COMING UNGLUED

Market Fragility and Credit Market risk indicators are now at post-Lehman levels .
Global Economic Risks have taken a noticeable and abrupt turn downward over the last 30 days. Deterioration in
Credit Default Swaps, Money Supply and many of our Macro Analytics metrics suggest the global economic
condition is at a Tipping Point. Urgent and significant actions must be taken by global leaders and central banks to
reduce growing credit stresses.
GLOBAL MACRO TIPPING POINTS - JULY 2012

6/22/2012

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COMING UNGLUED
Market Fragility and Credit Market Risk Indicators Now At Post-Lehman Levels

GLOBAL MACRO TIPPING POINTS - JULY 2012

TIPPING POINTS........................................................................................................................................................................................ 6
GLOBAL MACRO: RISK ASSESSMENT ...................................................................................................................................................... 6
SITUATIONAL ANALYSIS ...................................................................................................................................................... 6
WE ARE HERE ................................................................................................................................................................................................................. 6
TROUBLING MID-YEAR 2012 DEVELOPMENTS ....................................................................................................................................................... 7

MACRO MONITORING INSTITUTIONS ............................................................................................................................... 13

WEF (WORLD ECONOMIC FORUM) .......................................................................................................................................................................... 13
IMF (INTERNATIONAL MONETARY FUND) .............................................................................................................................................................. 20
OECD (ORGANIZATION FOR ECONOMIC COOPERATION & DEVELOPMENT) .............................................................................................. 35

GLOBAL RISK ...................................................................................................................................................................... 37

SCANNING THE GLOBE ............................................................................................................................................................................................... 37
NIELSEN: CONSUMER SENTIMENT ......................................................................................................................................................................... 40
RISK: GERMANY, GREECE PLAYING ACCELERATING FINANCIAL WAR GAME ............................................................................................ 47
RISK: MARKET FRUGALITY & CREDIT MARKET RISK INDICATORS ................................................................................................................ 49
RISK: GROWING CHINA CONCERNS IN 15 BULLETS ........................................................................................................................................... 51
RISK: CRISIS MONITOR: GREECE ............................................................................................................................................................................ 57
RISK: CRISIS MONITOR: SPAIN ................................................................................................................................................................................. 60

GLOBAL MACRO: RISK LEVELS ................................................................................................................................................................ 63

AGGREGATED GLOBAL FINANCIAL RISK INDEX.............................................................................................................. 63
BANKING RISK - LIBOR-OIS SPREAD (Updated) .................................................................................................................................................... 64
BANKING RISK - TED SPREAD (Updated) ................................................................................................................................................................ 64
CREDIT RISK - GLOBAL CREDIT DEFAULT SWAPS (Updated) .......................................................................................................................... 65
CREDIT RISK - EU CREDIT DEFAULT SWAPS (Updated) ..................................................................................................................................... 66
CONSUMER RISK - HOUSING - RATE OF CHANGE (Reference) ........................................................................................................................ 67
ECONOMIC RISK - ECRI LEADING INDEX (Updated) ............................................................................................................................................. 68
INFLATION RISK - MONEY SUPPLY GROWTH - M3 (Updated) ............................................................................................................................ 69
INFLATION RISK - MONEY VELOCITY (Updated) .................................................................................................................................................... 70
MONETARY RISK - BANK LIABILITIES (Updated) ................................................................................................................................................... 70
COST OF MONEY RISK - INTEREST RATES (Updated)........................................................................................................................................ 72

AGGREGATED RISK LEVEL ................................................................................................................................................ 73

TIPPING POINTS: CHANGES ...................................................................................................................................................................... 74
TIPPING POINT MAPPING: 2012 UPDATE .......................................................................................................................... 74
SHIFTS TO WATCH IN 2012 ................................................................................................................................................ 77
TIPPING POINTS: FOCUS - JULY 2012 ..................................................................................................................................................... 84
I - EU BANKING CRISIS ....................................................................................................................................................... 84
II - SOVEREIGN DEBT ......................................................................................................................................................... 85
III - RISK REVERSAL............................................................................................................................................................ 86
IV - CHINA HARD LANDING ................................................................................................................................................. 87
V - JAPAN DEBT DEFLATION .............................................................................................................................................. 88
VI - BOND BUBBLE .............................................................................................................................................................. 90
DRIVER$: RISK-ON - RISK-OFF ANALYTICS ........................................................................................................................................... 91
1- G10 MACRO SURPRISE INDEX ...................................................................................................................................... 93
2- CUMULATIVE GLOBAL PMI............................................................................................................................................. 95
3- FINANCIAL TIGHTENING INDEX ..................................................................................................................................... 97
4- US NON-REVOLVING CONSUMER CREDIT................................................................................................................... 99
5- IBES' RELATIVE GLOBAL PE RATIOS .......................................................................................................................... 100
6- FSB 30 Index of Systemic Risk Names ........................................................................................................................... 102
7- Swift Payment & Economic Activity ................................................................................................................................. 104

