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1 July 2011 Edition Restricted & Confidential

Copyright 2011 Gordon T. Long All Rights Reserved [email protected]

European Summer, America AutumnThe Arab Spring has set the Stage for the European Summer

GLOBAL MACRO TIPPING POINTS - JULY 20116/23/2011

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July 2011 Edition Restricted & Confidential


European Summer, America AutumnThe Arab Spring has set the stage for the European Summer.

GLOBAL MACRO TIPPING POINTS - JULY 2011

TIPPING POINTS........................................................................................................................................................................................ 5

WEAREHERE ................................................................................................................................................................................................. 5

SHIFTINGTIPPINGPOINTS-CHANGES TOWATCH.................................................................................................................................... 6

TIPPINGPOINTSINFOCUS-JULY2011................................................................................................................................................... 10I - SOVEREIGN DEBT.......................................................................................................................................................................................................... 10II - EU BANKING CRISIS...................................................................................................................................................................................................... 10III - GEO-POLITICAL EVENT............................................................................................................................................................................................... 11IV - SOCIAL UNREST........................................................................................................................................................................................................... 11V - RISK REVERSAL ............................................................................................................................................................................................................ 12VI - INFLATION & INTEREST PRESSURES..................................................................................................................................................................... 13

GLOBALMACRO -RISK LEVELS ................................................................................................................................................................ ........ 14CREDIT METRICS - LIBOR-OIS SPREAD........................................................................................................................................................................ 14HOUSING - RATE OF CHANGE......................................................................................................................................................................................... 14DIVERGENCE........................................................................................................................................................................................................................ 14MONTHLY MONEY SUPPLY GROWTH - M3................................................................................................................................................................... 15BANK LIABILITIES................................................................................................................................................................................................................ 16GLOBAL CREDIT DEFAULT SWAPS................................................................................................................................................................................ 17COST OF MONEY................................................................................................................................................................................................................. 18EMPLOYMENT DIVERGENCE........................................................................................................................................................................................... 19

GLOBAL MACRO......................................................................................................................................................................................20

EUROPEANSUMMER-SPAINLAUNCHES THEEUROPEANSUMMER........................................................................................................ 23

'DATERAPE'OFGREECE ................................................................................................................................................................ ........... 24

BONDMARKET.............................................................................................................................................................................................. 25BOND MARKET IS MISSING THE POINT......................................................................................................................................................................... 25INVESTMENT GRADE & HIGH YIELD OFFERINGS EXPLODING............................................................................................................................... 25

ASIA-NOTALL IS AS ITAPPEARS!............................................................................................................................................................. ..... 27THE "GLOBAL ECONOMIC DRIVER" IS SHIFTING - US CONSUMER TO CHINESE CAPITAL/REAL ESTATE INVESTMENT........................ 27BEWARE OF MASSIVE MISALLOCATION OF CAPITAL ............................................................................................................................................... 29EMERGING MARKET INFLATION CONCERNS.............................................................................................................................................................. 30

US ECONOMY...........................................................................................................................................................................................35

KEYMONTHLYECONOMICINDICATORSHAVE A CLOSER LOOK AT WHAT THE MAINLINE MEDIA DOESNT DISCUSS. ...................... 36

CONTINUING SIGNSOFUSECONOMICPROBLEMS .......................................................................................................................... 38JOBLESS CLAIMS................................................................................................................................................................................................................ 38APRIL WHOLESALE INVENTORIES AND SALES - ANOTHER MISS......................................................................................................................... 38BANKS CONTINUE TO PREPARE FOR STORM - UNLOADING CRE........................................................................................................................ 39RESIDENTIAL REAL ESTATE - SHILLER WARNING..................................................................................................................................................... 40RAIL TRAFFIC SLOWING.................................................................................................................................................................................................... 41

USEMPLOYMENT ........................................................................................................................................................................................ 42WILLTHEREALUSGDPPLEASESTANDUP!........................................................................................................................................ 48

CAN WE PLEASE STOP PRETENDING THE GDP IS "GROWING"?........................................................................................................................... 50

401KLOANSONTHERISE ................................................................................................................................................................ ......... 51

TEXASASAMICROCOSM ................................................................................................................................................................ .......... 52

DODD-FRANK FINANCIALOVERHAULBOGGEDDOWN..................................................................................................................... 53

REALESTATE "DOUBLEDIP"SUMMARY ............................................................................................................................................... 55RESIDENTIAL REAL ESTATE- "STILL HOME SICK"...................................................................................................................................................... 55

