Mish's Global Economic Trend Analysis

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Giant Sucking Sound; Demand for Credit in Europe Collapses; Pritchard Misses the Boat Posted: 28 Apr 2012 06:40 PM PDT In a report on fixed income, David Owen, Chief European Financial Economist at Jefferies, notes that demand for credit in Europe has plunged. Owen asks Is it the supply or demand for credit that matters? 25 April 2012 Perhaps the most memorable comment Mario Draghi made to the European Parliament today was the need for a euro area Growth Pact, but he did draw comfort from the results of the ECB's latest Bank Lending survey. Draghi made reference to the fact that the balance of firms tightening credit conditions had fallen (from 35% in January to 9%). However, that it is not to say that credit conditions are actually easing, just that they are no longer tightening at the same rate as in January. Not only are credit conditions still tightening, albeit at a slower rate, but importantly the ECB's latest Bank Lending survey shows credit demand collapsing. This is not something that Mario Draghi mentioned to the European Parliament at all. Europe Faces Japan Syndrome In reference to the above chart, Ambrose Evans-Pritchard at The Telegraph says Europe faces Japan syndrome as credit demand implodes Europe (minus Germany) looks more like post-bubble Japan each month. The long-feared credit crunch has mutated instead into a collapse in DEMAND for loans. Households and firms are comatose, or scared stiff, in a string of countries. Demand for housing loans fell 70pc in Portugal, 44pc in Italy, and 42pc in the Netherlands in the first quarter of 2012. Enterprise loans fell 38pc in Italy. The survey took place in late March and early April, and therefore includes the second of Mario Draghi's €1 trillion liquidity infusion (LTRO). The ECB said net demand for loans had fallen "to a significantly lower level than had been expected in the fourth quarter of 2011, with the decline driven in particular by a further sharp drop in financing needs for fixed investment." Demand fell 43pc for household loans, and 30pc for non-bank firms. This slump in loan demand is more or less what happened during Japan's Lost Decade as Mr and Mrs Watanabe shunned debt. Zero interest rates did nothing. The Bank of Japan was "pushing on a string" (though it never really launched bond purchases with any serious determination). The credit squeeze is entirely predictable – and was widely predicted – given that banks must raise their core Tier 1 capital ratios to 9pc by July to meet EU rules, or face nationalisation. (The pro-cyclical folly of this beggars belief: by all means impose higher buffers, but not during a recession, and not by letting banks slash their balance sheets. The US at least forced its banks to raise capital, an entirely different policy since it does not lead to a lending crunch.) The IMF said last week that Europe's banks would slash their balance sheets by €2 trillion – or 7pc – by next year. This amounts to an economic shock. The Fund said deleveraging on this scale at a time of sharp fiscal tightening risks a "bad equilibrium". Or one analyst said, the LTRO lets northern banks dump their bond holdings onto Club Med banks. The renationalisation of the eurozone financial system goes a step further. The LTRO "carry trade" is already revealing the sting in its tail in any case since the banks are by now underwater on a lot of bonds. What happens if and when they need to sell those bonds to cover debts falling due over the next year? Until the ECB conducts monetary policy with proper energy, calls for "Growth Compacts" from governments amount to humbug. The ECB needs to do its own work. We all know why it will not do so: because Hayekian romantics at the Bundesbank hold sway, and none of the other governors dare say boo. Live with the consequences. Live with the Consequences Indeed Pritchard conveniently ignores the fact that Japan is struggling right now to "live with the consequences" of numerous misguided monetary and fiscal stimulus efforts over 20 years. Japan has debt-to-GDP exceeding 200% and little to show for it. And Japan now has to live with the consequences of numerous misguided QE and stimulus proposals. Pritchard apparently wants more QE for Europe as if that would increase demand for credit. Note that two rounds of QE did not increase the demand for credit in the US as per my post The Real Consumer Credit Story: Virtually No Recovery in Revolving Credit, No Recovery in Non-Revolving Credit. Moreover, QE did not succeed in increasing the demand for credit in Japan over 20 years. So pray tell why would QE increase the demand for credit in Europe? More importantly, even if it did, would that be a good thing? European banks are already over-leveraged and