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Things That Make You Go Hmmm...

Hato No Naka No Neko (ハトの中の猫)

November 11, 2014



Hato No Naka No Neko (ハトの中の猫)

“To sum up what is most crucial in Japanese political culture: the Japanese have never been encouraged to think that the force of an idea could measure up to the physical forces of a government. The key to understanding Japanese power relations is that they are unregulated by transcendental concepts. The public has no intellectual means to a consistent judgment of the political aspects of life. The weaker, ideologically inspired political groups or individuals have no leverage of any kind over the status quo other than the little material pressure they are sometimes able to muster. In short, Japanese political practice is a matter of ‘might is right’ disguised by assurances and tokens of ‘benevolence.’”






“Living in a world such as this is like dancing on a live volcano.”


THINGS THAT MAKE YOU GO HMMM... ....................................................3

Inflation or Deflation? .................................................................................20

HK Property Prices Continue to Rise ................................................................22

Dollar Smashes Through Resistance as Mega-Rally Gathers Pace ..............................23

Mario Draghi’s Efforts to Save EMU Have Hit the Berlin Wall ...................................25

Is It Time to Get Long Volatility? ....................................................................26

Billionaire Enclave Prices Drop on Singapore Property Curbs ...................................27

The Colder War by Marin Katusa: An Exclusive Extract ..........................................29

Bob Rodriguez: New Great Recession Coming In 3 Years ........................................31

Deep Divisions Emerge over ECB Quantitative Easing Plans ....................................33

The Dodgiest Duo in the Suspect Six ...............................................................35

CHARTS THAT MAKE YOU GO HMMM... ..................................................37

WORDS THAT MAKE YOU GO HMMM... ...................................................40

AND FINALLY... .............................................................................41

Things That Make You Go Hmmm...

Last week, appropriately enough on Halloween, the Bank of Japan did something truly scary.

As shocks go, this one — though it had been fairly well-telegraphed to the markets that something wicked this way might be coming — was in a league of its own.


I’m sure that by now you’re well aware of what Kuroda-san (the Governor of the Bank of Japan) announced to the world; but in case you’re not, here’s a little recap:

(Japan Times): The bank will “enter a new phase of monetary easing in terms of quantity and quality,” Kuroda said.... “This is coming from a different level in both quality and quantity,” Kuroda told reporters after the two-day Policy Board meeting. “We have put forward everything there is to do at this point,” he said....

The former chief of the Asian Development Bank said the BOJ will aim to expand the amount of outstanding JGBs by hiking purchases to an annual pace of ¥50 trillion.

Increasing the amount outstanding of the bank’s JGBs at an annual pace of ¥50 trillion will bring the current balance of ¥89 trillion to about ... ¥190 trillion by the end of 2014.

It also will target longer-term debt, including JGBs with maturities as long as 40 years, as well as ETFs and real estate investment trusts, it said....

Kuroda said he’d allow this monetary experiment to run until the inflation target is met.

He also said the main target of the BOJ’s operations would switch from the uncollateralized overnight call rate to the monetary base, which will be fattened via money market operations to the tune of about ¥60 trillion to ¥70 trillion a year.

Kuroda also pledged that the BoJ:

Will invest ¥1 trillion in exchange-traded funds and ¥30 billion in real-estate investment trusts annually.

Vows to continue quantitative and qualitative monetary easing until 2 percent inflation is achieved in a stable manner.

Will conduct monetary market operations so Japan’s monetary base expands at an annual pace of about ¥60 trillion to ¥70 trillion per year. The monetary base is cash in circulation and the balance of current-account deposits held by financial institutions at the BOJ.

Shocking? Unprecedented? Foolhardy?

All of the above... except...

That was the announcement Kuroda made in April of 2013 as the first of Abenomics’ Three Arrows was fired.


Last week, barely 19 months after the world digested the news that Japan was going all-in, Kuroda pointed over the shoulders of all the other players at the table, said “Look! Behind you! An Austrian economist!” And in the ensuing panic, he slipped a bunch of freshly minted chips from a secret pocket in his jacket onto the table and, once calm had returned, went all-in again.

This time, apparently, he was serious.

The Bank of Japan, said Kuroda, would first be increasing its purchases of JGBs to ¥80 trillion a year from the previous range of ¥60-70 trillion.

What does this mean in real(ish) money? Well that’s about $720 billion. Sounds OK, right? After all, TARP was $787 billion, and that hasn’t done any damage whatsoever, has it?

However, there’s this age-old problem with comparing apples to oranges; and so, once we get our citrus fruits straight and convert the BOJ’s stimulus to a number proportionate to the larger economy of the USA, we find ourselves staring at the equivalent of the BoJ’s splashing out almost $3 trillion. Each year.

JP Morgan swiftly pointed out that this means the BoJ will be buying more than double the amount of new JGBs issued by the government.

Yes. You read that right. Double the total new government issuance. The Fed are lightweights compared to this mob.

We’ll get back to why they’re doing this a little later.

But this is just the beginning.

The BoJ will also triple its purchases of ETFs and J-REITs (yes, direct intervention by a Central Bank into the stock market is now not something to be afraid of, but rather embraced) which will make the BoJ the largest buyer of Japanese equities.

Do you smell anything wrong with this, Dear Reader?

Well, by way of a change, a few mainstream commentators are also beginning to question the logic of Kuroda-san’s latest incursion into monetary madness:

(Gavyn Davies, FT): [The BoJ’s] gigantic increase in QE activities... [is] ...of first order global importance… ensuring that the total central bank injection of liquidity into the global economy in 2015 will be much larger than it has been in the last year....

The Japanese injection... relative to the size of the economy, is far larger than anything attempted by the other central banks.

[Japan is now conducting] a laboratory experiment... [and] Governor Kuroda’s monetary experiment has in effect morphed into a strategy of devaluation plus financial repression.

But Davies isn’t alone in highlighting the sheer madness of Kuroda’s latest move:

(Richard Katz, The Oriental Economist): In the face of growing loss of faith in the Bank of Japan’s ability to either achieve its 2% inflation target in the foreseeable future or to help boost real growth, Kuroda has doubled down his strategy of lots of confident talk and even more money-creation.... (I)t is well known that Prime Minister Shinzo Abe, who keeps a stock monitor in his offices, sees rising stock prices as critical to voter confidence in Abenomics and hence his own approval ratings.... Moves to lower the yen and raise stock prices are key to the BoJ’s own strategy and tactics; Kuroda is an Abe ally, not a puppet.

However, leave it to David Stockman — one of the shoutiest sane people you’ll ever come across — to dispense with journalistic niceties.

In a piece entitled The BOJ Jumps the Monetary Shark — Now the Machines, Madmen and Morons Are Raging, Stockman takes Kuroda and the BoJ to task as only he can:

This is just plain sick. Hardly a day after the greatest central bank fraudster of all time, Maestro Greenspan, confessed that QE has not helped the main street economy and jobs, the lunatics at the BOJ flat-out jumped the monetary shark. Even then, the madman Kuroda pulled off his incendiary maneuver by a bare 5-4 vote. Apparently the dissenters — Messrs. Morimoto, Ishida, Sato and Kiuchi — are only semi-mad.

Never mind that the BOJ ... balance sheet which had previously exploded to nearly 50% of Japan’s national income or more than double the already mind-boggling US ratio of 25%.

In fact, this was just the beginning of a Ponzi scheme so vast that in a matter of seconds it ignited the Japanese stock averages by 5%. And here’s the reason: Japan Inc. is fixing to inject a massive bid into the stock market based on a monumental emission of central bank credit created out of thin air. So doing, it has generated the greatest frontrunning frenzy ever recorded.

The scheme is so insane that the surge of markets around the world in response to the BOJ’s announcement is proof positive that the mother of all central bank bubbles now envelopes the entire globe.

The “surge of markets” to which Stockman refers illustrates the madness that has consumed both equity and bond markets in the wake of the 2008 ceding of custody of formerly free markets to the world’s central banks.

These are the two charts that people care about when discussing the Bank of Japan’s moves.

