Mish's Global Economic Trend Analysis

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• China Snubs Geithner on Iran Oil; China Gets Cheaper Iran Oil as U.S. Pays Tab for Hormuz Patrols; Retired Admiral Warns "US Policy Benefits the Chinese"
• Europe’s $39 Trillion Pension Time Bomb Explodes in 2012; Simple Proposal to Fix the Problem
• German Economy Contracts in 4th Quarter; Spain's Industrial Output Plunges 7%; UK Trade Deficit Widens; European Banks Wisely Hoard Cash
• Debt Trap Looms in India on Convertible Bonds; Borrowing Costs May Quadruple for Indian Corporations
• Greek Crisis Has Pharmacists Pleading for Aspirin; Bailout Money Used for Military Spending

China Snubs Geithner on Iran Oil; China Gets Cheaper Iran Oil as U.S. Pays Tab for Hormuz Patrols; Retired Admiral Warns "US Policy Benefits the Chinese" Posted: 11 Jan 2012 10:42 PM PST The US' complete ineptitude on oil policy is in the spotlight just as predicted. A pair of articles will show what I mean. China Snubs Geithner on Iran Oil Bloomberg reports China Snubs Geithner on Iran Oil, Japan Plans Cut U.S. Treasury Secretary Timothy F. Geithner's efforts to tighten economic sanctions on Iran over its nuclear program won backing from Japan a day after China rejected limiting oil imports from the country. China, which counts Iran as one of its top petroleum suppliers, yesterday snubbed the U.S., with a vice foreign minister saying his nation "opposes imposing pressure and sanctions." 'Halfway Solution' "Japan will try and seek a halfway solution where they'll try and limit imports from Iran and boost imports from other Middle Eastern countries that are also U.S. allies," said Razeen Sally, a professor at the Lee Kuan Yew School of Public Policy at the National University of Singapore. Given its military alliance with the U.S., Japan "is much more susceptible to U.S. pressure than China," he said. Halfway Idiocy Razeen Sally, a professor at the Lee Kuan Yew School of Public Policy at the National University of Singapore is an economic dunce. Oil is fungible. It makes no difference where one gets the oil. If Japan gets oil from Saudi and China gets more oil from Iran nothing changes. However, if there is any supply disruption prices will rise. Simply put, if Iran pumps less oil prices will rise unless Saudi Arabia or other supplies makes up the difference. If Iran oil is shut off, Saudi  and other supplies cannot make up the difference. If there is a partial shutdown, and China buys Iranian oil to make up the difference nothing at all changes unless China uses pressure to get a better deal. I mentioned such problems were likely in Geithner Seeks Support for Iran Oil Sanctions From China; What Should China's Response Be? Shoddy Reporting by Bloomberg on Oil Story What Should China's Response Be? I propose this: Dear Secretary Geithner In light of the fact that the US Defense Secretary announced on Face the Nation that "Iran Not Trying to Develop Nuclear Weapon" China will not support a US-Led oil embargo. Moreover, we will consider any efforts by the US or Europe to block Iranian exports to be economic warfare against China. We call on the United States to dump their unfounded economic attack on Iran immediately. That would set the proper tone for discussion and make the Obama administration as well as Republican warmongers look foolish in the process. Unfortunately, China is unlikely to do that. Instead, If the US and Europe are stupid enough to ban Iranian oil, China would have additional leverage on those disputed Iran oil contracts mentioned above. It took precisely one day to prove the above highlighted theory correct. China Gets Cheaper Iran Oil as U.S. Pays Tab for Hormuz Patrols Please consider China Gets Cheaper Iran Oil as U.S. Pays Tab for Hormuz Patrols China stands to be the biggest beneficiary of U.S. and European plans for sanctions on Iran's oil sales in an effort to pressure the regime to abandon its nuclear program. As European Union members negotiate an Iranian oil embargo and the U.S. begins work on imposing sanctions to complicate global payments for Iranian oil, Chinese refiners already may be taking advantage of the mounting pressure. China is demanding discounts and better terms on Iranian crude, oil analysts and sanctions advocates said in interviews. "The sanctions against Iran strengthen the Chinese hand at the negotiating table," Michael Wittner, head of oil-market research for Societe Generale SA in New York, said in a phone interview. Chinese refiners are likely to win discounts on Iranian crude contracts as buyers from other nations halt or reduce their purchases of Iranian oil to avoid being penalized by U.S. and European sanctions, he said. At the same time, the U.S. is bearing most of the cost of air and sea patrols and surveillance in the Strait of Hormuz, through