Things That Make You Go Hmmm...

‘It’s Just Bluefish’

March 4, 2013


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'It's Just Bluefish'

Out of the water! Everyone out of the water!

Get out of the water! Tell everyone to get out!

Now! Out of the water!...

Oh my god... What the hell is that idiot doing?...

Out of the water! Now! Everyone!...

Martin! No!...

No! Don't go in! Stay out! Stay clear!

Get out! Get out!...

It's bluefish! It's a school of bluefish! Chief! It's bluefish!

It's just bluefish.

' False face must hide what the false heart doth know.'


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

Trade Protectionism Looms Next as Central Banks Exhaust QE ................................16

Glencore's Glasenberg Says Mining CEOs 'Screwed Up' ..........................................17

Italy's Prospects Look Grim ..........................................................................18

Stalling for Time: Greek Reform Effort Slows to a Crawl .......................................19

World from Berlin: 'Europe Can't Afford an Ungovernable Italy' ................................20

Syria: The Death of a Country .......................................................................22

French Consumer Recession Is Likely Driven by Job Losses .....................................24

January New Home Sales Bullet Points: The Reality .............................................24

The Investment Case for Gold: Part 2 ..............................................................26

CHARTS THAT MAKE YOU GO HMMM... ..................................................28

WORDS THAT MAKE YOU GO HMMM... ..................................................33

AND FINALLY ................................................................................34

Things That Make You Go Hmmm...

Anybody who has heard of Tommy Johnson has my undying admiration (and a guaranteed spot in perpetuity on any pub quiz team that I am a member of).


John Thomas Johnson, who sadly passed away in October of 2006, was an American orchestral tuba player. In all, Johnson played on more than 2,000 film soundtracks and became Hollywood's 'first-call' tuba player after his debut performance on the score for Al Capone in 1958. The list of his film credits is a veritable treasure trove of classic celluloid: The Godfather, Back To The Future, The Matrix, the Indiana Jones series, the first five Police Academy movies, and Cats and Dogs, starring Jeff Goldblum and Elizabeth Perkins, to name but a few. Johnson also played his tuba for the TV series The Flintstones.

In 1975, Johnson received a call from John Williams (the composer, not the ShadowStats compiler, I hasten to add), who asked him if he was available to play on the latest score that Williams had composed, for a collaboration with a young director shooting his fifth movie — an adaptation of a best-selling novel by Peter Benchley that had been published in February 1974 and caused a sensation, remaining firmly entrenched on the bestseller list for 44 weeks.

The rights to the movie had been bought prior to its publication by Richard D. Zanuck and David Brown, who happened to read a draft version and clearly had an eye for a hit.

The movie was released to great critical acclaim on June 20, 1975; and it marked a watershed in movie history, becoming the first 'summer blockbuster' and setting the trend for a slew of big 'event' movie releases, hyped and built up over months, whose debuts in the world's cinemas were timed to coincide with the long, lazy days of vacation season.

The young director in question was Steven Spielberg. The movie was Jaws.

According to an interview Johnson gave in 2004 to one of my favourite (though sadly no longer operational) websites, (the leading tuba news site on the net), on the day he was slated to record the 'voice' of the shark, he arrived late at the studio and, upon opening his music, found himself faced with a strange passage in a high register which he felt seemed more appropriate for the French horn.

Williams told Johnson that he wanted something that sounded 'a little more threatening' for the 'voice' of the shark.

Job done.

In the nearly 40 years since its release, Jaws has gone on to rake in $470.7 million at the US box office alone, which is about the same as the domestic gross of 2012's The Dark Knight Rises; but, as testament to the depreciation of the almighty dollar, the movie is still the 9th-highest-grossing film of all time, with a massive $1,945,100,000 in inflation-adjusted box office earnings.



Worldwide Gross (US$)



Gone With The Wind








Star Wars








The Sound of Music








The Ten Commandments




Doctor Zhivago








Snow White & Seven Dwarfs



Three years later, with Spielberg opting not to direct, Jaws 2 was released, accompanied by one of the most famous taglines of all time:

'Just When You Thought It Was Safe to Go Back in the Water'

Everybody who has seen the original Jaws movie remembers the classic scene when a shell-shocked Chief Brody (played by Roy Scheider) backs his way into Quint's (Robert Shaw's) cockpit after both he and the audience have witnessed the full size of the shark for the first time, and utters the immortal line, 'You're gonna need a bigger boat'; but I dare say very few amongst you would be able to recite any of the dialogue from the sequel.

The title of this edition of Things That Make You Go Hmmm..., however, comes from a scene in Jaws 2 that for some strange reason popped into my head during my recent travels. Fortunately, thanks to the miracle of YouTube, I was able to find the scene, watch it in its entirety, and transcribe the dialogue for the front cover.


The scene takes place on the beach at Amity Island, with an extremely nervous Chief Brody up in his watchtower as holidaymakers frolic in the surf. He is clearly agitated (hardly surprising, since he has been face to face with a huge Great White and has watched it bite Quint in half) as he scans the ocean through his binoculars, looking for trouble.

Seeing an ominous shadow moving beneath the water towards the helpless swimmers, Brody frantically rings the warning bell and screams at everyone to get out of the water. When his cries go unheeded he climbs down the ladder and runs towards the ocean like a man possessed, yelling at everyone to get out, now.

Still his warning goes unheeded, and so he takes out his gun and fires six shots at the shadow lurking in the ocean, and panic ensues amongst the bathers.

Then a man in the crowd (wearing a rather fetching green trucker's cap) blurts out that the shadow is nothing more than a school of bluefish.

The mayor of Amity Island and several counsellors look on aghast — they can virtually see Brody's antics sucking away tourist dollars from a town reliant upon them for survival.

The scene ends with a forlorn-looking Brody, a man who has seen the truth of the horrors that lurk beneath the water's surface, picking up his spent cartridges on the now deserted beach, helped by his young son.

Of course, as even those amongst you who haven't been fortunate enough to catch Jaws 2 can probably guess, Brody's fears are later realized when a huge man-eating shark does go on a rampage, killing tourists left and right and making everybody fervently wish they had heeded the warnings from the crazy man to stay out of the water.

