The Greater Depression or - How I Learned to Stop Worrying and Love the Bear 2011.10.15

8/3/2019 The Greater Depression or - How I Learned to Stop Worrying and Love the Bear 2011.10.15

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The Greater Depression or:How l Learned to Stop Worrying and Love the BearOctober 14, 2011

Private & Confidential


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Throughout all my years

of investing I've found

that the big money was

never made in the buying

or the selling. The big

money was made in thewaiting.

- Jesse Livermore

Preface

3

A few months back, I turned on the news while getting ready for

work to see what the weather was going to be like that day. It had

been particularly hot and dry for the past couple of months with

basically no rain except for a random thunderstorm a few weeks

prior. I wanted to wear this new pair of expensive shoes I had just

purchased, but hadnt had a chance to waterproof yet, and while wehadnt had a lot of rain lately, I wanted to be sure that they would

be safe. There is nothing worse than buying a new pair of shoes and

ruining them the first time you wear them.

The first meteorologist I landed on said it was slight chance of

clouds, but overall a beautiful day with no rain in the forecast. This

meteorologist had been notoriously wrong to my recollection, and

being the skeptic I am, I turned to another station to get a second

opinion. Just to be sure.

The next one was a new weathergirl in town, who gave a similarstory, except she didnt even mention a chance for clouds. She went

on to say that as we were clearly in a drought, and it hadnt rained

for weeks, there was an extremely low chance for rain today. While

she was pretty and bubbly and seemed trustworthy, she didnt even

show a shot of the radar, which I thought was kind of odd until I

later found out that her shtick was giving sunny day forecast

regardless of what the instruments said. As a matter of fact, it was

later discovered that she couldnt even read meteorological

equipment.

Unsatisfied, I decided to go out on to my balcony and take a look atthe sky for myself. While it was a little dark outside, I thought it was

just because it was still early - until I looked toward the west. There I

saw massive storm heads moving in, black with rain. Call me crazy,

but I not only decided to wear another pair of shoes, but I also

brought an umbrella. Just to be sure.

My point is that I dont need a weather man to tell me if its raining,

and even if the weatherman says, No rain, I might plan for rain

anyway if I see storm clouds on the horizon with my own eyes.

There is a lot of this going on right now.

The MSM tends to spin the news to serve its own purpose/agenda

because doing so is in their best interest; appealing to a certain

demographic, or telling its target market what it wants to hear helps

retain viewership. Few will argue that media bias exists. If well-

informed conservative turns on CNN, he will likely be repulsed by

the blatant liberal slant to its reporting. Same for a liberal watchingFox News.

What some people do not realize, however, is that this same bias

that can be seen so clearly on politically-based news stations also

exists within business-oriented news outlets. I have learned, for

example, that getting all my economic news from CNBC is akin to

getting all my political news from CNN and the New York Times.

Currently, the MSM is trying to sell us on an economic recovery

that, frankly, has failed to materialize.

As you might know, I tend to get most of my economic news fromnon-mainstream media outlets because I believe it can be

dangerous to get all my news from one place, through one filter.

And I have found some that provide true, unbiased analysis of what

is going on without the spin.

I have been following some people such as Mish Shedlock and

Reggie Middleton for years, and have continued to read their

analyses because they have been so spot-on and very far ahead of

the curve. The sites I read called the top in residential real estate,

the collapse of Bear Sterns weeks before it imploded, the Lehman

collapse months before it imploded, and so on.

I have tried to aggregate information from several of these and

other sources outside of the mainstream, with the intent of

objectively basing my research on the data that is out there, not

what I want or hope to see or what some talking head wants me to

think. To be sure, I would like nothing more than to see another 20-

year bull market, especially at this stage in my life and career.

However, I believe it is more prudent to base my plans on the

outcome that is likely to occur rather than the one I simply hope will

occur, because only then will I be able to avoid being caught offguard and hopefully be able to position myself to profit from it.


4/153

DRAFTPreface

4

My father taught me to analyze the world around me, the claims

that people made. He taught me how to apply logic and how to

debate. He taught me to do my homework, to investigate to find the

truth, to develop a healthy skepticism and look to corroborate

evidence. He used to say: You can lie about numbers, but numbers

dont lie. Perhaps (and this might sound kind of nerdy) this is why

finance and economics is my passion. I like trying to uncover the

truth, trying to solve the puzzle, trying to beat the market, especially

because in this realm one can also be rewarded so handsomely for

being good taking calculated risks. This is what drives me to search

for the truth and to pick apart the claims being made every day

about the economy.

Please keep in mind: This was not written to detract from our

investment direction, but rather to add to it, as I believe diversity of

opinion and healthy debate increases the likelihood of our making

the right decisions at the right time. I hope you will approach thisreport with an open mind that is truly objective and unbiased.

I put this together because I believe we are on the precipice of a

global economic collapse and I dont believe we are currently

positioned to profit from it. Most likely we would be hurt by a

significant downturn in the economy given our current portfolios

exposure.

My hope is that this will help generate thoughtful and meaningful

debate to arrive at a course of action for our firm, as the purpose of

this report is to investigate the forecast and determine if it might beprudent to pack an umbrella. Just to be sure.

ng

p.s. I know there is a lot here, but I tried to be both brief and

thorough. Pay particular attention to Key Slides with Red Star in

bottom corner.


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October 14, 2011

Table of Contents

Section Page

Executive Summary 6

Appendix I: Stock Market 40

Appendix II: Employment 55

Appendix III: Confidence 68

Appendix IV: Personal Consumption 78

Appendix V: Gross Domestic Product 86

Appendix VI: Housing 95

Appendix VII: Europe 115

Appendix VIII: Miscellaneous 124


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October 14, 2011

Executive Summary

Overview


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The Global Financial

Crisis (GFC) is not over

and Things have not

looked this bad for the

global economy since

2008

Analysis of current

economic data

indicates that the

occurrence of another

global downturn is not

only possible, but

probable

The U.S. is currentlyclose to falling into

another recession, if

its not already there.

Expect negative GDP

growth through 2012

The new Normal is an

era of increased

volatility and

uncertainty

From both an isolated,

and, more

importantly, a Total-

Portfolio perspective,

the establishment of a

directionally short

market position offers

a compelling risk-

reward

Executive Summary

Overview

7

Outline

In the Executive Summary, we will begin with Overviewof our

current situation and how we got here, followed by a

discussion surrounding the Economic Outlook.

Next, we will consider a simple framework for analyzing where

we are in our current economic cycle while discussing what we

are seeing the data related to the factors ofJobs, Confidence,

Consumption, and Growth.

We will then take an inventory of where we are currently,

and discuss the Recovery to this point.

Next, we will discuss how the Federal Reserves policies over

the last 30 years lead to the financial collapse in 2008, what

the Fed has done since then to fix the economy, and what

they are signaling for the near term along with the effect on

the broader market will likely be.

Next, we will investigate the concept of Secular Markets and

see how the returns one ultimately gets from an investment is

largely determined by when he invest, not by simply being

invested.

Finally, we will consider an investment idea that could present

a compelling risk-adjusted return on its own, and concurrently

lower the volatility of our overall portfolios returns.

The second part of this report is an Appendix, which exploreseach of the related topics in further detail:

The Market

Employment

Confidence

Consumption

Gross Domestic Product

Housing

Europe

Miscellaneous

Overview

The global economy is currently experiencing a slight

depression, which is basically a prolonged recession that lasts

several years. At its core, these problems are the result of

loose credit and expansive monetary policies by the worlds

Central Banks. The global financial system is a house of cardsbuilt on a foundation of debt, leverage, and risk. 2008 will pale

in comparison to the global credit crunch we are headed for

because none of the fundamental problems that caused the

GFC have been fixed. Anywhere.

