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

MUNI BOND OUTFLOWS

RISK REVERSAL

RESIDENTIAL REAL ESTATE - PHASE II

COMMERCIAL REAL ESTATE

2011 will see the largest magnitude of US bank commercial real estate mortgage maturities on record.

2012 should be a top tick record setter for bank CRE maturities looking both backward and forward over the half decade ahead at least.

Will this be an issue for an industry that has been supporting reported earnings growth in part by reduced loan loss reserves over the recent past? In 2010, approximately $250 billion in commercial real estate mortgage maturities occurred. In the next three years we have four times that much paper coming due.

Will CRE woes, (published or unpublished) further restrain private sector credit creation ahead via the commercial banking conduit?

Wiil the regulators force the large banks to show any increase in loan impairment. Again, given the incredible political clout of the financial sector, I doubt it.

We have experienced one of the most robust corporate profit recoveries on record over the last half century. We know reported financial sector earnings are questionable at best, but the regulators will do absolutely nothing to change that.

So once again we find ourselves in a period of Fed sponsored asset appreciation. The thought, of course, being that if stock prices levitate so will consumer confidence. Which, according to Mr. Bernanke will lead to increased spending and a virtuous circle of economic growth. Oh really? The final chart below tells us consumer confidence is not driven by higher stock prices, but by job growth.

9 - CHRONIC UNEMPLOYMENT

There are 3 major inflationary drivers underway.

1- Negative Real Interest Rates Worldwide - with policy makers' reluctant to let their currencies appreciate to market levels. If no-one can devalue against competing currencies then they must devalue against something else. That something is goods, services and assets.

2- Structural Shift by China- to a) Hike Real Wages, b) Slowly appreciate the Currency and c) Increase Interest Rates.

3- Ongoing Corporate Restructuring and Consolidation - placing pricing power increasingly back in the hands of companies as opposed to the consumer.

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.

- In India, January food prices reflected a year-on-year increase of 18%t.

- Buyers must now pay 80%t more in global markets for wheat, a key commodity in the world's food supply, than they did last summer. The poor are especially hard-hit. "We will be dealing with the issue of food inflation for quite a while," analysts with Frankfurt investment firm Lupus Alpha predict.

- Within a year, the price of sugar on the world market has gone up by 25%.

US STOCK MARKET VALUATIONS

WORLD ECONOMIC FORUM

Potential credit demand to meet forecast economic growth to 2020

The study forecast the global stock of loans outstanding from 2010 to 2020, assuming a consensus projection of global
economic growth at 6.3% (nominal) per annum. Three scenarios of credit growth for 2009-2020 were modelled:

• Global leverage decrease. Global credit stock would grow at 5.5% per annum, reaching US$ 196 trillion in 2020. To
meet consensus economic growth under this scenario, equity would need to grow almost twice as fast as GDP.
• Global leverage increase. Global credit stock would grow at 6.6% per annum, reaching US$ 220 trillion in 2020.
Likely deleveraging in currently overheated segments militates against this scenario.
• Flat global leverage. Global credit stock would grow at 6.3% per annum to 2020, tracking GDP growth and reaching
US$ 213 trillion in 2020 – almost double the total in 2009. This scenario, which assumes that modest
deleveraging in developed markets will be offset by credit growth in developing markets, provides the primary credit
growth forecast used in this report.

Will credit growth be sufficient to meet demand?

Rapid growth of both capital markets and bank lending will be required to meet the increased demand for credit – and it is
not assured that either has the required capacity. There are four main challenges.

Low levels of financial development in countries with rapid credit demand growth. Future coldspots may result from the
fact that the highest expected credit demand growth is among countries with relatively low levels of financial access. In
many of these countries, a high proportion of the population is unbanked, and capital markets are relatively undeveloped.

Challenges in meeting new demand for bank lending. By 2020, some US$ 28 trillion of new bank lending will be
required in Asia, excluding Japan (a 265% increase from 2009 lending volumes) – nearly US$ 19 trillion of it in China
alone. The 27 EU countries will require US$ 13 trillion in new bank lending over this period, and the US close to US$
10 trillion. Increased bank lending will grow banks’ balance sheets, and regulators are likely to impose additional capital
requirements on both new and existing assets, creating an additional global capital requirement of around US$ 9 trillion
(Exhibit vi). While large parts of this additional requirement can be satisfied by retained earnings, a significant capital gap in
the system will remain, particularly in Europe.

