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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 $1.76T of non-borrowed reserves sitting on the Fed’s balance sheet.
MORE>>
OCTOBER 2011: GLOBAL MACRO TIPPING POINTS -(Subscription Plan III - 118 Pages)
Liquidity is quickly evaporating across Europe. The global slowdown we have been waring about has now become clearly evident. The initial EU bailouts are now being found to insufficent because of slow austerity implementatiosn and rapidly de-accelerating economic conditions. Despite rumors of dramatic increases in the firepower of the EFSF and the IMF, nothing yet has happened. The markets will now call the politicos bluff - The end of 'kicking-the-can-down the-road' is fast approaching. Expect a coordinated global response by Central Bankers and G20 finance ministers. Do not be fooled. It will not be a solution but simply one last desperate attemtp to 'kick the can' again. The best we can expect is a year end rally that will fai miserably in the new year. MORE>> EXPANDED COVERAGE INCLUDING AUDIO & MONTHLY UPDATE SUMMARY
MARKET ANALYTICS & TECHNO-FUNDAMENTAL ANALYSIS
SEPTEMBER 2011: MARKET ANALYTICS & TECHNICAL ANALYSIS - (Subscription Plan IV - 136 Pages) The market action since March 2009 is a bear market counter rally that has completed a classic ending diagonal pattern. The Bear Market which started in 2000 will resume in full force when the current "ROUNDED TOP" is completed. We presently are in the midst of of a "ROLLING TOP" across all Global Markets. We are seeing broad based weakening analytics and cascading warning signals. This behavior is typically seen during major tops. This is all part of a final topping formation and a long term right shoulder technical construction pattern.MORE>> EXPANDED COVERAGE INCLUDING AUDIO & EXECUTIVE BRIEF
AUGUST 2011: TRIGGER$ 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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"BEST OF THE MONTH "
MOST CRITICAL TIPPING POINT ARTICLES THIS MONTH - OCTOBER 2011
Morgan Stanley CDS Soar - The market, just sent MS' CDS up to the widest since 10/13/08 having only traded wider than this level from 9/16/08 to 10/13/08. Critically for those looking at CDS not being as bad as during the peak of the crisis and gaining comfort from that - CDS did not trade gently to those extremes - it gapped unmercifully wider with incredible day to day volatility. Furthermore, for those talking about how illiquid CDS are and easily manipulated, we remind them that it is bonds that cracked first (a much more broadly owned and traded set of instruments) and only very recently has CDS started to catch up to the wide/risky levels at which bonds trade.
10/04/11
Zero Hedge
11
Egan-Jones Downgrades Morgan Stanley From A+ To A, Negative OutlookSynopsis: Questions about MS's French bank exposure and level of derivatives exposure. While June results were good, MS' French bank exposure (all asset and off balance sheet classes except derivatives) is estimated at $39B (57% of equity of $68B and 150% of market cap of $26B) of which interbank placements is believed to be a small component. These exposures are significant and unusually large as a percentage of capital. Of equal concern is the estimated $1.78T in notional value of CDS' on MS' books although EJR does acknowledge the netting effect (the net estimated exposure is $457M). The US is likely to provide MS additional support if needed, despite wind-down procedures contained in Dodd Frank. We are downgrading with a neg outlook.
10/04/11
Zero Hedge
11
Morgan Stanley Takes Hits - Concern Over European Exposure Produces Volatile Month - The concern with Morgan Stanley stems from its small size relative to other global financial firms and its reliance on debt markets, rather than customer deposits, to fund its business.
As jitters about potential European debt defaults grow, investors are steering clear of bank stocks that might be dragged down as collateral damage if conditions in Europe worsen.
Morgan Stanley feels the concern more acutely because it is a big player in derivatives, risky opaque contracts that can often backfire on a bank if its risk management doesn't limit losses. The firm still is a big player in derivatives. Recent data from the Office of the Comptroller of the Currency showed Morgan Stanley had derivatives contracts with a total notional value of $56 trillion at the end of June. While that number exaggerates the total amount at risk, Morgan's figures exceed the total notional amounts at Citigroup and Goldman Sachs Group Inc. J.P. Morgan Chase & Co. and Bank of America were still well ahead of Morgan Stanley, which had the third- largest total, according to the OCC. But investors don't necessarily trust hedges as much as they used to. And if the hedges are with other weakened banks, the exposure might actually be greater than zero, critics allege. "There's nothing the company can do with its statements because everyone thinks the banks are doing things off balance sheet,"
Dexia CDS Rips And Stock Implodes On Partial Nationalization - "As part of the restructuring of Dexia, the Belgian and French, in conjunction with central banks will take all necessary measures to ensure the safety of depositors and creditors. To this end, they undertake to guarantee to bring their financing raised by Dexia." Translation: Partial nationalization.
