Mish's Global Economic Trend Analysis

Google News Closes in Spain; News Vacuum
C.I.A. Director Brennan, a Proven Liar, Defends Torture; Brennan Should be Fired Immediately, then Prosecuted along with Other CIA Directors and Cheney
$550 Billion Energy Junk Bond Bubble Busts; "Whac-A-Mole" Distortions in Multiple Markets
Charts Show 28 Seriously Troubled Mega-Banks: 24 of them in Europe

Google News Closes in Spain; News Vacuum

Posted: 11 Dec 2014 10:24 PM PST

In the wake of an inane new law in Spain that requires every Spanish publication to charge services like Google News for showing even the smallest snippet from their publications, whether they want to or not, Google did the only sensible thing: Google Shut Down Spanish News Operations.

After 9/11, one of our engineers, Krishna Bharat, realized that results for the query "World Trade Center" returned nothing about the terrorist attacks. And it was also hard to compare the news from different sources or countries because every web site was a silo. That's how Google News was born and today the service is available in more than 70 international editions, covering 35 languages.

It's a service that hundreds of millions of users love and trust, including many here in Spain. It's free to use and includes everything from the world's biggest newspapers to small, local publications and bloggers. Publishers can choose whether or not they want their articles to appear in Google News -- and the vast majority choose to be included for very good reason. Google News creates real value for these publications by driving people to their websites, which in turn helps generate advertising revenues.

But sadly, as a result of a new Spanish law, we'll shortly have to close Google News in Spain. Let me explain why. This new legislation requires every Spanish publication to charge services like Google News for showing even the smallest snippet from their publications, whether they want to or not. As Google News itself makes no money (we do not show any advertising on the site) this new approach is simply not sustainable. So it's with real sadness that on 16 December (before the new law comes into effect in January) we'll remove Spanish publishers from Google News, and close Google News in Spain.

For centuries publishers were limited in how widely they could distribute the printed page. The Internet changed all that -- creating tremendous opportunities but also real challenges for publishers as competition both for readers' attention and for advertising Euros increased. We're committed to helping the news industry meet that challenge and look forward to continuing to work with our thousands of partners globally, as well as in Spain, to help them increase their online readership and revenues.

Posted by Richard Gingras, Head of Google News

News Vacuum

There is absolutely no way, anyone, anywhere, benefits from a news vacuum other than corrupt leaders and tiny media outlets that support corrupt leaders.

Spanish publications may think they won a victory, but they will soon find out otherwise when their traffic slumps and ad revenue right along with it.

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

C.I.A. Director Brennan, a Proven Liar, Defends Torture; Brennan Should be Fired Immediately, then Prosecuted along with Other CIA Directors and Cheney

Posted: 11 Dec 2014 02:21 PM PST

In 2009, CIA Director John Brennan criticized CIA techniques for having "led us to stray from our ideals as a nation." Brennan also stated "Tactics such as waterboarding were not in keeping with our values as Americans."

Today, the New York Times reports C.I.A. Director Defends Use of Interrogation Tactics, Avoiding Issue of Torture.

John O. Brennan, the director of the Central Intelligence Agency, defended the agency's use of waterboarding and other brutal interrogation tactics on Thursday, sidestepping questions about whether agency operatives tortured anyone.

Mr. Brennan, responding to an excoriating Senate report detailing years of brutal interrogation tactics in secret C.I.A. prisons, criticized only those officers who he said went "outside the bounds" of the guidelines established by the Justice Department. Those guidelines allowed for waterboarding, a week of sleep deprivation, shackling prisoners in painful positions, dousing them with water, and locking them in coffin-like boxes.

"I will leave to others how they might want to label those activities," Mr. Brennan said.

"My fervent hope is that we can put aside this debate and move forward," Mr. Brennan said.

Definition of "Moving Forward"

By "moving forward" Brennan means sweeping the mess under the rug and letting every one of the CIA torturers get away with what they did, without so much as a slap on the wrist.

Definition of "Torture"

Since it was torture in 2009 but not torture now, it would be perfectly "fitting" if Brennan were captured, waterboarded, deprived of sleep, and shackled like a dog, in painful positions, for months on end.

Perhaps then, Brennan would change his mind back to the blatant lie he stated in 2009.

