Mish's Global Economic Trend Analysis

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• Spanish Banks Stuck with ‘Unsellable’ Real Estate, 50% of Real Estate Loans are Troubled ; Wave of Debilitating Defaults in Subordinate RMBS Tranches Coming Up; Spain Becomes Eurozone's Weaker Link
• EU Bans Claim "Drinking Water Can Prevent Dehydration"; Expect More Such Stupidity if European Nanny-Zone Fiscal Union Forms
• Leading Indicators or Statistical Noise?
• Mish Video with Max Keiser: Rise of Technocrats, Fraudulent Conveyance, MF Global, the Culture of Greed, Christina Romer, and the US Dollar
• London Stock Exchange Becomes Lender of Last Resort to Italian Banks

Spanish Banks Stuck with ‘Unsellable’ Real Estate, 50% of Real Estate Loans are Troubled ; Wave of Debilitating Defaults in Subordinate RMBS Tranches Coming Up; Spain Becomes Eurozone's Weaker Link Posted: 18 Nov 2011 04:32 PM PST Explaining the recent selloff in Spanish bonds is easy: The bond market has finally come to grips with the idea there is no solution for Spain's massive structural problems. Here is a trio of articles to show what I mean. Spanish Banks Stuck 'Unsellable' Real Estate, 50% of Real Estate Loans are Troubled Bloomberg reports Spanish Banks Have $41B of 'Unsellable' Real Estate Spanish banks, under pressure to cut property-backed debt, hold about 30 billion euros ($41 billion) of real estate that's "unsellable," according to a risk adviser to Banco Santander SA (SAN) and five other lenders. "I'm really worried about the small- and medium-sized banks whose business is 100 percent in Spain and based on real- estate growth," Pablo Cantos, managing partner of Madrid-based MaC Group, said in an interview. "I foresee Spain will be left with just four large banks." Spanish lenders hold 308 billion euros of real estate loans, about half of which are "troubled," according to the Bank of Spain. The central bank tightened rules last year to force lenders to aside more reserves against property taken onto their books in exchange for unpaid debts, pressing them to sell assets rather than wait for the market to recover from a four- year decline. Land "in the middle of nowhere" and unfinished residential units will take as long as 40 years to sell, Cantos said. Land in some parts of Spain is literally worthless, said Fernando Rodriguez de Acuna Martinez, a consultant at Madrid- based adviser R.R. de Acuna & Asociados. "If there were to be a proper mark to market of real estate assets, every Spanish domestic bank would need additional capital," said Daragh Quinn, an analyst at Nomura Holdings Inc. in Madrid, in a telephone interview. 'Enormous' Price Gap There is an "enormous" gap between prices offered by banks and what investors are willing to pay, preventing sales of large property portfolios, MaC Group's Cantos said. "Banks have already provisioned for a 30 percent loss, but if you are selling at 70 percent discount, you have to take another 40 percent loss. Which small and medium size banks can take such a hit?" Wave of Debilitating Defaults in Subordinate RMBS Tranches Reuters comments on Default pain in Spain RMBS Extremely poor performance of assets in Spanish RMBS, which in some cases means there is simply not enough performing collateral in the portfolios to service required cashflows, could lead to a wave of debilitating defaults in subordinate tranches. Eurozone's Weaker Link The BBC reports Spain Becomes Eurozone's Weaker Link Yesterday, when Spain actually borrowed €3.6bn of new ten-year loans, it had to pay 6.975%, the highest rate for 15 years and so close to the unaffordable 7% rate as makes no helpful difference. In short, as Spain prepares for its general election on Sunday, it has become the weaker link in the eurozone chain. New fundamental research by the consultancy McKinsey sheds some light on why that should be. The point is that if you add together all debts - government debts, corporate debts, financial institution debts, and household debts - Spain is a much more indebted or leveraged country than Italy. In general Spanish businesses geared up, or took on huge amounts of additional debt, especially those in the property and utility sectors. The indebtedness of households rose to 82% of GDP, government debt increased to 71% of GDP and financial debt - which is bank lending to financial vehicles that aren't banks - went up to 76% of GDP. Italy's government debts, at around 120% of GDP, are a far bigger burden than Spain's. And the debts of its financial sector are more or less the same: which may be another way of explaining why creditors' confidence in both Italian and Spanish banks has been seeping away in recent weeks and months. But the debts of Italy's private sector are a fraction of Spain's. The indebtedness of Italian businesses is just 81% of GDP and the indebtedness of households just 45% of GDP. Italy's private sector, from the point of view of indebtedness, is in pretty good shape. So Italy's total indebtedness at the end of last year was 313%, some 50 percentage points less than Spain's. The point is that a government's ability to service and repay debts depends partly on the overall size of the debts, and partly on the health of the private sector that pays taxes. A private sector relatively burdened by huge debts - as is the case in Spain but not Italy - is less able to spend and invest. As a result, it struggles to provide the momentum in the economy necessary for the generation of growing tax revenues. Mission Impossible With 22% unemployment and a hugely over-burdened private sector, the bond market has finally caught on that austerity measures are not going to help Spain meet its budget goals. A new government will be elected this weekend in Spain. Will it raise taxes? Collect more revenue? It's the latter that is important, and that is mission impossible. 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 Bans Claim "Drinking Water Can Prevent Dehydration"; Expect More Such Stupidity if European Nanny-Zone Fiscal Union Forms Posted: 18 Nov 2011 11:31 AM PST In a 3-year study, EU concluded there is no evidence that drinking water can cure dehydration and has banned bottles from stating that claim. Previously, EU officials banned the selling of overly bent bananas and curved cucumbers but backed off after international ridicule. Yes, I am serious. The Telegraph reports EU bans claim that water can prevent dehydration EU officials concluded that, following a three-year investigation, there was no evidence to prove the previously undisputed fact. Producers of bottled water are now forbidden by law from making the claim and will face a two-year jail sentence if they defy the edict, which comes into force in the UK next month. Ukip MEP Paul Nuttall said the ruling made the "bendy banana law" look "positively sane". He said: "I had to read this four or five times before I believed it. It is a perfect example of what Brussels does best. Spend three years, with 20 separate pieces of correspondence before summoning 21 professors to Parma where they decide with great solemnity that drinking water cannot be sold as a way to combat dehydration. Rules banning bent bananas and curved cucumbers were scrapped in 2008 after causing international ridicule. Prof Brian Ratcliffe, spokesman for the Nutrition Society, said dehydration was usually caused by a clinical condition and that one could remain adequately hydrated without drinking water. Those arguing for a European Nanny-Zone fiscal union better get used to this kind of stupidity because if they get their wish, more such stupidity is coming. Worse yet, Nanny-Zone stupidity will be financial related, precisely where it can do the most economic damage. 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.