In the recent Fed minutes release, the august phrase

"downside risks to the economic outlook have increased" was

changed to "there are significant downside risks to the

economic outlook, including strains in global financial

markets. We are currently seeing the acceleration in thedeterioration of global financial conditions. Many statistics

support the fact that the U.S. is worse off today than it was

prior to the previous recession, which officially ended 21 short

months ago.

9.5 million fewer workers than the 2007 peak

Real GDP lower than Q4 2007

Real retail sales $13 billion below 2007 peak

Real personal income $515 billion below 2008 peak

S&P 20% lower than peak (officially a bear market)

40% drop in bond yields since peak in 2007

It takes a long time to unwind the previous borrowing

excesses. Over-borrowing leads to bankruptcy and financial

ruin. And we are approaching a day of reckoning. We have

been living in the largest debt bubble in the history of the

world, and that bubble is ending. This is natural. We will soon

see that the debt-fueled prosperity we have enjoyed over the

last few decades was nothing but an illusion.


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DRAFT



and Things have not



2008

Analysis of current

economic data

indicates that the



only possible, but

probable




Expect negative GDP

growth through 2012


era of increased

volatility and

uncertainty


and, more




directionally short


a compelling risk-

reward

Executive Summary

Overview (cont.)

8

The financial avalanche we are about to witness will destroy

the wealth of millions of people, making it glaringly apparent

why excessive debt is unsustainable and a bad thing.

The problem is not debt, per se, but rather the excessive level

of debt and the associated increase in systematic risk, whichitself is exacerbated by both the increased integration of and

the increased correlations between the worlds financial

markets and economies.

The modern financial system is dependent on perpetual

growth. As all (fiat) money is loaned into existence, it carries

with it an obligation to repay both principal and interest. As

the economy is able to grow at a 2% rate, debt servicing is not

a problem. But when growth slows, or worse, goes negative,

the problems begin to arise. One need only consider thefollowing graph, which shows the total debt (public and

private) as a percent of each countrys GDP, to see that the

excess debt problem is a huge problem in every major

economy around the globe:

Debt can only be rolled or repaid through growth and growth is

over, because the growth we have witnessed has been driven

by the expansion of debt, which is not expanding any longer.

Put simply, countries or economies built on debt cannot be

strong, unless growth in true value creation and productivity

per capita outpaces the cost of the debt.

The last bull market, which lasted from 1982 to 2000, was

driven by the secular decline in interest rates and the

expansion of credit, which allowed for the expansion of

investment, which led to increased risk-taking, which led to

more easy money, which not only helped change the structure

of our economy to one that is now consumption-based, but

also allowed for the investment in new technologies, which led

to the Internet Boom, which led to the Internet Bubble, which

topped in 2000, then popped.

The Feds response to fixing the economy and restoring

growth was to ease credit further by lowering the Fed Funds

rate more, which lead to more risk-seeking behavior, which led

to more growth, more consumption, and more credit

expansion, which ultimately led to the Housing Bubble, which

topped in 2007, then popped.

True to form, the Fed responded by lowered the Fed Funds

rate further in an attempt to generate growth, however, it alsoexpanded its manipulation of the financial markets beyond

simply buying short-term Treasury bills by making large scale

asset purchases. In essence, the Fed, which historically was the

Lender of Last Resort, also became the Buyer of Last

Resort, and effectively bailed out the entire banking system

by increasing the size of its balance sheet by about $2 Trillion.

However, wide-scale asset purchases and fiscal stimulus have

failed to generate the growth expected.

350%

450% 450%470%

410%

0%

50%

100%

150%

200%

250%

300%

350%

400%

450%

500%

U.S EuroZone UK Japan Canada

Aggregate(private&g

ov't)debt

toGDP

Total (Private & Government) Debt as Percent of GDP


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DRAFT



and Things have not



2008

Analysis of current

economic data

indicates that the



only possible, but

probable




Expect negative GDP

growth through 2012


era of increased

volatility and

uncertainty


and, more




directionally short


a compelling risk-

reward

Executive Summary

Overview (cont.)

9

This should come as no surprise. There is too much waste and

too much debt still clogging the system, which is leading to the

law of diminishing returns for the Feds policies.

There is no way to unwind this debt spiral easily, at least not

without creating severe financial instability in the short-run.However, putting off the pain that needs to be felt in order

for the waste still in the system to be flushed out, will only

make the problem worse in the future.

Our political leaders and policy makers have made it apparent

that they are not willing to take the tough steps necessary to

truly fix our problems. This is evident by the kick the can

down the roadsolutions that have been applied so far. To

be sure, you cannot solve a debt problem with more debt.

We cannot afford to ignore the macroeconomic landscape and

invest based on hope. When we look at a company to buy, we

focus on the fundamentals of the organization, consider the

growth opportunities, and develop a road map for the future. I

believe it is prudent and possible to apply a similar framework

for the analysis of the overall economy, which is particularly

important because each and every investment in our portfolio

has a positive correlation to the overall health of the market.

The financial crisis in 2008 threw the world into the worstrecession since the Great Depression. The next financial crisis

will hit the world even harder and throw us into the Greater

Depression. And we are tipping into another recession right

now.

The same problems that brought down the banks in 2008 are

the same issues that are present right now with almost no

difference, save for some government backing. Nothing has

changed, at least not for the better.

The macro fundamentals are actually worse. Housing is still in a

decline, unemployment is still extremely high, and we have

more concentration of risk. For example, ca. 95% of notional

derivative exposure, which is at all-time highs, is currently

concentrated in 5 banks.

It is important to realize that all the losses are actually incurred

during the heady euphoria of the Boom, that the Bust is

nothing more than the overdue recognition of those mistakes,

and that to procrastinate thereafter in their acknowledgement

is not to avoid the pain, but to exacerbate it in much the same

way as a sufferer from a cancer can do himself nothing but

harm by trying to delay the awfulness of the therapy which

sadly must await.

We are about to experience the most terrifying opportunity ofour lifetimes. Will we be a part of the minority who are

positioned to profit from this Collapse, or part of the majority

that is taken by surprised?


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DRAFT

The U.S. economy will

likely register negative

growth during Q4 2011

and through 2012.

While monetary and fiscalpolicies helped create the

backdrop for the

slowdown in growth, it

has been aggravated by:

Falling productivity

Inventory reversal

Falling real-wages

The case of animpending recession rests

not only on cyclical

precursors evident in

productivity, real wages,

and inventory investment,

but also in dysfunctional

fiscal and monetary

policies.

Source:

http://goo.gl/LTrxK

Executive Summary

Economic Outlook

10

Productivity

Real GDP grew at approximately 2.5% in the last half of 2010. The

consensus forecast was for growth to continue to accelerate at a

rate of 3-4%, due to assumed economic impact of quantitative

easing and other fiscal stimulus. However, growth slowed to less

than 1% for the first half of this year.

Such an abrupt slowdown in growth, especially when it comes as a

surprise, leaves businesses with more workers than are necessary.

As most are slow to resort to layoffs, they instead see their unit

labor cost increase as output per man hour (productivity) falls. In

the first half of 2011, we saw productivity decrease at a 0.7%

annual rate with a corresponding increase in unit labor cost of

4.8%.

A drop in productivity coupled accompanied by an increase in unit

labor cost has historically been the preamble to a surge in layoffs

as companies try to fight margin compression.

