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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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 DECEMBER 2012: MONTHLY MARKET COMMENTARY (Subscription Plan II)
COUNTERFEITING "RISK FREE": The Currency Cartel, a Fiat Failure & the Risk of Collateral Contagion.
Since Bretton Woods and the creation of post WWII Monetary structure, US obligations were considered risk free and its debt instruments rated as AAA. Global risk and spreads have traditionally been priced off this foundation. A crippled dollar and US debt worries has the potential to trigger a global credit melt down. The 2008 financial crisis with Bear Stearns and Lehman gave us just an inkling of the magnitude of the problem. This is forcing a game of Risk Free Counterfeiting to now be played out. It will end and end badly. However, at the present time it is considered the only politically palatable solution.This has forced the Bank of Intern tional Settlements (BIS) to facilitate what can only be called a Currency Cartel to alleviate the daunting global pressures that the eroding need for US dollars is causing. As the Central Bankers' Central Bank, the BIS exercises control over the settlement of the balance of payments and the problems stemming from growing global imbalances. Effectively, what appears to have emerged is a forced alliance between fiat currency based regimes to protect themselves, and sustain the faulty system that emerged from post WWII Bretton Woods. When the US jettisoned its obligations, and in August of 1971 took itself off the gold standard, the US effectively defaulted on its obligations as the world reserve currency. Since then it has been primarily the 'good faith and credit' of the US, that has sustained an acknowledged failed and broken system. The current US Fiscal Cliff machinations only bring to the fore the seriousness of any longer considering the US as "Risk Free" and being a realist foundation for a sound and sustainable global currency reserve. As true as this is, it is not going to change as long as the status quo can be protected, and protected it must be! Similar to the OPEC Oil Cartel protecting the price of 'black' gold, we now have a Currency Cartel protecting the US dollar, and more specifically, the fiat currency system which they all are inextricably tied to. It is the basis for their collusion. 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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MOST CRITICAL TIPPING POINT ARTICLES TODAY |
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RISK - Tied to EU in 2012
Goldman's Top Economist Reveals His Favorite Chart Of 2012 12-20-12 Goldman via BI
When we first ran our Most Important Charts Of 2012 feature earlier, we didn't have the top chart from Goldman's top economist Jan Hatzius.
We've now put it in there, but given his importance and brilliance, we wanted to peel it out to show it to you.
It's this: Basically, the primary driver of financial markets for the second half of the year has been euro risk. The grey line measures euro risk (by blending things like yields spreads, Credit Default Swap spreads and so forth). The blue line is general financial conditions.
Europe's ability to get its house in order has been a huge driver of financial markets in the second half of the year.
See the rest of our Most Important Charts of 2012 here >
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12-21-12 |
RISK |
3
3 - Risk Reversal |
GLOBAL MACRO - Headwinds-Tailwinds
Headwinds Vs. Tailwinds: The Macroeconomic HeatMap 12-20-12 Barclays via Zero Hedge
For all economies, the relative pressure of ‘tailwinds’ in relation to ‘headwinds’ will be crucial for the outcome of economic activity. In the chart below, Barclays shows a heat-map that represents their subjective assessment of the relative balance of forces from 2012 into 2013 and beyond. In 2013, the fiscal headwind continues to loom large and is an important basis of caution despite the strong improvement in financial conditions. The fiscal headwind is unlikely to abate by much in the US and Europe until 2014, possibly later. Other sources of ‘headwind’ are likely to continue during 2013; these include private sector de-leveraging in the highly indebted parts of Europe, as well as political uncertainty (in this context, we observe the elections in Italy (Q1) and Germany (Q4)). Monetary policy, policy reforms, and the financial markets themselves are the main tailwinds as vol suppression continues. Headwinds vs Tailwinds once again in 2013...
Table: Barclay |
12-21-12 |
GLOBAL
RISK
ASSESS'T
SIUTATION
ANALYSIS |
GLOBAL MACRO |
GLOBAL MANUFACTURING - Shifting Center of Gravity Away from Developed Countries
The Changing Face Of Global Manufacturing 12-20-12 McKinsey via ZH
Manufacturing industries have helped drive economic growth and rising living standards for nearly three centuries, and for some developing economies (as McKinsey notes in a recent report) continues to do so. Things are changing, however, as manufacturing output (as measured by gross value added) grew by 2.7% annually in advanced economies and 7.4% in large developing economies (from 2000 up until 2007); the leaders are changing rapidly China, India and Russia rise and Germany, Japan, UK, and Canada are sliding. The following chart simplifies the evolution of global manufacturing economies over the last four decades.
