"UNLIMITED" QE-finity & "UNCAPPED" OMT

Any Geo-Political, Economic or Financial Event Could Trigger a Market Clearing Fall

GLOBAL MACRO TIPPING POINTS - OCTOBER 2012

9/25/2012

1 October 2012 Edition

Copyright 2012 Gordon T. Long All Rights Reserved

Restricted & Confidential

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"UNLIMITED" QE-finity & "UNCAPPED" OMT

Any Geo-Political, Economic or Financial Event Could Trigger a Market Clearing Fall

GLOBAL MACRO TIPPING POINTS - OCTOBER 2012

TIPPING POINTS........................................................................................................................................................................................ 7
GLOBAL MACRO: RISK ASSESSMENT ...................................................................................................................................................... 7
SITUATIONAL ANALYSIS ...................................................................................................................................................... 7
WE ARE HERE ................................................................................................................................................................................................................. 7
TROUBLING Q3 2012 DEVELOPMENTS ..................................................................................................................................................................... 8
RISK CONTINUUM ......................................................................................................................................................................................................... 14

MACRO MONITORING INSTITUTIONS ............................................................................................................................... 15

WEF (WORLD ECONOMIC FORUM) .......................................................................................................................................................................... 15
IMF (INTERNATIONAL MONETARY FUND) .............................................................................................................................................................. 22
OECD (ORGANIZATION FOR ECONOMIC COOPERATION & DEVELOPMENT) .............................................................................................. 37
NIELSEN (GLOBAL CONSUMER SENTIMENT) ....................................................................................................................................................... 39
MAPLECROFT (SCANNING THE GLOBE) ................................................................................................................................................................ 45

GLOBAL RISK SIGNALS ...................................................................................................................................................... 47

RISK - RISING GEO-POLITICAL EVENT RISK.......................................................................................................................................................... 48
RISK - UNCHARTERED MONETARY POLICY WATER ........................................................................................................................................... 52
RISK - FOOD INFLATION RETURNING ..................................................................................................................................................................... 54
RISK - SLOWING GLOBAL ECONOMIES .................................................................................................................................................................. 55
RISK -INCREASINGLY DYSFUNCTIONAL CAPITALS MARKETS ........................................................................................................................ 56

GLOBAL MACRO: RISK LEVELS ................................................................................................................................................................ 58

AGGREGATED GLOBAL FINANCIAL RISK INDEX.............................................................................................................. 58
BANKING RISK - LIBOR-OIS SPREAD (Updated) .................................................................................................................................................... 59
BANKING RISK - TED SPREAD (Updated) ................................................................................................................................................................ 59
CREDIT RISK - GLOBAL CREDIT DEFAULT SWAPS (Updated) .......................................................................................................................... 60
CREDIT RISK - EU CREDIT DEFAULT SWAPS (Updated) ..................................................................................................................................... 61
CONSUMER RISK - HOUSING - RATE OF CHANGE (Reference) ........................................................................................................................ 62
ECONOMIC RISK - ECRI LEADING INDEX (Updated) ............................................................................................................................................. 63
INFLATION RISK - MONEY SUPPLY GROWTH - M3 (Updated) ............................................................................................................................ 64
INFLATION RISK - MONEY VELOCITY (Updated) .................................................................................................................................................... 65
MONETARY RISK - BANK LIABILITIES (Updated) ................................................................................................................................................... 65
COST OF MONEY RISK - INTEREST RATES (Updated)........................................................................................................................................ 67

AGGREGATED RISK LEVEL ................................................................................................................................................ 69

