gmtp - stealth qeiii? (us)

8/4/2019 GMTP - Stealth QEIII? (US)

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1 September 2011 Edition Restricted & Confidential

Copyright 2011 Gordon T. Long All Rights Reserved [email protected]

STEALTH QE III?Is the Federal Reserve already in the process of implementing a Stealth QE III?

GLOBAL MACRO TIPPING POINTS - SEPTEMBER 2011 8/24/2011


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September 2011 Edition Restricted & Confidential


STEALTH QE III?Is the Federal Reserve Already in the Process of Implementing a Stealth QE III?

GLOBAL MACRO TIPPING POINTS - SEPTEMBER 2011

TIPPING POINTS........................................................................................................................................................................................ 5

WEAREHERE ................................................................................................................................................................................................. 5

SHIFTINGTIPPINGPOINTS-CHANGES TOWATCH.................................................................................................................................... 6

TIPPINGPOINTSINFOCUS:AUGUST2011 .............................................................................................................................................. 10I - SOVEREIGN DEBT.......................................................................................................................................................................................................... 10II - EU BANKING CRISIS...................................................................................................................................................................................................... 10III - GEO-POLITICAL EVENT............................................................................................................................................................................................... 11IV - SOCIAL UNREST........................................................................................................................................................................................................... 11V - RISK REVERSAL ............................................................................................................................................................................................................ 12VI - INFLATION & INTEREST PRESSURES..................................................................................................................................................................... 13

GLOBAL MACRO -RISK LEVELS ................................................................................................................................................................ ........ 14CREDIT METRICS - LIBOR-OIS SPREAD (Updated) ...................................................................................................................................................... 14HOUSING - RATE OF CHANGE (Reference).................................................................................................................................................................... 14DIVERGENCE (Reference) .................................................................................................................................................................................................. 15MONEY SUPPLY GROWTH - M3 (Updated) ..................................................................................................................................................................... 16BBANK LIABILITIES (Reference) ........................................................................................................................................................................................ 16GLOBAL CREDIT DEFAULT SWAPS (Reference) ........................................................................................................................................................... 17EU CRDIT DEFAULT SWAPS (Updated) ........................................................................................................................................................................... 18COST OF MONEY (Updated) .............................................................................................................................................................................................. 19EMPLOYMENT DIVERGENCE (Updated) ......................................................................................................................................................................... 20

GLOBAL MACRO......................................................................................................................................................................................22

EUROPE-THEEUROPEANSUMMER................................................................................................................................................. ............ 24BANK STRESS TESTS........................................................................................................................................................................................................ 24FRENCH BANK STRESS TESTS....................................................................................................................................................................................... 27EUROPEAN FINANCIALS: Credit Default Swap Activity................................................................................................................................................. 28ITALY: Crisis Moves From Peripheral to Outer Core (Mezzanine Level) ........................................................................................................................ 31IRELAND: Non Investment Grade (Junk) ........................................................................................................................................................................... 37PORTUGAL: Non Investment Grade (Junk) ....................................................................................................................................................................... 38GREECE: Non Investment Grade (Junk)............................................................................................................................................................................ 39SPAIN: Investment Grade..................................................................................................................................................................................................... 40GIIPS: Sovereign Notes versus CDS Yields....................................................................................................................................................................... 41BRADY BONDS - The Final EU Solution When the Politics End and Reality Sets In................................................................................................... 42

ASIA-ALL IS NOTQUIET!THEWEST IS JUSTDISTRACTED. .......................................................................................................................... 43CHINA: Chinese Shadow Banking....................................................................................................................................................................................... 43JAPAN: Is the Carry Trade Unwinding?.............................................................................................................................................................................. 44

EMERGINGMARKETS-INFLATION&SLOWINGGROWTH......................................................................................................................... 46INDIA: Slowing Badly............................................................................................................................................................................................................ 46

US ECONOMY...........................................................................................................................................................................................47

KEYMONTHLYECONOMICINDICATORSHAVE A CLOSER LOOK AT WHAT THE MAINLINE MEDIA DOESNT DISCUSS. ...................... 48

PHILLY FED BOMBSHELL .................................................................................................................................................................................................. 50CONSUMER CREDIT........................................................................................................................................................................................................... 51

JOBS-CONFIDENCE-CONSUMPTION-GROWTHCYCLE................................................................................................................ 52JOBS....................................................................................................................................................................................................................................... 53

EMPLOYMENT TRACKING STATISTICS................................................................................................................................................................... 61CONFIDENCE & SENTIMENT............................................................................................................................................................................................ 64CONSUMPTION.................................................................................................................................................................................................................... 69GROWTH................................................................................................................................................................................................................................ 70


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STEALTHQEIIIAHEAD ............................................................................................................................................................................... 72NBRs (Non-Borrowed Reserves) ......................................................................................................................................................................................... 73REVERSE REPO MARKET................................................................................................................................................................................................. 73CONTINGENT LIABILITIES................................................................................................................................................................................................. 75OPERATIONAL READINESS.............................................................................................................................................................................................. 75

CONCERNSWITHBANKS&USCREDITMARKETS.............................................................................................................................. 77BANK OF AMERICA ............................................................................................................................................................................................................. 77

WHISTLEBLOWERTELLSALLATTHERATINGAGENCIES................................................................................................................ 79

REALESTATE "DOUBLEDIP"UPDATE................................................................................................................................................... 80BIG PICTURE........................................................................................................................................................................................................................ 80RESIDENTIAL REAL ESTATE- "STILL HOME SICK"...................................................................................................................................................... 83

CURRENT SITUATIONAL ANALYSIS......................................................................................................................................................................... 83HOME OWNERSHIP TRENDS..................................................................................................................................................................................... 85$6.5 TRILLION IN MIDDLE CLASS NET WORTH EVAPORATES.......................................................................................................................... 87GARY SHILLING LAYS OUT THE HOUSING FACTS.............................................................................................................................................. 88DISTRESSED MORTGAGES..................................................................................................................................................................................... 102NATIONAL STATISTICS.............................................................................................................................................................................................. 103SHILLER WARNING.................................................................................................................................................................................................... 107

COMMERCIAL REAL ESTATE.......................................................................................................................................................................................... 108COMMERCIAL REAL ESTATE DECLINES 3.7% IN APRIL - NEW POST BUBBLE LOW................................................................................ 108

2011USECONOMICIMPEDIMENTS............................................................................................................................................. .......... 112


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MONTHLY PROCESS OF ABSTRACTION

The Global Macro Tipping Points (GMTP) Service is an integral part of our monthly Process of Abstraction research

methodology. The process starts monthly with the Tipping Points and completes with a final Synthesis. Thesequence is optimized to align with the established Macro Economic Data releases.

Section Release

Date

Service Focus Coverage

II. 3rd Saturday

of the Month

Global Macro Tipping Points

(GMTP)

Tipping Points

Abstraction

Abstraction

Tipping Points

Global Macro

US Economy

III. 1st Day of the

Month

Market Analytics & Technical

Analysis (MTA)

Technical Analysis

Market Analytics

Market Analytics

Technical Analysis

Fundamental Analysis

Risk Analysis

I. Day Following

Monthly Labor

Report

(~ 1st Saturday)

Monthly Market Commentary

(MMC)

Synthesis Commentary

Synthesis

Thesis

Commentary

Conclusions


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TIPPING POINTS

WE ARE HERE


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SHIFTING TIPPING POINTS - Changes to Watch

Sovereign EU Debt and the EU Banking Crisis have once again returned to the number one and two spots in ourTipping Points ranking. This was reflected in last month's report.

The rankings have not changed during the last 30 days

INCREASES CURRENT Q4 '10 CHANGE

Sovereign Debt 1 1 0

EU Banking Crisis 2 2 0

Geo-Political Event 3 37 +34

Social Unrest 4 36 +32

Risk Reversal 5 5 0

Rising Inflation &Interest Pressures

6 14 +8

Food Price Pressures 7 15 +8

Oil Price Pressures 8 30 +22

MAJOR DECREASES

North & South Korea 35 12 -23

Bond Bubble 17 3 -14

Financial Crisis ProgramExpiration

34 24 -10

We need to continue to carefully watch:

1) The increasing & broadening potential for Global Contagion as a result of:

- Japan: Yen Carry Trade Unwind & an FX fallout,

- North Africa: An escalation of the Libyan Civil War and UN Military involvement,

- Middle East: Mounting pressures on oil prices due to worsening social unrest,

- EU PIIGS: Sovereign Debt Crisis, EU Banking problems and Spain potentially being next,

- CEE: Central & Eastern Europe is not presently getting the attention it deserves. it isthe 'sub-price' of Europe

and has yet to be addressed.

