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JUNE 2012: GLOBAL MACRO TIPPING POINT - (Subscription Plan III)

GROSS DOMESTIC DISTORTIONS: GDP Does Not Stand for "Gross Distortional Propaganda" despite Government Actions! - The GDP presently being used to reflect Economic Growth is based on 1- A Now Flawed Economic Growth Formula, 2- Uni-Directional Inflation Gimmicks such as Hedonics, Substitution and Imputation to name only a few, 3- A Deflator that is even lower than the bogus CPI to keep GDP reporting articifically high, 4 - A Process of Government Gaming of the formula. Real Growth in the US is negative and has been for sometime. This is clear to the man on the street but something that those in the Ivory Towers can't comprehend because their misprogrammed computer screens are giving them flawed analysis.  - The "Peek Inside" shows the detailed coverage available this month.

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MISGUIDED PUBLIC POLICY: Could Irresponsible Populist Policies be Steadily Destroying the System? - If you employ a decision making process that is based on an absurdly expensive electioneering hurdle, to decide on highly complex matters, debated through the beliefs in false economic theory, with highly polarized views - is it then any wonder we get either gridlock, kick-the-can-down-the road or pork barrel politics? We have a flawed and inoperable system that is doomed to waiting for crisis events to take actions that then have little probability of success. . MORE>>

MARKET ANALYTICS & TECHNO-FUNDAMENTAL ANALYSIS

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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.  - The "Peek Inside" shows the detailed coverage available this month.

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	PART I - Understanding FINANCIAL REPRESSION
	PART II - FINANCIAL REPRESSION in Europe
	PART III - FINANCIAL REPRESSION in the US & ASIA
	PART IV - Preparations for FINANCIAL REPRESSION

Password: macro

RISK - Pre Greek Election Weekend

What Are Bonds Worried About That Stocks Aren't? 06/15/12 Zero Hedge

Equity markets remain exuberantly willing to carry risk into the weekend on the "it's discounted" argument or the "Central Banks will save us" scenario.

However, it appears investors are more anxiously buying Treasury bonds into the weekend as safe-haven flows continue (and Spanish bond yields press back up to 7%) and Swiss 2Y rates hold at -32bps.

Euro strength on repatriation flows and stocks diverging from risk-assets in general make us nervous for this rally holding (especialy given the underperformance of financials from the open).

EU BANK RUNS - The Issue is Disruptive Internal Flows & Capital Flight

From An Orderly EUR Decline To A Capital Flight Crisis In 4 Easy Steps 06/14/12 Zero Hedge

Thomas Stolper, Goldman Sachs - What Could Turn an Orderly EUR Decline into a Capital Flight Crisis?:

Euro Decline Has Been Orderly So Far... as volume seems well-controlled however implied volume (forward expectations of volatility) is rising very notably.

The market is starting to price in more extreme scenarios and safe-havens (swissy-Swiss 2Y rates hold at -32bps) are bid.

Disrupting Internal Flows Could Trigger a Euro Capital Flight Crisis

At the extreme, and in the absence of a legislated true European risk-free asset, a capital flight crisis could hypothetically occur, if investors start doubting that any placement in cash or government bonds can guarantee them a return of their placement in Euros. So what could cause such a disruption? In principle, it could be a situation or a policy initiative that either incentivises or forces people to seek a safe return of (rather than on) their principal in a jurisdiction outside the EMU, despite the considerable FX risks involved.

Some examples we can contemplate are:

1. Invalidation of the ECB’s Target 2 facilities would interrupt the (so far unlimited) capacity to shift cash within the European banking system. Even a signal that such a development could occur (upon certain conditions) in just one country in the EMU could potentially lead to a large-scale flight of deposits from the Euro area.
2. Capital controls within Europe, and legislated barriers to capital transfers within European financial markets, would have a similar impact.
3. Taxation by core countries on capital inflows is sometimes viewed as a disincentive for capital to migrate from the periphery to the core. Should it be applied on a large scale, it could make the relative risk-reward of assuming currency risk to safeguard return of principal more appealing.
4. Negative yields on core European fixed income. It is possible to envisage that, at times of extreme tensions, nominal yields for core European bonds could decline below zero as investors could decide to pay a premium for ‘insurance’ on their capital. Sufficiently negative yields could also increase the risk-reward for local investors to assume currency risk.

This is not an exclusive list of triggers for a capital fight crisis in the Euro area. Nor are all of these examples equivalent in terms of their impact (for example, Target 2 disruptions could cause much more tension than return disincentives). But it helps illustrate the types of outcome that have the potential to derail the current Euro area investor/depositor rational bias to remain EMU-based

SPAIN - Housing to fall another 25% with it being 79% of Spanish Household Assets

Spanish Assets Wildly Overweighted with Housing 06/15/12 Barry Ritholtz

Real Estate comprised 79% of Spanish household assets, according to Jon Carmel at Carmel Asset Management (he credits the chart above to Oliver Wymann). That is 50% more than many other European countries, double the UK and triple the US.