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CURRENT SITUATIONAL ANALYSIS......................................................................................................................................................................... 55HOME OWNERSHIP TRENDS..................................................................................................................................................................................... 57$6.5 TRILLION IN MIDDLE CLASS NET WORTH EVAPORATES.......................................................................................................................... 59GARY SHILLING LAYS OUT THE HOUSING FACTS.............................................................................................................................................. 60DISTRESSED MORTGAGES....................................................................................................................................................................................... 75NATIONAL STATISTICS................................................................................................................................................................................................ 75

COMMERCIAL REAL ESTATE............................................................................................................................................................................................ 80COMMERCIAL REAL ESTATE DECLINES 3.7% IN APRIL - NEW POST BUBBLE LOW.................................................................................. 80

2011USECONOMICIMPEDIMENTS............................................................................................................................................. ............ 84

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MONTHLY PROCESS OF ABSTRACTION

The Global Macro Tipping Points (GMTP) Service is an integral part of our monthly Process of Abstraction research

methodology. The process starts monthly with the Tipping Points and completes with a final Synthesis. Thesequence is optimized to align with the established Macro Economic Data releases.

Section Release

Date

Service Focus Coverage

II. 3rd Saturday

of the Month

Global Macro Tipping Points

(GMTP)

Tipping Points

Abstraction

Abstraction

Tipping Points

Global Macro

US Economy

III. 1st Day of the

Month

Market Analytics & Technical

Analysis (MTA)

Technical Analysis

Market Analytics

Market Analytics

Technical Analysis

Fundamental Analysis

Risk Analysis

I. Day Following

Monthly Labor

Report

(~ 1st Saturday)

Monthly Market Commentary

(MMC)

Synthesis Commentary

Synthesis

Thesis

Commentary

Conclusions

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TIPPING POINTS

WE ARE HERE

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SHIFTING TIPPING POINTS - Changes to Watch

Sovereign EU Debt and the EU Banking Crisis have once again returned to the number one and two spots in ourTipping Points ranking.

INCREASES CURRENT Q4 '10 CHANGE

Sovereign Debt 1 1 0

EU Banking Crisis 2 2 0

Geo-Political Event 3 37 +34

Social Unrest 4 36 +32

Risk Reversal 5 5 0

Rising Inflation &Interest Pressures

6 14 +8

Food Price Pressures 7 15 +8

Oil Price Pressures 8 30 +22

MAJOR DECREASESNorth & South Korea 35 12 -23

Bond Bubble 17 3 -14

Financial Crisis ProgramExpiration

34 24 -10

We need to continue to carefully watch:

1) The increasing & broadening potential for Global Contagion as a result of:

- Japan: Yen Carry Trade Unwind & an FX fallout,

- North Africa: An escalation of the Libyan Civil War and UN Military involvement,

- Middle East: Mounting pressures on oil prices due to worsening social unrest,

- EU PIIGS: Sovereign Debt Crisis, EU Banking problems and Spain potentially being next,

- CEE: Central & Eastern Europe is not presently getting the attention it deserves. it isthe 'sub-price' of Europe and has yet to be addressed.

2) How and if Global Central Banks actually do unwindtheir crisis triage programs or are they permanent?

Specifically, what will the US Federal Reserve signal inlate April and May regarding the expiration ofQuantitative Easing (QE) II. It was originally plannedto expire in June 2011.

3) What G20 Government public policy initiatives will

be concerning:

- Weakening economic conditions- Chronic unemployment levels.

These events will allow us to determine if our roadmap is stillvalid or if we are going to see an acceleration in weakeningglobal financial conditions.

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Social Unrest

Our 2011 Thesis analysis outlined that we needed to be watching for a major shift towards Conflict and Tensionin 2011. This prediction has arrived with an unexpected jolt in Q1 2011, even to us!

Social Unrest and Geo-Political Tensions seem to have broken out globally in a wide spread fashion. It is ouropinion that the drivers behind these tensions are rising food, energy and cost of living prices, that coupled withextreme levels of unemployment is heralding an era of unprecedented levels of global unrest.

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Q2

2011

Q4

2010

Diff.

SOVEREIGN DEBT - PIIGS Insolvency and Inability to stimulate

economies

1 1 0

EU BANKING CRISIS Bank Ratios of 50:1 and toxic debt on and off

the balance sheet

2 2 0

GEO-POLITICAL EVENT A sovereign country overthrow, rebellion or

insurrection

3 37 +34

SOCIAL UNREST Public rallies, protests and rioting against the

government.

4 36 +32

RISK REVERSAL Historic level of financial market participation

and dependency (i.e. pension entitlements)

5 5 0

RISING INFLATION PRESSURES &

INTEREST RATES

Reversal in Interest rate and impact on

government financing budgets

6 14 +8

FOOD PRICE PRESSURES Production shortages, distribution break-

downs with growing Asian demand

7 15 +8

OIL PRICE PRESSURES Shortages, Peak Oil & Asian Growth demand. 8 30 +22

CHINA BUBBLE Real Estate & speculative bubbles 9 22 +13

RESIDENTIAL REAL ESTATE

PHASE II

Shadow Inventory, Strategic Defaults,

Looming Option ARMS python, LTV levels.

