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1 August 2013 Edition Restricted & Confidential

Copyright 2012 Gordon T. Long All Rights Reserved [email protected]

THE GLOBALIZATION TRAP

Slowing Growth Triggering the Trap

GLOBAL MACRO - Regional Update

GLOBAL MACRO TIPPING POINTS - AUGUST 2013

7/22/2013

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2August 2013 Edition Restricted & ConfidentialCopyright 2012 Gordon T. Long All Rights Reserved [email protected]

THE GLOBALIZATION TRAP

Slowing Growth Triggering the Trap.

GLOBAL MACRO TIPPING POINTS - AUGUST 2013

TIPPING POINTS ...................................................................................................................... 14

GLOBALMACRO:RISKASSESSMENT .................................................................................................................................................... 14

SITUATIONAL ANALYSIS .................................................................................................................................................... 14POSITIONAL FRAMEWORK: "WE ARE HERE!"....................................................................................................................................................... 14Q2 2013 DEVELOPMENTS TO WATCH..................................................................................................................................................................... 15GLOBAL THEMES - A STRUCTURAL BACKDROP FOR STRATEGY................................................................................................................. 24GLOBAL TRENDS - NATIONAL INTELLIGENCE COUNCIL ................................................................................................................................... 26A BROKEN PONZI SCHEME - BOSTON CONSULTING GROUP.......................................................................................................................... 28RISK CONTINUUM......................................................................................................................................................................................................... 30

MACRO MONITORING INSTITUTIONS ............................................................................................................................... 31

WEF (WORLD ECONOMIC FORUM -JANUARY 2013) ............................................................................................................................................ 31The 17 Biggest Risks To Our Hyper-Connected World.............................................................................................................................................. 31IMF (INTERNATIONAL MONETARY FUND - APRIL 2013) ...................................................................................................................................... 46Policymakers Should Address Old Financial Risks, Meet New Challenges ............................................................................................................ 46Credit Default Swaps on Government Debt Are Effective Gauge ............................................................................................................................. 47Extended Period of Low Interest Rates Can Rekindle Financial Risks .................................................................................................................... 49OECD (ORGANIZATION FOR ECONOMIC COOPERATION & DEVELOPMENT) .............................................................................................. 66MAPLECROFT (SCANNING THE GLOBE) ................................................................................................................................................................ 68

GLOBAL RISK SIGNALS ...................................................................................................................................................... 70RISK - COLLAPSING PETRODOLLAR FOUNDATION............................................................................................................................................ 72RISK - GLOBAL DEBT 313% of GDP.......................................................................................................................................................................... 75RISK - 202M GLOBALLY UNEMPLOYED................................................................................................................................................................... 76RISK - SIGNS APLENTY, BUT NO ONE PANICKING - YET!.................................................................................................................................. 77RISK - CANARIES SINGING AGAIN........................................................................................................................................................................... 79RISK - COMPLACENCY & REPRESSED FEAR........................................................................................................................................................ 80RISK - TIED TO EU IN 2012......................................................................................................................................................................................... 81RISK - GLOBAL DERIVATIVE COLLATERAL ............................................................................................................................................................ 82RISK - GLOBAL RISK MATRIX..................................................................................................................................................................................... 84RISK - GLOBAL MACRO HEADWINDS / TAILWINDS .............................................................................................................................................. 84RISK - FOOD A GROWING GLOBAL INFLATION & SOCIAL UNREST RISK...................................................................................................... 86RISK - INCREASINGLY DYSFUNCTIONAL CAPITALS MARKETS ....................................................................................................................... 91

RISK - GLOBAL RISK REWARD .......................................................................................................................................... 93RISK - RISING GEO-POLITICAL EVENT RISK.......................................................................................................................................................... 94

GLOBALMACRO:RISKLEVELS .................................................................................................................................................... ............ 98

AGGREGATED GLOBAL FINANCIAL RISK INDEX .............................................................................................................. 98BANKING RISK - LIBOR-OIS SPREAD (Updated) .................................................................................................................................................... 99BANKING RISK - TED SPREAD (Updated) ................................................................................................................................................................ 99CREDIT RISK - GLOBAL CREDIT DEFAULT SWAPS (Updated) ........................................................................................................................ 100CREDIT RISK - EU CREDIT DEFAULT SWAPS (Updated) ................................................................................................................................... 100CONSUMER RISK - HOUSING - RATE OF CHANGE (Reference) ...................................................................................................................... 101ECONOMIC RISK - ECRI LEADING INDEX (Updated) ........................................................................................................................................... 102INFLATION RISK - MONEY SUPPLY GROWTH - M3 (Updated) .......................................................................................................................... 103INFLATION RISK - MONEY VELOCITY (Updated) .................................................................................................................................................. 104MONETARY RISK - BANK LIABILITIES (Updated) ................................................................................................................................................. 105COST OF MONEY RISK - INTEREST RATES (Updated)...................................................................................................................................... 105

AGGREGATED RISK LEVEL .............................................................................................................................................. 106

TIPPINGPOINTS:CHANGES................................................................................................................................................................ .... 108

TIPPING POINT MAPPING: 2013 UPDATE ........................................................................................................................ 108

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TIPPINGPOINTS:TOP5FOCUS-FEBRUARY 2013 .......................................................................................................................... 117