Inventory Reversal (cont.)

In July and August production of consumer goods increased at

3.2% over Q2 2011, while retail sales contracted at a 1.4% rate,

pushing inventory investment to an even higher level of GDP.

This has set the stage for a slow-down in production, which will

only exacerbate the need to increase layoffs.Real Wages

Real hourly earnings has fallen by 2.2% over the 12 months ended

August 2011, and real disposable income is lower now than in

December 2010.

First, consumers simply cut savings (back to recession low of 4.5%)

to compensate for the lack of income growth, but now a

slowdown in spending is occurring.

Inventory Reversal

Inventory investment accounted for 35% of the rise in real GDP

between Q2 2009 and 2Q 2011, and now accounts for 1.18% of

real GDP (the 20 year average of 1%).

First, consumers simply cut savings (back to recession low of 4.5%)

to compensate for the lack of income growth, but now a

slowdown in spending is occurring. Real spending expanded only

0.7% in Q2 and remains sluggish.

The case of an impending recession rests not only on cyclical

precursors evident in productivity, real wages, and inventory

investment, but also in dysfunctional fiscal and monetary policies.


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DRAFTExecutive Summary

The Jobs > Confidence > Consumption > Growth Economic Model

11

Jobs

9.1% unemployment rate, 11% if adjusted for decrease in workforce

U-6 Unemployment back above 16%

Record unemployment duration 40.5 weeks

Labor force participation rate at 30-year low

S&P indicating unemployment about to spike

Disproportionate increase in long-term unemployment with 4% > 27 weeks

Confidence

University of Michigan Consumer confidence lowest it has been in 30 years

Fed Business Survey suggests further weakness

Pule of Commerce Index turning down, @ Sept-04 levels

73% of Americans think the country is headed in the wrong direction

Consumption

Real private wages have grown only 4.2% over the last 10 years

Labor share of national income has fallen to its lowest level in modern history (57.5%)

Over 42 million Americans now receive food stamps

48.5% of Americans live in a household that receives some kind of government aid; 5m onwelfare; 50m on Medicaid, 8m receiving unemployment compensation, 10.5m on SS disability

Growth during the later half of 2010 was driven by consumers lowering their savings rate

Growth

Growth is rolling over across the globe

ECRI Weekly Leading Index pointing toward another recession

Goldman and adjusted yield curve indicating between 40-65% chance of another recession

Estimates of growth, at both the country and individual company level, have been continuallyrevised throughout the current year

We have seen this trend in allmajor economies during 2011 (U.S. Europe, China, Japan)

The Jobs > Confidence >

Consumption > Growth

Model can serve as a

simple framework to see

where we are in an

economic cycle by focusing

on the key drivers of

economic growth in an

economy.

When jobs are plentiful,

people become more

confident about the future

and their personal financial

security, which prompts

increased consumption,

which leads to increasedgrowth, and vice versa.

In order for this potentially

self-sustaining cycle to

perpetuate, one of these

factors needs to generate

inertia to lead to the next

step. In order for the

Recovery to take hold

and gain momentum, one

of these key factors mustreverse course.

Consider our current

situation:

High structural

unemployment

Record low confidence

Extremely low

consumption

Slowing growth


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ZIRP QE

FiscalStimulus

QE2

Food &EnergyPrice

Pressures

Insurance &FinanceDistress

RisingInterest

RatesConsumerFrugality

Retail StoreClosings

InternationalSwap Crisis

Credit & DebitCard

Restrictions

U.S. ReserveCurrency

Crisis

New New

Deal

Executive Summary

The Tectonic Shift 2009-2013

12

EconomicCrisis

JobEliminations

& Layoffs

Sate & Local-Budget Crisis-

Federal

ResidentialReal EstateDouble Dip

EntitlementFunding Crisis

CurrencyCrisis

Bretton

Woods II 2009

2010

2011

2011-20122012

2012

2013

Gordon T. Long presents a

compelling roadmap for

the Global Financial Crisis,

which has been spot-on to

date.

Housing is set to leg down

once again, which will lead

to Commercial Real Estate

double dip, which will

usher in a new era a

consumer frugality. This

will spur on retail closing

and an entitlement funding

crisis that could lead to a

fiat currency crisis,

ultimately ending with aUS Reserve currency crisis.

The GFC began with a

Financial Crisis; currently,

we are seeing the

beginning of the Sovereign

Debt Crisis; this will lead to

Currency Crisis/Fiat Failure

Again, it is natural and

inevitable that a system

built on fiat currency and

the expansion of credit to

drive growth would go

through a purging process

as described here.

Source: Gordon T. Long

Research & Analytics

October 2011 Global Macro

Tipping Points 9/30/2011

www.gordontlong.com

We are here


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DRAFT

While the MSM goes

great lengths to sell us all

on this so-called

Recovery, anyone actually

believing it needs to get

their head checked.

Executive Summary

You Call This a Recovery?!

13

Growth in Real GDP Components: Current & 3 Previous Recoveries

Job Growth: Current & 3 Previous Recoveries

As you can see from the charts, Residential

Investment has been a major driving force in

previous economic recoveries. While it is a

small component of GDP, it had been an

important monetary policy transmissionmechanism in the past because it can expand

quickly as interest rates fall.

With low U.S. mortgage rates currently,

residential investment has failed to gain

traction and help drive us out of this recession.

This is due partially to the huge overhang of

vacant housing units.

Also personal consumption has not accelerated

as quickly as it has in the past, and with PCE at

approx. 70% of GDP, the lack of participation iscreating a drag.

Far fewer jobs have been created in this

recovery than in the last three, and again,

this is influenced by housing. Take a look at the

decline in construction jobs: down 9% vs.

increase of 4% in the last three recoveries.

This is because there is existing capacity inmost industries and excess housing units still in

the marketplace, coupled with household and

corporate deleveraging.


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E ti S


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US Inventory Cycle Set to Force Headline ISM Much Lower

From Albert Edwards of

Societe Generale:

One of the US indicators

that has held up quite

well and maintained

some sense of hope thatrecession can still be

avoided is the ISM which

has stayed above the

critical 50 level. But

further pronounced

weakness seems baked

in the cake and will

disabuse the optimists.

The excess of inventories

over new orders

suggests a very sharp

slowdown (see left-hand

chart below), and the

inventory de-stocking

cycle is set to remove

one source of component

strength from the overall

ISM indicator

E ti S


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DRAFT

Graph shows the

percentage of the

previous peak for Real

GDP, Real GDP per Capita,

and Employment.

We can see that not only

was the drop from the

previous peak more

severe than that which

we have experienced over

the last 50 years, but also

that we have a long way

to go before we are back

at pre-recession levels,

particularly for

employment and per

capita GDP.

Executive Summary

Percent of Previous Peaks

16

E ec ti e S mmar


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DRAFT

Income here is indexed to

2000, which means that

household income is 10%

lower than it was a

decade ago.

An economy built on

Consumer Spending

cannot rebound until

either consumer spending

rebounds or is replaced

by something else (e.g.,

exports).

Executive Summary

Household Income Index and Unemployment Rate

17

Executive Summary


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DRAFT

Notice how the Debt-to-

GDP ratio has increased

since the BreakingPoint

around 1980. Since this

broke we have had a

tremendous bull marketof over 20 years, but

corresponding general

decline in average GDP

growth rates (A)

The excess debt that has

been accumulated over

the last 30 years as

interest rates were in a

steady decline, lending

standards were reduced

and massive pools of

available credit were

supplied has now begun

the inevitable unwinding

process.