Now, this is a scene that plays out on a regular basis in the world of finance, I am afraid; and so once again we find there are quite a few supposedly crazy people in watchtowers all around the world screaming at people to get out of all kinds of markets before their capital is devoured. Sadly, and so painfully soon after 2006 and 2007, nobody seems to be listening.

Take that crazy man Kyle Bass, for example.

Kyle has been ringing the alarm over the perilous state of Japan's finances for several years now but has been largely ignored, despite his making a pretty watertight case as to why Japan is about to implode. In a fantastic interview late last year with Ken Eades of the Univ. of Virginia's Darden School of Business, Kyle laid out his thesis once more for those idly paddling in the surf:

A lot has happened in Japan in the last 12 months. In fact, in the last two months we believe Japan has crossed that proverbial Rubicon. We think that you've seen 20 years of conjecture regarding Japan's eventual demise. And now we see a point where, in the last couple months what you see is a continued deterioration in their balance of trade. It's actually running at about negative $100 billion, or close to 10 trillion yen. And we think given this resurgence of Chinese nationalism over the Senkaku crisis [disputed islands], you're going to see that move another 1.5 to 2 percent or another $100 billion. Put that in perspective. What that means is we could see full current account negativity in Japan in October. That's something nobody is ready for.

Think about it. You have a secular decline in the population, you have a balance of trade that is literally being rewritten and falling off a cliff, and their GDP is now tracking negative 3.5 or 4 percent.

So what has to happen in Japan? Now their backs are against the wall. They have a full crisis, and they absolutely have to change the manner in which they deal with their currency. And so we think over the last couple of months they have crossed the final Rubicon that turns the whole situation around and weakens the yen from a currency perspective. Then you are going to start to see, we think, in the next 12-18 months a move in their rates.

Basically Japan is entering its final checkmate phase of the game.

Was anybody listening? Well, no, not really. Not in the kinds of numbers the situation's seriousness deserves, anyway.

The election of Shinzo Abe in December of 2012 has brought Kyle's premise closer to realization but still hasn't been enough to scare people out of the water, as they willfully ignore the mathematical implications of a PM promising to generate 2% inflation in a country that has the largest debt relative to GDP anywhere on earth but can, for now at least, borrow money at levels that will most definitely NOT be available to them should they succeed in their aims.

Case in point, Japanese 5- and 10-year JGBs which, as I write this, have reached mind-numbing yields of 12bp and 66bp respectively. If we go back in time, however, to the last time Japanese CPI registered above 2% for any sustained period (shaded area), the world looked a LOT different, as can be seen from this chart:


Source: Bloomberg

Yes, in those heady days, both 5- and 10-year JGBs reached yields of a little over 8% — something that, mathematically, Japan cannot presently sustain. In fact, a rate of a bit under 3% would be enough to require all of Japan's declining tax revenue to be applied to interest payments.

This isn't an opinion, folks, it's maths.

Abe has promised to generate 2% inflation in Japan and significantly weaken the yen, after the country has essentially suffered two decades of deflation following the bursting of the twin bubbles in Japanese real estate and the Nikkei at the end of 1989. The new strategy has been dubbed 'Abenomics', and it's a pretty good plan ... except for a couple little things.

Japan's gross government debt-to-GDP ratio stands at 240%, whilst its total debt-to-GDP (which includes government, nonfinancial, and consumer debt) is an astronomical 450%. Abe's intention is to inflate away as much of that debt burden as he can whilst simultaneously providing Japan's ailing export industry with the impetus it needs to reclaim its former glory and, at the same time, keeping borrowing costs at historical lows.

Let me know how that works out for ya, Shinzo.

But for now, people are ignoring mathematics and surfing the Japanese wave.

The chart below shows the recent performance of the Nikkei stock exchange; and, as you can clearly see, folks have bought into the idea that a much weaker yen will be good for the nominal performance of Japanese equities. So far so good.


Source: Bloomberg

The next chart shows just how far the Nikkei has to go before it follows the S&P 500 back to its nominal high, which it reached on December 29, 1989. Despite the recent surge, the Nikkei sits some 70% beneath its peak of 38,915:


Source: Bloomberg

Adding to the fun is the huge underweight that many funds have been carrying in Japanese equities for the last few years after a series of false alarms were sounded that '<insert year here> is Japan's year'.

As recently as October 2012, according to JPMorgan, the degree to which investors were underweight Japan was at levels that served only to exacerbate the frenetic rush into the asset class after Abe's election victory:


Source: JPMorgan

So, to recap, we have some great reasons to buy Japanese equities: the stated policy of yen devaluation, an extremely low Nikkei 225 index relative to its highs, as well as a significant underweighting of Japan by investors around the world.


What I don't see amongst those reasons, however, is anything one would traditionally look for when evaluating companies in which one is going to invest one's capital — things such as, oh I don't know, outdated concepts like growth prospects, perhaps? Or good corporate governance, maybe?

The recent results announced by the former powerhouse of Japan's consumer electronics industry, Sony, provide stunning evidence as to just how far once-mighty Japan Inc. has fallen, and just how poorly these companies have performed.


Sony published its Q3 results on February 7th, and a worse set of numbers you'd be hard-pushed to find. The firm unveiled an 'unexpected' loss of ¥10.8bn (its eighth-straight losing quarter —each of the previous seven was also 'unexpected'), lowered its outlook for sales for the full year, and announced worse-than-expected performance from its LCD TV business, its digital camera division (whose sales fell an 'unexpected' 30%), its Playstation console arm, and its videogame division.

'We cannot be optimistic about the electronics business. There are many issues that we need to deal with,' said Masaru Kato, chief financial officer.


In the 40 days prior to the release of that blistering set of results, as Abenomics Fever swept the world, Sony stock had doubled.

But this theme of investing in asset classes for the wrong reasons isn't confined to Japan — far from it. Thanks to the confiscatory policies of the world's central banks and the cancerous ZIRP they are all pursuing so persistently, it is ubiquitous.

With the risk-free rate (US 3-month treasury bills) currently standing at just 10bp, or 0.10%, money has been pouring into places it would normally steer well clear of, for the simple reason that the desperate search for yield is taking it there.

This is a trend that has nothing at all to do with fundamentals, and it is dragging investors deeper into the water than they perhaps ought to go ­— water where significant danger lurks.

Take high-yield bonds, for example.

