Mish's Global Economic Trend Analysis

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• Treasury Spreads Widen on Debt Concerns; Bond Market Revolt Awaits QE3
• EU Running Out of Rabbits; 60% of Germans Have "Little or Very Little Trust in Euro"
• Bank of America Clobbered on $50 Billion Capital Shortfall Related to Mortgage Losses
• Greece 2-Year Debt Hits 35.98%, Ireland Hits 23.31%, Italy 10-Year Debt Tops 6%, New Highs In Spain; Sovereign Debt Charts
• 30-Year Extend-and-Pretend Plan for Greece, Ireland, Proposed Amid Total Confusion; Plane Crash Looking More Likely

Treasury Spreads Widen on Debt Concerns; Bond Market Revolt Awaits QE3 Posted: 18 Jul 2011 09:17 PM PDT The long-end of the treasury curve is acting sick, smack in the face of a clearly slowing global economy. Please consider Treasury Five-to-30 Spread Near Widest This Year on Debt Ceiling Concern The spread between five- and 30-year Treasury yields was near the widest since November as U.S. officials struggled to reach agreement on how to raise the debt ceiling to avoid a default. Treasury 30-year yields climbed yesterday as President Barack Obama vowed to veto a Republican proposal to impose mandatory budget cuts. Fitch Ratings reiterated its plan to reduce its U.S. rating in the event of a debt default. Treasury spreads, oil prices, and food prices would likely make Bernanke's life miserable should he decide any time soon to embark on another round of Quantitative Easing. Sadly, some economists calling for QE3 simply cannot see the obvious. Please see University of California Economist Bradford DeLong is Blind: "I Don't See Any Argument Against QE3" for a discussion. Yield Curve 2011-07-18 click on chart for sharper image Not Just a Debt Ceiling Concern The long end of the curve is acting sick. I do not believe this is merely a "debt ceiling" concern, but rather a "debt" concern. Democrats and Republicans alike have refused to do much of anything but point fingers and throw stones at the other party. Bernanke has not helped matters by butting into fiscal issues and by threatening QE3 if the economy worsens. For further discussion, please see Bernanke Interferes in Fiscal Policy Yet Again, This Time Hoping to Place the Blame on Congress Rather than the Fed In 2010, the bond market and stock markets were both cooperative with Bernanke's actions. However, it is a huge mistake to believe that will always be the case. At some point the bond market will revolt when Bernanke gets too cute, too many times. That revolt may be sooner than anyone thinks. 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.

EU Running Out of Rabbits; 60% of Germans Have "Little or Very Little Trust in Euro" Posted: 18 Jul 2011 03:51 PM PDT One of the things that can "save" the Euro is the creation of a European Nanny State, complete with joint fiscal policy and joint government bonds. Jean-Claude Juncker, head Euro-Zone finance minister, is in favor of the idea and ECB president Jean-Claude Trichet is agnostic. However, Jens Weidmann, the head of German Central Bank has ruled out the idea. Please consider Bundesbank chief slams eurobonds The head of Germany's Bundesbank central bank attacked Sunday proposals to issue eurobonds guaranteed by eurozone states as a way of helping Greece, saying it would lead to a "transfer union." "Nothing would destroy more quickly and in a more lasting fashion incentives for a solid budget policy that joint guarantees for sovereign debt," Jens Weidmann told the Bild am Sonntag weekly in an interview. "But this is exactly what some politicians and economists are proposing in the form of eurobonds as a solution to Greece's problems," he said. "The result would be European taxpayers, and first and foremost German ones, vouching for Greece's entire national debt. It would be a step towards a transfer union, something which Germany has correctly opposed thus far." He also said that restructuring Greece's mammoth debts would also fail to solve the stricken eurozone country's problems. The idea of eurobonds issued and guaranteed by countries with better credit ratings that Greece, therefore obtaining lower borrowing rates, has long been floated as a way of helping Athens and other struggling eurozone members. But German voters are wary of any scheme that would see their taxes going towards other countries -- a so-called "transfer union" -- while eurobonds could also raise the borrowing costs of countries backing them, critics say. A poll released by the Bild am Sonntag meanwhile showed 60 percent of those questioned in Europe's biggest economy with little or very little trust in the euro single currency, up from 54 percent in December. One of the proposals on the slate for Thursday is creation of Eurobonds. That proposal is clearly dead-on-arrival. The 30-year extend-and-pretend option floating around constitutes default, and Trichet insists "no defaults". Indeed, there are no solutions only a mountain of unworkable ideas as noted in 30-Year Extend-and-Pretend Plan for Greece, Ireland, Proposed Amid Total Confusion; Plane Crash Looking More Likely Thursday's emergency meeting might get interesting. 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.

