Mish's Global Economic Trend Analysis

Australia Department Store Sales Slump 10.2 Percent; Retail, Food Store Bankruptcies; Reflections on Housing and Commodities Bust
Spain's Social Security Fund Runs Out of Money; Full Sovereign Bailout Hits €300 Billion; Breathtaking Implosion in Every Way; Five Things Spain Needs to Do
"Property Always a Good Investment" Says President of National Association of Realtors in India
Spain VAT Hike Largest In History; Stunning Ineptitude Will Make History Books

Australia Department Store Sales Slump 10.2 Percent; Retail, Food Store Bankruptcies; Reflections on Housing and Commodities Bust

Posted: 05 Sep 2012 07:37 PM PDT

Interest rates cuts that helped boost retail sales in Australia over the past two months have already worn off. Economists expected a further rise in sales this month only to see a seasonally adjusted .8% decline.

Now Retailers want RBA action as sales dive

Retailers hope the biggest monthly drop in consumer spending in nearly two years will trigger alarm bells at the central bank when its board meets to discuss interest rates.

Retail trade fell by a seasonally adjusted 0.8 per cent in July to $21.4 billion, after being bolstered in the previous two months by government handouts and earlier interest rate cuts by the Reserve Bank of Australia (RBA).

Economists had expected an overall spending rise of 0.2 per cent in the data collected by the Australian Bureau of Statistics.

But department stores' sales slumped 10.2 per cent, the largest fall since April 2005.

Understatement of the Day Award

The understatement of the day award goes to Macquarie Research divisional director Brian Redican who said "The headwinds for growth may be building more rapidly than analysts or policymakers have been expecting."

More Retail, Food Store Bankruptcies

The Age reports Food, fashion jobs in jeopardy as companies collapse

In another blow to Australia's already shaky retail sector, women's fashion chain Ojay and a ready-to-eat food manufacturer have reportedly been put into administration, threatening hundreds of jobs nationwide.

Food jobs also in jeopardy

It was reported early this afternoon that Australian Convenience Foods Group, which makes sandwiches for petrol stations and supermarkets, had collapsed.

Deloitte has been appointed managers of the company, with up to 400 jobs at risk. The company's history goes back to the 1970s. A receptionist at ACF's office confirmed the company had collapsed.

Australian Convenience Foods fell into voluntary administration on August 28 and Deloitte is currently running a sale process to sell the business as a going concern to a new owner. Expressions of interest for buyers close tonight.

Commodities and Housing Bust

In Australia the Unlucky Country Variant Perception states the case for a substantially weaker Australian dollar based on a slowdown in China and a busting of the housing bubble.

That is right in line with the case Michael Pettis has presented in regards to his prediction of a major slowdown in China.

For details please see By 2015 Hard Commodity Prices Will Collapse; Australia's Mining Boom Dies (and the Official Denials Start)

Wrapping up the disaster in Australia, please see Michael Feller's synopsis on Macro Investor Being a Bear is Not "unAustralian".

Peruse the Reserve Bank governor's recent remarks to the senate or listen to the commentariat on talkback radio and it would seem that Australia's economy has become victim of nothing more than an insidious rogue gloom-and-doomerism that threatens to hurt the nation, or worse.

At its worst, this anti-half-glass-empty rhetoric smacks economic McCarthyism. Shooting the messenger is as old as politics itself, but in what we like to consider an open, pluralistic society, let alone the 21st century, we should demand a higher standard of debate.

Saying that Australia has unusually high house prices, has a banking system vulnerable to external shocks, relies too much on a cyclical and temporary mining boom, or carries far too much household sector debt is not unAustralian, it is patriotic. And calling on policymakers to do something about our vulnerabilities is not negative behaviour, nor does it diminish our otherwise very obvious achievements, it is prudent.

