Mish's Global Economic Trend Analysis

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• Debt Deflation in Spain: Record 4.7% Decline in Household Credit, Business Lending Down 10%
• Expect the "Practically Virtually Impossible"
• "Emerging Market Slowdown to Last for Years"; Comments from Saxo Bank Chief Economist
• Battle for $15 minimum Wage; Should Companies Pay Workers More? Wal-Mart a Savior or a Pariah?

Debt Deflation in Spain: Record 4.7% Decline in Household Credit, Business Lending Down 10% Posted: 02 Dec 2013 08:01 PM PST Kiss any notion of a Spanish recovery goodbye. Via translation, El Pais reports Household credit suffers record fall in October despite the rescue. Credit in Spain continues to show signs of weakness, year and a half after the Troika bailout. Statistics from the Bank of Spain show that household credit fell 5.2% in October to 793.940 billion euros. If we look at the evolution of the cash flow of borrowed money, the net change in assets is a decrease is 4.7%. In October, the credit borrowed to buy homes fell 4.7%, maintaining its rate of collapse, to 614.860 billion euros. Lending to businesses fell 10% in October, to 1.081 trillion euros. In both cases, the amount of money borrowed is at its lowest level since 2007. Debt Deflation? Precisely! Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com 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.

Expect the "Practically Virtually Impossible" Posted: 02 Dec 2013 01:44 PM PST The collapse of Spanish housing left the banking system with as much as 51 billion euros of deferred tax assets(DTAs), mostly from 2011, that can be used against future profits for as long as 18 years. Because the DTAs depend on future and unknowable profits, the DTAs cannot be fully counted as core capital. To get around Basel capital rules, El Diario reports Spain Guarantees 30 Billion in DTAs. Multimillion dollar losses banks have generated billions in tax credits in just two years. The official estimate is that the sector hoards 51 billion in such tax advantages. The government now guarantees 60 percent of the DTAs, some 30 billion euros over the next fifteen years. To make full use of the DTAs banks will have to generate 100 billion euros in profits. If sufficient results are not achieved, the state will have to come to the rescue with public debt, charged to the taxpayer. Why 100 billion? Because corporate tax takes 30% of the profits of the company. Sources of Finance estimate that at least multiply by 3.3 the DTA to get the benefits that would be necessary to consume these benefits. And then, as always, a lot of fine print. According to finance minister Luis De Guindos, it is "practically virtually impossible" for taxpayers to be at risk. The "Practically Virtually Impossible" The article contains an analysis of various banks including Bankia, CaixaCatalunya Bank, and Santander. The fine print is critical because some of the banks have no hope of using the DTAs. Rather, they will auction them off in a raffle. I suspect we will not have to wait until 2029 for the "practically virtually impossible" to happen. Will the eurozone even hold together that long? Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com 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.

"Emerging Market Slowdown to Last for Years"; Comments from Saxo Bank Chief Economist Posted: 02 Dec 2013 11:00 AM PST Citing a need for structural reforms, Paul Polman, CEO of Unilever, the world's third largest Fast-Moving-ConsumerGoods (FMCG) company says the emerging market slowdown is here to stay. Before diving into the report on Unilever, let's take a look at the definition of FMCG corporations. Fast-Moving Consumer Goods (FMCG) or Consumer Packaged Goods (CPG) are products that are sold quickly and at relatively low cost. Examples include non-durable goods such as soft drinks, toiletries, and grocery items. Though the profit margin made on FMCG products is relatively small, more so for retailers than the producers/suppliers, they are generally sold in large quantities. FMCG is probably the most classic case of low margin/high volume business. Many of the players on the retailer side such as Walmart, Carrefour, Choithram, Tawseel, Sheel, Walgreens or Metro Group and supplier side are among the largest and most recognized global companies. Fast-moving consumer electronics are a type of FMCG and are typically low priced generic or easily substitutable consumer electronics, including mobile phones, MP3 players, game players, and digital cameras which are of disposable nature. Global leaders in the FMCG segment include Johnson & Johnson, Colgate-Palmolive, Anheuser-Busch InBev, Henkel, Kellogg's, S.C. Johnson, Dr Pepper Snapple Group, Beiersdorf, Mars Inc., Heinz, Nestlé, Reckitt Benckiser, Unilever, Procter & Gamble, L'Oréal, The Coca-Cola Company, General Mills Inc., PepsiCo, Mondelēz and Kraft Foods. Slowdown Here to Stay Bloomberg reports Emerging Market Slowdown to Last for Years Unilever (UNA) Chief Executive Officer Paul Polman said the economic slowdown in emerging markets is here to stay as many countries need to enact structural reforms to adjust to new conditions after the boom of recent years. "They are still relatively stronger economies, but still fragile," Polman said. "And you see that growth coming off now a little bit, obviously not being helped either by lower demand coming from Europe and the U.S. This will last a few years. And it will only be corrected if some of the reforms have been made in these places." "I am always surprised that I am the one who sort of has to announce there's a slowdown in emerging markets," Polman said, speaking Nov. 29 at a reception where he was awarded the 2013 World Wildlife Fund Duke of Edinburgh Conservation Medal for Unilever's efforts to reduce environmental damage. "Emerging markets are clearly decelerating, but will always grow faster than the developed world," said Jon Cox, an analyst at Kepler Cheuvreux in Zurich. "Unilever is the emerging market play -- given 60 percent of sales are there, what Polman says on them has a lot of weight." More on FMCGs The World of CEOs cites Unilever as the third largest FMCG. Here is a list of Leading FMCG Corporations and the products they have. Comments From Saxo Bank Chief Economist Steen Jakobsen, Saxo Bank chief economist pinged me with these thoughts on emerging markets as well as countries in need of structural reform. Unilever is THE EMG company of the world. In the equity space, EMG earnings should come under some pressure and soon. Likewise and probably a better play is to short the French luxury makers and CAC40 direct. Short Luxury and short France. Both trades are definitely high on my 2014 list. A quick look at the CAC40 (the France stock market index), shows the CAC40 includes companies like L'Oréal (personal products), Groupe Danone (a food products corporation), LVMH (clothing and accessories), and Carrefour (food retailers and wholesalers). France is also a country with uncompetitive labor costs and a huge need for numerous structural reforms. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com 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.

