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1 September 2013 Edition Restricted & Confidential

Copyright 2013 Gordon T. Long All Rights Reserved [email protected]

"TAPER" & A New Fed Chair

Fed in a Box as the Recovery Stalls and a US Recession Looms

US ECONOMIC UPDATE

GLOBAL MACRO TIPPING POINTS - SEPTEMBER 2013

8/23/2013

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2 September 2013 Edition Restricted & ConfidentialCopyright 2013 Gordon T. Long All Rights Reserved

[email protected]

"TAPER" & A New Fed Chair

Fed in a Box as the Recovery Stalls and a US Recession Looms.

GLOBAL MACRO TIPPING POINTS - SEPTEMBER 2013

TIPPING POINTS ...................................................................................................................... 14

GLOBALMACRO:RISKASSESSMENT .................................................................................................................................................... 14

SITUATIONAL ANALYSIS .................................................................................................................................................... 14POSITIONAL FRAMEWORK: "WE ARE HERE!"....................................................................................................................................................... 14Q2 2013 DEVELOPMENTS TO WATCH..................................................................................................................................................................... 15GLOBAL THEMES - A STRUCTURAL BACKDROP FOR STRATEGY................................................................................................................. 24GLOBAL TRENDS - NATIONAL INTELLIGENCE COUNCIL ................................................................................................................................... 26A BROKEN PONZI SCHEME - BOSTON CONSULTING GROUP.......................................................................................................................... 28RISK CONTINUUM......................................................................................................................................................................................................... 30

MACRO MONITORING INSTITUTIONS ............................................................................................................................... 31

WEF (WORLD ECONOMIC FORUM -JANUARY 2013) ............................................................................................................................................ 31The 17 Biggest Risks To Our Hyper-Connected World.............................................................................................................................................. 31IMF (INTERNATIONAL MONETARY FUND - APRIL 2013) ...................................................................................................................................... 47Policymakers Should Address Old Financial Risks, Meet New Challenges ............................................................................................................ 47Credit Default Swaps on Government Debt Are Effective Gauge ............................................................................................................................. 48Extended Period of Low Interest Rates Can Rekindle Financial Risks .................................................................................................................... 50OECD (ORGANIZATION FOR ECONOMIC COOPERATION & DEVELOPMENT) .............................................................................................. 68MAPLECROFT (SCANNING THE GLOBE) ................................................................................................................................................................ 70

GLOBAL RISK SIGNALS ...................................................................................................................................................... 72RISK - COLLAPSING PETRODOLLAR FOUNDATION............................................................................................................................................ 74RISK - GLOBAL DEBT 313% of GDP.......................................................................................................................................................................... 78RISK - 202M GLOBALLY UNEMPLOYED................................................................................................................................................................... 79RISK - SIGNS APLENTY, BUT NO ONE PANICKING - YET!.................................................................................................................................. 80RISK - CANARIES SINGING AGAIN........................................................................................................................................................................... 82RISK - COMPLACENCY & REPRESSED FEAR........................................................................................................................................................ 83RISK - TIED TO EU IN 2012......................................................................................................................................................................................... 84RISK - GLOBAL DERIVATIVE COLLATERAL ............................................................................................................................................................ 86RISK - GLOBAL RISK MATRIX..................................................................................................................................................................................... 88RISK - GLOBAL MACRO HEADWINDS / TAILWINDS .............................................................................................................................................. 88RISK - FOOD A GROWING GLOBAL INFLATION & SOCIAL UNREST RISK...................................................................................................... 90RISK - INCREASINGLY DYSFUNCTIONAL CAPITALS MARKETS ....................................................................................................................... 96

RISK - GLOBAL RISK REWARD .......................................................................................................................................... 99RISK - RISING GEO-POLITICAL EVENT RISK........................................................................................................................................................ 100

GLOBALMACRO:RISKLEVELS .................................................................................................................................................... .......... 104

AGGREGATED GLOBAL FINANCIAL RISK INDEX ............................................................................................................ 104BANKING RISK - LIBOR-OIS SPREAD (Updated) .................................................................................................................................................. 105BANKING RISK - TED SPREAD (Updated) .............................................................................................................................................................. 105CREDIT RISK - GLOBAL CREDIT DEFAULT SWAPS (Updated) ........................................................................................................................ 106CREDIT RISK - EU CREDIT DEFAULT SWAPS (Updated) ................................................................................................................................... 106CONSUMER RISK - HOUSING - RATE OF CHANGE (Reference) ...................................................................................................................... 107ECONOMIC RISK - ECRI LEADING INDEX (Updated) ........................................................................................................................................... 108INFLATION RISK - MONEY SUPPLY GROWTH - M3 (Updated) .......................................................................................................................... 109INFLATION RISK - MONEY VELOCITY (Updated) .................................................................................................................................................. 110

MONETARY RISK - BANK LIABILITIES (Updated) ................................................................................................................................................. 111COST OF MONEY RISK - INTEREST RATES (Updated)...................................................................................................................................... 111

AGGREGATED RISK LEVEL .............................................................................................................................................. 112

TIPPINGPOINTS:CHANGES................................................................................................................................................................ .... 114

TIPPING POINT MAPPING: 2013 UPDATE ........................................................................................................................ 114

TIPPINGPOINTS:TOP5FOCUS-FEBRUARY 2013 .......................................................................................................................... 124

