Mish's Global Economic Trend Analysis

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• Bad Checks in Greece Soar 43% as Credit Dries Up; Greek Unemployment Rate Hits Record High 16.6%; Hey I have an Idea!
• SEC Destroys 9,000 Fraud Files Involving Wells Fargo, Bank of America, Citigroup, Goldman Sachs, Credit Suisse, Deutsche Bank, Morgan Stanley, Lehman
• Wells Fargo Says "Gold Bubble Poised to Burst", Mish Says "Wells Fargo Bubble Poised to Burst"
• Congressional Approval 13%;Theory of Elections and Overcoming Huge Political Bureaucracies; What the Hell Does it take to Get Real Change?
• Earnings Collapse Coming Up; Don't Worry Companies Will Still "Beat the Street"; Value Traps and Road to Ruin

Bad Checks in Greece Soar 43% as Credit Dries Up; Greek Unemployment Rate Hits Record High 16.6%; Hey I have an Idea! Posted: 17 Aug 2011 09:00 PM PDT It is pretty tough to pay bills when you have no job, no money, and the unemployment rate is both high and soaring. Greek Unemployment Rate Hits Record High 16.6% Inquiring minds note Greek unemployment rate hits all-time high Thursday August 18, 2011: Unemployment in Greece grew at a stunning rate of 1,200 people per day in May, climbing to 16.6 percent of the Greek work force that month, according to data released on Thursday by the Hellenic Statistical Authority (ELSTAT). The total number of jobless Greeks soared above the 800,000 level for the first time in the last few years, reaching 822,719. Twelve months earlier, in May 2010, the figure stood at 602,185, or 220,534 fewer jobless people. In percentage terms it was at 12 percent, having been at just 6.6 percent in May 2008. The steep rise in unemployment is obviously due to the recession of the Greek economy in the last couple of years and the austerity measures imposed, forcing a considerable number of enterprises to close down and thousands of jobs to be lost without being replaced in the market. The situation is worsening by the month, as in April 2011 the unemployment rate had stood at 15.8 percent, which means an additional 36,260 people lost their jobs within May alone, or about 1,200 per day. As usual, the problem is greater among women and the young. One in every five women (20 percent) seeking a job in May could not find one (against 14.1 percent for men), while 40.1 percent of people aged between 15 and 24 were unemployed. The worst-hit region was Western Macedonia, with a 24.9 percent jobless rate. Bad Checks in Greece Soar 43% to 1.4 Billion EU as Credit Dries Up With no jobs and no credit, one should not be shocked to learn Bad checks, unpaid bills of exchange stifling the market Rubber checks soared by over 43 percent year-on-year in the first seven months of 2011, asphyxiating the market further as credit lines continue to dry up. Data released yesterday by the Tiresias bank information system showed that bounced checks in the year to July amounted to 1.38 billion euros, up by 43.3 percent from the same period in 2010, while unpaid bills of exchange rose to 86,257 units, totaling 134,476,048 euros and representing a 6.47 percent increase compared to last year. Given the growth in bad checks and the deepening recession in the real economy, it is almost certain that their total amount will exceed 2 billion euros by the end of the year. A survey by the General Confederation of Greek Small Businesses and Traders (GSEVEE) has shown that just under half of the companies that make transactions through checks possess checks that have already bounced (37.9 percent) or are at risk of doing so (7.3 percent). This phenomenon, which is set to grow, is causing a chain reaction in the market as it is also threatening the existence of healthy enterprises. Hey I have an Idea! Actually, I just want to recap ECB president Jean-Claude Trichet's failed idea. Let's bailout the bondholders Let's bailout the banks Let's raise taxes Let's expect the situation to improve by 2012 Let's ignore impending recessions Let's stick with growth estimates for Greece, Spain, Italy, and Portugal I agree with the forced productivity improvement ideas, cutbacks in pension plans, increase in retirement age, and the liberalization of work rules. I vehemently disagree with most of the rest of the bargain and ECB president Trichet's solution as implemented. Banks eventually took haircuts on Greek bonds. Spain, Ireland, and Italy coming up. 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.