I would expect mean reversion to be rather discomforting.

With all eyes on Greece, Carmel sees Spain as “worse than the market anticipates.” He points out these 5 bullet points as to why Spain’s RE market has much further to fall:

1. Spain’s national debt is 50% greater than the headline numbers
Spain’s debt-to-GDP balloons from 60% to 90% of GDP with regional and other debts

2. Spain’s housing prices will fall by an additional 35%
Spain built one house for every additional person added to the population during the
past two decades; the fall will decrease GDP by ~2% each of the next two years

3. Spain has “zombie” banks with massive loans to developers and to homeowners
Banks have not begun to realize losses and are vastly undercapitalized

4. Spain’s economy has not stabilized and will continue to deteriorate
Spain has the highest unemployment in the developed world, one of the highest overall
debt loads, and the most uncompetitive labor market in Europe

5. The EU will not have the firepower or political will to bail out Spain
Rescue fund headline numbers are misleading and count capital that is not yet
committed

CRONY CAPITALISM: Enforceable Global Corporate Goverance

Public Citizen News Release 06/13/12 "An Incredible Corporate Power Tool"

Treaty Negotiated In Secret – Hidden Even from Congressmen Who Oversee Treaties – Threatens to Destroy National Sovereignty 06/14/12 Zero Hedge

The normally-reserved Yves Smith asks whether Obama should be impeached over it.

Democratic Senator Wyden – the head of the committee which is supposed to oversee it – is so furious about the lack of access that he has introduced legislation to force disclosure.

Republican House Oversight Committee Chairman Darrell Issa is so upset by it that he has leaked a document on his website to show what’s going on.

What is everyone so furious about?

An international treaty being negotiated in secret which would not only crack down on Internet privacy much more than SOPA or ACTA, but would actually destroy the sovereignty of the U.S. and all other signatories. It is called the Trans-Pacific Partnership (TPP).

Wyden is the chairman of the trade committee in the Senate … the committee which is supposed to have jurisdiction over the TPP. Wyden is also on the Senate Intelligence Committee, and so he and his staff have high security clearances and are normally able to look at classified documents. And yet Wyden and his staff have been denied access to the TPP’s text.

This is similar to other recent incidences showing that we’ve gone from a nation of laws to a nation of powerful men making laws in secret.

For example,  in the summer 2007, Congressman Peter DeFazio – who is on the Homeland Security Committee (and so has proper security access to be briefed on so-called “Continuity of Government” issues) – inquired about continuity of government plans, and was refused access. Indeed, DeFazio told Congress that the entire Homeland Security Committee of the U.S. Congress has been denied access to the plans by the White House (video; or here is the transcript). The Homeland Security Committee has full clearance to view all information about COG plans. DeFazio concluded: “Maybe the people who think there’s a conspiracy out there are right”.

As University of California Berkeley Professor Emeritus Peter Dale Scott warned:

If members of the Homeland Security Committee cannot enforce their right to read secret plans of the Executive Branch, then the systems of checks and balances established by the U.S. Constitution would seem to be failing.

To put it another way, if the White House is successful in frustrating DeFazio, then Continuity of Government planning has arguably already superseded the Constitution as a higher authority.

SWAPS: How Things REALLY Work

The Greatest Hoax Ever Perpetrated on Mankind 06/15/12 Rob Kirby

A few years ago, when J.P. Morgan grew their derivatives book by 12 Trillion in one quarter [Q3/07] – I did some back of the napkin math – and figured out how many 5 and 10 year bonds the Morgue would have necessarily had to transact on their swaps alone – if they are hedged.  The bonds required to hedge the growth in Morgan’s Swap book were 1.4 billion more in one day than what was mathematically available to the entire domestic bond market for a whole quarter?

Put simply:

Interest Rate Swaps create more settlement demand for bonds than the U.S. issues.

This is why U.S. bonds “appear” to be “scarce” – which the bought-and-paid-for mainstream financial press explains to us is “a flight to quality”.  Better stated, it’s a “FORCED FLIGHT [or sleight, perhaps?] TO FRAUD”.

Assertions that netting “explains” this incongruity are a NON-STARTER.  Netting generally occurs at day’s end – the math simply does not even work intra-day.

Further Evidence of Gross Malfeasance in the U.S. Bond Market

Back in 2008, at the height of the financial crisis, folks are reminded how the Fed and U.S. Treasury were unsuccessful in finding a financial institution to either acquire or merge with Morgan Stanley.  Unfortunately, Morgan Stanley’s financial condition has continued to deteriorate:

Analysis: How Morgan Stanley sank to junk pricing

REUTERS | June 1, 2021 at 5:45 pm |

(Reuters) – The bond markets are treating Morgan Stanley like a junk-rated company, and the investment bank’s higher borrowing costs could already be putting it at a disadvantage even before an expected ratings downgrade this month.