I - RISK REVERSAL............................................................................................................................................................ 124II - JAPAN DEBT DEFLATION ............................................................................................................................................ 127III-BOND BUBBLE .............................................................................................................................................................. 130

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IV - EU BANKING CRISIS ................................................................................................................................................... 130V - SOVEREIGN DEBT ....................................................................................................................................................... 131VI - CHINA HARD LANDING ............................................................................................................................................... 133

DRIVER$:RISK-ON-RISK-OFFANALYTICS......................................................................................................................................... 138

1- G10 MACRO SURPRISE INDEX .................................................................................................................................... 1412- CUMULATIVE GLOBAL PMI ........................................................................................................................................... 1463- SLOWING GLOBAL EXPORTS ...................................................................................................................................... 1524- US NON-REVOLVING CONSUMER CREDIT ................................................................................................................. 1575- IBES' RELATIVE GLOBAL PE RATIOS .......................................................................................................................... 1616- CONSENSUS EARNINGS ESTIMATES - Sell Side Analysts .......................................................................................... 1687- INFLATION PRESSURES - Global Food Prices.............................................................................................................. 171

GLOBAL MACRO ................................................................................................................... 175

GLOBALMACRO:ECONOMICOUTLOOK ............................................................................................................................................. 177

GLOBAL OUTLOOK - EM Crisis Will make the 1997 Asian Crisis Seem Like an Early Warning.......................................... 177GLOBAL OUTLOOK - Global Deleveraging Accelerating and Developing Nations Feeling the Pain .................................... 179GLOBAL OUTLOOK - Problems Erupting Everywhere (Signs of Implosion) ........................................................................ 181GLOBAL OUTLOOK - Credit Fueled Globalization in Retreat .............................................................................................. 184GLOBAL OUTLOOK - Rogoff's Sovereign Debt Default Levels ........................................................................................... 187GLOBAL OUTLOOK - Fiscal Adjustments Required............................................................................................................ 190GLOBAL OUTLOOK - Imbalances Continue to Increase Along With Financial Fragility ....................................................... 190GLOBAL OUTLOOK - A 67 Million Jobs Gap ...................................................................................................................... 194GLOBAL OUTLOOK - Center of Global Manufacturing Confirmed to be Shifting Away from developed Countries .............. 197GLOBAL OUTLOOK - Mercantilist China the Clear Winner Globally, Mercantilist Germany Regionally ............................... 198

ECONOMIC CUTS .............................................................................................................................................................. 200OECD CUTS ECONOMIC OUTLOOK....................................................................................................................................................................... 200IMF CUTS ECONOMIC OUTLOOK............................................................................................................................................................................ 203

ECONOMIC WARNINGS .................................................................................................................................................... 214IMF WARNS - May 2013 .............................................................................................................................................................................................. 214BIS WARNS - June 2013 ............................................................................................................................................................................................. 220WORLD BANK WARNS - June 2013 ......................................................................................................................................................................... 227

GLOBALMACRO:INDICATORS ............................................................................................................................................................ ... 232

GLOBAL CREDIT ............................................................................................................................................................... 232CREDIT CYCLE - HY Leading the Way..................................................................................................................................................................... 232CREDIT CYCLE - Reversal Ahead............................................................................................................................................................................. 235

GLOBAL GROWTH............................................................................................................................................................. 239GLOBAL GROWTH - PMI Barely Above Stagnation ................................................................................................................................................ 239GLOBAL GROWTH - Chinese Slowing moves to CONTRACTION....................................................................................................................... 242GLOBAL GROWTH - Slowing Global Economies .................................................................................................................................................... 243GLOBAL GROWTH - Global GDP Growth Trending Down by Region and Cumulatively................................................................................... 244GLOBAL GROWTH - Global PMI............................................................................................................................................................................... 244GLOBAL GROWTH - Global Recession .................................................................................................................................................................... 247GLOBAL GROWTH - Slowing Global Growth - Air Cargo Shipments................................................................................................................... 248

GOBAL UNEMPLOYMENT ................................................................................................................................................. 249GLOBAL UNEMPLOYMENT - The Beginnings of the Welfare Myth Unwind........................................................................................................ 249GLOBAL UNEMPLOYMENT - The Unsustainable Welfare Myth ........................................................................................................................... 252GLOBAL UNEMPLOYMENT - Global Financial Sector Job Cuts ........................................................................................................................... 254GLOBAL UNEMPLOYMENT - Global Unemployment Rising -Now 202 Million .................................................................................................. 256

GLOBAL TRENDS .............................................................................................................................................................. 258

BRANDS & COMMODITIES: Tell the Global Story.................................................................................................................................................. 258GLOBAL SENTIMENT ........................................................................................................................................................ 271

GLOBAL SENTIMENT - Complacent......................................................................................................................................................................... 271GLOBAL SENTIMENT - Nielsen's Global Consumer Confidence, Concerns & Spending Intentions ............................................................... 272

GLOBAL INFLATION .......................................................................................................................................................... 283GLOBAL INFLATION - Food Prices, Driver of Social Unrest.................................................................................................................................. 283GLOBAL INFLATION - Food Price Manipulation in Thailand.................................................................................................................................. 285

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GLOBALMACRO:MONETARYPOLICY&CENTRALBANKING ........................................................................................................ 286