Leading Indicators or Statistical Noise? Posted: 18 Nov 2011 09:46 AM PST Inquiring minds are digging into the touted numbers of the day, the conference board index of leading indicators. Index of Leading Indicators Leading Indicator Contribution May June July Aug Sep Oct Average Weekly Hours Manufacturing +.00 +.00 +.00 -.07 +.00 +.13 Average Weekly Initial Claims +.04 +.00 +.14 -.02 -.03 +.08 Manufacturers' New Orders, Consumer Goods and Materials -.01 +.00 +.13 -.11 -.03 +.01 Index of Supplier Deliveries -.32 +.04 -.42 +.01 +.06 -.01 Manufacturers' New Orders, Nondefense Capital Goods +.10 -.05 +.07 +.10 -.04 +.01 Building Permits, New Private Housing Units +.21 +.03 -.07 +.10 -.16 +.27 S&P 500 Stock Market Index +.02 -.14 +.11 -.41 .0.4 +.10 M2 Money Supply +.13 +.35 +.59 +.71 +.10 +.10 Interest Rate Spread, 10-Year Treasury Bonds Less Federal Funds +.32 +.31 +.31 +.23 +.20 +.22 Index of Consumer Expectations +.23 -.14 -.26 -.25 +.06 +.07 Month in, month out, one of the biggest leading indicator components is the treasury-Fed Funds Rate spread.One might think that the direction of the spread would be important, but one would think wrong. Month-after-month, the conference board woodenly add points to this leading index component. In these zero-bound conditions, I suggest using the direction of the 10-year rate itself would make more sense, with a falling rate an indication of weakness. Is the stock market a leading indicator or a coincident index of stock market sentiment? If it was leading, what did it say at the 2007 stock market peak? What did it say at the March 2009 stock market bottom? The idea the stock market leads the economy is complete nonsense. It is coincident at best, and lagging at worst. Building permits are a leading indicator, but most of this month's rise is a rebound from last month's bleak report. The average workweek hours for the last 7 months have been 41.4 41.4 41.4 41.4 41.3 41.3 41.5 Is that meaningful? The conference board seams to think so. I think it is random noise until there is a clear trend. Is M2 money supply a reflection of capital flight out of Europe? A reflection of excess reserves parked at the Fed? Flight of money into savings accounts from CDs that yield nothing? All of the above? My conclusion is a couple indicators are better, the rest is meaningless noise or worse yet, biased nonsense. Jumping to Conclusions Bloomberg reports U.S. Stocks Gain as Economic Indicators Temper Europe Concerns Well the stock market is now in the red as of 11:30 Central, but it is not the headline that caught my eye, but the willingness of people to cling to every meaningless uptick in everything as if it is something other than random noise. "The pace of U.S. economic growth is the most important story for stock investors," James Paulsen, chief investment strategist at Minneapolis-based Wells Capital Management, which oversees about $333 billion, said in an e-mail. "The next big catalysts for the stock market will probably be a growing appreciation that not only is the U.S. economy not recessing, but U.S. economic growth is actually accelerating next year." 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.

