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  • Separately, the July Empire manufacturing survey provided a mixed picture on the first data point of the quarter. While the top line purchasing managers sentiment bounced to 7.39, the underlying components that track hard data indicated that new orders declined (-2.29). Inventories were flat and the average workweek remained unchanged. The contraction in new orders and no change in inventories reaffirm the view that manufacturing lost momentum heading into the third quarter. It is likely contracting as indicated by the June Institute for Supply Management’s survey of national manufacturing conditions.
  • Amid continuing concerns about the US Economy and fiscal policy, the European debt crisis, and slowing growth in China, financial markets have been subject to heightened uncertainty. The bottom line is that financial market volatility is a killer of the economy. The issue is two fold: 1- Investors hate uncertainty, 2- Businesses don’t make capital investments and hiring decisions when there is a sense of uncertainty and instability. They pull in their horns and conserve cash flow. This is what we have in the US and can be seen from Small Business Optimism Indexes to Corporate Balance sheets to Hiring projections.
  • Michigan =Consumer Confidence =
  • Sour Consumers Likely to Slow Spending in Third Quarter – BL Brief 07-16-12 Sour economic data combined with a deteriorating labor market is reshaping public expectations for the economy. This carries with it implications for consumer spending and overall economic outlook. Economic expectations in the Bloomberg Consumer Comfort Index, the University of Michigan consumer confidence survey and the Conference Board’s estimate of confidence have deteriorated sharply since the end of the first quarter, roughly coincident with the deceleration in the labor market. Details in each survey over the past few months have pointed to falling expectations for employment and income gains. This shift in expectations poses a risk to the spending outlook. Personal consumption on a three-month annualized basis through May, which is the latest data available, increased at a 2 percent pace, well below the 2.4 percent average since the start of the recovery in December 2009. Diminished consumer comfort and the decline in the buying climate over the past few months indicate the probability of a sub-2 percent rate of personal consumption in the second quarter is increasing. This has occurred in two of the past four quarters. The spending slowdown will likely spill over into the third quarter, placing at risk the current 2 percent annualized pace of inflation-adjusted spending posted midway through the second quarter. The buying climate questions in the BCCI have declined to minus 41.5 from minus 33.9 since the start of the second quarter. This may have to do with the decline in sentiment among upper income households earning more than $75,000 per year, which have fallen to 75 from 85 in the UMICH survey, and in households making more than $100,000, which has sagged to minus 8.2 from 10.2 in April. Between 1996 and the first quarter of 2012, the consumer comfort buying index has accounted for roughly 70 percent of the variation in inflation-adjusted personal consumption. The upper 40 percent of income earners generally account for about 60 percent of overall spending. Even a modest slowdown, much less an outright pullback, among these consumers can have an outsized impact on the spending outlook. The decline in consumer expectations and buying climate is particularly ill-timed given events in Europe and the looming $567 billion fiscal cliff – $400 billion in tax hikes, $207 billion in spending cuts, $47 billion in offsets due to a reduced budget deficit – which is equivalent to roughly 4 percent of GDP. Should public policy not be adjusted in the next few months, there is a growing probability that consumers may choose to boost savings and slow spending to smooth out their consumption path prior to and after the possible tax hikes scheduled to take effect January 1, 2013. This morning, investors will get a first glimpse at the June advance retail sales data. While the increase in auto sales to 14 million annualized pace – below the 14.49 average pace in the first three months of the year – will likely support a modest increase in the top line estimate, three straight months of declining chain store sales places that forecast in jeopardy.
