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1 September 2012 Edition Restricted & Confidential

Copyright 2012 Gordon T. Long All Rights Reserved [email protected]

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

GLOBAL MACRO TIPPING POINTS - SEPTEMBER 2012

8/20/2012

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2September 2012 Edition Restricted & ConfidentialCopyright 2012 Gordon T. Long All Rights Reserved [email protected]

STALL SPEED

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

GLOBAL MACRO TIPPING POINTS - SEPTEMBER 2012TIPPING POINTS........................................................................................................................................................................................ 7

GLOBALMACRO:RISKASSESSMENT ...................................................................................................................................................... 7

SITUATIONAL ANALYSIS ...................................................................................................................................................... 7WE ARE HERE................................................................................................................................................................................................................. 7TROUBLING MID-YEAR 2012 DEVELOPMENTS....................................................................................................................................................... 8

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

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

GLOBALMACRO:RISKLEVELS .................................................................................................................................................... ............ 64

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

MONETARY RISK - BANK LIABILITIES (Updated)................................................................................................................................................... 71

COST OF MONEY RISK - INTEREST RATES (Updated)........................................................................................................................................ 73

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

TIPPINGPOINTS:CHANGES................................................................................................................................................................ ...... 75

TIPPING POINT MAPPING: 2012 UPDATE .......................................................................................................................... 75SHIFTS TO WATCH IN 2012 ................................................................................................................................................ 78

TIPPINGPOINTS:FOCUS-JULY2012..................................................................................................................................................... 85

I - EU BANKING CRISIS ....................................................................................................................................................... 85II - SOVEREIGN DEBT ......................................................................................................................................................... 86III - RISK REVERSAL ............................................................................................................................................................ 87IV - CHINA HARD LANDING ................................................................................................................................................. 88V - JAPAN DEBT DEFLATION .............................................................................................................................................. 89VI - BOND BUBBLE .............................................................................................................................................................. 91

DRIVER$:RISK-ON-RISK-OFFANALYTICS........................................................................................................................................... 92

1- G10 MACRO SURPRISE INDEX ...................................................................................................................................... 942- CUMULATIVE GLOBAL PMI ............................................................................................................................................. 963- FINANCIAL TIGHTENING INDEX ..................................................................................................................................... 984- US NON-REVOLVING CONSUMER CREDIT ................................................................................................................. 1005- IBES' RELATIVE GLOBAL PE RATIOS .......................................................................................................................... 1016- FSB 30 Index of Systemic Risk Names ........................................................................................................................... 1037- Swift Payment & Economic Activity ................................................................................................................................. 105

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

GLOBALECONOMICOUTLOOK .................................................................................................................................................... .......... 109

IMF WARNS: Japanese & Spanish Debt Unsustainable ...................................................................................................... 109IMF WARNS: Global Recovery Faltering, Reduces Global Growth to Just Above 3% Global Recession Level .................... 111

BIS WARNS: Monetary Policy At Its Limits .......................................................................................................................... 113GLOBAL GROWTH - Europe Continues to Force Global Growth Estimate Reductions ....................................................... 114

GDP Reductions - By Region...................................................................................................................................................................................... 115Manufacturing PMI - By Country................................................................................................................................................................................ 121

GLOBAL SENTIMENT - Europe has a Growing Sentiment /Confidence Problem ................................................................ 124GLOBAL CREDIT MARKETS - Stable but Tenuous ............................................................................................................ 131GLOBAL INFLATION - Where Do these Deflators Come From? ......................................................................................... 133GLOBAL TRENDS - Commodities and Brands Tell the Global Story ................................................................................... 134

Cooper - Rio Tinto......................................................................................................................................................................................................... 134Aluminum - Alcoa, Rio Tinto........................................................................................................................................................................................ 136Iron Ore and Thermal Coal - Rio Tinto....................................................................................................................................................................... 138Consumable Brands - P&G.......................................................................................................................................................................................... 140Parcel Volumes - FEDEX............................................................................................................................................................................................. 141Shipping - Baltic Dry Index........................................................................................................................................................................................... 142

EUROPE-PLACED ININTENSIVECARE............................................................................................................................................. .......... 146

MEDICAL CHARTS -Situation Critical ............................................................................................................................... 146EUROSIS -A Terminal Disease ........................................................................................................................................ 151

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

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

FRANCE - Has Turned back to Socialism ........................................................................................................................... 170

ITALY - Cracks Impossible to Hide and Contain .................................................................................................................. 172

IBERIAN PENINSULA - Spain & Portugal Imploding ........................................................................................................... 174SPAIN A LTRO JUNKIE: Monetary Malpractice - Banks on Artificial "Ponzi Bond" Life Support ....................................................................... 183

MONETARY MALPRACTICE - How Long Will Germany & the Bundesbank Accept TARGET2 "Contingent Liability"? ....... 190

