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JULY 2012: GLOBAL MACRO TIPPING POINT - (Subscription Plan III
COMING UNGLUED: Market Fragility and Credit Market risk indicators are now at post-Lehman levels.
Global Economic Risks have taken a noticeable and abrupt turn downward over the last 30 days. Deterioration in Credit Default Swaps, Money Supply and many of our Macro Analytics metrics suggest the global economic condition is at a Tipping Point. Urgent and significant actions must be taken by global leaders and central banks to reduce growing credit stresses.
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MORAL METASTASIS : Malfeasance, Manipulation & Malpractice - Metastasis is the spread of a disease from one organ or part to another non-adjacent organ or part. Cancer occurs after a single cell in a tissue is progressively genetically damaged to produce a cancer stem cell possessing a malignant phenotype. These cancer stem cells are able to undergo uncontrolled abnormal mitosis, which serves to increase the total number of cancer cells at that location. The moral fiber of our society is going through this same process as it breaks down, spreads and metastasis. We are presently in the process of Moral Metastasis that will prove fatal if not immediately operated on and surgically removed. Sadly, however it has gone undetected too long and the damage it has caused is now irreparable. MORE>>
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 JULY 2012: MARKET ANALYTICS & TECHNICAL ANALYSIS - (Subscription Plan IV)
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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HOUSING: What Recovery?
No Housing Recovery In These Three Charts 07-24-12 Zero Hedge
One day, we hope, the broader public will realize that just as the Libor scandal was largely precipitated by the fact that it was a self-reported number and thus open to collusion and manipulation by the same people who set it, so any data coming out of the National Association of Realtors - an organization that by definition benefits from high prices and frenzied real estate activity - is total manipulated garbage (in fact courtesy of the massive 2011 restatement from the NAR several months ago we know just that). In fact, when it comes to the NAR, it is worse: as a reminder, US real estate transactions are nothing but glorified and perfectly legal money laundering, which is the main reason why the NAR has a waiver from regulation for anti-money laundering. Although unlike HSBC, the NAR's money laundering at least leads to benefits for everyone, in the form of perpetuating the delusion that US real estate is fairly priced in when a few robber barons from around the world become indiscriminate marginal price settlers eager to put their money in the "safety" of the US. And lately, with the latest forced delusion being that US real estate has bottomed and is rising even as the global economy is decelerating at the fastest pace in the past 3 years, the NAR serves a handy purpose: it provides a reflexive way of misrepresenting the underlying trends in real estate, suckering the marginal fool in once again, as it did throughout the period between 2000 and 2007. The question then is what does objective, unmanipulated data say. As the following three charts from Bloomberg confirm the last word one should use when discussing the US housing market, where as we already pointed out shadow inventory is once again building up while construction jobs have tumbled to decade lows, is "bottomed."
From Bloomberg Brief:
Key housing barometers are all moving in a sideways direction, implying neither definitive improvement nor continued deceleration.
The most leading of the housing/construction indicators is the American Institute of Architect’s Work-on-the-Boards survey. During June the headline Architecture Billing Index (ABI) was mired in contractionary territory with a reading of 45.9. This was the third consecutive sub-50 posting. This isn’t very surprising since executives have been quite vocal with respect to concerns in Europe, China and the increased potential contagion in the U.S. The CEO Roundtable sent a letter to Congress citing these three issues. In addition, a sizeable number of complaints were found in the Bloomberg Orange Book.
Lumber giant Universal Forest Products’ CEO Matt Missad said in the company’s latest earnings conference call, “We are watching our inventories closely and trying not to get too far ahead because we are concerned about disappointing employment figures and lack of construction growth in the U.S.”
Rather than observe the trends in the Mortgage Bankers Association’s headline Mortgage Applications Index, which includes refinancing, a far better gauge of economic conditions is the Mortgage Purchases Index trends. This weekly representation of demand for mortgages related to home buying is little changed from levels registered at the bottom of the housing market collapse.
The level of residential housing construction is an important indicator, and has made little improvement since the apparent market bottom in 2009.
The sunken pace of residential construction spending in May was $268 billion – essentially the same levels seen in 1997. This profoundly low level of activity is not limited to the residential sector; spending on commercial structures is currently the same as in 1996.
Since there is diminished activity, the need for workers in the construction industry has also stagnated. During June construction employment totaled 5.5 million workers – a near 30 percent decline from the peak in April 2006 and the same number as in mid 1996.
The Federal Reserve has kept its overnight borrowing target at near zero for more than three-and-a-half years. As a result, mortgage rates are at all-time lows with the average 30-year fixed rate lingering around 3.53 percent. Since adopting this accommodative policy there has been essentially no improvement in the level of new home sales.
And finally, here is the NAR's reflexive feedback: existing home sales:
Existing home sales have improved somewhat, but remain a far cry from pre-recession and pre-bubble levels. The gain is likely a function of the “haves” grabbing the foreclosed properties of the “have-nots.” This is proof that the Fed may be able to lead the horse to water with lower rates, but scant few are drinking up.
