Mish's Global Economic Trend Analysis

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• Germany Blinks After All-Night Fight; Italy and Spain Still Not Happy; For Now, Futures Are
• Monti Threatens to Halt the Game of Marbles Unless he Gets the Big Green One; Hollande Threatens to Remove Marbles as Well; EU Summit Deadlocked
• Eurozone Retail Sales Drop 8th Month; Italy, France are Down; Germany Retail Sales Up, Outlook Down
• Obamacare Upheld; What Should Romney, Republicans Do?
• Bankia Valued at EUR -13.635 Billion; Spain Becomes Sole Owner, Shareholders Totally Wiped Out; Entire Bankia Board Resigns

Germany Blinks After All-Night Fight; Italy and Spain Still Not Happy; For Now, Futures Are Posted: 28 Jun 2012 09:23 PM PDT It's a love-fest in Asia futures once again, but will it hold on Friday or through the weekend? One thing's for sure, sentiment was so sour about this 19th summit, that any bit of good news stood a decent chance of temporarily igniting the market. You can actually credit German chancellor Angela Merkel for that sour sentiment because she repeatedly stated Germany would not give in. The latest reports suggest Germany did blink, but not enough to please Italy, Spain, and France. The fact remains that Italy, Spain, and France all want something that is virtually impossible. They demand actions that are against the German constitution. Simply put, it's not going to happen. Meanwhile, let's tune in to what has the futures all excited. All Night Fight Please consider the Financial Times report Eurozone officials in all-night aid fight German officials gave their clearest indication to date that they were prepared to intervene to shore up Italian and Spanish borrowing costs, saying eurozone leaders should use existing powers with their €440bn rescue fund for short-term help. After weeks of insisting they would not budge on short-term measures, the sudden German acquiescence led to a flurry of activity in Brussels, where EU leaders gathered for the latest in a series of high-stakes summits intended to solve the crisis. Unexpectedly, senior officials from all 17 eurozone finance ministries met on the sidelines of the summit to weigh emergency plans for Rome and Madrid which focused on using the rescue fund to buy Italian and Spanish bonds to reverse the recent spike in yields. That certainly isn't much. Indeed this next snip seems far more meaningful in a negative sense. The political stakes for Mr Monti also rose on Thursday. Giorgio Napolitano, the Italian president and a strong Monti backer, said that political support for his technocratic government was slipping – an implicit warning to European leaders that Mr Monti needed to return from Brussels with assistance. "Conflicts and political polemics among the forces that support this government are increasing," Mr Napolitano said a written statement. Euro Surges After EU Leaders Renounce Seniority Since the Financial Times does not have the rest of the story, let's look elsewhere. In a move that will put still more risk on German taxpayers, and also what likely has the futures market excited (until the next problem hits), Euro Rises After EU Leaders Renounce Spain Loan Seniority reports Bloomberg. The euro surged the most this year after European leaders agreed to drop the condition that emergency loans to Spanish banks give their governments preferred creditor status. No Problems Solved In isolation, renouncing seniority is certainly net positive for bond yields in Spain and Italy. However, it does not solve a single structural problem. Moreover, that move it is certain to raise ire of some in Germany and Finland who will have to bear the risk. If this is all the summit produces (other then the expected fluff to agree to agree to do something five years from now), expect whatever gains  (if any) that come from this maneuver to be fleeting.  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.

