• 257 days Will The ECB Continue To Hike Rates?
  • 258 days Forbes: Aramco Remains Largest Company In The Middle East
  • 259 days Caltech Scientists Succesfully Beam Back Solar Power From Space
  • 659 days Could Crypto Overtake Traditional Investment?
  • 664 days Americans Still Quitting Jobs At Record Pace
  • 666 days FinTech Startups Tapping VC Money for ‘Immigrant Banking’
  • 669 days Is The Dollar Too Strong?
  • 669 days Big Tech Disappoints Investors on Earnings Calls
  • 670 days Fear And Celebration On Twitter as Musk Takes The Reins
  • 672 days China Is Quietly Trying To Distance Itself From Russia
  • 672 days Tech and Internet Giants’ Earnings In Focus After Netflix’s Stinker
  • 676 days Crypto Investors Won Big In 2021
  • 676 days The ‘Metaverse’ Economy Could be Worth $13 Trillion By 2030
  • 677 days Food Prices Are Skyrocketing As Putin’s War Persists
  • 679 days Pentagon Resignations Illustrate Our ‘Commercial’ Defense Dilemma
  • 680 days US Banks Shrug off Nearly $15 Billion In Russian Write-Offs
  • 683 days Cannabis Stocks in Holding Pattern Despite Positive Momentum
  • 684 days Is Musk A Bastion Of Free Speech Or Will His Absolutist Stance Backfire?
  • 684 days Two ETFs That Could Hedge Against Extreme Market Volatility
  • 686 days Are NFTs About To Take Over Gaming?
The Problem With Modern Monetary Theory

The Problem With Modern Monetary Theory

Modern monetary theory has been…

Zombie Foreclosures On The Rise In The U.S.

Zombie Foreclosures On The Rise In The U.S.

During the quarter there were…

  1. Home
  2. Markets
  3. Other

Mapping the Tipping Points

The economic news has turned decidedly negative globally and a sense of 'quiet before the storm' permeates the financial headlines. Arcane subjects such as a Hindenburg Omen now make mainline news. The retail investor continues to flee the equity markets and in concert with the institutional players relentlessly pile into the perceived safety of yield instruments, though they are outrageously expensive by any proven measure. Like trying to buy a pump during a storm flood, people are apparently willing to pay any price. As a sailor, it feels like the ominous period where the crew is fastening down the hatches and preparing for the squall that is clearly on the horizon. Few crew mates are talking as everyone is checking preparations for any eventuality. Are you prepared?

What if this is not a squall but a tropical storm, or even a hurricane? Unlike sailors, the financial markets do not have the forecasting technology for protection against such a possibility. Good sailors before today's technology advancements avoided this possibility through the use of almanacs, shrewd observation of the climate and common sense. It appears to this old salt that all three are missing in today's financial community. Looking through the misty haze though, I can see the following clearly looming on the horizon.

Since President Nixon took the US off the Gold standard in 1971, the increase in global fiat currency has been nothing short of breath taking. It has grown unchecked and inevitably has become unhinged from world industrial production and the historical creators of real tangible wealth.

Do you believe trees grow to the sky?
Or, is it you believe you are smart enough to get out before this graph crashes?

World Money Growth versus Industrial Production

Apparent synthetic wealth has artificially and temporarily been created through the production of paper. Whether Federal Reserve IOU notes (the dollar) or guaranteed certificates of confiscation (treasury notes & bonds), it needs to never be forgotten that these are paper. It is not wealth. It is someone else's obligation to deliver that wealth to the holder of the paper based on what that paper is felt to be worth when the obligation is required to be surrendered. It must never be forgotten that fiat paper is only a counter party obligation to deliver. Will they? Unfortunately, since fiat paper is no longer a store of value, it is recklessly being created to solve political problems. What you will inevitably receive will be only be a fraction of the value of what you originally surrendered.