In other words, instead of "housing recovery" a much better phrase would be "the rich are getting richer", and everyone else can go suck a lollipop and watch their wealth evaporate courtesy of Z/NIRP.
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07-27-12 |
HOUSING |
12
12 - Residential Real Estate - Phase II |
US GROWTH: Revisions in a Consistent Direction
Charting America's Ever Shrinking "Revisionist" Economy 07-24-12 Zero Hedge
This has been the recovery of downward revisions - each annual revision to payrolls and GDP since the recovery started in 2009 revealed an even sharper contraction and weaker recovery. BofAML believes this year’s revision, which is released with the Q2 GDP report on Friday, will once again show an even slower start to the recovery with growth revised lower in 2009 and 2010, and modestly higher in 2011. While it is good news that growth could be revised higher in 2011, it appears that it will only be marginal. The downward revisions to growth in 2009 and 2010 will still leave the level of GDP lower and, hence, the output gap larger. This shows that the economy has made even less progress in healing from the deep recession. The severity and duration of the recession was understated in real time and the recovery was overstated. This suggests that monetary policy may not have been easy enough over the past several years - and therefore the current slowdown is even more significant.
The Bureau of Economic Analysis (BEA) revises the National Income and Products Accounts (NIPA) every year along with the first estimate of Q2 GDP. This will not only affect GDP, but also income and PCE inflation. Thus, the saving rate and core PCE deflator could be altered. The revisions are based on more comprehensive source data and, on occasion, reflect methodology changes. There were fairly significant methodology changes last year, but this year, the revisions mostly reflect more complete data and updated seasonal adjustments. Data are subject to revision back to Q1 2009. |
07-27-12 |
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US ECONOMY |
ANOTHER RECESSION OR ONGOING DEPRESSION?
David Rosenberg On A Modern Day Depression Vs Dow 20,000 07-23-12 Zero Hedge
The challenge ahead is one of expectations. I think we win be fortunate to see any GDP growth at all for Q3, and yet the consensus is at +2.2%. The consensus is at +97k on July non-farm payrolls whereas the claims data point to sub-80k. Among the analysts, hope springs eternal that expected revenue growth of +2.6% in Q4 will be enough to generate a +12.1% expansion in bottom-line performance.
To meet that profit forecast, even more cost-cutting will have to come our way (no sooner do we say that than we see this article on page 61 of the WSJ: Steelmaker Presses for 26% Pay Cut). This may be encouraging for profits, but will also come at the expense of labour income, and with that, a sluggish consumer. Concerns over the fiscal cliff have already led to a renewed uptrend in the personal savings rate. The worst drought in the U.S. in a half-century are sending food costs sharply higher, which will severely pinch discretionary outlays, and whatever respite there had been of late from relief at the gas pumps has come to an end (have a look at Price Check: Drought May Hit Grocery Tabs, also on page 61 of the weekend WSJ). Survey after survey shows a sharp turndown in hiring plans as well.
This is looking more and more like a modem-day depression. After all, last month alone, 85,000 Americans signed on for Social Security disability cheques, which exceeded the 80,000 net new jobs that were created: and a record 46 million Americans or 14.8% of the population (also a record) are in the Food Stamp program (participation averaged 7.9% from 1970 to 2000, by way of contrast) — enrollment has risen an average of over 400,000 per month over the past four years. A record share of 41% pay zero national incomes tax as well (58 million), a share that has doubled over the past two decades. Increasingly, the U.S. is following in the footsteps of Europe of becoming a nation of dependants.
Meanwhile, policy stimulus, whether traditional or non-conventional, are still falling well short of generating self-sustaining economic growth. Some investors see this deflationary trendline because it is they that have helped drive the S&P Dividend Aristocrats index (contains large-caps that have consistently raised their payouts over the past 25 years) up 10.5% in the past month and actually touched a new all-time high last week. The likes of Kraft, Wal-Mart, Verizon, Johnson & Johnson, Pfizer and Merck all managed to reach 52-week highs as well. So even in this tough macro and market environment, there are ways to put money to work — in areas of the market that generate a reliable dividend stream for investors and produce a product that people need, not what they want.
Investors must not only screen for earnings visibility, non-cyclicality, dividend payout potential, strong management and high quality balance sheets with a manageable debt maturity calendar, but also for fully-funded pension plans. The S&P 500 space, right now, contains 338 defined-benefit plans, with aggregate obligations of $1.68 trillion but assets of just $1.32 billion, for an unprecedented underfunded liability of $355 billion. So you know the record cash-stash on corporate balance sheets that are often cited as a prime reason to be bullish on Corporate America the real issue is the extent to which shoring up depleted pension funds will compete with stock buybacks and dividend growth in the future. One thing is for sure — a reversion back to the old defined-contribution pensions is clearly coming back into focus as company after company seek out ways to reduce their contribution rates. |
07-27-12 |
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US ECONOMY |
ANALYTICS: Demographics According to Harry Dent
HARRY DENT: The 'Baby Bust' Is Sending The Dow 07-24-12 BI
We track demographics. We were more bullish than anybody in the 1990s and 2000s because we saw this giant generation spending more money, borrowing more money, technologies, internet rising.
