• corruption in the business class that tries to hide much of its income from tax collectors,
• corruption in the administrative machinery that distributes government goodies to the poor, and
• above all in the political class that seeks to build great personal wealth while in office after spending a lot to provide free goodies to gain political office.

•  A recent analysis of government survey data by economists at the University of British Columbia found that the wage gap between other castes and Dalits has decreased to 21 percent, down from 36 percent in 1983, less than the gap between white male and black male workers in the United States. The education gap has been halved.

• Why does money run out of India in every crisis and why does money run into America in every crisis?

• “It was my Mother-in-law Indira Gandhi who nationalized India's Banks. That is what protected India from the global economic crisis”.

• Think back to a comment by an Indian General just before the 1991 Gulf War.  The Iraqi Army of Saddam Hussein was trained by officers of the Indian Army. This General was quoted as saying that the Iraqis would give "a good account of themselves" in the war.  We all know what happened. The Iraqi Army, the fourth largest in the world, was destroyed in a week. The "Shock & Awe" of American military technology converted the huge Iraqi Army into a helpless flock of sitting ducks.

• We like “expert” Guests, TV Anchors or TV Shows IF they make us money or at least IF we would have made money had we listening to them. In this context, we include “not losing money” or “saving capital” in our definition of making money. We like them more if they reveal an insight we would not have observed ourselves. And we adore Simplicity.

Our prior winners for the Most Useful Financial Guest Award are:

• David Tepper – 2010
• Meredith Whitney – 2009

Frankly, these two were in a zone in their respective years. It is hard to stay in a zone in any business. It is especially difficult to do so in the complex, turbulent, ever changing investing game. Take Meredith Whitney. She was prescient in 2009 but blew up in 2011 with her Muni defaults call.

• CNBC Fast Money - 2010
• CNBC Squawk Box - 2009

• Friday January 14 in a Bloomberg phone interview – "If we break to lower yields thanks to weak economic data, then we should see a pretty good rally in the 10-year…As this correction to the downside is unfolding in the weeks ahead, Treasuries will be the best performer..."
  
• Wednesday, January 19 on CNBC Strategy Session - "High yields are at the richest level in history vs Treasuries."
  
• Wednesday March 9 on CNBC Strategy Session – "It is time to ring the register in risk assets…the US is a debt-clogged economy, credit card debt & public debts have been rung up and deflation is always around the corner...I think in the short term, meaning from now until labor day, we are going to make the most money in long term government bonds....Emerging Market Equities are topped out in a very convincing way..." .
• Tuesday, May 24 on CNBC Strategy Session – "I kinda think we are looking at some sort of echo of the credit crisis coming up here. That's what I am afraid of.... I really do believe that we are looking at the beginning of a repricing lower in risk assets..."
  
• Thursday, June 30 on CNBC Strategy Session – "I still look for further markdowns in credit...we are holding cash in anticipation of cheaper prices in credit……"
• Monday August 8 on CNBC Strategy Session – "I just think the [US] downgrade is outright silly…I hate Bank of America ..It’s a freight train…Get off the tracks. The momentum towards lower prices of Banks is overpowering at this point. BofA – don’t own stock and their bonds…"
• Tuesday October 4 on CNBC Strategy Session – "...high yield bonds were two standard deviations rich... in March-April and now you are one & half standard deviations cheap…you should not sell bonds to buy equities ever...there is a huge loss emanating out of Europe …means avoid Europe , avoid banks…no investments there at all..."

• Add the most money-making value to viewers,
• Provide insight that is not readily available elsewhere, 
• Keep it simple & profound.

No other show consistently performed to these high standards this year. Others may disagree. In fact, CNBC Fast Money, the 2010 winner, might argue that they did this too. And they might be right to an extent. But CNBC Fast Money has a narrow mission and a narrow time horizon. What they tell you on one day becomes obsolete in a couple of weeks and this year, even in a couple of days.

In contrast, the investments of most individual investors are Slow Money and their investment horizon is medium term. For such viewers, for such monies, CNBC Strategy Session did a heroic job in 2011. Look at the evidence:

• Content - Guests: Jeffrey Gundlach won the Macro Viewpoints Most Useful Guest of 2011 Award. His recommendations were simple and profound. Kyle Bass, another regular guest, provided insight about the European Debt Crisis better than just about any other guest on FinTV. The show brought in smart and relatively new guests like Steven Walsh who discussed the broken state of major bond markets. David Faber, the show's co-anchor, made it his mission to bring in veteran investment guests that are not ordinarily seen on FinTV.
  
• Content - Topics: The show made it a point to discuss markets like Municipal Bonds, High Yield Bonds as well as a broader range of investment themes. This was a major departure from Old CNBC which was all about which mutual funds or stocks to buy and hold for ever. David Faber and Gary Kaminsky, the co-anchors, made it their mission to differentiate the show by its content.
  
• Making Money for Viewers: Gary Kaminsky gave very valuable and timely advice to individual investors. He made it a point to focus on the need for income of American Families and how that should become a secular investment theme. He stood up and told viewers to buy Municipal bonds during a vicious sell-off in the first quarter. That sell-off was partly due to a vociferous call by Meredith Whitney about massive defaults to come in the muni space. Kaminksy vehemently disagreed and told viewers why. His public stand was a courageous call, not the type FinTV anchors make or get right. Viewers who listened to Gary Kaminsky are probably in a festive mood right now. This was simple, direct stuff, the sort that later gets to be called profound.
  

• This week, our featured clips are all mega bearish. Will this prove to be another contrary signal for the stock market next week? 

• Tom DeMark: $SPX will likely trade thru 10/27 high of 1284 next 7-8 days and then top out 1313-1340. Caveat: if no 1284 by 12/31 problem.

• VXO is what we really concentrate upon, it is getting very close to a bottom..two more lower closes in that volatility index, could identify a bottom and typically anywhere from 2-7 days later, the markets top

• we see a market possible tending a Trap

• The $SPX chart is confined by two trend lines. A breakout through either trend line should propel a sizable move in the same direction. Currently, the breadth indicators are on buy signals. $VIX has been divergently bullish for some time now. ... In summary, the test of resistance is taking place now. We should know fairly soon whether or not it is successful. If so, bullish positions can be taken.

• ...We still expect a bear market to unfold - one that will be far more severe than what we've seen in the last few months (although perhaps not so volatile). It is likely that the next bear market will take out the 2009 lows, thereby souring an entire generation (or two) on stock ownership for much of their lives - as it happened with investors in the 1930's.

• Meanwhile, global long-only equity redemptions of $23bn in past 5 weeks means we move very close to a "buy" signal for equities.

• Our trading rule us flashing a tactical "buy" signal....Our backtesting shows that MSCI ACWI, on average, rallies 6% in the subsequent 3-4 weeks.....The rule last gave a "buy" signal on Aug 9, 2011, coinciding with the first trough in global equities after big 16% sell-off in Jul-Aug. ACWI rallied 4% in the subsequent 3 weeks before taking another leg down to the Oct 4 trough.

• EM saw big $4.3bn outflows (6 straight weeks of outflows and strongest since Aug'11); alas our EM trading rule remains in neutral territory 

• Ultra low, zero-bounded central bank policy rates might in fact de-lever instead of relever the financial system, creating contraction instead of expansion in the real economy. Just as Newtonian physics breaks down and Einsteinian concepts prevail at the speed of light, so too might easy money policies fail to stimulate at the zero bound.

• Fed chairman Ben Bernanke blames policy rate increases in the midst of the 1930s for an economic relapse, and a lack of credit expansion for Japan’s lost decades 60 years later. But all central banks should commonsensically question whether ultra-cheap money continually creates expansions as opposed to destroying liquidity, delevering and obstructing recovery. Gresham as opposed to Keynes may become the applicable economist of this new day.

• People who are looking for an explosion in bond yields on a better economy are thinking that somehow the world is still in 1995, where we have moderate economic growth, low inflation, stable tax policy and people getting along.

• It [the Euro] was the most heroic example of co-operation but the co-operation was on paper and it was lip service, because the countries started to violate the requirements – the fiscal requirements – of their own treaty almost immediately.

•  He thinks the next currency crisis will hit the British Pound due to massive money printing by Britain. Britain is isolated and has no gold.
•  He is positive on the Euro and on Gold. He thinks by the end of the first quarter of 2012, Deflation will be a reality in Europe. This will move the ECB to print money because deflation violates its mandate of price stability. But Europe has 10,000 tons of gold and so the Euro would be fine. Gold will of course be the big beneficiary.
• He thinks China is in trouble and would set the peg at a lower level to the dollar. This, he thinks, will be the trigger for the US Fed to launch QE3.
• He thinks the US is in a depression which began in 2007 and will last until 2014. But the US is the Saudi Arabia of Gold and so the US $ will be OK.

1. Tom DeMark on Bloomberg TV's Street Smart on Thursday, December 22
2. Megan Greene on CMC Markets on Monday, December 19
3. Robert Shiller on The Motley Fool on Friday, December 23

• Tom DeMark - $SPX will likely trade through 10/27 high of 1284 next 7-8 days and then top out 1313-1340. Caveat : if no 1284 by 12/31 problem

• Johnson - Two weeks ago, you came on on air and said you need to buy S&P 500. It is going higher - 1313-1340.  You also thought it was going to happen by 12/21, yesterday. Didn't happen. What do you think about the S&P right now?
• DeMark - Its difficult..it is difficult to define when a particular top or bottom is going to occur unless you use a model and the model we use has not spoken unfortunately. It is still directing us to the upside. We are currently at the same price level we were on the December 5th day and the market still looks like it could go higher...If someone were perfect, then obviously the business would be no fun.
• Johnson - As I recall, you were trying to extrapolate - you had said the previous 3 upwards moves in the S&P were 17-21 days and based upon your model, you thought that December 21st would be the peak. You were extrapolating, is that right?
• DeMark - that's right. Just for simplicity's sake, the rally of the August 9th low was 16 trading days, the rally off the October low was 17 trading days, so just for simplicity's sake, I said this one would probably be 17 days = December 21. Actually, you got the seasonal pull through the first week in January..you got a lot of other factors that hinted the market should go higher and it has. Usually when a market makes a top as it did back in first week in December, it does correct less than 5.56%, and rallies again. Typically, that peak is taken out and our models are still telling us the upside the direction to follow the market.
• Johnson - you have also made the comment to me that we have to get through the high from October 27th, I believe it was 1284, and then you believe you are looking for 4-5 successively higher closes - that is still part of your thinking?
• DeMark - Still active - what I am looking for - there is some confusion from prior two times I was on the air - the October 27th high close is very critical, once we exceed that..if we do that October 27th..close, we must record 3 successively higher closes and that will fulfill the requirements of our model to identify the market top - it is the same model we used for the August 9th low and the October 4th low, it might possibly be 4 closes but we are running against the beat the clock right now..I think we got may be 8 more days, the VXO is what we really concentrate upon, it is getting very close to a bottom..two more lower closes in that volatility index, could identify a bottom and typically anywhere from 2-7 days later, the markets top...so by the end of the first week of January, we should have accomplished what I am looking for..which is 3 successively higher closes over that October 27th close ..

• The latest forecast will expire by the end of the first week of January if it doesn’t come true, Market Studies’s Roderick E. Bentley said in an e-mail. 

• DeMark - I tell you, it doesn't look good. We have applied our model which are called Sequential and Combo, for primarily the markets, but also for have applications for economic indicators as well as politics..If you apply our model to the jobless indicator, you can see in 2006 it was a low bid and subsequently the jobless claims went up.. it peaked in 2009 and the market bottomed...currently we are at a low again, that doesn't bode well for the market....

• We called the Gingrich top and we called the Romney bottom...it was the right to the day when the thirteens (model rank)  appeared...we are as surprised as most people are; the indicators do have some validation when they are applied to trends such as the popularity of a public politician...

• It's not at all a debt crisis any more, it started off as a public debt crisis in Greece and a private debt crisis in Spain & Ireland, a bit of both in Portugal. But it has moved way beyond that by now. It is not just a debt crisis, it is a financial crisis, a political crisis. You have a banking crisis with the Sovereigns having to prop up all the banks. So there is a sovereign-banking negative feedback loop we see. It is impossible to break that unless you address both sides and you cannot do that unless you have political unity. But of course, you have a political crisis as well. It is very difficult to draw a line under this Eurozone crisis.

