Mish's Global Economic Trend Analysis

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• UK GDP Disaster Far Worse Than It Looks; UK Growth in 2012 "inconceivable"
• "Actual" New Home Sales First 6 Months of 2012 vs. Prior Years; Reflections on the Housing Recovery
• ESM Banking License? Rumors of Non-Solution Send Sovereign Yields Lower; Purposeful Non-Elaboration
• Spain 2-Year Treasury Yield Tops 7%, Inversion Between 5 and 10 Year Yields; Spain Sovereign Debt Restructuring Coming Up

UK GDP Disaster Far Worse Than It Looks; UK Growth in 2012 "inconceivable" Posted: 25 Jul 2012 02:51 PM PDT The global recession picked up steam today with news of a UK GDP Shock. The economy shrank by 0.7pc in the second quarter – far more than the 0.2pc fall expected, as record rainfall and the Jubilee holiday added to pressure from austerity cuts and the eurozone debt crisis. It marks the third successive quarter of contraction, leaving Britain in its longest double-dip recession in more than 50 years. The Office for National Statistics showed broad-based weakness across the private sector, with construction output down 5.2pc, industrial production down 1.3pc and services output – which accounts for 77pc of the economy – falling 0.1pc. Only public-sector services output, and business services registered any growth. "I think it's inconceivable that there'll be positive growth this year," said Gerard Lyons, chief economist at Standard Chartered, forecasting a 1.3pc fall in GDP. Victoria Clarke, economist at Investec, said the economy would now have to grow by 1.2pc in both the third and fourth quarters for the economy to expand by just 0.1pc in 2012 overall. In March, the Office for Budget Responsibility, the government's independent fiscal watchdog, forecast 0.8pc growth this year, which now looks wildly optimistic. UK GDP Disaster Far Worse Than It Looks A drop of .7% might not seem that shocking in the US, but that's because the US uses annualized reporting while most of the rest of the world does not. I asked Doug Short at Advisor Perspectives to show UK GDP as it would be presented in the US. UK GDP Quarter-by-Quarter Annualized click on chart for sharper image Presented that way, UK GDP does look like a disaster. Of course the results were a disaster regardless of how presented, but the US peculiar method of reporting may not be obvious to US readers following European news. 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.

"Actual" New Home Sales First 6 Months of 2012 vs. Prior Years; Reflections on the Housing Recovery Posted: 25 Jul 2012 10:42 AM PDT New home sales unexpectedly plunged today, with the biggest drop in over a year. New U.S. single-family home sales in June fell by the most in more than a year and prices resumed their downward trend, suggesting a set back for the budding housing market recovery. The Commerce Department said on Wednesday sales tumbled 8.4 percent to a seasonally adjusted 350,000-unit annual rate, the lowest rate in five months. The percent decline was the largest since February 2011. May's sales pace was revised up to 382,000 units from the previously reported 369,000 units, taking some of the sting from the report. Economists polled by Reuters had forecast sales at a 370,000-unit rate last month. Compared to June last year, new home sales were up 15.1 percent. Actual New Home Sales Reader Tim Wallace provides a look at actual new home sales, six-month running totals, not seasonally adjusted, not annualized, vs. prior years. click on chart for sharper image Reflections on the Housing Recovery Even with today's reported decline, new home sales have likely bottomed on an annual, cumulative-total basis. However, don't expect much in terms of recovery. Debt overhang is immense, and student debt is particularly problematic. Lack of jobs coupled with high student debt is capping family formation. Kids out of college are deep in debt and holding off getting married, starting families, and therefore buying houses. Moreover, home sizes will trend lower and price recovery will be anemic because of boomer demographics. Retired boomers looking to downsize have few buyers able or willing to buy. Bank-owned real estate (REOs) and shadow inventory are hugely underestimated. That too will pressure prices and sales. The good news is home sales will add to GDP. The more realistic news is structural headwinds are immense, demographics are poor, and job prospects for college graduates are poor. The bottom in new home sales may be in, just don't expect anything close to a normal housing-led recovery, because it's not going to happen.  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.

ESM Banking License? Rumors of Non-Solution Send Sovereign Yields Lower; Purposeful Non-Elaboration Posted: 25 Jul 2012 08:53 AM PDT The mantra of eurocrats is quite obvious: When times get tough, roll out already discarded rumors and hope they stick for a while. Earlier today yield on 2-year Spanish bonds hit 7.14%. The yield now is a still unsustainable 6.42%. What happened? The answer is another silly rehash of something the German constitutional court probably would not allow, and is not even being seriously discussed at the moment anyway: a banking license that would allow the ESM to use leverage.  European Central Bank council member Ewald Nowotny said there are arguments in favor of giving Europe's rescue fund a banking license, reviving the debate on bolstering its firepower as leaders face the prospect of a full- scale Spanish bailout. "I think there are pro arguments for this," Nowotny, who heads Austria's central bank, said in an interview in his office in Vienna yesterday. "There are also other arguments, but I would see this as an ongoing discussion," he said, adding he's "not aware of specific discussions within the ECB at this point." Granting a banking license to Europe's permanent bailout fund, the European Stability Mechanism, would give it access to ECB lending, easing concerns that its 500 billion-euro ($602.5 billion) cash pot won't be enough if Spain or Italy require aid. While ECB President Mario Draghi said on May 24 that such a move amounts to the central bank financing governments, which is prohibited by European Union law, publicly-owned credit institutions such as the European Investment Bank are exempt. "It is not something that is only in the field of monetary policy, so this is part of a broad discussion," Nowotny said. He declined to elaborate. Purposeful Non-Elaboration Declining to elaborate was a good move from the standpoint of politics. The more that is said about rehashed ideas, the less believable the rumor is. Note that the ECB has already rejected this idea, so has the German central bank and numerous German politicians. Moreover, no one really wants to discuss this issue now anyway, fearing it might impact a German constitutional court ruling coming up in September. The game plan, if there is one (other than obvious BS), is to sneak this idea in later, after a favorable court ruling. However, if Merkel really supported this idea, it would have happened already. It is quite possible the constitutional court picks up on this chatter, and puts an end to the idea even if it approves the ESM. Let's hope so. Regardless, leverage will not solve anything, anyway. This rehash of a discarded idea might calm the markets for a few days, but that is likely it. 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.

Spain 2-Year Treasury Yield Tops 7%, Inversion Between 5 and 10 Year Yields; Spain Sovereign Debt Restructuring Coming Up Posted: 24 Jul 2012 11:49 PM PDT Those wondering when the yield on Spain's 2-year government bond would exceed 7% now have an answer. Today is the day. Note: the lines on the charts below reflect yesterday's close. The numbers in green accurately reflect today's price movements. Spain 2-Year Government Bond Yield Of further interest please note the inversion at the long end of the curve. The yield on 5-year treasuries now exceeds that on the 10-year treasury. Spain 5-Year Government Bond Yield Spain 10-Year Government Bond Yield Synopsis 2-Year Yield + 36.5 basis points to 7.007% 5-Year Yield + 12.5 basis points to 7.717% 10-Year Yield + 2.7 basis points to 7.648% The inversion is slight but the massive yield increase on the shorter end is significant. If this action continues, and I expect it will, the market is pricing in a sovereign debt restructuring of Spain, including bond haircuts. 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.

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