Things That Make You Go Hmmm...

Mon(k)ey Puzzle

December 9, 2013

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Mon(k)ey Puzzle

"Never interrupt your enemy when he is making a mistake."




"Don't confuse me for that other girl,

She's a fraud and a fool.

Don't confuse me with anyone else,

I am not anyone other than myself."





"We learn from failure, not from success!"

"Smart people learn from their mistakes. But the real sharp ones learn from the mistakes of others."

"Cats and monkeys – monkeys and cats – all human life is there!"


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

France Fights Back Against German "Sick Man of Europe" .......................................21

Hugh Hendry Throws in the Bearish Towel ........................................................22

Mexico Housing Hits U.S. Investors As Plan Collapses ............................................24

Weapons of Last Resort: ECB Considers Extreme Crisis Measures ..............................25

Greenspan Says Bitcoin a Bubble Without Intrinsic Currency Value .......................... 27

There Is Too Little Gold in the West ................................................................28

The Every-Which-Way-But-Down Market ...........................................................29

Kuroda $235,000 Salary Highlights Goldman Concern ...........................................31

George Osborne's Recovery Is Built on Sand .......................................................32

Japan's Abe Secures Passage of Secrecy Law As Opposition Revolts ...........................33

CHARTS THAT MAKE YOU GO HMMM... ..................................................35

WORDS THAT MAKE YOU GO HMMM... ...................................................39

AND FINALLY... .............................................................................40

Things That Make You Go Hmmm...

Protruding from the sand a short distance to the south of the Pilot Pier, on the golden sands of Hartlepool in England's North East, is a vertical wooden mast.


The mast dates back to the Napoleonic Wars, when the Emperor Bonaparte's armies were marching through Europe, sweeping all before them as the aftermath of the French Revolution manifested itself in France's aggressive attempt to take what it deemed as its rightful place at the head of the European table.

Of course, with Napoleon's disastrous invasion of Russia in 1812, the French Army was to suffer one of the most comprehensive military defeats in history; but at the time of our story the battle was very much joined; and Britain, the mightiest naval power the world had ever seen, was locked in combat with her mortal enemy from across the English Channel.

Hartlepool, a small port in County Durham, was founded in the 7th century around Hartlepool Abbey, a Northumbrian monastery. The name originates from the Old English "heort-ieg" or "hart island," as stags were seen roaming the countryside in great abundance.

Around the time of the Napoleonic Wars, Hartlepool boasted a population of about 900 people — all of whom seemed to be obsessed with the possibility of attack by France.

Gun emplacements were established and defences constructed in order to repel any French aggression, and the Hartlepudlians (as the people of that region were known) stood ready to fight the first Frenchman who dared set foot upon their beloved sand.

One night, amidst a terrible storm, a French chasse-marée (fishmonger ship) that had been pressed into the service of the Emperor capsized and sank off the coast of North East England, leaving a somewhat unusual but most definitely solitary survivor — a monkey, who found himself washed ashore, exhausted, battered and bruised from his nautical tribulations but still clinging to the mast, which remains there to this day.

One can only imagine how glad he must have been to end up on the golden sands of Hartlepool's beach.

Unfortunately for him, he happened to be wearing a French naval uniform, which would, sadly, be the direct cause of his tragic demise a matter of hours after his miraculous escape from a watery grave.

The best guess that historians can posit is that the monkey was dressed in a sailor's uniform for the amusement of the ship's crew, but the Hartlepudlians were most definitely NOT amused; and upon finding him sprawled on the sand clad in a uniform with which they were unfamiliar, they immediately arrested him as a French spy and proceeded to force the confused monkey to stand trial right there on the beach.

The monkey was asked a series of questions designed to discover why he had come to Hartlepool; but with the monkey unable (or perhaps unwilling) to answer their questions, and with the locals uncertain as to what a Frenchman looked like, they reached the inevitable — but for the monkey somewhat unfortunate — conclusion that the monkey was a French sailor and therefore a spy.

The monkey was sentenced to death and hanged from the mast on the beach.

Music hall performer Ned Corvan immortalized the tale in "The Monkey Song," a popular ditty of the time that contains the wonderful lines:

The Fishermen hung the Monkey O!
The Fishermen wi' courage high,
Seized on the Monkey for a spy,
"Hang him" says yen, says another,"He'll die!"
They did, and they hung the Monkey O!.
They tortor'd the Monkey till loud he did squeak
Says yen, "That's French," says another "it's Greek"
For the Fishermen had got drunky, O!

To this day, the citizens of Hartlepool are known, much to their chagrin, in England (and around the world) as "monkey hangers."