• The announcements they made at the Euro summit in theory kinda address the short, medium and long term nature of the crisis.
  
• So in the short term, they announced IMF funding from the national central banks that can be used for a big bailout of Italy and Spain.
  
• In the medium term they announced they would accelerate the ESM next year from 2013 and
  
• in the long term they talk about some treaty changes. But fundamentally, none of these measures actually draws a line under the crisis.

• For the IMF bazooka for Italy and Spain, we could cobble together about 600-700 billion euros and that's enough to take Italy and Spain out of the markets for about a year and quarter, may be year and half....Some of it will come from the IMF possibly from national central banks lending to the IMF, some of it will come from the EFSF, there is 250 billion left over that has not been earmarked, and some of it will probably come from the ECB in terms of its continuing securities market purchase program. So using these different sources, you could cobble together around 600-700 billion euros.

• It would be stretching it but it wouldn't actually really help. It would kinda  delay the inevitable. So Spain and Italy both have new governments and immediately they have to implement austerity measures. And they also have to implement structural reforms.
  
• And in the short term, the austerity measures would just undermine growth.
  
• In the medium to long term, the structural reforms would help. But it would take a number of years for them to start supporting growth. So by mid 2013 at the latest, when Spain and Italy have to return to the markets, their debt dynamics are going to look even worse because their GDP would have fallen by then.  So when they have to return to the markets, I don't think investors will be anymore willing to hold their debt than they are now.
  
• So a debt restructuring is probably inevitable for both countries. But they have managed to do what they do best which is to kick the can a bit further down the road.

• Greece - The tipping point is either the Troika says you have missed the targets so many times, we are not willing to lend more money to Greece or whether it is the Greece government or the Greek people say we can't do this anymore. I think ultimately EU leaders have said that Greece is a special case, it is really going to be a model of how we deal with weaker countries in the Eurozone, and ultimately Greek government will face a choice in terms of its growth strategy -
  
• it can either continue down this road of austerity and recession/depression to regain competitiveness which will take about a decade for Greece probably and finally return to growth or
  
• it should leave the Eurozone, reissue the drachma, see a depreciation massively, regain competitiveness and return to growth -
  
• Argentina Parallel - that's not say that leaving the Eurozone is an easy choice, it will be messy and painful, but if you look at kinda the nuclear case of Argentina, the worst case scenario, Argentina defaulted and gave up the dollar peg, it returned to growth within months. It is a much faster route to growth and given that choice most weaker Eurozone governments will probably choose to leave the Eurozone.

• EU Fiscal Compact - The idea of the fiscal compact is that it is meant to be the first step towards eventual fiscal union and I think the fiscal union and Eurobonds are potentially the only game changers left in this crisis. And these are supposed to be the first steps but they are not actually fiscal union. All the fiscal compact really does is institutionalize the asymmetric adjustment going on in the Eurozone whereby it is the peripheral countries that are having to make all of the adjustments with retrenchments while the core countries don't make any adjustments at all. Gemany has been really insistent that fiscal union happen a certain way, that there is political union first and pooling of assets and finally pooling of liabilities, with Eurobonds and I think this is the right way to go about it but they needed to have started that process about years ago and now we are in middle of a crisis and they need to do things differently.

• LTRO - It doesn't deal with the problem at all. In fact, it exacerbates it, a terrifying prospect in my view. Because then you are just strengthening this banking-sovereign debt feedback loop - banks borrowing at the ECB to buy more sovereign debt-  that just makes it worse. At the end of the day, if you see cascading defaults, it will be that much messier. I am not convinced the banks will actually do that. I have spoken to a lot of banks and it seems that actually they are not interested in same sort of carry trade that they previously carried out using cheap ECB financing of sovereign debt.

• Germany - yeah, we will continue to lurch from mini-crisis to mini-crisis in this greater crisis. Unfortunately, fiscal union as I said is the only game changer and I don't think there is the political will to achieve that. I mean for there to be true fiscal union, Germany would have unlimited fiscal transfers to the weaker countries for ever. and I don't think the German government or the German people will ever be willing to accept that. I think fundamentally it will come down to the question of growth and growth is the one thing that no one has done anything to deal with.

• ECB - For the ECB to do the "right thing", they would have to step in with unlimited, unsterilized fashion for ever. If it did anything short of that, if it did in a limited way, it would basically create the equivalent of a bank run in the bond market. All of a sudden, these investors who have been trying to get rid of this debt will see there is finally a big buyer and will line up to dump what they are holding. I think the ECB could actually exacerbate things if it stepped in a limited way. And I don't think there is any chance that the ECB will step in an unlimited way.

• Binary Solution -  Full Fiscal Union or Break up of the Euro -
  
• the first country that will leave the Eurozone will be Greece, possibly as early as end of next year, they will still be running a primary deficit, I think, basically it will be like a divorce. The Troika and Greece will admit this wasn't really meant to be and I think because Greece is running a primary deficit, Greece will be frozen out of the markets if it leaves the Eurozone. The Troika will provide some kind of bridge financing to facilitate Greece's exit from the Eurozone. So, I think there is a chance it could be done in  a negotiated orderly way - like a Marshall plan for Greece - there are a lot of triggers that could switch it from orderly to disorderly - certainly events could supercede best intentions, it is possible... but I think it is in everybody's best interests to have a default and exit be as orderly as possible. So I think they will probably deal with it that way..
• Greece will become kind of a model for weaker countries. So I think Portugal won't be too far behind, and probably Ireland will end up going down the same route even thought it doesn't have to but it might choose to if no one is making their creditors whole then why would Ireland?
  
• And I think Italy and Spain are the really the big question. Ultimately, it is the same decision and it will be much more difficult to make the exit of Italy and Spain more orderly but they will definitely try. Once you have Italy and Spain leaving the euro, there is essentially no Eurozone left. and at the end of the day, monetary union is really a political choice and so if you have that many countries dropping out there will be the political will to keep this euro project running any longer.
  

• Growth in Europe - there is a laundry list of things that need to happen for this recession to bottom out next year and growth to return..
• the ECB needs to cut rates really aggressively close to zero,
  
• it needs to provide quantitative easing and credit easing, it needs to talk down the euro massively, that it depreciates to parity with the dollar, and
  
• the core countries need to provide fiscal stimulus for the peripheral countries.. the probability of each one of these things happening is pretty low and I will give you two main examples...
  
• Euro Depreciation - in terms of the Euro depreciating massively, I don't think either the US or China would allow that actually - every body now is trying to weaken their currency and so I don't think it is possible for that to happen and also you look at as things get better in the euro zone, then the Euro appreciates ..it depreciates as things get bad, it is impossible to engineer it so that things are getting better as the euro depreciates,
  
• Fiscal Stimulus from the Core - I recently attended a conference with a bunch of German CDU MPs and they had an entire panel session on austerity and Germany and I finally asked why are we talking about austerity why aren't we talking about stimulus package and they looked at me as if I had 20 heads, - absolutely not on the table whatsoever...
• German Bundesbank - if you walk into the Bundesbank, there is a trillion reichsmark note that is framed in the lobby - its a social memory at this point - but I think it is a very powerful one... but also there is a question of wage growth in Germany which if you look at the past decade, real wages really haven't risen in Germany - it has been really flat - whereas they have risen quite significantly in the rest of the Eurozone  country - so if Germany were to all of a sudden  be in favor of the ECB stepping in as a lender of last resort the Government would have to admit to its population - look you went through flat real wages for a decade which was really all for nothing...
  

• Robert Shiller - The housing boom in the early 2000s was driven by a sense that housing is a wonderful investment. And it was not informed by good history. If you look at the history of the housing market and I have taken it back to 1890, it hasn't been a good provider of capital gains - it is a provider of housing services, that's not exactly like a dividend,.... and so whether that is good or not depends on what you want - but capital gains is more of an investment aspect of housing and capital gains have not even been positive. From 1890 to 1990, real inflation directed home prices were virtually unchanged.
• Morgan House - So is that what they [homeowners] should expect going forward that their house will be giving them a place to live, it will keep up with inflation and nothing else? Is that the basic model that homeowners should think about?
• Robert Shiller - I think it is a reasonable first approximation to assume that home prices will just keep up with inflation. There is concerns that they will do something different and people are very focused on the possibility that there will be another boom which is possible. Over the ten years of one's ownership of a home, it is very hard to say what they will do. But I think we should also consider the possibility that home prices will decline in real terms over the next few decades. Why is that? well, you have to reflect on the fact that it has done it before. Home prices declined for the first half of the 20th century in real terms.
  
• Robert Shiller - Economists discussed that back then - Why are they going down? The conclusion, if there was any consensus in say 1950, was, as I interpret what  have read, of course home prices go down, there are technical progress, they are a manufactured goods, back in 1900, homes were hand made, you know, craftsman, now in 1950, we have all kinds of power tools and prefab and they are just better in 1950 than they were in 1900 and so of course home prices go down...and from that frame of reference, that is exactly what we should expect too.  It is just a manufactured good and progress is always happening. On top of that progress, there is the outmoding, the out of style factor.
• Robert Shiller - So what kinds of houses would they be building in 20 years? They may have lots of new amenities, computerized something, in some way that we can't anticipate now. People won't want these old homes. So the idea that buying a home is such a great idea is just wrong. They may very well decline in the next 30 years in real terms.

This is a period of intense turmoil in financial markets. The origin of the turmoil has been and remains the European Monetary Union. This week, the Euro broke down. It has already fallen by 12% from its summer highs. Forecasters predict another 10% decline against the dollar in the first quarter of 2012. Gold broke down as well this week.

The collateral damage is going global. Recently, the Indian Rupee fell in a steep vertical decline against the U.S. Dollar from about 44 to 53, a 20% drop. All emerging market countries are beginning to see flight of capital and loss of wealth. Stories abound of wealthy Chinese trying desperately to leave China to migrate to Vancouver, Sydney, Tampa, essentially wherever they can move with their money. China appears to be headed towards a hard landing. 

In this turmoil, the U.S. Dollar stands tall and firm, a veritable mountain of strength. This is why the U.S. Dollar gets massive inflows of capital from all over the world. This is a good thing, because financial stability demands the existence of at least one risk-free asset in the world. That is the U.S. Treasury market and underlying that is the U.S. Dollar.

If the US remains the solitary bastion of safety in a turbulent financial world, then one can see a time when a large portion of the world's capital becomes resident in the U.S. Dollar. This would be the classic case of everyone piling on one side of a large boat.

This could be when the U.S. financial system, Treasuries, Stocks & Dollar, reaches a critical stage, or the state in which the U.S. financial system becomes vulnerable to a Phase Transition in the jargon of Complexity Theory. 

This is when even a small event can begin a chain reaction within the U.S. Financial System, just like a small snowfall or a single snowflake can cause an avalanche.  

Jim Rickards describes such an avalanche, a phase transition, otherwise known as a catastrophe, in the Section titled Chaos in Chapter 11 of his book Currency Wars. 



Chaos

Mr. Rickards begins the section with:

• Perhaps the most likely outcome of the currency wars and the debasement of the dollar is a chaotic, catastrophic collapse of investor confidence resulting in emergency measures by governments to maintain some semblance of a functioning system of money, trade and investment.

• As the panic courses through Europe for the second day, all eyes slowly turn to the White House. A dollar collapse is tantamount to a loss of faith in the United States itself. The Fed and the Treasury have been overwhelmed and now only the president of the United States can recover confidence.

• ...IEEPA, passed during the Carter Administration as an updated version of the 1917 Trading with the Enemy Act. President Franklin Roosevelt had used the Trading with the Enemy Act to close banks and confiscate gold in 1933.

1. There must be a threat to the national security or the economy of the United States, and
2. the threat must originate from abroad.

• The president will appoint a bipartisan commission consisting of seasoned veterans of capital markets and "eminent economists" to study the panic and make suitable recommendations for reform within 30 days.
• All private and foreign-owned gold held in custody at the Federal Reserve Bank of New York or depositories such as the HSBC and Scotiabank vaults in New York will be converted to the ownership of the U.S.  Treasury and transferred to the U.S. gold depository at West Point. Former owners will receive suitable compensation, to be determined at a later time.
• All transfers of foreign holdings of U.S. Treasury obligations held in electronic book entry in the system maintained by the Federal Reserve will be suspended immediately. Holders will receive interest and principal as agreed but no sale or transfers will be allowed.
•  All financial institutions will record U.S. Treasury obligations on their book at par value and such securities will be held to maturity.
  