under-capitalized so how the hell is providing cheap credit going to possibly do anything good? Would 0% interest rates help when they did not help Japan? Pritchard Misses the Boat Clearly Pritchard missed the boat on QE as well as the desirability of attempting to cram more credit down banks' throats when banks are over-leveraged and under-capitalized. Everyone wants to do something "but not now". While there is immense merit to not hiking taxes in a recession as Brussels forced on Greece, Spain, and Portugal, work rule and pension changes are badly needed. Pritchard's idea of raising capital instead of selling assets seems reasonable enough. However, nothing stops banks from doing that, at least in theory. Is practice another matter? Giant Sucking Sound William Wright discusses Tier-1 Capital requirements in A rough guide to surviving the great deleveraging of 2012 As if Basel III weren't enough of a headache, big European banks face a deadline of June 30 from the European Banking Authority to increase their core Tier-1 capital ratios to 9%, equivalent to raising €115bn in equity. In theory, banks can meet this by retaining profits, raising equity or shrinking assets. But with equity markets all but closed to banks and earnings falling, a crash diet to reduce their bloated balance sheets is the only realistic option. Analysts expect that the great bank deleveraging of 2012 could see as much as $2 trillion to $3 trillion of assets trimmed from European banks' balance sheets – or about 5% of total assets – with damaging consequences not only for the banking industry but for the fragile European economy. Here is a rough guide to some of the inevitable consequences – some deliberate, some unintended and some obscure – of this deleveraging on the investment banking industry. Death of profits, jobs and banks The most obvious impact of deleveraging will be the devastation it will wreak on the profits of investment banks. In 2006, Goldman Sachs posted a return on equity of 33% and its core leverage – assets divided by equity – was 29 times. Fast forward to the first nine months of this year, and its return on equity was 3.7% with leverage of 14 times. Not because it has radically shrunk its balance sheet (yet) but because it has more than doubled its equity. The same process will play out across the industry, where the combination of an increase in the cost of business driven by regulation is colliding with a downturn in activity. This will choke off profits, with JP Morgan forecasting that average ROE for the industry will fall to just 8% next year. That's in line with research by Financial News that shows average pretax ROE in the first nine months of this year was 12% (or about 8% net). Structurally lower profitability has already prompted banks such as Credit Suisse and UBS to slash their fixed income trading activities. While the thousands of job cuts seem harsh, they are often in the low single digits in terms of overall headcount. As more banks grasp the nettle in 2012, they will pull out of entire business lines, cutting 10% or 20% of their staff – or pull out of investment banking altogether. Is That All Bad News? Wright concludes that is not all bad news. I agree, but for some different reasons. First Wright ... The Promised Land In all of this, there is some good news. For those banks that can survive the rigours of deleveraging without having to pull out of entire regions or businesses while retaining a profitable operation, there is a Promised Land on the other side. Overcapacity in the investment banking industry will be whittled away to leave a smaller number of bigger and (relatively) more profitable global banks whose scale will increasingly play to their advantage. Bankers talk of JP Morgan, Deutsche Bank, Goldman Sachs and perhaps one other – maybe Bank of America Merrill Lynch, Barclays Capital or Citi – emerging stronger than ever. At the same time there will be a larger number of product and sector specialists, which will drop the "me-too" approach of the past decade. In this new world, with a realistic price for risk and credit and less competition, margins can only go one way: up. Banks Should Be Banks, Not Hedge Funds I do not believe that bigger is better and I am sick of the notion "too big to fail". Indeed, it most often means two things: Too Big To Succeed Taxpayer Bailouts However, I do believe that banks should be banks, not hedge funds. To the extent that Basel III forces banks to shed trading activities and other non-tradition activities that banks now find themselves in, I view that as a good thing. I certainly agree with Wright regarding the need for "a realistic price for risk and credit", but "less competition" is certainly not the essence of well-formed free markets. My conclusion is that Wright does not understand the Fed's role in the creation of this mess or sound Austrian economic principles needed to fix it.  