Mish's Global Economic Trend Analysis

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• German Central Bank Head Warns Merkel on Repeated Weakening of Positions; Third Front Against Merkel
• Japan Composite PMI Contracts; China Composite PMI Stagnates
• Eurozone Composite PMI Signals Steep Rate of Contraction; Germany Contracts at Steepest Rate in 3 Years; German Construction Activity Plummets 3rd Month
• Record Number of Homes for Sale in Melbourne; Sub-Prime Collapse; "No End in Sight" for Arrears on Low-Doc Loans
• Global Uncoordinated Panic; ECB Cuts Rates to Record Low, Deposit Rate to Zero; Bond Market Response Was "Not Enough"; Words "Heightened Uncertainty" Explained

German Central Bank Head Warns Merkel on Repeated Weakening of Positions; Third Front Against Merkel Posted: 05 Jul 2012 10:32 PM PDT Chancellor Angela Merkel is now under pressure from a third front, this time, from Jens Weidmann, president of the Bundesbank (Germany's Central Bank). The Financial Times reports Weidmann warns Merkel over weakening Germany's top central banker has criticised the decisions of last week's summit to help debt-laden eurozone members, warning that the bloc was "constantly mutualising risks and weakening the agreed rules". "Fiscal aid should be the last resort of crisis management," said Jens Weidmann, president of the Bundesbank. "This position has by now been recognisably weakened." In a speech that looks set to increase political pressure on Angela Merkel, the chancellor, Mr Weidmann said strict conditions that had come with emergency aid at the start of the crisis had been "clearly eroded" since then – and possibly again at last week's European summit. In remarks apparently meant as a warning shot to Berlin, Mr Weidmann signalled any further steps to loosen aid conditions had to come together with eurozone commitments to pool fiscal decision-making. If mutual liability was to be the only path, then "those taking on liability should get the opportunity to exercise oversight." He lamented that the results of last week's summit allowed for "a broad spectrum of interpretation" – especially over whether the eurozone wanted to stick to Maastricht principles or move towards fiscal integration. Third Front This pressure from the central bank represents a third front against Merkel. The ESM is already on hold waiting challenges from Germany's constitutional court. (see German Supreme Court Delays ESM; Another Setback for Merkel; Creeping Bailouts; Reflections on German Expectations for details) Moreover, Merkel's Coalition About to Splinter Over Creation of "European Monster State". Simply put, the CSU (Merkel's coalition partner), has threatened to sink the Coalition if Merkel gives any more ground. In all likelihood, this is close to if not the absolute end of the line for further Merkel concessions. The irony regarding the latest wave of attacks is Merkel gave nothing to France and next to nothing to Italy and Spain in the 19th eurozone summit. For details, please see EU Summit Winner Was Merkel. 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.

