Mish's Global Economic Trend Analysis

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Reid, Pelosi Push Smoke and Mirrors Debt Plan With $2.5T in Cuts; Boehner Proposes Six Month Solution, Geithner Proposes Insanity Posted: 24 Jul 2011 04:58 PM PDT In what amounts to nothing more than smoke and mirrors, At White House, Reid, Pelosi Push Debt Plan With $2.5T in Cuts Senate Majority Leader Harry Reid, D-Nev., and House Minority Leader Nancy Pelosi, D-Calif., met at the White House for a meeting at 6 p.m. that lasted a little more than an hour. The meeting started an hour after the first of the Asian global markets opened. House Speaker John Boehner, R-Ohio, on Saturday had asked for a debt framework before then, intended to give the Asian markets time to process a last-ditch bid to ward off the market turmoil. Reid is taking a proposal for "at least" $2.5 trillion in spending cuts as part of a debt-ceiling deal, seeking Obama's approval, according to an aide. Both Reid and Boehner are advancing plans to raise the debt ceiling. The biggest difference is that the Reid plan would increase the borrowing limit through at least the November 2012 election, while the Boehner proposal would have two stages – with the debt ceiling increase coming early next year and allowed only if matching spending cuts are enacted. Democrats have said that carrying the borrowing authorization past the election is a make-or-break provision. Republicans want two votes, saying they hope to wring more savings. In a conference call with rank-and-file GOP House members on Sunday afternoon, Boehner said the House and Senate were nearing agreement on a six-month solution, according to one participant. Boehner said he was ready to proceed with that short-term deal, without Obama's sign-off, the participant said. In the conference call, Boehner asked for support. He said compromises were necessary, but he promised to use the "Cut, Cap, and Balance" amendment as a basis for any compromise, according to a source familiar with the call. Pointing out that the Senate had brushed aside the Cut, Cap and Balance amendment, Boehner said: "So the question becomes – if it's not the Cut, Cap, and Balance Act itself – what can we pass that will protect our country from what the president is trying to orchestrate?" But the more Boehner's plan relies on House GOP support, the less likely it would be to clear the Senate. Democrats in the House, Senate, and White House have all signaled unwillingness to sign off on a debt-ceiling hike that does not carry into 2013. Obama has vowed to veto an extension of borrowing authority that does not last into 2013 -- after the presidential election. Geithner laid out two paths: a two-tiered approach involving a savings package followed by a tax code and entitlement reform, and another option that hews to the one-swipe "grand bargain" that Obama and Boehner had been hashing over before talks fell apart late on Friday. The first and more likely path could establish a powerful special committee to devise a blueprint for additional savings and revenues, fanged with deadline authority and tools to circumvent the traditional legislative byways. Geithner Proposes "Powerful Special Committee to Devise a Blueprint for Additional Savings" Not only did Geithner propose something idiotic, he called it a "likely path". What planet is Geithner living on? As for the Republicans, the least they can do it put Obama to the test. Pass a six month extension and see if Obama vetoes 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.

Property Loans Halted in China's 2nd and 3rd-Tier Cities; Is China's Spectacular Real Estate Bubble About to Pop? Posted: 24 Jul 2011 10:02 AM PDT China Daily reports Property loans halted in 2nd and 3rd-tier cities Commercial banks are halting individual property loans in the face of tightening monetary policy and limited lending quota, the China Securities Journal reported Thursday. "We will not accept property loan applications at present, even if it is from a first-time home buyer," a bank staff in Chongqing told the paper. Meanwhile, some banks are mulling over whether to raise the ratio of down payment. "You'd better prepare to pay 40 percent of your home price as down payment, because commercial banks are going to ask more for a property loan," said Gong Hang, a bank staff in Taiyuan, Shanxi province. "It is only a matter of time," he said. Requirements for second-home loans have also become stricter in these cities. Home buyers may have to pay 50 to 60 percent of their home prices as down payments, with lending interest rates 10 to 15 percent higher than the benchmark rate, the paper said. Jeremy Warner writing for The Telegraph says China's spectacular real estate bubble is about to go pop So you thought that UK housing was unaffordable. Try Beijing and Shanghai, where as can be seen from the graphic below, prices are off the scale relative to income, the commonly used yardstick for measuring affordability. OK, so these are the boom cities of the Chinese economic miracle, but even on a nationwide basis, affordability is no lower than in the UK. Residential and commercial property development have been such a big component of growth in recent years that anything that damages the property market risks upsetting the entire apple cart. Nobody can forecast with any certainty when the crash will come, but come it will. You cannot cram that much development into such a short space of time without there eventually being a correction. And when it comes, its knock on consequences are going to be extreme, possibly just as seismic as the rolling series of banking crises we've had here in the west. As noted in the IMF's latest staff report on China, published this week, the property sector occupies a central position in the Chinese economy, directly making up some 12pc of GDP. It is also highly connected to the health of basic industries such as steel and cement, and to the success of downstream industries like domestic appliances and other consumer durables. More worrying still, direct lending to real estate (developers and household mortgages) makes up around 18pc of all bank credit (see second graphic below). Again, even by UK standards, this is extreme. And for local authorities, which account for 82pc of public spending in China, property related revenues are an important constituent of the overall revenues used as collateral to back borrowing to fund property and infrastructure development. There's an element of ponzi scheme here. Any reading of economic history reveals that in the end this path to growth and development is as unsustainable as excessive consumption. The Chinese leadership recognises this deficiency and is taking active steps to liberalise and reform, so as to achieve a more sustainable form of growth. Yet as the IMF notes, progress is painfully slow, and for the time being China is stuck on the treadmill of the old model. Personally, I doubt the switch in horses is going to occur without mishap. Bubbles Pop Jeremy Warner makes a case there is a bubble in Chinese real estate. Moreover, and by definition, bubbles pops. The question at hand is "when?" Warner states "soon". However, it is difficult to predict exactly when bubbles pop. There was clearly a Nasdaq dot-com bubble in 1998. However, the bubble got more extreme, rising another 100% in 1999. The bubble did not pop until March of 2000. Australia's property bubble has popped and it will play out in years of pain. Many are still in denial. A US housing bubble was brewing for years. Even after it popped in summer of 2005, many did not recognize that fact for 18 months as the chain reaction mentality "it's different here" spread to every city that had not yet burst. We cannot say "when" China's bubble will burst or if it will be city-by-city as happened in the US, or one big bang where everything implodes at once. However, we can say with certainty China's property bubble will pop. We can also say the longer it goes before it bursts the bigger the mess when it does. As with the US, the property bubble will take China's massive credit bubble and banking system with it. Indeed, China property bubble is only a subset of a much larger credit bubble. China's implosion looks to be massive. Few are prepared for the implications of a rapidly cooling Chinese economy. 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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