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>>
The World Economic Forum's 2012 Risks Report, the IMF's Global Financial Stability Report and our proprietary Aggregated Global Risk Level Index (AGRLI) all suggest global macroeconomic risks are increasing. The consensus findings are that the center of gravity of Global Macro issues are a combination of Chronic Fiscal Imbalances and a Global Governance Failure. 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>>
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01/29/2012 4:10 AM
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"BEST OF THE WEEK "
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"If I get this right, the EFSF is now the bailout mechanism for the ECB's SMP and that the PSI must now be broadened to become the PPSI or Public Private Sector Involvement and ESM is to be readied by this summer to take the place of the EFSF . And all of this just to deal with Greece. Given the failed bailouts, collapsed arrangement, lies, violations of EU law, summits, press conferences can Merkel, Sarkozy, Barroso and Rehn cobble together only to have fall apart before everyone realizes the jig is up? That they have no solution because there is no solution. The system is bankrupt." Chart of the Day
Fitch Gives Europe Not So High Five, Downgrades 5 Countries... But Not France 01/27/12 Zero Hedge
FITCH TAKES RATING ACTIONS ON SIX EUROZONE SOVEREIGNS
ITALY LT IDR CUT TO A- FROM A+ BY FITCH
SPAIN ST IDR DOWNGRADED TO F1 FROM F1+ BY FITCH
IRELAND L-T IDR AFFIRMED BY FITCH; OUTLOOK NEGATIVE
BELGIUM LT IDR CUT TO AA FROM AA+ BY FITCH
SLOVENIA LT IDR CUT TO A FROM AA- BY FITCH
CYPRUS LT IDR CUT TO BBB- FROM BBB BY FITCH, OUTLOOK NEGATIVE
And some sheer brilliance from Fitch: In Fitch's opinion, the eurozone crisis will only be resolved as and when there is broad economic recovery. And just as EUR shorts were starting to sweat bullets. Naturally no downgrade of France. French Fitch won't downgrade France. In other news, Fitch's Italian office is about to be sacked by an errant roving vandal tribe (or so the local Police will claim).
Iran Set to Turn Off Oil Supply to Europe 01/27/12 Spiegel The European Union embargo on Iranian oil will only come into effect in six months, but the leadership in Tehran wants to act first
US to send floating commando base to Mideast The US military plans to send a large floating base for commando teams to the Middle East amid rising tensions with Iran and intensifying fighting in Yemen, The Washington Post reported Saturday.
The Pentagon is rushing a “mothership” to the Middle East to be used by commando teams as unrest in the region heightens, reports The Washington Post. The U.S. Navy is planning to refit the USS Ponce, an amphibious transport docking ship, which was about to be retired and decommissioned. The Post reports that it will now be modified into an “Afloat Forward Staging Base” and used to support mine-clearance ships, smaller patrol ships and aircraft in the Middle East.
Unofficially dubbed a “mothership,” the floating base could accommodate smaller high-speed boats and helicopters commonly used by Navy SEALs,
Portugal's default insurance costs marched to record highs as the yield on its 10-year bond rose toward the record levels reached in July, due to concern about the implications of the Greek debt-restructuring talks. Five-year credit default swaps—derivatives that function like a default insurance contract for debt—were trading near levels Greece's CDS reached last April. The annual cost of insuring $10 million of debt issued by Portugal for five years increased by $31,000 to an average of $1.31 million, although it had declined at the start of trading. The country's borrowing costs were also higher. Its 10-year bond yielded 14.05%, moving up 0.37 percentage point from the close Tuesday, according to Tradeweb data. Yield levels in Portugal need to be viewed with caution because trade in the country's debt is limited and prices are volatile.
Fears Mount That Portugal Will Need a Second Bailout 01/24/12 WSJ Investors, economists and politicians are increasingly concerned that Portugal will need a second bailout as fears mount that it won't be able to return to markets for financing next year.
Too much borrowing by people who couldn’t afford it,
to buy non-productive assets.
And an insanely leveraged banking system run amuck.
Indonesia and South Korea “reset” their systems back in the late 1990s and have emerged stronger and more dynamic than ever. When everything collapsed, the policy prescriptions from the World Bank and IMF for Asia’s sick economies was to:
HIKE interest rates,
CUT government spending,
Further deregulate, liberalize, and open their economies to foreign investment to attract capital;
And let their zombie banks FAIL
Today, the same Western policymakers whose advice got Indonesia and South Korea quickly back on the rails are giving the EXACT OPPOSITE prescriptions for their own economies. They’ve CUT interest rates to near ZERO. Governments have SPENT trillions of borrowed money that they have no hope of ever repaying on ill-advised “stimulus.” They’ve BAILED OUT nearly all the brain-dead banks, keeping them on life support in a coma. Protectionist rhetoric is building up, and more onerous regulations are being ushered in. This is what Japan did after its 1980s bubble. And look at them now. They’re stuck in a time warp, and the Japanese economy remains in a funk.