Now, it's the opposite. From 2008 to 2020, the "Baby Bust" points trends down. There's going to be less home buying, less spending. Baby boomers are going to be saving for retirement. There's no way you can stimulate your way out of this.
I would agree with Seth – in normal times – [that] 20,000 is a reasonable target [for the Dow]. But hey, just like we boomed unprecedented bubbles in the last few decades, when we see a correction after a major a debt and demographic bubble like this, you see the markets fall 70 to 80 percent.
When asked when this fall to 3,000 on the Dow would happen, Dent replied:
Over the next decade. We think the worst is likely to happen when this big debt bubble deleverages. The government has been preventing this by forcing money into the banking system. We don't just have $16tn in government debt – we have $42tn in private debt that is deleveraging, and $66tn (or $80tn by different estimates) in unfunded entitlements.
We have the biggest debt bubble in history. This debt bubble needs to deleverage. That's when stocks collapse the most. We had a big debt bubble deleverage from 1930 to 1933. That's why we saw such an extreme crash.
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07-27-12 |
STUDY FUNDEMENTALS
DEMOGRAPHIC |
ANALYTICS |
ANALYTICS: Numbers to Consider
David Rosenberg On A Modern Day Depression Vs Dow 20,000 07-23-12 Zero Hedge
DOW 20,000?
Well, this is perfect.
It is amazing how many pundits still believe in stocks for the long run. See The Long-Term Argument for Dow 20,000 on page 6 of the Sunday NYT Money & Business section. Shades of Jeremy Siegel.
So what are we left to conclude?
Last week, we saw the VIX index touch 15. The Investors' Intelligence survey showed there to still be two bulls for every bear in the realm of market newsletters. The put-call ratio had fallen through 1:1 after a 20% decline since early June. The bottom-up consensus of equity analysts see global profit growth of 13.5% for 2013, which is more than a double from the 6.3% projection for this year. The S&P 500 is currently trading much closer to the top end of its year-long 1.100-1,400 band than the low end. And now we see headlines of Dow 20,000 (whatever happened to the other 15,000 points Dr. Siegel promised 13 years ago)? Where exactly is there any sign of capitulation beyond, say, the mutual fund flows data which are illustrating even to the most casual observer that what we are witnessing on this front is little more than a demographic-driven rebalancing of the baby boomer asset mix as the investment lifecycle continues along a secular shift towards capital and cash-flow preservation themes.
The bottom line is that from the spring of 2009 to the spring of 2011, the stock mark doubled, and it doubled principally because of a wild short-covering rally in the financials which were priced for insolvency at the lows. It was a classic 1933-1936 bounce that never saw a new high and never foreshadowed better times ahead. The Great Depression ended nearly a decade later and the next secular bull market did not begin until 1954. And from what history teaches us, secular bear phases do not typically end with headlines about Dow 20,000 but rather with contrarian news like The Death of Equities on the front cover of BusinessWeek back in 1979 (or Awash in Oil on the front cover of the Economist back in 1999, when crude prices were turning in their secular lows). |
07-27-12 |
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ANALYTICS |
MOST CRITICAL TIPPING POINT ARTICLES THIS WEEK - July 22nd - July 28th, 2012 |
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EU BANKING CRISIS |
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1 |
SOVEREIGN DEBT CRISIS [Euope Crisis Tracker] |
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GERMNAY: PMI Collapses
Germany in Recession: Private Sector Sees Fastest Falls in Output and New Business Since June 2009; New Export Orders Collapse 07-24-12 Mish
The vaunted German export machine is sinking into the abyss. The Markit Flash Germany PMI® shows German private sector sees fastest falls in output and new business since June 2009.
Key Points
- Flash Germany Composite Output Index(1) at 47.3 (48.1 in June), 37-month low.
- Flash Germany Services Activity Index(2) at 49.7 (49.9 in June), 10-month low.
- Flash Germany Manufacturing PMI(3) at 43.3 (45.0 in June), 37-month low.
- Flash Germany Manufacturing Output Index(4) at 42.8 (44.8 in June), 37-month low.
Summary:
The seasonally adjusted Markit Flash Germany Composite Output Index fell for the sixth month running in July, to 47.3 from 48.1 in June. The index has posted below the 50.0 no-change value in each month since May, and the latest reading signalled the fastest pace of private sector contraction since June 2009.
Manufacturers suffered a sharper drop in business activity than service providers during July, as well as a greater loss of momentum relative to the situation in June. The latest reduction in manufacturing production was the steepest for just over three years, while new orders received in the sector dropped at the fastest pace since April 2009. Service providers recorded only a marginal decrease in business activity, although the rate of contraction was the joint-fastest in three years.
Across the private sector as a whole, new business intakes fell at the quickest rate since June 2009, with manufacturers and service providers both recording much sharper declines than during the previous month. Lower levels of new work have been recorded in the service economy during each month since April, and the latest reduction was the fastest for exactly three years. Meanwhile, in the manufacturing sector, new export orders declined at the steepest rate since May 2009, which contributed to a thirteenth successive monthly fall in total new business volumes.