2) How and if Global Central Banks actually do unwindtheir crisis triage programs or are they permanent?

Specifically, what will the US Federal Reserve signal inlate April and May regarding the expiration ofQuantitative Easing (QE) II. It was originally planned

to expire in June 2011.

3) What G20 Government public policy initiatives willbe concerning:

- Weakening economic conditions- Chronic unemployment levels.

These events will allow us to determine if our roadmap is stillvalid or if we are going to see an acceleration in weakeningglobal financial conditions.


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Social Unrest

Our 2011 Thesis analysis outlined that we needed to be watching for a major shift towards Conflict and Tensionin 2011. This prediction has arrived with an unexpected jolt in Q1 2011, even to us!

Social Unrest and Geo-Political Tensions seem to have broken out globally in a wide spread fashion. It is ouropinion that the drivers behind these tensions are rising food, energy and cost of living prices, that coupled withextreme levels of unemployment is heralding an era of unprecedented levels of global unrest.


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Q2

2011

Q4

2010

Diff.

SOVEREIGN DEBT - PIIGS Insolvency and Inability to stimulate

economies

1 1 0

EU BANKING CRISIS Bank Ratios of 50:1 and toxic debt on and off

the balance sheet

2 2 0

GEO-POLITICAL EVENT A sovereign country overthrow, rebellion or

insurrection

3 37 +34

SOCIAL UNREST Public rallies, protests and rioting against the

government.

4 36 +32

RISK REVERSAL Historic level of financial market participation

and dependency (i.e. pension entitlements)

5 5 0

RISING INFLATION PRESSURES &

INTEREST RATES

Reversal in Interest rate and impact on

government financing budgets

6 14 +8

FOOD PRICE PRESSURES Production shortages, distribution break-

downs with growing Asian demand

7 15 +8

OIL PRICE PRESSURES Shortages, Peak Oil & Asian Growth demand. 8 30 +22

CHINA BUBBLE Real Estate & speculative bubbles 9 22 +13

RESIDENTIAL REAL ESTATE

PHASE II

Shadow Inventory, Strategic Defaults,

Looming Option ARMSpython, LTV levels.

10 6 -4

US BANKING CRISIS II Deferred accounted write-downs for Real

Estate, Commercial Real Estate & HELOCS

11 10 -1

CHRONIC UNEMPLOYMENT Historic Unemployment rates in G7 12 9 -3

COMMERCIAL REAL ESTATE Market Values are down 45 - 55% with little

write downs as of yet being taken by banks,

insurance or financial holders.

13 7 -6

JAPAN DEBT DEFLATION SPIRAL Ability for Japan to continue to fund national

debt with shifting demographic patterns.

14 18 +4

US STATE & LOCAL GOVERNMENT Unprecedented budget shortfalls & funding

problems

15 4 -11

NATURAL PHYSICAL DISASTER Presently: Japan's Earthquake, Tsunami and

Nuclear Accident. -- The Economic Fallout

16 31 +15

BOND BUBBLE Historically high Bond Prices 17 3 -14

PUBLIC POLICY MISCUES Impact of Obamacare, Dodd-Frank Bill and

others in reaction to present environment.

18 13 -5

SHRINKING REVENUE GROWTH

RATE

Slowing Corporate Top-Line revenue growth

rates

19 27 +8


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CENTRAL & EASTERN EUROPE The Sub Price of Europe Level of borrowing

in non sovereign currency (EU loans)

20 8 -12

PENSION ENTITLEMENT CRISIS Unfunded Pension Liabilities - > $100T in US 21 11 -10

US DOLLAR WEAKNESS Domestic Inflationary Pressures 22 28 +6CREDIT CONTRACTION II Bankruptcy & Mal-Investment Catalyst 23 18 -5

US FISCAL, TRADE AND ACCOUNT

IMBALANCES

Inability of the US to f inance imbalances 24 21 -3

FINANCE & INSUR. BALANCE SHEET

WRITE-OFFS

Accounting for Commercial Real Estate

market values, loan loss reserves

25 17 -8

US STOCK MARKET VALUATIONS Over-Valuation and unrealistic earnings

estimates.

26 16 -10

GOVERNMENT BACKSTOP

INSURANCE

Fannie, Freddie, Ginnie, FHA, FDIC, Pension

Guarantee backstop funding.

27 23 -4

GLOBAL OUTPUT GAP Global Overcapacity & Underutilization 28 29 +1

US RESERVE CURRENCY Emergence of alternative solutions such as

SDRs. Inflationary repatriation impact

29 20 -9

PUBLIC SENTIMENT & CONFIDENCE Growing social unrest and public rage 30 26 -4

SLOWING RETAIL & CONSUMER

SALES

Impact of slowing consumer sales and

increasing savings rate on 70% consumption

US Economy

31 25 -6

CORPORATE BANKRUPTCIES Reverse Gearing & margin pressures 32 24 -8

TERRORIST EVENT Unknown black swan 33 35 +2

FINANCIAL CRISIS PROGRAMS

EXPIRATION

Withdrawal of Financial Crisis Triage

Programs and interest rate normalization

34 24 -10

NORTH & SOUTH KOREA Geo-Political tensions - Escalating 35 12 -23

IRAN NUCLEAR THREAT Israeli attack on Iran - Middle East escalation 36 33 -3

PANDEMIC /EPIDEMIC Unknown black swan 37 32 -5


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TIPPING POINTS IN FOCUS:August 2011

I - SOVEREIGN DEBT

As quickly as one solution is proposed tocontain potential contagion due to the EUSovereign Debt Crisis, it is discarded foranother.

The problem is as much political as it is theeconomics of how to structure a financialwork-out to the crisis.

The biggest hurdle is whether the membersstates, and most significantly Germany, canaccept a stronger fiscal Union within the EU.

With it comes huge financial burdens on thewealthier states and its citizens whoultimately must pay!

A solution will be found that will liekyl benothing more than "kicking- the-can=down-the road".

II - EU BANKING CRISIS

The European Stress Tests were releasedFriday July 15th, 2011.

Generally analysts derided the latest round ofindustry stress tests as inadequate.

Analysts and investors said the criteria used

by the EBA were overly optimistic and failed

to capture the severity of the current

sovereign debt crisis sweeping across the

euro zone.

The EBA has already faced criticism for being

too soft, particularly because it did not make

any allowance for a sovereign debt default

as is now widely expected in Greece.

Simply said, the Stress Tests did not alleviate

the concern about EU banks ability to

withstand fallout from a sovereign debt

default - especially when only 15% discounts

were used for Greek bonds already trading at

more than a 50% discount.


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III - GEO-POLITICAL EVENT

LIBYA: The situation in Libya continues toworsen with the eventuality of NATO ground

forces being required. This is presently apolitical hurdle that will be overcome as themedia carefully crafts public sentiment.

SYRIA: The situation in Syria is rapidlyspiraling out of control no doubt beingaggravated by western subversive forces.

KOREA: North Korea has recently requestedriot materials from China in anticipation ofsocial unrest.

EGYPT: The Muslin Brotherhood continues tostrengthen in Egypt which is a concern ofWestern Powers.

VENEZUELA & IRAN: Missile bases continue tobe brought into operation in Venezuela byIranian contractors. Three stage rockets with60 foot silos are being reported.

China, ASEAN agree on plans to solve South China Sea dispute

Picture by the Vietnam News Agency showing live fire drills June

14 on Phan Vinh Island in the disputed Spratly Island chain.

CNN

IV - SOCIAL UNREST

Burning churches in Cairo, dead and woundedin Syria, Libya and Yemen, and a deathlysilence in Bahrain. The Arab protestmovement has come to a standstill, and thekings, emirs and sultans are rallying to launcha counterrevolution.

According to the "Fundamental Law of

Revolution," regimes fall when those at thebottom are fed up with the status quo andthose at the top are no longer capable ofremaining in power.

But difficulties arise when there is one thingthose at the top are still quite capable ofdoing, namely deploying tanks to deal withtheir opponents -- as is the case in Syria andLibya.

