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 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 |
 DECEMBER 2012: MARKET ANALYTICS & TECHNICAL ANALYSIS - (Subscription Plan IV)
It is an explosive 'cocktail' when the present levels of uncertainty and complacency coexist. The drama and political intrigue of the Fiscal Cliff is temporarily distracting investors from the magnitude of the global economic slowdown underway. Europe is entering a serious recession, the US is at stall speed, corporate revenues and margins are under attack, and analysts are steadily reducing earnings. Peak earnings have likely been achieved for this economic cycle and the ammunition of QE∞ at the disposal of the Central Bankers, no longer yields the same response. The market is setting itself up for an "Oh Sh#7T Moment", likely before the Q1 quadruple witch.
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 NOVEMBER 2012: TRIGGER$ (Subscription - Plan V)
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FOMC - "Unsterilized" QE4 Will Grow Fed Balance Sheet $1 Trillion in 2013
WHAT YOU NEED TO KNOW
Just as consensus demanded expected, the FOMC transformed sterilized 'Twist' into unsterilized QE4 in addition to QE3's MBS buying and lowered economic forecasts - dropping calendar-based rate guidance unchanged with a shift to "Evans-Rule"-like threshold-based guidance.
- FED BOOSTS QE WITH $45 BILLION IN MONTHLY TREASURY PURCHASES
- FED TO KEEP BUYING MORTGAGE BONDS AT PACE OF $40 BLN PER MONTH
- FED SAYS MONTHLY PURCHASES TO TOTAL $85 BLN
- FED ADOPTS ECONOMIC THRESHOLDS FOR POLICY TIGHTENING
- FED: RATES TO STAY EXCEPTIONALLY LOW WITH JOBLESS ABOVE 6.5%
- FED: RATES TO STAY LOW WITH INFLATION SEEN AT 2.5% OR LESS
- Operation Twist converted to Outright QE - "Maturity Extension Program" (MEP) of $45B/M
- Fed will add ($45B + $40 MBS) $85 in 2013 = $1 Trillion Balance Sheet Growth
- Fed-Eligible Treadury Purchases includes all Risky Paper from Banks
- Evans Rule Adopted (As expected) with a 6.5% Unemployment rate if inflation remains neaar Fe's 2%. A 6.5% Unemployment rate will never be met (unless everyone leaves the work force as the current trend indicates). Basically the statements is a guise for "endless and unstoppable money printing"
- QE is more stimulus than Twist.
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12-13-12 |
US MONETARY |
CENTRAL BANK POLICY |
QUANTITATIVE EASING - How The Equties Markets Been Reacting?
LOOKS LIKE DIMINSHING RETURNS?
MARKET REACTION
Out Of Ammo? 12-12-12 Zero Hedge
It has been three years and nine months since the Fed announced 'real' QE1. Presented for your convenience below is the market's reactions then and for comparison we have included today's reaction. It seems the markets - whether Gold, FX, or Treasuries - have become numb (or engorged) on the Fed's actions. This leaves us with the sad conclusion, which the Fed will be last to acknowledge: the ammo, it's gone. It's all gone.
EURUSD - rose 370 pips on the announcement of QE1, rose 45 pips on QE4...

Gold- rose 5.4% on the announcement of QE1 but today (on QE4) Gold jumped 1.3% then faded back
Treasuries - When QE1 was announced Treasury Prices exploded in the then 10Y by over $4, today saw the same (now 7Y) bond price drop by around 4 Ticks...
Charts: ZeroHedge archive and Bloomberg
NOW LARGER & MORE FREQUENT
The Collapsing Half-Life Of Unsterilized Central Bank Intervention 12-12-12 Zero Hedge
At the current average decay period of around 40% per action, we should see the ECB or Fed enact something new by around February 4th (just as the debt-ceiling comes to a head).
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12-13-12 |
US MONETARY |
CENTRAL BANK POLICY |
FOMC - Evans Rule Adopted & Potential Monetary Policy Exposure
FOMC Preview: Expiration, Extension, And 'Evans' Rule 12-12-12 SocGen via ZH
EVANS RULE ADOPTION