Executive Summary

The Breaking Point

18

A

Executive Summary


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DRAFT

The drop in the 10-year

yield was accompanied by

a parabolic increase in the

total credit market debt

owed. The result has been

a secular decline in theGDP year-over-year

percent change.

Our problem isn't low

interest rates; it is excess

debt, which literally

drains the demand for

more credit.

The NFIB Small Business

Survey stated Poor

sales" are the number

one concern (not lack of

credit) and the lack of

demand on their

businesses do not

warrant adding on more

leverage. The number of

businesses currently

thinking this is a "good

time to expand" is at

some of the lowest levels

on record. Likewise,consumers are trying to

pay down debt, as

worries about job

security, rising food and

energy costs and stagnant

wages reduce their desire

to consume and make

debt reduction a priority.

Executive Summary

Rise of Debt Drained The Economy

19

Executive Summary


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DRAFT

During the previous

"Operation Twist" the

economy was

experiencing an

increasing trend of

growth. Interest rateswere also steadily rising

as stronger economic

growth allowed for higher

rates of interest to be

charged. Debt, as a

function of GDP,

remained well

constrained at low,

structurally manageable

levels. However,

beginning in 1980, theeconomy shifted and

interest rates began a

very steady decent. This

decline of interest rates

led to a massive

expansion of debt, which

ultimately sowed the

seeds for a slowing rate of

growth in the economy.

Executive Summary

GDP vs 10 Year Treasury

20

Executive Summary


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DRAFT

What we are seeing play

out before our eyes is

exactly what is predicted

by the Austrian School of

Economics (more here

and here), which holdsthe view that economic

cycles are the

consequence of excessive

bank credit, exacerbated

by inherently damaging

central bank policies,

which tend to keep

interest rates too low for

too long, result in

excessive credit creation,

speculative economicbubbles and lowered

savings.

Or simply, a period of

sustained low interest

rates and excessive credit

creation results in a

volatile and unstable

imbalance between

savings and investment.

Executive Summary

Rising Money Supply & Credit = Declining Wages & GDP

21

From StreeTalkLive.com: We are not entirely sure what created this breaking point specifically whether it was deficit spending by the Reagan

Administration to break the back of inflation, deregulation, exportation of manufacturing and a shift to a serviced based economy, or a myriad of other

possibilities or even a combination of all of them. Whatever the specific reason; the policies that have been followed since thebreakingpoint have

continued to work at odds with the AmericanDreamto the benefit of Wall Street.Beginning in 1980 our world changed as we discovered the world of financial engineering, easy money and the wealth creation ability of successful use of

leverage. However, what we didn't realize then, and are slowly coming to grips with today, is that financial engineering had a very negative side effect - it

deteriorated our economic prosperity.

As the use of leverage crept through the system it slowly chipped away at the savings and productive investment. Without savings - consumers can't

consume, producers can't produce and the economy grinds to a halt as the cycle of economic growth is thrown into a "balance sheet recession" strangle

hold that is slowly pushing the economy towards unconsciousness.

Regardless of the specific cause, each interest rate reduction that was used from that point forward to stimulate economic growth did, in fact, lead to a

recovery in the economy; just not at levels as strong as they were in the previous cycle. Therefore, each cycle led to lower interest rates and economic

growth slowed and as a result of consumers and producers turning to credit and savings to finance the shortfall which in turn led to lower productive

investment. It was like an undetectable cancer slowing building in system. TheBreakingPointwas the beginning of the end of the Keynesian economic

model.

Executive Summary
http://en.wikipedia.org/wiki/Austrian_Schoolhttp://mises.org/http://mises.org/http://en.wikipedia.org/wiki/Austrian_Schoolhttp://en.wikipedia.org/wiki/Austrian_School


22/153

DRAFT

This graph is astounding.

It really puts the last 30

years of growth we

have experienced in its

proper perspective.

At the height of the

housing bubble, it took

over $3 of debt to finance

$1 of GDP.

Notice the change in

slope of this line at (A)

leading up to Tech Bubble

and then (B) to the

housing bubble.

It is taking increasingly

more debt to generate

our GDP. How sustainable

is this?

Executive Summary

Amount of Debt Required to Finance $1.00 of GDP

22

A

B

Executive Summary


23/153

DRAFT

This chart really sums up

the fact that all of our

recent growth has been

totally driven by

debt/credit expansion,

which is problem becauseof the diminishing returns

of more debt.

This would not be an

issue if the economy was

able to grow faster than

the corresponding debt

needed to fuel that

growth. Unfortunately,

this is not the case.

And what have we ended

up with? Well, banks

across the globe full of

toxic debt and pseudo-

assets and countries and

consumers leveraged to

the hilt.

Executive Summary

What Has (Really)Driven Our Growth?

23

Executive Summary


24/153


Debt Fueled Growth Leads to Deleveraging

This shows that Total

Credit Market Debt as a %

of GDP more than

doubled over the last 30

years.

While some deleveraging

has occurred recently,

dropping the ratio from

its high of 375% to about

350% in March 2011, we

are still almost 3x the low

in the early 1950s and

more than 2x the level in

the early 1980s.

This suggest more

deleveraging is ahead,

which would follow if, in

fact, credit has fueled the

growth. Deleveraging =

asset price deflation.

Executive Summary


25/153

DRAFT

This graph makes it clear

that the last cyclical bull

market, starting from the

low in March 2009 was

driven totally by Fed

intervention and

quantitative easing.

Over this time, the Fed

has driven the Fed Funds

rate from a pre-market

level of approximately 5%

to current near-zero

levels, which they have

indicated will continue for

the near term.

Notice how at (A) and (B)

the market fell off a cliff

following the conclusion

of respective Fed

intervention. In short, the

only thing holding up the

market has been the Fed.

See slide 148 in theAppendix of this report

for a more detailed look

at Federal Reserve

Intervention.

Executive Summary

The S&P 500 & Federal Reserve Intervention

25

B

A

Executive Summary


26/153

DRAFT

The major driver of Fed

Treasury purchases of

over $1.2 trillion since

the Great Collapse

began in 2008 was not

to satisfy its dualmandate, per se, but

rather to keep the

interest rate based

derivative market in

check.

Of the $244 trillion in

derivative exposure

sitting on the balance

sheets of U.S.commercial banks, $200

trillion of it is interest

rate based.

Levels of financial

leverage are higher

today than during the

Tech Bubble.

ecut e Su a y

The $200 Trillion Gorilla

26

While the stated purpose of the Feds interventionist policies

over the last couple of years has been to satisfy its dual

mandate of employment and economic stability, it seems like

Bernanke is interested in interest rates for other reasons.

After looking at a chart of 30-year Treasury yields, it is clear

that QE has not lowered interest rates. Further, the only time

interest rates did fall was when the Fed was not engaging in

quantitative easing.

The Fed is engaging in QE to:

Absorb the debt fueled by the U.S.s enormous deficit

Manage the interest rate based derivative market

Since the Great Crisis began, we have seen The Powers That

Be (TPTB) spend massive amounts of money in an attempt to

stop gap the downturn in private sector spending.

82% of the $244 trillion of U.S. commercial banks derivative

exposure is interest rate based. The graph at right shows the

banks with the largest exposure. These are also the banks that

the Fed has been funneling money into. This $200 trillion

gorilla in the room. Compare this to the CDS market, a major

contributor to the initial downturn in 2008, which was only

$50-60 trillion at that time.