Germany Approves Bank Bailout Bill 01/27/12 WSJ German lawmakers approved a bill to reactivate the country's bank bailout fund SoFFin to help banks weather the current debt crisis and improve their capital base.
German Bunds Draw Strong Demand The Bundesbank, which conducts German federal debt auctions, sold €2.458 billion ($3.2 billion) at an average yield of 2.62%, down from 2.82% at the previous sale on Oct. 12. The German finance agency received €5.042 billion of bids on its €3 billion offer, leaving the auction strongly covered.
These funds, among the most conservative and largest lenders, now hold $64 billion, or 10% of their total assets—$644 billion at the end of December—in euro-zone bank debt. This is down from $230 billion, or 30%, of the $755 billion total at the end of May. That's when the worsening sovereign debt crisis first sparked funds to begin reducing their exposure to European banks. The money withdrawn from Europe ended up in debt from banks in Australia, Canada and Japan. The percentage of holdings in those countries represents more than 30% of money-market fund assets, up from 20% at the end of May.
ECB Loan Program Has Eased Strains 01/23/12 WSJ The ECB's program of offering three-year loans to euro-zone banks at cheap interest rates has given Europe's bond market a psychological boost and driven down yields on struggling nations' debt.
IMF's Lagarde Warns Europe Over Growth The IMF's Lagarde warned that in addition to cutting budget deficits, Europe needs to do more to promote growth and stop the region's crisis from spreading to the world economy.
01/24/12
WSJ
2
GREECE
Euro Zone Spars Over Greece Germany and the IMF pressed their case at a meeting of finance ministers that Greece's private-sector creditors should agree to interest rates of less than 4%, deepening a standoff that has delayed time-sensitive talks.
Eurozone Fin Mins REJECT Greek Debt Deal BI Eurozone finance ministers have rejected a deal reached by the Greek government and its private creditors to extend maturities on Greek debt. That's according to a eurozone official. Evidently, the finance ministers are asking Greece's creditors to accept a coupon of below 4% on the new Greek bonds it will swap in exchange for existing obligations. Managing Director of the Institute of International Finance Charles Dallara told reporters earlier today that private creditors would accept a maximum haircut on current holdings of 65% to 70%. While the details of the initial deal had not been released, those terms would probably have been part of it. Demands by eurozone finance ministers for a more potent deal diminish further the likelihood that all Greece's creditors will agree to participate in the swap voluntarily. Several hedge funds have already threatened to press a legal case if they are forced to stomach the losses on a "voluntary" basis without provoking a credit event.
Super Mario’s bank rescue no lifesaver for a dying Greece G&M If you think Greece, sinking ever deeper into the recession hellhole, can survive, let alone thrive, with €100-billion less debt, we’ve got a deal for you on a nice little Athens bank. And we’ll throw in the subsidiary branches in Portugal and Ireland for free...
Syria Rejects Arab League Plan 01/23/12 WSJ Syria rejected a new Arab League plan aiming to end the country's 10-month crisis by calling on the government and the opposition to form a national unity government within two months.
EU Sets Embargo on Iranian Oil 01/24/12 WSJ EU foreign ministers approved an oil embargo on Iran, moving past an internal debate on the economic burden on some members.
U.S. Sanctions Iran's 3rd Largest Bank - Bank Tejarat 01/24/12 WSJThe U.S. Treasury Department's action on Monday follows President Barack Obama's move last month to ban any American dealings with Iran's central bank, and an agreement by the European Union earlier Monday to ban all purchases of Iranian oil. Bank Tejarat is the 23rd Iranian-linked financial institution to be blacklisted by the U.S. since 2006. The list includes all of Iran's largest state-owned banks. Treasury officials said they sanctioned Bank Tejarat for its alleged role in financing Iran's nuclear program and for assisting other designated Iranian banks and companies in evading international sanctions.
Severely depressed real estate prices continue to be a concern for investors. For some perspective on the magnitude of the decline in home prices, today's chart presents the median single-family home price divided by the price of one ounce of gold. This results in the home / gold ratio or the cost of the median single-family home in ounces of gold. For example, it currently takes a relatively low 105 ounces of gold to buy the median single-family home. This is dramatically less than the 601 ounces it took back in 2001. When priced in gold, the median single-family home is down over 80% from its 2001 peak, remains well within the confines of a six-year accelerated downtrend and remains very near its 1980 trough.