Source: McKinsey |
12-21-12 |
GLOBAL
RISK
ASSESS'T
SIUTATION
ANALYSIS |
GLOBAL MACRO |
CENTRAL BANK GOLD ACCUMULATION - Brazil Doubles Gold Reserves In Last 3 Months
Brazil Doubles Gold Reserves In Last 3 Months 12-20-12 Zero Hedge With precious metal prices echoing 2011's year-end plunge, it is perhaps worthwhile considering the bigger picture. To wit, Central banks in emerging markets have increased their purchases of gold in recent years to bolster their rapidly growing currency reserves as the global financial crisis unfolds. Brazil, until recently, held only 0.5% of its foreign reserves in gold, but as Bloomberg reports, the nation's official holdings of gold now stand at 2.16 million troy ounces - double the 1.08 million ounces it held in August. Brazil's foreign currency reserves grew USD807mm in November (during which the nation bought 472,000 ounces of gold) as "anecdotal reports suggest that demand from central banks will remain strong." As one analyst opined, "Central banks will remain a source of demand in the gold market," as is increasingy obvious in the chart below, "liquidity is paramount and gold will deliver."
USD value of Brazil's Gold reserves
Chart: Bloomberg |
12-21-12 |
GLOBAL
MONETARY
THEME CURRENCY WARS |
CURRENCY WARS |
STATISM - NDAA is Actually Unconstitutional
The Section Preventing Indefinite Detention of Americans Without Trial Removed From Final NDAA Bill 12-20-12 Michael Krieger of Liberty Blitzkrieg blog, via ZH
While the Feinstein-Lee Amendment wasn’t perfect, it was a small step forward as I outlined in my piece: My Thoughts on the Feinstein-Lee Amendment to the NDAA. Amazingly, this small victory has been stripped out of the final bill by our “representatives.” If this doesn’t prove without a shadow of a doubt that this government is criminal and wants the power to lock up citizens without trial I don’t know what will. From the Huffington Post:
WASHINGTON — Congress stripped a provision Tuesday from a defense bill that aimed to shield Americans from the possibility of being imprisoned indefinitely without trial by the military. The provision was replaced with a passage that appears to give citizens little protection from indefinite detention.
The new provision appears to do little, because the Supreme Court has already declared that the writ of habeas corpus — requiring that someone be presented to a judge — applies to all people. The more difficult part of whether people deserve a trial remains unsettled, and the new provision does not appear to resolve it.
Could their intentions be any more clear?
Full article here.
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12-21-12 |
THEMES |
STATISM |
MOST CRITICAL TIPPING POINT ARTICLES THIS WEEK - Dec 16th - Dec 22nd, 2012 |
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EU BANKING CRISIS |
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SOVEREIGN DEBT CRISIS [Euope Crisis Tracker] |
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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. |
12-18-12 |
US FISCAL |
2
2- Sovereign Debt Crisis |
RISK REVERSAL |
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RISK - Reality-On versus Reality-Off
From Risk On/Risk Off To Reality On/Reality Off 12-18-12 Zero Hedge
While most market participants are well aware of the broad risk-on / risk-off tendency in asset markets over the course of the last few years; this year - most notably as the facts of companies' earnings came under scrutiny in the last quarter - we saw a new pattern emerge. As equity markets levitated on hope of another injection of central bank largesse, so reality was suspended and valuation multiples simply didn't matter as "it's all about the future", but as Q3 Earnings Season began and exhibited its worst tendencies in years, starkly highlighting 'what lies beneath' so stocks traded in a 'Reality-On' mode. This then rapidly disappeared from view as Q3 earnings season ended and 'Reality-Off' mode was re-engaged. We can only assume, given GE's warning, how bad Q4 will be and the question then remains, will stocks re-engage 'reality-on' and retest reality lows?