Again, the real risk here is with counter party risk and if

anyone one has unhedged/naked exposure (like AIG did),

which can lead to cross-defaults.

Keep in mind that the large majority of interest rate swaps are

nominal payments on the 30-year fixed rate mortgages, and

the majority of bank profits come from the spread on these

derivative transactions. If the 10 year jumps 5%, putting

anyone with a fixed rate in the money, none of these banks

would be solvent.

30-Year Treasury Yield

Credit-based Derivative Exposure of Largest U.S. Banks

Executive Summary


27/153

DRAFT

The Fed has pushed the

Fed Funds rate from a

pre-recession level of 5%

to near zero, with no

plans on allowing them to

increase at least through

2013.

Notice how rates fell

again after QE2 ended

during the summer.

The adjusted yield curve

(which removes the

distortions caused by

extreme volatility and Fedmanipulation) is currently

20 bps away from

inversion between the 2-

year and the 5-year rates.

An inverted yield curve

preceded every recession

since 1970. Current

estimates based on this

methodology (out of

BofA) puts the occurrence

of another recession inthe U.S. at approximately

60%.

y

Daily Treasury Yields

27

Executive Summary


28/153

DRAFT

The issue now is that we

have entered into

the "Japan Syndrome".

Almost 30 years ago

Japan experienced its

own real estate/credit

bubble bust. Japan has

attempted virtually

everything the Fed has

tried from lowering

interest rates, liquidity

injections and currency

deflation in order to

restart their ailing

economy. It has all failed.

As a result of these

monetary experiments,Japan has remained in a

protracted economic

slump.

Notice how Japan, a net

export country with one

of the highest domestic

savings rates globally,

faced deflation following

the implementation of itsZIRP (zero interest rate

policy).

y

Were Turning Japanese (I really think so)

28



29/153

DRAFT

While the Fed stopped

publishing M3 data in

March of 2006,

ShadowStats.com

continues to publish an

estimate.

Note that only when

Money Supply Growth

falls below zero (A), does

this indicate a contraction

over the previous 12

months.

While the impact of the

Feds QE efforts (in theirvarious forms) began to

finally work as M3

finally began to have

positive growth after

point (A), QE2 has ended

and M3 appears to be

rolling over again (B).

Source:

http://goo.gl/y9XA0

y

Inflation?

29

A

B



30/153

DRAFT

So we have money supply

flattening out (previous

slide), and here we have

the velocity of money

turning down again. This

is deflationary.

The risk of hyperinflation,

at least in the

short/medium term, is

low in my opinion

because we have money

supply flattening out and

velocity of money turning

down.

Source:

http://goo.gl/y9XA0

Inflation? (2)

30



31/153

DRAFT

Since the Fed Funds Rate

peaked in January of 1981

at 20.06% (!!!), it has

fallen to a current level of

approximately zero.

Over this same period,

the 10-year Treasury has

fallen from 15.7% to

approximately 2%

currently.

This indicates a secular

loosening of credit over

the last few decades.

10-Year Treasury Yield & Inflation

31



32/153

DRAFT

The precipitous drop in

both the Fed Funds Rate

and, more importantly,

the 10-year, has virtually

driven all of the growth in

the U.S. economy since

the early 80s.

This is simply showing

that the economic growth

we have experienced has

been credit-driven.

With the FFR near zero

and the Fed is out of

bullets, in the traditionalsense. This is not to say

further easing will not

occur, however, it is likely

to take a new form.

S&P 500, 10-Year Treasury Yield, & FFR

32



33/153

DRAFT

Graph shows inflation-

adjusted (i.e., real) S&P

historical returns

(excluding inflation and

dividends), along with a

regression line and call-

outs at extreme points

above and below that

line.

Blue and Red portions of

the line denote secular

bull and secular bear

markets, respectively.

Purple is unknown.

While we cannot tell the

future, and whether or

not 2009 (A) was the start

of another secular bull

market or simply a

bounce within a secular

bear started in 2000.

Excluding 1877, you will

note that the start of anytrue secular bull market

came only after a print at

least 50% below the

regression line. This

implies that we have

much further to fall

before the next secular

bull, as our recent print

below the regression line

was a mere 9%.

Inflation-Adjusted Regression to Trend

33

A



34/153

DRAFT

The stock market returns

over the last century can

be divided between

periods of above- and

below-average returns,

denoted in the graph by

green or red bars,

respectively.

Valuation level at the

time of investment (i.e.,

price-to-earnings ratio)

relative to changes in that

valuation level over the

holding period generally

drive the return

ultimately realized by aninvestor.

For example, investing at

a time of above-average

P/E ratios will generally

only yield positive results

if the P/E ratio at exit is

even further above-

average.

Negative Annualized Returns Over The Next Decade Very Likely

34



35/153

DRAFT

The first table shows a mix

of 20 year annualized

returns from different points

in time using the Nominal

Returns (not inflation

adjusted), including

dividends (reinvested),transaction costs, and taxes

paid.

Notice how much the

starting P/E ratio matters in

influencing the returns over

the following 20 years.(http://goo.gl/gwYUv)

The bulk of investment gains

tend to generally come fromexpansion in the P/E ratio

over time, and not from

improvements in earnings,

per se.

Thus, it is important to

understand where we are in

a PE cycle, as when you

invest has more of a bearing

on the returns you can

expect than simply being

invested.

Next, we see the

compression and expansion

of PE ratios since 1965.

Again, the values in the

squares represent the

annualized rates of return

since 1965.

Negative Annualized Returns Over The Next Decade Very Likely

35

An investment made in

1996 would have yielded

an annualized return of

only 3% over the last 14years



36/153

DRAFT

Reasons current earnings

growth is unsustainable:

Much of recent earnings

growth has been driven

by unsustainable federal

stimulusMuch of recent financial

earnings are a mirage,

driven by assets not being

marked-to-market,

insufficient loan loss

reserves, and their prior

ability to borrow short

(essentially for free) and

lend long, which is

currently changing

through Operation Twist

Both Financial and non-

financial sectors have

margins outside of

historical norms, driven

by low headcounts and

increased outsourcing

Source:

http://goo.gl/OEW6E

Negative Annualized Returns Over The Next Decade Very Likely (2)

36

Essential Ideas

In spite of what efficient market theorists say, for a period of at least 20 years, it very much matters whether the starting valuation (PE) is

high or low when one starts to invest.

However, in any given year (or even for several years), stock market returns may do random things. In other words, just because a market is

richly valued does not mean it cannot get more so. Likewise, just because a market is cheaply valued, does not mean it cannot get cheaper.

As a result of the preceding point, many think that returns are random. While that may be true in a given year, over a suffic ient period of

time, expected future returns are anything but random.

The bulk of stock market gains frequently come from PE expansion, not from improved earnings.

It is important to know where in the cycle one is (whether PEs are in a state of expansion or contraction).



37/153

If we were at (A) right

now, would you rather be

a buyer or a seller?

Do we have enough

empirical data toreasonably believe we are

more likely at a point

such as (X) or (Y) right

now?

Secular Markets: S&P Historical Inflation Adjusted Composite

37

A

X

Y


d h ?


38/153

The business cycle

oscillates between fear

and greed. Where one

decides to go long has all

the influence over the

returns ultimately

realized.

Given the growing anxiety

about the global

economy, the constant

bottom calling (i.e,

denial) since the

Collapse began, and fear

about the future, coupled

with the fact that we

have yet to seecapitulation, panic,

despondency, et. al.,

where do you think we

are in the cycle?

Fear, Hope, & Greed: Where Are We Now?