Der Spiegel outlines the situation in NorthAfrica and the Middle east is a series entitled:Has the Arab Spring Stalled?Autocrats Gain Ground in Middle East

A Spanish revolution is slowly gainingcoverage, both internationally and locally.http://www.ikimap.com/map/2CYF is a mapof existing, planned and evicted camps(shown to the right).

Enlargehttp://www.spiegel.de/international/world/bild-762861-215852.html
http://edition.cnn.com/2011/WORLD/asiapcf/07/21/china.sea.conflict/http://edition.cnn.com/2011/WORLD/asiapcf/07/21/china.sea.conflict/http://www.spiegel.de/international/world/0,1518,762861,00.htmlhttp://www.spiegel.de/international/world/0,1518,762861,00.htmlhttp://www.spiegel.de/international/world/0,1518,762861,00.htmlhttp://www.spiegel.de/international/world/bild-762861-215852.htmlhttp://www.spiegel.de/international/world/bild-762861-215852.htmlhttp://www.spiegel.de/international/world/bild-762861-215852.htmlhttp://www.spiegel.de/international/world/0,1518,762861,00.htmlhttp://www.spiegel.de/international/world/0,1518,762861,00.htmlhttp://edition.cnn.com/2011/WORLD/asiapcf/07/21/china.sea.conflict/


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V - RISK REVERSAL

ALL COUNTRIES ARE RE-ASSESSING

RISK EXPOSURE

External risks to economy rising, Bank ofCanada warns

The high degree of interconnectedness in the

international banking system can amplify

shocks, the Canadian central bank warned.

And it doesnt end there. In addition to the

acute fiscal strains in Europe that could

have severe ramifications throughout the

global banking system if mishandled,

countries like the United States and Japan

must also come up with credible debt-

reduction plans, Mr. Carney and his deputies

said. Furthermore, efforts to beef upinternational banking standards must

continue apace, he said.

If the significant fragilities that still burden

the financial system are not addressed in a

timely manner, the progress achieved to date

could be derailed.
http://www.theglobeandmail.com/report-on-business/economy/risks-rising-bank-of-canada-warns/article2070766/http://www.theglobeandmail.com/report-on-business/economy/risks-rising-bank-of-canada-warns/article2070766/http://www.theglobeandmail.com/report-on-business/economy/risks-rising-bank-of-canada-warns/article2070766/http://www.theglobeandmail.com/report-on-business/economy/risks-rising-bank-of-canada-warns/article2070766/http://www.theglobeandmail.com/report-on-business/economy/risks-rising-bank-of-canada-warns/article2070766/


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VI - INFLATION & INTEREST PRESSURES

Interest Rates Are on the Launch Pad-therein lies the problem for the Fed. Anyfurther debt monetization by the central banknow becomes counterproductive.

Thats because as inflation rates climb, bondinvestors demand higher interest rates. Thelower real interest rates become, the lessparticipation there will be in the bond marketfrom private sources. If you dont believe me,ask Bill Gross. The Fed is now damned if itdoes and damned if it doesnt.

Interest rates have been artificiallysuppressed for such a long time that nomatter what Bernanke does come June,

interest rates will rise. If it enacts anotheriteration of Quantitative Easing, the Fed mayfind itself the only player in the bond market.

The truth is that only a central banker couldafford to own bonds that are yielding rateswell below inflation, and growing even more

so.

Gap Shares Plunge, As Company Says It WillGet Slaughtered By Rising Inflation- Thecompany now expects product costs per unitto be up about 20 percent in the back half ofthe year, which will more than outweigh retailprice increases. As a result, the company hasrevised guidance for fiscal year 2011 diluted

earnings per share to be in the range of $1.40to $1.50. That's about $.30 lower thanprevious estimates

Think prices are high? Just wait til summer

China's April inflation higher than expected

China acts after inflation rises to 5.4%

Fresh price controls introduced and renminbi appreciationexpected

The Coming Japanese Hyperinflation

German Inflation at Highest Level Since 2008 - Annual consumer-price inflation in Germany, Europe's largest economy, was the

highest in April since October 2008, driven primarily byenergy-price increases.

Eurozone inflation jumps to 2.7%

Revision to March figure strengthens expectations of ratesincrease

Emerging Markets inflation surges

Inflation across the G20
http://www.europac.net/commentaries/interest_rates_are_launch_padhttp://www.europac.net/commentaries/interest_rates_are_launch_padhttp://www.businessinsider.com/gap-shares-plunge-as-company-says-it-will-get-slaughtered-by-rising-inflation-2011-5http://www.businessinsider.com/gap-shares-plunge-as-company-says-it-will-get-slaughtered-by-rising-inflation-2011-5http://www.businessinsider.com/gap-shares-plunge-as-company-says-it-will-get-slaughtered-by-rising-inflation-2011-5http://www.nypost.com/p/news/business/think_prices_are_high_just_wait_e8UQsYRLzapNcvWe0cgEIOhttp://www.nypost.com/p/news/business/think_prices_are_high_just_wait_e8UQsYRLzapNcvWe0cgEIOhttp://www.gordontlong.com/article/2011/05/11/uk-china-economy-inflation-idUKTRE74A0FM20110511http://www.gordontlong.com/article/2011/05/11/uk-china-economy-inflation-idUKTRE74A0FM20110511http://www.ft.com/cms/s/0/69aa5fcc-670d-11e0-8d88-00144feab49a.htmlhttp://www.ft.com/cms/s/0/69aa5fcc-670d-11e0-8d88-00144feab49a.htmlhttp://www.zerohedge.com/article/dylan-grice-coming-japanese-hyperinflationhttp://online.wsj.com/article/SB10001424052748703864204576316392675493366.html?mod=WSJ_hps_sections_worldhttp://online.wsj.com/article/SB10001424052748703864204576316392675493366.html?mod=WSJ_hps_sections_worldhttp://www.ft.com/cms/s/0/2ccdbf04-674e-11e0-9bb8-00144feab49a.htmlhttp://www.ft.com/cms/s/0/2ccdbf04-674e-11e0-9bb8-00144feab49a.htmlhttp://www.ft.com/cms/s/0/c93f569a-678a-11e0-9138-00144feab49a.htmlhttp://www.ft.com/cms/s/0/c93f569a-678a-11e0-9138-00144feab49a.htmlhttp://www.ft.com/cms/s/0/c40c439e-66aa-11e0-ac4d-00144feab49a.htmlhttp://www.ft.com/cms/s/0/c40c439e-66aa-11e0-ac4d-00144feab49a.htmlhttp://www.ft.com/cms/s/0/c40c439e-66aa-11e0-ac4d-00144feab49a.htmlhttp://www.ft.com/cms/s/0/c40c439e-66aa-11e0-ac4d-00144feab49a.htmlhttp://www.ft.com/cms/s/0/c93f569a-678a-11e0-9138-00144feab49a.htmlhttp://www.ft.com/cms/s/0/2ccdbf04-674e-11e0-9bb8-00144feab49a.htmlhttp://online.wsj.com/article/SB10001424052748703864204576316392675493366.html?mod=WSJ_hps_sections_worldhttp://www.zerohedge.com/article/dylan-grice-coming-japanese-hyperinflationhttp://www.ft.com/cms/s/0/69aa5fcc-670d-11e0-8d88-00144feab49a.htmlhttp://www.gordontlong.com/article/2011/05/11/uk-china-economy-inflation-idUKTRE74A0FM20110511http://www.nypost.com/p/news/business/think_prices_are_high_just_wait_e8UQsYRLzapNcvWe0cgEIOhttp://www.businessinsider.com/gap-shares-plunge-as-company-says-it-will-get-slaughtered-by-rising-inflation-2011-5http://www.businessinsider.com/gap-shares-plunge-as-company-says-it-will-get-slaughtered-by-rising-inflation-2011-5http://www.europac.net/commentaries/interest_rates_are_launch_pad


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Global Macro -Risk Levels

CREDIT METRICS - LIBOR-OISSPREAD (Updated)

When the LIBOR-OIS Spread isincreasing, it tells us that banksbelieve the other banks they arelending to have a higher risk ofdefaulting on the loans, so they arecharging a higher interest rate tooffset this risk.

