Mish's Global Economic Trend Analysis

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• Face-to-Face Showdown With Merkel; Wicked Irony of Greece Bankruptcy
• Is Italy Following the Footsteps of Greece? Does Italy or Germany Exit the Eurozone First?
• Retail Sales Rise? Not in California Where Sales Tax Collections Plunge Amazing 40% Year-Over-Year

Face-to-Face Showdown With Merkel; Wicked Irony of Greece Bankruptcy Posted: 15 Aug 2012 10:24 PM PDT Greece is bankrupt. It cannot pay the bills. A Spending Moratorium proves just that. Greece will only pay salaries and pensions. If the state owes anyone else money, they can forget about it unless the Troika sends more money. If that causes more corporate and personal bankruptcies (and it will), then tough luck.  Even Der Spiegel admits the obvious: Only Bankruptcy Can Help Now. Officially, at least, everything is going according to plan. In September, officials with the troika -- made up of the European Commission, the European Central Bank (ECB) and the International Monetary Fund (IMF) -- are planning to travel to Athens to check on the progress that Greece has made with its cost-cutting program. Then, according to the plan, they could disburse billions more in aid out of the second bailout package for Greece, which the euro-zone countries and the IMF agreed on in February. But, in reality, it is rather unlikely that all of the €130 billion ($160 billion) in the bailout package will ever be paid out. And what is even more unlikely is that the money would keep Greece from going bankrupt. The assumptions on which the current program was based in February are no longer valid. At that time, it was thought that the Greek economy would only contract by 4.5 percent this year, but now it appears that this figure will be closer to 7 percent. This would mean even fewer tax receipts and even more social expenditures. What's more, given these circumstances, it's almost irrelevant that the Greek government is expected to ask for a two-year extension, to 2016, of the agreed austerity plan. One thing is clear: In addition to more time, Greece also needs more money. And those who have been financing it thus far -- primarily the major euro-zone countries and the IMF -- are either unwilling or unable to give the country any more. Face-to-Face Showdown With Merkel The Telegraph reports Greece's Samaras to face show-down with Angela Merkel in Berlin Antonis Samaras will travel to Berlin next Friday to ask for extra time - at least two more years - to meet the austerity targets set in its second €130bn (£102bn) bail-out. Amid continued protests and a grim rise in suicides in Greece, the German Chancellor has agreed to listen to Mr Samara's request to slow down the austerity drive. Greece's economy is already in free-fall and economists have argued the terms of the bail-out programme - which include another €11.5bn of cuts in 2013 and 2014 - are making things worse. However Ms Merkel's spokesman Steffen Seifert warned: "The German position, which is a European position, is based on the memorandum of understanding, which is the foundation." The Chancellor is struggling to contain increasing domestic impatience with the debt crisis which is thought to have cost German savers €163bn or €3,125 each, according to Die Welt.Guido Westerwelle, Germany's foreign minister, said that while the impact of the delayed elections had to be considered, there could be "no substantial changes" to Greece's austerity programme. Wicked Irony Antonis Samaras wants two more years and more money to meet budget goals. This puts Merkel in a damned if she does, damned if she doesn't predicament of her own making. Recall that Greece technocrat Prime Minister Lucas Papademos was handpicked by the Troika to replace George Papandreou simply because the latter proposed a voter referendum on the Greek bailouts. Also recall that when the government of Papademos failed, it took two elections to come up with a successor. And in each of those elections German leaders, as well as clowns from Brussels, openly campaigned for Samaras, even though he pledged to do exactly what he is doing: asking for more time and more money. Sheeseh. Notice the massive irony of it all. Germany does not want to give Greece more money or more time, nor does Germany want the blame for forcing Greece out of the eurozone. However, Germany, theEU, and the ECB openly backed a person guaranteed to put Germany and the EU in such a no-win position. Had the radical left won the Greek election, Germany and the EU could easily have walked away because Alexis Tsipras, SYRIZA's radical left leader promised a bailout rejection, which would have meant a eurozone exit. Now Germany is in the ludicrous position of having to make a decision that will either give Greece more money or force them out of the eurozone. Germany does not want to pony up more money, nor does it want to be accused of forcing Greece out of the eurozone, yet those are the only choices. OK chancellor, pick your poison. 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.

