Current Thesis Advisory:
Reading the right books?
We have analyzed & included
"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."
Gladwell describes the "three rules of epidemics" (or the three "agents of change") in the tipping points of epidemics.
PROCESS OF ABSTRACTION
SOVEREIGN DEBT & CREDIT CRISIS
MUNI BOND OUTFLOWS
RESIDENTIAL REAL ESTATE - PHASE II
COMMERCIAL REAL ESTATE
2011 will see the largest magnitude of US bank commercial real estate mortgage maturities on record.
2012 should be a top tick record setter for bank CRE maturities looking both backward and forward over the half decade ahead at least.
Will this be an issue for an industry that has been supporting reported earnings growth in part by reduced loan loss reserves over the recent past? In 2010, approximately $250 billion in commercial real estate mortgage maturities occurred. In the next three years we have four times that much paper coming due.
Will CRE woes, (published or unpublished) further restrain private sector credit creation ahead via the commercial banking conduit?
Wiil the regulators force the large banks to show any increase in loan impairment. Again, given the incredible political clout of the financial sector, I doubt it.
We have experienced one of the most robust corporate profit recoveries on record over the last half century. We know reported financial sector earnings are questionable at best, but the regulators will do absolutely nothing to change that.
So once again we find ourselves in a period of Fed sponsored asset appreciation. The thought, of course, being that if stock prices levitate so will consumer confidence. Which, according to Mr. Bernanke will lead to increased spending and a virtuous circle of economic growth. Oh really? The final chart below tells us consumer confidence is not driven by higher stock prices, but by job growth.
9 - CHRONIC UNEMPLOYMENT
There are 3 major inflationary drivers underway.
1- Negative Real Interest Rates Worldwide - with policy makers' reluctant to let their currencies appreciate to market levels. If no-one can devalue against competing currencies then they must devalue against something else. That something is goods, services and assets.
2- Structural Shift by China- to a) Hike Real Wages, b) Slowly appreciate the Currency and c) Increase Interest Rates.
3- Ongoing Corporate Restructuring and Consolidation - placing pricing power increasingly back in the hands of companies as opposed to the consumer.
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
US$ RESERVE CURRENCY
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.
PUBLIC SENTIMENT & CONFIDENCE
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).
EM Equities: Breaking Down?
Emerging market stock prices have broken down in relative terms, and the odds of a breakdown in absolute terms are rising. Our composite momentum indicator for relative performance against the global equity benchmark has fallen sharply into negative territory, while the momentum indicator for absolute performance has negatively diverged from share prices. There are a number of signals that often occur at the cusp of some sort of top. First, share price tops tend to occur amid strong growth and rising inflation, as the market becomes preoccupied with policy tightening to curb inflation and a subsequent economic slowdown. Second, IPO activity in emerging market bourses is booming and global retail investors have been pouring money into the asset class, indicative of extrapolation of past decade performance into the future. This is typical at frothy market points. Finally, policymakers in developing nations are tightening policy to combat inflationary pressures. Such policy tightening will eventually slow down growth, leaving emerging market share prices in a hostile spot. Bottom line: Many signs that typically precede a prolonged period of underperformance, or some sort of a top, have been evident in emerging markets. Caution is warranted.
We've pointed this out before, that unlike with other credit instruments, munis are unlikely to pose systemic risk (even with a lot of defaults) simply because they're not typically owned by systemically important institutions. Most are owned by individuals -- people who are small enough to fail. This chart from Bank of America/Merrill Lynch's Global Credit Strategy Outlook Conference Call breaks it down.
Now, what about the impact on property-casualty insurers? All told, they account for about 25% of holdings.
By their estimates, an "extreme" level of muni defaults would lead about 5% equity hit for these companies.
For some perspective on the post-financial crisis rally, today's chart illustrates how much of the downturn that occurred as a result of the financial crisis has been retraced by each of the five major stock market indexes. For example, the Dow peaked at 14,164.53 back in October 9, 2007 and troughed at 6547.05 back on March 9, 2009. The Dow currently trades at 12,229.29 -- it has retraced 74.6% of its financial crisis bear market decline. As today's chart illustrates, each of these five major stock market indices have retraced over 70% of their financial crisis decline. However, it is the Russell 2000 (small-cap stocks), the tech-laden Nasdaq, and the S&P 400 (mid-cap stocks) that have recouped nearly all or (in the case of the S&P 400) more than all of the losses incurred during the financial crisis.
"As interest rates decline to nearly zero bound, it is classical Keynes who postulated that buyers of government bonds would disappear and retreat to cash as the returns in the bonds could not justify the risk in holding them. This appears to be taking place, and once WASHINGTON and theFed become the whole market (which they now are), how will they get private investors to return after they withdraw -- this is the question."
Ty Andros - TraderView
As the main-stream press misleads the public to support PUBLIC servants and central bankers in raping the public and their creditors at large with the soft default of the printing press. The printing press looms LARGE in 2011, as the maturity wall of PAST borrowing (which is requiring the rolling forward of previous borrowing) joins with current requirements for NEW borrowing to create the perfect storm for developed-world governments and financial systems.
In the United States the amount required has BALLOONED to almost 28% of GDP, totaling approximately $4.2 Trillion. Just doing the math tells us this will require a US Bond issuance of one maturity or another of almost $16 Billion A DAY (260 weekdays in 52 weeks). Since these sums are unconceivable to me and you, let me take it to a number you may be able to grasp: take $1 Million and multiply that by 16,000 A DAY! How absurd. This is being loaded onto the US public's back as DEBT slaves to pay for the follies (i.e. redistribution, expansion of government and funding of politically-correct schemes such as CLEAN energy, ethanol, etc. -- boondoggles all) of morally-bankrupt public servants, banksters, crony capitalists and elites.
In the developed world the total required is $10.2 trillion for the year, or $39 billion (39,000 million) a day. These sums are SIMPLY INCONCEIVABLE, and of course do not include all the debt these rascals have either GUARANTEED, promised to pay in future entitlements or hold off their balance sheets, especially including that of their financial systems. And that is before even one company tries to raise money in the bond markets; but what will be left to borrow? Take a look at the bloody details as compiled by the IMF:
This is the boat the developed world's economies and public servants find themselves in, and it is sinking FAST. What a maturity wall, will they hurdle it? When looking at Ireland, that number is now almost another 20% of GDP for 2011 -- not including the bailout of 82 billion Euros in 2010. That is 28,533 Euros ($38,947) per person in Ireland (now debt slaves to foreign banksters in the eurozone). Including interest, principle and compounding, every man, woman and child will pay MANY TIMES MORE than this. This is not a rescue, this is a crime against the public.
The Irish bailouts are FAR FROM OVER, billions more unpayable IRISH BANK obligations are still sitting within the EU banks and have yet to be dealt with. To see just a hint of what's to come, take a look at this illustration of Crossborder Holdings of the PIIGS (Portugal, Ireland, Italy, Greece and Spain) to see the enormity of the current challenges - and but a small portion of the TOTAL European Union's challenges:
"In order to pay debt you must have income growth, and income growth is nothing but a statistical ILLUSION, courtesy of politically-correct INFLATION measures used to FIX the DATA for PUBLIC consumption. Incomes are in FREEFALL if correctly measured and INFLATION is EATING the middle and lower classes ALIVE. We have a congress doing tax and spend, borrow and spend (40 cents of every dollar spent is BORROWED), and the Federal Reserve is doing print and spend. DITTO EUROPE. NOWHERE are the policies of growth being considered or implemented, and as growth contracts, the printing press is the only escape route."
Ty Andros - TraderView