rpt-GMTP-2013-05-Peek.pdf

1 May 2013 Edition Restricted & Confidential Copyright 2012 © Gordon T. Long All Rights Reserved [email protected]

PEAK CONSUMPTION The Era of a 70% US Consumption Economy Are Over.

US ECONOMY

GLOBAL MACRO TIPPING POINTS - MAY 2013

4/25/2013


PEAK CONSUMPTION

The Era of a 70% US Consumption Economy Are Over.

GLOBAL MACRO TIPPING POINTS - MAY 2013

TIPPING POINTS ...................................................................................................................... 12

GLOBAL MACRO: RISK ASSESSMENT .................................................................................................................................................... 12 SITUATIONAL ANALYSIS .................................................................................................................................................... 12

POSITIONAL FRAMEWORK: "WE ARE HERE!" ....................................................................................................................................................... 12 Q1 2013 DEVELOPMENTS TO WATCH ..................................................................................................................................................................... 13 GLOBAL TRENDS - NATIONAL INTELLIGENCE COUNCIL ................................................................................................................................... 22 A BROKEN PONZI SCHEME - BOSTON CONSULTING GROUP .......................................................................................................................... 24 RISK CONTINUUM ......................................................................................................................................................................................................... 26

MACRO MONITORING INSTITUTIONS ............................................................................................................................... 27

WEF (WORLD ECONOMIC FORUM) .......................................................................................................................................................................... 27 IMF (INTERNATIONAL MONETARY FUND) .............................................................................................................................................................. 42 OECD (ORGANIZATION FOR ECONOMIC COOPERATION & DEVELOPMENT) .............................................................................................. 57 MAPLECROFT (SCANNING THE GLOBE) ................................................................................................................................................................ 59

GLOBAL RISK SIGNALS ...................................................................................................................................................... 61

RISK - SIGNS APLENTY, BUT NO ONE PANICKING - YET! .................................................................................................................................. 63 RISK - CANARIES SINGING AGAIN ........................................................................................................................................................................... 65 RISK - COMPLACENCY & REPRESSED FEAR ........................................................................................................................................................ 66 RISK - TIED TO EU IN 2012 ......................................................................................................................................................................................... 67 RISK - GLOBAL DERIVATIVE COLLATERAL ............................................................................................................................................................ 68 RISK - GLOBAL RISK MATRIX..................................................................................................................................................................................... 70 RISK - GLOBAL MACRO HEADWINDS / TAILWINDS .............................................................................................................................................. 70 RISK - FOOD A GROWING GLOBAL INFLATION & SOCIAL UNREST RISK ...................................................................................................... 72 RISK - INCREASINGLY DYSFUNCTIONAL CAPITALS MARKETS ....................................................................................................................... 77

RISK - GLOBAL RISK REWARD .......................................................................................................................................... 79

RISK - RISING GEO-POLITICAL EVENT RISK.......................................................................................................................................................... 80

GLOBAL MACRO: RISK LEVELS ................................................................................................................................................................ 84 AGGREGATED GLOBAL FINANCIAL RISK INDEX .............................................................................................................. 84

BANKING RISK - LIBOR-OIS SPREAD (Updated) .................................................................................................................................................... 85 BANKING RISK - TED SPREAD (Updated) ................................................................................................................................................................ 85 CREDIT RISK - GLOBAL CREDIT DEFAULT SWAPS (Updated) .......................................................................................................................... 86 CREDIT RISK - EU CREDIT DEFAULT SWAPS (Updated) ..................................................................................................................................... 87 CONSUMER RISK - HOUSING - RATE OF CHANGE (Reference) ........................................................................................................................ 88 ECONOMIC RISK - ECRI LEADING INDEX (Updated) ............................................................................................................................................. 89 INFLATION RISK - MONEY SUPPLY GROWTH - M3 (Updated) ............................................................................................................................ 90 INFLATION RISK - MONEY VELOCITY (Updated) .................................................................................................................................................... 91 MONETARY RISK - BANK LIABILITIES (Updated) ................................................................................................................................................... 91 COST OF MONEY RISK - INTEREST RATES (Updated)........................................................................................................................................ 93

AGGREGATED RISK LEVEL ................................................................................................................................................ 95

TIPPING POINTS: CHANGES ...................................................................................................................................................................... 96 TIPPING POINT MAPPING: 2013 UPDATE .......................................................................................................................... 96

TIPPING POINTS: TOP 5 FOCUS - FEBRUARY 2013 .......................................................................................................................... 105 I - RISK REVERSAL............................................................................................................................................................ 105 II - JAPAN DEBT DEFLATION ............................................................................................................................................ 108 III-BOND BUBBLE .............................................................................................................................................................. 111 IV - EU BANKING CRISIS ................................................................................................................................................... 111 V - SOVEREIGN DEBT ....................................................................................................................................................... 112 VI - CHINA HARD LANDING ............................................................................................................................................... 114


DRIVER$: RISK-ON - RISK-OFF ANALYTICS ......................................................................................................................................... 118 1- G10 MACRO SURPRISE INDEX .................................................................................................................................... 121 2- CUMULATIVE GLOBAL PMI ........................................................................................................................................... 124 3- SLOWING GLOBAL EXPORTS ...................................................................................................................................... 130 4- US NON-REVOLVING CONSUMER CREDIT ................................................................................................................. 133 5- IBES' RELATIVE GLOBAL PE RATIOS .......................................................................................................................... 136 6- CONSENSUS EARNINGS ESTIMATES - Sell Side Analysts .......................................................................................... 142 7- INFLATION PRESSURES - Global Food Prices.............................................................................................................. 144