PRE-ANNOUCEMENT EXPECTATIONS via SocGen
Under the rule, the calendar guidance would be replaced with economic conditions based parameters tied to the level of unemployment and to the outlook for inflation. This has been a topic of extensive discussions by the FOMC and according to Bernanke, the talks have been promising. Evans has recently revised his 7%/3% plan to 6.5%/2.5%, moving closer to Kocherlakota’s proposed thresholds of 5.5%/2.25%. The movement towards the middle suggests that the committee may be getting closer to reaching a compromise. While we cannot exclude the possibility of an announcement today, we believe that the more likely timeframe for adopting quantitative thresholds is Q1 2013.
Even if the rule is not officially announced next week, it may be useful to view the FOMC’s new economic projections in the context of the proposed quantitative thresholds. Of particular interest should be the terminal point of the unemployment rate trajectory and when it crosses the 6.5% threshold.
Based on the September forecasts, the new Evans rule would trigger the first rate hike NO SOONER THAN 2015 which is in line with the current calendar guidance.

We don’t expect that the terminal forecast for unemployment will change materially next week as any downward revision to the GDP path will be mitigated by a lower starting point for unemployment
FOMC FORECASTS

"FLY IN THE OINTMENT" - Particpation Rate
"Regime Change": The Critical Message In Today's FOMC Announcement 12-12-12 Zero Hedge
It will take the market some time to figure it out, but there were two main parts to the Fed's announcement: the actual breakdown of the $85 billion/month QE4EVA which were priced in as far back as the day QE3 was announced and were not a surprise at all; and the employment and inflation hard-targeting part, the so-called Evans Rule, which is, or at least should be, a shock to the market, only it hasn't quite realized it yet. Why shock? Because starting today, every incremental economic data point that is materially better, brings us closer to an explicit end of Fed intervention. Because at least before the Fed's calendar target was as soft as it gets; now the Fed will have no choice but to terminate its monetization once the unemployment rate plunges (be it entirely due to part-time jobs or 68 year old workers, as has been the case lately). It also means that as the economy continues along an "improving" glideslope, whether real, manufactured or doctored, the market will start pricing in its own "flow"-based demise. Because once the Fed's $85 billion/month in new Flows ends, it's game over.
Indicatively, using a simple forecast, based on LTM trends across all key employment metrics reveals something very troubling, for the Fed and stocks that is: the 6.5% unemployment rate will be breached in July 2013! Now granted that is simply idiotic, and there is no way that the US economy could possibly recover that fast, but that is precisely what is implied based on the ongoing collapse in the Labor Force Participation, and the concurrent plunge in the Labor Force Participation rate, which has been the biggest marginal driver for the unemployment rate, far more than the number of people who have jobs, or are unemployed (readers can recreate our calculation on their own in 10 minutes with excel).
The yellow arrow in the chart below shows at what point in the future the US Unemployment Rate is projected to dip below 6.5% assuming the current ongoing rate of contraction in the labor force participation rate.

Which then brings up the question: will the participation rate mysteriously start soaring beginning with the December data, as mysteriously all those people who had left the work force - supposedly all of the retirees if one listens to the "expert pundits" - start rushing back into the work force?
And if so, how will these same pundits reconcile their demographic based explanation that had justified the unemployment rate sliding so far, with the oposite trend which however has no demographic explanation?
After all, hitting the 6.5% unemployment threshold rapidly now is the wordst possible thing that can happen to stocks!
Perhaps, the best news of the day is that, finally, the narrative will be one where bad news are no longer both bad news and good news in the eyes of the market trading algos, but where good news, going forward, will be decidedly bad news for the stock market.
And after 4 years of benefits accruing only to stockholders even as the economy constantly suffered, this sounds like a very equitable trade off. |
12-13-12 |
US MONETARY |
CENTRAL BANK POLICY |
OPERATION TWIST ENDS - QE4 Begins
OPERATION TWIST - Maturity Extension Program (MEP)