Firstly, the Nikkei 225:


As you can see, stocks have exploded in Japan since the beginning of Abenomics, rising 41.6% in just 19 months — but it wasn’t a straight line. Initially, after a 30% surge, the doubts set in and the Nikkei retraced most of its gains before beginning a long grind higher as investors reluctantly bought into the idea that Abenomics might just work raise the Nikkei 225.

Taking a step back, we get to see just how poorly stocks have behaved since the bursting of the twin Japanese bubbles in real estate and equities back in the late 1980s, as well as the clear breakout, retest, and break higher from the 25-year downward trendline:


The second chart that folks care about in the wake of the BoJ’s moves is this one, the yen:


Again, as you can clearly see, QE10 and now QE11 jumpstarted the yen. (Are you paying attention, Janet? Do you think for a second that when the BoJ announced QE1, it was as the first installment of a cunning 11-part plan to be implemented over a couple of decades?)

However, jumpstarted tends to imply a positive effect, as does a chart that travels from bottom-left to top-right. In the chart above, I have inverted the yen to better reflect the damage being done to it by the BoJ rather than the kinda-cool-looking chart where it explodes “higher.”

Of course, thanks to the wisdom of guys like Kyle Bass (whose Rational Investor Paradox warned of a plummeting yen and a skyrocketing Nikkei) and Dylan Grice (whose 63,000,000 call for the Nikkei by 2025 is occasioning fewer chuckles by the day), everybody is riding both these horses — hard. However, the fact that everybody got “long the Nikkei” and everybody got “short the yen” when Abenomics’ first arrow was fired is the wrong reason to be cheering Kuroda’s interference in the natural forces that used to drive markets.

Now, “long the Nikkei and short the yen” is undoubtedly a great trade and has much further to go — something my friend Jared Dillian pointed out in his excellent Daily Dirtnap recently. Pointedly, the piece was entitled “Unlimited Upside”:

(The Daily Dirtnap): I am starting to wonder if nobody understands why this trade works and why it will continue to work, and why, in November 2012, I called it “THE GREATEST TRADE EVER.” The reason it is the greatest trade ever is because you literally have unlimited upside. JPY can infinitely weaken. The stock market can go infinitely high....

So USDJPY is going to get to 120 in a hurry, then what? You’ve seen the chart. If it gets through that trendline, the sky is the limit. Where could the Nikkei go? Beats the heck out of me. But that is the great and interesting thing about this trade, is that if Japan really does find itself in trouble, they can’t default — well, I suppose they could, and that actually would be the smart thing to do, but no, they will print their way out.

No arguments from me there, Jared, BUT... the charts that people need to be looking at to try to understand the dire state Japan is in (as well as the ultimate futility of the Keynesian free lunch) are charts of things that can’t be directly influenced by the BoJ but which are instead supposed to be indirect beneficiaries of Abenomics and to generate the organic growth needed to revive Japan’s moribund economy.

Charts like... oh, I dunno, Japanese industrial production:


Orrrr... perhaps that relatively unimportant macroeconomic datapoint, GDP:


Then there are the places my friend Paul Mylchreest of ADM ISI looked at this week in an excellent piece that landed in my inbox — places like real Japanese household incomes:

(Paul Mylchreest): You only know with hindsight, but there’s a good chance that Japan’s economy has just moved into the terminal ward of mismanagement and decline.

Kuroda went nuclear just as Mr and Mrs Watonabe… never mind the rest of the world… had begun to realise that “Abenomics” wasn’t working.

Real household incomes in Japan are running 6.0% lower year-on-year, which is close to the worst they’ve been in a decade… and most of the bad data points have followed the implementation of Abenomics.


And then of course there are the twin charts from my presentation at the Strategic Investment Conference back in May: Japan’s trade balance and current account (updated here to show the improvement in the data):


In his most recent Global Macro Investor, my friend and colleague Raoul Pal pointed out a couple more problems with the Japanese economy that no amount of prestidigitation can hope to cure, beginning with the reaction to Abe’s recent sales tax hike and moving swiftly along to exports (ordinarily the natural beneficiary of a plummeting currency for an exporter like Japan):

(Global Macro Investor): Japan’s economy has reacted as it always has with regards to the tax hike — it got flushed down the toilet…. It puts to rest any stupid notions that you can falsely raise inflation and see it stick. It also shows that QE does not help the economy in any way.

We can also see that massive Japanese QE has not helped its industrial production base…. And exports are just not picking up with a cheaper currency…. And even after a massive currency move versus the RMB, it is still not able to export its way out of trouble… demand is just not there, regardless of price….




So the simple truth is this:

Japan’s only solution to its crippling debt burden and seemingly unbreakable deflationary spiral is to weaken its currency.


Yes, there is plenty of talk of reform, though given Japan’s corporate culture that is far harder to achieve and much farther in the distance than most outside observers could possibly imagine; but were the narrative presented to the world simply as “we are going to destroy our currency,” even the market monkeys who continue to see no evil would be forced to take drastic action.

By maintaining the pretense that weakening the yen is actually part of a broader strategy which will ultimately be successful, the Bank of Japan is engaged in simply that: pretense.

Now don’t get me wrong: I’m not saying the necessary reforms CAN’T be achieved in Japan — just that they won’t. Not in time to save the country from disaster at the hands of Abe, Kuroda, and the rest of the Crazy Gang, anyway.

Those stagnant exports are a huge, flashing-red warning sign in the face of what can only be described as a resounding success in beginning the complete destruction of weakening the yen.

Let’s face it, if you are Japan and a chart like the one below doesn’t have a significant positive effect on your exports, something is structurally wrong — and structural change is not something the Japanese like (or do):


Now, after 18 months of a one-sided assault on the Asian currency markets, several countries are nearing a line in the sand. Raoul again:

(Global Macro Investor): This all leads me to another important topic for discussion, and that is Japan and China. There is a war going on and we need to understand it... with a chart of the Chinese Yuan versus the Japanese Yen. This is going to become increasingly important in understanding what is likely to develop.

The JPY has just wiped out 21 years of Yuan weakness.

This is an aggressive competitive devaluation against Japan’s largest competitor — China. This is a big deal…. But in the case of Japan it is not all about dollar strength; something much more troubling is going on, and that is a currency war with its competitors. The JPY/KRW cross is also getting close to some very key levels…. The JPY/TWD cross is equally troubling….


Think the Bank of Korea or the Central Bank of the Republic of China (Taiwan to you and me) are about to sit idly by and watch their exporters get put out of business by Japan Inc.? Me either... and that spells T-R-O-U-B-L-E, as Raoul ominously points out:

(Global Macro Investor): The issue here is the mercantile trade policies of Asia in a highly-indebted, imbalanced, low-demand world — the only answer is currency war and trade war.

Thus, I think it will not have escaped the notice of the other Asian countries that Japan is trying to steal an advantage from them in a desperate bid to counterbalance the gigantic debts within Japan itself.

Their response will be the only answer they can make — allowing their own currencies to fall sharply (I think the charts in the previous section show that).



In a currency war in Asia, four possible risk events could occur:

1. Someone loses control of their currency, and economic collapse and de facto defaults occur (devaluation or hyperinflation).

2. The dollar absolutely skyrockets (almost a certainty).

3. The Yuan is forced to devalue sharply.

4. War.

So it appears that Japan is playing some high-risk games, both with its own markets and with its mercantile neighbours….


Scary stuff — perfect for Halloween.

But what of the bond market? Well, fortunately for Japan, the profile of those poor unfortunate souls who own JGBs looks like this (left):

As you can see, only 4% of JGBs are owned by overseas investors, which helps keep this little problem in-house for a while longer, and ‘in-house’ is something Japan needs, because the Japanese ability (and willingness) to take pain for the greater good is beyond the comprehension of most market watchers.

That’s the good news.

The bad news brings us back to what we were discussing earlier — the reason why the BoJ is ramping up its bond buying to levels which have left madness in the dust.

