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POSTS: Weekend, 01-22-2011
Last update:  02/12/2011 9:13 AM Postings begin at 5:30am EST
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TIPPING POINTS

Process of Abstraction

Research Process

1- Sovereign Debt Crisis
2- EU Banking Crisis
3- Bond Bubble
4- State & Local Government
5 - Risk Reversal
 
6 - Residential Real Estate -
Phase II
7 - Commercial Real Estate
8 - Central & Eastern Europe
9 - Chronic Unemployment
10 - US Banking Crisis II
11 - Pension - Entitlement Crisis
12 - North & South Korea
 
13 - Public Policy MIscues
14 - Rising Interest Pressures
15 - Food Price Pressures
16 - US Stock Market Valuations
17- Finance & Insurance Balance Sheet Write-Offs
18 - Japan Debt Deflation Spiral
19 -Credit Contraction II
 
20 - US Reserve Currency
21 - US Fiscal, Trade and Account ImBalances
22 - China Overheating Buuble
23- Government Backstop Insurance
24 - Corporate Bankruptcies
25 - Slowing Retail & Consumer Sales
26 - Public Sentiment & Confidence
27 - Shrinking Revenue Growth Rate
28 - US Dollar Weakness
29 -Global Output Gap
30 - Oil Price Pressures
31 -Natural Disaster
32 - Pandemic
33 - Iran Nuclear Threat
34 - Crisis Programs Expiration
35 - Terrorist Event

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TIPPING POINTS

"The moment of critical mass, the threshold, the boiling point"

The tipping point is the critical point in an evolving situation that leads to a new and irreversible development. The term is said to have originated in the field of epidemiology when an infectious disease reaches a point beyond any local ability to control it from spreading more widely. A tipping point is often considered to be a turning point. The term is now used in many fields. Journalists apply it to social phenomena, demographic data, and almost any change that is likely to lead to additional consequences. Marketers see it as a threshold that, once reached, will result in additional sales. In some usage, a tipping point is simply an addition or increment that in itself might not seem extraordinary but that unexpectedly is just the amount of additional change that will lead to a big effect. In the butterfly effect of chaos theory , for example, the small flap of the butterfly's wings that in time leads to unexpected and unpredictable results could be considered a tipping point. However, more often, the effects of reaching a tipping point are more immediately evident. A tipping point may simply occur because a critical mass has been reached.

The Tipping Point: How Little Things Can Make a Big Difference is a book by Malcolm Gladwell, first published by Little Brown in 2000. Gladwell defines a tipping point as "the moment of critical mass, the threshold, the boiling point." The book seeks to explain and describe the "mysterious" sociological changes that mark everyday life. As Gladwell states, "Ideas and products and messages and behaviors spread like viruses do."

The three rules of epidemics

Gladwell describes the "three rules of epidemics" (or the three "agents of change") in the tipping points of epidemics.

  • Connectors are the people who "link us up with the world ... people with a special gift for bringing the world together." They are "a handful of people with a truly extraordinary knack [... for] making friends and acquaintances". He characterizes these individuals as having social networks of over one hundred people. To illustrate, Gladwell cites the following examples: the midnight ride of Paul Revere, Milgram's experiments in the small world problem, the "Six Degrees of Kevin Bacon" trivia game, Dallas businessman Roger Horchow, and Chicagoan Lois Weisberg, a person who understands the concept of the weak tie. Gladwell attributes the social success of Connectors to "their ability to span many different worlds [... as] a function of something intrinsic to their personality, some combination of curiosity, self-confidence, sociability, and energy."
  • Mavens are "information specialists", or "people we rely upon to connect us with new information." They accumulate knowledge, especially about the marketplace, and know how to share it with others. Gladwell cites Mark Alpert as a prototypical Maven who is "almost pathologically helpful", further adding, "he can't help himself". In this vein, Alpert himself concedes, "A Maven is someone who wants to solve other people's problems, generally by solving his own". According to Gladwell, Mavens start "word-of-mouth epidemics" due to their knowledge, social skills, and ability to communicate. As Gladwell states, "Mavens are really information brokers, sharing and trading what they know".
  • Salesmen are "persuaders", charismatic people with powerful negotiation skills. They tend to have an indefinable trait that goes beyond what they say, which makes others want to agree with them. Gladwell's examples include California businessman Tom Gau and news anchor Peter Jennings, and he cites several studies about the persuasive implications of non-verbal cues, including a headphone nod study (conducted by Gary Wells of the University of Alberta and Richard Petty of the University of Missouri) and William Condon's cultural microrhythms study.

