Mish's Global Economic Trend Analysis |
| Posted: 23 Oct 2012 12:48 PM PDT The implosion in Spain continues, with the budget deficit heading in reverse, now revised up to 9.4% of GDP. [Correction: 9.4% was upward revision for 2011. The upward revision for 2012 is "only" 7.3%] Spain's original deficit target for 2012 was 4.4%, then revised to 5% then 5.3%. Yet another revision brought the target all the way up to 6.3%. So how is Spain doing? A few flashbacks will explain. On April 10 I optimistically wrote Inconsistencies in Spain's Budget Suggest Deficit will be 7% not 5.3% "I have been saying for what seems like forever that Spain would not makes its budget. It won't, and we have a starting point for how bad it might get." Indeed "starting point" was the operative phrase as 7% was reached by June. On June 26, I wrote Spain Has Budget Deficit of 3.41% of GDP Through May (Not Counting Regional Governments); Target for Entire Year was 3.5% That brief moment of 7% did not last long. On September 21 I wrote Spain's Fiscal Deficit 8.56% of GDP in First Half; Impossible Second Half Targets. That did not last long either. Brussels Revises Spain's Deficit Upward to 9.4% of GDP Today we learned from El Pais English edition that Brussels Revises Spain's Deficit Upward to 9.4% of GDP The European Union's statistics office, Eurostat, on Monday said it had revised Spain's public deficit for last year upward from 8.5 percent of GDP to 9.4 percent to reflect state injections of capital into nationalized banks.Optimistic Nonsense The article continues with blatantly optimistic nonsense from the IMF and even more absurd statements from Spanish officials. "Given the weak state of the Spanish economy, which is expected to contract 1.5 percent this year and 1.3 percent next year, the IMF has thrown doubt on the government's ability to meet its deficit-reduction target for this year and the following, which is 4.5 percent of GDP. The IMF believes Spain will not be able to meet the 3-percent target until 2017, although the government has pledged to do so by 2014." The IMF targets are ridiculous enough, but Spain's likelihood of achieving its government pledge of 3% by 2014 are simply laughable. Spanish Home Loans Plunge 28.5% to Record Lows Also from El Pais English edition, please consider Home loans granted drop to record lows The number of home loans granted by lenders in Spain fell to their lowest levels on record in August as tight credit conditions and high unemployment continued to depress the mortgage market despite a fall in prices.Reflections on Non-Performing Loans With non-performing loans at 10.5% expect more bank bailouts while noting that Spain's injection of capital into banks is the reason for the latest jump in debt-to-GDP ratios. The sane thing to do would be to simply let failed banks fold, but instead governments bail out the banks at taxpayer expense. Finally, the official stats of a mere 25% drop in home prices since the peak, are a believable as the tooth fairy. Addendum: That 9.4% was an upward revision for 2011. Reader Bran informs me that 2012 is only up to 7.3% but various officials still claim for 6.3%. From Libre Mercado: Montoro contradicts the compliance deficit in 2012 "Finance Minister Cristobal Montoro claims in Congress that Spain will reduce the deficit to 6.3% of GDP in 2012, but communicates to Brussels to be located at 7.3%." With first-half deficit of 8.56% the target of 6.3% is of course impossible. 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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| Posted: 23 Oct 2012 09:53 AM PDT McDonald's is facing lean times, not just in the US, but globally. Earlier this year, McDonald's shifted from a 'Dollar Menu' to an "Extra Value Menu" which Chief Executive Don Thompson said didn't "resonate as strongly" with consumers. One reason? There was no value in it, except for McDonald's. The Wall Street Journal reports Amid Falling Profit, McDonald's to Revisit 'Dollar Menu' McDonald's Corp. reported a 3.5% decline in third-quarter earnings as sales slowed more dramatically than expected because of a sluggish economy and a disappointing marketing campaign.Saturated Fat The entire fast food industry is loaded with saturated fat. I am not talking about the food itself (which of course much of it is fat and nutritionless carbs), but rather the sheer saturation of restaurants everywhere you look, all competing for the same customers. Over the years, I have frequently asked a question that goes something like this: "How many more Pizza Huts, McDonald's, nail salons, WalMarts ... do we need?" My conclusion long ago was not many. Nonetheless, stores kept going up. And as long as they were, they hired workers (even if most of them were part-time). Reflections on Same Store Sales Now what? Now cannibalization of same-store-sales from each other is the norm. With part-time jobs becoming more-and-more the norm (for a detailed discussion, please see Obama Slashes Four Hours Off Definition of "Full-Time" Employment), with kids graduating from college with no jobs but monstrous debt, and with boomers retiring with insufficient savings, where is the store growth going to come from? Heck, where are customers going to come from to support existing stores? McDonald's cautioned that its margins are being hit with the effects of higher food and business expenses, and lower consumer confidence, and that its rivals in the U.S. are turning up the heat with revamped menus and marketing campaigns. With cannibalization and intense competition the norm, with stores everywhere you look, is it any wonder companies are struggling with same store sales? I think not (and I am talking industry-wide, not just McDonald's). Actually, the only wonder is why this did not happen before. Commercial Real Estate Here are some questions to ponder: Where else is there to build, that makes sense to build from a risk-reward scenario? Will more stores result in more jobs or will cannibalization of jobs follow cannibalization of customers? What about store overall profit levels? I think the answers to those questions are pretty obvious. One only need think of the questions to have serious doubts about job and earnings growth going forward. 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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