Sign Up for the free 2011 Thesis Paper: Beggar-thy-Neighbor at Tipping Points
Throughout my 2010 article series "Extend & Pretend" and "Sultans of Swap" I stressed that we were rapidly moving from the Financial Crisis of 2008, through the Economic Fallout of 2009 -2010, towards a Political Crisis in 2011 -2012. We are now clearly beginning to see the early emergence of the final part of this continuum. From North Africa to Wisconsin all are fundamentally based on the single insidious underlying problem - excessive global debt and credit levels.
The global macroeconomic environment appears to be rapidly unraveling. The situations in North Africa through the Middle East are blatant proof of social unrest and accelerating political instability. Food shortages and inflation pressures are now driving people into the streets. When you feel the hunger in your stomach and see it in the eyes of your children, it quickly erupts and motivates people to action.
It is now time to revisit our Tipping Points framework to see where this is leading. A framework that is clearly pointing to a global fiat currency failure and an emerging new world order which is detailed in our "2011 Thesis - Beggar-thy-Neighbor."
CURRENT TIPPING POINTS
Our Tipping Points which are outlined below are adjusted continuously based on daily news flow analysis. Through a proprietary 'Process of Abstraction' news is tracked and consolidated around these potentially critical flash points.
| IS | WAS | Diff. | ||
| SOVEREIGN DEBT - PIIGS | Insolvency and Inability to stimulate economies | 1 | 1 | Same |
| EU BANKING CRISIS | Bank Ratios of 50:1 and toxic debt on and off the balance sheet | 2 | 2 | Same |
| RISK REVERSAL | Historic level of financial market participation and dependency (i.e. pension entitlements) | 3 | 5 | +2 |
| US STATE & LOCAL GOVERNMENT | Unprecedented budget shortfalls & funding problems | 4 | 4 | Same |
| FOOD PRICE PRESSURES | Production shortages, distribution break-downs with growing Asian demand | 5 | 15 | +10 |
| RISING INFLATION PRESSURES & INTEREST RATES | Reversal in Interest rate and impact on government financing budgets | 6 | 14 | +8 |
| SOCIAL UNREST | Public rallies, protests and rioting against the government. | 7 | NEW | |
| CHRONIC UNEMPLOYMENT | Historic Unemployment rates in G7 | 8 | 9 | +1 |
| CHINA BUBBLE | Real Estate & speculative bubbles | 9 | 22 | +13 |
| GEO-POLITICAL EVENT | A sovereign country overthrow, rebellion or insurrection | 10 | NEW | |
| RESIDENTIAL REAL ESTATE - PHASE II | Shadow Inventory, Strategic Defaults, Looming Option ARMS 'python', LTV levels. | 11 | 6 | -5 |
| COMMERCIAL REAL ESTATE | Market Values are down 45 - 55% with little write downs as of yet being taken by banks, insurance or financial holders. | 12 | 7 | -5 |
| PUBLIC POLICY MISCUES | Impact of Obamacare, Dodd-Frank Bill and others in reaction to present environment. | 13 | 13 | Same |
| OIL PRICE PRESSURES | Shortages, Peak Oil & Asian Growth demand. | 14 | 30 | +16 |
| BOND BUBBLE | Historically high Bond Prices | 15 | 3 | -12 |
| PENSION - ENTITLEMENT CRISIS | Unfunded Pension Liabilities - > $100T in US | 16 | 11 | -5 |
| CENTRAL & EASTERN EUROPE | The Sub Price of Europe - Level of borrowing in non sovereign currency (EU loans) | 17 | 8 | -9 |
| US BANKING CRISIS II | Deferred accounted write-downs for Real Estate, Commercial Real Estate & HELOCS | 18 | 10 | -8 |
| CREDIT CONTRACTION II | Bankruptcy & Mal-Investment Catalyst | 19 | 18 | -1 |
| JAPAN DEBT DEFLATION SPIRAL | Ability for Japan to continue to fund national debt with shifting demographic patterns. | 20 | 18 | -2 |
| FINANCE & INSUR. BALANCE SHEET WRITE-OFFS | Accounting for Commercial Real Estate market values, loan loss reserves | 21 | 17 | -4 |
| US STOCK MARKET VALUATIONS | Over-Valuation and unrealistic earnings estimates. | 22 | 16 | -6 |
