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OCTOBER 2011: MONTHLY MARKET COMMENTARY -(Subscription Plan II - 26 Pages)
The results of the Euro Experiment are now in and it can be shown to have been a failure as originally formulated. It is clearly evident that Monetary and Fiscal Policy cannot be separated for a sustained period of time within a single currency regime. The EU and Euro will survive the current sovereign and financial crisis, however, the underlying structural problems are potentially fatal, if not addressed. It is not yet clear how in fact the structural problems can be addressed. Though the Euro will survive to fight another day, the EU's days as a 17 member union are numbered. MORE>>
NOVEMBER 2011: GLOBAL MACRO TIPPING POINTS -(Subscription Plan III - 115 Pages)
The global slowdown we have been waring about has now become clearly evident. Liquidity is quickly evaporating across Europe. The initial EU bailouts are now being found to insufficent because of slow austerity implementatiosn and rapidly de-accelerating economic conditions. Despite rumors of dramatic increases in the firepower of the EFSF and the IMF, nothing yet has happened. The markets will now call the politicos bluff - The end of 'kicking-the-can-down the-road' is fast approaching. Expect a coordinated global response by Central Bankers and G20 finance ministers. Do not be fooled. It will not be a solution but simply one last desperate attemtp to 'kick the can' again. The best we can expect is a year end rally that will fail miserably in the new year. MORE>> EXPANDED COVERAGE INCLUDING AUDIO & MONTHLY UPDATE SUMMARY
MARKET ANALYTICS & TECHNO-FUNDAMENTAL ANALYSIS
OCTOBER 2011: MARKET ANALYTICS & TECHNICAL ANALYSIS - (Subscription Plan IV - 136 Pages) The market action since March 2009 is a bear market counter rally that has completed a classic ending diagonal pattern. The Bear Market which started in 2000 will resume in full force when the current "ROUNDED TOP" is completed. We presently are in the midst of of a "ROLLING TOP" across all Global Markets. We are seeing broad based weakening analytics and cascading warning signals. This behavior is typically seen during major tops. This is all part of a final topping formation and a long term right shoulder technical construction pattern.MORE>> EXPANDED COVERAGE INCLUDING AUDIO & EXECUTIVE BRIEF
SEPTEMBER 2011: TRIGGER$ BETA RELEASE (NEW BETA TRIAL Subscription Plan V - 36 Pages)
Over the next three months we are BETA testing a NEW subscription offering specifically for TRADERS. It is based on our Professional Market Analytics and Technical Analysis Research which has now been refined for those readers who are specifically Position, Swing or Day Traders.
TRIGGER$ publications combine both Technical Analysis and Fundamental Analysis together offering unique perspectives on the Global Markets. Every month “Gordon T Long Market Research & Analytics” publishes three reports totalling more then 380 pages of detailed Technical Analysis and in depth Fundamentals. If you find our publications TOO detailed, we recommend you consider TRIGGER$ which edited by GoldenPhi offers a ‘distilled’ version in a readable format for use in your daily due diligence. Read and understand what the professionals are reading without having to be a Professional Analyst or Technician.
There is a FREE three month trial subscription available. MORE>>
CURRENCY WARS: EU: A FLAWED FOUNDATION, BUT A BRILLIANT STRATEGY Released May 31st, 2011
It was the perception of getting something of value without any meaningful sacrifice that initially fostered the EU Monetary Union. Though the countries of Europe were fiercely nationalistic they were willing to surrender minor sovereign powers only if it was going to prove advantageous to them. They were certainly unwilling to relinquish sufficient sovereignty to create the requisite political union required for its success. After a decade long trial period it is now time to pay the price for Monetary Union. I suspect that the EU membership is unwilling to do so. Though they likely will see the price as too high to do so, the price to not do so has become even greater. They have unwittingly been trapped by a well crafted strategy. MORE>>
CURRENCY WARS: The Economic Death Spiral Has Been Triggered Released May 27th, 2011
For nearly 30 years we have had two Global Strategies working in a symbiotic fashion that has created a virtuous economic growth spiral. Unfortunately, the economic underpinnings were flawed and as a consequence, the virtuous cycle has ended. It is now in the process of reversing and becoming a vicious downward economic spiral. One of the strategies is the Asian Mercantile Strategy. The other is the US Dollar Reserve Currency Strategy. These two strategies have worked in harmony because they fed off each other, each reinforcing the other. However, today the realities of debt saturation have brought the virtuous spiral to an end. MORE>>
CURRENCY WARS: Debt Saturation & Money Illusion Released April 27th, 2011
Most of the clearly evident financial problems that surround us today stem from one cause - Debt Saturation. Most, intuitively, sense this to be a correct assessment but few can either prove it or articulate it to the less sophisticated. Let me arm you to be the "Nostradamus" amongst your friends and colleagues in explaining the problem and what the future therefore foretells. However, let me make it very clear, this will not make you popular. Smart maybe, but highly likely to make you unwanted at the social gatherings of the genteel. MORE>>
10/20/2011 4:10 AM
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"BEST OF THE MONTH "
MOST CRITICAL TIPPING POINT ARTICLES THIS MONTH - OCTOBER 2011
Merkel Warns Against High Hopes in Europe WSJ Video - German Chancellor Angela Merkel expects agreement on a package of measures aimed at solving the euro-zone debt crisis, but officials are already playing down high hopes for resolution,
G-20 Magic Starts Wearing Off WSJ Video - The suggestion of a deal to resolve the euro-zone crisis by Oct. 23 boosted risky bets early Monday, but later suggestions that the deadline might be too ambitious sent investors back into the arms of safe retreats.
