The European financial markets in the six weeks since the last EU Summit, have had a complete, unofficial and unreported implosion in the bond and credit markets .
Wholesale Lending is now completely frozen,
Sovereign yields have reached unfundable levels as even sovereign yield curves have inverted,
Collateral Contagion is running rampant,
Banks runs are quietly occurring,
Shadow Banking Dis-intermediation is under distress,
The Euro-Yen Carry trade unwinding is rapidly accelerating,
The Shadow banking system is seizing up,
European banks have nearly stopped lending, sopped interbank lending, have been repatriating funds globally and are now increasingly depositing funds at central banks for safe keeping.
The Credit rating have placed 15 EU sovereign countries on negative credit watch includes EU Core countries.
The EFSF yields have soared and foreign funding sources dried up
The current agenda of the upcoming EU Summit does nothing to fundamentally address the underlying causes. MORE>>
DECEMBER 2011: GLOBAL MACRO TIPPING POINTS -(Subscription Plan III - 140 Pages) The global slowdown we have been warning about has now become clearly evident. Liquidity is quickly evaporating across Europe.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 fail miserably in the new year. MORE>> EXPANDED COVERAGE INCLUDING AUDIO & MONTHLY UPDATE SUMMARY
MARKET ANALYTICS & TECHNO-FUNDAMENTAL ANALYSIS
DECEMBER 2011: MARKET ANALYTICS & TECHNICAL ANALYSIS - (Subscription Plan IV - 165 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
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Latest Public Research ARTICLES & AUDIO PRESENTATIONS
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 - DECEMBER 2011
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Weeks Highlights
Foreigners Shed European Debt, StocksThe euro zone swung back to a current-account deficit in October, and foreign investors shed European debt and stocks. The euro zone’s current account — the balance of payments between the 17-member currency bloc and the rest of the world — was a seasonally adjusted deficit of €7.5 billion in October, compared with a €2.2 billion surplus in September. Net outflows from the euro zone’s financial account reached €32.1 billion in October, on an unadjusted basis. The drop reflects the sale by foreign investors of €53.3 billion in euro-zone debt instruments and €6.6 billion in equities.
12/21/11
WSJ
Fed proposes rules to tame Wall Street risk-taking The rules will be out for public comment until March 31, 2012, giving Wall Street time to argue that being forced to keep so much cash on hand it will hurt lending and the economic recovery.
Fitch puts Italy, Spain's banks on watch “The downgrade reflects the material market and fundamental challenges facing many banks globally, particularly in Europe”
The French are the second-highest paid people (on an hourly basis) in the Eurozone (after the Belgians). The French get paid way more per hour than the Germans. But it wasn't always like that. In 2000, Germans actually made more per hour than the French. From the German standpoint, then, the last 10 year looks like this: Workers swallowed poor wage gains (relatively) but remained competitive, and that's why unemployment is low and exports are strong. On the other hand, everyone else around them saw wages go up, and competitiveness get reduced, and now they're looking for German money. The actual story probably isn't quite that neat, but it's not hard to see the conundrum facing German politicians trying to sell its citizens on bailouts and firewalls.
"It appears today as a debt crisis. More than that, it is a growth crisis. Behind the growth crisis is a leadership crisis,” he said. “The problem is that they don’t have exactly the same view and I’m not quite sure that [Angela] Merkel and [Nicolas] Sarkozy clearly understand each other,” he said.
European leaders had consistently underestimated the severity of the financial crisis and made repeated mistakes in focusing on cutting debt at the expense of growth. “The problem is that they are still in denial,”
Mr Strauss-Kahn was dismissive of the European summit in Brussels earlier this month, saying it was “another of the kind bleeding away, day by day, the remaining confidence investors may have in politicians”... The stability pact that was agreed at the summit “may be good news for German domestic politics, but it is bad news for the European population.”
...Strauss-Kahn said the firewall to staunch the spread of the crisis “doesn’t really exist”. The €500bn European Stability Mechanism would only be operational in months when “the question is a question of weeks. The question is not a question of months.”
Why ECB lending won’t solve the euro crisis 12/20/11 Salmon
12/20/11
BI
2
Euro Zone Agrees to New IMF Loans Euro-zone finance ministers on Monday confirmed plans to contribute $195.6 billion in additional bilateral loans to the International Monetary Fund as part of a move to boost its resources for crisis response.