TIPPING POINTS: CHANGES ...................................................................................................................................................................... 70
TIPPING POINT MAPPING: 2012 UPDATE .......................................................................................................................... 70
SHIFTS TO WATCH IN 2012 ................................................................................................................................................ 73
TIPPING POINTS: TOP 5 FOCUS - SEPTEMBER 2012.......................................................................................................................... 80
I - EU BANKING CRISIS ....................................................................................................................................................... 80
II - SOVEREIGN DEBT ......................................................................................................................................................... 82
III - RISK REVERSAL............................................................................................................................................................ 84
IV - CHINA HARD LANDING ................................................................................................................................................. 85
V - JAPAN DEBT DEFLATION .............................................................................................................................................. 88
DRIVER$: RISK-ON - RISK-OFF ANALYTICS ........................................................................................................................................... 90
1- G10 MACRO SURPRISE INDEX ...................................................................................................................................... 93
2- CUMULATIVE GLOBAL PMI............................................................................................................................................. 96
3- SLOWING GLOBAL EXPORTS ...................................................................................................................................... 102
4- US NON-REVOLVING CONSUMER CREDIT................................................................................................................. 105
5- IBES' RELATIVE GLOBAL PE RATIOS .......................................................................................................................... 108
6- CONSENSUS EARNINGS ESTIMATES - Sell Side Analysts .......................................................................................... 114
7- INFLATION PRESSURES - Global Food Prices.............................................................................................................. 116

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GLOBAL MACRO.................................................................................................................................................................................... 120

GLOBAL ECONOMIC OUTLOOK .............................................................................................................................................................. 122
IMF WARNS: Japanese & Spanish Debt Unsustainable ...................................................................................................... 122
IMF WARNS: Global Recovery Faltering, Reduces Global Growth to Just Above 3% Global Recession Level .................... 124
BIS WARNS: Monetary Policy At Its Limits .......................................................................................................................... 126
GLOBAL GROWTH - Europe Continues to Force Global Growth Estimate Reductions ....................................................... 127
GDP Reductions - By Region ...................................................................................................................................................................................... 128
Manufacturing PMI - By Country ................................................................................................................................................................................ 134

GLOBAL SENTIMENT - Europe has a Growing Sentiment /Confidence Problem ................................................................ 137
GLOBAL CREDIT MARKETS - Stable but Tenuous ............................................................................................................ 144
GLOBAL INFLATION - Where Do these Deflators Come From? ......................................................................................... 146
GLOBAL TRENDS - Commodities and Brands Tell the Global Story ................................................................................... 147
Cooper - Rio Tinto ......................................................................................................................................................................................................... 147
Aluminum - Alcoa, Rio Tinto ........................................................................................................................................................................................ 149
Iron Ore and Thermal Coal - Rio Tinto ....................................................................................................................................................................... 151
Consumable Brands - P&G .......................................................................................................................................................................................... 153
Parcel Volumes - FEDEX ............................................................................................................................................................................................. 154
Shipping - Baltic Dry Index ........................................................................................................................................................................................... 155

EUROPE - PLACED IN INTENSIVE CARE ....................................................................................................................................................... 159

MEDICAL CHARTS - Situation Critical ............................................................................................................................... 159
EUROSIS - A Terminal Disease ........................................................................................................................................ 164
PROGNOSIS: Why the European Situation Will Get Worse ................................................................................................................................... 164
PROGNOSIS: Increasing Structural Imbalances ...................................................................................................................................................... 167
PROGNOSIS: Monetary Malpractice - ECB's LTRO Not a Solution but ................................................................................................................ 169
PROGNOSIS: Monetary Malpractice - ECB's SMP Effort Futile ............................................................................................................................. 172
PROGNOSIS: Monetary Malpractice - ECB Accepts BBB Collateral ..................................................................................................................... 174
PROGNOSIS: EU Banking Overbanked, Undercapitalized and Now Insolvent .................................................................................................... 175

SUMMITS - "19th Nervous Breakdown" .............................................................................................................................. 176

FRANCE - Has Turned back to Socialism ........................................................................................................................... 183
ITALY - Cracks Impossible to Hide and Contain .................................................................................................................. 185
IBERIAN PENINSULA - Spain & Portugal Imploding ........................................................................................................... 187
SPAIN A LTRO JUNKIE: Monetary Malpractice - Banks on Artificial "Ponzi Bond" Life Support ....................................................................... 196