We will indeed see a "a realistic price for risk and credit" if and only if we get rid of the Fed and end fractional reserve lending. Bigger banks are not the answer. By the way, Wright is not quite correct when he says "equity markets all but closed to banks". Let's phrase it properly: "equity markets all but closed to banks, on terms that banks want". Banks do not want shareholder dilution that comes with raising equity now. Bondholders do not want to take a hit either. Both should have happened already, but Bush, Obama, Congress, and the Fed acted in unison to prevent what desperately needed to happen. If Not Now, When? Pritchard thinks the time to raise Tier-1 Capital requirements is not now. OK When is it? 10 years from now or will Spain, Greece, and Italy still be too fragile? Japan shows the folly of waiting and depending on QE and fiscal stimulus to spawn inflation. Japan's Four-Pronged Approach  Fiscal Stimulus Monetary Stimulus (QE) Misguided Hope Ignore Capital Impairments of Banks Waiting for Things to Get Better Did Japan succeed? In the case of Europe, there is also this "not-so-little" problem that Pritchard is extremely aware of yet mysteriously avoids every time he rails about the ECB not doing enough. I am obviously talking about the Euro. The LTRO increased leverage and risk on Spanish and Italian banks. QE is useless, something Pritchard should see. Reducing interest rates will shift imbalances to other countries, and may send oil and food prices higher, but it sure will not increase lending. Pritchard says "The ECB needs to do its own work, with proper energy." What "work" is that? Does any "work" make any sense? The first irony is Pritchard compares Europe to Japan, while essentially proposing the same four-pronged policy of failure followed by Japan. The second irony of Pritchard's column is that if Basel III moves forward the date of the inevitable breakup of the eurozone, that would be a good thing. A eurozone breakup would place Europe on a faster pace of ending the very "Japan Syndrome" that Pritchard rails against. Proper Energy Not only do I want to raise tier-1 capital requirements, I want to see a 100% gold-backed dollar, the end of fractional reserve lending, and the end of duration-mismatched lending (e.g. selling 5-year CDs and making mortgage loans for 30 years). Finally, lending of money that is supposed to be available on demand is fraudulent and must be stopped.  I would be more than willing to phase those ideas in, but the time to start is now, not 10 years from now, under the misguided notion things will be better if only banks would lend more. 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.

The No Retirement Plan: 25% Expect to Work Till 80 (Greater than Life Expectancy); What About the Expected Retirement of Nuclear Power Plants? Posted: 28 Apr 2012 08:52 AM PDT Given major delays in retirement plans, 80 is the new 65 says CNN Money. A quarter of middle-class Americans are now so pessimistic about their savings that they are planning to delay retirement until they are at least 80 years old -- two years longer than the average person is even expected to live. It sounds depressing, but for many it's a necessity. On average, Americans have only saved a mere 7% of the retirement nest egg they were hoping to build, according to Wells Fargo's latest retirement survey that polled 1,500 middle-class Americans. While respondents (whose ages ranged from 20 to 80) had median savings of only $25,000, their median retirement savings goal was $350,000. And 30% of people in their 60s -- right around the traditional retirement age of 65 -- that were surveyed had saved less than $25,000 for retirement. As a result, many people aren't in a hurry to quit their day jobs. Three-fourths of middle-class Americans expect to work throughout retirement. And this includes the 25% of Americans who say they will "need to work until at least age 80" before being able to retire comfortably. Job Insecurity, Debt Weigh on Retirement Confidence, Savings The Employee Benefit Research Institute (EBRI) reports Job Insecurity, Debt Weigh on Retirement Confidence, Savings Executive Summary Points   Americans' confidence in their ability to retire comfortably is stagnant at historically low levels. Just 14 percent are very confident they will have enough money to live comfortably in retirement (statistically equivalent to the low of 13 percent measured in 2011 and 2009). Employment insecurity looms large: Forty-two percent identify job uncertainty as the most pressing financial issue facing most Americans today. Worker confidence about having enough money to pay for medical expenses and long-term care expenses in retirement remains well below their confidence