Mish's Global Economic Trend Analysis

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• Gmail Dead in China, All Google Products Blocked; Reserve Currency Silliness Review
• Snap Elections in Greece; 3-Year Bond Yield Tops 12%; Potential Cascade! Who Has the Upper Hand?
• China's Zombie Factories Provide Illusion of Work and Prosperity; Rebalancing Chinese Style

Gmail Dead in China, All Google Products Blocked; Reserve Currency Silliness Review Posted: 29 Dec 2014 12:43 PM PST Access to Gmail in China was difficult, but not impossible. Workarounds included Outlook, Apple Mail, and third-party Gmail hosts. Starting last Friday, the "Great Firewall" became nearly impenetrable as China's Censors Took Final Step in Blocking Gmail. In the six months since Google's mail service Gmail was blocked in mainland China, users had been able to access it using third-party email applications such as Microsoft Outlook or Apple Mail. Beijing now appears to have closed the loophole, completely shutting down access to Gmail behind the so-called Great Firewall. Google data showed Gmail appeared to have been walled off starting Friday. Google spokesman Taj Meadows acknowledged the drop in traffic and said Monday that "there's nothing wrong on our end." Google clashed with Beijing in 2010 after the company decided to stop censoring its Internet search results in China. Google shifted most of its Chinese operations to Hong Kong as a result, and it has been hard since then to access the company's services on the mainland. As with Google search functions, Gmail users will now have to access the application through virtual private networks or other censorship circumvention channels, putting the email service on par with Facebook and Twitter in the eyes of Beijing censors. Reserve Currency Silliness China has no sizable bond market, no floating currency, few political freedoms, no freedom of speech, massive censorship, and questionable property rights, yet every week I see some article promoting the idea that the yuan will soon replace the dollar as world's reserve currency. The idea is laughable. Lack of a bond market in sufficient size is enough to kill the notion. 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.

Snap Elections in Greece; 3-Year Bond Yield Tops 12%; Potential Cascade! Who Has the Upper Hand? Posted: 29 Dec 2014 10:18 AM PST Despite fearmongering by Greek prime minister and the EU, prime minister Antonis Samaras fell 12 votes short of a needed majority to elect a new Greek President. As a result, snap elections will be held on January 25. Stavros Dimas, a former EU commissioner, captured 168 votes in Monday's decisive third presidential ballot,12 short of the required three-fifths majority after a weekend of frantic backroom politicking failed to round up additional votes from independent lawmakers and small opposition parties. A sombre-looking Mr Samaras said in a televised statement: "It's time for voters to do what parliament couldn't — end uncertainty and restore stability so that we can continue with reforms and make a decisive exit from the bailout." "Be optimistic and cheerful, austerity will soon be over," said Alexis Tsipras, Syriza's firebrand leader, as he left parliament after the vote. "The Samaras government which looted society and decided to take further austerity measures is finished." Along with the IMF and the European Commission, the ECB played a key role in overseeing the four year €245bn bailout of Greece. "The ECB holds the key," said Greek finance minister Gikas Hardouvelis in an interview with Greece's To Vima newspaper on Sunday. He added: "This key can easily and abruptly turn off bank funding and strangle the Greek economy in a split second." Commenting on Monday's vote, Wolfgang Schäuble, Germany's finance minister, said in a statement: "We want to give Greece further support on its path of reform, helping it to help itself. If Greece chooses another way, it will be difficult. New elections will not change any of the agreements made with the Greek government. Any new government must keep to the contractual agreements of its predecessor." Opinion polls at the weekend gave Syriza a lead of 3-4 percentage points over Mr Samaras's centre-right New Democracy party, but pollsters say it is unclear whether this would be sufficient to ensure an outright majority at election. Yields Soar Greek stock and bond markets reacted with disapproval. The Athens stock market fell about 10% and Yield on the 3-year note sailed above 12%. On August 24, yield on the 3-Year note fell to an absurdly low 3.14%. Today it sits at 12.15%.  Potential Cascade to Spain, Italy To prevent default on  €50 billion or so of Greek bonds, the Troika gave Greece a €245 billion bailout, a sum that will be impossible for Greece to ever pay back. Yet, German finance minister Wolfgang Schäuble insists "new elections will not change any of the agreements made with the Greek government." Either Germany changes its tune, or Greece may default on  €245 billion. The following table shows what may happen. Eurozone Financial Stability Contribution Weights Country Guarantee Commitments (EUR) Millions Percentage Austria € 21,639.19 2.78% Belgium € 27,031.99 3.47% Cyprus € 1,525.68 0.20% Estonia € 1,994.86 0.26% Finland € 13,974.03 1.79% France € 158,487.53 20.32% Germany € 211,045.90 27.06% Greece € 21,897.74 2.81% Ireland € 12,378.15 1.59% Italy € 139,267.81 17.86% Luxembourg € 1,946.94 0.25% Malta € 704.33 0.09% Netherlands € 44,446.32 5.70% Portugal € 19,507.26 2.50% Slovakia € 7,727.57 0.99% Slovenia € 3,664.30 0.47% Spain € 92,543.56 11.87% Eurozone 17 € 779,783.14 100% The above table from European Financial Stability Facility Who Has the Upper Hand? Supposedly, Greece is responsible for 2.81% of its own default, quite illogical to say the least. Its portion would have to be spread out accordingly. Spain's portion of a Greek default (not counting the extra spread) would be  would be 11.87%. Where is Spain supposed to get €29 billion or Italy €44 billion? Yes, the IMF and EU could ruin Greece. But if Greece wants to play hardball, it actually has the upper hand. One way or another, sooner or later, a significant portion of that €245 billion bailout (not of Greece, but of bondholders) will not be paid back. 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.