In the chart above, we see that just when the exponential expansion seemed to have run its course during the dotcom bubble implosion, we subsequently accelerated even faster. Cheap central bank money; the unregulated, off-shore, off-balance sheet increase in securitization products; a $617T derivatives market; and the domination of the credit producing Shadow Banking system then took us to even greater levels. Bubble after bubble continues to propel us, as more recently the Bond Bubble replaced the Real Estate bubble. Similar to trees not growing to the sky, something always happens which creates a tipping point, a moment of instability or a critical phase transition. Suddenly what worked no longer works.

I have written extensively in a series entitled "Sultans of Swap" and another series entitled "Extend & Pretend" the growing and clearly evident tipping points that are unquestionably now on the horizon. You can ignore them at your peril, but when the storm swells hit, don't say you were never warned and no one saw this coming.

Evolving Financial Transition

Consolidating the trends and distortions outlined in these two series, we arrive at the following 'large brush' death spiral leading to a failure of fiat based currency regimes.

Death Spiral of Fiat Based Currency Regimes

The above cycle is well supported by recent and still unfolding developments. These have been mapped onto the cycle.

Fiat Failure Cycle


Let's now list the Tipping Points which have become abundantly evident over the last few years and which are continuously expanded on our web site Tipping Points. We track each of these on a daily basis on the site. The rankings shown below, though they do shift, we have found to stay relatively stable on a quarterly basis. Each Tipping Point has the capability of individually being a catalyst to advance the sector marked in red above.

CHRONIC UNEMPLOYMENT Historic Unemployment rates in G7  
US STATE & LOCAL GOVERNMENT Unprecedented budget shortfalls & funding problems
BOND BUBBLE Historically high Bond Prices
RISK REVERSAL Historic level of financial market participation and dependency (i.e. pension entitlements)
COMMERCIAL REAL ESTATE Market Values are down 45 - 55% with little write downs as of yet being taken by banks, insurance or financial holders.
RESIDENTIAL REAL ESTATE - PHASE II Shadow Inventory, Strategic Defaults, Looming OptionARMS 'python', LTV levels.  
CENTRAL & EASTERN EUROPE The Sub Price of Europe - Level of borrowing in non sovereign currency (EU loans)
PENSION - ENTITLEMENT CRISIS Unfunded Pension Liabilities - > $100T in US
SOVEREIGN DEBT - PIIGS Insolvency and Inability to stimulate economies
EU BANKING CRISIS Bank Ratios of 50:1 and toxic debt on and off the balance sheet
US BANKING CRISIS II Deferred accounted write-downs for Real Estate, Commercial Real Estate & HELOCS
IRAN NUCLEAR THREAT Israeli attack on Iran - Middle East escalation  
FINANCIAL CRISIS PROGRAMS EXPIRATION Withdrawal of Financial Crisis Triage Programs and interest rate normalization
FINANCE & INSUR. BALANCE SHEET WRITE-OFFS Accounting for Commercial Real Estate market values, loan loss reserves
RISING INTEREST RATES Reversal in Interest rate and impact on government financing budgets
NATURAL DISASTER Presently: Gulf Oil Spill Economic fallout and possible hurricane impact
PUBLIC POLICY MISCUES Impact of Obamacare, Dodd-Frank Bill and others in reaction to present environment.
JAPAN DEBT DEFLATION SPIRAL Ability for Japan to continue to fund national debt with shifting demographic patterns.
CREDIT CONTRACTION II Bankruptcy & Mal-Investment Catalyst
US FISCAL, TRADE AND ACCOUNT IMBALANCES Inability of the US to finance imbalances  
NORTH & SOUTH KOREA Geo-Political tensions - Escalating
CHINA BUBBLE Real Estate & speculative growth bubbles
GOVERNMENT BACKSTOP INSURANCE Fannie, Freddie, Ginnie, FHA, FDIC, Pension Guarantee backstop funding.
CORPORATE BANKRUPTCIES Reverse Gearing & margin pressures
SLOWING RETAIL & CONSUMER SALES Impact of slowing consumer sales and increasing savings rate on 70% consumption US Economy  
PUBLIC SENTIMENT & CONFIDENCE Growing social unrest and public rage
US RESERVE CURRENCY Emergence of alternative solutions such as SDRs. Inflationary repatriation impact
SHRINKING REVENUE GROWTH RATE Slowing Corporate Top-Line revenue growth rates
US DOLLAR WEAKNESS Domestic Inflationary Pressures
GLOBAL OUTPUT GAP Global Overcapacity & Underutilization
OIL PRICE PRESSURES Shortages, Peak Oil & Asian Growth demand.
FOOD PRICE PRESSURES Production shortages, distribution break-downs with growing Asian demand
US STOCK MARKET VALUATIONS Over-Valuation and unrealistic earnings estimates.
PANDEMIC Unknown black swan
TERRORIST EVENT Unknown black swan