The bears, the doom-mongers, the chip-kickers, the Hanrahans and the whingers aren't a bunch of lazy bludgers, jeering from the sidelines, they are the people who are cognisant of the very real risks to the Australian economy. Many of them merely believe that while Australia's economy is great, and its stewardship has been largely competent, even a perfect work of machinery can have its flaws and it would be remiss to ignore these if they can damage the whole.

Although it's probably too late to implement policies that would have had us squirrel away some of the boom for a rainy day – a boom that Rio Tinto's CEO now denies ever existed – and although it's probably too late to diversify our trade balance before China stops building surplus fixed inventory, it's not too late to reshape our economic conversation before we face the next challenges, opportunities and threats as an economy and as a society.

It's Too Late

The housing bubble cannot be undone, it can only crash. Retailers will continue to go bust because they overpaid on property or leases relative to demand. Excessive mortgages will make debt slaves out of many Australians for life.

The over-investment in base metals based on a silly belief China could grow 10% a year forever has yet to play out (but it will).

Does anyone understand exponential math? It seems not. Even if peak oil was not an issue, it is virtually impossible for China to maintain the growth rate most analysts expected.

No one listened to Steve Keen, me, and other bears when there was time to limit the damage. It's far too late now. Time has expired and any efforts to reignite the boom can only make matters worse.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Spain's Social Security Fund Runs Out of Money; Full Sovereign Bailout Hits €300 Billion; Breathtaking Implosion in Every Way; Five Things Spain Needs to Do

Posted: 05 Sep 2012 12:35 PM PDT

The Spanish implosion in breathtaking in every way: Human Flight, Capital Flight, Real Estate, Employment, and Taxes. The cost of a full bailout is now €300 billion, up from a preposterously low €30 billion projection in June.

€300 billion should not be shocking given my statements on June 9th in Bailout Lite? There's Really No Such Thing; €30 Billion Needed? It's Now €100 Billion; Contagion of Economic Idiocy.

A few days ago Spain was purportedly going to need another €30 billion to €70 billion to recapitalize Spanish banks. I suggested the amount would be at least triple that...triple the upper end of the reported amount. Bear in mind I am just guessing. However, history shows that I am more likely to be on the low end than the high end.

As with Greece, every economic number from Spain is revised to the downside, month in and month out. For now, the EU economic wizards will likely concoct a number just under that alleged "upper limit". My best guess is €90 billion. Then within six months, possibly as soon as the money is handed over, more problems will surface, more meetings will take place, and still more money will be stolen from Spanish taxpayers and handed over to the banks and bondholders.

Mish the Optimist

"Within six months" I said. It took three months, proving once again that I tend to be optimistic on such problems.

By the way, with revised sovereign bailout estimates already hitting my €300 billion target, it is best to start thinking in terms of half-a-trillion or more.

Breathtaking Implosion in Every Way

I get links from Bran who lives in Spain nearly every day. I do not have time to translate them all. Here are some links from the past few days with brief comments from Bran.

Social Security Fund Runs Out of Money: Social Security pulls from its reserve fund for the first time, using it up almost entirely. Article states there is nothing to stop the government from selling the main SS fund investment to meet payments. Article also notes the fund is invested heavily in Spanish sovereign debt, to the tune of €67.948 billion.
Cost of Unemployment Benefits Soar: Unemployment benefit cost predictions blow out. The government prediction was -5%. Reality was +5.4%
Price of Gasoline Soars: Gasoline prices up 75% in the last 4 yrs here and was not cheap to start off with!
Massive Mortgage Debt: Household debt is €848.222 billion, 76.9% of which is mortgage debt.
Capital Flight: Clients pull 15.6% of deposits at Novagalicia in the first half.

Early this morning I posted Spain VAT Hike Largest In History; Stunning Ineptitude Will Make History Books.

I have near-endless material on Spain. Here are some additional links, this time from mainstream media.

