Global Economy

• Jon Huntsman Will Leave Republican Presidential Race, Endorse Mitt Romney, Officials Say (WaPo)
• Dont laugh - Plosser: Fed Tightening Possible Before Mid-2013 (WSJ)
• Greece’s Creditors Seek End To Deadlock (FT)
• France Can Overcome Crisis With Reforms – Sarkozy (Reuters)
• Nowotny Says S&P Favors Fed’s Bond Buying Over ECB’s ‘Restrictive’ Policy (Bloomberg)
• Bomb material found in Thailand after terror warnings (Reuters)
• Ma Victory Seen Boosting Taiwan Markets as Baer Considers Upgrading Stocks (Bloomberg)
• Japan Key Orders Jump; Policymakers Fret over Euro (Reuters)
• Renminbi Deal Aims to Boost City Trade (FT)

There is a little for everyone in Marc Faber's latest appearance on CNBC. The infamous boomer (and doomer) believes (as we do) that today's downgrades are less significant for stocks (at least until the realization that banks and more importantly insurance companies are about to be cut as well - keep a close eye out on Allianz and Generali (of ASSGEN fame) - it is not incidental that they are abbreviated to A&G, just one letter away from our own AIG) as it is largely priced in but the equity market's rally of the last few weeks (with its lack of breadth and volume) is strongly suggestive of a bear-market rally (as opposed to the decoupling bull market that so many hope for). His view quite simply is that the ECB has undergone a backdoor monetization and without this the EUR would be significantly stronger especially given the huge short-interest (though he sees the trend for EUR is down).  Some highlights include: EUR weakness may help exports but the debt servicing costs of major European firms with huge US denominated debt wil suffer greatly, most European nations should be CCC-rated, nominally European stocks will outperform and holding quality dividend paying companies is preferred, valuation is practically impossible given ZIRP, and finally noting the irony, the worse the global economy gets (and the Chinese economy suffers), the more money printing will occur lifting nominal equity prices while real economies stumble and standards of living drop, so hold gold.

Americans have been conditioned for three generations to expect the Savior State to "do something" during downturns to "make it right." The idea that systemic problems are now beyond the reach of the Federal government does not compute; there must be something the government can do to "fix" everything. This notion that the Central State is effectively omniscient and all-powerful is central to the belief system of Americans now. The concept that the government cannot fix the problem, or that government central-planning has made the problem worse, is anathema to everyone conditioned to believe government intervention will "save the day." The basic reality is the Federal government has already pulled out all the stops in the past four years to "make the economy recover," and all its unprecedented actions have accomplished is to maintain the Status Quo via unsustainably gargantuan borrowing, spending and backstopping. If we scrape away the rhetoric and bogus statistics, at heart the current fantasy that the U.S. has "decoupled" from the global economy and will remain an island of "permanent prosperity" in a sea of recession boils down to this belief: the Federal government "won't let us stay in recession." In other words, it's within the power of the Central State to make good every loss, guarantee every debt, maintain the Empire, solve every geopolitical challenge and find technological or military solutions to potential energy shortages. All we need is the "will" to force the government to use its essentially unlimited power to "fix everything." A people conditioned to this expectation will have great difficulty accepting that their government has already done everything possible, and that these stupendous debt-based expenditures are simply not sustainable going forward. Some problems are not fixable by more government intervention; indeed, government intervention in the marketplace is like insulin: the system begins to lose sensitivity to Central State manipulation and intervention.

All you need to read.

Imagine pensions not paying retiree funds, insurers not paying claims, and banks collapsing everywhere. Sounds like fun? I will be discussing this live on RT's Capital Account with the lusciously locquacious Lauryn Lyster at 4:30pm.

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Heading into the North American open, European equity futures are trading lower, with comments from Fitch’s Riley, who suggested that the ECB must do more to prevent cataclysmic EURO collapse, causing the most recent bout of risk averse sentiment. As a result, major FX pairs are trading lower, with EUR/USD testing 1.2700, while GBP/USD fell through 1.5400 level. Looking elsewhere, apart from being buoyed by Fitch comments, German Bunds benefited from a well received German Bobl auction. Of note, European bond yield spreads are predominantly tighter for the time being, with analysts noting buying of Spanish and Italian paper by domestic and real money account names.  Finally, there is little in terms of macro-economic data and instead the attention will be on the publication of various EU related economic outlooks and the US Treasury is set to sell USD 21bln in 10-y notes.

