Mish's Global Economic Trend Analysis

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• San Bernardino, California, Weighs Chapter 9 Bankruptcy; That Seals the Fate
• Egan Jones Lowers Credit Rating of Netherlands, Austria; Time to Break Up the Rating Agency Cartel Revisited
• German Constitutional Court May Take 3 Months to Rule on ESM; Finance Minister Wolfgang Schäuble Warns of "Uncertainty"
• China Import Growth Plunges, Trade Surplus Hits 3-Year High; Will US Response Be Protectionism? Is China Headed For a Deflationary Shock?

San Bernardino, California, Weighs Chapter 9 Bankruptcy; That Seals the Fate Posted: 10 Jul 2012 07:44 PM PDT When you see headlines like this: San Bernardino, California, Weighs Chapter 9 Bankruptcy, you know 100% without a doubt the city is bankrupt, and the only question pertains to the filing. From the Bloomberg headline story .... San Bernardino may become the third California city in two weeks to file for municipal bankruptcy protection, as it struggles with declining tax revenue, growing employee costs and ill-timed public-works projects. The City Council is to consider authorizing the city attorney to file a Chapter 9 petition at a meeting late today, said Gwendolyn Waters, a spokeswoman. A decision was possible tonight, though unlikely, she said. A San Bernardino bankruptcy would follow Stockton, a community of 292,000 east of San Francisco, which on June 28 became the biggest U.S. city to file for bankruptcy. Mammoth Lakes, a mountain resort of 8,200, filed for protection from creditors on July 3 saying it can't afford to pay a $43 million judgment, more than twice its general-fund spending for the year. San Bernardino, a city of 209,000 east of Los Angeles, faces a $45 million deficit this fiscal year, according to a June 26 budget analysis posted on its website. The city has declared fiscal emergencies, negotiated for concessions from employees and reduced its workforce by 20 percent in four years, according to the report. The city is facing insolvency because of accounting errors, deficit spending, pension and debt costs, and lack of revenue growth, according to the report. Few Options "Cities are running out of options," Michael Sweet, a partner specializing in bankruptcy at the San Francisco office of law firm Fox Rothschild LLP, said today in a telephone interview. "As they see pension contribution obligations and retiree health-care costs going through the roof, revenue is at best stable if not declining." "The city's reserves and discretionary funds have been depleted, and the city faces insolvency," San Bernardino Interim City Manager Andrea Travis-Miller and Finance Director Jason Simpson wrote in a June 26 memo to the council. "Simply put, the city must now take substantial action to reduce its spending and increase revenues." According to its financial statements, the city and its agencies held $243 million of outstanding debt, including $48.6 million of taxable pension-obligation bonds outstanding. The city's debt per person was $1,506 or $5.37 percent of personal income. San Bernardino had $200 million of outstanding general- obligation bonds, according to the statement. Untenable Union Wages and  Pension Benefits to Blame Once again, deficit spending, union wages, and soaring pension obligations are at the heart of the matter. Los Angeles, Oakland, San Diego, and numerous other cities face the same fate. Just give it time. Excellent News Some people will look at this as bad news. However, this is excellent news. The only solution is to stick it to uncompromising public unions in bankruptcy court. Bankruptcy is the way forward. For more excellent news, please see Excellent Anti-Union News From Multiple Places Including US Supreme Court 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.