MONETARY MALPRACTICE - How Long Will Germany & the Bundesbank Accept TARGET2 "Contingent Liability"? ....... 203
CURRENT STATE OF EU BAIL-OUTS ............................................................................................................................... 209
ASIA - EUROPEAN FALLOUT NOW ACUTE ..................................................................................................................................................... 211
CHINA................................................................................................................................................................................. 215
Socit General Sees a Likely Soft Landing! ............................................................................................................................................................ 215
SLIDES BELOW ............................................................................................................................................................................................................ 215
CHINA PMI: 48.2. Fourth Straight Month of JOB Contraction ................................................................................................................................. 223
CHINA: Manipulated Statistics due to Upcoming Decade Long Regime Change ................................................................................................ 225

JAPAN: Manufacturing Output Falls .................................................................................................................................... 226

EU Just a Warm-up for the Main Event! ................................................................................................................................................................. 226

EMERGING MARKETS - ECONOMIC ENGINE STALLING............................................................................................................................ 229

GLOBAL SLOWING: A Quickly Worsening Situation ......................................................................................................................................... 229
RISKS: All on the downside for Asia ...................................................................................................................................................................... 231
GLOBAL IMBALANCES: Demographic Headwinds ............................................................................................................................................ 233
FLIGHT TO SAFETY: Becoming Pronounced ....................................................................................................................................................... 234
INDIA: Watch Out For RE-Emergence of Food Price Inflation .......................................................................................................................... 236

US ECONOMY ......................................................................................................................................................................................... 237

THE GLOBAL MACRO OVERLAY ............................................................................................................................................................. 238
MACRO POSITIONING ...................................................................................................................................................... 238
POSITIONING US SENTIMENT ......................................................................................................................................... 242
US GROWTH NOW STALLED............................................................................................................................................ 244
OVERWORKED & OVERSTRESSED................................................................................................................................. 248

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US INVESTMENT CYCLE........................................................................................................................................................................... 250

GORD'S BIG PICTURE ECONOMIC CYCLE ...................................................................................................................... 250
ECONOMIC INDICATORS.................................................................................................................................................. 251
MONTHLY INDICATORS OF NOTE .......................................................................................................................................................................... 251

THE CURRENT BUSINESS CYCLE - SITUATIONAL ANALYSIS ....................................................................................... 257

ECONOMIC CYCLE, INVESTMENT CYCLE, SECTOR ROTATION .................................................................................................................... 257
JOBS - CONFIDENCE - CONSUMPTION - GROWTH CYCLE ............................................................................................................................. 261
JOBS .............................................................................................................................................................................................................................. 262
CONFIDENCE & SENTIMENT .................................................................................................................................................................................... 272
CONSUMPTION ........................................................................................................................................................................................................... 280
GROWTH ....................................................................................................................................................................................................................... 294

MONETARY POLICY - MONETARY MADNESS & WILDCAT FINANCE ............................................................................................. 308

MONETARY MALPRACTICE: Global Wildcat Finance ........................................................................................................ 309
FED PRESSURES .............................................................................................................................................................. 313
U.S. STRUGGLING TO ATTRACT FOREIGN FUNDS: Needed to Finance Trade Deficit ................................................................................. 313
GLOBAL DELEVERAGING: $28T to Go! .................................................................................................................................................................. 316
MOUNTING QE III PRESSURES: Perceptions Forcing Fed to Take Action ......................................................................................................... 318
MOUNTING QE III PRESSURES: Perceptions Forcing Fed to Take Action - II - (Jon Hilsenrath Speaks) ...................................................... 319
MOUNTING QE III PRESSURES: Perceptions Forcing Fed to Take Action - III .................................................................................................. 320

FED INDICATORS .............................................................................................................................................................. 321