SEC Destroys 9,000 Fraud Files Involving Wells Fargo, Bank of America, Citigroup, Goldman Sachs, Credit Suisse, Deutsche Bank, Morgan Stanley, Lehman Posted: 17 Aug 2011 02:39 PM PDT Senator Chuck Grassley, Republican of Iowa, says SEC may have destroyed documents "From what I've seen, it looks as if the SEC might have sanctioned some level of case-related document destruction," said Sen. Chuck Grassley, Republican of Iowa, in a letter to the agency's chairman, Mary Schapiro. "It doesn't make sense that an agency responsible for investigations would want to get rid of potential evidence. If these charges are true, the agency needs to explain why it destroyed documents, how many documents it destroyed over what timeframe, and to what extent its actions were consistent with the law." Agency staff "destroyed over 9,000 files" related to preliminary agency investigations, according to a letter sent in July to Grassley, the top Republican on the Senate Judiciary Committee, and obtained by MarketWatch. The allegations were made by SEC enforcement attorney, Darcy Flynn, in a letter to Grassley. Flynn is a current employee, and according to the letter, received a bonus for his past year's work. Flynn alleges the SEC destroyed files related to matters being examined in important cases such as Bernard Madoff and a $50 billion Ponzi scheme he operated as well as an investigation involving Goldman Sachs Group Inc. trading in American International Group credit-default swaps in 2009. Flynn also alleged that the agency destroyed documents and information collected for preliminary investigations at Wells Fargo, Bank of America,, Citigroup, Credit Suisse, Deutsche Bank, Morgan Stanley, and the now-bankrupt Lehman Brothers. The letter goes into particular detail about Deutsche Bank, the former employer of current SEC enforcement chief Robert Khuzami as well as former enforcement chiefs Gary Lynch and Richard Walker. The allegations that the SEC destroyed documents were first reported by the Rolling Stone magazine in a report Wednesday. Senator Grassley's Letter to the SEC Inquiring minds may be interested in Senator Grassley's Letter to the SEC Slap of the Wrist of MarketWatch Once again I am irritated by articles and authors who quote other sources and do not have the decency to post a link. In this case the author is Ronald D. Orol, a MarketWatch reporter, based in Washington. Orol should have caught that and if not the editors at MarketWatch should have caught it. Is the SEC Covering Up Wall Street Crimes? Please consider Rolling Stone: Is the SEC Covering Up Wall Street Crimes? by Matt Taibbi Imagine a world in which a man who is repeatedly investigated for a string of serious crimes, but never prosecuted, has his slate wiped clean every time the cops fail to make a case. No more Lifetime channel specials where the murderer is unveiled after police stumble upon past intrigues in some old file – "Hey, chief, didja know this guy had two wives die falling down the stairs?" No more burglary sprees cracked when some sharp cop sees the same name pop up in one too many witness statements. This is a different world, one far friendlier to lawbreakers, where even the suspicion of wrongdoing gets wiped from the record. That, it now appears, is exactly how the Securities and Exchange Commission has been treating the Wall Street criminals who cratered the global economy a few years back. For the past two decades, according to a whistle-blower at the SEC who recently came forward to Congress, the agency has been systematically destroying records of its preliminary investigations once they are closed. By whitewashing the files of some of the nation's worst financial criminals, the SEC has kept an entire generation of federal investigators in the dark about past inquiries into insider trading, fraud and market manipulation against companies like Goldman Sachs, Deutsche Bank and AIG. With a few strokes of the keyboard, the evidence gathered during thousands of investigations – "18,000 … including Madoff," as one high-ranking SEC official put it during a panicked meeting about the destruction – has apparently disappeared forever into the wormhole of history. Under a deal the SEC worked out with the National Archives and Records Administration, all of the agency's records – "including case files relating to preliminary investigations" – are supposed to be maintained for at least 25 years. But the SEC, using history-altering practices that for once actually deserve the overused and usually hysterical term "Orwellian," devised an elaborate and possibly illegal system under which staffers were directed to dispose of the documents from any preliminary inquiry that did not receive approval from senior staff to become a full-blown, formal investigation. Amazingly, the wholesale destruction of the cases – known as MUIs, or "Matters Under Inquiry" – was not something done on the sly, in secret. The enforcement division of the SEC even spelled out the procedure in writing, on the commission's internal website. "After you have closed a MUI that has not become an investigation," the site advised staffers, "you should dispose of any documents obtained in connection with the MUI." That is the opening snip. The entire article is worth a read. I rather suspect the SEC has safeguarded with perfect care the files on Martha Stewart, two-bit Joe, and blogger Bob. 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.

