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)

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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

US DEBT- Wars & Financial Crisis are Good For Banks

US Debt And Deficit Since Inception 12-17-12 Zero Hedge

In the recent aftermath of the US just concluding its fourth consecutive fiscal year with a $1 trillion+ deficit, we have been flooded with requests to show how the current fiscal situation stacks up in a big picture context. Very big picture context. For all those requests, we present the following chart showing total US Federal debt/GDP as well as Deficit/(Surplus)/GDP since inception, or in this case as close as feasible, or 1792, which appears to be the first recorded year of historical fiscal data. We can see why readers have been so eager to see the "real big picture" - the chart is nothing short of stunning.

Some observations:

• Beginning with the Anglo-American war of 1812, and continuing through the US civil war, World War I and World War II, the major military shocks to the US fiscal system are clearly obvious.
• Just as obvious is the impact of not only The Great Moderation which started in the early 1980s just before the 1987 arrival of Alan Greenspan at the helm of the Fed, which allowed the US to exchange fiscal prudence for ever cheaper debt which could and would be used to fund an ever greater budget deficit, and lead to a surge in the Federal debt.
• The increasingly more unstable system, which saw the additional layering of another $23 trillion in shadow banking debt at its peak in 2008, as well as countless trillions in household, corporate and financial debt, as well as hundreds of trillions in underfunded welfare liabilities, led first to the Internet bubble, then the Housing and Credit bubble, and finally, to the Great Financial Crisis of 2008 which climaxed with the failure of Lehman brothers, and resulted in the central bank bailout of every developed bank, and shortly thereafter, the backstop of every peripheral country in Europe.
• The gravity and impact of the Great Financial Crisis on the US economy is stark, very visible, and can only be compared to previous instances of destructive military conflict in terms of lost output and impact on the US economy.
• Total US Debt/GDP is currently just over 103%. This number is expected to rise to 125% by the end of 2016, which will eclipse the peak debt/GDP seen in World War II, and be the highest in US history.
• Whereas in the past episodes of fiscal catastrophe were accompanied not only by a surge in debt (black line), but by a parallel explosion in fiscal deficits (red bars), this time the deficit spike has been more modest (peaking at about 10% of GDP), but more protracted, with even the CBO expecting deficits of around $1 trillion to last for the next several years.
• One possible interpretation is that due to the Fed's relentless interest rates intervention, the polarized US government feels no burning desire to promptly balance its budget, and even overshoot, and through a combination of aggressive spending cuts and/or revenue increases, result in a much needed surplus which would be used to reduce the sovereign debt. This is graphically seen in the ongoing Fiscal Cliff debate, when any proposal for substantial spending cuts - the true problem at the core of America's deficit habituation and welfare statism - is greeted with shrieks of Mutual Assured Destruction.
• This is not a political issue: politicians on both sides of the aisle are perfectly aware that setting the US on a sustainable fiscal course would mean massive pain for the common citizen, and an immediate termination of all existing political careers: after all the myth of the welfare state is at stake. It is in everyone's interest - both GOP and Democrat - to perpetuate the unsustainable deficit status quo indefinitely. Any theatrics out of the GOP demanding fiscal conservatism are therefore just that - theatrics.
• There is no question that it is unsustainable: US GDP is currently growing at a pace of 1.5%-2.5% at best. Total 2012 US debt will have risen at a rate of 8%, and will continue rising in the 6%-8% range.  
• More disturbing is the influence of the Fed, whose policy of ZIRP and outright debt monetization (recall even JPM has now admitted the Fed will monetize all US debt issuance in 2013) is the only permissive factor that has allowed the US to delay the inevitable moment of reckoning as long it has.
• Indicatively, a modest rise in the average US interest rate, which is currently at all time blended lows, to just 5%, would mean that in 3 years the US would spend, pro forma, $1 trillion in cash interest each year. At that point the US will approach Japan status, where the government needs to borrow just to fund interest outlays. Actually, instead of Japan, Weimar would be a better analogy.
• Finally, on all previous historical occasions, there was at least one backstop of last reserve, a central bank, standing ready to step in and provide the necessary liquidity, and monetize the needed debt to keep the show running. Since 2009, all the central banks have also gone all in on the Keynesian endgame: at this point the next shock to the status quo system will be the last, as there is no more backstops. 
• At that point the only two options will be outright monetary devaluation, though not relative in the closed monetary loop of modern monetarism, but absolute, where every currency is concurrently devalued against a hard asset (potentially with the forceful concurrent confiscation of said hard asset by the host government, think Executive Order 6102), in order to generate a terminal currency and debt debasement, or outright global debt moratoria, and the end of the modern financial system as we know it (but not before the financial "leaders" of our time have converted enough of their paper wealth into hard asset format and transferred it to more peaceful, more "gun-controlled", non-extradition territories).

