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COMING UNGLUED: Market Fragility and Credit Market risk indicators are now at post-Lehman levels.

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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>>

MARKET ANALYTICS & TECHNO-FUNDAMENTAL ANALYSIS

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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

US ECONOMY - We Warned the US Was Slowing Rapidly! --#1

US Export Orders Are Collapsing 08-02-12 Zero Hedge

Presented with little comment, courtesy of Diapason Commodities' Sean Corrigan, NAPM Export Orders have plunged over 3 sigma in the last 3 months and have only dropped more (in history) immediately after the Lehman debacle. Decoupling anyone?

US ECONOMY - We Warned the US Was Slowing Rapidly! --#2

Dallas Fed Plunges Most In Over 7 Years To 10 Month Low; With Biggest Miss In 14 Months 07-30-12 Zero Hedge

With expectations for a muddle-through slight positive print, the headline Dallas Fed index just printed at -13.2 (exp. 1.9). This is its lowest level since September of last year and the biggest miss of expectations since May of last year. The headline index is teetering on the edge of its worst levels since 2009 as the month to month change in the general business activity index dropped a massive 19pts - its largest drop since April 2005. Specifically it appears the outlook for capital expenditures was among the largest sub-index to have its hope crushed - and this strongly suggests (and confirms) a sub-50 ISM print.

The Dallas Fed general activty index plunged its most in over seven years...

to last summer's levels...

which goes to confirm the sub-50 ISM print that appears to be looming large...

US ECONOMY - We Warned the US Was Slowing Rapidly! -- #3

US Manufacturing Sector Contracts For Second Month In A Row, Misses Expectations Of Expansion 08-01-12 Zero Hedge

Expectations that the American manufacturing sector would expand after "briefly" contracting in June were promptly doused after the Manufacturing ISM printed at 49.8, below expectations of an expansionary print of 50.2, and essentially unchanged from last month's 49.7. Where did offsetting growth come from? The most hollow of indicators - Inventory - which keeps on being built up in expectation of a demand spike that never comes. This is also the third miss in a row for the ISM, whose most watched component, the Employment index, slid from 56.6 to 52.0 confirming that the earlier ADP number was a total noisy fluke as usual. The question: is the data as bad as possible for it to be good for stocks remains unanswered, especially with some Knight algo wreaking havoc across all stocks as of this posting.

And the summary:

Here are the always interesting respondents:

• "Business has been up for the last seven consecutive months — strong customer orders coming in." (Machinery)
• "Automotive demand remains strong." (Fabricated Metal Products)
• "Resin pricing has bottomed out so customer orders have increased; it was pent-up demand." (Plastics & Rubber Products)
• "We have noticed a marked slowing in business overall. [We] have confirmed this with other companies in our industry as well." (Wood Products)
• "Forecasts remain high, but actual bookings remain flat." (Computer & Electronic Products)
• "Taking a conservative approach to spending including hiring, travel and inventory. U.S. economy seems stuck — at best — with little to no growth." (Apparel, Leather & Allied Products)
• "Business remains surprisingly strong." (Primary Metals)
• "Continued slowdown in government military sector spending in advance of the presidential elections has seriously impacted business performance." (Transportation Equipment)
• "Business is softening, requiring some down production days." (Furniture & Related Products)
• "General state of business this month is flat, with increasing economic uncertainty." (Chemical Products)

SLOWING GLOBAL GROWTH - World Wide PMI

How The Global Economy Changed In One Month 08-01-12 BI

Click to Enlarge

Global manufacturing remained deeply depressed in Europe and much of the developed world, even as North America largely showed strength this June. New data out of Markit Economics shows continued weakness across the euro area, and difficulty resonating in Asian strongholds like Japan and China.

Notable readings:

• U.S.: 51.4 in July, down from 52.5 in June
• U.K.: 45.4 in July, down from 48.6 in June
• Eurozone: 44.0 in July, down from 45.1 in June
• Spain: 42.3 in July, up from 41.1 in June
• Germany: 43.0 in July, down from 45.0 in June
• Italy: 44.3 in July, down from 44.6 in June
• China: 49.3 in July, up from 48.2 in June
• Japan: 47.9 in June, down from 49.9 in June

Below we present revised July PMI results. You'll notice the sea of red in Europe continues to persist, but growth in Eastern Europe and Asia declined — and even contracted in some countries.

Global PMI Update: 10 Of 11 European Countries In Contraction 08-01-12 Zero Hedge

Overnight, global July PMI data was released. In a nutshell: the contraction in the world economy is accelerating primarily due to that fulcrum continent, Europe, where 10 out of 11 countries indicated they are now in contraction. And since Europe is the nexus economy for global trade, what happens in Europe happens everywhere. As BAC summarizes: "From June’s levels’ global PMIs were mixed with roughly half (13) of the manufacturing PMIs decreasing over the course of the month. Out of the 23 countries that have reported so far, sixteen of the PMIs indicate that their manufacturing sectors are contracting – indicated by a PMI reading below 50. Europe’s sovereign debt and banking crisis continues to take a toll on the region’s manufacturing sector. Out of the 11 European countries that we reported on today, 10 printed with a PMI below 50. In other words, the majority of the global manufacturing weakness is stemming from Europe."

SLOWING GLOBAL GROWTH - ASIA

Goldman Sachs considers Korean trade data to be Asia's "canary in the coal mine" due to its high correlation to economic activity in mainland Asia. Unfortunately, the canary is looking sick.

South Korean July exports plunged 8.8 percent from a year ago. Economists surveyed by Bloomberg were looking for a decline of 3.7 percent. This disappointing number comes as global PMI data shows that deterioration in the world's manufacturing sectors.

Jim O'Neill, Chairman of Goldman Sachs Asset Management has previously argued that PMI and South Korean trade data were among the most reliable economic indicators in the world. So, there's not much good news coming from the Asian economies. At this point, it seems the data is increasingly justifying further easy monetary policy measures from local central banks

Asia Shows More Signs of Slowing 08-01-12 WSJ

A slowdown in China's manufacturing sector in July added to a broader ramp-down in the region, as slack demand in Europe and the U.S. continued to erode growth in Asia's export-driven economies. The weak data bolster expectations that policymakers in China and elsewhere in Asia will further loosen monetary conditions to stimulate economic growth.

