WHY A LOOMING US RECESSION MAY BE NEAR

THE FED IS IN A BOX

1. The US Economy is hinging on a Recession (GordonTLong.com videos: LONGWave on a US Recession, Is the US in a Recession, Dohmen - China Slowdown Crippling Asia ) so it needs to be adding stimulus (according to Keynesian Economic Theory).
2. The Improving US Trade deficit is squeezing Global Liquidity via the Triffin Paradox at exactly the wrong time after a 7 quarter EU Recession.
3. Additionally, several recent regulatory proposals will increase the pressure on banks to reduce assets that carry low risk weights. Repurchase agreements are a large source of banks’ low-risk assets, and it is expected that banks will reduce their matched book operations in response to these proposals. We are already seeing Treasury fails.

HOWEVER

There are serious credit issues that are forcing the Fed to "TAPER"

1. Excess Speculation as witnessed by:
   • PAYMENT IN KIND (PIK) NOTES
   • COVENANT-LITE LOANS
   • DIVI RECAPS
   • LBO LEVERAGE
2. Fracturing occurring in US Term Structures
3. Shortage of High Value Collateral due to the Fed almost completely dominating the risk free US Treasury Market. This is causing serious credit problems in the Collateral Transformation trade and a reduction in Repo balances.

THE REQUIRED 'COVER' OR NO CHOICE?

The Fed may be forced to let the US enter a recession hoping it will give it the cover to insert massive more liquidity into the system which is needed as deleveraging from NPL continues unabated globally.

ECONOMIC CYCLE

CAPEX & INVESTMENT

BUYBACKS & DIVIDENDS

JOBS - Part Time and Full Time Don't Supply a Working Wage

WORKING WAGE: The primary issue running through the economy today is that most Americans lack a sufficient wage capable of boosting spending and getting the economy operating at a desirable pace.

Real consumer spending is clinging to the critical 2 percent pace over the last 12 months. A sub-2 percent pace is typically associated with recession

CRIPPLED MIDDLE CLASS: We have a 'crippled' middle class in a 70% consumption economy.

SENTIMENT - Real Disposable Income

For the first time in 2013, UMich consumer confidence missed expectations dropping from a cyclical high 85.2 to a 'mere' 80.0. However, the miss from an expectation of 85.0 is the big news - this is the biggest miss since records began in 1999. The US Consumer (so in the news this week on the back of the retail earnings) appears have finally woken up to soaring mortgage rates, rising gas prices, and only part-time job growth. We warned this might happen - just as it has happened in the previous two cycles... Both the current and future conditions indices collapsed to their lowest in 4 months.

The biggest miss on record and first miss in 2013...

HOUSING FORMATIONS

A recent Pew Research study finds, a record 21 million young adults are now living at home with their parents.

Since 2007, young adults have grown increasingly likely to live at home. This is a new trend with a stunning 45-year high 36% (21 million) of 18-31 year-olds back with mom-and-pop.

SURPRISES AHEAD

.... for more detail, watch:

US RECESSION - Minimally in the Back Stretch of the Recovery

Cramer's Miss On The Corporate/Economic Relationship 08-19-13 Lance Roberts of Street Talk Live blog, via ZH

JAPAN - ABE-nomics About Lowering Real Interest Rates

This Chart Debunks The Biggest Myth About Abenomics 08-19-13 BI

A popular conception about Abenomics — Japan's new drive for economic recovery — is that it's all about weakening the yen and boosting exporters.

But this really isn't the play at all. The real idea is to reduce real interest rates, so as to stimulate domestic demand, unlocking dormant investment and consumption spending. Remember, in deflation, it makes sense to horde cash, because prices will be lower tomorrow, potentially leading to a deflationary/recessionary spiral. Abenomics seeks to break this, stoking inflation, and creating an encouragement to spend and invest today.

A quick look at the Japanese trade picture shows that improving the economy via exports is not the play.

Japan's trade deficit just came in surprisingly high.

From Nomura:

Japan's nominal exports in July rose 12.2% y-y and nominal imports were up 19.6%. Market consensus forecasts (Bloomberg survey medians) had called for 12.8% growth in nominal exports and 16.0% growth in nominal imports. The trade deficit came to ¥1,024.0bn, larger than the consensus forecast of ¥773.5bn. On a seasonally adjusted basis, the deficit was ¥994.0bn, again wider than the consensus forecast of ¥741.3bn and also larger than the June deficit of ¥663.2bn. There had been signs from the beginning of 2013 that the trade deficit would stop expanding and start contracting, but the data have continued to fluctuate and we have yet to see any clear trend of contraction.

