Gross Domestic Product

In what may be the most disturbing news of the day, moments ago the BOE announced it is halting its own version of QE3, and capping the asset purchase program at £375 billion after "some policy makers questioned its effectiveness in supporting a recovery that remains lackluster." Could it be that even that peculiar Homo Sapiens subspecies known as "economist" is starting to realize that when applying the same "remedy" time after time to absolutely no avail, and where even the market no longer responds to unlimited injections of liquidity, then perhaps it is time to end said "remedy" altogether? And how long until the voodoo shamans in the dark lit room at Marriner Eccles follow through? Sadly, if Japan, and its 9 (so far) rounds of easing, is any indication, we have a lot more pain to go before what has been glaringly obvious to every hotdog vendor and shoeshine boy is also understood by Economics Nobel prize winners.

There is one thing that is certain come Wednesday morning; there will be just as many losers as winners and as ConvergEx's Nick Colas notes, while the main-event remains too close to call, the psychology of 'losing' will become a critical part of the domestic political process from November 7th onwards. We suggest the Post-Election Stress Syndrome (PESS) will follow the Kubler-Ross model - which means initially 'Denial' and 'Anger' will dominate people's deeds and words. None of this is good news for an efficient resolution to the political Gordian Knot know as the 'fiscal cliff' or to the stability of capital markets going into year-end as politicians and plebeians alike will be PESS'd off - and as a sad reminder, a loss in a sporting contest doesn’t just sting the losing players – it lowers the testosterone levels of male fans that back the unhappy team.

”We now live in a world with fiat-based paper money being printed with impunity. There are no risk- free assets anymore, anywhere."

Fear the truth, it shall set fundamental market forces free!

We’re talking about a banking system that is nearly four times that of the US ($46 trillion vs. $12 trillion) with at least twice the amount of leverage (26 to 1 for the EU vs. 13 to 1 for the US), and a Central Bank that has stuffed its balance sheet with loads of garbage debts, giving it a leverage level of 36 to 1.

Chinese economic data has in general been surprising to the downside in recent weeks - in opposition to the positive (seasonally adjusted awesomeness) of US data. However, for tonight's entertainment we have GDP at 7.4% YoY - perfectly in line with expectations (but the 7th consecutive quarter of slowing growth), Industrial Production beat modestly, Retail Sales beat handsomely (biggest beat in 18 months), and FAI beat...

• *CHINA 3Q GDP RISES 7.4% VS ECONOMISTS' EST. 7.4%       :NBSZ CH
• *CHINA SEPT. INDUSTRIAL OUTPUT RISES 9.2% VS 9% ECONOMISTS' EST.
• *CHINA JAN.-SEPT. FIXED-ASSET INVESTMENT UP 20.5% VS EST. 20.2%
• *CHINA SEPT. RETAIL SALES RISE 14.2% FROM YEAR EARLIER

So, no new stimulus coming anytime soon - leaving Bernanke and Draghi all alone (and the latter is stuck waiting for Rajoy to say 'Si'). AUD lurched violently up and down; US equity futures are unmoved; and Treasury yields rose perhaps 1bps.

Japan's economy has stagnated for two decades despite the global economy experiencing one of its greatest economic booms ever. Japan continues to avoid fiscal or financial crisis, and perhaps it can do so for decades to come. But we should note that Japan has had the incredible, once-in-a-lifetime tailwind of a global boom for the past 23 years. That has enabled Japan, and all the other developed economies, the means to avoid facing their structural and demographic problems. If Japan's economy has stagnated during a global boom, what will it do during a global bust? Japan's stable stagnation will continue in a linear fashion--until it doesn't.

The truth of the matter is that there is no such thing as a free lunch. The phony prosperity of monetary inflation is entirely illusory. You cannot get something for nothing. "So, whenever you see a criticism of austerity as fostering recession, you are reading a Keynesian. He may not call himself a Keynesian, but in this case, he is delusional. Only Keynesianism teaches that reduced national government spending (“austerity”) in a nation whose national government spends 40% of its GDP (Greece) will produce a recession." Keynesian economic pundits advance many fallacious arguments about government spending. Chief among them is the egregious notion that mortgaging your posterity with debt and deficits is somehow “virtuous.”

