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 AUGUST 2012: MONTHLY MARKET COMMENTARY (Subscription Plan II)
MONETARY MALPRACTICE : Moral Hazard, Unintended Consequences & Dysfunctional Markets - Monetary Malpractice has had the desired result of driving Investors into becoming Speculators and are now nothing more than low-odds Gamblers. There is a difference between investing, speculating and gambling. At one time these lines were easy to comprehend and these distinctive groups separated into camps with different risk profiles in which to seek their fortunes. Today investing has become at best nothing more than speculating and realistically closer to outright gambling.
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TIPPING POINT or 2012 THESIS THEME |
HOTTEST TIPPING POINTS |
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EU BANKING CRISIS - 1T Euros in NPL
Breakdown of 1 trillion euros in European bank NPLs by country 08-16-12 PwC’s Frankfurt office
The chart only includes the periphery, the UK and Germany but that’s where most of the NPLs are right now. The total from 2010 was 965 billion euros. In 2011 it was 1.048 trillion euros.
Some of these countries are clearly underreporting their NPLs. But, as a whole 1 trillion euros is a lot of bad loans to cover. That’s one reason European bank shares are so depressed. And as the current deflationary policy path has continued, expect these numbers to get even bigger in 2012 and 2013. |
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GOVERNMENT SPENDING - As a Percentage of GDP
Government Spending as Percentage of GDP 08-28-12 Mish

Paul Krugman said he would be concerned if government spending hit 50% of GDP. The trend does not look good, but by Krugman's measure there is a ways to go.
Nonetheless, I think we should be concerned now. The numbers ignore exploding national debt and interest on national debt. Interest on national debt will skyrocket if rates go up or growth estimates penciled in do not occur. Both of those are likely, although Japan proves that amazingly low interest rates can last longer than anyone thinks.
For a discussion of interest, please see Trends in Interest Rates on National Debt Suggest Currency Crisis is Coming
The figures also ignore ever-escalating costs of Medicare, Social Security, and pension promises, all of which are guaranteed to soar in the not so distant future. Romney says Unfunded liabilities amoint to $520,000 per household.
I will point out that those liabilities are not debt yet. So might Krugman. However, I am comfortable in reducing benefits and slashing spending while Krugman is not.
Clearly there are many ways to spin this data but please note that government spending in France exceeds 50% of GDP. Also note that French unemployment is 10.2% and Hollande is poised to hike the top marginal tax rate to 75%.
Do we really want to imitate France?
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08-28-12 |
FISCAL |
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2- Sovereign Debt Crisis |
CHINA - Food Price Inflation Coming Back
Food price inflation now visible in China Food price inflation now visible in China 08-16-12 Credit Writedowns
China’s Ministry of Commerce blamed the increase in vegetable prices on “strong winds and rainfall in the country’s eastern regions” that “disrupted production and logistics.” Nevertheless vegetable prices are up 15.4% over the past four weeks.
China Daily: – The wholesale prices of 18 types of vegetables in 36 cities rose for the fourth consecutive week, up 2.9 percent week-on-week and 15.4 percent cumulatively over the past four weeks, according to the MOC.
Signs of food inflation seen across emerging markets are now visible in China. And anecdotal evidence (see these interviews by Radio Free Asia) suggests that official inflation gauges in China may be understating true consumer price increases. Wholesale food prices have definitely risen lately.
A Bloomberg article this week even suggested that China may postpone some policy easing due to renewed inflationary concerns .
Bloomberg: – China’s slower-than-forecast cuts in banks’ reserve requirements show authorities are reluctant to shake their concern inflation will quicken, three months after Premier Wen Jiabao shifted priorities to boosting growth.
China has left the reserve ratio for the biggest banks at 20 percent since mid-May while lowering interest rates in June and July, bucking forecasts from HSBC Holdings Plc and Societe Generale SA that the government would build on three ratio reductions since Nov. 30.
The ISI Group had this to say on the topic of rising food prices, particularly in Emerging markets (discussed here a month ago) :
“This is an unexpected, supply-related problem for both consumers and policymakers around the world.”