Obama: High-Earners Should Pay 30% of Income as Tax 01/25/12 BL “It’s time to apply the same rules from top to bottom: No bailouts, no handouts, and no copouts. An America built to last insists on responsibility from everybody.” -- “So if you’re a big bank or financial institution, you are no longer allowed to make risky bets with your customers’ deposits. You’re required to write out a “living will” that details exactly how you’ll pay the bills if you fail – because the rest of us aren’t bailing you out ever again.” -- “...anyone who tells you that America is in decline or that our influence has waned, doesn’t know what they’re talking about.”
Economic Programs Are Outlined 01/25/12 WSJ The president offered Americans a populist economic vision in the State of the Union address, seeking to draw a contrast with his eventual GOP rival.
Pension-fund officials say they increasingly are turning to private equity in an effort to hit annual return targets of 8%. Over both the past five years and the past 10 years, private-equity returns were more than double those of the S&P 500 stock index and the Dow Jones Industrial Average, according to Cambridge Associates LLC, which tracks over 4,500 private-equity firms.
As of September 2011, median private-equity returns for large public pension funds over the past five years was 6.6%, according to Wilshire Associates. Median stock-market returns for those funds were a negative 0.9% over that same five-year period.
Today, pension-fund managers "would say you may be breaching your fiduciary duty if you avoid this asset class," said Bill Kelly, a lawyer at Nixon Peabody who has worked with pensions and private-equity firms for 30 years.
Pension funds are experimenting with new ways to team up with private-equity firms, such as publishing joint research and investing directly in companies alongside private-equity partners.
In November, the $100 billion Teacher Retirement System of Texas made one of the largest single private-equity investment ever—a $6 billion commitment to new partnerships with Apollo Global Management and KKR & Co. The pension fund and the two New York firms will swap strategies and share resources.
01/26/12
WSJ
21
21 - Pension - Entitlement Crisis
United Welfare States of America: In 2011 Nearly Half The Population Received Some Form Of Government Benefit in 2011 nearly half of the population lived in a household that receives some form of government benefit, which in turn accounted for 65% of total federal spending, or $2.5 trillion, and amount to 15% of GDP. Something tells us that there will be a peculiar overlap between this 50% and the 50% of Americans that pay zero taxes.
01/23/12
Zero Hedge
27
27- Government Backstop Insurance
NEC Forecasts a Loss NEC plans to cut 10,000 jobs and warned that asset write-downs and restructuring costs will result in a net loss of more than $1 billion this fiscal year.
01/27/12
WSJ
32
32 - Corporate Bankruptcies
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“...the Committee...currently anticipates that economic conditions...are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.”
Fed Expects Low Rates Through 2014 01/26/12 WSJ Fed officials said they expect short-term interest rates to stay close to zero "at least through late 2014," longer than previously.
Stephen Roach Explains How The Fed Is Pulling The Wool Over Our Eyes "Bernanke is betting the ranch on open-ended QE and zero interest rates and it worries me" is how Stephen Roach of Morgan Stanley starts this must-see reality-check interview with Bloomberg TV's Tom Keene. The reason for his concern is simple, the current Fed modus operandi is a framework for rescuing economies in crisis but does little to sustain economic recovery. Roach agrees with Cal's Eichengreen that the European and US central banks are indeed in a policy trap, committed to a path of action that has to be perpetually ante'd up to maintain the dream. With Europe in recession already in his view, Roach does not expect the tough structural action until we see greater social unrest or overwhelming unemployment and reminds us of how close we got when Greece threatened the referendum in the late summer. He goes on to discuss China (positive on their efforts and 'solid strategy') and it's relative success as a regime which he contrasts with our "central bankers who pull the wool over our eyes with ZIRP and magical QE". Taking on the mistakes of Greenspan, letting capitalism go unchecked, and his incredulity at the 'glide-path' charts we were treated to yesterday by the Fed's bankers ('accountability'), Roach sees the painful process of deleveraging from excess debt, insufficient savings, and over-consumption as likely to take a long time as we should not assume investment will be the driver as Obama goes 'protectionist' (in the SOTU) on our 3rd largest export partner - yes, China.