It also tells us that the creditmarkets are not functioning assmoothly as they could bewhich issign of potential economiccontraction.

Though the levels are not alarmingthe DOWNTREND IS A MYSTERY,as illustrated to the right.

NOTE: The Banks are presentlyunder investigation formanipulating the LIBOR rateduring the financial crisis.

For a Current Update:Bloomberg

HOUSING - RATE OF CHANGE(Reference)

Prof. Robert Shiller (one of the

creators of the CS Index) pointedout that when 6 out of 20 US cities inthe index have hit new lows (evenlower than in early 2009) that theeconomy would face seriousworries if house prices keptfalling this fast

Why did he say this fast? Tounderstand, you have to look at theannualized rate of change of the last3 month. And it is not a prettypicture.

While the 10-city index dropped anannualized 8.8% in the three-month

period from July to October 2010,the 20-city index fell at a rate of10.4%.

The annualized three-month rate ofchange gave an early warning signwhen it went into negative territoryin June 2006, while both the 10-cityand 20-city only showed declininghouse prices in January of 2007.
http://www.bloomberg.com/apps/quote?ticker=.LOIS3:INDhttp://www.bloomberg.com/apps/quote?ticker=.LOIS3:INDhttp://www.bloomberg.com/apps/quote?ticker=.LOIS3:INDhttp://www.bloomberg.com/apps/quote?ticker=.LOIS3:IND


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DIVERGENCE (Reference)

One of the things to watch for in themarkets is divergence.

Divergence are one of the bestwarnings that something is wrongsomewhere. It often tells you thatthere are unbalanced forces at playin the market.

These forces will resolve themselves,but often do this via gradual reversalin trend or a sudden surprise shock

to the markets.

The ECRI Weekly Leading Index ispresently showing a divergence withthe S&P 500 Index.

While the S&P 500 is setting a higherhigh, the ECRI on a longer termweekly basis is setting lower highs.

This suggests that the stock marketmay be pricing in more economicgood news than it should.

Corporate Earnings are at historicallyvery high levels and have expandedrapidly. CAPE (Cyclically Adjusted PE)are also at extremes.


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MONEY SUPPLY GROWTH - M3(Updated)

Though the government no longerreleases the M3 money supplystatistics, they are put together bysuch organizations asShadowStats.com.

The massive efforts by the USFederal Reserve the overall moneysupply as represented by thisbroadest measure of US money andcredit appears to have finally begunto work.

What is worrying however, is it isbased on programs such as QEII

which has now ended!

What will stop it from rolling over aswe are seeing in Housing and theEconomy overall?

Source:ShadowStats

BBANK LIABILITIES (Reference)

The Shadow Banking System as the

prime pusher of toxic debt

instruments collapsed in the 2008

financial crisis and so far it simply

has not re-emerged in some sort of

hybrid fashion. The Federal Reserve

desperately needs this to happen and

this has been another reason for the

Fed's "Extend & Pretend" policy.

To the right is the latest figures from

the Federal Reserve'sFlow of Funds

reportfor Q4 2010. The report was

startling since Q3 2010 was even

worse than thought after final

adjustments were made.

We had aQ4 2010 decline of $206.4Billion in Shadow Banking liabilities

with $440 Billion in combined

Shadow and Conventional Banking

System Liabilities.

This almost guarantees that the

Federal Reserve must continue QEX.
http://www.shadowstats.com/alternate_data/money-supply-chartshttp://www.shadowstats.com/alternate_data/money-supply-chartshttp://www.shadowstats.com/alternate_data/money-supply-chartshttp://www.federalreserve.gov/releases/z1/current/z1.pdfhttp://www.federalreserve.gov/releases/z1/current/z1.pdfhttp://www.federalreserve.gov/releases/z1/current/z1.pdfhttp://www.federalreserve.gov/releases/z1/current/z1.pdfhttp://www.federalreserve.gov/releases/z1/current/z1.pdfhttp://www.federalreserve.gov/releases/z1/current/z1.pdfhttp://www.shadowstats.com/alternate_data/money-supply-charts


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GLOBAL CREDIT DEFAULT SWAPS(Reference)

Anything over 300 is a concern.

GIIPS

GREECE continues to get worse and

as we go to press has again set new

highs

PORTUGAL though having

accepted an EU/IMF bailout is still

showing that the problem has not

been solved.

IRELAND at 660 and up an

additional 8.5% suggests the

problems are still festering.

VENEZUELA at 1131 and rising

may be a blow to Latin America

MIDDLE EAST & NORTH AFRICA

Increases in Egypt, Saudi Arabia

and Israel stand out.

USA

For the first time the US has

appeared on the this list


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EU CRDIT DEFAULT SWAPS(Updated)

FIRST CHART:

Credit Default Swaps have been

steadily deteriorating since the Greek

Bailout Crisis escalated.

The recent possibility of a new

approach to a second bailout

package for Greece, prompted a

'relief rally'. This optimism is quickly

proving unfounded.

A final resolution will be requiredbefore the next tranche of funding is

due to be released in September

2011.

Downgrades in Portugal and other

PIIGS suggest the strong possibility

of the CDS spreads worsening.

SECOND CHART:

The July 4th, 2011downgrade of

Portugal government debt prompted

one of the largest one day moves in

CDS spreads in some time.

The PIIGS are all significantly above

the 300 level.


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COST OF MONEY (Updated)

Last month we wrote:

"The dramatic rise in the 10 Year US Treasury following the November 3rd FOMC Q2 press release is

nothing short of dramatic. However, it has recently begun to stall.

"The rally will not continue if rates are allowed to rise!"

You can be assured the US Federal Reserve has more 'bullets' ready to hold yields down!

Here is what silently happened. Note the arrow. What caused this?


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EMPLOYMENT DIVERGENCE (Updated)

Initial claims for jobless insurance increased to 429,000during the June 18th week from 420,000 during theweek prior, initially reported as 414,000.

The latest compared to Consensus expectations for415,000 claims. The four-week moving average of claimsheld steady at 426,250. During the last ten years therehas been a 77% correlation between the level of claimsand the m/m change in nonfarm payrolls.

The latest figure covers the survey period for Junenonfarm payrolls and claims rose 15,000 (3.6%) fromthe May period. During the last ten years there has beena 76% correlation between the level of claims and them/m change in nonfarm payrolls.

Continuing claims for unemployment insurance

held roughly steady at 3.697M, about where they'vebeen since mid-April.


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GLOBAL MACRO

During Q1 2011 we have all had our investments suddenly exposed to what is called Event Risk or "Tail" Risk.

Whether it is the Earthquake, Tsunami or Nuclear Fallout in Japan, the overthrow of governments in Egypt and

Tunisia, civil war in Libya or social unrest in Bahrain, Yemen, Saudi Arabia; all have been unexpected and caughtthe financial markets by surprise.

As we pointed out earlier in this report, our 2011 Thesis: "Beggar-thy-Neighbor" fully identified the socialunrest and political tensions now being experienced globally as a major new emerging theme in 2011.

We called it the "Age of Rage" as the days of plenty come to a close for the Western powers.

Soon the populations of these countries will witness changes that make them realize that:

- Gone are the days of plenty of Job for those who are willing to work,

- Gone are the days of plenty of food, energy and water,

- Gone are the days of secure pensions and retirement benefits

- Gone are the days of affordable education to build a future on,

- Gone are the days of affordable and available health coverage,

- Gone are the days of plenty of disposable income to maintain a middle class lifestyle,

- Gone are the days when children could expect to have a higher standard of living than their parents,

- Gone are the days of trust in government.

As we experience a massive shift in economic and political power to the East from the West, we will see moretension and conflicts. We will see more confrontations for scarcer and scarcer resources to compete with.


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We are already seeing the above emerge in many ways. One that is not talked about often enough is RISK.

I have written extensively of Regulatory Arbitrage being the dominate strategy over the last few years where riskhas been shifted to sovereign governments by the financial sector (SeeSultans of Swaparticle series).
http://lcmgroupe.home.comcast.net/~lcmgroupe/2010/Commentary.htm#SShttp://lcmgroupe.home.comcast.net/~lcmgroupe/2010/Commentary.htm#SShttp://lcmgroupe.home.comcast.net/~lcmgroupe/2010/Commentary.htm#SShttp://lcmgroupe.home.comcast.net/~lcmgroupe/2010/Commentary.htm#SS


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EUROPE - The European Summer

BANK STRESS TESTS

After months of speculation, guesswork, front-running, last-ditch efforts to raise cash, gnashing of teeth around

the exclusion of various types of capital, political fits (Helaba, although potentially with some justification), and afair degree of protectiveness-cum-thinly-veiled-animosity towards the European Banking Authority (EBA) by some

of the national regulatory bodies, the results of the EU-wide stress tests are out.

