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
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.
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Latest Public Research ARTICLES & AUDIO PRESENTATIONS
EURO EXPERIMENT : ECB's LTRO Won't Stop Collateral Contagion! Released December 27th, 2011
I would argue that the problem short term is a shortage of real collateral and that US dollar cash, versus 'encumbered' cash flow, is now king. It is clear that the rampant advancing Collateral Contagion will quickly eat the futile LTRO attempt like ravenous wolves. A well circulated Tweet from PIMCO bond king Bill Gross said it all: " What does LTRO stand for? 1- A shell game; 2-Cash for trash; 3 Three-card Monti; or 4. All of the above." Here is the stark reality of what forced the ECB to offer unprecedented three year loans at absurd rates and most alarmingly, the acceptance of collateral that no other financial institutions will accept. The ECB has sacrificed its balance sheet in yet another EU "kick at the can". 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>>
Last update:
01/21/2012 4:03 AM
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"BEST OF THE WEEK "
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HOTTEST TIPPING POINTS
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This chart provides some further perspective into the past and future trends of 12-month, as-reported, inflation-adjusted S&P 500 earnings. Today's chart illustrates how earnings declined over 92% from its Q3 2007 pre-financial crisis peak and then, beginning in Q1 2009, quickly surged back to near record levels. This begs the question; will corporate earnings make new record highs? As today's chart illustrates, based on the latest S&P 500 earnings estimates (see red line), earnings are expected to make new, inflation-adjusted record highs during the first half of this year. Considering the current global economic environment, this is indeed quite an achievement.
01/20/12
Chart of the Day
T & M ANALYTICS
EARNINGS
GE Profit Declines 18% General Electric's fourth-quarter earnings slipped 18% as revenue declined following the sale of a majority stake in NBC Universal.
Beat on top line, miss on EPS - Margin Compression?
Microsoft's Profit Drops 01/20/12 WSJ Microsoft's profit slipped 0.2% as the software giant recorded lower sales in its Windows and Windows Live segment, though revenue rose in its other divisions.
Beat on bottom, miss on top
IBM Reports 2011 Fourth-Quarter and Full-Year Results 01/20/12 BW
Beat on bottom, miss on top
Intel Reports Record Year $54 Billion in Annual Revenue Up 24 Percent 01/20/12 BW$2.39 in Annual EPS Up 19 Percent $18 Billion in Dividends, Buybacks Returned to Stockholders
Pandit Feels Citi Heat on Expenses Citi's chief executive unveiled an ugly set of fourth-quarter results Tuesday, driven in large part by a poor performance at the bank's securities-and-banking arm. The bank said overall fourth-quarter revenue fell by 7% compared with the prior year, while net profit was down 11%. For 2011 as a whole, net profit increased 6% versus 2010. The performance was in sharp contrast to results also out Tuesday from Wells Fargo, which is more geared to non-Wall Street business. It reported fourth-quarter profit of $4.1 billion, up 20% over the prior year, as consumer and business lending strengthened.
Citi Earnings Miss on Profit and Revenue; Shares Lower 01/17/12 CNBC
Greece Begins Talks With Troika Greece began meeting with a visiting delegation of international auditors for a new bailout loan, coinciding with parallel negotiations with private creditors to restructure the country's debt.
Greece, Creditors Set to Resume Talks 01/19/12 WSJ Greece's government was set to resume talks with its private creditors over a plan to restructure the country's debt, as it worked to secure a deal demanded by its European partners for a new bailout package.
Greek Premier Says Creditors May Be Forced to Take Losses 01/18/12 NY Times: Taking direct aim at hedge funds and other private holders of Greece’s debt, Prime Minister Lucas Papademos says he will consider legislation forcing the creditors to take losses on their holdings if no agreement can be reached in critical negotiations scheduled to resume Wednesday. Mr. Papademos said that if Greece did not receive 100 percent participation in a program in which bondholders would voluntarily write down $130 billion from Greece’s unwieldy $450 billion debt, the country would consider passing a law to require holdouts to take losses. “It is something that has to be considered in the light of expectations about the degree of the participation to be achieved,” Mr. Papademos said. “It cannot be excluded. It is contingent on the percentage.”
Greece Looks More And More Like A Collapsed Society 01/18/12 BI The closing of stores and shops is escalating. Apparently, 20% of all retail establishments are shuttered. Nearly every block has one reminder of the ongoing depression in the economy. The Greek Diaspora is in full swing. People are leaving the country, old and young alike. They are going to Europe, where the prospects of jobs stink, but not as badly at Greece. They are also fleeing to America (family members in the US have been helping out), Australia (where some are welcome) and South America. The talk is that the Greeks are becoming the new Palestinians. They leave their homes, as there is no future there, but all the time they wish they never left. A transition from the Euro to the Drachma would cause huge additional pain. It would devalue the pensions of every citizen by at least 50%. He understands that a default would mean that Greece would be a debt pariah. In spite of this, he prefers that it would come sooner rather than later. He thinks this is the prevailing sentiment in the country. There is nothing desirable about this choice. It’s now just inevitable Read more: http://brucekrasting.blogspot.com/2012/01/greece-china-and-usa.html#ixzz1jofOqoJu
Turks Stage Biggest Protest in Years 01/20/12 WSJ Tens of thousands of Turks marched through central Istanbul, mounting the biggest demonstration for democracy and human rights that the country has seen in years.
