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duminică, 26 octombrie 2014

Mish's Global Economic Trend Analysis

Another Unbelievable Stress-Free Test; Whitewash Math and Deferred Tax Assets

Posted: 26 Oct 2014 09:36 PM PDT

In an effort to fool the public into believing the latest round of bank stress tests were actually designed to find stress, the ECB found 25 scapegoats, with the biggest losers in Italy and Greece.

Interested parties may wish to slog through the full 178 page Stress Test Report.

Capital Shortfalls

Reuters reports ECB Fails 25 Banks in Health Check but Problems Largely Solved.

Roughly one in five of the euro zone's top lenders failed landmark health checks at the end of last year but most have since repaired their finances, the European Central Bank said on Sunday. Italy faces the biggest challenge with nine of its banks falling short and two still needing to raise funds.

"This seems as if it has been pretty unstressful," said Karl Whelan, an economist with University College Dublin.

"The real issue is the size of the capital shortfall and that is very, very small. I don't feel a whole lot more reassured about the health of the banking system today than last week."

€48 Billion Shortfall

The Financial Times reports ECB Says Banks Overvalued Assets by €48bn.

The European Central Bank's dissection of the books of the eurozone's biggest banks has found lenders overvalued their assets by €48bn.

The results of the ECB's examination of balance sheets worth €22tn, known as the Asset Quality Review, will require the 130 lenders who took part in the exercise to adjust the value of their assets in their accounts or prudential requirements.

A quarter of the reduction, €12bn, will fall on Italian lenders, an amount just short of 1 per cent of their risk-weighted assets. Greek banks will have to lower their asset values by €7.6bn, or almost 4 per cent of their risk-weighted assets.

Philippe Legrain, an economist and former adviser to then European Commission president José Manuel Barroso, described the tests as a "whitewash".

"The ECB singles out less important banks in less important countries and gives the German banks a clear bill of health," Mr Legrain said.

German lenders will have to lower the value of their assets by €6.7bn and their French counterparts by €5.6bn.

The AQR reviewed 800 portfolios, which together made up more than 57 per cent of banks' risk-weighted assets. The ECB said they examined 119,000 borrowers and valued 170,000 items of collateral. Supervisors also built 765 models to challenge banks' estimates of their provisions.

The 130 banks account for 81.6 per cent of all eurozone assets.

Whitewash Math

Of the 130 banks, 25 failed, which seems like a lot. However, the total amount of under-capitalization is a mere €48 billion out of balance sheets that total €22 trillion.

That is an overall asset overvaluation of 0.218%.

Anyone seriously believe that with France, Italy, and Spain in or near recession? I don't. It's not even a generous rounding error.

Have Spanish banks written off 100% of their bad property loans? What about sovereign bonds assumed to be 100 percent risk-free? Didn't Greece prove bonds payments are not sacrosanct?

When the eurozone splinters, German banks are going to take a massive hit.

Deferred Tax Assets

Huky Guru has some interesting figures about Spanish banks.

About a year ago, Guru reported that a Reclassification of DTAs (Deferred Tax Assets) provided an extra €30 billion capital for Spanish banks.

Guru brought up the subject again today in Putting the Stress Tests in Context.

Paraphrasing Guru ... Accounting magic and government decree has allowed banks to compute an extra €30 billion in capital for Spanish banks via DTAs. Without that €30 billion, the average Tier 1 capital for Spanish banks would have fallen from 9.1% to 7.1%. More than one bank would have failed the test.

Spanish Banks Plow Into Spanish Sovereign Bonds

Guru notes "Spanish banks hold Close to €231.519 billion in Spanish bonds, almost twice around the capital of the Spanish banking system."

At least six Spanish banks have massive leverage in bonds. Catalunya Banc and NCG are particularly exposed.

The entire exercise was another stress-free farce.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

What Do Seven Billion People Do? Top 10 Mega-Cities by Population 2014 vs. 2030 Estimate

Posted: 26 Oct 2014 11:20 AM PDT

Reader Bran who lives in Spain sent some interesting charts of population, expected population growth, the world's largest cites, and what people do for a living. I don't have links for the charts, but most show the origin.

Seven Billion People

Breakdown

4.30 Billion Work
1.90 Billion too Young to Work
0.43 Billion Unemployed
0.58 Billion 65 or Older

Total about 7.2 Billion people

Cities With Projected 2030 Population of 10+ Million

Top 10 Mega-Cities by Population

Anyone have any concerns over these numbers in regards to jobs, food, housing, cost of education, healthcare costs, or retirement?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Seth's Blog : Pitchcraft

Pitchcraft

When you present to a board, to potential investors, they ask themselves some questions about your new project:

Is there a problem?

Do I like the solution—is it free, instant and certain, or at least close enough to be interesting?

Are you the one to take this problem on and create this solution?

