Things That Make You Go Hmmm...

Delay Of Game. Five (point eight) Yards.

April 1, 2013

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Delay of Game. Five (point eight) Yards.

“There is no avoidance in delay.”




“You may delay, but time will not.”





“Truth is confirmed by inspection and delay; falsehood by haste and uncertainty.”



“Delay always breeds danger; and to protract a great design is often to ruin it.”

“ Delay is the deadliest form of denial.”


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

Cyprus and the Unraveling of Fractional-Reserve Banking ......................................17

Slovenia Faces Contagion from Cyprus as Banking Crisis Deepens .............................19

Luxembourg Warns of Investor Flight from Europe ...............................................20

Does a Yes to the Swiss Gold Referendum Imply an End of the CHF Cap? ....................21

A Tale of Two Londons ................................................................................23

Three Days that Saved the World Financial System ..............................................24

Texas Wants its Gold Back! Wait, What? ...........................................................26

The German Professor Who Wants to Get Rid of the Euro in Order to Save Europe ........27

State-Wrecked: The Corruption of Capitalism in America ......................................29

CHARTS THAT MAKE YOU GO HMMM... ..................................................30

WORDS THAT MAKE YOU GO HMMM... ..................................................35

AND FINALLY ................................................................................36

Things That Make You Go Hmmm...

Yard, n: Yard is derived from the term 'milliard' which is used in some European languages and is equivalent to the number one billion used in American English. It is equal to 10y (10 to the ninth power), or the number one followed by nine zeros: 1,000,000,000. If someone were to purchase one billion U.S. dollars, he or she could refer to the purchase as 'a yard of U.S. dollars'. (Investopedia)

Section 6 of the NFL official rulebook contains five articles, all of which deal with infringements that result in a 'delay of game' penalty.

It appears as though the powers that be frown upon the idea of players wasting time in the hope that they can hasten the sound of the whistle whilst holding an advantage.

Based upon the seemingly petty nature of many of the designated infractions, it would appear that not only has this been going on for quite some time, but that the players and officials are locked in a never-ending battle to identify new ways to delay the game — the players to delay the game and the officials to punish their ingenuity.

The list of 'Other Delay Of Game Fouls' (which is contained in Article 5, for those of you keeping score at home) reads as follows:

Article 5

Other examples of action or inaction that are to be construed as delay of the game include, but are not limited to, the following:

(a) a player unnecessarily remains on a dead ball or on a runner who has been downed;

(b) the snapper repeatedly snaps the ball after the neutral zone is established and before the Referee can assume his position (see 7-6-3-c);

(c) undue delay by either team in assembling after a timeout;

(d) a defensive player aligned in a stationary position within one yard of the line of scrimmage makes quick and abrupt actions that are not a part of normal defensive player movement and are an obvious attempt to cause an offensive player(s) to foul (false start). (The Referee shall blow his whistle immediately.);

(e) spiking or throwing the ball in the field of play after a down has ended, except after a score;

The penalty for delay of game is the loss of five yards to the offending team.

In the arena of international finance, the tables have been turned spectacularly, and it is the officials who are desperately trying to find ingenious new ways to delay the game whilst clinging to the most slender of advantages, as all around them players are penalized indiscriminately.

From the onset of the financial crisis that still besets us (since whenever that may have been — it's all getting very hazy), the first response of policymakers and central bankers has been the same: guarantee deposits to stop capital flight leading to bank runs. Case in point, Ireland:

(FT, September 2008): Ireland’s government on Tuesday unveiled a wide-ranging guarantee arrangement to safeguard the deposits and debts at six financial institutions in response to turmoil in the financial markets.

The scheme, which guarantees an estimated €400bn (£315bn, $567bn) of liabilities, covers retail, commercial and inter-bank deposits as well as covered bonds, senior debt and dated subordinated debt.

Most depositors were already covered by an existing deposit insurance scheme for up to €100,000. But Tuesday’s initiative was primarily aimed at easing the banks’ short-term funding, which had seized up in recent days.

Ireland's deposit guarantee, it was announced, would expire in September 2010, at which point all would be well and the panic would be over. Of course, the strong rally in Irish banks on the day the plan to guarantee deposits was announced faded quickly when somebody bothered to do some rudimentary arithmetic, and the guarantee had to be extended. Fast-forward to last Thursday:

(Irish Independent, March 28, 2013): The government guarantee on bank deposits above €100,000 finally comes to an end today, despite the nervousness over the Cyprus crisis....

The guarantee failed in its fundamental objective of restoring stability to the banking system. After an initial positive response, investors and lenders quickly realised that the Irish State could not cover the total €440bn liability.

Deposits flooded out of the system and the European Central Bank insisted on a bailout to allay fears of imminent bankruptcy, while it pumped in emergency loans to the banks.

Those loans have also declined sharply in recent years but remain at around €50bn. AIB at least is still unable to fully finance its operations in the market and the confusion over Cyprus will not help the restoration of normality.

Yes folks, Ireland bankrupted itself overnight with one stupid decision. They clearly thought that a proclamation from the government that all would be well was going to be more than enough to calm things down and that people would go about their business safe in the knowledge that the Taioseach and the geniuses in the Oireachtas had everything under control.

Funnily enough, things didn't work out that way, and the reason for that was something that one would have thought would be fairly obvious to all concerned: the maths didn't add up.

As soon as they guaranteed the bank deposits, Ireland was bankrupt, because assuming an additional liability of €400bn when, in the same year, your revenues were €40bn is going to cause you problems of a mathematical nature; and those sorts of problems have, over the years, proven to be generally unresponsive to policy adjustments.


Source: Bloomberg/TTMYGH

The Irish Exchequer's official budget statement at the end of 2008 provided some insight into a few of the 'unexpected' problems encountered in the Emerald Isle that year:

The Exchequer Returns published today ... reflect the fact that, both domestically and internationally, economic conditions are poor.

Tax Revenues at €40,777 million were €8.1 billion below profile. The further deterioration in tax receipts ... reflects the worsening economic circumstances over the last number of months.

Expenditure pressures emerged during 2008 mainly due to increased unemployment-related spending.

There was an Exchequer Borrowing Requirement of €12.7 billion in 2008. This is substantially higher than we had planned for and as a result the national debt rose by this magnitude.

At end-2008 the General Government Debt to GDP ratio was just over 41 per cent, up from just under 25 per cent at end 2007.

Overall, these Exchequer Returns, combined with economic data published since the Budget, confirm that the outlook for next year has deteriorated. I recently indicated that economic activity in 2009 will contract by significantly more than generally anticipated at Budget time last October. Contraction in economic activity in 2009 of somewhere in the region of 4 per cent is now likely...

Borrowing for day-to-day expenditure is not sustainable.


Ireland begat Greece, which begat Portugal, which morphed into Spain then Italy; but all these problems have been 'solved' by delaying the game through methods that may not have been against the rules but were certainly not in the spirit of the game.

