Mish's Global Economic Trend Analysis

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• Stubborn Stupidity, Fantasyland Thinking, Hopeless Bluffs
• Bailout Scam: Collecting Non-Interest on Non-Loans; "Because We're Europe"
• Competition for McJobs Hits Teens: High-School Students with Jobs Hits 20-Year Low

Stubborn Stupidity, Fantasyland Thinking, Hopeless Bluffs Posted: 29 May 2012 10:33 PM PDT The Financial Times says Madrid in 'game of chicken' with EU. I disagree. I think Spain's prime minister Mariano Rajoy is a stubborn fool engaged in Fantasyland thinking, unable to think straight. The issue regards a proposed Ponzi financing scheme to recapitalize Spanish banks. For details of the scheme, please see Spain's Plans to Recapitalize Bankia Will Put Germany, ECB at Risk; When Does the Ponzi Scheme Collapse? Fantasyland Thinking or Failed Bluff? If Spain was playing a game of chicken, the ECB just ended it by rejecting the Ponzi financing scheme of Rajoy. Please consider ECB rejects Madrid plan to boost Bankia A Spanish plan to recapitalise Bankia, the troubled lender, by indirectly tapping the European Central Bank for cash, was bluntly rejected as unacceptable by the ECB, European officials said. News of the rejection came as Spain faces elevated borrowing costs in the bond markets, tries to persuade investors it can contain problems in a banking sector weighed down by €180bn of bad property loans and, on Tuesday, saw its central bank governor stand down early. Madrid had floated the unorthodox idea over the weekend of recapitalising Bankia by injecting €19bn of sovereign bonds into its parent company, which could then be swapped for cash at the ECB's three-month refinancing window, avoiding the need to raise the money on bond markets. The ECB told Madrid that a proper capital injection was needed for Bankia and its plans were in danger of breaching an EU ban on "monetary financing," or central bank funding of governments, according to two European officials. Senior government officials in Madrid argue that bailouts in Portugal, Greece and Ireland have been catastrophic and Spain will not compromise on its refusal to accept a similar form of intervention. They said the country had implemented reforms requested by Brussels and must now be granted relief by the ECB, or the future of the single currency will be threatened. The government would like to see the ECB restart its government bond-buying programme and wants the nascent European Stability Mechanism to be retooled as a bank bailout fund. "This is like a game of poker now," one government adviser said, "and I don't think Spain is bluffing". ECB Had No Choice If this was a bluff by Rajoy, it was a very poorly conceived one. The ECB had no choice but to call it, given its disastrous position of Greek garbage on its balance sheet. The ECB simply cannot afford to load up on Spanish garbage for fear Spain will do as Greece threatens to do: default. Irish Turn The Financial Times says Spain must avoid an Irish turn "We are not going to let . . . any bank fall . . . if that happens the country will fall," Mr Rajoy said on Monday. That is the message Ireland's government insisted on as it piled private banks' debts on to its puny sovereign shoulders. By the end of 2010 markets had lost faith in Dublin's ability to repay and it was strong-armed into a eurozone rescue loan. Ireland's folly made clear that the interdependence of sovereigns and national banks is at the heart of the monetary union's present dysfunction. But to judge from Mr Rajoy's words, Madrid will tighten this deadly embrace instead of loosening it – even as its sovereign bond spreads hit euro-era records. Losses at Bankia – spawned of a shotgun marriage between savings banks – has made Madrid promise a bailout of €19bn on top of what the state has already provided. It may reportedly place sovereign bonds directly with Bankia so as to give the bank collateral for European Central Bank liquidity while avoiding market borrowing at current punishing yields. This trick would not change the key fact of Spain increasing a debt burden it already struggles to refinance. Promising that no bank will fall is what truly brings a country down. Can someone please explain the absurd line of thinking that says banks and bondholders cannot take losses? 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.