Chart: Bloomberg |
12-19-12 |
RISK-On - Off |
3
3 - Risk Reversal |
CHINA BUBBLE |
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JAPAN - DEBT DEFLATION |
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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.
"We think this could be the beginning of a fresh reflation cycle for the global system, combining with the US recovery to mark a turning point in the crisis,"
Simon Derrick from BNY Mellon.
"It is tremendously important for global growth, and markets are starting to take note" Lars Christensen from Danske Bank.
Mr Abe’s Liberal Democratic Party (LDP) won a landslide victory on Sunday, securing a two-thirds "super-majority" in the Diet with allies that can override senate vetoes.
Armed with a crushing mandate, Mr Abe said he would "set a policy accord" with the Bank of Japan for a mandatory inflation target of 2pc, backed by "unlimited" monetary stimulus.
"Its very rare for monetary policy to be the focus of an election. We campaigned on the need to beat deflation, and our argument has won strong support. I hope the Bank of Japan accepts the results and takes an appropriate decision,"
The menace behind his words did not have to be spelled out. He has already threatened to change the Bank of Japan’s governing law if it refuses to comply. "An all-out attack on deflation is on its way," said Jesper Koll, Japanese equity chief at JP Morgan.
Mr Abe plans to empower an economic council to "spearhead" a shift in fiscal and monetary strategy, eviscerating the central bank’s independence.
The council is to set a 3pc growth target for nominal GDP, embracing a theory pushed by a small band of "market monetarists" around the world. "This is a big deal. There has been no nominal GDP growth in Japan for 15 years," said Mr Christensen.
The yen depreciated sharply to Y84.48 against the dollar on Monday, the weakest in nearly two years, as traders bet that the LDP will this time bend the Bank of Japan to its will.
The yen has weakened 5pc over the past month, helping to lift the Nikkei index of stocks by 10pc. The Tokyo bourse is still down 75pc since peaking in 1989. Land prices have fallen by two-thirds. The LDP plans what some have dubbed a "currency warfare fund" to weaken the yen with a blitz of foreign bond purchases, copying Switzerland’s success in capping the franc.
The effect of Switzerland’s unlimited bond purchases has been to finance most of the eurozone’s budget deficits for the last year with printed money. If Japan tries to do this - with a vastly bigger economy - it would amount a blast of quantitative easing for the world.
Japan’s curse as creditor nation with $3 trillion of net assets abroad is that safe-haven flows cause the yen to strengthen during a crisis, tightening policy in a "pro-cyclical" fashion when least wanted, this time due to the Fukushima nuclear disaster and Europe’s sovereign debt saga.
The effect of the strong yen has been to asphyxiate Japan’s exporters, leading to a "hollowing out" of manfacturing as companies switch plant abroad. Fuel imports to replace the closure of nuclear plants amount to an added import shock.
The combined effect has caused the country's historic trade surplus to evaporate altogether, not helped in recent months by a partial boycott of Japanese goods in China over the Diayou-Senkaku island dispute. The burden of the strong yen has finally become too great to bear.
Opinion is split over the wisdom of ultra-loose money. Although Japan is trapped in chronic deflation, it is a stable - almost comfortable - equilibrium. The "real" value of savings is rising, in stark contrast to the West.
Stephen Jen from SLJ Macro Partners said the Bank of Japan is right to fret that a return to inflation could set off a spike in debt costs and a flight from Japanese government bonds (JGBs).
"Any meaningful sell-off in the JGBs could trigger a serious problem in Japan’s banking system. The holdings of JGBs by Japanese banks account for 900pc of their Tier I capital," he said. Better the Devil you know.
Professor Richard Werner from Southampton University, author of Princes of the Yen, said the Bank of Japan is to blame for the country's failure to shake off its financial crisis in the early 1990s and for two Lost Decades of perma-slump that have followed. He accused the bank of dragging its feet at every stage, forcing governments to rely on huge fiscal deficits instead.
This tight-money/loose fiscal mix has pushed public debt to 240pc of GDP. The country would have been better served if the bank had stopped the rot immediately by flooding the money supply to kickstart lending. "It has taken 20 years and the Fed's Ben Bernanke to show them how to do it."
"Mr Abe has the right intentions but the Bank of Japan knows how to put up a fight. After watching the glacial moves in Japan for over 20 years - often in the wrong direction - I want to see the details before being sure that something really big is happening," he said.