Thousands of people held placards and a portrait of the slain journalist Hrant Dink during a commemoration ceremony in front of the offices of the Armenian newspaper "Agos" in Istanbul on Wednesday. .
01/20/12
WSJ
5
5 - Social Unrest
Romanian Riots Reveal A Growing Gloom In Eastern Europe BUCHAREST, Romania (AP) — Romanian cities are gripped by the worst street violence in over a decade. Slovaks seem poised to re-elect a confrontational and divisive populist. Hungary alarms the European Union with laws that erode democratic rights.
In former Soviet bloc nations now part of the EU, frustration is mounting due to economic stagnation and worrisome governance, encouraging street protests and unpredictability that could further jeopardize growth and stability in an already troubled part of the continent.
Many of the problems are common far beyond the region: indebted states hiking taxes and slashing state spending to stay solvent. But the added burdens come to a region that was already grappling with much deeper poverty and corruption than in the West before the global financial crisis hit. Much of the frustration goes back to the way Romania transitioned to democracy after its 1989 coup against dictator Nicolae Ceausescu — with many former communists keeping control of power and resources. The results, today, are seen in
Entrenched cronyism,
A huge gap between rich and poor and
A lack of government transparency that feeds a widespread sense of injustice.
"The Mafioso government stole everything we had!" protesters declared on banners at several of the rallies that have taken place in more than a dozen Romanian cities
Michael Krieger Summarizes "The Building Tension" 01/20/12 Zero Hedge The reason I don’t write about markets so much anymore is because I don’t believe there are markets any longer. Sure there are flashing prices on the screens for various assets and those can be addicting to look at on a daily basis, but I think these “markets” are now merely a mechanism for government propaganda and a method to ultimately fleece more money from the uniformed masses that play in it by the casino operators and their puppets in government. It’s basically a hologram. I have alluded to this in recent interviews, but I myself feel extremely uncomfortable being involved at this point in a way I have never felt before.
Fed Holds Off on Bond Buys 01/20/12 WSJ Federal Reserve officials are waiting to see how the economy performs before deciding whether to launch another bond-buying program.
The underlying trend over the past six months is sufficient to allow policy makers to take further steps to boost economic activity this year should economic conditions warrant or exogenous economic events disturb global financial markets.
Credit Suisse Buys AIG Bonds 01/20/12 WSJ The Federal Reserve Bank of New York sold a multibillion-dollar parcel of risky mortgage bonds Thursday to a unit of Credit Suisse Group AG in a deal that represents its single-largest sale of troubled assets since the financial crisis.
The Substitution Of Debt For Productivity Here's how the substitutiion works: when productivity is flat, then "growth" can be created by leveraging the economy's surplus into greater amounts of debt, which can then be squandered on mal-investments and consumption to foster an illusion of "growth." Note that I use the phrase "meaningful productivity." If a highrise tower is built in the middle of nowhere and sits empty, the construction and related costs (inspections, transport of goods, utilities, etc.) are added to the gross domestic product (GDP) as "growth," even though the empty building is not adding any real value to the economy. The same can be said of millions of unneeded medical tests, millions of doses of medications that don't work as advertised, etc.--all the costs of sickcare that rarely add productive value to the economy but which are all added to the GDP as "growth."
01/20/12
Charles Hugh Smith
MOST CRITICAL TIPPING POINT ARTICLES THIS WEEK - JANUARY 16-21, 2012
EU BANKING CRISIS
1
Spanish Banks' Bad Loans Keep Rising The bad debt ratio of Spain's banking sector rose for the eighth consecutive month in November to a new 17-year high, while deposits and loans shrunk further as the country edged towards a double-dip recession. 7.51% of loans held by banks were more than three months overdue for repayment in November, up from 7.42% in October. It is the highest percentage recorded since November 1994, and contrasts with bad debt levels below 1% of all loans in the years prior to the country's 2008 property bust. loans to shrink at a faster pace this year as lenders reduce risk on their balance sheets. The November data showed banks had cut lending by 2.54% on the year, while the pool of deposits fell at an annual rate of 2.14%.
Eurozone credit crunch fears on M3 money contraction 01/18/12 Ambrose Evans-Pritchard Europe is at mounting risk of a fresh credit crunch after the eurozone money supply contracted for a second month in November and the volume of private loans began to shrink.
01/18/12
Zero Hedge
1
1- EU Banking Crisis
ECB
ECB Seeks Plan B The European Central Bank is looking for a possible alternative to its current bond-buying program, Governing Council Member Ewald Nowotny said.
European Banks Deposit Entire LTRO, And Then Some, With ECB As Deposits Approach €500 Billion 01/16/12 Zero Hedge Back on December 21, the day when the deus ex 3 year LTRO was completed and €489 billion in gross capital was provided to banks at a 1.00% cost, of which €210 billion was net new incremental capital (pro forma for rolling maturities), the ECB deposit facility usage was €265 billion. As of Friday, the ECB announced deposits have grown to just shy of €500 billion, or a new record of €493 billion (which pays banks just 0.25%). In other words, between the LTRO effective date, and today, an additional €228 billion has been deposited, or more than the entire LTRO!