• Financial institutions and the Federal Reserve will coordinate efforts to purchase all new issuance of U.S. Treasury obligations in order to continue the smooth financing of U.S. deficits and the refinancing or redemption of any outstanding obligations.
• Stock exchanges will close immediately and remain closed until further notice.
• All exports of gold from the United States are prohibited.
  

• Now the hidden strength of the U.S. financial position would be revealed. By confiscating foreign official and most private gold on U.S. soil, the Treasury would now possess over seventeen thousand tons of gold, equal to 57% of all official gold reserves in the world. This would put the United States in about the same relative position it held in 1945 just after Bretton woods, when it controlled 63% of all official gold.

• Such a hoard would enable the United States to do what it did at Bretton Woods - dictate the shape of the new global financial system.

• The United States could declare the issuance of a "New United States Dollar" equal to ten old dollars. 
  

• The new dollar would be convertible into gold at the price of 1,000 new dollars per ounce. Or equal to 10,000 old dollars per ounce of gold under the old dollar system.
  

• This would represent an 85% devaluation of the dollar when measured against the market price of gold in April 2011, and would be slightly greater than the 70% devaluation against gold engineered by FDR in 1933, but not of a different order of magnitude. It would be far less than the 95% dollar devaluation measured in gold that occurred under Nixon, Ford and Carter from 1971 to 1980.

• Because of its gold backing, the New United States Dollar would be the only desirable currency in the world - the ultimate victor in the currency wars.

• The United States would then pledge generous concessionary loans and grants to Europe and China to provide liquidity to facilitate world trade, much as it had done under the Marshall Plan. Gradually, those parties whose gold had been confiscated, mostly European countries, would be allowed to buy back their gold at the new, higher prices.
• Confidence would slowly be restored, markets would reopen, new prices for goods and services would be discovered and life would continue with a New King Dollar at the center of the financial universe.
  

• No other country on earth has the broad, deep and flexible financial system that the United States has. We witness the real problems, the deep fissures and the utter rigidity of Europe's financial system every day.  China's financial system is both non-existent globally and deeply troubled internally. The United States is the only country capable of building the next version of the global financial system, obviously on its own terms first and later on favorable terms for its allies.
• Europe will go along after vociferous protests as it did in the 1970s. Europe demonstrates every day, every week that it cannot function on its own. A system established by the United States and accepted by Europe would become the de facto global system. China, which depends on exports to Europe and America, will have no real choice but to go along.

• Today, even more so than in the 1970s, the United States military is the predominant global power in the world. It is also the one military capable of projecting its power in all corners of the world. China, by its own admission, will not come close to matching the US militarily in the next 10 years.

• Another possible response...would be governmental intervention of a type that is far more extreme and coercive....Such coercion would more likely occur in Asia or Russia and may involve wholesale nationalization of capital stock and intellectual property, closed borders and redirection of productive capacity to domestic needs rather than export.

• The world would retreat into a set of semiautarkic  zones and world trade would collapse. The result would be the opposite of globalization.

• Platt - The probability that the market is putting on a Eurozone breakup, in my opinion from evidence I'm seeing from option pricing across the different markets, is steadily rising…We're going into 2012, and in our opinion, it's only going to get worse.

• Platt - I believe that the eventuality of a European breakup is so awful, that more and more drastic measures will take place as time goes by.

• Bass - they are going to have to restructure a lot of their debts..I think eventually the EMU is gonna  have to break up because you are going to need the adjustment mechanism that these countries need of a much weaker currency and it is very difficult to go through a hard restructuring and become competitive as a nation unless you have a currency adjustment mechanism that is associated with your restructuring.

• BlackRock - We now believe that we're in for a full-fledged recession, including one in France and Germany, that could cut GDP by 1 percent to 2 percent.....Short-term austerity measures could worsen the recession, defeating their very purpose of closing budget gaps."

• Tom DeMark tells me 1. $SPX still has another up move 1313-1340 (defending his call) 2. Euro due to bounce 3. Germany now a Buy.

• If our short term bullish view on SPX500 is correct, the next leg up should start no later than Wednesday --- Our timing cycles are calling for a peak in SPX500 by the end of next week (b4 xmas) which goes well with our preferred wave count.

• Rather heavy selling over the past six days (with the exception of last Friday) has resulted in a deeply oversold condition. That should produce a short-term rally, but after that the picture is far less rosy. Both equity-only put-call ratios are now rising, which places them on sell signals......That has resulted in breadth generating sell signals. Volatility indices ($VIX and $VXO) have been registering a short-term bullish divergence by generally declining even though $SPX was falling.

• $94bn of inflows into money-market funds past 6 weeks is the biggest inflow into cash since Jan'09. This points to some liquidation of risk positions and highlights bearish consensus. Meanwhile, global long-only equity redemptions of $23bn in past 5 weeks means we move very close to a "buy" signal for equities.

• Market Access - most EM countries are exporters to DM. These countries have become efficient exporting machines but have not developed internal consumption. As such, these economies are very susceptible to protracted and/or deep slowdown in DM economies.
• Capital Inflows - economies like India that are not export driven are highly reliant on capital inflows from DM for their growth. India, for one, cannot sustain its growth without continuous capital inflows. In DM countries, a weak currency creates demand for industrial production. In India, industrial production drops when the Indian Rupee weakens, a symbol of capital outflows.
• Both - that case study may be China which depends on US & Europe for both access their markets and for imports of FDI.

• increase in probability of "crash and burn" scenario to 30% from 22%.

• Every other country has an army. The Pakistani Army has a country.

• Every other [democratic] country has an electocracy. The Indian Electocracy has a country.

• The politicians see no need for 9% economic growth. They feel a 7% growth rate is sufficient for reelection.

1. Michael Platt on Bloomberg TV's InsideTrack on Thursday, December 15
2. Robert Prechter on CNBC's Closing Bell on Wednesday, December 14
3. Kyle Bass on CNBC's Squawk on the Street on Wednesday, December 14
4. John Taylor on Bloomberg TV's Street Smart on Thursday, December 15
5. Howard Lutnick on CNBC's Closing Bell on Thursday, December 15

• He has delivered trading profits of $17 billion to his investors. Blue Crest International is up 350% with never a more than 4% drawdown and no down year.
• Since inception, his returns have been 15% net or 20% gross. This year, his fund is up 10% on a gross basis.

• "The level of concern of what we have about what is going on in Europe is absolutely huge.  When you evidence all over the markets that they are pricing for the potential of the eurozone break up, it is contrary to what everything is set by policy makers and by central bankers. We distill it down essential fact that we continue to focus on at BlueCrest Capital Management - if you look at the debt of Italy at 120% of GDP, which is increasing at a real rate of 5%, and if you look at the GDP, which now is forecast next year to be declining, arithmetically their debt is going to blow up.  And we don't see anything happening at the policy level that gives us any indication that there's anything that's going to convert this situation from where it is now to a much more substantial and real crisis in the future."

• "We need much more radical measures to prevent this from happening.  If Italy and Spain are forced to roll their debt over, if they have to pay rates between 5 and 7% for this, then the situation in Europe is unsustainable.  We're not going to have any euro bonds, we're not going to have a full political and fiscal union where the transfers will take place.  It seems what we're going to have is an attempt to control the European situation through continued austerity, which is pro-cyclical.  As the economy slows down, we end up with more austerity which creates more slowdown.  We also have a requirement for banks to increase capital, therefore we're looking at a 3 trillion euro takedown in European balance sheets.  There's basically nowhere I can see where we can get any growth from."

• "Absolutely, it's about the cultural and political divide.  The reality is that there is no willingness within the Eurozone to share wealth.  In the United States, if California is having a really difficult time, the rest of the United States will send money to California.  This is not the case in Europe.  There is no willingness to transfer money across boundaries in a long-term and sustainable way."

• "The market prices the probability of a euro breakup to be distinctly non-zero, despite what the politicians say.  I believe that the eventuality of a European breakup is so awful, that more and more drastic measures will take place as time goes by.  The ECB is probably the only institution that can tackle this problem, but it doesn't have a mandate to do so…As time goes by, my view of what's required is a radical change of policy from the ECB to tackle this problem."

• "The probability that the market is putting on a Eurozone breakup, in my opinion from evidence I'm seeing from option pricing across the different markets, is steadily rising…We're going into 2012, and in our opinion, it's only going to get worse."

• "There is a sensible argument you should not price and the whole loan in response to where the government trades because the government has the ability to remove assets and put them on their own balance sheets."

• "The problem with Europe is that almost every part of it has gone wrong now.  The banks are undercapitalized…If banks were hedge funds, and you mark them to market properly, I would say that probably most of them are insolvent.  [Most of the banks in Europe are insolvent right now] if they were marked like I am at a hedge fund, yes."

• "I do not take any exposure to banks at all if I can avoid it.  All the money at BlueCrest Capital Management is in Two-Year U.S. government debt, Two-Year German debt, we have segregated accounts with all of our counterparties.  We are absolutely concerned about the credit quality of the counterparties."

• "Absolutely.  The main thing that's driving our decision about where to lend money or where to place our funds under management, the vast majority is dollars which we keep in two-year notes.  We have a chunk of euros, which we keep in German two-year paper.  We're not interested in taking any peripheral debt risk at all and we're not interested in taking any bank credit risk right now."

• "I think they're the best of the bunch.  I feel pretty good about the United States.  I don't really have an issue because I think the complete control that the authorities have, particularly the Fed and its bond buying program, we do not have issues about having money in Two-Year securities in the United States.  In Europe, you've got to put your euros somewhere.  It is a much more difficult place to make a decision.  Two-year German notes seem like a reasonably safe bet right now, certainly compared to anything else."

• "The most important thing to remember about crises is you do not make your money going into the crisis.  When you go into a crisis such as 2008, markets trade against positions. People have positions on and people need to get risk off.  All the things that people thought were a good idea start going into reverse.  The big money you make in trading is more in the aftermath of the crisis.  In 2009 we made 60% with no down months on our master fund."

• "I would not touch an illiquid product with a barge pole, to be honest. We're going into an environment where banks need to delever.  Illiquid assets will be coming on to the streets everywhere.  The price of liquidity in my opinion will go up.  I don't want to own any illiquid assets whatsoever. The strategy at BlueCrest is to be in super liquid products, things that can be turned around in a day."

• "It would have been the end of my business in 2008 had I done such a thing.  Anyone who had an illiquid position within their hedge funds, there were runs on those hedge funds because people wanted to get the cash out and not be side pocketed with the illiquids.  In 2008 I paid out $9.5 billion to the street because I was the only hedge fund that was up a lot and completely liquid.

• "That's what I think, yes.  I think so.  In my opinion, what's going on now is significantly worse than 2008…The European debt situation is fundamentally completely unstable.  The process of refinancing your debt with a real rate of 5 when you have negative GDP growth, and we are heading into a recession in Europe, arithmetically can turn all of the countries in Europe, given enough time, into Greece."

• "Clearly it would be a huge drag on the U.S. economy.  We're talking about in Europe is a situation of instability driven by pro cyclical policy, removing the ability of banks to invest in sovereign debt.  We're talking about pro-cyclical policy of governments not being able to deficit spend by law. We're talking about existing deficits that need to be closed. We're talking about an increase in the amounts that governments will have to find when they're forced to refinance their rolling over paper this year at real rates of interest, which are way beyond anything they will ever be able to achieve in terms of growth."

• "Because we are traders and do not take any credit risk and we're super liquid.  In the time that BlueCrest has been around, we have made $17 billion of trading profits for our investors…so in an environment like this where we are a very secure trading strategy, taking no credit risk, not buying anything illiquid, that is the kind of thing investors frankly really want to hear from someone like me."

• "I think the major opportunities will come post the blow up.  I think for the time being you want to keep it quite simple.  You do not want to take any credit risk.  I think volatility in certain markets is very underpriced compared to what's potentially about to happen.  I think if we go into a crisis scenario, things like German bunds could be more expensive than they are right now.  And I think as the crisis intensifies through the process of governments refinancing and deficits becoming more unstable and growth deteriorating in particular, I think those kinds of trades will play out in the market and be profitable."