The "OMF" Trial Balloon Raised .......................................................................................................................................... 286OPMF - A Reversing Wealth Effect May Force OPMF & Global Abenomics ........................................................................................................ 287OPMF - Financial Times: Martin Wolf - "The Case For Helicopter Money" ........................................................................................................... 288

OPMF - Financial Times: Martin Wolf - "The Case To Reset Basis of Monetary Policy"..................................................................................... 291OPMF - Financial Times: Gavyn Davies On Why Helicopters Are Dangerous ..................................................................................................... 292OPMF - A Conundrum for the World's Central Bankers ........................................................................................................................................... 295

GLOBAL CENTRAL BANKING ........................................................................................................................................... 297CENTRAL BANKS - Austerity Now Officially Dead Public Policy........................................................................................................................... 297CENTRAL BANKS - They are the Market.................................................................................................................................................................. 297CENTRAL BANKS - The longer QEpersists, the greater the magnitude of the left-tail event & a Minsky Trap ............................................. 300CENTRAL BANKS - We May Have Reached a Risk-Off Leverage Pivot.............................................................................................................. 301CENTRAL BANKS - The Macro Landscape .............................................................................................................................................................. 303CENTRAL BANKS - A Serious Shortage of Quality Collateral - A $10T US Problem Over 10 Years ................................................................ 304CENTRAL BANKS - Global Balance Sheet Expansion ............................................................................................................................................ 306CENTRAL BANKS - Where Do these Deflators Come From? ................................................................................................................................ 310CENTRAL BANKS - First Remove Gold Standard, Now Remove Debt................................................................................................................. 311

EMERGING MARKETS ...................................................................................................................................................... 316EMERGING MARKETS - The Impact of "TAPER"................................................................................................................................................... 316

BOE - UK ............................................................................................................................................................................ 320UK - Mark Carney and "Flexible Inflation Targeting"................................................................................................................................................ 320

FED - US............................................................................................................................................................................. 321US - FOMC January Minutes Un-Nerve Markets ...................................................................................................................................................... 321US - Congress Asks Bernanke For Full Risk Analysis On Fed's Soaring Balance Sheet.................................................................................... 322

BOJ - JAPAN ...................................................................................................................................................................... 327JAPAN - Some Policies Have Clearly Hit the Limit................................................................................................................................................... 327JAPAN - Foreshadows Next Global Crisis ................................................................................................................................................................. 328JAPAN - Japan's Prime Minister Shinzo Abe prepares to print money for the whole world................................................................................ 333JAPAN - Shinzo Abes Monetary-Policy Delusions ................................................................................................................................................... 334JAPAN - BOJ Governor Job Suddenly Available in Historical "Abenomics U-Turn"............................................................................................. 337JAPAN - Japanese Economic Policy Goes The Full Ponzi...................................................................................................................................... 338

ECB - EU ............................................................................................................................................................................ 340

EU - Japan Will Effectively Monetize European Debt............................................................................................................................................... 340

EU - TARGET-2 Imbalances - "The Debt Crisis Is Eating Its Way Ever Further Into Europe's Core"................................................................ 340EU - Draghi Will Soon Be Forced to Start Printing - Again!..................................................................................................................................... 342

GEO-POLITICALTENSIONS ................................................................................................................................................................ ..... 346

GLOBAL BOND SCARE ..................................................................................................................................................... 346BOND SCARE - Volatility and Instability Increase Risk........................................................................................................................................... 346BOND SCARE - Inflation Expectations Contributing to Volatility ............................................................................................................................ 348BOND SCARE - The Financial Times Headlines Tell An Interesting Story ........................................................................................................... 349BOND SCARE - A LONG Supply and Demand Problem BUT Heavy SHORT Demand..................................................................................... 350BOND SCARE - Long Term Support Trendline Achieved........................................................................................................................................ 351BOND SCARE - Retail Investors Running for the Exit............................................................................................................................................. 353

CHINA LIQUIDITY TIGHTENING SCARE ........................................................................................................................... 355CHINA LIQUIDITY - Housing Bubble Restricting PBOC Actions ............................................................................................................................ 355CHINA LIQUIDITY - PBOC Squeezing Banks towards Reducing Speculative Risk............................................................................................. 358CHINA LIQUIDITY - Overnight Repo at 25% ............................................................................................................................................................ 359CHINA LIQUIDITY - Red Flags ................................................................................................................................................................................... 360CHINA LIQUIDITY - Credit Fueled Growth ................................................................................................................................................................ 362CHINA LIQUIDITY - Shadow Banking System Showing Signs of Implosion ......................................................................................................... 367CHINA LIQUIDITY - PBOC Wants to Hold the Line on Explosive Credit Expansion through A Liquidity Squeeze .......................................... 370CHINA LIQUDITY - Potentially De-Stabilizing Cash Crunch ................................................................................................................................... 372CHINA LIQUIDITY - Chinese Liquidity Pump Unplugged........................................................................................................................................ 373

CURRENCY WARS BECOMING RATE WARS .................................................................................................................. 375CURRENCY WARS - A Major Shift............................................................................................................................................................................ 375BATTLEFIELD - Combatants & Belligerents ............................................................................................................................................................. 379BATTLEFIIELD - The Race to Debase ....................................................................................................................................................................... 380JAPAN - The Destabilizing Agent............................................................................................................................................................................... 383EUROPE - Euro Exposed............................................................................................................................................................................................ 383