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GLOBAL MACRO.................................................................................................................................................................................... 106

WORLD ECONOMIC OUTLOOK ............................................................................................................................................................... 108
GLOBAL GROWTH - Europe Continues to Force Global Growth Estimate Reductions ....................................................... 108
GDP Reductions - By Region ...................................................................................................................................................................................... 109
Manufacturing PMI - By Country ................................................................................................................................................................................ 115

GLOBAL SENTIMENT - Europe has a Growing Sentiment /Confidence Problem ................................................................ 118
GLOBAL CREDIT MARKETS - Stable but Tenuous ............................................................................................................ 125
GLOBAL INFLATION - Where Do these Deflators Come From? ......................................................................................... 127
EUROPE - ITS CONTAGIOUS ......................................................................................................................................................................... 128
EUROSIS - Signs of a Terminal Prognosis ........................................................................................................................ 128
PROGNOSIS: Why the European Situation Will Get Worse ................................................................................................................................... 128

IBERIAN PENINSULA - Spain & Portugal Imploding ........................................................................................................... 131

REAL DEBT PROBLEM: Size of the True Spanish Debt ....................................................................................................................................... 131
PAYING FOR THE DEBT: Growth, PMI & Industrial Production ............................................................................................................................ 135
UNEMPLOYMENT: Who Has Any Money for Taxes? .............................................................................................................................................. 136
PRIVATE CONSUMPTION: Shrinking Rapidly ......................................................................................................................................................... 137
REAL ESTATE: The Giant Spanish Housing Bubble, Now Beginning to Implode ................................................................................................ 138
NON PERFORMING LOANS - Mal-Investment Coming Home to Roost ............................................................................................................... 140
STEALTH BANK RUNS: Bank Deposits Were Leaving, Now they Are Fleeing .................................................................................................... 141
SPAIN A LTRO JUNKIE: Banks on Artificial "Ponzi Bond" Life Support ................................................................................................................ 143
INVESTORS: Move from Defensive to Protective - Equity, Bond & Credit Markets ............................................................................................. 147
SUMMARY: PROGNOSIS ........................................................................................................................................................................................... 150

ECB - LTRO Grades Are Now Posted ................................................................................................................................. 153

LTRO a Failure - Exhibit A: Spain & Italy ................................................................................................................................................................... 154
EU Banks Failed To Take Action ................................................................................................................................................................................ 156
BUNDESBANK & TARGET2 - How Long Can Germany Finance this Debacle? ................................................................................................. 157
The Real Problem ......................................................................................................................................................................................................... 160

ASIA - EUROPEAN FALLOUT BEING FELT ...................................................................................................................................................... 162

China's PMI - Results all in the opaque "Seasonal" Adjustments ........................................................................................................................... 163
CHINA - More Signs of Broadening Slowdown: To Single Digits Mind You! ......................................................................................................... 166
Commodities May be Sending a Signal of a Chinese Hard Landing ...................................................................................................................... 168
A Record Trade Deficit Shocks World ........................................................................................................................................................................ 169

JAPAN: A Weak Yen Desperately Needed .......................................................................................................................... 170

YEN Carry Trade - Andy Xie Predicts 40% Devaluation .......................................................................................................................................... 170
Japan's Turn Again? - Central Bank Liquidity Pumping ........................................................................................................................................... 172

EMERGING MARKETS - ECONOMIC ENGINE SLOWING ............................................................................................................................ 174

Additionally, proof of the Global Slowing is very evident in the BRICS & specifically INDIA. ............................................................................. 174
BRICS Nations Threaten IMF Funding ....................................................................................................................................................................... 176
BRICS want a World Bank for Asia ............................................................................................................................................................................. 177
Global Slowing - Proof is in the BRICS & Specifically INDIA .................................................................................................................................. 179

US ECONOMY ......................................................................................................................................................................................... 181

THE GLOBAL MACRO - US OVERLAY .................................................................................................................................................... 182
OVERWORKED & OVERSTRESSED................................................................................................................................. 185
US INVESTMENT CYCLE........................................................................................................................................................................... 187
GORD'S BIG PICTURE ECONOMIC CYCLE ...................................................................................................................... 187
ECONOMIC INDICATORS.................................................................................................................................................. 188
MONTHLY INDICATORS OF NOTE .......................................................................................................................................................................... 188

THE CURRENT BUSINESS CYCLE - SITUATIONAL ANALYSIS ....................................................................................... 193