Although that would be perfectly "fitting", it's not what I advocate. Two torture wrongs don't make a right, regardless of Brennan's asinine defense of the practice.

My "Fervent Hope"

Brennan has his "fervent hope" of moving forward.

Here's mine: Instead of "fitting" torture, I propose Obama fire Brennan immediately, and better yet fire the entire CIA. The agency is worse than useless. Next, everyone involved in torture should be prosecuted.

These liar-hypocrite a**holes just do not get it, and never will until they are prosecuted under an international war crimes tribunal.

To prove the US can once again lead the way in integrity and honor, let's "move forward", by prosecuting the entire bunch.

Related Reading

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

$550 Billion Energy Junk Bond Bubble Busts; "Whac-A-Mole" Distortions in Multiple Markets

Posted: 11 Dec 2014 12:12 PM PST

The energy junk bond bubble has finally popped. Falling crude prices were the catalyst. Junk bonds of Energy XXI Ltd. plunged to 64 cents on the dollar from 106.3 cents since September. They now yield over 27%. Energy XXI Ltd. raised over $2 billion.

Energy production is extremely capital intense, and often accompanied by negative free cash flow.

Recently I have been getting numerous cold-calls, nearly all of them energy related. These companies need money, and snake-oil salesmen attempt to get it for them.

Energy investment added to GDP since 2010, with $550 billion in bond and loan offerings. Energy will now have a negative impact on GDP as funding dries up. And if oil prices do not head back up, expect outright defaults, and lots of them. This is what happens when bubbles burst.

Who Caused the Energy Bubble?

The Fed is responsible of course, by holding interest rates at record lows, stimulating all sorts of speculative investments. But it's exceptionally rare to see anyone in mainstream media point the finger in the right direction. Today I have a notable and welcome exception.

Kudos to Bloomberg writers Christine Idzelis and Craig Torres for placing blame precisely where it belongs in their report Fed Bubble Bursts in $550 Billion of Energy Debt.

Since early 2010, energy producers have raised $550 billion of new bonds and loans as the Federal Reserve held borrowing costs near zero, according to Deutsche Bank AG. With oil prices plunging, investors are questioning the ability of some issuers to meet their debt obligations. Research firm CreditSights Inc. predicts the default rate for energy junk bonds will double to eight percent next year.

"Anything that becomes a mania -- it ends badly," said Tim Gramatovich, who helps manage more than $800 million as chief investment officer of Santa Barbara, California-based Peritus Asset Management. "And this is a mania."

The Fed's decision to keep benchmark interest rates at record lows for six years has encouraged investors to funnel cash into speculative-grade securities to generate returns, raising concern that risks were being overlooked. A report from Moody's Investors Service this week found that investor protections in corporate debt are at an all-time low, while average yields on junk bonds were recently lower than what investment-grade companies were paying before the credit crisis.

Yields Surge

Yields on junk-rated energy bonds climbed to a more-than-five-year high of 9.5 percent this week from 5.7 percent in June, according to Bank of America Merrill Lynch index data. At least three energy-related borrowers, including C&J Energy Services Inc. (CJES), postponed financings this month as sentiment soured.

Stimulus Effect

The Fed's three rounds of bond buying were a gift to small companies in the capital-intensive energy industry that needed cheap borrowing costs to thrive, according to Chris Lafakis, a senior economist at Moody's Analytics in West Chester, Pennsylvania.

Quantitative easing "has been one of the keys to the fast, breakneck pace of the growth in U.S. oil production which requires abundant capital," Lafakis said.

One of those to take advantage was Energy XXI Ltd. (EXXI), an oil and gas explorer, which has raised more than $2 billion in the bond market in the past four years.

The Houston-based company's $750 million of 9.25 percent notes, issued in December 2010, have tumbled to 64 cents on the dollar from 106.3 cents in September, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. They yield 27.7 percent.

Energy XXI got its lenders in August to waive a potential violation of its credit agreement because its debt had risen relative to its earnings, according to a regulatory filing. In September, lenders agreed to increase the amount of leverage allowed.

