Mish's Global Economic Trend Analysis

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European Border Controls Return; Is the Schengen Free Movement Treaty Dead? Posted: 13 Sep 2015 09:52 PM PDT The Schengen Agreement represents a territory in Europe where the free movement of persons is guaranteed. 26 nations signed the treaty. The signatory nations abolished internal borders in lieu of a single external border. Common rules and procedures apply to visas, asylum requests and border controls. The treaty has been under pressure with a huge wave of migrants pouring into Germany, Sweden, Hungary, Italy, and Greece from Syria and other countries. Last week I noted Denmark Cancels All Trains From Germany. Today, reader Olivier pinged me with this comment "An Austrian rail company spokesman said trains from Austria to Germany have stopped running." Confirmation comes from Spiegel article Stopped Trains from Austria to Germany: Refugee Crisis. Trains were not stopped heading the other direction. "Temporarily" Halted Trains The above train information from http://fahrplan.oebb.at/bin/help.exe/dn?tpl=showmap_external. Border Controls Return Supposedly this is a "temporary" measure until border controls can be reinstated. Olivier offered this opinion: "I am afraid the Schengen Treaty is dead ("lettre morte", as they say in French). Speaking for myself that was one of the more tangible benefits of the European construction. If that is no more, it's one less reason to hang on to the EU." Definition of Temporary Temporary did not last long. A couple hours later the Guardian reported: Germany Reinstates Controls at Austrian Border. Germany introduced border controls on Sunday, and dramatically halted all train traffic with Austria, after the country's regions said they could no longer cope with the overwhelming number of refugees entering the country. Interior minister, Thomas de Maizière, announced the measures after German officials said record numbers of refugees, most of them from Syria, had stretched the system to breaking point. "This step has become necessary," he told a press conference in Berlin, adding it would cause disruption. Asylum seekers must understand "they cannot chose the states where they are seeking protection," he told reporters. All trains between Austria and Bavaria, the principal conduit through which 450,000 refugees have arrived in Germany this year, ceased at 5pm Berlin time. Only EU citizens and others with valid documents would be allowed to pass through Germany's borders, de Maizière said. The decision means that Germany has effectively exited temporarily from the Schengen system. It is likely to lead to chaotic scenes on the Austrian-German border, as tens of thousands of refugees try to enter Germany by any means possible and set up camp next to it. The move comes amid extraordinary scenes at Munich's main train station over the weekend and a growing backlash inside Germany over the decision last week by Merkel, to allow unregistered refugees to enter the country. The numbers exceeded all expectations. On Saturday, 13,015 refugees arrived at the station on trains from Austria. Another 1,400 came on Sunday morning. The city's mayor, Dieter Reiter, said Munich was "full", with its capacities completely exhausted. Some refugees slept on the station concourse on Saturday night. Numbers Exceed All Expectations The only expectations that were exceeded were the expectations of complete economic illiterates. I predicted this well in advance as did anyone else with so much as an ounce of common sense. EC president Jean-Claude Juncker and Keynesian fools who stated immigration would pay for itself are on top of the list of illiterates. The Fence Maizière said Germany had reintroduced border controls for reasons of security but added pointedly that they were also "a signal to Europe". Germany, Austria and France support Juncker's proposal which would see 160,000 asylum seekers shared out across all 28 EU states. The refugees would be allocated to each country on the basis of its size and wealth. There has been implacable opposition from other EU states including Hungary, Slovakia, the Czech Republic, Poland and Romania. On Sunday, the Czech prime minister, Bohuslav Sobotka, said: "I think it is impossible to retreat. Our position is firm." Budapest is racing to complete a fence on its border with Serbia, where 4,330 people crossed on Saturday. On Tuesday, it introduces tough laws which make crossing the border punishable with jail. Greek authorities said on Sunday that 28 people drowned, half of them children, when their wooden smuggling boat capsized in the Aegean sea. The incident happened before dawn off the Greek island of Farmakonisi. The Greek coastguard pulled 68 people out of the water. Another 30 managed to swim to land. The CSU, the Bavarian sister party to Merkel's Christian Democrat CDU, has accused the chancellor of making an "unparalleled historical mistake" in opening Germany's borders. On Sunday, Christoph Hillenband, the president of Upper Bavaria, said the system for dealing with refugees was close to collapse, with 63,000 people arriving in Munich since late August. As I have stated on numerous occasions: "There is an unlimited demand for free services, free food, and free shelter". Recent drownings, passport theft, and passport forgery is proof enough. Upping quotas as Merkel proposes is not the answer, because as we have seen, numbers will easily surpass expectations. 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.

