FISCAL CLIFF: US Capitulates on 'RISK FREE'

The US$ as the Global Reserve Currency Has Officially Entered It's Twilight Era

GLOBAL MACRO TIPPING POINTS - DECEMBER 2012

11/24/2012

1 December 2012 Edition

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FISCAL CLIFF: US Capitulates on 'RISK FREE'

The US$ as the Global Reserve Currency Has Officially Entered It's Twilight Era

GLOBAL MACRO TIPPING POINTS - DECEMBER 2012

TIPPING POINTS........................................................................................................................................................................................ 8
GLOBAL MACRO: RISK ASSESSMENT ...................................................................................................................................................... 8
SITUATIONAL ANALYSIS ...................................................................................................................................................... 8
WE ARE HERE ................................................................................................................................................................................................................. 8
TROUBLING Q3 2012 DEVELOPMENTS ..................................................................................................................................................................... 9
RISK CONTINUUM ......................................................................................................................................................................................................... 15

MACRO MONITORING INSTITUTIONS ............................................................................................................................... 16

WEF (WORLD ECONOMIC FORUM) .......................................................................................................................................................................... 16
IMF (INTERNATIONAL MONETARY FUND) .............................................................................................................................................................. 23
OECD (ORGANIZATION FOR ECONOMIC COOPERATION & DEVELOPMENT) .............................................................................................. 38
NIELSEN (GLOBAL CONSUMER SENTIMENT) ....................................................................................................................................................... 40
MAPLECROFT (SCANNING THE GLOBE) ................................................................................................................................................................ 46

GLOBAL RISK SIGNALS ...................................................................................................................................................... 48

RISK - RISING GEO-POLITICAL EVENT RISK.......................................................................................................................................................... 49
RISK - UNCHARTERED MONETARY POLICY WATER ........................................................................................................................................... 53
RISK - FOOD INFLATION RETURNING ..................................................................................................................................................................... 55
RISK - SLOWING GLOBAL ECONOMIES .................................................................................................................................................................. 56
RISK -INCREASINGLY DYSFUNCTIONAL CAPITALS MARKETS ........................................................................................................................ 57

GLOBAL MACRO: RISK LEVELS ................................................................................................................................................................ 59

AGGREGATED GLOBAL FINANCIAL RISK INDEX.............................................................................................................. 59
BANKING RISK - LIBOR-OIS SPREAD (Updated) .................................................................................................................................................... 60
BANKING RISK - TED SPREAD (Updated) ................................................................................................................................................................ 60
CREDIT RISK - GLOBAL CREDIT DEFAULT SWAPS (Updated) .......................................................................................................................... 61
CREDIT RISK - EU CREDIT DEFAULT SWAPS (Updated) ..................................................................................................................................... 62
CONSUMER RISK - HOUSING - RATE OF CHANGE (Reference) ........................................................................................................................ 63
ECONOMIC RISK - ECRI LEADING INDEX (Updated) ............................................................................................................................................. 64
INFLATION RISK - MONEY SUPPLY GROWTH - M3 (Updated) ............................................................................................................................ 65
INFLATION RISK - MONEY VELOCITY (Updated) .................................................................................................................................................... 66
MONETARY RISK - BANK LIABILITIES (Updated) ................................................................................................................................................... 66
COST OF MONEY RISK - INTEREST RATES (Updated)........................................................................................................................................ 68

AGGREGATED RISK LEVEL ................................................................................................................................................ 70

TIPPING POINTS: CHANGES ...................................................................................................................................................................... 71
TIPPING POINT MAPPING: 2012 UPDATE .......................................................................................................................... 71
SHIFTS TO WATCH IN 2012 ................................................................................................................................................ 74
TIPPING POINTS: TOP 5 FOCUS - SEPTEMBER 2012.......................................................................................................................... 81
I - EU BANKING CRISIS ....................................................................................................................................................... 81
II - SOVEREIGN DEBT ......................................................................................................................................................... 83
III - RISK REVERSAL............................................................................................................................................................ 85
IV - CHINA HARD LANDING ................................................................................................................................................. 86
V - JAPAN DEBT DEFLATION .............................................................................................................................................. 89
DRIVER$: RISK-ON - RISK-OFF ANALYTICS ........................................................................................................................................... 91
1- G10 MACRO SURPRISE INDEX ...................................................................................................................................... 94
2- CUMULATIVE GLOBAL PMI............................................................................................................................................. 97
3- SLOWING GLOBAL EXPORTS ...................................................................................................................................... 103
4- US NON-REVOLVING CONSUMER CREDIT................................................................................................................. 106
5- IBES' RELATIVE GLOBAL PE RATIOS .......................................................................................................................... 109
6- CONSENSUS EARNINGS ESTIMATES - Sell Side Analysts .......................................................................................... 115
7- INFLATION PRESSURES - Global Food Prices.............................................................................................................. 117