• "I did not really want to be exposed to the Eurozone. I don’t want to be exposed to regulation coming out of the Eurozone.  Most of my clients come from the United States.  I am not really marketing to the Eurozone anyway.  So it didn't make much sense for me to be in the Eurozone as a business."

• Bartiromo - ...to tell us why he thinks we are in the late stages of a 1930 depression, here is Robert Prechter, ..
• Prechter - ... we get to talk once a year and I will try to curb my answers..
• Bartiromo - don't curb your answers, we want it all....your charts show a pessimistic outlook for the markets. Tell us if history is repeating itself.
• Prechter - history repeats but never exactly. I think the big difference between the last 10 years and the top of the late 20s & early 30s is the size of it. This one is much much bigger. The overvaluation in stocks and in other markets was much greater than it was in 1929 in terms of dividends and book value.  And there is also a whole lot of ultimately unpayable debt out there than there was in the 1929. This is why it is a big deal.
• Prechter - ... valuations are still very high, the yield on the S&P is 2.2%; it should be more than double that....back in 2000 & 2007 guess what we had, record earnings both times... were they great times to sell stocks or buy stocks? They were great time to sell stocks. Record earnings tend to occur a few months or even quarters after the high. They occurred in Q3 2000, after the high in the first quarter in stocks, they occurred in early 2008 after the late 2007 high in stocks, we had record earnings again in the 2nd, 3rd quarters of this year, after the top in April. People look at lagging indicators such as cash flow or how corporations are doing. They need to look at leading indicators.
• Bartiromo - if you are looking at depression type environment, how do I manage my money?
• Prechter - ... Look at what has happened this year. Most people recommended foreign stocks, They are down 10-30%, they have recommended commodities, the CRB is down 10%+ this year, the thing that almost everybody hated, the bond market, the bulls didn't like it because we were going to have a recovery, the bears didn't like it because they expected hyper inflation, that market is up 20%, the best total return of any sector. We are in safety, we are in cash. We have ways to go, several more years before we are going to be buying. But I think it is going to be the greatest buying opportunity ever, when it comes.

• Bass - ... If you get out a blank piece of paper and look at it, that is the plan they are working out of right now. Everything is an agreement in principle. There are no details. It is very difficult to arrange such a disparate group of people and get them all to cede their fiscal sovereignty to a central taxing authority. I say in the absence of that, it will not work.
• Faber - Is there anything they can do that you believe will work?
• Bass - yeah, they are going to have to restructure a lot of their debts..I think eventually the EMU is gonna  have to break up because you are going to need the adjustment mechanism that these countries need of a much weaker currency and it is very difficult to go through a hard restructuring and become competitive as a nation unless you have a currency adjustment mechanism that is associated with your restructuring and...historically that is what has worked, so I think history is likely to repeat itself...
• Faber - your focus is on capital mobility and capital flight from many of these countries and banks in those countries..
• Bass - I tend to think that the coordinated action of the dollar liquidity facility by the Fed and the G-7 central banks was one of wanting to put an air bag..again to inject as much liquidity into a system that is having a solvency problem and they are serving their purpose from a perspective of stability, liquidity in a default environment.. again they are putting an airbag for the fall that's about to happen...
• Bass - if you were a Greek or a Spaniard or a Portuguese citizen why on earth would you leave your deposits in your host country's banking system when in fact there is nothing prohibiting you from setting up accounts in Switzerland, Norway, Canada and Australia...places where you know they have more structural stability in their banking system even in the event of a crisis.... with the advent of enormous capital mobility that we have today, as studies have shown with Rogoff and Reinhart, capital mobility is a essential precondition to these kinds of runs...
• Bass - what we are talking about today, in the eurozone... we have seen deposit runs annualizing at about 28%, the Greek national bank announced last night that they lost over 4.5% of their deposits in the month of October.  The point being in the end just before the defaults, you are going to see deposit flight and you are seeing it in the European peripheral countries... not only you are seeing it you are seeing it at an accelerated pace ..which makes complete sense to me.. and the counterbalancing argument there is that these governments  don't want these capital flights to happen ... but that happens when you lose confidence..
• Bass - ...doomsday machine...ECB and Governments guaranteeing debts of their banks which in turn buy the debts of their countries that is making that guarantee, pledging it at the central bank to get more money to go and buy more debt of those countries....it is a circular reference that Institutional Investors around the world are going to buy...today, there are no buyers for peripheral bonds other than host country banking systems
• Bass - I will ask you a simple question (to Simon Hobbs of CNBC). How many of your relatives and extended family would you sign a joint and several liability agreement with? The answer with me is None. And secondarily, either in EMU or EC, they don't have any money to recap their banking system. 
• Bass - The ECB and more importantly Bundesbank, Weideman and Schauble know they are going to have to print a lot of money..clearly they are printing some now... the question is in my opinion do they take the nuclear option and print it all pre-default or post-default? In my opinion, they print post-default to recap their system.
• Hobbs - they know that on their own they will be destroyed by  the markets, there will be no banking system left for many of them. That is why they will stick together.
• Bass - I disagree with you. I think they will maintain structural stability in the banking systems. That doesn't mean bank equity is worth anything. That doesn't mean that sub debt or senior debt is worth anything. It means that payment functions will continue to function. Remember in the Lehman scenario, the payment systems worked perfectly, the derivative contracts settled perfectly. The thing that went wrong with Lehman was that their senior unsecured debt was in money market funds and the money market funds broke the buck. That's what scared everyone. In this scenario, the payment systems will function because I think global governments are well aware of this. That is evidenced by the G-7 dollar liquidity facility. But Simon, in the end, this bill is due, no one can pay it and so if you go the nuclear option, then you go try to print, think about this Simon, 2.6 trillion dollars worth of debt rolls into the Eurozone next year between bank debt in Euroland and sovereign debt.
• Faber - that's out of 18 trillion in total credit, correct?
• Bass - no the 18.5 trillion is in the periphery. I am talking about the totality in Europe. Again, there aren't any buyers of this debt in that kind of size . So these facilities that we are kicking around - there is no levered EFSF, they couldn't even get the 3 billion euro bond issue done  and they want to get 200 billion done....The ESM is trying to get accelerated to the middle of next year but it has some treaty problems, ...basically what I see is I don't see any thing yet..... In the end, the picture is so large and the leverage in the banking system is so enormous that when you start delevering there is no way out of this scenario...and that's what is happening.
• Faber - collateral chains are shortening--- Why should people be focused on that? Why is that of importance?
• Bass - ...this is more of a plumbing and with this plumbing concept, you have sovereign wealth funds and investors all over the world that deposit their securities in institutions like prime brokerage all round the world... those securities are lent and relent and relent...what's important is with the advent of MF global and the fact that world governments are not going to behind investment banks if they fail again...customers are pulling their collateral, ending relationships in Europe, US and Asia --- that takes the grease out of a highly levered banking system and that is also what is driving these dollar liquidity scenarios
• Bass -  and remember this problem has been misdiagnosed for the last 3 years. If you remember in the beginning of Greece, it was just a liquidity problem..I don't remember when it morphed from a liquidity problem to a solvency problem. But we are talking about injecting a lot of liquidity into a solvency problem. And it's the right thing to do but I think the markets are reading it improperly and I think they will figure it out later on.

• "It seems to me that [the euro] should be a lot lower than it is."
• "I think there’s a distinct possibility [that the euro will drop to parity with the dollar]. What's surprising to me is that it's part of the policy settings that Europe ought to have. It really ought to be at parity. Things could be better for the Mediterranean states. They would sell more products, they'd import fewer products because they'd be expensive. That would help current account balances."
• "If Mario Draghi just came out and made a statement, you know, Gee whiz, I think the euro's a little high, all of us would be happy to oblige and the currency would drop sharply."

• "All the European banks have to raise capital. This is very difficult for them. So instead of raising the capital in order to increase their capital ratios, they're bringing back assets that were overseas, into Europe. So, that means a building that was maybe financed in New York by Hypobank out of Germany, that financing is going to Citibank, or J.P. Morgan, and a German bank is moving its money back into Germany, and that buys euros."

•  "The easiest place for [European banks] to cut back is in the U.S., Asia and Latin America, so they're taking money home."

• "It's extremely hard to follow. One of the easiest ways to follow it is, looking at the number of deals being brought to private equity people from European banks where they are trying to sell things -- not just a loan, but a whole subsidiary they don't want anymore. They're going to take the dollars they get for that, buy euros, and send it home. That flow has increased dramatically…on a percentage basis, around 400%, or 500%."
• "In fact, there are so many things to be sold that European banks aren't going to get good prices at all".

• "The European banks are in trouble, so the euro goes up. That seems wrong. In 2008, we had a crisis in the mortgage market, and the dollar went up."

• "For the same kind of reason because J.P. Morgan Chase, Citibank had to bring money home in order to protect their capital position in the U.S. So, also, the central banks of Asia and everybody are trying to protect Europe. They want Europe to do well."

• "So enough though we look at it as a good deal, the central bankers might because they want to protect their brethren."

• "One of the things [I'm watching in Washington, D.C.] is, what is Ben Bernanke going to do? If we do QE3, that's bad for the dollar."

• "What are the Republicans and Democrats going to do about extending the tax benefits that existed in 2011 into 2012?  If they don't, that will put the U.S. into a recession, which is again one of these perverse things that will strengthen the dollar. The dollar is negatively correlated to its growth: when the U.S. is doing great, the dollar goes down. When the U.S. is doing lousy, the dollar goes up."

• "The Norwegian krone is one of the best currencies because they have all the oil. They don't belong to the European Union so they're completely free -they can do what they want. [The krone] a strong currency, a stable currency."

• "We own more dollars than anything else but in Europe our favorite currencies are Norway and Sweden."

• "The Canadians are looking fairly good because they're close to us. We have the best economy. They import a lot of raw materials we need, and we're using them, so they look very good."

• "For Norway, the price of oil is somewhat dominated by the OPEC decisions. If OPEC keeps the supplies tight, oil won't go down very much. I'm more worried about Australia, New Zealand, countries that are selling a lot to China."

• "[If China slows down], I think commodities could do something like they did in 2008, I'm not saying it will be that aggressive, but if they dropped in half, it will really kick Australia in the teeth."
  

• "I am long the Australian dollar, and short New Zealand."

• "Looking behind the scene, it looks like a lot of money is coming into Australia to develop the mineral sector. Capital inflow into Australia is very strong. The export market is turning down, but capital inflow is very strong. New Zealand doesn't have that capital inflow so therefore it's not protected by that."

• "You know what is happening to these big banks is Basle III is gonna put so much pressure on things these banks do that are capital intensive....they are not going to be in the business of securitization like things any more, so that's why Cantor Fitzgerald went into the commercial real estate lending business. So we are going to lend and securitize because the banks are going to step out of that business".
• "look at the big banks - they are firing people in NY & London and they are hiring in Brazil and Asia - where the rules don't go against you, that's where they are going to be hiring people - classic, classic stuff - lower regulations on wall street firms, that's where the jobs are going to be."
• "I am absolutely convinced QE3 is coming. Operation Twist - the Fed owns so many 3-year notes. They are selling 3-year notes and they are buying 6-7-10 year paper. They are going to do huge amounts of QE3 but mostly in mortgages. Their goal is to get mortgage rates down so people can refinance but they have a big problem. Because Fannie Mae & Freddie Mac are not letting people refinance.  The idea is low interest rates is nonsense because the Federal Government, FNM/FRE are in the way - it is not happening."

• "...when the avalanche began, everything else was swept up in it and the entire banking system was put at risk. When derivatives and other instruments are included, total losses reached over $6 trillion, an order of magnitude greater than the actual losses on real mortgages."

• "..the regulators and bankers were using the wrong tools and the wrong metrics. Unfortunately, they still are.

He thinks that what happened in 2008 was an example of a phase transition of a complex system in a critical state. The Financial Crisis of 2008 sped like wildfire and caused havoc in seemingly unrelated markets all over the world. The term wildfire is itself relevant. Forest fires that destroy million acres can begin with just a small spark and then create a chain reaction that creates a huge wave of fire that engulfs everything in its path. The term chain reaction itself describes the ultimate human nightmare, a nuclear meltdown.