G20 calls for speedy eurozone package Ball firmly in France and Germany’s court A 9% Core Tier 1 Capital requirement could mean a stream of assets coming on to the markets, coupled with constrained lending, as some institutions try to shrink their way to compliance. If banks cannot raise funds privately, national governments would be the next source of capital; then it would be the turn of the EFSF.
Europe's lost decade as $7 trillion loan crunch looms- The risk is "Japanisation" without the benefits of Japan, without a single government, or a trade super-surplus, or 1pc debt costs, or unique social cohesion. Stephen Jen from SLJ Macro Partners says the loan to deposit (LTD) ratio of Europe’s lenders is 1.2, much like Japanese banks in the early 1990s at the onset of the country’s Lost Decade (now two decades). The Japanese eventually trimmed their LTD ratio to the current safe level of 0.7pc, the same as US banks. It is a fair bet that new bank rules and market pressure will force Europe to do likewise. Mr Jen said this means slashing the loan book from $19 trillion to nearer $12 trillion, given the dearth of fresh deposits.
Euro-zone officials are searching for common ground on three key elements of their rescue plan
Greece: Officials are reworking a July 21 agreement that would subject Greek bond investors to bigger cuts in the value of their holdings.
Bailout fund: Euro-zone nations are trying to boost the firepower in their €440 billion ($606 billion) European Financial Stability Facility, potentially through an insurance program to guarantee investors some protection against losses in European debt.
Banks: Governments need to shore up banks that are sitting on Greek debt that has tumbled in value. Countries are nearing an accord to set new capital thresholds
Bolstering of the European Financial Stability Facility rescue fund,
Fresh capital for banks,
A new push to boost competitiveness and
Consideration of European treaty amendments to tighten economic management.
Political, technical and legal constraints cloud the crisis-resolution strategy. Officials are considering seven ways of getting more firepower out of Europe’s temporary rescue fund. The options break down into two broad categories: enabling it to borrow from the European Central Bank or using it to provide bond insurance.
The ECB has all but ruled out the first method, making bond insurance more likely. Recourse to bond insurance suggests the central bank will need to maintain its secondary-market purchases for an unspecified “interim” period, the people said. ECB President Jean-Claude Trichet, whose eight-year term ends Oct. 31, has expressed reluctance to maintain the policy with his institution having bought 163 billion euros of bonds.
Europe's grand plan risks slow death by a thousand cuts - There seemed to be scarcely a person in the room (Association for Financial Markets in Europe (AFME) annual dinner in London) who thought the grand plan to recapitalise the European banking system would do the trick. Indeed, many took the same view as Josef Ackermann, chief executive of Deutsche Bank, that it's likely to be outright counter-productive.
The overwhelming message was: We don't need this new capital. And if regulators really are going to force us to mark sovereign debt to market and backstop capital to 9pc, then we'll be doing it by shrinking the balance sheet, not by raising new equity at today's penalty rates. Thanks very much, but no thanks.
Bank debt: Eurozone crisis systemic, Trichet says - European Central Bank President Jean-Claude Trichet addresses the European Parliament's Economic and Monetary Affairs Committee in Brussels Oct. 11, 2011. Mr. Trichet says the fears about government debt have spread to bank debt and is drying up bank funding. "The banking sector in Europe needs recapitalization, that is part of our message," Trichet said.
Now "it is a matter of urgency" that governments move "decisively to tackle" the crisis, he added. "The high interconnectedness in the EU financial system has led to a rapidly rising risk of significant contagion."
Christian Science Mon.
Is It a Euro Bazooka Or a Damp Squib? - It has taken the collapse of bank stocks, the closure of the bank funding market and a looming credit crunch to convince euro-zone leaders that the banking system is short of capital
Europe Divided on Greek Writedowns That Juncker Says May Top 60% “The crisis has reached a systemic dimension,” Trichet told lawmakers in Brussels today in his capacity as head of the European Systemic Risk Board. “Sovereign stress has moved from smaller economies to some of the larger countries. The crisis is systemic and must be tackled decisively.”
European leaders are trying to shore up the region’s banks as they debate how best to manage the fallout from any Greek default. Governments yesterday pushed back a summit amid opposition to Germany’s drive for deeper-than-planned Greek bond writedowns that Luxembourg’s Jean-Claude Juncker says may exceed 60 percent. Officials are also debating how to magnify the firepower of the euro region’s bailout plan, with ECB Vice President Vitor Constancio signalling yesterday that it should be done using government guarantees rather than the central bank’s market operations.
“We don’t consider it appropriate for us to leverage the EFSF,” said Trichet t
The Evolution Of The EFSF, And Its €726 Billion In Max Losses - The guarantees were increased so that the total amount of money that the EFSF could raise was about 450 billion euro. That was the size of the guarantees of the AAA countries. If not the only way to get a AAA, it was a relatively easy one as no fancy CDO mechanics were involved. The 450 billion of potential issuance was backed by 726 billion of guarantees (no point counting Greece, Portugal, and Ireland), of which 450 billion of the guarantees were provided by AAA countries. The plan seemed to change from EFSF making loans to also buying bonds. So now the realistic loss was higher. Lets say it could now realistically lose 60% of 450 billion, so 270 billion was likely at risk.
