TIPPING POINTS

"The moment of critical mass, the threshold, the boiling point"

The tipping point is the critical point in an evolving situation that leads to a new and irreversible development. The term is said to have originated in the field of epidemiology when an infectious disease reaches a point beyond any local ability to control it from spreading more widely. A tipping point is often considered to be a turning point. The term is now used in many fields. Journalists apply it to social phenomena, demographic data, and almost any change that is likely to lead to additional consequences. Marketers see it as a threshold that, once reached, will result in additional sales. In some usage, a tipping point is simply an addition or increment that in itself might not seem extraordinary but that unexpectedly is just the amount of additional change that will lead to a big effect. In the butterfly effect of chaos theory , for example, the small flap of the butterfly's wings that in time leads to unexpected and unpredictable results could be considered a tipping point. However, more often, the effects of reaching a tipping point are more immediately evident. A tipping point may simply occur because a critical mass has been reached.

The Tipping Point: How Little Things Can Make a Big Difference is a book by Malcolm Gladwell, first published by Little Brown in 2000. Gladwell defines a tipping point as "the moment of critical mass, the threshold, the boiling point." The book seeks to explain and describe the "mysterious" sociological changes that mark everyday life. As Gladwell states, "Ideas and products and messages and behaviors spread like viruses do."

The three rules of epidemics

Gladwell describes the "three rules of epidemics" (or the three "agents of change") in the tipping points of epidemics.

• "The Law of the Few", or, as Gladwell states, "The success of any kind of social epidemic is heavily dependent on the involvement of people with a particular and rare set of social gifts."According to Gladwell, economists call this the "80/20 Principle, which is the idea that in any situation roughly 80 percent of the 'work' will be done by 20 percent of the participants." (see Pareto Principle) These people are described in the following ways:

• Connectors are the people who "link us up with the world ... people with a special gift for bringing the world together." They are "a handful of people with a truly extraordinary knack [... for] making friends and acquaintances". He characterizes these individuals as having social networks of over one hundred people. To illustrate, Gladwell cites the following examples: the midnight ride of Paul Revere, Milgram's experiments in the small world problem, the "Six Degrees of Kevin Bacon" trivia game, Dallas businessman Roger Horchow, and Chicagoan Lois Weisberg, a person who understands the concept of the weak tie. Gladwell attributes the social success of Connectors to "their ability to span many different worlds [... as] a function of something intrinsic to their personality, some combination of curiosity, self-confidence, sociability, and energy."

• Mavens are "information specialists", or "people we rely upon to connect us with new information." They accumulate knowledge, especially about the marketplace, and know how to share it with others. Gladwell cites Mark Alpert as a prototypical Maven who is "almost pathologically helpful", further adding, "he can't help himself". In this vein, Alpert himself concedes, "A Maven is someone who wants to solve other people's problems, generally by solving his own". According to Gladwell, Mavens start "word-of-mouth epidemics" due to their knowledge, social skills, and ability to communicate. As Gladwell states, "Mavens are really information brokers, sharing and trading what they know".

• Salesmen are "persuaders", charismatic people with powerful negotiation skills. They tend to have an indefinable trait that goes beyond what they say, which makes others want to agree with them. Gladwell's examples include California businessman Tom Gau and news anchor Peter Jennings, and he cites several studies about the persuasive implications of non-verbal cues, including a headphone nod study (conducted by Gary Wells of the University of Alberta and Richard Petty of the University of Missouri) and William Condon's cultural microrhythms study.

• The Stickiness Factor, the specific content of a message that renders its impact memorable. Popular children's television programs such as Sesame Street and Blue's Clues pioneered the properties of the stickiness factor, thus enhancing the effective retention of the educational content in tandem with its entertainment value.

• The Power of Context: Human behavior is sensitive to and strongly influenced by its environment. As Gladwell says, "Epidemics are sensitive to the conditions and circumstances of the times and places in which they occur." For example, "zero tolerance" efforts to combat minor crimes such as fare-beating and vandalism on the New York subway led to a decline in more violent crimes city-wide. Gladwell describes the bystander effect, and explains how Dunbar's number plays into the tipping point, using Rebecca Wells' novel Divine Secrets of the Ya-Ya Sisterhood, evangelist John Wesley, and the high-tech firm W. L. Gore and Associates. Gladwell also discusses what he dubs the rule of 150, which states that the optimal number of individuals in a society that someone can have real social relationships with is 150.