Bond rating agency Moody’s Investors Service has said it may cut Morgan Stanley by at least two notches in June, to just two or three steps above junk status. Many investors see such a cut as all but certain.

Many U.S. banks are at risk of a downgrade, but ratings cuts could affect Morgan Stanley most because of the severity of the cut and because of its relatively large trading business…..

The “take-away” from the article above is that Morgan Stanley is not a particularly good credit and the trajectory of their “credit” has been “negative” for some time – particularly since the financial crisis of 2008 when the Fed/U.S. Treasury could not find anyone willing to acquire them.  The Reuter’s scribe also pointed out something highly relevant when she said Morgan Stanley has a “relatively large trading business”.  Let’s explore this a little bit deeper.  According to the U.S. Office of the Comptroller of the Currency [OCC] Morgan Stanley’s derivatives book stood at 52.2 TRILLION at Dec. 31/2011.  So to say that Stanley’s trading business is “relatively large” is perhaps a gross understatement [or maybe an intentionally misleading statement?] – since it is currently the third largest “known” derivatives book in the world:

Click To Enlarge

Ladies and gentlemen, the ENTIRE GLOBAL BANKING COMMUNITY DOES NOT HAVE SUFFICIENT CREDIT LINES, FOR MS, TO ALLOW MORGAN STANLEY TO GROW THEIR SWAP BOOK BY 8 TRILLION IN 6 MONTHS.  Do remember, the Federal Reserve has purview over Bank Holding Companies – so the Fed necessarily knows “who” the other side of these trades really is – and they are implicitly “comfortable” with the counter-party risk.

Ergo, Morgan Stanley necessarily had a NON-BANK counterparty for this 8 Trillion increase in the SWAPS component of their book.  The counter-party for Morgan Stanley’s swaps book is, by-and-large, the same counter-party as J.P. Morgan, Citi, B of A and Goldman.

Now, you have to think about “WHO” or “WHAT” would have the motivation to do this business with Morgan Stanley et al?   In light of the psychedelic, incomprehensibly large amounts of swaps being consummated between Morgan Stanley and this “unidentified” counterparty – it is most likely that the counterparty is none other than the U.S. Treasury’s Exchange Stabilization Fund [ESF] – an entity that is accountable to NO ONE, has absolutely ZERO oversight and operates above ALL LAWS.  It is HIGHLY probable that these trades are being used as a means of undeclared stealth bailout / recapitalization of Morgan Stanley on the public teat in conjunction with arbitrarily controlling the long end of the interest rate curve.

It’s all about national security/preservation of U.S. Dollar Standard.  The following underscores what lengths the governing apparatus will go to – to ensure the perpetuation of actual/perceived U.S. Dollar hegemony:

First reported by Dawn Kopecki back in 2006 when she reported in BusinessWeek Online in a piece titled, Intelligence Czar Can Waive SEC Rules,

"President George W. Bush has bestowed on his [then] intelligence czar, John Negroponte, broad authority, in the name of national security, to excuse publicly traded companies from their usual accounting and securities-disclosure obligations. Notice of the development came in a brief entry in the Federal Register, dated May 5, 2006, that was opaque to the untrained eye."

What this means folks, if institutions like J.P. Morgan, Citi, B of A, Goldman or Morgan Stanley are deemed to be integral to U.S. National Security - can be "legally" excused from reporting their true financial condition – including KEEPING TWO SETS OF BOOKS.  The entry in the Federal Register is described as follows:

The memo Bush signed on May 5, which was published seven days later in the Federal Register, had the unrevealing title "Assignment of Function Relating to Granting of Authority for Issuance of Certain Directives: Memorandum for the Director of National Intelligence." In the document, Bush addressed Negroponte, saying: "I hereby assign to you the function of the President under section 13(b)(3)(A) of the Securities Exchange Act of 1934, as amended."

A trip to the statute books showed that the amended version of the 1934 act states that "with respect to matters concerning the national security of the United States," the President or the head of an Executive Branch agency may exempt companies from certain critical legal obligations. These obligations include keeping accurate "books, records, and accounts" and maintaining "a system of internal accounting controls sufficient" to ensure the propriety of financial transactions and the preparation of financial statements in compliance with "generally accepted accounting principles."

Conclusion: 

The U.S. Bond market has been “gamed” beyond belief and the only institution in the world with the means and motive to conduct this business is the U.S. Treasury [ESF] in conjunction with/acting through the New York Federal Reserve.  As such, U.S. bond pricing and interest rates are set 100 % arbitrarily and today represent the BIGGEST FINANCIAL HOAX ever perpetrated on mankind. 

$700 Trillion Swaps Market: Bloomberg Finally Smelling the Rat!

Just What Is Mario Draghi Hiding? ECB Declines To Respond To Bloomberg FOIA Request On Greek-Goldman Swaps 06/14/12 Zero Hedge

See My 2010 "Sultans of Swap" article Outlining the Whole Greek Tilos PLC Swap

SULTANS OF SWAP: Explaining $605 Trillion in Derivatives!