Japan Composite PMI Contracts; China Composite PMI Stagnates Posted: 05 Jul 2012 04:13 PM PDT The contraction hit parade keeps humming along. Japan Composite data show first fall in business activity since November 2011 Business activity in Japan's service sector decreased for a second successive month during June, as new order growth remained muted. Meanwhile, manufacturing PMI™ data showed factory output falling for the first time in six months. Consequently, the Composite Output Index (covering manufacturing and services) dipped below the neutral 50.0 threshold in June, down from 50.1 to 49.1, and indicated the first reduction in private sector activity since November 2011. Behind the latest reduction in service sector activity was a worsening of market conditions. Some firms also commented on muted new business growth. The rate of expansion in new work was marginal, albeit slightly faster than in May. Composite data pointed to the weakest expansion of new work in the current five-month period of growth. China Composite PMI Stagnates Markit China Services PMI Activity Growth Eases to Near-Stagnation in June Key points Overall new business down for first time in six months Composite data showed input prices falling at the fastest rate in 39 months Service sector optimism remains subdued The HSBC Composite Output Index posted 50.6, down from 51.9 in May, and was the lowest reading in three months. The slowdown at the composite level reflected a sharper decline in manufacturing output and a moderation of activity growth in the service sector. The latter was highlighted by the HSBC Business Activity Index falling from 54.7 to a ten-month low of 52.3 in June. Moreover, the pace of new order growth in China's service sector eased since the month before, with the index measuring trends in overall new work at a ten-month low. This, coupled with an accelerated decline in new orders placed at goods producers, meant that overall new work fell for the first time in 2012 so far. Largely in response to muted growth of new business, backlogs of work in the Chinese service sector decreased for a fifth successive month during June. The rate of decline in work outstanding remained marginal, however. Goods producers also recorded a slight rate of backlog depletion in June. 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 Composite PMI Signals Steep Rate of Contraction; Germany Contracts at Steepest Rate in 3 Years; German Construction Activity Plummets 3rd Month Posted: 05 Jul 2012 01:07 PM PDT PMI reports from Europe continue to show severe signs of stress. Yesterday, Markit reported Eurozone PMI rises in June but still signals steep rate of contraction Key points for June Final Eurozone Composite Output Index: 46.4 (Flash 46.0, May 46.0) Final Eurozone Services Business Activity Index: 47.1 (Flash 46.8, May 46.7) Near-record fall in service sector confidence The Eurozone economic downturn extended into a fifth consecutive month in June, as the debt and political crises continued to have an adverse impact on both the manufacturing and service sectors. The spreading of the economic malaise from the periphery of the currency union to its core continued in June. German output contracted at the fastest rate in three years, and France also saw a further decline (albeit slower than in May). Italy and Spain, meanwhile, remained in deep recessions. Comments: Chris Williamson, Chief Economist at Markit said: "The final Eurozone PMI for June picked up slightly on May, but the rise failed to avoid the region seeing the strongest quarterly downturn for three years in the second quarter. The survey points to the economy having contracted by approximately 0.6% in the three months to June. "Even Germany looks to have fallen into a renewed decline, though only a very modest drop in output is signalled. The pace of downturns in other major euro member states is far more worrying. Output in Italy looks to have fallen by 1% in the second quarter, while declines of 0.6% and 0.5% are signalled for Spain and France respectively. "Job losses are mounting as a result of falling demand, as companies seek to reduce costs and prepare for the possibility that worse is to come. Service sector companies' expectations for the year ahead showed one of the largest declines in the history of the survey, pointing to a huge drop in confidence due to the worsening political and economic crises." Key Phrase:  "The survey points to the economy having contracted by approximately 0.6% in the three months to June." German Construction Activity Plummets 3rd Month A Markit report out today reveals a solid reduction in German construction activity The seasonally adjusted Germany Construction Purchasing Managers' Index® (PMI®) – a single-figure snapshot of overall activity in the construction economy – edged up from May's reading of 44.7 to 46.0 in June, signalling a further, albeit slightly slower, decrease in overall building activity across Germany. Construction activity in the Eurozone's largest economy has now fallen for three consecutive months. In contrast with the overall trend in output, both residential building activity and civil engineering work fell at faster rates during June. The latter posted by far the sharpest contraction of the monitored sub-sectors, with the rate of decline steeper than the series long-run average. Commercial construction activity meanwhile decreased at a notably slower rate than that registered during the previous month. The decrease in output levels in June reflected a further fall in new order inflows, which were down for the third month running and at the steepest rate since February. Reports from panel members noted a general decrease in demand, as well as a reduction in intakes of new business from the public sector. Fearing further declines in new orders as a result of uncertain economic conditions in the Eurozone, Germany constructors were on balance pessimistic of a return to growth in the next 12 months in June. This ended a period of optimism in the sector that stretched back to February. Once again this is as I expected and I still expect things to get much worse, including Germany. In response to eurozone weakness, the ECB cut rates to .75%, a record low amount, but it will not help one bit. Please see Global Uncoordinated Panic; Bond Market Response Was "Not Enough"; Words "Heightened Uncertainty" Explained for details. 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.

