Mish's Global Economic Trend Analysis

Delinquencies and Defaults in Spain Hit 13%, a 50-Year Record
Obama's Message On NSA Translated
Greece Will Default in May Without Another Bailout or Change in Terms
Canada Housing Bubble: Far Too Late for Warnings; Rule of Predictions

Delinquencies and Defaults in Spain Hit 13%, a 50-Year Record

Posted: 17 Jan 2014 06:23 PM PST

Looking for evidence of a recovery in Spain? So am I, but I sure don't see any.

Via translation from La Vanguardia, please consider Bank Defaults Hit Record 13% in November.

Delinquency ratio of banks, savings banks, cooperatives and credit institutions operating in Spain rose again in November to 13.08%, a level not seen since the data began to be collected, over 50 years.

According to provisional data for November released today by the Bank of Spain, the Spanish financial system stand together a volume of overdue loans of 192.504 billion euros, compared to 190.971 billion in October, largely due to the economic crisis and high unemployment.

Compared to November 2012 the total volume of loans in November declined by nearly 212 billion, due in large part to deleveraging holding families and Spanish companies.

Although the Bank of Spain does not break default rates by type of institutions with the exception of the EFC, the rest (banks, savings banks and cooperatives) recorded a volume of bad loans of 187.039 billion euros, compared to 185.439 billion of previous month.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Obama's Message On NSA Translated

Posted: 17 Jan 2014 12:12 PM PST

Earlier today, President Obama gave a long-awaited and long-winded speech on the NSA. The Washington Post has the transcript.

Here are my thoughts:

Obama says we need more "balance" between security and liberty. The president would "not dwell on Mr. Snowden's actions or his motivations".

I will. Edward Snowden is a national hero who should be given immunity from prosecution and welcomed back to the US.

Instead of praising Snowden, the president says "the sensational way in which these disclosures have come out has often shed more heat than light, while revealing methods to our adversaries that could impact our operations in ways that we might not fully understand for years to come."

I suggest the revelations by Snowden shed an immense amount of light into the downright scary surveillance tactics of the NSA.

Obama says "I consulted with the Privacy and Civil Liberties Oversight Board, created by Congress. I've listened to foreign partners, privacy advocates and industry leaders. My administration has spent countless hours considering how to approach intelligence in this era of diffuse threats and technological revolution."

That's completely believable. However, Obama failed to say "But heck, the discussion was meaningless, because I did what I wanted in the first place."

Obama promised "reformed procedures" and "greater transparency to protect privacy".

And here's a humorous statement: "I've made clear to the intelligence community that unless there is a compelling national security purpose, we will not monitor the communications of heads of state and government of our close friends and allies."

In short, we will not monitor communications of foreign leaders unless we will. How comforting.

I can sum up President Obama's entire speech up in a simple easy to understand graphic courtesy of reader "California Banker".

"Trust Me!" (Just as you did with Obamacare).

I promise "Change You Can Believe In!" (You can believe all you want, but there won't be any changes).

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Greece Will Default in May Without Another Bailout or Change in Terms

Posted: 17 Jan 2014 10:49 AM PST

Cash flow analysis shows Greece is in serious trouble again in spite of having a current account surplus.

Specifically, Greece needs a change in payback terms or another bailout or it will default in August, if not May. I use the words "will default" imprecisely.

The only way Greece is making loan payments now is with money from the Troika.

The scam works like this: bailout money is allegedly given to Greece, but Greece cannot really touch it. Instead the money goes right back to the Troika for interest and capital payments, with perhaps a miniscule portion finally getting to Greece.

Realistically, Greece defaults on every payment already.

Greece Bailout Cash Flow

Even this game is in trouble now as Greek Cash Flow Charts show.

Just two days before New year 2014, Antonis Samaras told his People that Greece would leave its bailout programme next year without needing a third aid package. "In 2014 we will make the big step of exiting the loan agreement," said the Greek PM in a nationally televised address. "In 2014, Greece will venture out to the markets again [and] start becoming a normal country… There will be no need for new loans and new bailout agreements".

But figures obtained by The Slog show he lied.

Mr Samaras told the Greeks during October that debt relief would come by Christmas. It didn't. He is now suggesting there is no budget shortfall. There is.

He says the much-trumpeted €800m surplus obtained last year will help solve the problem. It won't.

The total payments due in 2014 are €31.6bn. The total loan funds available to meet that sum are €17.5bn. €0.8bn of Greek surplus doesn't even make a dent in it.

This second chart highlights when the inevitable shortage will become a default issue:

On 20th and 21st of the month, three whopping capital and interest payments become due. The largest of these – a €5.2bn sum – is also at a floating rate, and so could be bigger if confidence fails in the meantime. The funding gap to avoid default here is almost as big as that one sum due – at €4.7bn.

With that help available (and no yield rises) Athens could limp through to Q3. But then on 20th August things go badly pear-shaped again, when two further biggies hit the due date. The funding gap here is €5.6bn. Even if the Troika allowed Greece to bring the Q4 support forward, the gap would still be €3.8bn.

So in the very best, most optimistic scenario, Antonis Samaras needs €8.5bn in fiscal surpluses, and he needs them over the next 16 weeks.

