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SEPTEMBER 2011: MONTHLY MARKET COMMENTARY -(Subscription Plan II - 30 Pages)
It is now highly likely that the Fed has no intention of introducing QE3 in any recognizable form we are anticipating, given that:
1- The expansion of narrow money so far has led only to a degree of price inflation, without much benefit to asset prices.
2- With the ECB still reluctant to print Euros, QE3 would probably collapse the dollar/euro rate and propel gold considerably higher, placing unwelcome strains on the financial system.
3- The Fed also finds itself having dramatically expanded the monetary base for little economic benefit: against all its expectations, the economy is sliding into recession again. Perhaps it is a case of all the people being no longer fooled all of the time with respect to what QE actually is.
No, another approach is called for. To the Keynesian mind, the obvious alternative must be to expand bank credit, particularly when there is an accumulation of $1.76T of non-borrowed reserves sitting on the Fed’s balance sheet.
MORE>>
SEPTEMBER 2011: GLOBAL MACRO TIPPING POINTS -(Subscription Plan III - 114 Pages)
The EU Summit and the subsequent Merkel-Sarkozy emergency meetings have done little to assure global investors that European banks could withstand a sovereign debt default or potential bond write-downs. Liquidity is quickly evaporating across Europe.Whether the announceda and greatly expanded powers of the EFSF will do the job, time will tell. The global slowdown is becoming much more evident. Additionally, the US Employment-Confidence-Consumption-Growth Cycle is badly deteriorating. MORE>> EXPANDED COVERAGE INCLUDING AUDIO & MONTHLY UPDATE SUMMARY
MARKET ANALYTICS & TECHNO-FUNDAMENTAL ANALYSIS
SEPTEMBER 2011: MARKET ANALYTICS & TECHNICAL ANALYSIS - (Subscription Plan IV - 136 Pages) The market action since March 2009 is a bear market counter rally that has completed a classic ending diagonal pattern. The Bear Market which started in 2000 will resume in full force when the current "ROUNDED TOP" is completed. We presently are in the midst of of a "ROLLING TOP" across all Global Markets. We are seeing broad based weakening analytics and cascading warning signals. This behavior is typically seen during major tops. This is all part of a final topping formation and a long term right shoulder technical construction pattern.MORE>> EXPANDED COVERAGE INCLUDING AUDIO & EXECUTIVE BRIEF
AUGUST 2011: TRIGGER$ BETA RELEASE (NEW BETA TRIAL Subscription Plan V - 36 Pages)
Over the next three months we are BETA testing a NEW subscription offering specifically for TRADERS. It is based on our Professional Market Analytics and Technical Analysis Research which has now been refined for those readers who are specifically Position, Swing or Day Traders.
TRIGGER$ publications combine both Technical Analysis and Fundamental Analysis together offering unique perspectives on the Global Markets. Every month “Gordon T Long Market Research & Analytics” publishes three reports totalling more then 380 pages of detailed Technical Analysis and in depth Fundamentals. If you find our publications TOO detailed, we recommend you consider TRIGGER$ which edited by GoldenPhi offers a ‘distilled’ version in a readable format for use in your daily due diligence. Read and understand what the professionals are reading without having to be a Professional Analyst or Technician.
