Mish's Global Economic Trend Analysis

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• $18.7 Billion of $20 Billion Bush Sent to Iraq for Reconstruction is Missing
• Leading German Economist Buys Greek Bonds On Belief in "Boundless Stupidity of German Government", Says Bailout Programs Will Exacerbate Problems
• Consumer Spending, Personal Incomes "Weaker Than Expected", Economists Optimistic for Second Half, I'm Not
• Stress Increases in Eurozone; Portuguese, Spanish, Irish, and Italian 10-Year Yields All Make New Highs

$18.7 Billion of $20 Billion Bush Sent to Iraq for Reconstruction is Missing Posted: 27 Jun 2011 11:39 AM PDT Over $18 billion in US funds the Bush administration sent to Iraq for reconstruction is unaccounted for. The Pentagon claims it could find it if given enough time. Interestingly, they have been saying this for six years. Apparently $18 billion is such a trivial amount for the Pentagon that it has not bothered to look. Please consider Missing Iraq cash 'as high as $18bn'. Osama al-Nujaifi, the Iraqi parliament speaker, has told Al Jazeera that the amount of Iraqi money unaccounted for by the US is $18.7bn - three times more than the reported $6.6bn. Just before departing for a visit to the US, al-Nujaifi said that he has received a report this week based on information from US and Iraqi auditors that the amount of money withdrawn from a fund from Iraqi oil proceeds, but unaccounted for, is much more than the $6.6bn reported missing last week. The Los Angeles Times reported last week that Iraqi officials argue that the US government was supposed to safeguard the stash under a 2004 legal agreement it signed with Iraq, hence making Washington responsible for the cash that has disappeared. Pentagon officials have contended for the last six years that they could account for the money if given enough time to track down the records. The US has audited the money three times, but has still not been able to say exactly where it went. Al Jazeera's Iraq correspondent, Jane Arraf, reporting from Baghdad, said: "It's an absolutely astonishing figure - this goes back to 2003 and 2004. "Safeguarding the money was up to the Americans ... after the invasion, provisional authority here was run by the American military. "Piles and piles of shrink-wrapped US dollars came here, but the cash coming in is not the important part - it is what happened to it after [it got here]. "There are no documents to indicate who got it, where it was spent and what was ever built from it." 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.

Leading German Economist Buys Greek Bonds On Belief in "Boundless Stupidity of German Government", Says Bailout Programs Will Exacerbate Problems Posted: 27 Jun 2011 08:14 AM PDT Stefan Homburg, a leading German economist believes the bailout of Greece is exactly that wrong thing to do and will exacerbate bankruptcy problems. Nonetheless Homburg invested a "considerable sum" in Greek bonds on belief in the "boundless stupidity of the German government to pay up". Please consider this Der Spiegel Interview with Stefan Homburg. SPIEGEL: ... the voluntary participation of private creditors, which German Chancellor Angela Merkel and French President Nicolas Sarkozy have agreed on, will achieve little or nothing? Homburg: It was all just a big show which was mainly intended to calm the German public. Merkel wanted mandatory participation, Sarkozy wanted none at all. In effect, Sarkozy has prevailed. SPIEGEL: But the plumber is not, as they say, too big to fail -- his or her bankruptcy wouldn't cause entire banks to collapse. The European Central Bank has warned of a massive new financial crisis if it comes to the compulsory involvement of private creditors or even a restructuring of Greece's debt. Homburg: The alleged risk of contagion is a myth that doesn't stand up to closer scrutiny. If you share my conviction that all this talk of Greece being too big to fail is simply nonsense, then there is no reason for bailouts … SPIEGEL: … yes, but only if you're right. Homburg: No, it also holds true in the reverse situation. If the bankruptcy of little Greece were actually to trigger a global financial crisis, new bailout programs couldn't solve the problem: They would actually exacerbate it. If no more states or banks are allowed to go bankrupt because this might precipitate a financial crisis, then we're finished. Then the problem continuously escalates and leads to a much greater crisis. SPIEGEL: Europe wants to use the bailouts to buy time. The idea is that during this period the banks can recover and countries like Portugal, Ireland and Spain can get back on an even keel, so the risk of contagion is not so great when the inevitable restructuring takes place in the distant future. That is the strategy. Homburg: I wouldn't call it a strategy. First, states bailed out their banks, now states themselves are being bailed out. But there is no next level to fall back on beyond this bailout. The bailout packages have merely exacerbated the crisis. Last year, if we had adhered to the Lisbon Treaty, which prohibits assistance payments, Greece would have restructured its debt, just as Uruguay, Argentina, Russia and other countries have done over the past 15 years ... SPIEGEL: In a monetary union, isn't there a much greater danger that the crisis will spread from one weak member country to another? Homburg: No. The contagion spreads in precisely the opposite direction, because many banks and hedge funds benefit from the following business model. Step one: They sell the bonds of the country concerned. Step two: They spread negative rumors about the country. Step three: After bond prices have fallen, they buy them back cheaply. And, finally, they take governments for a ride with this nonsense that a default would have devastating consequences. In a zero-sum game, there are not only losers, like us taxpayers, but also winners. SPIEGEL: And what is the risk of contagion now? Homburg: After the Greek bonds have been paid back at full value, the gamblers will turn to the next candidate, such as Portugal. If creditors suffered losses in Greece, however, they would renounce this business model. In this sense, the rescue measures are exacerbating the problem. SPIEGEL: If there were such a business model, a lot of people would be buying Greek government bonds now. Homburg: In recent days, I myself have invested a considerable sum in Greek bonds. They will mature in one year's time and, if all goes well, produce a 25 percent return on investment. I sleep very soundly at night because I believe in the boundless stupidity of the German government. They will pay up. SPIEGEL: And what will happen next? Homburg: Many politicians have also come to the realization that the path that we are on ultimately leads to national defaults and currency reforms. This process is already irreversible, but nobody wants to say it out loud and go down in history as the one who triggered the explosion. So we leave the bankruptcy to subsequent German governments and, in the meantime, throw good money after bad. Sooner or later, this much is certain, the system will be blown apart by political and economic factors. And, unfortunately, there is a great danger that, when this happens, it is not only the euro that will fall apart, but also the entire EU. The bailout is certainly the wrong thing to do for the reasons Homburg suggested. However, as much as I generally agree with the notion of "boundless stupidity" of governments, buying Greek debt is not risk free. There will likely be steep haircuts on long-dated debt. 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.