  • Retail Sales Signal Firms, Consumers Pulling Back Firms and consumers have turned cautious heading into the third quarter, wary of ongoing problems in Europe and the approaching $400 billion in tax hikes next year scheduled to take place should current public policy not be changed. Investors wondering when those risks would impact the economy won’t to wait much longer; they have likely already begun, marking the start of what will probably be a very difficult third quarter. Based on the decline in control retail sales, GDP in the second quarter is now tracking at 1.2 percent, with appreciable downside risk through the first estimate of overall economic activity between March and June set for release on July 27. While it is still early, should household spending not rebound in the current quarter, the durability of the nascent economic expansion will become increasingly suspect. There is no way to characterize the June retail sales report as anything other than weak. Motor vehicle and parts sales dropped 0.6 percent, removing the only real source of support from the household sector to overall spending on the month, even after a stronger pace of unit auto sales in June. Without any source of support to offset the minus 1.8 percent decline in retail gasoline prices, the bottom fell out of the retail sector to close out the third quarter. Retail sales fell 0.6 percent on average. Excluding volatile autos, buildings and gasoline stations, sales fell 0.1 percent and were down on the quarter overall. The only major categories that showed an increase were food spending, up 0.1 percent month-over-month, and non-store retailers and miscellaneous spending, both of which increased 0.5 percent.
  • The IMF forecasts global growth at 3.5 percent this year, the weakestsince 2009, when the world economy contracted for the first time in 60years. The estimate for 2012 may be revised lower as the euro debt crisiscontinues. A global recession is defined as growth falling below 3 percenton an annual basis, according to the fund.
  • Real rates are negative in the euro area, the U.K. and the U.S. The U.K.has had the largest negative real interest rate among the G-7 countries,averaging minus 2.6 percent since September 2008 compared with minus1.38 percent in the U.S. and minus 0.4 percent in the euro-area. It mayhelp reduce government debt if the economy grows. The Bank for InternationalSettlements warns the fall in financing costs may tempt borrowersinto ignoring their balance-sheets.
  • Euro Losing Support as Global Reserve Accumulation SlowsThe euro is losing support versus the U.S. dollar from central banks around the world as foreign-exchange reserve accumulation slows and they reallocate their assets. That leaves the currency pair increasingly vulnerable to a decline induced by the sovereign debt crisis. China reported yesterday its foreign exchange reserves fell by $65 billion to $3240 billion during the second quarter. They peaked in February at a record high of $3310 billion. Five of the 10 largest holders of foreign exchange reserves in the world have reported declines in the level of those assets for the second quarter. The drop for Japan during those three months registered $15 billion; it was $2.6 billion for Taiwan; $3.6 billion for South Korea; and $4.4 billion for India. Those figures suggest a sharp deceleration in reserve accumulation on a global basis. The 12-month sum of newly accumulated reserves, adjusted for valuation effects, for the 56 largest holders of foreign reserves for June equals $666.9 billion, according to Bloomberg Brief calculations, with nine of the 10 largest reserve accumulating countries having already released data for the month. That figure compares with a peak of $1667.4 billion in May 2010. That development removes a pillar of support for EUR/USD. Regression analysis suggests a $1 billion increase in the 12-month sum of global reserves, adjusted for valuation effects, has been accompanied by an approximate exponential rise of EUR/USD by a factor of 0.2, using data from the start of 2002, when reserve growth began to surge. The regression model implies EUR/USD should have gradually slid to 1.28 by the end of June from 1.34 in March and a high of 1.54 in May 2010, though the European sovereign debt crisis and shifts in expectations for the interest-rate differential between the euro area and the U.S. have contributed to deviations from that level. The currency pair also appears pressured by changes in the allocation of existing reserves. The percentage of reserves held in euros – for those countries that reveal the breakdown - fell to 25 percent at the end of March from a high of 28 percent in September 2009, according to data from the IMF. The figure for the U.S. has risen to 