Mish's Global Economic Trend Analysis

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• S&P Predicts 20% Drop in Spain's Housing Prices Over Next 4 Years; Bad Bank to Dump Distressed Properties on Market
• April 2013 Manufacturing ISM at a Glance; What do the Numbers Mean?
• Expect ECB to Cut Rates on Friday; Even a "Shock-and-Awe" Cut Won't Help One Bit
• Canada Goes After Bitcoin; Saskatoon Realtor Lists Home Priced in Bitcoins; Is Bitcoin a Money Laundering Machine?

S&P Predicts 20% Drop in Spain's Housing Prices Over Next 4 Years; Bad Bank to Dump Distressed Properties on Market Posted: 01 May 2013 01:05 PM PDT Spain's "bad bank", Sareb to speed up distressed property sales in an ambitious new timetable for liquidation. The bad bank is hoping to sell almost 42,000 housing units in the next five years. This is about half of the properties in its €50 billion (£42.5 billion approximately) portfolio. However, falling house prices and a desire among buyers for modern properties in prime locations could hamper these plans for swift sale. Already the value of assets is being slashed by Sareb to clear their books, but attracting investors is proving to be no easy task. At the beginning of March the International Monetary Fund (IMF) declared: "The clean-up of undercapitalised banks has reached an advanced stage, and key reforms of Spain's financial sector have been either adopted or designed." Sareb has also been praised for its receipt of distressed real estate assets from the country's weakest banks. The bad bank has also finalised agreements with participating banks to manage the transfer of assets. Cleanup "Advance Stage" Nonsense from IMF To suggest the cleanup of undercapitalized banks is in an "advance stage" is complete nonsense. It only makes partial sense if there is a zero percent probability of haircuts on Spanish sovereign debt. I suggest the probability of haircuts on Spanish government bonds is far greater than 50%. And since Spanish banks are loaded to the gills with sovereign debt, the banks are severely undercapitalized by implication. S&P Predicts 20% Drop in Spain's Housing Prices Courtesy of Mish-Modified google translate from El Economista, please consider S&P predicts that housing in Spain fall by 20% over the next four years. The credit rating agency Standard & Poor's does not see "signs of improvement" in the Spanish property market given the "precarious economic conditions and the heavy weight of the 'stock' of unsold homes," and anticipates that home prices will fall 20% over the next four years. "We see little chance of that Spanish households become more solvent, as prices continue to fall, the purchasing power continues to decline and interest rates are stabilizing. This should keep demand very depressed," said S&P in a report on the European property market. Sareb's plans to sell 45,500 homes in the next five years, about half of its portfolio, will likely determine the pace of declines in housing prices. Should the divestiture from Sareb be gradual, housing prices in Spain will fall 8% in 2013 and 5% in 2014, after falling 10.5% in 2012 and 28% from their highs reached in March 2008. Falls widespread in Europe On the whole of Europe, the agency notes that the downward trend in most European property markets continue this year as a result of the economic downturn. In most countries housing prices will continue on a path "down" this year and only start to stabilize or slowdown in 2014. After Spain, the largest decreases will occur in the Netherlands (-5.5%) and France (-5%). S&P Optimistic I am of the opinion the S&P is overly optimistic about Spain, about France, and about the Netherlands. The European recession is worsening, credit conditions are awful, employment conditions are awful, and there are scant buyers of property because discounts are not large enough and credit is nowhere to be found. None of this remotely takes into consideration the very strong likelihood of a Spanish debt writedown in the next year or so. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com 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.

April 2013 Manufacturing ISM at a Glance; What do the Numbers Mean? Posted: 01 May 2013 11:25 AM PDT US Manufacturing as measured by the April 2013 Manufacturing ISM Report On Business® is treading water barely above contraction. Economic activity in the manufacturing sector expanded in April for the fifth consecutive month, and the overall economy grew for the 47th consecutive month, say the nation's supply executives in the latest Manufacturing ISM Report On Business®. ISM at a Glance Series Data Apr Index Mar Index Percentage Point Change Direction Rate of Change Trend (Months) PMI™ 50.7 51.3 -0.6 Growing Slowing 5 New Orders 52.3 51.4 +0.9 Growing Faster 4 Production 53.5 52.2 +1.3 Growing Faster 8 Employment 50.2 54.2 -4.0 Growing Slower 43 Supplier Deliveries 50.9 49.4 +1.5 Slowing From Faster 1 Inventories 46.5 49.5 -3.0 Contracting Faster 2 Customers' Inventories 44.5 47.5 -3.0 Too Low Faster 17 Prices 50.0 54.5 -4.5 Unchanged From Increasing 1 Backlog of Orders 53.0 51.0 +2.0 Growing Faster 3 Exports 54.0 56.0 -2.0 Growing Slower 5 Imports 55.0 54.0 +1.0 Growing Faster 3 Synopsis Manufacturing employment has grown for 43 months. I expect that trend to break next month. Production was up but inventories were way lower. The drop in inventories, in conjunction with a big slowdown in employment, is likely a leading indicator of future production. The positive surprise that does not fit into the above assessment is that new orders grew at a faster rate. Next month may be telling. I expect the new order divergence to resolve to the downside as the global economy and the US economy are both slowing. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com 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.