Generally analysts derided the latest round of industry stress tests as inadequate. Analysts and investors said the

criteria used by the EBA were overly optimistic and failed to capture the severity of the current sovereign debt

crisis sweeping across the euro zone. The EBA has already faced criticism for being too soft, particularly because it

did not make any allowance for a sovereign debt default as is now widely expected in Greece.

While Greek bonds are trading at about half their face value in the market, the EBA only required banks

to assume a 15pc loss on their holdings.

If the European Union could monetize the value of the credibility it has

destroyed it would be the richest organization on earth

The accusations follow last years widely-derided tests by the Committee of European Banking Supervisors. Seven

banks failed the last set, but all the Irish banks passed. A few months later, Ireland had to nationalize its banking

industry as its lenders faced insolvency.

The EBA revealed it allowed a large degree of discretion for recapitalization plans. Although the test was applied to

2010 results, any capital raised between January and April this year was admissible, bolstering balance sheets by

50bn.


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EDITOR'S NOTE: The following article by Simon Nixon gives a sense of the universal skepticism the EU Banking

Stress Tests received. He points out quite accurately that the real value of the stress tests may be in the release

of 3,000 data points including asset disclosures, which allow analysts to better assess loan quality and values.

BACKGROUNDER:Europe Fails Another Stress Test Simon Nixon WSJ

If the European banking system was looking for a cathartic moment, this wasn't it.

Just eight out of 91 banks failed this year's stress tests, one more than last year, with a combined capital

shortfall of just 2.5 billion ($3.54 billion). They comprised five Spanish savings bank, two Greek banks

and one Austrian. One German bank also would have failed but withdrew from the process. Some of the

failures made it immediately clear they saw no need to raise fresh capital, further undermining the

credibility of the exercise.

The key problem, as last year, was that the exams didn't adequately test for the one risk that most

worries the markets: sovereign defaults. Write-downs on government debt held on banking books weren't

based on market prices but a complex formula based on credit ratings. As result, Greek government debt,which trades at just 50 cents on the euro, was written down by only 15%. Nor was there any allowance

for effects such as rising bank-funding costs, whose impact could be greater than the initial capital hit.

Even on this benign scenario, 20 banks passed the test only because they were allowed to include

"mitigating actions" taken since the end of last year. This included some 50 billion of equity capital raised

from December to April; Spanish banks also were allowed to count generic provisions, excluded from the

test to ensure consistency with other countries. But some actions smack of national horse trading,

including allowances for planned future capital increases, restructurings and regulatory instruments.

The real value of the tests

will come in the asset

disclosures that

accompanied the results.

That could prove a double-

edged sword if it causes

investors and depositors to

lose confidence in banks

whose governments lack

the means to recapitalize

them. But that merely

underlines the extent to

which the euro-zone

banking crisis and

sovereign-debt woes are

intertwined.

Europe's ditheringpoliticians need to decide

quickly whether to bail out

countries or recapitalize the

entire banking system in

the aftermath of multiple

sovereign defaults. If the

stress tests help focus

minds, they won't have

been in vain.
http://online.wsj.com/article/SB10001424052702304521304576448312259883464.html?mod=WSJ_economy_LeftTopHighlightshttp://online.wsj.com/article/SB10001424052702304521304576448312259883464.html?mod=WSJ_economy_LeftTopHighlightshttp://online.wsj.com/article/SB10001424052702304521304576448312259883464.html?mod=WSJ_economy_LeftTopHighlightshttp://online.wsj.com/article/SB10001424052702304521304576448312259883464.html?mod=WSJ_economy_LeftTopHighlights


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The EU Stress Tests were released after the markets closed on Friday July 15th. The markets opened with the

following Credit Default Swap (CDS) activity. A 5% increase in CDS' would suggest the markets simply did not

believe the European Banking Authority (EBA).

Prior to the release the IMF was on the record issuing awarning on Europe's Banksstating:

European Banks remain insufficiently funded,

Stress Tests assume insufficient loss of value on government bonds,

Capitalization of banks in Europe remains relatively low

European Banks are lagging behind in securing funding for 2011,

G20 progress on strengthening and repairing the financial sector has been too slow.
http://online.wsj.com/article/SB10001424052702303406104576445993867004556.html?mod=WSJ_hp_LEFTWhatsNewsCollectionhttp://online.wsj.com/article/SB10001424052702303406104576445993867004556.html?mod=WSJ_hp_LEFTWhatsNewsCollectionhttp://online.wsj.com/article/SB10001424052702303406104576445993867004556.html?mod=WSJ_hp_LEFTWhatsNewsCollectionhttp://online.wsj.com/article/SB10001424052702303406104576445993867004556.html?mod=WSJ_hp_LEFTWhatsNewsCollection


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FRENCH BANK STRESS TESTS

EDITOR'S NOTE: I discussed the French Banking situation in the recent July edition of the Monthly MarketCommentary. I found the following analysis on the French banks, as a result of the Stress Tests, to be instructive.

BACKGROUNDER: French sovereign risk not fully addressed WSJ

French banks passed the EU-wide stress tests, but their continuing heavy exposure to sovereign debt risks

could undermine the credibility of the result, an analyst said.

BNP Paribas SA (BNP.FR), France's largest bank by market value, came through the stress test's adverse

scenario with a core Tier 1 capital ratio of 7.9%, comfortably above the 5% needed. Socit Gnrale SA

(GLE.FR) passed with 6.6%, while Credit Agricole SA (ACA.FR) had 8.5%. French mutual bank BPCE

Group, the owner of Natixis (KN.FR) which was hit hard during the financial crisis, had a core Tier 1 ratio

of 6.8%.

Although the European Banking Authority recently revised the terms of the test to include the growing risk

of a sovereign debt default, it only included a part of the French banks' exposure. All three main listed

French banks own Greek bonds and are widely expected to suffer losses from them. However, most of

the banks' bonds are held on their banking books rather than their trading books and therefore

weren't subject to the stress test.

"The perception that the exercise was not tough enough to see many banks fail but just tough enough for

a few to fail will prove hard to correct. The regulators' unwillingness to test for the possibility of a

sovereign default is also seen as undermining the credibility of the whole exercise," said BNP Paribas' chief

euro-zone market economist, Ken Wattret.

BNP Paribas has around EUR5 billion in Greek sovereign debt, of which less then EUR500 million is on its

trading book. Agricole held EUR631 million worth of sovereign debt at the end of March this year through

its Emporiki Bank of Greece SA unit. It had over ERU22 billion worth of outstanding Greek loans. SocGen,

which owns the Greek lender Geniki Bank, said recently that the bank holds EUR2.5 billion worth ofsovereign bonds from Greece.

All the banks have said repeatedly that losses on their Greek bond holdings would be manageable.

In June, Moody's Investors Service threatened to downgrade the ratings of France's three main listed

banks because of their exposure to Greek sovereign debt.

Under the terms of the stress test, the cumulative shock from sovereign risk from all four French banks

was put at around only EUR1.46 billion, despite the relatively high exposure of France's three biggest

listed banks.

BNP Paribas' losses under the test were EUR558 million, Agricole was EUR204 million, SocGen EUR508

million and BPCE, EUR187 million.

French Finance Minister Francois Baroin defended the stress tests Friday. "The methodology was very

rigorous ... whether in terms of the number of banks covered, the transparency, the treatment of

sovereign risk, it's a method that is good and demanding," he said, adding that this year's tests were

more transparent than those carried out last year.

Asked if European authorities are considering the possibility of a Greek default, Baroin said "we do not

subscribe to that prospect."

"We are working on solutions that are good answers for Greece and the euro zone," he said.
http://c/online.wsj.com/article/BT-CO-20110715-711467.htmlhttp://c/online.wsj.com/article/BT-CO-20110715-711467.htmlhttp://c/online.wsj.com/article/BT-CO-20110715-711467.html


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EUROPEAN FINANCIALS: Credit Default Swap Activity


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The ECB has the unenviable task of trying to bridge the North-South gap with a single interest policy.