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08-28-12 |
CHINA |
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4 - China Hard Landing |
FOOD STAMPS - Program Reflects Real Inflation & Cost of Living Increase
Food Stamp Usage up 64% in Last Four Years, Cost up 114% in Same Period; SNAP Charts, Facts and Figures 08-27-12 Mish
SNAP stands for Supplemental Nutrition Assistance Program.
SNAP Facts and Figures
- In the last four years the number of participants increased by 64.7%
- In the last four years the program cost is up by 114.4%
- Since 2000, the number of participants is up 170%
- Since 2000, the program cost is up by 395%


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08-28-12 |
CATALYSTS DISPOSABLE INCOME |
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27 - Pension - Entitlement Crisis |
REAL GDP - Cummulative GDP Growth

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08-28-12 |
CYCLE GROWTH |
US ECONOMY |
MOST CRITICAL TIPPING POINT ARTICLES THIS WEEK - August 16th - Sept. 1st, 2012 |
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EU BANKING CRISIS |
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SOVEREIGN DEBT CRISIS [Euope Crisis Tracker] |
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RISK REVERSAL |
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CHINA BUBBLE |
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JAPAN - DEBT DEFLATION |
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BOND BUBBLE |
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CHRONIC UNEMPLOYMENT |
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LABOR - Shifting Profile
The US Job Market Is Just Awful For College Graduates 08-25-12 John Mauldin
There are some new patterns in the employment trends that suggest we may be going through a generational transformation, led by both demographics and technology. And while it is ultimately positive, the transition will be harder on some groups than others.
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08-27-12 |
CATALYST JOBS |
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7 - Chronic Unemployment |
GEO-POLITICAL EVENT |
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MACRO News Items of Importance - This Week |
GLOBAL MACRO REPORTS & ANALYSIS |
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US ECONOMIC REPORTS & ANALYSIS |
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CENTRAL BANKING MONETARY POLICIES, ACTIONS & ACTIVITIES |
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Market Analytics |
TECHNICALS & MARKET ANALYTICS |
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BERNANKE PUT - Proof
Are Bernanke's Fingerprints All Over Equity Indices? 08-25-12 UBS via Zero Hedge
The link between nominal interest rates, inflation breakevens, and stocks has changed; especially with regard the last few years' seemingly increased dependence on the Central Bank to keep an anti-deflationary floor on breakevens (or conversely the Bernanke Put under stocks). UBS' macro team, while humbly professing not to be experts in corporate earnings (which have been dismal) or balance sheet ratios (which are positive but have deteriorated in recent months) believe in a big picture macro perspective that we have been vociferously commenting on for a year or two now.
SPX (green) vs 10Y Treasury rates (red) and 10Y TIPS Breakevens (blue-dots)
As official policy rates are frozen near zero and the Fed is likely to keep them there for at least two more years, one would need to look for different indicators quantifying market expectation of a future success or failure of the Fed’s stimulative effort. Breakeven inflation is a good candidate. The logic is pretty straightforward: we have been living in the low inflation environment for the past several years, and the Fed is quite intent on preventing deflation, so “successful” monetary policy should boost future inflation. The TIPS market reflects changing inflation expectations by repricing breakevens. Breakevens have reacted to the introduction of traditional and non-traditional policy measures, from new bond purchase announcements to extending the language regarding super low policy rates.
Specifically, they have noticed a potentially curious link between the way the market interpreted monetary policy signals and the large cap stocks in the US: the breakeven inflation rate on 10yr TIPS has tracked the S&P 500 very closely this year.
When the Fed is perceived to be successful in stimulating the economy, stocks benefit and breakevens also rise.
When the Fed’s potency is called into question, stocks fade and breakevens decline.
We have checked historical data to see if a similar pattern existed for the relationship between SPX and the nominal 10y Treasury yield in 2012. We found that relationship to be very statistically weak. We can point out to a pair of dates in 2012 when the 10y benchmark yield was essentially the same (1.83% vs.1.88%) while the S&P500 was 158 points higher on one date than the other.