Monti Threatens to Halt the Game of Marbles Unless he Gets the Big Green One; Hollande Threatens to Remove Marbles as Well; EU Summit Deadlocked Posted: 28 Jun 2012 06:35 PM PDT Conditions at the EU summit are breaking down more than expected thanks to a position taken by Italian Prime Minister Mario Monti. Acting like a spoiled brat in a game of marbles, Monti refuses to let anyone else play unless he gets the big green marble he wants. In less colorful terms, Bloomberg explains Monti Withholds EU Growth Pact Approval Unless He Gets Interest Rate Relief. Italian Prime Minister Mario Monti may block the 120 billion-euro ($149 billion) growth initiative announced by European Union President Herman Van Rompuy without an effort to reduce its borrowing costs, two Italian officials said. Italy is withholding its official endorsement as it pushes for collective action at an EU summit in Brussels to push down its bond yields, said the officials who spoke on the condition that they not be named. EU Summit Gridlocked Euroskeptics will be pleased to note the summit is gridlocked, at least for the moment. How do we know this? Easy. EU President Herman Van Rompuy said "talks weren't gridlocked" and will continue through the night and later today. Moreover, Hollande threatened to temporarily remove his marbles from the game as well. Please consider this snip from Demands for Bond-Buying Agreement Roil European Summit French President Francois Hollande said Italy and Spain ought to receive support from the euro area's firewall funds and that their yields are still too high after the efforts they've made to reform their economies. Spain's 10-year yields breached 7 percent and Italy auctioned 10-year securities at the highest yields since December yesterday. Hollande said the growth remarks "aren't enough" and that he'll withhold endorsement of an EU fiscal pact, which was endorsed by his predecessor, Nicolas Sarkozy in December, at least until the end of the two-day summit. "The euro zone cannot stay in the current circumstance, without a budgetary union and even more without a banking union," Hollande told reporters. Since German chancellor Angela Merkel will not agree to a banking union or a budgetary union, the EU summit is for sure deadlocked. It will remain deadlocked until Monti and Hollande change their opinions, effectively putting their marbles back in the game. 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 Drop 8th Month; Italy, France are Down; Germany Retail Sales Up, Outlook Down Posted: 28 Jun 2012 01:25 PM PDT German retail sales bounced back for the second month, but not enough to prevent the aggregate eurozone sales from falling for the eighth consecutive month. Summary of June findings: The Eurozone retail sector remained in contraction mid-way through 2012, according to PMI® data from Markit. Sales fell on a month-on-month basis for the eighth successive month – the third-longest sequence in the survey history – and purchases of new goods by retailers declined at the second-fastest pace on record. That said, the rate of decline in sales slowed sharply during the month. Germany, France, Italy Sales The key sentence is "purchases of new goods by retailers declined at the second-fastest pace on record." Will inventory liquidation continue or will retail sales rebound? Liquidation can only go so far, but that does not mean sales will rebound in a meaningful way. There is certainly no reason to expect a rebound in sales, but data seldom runs in a straight line. Much depends on Germany. Yet, in spite of a two month rebound in sales, Germany alone could not pull aggregate sales up to even. Italy Remains a Disaster Zone Individually, Italy Retail Sales remain a disaster zone. June sales were down sharply on levels seen in the corresponding month one year ago, which firms linked to lower consumer purchasing power and greater uncertainty over the economic outlook. The annual rate of contraction was, however, slower than May's series record. Targets set for June were missed by the majority of firms, with a lack of confidence among clients and unfavourable weather conditions among the reasons cited by those that registered lower-thanexpected sales. Although the narrowest for three months, the gap between actual and planned sales remained considerable. As was the case in each of the previous two survey periods, retailers were downbeat with regards to the prospects of achieving July targets. In fact, the overall degree of sentiment in June was one of the most negative in the series history, matching that recorded last December. Markets turn on extreme sentiment, yet sentiment can remain extreme for long periods of time. Here is an accurate assessment by Markit economist Phil Smith. "Retail PMI data for June continue to underline the effects that decreasing real wages, rising tax burdens and greater job insecurity are each having on Italian households' willingness and ability to spend. High street sales were again down markedly on the month, leading to further reductions in profitability and employment in the sector. Rates of decline were slower in June, though, given that this came on the back of some of the worst months trading in the series history, this was by no means a cause for celebration." Retailer Purchasing Falls at Record Rate in France Inventory reduction is underway in France as Purchasing Falls at Record Rate French retailers reported a slower decrease in sales during June. The latest drop was only modest and much weaker than in the preceding two months. However, the performance over Q2 as a whole has been the worst since the inception of the survey in 2004, as trading has suffered in the face of difficult economic conditions. With retailers attempting to prevent an unwanted build-up of inventories, the value of goods purchased for resale fell