The European Central Bank has raised interest rates a quarter point to 1.5pc to curb inflation and signaled more to

come, despite faltering growth in southern Europe and acute stress in peripheral bond markets. Interest rates were

raised to 1.5pc by the European Central Bank

Germany's industrial machine is powering ahead on exports to China, Russia, and the Mid-East.

SPANISH REAL ESTATE

Spain seems trapped in near-depression, with unemployment at 21pc.

The ECB's monetary tightening has asymmetric effects, with greater impact on heavily-indebted and rate-sensitive

economies in Spain and Ireland than on core Europe.

Over 90pc of Spanish mortgages are priced off the floating 1-year Euribor rate, which has risen 66

basis points to 2.19pc this year. Only 20pc of German loans are on floating rates.

Rate rises are ratcheting up the pressure as each month a fresh cohort of Spanish households sees a sharp upward

adjustment in their mortgage payments. There is a hangover of 680,000 unsold properties on the market,

according to government figures.

"There is no sign of recovery. House sales are falling again at double-digit rates and if this spills over into 2012, thepressure on the Spanish banking system could become unbearable,"

Raj Badiani from IHS Global Insight

When Spanish mortgage debtors cannot make their payments, Spanish law denies them two ways out that are

common elsewhere: they cannot simply hand the keys back to the bank and walk away, and they cannot discharge

their debt in bankruptcy. They remain personally liable for the full amount of the loan after foreclosure, and when

penalty and interest charges and tens of thousands of dollars in court fees are counted, they can end up on the

street facing a mountain of debt.


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ITALY: Crisis Moves From Peripheral to Outer Core (Mezzanine Level)

For the first time, Italy has been thrust into focus as part of the European Debt Crisis.

The steadily growing size of Italian CDS contracts as been evidence of growing concerns.


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Italy was forced to react by passing a $40B austerity budget program to control its growing Debt to GDP ratio.

In addition other concerns regarding Italy began dominating the media:


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Italian Prime Minister Silvio Berlusconi was forced to cave to pressure and withdrew a controversial

amendment to Italy's austerity bill that would have saved his company hundreds of millions in damages,

the Financial Times reported. It appears Silvio Berlusconi inserted a clause into Italy's austerity bill saying

that his company Fininvest did not have to pay the 750 million ($1 billion) in damages that it owed.

Worries began surfacing of potential problems with the JUly 15th, 2011 release of the EU Banking StressTests

The Italian Finance Minister was having an apartment paid for him - it was obscenely even more

expensive than the digs Dominique Strauss-Kahn was occupying in New York

Italys largest bank Unicredit saw its spreads widen sharply after its shares were suspended

A special EU meeting was called to discuss Italy. EU's Van Rompuy calls emergency debt crisis talks -The

talks focused on the stalled effort to secure the private sector's involvement in a second bailout package

for Greece, and mounting concerns about Italy after a heavy sell-off in Italian assets.

The government was forced to attacking speculative Shorts - The government wanted it stopped Italy

orders short sellers to disclose positions BL

But it was when stock trading on Italy's largest bank, Unicredito was mysteriously halted, that the CDS of all the

Italian banks widened significantly.

Funding for Italy across the board then just as quickly shot up as reflected by 2, 5 and 10 year sovereign Italian

notes.
http://www.reuters.com/article/2011/07/10/us-eurozone-crisis-vanrompuy-idUSTRE76913U20110710http://www.reuters.com/article/2011/07/10/us-eurozone-crisis-vanrompuy-idUSTRE76913U20110710http://www.bloomberg.com/news/2011-07-10/consob-may-ban-restrict-naked-short-selling-at-meeting-sunday-night.htmlhttp://www.bloomberg.com/news/2011-07-10/consob-may-ban-restrict-naked-short-selling-at-meeting-sunday-night.htmlhttp://www.bloomberg.com/news/2011-07-10/consob-may-ban-restrict-naked-short-selling-at-meeting-sunday-night.htmlhttp://www.bloomberg.com/news/2011-07-10/consob-may-ban-restrict-naked-short-selling-at-meeting-sunday-night.htmlhttp://www.reuters.com/article/2011/07/10/us-eurozone-crisis-vanrompuy-idUSTRE76913U20110710


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CREDIT RATING:

April 15th: Lowest INVESTMENT GRADE

July 12th: NON INVESTMENT GRADE

The non investment grade rating completely

removed Ireland from the private funding

markets.

Irish Sovereign Debt yields reflect this.2 YEAR NOTE

4.6%

5 YEAR NOTE5.5%

10 YEAR NOTE6.0%


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The only good news it that Italy's bond redemptions are relatively small compared to its total debt.

This is quiet different than many countries, where for example in Greece, immediate roll-over financing are causing

major havoc.


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The problem for Italy is that labor productivity is not making the gains it must to stay competitive. Though it has

marginally improved it is falling further behind countries such as Germany.

The GDP per capita reflects this. Consequentially its growing debt burden is becoming more onerous.


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IRELAND: Non Investment Grade (Junk)

Ireland joined Portugal and Greece to become the third euro-area nation to be reduced to non-investment grade.

Ireland's rating was lowered to Ba1 from Baa3 on after the markets closed July 12th, 2011.

Moody's had previously cut Ireland's credit rating two levels on April 15 to the lowest investment grade.

Moody's said that reason for the downgrade was a growing possibility that once the current 85bn European Union/

International Monetary Fund rescue package ends in 2013, Ireland is likely to need further bail-outs before it can

return to the bond market.

CREDIT RATING:

April 15th: Lowest INVESTMENT GRADE

July 12th: NON INVESTMENT GRADE


removed Ireland from the private funding

markets.

Irish Sovereign Debt yields reflect this.2 YEAR NOTE

23.22%

5 YEAR NOTE17.1%

10 YEAR NOTE14.1%

BACKGROUNDER: Irish Debt Downgraded to Junk as Euro Worries Spread Spiegel

BACKGROUNDER: Irish bonds cut to junk status on bail-out worries Telegraph
http://www.spiegel.de/international/europe/0,1518,774099,00.htmlhttp://www.spiegel.de/international/europe/0,1518,774099,00.htmlhttp://www.telegraph.co.uk/finance/economics/8633665/Irish-bonds-cut-to-junk-status-on-bail-out-worries.htmlhttp://www.telegraph.co.uk/finance/economics/8633665/Irish-bonds-cut-to-junk-status-on-bail-out-worries.htmlhttp://www.telegraph.co.uk/finance/economics/8633665/Irish-bonds-cut-to-junk-status-on-bail-out-worries.htmlhttp://www.spiegel.de/international/europe/0,1518,774099,00.html


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PORTUGAL: Non Investment Grade (Junk)

Portuguese debt wasreduced to non investmentgrade with a four notch reduction byMoody's on July 6th, 2011.This left Portugal completely at the mercy of an EU / IMF bailout. Portugal's new leader Pedro Passos Coelhofollowed very quickly with apublic announcementon July 19th, 2011 that the nation was to brace for further

austerity measures after his government discovered a "colossal" 2bn (1.7bn) hole in the public accounts left bythe outgoing Socialists.

There is growing rancor in Lisbon over the term of the 78bn rescue by the EU and the International Monetary

Fund, and the sweeping powers of the inspectors as they impose a "structural adjustment" on the economy.

The penal rate of interest charged by the EU is expected to top 5.5pc and risks trapping the country in debt-

deflation. At the same time fiscal austerity, without offsetting monetary stimulus or devaluation, may tip the

economy into an even deeper downturn.

Portugal is obliged to cut the budget deficit to 5.9% of GDP this year under its rescue terms. This looks like a

Sisyphean task since the deficit was still 8.7% in the first quarter, and further austerity will have the side-effect of

choking tax revenue.

The experience of Greece is that the country can find itself chasing its tail, with the deficit remaining stubbornlyhigh in a shrinking economy. Portugal's central bank said the economy will contract a further 1.8% next year.

CREDIT RATING:

NON INVESTMENT GRADE


removed Portugal from the private funding

markets.

Portuguese Sovereign Debt yields reflect

this.