How does this help us understand the 2008 Financial Crisis? And more importantly how does it help us ponder the next financial meltdown? The answers may come from Complexity Theory, a relatively new school.

This articles reviews the application of Complexity Theory to Financial Markets discussed by James Rickards in his book. Mr. Rickards is a counselor, investment banker and risk manager with over 30 years' of experience in financial markets. He advises the Department of Defense, the U.S. Intelligence community and major hedge funds on global finance.

This article is about Currencies, Capital and Complexity or Chapter 10 of the book Currency Wars. 

Why should you read this? Just look at the world today and remember what the world's leaders told us after 2008. In 2009, the leaders in America swore never again. They vowed to take regulatory steps to ensure that the financial crisis will not happen again. The rest of the world took steps to ensure that the American problems will not enter their regions.

Today, a mere three years later, Europe is engulfed in a much bigger crisis. Last month, the Indian Rupee lost 17% of its value against the U.S. Dollar in about a month in a free fall. The world seems perched on a precipice of a global problem.

Mr. Rickards argues that Complexity Theory provides an understandable model that explains why the world's financial problems are getting worse.




Concepts of Complexity Theory

Complexity theory rests on straightforward foundations, as Jim Rickards explains:

• Complex systems are NOT designed from the top down. Complex Systems design themselves through evolution or the interaction of myriad autonomous parts.
  
• Complex Systems have emergent properties. When systems are highly complex, emergent properties are far more powerful and unexpected. Jim Rickards illustrates this with an example:
• Climate is one of the most complex systems ever studied. Hurricanes are emergent properties of climate. Their ingredients, such as low pressure, warm water, convection and the like, are all easily observed, but the exact timing and location at which hurricanes will emerge is impossible to predict. We know them when we see them.
  
• Complex systems run on exponentially greater amounts of energy. When you increase the system scale by a factor of 10, you increase the energy requirements by a factor of 1,000 and so on.
• Complex systems are prone to catastrophic collapse.

• "a watch has gears, springs, jewels, stems and castings to make it complicated. Yet, the parts do not communicate with one another. They touch but do not interact. The behavior of one gear does not change the behavior of another gear.  Complexity is much more than complication."

• Complex Systems begin with individual components called autonomous agents  which make decisions and produce results in the system.
  
• Millions of traders, investors and speculators are the autonomous agents. These agents are diverse in their resources, preferences and risk appetites.
• The second element is connectedness - the autonomous agents are connected to one another through some channel. The agents must have a way to contact one another.
  
• The millions of traders, investors and speculators are densely connected. They trade and invest within the networks of exchanges, brokers, automated execution systems and information flows.
• The third element is interdependence, which means agents influence one another. Mr. Rickards first gives the example of a person who looks out of the window and decides to wear a coat because every one in the street is wearing one.  Then he relates it to financial markets:
  
• When the subprime mortgage struck in early August 2007, stocks in Tokyo fell sharply. Some Japanese analysts were initially baffled about why a U.S. mortgage crisis should impact Japanese stocks. The reason was that Japanese stocks were liquid and could be sold to raise cash for margin calls on the U.S. mortgage positions. This kind of financial contagion is interdependence with a vengeance.
  
• We look at this property in another way. A classic case of agents or investors influencing one another is what is known as a "crowded trade". For example, investors began pouring into emerging markets (or in technology-telecom stocks in 1999) because they saw others investing there. This interdependence is what is called in investing parlance as "Trend Following", "buying new highs", "buying strength" or "markets telling you what to do". This interdependence taken to the nth degree turns into a bubble.
  
• The last element is adaptation. In complex systems, adaptation means more than change; rather it refers specifically to learning. This learning can be collective in the sense that lessons are shared quickly with others without each agent having to experience them directly.
  
• According to Jim Rickards, traders and investors are nothing if not adaptive. They observe trading flows and group reactions; learn on a continuous basis through information services, television, market prices ... and respond accordingly.
• We look at this property in another way. This "adaptation" shows up in the fact that sectors or asset classes that led before a bubble take a long time before coming back into favor. This is why sectors that lead in new bull markets after a bust are very different from those which led before the bust. Cisco, the darling stock on the tech boom, is still 75% below the 2000 high. Today, we see people paying more to rent rather than buying homes or apartments. This is also true of young people who did not lose any money themselves in the housing bubble but have seen the what happened to other homeowners.

• When a volcano erupts, its state goes from dormant to active. When the stock market drops 20% in one day (October 19, 1987), its state goes from well behaved to disorderly. If the price of gold were to double in one week, the state of the dollar would go from stable to free fall.

• Buy and sell orders hit the market all the time just like snowflakes in the mountain. Sometimes the buyers and sellers are arranged in highly unusual ways so that one sell order triggers a few others, which are then reported by the exchange, triggering even more sell orders by nervous investors. Soon the cascade gets out of control,...The process feeds on itself.....Once the cascade stops, the complex system can return to a stable, noncritical state - until the next time.

• an active volcano on a remote island can make up a complex dynamic system in a critical state....Finally the volcano completely explodes and the island sinks, leaving nothing behind. The event would be extreme, but limited by the scale of the system - one island.
  

• This means that if size of a system is doubled, the risk does not merely double - it increases by a factor of 10. If the system size is doubled again, risk increases by a factor of hundred. Double it again and risk increases by a factor of thousand, and so forth.

• When a natural system reaches the point of criticality and collapses through a phase transition, it goes through a simplification process that results in greatly reduced systemic scale, which also reduces the risk of another megaevent.

• This is why a mountain ski patrol throws dynamite on unstable slopes before skiing starts for the day. It is reducing avalanche danger by descaling, or simplifying, the snow mass.

• The financial ski patrol of central bankers is shoveling more snow onto the mountain. The financial system is now larger and more concentrated than immediately prior to the beginning of the market collapse in 2007.

• Europe's sovereign borrowers and banks are in worse shape than those in America...Even China, which has enjoyed relatively strong growth and large trade surpluses in recent years, has an overleveraged banking system run by provincial authorities, a massively expanding money supply and a housing bubble that can burst any moment. 

• The post-2010 world may be different in many ways from the 1920s and the 1970s, but the massive overhang of unpayable, unsustainable debt is producing the same dynamic of deleveraging and deflation by the private sector offset by efforts at inflation and devaluation by governments. The fact that these policies of inflation and devaluation have led to economic debacles in the past does not stop them from being tried again.

• Next time, however, it really will be different. based on theoretical scaling metrics, the next collapse will not be stopped by governments, because it will be larger than governments. The five-meter seawall will face the ten-meter tsunami and the wall will fall. 

• The problem with the Fed is they think they are toying with the thermostat, hold the money supply up, if it gets too hot, dial it down a bit. It is not a thermostat. It is a nuclear reactor with fuel rods and control rods. You can dial it up and down but if you get it wrong, you have a catastrophe. Not that the house is too hot, but the whole thing melts down.

• Karan Johar - If Dev Anan approached you to play his on screen sister or mother in his upcoming film, your immediate response would be?
• Zeenat Aman - I would accept whatever he offers, sister mother whatever.....

• "better than most people feared and worse than most people expected".

• Since we believe a trend sequence in S&P500 (cash) ended at @1266.9, we see today's rally as a B wave. Price has failed at resistance multiple times and there is a falling trend just above current levels (1270), therefore we would ideally expect a C wave down to about 1237 (C=1.618*A).

• What a lovely C wave sell off in S&P 500 and DJIA as highlighted last night..I think the stage has been set and if tomorrow we don't close below today's low, then the market has the potential to start a strong rally and a lot of shorts might get burnt

• It was interesting that just 3 days ago people were very aggressively buying strikes at the 30, 32.5, 35 even the 40 strike (on the VIX) and that's with the VIX down around 25-26. Now with it popping back up through 30......people are not buying anymore, they are not selling  but they seem to have their fingers on the trigger ready to sell from whatever comes up either later today or tomorrow.....in other words the levels at which the VIX has gotten to very quickly have virtually terminated the trade of those who were buying calls ...no more upside call speculation at all...

• John Bollinger came on CNBC Fast Money to argue for a pretty big upside in the stock market (see clip 3 below). 
  
• Tom DeMark came on Bloomberg TV to predict an explosive move to 1,330-1,340 by December 21, in just 8 trading days (see clip 4 below). 
  
• Jim Cramer relayed the views of Mark Sebastian who argues for a move to 1300 based on downside in VIX (see clip 5 below).

• It is happening.....The downturn we have now is very different than the downturn in 2010 which did not persist. This one is persisting.... A market economy that does not want to have a static state. It either accelerates or it decelerates.... The last reading is 0.28% on GDI. That is a big red recession signal.

• I think things are slowing, I think margins will be compressed. We are going to see reductions in profit expectations as January and February develop.

• equity flows outflows from Long Only equity funds have been so large (-$20 billion over 5 weeks) that, according to their Global Flow Trading Rule,  is inching closer to a "buy signal". Another $9-10 billion over the next 2 weeks would trigger " buy". 
  
• EM funds saw 4th straight week of redemptions.
  
• Biggest inflows to Muni Bonds in 15 months
  
• Big rotation into High Yield Bonds (+$2.1 billion) from Investment Grade Bonds (-$2.1 billion).

• ... the headline last night that actually got more people concerned...was that a developer missed a big payment to another developer and about 200, $300 million was due and was not made. This was the buzz in markets over there overnight.....but in any case, you're going to see more stories about this, about missed payments and debt servicing problems. That's where we are in the cycle.

• I sort of doubt China is going to be the savior of anybody but China.... There's a big misconception. You had a guest on earlier talking about China's reserves. as if it's some pot of money sitting there waiting to be distributed to needy countries and whatever. The fact of the matter is any country that has FX reserves, there are liabilities against that. There are Chinese Currency liabilities.... It is not free money.

• China is a developing country, still low income country. And all these hard won, hard earned, foreign exchange reserves are important for the Chinese economy.

• China is in potential jeopardy now because it has an overextended government and a very over extended economy. There is a credit bubble there, a real estate bubble. The financial system is in entire disarray. They have non-performing loans to the hilt.

• Some emerging markets could rebound more strongly than the U.S. because they are more oversold. Like India, the currency is down 18% since July and the market is down 22%. Currency adjusted, the market has been extremely weak and is oversold. It could rebound somewhere here, but forget about new highs.

• I'm thinking about the first three months of 2012. I think it's going to be a very challenging time for the Euro zone.... I think the main problem for Euro Zone Bond Markets is that the volatility we've seen over the last couple months has really scared away foreign investors. There's a structural asset allocation shift going on away from euro zone assets and that's going to be a major challenge to bring that confidence back. I think in the next couple months we will continue to see foreign investors exit euro zone markets.

• I think it's very important to distinguish between leverage money that is max short and ...real money investors who hold big bond portfolios and have huge exposures, long exposures in euro zone bonds still. There's been some evidence of Foreign investors reducing their spending on Italian but not yet their Belgium or French exposures. It's not about whether people are already short in the leverage community but what the real money is doing.

• Overweight of the US equity market, and underweight of emerging markets.
• He points out that S&P 500 has outperformed MSCI BRIC for four years. He thinks this is a major leadership change. 
  
• According to him, EM free cash flow yields were roughly 7% in 1998 when they were about 3-4% in the US. Today,...US free cash flow yields are 7-8% and EM free cash flow yields are less than 3%.
• The US appears to have the strongest corporate sector in the world right now, and US corporations have produced their strong  earnings while actually de-levering their balance sheets. 
  
• Overweight of smaller US stocks, with an eye for smaller, domestically-oriented financials.
• Underweight commodities and gold for US dollar investors. Overweight for EM-currency investors.
• Positions in treasuries to maintain portfolio diversification.
• Increasingly avoid alternative assets.
• He argues that most alternative assets' returns are credit-dependent, and that these asset classes' outperformance was largely driven by the bubbles' increasing availability of credit. 
• He expects 2012 to be another year of political intervention as the global credit bubble continues to deflate.
  