Manufacturing growth in India slowed sharply last month, while South Korea, Taiwan and Vietnam experienced a contraction in manufacturing

• SOUTH KOREA:
  • South Korea recorded its largest monthly drop in exports in nearly three years.
  • In South Korea, exports in July marked their biggest drop since October 2009 while consumer prices rose at the slowest pace in more than 12 years, strengthening expectations for a back-to-back rate cut by the country's central bank this month.
  • Korean exports fell 8.8% in July from a year earlier, the government said, much weaker than a forecast 3.9% drop. Conditions for manufacturers worsened in July for a second month in a row, according to HSBC's PMI gauge, which was at 47.2 in July from 49.4 in the previous month.
• TAIWAN:
  • It was a similar story in Taiwan, where the HSBC PMI fell to 47.5 in July from 49.2 in June, as new orders declined. "The inventory build-up for a number of key product launches which has underpinned manufacturing activity since the first quarter is coming to an end, but the pick up in final demand that's needed to keep things going is nowhere in sight," HSBC said.
• VIETNAM:
  • The weak global environment was compounded by poor domestic demand in Vietnam, where HSBC's PMI gauge for July fell to 43.6 from 46.6 in June.
• INDIA:
  • India manufacturing activity slumped in July to its slowest pace in eight months, weighed down by weakness in new orders, particularly from overseas, HSBC said. Widespread power outages in July were also a factor, HSBC said, as sporadic blackouts throughout the month disrupted production. The PMI reading fell to 52.9 in July from 55.0 in June.
• INDONESIA
  • Indonesia, Southeast Asia's biggest economy showed a pickup in manufacturing, but weak external demand caused its trade deficit to widen sharply to a record amount.
  • In Indonesia, higher domestic demand helped to propel the HSBC PMI up to 51.4 in July from 50.2 in June. But falling export orders also weighed on businesses. Other data showed a sharp deterioration in the country's trade position, with the deficit widening to a record $1.33 billion in June from $490 million in May, as exports declined 8.7% from the month prior.
• CHINA:
  • China's official Purchasing Managers Index, the government's gauge of the health of the manufacturing sector, slipped to 50.1 in July from 50.2 in June. The result dashed hopes for a slight recovery to 50.4 that had been predicted by economists in a Dow Jones survey.
  • The Chinese PMI reading is the weakest since November 2011, and reflects three consecutive months of decline, as Europe's broadening debt crisis and a stalled U.S. economy have kept a lid on Western demand for Chinese exports.
  • A separate PMI gauge compiled by HSBC continued to show Chinese manufacturing activity is contracting, but not as sharply as in the previous month. The HSBC manufacturing PMI for China rose to 49.3 in July compared with 48.2 in June.
  • Taken together, the data strengthen the view of many economists that China will ease policy in the third quarter, either through cutting its benchmark rate or by reducing bank reserve requirements. Aside from policy action, Barclays' Leong said the expected launch of the Apple iPhone 5 this fall should give Chinese manufacturers a boost.

"This trough is proving deeper than we expected, but we are still looking for an upturn later in the year," said Barclays senior Asia economist Wai Ho Leong. "If anything, the soft readings we are seeing will only encourage more stimulus."

Despite the regional slowdown in output, capital investment flows into the region have surged in recent weeks as expectations of further easing by central banks in the U.S. and Europe have propelled central bank, pension and insurance funds into Asia seeking higher yields, said Sameer Goel, head of Asia rates and currency research at Deutsche Bank.

That has boosted Asian government bonds and currencies such as the Korean won, and should continue despite July's downbeat economic data, he said. "Here and now, the expectations of policy easing by the [Fed] and ECB are dominating price action more than anything else," said Goel.

CONSUMPTION - Increasing US Savings Rate

Households Hunker Down As Saving Rate Soars To Highest Since August 2011 07-31-12 Zero Hedge

Confirming that the economy continues to be on life support and that the consumer has been actively withdrawing from providing that key lifeblood so needed to regain the "virtuous circle" [RIP: XXXX-2009] is the just released revised personal consumer data, which showed even further retrenchment, as personal spending came unchanged in June on expectations of a modest 0.1% increase, while income rose 0.5% on expectations of a 0.4% increase (among other things due to "Contributions for government social insurance -- a subtraction in calculating personal income -- increased $3.5 billion in June, compared with an increase of $0.8 billion in May."). End result: the Personal Savings Rate (revised) rose from 3.6% in April, to 4.0% in May, to 4.4%, in June: the highest it has been since August 2011, just before the economy as manifested by the Fed's favorite metric, the Russell imploded. All those expecting the consumer to step up and pick up the pieces will have to defer hope and prayer for one more month. Luckily, for everything else there is the Fed's Taxpayercard

.

SENTIMENT - The Mother of All Contrarian Indicators?

BofA: Our -Contrarian Indicator Is Flashing The Biggest Stock Market Buy Signal -We've Ever Seen 08-01-12 BI

BofA just updated one of their favorite market indicators, and it's looking very bullish for stocks.

Savita Subramanian, who heads the bank's quant and equity strategy, says the indicator is flashing the biggest contrarian buy signal they've seen in 27 years of data:

After triggering a Buy signal in May, our measure of Wall Street bullishness on stocks has continued to decline, marking the tenth time in the past year that the indicator has fallen. This month’s 5.5ppt decline pushed the indicator down to 43.9, the lowest level in the history of our data going back to 1985, suggesting that sell side strategists are now more bearish on equities than they were at any point in the last 27 years. Given the contrarian nature of this indicator, we are encouraged by Wall Street’s lack of optimism and the fact that strategists are recommending that investors significantly underweight equities vs. a traditional long-term average benchmark weighting of 60-65%.

Here's a look at the indicator, which according to Subramanian is "based on the average recommended equity allocation of Wall Street strategists as of the last business day of each month," has plunged in 2012:

CONSUMPTION - No Longer the Answer for America

America Can't Keep Relying On Spending To Drive The Economy 07-31-12 Stephen Roach via BI

This article was originally published by Project Syndicate. For more from Project Syndicate, visit their new Web sit

US GROWTH: More Confirmations of Slowing Growth

The US Garbage Indicator Is Sending An Ominous Sign For The Economy 07-26-12 BI

Among the 21 categories of items shipped by rail, none have a tighter correlation to GDP than waste. According to a 2010 piece on Bloomberg, economists Michael McDonough and Carl Riccadonna note that waste has an 82 percent correlation to US economic growth. This should be pretty intuitive. The more you produce, the more you throw out.

