Preserve and Protect: Mapping The Tipping Points

[sandwind]

Apparent synthetic wealth has artificially and temporarily been created through the production of paper. Whether Federal Reserve IOU notes (the dollar) or guaranteed certificates of confiscation (treasury notes & bonds), it needs to never be forgotten that these are paper. It is not wealth. It is someone else’s obligation to deliver that wealth to the holder of the paper based on what that paper is felt to be worth when the obligation is required to be surrendered. It must never be forgotten that fiat paper is only a counter party obligation to deliver. Will they? Unfortunately, since fiat paper is no longer a store of value, it is recklessly being created to solve political problems. What you will inevitably receive will be only be a fraction of the value of what you originally surrendered.

In the chart above, we see that just when the exponential expansion seemed to have run its course during the dotcom bubble implosion, we subsequently accelerated even faster. Cheap central bank money; the unregulated, off-shore, off-balance sheet increase in securitization products; a $617T derivatives market; and the domination of the credit producing Shadow Banking system then took us to even greater levels. Bubble after bubble continues to propel us, as more recently the Bond Bubble replaced the Real Estate bubble. Similar to trees not growing to the sky, something always happens which creates a tipping point, a moment of instability or a critical phase transition. Suddenly what worked no longer works.

http://www.zerohedge.com/article/gue...tipping-points

[Rajiv]

Re: Preserve and Protect: Mapping The Tipping Points

The original - PRESERVE & PROTECT - Mapping the Tipping Points

Well worth posting in its entireity

The economic news has turned decidedly negative globally and a sense of ‘quiet before the storm’ permeates the financial headlines. Arcane subjects such as a Hindenburg Omen now make mainline news. The retail investor continues to flee the equity markets and in concert with the institutional players relentlessly pile into the perceived safety of yield instruments, though they are outrageously expensive by any proven measure. Like trying to buy a pump during a storm flood, people are apparently willing to pay any price. As a sailor, it feels like the ominous period where the crew is fastening down the hatches and preparing for the squall that is clearly on the horizon. Few crew mates are talking as everyone is checking preparations for any eventuality. Are you prepared?

What if this is not a squall but a tropical storm, or even a hurricane? Unlike sailors, the financial markets do not have the forecasting technology for protection against such a possibility. Good sailors before today’s technology advancements avoided this possibility through the use of almanacs, shrewd observation of the climate and common sense. It appears to this old salt that all three are missing in today’s financial community.

Looking through the misty haze though, I can see the following clearly looming on the horizon.

Since President Nixon took the US off the Gold standard in 1971, the increase in global fiat currency has been nothing short of breathtaking. It has grown unchecked and inevitably has become unhinged from world industrial production and the historical creators of real tangible wealth.

Do you believe trees grow to the sky?

Or, is it you believe you are smart enough to get out before this graph crashes?

Apparent synthetic wealth has artificially and temporarily been created through the production of paper. Whether Federal Reserve IOU notes (the dollar) or guaranteed certificates of confiscation (treasury notes & bonds), it needs to never be forgotten that these are paper. It is not wealth. It is someone else’s obligation to deliver that wealth to the holder of the paper based on what that paper is felt to be worth when the obligation is required to be surrendered. It must never be forgotten that fiat paper is only a counter party obligation to deliver. Will they? Unfortunately, since fiat paper is no longer a store of value, it is recklessly being created to solve political problems. What you will inevitably receive will be only be a fraction of the value of what you originally surrendered.

In the chart above, we see that just when the exponential expansion seemed to have run its course during the dotcom bubble implosion, we subsequently accelerated even faster. Cheap central bank money; the unregulated, off-shore, off-balance sheet increase in securitization products; a $617T derivatives market; and the domination of the credit producing Shadow Banking system then took us to even greater levels. Bubble after bubble continues to propel us, as more recently the Bond Bubble replaced the Real Estate bubble. Similar to trees not growing to the sky, something always happens which creates a tipping point, a moment of instability or a critical phase transition. Suddenly what worked no longer works.

I have written extensively in a series entitled “Sultans of Swap” and another series entitled “Extend & Pretend” the growing and clearly evident tipping points that are unquestionably now on the horizon. You can ignore them at your peril, but when the storm swells hit, don’t say you were never warned and no one saw this coming.

Consolidating the trends and distortions outlined in these two series, we arrive at the following ‘large brush’ death spiral leading to a failure of fiat based currency regimes. Click all charts below to enlarge them.