Then, before that was ever approved, the idea of injecting capital into banks was created. Now, realistically, the loss rate could be higher. Not all capital injections would be paid, so a realistic downside is an 80% loss on this mix of equity investments and bonds, a total potential loss of 360 billion. Certainly no longer a small number.
But that wasn't enough. Now we have a new plan. EFSF would take first loss on the full guarantee amount of 726 billion. Given everything that EFSF can now invest in, and the fact that it is taking first loss risk, the potential loss is 726 billion.
So in a little over a year, the risk of loss transfer from private companies to sovereign nations has increased from 120 billion, to 270 billion, to 360 billion, to the possibility of 726 billion!
Merkel and Sarkozy on Sunday concoct a new plan to recapitalize banks - The main pitfall of the meeting is that despite the good feeling that boasts the Franco-German axis, Berlin and Paris have called for different models of bank recapitalization, each with the interests of his country in mind.
The Chancellor stressed that it would be best that the banks themselves were able to raise funds "for his own," ie in the market or, alternatively, that national governments take charge of their recapitalization needs, a position broadly shared by Brussels.
Only if they fail the first two springs, and if it is a bank of "systemic", states could resort to EFSF to support the institutions in trouble, a measure that would require some "conditionality" reciprocal form of "structural reforms ".
The French position, meanwhile, denies this response in three steps and openly advocates that is used in the first place EFSF capital.
Merkel, Sarkozy Pledge Bank Recapitalization - Angela Merkel and Nicolas Sarkozy, racing to stamp out the euro debt crisis threatening to engulf the financial system, gave themselves three weeks to devise a plan to recapitalize banks, get Greece on the right track and fix Europe’s economic governance.
“By the end of the month, we will have responded to the crisis issue and to the vision issue,” the French president said in Berlin yesterday at a joint briefing with the German chancellor before they dined at her office.
Bailouts or Bankruptcies? Europe Begins Working on Plan B for the Euro - German economists Harald Hau and Bernd Lucke, who have calculated a comprehensive scenario for what a wave of bankruptcies in Europe's banks could mean. Under the scenario, Greece and Portugal would undertake a debt haircut of 50 percent, with Italy, Spain and Ireland each eliminating 25 percent of their outstanding debt.
Under the scenario, European banks would lose more than €250 billion in equity capital, which would have to be replaced by government infusions. In Germany, around €20 billion in government money would be needed to shore up the banks. Deutsche Bank would require €3.7 billion and Commerzbank around €6 billion.
Together, the euro-zone economies would also have to cover the losses at financial institutions in the countries that went bust -- a figure the economists estimate to be at around €180 billion. As Europe's largest and most solvent country, Germany would have to foot a large portion of that bill.
Behind Europe's Debt Crisis Lurks Another Giant Bailout of Wall Street -
It’s rumored that Morgan could lose as much as $30 billion if some French and German banks fail. (That’s from Federal Financial Institutions Examination Council, which tracks all cross-border exposure of major banks.)
$30 billion is roughly $2 billion more than the assets Morgan owns (in terms of current market capitalization.)
But Morgan says its exposure to French banks is zero. Why the discrepancy? Morgan has probably taken out insurance against its loans to European banks, as well as collateral from them. So Morgan at least feels safe.
Should it? Does anyone remember something spelled AIG?
Europe - Political Fabrications Instead Of Economic Realities - The latest EFSF “collateral” package shows once again, just how wrong Europe has it. Dreams of Eurobonds should be relegated to the trash bin. Fantasies that EFSF will leverage itself up to save Europe should be discarded. The latest outcome of EFSF meetings should be enough to let everyone know that even the people with the money have no clue what to do, and the structure of compromise will never get anywhere. The Greek bond rollover is another example of an overly complex, unwieldy mechanism, that doesn’t do what it portrays. Until Europe is willing to address the reality of the situation and take some simple but painful steps rather than complex, unworkable ones, that sound good but do nothing, the problems will increase.
TF Market Advisors
Eurozone fix a con trick for desperate There exist only 2 categories of solutions to the EU Crisis: A Fiscal Solution or a Monetary one. Politics blocks the first and European Law (Article 123 of the EU Treaty + Maastricht Treaty manadate for the ECB) blocks the later. To circumvent these impediments the idea now is to turn the rescue fund into an insurance company, or worse, a collateralized debt obligation (CDO). Why? If you want to leverage the EFSF without increasing the liabilities of the government, then the 440B would become the equity tranche. You would then create senior tranches and mezzanine layers. Effectively the senior tranches would become Eurobonds. This is equivalent to placing dynamite in the can before kicking it down the road. People come up with these sorts of solutions when it is other people's money - not their own.
Moody's Downgrades Italy From Aa2 To A2, Negative Outlook - Full Text Of Three Notch Downgrade - Moody's notes that the size of the rating action is largely driven by the sustained increase in the country's susceptibility to financial shocks due to a structural shift in market sentiment regarding euro-area countries with high debt burdens. The negative outlook reflects ongoing economic and financial risks in Italy and in the euro area. The uncertain market environment and the risk of further deterioration in investor sentiment could constrain the country's access to the public debt markets. If such risks were to materialise and the long-term availability of external sources of liquidity support were to remain uncertain, the country's rating could transition to substantially lower rating levels.
(1) The material increase in long-term funding risks for euro area sovereigns with high levels of public debt, such as Italy, as a result of the sustained and non-cyclical erosion of confidence in the wholesale finance environment for euro sovereigns, due to the current sovereign debt crisis.
(2) The increased downside risks to economic growth due to macroeconomic structural weaknesses and a weakening global outlook.
