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

FISCAL CLIFF: US Capitulates on "RISK FREE"

As the world's Reserve Currency the US has enjoyed what is referred to as "Exorbitant Privilege". The US has been able to 'print' money but not suffer the consequences of the associated inflation and currency debasement that comes with such irresponsibility. This is because the 'exorbitant privilege' effectively allows the US to export its inflation. This inflation returns initially as higher import costs, but eventually as hyperinflation, as the world slowly abandons the US dollar and its reserve currency status. This 'exorbitant privilege' continues to work until something which was well understood prior to the US going off the gold standard no longer works. That is a concept referred to as the "Triffin Paradox".

The US Council on Foreign Relations aptly describes why Triffin's dilemma becomes unsustainable: "To supply the world's risk-free asset, the center country must run a current account deficit and in doing so become ever more indebted to foreigners, until the risk-free asset that it issues ceases to be risk free. Precisely because the world is happy to have a dependable asset to hold as a store of value, it will buy so much of that asset that its issuer will become unsustainably burdened."

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NOVEMBER 2012: MONTHLY MARKET COMMENTARY (Subscription Plan II)

THE P/E COMPRESSION GAME: An Old Game with a Different Twist to Misprice Risk

We are manipulating markets metrics in such a fashion as to intentionally Misprice, Misrepresent & Hide RISK. Prior PE reference boundary conditions which reflected risk have decoupled. Never has the game of forward operating earnings (versus historically trailing earnings) been more inappropriate than presently. Forward PE's can only be of value in rapid revenue and profit growth eras. This is not what we have presently. It is the wrong tool for the wrong job! Unless you are a sell side analyst, then it is exactly the right too for the difficult selling job you have. We have an era of Peak earnings growth RATES, slowing profit growth RATES and Peak PEs which are reflective of rapidly contracting PE's. We have a secular bear market in REAL terms but PE's are not contracting at a sufficient enough rate to reflect this. Though PEs in nominal terms net out inflation, they don't reflect the underlying downward trend in real terms. MORE>>

MARKET ANALYTICS & TECHNO-FUNDAMENTAL ANALYSIS

NOVEMBER 2012: MARKET ANALYTICS & TECHNICAL ANALYSIS - (Subscription Plan IV)

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NOVEMBER 2012: TRIGGER$ (Subscription - Plan V)

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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

CONSUMER CONFIDENCE - Plunges After Election as Fiscal Cliff Realization Faced.

Consumer Spending Wobbles - Job Worries, 'Fiscal Cliff' Uncertainty Threaten a Key Engine for U.S. Economy 12-09-12 WSJ

As recently as September, about half of consumers were largely ignoring the issue, according to a regular survey by RBC Capital Markets. But in the most recent survey, completed last week, 71% of respondents said they were following the cliff debate, and more than half said the threat had hurt their confidence or led them to hold back on spending. Will Churchill is already seeing the issue affect his business. Mr. Churchill, co-owner of Frank Kent Motor Co. in Fort Worth, Texas, saw strong sales growth at his Cadillac and Honda dealership until early November.

But sales started to slow after Election Day, with many customers attributing their caution to the Washington budget debate. "Fifty percent of the customers we talk to, it comes up at some point," he said. "They're in the market, they want to buy, but the hesitation is that they don't know what's going to be the result in Washington."

UNCERTAINTY - What Always Stops Business Investment

Trying to Calculate the Cost of Uncertainty 12-05-12 WSJ

When it's unusually hard to tell where the economy and government policy are going, businesses will be reluctant to invest and hire.

The notion isn't new. It was central to Federal Reserve Chairman Ben Bernanke's Ph.D. dissertation in 1979. "Increased uncertainty provides an incentive to defer investments in order to wait for new information," he wrote. With a lot of equations, Mr. Bernanke argued that investing and hiring decisions are hard to reverse. When there is a lot of doubt, businesses wait.

But the possibility that uncertainty about government policy might make a weak economy worse is timely. There is growing angst about the U.S. "fiscal cliff," the spending cuts and tax increases set for the beginning of January. There are signs that fears of going over the cliff are contributing to slower business investment and gloomy forecasts about fourth-quarter growth. There are doubts about the longevity of the euro and whether European governments can pay their debts.