 

RESEARCH METHODOLOGY

 

PROCESS OF ABSTRACTION

 

 

SOVEREIGN DEBT & CREDIT CRISIS

 

Inverted chart of 30-year Treasury yields courtesy of Doug Short and Chris Kimble. As you can see, yields are at a "support" area that's held for 17 years.

If it breaks down (i.e., yields break out) watch out!

The state budget crisis will continue next year, and it could be worse than ever. That's part of what's freaking out muni investors, who last week dumped them like they haven't in ages.

States face a $112.3 billion gap for next year, according to the Center on Budget and Policy Priorities. If the shortfall grows during the year -- as it does in most years -- FY2012 will approach the record $191 billion gap of 2010. Remember, with each successive shortfall state budgets have become more bare.

Things could be especially bad if House Republicans push through a plan to cut off non-security discretionary funding for states, opening an additional $32 billion gap. 

MUNI BOND OUTFLOWS

FOOD PRICE PRESSURES

RICE: Abdolreza Abbassian, at the FAO in Rome, says the price of rice, one of the two most critical staples for global food security, remains below the peaks of 2007-08, providing breathing space for 3bn people in poor countries. Rice prices hit $1,050 a tonne in May 2008, but now trade at about $550 a tonne.

WHEAT: The cost of wheat, the other staple critical for global food security, is rising, but has not yet surpassed the highs of 2007-08. US wheat prices peaked at about $450 a tonne in early 2008. They are now trading just under $300 a tonne.

The surge in the FAO food index is principally on the back of rising costs for corn, sugar, vegetable oil and meat, which are less important than rice and wheat for food-insecure countries such as Ethiopia, Bangladesh and Haiti. At the same time, local prices in poor countries have been subdued by good harvests in Africa and Asia.

 

- In India, January food prices reflected a year-on-year increase of 18%t.

- Buyers must now pay 80%t more in global markets for wheat, a key commodity in the world's food supply, than they did last summer. The poor are especially hard-hit. "We will be dealing with the issue of food inflation for quite a while," analysts with Frankfurt investment firm Lupus Alpha predict.

- Within a year, the price of sugar on the world market has gone up by 25%.

US STOCK MARKET VALUATIONS

WORLD ECONOMIC FORUM

Potential credit demand to meet forecast economic growth to 2020


The study forecast the global stock of loans outstanding from 2010 to 2020, assuming a consensus projection of global
economic growth at 6.3% (nominal) per annum. Three scenarios of credit growth for 2009-2020 were modelled:


• Global leverage decrease. Global credit stock would grow at 5.5% per annum, reaching US$ 196 trillion in 2020. To
meet consensus economic growth under this scenario, equity would need to grow almost twice as fast as GDP.
• Global leverage increase. Global credit stock would grow at 6.6% per annum, reaching US$ 220 trillion in 2020.
Likely deleveraging in currently overheated segments militates against this scenario.
• Flat global leverage. Global credit stock would grow at 6.3% per annum to 2020, tracking GDP growth and reaching
US$ 213 trillion in 2020 – almost double the total in 2009. This scenario, which assumes that modest
deleveraging in developed markets will be offset by credit growth in developing markets, provides the primary credit
growth forecast used in this report.

Will credit growth be sufficient to meet demand?


Rapid growth of both capital markets and bank lending will be required to meet the increased demand for credit – and it is
not assured that either has the required capacity. There are four main challenges.


Low levels of financial development in countries with rapid credit demand growth. Future coldspots may result from the
fact that the highest expected credit demand growth is among countries with relatively low levels of financial access. In
many of these countries, a high proportion of the population is unbanked, and capital markets are relatively undeveloped.