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12-18-12 |
JAPAN |
5
5 - Japan Debt Deflation Spiral |
BOND BUBBLE |
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CHRONIC UNEMPLOYMENT |
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GEO-POLITICAL EVENT |
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GROWTH - New Era of Slow Growth & Plummeting Real GDP per Capita
The Scariest Chart At The Dealbook Conference 12-12-12 BI
At the Dealbook conference, a panel just wrapped up hosted by NYT econ reporter Annie Lowrey, along with Jared Bernstein, Glenn Hubbard, and the economist Robert Gordon.
Gordon presented the scariest chart at the conference from his paper: Is US Economic Growth Over?
He basically sees the end of huge growth trends, and six huge headwinds that could drag down future growth. From the NBER:
The analysis links periods of slow and rapid growth to the timing of the three industrial revolutions (IR’s), that is,
- IR #1 (steam, railroads) from 1750 to 1830;
- IR #2 (electricity, internal combustion engine, running water, indoor toilets, communications, entertainment, chemicals, petroleum) from 1870 to 1900; and
- IR #3 (computers, the web, mobile phones) from 1960 to present.
It provides evidence that IR #2 was more important than the others and was largely responsible for 80 years of relatively rapid productivity growth between 1890 and 1972. Once the spin-off inventions from IR #2 (airplanes, air conditioning, interstate highways) had run their course, productivity growth during 1972-96 was much slower than before. In contrast, IR #3 created only a short-lived growth revival between 1996 and 2004. Many of the original and spin-off inventions of IR #2 could happen only once – urbanization, transportation speed, the freedom of females from the drudgery of carrying tons of water per year, and the role of central heating and air conditioning in achieving a year-round constant temperature.
Even if innovation were to continue into the future at the rate of the two decades before 2007, the U.S. faces six headwinds that are in the process of dragging long-term growth to half or less of the 1.9 percent annual rate experienced between 1860 and 2007. These include
- Demography,
- Education,
- Inequality,
- Globalization,
- Energy/environment, and the
- Overhang of consumer and government debt.
A provocative “exercise in subtraction” suggests that future growth in consumption per capita for the bottom 99 percent of the income distribution could fall below 0.5 percent per year for an extended period of decades.
Below, the key chart showing the possible end of growth is here:

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12-17-12 |
CYCLE
GROWTH |
25
25 - Global Output Gap |
TO TOP |
MACRO News Items of Importance - This Week |
GLOBAL MACRO REPORTS & ANALYSIS |
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US ECONOMIC REPORTS & ANALYSIS |
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SMALL BUSINESS - Falling Startup Rates
The Government Policies That Are Suffocating Entrepreneurs 12-18-12 American Enterprise Institute via BI
There are nearly 5 million small businesses in America, firms with less than 500 employees.
On average, they employ 11 workers each and produce $1 million of output annually.
They account for 60% of job creation, and nearly half of all employment and economic output.
But, says Citigroup, “the US small-firm sector is under substantial stress.”
Small firm employment has declined about 20% relative to large firm employment versus its peak in the mid-1980s — including a 10% drop since the late 1990s.
And the small-firm share of output produced by the private sector has declined to 45% in 2010 versus 50% in 1998.
And, as the chart above shows, the birth rate of new small firms – the number created in a given year relative to the total number of such firms – has fallen to around 8% vs. 10% before the financial crisis and 12% in the 1980s.
Some of the decline can be blamed on short-term reasons.
Small firms make up a good chunk of the construction and real estate sectors, both hard hit by the Great Recession and Not-So-Great Recovery. But longer-term, structural issues also play a role. Citigroup:
First, large firms account for the lion’s share of U.S. exports and, as such, have been better positioned to benefit from the rapid growth of emerging market economies and globalization trends more generally. Consistent with this observation, we find that a depreciation of the dollar systematically raises large-firm employment relative to that of small firms.
Second, we find that large firms tend to be in more capital-intensive industries, which means that these firms have likely benefited more directly from the decline in interest rates that has occurred over the past thirty years.
A third structural headwind appears to have been the ongoing consolidation of the U.S. banking system. This has brought with it a declining role for small banks, which traditionally have been major suppliers of credit to small firms. Our sense is that such structural forces are likely to continue to favor large firms for some time to come.