And now economists Steven Davis of the University of Chicago and Scott Baker and Nicholas Bloom of Stanford have a way to measure policy uncertainty, which they attempt to link to the vigor of the economy. Half of their economic-policy-uncertainty index comes from a computerized reading of relevant references in 10 newspapers. (That makes this journalist wonder if the press is causing uncertainty or merely reflecting it.) The other half relies on a tally of expiring tax-code provisions and statistical measures of disagreement among forecasters about inflation and government spending.

As the chart shows, uncertainty about economic policy has been rising since the onset of the financial crisis and spiked during the August 2011 showdown over the federal debt ceiling. An alternative gauge that counts references to uncertainty in the Federal Reserve's periodic "beige book" review of regional economies shows a similar pattern.

During the presidential campaign, this turned partisan. Republicans accused President Barack Obama of crippling the economy by layering uncertainty on top of uncertainty. Mr. Obama's allies blamed Republican intransigence, pointing particularly to the debt-ceiling confrontation.

"Uncertainty" became the all-purpose diagnosis for the economy's ills, though polls of executives found many worried more about demand for their wares than about government policies. Other executives pleaded for certainty—as long as it didn't mean higher taxes.

With the election over, the focus is back on figuring out just how much uncertainty actually hurts an economy. It could lead consumers to save more and spend less. It could deter already-wary executives from taking risks. And by making investors uneasy, uncertainty could make financing more costly for companies.

At the University of Chicago, Lubos Pastor and Pietro Veronesi wondered why, for instance, pronouncements by officials in Greece—whose economy is smaller than Michigan's—move global stock markets so much.

After some thinking, they concluded that

1), there is more uncertainty when the economy is bad because that is when governments are more likely to actually do something (for better or worse), so that is when markets are particularly sensitive to clues in politicians' rumblings; and

2), stocks tend to move in unison when there is little clarity about government policy because it is hard for investors to discern which companies will be winners and which will be losers.

Professors Baker, Bloom and Davis used statistical techniques to match the ups and downs of their index to the ups and downs of the economy. They estimate that the upturn in uncertainty between 2006 and 2011 foreshadowed a 16% drop in private investment within nine months and a loss of 2.3 million jobs within two years.

Skeptics challenge the cause-and-effect hypothesis. "We do not doubt that uncertainty shocks depress economic activity, or that uncertainty has risen substantially since 2006," Goldman Sachs GS -0.54%economists Jan Hatzius and Sven Jari Stehn wrote recently. "But we don't believe that the economy's poor performance has been caused by an…increase in U.S. policy uncertainty." A lousy economy is more likely to produce uncertainty than the other way around, they said. (They also said that worries about Europe were more of a factor than worries about Washington.)

Right now, we are all lab rats in the economists' experiment. The fiscal cliff is less than a month away, and no one knows if we are going over it.

You don't need an index to tell you that there is a lot of uncertainty. It would be both convenient (for the economists) and refreshing (for the rest of us) if Mr. Obama and Congress manage to cut a deal. That would reduce uncertainty, and we would find out just how much of a weight it has been on the U.S. economy.

RISK - High Level of Complacency

Complacency Everywhere You Look 12-08-12 Michael Panzner of Panzner Insights via ZH

Complacency Everywhere You Look

When trying to get a handle on investor sentiment, the benchmark of choice for many market-watchers is the CBOE S&P 500 Volatility Index, or VIX. However, this popular “fear gauge” only offers a snapshot of implied volatility, or relative pricing levels, for equity index options, which might not necessarily tell us all we need to know about the mood on The Street.

In theory, stock traders could be overreacting to equity-specific developments that are not relevant to other markets.

That said, there is data that suggests the high levels of complacency in the stock market are also being seen elsewhere. As the chart shows, gauges of implied volatility levels for equity, bond, currency, gold, and oil markets are at or near multi-month lows, indicating that “the crowd” is unanimous in its belief that nothing untoward is going to happen in the immediate future.