As I wrote in Things That Make You Go Hmmm... back in 2011 when Japan’s Government Pension Investment Fund (GPIF) first announced that they would be turning seller of JGBs to fund retirees demands for cash, that shift, when it occurred, was going to cause significant problems for the BoJ. Well, right around the time Kuroda was scaring the kids with his latest news conference, the GPIF made an announcement of their own quite coincidentally and in no way coordinated with Kuroda’s:

(Bloomberg): GPIF, which manages 127.3 trillion yen, revealed plans to reduce domestic bonds, while setting allocation targets of 25% each for Japanese and overseas equities, up from 12% each.



Under the new plan, GPIF would need to cut about 23.4 trillion yen of its domestic bond holdings to achieve the 35% target, according to data compiled by Bloomberg based on the plan. The fund’s new target allows for a 10% deviation. GPIF held 67.9 trillion yen of local debt, which accounted for about 53% of its portfolio as of the end of June.

The announcement of the BOJ’s added stimulus on the same day GPIF revealed its new investment plan was no coincidence, according to Takatoshi Ito, who led a government pension advisory panel last year.

“Everybody involved was on the same wavelength,” Ito said in a telephone interview from Bangkok. “It is quite a coordinated action, whether consciously or unconsciously. It was beautifully timed, and I would call it a Halloween treat.”

“A Halloween treat”? Really?


William Pesek of Bloomberg took a rather dimmer view:

(Bloomberg): In announcing that it will boost purchases of government bonds to a record annual pace of $709 billion, the central bank has just added further fuel to the most obvious bond bubble in modern history — and helped create a fresh one on stocks. Once the laws of finance, and gravity, reassert themselves, Japan’s debt market could crash in ways that make the 2008 collapse of Lehman Brothers look like a warm-up. Worse, because Japan’s interest-rate environment is so warped, investors won’t have the usual warning signs of market distress.

Even before Friday’s bond-buying move, Japan had lost its last honest tool of price discovery. When a nation that needs 16 digits in yen terms to express its national debt (it reached 1,000,000,000,000,000 yen in August 2013) sees benchmark yields falling, you’ve entered the financial Twilight Zone. Good luck fairly pricing corporate, asset-backed or mortgage-backed securities....

Kuroda’s latest move means Japan’s QE scheme could last forever. The BOJ has willingly become the Ministry of Finance’s ATM; reversing the arrangement will be no small task.

Pesek continued, taking aim at the GPIF:

All this liquidity has made for surreal events in Tokyo. Take the news that Japan’s $1.2 trillion Government Pension Investment Fund will dramatically rebalance its portfolio away from bonds. Japan has enormous public debt and a fast-aging population, and now the world’s biggest pension pool is shifting to stocks. Yet somehow, 10-year yields are just 0.43 percent. The explanation, of course, is that the parts of the market the BOJ doesn’t already own are sedated by its overwhelming liquidity. The BOJ is now on a financial treadmill that’s bound to accelerate, demanding ever more multi-trillion-dollar infusions to keep the market in line.

And what of Japan’s households — the people who have been promised that the value of any cash holdings will be systematically destroyed by the men entrusted to steward the country successfully across the river of deflation to the safety of inflation waiting on the other side in the sunlit uplands? What of them?

Well, if the most recent flow of funds report, released by the BoJ in September, is anything to go by, poor old Mrs. Watanabe is about to get what is known in the West as the shaft:


Yep... the BoJ has made the Japanese people a promise. They will continue trashing 53.1% of their assets (having already knocked roughly 20% off them since the beginning of Abenomics); BUT, not to worry, because they will simultaneously inflate the value of the 9% of their assets held in equity portfolios by an as yet unspecified amount.

Now, rudimentary math would suggest that the Nikkei would have to double to compensate them for the confiscation of 20-odd percent of their cash — and that is assuming no further erosion — but a promise is a promise.

Pesek finished his piece on a high, taking aim squarely at Kuroda:

(Bloomberg): Kuroda is turning the BOJ into the world’s biggest asset-management company. The BOJ won’t admit it, but it’s monetizing Japan’s debt on a massive scale, and probably even retiring large blocks of it — just as the government did in the 1930s. What happens when the BOJ decides Japan needs a credible and functioning bond market in the years ahead? Kuroda’s successors face terrible odds disengaging from a market he’s effectively nationalized.

Perhaps history will vindicate Kuroda’s genius. That depends on whether Abe musters the courage to attack structural impediments to growth in employment, industry, trade and energy. More likely, Kuroda is demonstrating that it’s one thing to go long on a market, and quite another if you have to stick with that bet forever. To avoid being remembered as a madman, Kuroda had better devise an exit strategy from history’s most audacious bond trade.

I feel certain that when we finally emerge from this dystopian Keynesian nightmare and the books are written about this sorry period in monetary history, the day Kuroda finally went Colonel Kurtz on the world will be seen as the beginning of the end.

Back in 2010, my friend Dylan Grice wrote these words:

Despite the Japanese government paying a mere 1.5% on its bonds, interest payments amount to a hair-raising 27% of tax revenues. Including rolled government bills (which Japan’s MoF defines as debt service) takes the share to an eyebrow-singeing 57%.

Any meaningful repricing of Japanese sovereign risk would push yields to a level the government would be unable to pay. Moreover, since the domestic financial system is loaded up to the eyeballs with JGBs, a crisis of confidence there would soon transmit itself beyond the public sector.

The BoJ is now paying even less on its bonds — such is the temporary miracle of faith in a central bank’s ability to control the unintended consequences of its actions no matter the level of sheer lunacy involved — but, as Dylan pointed out, the BoJ’s course of action was set in stone four years ago.

Kuroda’s move was inevitable; and that, sadly, also applies to the end game. Back to Dylan:

So the path of least political resistance will presumably be to keep yields at levels which the Japanese government can afford to pay, and to stabilise JGBs at levels which won’t blow up the financial system. This will involve the BoJ buying any/all bonds the market can no longer absorb, probably under the intellectual camouflage of “a quantitative easing program” aimed at breaking Japan’s deflationary psychology. Economists might applaud such a step as finally showing the BoJ was getting serious about Japan’s problems. In fact, it will be the opening chapter of a long period of inflation instability.

Is Dylan a psychic? No. He’s just a very smart, incredibly astute observer of both market psychology and, perhaps more importantly, history.

The die is already cast, and all we can do now is wait for the inevitable to happen and Japan’s bond market and currency to be destroyed — and the Nikkei to head in the direction of Dylan’s 63,000,000 target.

In his always-brilliant Epsilon Theory this week, Ben Hunt looked at the BoJ move through the prism of Game Theory, threw in a lesson learned the hard way from getting schooled by his Grandmother’s bridge partners, and reached his own conclusions — conclusions that echo the fears of Raoul, Dylan, and myself. (Incidentally, I sat down with Ben in New York recently for a chat with my RealVision hat on, and what he had to say was fascinating:)

(Epsilon Theory): For five and a half years the BOJ has had a clear field to take whatever actions they wished without fear of some other, stronger central bank smacking them in the mouth. There has been a coordination of central bank purpose and effort that hasn’t been seen since… the 1985 Plaza Accords? Bretton Woods? Whatever your reference point might be from an economic history perspective, it’s been a very long time since we’ve seen such a very long period of such a non-strategic, we’re-all-in-this-together decision-making backdrop for second tier central banks like the BOJ or the BOE. So it really doesn’t surprise me at all that the BOJ did what it did last Friday. Like you and me and market participants everywhere, the BOJ Governors have been very well trained to expect that the Fed has got their back, that they can act according to their own narrow and immediate self-interests without concern or fear that their actions will result in someone smacking them in the mouth.

Unfortunately for the BOJ, I think that this happy state of coordinated policy bliss ended about six months ago. I think that they have redoubled this particular contract as if they were playing bridge with doting grandparents rather than chain-smoking, penny-pinching old crones. I think that there is a clear and growing divergence between the US and the rest of the world when it comes to balance sheet expansion and monetary policy intentions, and I think that for China in particular this latest BOJ action is perceived as an aggressive provocation that must be responded to forcefully.

So what’s next? I’m waiting for China’s response. I have no idea whether the response will be (to use the political science terminology) symmetric or asymmetric in scale and delivery. That is, the response could be larger or smaller than the perceived provocation, and it may or may not be a response delivered through monetary policy. I have no idea exactly when the response will occur. But I have zero doubt that a forceful response is coming. I have zero doubt that Japan is about to get smacked in the mouth. And when that happens, the monetary policy calculus in Japan … and the UK … and even the EU will take on a very different shape.