I - RISK REVERSAL............................................................................................................................................................ 117II - JAPAN DEBT DEFLATION ............................................................................................................................................ 120III-BOND BUBBLE .............................................................................................................................................................. 123IV - EU BANKING CRISIS ................................................................................................................................................... 123

V - SOVEREIGN DEBT ....................................................................................................................................................... 124VI - CHINA HARD LANDING ............................................................................................................................................... 126

DRIVER$:RISK-ON-RISK-OFFANALYTICS......................................................................................................................................... 131

1- G10 MACRO SURPRISE INDEX .................................................................................................................................... 1342- CUMULATIVE GLOBAL PMI ........................................................................................................................................... 1383- SLOWING GLOBAL EXPORTS ...................................................................................................................................... 1444- US NON-REVOLVING CONSUMER CREDIT ................................................................................................................. 1485- IBES' RELATIVE GLOBAL PE RATIOS .......................................................................................................................... 1516- CONSENSUS EARNINGS ESTIMATES - Sell Side Analysts .......................................................................................... 1587- INFLATION PRESSURES - Global Food Prices.............................................................................................................. 160

GLOBAL MACRO ................................................................................................................... 163

GLOBALMACRO:ECONOMICOUTLOOK ............................................................................................................................................. 165

GLOBAL OUTLOOK - EM Crisis Will make the 1997 Asian Crisis Seem Like an Early Warning.......................................... 165GLOBAL OUTLOOK - Global Deleveraging Accelerating and Developing Nations Feeling the Pain .................................... 167GLOBAL OUTLOOK - Problems Erupting Everywhere (Signs of Implosion) ........................................................................ 169GLOBAL OUTLOOK - Credit Fueled Globalization in Retreat .............................................................................................. 172GLOBAL OUTLOOK - Rogoff's Sovereign Debt Default Levels ........................................................................................... 175GLOBAL OUTLOOK - Fiscal Adjustments Required............................................................................................................ 178GLOBAL OUTLOOK - Imbalances Continue to Increase Along With Financial Fragility ....................................................... 178GLOBAL OUTLOOK - A 67 Million Jobs Gap ...................................................................................................................... 181GLOBAL OUTLOOK - Center of Global Manufacturing Confirmed to be Shifting Away from developed Countries .............. 184GLOBAL OUTLOOK - Mercantilist China the Clear Winner Globally, Mercantilist Germany Regionally ............................... 185

ECONOMIC CUTS .............................................................................................................................................................. 187OECD CUTS ECONOMIC OUTLOOK....................................................................................................................................................................... 187IMF CUTS ECONOMIC OUTLOOK............................................................................................................................................................................ 190

ECONOMIC WARNINGS .................................................................................................................................................... 201IMF WARNS - May 2013 .............................................................................................................................................................................................. 201BIS WARNS - June 2013 ............................................................................................................................................................................................. 207WORLD BANK WARNS - June 2013 ......................................................................................................................................................................... 214

GLOBALMACRO:INDICATORS ............................................................................................................................................................ ... 218

GLOBAL CREDIT ............................................................................................................................................................... 218CREDIT CYCLE - HY Leading the Way..................................................................................................................................................................... 218CREDIT CYCLE - Reversal Ahead............................................................................................................................................................................. 221

GLOBAL GROWTH............................................................................................................................................................. 224GLOBAL GROWTH - PMI Barely Above Stagnation ................................................................................................................................................ 224GLOBAL GROWTH - Chinese Slowing moves to CONTRACTION....................................................................................................................... 227GLOBAL GROWTH - Slowing Global Economies .................................................................................................................................................... 228GLOBAL GROWTH - Global GDP Growth Trending Down by Region and Cumulatively................................................................................... 229GLOBAL GROWTH - Global PMI............................................................................................................................................................................... 229GLOBAL GROWTH - Global Recession .................................................................................................................................................................... 232GLOBAL GROWTH - Slowing Global Growth - Air Cargo Shipments................................................................................................................... 233

GOBAL UNEMPLOYMENT ................................................................................................................................................. 234GLOBAL UNEMPLOYMENT - The Beginnings of the Welfare Myth Unwind........................................................................................................ 234GLOBAL UNEMPLOYMENT - The Unsustainable Welfare Myth ........................................................................................................................... 236GLOBAL UNEMPLOYMENT - Global Financial Sector Job Cuts ........................................................................................................................... 238GLOBAL UNEMPLOYMENT - Global Unemployment Rising -Now 202 Million .................................................................................................. 240

GLOBAL TRENDS .............................................................................................................................................................. 242BRANDS & COMMODITIES: Tell the Global Story.................................................................................................................................................. 242

GLOBAL SENTIMENT ........................................................................................................................................................ 253GLOBAL SENTIMENT - Complacent......................................................................................................................................................................... 254GLOBAL SENTIMENT - Nielsen's Global Consumer Confidence, Concerns & Spending Intentions ............................................................... 255

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GLOBAL INFLATION .......................................................................................................................................................... 266GLOBAL INFLATION - Food Prices, Driver of Social Unrest.................................................................................................................................. 266GLOBAL INFLATION - Food Price Manipulation in Thailand.................................................................................................................................. 267

GLOBALMACRO:MONETARYPOLICY&CENTRALBANKING ........................................................................................................ 268The "OMF" Trial Balloon Raised .......................................................................................................................................... 268

