36% in March. We are introducing the TrimTabs Dependency Ratio II, which adds income from government wages and salaries to income from government social benefits and compares it to income from wages and salaries. This modified ratio rose to 66% in March, from 33% in 1960 and 45% in 2000. The principal driver of the increase in TrimTabs Dependency Ratio is the rapid rise in government wages and salaries and social benefits over the past decade. From 2000 to 2010 private sector wages and salaries grew 29%, whereas government wages and salaries plus social benefits grew 89%, nearly three times the growth rate of private sector wages and salaries. The government is playing an increasingly dominant role in the economy by borrowing massive sums to fund social welfare programs. This borrowing is financially unsound if not morally wrong. Instead of creating new wealth, it is simply piling more debt on an economy with the same capacity. At some point, the carrying capacity of the economy will be exhausted. We believe the economy is at or near that point. Transitory Inflation TrimTabs offers this assessment of Bernanke's claim regarding "Transitory Inflation" The increase in food and energy prices reduced cash available to spend on non-essential items—consumer items excluding housing, food, transportation, or health care—by 3.5% to 5.2% for low- and middle-income earners and 1.6% to 3.6% for high-income earners. We estimate that the increase in food and energy prices is reducing cash available to spend on non-essential items by $200 billion to $260 billion annually, which offsets most of the $114 billion stimulus from the payroll tax cut and the $245 billion increase in consumer spendables. We are troubled by the Fed's focus on core inflation. Since core inflation is only 1.3% y-o-y, the Fed assumes that soaring food and energy prices are transitory and therefore unimportant. In our view, something transitory lasts no longer than a few months, but the run-up in food and energy prices began last summer. While the Fed may consider a 10% annualized increase in food prices and a 70% annualized increase in gas prices transitory, these increases are reducing discretionary income and slowing economic growth. If food and energy prices do not retreat, they could tip the economy into recession. Thanks to TrimTabs for those excerpts. There are eight additional charts in the 15-page report I did not cover. In regards to TrimTabs' statement on recession in the last paragraph above, I agree. In fact, I think another recession is already baked in the cake. For more details on the slowing global economy please see Huge Cracks in Global Recovery Thesis; Industrial Production Unexpectedly Drops in Germany, France; UK Weaker than Expected. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Norway, Iceland Suspend $42 Million in EEA Greek Development Funds; Euro-Zone Friction, Protectionism, Mistrust; Why Shouldn't There be Mistrust? Posted: 20 May 2011 09:40 AM PDT Bloomberg offers a nice summary of recent Euro-Zone friction in How the Strauss-Kahn Case Damages Europe Strauss-Kahn's departure from the scene couldn't have come at a worse moment. Little noticed in the U.S., but momentous inside Europe, was Denmark's unilateral decision on May 11 to check the papers of people arriving from other European nations. That's the equivalent of New York asking for papers at the Lincoln Tunnel crossing from New Jersey, and appears to violate the 1985 Schengen Agreement, which removed border-crossing procedures among 25 European states. German Interior Minister Hans-Peter Friedrich says that Denmark's action could set off a "spiral of mistrust." Outside of a cosmopolitan few, Europeans' loyalty is first to their town or nation, and only then to "Europe," which, nearly two decades after the 1992 Maastricht Treaty, is still more of a landmass than an idea. Europe's equivalents of the Tea Party are populist, nationalist parties like the True Finns and the Danish People's Party, which resent Arab immigrants, the Eurocrats in Brussels, and members of the elites like Strauss-Kahn who are taking them places they don't want to go. Finland's demand for tough terms on Portugal's bailout can be traced directly to the rise of the True Finns, who captured a fifth of the vote in April elections. The backdrop for the intra-European tension is, of course, financial distress. It's no longer fellow feeling that's keeping aid flowing to Greece, Ireland, and Portugal; it's fear. If those countries default on their sovereign debts, it will blow a hole in the banks that hold their loans and bonds. By the latest count of the Bank for International Settlements in Basel, Switzerland, foreign banks (mostly in Europe) held over $1 trillion worth of Spanish, Greek, Irish, and Portuguese debt at the end of 2010. The latest idea, launched by Luxembourg Prime Minister Jean-Claude Juncker, is to give breathing room to debtors in a way that (it's hoped) doesn't qualify as a default that would force banks to take writedowns. It's called "soft restructuring," or even "re-profiling," a European Commission mot du jour that belongs in the same linguistic category as "terminating with extreme prejudice" for murder. Opposing the would-be re-profilers, European Central Bank officials are standing firm against any sort of restructuring. On May 18, Juergen Stark, a member of the bank's executive board, said a restructuring of Greek debt "would create a catastrophe" by