This 'delay of game' has come to be widely known by another term over the past several years: 'kicking the can down the road'. But either way, the point is the same: you can't just hope to buy enough time for the game to end and for things to get better. There are penalties for doing that. On the football field it's five yards; in the real world the penalties are significantly steeper.

For the past fortnight, a tiny rock in the Eastern Mediterranean has gripped the world's attention.

Cyprus is a former British colony that gained independence in 1960 after years of resistance. The island covers a total of 9,251 km² (roughly half the size of Connecticut) and is split along ethnic lines between the northern third, which is largely Turkish Cypriot, and the southern two-thirds, which is mainly Greek Cypriot.

The tension between the two groups has simmered for fifty years and, despite the country's entering the EU on May 1, 2004, peace talks between north and south are ongoing.

Cyprus's 1.1 million inhabitants make it the 160th-largest country in the world, and its GDP of €18bn puts it 125th in economic output.

Clearly, little Cyprus punches above its weight.

The reason for this? The size of the Cypriot banking system, which, at roughly €150bn (and falling), is about seven times the size of the country's economy.

On October 7, 2010, President Medvedev of Russia witnessed the signing of a new 'protocol' to a double-taxation treaty between Russia and Cyprus that paved the way for the removal of Cyprus from a list of 'non-cooperative jurisdictions'. What this meant was that Cyprus was suddenly an oligarch's delight, boasting the lowest corporate tax in the EU (10%) and many other benefits around moving money that made the establishment of Cyprus-based holding companies (and their attendant bank accounts) de rigueur.


Source: Eurofast

The Cypriot banks themselves, flush with deposits (many of them the property of wealthy Russians), invested their reserves heavily in, amongst other things, Greek government bonds. And, despite things being a bit shaky in the Eurozone, Cyprus was hanging in there quite well — until the Delay of Game that occurred in March of last year, when, to stall the demise of the EU as we know it, the eurocrats once again bailed out Greece. But this time, against a backdrop of rising German ire at the increasing size of the cheques their taxpayers were being forced to cut, we had our first PSI (private-sector involvement).

What this meant was that investors in those Greek bonds favoured by the Cypriot banks were obliged to take a haircut of roughly 75% on their holdings.

And, just like Ireland's, Cyprus's banks were instantly in trouble.

During the next year of wrangling (during which everybody knew the numbers but assumed everything would be 'solved', as always) there were the usual false dawns and minor scares, but the working assumption was that everything was going to be OK — and it was.

Until it wasn't.

Now, I'm not going to bore you with a full recap of the events of the last 14 days, because I'm sure you are all sick to death of it by now; but, in essence, after taking into account the amount of money the Troika were willing to pony up, Cyprus was short €5.8bn.

That shortfall had to be made up from somewhere, and so where better than guaranteed deposits? After all, haircutting the senior bondholders wouldn't do much good — what with Greek banks, other supposedly solvent European banks, and the ECB being chief amongst them.

Here's how it played out:


Friday March 15th: Cypriot banks close.

Saturday March 16th: Cypriot banks don't open.

Saturday March 16th: Cypriots are told they face the theft of their money by the government, in the form of a haircut on their deposits of between 6.75% and 9.9%, depending on whether they were under the government-insured EU limit of €100,000 or not.

Saturday March 16th: Cypriots are not best pleased.

Sunday March 17th: Cypriots empty the island's ATM machines.

Monday March 18th: Cypriot banks don't open again — this time because of a one-day bank holiday.

Tuesday March 19th: No doubt aware of their fate should they vote in favour of the bailout terms, Cypriot MPs vote a resounding 'NO!' to the conditions imposed by the Troika.

Wednesday March 20th: One-day bank holiday is extended to prevent a run on the currency.

Friday March 22nd: Russia spurns request from Cyprus for financial lifeline.

Monday March 25th: New bailout terms are agreed that don't involve haircuts below the insured limit but substantially increase haircuts on those above — which are technically uninsured in any case.



Wednesday March 27th: Capital controls are announced, which will 'only be in place for a week'.

Thursday March 28th: Banks reopen under draconian restrictions, but Cyprus is calm.

Thursday March 28th: The announcement is made that capital controls will be in place for a month.

So, that's the timeline. Now that we're all clear on the Delay of Game infractions, let's take a look at the impressive implications and try to figure out who gets penalized.

First, if we look at the traditional capital structure of a bank (below), you will see that at the very top, and supposedly last in line to suffer any kind of a loss, are government-guaranteed deposits.

Next come uninsured deposits, then senior bondholders, and down the line we go until we come to the poor equity holders — the first cab off the rank when losses are being doled out.


Source: FIIG

Prior to Cyprus, the progression was pretty well set in stone:

(Reuters): In previous packages for Greece, Ireland, Portugal and Spain, leaders were unwilling to force losses on either senior bondholders or savers for fear of prompting flight from banks across the region.

Under new EU regulations, senior bondholders would bear part of the cost of future bank bailouts but that provision is not due to be enforced before 2015. Non-euro zone member Denmark is the only EU state to impose losses on senior bondholders in recent years, but after its banks were shut out of debt markets in 2011 it has moved to limit the likelihood of such losses.

Flashback: On February 1, then-Cypriot finance minister, Vassos Shiarly, calmed fears after meeting with Dutch lawmakers in The Hague (emphasis mine):

(Bloomberg): Cypriot Finance Minister Vassos Shiarly said senior creditors won’t be forced to take losses in a proposed rescue of the country’s banks.

Only junior bondholders will face losses in the bailout of Cyprus’s lenders, which may need about 10 billion euros ($13.7 billion) of fresh capital, Shiarly said in an interview in The Hague late yesterday. Senior creditors and depositors won’t be touched, he said after meeting with Dutch lawmakers....

Most junior bondholders are individuals in Cyprus, Shiarly said. “There’s been a lot of discussion and an association has been formed to lobby against the bail-in,” he said. “Unfortunately it’s a necessity.” There has been no talk of imposing losses on depositors, he added.

Flashback: On February 11th, the following letter was set to the CEO of Laiki Bank from the office of the Governor of the Central Bank of Cyprus (unfortunately for all involved, ZeroHedge dug it up after the fact. I love those guys!):


Fast-forward to March 1st, when Cyprus's newest FinMin, Michalis Sarris, had this to say to waiting reporters after his party's win in the general election:

(WSJ): "There is nothing more foolish than talking about a deposits haircut," Mr. Sarris told journalists. "The important thing is to come to an agreement as soon as possible."

Exactly two weeks later, depositors were shut out of banks and left helpless as the new government, at the behest of the EU, stole their savings.

So, as it turns out, there was one thing more foolish than talking about a deposit haircut, and that was believing the Cypriot government's assurances.

Of course, as always, the headlines did no justice at all to what was going on behind the scenes (at least, if you focused your attention on the mainstream media).

If you did a little digging, however, you quickly realized that this was just a complete and utter ... (I'm looking for a word other than 'clusterf***' here, but I just can't find one that is equally apposite, so I'm afraid I'm going to have to go with it) clusterf***.

