Mish's Global Economic Trend Analysis

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• Feedback on China Video Story from Mike "In Tokyo" Rogers, Sculptor Hopen, Others; Reserve Currency Reflections
• EU Given Rope, Hangs Itself
• Euro Summit Statement "Leaked" Draft Looks Like Swiss Cheese; 10-Point Proposal for More Meetings
• Merkel Cancels Speech to Parliament; "Merkozy Marbles"
• EU Commissioner Seeks to Prohibit Rating Agencies from Rating Stressed Debt; IMF Report on Greece Held Up in Dispute with EU
• Blatant Arrogance of France

Feedback on China Video Story from Mike "In Tokyo" Rogers, Sculptor Hopen, Others; Reserve Currency Reflections Posted: 20 Oct 2011 05:11 PM PDT In response to A "Must See" Heart Wrenching Video of Moral Deterioration in China I received several emails saying I should have posted a warming about graphic content. Yes, I could have done that. I also received emails from several people who were upset at this video thinking it does not belong in an economic blog at all. They are mistaken. The often repeated story regarding China is that the country will grow without end, it will overtake the US, and rule the world. Instead, I propose the China story is really about rampant credit expansion, malinvestments, unproductive assets, no free capital markets, centralized planning that people mistake for capitalism, no legal system of merit, no freedom of speech, no respect for either property rights or human rights, and that peak-oil will in and of itself kill the story. In short, all the people who think China is some sort of miracle savior for the world economy are going to find out otherwise. Let's move on to emails from readers. Mike "In Tokyo" Rogers Replies Mish, You are absolutely 100% correct in showing this video. Even though I live in Japan, I have been to China many times and even handled marketing in promotion in Japan for Chinese companies. The reason I have never commented on these things is because China and Japan have had a bad and contentious and violent enough history without me throwing in my 2-cents. In Japan, perhaps because of of a "Japanese homogeneous" mind-set or a common history this sort of thing would be an incredibly rare experience. In general, the Japanese feel like they are all part of the same family. This is an important thing that keeps the fabric of society here stable. This is also why Japan does not have crime and social problems like the rest of the world. Anyway, thanks for the video. Mike Reader "Larry" Writes Dear Mish, I regard your comments on this video wholly appropriate. Basic economic hardship drives people to terrible inhumanity. Allowing choice is very important but there is no choice without truth. The trouble is we are told so many lies that proper choices are very hard to make without a strong commitment to the facts. Thank you for your integrity in this vital matter even if I don't always agree with you when the figures don't add up but the heart is quite clear on the matter. Larry Bill Hopen, Sculptor Replies Hello Mish Mike, you and I live in a different culture, different economy, different head space. Americans who help strangers are a curiosity in China, often applauded in the media. This is because most urban Chinese people stay to themselves, don't get involved, don't help, unless it is a friend or family. I, like you, are of the boy scout persuasion, I stop to help if there is trouble. Once I interceded in a NYC street incident, saving two women who were being beaten by a drug crazed person. I was the only one to act. Still this horrible neglect of this poor little run down girl is beyond belief. Shanghai is a city squared, 30 million, in its poorer areas, the residents work 14-16 hours a day for survival, for several dollars a day. If you get sick with no money, you die. If you lose your job you starve. There is no social net to save you. The message a Chinese feels is: "No One Cares if I Live or Die". Within living memory, 20 million people starved in China. The ones who made it through that time were hardened with the attitude "take care of yourself and do what you need to do. Don't waste time and effort on strangers. There are too many and you have too little to help." Everyone knows of this incident in China now. The Chinese public is horrified and outraged by the video. They feel shame at what their society has become.....the cars scooters, pedestrians running over or passing by without regard for this poor little injured human being in need. This video hit me like a punch in the gut, I have 5 little ones now, an almost two and a three year old among them. Regards Bill Hopen, Sculptor www.billhopen.com Bill Hopen lives part-time in China, part-time in the US. He met his wife in China. For more on his story please see Inside China: A Sculptor's View. His latest work is "Dedication of the Wedding Feast of Cana" in bronze. Final Comments There is quite a difference between failing to act out of fear for yourself or life vs. complete indifference as to what happens to a little girl run over by a van. The video represents the tragic state of everyday affairs in China. The Yuan will not become the new world reserve currency. China does not have deep enough capital markets or deep enough bond markets. China does not respect human or property rights, and contrary to popular belief there are so many problems with being the world's reserve currency that Chinese leadership does not even want 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.

