Mish's Global Economic Trend Analysis

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• Home Prices Rise in All 70 Monitored China Cities;Local Governments Rely on Ponzi Land Sales to Pay Mounting Debt;Tightening Concerns Hit China Stocks
• Obama Proposes $4 Trillion in Spending Cuts "Over 120 Years"
• European Leaders Remain Divided, Geithner Brushed Off; German Banks Need $175 Billion Capital

Home Prices Rise in All 70 Monitored China Cities;Local Governments Rely on Ponzi Land Sales to Pay Mounting Debt;Tightening Concerns Hit China Stocks Posted: 18 Sep 2011 10:54 PM PDT The housing bubble in China blasts ahead full steam even if the Chinese stock market is not. Please consider China Home Prices Rise, Challenge Curbs China's August new-home prices rose in all 70 cities monitored for the first time this year, undercutting government efforts to cool the market through higher down-payments and mortgage rates. Prices in Beijing rose 1.9 percent from a year ago, while those in Shanghai, the nation's financial center, increased 2.8 percent, the statistics bureau said on its website yesterday. New home prices rose in 67 out of 70 cities in the first half this year and were up in all but two in July. China's measures to control its property market are at a critical stage and the nation needs to focus efforts on curbing price increases in less affluent cities after limiting home purchases by each family in metropolitan areas including Beijing and Shanghai, Premier Wen Jiabao said on Sept. 1. Only two cities responded to the government's July call for added restrictions on housing purchases, as local governments rely on land sales to pay mounting debt. Local Governments Rely on Land Sales to Pay Mounting Debt Read that last paragraph above carefully. Local governments have ignored central authority calls to restrict housing because fueling the housing bubble is the only way local governments can pay interest on debt. Thus, the China property boom has gone beyond bubble to an outright Ponzi scheme. China Stocks Hit 14-Month Low Bloomberg reports China's Stocks Decline to 14-Month Low on Tightening Concern, Pending IPOs China's stocks fell to a 14-month low after Premier Wen Jiabao said the government will take measures to control inflation and investors speculated pending initial public offerings will sap demand for existing equities. "The upcoming big IPOs are a major reason for the market plunge, draining liquidity in the market," said Tu Jun, a strategist at Shanghai Securities Co. "It's not a good time for fund-raising but the government's tight monetary policy has left companies with no other choice." Tight Money Policy?! Good Grief. Credit in China is soaring. Home prices are booming. Local governments are lending money for housing in spite of requests by central authorities to not do so. How can anyone get "tight money policy" out of those conditions? Economic Challenges China shouldn't ease its monetary policy and could face vicious inflation if it does, the Oriental Morning Post said today, citing Wu Xiaoling, vice director of the finance and economy committee of the National People's Congress. China's economic growth faces large challenges in the fourth quarter and next year as the global economic recovery slows, the newspaper said. China Overheating Those looking for inflation can easily find it, in China. However, nearly everyone is looking at the US where inflation is nowhere to be found (at least from a credit aspect, housing aspect, and interest rate aspect) all of which are far more important than nominal price moves of food and gasoline. Of course inflation is not about rising prices in the first place, but rather about credit and credit-marked-to-market. "No New Stimulus" Warning Former Deputy Central Banker pleads "No New Stimulus" China should refrain from boosting credit and fiscal spending again as stimulus measures to avoid fueling inflation and pushing up government debt, Wu Xiaoling, a former deputy central bank governor said in remarks published on Monday. "Currently, China's economy faces inflationary pressures as well as pressures on government debt, which means we cannot go down the road of expanding both credit and fiscal spending," the official Finance News quoted Wu as telling a forum. Chinese policymakers should be "extremely wary" about the risk of government debt, said Wu, who is now a senior lawmaker. China is trying to clean up the roughly 10.7 trillion yuan ($1.68 trillion) in local debt -- a hangover from a 4 trillion yuan economic stimulus package unveiled by Beijing in late 2008 to counter the global financial crisis. China faces more economic challenges in the fourth quarter of this year and 2012, Wu said, adding that slower economic growth next year would be highly likely. Weak global demand, government tightening steps to target the property sector and a slowdown in investment for highways and high-speed railways as could weigh on China's growth, she added. Warning Far Too Late Put that stimulus warning in the category labeled "ridiculously late". China's property bubble is in an extreme state, right at a time the entire global economy is slowing dramatically. China Will Slow Far Faster Than Most Think China's property bubble is set to implode, and when it does, the Chinese economy will cool far more than anyone thinks, taking commodities along for the ride. Commodity producers like Australia and Canada are at extreme risk as well. 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.

