Mish's Global Economic Trend Analysis

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• California Revenue $1.5B (6.5%) Lower Than Expected, Automatic Spending Cut Triggers May Fire; 4 Better Ways to Fix the Problem
• France, the New Elephant in the Room
• World has Major Funding Gap; IMF Begs Russia and China for Money; Italy and Greece Demand Deposits Collapse; Run on Greek Banks?
• Italy in Recession; Industrial Production Drops 4.8% M/M, .1% Q/Q; Barclays says GDP Likely Negative; Vast Army of Krugmanites to Howl at Moon
• Beware the Technocrati; The Next Delusion is Technical Government; Borg Cannot Save Europe

California Revenue $1.5B (6.5%) Lower Than Expected, Automatic Spending Cut Triggers May Fire; 4 Better Ways to Fix the Problem Posted: 10 Nov 2011 04:14 PM PST The recovery has fizzled out in California with revenues $1.5 billion below overly-optimistic estimates. California tax collections since the start of the fiscal year have fallen $1.5 billion behind projections, raising concern that the most-populous U.S. state will face automatic spending cuts. Revenue was $810.5 million less than budgeted in October, bringing the total to 6.2 percent below expectations for July 1 through Oct. 31, according to figures released today by Controller John Chiang. Since the start of the fiscal year, the state has spent $1.7 billion more than it budgeted. The $86 billion spending plan Governor Jerry Brown and fellow Democrats adopted in June included a series of cuts to be activated if revenue falls below certain levels. In December, Brown's finance department will estimate whether the rest of the year's revenue can meet the original projection. "October's poor revenues capped a very disappointing first four months of the fiscal year," Chiang said in a statement. "Unless revenues and expenditures begin to track with projections, the state will face increasing cash pressure in the months ahead." Tier 1 Cuts Trim University of California and California State University budgets by $100 million each Increase community-college fees by $10 per unit Cut in-home services for the elderly and disabled Tier 2 Cuts Seven-day reduction in the school year to save $1.54 billion End $248 million in student busing subsidies Tier 2 cuts kick in at the $2 billion shortfall level. To put this in perspective, it took months of wrangling to reduce spending by $12 billion and the state is already (in a single quarter), $1.5 billion in the hole. Rather than increase taxes (grumbling on that is guaranteed to start), how about .... Putting an end to collective bargaining for public unions Getting rid of needless bureaucracies Scrapping prevailing wage laws Scrapping defined benefit pension plans 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.

France, the New Elephant in the Room Posted: 10 Nov 2011 11:44 AM PST On January 7, long before Italy was in the spotlight of mainstream media attention, I wrote Italy The Invisible Elephant. It was five or six months before Italy became an uncloaked popular economic topic. However, "elephant hunting" is now a popular sport and mainstream media has done a better job at spotting the next one (with help of S&P threats to France's AAA rating of course). Elephant Spotting Articles San Francisco Chronicle: France Plans EU7 Billion in Taxes, Cuts to Save AAA Rating France unveiled tax increases and spending cuts amounting to 7 billion euros ($9.6 billion) for next year to defend its triple-A rating as growth slows and Europe's debt crisis deepens. The country will increase some levies on large companies, push up the lower end of its range of value-added taxes and curb welfare spending, Prime Minister Francois Fillon said today. "French people must roll up their sleeves," Fillon said at a press conference in Paris. "We have one goal: to protect the French people from the severe difficulties faced by some European countries." Los Angeles Times: Eurozone debt jitters creeping into French bonds The European debt crisis has gone from bad to worse as Italian government bond yields have soared, threatening the solvency of the Eurozone's third-largest economy. But things could go from worse to worst if bond yields keep rising in France, the continent's No. 2 economy after Germany. The French government knows it can't afford for the bond market to turn on it. Paris announced a new round of spending cuts last week aimed at ensuring that the country holds on to its coveted AAA credit rating. Moody's Investors Service warned last month that it might put a negative outlook on France's top-rung rating if Paris made too many commitments to back up its banks or other Eurozone states with tax dollars. But France's need to protect itself also raises doubts about its ability to extend help to Italy as Rome's debt nightmare worsens. Ah yes, how can you save Greece and Italy if your concern is to save yourself? The answer is you cannot and a quick look at sovereign debt spreads will show the bond market is starting to figure that out. Sovereign Debt Table France vs. Germany Duration Germany France Spread 2-Year 0.38 1.61 1.23 3-Year 0.51 1.81 1.30 5-Year 0.94 2.46 1.52 10-Year 1.78 3.47 1.69 To help put that spread table into perspective let's look at today's action in 10-Year and 2-Year government bonds. France 2-Year Government Bonds France 10-Year Government Bonds Germany 2-Year Government Bonds Germany 10-Year Government Bonds The two-day move in French bond yields vs. German is likely a 6-sigma event. Today alone, the 2-year yield rose 27 basis points vs. 2 for Germany. Unfortunately the chart does not reflect this because Bloomberg charts are hopelessly a day out of sync with the numbers posted left of the chart. While the equity markets are cheering the Rise of the Borg (and also the ECB stepping into the fray as the buyer of last resort of Italian bonds), a new elephant, completely visible, stepped into the room. 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.