Click to Enlarge
PRE-ANNOUCEMENT EXPECTATIONS via SocGen (Background)
Deciding what to do about the Maturity Extension Program which is set to expire at the end of the month will top the agenda at today’s FOMC meeting. At December 31, the Fed will have no short-term Treasury holdings left in its portfolio; hence extending the program is not an option. We believe that the Fed will opt to continue buying Treasuries outright and finance the new purchases by increasing excess reserves. In other words, the growth of the Fed’s balance sheet will accelerate from the current pace of $40bn/month.
There is strong consensus that Treasury purchases will continue beyond December. The size, however, is more uncertain. Our own expectation is that the Fed will continue buying at the long end of the curve to the tune of $45bn/month. This view was challenged last week by St Louis President Bullard who suggested that the pace could be scaled back to $25bn/month. His rationale was that outright QE is more simulative than the twist, allowing the Fed to buy fewer Treasuries while still providing the same amount of accommodation. However, we see several arguments against scaling back the size significantly below $45bn.
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12-13-12 |
US MONETARY |
CENTRAL BANK POLICY |
MOST CRITICAL TIPPING POINT ARTICLES THIS WEEK - Dec 9th - Dec 15th, 2012 |
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EU BANKING CRISIS |
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SOVEREIGN DEBT CRISIS [Euope Crisis Tracker] |
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US DEMOGRAPHICS - Mathmatically Limited US Fiscal Policy
Art Cashin Previews Our $202 Trillion Destiny 12-11-12 Art Cashin via ZH
"The real problem is that regardless of the resolution it will not solve anything. We have passed the point of no return. We cannot mathematically solve this debt problem. We can only slow its progression."
Via Art Cashin of UBS:
Demographics, Destiny And The Fiscal Cliff – Somewhat lost in the posturing is the fact that the Fiscal Cliff was put in place to force Washington to address the exploding government debt problem. That problem is greatly exacerbated by the rapidly changing demographics in this country. Bill Gross, Bill Frezza and others have recently explored this connection and complication. Here's a bit from a tenured veteran of Wall Street, Jim Brown of the Option Investor:
That December 7th attack launched the greatest economic boom of our time once the war was over. That was the baby boom generation. A population explosion in the years after the war increased births by more than four million a year. The "leading edge" boomers (1946-1955) total more than 38 million and the "late boomers" 1956-1964 accounted for another 37 million. Since population demographics have shown the most consumptive years are those between age 40-55 we are heading into a period where consumption (spending) is going to decline sharply as the boomers retire.
Bill Gross penned an article this week showing per capita spending drops off a cliff once people turn 65 and retire. Currently boomers control over 80% of personal financial assets, more than half of all consumer spending, account for 80% of leisure travel, 77% of prescription drugs and 61% of over the counter drugs. Starting in 2011 more than 10,000 boomers retire every day and that will continue for the next 19 years. More than 36% claim they have nothing in retirement savings. More than 35% over age 65 rely entirely on Social Security for their sustenance. A recent AARP survey found that 40% plan to work until they die because they did not plan ahead.
In 1950 every retiree on social security was supported by 15 active workers. By the end of 2010 there were only 3.3 workers for each retiree. The government believes there will only be two per retiree by 2025. A Wall Street Journal editorial a couple weeks ago highlighted the fact the government is facing not a $16 trillion debt but an $87 trillion debt if you take into account the unfunded liabilities of social security, Medicare and Medicaid. If you fast forward 20 years until all the boomers are retired that soars to $202 trillion according to Boston University.
Treasury Secretary Tim Geithner called the fiscal cliff discussions in Washington "orchestrated drama." I call it political theater or basically the same thing. The real problem is that regardless of the resolution it will not solve anything. We have passed the point of no return. We cannot mathematically solve this debt problem. We can only slow its progression. Arguing on whether the 2013 deficit will be $800 million or $1.2 trillion is wasted breath. It is still a deficit. Cutting spending does not mean you only increase the budget over the prior year by $700 billion instead of $900 billion. Until lawmakers can make voters understand the math of ever increasing spending and the disaster that is headed our way, they are just rearranging the deck chairs on the USS Titanic.
Wow! As the Boomers mature, $202 trillion. Hopefully, more on this quandary in coming days.
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12-12-12 |
US FISCAL |
2
2- Sovereign Debt Crisis |
RISK REVERSAL |
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RISK: Risk versus Uncertainty
Defining Risk Versus Uncertainty 12-10-12 Barry Ritholtz
Consider the distinctions:
Risk: We don’t know what is going to happen next, but we do know what the distribution looks like.
Uncertainty: We don’t know what is going to happen next, and we do not know what the possible distribution looks like.
In other words, the future is always unknown — but that does not make it “uncertain.”
A statistical approach perfectly clarifies the falsity of the uncertainty meme.
When we don’t know what any future outcome will be, but we understand the probability distribution — think of dice or a multiple choice exam — we have risk, but we do NOT have uncertainty. We never know what the roll of the dice will be, but we do know its one of six choices.
Is that uncertainty? The answer is of course not — it is an unknown outcome with well-defined possibilities. We may not know precisely which outcome will occur in advance, but we do know its either 1, 2,3, 4, 5 or 6. Call that risk or an unknown future, but do not call that uncertainty.
I am pushing against a usage that conflates “Uncertainty” with”Unknown.” Since the future is, by definition, always “unknown,” then what purpose does it serve to say there is Uncertainty? By that definition, there is always uncertainty. As currently heard in the MSM, this renders the word utterly meaningless.
Consider alternatively what is the true definition of Uncertainty: That occurs when we have no idea of what the possible outcome might be. The probability distribution is unknown (or so extremely large as to functionally be the same as unknown).
The so-called fiscal cliff is a perfect example — we know what the possible outcomes are, and we have a very good idea what their impact will be. |
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3 - Risk Reversal |
CHINA BUBBLE |
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CHINA - Record Trade Deficit With US
US-China Trade Deficit Hits Record 12-11-12 Zero Hedge
The US Census Bureau reported that in October, the total deficit with China hit a record $29.5 billion. What did America need to export so much that it is willing to impair its GDP (net imports are a GDP drain) and boost the GDP of China? "Primarily computers and toys, games, and sporting goods." In other words, gizmos and iPhones. And no, China did not buy US bonds - recall that China has boycotted US Treasurys for precisely one year - so the age old equality that we export China worthless paper in exchange for just as worthless gizmos, yet somehow everyone benefits, is no longer valid. What the US does, however, export to China, is inflation, courtesy of the USDCNY peg, and is the reason why the PBOC is still terrified, and certainly will be after Bernanke announces QE4EVA (RIP QEternity) tomorrow, to ease more as the last thing it can afford is to create its own inflation in addition to importing America's.