Bailout Scam: Collecting Non-Interest on Non-Loans; "Because We're Europe" Posted: 29 May 2012 02:00 PM PDT The absurdity of the Greek "bailout" setup is in the news once again. The New York Times reports Athens No Longer Sees Most of Its Bailout Aid In an elaborate payment system that began after the May 6 election that brought down the Greek government, and is meant to ensure that the Greeks do not touch the cash, the big three creditors are now wiring bailout payments to an escrow account in Greece. There the money sits for two or three days — before much of it is sent back to the troika as interest payment on the Greek bonds that Europe accepted under terms of the bailout deal struck in February. "Greece will not default on the troika because the troika is paying themselves," said Thomas Mayer, a senior advisor at Deutsche Bank in Frankfurt. "Why are we doing it like this?" Mr. Mayer said. "Because we're Europe." A Greek government advisor who spoke anonymously, for fear of alienating the European lenders, said of the troika: "They made sure that the sum for domestic spending is kept small enough to force Greece to dramatically raise its own revenues." On its face, the situation seems absurd. The European authorities are effectively lending Greece money so Greece can repay the money it borrowed from them. "You send the money, you call it a 'loan' — you get it back and call it an 'interest rate,"' said Stephane Deo, global head of asset allocation in London for UBS. Since May 2010, Greece has been sent €141.7 billion in European taxpayer money to keep the country afloat and ward off a bigger meltdown that might threaten the entire currency union. Of that amount, a full two-thirds has gone to pay off bondholders and the troika. Only a third has been earmarked to finance government operations, with only a tiny sliver spent on stimulus projects for the anemic economy. Greek bonds are a profitable investment for the E.C.B. as long as Greece continues to make interest payments. The E.C.B. exempted itself from the debt restructuring deal. And Greek bonds were already trading at a big discount when the E.C.B. started buying them. As a result, the central bank is earning an effective interest rate of 10 percent or so. Non-Interest on Non-Loans If the money never gets to the borrower, then it's not a loan. Scam is a more appropriate word. Of the €141.7 billion bailout, only €47.2 can be construed as a loan all of which nearly all went to government operations, none to the average Greek citizen. As for Mayer's statement "Greece will not default on the troika" we will see about that.  Nearly three-quarters of Greece's debt, or €182 billion, is now effectively owned by the EU the ECB or the IMF, according to estimates by the investment bank UBS. If Syriza party leader Alexis Tsipras wins the June 17 election, the Troika is going to take a big hit. The ECB's share is estimated to be between €35 billion to €55 billion. 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.

Competition for McJobs Hits Teens: High-School Students with Jobs Hits 20-Year Low Posted: 29 May 2012 09:26 AM PDT High school and college kids typically get the jobs that are left over, that no one else really wants, such as working at McDonalds. However, competition for any job is now so intense, that teens cannot find any job that no one else wants. As a result of that increased competition, Number of high-school students with jobs hits 20-year low The American job market is no place for students as the number of employed high schoolers has hit its lowest level in more than 20 years, according to new figures from the National Center for Education Statistics. In 1990, 32 percent of high school students held jobs, versus just 16 percent now. Blame their elders. "By definition, teenage workers get the jobs that are left over," said Charles Hirschman, a sociology professor at the University of Washington who has studied and written about student employment. "When you can't find someone else to bag your groceries or work construction, often teenagers are the labor force you can count on to pick up that slack for a low wage. But now, with the recession, everybody has moved down. Those jobs aren't going to teenagers." Local McDonald's managers, for example, are no longer forced to accept young workers who can show up after class. They now have the option to hire older employees with more experience and, in many cases, much more education. "They think, 'I can hire this old guy instead. He already knows how to work, so we don't need to teach him,' " said Andrew Sum, director of Northeastern University's Center for Labor Market Studies. The crunch is also hitting college students. In 2000, 52 percent of full-time college students worked. That number has now fallen to 40 percent, the National Center for Education Statistics reports. Job Demographics Please consider these thoughts I penned on May 1, 2008 (emphasis in italics added) Demographics of Jobless Claims Structural Demographics Poor Structural demographic effects imply that prospects in the full-time labor market will be poor for those over age 50-55 and workers under age 30. Teen and college-age employment could suffer a great deal from (1) a dramatic slowdown in discretionary spending and (2) part-time Boomer reentrants into the low-paying service sector; workers who will be competing with younger workers. Ironically, older part-time workers remaining in or reentering the labor force will be cheaper to hire in many cases than younger workers. The reason is Boomers 65 and older will be covered by Medicare (as long as it lasts) and will not require as many benefits as will younger workers, especially those with families. In effect, Boomers will be competing with their children and grandchildren for jobs that in many cases do not pay living wages. Very few are considering demographics, a change in attitudes by consumers towards spending, a change in attitudes of banks to lend, and the ability of capital impaired banks to lend even if they want to. A structural shift in consumption to savings or at least reduced consumption, is in store for boomers. Meanwhile job prospects are looking pretty grim for some time to come across the entire economic spectrum. And so it is. Unfortunately it will stay that way for many years to come. Economists missed the boat on this one and still do even as it plays out as I suggested. Because of student debt and low paying jobs, kids out of college are putting off raising families and buying homes. Headwinds on home prices are enormous. Rather than buy cars they cannot afford, many kids tweet and send text messages. Demographics, student debt, debt in general, and changing attitudes of youth about what is really important are huge deflationary forces that Bernanke is fighting. Those expecting hyperinflation or even strong inflation out of this mess are simply not thinking clearly. 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.