BOND SCARE - The Bearish Bond Trend Has Resumed

"The Bearish Bond Trend Has Resumed" 08-18-13 chief technical strategist MacNeill Curry, BoAML via ZH

From BofA:

After 5 weeks of range trading, US Treasury yields have resumed their bear trend. US 10yr yields target 2.951%/3.045% before greater signs of top emerge. Bulls need a break of 2.730% to invalidate the bearish potential.

While the above is nothing more than a few squiggly lines and their extrapolations, in the New fundamental-less Normal self-fulfilling prophecies (i.e., technicals) have a way of, well, self-fulfilling. The only problem with a blow out in yields to north of 3% is that not only does it kill any mythical housing recovery, it outright obliterates any hopes of a continuing GDP tail wind from the housing market, even from investors, speculators and flippers. We are confident we are not the only ones to notice that the APR on the 30 Year Fixed FHA from Wells just soared to over 6% - a level that has no place in an economy that is "growing" at 1.5%.

But before we lament the end of the great 30 Year bond market, we will simply recall that what is happening now is a carbon copy of what happened two years ago, when all it took for yields to plunge over 100 bps was a 20% drop in equities following the Great Debt Ceiling fight and the US downgrade.

Because there is nothing easier for Bernanke to do (in 15 minutes or less) than to enact a wholesale scramble out of stocks and right back into bonds, when he needs it.

Then only question is "when"?

BOND SCARE - Bonds (TLT) Break Important Support

Bonds (TLT) Break Important Support 08-16-13 Carl Swenlin, Decision Point

e use the 20+ Year T-Bonds ETF (TLT) as the surrogate for long bond timing. As of 5/20/2013 TLT is on a Trend Model NEUTRAL signal, which means that the model has been out of bonds but not short. The LT Trend Model, which informs our long-term outlook, is on a SELL signal as of 5/29/2013, so our long-term posture is bearish.

The weekly chart shows a support zone between 105 and 106, and TLT has violated that zone in a move that is becoming decisive. Note also that the PMO (Price Momentum Oscillator), which is used to estimate when prices have become overbought or oversold, has dropped below the bottom of the five-year PMO range. That range was established during a long-term rising price trend, and it will become irrelevant as the long-term trend turns down. In fact, if a down trend persists, over the next five years or more, the PMO range will shift downward from +7 to -1 to something like +1 to -5.

For the time being we are ignoring the possibility of a large head and shoulders pattern forming (the right shoulder being the only element remaining to complete the pattern); however, an extended bounce is not out of the question once the bears are fully committed.

CORPORATE SPENDING - Shrinking CAPEX, Expanding Buybacks and Dividends

What Corporations Spend Their Cash On 08-17-13 Zero Hedge

While bullish talking heads are quick to point out that corporate earnings have never been higher, they tend to get very quiet the second corporate cash flow generation is mentioned. The reason is simple: where non-GAAP earnings, much of which are vaporware such as exclusions and other adjustment involving addbacks for "non-recurring" events such as Cisco's now annual mass termination announcement are indeed at nosebleed levels, actual corporate cash generation is a shadow if its former self which peaked in 2007 and has never been retraced. We showed this a month ago.

The problem is that since corporations generate less cash, they also spend less cash. As the following chart confirms, corporate capital use which peaked at a little over $1.8 trillion in 2007 has yet to be surpassed.

But perhaps what is more interesting is what corporations spend their money on. As we have pointed out in the past (usually when lamenting the lack of CapEx spending), there are five things corporations spend money on: CapEx, R&D, Acquisitions, all of which fall into the "growth category", and Dividends and Buybacks, which are the opposite, and represent shareholder-friendly actions which take from a company's growth potential and distribute dividend, literally, here and now.

Here is the same chart as above, shown on a percentage of total basis.

There are two key observations here, both of which go the heart of what is ailing the US economy.

First, just like in 2006 and 2007, when activist shareholders and overeager management teams were scrambling to engage in buybacks and artificially boost earnings per share, so now the last bastion of corporate "growth" is using cash, usually in conjunction with leverage, to buy back one's own stock. Naturally, as can be seen on the chart above, shortly after peaking at 34% of total in 2007, buyback activity crashed following the Lehman bankruptcy as cash hoarding became the norm. Is there a causal link between buybacks, and especially levered buybacks, and systemic instability? Unclear, however the more leverage companies utilize to pretend they are growing, and the more cash is used for shareholder friendly activities, the less real growh potential there is.