Now at this point in the proceedings, you are no doubt thinking to yourself, "He's finally lost the plot. Where is he going this time?" Well, as you have indulged me and my tales of monkeys swinging from yardarms, I'll tell you.

The people on that storm-tossed beach were confronted with something they didn't recognize, and though logic dictated that they ought to investigate further before they took any action, the animal spirits of a group of excitable people ensured that they forgot about clear-headed analysis and did something that their descendants still regret over two centuries later.

Right now, today, investors all over the world are confronted by markets that have been dressed up for the amusement of the crew in charge of the ship, and nobody seems to recognize what they are looking at.

Sure, they look like markets, but at the same time there is an unfamiliarity that is extremely unnerving to at least a few in the gathering crowd.

The majority of the mob, however, have decided that they look enough like markets to charge in blindly in the expectation that all will be as it should.

Things are not as they should be. Far from it.

Everywhere one looks are signs that the markets are just monkeys dressed up in fancy costumes.

Take the "benign" CPI levels which "prove" that inflation isn't a problem.


Source: Bloomberg

US CPI has remained under control for the last three years as headline inflation has headed lower — signaling both the fact that the Fed's aggressive QE programs have NOT impacted prices negatively (as many feared they would) and the fact that deflation remains a very real threat and justification for continued QE. Both of these signals clear the way for the Fed to keep on keepin' on with their money printing because it won't have hasn't had any inflationary effect.



Jim Quinn of the Burning Platform reproduced a chart this week from Doug Short. It's one that surfaces from time to time, and it lays out beautifully the reality of inflation as opposed to the sterilized numbers produced by the government, replete with their hedonics and substitutions:

(Jim Quinn — via Zerohedge): First things first. Losing 39% of your purchasing power over the course of 13 years is criminal. This was purposely created by Greenspan/Bernanke and the Federal Reserve. My annual salary has not gone up by 39% since 2000. Therefore, I've lost ground. I'm sure that most Americans have not seen their wages go up by 39% since 2000.

But now we get to the falseness of the data. If the BLS measured CPI as they did in 1990, without all of their hedonistic adjustment crapola, it would exceed 60%. The housing figure of 39% is a pure lie. Even after the housing crash, the Case Shiller Index is 50% higher than it was in 2000. The houses in my neighborhood sell for an 85% higher price than they sold for in 2000. They can't fake the price of energy, so the 121% increase is real. They can't manipulate tuition costs, so the 129% increase is real. Are you really paying less for clothes today than you did in 2000? The 68% increase in medical costs isn't even close to the real increases, which are above 100%.


I wonder where taxes fall in the inflation calculation, because my real estate taxes, sales taxes, income taxes, and the other 50 taxes/fees I pay have gone up dramatically in the last thirteen years. No matter how you cut it, Federal Reserve-created inflation slowly but surely destroys the middle class and benefits the ruling class. Ben isn't working for you. His mandate of stable prices has been disregarded. He does not have it contained.

Amen to that, Brother Quinn!

The BLS's CPI statistics are nothing more than a monkey wearing a sailor's suit, I am afraid: the reality is completely different to that which is spoon-fed to the public. What surprises me is that the public are so willing to accept numbers they instinctively know are misrepresentative.

John Williams of ShadowStats prefers to use the same methodology for calculating CPI as was used by the BLS back in 1980 before a lot of the "tinkering" took place, and guess what? Yep... inflation as calculated back then would have been significantly higher than as measured today. How much higher? Ohhhh, about eight times higher:


Source: Shadowstats


Funny old world.

But it's not just energy, medical fees, and school tuition that are seeing significant cost increases. No. Spare a thought for collectors of vintage Ferraris, who have seen astronomical increases in price since the onset of QE, as you can clearly see from the chart (right) of the HAGI Classic Car Top 50 Index, which measures the price of a group of exotic cars.

(FT): There was more money spent at the five leading auctions than ever before — $302m in total compared with $258m in 2012. A Ferrari that sold for $27.5m at RM Auctions became nominally the most valuable "road" car sold at public auction; a W196 Mercedes-Benz racing car fetched $29.8m in July to set the highest price for any car at auction.

Luxury home prices have also continued to spiral to levels impossible to fathom a few short years ago.

(Forbes): This year kicked off with the news of a record-breaker home sale price: $117.5 million for a nine-acre Woodside, Calif., estate purchased by billionaire and Softbank chief Masayoshi Son, Japan's 2nd-richest man. It remains the highest price paid for a home in the U.S., ever. Although the news hit this year, the transaction was technically a 2012 sale....

Money manager Howard Marks, founder of Oaktree Capital Management, tops the list of 2013′s highest sale prices at $75 million, the sale price for his Malibu estate. The property, situated along the scenic Pacific Coast Highway, sold in January to an anonymous Russian buyer, marking a record-high price for Malibu.