There is a FREE three month trial subscription available. MORE>>
CURRENCY WARS: EU: A FLAWED FOUNDATION, BUT A BRILLIANT STRATEGY Released May 31st, 2011
It was the perception of getting something of value without any meaningful sacrifice that initially fostered the EU Monetary Union. Though the countries of Europe were fiercely nationalistic they were willing to surrender minor sovereign powers only if it was going to prove advantageous to them. They were certainly unwilling to relinquish sufficient sovereignty to create the requisite political union required for its success. After a decade long trial period it is now time to pay the price for Monetary Union. I suspect that the EU membership is unwilling to do so. Though they likely will see the price as too high to do so, the price to not do so has become even greater. They have unwittingly been trapped by a well crafted strategy. MORE>>
CURRENCY WARS: The Economic Death Spiral Has Been Triggered Released May 27th, 2011
For nearly 30 years we have had two Global Strategies working in a symbiotic fashion that has created a virtuous economic growth spiral. Unfortunately, the economic underpinnings were flawed and as a consequence, the virtuous cycle has ended. It is now in the process of reversing and becoming a vicious downward economic spiral. One of the strategies is the Asian Mercantile Strategy. The other is the US Dollar Reserve Currency Strategy. These two strategies have worked in harmony because they fed off each other, each reinforcing the other. However, today the realities of debt saturation have brought the virtuous spiral to an end. MORE>>
CURRENCY WARS: Debt Saturation & Money Illusion Released April 27th, 2011
Most of the clearly evident financial problems that surround us today stem from one cause - Debt Saturation. Most, intuitively, sense this to be a correct assessment but few can either prove it or articulate it to the less sophisticated. Let me arm you to be the "Nostradamus" amongst your friends and colleagues in explaining the problem and what the future therefore foretells. However, let me make it very clear, this will not make you popular. Smart maybe, but highly likely to make you unwanted at the social gatherings of the genteel. MORE>>
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09/13/2011 4:56 AM
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"BEST OF THE WEEK"
MOST CRITICAL ARTICLES IN THE LAST 7 DAYS - SEPTEMBER PILOT
Market Preview Is Not Pretty - Several records have been set today, from a 92 percent annualized yield on very short-dated (6-month) Greek bonds to the risk spreads on Italian and Spanish CDS (credit default swaps).
Europe Grinds To A Halt -
Eurozone PMI plunged to a two-year low this morning, indicating a worse-than-expected slowdown and triggering declines for the euro on easing expectations.
Manufacturing PMI -- regarded as an early indicator of recession -- fell to 49.0 in August from 50.4 in July, indicating that while GDP is still expanding manufacturing is stalled.
According to Credit Suisse, inventories are at their highest since December 2008, but the lack of demand for goods means that manufacturers will probably have to cut production to reduce overhead in the months ahead. If we regard this orders-to-inventories statistic as an early indicator for manufacturing PMI and ISM, then we're likely to see these numbers slip further over the next few months.
When debt levels turn cancerous - Now we know where the tipping point lies. Debt becomes poisonous once it reaches 80pc to 100pc of GDP for governments, 90pc of GDP for companies, and 85pc of GDP for households. From then on, extra debt chokes growth.
Stephen Cecchetti and his team at the Bank for International Settlements have written the definitive paper rebutting the pied pipers of ever-escalating credit. “The debt problems facing advanced economies are even worse than we thought.”
German Finance Minister Prepares for Possible Greek Bankruptcy - German Finance Minister Wolfgang Schäuble, who is reportedly doubtful that the country can be saved from bankruptcy, is preparing for the possibility of Greek insolvency. Officials in his ministry are currently reviewing scenarios for handling such a situation, exploring what it might mean for the rest of the euro zone. Under the first scenario for a Greek bankruptcy, the country would remain in the euro zone. Under the other, Athens would abandon the common currency and reintroduce the drachma.
Germany pushes Greece to the brink in dangerous brinksmanship - German finance minister Wolfgang Schauble said there will be no more money until Greece "actually does" what it agreed to do. "I understand that there is resistance among the Greek population to austerity measures. But in the end it is up to Greece whether it can fulfil the conditions necessary for membership of the common currency. We offer no discounts," he told Deutschlandfunk. The wording has been taken as a threat to eject Greece from EMU, though is there no legal mechanism for such drastic action.
Dutch finance minister Jan Kees de Jager said the Netherlands "will not participate" in further payments to Greece unless it secures the go-ahead from the EU-IMF Troika, which left Athens abruptly last week after talks broke down
09-10-11
Pritchard
1
Runaway Debts - Doubts Escalate about Greek Rescue Deal - One rarely sees such cut-price offers on the financial markets. If you believe the assurances of European politicians, you can pocket a yield of 76% on Greek bonds due to mature in March.
Finland's Collateral Deal with Greece Off: Ireland
09/02/11
Reuters
1
EU BANKING CRISIS
2
Many Views on a Greek Bond’s Value -
Most European banks have taken write downs to approximate the 21% haircut as per IAS 39.
French banks are rumored that they have not. In fact the
International Accounting Standards Board have notified the French Securities Regulatory about it.
The French Bank Regulators & Government are ignoring it.
French auditors are looking the other way.
French banks are claiming there is insufficient trading. The IASB claim this is absurd and by the way they can’t be no market downs
09-12-11
NY Times
2
The European Central Bank (ECB) abandoned its push for higher interest rates and slashed growth forecasts for the next two years, warning that the situtation is "extraordinarily demanding" and that "downside risks" have intensified.