GLOBAL MACRO ................................................................................................................... 148

GLOBAL MACRO: ECONOMIC OUTLOOK ............................................................................................................................................. 150 GLOBAL - Credit Fueled Globalization in Retreat ................................................................................................................ 150 GLOBAL - Rogoff's Sovereign Debt Default Levels ............................................................................................................. 152 GLOBAL - Fiscal Adjustments Required .............................................................................................................................. 155 GLOBAL - Imbalances Continue to Increase Along With Financial Fragility ......................................................................... 155 GLOBAL - A 67 Million Jobs Gap ........................................................................................................................................ 158 GLOBAL - Center of Global Manufacturing Confirmed to be Shifting Away from developed Countries ................................ 161 GLOBAL - Mercantilist China the Clear Winner Globally, Mercantilist Germany Regionally ................................................. 162 IMF CUTS ECONOMIC OUTLOOK ..................................................................................................................................... 164

IMF Cuts Advanced Economies Growth by 25% from 2.0% to 1.5% ..................................................................................................................... 164 IMF Cuts Growth from 3.9% to 3.6% and Increases Deficit Multiplier by 100 to 200% ........................................................................................ 171

WARNINGS ........................................................................................................................................................................ 173 IMF WARNS .................................................................................................................................................................................................................. 173 BIS WARNS ................................................................................................................................................................................................................... 177 WORLD BANK WARNS ............................................................................................................................................................................................... 178

GLOBAL MACRO: INDICATORS ............................................................................................................................................................... 180 GROWTH............................................................................................................................................................................ 180

Slowing Global Economies .......................................................................................................................................................................................... 180 Global GDP Growth Trending Down by Region and Cumulatively ......................................................................................................................... 181 Global PMI ..................................................................................................................................................................................................................... 182 Global Recession .......................................................................................................................................................................................................... 184 Slowing Global Growth - Air Cargo Shipments ......................................................................................................................................................... 185

GOBAL UNEMPLOYMENT ................................................................................................................................................. 186 Global Unemployment Rising - 202 Million ................................................................................................................................................................ 186

TRENDS ............................................................................................................................................................................. 188 BRANDS & COMMODITIES: Tell the Global Story .................................................................................................................................................. 188

SENTIMENT ....................................................................................................................................................................... 200 NIELSEN (Global Consumer Confidence, Concerns & Spending Intentions) ....................................................................................................... 200

INFLATION ......................................................................................................................................................................... 211 Food Prices, Driver of Social Unrest ........................................................................................................................................................................... 211 Food Price Manipulation in Thailand .......................................................................................................................................................................... 212

GLOBAL MACRO: MONETARY POLICY & CENTRAL BANKING ........................................................................................................ 213 The "OMF" Trial Balloon Raised .......................................................................................................................................... 214

Financial Times: Martin Wolf - "The Case For Helicopter Money" .......................................................................................................................... 215 Financial Times: Martin Wolf - "The Case To Reset Basis of Monetary Policy" .................................................................................................... 218 Financial Times: Gavyn Davies On Why Helicopters Are Dangerous .................................................................................................................... 219 A Conundrum for the World's Central Bankers.......................................................................................................................................................... 222

PBOC - China ..................................................................................................................................................................... 224 Chinese Liquidity Pump Unplugged ............................................................................................................................................................................ 224

BOE - UK ............................................................................................................................................................................ 226 Mark Carney and "Flexible Inflation Targeting" ......................................................................................................................................................... 226

FED - US............................................................................................................................................................................. 227 FOMC January Minutes Un-Nerve Markets ............................................................................................................................................................... 227 Congress Asks Bernanke For Full Risk Analysis On Fed's Soaring Balance Sheet ............................................................................................. 228

BOJ - JAPAN ...................................................................................................................................................................... 232 Japan's Prime Minister Shinzo Abe prepares to print money for the whole world................................................................................................. 232 Shinzo Abe’s Monetary-Policy Delusions ................................................................................................................................................................... 233 BOJ Governor Job Suddenly Available in Historical "Abenomics U-Turn" ............................................................................................................. 236 Japanese Economic Policy Goes The Full Ponzi ...................................................................................................................................................... 237

ECB - EU ............................................................................................................................................................................ 239 Japan Will Effectively Monetize European Debt ........................................................................................................................................................ 239


TARGET-2 Imbalances - "The Debt Crisis Is Eating Its Way Ever Further Into Europe's Core" ......................................................................... 239 Draghi Will Soon Be Forced to Start Printing - Again! .............................................................................................................................................. 241

COMBINED ......................................................................................................................................................................... 245

Global Balance Sheet Expansion ................................................................................................................................................................................ 245 Where Do these Deflators Come From? .................................................................................................................................................................... 249 First Remove Gold Standard, Now Remove Debt .................................................................................................................................................... 250

GEO-POLITICAL TENSIONS ..................................................................................................................................................................... 254 CURRENCY WARS ............................................................................................................................................................ 254

