| Good News: 96 Percent of Spaniards Believe Political Corruption is "Very High"; Journalism Comments Posted: 21 Jan 2013 07:59 PM PST I have good news tonight from Spain: 96 Percent of Spaniards Believe Political Corruption is "Very High". To untrained ears and eyes that might not sound like good news. However look at it this way: How much worse can it get? Simple math suggests only 4%. However, accounting for politicians on the take unwilling to admit corruption ever, it appears corruption sentiment has not only peaked but has crossed the threshold beyond mathematical infinity. While pondering that thought, please consider the Financial Times article Party accounts scandal rocks Spanish PM. Mariano Rajoy, Spain's prime minister, has ordered an investigation into his own party's accounts as he scrambles to distance himself from allegations that its former treasurer presided over a system of paying cash kickbacks to top officials.
Spain's ruling Popular party has been rocked by the allegations of cash payments to party members, which follow prosecutors revealing that Luis Bárcenas, former treasurer of the party, amassed a fortune of as much as €22m in a Swiss bank account, prompting protests outside the PP's central Madrid headquarters.
The escalating scandal threatens to damage the credibility of the Rajoy government at a time when it is pushing through a series of swingeing public spending cuts as unemployment stands at 25 per cent, and anger mounts at successive corruption cases within Spain's political and business elite.
Ongoing high-profile corruption investigations include a case against Iñaki Urdangarin, son-in-law of King Juan Carlos, who was last year charged with embezzling millions of euros from charitable organisations. There are at least a further 200 open cases against politicians across Spain.
A recent poll conducted for the El País newspaper found 96 per cent of Spaniards believed political corruption in the country was "very high". Journalism Comments The Financial Times is at least three days late in reporting this story. I have covered it via Google translates starting last Friday. I did not have a poll to present then, but realistically speaking neither does the Financial Times now. Instead the Financial Times refers to El País. Lovely. I link to my sources and the Financial Times does not. It is typical for all mainstream media to not properly credit sources (and the only way to do that is via links). If you are going to cite a reference that is not generally understood, have the decency to post a link, especially if you include automatically inserted bullsheet like this whenever anyone goes to copy a snip from you: " High quality global journalism requires investment. Please share this article with others using the link below, do not cut & paste the article. See our Ts&Cs and Copyright Policy for more detail. Email ftsales.support@ft.com to buy additional rights. http://www.ft.com/cms/s/0/f52b4244-63de-11e2-b92c-00144feab49a.html#ixzz2Ifhcg2PR" There was not a damn thing on the Financial Times that was not lifted and reworded from somewhere else. Want Proof? Please consider Crisis in Madrid Update; Plan "A" is Sgt. Schultz Defense, No Plan "B" Yet. Yes corruption in Spain is very high. That we knew a long time ago. We now have a poll now to prove it. 96 percent belief in corruption is a story. However, it's not a story the Financial Times originated. One of my pet peeves is not properly citing (with links) people you lift ideas from. The Financial Times, Reuters, Bloomberg, and most bloggers are all guilty. Many bloggers are guilty as well. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com |
| Golf star Phil Mickelson may bolt California over taxes; Time to Send Taxifornia a Message Posted: 21 Jan 2013 01:40 PM PST Golf star Phil Mickelson has had enough of California taxes. He totaled up Federal and California state taxes and came up with 62%. What about sales taxes? Regardless, he has finally had enough of Taxifornia. Fox News reports Teed off: Golf star Phil Mickelson may bolt California over taxes For golf legend Phil Mickelson, the low 60s makes for a great score on the links — and a lousy tax rate in his home state of California.
Mickelson said "drastic changes" are ahead for him due to federal and California state tax increases that have pushed his tax rate to what he figures adds up to "62, 63 percent." The left-hander will talk more about his plans — possibly moving out of California or even retiring altogether — before his hometown Farmers Insurance Open, the San Diego-area event that begins Thursday at Torrey Pines.
Mickelson, who lives in Rancho Santa Fe, is unsure exactly what he'll do, but changes will come, he said. If he bolts California, the San Diego native could be the Golden State's answer to actor Gerard Depardieu, who renounced his French citizenship and moved to Russia after the French government tried to jack up taxes on the rich.