OPMF - A Reversing Wealth Effect May Force OPMF & Global Abenomics ........................................................................................................ 269OPMF - Financial Times: Martin Wolf - "The Case For Helicopter Money" ........................................................................................................... 270OPMF - Financial Times: Martin Wolf - "The Case To Reset Basis of Monetary Policy"..................................................................................... 273OPMF - Financial Times: Gavyn Davies On Why Helicopters Are Dangerous ..................................................................................................... 274OPMF - A Conundrum for the World's Central Bankers ........................................................................................................................................... 277

GLOBAL CENTRAL BANKING ........................................................................................................................................... 279CENTRAL BANKS - Austerity Now Officially Dead Public Policy........................................................................................................................... 279CENTRAL BANKS - They are the Market.................................................................................................................................................................. 279CENTRAL BANKS - The longer QE persists, the greater the magnitude of the left-tail event & a Minsky Trap ............................................. 282CENTRAL BANKS - We May Have Reached a Risk-Off Leverage Pivot.............................................................................................................. 283CENTRAL BANKS - The Macro Landscape .............................................................................................................................................................. 285CENTRAL BANKS - A Serious Shortage of Quality Collateral - A $10T US Problem Over 10 Years ................................................................ 286CENTRAL BANKS - Global Balance Sheet Expansion ............................................................................................................................................ 288CENTRAL BANKS - Where Do these Deflators Come From? ................................................................................................................................ 292

CENTRAL BANKS - First Remove Gold Standard, Now Remove Debt................................................................................................................. 293

EMERGING MARKETS ...................................................................................................................................................... 297

EMERGING MARKETS - The Impact of "TAPER"................................................................................................................................................... 297

BOE - UK ............................................................................................................................................................................ 301UK - Mark Carney and "Flexible Inflation Targeting"................................................................................................................................................ 301

FED - US............................................................................................................................................................................. 302US - FOMC January Minutes Un-Nerve Markets ...................................................................................................................................................... 302US - Congress Asks Bernanke For Full Risk Analysis On Fed's Soaring Balance Sheet.................................................................................... 303

BOJ - JAPAN ...................................................................................................................................................................... 307JAPAN - Some Policies Have Clearly Hit the Limit................................................................................................................................................... 307JAPAN - Foreshadows Next Global Crisis ................................................................................................................................................................. 308JAPAN - Japan's Prime Minister Shinzo Abe prepares to print money for the whole world................................................................................ 313JAPAN - Shinzo Abes Monetary-Policy Delusions ................................................................................................................................................... 314JAPAN - BOJ Governor Job Suddenly Available in Historical "Abenomics U-Turn"............................................................................................. 317JAPAN - Japanese Economic Policy Goes The Full Ponzi...................................................................................................................................... 318

ECB - EU ............................................................................................................................................................................ 320EU - Japan Will Effectively Monetize European Debt............................................................................................................................................... 320EU - TARGET-2 Imbalances - "The Debt Crisis Is Eating Its Way Ever Further Into Europe's Core"................................................................ 320EU - Draghi Will Soon Be Forced to Start Printing - Again!..................................................................................................................................... 322

GEO-POLITICALTENSIONS ................................................................................................................................................................ ..... 326

GLOBAL BOND SCARE ..................................................................................................................................................... 326BOND SCARE - Volatility and Instability Increase Risk........................................................................................................................................... 326BOND SCARE - Inflation Expectations Contributing to Volatility ............................................................................................................................ 328BOND SCARE - The Financial Times Headlines Tell An Interesting Story ........................................................................................................... 329BOND SCARE - A LONG Supply and Demand Problem BUT Heavy SHORT Demand..................................................................................... 330BOND SCARE - Long Term Support Trendline Achieved........................................................................................................................................ 331BOND SCARE - Retail Investors Running for the Exit............................................................................................................................................. 332

CHINA LIQUIDITY TIGHTENING SCARE ........................................................................................................................... 334CHINA LIQUIDITY - Housing Bubble Restricting PBOC Actions ............................................................................................................................ 334CHINA LIQUIDITY - PBOC Squeezing Banks towards Reducing Speculative Risk............................................................................................. 337CHINA LIQUIDITY - Overnight Repo at 25% ............................................................................................................................................................ 338CHINA LIQUIDITY - Red Flags ................................................................................................................................................................................... 339CHINA LIQUIDITY - Credit Fueled Growth ................................................................................................................................................................ 341CHINA LIQUIDITY - Shadow Banking System Showing Signs of Implosion ......................................................................................................... 346CHINA LIQUIDITY - PBOC Wants to Hold the Line on Explosive Credit Expansion through A Liquidity Squeeze .......................................... 349CHINA LIQUDITY - Potentially De-Stabilizing Cash Crunch ................................................................................................................................... 351CHINA LIQUIDITY - Chinese Liquidity Pump Unplugged........................................................................................................................................ 352

CURRENCY WARS BECOMING RATE WARS .................................................................................................................. 354

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CURRENCY WARS - A Major Shift............................................................................................................................................................................ 354BATTLEFIELD - Combatants & Belligerents ............................................................................................................................................................. 358BATTLEFIIELD - The Race to Debase ....................................................................................................................................................................... 359JAPAN - The Destabilizing Agent............................................................................................................................................................................... 361EUROPE - Euro Exposed............................................................................................................................................................................................ 361ARGENTINA - Here we Go Again!.............................................................................................................................................................................. 363VENEZUELLA - Bad Situation..................................................................................................................................................................................... 364BRAZIL - No One Wants to Listen .............................................................................................................................................................................. 364SWITZERLAND - No Choice ....................................................................................................................................................................................... 364SINGAPORE - Hot Money........................................................................................................................................................................................... 365UK- Pound Joins War................................................................................................................................................................................................... 366