BATTLEFIELD - Combatants & Belligerents ............................................................................................................................................................. 256 BATTLEFIIELD - The Race to Debase ....................................................................................................................................................................... 257 JAPAN - The Destabilizing Agent ............................................................................................................................................................................... 259 EUROPE - Euro Exposed ............................................................................................................................................................................................ 259 ARGENTINA - Here we Go Again!.............................................................................................................................................................................. 261 VENEZUELLA - Bad Situation ..................................................................................................................................................................................... 262 BRAZIL - No One Wants to Listen .............................................................................................................................................................................. 262 SWITZERLAND - No Choice ....................................................................................................................................................................................... 262 SINGAPORE - Hot Money ........................................................................................................................................................................................... 263 UK- Pound Joins War ................................................................................................................................................................................................... 264

CYBER WARS .................................................................................................................................................................... 265

A Potential Destabilizing Catalyst ............................................................................................................................................................................... 265 Rules of Engagement ................................................................................................................................................................................................... 265 Brushfire Battle: ............................................................................................................................................................................................................. 265 Brushfire Battle: ............................................................................................................................................................................................................. 265

IRAN ................................................................................................................................................................................... 266

Watch Out for a "False Flag" or "Covert" Activity Event ........................................................................................................................................... 266 Who Is Threatening Who Here? .................................................................................................................................................................................. 266

REGIONAL ............................................................................................................................... 269

EUROSIS - A Terminal Disease ........................................................................................................................................ 269 PROGNOSIS: Why the European Situation Will Get Worse ................................................................................................................................... 269 PROGNOSIS: Increasing Structural Imbalances ...................................................................................................................................................... 272 PROGNOSIS: $22T Unaccounted - A Hidden World of Contingent Liabilities, Government Backing & Guarantees. ................................... 274 PROGNOSIS: Monetary Malpractice - ECB's LTRO Not a Solution but ................................................................................................................ 278 PROGNOSIS: Monetary Malpractice - ECB's SMP Effort Futile ............................................................................................................................. 281 PROGNOSIS: Monetary Malpractice - ECB Accepts BBB Collateral ..................................................................................................................... 283 PROGNOSIS: EU Banking Overbanked, Undercapitalized and Now Insolvent .................................................................................................... 284 PROGNOSIS: Monetary Malpractice - TARGET2 "Contingent Liabilities"............................................................................................................. 285 PROGNOSIS: Bailouts - Unsustainable & Unfundable ............................................................................................................................................ 291

MEDICAL CHARTS - Situation Critical ............................................................................................................................... 293

CHARTS - Regional Risk-Reward .............................................................................................................................................................................. 293 CHARTS - Europe's "Core" Problem is France ......................................................................................................................................................... 294 CHARTS - Germany's Preoccupation with Inflation is More Than It Would Seem ............................................................................................... 297 CHARTS - Evidence OF Global Slowing Now Indisputable ..................................................................................................................................... 298 CHARTS - EU Credit Downgrades, France and UK On Tap .................................................................................................................................. 300 CHARTS - Perceived Reduction in Risk, A Temporary Aberration ......................................................................................................................... 302 CHARTS - Dangerous Delusional Divergences ........................................................................................................................................................ 304 CHARTS - IMF Projections for Euro Area and GIIPS ............................................................................................................................................... 305 CHARTS - Air Cargo Shipments Confirm Slowing Global Growth .......................................................................................................................... 306 CHARTS - Eurozone Misery Indices Never Been Higher ........................................................................................................................................ 307 CHARTS - Euro Currency ............................................................................................................................................................................................ 309

CYRPUS - Latest EU Banking Crisis ................................................................................................................................... 314

CYRPUS - What you Need To Know .......................................................................................................................................................................... 314 CYRPUS - Basic Situational Charts ............................................................................................................................................................................ 315 CYPRUS - Crumbling Property Rights ....................................................................................................................................................................... 317 CYPRUS - Plan D Supersedes Plan C and B as Time running Out ....................................................................................................................... 321 CYPRUS - Forgetting About Contract Law, Private Property Rights and Due Process ....................................................................................... 324 CYPRUS - Russian Tax Haven ................................................................................................................................................................................... 325 CYPRUS - Plan B as Bad As Plan A .......................................................................................................................................................................... 326 CYPRUS - Breaks Public Trust and Incites the Politics of Germany Dictating Terms .......................................................................................... 327 CYPRUS - Does Anyone Care How a Capitalist System (versus a Crony Capitalist System) is Supposed to Work? ..................................... 333 CYPRUS - Criminal "Confidence Game" Payouts to Everyone at the Tax Payers Expense ............................................................................... 334 CYPRUS - Cyprus Pushes EU Banking Crisis Back Near the Edge ..................................................................................................................... 336

ITALY - Election Sends A Clear Message ........................................................................................................................... 337


ITALIAN ELECTION - What You Need to Know ....................................................................................................................................................... 337 ITALIAN ELECTION - Europe Capitulates On Austerity- Never Had The Stomach For It ................................................................................... 339 ITALIAN ELECTION - Message Given By the People.............................................................................................................................................. 341 ITALIAN ELECTION - Bad Debt Continue to Soar ................................................................................................................................................... 345 ITALIAN ELECTION - Italians React Badly to Austerity, Elections Hardly a Surprise! ......................................................................................... 347 ITALIAN ELECTION - EUROPEAN FEEDBACK - #1 .............................................................................................................................................. 348 ITALIAN ELECTION - EUROPEAN FEEDBACK - #2 .............................................................................................................................................. 350 ITALIAN ELECTION - Regional Financial Cracks in Sicily ...................................................................................................................................... 353