levels for paying basic expenses. Many workers report they have virtually no savings and investments. In total, 60 percent of workers report that the total value of their household's savings and investments, excluding the value of their primary home and any defined benefit plans, is less than $25,000. Retirees report they are significantly more reliant on Social Security as a major source of their retirement income than current workers expect to be. Although 56 percent of workers expect to receive benefits from a defined benefit plan in retirement, only 33 percent report that they and/or their spouse currently have such a benefit with a current or previous employer. More than half of workers (56 percent) report they and/or their spouse have not tried to calculate how much money they will need to have saved by the time they retire so that they can live comfortably in retirement. What About the Expected Retirement of Nuclear Power Plants? I picked up links to the above articles in a surprising place. Dawn Stover, writing for the Bulletin of the Atomic Scientists compared the retirement of workers to the "The new retirement" for nuclear power plants Today, only 14 percent of Americans age 25 and older are confident that they will have enough money to retire comfortably, according to a recent survey by the Employee Benefit Research Institute (EBRI). Another recent survey, by Wells Fargo, reported that a quarter of middle-class Americans now plan to postpone retirement until they are at least 80 years old -- longer than many of them are expected to live. For Americans facing an uncertain financial future, 80 is the new 65. Some are calling it "the new retirement." But it really should be called "the no retirement." And senior citizens aren't alone. Nuclear reactors are experiencing some of the same woes: Retirement age is fast approaching or already in the rearview mirror, but there is a lot less money in the nest egg than anticipated. At the 44 US nuclear reactors that have already received license extensions, 60 is the new 40. And even when those reactors reach the end of their working lives, they may not be able to move on to the final stage. According to a recent article in The New York Times, the operators of 20 US nuclear reactors -- including some with licenses that expire soon -- do not have sufficient funding for prompt dismantling. If these reactors can't keep working, their owners "intend to let them sit like industrial relics for 20 to 60 years or even longer while interest accrues in the reactors' retirement accounts." Is it crazy for someone to delay his retirement past the age he can expect to live? Sure, but that's essentially what the nuclear industry plans to do with many of its reactors. And it should not come as a surprise that the NRC has no problem with this plan. After all, we're talking about a regulatory agency that issues 40-year licenses for a process that creates a radioactive waste problem lasting tens of thousands of years. Crazy to Plan Retirement Past Life Expectancy? Dawn says "Is it crazy for someone to delay his retirement past the age he can expect to live". Sorry Dawn, that's not crazy at all. If you have insufficient money, you need to work. Some want to work because they like what they are doing. If you are seeking crazy, try these: What is crazy is to expect social security to take care of all your retirement needs. It's also crazy to expect to receive defined benefits even if you are not in a defined benefit plan.  Finally, it's crazy for public unions to think they are going to get all of their promised benefits when it will bankrupt cities and states to do so. Economic Craziness If you are looking for more craziness, Dawn wants a "carbon tax to lift job prospects". Here is another crazy idea: Dawn talks of  "forcing people to save more and protect retirement savings from the vagaries of the financial markets". Yikes! Nuclear Craziness One point I happen to agree with Dawn on.  It's crazy to issue "40-year licenses for a process that creates a radioactive waste problem lasting tens of thousands of years" and have no plans for anything but the first 40 years. 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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Damn Cool Pics

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• Bohemian Rhapsody On The Way To School
• Brass knuckles iPhone Case Can be Used for Self-Defense
• Crime On Campus [Infographic]

Bohemian Rhapsody On The Way To School Posted: 27 Apr 2012 11:25 PM PDT Parenting: You're doing it right. From the video description on YouTube: It has become a morning habit to sing Bohemian Rhapsody on the way to school in the morning. Depending on traffic, we can usually start the song as we pull out of the driveway, and pull into the school just as the song ends.