McDonough, a Bloomberg BRIEF economist, tweeted out an update on the indicator. And frankly, it stinks. Waste carloads are way down.

US MONETARY POLICY - Still Too Soon?

Is Third Time The Charm For Central Bank Intervention Prayers? 07-31-12 Zero Hedge

QEIII: What is the Fed's Trigger?

The Bernanke Put 'Strike' Is Now At 1200 For The S&P 500 07-10-12 Zero Hedge

We have discussed at length the need for the equity market to be significantly lower in order for Bernanke to step in with his munificence. Critically, this is less about the absolute level of the S&P 500 (though anyone expecting the Fed chairman to step in with the S&P 500 within a few percent of multi-year highs is dreaming) but, as Barry Knapp from Barclays notes - based on Bernanke's writings - additional monetary stimulus is a function of a significant drop in inflation expectations (as opposed to a shallow drop in the S&P 500). It is the risk of deflation that will trigger a policy reaction. Current conditions are not even close to levels that have warranted additional stimulus in the past - which we estimate to be a 2% 5Y5Y forward inflation breakeven rate. In order for that level to be triggered - based on the post-crisis relationship between equities and inflation expectations - the S&P 500 trailing earnings yield would need to rise over 8.2% implying an S&P 500 level near 1200. Tracking inflation expectations is critical to any NEW QE hope - and for now, there is none on the horizon, no matter how much everyone clamors for it.

The trigger for previous extreme monetary easing has been around the 2% level (red dotted line) for 5Y5Y inflation breakevens...

The small red and green arrows above (as we noted in a previous post) show the risk flare around Europe's initial re-emergence into crisis which was quickly grabbed as managers bought the dip on the Bernanke Put hope.

This implies around an 8.2% trailing earnings yield or an S&P 500 level around 1200...

Simply put - without break-evens dropping, the Bernanke Put will not arrive (as the printer-in-chief would implicitly believe it to be too inflationary) and so asset values will need to fall (on the back of real earnings disappointment or fundamental macro deterioration) in order to bring the FOMC in - if the status quo of BTFD reflexive front-running continues, NEW QE will remain absent.

Did The Market Remove Its Own QE Punchbowl? 07-29-12 Zero Hedge

As we discussed here two weeks ago, Bernanke's actions in extreme monetary policy have all occurred at periods when the market's expectations of future rapid de- or dis-inflation have increased rapidly. As we noted then: without inflation break-evens dropping, the Bernanke put will not arrive; but the market in its infinitely efficient wisdom has created a self-defeating spiral of BTFD reflexive front-running on any rapid spike down in future inflation expectations - which implicitly sparks a non-dis-inflationary reaction and removes Bernanke's punchbowl for another day. This has occurred 4 times this year - with this week's early plunge being caught by Draghi and Hilsenrath - and with inflation break-evens almost at their highest in 10 months, it would appear the 'desperate-not-to-miss-the-life-giving-rally' market just removed its own blood supply.

MOUNTING QE III PRESSURES: Perceptions Forcing Fed to Take Action - (Jon Hilsenrath Speaks)

Fed Moves Closer to Action: Central Bank Prepares Steps to Spur the Economy Unless the Recovery Picks Up 07-25-12 WSJ JON HILSENRATH

Federal Reserve officials, impatient with the economy's sluggish growth and high unemployment, are moving closer to taking new steps to spur activity and hiring. Since their June policy meeting, officials have made clear—in interviews, speeches and testimony to Congress—that they find the current state of the economy unacceptable. Many officials appear increasingly inclined to move unless they see evidence soon that activity is picking up on its own.

Fed officials could take some actions in combination or one after another.

Fed Chairman Ben Bernanke, in testimony to Congress last week, listed several options under consideration, including

1. a new program of buying mortgage-backed or Treasury securities,
2. new commitments to keep short-term interest rates near zero beyond 2014 or
3. an effort to push already-low benchmark short-term interest rates even lower.

One idea mentioned by Mr. Bernanke in his testimony would be to use a facility the Fed calls its discount window to provide cheap credit directly to banks that make new business or consumer loans. But it isn't clear such a program would do much good when banks already have ample access to cheap credit and this kind of program doesn't appear to be winning favor at the moment.

There are several reasons why Fed officials might wait for their September meeting to decide whether to proceed. By then they will have seen two more monthly unemployment reports and two more months of data on output, spending and investment. Fed officials update their economic projections at the September meeting and Mr. Bernanke holds his quarterly news conference after, which would give him an opportunity to publicly explain the Fed's thinking. Moreover, some officials believe the Fed's June decision to continue a program known as "Operation Twist" through year-end could help the economy and want to give it time to work.

• Cashin Notes Hilsenrath Is To The Fed As Greg Ip Is To The ECB 07-27-12 Zero Hedge
• Stephen Roach Smokes Crack-Addicted Market "QE3 Is Not Going To Work" 07-25-12 Zero Hedge Jon Hilzenrath is actually the chairman of the Fed. When he writes something in the Wall Street Journal, Bernanke has no choice but to deliver on what he wrote.”

MOUNITNG QE III PRESSURES: Perceptions Forcing Fed to Take Action

FOMC Preview: Christening QE III 07-27-12 Nothern Trust

The Federal Open Market Committee will be meeting next Tuesday and Wednesday to decide on the future course of monetary policy. Here is a matrix that looks at the pros and cons of the most likely outcomes, along the subject lines that the Committee will likely discuss.

All things considered, we think that the FOMC will opt for a modest extension of its quantitative easing program, initiating what some have called QE III. As we discussed earlier this week, we don’t think that the Fed will lower the interest rate it pays on excess reserves (IOER).

Here are the key factors we think will carry the day.