And there you have it.

Oh, and whoever said the advent of the Federal Reserve, or the end of "hard money" standard courtesy of Richard Nixon, made catastrophic or systematically shocking events less frequent, probably should have their head examined.

JAPAN - Abe prepares to print money for the whole world

Japan's Shinzo Abe prepares to print money for the whole world 12-17-12 Telegraph - Ambrose Evans-Pritchard

Japan’s incoming leader Shinzo Abe has vowed to ram through full-blown reflation policies to pull his country out of slump and drive down the yen, warning Japan's central bank not to defy the will of the people. The profound shift in economic strategy by the world’s top creditor nation could prove a powerful tonic for the global economy, with stimulus leaking into bourses and bond markets - a variant of the "carry trade" earlier this decade but potentially on a larger scale.

US RECESSION - ECRI "Likely to have started 4 Months Ago"

Albert Edwards: “Something Bad Happened In November" SocGen via ZH

“Something bad happened in November…and it wasn’t merely Hurricane Sandy”, the NFIB chief economist Bill Dunkelberg is quoted as saying - see chart below and link. Even scarier than the decline in the headline measure was the 37% slump to an all-time low in those firms who believe economic conditions will improve over the next six months. That 37% drop is twice the previous record 18% decline, which occurred in the immediate aftermath of the Lehman’s collapse (see chart below). For those who might immediately retort that this is a sentiment indicator that should be used as a contrary indicator - you are wrong. It is a good leading or at worst coincident indicator. I would say this datum is more than consistent with the recession that Lakshman Achuthan of the ECRI has been warning of, wouldn't you?

Lakshman Achuthan of the Economic Cycle Research Institute (ECRI) doing the rounds reiterating his call that the US economy is already in a recession. He seems to be getting a bit of stick recently, but as I am fully aware, bearers of bad news are usually derided. I think he is doing an excellent job of explaining his stance patiently and clearly in the face of some very hostile interviewers. His recent 7 December analysis on the ECRI website of why a recession is likely to have started around four months ago is well worth an uncomfortable read - link (see also the related video link).

GE's Jeff Immelt: "We've Definitely Seen A Slowdown In The Fourth Quarter 12-17-12 Zero Hedge

FUNDAMENTALS - Margin Expectations At 7 Month Low

Projected Corporate Margin Expectations Dip To 7 Month Lows 12-17-12

Buried in the Empire Fed manufacturing data is the forward expectations for Prices Paid and Prices Received. Taken together, somewhat obviously, they reflect businesses views of their margin expectations for the future. For seven of the last nine years, this future margin expectation has risen from mid-year into the end of the year (whether hope-driven or real fundamentals is unclear), but this year, the picture is very different. For the first time since 2007, future margin expectations have plunged into year-end as expectations for prices-paid have notably risen relative to expectations for prices received. Though the sample is small, the last time we saw such a huge divergence from the seasonal tendency for margin expectations was followed by an equity market reaction many would prefer not to remember.

The lower pane shows the implied margin expectations from the Empire Fed survey. Notice the pattern into year-end...

which is highlighted more specifically here - the blue line is the 10 year average seasonal tendency for the margin expectation (a fall into mid-year and rise into year-end). This year saw the same pattern into mid-year and then a collapse from June to November (Red line)... quite notably different.

Charts: Bloomberg

GROWTH - New Era of Slow Growth & Plummeting Real GDP per Capita

The Scariest Chart At The Dealbook Conference 12-12-12 BI

FOOD STAMPS - Now 14 Percent of US Grocery Sales

The Fed on Food Stamps 12-14-12 Global Macro Monitor via Ritholtz

Wow!   The food stamp program is now equivalent to 14 percent of all U.S. grocery store sales.