Brass knuckles iPhone Case Can be Used for Self-Defense Posted: 27 Apr 2012 10:49 PM PDT iPhone can do all sorts of things thanks to its accessories, but iPhone cases can transform your iPhone and enhance its functionality as well, and today we're going to show you Brass knuckles iPhone case. This case transforms your iPhone into a self-defense weapon, or into brass knuckles to be precise. Although Brass knuckles iPhone case is designed to work as a self-defense weapon, it's probably not recommended to use it, because you might damage your phone while using it. Luckily for you, Brass knuckles iPhone case is just a concept for now, so you don't have to worry that you might hurt someone with it, or damage your iPhone while using it. Via: gadgetlite

Crime On Campus [Infographic] Posted: 27 Apr 2012 09:17 PM PDT In 2010, the United States Secret Service, Department of Education, and FBI released a report focusing on violence at institutions of higher education. By understanding these occurrences and learning from them, we can better protect ourselves in the future. Click image to see a larger version. Via: onlinecolleges

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Weekly Address: Helping our Veterans and Servicemembers Make Informed Decisions about Higher Education

Your Daily Snapshot for Saturday, April 28, 2012   Weekly Address: Helping our Veterans and Servicemembers Make Informed Decisions about Higher Education President Obama discusses a new Executive Order designed to crack down on the bad actors who prey on our veterans and service members considering higher education. Watch the President's weekly address: President Barack Obama tapes the Weekly Address in the Grand Foyer of the White House, April 27, 2012. (Official White House Photo by Chuck Kennedy) Weekly Wrap Up Your quick look at this week on WhiteHouse.gov: Soldier Ride: Last Friday, 22 injured servicemembers took a spin around the South Lawn -- with President Obama cheering them on -- as a part of the annual Wounded Warrior Project's Soldier Ride. The Soldier Ride is a four-day cycling event that unites Wounded Warriors and aims to help restore their physical and emotional well-being. The President praised the riders for their strength and dedication, noting, "You ride because you can, and you ride for those who can't. That's what this is all about." Honoring Never Again: "Awareness without action changes nothing," the President remarked at the United States Holocaust Museum in Washington, D.C. on Monday. He spoke about honoring the pledge of "never again" by making sure we are doing everything we can to prevent and respond to atrocities and save lives, by spearheading new efforts and utilizing existing ones, including the Atrocities Prevention Board -- established by the President to bring together senior officials from across our government to focus on the critical mission to prevent mass atrocities and genocide. Fighting Falcons: The United States Air Force football team was honored with the Commander-in-Chief Trophy on Monday in the East Room of the White House after beating the Army and Navy in 2011 to claim their 18th trophy. #DontDoubleMyRate: When speaking this week at the University of North Carolina at Chapel Hill, the University of Colorado at Boulder and the University of Iowa about the importance of keeping interest rates on student loans low so that more Americans can get a fair shot at an affordable college education, President Obama asked college students to tell their members of Congress one thing: Don't double my rates. While Congress cut the rates on federal loans in half five years ago, that rate cut is set to expire on July 1st. Students are taking on more debt to afford the tuition and fees, and for each year that Congress doesn't act, the average student with federal loans will rack up an additional $1,000 in debt. Slow Jams: On Tuesday while stopping by Late Night with Jimmy Fallon, President Obama had a message for Congress: This is not the time to make school more affordable for our young people. He didn't just say it, though -- if you missed President Obama slow jam the news, you can watch it here. Veterans and their Families Can't Wait: On Friday, the President and the First Lady traveled to Fort Stewart, Georgia, home to the Army's famed 3rd Infantry Division. Besides meeting with soldiers and families, the President signed an Executive Order that renews his commitment to fully fund the post-9/11 G.I. Bill in an effort to preserve and enhance the educational opportunities for those who have served, as well as their families. West Wing Week: Your video guide to everything that's happening this week at 1600 Pennsylvania Avenue. Watch here. Stay Connected Sign up for the Daily Snapshot     Facebook Twitter YouTube Flickr Google+     This email was sent to e0nstar1.blog@gmail.com Manage Subscriptions for e0nstar1.blog@gmail.com Sign Up for Updates from the White House Unsubscribe | Privacy Policy Please do not reply to this email. Contact the White House The White House • 1600 Pennsylvania Ave NW • Washington, DC 20500 • 202-456-1111

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Mish's Global Economic Trend Analysis

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• GDP Miss Far Bigger Than Announced; Real GDP is 0% Using More Reasonable Deflator
• Depression in Spain: Unemployment Rate Up .5 Percentage Points to 23.6%; Expect Much Higher Rates Later This Year; When is the Breaking Point?