• The Fed's dual mandate calls for them to work towards maximum sustainable employment. We seem to be moving in the opposite direction of that aim. Inflation seems to be well-contained, allowing room to address the jobless issue.
• The paralysis in Congress, likely to last for the balance of this election year, does place additional pressure on the Fed to be accommodative. It might be tempting for the FOMC to throw up its collective hands in frustration, but quantitative easing has proceeded for three years now in the face of fiscal gridlock.
• Even if recent statements from Europe are followed by real action, it will take some time for European economies and banks to recover from what they have been through. The global picture will therefore remain a headwind for U.S. growth.

There will no doubt be dissent on this decision from some corners of the table. But there should be a core of support that can carry the day.

This will be a close call, so the risk of being incorrect is certainly high. I’m therefore tempted to research this even more deeply, but my family has their faces pressed angrily against the library window. Time to shut down and enjoy the scenery.

MONETARY MALPRACTICE: GLobal Wildcat Finance

Monetary Madness 07-27-12 Doug Nolan

M2

• In commemoration of M2 surpassing $10.0 TN for the first time – not to mention the unfolding confrontation between ECB President Draghi and Germany’s Bundesbank - this week’s CBB will focus on Monetary Analysis.
• It is worth noting that M2, the Fed’s narrow measure of “money” supply, surpassed $1 TN for the first time in 1975. It made it past $2 TN in 1983, $4TN in 1997, $8 TN in 2008 and $9 TN in April 2011. M2 has inflated another Trillion during the past 15 months.

MONEY

• To set the backdrop, it is worth noting that early economic thinkers were obsessed with money.
• These days, monetary analysis is little more than a footnote in contemporary economic doctrine.
• Generations ago, great minds were trying to come to grips with monetary phenomena. They came to appreciate that money and Credit had profound impacts on economies and societies, although throughout history even the most astute struggled with the complexity of it all.
• These days, “monetary stimulus” is seen as good for the markets and, yes, good again for GDP. Inflation, if it ever were to return, is not so good.
• Today’s monetary analysis is not good but it is shallow.
• Thinkers of things economic long ago appreciated that the functioning of economies was literally transformed by the introduction of money.
• An economy dominated by barter operated altogether differently after units of exchange entered the fray.
• They further understood that the introduction of bank lending – where new purchasing power and bank liabilities were created by the act of borrowing – added great complexities to how economies functioned.
• Finance mattered and it mattered a lot. Keen attention was paid to the role Credit played in economic cycles.
• For centuries, the seemingly straightforward issues of money and Credit were recognized as extraordinarily, incredibly complex.
• Analyses that various monetary fiascos and inevitable collapses came to similar conclusions: sound money and Credit were paramount.

Credit and speculative excesses were recognized as primary culprits to financial collapse and the Great Depression.

• Regrettably, incredibly important lessons learned through devastation and hardship were relegated to the dustbin of history.

WILDCAT BANKING

• Early analysis of “wildcat banking” was quite insightful. Especially as banks proliferated along with the development of the Wild West, individual banks’ bills of exchange and promissory notes garnered considerable attention. These types of bank liabilities differed greatly, based on their backing and the perceived soundness of individual institutions – depending as well on the phase of the Credit cycle. In the end, there were too many bank failures, too much worthless wildcat currency and too little confidence in these Credit instruments and institutions.
• Importantly, however, wildcat fiat “money” was initially a crucial facet of impressive wealth creation. Many a prospector borrowed from a local bank to clear land, buy seeds and invest in animals and tools. Many businesses flourished.
• Early economic thinkers, however, also recognized that unsound money would inevitably prove destabilizing and detrimental.

Monetary inflations could not be controlled. Lending volumes – along with outstanding fiat currency - would inevitably grow larger and larger, financing speculative activities and uneconomic ventures – fueling inflation and sowing the seeds of boom and bust dynamics.

• This is a common theme throughout monetary history, although monetary analysis is always burdened by the fact that every cycle has its own financial and economic nuances. The nature of the analysis is prone to historical revisionism.

GLOBAL WILDCAT FINANCE

• But I’ll conclude the shallowest analysis of monetary history - and jump right to the present. I’ve for years posited that we live in an extraordinary period of “global wildcat finance.”
• Fiat electronic Credit – much of it marketable debt instruments – has expanded unlike anything previously experienced.
• In the “developed” West, inflated real and financial assets were a primary inflationary consequence.
• In China and “developing Asia,” an unprecedented expansion of manufacturing capacity was integral to the incredible inflation of incomes and wealth.
• As for fundamental “nuances” of this monetary and economic Bubble, one can point to so-called “globalization,” the explosion of computer and communications technologies, enterprising financial innovation, deregulated Credit and speculation, and monetary policy activism.

DECOUPLED MONETARY INFLATION

• Myriad forces worked to break the traditional link between monetary excess and rapidly rising consumer prices.
• The “developing” world, enjoying access to unlimited cheap finance, built manufacturing capacity to inundate the world with manufactured goods and technology products.
• Global financial excesses allowed developed nations to indulge in cheap imports by issuing endless IOUs, while transforming economic systems from production-based to Credit-driven consumption and services.
• And the seeming New Paradigm victory over “inflation” emboldened New Age central bankers. They unwittingly nurtured an epic monetary inflation, and as this Credit Bubble has begun to buckle they have moved with extraordinary force to sustain it. Especially after the 2008 crisis response, global policymakers lost control.

EU CRISIS

• The eurozone is today locked in a disastrous monetary crisis. The marketplace simply no longer trusts the liabilities issued by some its members. Analysts continue to lambast European officials for failing to learn from our successful navigation through the 2008 crisis. This is flawed analysis.
• Europe is suffering from a late-cycle sovereign debt crisis.
• In ‘08/’09, U.S. policymakers enjoyed unprecedented demand for Treasury (and even agency) debt securities. Through the massive issuance of federal government debt along with Federal Reserve monetization, the U.S. system was able to sustain ongoing Credit growth.
• U.S. non-financial debt expanded $1.9 TN in 2008 and, despite huge mortgage write-downs, U.S. non-financial Credit still grew almost $1.1 TN in 2009. With federal debt expanding a then record $1.4 TN, total non-financial debt expanded 3.1% in 2009.

Washington was willing to jeopardize the creditworthiness of federal debt and the Fed was willing to risk its reputation - and a downward spiral was thwarted.