FRANCE - Core Fractures As France Quits On Austerity .................................................................................................... 355

FRANCE - What You Need to Know .......................................................................................................................................................................... 355 FRANCE - Key Indicators ............................................................................................................................................................................................ 356 FRANCE: Sharpest Drop in Private Sector Output in Four Years........................................................................................................................... 359 FRANCE - Quits on Austerity - Never a Doubt This Would Happen ....................................................................................................................... 362 FRANCE - Socialism is Expensive.............................................................................................................................................................................. 363 FRANCE - Has Turned back to Socialism ................................................................................................................................................................. 365 FRANCE - Losing Its Way through Political Illusions and Lies ................................................................................................................................ 366 FRANCE - Uncompetitive ............................................................................................................................................................................................ 367 FRANCE - Titan Tire Calls Out French Labor ........................................................................................................................................................... 369 FRANCE - France Responds to Titan Tire................................................................................................................................................................. 371 FRANCE - What Happens In France When Companies Fire People ..................................................................................................................... 373 FRANCE - Hollande's Economically Insane campaign Promise ............................................................................................................................. 374

GERMANY - Growing Anti-EU Sentiment ............................................................................................................................ 375

GERMANY - Anti Euro AfD Party May Cost Merkel in Critical September Election ............................................................................................. 376 GERMANY - The Euro Crisis Escalation over Cyprus May Politically Cripple Merkel .......................................................................................... 377 GERMANY - Call for End of "Coercive Euro Association" ....................................................................................................................................... 379

IBERIAN PENINSULA - Spain & Portugal Imploding ........................................................................................................... 381

IBERIA - Credit Downgrades - At Precipice of "Non Investment Grade"................................................................................................................ 381 IBERIA - Regional Bailout Bailouts a Massive Problem ........................................................................................................................................... 382 IBERIA - NPL Going Ballistic ....................................................................................................................................................................................... 383 IBERIA - Spanish Funding Problem ............................................................................................................................................................................ 384 IBERIA - The Giant Spanish Housing Bubble, Now Beginning to Implode ............................................................................................................ 388 IBERIA - Mal-Investment Coming Home to Roost .................................................................................................................................................... 390 IBERIA - Bank Deposits Were Leaving, Now they Are Fleeing ............................................................................................................................... 391 IBERIA - Now a Capital Investment Problem ............................................................................................................................................................ 392 IBERIA - Banks on Artificial "Ponzi Bond" Life Support ............................................................................................................................................ 393

UK - Yet Another Recession and 5 More Years of Austerity ................................................................................................ 400

UK - What you need to Know ...................................................................................................................................................................................... 400 UK - Joins Currency War - £ Down 8% YTD ............................................................................................................................................................. 401 UK - Specter of Stagflation Haunts UK ....................................................................................................................................................................... 402 UK - Public Policy turns Against Austerity and PM Cameron .................................................................................................................................. 403 UK - Doomsday Debt Machine .................................................................................................................................................................................... 404 UK - QE Extension Coming ......................................................................................................................................................................................... 407 UK - Small Business Credit Squeeze Now Acute - Loan Rejections Rising ......................................................................................................... 409 UK - Technically in a Depression ................................................................................................................................................................................ 410

ASIA - SERIOUS CRACKS BELOW THE SURFACE .......................................................................................................................................... 413 CHINA - Shadow Banking Dangerously Unstable ................................................................................................................ 416

CHINA SHADOW BANKING - Shadow Banking and Credit Growth ...................................................................................................................... 418 CHINA SHADOW BANKING - The US Sub-Prime / CDO All Over Again ............................................................................................................. 421 CHINA SHADOW BANKING - Report ........................................................................................................................................................................ 425 CHINA SHADOW BANKING - Situation ..................................................................................................................................................................... 426 CHINA RESERVES - Distorted Foreign Reserve Levels ......................................................................................................................................... 427 CHINA RESERVES - Declining Reserve Accumulation ........................................................................................................................................... 429 CHINA RESERVES - Has Caught the Gold Bug big time! ....................................................................................................................................... 431 CHINA CURRENCY WARS - Hot Money into China ................................................................................................................................................ 433 CHINA - Withdraws Liquidity ....................................................................................................................................................................................... 434 CHINA - Société General Sees a Likely Soft Landing! ............................................................................................................................................. 436 CHINA - True Debt is Orders of Magnitude More than Officially Being Reported ................................................................................................. 444 CHINA - Evidence OF Slowing Now Indisputable ..................................................................................................................................................... 447 CHINA - PMI Improvement .......................................................................................................................................................................................... 448 CHINA - Political Transition & Ongoing Emergence as a Super Power ................................................................................................................. 451 CHINA - An Implicit Social Contract ............................................................................................................................................................................ 453 CHINA - Manipulated Statistics due to Upcoming Decade Long Regime Change ............................................................................................... 455 CHINA - Increasing Leverage is China's Way of Monetary Easing ........................................................................................................................ 456 CHINA - Possible Interest-Rate Liberalization ........................................................................................................................................................... 457 CHINA - Global Impact of China's Slowdown ............................................................................................................................................................ 458 CHINA - Shanghai Composite at 2008 Low Levels .................................................................................................................................................. 460