Is it just me, or does anyone else have a problem with a junk bond benchmark index in today's uncertain world yielding less than 6% (lower than at any time since its launch 16 years ago)? Well, that is exactly where the BAML High Yield Master II Index stands, as you can see from the following chart:


Source: St. Louis Fed

How about Spanish government debt?

Does anyone really believe that borrowing costs should be falling for the Kingdom of Spain, a nation with unemployment greater than that seen in the United States during the Great Depression (one in two under-25s out of work), industrial production that has been slipping for a year, and an ongoing corruption scandal that could topple the government?

Two weeks ago Spain announced its latest debt-profile report, which was, frankly, horrendous:

(Mish): The Government and the Bank of Spain debt figures are chilling. Government debt broke records in 2012. In the first year of the Government of Mariano Rajoy, debt skyrocketed to €882 billion, a one-year increase of €146 Billion. Never in the economic history of Spain's general government had debt increased so much in a single year. In five years, the debt has increased by €500 Billion....

The increase in public debt in 2012 is the equivalent of more than 14 percentage points of gross domestic product (GDP). €882 billion is equivalent to between 83.5% and 84% of GDP. The government had forecast a ratio of 79.8% for the 2012 budget last July, but has since revised the figure upwards. In relative terms, debt-to-GDP is at the highest debt level in more than a century, particularly since 1910, when the Spanish debt stood at 88% of GDP, according to historical IMF data.

Despite cuts and tax increases, the government of Mariano Rajoy has been unable to significantly reduce the gap in the public accounts.

Outstanding liabilities will probably exceed 100% of GDP at the end of the year, and there are more than €100 billion of government debt in the hands of others (Social Security mainly). The €882 billion figure also does not include about €60 billion of debt owed by public enterprises.


Source: El Pais

Meanwhile, against that background, Spanish borrowing costs continue to fall:


Source: Bloomberg

But it's not the fact that they're falling that's so troubling, it's why that's the issue.

Investors are snapping up Spanish sovereign bonds simply because they know that Mario Draghi and the ECB have their backs. Period.

It has absolutely nothing to do with fundamentals.

Fundamental: Foundation of reality; the state of things as they actually exist, rather than as they may appear or might be imagined.

But don't take my word for it. Far wiser men than I have been up in the towers screaming at investors to get out of these waters.

Regular readers will be well aware of the high regard in which I hold Bill Fleckenstein. Having been fortunate enough to have dinner with him recently, I can confirm that the admiration is well-placed. He recently opined on what he termed 'pure fantasy':

What has caused the stock and bond markets to levitate is nothing short of an extraordinary amount of worldwide money printing that thus far has not resulted in 'enough' inflation for people to recognize it as such. (Most likely, the fear of a deflationary accident still lingers, even though that is receding into the background.) How long folks will remain in denial (delusional) is not knowable in advance, just as it wasn't possible to know when the equity and real estate bubbles would end. What is knowable, as it was with the prior two bubbles, is that it will end, and end very badly. Once central banks cannot monetize government debt, we will have a variation of the scare we saw over the last couple of years involving European governments, this time focusing most likely on Japan, Great Britain, and the U.S., as well as Europe.

In other words, we are in the final misallocation of capital. As I have noted before, we can't really call it a bond bubble, since we don't have the euphoria and behavior-changing aspects that normally accompany bubbles; but the warping that has been caused during this go-round is no less significant, and the ramifications will be even more powerful, simply because the scale of the abuse is so gargantuan.

(Incidentally, readers can avail themselves of Bill's daily thoughts by clicking HERE and subscribing. I have been a subscriber for many years and can honestly say that, in my opinion, the $120 annual charge is the best value for money you will find anywhere.)

But it's not just Bill who, like me, is scratching his head.

John Hussman, a renowned thinker with an extremely practical approach to investing, also sees trouble looming:

(FT): These conditions represent a syndrome of overvalued, overbought, overbullish, rising yield conditions that has emerged near the most significant market peaks — and preceded the most severe market declines — in history:

    1.S&P 500 Index overvalued, with the Shiller P/E (S&P 500 divided by the 10-year average of inflation-adjusted earnings) greater than 18. The present multiple is actually 22.6.

    2.S&P 500 Index overbought, with the index more than 7% above its 52-week smoothing, at least 50% above its 4-year low, and within 3% of its upper Bollinger bands (2 standard deviations above the 20-period moving average) at daily, weekly, and monthly resolutions. Presently, the S&P 500 is either at or slightly through each of those bands.

    3.Investor sentiment overbullish (Investors Intelligence), with the 2-week average of advisory bulls greater than 52% and bearishness below 28%. The most recent weekly figures were 54.3% vs. 22.3%. The sentiment figures we use for 1929 are imputed using the extent and volatility of prior market movements, which explains a significant amount of variation in investor sentiment over time.

    4.Yields rising, with the 10-year Treasury yield higher than 6 months earlier.

I have chosen a few examples of disconnected assets that are most certainly not performing, based on fundamentals, but there are many others. In fact, the corruption of the risk-free rate by ZIRP and QE has managed to render every traditional price signal ineffective, and that in turn has led to the mispricing of just about every kind of risk asset anywhere in the world (the single exception being the marketplace where private capital meets private desire for investment, i.e., the only market that, in effect, excludes governmental and political interference).

This will end very badly.

Maybe not yet, maybe not for a while; but the swimmers are loath to get out of the water, and end badly it surely will.

There is no growth to speak of and Europe is mired in recession, as are the UK and Japan. The official statistics may not quite say so, but I am willing to bet that in time we will discover that the US is in similar straits. The world is awash in debt, and central bankers seem to think that more debt is the solution. Currencies are being debased as fast as possible against each other in an oh-so-quiet race to the bottom that, while denied by those involved, is plain to see for all who are willing to look at the evidence and make up their own minds instead of listening to 'officials'. And, as the 'unexpected' election result in Italy demonstrates, people are growing tired of austerity and are ready to vote accordingly.

However, amazingly enough, rather than pay heed to the folks in the watchtowers screaming at them, investors would far rather listen to the 'mayors' of picturesque investment locales telling them not to worry, that the water is safe, and that they have made quite sure that nothing dangerous will happen.

In short, everything is, once again, 'contained'.