July data pointed to a sharp and accelerated fall in outstanding business across the German private sector. ....
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07-26-12 |
GERMANY |
2
2- Sovereign Debt Crisis |
EU DEBT CRISIS: Current Scenarios for Further Stop Gap Fixes
The European Debt Mutualization Options Matrix 07-20-12 Zero Hedge
As Barclays points out, the Summit produced an agreement in principle to achieve banking and fiscal union in the medium to long term. However, this commitment was lacking detail and as we pointed out earlier, is now critically exposing once again the fundamental flaw of disunited and self-interested European union of idiosyncratic nations.
While the decision to give the ESM the 'capability' to recapitalize banks directly solidified the medium-term commitment to a financial markets/banking union, there were no specific announcements/agreements from the EU Summit on various debt mutualization possibilities for the near term. If the eurozone debt crisis worsens, such that Spain loses market access and needs to be put into a full program (which a 7% yield and recent auctions suggests), policy makers will be required to give some serious thought to alternative plans, and in particular an accelerated move towards some form of debt mutualization - those options are laid out simply here (in all their unlikely transfer-of-sovereignty scenarios).
Barclays: Eurozone Debt Mutualization options, A Comparison
Market developments might relatively quickly push policy makers to consider various debt mutualization proposals, which will likely require significant transfers of sovereignty. In addition, most of these proposals come with varying degrees of challenges in terms of time to implementation, effectiveness of firepower, costliness to core countries and moral hazard. Of all the proposals, we find the ESM gaining a banking licence and leveraging itself at the ECB to be the most practical solution, especially in reaction to an acute funding crisis. However, legal considerations could prevent this from happening in the near term. Among the remaining potential choices, we believe Euro T-bill and Debt Redemption Fund proposals also look promising.
Click to Enlarge
Our approach here is to attempt to analyze the proposals separately by taking into account all of the criteria. The ultimate goal for the eurozone in the long term (ie, around 10 years) would be a fully fledged Eurobond solution once the economic and fiscal integration of Europe is in place. And this would require strong implementation of existing frameworks/plans such as the fiscal compact and European Semester stability plans by all eurozone members, but also an ultimate development of a fiscal body at the eurozone level (such as a central treasury/budget office), which would imply completion of transfer of sovereignty. As such, proposals such as ESM gaining a banking license and Euro T-bills can be seen as initial milestones on a roadmap for Europe, which will ultimately lead to a Debt Redemption Fund or fully fledged Eurobonds.
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07-25-12 |
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2
2- Sovereign Debt Crisis |
EU: GDP versus Deleveraging Credit Growth
He Who Deleverages Best: Presenting The 'Credit Intensity' Of Europe's GDP Growth 07-21-12 Zero Hedge
There exist those pathological Economics 101 acolytes who say that no matter what happens in the global economy, since it is all supposedly a closed system, whether one incurs leverage at the sovereign or private-sector level is largely irrelevant, and that is all translates into economic growth as long as the system is experincing a net leverage increase. Usually these same acolytes come up with economic theories which attempt to validate and justify infinite sovereign debt incurrence, usually to explain why socialism can be funded (if only in various formerly capitalist societies). At the heart of their thinking is the Kalecki profits equation which says that:
Profits = Investment – Household Savings – Government Savings – Foreign Savings + Dividends
Or in other words, as long as the non-government sector is expanding its savings (reducing leverage), aggregate economic output remains the same as long as the government is doing the opposite. Of course, as we explained before this equality breaks immediately in a real world in which one evaluates the impact of asset age, amortization, depreciation and otherwise the impact of reality on profitability. But does that mean that every economics theory that says corporate deleveraging is offset by sovereign leverage is wrong? Not necessarily. it just says that there is far more to the final outcome than what an Neo-Keynesian Econ 101 textbook alleges.
To evaluate the impact of private sector deleveraging on economic growth/GDP in the context of a rapidly releveraging sovereign, we present the following analysis from Citi which observes various European countries and analyzes the "credit intensity" of GDP growth, or in other words which country has preserved, or even grown its GDP even as its private sector has seen substantial deleveraging. The results are interesting and may present a framework for evaluation the winners and losers in Europe in the era of "great sovereign leveraging", permitting a reverse engineering of the success stories, and applying their lessons to the losers.
Citi has compiled data analyzing private sector leverage and cross referenced it to countries who have seen massive sovereign debt expansion in the past 5 years, however offset with various degrees of private sector deleveraging. The results are as follows :
Given the persistent tensions from the financial sphere and the precarious situation of some banking systems, it is interesting to compare how much leverage has been accumulated in the last ten years in various euro area member states and how much economic activity was generated during the same period (see Figure 4). This allows us to measure the ‘credit-intensity’ of GDP growth. In particular, we concentrate on the last five years to see whether the relationships have evolved.
