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STALL SPEED

Any Geo-Political, Economic or Financial Event Could Trigger a Market Clearing Fall

GLOBAL MACRO TIPPING POINTS - SEPTEMBER 2012

8/20/2012

1 September 2012 Edition


Copyright 2012 Gordon T. Long All Rights Reserved

Restricted & Confidential


general@GordonTLong.com

STALL SPEED
Any Geo-Political, Economic or Financial Event Could Trigger a Market Clearing Fall

GLOBAL MACRO TIPPING POINTS - SEPTEMBER 2012


TIPPING POINTS........................................................................................................................................................................................ 7
GLOBAL MACRO: RISK ASSESSMENT ...................................................................................................................................................... 7
SITUATIONAL ANALYSIS ...................................................................................................................................................... 7
WE ARE HERE ................................................................................................................................................................................................................. 7
TROUBLING MID-YEAR 2012 DEVELOPMENTS ....................................................................................................................................................... 8

MACRO MONITORING INSTITUTIONS ............................................................................................................................... 14


WEF (WORLD ECONOMIC FORUM) .......................................................................................................................................................................... 14
IMF (INTERNATIONAL MONETARY FUND) .............................................................................................................................................................. 21
OECD (ORGANIZATION FOR ECONOMIC COOPERATION & DEVELOPMENT) .............................................................................................. 36

GLOBAL RISK ...................................................................................................................................................................... 38


SCANNING THE GLOBE ............................................................................................................................................................................................... 38
NIELSEN: CONSUMER SENTIMENT ......................................................................................................................................................................... 41
RISK: GERMANY, GREECE PLAYING ACCELERATING FINANCIAL WAR GAME ............................................................................................ 48
RISK: MARKET FRUGALITY & CREDIT MARKET RISK INDICATORS ................................................................................................................ 50
RISK: GROWING CHINA CONCERNS IN 15 BULLETS ........................................................................................................................................... 52
RISK: CRISIS MONITOR: GREECE ............................................................................................................................................................................ 58
RISK: CRISIS MONITOR: SPAIN ................................................................................................................................................................................. 61

GLOBAL MACRO: RISK LEVELS ................................................................................................................................................................ 64


AGGREGATED GLOBAL FINANCIAL RISK INDEX.............................................................................................................. 64
BANKING RISK - LIBOR-OIS SPREAD (Updated) .................................................................................................................................................... 65
BANKING RISK - TED SPREAD (Updated) ................................................................................................................................................................ 65
CREDIT RISK - GLOBAL CREDIT DEFAULT SWAPS (Updated) .......................................................................................................................... 66
CREDIT RISK - EU CREDIT DEFAULT SWAPS (Updated) ..................................................................................................................................... 67
CONSUMER RISK - HOUSING - RATE OF CHANGE (Reference) ........................................................................................................................ 68
ECONOMIC RISK - ECRI LEADING INDEX (Updated) ............................................................................................................................................. 69
INFLATION RISK - MONEY SUPPLY GROWTH - M3 (Updated) ............................................................................................................................ 70
INFLATION RISK - MONEY VELOCITY (Updated) .................................................................................................................................................... 71
MONETARY RISK - BANK LIABILITIES (Updated) ................................................................................................................................................... 71
COST OF MONEY RISK - INTEREST RATES (Updated)........................................................................................................................................ 73

AGGREGATED RISK LEVEL ................................................................................................................................................ 74


TIPPING POINTS: CHANGES ...................................................................................................................................................................... 75
TIPPING POINT MAPPING: 2012 UPDATE .......................................................................................................................... 75
SHIFTS TO WATCH IN 2012 ................................................................................................................................................ 78
TIPPING POINTS: FOCUS - JULY 2012 ..................................................................................................................................................... 85
I - EU BANKING CRISIS ....................................................................................................................................................... 85
II - SOVEREIGN DEBT ......................................................................................................................................................... 86
III - RISK REVERSAL............................................................................................................................................................ 87
IV - CHINA HARD LANDING ................................................................................................................................................. 88
V - JAPAN DEBT DEFLATION .............................................................................................................................................. 89
VI - BOND BUBBLE .............................................................................................................................................................. 91
DRIVER$: RISK-ON - RISK-OFF ANALYTICS ........................................................................................................................................... 92
1- G10 MACRO SURPRISE INDEX ...................................................................................................................................... 94
2- CUMULATIVE GLOBAL PMI............................................................................................................................................. 96
3- FINANCIAL TIGHTENING INDEX ..................................................................................................................................... 98
4- US NON-REVOLVING CONSUMER CREDIT................................................................................................................. 100
5- IBES' RELATIVE GLOBAL PE RATIOS .......................................................................................................................... 101
6- FSB 30 Index of Systemic Risk Names ........................................................................................................................... 103
7- Swift Payment & Economic Activity ................................................................................................................................. 105