Bank of America Clobbered on $50 Billion Capital Shortfall Related to Mortgage Losses Posted: 18 Jul 2011 09:11 AM PDT Shares of Bank of America corporation are getting clobbered once again, this time on news of a $50 billion capital shortfall related to devastating mortgage losses. Please consider BofA Mortgage Settlements Magnify Capital Strain as $50 Billion Gap Looms Bank of America Corp. (BAC) may have to build its capital cushion by $50 billion and renege again on Chief Executive Officer Brian T. Moynihan's pledge to raise the firm's dividend as mortgage losses drain funds. Expenses tied to soured home loans may total $20.4 billion in the second quarter, pulling the bank further from capital ratios demanded under new international standards, the Charlotte, North Carolina-based company said June 29. The gap may equal 2.75 percent of risk-weighted assets starting in 2013 -- at about $18 billion for each percentage point -- crimping Moynihan's ability to raise dividends and repurchase shares. Moynihan, 51, has booked about $30 billion in settlements and writedowns to clean up mortgage liabilities at the biggest U.S. bank since succeeding Kenneth D. Lewis last year. As the costs mounted, Bank of America's stock declined 26 percent this year, the worst showing in the 24-company KBW Bank Index. The company reports second-quarter results tomorrow and has told investors to brace for a loss of as much as $9.1 billion. Under rules prepared by the Basel Committee on Banking Supervision, Moynihan has to achieve a 9.5 percent ratio of capital to risk-weighted assets between 2013 and 2019. That's based on a 7 percent minimum and a 2.5 percent surcharge imposed by regulators on the largest companies whose collapse would pose a threat to the banking system. Moynihan's task was complicated after he underestimated how big the capital surcharge would be. The bank counted on 1 percentage point, an assumption based upon "fairly senior information saying that was a reasonable number to use," Moynihan said in a June 1 conference. The 2.5 percent announced last month means an extra $27 billion burden. Moynihan has previously had to revise guidance about the bank's dividend after the Fed rejected what he called a "modest" increase requested for later this year. His deals to settle disputes over defective mortgages, including an $8.5 billion accord last month, means the CEO may have to adjust another promise to investors -- a larger dividend boost by 2013. In March, Moynihan said that all $42 billion of projected earnings in 2013 and 2014 would be returned to shareholders. Bank of America was "committed" to raising its 1-cent dividend to a higher level equal to 30 percent of earnings, he said. "We go from being a company which gets its capital in shape in 2011 and 2012 and pays a modest dividend to a company which has significant capital generation from there on out," Moynihan said at the March 8 conference. The result would be a total of $12 billion in payouts during those two years, he said. Bank of America Daily Chart The idea that Bank of America would soon be in a position to raise its dividend was silly when Moynihan proposed it and looks absurd now. Indeed, Bank of America should not have a dividend at all given its huge capital problems. All the nay-sayers who said the Countrywide Financial takeover would kill Bank of America got it correct. 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.

Greece 2-Year Debt Hits 35.98%, Ireland Hits 23.31%, Italy 10-Year Debt Tops 6%, New Highs In Spain; Sovereign Debt Charts Posted: 18 Jul 2011 08:19 AM PDT 2-Year Government Bonds Greece 2-Year Government Bonds Ireland 2-Year Government Bonds Spain 2-Year Government Bonds Italy 2-Year Government Bonds Germany 2-Year Government Bonds 10-Year Government Bonds Greece 10-Year Government Bonds Ireland 10-Year Government Bonds Spain 10-Year Government Bonds Italy 10-Year Government Bonds Germany 10-Year Government Bonds 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.