Though the Fed indirectly finances the food stamp program with its purchase of treasury securities — $45 billion per month starting in January — we wouldn’t be surprised someday that the central bank actually begins to print food stamps.  This wouldn’t pack the potential punch of creating “high powered” bank reserves, which can be multiplied in a healthy financial system through credit creation, however.  But at least the “printed money food stamps” would lead to direct demand creation, rather than, as most of it does now,  sit on deposit at the Fed in the form of excess bank reserves.

Seriously.  Monetary policy has almost become this absurd.

What if the Fed’s policies actually contribute to unemployment?   Such as repressing and changing the relative cost of capital.  This makes it easier for companies to finance machinery which either enhances labor productivity,  reducing the need for more workers,  or less costly to replace workers with robots.   Clearly, some of this is currently taking place.

The Fed’s  policy of repressing government borrowing costs and indirect deficit financing  reduces the government’s  incentive to implement the necessary structural reforms to put the budget on a sustainable path.  This would reduce uncertainty and maybe give the business sector more confidence to hire and spend their cash hoard.

We’re starting to think that the business sector behaves according to the Ricardian equivalence model.  Consumers?  We are not so sure.   Great thesis for a Ph.D. dissertation, by the way.

In other words,   the probability the Fed has the wrong, or, at the very least,  flawed model of the economy (think Apple maps instead of Google maps) is much larger than is priced,  in our opinion.   This wouldn’t be the first time.   No problem now, but if the Fed loses cred with such a ballooned balance sheet,  the demand for money could become more unstable or collapse.

It would, at first,  feel nice as equities would shoot to the moon.  Beyond the short-term, however, we would be in a heap of trouble, with a capital T, right here in River City!   Big trouble.

Just got back from the grocery store.   Inflation cometh!

P.S.  Negative real interest rates are immoral.

RISK - Increasing Margin Debt

Margin Debt Continues To Climb 12-13-12 Zero Hedge

The NYSE released October margin debt data and to nobody's surprise total margin debt rests at $317 billion, the highest since April 2011 ($320 billion), leaving inquiring minds to ask just how much purchasing is being done on margin (Free Credit less Total Margin Debt)?  The answer is $43.9 billion, the highest since June of 2011 ($45.9 billion).  The level of investor net worth has only been postive 4 times since September 2009, the same month Bernanke claimed the recession was "technically" over, lagging 3 months behind ZH's number 1 fan Dennis Kneale.  When the Fiscal Cliff goes unresolved and headline reading algo's rip orders off a neverending stream of rehashed articles, margin calls will accelerate heavily and usually stable assets like Gold and Silver are likely to experience volatility as investors computer programs liquidate in a mad-faced fashion.  Rogue traders with unauthorized postions, off book loses, and fat fingers beware.

PRIVATE EQUITY DEALS - Leveraging up to Less than 30% Equity from 42%

Debt Loads Climb in Buyout Deals 12-16-12 WSJ

Private-equity firms are using almost as much debt to fund acquisitions as they did before the financial crisis, as return-hungry investors rush to buy bonds and loans backing those takeovers.

The rise in borrowed money, or leverage, heralds the possibility of juicy returns for buyout groups. Ominously, the surge also brings back memories of the last credit binge around six years ago, which saddled dozens of companies with huge levels of debt. Some companies laden with debt by private-equity firms in the mid 2000s foundered during the recession.

Since the beginning of 2008, private-equity firms have paid an average of 42% of the cost of large buyouts with their own money, also known as "equity," while borrowing the rest. In the past six months, the percentage has fallen to 33%, according to Thomson Reuters, close to the 31% average in 2006 and the 30% average in 2007.

About one-third of large leveraged buyouts since the end of June were purchased with a cash component of 30% or less, compared with none in the first half, according to Thomson Reuters.

Other measures also suggest that debt loads are hovering around precrisis levels. The average debt put on companies acquired in leveraged-buyout deals from July to December amounted to 5.5 times the companies' annual earnings (defined as earnings before interest, taxes, depreciation and amortization). That is higher than any two consecutive quarters since the beginning of 2008, according to S&P Capital IQ LCD. The average deal leverage was 5.4 times earnings in 2006 and 6.2 times earnings in 2007.

For private-equity funds, the shift toward higher debt financings is good news because it gives them the opportunity to boost returns. But for the companies and the investors providing the debt, more leverage can mean more risk. In a study of 40 highly leveraged buyouts it rated between 2006 and 2008, Moody's Investors Service found that 26% defaulted in 2009, compared with 17% of other comparable companies that year.