The requirements of the new healthcare law may prove to be another structural headwind for the small-firm sector.
From a public policy perspective, the key would be to focus on entrepreneurship and the expansion of young firms — they’re the engine of job growth — rather than small firms in general.
Indeed, research from the Kauffman Foundation finds that the fastest-growing 1% of firms typically account for about 40% of US job creation. And of that group, three-quarters are less than six years old.
Given the Citigroup findings, an entrepreneurship agenda might include a) a less concentrated banking system and b) getting business out of the health care business through consumer-driven reform.
Beyond that, perhaps eliminating capital gains taxes on long-term investments and creating a more-skilled workforce. NGDP level targeting might also play a role, as Evan Soltas argues:
Economists believe that firms in the United States are risk-averse, and that’s not a bad thing in itself, but it does imply that nominal instability has real costs in the long run. In other words, if the economy is constantly swinging from boom to bust in NGDP, then if I run a business, I won’t invest as much as I would have if the economy grew with more stability, because I am afraid that if I invest (say, I open a new storefront) and a recession comes, then my investment will lose value. Now expand this consideration of one firm to the entire economy: when NGDP growth is unstable, firms make fewer investments — factories buy fewer machines, merchants open fewer stores, companies hire and train fewer employees, etc. — and what this means is that, in the long run, the economy grows more slowly because productivity increases more slowly.
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12-19-12 |
INDICATORS
CATALYST
EMPLOY- MENT
THEMES |
US ECONOMY |
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 |
12-18-12 |
INDICATORS
CYCLE
GROWTH |
US ECONOMY |
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. |
12-17-12 |
CATALYST
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FOOD |
US ECONOMY |
CENTRAL BANKING MONETARY POLICIES, ACTIONS & ACTIVITIES |
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Market Analytics |
TECHNICALS & MARKET ANALYTICS |
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PATTERNS - 2003-V-2009 Lows
It Really Is Different (Again) This Time 12-19-12 Zero Hedge
Despite the seemingly generational destruction to household and bank balance sheets and an entirely unprecedented fiscal and monetary policy reponse, investors would never know it given the market's reactions from the 2009 lows relative to its rally from the 2003 lows. Different this time? hhmmm... Worried about gold prices falling also? Doesn't look like we learned anything from the 'Debt Ceiling' debate either...
S&P 500 - 2003-low rally vs 2009-low rally; unbelievable!

What is most shocking is the cataclysmic drop we suffered did nothing to quell the status quo's belief that one more bubble will do it and save us all... This rally off the 2009 lows feels excessive (and is given the real backdrop) but is in reality not so different from the Greenspan-to-Bernanke handoff bubble that led to this idiocy...
Can we really kick the can one more year? Last time it was mega-securitization technical pressure that sustained credit support for equities with that last lurch higher - with yields already at record lows, leverage creeping up and spreads not pricing in any credit cycle, we suspect this time might just be different for the nominal value of the S&P 500...
(h/t Brad Wishak At NewEdge)
Gold - Debt Ceiling vs Fiscal Cliff

Charts: Bloomberg |
12-20-12 |
ANALYTICS
PATTERNS |
ANALYTICS |
US DOLLAR - Foreign Markets May Be Signalling Weakness
Breakout in Foreign Stocks Suggests Breakdown in USD 12-20-12 dshort.com
One useful relationship that helps identify turning points in the USD Index is a look at foreign equities. Foreign stocks will often outperform the U.S. markets when the USD is weak; part of the reason for this is that foreign markets are very sensitive to inflation, so when their currencies advance relative to the USD, their inflation rates fall and their equities climb. Typically, we see a turn in foreign markets prior to a turning point in the USD, which was the case this summer. The iShares Emerging Markets ETF (EEM) bottomed on June 1st, with the USD Index topping on July 24th. Since the summer lows, the EEM has rallied nearly 20%, while the USD fell more than 6.5% before finding its footing in September. Over the last three months the USD Index has staged what looks like a very weak recovery rally, and the breakout in the EEM may be signaling that the USD Index is set to begin another leg down.