"The hiking cycle has been aborted," said Carsten Brzeski from ING, adding that rates may even be cut from 1.5pc if the economy worsens and deflations rears its ugly head.
Jennifer McKeown, at Capital Economics, said the ECB will have to cut rates twice over the next six months as the global downturn deepens. The bank raised rates in July even though eurozone growth had already ground to halt, a move widely deemed to be a policy error.
Regulators Poised to Soften New Bank Rules -The move follows complaints from banks that the new Basel III standards on liquidity – the first international rules of their kind – would force them to sharply curtail lending to consumers and businesses.
"It is an open secret that numerous European banks would not survive having to revalue sovereign debt held on the banking book at market levels."
"In recent weeks, the distrust of the financial markets has spread to the banks because they are now suffering from the debt crisis in Europe and have a lot of exposure to, for example, Greek bonds."
"Since the financial crisis, some European banks have lost a third or more of their market capitalization,"
"Most institutions have a rating of "below the book value or at best."
There are three major stress factors crushing Euro banks right now, he says: the debt crisis, structural factors and financial regulation. With them together, it will be hard for the European banks to increase their revenues.
"Many countries and households would have to reduce their debt. The mortgage business and consumer loans were [the few things] driving growth. In addition, there's the problem of shrinking populations in several European countries, which negatively affects the growth of credit markets."
"All this reminds one of the autumn of 2008," said Ackermann. "We should resign ourselves to the fact that the 'new normality' is characterized by volatility and uncertainty."
The implication is that not just Eurozone countries are buckling under the pressure of Greece's, France's, and Italy's debts, but banks are too. It sounds like a desperate call for a bailout.
Now.
recapitalization is not the answer. Ackermann duly shot down the measure suggested by IMF head Christine Lagarde at Jackson Hole.
He said recapitalizing the banks urgently, as Lagarde suggested, would be "counterproductive."
"A forced recapitalization would give the signal that politicians do not themselves believe in the measures" they are negotiating.
IMF sees 200 billion euro capital gap at European banks
09/02/11
Reuters
2
Bank Funding Costs Are Soaring Major banks on both sides of the Atlantic are self-reporting higher and higher interbank USD borrowing rates, meaning that funding is getting more expensive in a hurry.
This graph from ZeroHedge demonstrates a sharp rise in the 3-month USD LIBOR -- a benchmark interest rate for short-term borrowing of U.S. dollars -- over the last two months. Every bank detailed saw an increase in its short-term borrowing costs. Reuters reports that European banks are paying slightly more than the fixed LIBOR rate while U.S. banks slightly less. On the whole, 3-month rates are at their highest since last August.
We keep talking about signs that the funding situation for eurozone banks is going downhill, and this looks like the newest sign that dollars are becoming increasingly expensive. Rising borrowing costs could provoke a credit crunch that would lead to another global slowdown.
09/01/11
BI
2
Watchdog Worried About Europe's Banking Sector - The new powers of the euro bailout fund haven't even been signed off yet by the national parliaments, but there are already calls for its remit to be broadened, causing a fresh headache for Chancellor Angela Merkel.
SOAK THE RICH: Italy Slapping The Wealthy With Brand New Taxes In Austerity Bill -
Italy, as part of its desperate attempt to produce a "credible" budget that will calm the bond vigilantes, has unveiled new features of its austerity plan.
They are:
A higher retirement age for women, starting in 2014.
A new 3% tax on income over 500 EUR.
An increase in the VAT tax by 1%.
A new wealth tax.
Also, a previously announced, the constitution will require a balanced budget going forward.
Analysis: As debt maturities loom, U.S. needs to extend - The United States has the least balanced maturity schedule of any major nation. Over 70 percent of its bonds mature within 5 years, compared with an average 49 percent for the 34 member countries in the OECD.
09/03/11
Reuters
1
U.S. has "enormous" debt problem: ECB's Stark
09/03/11
Reuters
1
As debt maturities loom, U.S. needs to extend
09/02/11
Reuters
1
U.S. has "enormous" debt problem: ECB's Stark - A debt crisis is still gripping the developed world, European Central Bank policymaker Juergen Stark said, adding there was no alternative but for countries to take painful steps to consolidate their public finances.
"The crisis is not over. Not just in Europe is it not over, it is also not over in other regions of the world," he said, adding the United States had an "enormous" debt problem and lacked the structures to get the problem under control.