Billionaire SAC Capital Advisors founder Steve Cohen gobbled up the second-most expensive property this May, a $62.5 million estate in East Hampton. In June, he added the $23.4 million Abingdon "Maisonette," a 9,600-square-foot triplex apartment in New York City's West Village, to his collection.

Or, of course, there is the fine art market:

(NY Times): A few weeks ago, a triptych portrait by the British modernist painter Francis Bacon sold for $142.4 million, a record for a work of art at auction. The next night, a silk-screen print, "Silver Car Crash (Double Disaster)," by the American pop artist Andy Warhol brought $105.4 million. And this week, "Saying Grace," by the American illustrator Norman Rockwell, sold for $46.1 million.

The art market would seem to be going through the roof...

Now, classic cars, luxury homes, and fine art all have one thing in common, of course: they are things that only the super-wealthy spend their money on, so you might well think that these assets are hardly applicable when trying to establish whether inflation is as benign as is suggested by the numbers — or as rampant as the doubters would claim.

But think about this for a second and ask yourself the following question:

Where is the majority of the money printed in the name of QE going?

Is it going to the man in the street?


US average hourly earnings have remained subdued since 2008, as the chart below clearly demonstrates:


Source: BLS

... and the number of Americans who benefit from a rising stock market is hardly the stuff dreams are made of, if a recent Pew Research poll is anything to go by (although, as you can also see, high food and gasoline prices DO cause problems for most):


Source: Pew Research/Wall St. Cheatsheet

No. High inflation is seen in the items being sought by the real recipients of QE's largesse: the wealthy. But it won't remain confined to that tiny subset of society for long, I'm afraid.

Just this past week, PNC released their annual Christmas Price Index; and, well let's just say, there is a bit of a discrepancy between those good old CPI figures and the reality of putting on a traditional Christmas:

(Zerohedge): Over the past 30 years, the rise in the price of Christmas according to PNC's annual 12-days-of-Christmas price index has matched the CPI at around 2.9% YoY. However, in recent years, the reality is considerably worse than the well-managed inflation data the government proffers.

The price of Christmas in 2013 is up a stunning 7.7% over 2012 — the biggest jump since 2010' 9.2% rise. The biggest driver of the increase were the dancing ladies (must be the minimum wage decree?), though 8 items saw modest increases also. Once again, it seems the government's benign inflation data is fictionalized by reality's rising price of everything.


But let's not get hung up on inflation. There are other monkeys on this particular beach that need closer inspection.

Take for example something that has been receiving a good deal of scrutiny in recent weeks: corporate profit margins.


Source: St. Louis Fed

This chart shows US corporate profits after tax. As you can see, they are comfortably at all-time highs and screaming almost vertically higher — on roughly the same trajectory they were in 2006/2007. It amazes me that, in a world where so much store is put into the idea of "sustainability," people are willing to apply the concept only to such things as pulling lobsters from the sea or vegetables out of the ground.

Perhaps there is something I'm missing in the definition of sustainable.

sus·tain·a·ble (adj).

1. Capable of being sustained
2. Capable of being continued with minimal long-term effect on the environment

Nope. Pretty much as I understood it.

But are these profit levels sustainable, I wonder?

In his recent "Open Letter to the FOMC," the brilliant John Hussman took this metric a step farther and found some interesting data:

(John Hussman): A simple way to see the implications of the present elevation of the profit share is to relate the level of profit margins to subsequent growth in profits over a reasonably "cyclical" horizon of several years. Remember, when one values equities, one is valuing a long-term stream, not just next year's earnings. Investors taking current-year or forward-year profits as a sufficient statistic should be aware that high margins are reliably associated with weak profit growth over subsequent years.


The next relevant question is to ask why profit margins are presently so high. One might argue that the profitability of companies has achieved a permanently high plateau. Despite historical mean-reversion in profit margins (which tend to collapse over the full course of the business cycle), maybe this time is different?

I doubt it ... and so does John.

Everywhere we look today, the beach is littered with monkeys in uniform that somehow just look wrong to the eye of a trained observer, and yet investors continue to stampede into markets simply because the Fed continues to print money.

The Hartlepool Monkey's silence was taken as proof positive that he was, in fact, a French sailor. Similarly, investor complaisance today is a dangerous and ill-advised strategy.

Citigroup's Tobias Levkovich recently highlighted a few other worrying disconnects that all point towards something being seriously awry:

(Citigroup): While roughly 70% of companies have again beaten 3Q13 estimates thus far (with approximately 45% having posted results), one needs to recognize that the numbers came down from near 6% year-over-year expected EPS growth back in late June to less than 1% by the time earnings began to get reported. Moreover, a good number have made or topped forecasts on lower than expected tax rates or one-time items, suggesting that results were not necessarily comprised of high quality beats. Accordingly, it is challenging to argue that the reporting season has been all that good when some detailed insight is applied.


