2011 Tipping Points

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Throughout my 2010 article series "Extend & Pretend" and "Sultans of Swap" I stressed that we were rapidly moving from the Financial Crisis of 2008, through the Economic Fallout of 2009 -2010, towards a Political Crisis in 2011 -2012. We are now clearly beginning to see the early emergence of the final part of this continuum. From North Africa to Wisconsin all are fundamentally based on the single insidious underlying problem - excessive global debt and credit levels.

The global macroeconomic environment appears to be rapidly unraveling. The situations in North Africa through the Middle East are blatant proof of social unrest and accelerating political instability. Food shortages and inflation pressures are now driving people into the streets. When you feel the hunger in your stomach and see it in the eyes of your children, it quickly erupts and motivates people to action.

It is now time to revisit our Tipping Points framework to see where this is leading. A framework that is clearly pointing to a global fiat currency failure and an emerging new world order which is detailed in our "2011 Thesis - Beggar-thy-Neighbor".

Our Tipping Points which are outlined below are adjusted continuously based on daily news flow analysis. Through a proprietary 'Process of Abstraction' news is tracked and consolidated around these potentially critical flash points.

		IS	WAS	Diff.
SOVEREIGN DEBT - PIIGS	Insolvency and Inability to stimulate economies	1	1	Same
EU BANKING CRISIS	Bank Ratios of 50:1 and toxic debt on and off the balance sheet	2	2	Same
RISK REVERSAL	Historic level of financial market participation and dependency (i.e. pension entitlements)	3	5	+2
US STATE & LOCAL GOVERNMENT	Unprecedented budget shortfalls & funding problems	4	4	Same
FOOD PRICE PRESSURES	Production shortages, distribution break-downs with growing Asian demand	5	15	+10
RISING INFLATION PRESSURES & INTEREST RATES	Reversal in Interest rate and impact on government financing budgets	6	14	+8
SOCIAL UNREST	Public rallies, protests and rioting against the government.	7		NEW
CHRONIC UNEMPLOYMENT	Historic Unemployment rates in G7	8	9	+1
CHINA BUBBLE	Real Estate & speculative bubbles	9	22	+13

GEO-POLITICAL EVENT	A sovereign country overthrow, rebellion or insurrection	10		NEW
RESIDENTIAL REAL ESTATE – PHASE II	Shadow Inventory, Strategic Defaults, Looming Option ARMS ‘python’, LTV levels.	11	6	-5
COMMERCIAL REAL ESTATE	Market Values are down 45 - 55% with little write downs as of yet being taken by banks, insurance or financial holders.	12	7	-5
PUBLIC POLICY MISCUES	Impact of Obamacare, Dodd-Frank Bill and others in reaction to present environment.	13	13	Same
OIL PRICE PRESSURES	Shortages, Peak Oil & Asian Growth demand.	14	30	+16
BOND BUBBLE	Historically high Bond Prices	15	3	-12
PENSION – ENTITLEMENT CRISIS	Unfunded Pension Liabilities - > $100T in US	16	11	-5
CENTRAL & EASTERN EUROPE	The Sub Price of Europe – Level of borrowing in non sovereign currency (EU loans)	17	8	-9
US BANKING CRISIS II	Deferred accounted write-downs for Real Estate, Commercial Real Estate & HELOCS	18	10	-8

CREDIT CONTRACTION II	Bankruptcy & Mal-Investment Catalyst	19	18	-1
JAPAN DEBT DEFLATION SPIRAL	Ability for Japan to continue to fund national debt with shifting demographic patterns.	20	18	-2
FINANCE & INSUR. BALANCE SHEET WRITE-OFFS	Accounting for Commercial Real Estate market values, loan loss reserves	21	17	-4
US STOCK MARKET VALUATIONS	Over-Valuation and unrealistic earnings estimates.	22	16	-6
GOVERNMENT BACKSTOP INSURANCE	Fannie, Freddie, Ginnie, FHA, FDIC, Pension Guarantee backstop funding.	23	23	SAME

SHRINKING REVENUE GROWTH RATE	Slowing Corporate Top-Line revenue growth rates	24	27	+3
GLOBAL OUTPUT GAP	Global Overcapacity & Underutilization	25	29	+4
US DOLLAR WEAKNESS	Domestic Inflationary Pressures	26	28	+2
US RESERVE CURRENCY	Emergence of alternative solutions such as SDRs. Inflationary repatriation impact	27	20	-7
PUBLIC SENTIMENT & CONFIDENCE	Growing social unrest and public rage	28	26	-2
SLOWING RETAIL & CONSUMER SALES	Impact of slowing consumer sales and increasing savings rate on 70% consumption US Economy	29	25	-4
NORTH & SOUTH KOREA	Geo-Political tensions - Escalating	30	12	-18
US FISCAL, TRADE AND ACCOUNT IMBALANCES	Inability of the US to finance imbalances	31	21	-10

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
IRAN NUCLEAR THREAT	Israeli attack on Iran - Middle East escalation	35	33	-2
NATURAL PHYSICAL DISASTER	Presently: Gulf Oil Spill Economic fallout and possible hurricane impact	36	31	-5
PANDEMIC /EPIDEMIC	Unknown black swan	37	32	-5

The Tectonic Shifts from 2007 to 2013 are best shown in the following illustration which is closely tracking our expectations and projections from the early stage of the financial crisis.

1) The increasing & accelerated contagion of social tensions. Watch for Asia demonstrations in places such as North Korea.

2) How and if the Central Banks actually do unwind their crisis ‘triage’ programs or are they realistically now permanent and necessary to maintain the illusion of financial stability?

3) New government public policy initiatives to combat growing inflation and price pressures

4) The financial sectors abilities to continue to hide massive nonperforming commercial and residential real estate loans through Federal Reserve endorsed accounting gimmickry.

These events will allow us to determine if our roadmap is still valid or if we are going to see even sooner and possibly poorer financial outcomes than we predict in our free Monthly Market Commentary and Market Analytics reports.

The public will soon wake up to the magnitude of money printing that is going on to support the economic recovery fallacy. When the public does become aware, “Money Velocity” will accelerate. When this happens, the likelihood is that the markets will dramatically rise, not because economic conditions are improving, but rather because of a depreciating US dollar. We believe this expectation is presently being priced into the market. We are truly exposed to the potential of a “Minsky Melt-Up” or more correctly from an Austrian perspective, a Von Mises “Crack-up Boom”.

The risks are presently towards a SHORT TERM corrective consolidation. The Intermediate Term calls for higher market highs into June 2011 - then it gets ugly - fast!

“The Federal Reserve historically was the lender of last resort in a crisis;

Mr. Long is a former senior group executive with IBM & Motorola, a principle in a high tech public start-up and founder of a private venture capital fund. He is presently involved in private equity placements internationally along with proprietary trading involving the development & application of Chaos Theory and Mandelbrot Generator algorithms.

Gordon T Long is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. Of course, he recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, you are encouraged to confirm the facts on your own before making important investment commitments.

© Copyright 2010 Gordon T Long. The information herein was obtained from sources which Mr. Long believes reliable, but he does not guarantee its accuracy. None of the information, advertisements, website links, or any opinions expressed constitutes a solicitation of the purchase or sale of any securities or commodities. Please note that Mr. Long may already have invested or may from time to time invest in securities that are recommended or otherwise covered on this website. Mr. Long does not intend to disclose the extent of any current holdings or future transactions with respect to any particular security. You should consider this possibility before investing in any security based upon statements and information contained in any report, post, comment or recommendation you receive from him.


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