CYBER WARS - GROWING THREAT ................................................................................................................................ 367SECURITY-SURVEILLANCE COMPLEX - NSA Whistleblower Example: Booz Hamilton ................................................................................. 367SECURITY SURVEILLANCE COMPLEX - Growing Without Public Control or Supervision!.............................................................................. 369

IRAN & SYRIA - COMPLETE MIDDLE EAST DOMINATION .............................................................................................. 370MIDDLE EAST - Watch Out for a "False Flag" or "Covert" Activity Event.............................................................................................................. 370MIDDLE EAST - Who Is Threatening Who Here? .................................................................................................................................................... 371

REGIONAL ............................................................................................................................... 373

EUROSIS -A Terminal Disease ........................................................................................................................................ 373RESEARCH WE FOLLOWED THIS MONTH........................................................................................................................................................... 373RESEARCH OF PARTICULAR IMPORTANCE........................................................................................................................................................ 374RESEARCH - EFSF Downgraded to AA+.................................................................................................................................................................. 374RESEARCH - EU Stabilization Programs Are Presently Very Fragile .................................................................................................................... 375RESEARCH - Spreads Widened in Peripherals and Significantly in Portugal and Greece ................................................................................. 378

PROGNOSIS: Why the European Situation Will Get Worse ................................................................................................................................... 380PROGNOSIS: Increasing Structural Imbalances ...................................................................................................................................................... 383PROGNOSIS: $22T Unaccounted - A Hidden World of Contingent Liabilities, Government Backing & Guarantees. ................................... 385PROGNOSIS: Monetary Malpractice - ECB's LTRO Not a Solution but................................................................................................................ 389PROGNOSIS: Monetary Malpractice - ECB's SMP Effort Futile ............................................................................................................................. 392PROGNOSIS: Monetary Malpractice - ECB Accepts BBB Collateral..................................................................................................................... 394PROGNOSIS: EU Banking Overbanked, Undercapitalized and Now Insolvent.................................................................................................... 395PROGNOSIS: Monetary Malpractice - TARGET2 "Contingent Liabilities"............................................................................................................. 396PROGNOSIS: Bailouts - Unsustainable & Unfundable ............................................................................................................................................ 402

MEDICAL CHARTS -Situation Critical ............................................................................................................................... 404CHARTS- EU Real Rates ........................................................................................................................................................................................... 404CHARTS - EU -NON Euro Members GDP RELIANCE............................................................................................................................................ 405CHARTS - EU GLOBAL GDP GROWTH CONTRIBUTION.................................................................................................................................... 406CHARTS - EU PMI........................................................................................................................................................................................................ 406CHARTS - EU CPI........................................................................................................................................................................................................ 408CHARTS - Regional Risk-Reward.............................................................................................................................................................................. 409CHARTS - Europe's "Core" Problem is France ......................................................................................................................................................... 410CHARTS - Germany's Preoccupation with Inflation is More Than It Would Seem ............................................................................................... 413CHARTS - Evidence OF Global Slowing Now Indisputable ..................................................................................................................................... 414CHARTS - EU Credit Downgrades, France and UK On Tap.................................................................................................................................. 416CHARTS - Perceived Reduction in Risk, A Temporary Aberration ......................................................................................................................... 418CHARTS - Dangerous Delusional Divergences ........................................................................................................................................................ 420CHARTS - IMF Projections for Euro Area and GIIPS ............................................................................................................................................... 421CHARTS - Air Cargo Shipments Confirm Slowing Global Growth .......................................................................................................................... 422CHARTS - Eurozone Misery Indices Never Been Higher........................................................................................................................................ 423CHARTS - Euro Currency............................................................................................................................................................................................ 425

ITALY - Budget Failure on NO Growth ................................................................................................................................ 430RESEARCH WE FOLLOWED THIS MONTH........................................................................................................................................................... 430RESEARCH OF PARTICULAR IMPORTANCE........................................................................................................................................................ 430RESEARCH - Italys Budget Failures, Weak Growth Outlook Call Debt Sustainability Into Question................................................................ 430

CHARTS OF PARTICULAR IMPORTANCE............................................................................................................................................................. 434CHARTS - ITALY - Forced Rate Cuts ........................................................................................................................................................................ 434

SITUATIONAL ASSESSEMENT................................................................................................................................................................................. 435ITALIAN ELECTION - What You Need to Know....................................................................................................................................................... 435ITALIAN ELECTION - Europe Capitulates On Austerity- Never Had The Stomach For It................................................................................... 436ITALIAN ELECTION - Message Given By the People .............................................................................................................................................. 438

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ITALIAN ELECTION - Bad Debt Continue to Soar................................................................................................................................................... 442ITALIAN ELECTION - Italians React Badly to Austerity, Elections Hardly a Surprise!......................................................................................... 444ITALIAN ELECTION - EUROPEAN FEEDBACK - #1 .............................................................................................................................................. 445ITALIAN ELECTION - EUROPEAN FEEDBACK - #2.............................................................................................................................................. 447ITALIAN ELECTION - Regional Financial Cracks in Sicily ...................................................................................................................................... 450