"There are going to be some drastic changes for me because I happen to be in that zone that has been targeted both federally and by the state and, you know, it doesn't work for me right now," he said. "So I'm going to have to make some changes."
California voters in November approved Proposition 30, which, in addition to raising the state sales tax, carries a menu of new tax brackets that hit millionaires like Mickelson hard. For income exceeding $1 million, the state rate jumped to 13.3 percent from 10.3 percent. For Mickelson, who earned roughly $60 million in 2012, that would be a tax increase of more than $1.8 million.
"If you add up all the federal and you look at the disability and the unemployment and the Social Security and the state, my tax rate's 62, 63 percent," Mickelson said. "So I've got to make some decisions on what I'm going to do."
Mickelson, according to Sports Illustrated, was the second-highest earning athlete of 2012, second only to boxing's Floyd Mayweather, Jr. Mickelson, who was also second on the list in 2011, earned $3.7 million in winnings and $57 million in endorsements last year — for a staggering total of $60,763,488.
Details of Mickelson's several endorsement deals — including partnerships with Callaway, Barclays and Rolex to name a few — are unknown, and his real estate holdings and other business ventures are not included in the Sports Illustrated tally. Curious Time to Leave If indeed Mickelson is pondering retirement, it's a somewhat curious time to leave. His income will drop, and so will taxes. Proposition 13 ensures his California property will not be taxed at a high rate. He should have been "teed off" long ago. Of course he may have meant retire from the tour as opposed to "retire". It's possible he would be hired as a top commentator for a news network, or that he has other business ventures in mind. Still, how likely is income from other ventures to approach $60 million? Time to Send a Message Perhaps Proposition 30 was simply the final straw. However, regardless of what he earns, I do hope he leaves Taxifornia. The more millionaires that leave the better, because it's certainly time to send a message. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com |
| 20,000 Layoffs in Spanish Banks, 40% Pay Cuts, Pension Contributions Halted; Spanish Bank Unions Announce Strike; Protests Snowball; When's the Breaking Point? Posted: 21 Jan 2013 09:52 AM PST Spanish banks have already shed 30,000 jobs in its banking crisis. Another 20,000 cuts are due in 2013, along with pay cuts and reduced pension contribution. In response Spain's Banking Unions Announce Strikes. Workers at three of Spain's bailed-out banks will stage strikes in coming weeks as they fight mass layoffs, unions said on Monday, spreading industrial unrest to a sector where walkouts have so far been rare.
While the banks, crippled by a property bubble that burst five years ago, have hogged headlines, employees have so far mostly kept a low profile even as protests become a way of life elsewhere in Spain.
But about 20,000 layoffs planned for 2013, almost 10 percent of the total, could reduce the workforce to levels last seen in 1975, data from the unions showed.
Alarmed at the scale of cuts, employees from across the industry will demonstrate on January 23, while workers from Bankia, Banco de Valencia and NovaGalicia Banco will strike on February 6 and hold partial strikes before then.
Protests are snowballing and becoming more visible, as bankers take to the street and join judges, doctors, bus drivers and garbage workers as strikes become almost a daily occurrence across recession-bound Spain.
As well as losing their jobs, workers at the likes of Bankia are being asked to take 40 to 50 percent pay cuts and many will see pension contributions halted for several years.
Many of Bankia's more than 20,000 employees also bought shares in its listing in June 2011 and face seeing their savings practically wiped out.
The deadline for negotiations between unions and Bankia is Feb 9.
Spain's banks have shed over 30,000 jobs since the start of the global financial crisis in 2007, data from the Comisiones Obreras union showed. With about 20,000 more set to be axed in 2013, the banking workforce could drop to 218,500 by year end. When's the Breaking Point? With 26% unemployment and rising, as well as corruption and fraud at the highest levels in government, I keep wondering when the breaking point will hit Spain. All I can suggest is some time in 2013. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com |
| Pettis: Nine Things to Watch in 2013; Unwarranted Outbreak of Optimism in China and Europe; The Great Rebalancing Posted: 21 Jan 2013 12:09 AM PST Michael Pettis at China Financial Markets believes optimism regarding China and Europe is unwarranted. Via email, he states the case while giving nine key things to watch in 2013. The subtitles below are mine, the rest from Pettis. Too Early to be Enthusiastic About China
I wanted to send out this newsletter last week, but the air in Beijing has been so foul that it has been hard to generate the necessary enthusiasm to write it. Over the weekend I was finally able to finish it, perhaps because I have finally gotten used to breathing solid chunks of grit.