Is Italy Following the Footsteps of Greece? Does Italy or Germany Exit the Eurozone First? Posted: 15 Aug 2012 07:42 AM PDT As I watch the implosion of Greece, with shops closing everywhere and GDP plunging like a rock, I cannot help but wonder if we are witnessing the start of a similar trend in Italy. To be sure, Italy has a manufacturing base that Greece does not have, but retail aspects and shop closings in Rome as compared to Athens seems rather similar. If that sounds far-fetched, please consider Summer of gloom for crisis-hit Rome shops It is not just stifling summer heat that is keeping shoppers at bay on Rome's Via del Corso: as the economic crisis hits locals and tourists alike, many shops have little choice but to close for good. The few people around seem to ziz zag from shop to shop, seeking relief from the heat in air-conditioned outlets and leaving behind frustrated shop assistants who struggle to sell anything despite discounts of up to 80 percent. "The crisis has hit everyone," sighed one empty-handed customer, while shopkeepers up and down the street whiled away their time folding and re-folding piles of brightly coloured T-shirts and stylish outfits. "The sales have not gone well," said clothes shop manager Fabio Anticoli. While the eternal city usually draws tourists from all over the world who spend their cash on Italian designs, "this year, it's an impoverished tourism." The sales have gone "very badly" compared with 2011 according to the shopkeepers' association Confesercenti, which reports a 20 percent drop in turnover in central Rome, a figure that rises to 40 percent in outer suburbs. Lina Rocchi, a lingerie shop founded in 1938, closed down and left a sign that read "80 years, three generations, a story comes to an end." "1,500 shops in Rome have already closed their doors for good since the start of 2012, and the figure might rise to 2,500 by the end of the year," said the association's head Valter Giammaria. According to a Confcommercio report, 80 percent of supermarkets and restaurants and more than 50 percent of bars are staying open this week despite a holiday on Wednesday because of the financial crisis. Same Ordeals as Greece The BBC reports Italy GDP Drops 4th Consecutive Quarter Italy's GDP fell for the fourth quarter in a row, preliminary figures showed. Compared with a year earlier, growth slumped by 2.5%, Istat said. Investors are worried Italy - the eurozone's third biggest economy - may be next in line to suffer the same ordeals that have hit Greece, Portugal and now Spain. 'No sign of change' from recession Italy's government has the biggest debt burden of any of the major eurozone countries at 123% of GDP, which makes it particularly susceptible to a loss of market confidence - something that would make it impossible for the government to roll over its debts as they come due for payment. Despite the austerity measures investors have continued to dump Italian sovereign bonds, which have pushed their yields close to unsustainable levels as markets fear a breakdown of the euro. Italian business confidence fell last month, as company executives are increasingly pessimistic over the country's economic prospects and expect the recession to worsen in coming months. "There is no sign of any change of trend for Italy," said Annamaria Grimaldi, an analyst at Intesa Sanpaolo. Italy Manufacturing PMI Please consider the Markit/ADACI Italy Manufacturing PMI®  Key points: Rate of job losses sharpest since October 2009 Output falls at sharp pace unchanged since June Input prices drop at fastest rate in three years Manufacturers in Italy continued to face a challenging operating environment at the start of the third quarter. A further contraction in demand led to lower output levels and the sharpest reduction in employment for 33 months, with a sharp and accelerated decrease in backlogs of work underlining the degree of excess capacity in the sector. The seasonally adjusted Markit/ADACI Purchasing Managers' Index® (PMI®) – a composite indicator designed to provide a single-figure snapshot of manufacturing performance – dipped to a three month low of 44.3 in July, down from June's reading of 44.6. The headline index has posted below the neutral mark of 50.0 – signalling deteriorating business conditions – throughout the past year, and was below the average recorded over the second quarter as a whole. July saw output levels at manufacturers in Italy fall markedly, and at a rate that was equal to that registered in the preceding survey period. The month-on-month decrease in goods production was the eleventh in the past year. Markit/ADACI Italy Services PMI® Markit reports Italy Service Sector New Work Drops at Fastest Rate Since March 2009 Key points: Activity falls markedly as a result of accelerated decline in new business 12-month outlook turns negative for first time in series history Rate of job shedding fastest for three months Summary: Conditions across Italy's service sector took a turn for the worse in July, as incoming new business fell at the fastest rate since March 2009. Activity and employment both dropped as a result, and for the first time since the launch of the survey in January 1998 firms generally expected output to be lower in a year's time than current levels. Another negative development for businesses was a slight rise input price inflation from June's seven-month low. Outstanding business at services firms was further reduced during the latest survey