Kuroda has fired the shot that looks likely to trigger the next phase of the crazy monetary experiment we’ve all been living in for the last five years. Unfortunately, the next phase is where things start to get nasty. Just because equity markets cheered the latest sugar rush he guaranteed them should not make smart investors lower their guard — quite the opposite, in fact.

Colonel Kuroda has gone up-country into the Heart of Darkness, and all we can do is await the Apocalypse now.



OK... so this week’s slamdown in gold came after I’d gotten knee-deep into the BoJ’s scarefest, but you can rest assured that next week I’ll be addressing the gold market. Until then, however, I’ve got a bunch of goodies lined up for you, beginning with a wonderful piece on the inflation versus deflation debate from Charles Gave of GaveKal. Charles is a brilliant mind held captive in a charming Frenchman — a powerful combination if ever there was one.

After hearing from Charles, we stay in Hong Kong to find out a little about the ongoing property bubble in the Fragrant Harbour as prices continue to climb, head to Europe to hear how Mario Draghi’s ability to save the world may just have limits after all, before returning to Asia — this time to my home, Singapore — to find out that there’s another property bubble in this part of the world, which is heading in an altogether different direction to that of Hong Kong’s.

The need for QE in the EU is creating a schism at the heart of the Europe’s banking and political elite; Russia and Brazil take their place as the “Dodgy Duo” amidst the “Suspect Six”; we hear the thoughts of my friend Steve Diggle on the volatility markets; and, in an exclusive extract from his fabulous book The Colder War, Marin Katusa brings a historical perspective to today’s oil markets.

Lastly, there is a fantastic, no-holds-barred interview with one of the all-time greats: Robert Rodriguez of FPA. Don’t miss that.

Charts? Well, Global Precious Metals (a Singapore-based company on whose board I sit, by way of full disclosure) have produced what I think is the definitive guide to buying, shipping, and storing gold; we extract from that and look at the chart which Bob Rodriguez (and many other smart investors) considers the world’s most important — the Dollar Index. Next, we bring you a page to bookmark — the 100 most important charts in the world right now, courtesy of Business Insider.

Lastly, Marc Faber discusses what he calls the Japanese Ponzi scheme; Alan Greenspan finds religion (again); and yours truly chats with Gordon T. Long about financial repression.

Lest we forget.



Inflation or Deflation?

As the reader is aware, I have been of the opinion for quite a while that Capitalism was returning to its deflationary roots.

In my view, the evidence is beginning to be overwhelming. Thirteen OECD countries already have a negative reading for their Y/Y CPI. Another eight are below 1%. In Europe, when it comes to the so called “goods inflation” which is fairly easy to measure, ALL the countries have a negative reading y/y The German PPI is negative Y/Y which kills any hope to engineer an internal devaluation elsewhere. If I look at the US CPI ex shelter (I have a big problem with this measure and its weight in the US CPI), I reach a level of roughly 1% y/y and I have a roughly similar measure for the US CPI ex food (up) Energy (down) and shelter (up).

My own leading indicator of inflation based mostly on prices actually reached in markets (such as the Australian dollar) is plunging again as evidenced by the graph below. This has tended to lead falling or decelerating prices by roughly 6 months. My index of economic sensitive prices has broken down in the last few days, and is highly correlated to world trade. World trade in volume is probably going to shrink, with falling prices to boot.


So the deflationary forces seem to be gathering momentum. But a few more remarks must be made here. What are these forces?

Let us assume that we have three deflationary forces at work in the world today.

1. The first one is the result of the shale oil and gas technologies and should lead to a fall in energy prices. This is “good deflation”, equivalent to a tax cut. What I do not know is how much debt has been incurred in dollars to develop new energy resources which would not been profitable anymore if the price of oil kept falling. And then the borrowers would go bankrupt, which is hardly good news. After all, after the 1985 crash in oil prices, the Texas banks went bust and the Texan economy did not do too well for quite awhile. Let us avoid the Texas of tomorrow, if possible.

2. The second one is the emergence of things like the robots. Robots use to do stupid and repetitive things. Now they do smart and repetitive things like surgery. Intelligent and repetitive things are where the middle class jobs are. The good news is that the price of surgery will go down, the bad news that the surgeon will be out of a job. This is classical creative destruction, but hitting the middle class.

3. The third one is the deflation in classical goods, cars, washing machines etc…. Most of the debt due to banks or financial markets tends to be issued by the so called “good producers” and these companies could be very badly hurt by the arrival of “disruptive technologies” such as the ability to store electricity efficiently. This would lead to the replacement of the combustion engine by the electric engine and to the bankruptcy of a big chunk of our industrial systems.

To summarize, both creation and destruction forces have never been as powerful as they are now....

*** Charles Gave / Request Complete article

HK Property Prices Continue To Rise

Despite slowing growth, street protests and the prospect of higher interest rates, Hong Kong property prices — already the world’s highest — are continuing to rip even higher.

Average prices, as measured by local agency Centaline, clocked up a fresh record in October, presenting another challenge to the Hong Kong government, which is also facing a mass civil disobedience campaign now into its second month.

Despite the protests, which have shut down major highways across the city’s main business districts, new developments have continued to attract strong interest. When sales began last month at Pavilia Hill, a new luxury development, demand was such that a raffle had to be held simply for the right to put down a deposit.

The first round of apartments — the cheapest of which carried an asking price of more than US$2M — sold out within hours.

The strength of the property market poses a serious challenge to Hong Kong’s embattled government as many people struggle to find affordable housing. Average home prices are now 14.9 times median household income, according to research from Demographia, compared with 7.3 in London.


Prices have more than doubled since 2008 fuelled by record low interest rates, imported from the US; a buoyant economy, and interest from mainland Chinese buyers.

“The reality is that interest rates will remain low and supply will remain constrained. Uncertainty in other parts of the world will persist, and I think that will act to support values,” said Simon Smith, head of Asia research at Savills, an estate agent.

In a city suffering from worsening inequality, sky-high home prices are a key political issue. CY Leung, Hong Kong’s chief executive, acknowledged in a recent interview that the cost of housing was a “major concern” and one that the government must “do more” to fix.

“Poll after poll has shown that the one issue that’s uppermost on the minds of the people, particularly the younger generation, is the cost of housing,” said Mr Leung, himself a former developer. “The shortage of housing has worsened to such an extent that some young married couples live apart. It is not acceptable.”

He also admitted that cooling measures — such as tighter lending requirements and increased stamp duty — had proved only “temporarily effective”.

Mr Leung’s answer to the problem is to increase new supply. There are some hopeful signs on this front — in the first nine months of the year housing starts jumped more than 30 per cent, according to Barclays.

The end of quantitative easing in the US could also act as a dampener by raising borrowing costs. Hong Kong effectively imports interest rate policy from the US through its currency peg, meaning that mortgage rates have been at rock bottom for a number of years, despite robust economic growth and low unemployment....

*** FT / link

Dollar Smashes Through Resistance As Mega-Rally Gathers Pace

The US dollar has surged to a four-year high against a basket of currencies and has punched through key technical resistance, marking a crucial turning point for the global financial system.

The so-called dollar index, watched closely by traders, has finally broken above its 30-year downtrend line as the US economy powers ahead and the Federal Reserve prepares to tighten monetary policy.

The index — a mix of six major currencies — hit 87.4 on Monday, rising above the key level of 87. This reflects the plunge in the Japanese yen since the Bank of Japan launched a fresh round of quantitative easing last week.

Data from the Chicago Mercantile Exchange show that speculative dollar bets on the derivatives markets have reached a record high, with the most extended positions against the euro, the yen, the Australian dollar, Mexican peso, the Canadian dollar, the Swiss franc, sterling, and the New Zealand dollar, in that order. The Swedish and Norwegian currencies are also coming under heavy pressure.