World has Major Funding Gap; IMF Begs Russia and China for Money; Italy and Greece Demand Deposits Collapse; Run on Greek Banks? Posted: 10 Nov 2011 09:28 AM PST Saxo bank chief economist Steen Jakobsen pinged me with an interesting set of comments regarding Italian interest rates.... World has Major Funding Gap Our estimation shows that on the 2012 interest payment alone Italy now needs to find additional 10 billion EUR to pay for the rise in interest rates. Some independent trading houses have calculated that the combined funding need for Spain and Italy combined (banks, and national debt) is 400-500 billion EUR per year for next two to three years. This does not include already in-place money "guaranteed" to Greece, Portugal, and Ireland. Thus, the world has major funding gap – the cash-flow need flowing into EU bonds is 400-500 billion EUR. The petty cash from China, Russia, and EMG will be 10-25 billion EUR each, far less than needed. A bigger issue is how do you buy EU debt? Which paper, who is guaranteeing it? What is the EFSF capital structure? This is what you get when you continue to produce plan-for-plans. The Grand Plan has no specifics, and it certainly did not create a fire-wall for Italy. Italy and Greece Demand Deposits Collapse But as concerning as higher yield is…. Looking at the deposit base in Italian banks vs. Greek banks…. You could seriously get concerned (Red line: Italy – Blue line: Greece) Christine Lagarde is in China "begging" for support for increased fire power for the IMF, but it's again it's a race against time. Safe travels, Steen IMF Begs China for Money That last comment from Steen piqued my interest and a quick search lead me to IMF chief holds talks in China amid eurozone turmoil. International Monetary Fund chief Christine Lagarde held talks in Beijing Thursday against a backdrop of worsening economic turmoil in Europe that has rattled financial markets around the world. Lagarde, who is on a two-day visit to China, has warned that Asian economies are not immune to the crisis that has engulfed the eurozone, saying the world risked a "downward spiral" if it did not pull together to tackle the crisis. Details of the IMF chief's visit were being kept under wraps, but it is all but certain to focus on the crisis in Europe, whose leaders have already called on China to contribute to a fund set up to support troubled eurozone economies. Last month Klaus Regling, the head of the European Financial Stability Facility, travelled to Beijing to try to persuade China's leaders to help. Europe has been discussing establishing a special purpose investment vehicle to persuade China and other potential contributors, and is exploring the possibility of linking it to the IMF. Lagarde visited Moscow before heading to China, and on Wednesday the Russian government said it was not prepared to invest directly in the EU rescue fund and would prefer to help the eurozone through the IMF. Men Jing, chair of European Union-China relations at the Belgium-based College of Europe, said in a comment piece published in the official China Daily newspaper that Europe needs to behave in a "responsible way." "It is ridiculous that rich European nations have their begging bowls out and want money out of the pocket of China, whose per capita income is only about $4,000," she said. China has also been burned before on risky overseas investment. It bought stakes in investment bank Morgan Stanley and asset management firm Blackstone only to see values collapse in the 2008 global financial crisis. Act of Desperation, Rise of the Borg Begging for money from Russia and China is an act of desperation. Why would or should either country invest in European bonds other than Germany when Europe has not fixed its structural problems? Six week ago Merkel and Sarkozy promised a comprehensive solution. We do not even know terms of the EFSF yet. What is the leverage? How is it structured? What is the guarantee? None of that is set, Italy and Greece have prime ministers who agreed to step down (with no replacements other than Technocrat Borgs in sight), and the IMF has the gall (and stupidity) to go begging for money. Sheesh. For a discussion of "The Rise of Technocrat Borgs" please see Beware the Technocrati; The Next Delusion is Technical Government; Borg Cannot Save Europe Has a Run on Greek Banks Started? It would appear so. ZeroHedge reports Greek Bank Deposits Plunge By €5.5 Billion In September: Biggest Monthly Drop Ever According to just released data by the Bank of Greece, the September collapse in gross deposits from €188.7 billion €183.2 billion was the largest ever, and took the total to an amount last seen in June 2007. Indicatively Greek deposits peaked at €237.8 billion in September 2009. Said otherwise, in addition to being massively undercapitalized, banks cash in the form of deposit liabilities has plunged 23% from its all time highs. Look for this number to continue dropping month after month as more and more Greeks move their cash offshore. Additionally, the ECB announced that financing to Greek banks in September was €77.8 billion while Greek reliance on the "temporary" Emergency Liquidity Assistance program hit €26.6 billion according to Bloomberg. With every additional deposit outflow, expect ever more money to be needed to keep the Greek sham of a banking system afloat. click on chart for sharper image How Long Can Greece Hold Out? Inquiring minds may be wondering how long Greece can hold out. For one possibility, please see History Suggests Greece Will Freeze Bank Deposits, Exit Euro by Christmas; Spain and Portugal to Follow Next Year; What's the Rational Thing to Do? Whether it happens by Christmas is debatable. What's not debatable is the rational thing for Greek depositors to do is pull every cent of their money out of Greek banks immediately. If depositors act rationally, the Greek banking system will not last long. 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.