Stark, a member of the ECB's executive board,
Brazil Slashes Interest Rates on Global Worries - “I think it's a huge mistake. They gave in to political pressure...The central bank is making a bet that it is 2008 all over again but central banks shouldn't be in the business of making bets”
China's Low-Wage Export Engine Starts to Sputter -UBS Economist Jonathan Anderson, a sharp analyst of the Chinese economy, believes he's uncovered a "pretty convincing turning point" in China's development model. For decades, Beijing has relied on super-low wages to win a bigger slice of global exports and help turn a poor country into the world's second largest economy. In the U.S. market, Mr. Anderson says Vietnam, Bangladesh and Indonesia are getting a bigger slice of the clothing and footwear the U.S. imports, while Mexico is picking up market share in furniture.
U.S. Is Set to Sue a Dozen Big Banks Over Mortgages - Bank officials counter that further legal attacks on them will only delay the recovery in the housing market, which remains moribund, hurting the broader economy.
Chris Whalen: Bank Of America Should Declare Bankruptcy His point: Countrywide's bond trusts are worthless, were never properly constructed, and don't protect investors at all. Bank of America is on the hook for all of that, and while its subsidiaries are well capitalized, the parent company is bust. The only thing to do to fix this problem is to unmake $100s of billions worth of bond contracts.
09/07/11
BI
11
World-Wide, Bad News You Can Take to Bank - Analysts from Keefe Bruyette & Woods recently noted a "more conservative sentiment from bank managements as to lack of loan growth, lack of consumer demand, intense competition pressuring [profit] margins and a lack of imminent" mergers and acquisition activity in the banking industry. Most of the industry's recent profit burst came from the release of cash that was set aside to cover bad loans. Such releases don't represent actual business growth. Loss-reserve releases have generated roughly one-third of pretax earnings at the top 10 U.S. commercial banks over the past 18 months, according to an analysis by The Wall Street Journal. Meanwhile, the industry's quarterly revenue fell below year-earlier levels in the second quarter for the second quarter in a row—the first time that has happened in the nearly three decades the FDIC has kept track.
09/06/11
WSJ
11
Fresh Scrutiny of BofA - U.S. regulators have pushed Bank of America to show what measures it could take if conditions worsen for the lender, according to people familiar with the situation.
09/02/11
WSJ
11
Banks Face Suits on Mortgage Bond Losses - The federal regulator for mortgage giants Fannie Mae and Freddie Mac is preparing to sue some of the nation's largest banks over soured mortgage bonds in a bid to recoup billions of dollars in losses from the failed investments.
09/02/11
WSJ
11
Pockets of Debt Illiquidity Show Rising Bank Fears - Large money funds have been pulling back on making unsecured loans to European banks, and instead moving to secured transactions. This has left the banks scrambling for dollar-based funding and, in one rare case, led a bank to tap a liquidity line at the European Central Bank.
Three-month interbank dollar lending rates also rose again on Tuesday to their highest in over a year.
In some recent cases illiquidity in the corporate debt market has also led investors to credit default swaps for protection as selling the bonds was too costly.
Hidden In The Jobs Report: 15.4 Million Missing Jobs -
41.8% of the working-age people in the U.S. don't have jobs, as opposed to 35.3% in the year 2000. To convert this percentage into real people: Since the working-age population in the U.S. these days is 238 million people, a decline of 6.5% in participation represents 15.4 million jobs.
There are no green shoots or improvements or recoveries in sight. It's a structural issue. Every time a U.S. company outsources production or services to entities overseas, or buys from foreign suppliers when it used to buy from domestic suppliers, it removes more jobs.
A superb example—not only because of its majestic physical aspect but also because of its economic impact—is the new San Francisco Bay Bridge, the most expensive single structure in the U.S. Incredibly, its most prominent segment was built in China.
These jobs gone offshore will continue to drag down our economy, and no amount of money-printing by the Fed and no amount of hope-mongering by the White House and no amount of deficit-spending by Congress are going to change that. Only one thing will: A collective corporate decision to reverse the trend of off-shoring production and services. Because, mathematically, you can't grow an economy by removing jobs.