EL-ERIAN: The REAL Reason Europe Is Begging For Help From The IMF 12/20/11 BI EU leaders are trying to finalize a plan which would channel €200 billion ($261 billion) from the IMF to the euro rescue fund in order to bail out Europe. But PIMCO's Mohamed El-Erian said today on Bloomberg TV that this enthusiasm for IMF support is not based on the reasons you might think. In fact, he says, "The only argument for having the IMF there is that it can impose conditionality that Europe cannot impose on itself." And that's not necessarily a good thing. Later in the interview, he also gave a brief outlook for 2012. He thinks the first-half of the year will be dominated by a risk-off environment, while the rest of the year is a "wild card."
Ties That Bound Europe Now FrayingThe first decade of the euro intertwined the Continent's financial systems as never before. Banks and investment funds in one euro-using country gorged on the bonds of others, freed of worry about devaluation-prone currencies like the drachma, lira, peseta and escudo.
But as the devaluation danger waned, another risk grew, almost unseen by investors: the chance that governments, no longer backed by national central banks, could default.
The European Central Bank lets any bank in the euro area deposit government bonds in return for short-term loans, under so-called repurchase, or "repo," agreements. This was profitable for banks, since bond yields exceeded their interest cost for repo loans, and was initially a spur to buy euro-zone bonds. In October 2010, on the boardwalk of the French resort of Deauville, German Chancellor Angela Merkel and French President Nicolas Sarkozy agreed that any bailouts after 2013 would require involvement of the private sector, which would have to take reduction in the value of its government-bond holdings. A turning point for euro-zone investment came in July. European leaders, in negotiating an expanded Greek bailout, confirmed that investors in its bonds would take losses.
"It was a wake-up call for the industry," said a top French bank executive, who soon started dumping his Italian government bonds. Deutsche Bank AG said it substantially reduced its "net exposure" to Italy, both by selling bonds and buying default protection.
In the Long Run - A Fiscal Union with a prospect of a euroBond
In the Short Run - Unlimited Sovereign Bond Market support by the ECB
RESULT:
No Treaty Change,
No Eurozone Bond,
No increase in ECB support,
No increase in the rescue fund.
12/12/11
Wolfgang Munchau
2
Europe's blithering idiots and their flim-flam treaty There is
No shared debt issuance,
No fiscal transfers,
No move to an EU Treasury,
No banking licence for the ESM rescue fund, and
No change in the mandate of the European Central Bank.
In short, there is no breakthrough of any kind that will convince Asian investors that this monetary union has viable governance or even a future.
Germany has kept the focus exclusively on fiscal deficits even though everybody must understand by now that this crisis was not caused by fiscal deficits (except in the case of Greece). Spain and Ireland were in surplus, and Italy had a primary surplus.
So in short: A treaty that solves nothing that now opens up a rift between the EU and the UK. There is more discipline for fiscal sinners, but without any transforming help. Hard to spin that as positive.
Sir Mervyn King said last week, the disaster was caused by current account imbalances (Spain's deficit, and Germany's surplus), and by capital flows setting off private sector credit booms. Europe's debacle stems from:
The euro itself,
From a 30pc currency misalignment between from North and South, and
From an over-leveraged €23 trillion banking bubble that German, French, Dutch, Belgian regulators allowed to happen.
The system will lurch from crisis to crisis until it blows up in acrimony.
Europe has created a new crisis So we have two crisis now. A still-unresolved Eurozone crisis AND a crisis of the Euopean Union. Of the two, the latter is potentially the more serious one. The Eurozone may, or may not, break up. The EU almost certaily will. The decision by the Eurozone countries to go outside the legal framework of the EU and to set up the core of a fiscal union in a multilateral treaty will eventually produce this split. The fiscal union likely to be agreed in March may not initially be very effective in resolving the crisis. It focuses on all the wrong issues, mostly fiscal discipline, which is not the real reason why the crisis has spread to Spain or Belgium.
Eurozone countries sign-up to closer ties UK vetos historic agreement to forge closer links The leaders, who are still deeply divided over key elements of their crisis strategy, decided they would move to form a pact among at least 23 of the members to tighten rules on national fiscal policy. Some European officials said that an agreement that didn't include all 27 members would be weaker, but the proposed deal would include all 17 members of the euro zone. The two-day summit will resume Friday. "We will achieve the new fiscal union. We will have a euro currency within a stable union," German Chancellor Angela Merkel said at the end of the meeting. "We will have stronger budget deficit regulations for euro-zone members."