10/04/11
Zero Hedge
1
France, Belgium to Protect Dexia Account Holders - The bank summoned board members for a emergency meeting from Monday evening into the early hours of Tuesday.
Dexia Nationalization Imminent? - Now that a bank which holds assets amounting to 180% of Belgium's GDP, is about to be nationalized by the very same country. Anyone who is still not long Belgium CDS, this is probably your last chance to get on that particular train. Of course, if one is waiting patiently in line at a Dexia ATM machine, one is forgiven.
10/03/11
Zero hedge
1
Dexia Tumbles After Moody's Puts It On Downgrade Review Citing "Deteriorating Liquidity And Worsening Funding Conditions" - The biggest Belgian bank (whose assets are 180% of Belgian GDP) Dexia is in trouble. Potentially very big trouble. "Moody's Investors Service has today placed on review for downgrade the standalone bank financial strength ratings (BFSRs), the long-term deposit and senior debt ratings and the short-term ratings of Dexia Group's three main operating entities -- Dexia Bank Belgium (DBB), Dexia Credit Local (DCL) and Dexia Banque Internationale à Luxembourg (DBIL). The review for downgrade of Dexia's three main operating entities' BFSRs is driven by Moody's concerns about further deterioration in the liquidity position of the group in light of the worsening funding conditions in the wider market." Immediate result: stock plunges up to 15% overnight. Likely outcome will be a full or partial nationalization.
Greek cabinet to approve '12 budget, plan to sack state workers- Greece has promised to raise taxes, cut state wages and accelerate plans to reduce the number of public sector workers by a fifth by 2015. The government has been falling behind an ambitious deficit target of 7.6 percent of GDP for 2011, partly because of a deeper than expected contraction of the economy. No part of the package is more contentious than the plan to lay off state workers -- who make up a fifth of the Greek workforce and are guaranteed jobs for life under a constitution that bans firing them under nearly all circumstances.
The government plans to begin layoffs by putting 30,000 workers in a "labor reserve" by the end of this year. They would be paid 60 percent of their salaries for a year, after which they would be dismissed. George Papandreou will not survive the next election. He is hanging by a thread now, with a mere 4-seat majority in Parliament.
Will the next government go along with all these proposals? I highly doubt it.
Strikes hamper Greek rescue effort Default fears and slow global recovery cap tough quarter for markets - Wildcat, striking civil servants blocked access to Greece's statistical agency in Athens since Tuesday, undermining efforts by Elstat, the statisitcal agency, to bring greek figures in line with EU standards after years of fudging. Consequentially Greece calims it will miss its deadline for fiqures due to the troikia. Strikers also blocked ministries of finance, transport and health.
10/01/11
FT
2
EUROPEAN UNION
2
Europe - Political Fabrications Instead Of Economic Realities - The latest EFSF “collateral” package shows once again, just how wrong Europe has it. Dreams of Eurobonds should be relegated to the trash bin. Fantasies that EFSF will leverage itself up to save Europe should be discarded. The latest outcome of EFSF meetings should be enough to let everyone know that even the people with the money have no clue what to do, and the structure of compromise will never get anywhere. The Greek bond rollover is another example of an overly complex, unwieldy mechanism, that doesn’t do what it portrays. Until Europe is willing to address the reality of the situation and take some simple but painful steps rather than complex, unworkable ones, that sound good but do nothing, the problems will increase.
10/04/11
TF Market Advisors
2
Eurozone fix a con trick for desperate There exist only 2 categories of solutions to the EU Crisis: A Fiscal Solution or a Monetary one. Politics blocks the first and European Law (Article 123 of the EU Treaty + Maastricht Treaty manadate for the ECB) blocks the later. To circumvent these impediments the idea now is to turn the rescue fund into an insurance company, or worse, a collateralized debt obligation (CDO). Why? If you want to leverage the EFSF without increasing the liabilities of the government, then the 440B would become the equity tranche. You would then create senior tranches and mezzanine layers. Effectively the senior tranches would become Eurobonds. This is equivalent to placing dynamite in the can before kicking it down the road. People come up with these sorts of solutions when it is other people's money - not their own.
10/03/11
Wolfgang Munchau
2
GERMANY
2
NEIN, NEIN, NEIN, and the death of EU Fiscal Union - Something profound has changed. Germans have begun to sense that the preservation of their own democracy and rule of law is in conflict with demands from Europe. They must choose one or the other.