CHINA - Shanghai Composite Warnings Signs ......................................................................................................................................................... 461 CHINA - Credit to GDP ................................................................................................................................................................................................. 463 CHINA - A Slow Recovery Through 2013 .................................................................................................................................................................. 464 CHINA - Manufacturing PMI in Contraction Territory ................................................................................................................................................ 466

JAPAN: The New Currency War Front ................................................................................................................................ 467

JAPAN - What You Need to Know .............................................................................................................................................................................. 469 JAPAN - Regional Risk-Reward .................................................................................................................................................................................. 471 JAPAN - Now the Frontrunner of Outright Monetization. ......................................................................................................................................... 472 JAPAN - Yen Devaluation ............................................................................................................................................................................................ 473 JAPAN - New Bank of Japan Policy - 2% Inflation in 2 Years ................................................................................................................................. 474 JAPAN - Appoints BOJ Governor Firmly Committed to Printing Money................................................................................................................. 476 JAPAN - Third Straight Quarter of Recession ........................................................................................................................................................... 477 JAPAN - Full Out War on Deflation ............................................................................................................................................................................. 477 JAPAN - First Test of the new found “dominance” of the Central Banks ............................................................................................................... 479 JAPAN - BOJ Was Next Up. No Surprise .................................................................................................................................................................. 481 JAPAN - Negative Current Account Balance and -3.5% Recession ....................................................................................................................... 483 JAPAN - A 50% Over-Valued Yen Has Undermined Self Confidence & Drive...................................................................................................... 486 JAPAN - Proves QE's Low Cost of Capital Does Structural Damage to Economy ............................................................................................... 488 JAPAN - BOJ Being Pressured to "Rip-Up Government Debt"1 ............................................................................................................................. 490 JAPAN - Easy Money Has Hurt Corporate Profitability in the Longer Term .......................................................................................................... 496 JAPAN - The Biggest Debtor with the Biggest Problem! .......................................................................................................................................... 499 JAPAN - A Magnitude Larger Problem than Europe................................................................................................................................................. 503 JAPAN - QE 9 A Complete Failure - Actually "Tightens" versus It's Intended Easing .......................................................................................... 509 JAPAN - Japanese Yen Continuously Under Attack ............................................................................................................................................... 513 JAPAN - Vast foreign US$ Coming Home for "Claim" .............................................................................................................................................. 514 JAPAN - PMI Breakdown ............................................................................................................................................................................................ 515 JAPAN - Exports Continue To Tumble ....................................................................................................................................................................... 517 JAPAN - Intervention Fails Again - It's a Whole new Ball Game ............................................................................................................................. 518 JAPAN - First Signs of Massive Debt Monetization After Next Election ................................................................................................................. 521 JAPAN - Japan to the ESM's Rescue ........................................................................................................................................................................ 521

EMERGING MARKETS - SYNCHRONIZED MARKETS ................................................................................................................................. 523 EMERGING MARKETS - What you Need to Know .................................................................................................................................................. 523 EMERGING MARKETS - Comparative Ease of Doing Business ............................................................................................................................ 525 EMERGING MARKETS - Importance of Employment, Equality and Per Capital Income .................................................................................... 526 ASIA ................................................................................................................................................................................................................................ 529 ASIA - Regional Risk-Reward...................................................................................................................................................................................... 529 ASIA - Corporate Debt Levels Reflect Unintended Consequences of Mispricing & Malinvestment ................................................................... 530 ASIA - Synchronized Markets ...................................................................................................................................................................................... 535 ASIA - Caution Advised Regarding Positive South Korea Export Turnaround ...................................................................................................... 537 ASIA - Export Growth Looks Similar to Pre-2008...................................................................................................................................................... 538 ASIA - Global Slowing Quickly a Worsening Situation Across Asia ........................................................................................................................ 539 ASIA - Risks All on the Downside for Asia ................................................................................................................................................................. 540 ASIA - Demographic Headwinds ................................................................................................................................................................................. 542 ASIA - Pronounced Flight to Singapore Safety ......................................................................................................................................................... 543 BRICS ............................................................................................................................................................................................................................. 545 BRICS - A Development Bank-Forex Reserve Pool-African Integration ................................................................................................................ 545 BRICS - 40% of World Population and 25% of World GDP ..................................................................................................................................... 546 BRICS - $3 to $13B GDP in Ten Years ...................................................................................................................................................................... 549 BRAZIL - Inflation will remain high thanks to a "growth mismatch". ...................................................................................................................... 551 RUSSIA - Central bank will hike rates if inflation and oil prices continue to rise. .................................................................................................. 552 INDIA - Will be fine as long as it continues to reduce its deficit............................................................................................................................... 553 INDIA - Watch Out For RE-Emergence of Food Price Inflation ............................................................................................................................... 554 BRICS- A World Wide Distrust of Financial Markets Building ................................................................................................................................. 555

US ECONOMY ......................................................................................................................... 557