David Bloom, currency chief at HSBC, said a “seismic change” is under way and may lead to a 20pc surge in the dollar over a 12-month span. The mega-rally of 1980 to 1985 as the Volcker Fed tightened the screws saw a 90pc rise before the leading powers intervened at the Plaza Accord to cap the rise.“We are only at the early stages of a dollar bull run. The current rally is unlike any we have seen before. The greatest danger for markets and forecasters is that they fail to adjust their behaviour to fully reflect a very different world,” he said.

Mr Bloom said the stronger dollar buys time for other countries engaged in currency warfare to “steal inflation”, now a precious rarity that economies are fighting over. The great unknown is how long the US economy itself can withstand the deflationary impact of a stronger dollar. The rule of thumb is that each 10pc rise in the dollar cuts the inflation rate of 0.5pc a year later.

Hans Redeker, from Morgan Stanley, said the dollar rally is almost unstoppable at this stage given the roaring US recovery, and the stark contrast between a hawkish Fed and the prospect of monetary stimulus for years to come in Europe.

“We think this will be a four to five-year bull-market in the dollar. The whole exchange system is seeking a new equilibrium,” he said. “We think the euro will reach $1.12 to the dollar by next year and will be even weaker than the yen in the race to the bottom.”

Mr Redeker said US pension funds and asset managers have invested huge sums in emerging markets without considering the currency risks. “They may be forced to start hedging their exposure, and that could catapult the dollar even higher in a self-fulfilling effect.”

The dollar revival could prove painful for companies in Asia that have borrowed heavily in the US currency during the Fed’s QE phase, betting it would continue to fall.

Data from the Bank for International Settlements show that the dollar “carry-trade” from Hong Kong into China may have reached $1.2 trillion. Corporate debt in dollars across Asia has jumped from $300bn to $2.5 trillion since 2005.

More than two-thirds of the total $11 trillion of cross-border bank loans worldwide are denominated in dollars. A chunk is unhedged in currency terms and is therefore vulnerable to a dollar “short squeeze”.

The International Monetary Fund said $650bn of capital has flowed into emerging markets as a result of QE that would not otherwise have gone there. This is often fickle “low-quality” money that came late to the party.

Many of these countries have picked the low-hanging fruit of catch-up growth and are suffering from credit exhaustion. They have deep structural problems and a falling rate of return on investment. The worry is that a tsunami of money could rotate back out again as investors seek higher yields in the US, possibly through crowded exits.

*** Ambrose Evans-Pritchard / link

Mario Draghi’s Efforts To Save EMU Hit The Berlin Wall

Mario Draghi has finally overplayed his hand. He tried to bounce the European Central Bank into €1 trillion of stimulus without the acquiescence of Europe’s creditor bloc or the political assent of Germany.

The counter-attack is in full swing. The Frankfurter Allgemeine talks of a “palace coup”, the German boulevard press of a “Putsch”. I write before knowing the outcome of the ECB’s pre-meeting dinner on Wednesday night, but a blizzard of leaks points to an ugly showdown between Mr Draghi and Bundesbank chief Jens Weidmann.

They are at daggers drawn. Mr Draghi is accused of withholding key documents from the ECB’s two German members, lest they use them in their guerrilla campaign to head off quantitative easing. This includes Sabine Lautenschlager, Germany’s enforcer on the six-man executive board, and an open foe of QE.

The chemistry is unrecognisable from July 2012, when Mr Draghi was working hand-in-glove with Ms Lautenschlager’s predecessor, Jorg Asmussen, an Italian speaker and Left-leaning Social Democrat. Together they cooked up the “do-whatever-it-takes” rescue plan for Italy and Spain (OMT). That is why it worked.

We now learn from a Reuters report that Mr Draghi defied an explicit order from the governing council when he seemingly promised to boost the ECB’s balance sheet by €1 trillion. He also jumped the gun with a speech in Jackson Hole, giving the very strong impression that the ECB was alarmed by the collapse of the so-called five-year/five-year swap rate and would therefore respond with overpowering force. He had no clearance for this.

The governors of all northern and central EMU states - except Finland and Belgium - lean towards the Bundesbank view, foolishly in my view but that is irrelevant. The North-South split is out in the open, and it reflects the raw conflict of interest between the two halves.

The North is competitive. The South is 20pc overvalued, caught in a debt-deflation vice. Data from the IMF show that Germany’s net foreign credit position (NIIP) has risen from 34pc to 48pc of GDP since 2009, Holland’s from 17pc to 46pc. The net debtors are sinking into deeper trouble, France from -9pc to -17pc, Italy from -27pc to -30pc and Spain from -94pc to -98pc. Claims that Spain is safely out of the woods ignore this festering problem.

David Marsh, author of a book on the Bundesbank and now chairman of the Official Monetary and Financial Institutions Forum, says the Bundesbank has been quietly seeking legal advice on whether it can block full-scale QE. It is looking at Articles 10.3 and 32 of the ECB statutes, arguably relevant given the scale of liabilities.

The let-out clauses would make QE the sole decision of the 18 national governors - shutting out Mr Draghi - based on the shareholder weightings. Germany would have 26pc of the votes, easily enough to mount a one-third blocking minority. Mr Draghi would not even have a say.

Mr Marsh said this has echoes of the “Emminger Letter” invoked in September 1992 to justify the Bundesbank’s refusal to uphold its obligation to defend the Italian lira in the Exchange Rate Mechanism. The lira crashed. The Italians were stunned. One of them was the director of the Italian Treasury, a young Mario Draghi.

Lena Komileva, from G+ Economics, says the ECB is heading for a crisis of legitimacy whatever happens. If the bank tries to press ahead with a QE-blitz, Mr Weidmann will resign. If it does not do so, the eurozone will remain stuck in a lowflation trap and the ECB will go the way of the Bank of Japan in the late 1990s, in which case Mr Draghi will resign.

Mr Draghi’s balance sheet pledge was muddled and oversold from the start. Much of it was predicated on banks taking out super-cheap loans (TLTROs) from the ECB, but they have so far spurned it. You cannot make a horse drink. These loans are not the same as QE money creation in any case. They are an exchange for collateral....

*** Ambrose Evans-Pritchard / link

Is It Time To Get Long Volatility?

I would argue that for at least three fundamental reasons the experience of 2008 is unlikely to repeat itself and that the balance of probability is that the buyers of volatility are likely to be disappointed by the results... In 28 years in the investing business I have constantly been mystified by otherwise intelligent investor’s inability to understand the purpose of hedging. Put simply the ideal objective of a hedge is that it will make a loss. Naturally the rational investor would prefer to make a smaller loss than a larger one, but a hedge should, if things go well, lose money. The reason for this is simple: The purpose of a hedge is not to make money on what you expect to happen but, to protect you against what you fear may possibly happen. Therefore if things go as you expect (and hope) the hedge will be unnecessary and lose some money. Investigating the price of hedging is always worth doing, and when the downside is very serious it should be regarded as essential. We intuitively understand this in terms of our personal life and the value of insurance but very often ignore it when investing in markets.

We currently see little value in OECD stock markets and have largely exited them having been very long in 2009-2012. We are not short and we are not long volatility. We are simply investing our capital elsewhere. Please contact us if you’d like to know where, and why we are having a good year.

For those who are heavily invested in markets, hedging today looks moderately expensive. As of writing today 21 October 2014 the S&P 500 stood at 1904, 5.7% below an all time high. With a P/E of 17 and a cash yield of 2% it could hardly be described as in the bargain basement but a June 2015 1700 put option (10.7% out of the money) at 55 points or 2.9% of spot or 22% implied volatility does not looks like a bargain either.

Which brings us to my first reason against the long volatility trade:

Prices are not low enough to bring the balance of probability to be in your favour.

If we take the above as a benchmark for prices, 22% implied volatility means that the US stock market would need to move approximately 1.4% every day for the next seven months to make a market neutral (with daily re-hedging) trade profitable. If you are not an experienced option trader you can find an explanation for what this means elsewhere, but it’s very important to distinguish between a directional bet and a market neutral one.

If you buy a naked put and the market falls you should make money. For various technical reasons it doesn’t always work that way and this causes outrage amongst small investors who feel they have been cheated when they got the market right and still lost money, but that’s a story for another day. But a market neutral bet is always both long and short the market so it’s the quantum of moves that matter, not the direction.