Nobody embodies the mayoral role better than our genial friend Ben Bernanke, chairman of the Federal Reserve Board and owner of the most soothing voice in town, who this past week gave his Humphrey Hawkins testimony to a noticeably fractious audience. Bernanke hinted that the famous Fed 'exit strategy' was, perhaps, actually to do nothing and allow things to sort themselves out:

First, we can simply allow securities on our balance sheet to run off and not replace them as we currently are doing. Secondly, we have a number of tools that can be used to drain reserves from the system, such as reverse repos.

Thirdly, we can raise interest rates even without reducing our balance sheet, by raising the interest rate we pay on excess reserves, which will in turn translate into higher interest rates in money markets. And fourth and finally ... eventually we can sell the securities back into the market in a slow, predictable way....

Each of the elements is something that we have tested, that we have seen other countries use, so we think we understand it pretty well....

Again, as I said earlier, we are quite comfortable that we can exit in a way that is both smooth and in which we provide lots of information to markets in advance so they will know what's coming and be able to anticipate it.

It's hard to fathom how such a vaunted cadre of intellectuals as the Federal Reserve Board can be so naive as to think that they (and only they) will be the arbiters of how they exit their bet. The simple truth is that the market will eventually decide what the right interest rate is, and I'm willing to go on the record and state that it will not be a rate that the Fed and the US government likes or has the means to pay.

Funnily enough, recently, a few more high-profile voices have been heard squawking from the watchtowers, including none other than former Bernanke right-hand man and star of Inside Job, Frederic Mishkin:

(UK Daily Telegraph): A new paper for the US Monetary Policy Forum and published by the Fed warns that the institution's capital base could be wiped out 'several times' once borrowing costs start to rise in earnest.

A mere whiff of inflation or more likely stagflation would cause a bond market rout, leaving the Fed nursing escalating losses on its $2.9 trillion holdings. This portfolio is rising by $85bn each month under QE3. The longer it goes on, the greater the risk. Exit will become much harder by 2014.

Such losses would lead to a political storm on Capitol Hill and risk a crisis of confidence. The paper — 'Crunch Time: Fiscal Crises and the Role of Monetary Policy' — is co-written by former Fed governor Frederic Mishkin, Ben Bernanke's former right-hand man.

It argues the Fed is acutely vulnerable because it has stretched the average maturity of its bond holdings to 11 years, and the longer the date, the bigger the losses when yields rise. The Bank of Japan has kept below three years.

Trouble could start by mid-decade and then compound at an alarming pace, with yields spiking up to double-digit rates by the late 2020s. By then Fed will be forced to finance spending to avert the greater evil of default. 'Sovereign risk remains alive and well in the U.S, and could intensify.'

'Feedback effects of higher rates can lead to a more dramatic deterioration in long-run debt sustainability in the US than is captured in official estimates,' it said.

Another warning came late in February, when Britain lost its AAA rating (something it has proudly held since 1978) after Moody's became the latest observer to see through the coalition government's 'Fauxsterity' program:

(EU Observer): Rating agency Moody's stripped the UK of its coveted AAA credit rating on Friday (22 February), rounding off a day of economic gloom in the EU.

In a statement released shortly before the closure of the markets, Moody's said that the downgrade was the result of 'continuing weakness in the UK's medium-term growth outlook, with a period of sluggish growth which Moody's now expects will extend into the second half of the decade'.

It is the first time Moody's has downgraded the UK's creditworthiness since its ratings system was set up in 1978. Meanwhile, the two other big rating agencies — Standard & Poor's and Fitch — are yet to cast their verdict ahead of the country's next annual budget on March 20.

The downgrade leaves just six EU countries — Denmark, Finland, Germany, Luxembourg, the Netherlands and Sweden — with AAA ratings.

I'm sorry, but reducing the rate at which you spend more than you take in, doesn't qualify as austerity.

It doesn't.

And so, as investors continue to willfully disregard the evidence staring them in the face and, thanks to the complete absence of any kind of 'safe' return, pile into the shark-infested waters in search of yield, spare a thought for the Chief Brodys of the world, desperately trying to warn people about the dangers lurking beneath the surface, but ignored because everybody is having such a damned good time.

If you listen very carefully, you can hear Tommy Johnson's ominous tuba playing quietly in the background. It may not be perceptible to most just yet, but it is unmistakably there.

I can only hope that the shadow I and many others see in the water is just bluefish.


In this week's edition of Things That Make You Go Hmmm... we travel to Greece, where the reform effort appears to be stalling; Italy, where the recent election threatens potentially dangerous upheaval in Europe; and France, where job losses appear to be driving a serious consumer recession.

The Economist takes an in-depth look at the tragic ongoing war in Syria; Ambrose Evans-Pritchard fears a wave of protectionism as QE's effectiveness wanes; Mark Hanson picks apart the recent new home sales numbers in the USA; and, in precious metals, Ivan Glasberg takes mining CEOs to task for their poor performance, and the doyen of PM fund managers, John Hathaway, lays out part 2 of his 'Investment Case for Gold'.

We have charts on silver, the sequester, and financial repression as well as the loss of interest in investing, the risk-on/risk-off markets, and something Mike Shedlock calls the 'wage recession'; and in our interviews section Ben Davies talks gold and silver and Rick Santelli talks paper vs. physical, but the star turn is by Stan Druckenmiller, who talks truth.

Druckenmiller's interview is, I think, an extremely important one, and I urge each and every one of you to find the time to watch it.

That's all from me for another week. I will hopefully be back next week, as long as the horrendous cold I have picked up on my travels abates.

Until Next Time.


Housekeeping: My thanks to those of you who journeyed to Indian Wells and the Cambridge House California Resource Investment Conference last weekend. It was a great pleasure to meet so many of you. My next speaking engagements will be at Commodity Investment World Asia, here in Singapore on March 13, and then Mines and Money in Hong Kong on March 18-22.


Trade protectionism looms next as central banks exhaust QE

Officials at the US Federal Reserve may be more worried than they have let on about the treacherous task of extricating America from quantitative easing. This is an unsettling twist, with global implications.

A new paper for the US Monetary Policy Forum and published by the Fed warns that the institution's capital base could be wiped out 'several times' once borrowing costs start to rise in earnest.

A mere whiff of inflation or more likely stagflation would cause a bond market rout, leaving the Fed nursing escalating losses on its $2.9 trillion holdings. This portfolio is rising by $85bn each month under QE3. The longer it goes on, the greater the risk. Exit will become much harder by 2014.