Away from the horrible air pollution the year seems to have begun with an optimism that I think is going to prove hard to justify.
Many countries before China have managed one or more decades of miraculous growth, and in every case, perhaps not surprisingly, they developed significant domestic imbalances that were only subsequently resolved during difficult adjustment periods.
Very few, however, have managed the subsequent adjustment process in such a way that their early economic promises were fulfilled. Beijing must now manage China's own adjustment, and this adjustment must come soon if we are not to run into a serious debt problem. How Beijing does so is key to China's longer-term economic success, and it is much too early in the process to get overly enthusiastic. Certainly last year gives a taste of what we might expect.
The next year or two are also going to be very important in determining the success of the great European experiment and, even more, the viability of the euro as it currently exists. At this point, unless the peripheral countries unite in their demands and force changes in growth policies, the future of the euro lies largely in German hands. If Germany decides to save the euro by expanding its economy sufficiently to allow the peripheral European countries to grow while cutting their debt levels, the euro can be saved. If not, I don't really see how peripheral Europe can manage many more years of grinding away at debt through high unemployment (which anyway doesn't seem to improve debt ratios).
Burst of Optimism for Europe
We ended 2012 in a burst of optimism for Europe, with everyone cheering Mario Draghi for having "saved" the euro, but I am deeply skeptical. As far as I can tell nothing substantial has changed, and if countries like Spain are a little more able today to roll over their debts than they had been during the summer, so what?
If Europe were merely suffering from a liquidity problem (or a problem of "confidence", as politicians and bankers always like to say before the big debt crisis), then the ECB's willingness to fund all this debt would be a step in the right direction. But if the problem is too much debt, too high unemployment, and misaligned currencies, then rolling over the debt means that the ultimate resolution will be more painful simply because there will ultimately be more debt to write down.
It is interesting that policymakers are so pleased by an end (temporarily, I assume) to the financing crisis. One of the regular features of sovereign debt crises, and one amply revealed in Beth Simmons book on the 1930s crisis in Europe, Who Adjusts?, is that one of the complicating factors in a crisis is the tendency of policymakers (along with workers, creditors, small businesses, and middle class savers) to change their behavior in response to a crisis by taking steps that protect them from the consequences of the crisis but that also make the crisis worse. Policymakers do this by shortening their time horizons and managing from crisis to crisis, rather than by sorting out the underlying problems. The fact that Spanish policymakers are so relieved by their ability to access near-term financing may be a case in point. It is easy to see why the worry so much about getting through the next bond auction, but at the end of the day this is not Spain's real problem.
Spain's real problem is unemployment and negative growth.
Under the circumstances there is very little popular appetite left in Spain, I think, for much more pain. When locksmiths in Pamplona got together a few weeks ago and decided that they were not going to help banks bust open locks and repossess homes, even though this must have become a major source of income for them, it suggests that ordinary Spaniards aren't eager to absorb much more damage and that solidarity is spreading. It also suggests that any political party that decides to take drastic action to grow the economy, even (and perhaps especially) at the expense of monetary union and its European partners (i.e. Germany), is likely to get at least some significant fraction of the votes.
One way or the other, the world will rebalance. But there are worse ways and better ways it can do so. Large trade surpluses can decline, for example, because exports fall, or they can decline because imports rise. Large trade deficits can contract under conditions of high unemployment, but they can also contract under conditions of low unemployment. Low savings rates can rise with declining household income or with rising household income. Repressed consumption rates can reverse through collapsing growth or through surging consumption. Excessive debt can be resolved by default or by growth.
Any policy that does not clearly result in a reversal of the deep debt, trade and capital imbalances of the past decade is a policy that cannot be sustained. The goal of policymakers must be to work out what rebalancing requires and then to design and implement the least painful way of getting there. International cooperation, of course, will reduce the pain.
