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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

EU SUMMIT: Same Old?

Some unpleasant eurozone arithmetic 06/22/12 Gavyn Davies.

EU SUMMIT has three very familiar options all of which mean a further use of the ECB balance sheet. So we will probably see more debt mutualisation via the activities of the ECB. This could occur in several different flavours:

1. Outright bond purchases through the central bank’s Securities Markets Programme;
2. Allowing the ECB to provide leverage to the ESM; or
3. Further LTROs to encourage banks to hold more government debt.

• Another week, another summit. Once again, we are being told, this time by Italian prime minister Mario Monti, that there is only one week left to save the euro.
• Yet the crisis still does not seem sufficiently acute to persuade eurozone leaders that a full resolution is necessary.
• The next summit on June 28 and 29 will unveil a long term road map towards fiscal and banking union, which in better economic circumstances could appear highly impressive. But the market is currently focused on the shorter term.
• Unless there is some form of debt mutualisation at the summit, resulting in a decline in government bond yields in Spain and Italy, the crisis could rapidly worsen. Debt mutualisation can come in many forms.
• The European Redemption Fund, proposed by the Council of Economic Experts in Germany (and discussed here) seems to have receded into the background this week but could still have an eventual role.
• The main option on the table seems to be the use of the eurozone firewall (ie a combination of the EFSF and ESM) to buy secondary government debt, or inject capital directly to the banks.
• But the problem here is simple: a lack of money. So far, the EFSF has lent €248bn of its original €440bn lending capacity. At the end of this month, the ESM treaty is supposed to be ratified, and the entity will become immediately operational with a maximum lending capacity of €500bn. However, there have been problems with ratification in several member states, including Germany, where the legal challenge being brought by the Left at the constitutional court could take a while to resolve. This is not necessarily fatal, however, because the EFSF can fill the breach by undertaking new lending up to July 2013.
• The key is that the EFSF and the ESM together can lend an additional €500bn from now on. If the EFSF does more in the next 12 months, the ESM will have less money available later.
• The first call on this money will be the €100bn which will be disbursed for the Spanish bank bail out. That €100bn will presumably need to come out of the total €500bn of new lending capacity, leaving €400bn for other purposes.
• Germany has been very insistent on maintaining the €500bn ceiling, because this sets a limit on its potential losses from this form of debt mutualisation. There is no sign of this changing.
• If unleveraged, this €400bn looks like a very small number, compared with the financing needs of Spain and Italy in the next couple of years. It used to be said in the markets that the eurozone firewall might just be large enough to deal with a loss of market access for Spain, but would not be large enough to deal with Italy as well. That assessment could turn out to be too optimistic.
• The arithmetic of eurozone government refinancing needs, relative to the size of the current firewall, looks increasingly unpleasant. In Spain, government refinancing needs in 2013 amount to around €232bn, or 21 per cent of GDP. Of this, around one quarter stems from the budget deficit, while three quarters stems from maturing debt. Maturing debt is normally easier to refinance, because bond managers re-allocate the money they receive from redemptions back into the bond market. But that can quickly change during a crisis, when bond managers typically sit on their hands rather than reinvesting their cash.
• Spain has not yet lost market access, but is in danger of doing so. Italy is different. Total refinancing needs in 2013 amount to €380bn on the IMF figures, but 93 per cent of those needs stem from maturing debt, a lot of which is very short term.
• The primary budget surplus in Italy is a very strong defence against a market crisis, but not necessarily a sufficient defence if there are increasing fears of a euro break-up. Former prime minister Silvio Berlusconi’s flirtation with a return to the lira this week will not help scotch these fears.
• Overall, the remaining €400bn firepower in the EFSF/ESM is probably inadequate to finance a full bail-out programme for Spain (lasting several years without market access), and would of course be dwarfed by the needs of both Spain and Italy.
• In the near term, what this means is that there is very little spare money in the EFSF/ESM to initiate a bond buying programme in the secondary market, which was the favoured option in the G20 summit discussions this week.
• If the EFSF/ESM uses its lending capacity in the near future to support Spanish and Italian secondary bond markets, it will rapidly absorb funds which might soon be needed for a Spanish debt programme.
• The IMF will hopefully be able to contribute to such a programme, but the attitude of the US to providing more financial support for the eurozone ahead of the Presidential election could be very hostile. Without IMF money, the arithmetic gets even more difficult.
• The markets can do arithmetic, and would quickly realise that a programme of secondary bond purchases would have inadequate firepower to restore confidence.
• Increasing the lending capacity of the ESM, before it has even been ratified, in the current German political climate, is a non-starter. Leveraging the effective size of the EFSF/ESM by providing first tranche loss insurance to private bond investors has already been tried after previous summits, without any obvious success.
• That leaves one very familiar final option, which is a further use of the ECB balance sheet. So we will probably see more debt mutualisation via the activities of the ECB.
• This could occur in several different flavours:
  1. outright bond purchases through the central bank’s Securities Markets Programme;
  2. allowing the ECB to provide leverage to the ESM; or
  3. further LTROs to encourage banks to hold more government debt.