September 2012 Edition


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Copyright 2012 Gordon T. Long All Rights Reserved

Restricted & Confidential


general@GordonTLong.com

GLOBAL MACRO.................................................................................................................................................................................... 107


GLOBAL ECONOMIC OUTLOOK .............................................................................................................................................................. 109
IMF WARNS: Japanese & Spanish Debt Unsustainable ...................................................................................................... 109
IMF WARNS: Global Recovery Faltering, Reduces Global Growth to Just Above 3% Global Recession Level.................... 111
BIS WARNS: Monetary Policy At Its Limits .......................................................................................................................... 113
GLOBAL GROWTH - Europe Continues to Force Global Growth Estimate Reductions ....................................................... 114
GDP Reductions - By Region ...................................................................................................................................................................................... 115
Manufacturing PMI - By Country ................................................................................................................................................................................ 121

GLOBAL SENTIMENT - Europe has a Growing Sentiment /Confidence Problem ................................................................ 124
GLOBAL CREDIT MARKETS - Stable but Tenuous ............................................................................................................ 131
GLOBAL INFLATION - Where Do these Deflators Come From? ......................................................................................... 133
GLOBAL TRENDS - Commodities and Brands Tell the Global Story ................................................................................... 134
Cooper - Rio Tinto ......................................................................................................................................................................................................... 134
Aluminum - Alcoa, Rio Tinto ........................................................................................................................................................................................ 136
Iron Ore and Thermal Coal - Rio Tinto ....................................................................................................................................................................... 138
Consumable Brands - P&G .......................................................................................................................................................................................... 140
Parcel Volumes - FEDEX ............................................................................................................................................................................................. 141
Shipping - Baltic Dry Index ........................................................................................................................................................................................... 142

EUROPE - PLACED IN INTENSIVE CARE ....................................................................................................................................................... 146


MEDICAL CHARTS - Situation Critical ............................................................................................................................... 146
EUROSIS - A Terminal Disease ........................................................................................................................................ 151
PROGNOSIS: Why the European Situation Will Get Worse ................................................................................................................................... 151
PROGNOSIS: Increasing Structural Imbalances ...................................................................................................................................................... 154
PROGNOSIS: Monetary Malpractice - ECB's LTRO Not a Solution but ................................................................................................................ 156
PROGNOSIS: Monetary Malpractice - ECB's SMP Effort Futile ............................................................................................................................. 159
PROGNOSIS: Monetary Malpractice - ECB Accepts BBB Collateral ..................................................................................................................... 161
PROGNOSIS: EU Banking Overbanked, Undercapitalized and Now Insolvent .................................................................................................... 162

SUMMITS - "19th Nervous Breakdown" .............................................................................................................................. 163


FRANCE - Has Turned back to Socialism ........................................................................................................................... 170
ITALY - Cracks Impossible to Hide and Contain .................................................................................................................. 172
IBERIAN PENINSULA - Spain & Portugal Imploding ........................................................................................................... 174
SPAIN A LTRO JUNKIE: Monetary Malpractice - Banks on Artificial "Ponzi Bond" Life Support ....................................................................... 183

MONETARY MALPRACTICE - How Long Will Germany & the Bundesbank Accept TARGET2 "Contingent Liability"? ....... 190
CURRENT STATE OF EU BAIL-OUTS ............................................................................................................................... 196
ASIA - EUROPEAN FALLOUT NOW ACUTE ..................................................................................................................................................... 198
CHINA................................................................................................................................................................................. 202
Socit General Sees a Likely Soft Landing! ............................................................................................................................................................ 202
SLIDES BELOW ............................................................................................................................................................................................................ 202
CHINA PMI: 48.2. Fourth Straight Month of JOB Contraction ................................................................................................................................. 210
CHINA: Manipulated Statistics due to Upcoming Decade Long Regime Change ................................................................................................ 212