Challenges in meeting new demand for bank lending. By 2020, some US$ 28 trillion of new bank lending will be
required in Asia, excluding Japan (a 265% increase from 2009 lending volumes) – nearly US$ 19 trillion of it in China
alone. The 27 EU countries will require US$ 13 trillion in new bank lending over this period, and the US close to US$
10 trillion. Increased bank lending will grow banks’ balance sheets, and regulators are likely to impose additional capital
requirements on both new and existing assets, creating an additional global capital requirement of around US$ 9 trillion
(Exhibit vi). While large parts of this additional requirement can be satisfied by retained earnings, a significant capital gap in
the system will remain, particularly in Europe.

The need to revitalize securitization markets. Without a revitalization of securitization markets in key markets, it is doubtful
that forecast credit growth is realizable. There is potential for securitization to recover: market participants surveyed by
McKinsey in 2009 expected the securitization market to return to around 50% of its pre-crisis volume within three years.
But to rebuild investor confidence, there will need to be increased price transparency, better data on collateral pools, and
better quality ratings.


The importance of cross-border financing. Asian savers will continue to fund Western consumers and governments:
China and Japan will have large net funding surpluses in 2020 (of US$ 8.5 trillion and US$ 5.7 trillion respectively), while
the US and other Western countries will have significant funding gaps. The implication is that financial systems must
remain global for economies to obtain the required refinancing; “financial protectionism” would lock up liquidity and stifle
growth.

 

SocGen crafts strategy for China hard-landing

Société Générale fears China has lost control over its red-hot economy and risks lurching from boom to bust over the next year, with major ramifications for the rest of the world.

Société Générale said China's overheating may reach 'peak frenzy' in mid-2011

- The French bank has told clients to hedge against the danger of a blow-off spike in Chinese growth over coming months that will push commodity prices much higher, followed by a sudden reversal as China slams on the brakes. In a report entitled The Dragon which played with Fire, the bank's global team said China had carried out its own version of "quantitative easing", cranking up credit by 20 trillion (£1.9 trillion) or 50pc of GDP over the past two years.

- It has waited too long to drain excess stimulus. "Policy makers are already behind the curve. According to our Taylor Rule analysis, the tightening needed is about 250 basis points," said the report, by Alain Bokobza, Glenn Maguire and Wei Yao.

- The Politiburo may be tempted to put off hard decisions until the leadership transition in 2012 is safe. "The skew of risks is very much for an extended period of overheating, and therefore uncontained inflation," it said. Under the bank's "risk scenario" - a 30pc probability - inflation will hit 10pc by the summer. "This would cause tremendous pain and fuel widespread social discontent," and risks a "pernicious wage-price spiral".

- The bank said overheating may reach "peak frenzy" in mid-2011. Markets will then start to anticipate a hard-landing, which would see non-perfoming loans rise to 20pc (as in early 1990s) and a fall in bank shares of 50pc to 75pc over the following 12 months. "We think growth could slow to 5pc by early 2012, which would be a drama for China. It would be the first hard-landing since 1994 and would destabilise the global economy. It is not our central scenario, but if it happens: commodities won't like it; Asian equities won't like it; and emerging markets won't like it," said Mr Bokobza, head of global asset allocation. However, it may bring down bond yields and lead to better growth in Europe and the US, a mirror image of the recent outperformance by the BRICs (Brazil, Russia, India and China).

- Diana Choyleva from Lombard Street Research said the drop in headline inflation from 5.1pc to 4.6pc in December is meaningless because the regime has resorted to price controls on energy, water, food and other essentials. The regulators pick off those goods rising fastest. The index itself is rejigged, without disclosure. She said inflation is running at 7.6pc on a six-month annualised basis, and the sheer force of money creation will push it higher. "Until China engineers a more substantial tightening, core inflation is set to accelerate.

- The longer growth stays above trend, the worse the necessary downswing. China's violent cycle could be highly destabilising for the world." Charles Dumas, Lombard's global strategist, said the Chinese and emerging market boom may end the same way as the bubble in the 1990s. "The basic strategy of the go-go funds is wrong: they risk losing half their money like last time."

- Société Générale said runaway inflation in China will push gold higher yet, but "take profits before year end".