| GOVERNMENT BACKSTOP INSURANCE | Fannie, Freddie, Ginnie, FHA, FDIC, Pension Guarantee backstop funding. | 23 | 23 | SAME |
| SHRINKING REVENUE GROWTH RATE | Slowing Corporate Top-Line revenue growth rates | 24 | 27 | +3 |
| GLOBAL OUTPUT GAP | Global Overcapacity & Underutilization | 25 | 29 | +4 |
| US DOLLAR WEAKNESS | Domestic Inflationary Pressures | 26 | 28 | +2 |
| US RESERVE CURRENCY | Emergence of alternative solutions such as SDRs. Inflationary repatriation impact | 27 | 20 | -7 |
| PUBLIC SENTIMENT & CONFIDENCE | Growing social unrest and public rage | 28 | 26 | -2 |
| SLOWING RETAIL & CONSUMER SALES | Impact of slowing consumer sales and increasing savings rate on 70% consumption US Economy | 29 | 25 | -4 |
| NORTH & SOUTH KOREA | Geo-Political tensions - Escalating | 30 | 12 | -18 |
| US FISCAL, TRADE AND ACCOUNT IMBALANCES | Inability of the US to finance imbalances | 31 | 21 | -10 |
| CORPORATE BANKRUPTCIES | Reverse Gearing & margin pressures | 32 | 24 | -8 |
| TERRORIST EVENT | Unknown black swan | 33 | 35 | +2 |
| FINANCIAL CRISIS PROGRAMS EXPIRATION | Withdrawal of Financial Crisis Triage Programs and interest rate normalization | 34 | 24 | -10 |
| IRAN NUCLEAR THREAT | Israeli attack on Iran - Middle East escalation | 35 | 33 | -2 |
| NATURAL PHYSICAL DISASTER | Presently: Gulf Oil Spill Economic fallout and possible hurricane impact | 36 | 31 | -5 |
| PANDEMIC /EPIDEMIC | Unknown black swan | 37 | 32 | -5 |
CHANGES OF SIGNIFICANCE THIS QUARTER
INCREASES IS WAS CHANGE
- Oil Price Pressures 14 30 +16
- China Bubble 9 22 +13
- Food Price Pressures 5 15 +10
- Rising Inflation Pressures & Interest Rate Pressures 6 14 + 8
- Geo-Political Event Risk New
- Social Unrest New
DECREASES
- North & Southern Korea 30 12 -18
- Financial Crisis Programs Expiration Impact 34 24 -10
The Tectonic Shifts from 2007 to 2013 are best shown in the following illustration which is closely tracking our expectations and projections from the early stage of the financial crisis.
CONCLUSIONS
We need to carefully watch:
- The increasing & accelerated contagion of social tensions. Watch for Asia demonstrations in places such as North Korea.
- How and if the Central Banks actually do unwind their crisis 'triage' programs or are they realistically now permanent and necessary to maintain the illusion of financial stability?
- New government public policy initiatives to combat growing inflation and price pressures
- The financial sectors abilities to continue to hide massive nonperforming commercial and residential real estate loans through Federal Reserve endorsed accounting gimmickry.
These events will allow us to determine if our roadmap is still valid or if we are going to see even sooner and possibly poorer financial outcomes than we predict in our free Monthly Market Commentary and Market Analytics reports.
The public will soon wake up to the magnitude of money printing that is going on to support the economic recovery fallacy. When the public does become aware, "Money Velocity" will accelerate. When this happens, the likelihood is that the markets will dramatically rise, not because economic conditions are improving, but rather because of a depreciating US dollar. We believe this expectation is presently being priced into the market. We are truly exposed to the potential of a "Minsky Melt-Up" or more correctly from an Austrian perspective, a Von Mises "Crack-up Boom".
The risks are presently towards a SHORT TERM corrective consolidation. The Intermediate Term calls for higher market highs into June 2011 - then it gets ugly - fast!
"The Federal Reserve historically was the lender of last resort in a crisis;
Today, the Federal Reserve is the buyer of first resort in a crisis
..... and every day for that matter"
Sign Up for the free 2011 Thesis Paper: Beggar-thy-Neighbor at Tipping Points