01/27/12
Zero Hedge
CENTRAL BANKING
TECHNICALS & MARKET ANALYTICS
Biderman Explains The Bullish Market PonziAll markets trade their way to Perdition" is how TrimTabs' CEO Charles Biderman concludes a rather clear and factually full exposition of the reason we have gone up and the reality of why a drop is inevitable. Between the outsize number of investment vehicles relative to investable assets, the trend bias that every wealth manager seems stuck with that we will grow our way out of this mess (which Biderman suggests means a long-term rate of 5-10% GDP growth for the US - which seems obviously beyond our reach). He takes on the irony of the Wall Street vs Main Street arguments and warns of the inevitable plunge in the stock market (further believing that the winner of the next election is irrelevant given the cash vs special needs imbalance that exists). The US economy, if marked to market, is broke. Take home pay for all taxpayers is now only $6.2tn, down from $7tn at its peak in 07, and additionally we have created $5tn of new debt since the start of QE1 and owe a PV of $50tn in 'unfunded' liabilities leaving the future looking quite grim in his view. Perdition indeed appears to be looming given the Fed's far from sanguine view of reality.
01/27/12
Zero Hedge
MARKET ANALYTICS
Dow Highest Since May 2008? Maybe Not? If it were not for CAT, HD, MCD, and IBM things would look a lot different The headlines are crowing of the magnificent CAT earnings (channel stuffing?) which in turn is helping the Dow reach its highest point since May 2008 (CAT is responsible for 27 of the Dow's 30 point gain today alone). This must be the signal that we-the-consuming-people need to borrow-and-spend again right? Well, no. Unfortunately, as many already know, the process of indexing is implicitly flawed in many ways - most importantly survivorship bias.
If we compare the performance of the components of the Dow at the start of 2008 to the actual Dow index performance, there is a very significant divergence of around 7% (or around 900 points). This is actually understating the difference (as it is an average) as we note that 5 of the 30 names from 2008 have lost more than 70% of their value (GM, AIG, C, BAC, and AA) since January 2008 (averaging -88% among those).
Three names have risen by more than 70% (MCD, HD, and IBM - thank you Warren) as 18 of the 2008 Dow 30 names are lower (on average -36.5%) with the remaining 12 Dow 2008 names up on average 33%. What is worse is the realization of the dramatic loss in real purchasing power as Gold has risen by more than 100% since the start of January 2008 as the Fed continues to realize it can abuse the lemming-like focus on nominal returns.
The media and analyst community were convinced early on in 2007, even though we did protest heavily, that the economy would experience a "Goldilocks scenario" and the economy would "muddle through." As the market declined, and one indication after another showed that the coming crisis would be far worse than people imagined, investors remained complacent until the "Oh $#@!" moment occurred. Unfortunately, by that time it was far too late. The same thing occurred in 2009 as the Fed intervened with quantitative easing and then again in 2010 with Q.E. 2. Each time, as the volatility index retraced back to levels of complacency, the seeds were sown for the next "Oh $#@!" moment.
"Most measures of market sentiment are back to where they were last May just when the S&P 500 was peaking.
Short interest has dried up to three year lows.
The VIX closed the week below 20 for the first time since last July.
As Mike Santoli points out in Barron's, volume in leveraged ETF's versus bearish ones has risen to levels that in the past touched off interim market pullbacks.
Credit market indicators have lagged well behind the improvement in equity performance.
The S&P 500 is three standard deviation points above its 20-day moving average.
Again, as Barron's points out, the ratio of the 15-day volume puts on the S&P 100 Index to bullish call volume hit 2-to-1 last week - this happened in the February 2007, February 2011 and April 2011."
Volume Crashes As Stocks End Unchanged 01/24/12 Zero Hedge Amid the lowest NYSE volume of the year (-24% from Friday - OPEX) and pretty much the lowest non-holiday-period volume in 9 years based on Bloomberg's NYSEVOL data, ES (the e-mini S&P 500 futures contract) ended the day almost perfectly unchanged underperforming 5Y investment grade and high-yield credit indices on the day as both moved to contract tights (their best levels since early August last year) even as their curves flattened. With a third of the quarter already done, this is shaping up to be an even worse quarter for banks that Q4. With trading volumes so far this year 18% lower than the Q4 (ex-Xmas), we can only assume that what they lose in volume they make up for in margin so expect your bid-offer spreads to widen (viciously exaggerating the decline in trading volume we suspect). The chart above shows the mind-blowingly bad NYSE stock volume appears to be the lowest non-holiday period trading volume we have seen in 9 years
Even as the economy has sluggishly improved, far too many consumers remain dependent on government assistance to make ends meet.
More than seven million people are living on unemployment benefit insurance.
Food stamps usage has increased 43 percent since 2009, with a near 19 percent increase from 2010 to October 2011.
As of October, 46.2 million Americans were in the supplemental nutrition assistance program, which is nearly 15 percent of the total U.S. population of 311 million in late 2011.
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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.