- The picture is more nuanced for food and industrial commodities. China accounts for 35pc of global use of base metals, 21pc of grains, and 10pc of crude oil. Prices will keep climbing under a soft-landing, a 70pc probability. A hard-landing will set off a "substantial reversal". Copper is "particularly exposed", and might slump from $9,600 a tonne to its average production cost near $4,000. Chinese real estate and energy equities will prosper under a soft-landing,

- The bank likes regional exposure through the Tokyo bourse, which is undervalued but poised to recover as Japan comes out of its deflation trap. If you fear a hard landing, avoid the whole gamut of Chinese equities. It will be clear enough by June which of these two outcomes is baked in the pie.

SocGen crafts strategy for China hard-landing Pritchard

SHRINKING REVENUE GROWTH RATES

PIMCO'S NEW NORMAL: According to PIMCO, the coiners of the term, the new normal is also explained as an environment wherein “the snapshot for ‘consensus expectations’ has shifted: from traditional bell-shaped curves – with a high likelihood mean and thin tails (indicating most economists have similar expectations) – to a much flatter distribution of outcomes with fatter tails (where opinion is divided and expectations vary considerably).” That is to say, the distribution of forecasts has become more uniform (as per Exhibit 1).

 

"I have discovered that the federal judges in Atlanta, Georgia, Washington, DC, and the justices of the United States Supreme Court function like common criminals intentionally making bogus rulings against honest people while covering up the crimes of their fellow judges.  I have been contacted by people from all over the country and around the world with their stories of judicial corruption with judges all over the U.S.

"My charges have been totally ignored by the United States Attorney's Office, the FBI, and Congress. I do not believe there is a shred of decency, honesty, or Constitutional rights in our federal courts.  In my opinion, we now live in a police state.  Judges are free to do absolutely anything they want.  Our laws are meaningless.  Your life savings can be stolen by a federal judge, and they have no risk in violating every law in the books.

"In my opinion, this is the most serious issue that our country has ever faced.  Our rights have been stolen.  And the mainstream media refuses to cover this story because they are afraid of the judges.  Heaven help us.

From: William M. Windsor
To: bill@lawlessamerica.com
Sent: Friday, January 21, 2011 4:55 PM
Subject: Windsor - Supreme Court and Judicial Corruption

Many hundreds have called and emailed following Monday’s shocking Supreme Court decisions to allow federal courts to void the Constitution at will.

I have not been able to respond to any of you individually yet as I am recovering from eye surgery on Monday, and it is hard to read or type with two fingers with a steel cage and patch taped over my eye. I will respond to each of you individually, but please allow me to give a general response for now.

1. I am happy to be on all of the radio shows that have invited me. Just tell me when. Since it is now painfully obvious that the entire federal court system is corrupt, we have to get the word out. We desperately need a big-time newspaper writer or TV journalist to take this story and win a Pulitzer Prize with it. I have an idea for a grass roots effort to educate the masses. I will share it later.

2. For those who want copies of the rulings, here they are: DENIED. There was no narrative provided. This isn’t the case of a refusal to hear an appeal; this is the decision on three separate petitions for writs of mandamus that SCOTUS was required to consider and rule on. For those of you not familiar with the law, the Supreme Court (“SCOTUS”) is a court of original jurisdiction on petitions for writs of mandamus. A writ of mandamus is a “lawsuit” generally used to force a government official to perform their legal duty.

Copies of the rulings can be seen at http://www.supremecourt.gov/docket/docket.aspx Enter Windsor, William and search. The docket numbers are 10-632, 10-633, and 10-690. Copies of the petitions are here:

http://www.lawlessamerica.com/index.php/news/blog-of-william-m-windsor/103-petition-for-recusal-of-judge-william-s-duffey-us-supreme-court

http://www.lawlessamerica.com/index.php/news/blog-of-william-m-windsor/104-petition-for-recusal-of-judges-of-the-eleventh-circuit-court-of-appeals-us-supreme-court

http://www.lawlessamerica.com/index.php/news/blog-of-william-m-windsor/105-petition-for-recusal-of-judge-orinda-d-evans-us-supreme-court

3. The only hope in the world we have of getting anything done about the corruption is to get everyone working together to fight this. We need ONE website where we all put all of our information – one rallying point.

4. Those of you who have asked what you can do. Send my story to your friends. Tell your friends, neighbors, relatives, and anyone who will listen that we have a crisis in America, and we have to spread the word so enough people know about it to get something done. Go onto bulletin boards and forums and spread the word, and correct the numbskulls who say this is bogus.