Record Number of Homes for Sale in Melbourne; Sub-Prime Collapse; "No End in Sight" for Arrears on Low-Doc Loans Posted: 05 Jul 2012 10:50 AM PDT Record Number of Homes for Sale in Melbourne Given the alleged housing shortage in Australia, it is interesting to note a Record number of houses for sale in Melbourne In June, Melbourne's residential listings grew at a monthly rate of 6.1 per cent - almost four times the national average - and recorded a yearly jump of 27.7 per cent, more than 27 times Sydney's annual growth of 1 per cent. Melbourne now has 55,293 unsold homes and apartments, according to today's report, published by independent property researcher, SQM Research. The city had a rental vacancy rate of 3.1 per cent in May, the highest among capital cities and an increase from 2.4 per cent a year earlier, SQM said in a release last month. Permits granted to build or renovate homes soared 27.3 per cent in May from the prior month after the central bank cut interest rates, a report this week showed. The number of homes approved in Victoria climbed 31.8 per cent from April, the biggest increase among all states, Australian Bureau of Statistics figures showed. Nothing like building more houses to add to record supply. Sub-Prime Collapse The Australian reports Provident implosion exposes low-doc risks THE $130 million collapse of subprime lender Provident Capital has highlighted the emerging problems in the nation's low-doc and no-doc lending markets, which flourished during the years of the last property boom. Provident Capital provided home-loan products but specialised in writing subprime "low-doc" and "no-doc"loans to people with impaired credit histories. Provident Capital's Fixed Term Investments offering, which holds about $130 million on behalf of 3500 investors, was frozen after the group wrote down its loans receivable by $13.8m. Provident Capital's trustee, concerned that writedown should have been higher and that Provident Capital was not in a position to fully repay its noteholders, took the group to the Federal Court. Judge Steven Rares agreed with the trustee, leading to the debenture holder funds being frozen and more writedowns booked. PPB Advisory partner Marcus Ayres said the receiver planned to hold a meeting for investors in about a month. He said the receiver would seek to recover funds by repossessing houses of defaulting borrowers and slowly releasing them into the market or by selling the defaulting loans if an investor could be found. "This won't be a fire sale and we won't be putting all these properties out on to the market at the same time," Mr Ayres said. According to ratings agency Standard & Poor's, 6.62 per cent of "prime" low-doc loans are more than 30 days in arrears. That figure is double the level of two years ago and more than four times higher than prime loans. Fitch Ratings has said it expects there is "no end in sight" for arrears rates on low-doc loans. What "Can't" Happen, Is Happening We have been told countless times that such scenarios could not happen in Australia. Well, clearly they could, because they are happening right now. Moreover, this is just the tip of the debtberg. Expect conditions to get much worse. 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.

Global Uncoordinated Panic; ECB Cuts Rates to Record Low, Deposit Rate to Zero; Bond Market Response Was "Not Enough"; Words "Heightened Uncertainty" Explained Posted: 05 Jul 2012 08:25 AM PDT Global Uncoordinated Panic In a 45-Minute Salvo today, the ECB cuts rates to a record low 0.75 percent and reduced the deposit rate to zero. Meanwhile, the People's Bank of China cut their benchmark borrowing costs (the second time in a month), and the Bank of England raised the size of its asset-purchase program. Also note the central banks of Australia, the Czech Republic, Kazakhstan, Vietnam and Israel cut rates in June, while the Swiss National Bank is buying euros to defend its franc ceiling. ECB president Mario Draghi said these events were not global coordinated easing. I am willing to take him for his word. Thus, it's safe to assume that what has transpired was more akin to global uncoordinated panic. European Bond Market Response Was "Not Enough" The market response to this 45-minute volley of coordinated easing was "not enough". One look at the bond market in Italy and Spain makes that point crystal clear. Spain 10-Year Government Bond Yield Italy 10-Year Government Bond Yield Certainty vs. Uncertainty Bloomberg reports ECB President Mario Draghi said "heightened uncertainty" was weighing on confidence. Draghi also said the council didn't discuss other non-standard tools. Clearly the market wanted "non-standard" tools such as more direct bond purchases. However, bond purchases are viewed by Germany as "monetary financing of government". Nonetheless, the ECB has done them before, over strenuous objections from the German central bank. It is 100% certain Europe is in a recession and that recession will strengthen. It is also 100% certain the 19th summit solved nothing. So what is with all this talk about "heightened uncertainty"?  Meaning of Heightened Uncertainty The words "heightened uncertainty" can be reasonably translated as "The economy is going to hell in a hand basket and we have no idea what to do about it". Since the ECB and government officials cannot say that, nor can they says they are out of policy tools, they simply moan about "heightened uncertainty". Certainly they are uncertain about what to do, primarily because the problem at hand is not fixable. Fed Uncertainty Principle Now would be a good time to review the Fed Uncertainty Principle, especially corollaries one and two. Corollary Number One: The Fed has no idea where interest rates should be. Only a free market does. The Fed will be disingenuous about what it knows (nothing of use) and doesn't know (much more than it wants to admit), particularly in times of economic stress. Corollary Number Two: The government/quasi-government body most responsible for creating this mess (the Fed), will attempt a big power grab, purportedly to fix whatever problems it creates. The bigger the mess it creates, the more power it will attempt to grab. Over time this leads to dangerously concentrated power into the hands of those who have already proven they do not know what they are doing. What I said about the Fed apples to central banks in general. 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.