1. Lakshman Achuthan on Bloomberg's Surveillance Midday on Thursday, December 8
2. James Rickards & James Bacchus on Bloomberg's Money Moves on Friday, December 9
3. John Bollinger on CNBC Fast Money on Wednesday, December 7
4. Tom DeMark on Bloomberg's Street Smart on Monday, December 5
5. Jim Cramer relays views of Mark Sebastian on Tuesday, December 6
6. Larry Lindsey on CNBC Closing Bell on Tuesday, December 6

• Keene - You had a recession call. What happened?
• Achuthan - It is happening. What do you mean?
• Keene - I saw too many economists talking 3% GDP.
• Achuthan - First of all, we made the recession call two months ago. Economists focus on incoming data which is short term or coincident. There has absolutely been stronger coincident or short term data over the last couple of months. What we learned from that, leading indicators, coincident indicators, lagging indicators, is that the recession very likely did not begin in Q3.
• Achuthan - We haven't switched our call. If there is no recession in Q4 or the first half of 2012, then we are wrong. You are not going to know whether we wrong until a year from now.
• Achuthan - Jobs data comes in strong. So there is no recession right? Wrong. In the recession that began in December 2007, the jobs data did not go negative for a couple of months. the 1973-75 recession. it took 9 months inside of the recession before jobs went negative.
• Achuthan - A recession is a contraction in production, employment, income and sales. The downturn we have now is very different than the downturn in 2010 which did not persist. This one is persisting. That (the chart that is being discussed) is a forward looking indicator. So far we have been talking about coincident data, production, jobs. This is forward looking data. That forward looking data has remained weak, it is getting weaker. It is not turning up.....
• There are those who say economy is firming and will continue to firm next year. We reject that. There is nothing here to suggest that at all.
  
• There is a larger camp that says we are going to muddle through...I would point out that has never happened. We never muddle through. A market economy that does not want to have a static state. It either accelerates or it decelerates. And these forward looking cycle indicators say decelerate.
• Achuthan - Gross Domestic Income (GDI). The problem here is that the GDI tends to be more accurate. The GDP tends to get revised towards the GDI. The Fed has been focused on this. And GDI was 0.3%. That is a far cry from a 2-handle. I read a Fed paper that is suggesting that (the revisions to GDP will go towards the much weaker GDI). The Fed points out that when you look at a 2-quarter growth rate of GDI, if it gets to 2% or lower, that is a recessionary stall speed. Here is a newsflash. That (GDI) has been trending downwards for 6 quarters. The last reading is 0.28% on GDI. That is a big red recession signal.
• Achuthan - The pace of each expansion since the 1970s has been getting lower and lower and lower. And plus the cycle volatility, we will all agree, has gone up. The economy hasn't gotten mellower. Volatility plus Low trend equals more Recessions. It is in that context that we are making this recession call.

• Bolton - Jim Rickards, you were saying some of shifts in trading patterns we are seeing tell us something about QE3. What have you noticed?
• Rickards - We eased with QE and QE2. That was designed to break the peg of  the Yuan. We sent inflation to China. They got enough inflation. They got worried about it. So they broke the peg and allowed Yuan to go up. Now they are cooling off, inflation is cooling off and their trade surplus is coming down. That means they are going to reestablish the soft peg as we discussed. But the Fed doesn't want that. The Fed wants a cheap dollar. So that's the signal for QE3. Lot of people think QE3 relates to monetary easing, economic growth in the US. It really relates to the currencies. Watch the Euro-US pair and the China-US pair. If you see the Dollar strengthening, that's the signal for QE3.
• Bolton - To what extent?
• Rickards - Enough to break the peg. This is what Bernanke has taught and his associates agree - that you can create inflation by lowering interest rates. But when you get to 0%, you cannot lower them. You can continue to ease and create inflation by cheapening the currency. So now that our rates are at zero, currency is the only weapon we have left. So he will do whatever it takes. He will do as much QE3 as it takes to force China to continue its appreciation of the yuan. They are not where we want them to be yet.
• Bolton - Jim Bacchus, then what does China do in response?
• Bacchus - The danger would be that we got to protectionism with China. I agree with every word that Jim just said. I worry about a world in which the US, China and many other countries engage in competitive devaluations. That could disrupt trade, investment and the entire world economy. We do not want to have the currency wars that Jim foresees.
• Rickards - The basic problem is there is too much debt in the system. The debt is stifling growth. How do you get out of that? Default is one way, we see that in Greece. Inflation is another way. That is what the US is trying to do. It is a lousy solution. The real answer is growth.

• Bolton - I am looking at the Yuan, trading at the bottom of its trading range, seven sessions in a row. This is different from the trading patterns we have seen so far. So what does this say? Do you think China is going to halt the appreciation of the yuan?
• Rickards - In effect, that is what they are going to do. This is how the currency wars play out. For about a year, the US has been winning. We have been sending them inflation by printing money. They finally said inflation was a threat and they let their currency appreciate. But today, there were two big pieces of news... Their trade surplus is shrinking and their inflation is coming way down. So that means that their economy is cooling off. They are now going to retaliate in the currency wars. That means they are going to go back to a soft peg. So we have seen the end of the appreciation of the yuan for awhile.  They have to create the jobs.
• Bolton - What does this mean for the relationship between US & China?
• Bacchus - If China stops the appreciation of the yuan, it will significantly increase the political pressures in the Congress of the USA to pass the currency bill. That would not be good for the United States or China.
• Bolton - What is the biggest unknown? What is the biggest misconception in the trade relationship between the US & China?
• Bacchus - Many Americans are worried about the rise of China. I am much more worried about what would happen if China were to fall economically because the fate of the US and China is joined at the hip.
• Bolton - Jim (Bacchus), you are not worried about China being strong. You are worried about China being weak?
• Bacchus - Every country in the world is trying to export its way out of these economic doldrums. Half of all new jobs we created in the United States have been through exports. China has been an export led economy for years. But if every country in the world is exporting, some one somewhere has to import something. China is in potential jeopardy now because it has an overextended government and a very over extended economy. There is a credit bubble there, a real estate bubble. The financial system is in entire disarray. They have non-performing loans to the hilt. The Chinese have to make a transition away from an export-led economy to a more consumer-driven economy. But at this point, consumer purchases account for only 35% of their GDP.

• Bollinger - I'm pretty constructive on stocks here. Part of the reason is that few other people are. If you look out there through media and chat rooms and various newspapers and shows like yours, we get very little bullish opinion here, yet the background is pretty bullish. We have good seasonals going for us. We have good market internals going for us.
• Bollinger - ... Seasonals are definitely a technical, and we have two good seasonals going for us here. 
• We're just coming into the best part of the year to own stocks, December through May, and
  
• in addition from the four-year perspective, this is the best part of the presidential cycle to own stocks. So we have two great seasonal plays here.
• Bollinger - In addition, we've just gotten the Dow 30 Buy Signal where both the transports and the industrial averages have turned up and cleared resistance.
• Bollinger - I'd get in on any pullbacks here. I think virtually any pullbacks that we see in the market, a great place to enter. We're in a net positive environment if you look at the advance decline line. It's performing very well. There's another positive fact there. Any places where we pull back, especially if we can get to the Lower Bollinger Band and turn up from there, those are great entry points. i don't think you have to worry about stops so much here. you may have to do a little bit of hedging if we get some untoward news events here, but the big thing is most people are underinvested, individuals, institutions. Not only are institutions underinvested, they're invested in lower beta defensive situations. there's going to be a lot of catch up to play....we could see some pretty big upside in the market.
  

• I would just say is watch 1280 because I think that's a stop for a lot of guys that are shorts. I think you get a waterfall effect up to the 1330 level.

• Seasonality, you know, never works perfectly. It's background information. At least two out of three times it will tend to work out....It gives you a direction that you can follow if nothing else intervenes. So if we start to get some really bad economic news here and the internals start to crumble, advances and declines start to crumble, we start to see new lows expanding then we ignore the seasonals.

• The Standard & Poor's 500 Index (SPX) may advance to between 1,330 and 1,345 this month before the rally reverses, according to Tom DeMark, the creator of indicators to show turning points in securities.
• "This month’s rally will end when the S&P 500 closes higher on four successive days, DeMark said.Today’s action is credible," DeMark said in an interview after the close of regular trading on U.S. exchanges on Bloomberg Television’s “Street Smart” hosted by Lisa Murphy and Adam Johnson.
• "I had the strongest short-term buy signal I’ve recorded in 40 years” during the week of Thanksgiving, which fell Nov. 24, said DeMark, the founder of Market Studies LLC, in a phone interview. “It’d be an explosive move to the upside"
• “Today was a good job for the market, there was some risk that it could move lower, but fortunately the buyers came in after a weekend and that is usually a pretty good sign.”
• “The market should top out around Dec. 21,” DeMark said today. “The market rhythm and market balance equilibrium all require the market rally. Once that’s completed, the market will have a vacuum on the downside and we should have a sharp decline.”

• It is going to be tired and disappoint everyone. We are 4-5 higher successively higher closes vs. yesterday's close (approx. 1255), but they are going to be modest..Once that happens, I think the market is going to build a trap and many of the people who are going to be bullish are going to be trapped into a market  somewhat similar to what we experienced back in November 1973 if you go back to that period, it was sharp to the downside.

• Tom DeMark to me $SPX working higher to 1313, may take another 5-7 days. Still several successfully higher closes away from the top

• SPX upside remains (!!) 1313-1340 with 4-5 successfully higher closes above the 10/27 high close of 1284.

• What comes next? Sebastian thinks the VIX could be moving down to a new lower volatility equilibrium. We are now on our fifth day in a row with the VIX trading below 30....that's the longest period of time it's held below 30% since August....this keeps going for another day or two, it could signal a new range for the VIX between 25 and 30.
• Even as the market got obliterated in November, the VIX was still going lower instead of higher, which is an extremely bullish development and very different from what happened when the market was put through the meat grinder in August and the VIX flew through the top. Sebastian calls is a divergence and a sign of a genuine bottom in the market.
• ...That's why Sebastian thinks there is a strong chance that the S&P 500 could break through its recent highs and threaten the 1,300 level, although at that point he thinks there could be a pullback unless the VIX can drop below 25%.

• As for me though, this lack of worry makes me fret that we could be getting too complacent. But I respect the VIX and Sebastian's interpretation.... So if the extreme volatility period is finally over as Sebastian is suggesting that would be a green light for all the sideline money to come back in. It could propel us higher and give us a very nifty end of the year rally.

• Bartiromo - Do you think we're on a path marching toward Italy?
• Lindsey - Yeah, I think we are....If you play the numbers forward without stopping them, we'll be Italy by the end of 2014 with a Debt to GDP ratio of 120%. I think the way our political process works, we are not gonna see a lot get done until the November election. Then between then and say the July 4 holiday,  which is when everything gets done in Congress as far as big deals go, they'll have to do a major rehashing of entitlements, taxing, spending. It's going to be a very very busy legislative session. Hopefully everyone involved will be able to come together and get something done. Otherwise, we will be Italy.
• Bartiromo - Busy or more complicated? What is going on in Washington?
• Lindsey - The public is evenly divided. 47% of the country pays no income tax at all. So the other 53% pay all of it. Well, that's a good way to begin to understand what the problem is. I think what you're going to have see is people come together in the middle. The reason you want to do is after an election, you have the maximum amount of time till the next election. Hopefully the voters will deliver a signal in November 2012. The new Congress and the President, whoever that may be, will have to carry it forward and try to get something done. I think they'll be in the mood to compromise. I really do. I think the country wants it. Even if we have a divided outcome, I think there will be a lot of goodwill there.
• Bartiromo - you're talking about the 47% of the people who don't pay any taxes. Michelle Bachman is on her way up here. She basically says her plan is everybody pays something, even if it's $100, so everybody has a stake in this, which is an interesting take.
• Lindsey - It is an interesting take. It doesn't have to be a lot, but, you know, economists tend to forget we dwell on the numbers, not the psychology of it all. If you pay absolutely nothing, what stake do you have in the government? I think she makes a fair point.
• Bartiromo - How would you characterize the environment in the US?
• Lindsey - I think we are soft, but growing. And I think that is how we are going to be for awhile. The main reason the unemployment figure dropped is people are still leaving the labor force. Labor force participation rate is back to where it was in 1943. Not a good sign.
• Bartiromo - So people have stopped looking and that is why the unemployment rate went down?
• Lindsey - Absolutely. The total amount of job creation has not been enough to justify that kind of decline. People are literally leaving the labor force. What I find troubling is wages are going nowhere. They basically have been flat. They've been well below inflation. It's going to be real hard to keep consumption going forward, to keep  the economy going forward when wages are dropping, People, to cover for that, they're now using the credit cards again....long term it's bad and certainly not sustainable.
• Bartiromo -  you think profit expectation will be down?
• Lindsey - Yes, I do. I think things are slowing, I think margins will be compressed. We are going to see reductions in profit expectations as January and February develop.