The need to revitalize securitization markets. Without a revitalization of securitization markets in key markets, it is doubtful
that forecast credit growth is realizable. There is potential for securitization to recover: market participants surveyed by
McKinsey in 2009 expected the securitization market to return to around 50% of its pre-crisis volume within three years.
But to rebuild investor confidence, there will need to be increased price transparency, better data on collateral pools, and
better quality ratings.

The importance of cross-border financing. Asian savers will continue to fund Western consumers and governments:
China and Japan will have large net funding surpluses in 2020 (of US$ 8.5 trillion and US$ 5.7 trillion respectively), while
the US and other Western countries will have significant funding gaps. The implication is that financial systems must
remain global for economies to obtain the required refinancing; “financial protectionism” would lock up liquidity and stifle
growth.

US$ RESERVE CURRENCY

SocGen crafts strategy for China hard-landing

Société Générale fears China has lost control over its red-hot economy and risks lurching from boom to bust over the next year, with major ramifications for the rest of the world.

Société Générale said China's overheating may reach 'peak frenzy' in mid-2011

- The French bank has told clients to hedge against the danger of a blow-off spike in Chinese growth over coming months that will push commodity prices much higher, followed by a sudden reversal as China slams on the brakes. In a report entitled The Dragon which played with Fire, the bank's global team said China had carried out its own version of "quantitative easing", cranking up credit by 20 trillion (£1.9 trillion) or 50pc of GDP over the past two years.

- It has waited too long to drain excess stimulus. "Policy makers are already behind the curve. According to our Taylor Rule analysis, the tightening needed is about 250 basis points," said the report, by Alain Bokobza, Glenn Maguire and Wei Yao.

- The Politiburo may be tempted to put off hard decisions until the leadership transition in 2012 is safe. "The skew of risks is very much for an extended period of overheating, and therefore uncontained inflation," it said. Under the bank's "risk scenario" - a 30pc probability - inflation will hit 10pc by the summer. "This would cause tremendous pain and fuel widespread social discontent," and risks a "pernicious wage-price spiral".

- The bank said overheating may reach "peak frenzy" in mid-2011. Markets will then start to anticipate a hard-landing, which would see non-perfoming loans rise to 20pc (as in early 1990s) and a fall in bank shares of 50pc to 75pc over the following 12 months. "We think growth could slow to 5pc by early 2012, which would be a drama for China. It would be the first hard-landing since 1994 and would destabilise the global economy. It is not our central scenario, but if it happens: commodities won't like it; Asian equities won't like it; and emerging markets won't like it," said Mr Bokobza, head of global asset allocation. However, it may bring down bond yields and lead to better growth in Europe and the US, a mirror image of the recent outperformance by the BRICs (Brazil, Russia, India and China).

- Diana Choyleva from Lombard Street Research said the drop in headline inflation from 5.1pc to 4.6pc in December is meaningless because the regime has resorted to price controls on energy, water, food and other essentials. The regulators pick off those goods rising fastest. The index itself is rejigged, without disclosure. She said inflation is running at 7.6pc on a six-month annualised basis, and the sheer force of money creation will push it higher. "Until China engineers a more substantial tightening, core inflation is set to accelerate.

- The longer growth stays above trend, the worse the necessary downswing. China's violent cycle could be highly destabilising for the world." Charles Dumas, Lombard's global strategist, said the Chinese and emerging market boom may end the same way as the bubble in the 1990s. "The basic strategy of the go-go funds is wrong: they risk losing half their money like last time."

- Société Générale said runaway inflation in China will push gold higher yet, but "take profits before year end".

- The picture is more nuanced for food and industrial commodities. China accounts for 35pc of global use of base metals, 21pc of grains, and 10pc of crude oil. Prices will keep climbing under a soft-landing, a 70pc probability. A hard-landing will set off a "substantial reversal". Copper is "particularly exposed", and might slump from $9,600 a tonne to its average production cost near $4,000. Chinese real estate and energy equities will prosper under a soft-landing,

- The bank likes regional exposure through the Tokyo bourse, which is undervalued but poised to recover as Japan comes out of its deflation trap. If you fear a hard landing, avoid the whole gamut of Chinese equities. It will be clear enough by June which of these two outcomes is baked in the pie.

SocGen crafts strategy for China hard-landing Pritchard

PUBLIC SENTIMENT & CONFIDENCE

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).

Federal Reserve Chairman Ben Bernanke gave his predictions on a House Republican plan to cut $60 billion dollars from the FY 2011 budget, saying it would eliminate 200, 000 jobs and only slightly lower economic growth.