EU Given Rope, Hangs Itself Posted: 20 Oct 2011 12:04 PM PDT Here is the latest piece of Fantasyland thinking as reported by the following Bloomberg headline. *EU MAY DROP 500 BILLION-EURO CEILING ON BAILOUT FUNDS 2011-10-20 17:45:07.290 GMT STORY TO FOLLOW. JAMES HERTLING No Story, Just Imagination Regardless of what follows from Hertling, the "story" is pure imagination. Steen Jakobsen, chief economist at Saxo Bank in Denmark, sent that news headline along with his comments as follows: It's very important for me to stress all these headlines are pure imagination. The facts remains: German Constitutional ruling plus EFSF vote in German Parliament makes it impossible for Germany to go ahead with any solutions which means bigger, permanent or increased liabilities. Furthermore the last 24 hrs has proved that ALL German agreement is subject to later approval by German Parliamentary finance committee Two summits are needed now, an EU summit then an internal German one, making it harder and less likely to succeed. The latest rumors and leaks are all part of extend-and-pretend. All solutions will be back loaded with actions taken in 2012 and 2014 rather than here and now. Time is up, but the next 48 hrs will give us plenty of leaks and management of expectations via PR. The conclusion however, remains the same: The EU was given a rope - it decided to use it for hanging itself and not to tie down the rudderless ship. 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.

Euro Summit Statement "Leaked" Draft Looks Like Swiss Cheese; 10-Point Proposal for More Meetings Posted: 20 Oct 2011 10:46 AM PDT A leaked draft of the Euro Summit Statement is sparse on details and long on hot air. They only item of "substance" and I really use that world lightly, is an 10-point action item plan detailing an agreement to setup more meetings. The Telegraph presents The Leaked Draft. I would like to provide details on resolutions to the economic crisis including the EFSF, however there are no details to present (and there will be none as long as the Merkozy feud lingers, which may be through the end of the summit). With nothing but holes everywhere else, I am pleased to present the 10-point agenda to establish more meetings. 10-Point Proposal for More Meetings There will be regular Euro Summit meetings bringing together the Heads of State or government (HoSG) of the euro area and the President of the Commission. These meetings will take place at least twice a year, at key moments of the annual economic governance circle. The President of the European Council will ensure the preparation of the Euro Summit, in close cooperation with the President of the Commission, on the basis of the work of the Eurogroup. The President of the Euro Summit will be designated by the HoSG of the euro area at the same time the European Council elects its President and for the same term of office. Pending the next such election, the present President of the European Council will chair the Euro Summit meetings. The President of the Euro summit will keep the non euro area Member States closely informed of the preparation and outcome of the Summits. The President will also inform the European Parliament of the outcome of the Euro Summits. As is presently the case, the Eurogroup will ensure ever closer coordination of the economic policies and promoting financial stability. The President of the Eurogroup is elected in line with Protocol n°14 annexed to the Treaties. A decision on whether he/she should be elected among Members of the Eurogroup or be a full-time President based in Brussels will be taken at the time of the expiry of the mandate of the current incumbent. The President of the Euro Summit will be consulted on the Eurogroup work plan and may invite the President of the Eurogroup to convene a meeting of the Eurogroup, notably to prepare Euro Summits or to follow up on its orientations. The President of the Euro summit will meet regularly, at least once a month, with the President of the Commission, the President of the Eurogroup and the President of the ECB. The Presidents of the supervisory agencies and the EFSF/ESM chair may be invited on an ad hoc basis. These meetings will be used to establish clear lines of responsibility and reporting between the Euro Summit, the Eurogroup and the preparatory bodies. Work at the preparatory level will continue to be carried out by the Eurogroup Working Group(EWG), drawing on input mainly provided by the Commission. The EWG also prepares Eurogroup meetings. It should benefit from a more permanent sub-group consisting of alternates/officials representative of the Finance Ministers, meeting more frequently, working under the authority of the President of the EWG. The EWG will be chaired by a full-time Brussels-based President. He/she should preferably also chair the Economic and Financial Committee. The existing administrative structures (i.e. the Council General Secretariat and the EFC Secretariat) will be strengthened and co-operate in a well coordinated way to provide adequate support to the Euro summit President and the President of the Eurogroup, under the guidance of the President of the EFC/EWG. External expertise will be drawn upon as appropriate, on an ad hoc basis. Clear rules and mechanisms will be set up to improve communication and ensure more consistent messages. The President of the Euro Summit and the President of the Eurogroup have a special responsibility in this respect. Synopsis There were six items actually pertaining to the Eurozone crisis in the draft. None of them had any details. However, there were 10 items pertaining to agreements to meet more often, including plenty of details regarding ad-hoc meetings, who gets to be the chairman, special working groups, preparatory bodies, additional consulting groups, and heads-of-state protocols. Competing Theories Eurozone bureaucrats are purposely hoping to downplay this now-failed summit into the gutter so that any results at the meeting will look good Eurozone bureaucrats are as clueless as they look and sound. If there is a positive result of any kind, it will be by accident. As a big fan of Occam's razor. Thus I favor choice number two. 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.