38

I am pretty smart.This is fun!

How could I have

been so wrong?

Temporary set-back.

Im a long-term

investor anyway.

Are we here

or are we here?


R d i


39/153

Given the current

economic environment,


short market position

would be a relatively low-

risk mechanism that could

be employed efficiently

while both providing out-

sided returns relative to

the capital deployed, as

well lowering the

standard deviation of the

total returns of the MOI

portfolio as a whole.

The graph at the right

depicts the payout on thepurchase of $1 million of

SPY $108 March 2012

puts (in-the-money if SPY

falls below $108 by March

2012). The red line is the

payout at expiration.

If we were to revisit the

lows set in March of

2009, this position wouldreturn over $7 million in

profit.

Stops would be placed at

resistance points above

current market levels and

the position would be

monitored for

confirmation of the

trades antithesis.

Recommendation

39

Overview

Recommendation

October 14, 2011


40/153

Appendix IThe Market

DRAFTThe Market

C t M k t S h t S&P 500


41/153

Current Market Snapshot: S&P 500

41

DRAFTThe Market

S&P R i t T d


42/153

Things tend to revert to

their mean over time.

This chart shows the

inflation-adjusted S&P

from 1870 to present,along with its regression

line. Below, the variance

between the market price

at a particular point in

time and the regression

line is plotted.

You can see that the

market is still about 30%

above trend.

Note also that each true

bottom did not occur

until a variance of 50% or

more below the trend

line.

Note also the duration of

the last few cycles:

approximately 18-19years.

S&P Regression to Trend

42

DRAFTThe Market

Q R ti Si 1900


43/153

The Q Ratio is the ratio of

market value to

replacement value for a

particular asset. It gives

an indication as to how

over- or under-valued a

particular asset is.

So, for an individual

company, a Q ratio

greater than one implies

that its market value is

greater than its corporate

net worth.

We can see here that thecurrent Q ratio is still well

above its arithmetic mean

(0.71), implying that in

spite of the declines since

the bursting of the tech

bubble (in real terms), we

are still significantly

overvalued.

Q Ratio Since 1900

43

DRAFTThe Market

Q Ratio Percent Change from Geometric Mean


44/153

Here, the Q ratio is

plotted as a percent

deviation from its

geometric mean.

Again, it is showing thatthe market is still

significantly overvalued.

Q Ratio Percent Change from Geometric Mean

44

DRAFTThe Market

Inflation Adjusted S&P and Q Ratio


45/153

Here we can see the

correlation between the

S&P and the Q Ratio.

Inflation-Adjusted S&P and Q Ratio

45

DRAFTThe Market

S&P Composite and the Crestmont P/E Ratio


46/153

The Crestmont P/E Ratio

is currently in the top

quintile. This indicates

relatively high level.

Definitely not a bottom.

S&P Composite and the Crestmont P/E Ratio

46

DRAFTThe Market

Q Ratio Crestmont P/E Cyclical P/E10 and S&P Variance from Regression


47/153

All 4 of these indicators

are showing the market

as significantly

overvalued and due for a

secular correction.

Notice, each other

bottom has printed

approximately -50%

below the zero line.

Another way to look at

this is the extent to which

we are still in a bubble.

In short, We have a longway to go.

Q Ratio, Crestmont P/E, Cyclical P/E10, and S&P Variance from Regression

47

DRAFTThe Market

Market Cap as a % of GDP


48/153

The market is still at over

120% of nominal GDP,

implying that we are still

in a bubble.

Market Cap as a % of GDP

M

48

M

DRAFTThe Market

Changes in Profit Margins Lead Changes in Stock Price


49/153

We have discussed

already the margin

contraction corporations

are experiencing during

2011.

As further slowdowns in

demand will only

exacerbate this problem

further, causing margins

to fall even more, expect

future stock prices to fall.

Changes in Profit Margins Lead Changes in Stock Price

49

DRAFTThe Market

Technical Evidence for a Bear Market Decline


50/153

There currently exists

substantial evidence that

a further bear market

decline is ahead.

A.Over the last two

months, the market has

experienced severe

volatility, which is not

typical of a bear

market. Also, its

inability to overcome

its 50 day moving

average is bearish.

B.Breaks below the 200

week moving average

are extremely bearish.

Notice how it hasprovided support and

resistance.

C.Notice what occurred

after the last real break

of the 200 week moving

average.

D.This chart suggests a

low of 600 will be

retested after a test of

the March 2009 lows.This represents a

decline of almost 50%

from current levels.

Source: http://goo.gl/SIi2b

Technical Evidence for a Bear Market Decline

50

A B

C D

DRAFTThe Market

High-Yield Credit Signaling Another Market Downturn
http://goo.gl/SIi2bhttp://goo.gl/SIi2bhttp://goo.gl/SIi2bhttp://goo.gl/SIi2bhttp://goo.gl/SIi2bhttp://goo.gl/SIi2bhttp://goo.gl/SIi2bhttp://goo.gl/SIi2b


51/153

Remember: Credit

anticipates, equity

confirms

Notice how the 50 day

moving average crossedunder the 200 day moving

average [1] prior to the

last major market

correction. You can see at

[2], the 50 has recently

crossed under the 200

once again. This indicates

that the market is

heading for a period of

contraction.

High Yield Credit Signaling Another Market Downturn

51

DRAFTThe Market

High-Yield Credit Signaling Another Market Downturn (2)


52/153

Notice how High Yield

broke support and 30-

year bonds broke

resistance prior to the last

crash [1].

This signals Risk Off as

funds flow from the

riskier high yield to the

safer 30-year fund.

We can see at [2] that this

is occurring again as the

Market is shifting into

Risk Off mode once

again.

High Yield Credit Signaling Another Market Downturn (2)

52

DRAFTThe Market

Street Talk Advisors Intermediate Buy/Sell Indicator


53/153

STA developed a

proprietary model that

provides intermediate

term signals for

increasing/reducing

equity exposure.

Street Talk Advisors Intermediate Buy/Sell Indicator

53

DRAFTThe Market

2-10 Spread and the S&P 500


54/153

The expansion of the 2-10

yield spread has helped

prop up the market since

the Collapse began in

2008. As the yield curve

flattens, this support will

begin to fade.

2 10 Spread and the S&P 500

54

October 14, 2011


55/153

Appendix IIEmployment (or lack thereof)

DRAFTEmployment

Weakest Employment Index Since March 2010; Respondents Uniformly Bearish


56/153

While the overall NMI

came at 53, a drop from

53.3, but better than

expected 52.8, it is the

Employment index that is

attracting everyone's

attention, printing at48.7, down from 51.6: the

lowest from March 2010,

which has offset an

improvement in both

New Orders and Business

Activity. And the kicker,

all the responses in the

survey were negative

across the board

Source:

http://goo.gl/O4AeR

p y ; p y

56

Respondents were uniformly bearish:

"It appears everyone is waiting to see what

happens next. No trust in the economy or

the federal government to do what is

needed.

"Weak consumer confidence and high gas

prices are placing downward pressure on

retail sales volume." (Information)

"Business volume outlook and confidence

across many market areas in North America

appear to be softening." (Mining)

"The 2012 outlook is not optimistic; though

we keep hoping for a rebound, we see littlesign of an improved economy nothing at

least that will spur growth, investment or

expansion. Improved investment

performance in early 2011 caused us to

begin several large capital projects, and

although we have broken ground, we cannot

help but question if our timing was right."