Brinkmanship Over Bail-Out Terms

Ambrose Evans-Pritchard at The Telegraph notes Brinkmanship as Spain warns over bail-out terms

Spain has issued a veiled warning that it will not accept a full bail-out from Europe if the terms are too harsh, a move that would paralyse the European Central Bank and call the euro's survival into question.

In an escalating game of brinkmanship, Spanish finance minister Luis de Guindos said his country is not yet willing to sign a Memorandum giving up fiscal sovereignty to EU inspectors. "First of all, one must clarify the conditions," he told German newspaper Handelsblatt.

Mr de Guindos said the crisis engulfing the region is larger than any one country and warned north Europe not to scapegoat Spain.

The warning comes as German Chancellor Angela Merkel leaves for Madrid for talks with premier Mariano Rajoy to thrash out the conditions of a full sovereign rescue of up €300bn (£238bn), beyond the €100bn bank rescue already agreed.

It emerged today that Spain's social security system has raided a rainy-day fund to cover state pensions for the first time as deepening recession erodes contributions.

Meanwhile, official data shows that the toxic property loans of Spain's four nationalised banks have reached €75bn and are rising faster than feared. Bankia's "potentially problematic" loans are €42bn. The biggest surprise is a 50pc surge in bad debts to €9bn at Cataluyna Caixa since January. Non-payments on mortgages have doubled.

Net claims on Spain through the ECB's Target 2 payments system have reached 39pc of GDP.

"The build-up in central bank liabilities is explosive," said Nomura's Jens Nordvig.

Spaniards Pull Out Their Cash and Get Out of Spain

The New York Times reports Fears Rising, Spaniards Pull Out Their Cash and Get Out of Spain

"The macro situation in Spain is getting worse and worse," Mr. Vildosola, 38, said last week just hours before boarding a plane to London with his wife and two small children. "There is just too much risk. Spain is going to be next after Greece, and I just don't want to end up holding devalued pesetas."

In July, Spaniards withdrew a record 75 billion euros, or $94 billion, from their banks — an amount equal to 7 percent of the country's overall economic output — as doubts grew about the durability of Spain's financial system.

The deposit outflow in Spain reflects a broader capital flight problem that is by far the most serious in the euro zone. According to a recent research note from Nomura, capital departing the country equaled a startling 50 percent of gross domestic product over the past three months — driven largely by foreigners unloading stocks and bonds but also by Spaniards transferring their savings to foreign banks.

More disturbing for Spain is that the flight is starting to include members of its educated and entrepreneurial elite who are fed up with the lack of job opportunities in a country where the unemployment rate touches 25 percent.

According to official statistics, 30,000 Spaniards registered to work in Britain in the last year, and analysts say that this figure would be many multiples higher if workers without documents were counted.

"It seems as if everyone I know in Spain is getting on an easyJet to come to London and open a bank account," said one such banker, who spoke on condition of anonymity, citing his company's policy.

That is what Mr. Vildosola did before he took the more drastic step of moving his family to England.

"It's sad," he said. "But I just don't think there is a future for me in Spain right now."

Key Question

The key question now regarding Spain is whether human and capital flight is excessively pessimistic or simply the recognition phase that things far worse are coming.

Sadly, I believe the latter. The reason is Spain needs to do a number of things and it is on a track to do none of them.

Five Things Spain Needs to Do

Exit the Euro
Institute major changes in work rules
Revamp its pension system
Lower taxes in general, especially corporate income taxes and the VAT
Write off bad property loans

How many of those things is Spain doing? The answer is zero. Actually, the answer is negative given Spain is foolishly hiking taxes, exactly the wrong thing to do.

The situation in Spain is hopeless. Expect more capital and human flight.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

"Property Always a Good Investment" Says President of National Association of Realtors in India

Posted: 05 Sep 2012 09:22 AM PDT

Occasionally I get an email regarding India that piques my interest.

Such is the case today with this link from an Indian reader: "Property is Always a Good Investment" says the president of the National Association of Realtors India.