The major point of the primary current account surplus is that Greece now obtains as much in tax revenues as it needs to finance current debt (not counting interest and debt repayments to the Troika).

If Greece can remain in a state of surplus, it can tell the Troika to go to hell, declare the bailout debt null and void, and shed its onerous debt burden. I suggest Greece should do just that.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Canada Housing Bubble: Far Too Late for Warnings; Rule of Predictions

Posted: 17 Jan 2014 12:35 AM PST

A recent parade of articles discusses the prospects of a pending Canadian housing bust. For example, The Globe and Mail reports Bank CEOs 'should be worried' about real estate.

Ed Clark, Toronto-Dominion Bank's outspoken chief executive officer, is playing the contrarian card one more time, publicly arguing that he and his fellow bank CEOs should be cautious about the country's heated real estate market.

While he isn't worried about a full-blown bust, Mr. Clark believes chief executives simply can't ignore warning signs in the market – particularly the sudden run up in prices for real estate of all stripes. "If you run a bank, you should be worried about it," he told the audience at a bank conference in Toronto.

The only thing I am confused about is why Ed Clark isn't concerned about a "full-blown bust".

Pater Tenebrarum at the Acting Man blog notes Carney's Legacy: Canada's Credit and Housing Bubble.

Tenebrarum quickly asks "How Long Before it Bursts?"

Energizer Bunny

Over the course of the past five years, every time I thought a major Canadian housing correction was coming, none did.

Canadian housing has been like the "Energizer Bunny", going and going and going. Nonetheless the housing bust calls keep on coming.

Short Notice

The Financial Times reports Canada housing: On short notice.

In the past five years, while other big developed economies have been suffering through the financial crisis, the average Canadian home price has risen 38 per cent to C$389,119 (US$355,000), according to data from the Canadian Real Estate Association. This has been driven in part by Toronto, where a condominium boom has driven prices to record highs.

At the same time, Canadian households have been on a debt binge fuelled by easy bank lending, low interest rates and government-insured mortgages. The household debt-to-income ratio rose to a record 163.7 per cent in the third quarter, close to the US peak of about 165 per cent on an adjusted basis.

Many of the investors and economists sounding the alarm about Canada's housing market are veterans of the US subprime crisis. They include Mr Hanson, the analyst, Steve Eisman, an investor, and Nouriel Roubini and Robert Shiller, the economists. Whether they will be right a second time is the source of a heated debate on both sides of the border.

While some of the bigger hedge funds are choosing to stay on the sidelines, Canada, and to a greater extent Australia, are top of the watch list.

"Once you start to see [Canadian] banks showing credit deterioration they'll all pile in," says Mr Eisman, founder of Emrys Partners and noted for his role in forecasting the US subprime crisis in Michael Lewis's book The Big Short.

The Canadian government is playing an important role in the mortgage boom. The government encourages banks to insure mortgages with more than an 80 per cent loan-to-value ratio with the national housing agency, meaning that mortgages with 20 per cent deposits and under are counted as close to sovereign risk.

"The vast majority of the mortgage book is insured by the government. This naturally protects the banking system but it does create a big taxpayer liability," says Craig Alexander, chief economist at TD Bank, the country's second-biggest bank.

"If you had large-scale losses and that insurance came into effect it would end up with the Canadian taxpayer."

Banks have piled into housing, racking up hundreds of billions of dollars in mortgage loans, a large portion of which are backed by the government through the Canada Mortgage and Housing Corporation. Consumer lending helped the banks to report record earnings in 2013.

The federal government is also guaranteeing up to 90 per cent on claims in the case of insolvency of private insurers in an effort to level the playing field between the private sector and the national housing agency.

This year, Canada imposed a "risk fee" on mortgage insurance provided by the country's housing agency, to compensate taxpayers for potential losses.

Despite the government's measures, Toronto's cranes and surging skyline tell a different story. But even those in the hedge fund industry know that betting on a Canadian housing collapse is not a sure thing.

"For every Eisman or [John] Paulson, there's someone that went out of business for shorting subprime too early," says Mr Daniels.

Rule of Predictions

No one knows for sure precisely when any bubble will burst. I got the US housing bubble correct but missed Canada by a mile.

I got the 2007 stock market bubble on the nose, but on this go around called a top on February 3, 2013: Extreme Sentiment: Barron's Cover "Get Ready for Record Dow - We Told You So"; Top Call.

Here is the cardinal rule of predictions: Make enough calls and sooner or later you are going to look ridiculous. Even those who get things correct often look ridiculous at intermediate stages.

I discussed a prime example of getting the call perfect but looking ridiculous along the way in Bubble Valuation Blues; GMO 7-Year Outlook for U.S. Stocks is Negative.

Leverage Works Both Ways

Make a play on major macro calls too early with leverage and you are wiped out. Had Paulson been a year early, he would have been fried to a crisp and we probably would never have heard about him.

In general, you only hear about the successes, never the failures.

The safest thing to do with bubbles is avoid investing in them at all, either way. There is no rule that says "one has to play the game".

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Mish's Global Economic Trend Analysis

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