(3) The implementation risks and time needed to achieve the government's fiscal consolidation targets to reverse the adverse trend observed in the public debt, due to economic and political uncertainties.
Greek cabinet to approve '12 budget, plan to sack state workers- Greece has promised to raise taxes, cut state wages and accelerate plans to reduce the number of public sector workers by a fifth by 2015. The government has been falling behind an ambitious deficit target of 7.6 percent of GDP for 2011, partly because of a deeper than expected contraction of the economy. No part of the package is more contentious than the plan to lay off state workers -- who make up a fifth of the Greek workforce and are guaranteed jobs for life under a constitution that bans firing them under nearly all circumstances.
The government plans to begin layoffs by putting 30,000 workers in a "labor reserve" by the end of this year. They would be paid 60 percent of their salaries for a year, after which they would be dismissed. George Papandreou will not survive the next election. He is hanging by a thread now, with a mere 4-seat majority in Parliament.
Will the next government go along with all these proposals? I highly doubt it.
German President Christian Wulff lashed out at Europe, accusing the ECB of violating its mandate and subverting the Lisbon Treaty.
“I regard the huge buy-up of bonds of individual states by the ECB as legally and politically questionable. Article 123 of the Treaty on the EU’s workings prohibits the ECB from directly purchasing debt instruments, in order to safeguard the central bank’s independence,” he said. “This prohibition only makes sense if those responsible do not get around it by making substantial purchases on the secondary market,” he said.
Mr Wulff said Germany itself risks being engulfed by escalating debts. Who will “rescue the rescuers?” as the dominoes keep falling, he asked.
"Solidarity is the core of the European Idea, but it is a misunderstanding to measure solidarity in terms of willingness to act as guarantor or to incur shared debts. - With whom would you be willing to take out a joint loan, or stand as guarantor? For your own children? Hopefully yes. For more distant relations it gets a bit more difficult."
THERE WILL BE NO FISCAL UNION.
THERE WILL BE NO EUROBONDS.
THERE WILL BE NO DEBT POOL.
THERE WILL BE NO EU TREASURY.
THERE WILL BE NO FISCAL TRANSFERS IN PERPETUITY.
THERE WILL BE A STABILITY UNION – OR NO MONETARY UNION.
Get used to it. This is the political reality of Europe, since nothing of importance can be done without Germany. All else is wishful thinking, clutching at straws, and evasion. If this means the euro will shed some members or blow apart – as it almost certainly does – then the rest of the world must prepare for the day.
Derivatives: The $600 Trillion Time Bomb That's Set to Explode In 2009, five banks held 80% of derivatives in America. Now, just four banks hold a staggering 95.9% of U.S. derivatives, according to a recent report from the Office of the Currency Comptroller. The four banks in question: JPMorgan Chase & Co. (NYSE: JPM), Citigroup Inc. (NYSE: C), Bank of America Corp. (NYSE: BAC) and Goldman Sachs Group Inc. (NYSE: GS). The world's gross domestic product (GDP) is only about $65 trillion, or roughly 10.83% of the worldwide value of the global derivatives market, according to The Economist. the Bank for International Settlements (BIS) estimated the net notional value of uncollateralized derivatives risks is between $2 trillion and $8 trillion, which is still a staggering amount of money and well beyond the billions being talked about in Europe. According to the Bank of International Settlements, U.S. banks have loaned only $60.5 billion to banks in Greece, Ireland, Portugal, Spain and Italy - the countries most at risk of default. But they've lent $275.8 billion to French and German banks. And undoubtedly bet trillions on the same debt.
Erste Group Reveals Stunner: Reports Billions In Previously Undisclosed Underwater Sovereign CDS - Austrian mega bank Erste, which issued an ad hoc and very unexpected press release, in which it warned that losses in its Hungarian and Romanian books would lead to a 14% hit, or €1.1 billion, to tangible book value, something that in itself is not a surprise to anyone (except the stress test). After all, since early 2010, most have known that due to Swiss Franc-based mortgage exposure, Hungary is next to follow in the PIIGS footsteps, and its collapse has so far been delayed due to lower overall public and private sector leverage. What was, however not only a surprise, but a shock, was that Erste disclosed some major losses on its €5.2 billion CDS portfolio, consisting of "EUR 2.4 billion related to financial institution exposures, and EUR 2.8 billion related sovereign exposures"
Dexia Accepts Rescue Plan - The board of beleaguered Franco-Belgian bank Dexia SA early Monday approved the rescue plan agreed by the governments of Belgium, France and Luxembourg, which includes the sale of the Belgian unit for €4 billion ($5.35 billion) to the Belgian state and a €90 billion guarantee over its funding for the next ten years.
The statement didn't specify what will happen to Dexia's coveted Turkish unit Denizbank.
The three governments and the bank's board agreed on a three-step plan for the bank that includes the nationalization of the Belgian unit; the project to associate Dexia's French local public finance unit to French state-owned financial institutions Caisse des Dépôts et Consignations and Banque Postale, the banking arm of state-owned mail service; and the sale of the Luxembourg unit to a group of investors that include the Luxembourg government
Moody's Cuts 12 U.K. Banks & Building Societies- Posssibilities of Cuts at three largest UK Lenders - Moody's cut Royal Bank of Scotland PLC and Nationwide Building Society two notches to A2, from Aa3. Lloyds TSB Bank PLC and Santander UK PLC were cut one notch, to A1 from Aa3. Lloyds TSB, RBS and Santander UK are on negative outlook. Co-Operative Bank PLC was also cut one notch, to A3 from A2. Seven smaller building societies were cut by between one and five notches.