Merkel Cancels Speech to Parliament; "Merkozy Marbles" Posted: 20 Oct 2011 09:31 AM PDT How often do politicians cancel speeches? One might think never, except in case of death or accident, but I have stunning proof it can happen. Bloomberg reports U.S. Stocks Extend Losses as Merkel Cancels Speech U.S. stocks extended losses as German Chancellor Angela Merkel canceled a speech to parliament on the European bailout fund because of disagreements on the role of the region's central bank. German Chancellor Merkel has canceled her planned speech to parliament in Berlin tomorrow because of a deadlock over proposals to leverage the European Financial Stability Facility to give it more firepower, three German lawmakers said. More than a Merkozy Feud This is far more than a Merkel-Sarkozy feud. Merkel is feuding with the German Parliament Sarkozy is feuding with Merkel Sarkozy is feuding with the ECB The IMF is feuding with the EU Part of the Merkel-Parliament feud is in regards to oversight. The German supreme court said the Bundestag (German Parliament) must be consulted on EFSF and bailout matters and Merkel does not want to give up control. Like a child who loses at marbles, Merkel took her marbles and left the room. It would be fitting if Sarkozy took his marbles from the game as well. Of course all eyes are on the next release of the tranche to Greece, unless of course the IMF takes its marbles from the game. 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 Commissioner Seeks to Prohibit Rating Agencies from Rating Stressed Debt; IMF Report on Greece Held Up in Dispute with EU Posted: 20 Oct 2011 01:55 AM PDT Some things are so blatantly stupid they sound like a headline from the news spoof site The Onion. Here is a case in point, and had this been April 1, everyone would have thought I was making this up. Courtesy of Google Translate and Deutschland Financial Times please consider a "Radical Proposal". In a confidential preliminary plan to reform the law on credit rating agencies, EU Internal Market Commissioner Michel Barnier seeks to prohibit rating agencies from publishing judgments about ailing EU countries. Barnier proposes that the new Securities and Exchange ESMA is granted the right "to temporarily prohibit" the disclosure of assessments of the ability to pay. Barnier has advised the rule take effect in November and wants to hold rating agencies civilly liable for damage caused by "poor" ratings. Never Underestimate the Stupidity of Bureaucrats EU Commissioner Michel Barnier obviously believes the rating is the problem, not the debt, or the likelihood the debt is paid back. What about ratings that are too high? Never, ever, underestimate the blatant stupidity of government bureaucrats, especially desperate bureaucrats. Instead, one can look at such asinine proposals and make a simple judgment: the s*** is about to hit the fan. IMF Report on Greece Held Up in Dispute with EU The Greek website Ekathimerini reports Brussels at odds with IMF about sustainability of Greek public debt The differing views between the European Commission and the International Monetary Fund on the sustainability of Greece's debt have led to a delay in the issuing of a report by Brussels on the country. The IMF is maintaining a tougher stance vis-a-vis the Greek debt and how viable it could be and is seeking the drafting of a new streamlining program, as it considers the Commission's estimates too optimistic. Austrian Finance Minister Maria Fekter said that "Austria's position is that the new package requires a somewhat greater participation of the private sector," but always on a voluntary basis. However, the time frame is particularly tight for an agreement as the eurozone summit of this Sunday is fast approaching and the aim of bring Greek debt below 100 percent of GDP by 2020 seems difficult. 2020 Target for Greece Please note the open discussion of a 2020 target date for Greece. Bear in mind that is for a debt-to-GDP ratio of 100% not the 60% as required by EU treaty. Also note the preposterous idea that haircut participation is "voluntary". And what's with this "somewhat greater participation" participation nonsense? A quick check this morning shows that the yield on 1-year Greek bonds hit a high of 189%. As long as we are checking yields, the yield on 10-year Italian debt is a whopping 5.9% vs. Germany at 2.04% and Spain at 5.47% I would be remiss if I failed to point out the 10-year yield on Portuguese debt is and even bigger 12.14%. Portugal is without a doubt the next country in Europe to blow. Finally, and in case you missed it, please consider the Blatant Arrogance of France in dealing with this mess. 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.