China's Zombie Factories Provide Illusion of Work and Prosperity; Rebalancing Chinese Style Posted: 28 Dec 2014 11:41 PM PST China has zombie malls and even zombie cities, so zombie factories can hardly be a surprise. And as the malinvestments pile up, so do unrealized shadow bank losses. The Financial Times reports China Zombie Factories Kept Open to Give Illusion of Prosperity. In the shadow of a group of enormous smokestacks and abandoned foundries, a peeling sign welcomes visitors to the Wenxi Steel Industrial Park. Highsee stopped paying its 10,000 employees six months ago. Local officials estimate the plant supported indirectly the livelihood of about a quarter of Wenxi county's population of 400,000. Highsee was the biggest privately owned steel mill in Shanxi, accounting for 60 per cent of Wenxi's tax revenues. For those reasons, the local government was reluctant to allow the company to go out of business, even though it had been in serious financial difficulties for several years. "By 2011 Highsee was already like a dead centipede that hadn't yet frozen stiff with rigor mortis," says one official who asks not to be named because he was not authorised to speak to foreign reporters. "More than half the plant shut down, but it was still producing steel even though its suppliers wouldn't deliver anything without cash up front and it was drowning in debt." In the past month alone Chinese media have reported on at least nine large steel mills that appeared to be suspended in limbo after halting production but which are forbidden from going formally bankrupt. "There are large numbers of companies across China that should go bankrupt but haven't done so," says Han Chuanhua, a bankruptcy lawyer at Zhongzi Law Office, a Beijing legal practice. "The government doesn't want to see bankruptcy because as soon as companies go bust, unemployment spikes and tax revenues disappear. By stopping companies from going bankrupt, officials are able to maintain the illusion of local prosperity, economic growth and stable taxes." The outstanding volume of non-performing loans in the Chinese banking sector has increased 50 per cent since the beginning of 2013, according to estimates from ANZ, the Australian bank, but the sector-wide NPL ratio remains extremely low, at just over 1.2 per cent. In private, however, senior Chinese financial officials admit the real ratio is almost certainly much higher, obscured by local governments trying to prop up companies. Rebalancing Chinese Style As part of China's rebalancing effort, growth must slow (or an even bigger crash will come later), and shadow banking losses recognized. So far, all we see is the slowdown in growth. Even then, China recently cut interest rates hoping to keep the illusion alive (as some might see it), or smooth the transition (as others might see it). Regardless how one sees it, these closures are at the back end of a collapse in commodity prices as China moves from an investment (malinvestment) driven pattern of growth, to a consumer-driven pattern of growth. The transition will not be easy. The SOEs (state-owned-enterprises), the regional governments, and all those who got wealthy from the prior boom will not let go easily. Nor it seems will the central government. Failure to recognize absurdly high deposit rates are proof enough. For a look at unsound deposit rates, please see Chinese Banks Hemorrhaging Deposits, 1st Quarterly Drop Since 1999; Banks Offer iPhones, Even Cars for Large Deposits. For more on rebalancing implication, please see Pettis on Strains in China's Banking System; Avoiding the Fall. 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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