Wells Fargo Says "Gold Bubble Poised to Burst", Mish Says "Wells Fargo Bubble Poised to Burst" Posted: 17 Aug 2011 01:24 PM PDT Wells Fargo analysts proclaim Gold market is a 'bubble poised to burst'. Speculative demand from investors has pushed the gold market into a "bubble that is poised to burst" after prices surged to a record this year, Wells Fargo & Co. said. "We have seen the economic damage" of past bubbles and "feel compelled to ring the warning bells," Wells Fargo analysts led by Dean Junkans said in a report dated yesterday and e-mailed today. Economic Damage Nonsense Regarding Gold If gold fell to $1000 in the next 12 months, pray tell what economic damage would it cause? The answer is none. The irony is that gold is rising on account of economic damage, currency debasement, and the simple fact that gold is the only currency with no liabilities. The second irony is if gold fell that much, it would likely be an indication that some of the global financial problems were finally fixed. Those looking for bubbles would be advised to consider shares of Wells Fargo. WFC - Wells Fargo Weekly Chart I suspect there will be a retest of that March 2009 low if and when Wells Fargo has to mark-to-market its balance sheet chock full of piss-poor real estate loans and other assets. Then again, the market may take things into its own hands first. Furthermore, were it not for taxpayer bailouts and extraordinary support from the Fed and Congress, Wells Fargo may have gone to zero in 2009. Regardless, Wells Fargo is a far better short than gold given the US economic backdrop, weakening global economy, and the competitive currency debasement practices of central bankers throughout the world. By the way, that is an opinion, not a recommendation. 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.

Congressional Approval 13%;Theory of Elections and Overcoming Huge Political Bureaucracies; What the Hell Does it take to Get Real Change? Posted: 17 Aug 2011 08:36 AM PDT The most recent Gallup poll shows Congressional Job Approval Ties Historic Low of 13% Americans' evaluation of the job Congress is doing is the worst Gallup has ever measured, with 13% approving, tying the all-time low measured in December 2010. Disapproval of Congress is at 84%, a percentage point higher than last December's previous high rating. click on chart for sharper image These results are based on an Aug. 11-14 Gallup poll, which includes the first update on Congress' job approval rating since the government reached agreement on a deal to raise the debt ceiling after contentious and protracted negotiations between President Obama and congressional leaders Implications Americans have usually not held Congress in high regard, but currently they have a more negative view of the institution than any other time Gallup has measured. Although Congress agreed to raise the debt ceiling, the issue is far from settled, as a special committee of 12 House and Senate members will work toward an agreement to make significant cuts in federal spending over the next few months to avoid mandatory cuts in defense and entitlement programs. Though the results of that committee's work are not likely to dramatically transform the way Americans view Congress, they could determine whether the institution's ratings remain in this new lower range or show some improvement. If Congress' ratings do not improve much before the November 2012 elections, its membership could be in line for another shake-up. Obama's Approval Rating at 39% Gallup also reports President Obama's Job Approval Rating has declined in recent days, reaching a low of 39% in Aug. 11-13 Gallup Daily tracking. click on chart for sharper image What the Hell Does it take to Get Real Change? In response to Amazingly Absurd Loan "Guarantee" Arrangement Between Finland and Greece my friend "Fedwatcher" commented ... "Looks like the Finns need another election. As it was in Iceland, it took two elections to beat the banker politicians over the head with a two by four. The bigger the nation state, the more elections are required. I think Finland needs two more elections. We need four to eight." Theory of Elections and Overcoming Huge Political Bureaucracies Adding to Fedwatcher's observation, I propose: "The bigger the nation state, the more elections or global forces it takes to change direction, no matter how misguided current direction is." A bond market revolt, global currency crisis, or another major world war might suffice as well. If the bond market or global currency crisis does not force change in misguided and unsustainable US spending and warmongering (actually I think it will - timing is unknown - but faster than 4 elections), then eventually US citizens may act on their own to stop fighting World War II, to end the US' role as world's policeman and pandering to various special interest groups (only to be replaced by pandering to different special interests of course). Eventually boomers and those still fighting World War II will be swept under the rug by increasing numbers of Generation X, Y, and Millennials who will have had enough of the "pampered generation", bank bailouts, public unions, wars, global police actions, and other monstrosities. 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.