Egan Jones Lowers Credit Rating of Netherlands, Austria; Time to Break Up the Rating Agency Cartel Revisited Posted: 10 Jul 2012 12:30 PM PDT In a common sense move, Egan-Jones cuts Austrian, Dutch sovereign ratings. Credit rating agency Egan-Jones lowered Austria's rating to A from A-plus and cut the rating on the Netherlands to A from AA-minus. Both ratings have a negative watch. Northern European countries will absorb the cost of shoring up ailing neighbors, Egan-Jones said in separate statements on each rating action. And with Spain and potentially Italy looking for support, "two major economies will switch from providers to users of funds. Our view is that the longer the euro crisis continues, the lower the ultimate recoveries," the statements read. Big-3 Behind the Curve The always behind the times "Big Three" (Moody's, Fitch, and the S&P) maintain AAA status on the Netherlands, with Fitch alone having a negative watch. Time to Breakup the Rating Agency Cartel   Egan-Jones gets business on the basis of accuracy. It has a vested interest in doing a good job. The Big Three get business by government mandate. They primarily get paid on the volume of business they do. What follows are snips from my post Time To Break Up The Credit Rating Cartel, written September 28, 2007, long before the rating agency AAA scam on sliced, diced, and tranched mortgage-debt was fully exposed. .... The rating agencies were originally research firms. They were paid by those looking to buy bonds or make loans to a company. If a rating company did poorly it lost business. If it did poorly too often it went out of business. Low and behold the SEC came along in 1975 and ruined a perfectly viable business construct by mandating that debt be rated by a Nationally Recognized Statistical Rating Organization (NRSRO). It originally named seven such rating companies but the number fluctuated between 5 and 7 over the years. Establishment of the NRSRO did three things (all bad): 1) It made it extremely difficult to become "nationally recognized" as a rating agency when all debt had to be rated by someone who was already nationally recognized. 2) In effect it created a nice monopoly for those in the designated group. 3) It turned upside down the model of who had to pay. Previously debt buyers would go to the ratings companies to know what they were buying. The new model was issuers of debt had to pay to get it rated or they couldn't sell it. Of course this led to shopping around to see who would give the debt the highest rating. Problems arose because the free market was disrupted by a misguided mandate by the SEC. Those interested in more information on this topic can read Removing a Regulatory Barrier by Senate Republican Jon Kyl or Creating a Competitive Rating Agency Sector by the American Enterprise Institute. The Solution is Amazingly Easy Government sponsorship of organizations and intervention into free markets always creates these kinds of problems. The cure is not an executive shuffle, third party verification or half-measures and more regulation that mask over the issues by splitting functions within an organization. The SEC created this problem by creating the NRSRO. The problem is easily fixable. It's time to break up the cartel by eliminating the rules that created it. Moody's, Fitch, and the S&P should have to sink or swim by the accuracy of their ratings just like everyone else. Free market competition, not additional regulation is the cure.  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 Constitutional Court May Take 3 Months to Rule on ESM; Finance Minister Wolfgang Schäuble Warns of "Uncertainty" Posted: 10 Jul 2012 10:13 AM PDT The "fast track" for constitutional review of the ESM in Germany just got a lot slower. Via Google Translate (further modified by me for clarity), Der Spiegel reports ESM Review Probably Longer Than Planned Karlsruhe - The Federal Constitutional Court fast track review of the euro rescue ESM and Fiscal Pact may take more time than previously thought. Chief Justice Andrew Voßkuhle announced at the hearing on Tuesday a "constitutionally reasonable inspection" of complaints could extend beyond a normal emergency procedures. This could, according to those involved take up to three months. The fast track was originally expected to last up to three weeks. Schäuble warns of market uncertainty Finance Minister Wolfgang Schäuble (CDU), stated that in his opinion a clear shift of the July ESM also "could mean a considerable uncertainty in the markets." A stop of the bailout could lead to "serious economic dislocation, with unforeseeable consequences" for the Federal Republic, said Schäuble. "Avoid constitutional doubts about the ability or the willingness of the Federal Republic of Germany, threats to the stability of the euro zone could lead to the current crisis symptoms were significantly increased," said Schäuble. The speculation about the euro-exit of some countries would be fueled. This brings no foreseeable risks for the German economy, such as during the 2009 crisis, the minister said. The last two paragraphs above are as directly translated. The rest contains slight rewordings by me for ease in reading. Reflections on "Uncertainty" This is one of the few recent instances of the use of the word "uncertainty" that actually makes any sense. In most other instances lately, the word "uncertainty" was conveniently substituted for something tantamount to  "economy is clearly falling apart". In this case we do not know how the court will rule. However, that the ruling may take as long as three months is a clear indication the recent challenges to the ESM are not a trivial matter that can be easily dismissed. That much is certain. So is the fact that Schäuble doesn't care for that message one bit. Tough. 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.