USD set for Sharp Decline in H1 2013? Moving back to what messages the emerging markets are signaling, it appears the USD Index is on the verge of breaking a rising trend line support (red line below), and if it weakens below the key 78 level, it looks like we will have a completed head-and-shoulders top, which would project a return to the 2011 summer lows near $73-$74. The Fed's decision this week to expand QE3 with $45B monthly purchases of UST's is likely a major catalyst that would lead to USD weakness in 2013.

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12-20-12 |
ANALYTICS
STUDY |
ANALYTICS |
SPX PE - Near Near Expansion Suggesting Santa Claus Rally
S&P 500 Valuation 12-18-12 Yardeni
Our Blue Angels analysis of the S&P 500 shows that its forward P/E rebounded from a recent low of 12.1 on November 15 to 12.7 yesterday. In the Santa rally scenario, it should soon retest 13, which has been an unlucky number since early 2010. The market had three nasty corrections since then after failing to rise above this valuation level.
The fourth assault on 13 could be the charm. If so, then the valuation multiple could rise quickly to 14, a level not seen since early 2010, just before Greece hit the fan. S&P 500 forward earnings edged back up to $112.77 per share during the week of December 13, just a nickel below its recent record high. A 14 multiple on that number would put the S&P 500 up to 1579, slightly above the previous record high.
The S&P 500 forward P/E is highly correlated with the Citigroup Economic Surprise Index and with the CRB metals spot price index. That’s not surprising since investors are more likely to pay higher valuation multiples for earnings when they have more confidence in the economy. Both the surprise and the metals indexes have firmed up in recent weeks.
Today's Morning Briefing: Santa. (1) Looking up. (2) Nice round numbers: 1465 then 1565. (3) Barack, John, and Nick. (4) The rich will get richer. (5) Fiscal deal taking shape. (6) Devil is in the details. (7) Room for higher valuation multiple. (8) Analysts too optimistic about earnings in 2013 and 2014. (9) But there’s room for improvement. (10) Picking the leaders and laggards of 2013.

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12-20-12 |
ANALYTICS
FUND-MENTALS |
ANALYTICS |
PATTERNS - Election Year Market Trends
Chart of the Day 12-19-12
The chart illustrates how the stock market has performed during the average post-election year. Since 1900, the stock market has tended to underperform from early January to late February and again from early August to early November during the average post-election year. Some parts of the year have, on average, outperformed. The most notable period of outperformance has occurred from late March to late May. In the end, however, the stock market has tended to underperform during the entirety of the post-election year. One theory to support this behavior is that the party in power will tend to make the more difficult economic decisions in the early years of a presidential cycle and then do everything within its power to stimulate the economy during the latter years in order to increase the odds of re-election.
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12-19-12 |
ANALYTICS
PATTERNS |
ANALYTICS |
PATTERNS - Macro Surprise Index 2012-v-2011
Deja Vu All Over Again 12-18-12 Zero Hedge
Across many of the desks we hear from there is a distinct feeling of incredulity at the moves in the last week or two. Bullish or bearish, it seems the velocity and scale of the runaway moves after every utterance from D.C. has wrong-footed many across every asset class. However, one thing remains constant, a very strange case of deja vu all over again with last year's market and macro-economic behavior. The following two charts are showing spooky similarities between this year's 'fiscal cliff' hopes and fears and last year's 'debt ceiling' ecstasy and anxiety. Perhaps it will be useful to all those claiming that the market efficiently predicts a resolution - it might be useful to temper that enthusiasm given the moves we saw last year and the market's clear ignorance.
Heard on CNBC today "no way we get a sell the news event here"... "the market is telling you we get a deal"
US Macro Surprise Index (via Citi) is seemingly tick for tick with last year's...

and the market itself seems to oscillate in a very similar greed-and-fear-like manner as noone surely believes we actually go over the cliff... right?

Charts: Bloomberg |
12-19-12 |
ANALYTICS
PATTERNS |
ANALYTICS |
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 |
12-18-12 |
ANALYTICS
FUNDA- MENTALS |
ANALYTICS |
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.