German President Christian Wulff lashed out at Europe, accusing the ECB of violating its mandate and subverting the Lisbon Treaty.
“I regard the huge buy-up of bonds of individual states by the ECB as legally and politically questionable. Article 123 of the Treaty on the EU’s workings prohibits the ECB from directly purchasing debt instruments, in order to safeguard the central bank’s independence,” he said. “This prohibition only makes sense if those responsible do not get around it by making substantial purchases on the secondary market,” he said.
Mr Wulff said Germany itself risks being engulfed by escalating debts. Who will “rescue the rescuers?” as the dominoes keep falling, he asked.
"Solidarity is the core of the European Idea, but it is a misunderstanding to measure solidarity in terms of willingness to act as guarantor or to incur shared debts. - With whom would you be willing to take out a joint loan, or stand as guarantor? For your own children? Hopefully yes. For more distant relations it gets a bit more difficult."
THERE WILL BE NO FISCAL UNION.
THERE WILL BE NO EUROBONDS.
THERE WILL BE NO DEBT POOL.
THERE WILL BE NO EU TREASURY.
THERE WILL BE NO FISCAL TRANSFERS IN PERPETUITY.
THERE WILL BE A STABILITY UNION – OR NO MONETARY UNION.
Get used to it. This is the political reality of Europe, since nothing of importance can be done without Germany. All else is wishful thinking, clutching at straws, and evasion. If this means the euro will shed some members or blow apart – as it almost certainly does – then the rest of the world must prepare for the day.
10/01/11
Pritchard
2
RISK REVERSAL
4
IMF Sees Higher Risks to Global Growth Deputy Managing Director Zhu Min said downside risks to the IMF's global economic growth projections have increased "as of late." The IMF two weeks ago slashed its forecasts, predicting global growth will slow to about 4% this year and next year from 5% in 2010
Wall Street Protest Spreads - Many of the protesters are young. Joblessness seems to be a persistent theme. A blog that has become popular has pictures of people's faces next to stories of economic woe and messages of support for the protesters. Like the initial stage of the New York protest, much of the activity in the offshoot cities is still taking place online on Facebook. James Cox, a 25-year-old waitress, discovered the movement on Twitter and showed up on the second day when there were just seven people. She has now slept on the sidewalk for a week and has become and organizer, keeping track of donated food and water. "We definitely stand in solidarity," said Mark Banks, a 30-year-old unemployed biochemist and Occupy Chicago spokesman. "But we're employing a very careful, inclusive process to make sure what they're trying to say is what we're trying to say." "We are part of a global and spreading movement," shouted Micah Philbrook, a 33-year-old actor with shaggy white hair who serves a press liaison for the Occupy Chicago movement.
10/03/11
WSJ
5
Anti-Wall Street Protests Reach ‘Prime Time’ - Anti-Wall Street protests escalated with more than 700 arrests over the weekend, thrusting the once- dwindling demonstrations into the national spotlight.
The rallies, which began 16 days ago with a goal of occupying Wall Street for months, spread to cities including Los Angeles and Boston, where 25 people were arrested Sept. 30 after police said they refused to leave the lobby of a Bank of America Corp. (BAC) building. The next day, New York City police halted a march over the Brooklyn Bridge and took hundreds of activists into custody for blocking traffic. Some people arrested claimed officers had tricked them into leaving the pedestrian walkway.
“The huge event on the Brooklyn Bridge is likely to bring thousands more into the movement,”
As Wall Street protest enters 3rd week, movement gains steam nationwide - A spirited and leaderless protest in the Wall Street section of New York has entered its third week, helping to inspire a growing number of demonstrations united in their passion if not necessarily their reasons for hitting the streets.
The hub of the movement, in Lower Manhattan, was abuzz with activity on Sunday as activists continued to vent their frustrations with everything from "corporate greed" to high gas prices to insufficient health insurance.
No single group or person heads the effort, which has adopted the name "Occupy Wall Street."
Gas Stays High as Oil Drops Prices at the Pump Have Yet to Reflect the Substantial Decline in Crude Futures - Due to many factors, such as an accumulation of crude oil at the U.S.'s largest commercial storage hub in Oklahoma, Brent is now $20 more than Nymex crude.
But that's not the only reason for gasoline prices lagging behind. Refinery operators may be taking a cut for as long as they can.
