Mish's Global Economic Trend Analysis

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China Contraction Unexpectedly Continues Third Month Posted: 31 Oct 2015 09:50 PM PDT Given that economists hardly expect anything bad ever, this headline is hardly shocking: China's Factory Activity Shrinks for an Unexpected Third Month. Activity in China's manufacturing sector unexpectedly shrank for a third straight month in October, an official survey showed on Sunday, fueling fears that the economy may be cooling further in the fourth quarter despite a raft of stimulus measures. The official Purchasing Managers' Index (PMI) was at 49.8 in October, the same pace as in previous month and lagging market expectations of 50.0. To shore up growth, the government has cut interest rates six times since November and lowered the amount of cash that banks must hold as reserves four times this year. The latest cut in interest rates and banks' reserve requirement came in late October. Beijing has also ramped up infrastructure spending and eased restrictions on home purchases to revive the flagging property market. Gee. Who Coulda Thunk? Mike "Mish" Shedlock 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.

€238 Billion Nonperforming Loans at Spanish Banks Despite ECB's Helping Hand Posted: 31 Oct 2015 09:08 AM PDT Via translation, El Confidential comments on the Banking Drag of €238 Billion Nonperforming Loans at Spanish Banks. The profitability of banks has plummeted. And only the loose monetary policy of the ECB has improved the results. That is underscored by a report on the performance of Spanish banks by International Financial Analyst (AFI). The report estimates the Spanish banking sector accumulated €238 Billion poor credit and foreclosed assets (8.8% of the balance), with coverage average of 44%. Only the ECB's monetary policy, its strategy of zero interest rates and asset purchase, keeps the banks alive. The ROE of the banking sector, has been reduced by 6.8 points, reaching levels of 5.3%, mainly due to higher capital requirements. As the report makes clear, higher capital requirements (to maintain solvency) are here to stay, so it is difficult for the results of the fixed income portfolios in recent years to be repeated in the short term. In fact, unrealized gains associated with these portfolios have declined more than 50% in 2015. This means that banks are eating the benefits associated with the decline in interest rates. In the words of AFI, ECB monetary policies have contained the fall in the profitability of the sector in recent years, and this has benefited "substantially" the peripheral countries including the Spanish banking system. Non-performing assets could be reducing the annual profitability of the sector up by 5.4 percentage points according to the report. With treasury yields low or negative in Eurozone countries, the recapitalization benefits of ECB policy (banks loading up on their own sovereign bonds) have run their course.  In case of another downturn, there will be little else the ECB can do.  . Mike "Mish" Shedlock 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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