Is the way you’re doing it the way I would do it?

And, is it urgent, or can I wait?

Note that the order of the questions matters a lot. If you bring me a solution for a problem I haven't been sold on, you lose. And if your solution is risky and difficult, I'm almost certainly going to work hard to begin diminishing the problem in my mind, because no one finds it easy to walk around with a difficult problem.

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sâmbătă, 25 octombrie 2014

Mish's Global Economic Trend Analysis

Home Prices Drop in 69 of 70 Chinese Cities; Did the Pool of Greater Fools Run Out?

Posted: 25 Oct 2014 10:25 AM PDT

China eased purchase restrictions last month ending its four-year campaign to contain home prices. And what a ridiculous campaign it was. Prices are down less than 1% this month and less then 1% year-over-year.

Bloomberg reports China Home-Price Drop Spreads as Easing Doesn't Halt Fall.

Prices dropped in 69 of the 70 cities in September from August, the National Bureau of Statistics said in a statement today, the most since January 2011 when the government changed the way it compiles the data. They fell in 68 cities in August.

The central bank on Sept. 30 eased mortgage rules for homebuyers that have paid off existing loans, reversing course after a four-year campaign to contain home prices as Premier Li Keqiang seeks to prevent economic growth from drifting too far below the government's 7.5 percent annual target. Home sales slumped 11 percent in the first nine months of this year.

Developers will keep prices attractive as they open more projects toward the end of the year to meet sales targets, boosting supply and increasing competition, Ping An Securities Co. Shenzhen-based analyst Yang Kan wrote in an Oct. 14 report.

New-home prices fell 0.7 percent from August in Beijing and 0.9 percent in Shanghai, according to the government. The port city of Xiamen in southern Fujian province was the only city where prices didn't fall, remaining unchanged from the previous month.

Prices in Shanghai fell 0.8 percent from a year earlier, the first annual decline since December 2012, compared to a 17.5 percent jump in January this year. Hangzhou, the capital of southeastern Zhejiang province, had the biggest decline among all cities, with 7.6 percent.

The average new-home price in 100 cities tracked by SouFun Holdings Ltd. fell 0.9 percent in September from August, dropping for the fifth consecutive month. The price rose 1.1 percent from a year earlier, narrowing for a ninth month in a row, China's biggest real estate website owner said.

The People's Bank of China's new rules give homeowners who have paid off their mortgages and want a second property the same advantages as first-time buyers, including a 30 percent minimum down payment, compared to at least 60 percent previously, and interest-rate discounts of as much as 30 off the central bank's benchmark. The PBOC also eased a ban on mortgages for people without home loan debt who want to buy a third home, allowing banks determine down payments and rates.

Home sales in September jumped 40 percent from August, the biggest increase this year, according to Bloomberg News calculations, based on a government report earlier this week.

Did the Pool of Greater Fools Run Out?

All it took for china to reverse course was a .8% year-over-year decline.

Home sales are down 11% this year, but that may not last long if September is any indication. Then again, the easing of restrictions may have suckered in the last remaining greater fools.

Either way, I laugh at the assessment analyst Yang Kan who says "developers will keep prices attractive as they open more projects toward the end of the year to meet sales targets".

The only thing that will make prices attractive is a 50% decline in price. That's how big China's property bubble is.

Even in China the pool of greater fools will eventually run out. Perhaps it already has.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Damn Cool Pics

21 One Line Jokes You Need To Memorize

Posted: 24 Oct 2014 10:34 PM PDT

You never know when you're going to need a good one liner.

Seth's Blog : The dorm-room startup mindset

The dorm-room startup mindset

"Selling enough records to make another record."

Rick Rubin started DefJam in his NYU dorm. Steve and I built TSR in Curtis Hall, and I went on to build my publishing business in my wife's dorm at NYU. It happens more than you might guess, and the reason it works is something you can use, even if you're not in college or living in a dorm...

You sell enough records to make another record.

You're not trying to sell the company or to make a huge payroll or to make sure the stock options are in place. You're building something.

The only way to build something when you don't have money to invest is to make something so great that people will pay for it in advance, that they'll eagerly sign up to use what you're making. Now not later. Now when it's new. When it's useful and fresh and interesting.

Too often, we look at the serious nature of starting a business (and worse, our imagined serious implications of failing when we do so) and we forget about useful, fresh or interesting. We forget to do that thing that might not work, to expose ourselves to things that are generous and new and fun.

You don't have to quit your day job to start something, just as you don't have to drop out of college to do so. You have weekends and evenings and all that time you're online...

Make another record.

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vineri, 24 octombrie 2014

Mish's Global Economic Trend Analysis

Hyperventilation Charade: EU Demands Another €2.1 Billion from UK, "We Won't Pay," Says Furious Cameron

Posted: 24 Oct 2014 12:54 PM PDT

Things are about to get more interesting in the EU as a review of budget procedures shows the UK, Greece, and Italy owe more money, but Germany and France will get money back.