The 999 day historic volatility of the S&P500 is 15.67%, the 500 day is 11.5% so to make money buying at 22% the volatility of the next 150 days needs to be 40% above the last 1000 days and 91% above the last 500. Back in 2005-2007 Artradis was only having to pay historic volatility levels for options, one bank volatility trader notoriously went ‘offer only’ on his volatility prices, in other words his bid was zero and his offers very low. This is no longer the case for the simple reason that prior to 2007-08 markets had enjoyed an unprecedentedly long period of very stable markets with volatility prices constantly falling this was termed ‘The End of Volatility’ in one BIS paper, or ‘The Volocaust’ by market traders. As a consequence volatility prices were low and sellers did not demand a ‘cushion’ in the price to protect them from spikes in volatility as they believed they wouldn’t need a cushion. After 2008 the folly of this assumption was fully recognised and is priced in. Investors have famously short memories but when it comes to option pricing, they still remember 2008 and this will keep prices at a premium. Of course experienced volatility above 22% is far from impossible, the past 1000 days have been a period of historically low volatility, but ceteris paribus, the odds are against the bet. Which brings us to my second reason...

*** Steve diggle / COMPLETE LETTER

Billionaire Enclave Prices Drop on Singapore Property Curbs

Australian hedge-fund manager Stephen Fisher says he was lucky to have bought his luxury home on Sentosa, a Singapore resort island that has attracted the wealthy, in 2005, before property curbs kicked in.

“I would be very wary of buying a second property in Singapore as I would have to pay higher taxes, which makes it less attractive,” Fisher, 50, chairman of First Degree Global Asset Management, said in a phone interview.

Sentosa, where Australia’s richest woman, Gina Rinehart, and telecommunications billionaire Bhupendra Kumar Modi have homes, is losing its appeal. Taxes as high as 18 percent on foreigners purchasing property introduced in 2013 have depressed prices and sales.

Condominium prices in the residential enclaves that line the seafront with sweeping views across the Singapore Strait are near their lowest levels since the end of 2006 based on 15 transactions, according to Maybank Kim Eng Securities Pte. Some bungalows are being sold for more than 50 percent below the peak in 2012, Urban Redevelopment Authority, or URA, data show.

Singapore has been trying to rein in the property market since 2009, with the toughest measures, including stricter lending, introduced last year. The island-state is unlikely to ease the curbs until “a meaningful correction” takes place, Finance Minister Tharman Shanmugaratnam said Oct. 28.

“The way prices have fallen is like during the crisis time” in 2008, Alan Cheong, a Singapore-based director at broker Savills Plc, said, referring to values on Sentosa Island. “The measures have impacted demand and we are seeing a diversion of interest by foreigners away from here.”

Home prices on Sentosa have fallen about 40 percent since 2012, compared with a 28 percent drop in 2008, Cheong said.

Among the government’s curbs have been a cap on debt at 60 percent of a borrower’s income and higher stamp duties on home purchases. Additional taxes for foreigners buying residential property were raised to 15 percent in 2013 from 10 percent, on top of the basic buyer’s stamp duty rate of about 3 percent. All home sellers need to pay 16 percent in levies if they sell within the first year.

Singapore home prices reached a record high in the third quarter last year amid low interest rates. They have fallen every quarter since, sliding 3.8 percent in the longest stretch of declines since the global financial crisis in 2008.

In 2004, the island-state eased rules to allow foreigners to buy land for development on Sentosa, luring buyers from Australia to Russia. Sentosa Cove, home to marinas and sprawling houses, became the first location where foreigners were allowed to own stand-alone homes with easy approval from the Singapore Land Authority.

“The curbs were to help the Singaporeans, but in the process they are also curtailing the growth prospects of the country,” Modi, who estimates his net worth at $2 billion, said in a phone interview. “The government needs to differentiate between global and local citizens.”...

Homes larger than 2,000 square feet that cost between S$4 million and S$5 million have been hit the hardest by the stamp duties on purchases and sales, Han said.

Prices of some condominiums slumped as much as 45 percent from 2007, when they were first sold, at auctions earlier this year by banks that repossessed them, according to Maybank Kim Eng.

A bungalow on 11,280 square feet of land on Treasure Island in Sentosa Cove was sold for 53 percent below the peak this year, while a 7,341-square-foot property on Paradise Island was priced 39 percent below the record S$3,214 per square foot, URA data showed.

Homes purchased after 2006 and sold in the last 12 months lost between 5 percent and 21 percent of their value, Ng Wee Siang, a Singapore-based analyst at Maybank Kim Eng estimates.

“It’s now taking two to three months longer to sell,” Mok Sze Sze, head of auctions in Singapore at broker Jones Lang LaSalle Inc., said.

*** Bloomberg / link

The Colder War, by Marin Katusa: An Exclusive Extract

Putin’s plan to undo the petrodollar and elbow the US out of the way in world affairs rests on the energy resources of the Middle East. Turmoil there is his best friend, which is reason enough for a careful look at the recent histories of the region’s three big oil producers (which pump 20% of the world’s oil) and their neighbors.

Religion is a divider that can unite Middle Easterners living under different governments in the important business of attacking their own countrymen. Conflict between Shi’a and Sunni in one country induces conflict between the same two groups in other countries. It happens easily, almost unavoidably, because the differences between the two traditions are not details, like the differences between one‐button Baptists and two‐button Baptists. The differences are absolutes. No one has found any room, even in principle, for reconciling them. The career of any would‐be ecumenical, should one appear, would likely be brief.

What separates Sunni from Shi’a is a succession dispute that erupted after the death of Mohammed in 632 A.D. Those who accepted Abu Bakr, Mohammed’s father‐in‐law, as the rightful successor became known as Sunnis. Those who believed that Ali, Mohammed’s son‐inlaw, was properly the successor became known as Shi’ites. They’ve been fighting ever since.

Worldwide, about 85% of all Muslims are Sunni. However, in two of the Middle East’s three biggest oil‐producing countries, Iran and Iraq, they are outnumbered by a Shi’a majority. The third, Saudi Arabia, is overwhelmingly Sunni — although its restless Shi’a minority is concentrated inconveniently in the country’s oil‐producing east.

Iran: Sanctions, Coups, and Revolutions

Let’s start with a known name, Winston Churchill. Churchill is remembered by most as England’s World War II prime minister, but there is much else to remember about him. At the time he was rallying his countrymen to oppose the Nazis, he was already an old man. Three decades earlier, in 1911, before World War I, he was First Lord of the Admiralty, with responsibility for the Royal Navy. Being more a visionary than a functionary, he set out to bring the Royal Navy’s aging fleet into the 20th century.

The Royal Navy still dominated the oceans of the world, but it was in danger of falling behind the Americans and, more ominously, the Germans. To keep up, Britain needed ships with the efficiencies that oil had made possible.

Most ships of the Royal Navy still burned coal, which Britain had in abundance but which was not nearly as well suited for warships as oil was proving to be. A pound or a cubic foot of the new stuff, oil, yielded far more energy, more go‐power, than the same amount of coal. Oil burned without need for heavy, space‐eating furnaces and required less shipboard manpower for handling. The economies of space and weight for carrying the fuel, for burning the fuel, and for feeding and berthing fuel handlers made oil essential for ships that could win wars.

Building oil‐fueled naval ships would be expensive but in no way difficult for Britain. The difficulty was the oil: the British Isles didn’t have any. So securing a reliable supply of oil became a matter of paramount importance to Churchill.

He also considered how technology would change ground warfare. It was still the business of armies to establish lines, dig trenches, lay barbed wire, and mass troops to attack an enemy that was doing the same things with trenches, wire, and troops. Churchill saw beyond that. He encouraged the development of armed, armored vehicles powered by internal combustion engines, vehicles that could push through barbed wire, roll over trenches, and annihilate enemy troops. Tanks (as they came to be called from British disinformation that they were water carriers) would need still more oil. But where to get it?

The Americans were in their first oil rushes in Texas and California. That was one possible source, but American oil was an ocean away. Russia? It was a big producer but was also a rival empire, and its output was controlled by the Rothschilds, who couldn’t be relied upon.