Such losses would lead to a political storm on Capitol Hill and risk a crisis of confidence. The paper — 'Crunch Time: Fiscal Crises and the Role of Monetary Policy' — is co-written by former Fed governor Frederic Mishkin, Ben Bernanke's former right-hand man.

It argues the Fed is acutely vulnerable because it has stretched the average maturity of its bond holdings to 11 years, and the longer the date, the bigger the losses when yields rise. The Bank of Japan has kept below three years.

Trouble could start by mid-decade and then compound at an alarming pace, with yields spiking up to double-digit rates by the late 2020s. By then Fed will be forced to finance spending to avert the greater evil of default.'Sovereign risk remains alive and well in the U.S, and could intensify. Feedback effects of higher rates can lead to a more dramatic deterioration in long-run debt sustainability in the US than is captured in official estimates,' it said.

Europe has its own 'QE' travails. The paper said the ECB's purchase of Club Med bond amounts to 'monetisation' of public debt in countries shut out of global markets, whatever the claims of Mario Draghi.

'We see at least a risk that the eurozone is on a path to become more like Argentina (which of course is why German central bankers are most concerned). The provinces overspend and are always bailed out by the central government. The result is a permanent fiscal imbalance for the central government, which then results in monetization of the debt by the central bank and high inflation,' it said.

In America, the Fed would face huge pressure to hold onto its bonds rather than crystalize losses as yields rise — in other words, to recoil from unwinding QE at the proper moment. The authors argue that it would be tantamount to throwing in the towel on inflation, the start of debt monetisation, or 'fiscal dominance'. Markets would be merciless. Bond vigilantes would soon price in a very different world.

Investors have of course been fretting about this for some time. Scott Minerd from Guggenheim Partners thinks the Fed is already trapped and may have to talk up gold to $10,000 an ounce to ensure that its own bullion reserves cover mounting liabilities.

*** UK Daily Telegraph / link

Glencore's Glasenberg says mining CEOs 'screwed up'

Ivan Glasenberg, head of commodity giant Glencore, has launched an extraordinary broadside against fellow chief executives, condemning mining's record as 'catastrophic'.

The outspoken trader-turned-billionaire CEO said the mining companies had erred in chasing growth, and made the case for keeping supply tight and prices high.

'The big guys really screwed up,' he said. 'We’ve always been wanting to keep building and keep putting the cash which we generate into new assets.

'That’s what we’ve got to stop doing as a mining industry. We’ve got to learn about demand and supply.'

He spoke as the major miners undergo a change of leadership in the face of a worsening environment, with Anglo American’s Cynthia Carroll, BHP Billiton’s Marius Kloppers and Rio Tinto’s Tom Albanese all announcing their exits in recent months.

'Now we have a new generation of CEOs; I hope CEOs have learnt their lesson,' Mr Glasenberg said. 'They built, they didn’t get the returns for their shareholders. It’s time to stop building.

'I hope we are in a new paradigm in the mining industry,' he added. 'It’s really, I believe, catastrophic what we’ve done in this industry.'

In comments likely to raise eyebrows among Glencore’s customers, Mr Glasenberg argued that putting off the development of new mines will help keep prices high for commodities, supporting dividends for investors.

'What we’ve got to do, when the markets do get stronger, no need to keep building a new asset and let’s keep the market tight for a while,' he said.

'Not that we’re here to create an anti-competitive nature, but we’ve got to get returns. You the investors want to get returns on our assets and it’s easily done if we just use our brains.'

*** UK Daily Telegraph / link

Italy's prospects look grim

From political stalemate to the loss of manufacturing strength and the lack of youth protest, two Italian academics find little joy in their country's current predicament.

Talking to Roberto D'Alimonte, professor of political science at Rome's Luiss Guido Carli university, and his colleague Giuseppe Ragusa, a professor of econometrics, makes for a few laughs, but little joy.

D'Alimonte says he's been on the phone this morning and heard tell of several different outcomes following inconclusive parliamentary elections.

Pier Luigi Bersani, leader of the social democrat bloc, is attempting to woo the 20 senators he needs to form a majority government. Where from? His target is the large number of left-of-centre elected officials in Beppe Grillo's Five Star Movement.

Grillo, meanwhile, is leaning towards those who believe the president, Giorgio Napolitano, should resign and make himself available to be prime minister. A Napolitano cabinet would take a more robust attitude to reforms than Mario Monti, but in the same vein.

Then there is Monti, who, as the third choice of most people, becomes the least worst option, again.

Ragusa says the British press have misunderstood Grillo's appeal. It is not a vote against austerity, it is a vote against the establishment and corruption. Starting as a left movement, Grillo has brought together a hotchpotch of environmentalists and social reforms as much as he has corralled Eurosceptics.

Ragusa is pessimistic about the outcome, saying the vote has shown a deeply divided Italy — along regional lines and the generations.

'We need a social compact that binds the winners and losers from economic reforms. And the losers, who should be the older generation, need to accept the deal because the winners are their sons and daughters,' he said.

He is also worried that the engine of Italian wealth, its vast manufacturing base in the north, has lost the battle to badge its own goods and instead is a supplier to BMW and Mercedes and other well-known brands. It is also being lured abroad — even to the US — by tax breaks that mean the country will continue to haemorrhage jobs.

D'Alimonte reflects on the lack of protest by Italy's youth. There are few demonstrations to match los indignados in Madrid. He muses that maybe the Italian middle class is so wealthy, with savings based on 50 years of accumulated income, that it can cushion the blow of austerity unlike Spanish families, which were working in a largely agrarian economy until the 1970s and Franco's death.

Ragusa points out that everyone in senior political positions is over 60. Contrast this situation with the period when Monti started his career. 'He was a professor at 27 and was entirely unpublished, he had nothing standing in front of him — no barriers — something that is unheard of now.'

*** uk guardian / link

Stalling for Time: Greek Reform Effort Slows to a Crawl

The troika is back in Athens this week and with all eyes on Italy, Greece feels it has little to fear. But important reforms have stalled and the government's belt-tightening efforts seem paralyzed. Politicians are playing for time and hoping for fresh money.

The troika mission has returned to Greece, but this time things are different. No front page headlines are warning about new painful demands made by Greece's international creditors, no government officials are pleading for unity in the three-party coalition in support of unpopular measures. And there is no overhanging fear of a long drawn-out process of evaluation, full of innuendos about a catastrophic default or euro-zone exit.