Firstly, the bail-in was a sop to German voters in an election year for Angela Merkel. The German press had been full of stories about how the money in Cyprus all belonged to 'evil Russian gangsters' and that bailing out Cyprus was effectively giving money to criminals, and so Angie & Wolfie decided to play hardball to appease their electorate.

OK, that's a dumb move, but with AFD (Alternative für Deutschland) threatening to get all Grillo on Angie (see story on page 27), I do get it. BUT ...

Remember those 'evil Russian gangsters'? Well another, less pejorative name for them is 'smart money', and what does 'smart money' do? It generally does smart things.

(Reuters): In banknotes at cash machines and exceptional transfers for "humanitarian supplies", large amounts of euros fled the east Mediterranean island before and after Cypriot lawmakers stunned Europe by rejecting a levy on all bank deposits.

EU negotiators knew something was wrong when the Central Bank of Cyprus requested more banknotes from the European Central Bank than the withdrawals it was reporting to Frankfurt implied were needed, an EU source familiar with the process said. "The amount the Cypriots mentioned ... on a daily basis was much less than it was in reality," the source said.

Confusion over just how much money was pulled out of Cyprus' banks is illustrative of the confusion surrounding the negotiations as a whole. Representing just 0.2 percent of the euro zone economy, Cyprus nevertheless threatened to reignite the bloc's debt crisis. Cyprus' problems began in Greece — it is heavily exposed to the euro zone's first bailout casualty.

No one knows exactly how much money has left Cyprus' banks, or where it has gone. The two banks at the centre of the crisis — Cyprus Popular Bank, also known as Laiki, and Bank of Cyprus — have units in London which remained open throughout the week and placed no limits on withdrawals. Bank of Cyprus also owns 80 percent of Russia's Uniastrum Bank, which put no restrictions on withdrawals in Russia. Russians were among Cypriot banks' largest depositors.

Yes folks, it appears as though the people who got really penalized by the bank closures in Cyprus were, you guessed it, the little people.

This capital flight, however, creates a far bigger problem than just the sheer amount of egg it leaves on the faces of the eurocrats; because with the big money fleeing, the pool of capital available to be stolen is much, much smaller than originally calculated, and that means the haircut on deposits over €100,000 can no longer be the 9.9% originally proposed.

Nor will it be the 15% suggested after the Cypriot parliament rejected the first proposal. 20%? No, more; much more. The last official estimate was 40% ... but that was a lifetime ago.

How big will the haircuts eventually be? Well, frankly, that's anybody's guess. The most recent official scheme runs as follows:

Depositors in the Bank of Cyprus will be forced to take shares in the bank to the tune of 37.5% of any savings over €100,000, while the rest will likely never be paid back.

Of the 62.5% of uninsured deposits not converted into shares, 40% will continue to accrue interest (which will not be repaid unless the bank makes a decent profit — riiiiiiiiiight), which only leaves the last 22.5%. Which will earn zero interest.

But spare a thought for Laiki Bank depositors, who will lose 80% of their deposits in the winding down and THEN be transferred to the Bank of Cyprus.

It's an unmitigated disaster. Period.

However, fears of riots in Cyprus when the banks finally opened on Thursday gave way to a huge sense of relief when the unrest failed to materialize.

Unfortunately, this unexpected calm and the lack of long lines outside banks in places like Spain, Greece, and Italy has been taken as a sign that the eurocrats have recovered their own fumble once again.

They haven't. Believe me, they haven't.

"It hasn't happened" and "it hasn't happened yet" are two identical statements but for just three little letters, and yet the difference between them is a gaping chasm.


Allow me to illustrate this point.

Remember Friday September 12th, 2008? That was the last of the 'olden days'. On that day, Lehman Brothers was operating normally, despite rumours that it was in trouble. These rumours were, of course, strenuously denied by Dick Fuld, Joe Gregory, and anyone else at the company who was challenged as to its solvency.

After the market shut, the full horror began to unravel in real time before a stunned global audience. I say 'stunned,' but wouldn't you know it, the smart money had been pouring out of Lehman for weeks.

When the market opened Monday, September 15th, after Lehman had been officially forced to declare bankruptcy, the world prepared for cataclysm. But then something 'unexpected' happened:


Source: Bloomberg

As you can see from this chart, by the end of the first week after Lehman crystallized everybody's very worst fears, the market managed to close slightly positive, inducing a false sense of calm. However, that close above the pre-Lehman level was the last time the market would see such heady heights for quite a while.

The next chart (following page) shows what happened in the two months immediately after that first-week close; and, as you can see, just because bad stuff didn't happen in those first few days, it didn't mean things weren't about to get very, very dicey indeed as reality sunk in.


Source: Bloomberg

So, with that as a salutary example, and noting the relatively sanguine behaviour of markets this past week, what do we suppose is the new reality, PC (post-Cyprus)?

Lesson One: The eurocrats are capable of making — and in fact are likely to make — horrific errors in judgement around financial matters, in the interests of furthering their political aims.


The full ramifications of the damage done by these clowns when they even suggested breaking the sacrosanct deposit guarantee have yet to be felt, but it will slowly dawn on savers throughout Europe that their money is no longer safe in a Greek bank, nor a Spanish one. Nor an Italian or Portuguese one. In fact, with interest rates at zero, the banco de mattress is looking more and more like the smart option (see picture, left, from Spain).

Lesson Two: The slightest slip on the part of the eurocrats when trying to spin what they really want to do versus what they think the public will allow them to do could turn out to be disastrous.

Witness the newly incumbent head of the Eurogroup, Jeroen Dijsselbloem (successor to Mr "When-it-gets-serious-you-have-to-lie" himself, Jean-Claude Juncker) saying out loud that Cyprus is a 'template' for future bailouts, whereupon the market stumbled dramatically. So much so that Dijsselbloem's backpedalling was worthy of Lance Armstrong himself.

As everyone held their breath, Dijsselbloem issued a statement saying that Cyprus is “a specific case with exceptional challenges” and that “no models or templates” will be used in the future.

Unfortunately for Dijsselbloem & Co., the FT was on hand to provide a full, on-the-record transcript of the conversation in question, in which Jeroen certainly seems to suggest that Cyprus marks the dawn of a new approach to bailouts-ins. I'll let you judge his sincerity.

Lesson Three: What the public is told in the heat of the crisis and what actually happens once the immediate crisis has seemingly passed are altogether different things:

Casting aside the March 1 assurance from Sarris that nothing was more foolish than talking about a deposits haircut, let's focus on the assurances made to savers last week.

First, they were told that the banks would only be closed for a day. That ended up turning into almost two weeks. Then they were assured that the draconian capital controls put in place would only be there for seven days; but by sundown on the first day, that had been extended to 'about a month'.

As I write this, depositors still wait to hear the final amount of their savings they will end up losing to confiscation; but that money is now captive, and so if it takes a little longer to figure out how much of the 'dumb money' is left to carry the load, then so be it. That money is not going anywhere.

These capital controls will be impossible to lift at any point in time, I suspect, so the week that turned into a month will likely turn into a much longer period. Just ask Icelanders who still have capital controls in place from 2008.