 

RESEARCH METHODOLOGY

 

PROCESS OF ABSTRACTION

 

 

SOVEREIGN DEBT & CREDIT CRISIS

 

FOOD PRICE PRESSURES

RICE: Abdolreza Abbassian, at the FAO in Rome, says the price of rice, one of the two most critical staples for global food security, remains below the peaks of 2007-08, providing breathing space for 3bn people in poor countries. Rice prices hit $1,050 a tonne in May 2008, but now trade at about $550 a tonne.

WHEAT: The cost of wheat, the other staple critical for global food security, is rising, but has not yet surpassed the highs of 2007-08. US wheat prices peaked at about $450 a tonne in early 2008. They are now trading just under $300 a tonne.

The surge in the FAO food index is principally on the back of rising costs for corn, sugar, vegetable oil and meat, which are less important than rice and wheat for food-insecure countries such as Ethiopia, Bangladesh and Haiti. At the same time, local prices in poor countries have been subdued by good harvests in Africa and Asia.

US STOCK MARKET VALUATIONS

SHRINKING REVENUE GROWTH RATES

PIMCO'S NEW NORMAL: According to PIMCO, the coiners of the term, the new normal is also explained as an environment wherein “the snapshot for ‘consensus expectations’ has shifted: from traditional bell-shaped curves – with a high likelihood mean and thin tails (indicating most economists have similar expectations) – to a much flatter distribution of outcomes with fatter tails (where opinion is divided and expectations vary considerably).” That is to say, the distribution of forecasts has become more uniform (as per Exhibit 1).

 

The Irish Central Bank has crossed the Rubicon in European Union currency terms.  They have printed up about 25% of their GDP in electronic credits, and stuffed those credits into their banks.  These deposits, if you will, do not have new debt issued behind them.

This is a form of hyperinflation if you will, at least in context that a Central Bank, with no actual printing press, or a functioning bond market, has now electronically printed up new currency units for their banks without issuing debt behind these actions.

While this has happened before in history, it has not happened in the Euro currency project officially before today. This act is going to move the monetary policy of the union, to the individual capitals.  The capacity to print electronic credits, with out the creation of cash currency or debt, is a new wrinkle in the economic landscape.

The implications and ramifications will take a while to appear, but “Mark” my words, Germany both as a people, and as a political organization will notice this event.  The German people now find themselves captured in a currency where neighbors who are in political and financial stress, have the capacity to print up German Euros on demand.  This is Germany’s worse nightmare as both a nation and a people.  I dare say, you could not design a more frightening prospect for the “United German States”, than to find their currency diluted on demand by reckless neighbors.

In the coming weeks, and I say that because thing rarely happen quickly in life, Europe is going to have a Sovereign crisis of epic size.  They will have to decide what happens next, and do so rather quickly.

EU politicians have known about Ireland’s decision to print currency for weeks now.  They have had time to consider their response to Ireland’s dilution of the Euro.  I do not expect an initial reaction in the currency markets, as this kind of event takes time to be absorbed by all stakeholders in the Euro.

The Celtic Tiger has made their move and resorted to naked currency printing, to support its banks.  The next move belongs to Europe and it’s going to be interesting to see how this plays out in the public arena’s.  We know who is first, what CB will be second?

 

Today, state and local government debt has reached at an all-time high of 22 percent of U.S. GDP. It is a crisis of catastrophic proportions that is not going away any time soon.

So what is the solution? Well, for state and local politicians from coast to coast, the answer to these financial problems is to impose austerity measures.  Of course they never, ever use the term "austerity measures", but that is exactly what they are.

The following are 22 signs that austerity has already arrived in America and that it is going to be very, very painful....

#1 The financial manager of the Detroit Public Schools, Robert Bobb, has submitted a proposal to close half of all the schools in the city.  His plan envisions class sizes of up to 62 students in the remaining schools.

#2 Detroit Mayor Dave Bing wants to cut off 20 percent of the entire city from police and trash services in order to save money.

#3 Things are so tight in California that Governor Jerry Brown is requiring approximately 48,000 state workers to turn in their government-paid cell phones by June 1st.

#4 New York Governor Andrew Cuomo is proposing to completely eliminate 20 percent of state agencies.

#5 New York City Mayor Michael Bloomberg has closed 20 fire departments at night and is proposing layoffs in every single city agency.

#6 In the state of Illinois, lawmakers recently pushed through a 66 percent increase in the personal income tax rate.

#7 The town of Prichard, Alabama came up with a unique way to battle their budget woes recently.  They simply stopped sending out pension checks to retired workers.  Of course this is a violation of state law, but town officials insist that they just do not have the money.

#8 New Jersey Governor Chris Christie recently purposely skipped a scheduled 3.1 billion dollar payment to that state's pension system.