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12-12-12 |
CHINA |
4
4 - China Hard Landing |
JAPAN - DEBT DEFLATION |
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BOND BUBBLE |
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CHRONIC UNEMPLOYMENT |
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GEO-POLITICAL EVENT |
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SMALL BUSINESS CONFIDENCE - Plunges to -35% - Its worst level on record
NFIB Small Business Outlook Drops To Record Low 12-11-12 Zero Hedge
While Europe's confidence-inspired rally is floating all global boats in some magical unicorn-inspired way, the reality is that on the ground in the US, things have never looked worse. The NFIB Small Business Outlook for general business conditions had its own 'cliff' this month and plunged to -35% - its worst level on record - as the creators-of-jobs seem a little less than inspired. Aside from this unbelievably ugly bottom-up situation, top-down is starting to be worrisome also.
In a rather shockingly accurate analog, this year's macro surprise positivity has tracked last year's almost perfectly (which means the macro data and analyst expectations have interacted in an almost identical manner for six months). The concerning aspect is that this marked the topping process in last year's macro data as expectations of continued recovery were dashed in a sea of reality (both coinciding with large 'surprise' beats of NFP). We suspect, given the NFIB data, that jobs will not be quite so plentiful (unadjusted for BLS purposes) the next time we get a glimpse.
NFIB Small Business Outlook for General Business Conditions 'crashed'...