• A new phase of monetary inflation was commenced, this time through the massive injection of federal government and Federal Reserve finance.
• There are unappreciated costs associated with injecting such massive sums of unproductive Credit into a (maladjusted) system, which I return to below.
• Today, because they now lack creditworthiness in the marketplace, Spain and Italy no longer have the capacity to inject sufficient new Credit into their economic systems.
• This is a potentially devastating dynamic, as the lack of sufficient ongoing monetary inflation is illuminating deep structural economic impairment following years of Credit excess and attendant maladjustment.
• Earlier this week, with Spanish and Italian yields spiking higher and their markets turning illiquid, the European debt crisis was again spiraling out of control – only months after the ECB implemented its latest $1.3 TN liquidity facilities. And, once again, acute financial stress has provoked tough talk.
• ECB president Draghi Thursday morning stated, “…the ECB is ready to do whatever it takes to preserve the euro… Believe me, it will be enough.” German Finance Minister Schaeuble said he supported Draghi’s statement, while Chancellor Merkel and President Hollande came forward Friday with their own “bound by the deepest duty” to do everything to protect the euro.
• And then there was this afternoon’s unconfirmed report that Mr. Draghi is prepared to present a “game changing” multi-prong plan at next week’s European Central Bank governing council meeting that will include
  • ECB bond purchases and
  • A banking license for the ESM.

BUNDESBANK v ECB

Shifting 180 degrees from earlier in the week, rather than fearing Credit collapse the markets moved quickly in anticipation of yet another crisis-induced bout of monetary inflation. And, seemingly, only the Bundesbank remains capable of taking a measured approach. Friday morning (before afternoon reports of a Draghi’s “game changer”), from a Bundesbank spokesperson: “There haven’t been any changes in our positions on bond purchases of the Eurosystem, bond purchases by the EFSF, or giving a banking licence to the ESM… The Bundesbank has repeatedly expressed in the past that it views bond purchases critically because they blur the line between monetary and fiscal policy… The Bundesbank continues to view the SMP [securities market program] in a critical fashion. The mechanism of bond purchases is problematic because it sets the wrong incentives…

A banking license for the bailout fund would factually mean state financing via the printing press and would be a fatal route, which therefore is prohibited by the EU treaty.”

No doubt about it, the Bundesbank is increasingly isolated. They are at odds with most European politicians and they are at odds with other central bankers. They are clearly not on the same page with Mr. Draghi. And no group of government officials anywhere more clearly appreciates myriad risks associated with monetary inflations. The German/“Austrian” view of economics just has a very different perspective, and it goes way beyond some fixation on Weimar hyperinflation.

The focus is on how real wealth is created and how wealth is destroyed.

Monetary Inflations are powerfully destructive.

And as a deepening European crisis applies incredible pressure on politicians throughout the region – certainly including Germany's Merkel and Schaeuble – I suspect the Bundesbank will hold its ground. They are both right on the analysis and have the support of the German people. They understand that the German economy cannot support the massive debt of the entire eurozone.

Italian 2-year yields jumped from 3.80% on Monday morning to 5.18% by Wednesday morning. By Friday afternoon they had sunk back down to 3.6%. Spanish stocks dropped 5.8% last Friday, declined 1.1% Monday and another 3.6% on Tuesday. They gained 0.8% Wednesday, before jumping 6.1% Thursday and 3.9% Friday. Italian stocks dropped about 10% in three sessions, before rallying 10% in the next three sessions. U.S. stocks dropped 3% in three sessions and then gained 3.5% in two. German 10-year yields ended the week up 23 bps. Throughout already volatile global debt, equities, currencies and commodities markets, things have turned only more unstable.

INCREASINGLY UNSTABLE & PERILOUSLY DYSFUNCTIONAL

• And there is no doubt in my mind that ongoing monetary injections – albeit European, American, Chinese, or others – come with the cost of increasingly unstable – I would argue perilously dysfunctional - global financial markets.
• And there should be little doubt where Mr. Draghi was directing his “trust me, it will be enough” tough talk (kind of reminded me of, “go ahead, make my day”).
• The Europeans believe hedge fund and other speculator bets against their bonds, stocks and euro currency are a major contributing factor to the region’s woes.
• There wasn’t an issue back when speculators were leveraged long Europe’s (Greece’s, Spain’s, Italy’s, etc.) securities during the upside of the cycle.

RISK-ON, RISK-OFF DYNAMIC

This week demonstrated an even more powerful “risk on, risk off” dynamic. For lack of attractive alternatives, ongoing global monetary injections ensure only more “money” flows to the global leveraged speculating community. From there, the bets on red or black - either on or against policymakers’ capacity to sustain global risk market Bubbles - become bigger by the week. Draghi and European policymakers this week hit the panic button – and those with bearish hedges and bets were again forced to run for cover. Risk on wins again.

And as policymaking turns increasingly desperate, it is almost guaranteed that “risk on, risk off” turns only more unwieldy. Indeed, it is clear at this point that the more global policymakers turn to monetary inflation to thwart the downside of the Credit cycle the greater the amount of fuel injected into a dangerous global speculative Bubble. In anticipation of next week’s scheduled Federal Reserve and ECB meetings, CNBC’s Steve Liesman today referred to “Monetary Madness.” I’ll use the term to describe the past couple decades.

RISK On-Off - Omens from Credit Markets

Picturing The Turn In The Credit Cycle 07-31-12 Zero Hedge

Despite:

1. Record low coupon issuance and a
2. Net negative issuance

.. that is enabling technical flow to dominate any sense of releveraging risk in favor of the 'safety' of corporate bonds, the credit cycle is deteriorating rather rapidly in both the US and Europe. As these charts of the upgrade/downgrade cycle from Barclays show, things are as bad as they have been since the crisis began in terms of ratings changes among investment grade and high-yield credit. Combine that with the historically dismal seasonals for credit in the next three months and we urge caution.

The US Upgrade/Downgrade cycle is dropping rapidly...

and seasonally things are about to get tricky...