Recently this Blog discussed the smart, tactical and resolute moves of the Obama Administration in Asia. These moves are the signals sent by a real leader of a strong, courageous country to an aggressive power like China that seeks to establish its hegemony. This determination is why China respects America and is afraid of American power.

Then this week, we saw a stark contrast, We found out how a meek leader of a soft country responds to the bullying of an aggressive power. The aggressive power is the same, China. But the protagonist in this case is India.

This week, a four-day International Buddhist Conference was held in New Delhi. Around 1,300 Buddhist scholars, thinkers and followers from over 30 countries attended the conference.

Buddhism originated in India. Gautam Buddha was a product of India. The bulk of his work was done in India and various monuments in India are witness to his travels and teachings.  Buddhism was carried to the then known world by the messengers of Emperor Ashok, one of the greatest emperors in world history. India has had many great sons and daughters. But today's Indian flag is adorned by only one man's symbol, the Chakra of Ashok. The mission that organized the International Buddhist Conference is fittingly named the Ashok Mission. 

  
(Buddha Statue at Sarnath, India - src Wikipedia)                (The Chakra of Ashok - src Wikipedia)


India enjoys a special respect in much of the Buddhist world as a birthplace and as the founding society of Buddhism. So this conference in India's capital should have provided a significant diplomatic opportunity to present India's strength.

Unfortunately, the Indian Government only presented India's cowardice. The Ashok** Mission, organizers of the Buddhist Conference, had invited His Holiness the Dalai Lama to give the valedictory speech. This is but natural because the Dalai Lama is the most well known and the most respected Buddhist scholar in the world today.  But China was furious and demanded the cancellation of the conference.



The Dalai Lama, right, is greeted by a Buddhist monk during the Global Buddhist Congregation
in New Delhi Wednesday - src WSJ - Raveendran/Agence France-Presse/Getty Images


The Ashok Mission condemned China's politicization of the conference. As Ashok K. Wangdi, a member of the Organizing Committee, said:

• "It is first and foremost a religious event. We are very upset by China's attempt to politicise it,"

• “This is a religious congregation and not a political one,” said Alvydas Turskis, a delegate from Lithuania. “This is not even Chinese territory; this is another country. There is no aggression here against any country. Why should anyone object to something so peaceful?”

• CBs swaps action due to huge $ shortage & liquidity squeeze in financial markets due to EZ crisis. CBs preparing for worst but markets took it as positive.

• There is still an enormous amount of risk out there...We are hoping that there is going to be a grand bargain sometime next week that will both give the markets what they want and will give the ECB & the governments what they want which will be a package of short term measures and long term measures that will finally bring these things under control. But it is still a very risky state of affairs.

• restore investor confidence by finding ways to convince people, investors that Europe is a good place to keep their money.

• If you look at the costs of the European breakup, the costs are really so large that you are compelled to believe that rational people will find a way to avoid those costs. If we have now different currencies reintroduced in Europe you are going to have the mother of all currency mismatches with all of the problems associated with it. There are potentially huge problems here. That is the reason why I believe they will make every effort to try to avoid this happening...Plus the fact that they have put 20 years of work into making it happen.

• Bianco - It will either end with a deal that the market is convinced will end the crisis and cause a massive rally in sovereign bonds or it will end in failure and the market will immediately start to price in more chaos, much higher sovereign bond yields and a possible breakup of the euro.

• Patterson - if they (Chinese leaders) need to stabilize the economy, they can. They will.

• Faber - ...there is an obvious slowdown in the Chinese economy and as I pointed out in my report, I think there is a chance for a hard landing.and I think the economy will weaken because we have a very capital goods oriented economy..and capital spending is very volatile...
• Faber (in response to Patterson's comment "who cares"?) - I think a lot of people will care if China grows only at 5% rather than 10% or 0% in a hard landing case because China is the largest buyer of commodities in the world, and if the Chinese economy slows down the demand for commodities slows down. then the economies of Brazil, Argentina, everybody is affected and then they can buy less from China and then you have a downward spiral.

• Gross - ...Investors should consider risk assets in emerging economies, such as Brazil and Asia, and bonds in the strongest developed economies, where the steep yield curve may offer opportunities for capital gains and potentially higher total returns.
• Gross - ... Consider Brazil with its agricultural breadbasket and its oil, Consider Asia with its underdeveloped consumer sector but be mindful of credit bubbles. (emphasis ours)
  

• Poole - there was a decline in the unemployment rate, but it looked like there was a big decline in the labor force as well. so you have to look at that in a lot more detail to make sense of it.
• Shiller - people are overreacting to this unemployment rate news this morning. The economy is still in a difficult situation...I like to look at the employment to population ratio which as of this morning was 58.5% that's exactly where it was at the bottom of the recession in 2009. Unemployment fell this month because people are dropping out of the labor force which is the denominator of that ratio. So I think these numbers are not so encouraging right now.... It is vulnerable especially with the rest of the world teetering on recession.  

• Gross - focus on a consistent, "extended period of time" policy rate that allows two-to-ten year maturities to roll down a near perpetually steep yield curve to produce capital gains and total returns which exceed stingy, financially repressive coupons. A 1% five-year Treasury yield, for instance, produces a 2% return when held for 12 months under such conditions.

• Each previously time in the last two months that $VIX has gotten below 30, the market has sold off almost immediately. One of these times, it won't, of course, but it remains to be seen if this is that time.

• The Times of India reported that Facebook paid the highest salary of any recruiter to an Indian Institute of Technology graduate - $140,000 plus one-time signing bonus and a relocation bonus. Microsoft came in to recruit for its Redmond, WA headquarters and Google hired engineers for both their India offices and global offices. As the Times of India wrote "It appeared as if the placement process at the IITs was insulated from the world's crippled economy."

1. Richard Fisher on CNBC's Kudlow Report on Thursday, December 1
2. John Roque on CNBC Fast Money on Monday, November 28
3. Jim Rogers on CNBC Europe Investors Clinic - Tuesday, November 29
4. Jim O'Neill on CNBC Squawk on the Street on Wednesday, November 30
5. Robert Engle on CNBC Squawk Box on Wednesday, November 30

• Roque - Don't touch Financials. That's what we're continuing to go with, Melissa. We think the group will continue to work lower over time. We have a chart of the financials market cap as a percentage of the S&P which goes back to 1989. We have an average going back to 1977 - that's about 12%.  Here they are just over 13%. We think this is a reversion beyond the mean business, not a reversion to the mean business. We ultimately expect this yellow line will work below the long-term average like it did in March of '09.
• Lee - are you basically saying the historical average of the market cap to S&P will eventually work its way permanently lower at this point?
• Roque - permanent is too strong a word but suffice to say that we think the weighting of the financials is going to work into the single digits and stay there for some time much like it did through the '70s and early '80s. We have to remember the financial business was a lot smaller then than it is now. We continue to believe if this market remains choppy it's going to get smaller probably like it was in the late '70s, early '80s.
• Adami - Does that mean we maybe see a rally in the broader market or the financials going to go down faster than the S&P at this point? Are both going to go down, just financials lead?
• Roque - I think the Financials underperform. So I think the next move for the S&P is lower and I happen to agree with you on the upside. Let's call it 1215, 1225 and I think you end up selling them there. I think the market still has unresolved action to the downside. I think the financials underperform. So we think it's better to remain underweight or sell rallies in these things and we think it's deleterious to your portfolio's health to continue to try them. If they were cheap, they'd stop going down. They don't stop going down.
• Finerman - Do you differentiate between the big cap money center ones and the regionals? 
• Roque - yeah, Karen. The regionals perform better than the big caps. What's especially worrisome to us is the action in the Brokers, Goldman, Morgan, Lazard, Jefferies, you name it, they all look worse or lower going forward and worse than banks, of course, and worse than the regionals. We think the brokers still have a lot of downside and we'd use rallies to sell those and the money centers. The regionals act better.
• Lee - you mentioned unresolved action to the downside on the overall S&P 500. What are the levels you're watching at this point?
• Roque - I happen to agree with guy. We think 1215, maybe 1220 is a sale. We think 1,000 on the downside would be the rough part of this recent range, but we have had a 950 target on the S&P which we don't think is out of the question. We still think there's unresolved action and we think we have to get there in order to wash sort of this cycle out before we can have a good rally to the upside.

• Faber - let's start off with the news that has markets around the world up sharply. This coordinated action to try to unlock what appears to have been a very serious situation in terms of dollar funding for banks in Europe. Is it a good thing or is it a sign perhaps that the crisis is even more advanced than some of us had anticipated?
• O'Neill - a nice way to celebrate the ten-year anniversary of BRICs with a stock market rally like this, that's for sure. You know, the way I interpret it, which gives me enthusiasm, the central bank is clearly telling us that they learned a lot from 2008. it is both a sign of how tricky things have become, but it's also a clear sign of how when they need to do things to stop a replay of '08, they know exactly the sort of things to do, so I'm pretty impressed. By the way, also importantly, which is what started the markets to turn around in Europe, the Chinese made a reserve requirement.
• Faber - that 50 basis point reduction in capital, but what's behind that decision in your opinion in China?
• O'Neill - I think there are growing signs that the cyclical condition of the Chinese economy is slowing pretty sharply, more than they probably have thought, and highly importantly with it inflationary pressures in China are coming back down sharply, so they're getting to a position where they can reverse some of the aggressive tightening they have been doing for much of 2011. It's good news, good news. 
• Faber - but one wonders given China's reliance on a lot of buying coming from the European Union and what many people believe may be a recession there, what's going to happen to the Chinese economy, so a couple of questions there - do you believe Europe is going into a recession and what impact would that have on China?
• O'Neill - with the caveat of the German data this past week, virtually everything else I've seen suggests Continental Europe might already be in a recession. Because of the deleveraging problem surrounding the supply between banks and European sovereigns, it's clearly got a lot worse. I would guess data coming up would be weaker again. Two things about it.
  
• First of all, Germany, one-third of the Euro area, just printed another drop in the unemployment today and continues to show through some of its business confidence surveys actually better than what people expect. so it might not be quite as bad across the board as many of us have been worrying about would happen. 
• As it relates to China, you know, as I've said since '08 and the past year, China's growth going forward has got to depend increasingly on themselves. In many ways, I think it's not a bad thing for China to face these constant reminders that they can't rely on exporting to Europe and the U.S. They need to have it reversed and we need to be exporting to them, which I think we will see more and more signs of that as we go forward.
• O'Neill - one of the things I'm going to be looking for on the back of the meeting on the 9th is there's some talk coming out of Brussels that finally partly to demonstrate their commitment to the Euro project, the Europeans might start moving towards having a single representation at the IMF and at the G-7 and G-8 and that would open the door to a lot more space for the BRIC countries in a lot more effective smaller group than the G-20 and take their role in the world more seriously.

• Engle - We ask if there is another financial crisis, how much capital would these banks need - if tax payers say no, then there is global collapse. The amount of capital they would need in a financial crisis is a big number, it is much bigger than what is discussed in the European press. It is almost exactly the same as the same list would have need in the summer before Lehman. These banks are fragile and if the markets continue to collapse on them, they are going to be in big trouble. We are in a situation very much like the summer before Lehman.

Assemble together, Speak together, let your minds be all of one congruence,
As ancient Gods unanimous sit down to their appointed share.

Common are the invocations, Common the assembly, Common the mind, so be their thoughts united,
A Common purpose I lay before you and worship with your general oblation,

One and the same be your resolve, and be your minds of one accord,
United to the thoughts of all that all may happily agree.

Think back to the 1962 Cuban Missile crisis. The Soviet Union had embarked on an ambitious drive to become involved in South America. The initial responses of President Kennedy's were indecisive and unsuccessful. These mistakes emboldened the Soviet Union to act more aggressively. Finally, in 1962, President Kennedy had to respond.

