Mish's Global Economic Trend Analysis

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• Government Debt Held by Spanish Banks Doubles in Seven Months; Deleverage? What Deleverage?
• Reflections on Social Media and Demographics
• Rehypothecated "Ghost" Steel Pledged as Assets in China, Nowhere to be Found; Did it Ever Exist?

Government Debt Held by Spanish Banks Doubles in Seven Months; Deleverage? What Deleverage? Posted: 18 Sep 2012 09:51 PM PDT One of the goals of ECB president Mario Draghi's LTRO plan was to get banks to deleverage. Instead it concentrated the risks. For a case in point, please consider Europe Banks Fail to Cut as Draghi Loans Defer Deleverage. Lenders in the euro area increased assets by 7 percent to 34.4 trillion euros ($45 trillion) in the year ended July 31, according to data compiled by the European Central Bank. BNP Paribas SA (BNP), Banco Santander (SAN) SA, and UniCredit (UCG) SpA, the biggest banks in France, Spain and Italy, all expanded their balance sheets in the 12 months through the end of June. They have Mario Draghi to thank. The ECB president's decision nine months ago to provide more than 1 trillion euros of three-year loans to banks eased the pressure to sell assets at depressed prices. The infusion, designed to encourage firms to lend, succeeded in averting a short-term credit crunch by reducing their reliance on markets for funding. It also may be making European lenders dependent on more central-bank aid. "Deleveraging isn't taking place, especially in Spain and Italy," said Simon Maughan, a bank analyst at Olivetree Securities Ltd. in London. "The fact that we haven't got on with it, or very slowly, suggests that when the time comes we'll need another ECB injection to roll over the first one, just to keep the balance sheets of Italian banks in business." LTRO Lift The ECB's longer-term refinancing operation, or LTRO, changed the timetable. The Frankfurt-based central bank extended 489 billion euros of three-year loans to European banks in December in the first phase of the program. Two months later, it loaned 530 billion euros to 800 firms. Deleverage? What Deleverage? "Thanks to Draghi, the massive shrinkage that was looming six months ago across Europe isn't happening -- at least not yet," said Nikolaos Panigirtzoglou, an analyst at JPMorgan Chase & Co. in London. "That's what the economy needed on the short term." Actually, it's not what the economy "needed" at all. It's what the financial markets needed. The European markets rallied since LTRO because German and French banks were able unload Spanish sovereign debt garbage on to Spanish banks. Unfortunately, the economy certainly did not need more concentration of risk in banks that have failed or are about to fail. Nor did Spain specifically. Government Debt Held by Spanish Banks Doubles in Seven Months Via Google translate from El Economista, please consider Government Debt Held by Spanish Banks Doubles in Seven Months Spanish debt changes hands. The extraordinary monetary policy of the European Central Bank (ECB) and the distrust generated by the crisis are the main catalysts of the drastic change that are having this market in 2012. In his slipstream, two opposing trends. On the one hand, the increasing role of national banks that hoard and almost one in three volume euros in circulation, almost double that in late 2011, and secondly, the withdrawal of foreign investors, who have reduced their exposure to Spanish debt significantly pending clarification that the outlook for public finances. As central banks attempt to counteract forces of deleveraging (deflation) systemic risk of the largest lenders grows by leaps and bounds. The "success" of the LTRO was nothing more than offloading risky assets back into countries such as Spain that cannot afford more losses (yet are on the verge of getting them). 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.

