Dramatic Increases in Traffic Volumes are forcing us to move.

Today's Tipping Points   ||   Process of Abstraction   ||   Commentary   ||   Reader Roadmap

   ||   Subscriptions   ||   Gordon T Long

TIPPING POINTS

 
INVESTMENT RESEARCH
Bookstore

Bookmark and Share 

 

"Extend & Pretend" Read the Series...



Stage 1 Comes to an End!
A Matter of National Security
A Guide to the Road Ahead 
Confirming the Flash Crash Omen
It's Either RICO Act or Control Fraud
Shifting Risk to the Innocent
Uncle Sam, You Sly Devil!
Is the US Facing a Cash Crunch?
Gaming the US Tax Payer
Manufacturing a Minsky Melt-Up
Hitting the Maturity Wall
An Accounting Driven
Market Recovery

For upcoming show times...
See
Reader Roadmap

"SULTANS OF SWAP"
Read the series...

 

"EURO EXPERIMENT"
Read the series...

"UR all PIGS from HELL

For upcoming show times...
See
Reader Roadmap

FREE COPY...

Current Thesis Advisory:
"EXTEND & PRETEND"

PDF, 62 pages
Published November 2009


Click to view Index

CONTACT US
Use Promo Code: INTRODUCTION
in the Email Subject


Bookmark and Share

"INNOVATION"
Read the series...

For upcoming show times...
See
Reader Roadmap

 

"PRESERVE & PROTECT"
Read the series...

For upcoming show times...
See
Reader Roadmap

 

 
POSTS: Wednesday, 03-09-2011
   
Latest Research Publications RSS 
Last update:  03/10/2011 4:05 AM Postings begin at 5:30am EST
and updated throughout the day
External Articles Articles open in new window
ARTICLE Mouse
Over
Source Tipping
Point
EU SOVEREIGN DEBT CRISIS     1
WSJ 1
BL 1
  FT 1
IBERIAN PENINSULA: SPAIN / PORTUGAL     1
FT 1
     
USA     1

Congressional Presentation 1
TTicker 1
  Wells Fargo 1

KPCB 1
  FT 2
  FT 2
STATE & LOCAL GOVERNMENT     4
G&M 4
     
^FOOD PRICE PRESSURES^     5
Telegraph 5

BI 5
     
^RISING INFLATION & INTEREST PRESSURES ^     6

Saville 6

Doug Short 6
     
^SOCIAL UNREST^     7
  FT 7
     
  Pesek 9
Yale 9
^GEO-POLITCAL EVENT - North Africa & Middle East^     10
Global Insight 10
BI 10
     
  BL 11
TTicker 13
  Charles Hugh Smith 13
Congressman Ron Paul 13
     
^OIL PRICE PRESSURES^     14
  Telegraph 14
  FTA 14
     
  S&P 15
NB Financial 16
  Dean Baker 17
  Danske 26
  Fortune 27
  BL 28
       
Other News Items of Importance
CENTRAL BANKING MONETARY POLICIES, ACTIONS & ACTIVITIES      
  Shales  

Pragmatic Capitalist  
  EF News  
CURRENCY WARS      
  FT  
COMMODITY CORNER      
  Christian  
  USAT  
  Mack  
  MW  
TECHNICALS & MARKET ANALYTICS      

BI  
  CNBC  
  BI  
MARKET WARNINGS      
  Farrell  
  The Trumpet  
  Minack  
MARKET MANIPULATION      
  CNBC  
  Sorkin  
  WSJ  
GENERAL INTEREST      
  Hayman  
  Schiff  
       
Featured Video
  MusicVid  

C-SPAN  
  C-Span  
  CNBC  
  YouTube  
  CNBC  
  David Rosenberg  
  MSNBC  
  You Tube  
  BL  
  Chris Martenson  
  Chris Martenson  
  GRTV  
  Glenn Beck  
  Mike Ruppert  
  You Tube  
  Bloomberg  
  North  
  YouTube  
  Before Its News  
TechTicker  
  YouTube  
  Bloomberg  
  Real News  
  Hunt - Stansberry  
  Fora TV  
  U-Tube  
     