Second, and a point we have belabored since early 2012: capex spending is plunging. According to Goldman estimates, in 2014, CapEx will only account for 33% of total cash use: the lowest proportion since Lehman, and represents an unmistakably declining trendline. Furthermore, declining CapEx spend tells us two things: corporations, who know their business better than most, are spending less on growing their business in an organic fashion because they realize there is simply not enough demand they need to satisfy. Which is why they prefer to spend corporate cash on M&A and other fast-IRR generating shareholder activities, such as buybacks and dividends.

Putting all this together confirms that the bleak picture of a second consecutive quarter of declining revenues will continue. Without a boost in capital spending, there can be no organic growth for the S&P500 and instead any and all "growth" will come at the expense of balance sheet fudging, as had been the case for the past 5 years. However, now that interest rates are once again rising, corporations will be far less willing to spend cash on levered buybacks since the interest of such activities will soon be prohibitive if not already. Which ironically leaves CapEx investment as the best option for CFOs. However, absent true economic growth and a pick up in end demand for corporate products and services, this cash will not be spent and corporate contraction will continue.

The biggest irony in all this, which goes without saying, is that all of this capital misallocation is the direct result of the Fed's actions: something we observed in April of last year, and which only now is starting to filter through the mainstream media. The paradox is that as long as the Fed is there, insuring there is no "capital market" risk, corporations will opt to grow on the back of the Fed's balance sheet instead of actually risking capital and venturing to grow organically. And with this behavior continuing for year after year, very soon the entire premise of top line and cash growth becomes meaningless.

Which leads us to the point #1: if the Fed is truly looking for the culprit of why the economy is not growing, why the consumer's disposable income is at multi-year lowers, why corporations are stuck in space and corporate revenues are in a "recession", it should look in the mirror. Because the biggest culprit why the Fed's actions are having the opposite effect of that disclosed, at least for popular consumption is, well, the Fed.

STATISM - Governments Continue to Increase Repression of Civil Liberties

UK Government "Pulverizes" Guardian Hard Drives In Snowden Retaliation, Says "There's No Need To Write Any More" 08-20-13 Zero Hedge

While the much publicized Sunday morning detention of Glenn Greenwald's partner David Miranda at Heathrow on his way back to Brazil, in a stunning move that as we subsequently learned had been telegraphed apriori to the US, could potentially be explained away as a desperate attempt at personal intimidation by a scared, and truly evil empire in its last death throes, it is what happened a month earlier at the basement of the Guardian newspaper that leaves one truly speechless at how far the "democratic" fascist regimes have fallen and  fondly reminiscing of the times when dictatorial, tyrannical regimes did not pretend to be anything but.

For the fully story, we go to Guardian editor Alan Rusbridger who, in a long editorial focusing on the tribulations of Greenwald, his partner, modern journalism and free speech and press in a time of near-ubiquitous tyranny when the status quo is questioned, happened to let his readers know that a month ago, after the newspaper had published several stories based on Snowden's material, a British official advised him: "You've had your fun. Now we want the stuff back."

It gets better: after further talks with the British government, Rusbirdger says that two "security experts" from Government Communications Headquarters, the British NSA equivalent, visited the Guardian's London offices and in the building's basement, government officials watched as computers which contained material provided by Snowden were physically pulverized. One of the officials jokes: "We can call off the black helicopters."

Reuters adds that according to a source familiar with the event said Guardian employees destroyed the computers as government security experts looked on.

What is shocking is that as Rusbridger explained to the gentlemen from Whitehall, they had no jurisdiction over the forced destruction of Guardian property as it has offices in New York, that Greenwald himself was in Brazil, and that future reporting on the NSA did not even have to take place in London. That did not stop the UK government's punitive measures, and obviously neither did pleas, before the computers were destroyed, that the Guardian could not do its journalistic duty if it gave in to the government's requests.

In response, he wrote, a government official told him that the newspaper had already achieved the aim of sparking a debate on government surveillance. "You've had your debate. There's no need to write any more," the unnamed official was quoted as saying.

What is most shocking is that the UK government was apparently dumb enough to think that by forcing the Guardian to destroy its own hardware it would actually destroy some of the underlying data. It is this unprecedented idiocy that is most disturbing, because when interacting in a game theoretical fashion with an opponent one assumes rationality. In this case, what one got instead, was brute force and sheer, jawdropping stupidity.