Italy in Recession; Industrial Production Drops 4.8% M/M, .1% Q/Q; Barclays says GDP Likely Negative; Vast Army of Krugmanites to Howl at Moon Posted: 10 Nov 2011 08:30 AM PST Here is a note I received by email from Barclays Capital regarding Italian GDP and Industrial Production ... Italy: September IP declined 4.8% m/m (BarCap: -4.0%, consensus: -3.0%) Italian IP declined 4.8% m/m in September, weaker than our below-consensus expectation of -4.0% m/m (market: -3.0% m/m), from an increase of 3.9% m/m in August, downwardly revised from 4.3% m/m previously. As we had highlighted when the previous report was released, the sharp increase in August IP would prove temporary and correct in September. Italian industrial output tends to be historically quite volatile in August for technical reasons such as the process of seasonal adjustment undertaken by the ISTAT statistics office (for more on this please read: Italy: IP surged in August but past experiences suggest there is little to get excited about). Accounting for the revision to the index, Italian IP is reported to have contracted -0.1% q/q in Q3, below our initial expectations, suggesting a small downside risk to our expectation that Italian GDP had declined 0.2% q/q in Q3. As our GDP indicator shows, Italian GDP might have declined as much as 0.3% q/q. On this specific point, the Italian statistics office ISTAT will not release the preliminary GDP growth for Q3, but it plans to release the final Q3 figure on 21 December. Italian Economy is Toast The Italian economy is toast and that is before the "Rise of the Technocrat Borgs" who will make matters much worse. Please see Beware the Technocrati; The Next Delusion is Technical Government; Borg Cannot Save Europe. Expect Krugmanites to Howl at Moon Italy desperately needs structural reforms especially the ability for corporations to fire people much easier than they can now. Long-term, reforms will make Italy more competitive. Short-term, reforms coupled with austerity measures will add so much pain (not that it takes that much) that the vast army of Krugmanites will howl at the moon. Also bear in mind there have been no reforms that have started yet, only promises to make reforms. Things in Italy are about to get much worse, and Italy is already in recession. 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.

Beware the Technocrati; The Next Delusion is Technical Government; Borg Cannot Save Europe Posted: 10 Nov 2011 01:24 AM PST Politicians in Greece and Italy failed to do the job. Prime Ministers in both countries went down in flames. However, it has been a struggle to find anyone to replace them with. Politicians have been bickering over replacements ever since the leaders agreed to resign. The latest proposal, and one we will likely see in Greece and Italy is "technocracy", rule by well-respected economic experts, who supposedly will know what to do. Rise of the Technocrats The Financial Times discusses the setup in Rise of the Calculating Machine Stand by for the rise of the technocrats. Apparently, the answer to the huge problems of the eurozone is the replacement of elected premiers with economic experts – approved officials dropped from European institutions. In Greece, Lucas Papademos, a former vice-president of the European Central Bank, has been pushed hard for the job; in Italy, Mario Monti, another economist and a former EU Commissioner, is much mentioned. It is as if the crew of the Starship Enterprise had concluded that Captain Jean-Luc Picard is no longer the man for the job and that it is time to send for the Borg. Efficient, calculating machines driving through unpopular measures across the eurozone with the battle cry "resistance is futile" are apparently the order of the day. Faced with a deep crisis, once-proud European nations are essentially preparing to hand over power to Ernst & Young. The Next Delusion is Technical Government EuroIntelligence writes This is quite a brilliant comment by Robert Shrimsley of the Financial Times. He makes the point that there is now a possibility of technical government – led by Lucas Papademos in Greece, and Mario Monti in Italy, both former high ranking EU officials. While European officials may find this reassuring, it is not solving what is fundamentally a political problem in those countries. The problem with technocrats is that they have avoided the traditional routes to power. Shrimsley concludes the best politicians are also experts – they know what is politically possible. We agree with this. It is another one of these quick fix ideas. The EFSF did not work. Leveraging did not work. The next delusion is technical government. The eurozone crisis is a major political crisis at heart. This is why the financial markets are panicking. Borg Cannot Save Europe As of 3:15 AM central, various European markets shifted into the Green. S&P 500 futures that were down 6 are now up 9. Yield on the 10-Year Italian bond fell to 7.12 from a high of 7.40. Hooray! The Borg have saved Europe. Not. 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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