Consumer Spending, Personal Incomes "Weaker Than Expected", Economists Optimistic for Second Half, I'm Not Posted: 27 Jun 2011 07:01 AM PDT Consumer spending numbers are out and economists were surprised to learn that Americans spend at weakest pace in 20 months Americans spent at the weakest pace in 20 months, a sign that high gas prices are taking a toll on the economy. Consumer spending was unchanged in May, the Commerce Department said Monday. That was the worst result since September 2009. And when adjusted for inflation, spending actually dropped 0.1 percent. April's consumer spending figures were revised to show a similar decline when adjusting for inflation. It marked the first decline in inflation-adjusted spending since January 2010. Economists are optimistic for the second half of the year, saying growth should pick up to a 3.2 percent pace. They note that two of the biggest factors slowing the economy are abating. Gas prices are falling. And U.S. factories are expected to begin producing more once Japan's factories resume more normal operations. The March 11 earthquake and tsunami in that country has led to a parts shortage, particularly for auto and electronics manufacturers. Economists Optimistic For Second Half Are economists ever pessimistic? The idea that growth will pick up because of falling gasoline prices is complete silliness. Gasoline prices are falling because growth is slowing. Moreover, in about 2 months you will be able to toss that "auto parts shortage" theory in the ashcan where it belongs. Personal Income Weaker Than Expected Please consider Consumer Spending in U.S. Stagnated in May Consumer spending unexpectedly stagnated in May as employment prospects dimmed and rising inflation caused Americans to cut back. Purchases were little changed, the weakest outcome since June 2010, after a revised 0.3 percent gain the prior month that was smaller than previously estimated, Commerce Department figures showed today in Washington. The median of economists surveyed by Bloomberg News called for a 0.1 percent gain. Prices excluding food and energy rose more than forecast. The report showed incomes increased 0.3 percent for a second month. The gain was also less than forecast. Today's report also showed that spending adjusted for inflation figures, which are used to calculate gross domestic product, dropped 0.1 percent for a second month. It was the first back-to-back decline in two years. In May, cars and light trucks sold at an 11.8 million annual rate, the slowest since September and down from a 13.1 million pace a month earlier, according to researcher Autodata Corp. Some of the drop in demand last month reflected a shortage of Japanese-made vehicles after the earthquake and tsunami in March disrupted supplies. With inventories running low, companies offered smaller discounts, deterring buyers. "The economic recovery appears to be proceeding at a moderate pace, though somewhat more slowly than the committee had expected," Fed Chairman Ben S. Bernanke said at a press conference after a meeting of the Federal Open Market Committee on June 22. He said the slowdown is caused in part by "factors that are likely to be temporary," including more expensive commodities as well as supply chain disruptions associated with Japan's natural disaster. Bernanke Latches On To Parts Disruption Theory Note that Bernanke has latched on to this parts disruption excuse as well. To be fair, the disruption mattered, however, it is complete silliness to believe a parts disruption is the primary source of weakness. The job market, wages, falling home prices, and exhausted pent-up demand for autos are at the center of things. The entire global economy is slowing and Bernanke has not figured that out, nor does he understand why. There is no reason to be optimistic about the second half. The recovery, assuming you think we had one, is dead. 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.

Stress Increases in Eurozone; Portuguese, Spanish, Irish, and Italian 10-Year Yields All Make New Highs Posted: 27 Jun 2011 06:13 AM PDT Eurozone sovereign debt yields pushed higher across the board today. Irish debt has topped 12% for the first time, Italian debt topped 5% and most Euroland debt yields are at all times high spreads compared to Germany. Significantly, yields are at fresh new highs for Spain, Italy, Ireland and Portugal. If by any chance you are wondering whether to believe EU officials or the bond markets, I suggest you believe the bond markets. The charts below are delayed, but the quotes are accurate. Stress increases in Eurozone. Spain 10-Year Government Bond Yield Portugal 10-Year Government Bond Yield Italy 10-Year Government Bond Yield Ireland 10-Year Government Bond Yield Greece 10-Year Government Bond Yield Greece 2-Year Government Bond Yield If EU and ECB officials thought they solved something with their Greek bailout maneuvers, the bond market disagrees and so do I. 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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