5. A number of you have contacted me about things that sound a lot like revolution. As I understand it, anyone calling for the overthrow of the government can be locked up for a long time. So, I’m not into that. I’m happy to take time to understand what you have to say, but my approach is probably a lot more “pedestrian” than what some of you seem to be advocating.

6. I will share the views of all of you who say we don’t have a Constitution, and related views. Once again, I want to understand what you are saying, but that seems like an argument that won’t get us anywhere.

7. I am going to fly to Washington, DC as soon as my surgeon will let me as I want to get copies of all docket items in my files at SCOTUS. I am convinced from communication with Joseph Zernik that there are all kinds of illegal acts taking place in the Clerk’s office there, and the so-called orders of the Supreme Court that are nothing more than short letters are not valid based upon the law.

Today, I have ordered a mobile billboard in Washington, DC. It will say: WANTED: 1 Honest Government Official 800-###-####. I’m hoping the national media might pick it up.

8. We are planning a meeting of those interested here in Atlanta. A number of very interested people have said they will fly in for it. We tried to have this in December but I became quite ill and then had to have the eye surgery. Several have suggested that we meet in Washington, DC, so we might try to do that and make it an event. We have certainly outgrown Bill Moore’s living room as we originally planned.

9. It galls me to no end that there are so many people out there who don’t have any sense. If you have time, go here and straighten these people out –

http://patriotsforamerica.ning.com/forum/topics/us-supreme-court-issues?commentId=2734278%3AComment%3A250501&xg_source=msg_com_forum

10. I also learned today that some other people are spewing garbage on YouTube. Search for “Constitution Void,” and try to educate some of those folks. I tried to post replies, but YouTube hasn’t sent me permission yet.

11. Here are some articles off my website that help tell the story:

http://www.lawlessamerica.com/index.php/news/blog-of-william-m-windsor/68-we-live-in-lawless-america

Legal matters are almost always extremely detailed. Mine certainly is. It would take me hundreds of pages just to list all the judicial wrongdoing. It’s long, but here was my best effort at telling my story:

http://www.lawlessamerica.com/index.php/my-story

Here are my initial ideas for fixing the corruption:

http://www.lawlessamerica.com/index.php/news/blog-of-william-m-windsor/123-some-ideas-for-fixing-the-judicial-corruption-problem

Here’s how I have found the judges break the law:

http://www.lawlessamerica.com/index.php/news/blog-of-william-m-windsor/58-how-judges-break-the-law

11. To those of you who have suggested that we move to kinder and gentler places like Canada, I would love to…if it weren’t for the 2-year-old and 8-year-old granddaughters who live 15 minutes away from us in Atlanta.

12. I have never done a YouTube video, but I may try to do one this weekend.

13. I will be on a radio show Saturday night at 10 pm. As soon as I now the stations, I will post the information on www.lawlessamerica.com.

As I believe I said in my news release, I am still absolutely shocked that this could happen in America! It is truly unbelievable to me.

Bill

William M. Windsor

bill@lawlessamerica.com

Office: 770-578-1094

Estimates of the cost to recapitalize the banks range from 17 billion to 120 billion euros

with consensus falling in the 25 billion to 50 billion area, though Economy Minister Elena Salgado says it will be much lower.

- Spain plans a partial state takeover of its weakest savings banks as it seeks to reassure investors a rescue will not weigh on its deficit.

- The government would force debt-laden regional savings banks to become conventional banks and seek stock market listings to persuade skittish investors that they are good investments.

- The state-backed bank restructuring fund (FROB) would then take stakes in the banks -- known as cajas -- that fail to attract private investment, the source said. Up to now the FROB has functioned as a lender of last resort to the cajas.

- Deputy Prime Minister Alfredo Perez Rubalcaba told reporters a new savings bank plan was coming soon and could include new laws, implying a reform of the FROB.

- High levels of bad property loans at the cajas are seen as a major risk for Spain.

- The Bank of Spain forced the cajas last year into a round of mergers, reducing their number to 17 from 45. Five of them failed Europe-wide stress tests on banks last year.

- They must reveal by January 31 more details about their bad loans and property holdings. Only two cajas have reported so far, but once all the reports are in, the Bank of Spain will be able to give a clear idea of the total recapitalization needs.