China Announces SOE Shakeup: Too Little Too Late to Matter Posted: 13 Sep 2015 11:00 AM PDT What are SOEs? Who Benefited From Them? SOEs are State Owned Enterprises. The SOEs made millions for the people who controlled them, largely corrupt local politicians along with the politicos friends and associates. The SOEs also created jobs, but did so at huge expense: By taking productive land from farmers, by massive pollution, vacant cities and malls, forced migration, and an untenable reliance on fixed investment growth. Overcapacity is rampant. We now see the effects in steel and cement production, crashing commodity prices, capital flight, and a plunging stock market. China Announces SOE Shakeup As a proposed remedy to this mess, China Plans Shake-Up of State-Owned Enterprises to Boost Growth. China has unveiled the much-awaited guidelines for reform of its bloated state-owned enterprise sector as the latest official data show its economy continuing to slow. The guidance from the State Council, China's cabinet, calls for a shake-up of SOEs with share sales and management changes planned to reduce losses and improve efficiency, reported Xinhua, the official news agency, on Sunday. "The guidelines suggest that by 2020, the goals in all the main reform areas should be accomplished, constituting a system that is more suitable to the nation's socialist-market economy," said Xinhua. "The SOE system should be more modernised and market-oriented. It should make for higher economic vitality, higher control, greater influence and SOEs will be more risk-resistant." China has more than 155,000 SOEs, employing tens of millions of people in all sectors from banks to hotels and airlines to oil refiners. But while the vast majority are managed by local governments, there is a core of more than 100 large nationally strategic groups, including ICBC, the world's biggest bank by assets, and China Mobile, the world's biggest network by subscribers, controlled by Beijing. The State Council said that SOEs would be classified as either playing a social or commercial function, to better integrate them with the market economy. The government will then "actively introduce different investors" and push SOEs for public share sales, although most analysts believe that wholesale privatisations are highly unlikely. Analysts at ANZ argued last week that this round of SOE reform could be a "game-changer" in China's economic development. But they warned that "SOE reform will still be a gradual process" and it is "unlikely that the government will relinquish its tight control and involvement over the SOEs, especially those in strategically important sectors". Game-Changer Not Color me totally unimpressed. This is not a game changer, it is an effort to hide the fact the SOEs are for the most part bankrupt. China would not need to "actively introduce different investors" if the SOEs were solvent corporations. Instead, it's pretty clear China hopes to transfer massive malinvestment losses to the public. China need fools to bail out the system. Classification Shell Game One has to laugh at the notion "SOEs would be classified as either playing a social or commercial function, to better integrate them with the market economy". Really? How the hell is reclassifying businesses as to social or business function going to do anything? Instead, I propose classifying SOEs as viable or nonviable. Next, nonviable businesses should close and viable businesses privatized. My proposal might actually be a game-changer, but it's not going to happen because it would result in an immediate slowdown at expense of the local politicians who do not want to give up the gravy train. Michael Pettis Chimes In I mentally penned the above while reading the article. Towards the end of the article, Michael Pettis at China Financial Markets offered a few similar thoughts. "What China needs to do is transfer wealth from the state to the household sector, for example by lending more to private enterprises and less to SOEs and local governments. But it's tough to do so because it means taking away resources from those that have benefited over the last two or three decades," said Pettis Pettis added "Xi's administration has inherited a country with deep imbalances and enormous amounts of debt. There's no precedent in history for a country resolving those issues without a significant slowdown." China's "Socialist-Market" Goals Hide SOE losses Reform SOEs without privatizing them Prop up the stock market Reduce fixed investment Float the Yuan Manage the range of the Yuan Stop capital flight Not have a slowdown Conflicting Goals China's goals are incompatible with reality. Huge writeoffs are coming on SOE assets, as is a huge slowdown in GDP, if not an outright contraction in growth. The sooner that happens, the better off China will be. China seeks a miracle, but a miracle isn't coming. Instead, expect a strongly renewed witch hunt for scapegoats when growth slows. 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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