Nominal Treasury rates have lost their 'signal' as UBS agrees with the point we have been making for a long time: central bankers and politicians, not economic fundamentals and inflation expectations, currently drive the nominal rate and equity markets. |
08-27-12 |
PATTERNS |
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COMMODITY CORNER - HARD ASSETS |
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THESIS Themes |
FINANCIAL REPRESSION |
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CORPORATOCRACY -CRONY CAPITALSIM |
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BERNANKE PUT - Jackson Hole & The Fiscal Cliff
Ben Bernanke Will Channel Evel Knievel As He Jumps This Fiscal Cliff 08-24-12 Yardeni via BI
FISCAL CLIFF
Since bond yields are already at record lows, could it be that Fed officials have concluded that the only transmission mechanism they have left between monetary policy and the economy is the stock market? Recall that the Fed Chairman mentioned stock prices twice in his 11/4/10 Washington Post op-ed explaining why the Fed implemented QE2 the day before: “Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. … And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending.”
If nothing is done by Congress to avert the fiscal cliff at the start of next year, the Congressional Budget Office (CBO) projects a recession during the first half of next year, with the unemployment rate remaining above 8% through 2014: “The increases in federal taxes and reductions in federal spending, totaling almost $500 billion, that are projected to occur in fiscal year 2013 represent an amount of deficit reduction over the course of a single year that has not occurred (as a share of GDP) since 1969. ... Real GDP is projected to fall at an annual rate of 2.9 percent in the first half of next year and then to rise at an annual rate of 1.9 percent in the second half.”
“The magnitude of the slowdown we’re discussing next year is significant,” CBO Director Douglas Elmendorf said at a morning briefing yesterday. He warned that going over the cliff could cost the nation about 2 million jobs.
JACKSON HOLE
"The latest FOMC minutes noted: “Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery.” There was no similar comment about taking action "fairly soon" in the minutes of the previous meeting during June 19-20."
I think there’s a chance that he might announce during his August 31 speech at Jackson Hole that the Fed will launch an open-ended QE3 program with the hope of turbocharging the economy so that it can leap over the cliff. San Francisco Fed President John Williams, a voting member of the FOMC, was the first to advocate this stunt in an interview reported in the 7/23 FT.
He floated the idea again in an interview reported in the 8/10 issue of the San Francisco Chronicle. When he was asked whether QE3 should be saved to cushion the fall off the cliff early next year, if necessary, he responded: "We want to position the economy to be strong in advance of that. If you are really worried about running out of ammunition, you want to act more aggressively, more quickly and better prepare yourself for that eventuality."
Boston Fed President Eric Rosengren, who is a non-voting member of the FOMC, seconded Williams’ motion for open-ended QE3 in an interview reported in the 8/7 WSJ. According to the minutes of the July 31-August 1 FOMC meeting, released yesterday, "Many participants expected that such a [QE] program could provide additional support for the economic recovery both by putting downward pressure on longer-term interest rates and by contributing to easier financial conditions more broadly."
WILL IT WORK?
Michael Oliver, a seasoned stock market technician and a good friend, asks an interesting question about Bernanke’s highly anticipated stunt: “Prior [Fed] interventions came at market lows when the technicals were oversold, hence ripe for some upside relief. So, with that ‘difference’ this time around, with the market if anything technically stretched and measurably overbought on the upside, will a new QE work or blow up in their face?”
Great question. All the more reason to save the big QE3 stunt for early next year, if necessary, in my opinion. For now, why not just extend NZIRP until the unemployment rate drops below 7%? The FOMC discussed such a policy option at its last meeting:
“Given the uncertainty attending the economic outlook, a few participants questioned whether the conditionality of the forward guidance was sufficiently clear, and they suggested that the Committee should consider replacing the calendar date with guidance that was linked more directly to the economic factors that the Committee would consider in deciding to raise its target for the federal funds rate, or omit the forward guidance language entirely.”
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08-27-12 |
MONETARY |
CENTRAL BANK |
STATISM |
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CURRENCY WARS |
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STANDARD OF LIVING |
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GENERAL INTEREST |
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