which transit 17 million barrels a day of crude, or 20 percent of world supplies. China, the No. 2 importer of oil after the U.S., enjoys protection for the shipping lanes without paying a cent, retired Admiral Dennis Blair, a former U.S. Director of National Intelligence, said in an interview. "Policing the region imposes a cost on us, and benefits the Chinese," Blair said in an interview. A few Iranian officials recently have threatened to shut the passage if the U.S. and Europe enforce tough oil sanctions. China's oil executives are expected to demand lower prices for Iranian crude, said Mark Dubowitz, director of the Iran Energy Project at the Foundation for Defense of Democracies, an advocacy group in Washington. Reducing Purchases Dubowitz estimates that if China were the only remaining buyer of Iranian crude, it might command as much as 40 percent discounts. Among the other major refiners of Iranian oil, India has increased orders from Saudi Arabia, and Japanese and South Korean officials say they are gradually reducing their dependence on Iran, Dubowitz said. Inane US Oil Policy  The US picks up the tab for China to get cheaper oil as prices rise elsewhere. In light of the fact US Defense Secretary Admits "Iran Not Trying to Develop Nuclear Weapon" , US policy is inane. 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.

Europe’s $39 Trillion Pension Time Bomb Explodes in 2012; Simple Proposal to Fix the Problem Posted: 11 Jan 2012 03:44 PM PST Europe's pension time bomb has gone off. European demographics are among the worst in the world and Europe is heading into a huge, prolonged recession on top of it. Please consider Europe's $39 Trillion Pension Risk Grows as Economy Falters Even before the euro crisis, people were worried about Europe's pension bomb. State-funded pension obligations in 19 of the European Union nations were about five times higher than their combined gross debt, according to a study commissioned by the European Central Bank. The countries in the report compiled by the Research Center for Generational Contracts at Freiburg University in 2009 had almost 30 trillion euros ($39.3 trillion) of projected obligations to their existing populations. Germany accounted for 7.6 trillion euros and France 6.7 trillion euros of the liabilities, authors Christoph Mueller, Bernd Raffelhueschen and Olaf Weddige said in the report. Stable or falling birthrates, plus rising life expectancies, are adding to pressures, with the proportion of economic output devoted to spending on retirement benefits projected to rise by a quarter to 14 percent by 2060, according to the ECB report. Europe has the highest proportion of people aged over 60 of any region in the world, and that is forecast to rise to almost 35 percent by 2050 from 22 percent in 2009, according to a report from the United Nations. That compares with a global estimate of 22 percent by 2050, up from 11 percent in 2009. The number of people aged over 65 in the 34 countries in the Organization for Economic Cooperation and Development is forecast to more than quadruple to 350 million in 2050 from 85 million in 1970. Life expectancy in Europe is increasing at the rate of five hours a day, according to Charles Cowling, managing director of JLT Pension Capital Strategies Ltd. in London. In so-called developed countries, the average lifespan will reach almost 83 by 2050, up from about 75 in 2009, the UN said. By 2060, the average French pension benefit will be 48 percent of the national average wage, compared with 63 percent now, said Stefan Moog, a researcher at Freiburg University in Freiburg, Germany. State pension obligations in France and Germany are three times the size of their economies, according to data compiled by Mercer. It's more sustainable in France than Germany because of France's higher birthrate. Last year, there were 4.2 people of working age for every pensioner in France. The ratio will fall to 1.9 by 2050, according to a report by Economist magazine in March. In Germany, the proportion will decline to 1.6 from 4.1 in the same period. Simple Proposal to Fix the Problem The punchline to this economic disaster came in the middle of the article: "Pension managers and governments are relying on economic growth to safeguard the promises they make." Europe will be lucky to average 1% growth in the next 5 years. However, I have an idea guaranteed to fix the problem. Every country but Greece should exit the Euro but keep pension plans denominated in euros. The value of the Euro will sink to zero as Greece goes into hyperinflation. Thus, pension plans denominated in Euros will quickly be solvent. At that point the plans can be converted back to their respective currencies with obligations that can be paid with a few ounces of gold. 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.