If You Missed Obama's Speech Yesterday, This Is The One Paragraph You Should -
"That’s why we chose Detroit as one of the cities that we’re helping revitalize in our “Strong Cities, Strong Communities” initiative. We’re teaming up with everybody -- mayors, local officials, you name it -- boosting economic development, rebuilding your communities the best way, which is a way that involves you. Because despite all that’s changed here, and all the work that lies ahead, this is still a city where men clocked into factories. This is the city that built the greatest middle class the world has ever known. This is the city where women rolled up their sleeves and helped build an arsenal for democracy to free the world. This is a city where the great American industry has come back to life and the industries of tomorrow are taking root. This is a city where people, brave and bold, courageous and clever, are dreaming up ways to prove the skeptics wrong and write the next proud chapter in our history."
Infrastructure Likely Part of Obama Jobs Push - President Barack Obama signaled Monday he'll propose a major infrastructure program and an extension of a payroll tax break in the jobs speech he planned to deliver Thursday before a joint session of Congress.
The Hard Truth About Easy Money - From my perch, that point in time is soon approaching when investors will begin to more seriously struggle with the realization that more monetary easing (and cowbell) will fail to produce more meaningful economic growth prospects around the world.
09/03/11
TheStreet
The Last QE - The Fed will destroy itself with QE 3.0. It could also destroy the dollar, the US economy, the US political system and the remaining fabric of American uniqueness and greatness – so some academics can try to prove that their life’s’ work is right…Perry will be elated with QE 3.0!!! If we were the Fed, we would continue to play the Street and promise, but not deliver, QE 3.0 because there are still enough hope & hypesters to push stocks higher and keep jigginess glowing.
Central bank flight to Federal Reserve safety tops Lehman crisis - Central banks and official bodies have parked record sums of dollars at the US Federal Reserve for safe-keeping, indicating a clear loss of trust in commercial banks.
Data from the St Louis Fed shows that reserve funds from "official foreign accounts" have doubled since the start of the year, with a dramatic surge since the end of July when the eurozone debt crisis spread to Italy and Spain.
"This shows a pervasive loss of confidence in the European banking system," said Simon Ward from Henderson Global Investors. "Central banks are worried about the security of their deposits so they are placing the money with the Fed."
Capital Controls by Any Other Name - The embrace of ad hoc capital controls to address temporary market inefficiencies on a case-by-case basis, while pragmatic, perpetuates the view that each capital crisis is an isolated example of failed financial institutions.
Popping the gold bubble theory - It recently occurred to me that virtually no one who recognized the tech-stock and/or real-estate bubble now says that gold is a bubble
China punters sway gold market - “Contrary to what many people think, it is not unthinkable that...mainland punters may emerge as a dominant factor on the international gold market”
Bullish Sentiment Up Again - According to AAII's weekly poll of investor sentiment, bullish sentiment rose to 38.62% in the latest week. This now represents the fourth straight week where bullish sentiment has improved. It's hard to believe, but since S&P downgraded the AAA debt rating of the United States on August 5th, bullish sentiment has done nothing but go up.
09/02/11
BeSpoke
Investors slash equities in August melt: Reuters poll
The Divergence Between Corporate Profits And GDP Growth Is Totally Unsustainable -
"Typically at this stage of the cycle, cost cutting gives way to an acceleration in employment gains. Margins contract, but consumer demand rises and the impact on the bottom line is cushioned by faster revenue growth. In this cycle, it is not obvious that this normal mechanism will catch on. If it does not, the cycle is at risk of being choked.
...With nominal GDP growth expected to average around 3.7% in the next two years… this means that profit growth is likely to settle down in low single digits. Any margin contraction – even a modest one – could push non-financial profits into negative territory."
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"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 ChicagoanLois 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 anchorPeter 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, evangelistJohn 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
Inverted chart of 30-year Treasury yields courtesy of Doug Short and Chris Kimble. As you can see, yields are at a "support" area that's held for 17 years.
If it breaks down (i.e., yields break out) watch out!
The state budget crisis will continue next year, and it could be worse than ever. That's part of what's freaking out muni investors, who last week dumped them like they haven't in ages.
States face a $112.3 billion gap for next year, according to the Center on Budget and Policy Priorities. If the shortfall grows during the year -- as it does in most years -- FY2012 will approach the record $191 billion gap of 2010. Remember, with each successive shortfall state budgets have become more bare.
Things could be especially bad if House Republicans push through a plan to cut off non-security discretionary funding for states, opening an additional $32 billion gap.
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.
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.