Moody's said the downgrades reflect the fact that U.K. government support for financial institutions is less certain.
Top European Leader Talks About Coordinated Action To Recapitalize The Banks -
European Commission President Barroso has made comments about coordinated action to recapitalize the banks.
This is of course what's made the market go nuts for a couple of days, now, and leaders talking more and more about this in public (rather than through backchannel leaks via the FT) is driving optimism.
Still, as always, the legwork on any big project seems huge. Not clear at all that anything can be put into practice.
IMF Considers Plan to Purchase European Bonds Germany Promotes Bank Backstop Plans - Germany pushed a proposal to encourage the euro-zone's national authorities to announce backstops in case their banks hit difficulties, and a senior International Monetary Fund official said the IMF could step in to help shore up the bonds of troubled euro-zone governments. The idea for the IMF to step into the bond markets—probably via a separate legal vehicle created especially for the purpose—would address the other leg of the crisis: the risk of more countries facing financing problems because of rising borrowing costs. It would complement a plan by euro-zone governments to allow the euro-zone's bailout fund to buy government bonds. The IMF's involvement in euro-zone secondary bond-market purchases would give an "additional element of credibility because of the conditionality the IMF requires," France, which has been reluctant to agree to imposing deeper losses on Greek bondholders, suggested it was shifting its view. Mr. Baroin said the extent of private-sector involvement in bailing out Greece may need to be re-examined after the volatility in financial markets over the summer.
Everything You Need To Know About Dexia, The Belgian Bank That Everyone Is Freaking Out About -
Former French PM Laurent Fabius said France was was "caught by the throat," since bailing out the bank could jeopardize its AAA rating.
French officials quickly denied that such an action would damage France's credit rating. "The Belgian and French states will put much less money into this operation than the British put into the Royal Bank of Scotland or Barclays," concurred France's central banker Christian Noyer.
(Non) News Of Dexia "Bad Bank" Sends Market Soaring If anyone had any doubt this market is broken beyond compare and controlled by complete idiots, this should put all doubts to rest. Anyone wondering why stocks are soaring, the reason is that according to non-news, because this was first reported yesterday by the FT,
Dexia will park €180 billion in worthless assets in a bad bank. This is beyond ridiculous as Belgium, even in JV with France, will be unable to ringfence and hence fund this amount of capital for the now nationalized bank.
It also means that Belgium is about to be downgraded following a long-overdue warning by S&P and Moodys to cut the country.
It also means that Belgian CDS will soon trade points up front.
It also means that Belgian funding costs will soar.
It also means that French CDS will explode tomorrow and that interbank markets in Europe will collapse (even more) once the market realizes that France has just diluted its "bailout dry capital" by rescuing a Belgian bank.
And so on. And so on. But for now the ripfest is here. Fade every uptick as this is sheer desperation out of Belgium which pretends it is Switzerland and can do with Dexia what the Swiss did with UBS. Hint: it is not and no, it can't.
So stocks rose 4% on a plan of a plan to plan a plan for a bank they hadn't heard of until this morning.
Dexia depends more heavily on wholesale financial markets than any other major European bank,
Dexia's troubles extend to the U.S. where it backstops between $10 billion and $15 billion in municipal bonds,
Dexia's break-up plan calls for segregating at least €125 billion of assets into the bad bank, that should benefit from Belgian and French government guarantees. The proposed bad bank will include a portfolio of bonds worth €95 billion, about €30 billion in loans deemed nonstrategic, and Dexia's municipal lending businesses in Italy and Spain. The latter assets may bring the overall value of the bad bank to over €200 billion. Into the bad bank will go €21 billion of bonds from weak euro-zone economies.
Dexia is also expected to sell off its asset management business and DenizBank, its fast-growing retail bank in Turkey. Its Paris-based public finance arm, Dexia Municipal Agency, would be sold to the French savings banks Caisse des Depots & Consignations, or CDC, and La Banque Postale
Dexia has spent the past three years trying to undo a decade of over-zealous lending to governments and local authorities across the world using volatile wholesale funding. The seize-up of financial markets in the aftermath of the Lehman Brothers' collapse exposed deep flaws in Dexia's business model. More than half of its wholesale funding comes due in the next year, but the bank has only a small pool of liquid assets on hand that would make it easier to refinance that looming pile of maturing debt
Dexia Set for Restructuring - "I think there should be a solution tomorrow. It is undeniable that Dexia cannot remain in its current state. It's been hit by very bad management and a business model" with high liquidity needs, French Finance Minister François Baroin told RTL radio. Speaking a few minutes later on Europe 1 radio, Bank of France Governor Christian Noyer added that "we are on the cusp of a restructuring of Dexia."
Dexia CDS Rips And Stock Implodes On Partial Nationalization - "As part of the restructuring of Dexia, the Belgian and French, in conjunction with central banks will take all necessary measures to ensure the safety of depositors and creditors. To this end, they undertake to guarantee to bring their financing raised by Dexia." Translation: Partial nationalization.
Dexia Nationalization Imminent? - Now that a bank which holds assets amounting to 180% of Belgium's GDP, is about to be nationalized by the very same country. Anyone who is still not long Belgium CDS, this is probably your last chance to get on that particular train. Of course, if one is waiting patiently in line at a Dexia ATM machine, one is forgiven.