Battle for $15 minimum Wage; Should Companies Pay Workers More? Wal-Mart a Savior or a Pariah? Posted: 01 Dec 2013 11:55 PM PST On Friday, Salon reported Breaking: Massive Black Friday strike and arrests planned, as workers defy Wal-Mart. Defying the nation's top employer and a business model that defines the new U.S. economy, Wal-Mart employees and allies will try to oust shopping headlines with strike stories, and throw a retail giant off its heels on what should be its happiest day of the year. By day's end, organizers expect 1,500 total protests in cities ranging from Los Angeles, Calif., to Wasilla, Alaska, including arrests in nine cities: Seacaucus, New Jersey; Alexandria, Virginia; Dallas; Minneapolis; Chicago; Seattle; and Ontario, San Leandro, and Sacramento, California. On December 1, the New York Times reported Wage Strikes Planned at Fast-Food Outlets. Seeking to increase pressure on McDonald's, Wendy's and other fast-food restaurants, organizers of a movement demanding a $15-an-hour wage for fast-food workers say they will sponsor one-day strikes in 100 cities on Thursday and protest activities in 100 additional cities. The movement, which includes the groups Fast Food Forward and Fight for 15, is part of a growing union-backed effort by low-paid workers — including many Walmart workers and workers for federal contractors — that seeks to focus attention on what the groups say are inadequate wages. The fast-food effort is backed by the Service Employees International Union and is also demanding that restaurants allow workers to unionize without the threat of retaliation. Officials with the National Restaurant Association have said the one-day strikes are publicity stunts. They warn that increasing pay to $15 an hour when the federal minimum wage is $7.25 would cause restaurants to rely more on automation and hire fewer workers. On Aug. 29, fast-food strikes took place in more than 50 cities. This week's expanded protests will be joined by numerous community, faith and student groups, including USAction and United Students against Sweatshops. Fight For 15 Inquiring minds are investigating the Fight for 15 website. Here is a snip. Stand with striking Chicago fast food and retail workers! We, hundreds of fast food and retail workers, went on strike at 30 stores in the Loop and the Magnificent Mile to demand $15 an hour and the right to form a union without retaliation. Employers like McDonalds, Whole Foods, and Sears are raking in enormous profits while workers like us, mostly adults with families, don't get paid enough to cover basic needs like food, rent, health care and transportation. We are risking our jobs as we continue to stand up and say ENOUGH. And we need everyone who supports us to join us. It's time to give every worker a chance to survive and thrive – and strengthen Chicago's economy. Applicants a Mile Long Whenever Wal-Mart opens up a store it gets tens of thousands of applicants for a couple hundred openings. People want the jobs. Here's the deal. If you don't like the job, then don't take it. It really is as simple as that. Should Companies Pay Workers More? The economic illiterates think companies should be forced to pay $15 per hour. Is it even possible? Let's do the math. Wikipedia reports Wal-Mart is the largest retailer in the world as well as the biggest private employer in the world with over two million employees. In its last annual report, for the 12 months ending January 31, 2013, Wal-Mart had $16.999 billion in net income. That sounds like a lot of money, and it is, but not as much as you might think. I do not have a breakdown in headcounts, pay scales, or number of part-time employees, but let's assume that half of the 2 million workers make $8 an hour (75 cents above above minimum wage) and work 30 hours a week. $15 an hour would be an increase of $7 per hour. $7 multiplied by 30 hours per week, multiplied by 52 weeks a year, multiplied by 1 million workers is $10.92 billion, well over half Wal-Mart's profit. There would also be a large number of full-time employees making above $10 per hour but less than $15 per hour. Bump up those employees to $15 per hour and the company would not even be profitable at $15 per hour minimum. Moreover, sales would plunge at Wal-Mart, as would sales at McDonald's and Wendy's. The pressure to automate would be great, and marginal stores would surely close. Yet, prices across the board would soar, and so would yields on US Treasuries (and of course interest on the national debt would skyrocket). Then, how long would it take to discover that $15 was not a "living wage"? Less than a year? Wal-Mart a Savior or a Pariah? The idea that raising the minimum wage to $15 would fix anything is ridiculous. I am not totally unsympathetic to the plight of those struggling, but I am totally unsympathetic about minimum wages because the problem is the Fed, not minimum wage laws. Cheap money coupled with rising minimum wages encourages investment into automation as opposed to hiring of individuals. Cheap money also drives up costs of goods and services. And given that cheap money primarily benefits those with first access to it (the banks and the already wealthy), it is not surprising that people are struggling. Rather than protest Wal-Mart (a company that does the world a service by providing over 2 million direct jobs and millions more indirect ones), people ought to be protesting the Fed. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com 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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