Reflections on Social Media and Demographics Posted: 18 Sep 2012 12:29 PM PDT For about two weeks I have been involved with a Facebook campaign sponsored by JPMorgan Chase who is giving away $5 million to charity. All one has to do is vote. Voting can be via Facebook or by Chase cardholders logging in and voting. I have about 45,000 email subscribers but could only ring up about 1450 votes. A few days in the campaign we had perhaps 500 votes and were in 32nd place, good enough for a nice $50,000. Yet, I was surprised by such a feeble showing in relation to the number of subscribers of this blog. I contacted Calculated Risk, and he was not surprised at all. He related that he once did something via Facebook and only got 100 responses, and his email list is way bigger than mine. I talked to John Mauldin and got the same story. Very few of his million subscribers use Facebook. Calculated Risk said I would be shocked at how viral this campaign would get towards the end from those actively using Facebook. He was correct. The leader now has 78,000 votes but had less than a thousand when I talked to him. I had misread the rules when I first posted. I thought one had to be a Chase account holder to vote. You don't. Worse yet, those voting from their account only get one vote. Those voting on Facebook get two votes (but cannot be for the same place) with a chance for an extra vote (used anywhere). The result is only those campaigns populated with younger demographics had any realistic chance of winning a top prize. Clearly JPMorgan has instituted its campaign this way on purpose, hoping news about Chase will go viral, and it did. Yet, I wonder how many of those votes are from those in grade school who will not have an account for a decade or longer. Will it even influence where they open accounts? Nonetheless, something will go to the charity of my choice, Les Turner. However, we are right on the bubble. This is a moving target, but as of this morning we need about 50 more votes to move up one notch to get an extra $10,000 ($20,000 instead of $10,000). So for one final time (the campaign ends September 19) ... Facebook Users, I Have a Favor to Ask Chase is giving away $5 million to charity. The charity with the most votes will receive $250,000! The next 10 charities will receive $100,000 each. The next 35 charities will receive $50,000 each. There are 150 additional awards as per contest rules. Please click on Chase Community Giving to vote for your favorite charity. The above link points to Facebook and comes preloaded pointing to Les Turner ALS Foundation. You will need to approve Chase Community Giving on Facebook. One click is all it takes. Why Les Turner? In case you missed it my wife of 27 years, Joanne, passed away on May 16, 2012 from ALS, better known as Lou Gehrig's Disease. Here is my story: My Wife Joanne Has Passed Away; Stop and Smell the Lilacs. In July, I submitted the Les Turner ALS foundation to the Chase Community Giving program and it was approved. Mish Request I kindly ask those with Chase Credit Card or Chase accounts of any kind, to please login to your chase account and vote. Please do so. Thanks. Mike "Mish" Shedlock 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.

Rehypothecated "Ghost" Steel Pledged as Assets in China, Nowhere to be Found; Did it Ever Exist? Posted: 18 Sep 2012 09:45 AM PDT In the wake of a global crash on the the price of steel, led by falling demand, banks in China have gone to warehouses to seize assets of companies in default. However, commodities pledged as assets for loans, simply are not there. Please consider Ghost warehouse stocks haunt China's steel sector Chinese banks and companies looking to seize steel pledged as collateral by firms that have defaulted on loans are making an uncomfortable discovery: the metal was never in the warehouses in the first place. China's demand has faltered with the slowing economy, pushing steel prices to a three-year low and making it tough for mills and traders to keep up with payments on the $400 billion of debt they racked up during years of double-digit growth. As defaults have risen in the world's largest steel consumer, lenders have found that warehouse receipts for metal pledged as collateral do not always lead them to stacks of stored metal. Chinese authorities are investigating a number of cases in which steel documented in receipts was either not there, belonged to another company or had been pledged as collateral to multiple lenders, industry sources said. Ghost inventories are exacerbating the wider ailments of the sector in China, which produces around 45 percent of the world's steel and has over 200 million metric tons (220.5 million tons) of excess production capacity. Steel is another drag on a financial system struggling with bad loans from the property sector and local governments. "What we have seen so far is just the tip of the iceberg," said a trader from a steel firm in Shanghai who declined to be identified as he was not authorized to speak to the media. "The situation will get worse as poor demand, slumping prices and tight credit from banks create a domino effect on the industry." Miracle GDP or Sham Accounting? ZeroHedge had some choice comments today about the impact on GDP and China's miracle growth ... And just like that the Chinese growth "miracle" goes poof... as does its steel first, and soon all other commodities (coughcoppercough) that served as the basis of "secured" liability creation. If the above makes readers queasy, it should: after all rehypothecation of questionable assets is precisely what serves as the backbone of that critical component of the shadow banking system: the repo market, where anything goes, and where those who want, can create money virtually out of thin air with impunity as long as nobody checks if the assets used for liability creation are actually in the system. We will soon discover that all other assets: stocks, bonds, commodities (including gold and silver) and finally cash (think deposits) have been comparably rehypothecated and criminally commingled. I fully expect stockpiles of copper to be missing as well. I am not aware of gold and silver being pledged as assets for loans. For certain, at least in the US, stocks and bonds are under different rules than commodities. Furthermore, while I do not know what every US equity and bonds brokerage house does, many institutions require 100% full cash collateral on securities they lend out. Is cash collateral widespread in China? I highly doubt it. So at least in terms of China, a discovery that multiple asset classes were criminally commingled to a significant degree would not be surprising at all. The big question is not whether it happened, but to what degree. Let's just no go overboard thinking rehypothecation is a widespread practice in every asset class around the globe, even if it's likely this is the tip of the iceberg in China. 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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