For the moment, Europe is watching developments in Italy. Following the election debacle there, concerns have reawakened that the euro crisis might return. The Greek government, on the other hand, is confident that the inspection started on Monday by the troika — comprised of officials from the European Central Bank (ECB), the European Union and the International Monetary Fund (IMF) — will be over by March 10 and will approve the release of the next two tranches of bailout aid — €2.8 billion in March and a further €6 billion in April. No one seems to fear a repetition of the drama of the previous troika inspection, which lasted a full five months.

On the contrary, the government in Athens is going on the offensive this time, presenting its own list of demands. The Greek government is determined to push lenders to agree on a list of concessions it hopes will help to alleviate the crisis. They include a lower VAT, or sales tax, for restaurants, the allocation of EU funds to combat unemployment and a new law aimed at making life easier for indebted households.

But such complacency seems unfounded given the situation on the ground. The Greek economy remains mired in recession, and is expected to contract by another 4.5 percent of gross domestic product in 2013. The latest statistics show that 27 percent of Greeks are unemployed, and among those under the age of 24, that figure is 62 percent. Many are already fearful of the 'Bulgarian syndrome,' a reference to the street violence and anti-austerity protests that have shaken the government in Greece's northern neighbor.

Furthermore, it has become increasingly clear that the government in Athens is failing to implement promised reforms....

*** der spiegel / link

World from Berlin: 'Europe Can't Afford an Ungovernable Italy'

European leaders are nervous Rome might flout economic reforms and reignite the euro crisis as a result of the political stalemate which emerged from Italian elections. German commentators suggest that now might be a good time to consider policy changes on both sides.

With Italy facing political deadlock after this week's election, European leaders are on edge about what are likely to be negative effects on the currency union.

Financial markets and ratings agencies, the everyday harbingers of economic turmoil, have reacted negatively to concerns that despite a deep recession, much-needed reforms will not continue in the euro-zone's third-largest economy.

Though reform-minded Democratic Party head Pier Luigi Bersani's center-left camp managed a slim majority in Italian parliament, they were unable to gain the upper hand in the Senate didn't gain an edge against the center-right, led by anti-austerity comedian Beppe Grillo's Five Star Movement and populist Silvio Berlusconi and his followers. Meanwhile Brussels-backed technocrat and former Prime Minister Mario Monti garnered only about 10 percent of the vote.

With the center-left and center-right now pitted against each other, there is little to indicate that economic progress will be made in Italy. But that hasn't stopped appeals from European leaders for politicians to consider the consequences for the euro crisis, which many fear could now return.

German Finance Minister Wolfgang Schäuble said that 'the onus is now on political leaders in Italy to … do what the country needs, namely form a stable government that continues on the successful path of reform.'

His Dutch counterpart Jeroen Dijsselbloem, who is also head of the Euro Group, said that regardless of who runs Rome, he expects them to honor Italy's commitments to Europe. 'A stable government is important to the euro zone. To pull Europe from an economic quagmire, stable politics are required, also in Italy,' he added.

European Commission President Jose Manuel Barroso urged Italy not to give in to populism. 'We should be serious when we discuss economic policy and not give in to immediate political or party considerations,' he said.

German commentators on Wednesday once again lamented the election result, and many say it doesn't bode well for efforts to end the euro crisis.

Conservative daily Frankfurter Allgemeine Zeitung writes:

Governments that want to break down the state, economy and society to implement reforms incur the wrath of voters and must watch as their legitimacy crumbles. Instead, either radical forces or populists with irresponsible promises and no regard for consequences gain power. Austerity is unpopular. Even if drawing that conclusion is banal, it also has negative economic ramifications. Demands for an end to the austerity measures were to be expected, as was the renewed debate about euro bonds and debt union.

This much is clear: European economies will continue drifting apart and their ability to compete will not equalize at a good level. … Great uncertainty weighs on this currency union once again.

*** der spiegel / LINK

Syria: The death of a country

After the first world war Syria was hacked from the carcass of the Ottoman empire. After the second, it won its independence. After the fighting that is raging today it could cease to function as a state.

As the world looks on (or away), the country jammed between Turkey, Lebanon, Jordan, Iraq and Israel is disintegrating. Perhaps the regime of Bashar Assad, Syria’s president, will collapse in chaos; for some time it could well fight on from a fortified enclave, the biggest militia in a land of militias. Either way, Syria looks increasingly likely to fall prey to feuding warlords, Islamists and gangs—a new Somalia rotting in the heart of the Levant.

If that happens, millions of lives will be ruined. A fragmented Syria would also feed global jihad and stoke the Middle East’s violent rivalries. Mr Assad’s chemical weapons, still secure for now, would always be at risk of falling into dangerous hands.

This catastrophe would make itself felt across the Middle East and beyond. And yet the outside world, including America, is doing almost nothing to help.

Part of the reason for the West’s hesitancy is that, from the start of the uprising in 2011, Mr Assad has embraced a strategy of violence. By attacking the Arab spring with tanks and gunships, he turned peaceful demonstrators into armed militias. By shelling cities he uprooted his people. By getting his Alawite brethren to massacre the Sunni majority, he has drawn in jihadists and convinced Syrians from other sects to stick with him for fear that his own fall will lead to terrible vengeance.


Syrian blood now flows freely and sectarian hatred is smouldering (see article). The fight could last years. Rebel groups have lately been capturing military bases. They control chunks of the north and east and are fighting in the big cities. But the rebels are rivals as well as allies: they are beginning to target each other, as well as the government’s troops.

Even if Mr Assad cannot control his country, he has every reason to fight on. He still enjoys the cultlike devotion of some of his Alawite sect and the grudging support of other Syrians who fear what might come next.

He commands 50,000 or so loyal, well-armed troops — and tens of thousands more, albeit less trained and less loyal. He is backed by Russia, Iran and Iraq, which between them supply money, weapons, advice and manpower. Hizbullah, Lebanon’s toughest militia, is sending in its fighters, too. Mr Assad almost certainly cannot win this war; but, barring an unexpected stroke of fate, he is still a long way from losing it.