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12-17-12 |
RISK |
ANALYTICS |
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. |
12-17-12 |
FUNDA-MENTALS |
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COMMODITY CORNER - HARD ASSETS |
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FINANCIAL REPRESSION |
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FISCAL CLIFF - A Diversion & Hoax
The Fiscal Cliff Is A Diversion: The Derivatives Tsunami and the Dollar Bubble 12-17-12 Paul Craig Roberts Institute for Political Economy
The “fiscal cliff” is another hoax designed to shift the attention of policymakers, the media, and the attentive public, if any, from huge problems to small ones.
The fiscal cliff is automatic spending cuts and tax increases in order to reduce the deficit by an insignificant amount over ten years if Congress takes no action itself to cut spending and to raise taxes. In other words, the “fiscal cliff” is going to happen either way.
The problem from the standpoint of conventional economics with the fiscal cliff is that it amounts to a double-barrel dose of austerity delivered to a faltering and recessionary economy. Ever since John Maynard Keynes, most economists have understood that austerity is not the answer to recession or depression.
Regardless, the fiscal cliff is about small numbers compared to the
- Derivatives Tsunami or to
- Bond market Bubble and
- Dollar market Bubble.
The fiscal cliff requires that the federal government cut spending by $1.3 trillion over ten years. The Guardian reports that means the federal deficit has to be reduced about $109 billion per year or 3 percent of the current budget. http://www.guardian.co.uk/world/2012/nov/27/fiscal-cliff-explained-spending-cuts-tax-hikes More simply, just divide $1.3 trillion by ten and it comes to $130 billion per year. This can be done by simply taking a three month vacation each year from Washington’s wars.
The Derivatives Tsunami and the bond and dollar bubbles are of a different magnitude.
Last June 5 in “Collapse At Hand” http://www.paulcraigroberts.org/2012/06/05/collapse-at-hand/ I pointed out that according to the Office of the Comptroller of the Currency’s fourth quarter report for 2011, about 95% of the $230 trillion in US derivative exposure was held by four US financial institutions: JP Morgan Chase Bank, Bank of America, Citibank, and Goldman Sachs.
Prior to financial deregulation, essentially the repeal of the Glass-Steagall Act and the non-regulation of derivatives–a joint achievement of the Clinton administration and the Republican Party–Chase, Bank of America, and Citibank were commercial banks that took depositors’ deposits and made loans to businesses and consumers and purchased Treasury bonds with any extra reserves.
With the repeal of Glass-Steagall these honest commercial banks became gambling casinos, like the investment bank, Goldman Sachs, betting not only their own money but also depositors money on uncovered bets on interest rates, currency exchange rates, mortgages, and prices of commodities and equities.
These bets soon exceeded many times not only US GDP but world GDP. Indeed, the gambling bets of JP Morgan Chase Bank alone are equal to world Gross Domestic Product.
According to the first quarter 2012 report from the Comptroller of the Currency, total derivative exposure of US banks has fallen insignificantly from the previous quarter to $227 trillion. The exposure of the 4 US banks accounts for almost of all of the exposure and is many multiples of their assets or of their risk capital.
The Derivatives Tsunami is the result of the handful of fools and corrupt public officials who deregulated the US financial system. Today merely four US banks have derivative exposure equal to 3.3 times world Gross Domestic Product. When I was a US Treasury official, such a possibility would have been considered beyond science fiction.
Hopefully, much of the derivative exposure somehow nets out so that the net exposure, while still larger than many countries’ GDPs, is not in the hundreds of trillions of dollars. Still, the situation is so worrying to the Federal Reserve that after announcing a third round of quantitative easing, that is, printing money to buy bonds–both US Treasuries and the banks’ bad assets–the Fed has just announced that it is doubling its QE 3 purchases.
In other words,
the entire economic policy of the United States is dedicated to saving four banks that are too large to fail. The banks are too large to fail only because deregulation permitted financial concentration, as if the Anti-Trust Act did not exist.
The purpose of QE is to keep the prices of debt, which supports the banks’ bets, high.
The Federal Reserve claims that the purpose of its massive monetization of debt is to help the economy with low interest rates and increased home sales. But the Fed’s policy is hurting the economy by depriving savers, especially the retired, of interest income, forcing them to draw down their savings. Real interest rates paid on CDs, money market funds, and bonds are lower than the rate of inflation.