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ARGENTINA - Here we Go Again!.............................................................................................................................................................................. 385VENEZUELLA - Bad Situation..................................................................................................................................................................................... 386BRAZIL - No One Wants to Listen .............................................................................................................................................................................. 386SWITZERLAND - No Choice ....................................................................................................................................................................................... 386SINGAPORE - Hot Money........................................................................................................................................................................................... 387UK- Pound Joins War................................................................................................................................................................................................... 388

CYBER WARS - GROWING THREAT ................................................................................................................................ 389SECURITY-SURVEILLANCE COMPLEX - NSA Whistleblower Example: Booz Hamilton ................................................................................. 389SECURITY SURVEILLANCE COMPLEX - Growing Without Public Control or Supervision!.............................................................................. 391

IRAN & SYRIA - COMPLETE MIDDLE EAST DOMINATION .............................................................................................. 392MIDDLE EAST - Watch Out for a "False Flag" or "Covert" Activity Event.............................................................................................................. 392MIDDLE EAST - Who Is Threatening Who Here? .................................................................................................................................................... 393

REGIONAL ............................................................................................................................... 395

EUROSIS -A Terminal Disease ........................................................................................................................................ 395RESEARCH WE FOLLOWED THIS MONTH........................................................................................................................................................... 395RESEARCH OF PARTICULAR IMPORTANCE........................................................................................................................................................ 396RESEARCH - EFSF Downgraded to AA+.................................................................................................................................................................. 396RESEARCH - EU Stabilization Programs Are Presently Very Fragile .................................................................................................................... 397RESEARCH - Spreads Widened in Peripherals and Significantly in Portugal and Greece ................................................................................. 400

PROGNOSIS: Why the European Situation Will Get Worse................................................................................................................................... 402

PROGNOSIS: Increasing Structural Imbalances ...................................................................................................................................................... 405PROGNOSIS: $22T Unaccounted - A Hidden World of Contingent Liabilities, Government Backing & Guarantees. ................................... 407PROGNOSIS: Monetary Malpractice - ECB's LTRO Not a Solution but................................................................................................................ 411PROGNOSIS: Monetary Malpractice - ECB's SMP Effort Futile ............................................................................................................................. 414PROGNOSIS: Monetary Malpractice - ECB Accepts BBB Collateral..................................................................................................................... 416PROGNOSIS: EU Banking Overbanked, Undercapitalized and Now Insolvent.................................................................................................... 417PROGNOSIS: Monetary Malpractice - TARGET2 "Contingent Liabilities"............................................................................................................. 418PROGNOSIS: Bailouts - Unsustainable & Unfundable ............................................................................................................................................ 424

MEDICAL CHARTS -Situation Critical ............................................................................................................................... 426CHARTS- EU Real Rates ........................................................................................................................................................................................... 426CHARTS - EU -NON Euro Members GDP RELIANCE............................................................................................................................................ 427CHARTS - EU GLOBAL GDP GROWTH CONTRIBUTION.................................................................................................................................... 428CHARTS - EU PMI........................................................................................................................................................................................................ 428CHARTS - EU CPI........................................................................................................................................................................................................ 430CHARTS - Regional Risk-Reward.............................................................................................................................................................................. 431CHARTS - Europe's "Core" Problem is France ......................................................................................................................................................... 432CHARTS - Germany's Preoccupation with Inflation is More Than It Would Seem ............................................................................................... 435CHARTS - Evidence OF Global Slowing Now Indisputable ..................................................................................................................................... 436CHARTS - EU Credit Downgrades, France and UK On Tap.................................................................................................................................. 438CHARTS - Perceived Reduction in Risk, A Temporary Aberration ......................................................................................................................... 440CHARTS - Dangerous Delusional Divergences ........................................................................................................................................................ 442CHARTS - IMF Projections for Euro Area and GIIPS ............................................................................................................................................... 443CHARTS - Air Cargo Shipments Confirm Slowing Global Growth .......................................................................................................................... 444CHARTS - Eurozone Misery Indices Never Been Higher........................................................................................................................................ 445CHARTS - Euro Currency............................................................................................................................................................................................ 447

ITALY - Budget Failure on NO Growth ................................................................................................................................ 452RESEARCH WE FOLLOWED THIS MONTH........................................................................................................................................................... 452RESEARCH OF PARTICULAR IMPORTANCE........................................................................................................................................................ 452RESEARCH - Italys Budget Failures, Weak Growth Outlook Call Debt Sustainability Into Question................................................................ 452CHARTS OF PARTICULAR IMPORTANCE............................................................................................................................................................. 457CHARTS - ITALY - Forced Rate Cuts ........................................................................................................................................................................ 457SITUATIONAL ASSESSEMENT................................................................................................................................................................................. 458ITALIAN ELECTION - What You Need to Know....................................................................................................................................................... 458ITALIAN ELECTION - Europe Capitulates On Austerity- Never Had The Stomach For It................................................................................... 459ITALIAN ELECTION - Message Given By the People .............................................................................................................................................. 461ITALIAN ELECTION - Bad Debt Continue to Soar................................................................................................................................................... 465ITALIAN ELECTION - Italians React Badly to Austerity, Elections Hardly a Surprise!......................................................................................... 468ITALIAN ELECTION - EUROPEAN FEEDBACK - #1 .............................................................................................................................................. 468ITALIAN ELECTION - EUROPEAN FEEDBACK - #2.............................................................................................................................................. 470ITALIAN ELECTION - Regional Financial Cracks in Sicily ...................................................................................................................................... 474