He instead endorsed a Congressional federal deficit reduction plan that would take effect over a five to 10 year period, saying that markets look more towards Congressional action than the actual state of the economy. His remarks came during a House Financial Services Committee hearing in which he delivered his agency's semi-annual monetary report.

Despite Bernanke’s observations, several Republican lawmakers expressed doubt based on past efforts by the Fed and Congress to prompt economic growth through large stimulus packages.

Yesterday, the Fed Chair told the Senate Banking Committee that the U.S. economy will continue to grow this year despite rising oil prices, a high employment rate and weak housing market.

The 1978 Humphrey-Hawkins Act requires the Federal Reserve Board of Governors to deliver a report to Congress twice a year on its past economic policy decisions and discuss recent financial and economic developments.

SOURCE: IMF Chief Strauss-Kahn Charged With Attempted Rape Bloomberg

FACTS

• Charged with a Criminal Sex Act, Attenpted Rape and Unlawful Imprisonment on a New York hotel maid
• Occurred Saturday May 14th against a 32- year-old female at a Sofitel hotel in midtown Manhattan
• The assault occurred about 1 p.m. saturday when the woman entered the $3,000-a-night suite -- Room 2806
• She managed to escape from the room and notified colleagues who called the police
• Strauss-Kahn, who was taken into custody aboard an Air France flight at John F. Kennedy International Airport
• Strauss-Kahn, 62, denied the charges and will plead not guilty
• New York police said Strauss-Kahn doesn’t have diplomatic immunity. The French Foreign Ministry in Paris said the IMF will have to examine what immunity Strauss-Kahn may have.

• This is the second time since he took the helm of the IMF in November 2007 that Strauss-Kahn has faced allegations of misconduct.
  • In 2008, he had a relationship with Piroska Nagy, a female economist at the IMF, who quit in August of that year. An investigation by the IMF board, released in October 2008, concluded that while he had made a “serious error of judgment,” he shouldn’t be fired.
• Other women Strauss has been linked to:
  • -- An unnamed actress who said Strauss acted 'like a gorilla' after inviting her back to a Paris flat
  • -- Tristane Banon, a French journalist, who Strauss allegedly tried to rape, or at least sexually assault in 2002 -- The story comes via the French online citizen media Agora Vox
  • Thierry Ardisson, the host of the show where Banon first made her allegations, later commented: "Everyone knew. I have fourteen female friends who told me 'He tried it with me.' … I think this guy is sick. … He needs to go to rehab." French pundit Sylvie Pierre-Brossolette wrote: "His indiscretions are legendary, but are not reported in the press, because of the French tradition. His taste for the fairer sex has made him take many risks. He was almost sued for harrassment several times."

• Strauss-Kahn had been scheduled to attend a meeting of euro area finance ministers in Brussels tomorrow. The meeting will take place as officials discuss the possible increase of a 110- billion euro ($155-billion) loan package to Greece amid concerns the country may be unable to return to markets to finance its debt next year.

IMF

• For the fund, this is terrible news at a time when its leadership needs to portray stability, wisdom, and confidence
• John Lipsky, the first deputy managing director at the IMF, is in Washington and serving as acting managing director. He is scheduled to step down in August.
• Last month, officials from the Group of 24, which includes Brazil, China and Mexico, repeated a call for “an open, transparent, merit-based process” for choosing the heads of the World Bank and IMF, “without regard to nationality.” The IMF job is traditionally held by a European, while an American leads the World Bank.
• When he arrived, the IMF's emergency lending was $58.7 million in 2006. A record of $91.7 billion last year.
• Strauss-Kahn gained backing from the Group of 20 to triple the IMF’s resources, and the group has over the past two years given the agency a host of new missions to help avoid another crisis.
• Strauss-Kahn played a key role in efforts to stem the European debt crisis which started last year in Greece, with a pledge to contribute about a third of future bailouts in the region by the European Union.

FRENCH POLITICS

• Strauss-Kahn has juggled careers as an economics professor, lawyer and Socialist politician. He holds a law degree and a doctorate in economics from the University of Paris.

• In 1986, he was elected to the National Assembly and served as industry minister from 1991 to 1993. He returned to office as finance minister under Premier Lionel Jospin in 1997. He cut France’s budget deficit to below 3 percent in 1999, the level required for euro membership.

• In November 1999, he resigned as finance minister after magistrates began an investigation into financial irregularities at MNEF, a French student insurance group. The probe covered an allegation that the company had paid him about $100,000 from 1994 to 1996 for legal work on a property deal that he never performed. Strauss-Kahn denied wrongdoing and was cleared by a Paris court in November 2001.