12/09/11
FT
2
The Fundamental Problem In Europe The debt tolerance levels for a broad cross-section of emerging markets historically has probably been around the 35-45% mark, euro area governments went on and borrowed like every other industrial country that borrows in a currency it can actually print. It is the ability to print one’s own currency to pay government bond investors back under any circumstances that makes a government bond a government bond, i.e., a (credit) risk-free asset for hold-to- maturity investors. Fundamentally, the euro area faces the following policy: either to create a lender of last resort or to reduce the debt level drastically. In all likelihood, we believe that European policy- makers will do neither. Instead, they are likely to aim for a fudge. This fudge is more likely to involve the ECB than eurobonds, we think.
S&P Warns 15 Nations in Euro Zone S&P; put the long-term sovereign-debt ratings of 15 euro-zone nations, including struggling Italy and Spain, on negative watch. That typically means there is at least a 50% chance of a downgrade within 90 days, but the firm said Monday that it expected to announce any rating changes "as soon as possible" following this week's European Union summit, where policy makers are expected to lay out plans to enforce stricter budget rules. S&P; said the long-term ratings on Germany, Belgium, Austria, Finland, Luxembourg and the Netherlands aren't likely to fall by more than one notch, if at all. But it flagged a potential two-notch downgrade for France and other euro-zone nations.
Europe at Crossroads Sarkozy, Merkel Issue UltimatumThe leaders of France and Germany, racing to shore up the euro, on Monday issued an ultimatum to the 27 European Union governments, saying they must decide by week's end whether they will accept greater central control over their national budgets—effectively ceding some of their fiscal sovereignty.
Should some countries decide not to participate—the U.K., which opted out of euro membership, has shown little enthusiasm so far—the 17 countries in the euro zone will forge ahead with a more integrated union by signing a new agreement outside EU treaties, they said. Under a proposed compromise, Mr. Sarkozy and Ms. Merkel said that sanctions would apply automatically and that only a weighted majority of European countries would have the authority to reverse the punishment.
Mr. Sarkozy and Ms. Merkel said they will detail their proposals in a letter to European Council President Herman Van Rompuy, a text that will be up for discussion at the EU summit later this week.
The two leaders will also call for monthly meetings of leaders from euro-zone nations and other countries willing to participate, as well as for fast tracking the creation of a permanent euro-zone bailout fund.
FRANCE: President Sarkozy's speech on Thursday was a re-statement of traditional Gaullism, perhaps reflecting the electoral threat he faces from the National Front in next year's elections. He stressed the primacy of the nation-state and that fiscal discipline should be enforced via intergovernmental arrangements.
France would prefer to see fiscal discipline, including a debt brake, written into national constitutions—which is ironic since Mr. Sarkozy has conspicuously failed to get the French parliament to accept such a debt brake.
GERMANY: In contrast, Chancellor Merkel's speech on Friday reiterated Germany's belief that a system in which the sinners continue to judge themselves would provide no discipline at all; only by handing oversight of the fiscal rules to a supranational body such as the European Commission could national compliance be assured.
Germany's vision of the future requires a clear transfer of sovereignty— although Berlin argues this is misleading since all member states are obliged to honor the Stability and Growth Pact.
Fiskalunion is worst of all worlds for Europe STABILITY UNION: Merkel means prior vetting of fiscal plans. She means automatic fines, cuts in EU development funds, and loss of EU voting rights for alleged violators, all justiciable before the European Court. The Greeks have had a taste of this with EU commissars lodged in each ministry under the occupation terms of their loan package, and it may come back to bite Germany itself one day as the economic cycle plays its trick. None of Mrs Merkel’s proposals - whether enshrined in EU treaties or not - offer any meaningful solution to the crisis at hand. They continue to ignore the cancer in the EMU system: the corrosive 30pc currency misalignment between North and South, and the German-Dutch trade surplus.
Don't Mean To Spoil The Holidays, But Italian Bond Yields Are Back On The Rise For a few days after the historic (smoke and mirrors) Euro-summit a couple of weeks ago, it appeared the Euro-crisis had been solved. Bond yields in Italy, Spain, France, and other key countries fell, alleviating concerns that the continent was on the verge of imploding. And the good news is that bond yields in Spain, France, et al, are still much lower than they were a couple of weeks ago. As are yields on short-term Italian bonds, which are now enjoying a boost from the secret back-door bailout that the ECB provided. (The ECB quietly told all of Europe's basically-bankrupt banks that it would accept the kitchen sink as collateral for 3-year loans--a much longer term than banks are usually able to borrow for. This meant that the banks could borrow from the ECB for free and run out and buy 3-year sovereign bonds yielding 5%+, and thus coin money for themselves. And given that they're already basically bankrupt, there's no reason not to do this. On the off chance that Europe actually lets Italy, et al, default, the banks won't be any worse off than they already are, and the ECB will be left holding the bag). But the story is different for Italian 10-year yields, where borrowing costs are ticking back up toward 7%. This makes sense. The secret back-door bailout alleviated near-term funding concerns in the Eurozone, but it did not address the root of the problem: By being forced to operate with the same currency as the more efficient and richer Germany, Italy's economy has become less and less competitive. Rising borrowing costs, austerity, and an impending Eurozone recession, meanwhile, are making its budget deficit considerably worse. So long-term bond buyers are understandably concluding that Italy's problems are far from solved.