(Educational Services)

"Third and fourth quarters appear to beslowing down in order volumes. Uncertainty

over U.S. and European economy is causing

clients to hold off on new orders."

(Professional, Scientific & Technical Services)

"Negative forecast for housing market's

future leads us to think we will be at

current levels of business at best for the

foreseeable future." (Wholesale Trade)

M

DRAFTEmployment

Percent Job Losses in Post WWII Recessions


57/153

The current contraction

has generated the most

severe job losses in any

recession since WW2. The

fact that the

unemployment situation

is structural, rather thancyclical or transitional, is

evident by the fact that

over 40 months since the

employment peak, we are

still 5% below.

57

DRAFTEmployment

Initial Jobless Claims Over 400,000 (Still)


58/153

For the week ended

October 1, 2011, initial

jobless claims came in at

401,000, the 26th

consecutive week over

395,000.

Red lines indicate

averages over highlighted

periods.

, ( )

58

DRAFTEmployment

Average Duration of Unemployment at All-Time High


59/153

Average unemployment

duration is at the highest

level ever seen, and

shows no signs of rolling

over currently.

Unprecedented

This has clearly been

influenced by the

continual extensions of

unemployment benefits,

which are currently up to

99 weeks (!!!).

g p y g

59

DRAFTEmployment

Declining Labor Force Participation


60/153

The falling labor force

participation rate is the

primary reason that

unemployment is 9.1%

currently instead of 11%.

"It takes GDP growth of

about 2.5 percent to keep

the jobless rate constant.

But the Fed expects

growth of only about 1

percent in the last six

months of the year. So

that's not enough to bring

down the unemployment

rate. Bernanke

While this may not look

bad from a historical

standpoint, it is

important to remember

that the 1970s ushered in

a new era of dual-income

households as more

women entered the work

force.

g p

60

DRAFTEmployment

Unemployment by Duration


61/153

This Collapse has seen a

disproportionate rise in

longer term

unemployment with 4%

of the labor force

currently unemployed for

more than 6 months. Alsonote that this is only

marginally off of its highs.

61

DRAFTEmployment

Unemployment Weekly Claims


62/153

We seem to have stalled

at about 400k weekly

claims.

Keep in mind that claims

over 300k are not good

for economic growth.

62

DRAFTEmployment

Needs To Generate 261,200 Jobs/mo. To Return To Pre-Depression Employment by 11/2016


63/153

To provide some

perspective about how

bad the job situation

really is. The economy

would need to create

261,200 jobs per month

through the end ofObamas potential second

term in office in order to

return to pre-depression

unemployment. This

calculation takes into

account the historical

natural growth in the

labor force of

90,000/month

extrapolated out.

How likely is it that we

will be able to create 16.2

million jobs over the next

62 months?

63

DRAFTEmployment

Hypothetical Employment Paths


64/153

Here we examine the

time it will take to arrive

back at Peak

Employment, varying the

rate at which jobs are

added on a monthly basis.

You can see that we will

not return to peak

employment for some

time, even if we were

able to add 158k jobs per

month, which is

extremely high.

64

DRAFTEmployment

Manufacturing Jobs


65/153

This shows the decline in

manufacturing jobs and

speaks to the impact that

outsourcing our

production over the last

15 years has had on our

domestic employmentbase. Average levels of

each period are in red.

The manufacturing jobs

are gone because we

dont make anything in

the country any longer

its all been outsourced.

65

DRAFTEmployment

S&P Composite


66/153

This shows that

unemployment is a

lagging indicator that

moves inversely with

stock prices.

This makes sense, as we

have already discussed

that a) changes in

profitability lead to

changes in stock price,

and that b) in an attempt

to regain lost profitability,

companies, must fire

workers in order to

reduce unit labor costs,

which increase with dropsin productivity.

Recent stock market

drops imply that another

surge in unemployment is

right around the corner.

66

DRAFTEmployment

Jobless Claims vs. S&P 500 (Inverted)


67/153

As employment lags the

inverted S&P, this

indicates that

unemployment is set to

spike.

67

From StreetTalkLive.com:

Let's take a quick look at some numbers: 8, 160, 400, 350, 12 and 5. There have only been 8 weeks out of last 160 weeks that

unemployment claims have been below 400 thousand claims. In normal circumstances we are worried about recessions when

claims are rising above 350 thousand. Furthermore, jobless claims tend to plunge below 350 thousand a week within 12 months

after the end of a recession. Currently we are still holding above 400 thousand claims after more than two full years since the

recession officially ended.

October 14, 2011


68/153

Appendix IIIConfidence

DRAFTConfidence

Sentiment Leads Consumption


69/153

Remember: Sentiment

leads consumption

69

DRAFTConfidence

Fed Business Outlook Survey Report


70/153

The recent Fed Business

Outlook survey suggest

further weakness.

Source:

http://www.philadelphiaf

ed.org/research-and-

data/regional-

economy/business-

outlook-

survey/2011/bos0911.pdf

70

"Responses to the Business Outlook Survey this month suggest

that regional manufacturing activity is continuing to contract,

but declines are less widespread than in August. The surveys

broad indicators for activity, shipments, and new orders all

remained negative for the second consecutive month.

Responding firms, however, indicated that employment was

slightly higher this month. The broadest indicator of future

activity remained positive and rebounded this month, suggesting

that recent declines are not expected to continue over the next

six months."

Increasing costs were somewhat more widespread this month

compared to last month. Nearly 29 percent of firms reported

paying higher prices for inputs this month. Only 6 percent

reported lower prices. The prices paid diffusion index increased

10 points, its first one-month increase in seven months.

And inflation is back

DRAFTConfidence

U of M Consumer Sentiment Index with GDP (August 2011)
http://www.philadelphiafed.org/research-and-data/regional-economy/business-outlook-survey/2011/bos0911.pdfhttp://www.philadelphiafed.org/research-and-data/regional-economy/business-outlook-survey/2011/bos0911.pdfhttp://www.philadelphiafed.org/research-and-data/regional-economy/business-outlook-survey/2011/bos0911.pdfhttp://www.philadelphiafed.org/research-and-data/regional-economy/business-outlook-survey/2011/bos0911.pdfhttp://www.philadelphiafed.org/research-and-data/regional-economy/business-outlook-survey/2011/bos0911.pdfhttp://www.philadelphiafed.org/research-and-data/regional-economy/business-outlook-survey/2011/bos0911.pdfhttp://www.philadelphiafed.org/research-and-data/regional-economy/business-outlook-survey/2011/bos0911.pdfhttp://www.philadelphiafed.org/research-and-data/regional-economy/business-outlook-survey/2011/bos0911.pdfhttp://www.philadelphiafed.org/research-and-data/regional-economy/business-outlook-survey/2011/bos0911.pdfhttp://www.philadelphiafed.org/research-and-data/regional-economy/business-outlook-survey/2011/bos0911.pdfhttp://www.philadelphiafed.org/research-and-data/regional-economy/business-outlook-survey/2011/bos0911.pdfhttp://www.philadelphiafed.org/research-and-data/regional-economy/business-outlook-survey/2011/bos0911.pdfhttp://www.philadelphiafed.org/research-and-data/regional-economy/business-outlook-survey/2011/bos0911.pdfhttp://www.philadelphiafed.org/research-and-data/regional-economy/business-outlook-survey/2011/bos0911.pdfhttp://www.philadelphiafed.org/research-and-data/regional-economy/business-outlook-survey/2011/bos0911.pdfhttp://www.philadelphiafed.org/research-and-data/regional-economy/business-outlook-survey/2011/bos0911.pdfhttp://www.philadelphiafed.org/research-and-data/regional-economy/business-outlook-survey/2011/bos0911.pdfhttp://www.philadelphiafed.org/research-and-data/regional-economy/business-outlook-survey/2011/bos0911.pdfhttp://www.philadelphiafed.org/research-and-data/regional-economy/business-outlook-survey/2011/bos0911.pdfhttp://www.philadelphiafed.org/research-and-data/regional-economy/business-outlook-survey/2011/bos0911.pdfhttp://www.philadelphiafed.org/research-and-data/regional-economy/business-outlook-survey/2011/bos0911.pdfhttp://www.philadelphiafed.org/research-and-data/regional-economy/business-outlook-survey/2011/bos0911.pdfhttp://www.philadelphiafed.org/research-and-data/regional-economy/business-outlook-survey/2011/bos0911.pdfhttp://www.philadelphiafed.org/research-and-data/regional-economy/business-outlook-survey/2011/bos0911.pdfhttp://www.philadelphiafed.org/research-and-data/regional-economy/business-outlook-survey/2011/bos0911.pdfhttp://www.philadelphiafed.org/research-and-data/regional-economy/business-outlook-survey/2011/bos0911.pdfhttp://www.philadelphiafed.org/research-and-data/regional-economy/business-outlook-survey/2011/bos0911.pdfhttp://www.philadelphiafed.org/research-and-data/regional-economy/business-outlook-survey/2011/bos0911.pdfhttp://www.philadelphiafed.org/research-and-data/regional-economy/business-outlook-survey/2011/bos0911.pdf