10 6 -4

US BANKING CRISIS II Deferred accounted write-downs for Real

Estate, Commercial Real Estate & HELOCS

11 10 -1

CHRONIC UNEMPLOYMENT Historic Unemployment rates in G7 12 9 -3

COMMERCIAL REAL ESTATE Market Values are down 45 - 55% with little

write downs as of yet being taken by banks,

insurance or financial holders.

13 7 -6

JAPAN DEBT DEFLATION SPIRAL Ability for Japan to continue to fund national

debt with shifting demographic patterns.

14 18 +4

US STATE & LOCAL GOVERNMENT Unprecedented budget shortfalls & funding

problems

15 4 -11

NATURAL PHYSICAL DISASTER Presently: Japan's Earthquake, Tsunami and

Nuclear Accident. -- The Economic Fallout

16 31 +15

BOND BUBBLE Historically high Bond Prices 17 3 -14

PUBLIC POLICY MISCUES Impact of Obamacare, Dodd-Frank Bill and

others in reaction to present environment.

18 13 -5

SHRINKING REVENUE GROWTH

RATE

Slowing Corporate Top-Line revenue growth

rates

19 27 +8

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CENTRAL & EASTERN EUROPE The Sub Price of Europe Level of borrowing

in non sovereign currency (EU loans)

20 8 -12

PENSION ENTITLEMENT CRISIS Unfunded Pension Liabilities - > $100T in US 21 11 -10

US DOLLAR WEAKNESS Domestic Inflationary Pressures 22 28 +6

CREDIT CONTRACTION II Bankruptcy & Mal-Investment Catalyst 23 18 -5

US FISCAL, TRADE AND ACCOUNT

IMBALANCES

Inability of the US to f inance imbalances 24 21 -3

FINANCE & INSUR. BALANCE SHEET

WRITE-OFFS

Accounting for Commercial Real Estate

market values, loan loss reserves

25 17 -8

US STOCK MARKET VALUATIONS Over-Valuation and unrealistic earnings

estimates.

26 16 -10

GOVERNMENT BACKSTOP

INSURANCE

Fannie, Freddie, Ginnie, FHA, FDIC, Pension

Guarantee backstop funding.

27 23 -4

GLOBAL OUTPUT GAP Global Overcapacity & Underutilization 28 29 +1

US RESERVE CURRENCY Emergence of alternative solutions such as

SDRs. Inflationary repatriation impact

29 20 -9

PUBLIC SENTIMENT & CONFIDENCE Growing social unrest and public rage 30 26 -4

SLOWING RETAIL & CONSUMER

SALES

Impact of slowing consumer sales and

increasing savings rate on 70% consumption

US Economy

31 25 -6

CORPORATE BANKRUPTCIES Reverse Gearing & margin pressures 32 24 -8

TERRORIST EVENT Unknown black swan 33 35 +2

FINANCIAL CRISIS PROGRAMS

EXPIRATION

Withdrawal of Financial Crisis Triage

Programs and interest rate normalization

34 24 -10

NORTH & SOUTH KOREA Geo-Political tensions - Escalating 35 12 -23

IRAN NUCLEAR THREAT Israeli attack on Iran - Middle East escalation 36 33 -3

PANDEMIC /EPIDEMIC Unknown black swan 37 32 -5

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TIPPING POINTS IN FOCUS -July 2011

I - SOVEREIGN DEBT

The Sovereign Debt Crisis in Europe hasreturned with heightened awareness.

Greece is once again on the verge of default.

A second bailout of an additional 120B isnow required as things go from bad to worse.

Additionally, further austerity cuts andprivatization sales are now urgently requiredby July to secure the sixth 12B tranche aspart of the initial bailout agreement.

It is highly unlikely the Greek people willsupport any further government austeritymeasures needed to secure the loans since

80% of the electorate is opposed to thecurrent government direction.

Spain is now on the precipice and worries inItaly are becoming more evident.

Problems in Portugal and Ireland have noteffectively been addressed as Economicgrowth slows and further aggravates analready tenuous situation.

II - EU BANKING CRISIS

Any default in Greece and the EU Bankingsystem will implode.

Any haircuts in Portugal, Ireland or Spain andthe EU Banking System will implode.

The EU banks are so highly leveraged with offbalance sheet SIV's that they are simplyunable to absorb any losses associated withsovereign debt write-offs.

The game in Europe is fundamentally aboutbuying time for the EU banks to be in aposition to absorb the inevitable debt write-offs that are coming.

An Economic slowing will deliver a death blowto the game of musical chairs presently being

played.

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