Mish's Global Economic Trend Analysis

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Another Unbelievable Stress-Free Test; Whitewash Math and Deferred Tax Assets Posted: 26 Oct 2014 09:36 PM PDT In an effort to fool the public into believing the latest round of bank stress tests were actually designed to find stress, the ECB found 25 scapegoats, with the biggest losers in Italy and Greece. Interested parties may wish to slog through the full 178 page Stress Test Report. Capital Shortfalls Reuters reports ECB Fails 25 Banks in Health Check but Problems Largely Solved. Roughly one in five of the euro zone's top lenders failed landmark health checks at the end of last year but most have since repaired their finances, the European Central Bank said on Sunday. Italy faces the biggest challenge with nine of its banks falling short and two still needing to raise funds. "This seems as if it has been pretty unstressful," said Karl Whelan, an economist with University College Dublin. "The real issue is the size of the capital shortfall and that is very, very small. I don't feel a whole lot more reassured about the health of the banking system today than last week." €48 Billion Shortfall The Financial Times reports ECB Says Banks Overvalued Assets by €48bn. The European Central Bank's dissection of the books of the eurozone's biggest banks has found lenders overvalued their assets by €48bn. The results of the ECB's examination of balance sheets worth €22tn, known as the Asset Quality Review, will require the 130 lenders who took part in the exercise to adjust the value of their assets in their accounts or prudential requirements. A quarter of the reduction, €12bn, will fall on Italian lenders, an amount just short of 1 per cent of their risk-weighted assets. Greek banks will have to lower their asset values by €7.6bn, or almost 4 per cent of their risk-weighted assets. Philippe Legrain, an economist and former adviser to then European Commission president José Manuel Barroso, described the tests as a "whitewash". "The ECB singles out less important banks in less important countries and gives the German banks a clear bill of health," Mr Legrain said. German lenders will have to lower the value of their assets by €6.7bn and their French counterparts by €5.6bn. The AQR reviewed 800 portfolios, which together made up more than 57 per cent of banks' risk-weighted assets. The ECB said they examined 119,000 borrowers and valued 170,000 items of collateral. Supervisors also built 765 models to challenge banks' estimates of their provisions. The 130 banks account for 81.6 per cent of all eurozone assets. Whitewash Math Of the 130 banks, 25 failed, which seems like a lot. However, the total amount of under-capitalization is a mere €48 billion out of balance sheets that total €22 trillion. That is an overall asset overvaluation of 0.218%. Anyone seriously believe that with France, Italy, and Spain in or near recession? I don't. It's not even a generous rounding error. Have Spanish banks written off 100% of their bad property loans? What about sovereign bonds assumed to be 100 percent risk-free? Didn't Greece prove bonds payments are not sacrosanct? When the eurozone splinters, German banks are going to take a massive hit. Deferred Tax Assets Huky Guru has some interesting figures about Spanish banks. About a year ago, Guru reported that a Reclassification of DTAs (Deferred Tax Assets) provided an extra €30 billion capital for Spanish banks. Guru brought up the subject again today in Putting the Stress Tests in Context. Paraphrasing Guru ... Accounting magic and government decree has allowed banks to compute an extra €30 billion in capital for Spanish banks via DTAs. Without that €30 billion, the average Tier 1 capital for Spanish banks would have fallen from 9.1% to 7.1%. More than one bank would have failed the test. Spanish Banks Plow Into Spanish Sovereign Bonds Guru notes "Spanish banks hold Close to €231.519 billion in Spanish bonds, almost twice around the capital of the Spanish banking system." At least six Spanish banks have massive leverage in bonds. Catalunya Banc and NCG are particularly exposed. The entire exercise was another stress-free farce. 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.

What Do Seven Billion People Do? Top 10 Mega-Cities by Population 2014 vs. 2030 Estimate Posted: 26 Oct 2014 11:20 AM PDT Reader Bran who lives in Spain sent some interesting charts of population, expected population growth, the world's largest cites, and what people do for a living. I don't have links for the charts, but most show the origin. Seven Billion People Breakdown 4.30 Billion Work 1.90 Billion too Young to Work 0.43 Billion Unemployed 0.58 Billion 65 or Older Total about 7.2 Billion people Cities With Projected 2030 Population of 10+ Million Top 10 Mega-Cities by Population Anyone have any concerns over these numbers in regards to jobs, food, housing, cost of education,  healthcare costs, or retirement? 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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