FRANCE - Hollande Going Down for the Count ................................................................................................................... 452RESEARCH WE FOLLOWED THIS MONTH........................................................................................................................................................... 452RESEARCH OF PARTICULAR IMPORTANCE....................................................................................................................................................... 453RESEARCH - France Loses its Coveted and NEEDED AAA Rating..................................................................................................................... 453

CHARTS OF PARTICULAR IMPORTANCE............................................................................................................................................................. 455CHARTS - FRANCE - GDP......................................................................................................................................................................................... 455CHARTS - FRANCE - UNEMPLOYMENT................................................................................................................................................................. 456CHARTS - FRANCE - BUDGET DEFICIT................................................................................................................................................................. 457CHARTS - FRANCE - TAX versus GDP.................................................................................................................................................................... 458CHARTS - FRANCE - BUSINESS CONFIDENCE................................................................................................................................................... 459

SITUATIONAL ASSESSMENT................................................................................................................................................................................... 460FRANCE - What You Need to Know.......................................................................................................................................................................... 460FRANCE - Key Indicators ............................................................................................................................................................................................ 461FRANCE: Sharpest Drop in Private Sector Output in Four Years ........................................................................................................................... 464FRANCE - Quits on Austerity - Never a Doubt This Would Happen ....................................................................................................................... 467

FRANCE - Socialism is Expensive.............................................................................................................................................................................. 468

FRANCE - Has Turned back to Socialism ................................................................................................................................................................. 470FRANCE - Losing Its Way through Political Illusions and Lies ................................................................................................................................ 471FRANCE - Uncompetitive ............................................................................................................................................................................................ 472FRANCE - Titan Tire Calls Out French Labor........................................................................................................................................................... 474FRANCE - France Responds to Titan Tire ................................................................................................................................................................. 476FRANCE - What Happens In France When Companies Fire People ..................................................................................................................... 478FRANCE - Hollande's Economically Insane campaign Promise ............................................................................................................................. 479

GERMANY - EU in the Hands Of Election ........................................................................................................................... 480RESEARCH WE FOLLOWED THIS MONTH........................................................................................................................................................... 480RESEARCH OF PARTICULAR IMPORTANCE........................................................................................................................................................ 480RESEARCH - Europe's Shadow Economy: As Big As Germany............................................................................................................................ 480

CHARTS OF PARTICULAR IMPORTANCE............................................................................................................................................................. 483CHARTS - GERMANY - Inflation ................................................................................................................................................................................ 483CHARTS - GERMANY - IFO Investor Confidence .................................................................................................................................................... 483CHARTS - GERMANY - ZEW Expectations .............................................................................................................................................................. 484

SITUATIONAL ASSESSEMENT................................................................................................................................................................................. 486GERMANY - Anti Euro AfD Party May Cost Merkel in Critical September Election ............................................................................................. 487GERMANY - The Euro Crisis Escalation over Cyprus May Politically Cripple Merkel.......................................................................................... 488GERMANY - Call for End of "Coercive Euro Association"....................................................................................................................................... 490

IBERIAN PENINSULA - Spain & Portugal Going Critical ..................................................................................................... 492RESEARCH WE FOLLOWED THIS MONTH........................................................................................................................................................... 492RESEARCH OF PARTICULAR IMPORTANCE........................................................................................................................................................ 493RESEARCH - Presidential Warning Spikes Yields To 8 Months Highs ................................................................................................................. 493RESEARCH - Clear Signs of Desperation In Spain from a Growing Collateral Contagion .................................................................................. 495RESEARCH - The Spanish Government's 'Bad Bank' Scam .................................................................................................................................. 495

CHARTS OF PARTICULAR IMPORTANCE............................................................................................................................................................. 497CHARTS - PORTUGAL - Deficit Problem .................................................................................................................................................................. 497

SITUATIONAL ASSESSEMENT................................................................................................................................................................................. 498IBERIA - Credit Downgrades - At Precipice of "Non Investment Grade"................................................................................................................ 498IBERIA - Regional Bailout Bailouts a Massive Problem ........................................................................................................................................... 499IBERIA - NPL Going Ballistic....................................................................................................................................................................................... 500IBERIA - Spanish Funding Problem............................................................................................................................................................................ 501IBERIA - The Giant Spanish Housing Bubble, Now Beginning to Implode ............................................................................................................ 505IBERIA - Mal-Investment Coming Home to Roost.................................................................................................................................................... 507IBERIA - Bank Deposits Were Leaving, Now they Are Fleeing............................................................................................................................... 508IBERIA - Now a Capital Investment Problem ............................................................................................................................................................ 509IBERIA - Banks on Artificial "Ponzi Bond" Life Support............................................................................................................................................ 510

UK - New BOE Governor with More Printing Ahead ............................................................................................................ 517RESEARCH WE FOLLOWED THIS MONTH........................................................................................................................................................... 517RESEARCH OF PARTICULAR IMPORTANCE........................................................................................................................................................ 517

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RESEARCH - UK workers' wage squeeze is longest since the 1870s ................................................................................................................... 517

CHARTS OF PARTICULAR IMPORTANCE............................................................................................................................................................. 518CHARTS - UK - Crushed Disposable Income ........................................................................................................................................................... 518CHARTS - UK - BOE Balance Sheet Growth ............................................................................................................................................................ 518CHARTS - UK - Lending.............................................................................................................................................................................................. 519CHARTS - UK - Unemployment.................................................................................................................................................................................. 519CHARTS - UK - GDP - Pre and Post Recession Levels .......................................................................................................................................... 520CHARTS - UK - GDP.................................................................................................................................................................................................... 521CHARTS - UK - BOE Rates ......................................................................................................................................................................................... 521