Earnings Collapse Coming Up; Don't Worry Companies Will Still "Beat the Street"; Value Traps and Road to Ruin Posted: 16 Aug 2011 11:50 PM PDT Of all the inept reasons to be bullish about equities, "beat the street" hype is near the top of the list. The fact is, in aggregate, ever since Reg-FD (full disclosure) companies always beat the street. In Surprising Optimism in Face of Weekly Global Equity Carnage; Foolish Comments of the Day; "Beat the Street" Bullsweet I noted nearly every quarter, even in 2008 and 2009 the majority of firms beat estimates. Here is the way the process works: Corporations give analysts "tips" regarding profit expectations. Those profit expectations are purposely low. Wall Street analysts lower estimates, if necessary, as the quarter progresses such that corporations can "beat the street". If corporations are going to miss and need an extra penny, they change tax assumption or make other "one time" adjustments as necessary. Corporations beat the street by a penny with "pro-forma" (after adjustment) reporting. Understandings Earnings Estimates A couple of readers asked for a historic chart of "beat the street" metrics I just happen to have one, with thanks to Understandings Earnings Estimates by James Bianco on the Big Picture Blog. Aggregate S&P 500 earnings have beaten expectations for 50 straight quarters, including the current quarter. As we explained last July: The chart below highlights the inception of SEC regulation "FD" (aka, Fair Disclosure). Before FD roughly 50% of companies beat expectations, as would be the case if analysts were trying to get it right. Now that companies have to disclose to all at the same time, we believe their investor relations departments are masters at "guiding" analysts just below actual earnings. This way the companies "beat" expectations and get the positive press and accolades that come with it. Further, it seems that everyone is happy with this apparent gaming of the system. This is why we believe the percentage of companies that beat expectations is a meaningless statistic. The game is designed for this to happen, even when earnings are collapsing (during 2008′s epic collapse in earnings more than 50% of companies still beat expectations). Percentage of Companies that "Beat the Street" click on chart for sharper image The last time companies failed to "beat the street" was third quarter of 1998. At the earnings trough in third quarter of 2008, 58% of companies in the S&P 500 still managed to "beat the street". Sentiment, Not Earnings Key to Returns If this "beat the street" talk was not pathetic enough in and of itself, the fact remains that sentiment, not earnings, is the key to stock market performance. I discussed this concept at length in a pair of posts earlier this year. Negative Annualized Stock Market Returns for the Next 10 Years or Longer? It's Far More Likely Than You Think Anatomy of Bubbles; Negative Returns for a Decade Revisited; Is Gold in a Bubble? Please read those posts if you have not yet had a chance to do so. Value Traps On June 20, in Value Traps Galore (Including Financials and Berkshire); Dead Money for a Decade I noted Berkshire, Citigroup, and Bank of America were "value traps". At that time Citigroup had a price-to-book valuation of .64, and Bank of America a price-to-book valuation of .50. Citigroup Price-to-Book valuation is now .52 and Bank of America Price-to-Book Valuation has fallen to .38. Those who thought Bank of America was cheap at book value, now find themselves 62% in the hole. I suspect they may still be in the hole 10 years from now. Stocks that look cheap can always look cheaper. Road to Ruin John Hussman repeats his recession and valuation warnings in Two One-Way Lanes on the Road to Ruin It is important to recognize that the S&P 500 is presently only about 13% below its April peak, and the word "only" deserves emphasis. Our valuation impressions align fairly well with those of Jeremy Grantham at GMO, who puts fair value for the S&P 500 "no higher than 950" - a level that we would still associate with prospective 10-year total returns of only about 8% annually. I would consider investors to be very fortunate if the market does not substantially breach that level in the coming 12-18 months. Wall Street continues its servile attachment to forward operating earnings, seemingly unconscious that the perceived "norms" for the resulting P/E are artifacts of a bubble period. The fact is that historical periods of overvaluation and poor subsequent long-term returns correspond to forward operating P/E multiples anywhere above 12, while secular buying opportunities such as 1950, 1974 and 1982 map to forward operating multiples of only 5 or 6 (based on the strong correlation but downward-biased level of forward