Bloomberg sued the ECB under Freedom of Information rules requesting "access to two internal papers drafted for the central bank’s six-member Executive Board. They show how Greece used swaps to hide its borrowings, according to a March 3, 2010, note attached to the papers and obtained by Bloomberg News. The first document is entitled “The impact on government deficit and debt from off-market swaps: the Greek case.” The second reviews Titlos Plc, a securitization that allowed National Bank of Greece SA, the country’s biggest lender, to exchange swaps on Greek government debt for funding from the ECB, the Executive Board said in the cover note. The ECB's response: "The European Central Bank said it can’t release files showing how Greece may have used derivatives to hide its borrowings because disclosure could still inflame the crisis threatening the future of the single currency."

But what is far more likely is that the reason why the ECB, headed by none other than former Goldmanite Mario Draghi, is desperate to keep these documents secret is for another reason. A very simple reason:

Mario Draghi - 2002-2005:  Vice Chairman and Managing Director at Goldman Sachs International

In other words, Draghi was a key executive at Goldman at precisely the time when none other than Goldman Sachs was hired to create and facilitate the active hiding of the true extent of the Greek debt problem.

In yet other words: could it be that none other than the head of the European Central Bank is refusing to cooperate with a Bloomberg FOIA, something even the US Federal Reserve ultimately succumbed to which led the revelation that the Fed had handed out trillions in secret loans to banks all around the world  - and that includes tens of billions in under the table loans to JPM, contrary to Dimon's defense that he did not need the TARP money in Senate yesterday: he did, and much more, but since when is perjury a crime before a kangaroo court of bought politicians:

Disclosing the files when Bloomberg News first sought them in 2010 would have “fueled negative perceptions about Greece’s ability to honor its debt,” ECB lawyer Marta Lopez Torres said at a hearing of the European Union’s General Court in Luxembourg today. “It’s the same now with Spain” which “isn’t able to borrow money,” she said. “Markets are reacting in very volatile ways. It’s affecting the euro economy.”

EU BAILOUTS - The Most Important factor Lost => No Public nor Investor Confidence

Charting The Simple Reason Why Every 'Bailout' In Europe Will Be Faded 06/11/12 Zero Hedge

The bailout bullishness half-life is shrinking - dramatically - as it appears traders have become more aware of reality (and unreality). As we have noted again and again, the self-referencing, self-aggrandizing, self-pleasuring European government and banking systems are becoming more and more symbiotically linked. As JPM CIO Cembalest notes for Spain, Plan A was the 2010 announcement of government austerity targets. Plan B was the 2011/2012 ECB lending program to Spanish banks - to the point where Spanish banks now own around 50% of Spanish government debt. Neither plan worked and so on to Plan C - recap Spanish banks to cover the expected losses forthcoming. Recapitalization of the banks versus funding the sovereign is of course a semantic issue given the nature of the interplay. As Credit Suisse noted this weekend... "Portugal cannot rescue Greece, Spain cannot rescue Portugal, Italy cannot rescue Spain (as is surely about to become all too abundantly clear), France cannot rescue Italy, but Germany can rescue France.” Or, the credit of the EFSF/ESM, if called upon to provide funds in large size, either calls upon the credit of Germany, or fails; i.e., it probably cannot fund, to the extent needed to save the credit of one (and probably imminently two) countries that had hitherto been considered 'too big so save', without joint and several guarantees." Spain's reach-around is clear...

CHART: Eurozone Bailouts Are Horrible At Lowering Local Government Bond Yields 06/11/12 BI

Here's a look at how the Euro banking sector stocks performed during those same periods

SPANISH BANK BALIOUT - Shows That Major Banks Are Now Running the EU

The following comprehensive walk-thru appeared in the DB literature on Friday, before the formal announcement, it is quite clear that none other than Deutsche Bank, whose "walk-thru" has been adhered to by the Spanish government and Europe to the dot, was instrumental in defining a "rescue" of Spain's banks, which had it contaged, would have impacted the biggest banking edifice in Europe by orders of magnitude: Deutsche Bank itself.

The Spanish Bank Bailout: A Complete Walk Thru From Deutsche Bank 06/10/12 Zero Hedge

From DB: Spain: the mechanics of “recap only” loans

The guidelines for an EFSF bank recap are quite precise. There will be no conditionality on fiscal policy or structural reforms. The loan will also sit on Spain's balance sheet, meaning the volume of recapitalisation – to be established after a new, independent stress test – will be crucial: it needs to be big enough to convince the market that Spain's banking issue, which has been festering for three years, is addressed in a credible manner, while not being so large as to jeopardize Spain's public debt sustainability. We model possible trajectories for Spanish public debt for various recapitalisation volumes. In an intermediate recap scenario of EUR80bn, Spain could realistically, in our view, keep public debt below 95% of GDP at peak and bring it back below 90% by 2020.