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GLOBAL MACRO.................................................................................................................................................................................... 121

GLOBAL ECONOMIC OUTLOOK .............................................................................................................................................................. 123
IMF CUTS ECONOMIC OUTLOOK..................................................................................................................................... 123
IMF Cuts Advanced Economies Growth by 25% from 2.0% to 1.5% ..................................................................................................................... 123
IMF Cuts Growth from 3.9% to 3.6% and Increases Deficit Multiplier by 100 to 200% ........................................................................................ 130

WARNINGS ........................................................................................................................................................................ 132

IMF WARNS ....................................................................................................................................................................... 132
Japanese & Spanish Debt Unsustainable .................................................................................................................................................................. 132
Global Recovery Faltering, Reduces Global Growth to Just Above 3% Global Recession Level ....................................................................... 134

BIS WARNS ........................................................................................................................................................................ 136

Monetary Policy At Its Limits ........................................................................................................................................................................................ 136

WORLD BANK WARNS ...................................................................................................................................................... 137

Social Unrest Stems from Shrinking Disposable Income. Jobs are the central issue. ......................................................................................... 137

GLOBAL CENTRAL BANKING ................................................................................................................................................................... 139

Global Balance Sheet Expansion ................................................................................................................................................................................ 139
First Remove Gold Standard, Now Remove Debt .................................................................................................................................................... 142

GLOBAL INDICATORS ............................................................................................................................................................................... 145

GROWTH............................................................................................................................................................................ 145
Slowing Global Growth - Air Cargo Shipments ......................................................................................................................................................... 145
Global Slwoing- Export / Import Confirmations .......................................................................................................................................................... 146
Further Confirmations Global Growth Has Collapsed ............................................................................................................................................... 147
Europe Continues to Force Global Growth Estimate Reductions ........................................................................................................................... 148
GDP Reductions - By Region ...................................................................................................................................................................................... 149
Manufacturing PMI - By Country ................................................................................................................................................................................ 155

SENTIMENT ....................................................................................................................................................................... 158

Europe has a Growing Sentiment /Confidence Problem .......................................................................................................................................... 158

CREDIT MARKETS............................................................................................................................................................. 165

Stable but Tenuous ....................................................................................................................................................................................................... 165

INFLATION ......................................................................................................................................................................... 167

Food Prices, Driver of Social Unrest ........................................................................................................................................................................... 167
Where Do these Deflators Come From? .................................................................................................................................................................... 168

TRENDS ............................................................................................................................................................................. 169

Commodities and Brands Tell the Global Story......................................................................................................................................................... 169

GEO-POLITICAL TENSIONS ..................................................................................................................................................................... 181

IRAN ................................................................................................................................................................................... 181
Watch Out for a "False Flag" or "Covert" Activity Event ........................................................................................................................................... 181
Who Is Threatening Who Here? .................................................................................................................................................................................. 181

CURRENCY WARS ............................................................................................................................................................ 183

The Race to Debase ..................................................................................................................................................................................................... 183

EUROPE - MUDDLE STAGE ENDS - CRISIS STAGE BEGINS ........................................................................................................................ 185

SUMMITS ........................................................................................................................................................................... 186
The 20th Summit ........................................................................................................................................................................................................... 186
Muddle" Stage has ended. "Crisis" Stage has Begun .............................................................................................................................................. 186
A Banking Union & Central Budget ............................................................................................................................................................................. 188
Government Debt Dynamics Interactive Model ......................................................................................................................................................... 189
Roadmap of EU Hurdles and Surprises Ahead ......................................................................................................................................................... 190
"19th Nervous Breakdown" .......................................................................................................................................................................................... 192

MEDICAL CHARTS - Situation Critical ............................................................................................................................... 199

Perceived Reduction in Risk - A Temporary Aberration ........................................................................................................................................... 199
Dangerous Delusional Divergences ............................................................................................................................................................................ 201
IMF Projections for Euro Area and GIIPS .................................................................................................................................................................. 202
Euro-Area Manufacturing Shrank in September ....................................................................................................................................................... 203
Misery Indices Never Been Higher.............................................................................................................................................................................. 203

EUROSIS - A Terminal Disease ........................................................................................................................................ 210