EARNINGS - PE Ratio Expansion & Contraction

How Much More Does The Bear Market Have To Go? 07-29-12 Zero Hedge

The secular bear market that the US has been caught in for a better part of the last decade will end. Eventually. The only question is when. Last week we reported that the bulk of market gains year to date, has been driven exclusively by PE multiple expansion, which is to be expected: EPS forecasts for the end of 2012 are now the lowest they have been since the beginning of the year. Yet while such sharp, sudden and short and bear-market rallies, exclusively on the back of the global central banks, are to be expected, the bigger question is how much more of a secular decline in PE multiples is to be expected before the bear market ends and a new bull market can begin. As the following chart from Crestmont Research shows there is quite a bit more to go, even with Fed assistance (or rather, because of it, and its forced rejection of reaching a fair clearing price sooner rather than later), before the bear market is officially over. Just over 50% more. To the downside.

How the Bear Market declines have looked in perspective, and where we ultimately have to go before all the artifical supports are cleared out:

And the Bull Markets preceding them...

US MONETARY POLICY- PE Impact

Charting The Diminishing Multiple Expansion Benefits Of Fed Action 07-30-12 Morgan Stanley via Zero Hedge

The expanding-multiple-dependent US equity market that we have discussed numerous times (most recently here) appears to have hit a snag. While we noted the almost perfect correlation between forward-looking P/Es and the market during the last three years - and the clear hope-iness nature of said multiple expansion (and reality contraction) - what we failed to note until now is the significantly diminishing multiple-expansion impact from each of the Fed's actions. QE1 created a plus-4x multiple expansion (from ~10 to ~14), QE2 created a plus 1.5x pop in multiples, and Operation Twist around the same. Critically though, as soon as the Fed-sponsored money-supply 'flow' expansion ended, so the P/E multiple-expansion ended (and indeed reversed very quickly). It really is about the flow; and the threat of a crack-addicted market's requirement for perpetual QE.

So critically, unless we see/hear believe that the Fed will embark on perpetual and exponentially growing QE since its impact is lesser and lesser, then its game over for the equity market - and if they 'hint' at open-ended easing than Gold goes sky-bound...

EARNINGS - Update

How are companies in the S&P 500 faring this earnings season and what's ahead? 07-27-12 FACTSet

Of the 265 companies in the index that have reported earnings to date for Q2 2012, 71% have reported actual EPS above the mean EPS estimate. This percentage is consistent with the average over the past four quarters (72%). In terms of revenues, just 43% of companies have reported actual sales above estimated sales. This percentage is well below the average over the past four quarters (63%). If 43% is the final percentage, it would mark the lowest number since Q1 2009 (37%).

The blended earnings growth rate for the S&P 500 for Q2 2012 is 3.3%, slightly above last week’s growth rate of 3.1%. The improvement in the growth rate is mainly due to upside earnings surprises from companies in the Industrials (Caterpillar) and Telecom Services (AT&T) sectors, partially offset by downside earnings surprises from companies in the Information Technology (Apple) and Energy (ExxonMobil) sectors.

Bank of America is the largest contributor to earnings growth for the index at the company level, mainly due to an easy comparison to a large loss reported in the year-ago quarter. Excluding Bank of America, the blended earnings growth rate for the index falls to -1.5% from 3.3%.

Five of the ten sectors are reporting earnings growth for the quarter, led by the Financial (53.8%) and Industrials (11.3%) sectors. The Energy (-23.7%) and Materials (-14.5%) sectors have the lowest earnings growth rates, as oil and commodity prices dropped during the quarter. Although nine of the ten sectors are reporting revenue growth for the quarter, the blended sales growth rate is 1%. Slower economic growth in Europe and in emerging markets countries (China) and less favorable foreign-exchange rates had a negative impact on both top-line and bottom-line growth for many companies in the index.

Looking ahead, companies and analysts have reduced earnings estimates for the 2nd half of 2012 since the start of the third quarter. In terms of guidance for Q3 2012, 47 companies in the S&P 500 have issued negative EPS preannouncements to date while just 13 companies have issued positive EPS preannouncements. Analysts now expect a year-over-year decline in earnings for Q3 (-1.6%). Despite cuts to estimates, analysts still project double-digit earnings growth (11.1%) for Q4 2012.

EARNINGS - Surprises Relative to Unrevised Expectations

Biggest EPS Miss Since Lehman, And This Time It's Not The Tsunami's Fault 07-29-12 Citigroup via Zero Hedge

Yes, we know it doesn't matter because Ben & Mario have got our backs at whatever multiple is required to levitate the economy market, but as Citi's credit desk points out; despite the constant chatter about EPS beats (despite top-line misses), the trick is that analysts have been dragging down expectations since the earnings-cycle began and so judging 'misses' must be done against a 'frozen' pre-earnings number. If we do this 'fair' approach to considering expectations, the percentage miss in the S&P 500's EPS for Q2 2012 is as bad as the Q2/Q3 2011 Tsunami-driven miss - and the worst we have seen since Lehman Brothers shuffled off this mortal coil. So as usual, be careful what truth you believe and consider just how much more 'hope' is now in this market given this reality.

Citi Credit Weekly

Undoubtedly, part of the reason that Spain and Greece have come back into focus is that the earnings of US companies continue to be so uneven. With more than half of S&P500 companies having reported, we’re only now starting to get the full picture, and viewed from the top down perspective it’s far less pretty than even last week led us to believe. Relative to expectations, top line revenues have been especially weak, with nearly all sectors surprising to the downside, even as EPS and EBITDA have tended to beat.

But even those sorts of statistics tend to hide the true weakness because equity analysts tend to revise expectations down while earnings season is still ongoing, which explains why some 72% of S&P500 companies manage to beat expectations in a weak quarter.

To get a truer picture of the magnitude of disappointment, it’s necessary to freeze estimates prior to the start of earnings season, so that those companies reporting later don’t get the benefit of having the bar set lower by the early reporters. And viewed this way, we see that earnings surprises have been about as bad as the third quarter of 2011, which were impacted by the Japanese earthquake and the debt ceiling debate.