• What would Spain need to do to access the "recap only" EU loan?
• As a first step, a country triggering a "recap only" loan will submit to the EU a list of "institutions in distress".
• Second, the amount of capital needed would be determined by a stress-testing exercise, which will be conducted by the national supervisor (i.e. the Bank of Spain), but also involving the EBA and "national experts from supervisory authorities from other member states".
• The conditionality attached to the loan would be limited to the recapitalised institutions themselves and financial system reforms in the beneficiary country.
• The monitoring of Spain's compliance with the conditionality to such a package would be the responsibility of the European Commission, the ECB and the EBA.

Click to Enlarge

What would be the consequences for Spain?

• The current rules are unambiguous: “The beneficiary member state will remain the ultimate liable counterparty”. In our opinion, ideally such a provision should be changed, to help stopping the “sovereign/banks loop”. This means that in any case the receiving country would still have to stomach an increase in its contingent liabilities.
• A figure above EUR 120bn for the recapitalisation need could become an issue for the “recap only” approach, since the guidelines make it clear that the size of the loan should remain consistent with a “sound fiscal position” for the receiving country.
• ESM loans – except for the countries currently under program – are senior.
• Since ordinary investors could be spooked by the “subordination risk” post-ESM funded recap, it would make sense for Madrid to hurry.
• It may take a few more months of sluggish credit origination to prompt the central bank into more action.

EU - Polls Apart and in Completely Different Orbits!

Presenting The SchizEUphrenia 06/14/12 BNP Paribas

Click to Enlarge

HOW MUCH DOES THE US GOVERNMENT REALLY OWE? - Answer: $84 Trillion

How Much Does the Federal Government Owe? June National Center for Policy Analysis

The U.S. government faces severe fiscal challenges due to trillion dollar annual budget deficits and mounting public debt. But the liabilities are much larger than the public debt, due to commitments the government has made to federal employees, to veterans and to seniors. In addition, it has made explicit and implicit commitments to current workers and retirees through the Social Security and Medicare programs.

EU REDEMPTION PACK - Germany Appears to have been FORCED to Capitulate

IMF’s Lagarde Warns: European Leaders Have 3 Months to Save the Euro! Spiegel Online

As the focus of the euro crisis shifts to Italy, IMF head Christine Lagarde has warned that European leaders have less than three months to save the euro. Meanwhile top economist Nouriel Roubini has called on Berlin to drop its obsession with austerity, proposing that the German government give every household a 1,000 euro [$1,250 US equivalent] voucher to spend on a vacation in Southern Europe.

Debt crisis: Germany signals shift on €2.3 trillion redemption fund for Europe 06/13/12 Telegraph Ambrose Evans-Pritchard

The German government has begun opening the door to shared debts for the first time in a profound change of policy, agreeing to explore proposals for a €2.3 trillion (£1.9 trillion) stabilization fund in order to stop the eurozone’s crisis escalating out of control.

• Officials in Berlin say privately that Chancellor Angela Merkel is willing to drop her vehement opposition to plans for a “European Redemption Pact”, a “sinking fund” that would pay down excess sovereign debt in the eurozone.
• “It is conceivable so long as there is proper supervision of tax revenues,” said a source in the Chancellor’s office.
• The official warned that there would be no “master plan” or major break-through at the EU summit later this month.
• Mr Merkel rejected the Redemption Pact last November as “totally impossible”, even though it was drafted by Germany’s Council of Economic Experts or Five Wise Men and is widely-viewed as the only viable route out of the current impasse.
• Fast-moving events may have forced her hand. She is under immense pressure from the US, China, Britain, and Latin Europe to change course as the crisis engulfs Spain and Italy, threatening a global cataclysm.
• Jose Manuel Barroso, the European Commission’s chief, warned that Europe faces a “social emergency” . Countries sticking to reforms are engulfed by forces beyond their control. “We must recognise that we have a systemic problem. I am not sure the urgency of this is fully understood in all the capitals,” he said in a thinly veiled attack on Berlin.
• Yields on 10-year Spanish debt hovered at danger levels just under 6.8pc on Wednesday on doubts that the EU’s €100bn rescue for the country will be the end of the story, with drastic knock-on effects in Italy.
• “The crisis will inevitably roll onto the next domino, and that is Italy, “ said Simon Nixon from Societe Generale. We are now accelerating into the end-game. Either we have fiscal pooling of one sort or another, or we are heading straight into euro exits and defaults," he said.
• Italy's premier Mario Monti told the Italian Parliament on Wednesday that he expects the Redeption Pact to be "on the table" at the EU summit, even if it does not come into force immediately.
• In Germany, the opposition Greens and Social Democrats both back the plan.
• Mrs Merkel cannot ignore them since she needs their votes to ratify the EU Fiscal Treaty, which requires a two-thirds majority.
• Green leader Jürgen Tritten warned that his party would block the Treaty in the upper house unless the Redemption Pact was adopted. "It is central for us. The Europe of austerity is ending," he said. Cross-party talks in the Bundestag broke down in acrimony on Wednesday over demands by the opposition for a "growth compact" to help lift Southern Europe out of its downward spiral.
• Mrs Merkel's Chrisitian Democrats will clearly have to give ground.