Featured Audio
  BL Surveillance  
  BL Surveillance  
  BL Surveillance  
  TalkDigital  
  TalkDigital  
  TalkDigital  
     
Briefs
  Gordon T Long  
  Gordon T Long  
     
READER ROADMAP & GUIDE:   2010 Tipping Points and commentary


 
Tipping Points Life Cycle - Explained

Click on image to enlarge

   

Quote Of The Week

They (banks) had to know, but the attitude was sort of, ‘If you’re doing something wrong, we don’t want to know.’ ”

“I am saying that the banks and funds were complicit in one form or another.” 

Bernie Madoff Interview - NY Times

  BUY ANY BOOK
Get a 2-Month Subscription to
...

Monthly Market Commentary
Promotion Details   

 

 

 

 

FAIR USE NOTICE

This site contains copyrighted material the use of which has not always been specifically authorized by the copyright owner. We are making such material available in our efforts to advance understanding of environmental, political, human rights, economic, democracy, scientific, and social justice issues, etc. We believe this constitutes a 'fair use' of any such copyrighted material as provided for in section 107 of the US Copyright Law. In accordance with Title 17 U.S.C. Section 107, the material on this site is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. If you wish to use copyrighted material from this site for purposes of your own that go beyond 'fair use', you must obtain permission from the copyright owner.

COPYRIGHT & DISCLAIMER

Gordon T Long is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. Of course, he recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you confirm the facts on your own before making important investment commitments.

© Copyright 2010 Gordon T Long. The information herein was obtained from sources which Mr. Long believes reliable, but he does not guarantee its accuracy. None of the information, advertisements, website links, or any opinions expressed constitutes a solicitation of the purchase or sale of any securities or commodities. Please note that Mr. Long may already have invested or may from time to time invest in securities that are recommended or otherwise covered on this website. Mr. Long does not intend to disclose the extent of any current holdings or future transactions with respect to any particular security. You should consider this possibility before investing in any security based upon statements and information contained in any report, post, comment or recommendation you receive from him.

EMAIL US

  

Fractal Research  ||  Secrets of the Pyramids  ||  Φ Research  ||  Platonic Solids   ||  6T Development Site

 

  
         

ARCHIVES 

MARCH
S M T W T F S
    1 2 3 4 5
6 7 8 9 10 11 12
13 14 15 16 17 18 19
20 21 22 23 24 25 26
27 28 29 30 31    
  
Complete Archives
 
  

Mouse Over for Descriptions

TIPPING POINTS

Process of Abstraction

Research Process

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

Reading the right books?
No TIme?

We have analyzed & included
these in our latest research papers!


Accepting Pre-orders

Book Review- Five Thumbs Up for Steve Greenhut's Plunder!

 

 

 

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

RISK REVERSAL

 

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
growth.

 

US$ RESERVE CURRENCY

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

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).

Federal Reserve Chairman Ben Bernanke gave his predictions on a House Republican plan to cut $60 billion dollars from the FY 2011 budget, saying it would eliminate 200, 000 jobs and only slightly lower economic growth.

He instead endorsed a Congressional federal deficit reduction plan that would take effect over a five to 10 year period, saying that markets look more towards Congressional action than the actual state of the economy. His remarks came during a House Financial Services Committee hearing in which he delivered his agency's semi-annual monetary report.

Despite Bernanke’s observations, several Republican lawmakers expressed doubt based on past efforts by the Fed and Congress to prompt economic growth through large stimulus packages.

Yesterday, the Fed Chair told the Senate Banking Committee that the U.S. economy will continue to grow this year despite rising oil prices, a high employment rate and weak housing market.

The 1978 Humphrey-Hawkins Act requires the Federal Reserve Board of Governors to deliver a report to Congress twice a year on its past economic policy decisions and discuss recent financial and economic developments.