Dexia Tumbles After Moody's Puts It On Downgrade Review Citing "Deteriorating Liquidity And Worsening Funding Conditions" - The biggest Belgian bank (whose assets are 180% of Belgian GDP) Dexia is in trouble. Potentially very big trouble. "Moody's Investors Service has today placed on review for downgrade the standalone bank financial strength ratings (BFSRs), the long-term deposit and senior debt ratings and the short-term ratings of Dexia Group's three main operating entities -- Dexia Bank Belgium (DBB), Dexia Credit Local (DCL) and Dexia Banque Internationale à Luxembourg (DBIL). The review for downgrade of Dexia's three main operating entities' BFSRs is driven by Moody's concerns about further deterioration in the liquidity position of the group in light of the worsening funding conditions in the wider market." Immediate result: stock plunges up to 15% overnight. Likely outcome will be a full or partial nationalization.
Morgan Stanley CDS Soar - The market, just sent MS' CDS up to the widest since 10/13/08 having only traded wider than this level from 9/16/08 to 10/13/08. Critically for those looking at CDS not being as bad as during the peak of the crisis and gaining comfort from that - CDS did not trade gently to those extremes - it gapped unmercifully wider with incredible day to day volatility. Furthermore, for those talking about how illiquid CDS are and easily manipulated, we remind them that it is bonds that cracked first (a much more broadly owned and traded set of instruments) and only very recently has CDS started to catch up to the wide/risky levels at which bonds trade.
Egan-Jones Downgrades Morgan Stanley From A+ To A, Negative OutlookSynopsis: Questions about MS's French bank exposure and level of derivatives exposure. While June results were good, MS' French bank exposure (all asset and off balance sheet classes except derivatives) is estimated at $39B (57% of equity of $68B and 150% of market cap of $26B) of which interbank placements is believed to be a small component. These exposures are significant and unusually large as a percentage of capital. Of equal concern is the estimated $1.78T in notional value of CDS' on MS' books although EJR does acknowledge the netting effect (the net estimated exposure is $457M). The US is likely to provide MS additional support if needed, despite wind-down procedures contained in Dodd Frank. We are downgrading with a neg outlook.
Morgan Stanley Takes Hits - Concern Over European Exposure Produces Volatile Month - The concern with Morgan Stanley stems from its small size relative to other global financial firms and its reliance on debt markets, rather than customer deposits, to fund its business.
As jitters about potential European debt defaults grow, investors are steering clear of bank stocks that might be dragged down as collateral damage if conditions in Europe worsen.
Morgan Stanley feels the concern more acutely because it is a big player in derivatives, risky opaque contracts that can often backfire on a bank if its risk management doesn't limit losses. The firm still is a big player in derivatives. Recent data from the Office of the Comptroller of the Currency showed Morgan Stanley had derivatives contracts with a total notional value of $56 trillion at the end of June. While that number exaggerates the total amount at risk, Morgan's figures exceed the total notional amounts at Citigroup and Goldman Sachs Group Inc. J.P. Morgan Chase & Co. and Bank of America were still well ahead of Morgan Stanley, which had the third- largest total, according to the OCC. But investors don't necessarily trust hedges as much as they used to. And if the hedges are with other weakened banks, the exposure might actually be greater than zero, critics allege. "There's nothing the company can do with its statements because everyone thinks the banks are doing things off balance sheet,"
IMF Sees Higher Risks to Global Growth Deputy Managing Director Zhu Min said downside risks to the IMF's global economic growth projections have increased "as of late." The IMF two weeks ago slashed its forecasts, predicting global growth will slow to about 4% this year and next year from 5% in 2010
Wall Street Protest Spreads - Many of the protesters are young. Joblessness seems to be a persistent theme. A blog that has become popular has pictures of people's faces next to stories of economic woe and messages of support for the protesters. Like the initial stage of the New York protest, much of the activity in the offshoot cities is still taking place online on Facebook. James Cox, a 25-year-old waitress, discovered the movement on Twitter and showed up on the second day when there were just seven people. She has now slept on the sidewalk for a week and has become and organizer, keeping track of donated food and water. "We definitely stand in solidarity," said Mark Banks, a 30-year-old unemployed biochemist and Occupy Chicago spokesman. "But we're employing a very careful, inclusive process to make sure what they're trying to say is what we're trying to say." "We are part of a global and spreading movement," shouted Micah Philbrook, a 33-year-old actor with shaggy white hair who serves a press liaison for the Occupy Chicago movement.
Anti-Wall Street Protests Reach ‘Prime Time’ - Anti-Wall Street protests escalated with more than 700 arrests over the weekend, thrusting the once- dwindling demonstrations into the national spotlight.
The rallies, which began 16 days ago with a goal of occupying Wall Street for months, spread to cities including Los Angeles and Boston, where 25 people were arrested Sept. 30 after police said they refused to leave the lobby of a Bank of America Corp. (BAC) building. The next day, New York City police halted a march over the Brooklyn Bridge and took hundreds of activists into custody for blocking traffic. Some people arrested claimed officers had tricked them into leaving the pedestrian walkway.
“The huge event on the Brooklyn Bridge is likely to bring thousands more into the movement,”
As Wall Street protest enters 3rd week, movement gains steam nationwide - A spirited and leaderless protest in the Wall Street section of New York has entered its third week, helping to inspire a growing number of demonstrations united in their passion if not necessarily their reasons for hitting the streets.
The hub of the movement, in Lower Manhattan, was abuzz with activity on Sunday as activists continued to vent their frustrations with everything from "corporate greed" to high gas prices to insufficient health insurance.