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Nearly 10-years ago to the day, the government of Argentina collapsed. Beset by weighty deficit spending and a completely unrealistic currency peg to the US dollar, Argentina became the poster child for the golden rule of economics: ‘that which is unsustainable will not be sustained.’ It’s reversion to the mean. Within a matter of days, the country had burned through several presidents, the currency collapsed, inflation soared, unemployment shot up, crime rates spiked, and the government defaulted on its debt. After limping along for most of the last decade with a socialist agenda, the government of Argentina is at it again. The economy is rapidly deteriorating, and street-inflation has surpassed 25%.

One of the recurring analogues we have used in the past to describe the centrally planned farce that capital markets have become and the global economy in general has been one of a increasingly chaotic sine wave with ever greater amplitude and ever higher frequency (shorter wavelength). By definition, the greater the central intervention, the bigger the dampening or promoting effect, as central banks attempt to mute or enhance a given wave leg. As a result, each oscillation becomes ever more acute, ever more chaotic, and increasingly more unpredictable. And with "Austrian" analytics becoming increasingly dominant, i.e., how much money on the margin is entering or leaving the closed monetary system at any given moment, the same analysis can be drawn out to the primary driver of virtually everything: the inflation-vs-deflation debate. This in turn is why we are increasingly convinced that as the system gets caught in an ever more rapid round trip scramble peak deflation to peak inflation (and vice versa) so the ever more desperate central planners will have no choice but to ultimately throw the kitchen sink at the massive deflationary problem - because after all it is their prerogative to spur inflation, and will do as at any cost - a process which will culminate with the only possible outcome: terminal currency debasement as the Chaotic monetary swings finally become uncontrollable. Ironically, the reason why bring this up is an essay by Pimco's Neel Kashkari titled simply enough: "Chaos Theory" which looks at unfolding events precisely in the very same light, and whose observations we agree with entirely. Furthermore, since he lays it out more coherently, we present it in its entirety below. His conclusion, especially as pertains to the ubiquitous inflation-deflation debate however, is worth nothing upfront: "I believe societies will in the end choose inflation because it is the less painful option for the largest number of its citizens. I am hopeful central banks will be effective in preventing runaway inflation. But it is going to be a long, bumpy journey until the destination becomes clear. This equity market is best for long-term investors who can withstand extended volatility. Day traders beware: chaos is here to stay for the foreseeable future." Unfortunately, we are far less optimistic that the very same central bankers who have blundered in virtually everything, will succeed this one time. But, for the sake of the status quo, one can hope...

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Lesson to be learned - never be a small investor!

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We have now entered the fifth year of this Fourth Turning Crisis. George Washington and his troops were barely holding on at Valley Forge during the fifth year of the American Revolution Fourth Turning. By year five of the Civil War Fourth Turning 700,000 Americans were dead, the South left in ruins, a President assassinated and a military victory attained that felt like defeat. By the fifth year of the Great Depression/World War II Fourth Turning, FDR’s New Deal was in place and Adolf Hitler had been democratically elected and was formulating big plans for his Third Reich. The insight from prior Fourth Turnings that applies to 2012 is that things will not improve. They call it a Crisis because the risk of calamity is constant. There is zero percent chance that 2012 will result in a recovery and return to normalcy. Not one of the issues that caused our economic collapse has been solved. The “solutions” implemented since 2008 have exacerbated the problems of debt, civic decay and global disorder. The choices we make as a nation in 2012 will determine the future course of this Fourth Turning. If we fail in our duty, this Fourth Turning could go catastrophically wrong. I pray we choose wisely. Have a great 2012.

A REAL “black swan event” - an event that deviates by 180 degrees from what is “normally expected” - would be a political debate over root causes and basic principles. The great merit of Ron Paul - and the great service he is giving to his own and every other nation - is the fact that he is doing everything he can to raise the debate to that level. That makes Dr Paul a unique politician, a man who tells people what most of them DON’T want to hear or understand. Or at least they don’t think they want to understand it. Dr Paul’s great and merited attractiveness to a growing number of admirers has a very simple source. He is that rarest of creatures - a FREE man. He is beholden to nobody. He has developed his ideas and his convictions over a long and fruitful life of independent thinking. He does not compromise. He homes in on the fundamental issue and principle of any political issue and serves it up without salt or other “seasoning”. He says what he means and he means what he says. He is the living embodiment of the “dream” that most Americans have long since given up on as they saw it slip further and further beyond their grasp.