ECONOMIC CYCLE, INVESTMENT CYCLE, SECTOR ROTATION .................................................................................................................... 193
JOBS - CONFIDENCE - CONSUMPTION - GROWTH CYCLE ............................................................................................................................. 195
JOBS .............................................................................................................................................................................................................................. 196
CONFIDENCE & SENTIMENT .................................................................................................................................................................................... 206
CONSUMPTION ........................................................................................................................................................................................................... 213
GROWTH ....................................................................................................................................................................................................................... 223

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ECONOMIC GROWTH - GROSS DOMESTIC DISTORTIONS ............................................................................................................. 226

FLAWED FORMULA ........................................................................................................................................................... 227
UNI-DIRECTIONAL INFLATION: ........................................................................................................................................ 235
GROSS "REAL" ADJUSTMENT.......................................................................................................................................... 237
GOVERNMENT GAMING ................................................................................................................................................... 238
GDP DISTORTIONS - Government Credit & Channel Stuffing ............................................................................................................................... 238
CONSUMER STRENGTH - Government Transfer Payments in Disguise ............................................................................................................ 239
CHRONIC UNEMPLOYMENT - Migrates To "Disability" (Welcome To Socialism!) ............................................................................................. 239
CONSUMER CREDIT - Hugh Shift in Credit from Revolving to Non-Revolving? ................................................................................................. 241
CONSUMER CREDIT - It's All Government Sponsored and Guaranteed ............................................................................................................. 242
CONSUMER CREDIT - IS NOT WHAT IT APPEARS TO BE ................................................................................................................................. 243

FORCED TO LIE................................................................................................................................................................. 251

MONETARY POLICY - INFLATION & MONEY VELOCITY .................................................................................................................... 252
WHO'S TURN? - Fed, You're Up! ........................................................................................................................................ 252
US FISCAL CLIFF - The Fed's Game Plan.......................................................................................................................... 254
FINANCIAL REPRESSION - SOME NEW TOOL ............................................................................................................... 256
FLOATING RATE DEBT .............................................................................................................................................................................................. 256
FED MAY PREFER ANOTHER TWIST TO ADDING ASSETS .............................................................................................................................. 256

FINANCIAL REPRESSION - TOOLS [REFERENCE RESEARCH] ..................................................................................... 259

TOOL #1: MANAGED INFLATION EXPECTATIONS. ............................................................................................................................................. 261
TOOL #2: INTEREST RATE DERIVATIVE SWAPS ................................................................................................................................................ 263
TOOL #3: ZERO INTEREST RATE POLICY (ZIRP) ................................................................................................................................................ 264
TOOL #4: QUANTITATIVE EASING (QE) ................................................................................................................................................................. 264
TOOL #5: REPO DURATION ...................................................................................................................................................................................... 266
TOOL #6: OPERATION TWIST .................................................................................................................................................................................. 266
TOOL #7: INFLATION TARGETING .......................................................................................................................................................................... 267

RUSSIA & CHINA ARE DUMPING US TREASURIES [REFERENCE RESEARCH] ........................................................... 268
WHO IS BUYING US TREASURIES? ........................................................................................................................................................................ 270
WHERE IS THE MONEY COMING FROM? ............................................................................................................................................................. 271

FISCAL POLICY - US BUDGET ................................................................................................................................................................. 272

THE PROBLEM .................................................................................................................................................................. 273
THE RESPONSE ................................................................................................................................................................ 278
STATE OF THE UNION ............................................................................................................................................................................................... 278
US BUDGET .................................................................................................................................................................................................................. 280

KEY DRIVERS - CATALYSTS OF CHANGE ............................................................................................................................................ 284

EMPLOYMENT ................................................................................................................................................................... 284
REAL DISPOSABLE INCOME ............................................................................................................................................ 292
BEHAVIOURAL CHANGE: Forced Towards Fraud .................................................................................................................................................. 297

US RESIDENTIAL REAL ESTATE ...................................................................................................................................... 301

OVERVIEW.................................................................................................................................................................................................................... 301
CURRENT SITUATIONAL ANALYSIS ....................................................................................................................................................................... 306
CURRENT HOME OWNERSHIP TRENDS ............................................................................................................................................................... 306
NATIONAL STATISTICS: PRICE ............................................................................................................................................................................... 310
NATIONAL STATISTICS: EXISITNG HOME SALES ............................................................................................................................................... 312
NATIONAL STATISTICS: NEW HOME SALES ........................................................................................................................................................ 314
RESEARCH OF NOTE................................................................................................................................................................................................. 315

COMMERCIAL REAL ESTATE ........................................................................................................................................... 318

OVERVIEW.................................................................................................................................................................................................................... 318
NATIONAL STATISTICS: COMMERCIAL REAL ESTATE...................................................................................................................................... 319
RESEARCH OF NOTE................................................................................................................................................................................................. 320

CAPITAL SHRUGGED ................................................................................................................................................................................ 325

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