The debt rout is one of the latest examples of a boom and bust in U.S. markets as unprecedented Fed stimulus fuels a hunt for yield. The fallout has been limited so far, yet the longer the Fed holds its benchmark lending rate near zero, the greater the risk of more consequential bubbles, according to former Fed governor Jeremy Stein.

"There are distortions in multiple markets," said Lawrence Goodman, president of the Center for Financial Stability, a monetary research group in New York. "It is like a Whac-A-Mole game: You don't know where it is going to pop up next."

"Whac-A-Mole" Distortions in Multiple Markets

Lawrence Goodman along with writers Idzelis and Torres win the blue ribbon for accurate assessment of the month.

Yet, "Whac-A-Mole" has barely started. I suspect all junk bonds will come into question the moment the Fed hikes or the economy sours, whichever comes first.

Moreover, it's not just the US in play. I foresee global "Whac-A-Mole" in various currencies, equities, junk bonds, bank bonds and even sovereign bonds (especially European bonds).

For example, please consider the dismal state or European banks as noted in Charts Show 28 Seriously Troubled Mega-Banks: 24 of them in Europe.

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

Charts Show 28 Seriously Troubled Mega-Banks: 24 of them in Europe

Posted: 10 Dec 2014 11:57 PM PST

I have been saying for years that European banks are in far worse shape than US banks. We can now show that in chart form thanks to Ophir Gottlieb, CEO of Capital Market Labs.

Let's start with a visualization of the day: Worldwide Mega Cap Banks: Is Europe in Crisis?

If we take all of the banks in the world with market caps larger than $25 billion USD and then plot them with total assets on the x-axis and non-performing loans as a percentage of total loans, ALL of the top eleven are in Europe.

Click on any chart in this post for a sharper image.

Severe European Bank Crisis

Ophir Gottlieb expanded on the European bank crisis idea in this guest MarketWatch post yesterday: Opinion: European banks are Stuck in a Severe Crisis.

Big banks in Europe are riskier than anywhere else in the world.

They have higher non-performing loans, greater asset shrinkage, larger losses and higher debt-to-equity ratios. And European banks are bracing for even worse loan losses.

It's the combination of those characteristics that lead to a crisis, and the eurozone essentially is in one today.

Non-performing loans over total loans

There are 200 banks in the world with market values of more than $5 billion, 48 of which are in Europe. The chart below plots non-performing loans over total loans on the y-axis and market capitalization (or value) on the x-axis for that population of banks.

If we take the population of world banks greater than $5 billion in market capitalization and select those with non-performing loans over total loans that are greater than 5% (worse than the Bank of America/Countrywide/Merrill Lynch combination), we are left with 24 banks. Twenty-one of those are in Europe.

To give a perspective on this, at the height of the Great Recession, after Bank of America had integrated all Countrywide loans and Merrill Lynch debt, the combined entity hit an all-time high of 4.5% non-performing loans to total loans.

Taking the same population of world banks over $5 billion in market cap and charting only those that show asset shrinkage over the past two years, we are left with 31 banks. Twenty-seven of those are in Europe. In addition, all 22 banks in the world with a 2% shrinkage in assets or worse (per year over two years) are in Europe.

If you're wondering if any of this hits the bottom line, the answer is a resounding "yes." Below we chart net income margin on the y-axis and market cap on the x-axis.

If we take the banks worldwide over $5 billion in market cap and plot those with net income margins below 10%, we get 18 banks. Seventeen of those are in Europe. If we only look at banks with negative earnings, all 10 are in Europe.

Total assets, 2-year growth rate and net income

If we dive deeper and look to combine the charts from above into one chart, we find there are nine banks in the entire world that are larger than $5 billion, have shrinking assets over two years (y-axis) and have negative net income margins (x-axis). All nine are in Europe.

Those banks aren't trivial. In fact, they average nearly $900 billion in assets. As a group, they hold over $8 trillion in assets.

ECB Bound to Fail

Thanks much to Ophir Gottlieb and Capital Market Labs!

Gottlieb concludes with "The European Central Bank (ECB) seems motivated to pursue quantitative easing, which may include an interest rate cut. When interest rates fall, demand for borrowing tends to rise. It's that demand (in part) that hypothetically could jump-start the EU's economy. Given the data above, we must ask: Are European banks willing to (or can they afford to) lend more money if their existing bad debts get even worse?"