12/20/11
BI
2
Italy Plan Opens Pivotal Week for Euro - Premier's Three-Year, $40.2 Billion Austerity Program Precedes Franco-German Proposals for a New Budget Regime in Bloc a three-year plan made up of €30 billion ($40.2 billion) in tax increases, spending cuts, pension overhauls and growth-boosting measures.
The package—equivalent to 1.9% of Italy's €1.6 trillion gross domestic product—will likely be followed by Franco-German proposals on Monday to create a new regime for budget policies in the euro zone, which European leaders could adopt at a summit on Dec. 8-9.
In Italy, for example, public finances have been starved over the decades by endemic tax evasion that Mr. Monti on Sunday proposed combating with measures including a ban on cash payments above €1,000. His plan also calls for a one-time 1.5% tax on the billions of euros Italians repatriated under a tax amnesty adopted by the former conservative government led by Silvio Berlusconi. The government also unveiled €10 billion in stimulus measures aimed at spurring Italy's slow-growing businesses and fighting the country's sky-high youth unemployment, which stands at 29%. Under the plan, companies would receive as much as €2 billion in tax breaks if they boost hiring, particularly among young workers and women. Deputy Economy Minister Vittorio Grilli said he expected Italy's gross domestic product to contract by as much as 0.5% next year.
Financial Sector Is Now Too Big to Shrink The relationship between markets and the "real" economy has gotten out of whack. The amount of debt outstanding in the U.S.—from home mortgages to corporate bonds to municipal securities to U.S. Treasurys—stood at roughly $50 trillion, or more than triple the size of gross domestic product, as of June - 335% ratio of household, business and government debt-to-GDP. Princeton University economist Hyun Song Shin argues a global "banking glut" precipitated the financial crisis, not a global "savings glut," as Fed Chairman Ben Bernanke has said.
The trouble is, urgency to shrink the financial system conflicts with the urgency to boost growth. Call it the paradox of heft: The financial sector has become so large it is damaging, and yet shrinking it is painful.
Australian Banks Given One Week To Prepare For European "Meltdown" According to the Australian Finance Review (link - subscription required), banks down under "have been given 1 week by regulators to stress test how they would handle a spike in joblessness, plunge in home prices spurred by EU debt crisis."
Australian Prudential Regulation Authority envision worst-case scenario of 12% unemployment, 30% drop in house prices, 40% fall in commercial property values, AFR says
Banks will assume that write-offs, other mitigation measures are unavailable; later stress tests might allow for such steps, AFR says
Australia’s banks have A$87.2b of exposure to Europe, or 2.7% of assets, with A$74.6b of it mostly tied to bank borrowers in France, Germany, Netherlands, AFR says, citing RBA statistics
Europe Strains World's Banks Borrowing Costs Grow as Some Banks Take Emergency Steps; Euro Sinks Further Crédit Agricole SA, France's third-largest bank, said it will exit 21 of the 53 countries in which it operates to help shore up its finances. Commerzbank AG, struggling to avoid accepting a bailout by the German government, is in negotiations to transfer suspect assets to a government-owned "bad bank."
Fitch Ratings on Wednesday evening lowered its ratings on five big banks from Denmark, Finland, France and the Netherlands. Fitch said the downgrades reflected deteriorating market conditions. Deposits at foreign-owned banks and U.S. branches of foreign banks have fallen 20% since May, according to Federal Reserve data, to a recent $877 billion. That's a sign that customers are moving their money elsewhere.
Banks park more money with ECB The figure announced Tuesday indicates banks would rather park cash at the ECB rather than lend it to other banks because they do not trust the other banks to pay them back.
12/14/11
AP
1
Europe's Banks Retreat From the EastIn Poland and Turkey, once coveted by western lenders, at least seven European banks have sold or are looking to sell their local businesses to drum up much-needed cash. Buyers appear to be scarce.