German Economy Contracts in 4th Quarter; Spain's Industrial Output Plunges 7%; UK Trade Deficit Widens; European Banks Wisely Hoard Cash Posted: 11 Jan 2012 09:24 AM PST There are numerous signs the entire Eurozone is in recession, including Germany. Nonetheless economic dunces talk as if recession can be avoided. For making just that claim, I blasted the IMF on Monday in Dimwit Comment of the Day: Christine Lagarde, IMF Director says "Europe May Avoid a Recession This Year". Let's ponder a sampling of data released today that proves without a doubt Europe is already in recession. German Economy Contracts in $4th Quarter Bloomberg reports Germany May Be on Brink of Recession Europe's largest economy shrank "roughly" 0.25 percent in the fourth quarter from the third, the Federal Statistics Office in Wiesbaden said today in an unofficial estimate. The weaker global economy and waning demand from debt- stricken euro-area neighbors have eroded German foreign sales, the main pillar of its economic expansion. Net trade contributed 0.8 percentage point to growth last year, with exports up 8.2 percent and imports gaining 7.2 percent. In 2010, exports increased 13.7 percent. "All in all, the German economy has remained relatively resilient," said Annalisa Piazza, an economist at Newedge Group in London. "Signs of moderation have recently emerged but we expect the German economy to remain afloat in the coming quarters, maintaining its role as the major engine of growth for the euro area." 2012 Forecast German growth will slow to 0.6 percent this year before recovering to 1.8 percent in 2013, the Bundesbank predicted on Dec. 19. The European Central Bank, which has cut interest rates to a record low and flooded the banking system with cash during the debt crisis, last month reduced its 2012 growth forecast for the 17-nation euro region to just 0.3 percent. Preposterous Growth Forecast The growth forecast for Germany and the Eurozone are both preposterous. If Europe heads into a prolonged recession (and it has already started), Germany cannot help but get sucked into it. Approximately 28 percent of German GDP is derived by exporting goods to EU countries and Switzerland. Think German exports to the rest of Europe are going to rise forever? Think again, starting with a look at the Eurozone's 4th largest economy. Spain's Industrial Output Plunges 7% Economic Times reports Spain's Industrial Output Plunges 7%. Spain's industrial output plunged by 7.0 percent in November compared to a year earlier, its biggest drop in more than two years, official data showed on Wednesday. Economists have warned that Spain may have already entered a recession, with a likely contraction in the last quarter of 2011 and the first quarter of 2012. The official growth forecast for 2011 stands at 0.8 percent. The fall in production accelerated in November after a decline of 4.2 percent in October, according to Wednesday's figures. "All the industrial sectors displayed negative year-on-year rates," the institute said in a statement. The fall in production was sharpest in the consumer goods sector, at 16.3 percent. Energy fell 5.2 percent. Industrial production fell 1.4 percent on average from January to November compared to the same period a year earlier, the figures showed. The November figure was the worst since October 2009 when output fell 9.1 percent during the first wave of the economic crisis. Spanish Minister Sees Recession Risk Bloomberg reports Spain Industrial Output Falls, Minister Sees Recession Risk Spanish industrial production fell the most in two years in November as Budget Minister Cristobal Montoro warned that the euro area's fourth-largest economy is on the edge of a recession. Spain's economy is close to entering a recession, Montoro told lawmakers in Madrid as they began examining Prime Minister Mariano Rajoy's first package of austerity measures. The plan was announced on Dec. 30 after the new government learned that the 2011 budget gap will be a third larger than forecast. Interpreting Bureaucratese Spain has been in recession for two quarters already (assuming it ever got out of recession that started in 2007), yet talk is still Spain "may" fall into recession. Just what the heck does it take for these bureaucratic clowns to admit the obvious? Actually, if one knows how to interpret  "bureaucratese" they already have. When bureaucrats talk of "risk of recession" it is a sure-fire sign the economy is already in one. UK Trade Deficit Widens Please consider Pound Weakens to Three-Month Low Versus Dollar After Trade Deficit Widens The pound fell to a three-month low versus the dollar after a government report showed the trade deficit widened more than economists forecast, fueling bets the central bank will need to add more stimulus to spur growth. Sterling declined versus all its 16 major counterparts and gilts advanced after the British Retail Consortium said shop- price inflation slowed in December to the lowest in 16 months. The Bank of England will keep its bond-purchase target unchanged at 275 billion pounds ($422 billion) at a policy meeting tomorrow, according to a Bloomberg News survey. "The trade data is worse than expected, and it has negative connotation on sterling," said Jane Foley, a senior currency strategist at Rabobank International in London. "There is also some outside talk about possibility that the Bank of England may expand the target for bond purchases. The consensus