Lesson Four: Delays of Game work both ways. Just because money hasn't begun pouring out of peripheral European banks doesn't mean it won't.

Late on Friday, the good folks at Zerohedge (them again) broke the following story, which demonstrates the delayed reaction to events in the financial world as problems begin to permeate the consciousness of Europeans in general — and, in this case, Italians in particular:

(Zerohedge): It appears, given news from Italy today, that European depositors are increasingly coming to the realization that deposits in their local bank are not 'safe' places to put their spare cash, but are in fact loans to extremely leveraged businesses. In a somewhat wishy-washy, 'hide-the-truth'-like statement on Monte dei Paschi's website, the CEO admits to, "the withdrawal of several billion in deposits." Of course, the reasons why these depositors withdrew their capital from the oldest bank in the world will never be known though of course he blames it on "reputational damage" from their derivative cheating scandal. Apparently the fact that this happened to come about six week after said scandal and the bank's third bailout, and that the prior two bailouts did not result in such an outflow of unsecured liabilities (at least not to the public's knowledge), was lost on the senior management, as was lost that a far greater catalyst may have been the slightly more troubling events in Cyprus in the second half of March.

Unsurprisingly, as Reuters notes, the CEO declined to give a forecast on the level of deposits at the end of the first quarter of 2013.

Going forward, this is the key takeaway from the events in Cyprus:

That one crucial misstep by Dijsselbloem's Eurogroup has started a Europe-wide bank run that cannot be seen yet but is surely happening. In the 21st century, bank runs happen over the internet long before we see the angry queues forming outside the branches of weak banks; and, sadly, it takes those pictures to impress upon the 'dumb money' the gravity of the situation. By the time they understand what is happening to them, it's too late. Just ask any one of the hundreds of thousands of Cyprus residents who believed the promises of their government and central bank in the days and weeks leading up to the seizure of their hard-earned savings.

Cyprus will, in time, come to be seen as the beginning of the end for the euro; because trust has finally been broken, and without it fractional-reserve banking cannot operate.

By breaking that trust, the eurocrats have shown themselves to be what they are: ineffectual bureaucrats desperately lurching from one crisis to another, but now they have crossed the Rubicon.


Already, their next test awaits them as Slovenia, a country twice the size of Cyprus in land mass with a GDP of $45bn, begins to crumble under the weight of its own banking crisis.

Saddled with nonperforming loans equal to 20.5% of their portfolios, Slovenia's three largest banks are, according to the IMF, 'under severe distress', and the country's borrowing costs have tripled in a week (chart, left).

Naturally, the government uttered the usual assertions of solvency and promised all the right things:

(UK Daily Telegraph): The new prime minister Alenka Bratusek told the Slovene parliament on Wednesday that the fears are overblown. “Our banking system is stable and safe. Comparisons with Cyprus aren’t valid. Deposits are safe and the government is guaranteeing them.”

Sound familiar, folks?

But, if Slovenia does happen to require a bailout, it will be too soon after Cyprus to treat them any differently; and so Slovenians are at risk of being the second citizenry of the EU to suffer deposit seizure and capital controls. At that point, even the most disengaged citizens of peripheral Europe may just wake up and smell the coffee.

On the plus side, Slovenia's banking sector is just 130% of GDP, as opposed to Cyprus's 700%; so that helps, but if we're talking about off-shore banking destinations whose financial sectors could be potentially troublesome in the case of a Europe-wide bank run, then surely Luxembourg, with a banking sector that is equal to 2400% of GDP, warrants a cursory glance.

But maybe that's a subject for another day.


This week's Things That Make You Go Hmmm... is stuffed full of goodness, beginning with a look at Cyprus and the unraveling of fractional-reserve banking and moving right along to the problems besetting poor Slovenia. And then it's on to little Luxembourg, so you can all familiarize yourselves with the names and places that will soon require constant monitoring.

From there we make the short hop to Switzerland, to find that the referendum that now must be called on repatriating Swiss gold has a wrinkle in it that may play havoc with currency markets. Then we buzz across the English Channel to London, where the Candy Brothers' monument to opulence is raising a quizzical eyebrow or two.

Texas joins the chorus of places looking to repatriate gold, we sit on the shoulders of 'the Alchemists' as they try to fix the world in 2008, and we meet the German professor who is to Angela Merkel what Beppe Grillo was to Mario Monti.

Our charts include some fantastic work by Greg Weldon (a giant amongst data analysts, both literally and figuratively), some fascinating gold and silver charts that suggest brighter times ahead for both monetary metals, a handy dandy Cyprus bailout reference, and a great chart on European versus US unemployment — not to mention a nifty map of the potential targets for North Korea's missile batteries.

Lastly, we savor the wisdom of Fonzie Bill Fleckenstein, the bombast of Nigel Farage, and — for you millions who requested it — my recent speech at Mines & Money in Hong Kong, entitled 'Risk: It's Not Just A Board Game'.

Until Next Time.


Cyprus and the Unraveling of Fractional-Reserve Banking

The “Cyprus deal” as it has been widely referred to in the media may mark the next to last act in the slow motion collapse of fractional-reserve banking that began with the implosion of the savings-and-loan industry in the U.S. in the late 1980s.

This trend continued with the currency crises in Russia, Mexico, East Asia, and Argentina in the 1990s in which fractional-reserve banking played a decisive role.

The unraveling of fractional-reserve banking became visible even to the average depositor during the financial meltdown of 2008 that ignited bank runs on some of the largest and most venerable financial institutions in the world. The final collapse was only averted by the multi-trillion dollar bailout of U.S. and foreign banks by the Federal Reserve.

Even more than the unprecedented financial crisis of 2008, however, recent events in Cyprus may have struck the mortal blow to fractional-reserve banking. For fractional-reserve banking can only exist for as long as the depositors have complete confidence that regardless of the financial woes that befall the bank entrusted with their “deposits,” they will always be able to withdraw them on demand at par in currency, the ultimate cash of any banking system.

Ever since World War Two governmental deposit insurance, backed up by the money-creating powers of the central bank, was seen as the unshakable guarantee that warranted such confidence. In effect, fractional-reserve banking was perceived as 100-percent banking by depositors, who acted as if their money was always “in the bank” thanks to the ability of central banks to conjure up money out of thin air (or in cyberspace).

Perversely the various crises involving fractional-reserve banking that struck time and again since the late 1980s only reinforced this belief among depositors, because troubled banks and thrift institutions were always bailed out with alacrity—especially the largest and least stable. Thus arose the “too-big-to-fail doctrine.” Under this doctrine, uninsured bank depositors and bondholders were generally made whole when large banks failed, because it was widely understood that the confidence in the entire banking system was a frail and evanescent thing that would break and completely dissipate as a result of the failure of even a single large institution.

Getting back to the Cyprus deal, admittedly it is hardly ideal from a free-market point of view. The solution in accord with free markets would not involve restricting deposit withdrawals, imposing fascistic capital controls on domestic residents and foreign investors, and dragooning taxpayers in the rest of the Eurozone into contributing to the bailout to the tune of 10 billion euros.