So far the fighting has claimed 70,000 or more lives; tens of thousands are missing. The regime has locked up 150,000-200,000 people. More than 2m are homeless inside Syria, struggling to find food and shelter. Almost 1m more are living in squalor over the border.

Suffering on such a scale is unconscionable. That was the lesson from the genocides and civil wars that scarred the last half of the past century. Yet President Barack Obama has suggested that saving lives alone is not a sufficient ground for military action. Having learnt in Afghanistan and Iraq how hard it is to impose peace, America is fearful of being sucked into the chaos that Mr Assad has created. Mr Obama was elected to win economic battles at home. He believes that a weary America should stay clear of yet another foreign disaster.

That conclusion, however understandable, is mistaken. As the world’s superpower, America is likely to be sucked into Syria eventually.

Even if the president can resist humanitarian arguments, he will find it hard to ignore his country’s interests.

If the fight drags on, Syria will degenerate into a patchwork of warring fiefs. Almost everything America wants to achieve in the Middle East will become harder. Containing terrorism, ensuring the supply of energy and preventing the spread of weapons of mass destruction: unlike, say, the 15-year civil war in Lebanon, Syria’s disintegration threatens them all.

About a fifth of the rebels—and some of the best organised—are jihadists. They pose a threat to moderate Syrians, including Sunnis, and they could use lawless territory as a base for international terror. If they menace Israel across the Golan Heights, Israel will protect itself fiercely, which is sure to inflame Arab opinion. A divided Syria could tear Lebanon apart, because the Assads will stir up their supporters there. Jordan, poor and fragile, will be destabilised by refugees and Islamists. Oil-rich, Shia-majority Iraq can barely hold itself together; as Iraqi Sunnis are drawn into the fray, divisions there will only deepen. Coping with the fallout from Syria, including Mr Assad’s arsenal of chemical weapons, could complicate the aim of preventing Iran from obtaining a nuclear bomb. Mr Obama wanted to avoid Syria, but Syria will come and get him.

*** the economist / link

French consumer recession is likely driven by job losses

Recent retail numbers from France are showing an ongoing consumer recession in spite of signs of improvement in confidence elsewhere in the EU. In fact the EU economic sentiment numbers today beat expectations to the upside - nothing to write home about, but there are signs of stabilization (for now). French Retail PMI on the other hand shows highly stressed consumers generating the sharpest fall in retail sales in six months. French retail PMI materially dragged down the Eurozone's overall PMI.


Markit: - The French retail sector was caught in a deepening downturn during February. Sales fell sharply on both a monthly and annual basis, while there was a survey-record shortfall versus previously set plans. Retailers’ gross margins continued to be squeezed by a combination of higher purchasing costs and strong competitive pressures.

Job losses in France are likely the culprit, as French jobless claims hit a 15-year high last month.

Reuters: - The number of people out of work in France shot up again in January after a smaller rise in December, piling new pressure on Socialist President Francois Hollande who has made tackling joblessness his top priority.



The number of jobseekers in mainland France jumped by 43,900 or 1.4 percent, signalling a return to the rapid pace of increase seen over 19 straight months to December - although half of the rise was due to a change in methodology in January.

Until job losses are under control, it is hard to imagine consumer sentiment and spending improving. And as we've seen in the US, the time period from job market improvements to pickup in consumer spending can be fairly long.

*** sober look / LINK

January New Home Sales Bullet Points: The Reality

Will have client detail report out later that clearly shows that stimulus and headlines have once sharply overstated this data set.

Bottom line, this morning’s headline number of 437k was juiced by an unacknowledged short term-event … the year-end cap gains changes. We saw this same thing happen in CA Existing Sales for in Jan…'the cap gains effect ' has been boosting sales volume since Sept but ultimately will lead to a hangover near-term.

In short, in January ALL of the 4k MoM increase in New Home Sales came from the 'Western Region' greatly supporting the cap-gains theory. So does the fact that the Northeast — a higher end region — saw a 1k jump in sales (which is 50% due to such low volume in that region) and the South and MidWest regions showed zero sales gains, as there are so few houses there that would be hit with cap gains. Lastly, in this morning’s 'surprise' consumer confidence beat the subset housing data showed the expectations to buy a new home in the next 6 months dropped to near a 3 year now.

When a single region outperforms and is responsible for mostly all the gains or losses in a monthly data series go digging because something is not right. And paying attention to headline seasonally adjusted annualized numbers can lead to confusion and malinvestment. The real story always lies beneath the headlines as bulleted below.

    The Jan New Home Sales headline SAAR blow out of 437k is a case of seasonally adjusting stimulus. This sets up for disappointment near-term.

    Jan 2013 New Home sales higher by 3k to 4k NSA (can’t tell exact amount due to Census Bureau rounding) sales. Most — if not all — of this increase is due to homeowners that sold their houses for cap gains and rebought in Jan. We saw this in the CA and national resale numbers for Jan as well. The cap gains effect also supported New and Existing Home Sales in ALL of Q4, which means there is a pull forward effect in play, which always ends with a hangover. Some cap gains sellers will probably rebuy in Feb as well. Think about this…the entirety of this morning’s MoM gain in Jan New Home Sales was on 3k to 4k houses, or 1% of the volume of Existing Home Sales sold in January. Bottom line, it’s a rounding error to macro housing and GDP that means nothing until cap gains credit sellers get done rebuying, which will happen soon. Feb cap gains incremental buyer volume will probably be halved.

    The FULL 4k MoM gain in New Home Sales came from the Western Region supporting the theory it was mostly cap gains sellers/rebuyers who will not be there for long.

    Dec 12 sales revised higher by ONE THOUSAND sales to 27k NSA. But Nov revised LOWER by one thousand sales to 29k. So, net-net wash.

With sales only in the mid-to-high 20k’s per month a couple of thousand sales in a trough month can produce some pretty amazing headlines when you annualize the number and then throw on top some seasonal adjustment hot sauce. Just like they did in 2010 during the homebuyer tax credit period when 'record high' sales were going through and everybody then thought we were in a 'durable' housing market recovery with 'escape velocity'.

Shortly thereafter, Existing Sales took a 30% MoM collapse on the tax credit sunset and everybody all at once realized that massive stimulus really does 'activate' certain demand cohorts all at once, steals from the future, and leads to severe disappointment when the stimulus is removed.