view is that it remains unchanged." With the Eurozone in deepening contraction, don't expect the UK to export its way out of its economic mess either. European Banks Wisely Hoard Cash Please consider Europe Banks Hoarding Cash Resist Draghi Banks are hoarding the European Central Bank's record 489 billion-euro ($625 billion) injection into the banking system, thwarting attempts by policy makers to avert a credit crunch in the region. Almost all of the money loaned to 523 euro-area lenders last month wound up back on deposit at the Frankfurt-based central bank instead of pouring into the financial system, ECB data show. Banks will use most of the three-year loans to meet their refinancing needs for this year and next, analysts at Morgan Stanley and Royal Bank of Scotland Group Plc estimate. "It's illusory to think that the measure will translate into credit generation," Philippe Waechter, chief economist at Natixis Asset Management in Paris, said in an interview. "It will assuage some of the anxiety banks have regarding their liquidity needs. But they've engaged into a massive overhaul of their strategy and shrinkage of their balance sheets, which is, coupled with the deteriorating economy, not compatible with increasing credit." Governments are urging European banks to keep lending to companies and individuals while requiring them to raise an additional 114.7 billion euros of core capital by June to weather a deepening sovereign-debt crisis. Euro-area banks have more than 600 billion euros of debt maturing this year, the Bank of England said in its financial stability report last month. The first ECB loan offering should help cover about two-thirds of that amount, Goldman Sachs Group Inc. analysts say. Morgan Stanley's Van Steenis estimates banks may reduce assets by as much as 2.5 trillion euros in two years, a process known as deleveraging. The volume of loans to households and companies in the 17- nation euro area shrank in November for the second consecutive month, the ECB said on Dec. 29. Loans were still up 1.7 percent over the year-earlier period, slowing from a 2.7 percent increase in the 12 months through October. Expect Severe European Recession Telling banks to lend in the midst of a deepening recession with numerous austerity measures yet to kick in is simply absurd. If banks did increase loans, it would add to bank losses. The smart thing for banks to do is exactly what they are doing, parking cash at the ECB. Austerity measures in Italy, Spain, Portugal, Greece, and France combined with escalating trade wars ensures the recession will be long and nasty. For additional details please see ... "Social VAT" Trade Wars Heat Up Between Spain and France Brussels Recommends Sucking Spain Dry with Increased VAT; France to Raise Sales Tax to Protect Jobs; Is There Any Point or Reason for the Eurozone? Don't expect the US to be immune from a Eurozone recession and a Chinese slowdown. Unlike 2011, it will not happen again. 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.

Debt Trap Looms in India on Convertible Bonds; Borrowing Costs May Quadruple for Indian Corporations Posted: 11 Jan 2012 07:54 AM PST Let's turn our focus on a different country today, and ponder the plight of Indian convertible bonds. Bloomberg reports Debt Trap Looms in Convertibles Due After 25% Sensex Plunge Indian companies with a record $5.3 billion of convertible bonds due this year may see borrowing costs more than quadruple after the worst performance among the world's 10 biggest stock markets. Reliance Communications Ltd., Suzlon Energy Ltd. (SUEL) and Tata Steel Ltd. (TATA), sold a third of the total debt, according to data compiled by Bloomberg. Their shares are trading as much as 88 percent below the bond conversion prices. Should they choose to issue debt that can't be converted into equity to meet repayments, companies will face an average yield of 6.92 percent on dollar-denominated bonds, a HSBC Holdings Plc index shows, compared with 1.55 percent on convertible notes, according to Barclays Capital data. "Companies are heading into a debt trap," Raj Kothari, a convertible bond trader at Sun Global Investments Ltd., said in a phone interview from London on Jan. 4. "Companies have no option but to repay the debt." Cash levels for Indian borrowers relative to their interest commitments fell to a five-year low after the central bank raised interest rates a record 13 times since March 2010 to combat inflation and as operating profits declined, Standard & Poor's Indian unit Crisil Ltd. (CRISIL) said in a report this month. Corporate earnings will probably post the biggest drop in three years in the financial year ending March, according to analysts' estimates compiled by Bloomberg. Reliance Communications, India's second-largest mobile- phone operator, is due to repay $925 million of convertible debt on March 1, the largest amount by any Indian company this year, according to data compiled by Bloomberg. All except for $116 million of the bonds due this year were sold before 2008, according to data compiled by Bloomberg, as investors were attracted by the Sensex trebling in value in 2006 and 2007. "Equity prices have gone below the conversion prices on convertible bonds," Samir Shah, head of technical analysis at BP Equities Pvt. said in a phone interview from Mumbai on Jan. 6. "There's no option for companies but to repay the debt." 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.