The above cycle is well supported by recent and still unfolding developments. These have been mapped onto the cycle.

MAPPING THE TIPPING POINTS

Let’s now list the Tipping Points which have become abundantly evident over the last few years and which are continuously expanded on our web site Tipping Points. We track each of these on a daily basis on the site. The rankings shown below, though they do shift, we have found to stay relatively stable on a quarterly basis. Each Tipping Point has the capability of individually being a catalyst to advance the sector marked in red above.

TIPPING POINT CHARACTERIZATION RANKING

CHRONIC UNEMPLOYMENT	Historic Unemployment rates in G7
US STATE & LOCAL GOVERNMENT	Unprecedented budget shortfalls & funding problems
BOND BUBBLE	Historically high Bond Prices
RISK REVERSAL	Historic level of financial market participation and dependency (i.e. pension entitlements)
COMMERCIAL REAL ESTATE	Market Values are down 45 - 55% with little write downs as of yet being taken by banks, insurance or financial holders.
RESIDENTIAL REAL ESTATE – PHASE II	Shadow Inventory, Strategic Defaults, Looming OptionARMS ‘python’, LTV levels.
CENTRAL & EASTERN EUROPE	The Sub Price of Europe – Level of borrowing in non sovereign currency (EU loans)
PENSION – ENTITLEMENT CRISIS	Unfunded Pension Liabilities - > $100T in US
SOVEREIGN DEBT - PIIGS	Insolvency and Inability to stimulate economies
EU BANKING CRISIS	Bank Ratios of 50:1 and toxic debt on and off the balance sheet
US BANKING CRISIS II	Deferred accounted write-downs for Real Estate, Commercial Real Estate & HELOCS
IRAN NUCLEAR THREAT	Israeli attack on Iran - Middle East escalation
FINANCIAL CRISIS PROGRAMS EXPIRATION	Withdrawal of Financial Crisis Triage Programs and interest rate normalization
FINANCE & INSUR. BALANCE SHEET WRITE-OFFS	Accounting for Commercial Real Estate market values, loan loss reserves
RISING INTEREST RATES	Reversal in Interest rate and impact on government financing budgets
NATURAL DISASTER	Presently: Gulf Oil Spill Economic fallout and possible hurricane impact
PUBLIC POLICY MISCUES	Impact of Obamacare, Dodd-Frank Bill and others in reaction to present environment.
JAPAN DEBT DEFLATION SPIRAL	Ability for Japan to continue to fund national debt with shifting demographic patterns.
CREDIT CONTRACTION II	Bankruptcy & Mal-Investment Catalyst
US FISCAL, TRADE AND ACCOUNT IMBALANCES	Inability of the US to finance imbalances
NORTH & SOUTH KOREA	Geo-Political tensions - Escalating
CHINA BUBBLE	Real Estate & speculative growth bubbles
GOVERNMENT BACKSTOP INSURANCE	Fannie, Freddie, Ginnie, FHA, FDIC, Pension Guarantee backstop funding.
CORPORATE BANKRUPTCIES	Reverse Gearing & margin pressures
SLOWING RETAIL & CONSUMER SALES	Impact of slowing consumer sales and increasing savings rate on 70% consumption US Economy
PUBLIC SENTIMENT & CONFIDENCE	Growing social unrest and public rage
US RESERVE CURRENCY	Emergence of alternative solutions such as SDRs. Inflationary repatriation impact
SHRINKING REVENUE GROWTH RATE	Slowing Corporate Top-Line revenue growth rates
US DOLLAR WEAKNESS	Domestic Inflationary Pressures
GLOBAL OUTPUT GAP	Global Overcapacity & Underutilization
OIL PRICE PRESSURES	Shortages, Peak Oil & Asian Growth demand.
FOOD PRICE PRESSURES	Production shortages, distribution break-downs with growing Asian demand
US STOCK MARKET VALUATIONS	Over-Valuation and unrealistic earnings estimates.
PANDEMIC	Unknown black swan
TERRORIST EVENT	Unknown black swan

SEQUENCE & TIMEFRAMES

We can never be sure of the sequence and time frame of any particular Tipping Point. Like a house of cards you never know which one, or what movement will precisely bring the house of cards down. What you know however, is that it will happen – you just need to be patient and prepared. Unfortunately few have the patience or think they can time it for even more profit. The greatest trader of all time, Jesse Livermore, wrote after a life time of trading, that his best gains were made when “he bought right and sat tight!”