REDEMPTION PACT

• The Redemption Pact covers all public debts of EMU states above the Maastricht limit of 60pc of GDP, roughly €2.3 trillion. It is modeled on Alexander Hamilton's Sinking Fund in 1790 to clear up legacy debts after the American revolutionary war.
• The idea is to treat the first decade of monetary union as a learning experience -- with mistakes made all round -- and allow a fresh start. The excess debt would be paid down over twenty years. The beauty of the proposal is that would return Europe to the Maastricht discipline where each state is responsible for its own debts. It is the exact opposite of fiscal union.
• Officials at Germany's top court say it appears compatible with the country's constitution -- unlike eurobonds. There would be a fixed limit to costs and the fund would not endanger the tax and spending sovereignty of the Bundestag.
• The debt would be covered by joint bonds, payed for from a designated tax.
• Each country would be responsible for its own share of debt in the fund -- Italy €960bn, Germany €580bn, France €500bn, and so forth -- but would issue bonds jointly.
• It is not yet clear whether Chancellor Merkel can persuade her own party to support the Pact. Her own finance minister Wolfgang Schäuble poured cold water over the idea earlier this week. "This fund is not feasable because it breaches with the European treaties and the `no bail-out' clause, which says countries cannot be responsible for the liabilities of another country. Without a joint fiscal policy you can't have shared liabilities," he told Stern Magazine.
• Experts say this overlooks the tough conditionality. Italy and other states would have to pledge gold and other forms of collateral equal to 20pc of their debt in the fund. "The assets could be taken from the country's currency and gold reserves. The collateral nominated would only be used in the event that a country does not meet its payment obligations," said the proposal.
• Berlin would have veto lockhold, able to ensure discipline in a way that it cannot do with the European Central Bank where it has just two votes. The fund would entail sacrifices for Germany. The country would no longer enjoy safe-haven borrowing costs -- curently 1.48pc for 10-year Bunds -- on a quarter of its total debt.
• A study by Jefferies Fixed Income concluded that it would cost Germany 0.6pc of GDP each year. Yet the authors insist that any such costs will be outweighed by massive relief as Europe finally breaks the logjam of the last two years and offers southern Europe a chance to claw its way out of perpetual depression.
• Mrs Merkel is beginning to agree.

SPAIN - Real Problem is Banking and Competitiveness

Europe's Core / Periphery Imbalances Going Parabolic 06/04/12 EconompicData

US TREASURY YIELDS - UST Lowest in 120 Years. What is This Telling US?

Dividend vs. Treasury Yields 06/05/12 Econompic Data

The dividend yield of the S&P 500 is above that of the ten year Treasury for the first time since the financial crisis. Before that we have to go all the way back to the 1950's to find a time when this was the case.

The kicker... stock dividends have only made up about 45% of total S&P composite stock returns over the past 100 years, while Treasury bond coupon payments have made up north of 96% of Treasury bonds returns over that same period (see below). What this means for an investor is unless you think dividends will be cut and/or capital appreciation will be negative (i.e. corporate America will shrink in terms of nominal value), stocks are poised to outperform. Stocks appear to be very cheap relative to bonds for investors with a long-term investment horizon, while near term investors need to be careful as we seem to be in a world that is likely to have binary outcomes (i.e. either a boom or an absolute collapse).

Treasury Yields Break Out of Range; Head Toward 1% 05/31/12 AlphaNOW

It’s clear that in a market environment dominated by fear and uncertainty, investors’ hunger for safe havens will trump their reasoned analysis about whether these yields represent real value or not. And that fear and uncertainty is unlikely to evaporate any time soon.

STATISTICS - Is It any Wonder There is No New Business Growth in America?

23% of Small Business Owners (Approximately 6.21 million) Report "No Pay for a Year" 06/12/12 Mish

As of 2010, D&B estimates, there were about 23 million small businesses in the United States, employing nearly 81 million workers. Between 60% & 80% of all new jobs created in our country can be attributed to Small Business

Here are some interesting highlights.

• Over the past few years, business owners report that they have, at one time or another, taken less profit (78 percent), worked more hours than usual (70 percent), and used their own money to help the business survive (69 percent).
• 54 percent of respondents say they have gone without a paycheck in order to keep the business running.
• 23 percent of owners have gone without pay for one year or more.
• More than one-third of owners (38 percent) said their employees worked overtime without pay
• 18 percent of owners said employees either missed paychecks or had paychecks delayed.
• Access to financing doesn’t come up in the top five most important issues among small businesses. Instead, business owners cite lack of sales and consumer confidence.

Crunching the Numbers

If there are 27 million small business owners and 23% have not received any pay for a year, there are 6.21 million business owners who received no paycheck for at least a year.