THE GLOBAL MACRO OVERLAY ............................................................................................................................................................. 558 MACRO POSITIONING: US Macro Data Plunges Most In 10 Months ................................................................................. 558 MACRO POSITIONING: US Macro Surprise Index Goes Negative ..................................................................................... 560 MACRO POSITIONING: Nielsen's Global Survey - "Consumers Grappling With Economic Concerns" ............................... 561 MACRO POSITIONING: Credit Fueled Globalization in Retreat .......................................................................................... 563 MACRO POSITIONING: Executives Report Deteriorating Economic Environment .............................................................. 566 MACRO POSITIONING: A Serious Global Slowdown Underway ........................................................................................ 569 PROSPERITY AT RISK: Harvard Strategy Study Spells Out US Problem ........................................................................... 573

US INVESTMENT CYCLE ........................................................................................................................................................................... 577 GORD'S BIG PICTURE ECONOMIC CYCLE ...................................................................................................................... 577 ECONOMIC INDICATORS .................................................................................................................................................. 578


MONTHLY INDICATORS OF NOTE .......................................................................................................................................................................... 578 THE CURRENT BUSINESS CYCLE - SITUATIONAL ANALYSIS ....................................................................................... 582 BUSINESS CYCLE - JOBS > CONFIDENCE > CONSUMPTION > GROWTH CYCLE ....................................................... 582 BUSINESS CYCLE - JOBS ................................................................................................................................................. 583

JOBS: Participation Rate at 1979 Carter Levels ....................................................................................................................................................... 589 BRIDGING : Jobs to Confidence & Sentiment .......................................................................................................................................................... 591

BUSINESS CYCLE - CONSUMER & BUSINESS SENTIMENT .......................................................................................... 594

SENTIMENT: Consumer, Investor & Trader ............................................................................................................................................................. 595 Consumer Sentiment - Michigan ................................................................................................................................................................................. 598 Consumer Comfort ........................................................................................................................................................................................................ 599 Investors Intelligence .................................................................................................................................................................................................... 600 American Association of Independent Investors ....................................................................................................................................................... 600 National Association of Active Investment Managers (NAAIM) ............................................................................................................................... 601 Small Business Optimism ............................................................................................................................................................................................ 602 SENTIMENT: Morgan Stanley's Business Conditions Index ................................................................................................................................... 603 SENTIMENT: Widening Gulf Between Consumer & Business ................................................................................................................................ 605 BUSINESS CONDITIONS: Weakening Over the Last Year .................................................................................................................................... 607 BUSINESS CONFIDENCE: Competitiveness Problem ............................................................................................................................................ 608 PLUMMETTING CAPEX: Lack of CEO Confidence in Growth ............................................................................................................................... 610

BUSINESS CYCLE - CONSUMPTION ................................................................................................................................ 611

CONSUMPTION: A Consumption Setback ............................................................................................................................................................... 613 CONSUMPTION: The Achilles Heels of US Economic Consumption Deception ................................................................................................. 617 CONSUMPTION: Retail Sales All in the Seasonal Adjustments ............................................................................................................................. 620 CONSUMPTION: Doesn't Exist without "Seasonal Adjustments" ........................................................................................................................... 625 CONSUMPTION: Durable Goods in Freefall ............................................................................................................................................................. 626 CONSUMPTION: Retail Sales Continue to Deteriorate ........................................................................................................................................... 626 DELEVERAGING: Defaulting Is the Operative Word ............................................................................................................................................... 628 HOME EQUITY: Loan Losses Surge .......................................................................................................................................................................... 629

BUSINESS CYCLE - GROWTH .......................................................................................................................................... 632

GROWTH: US Economic Recovery Has Peaked ..................................................................................................................................................... 634 GLOBAL SLOWING: Evidence Now Indisputable .................................................................................................................................................... 638 US ECONOMY: Q4 Growth Will Likely Weaken Noticeably .................................................................................................................................... 639 SLOWING US GROWTH: Rail Traffic ........................................................................................................................................................................ 643 US GROWTH: New Normal Closer to 1% ................................................................................................................................................................. 644

ECONOMIC CYCLE, INVESTMENT CYCLE, SECTOR ROTATION ................................................................................... 647

PEAK CONSUMPTION - A 70% US CONSUMPTION ECONOMY IS UNSUSTAINABLE ................................................................................ 651 A 70% Consumption Economy ............................................................................................................................................ 651 How Did It Get To Such A Level? ........................................................................................................................................ 652 Why Has Consumption Levels Peaked? .............................................................................................................................. 652 Why Is a 70% Level Unsustainable? ................................................................................................................................... 653

DELUSIONAL ENTITLEMENTS - THE ENTITLEMENT PONZI SCHEME ..................................................................................................... 654 Financial Fiction .................................................................................................................................................................. 654 The Illusion .......................................................................................................................................................................... 654 The End Game .................................................................................................................................................................... 654

STUDENT LOAN CRISIS IN AMERICA ..................................................................................................................................................... 655 A Flawed or Obsolete College Business Model ................................................................................................................... 655 Reduced State & Local Funding .......................................................................................................................................... 658 Financialization of Education ............................................................................................................................................... 660 The Financial Case for College Misrepresented .................................................................................................................. 661 Soaring Costs ..................................................................................................................................................................... 663 Delinquencies & Defaults .................................................................................................................................................... 665

TRANSITIONING - FROM CAPITAL CONSTRAINED TO INNOVATION CONSTRAINED .................................................................................. 669 A Post-Capitalist Society ..................................................................................................................................................... 669 Continuously Obsolescing Work .......................................................................................................................................... 669 Changing Critical Role of Organizations .............................................................................................................................. 669 Innovation Risk.................................................................................................................................................................... 669