Curiously, this came about following a review of non-profit organizations from churches and universities to trade unions, charities and sports clubs. The time period is 2002-2009.

Cameron's Obvious Bluff

UK prime minister David Cameron is already battling French President Francois Hollande abroad, and UKIP at home.

Thus, Cameron's limited choice is to bluff as usual: "We Won't Pay," Says Furious Cameron.

In a vivid display of public fury at European Union technocrats, British Prime Minister David Cameron refused to pay a surprise 2.1-billion-euro bill on Friday as EU leaders ordered an urgent review of how the budget figures were arrived at.

"It's an appalling way to behave," Cameron said. "I'm not paying that bill on Dec. 1. If people think I am they've got another thing coming. It is not going to happen."

EU ministers will hold an emergency meeting on the issue next month. Cameron said he wanted to understand the technical calculations and was also ready to mount a legal challenge.

EU officials insisted the revision, which also saw Italy and even crisis-hit Greece asked to pay more while France and Germany would get rebates, was part of an annual statistical exercise handled by civil servants, not politicians.

Cameron noted that annual revisions to the payments had never been so great - an effect, EU officials said, of a once-in-a-generation review of how national incomes are calculated that found Britain was richer than it had previously declared.

Officials at EU statistics office Eurostat said that was a result mainly of taking more account of money flowing in 2002-09 to non-profit organizations - from churches and universities to trade unions, charities and sports clubs.

Cameron has demanded reforms and plans a referendum on EU membership if he manages to secure re-election next May.

His Eurosceptic opponents, gaining ground fast on his Conservative Party, accused the premier of misleading voters.

"David Cameron once claimed that he had reduced the EU budget -- but the UK contribution went up and now, quite incredibly, our contribution goes up a second time. It's just outrageous," said UKIP leader Nigel Farage.

"The EU is like a thirsty vampire feasting on UK taxpayers' blood. We need to protect the innocent victims who are us."

Hyperventilation Charade

It's easy to see through Cameron's hyperventilation charade.

Cameron did not really say "We won't pay" as the Reuters headline states. Rather, Cameron stated "I'm not paying that bill on Dec. 1".

The latter statement would be true if Cameron paid the bill on any date before or after December 1, or the amount changed by a penny.

This is the kind of wishy-washy nonsense that Cameron pulls all the time. Unfortunately, conservative believers fall for it every time.

Similarly, Cameron promises an up-down vote on UK membership in the EU, but only if he is reelected. Would he even keep that promise? Who the hell knows?

Cameron's pledge is to first get the EU to change its rules more to the UK's liking. If he succeeds, then and only then will he offer the vote (and of course he has to win reelection on top of it).

Odds Cameron gets the rule changes he seeks are approximately 0%. You know it, I know it, the world knows it, and even Cameron knows it.

The promise of a 2017 up-down vote is nothing more than an election ploy coupled with blatant arrogance.

Liar, Not a Conservative

As I have stated before, Cameron is a liar, not a conservative. He is in a coalition bed with the Liberal-Democrats, a pro-euro, pro-Labour, pro-climate-change, free education, and progressive tax party.

With that set of bed-mates, no conservative in their right mind should believe a damn thing he claims to stand for.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Japanese Style Deflation Coming? Where? Fed Falling Behind the Curve? Which Way?

Posted: 24 Oct 2014 10:05 AM PDT

There's some interesting discussion points in the UK-based Absolute Return Partners October 2014 Letter, by Niels C. Jensen, most of which I agree with, others not.

Japan-Style Deflation in Our Backyard?

It is no secret that we have been long-standing believers in deflation being a more probable outcome of the 2008-09 crisis than high inflation. What has changed over the past six months is that the world has begun to move in different directions. Whereas rising unit labour costs in the U.S. make outright deflation in that country quite unlikely, the same cannot be said of the Eurozone.

Japan-style deflation across the Eurozone is no longer an outrageous thought. As you can see from chart 1, there is a close link between CPI and demographics. That has certainly been the case in Japan and I don't see any reasons why it should be any different in Europe. The negative demographic trends are perhaps not as acute in Europe as they were in Japan in the early to mid 1990s, so one might expect a less dramatic outcome here, but the writing is on the wall. Furthermore, Japan's problems were multiplied due to an almost complete lack of political recognition and willingness to take drastic action. At least, with Mario Draghi in charge of the ECB, there seems to be a willingness to do something.

Deflation and "Willingness To Do Something"

Jensen is mistaken about Japan's willingness to take action. Japan has a debt-to-GDP ratio of 250%, highest of any major developed country, as a direct consequence of fighting deflation.

