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Posted: February 28, 2011 in Finance, Stock Market

2011 Tipping Points

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.


We need to carefully watch:

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;

Today, the Federal Reserve is the buyer of first resort in a crisis

….. and every day for that matter”


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