EARNINGS - Q3 Estimates to fall -3% to -5% from 0.9% in Q2

U.S. Profit Streak Hit by Global Weakness 07-30-12 WSJ

• Slowing economies from the U.S. to China, increasingly wary shoppers, recession in much of Europe and a stronger dollar could bring to an end at least 10 continuous quarters of profit growth for America's biggest companies.
• Forecasts are now turning negative amid a number of profit warnings from companies like Starbucks Corp. and Illinois Tool Works Inc.
• In the third quarter, earnings by companies in the S&P 500 are expected to shrink for the first time since just after the recession ended.
• One of the few bright spots of the struggling U.S. recovery gets dimmer. Strong earnings had been fueling corporate investment in technology and machinery, if not much hiring. Now, however, the pressure on profit is prompting firms including United Technologies Corp. and Dow ChemicalDOW to cut more costs.
• Coffee chain Starbucks last week warned that customer traffic in U.S. cafes began slowing in June. The softness continued in July, so the company cut its earnings guidance for the third quarter.

"This is not a Starbucks issue, this is a macro problem of weak consumer confidence.".... said Howard Schultz, Starbucks CEO

• Prices for commodities—oil, copper, aluminum and other building blocks of the global economy—have seen significant declines, which suggest that manufacturing activity is slowing
• At the same time, the dollar is strengthening, up 5% against the euro in the second quarter. A stronger dollar hurts U.S. exports by making American products pricier to people buying them in other currencies. It also erodes the value of American firms' overseas revenue once it is converted into dollars.
• For the third quarter, analysts predict profit and revenue for companies in the S&P 500 will slip into the red, declining by about 0.4% from the year-earlier quarter
• That follows what will likely have been three straight quarters of decelerating profit growth.
• About 40 companies have warned that their third-quarter performance will be weaker than originally thought, compared with eight that have been optimistic
• The ratio of negative-to-positive forecasts is the most negative since the second quarter of 2001
• At the beginning of the year, companies were expecting tough times in Europe and a slowing economy in China, but were voicing optimism about the U.S. However, the U.S. economy slowed to a crawl in the second quarter, with gross domestic product growing at an annual rate of 1.5%, a drop from the first quarter's 2% pace and the fourth quarter's 4.1%.
• The S&P 500's second-quarter earnings reporting season has just passed the halfway mark, and analysts expect profit growth of 6.2% for the period

Strip out Bank of America Corp., which booked a $2.5 billion profit after an $8.8 billion loss on mortgage-related write-downs a year earlier, and profits are expected to have grown by just 0.9%.

• Pulling down expectations for future quarters has been a dip in commodities prices, which heralds weaker earnings for oil and mining companies.
• Global diversified miner Anglo American PLC reported a worse-than-expected 38% drop in operating profit for the first half of the year due to falling commodity prices and said it would cut its capital-expenditure program this year and next.
• Jim Russell, chief equity strategist at U.S. Bank Wealth Management, expects third-quarter profits will fall between 3% and 5%. "Revenue growth is also slowing and margins look like they are peaking,"
• Slowing economies around the globe are hurting trade. United Parcel Service Inc.'s chief executive, Scott Davis, last week said that growth in exports is lagging behind global economic growth. That "only occurred once in the past 10 years," he said, "and that was during the last recession."

EARNINGS: Q3 Estimates Plummet tol -0.1% versus +3.1% on July 1st

Sharp Decline in Earnings and Revenue Estimates; Chart Explains Four Major Waves of Earnings Growth 07-27-12 Mish

Corporate Profits

Corporate After-Tax Profits As Percent of Real GDP

Four Major Waves of Earnings Growth

1. A stunning rise in corporate profits as a percent of GDP started when Nixon closed the gold window, effective ending the last semblance of the gold standard. In response, the trade deficit soared as did an exodus of manufacturing jobs.
2. A second massive rise in corporate profits began with the Greenspan Fed-sponsored internet bubble culminating in 2000 with a liquidity push out of misguided fears of a Y2K crash.
3. The third big jump in corporate earnings started in 2001 when the Greenspan Fed (followed by the Bernanke Fed), ignited housing and debt bubbles of epic magnitude. Financial profits soared at the expense of the greater fool going deep in debt buying houses right before the housing bust.
4. In 2009, the Bernanke Fed slashed interest rates across the board, clobbering those on fixed income, to bail out banks. A side-effect was lower interest rates on corporate bonds which also added to corporate profits.

For the first time in three years, US Quarterly Earnings are Poised to Drop.

Third-quarter earnings of Standard & Poor's 500 companies are now expected to fall 0.1 percent from a year ago, a sharp revision from the July 1 forecast of 3.1 percent growth, Thomson Reuters data showed on Thursday.

That would be the first decline in earnings since the third quarter of 2009, the data showed.

Earnings in the tech sector are now expected to rise only 5.8 percent — less than half the forecast of 13.1 percent growth, according to an estimate at the start of the month, Thomson Reuters data showed.

The materials sector is forecast to see an earnings drop of 11.4 percent for the third quarter, worse than the forecast of a 3.3 percent decline at the start of July, Thomson Reuters data showed. Slumping commodity prices and reduced demand from China have hurt that sector.

Sales Look Worse Than Earnings

While earnings performance has held up so far for the second quarter — with results in from about half of the S&P 500 companies — revenue has looked much gloomier.

Just 41 percent of companies have beaten revenue estimates, the lowest since the first quarter of 2009 and only the fourth time in the past 10 years that the beat rate was under 50 percent.

Revenue growth is expected to have increased just 1.2 percent for the second quarter, Thomson Reuters data showed.

• Corporations give analysts "tips" regarding profit expectations.
• Those profit expectations are purposely low.
• Wall Street analysts lower estimates, if necessary, as the quarter progresses such that corporations can "beat the street".
• If corporations are going to miss and need an extra penny, they change tax assumption or make other "one time" adjustments as necessary.
• Corporations beat the street by a penny with "pro-forma" (after adjustment) reporting.

Percentage of Companies that "Beat the Street"

The last time companies failed to "beat the street" was third quarter of 1998. At the earnings trough in third quarter of 2008, 58% of companies in the S&P 500 still managed to "beat the street".

The above chart from Understandings Earnings Estimates by James Bianco on the Big Picture Blog.

EARNINGS: Deteriorating US Revisions

Europe's Crisis Hits Profits Weaker Results at Ford, Apple, Glaxo Show Ripple Effect of Continent's Troubles 07-26-12 WSJ

The corporate alarm bells highlight how the miserable economic conditions in much of Europe are spilling onto the global stage. With much of Europe in recession and unemployment soaring, spending is sliding on everything from big-ticket items like cars to everyday staples like yogurt.