Faced with many risky options, President Kennedy chose the smartest and most effective option. His decision was to match America's greatest strength against the biggest weakness of the Soviet Union. He took a resolute stand and put America's dominant Navy directly in front of Soviet naval ambitions in Cuba. The Soviets were stunned. They never expected this determination and this brilliant move. The Soviet chess masters realized they had been checkmated and they withdrew from Cuba,

We thought of this when we read the Washington Post article titled Navy's next stop in Asia will set China on edge. This article reports that "The United States and Singapore are in the final negotiating stages of an agreement to base some of the U.S. Navy’s new Littoral Combat Ships at the Changi Naval Base". This follows the decision to base 2,500 marines in Darwin, a military base in Northern Australia. That decision will prove to be the most significant initiative of the Obama Administration , as we wrote last week.


                  ( The USS Independence - a littoral combat ship - src Washington Post)


Singapore* is widely known as a business center and as a peaceful city state that symbolizes world trade. Frankly, that pales when compared to its geo-strategic location. Singapore sits at the opening of the Strait of Malacca into South China Sea. Over 25% of the world's trade passes through the Strait of Malacca. And the Strait of Malacca narrows to 2.8 km (1.5 nautical miles) near Singapore. according to Wikipedia. This makes Singapore one of the world's most important choke points for naval traffic.

 

          (Location of Singapore - src Wikipedia)        (aerial view of the Strait of Malacca - src Wikipedia)


Virtually all of China's oil imports flow through the Strait of Malacca. China's naval access to the Indian Ocean, the Middle East and Africa runs through the Strait of Malacca. Singapore, as the Washington Post article points out, "is also on the southern edge of the South China Sea, the subject of increasingly nasty territorial disputes with Vietnam, the Philippines and other countries."

Now President Obama has decided to base US Naval Combat Ships at this choke point of extraordinary importance. This is why the Washington Post article writes:

• If China is unhappy with the Obama administration’s decision to send a handful of Marines to northern Australia, wait until the U.S. Navy starts basing warships in Singapore, on the edge of the disputed waters of the South China Sea.

• Nehru never understood the challenge posed by China. He paid a heavy personal price for this mistake but his country, India, has paid a far greater price and is still paying an enormous price for that mistake. Obama's great fortune is that today's America is not as complacent or weak as India was in 1947. Obama merely has to listen to America's experts and change his agenda. The trillion dollar question is Will He?

1. Jim Chanos on Bloomberg TV's In the Loop on Wednesday, November 23
2. Mohamed El-Erian on Bloomberg TV's In the Loop on Tuesday, November 22
3. Larry Fink & Bill Gross on Bloomberg TV on Monday, November 21

• "I think we probably came back a little bit more bearish….Our concerns about what we saw in Australia: an economy clearly tied to China has hitched its wagon to the tail of the tiger. In terms of the general complacency, what we heard over and over from investors and clients and potential clients is, 'yes, yes, there are some excesses, but the government will figure out a way. That the government is this all-knowing, omniscient basic entity that will not (?) prevent me from losing money."

• "[The Chinese government] doesn't [have money], and that's the problem. The banking system in China is extremely fragile, and that's one of the messages we wanted to get to people."

• "In fact, because what happened the last two crises, in '99 and '04, when non-performing loans went crazy in China without even a recession, the Chinese banking system was not re-capitalized like ours was, it was papered over. Going into this credit expansion, Chinese banks are sitting on lots of bonds from the so-called asset management companies set up in 1999 and 2004, and they are keeping them on the books at par, at full value. In the case of Agricultural Bank of China, which we're short, those restructuring receivables are equal to over 100% of their tangible book. The Chinese banking system is built on quicksand, and that's the one thing a lot of people don't realize. When they talk about the foreign reserves of $3 trillion, what everybody forgets is there's liabilities against that."

• "Everybody seems to think it is a free and clear open checkbook. It's not. That is what we have been trying to tell people. Focus on the lending system over there, because everything occurs through the banking system."

• "Property prices and transactions are really beginning to decelerate. We saw that starting in August, that's continued into November. Transactions are down 40% to 50% year over year in the tier 1 through 3 cities. Prices are down. In some cases, we've seen riots in sales offices, where people are amazed that prices could actually go down. There's lots of indicators on the side. There's a growing sense that the Chinese government will ease. We point out that credit this year will grow between 30% and 40% of Chinese GDP. If that’s tight, I'd hate to see it ease."

• "At some point, we will cover our shorts. [The scenario would be] a system where the banking system would have to be recapitalized again, most likely. You would see a flood of RMB in the system, and a realization that the growth by fixed asset model has got to change. Mr. [Stephen] Roach and others are convinced that the Chinese customers will pick up the slack. And at some point, he and she will. But the transition is going to be the real tough part. And right now, the consumer continues to decline as a percent of the Chinese economy.  That is, I think, flies right in the face of what most people think will happen."

• "I am worried. We've had two bits of unfavorable news in the last 24 hours. One you reported this morning, which is that we have less economic momentum than we thought we had - 2% growth as opposed to 2.5%.  The second is that yesterday we had no policy momentum. We're worried about the concept of stall speed, that 2% growth may not be enough for an economy that still has to de-lever. We put the chance of a recession at one-third to one half, which is really high given initial conditions."

• "[Policy makers] are totally off the track. It's not a failure to agree on medium-term fiscal reforms, it's also a failure to give air cover for other things that need to be done -- in housing, in the labor markets, in credit. We have no policy momentum. Let me tell you what I find most terrifying: we’re having this discussion about a risk of recession at a time when unemployment is already too high, at a time when a quarter of homeowners are underwater on their mortgages, at a time when the fiscal deficit is 9%, a time when interest rates are at zero."

• Rosenberg - It is problematic, We are in uncharted territory. Here we are talking about 0% Fed Funds Rate going on for 3 years, a Fed balance sheet that has tripled in the stratosphere and end-less fiscal stimulus. I mean FDR never ran a deficit over 6% of GDP in the New Deal, we already are running them 8-9% of GDP. Once the recession starts, my big dilemma is what is it that is going to pull us out? When you consider that China is fighting an inflation problem, Europe is fighting a sovereign debt problem, it is going to be very problematic what gets us out once we get into it.

• "This is a fragile economy. It doesn't mean we don't have strength, we certainly do - the corporate sectors are as strong as we have ever seen it in terms of balance sheets. We have incredible entrepreneurial spirit. But we're facing all these structural headwinds, and the big concern is the possibility of us being tipped over by Europe. Things in Europe, as you mentioned a few minutes ago, are getting worse, not better."

• "Unlike Europe, the U.S. doesn't face an engineering problem - it faces a political problem. The solution is not an engineering nightmare. You can actually put it on paper and get it done. But it's been a political nightmare. What we'd like to see is the political class to come together and agree on the steps that need to be taken."

• "As you have heard us say over and over again, Bill Gross has been saying it, I've been saying it, other PIMCO colleagues have been saying it -- it's structural in nature. We need medium term structural reforms to increase the growth potential and job creation potential of this economy. We can do it. This is different from Europe. Europe has both a political problem and an engineering problem. Our problems are small relative to Europe, but if we wait they will become larger."

• "That is what S&P is telling us. We have to remember that S&P still has us on negative outlook which means unless things improve over the next three years, there could well be another downgrade. The ratings agencies in general are in a very tough position. We talked about at PIMCO's investment committee yesterday. They've been beaten up a lot, both for what they have done and for mistakes that disrupted the markets for a while. It is hard to be a ratings agency today. You have to read these comments in that context. They are under fire."

• "I think [Stiglitz] is right, in the sense that the muddled middle, where Europe has been, is no longer sustainable. The crisis that started in the outer periphery, Greece, not only has shifted to the inner periphery and the outer core, Spain and Italy, but it has also impacted France which is the inner core."

• "Europe needs to make a choice if it wants to save the euro, and it should save the euro. There's only two choices: one is a full fiscal union, a political decision with a very large bill. The other [choice] is a smaller, less-than-perfect euro zone, which has political implications but has a smaller bill. That is a political decision that Germany must take. The quicker it takes it, the more likely it will be able to save the euro."

•  "There are no easy options. That's why the process is paralyzed. Wherever the policy makers look, they see tremendous costs and tremendous disruptions. The tendency has been to do too little, too late. There is no costless way forward at this point, and that is a problem that all of us have to internalize and understand, that there are no easy solutions."

• "Left to our own, we would muddle along with the risk of stall speed, but one thing we cannot cope with is the major shock from one of the largest economic areas of the world, Europe. Already we're seeing investors stepped back from markets because of the anxiety. The more that happens, the more dysfunctional these markets become."

• "I smiled when one of your guests said earlier that the Fed has been the only adult in Washington. That is true. It has been the only institution willing to take steps. As you pointed out, because the Fed has taken these steps, it has taken pressure off of the rest of Washington to do its part…Other agencies haven't stepped up to the plate. It is time for other agencies to step up. The effectiveness of the Fed is declining, unfortunately, day in and day out."

• "Chairman Bernanke has made it clear and he's repeating it three times, saying that when they look at these unconventional policies, they recognize the benefits but there are costs and risks. What we call collateral damage, unintended consequences." 

• "[Bernanke] recognizes that that equation, that balance, is shifting from potential benefits to costs and risks. Looking forward, if they were to do QE3, they may get some benefits, but I suspect there would also be quite a bit of collateral damage and distortions put into the system that would take us years to overcome."

• "[Collateral damage would be] pressure on the currency. What you will see is pressure on the functioning of markets, you will see people stepping back, because more and more non-commercial forces will be determining market outcomes. We will also see questions about the credibility of the Fed and the political autonomy of the Fed."

http://www.bloomberg.com/video/80855400/

http://www.bloomberg.com/video/80855480/

• "If you have the fortitude to look beyond the next cycle of information, if you have the fortitude to look beyond the next few years, and then you have the capability of investing for 10-year cycles, then a larger allocation in equities will probably pay off.  But it's going to have to be with equities that are multinational in nature so you're not country dependent.  And that's one of the real themes that we're talking about. Don't be so U.S. dependent.  Don't be so China dependent.  Try to get companies -- that's the beauty of corporations.  They are in multiple locations throughout the world, and their earnings streams are less dependent on one nation."

• "And so I do believe one has to accept more risk today.  And I think the PE ratios of the world are pricing in that fear.  And so in my mind, even today, I'm very worried about Europe and the resolution of Europe.  I do believe a larger than normal allocation in global equities with a bias towards dividend will pay off over a long cycle."

• "Here's the critical factor as I see it.  Can developed economies successfully reflate?  Can the Bernanke helicopter stay aloft?  Can we produce a nominal GDP growth rate, whether it's laden significantly with inflation or more significantly with real growth?  But can we produce an old normal economy of four to five percent nominal growth?  You know, it's not necessarily a slam dunk that we can.  Japan has proven that for the past several decades. There are two lost decades."

• "The critical element in terms of risk taking going forward is to decide whether or not developed economies can successfully reflate.  If they cannot, then -- then a higher quality, safer choice is the best alternative.  If they can, then obviously equities, which can cope with inflation, which can produce growth in a reflationary environment is the better choice.  But it's critical going forward.  And an investment company and an investor must, you know, attempt to make that decision on an annual type of basis because the outcome is not determined at the moment."

• "A barbell mix of both.  I have a substantial amount of bonds.  You know, not treasury bonds.  In many cases, municipal bonds.  But I have a decent mix in terms of global growth companies.  I once suggested if we can successfully reflate, and that's the barbell alternative on the optimistic side, then a Procter or a Johnson & Johnson or a Coca-Cola, a global company with half of their revenues coming from outside the United States, with dividends of three and a half to four percent and at least with some growth prospects, obviously much better than a treasury.  But that's a choice that you shouldn't make with a hundred percent certainty. That's a choice that you should make with the potential for a deflationary outcome, minimal as it might be in the minds of policy makers."

• "I'd take their ETF franchise. I don't know if it'd pay for it but I'd certainly take it if I could take the best of Blackrock. That's an area where PIMCO has not been struggling but it has been behind, and we're coming public with our actively managed total return fund in the next few months, the SEC willing.  So it's an area I guess that we're trying to emphasize. I'd also appreciate and would welcome their equity franchise, but PIMCO's trying to become more balanced from the standpoint of being a bond shop to being equally balanced not only domestically and globally but from the standpoint of equity."