Blatant Arrogance of France Posted: 20 Oct 2011 12:41 AM PDT The "Merkozy" coalition is one again in open dispute with itself. German chancellor Angela Merkel has one position and French President Nicolas Sarkozy another. Historically, Sarkozy's disputes with Merkel have always been resolved with Merkel buckling like corn flakes run over by a cement truck. However, I expect a different result this time because Sakrozy is fighting not only Merkel, but the ECB, the German constitution, and the Maastricht Treaty. This has spawned an emergency flight by Sarkozy to Germany where the feud will continue. Plans to tackle the euro zone debt crisis have stalled with Paris and Berlin at odds over how to increase the firepower of the region's bailout fund, French President Nicolas Sarkozy said on Wednesday. Sarkozy told French lawmakers the dispute was holding up negotiations and flew to Frankfurt to talk with German Chancellor Angela Merkel in an attempt to break the deadlock ahead of a make-or-break European leaders' summit on Sunday. The two leaders left that meeting without speaking to waiting reporters. Asked if a deal had been reached, Jean-Claude Juncker, chairman of the Eurogroup of euro zone finance ministers who attended the evening meeting, replied: "We're still in meetings Saturday, Sunday." Divided Over Leverage France has argued the most effective way of leveraging the European Financial Stability Facility (EFSF) is to turn it into a bank which could then access funding from the ECB, but both the central bank and the German government have opposed this. "In Germany, the coalition is divided on this issue. It is not just Angela Merkel whom we need to convince," Sarkozy told the parliamentarians at a lunch meeting, according to Charles de Courson, one of the legislators present. Adding to uncertainty, the Financial Times reported that plans to strengthen the banking system, another key plank of the discussions, would fall short of market expectations. The latest official estimates have put the banks capital shortfall at less than 100 billion euros, the FT said, compared with a recent IMF report putting the funding hole and 200 billion and analysts' estimates of 275 billion or more. Cirtcuit Breaker One senior EU official, who is involved in coming up with solutions to the crisis, said the only "circuit-breaker" now was for the ECB to make an explicit commitment to go on buying distressed euro zone debt for "as long as it takes," something Trichet has said should not happen. However, Barroso appeared to back such intervention, saying in Frankfurt: "The decisive intervention of the ECB in secondary bond markets was and still is a critical element in securing financial stability in the euro area." "You know the French position and we are sticking to it. We think that clearly the best solution is that the fund has a banking license with the central bank, but everyone knows about the reticence of the central bank," French Finance Minister Francois Baroin told reporters in Frankfurt. "Everyone also knows about the Germans' reticence. But for us that remains ... the most effective solution." A senior German government source said Berlin remained resolutely opposed to the ECB backstopping the rescue fund. Bank or Insurer? Euro zone officials have told Reuters that an alternative model, whereby the EFSF could underwrite a portion of newly issued euro zone debt, is also on the table. By guaranteeing the first 20-30 percent of any losses, the EFSF could stretch three to five times further. With about 300 billion euros of its 440-billion-euro capacity still available, the fund could be expanded to more than 1 trillion euros, and give markets pause for thought. However, analysts are unconvinced that a leverage plan involving a guarantee on first losses would succeed, warning that it could create a two-tier structure in some bond markets and would be meaningless without an explicit commitment from the ECB to go on buying at-risk debt. While Europe's leaders rush to stop a larger writedown of Greek debt infecting others in the euro zone, ordinary Greeks are angry at the prospects of several more years of pain as the price of help from international lenders. "Who are they trying to fool? They won't save us. With these measures the poor become poorer and the rich richer. Well I say: 'No, thank you. I don't want your rescue'," said 50-year public sector worker Akis Papadopoulos. The "French Position" Notice the blatant arrogance of France a depicted in the statement "You know the French position and we are sticking to it." Yes, the whole world knows the "French Position". A month ago the Central bank of France insisted there were no toxic debts in French banks. This prompted me to write on September 25 Desperate Times Lead to Desperate Lies; Europe Weighs the Weightless; Even Citigroup Sees the Lies Are central bankers and politicians really as stupid as they sound or are they pathological liars who simply cannot help it? Check out these preposterous lies by Bank of France Governor Christian Noyer as quoted by Bloomberg in Noyer Sees 'Absolutely No Reason' to Use Bank Backstop Noyer Lies "I'm extremely confident" in French banks because "we know them very well. We know their balance sheets, their risk assessments. We know they have no toxic assets." There is "absolutely no reason" to activate a support system for the nation's banks that was set up during the financial crisis in 2008. Markets "are over-reacting," he said. "They need to come back to a sense of reality." All of those are blatantly preposterous. However, lie number 1 has to be one of the top lies of the year. "French banks have no toxic assets"?! For starters, what about Greek bonds about to take a 50% haircut or more in default? That lie is so ridiculous no one on the planet can possibly believe it. The French central bank blatantly lied about the capitalization of French banks right before the implosion of Dexia Bank. Dexia was the allegedly the safest bank in stress tests. Furthermore the "French Position" is in violation of the German constitution, the ECB's wishes, and the Maastricht treaty as well. Bureaucrats never concern themselves with such details and worse yet, they are arrogant about 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.

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