Two of Europe's biggest banks, Germany's Commerzbank AG and Italy's UniCredit SpA, say they plan to cease or scale back lending in some Eastern European countries that previously were priorities. Both banks are under pressure from regulators to come up with billions of euros of new capital by next June.
The situation is feeding consumer jitters. In Latvia over the weekend, Internet rumors circulated that Swedish banks, which control about 40% of the industry's total assets, were unhealthy and preparing to leave the country.
EU to Banks: Raise Capital European banks must come up with a total of about €114.7 billion in new capital by next June, the European Banking Authority said.
ECB SAID TO CONSIDER LOOSENING RULES ON ABS AS COLLATERAL
ECB SAID TO PLAN LOOSENING OF COLLATERAL CRITERIA FOR LOANS
ECB SAID TO CONSIDER TWO-YEAR LOANS FOR BANKS
ECB SAID TO LOOK AT ALLOWING MORE UNCOVERED BONDS AS COLLATERAL
As a reminder: liquidity stopgaps only make the insolvency gangrene even worse as it allows banks to NOT address the underlying issues and mask the symptoms.
The ECB is focusing on getting banks lending again rather than increasing its government bond purchases to fight Europe’s debt crisis. The central bank’s insistence that governments take measures to restore investor confidence appears to have paid dividends, with Italian and Spanish yields plunging after Germany and France agreed to move the 17-nation euro area toward a fiscal union.
A Euro Crisis Deal Emerges ECB President Mario Draghi signaled the bank could ramp up its role battling the debt crisis if euro-zone governments enforce tougher deficit cutting.
12/02/11
WSJ
1
ECB Looks Ready to Act DecisivelyEuro-zone leaders are to meet on Dec. 9 to discuss governance reforms. The stakes couldn't be higher.
Total Outstanding Derivatives Increased By A Record $107 Trillion In 6 Months to 707T In the first 6 months of 2011, the total outstanding notional of all derivatives rose from $601 trillion at December 31, 2021 to $708 trillion at June 30, 2011. A $107 trillion increase in notional in half a year. Needless to say this is the biggest increase in history. So why did the notional increase by such an incomprehensible amount? Simple: based on some widely accepted definitions of gross market value, the value of outstanding derivatives actually declined in the first half of the year from $21.3 trillion to $19.5 trillion. Which means that in order to satisfy what likely threatened to become a self-feeding margin call as the $600 trillion derivatives market collapsed on itself, banks had to sell more, more, more derivatives in order to collect recurring and/or upfront premia and to pad their books with GAAP-endorsed delusions of future derivative based cash flows. Because derivatives in addition to a core source of trading desk P&L courtesy of wide bid/ask spreads are also terrific annuities for the status quo. The synthetic credit bubble has now been blown to a new all time high. One of the key contributors to global growth and prosperity in the past 10 years was an increase in total derivatives from just under $100 trillion to $708 trillion in exactly one decade.
with banks suffering massive losses, and rumors of bank runs and collateral calls, not to mention the aftermath of the MF Global insolvency, the world financial syndicate will have no choice but to increase gross notional even more, even as the market value continues to get ever lower, thus sparking the risk of the mother of all margin calls: a veritable credit fission reaction.
12/10/11
Zero Hedge
4
European Bank Sales Of CDS On European Sovereign Debt Soar European banks, in order to generate modest cash flow from collecting on the pariodic interest premiums owed to them in order to plug increasingly large capital shortfall holes that otherwise would simply keep growing ever larger, have sold and continue to sell massive amounts of default protection on their very own host countries! As a reminder, it was precisely this that destroyed AIG when the illusion of the credit bubble burst. As Bloomberg reports, "BNP Paribas SA, France’s biggest bank, sold a net 1.5 billion euros ($2 billion) of credit- default swaps on the nation’s sovereign debt, according to data compiled by the European Banking Authority. UniCredit SpA, Italy’s biggest lender, and Banca Monte dei Paschi SpA are net insurers of more than 500 million euros each of their government’s bonds, and Oesterreichische Volksbanken AG, the Austrian lender which has yet to pay interest on 1 billion euros of state aid received in 2009, has guaranteed a net 839 million euros of its national debt, EBA data show." (EBA source - link).
China's November PMI number came in fell to 49.0, down from 50.4 in October. The number was also worse than the estimate of 49.8. A reading below 50 signals a contraction. Bloomberg BRIEF economist Michael McDonough points out that it's "not just an external slowdown." Manufacturing, new orders, and new export orders are all pointing to contraction.
