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>>
Last update:
02/02/2022 3:23 AM
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"BEST OF THE WEEK "
Posting Date
Source
Tipping
Point
HOTTEST TIPPING POINTS
Highlight Groupings
ECB
The perils of Mario Draghi's 1.5 trillion blitz 02/01/12
Goldilocks Is Back - China PMI Rises To 50.5, Modest Beat Of Expectations, Shy Of Whisper Number 02/01/12 Zero Hedge China's goal-seeked economy performed admirably in January, and its Manufacturing PMI came absolutely golidlocks at 50.5, an increase from 50.3, previously, just modestly beating Wall Street expectations of a slight contraction of 40.6, yet a less than earlier whisper numbers which put it at 52. As such, thereis absolutely no indication if the PBoC will further tighten or ease in the next month, just as the PBoC likes it, because while many have been demanding easing in the last several weeks, and especially the housing market, the reality is that hot pockets of inflation still remain. Furthermore, the last thing China needs is to proceed with full on easing just as Bernanke goes ahead and launches QE x which will export more hot money, and thus inflation, to China than anywhere else, with the possible exception of gold.
And here are some observations from Bloomberg's Michael McDonough:
Headline PMI remained above 50 for two consecutive months; another 50-plus reading in Feb. would be very positive sign,
Underlying data still weak with new export orders falling to 46.9 from 48.6, while new orders rose to 50.4 Typically if this were true bottom, all forward-looking sub-components would rise above 50 in a month prior or the same month as headline index
Building domestic pressure coupled with foreign risks should continue to weigh on the Chinese economy, including the PMI going forward, forcing policy makers to cut RRR and eventually policy rates once they are convinced threat of inflation has been squelched
As Nomura notes, there seems to have been an unusual seasonal adjustment.
China’s official Purchasing Managers' Index (PMI) unexpectedly rebounded to 50.5 in January from 50.3 in December, much better than expected (Consensus: 49.6; Nomura: 49.0). The uptick may be partly due to an unusual seasonal adjustment. Since 2005 the PMI has shown a strong seasonal decline of 1.1 points on average in January (except for 2009). The accompanying press release indicates that the PMI this month was seasonally adjusted; an unusual move that may have contributed to the rebound.
What's also worrisome is that several key subcomponents showed strain.
...the export outlook appears to be under increasing strain, as the new export orders component fell sharply to 46.9 from 49.8 in December. Moreover, the overstock order component fell to 43.2 from 46.6 and the import component to 46.9 from 49.1, both now at their lowest levels since early 2009, when the economy was seriously affected by the global financial crisis. The employment component fell sharply to 47.1 from 48.7, the lowest in 35 months. Besides the impact from the new year, we believe the employment component reading may also reflect the strain facing the labour-intensive export sectors.
Euro area manufacturing declined for the sixth-consecutive month, data from Markit's Eurozone Manufacturing Purchasing Managers' Index showed. The index improved to 48.8 from a 46.9 reading in December, but remained below 50. Germany and Austrian PMI's topped 51, while French PMI was down slightly to 48.5
Euro zone manufacturing shrinks again in Jan: PMI 02/01/12 Reuters
02/01/12
FinFacts
Obama Plans Refinance Aid to Lift Housing Obama is expected to announce a fresh bid to revive the housing market—despite likely congressional opposition—by letting millions of homeowners refinance their mortgages.
Dead Market Exhibit A: January Volume Presented with little comment except to say that the total lack of volume (and massive concentration of what volume there is at the close) is hardly reflective of a market that is anything other than broken and dying. Last January (2011) the average number of stocks traded on the NYSE per day was 891mm shares vs 661mm for this January (a 26% drop YoY!) and this is down an incredible 59% from January 2008.