Mish Video with Max Keiser: Rise of Technocrats, Fraudulent Conveyance, MF Global, the Culture of Greed, Christina Romer, and the US Dollar Posted: 18 Nov 2011 07:44 AM PST I recorded another session with Max Keiser, this time with video over Skype. Previous segments with Max were audio only. We discussed technocrats, MF Global, fraudulent conveyance, the US dollar, Christina Romer, and other topics. My segment starts at about the 12:45 minute mark. Here is a link if Video does not play: In Debt We Trust This video was recorded earlier this week using Skype and a Logitech video camera. I now have a pair of studio lights so the next video will have better lighting. The audio echo is likely caused by having two microphones switched on (one on the camera and another plugged in to the computer). All in all this came out reasonably well for a first try at in-home video and was a lot of fun. 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.

London Stock Exchange Becomes Lender of Last Resort to Italian Banks Posted: 18 Nov 2011 12:27 AM PST One might think (and one would certainly hope) that financial institutions would have learned something from the blowup of MF Global and Missing Client Money One might also think (and again one would hope) in the wake of failing banks like Dexia that financial institutions would have some sense of responsibility as to where they park money. It goes back a while, but one might have hoped that financial institution would have remembered that E*Trade Nearly Went Bankrupt because it parked client cash position in Asset Backed Commercial Paper right before a credit crunch. One would be wrong, on all counts. The New York Times DealBook reports Banks in Italy Find an Unusual Liquidity Lifeline The London Stock Exchange is becoming the lender of last resort for many banks in Italy as concerns over the country's debt levels squeeze liquidity out of the Italian financial market. With cash increasingly hard to come by, Italy's banks are turning to CC&G, the exchange's Italian clearinghouse, for short-term lending. That includes some of the country's largest financial institutions, including Unicredit and Mediobanca, according to a person close to the situation. While just two banks received short-term capital from CC&G in 2009, that number has now risen to 15 — half of them Italian and the rest European financial institutions that trade in the country. The money, which comes from collateral that traders must put up to complete financial transactions, is deposited with the banks to cover shortfalls in liquidity. CC&G earns a profit by charging banks interest on the money that they borrow. CC&G also doesn't technically lend money to banks, but instead deposits the cash with them on a short-term basis. Under Italian law, this distinction makes CC&G a depositor with the banks, and places it ahead of other creditors looking to get their money back if any financial institution should fail. The legal distinction may still leave CC&G exposed if a lender defaults. And analysts question the sustainability of lending to struggling banks. That's particularly true as the collateral offered to institutions as short-term financing is often provided by the same bank's separate trading operations. Chasing a few extra basis points of earnings nearly sunk E*Trade. More recently (as in right now), the search for missing client money at MF Global is still underway. Somehow that has not deterred CC&G, the London Stock Exchange Italian clearinghouse from taking similar risks for a few extra basis points of earnings. 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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