JAPAN: Manufacturing Output Falls .................................................................................................................................... 213


EU Just a Warm-up for the Main Event! ................................................................................................................................................................. 213

EMERGING MARKETS - ECONOMIC ENGINE STALLING............................................................................................................................ 216


GLOBAL SLOWING: A Quickly Worsening Situation ......................................................................................................................................... 216
RISKS: All on the downside for Asia ...................................................................................................................................................................... 218
GLOBAL IMBALANCES: Demographic Headwinds ............................................................................................................................................ 220
FLIGHT TO SAFETY: Becoming Pronounced ....................................................................................................................................................... 221
INDIA: Watch Out For RE-Emergence of Food Price Inflation .......................................................................................................................... 223

September 2012 Edition


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Copyright 2012 Gordon T. Long All Rights Reserved

Restricted & Confidential


general@GordonTLong.com

US ECONOMY ......................................................................................................................................................................................... 224


THE GLOBAL MACRO OVERLAY ............................................................................................................................................................. 225
MACRO POSITIONING ...................................................................................................................................................... 225
POSITIONING US SENTIMENT ......................................................................................................................................... 229
US GROWTH NOW STALLED............................................................................................................................................ 231
OVERWORKED & OVERSTRESSED................................................................................................................................. 235
US INVESTMENT CYCLE........................................................................................................................................................................... 237
GORD'S BIG PICTURE ECONOMIC CYCLE ...................................................................................................................... 237
ECONOMIC INDICATORS.................................................................................................................................................. 238
MONTHLY INDICATORS OF NOTE .......................................................................................................................................................................... 238

THE CURRENT BUSINESS CYCLE - SITUATIONAL ANALYSIS ....................................................................................... 244


ECONOMIC CYCLE, INVESTMENT CYCLE, SECTOR ROTATION .................................................................................................................... 244
JOBS - CONFIDENCE - CONSUMPTION - GROWTH CYCLE ............................................................................................................................. 248
JOBS........................................................................................................................................................................................................................... 249
CONFIDENCE & SENTIMENT ................................................................................................................................................................................ 259
CONSUMPTION ........................................................................................................................................................................................................ 267
GROWTH ................................................................................................................................................................................................................... 281

CONSUMPTION GROWTH - A 70% CONSUMPTION ECONOMY MAY BE THE LIMIT? ............................................................................. 295
CONSUMPTION - No Longer the Answer for America? ...................................................................................................... 295
RECESSION - At Stall Speed but NOT There Yet! .............................................................................................................. 297
BACKGROUND ANALYSIS: The Big Four Indicators and Recessions ................................................................................................................. 300
BIG FOUR: Are They Rolling Over? ........................................................................................................................................................................... 303
CHART GALLERY :Notes ............................................................................................................................................................................................ 304
Industrial Production ..................................................................................................................................................................................................... 304
Real Personal Income Less Transfer Payments ....................................................................................................................................................... 306
Total Nonfarm Employees ............................................................................................................................................................................................ 307
Real Retail Sales ........................................................................................................................................................................................................... 309

RETAIL SALES - All in the Seasonal Adjustments............................................................................................................... 311


REAL FINAL SALES: DETERIORATING Y-O-Y ....................................................................................................................................................... 316

MONETARY POLICY - MONETARY MADNESS & WILDCAT FINANCE ............................................................................................. 320


MONETARY MALPRACTICE: Global Wildcat Finance ........................................................................................................ 321
FED PRESSURES .............................................................................................................................................................. 325
U.S. STRUGGLING TO ATTRACT FOREIGN FUNDS: Needed to Finance Trade Deficit ................................................................................. 325
GLOBAL DELEVERAGING: $28T to Go! .................................................................................................................................................................. 328
MOUNTING QE III PRESSURES: Perceptions Forcing Fed to Take Action ......................................................................................................... 330
MOUNTING QE III PRESSURES: Perceptions Forcing Fed to Take Action - II - (Jon Hilsenrath Speaks) ...................................................... 331
MOUNTING QE III PRESSURES: Perceptions Forcing Fed to Take Action - III .................................................................................................. 332

FED INDICATORS .............................................................................................................................................................. 333