Yet that is precisely what happened, and is why the stakes have suddenly been drastically higher: because the opponent now suddenly finds himself hurt, bleeding, ready to lash out at anything and everything without regard for the retaliation, and just happens to be dumb as a bag of hammers.

The full must read excerpt from Rusbridger:

Miranda, a Brazilian citizen in transit from Berlin to Brazil, said he was released without charge after nine hours of questioning but minus his laptop, cellphone and memory sticks.

The detention of Miranda has rightly caused international dismay because it feeds into a perception that the US and UK governments – while claiming to welcome the debate around state surveillance started by Snowden – are also intent on stemming the tide of leaks and on pursuing the whistleblower with a vengeance. That perception is right. Here follows a little background on the considerable obstacles being placed in the way of informing the public about what the intelligence agencies, governments and corporations are up to.

A little over two months ago I was contacted by a very senior government official claiming to represent the views of the prime minister. There followed two meetings in which he demanded the return or destruction of all the material we were working on. The tone was steely, if cordial, but there was an implicit threat that others within government and Whitehall favoured a far more draconian approach.

The mood toughened just over a month ago, when I received a phone call from the centre of government telling me: "You've had your fun. Now we want the stuff back." There followed further meetings with shadowy Whitehall figures. The demand was the same: hand the Snowden material back or destroy it. I explained that we could not research and report on this subject if we complied with this request. The man from Whitehall looked mystified. "You've had your debate. There's no need to write any more."

During one of these meetings I asked directly whether the government would move to close down the Guardian's reporting through a legal route – by going to court to force the surrender of the material on which we were working. The official confirmed that, in the absence of handover or destruction, this was indeed the government's intention. Prior restraint, near impossible in the US, was now explicitly and imminently on the table in the UK. But my experience over WikiLeaks – the thumb drive and the first amendment – had already prepared me for this moment. I explained to the man from Whitehall about the nature of international collaborations and the way in which, these days, media organisations could take advantage of the most permissive legal environments. Bluntly, we did not have to do our reporting from London. Already most of the NSA stories were being reported and edited out of New York. And had it occurred to him that Greenwald lived in Brazil?

The man was unmoved. And so one of the more bizarre moments in the Guardian's long history occurred – with two GCHQ security experts overseeing the destruction of hard drives in the Guardian's basement just to make sure there was nothing in the mangled bits of metal which could possibly be of any interest to passing Chinese agents. "We can call off the black helicopters," joked one as we swept up the remains of a MacBook Pro.

Whitehall was satisfied, but it felt like a peculiarly pointless piece of symbolism that understood nothing about the digital age. We will continue to do patient, painstaking reporting on the Snowden documents, we just won't do it in London. The seizure of Miranda's laptop, phones, hard drives and camera will similarly have no effect on Greenwald's work.

The state that is building such a formidable apparatus of surveillance will do its best to prevent journalists from reporting on it. Most journalists can see that. But I wonder how many have truly understood the absolute threat to journalism implicit in the idea of total surveillance, when or if it comes – and, increasingly, it looks like "when".

We are not there yet, but it may not be long before it will be impossible for journalists to have confidential sources. Most reporting – indeed, most human life in 2013 – leaves too much of a digital fingerprint. Those colleagues who denigrate Snowden or say reporters should trust the state to know best (many of them in the UK, oddly, on the right) may one day have a cruel awakening. One day it will be their reporting, their cause, under attack. But at least reporters now know to stay away from Heathrow transit lounges.

Needless to say both Hitler and Stalin are spinning in their graves.

Below is a photographer's rendering of what it would look like if the UK government were the Nazis and Macbook Pros were books.

STANDARD OF LIVING - The Destruction Of America's Middle Class

The Destruction Of America's Middle Class (In Under Seven Minutes) via ZH

While hardly news to frequent visitors, especially those who recall the following list, anyone who needs a 7 minute refresher into why the US middle class is on collision course with extinction is urged to watch the following brief video which highlights all the salient facts such as:

• 76% of Americans live paycheck to paycheck
• 27% of American have no savings at all
• 46% of Americans have less than $800 in savings
• The conversion of America into a part-time working society and the country's second largest employer - a temp agency.
• The college trap and the student loan bubble
• And of course, foodstamps, foodstamps, foodstamps and the nearly 50 million poverty-level Americans who need them to survive

Why seven minutes? Because everyone knows that just like you can't get "six minute abs", so it is impossible to recap the doom of America's middle class in only six minutes (or, gasp, less).