Click to Enlarge
In peripheral countries such as Spain, the last two years (Q4 2009 to Q4 2011) saw a 16-point drop in the real credit outstanding without triggering a contraction in the level of economic activity. Over the same period, Ireland was perhaps the most successful peripheral country, with real credit outstanding shrinking by 57 points while the real GDP level rose by 4 points. In Portugal, while the reduction in real credit outstanding was more limited, worth 12 points in the last two year, the level of real GDP still declined, albeit by a modest 2 points. Italy is the only country within the peripheral group that experienced an increase in the amount of private sector real credit outstanding, with a gain of 5 points. Yet, the corresponding increase in real GDP was limited to just 2 points.
Core and soft core countries recorded GDP gains, with Finland (7pt) and Germany (6pt) clearly in the lead, compared to Austria (5pt), Belgium (4pt) and France (3pt). Interestingly, Belgium managed to grow its GDP despite experiencing a clear deleveraging phase. Note that Germany is the only euro area member state to have recorded an increase in its GDP level since 2002 while its level of private sector credit outstanding has declined during the last decade .
So while the occasional success story may exist, the danger is as always one of extrapolating into the future too far, especially a future in which private sector growth will very likely be even more constrained in the coming years. The danger is that expanding sovereign leverage will no longer be private sector offset, which it obviously is not in the general case, and will simply become a headwind to growth, at both the macro as well as micro levels.
Looking ahead to the next few quarters, there is a clear risk that banks operating in peripheral countries will either maintain tight lending standards or restrict lending even more in the event of further increases in the proportion of non-performing loans. Unless those countries implement sufficiently comprehensive structural reforms to lift potential growth, economic activity is at risk of contracting further in the coming quarters, increasing investors concerns about debt sustainability.
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07-25-12 |
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2
2- Sovereign Debt Crisis |
RISK REVERSAL |
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3 |
RISK: Systemic Problems Becoming both Obvious & Critical
Market-Top Economics 07-19-12 Zero Hedge
- As human-beings we have developed an uncanny ability to rationalize what we know to be bad news and convince ourselves, "This time is different," despite the fact that it usually never is.
- In a previous article I provided analysis on economic/equity decoupling (cognitive dissonance) and showed that the economy as we know it cannot persist--we are either due for a literal gap-up in leading economic conditions, or we are due for a serious correction in US equities. With today's 5.4% slip in existing home-sales, let's go with the latter.
- Velocity of M2 Money Stock (blue) and the S&P500 (red): Inversion in the velocity & SPX correlation led to a market crash in 2000 and 2007. No evidence suggests that we should break that trend this time.
Market tops are classically defined by:
- The revelation of fraud within the financial sector
- The collapse of financial institutions under their own weight
- Sweeping revenue loss within the financial sector
- The erection of massive buildings.
Where there is smoke, there is fire; where there is coordinated financial fraud, there are systemic issues. In this case, it seems that the banks involved in LIBOR rigging were attempting to manipulate short-term interest rates in order to literally engineer the price of derivatives contracts. This is a scary notion, and I believe that it is apt to infer that these banks have trillions in losses on shadow derivative contracts that they have been attempting to cover up with interest rate manipulation. |
07-23-12 |
RISK-OnOff |
3
3 - Risk Reversal |
CHINA BUBBLE |
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4 |
JAPAN - DEBT DEFLATION |
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5 |
BOND BUBBLE |
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6 |
BOND BUBBLE: US Treasury Yields at Historic Lows
Record Low Yields Once Again on US Treasuries 07-24-12 Mish

Legend
- Brown: $IRX 3-Month Treasury Bill Discount Rate
- Blue: $FVX 5-Year Treasury Note Yield
- Orange: $TNX 10-Year Treasury Note Yield
- Green: $TYX 30-Year Long Bond Yield
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07-26-12 |
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6
6- Bond Bubble |
CAPITAL DESTRUCTION: The "Sudden Capital Death Syndrome"
Falling Interest Rates Destroy Capital 07-20-12 Keith Weiner
I have written other pieces on the topic of fractional reserve banking (http://keithweiner.posterous.com/61391483 and http://keithweiner.posterous.com/fractional-reserve-is-not-the-problem) duration mismatch, which is when someone borrows short-term money to lend long-term and how falling interest rates actually encourages duration mismatch (http://keithweiner.posterous.com/falling-interest-rates-and-duration-mis...).
Falling interest rates are a feature of our current monetary regime, so central that any look at a graph of 10-year Treasury yields shows that it is a ratchet (and a racket, but that is a topic for another day!). There are corrections, but over 31 years the rate of interest has been falling too steadily and for too long to be the product of random chance. It is a salient, if not the central fact, of life in the irredeemable US dollar system, as I have written (http://keithweiner.posterous.com/irredeemable-paper-money-feature-451).
A bond issuer is short a bond. Unlike a homeowner who takes out a mortgage on his house, a bond issuer cannot simply “refinance”. If it wants to pay off the debt, it must buy the bonds back in the market, at the current market price. Let’s repeat that. Anyone who issues a bond is short a security and that security can go up in price as well as go down in price. It is the bond issuer’s capital that flows to the bondholder.