PATTERN: US Monetary Policy PE Impact! (August) ............................................................................................................................................. 333
PATTERN: QE III Still Too Soon! (September) ........................................................................................................................................................ 334
PATTERN: What is the Fed Trigger Point? (September) ......................................................................................................................................... 334
PATTERN: M2 Money Velocity ................................................................................................................................................................................... 336

FED ACTIONS .................................................................................................................................................................... 337


GLOBAL GROWTH - Central Bank Intervention Results ......................................................................................................................................... 337
FED INJECTIONS - $600M REPO After 4 Year Hiatus ........................................................................................................................................... 338

MORAL HAZARD & UNINTENDED CONSEQUENCES...................................................................................................... 340


CRONY CAPITALISM - Enriching the Financial Sector Through Monetary Policy ............................................................................................... 340
EARNINGS - Earnings follow US$ which follows QEIII Expectations .................................................................................................................... 343
FURTHER MARKET RISE - Dependent on Fed Flows ............................................................................................................................................ 345

WHO'S TURN? - Fed, You're Up! ........................................................................................................................................ 349


FISCAL POLICY - THE FISCAL CLIFF ...................................................................................................................................................... 351
US RECOVERY: Forget Camouflage, this is the Stark Reality of the Non-Recovery .................................................................................. 352

September 2012 Edition


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Copyright 2012 Gordon T. Long All Rights Reserved

Restricted & Confidential


general@GordonTLong.com

2012 FEDERAL ELECTION ................................................................................................................................................ 356


A BAD DREAM .............................................................................................................................................................................................................. 356

FISCAL CLIFF..................................................................................................................................................................... 359


THE SIZE OF THE CLIFF ............................................................................................................................................................................................ 359
OFFICIAL FISCAL DEFICIT & DEBT ......................................................................................................................................................................... 360
HOW MUCH DOES THE US GOVERNMENT REALLY OWE? - Answer: $84 Trillion .................................................................................... 362
FISCAL CLIFF - Asymmetric Risk Profile & PE Contraction .............................................................................................................................. 363
ENTITLEMENTS: The Coming Demographics ...................................................................................................................................................... 364
US RECOVERY: Stimulus Hasn't Worked. It is Camouflaging Something Deeper ...................................................................................... 366

STATE & LOCAL GOVERNMENT FISCAL DRAG .............................................................................................................. 369


GOVERNMENT DEPENDENCE ......................................................................................................................................... 374
US ENTITLEMENTS - Entitlements Go Negative .................................................................................................................................................. 374

THE BUDGET PROBLEM ................................................................................................................................................... 376


LATEST US BUDGET .................................................................................................................................................................................................. 381
FINANCIAL REPRESSION: One cannot operate a capitalist system if the state can borrow at a negative cost. .................................. 385
US DEBT PROJECTIONS: Even the Official Numbers Show Little Hope ....................................................................................................... 388

KEY DRIVERS - CATALYSTS OF CHANGE ............................................................................................................................................ 389


EMPLOYMENT ................................................................................................................................................................... 389
REAL DISPOSABLE INCOME ............................................................................................................................................ 399
US RESIDENTIAL REAL ESTATE ...................................................................................................................................... 405
OVERVIEW.................................................................................................................................................................................................................... 405
CURRENT SITUATIONAL ANALYSIS ....................................................................................................................................................................... 410
CURRENT HOME OWNERSHIP TRENDS ............................................................................................................................................................... 410
NATIONAL STATISTICS: PRICE ............................................................................................................................................................................... 414
NATIONAL STATISTICS: EXISITNG HOME SALES ............................................................................................................................................... 416
NATIONAL STATISTICS: NEW HOME SALES ........................................................................................................................................................ 418
RESEARCH OF NOTE................................................................................................................................................................................................. 419

US COMMERCIAL REAL ESTATE ..................................................................................................................................... 426


OVERVIEW.................................................................................................................................................................................................................... 426
NATIONAL STATISTICS: COMMERCIAL REAL ESTATE...................................................................................................................................... 427
RESEARCH OF NOTE................................................................................................................................................................................................. 428

CAPITAL SHRUGGED ................................................................................................................................................................................ 432

September 2012 Edition


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Copyright 2012 Gordon T. Long All Rights Reserved

Restricted & Confidential


general@GordonTLong.com