Nonetheless, the deal does convey a salutary message to bank depositors and creditors the world over. It does so by forcing previously untouchable senior bondholders and uninsured depositors in the Cypriot banks to bear part of the cost of the bailout. The bondholders of the two largest banks will be wiped out and it is reported that large depositors (i.e., those holding uninsured accounts exceeding 100,000 euros) at the Laiki Bank may also be completely wiped out, losing up to 4.2 billion euros, while large depositors at the Bank of Cyprus will lose between 30 and 60 percent of their deposits. Small depositors in both banks, who hold insured accounts of up to 100,000 euros, would retain the full value of their deposits.

The happy result will be that depositors, both insured and uninsured, in Europe and throughout the world will become much more cautious or even suspicious in dealing with fractional-reserve banks. They will be poised to grab their money and run at the slightest sign or rumor of instability. This will induce banks to radically alter the sources of the funds they raise to finance loans and investments, moving away from deposit and toward equity and bond financing. As was reported Tuesday, March 26, this is already expected by many analysts....

*** von mises institute / link

Slovenia Faces Contagion from Cyprus as Banking Crisis Deepens

Slovenia’s borrowing costs have rocketed over recent days as it grapples with a festering financial crisis, becoming the first victim of contagion from Cyprus.

“Banks are under severe distress,” said International Monetary Fund in its annual health check on the country. Non-performing loans of the Slovenia’s three largest banks reached 20.5pc last year, with a third of all corporate loans turning bad.

Yields on two-year debt in the Alpine state have tripled over the past week, jumping from 1.2pc to 4.26pc before falling back slightly on Thursday. Ten-year yields have reached a post-EMU high of 6.25pc.

“The country has lost competitiveness since joining the euro and it’s led to slow economic collapse. Markets have been very complacent, but it has been clear for a long time that the banks need recapitalisation, and it is not easy to raise money in this climate,” said Lars Christensen from Danske Bank.

The IMF expects the economy to contract by 2pc this year, following a fall of 2.3pc in 2012. “A negative loop between financial distress, fiscal consolidation and weak corporate balance sheets is prolonging the recession. A credible plan to address these issues is essential to restore confidence and access markets,” it said.

The new prime minister Alenka Bratusek told the Slovene parliament on Wednesday that the fears are overblown. “Our banking system is stable and safe. Comparisons with Cyprus aren’t valid. Deposits are safe and the government is guaranteeing them.”

Slovenia’s bank assets equal 130pc of GDP compared with 700pc for Cyprus, though the Cypriot figure is misleading since a large part of its banking system is made of “brass plate” subsidiaries of foreign lenders such as Barclays or Russia’s VTB.

Tim Ash from Standard Bank said the events of the past two weeks had pushed the country over the edge. “Slovenia is now inevitably heading towards a bail-out. The eurozone shot itself completely in the foot in Cyprus,” he said.

The Slav-speaking state — a Baroque jewel with historic ties to Austria — has a population of just 2m and is too small to pose a financial threat.

However, analysts say a crisis in Slovenia would further complicate EMU politics, forcing the northern creditor states to define their rescue strategy yet again. Austerity fatigue in Germany and Holland has already caused policy to harden.

Luxembourg has also come into focus as markets take a closer look at EMU money centres. Its banking assets are 2,500pc of GDP, by far the highest in the eurozone....

*** Ambrose Evans-Pritchard / link

Luxembourg Warns of Investor Flight from Europe

In Luxembourg, leaders are warning that applying the Cypriot bailout model — a levy on bank deposits — to other crisis-plagued countries could lead to a flight of investors from Europe. But the EU is considering the option anyway.

The debate over this week's "bail in" of bank account holders in Cyprus as part of the country's debt crisis bailout is continuing to simmer in Europe. In Luxembourg, Finance Minister Luc Frieden has warned that the example set in Cyprus by taxing people holding €100,000 ($129,000) or more in their accounts could drive investors out of Europe.

"This will lead to a situation in which investors invest their money outside the euro zone," he told SPIEGEL. "In this difficult situation, we need to avoid anything that will lead to instability and destroy the trust of savers."

Earlier this week, Euro Group President Jeroen Dijsselbloem sparked an enormous controversy after stating that the solution found in Cyprus could be applied throughout the euro zone in the future.

The remark triggered immediate criticism from his predecessor as head of the Euro Group, Luxembourg Prime Minister Jean-Claude Juncker. "It disturbs me when the way in which they tried to resolve the Cyprus problem is held up as a blueprint for future rescue plans," Juncker told German public broadcaster ZDF earlier this week. "It's no blueprint. We should not give the impression that future savings deposits in Europe might not be secure. We should not give the impression that investors should not keep their money in Europe. This harms Europe's entire financial center."

But in the European Parliament, politicians are considering ways to make banks bear greater responsibility for their own financial problems. Lawmakers are considering the European Commission's proposed banking resolution legislation for faltering financial institutions.

The discussion includes the possibility of future compulsory levies on major depositors, although it is more focused on placing greater responsibility for risks on other investors in banks.

"We want to clearly strengthen the position of deposit customers," said Swedish European Parliament member Gunnar Hökmark. Under the proposal, deposits of up to €100,000 would be excluded from any loss participation at a bank. Any deposits over that amount would only get hit if the losses couldn't be fully covered through a bank's shareholders and other creditors.

The EU currently guarantees all deposits under €100,000, but this policy was called into question two weeks ago after the finance ministers of the euro zone decided to make small-scale savers contribute to the bailout of the Cypriot banking sector. Ultimately, Cyprus issued a one-time levy only against depositors with €100,000 or more in their accounts, the first time that personal bank accounts have been hit in Europe as part of a formal bailout package.

Under current EU policy, private creditors will not be required to cover banking imbalances until 2018. But in Germany, Andreas Dombret, a board member of the Bundesbank, the country's central bank, would like to implement the new rules much sooner, by 2015. And Carsten Schneider, the budget policy expert for the opposition center-left Social Democrats, says he believes the rules for winding down banks should be implemented as soon as 2014.

"Societal and political acceptance is ending for the model of bank rescues in which the state protects bond holders and major investors," said Schneider.

*** der spiegel / link

Does a Yes to the Swiss Gold Referendum Imply an End to the CHF Cap?

According to the upcoming referendum “Save our Swiss gold”:

The SNB should stop selling its gold.

The gold has to be stored in Switzerland.

Gold should represent at least 20% of the SNB assets.

Did you know that:

The SNB has sold one ton of gold per day during five years?

1550 tons of the people’s assets in form of gold had been sold for cheapest prices (between 300 and 500 US$)?

When the concerned minister was asked where the SNB gold currently is stored, he answered in parliament: “Where this gold exactly is stored, I cannot say, because I do not know, because I do not need to know and because I do not want to know."

The referendum initiative was successful, 106000 signatures were achieved. Hence the referendum will probably be held in the coming year. With it the Swiss people will decide if the SNB should be obliged to hold gold as 20% of its total assets. Currently the SNB holds only 10% gold.