- A bank recapitalization worth 50 billion euros would amount to about 5 percent of Spanish gross domestic product, which could endanger the government's goal of cutting the budget deficit to 6 percent of GDP this year.

- The FROB would have to raise debt on the market to purchase the bank stakes. In theory, the books would be balanced by the stakes in the savings banks to avoid a deficit impact, although the risk is those stakes dwindle in value.Taking stakes in the banks will increase the government's debt needs, said Josep Soler, general director of Financial Studies Institute. "We still don't know ... how much the cajas are going to need," he said. The FROB would invest in the cajas at market rates subject to EU anti-trust approval, a government source told Reuters.

- While some of the biggest cajas are seen as attractive, investors have shied away from smaller ones, notorious for being used by local politicians to fund pet projects from casinos to airports.

- The cajas plan a March trip to Asia, including China, following similar road shows in Europe and the United States.

Société Générale fears China has lost control over its red-hot economy and risks lurching from boom to bust over the next year, with major ramifications for the rest of the world.

Société Générale said China's overheating may reach 'peak frenzy' in mid-2011

- The French bank has told clients to hedge against the danger of a blow-off spike in Chinese growth over coming months that will push commodity prices much higher, followed by a sudden reversal as China slams on the brakes. In a report entitled The Dragon which played with Fire, the bank's global team said China had carried out its own version of "quantitative easing", cranking up credit by 20 trillion (£1.9 trillion) or 50pc of GDP over the past two years.

- It has waited too long to drain excess stimulus. "Policy makers are already behind the curve. According to our Taylor Rule analysis, the tightening needed is about 250 basis points," said the report, by Alain Bokobza, Glenn Maguire and Wei Yao.

- The Politiburo may be tempted to put off hard decisions until the leadership transition in 2012 is safe. "The skew of risks is very much for an extended period of overheating, and therefore uncontained inflation," it said. Under the bank's "risk scenario" - a 30pc probability - inflation will hit 10pc by the summer. "This would cause tremendous pain and fuel widespread social discontent," and risks a "pernicious wage-price spiral".

- The bank said overheating may reach "peak frenzy" in mid-2011. Markets will then start to anticipate a hard-landing, which would see non-perfoming loans rise to 20pc (as in early 1990s) and a fall in bank shares of 50pc to 75pc over the following 12 months. "We think growth could slow to 5pc by early 2012, which would be a drama for China. It would be the first hard-landing since 1994 and would destabilise the global economy. It is not our central scenario, but if it happens: commodities won't like it; Asian equities won't like it; and emerging markets won't like it," said Mr Bokobza, head of global asset allocation. However, it may bring down bond yields and lead to better growth in Europe and the US, a mirror image of the recent outperformance by the BRICs (Brazil, Russia, India and China).

- Diana Choyleva from Lombard Street Research said the drop in headline inflation from 5.1pc to 4.6pc in December is meaningless because the regime has resorted to price controls on energy, water, food and other essentials. The regulators pick off those goods rising fastest. The index itself is rejigged, without disclosure. She said inflation is running at 7.6pc on a six-month annualised basis, and the sheer force of money creation will push it higher. "Until China engineers a more substantial tightening, core inflation is set to accelerate.

- The longer growth stays above trend, the worse the necessary downswing. China's violent cycle could be highly destabilising for the world." Charles Dumas, Lombard's global strategist, said the Chinese and emerging market boom may end the same way as the bubble in the 1990s. "The basic strategy of the go-go funds is wrong: they risk losing half their money like last time."

- Société Générale said runaway inflation in China will push gold higher yet, but "take profits before year end".

- The picture is more nuanced for food and industrial commodities. China accounts for 35pc of global use of base metals, 21pc of grains, and 10pc of crude oil. Prices will keep climbing under a soft-landing, a 70pc probability. A hard-landing will set off a "substantial reversal". Copper is "particularly exposed", and might slump from $9,600 a tonne to its average production cost near $4,000. Chinese real estate and energy equities will prosper under a soft-landing,

- The bank likes regional exposure through the Tokyo bourse, which is undervalued but poised to recover as Japan comes out of its deflation trap. If you fear a hard landing, avoid the whole gamut of Chinese equities. It will be clear enough by June which of these two outcomes is baked in the pie.