operating P/E ratios, when compared with multiples based on normalized earnings - see Chutes and Ladders for a graphic). Without question, one of the notions buoying Wall Street optimism here is the hope that the Fed will pull another rabbit out of its hat by initiating QE3. That's a nice sentiment, but it does overlook one minor detail. QE2 didn't work. Actually, that's not quite fair. The Federal Reserve was indeed successful at provoking a speculative frenzy in the financial markets, which has now been completely wiped out. The Fed was also successful in leveraging its balance sheet by more than 55-to-1 (more than Bear Stearns, Lehman, Fannie Mae, Freddie Mac, or even Long-Term Capital Management ever achieved), and driving the monetary base to more than 18 cents for every dollar of GDP. The Fed was indeed successful in provoking a wave of commodity hoarding that affected global supplies and injured the poorest of the poor - particularly in developing countries. The Fed was successful in setting off a very predictable decline in the value of the U.S. dollar. The Fed was successful in punishing savers and the risk averse, and driving investors to reach for yield in risky investments that they would normally avoid were it not for the absence of yield. The Fed was successful in provoking those with strong balance sheets to pay down existing higher interest-rate debt, and in creating an incentive for those with weak balance sheets to issue more of it at low rates, resulting in a simultaneous deterioration of credit quality and compensation for risk in the financial system. Hussman's article is well worth a read in entirety. In terms of expected annualized returns, I think Hussman is a bit too optimistic over the long-term even though I endorse his intermediate-term philosophy "I would consider investors to be very fortunate if the market does not substantially breach [S&P 950] in the coming 12-18 months." Speaking of optimistic, way too optimistic ... Strategists Stick With 17% S&P 500 Gains Based on Earnings I am amused at the amazing year-end projections of strategists as noted in Strategists Sticking With 17% S&P 500 Gain on Higher Profit Wall Street has never been more sure that the Standard & Poor's 500 Index will rally in 2011, even after speculation the U.S. economy is heading for a recession prompted the biggest plunge since the bull market began. Strategists say earnings growth will fuel gains. S&P 500 profit will rise 18 percent in 2011 and 14 percent in 2012, according to the average per-share analyst estimates in a Bloomberg survey. More than 75 percent of corporations in the index have exceeded earnings estimates for the second quarter, with total income topping projections by 5.2 percent. Year-End Estimates Tobias Levkovich, Citigroup Inc. (C)'s chief U.S. equity strategist in New York, forecasts the S&P 500 will end the year at 1,400. Brian Belski, the New York-based chief investment strategist at Oppenheimer & Co., estimates the S&P 500 will reach 1,325. Barry Knapp, the New York-based chief U.S. equity strategist at Barclays year-end projection is 1,450. Credit Suisse Group AG (CSGN) and HSBC Holdings Plc (HSBA) advised investors to buy equities today. Andrew Garthwaite, a London- based strategist at Credit Suisse, reiterated an "overweight" recommendation on stocks even as he cut his year-end forecast for the S&P 500 to 1,350. Corporate Earnings Set to Plunge Nearly anything is conceivable, but I think fiscal and monetary stimulus has run its course and earnings will plunge. The Eurozone is heading for a recession or in one. China is slowing. The UK is in recession or headed for one, Australia and Canada, same story. In spite of denial by analysts, the US is on a recession track if not in one. Moreover, judging from the unemployment rate, corporations are running pretty lean here. If profits plunge, it will be tough to cut a lot of employees to make up for revenue shortfalls. Implications are severe either way. One affects job, the other earnings. The US can easily take a hit both ways. Telling Action in Bank Shares Take a look at the action in bank shares. They tell the story of excess leverage and capital shortfalls. On July 18, 2011 Bank of America Clobbered on $50 Billion Capital Shortfall Related to Mortgage Losses Capital shortfalls are not unique to Bank of America. For the current sorry state of affairs of the banking system, please see BNP Paribas leveraged 27:1; Société Générale Leveraged 50:1; Global Financial System is Bankrupt. With this backdrop, I fail to see how earnings can't plunge. But hey, look on the bright side: companies will still "beat the street". They always do. 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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