2 YEAR NOTE20.4%

5 YEAR NOTE17.2%

10 YEAR NOTE12.7%
http://www.ft.com/intl/cms/s/0/90ef90b4-a800-11e0-afc2-00144feabdc0.html#axzz1SYMoZ1rkhttp://www.ft.com/intl/cms/s/0/90ef90b4-a800-11e0-afc2-00144feabdc0.html#axzz1SYMoZ1rkhttp://www.ft.com/intl/cms/s/0/90ef90b4-a800-11e0-afc2-00144feabdc0.html#axzz1SYMoZ1rkhttp://www.reuters.com/article/2011/07/06/us-eurozone-idUSTRE7651EK20110706http://www.reuters.com/article/2011/07/06/us-eurozone-idUSTRE7651EK20110706http://www.reuters.com/article/2011/07/06/us-eurozone-idUSTRE7651EK20110706http://www.telegraph.co.uk/finance/financialcrisis/8646189/Portugals-Prime-Minister-Pedro-Passos-Coelho-discovers-colossal-budget-hole.htmlhttp://www.telegraph.co.uk/finance/financialcrisis/8646189/Portugals-Prime-Minister-Pedro-Passos-Coelho-discovers-colossal-budget-hole.htmlhttp://www.telegraph.co.uk/finance/financialcrisis/8646189/Portugals-Prime-Minister-Pedro-Passos-Coelho-discovers-colossal-budget-hole.htmlhttp://www.telegraph.co.uk/finance/financialcrisis/8646189/Portugals-Prime-Minister-Pedro-Passos-Coelho-discovers-colossal-budget-hole.htmlhttp://www.reuters.com/article/2011/07/06/us-eurozone-idUSTRE7651EK20110706http://www.ft.com/intl/cms/s/0/90ef90b4-a800-11e0-afc2-00144feabdc0.html#axzz1SYMoZ1rk


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GREECE: Non Investment Grade (Junk)

The charts are self explanatory. THIS IS BEYOND SERIOUS. Greece is now completely at the mercy of EU & IMF

financial generosity and the politics that go with it.

This includes the wholesale sale of priced Greek assets. Like the carpet baggers after the US Civil War, European

financiers are feeding on these fire sales.

CREDIT RATING:

NON INVESTMENT GRADE


removed Greece from the private funding

markets.

Greek Sovereign Debt yields reflect this.

2 YEAR NOTE36.0%

5 YEAR NOTE21.6%

10 YEAR NOTE18.2%


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SPAIN: Investment Grade

Though Spanish debt is still Investment Grade, this may not be the situation for much long.

At nearly 6.5% financing for the 10 year Spanish note, it is at the limit which Spain can afford.

The market is clearly afraid of 'bad news' still waiting in the wings in Spain and in the regional banking Cajas. The

pattern in Europe is that after an election, in which the incumbent is overthrown, the new government

subsequently releases details spelling out how the public books have been falsified to hide excess debt.

First it was Greece (2 years ago). Then Portugal July 19th, 2011. The charts below say it is Spain next.

CREDIT RATING:

INVESTMENT GRADE

2 YEAR NOTE4.6%

5 YEAR NOTE5.7%

10 YEAR NOTE6.3%


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GIIPS: Sovereign Notes versus CDS Yields

The first table summarizes the previous sovereign bond charts and additionally compares yields to CDS spreadsand bond ratings.

GREECE IRELAND PORTUGAL SPAIN ITALY

NOTES -Yield

2 Year 36.0 23.2 20.4 4.6 4.6

5 Year 21.6 17.1 17.2 5.7 5.5

10 Year 18.2 14.1 12.7 6.3 6.0

CDS - bps

5 Year 2399 1130.3 1145.2 341.3 303.0

S&P RATING BBB+ BBB- AA A+

For any of the GIIPS to be in a position to attract capital funding, from the private markets, they will have toreduce their Debt to GDP ratios to minimally 80%

This will require both massive budgets cuts and austerity programs, but additionally debt relief.

Whether the debt relief is an EU Bailout(s), or bank haircuts, the amount shown below suggests it to be well inexcess of 423B .


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BRADY BONDS - The Final EU Solution When the Politics End and Reality Sets In

INTERNATIONAL FINANCIAL STANDARDS BOARD 9: The Fix Is In

IFSR9

The International Accounting Standards Board (IASB) hasadvised Europe to implement their International FinancialReporting Standard 9 (IFRS 9), which is nothing but a slyand underhanded "mark to fantasy" trick posing as a"standard".

Think the US' FASB 157 that saved the US and reversed themarkets in March 2009. Basically, IFRS 9 allows investors tohold assets at cost as long as they don't try and sell them.That Greek haircut which is being discussed shaves off asmuch as 60% of debt value. But they may still appear on thebooks at 100%.

That's really great. Unless you would like to know what yourshares are really worth, and what your pension fund holds.

Who needs transparency, or reality, when you can justspend your days dreaming of riches?

Meet Hans Hoogervorst, Your Next IASB Chairman

This is the man that is going to make one high-quality set of global accounting standards a reality.

he took over as Chairman of the International Accounting Standards Board (IASB) on June 30th and immediately

implemented IFRS 9.
http://goingconcern.com/2010/10/meet-hans-hoogervorst-your-next-iasb-chairman/http://goingconcern.com/2010/10/meet-hans-hoogervorst-your-next-iasb-chairman/http://goingconcern.com/2010/10/meet-hans-hoogervorst-your-next-iasb-chairman/http://goingconcern.com/2010/10/meet-hans-hoogervorst-your-next-iasb-chairman/


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ASIA -All is not Quiet! The West is just Distracted.

CHINA: Chinese Shadow Banking

China's recent $463 billion bailout of its local governments could lead to a crisis

1.5X the strength of the 2008 financial crisis,according to Societe Generale'sDylan Grice.

Grice outlines who China, like the U.S., Japan, and other economies before it,has suppressed volatility in exchange for growth.

In China's case, that growth is industrial. But in the U.S. and Japan, that growth was focused on real estate.

The process is, however, the same: low interest rates, suppressed by central bankers, lead to booms, whicheventually result in busts.

And in China right now, we're setting up for a fantastic bust, according to Grice:

But the problem hasn't gone away. Think carefully about what's just happened. A bail-out of $463bn ishalf the size of the TARP, introduced by Paulson at the nadir of the 2008 crisis, for an economy which isonly one-third the size of the US.

So adjusted for GDP, China has just announced an emergency bail out of one and a half TARPs!!

If we calibrate the magnitude of the economic crisis with the size of the bail-out, one and a half TARPsimplies a financial crisis one and half times the order of magnitude of 2008.

Continued...

This is all China has done with its bail-out of local governments. It has upped the ante. While we can'tpredict where complex systems will go, we know that the longer their volatility is artificiallysuppressed, the more emphatic will be its release when it does come .

It is more likely that China has one and a half times (and counting) the 2008 financial crisis ahead of it.

The bailout is only contributing to China's suppression of volatility. Note, if you're comparing China's suppression to

some other recent crises, it blows away the Irish, Spanish, and Thai competition.
http://www.businessinsider.com/dylan-grice-china-great-supression-2011-6#ixzz1Slh7ZCv3http://www.businessinsider.com/dylan-grice-china-great-supression-2011-6#ixzz1Slh7ZCv3http://www.businessinsider.com/dylan-grice-china-great-supression-2011-6#ixzz1Slh7ZCv3http://www.businessinsider.com/dylan-grice-china-great-supression-2011-6#ixzz1Slh7ZCv3


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JAPAN: Is the Carry Trade Unwinding?

Since the YEN rose violently in the after mass of the Japanese Earthquake,

Tsunami and Nuclear Crisis in March 2011 I have been warning during my

Global Insights Audio recordings that the G5 intervention would not last. The

pressures of repatriation of Japanese investments to fund the rebuilding of

infrastructure would be an enormous headwind for G5 intervention that likely

could not be sustained.

This appears to be exactly the case as recently the USD/YEN broke through

support established in November 2010 and during the March 2011 natural

disaster. The G5 intervention was not found to be effective for any sustained

period as the chart below shows.

Below I have included two technical charts.

1. The first chart shows a one year regression channel that indicates the YEN will continue to strengthen.

2. The second study shows monthly charts of the YEN. A bottom has been forming over the last 15 years on

a closing basis. It is an active pattern targeting an approximate 50% move higher.