• Eurozone Retail Sales Plunge at Strongest Pace Since Late-2008; German Retail Sales Plunge Into Contraction; French Retail Sales Plunge at Record Pace; Record Job Losses, Record Retail Plunge in Italy
• Greece to Seize Money From Suspected Tax Evaders' Accounts, with Charges and Trials Later; More Capital Flight Coming Up

GDP Miss Far Bigger Than Announced; Real GDP is 0% Using More Reasonable Deflator Posted: 27 Apr 2012 12:44 PM PDT The Advance Estimate for Q1 GDP came in at 2.2%, down from 3.0% in the previous quarter, and below most mainstream media estimates of 2.5%. However, my friend BC notes .... The GDP deflator is reported to have averaged 1.2% annualized in the past 2 qtrs. Had the trend rate from '11 persisted, the deflator would have subtracted 2.6% annualized from real GDP, resulting in a 2-qtr. growth of real GDP of 0%.  ECRI's Achuthan would appear correct that a recession were imminent instead of looking like a dummy. Rick Davis at the Consumer Metric Institutes makes a similar calculation. In their "advanced" estimate of the first quarter 2012 GDP, the Bureau of Economic Analysis (BEA) found that the annualized rate of U.S. domestic economic growth was 2.20%, down more than three-quarters of a percent from the fourth quarter of 2011. The vast bulk of the downturn was in commercial activities, with both fixed investments and inventories lowering the headline number substantially. Consumer spending on both goods and services improved slightly, and the ongoing contraction in governmental spending moderated somewhat. The BEA's bottom-line "real final sales" improved about a half-percent to an annualized growth rate of 1.61% -- hardly robust and certainly not the kind of numbers we would expect to see nearly three years into a recovery. Once again the BEA has used "deflaters" that will strain the credibility of the public, especially if they buy gasoline. To correct the "nominal" data into "real" numbers the BEA assumed that the annualized inflation rate during 1Q-2012 was 1.54%. As a reminder, lower "deflaters" cause the reported "real" growth rates to increase -- and once again very low seasonally adjusted BEA inflation "deflaters" have been the headline number's best friend. If the raw "nominal" numbers were instead "deflated" by using the seasonally corrected CPI-U calculated by the Bureau of Labor Statistics (BLS) for the same time period, nearly the entire headline growth rate vanishes -- and the resulting growth rate would have been a minuscule 0.08% with "real final sales" contracting. And real per capita disposable income actually shrank during the quarter shrank at an annualized -0.27% rate (from $32,699 per capita to $32,677 per capita) -- and it remains lower than it was 5 quarters ago. -- even using the BEA's optimistic "deflaters." Real-world households likely felt the pinch even more. Doug Short at Advisor Perspectives has some interesting charts is his post GDP Q1 Advance Estimate Disappoints at 2.2%. This chart shows the disturbing trends. click on chart for sharper image GDP Trends Average growth since 1945 is 3.3% Linear regression says growth is trending lower at 2.1% Over the last 10 years, growth averages a mere 1.7% Take a good look at the last decade. The US only managed 1.7% growth in the biggest housing boom in history followed by the biggest multi-trillion dollar global stimulus effort in world history. Three years into a recovery, growth (if you believe preposterous deflators) is a mere 2.2% but only 0% if you don't.  Moreover, with parts of Europe in an outright depression, with even Germany and the UK in recession, and with China slowing significantly, the odds the US economy decouples for too much longer is now approaching zero. I think the ECRI has its recession forecast reasonably correct. However, it may take a well-deserved GDP revision (likely after the next election) to prove it. 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.