The ECB probably does not like any of this, but may well prefer the second and third flavours to the first. Once again, it is all up to Mario Draghi.

FINANCIAL REPRESSION: One cannot operate a capitalist system if the state can borrow at a negative cost.

"One Cannot Operate A Capitalist System If The State Can Borrow At A Negative Cost" 06/23/12 Charles Gave

Consumption bubbles fuelled by negative real rates always contain the seeds of their own destruction.

Debt levels get too high and force household deleveraging; meanwhile the currency falls, which improves competitiveness in the global marketplace. The combined effect is a narrowing of the current account deficit.

When the world’s reserve currency nation experiences such a narrowing, the supply of dollars outside of the US falls, and inevitably catches some countries out.

Excluding oil and China, the annualized US current account has moved from a deficit of 3% of GDP in 2003 to a recent surplus of 1% of GDP. This improvement in the current account position has taken place despite the fact that most of the world is growing well below its potential. In effect, the US economy has exercised an immense deflationary pressure on the margins of companies outside of the US, and in so doing has managed to “recover” roughly 4 % of its GDP.

While the oil producers and China may still be sitting on a ton of US dollars—which they are recycling into USTs and thus keeping US government borrowing costs at bargain-basement levels—the dollar supply elsewhere in the world has fallen sharply. The countries which have no access to the US currency have to start using their foreign exchange reserves to meet their payments (very often to oil producers and China), thus amplifying the problem. When a country is forced to sell reserves, then it has to follow restrictive monetary and budget policies to depress domestic demand and recreate a current account surplus. The cost of capital rises sharply for the private sector. India today offers a prime example of a country stuck in this corner. In the chart below , I am showing the 12-month variations of foreign central bank reserves deposited at Fed—this is excluding China (I would also exclude the oil producers, but could not find a way of estimating their forex reserves). Past periods of rundowns in global forex reserves always have been associated with crises.

When the US current account deficit starts closing, the dwindling supply of dollars eventually leads to a panicked rush for dollars. Non-US companies that binged on dollars when the money was cheap and the dollar was forever going down, now find themselves caught out. Every entity with a negative cash flow in dollars scrambles for dollars — even through selling local assets and converting the proceeds — depressing risk assets everywhere. The US dollar and USTs outperform everything, including industrial metals (see chart overleaf). And of course equities are not spared (see chart overleaf). Needless to say, if one has to be invested in equities in these periods, stay in the US stock market (as US companies will not have such troubles) and avoid non-US equities except when they become extraordinarily cheap versus the US market (e.g., a ratio below 1.2x).

could go on and on with other examples, but let’s just get to the point: one cannot operate a capitalist system if the state can borrow at a negative cost. Years of irresponsibly loose monetary policy in the US has led to cheap funding for the US (and other) governments, but difficult credit conditions for the private sector all around the world. As I underlined in How The World Works, negative real rates leads to misallocation of capital which ends in asset deflation, while simultaneously limiting the capacity for recovery by driving out the private sector. The Fed has been managed by a bunch of Keynesians who care nothing about the role of the dollar as a reserve currency and who probably believed they were managing the central bank of Belorussia or Zimbabwe!

GLOBAL MONETARY POLICY: At its Limits

BIS: More Monetary Stimulus, More Problems 06/24/12 BIS

During the current economic downturn, governments have been slow to use the fiscal tools at their disposal, due to political obstruction and high debt levels. That leaves central banks as one of the only sources of stimulus and financial sector rescue. In its recently released annual report, the Bank of International Settlements argues that continued dependence on the central bank actually entrenches the issues slowing down growth throughout the world. Here's their chart:

CHINA: Manipulated Statistics due to Upcoming Decade Long Regime Change (and promotions throughout Party)

Turns Out China IS Lying About Everything 06/23/12 Zero Hedge

NEW YOUR TIMES: As the Chinese economy continues to sputter, prominent corporate executives in China and Western economists say there is evidence that local and provincial officials are falsifying economic statistics to disguise the true depth of the troubles. Record-setting mountains of excess coal have accumulated at the country’s biggest storage areas because power plants are burning less coal in the face of tumbling electricity demand. But local and provincial government officials have forced plant managers not to report to Beijing the full extent of the slowdown, power sector executives said

Questions about the quality and accuracy of Chinese economic data are longstanding, but the concerns now being raised are unusual. This year is the first time since 1989 that a sharp economic slowdown has coincided with the once-a-decade changeover in the country’s top leadership. Officials at all levels of government are under pressure to report good economic results to Beijing as they wait for promotions, demotions and transfers to cascade down from Beijing. So narrower and seemingly more obscure measures of economic activity are being falsified, according to the executives and economists. “The government officials don’t want to see the negative,” so they tell power managers to report usage declines as zero change, said a chief executive in the power sector.

So... let's see here: huge disparity between what is represented and what the reality is... a crucial political election... and a regime that many have accused of misreporting critical data for years (even if others captured media outlets accuse the former of being conspiracy theorists)... Why... could this possibly mean that every piece of data out of the US is just as made up and just as meaningless? Now that would be truly unpossible.