Obama Proposes $4 Trillion in Spending Cuts "Over 120 Years" Posted: 18 Sep 2011 08:32 PM PDT The theater of the absurd regarding spending cuts hit a new high today. We are now counting budget cuts not over a year, or even ten years, but rather 120 years. Please consider Obama to propose $1.5 trillion in new tax revenue The president on Monday will announce a proposal that includes the new taxes, nearly $250 billion in reductions in Medicare spending, $330 billion in cuts in other mandatory benefit programs, and savings of $1 trillion from the withdrawal of troops from Iraq and Afghanistan. The $1.5 trillion in tax revenue would include about $800 billion realized over 10 years from repealing the Bush-era tax rates for couples making more than $250,000. It also would place limits on deductions for wealthy filers and end certain corporate loopholes and subsidies for oil and gas companies. By adding the tax revenue, about $580 billion in proposed mandatory spending cuts, the savings from troop withdrawals and $1 trillion in spending cuts already in place, the combined deficit reduction would total about $4 trillion over 120 years. Whose harebrained idea was it to carry the savings out to 120 years (the Administration or the AP writer?). I suppose it could be a typo for 12 years or 20 years but how about some savings over 1 year? By the way, we need to ask: Is that $1 trillion troop reduction a budgeted item or it is taking credit for something that was never was appropriated in the first place. Service Providers Hit Administration officials said 90 percent of the $248 billion in 10-year Medicare cuts would be squeezed from service providers. The plan does shift some additional costs to beneficiaries, but those changes would not start until 2017, and administration officials made clear as well that Obama would veto any Medicare cuts that aren't paired with tax increases on upper-income people. The president's plan also called for cuts of $72 billion over ten years from Medicaid, the federal-state health care program for low-income people and the severely disabled. States, hospitals and advocates for the poor are expected to resist those. Dead on Arrival I would like to see a detailed plan as to how $223 billion will be squeezed out of service providers. However, the question is moot because the entire proposal is likely dead on arrival. Republicans will not agree to new taxes and Democrats will bitch about cuts to Medicare and Medicaid. 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.

European Leaders Remain Divided, Geithner Brushed Off; German Banks Need $175 Billion Capital Posted: 18 Sep 2011 09:15 AM PDT As talks wind down in Poland, European leaders still divided on debt crisis European leaders made little headway Saturday on resolving a banking crisis that threatens to weaken their economies and spread damage overseas to countries such as the United States. Finance ministers from European Union nations gathered in Poland for two days of talks and even invited Treasury Secretary Timothy Geithner to their meeting to explain how the U.S. handled a similar crisis in 2008-09. Yet EU ministers did not coalesce around any rescue plan for Greece or troubled European banks. Some also brushed off advice from Geithner, who's urged them to stimulate their economies and act quickly to shore up their banking system. Wealthier EU countries such as Germany have been balking at a larger bailout of Greece using public money. All EU leaders have agreed on so far is that their banks need to be strengthened by raising more capital. "From our perspective, we see a clear need for bank recapitalization," Swedish Finance minister Anders Borg said. "The EU banking system needs better backstops and that's basically a matter of capital." The big question is where the money will come from, especially since private investors appear unwilling to risk more cash. A shortage of dollars prompted the Federal Reserve this week to engage in large currency swaps with European central banks that effectively injected more liquidity into the EU's financial system. Most analysts think European governments will have no choice but to use public money. Jay Bryson, global economist at Wells Fargo, said Germany "can pay now or they can pay later." Yes this is a case of pay now or pay later, but that is not the critical issue. Who pays, is the issue. Bondholder should take a hit. Banks that overleveraged into Greek, Spanish, and Portuguese bonds should taker the hit not taxpayers. Geithner, the Fed, the ECB, and the banks all want to screw taxpayers one more time, bailing out the banks at taxpayer expense. The amounts are not trivial. German Banks Need $175 Billion Capital Reuters reports German banks need 127 billion euros of more capital Germany's 10 biggest banks need 127 billion euros ($175 billion) of additional capital, German newspaper Frankfurt Allgemeine Sonntagszeitung reported, citing a study by economic research institute DIW. Bear in mind that is just German banks. French banks are also severely undercapitalized. Also note the target is a mere 5% equity ratio, implying a leverage ratio of 20-1, still hugely over-leveraged from a common-sense standpoint. It is fitting that European leaders remain divided, because the best solution is division, a breakup of the Eurozone. Please see Eurozone Breakup Logistics (Never Believe Anything Until It's Officially Denied) for a discussion. 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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