We can never be sure of the sequence and time frame of any particular Tipping Point. Like a house of cards you never know which one, or what movement will precisely bring the house of cards down. What you know however, is that it will happen - you just need to be patient and prepared. Unfortunately few have the patience or think they can time it for even more profit. The greatest trader of all time, Jesse Livermore, wrote after a life time of trading, that his best gains were made when "he bought right and sat tight!"

Our current analysis on Tipping Points reflects the following:

Tectonic Shift 2007-2013

DETERMINING MORE GRANULARITY - We are in the 2010-2011 Transition Phase

Evolving Transition

In my articles EXTEND & PRETEND: A Guide to the Road Ahead and EXTEND & PRETEND: A Matter of National Security I outlined even more granularity to the virtuous cycle turning vicious spiral.

The Economic Road Ahead

We can now overlay the Tipping Points onto this map. We arrive at the following.


  • Commercial Real Estate - Finally forced to account properly for mark-to market valuations.
  • Housing Real Estate - Option ARMS come due and FHA / FNM / FDE / FDIC are seen as insolvent.
  • Corporate Bankruptcies - Unfunded Pension impacts and debt loads (gearing) on reduced revenues.
  • State, City & Local Government Financial Implosion - Non Accrued Pension Obligations, falling tax revenue and years of accounting gimmicks come home to roost.
  • Central & Eastern Europe - The 'sub-prime' of Europe will soon erupt on the EU banking network as evidenced recently by Hungary and the Baltic States.


Significantly Increasing Interest Rates - A Major Global News Focus

A $5T Quantitative Easing (QE II) Emergency Action
It will likely be triggered by a geo-political event or false flag operation.


  • Entitlement Crisis - The unfunded and underfunded Pension charade ends
  • Credit Contraction II - Credit Shrinks Violently
  • Banking Crisis II - Banking Insolvency no longer able to be hidden through Extend & Pretend.
  • Reduced Rating Levels - Falling Asset Values and Collateral Calls on $430T Interest Rate Swaps
  • Government Back-Stopped Programs - FHA, Fannie Mae, Freddie MA, FDIC go bust


  • Lending 'Roll-Over' - Game Ends


A recent Zero Hedge contributing author summarized the current environment nicely:

"There is an entrenched insolvency problem in the United States, and a picture is worth a thousand words. Insolvency is not illiquidity; insolvency is about income that can't service debt burden. Notice where things fall off the cliff: I believe we are getting close to this point. Just need a catalyst. Sequential bond auction failures here, a sovereign default there, massive liquidity drain all around, worse... whatever. The fumes running the engine (QE, or credit easing) are dwindling."

Don't Go Chasing Waterfalls

There is an old sailor's saying:

Red sky at night, sailors delight.
Red sky in the morning, sailors take warning!

Every morning the next batch of economic numbers is released and the indications are consistently red. Of course the market initially drops, and then miraculously rises on no volume. Since 2007 we have potentially constructed the largest head and shoulders topping formation we have ever seen.

This doesn't mean the markets are imminently headed down. What it does mean is you should be meticulously battening down your financial hatches and checking your options for every eventuality.

"It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so." - Mark Twain

Patient Cartoon


Follow daily Tipping Point developments at Tipping Points
Sign Up for the next release in the Preserve & Protect series: Commentary


Back to homepage

Leave a comment

Leave a comment