Mish's Global Economic Trend Analysis

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• Spain's Latest Bad-Bank, Non-Bank, Shell-Game Proposal; Can One-Winged Pigs Fly?
• Showdown in Europe: Hollande Takes on Merkel and Draghi, Insists on Renegotiation of Merkozy Treaty; Does It Matter Whether France Signs?
• "Flying Piano" Costs Pentagon $1.5 Trillion

Spain's Latest Bad-Bank, Non-Bank, Shell-Game Proposal; Can One-Winged Pigs Fly? Posted: 29 Apr 2012 11:13 PM PDT Spain has floated a number of bad-bank proposals recently, all of which were fundamentally flawed and doomed from the start. The latest shell-game proposal will supposedly take bank assets, put them in a non-bank, while forcing the banks to come up with sufficient capital to cover losses. Please consider Spain in Talks Over 'Bad Bank' Scheme Spain's government and its banks are discussing a new scheme to segregate problematic property loans into one or more asset management companies to relieve the burden on struggling lenders, according to officials and bankers. The "bad bank" scheme is the latest attempt by the centre-right government of Mariano Rajoy, prime minister, to avoid an international rescue programme of the sort required by Greece, Ireland and Portugal. Ministers had decided they had no need of an Irish-style bad bank. But economists say the crisis is so dire that weak banks will need further recapitalisation of about €100bn. Government officials insist that the scheme should not be called a bad bank, because it will not be a bank and participating lenders will be able to park assets in it only if they have set aside sufficient bad loan provisions, independently valued. The scheme is being developed by Luis de Guindos, economy minister, and is in line with a recommendation by the International Monetary Fund. Can One-Winged Pigs Fly? If banks have sufficient loan-loss reserves then why don't they simply take the losses now? If they can raise capital now, then why don't they? If they cannot raise capital now, how will will they be able to do so in the process of moving the assets to a non-bank bank? This ludicrous plan has the flight capability of a one-winged pig. 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.

Showdown in Europe: Hollande Takes on Merkel and Draghi, Insists on Renegotiation of Merkozy Treaty; Does It Matter Whether France Signs? Posted: 29 Apr 2012 08:09 PM PDT German chancellor Angela Merkel says the Merkozy treaty is not renegotiable. There is just one "slight" hitch: France has not signed the treaty and will not sign the treaty unless it is reworked says François Hollande who on May 6 will in all likelihood replace Nicolas Sarkozy as president of France. Moreover, Hollande's demands have gotten steeper and steeper as he inches closer to election. Please consider Hollande rebukes Berlin over crisis role François Hollande, the Socialist candidate for the French presidency, has claimed support from across Europe for his demand for a growth plan, saying it was not up to Germany to decide what action should be taken in the face of the eurozone crisis. With opinion polls predicting he will beat President Nicolas Sarkozy in the run-off vote a week on Sunday, Mr Hollande has stepped up his insistence that he would not ratify the European fiscal discipline treaty without a renegotiation to add a package of growth measures. In a television appearance on Thursday night, Mr Hollande said: "It is not for Germany to decide for the rest of Europe. I'm getting lots of signals, direct and indirect, from other governments, even if they are conservative." Mr Hollande was delighted on Wednesday when Mario Draghi, governor of the European Central Bank, also called for a growth pact to accompany the austerity measures being implemented across Europe, including in France. But he has made it clear that his growth prescription differs markedly from the market-oriented structural reforms envisaged by Mr Draghi – and endorsed by Ms Merkel. His immediate demands are for common European project bonds, an increase in investment by the European Investment Bank, better targeting of underused European structural funds and the introduction of a financial transaction tax, all measures Mr Hollande's camp believes can win widespread backing, including from Germany. Election Posturing? Many think this Hollande's antics are nothing but election posturing. I am not so sure. After all, what does Hollande have to lose by holding out? One thing is for sure, and that is eurobonds are not going to fly.  Germany will not approve. Will Hollande settle for some meaningless "growth package"? Does it Matter What France Does? Short-term, the squabbles and finger-pointing will be far more entertaining if France refuses to sign the treaty. However, given the pathetic state of affairs in Greece, Spain, and Portugal, I fail to see why it really matters in the long-term whether France signs or not. The Eurozone will not last as-is in either case. That said, the bigger and deeper the squabbles, the sooner Germany many do the right thing for all involved: exit the Eurozone before it splinters led by the Club-Med countries. 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.