Risk Assets Deteriorating Rapidly On Europe's SNAFU Since the news broke that there is no 27-nation agreement, risk markets are showing strains. Perhaps a little surprising is the lack of total panic in the EURUSD (50pips or so) as ES (the e-mini S&P 500) has now dropped almost 1% from its after-hours peak. Broadly speaking risk is off across the major markets with US TSYs rallying, the TSY curve flattening, and commodities rolling over (oil under $98) but it is AUD and the carry pairs that are driving ES down as much as anything else.
Madoff's scheme collapsed for one primary reason -- he had more investors exiting his scheme than entering. As soon as this happened it was over. According to this most recent census, the Japanese population peaked within the last few years at 127.9 million and has since lost 3 million. Japan has one of the most homogeneous -- and some might even call it xenophobic -- soceities of any developed nation in the world. It is no secret that there is no love lost between the Japanese and their neighbors, and therefore, immigration is an unlikely answer to a dwindling poulace. ....
It is indisputable that Japan has the worst on balance sheet debt burden in the world (roughly 229% of GDP). ...
The European debt crisis will simply act as an accelerant to the Japanese situation as it will most likely change the qualitative thoughts of JGB investors. We believe that the sequence of events is set to begin in the new few months.
We look for a couple of warning signs. We move a nation out of risk free category as soon as they spend more than 10% of their central government revenues on interest alone. We also worry about debt loads that represent more than 5x the revenue of the responsible government. When these and other characteristics are met or exceeded, it can quickly move the country into checkmate."
A) The Bush tax cuts on those making more than $200k will expire.
B) The Bush tax cuts on those making less than $200k will also expire.
C) The Patch on AMT will expire.
D) The 2% payroll tax holiday will expire for all workers on 12/31/12 (I’m sure the current holiday will be rolled for another year)
E) The 99-week extended unemployment benefits die on 12/31. (The emergency benefits will also be extended for 2012)
F) There will have to be a budget that is approved. Alternatively, a series of continuing resolutions is required to avert a government shutdown. We have not had an approved budget in over 900 days.
G) 2013 is the first year that there will be mandatory caps on discretionary spending. These limits will result in a YoY decline in government spending.
H) The Federal Reserve has promised to keep interest rates at zero into 2013. While it is possible that the Fed could continue the madness for even longer, the reality is that interest rates have nowhere to go but up.
I) By January 2013 it will be painfully evident that the country’s key social programs, Social Security and Medicare will be running in the red at a pace that is far higher than anyone considered possible. The need for dramatic changes in these programs will have to come onto the table. The implications of this will be significant.
J) In 2013 the issues of Fannie, Freddie, FHA and the Federal Home Loan Banks must be addressed. The problems at the housing agencies has festered too long.
K) The country will face another debt ceiling extension. The last time cost us our AAA.
L) At some point in 2012 economic events (Probably Europe) will force the Fed into yet another round of QE. More LSAP and another increase in the Fed’s balance sheet. But when completed the Fed will have fired it’s last bullet. QE-3 will not achieve any better results than QE-1 or 2. The policy will be discredited as it achieves nothing positive and causes inflation. There are no credible options left for the Fed to fight the slowdown that HAS to occur when the effects of A – K are felt.
12/05/11
Krasting
18
EU, IMF Halt Hungary Talks EU and IMF officials broke off talks with Hungary over financial backing because of fears the government is trying to limit central-bank independence and lock in fiscal policies before any loan agreement can be negotiated.
Euro's Allure Dims in Eastern Europe Poland's Finance Minister Jan Vincent-Rostowski, citing "very deeply rooted structural problems" in the currency union, says it "will take several years before we will know if the euro zone is well constructed and safe to join," as he put it in a recent radio interview. Opposition leader Jaroslaw Kaczynski is blunter: He says adopting the euro now would be "economic suicide."
Across Central and Eastern Europe, the story is much the same. Governments from Hungary to Bulgaria that once clamored to join the euro club are putting plans on hold and reassessing the costs and benefits of something that used to seem inevitable.
12/08/11
WSJ
20
Social Security Is Running Out Of Money At Least 5 Years Ahead Of Schedule 2012 will be worse than 2011. Benefits are going to jump by $50B+ next year. 10,000 new people are signing up for checks every day of the week. Add the fact that every one of the 55mm beneficiaries will be getting 3.6% more in their checks (COLA adjustment). The revenue side is a wild card. What will GDP be? If it's around the 2% that is currently anticipated, revenues at SSA will fall well below plan. A flat economy (+2%) would translate into a $100B 2012 primary deficit (payroll receipts minus benefits). A number like that is not on anyone’s radar today.