China Import Growth Plunges, Trade Surplus Hits 3-Year High; Will US Response Be Protectionism? Is China Headed For a Deflationary Shock? Posted: 10 Jul 2012 02:51 AM PDT China's trade surplus hit a 3-year high this month as import growth plunged. That setup raises many questions. First, let's consider the initial story. Bloomberg reports China's Import Growth Misses Estimates for June China's imports rose less than anticipated in June, pushing the trade surplus to a three-year high and adding pressure on the government to support demand as the global economy slows. Inbound shipments increased 6.3 percent from a year earlier, the customs bureau said in a statement today in Beijing, compared with the 11 percent median estimate in a Bloomberg News survey of 32 economists. Export growth slowed to 11.3 percent and the trade surplus rose to $31.7 billion. Rising surpluses may further strain trade relations with the U.S., which surpassed the European Union in the first half as China's biggest foreign market and is in the midst of a presidential election marked by criticism of the Asian nation. The country's trade surplus with the U.S. and lack of currency gains have been issues in the U.S. election campaign this year, as American job growth slowed last quarter. Mitt Romney, the Republican presidential candidate, has criticized President Barack Obama as too soft on China. At the same time, Obama has expanded trade complaints against the nation: Last week he accused it of imposing unfair taxes on American vehicles, mostly from General Motors Co. and Chrysler Group LLC. Will US Response Be Protectionism? Mitt Romney has pledged to designate China a "currency manipulator" and impose duties on its imports if the yuan isn't allowed to float freely. If Romney increases tariffs three things will happen, all of them bad. Prices will rise Growth will slow China will retaliate with tariffs of its own or by buying more goods from Europe instead of  goods from US produces  In essence everyone will pay higher prices for goods and services in hopes of bring back a few hundred manufacturing jobs (while losing tens-of-thousands of jobs in the ensuing economic slowdown). Agreement With Lagarde It is not often I agree with IMF head Christine Lagarde, but this time I do. Please consider IMF's Lagarde urges caution over protectionism IMF Managing Director Christine Lagarde on Tuesday said the global economic situation was worrisome and urged countries to be cautious of protectionism. Lagarde described as "quite alarming" a report published by the World Trade Organization in June which said the world's trading nations were succumbing to protectionism in the wake of the global financial crisis. Cusp of Deflationary Vortex? Ambrose Evans-Pritchard writing for The Telegraph proposes China Headed For a Deflationary Shock China is on the cusp of a deflationary vortex. This was signalled late last year by the sharpest contraction in the (real) M1 money supply since modern records began. The hard data is now confirming the warnings. Consumer prices have been falling for the last three months, producer prices have been falling for four months. This is not a food cost story. It is systemic. Is this the long-feared hard landing? Of course it is. The problem was the explosive growth of credit in the preceding years. This is roughly twice the intensity of credit growth – around 50 percentage points of GDP – before the US and Japanese blow-offs. There seems to a near universal assumption that China can pull the levers of the state banking system and set off a fresh credit boom whenever it wants. Well, perhaps, but loan demand has withered. The big four banks lent just 190bn yuan in June, down from 253bn in May. "Large banks are all offering money, but no one is taking it," said a Shanghai dealer quoted by Reuters. This is more or less what happened in Japan in the 1990s, what is happening in Europe now. It is what happened to half the world in the 1930s. But at the end of the day, the country is bursting with industrial over-capacity. Woe betide the world if China does indeed land with a thud. We will then have a synchronised planetary slump for the first time since you know when. Less for More vs. More for Less Pritchard correctly cites the problem as the "explosive growth of credit in the preceding years." While not proposing a direct solution (thankfully - because I nearly always disagree), Pritchard fears something that needs to happen. In a comment to Pritchard's post, Pater Tenebrarum responds "It would of course be excellent news for all of us if we were indeed flooded with cheap goods. Who wants to pay more for goods instead of less? Apparently paying less is considered a great calamity. Not by me though, and I feel pretty certain that there are a few billion consumers who would agree with me." Count me in the group of a few billion people who would gladly pay less for more, rather than more for less. 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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