period, extending the current sequence of decline to 17 months. Moreover, the overall rate of depletion quickened to the fastest since September 2009. Weakness in new business inflows was the most frequently cited reason for lower backlogs. Comment: Phil Smith, economist at Markit and author of the Italy Services PMI® said: "July PMI data pointed to recession in Italy's service sector deepening at the start of the third quarter. New business intakes fell at a sharp monthly rate that has been exceeded only four times over the series history, all of which occurred around the height of the global financial crisis. Furthermore, data on expectations showed sentiment at a record low, and gave no impression of an impending recovery." "Not only did July see a further deterioration on the demand front, but input cost inflation also picked up from June's recent low. This placed greater pressure on service providers to reduce their overheads, with a solid and accelerated decrease in employment levels one outcome. At the same time, backlogs of work were still reduced at a marked pace, suggesting yet more scope for job cuts." Difference Between Italy and Greece The difference between Italy and Greece is certainly not the direction of the economy. Rather the difference is in magnitude. Certainly, Greece has imploded at a far faster rate than Italy, but the latest ISM numbers from Italy, both services and manufacturing have been nothing short of horrendous. Moreover, there is absolutely no reason to expect economic conditions in Italy to get any better. Does Italy or Germany Exit the Eurozone First? There is one crucial difference between Italy and Greece: Italy is without a doubt too big to bail. Moreover, German citizens would not be willing to try, even if chancellor Angela Merkel was willing. That begs the question, does Italy or Germany exit the eurozone first? I suspect Italy leaves first. Although the answer is unclear, timing is very important. Indeed, the value of the euro vs. the US dollar is very likely dependent on whether Germany remains in the union. Those wondering why the euro has been drifting nowhere recently just might ponder that rationale. Regardless, one thing is clear, and that is either Italy or Germany (or perhaps both) is eurozone "burnt toast". 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.

Retail Sales Rise? Not in California Where Sales Tax Collections Plunge Amazing 40% Year-Over-Year Posted: 15 Aug 2012 12:14 AM PDT On Tuesday we heard news that July retail sales rose, breaking a three-month downtrend. Doug Short at advisor Perspectives has a great set of charts in his report Retail Sales: At Last, an Improvement! Doug puts the improvement in proper perspective. However, my first thought in reading the report was "July sales will be likely revised lower". Now I'm Wondering "What's Going on in California?" My change in perspective come from looking at California State Finances for July 2012. Compared to Budget Total Revenues: -$475 million (-10.1%) Income Tax: $12 million (0.4%) Sales Tax: -$295 million (-33.5%) Corporate Tax: $57.1 million (27.4%) Compared to 2011 Total Revenues: -$468.8 million (-10%) Income Tax: $156.2 million (5%) Sales Tax: -$390.7 million (-40%) Corporate Tax: -$26.4 million (-9.1%) What the Numbers Tell Us Typically, July is a month when California revenues go on vacation, as the month accounts for about one dollar of every $20 deposited in the General Fund. (Only October has lower revenue volume.) Despite those low expectations, July's revenues were $475 million, or 10.1%, below estimates. Some of that variance may be due to timing, as a fund transfer expected in July will now be made in August (in the range of $100 million). Most of the shortfall was attributable to sales tax, which dropped $295 million, or 33.5%, below estimates. Partially offsetting these revenue losses, the state's other major revenue sources — income and cor-porate taxes — performed above estimates. Corporate taxes rose $57.1 million (27.4%) above estimates. This reverses an eight-month trend of corporate tax revenue underperforming estimates. This could have been helped by a drop in corporate refunds in July, $54.6 million below July of last year. Personal income taxes came in just above estimates by $12 million in July. The stability of this month's personal income tax could be attributed to the modest recovery being made in the labor markets. California added 38,300 nonfarm payroll jobs in June, which followed a gain of 45,900 jobs in May. July's sales tax performance is harder to explain as it is unclear whether consumer activity has slowed or if this is an issue of timing. The missed amount this month can certainly be made up in the near future. While sales taxes were only projected to hit $882 million in July, the Budget expects the State to collect $2.3 billion in sales tax in August. Total General Fund Disbursements also went out faster than originally projected. Table 2 shows Local Assistance payments in July totaling $1.7 billion over the budget's estimates. Most of that was caused by a $1.5 billion school payment scheduled for September, but instead issued in July. Sales taxes collections off 33.5% vs. budget and 40% from a year ago is not a "timing issue". Either California data is extremely messed up, or retail sales nationally will be revised sharply lower. 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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