12/07/11
Krasting
21
12/12/11
23
While overall consumer credit rose, consumer credit excluding student loans continued to decline as a percent of personal income from 15.74% in September to 15.71% in October. Of note, total consumer credit (revolving and non-revolving) is now below the 50 year average when viewed relative to personal income, with the big caveat that this excludes student loans*, a category that is now more than 3% of personal income (up from less than 0.5% on average the past 50 years).
23
SLOWING RETAIL & CONSUMER GROWTH
31
Best Buy 3rd-quarter profit falls, shares skid WSJ 12/13/11
31
BANKRUPTCY & BUSINESS FAILURES
32
Saab has filed for bankruptcy after its owner Swedish Autmobile gave up repeated attempts at finding financing 12/19/11 Reuters
IMF chief warns over 1930s-style threats - Lagarde speaks out against isolation“There is no economy in the world, whether low-income countries, emerging markets, middle-income countries or super- advanced economies that will be immune to the crisis that we see not only unfolding, but escalating at a point where everybody would actually have to focus on what it can do”
12/16/11
FT
$357 Billion Plunge In Q3 Shadow Banking If there is one threat above all to the monetary regime, primarily of the US but by extension, global, it is the ongoing collapse in shadow banking, which is simply an unregulated pass-thru funding conduit for all the non-traditional banks and bank holding company firms which perform one or all of the three banking functions: maturity, credit and liquidity transformations. As such these are critical because having peaked at $21 trillion, the shadow banking system was always substantially larger than the traditional banking system since Q4 of 1990 when it finally overtook in terms of total notional, and provided far more broad "credit-money" liquidity to the global financial system than regulated (and we emphasize this word with bold and underline) entities. And since the burst of the credit bubble, the liquidity is now evaporating on a quarterly basis. So cutting to the chase, in Q3, US shadow banking declined by $357 billion to $15.2 trillion in liabilities, a decline of $654 billion in 2011 YTD, and a drop of $5.7 trillion from the $20.9 trillion peak in March of 2008. Such an uncontrolled ongoing collapse, primarily brought by the disappearance of dumb incremental (marginal) money originating in Germany (Landesbanks) and Spain (Cajas), as well as various Asian sources of dumb money, is beyond a shadow of a doubt the biggest deleveraging threat to the global monetary system bar none.
12/13/11
Zero Hedge
ECB Deposits Hit Fresh High Euro-zone banks' overnight deposits with the European Central Bank hit another fresh high for 2011, reflecting continuing market tension and the end of the central bank's monthly reserve period. Banks deposited €346.36 billion ($456.78 billion) overnight, up from the previous 2011 peak of €334.91 billion deposited overnight Friday. The high deposit rate reflects the continuing distrust in interbank lending markets, as banks prefer to park cash overnight with the ECB rather than lend it out to other banks. Deposits also tend to rise with the approach of the ECB's reserve period for commercial banks. The current reserve, or maintenance, period will end Tuesday. The ECB also said that banks borrowed €8.95 billion from the ECB's overnight lending facility Monday, up from the €7.41 billion borrowed on Friday.
Market rout as ECB dashes bond hopes Mario Draghi, the ECB’s president, said the bank had not agreed to any sort of “Grand Bargain” with EU leaders to act as lender of last resort for sovereign states, insisting that it does not have a legal mandate to rescue sovereign states in trouble. “We have a treaty and Article 123 prohibits financing of governments. It embodies the best tradition of the Bundesbank. We shouldn’t try to circumvent the spirit of the treaty,” he added, warning against the use of “legal tricks” to bend the bank’s mandate. The comments caused consternation on trading floors, where expectations for a “shock and awe” action by the ECB have been running ahead of reality. Mr Draghi had earlier hinted that the ECB might be willing to do more if politicians deliver on a “fiscal compact” to anchor budgetary discipline at today’s summit in Brussels. “This is big, he’s basically pulled the rug out from under the market,” said Brian Dolan at forex.com. “There’s a sense of shock right now because he previously suggested that if EU leaders got things together, the ECB would step up bond purchases.”
On December 1, Mario Draghi gave a speech to the European parliament during which he said that perhaps more could be done to ease the European crisis, but that first the EU leaders must agree to a fiscal compact, a guarantee that nobody would spend recklessly again. He didn't say so explicitly, but people interpreted these further measures to mean: more bond buying. We interpreted it this way, as did the FT.
So now he's saying that he never hinted that there would be further bond buying, and that he doesn't know why his commenters were interpreted this way.