Notes About Unemployment

Bear in mind, that making money or receiving a paycheck is irrelevant to the BLS when they compute the unemployment rate. If you work as little as 1 hour, whether you collect a paycheck or not, you are considered employed.

In addition to the 6.21 million business owners with no paycheck, factor in those selling trinkets on EBay out of desperation and collecting a few dimes in the process.

Also factor in factor in all those starting multi-level marketing schemes and calling it a business. How many get sucked into that losing proposition every year? Yet, to the BLS, it's a job if you worked any hours.

FALSE PRIVATE SECTOR GDP

Obama " Private Sector Doing Fine" 06/11/12 Angrey Bear

many of the comments about the private sector economy are based on an erroneous calculation of private sector real GDP. They seem to think that one can estimate private sector GDP by subtracting government consumption from total GDP. But that is not correct. Remember, we do not directly estimate output. Rather the GDP data measures consumption and adjust that for changes in trade and inventories to indirectly estimate output. For example if Boeing builds a 747 or Ford builds a truck it does not show up in GDP as output. It shows up in the GDP accounts in one of five ways.

1. If they sell it to an individual it is recorded in personal consumption expenditures.

2. If they sell it to a business it shows up as business fixed investment.

3. If they export it is recorded in the trade account.

4. If they do not sell it , the jet or truck is counted as an increase in inventories.

5. If they sell it to the government it is recorded as government consumption.

But if the jet or truck or some other good or service is sold to the government it still counts as private sector output just the same as if they had exported it or sold it to an individual or a business. In the GDP accounts, government consumption includes two types of transactions. One is government employment like a policeman or a soldier. The other is government purchases of goods or services from private business. So to correctly estimate private sector GDP you need to subtract only government employment but not government purchases from total GDP. This makes a big difference in the size and growth of the private economy. Every quarter that government purchases grow faster than private sector output it causes the estimate of private GDP derived by subtracting government consumption from total GDP to understate private GDP. This method of estimating private GDP generates a highly biased estimate. For example,using the correct methodology shows that over the past decade private sector real GPD expanded almost 20% while the estimate derived from subtracting all government consumption from total real GDP concludes that private sector real GDP contracted some -16%.

UK'S LTRO? - Looks Like It Has Begun

Banking: King hits panic button Fears of new credit crunch prompt Bank of England to kickstart emergency lending scheme 06/15/12 Independent - Fears of new credit crunch prompt Bank of England to kickstart emergency lending scheme.

• Sir Mervyn King, and George Osborne said the Bank and the Treasury were working on a liquidity operation – a "funding for lending" scheme – which would provide private banks with cheap funding in exchange for a commitment from lenders to provide cheap loans to ordinary businesses and households.
• it hoped the measures would increase annual lending flows to the economy by about 5 per cent, or £80bn.
• The scheme would permit private British banks to pledge their existing, illiquid loans as collateral at the Bank of England in exchange for highly liquid UK government bonds, which they could then sell on. In return for this cheap financing, banks would be required to commit to using the proceeds to increase the volume of loans to businesses and households, and to make that lending cheaper than it otherwise would have been.

Her Majesty’s LTRO? 06/14/12 Financial Times

Bank of England governor Mervyn King did announce the activation of cheap, long-term funding for UK banks against wide collateral in his Mansion House speech on Thursday.

But there’s an element of credit easing…

What I can say tonight is that the Bank and the Treasury are working together on a “funding for lending” scheme that would provide funding to banks for an extended period of several years, at rates below current market rates and linked to the performance of banks in sustaining or expanding their lending to the UK non-financial sector during the present period of heightened uncertainty. The Bank would lend, as in its existing facilities, against a much greater value of collateral comprising loans to the real economy to protect taxpayers. But the long term nature of the lending and its pricing mean that the Bank could conduct such an operation only with the approval of the Government, as offered by the Chancellor earlier. So such a scheme would be a joint effort between Bank and Treasury. It would complement the Government’s existing schemes, and tackle the high level of funding costs directly. It could, I hope, be in place within a few weeks.

On liquidity, I want to make clear that the Bank, through its discount window and other facilities, will provide banks with whatever liquidity they require given the prospect of turbulence ahead. Last December, the Bank announced the new Extended Collateral Term Repo Facility under which auctions of short-term sterling liquidity can be held at any time. It is now time to activate that scheme, in the words of the Bank’s Red Book, “in response to actual or prospective market-wide stress of an exceptional nature” over the coming weeks. The Bank will start holding auctions of sterling liquidity with a maturity of six months, and tomorrow morning the Bank will issue a market notice explaining details of the timing and size of these auctions.

The governor added that “the case for a further monetary easing is growing”.

Here’s our December story on how the ECTR would work. In terms of the collateral crunch it’s designed to counteract, we found it interesting that Mervyn seems to be take a pop in his speech at regulatory demands for banks to hold high-quality liquid assets:

In current exceptional conditions, where central banks stand ready to provide extraordinary amounts of liquidity, against a wide range of collateral, the need for banks to hold large liquid asset buffers is much diminished, and I hope regulators around the world will take note.