On that I have a distinct opinion: It is virtually impossible for QE to work.

Banks do not lend because funding is cheap. One look at Japan provides sufficient proof.

I have stated that numerous times before, but in light of the above charts and Mario Draghi's hopeless plan, it's worth taking another look at when banks lend and when they don't.

When Banks Lend

From my August 22 post: German Two-Year Bonds Have Negative Yield, Demand High; Euro Bond Bubble Guaranteed to Burst

Central bank money madness continues, with market participants expecting QE to begin in Europe.

Would QE by the ECB spur European bank lending? Of course not. Banks do not lend from excess reserves. Banks lend (provided they are not capital impaired), when credit-worthy borrowers want credit and banks perceive risks worth lending.

The ECB tried to induce banks to lend by charging, rather than paying interest on excess reserves. The results are in: Yield on Two-Year German Bonds is Negative.

There is no demand for loans and/or willingness of banks to lend. Credit-worthy customers simply do not want loans in this environment. And no fundamental flaws with the euro have been fixed after all these can-kicking years.

Meanwhile, Spanish banks gorge on low-yielding Spanish bonds, Italian banks on low-yielding Italian bonds, Portuguese banks on low-yielding Portuguese bonds, etc., all with massive leverage.

The ECB's expectation was to spur lending, instead it created a bond bubble. It's a bubble guaranteed to burst.

Capital Impairment to the Forefront

Also consider snips from Spotlight on European Bank Lending: Capital Impairment to the Forefront.

Banks lend (provided they are not capital impaired), when credit-worthy borrowers want credit and banks perceive risks worth lending.

So which is it, lack of credit-worthy borrowers or capital impairment? The answer is likely both, but the spotlight goes on capital impairment and Texas Ratios, the latter a ratio of bad loans to equity.

Whether or not banks pass stress tests, and whether or not reports say they are not capital impaired, one can look at actual lending and easily come to another conclusion.

Occam's Razor and Bank Lending

I discuss bank lending again in response to a reader question regarding the above bank lending posts: Occam's Razor and Bank Lending. This was my explanation ...

Occam's Razor suggests the simplest explanation is likely to be the correct one. In this case, central banks clearly want to spur lending. So why aren't banks lending?

Two Possible Reasons Banks Aren't Lending

Banks are capital impaired (even if they deny they are not)
Banks have no credit-worthy borrowers who want loans

I suggest both

That is the simplest explanation that fits the bill, and it also fits in with sound economic theory.

Thus, that is precisely what Occam's Razor would suggest. Whether or not central banks talk to, or understand banks or bank lending is irrelevant.

Moreover, I stick with my assertion that central banks are generally clueless about the state of the economy. This has been proven time and time again.

Thus, it should not at all be surprising to find that central banks are surprised to discover their attempts to spur lending have failed.

Necessary Conditions for Bank Lending

Banks are not capital impaired.
Banks believe they have credit-worthy customers (or that asset prices will rise enough to cover the risk).
Creditworthy borrowers want loans.

If all three conditions are not met, banks don't lend.

Notice the word "believe". Banks do not actually have to have creditworthy borrowers (they didn't in the housing bubbles). Rather they have to believe they do (or that rising asset prices will bail them out). Banks were horribly wrong but that is what they believed.

The charts from Capital Market Labs show my overall thesis on the state of European banks was indeed the correct one.

Counterproductive Central Bank Efforts

Attempts to force banks to lend when they do not want to (or can't due to capital impairment), will do nothing but create asset bubbles while pushing real interest rates negative (in the case of German bonds, nominal rates are actually negative).

Asset bubbles by definition burst. And when bubbles burst, they unleash extreme deflationary forces that central banks hoped to stop.

Challenge to Keynesians

I discussed the absurdity of central bank deflation fighting in Challenge to Keynesians "Prove Rising Prices Provide an Overall Economic Benefit".

Please take a look.

Here is the key construct: "Central bankers should not fear falling consumer prices. What central bankers should fear is falling asset prices, more specifically, loans made on assets in an asset bubble. The irony is central banks create asset inflation by fighting something everyone on the planet should welcome [consumer price deflation]."

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

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11.12.14

Mish's Global Economic Trend Analysis

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