CURRENT STATE OF EU BAIL-OUTS ............................................................................................................................... 196

ASIA-EUROPEANFALLOUTNOWACUTE..................................................................................................................................................... 198

CHINA ................................................................................................................................................................................. 202Socit General Sees a Likely Soft Landing!............................................................................................................................................................ 202SLIDES BELOW............................................................................................................................................................................................................ 202CHINA PMI: 48.2. Fourth Straight Month of JOB Contraction................................................................................................................................. 210CHINA:Manipulated Statistics due to Upcoming Decade Long Regime Change................................................................................................ 212

JAPAN: Manufacturing Output Falls .................................................................................................................................... 213EU Just a Warm-up for the Main Event!................................................................................................................................................................. 213

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

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

THEGLOBALMACROOVERLAY ................................................................................................................................................... .......... 225

MACRO POSITIONING ...................................................................................................................................................... 225POSITIONING US SENTIMENT ......................................................................................................................................... 229

US GROWTH NOW STALLED ............................................................................................................................................ 231OVERWORKED & OVERSTRESSED ................................................................................................................................. 235

USINVESTMENTCYCLE................................................................................................................................................................. .......... 237

GORD'S BIG PICTURE ECONOMIC CYCLE ...................................................................................................................... 237ECONOMIC INDICATORS .................................................................................................................................................. 238

MONTHLY INDICATORS OF NOTE.......................................................................................................................................................................... 238

THE CURRENT BUSINESS CYCLE - SITUATIONAL ANALYSIS ....................................................................................... 244ECONOMIC CYCLE, INVESTMENT CYCLE, SECTOR ROTATION.................................................................................................................... 244JOBS - CONFIDENCE - CONSUMPTION - GROWTH CYCLE............................................................................................................................. 248

JOBS........................................................................................................................................................................................................................... 249CONFIDENCE & SENTIMENT................................................................................................................................................................................ 259CONSUMPTION........................................................................................................................................................................................................ 267GROWTH................................................................................................................................................................................................................... 281

CONSUMPTIONGROWTH-A70%CONSUMPTIONECONOMYMAYBETHELIMIT?............................................................................. 295CONSUMPTION - No Longer the Answer for America? ...................................................................................................... 295

RECESSION - At Stall Speed but NOT There Yet! .............................................................................................................. 297BACKGROUND ANALYSIS: The Big Four Indicators and Recessions................................................................................................................. 300BIG FOUR: Are They Rolling Over?........................................................................................................................................................................... 303CHART GALLERY :Notes............................................................................................................................................................................................ 304Industrial Production..................................................................................................................................................................................................... 304Real Personal Income Less Transfer Payments....................................................................................................................................................... 306Total Nonfarm Employees............................................................................................................................................................................................ 307Real Retail Sales........................................................................................................................................................................................................... 309

RETAIL SALES - All in the Seasonal Adjustments............................................................................................................... 311REAL FINAL SALES: DETERIORATING Y-O-Y....................................................................................................................................................... 316

MONETARYPOLICY-MONETARYMADNESS&WILDCATFINANCE............................................................................................. 320

MONETARY MALPRACTICE: Global Wildcat Finance ........................................................................................................ 321FED PRESSURES .............................................................................................................................................................. 325

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

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

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

MORAL HAZARD & UNINTENDED CONSEQUENCES ...................................................................................................... 340CRONY CAPITALISM-Enriching the Financial Sector Through Monetary Policy............................................................................................... 340EARNINGS - Earnings follow US$ which follows QEIII Expectations .................................................................................................................... 343

FURTHER MARKET RISE - Dependent on Fed Flows............................................................................................................................................ 345WHO'S TURN? - Fed, You're Up! ........................................................................................................................................ 349

FISCALPOLICY-THEFISCALCLIFF............................................................................................................................................ .......... 351US RECOVERY: Forget Camouflage, this is the Stark Reality of the Non-Recovery.................................................................................. 352

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2012 FEDERAL ELECTION ................................................................................................................................................ 356A BAD DREAM.............................................................................................................................................................................................................. 356

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

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

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

THE BUDGET PROBLEM ................................................................................................................................................... 376LATEST US BUDGET.................................................................................................................................................................................................. 381FINANCIAL REPRESSION:One cannot operate a capitalist system if the state can borrow at a negative cost. .................................. 385US DEBT PROJECTIONS: Even the Official Numbers Show Little Hope....................................................................................................... 388

KEYDRIVERS-CATALYSTSOFCHANGE............................................................................................................................................ 389

EMPLOYMENT ................................................................................................................................................................... 389REAL DISPOSABLE INCOME ............................................................................................................................................ 399

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

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

CAPITALSHRUGGED ................................................................................................................................................................................ 432

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