(1) Hold Until Maturity;
(2) Mark to Market;
(3) Two Borrowers, Same Amount;
(4) Two Borrowers, Different Amounts;
(5) Net Present Value;
(6) Capitalizing an Income;
(7) Amortization of Plant; and
(8) Real Meaning of an Interest Rate.
Debtors slowly pay down their debts and reduce the principle owed. This would reduce the NPV of their debts in a normal environment. But in a falling-interest-rate environment, the NPV of outstanding debt is rising due to the falling interest rate at a pace much faster than it is falling due to debtors’ payments. The debtors are on a treadmill and they are going backwards at an accelerating rate.
Irving Fisher, writing about falling prices proposed a paradox: “The more the debtors pay, the more they owe.” How apropos is Fisher’s eloquent sentence summarizing the problem! |
07-24-12 |
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6
6- Bond Bubble |
CHRONIC UNEMPLOYMENT |
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7 |
GEO-POLITICAL EVENT |
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8 |
NIXON'S REMOVAL OF US FROM GOLD STANDARD: Fallout Now Evident
Explaining Wage Stagnation 07-19-12 John Aziz Azizonomics

The end of the Bretton Woods system correlates beautifully to a rise in income inequality, a downward shift in total factor productivity, a huge upward swing in credit creation, the beginning of financialisation, the beginning of a new stage in globalisation, and a myriad of other things.
The long-term issue was the fundamental change in the nature of the global trade system and the nature of money that took place in 1971 when Richard Nixon ended Bretton Woods. |
07-24-12 |
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13
13 - Global Governance Failure |
TO TOP |
MACRO News Items of Importance - This Week |
GLOBAL MACRO REPORTS & ANALYSIS |
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US ECONOMIC REPORTS & ANALYSIS |
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US GROWTH Key Paradyns Suggest a New Normal Ahead
Three Converging Factors May Slash Economic Growth By 71% 072-12 Daniel Amerman
Everything from the ability to pay for Social Security, to projected federal deficits, to retirement planning and stock market valuations is based upon assumptions that the United States and other nations will emerge from crisis and return to "normal" long-term growth rates. What happens if we don't return to those growth rates?
There are strong historical reasons to believe that the United States growth rate could drop from a long-term historical rate of 3.5%, to an annual rate of 1.3% - and a per capita rate of 0.2% - in the coming decades. If so, then over a period of a little more than 20 years this would compound to a 71% reduction in economic growth.

This lack of future growth would result in a 40% smaller overall economy, compared to what it would be with normal growth. Because current government deficit projections, stock market valuations, and retirement planning models are all based upon "normal growth", the results would be catastrophic. There would be a much smaller economy available to support retirement and government promises, almost no growth in the stock market, and a long-term collapse in the value of retirement portfolios and pension plans
This may sound extreme. Yet, the three factors reducing long-term growth rates are not wild "gloom and doom" projections, but rather are quite fundamental factors that form the bedrock of the economic and financial present and future, albeit little noticed in the exciting daily hubris of the financial news.
- Debt Overhangs
- An Aging Population
- Adjusting For Population Growth

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07-24-12 |
INDICATORS CYCLES |
US ECONOMY |
US RECESSION: Signs Becoming Overwhelming
The Evidence Of A Coming Recession Is Overwhelming 07-20-12 Comstock Partners
We first noticed the first signs that the economy was beginning to soften about three months ago. Now the evidence of a slowdown has become so overwhelming that it is difficult to avoid the conclusion that we are headed for a recession. We cite the following as evidence.
- RETAIL sales (both total and non-auto) have dropped for three consecutive months. This has happened only five times since 1967----four times in 2008, and one now. Vehicle sales have tapered off with May and June being the two weakest months of the year.
- CONFIDENCE: Consumer confidence for both the Conference Board index and the University of Michigan Survey are at their lowest levels of 2012. The small business confidence index declined in June to its lowest level since October and has now dropped in three of the last four months. Plans for capital spending and new hiring have dropped sharply.
- JOBS: On the labor front, June payroll numbers were weak once again and averaged only 75,000 in the second quarter. The latest weekly new claims for unemployment insurance jumped back up to 386,000 and the last two months have been well above the numbers seen earlier in the year.
- MANUFACTURING: The ISM manufacturing index for June fell 3.8 points to 49.7, its first sub-50 reading in the economic recovery. Most recently the Philadelphia Fed Survey for July was negative (below zero) for the third consecutive month.
- Core factory orders, while volatile on a month-to-month basis, have declined 2.6% since year-end, and the ISM numbers indicate the weakness is likely to continue.
- SERVICES: The ISM non-manufacturing index for June dropped to its lowest level since January 2010.
- HOUSING: Despite all of the talk about a housing bottom, June existing home sales fell 5.4% to its lowest level since the fall of last year. In addition mortgage applications for home purchases have been range-bound since October.