Our current analysis on Tipping Points reflects the following:

DETERMINING MORE GRANULARITY – We are in the 2010-2011 Transition Phase

In my articles EXTEND & PRETEND: A Guide to the Road Ahead and EXTEND & PRETEND: A Matter of National Security I outlined even more granularity to the virtuous cycle turning vicious spiral.

We can now overlay the Tipping Points onto this map. We arrive at the following.

A – EXIT FROM ECONOMIC CRISIS STAGE

· Commercial Real Estate – Finally forced to account properly for mark-to market valuations.
· Housing Real Estate – Option ARMS come due and FHA / FNM / FDE / FDIC are seen as insolvent.
· Corporate Bankruptcies – Unfunded Pension impacts and debt loads (gearing) on reduced revenues.
· State, City & Local Government Financial Implosion – Non Accrued Pension Obligations, falling tax revenue and years of accounting gimmicks come home to roost.
· Central & Eastern Europe – The ‘sub-prime’ of Europe will soon erupt on the EU banking network as evidenced recently by Hungary and the Baltic States.

TRANSITION:

HIGHER INTEREST RATES

Significantly Increasing Interest Rates – A Major Global News Focus

A $5T Quantitative Easing (QE II) Emergency Action

It will likely be triggered by a geo-political event or false flag operation.

B – ENTER POLITICAL CRISIS STAGE
· Entitlement Crisis - The unfunded and underfunded Pension charade ends
· Credit Contraction II – Credit Shrinks Violently
· Banking Crisis II – Banking Insolvency no longer able to be hidden through Extend & Pretend.
· Reduced Rating Levels - Falling Asset Values and Collateral Calls on $430T Interest Rate Swaps
· Government Back-Stopped Programs - FHA, Fannie Mae, Freddie MA, FDIC go bust

C - HITTING ‘MATURITY WALL’ STAGE
· Lending ‘Roll-Over’ – Game Ends

CONCLUSION

A recent Zero Hedge contributing author summarized the current environment nicely:

"There is an entrenched insolvency problem in the United States, and a picture is worth a thousand words. Insolvency is not illiquidity; insolvency is about income that can’t service debt burden. Notice where things fall off the cliff: I believe we are getting close to this point. Just need a catalyst. Sequential bond auction failures here, a sovereign default there, massive liquidity drain all around, worse… whatever. The fumes running the engine (QE, or credit easing) are dwindling."

There is an old sailor’s saying:

Red sky at night, sailors delight.

Red sky in the morning, sailors take warning!

Every morning the next batch of economic numbers is released and the indications are consistently red. Of course the market initially drops, and then miraculously rises on no volume. Since 2007 we have potentially constructed the largest head and shoulders topping formation we have ever seen.

This doesn’t mean the markets are imminently headed down. What it does mean is you should be meticulously battening down your financial hatches and checking your options for every eventuality.

“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” – Mark Twain

[dummass]

Re: Preserve and Protect: Mapping The Tipping Points

Somebody want to take a stab at where we are in this diagram?.

[Rajiv]

Re: Preserve and Protect: Mapping The Tipping Points

Somebody want to take a stab at where we are in this diagram?.

Gordon Long says right before he puts in the picture

"There is an entrenched insolvency problem in the United States, and a picture is worth a thousand words. Insolvency is not illiquidity; insolvency is about income that can’t service debt burden. Notice where things fall off the cliff: I believe we are getting close to this point. Just need a catalyst. Sequential bond auction failures here, a sovereign default there, massive liquidity drain all around, worse… whatever. The fumes running the engine (QE, or credit easing) are dwindling."

[dummass]

Re: Preserve and Protect: Mapping The Tipping Points

Gordon Long says right before he puts in the picture

Not trying to sound like Mega, but haven't we been waiting for those things to happen for a while? Bond auction failure, ya right! With the Fed's announced buying, hardly. Sovereign default, LOL, not in Euro land with the ECB and the IMF rolling out new programs daily. Massive liquidity drain, get real. I'll take the opposite bet.

No, I'd put us squarely on the left side of the diagram.

[Starving Steve]

Re: Preserve and Protect: Mapping The Tipping Points

But the rub is that QE never ends. They just keep shovelling money into circulation any way they can, even by monetizing debt and faking the markets for debt. Real asset prices slowly go up simply because the central banks (Bernanke and his friends) can not allow any de-flation in anything. This is a slow trip to bankruptcy through inflation in everything, especially in the prices of what you need: food, energy, water, and shelter.