wiping out most or all of the capital of Greece's own banks. The friction between the nations that give and those that receive is only getting worse. Europe's richer members don't want to hand over, without strings, any more aid money; their populations won't stand for it. "Greece will have to implement huge reforms. Greece will have to rapidly, rapidly privatize many public entities," Juncker said on May 17. Only then, he said, would the EU consider further aid. It doesn't help that Germany, the biggest creditor on the continent, is thriving. The European Central Bank is torn between Germany's need for higher interest rates to avoid inflation and the weaker countries' need for super-low rates. The compromise is a key lending rate of 1.25 percent, vs. the zero to 0.25 percent range maintained by the Federal Reserve. Strauss-Kahn, before his arrest, had been considered a favorite to succeed Nicolas Sarkozy as French President. As one of the EU's true believers, he had demonstrated the leadership and persuasiveness needed to prod the European countries that expressed little more than a vague commitment to back up their pledges with cash. The tragedy of his downfall echoes far beyond an 11-by-13-foot jail cell at Rikers. Spiral of Mistrust Other than that last misguided paragraph, the Bloomberg article hits the nail on the head regarding friction, protectionism, and mistrust. The question I have is simple: Why shouldn't there be mistrust? The Euro-Zone setup was flawed from the beginning. A currency union with no fiscal union has never worked in history. Why should such a union work now? Greece should never have been admitted into the Euro-Zone in the first place. A trivial amount of research would have uncovered Goldman Sachs derivatives designed to hide Greek debt. Even if one failed to discover those derivatives, pension rules, retirement plans, and productivity were all wildly different between Greece and Germany. So why was Greece admitted other than to placate bureaucrats' wet-dream of a unified Europe? Instead of admitting the mistake, ECB president Jean-Claude Trichet, against the advice of Axel Weber (then head of the German central bank), decided to put the ECB itself at risk by buying government bonds of Greece in a foolish attempt to drive out speculators, and drive down the yields on Greek debt. Trichet's foolish move makes his face look like a scrambled egg, yet Trichet refuses to admit he has done anything wrong. Like a gambler down 90%, Trichet wants to double-down one more time, risking the solvency of the EU itself. True Finns Rise a Result of Mistrust Bear in mind all of these maneuvers by Jean-Claude Trichet, the IMF, and the Euro-Zone ministers are designed to bailout banks at the expense of taxpayers. The True Finns party is one result. I vehemently disagree with the True-Finns socialist agenda, but they rose to power for one simple and well-deserved reason. The True Finns see these bailout maneuvers for what they are: a violent raping of taxpayers for the benefit of the banks. With that in mind, why shouldn't there be mistrust? The surprising thing is not the Euro-Zone mistrust; the surprising thing is there is not more mistrust. For further discussion, please see ... Trichet Goes Ballistic, Walks Out of Meeting Over the Term "Soft Restructuring"; Infighting Over Who Replaces IMF Chief; Some Suggest Trichet ECB Ostrich Maneuver; Euro-Zone Comedy Show: Junker Proposed "Re-Profiling" Greek Debt, Now He Wants "Soft Restructuring"; Targeting Short-Selling Norway, Iceland, Liechtenstein Suspend Greek Development Funds New news is out today, this time from several countries which have had enough of Greece. Bloomberg reports Norway Suspends $42 Million in EEA Greek Development Funds Norway, Iceland and Liechtenstein froze payment of 235 million kroner ($42 million) in European Economic Area grants to Greece because the government didn't meet the obligations linked to the funds. "Greece had committed to paying 50 percent of each project. This was not followed up," Norwegian Foreign Ministry said in a statement posted on its website yesterday. "It's also unclear whether the money already transferred to the Greek authorities was forwarded to the appropriate recipients." About 13 million kroner of the committed funds for the period of 2004 to 2009 had been paid out, the ministry said. Greece's debt will balloon to 157.7 percent of gross domestic product in 2011 as the economy slumps for the third year, the European Commission forecast last week, fueling doubts whether the country will generate enough growth to pay its bills. The amount is not significant, the attitude change is. Finally, and in case you missed it, please see Spain's Icelandic Revolt; Protests Spread to Italy. "Fed Up" sentiment as well as mistrust are spreading. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Spain's Icelandic Revolt; Protests Spread to Italy Posted: 20 May 2011 01:55 AM PDT A protest movement that started in Spain has now spread to Italy. The Spanish government has banned protests, but that has only encouraged more protests. I picked the story up two days ago in Protests Mount in Spain; Sovereign Debt Crisis to Follow Acting on a tip, the New York Times picked up the story a day later in Protesters Rally in Madrid Despite Ban. Protest Images Here are a few protest images by Juan Luis Sanchez on Yfrog. Spain's Icelandic revolt Protests in Iceland helped bring down the Icelandic government and stopped the bailouts of banks at the expense of Icelandic taxpayers. Can the same thing happen in Spain? Please consider Spain's Icelandic revolt After passively submitting to the crisis, young Spaniards have finally taken to the street. Breaking out on the eve of municipal elections, the protests of recent days have been inspired by those in Iceland that led to the fall of the government in Reykjavik. One morning in October 2008, Torfason Hördur turned up at what Icelanders call the "Althing", the Icelandic parliament in the capital city, Reykjavik. By then, the country's biggest bank, the Kaupthing, had already gone into receivership and the Icelandic financial system itself was in danger of going under. Torfason, with his guitar, grabbed a microphone and invited people to talk about their dissatisfaction with the freefall of their country and to speak their minds. A movement spawned by the internet But those voices calling for real democracy are not just being raised in Iceland, a country of about 320,000 inhabitants. Here in Spain, the umbrella organisation for various Spanish movements – Democracia Real Ya (Real Democracy Now) – already lists among its proposals some 40 points ranging from controlling parliamentary absenteeism to reducing military spending through to abolishing the so-called Sinde law (a law restricting on-line infringements of copyright). The demonstrations have broadened spontaneously, as was the case for those who rallied under the umbrellas of the "alternative globalisation" movements, and have evolved, one decade after the World Social Forum in Porto Alegre, Brazil, on a more modest stage than the one demonstrators faced in the past at the World Economic Forum of the global elite in Davos, Switzerland. All this is happening at astonishing speed via the Internet, which has amplified the echo of discontent and opened the lanes of cyberactivism to groups such as Anonymous, notable for intervening against companies like PayPal and Visa during the advocacy campaign for Wikileaks chief Julian Assange. Yet it was also there at the beginning of the revolts in the Arab world, to help people get round the censorship of the Tunisian and Egyptian dictatorships. "When we grow up, we want to be Icelanders!" cried one of the leaders of the organisation during the march on Sunday May 15 before a column of young – and not so young – parents and children, students and workers, the jobless and pensioners. Many Saturdays in Iceland were needed before citizens won the changes they had demanded. Spain's first Sunday has taken place, and was followed by a Tuesday [May 17]- but there's still a long way to go. Protests have now spread to Italy and beyond. Protest Camps Green tents are current protest camps. Purple tents are planned protest camps. My friend Bran who lives in Spain writes ... A Spanish revolution is slowly gaining coverage, both internationally and locally. http://www.ikimap.com/map/2CYF is a map of existing, planned and evicted camps. Politicians and administrations are trying to claim sympathy and similarity to the protests expression, yet no one has good faith in the political class. 'Revolution' jumps from Spain to Italy Courtesy of Google Translate (a choppy one, slightly edited by me) please consider 'Revolution' jumps from Spain to Italy and Italy to the rest of the world Agglutinated protests in Spain by platform Real Democracy Now has called for demonstrations in at least six cities in the country, today and tomorrow at 20.00 . Concentrations have been summoned by a profile of the social networking site Facebook entitled 'Italian Revolution. Reale Democrazia Ora ', launched yesterday. The cities are Florence are scheduled today at 20.00, and Rome (Plaza of Spain), Milan, Bologna, Padua and Pisa, tomorrow at the same time. The manifesto makes specific reference to the protests in Madrid, which cites as inspiration and express their solidarity. And the story is repeated all over the world After Spain and Italy are numerous cities that have emulated the system concentrations. Berlin joins the struggle for real democracy, support to Spain and joined the protest. "This decision May 20 Berlin Street," announced their posters. Paris or Buenos Aires will focus today. Brussels, Birmingham and Bogotá Ahram, tomorrow. Amsterdam will hold a rally on Saturday 20. For Spanish speaking readers, here is the original link: http://ecodiario.eleconomista.es/espana/noticias/3081817/05/11/Italia-copia-a-Espana-y-crea-su-Italian-Revolution.html It is difficult to know what exactly might transpire from these protests, but we certainly have seen some shocking results in Africa and the Mideast already. Watch Italian and Spanish Government Bonds Most eyes remain focused on Greece. It is more important, to pay attention to Spain and Italy. Here are the charts I have been watching. Spain 10-Year Government Bonds Italy 10-Year Government Bonds If yields break North of those zones shown in the above charts it will signify a lack of faith in the government bonds of those countries. Spain is huge, but Italy is massive. Italy has as much debt as Germany in an economy nowhere near as big. I believe it is simply a matter of time before the markets start questioning Spanish government debt. Should Italian debt come into question, so will the very existence of the Euro itself. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

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