The ambitions of a Briton, William K. D’Arcy, found what Churchill was looking for. In 1900 D’Arcy, whose interest had been attracted by Persia’s natural oil seeps, paid the ruler, Mozaffar al‐Din Shah Qajar, £20,000 for a 60‐year concession to explore for oil in an area of 480,000 square miles, which was the entire country save for five provinces in the north. The Persian government reserved a royalty of 16% of the oil company’s profit.

After exhausting his personal fortune in exploring the area, D’Arcy farmed out most of the concession to Burmah Oil, which spent another £500,000 on exploration. In 1908, on the last hole their budget could cover, Burmah drilled into a major oil reserve. The following year, to exploit the mammoth opportunity the well had proven, Burmah Oil formed a subsidiary, Anglo Persian Oil Company, or APOC, which would later become the British supermajor BP.

Developing an oilfield takes capital, especially in a land short on modern infrastructure. So APOC needed to raise money. In May 1914, at Churchill’s urging, the British government provided the money in exchange for 51% of the company and the right to appoint directors to the board who would have controlling authority on any question relating to the British national interest. Additionally, the Royal Navy was guaranteed a 30‐year oil supply at a fixed price.

It was a brilliant bit of maneuvering by Churchill. Britain had beaten the Germans to the first great Middle Eastern oil reservoir, and they would draw on it to win the war that started three months later.

*** Marin Katusa, the colder war / link

Bob Rodriguez: New Great Recession Coming in 3 Years

THINKADVISOR: What’s your take on the market and the economy?

ROBERT RODRIGUEZ: We’re living on borrowed time. When this market breaks, you’re going to see so many money managers and others washed out to sea who will never see land again. It will happen between now and 2018.


The federal government isn’t controlling their spending. For the past two years, 60% of investment returns have been a function of P/E expansion. Earnings growth is being driven by a fair amount of financial engineering on the part of the Federal Reserve and corporations. I’m sitting here for two years saying, “Hel-lo! Doesn’t anybody get this?”

You must be frustrated.

For some time, I’ve hated the financial market. When the history of this period is written, the Fed presidents and those who have deployed quantitative easing will be glorified as great snake-oil marketers.

How would you characterize the economy right now?

Is this a vibrant economy? Absolutely not. I don’t know what people are smoking! No amount of monetary stimulus that’s driving up the illusion of stock prices is going to get back to the basic elements of improving fundamental elements in the economy. Debt and entitlements are growing at more than twice the rate of nominal GDP growth. It’s an absurdity!

Doesn’t the financial services industry realize what’s happening?

I get on a tangent; but I sit here in utter amazement that all this goes on, and the industry proceeds as usual. Hel-lo! The world has changed! It changed in 2008. We’re in a different and fundamentally more volatile environment than any we’ve seen prior to 2008.

What’s your advice to advisors?

I don’t live in the here and now; I live five and 10 years in the future and always have. Lots of things will be coming together in the next two years. Your readership [could] be deployed in risky assets: Do you believe the assets you’re invested in compensate you with sufficient margin of safety for the volatility of what’s likely to transpire in the next two to three years? If the answer is yes, be happy. If the answer is no, then maybe you need more cash or liquidity in your asset-allocation structure.

What’s in your own portfolio?

I sold my last direct ownership stock in July of this year. So, for the first time in 43 years, I don’t own any equities directly. I own stocks through our mutual funds.

You got out of individual equities entirely?

Yes. The underlying fundamentals of equities are deteriorating. So I think exposure should be low.

What strategy do you live by to make money in the market?

Being successful in longer-term investing requires 5 elements. The first is discipline: You have to have discipline in how you analyze your securities. The 2nd is patience to wait for those securities to present themselves in an attractive way. Next is the most difficult: courage. You have to have the courage to execute when all else says don’t. Then you need patience again — to allow those investments to work out over a period of time.

And finally?

You need discipline again to sell because you’ve been correct or to sell because your analysis has been incorrect. So you have to have double doses of discipline, double doses of patience; and then you mix in courage. With that concoction, the odds are you’ll be a successful investor longer term.

What research do you rely on?

I believe the most important chart to look at is the dollar index, DXY Index GP. When monetary policy fails with QE, the only thing left in the bag of arrows will be currency. That is, how do you cheapen your currency to improve the competitiveness of your product to sell it? We will see aggressive currency realignment and at some point, if it gets out of control, currency war.

When could that happen?

We’ll find out in approximately two or three years whether the Fed’s monetary policies have worked their magic. By that time the U.S. will have been on QE of some type for going on nine years.

What’s your forecast for the stock market in 2015?

Lower! It will be easily 20% or 30% lower from what it is now.

What specifically do you see happening in the economy in 2015?

The unintended consequences of monetary policy and lack of fiscal resolve in this country, as well as in other countries, is only expanding the balloon. Nothing I was concerned about in 2009 has been addressed. GDP is not going to be a 3% growing number. It will be weaker again. The quality of the growth recovery in employment is questionable. That’s reflected in the fact that incomes are not really improving. Median income is still below where it was in 1999. We’re going along a road that’s not healthy. It will lead to sluggish GDP growth that will result in pressures on the system....

*** robert rodriguez / link

Deep Divisions Emerge over ECB Quantitative Easing Plans

At first glance, there’s little evidence of the sensitive deals being hammered out in the Market Operations department of Germany’s central bank, the Bundesbank. The open-plan office on the fifth floor of its headquarters building, where about a dozen employees are staring at their computer screens, is reminiscent of the simple set for the TV series “The Office”. There are white file cabinets and desks with wooden edges, there is a poster on the wall of football team Bayern Munich, and some prankster has attached a pink rubber pig to the ceiling by its feet.

The only hint that these employees are sometimes moving billions of euros with the click of a mouse is the security door that restricts access to the room. They trade in foreign currencies and bonds, an activity they used to perform primarily for the German government or public pension funds. Now they also often do it for the European Central Bank (ECB) and its so-called “unconventional measures.”

Those measures seem to be coming on an almost monthly basis these days. First, there were the ultra low-interest rates, followed by new four-year loans for banks and the ECB’s buying program for bonds and asset backed securities -- measures that are intended to make it easier for banks to lend money. As one Bundesbank trader puts it, they now have “a lot more to do.”

Ironically, his boss, Bundesbank President Jens Weidmann, is opposed to most of these costly programs. They’re the reason he and ECB President Mario Draghi are now completely at odds. Even with the latest approved measures not even implemented in full yet, experts at the ECB headquarters a few kilometers away are already devising the next monetary policy experiment: a large-scale bond buying program known among central bankers as quantitative easing.

The aim of the program is to push up the rate of inflation, which, at 0.4 percent, is currently well below the target rate of close to 2 percent. Central bankers will discuss the problem again this week.

It is a fundamental dispute that is becoming increasingly heated. Some view bond purchases as unavoidable, as the euro zone could otherwise slide into dangerous deflation, in which prices steadily decline and both households and businesses cut back their spending. Others warn against a violation of the ECB principle, which prohibits funding government debt by printing money.

Is it important that the ECB adhere to tried-and-true principles in the crisis, as Weidmann argues? Or can it resort to unusual measures in an emergency situation, as Draghi is demanding?

The key issues are the wording of the European treaties, the deep divide in the ECB Governing Council and, not least, the question of what monetary policy can achieve in a crisis. Is a massive bond-buying program the right tool to inject new vitality into the economy? Or does it turn central bankers into the accomplices of politicians unwilling to institute reforms?

The question has been on the minds of monetary watchdogs and politicians since the 1990s, when a German economist working in Tokyo invented the term “quantitative easing.” Its purpose was to help former economic miracle Japan pull itself out of crisis after a crash.

The core idea behind the concept is still the same today: When a central bank has used up its classic toolbox and has reduced the prime rate to almost zero, it has to resort to other methods to stimulate the economy. To inject more money into the economy, it can buy debt from banks or bonds from companies and the government.