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Shows the Michigan

Consumer Sentiment

Index along with GDP and

recessions.

Note that every other

precipitous fall in the

magnitude we have just

seen has been followed

by diminish, if not

negative, GDP prints.

71

DRAFTConfidence

Conference Board Consumer Confidence Index & NFIB Small Business Optimism Index


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Both indices are falling

precipitously again.

72

DRAFTConfidence

Ceridian-UCLA Pulse of Commerce Index


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The PCI is rolling over

again.

73

DRAFTConfidence

Confidence Board Consumer Confidence Index


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Consumer Confidence

Index dropping hard.

Drops this steep are

typically followed by

declines in GDP. Our

current GDP levels are

already close to fallinginto the red.

74

DRAFTConfidencePulse of CommerceTM Index: 3-Month Moving Average


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Pulse of Commerce rolling

over again, back at

September 2004 levels.

Also showing a similar

fractal to that which was

seen prior to the lastrecession.

75

DRAFTConfidenceNFIB Small Business Optimism Index


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Small business confidence

falling back to recession

levels.

76

DRAFTConfidenceU.S Misery Index


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This is a graph of CPI

Inflation plus

Unemployment Rate

Percentage.

You can see it has just hit

a new 28 year high.

77

October 14, 2011


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Appendix IV

Consumption

DRAFTConsumptionComponents of Real GDP since 2007


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Clearly the Personal

Consumption

Expenditures (PCE)

component has the

highest correlation to

Real GDP.

We are clearly in a

downtrend.

79

DRAFTConsumptionReal Mean Household Income Cumulative Growth


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Data from the recently

released Census Bureau

report showing the

cumulative growth in real

household income since

1967, by quintile , along

with the top 5%.

You will see that growth

was much higher for the

top quintile in general,

and for the top 5% in

particular.

Also, purchasing power of

2010 incomes has shrunk

to approximately mid-1990s levels.

This lack of purchasing

power has a huge drag on

consumer confidence.

80

DRAFTConsumptionDeclining Household Income


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Household income has

continued to fall since the

recession ended in

2009.

In a separate study by

Henry S. Farber, aneconomics professor from

Princeton found that

those who lost jobs

during the recession and

later found work made an

average of 17.5% less

than they had in their old

job.

Between June 2009,when the recession

officially ended, and June

2011, inflation-adjusted

median household

Income fell 6.7 percent,

to $49,909, according to a

study by two former

Census Bureau officials.

During the recession

from December 2007 to

June 2009 household

income fell 3.2 percent.

Source:

http://goo.gl/aX6bZ

81

DRAFTConsumptionConsumer Credit


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Consumer credit fell in

August by the most in

over a year. This is the

largest month-over-

month contraction since

1998.

This is equivalent to a six

standard deviation

deceleration in credit

availability (based on the

last 60 years).

82

DRAFTConsumptionConsumer Credit (2)


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Here is the breakdown

between revolving and

non-revolving credit. You

can see the bulk of the

drop was attributable to

the non-revolving

component, which spikedin July.

83

DRAFTConsumptionConsumer Credit


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The Government has

increased it share of total

consumer credit from

below 5% before the

Collapse, to over 15%

currently.

84

DRAFTConsumptionFood Stamp Participation and U-6 (Total) Unemployment


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With U-6

unemployment still

over 16%, we

currently have a

record of over 45

million Americans

receiving food stampbenefits.

October 14, 2011


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Appendix V

Gross Domestic Product

DRAFTGross Domestic ProductReal Annualized GDP Growth


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The 2nd Estimate for Q2

2011, which was revised

down from the initial

estimate, came in at a

mere 1% annualized rate.

We can see here not onlythe initial recovery here,

but also the slowing of

said recovery, with

growth rolling over.

While we have not seen

any negative prints since

the official end of the

recession, we are getting

dangerously close. Iexpect to see a negative

print in Q4 2011.

87

DRAFTGross Domestic ProductECRI Weekly Leading Index with Gross Domestic Product


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The Weekly Leading Index

(WLI) growth indicator of

the Economic Cycle

Research Institute (ECRI)

has now dropped further

into negative territory

after oscillating in anarrow range (1.5 to 2.1)

from late June through

the first week of August.

The sequence that follows

the pattern seen to the

right is:

P/E Ratio compression

GDP reductions in outlook

Reduced earningsestimates

Markets regress to their

mean

Without fiscal and

monetary support the

economy is prone to

further weakness given

the underlying weakness

in fundamentals:

Weak housing market

Sustained high

unemployment levels

Rising commodity prices

Stagnating wages

Low overall levels of GDP

growth

88

DRAFTGross Domestic ProductInvestment Contributions to Percent Change in Real GDP
http://www.businesscycle.com/resources/http://www.businessinsider.com/ecri-leading-indicator-negative-2011-9http://www.businessinsider.com/blackboard/ecrihttp://www.businessinsider.com/blackboard/ecrihttp://www.businessinsider.com/ecri-leading-indicator-negative-2011-9http://www.businesscycle.com/resources/


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Notice how Residential

has not only remained in

negative territory since

the start of the housing

bubble bursting, but also

that it has currently

turned downward onceagain.

Equipment and software

purchases is also turning

down, with Non-

Residential structures

barely in positive

territory.

89

DRAFTGross Domestic ProductNon-Residential Investments as Percent of GDP


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While we have seen a

general rise in Equipment

and Software

purchases/investment

since the end of the

recession, investments in

Structures have failed tocome off of their

recession lows.

90

DRAFTGross Domestic ProductReal GDP (Billions of Chained 2005 Dollars), Seasonally-Adjusted Annual Rate


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Real GDP is still below its

pre-recession peak.

Also note the consistent

direction of

revisionsInteresting.

This is GDP in real terms

rolling over.

91

DRAFTGross Domestic ProductState Coincident Index, Number of States Showing Increased Activity

8/3/2019 The Greater Depression or - How

The Greater Depression or - How I Learned to Stop Worrying and Love the Bear 2011.10.15

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