PATTERN: US Monetary Policy PE Impact! (August) ............................................................................................................................................. 321
PATTERN: QE III Still Too Soon! (September) ........................................................................................................................................................ 322
PATTERN: What is the Fed Trigger Point? (September) ......................................................................................................................................... 322
PATTERN: M2 Money Velocity ................................................................................................................................................................................... 324

FED ACTIONS .................................................................................................................................................................... 325

GLOBAL GROWTH - Central Bank Intervention Results ......................................................................................................................................... 325
FED INJECTIONS - $600M REPO After 4 Year Hiatus ........................................................................................................................................... 326

MORAL HAZARD & UNINTENDED CONSEQUENCES...................................................................................................... 328

CRONY CAPITALISM - Enriching the Financial Sector Through Monetary Policy ............................................................................................... 328
EARNINGS - Earnings follow US$ which follows QEIII Expectations .................................................................................................................... 331
FURTHER MARKET RISE - Dependent on Fed Flows ............................................................................................................................................ 333

WHO'S TURN? - Fed, You're Up! ........................................................................................................................................ 337

FISCAL POLICY - THE FISCAL CLIFF ...................................................................................................................................................... 339
US RECOVERY: Forget Camouflage, this is the Stark Reality of the Non-Recovery .................................................................................. 340

2012 FEDERAL ELECTION ................................................................................................................................................ 344

A BAD DREAM .............................................................................................................................................................................................................. 344

FISCAL CLIFF..................................................................................................................................................................... 347

THE SIZE OF THE CLIFF ............................................................................................................................................................................................ 347
OFFICIAL FISCAL DEFICIT & DEBT ......................................................................................................................................................................... 348
HOW MUCH DOES THE US GOVERNMENT REALLY OWE? - Answer: $84 Trillion .................................................................................... 350
FISCAL CLIFF - Asymmetric Risk Profile & PE Contraction .............................................................................................................................. 351
ENTITLEMENTS: The Coming Demographics ...................................................................................................................................................... 352
US RECOVERY: Stimulus Hasn't Worked. It is Camouflaging Something Deeper ...................................................................................... 354

STATE & LOCAL GOVERNMENT FISCAL DRAG .............................................................................................................. 357

GOVERNMENT DEPENDENCE ......................................................................................................................................... 362
US ENTITLEMENTS - Entitlements Go Negative .................................................................................................................................................. 362

THE BUDGET PROBLEM ................................................................................................................................................... 364

LATEST US BUDGET .................................................................................................................................................................................................. 369
FINANCIAL REPRESSION: One cannot operate a capitalist system if the state can borrow at a negative cost. .................................. 373
US DEBT PROJECTIONS: Even the Official Numbers Show Little Hope ....................................................................................................... 376

KEY DRIVERS - CATALYSTS OF CHANGE ............................................................................................................................................ 377

EMPLOYMENT ................................................................................................................................................................... 377
REAL DISPOSABLE INCOME ............................................................................................................................................ 387

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US RESIDENTIAL REAL ESTATE ...................................................................................................................................... 393

OVERVIEW.................................................................................................................................................................................................................... 393
CURRENT SITUATIONAL ANALYSIS ....................................................................................................................................................................... 398
CURRENT HOME OWNERSHIP TRENDS ............................................................................................................................................................... 398
NATIONAL STATISTICS: PRICE ............................................................................................................................................................................... 402
NATIONAL STATISTICS: EXISITNG HOME SALES ............................................................................................................................................... 404
NATIONAL STATISTICS: NEW HOME SALES ........................................................................................................................................................ 406
RESEARCH OF NOTE................................................................................................................................................................................................. 407

US COMMERCIAL REAL ESTATE ..................................................................................................................................... 414

OVERVIEW.................................................................................................................................................................................................................... 414
NATIONAL STATISTICS: COMMERCIAL REAL ESTATE...................................................................................................................................... 415
RESEARCH OF NOTE................................................................................................................................................................................................. 416

CAPITAL SHRUGGED ................................................................................................................................................................................ 420

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