US GOVERNMENT SURRENDERS 'RISK FREE" .................................................................................................................................. 670 Exorbitant Privilege ............................................................................................................................................................. 670


US Firmly in Stage 5 of the "Sovereign Life Cycle" .............................................................................................................. 675 The Price of Political Chicanery ........................................................................................................................................... 678

US PUBLIC POLICY - SOME NOTABLE POLICY PROBLEMS ............................................................................................................. 679 POLICY: A Destructive and Distorted Government Protection Racket ................................................................................. 681 POLICY: "Institutionalizing" 47.8 Million or 15% of Americans on Food Stamps ................................................................. 683 POLICY: Credit Growth Solely Government Funded ........................................................................................................... 688 POLICY: Failure of Economic Policy & The Creation of a Credit Bubble of Epic Proprtions ................................................. 690 POLICY: Government's Consumption Spending versus Investment Spending .................................................................... 692 POLICY: FHA is a Case Study in Failed Public Policy ......................................................................................................... 694 POLICY: What Was Intentionally Avoided During the Election Promises By Both Parties .................................................... 698

What about the $84T in Unfunded Federal Entitlements? ....................................................................................................................................... 698 What about the $5T in Unfunded State & Local Government Pension Obligations? ............................................................................................ 699 What about the $1T in Student Loan Bubble? ........................................................................................................................................................... 702 What about the ...... ? ................................................................................................................................................................................................... 703

POLICY: Failure to Recognize & Alter Policy When it is Clearly Not Working ...................................................................... 703 Stimulus Hasn't Worked. It is Camouflaging Something Deeper ..................................................................................................................... 708

POLICY: A Capitalist System No Longer Realistically Operate When the State Borrows at a Negative Cost ....................... 710 POLICY: Congressman Ron Paul's Farewell Speech to Congress ...................................................................................... 713

MONETARY POLICY - HELICOPTER MONEY IS LIKELY FOREVER ............................................................................................................. 719 MONETARY: Helicopter Money of Central Bank Bond Purchases are Forever ................................................................................................... 721 MONETARY: Central Bank Balance Sheet Expansion and the Theoretical Path to SPX of 1950 ..................................................................... 723 MONETARY: Central Bank Balance Sheet Expansion versus CPI ........................................................................................................................ 725 MONETARY: The Fed Model No Longer Prices Risk .............................................................................................................................................. 725 MONETARY: US GDP Growth Through Manipulation ............................................................................................................................................. 731

FED INDICATORS .............................................................................................................................................................. 734

CHARTS: Fed Deliberately ignoring data on both growth and inflation .................................................................................................................. 734 CHARTS: US Economic Activity ................................................................................................................................................................................. 735 CHARTS: Effects of QE on S&P 500 .......................................................................................................................................................................... 736 CHARTS: Monetary Velocity versus Monetary Base ................................................................................................................................................ 737 CHARTS: Days Between 'Unsterilized' Actions ......................................................................................................................................................... 738 CHARTS: FOMC Economic Projections .................................................................................................................................................................... 738 CHARTS: Taylor Rule & Evans Rule Estimates of Fed Funds Rates .................................................................................................................... 739 CHARTS: Market Pricing In A Longer On-Hold Fed ................................................................................................................................................. 739 CHARTS: Fed Balance Sheet Assets & Liabilities .................................................................................................................................................... 740 CHARTS: Fed Policy Turns 180 Degrees .................................................................................................................................................................. 740 CHARTS: US Banking Industry Concentration .......................................................................................................................................................... 741 CHARTS: Total Credit Market Debt as % GDP ......................................................................................................................................................... 742 CHARTS: Debt-to-GDP Ratio Above What Caused Great Depression ................................................................................................................. 743 CHARTS: Yield Chase Completely Distorted ............................................................................................................................................................ 743 PATTERNS: Velocity of Money ................................................................................................................................................................................... 746 PATTERNS: Real Negative Rates .............................................................................................................................................................................. 748 PATTERNS: Short Interest Rates a Fed Problem .................................................................................................................................................... 750

UNDERSTANDING MONETARY POLICY - A Primer ......................................................................................................... 752

Understanding the Modern Monetary System – Part 1 ............................................................................................................................................ 752 Understanding the Modern Monetary System – Part 2a .......................................................................................................................................... 754 Understanding the Modern Monetary System – Part 2b .......................................................................................................................................... 758 Understanding the Modern Monetary System – Part 3 ............................................................................................................................................ 763 Understanding the Modern Monetary System – Part 4 ............................................................................................................................................ 771

QE III POST MORTEM - BROKEN FED MODEL ................................................................................................................ 777

POST MORTEM: Market Reacts Badly...................................................................................................................................................................... 777 POST MORTEM: Currency War Salvos & The $67T Shadow Banking Currency Cartel ..................................................................................... 779 POST MORTEM: Fed's Broken Model ....................................................................................................................................................................... 788 POST MORTEM: QEfinity Working Psychologically the same as 1987 Pre-Crash Portfolio Insurance ............................................................ 790

FED'S NEXT STEP ............................................................................................................................................................. 792