#9 The state of New Jersey is in such bad shape that they still are facing a $10 billion budget deficit for this year even after cutting a billion dollars from the education budget and laying off thousands of teachers.

#10 Due to a very serious budget shortfall, the city of Newark, New Jersey recently made very significant cuts to the police force.  Subsequently, there has been a very substantial spike in the crime rate.

#11 The city of Camden, New Jersey is "the second most dangerous city in America", but because of a huge budget shortfall they recently felt forced to lay off half of the city police force.

#12 Philadelphia, Baltimore and Sacramento have all instituted "rolling brownouts" during which various city fire stations are shut down on a rotating basis.

#13 In Georgia, the county of Clayton recently eliminated its entire public bus system in order to save 8 million dollars.

#14 Oakland, California Police Chief Anthony Batts has announced that due to severe budget cuts there are a number of crimes that his department will simply not be able to respond to any longer.  The crimes that the Oakland police will no longer be responding to include grand theft, burglary, car wrecks, identity theft and vandalism.

#15 In Connecticut, the governor is asking state legislators to approve the biggest tax increase that the state has seen in two decades.

#16 All across the United States, conditions at many state parks, recreation areas and historic sites are deplorable at best.  Some states have backlogs of repair projects that are now over a billion dollars long.  The following is a quote from a recent MSNBC article about these project backlogs....

More than a dozen states estimate that their backlogs are at least $100 million. Massachusetts and New York's are at least $1 billion. Hawaii officials called park conditions "deplorable" in a December report asking for $50 million per year for five years to tackle a $240 million backlog that covers parks, trails and harbors.

#17 The state of Arizona recently announced that it has decided to stop paying for many types of organ transplants for people enrolled in its Medicaid program.

#18 Not only that, but Arizona is do desperate for money that they have even sold off the state capitol building, the state supreme court building and the legislative chambers.

#19 All over the nation, asphalt roads are actually being ground up and are being replaced with gravel because it is cheaper to maintain.  The state of South Dakota has transformed over 100 miles of asphalt road into gravel over the past year, and 38 out of the 83 counties in the state of Michigan have transformed at least some of their asphalt roads into gravel roads.

#20 The state of Illinois is such a financial disaster zone that it is hard to even describe.  According to 60 Minutes,  the state of Illinois is six months behind on their bill payments.  60 Minutes correspondent Steve Croft asked Illinois state Comptroller Dan Hynes how many people and organizations are waiting to be paid by the state, and this is how Hynes responded....

"It's fair to say that there are tens of thousands if not hundreds of thousands of people waiting to be paid by the state."

#21 The city of Chicago is in such dire straits financially that officials there are actually toying with the idea of setting up a city-owned casino as a way to raise cash.

#22 Michigan Governor Rick Snyder is desperately looking for ways to cut the budget and he says that "hundreds of jurisdictions" in his state could go bankrupt over the next few years.

But everything that you have just read is only the beginning.  Budget shortfalls for our state and local governments are projected to be much worse in the years ahead.

So what is the answer?  Well, our state and local governments are going to have to spend less money.  That means that we are likely to see even more savage budget cutting.

In addition, our state and local politicians are going to feel intense pressure to find ways to "raise revenue".  In fact, we are already starting to see this happen.

According to the National Association of State Budget Officers, over the past couple of years a total of 36 out of the 50 U.S. states have raised taxes or fees of some sort.

So hold on to your wallets, because the politicians are going to be coming after them.

We are entering a time of extreme financial stress in America.  The federal government is broke.  Most of our state and local governments are broke.  Record numbers of Americans are going bankrupt.  Record numbers of Americans are being kicked out of their homes.  Record numbers of Americans are now living in poverty.

The debt-fueled prosperity of the last several decades came at a cost.  We literally mortgaged the future.  Now nothing will ever be the same again.

We see seven main impediments to economic progress in 2011 that will slow real GDP expansion to the 1.5%-2.5% range.

1- Fiscal policy actions are neutral for 2011.

2- State and local sectors will continue to be a drag on the economy and labor markets in 2011.

3- Quantitative Easing round 2 (QE2) will likely produce only a slight economic benefit as the Fed continues to encourage additional leverage in an already over-indebted economy.

4- While consumers boosted economic growth in the second half of 2010 by sharply reducing their personal saving rate, such actions are not sustainable.

5- Expanding inventory investment, the main driver of economic growth since the end of the recession in mid-2009, will be absent in 2011.

6- Housing will continue to be a persistent drag on growth.

7- External economic conditions are likely to retard U.S. exports.