- LEI The Conference Board Index of leading indicators has declined for two of the last three months and is now up only 1.4% over a year earlier, the lowest since November of 2009, when it was climbing from recessionary numbers. The ECRI Weekly Leading Index is indicating a recession is either here now or will begin in the next few months.
REGIONAL
- GLOBAL: The breadth and depth of the slowdown are greater than the growth pauses experienced in mid-2010 and mid-2011, and indicate a strong likelihood of recession ahead.
- EU: In addition the foreign economies will be a drag as well. A number of European nations are already in recession and others are on the cusp. The debt, deficit and balance sheet problems of the EU's southern tier are a long way from any solution, and will not remain out of the news for long.
- CHINA is coming down from a major real estate and credit boom, and is not likely to avoid a hard landing. The Shanghai Composite is in a major downtrend, declining 28% since April 2011. The view that China is immune because of their unique economic system reminds us of what people were saying about Japan in 1989.
The stock market is ignoring these fundamentals as it did in early 2000 and late 2007 in the belief that the Fed can pull another rabbit out its hat. It couldn't do it in 2000 or 2007 when it had plenty of weapons at its disposal. Now there is little that the Fed can do, although it will try since it will not get any help, as Senator Schumer so aptly pointed out at Bernanke's Senate testimony. In sum, we believe that the stock market is in store for a huge disappointment. |
07-23-12 |
INDICATORS-CYCLES |
US ECONOMICS |
CENTRAL BANKING MONETARY POLICIES, ACTIONS & ACTIVITIES |
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QE III: China Needs to be Support this, and it isn't QUITE YET.
Why Is The Fed Not Printing Like Crazy? 07-21-12 John Aziz Azizonomics
The answer to why Bernanke isn’t increasing inflation when his former self and former colleagues say he should be is actually nothing to do with domestic politics, and everything to do with international politics. Most of the pro-Fed blogosphere seems to live in denial of the fact that America is massively in debt to external creditors — all of whom are frustrated at getting near-zero yields (they can’t just flip bonds to the Fed balance sheet like the hedge funds) — and their views matter, very simply because the reality of China and other creditors ceasing to buy debt would be untenable.
Why else would the Treasury have thrown a carrot by upgrading the Chinese government to primary dealer status (the first such deal in history), cutting Wall Street’s bond flippers out of the deal? As John Huntsman (in his days as ambassador to China) reported in a cable back to Washington, China is keen to stop buying low-yield treasuries and start buying other assets, but the US is desperately pushing China back toward treasuries. Only a brutal 2008-style collapse can bring on the kind of printing — QE3, NGDP targeting and beyond — that the pro-Fed blogosphere wishes to see, because it is only under those circumstances that China and other creditors will happily support it.
To a heavily-indebted nation, creditors have big leverage on monetary policy. |
07-25-12 |
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CENTRAL BANKS |
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Market Analytics |
TECHNICALS & MARKET ANALYTICS |
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UPS BELLWETHER: Clear Messages but few Listening
Global Trade And Logistics Bellwether UPS Misses Top and Bottom Line, Cuts Forecast 07-24-12 Zero Hedge
UPS, traditionally considered one of the legacy bellwether, came out with earnings. And they were ugly.
- The company missed both the top and bottom line, with the revenue coming at $13.35 billion, below expectations of $13.7 billion, and EPS at $1.15 on expectations of $1.17.
- This merely confirms what those who did not have their head in the sand in Q2 knew all along: without Europe, global trade stalls every time.
- But it was the outlook cut that was the cherry on top: "The company’s performance was mixed during the second quarter,” said Kurt Kuehn, UPS’s chief financial officer. "The results in the U.S. Domestic and Supply Chain and Freight segments were partially offset by the weakness in International.
- “As we look toward the second half of the year, customers are more concerned as greater uncertainty exists.
- Additionally, economic growth expectations have come down,” Kuehn continued." China bull take note: "Revenue was $3 billion as the segment remains under pressure due to weaker global economies and reductions in exports from Asia." Going back to Kuehn: "Consequently, we are reducing our guidance for 2012 diluted earnings per share to a range of $4.50 to $4.70, an increase of 3%-to-8% over 2011 adjusted results.”
- The firm's previous guidance was $4.75-$5.00, with sellside consensus of $4.82.
- Somehow we fail to see how the Q3 and Q4 renaissance, which is so critical to meet the S&P target of over 100 in earnings, will happen. Actually scratch that: it won't. Expect reality to slam stocks head on some time in Q3 as the realization that the air out of the US corporate juggernaut has come out, courtesy of a sliding EUR and surging USD. Or at least until the Chairman has something to say about it.
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07-26-12 |
STUDY FUNDMANENTALS EARNINGS |
ANALYTICS |
CANARIES IN THE COAL MINE: Markets Ahead of Reality
Before You "Buy the Dip," Look at These Two Charts 07-24-12 Charles Hugh Smith
Before You "Buy the Dip," Look at These Two Charts
The real economy has entered recession territory, while the stock market is setting up a massive downtrend from QE-juiced highs.