The prices will go up in the near future with costs of construction increasing. This is a good time for prospective homebuyers to make a move and acquire property. Farook Mahmood, Founder President, National Association of Realtors - India, shares some thoughts on the market conditions, in this chat with TOI.

"Always a Good Investment"

There is no need to read further. Indeed there was no need to do anything but read the title of the Economic Times article and laugh out loud.

However, for the sake of amusement, I did read the article to discover...

Property is always a good investment. It is more so at a time when the markets are stable. If you buy at a time when the markets are stable, the value appreciation is sharper when the markets move up.

It is an effective hedge against inflation in the long term. In volatile financial market conditions , real estate has always bucked the trend. Property has always delivered high capital gains for investors at all points in time. This makes it a safe option and a good avenue for risk-averse investors. It is good for those who want it for their own use or purely as an investment to be liquidated later.

In these days, when the stock markets are volatile, and apart from gold all other asset classes are not yielding the desired returns , property is the best bet.

This is the best time for those undecided to buy. There are many prospective homebuyers waiting in the wings either because they expect the prices to come down or home loan interest rates to drop in the near future.

Property prices seldom come down. With the existing values, I don't see the possibility of a price correction. There are various reasons why property prices will only go up - the costs of raw material, labour and acquiring land are going up by the day. Inflation is pushing up the costs too.

Such blatant nonsense is exactly what one hears at market tops. I do not follow India closely but in isolation, that preposterous infomercial, disguised as a news story, suggests property prices in India are on the verge of collapse.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Spain VAT Hike Largest In History; Stunning Ineptitude Will Make History Books

Posted: 05 Sep 2012 12:30 AM PDT

Fiscal deficits continue to mount in Spain in spite of austerity measures and tax hikes. Spain desperately needs work reforms, but on that score there has been little progress.

Instead, the government keeps hiking taxes to combat ballooning deficits, only to see further declining revenues in which the government hikes taxes again and again in an absurd attempt to make up for those shortfalls.

Via Google translate from Libre Mercardo please consider The VAT increase is the largest tax increase democracy.

Each Spanish pay an average of 20.8% VAT, 369 per year, six days of extra work to comply with the Treasury.

The VAT increase, which took effect on Saturday, raising the general rate of 18% to 21%, reduced from 8% to 10%, while the super-reduced-duty on-staples remains 4%. In addition, hundreds of products previously taxed at 4%, as school supplies, and 8%, such as film and hairdressers, pass it to 21%, nearly three multiplying its previous taxation.

But beyond these percentage increases, the increase in VAT means that a worker will pay on average 369 euros per year ditional this concept, a 20.79%, according to a study by the think tank Civics. Thus, the taxpayer will have to work six days a year just to meet its commitments to the Treasury.

In retrospect, it is "the largest tax increase in democracy", as it will reduce the disposable income of citizens even more than the increase of VAT by the previous government of Rodriguez Zapatero (192 per year) and the recent income tax hike approved last December Mariano Rajoy (137 euros) "together", the report warns. Successive increases applied to income tax and VAT since 2010 have undermined the middle class almost 700 euros per year.

Furthermore, according to the head of Research Civics, Cristina Berechet, this higher tax will not serve to raise more, and will restrict consumption and probably increase fraud. "The VAT rise is incompatible with some as high taxes to work, "he says.

Stunning Ineptitude Will Make History Books

Spain's unemployment rate is over 25% and the youth unemployment rate is near 53% yet the fools in the Spanish government hiked taxes yet again, this time by the largest amount in history.

Spain's handling of this economic implosion is sure to make the history books as a prime example of complete ignorance in how to deal with a fiscal crisis.

Flashback 2010

My friend Bran who lives in Spain writes ...

Hello Mish
Check out this YouTube Video Montage (in Spanish) from Rajoy / PP in 2010.
Rajoy states raising the VAT would be a counterproductive stab in the back of fellow countrymen. No more VAT hikes was a key election promise.
Bran.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

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5.9.12

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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