• Strauss-Kahn, a former French finance minister and member of France’s opposition Socialist Party, has consistently been among the most popular possible candidates to contest France’s 2012 presidential election, opinion polls show.

• Strauss-Kahn took the helm of the IMF in November 2007, following his loss in the primaries of the French Socialist Party ahead of the 2007 presidential elections.

• Strauss-Kahn, whose term at the IMF expires next year, has in the past several months declined to say whether he was planning to run for office. The vote will be held in April and May 2012.

• President Nicolas Sarkozy would have trailed Strauss-Kahn by 5 percentage points in the first round of the presidential voting if the election had been held at the end of last month
• Mr Strauss-Kahn has no equal in France’s opposition Socialist party. But now it is almost inconceivable that he will throw his hat into the ring. There have, in any case, always been doubts as to whether socialist voters would pick him as their candidate in the party’s primary election later this year. The risk now is that the party will choose Martine Aubry, standard-bearer of the traditional left, or François Hollande, more pragmatic but lacking in fresh ideas. The socialists badly need to find a candidate with Mr Strauss-Kahn’s intellectual weight and centrist appeal.
• Sarkozy faces party wrath after poll defeats, the centre-right president, his re-election remains anything but certain.
• Recent surveys indicate that the far right’s Marine Le Pen may beat Mr Sarkozy in the election’s first round next April and eliminate him from the two-candidate run-off.
• If one effect of the Strauss-Kahn affair is to enhance Ms Le Pen’s prospects at the expense of mainstream candidates, it will be a black day for democracy in France.

REFERENCE: Tipping Points Audio - Global Insights 

SOURCE: Dominique Strauss-Kahn accused of sex attack on maid Guardian

• Strauss-Kahn is suing a French newspaper that claimed staples of his lifestyle included luxury homes and sought-after works of art. In its report, France Soir also said he had several handmade suits made by Barack Obama's tailor, a claim hotly denied. The tailor, a 75-year-old Frenchman from Marseille, sells suits for between £4,300 and £21,000. Questions over Strauss-Kahn's wealth were raised two weeks ago after he was pictured climbing into a friend's £87,000 Porsche Panamera S outside his £3.5m Paris home alongside his heiress wife.
• Rumours of dangerous liaisons and sexual conquests have had little effect on Strauss-Kahn's chances of occupying the highest office in France, but last night's arrest may alter his future ambitions. Strauss-Kahn was expected to throw his hat into the election ring within weeks. He has been fighting off a very French furore over assertions his tastes are too luxurious to lay claim to the political left.
• Strauss-Kahn is suing a French newspaper that claimed staples of his lifestyle included luxury homes and sought-after works of art.
• In its report, France Soir also said he had several handmade suits made by Barack Obama's tailor, a claim hotly denied. The tailor, a 75-year-old Frenchman from Marseille, sells suits for between £4,300 and £21,000.
• Questions over Strauss-Kahn's wealth were raised two weeks ago after he was pictured climbing into a friend's £87,000 Porsche Panamera S outside his £3.5m Paris home alongside his heiress wife.
• In its report on Thursday, the newspaper said that since Strauss-Kahn and his wealthy wife, Anne Sinclair, had arrived in the US capital for his IMF job in 2007 they had lived a life of luxury. The couple was said to have bought a £2.5m home in the upmarket Washington district of Georgetown.
• Other reports revealed that Strauss-Kahn, who allegedly earns £22,000 net a month, also has a flat in the 16th arrondissement of Paris which was bought for £2.2m in 1990, another flat on the expensive Place des Vosges in the 4th arrondissement bought in 2007 for £3.4m, and a riad in Marrakech.
• Sinclair is the granddaughter of Paul Rosenberg, a celebrated dealer of modern art, and has inherited part of his collection, which is said to include at least one Picasso.

REFERENCE: Tipping Points Audio - Global Insights 

SOURCE: Kicking the Can to the End of the Road John Mauldin

• It is all well and good to kick the can down the road, but what happens when you come to the end of the road? The European answer seems to be to haul in the heavy equipment and extend the road.
• The biggest bubble in history is the bubble of government debt. It is a bubble in a world full of pins.
• The rumors have been flying all this week.
  • GREECE: Greek is going to leave the euro. No, it won’t.
  • GERMANS: Germans are demanding debt restructuring, and then they say no.
  • MEDIA (BANKS): A German newspaper is reporting that the EU, IMF, and Germany want a Greek debt extension, while the ECB (holders of Greek debt) and France oppose it.
  • MARKETS: Greek two-year bonds are now paying 25% if you care to buy them in the open market, which is effectively the market voting for some type of debt restructuring or outright default.
• It is not a matter of pain or no pain; it is a decision as to who will bear the pain.