"Flying Piano" Costs Pentagon $1.5 Trillion Posted: 29 Apr 2012 10:08 AM PDT The Pentagon is about to waste $1.5 trillion, 38% of entire defense budget for a "virtual flying piano". That may sound preposterous, and it is. Unfortunately, it is also true. Foreign Policy Magazine discusses the sad saga of The Jet That Ate the Pentagon. This month, we learned that the Pentagon has increased the price tag for the F-35 by another $289 million -- just the latest in a long string of cost increases -- and that the program is expected to account for a whopping 38 percent of Pentagon procurement for defense programs, assuming its cost will grow no more. How bad is it? A review of the F-35's cost, schedule, and performance -- three essential measures of any Pentagon program -- shows the problems are fundamental and still growing. Although the plane was originally billed as a low-cost solution, major cost increases have plagued the program throughout the last decade. Last year, Pentagon leadership told Congress the acquisition price had increased another 16 percent, from $328.3 billion to $379.4 billion for the 2,457 aircraft to be bought. Not to worry, however -- they pledged to finally reverse the growth. The result? This February, the price increased another 4 percent to $395.7 billion and then even further in April. Don't expect the cost overruns to end there: The test program is only 20 percent complete, the Government Accountability Office has reported, and the toughest tests are yet to come. Overall, the program's cost has grown 75 percent from its original 2001 estimate of $226.5 billion -- and that was for a larger buy of 2,866 aircraft. The total program unit cost for each individual F-35, now at $161 million, is only a temporary plateau. Expect yet another increase in early 2013, when a new round of budget restrictions is sure to hit the Pentagon, and the F-35 will take more hits in the form of reducing the numbers to be bought, thereby increasing the unit cost of each plane. A final note on expense: The F-35 will actually cost multiples of the $395.7 billion cited above. That is the current estimate only to acquire it, not the full life-cycle cost to operate it. The current appraisal for operations and support is $1.1 trillion -- making for a grand total of $1.5 trillion, or more than the annual GDP of Spain. And that estimate is wildly optimistic: It assumes the F-35 will only be 42 percent more expensive to operate than an F-16, but the F-35 is much more complex. The F-35 isn't only expensive -- it's way behind schedule. The first plan was to have an initial batch of F-35s available for combat in 2010. Then first deployment was to be 2012. More recently, the military services have said the deployment date is "to be determined." A new target date of 2019 has been informally suggested in testimony -- almost 10 years late. What Happened? You can actually blame president Clinton for this debacle. You can also blame every president since Clinton for stupid decisions upon stupid decisions and for not scrapping the program. The sad saga continues ... The design was born in the late 1980s in the Defense Advanced Research Projects Agency (DARPA), the Pentagon agency that has earned an undeserved reputation for astute innovation. It emerged as a proposal for a very short takeoff and vertical-landing aircraft (known as "STOVL") that would also be supersonic. This required an airframe design that -- simultaneously -- wanted to be short, even stumpy, and single-engine (STOVL), and also sleek, long, and with lots of excess power, usually with twin engines. President Bill Clinton's Pentagon bogged down the already compromised design concept further by adding the requirement that it should be a multirole aircraft -- both an air-to-air fighter and a bomber. This required more difficult tradeoffs between agility and low weight, and the characteristics of an airframe optimized to carry heavy loads. Clinton-era officials also layered on "stealth," imposing additional aerodynamic shape requirements and maintenance-intensive skin coatings to reduce radar reflections. They also added two separate weapons bays, which increase permanent weight and drag, to hide onboard missiles and bombs from radars. On top of all that, they made it multiservice, requiring still more tradeoffs to accommodate more differing, but exacting, needs of the Air Force, Marine Corps, and Navy. Finally, again during the Clinton administration, the advocates composed a highly "concurrent" acquisition strategy. That meant hundreds of copies of the F-35 would be produced, and the financial and political commitments would be made, before the test results showed just what was being bought. This grotesquely unpromising plan has already resulted in multitudes of problems -- and 80 percent of the flight testing