Until the end of Bretton Woods, the Swiss managed to accumulate large gold reserves thanks to continuous current account surpluses. In the year 2000, the IMF intensified the “demonetization of gold” campaign started in the 1970s in the strong belief that the “new economy” and the strength of the anchor currency of the global monetary system, the US dollar, would be able to defeat any future supply-side and inflation issues.

Many central banks, like the Bank of England or the SNB, sold masses of gold. The Germans and Italians, however, decided to keep their big gold reserves, possibly to give the euro a better credibility. Since the last gold sales in 2007, the Swiss have maintained the same quantity of gold in a sort of “gentlemen agreement among central banks of developed nations”. Despite the strong rise of gold prices since 2008, they never bought more gold, but central banks of emerging markets did.



Between 2001 and 2007, the SNB made the Swiss cantons happy and delivered some billions of francs to prop up their finances. The gains were unfortunately not caused by strong asset management capabilities, but mostly due to gold price improvements and gold sales at quite cheap prices.

For the proponents of the gold referendum, the SNB gold sales were the destruction of what their parents and grand parents achieved during the Bretton Woods period. As the year 2010 SNB results show, the remaining Swiss gold holdings prevented higher losses; Unfortunately, the quantity of gold was less than half the one of the year 2000; otherwise gains on the gold price would have nearly neutralized losses on fiat currencies....

*** SNBCHF (Thanks, BG) / link

A Tale of Two Londons

Up until the 18th century, Knightsbridge, which borders genteel Kensington, was a lawless zone roamed by predatory monks and assorted cutthroats. It didn’t come of age until the Victorian building boom, which left a charming legacy of mostly large and beautiful Victorian houses, with their trademark white or cream paint, black iron railings, high ceilings, and short, elegant stone steps up to the front door.

This will not be the impression a visitor now gets as he emerges from the Knightsbridge subway station’s south exit. He will be met by four hulking joined-up towers of glass, metal, and concrete, sandwiched between the Victorian splendors of the Mandarin Oriental Hotel, to the east, and a pretty five-story residential block, to the west. This is One Hyde Park, which its developers insist is the world’s most exclusive address and the most expensive residential development ever built anywhere on earth. With apartments selling for up to $214 million, the building began to smash world per-square-foot price records when sales opened, in 2007. After quickly shrugging off the global financial crisis the complex has come to embody the central-London real-estate market, where, as high-end property consultant Charles McDowell put it, “prices have gone bonkers.”

From the Hyde Park side, One Hyde Park protrudes aggressively into the skyline like a visiting spaceship, a head above its red-brick and gray-stone Victorian surroundings. Inside, on the ground floor, a large, glassy lobby offers what you’d expect from any luxury intercontinental hotel: gleaming steel statues, thick gray carpets, gray marble, and extravagant chandeliers with radiant sprays of glass. Not that the building’s inhabitants need venture into any of these public spaces: they can drive their Maybachs into a glass-and-steel elevator that takes them down to the basement garage, from which they can zip up to their apartments.

The largest of the original 86 apartments (following some mergers, there are now around 80) are pierced by 213-foot-long mirrored corridors of glass, anodized aluminum, and padded silk. The living spaces feature dark European-oak floors, Wenge furniture, bronze and steel statues, ebony, and plenty more marble. For added privacy, slanted vertical slats on the windows prevent outsiders from peering into the apartments.

In fact, the emphasis everywhere is on secrecy and security, provided by advanced-technology panic rooms, bulletproof glass, and bowler-hatted guards trained by British Special Forces. Inhabitants’ mail is X-rayed before being delivered.

The secrecy extends to the media, many of whose members, including myself and the London Sunday Times’s and Vanity Fair’s A. A. Gill, have tried but failed to gain entry to the building. “The vibe is junior Arab dictator,” says Peter York, co-author of The Official Sloane Ranger Handbook, the riotous 1982 style guide documenting the shopping and mating rituals of a certain striving class of Brits, who claimed Knightsbridge’s high-end shopping area, which stretches from Harrods to Sloane Square, as their urban heartland.

One Hyde Park was built by two British brothers, Nick and Christian Candy, together with Waterknights, the international property-development company owned by Qatar’s prime minister, Sheikh Hamad bin Jassim al-Thani. Christian, 38, a lanky former commodities trader, is the duo’s discreet number cruncher, while his stockier, tousled-haired brother, Nick, 40, is its flashy, name-dropping, celebrity-loving public face. The Candys don’t go in for small gestures. In October, Nick married the Australian actress Holly Valance in Beverly Hills, after she had announced their engagement by tweeting a photo of Nick down on one knee proposing on a beach in the Maldives.

In flaming torches behind the happy couple, will you marry me was written, without the usual question mark.

Designed by the architect Lord Richard Rogers, who also designed London’s iconic Lloyd’s building, One Hyde Park has divided Britain. Gary Hersham, managing director of the high-end real-estate agency Beauchamp Estates, says it is “the finest building in England, whether you like the style or you don’t,” while investment banker David Charters, who works in Mayfair, says, “One Hyde Park is a symbol of the times, a symbol of the disconnect. There is almost a sense of ‘the Martians have landed.’ Who are they? Where are they from? What are they doing?” Professor Gavin Stamp, of Cambridge University, an architectural historian, called it “a vulgar symbol of the hegemony of excessive wealth, an over-sized gated community for people with more money than sense, arrogantly plonked down in the heart of London.”

The really curious aspect of One Hyde Park can be appreciated only at night. Walk past the complex then and you notice nearly every window is dark. As John Arlidge wrote in The Sunday Times, “It’s dark. Not just a bit dark — darker, say, than the surrounding buildings — but black dark. Only the odd light is on.... Seems like nobody’s home.”...

*** vanity fair / LINK

Three Days that Saved the World Financial System

Adapted from “The Alchemists: Three Central Bankers and a World on Fire,” by Neil Irwin.

The BlackBerrys all started buzzing, just before dinner was to begin at the Palacio da Bacalhoa, a 15th-century estate outside Lisbon. The 21 men and one woman charged with charting the course of Europe’s economy looked down to find startling news that evening of May 6, 2010.

Across the Atlantic, the U.S. stock market had plummeted. In only 15 minutes, the Dow Jones industrial average had fallen about 1,000 points, razing the stock prices of some of America’s biggest companies to a single penny. It would later be known as the “flash crash” and would be chalked up to strange technical factors. But in the heat of the moment, it flashed a different sort of danger. To the leaders of the European Central Bank who made up the Governing Council, who that very day had dismissed risks to their financial system, the crash seemed a striking referendum on what they had done — or rather, not done.

That afternoon, their leader, a Frenchman named Jean-Claude Trichet, had told the world in a news conference that the group hadn’t so much as discussed deploying its bottomless resources — its power to print money — to fight the crisis that was enveloping Europe and increasingly throwing into question the ability of nations to pay their debts.

Did we botch this? the central bankers wondered. What do we do now?