The first is a long-term chart of the Dow Jones Industrial Average (DJIA). The recent price history has traced out a pattern that looks remarkably similar to the one that presaged the crash of 2008, with one difference: massive quantitative easing and Eurozone bailouts pushed the B leg into an overextension. If this pattern is valid, the C leg down could be a real doozy:
How can we tell the market is ready to roll over on fundamentals? Study the ISM PMI composite readings, which just dropped below 50 into recession territory:

Notice that the S&P 500 stock market index is highly correlated to the Composite. Those who expect stocks to rise despite the PMI Composite cratering will have to explain why "this time it's different."
The "buy the dip" crowd is counting on the Federal Reserve to launch a new round of QE (quantitative easing) that will goose the market higher even as the real economy follows the rest of the global economy into recession.
Perhaps, but for how long? Or even more sobering, suppose this entire "b" leg up was the market pricing in QE3 being unleashed on August 1.
The "buy the dip" crowd may well face a new choice: either sell at 12,500, or sell at 10,500. |
07-26-12 |
PATTERNS |
ANALYTICS |
EARNINGS: Unit Revenues Must Fall Based Falling GDP & Inflation
Are Analysts' Revenue Estimates Signaling A Recession? 07-20-12 Zero Hedge
If inflation is running around 2%, a 1% increase in revenues means a negative 1% growth rate for units sold, assuming constant mix.
- On average, the Street expects the 30 companies of the Dow to post only 1.0-1.5% year-over-year top line growth for Q3 2012, down from the 3.0-3.7% expectations it had baked into its financial models just 60 days ago.
- Also, these analysts now peg Q4 2012 at 3.9% growth, but those numbers are falling quickly
- Analysts are reducing their revenue expectations across the board – only 3 of the Dow 30 companies saw increased expectations for Q3 2012 revenues in the past 30 days, with a similarly dismal count for Q4 2012 expectations.

Click to Enlarge
Analysts started off 2012 thinking that Q3 and Q4 would average about 4-6% revenue growth for the Dow companies. By April, they began to grow a bit concerned, nibbling away at Q3 revenue estimates but leaving Q4 numbers largely unchanged. In May and June they started to ratchet back expectations more aggressively, to something more like 2-3% for Q3 and 4-5% for the final quarter of the year.
Click to Enlarge
- For the third quarter of 2012, the analysts that cover the Dow stocks expect to see only 1.0 – 1.5% year-on-year top line growth for the overall index and the non-financial names, respectively. That will be the worst comparison since the Financial Crisis, and show sequential deceleration/stagnancy from Q2 2012’s expected 3.2% comp overall and 1.5% comparison for the non-financial names.
- Analysts are still holding out some hope for Q4, but I can tell you from years of experience doing such models that this is probably because they do not want to reduce their full-year earnings estimates just yet.
- What is also notable is that the cuts in expectations over the past 30 days have been widespread. Analysts are only marginally more bullish on 3 names of the Dow 30 for the back half of the year, and the increases in revenue growth here is miniscule.
CONVULUTED THINKING: When corporations feel the pinch from a slower economy, they lay off workers. When they lay off workers, the Fed executes on its dual mandate and increases liquidity. And when the Fed increases liquidity, stocks go up. |
07-23-12 |
STUDY FUNDAMENTALS EARNINGS |
ANALYTICS |
EARNINGS: Abysmal Earnings Season
The Abysmal Earnings Season Explained In Two Charts 07-21-12 Zero Hedge
The following two charts show just why any hopes that corporate earnings can mask the US economic deterioration this year, as they did in 2011 (probably the first and only way in which 2012 is not a carbon copy of 2011 so far), should be promptly dashed.

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Basically revenue growth is abysmal. But no surprise there - after all we have been warning for nearly a year that with the Fed intervening directly in corporation cash allocation decisions (via ZIRP), management teams are much more eager to hand out retained earnings in the form of dividends than reinvest via CapEx - an extremely short-sighted strategy and one that backfires immediately with cash-generating assets around the world already at record old age. (for more read: "How The Fed's Visible Hand Is Forcing Corporate Cash Mismanagement").
And with revenue growth absent, EPS can only grow if corporations cut even deeper into the muscle and let even more workers off, since employee pay is already abnormally low and can not realistically be cut any more. Sure enough, ex-financials, Year over Year EPS growth is now at 0% for the first time since the Lehman collapse!

Click to Enlarge
In other words, corporations have already extracted all the growth they could courtesy of ZIRP.
It is all downhill from here, as only the negative consequences of the Fed's disastrous policies now predominate in finance and the economy.
As an appendix, here is a full summary of the earnings season to date:

Click to Enlarge |
07-23-12 |
STUDY FUNDAMENTALS EARNINGS |
ANALYTICS |
COMMODITY CORNER |
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THESIS Themes |
FINANCIAL REPRESSION |
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CORPORATOCRACY -CRONY CAPITALSIM |
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GLOBAL FINANCIAL IMBALANCE |
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SOCIAL UNREST |
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STATISM |
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CURRENCY WARS |
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STANDARD OF LIVING |
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GENERAL INTEREST |
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