Amazon Slides After Missing Revenues Expectations, Guides Much Lower 02/01/12 Zero Hedge Amazon slides 10% after hours as it reports much weaker revenues of $17.43 billion on expectations of $18.26 billion. EPS are not really comparable but seems to beat EPS of $0.16 on Exp. of $0.38. This may not be apples to apples. More importantly, the company guides Q1 to Operating Loss of $200MM to Income of income of $100MM, on Wall Street Consensus of $268MM, and guides to Q1 revenue of just $120-$13.4 billion on Estimates of $13.4 billion: pretty wide range there
Amazon's Spending Hurts Profit 02/01/12 WSJ Amazon is struggling to make money as quickly as it spends it, putting the squeeze on the online retailer's latest financial results and crimping its outlook
HONDA: 01/31/12 Honda announced net profitfell 41 percent to ¥47.66 billion, or $624.3 million, as a strong yen eroded international margins and Thai suppliers only started coming back on line. The company forecast full year net profit of ¥215 billion, well below analyst expectations for ¥250.5 billion.
MOST CRITICAL TIPPING POINT ARTICLES THIS WEEK - JAN. 30 - FEB. 4th, 2012
EU BANKING CRISIS
1
ECB
Banks set to double crisis loans from ECB Emergency funding take-up could reach €1tn European banks are preparing to tap the European Central Bank’s emergency funding scheme for up to twice as much as the ECB supplied in its debut €489bn auction last month, providing further evidence of the sector’s liquidity squeeze. Several of the eurozone’s biggest banks have told the Financial Times that they could well double or triple their request for funds in the ECB’s three-year money auction on February 29. “Banks are not going to be as shy second time round,” said the head of one eurozone bank at last week’s World Economic Forum in Davos. “We should have done more first time.” Three bank chief executives, all of whom asked to remain anonymous, said they were planning to increase their participation twofold or threefold.
You Ain't Seen Nothin' Yet; Another Trillion (or Two) Euro LTRO Coming Next Month 01/30/12 Mish Last month, European banks tapped the ECB for €489bn in a long-term refinance operation dubbed LTRO. On February 29, another round of LTRO is coming up and expect banks to go for the gusto. Banks like cheap money to speculate and that is exactly what they will do. The money is supposed to go for bank lending but it won't. Why should banks lend? They have a guaranteed profit by speculating in Spanish or Italian bonds, assuming of course Spain and Italy do not need bailouts coupled with a writedown on government debt
Mario Draghi, the Latin Bloc’s monetarist avengerOne dreads to think what would have happened to Europe’s banking system and to the solvency of Italy and Spain if Mario Draghi had not come to the rescue before Christmas...
U.S. Banks Tally Their Exposure to Europe's Debt Maelstrom
01/30/12
Dealbook
1- EU Banking Crisis
Santander Profit Tumbles 98% Banco Santander said its fourth-quarter net profit plummeted 98% after it took a $2.38 billion charge on its Spanish real estate holdings, and as the bank set aside more funds to cover bad property loans.
Interesting calculations posted by Spiegel from the Kiel Institute on the sovereign haircuts which would make the debt of the listed countries sustainable.
European Bailout Infographic: Presenting The Truckloads Of Cash Needed To Rescue The Insolvent PIIGS 01/30/12 Zero Hedge one would need a 13 lane highway, filled with trucks bumper to bumper, stretching for about 3 kilometers to represent the €2.91 trillion in total amounts owed by the PIIGS and their citizens (whether voluntarily or not... actually make that involuntarily) to Europe's largest banks. What is most frightening is what is not shown: just how it is that the world's central banks are keeping all of these banks propped up. Because sooner or later all this money will be discovered to have been fatally misallocated. Then the real bailout cost will become all too evident, and just like in the US, it will be in the double digit trillions. Which means the metaphorical highway of trucks full of cash will stretch on for kilometers and kilometers and so on (or miles, for the naive US-based truckers). But since that day is in the future, there is no reason to worry about it.