62.2 percent from 61.5 percent over the same period. Those figures are supported by qualitative evidence. GaoXiqing, president of China Investment Corp., told Bloomberg News in May the nation’s sovereign wealth fund has stopped buying European government debt. “We aren’t doing too much” in Europe, he said. If that state-run investment vehicle, which has a mandate to invest in high-risk, highreturn assets, shunned European government bonds, the more risk-averse State Administration of Foreign Exchange, the primary manager of China’s foreign reserves, has probably acted in a similar fashion. The fall in reserve growth leaves EUR/ USD increasingly vulnerable to the sovereign debt crisis. The daily correlation between the percentage change of the exchange rate and the first difference of the spread between the 10-year sovereign yields of Italy and Germany stands at minus 0.74 for the last month and minus 0.59 for the last three months. The correlations are similar between the exchange rate and equivalent spreads on Spanish government bonds
  • Fed QE May Spur Risk Rally, End Global Easing CycleRapidly decelerating global inflation will likely lead to more extensive easing by the world’s central banks as policy makers appear to be adhering to a de facto global inflation target-range of between 2 percent and 4 percent. Another round of easing in the U.S. may end the burgeoning easing cycle, leading to another risk rally going into year-end. On a quarterly basis, since 1998 global inflation below 2 percent has coincided with an average central bank policy rate of 1.9 percent, while inflation above 4 percent has coincided with an average rate of 4.3 percent. Global inflation between these two levels has coincided with a relatively rangebound global policy, averaging 3.2 percent. As of June, the average annual global inflation stood at 3.3 percent, after falling from a post-financial crisis high of 4.8 percent in September. During this same period, policy rates fell to an average of 2.4 percent from 4.5 percent, indicating the easing cycle was already under way. In the first half of 2012, 18 central banks reduced rates a total of 27 times. Slowdowns in Europe, the U.S. and China mean global inflation will continue to slide, intensifying the easing cycle as more countries respond to slowing growth and moderating inflation by cutting rates. Recently, two unanticipated Chinese rate cuts less than a month apart, a surprise decision by the Bank of Korea last week to slash its benchmark rate by 25 basis points, and a cut by the ECB on July 5 have signified the cycle’s growing momentum. All three of these banks will likely cut rates again. Korea’s surprise cut amounted to a preemptive measure by policy makers amid signs of slowing economic growth. BOK Governor Kim ChoongSoo cited specifically “deteriorating external conditions.” Up until the July 12 decision, relatively strong domestic demand coupled with elevated inflation expectations had kept the central bank on hold. Many pundits were still debating whether its next move would be a rate increase or rate cut. Looking solely at the relationship between Korea’s CPI and benchmark rate since 2008, June’s inflation reading of 2.2 percent has coincided with a policy rate of about 2 percent. With external conditions unlikely to improve in the near term, there may be additional cuts by this newcomer to the easing cycle. Presently, two forecasters see another 25 basis-point cut during the third quarter. For countries like the U.S. and Japan, with reference rates already at 0 percent, moderating inflation coupled with slowing growth will likely stoke more substantial quantitative easing in the next several months, which may have a global effect. In August 2010, when Fed Chairman Ben Bernanke signaled a second round of easing, average global inflation stood at 3.0 percent, just 30 basis points below May’s reading of 3.3 percent, which has likely moderated further. Another round of easing in the U.S. may culminate in the end of the global easing cycle. Following Bernanke’s indication of a second round of QE and its eventual implementation in November 2010, global inflation rose from 3.0 percent to a high of 4.8 percent in September 2011. This kicked off a global central bank tightening cycle that lasted through July 2011, the month following the expiration of the Fed’s second easing program. Another round of easing by the Fed may help kickstart another risk rally. Between November 2008 and March 2009 — the duration of the first easing program — the MSCI World index rose more than 25 percent. Between August 2010 and June 2011, the period between Bernanke’s first indication of a second round of easing and its expiration, the world equity index rose by almost the same magnitude.