GREECE

• Both HSBC and Roubini assume there are options that can work to extend the debt maturities, lower the interest rates, and give Greece some room to work out its problems. But the solution to too much debt is not to increase the debt. No country save Britain at the height of its empire has ever recovered from a debt-to-GDP ratio of over 150% without a default. None.
• Roubini writes: “A haircut of 20-50% is required to achieve debt sustainability. To put things into perspective, it is worth considering the magnitude of haircut required to make debt clearly sustainable. For simplicity at this stage, we consider face-value haircuts in our debt sustainability analysis toolkit and find that a haircut of around 20% on the total stock of debt would allow Greece to achieve a debt-to-GDP ratio of 60% by 2030. This assessment is based on the macroeconomic projections in the IMF’s April 2011 WEO; however, more conservative macroeconomic projections suggest a haircut of around 50% could be necessary.”
• MAULDIN - "I think both Greece and the EU would be better off if Greece did default"

IRELAND

• Morgan Kelly is professor of economics at University College Dublin. He is not popular at times with the establishment, as he points out their foibles, but he has a very good track record of being right. He recently wrote a devastating piece for the Irish Times, which has gone viral in Ireland. (http://www.irishtimes.com/newspaper/opinion/2011/0507/1224296372123_pf.html )

  He basically points out that the Irish cannot afford to pay the debts of their banks. He suggests they simply walk away.

• MAULDIN - "Ireland should not bail out their banks. They simply cannot afford to. Tell the EU and British banks to go pound sand. It will mean serious budget cuts; but like Iceland when it rejected baking its banks, it will mean a quick recession and then growth can start again."

KICK THE CAN TO THE END OF THE ROAD

• We are watching the biggest bubble of all time, the bubble of government debt, try to keep from popping. My bet is that it can’t.

• European leaders will continue to try to kick the can down the road. I would not be surprised to see no real “crisis” this year. But there is an Endgame. And I think it involves voters and not just leaders. The guy in the street can see that bailing out countries is really just a back-door way to bail out banks on the backs of taxpayers and the currency.

• In the end, this comes down to elections. It becomes not a matter of high finance and political will on the part of European leaders, but of how you convince the burghers in Germany and the practical Dutch (et al.) of the need to share some Greek pain. It requires convincing the Irish people to assume that bank debt, when they have already told their leaders no. I am glad that is not my job.

REFERENCE: Tipping Points Audio - Global Insights 

SOURCE: Debt crisis intensifying Danske Research

CHINESE GDP

• On balance, the April data released last week suggests that growth in China has finally started to slow,
• Slower growth has for some time been evident in the PMIs but until the April data there had been few signs of slower growth in the hard economic data.
• Industrial production – the most reliable indicator we have for GDP growth – was significantly weaker than expected and dropped 1.6% m/m according to our own seasonally adjusted numbers, albeit this to some degree was payback on relatively strong industrial production in the previous month.
• There was also evidence of weaker growth in the foreign trade data, where China’s import growth has slowed substantially in recent months as can be seen in the chart.
• That said, it was not weakness across the board in April. For example, fixed asset investment was surprisingly resilient in April.

CHINESE INFLATION

• CPI inflation in April eased slightly to 5.3% y/y from 5.4% y/y in the previous month.
• Food price inflation has started to ease a bit, not least because of a drop in vegetable prices (one of the main inflation drivers late last year), but on the other hand core inflation continues to edge higher, albeit it remains relatively muted at just 1.6% y/y.
• However, some of our leading indicators for inflation – such as the price components in the manufacturing PMIs and not least money supply growth – suggest that inflationary pressure has already peaked.
• In our view, the April data is consistent with our view that GDP growth peaked in Q1 and is poised to slow below potential in Q2 and Q3.
• Our view on inflation also remains unchanged: i.e. that inflation will remain elevated around current levels until Q3, when we expect it to start declining substantially.
• The April data does not suggest more aggressive more monetary tightening; if anything, it suggests that the pace of monetary tightening will start to slow. We expect the People’s Bank of China (PBoC) to continue to tighten monetary policy with two additional rate hikes before we expect PBoC to go on hold in Q3.