The Bank of Japan finally began to implement the concept, between 2001 and 2006, but the country sank into years of deflation nonetheless. After the financial crisis erupted, central bankers in Tokyo tried a second time to acquire government bonds on a large scale, in the hope that earlier programs had simply not been sufficiently forceful. Between 2011 and 2012, the central bank launched emergency bond-buying programs worth €900 billion ($1.125 trillion). Finally, in 2013, the new prime minister, Shinzo Abe, opened up the money supply completely when he had the central bank announce a virtually unlimited bond buying program.

But the strategy, known as “Abenomics,” worked only briefly. After a high in 2013, in which Abe proudly proclaimed that Japan was “back,” industrial production declined once again. With a debt-to-GDP ratio of 240 percent, much higher than that of Greece, investments declined again, despite the flood of money released under Abenomics....

*** der spiegel / link

The Dodgiest Duo In The Suspect Six

INVESTORS in emerging markets know how quickly things can turn sour. In the mid 1990s fast-growing Thailand and Indonesia became known as the “Asian Tigers”. By 1997 they were suffering currency crises and had to be bailed out by the IMF. Nearly 20 years on two members of the “BRICs” (Brazil, Russia, India and China) lionised for propping up global growth in 2010, are close to recession. The mixture Brazil and Russia face—falling currencies, high inflation and slow growth—could make 2015 a very bad year.


Trouble has been brewing for a while. Over a year ago James Lord of Morgan Stanley, a bank, labelled Brazil, India, Indonesia, South Africa and Turkey the “fragile five” of the emerging markets. His concern was that the combination of high inflation and big current-account deficits meant exports were too dear; their currencies topped his list of those likely to tumble. Four of the five have since lost ground against the dollar, but a sixth emerging-market currency, the Russian rouble, has fallen much further (see chart 1). On November 5th the central bank scaled back its expensive and futile efforts to prop the currency up, leaving it floating almost freely.

These countries have common problems, particularly high inflation. Each of the fragile five has a “twin deficit”: budget shortfalls that mean debts are piling up and current-account gaps that make them reliant on foreign capital inflows. Yet their prospects have diverged. India and Indonesia look secure. The rupee is up against the dollar since August of last year and the public-sector deficit is falling. The Indonesian rupiah has been less solid, losing 10% since end-August, but inflation has moderated and growth is strong (see chart 2).

The remaining four are faring less well. The South African rand and Turkish lira look likely to fall further since both still combine big current-account gaps with high inflation. Yet for government economists in Pretoria and Ankara there are chinks of light. Energy prices have dropped—great news for Turkey since oil and natural gas account for 60% of its energy supply, of which over 90% is imported. In South Africa, strikes which have stunted exports of minerals have abated; the economy could grow by 2.5% next year.

Brazil and Russia, by contrast, are in really bad shape. The largest emerging economies after China, together they have the heft of Germany. In both countries the currency is sliding. The real hit new lows in November after data revealed the budget deficit reached a record in September. The rouble is dropping faster, down 27% in a year and 10% in the past month. Both face stagflation: bubbly prices coupled with growth rates likely to be below 1% this year.

Some of their pain comes from abroad. Brazil’s main trading partners are slowing (China), stagnant (the euro area) or tanking (Argentina). Not only are export volumes down; the prices of things Brazil sells—iron ore, petroleum, sugar and soyabeans—are dropping as global demand falters. Russia is feeling the slowdown too, as energy prices fall. It is one of the world’s biggest producers of oil and natural gas. Its big five energy firms employ close to 1m workers. Exports worth $350 billion flowed through pipelines to Europe and Asia in 2013. As prices drop, Turkey’s gain is Russia’s loss.

But Brazil and Russia’s problems have domestic roots too. Since the 1990s Brazil has tended to aim for a primary surplus (before interest payments) of close to 3% of GDP—enough to begin reducing its debts. But Dilma Rousseff, the newly re-elected president, has played havoc with Brazil’s public finances. In 2014 spending has expanded at twice the rate of revenues despite one-off gains from the sale of Libra, an oilfield, and the 4G telecoms spectrum. Brazil’s debt-to-GDP ratio is rising fast....

*** economist / link

Charts That Make You Go Hmmm...


Recently, I have fielded a lot of questions about the best way to buy and store gold outside the banking system; and in an attempt to provide investors with a reference guide that will outline all the options available and help them navigate the various pitfalls of the exercise, I did the smart thing and asked somebody else to do it for me!

Vincent Malherbe of Singapore-based Global Precious Metals has put together a comprehensive resource that does the job brilliantly. How do I know? Well, I sit on the board of GPM and helped Vincent put the guide together, so I can vouch that he’s done a bang-up job!

If you want a copy of the guide, just click on the link to the right, and Vincent will send you a copy.

*** link


The most important chart in the world? Two of the brightest minds in the business think so — Robert Rodriguez and Raoul Pal, who had this to say about the bottom chart:

If we break the trendline we will be entering potentially one of the biggest dollar bull markets in decades, if not ever. This would be the biggest technical break in the history of fiat currencies. Considering the dollar is the world’s funding currency, this has the ability to create havoc on the unprecedented $5tln carry trade — with China at the epicentre.

Business Insider recently published a fantastic piece on the most important charts in the market, as determined by the brightest minds in the business. Here are a couple that caught my eye. Click on the link for the full list.

*** Business insider / link



Words That Make You Go Hmmm...



Mark Faber shocks a Bloomberg anchor by suggesting Japan is engaging in a Ponzi scheme. Apparently, they are buying all their own debt with freshly printed yen.

Doesn’t sound like a Ponzi scheme to me either.

Except it does.

Oh... and that whole “independent Fed” thing? Not so much, according to Alan Greenspan...



Talking of Greenspan, the former Fed chair sure seems to have found religion again as far as gold is concerned, now that he isn’t employed as Hater-in-Chief.

In this remarkable audio clip from a recent session at the CFR, Greenspan matter of factly goes against just about everything he asserted around gold whilst employed in the Marriner Eccles Building all those years.

Funny how the world turns.




Last week I had the great pleasure of chatting with Gordon T. Long as part of his collection of Financial Repression Authority interviews.

Gordon’s website is HERE, and you can listen in on our conversation by clicking the link below.


and finally...

They went with songs to the battle, they were young,

Straight of limb, true of eye, steady and aglow.

They were staunch to the end against odds uncounted,

They fell with their faces to the foe.

They shall grow not old, as we that are left grow old:

Age shall not weary them, nor the years condemn.

At the going down of the sun and in the morning

We will remember them.

For The Fallen by Laurence Binyon





Grant Williams

Grant Williams is the portfolio and strategy advisor to Vulpes Investment Management in Singapore — a hedge fund running over $280 million of largely partners’ capital across multiple strategies.

The high level of capital committed by the Vulpes partners ensures the strongest possible alignment between the firm and its investors.

Grant has 28 years of experience in finance on the Asian, Australian, European, and US markets and has held senior positions at several international investment houses.

Grant has been writing Things That Make You Go Hmmm... since 2009.

For more information on Vulpes, please visit


Follow me on Twitter: @TTMYGH

YouTube Video Channel:

PDAC 2014 Presentation: “Gold and Bad: A Tale of Two Fingers

ASFA Annual Conference 2013: “Wizened in Oz

66th Annual CFA Conference, Singapore 2013 Presentation: “Do the Math

Mines & Money, Hong Kong 2013 Presentation: “Risk: It’s Not Just a Board Game

As a result of my role at Vulpes Investment Management, it falls upon me to disclose that, from time to time, the views I express and/or the commentary I write in the pages of Things That Make You Go Hmmm... may reflect the positioning of one or all of the Vulpes funds—though I will not be making any specific recommendations in this publication.



A walk around the fringes of finance


By Grant Williams

11 November 2014


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Nov. 11, 10:25 a.m.

Grant.  A great article on Japan. 

One question, why are Japanese exports not responding to the lower yen?  The economist in me always thinks that if prices are lower, quantities will respond.  Is there something else happening? 

Following this argument on, I can see that if Japan was stealing export market share via its currency depreciation, the natural response from competitors (China, Korea, Taiwan) is to devalue as well.  But if they arent actually loosing market share (because Japan’s exports arent actually increasing) doesnt this negate the need for a response.