Moreover, the money that the Fed is creating in order to bail out the four banks is making holders of dollars, both at home and abroad, nervous. If investors desert the dollar and its exchange value falls, the price of the financial instruments that the Fed’s purchases are supporting will also fall, and interest rates will rise. The only way the Fed could support the dollar would be to raise interest rates. In that event, bond holders would be wiped out, and the interest charges on the government’s debt would explode.
With such a catastrophe following the previous stock and real estate collapses, the remains of people’s wealth would be wiped out. Investors have been deserting equities for “safe” US Treasuries. This is why the Fed can keep bond prices so high that the real interest rate is negative.
The hyped threat of the fiscal cliff is immaterial compared to the threat of the derivatives overhang and the threat to the US dollar and bond market of the Federal Reserve’s commitment to save four US banks.
Once again, the media and its master, the US government, hide the real issues behind a fake one. The fiscal cliff has become the way for the Republicans to save the country from bankruptcy by destroying the social safety net put in place during the 1930s, supplemented by Lyndon Johnson’s “Great Society” in the mid-1960s.
Now that there are no jobs, now that real family incomes have been stagnant or declining for decades, and now that wealth and income have been concentrated in few hands is the time, Republicans say, to destroy the social safety net so that we don’t fall over the fiscal cliff.
In human history, such a policy usually produces revolt and revolution, which is what the US so desperately needs.
Perhaps our stupid and corrupt policymakers are doing us a favor after all. |
12-20-12 |
US FISCAL |
FINANCIAL REPRESSION |
CORPORATOCRACY - CRONY CAPITALSIM |
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CENTRAL PLANNING |
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CURRENCY WARS |
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STANDARD OF LIVING |
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STANDARD OF LIVING - Disposable Income
The Death Of America's Middle Class 12-18-12 Zero Hedge
There is one chart that everyone should see that is part of Reuters' must read special series: The Unequal State of America: Redistributing Up - it is the chart we have said over the past 4 years is the only one that matters for America - that showing the flattening of America's wealth distributon Gaussian curve, aka the plunder and accelerating destruction of America's middle class, at the expense of the poorest and the wealthiest. This is nothing but the inevitable outcome of a co-opted, conflicted and controlled marionette government, which does the bidding of the wealthiest lobby powers (read corporate shareholders and Wall Street), partitioning the bulk of the wealth to the richest, while sending the scraps to the poorest in order to keep itself in power due to the power of the ever poorer, democratic majority. Alas, since there is never a free lunch, and since the Fed does not create wealth but through its currency debasement merely accelerates the transfer of wealth, someone ends up footing the bill? Who? None other than that part of the US population which made the United States of America the greatest country in the world, and is now watching it implode first slowly, then fast.
The chart in question:

How does Reuters frame this ever so critical topic that only impairs the ever more disenfranchised, ever declining middle class, and thus few actually bother discussing:
In the town that launched the War on Poverty 48 years ago, the poor are getting poorer despite the government's help. And the rich are getting richer because of it.
The top 5 percent of households in Washington, D.C., made more than $500,000 on average last year, while the bottom 20 percent earned less than $9,500 - a ratio of 54 to 1.
That gap is up from 39 to 1 two decades ago. It's wider than in any of the 50 states and all but two major cities. This at a time when income inequality in the United States as a whole has risen to levels last seen in the years before the Great Depression.
Americans have just emerged from a close presidential election in which the government's role as a leveling force was fiercely debated. The right argued the state does too much; the left, too little. The issue is now at the center of tense negotiations over whose taxes to raise and what social programs to cut before a Jan. 1 deadline. And the government's role will be paramount again next year if Congress takes up tax reform.
The federal government does redistribute wealth down to struggling Americans. But in the years since President Lyndon Johnson took aim at poverty in his first State of the Union address, there has been an increasingly strong crosscurrent: The government is redistributing wealth up, too - especially in the nation's capital.
The beneficiaries are not the billionaire financiers and celebrities who
have come to personify income inequality in the 21st century. Yet the
Washington elite are just as much part of the trend, having influenced
laws and decisions that alter the entire country's distribution of
income.
Read more here.
In summary: crony capitalism for the wealthiest, scrappy socialism for the poorest, and everyone else (that soon to be extinct creature known as the middle class) left to fend for themselves. |
12-19-12 |
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