FRANCE - Hollande Going Down for the Count ................................................................................................................... 476RESEARCH WE FOLLOWED THIS MONTH........................................................................................................................................................... 476RESEARCH OF PARTICULAR IMPORTANCE....................................................................................................................................................... 477RESEARCH - France Loses its Coveted and NEEDED AAA Rating..................................................................................................................... 477

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CHARTS OF PARTICULAR IMPORTANCE............................................................................................................................................................. 479CHARTS - FRANCE - GDP......................................................................................................................................................................................... 479CHARTS - FRANCE - UNEMPLOYMENT................................................................................................................................................................. 480CHARTS - FRANCE - BUDGET DEFICIT................................................................................................................................................................. 481CHARTS - FRANCE - TAX versus GDP.................................................................................................................................................................... 482CHARTS - FRANCE - BUSINESS CONFIDENCE................................................................................................................................................... 483SITUATIONAL ASSESSMENT................................................................................................................................................................................... 484FRANCE - What You Need to Know.......................................................................................................................................................................... 484FRANCE - Key Indicators ............................................................................................................................................................................................ 485FRANCE: Sharpest Drop in Private Sector Output in Four Years ........................................................................................................................... 488FRANCE - Quits on Austerity - Never a Doubt This Would Happen ....................................................................................................................... 491FRANCE - Socialism is Expensive.............................................................................................................................................................................. 492FRANCE - Has Turned back to Socialism ................................................................................................................................................................. 494FRANCE - Losing Its Way through Political Illusions and Lies ................................................................................................................................ 495FRANCE - Uncompetitive ............................................................................................................................................................................................ 496FRANCE - Titan Tire Calls Out French Labor........................................................................................................................................................... 498FRANCE - France Responds to Titan Tire ................................................................................................................................................................. 500FRANCE - What Happens In France When Companies Fire People ..................................................................................................................... 503FRANCE - Hollande's Economically Insane campaign Promise ............................................................................................................................. 504

GERMANY - EU in the Hands Of Election ........................................................................................................................... 505RESEARCH WE FOLLOWED THIS MONTH........................................................................................................................................................... 505RESEARCH OF PARTICULAR IMPORTANCE........................................................................................................................................................ 505RESEARCH - Europe's Shadow Economy: As Big As Germany............................................................................................................................ 505CHARTS OF PARTICULAR IMPORTANCE............................................................................................................................................................. 509CHARTS - GERMANY - Inflation ................................................................................................................................................................................ 509CHARTS - GERMANY - IFO Investor Confidence .................................................................................................................................................... 509CHARTS - GERMANY - ZEW Expectations .............................................................................................................................................................. 510SITUATIONAL ASSESSEMENT................................................................................................................................................................................. 512GERMANY - Anti Euro AfD Party May Cost Merkel in Critical September Election ............................................................................................. 513GERMANY - The Euro Crisis Escalation over Cyprus May Politically Cripple Merkel.......................................................................................... 514GERMANY - Call for End of "Coercive Euro Association"....................................................................................................................................... 516

IBERIAN PENINSULA - Spain & Portugal Going Critical ..................................................................................................... 518RESEARCH WE FOLLOWED THIS MONTH........................................................................................................................................................... 518RESEARCH OF PARTICULAR IMPORTANCE........................................................................................................................................................ 519RESEARCH - Presidential Warning Spikes Yields To 8 Months Highs ................................................................................................................. 519RESEARCH - Clear Signs of Desperation In Spain from a Growing Collateral Contagion .................................................................................. 521RESEARCH - The Spanish Government's 'Bad Bank' Scam .................................................................................................................................. 522CHARTS OF PARTICULAR IMPORTANCE............................................................................................................................................................. 524CHARTS - PORTUGAL - Deficit Problem .................................................................................................................................................................. 524

SITUATIONAL ASSESSEMENT................................................................................................................................................................................. 525

IBERIA - Credit Downgrades - At Precipice of "Non Investment Grade"................................................................................................................ 525IBERIA - Regional Bailout Bailouts a Massive Problem ........................................................................................................................................... 526IBERIA - NPL Going Ballistic....................................................................................................................................................................................... 527IBERIA - Spanish Funding Problem............................................................................................................................................................................ 528IBERIA - The Giant Spanish Housing Bubble, Now Beginning to Implode ............................................................................................................ 533IBERIA - Mal-Investment Coming Home to Roost.................................................................................................................................................... 535IBERIA - Bank Deposits Were Leaving, Now they Are Fleeing............................................................................................................................... 536IBERIA - Now a Capital Investment Problem ............................................................................................................................................................ 537IBERIA - Banks on Artificial "Ponzi Bond" Life Support............................................................................................................................................ 538