Another nail in the coffin of the deflation argument

In the article posted HERE, Robert Murphy explains that earlier this year the Fed implemented a change in its accounting. On the surface the change appeared to be trivial. In fact, it was promoted by the Fed as being nothing more than a small step towards greater transparency. However, it has since become clear that this seemingly innocuous bookkeeping adjustment makes it impossible for the accounting value of the Fed's assets to fall below the accounting value of its liabilities; that is, it makes it impossible for the Fed to become technically insolvent.

The accounting change in question involves the offsetting of changes in assets by an equivalent change in liabilities, such that an $X increase or decrease in the total market value of assets will now automatically be offset by an $X increase or decrease in an item on the liability side of the Fed's balance sheet called "Interest on Federal Reserve notes due to the Treasury". Of primary importance, in the case where the Fed's assets decline in value the aforementioned item would be a negative number. For example, if the Fed's assets were to suddenly fall in value by $1 trillion, as a result of the recently-implemented accounting change the capital shown on the Fed's balance sheet would remain intact because the $1T decline in assets would be offset by inserting a negative $1T liability. Ben Bernanke may well be a terrible economist, but time and time again he proves to be a master of financial legerdemain.

Concerns about the health of its balance sheet were never likely to prevent the Fed from inflating the money supply if more inflation was deemed desirable, but in the unlikely event that balance-sheet health was a limiting factor in the past the above-mentioned accounting change will ensure that it won't be in the future. This means that another nail has been driven into the coffin of the deflation argument.

The Exploding US Money Supply Myth

In recent weeks some hyperinflationists have succumbed to the reality that QE2 isn’t really adding net new financial assets to the private sector – it is indeed just an asset swap.  But this hasn’t stopped them from claiming that QE2 directly results in an exploding money supply.  This convoluted thinking claims that QE is directly funding government spending (as if the US government would have stopped spending money and folded up shop without QE2).  So now the theory is that QE is really resulting in excess of $1.5T in new money in the form of deficit spending. This is flawed for reasons I have previously explained, but let’s not theorize about the money supply – let’s allow the facts to speak for themselves.

Over the years many have been quick to cite the monetary base as the direct transmission mechanism that would lead to the great hyperinflation.  We all know the story – the Fed’s balance sheet explodes, the monetary base shoots higher and money starts flowing out of bank vaults like a volcanic overflow.  But regular readers are all too aware that the monetary base has no correlation with the broader money supply.  The reasoning is simple – the money multiplier is a myth.  So, it doesn’t matter how many apples (reserves) the Fed puts on the shelves.  It doesn’t result in more apple sales (loans). 

Banks are never reserve constrained. 

The explosion in reserves and continuing decline in loans makes this crystal clear. 

The Fed can continue to stuff banks with reserves and unless we see a substantive increase in lending the expansion of the monetary base will continue to be insignificant.

But what about M2?  Isn’t it also exploding higher now?  Not really.  In a recent article Erwan Mahe, an asset allocation and options strategist with OTCexgroup, posted this excellent chart comparing M2 growth across the big three economies.  He said:

“As you can see in this graph, China literally allowed its money supply to skyrocket, compared to that of the U.S. or the eurozone, with annual growth averaging +17.4% between 1996 and 2008, which compares to +7.1% in the eurozone and +6.3% in the United States.

Above all, since the beginning of 2009, this divergence has actually widened, despite the Fed’s QEs and 0% interest rates, since Chinese M2 has been growing at 26.6% per annum (!), versus +3.5% in the U.S. and +2.3% in the eurozone.

So, I wonder, is Bernanke truly responsible for the hike in world commodity prices and the ensuing popular upheavals?”

The story here couldn’t be more self explanatory.  The US M2 money supply is simply not expanding anywhere close to its historical rate.  The only country where the M2 money supply is seeing any sort of substantive growth is in China.  And so it’s not surprising to see the combination of commodity hungry China and enormous money supply growth result in higher commodity prices.  While I don’t think it’s incorrect to blame some speculative aspect of this rally on the Fed it is entirely incorrect to blame the Fed for the commodity rally due to their “money printing”.  The fact is, the USA is not expanding the money supply at an alarming rate.  China controls their own money supply.  If they desire to print money in order to maintain their flawed currency peg then that’s a policy only they can control.  Blaming the Fed for China’s flawed monetary policy is not even remotely fair.