Greek Crisis Has Pharmacists Pleading for Aspirin; Bailout Money Used for Military Spending Posted: 11 Jan 2012 01:04 AM PST The Greek economy is now totally and completely dysfunctional. The government has resorted to price controls on goods to contain costs. However, price controls do nothing but cause shortages. The sad result has Pharmacists Pleading for Aspirin. For patients and pharmacists in financially stricken Greece, even finding aspirin has turned into a headache. The 12,000 pharmacies that dot almost every street corner in Greek cities are the damaged capillaries of a complex system for getting treatment to patients. The Panhellenic Association of Pharmacists reports shortages of almost half the country's 500 most-used medicines. Even when drugs are available, pharmacists often must foot the bill up front, or patients simply do without. Official Denial of Pharmaceutical Tragedy Without a doubt the medical crisis in Greece is a tragedy underway. Proof comes from Nicolaos Polyzos, secretary general of the Ministry of Health, who says "It would be unrealistic to deny that there are many difficulties regarding all public services due to the financial crisis. However, this cannot justify characterizing the current picture of (the) health sector in Greece as a tragedy." Apparently shortages of 500 drugs including aspirin is not a tragedy. Shortages Caused by Price Controls As part of an effort to cut its own costs, Greece has mandated lower drug prices in the past year. That has fed a secondary market, drug manufacturers contend, as wholesalers sell their shipments outside the country at higher prices than they can get within Greece. Strained government finances only make matters worse. Wholesalers and pharmacists say the system suffers from a lack of liquidity, as public insurers delay payments to pharmacies, which in turn can't pay suppliers on time. "Wholesalers simply do not have the money anymore to play bank to the pharmacies," Heinz Kobelt, secretary general of the European Association of Euro-Pharmaceutical Companies, said in a telephone interview. Reimbursement fraud compounds the drain on the country's health resources, Richard Bergstrom, director-general of European Federation of Pharmaceutical Industries and Associations, said in an interview. Drugs shipped elsewhere yet submitted for reimbursement to public insurers as if they had been prescribed to patients cost Greece more than 500 million euros a year, Bergstrom said, citing figures he said he got from the Ministry of Health. In a later e-mail, Bergstrom said he had personally seen packs of drugs with Greek reimbursement stickers on the market outside of Greece, suggesting that exporters were reimbursed and able to ship the packs abroad. "If the pack is exported, the exporter is obliged to 'cancel' the code, a bar code, by using a black pen," Bergstrom wrote. "But this is not monitored." Plenty of Money Though for Military Spending Via choppy Google translation, please consider Fine weapons for Athens Frigates, tanks and submarines: A Greek military passes any savings package. And Germany benefited. The Gift of the Greek Ministry of Defense has the man in the head: up to 60 fighter aircraft fighter for maybe € 3.9 billion euros. French frigates for about four billion, patrol boats worth 400 million euros, as much is the necessary modernization of the existing Greek fleet. Then it still lacks of ammunition for the Leopard tank , also would have two American Apache helicopters will be replaced. Oh, and one would like to buy German U-boats, total price: two billion euros. What the man who goes in and out of Greece's Defence Ministry, in an Athens cafe is because of the sounds absurd. A State which is on the verge of bankruptcy and is supported by billions of the European Union wants to buy tons of weapons? According to the just-released report, Arms Export in 2010 after the Portuguese, the Greeks - a state on the verge of bankruptcy - the largest buyers of German war weapons. According to the just-released report, Arms Export in 2010 after the Portuguese, the Greeks - a state on the verge of bankruptcy - the largest buyers of German war weapons. Bailout money first goes to French and German banks. What is left over goes for weapons systems. Meanwhile, price controls and fraud have made aspirin hard or impossible to get. To top it off, Germany and France want still more tax hikes and austerity measures. Greece will default soon. It's all over. Nothing is left but a corrupt hollow shell. 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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