01/31/12
BI
2
2- Sovereign Debt Crisis
EU SUMMIT
Europe Tightens Fiscal Ties European leaders agreed on a pact to move to closer fiscal union and signed off on details of a permanent bailout fund for the euro zone—yet Greece's debt restructuring threw a shadow over the summit
The European Union headed closer to fiscal unity when leaders of 25 member countries agreed to sign a treaty ('FISCAL COMPACT') designed to stop overspending and move forward with the establishment of a permanent E.U. rescue fund. The compact includes rules that limit debt allowances and makes it harder for countries to avoid sanctions if running debt above certain metrics. Britain and the Czech Republic said they were against the new ties.
Eurozone ministers push toward tighter budget rules 01/29/12 Washington Post
Overall, 23 million people are jobless across the EU, 10 percent of the active population. In Spain, unemployment has soared to nearly 23 percent and closed in on 50 percent for those under age 25, leaving more than 5 million people out of work as the country slides toward recession.
Portugal has a tiny economy, but the one country that's overwhelmingly exposed to it is Spain. And yet, here's the Spanish 2-year. It's pretty much making the exact opposite move of late.
Occupy Protesters in Oakland Clash With Police Violence between authorities and Occupy protesters in Oakland flared over the weekend in a showdown demonstrators planned and police expected. Oakland police said they arrested more than 400 people
India says it won’t cut back on Iran oil imports, in defiance of stiffer US and EU sanctions 01/31/12 AP
01/30/12
FT
6
6 - Geo-Political Event
Weaning Off 'Alternative' Investments Just five years ago, it was illegal for South Carolina's public pension plan to invest in hedge funds and other complicated bets. Now, nearly half its assets are in such investments. That is way too much for the state treasurer.
01/30/12
WSJ
21 - Pension - Entitlement Crisis
Rising Income Is Saved, Not Spent Incomes ticked up in December but consumers chose to save instead of spend, suggesting a still-cautious outlook that likely has carried into 2012.
U.S. consumers fizzle out even as incomes rise 01/30/12 Reuters
01/31/12
WSJ
31
31 - Slowing Retail & Consumer Sales
TO TOP
Gold & Silver Backed, Absolute-Return
Alternative Investments Q&A -- Hit PLAY to hear all or click on a specific title below
past performance is no guarantee of future results.
Other News Items of Importance
GLOBAL MACRO REPORTS & ANALYSIS
CENTRAL BANKING MONETARY POLICIES, ACTIONS & ACTIVITIES
TECHNICALS & MARKET ANALYTICS
MARKET ANALYTICS
Yields Plunge Most In 3 Months As Equity-Debt Divergence Remains The Treasury complex is seeing yields (and curves) compress dramatically today. With 5Y at all-time low yields and 30Y rallying the most in three months, the divergence between stocks and bonds appears ever more glaring. 30Y (which just went positive YTD in price) has traded around the 3% yield mark for much of the last 4 months (around 120bps lower than its average in Q2 2011 - pre-US downgrade) and most notably curve movements (as the short-end becomes more and more anchored to zero) have been dramatic. 2s10s30s is now at almost four-year lows and the last four times we saw equities diverge (up) from bonds' sense of reality, it has been stocks that have awoken. Back of the envelope, 2s10s30s suggests that the S&P should trade around 1100 (as we test 1300 in cash today).
SOCIETE GENERALE: The spread between high and low beta equities has also been very wide. When measured using deciles, we find a spread of around 15% in the US, and a remarkable 20% gap in Europe. Over the last 22 years we have only recorded such a wide spread in Europe on two other occasions – in October 2002 and in March/April 2009. This isn't necessarily bullish, however. While the strong performance of high beta names may indicate a potential bottoming out of equity markets, we have seen numerous occasions in the US where the spread has been wider than the current 15% and where the equity market continued to trend lower. Notably almost all these bear market beta rallies coincided with an interest rate cut from the Fed.
NOMURA: The decline in implied volatility (red line) vs. the a basket of "high-risk" stocks (grey line, inverted). As you can see, the grey line hasn't caught up to the red line, suggesting more strong performance for the risk basket.
01/30/12
BI
MARKET ANALYTICS
MARKET WARNING
Hussman Warns : Goat Rodeo: "Conditions like today's have generally been followed by a 25% crash within 6 months"
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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.