  • QE III: What We Are WatchingSadly, not even the extension of Twist can do anything about the biggest concern that banks are currently facing, namely the accelerated decline in reserves, as a result of the prepayment of Maiden Lane obligations and the gradual drop in FX swaps (at least until the next time Europe needs a Fed-based bail out that is). As can be seen in the chart below, Adjusted Reserves have tumbled to level not seen since December, and then May of 2011, both times when the market was about to turn over if not for global coordinated central bank intervention
  • Bernanke Incomplete on Employment Prompts Fed to Shift Its FocusSince the recession ended in June 2009, the Federal Reserve chairman has achieved inflation near his target of 2 percent, bolstered capital across the banking system and helped underpin confidence in the U.S. economy that’s contributed to record-low borrowing costs for the nation. Meanwhile, the unemployment rate has stalled above 8 percent for 41 consecutive months. The failure to bring joblessness closer to Fed officials’ longer-run goal of 5.2 percent to 6 percent has prompted Bernanke and his lieutenants to emphasize the need for economic growth over price stability, said John Silvia, chief economist at Wells Fargo Securities LLC. Bernanke added to his record monetary stimulus last month and said more action will be needed without “sustained improvement” in the jobs outlook. “The employment number just isn’t improving; it’s the thing that’s out of whack,” Silvia said in a telephone interview from his Charlotte, North Carolina, office. “Yes, you’ve got a dual mandate, but like everything else in life sometimes you’ve got to focus on one more than the other.” Bernanke, who is scheduled to deliver his semi-annual monetary-policy report to Congress today and tomorrow, said June 20 that policy makers are focusing “primarily” on the outlook for jobs in deciding whether to ease further. The Federal Open Market Committee last month prolonged its maturity-extension program, known as Operation Twist, through the end of the year by $267 billion.

Under the Lens-audio_slides-07-17-12-sub-Monetary_Malpractice Under the Lens-audio_slides-07-17-12-sub-Monetary_Malpractice Presentation Transcript

  • Global Macro Tipping Points July 17th, 2012 Monetary Malpractice Listen to the original podcast for this slide at www.GordonTLong.com/UnderTheLensThe content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of thisslide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
  • Global Macro Tipping Points July 17th, 2012 Monetary Malpractice AGENDA US ECONOMY • US Economy at Stall Speed – Following Global Economy DOWN • Nearing a “Double-Dip” Recession Tipping Point • Earnings – The Coming Cold Plunge • QE III On Its Way – No Later than September 13th FOMC GLOBAL RISKS • International Monetary Fund (IMF) & Bank of International Settlements (BIS) Warn • Bernanke’s Humphrey Hawkins Testimony Listen to the original podcast for this slide at www.GordonTLong.com/UnderTheLensThe content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of thisslide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
  • Global Macro Tipping Points July 17th, 2012 Getting Bad – Fast! Listen to the original podcast for this slide at www.GordonTLong.com/UnderTheLensThe content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of thisslide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
  • Global Macro Tipping Points July 17th, 2012 US Economy at Stall Speed Listen to the original podcast for this slide at www.GordonTLong.com/UnderTheLensThe content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of thisslide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
  • Global Macro Tipping Points July 17th, 2012 US Economy at Stall Speed Listen to the original podcast for this slide at www.GordonTLong.com/UnderTheLensThe content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of thisslide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
  • Global Macro Tipping Points July 17th, 2012 US Economy at Stall Speed Listen to the original podcast for this slide at www.GordonTLong.com/UnderTheLensThe content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of thisslide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
  • Global Macro Tipping Points July 17th, 2012 US Economy at Stall Speed Listen to the original podcast for this slide at www.GordonTLong.com/UnderTheLensThe content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of thisslide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
  • Global Macro Tipping Points July 17th, 2012 US Economy at Stall Speed Listen to the original podcast for this slide at www.GordonTLong.com/UnderTheLensThe content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of thisslide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
  • Global Macro Tipping Points July 17th, 2012 US Economy at Stall Speed Listen to the original podcast for this slide at www.GordonTLong.com/UnderTheLensThe content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of thisslide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
  • Global Macro Tipping Points July 17th, 2012 US Economy at Stall Speed Listen to the original podcast for this slide at www.GordonTLong.com/UnderTheLensThe content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of thisslide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
  • Global Macro Tipping Points July 17th, 2012 US Economy at Stall Speed Listen to the original podcast for this slide at www.GordonTLong.com/UnderTheLensThe content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of thisslide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