Expect ECB to Cut Rates on Friday; Even a "Shock-and-Awe" Cut Won't Help One Bit Posted: 01 May 2013 09:59 AM PDT Eurozone inflation collapsed to 1.2% in the latest report, from an expected print of 1.6%. Given the ECB has an inflation target of 2%, rate cut calls range all the way from a cut of 25 basis points to a cut of 75 basis points. With the current rate at .75%, a 75 basis point to 0% is very unlikely. A cut of 25 or 50 basis points is almost certain but even 50 basis points won't do much good. Steen Jakobsen, chief economist at Saxo Bank writes via email: Calls for cut in ECB rate by 25 bps from 75 bps to 50 bps. We see 25 bps Background: Inflation have dropped to +1.2% against at target of +/- 2.0% Unemployment rate now at 12.1% in Europe (A record high) Survey data again going south Data been weaker into the meeting European GDP is looking like -1.5 / 2.0% right now without 'some miracle' or stimulus help. Issues: Monetary policy is impotent at zero bound. 25 bps plus or minus will not change the banks appetite for risk – ECB latest lending report says that in excess of 30% of banks see less appetite for lending to SMEs [Small to Medium Enterprises] vis-à-vis last quarter. Only exception is Germany where the number is +6% ECB needs to create better "transmission" – however local regulators prevent this as Spain has a minimum mortgage rate of 325 bps is in place and the Netherlands a 300 bps minimum. Moreover,  banks are under capital constraint due to incoming increase demand from BIS III. A TARP-like institution backed by tax receipt is very unlikely as Germany again shot down any belief in banking union only yesterday. Investors Fooling Themselves Echoing the opinion of Steen, please consider Investors may be fooling themselves about an ECB rate cut High hopes ride on the European Central Bank, which is set to make its latest monetary policy announcement on Thursday. Despite the fact that poor economic data continues to flow out of the euro zone, investors seem convinced that the euro area is a fleeting concern, and certain that the ECB will cut rates from their current level of 0.75% in order to relax credit. Despite the likelihood of a rate cut, the euro zone is still mired in a sovereign debt and banking crisis, with a recession that isn't likely to go away so fast. We've already argued that even if the ECB slashes its target interest rate, the effect is unlikely to trickle down into the real economy, and particularly to small- and medium-sized enterprises (SMEs). The options Deutsche Bank wraps up all the options it thinks the ECB has (and the likelihood of each happening) in this handy chart: Importantly, banks are still scared to lend to one another, so they're paying a premium to fund themselves. While interest rates have fallen across the board because of earlier ECB actions, borrowing rates for SMEs and individuals have not fallen much in the last year. Shock and Awe? Consensus is for a 25 basis point cut. I would not at all be surprised by a "shock-and-awe" announcement of 50 basis points. However, cuts of any size will not help because the problems in the eurozone are structural: Structural Issues  Banks are undercapitalized Interest rate differentials although way lower are still high Target II imbalances are high Austerity via tax hikes is an absolute killer Work rules in southern Europe are badly in need of an overhaul The Euro itself is fundamentally flawed  Anyone who thinks that even a 75 basis point cut would solve those issues is not thinking clearly. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com 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.

Canada Goes After Bitcoin; Saskatoon Realtor Lists Home Priced in Bitcoins; Is Bitcoin a Money Laundering Machine? Posted: 01 May 2013 12:37 AM PDT Is Bitcoin a Money Laundering Machine? Bitcoin trumpets itself as being totally anonymous. Facts speak otherwise. New Bitcoin World tackles the issue in Can code and competition build a better Bitcoin? Everyone from the mainstream media to Wikileaks to the now-disbanded hacker collective LulzSec has trumpeted Bitcoin as "anonymous." But the truth is that researchers have long since proven it's anything but — since every bitcoin transaction appears on a public ledger distributed to everyone in the network (called the "block chain"), tracking bitcoins back to individuals is often trivial. Zerocoin promises true anonymity by giving Bitcoin its own built-in money laundering system.  The special sauce is a zero-knowledge proof, a statement used to verify a piece of secret information without giving away the secret in the process. This makes it so that if someone looks at the block chain, they'll be able to see that you minted a zerocoin at some point, but there will be no way to tell which one you're redeeming. Saskatoon Realtor Lists Home Priced in Bitcoins Just in time for tax season, the Canada Revenue Agency says BitCoins aren't tax exempt. Originally designed as a virtual currency alternative to conventional money, the cash value of a BitCoin jumped from under $50 US to above $250 and back earlier this month, as speculators flooded the market after awareness of them grew. Saskatoon realtor Paul Chavady said he has listed a house priced in BitCoins, and has found clients willing to pay his fees in the electronic currency. The CRA told the CBC there are two separate tax rules that apply to the electronic currency, depending on whether they are used as money to buy things or if they were merely bought and sold for speculative purposes. "Barter transaction rules apply where BitCoins are used to purchase goods or services," Canada Revenue Agency spokesman Philippe Brideau said in an email. When it comes to trading BitCoins for profit, the tax man says there are tax implications there, too. "When BitCoins are bought or sold like a commodity, any resulting gains or losses could be income or capital for the taxpayer depending on the specific facts," ruled the CRA. If you think the anonymity of bitcoin will hide what you are doing, you probably better think twice. And the more popular bitcoin gets, the more government will be asking questions. If bitcoin gets big enough, governments will do far more than ask questions, they will demand an accounting of every transaction, where the money went, and whether taxes were properly paid. For more on bitcoins please see Mish Interview With "Bitcoin Jesus" Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com 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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