UK - New BOE Governor with More Printing Ahead ............................................................................................................ 547RESEARCH WE FOLLOWED THIS MONTH........................................................................................................................................................... 547RESEARCH OF PARTICULAR IMPORTANCE........................................................................................................................................................ 547RESEARCH - UK workers' wage squeeze is longest since the 1870s ................................................................................................................... 547CHARTS OF PARTICULAR IMPORTANCE............................................................................................................................................................. 548CHARTS - UK - Crushed Disposable Income ........................................................................................................................................................... 548CHARTS - UK - BOE Balance Sheet Growth ............................................................................................................................................................ 549CHARTS - UK - Lending.............................................................................................................................................................................................. 549CHARTS - UK - Unemployment.................................................................................................................................................................................. 550CHARTS - UK - GDP - Pre and Post Recession Levels .......................................................................................................................................... 550CHARTS - UK - GDP.................................................................................................................................................................................................... 551CHARTS - UK - BOE Rates ......................................................................................................................................................................................... 551SITUATIONAL ASSESSEMENT................................................................................................................................................................................. 552UK - What you need to Know...................................................................................................................................................................................... 552UK - Joins Currency War - Down 8% YTD ............................................................................................................................................................. 554UK - Specter of Stagflation Haunts UK....................................................................................................................................................................... 555UK - Public Policy turns Against Austerity and PM Cameron .................................................................................................................................. 556UK - Doomsday Debt Machine .................................................................................................................................................................................... 557UK - QE Extension Coming......................................................................................................................................................................................... 560

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UK - Small Business Credit Squeeze Now Acute - Loan Rejections Rising......................................................................................................... 562UK - Technically in a Depression ................................................................................................................................................................................ 563

CYRPUS - Latest EU Banking Crisis ................................................................................................................................... 566CYRPUS - What you Need To Know.......................................................................................................................................................................... 566CYRPUS - Basic Situational Charts ............................................................................................................................................................................ 568CYPRUS - Crumbling Property Rights ....................................................................................................................................................................... 570CYPRUS - Plan D Supersedes Plan C and B as Time running Out....................................................................................................................... 574CYPRUS - Forgetting About Contract Law, Private Property Rights and Due Process ....................................................................................... 577CYPRUS - Russian Tax Haven ................................................................................................................................................................................... 578CYPRUS - Plan B as Bad As Plan A .......................................................................................................................................................................... 579CYPRUS - Breaks Public Trust and Incites the Politics of Germany Dictating Terms .......................................................................................... 581CYPRUS - Does Anyone Care How a Capitalist System (versus a Crony Capitalist System) is Supposed to Work? ..................................... 587CYPRUS - Criminal "Confidence Game" Payouts to Everyone at the Tax Payers Expense ............................................................................... 588CYPRUS - Cyprus Pushes EU Banking Crisis Back Near the Edge ..................................................................................................................... 590

ASIA-SERIOUS CRACKS BELOW THESURFACE.......................................................................................................................................... 591

CHINA - Credit Tightening Panic Averted - Temporarily? .................................................................................................... 591

RESEARCH WE FOLLOWED THIS MONTH........................................................................................................................................................... 591CHARTS OF PARTICULAR IMPORTANCE............................................................................................................................................................. 592

CHARTS - CHINA - PMI............................................................................................................................................................................................... 592

CHARTS - CHINA - PMI-2.......................................................................................................................................................................................... 593CHARTS - CHINA - GDP............................................................................................................................................................................................. 594CHARTS - CHINA - INDUSTRIAL OUTPUT............................................................................................................................................................. 595CHARTS - CHINA - Urban Fixed Asset Investment................................................................................................................................................. 596CHARTS - CHINA - RETAIL SALES .......................................................................................................................................................................... 597

RESEARCH OF PARTICULAR IMPORTANCE........................................................................................................................................................ 598RESEARCH - Investors Worried and Losing Confidence ....................................................................................................................................... 598RESEARCH - China Stampeding into Gold............................................................................................................................................................... 599RESEARCH - China "Will introduce some measures to arrest the slowdown of growth in the next couple of quarters"................................. 601RESEARCH - Slower Growth In the Cards & Endorsed by New Chinese Leadership ......................................................................................... 602RESEARCH - Is a PBOC Controlled Speculation Bust Possible or Will It Get Out of Control ............................................................................ 604RESEARCH - PBOC Liquidity Squeeze ..................................................................................................................................................................... 605RESEARCH - Chinese Housing Bubble Restricting PBOC Actions ....................................................................................................................... 607RESEARCH - PBOC Squeezing Banks towards Reducing Speculative Risk....................................................................................................... 609RESEARCH - Chinese Overnight Repo at 25% ........................................................................................................................................................ 611RESEARCH - Red Flags.............................................................................................................................................................................................. 612

RESEARCH - Credit Fueled Growth in China ........................................................................................................................................................... 614RESEARCH- PBOC Wants to Hold the Line on Explosive Credit Expansion through A Liquidity Squeeze ...................................................... 619RESEARCH - A Potentially De-Stabilizing Cash Crunch ......................................................................................................................................... 621