Although the USA stopped issuing M3 we can still measure M3 through various independent sources.  Hyperinflationists are often quick to point out Shadow Stats when anyone cites the CPI.  Ironically, according to their data the M3 money supply is still shrinking at an annualized rate:

So yes, the US government is running a massive $1.5T deficit, however, by any metric of money supply we can see that this is barely offsetting the continued de-leveraging that is occurring across the US economy.  We are certain to see higher rates of inflation in 2011 (especially if oil prices surge higher), however, it is not an accurate portrayal of reality to conclude that the USA is “printing money” uncontrollably and flooding the world with dollars that will lead to hyperinflation. That is simply not the case and the data speaks for itself. 

At best, we are barely printing enough to offset the destruction of de-leveraging….

The percentage of farmers who think farm values will increase next quarter just had its biggest sequential jump in history last quarter.

The chart is part of a bigger report, which urges caution on the red-hot fertilizer companies, like Potash and Mosaic.

Says Citi's PJ Juvekar:

Fertilizer equities have been among the best performing stocks over the past eight months. Stock prices in our fertilizer universe have increased on average more than 100% since last July compared to a gain of ~27% for the S&P 500. We are not turning bearish on the fundamentals of the fertilizer cycle, which remain robust as we confirmed during our recent trip to Brazil. However, we think much of the good news is factored into current equity prices. Realized fertilizer prices will improve as old contracts run off and more product is shipped at newly announced higher prices, boosting earnings. But this trend is reflected in high P/E multiples for the group. Lacking well-defined near-term catalysts, we see growing risk that the stocks could trade sideways into the summer. As a result, we move from Buy to Hold for both POT and MOS.

Today is the 2-year anniversary of the March, 2009 bottom. Why have stocks been on such a monster tear since then? It's not that complicated, really. The v-shaped recovery in equities is closely echoed by the v-shaped recovery in earnings, as this chart from Citi's Tobias Levkovich confirms. If earnings continue on their current trajectory, or something close to it, watch for stocks to follow.

In a previous post I illustrated the growth of household incomes since 1967 based on Census Bureau data. Let's trim the timeline and compare the growth of two major household expenses — medical costs and college tuition and fees. The first chart below shows the real (inflation-adjusted) annualized income growth from 1980 to 2009 (the most recent annual data). The lines represent the average household incomes by quintile along with the average for the top five percent of households.

The next chart shows the real growth of medical costs over the same time frame. The top 5% of households saw their real incomes increase by 71.5%. But real medical costs grew by a stunning 241%.


But the growth in medical costs pales in comparison to the growth of college tuition and fees, up 596% since 1980. Mind you, that's 596% above the core rate of inflation, which increased by a "mere" 160.4% over the same time frame.

Medical costs are incurred to varying degrees by all households. A critical factor in determining the pain of these costs is the ratio of household medical costs to total expenses.

College tuition and fees are another matter in several respects. Not all households incur these costs, and they happen over relatively short periods of time. Also, the costs may be split between households — parents, children and occasionally grandparents — and financed over time. But one hypothesis we might formulate from the data is that college for lower-income families create an enormous debt burden. Unless the education purchased helps to move its recipient into the higher income quintiles, its value is no bargain.

The next chart is from USA, Inc., a non-partisan report that looks at the U.S. federal government (and its financials) as if it were a business.

Are we getting our money's worth for our skyrocketing medical costs? Apparently not.

For anyone who is unfamiliar with the UNC, Inc. research, here is a direct link to the report in PDF format.

Wisconsin Congressman Paul Ryan has been using this presentation to persuade colleagues that dramatic action is needed to cut the deficit.

Ryan, the House Budget Chairman and lead debt warrior of the GOP, warns of a budget that will more than double from 2005 to 2020, reaching $5.5 trillion.

By 2080 the budget will reach 75% of GDP, dominated more than half by interest payments on debt.

Ryan supports curtailing Social Security benefits and converting Medicare to a voucher system.