JAPAN GROWTH

• In Asia, the main event next week is the release of Q1 GDP in Japan.
• We expect GDP to have contracted 1.3% q/q AR following a similar contraction in the previous quarter.
• The main explanation is of course a very weak March in the wake of the earthquake and tsunami on 11 March.
• We expect domestic demand to have been broadly flat in Q1 and foreign trade to have subtracted slightly from growth.
• The biggest drag on growth in Q1 has probably been inventories, which expect to have subtracted close to one percentage point from GDP growth in Q1.
• However, as seen in the chart, the biggest negative impact on GDP growth will be in Q2, where we currently forecast GDP will contract 4-5% q/q AR.

REFERENCE: Tipping Points

SOURCE: Medicare, Social Security Funds Expiring Sooner, U.S. Says Bloomberg

• Medicare, the U.S. health insurance program for the elderly and disabled, and the Social Security trust for the disabled and retirees are running out of money sooner than the government had projected.
• While Medicare won’t have sufficient funds to pay full benefits starting in 2024, five years earlier than last year’s estimate, Social Security’s cash to pay full benefits runs short in 2036, a year sooner than the 2010 projection, the U.S. government said today in an annual report.
• Both forecasts were affected by a slower-than-anticipated economic recovery, the government said.
• The estimates for funding add urgency to talks between Democrats and Republicans on ways to cut spending to reduce the U.S. budget deficit. “Projected long-run program costs for both Medicare and Social Security are not sustainable under currently scheduled financing, and will require legislative corrections if disruptive consequences for beneficiaries and taxpayers are to be avoided,” according to the report summary.
• The 2010 health-care overhaul backed by Democrats extended the life of Medicare, though a greater effort is needed to shore up the program’s long-term funding, Treasury Secretary Timothy Geithner said in a statement distributed with the report. “If we do not do more to contain health-care costs, our commitments will become unsustainable,” said Geithner, managing trustee of Medicare and Social Security, in the statement.
• Debt-Limit Deal When Medicare and Social Security funds run short, they will pay less in benefits rather than stop paying entirely.
• Social Security would have to cut payments by 23 percent, while Medicare would reduce by 10 percent what it pays hospitals and other inpatient care providers.
• Congress is debating potentially sweeping changes in the federal budget as part of a deal to raise the government’s $14.3 trillion debt limit, which the Treasury Department said will be needed by Aug. 2.
• Two groups of lawmakers have held private meetings to negotiate a deficit-reduction plan while President Barack Obama met yesterday with Senate Republicans, a day after meeting with their Democratic counterparts.
• Republicans demanding that the U.S. cut its budget deficit have proposed privatizing Medicare by giving individuals a subsidy to buy coverage from private insurers.
• Lawmakers such as House Budget Committee Chairman Paul Ryan, Republican of Wisconsin, said today’s forecasts were justification for action. “Leadership is required from both sides to ensure that Medicare and Social Security are saved for current seniors and strengthened to meet the need of future generations,” he said. Time To Respond Democrats, who have resisted changes to Social Security, said the trustees’ analysis shows there’s time to respond. “The current situation does not necessitate rushed or severe action,” said Senate Finance Committee Chairman Max Baucus, Democrat of Montana. “We must continue to protect the Social Security benefits our seniors count on.” The Social Security trust fund that finances aid to about 10 million disabled Americans and their dependents will be the first to dry up, with funding scheduled to run out in 2018, according to the trustees.
• The fund, when combined with a separate and much larger trust fund paying benefits to seniors, has enough money to stay solvent until 2036. The new projections partly roll back last year’s trustees analysis, which credited the 2010 health care overhaul with expanding the life of the Medicare trust fund by 12 years.
• Spending Law Social Security law requires program spending to match revenue, so a lack of action by lawmakers by that time will mean benefits will have to be cut 23 percent -- or the Social Security payroll tax increased to 16 percent, or a combination, the report said.
• Congress has never allowed the program’s two trust funds to be depleted. Medicare, to stay solvent for the next 75 years, would have to immediately raise payroll taxes by 24 percent, or cut current benefit payments by 17 percent, Cori Uccello, a senior health fellow with the American Academy of Actuaries in Washington, said in a phone interview.
• The longer the U.S. waits to address the coming shortages in Medicare and Social Security, the more painful it may be, said Uccello.
• A U.S. delay in extending Medicare’s fiscal life may force cuts for current beneficiaries rather than diminishing them for people who enter the program several years from now.

REFERENCE: Tipping Points Audio - Global Insights