No single group or person heads the effort, which has adopted the name "Occupy Wall Street."
Gas Stays High as Oil Drops Prices at the Pump Have Yet to Reflect the Substantial Decline in Crude Futures - Due to many factors, such as an accumulation of crude oil at the U.S.'s largest commercial storage hub in Oklahoma, Brent is now $20 more than Nymex crude.
But that's not the only reason for gasoline prices lagging behind. Refinery operators may be taking a cut for as long as they can.
Refiners usually are quick to raise fuel prices in tandem with crude but go slower on the way down, because they want to recapture profits that had been squeezed.In addition, refiners have increasingly kept inventories thin in the face of falling demand in the U.S. If oil prices continue to hover around $80 a barrel, gasoline prices could slide another five or 10 cents in coming week
THE AMERICAN JOBS DEPRESSION: We're In A Deep Hole And The Hole Is Deepening -
Since the start of the Great Recession at the end of 2007, the potential labor force of the United States – that is, working-age people who want jobs - has grown by over 7 million. But since then, the number of Americans who actually have jobs has shrunk by more than 300,000.
The problem is on the demand side. Consumers (whose spending is 70% of the economy) can’t boost the American economy on their own. They’re still too burdened by debt, especially on homes that are worth less than their mortgages. In addition, their jobs are disappearing, their pay is dropping, their medical bills are soaring.
Consumer spending slowed again in August as incomes dropped.
Businesses, for their part, won’t hire without more sales. So we’re in a vicious cycle.
Consumer Credit Unexpectedly Fell In August By Most In Over A Year - The consumer credit number just released and was dreadfully bad. Little revision to last month's number, it printed -$9.5bn against an expectation of +$8bn and prior over $12bn. This is the biggest drop MoM since April 2010. More surprising is that we just saw the first drop in non-revolving credit in a year: since this is credit that goes out for car purchases and school loans, is either of these two bubbles (student loans and GM subprime loans) about to pop?
This is the biggest swing in the MoM contraction (or momentum deceleration) since May 1998!
This is a six standard-deviation deceleration (based on the last 60 years of history). The full breakdown between revolving and non-revolving can be seen below. The momentum swing is the biggest since 1998.
"This is the most serious financial crisis at least since the 1930s, if not ever" U.K. bank chief Mervyn King."We're creating money because there's not enough money in the economy."
France's statistics agency Thursday predicted recession for Spain and Italy by year's end, saying that would help drag France's growth to zero.
Jean-Claude Trichet, at his last meeting as ECB president before handing the reins to Mario Draghi, again criticized European governments for failing to do more themselves.
"Governance has been insufficient. We cannot substitute ourselves for governments."
The European Banking Authority said Thursday it can't rule out launching a new round of stress tests for Europe's banks. Politicians and central bankers have been increasingly outspoken in recent days on the possible need for a forcible recapitalization of Europe's banks.
The BOE and ECB Could Use a Policy Swap - The BOE plans to buy another £75 billion of government bonds, while the ECB is providing more support to banks. They could do better if they swapped policies.
The BOE says it is restarting its quantitative-easing program because it fears the U.K. economy is slowing so sharply that inflation, currently 4.5%, could fall below its 2% target. It argues its previous £200 billion of gilt purchases were equivalent to a rate cut of 1.5-3 percentage points and boosted real gross domestic product by 1.5-2%.
The ECB is doing something about bank funding. 1- It will offer banks two unlimited loans with 12- and 13-month maturities. That should reduce the pressure on banks to shrink their balance sheets. 2- And it will spend €40 billion restarting a program to buy covered bonds, a key source of European bank funding. Its previous purchases of these bonds in 2009-2010 were a huge success, kickstarting a wave of issuance before it even spent a euro.
ECB Deposit Facility Usage Soars To 2011 High - Just when you thought the latest round of liquidity improvement rumors out of the ECB (such as the resumption of a 12 month refinancing operation from last week) would buy the European financial system some time, here comes reality confirming that it took about 4 days before liquidity got hopelessly snarled up again. As of Friday, the ECB Deposit Facility usage soared to a fresh 2011 high of €200 billion, beating the previous high of €198 billion set on September 12. Once again banks are scared of keeping excess cash with each other (as confirmed by the nearly 50th consecutive increased in LIBOR) and instead have dumped a 2011 high amount with the ECB. And the flip side, or looking at the ECB's Marginal Lending Facility, which does just as it says, shows that €1.4 billion in cash was loaned out from the ECB to "needy" banks - the highest since the €3.4 billion lent out September 14.
Japan's Collateral Damage From the Euro - The euro has shed nearly 20% against the yen from its high this year and touched a decade low earlier this week. The current euro-yen level of about ¥102.50 is at odds with the ¥112.19 average of corporate assumptions.
China Fires Back At US Senate Which May Have Just Started The Sino-US Currency Wars - A few hours ago, the maniac simians at the Senate finally did it and fired the first round in the great US-China currency war, after they took aim at one of China's core economic policies, voting to move forward with a bill designed to press Beijing to let its currency rise in value in the hope of creating U.S. jobs. As Reuters reports, "Senators voted 79-19 to open a week of Senate debate on the Currency Exchange Rate Oversight Reform Act of 2011, which would allow the U.S. government to slap countervailing duties on products from countries found to be subsidizing their exports by undervaluing their currencies. Monday's strong green light for debate on the bill bolsters prospects it will clear the Democrat-run Senate later this week, but prospects for action in the Republican-controlled House of Representatives are murky.