These charts suggest the Yen Carry Trade is about to be unwound. Presently banks and hedge funds are on the

wrong side of this explosive long-term pattern.


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EMERGING MARKETS - Inflation & Slowing Growth

Inflation is still a major concern across the emerging Markets as is slowing growth

as reflected in the latest PMI reports.

INDIA: Slowing Badly

The Reserve Bank of India has already raised policy rates 10 times since early 2010

to tame inflation, which still stands at over nine per cent despite the central bank initiatives.


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KEY MONTHLY ECONOMIC INDICATORS Have a closer look at what the mainline media doesnt discuss .

U.S. GDP Growth Of 1.3% Disappoints

The Commerce Department reported that real GDPgrew just 1.3% (SAAR) last quarter. The figure wasdisappointing for several reasons. It fell short ofConsensus expectations for 1.7% growth and it was thesoftest reading since Q2'09.

Moreover, the gain followed a downwardly revised0.4% in Q1 and the components showed widespreadweakness.

As if that wasn't enough, GDP fell a revised 3.5% duringthe recession year of 2009, nearly one percentage pointmore than earlier indicated.

Weakness in consumer spending continued to head thelist of soft GDP components as it ticked up just 0.1% lastquarter.

Government spending, down 1.1%, followed with itsthird consecutive quarterly decline. It was paced bylower state & local purchases. Business investmentcontinued to be the economy's bright spot and it grew6.3%, though growth did lag its double-digit pace duringmuch of last year

U.S. Durable Goods Orders Decline

New orders for durable goods fell 2.1% last month

following an unrevised 1.9% May rise. A 0.4% increasehad been the Consensus expectation.

Transportation sector orders led the fall and slumped8.5% (+9.5% y/y). Bookings for aircraft & parts fell26.0% (+11.4% y/y) and reversed the prior month's

jump. Nondefense aircraft orders fell 28.9% (+41.1%y/y) while defense fell 20.5% (-17.6% y/y). Lowerorders for motor vehicles & parts added to the declinewith a 1.4% drop (+6.8% y/y).

However, trend growth is slowing. Electrical machineryorders rose 0.4% (2.1% y/y) after a 15.9% gain lastyear but machinery orders fell 2.3% (+4.0% y/y)following last year's 22.8% recovery. Orders for

computers fell 0.8% (+5.3% y/y) and the y/y gaincompares to 30.0% growth last summer.

In the nondefense capital goods sector, the 4.1% orders'decline owed to the drop in aircraft, but nondefenseorders less aircraft still slipped 0.4%. The 5.6% y/y gaincompares to 20.8% growth at its peak in the Spring of2010.


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ISM Manufacturing

The Institute for Supply Management indicated that itsJuly Composite Index of factory sector activity droppedsharply to 50.9 from an unrevised 55.3 in June. Thefigure was nearly the lowest since the economic recoverybegan two years ago. It also compared unfavorably toConsensus expectations for a just a slight decline to55.0.

The reading continued to indicate positive factory growthand was the twenty-fourth consecutive monthly figureabove the break-even level of 50. It was up from the lowof 32.5 reached in December '08.

Each of the index's five components declined last month,but it was the employment component that declined themost. Its reading of 53.5 still indicated positive jobsgrowth, but it was the least since it was negative in

September, 2009. During the last ten years there hasbeen a 91% correlation between the employment serieslevel and the m/m change in factory sector payrolls.

ISM Services

This summer has started out with indications of economicweakness relative to the lethargic Q2. The JulyComposite Index for the service and construction sectorsfrom the Institute for Supply Management (ISM) fell to52.7 from an unrevised 53.3 in June. The figure wasshort of Consensus expectations for 53.7. Since theseries' inception in 1997 there has been a 71%correlation between the level of the nonmanufacturingcomposite index and the q/q change in real GDP for theservices and the construction sectors.

The figure is consistent with the ISM factory sector indexfell last month to 50.9 from 55.3 in June.

U.S. Small Business Optimism Falls To Lowest SinceSeptember 2010

The National Federation of Independent Businessindicated that its index of small business optimism fell to89.9 last month from an unrevised 90.8 in June.

The latest was the lowest level since last September.

Deterioration was notable for the percentage of firmsexpecting the economy to improve and for thoseexpecting higher real sales in six months. Nevertheless,the percent of firms reporting higher nominal sales nowheld just below its April high and still was up sharplyfrom the recession low.


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PHILLY FED BOMBSHELL

The Philadelphia Federal Reserve Bank's index ofregional factory sector plunged this month.

The Philadelphia Fed General Activity index droppedto -30.7 from an unrevised 3.2 in July. The figurewas well short of Consensus expectations for 4.2.

Haver Analytics constructs an ISM-adjusted readingof the Philadelphia number and it plunged to 42.1from 51.7 in July. During the last ten years there'sbeen a 75% correlation between the level of thePhiladelphia Fed Business Conditions Index and thethree-month growth in factory sector industrialproduction. There's also been a 75% correlation withq/q growth in real GDP.

Month-to-month deterioration occurred in each ofthe Fed's component series with new orders andshipments falling the most. The employment seriesturned negative for the first time in twelve months.During the last ten years, there has been an 86%correlation between the employment index level andthe monthly change in manufacturing sectorpayrolls.

The prices paid index fell to its lowest level sinceSeptember. Twenty-six percent of firms paid higherprices while 13% paid less, the highest in two years.During the last ten years there has been a 72%correlation between the prices paid index and thethree-month growth in the intermediate goods PPI.

The Philly Fed matches the New York Manufacturingand Richmond Fed Survey!


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CONSUMER CREDIT

TheFederal Reservepositively reported arise in consumer credit July 8th.

This data is unfortunately misleading.

The Federal Reserve is now adding theFederal Government student loan program(Sallie Mae) to the statistics which gives theconsumer credit data the appearance ofimproving. In fact, IT IS NOT!

If you back out this newly added data so youcan compare true trend, you actually get acontinuation in the negative trend inconsumer credit with a month on monthdecline of $1.6B.

Year over year the figure is still dropping5.6%. Its not a pretty picture out theredespite the governments policy initiatives.

To the right is the Sallie Mae student loanreclassification amount.

You can see how this program would skewthe consumer credit data if added, withoutpointing this anomaly out.

Source:Pragmatic Capitalist
http://federalreserve.gov/releases/g19/current/g19.htmhttp://federalreserve.gov/releases/g19/current/g19.htmhttp://federalreserve.gov/releases/g19/current/g19.htmhttp://pragcap.com/consumer-credit-rises-but-not-reallyhttp://pragcap.com/consumer-credit-rises-but-not-reallyhttp://pragcap.com/consumer-credit-rises-but-not-reallyhttp://pragcap.com/consumer-credit-rises-but-not-reallyhttp://federalreserve.gov/releases/g19/current/g19.htm


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JOBS - CONFIDENCE - CONSUMPTION - GROWTH CYCLE

A simple but effective way to quickly analyze economic activity is the use of the Jobs-Confidence-Consumption-Growth Cycle graphically depicted above. This model distills economic activity and highlights key factors for theinvestor to focus on.

If Jobs are becoming harder to f ind or keep it is not long before consumer, investor and business confidenceerodes. When the erosion in confidence comes cautious spending habits and often increased levels of savings. Theconsequence is slowing economic consumption. When consumption slows, especially in a 70% consumptioneconomy like the US, economic growth slows. Slowing growth forces business to cut back and we have thebeginnings of a death spiral.

One of these four elements must be reversed before an self feeding cycle develops.

Let's consider where the US is in this cycle.

The August 5th, 2011 Non Farm Payrolls report showed the labor participation rate "at a 30-year low".

The most recent poll from Thomson Reuters and University of Michigan shows thatconsumer confidence is thelowest it's been for 30 years.

That's not a coincidence.

As I said above, if people can't find work, they'll have no confidence in their ability to pay for the things they wantor need, or in the economy as a whole.

The administration - despite its rhetoric - isdoing nothing to decrease unemployment(and seethis), and is solelyhelping the super-rich at the expense of everyone else.

Given this situation, it shouldn't be a huge surprise that:

73% of Americans think the country is headed in the wrong direction

79% are dissatisfied with the U.S. political system

In fact onlya small percentage think that the government is acting with the "consent of thegoverned"
http://www.realclearmarkets.com/blog/Employmen

gmtp - stealth qeiii? (us)

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