remains. A virtual flying piano, the F-35 lacks the F-16's agility in the air-to-air mode and the F-15E's range and payload in the bombing mode, and it can't even begin to compare to the A-10 at low-altitude close air support for troops engaged in combat. Worse yet, it won't be able to get into the air as often to perform any mission -- or just as importantly, to train pilots -- because its complexity prolongs maintenance and limits availability. The Dustbin Awaits Foreign Policy Magazine arrives at a rational conclusion: "There is only one thing to do with the F-35: Junk it. America's air forces deserve a much better aircraft, and the taxpayers deserve a much cheaper one. The dustbin awaits." Who supports the program? Defense Contractors Defense contractors are at the top of the list. For example, Lockheed Martin, Northrop Grumman, BAE Systems, and Pratt & Whitney support the F-35. Please consider this Lockheed Martin Propaganda. Establishing air superiority in today's complex global security climate requires the unprecedented capabilities and versatility that only the F-35 Lightning II can offer. And the F-35's strong global partnership and broad industrial base ensures affordability through economies of scale while delivering thousands of technology sector jobs around the world. Visit our partners Northrop Grumman BAE Systems Pratt & Whitney To show you what incredible liars the defense industry has, Lockheed Martin has the gall to claim "economies of scale".  Senator John McCain Supports the Boondoggle Senator John McCain wants F-35 training in Arizona at Luke Air Force Base. McCain was presented with the Wing Coin and Chairman's Award by Brig. Gen. Kurt Neubauer, 56th Fighter Wing Commander, and Charley Freericks, Chairman of Fighter Country Partnership's board of directors. The award was given in recognition of McCain being a champion of Luke during his years of public service. Neubauer thanked McCain for speaking at the gathering of more than 250 Fighter Country Partnership members and guests at the annual meeting. He noted the 27,000 sorties, 35,000 hours of flight, the training of 350 new pilots and 400 crew chiefs that took place at Luke in 2009. He told the crowd that Luke trains 95 percent of all the fighter pilots for the Air Force, and has deployed 600 down range to 17 different countries. Spirit of Idaho The Spirit of Idaho organization hopes for training mission in Idaho. Idaho citizens are second to none in their enthusiastic support for the men and women of our Armed Forces and for their military missions. Hosting the F-35 Lightning II Joint Strike Fighter would be a great way to continue that tradition while helping to secure the future of Mountain Home Air Force Base and Gowen Field. That's to say nothing of the thousands of great jobs and economic opportunities that having the F-35s here would create. C.L. "BUTCH" OTTER, GOVERNOR Greed, Graft, Public Unions In general, states where defense contractors are located, states that will house or train the pilots want the jobs support the F-35. Those states, and politicians in those states do not give a rat's ass about how inept or costly the program is. The greed, graft, and waste are bad enough as it is. However, no amount of greed, gall, and waste is so great that unions will be satisfied with it. Please consider Lockheed F-35 workers ready for long strike, union says Unionized workers on strike against Lockheed Martin Corp (LMT.N) over healthcare benefits and pensions are prepared for a long work stoppage, a top union official said on Tuesday as the company said it would be able to keep operations running. Nearly 3,650 union workers walked off the job on Monday at the Fort Worth, Texas, plant where Lockheed builds the new F-35 fighter plane and at two military bases where it is tested. Paul Black, president of the local chapter of the International Association of Machinists and Aerospace Workers (IAM), said three earlier strikes in 1984, 2000 and 2003 lasted from two to three weeks, and union leaders have warned workers the current dispute could take longer to settle. Workers in the union voted overwhelmingly on Sunday to hit the picket line rather than accept the company's "best and final offer," which called for an end to the defined benefits pension that current workers receive and a switch to a retirement account similar to a 401(k). The F-35 program deserves to be scrapped because of cost overruns, inept design specs, and poor test results. Yet 3,650 union ingrates were arrogant enough to walk off the job demanding still more money to build this boondoggle. Every last one of them deserves to lose their job permanently. Let's hope this is the final straw that kills the program. 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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