Draghi says that he has not made any commitment to do more bond buying, which is how his earlier comments had been interpreted.
On December 1, Mario Draghi gave a speech to the European parliament during which he said that perhaps more could be done to ease the European crisis, but that first the EU leaders must agree to a fiscal compact, a guarantee that nobody would spend recklessly again.
He didn't say so explicitly, but people interpreted these further measures to mean: more bond buying.
So now he's saying that he never hinted that there would be further bond buying, and that he doesn't know why his commenters were interpreted this way. Not good.
99% of S&P 500 companies have reported for Q3 2011With third-quarter earnings largely in the books (99% of S&P; 500 companies have reported for Q3 2011), today's chart provides some long-term perspective on the current earnings environment by focusing on 12-month, as reported S&P; 500 earnings. Today's chart illustrates how earnings declined over 92% from its Q3 2007 peak to Q1 2009 low which brought inflation-adjusted earnings to near Great Depression lows. Since its Q1 2009 low, S&P; 500 earnings have surged (up over 1100%) and currently come in at a level that is greater than what occurred at the peak of the dot-com bubble and very near what occurred at the peak of the credit bubble. It is interesting to note that the original run up in real earnings from Great Depression lows to credit bubble highs took over 78 years. The current spike has taken 29 months.
Corzine "Simply Does Not Know Where The Money Is" - Presenting Jon Corzine's Complete Testimony To Congress "Obviously on the forefront of everyone’s mind – including mine – are the varying reports that customer accounts have not been reconciled. I was stunned when I was told on Sunday, October 30, 2011, that MF Global could not account for many hundreds of millions of dollars of client money. I remain deeply concerned about the impact that the unreconciled and frozen funds have had on MF Global’s customers and others. As the chief executive officer of MF Global, I ultimately had overall responsibility for the firm. I did not, however, generally involve myself in the mechanics of the clearing and settlement of trades, or in the movement of cash and collateral. Nor was I an expert on the complicated rules and regulations governing the various different operating businesses that comprised MF Global. I had little expertise or experience in those operational aspects of the business. Again, I want to emphasize that, since my resignation from MF Global on November 3, 2011, I have not had access to the information that I would need to understand what happened. It is extremely difficult for me to reconstruct the events that occurred during the chaotic days and the last hours leading up to the bankruptcy filing....I simply do not know where the money is, or why the accounts have not been reconciled to date. I do not know which accounts are unreconciled or whether the unreconciled accounts were or were not subject to the segregation rules. Moreover, there were an extraordinary number of transactions during MF Global’s last few days, and I do not know, for example, whether there were operational errors at MF Global or elsewhere, or whether banks and counterparties have held onto funds that should rightfully have been returned to MF Global." Translation - he pleads da FIF.
In Capitol, Investors Pay for Trading Tips Seeking advance word of government decisions is part of a growing, lucrative—and legal—practice in Washington that employs brokers, lobbyists and political insiders who arrange meetings between hedge funds and officials.
Panel to Vote on Insider Trading The chairman of the House Financial Services Committee plans to hold a panel vote next week on legislation to ban insider trading by lawmakers.
Oldest Baby Boomers Face Jobs Bust Many older Americans fear they will be working well into their 60s because they didn't save enough to retire. Those without full-time jobs are short of money and afraid of what lies ahead.
12/19/11
WSJ
Debate Heats Up on Travails of Baby Boomers In part because of improvidence and weak wage growth, in part because many have lost jobs and in part because of the severe recession, Baby Boomers as a group are unready for two or even three decades of life after they stop working. Others decry an economy that allows people to be fired from jobs just as they reach their mid-50s. That is a time when they normally would be earning peak incomes and fattening their retirement savings. Instead, many Boomers without well-paying jobs are spending their late 50s and early 60s running down their savings just to cover the costs of daily life.
12/20/11
WSJ
DERIVATIVES & SWAPS
GENERAL INTEREST
TO TOP
Learn more about Gold & Silver-Backed, Absolute Return Alternative Investments
with these complimentary educational materials
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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.
EUROPEAN UNION - NOVEMBER POSTED GRAPHICS
Scroll Down Page - Latest First, Oldest Last
We drew the 4.5% "Margin Increase' Trigger to show the effective Breakdown Point.
GOES PARABOLIC & DOES NOT RETURN AFTER THE MARGIN TRIGGER!!
Wholesale Lending is now completely frozen,
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.
Europe at Crossroads Sarkozy, Merkel Issue Ultimatum