SITUATIONAL ASSESSEMENT................................................................................................................................................................................. 522UK - What you need to Know...................................................................................................................................................................................... 522UK - Joins Currency War - Down 8% YTD ............................................................................................................................................................. 523UK - Specter of Stagflation Haunts UK....................................................................................................................................................................... 524UK - Public Policy turns Against Austerity and PM Cameron .................................................................................................................................. 525UK - Doomsday Debt Machine .................................................................................................................................................................................... 526UK - QE Extension Coming......................................................................................................................................................................................... 529UK - Small Business Credit Squeeze Now Acute - Loan Rejections Rising......................................................................................................... 531UK - Technically in a Depression ................................................................................................................................................................................ 532

CYRPUS - Latest EU Banking Crisis ................................................................................................................................... 535CYRPUS - What you Need To Know.......................................................................................................................................................................... 535

CYRPUS - Basic Situational Charts............................................................................................................................................................................ 536

CYPRUS - Crumbling Property Rights ....................................................................................................................................................................... 538CYPRUS - Plan D Supersedes Plan C and B as Time running Out....................................................................................................................... 542CYPRUS - Forgetting About Contract Law, Private Property Rights and Due Process ....................................................................................... 545CYPRUS - Russian Tax Haven ................................................................................................................................................................................... 546CYPRUS - Plan B as Bad As Plan A .......................................................................................................................................................................... 547CYPRUS - Breaks Public Trust and Incites the Politics of Germany Dictating Terms .......................................................................................... 548CYPRUS - Does Anyone Care How a Capitalist System (versus a Crony Capitalist System) is Supposed to Work? ..................................... 554CYPRUS - Criminal "Confidence Game" Payouts to Everyone at the Tax Payers Expense ............................................................................... 555CYPRUS - Cyprus Pushes EU Banking Crisis Back Near the Edge ..................................................................................................................... 557

ASIA-SERIOUS CRACKS BELOW THESURFACE.......................................................................................................................................... 558

CHINA - Credit Tightening Panic Averted - Temporarily? .................................................................................................... 558RESEARCH WE FOLLOWED THIS MONTH........................................................................................................................................................... 558

CHARTS OF PARTICULAR IMPORTANCE............................................................................................................................................................. 559

CHARTS - CHINA - PMI............................................................................................................................................................................................... 559CHARTS - CHINA - PMI-2.......................................................................................................................................................................................... 560CHARTS - CHINA - GDP............................................................................................................................................................................................. 561CHARTS - CHINA - INDUSTRIAL OUTPUT............................................................................................................................................................. 562CHARTS - CHINA - Urban Fixed Asset Investment................................................................................................................................................. 563CHARTS - CHINA - RETAIL SALES .......................................................................................................................................................................... 564

RESEARCH OF PARTICULAR IMPORTANCE........................................................................................................................................................ 565RESEARCH - Investors Worried and Losing Confidence ....................................................................................................................................... 565RESEARCH - China Stampeding into Gold............................................................................................................................................................... 566RESEARCH - China "Will introduce some measures to arrest the slowdown of growth in the next couple of quarters"................................. 568RESEARCH - Slower Growth In the Cards & Endorsed by New Chinese Leadership ......................................................................................... 569RESEARCH - Is a PBOC Controlled Speculation Bust Possible or Will It Get Out of Control ............................................................................ 570RESEARCH - PBOC Liquidity Squeeze ..................................................................................................................................................................... 571RESEARCH - Chinese Housing Bubble Restricting PBOC Actions ....................................................................................................................... 573RESEARCH - PBOC Squeezing Banks towards Reducing Speculative Risk....................................................................................................... 575RESEARCH - Chinese Overnight Repo at 25% ........................................................................................................................................................ 577RESEARCH - Red Flags.............................................................................................................................................................................................. 578RESEARCH - Credit Fueled Growth in China ........................................................................................................................................................... 580RESEARCH- PBOC Wants to Hold the Line on Explosive Credit Expansion through A Liquidity Squeeze ...................................................... 585RESEARCH - A Potentially De-Stabilizing Cash Crunch ......................................................................................................................................... 587

SITUATIONAL ANALYSIS ........................................................................................................................................................................................... 588CHINA SHADOW BANKING - Shadow Banking System Showing Signs of Implosion ........................................................................................ 590CHINA SHADOW BANKING - Shadow Banking and Credit Growth ...................................................................................................................... 593CHINA SHADOW BANKING - The US Sub-Prime / CDO All Over Again ............................................................................................................. 596CHINA SHADOW BANKING - Report........................................................................................................................................................................ 600CHINA SHADOW BANKING - Situation..................................................................................................................................................................... 601CHINA RESERVES - Distorted Foreign Reserve Levels ......................................................................................................................................... 602CHINA RESERVES - Declining Reserve Accumulation ........................................................................................................................................... 604CHINA RESERVES - Has Caught the Gold Bug big time!....................................................................................................................................... 606