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PROGNOSIS: Why the European Situation Will Get Worse ................................................................................................................................... 210
PROGNOSIS: Increasing Structural Imbalances ...................................................................................................................................................... 213
PROGNOSIS: $22T Unaccounted - A Hidden World of Contingent Liabilities, Government Backing & Guarantees. ................................... 215
PROGNOSIS: Monetary Malpractice - ECB's LTRO Not a Solution but ................................................................................................................ 219
PROGNOSIS: Monetary Malpractice - ECB's SMP Effort Futile ............................................................................................................................. 222
PROGNOSIS: Monetary Malpractice - ECB Accepts BBB Collateral ..................................................................................................................... 224
PROGNOSIS: EU Banking Overbanked, Undercapitalized and Now Insolvent .................................................................................................... 225
PROGNOSIS: Monetary Malpractice - TARGET2 "Contingent Liabilities"............................................................................................................. 226
PROGNOSIS: Bailouts - Unsustainable & Unfundable ............................................................................................................................................ 232

IBERIAN PENINSULA - Spain & Portugal Imploding ........................................................................................................... 234

Credit Downgrades - At Precipice of "Non Investment Grade" ................................................................................................................................ 234
Regional Bailout Bailouts a Massive Problem ........................................................................................................................................................... 235
NPL Going Ballistic ....................................................................................................................................................................................................... 236
Spanish Funding Problem ............................................................................................................................................................................................ 237
Banks on Artificial "Ponzi Bond" Life Support ............................................................................................................................................................ 246

ITALY - Cracks Impossible to Hide and Contain .................................................................................................................. 253

Bad Debt Continue to Soar .......................................................................................................................................................................................... 253

UK ....................................................................................................................................................................................... 258
QE Extension Coming .................................................................................................................................................................................................. 258

FRANCE ............................................................................................................................................................................. 260

Has Turned back to Socialism ..................................................................................................................................................................................... 260

ASIA - CHINA-JAPAN CONFLICT EMERGES ................................................................................................................................................... 262

CHINA - POLITICAL TRANSITION ..................................................................................................................................... 264
China' Political Transition & Ongoing Emergence as a Super Power ..................................................................................................................... 266
An Implicit Social Contract ........................................................................................................................................................................................... 268
ChinaManipulated Statistics due to Upcoming Decade Long Regime Change ..................................................................................................... 270
Declining Reserve Accumulation................................................................................................................................................................................. 271
China Has Caught the Gold Bug big time! ................................................................................................................................................................. 273
Increasing Leverage is China's Way of Monetary Easing ........................................................................................................................................ 274
Possible Interest-Rate Liberalization .......................................................................................................................................................................... 275
Shanghai Composite at 2008 Low Levels .................................................................................................................................................................. 276
Shanghai Composite Warnings Signs ........................................................................................................................................................................ 277
China's Credit to GDP .................................................................................................................................................................................................. 279
A Slow Recovery Through 2013 .................................................................................................................................................................................. 280
Manufacturing PMI in Contraction Territory ............................................................................................................................................................... 282
SHADOW BANKING .................................................................................................................................................................................................... 283
Shadow Banking System Report................................................................................................................................................................................. 283
Shadow Banking in China ............................................................................................................................................................................................ 284
Socit General Sees a Likely Soft Landing! ............................................................................................................................................................ 285

JAPAN: AUTO EXPORTS TO CHINA PLUMMET 44.5%. JAPAN'S LARGEST EXPORT MARKET ................................... 293
Exports Continue To Tumble ....................................................................................................................................................................................... 295
Intervention Fails Again - It's a Whole new Ball Game ............................................................................................................................................. 296
Japan in Negative PMI and GDP Territory ................................................................................................................................................................. 298

EMERGING MARKETS - SYNCHRONIZED MARKETS ................................................................................................................................. 301

Synchronized Markets .................................................................................................................................................................................................. 302
Export Growth Looks Similar to pre-2008 .................................................................................................................................................................. 304
Global Slowing: A Quickly Worsening Situation Across Asia................................................................................................................................... 305
Risks All on the Downside for Asia ............................................................................................................................................................................. 306
Demographic Headwinds ............................................................................................................................................................................................. 308
Pronounced Flight to Safety......................................................................................................................................................................................... 309
India: Watch Out For RE-Emergence of Food Price Inflation .................................................................................................................................. 310

US ECONOMY ......................................................................................................................................................................................... 312