30-Year Extend-and-Pretend Plan for Greece, Ireland, Proposed Amid Total Confusion; Plane Crash Looking More Likely Posted: 18 Jul 2011 07:21 AM PDT Confusion reins supreme ahead of Thursday's EU summit that German Chancellor Angela Merkel thinks is "urgently necessary." However, Merkel will only attend if there is a plan that will be approved. Is there any conceivable solution that can be worked out in 4 days? I suggest it is impossible. Please consider Confusion reigns as Europe limps toward Greece summit Confusion over competing policy proposals reigned among officials and bankers on Monday as Europe struggled to put together a second bailout of Greece and prevent the region's debt crisis from spreading. For starters you cannot prevent something from spreading that has already infected Greece, Ireland, Portugal, Spain, and Italy. French government spokeswoman Valerie Pecresse said she believed a summit of the euro zone's 17 national leaders scheduled for Thursday in Brussels would agree on a rescue of Greece, supplementing a 110 billion euro ($154 billion) bailout launched in May last year. But after three weeks of preparatory talks, it remained unclear whether government officials and commercial bankers could agree on a way for private owners of Greek government bonds -- banks, insurers and other investors -- to contribute to the bailout by taking cuts in the face value of their holdings. Paul de Grauwe, a professor of international economics at Leuven University in Belgium who has informally advised European Commission President Jose Manuel Barroso, said politicians had delayed taking decisive action on Greece for so long that their options were narrowing fast. "We've had solutions in the past, but we haven't grasped them. Now it's too late for some of those solutions to work anymore; the opportunity has been lost." So Many Proposals One Cannot Rule Out Anything Officials are wrestling with a range of schemes for Europe's bailout fund, the European Financial Stability Facility, to finance a voluntary buy-back or swap of Greek debt that would be conducted at a discount to face value, helping to reduce Greece's 340 billion euro mountain of sovereign debt. But all of the schemes could face major technical and legal obstacles, in some cases requiring the approval of national parliaments in the euro zone. Other proposals still appear to be on the table; Germany's Die Welt newspaper reported on Monday that governments were considering a levy on banks as a way to involve private creditors in rescuing Greece. An official of a major euro zone government who is familiar with the talks said he had not heard of a proposal for a bank levy, but added: "There are at the moment so many proposals that you cannot rule out anything." That there are so many proposals is evidence of massive confusion. It is also evidence none of the proposals can possibly work. If a deal on private creditor participation is reached, it may cut Greece's debt by just 20 or 30 billion euros, not nearly enough by itself to solve the problem. Analysts have estimated the debt would have to be roughly halved, to 80 percent of gross domestic product, to make it manageable in the long run. German Chancellor Angela Merkel said on Sunday that while this week's summit was "urgently necessary," she would only attend if lower-ranking officials had already prepared a clear rescue plan. "I will only go there if there is a result." Some official sources have said interest rates on bailout loans extended to Greece, Ireland and Portugal may be cut and maturities on those loans extended drastically, perhaps to 30 years. There has also been talk of expanding the 750 billion euro bailout facility which the European Union and the IMF jointly created last year as the debt crisis erupted. Die Welt quoted unnamed diplomatic sources as saying the IMF was angered by Europe's crisis management and that "influential parties" in the Fund wished not to take part in further bailouts of Greece. It did not elaborate. Many private economists think some form of regional guarantee for countries' debt along the lines suggested by Summers -- or perhaps even the issuance of joint euro zone bonds -- may ultimately be the only way to emerge from the crisis without one or more weak states being forced out of the zone. But Germany has shown no appetite for such a sweeping solution, which in any case would require a complex and time-consuming revision of the EU treaty. "We are against euro bonds," German government spokesman Steffen Seibert said on Friday, repeating Berlin's concern that a common bond for the single currency area would provide no meaningful incentives for national governments to pursue prudent budget policies. No Acceptable Solution By now it should be obvious that there is no real solutions, only 30-year can-kicking proposals. Even default is not a solution because default does not fix the underlying problem of widely varying fiscal policies and structural issues among member countries. The ECB's "One Size Fits Germany" interest rate policy greatly compounds the problem. Once again we return to the Right Place to Crash the Plane The Plane Crash Solution has two Options. Breakup of the Eurozone Creation of the European Nanny State Either one is a serious undertaking requiring complex revisions to the EU treaty. Which will it be, and how long will it take? Sovereign Debt Yields Soar In the wake of the mass confusion (panic is probably a better word), European sovereign debt yields have soared to new highs. For a look at 2-Year and 10-Year charts please see Greece 2-Year Debt Hits 35.98%, Ireland Hits 23.31%, Italy 10-Year Debt Tops 6%, New Highs In Spain; Sovereign Debt Charts 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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