SITUATIONAL ANALYSIS ........................................................................................................................................................................................... 622CHINA SHADOW BANKING - Shadow Banking System Showing Signs of Implosion ........................................................................................ 624CHINA SHADOW BANKING - Shadow Banking and Credit Growth ...................................................................................................................... 627CHINA SHADOW BANKING - The US Sub-Prime / CDO All Over Again ............................................................................................................. 630CHINA SHADOW BANKING - Report........................................................................................................................................................................ 634CHINA SHADOW BANKING - Situation..................................................................................................................................................................... 635CHINA RESERVES - Distorted Foreign Reserve Levels ......................................................................................................................................... 636CHINA RESERVES - Declining Reserve Accumulation ........................................................................................................................................... 638CHINA RESERVES - Has Caught the Gold Bug big time!....................................................................................................................................... 640CHINA CURRENCY WARS - Hot Money into China................................................................................................................................................ 642CHINA - Withdraws Liquidity....................................................................................................................................................................................... 643CHINA - Socit General Sees a Likely Soft Landing!............................................................................................................................................. 645CHINA - True Debt is Orders of Magnitude More than Officially Being Reported................................................................................................. 655CHINA - Evidence OF Slowing Now Indisputable ..................................................................................................................................................... 658CHINA - PMI Improvement.......................................................................................................................................................................................... 659CHINA - Political Transition & Ongoing Emergence as a Super Power................................................................................................................. 662CHINA - An Implicit Social Contract............................................................................................................................................................................ 664CHINA - Manipulated Statistics due to Upcoming Decade Long Regime Change ............................................................................................... 666CHINA - Increasing Leverage is China's Way of Monetary Easing........................................................................................................................ 667CHINA - Possible Interest-Rate Liberalization ........................................................................................................................................................... 668CHINA - Global Impact of China's Slowdown ............................................................................................................................................................ 669CHINA - Shanghai Composite at 2008 Low Levels .................................................................................................................................................. 671CHINA - Shanghai Composite Warnings Signs......................................................................................................................................................... 672CHINA - Credit to GDP................................................................................................................................................................................................. 674CHINA - A Slow Recovery Through 2013 .................................................................................................................................................................. 675CHINA - Manufacturing PMI in Contraction Territory................................................................................................................................................ 677

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JAPAN: The New Currency War Front ................................................................................................................................ 681

RESEARCH WE FOLLOWED THIS MONTH........................................................................................................................................................... 681RESEARCH OF PARTICULAR IMPORTANCE........................................................................................................................................................ 681RESEARCH - Japanese Structural Problems a "Canary" for Western Developed Economies........................................................................... 68107-15-13-JAPAN - Shinzo Abe Hasn't the Stomach for the Heavy Lifting Needed to Accompany ABE-nomics. ............................................. 684RESEARCH - A Credit Squeeze Leads Deflationary Leg Down............................................................................................................................ 686RESEARCH - Some Japanese Policies Have Clearly Hit the Limit........................................................................................................................ 687RESEARCH - The ABE (Asset Bubble Evaluator) Index......................................................................................................................................... 689

CHARTS OF PARTICULAR IMPORTANCE............................................................................................................................................................. 690CHARTS - JAPAN - GDP Resurgence ....................................................................................................................................................................... 690CHARTS - JAPAN - BOJ Balance Sheet................................................................................................................................................................... 691

SITUATIONAL ASSESSEMENT................................................................................................................................................................................. 692JAPAN - What You Need to Know.............................................................................................................................................................................. 694JAPAN - Regional Risk-Reward.................................................................................................................................................................................. 696JAPAN - Now the Frontrunner of Outright Monetization. ......................................................................................................................................... 697JAPAN - Yen Devaluation ............................................................................................................................................................................................ 698JAPAN - New Bank of Japan Policy - 2% Inflation in 2 Years ................................................................................................................................. 699JAPAN - Appoints BOJ Governor Firmly Committed to Printing Money................................................................................................................. 701JAPAN - Third Straight Quarter of Recession ........................................................................................................................................................... 703JAPAN - Full Out War on Deflation ............................................................................................................................................................................. 703

JAPAN - First Test of the new found dominance of the Central Banks............................................................................................................... 705

JAPAN - BOJ Was Next Up. No Surprise .................................................................................................................................................................. 708JAPAN - Negative Current Account Balance and -3.5% Recession ....................................................................................................................... 710JAPAN - A 50% Over-Valued Yen Has Undermined Self Confidence & Drive ...................................................................................................... 713JAPAN - Proves QE's Low Cost of Capital Does Structural Damage to Economy............................................................................................... 715JAPAN - BOJ Being Pressured to "Rip-Up Government Debt"1 ............................................................................................................................. 717JAPAN - Easy Money Has Hurt Corporate Profitability in the Longer Term .......................................................................................................... 723JAPAN - The Biggest Debtor with the Biggest Problem!.......................................................................................................................................... 726JAPAN - A Magnitude Larger Problem than Europe................................................................................................................................................. 730JAPAN - QE 9 A Complete Failure - Actually "Tightens" versus It's Intended Easing.......................................................................................... 736JAPAN - Japanese Yen Continuously Under Attack............................................................................................................................................... 740JAPAN - Vast foreign US$ Coming Home for "Claim".............................................................................................................................................. 741JAPAN - PMI Breakdown............................................................................................................................................................................................ 743JAPAN - Exports Continue To Tumble ....................................................................................................................................................................... 745JAPAN - Intervention Fails Again - It's a Whole new Ball Game ............................................................................................................................. 746JAPAN - First Signs of Massive Debt Monetization After Next Election ................................................................................................................. 749JAPAN - Japan to the ESM's Rescue........................................................................................................................................................................ 749

EMERGINGMARKETS-SYNCHRONIZED MARKETS ................................................................................................................................. 751RESEARCH WE FOLLOWED THIS MONTH........................................................................................................................................................... 751