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CHINA CURRENCY WARS - Hot Money into China................................................................................................................................................ 608CHINA - Withdraws Liquidity....................................................................................................................................................................................... 609CHINA - Socit General Sees a Likely Soft Landing!............................................................................................................................................. 611CHINA - True Debt is Orders of Magnitude More than Officially Being Reported................................................................................................. 619CHINA - Evidence OF Slowing Now Indisputable ..................................................................................................................................................... 622CHINA - PMI Improvement.......................................................................................................................................................................................... 623CHINA - Political Transition & Ongoing Emergence as a Super Power................................................................................................................. 626CHINA - An Implicit Social Contract............................................................................................................................................................................ 628CHINA - Manipulated Statistics due to Upcoming Decade Long Regime Change ............................................................................................... 630CHINA - Increasing Leverage is China's Way of Monetary Easing........................................................................................................................ 631CHINA - Possible Interest-Rate Liberalization ........................................................................................................................................................... 632CHINA - Global Impact of China's Slowdown ............................................................................................................................................................ 633CHINA - Shanghai Composite at 2008 Low Levels .................................................................................................................................................. 635CHINA - Shanghai Composite Warnings Signs......................................................................................................................................................... 636CHINA - Credit to GDP................................................................................................................................................................................................. 638CHINA - A Slow Recovery Through 2013 .................................................................................................................................................................. 639CHINA - Manufacturing PMI in Contraction Territory................................................................................................................................................ 641

JAPAN: The New Currency War Front ................................................................................................................................ 644RESEARCH WE FOLLOWED THIS MONTH........................................................................................................................................................... 644RESEARCH OF PARTICULAR IMPORTANCE........................................................................................................................................................ 644RESEARCH - Japanese Structural Problems a "Canary" for Western Developed Economies........................................................................... 644RESEARCH - Shinzo Abe Hasn't the Stomach for the Heavy Lifting Needed to Accompany ABE-nomics. ..................................................... 647RESEARCH - A Credit Squeeze Leads Deflationary Leg Down............................................................................................................................ 649RESEARCH - Some Japanese Policies Have Clearly Hit the Limit........................................................................................................................ 650RESEARCH - The ABE (Asset Bubble Evaluator) Index......................................................................................................................................... 652

CHARTS OF PARTICULAR IMPORTANCE............................................................................................................................................................. 653CHARTS - JAPAN - GDP Resurgence ....................................................................................................................................................................... 653CHARTS - JAPAN - BOJ Balance Sheet................................................................................................................................................................... 654

SITUATIONAL ASSESSEMENT................................................................................................................................................................................. 655JAPAN - What You Need to Know.............................................................................................................................................................................. 657JAPAN - Regional Risk-Reward.................................................................................................................................................................................. 659JAPAN - Now the Frontrunner of Outright Monetization. ......................................................................................................................................... 660JAPAN - Yen Devaluation ............................................................................................................................................................................................ 661JAPAN - New Bank of Japan Policy - 2% Inflation in 2 Years ................................................................................................................................. 662JAPAN - Appoints BOJ Governor Firmly Committed to Printing Money................................................................................................................. 664JAPAN - Third Straight Quarter of Recession ........................................................................................................................................................... 665JAPAN - Full Out War on Deflation ............................................................................................................................................................................. 665JAPAN - First Test of the new found dominance of the Central Banks............................................................................................................... 667

JAPAN - BOJ Was Next Up. No Surprise.................................................................................................................................................................. 669

JAPAN - Negative Current Account Balance and -3.5% Recession ....................................................................................................................... 671JAPAN - A 50% Over-Valued Yen Has Undermined Self Confidence & Drive ...................................................................................................... 674JAPAN - Proves QE's Low Cost of Capital Does Structural Damage to Economy............................................................................................... 676JAPAN - BOJ Being Pressured to "Rip-Up Government Debt"1 ............................................................................................................................. 678JAPAN - Easy Money Has Hurt Corporate Profitability in the Longer Term .......................................................................................................... 684JAPAN - The Biggest Debtor with the Biggest Problem!.......................................................................................................................................... 687JAPAN - A Magnitude Larger Problem than Europe................................................................................................................................................. 691JAPAN - QE 9 A Complete Failure - Actually "Tightens" versus It's Intended Easing.......................................................................................... 697JAPAN - Japanese Yen Continuously Under Attack............................................................................................................................................... 701JAPAN - Vast foreign US$ Coming Home for "Claim".............................................................................................................................................. 702JAPAN - PMI Breakdown............................................................................................................................................................................................ 703JAPAN - Exports Continue To Tumble ....................................................................................................................................................................... 705JAPAN - Intervention Fails Again - It's a Whole new Ball Game ............................................................................................................................. 706JAPAN - First Signs of Massive Debt Monetization After Next Election ................................................................................................................. 709JAPAN - Japan to the ESM's Rescue........................................................................................................................................................................ 709

EMERGINGMARKETS-SYNCHRONIZED MARKETS ................................................................................................................................. 711

RESEARCH WE FOLLOWED THIS MONTH........................................................................................................................................................... 711RESEARCH OF PARTICULAR IMPORTANCE........................................................................................................................................................ 711

EMERGING MARKETS - Stunning Withdrawals ...................................................................................................................................................... 711EMERGING MARKETS - Bond Outflows Accelerating............................................................................................................................................ 712EMERGING MARKETS - This will make the 1997 Asian Crisis Seem Like an Early Warning ........................................................................... 714EMERGING MARKETS - Developing Nations Feeling the Pain of Global Deleveraging Acceleration .............................................................. 716EMERGING MARKETS - The Impact of "TAPER"................................................................................................................................................... 718