Depression in Spain: Unemployment Rate Up .5 Percentage Points to 23.6%; Expect Much Higher Rates Later This Year; When is the Breaking Point? Posted: 27 Apr 2012 09:55 AM PDT Via email from Barclays Capital, Spain: Q1 unemployment rate rises; trend likely to continue into H1 2013. This morning Spain released labour market statistics for Q1. Seasonally adjusted, the unemployment rate rose to 23.6% from 23.1% in Q4 last year (Figure 1). We think that the labour market's deterioration is likely to continue over the next 3-4 quarters. We look for unemployment to peak at nearly 26% in H1 2013, before slowly starting to decline. Beyond cyclical lags, the Spanish labour market trend, to a large extent, is a reflection of the hangover from a boom-bust in the construction sector, which for many years has been an important source of employment growth (Figure 2). It seems that the adjustment in the construction sector's employment is close to an end: it now contributes c.10% to total employment, in line with the long-term average pre the housing sector boom. However, we think that the unemployment rate is likely to stay elevated for a while and that it will decline only slowly as the economy likely starts to grow in H2 2013. There are at least two reasons for our view: 1) fiscal consolidation will negatively affect consumers' spending, economic activity and consequently employment; 2) As we pointed out in Spain: Assessing the fiscal and labour market reforms, we think that Spain needs better "active labour market policies" that can address long-term unemployment (Figure 3) and the retraining of young (in some cases) low-skilled unemployed workers (Figure 4). click on chart for sharper image Depression in Spain It is difficult to know precisely when Spanish unemployment stops going up. I see no reason it cannot hit 28% or even 30%. Spanish politicians (for now) remain insanely committed to the Euro. How long the citizens remain committed to the Eurozone is another matter. When is the Breaking Point? Will the general population of Spain put up with an unemployment rate of 28%? 30%? I think not, but I do not know the precise breaking point. Whatever it is, Spain has little chance for growth prospects for a decade as long as it remains in the eurozone. Eventually will come a time when a politician will hold up a copy of the EMU treaty, declare it null and void, and the debt null and void right along with it. That politician will be elected. Spain will be better off as soon as that happens. 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.

Eurozone Retail Sales Plunge at Strongest Pace Since Late-2008; German Retail Sales Plunge Into Contraction; French Retail Sales Plunge at Record Pace; Record Job Losses, Record Retail Plunge in Italy Posted: 27 Apr 2012 02:30 AM PDT The word of the day is plunge. Retail sales fell like a rock in Germany and fell at a record pace in France. Jobs and retail sales plunged at a record pace in Italy, and in general, did a nose-dive across the entire Eurozone German Retail Sales Plunge Into Contraction Please Consider the Markit Germany Retail PMI® Report. Fastest drop in retail sales since April 2010 as year-and-a-half run of growth comes to an end. Key points: Retail PMI falls sharply in April Steepest decline in margins for two years... ...despite wholesale price inflation hitting 15-month low Sharp squeeze on operating margins Lower sales and strong market competition resulted in a sharp and accelerated decline in margins across the German retail sector. The latest fall in margins was seventeenth in consecutive month and also the steepest for two years. French Retail Sales Plunge at Record Pace Please Consider the Markit France Retail PMI® Report. French retail sales fall at survey-record rate in April Key points: Sales hit by weak economy and presidential elections Targets missed to greatest degree in 18 months Margin squeeze continues amid widespread discounting French retailers reported a sharp reduction in sales during April. The month-on-month fall was the most marked recorded by the survey since data collection started in January 2004. Sales were also down considerably on a year-on-year basis, while previously set plans were again missed. The weak sales performance occurred despite evidence of substantial discounting and promotions among retailers, which resulted in a further steep drop in gross margins. The headline Retail PMI® plunged to a series-record low of 41.4 in the latest month, from 50.2 in March. The latest reading was below the neutral 50.0 mark for the first time since January and indicative of a steep month-on-month decline. The extent of the latest failure to meet targets was the greatest for one-and-a-half years. Panelists are nevertheless optimistic that sales will exceed previously set plans in May. Factors expected by retailers to boost sales over the coming three months include the end of the presidential election, summer weather, promotions and new products. Note the absurd level of optimism by French retailers. Eurozone Retail Sales Plunge at Strongest Pace Since Late-2008 Please Consider the Markit Eurozone Retail PMI® Report. Key points: Retail PMI plunges to 41.3, lowest since November 2008 All three countries surveyed post lower sales, with record decline in France Cost pressures for retailers at 16-month low Plunging to its second-lowest level on record in April, the PMI hit 41.3, down from 49.1 in March. The latest figure signaled the largest monthly fall in retail sales across the single currency area since the depths of the global financial crisis in November 2008 (40.6). Eurozone retail PMI figures are based on responses from the three largest euro area economies. For the first time since September 2010, retail sales fell