RESEARCH OF PARTICULAR IMPORTANCE........................................................................................................................................................ 751EMERGING MARKETS - Stunning Withdrawals ...................................................................................................................................................... 751EMERGING MARKETS - Bond Outflows Accelerating............................................................................................................................................ 752EMERGING MARKETS - This will make the 1997 Asian Crisis Seem Like an Early Warning ........................................................................... 754EMERGING MARKETS - Developing Nations Feeling the Pain of Global Deleveraging Acceleration .............................................................. 756EMERGING MARKETS - The Impact of "TAPER"................................................................................................................................................... 758

CHARTS OF PARTICULAR IMPORTANCE............................................................................................................................................................. 762CHARTS - Reserves versus World............................................................................................................................................................................. 762CHARTS - Current Account Balances versus GDP.................................................................................................................................................. 763CHARTS - Emerging Markets Index versus MSCI World Index.............................................................................................................................. 764CHARTS - SINGAPORE - Inflation ............................................................................................................................................................................. 765CHARTS - SINGAPORE - Exports ............................................................................................................................................................................. 766CHARTS - SOUTH KOREA ......................................................................................................................................................................................... 767CHARTS - TURKEY - Spreads ................................................................................................................................................................................... 768SITUATIONAL ASSESSEMENT................................................................................................................................................................................. 769

EMERGING MARKETS - What you Need to Know.................................................................................................................................................. 769EMERGING MARKETS - Comparative Ease of Doing Business ............................................................................................................................ 771EMERGING MARKETS - Importance of Employment, Equality and Per Capital Income .................................................................................... 772

ASIA................................................................................................................................................................................................................................ 775ASIA: CHARTS - AUSTRALIA .................................................................................................................................................................................... 776ASIA - Regional Risk-Reward...................................................................................................................................................................................... 777ASIA - Corporate Debt Levels Reflect Unintended Consequences of Mispricing & Malinvestment................................................................... 778ASIA - Synchronized Markets...................................................................................................................................................................................... 783ASIA - Caution Advised Regarding Positive South Korea Export Turnaround...................................................................................................... 785ASIA - Export Growth Looks Similar to Pre-2008...................................................................................................................................................... 786

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ASIA - Global Slowing Quickly a Worsening Situation Across Asia ........................................................................................................................ 787ASIA - Risks All on the Downside for Asia ................................................................................................................................................................. 788ASIA - Demographic Headwinds ................................................................................................................................................................................. 790ASIA - Pronounced Flight to Singapore Safety......................................................................................................................................................... 791BRICS............................................................................................................................................................................................................................. 793BRICS - A Development Bank-Forex Reserve Pool-African Integration ................................................................................................................ 793BRICS - 40% of World Population and 25% of World GDP..................................................................................................................................... 794BRICS - $3 to $13B GDP in Ten Years ...................................................................................................................................................................... 797BRICS- A World Wide Distrust of Financial Markets Building ................................................................................................................................. 799BRAZIL - Inflation will remain high thanks to a "growth mismatch". ...................................................................................................................... 801RUSSIA - Central bank will hike rates if inflation and oil prices continue to rise. .................................................................................................. 802INDIA - Inflation ............................................................................................................................................................................................................. 803INDIA - Will be fine as long as it continues to reduce its deficit. .............................................................................................................................. 804INDIA - Watch Out For RE-Emergence of Food Price Inflation ............................................................................................................................... 805

US ECONOMY ......................................................................................................................... 807

THEGLOBALMACROOVERLAY ................................................................................................................................................... .......... 809

MACRO - US Macro Data Divergence ................................................................................................................................. 809MACRO - US Macro Surprise Index .................................................................................................................................... 811MACRO - Serious Structural US Problems Impeding Global Competitive ............................................................................ 814MACRO - First Half In Charts .............................................................................................................................................. 816

USINVESTMENTCYCLE................................................................................................................................................................. .......... 825GORD'S BIG PICTURE ECONOMIC CYCLE ...................................................................................................................... 825ECONOMIC INDICATORS .................................................................................................................................................. 826

MONTHLY INDICATORS OF NOTE.......................................................................................................................................................................... 826RESEARCH - The US Economy Continues to Tank Under Obama ....................................................................................................................... 826REFERENCE CHARTS ............................................................................................................................................................................................... 829

THE CURRENT BUSINESS CYCLE - SITUATIONAL ANALYSIS ....................................................................................... 833BUSINESS CYCLE - JOBS > CONFIDENCE > CONSUMPTION > GROWTH CYCLE ....................................................... 833

BUSINESS CYCLE - JOBS ................................................................................................................................................. 835CHARTS & TABLES ..................................................................................................................................................................................................... 837CHARTS - Underemployment Gap ............................................................................................................................................................................. 837CHARTS - Employment to Population and Labor Slack........................................................................................................................................... 837CHARTS - Participation Rate ...................................................................................................................................................................................... 838CHARTS - Part Time Employment.............................................................................................................................................................................. 838REFERENCE - Prior Posts .......................................................................................................................................................................................... 846BRIDGING : Jobs to Confidence & Sentiment.......................................................................................................................................................... 846JOBS: Participation Rate at 1979 Carter Levels ....................................................................................................................................................... 850

BUSINESS CYCLE - CONSUMER & BUSINESS SENTIMENT .......................................................................................... 852CHARTS & TABLES ..................................................................................................................................................................................................... 854CHARTS - NFIB Small Business Sentiment.............................................................................................................................................................. 854CHARTS - Orange Book.............................................................................................

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