Should we be worried?

RISK - Mispricing Uncertainty

Why Is The Market Mispricing Uncertainty By 50%? 12-07-12 Zero Hedge

By now there can be no doubt that due to Bernanke et al's endless intervention in any and all capital markets, the "market" is no longer a mechanism that discounts the future in any way. In fact, instead of predicting the future, all the market has become is a backward looking race in which collocated algos respond to historical data - flashing red headlines - and attempt to out run each other in who can buy or sell more free for all, knowing full well at least one other greater fool will be behind them to pick up the pieces.

Sadly, fundamentals as a driver to valuaton no longer exist. But such is life under central planning.

Yet there is one thing that the market responds to - it is politicians and the uncertainty that political risk brings with it. This certainly includes that most political of organizations, the Federal Reserve, whose stimulative intervention into capital markets two months before the presidential elections was without precedent. Yet even here, the market has managed to decouple from reality, and is trading at level far greater than what political uncertainty risk implies.

As the chart below from Citi's Matt King shows, a correlation between BBB spreads and a broader proprietary uncertainty index, there is currently a roughly 50% political risk premium that is not being priced into stocks.

This is certainly evident in stock prices, as with just 23 days left until the end of the year, politicians are nowhere nearer a Fiscal Cliff resolution than when they started the debate. Yet the biggest catalyst that could force an immediate compromise - the Dow Jones Industrial Average (D.C. continues to be oblivious about the SPX) - refuses to decline on the expectations that the cliff will be resolved. The paradox is that it won't unless the market tumbles.

So who blinks first, and what does the complete failure of any capital market to accurately reflect any and all risks (largely onboarded by every central bank in the world), macro, micro and political, mean for the future of asset prices?

One thing is certain: in a market addicted to $85 billion in monthly Fed-funded Flows each and every month: a nominal amount needed to avoid an all out collapse, the last thing the Fed will ever be able to do, is unwind its balance sheet which is now a $3 trillion (rising to $5 trillion by the end of 2014) buffer between myth and reality.

CANARIES - EU Consumer Sentiment TellTales

The Unprecedented Implosion Of European Car Sales 12-04-12 Zero Hedge

The graphic below, which presents an unvarnished picture of Europe's true economic state, needs no explanation:

Source: FT

In the context of the above, no explanation is also needed that quietly, and without much fanfare, French car-maker, Peugeot, and Europe's second largest after VW, was recently GMed, and received a government bailout.

Carmaker Peugeot gets $9.1B government bailout

The French government has agreed to underwrite up to €7 billion ($9.1 billion) of bonds issued by Banque PSA Finance SA, the financing unit of carmaker PSA Peugeot Citroen SA, allowing the French automaker to offer low-cost credit to its dealerships and clients amid a slump in sales.

Peugeot announced the deal on Wednesday, Oct. 24. It also said it had agreed the basis of a €10.5 billion restructuring of existing loans and asked banks to provide a further €1 billion of new debt to its finance unit.

The deals effectively immunize Peugeot's credit unit against recent downgrades of its parent's debt rating. That had threatened to drive the lending arm's rating to junk and would have forced it to increase the rates on loans to its own dealerships and to clients, hurting car sales that are already suffering from a Europe-wide slump.

The government, in return for the debt guarantees and its role in cajoling the banks to extend new loans to Peugeot, has demanded that Peugeot pay no dividends, undertake no share buybacks and issue no new share options to its managing board until the debt guarantees expire. Family-controlled Peugeot also agreed to add a workers' representative and a government appointee to its board.

"The government has no intention of making gifts without demanding anything in return," French Prime Minister Jean-Marc Ayrault told France Inter radio on Wednesday. "We ask the PSA group not to pay dividends, stock options or buybacks - that would be scandalous - and to concentrate on turning the company around."

Expect many more such bailouts as a relentlessly socialist and protectionist Europe does all it can to preserve much needed votes jobs in the critical, if greatly uncompetitive, carmaking sector, and all other sector, soon to follow.

Bottom Falls Out Of The European Consumer 12-05-12 BI