NEXT STEP: Current Fed Thinking ............................................................................................................................................................................ 792 NEXT STEP: Fed Lays Foundation for Further Policy Changes ............................................................................................................................. 793 NEXT STEP: High Probability Direction ..................................................................................................................................................................... 799 NEXT STEP: Communications to Ensure "Duration" Understood .......................................................................................................................... 801

PREVIOUS QUARTERLY SUMMARY - REFERENCE ............................................................................................................................... 802 December 2013 ................................................................................................................................................................... 802 September 2013 .................................................................................................................................................................. 804


FISCAL POLICY - A BUDGET SHAM ........................................................................................................................................................ 805 BUDGET - What You Need to Know ................................................................................................................................... 807

BUDGET: As Represented and Spun for the Public ................................................................................................................................................. 807 BUDGET: A Budget That Institutionalizes Big Government .................................................................................................................................... 809 BUDGET: The Secrets in The Budget ........................................................................................................................................................................ 813

BUDGET - Entitlement Reform through "Chained CPI" Changes ........................................................................................ 816

CHAINED: Both A Cut and Tax ................................................................................................................................................................................... 816 CHAINED: Reason It Hits So Hard ............................................................................................................................................................................. 818

BUDGET - Retirement Account Limits ................................................................................................................................. 821

RETIREMENT: $205K Account Limits ....................................................................................................................................................................... 821 RETIREMENT: $3M Retirement Cap Unanswered .................................................................................................................................................. 822

OUR FISCAL CLIFF PREDICTIONS versus OUTCOME ..................................................................................................... 824

PREDICTION: The High Probability Outcome .......................................................................................................................................................... 824 PREDICTION: Political Brinksmanship & Vigilantes ................................................................................................................................................. 825 OUTCOME ..................................................................................................................................................................................................................... 833

CHARTS ............................................................................................................................................................................. 835

KEY CHARTS: Growth & Jobs .................................................................................................................................................................................... 835 KEY CHARTS: Taxes & Spending .............................................................................................................................................................................. 838 KEY CHARTS: Politics & Policy .................................................................................................................................................................................. 841 KEY CHARTS: The Stakes .......................................................................................................................................................................................... 842 KEY CHARTS: Payroll Tax Holiday ............................................................................................................................................................................ 845 CHARTS: Tax Rate Comparisons ............................................................................................................................................................................... 846 CHARTS: Risk Perceptions ......................................................................................................................................................................................... 847 CHARTS: 2013 Quarterly Impact ................................................................................................................................................................................ 848 CHARTS: Budget Deficit .............................................................................................................................................................................................. 849 CHARTS: Sovereign Debt ............................................................................................................................................................................................ 851 CHARTS: State & Local Government Drag ............................................................................................................................................................... 852 CHARTS: Government Dependence .......................................................................................................................................................................... 855 CHARTS: Coming Demographic Shock ..................................................................................................................................................................... 855

TREASURY FUNDING ....................................................................................................................................................... 858

TREASURY DEBT: TIC Table ..................................................................................................................................................................................... 858 TREASURY DEBT: Reference .................................................................................................................................................................................... 859

US BUDGETING PROCESS - Reference ........................................................................................................................... 861

STATEMENTS: As A Corporation it is Both Insolvent & Exhibits Fraudulent GAAP Accounting Practices ....................................................... 861 PREVIOUS QUARTERLY SUMMARY - Reference ............................................................................................................. 873

December 2012 ............................................................................................................................................................................................................. 873 September 2012 ............................................................................................................................................................................................................ 877

KEY DRIVERS - CATALYSTS OF CHANGE ............................................................................................................................................ 879 EMPLOYMENT ................................................................................................................................................................... 884

1- CAPITAL SPENDING .............................................................................................................................................................................................. 884 2- SMALL BUSINESS OPTIMISM .............................................................................................................................................................................. 887 3- DEMOGRAPHIC SHIFT .......................................................................................................................................................................................... 891 RESEARCH OF NOTE................................................................................................................................................................................................. 896

REAL DISPOSABLE INCOME ............................................................................................................................................ 901

RESEARCH OF NOTE................................................................................................................................................................................................. 905 US RESIDENTIAL REAL ESTATE ...................................................................................................................................... 910

OVERVIEW .................................................................................................................................................................................................................... 910 CURRENT SITUATIONAL ANALYSIS ....................................................................................................................................................................... 914 CURRENT HOME OWNERSHIP TRENDS ............................................................................................................................................................... 914 NEW HOME SALES - Not as Strong as Headlines & Excitement Suggests ......................................................................................................... 918 HOUSING - Potentially Increasing Supply v Demand Problem ............................................................................................................................... 922 NATIONAL STATISTICS: PRICE ............................................................................................................................................................................... 924 NATIONAL STATISTICS: EXISITNG HOME SALES ............................................................................................................................................... 926 NATIONAL STATISTICS: NEW HOME SALES ........................................................................................................................................................ 928 RESEARCH OF NOTE................................................................................................................................................................................................. 929

US COMMERCIAL REAL ESTATE ..................................................................................................................................... 935

OVERVIEW .................................................................................................................................................................................................................... 935


NATIONAL STATISTICS: COMMERCIAL REAL ESTATE...................................................................................................................................... 936 RESEARCH OF NOTE................................................................................................................................................................................................. 937

CAPITAL SHRUGGED ................................................................................................................................................................................ 941

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