Source: Washington Post

The events that followed were, to most Americans, just one more series of headlines about a global crisis.

But in fact, what happened over three days and four nights in May 2010 is essential to understanding the economic predicament in which the world still finds itself. In that moment, the major Western central banks — and their leaders, Ben S. Bernanke of the U.S. Federal Reserve, Mervyn King of the Bank of England, and Trichet of the ECB — made a series of decisions that created the world economy we inhabit today, and likely far into the future.

Through half a decade of crisis that spanned every continent on Earth, it was this triumvirate of central bankers who responded on a scale and with a speed that presidents and parliaments could never muster. They deployed trillions of dollars, pounds and euros, often in concert, always trying to contain the damage. They made plenty of mistakes, some of them costly. But they also have kept the world from a disastrous economic collapse of the sort their predecessors had allowed eight decades earlier, setting the stage for the rise of the Nazis and World War II.

This is the inside story — based on dozens of interviews with people involved first-hand along with documents and other resources — of how, at one particularly crucial turning point, the central bankers pulled it off....

*** Washington post / link

Texas Wants Its Gold Back! Wait, What?

Texas has generally been at the front of the pack of a certain variety of uber-hawkish, vaguely paranoid monetary policy talk over the last few years. Recall it was the state’s governor, Rick Perry, who while running for president strongly suggested that Ben Bernanke would be committing treason should the Federal Reserve print any more money.

But now some in the state, including Perry, are looking to put their money where their mouths are. Literally.

Perry and some in the Texas legislature want to bring the roughly $1 billion worth gold held by the state university system’s investment fund onto Texas soil, rather than in its current resting place in a vault in New York.

“If we own it,” Perry said on Glenn Beck’s radio show last week, according to the Texas Tribune, “I will suggest to you that that’s not someone else’s determination whether we can take possession of it back or not.”

Here’s the thing. Perry’s push to relocate the state’s gold to a newly created “Texas Bullion Depository,” in a strange way makes perfect sense. It lays bare the rationale for investing in the yellow metal to begin with, and is an excellent illustration of the strange role that gold plays in a modern economy and investors’ psyches.

Some basics: People speak of gold as an “investment,” but that’s not quite right. When you buy shares of a company’s stock , you are buying a claim to the future profits of that company. When you buy a Treasury bond, the U.S. government is pledging to pay you a certain amount of money on a certain schedule in the future. But when you buy a 1 ounce ingot of gold, no matter how long you will hold it, you still have exactly one ounce of gold.

In fact, if anything, gold has a negative yield. Because you have to store that gold somewhere; if you keep it in your house, there is a risk of theft. If you keep it in a safe deposit box at the bank, you will have some fee.

If Texas moves its gold back home, it will deal with this in a very real way: Whatever it costs to build, maintain, and guard a facility secure enough to stash $1 billion of gold in will essentially subtract from whatever investment return the holdings offer. (The lawmaker advocating the plan pointed out that only about 20 square feet of space would be needed for the gold as evidence that the cost shouldn’t be high, which kind of misses the point. It’s not the real estate cost that is expensive, it’s the technology and manpower needed to prevent the heist of the millennium.)

Texas media outlets have reported that the state’s gold is held at the Federal Reserve Bank of New York, though it appears the gold in question is actually at the vault of a private bank, HSBC, in New York (here is a 2011 article about the acquisition; an aide to Texas State Rep. Giovanni Capriglione confirmed that this is the gold in question). Despite what you may have seen in Die Hard 3, in which thieves ransack the New York Fed, the security around major vaults is extremely sophisticated. Texas is considering replicating those security costs and giving up the convenience of being able to sell gold easily at the world’s financial capital. But why?

The most common reason to buy gold is as something of an insurance policy against some very bad events, like a bout of significant inflation. In the more plausible scenarios, like a return of 1970s-style period of 10 percent or so annual price increases, gold would indeed likely prove to be quite a good investment. But in that scenario, the state of Texas would have no problem getting access to its gold stored in New York. There would be no need to go to the trouble and expense of setting up a miniature Fort Knox in Austin.

For it to make sense to go to all that hassle of storing your own gold, you have to be insuring against some much darker possibilities, like a collapse of the U.S. government and monetary system, and/or Texas making a (second) bid to secede from the United States....

*** Neil Irwin / LINK

Meet The Influential German Professor Who Wants To Get Rid Of The Euro In Order To Save Europe

Meet Dr. Bernd Lucke, the University of Hamburg economics professor who just formed a new, anti-euro political party to unseat Angela Merkel in this September's German elections.

Lucke, the leader of Alternative für Deutschland, is on board with the "new approach" the euro zone appears to be taking with bank bailouts in the wake of this week's Cyprus deal that has sent bank stocks in Italy and Spain tumbling.

Depositors in the two largest Cypriot banks will take a substantial haircut on bank account balances in excess of 100,000 euros in order to help pay for the bailout. This shifts the burden of footing the bill away from the taxpayers and onto those involved directly with the banks.

Germany, the kingmaker in the euro zone, pushed hard for the EU to take a hard line with Cyprus, ensuring that depositors would be involved in the restructuring. After all, with elections looming in September, the last thing German Chancellor Angela Merkel and her party needs is to look like they are willing to write blank checks to Cypriot banks, which are viewed by the international community as an offshore tax haven for moneyed Russian interests.

Lucke says the reason Germany had to take such a hard line toward depositors — a stance that has set in motion a whole new disruptive chain of events in the euro zone in recent weeks — was because of the new dynamic his party has brought to the German political scene.

"My sentiment is that this is a response to the fact that our party has gone public and that Angela Merkel feels threatened and now fights back for her popular support," Lucke told Business Insider.

So, what exactly is Alternative's plan for Germany and the euro?

For Germany, it's severing the fiscal transfers to struggling peripheral euro zone countries in southern Europe that have fallen into recession.

"While it currently seems to be the case that we do benefit from the euro crisis, there are tremendous risks in the wings, and we would like to end these policies of disguising fiscal risk, and discharging banks of their risk to the detriment of taxpayers," says Lucke. "This heavy burden we just do not want to bear, and this is why we have formed our party to oppose it."

For the rest of Europe, in which Germany remains dominant, it's dissolving the euro altogether.

Lucke says the economic division the euro is creating between North and South "certainly is the cause for envious sentiment and angry sentiment in the southern European countries, so that the political tensions within the European Union actually rise."

Alternative für Deutschland fears that these tensions could jeopardize the principles of a "common market" that make the EU so great for German trade. Lucke suggests, for example, that peripheral nations could perhaps impose customs duties if they can find no other way to become competitive.

"We use the completely wrong incentives for the crisis countries," says Lucke. "We do not help them solve their problems, but pile up more debt for them and force them into a recession, which makes the situation simply unsustainable."

Thus, it's about sacrificing the euro to save the European Project.

We also spoke to Lucke about AfD's chances in September's elections, what an AfD opposition would look like in the German Bundestag, his thoughts on the rise of Beppe Grillo and the anti-euro Five Star Movement in Italy, and the economics Germany's relationship with the euro....