Refiners usually are quick to raise fuel prices in tandem with crude but go slower on the way down, because they want to recapture profits that had been squeezed.In addition, refiners have increasingly kept inventories thin in the face of falling demand in the U.S. If oil prices continue to hover around $80 a barrel, gasoline prices could slide another five or 10 cents in coming week
10/01/11
WSJ
9
THE AMERICAN JOBS DEPRESSION: We're In A Deep Hole And The Hole Is Deepening -
Since the start of the Great Recession at the end of 2007, the potential labor force of the United States – that is, working-age people who want jobs - has grown by over 7 million. But since then, the number of Americans who actually have jobs has shrunk by more than 300,000.
The problem is on the demand side. Consumers (whose spending is 70% of the economy) can’t boost the American economy on their own. They’re still too burdened by debt, especially on homes that are worth less than their mortgages. In addition, their jobs are disappearing, their pay is dropping, their medical bills are soaring.
Consumer spending slowed again in August as incomes dropped.
Businesses, for their part, won’t hire without more sales. So we’re in a vicious cycle.
ECRI-New, Inevitable Recession in the US - Lakshman Achuthan The big economic news yesterday: Lakshman Achuthan, the head of the highly respected, ECRI, called for a new, inevitable recession in the US. He did a full media tour about his prediction, including a stop with Tom Keene at Bloomberg where they put up this chart showing copper. The key thing is: It's not just that copper has fallen, but that it's moved 3-standard deviations away from the post-2008 trend, a crystal clear sign that this moment in the economy is big, dramatic and real.
CENTRAL BANKING MONETARY POLICIES, ACTIONS & ACTIVITIES
ECB Deposit Facility Usage Soars To 2011 High - Just when you thought the latest round of liquidity improvement rumors out of the ECB (such as the resumption of a 12 month refinancing operation from last week) would buy the European financial system some time, here comes reality confirming that it took about 4 days before liquidity got hopelessly snarled up again. As of Friday, the ECB Deposit Facility usage soared to a fresh 2011 high of €200 billion, beating the previous high of €198 billion set on September 12. Once again banks are scared of keeping excess cash with each other (as confirmed by the nearly 50th consecutive increased in LIBOR) and instead have dumped a 2011 high amount with the ECB. And the flip side, or looking at the ECB's Marginal Lending Facility, which does just as it says, shows that €1.4 billion in cash was loaned out from the ECB to "needy" banks - the highest since the €3.4 billion lent out September 14.
10/03/11
Zero Hedge
CURRENCY WARS
China Fires Back At US Senate Which May Have Just Started The Sino-US Currency Wars - A few hours ago, the maniac simians at the Senate finally did it and fired the first round in the great US-China currency war, after they took aim at one of China's core economic policies, voting to move forward with a bill designed to press Beijing to let its currency rise in value in the hope of creating U.S. jobs. As Reuters reports, "Senators voted 79-19 to open a week of Senate debate on the Currency Exchange Rate Oversight Reform Act of 2011, which would allow the U.S. government to slap countervailing duties on products from countries found to be subsidizing their exports by undervaluing their currencies. Monday's strong green light for debate on the bill bolsters prospects it will clear the Democrat-run Senate later this week, but prospects for action in the Republican-controlled House of Representatives are murky.
Corn Market Surprise Report of Higher Stockpiles Stuns Farmers Just Weeks After Previous Estimate - Corn prices tumbled to their lowest level since December on Friday after the U.S. Department of Agriculture surprised the market by saying stockpiles were nearly a quarter higher than it had estimated less than three weeks ago.
The unexpected buildup in reported supplies of the nation's largest crop sent prices down 6.3%, the second-steepest drop of the year, to $5.925 per bushel in Chicago futures trading—a 25% decline from the all-time high on June 10. Friday's 40-cent drop was the maximum allowed under exchange rules. The report also dragged down wheat prices, which fell 6.7%, and soybean prices, which fell 4.1% to a fresh low for the year.
The new data shocked farmers, traders and analysts, who have frequently been caught off-guard by USDA reports in recent years.
10/01/11
WSJ
TECHNICALS & MARKET ANALYTICS
Stocks Log Worst Quarter Since '09 - Dow Swoons 12% in Period Amid Global Economic Turmoil - Financial stocks were among the hardest hit during the quarter, with many banks falling 25% or more. Treasurys maturing in 10 years or more returned 23% during the quarter through Thursday, according to Barclays Capital index data. The yield on the 10-year note tumbled 1.23 percentage points during the quarter. The Dow's September decline capped its fifth straight month of losses, the longest such string since the six months ended February 2009. March 2009, however, marked the beginning of a two-year rally.
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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.
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