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2011 Thesis Paper: Beggar-thy-Neighbor at Tipping
Points
Throughout my 2010 article
series "Extend
& Pretend" and "Sultans
of Swap" I stressed that we were rapidly moving from the Financial
Crisis of 2008, through the Economic Fallout of 2009 -2010, towards a
Political Crisis in 2011 -2012. We are now clearly beginning to see the early
emergence of the final part of this continuum. From North Africa to Wisconsin
all are fundamentally based on the single insidious underlying problem -
excessive global debt and credit levels.
The global macroeconomic environment
appears to be rapidly unraveling. The situations in North Africa through the
Middle East are blatant proof of social unrest and accelerating political
instability. Food shortages and inflation pressures are now driving people
into the streets. When you feel the hunger in your stomach and see it in the
eyes of your children, it quickly erupts and motivates people to action.
It is now time to revisit our Tipping
Points framework to see where this is leading. A framework that is
clearly pointing to a global fiat currency failure and an emerging new world
order which is detailed in our "2011
Thesis - Beggar-thy-Neighbor."
Larger Image
CURRENT TIPPING POINTS
Our Tipping
Points which are outlined below are adjusted continuously based on daily
news flow analysis. Through a proprietary 'Process of Abstraction' news is
tracked and consolidated around these potentially critical flash points.
IS
|
WAS
|
Diff.
|
SOVEREIGN
DEBT - PIIGS
|
Insolvency
and Inability to stimulate economies
|
1
|
1
|
Same
|
EU BANKING
CRISIS
|
Bank Ratios
of 50:1 and toxic debt on and off the balance sheet
|
2
|
2
|
Same
|
RISK
REVERSAL
|
Historic
level of financial market participation and dependency (i.e. pension
entitlements)
|
3
|
5
|
+2
|
US STATE
& LOCAL GOVERNMENT
|
Unprecedented
budget shortfalls & funding problems
|
4
|
4
|
Same
|
FOOD PRICE
PRESSURES
|
Production
shortages, distribution break-downs with growing Asian demand
|
5
|
15
|
+10
|
RISING
INFLATION PRESSURES & INTEREST RATES
|
Reversal in
Interest rate and impact on government financing budgets
|
6
|
14
|
+8
|
SOCIAL
UNREST
|
Public
rallies, protests and rioting against the government.
|
7
|
NEW
|
|
CHRONIC
UNEMPLOYMENT
|
Historic
Unemployment rates in G7
|
8
|
9
|
+1
|
CHINA BUBBLE
|
Real Estate
& speculative bubbles
|
9
|
22
|
+13
|
GEO-POLITICAL
EVENT
|
A sovereign
country overthrow, rebellion or insurrection
|
10
|
NEW
|
|
RESIDENTIAL
REAL ESTATE - PHASE II
|
Shadow
Inventory, Strategic Defaults, Looming Option ARMS 'python', LTV levels.
|
11
|
6
|
-5
|
COMMERCIAL
REAL ESTATE
|
Market
Values are down 45 - 55% with little write downs as of yet being taken by
banks, insurance or financial holders.
|
12
|
7
|
-5
|
PUBLIC
POLICY MISCUES
|
Impact of
Obamacare, Dodd-Frank Bill and others in reaction to present environment.
|
13
|
13
|
Same
|
OIL PRICE
PRESSURES
|
Shortages,
Peak Oil & Asian Growth demand.
|
14
|
30
|
+16
|
BOND BUBBLE
|
Historically
high Bond Prices
|
15
|
3
|
-12
|
PENSION -
ENTITLEMENT CRISIS
|
Unfunded
Pension Liabilities - > $100T in US
|
16
|
11
|
-5
|
CENTRAL
& EASTERN EUROPE
|
The Sub
Price of Europe - Level of borrowing in non sovereign currency (EU loans)
|
17
|
8
|
-9
|
US BANKING
CRISIS II
|
Deferred
accounted write-downs for Real Estate, Commercial Real Estate & HELOCS
|
18
|
10
|
-8
|
CREDIT
CONTRACTION II
|
Bankruptcy
& Mal-Investment Catalyst
|
19
|
18
|
-1
|
JAPAN DEBT
DEFLATION SPIRAL
|
Ability for
Japan to continue to fund national debt with shifting demographic patterns.