across Germany, France and Italy. The rate of contraction in Germany was the fastest since April 2010, while French retailers posted a survey-record drop as they reported disruption due to the presidential elections. Italy continued to see the steepest overall rate of decline, however, as the pace of contraction reaccelerated to approach the record level posted in January. The annual rate of decline in Eurozone retail sales was also one of the strongest since the survey started in January 2004. Sales have fallen on an annual basis each month since last June. Record Job Losses, Record Retail Plunge in Italy Please Consider the Markit Italy Retail PMI® Report. Sharp decrease in retail sales leads to survey-record job losses Key points: Sales fall at second-sharpest annual rate in series history Confidence sinks to four-month low Cost inflation slowest since December 2010 The seasonally adjusted Italian Retail PMI® – an indicator of month-on-month changes in total retail sales – fell to the greatest extent in survey history in April, dropping from 42.4 in March to 32.8. This sharp and accelerated decrease in high street spending was the second-fastest since December 2008, and extended the current sequence of contraction in the sector to 14 months. Retailers in Italy sped up their rate of job shedding in April, with staffing levels falling at the fastest pace since data were first compiled in January 2004. This latest reduction in employment was primarily attributed by survey respondents to lower sales and rising input costs. Vindication For months I have been reading the apologists at Markit (and elsewhere) predict a short, shallow Eurozone recession. Check this snip from my April 4, 2012 post: Eurozone Composite PMI® Signals Recession Says Markit; France in Renewed Decline, German Growth Weakens, Italy and Spain Contract Further: Chris Williamson, Chief Economist at Markit said: "A slight easing in the rate of decline of the Eurozone service sector was insufficient to offset the first decline in manufacturing output for three months, causing the overall economy to contract again in March. "With the exception of a marginal expansion seen in January, the economy has been in continual decline since last September. Although the average rate of decline seen over the first quarter eased compared with the final three months of last year, the survey data nevertheless indicate that the region has slipped back into a technical recession. "The downturn is currently only very mild, however, with gross domestic product probably falling by just 0.2% in the first quarter. Furthermore, with business confidence in the service sector running at a far higher level than late last year, the recession may also be brief." I have been critical of Market analysis for months and this is the worst yet. First they said Germany would prevent a recession, then Germany would decouple, now they suggest this is only a "technical" recession and  the "the recession may be mild and brief". The European recession will be neither mild nor brief. Spain, Portugal, and Greece are in economic depressions with no end in sight. Spain and Italy (the 3rd and 4th largest eurozone markets) are poised for steeper slides. Germany will not be immune to this as I have stated for months on end. German manufacturing contracted in March and services sector will soon follow. For some reason, Markit economists cannot figure this out. This was extremely easy to predict, yet most blew it.  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.

Greece to Seize Money From Suspected Tax Evaders' Accounts, with Charges and Trials Later; More Capital Flight Coming Up Posted: 26 Apr 2012 11:52 PM PDT There can be little doubt of fraudulent tax avoidance in Greece. However, the Greek solution (seize money first, then place charges and hold trials later) leaves a lot to be desired. Please consider Greece to seize money from suspected tax evaders' accounts The Greek government is to begin seizing money from the bank accounts of suspected tax evaders, Finance Minister Filippos Sachinidis told Skai TV on Thursday. Sachinidis said that the relevant authorities have been instructed to seize the amount that account holders are suspected of owing to the state. The minister said that this would happen before suspected tax evaders go on trial. Banks, insurance companies and the stock market will have to submit the full details of transactions by taxpayers so that the ministry can draft a property profile for each person and compare it with the tax statement submitted. Public and private hospitals to send information about the doctors they employ and their activity. Private insurance companies as well as social security funds must supply in electronic form all the statements they issue to their clients or beneficiaries for tax purposes, showing the taxpayers' payments and contributions, while utilities, including cell phone networks, must supply account data such as total annual bills. Credit card companies will also have to submit data on transactions in Greece for cards issued not just in this country but also abroad. More Capital Flight Coming Up Anyone with any common sense has already pulled all of their money out of Greek banks. However, the unthinking masses probably have not. This move will without a doubt cause more than a few to worry about accusations, true or false, and in the case of the latter, the illegal confiscation of money. Expect to see a further plunge in money kept at Greek banks. Also expect capital flight of another kind: human capital. With this kind of crackdown, anyone capable of leaving would be wise to leave Greece immediately. 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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