THE GLOBAL MACRO OVERLAY ............................................................................................................................................................. 313
MACRO POSITIONING: A Serious Global Slowdown Underway ........................................................................................ 313
MACRO POSITIONING: Credit Fueled Globalization in Retreat .......................................................................................... 317
MACRO POSITIONING: Notion of Eurozone "Decoupling" Has Ended. .............................................................................. 319
MACRO POSITIONING: Nielsen's Global Survey - "Consumers Cutting Back & Worrying about a Recession" ................... 322
MACRO POSITIONING: Executives Report Deteriorating Economic Environment .............................................................. 325
PROSPERITY AT RISK: Harvard Strategy Study Spells Out US Problem ........................................................................... 328

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US INVESTMENT CYCLE........................................................................................................................................................................... 332

GORD'S BIG PICTURE ECONOMIC CYCLE ...................................................................................................................... 332
ECONOMIC INDICATORS.................................................................................................................................................. 333
MONTHLY INDICATORS OF NOTE .......................................................................................................................................................................... 333

THE CURRENT BUSINESS CYCLE - SITUATIONAL ANALYSIS ....................................................................................... 339

ECONOMIC CYCLE, INVESTMENT CYCLE, SECTOR ROTATION .................................................................................................................... 339
JOBS - CONFIDENCE - CONSUMPTION - GROWTH CYCLE ............................................................................................................................. 343
JOBS ......................................................................................................................................................................................................................... 344
CONSUMER & BUSINESS SENTIMENT .............................................................................................................................................................. 353
CONSUMPTION ........................................................................................................................................................................................................ 370
GROWTH ................................................................................................................................................................................................................... 384

US GOVERNMENT SURRENDERS 'RISK FREE" .................................................................................................................................. 396

Exorbitant Privilege ............................................................................................................................................................. 396
US Firmly in Stage 5 of the "Sovereign Life Cycle" .............................................................................................................. 401
The Price of Political Chicanery ........................................................................................................................................... 404
"Kick the Can" Politics .................................................................................................................................................................................................. 404

US PUBLIC POLICY - SOME NOTABLE POLICY PROBLEMS............................................................................................................. 405

POLICY: Congressman Ron Paul's Farewell Speech to Congress ...................................................................................... 407
POLICY: Credit Growth Solely Government Funded ........................................................................................................... 412
POLICY: Government's Consumption Spending versus Investment Spending .................................................................... 414
POLICY: FHA is a Case Study in Failed Public Policy ......................................................................................................... 416
POLICY: What Was Intentionally Avoided During the Election Promises By Both Parties .................................................... 420
What about the $84T in Unfunded Federal Entitlements? ....................................................................................................................................... 420
What about the $5T in Unfunded State & Local Government Pension Obligations? ............................................................................................ 421
What about the $1T in Student Loan Bubble? ........................................................................................................................................................... 424
What about the ...... ? ................................................................................................................................................................................................... 425

POLICY: Failure to Recognize & Alter Policy When it is Clearly Not Working ...................................................................... 425
Stimulus Hasn't Worked. It is Camouflaging Something Deeper ..................................................................................................................... 430

POLICY: A Capitalist System No Longer Realistically Operate When the State Borrows at a Negative Cost ....................... 432
MONETARY POLICY - ELECTILE DYSFUNCTIONAL .................................................................................................................................... 435
HIGHLIGHTS ...................................................................................................................................................................... 435
QE III POST MORTEM - BROKEN FED MODEL ................................................................................................................ 437
POST MORTEM: Market Reacts Badly...................................................................................................................................................................... 437
POST MORTEM: Currency War Salvos & The $67T Shadow Banking Currency Cartel ..................................................................................... 439
POST MORTEM: Fed's Broken Model ....................................................................................................................................................................... 448
POST MORTEM: QEfinity Working Psychologically the same as 1987 Pre-Crash Portfolio Insurance ............................................................ 450

FED'S NEXT STEP ............................................................................................................................................................. 452

NEXT STEP: Current Fed Thinking ............................................................................................................................................................................ 452
NEXT STEP: Fed Lays Foundation for Further Policy Changes ............................................................................................................................. 453
NEXT STEP: High Probability Direction ..................................................................................................................................................................... 459
NEXT STEP: Communications to Ensure "Duration" Understood .......................................................................................................................... 461

FED INDICATORS .............................................................................................................................................................. 462

PATTERNS: Velocity of Money ................................................................................................................................................................................... 462
PATTERNS: Real Negative Rates .............................................................................................................................................................................. 464
PATTERNS: Short Interest Rates a Fed Problem .................................................................................................................................................... 466
CHARTS: Fed Deliberately ignoring data on both growth and inflation .................................................................................................................. 467

PREVIOUS QUARTERLY SUMMARY - REFERENCE ............................................................................................................................... 469