*** business insider / link

State-Wrecked: The Corruption of Capitalism in America

The Dow Jones and Standard & Poor’s 500 indexes reached record highs on Thursday, having completely erased the losses since the stock market’s last peak, in 2007. But instead of cheering, we should be very afraid.

Over the last 13 years, the stock market has twice crashed and touched off a recession: American households lost $5 trillion in the 2000 dot-com bust and more than $7 trillion in the 2007 housing crash. Sooner or later — within a few years, I predict — this latest Wall Street bubble, inflated by an egregious flood of phony money from the Federal Reserve rather than real economic gains, will explode, too.

Since the S.&P. 500 first reached its current level, in March 2000, the mad money printers at the Federal Reserve have expanded their balance sheet sixfold (to $3.2 trillion from $500 billion). Yet during that stretch, economic output has grown by an average of 1.7 percent a year (the slowest since the Civil War); real business investment has crawled forward at only 0.8 percent per year; and the payroll job count has crept up at a negligible 0.1 percent annually. Real median family income growth has dropped 8 percent, and the number of full-time middle class jobs, 6 percent. The real net worth of the “bottom” 90 percent has dropped by one-fourth. The number of food stamp and disability aid recipients has more than doubled, to 59 million, about one in five Americans.

So the Main Street economy is failing while Washington is piling a soaring debt burden on our descendants, unable to rein in either the warfare state or the welfare state or raise the taxes needed to pay the nation’s bills. By default, the Fed has resorted to a radical, uncharted spree of money printing. But the flood of liquidity, instead of spurring banks to lend and corporations to spend, has stayed trapped in the canyons of Wall Street, where it is inflating yet another unsustainable bubble.

When it bursts, there will be no new round of bailouts like the ones the banks got in 2008. Instead, America will descend into an era of zero-sum austerity and virulent political conflict, extinguishing even today’s feeble remnants of economic growth.

THIS dyspeptic prospect results from the fact that we are now state-wrecked. With only brief interruptions, we’ve had eight decades of increasingly frenetic fiscal and monetary policy activism intended to counter the cyclical bumps and grinds of the free market and its purported tendency to underproduce jobs and economic output. The toll has been heavy.

As the federal government and its central-bank sidekick, the Fed, have groped for one goal after another ... they have now succumbed to overload, overreach and outside capture by powerful interests. The modern Keynesian state is broke, paralyzed and mired in empty ritual incantations about stimulating “demand,” even as it fosters a mutant crony capitalism that periodically lavishes the top 1 percent with speculative windfalls....

*** New York Times / link


Charts That Make You Go Hmmm...

One of the more fascinating reminders of what may be to come for the remainder of this gold bull market, is the charted history of the dow/gold ratio. Below are two charts illustrating the upward potential in gold which remains for the duration of this market.

The first chart is a normal 200-year look at the dow/gold ratio. What’s particularly shocking here is the staggering levels of volatility injected into the economy and financial system following the US Federal Reserve’s formation in 1913.... [This] volatility has wreaked havoc on many, while creating excellent one-way bets for long term speculators.... [T]he second and more alarming ratio chart is illustrated with a “confidence trend band”:



*** cambridge house / link

The Cyprus bailout in a simple infographic from Saxo Markets. Everything you need to know in one handy place:


Source: Saxo Markets

Greg Weldon, the source of the following text and charts, is, in my opinion, the best data analyst around. His Money Monitor is required reading — particularly for professional investors — and both the breadth and depth of his coverage is unparalleled.

You can sign up for a free one-month trial of Greg's work HERE. It's worth every cent.

The pop-media focused on and celebrated the miniscule monthly increase in the German Economic Expectations Index, which was pegged at 48.5, barely higher than February’s reading of 48.3 … and … the rise in the Current Situation Index, which rose to its highest level since last August.

BUT … that is the extent of the ‘positives’ to be gleaned from this survey.

We focus on the DELCINES in BOTH the Current and Expectations Indexes …

… in France … in Italy …

… and, in the EU as a whole.

The EU Economic Expectations Index fell to 33.4, down from 42.4 in February …

… while the Current Conditions Index plunged to (-) 76.1, down from 75.6.


The sabre-rattling in North Korea is getting louder by the day as the renewed sanctions bite. Scope for a miscalculation in the region is broad and potentially extremely dangerous. The BBC took a look at just where the North Koreans could target their missiles should they lose the plot completely, and the results are somewhat surprising:


*** BBC / link

Courtesy of the UK Guardian comes this fantastic interactive timeline of the Eurozone crisis for those of you who just can't keep up anymore:


Unemployment in Europe & the USA

Mish has crafted some fantastic charts on unemployment that highlight the problems in Europe and compare them to the USA's. Germany is looking relatively good by comparison — but for how long?


*** Mike Shedlock / link

Words That Make You Go Hmmm...



Fonzie Bill Fleckenstein had a few thoughts on the potential ramifications of the debacle in Cyprus, which he was kind enough to share with Eric King this past week.

As usual, Fleck's level-headed approach to a distinctly troubled situation is welcome relief from the hysteria, but even he thinks this could be the start of something disastrous.


After a week in which Europe's leaders look to have made a potentially catastrophic error in their handling of the Cyprus situation, how could I not include Nigel Farage's thoughts on the events that have unfolded in the Eastern Mediterranean.

As always, Nigel pulls no punches and is both entertaining and coruscating in his condemnation of the actions of Europe's masterminds.




Last week in Hong Kong, I gave a presentation at Mines & Money entitled 'Risk: It's Not Just A Board Game'. In it, I discussed risk (obviously) as well as the corruption of traditional price signals, financial repression, and the possibility of trouble in the gold-leasing market.

A few people have asked me to post a link to it; so, after several unsuccessful attempts to record it due to various technical glitches ... here it is!


and finally...


With March Madness upon us once again, this amazing video goes beyond the crazy hops of this basketball player and into the realm of wonder as we see some of the incredible things human beings are capable of (in many cases, once their brains are removed it would seem)....


Thanks, MB.




Grant Williams

Grant Williams is a portfolio and strategy advisor to Vulpes Investment Management in Singapore — a hedge fund running over $250 million of largely partners’ capital across multiple strategies.

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

Grant has 26 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


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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

1 APRIL 2013


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Thomas Wolf

April 5, 2013, 4:22 p.m.

Banco de mattress ,
      the smartest choice
    of the smart set
where the ATM rests.

Alexander Di Nardo

April 1, 2013, 3:36 p.m.

Notable cut-and-paste from the 2013 Canadian Budget, page 145.

“The Government proposes to implement a “bail-in” regime for systemically important banks. This regime will be designed to ensure that, in the unlikely event that a systemically important bank depletes its capital, the bank can be recapitalized and returned to viability through the very rapid conversion of certain bank liabilities into regulatory capital.  This will reduce risks for taxpayers. The Government will consult stakeholders on how best to implement a bail-in regime in Canada. Implementation timelines will allow for a smooth transition for affected institutions, investors and other market participants.”