01/17/12
WSJ
1
1- EU Banking Crisis
EFSF
Europe Bailout Fund Borrowing Costs Rise The euro-zone's temporary bailout fund is set to test investor appetite for its debt in the wake of a downgrade that has generated concerns about its future borrowing costs.
Euro shaky after mass ratings downgrade, outlook poor 01/16/12 Reuters
01/16/12
FT
2
2- Sovereign Debt Crisis
Downgrades Fan Fresh Euro Fears The cascade of rating downgrades that hit France and eight other euro-zone nations casts fresh doubts over the monetary union's ability to bail itself out of financial crisis and rescue Greece.
Has The ECB Given Up On Portugal? 01/16/12 Zero Hedge Given the expected shift in the AAA benchmark used for margining (dropping higher yielding France 'AAA's as they are downgraded will lower AAA benchmark significantly and implicitly widen the yielPortugal moves into default territory
Portugal sold €2.5 billion of treasury bills this morning. Yields on its 6-month bills eased to 4.740%, down from 5.250% at a similar auction in November. The average yield on the 3-month bill was unchanged at 4.346%. Portugal also issued 11-month bills for the first time since April 2011, just before it sought its bailout.
d differential for other sovereigns), it is perhaps no surprise that TPTB are active in BTPs (Italian bonds) but it appears that Portugal (admittedly illiquid) has been left to its own devices. Portuguese 10Y bond spreads to bunds just broke 1250bps, +180bps on the day and at record wides. Given the subordination concerns as ESM is accelerated, it is perhaps no surprise that the ECB's SMP has seemingly decided that Portugal has crossed the Rubicon into Greece territory.
World Bank Cuts Growth Forecast 01/18/12/ WSJ The World Bank has revised downward its global growth forecast for 2012, acknowledging that the world is in a precarious position under threat of a Lehman-like crisis engulfing capital markets.
Global Risks 2012 - Seventh Edition 01/17/12 World Economic Forum Economic imbalances and social inequality risk reversing the gains of globalization, warns the World Economic Forum in its report Global Risks 2012. These are the findings of a survey of 469 experts and industry leaders, indicating a shift of concern from environmental risks to socioeconomic risks compared to a year ago. Respondents worry that further economic shocks and social upheaval could roll back the progress globalization has brought, and feel that the world’s institutions are ill-equipped to cope with today’s interconnected, rapidly evolving risks. The findings of the survey fed into an analysis of three major risk cases: Seeds of Dystopia; Unsafe Safeguards and the Dark Side of Connectivity. The report analyses the top 10 risks in five categories - economic, environmental, geopolitical, societal and technological - and also highlights "X Factor" risks, the wild card threats which warrant more research, including a volcanic winter, cyber neotribalism and epigenetics, the risk that the way we live could have harmful, inheritable effects on our genes. Key crisis management lessons from Japan’s earthquake, tsunami and nuclear disasters are highlighted in a special chapter.
Novartis to Cut 1,960 Jobs 01/13/12 WSJ Novartis said it will cut 1,960 jobs as it restructures its U.S. business, reflecting the patent loss of heart drug Diovan in the U.S. and the recent failure to turn high-blood pressure medicine Rasilez into a blockbuster.
Hungary faces ruin as EU loses patience 01/17/12 Ambrose Evans-Pritchard The European Commission has launched legal action against Hungary's Fidesz government for violations of European Union treaty law and erosion of democracy, marking a dramatic escalation in the war of words with the EU's enfant terrible. Hungary's defiant premier Viktor Orbán has no hope of securing vital funding from the EU and the International Monetary Fund until the dispute is resolved, leaving him a stark choice of either bowing to EU demands or letting his country slide into bankruptcy. The immediate dispute centres on three laws in Hungary's new constitution pushed through despite EU warnings. Commission officials say these are just the "tip of the iceberg". Over 300 laws have been passed since Fidesz took power in 2010, giving the party sweeping control over the country's institutional system
01/19/12
WSJ
20
European Car Market Slides The European car market fell by 1.4% to 13.6 million vehicles in 2011, marking the fourth-consecutive annual decline, and the outlook for this year looks bleak as tough austerity measures are expected to eat into demand.
short interest on the NYSE has plunged to practically multi-year lows
When the experts say that the stock market is a leading indicator, maybe they are referring to margin debt — seeing as this provides a bit of a pulse on the investor appetite for risk. The 12-month trend in margin debt slipped into negative terrain in December 2000 and then did it again in April 2008. Both times, heeding this trend paid dividends in the sense that they both led downturns in both economic activity and in equity market valuation. The YoY trend just slipped into negative terrain last November for the first time since 2009 —just something to consider
Online Piracy Bill Faces New Hurdles 01/19/12 WSJ The entertainment industry moved to counter growing opposition to antipiracy bills. But its efforts appeared to have little effect as a series of congressional leaders dropped their support for the legislation.
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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.