Nine Things to Watch in 2013
My guess is that we have ended the first stage of the global crisis, and most of the deepest problems have been identified. In 2013 we will begin to see how policymakers respond and what the future outlook is likely to be. Here is what I will be watching this year in order to figure out where we are likely to end up (and I have a related article, for those who might care, in last week's Financial Times - Hello 2013: Chinese banking and economic reform).
1. Watch how quickly growth adjusts. The speed with which China's GDP growth slows in 2013 will tell us a lot about how determined Beijing is to rebalance the economy in such a way that growth is driven more by higher household income and consumption and less by investment funded by rising government and government-related debt. It will also tell us how successful Beijing's new leadership will be in consolidating power and forcing the kinds of economic and financial reforms on which most economists now agree, but which are likely to be politically difficult.
I expect GDP growth in the first half to be fairly high, probably close to 8%, continuing the investment boom that was recently unleashed. I am not fully confident of this number because there seem to be significant strains in the banking system, and without easy credit growth there cannot be much investment growth. Of course part of any credit tightness will be "resolved" by the tried-and-true method of vendor financing, which is already becoming a problem for SOE balance sheets.
As an aside, one of my former students, now an investment banker working on the domestic IPO market, came to visit me today and warned me that there is a huge backlog of companies trying to get approval to sell shares. One of the requirements is that they must have two consecutive years of rising net earnings. Many of these firms expected to come to market in 2012 and were able to manage the needed two years of rising net earnings to 2011, but now that they have been pushed back, at least to 2013, they are struggling to show that net earnings in 2012 also went up. For that reason his firm is especially wary of sneaky attempts to boost reported earnings. There are hundreds of companies waiting for approval.
At any rate it is second half GDP growth that interests me more. If Beijing has really gotten its arms around the rebalancing problem and is serious about adjusting quickly, I expect reported growth to drop sharply, perhaps to close to 6%. If not, I expect reported growth to remain well above 7% in the second half of 2013. This would worry me.
2. Watch how quickly new debt emerges. Debt problems are going to continue to emerge in 2013, but as long as each new manifestation of excessively rising debt is treated as a specific and localized problem that can be resolved with specific polices, overall balance sheets will continue to get worse. We need to watch what Beijing does to rein in the growth in debt, and of course this is closely related to overall GDP growth. As long as GDP is growing at levels above 6% or 7%, it is almost a certainty that debt is rising too fast. If GDP growth levels come in much below 6 or 7%, there is a chance that debt growth is not excessive.
How do we keep track of debt levels? Obviously this is no easy task in China, where both the banks and the informal banking system have done a great job in recent years of hiding loan growth and keeping formal debt levels from looking to risky.
But follow the cash. Large increases in infrastructure investment and in real estate development are almost always funded, directly or indirectly, by increases in debt.
3. Watch for financial scandals. We should also be keeping track of stories about defaults and bank runs. Remember that the Chinese financial system does not really "do" defaults. When borrowers are unable to repay debt out of operating cashflow, the problem is usually "managed" away by forcing losses onto some other entity.
The late stages of a debt bubble are almost always characterized by the sudden emergence of financial fraud, and the huge extent of the frauds lead many to assume that fraud was the source of the credit problems, when in fact widespread financial fraud is more typically a symptom of a financial system that has already gone to excess. This is why I am going to be following financial scandals closely, no matter how arcane or small. The occurrence and pattern of financial scandal will tell us a lot about the likely problem areas in the financial system.
3. Watch bank activities. More generally I am going to watch the relationship between total credit growth and the growth in RMB loans. Much of the off-balance sheet financing in China is designed specifically to skirt regulations, and the relative size of these transactions will tell us about transparency (or lack thereof).
4. Watch inflation. Inflation is actually a positive indicator for China's rebalancing, and also worth watching because I expect (hope) it to rise in 2013, although not by too much. This may sound like a strange thing to say – everyone else thinks of rising inflation as a bad thing – but remember that the more you repress household income growth, the more you divert resources, especially through cheap financing, from consumption into production, and so this tends to be disinflationary.
If China is truly rebalancing, at least part of this is going to show up in upward inflationary pressure, although it is likely to be the "right" kind of inflation – i.e. it will hurt the rich more than the poor because it will be based on non-food rather than food items. Perhaps this inflation is already starting to happen, although not in the way I would like it to happen. There has been an uptick in inflation but it seems to have been caused by the impact of cold weather on food prices, rather than because consumption of manufactured goods is rising faster than production.