The usual definition of a recession is GDP goes negative. But this isn't necessarily true. Notice that GDP never went below the zero line in the 2001 recession. Dipping close to zero was good enough. The more interesting line is our composite of economic activity. We can pose the "recession" question in this way: if real investment, net earnings after debt service and M2 money are all puking, how can the economy be "growing slowly but steadily"?

Standing in Legoland in Carlsbad, California in 2011, fulfilling a promise to my then eight-year-old son William, it hit me. I was strolling around a Blackstone-owned property. We'd woken up in a Homewood Suites, owned by Blackstone-backed Hilton. We'd driven to the park in a rental car from Hertz, owned by private-equity firms Carlyle and Clayton, Dubilier & Rice. Practically every time I'd opened my wallet that day, it had been to a company owned by private equity. Even on vacation, I couldn't escape. A few months later, I had dinner with Greg Brenneman, who'd held top positions at Continental, Burger King, and Quizno's, all private-equity-owned at the time he was involved. Brenneman is now the chairman of CCMP Capital, whose investments have included 1-800-Flowers.com and Vitamin Shoppe. We talked at length about the ubiquity of PE ownership -- my J. Crew sweater, the Dollar General store in my wife's hometown in the Catskills. I started a running list on my BlackBerry that quickly grew to dozens of examples. Brand names piled up, from Toys "R" Us to Petco. The more I looked, the more I found it.  The numbers are staggering. Private-equity firms globally and collectively had almost $3 trillion in assets at the end of 2011. The companies they own account for about 8 percent of the U.S. gross domestic product by one estimate.

The Federal Reserve is probably not ready to take the aggressive plunge into Nominal GDP Targeting, but it likely will. But if you think these measures are desperate, we have only just begun to push energy and financial systems beyond their capability. The launch of QE3 (and similar measures by the European central bank (ECB) in Europe) is like the crack! of a starting-gun to human psychology that carries the following, urgent message: Hey, humans – go get those resources quickly, before someone else does! Indeed, the most powerful lever for monetary policy remains our capacity for social competition. The open-ended promise to pursue a faster rate of growth at the expense of inflation, mal-investment, bubbles, and the environment places a new and fast pressure on human economies to perform.

Six charts tell the story of financialization and the diminishing returns of credit.

Expanding base money pushes the price of oil up to stall speed, while expanding credit has a diminishing effect on the real economy. It does however handsomely boost bank assets.

While most "developed world" people have heard of Hong Kong and Macau, far fewer have heard of China's province of Guangdong, which is somewhat surprising. With over 100 million people, a GDP of nearly $1 trillion - the biggest of all Chinese provinces, this South China Sea adjacent territory is perhaps China's most important economic dynamo. One of the key cities of Guangdong is Dongguan, which as the map below shows is a stone's throw from Hong Kong, has a population of nearly 10 million, and has long been considered Guangdong's boomtown and one of China's richest cities. One notable feature about Dongguan is that it is home to the New South China Mall, which is the world's largest. It also happens to be mostly empty ever since it opened in 2005. Which perhaps is a good segue into this story. Because while for the most part the city of Dongguan has been a story of prosperity, a wrinkle has appeared. According to the South China Morning Post, which cites researchers at Sun Yat-sen University, this city is now on the brink of bankruptcy.

Investors remain convinced, it would seem, that the fiscal cliff will not happen because our great-and-good politicians in Washington know full-well that the economic repercussions will be too great. Even though Ben's foot is to the floor, he has stated that monetary policy will be unable to offset the negative economic impact of the tax hikes and spending cuts. The prospect of agreement among a deeply polarized politik and just as Goldman expects, we worry that the S&P 500 will fall sharply following the election once investors finally recognize the serious possibility that the 'fiscal-cliff-problem' will not be solved in a smooth manner. In order to clarify that thinking, Bloomberg Brief has provided 12 charts on the timelines, impact, uncertainty, and possibilities surrounding this most obvious of risk events.

Europe’s new mantra has become that of “why just one”? Spain is returning to the table asking for yet another bailout. Of course you will hear the cries of conditions this, targets that… With rampant unemployment and an untenable political position, expect Rajoy to nod his head in acquiescence to the ECB while at the same time ignoring his pledge the very next minute.