CHARTS OF PARTICULAR IMPORTANCE............................................................................................................................................................. 722CHARTS - Reserves versus World............................................................................................................................................................................. 722CHARTS - Current Account Balances versus GDP.................................................................................................................................................. 723CHARTS - Emerging Markets Index versus MSCI World Index.............................................................................................................................. 724

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CHARTS - SINGAPORE - Inflation ............................................................................................................................................................................. 725CHARTS - SINGAPORE - Exports ............................................................................................................................................................................. 726CHARTS - SOUTH KOREA ......................................................................................................................................................................................... 727CHARTS - TURKEY - Spreads ................................................................................................................................................................................... 728

SITUATIONAL ASSESSEMENT................................................................................................................................................................................. 729EMERGING MARKETS - What you Need to Know.................................................................................................................................................. 729EMERGING MARKETS - Comparative Ease of Doing Business ............................................................................................................................ 731EMERGING MARKETS - Importance of Employment, Equality and Per Capital Income .................................................................................... 732

ASIA................................................................................................................................................................................................................................ 735ASIA: CHARTS - AUSTRALIA .................................................................................................................................................................................... 736ASIA - Regional Risk-Reward...................................................................................................................................................................................... 737ASIA - Corporate Debt Levels Reflect Unintended Consequences of Mispricing & Malinvestment................................................................... 738ASIA - Synchronized Markets...................................................................................................................................................................................... 743ASIA - Caution Advised Regarding Positive South Korea Export Turnaround...................................................................................................... 745ASIA - Export Growth Looks Similar to Pre-2008...................................................................................................................................................... 746ASIA - Global Slowing Quickly a Worsening Situation Across Asia ........................................................................................................................ 747ASIA - Risks All on the Downside for Asia ................................................................................................................................................................. 748ASIA - Demographic Headwinds ................................................................................................................................................................................. 750ASIA - Pronounced Flight to Singapore Safety......................................................................................................................................................... 751

BRICS............................................................................................................................................................................................................................. 753BRICS - A Development Bank-Forex Reserve Pool-African Integration ................................................................................................................ 753

BRICS - 40% of World Population and 25% of World GDP..................................................................................................................................... 754BRICS - $3 to $13B GDP in Ten Years ...................................................................................................................................................................... 757BRICS- A World Wide Distrust of Financial Markets Building ................................................................................................................................. 759BRAZIL - Inflation will remain high thanks to a "growth mismatch". ...................................................................................................................... 761RUSSIA - Central bank will hike rates if inflation and oil prices continue to rise. .................................................................................................. 762INDIA - Inflation ............................................................................................................................................................................................................. 763INDIA - Will be fine as long as it continues to reduce its deficit. .............................................................................................................................. 764INDIA - Watch Out For RE-Emergence of Food Price Inflation ............................................................................................................................... 765

US ECONOMY ......................................................................................................................... 767

THEGLOBALMACROOVERLAY ................................................................................................................................................... .......... 768

MACRO POSITIONING: US Macro Data Plunges Most In 10 Months ................................................................................. 768MACRO POSITIONING: US Macro Surprise Index Goes Negative ..................................................................................... 770MACRO POSITIONING: Nielsen's Global Survey - "Consumers Grappling With Economic Concerns" ............................... 771MACRO POSITIONING: Credit Fueled Globalization in Retreat .......................................................................................... 773

MACRO POSITIONING: Executives Report Deteriorating Economic Environment .............................................................. 776MACRO POSITIONING: A Serious Global Slowdown Underway ........................................................................................ 779PROSPERITY AT RISK: Harvard Strategy Study Spells Out US Problem ........................................................................... 783

USINVESTMENTCYCLE................................................................................................................................................................. .......... 787

GORD'S BIG PICTURE ECONOMIC CYCLE ...................................................................................................................... 787ECONOMIC INDICATORS .................................................................................................................................................. 788

MONTHLY INDICATORS OF NOTE.......................................................................................................................................................................... 788

THE CURRENT BUSINESS CYCLE - SITUATIONAL ANALYSIS ....................................................................................... 792BUSINESS CYCLE - JOBS > CONFIDENCE > CONSUMPTION > GROWTH CYCLE ....................................................... 792

BUSINESS CYCLE - JOBS ................................................................................................................................................. 793JOBS: Participation Rate at 1979 Carter Levels ....................................................................................................................................................... 799BRIDGING : Jobs to Confidence & Sentiment.......................................................................................................................................................... 801

BUSINESS CYCLE - CONSUMER & BUSINESS SENTIMENT .......................................................................................... 804

SENTIMENT: Consumer, Investor & Trader............................................................................................................................................................. 805

Consumer Sentiment - Michigan ................................................................................................................................................................................. 808Consumer Comfort........................................................................................................................................................................................................ 809Investors Intelligence .................................................................................................................................................................................................... 810American Association of Independent Investors ....................................................................................................................................................... 810National Association of Active Investment Managers (NAAIM) ............................................................................................................................... 811Small Business Optimism ............................................................................................................................................................................................ 812SENTIMENT: Morgan Stanley's Business Conditions Index................................................................................................................................... 813SENTIMENT: Widening Gulf Between Consumer & Business ................................................................................................................................ 815BUSINESS CONDITIONS: Weakening Over the Last

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