As to the “funding for lending” scheme — firstly we’d ask how the Bank, or the government, will monitor banks’ lending performance.

Second, despite advertising the fiscal indemnity which the Bank will receive for this op, the governor has blasted the argument for purchases of private sector assets under QE by pointing to risks of fiscal entwining. ”Buying risky assets outright has implications for future taxes,” he says. “That is why the role of central banks is only to lend against risky assets, and to do so with appropriate and often large haircuts.”

MARKET IS BROKEN - Markets Levitating For An Unknown Reason

Charting The Generational Shift In Equity Risk Appetite 06/14/12 Zero Hedge

The topic of deteriorating volumes in equity trading has not been far from our thoughts for a few years now but BTIG's Dan Greenhaus has one of the more explicitly clear and sobering charts of this trend today. Whether you see this as a signal of a lack of trust in our capital markets, an investor-class burned by multiple sigma events occurring weekly, an increasingly binary set of scenarios that leave investors clueless, retiring boomers demographically unwinding the 30 year rip, savings draw-downs as income stagnates, or more simply just a generational shift in attitudes towards risk appetite/tolerance; the absolute value of stocks traded is for the first time in a generation diverging rapidly lower as stocks levitate on central bank largesse.

It leaves the question: who is the incremental buyer and how sustainable is their presence?

DRIVER$: Getting to Global Growth Stimulus

ESCALATING EU CRISIS (Rising Italian and Spanish Bonds) ==> FALLING EURO

FALLING EURO ==> FALLING COMMODITIES & GOLD

FALLING COMMODITIES ==> FALLING CHINESE INFLATION CRISIS ==> CHINESE STIMULUS

CHINESE STIMULUS IS THE ONLY HOPE OF "KICK STARTING" GLOBAL GROWTH!!

SELL SIDE ANALYSTS - Careful With How You Interpret the Data

SocGen: This Could Be The Best Opportunity To Buy Stocks Since 2009 06/11/12 Soc Gen

Chart of the Week: Equity Valuations Look Like They Have Landed in the Bargain Basement 06/11/12 Scott Barber - Reuters

Interest rates in the United States and Germany are at such astonishingly low levels that it may be impossible for investors not to contemplate re-allocating some cash into the very cheap world of equities, as we saw last week. But it may take many more weeks of that kind of valuation discrepancy, coupled with strong fundamental news (such as better than expected earnings announcements at the end of the second quarter) and an absence of anxiety-generating headlines, to propel stock market valuations toward their 10-year highs once more.

FINANCIAL REPRESSION - Income Inequality

Fed's Survey of Consmer Finances 06/12/12 BI

Income inequality has gotten so extreme here that the US now ranks 93rd in the world in "income equality." China's ahead of us. So is India. So is Iran.

CRONY CAPITALISM - The Media Complex

These 6 Corporations Control 90% Of The Media In America 06/14/12 Frugal Dad

This infographic created by Jason at Frugal Dad shows that almost all media comes from the same six sources. That's consolidated from 50 companies back in 1983. NOTE: This infographic is from last year and is missing some key transactions. GE does not own NBC (or Comcast or any media) anymore. So that 6th company is now Comcast. And Time Warner doesn't own AOL, so Huffington Post isn't affiliated with them. But the fact that a few companies own everything demonstrates "the illusion of choice," Frugal Dad says. While some big sites, like Digg and Reddit aren't owned by any of the corporations, Time Warner owns news sites read by millions of Americans every year.

JP MORGAN - Better Odds Than A Casino!

Ahead Of Tomorrow's Dimon Hearing, Presenting JP Morgan's 93.5% Historical Winning Trade Perfection 06/13/12 Zero Hedge

Can someone explain how it is possible that a firm that over the past 9 quarters has disclosed a total of 41 days on which it has lost money trading, and 546 days on which it was profitable, or a 93.5% win rate of the total 587 days in the past 2 years and 1 quarter.

CRONY CAPITALISM - The Illusion of Choice!

These 10 Corporations Control Almost Everything You Buy 04/25/12 BI

Click to Enlarge

CRONY CAPITALSIM - The Bilderberg "Old Boys" Network

This Chart Shows The Bilderberg Group's Connection To Everything In The World 06/12/12 BI

Click to Enlarge

CORPORATE PROFITS - Doesn't Get Any Better Than This (and still be legal?)

THE MOST IMPORTANT STORY IN AMERICA: Family Net Worth Collapses 40% In 3 Years 06/12/12 BI

Corporate profits just hit another all-time high. These are more than just "up". They are through the roof!

Corporate profits as a percent of the economy also just hit an all-time high. Profits are now VASTLY higher than they've been for most of the last half-century

FALLING STANDARD OF LIVINGS - Down 40% in 3 Years

THE MOST IMPORTANT STORY IN AMERICA: Family Net Worth Collapses 40% In 3 Years 06/12/12 BI