|
20
|
18
|
-2
|
FINANCE
& INSUR. BALANCE SHEET WRITE-OFFS
|
Accounting
for Commercial Real Estate market values, loan loss reserves
|
21
|
17
|
-4
|
US STOCK
MARKET VALUATIONS
|
Over-Valuation
and unrealistic earnings estimates.
|
22
|
16
|
-6
|
GOVERNMENT
BACKSTOP INSURANCE
|
Fannie,
Freddie, Ginnie, FHA, FDIC, Pension Guarantee backstop funding.
|
23
|
23
|
SAME
|
SHRINKING
REVENUE GROWTH RATE
|
Slowing
Corporate Top-Line revenue growth rates
|
24
|
27
|
+3
|
GLOBAL
OUTPUT GAP
|
Global
Overcapacity & Underutilization
|
25
|
29
|
+4
|
US DOLLAR
WEAKNESS
|
Domestic
Inflationary Pressures
|
26
|
28
|
+2
|
US RESERVE
CURRENCY
|
Emergence of
alternative solutions such as SDRs. Inflationary repatriation impact
|
27
|
20
|
-7
|
PUBLIC
SENTIMENT & CONFIDENCE
|
Growing
social unrest and public rage
|
28
|
26
|
-2
|
SLOWING
RETAIL & CONSUMER SALES
|
Impact of
slowing consumer sales and increasing savings rate on 70% consumption US
Economy
|
29
|
25
|
-4
|
NORTH &
SOUTH KOREA
|
Geo-Political
tensions - Escalating
|
30
|
12
|
-18
|
US FISCAL,
TRADE AND ACCOUNT IMBALANCES
|
Inability of
the US to finance imbalances
|
31
|
21
|
-10
|
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
|
IRAN NUCLEAR
THREAT
|
Israeli
attack on Iran - Middle East escalation
|
35
|
33
|
-2
|
NATURAL
PHYSICAL DISASTER
|
Presently:
Gulf Oil Spill Economic fallout and possible hurricane impact
|
36
|
31
|
-5
|
PANDEMIC
/EPIDEMIC
|
Unknown
black swan
|
37
|
32
|
-5
|
CHANGES OF SIGNIFICANCE THIS QUARTER
INCREASES IS WAS CHANGE
- Oil Price
Pressures 14 30 +16
- China Bubble
9 22 +13
- Food Price
Pressures 5 15 +10
- Rising
Inflation Pressures & Interest Rate Pressures 6 14 + 8
- Geo-Political
Event Risk New
- Social
Unrest New
DECREASES
- North &
Southern Korea 30 12 -18
- Financial
Crisis Programs Expiration Impact 34 24 -10
The Tectonic Shifts from 2007
to 2013 are best shown in the following illustration which is closely
tracking our expectations and projections from the early stage of the
financial crisis.
CONCLUSIONS
We need to carefully watch:
- The
increasing & accelerated contagion of social tensions. Watch for
Asia demonstrations in places such as North Korea.
- How and if
the Central Banks actually do unwind their crisis 'triage' programs or
are they realistically now permanent and necessary to maintain the
illusion of financial stability?
- New
government public policy initiatives to combat growing inflation and
price pressures
- The
financial sectors abilities to continue to hide massive nonperforming
commercial and residential real estate loans through Federal Reserve
endorsed accounting gimmickry.
These events will allow us to
determine if our roadmap is still valid or if we are going to see even sooner
and possibly poorer financial outcomes than we predict in our free Monthly
Market Commentary and Market
Analytics reports.
The public will soon wake up
to the magnitude of money printing that is going on to support the economic
recovery fallacy. When the public does become aware, "Money
Velocity" will accelerate. When this happens, the likelihood is that the
markets will dramatically rise, not because economic conditions are
improving, but rather because of a depreciating US dollar. We believe this
expectation is presently being priced into the market. We are truly exposed
to the potential of a "Minsky
Melt-Up" or more correctly from an Austrian perspective, a Von Mises
"Crack-up Boom".
The risks are presently
towards a SHORT TERM corrective consolidation. The Intermediate Term calls
for higher market highs into June 2011 - then it gets ugly - fast!
"The Federal Reserve
historically was the lender of last resort in a crisis;
Today, the Federal Reserve is the buyer of first resort in a crisis
..... and every day for that matter"
Sign Up for the free 2011
Thesis Paper: Beggar-thy-Neighbor at Tipping
Points