5. Watch the prices of hard commodities. Of course I will be watching copper prices and prices of other hard commodities. I expect that hard commodity prices will fall sharply over the next two to three years, but to the extent that prices rise in the short term, as they have in the past three months, it is likely to reflect additional investment growth in China.
As a quick measure this means that declining copper prices can be seen as a measure of the extent of Chinese rebalancing. The longer it takes for copper prices to drop, the slower is the Chinese adjustment likely to be.
6. Watch the trade numbers. China's trade surplus for November came in much higher than expected, although there are so many discrepancies in the numbers that not all of us are confident about how to interpret the numbers. It seems like growth in both imports and exports may have been exaggerated, as local authorities may be round-tripping both exports and imports in order to make their numbers look good.
In addition, as I have argued many times, China's exports are likely to be misleadingly low and its imports misleadingly high (and so its real trade surplus higher than the official trade surplus) to the extent that there is significant commodity stockpiling and hidden capital flight. Of course destocking and capital inflows will have the opposite effect.
7. Watch the Spanish bond market. Obviously I, like everyone else, will be watching the Spanish bond markets.
I do not think anything important has changed as far as the European crisis is concerned. The fact that there is a additional liquidity for bond purchases does not mean, as I see it, that Spanish competitiveness has been resolved and it does not mean that the economy can grow out of its debt burden. It simply means that there is temporarily a little less pressure to resolve the underlying problems. I would guess that by the second quarter of 2013, and likely earlier, markets will once again have gotten much worse.
8. Watch Target 2. On a related topic, I will continue to watch Target 2 closely as an indicator of strains within the European banking system. This too ended 2013 on a positive note.
For the same reason that I am not optimistic about the Spanish bond market I am also not optimistic that Target 2 will continue to reverse. If it does, of course, that will be a great sigh, but if it doesn't, and if in fact the imbalances continue to grow, that will put additional stress on Germany's ability to maintain the euro system.
9. Watch Japan. Remember that Japanese attempts to get their arms around their huge debt burden will almost certainly affect China and the rest of the global economy. If Japan tries to increase domestic savings to fund the debt, for example by limiting wage increases, or by taxing consumption, both of which they have proposed, these measures may well cause domestic investment to fall. Whether or not they do, if domestic savings rise faster than domestic investment, which is the only way to increase the domestic savings pool available to fund Japanese debt, then by definition the current account surplus must rise.
I am not smart enough to tell you what Japan will do, but I do know that almost anything it does must affect the relationship between its savings and its investment, and hence Japan's current account surplus, which I suspect everyone hopes will rise. Of course everyone else wants the same thing too – rising exports relative to imports – which is clearly impossible, but Japan needs it more urgently than most of the rest of us. This is going to increase strains on the global trading system. Financial Scandals Pettis used point number three twice, I am not sure if on purpose. Both threes are financial. In general, and as is typically the case, I side with Pettis' point of view. One of the more interesting things on his watch list was "3. Watch For Financial Scandals". I have been following scandals in Spain that may bring down the Spanish government. Media attention in English has been scant. Here are a pair of significant articles: January 19: Massive Fraud in Spain Threatens Entire Government of Prime Minister Mariano Rajoy January 20: Crisis in Madrid Update; Plan "A" is Sgt. Schultz Defense, No Plan "B" Yet In Greece, Law-and-Order Problem Escalates; Bomb Explodes at Athens Mall; AK-47 Shots Hit Ruling Party Headquarters prompting me to say "Worst Not Over" Complacency reins in European bond markets, even though Spanish and Greek unemployment is over 26% and youth unemployment is over 56% in both countries and both countries have recent fraud investigations at the highest levels. How much longer this can go on before the powder keg blows remains a mystery. The Great Rebalancing Michael Pettis has just released his book " The Great Rebalancing: Trade, Conflict, and the Perilous Road Ahead" I will get a copy soon. Note that Pettis is one of the speakers at my economic conference in April. Please click on the image below for details. "Wine Country" Economic Conference Hosted By Mish Click on Image to Learn More  Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com |
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