Corn Market Surprise Report of Higher Stockpiles Stuns Farmers Just Weeks After Previous Estimate - Corn prices tumbled to their lowest level since December on Friday after the U.S. Department of Agriculture surprised the market by saying stockpiles were nearly a quarter higher than it had estimated less than three weeks ago.
The unexpected buildup in reported supplies of the nation's largest crop sent prices down 6.3%, the second-steepest drop of the year, to $5.925 per bushel in Chicago futures trading—a 25% decline from the all-time high on June 10. Friday's 40-cent drop was the maximum allowed under exchange rules. The report also dragged down wheat prices, which fell 6.7%, and soybean prices, which fell 4.1% to a fresh low for the year.
The new data shocked farmers, traders and analysts, who have frequently been caught off-guard by USDA reports in recent years.
TECHNICALS & MARKET ANALYTICS
Retail Stock Exodus Continues: Fund Equity Outflows Continue For 23rd Out Of 24 Consecutive Weeks - outflows in domestic equities may be traditionally perceived as a contrarian signal, but when they hit 23 out of 24 weeks for a total of $106 billion (and the one weekly inflow was $715 million) one has to start getting concerned about the cash levels of the broader mutual fund space which as had been pointed out recently are already at all time lows. In the week ended October 5, domestic equity funds saw an outflow of $4.3 billion, which brings total 2011 outflows to a total of $93 billion. What was just as notable about the week is that while traditionally we have seen rotation from equity assets into fixed income, in the past week a whopping $6.2 billion was withdrawn from taxable bond funds as well, implying that the ever increasing volatility not only means retail has thrown in the towel on stocks but that the already painfully low yields in bonds are forcing the long-term investors to get out of the market in its entirety.
Volatile Market Sends a Warning - Starting on Sept. 21, the Dow Jones Industrial Average moved more than 1% on 11 of 13 trading days; five moves exceeded 2%.
.That much volatility isn't normal. Since 2000, the Dow has moved an average 0.87% a day, up or down. Since the start of August, the average move has been almost twice that—1.69%.
Tired of Ups and Downs, Investors Say, 'Let Me Out!' - "I felt the people buying were people inside the market. They weren't the investors of the past who wanted to protect what they had or see it grow a little bit". "Nothing out there looks like a winner," says Ms. Fletcher, who has $70,000 in investments. "Normally, I would just add the money to my portfolio, but I am too freaked out to do that right now."
Even some young investors are nervous. Dan Manges, a 26-year-old software developer in Chicago, is so worried about extreme stock-market movements and sluggish job growth that he has shifted 70% of his $100,000 investment portfolio into bond funds. "I am basically investing like a retiree with very few risky choices," he says.
"Although the details of the plan are still under discussion, officials said EU ministers meeting in Luxembourg had concluded that they had not done enough to convince financial markets that Europe’s banks could withstand the current debt crisis... “
Olli Rehn, European commissioner for economic affairs, told the Financial Times:
"There is an increasingly shared view that we need a concerted, co-ordinated approach in Europe while many of the elements are done in the member states. There is a sense of urgency among ministers and we need to move on.. While there was “no formal decision to begin a Europe-wide effort, co-ordination among EU’s institutions on necessary measures had intensified."
So, there is .... nothing definite, just more speculation, more rumors, and more innuendo. But hey, it worked last week with the Liesman rumor. It obviously would work for the FT which has become the End of Day rumor source du jour, first with China bailout rumors (since denied), then with recapitalization rumors (denied), and now with this joke. Pathetic.
Stocks Log Worst Quarter Since '09 - Dow Swoons 12% in Period Amid Global Economic Turmoil - Financial stocks were among the hardest hit during the quarter, with many banks falling 25% or more. Treasurys maturing in 10 years or more returned 23% during the quarter through Thursday, according to Barclays Capital index data. The yield on the 10-year note tumbled 1.23 percentage points during the quarter. The Dow's September decline capped its fifth straight month of losses, the longest such string since the six months ended February 2009. March 2009, however, marked the beginning of a two-year rally.
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"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.
"The Law of the Few", or, as Gladwell states, "The success of any kind of social epidemic is heavily dependent on the involvement of people with a particular and rare set of social gifts."According to Gladwell, economists call this the "80/20 Principle, which is the idea that in any situation roughly 80 percent of the 'work' will be done by 20 percent of the participants."(see Pareto Principle) These people are described in the following ways:
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 ChicagoanLois 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 anchorPeter 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.
The Stickiness Factor, the specific content of a message that renders its impact memorable. Popular children's television programs such as Sesame Street and Blue's Clues pioneered the properties of the stickiness factor, thus enhancing the effective retention of the educational content in tandem with its entertainment value.
The Power of Context: Human behavior is sensitive to and strongly influenced by its environment. As Gladwell says, "Epidemics are sensitive to the conditions and circumstances of the times and places in which they occur." For example, "zero tolerance" efforts to combat minor crimes such as fare-beating and vandalism on the New York subway led to a decline in more violent crimes city-wide. Gladwell describes the bystander effect, and explains how Dunbar's number plays into the tipping point, using Rebecca Wells' novel Divine Secrets of the Ya-Ya Sisterhood, evangelistJohn Wesley, and the high-tech firm W. L. Gore and Associates. Gladwell also discusses what he dubs the rule of 150, which states that the optimal number of individuals in a society that someone can have real social relationships with is 150.
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
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
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.
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.