Japan piled on debt, built bridges to nowhere, and engaged in other wasteful spending, all of which made matters worse. Taking on debt to fight deflation is insane. Yet that is exactly what France and Italy want now!

Japan's QE certainly did not help either. Both policies addicted Japan to 0% interest rates forever (until of course Japan blows up).

To suggest that the ECB can do something meaningful with European demographics being what they are, the flaws in the euro being what they are, and lack of willingness for France and Italy to initiate badly-needed structural reforms, is simply wrong.

Holding down interest rates and state-sponsored stimulus will have the identical result as in Japan.

As for wages, they are actually rising not only in the US, but also in Europe as I pointed out in European Service Prices Plunge at Steepest Rate Since January 2010; Reflections on Keynesian Stupidity.

In the US, the Fed did stave off for now, another round of price deflation. However, that came at the expense of creating monstrous asset bubbles.

The bursting of asset bubbles is inherently deflationary, and much more damaging than falling prices because of the impact asset prices have on asset-based loans.

I propose falling prices should be welcome across the board.

Behind the Curve?

Is the Fed Falling Behind the Curve?

As mentioned earlier, the picture in the U.S. – and to a degree also in the UK - is quite different. The Fed increasingly looks like it is behind the curve with the Fed Funds rate remaining unchanged despite a significant rise in unit labour costs.

Not only does that suggest a meaningful rise in the U.S. policy rate over the next couple of years – and therefore also possibly a further rise in longer term rates - but it also suggests a relatively strong U.S. dollar. Forward rates on the Fed Funds rate suggest it will reach 1.50% by June of next year; however, if the latest estimates for unit labour costs are painting a true picture of inflation in the pipeline, one could argue that the Fed Funds rate could go substantially higher.

Behind the Curve? Which Way?

Curiously, St. Louis Fed Governor James Bullard says Fed Should Consider Delay in Ending QE because "Inflation expectations are declining in the U.S."

That's nonsense of course because of the asset bubbles the Fed spawned. With interest rates so low across the world, the chase for yield is on.

Opportunity in Japan

Which Equity Markets Offer Most Potential?

One area I have not elaborated on yet is Japan. There are strong indications that Japan has finally turned the corner economically. At the same time, return on equity has returned to pre-crisis levels in Japan, but valuations have not.

Japanese return on equity is back to an all-time high

With a more or less fully priced U.S. equity market and a Federal Reserve Bank at risk of falling seriously behind the curve, and a Europe where it is hard to see where growth is going to come from (ex. U.K.), Japan looks remarkably interesting, and I expect it to be one of the better performing mature equity markets over the next few years. Just don't forget to hedge your currency risk. I am not saying that the Yen will fall, but there is enough uncertainty surrounding the Yen that I would rather not have to worry about that aspect.

Japanese Equities and the Yen

It's certainly debatable whether Japan has turned the corner economically. Nonetheless, on a valuation basis alone, I have been recommending a yen-hedged position in Japanese equities.

Whether or not the Yen plunges will have to do with Abenomics, and how Japan eventually handles (or doesn't) zero percent rates.

Jensen's comment that US equities are "more or less fully priced" is silly. US equities are priced well beyond perfection in one of the biggest valuation bubbles in history.

Pension Fund Piling On

Jensen concludes with an interesting chart and comments about piling on.

Investors (well, most investors) continue to pile in to equities, as if they are the solution to their return challenge.

Pension funds are one example of such investors. If such pension funds have fixed obligations (called defined benefit plans in the UK), they currently struggle to generate the level of re turns they need to meet their obligations.

Even if there are good reasons to believe that the prolonged rally can continue for a little longer, there are equally good reasons to believe that the current equity bull market may end in tears. Such is the disconnect between stock valuations and economic fundamentals in some markets.

Disconnects

I agree with Jensen on Japanese equities, hedging the Yen, and the prospects of deflation in Europe.

The chart on asset allocations is particularly interesting. Investors are overweight equities just as they were were in 2000 and 2007, and I believe with dire consequences.

Jensen says "Statistically, equity markets fall 40-50% (as they did in 2008-09) only a couple of times in a life time, so why somebody is forecasting the next bloodbath to be around the corner is quite frankly beyond me."

It seems to me that equities plunged in 2000 and again in 2007. So that was twice in a seven year timespan. Given valuations are equally extreme now, caution is more than in order.

Japan prove stocks can stay depressed for decades. And that can happen again, someplace else, besides Japan.

Central Bank Action

I disagree with Jensen on the need for the ECB to do anything about falling prices. For discussion, please see Challenge to Keynesians "Prove Rising Prices Provide an Overall Economic Benefit".

Inquiring minds may also wish to consider James Grant Conference Video: Inflation Expectations, Growth, Policy Problems; Europe Has Become Japan.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

duminică, 26 octombrie 2014

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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