Even when I was a child, I noticed that inflation was forgiving to everyone. It was intoxicating. All kinds of bad behaviour and mal-investment would be bailed-out through inflation. Even government would be bailed-out through inflation. The party might go on forever, or at least until people starved. But inflation gave people jobs, so how could they ever starve?

My first inflation shock was when all of the silver dollars dis-appeared from circulation in America in 1962. The second inflation shock was LBJ and his Vietnam War escalation, even after promising everyone peace. My third inflation shock was when silver coins began to dis-appear, as if by magic. All of America's silver coins vanished from circulation in about one month. My fourth inflation shock was when prices of homes inflated upward to the stars. And then I figured it out....... ( I was the slow-learner. )

There is no de-flation ahead, only endless inflation courtesy of the central banks of the world. The central banks want inflation forever, but not hyper-inflation. They want to maintain the illusion of price stability, forever. It is a control thing, and the central banks want control of the world's economy.

I am still learning: Recently, paper money is no longer a store of value in a retirement portfolio. Everything except for gold is losing value in real terms, even after dividends. That's a shocker! Another shocker is that government data is now questionable, on everything. I've never seen that before, at least not to this degree.

Another shocker: There are no good stocks. Everything is going down. Everything stinks.

The political unrest is just about to begin in Canada and America.

[Rajiv]

Re: Preserve and Protect: Mapping The Tipping Points

Not trying to sound like Mega, but haven't we been waiting for those things to happen for a while? Bond auction failure, ya right! With the Fed's announced buying, hardly. Sovereign default, LOL, not in Euro land with the ECB and the IMF rolling out new programs daily. Massive liquidity drain, get real. I'll take the opposite bet.

No, I'd put us squarely on the left side of the diagram.

I would tend to agree with you. Gordon Long has some good analysiis, but he has still not figured out MMT. He still thinks of money in a traditional way. In MMT, bonds have no impact on the capability of a sovereign government to create and destroy money at will.

A primer on Modern Monetary Theory (MMT)

[ken]

Re: Preserve and Protect: Mapping The Tipping Points

When should we sell gold? When interest rates start rising? So, inflation will support housing prices? So, it's a good idea to take out a mortgage, especially if you have collateral, because it will be inflated away in dollar terms?

I really need to plan to get out of precious metals...anyone out there have a plan? How about a discussion of when to sell here on Itulip?

When employment starts rising? Won't that happen after interest rates have peaked? Are interest rates going to control, and decrease the price of gold?

Ken

[Jeff]

Re: Preserve and Protect: Mapping The Tipping Points

Ken

The problem with selling gold is this: what the hell do you buy with the proceeds? I believe that a very important step in learning to think like an economist, or rather, to think intelligently about economics, is learning to think about the price of things in other things, rather than just in the local fiat currency du jour. Eric likes to ask, "What's that cost in oil?"

It's not enough that I bought gold at somewhere just over $300 an ounce in the mid-to-late 1990's. What's more important is the price I paid in the currency of WorldCom (WCOM) shares that I sold to buy it. WorldCom was around US$55.00, so I paid just under 7 shares of WCOM per ounce of gold. I bought those shares of WCOM (presplits, etc.) for for about US$0.01 per share in 1995, so an ounce then would have cost about 30,000 shares of WCOM. The current number of WorldCom shares required to buy an ounce of gold is infinite.

Paying 7 of anything for something that would cost you 30,000 of anything a few years earlier is probably a wise buy.

My point is that the price of gold has had a good run, and gold remains a good store of value to hold onto. "Selling" gold just means you'll be left hanging onto something less desirable, like US dollars. Move your gold from an imaginary pile labelled "investments" and move it to one labelled "store of value". That way, you can feel good about riding the price of gold up, and confident that you are in a sensible store of value. There's no finish line when we get to add up our results and compare what happened with our investment plan, 'cuz this is all real life, and it all just keeps happening. No pause button. No time outs.

Jeff

[grapejelly]

Re: Preserve and Protect: Mapping The Tipping Points

sell gold when gold hits the cover of Forbes/Fortune/Time magazine, and "everyone" is into gold.

Or sell when you can buy one "unit" of the Dow for an ounce of gold.

[sandwind]

Re: Preserve and Protect: Mapping The Tipping Points

Or sell when you can buy one "unit" of the Dow for an ounce of gold.

I am thinking about starting to sell at 3 "units" for one once and unload all at 2. Maybe I am a chicken