at a series-record rate. Meanwhile, intense competitive pressures led to another marked drop in gross margins, while retail sector employment decreased at an accelerated pace. Jack Kennedy, Senior Economist at Markit and author of the France Retail PMI, said: "The French retail sector continued to struggle in June, as the tough economic climate led to another drop in sales. The failure to rebound from May's severe weakness, when trading was impacted by a run of public holidays and the presidential election, underlines the strong headwinds facing retailers amid depressed consumer purchasing power and high unemployment. The overall sales performance over the second quarter has been the weakest since the survey began in 2004, and it was therefore no surprise to see accelerated falls in both purchasing and employment during June as retailers went into retrenchment mode." Germany Retail Sales Up, Outlook Down Markit reports Stronger increase in German retail sales, but outlook is reported as weakest for 2½ years German retailers indicated a further rebound in monthly sales in June, with the pace of expansion reaching a three-month high. At 52.4, up from 50.7 in May, the seasonally adjusted Germany Retail PMI was above the neutral 50.0 value for the second month running. The latest reading pointed was above the long-run survey average (49.9) and indicated to a moderate increase in month-on-month retail sales in Germany. Some firms linked the improvement to better weather conditions and higher consumer spending as a result of the European Football Championship in June. First drop in goods ordered for resale in nine months Retailers in Germany responded to worries about the outlook for sales by reducing the value of goods ordered for resale at their stores in June. This was the first reduction since September 2011 and in turn contributed to the slowest accumulation of stocks of goods for resale so far in 2012. In spite of highly unusual reports of higher sales due to "better weather" as well as higher sales because of football (soccer) championships, Markit reports ... Actual sales in June were generally lower than expected, as has been the case in each of the past three months. Moreover, German retailers signalled a marked degree of pessimism about the outlook for their sales in one month's time. The balance of firms expecting to reach their targets in July is the lowest for two-and-a-half years. Anecdotal evidence widely cited concerns about the impact of weakening domestic economic conditions, alongside uncertainty related to the euro area crisis, as the main factors leading to downbeat sentiment in the retail sector. 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.

Obamacare Upheld; What Should Romney, Republicans Do? Posted: 28 Jun 2012 10:53 AM PDT Today the Supreme Court ruled in favor of Obamacare by a 5-4 margin. Here is the Full Text of the Supreme Court Ruling. Romney has promised to overturn the ruling, saying "ObamaCare was bad policy yesterday, it's bad policy today." That statement makes Romney a hypocrite as the Financial Times notes. "Obamacare places the government between you and your doctor," said Mr Romney, who championed a similar plan while governor of Massachusetts but says he opposes its expansion at a federal level. Why wasn't it bad policy in Massachusetts? Obama Chimes In Here are some quotes from a press conference of President Obama as reported by The Guardian. "Whatever the politics, today's decision was a victory for people all over this country" "It should be pretty clear by now that I didn't do this because it would be good politics." "Today I am as confidence as ever, that when we look back five years from now, or 10 years from now, or 20 years from now, we will be better off because we had the courage to pass this law and keep moving forward." Clearly, Obamacare was not good politics. The president took no questions to which the Guardian commented "What was interesting is that Obama – for the first time in a while – offered an unapologetic defense of the healthcare reforms. That's going to make for a different approach in the presidential campaign." Small Likelihood of Overturning Obamacare Even if Romney were to win, he would be extremely challenged to overturn Obamacare outright. Senate filibuster rules are such that Democrats will easily be able to block it. Besides, Democrats have a majority in the Senate and do not even need a Filibuster move to block changes. Given the Supreme Court ruled Obamacare is a tax, there would be some scope for Republicans to trash it in the once a year Reconciliation Process that limits Congressional debate. After all, that is how the bill passed in the first place. Still, to use reconciliation, Republicans will have to elect Romney, hold the House and take control of the Senate. Is that likely? Justice Robert's Opinion Members of this Court are vested with the authority to interpret the law; we possess neither the expertise nor the prerogative to make policy judgments. Those decisions are entrusted to our Nation's elected leaders, who can be thrown out of office if the people disagree with them. It is not our job to protect the people from the consequences of their political choices. Pragmatically Speaking We can debate all day whether or not the Supreme Court made the correct ruling. However, such debate is useless. It will not change a thing. Like it or not, the Supreme Court ruled that we are stuck with Obamacare unless Congress changes it. Pragmatically speaking, it would be more beneficial to have discussions on how to improve healthcare rather than howling at the moon against it. However, I suspect Romney will keep howling at the moon even though he was in favor of essentially the same moon when he was governor of Massachusetts. 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.