  • Global Macro Tipping Points July 17th, 2012 Nearing a “Double-Dip” Recession Tipping Point Listen to the original podcast for this slide at www.GordonTLong.com/UnderTheLensThe content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of thisslide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
  • Global Macro Tipping Points July 17th, 2012 Nearing a “Double-Dip” Recession Tipping Point Listen to the original podcast for this slide at www.GordonTLong.com/UnderTheLensThe content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of thisslide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
  • Global Macro Tipping Points July 17th, 2012 Nearing a “Double-Dip” Recession Tipping Point Listen to the original podcast for this slide at www.GordonTLong.com/UnderTheLensThe content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of thisslide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
  • Global Macro Tipping Points July 17th, 2012 The Coming Cold Plunge Listen to the original podcast for this slide at www.GordonTLong.com/UnderTheLensThe content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of thisslide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
  • Global Macro Tipping Points July 17th, 2012 Monetary Malpractice Listen to the original podcast for this slide at www.GordonTLong.com/UnderTheLensThe content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of thisslide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
  • Global Macro Tipping Points July 17th, 2012 Monetary Malpractice Listen to the original podcast for this slide at www.GordonTLong.com/UnderTheLensThe content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of thisslide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
  • Global Macro Tipping Points July 17th, 2012 Monetary Malpractice Listen to the original podcast for this slide at www.GordonTLong.com/UnderTheLensThe content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of thisslide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
  • Global Macro Tipping Points July 17th, 2012 Monetary Malpractice Listen to the original podcast for this slide at www.GordonTLong.com/UnderTheLensThe content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of thisslide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
  • Global Macro Tipping Points July 17th, 2012 Monetary Malpractice Listen to the original podcast for this slide at www.GordonTLong.com/UnderTheLensThe content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of thisslide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
  • Global Macro Tipping Points July 17th, 2012 Monetary Malpractice Listen to the original podcast for this slide at www.GordonTLong.com/UnderTheLensThe content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of thisslide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
  • Global Macro Tipping Points July 17th, 2012 Monetary Malpractice Listen to the original podcast for this slide at www.GordonTLong.com/UnderTheLensThe content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of thisslide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
  • Global Macro Tipping Points July 17th, 2012 Monetary Malpractice Listen to the original podcast for this slide at www.GordonTLong.com/UnderTheLensThe content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of thisslide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
  • Global Macro Tipping Points July 17th, 2012 Monetary Malpractice Listen to the original podcast for this slide at www.GordonTLong.com/UnderTheLensThe content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of thisslide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
  • Global Macro Tipping Points July 17th, 2012 New York Federal Reserve Paper Listen to the original podcast for this slide at www.GordonTLong.com/UnderTheLensThe content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of thisslide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
  • Global Macro Tipping Points July 17th, 2012 Monetary Malpractice Listen to the original podcast for this slide at www.GordonTLong.com/UnderTheLensThe content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of thisslide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
  • DISCLOSURE STATEMENT AND TERMS OF USETHE CONTENT OF THIS SLIDE PRESENTATION AND ITS ACCOMPANYING RECORDED AUDIO DISCUSSION AREINTENDED FOR EDUCATIONAL PURPOSES ONLY.This slide presentation and its accompanying recorded audio discussion are not a solicitation to trade or invest, andany analysis is the opinion of the author and is not to be used or relied upon as investment advice. Trading andinvesting can involve substantial risk of loss. Past performance is no guarantee of future returns/results. Commentaryis only the opinions of the authors and should not to be used for investment decisions. You must carefully examinethe risks associated with investing of any sort and whether investment programs are suitable for you. You shouldnever invest or consider investments without a complete set of disclosure documents, and should consider the risksprior to investing. This slide presentation and its accompanying recorded audio discussion are not in any way asubstitution for disclosure. Suitability of investing decisions rests solely with the investor. Your acknowledgement ofthis Disclosure and Term of Use Statement is a condition of access to it. Furthermore, any investments you may makeare your sole responsibility.THERE IS RISK OF LOSS IN TRADING AND INVESTING OF ANY KIND. PAST PERFORMANCE IS NOT INDICATIVE OFFUTURE RESULTS. Listen to the original podcast for this slide at www.GordonTLong.com/UnderTheLens