FISCAL POLICY - FROM POLITICAL POLLING TO POLITICAL BRINKSMANSHIP ......................................................................... 470
HIGHLIGHTS ...................................................................................................................................................................... 470
TIMELINE: Calendar of Events Ahead ................................................................................................................................ 474
PREDICTIONS.................................................................................................................................................................... 475
PREDICTION: The High Probability Outcome .......................................................................................................................................................... 475
PREDICTION: Political Brinksmanship & Vigilantes ................................................................................................................................................. 476
PREDICTION: US Unwittingly Surrenders "Risk Fee" Status.................................................................................................................................. 484

PERSPECTIVES................................................................................................................................................................. 485

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PERSPECTIVE: One Non-Mainstream Analyst's Views .......................................................................................................................................... 485

PERSPECTIVE: One Mainstream Analyst's Views .................................................................................................................................................. 488
PERSPECTIVE: A Collection of Wall Street Views................................................................................................................................................... 493
PERSPECTIVE: Barron's Weigh In ............................................................................................................................................................................ 495
PERSPECTIVE: Goldman's Fiscal Cliff Scenarios ................................................................................................................................................... 498

CHARTS ............................................................................................................................................................................. 502

KEY CHARTS: Growth & Jobs .................................................................................................................................................................................... 502
KEY CHARTS: Taxes & Spending .............................................................................................................................................................................. 505
KEY CHARTS: Politics & Policy .................................................................................................................................................................................. 508
KEY CHARTS: The Stakes .......................................................................................................................................................................................... 509
KEY CHARTS: Payroll Tax Holiday ............................................................................................................................................................................ 512
CHARTS: Tax Rate Comparisons ............................................................................................................................................................................... 513
CHARTS: Risk Perceptions ......................................................................................................................................................................................... 514
CHARTS: 2013 Quarterly Impact ................................................................................................................................................................................ 515
CHARTS: Budget Deficit .............................................................................................................................................................................................. 516
CHARTS: Sovereign Debt ............................................................................................................................................................................................ 518
CHARTS: State & Local Government Drag ............................................................................................................................................................... 519
CHARTS: Government Dependence .......................................................................................................................................................................... 522
CHARTS: Coming Demographic Shock ..................................................................................................................................................................... 522

TREASURY FUNDING ....................................................................................................................................................... 525

TREASURY DEBT: Latest TIC Table ......................................................................................................................................................................... 525
TREASURY DEBT: Who is Buying? ........................................................................................................................................................................... 526

BUDGET ............................................................................................................................................................................. 528

STATEMENTS: As A Corporation it is Both Insolvent & Exhibits Fraudulent GAAP Accounting Practices ....................................................... 528
QUARTERLY US BUDGET UPDATE ........................................................................................................................................................................ 535

PREVIOUS QUARTERLY SUMMARY - Reference ............................................................................................................. 539

KEY DRIVERS - CATALYSTS OF CHANGE ............................................................................................................................................ 540
EMPLOYMENT ................................................................................................................................................................... 544
1- CAPITAL SPENDING .............................................................................................................................................................................................. 544
2- SMALL BUSINESS OPTIMISM .............................................................................................................................................................................. 547
3- DEMOGRAPHIC SHIFT .......................................................................................................................................................................................... 551
RESEARCH OF NOTE................................................................................................................................................................................................. 556

REAL DISPOSABLE INCOME ............................................................................................................................................ 561

RESEARCH OF NOTE................................................................................................................................................................................................. 565

US RESIDENTIAL REAL ESTATE ...................................................................................................................................... 570

OVERVIEW.................................................................................................................................................................................................................... 570
CURRENT SITUATIONAL ANALYSIS ....................................................................................................................................................................... 574
CURRENT HOME OWNERSHIP TRENDS ............................................................................................................................................................... 574
NEW HOME SALES - Not as Strong as Headlines & Excitement Suggests ......................................................................................................... 578
HOUSING - Potentially Increasing Supply v Demand Problem ............................................................................................................................... 582
NATIONAL STATISTICS: PRICE ............................................................................................................................................................................... 584
NATIONAL STATISTICS: EXISITNG HOME SALES ............................................................................................................................................... 586
NATIONAL STATISTICS: NEW HOME SALES ........................................................................................................................................................ 588
RESEARCH OF NOTE................................................................................................................................................................................................. 589

US COMMERCIAL REAL ESTATE ..................................................................................................................................... 595

OVERVIEW.................................................................................................................................................................................................................... 595
NATIONAL STATISTICS: COMMERCIAL REAL ESTATE...................................................................................................................................... 596
RESEARCH OF NOTE................................................................................................................................................................................................. 597

CAPITAL SHRUGGED ................................................................................................................................................................................ 601

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