And the US Macro Surprise Index (which tracks both macro performance absolutely and relative to expectations) has tracked last year's rise almost tick-for-tick. This stunningly close analog suggests we have reached a peak in this macro cycle...

Charts: Bloomberg |
12-12-12 |
INDICATORS
CYCLE
CONFID-ENCE |
33
33 - Public Sentiment & Confidence |
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." |
12-10-12 |
SENTIMENT
MATA A12 |
33
33 - Public Sentiment & Confidence |
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. |
12-10-12 |
SENTIMENT
MATA A12 |
33
33 - Public Sentiment & Confidence |
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? |
12-10-12 |
SENTIMENT
MATA A12 |
33
33 - Public Sentiment & Confidence |
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. |
12-10-12 |
SENTIMENT
MATA A12
CANARIES |
33
33 - Public Sentiment & Confidence |
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
There are green shoots in Europe.
Financial markets are doing well both on the equity and debt front. Germany's engine is revving again. PMI data hit its lowest level in 8 months.
But as always, the biggest risk in Europe is, well, how long will the people tolerate recession? How long can they handle dismal growth.
New data from Eurostat provides a really depressing snapshot of the state of the consumer, at least as of October.
In October 2012 compared with September 2012, the volume of retail trade fell by 1.2% in the euro area (EA17) and by 1.1% in the EU272, according to estimates from Eurostat, the statistical office of the European Union. In September, retail trade decreased by 0.6% and 0.2% respectively. In October 2012, compared with October 2011, the retail sales index fell by 3.6% in the euro area and by 2.4% in the EU27.
Click to enlarge the chart. It's really ugly.

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SENTIMENT
MATA A12
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33 - Public Sentiment & Confidence |
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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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US EXPORTS PLUNGE - US Import Partners are all wrapped in a major Recession
October US Exports Plunge By Most Since January 2009 As Trade Deficit With China Hits Record 12-11-12 Zero Hedge
The boost to GDP from the declining US trade deficit is over. While the September trade deficit number was revised further lower, to $40.3 billion from $41.5 previously, October saw a pick up to $42.2 billion, slightly less than the expected $42.7 billion, but a headwind to Q4 GDP already. As a result, expect a modest boost to Q3 GDP in its final revision, even as Q4 GDP continues to contract below its consensus of sub stall-speed ~1%. The reason for the decline: a 3.6% decline in exports of goods and services.
This was the biggest percent drop in exports since January 2009 as the traditional US import partners are all wrapped in a major recession.
What helped, however, was the offsetting drop in imports by 2.1%, the lowest since April 2011, as US businesses are likewise consumed by a concerns about the global economy. And without global trade, whose nexus just happens to be Europe, there can be no global or even regional recovery. So far, all hopes of a pick up in global economy have been largely dashed. Yet one country benefits from the ongoing US slump is China:
Imports from China - consisting primarily of gizmos and iPhones:
- Computers and
- Toys,
- Games, and
- Sporting goods
- jumped 6.4% to a record $40.3 billion, offset be a modest rise in exports - primarily soybeans - to $10.8 billion, bring the China deficit to a record $29.5 billion from $29.1 billion in September. Of course, one wouldn't get that impression looking at the Chinese side of the ledger: the Chinese Customs department, reported a September and October trade surplus with the US amounting to $21.1 and $21.7 billion. One wonders, somewhat, where the over $16 billion difference has gone.
Combined trade deficit:

Just exports:

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12-12-12 |
CYCLE
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US ECONOMY |
CENTRAL BANKING MONETARY POLICIES, ACTIONS & ACTIVITIES |
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Market Analytics |
TECHNICALS & MARKET ANALYTICS |
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ANALYTICS - The Global Financial Markets Await the Fiscal Cliff Resolution
We take a look of some of the more interesting charts in the various assets, indicies, and commodities we cover.
Apple
Probably the most talked about death cross in ages. Apple’s 50-day moved through its 200-day moving average last week leaving the stock technically vulnerable. This sell-off probably ends in a massive short squeeze sparked by some positive fundamental news, in our opinion.
Mexican Bolsa
Sneaky rally to new all-time high. Mexico’s stock market has been the tortoise of Aesop’s Fables. Slow, steady grind higher.

Brazil Bovespa
Mexico’s Bolsa must make Brazil’s Bovespa the hare of Aesop’s Fables. The index has been weighed down by the China slowdown and the government’s use of some of large cap stocks, such as Petrobras, as piggy banks.
India’s Sensex
The index has been one of the best performers in local currency terms this year. It is also closing in on an all-time high.
Hang Seng
It’s no wonder that equity markets are rallying into the close for the year. The Hang Seng is are favorite indicator species of global risk appetite. The index has performed remarkably well given the Shanghai Composite if just off a 3-year low.
Shanghai Composite
The Shanghai bounced hard after making a 3-year low on Tuesday. This index is the odd man out this year, the only major equity index with a negative return. It could be setting up as the trade of 2013, but still needs more technical work, such as taking out the 200-day moving average.
Japan’s Nikkei
The Nikkei has had a huge snapper rally based on the expectations Shinzo Abe will become Japan’s prime minister next Sunday and will lean heavily on the Bank of Japan to implement massive quantitative easing. The yen has weakened considerably and taken the Nikkei up. This policy will not be without big risks, however.
Australia’s All Ords
Not far from a 52-week high. Australian are caught in between the risk on rally and weaker commodity markets, in our opinion.

U.K.’s FTSE
It will be interesting to see if the FTSE can break to new highs by the end of year on the back of the DAX and CAC breakouts. We think traders, led by Santa Claus, will have the Christmas Spirit in them to move the index over 6000 by the New Year.
Euro
The euro has been in a definitive range over the past three months. Having difficulty breaking above 1.31625. Let’s see if Italy’s political problems and economic weakness can take out the downside at 1.2700

Yen
If they don’t sell the Abe news next week, the yen looks ready to break to new lows. Feels like traders are setting up the Japan trade next year. Long the Nikkei, short the yen. Two death crosses this year! Outch!
Crude Oil
Crude oil has led the commodity complex lower. Resistance levels are declining though crude is trying to hold its recent low of $84.52. It should be helped by the China story, but the CFTC is working hard to take the spec bid out of the market. Lower crude has now become equity positive. Wouldn’t be surprised to see the low at 79ish tested. Brent may be a different story, however.

Copper
Clearly bouncing with the Shanghai. Tough one here.

Gold
Gold has been a very difficult trade this year. If QE∞ can’t move the yellow metal to new highs, something must be wrong. Though the actual printing of money has lagged greatly QE rhetoric. The last time we looked the U.S. monetary base is slowly shrinking and the ECB has yet to engage in OMTs. Maybe the rise to Shizno Abe as Japan’s Prime Minister will be the spark. And, maybe, not. We have learned the hard way never to fall in love with a position.

Wheat
Cool chart. Big spike and big, long flag formation. A breakout to the upside would not be positive for the overall economy and global political stability.
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12-11-12 |
ANALYTICS
PATTERNS
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ANALYTICS |
COMMODITY CORNER - HARD ASSETS |
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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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CENTRAL PLANNING |
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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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