*** mark hanson (via barry ritholtz) / link

The Investment Case for Gold: Part 2

Those who seek to find the rationale for owning gold in the growth of the Fed and other central bank balance sheets, future inflation, the prospects for a deflationary collapse, the flight to safety or other macroeconomic themes only touch on ephemeral aspects of the forces that drive the bull market in gold. The narrative for gold has evolved several times since the bull market began in 1999. At first, central bank selling and producer hedging was the focus of most commentary. The attack of 9/11/01 added a geopolitical dimension. In 2006 and 2007 a thirst for 'hard assets' premised on emerging market growth co-opted the investment thesis. The crash of gold during 2008 was explained by the specter of deflation. The dollar price of gold rose from its bear market low of $250 in 1999 to more than $700 according to several different narratives as voiced by conventional wisdom.

Post the 2008 meltdown, media commentary on gold flourished. High profile investors proclaimed the merits. Quantitative easing with implications for future inflation dominated investment thinking. The sovereign debt crisis in euro land and the 2011 showdown over the debt ceiling in Congress culminated the frenzy. The bull market, unnoticed by most for the previous eight years, became front page and hostage to popular perceptions.

To be caught up in a debate dictated by the explanations of mainstream commentary is, in our opinion, a waste of time. The rationale for further advances is destined to change. What needs to be addressed, as in any investment analysis, is not what is on the tip of everybody’s tongue, but rather what is it that has not been articulated; positive or negative.

The DNA of the bull market in gold is bad money, which in turn is evidenced by negative real rates of interest. In our view, one only needs to return to the notion of an overvalued and over abundant dollar for a starting point. Is the dollar less over valued and in less oversupply than it was ten years ago? Will it become more or less so during the coming decade?

Gold at roughly $1575 most certainly reflects the negative evolution of dollar fundamentals since 2000. Gold’s advance suggests that the dollar is worth substantially less, but in terms of what? The dollar buys 80% less gold than it did ten years ago. It buys 25% less of the DXY basket of foreign exchange than ten years ago. Because however reported, inflation remains tame and most do not seem to grasp or feel the dollar’s loss of value.


Source: Tocqueville

In addition to reflecting history, the dollar-gold price also discounts the future. The dollar’s decline versus gold is, in our opinion, a market expression of uncertainty as to its future purchasing power. In this sense, the dollar’s crash in gold terms is similar to a previously highly valued equity that investors have soured on. The multiple has contracted. Former cheerleaders are forced to become value players. The facts have to be reconsidered. We believe the rise of gold should be considered a warning....

*** John Hathaway / link

Charts That Make You Go Hmmm...


Source: Demonocracy (via Zerohedge)

The historical cumulative Gold-to-Silver production ratio is 1:10.7; the price ratio of Silver-to-Gold is currently around 1:50. Demonocracy enables us to visualize the 1.411 million tonnes of Silver that has been mined in history and compares that to the world government reserve holdings (and gold).

*** Zerohedge / link

The Sequester: A look at the 20 districts that receive the most in defense contracts


Source: Bloomberg (via Barry Ritholtz)

This slide from my recent presentation in Indian Wells drew a few gasps, so I thought I'd include it here this week. It shows the true extent of the confiscatory policies of the Fed (as well as many of the world's other central banks).

Still confused about the rush into riskier assets that offer a return?


Source: Things That Make You Go Hmmm...

Fascinating chart from Kevin Lane of FusionIQ


Kev created a Risk On/Risk Off chart by plotting High Beta, High Yield and Emerging Markets versus Consumer Staples, Health Care and Low Beta names. When risk appetites are higher, it is reflected in the ratio moving higher. When fear levels rise, and sector rotation switches to the defensive names, the ratio heads lower.…

*** the big picture / link

Since 2004, interest in 'stocks' and 'bonds' has plunged by more than 50%. Despite a renaissance for bonds in 2008, and stocks in 2009, the 'Great Rotation' appears to be 'out of investing'. Google Trends also shows that, as expected, 'Bonds' have been more popular than 'Stocks' since the crash - a development the Fed is so desperately trying to reverse, by imposing ever stricter central planning, ironically the reason why most have 'just said no' to an authoritarian, inefficient, and farcical policy instrument formerly known as the market. Is it any wonder so many retail brokerages, commission-takers, and asset-gatherers are advertising day-in, day-out and constantly reassuring with the 'it'll all be ok in the long-run meme'?


*** zerohedge / link

Mike Shedlock offers some reflections on the wage recession this week. Below are two charts from his piece, but I recommend reading it in its entirety, which you can do by clicking the link below.



*** Mike Shedlock (via Doug Short) / link

Words That Make You Go Hmmm...



Stan Druckenmiller is a man you should listen to.

If you do nothing else this weekend, watch this interview.

More evidence that clear-headed thinking is the single best tool one can possess in the current environment.

The truth hurts.


Rick Santelli gets it.

Yet more evidence of the dumbing down of the investment process.

Don't buy the metal — it's too hard. Buy a piece of paper with the click of a mouse.

It's not about conspiracy theories; it's about understanding the reasons for buying gold in the first place.





Ben Davies has been absent from these pages for quite some time, and it's good to see him back again. Here he talks to Eric King about the recent weakness in precious metals and the structure of the market, as well as the performance of mining stocks.

As always, Ben's clear-headed approach is a beacon in a world of hyperbole.


and finally...

Just three pictures from National Geographic's 'Photo of the Day' collection. If you haven't already bookmarked it, you should. Amazing images from all around the world.





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.

In Q1 2013, we will be closing the Vulpes Agricultural Land Investment Company (VALIC), a globally diversified agricultural land vehicle that will provide truly diversified exposure to the agricultural sector through a global portfolio of physical farmland assets.

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


Follow me on Twitter: @TTMYGH

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Fall 2012 Presentation: 'Extraordinary Popular Delusions & the Madness of Markets':

California Investment Conference 2012 Presentation: 'Simplicity': Part I : Part II

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

4 MARCH 2013


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Brian McMorris 46364174

March 9, 2013, 7:12 a.m.

I have good friends in the investment world who always remind me that economic outlook is not always correlated with investment outlook.  They are right, for now.  The past four years the economic outlook has hardly budged, and may be even darker from the perspective of accumulated global debt, yet equity markets have soared.  When does the equity world finally revert to mean and come back into line with the underlying economy?  That is the question.