• 20% OF US EXPORTS: the 27 countries of the European Union are the largest economy of the world. Europe accounts for about one-fifth of all U.S. exports.
• 17% S&P 500 PROFIT & REVENUE: Deutsche Bank's chief U.S. equity strategist, David Bianco, estimates 17% of profit and revenue of the Standard & Poor's 500-stock index companies comes from greater Europe.

About 60% of the 195 S&P 500 companies that have reported second-quarter results have missed REVENUE targets

• 3.9% REVENUE GROWTH: Revenue growth in the quarter inched up just 3.9%, and many companies have cited Europe as a factor
• 13.6% PROFIT GROWTH: Profit figures for the S&P 500 were stronger, up 13.6% over a year earlier as companies coped by cutting costs.
• 4X WARNINGS TO UPSIDE SURPRISES: But downside surprises are growing; the number of profit warnings is four times that of upside surprises, Thomson Reuters said.
• GERMAN BUSINESS CONFIDENCE-LOWEST IN 2 YEARS: The Ifo Institute survey of business sentiment released on Wednesday shows business confidence in Germany, Europe's largest economy, falling to its lowest level in over two years

"Everyone is afraid. Governments are afraid. Households are afraid. Companies are afraid."

Treasury Secretary Timothy Geithner said in congressional testimony Wednesday.

1. "The ongoing European crisis presents the biggest risk to our economy,"
2. "The economic recession in Europe is hurting economic growth around the world, and
3. The ongoing financial stress is causing a general tightening of financial conditions, exacerbating the global slowdown."

In January, for instance, analysts estimated that earnings of companies in the S&P 500 would rise 10% this year. Now, they project just 5% growth for the year,

EARNINGS: Deteriorating Global Revisions

Earnings Revisions Ratio Weakening Along with ISM Readings 07-23-12 AlphaNOW

Analysts anticipate sluggishLgrowth in lowering their forecasts for earnings growth rates lower.

In the heart of second-quarter earnings season, solid earnings reports have helped give a more positive tone to the stock market with about two-thirds of companies in the Standard & Poor’s 500-stock index reporting results that were better than expected.

What remains to be seen, however, is whether this trend can continue and – just as importantly – whether their outlook for future quarters is upbeat, or whether many companies will continue to “beat” earnings forecasts that analysts already have trimmed throughout the preceding weeks and months.

This week’s Chart of the Week illustrates graphically what is at stake, plotting the earnings revision ratio for the MSCI world index against the ISM manufacturing index.

As the rate of global growth has slumped again in recent months, so, too, has the earnings revision ratio, as analysts have become more anxious about the impact of that slowdown on the rate of growth in corporate earnings.

Even as companies reported stronger than expected earnings, however, they remain cautious when it comes to their outlook. Bank of America, for instance, is able to gauge the outlook for future growth not just on its own behalf, but through the eyes of its clients, a cross-section of corporate America.

“There remains some uncertainty (that) largely revolves around the situations in

1. Europe,
2. the United States,
3. around the longer-term fiscal issues that must be dealt with,”

... the bank’s CEO, Brian Moynihan, told investors on a post-earnings release conference call.

This means that once the earnings season and its flow of news comes to an end next month, investors’ eyes will once more be glued on to the economy, in search of more insight into what lies behind corporate earnings power and that revisions ratio.

EARNINGS: PE Ratos Falsely Expanding Based on Central Bank Expectations

In Case Of Collapsing Earnings, Expand Multiples And Pray 07-26-12 Goldman Sachs via Zero Hedge

Both earnings and revenues for 2012 have been cut dramatically in the last three months, rejuvenating a sliding consensus trend for 2012 that began in the middle of last year. However, as we are told again and again, the economy must be doing fine because the market is up so much in that period. In fact, what is even more fun to hear is that the market is cheap (never mind the incredulous hockey-stick expectations for Q4 this year). In fact, the market is not cheap at all. The correlation between the S&P 500 in the last two years and the P/E multiple shows that performance has been driven almost entirely by multiple-expansion alone. Forward P/E is now getting close to recent peaks suggesting the market is far from cheap and on a longer-term view (based on both an as-reported and operating basis), the S&P 500 appears expensive - and perhaps these charts will re-anchor whatever cognitive bias that seems to pervade the long-only manager's herding mentality.

Equities have ripped and dipped all on the basis of multiple expansion and compression...

and recently even more so - as EPS and Sales have been cut significantly...

Third-quarter earnings of Standard & Poor's 500 companies are now expected to fall 0.1 percent from a year ago, a sharp revision from the July 1 forecast of 3.1 percent growth, Thomson Reuters data showed on Thursday.

That would be the first decline in earnings since the third quarter of 2009, the data showed.

which extends a longer-term reversion to reality trend...

which leaves Cyclically Adjusted S&P 500 P/E Ratios notably expensive to longer-term averages...

so the bottom line is that the S&P 500 is what it is - a nominally priced index of the state of the USA - and its valuation is driven by a multiple expansion that is justified by those that need to on the basis of hope - as opposed to the reality of declining earnings fundamentals...

CANARIES: Mounting Pressures on Central Banks to Take Action

The Stock Market Desperately Needs The Economy To Perk Up 07-24-12

Last week, Lance Roberts pointed us to a stock market chart that showed if 2012 were to repeat 2011, than stocks should collapse within days.

LPL Financial's Jeff Kleintop points at the pattern again in his weekly market commentary. But he goes one step further to show the divergence between stocks and the Citigroup Economic Surprise Index, which measures whether economic data comes in better or worse than estimates.

Lately, disappointing economic data has caused the CESI to fall, while stocks have been relatively resilient.

Here's Kleintop's comments:

For the gap between market and economic performance depicted in Figure 1 to close, either upcoming economic data must surprise to the upside or stocks need to drop sharply. It is notable that a gap similar to the current one appeared in July of 2011. Ominously, that gap closed with a sharp drop in the S&P 500, as you can see in Figure 2.

In other words, if the relationship between stocks and the CESI holds, than stock investors are going to want economic data to start surprising to the upside again soon