Bankia Valued at EUR -13.635 Billion; Spain Becomes Sole Owner, Shareholders Totally Wiped Out; Entire Bankia Board Resigns Posted: 28 Jun 2012 12:34 AM PDT Five days ago we heard from the Bank of Spain that Spanish banks only need between €16bn and €62bn in new capital. For details, see Laugh of the Day: Stress Tests Show Spanish Banks Only Need Between €16bn and €62bn in New Capital; ECB to Accept BBB- Rated Debt (One Step Above Junk) as Collateral In the same report we also heard that the three largest bank groups do not need any capital at all. Bear in mind that was allegedly in a "stress" scenario. Today we learned that Bankia is Valued at EUR -13.635 Billion The seven banks that founded Bankia be left out of the shareholders of the entity and the State will be made with one hundred percent of the group's parent, Bank Savings Financial (BFA), the latter having a negative value of 13.635 million euros According to the assessment commissioned by the state. After the assessment, the FROB becomes the sole owner of BFA. Thus, the seven savings banks that created the group, Caja Madrid, Bancaja, La Caja de Canarias, Caja de Avila, Laietana Caixa, Caja Segovia and Caja Rioja, stay out of the shareholders. Finally, BFA proceed to recapitalize its subsidiary, Bankia, with an injection of 12,000 million euros. He will do through a capital increase in which existing shareholders will have preferential subscription rights. It is expected that the capital increase in Bankia be completed during October. The European Commission today gave its approval temporary nationalization and recapitalization of the matrix BFA waiting for Spain to send to Brussels a restructuring plan of the institution in the next six months. I strongly suspect that a valuation of -13.635 billion euros is on the wildly optimistic side. Entire Bankia Board Resigns Here is an amusing picture from the El Pais article The assessment shows a group of Bankia 13.635 billion hole El Pais reports ... The group Bankia worthless. Worse, his assessment is negative, -13.635 billion euros. That is the appraisal on the face of nationalization has been presented today to the board of the entity, sources of such advice. That means that the conversion of the 4.465 million of preferred shares of Bank Savings Financial (BFA) results in 100% nationalization of the matrix and, indirectly, 45% of Bankia, but the assessment does not directly affect the bank quoted. The BFA board of directors resigned en bloc. The seven savings banks that are BPA was created without any equity in the state, leaving them no future dividends to be used for social work . The entities concerned are Caja Madrid, Bancaja, La Caja de Canarias, Caja de Avila, Laietana Caixa, Caja Segovia and Caja Rioja. The seven contributed to its financial business BFA and are now nothing more than the assets of the work were marginalized social integration. Did they all retire with full pensions? Looking back, Bankia has provided more laughs than I remembered. May 7, 2012: Spain to Spend €7bn-€10bn (It Doesn't Have), Bailing Out Bankia, the Nation's 3rd Largest Bank; Liar, Liar Pants on Fire May 9, 2012: Audit Shows Spain's Bankia Short 3.5 Billion Euros; PP says "We Must Help Bankia, It Has Deposits for 10% of GDP" May 10, 2012: Spain Nationalizes BFA and 45% of Bankia; No Bid for CatalunyaCaixa, Bank Worth Less Than Zero; Der Spiegel: Germany Fears "Bottomless Pit" The implosion in Spanish banks continues. On Wednesday, Spain nationalized BFA, the 8th nationalization since the start of the crisis. After sinking 3 billion into CatalunyaCaixa, Spain tried to privatize the mess but there were no offers at zero euros. Clearly CatalunyaCaixa bank is worth less than zero. Meanwhile Der Spiegel reports "Bundesbank has no idea of what is happening in Spanish banks". Mish readers do. The Spanish banking system is without a doubt bankrupt. Emphasis added. Today we see that Bankia and the entire group is worth less than zero. 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.