While there is much discussion about companies being able to manage their businesses wonderfully and thus even small revenue gains can generate more impressive bottom-line increases, this mindset is ill-founded, in our view. The broad data shows that overall S&P 500 operating margins have been flat to down for more than six quarters and the true story behind net margins has been lower effective tax rates and interest expense. As a result, the somewhat less than inspiring quality seen in earnings recently only supports this idea, and it may not be well understood by just headline-seeking investors.

Hmmm... yet more evidence of mistaken identity on the part of investors.

But the housing market is going great guns, right? Surely that is where we can find some uncomplicated signs that the most expensive "recovery" in history is picking up steam and is being driven by fundamentals rather than all that lovely fresh money spewing forth from the Marriner S. Eccles Building?

(Ramsey Su): October New Residential Sales went up 25.4% from September. This is primarily due to the government shutdown, which gave Federal employees more time to shop for new homes. In addition, consumers realized that they can save so much on insurance with Obamacare that they can now afford the media room in their new Toll Brothers McMansion.

Of course, except for the 25.4%, the above is all made up. In fact, the 25.4% is also made up, just not by me but by the Census Bureau. In numbers versus percentage, September sales were 354,000 and October somehow jumped to 444,000. Anyone with some common sense would question how an indicator such as new home sales can fluctuate that much from month to month.

Setting aside the silly numbers, there is only one question:


In fact, if we ask the same question with every piece of housing data, we will arrive at the conclusion all data are meaningless for the time being. Fed policy is all that matters.

Last week, FHFA released the Quarterly Performance Report of the Housing GSEs for the Second Quarter of 2013. THEY say THEY are making great progress. Here is an interesting chart from that report:


This week, Corelogic made this announcement:


Is this rate of appreciation healthy? Is this a free market phenomenon or is it a manipulated outcome? Is the objective to inflate prices back to a subprime bubble high?

Against this backdrop, one would assume that a reasonable policy maker should be considering tightening, or at least slow down the accommodations. Who would believe the FOMC see fit to keep rates low and buy $40 billion worth of MBS every month indefinitely? Actually, the Feds have purchased $736 billion for the first 11 months of 2013, far more than $40 billion per month. The current QE3 includes a stealth extension of MBS purchases under QE1 and QE2.

Yikes! OK, so it seems as though the housing "recovery" may not be quite so robust as it seems at first blush, and if we strip out the hype about how well things are going relatively speaking, we can see, as my buddy Greg Weldon has been pointing out for quite some time now, that all we have managed to do is recapture previous secular lows:


Source: Greg Weldon

(Incidentally, for a free trial of Greg's phenomenal work, simply click HERE.)

The search for the recovery continues.

The tail end of last week saw a healthy upward revision to US GDP and better-than-expected job numbers; so maybe, just maybe, we have some genuine signs there of the recovery taking hold?

Maybe not.

First up, Mike Shedlock on the Non-Farm Payrolls "beat":

Some of the skew in last month's job report related to the government shutdown was taken back today, as expected. The labor force stats and participation rate were exceptions, and details reveal much weakness.

Last month employment fell by 735,000 due to the shutdown, this month it rose by 818,000.

Averaging the two months, household survey employment only rose by 83,000 (a mere 43,500 per month)

Last month, the change in those not in the labor force was +932,000. This month, the change was -268,000.

Last month the labor force declined by 720,000. This month it only rose by 455,000.

Averaging the two months, the labor force fell by 265,000. This explains the drop in the unemployment rate despite anemic employment growth on average.

Last month the participation rate fell 0.4 percentage points to a new low; this month, only 0.2 percentage points were taken back.

Ignoring the decline and the rise in employment over the past two months, the huge discrepancy between the household survey and the establishment survey persists.

In essence, this was a bad report, with people dropping out of the labor force like mad....

Were it not for people dropping out of the labor force, the unemployment rate would be well over 9%.

Digging under the surface, much of the drop in the unemployment rate over the past two years is nothing but a statistical mirage coupled with a massive increase in part-time jobs starting in October 2012 as a result of Obamacare legislation.

Digging beneath the surface, the snap-back from the government shutdown was nowhere near as strong as it should have been in the household survey.

... and now we'll go back to the work of Greg Weldon to see an illustration of just why the GDP revision was seemingly so robust:


Source: Greg Weldon

Yes, the "strength" in US GDP came largely from the second-biggest quarterly buildup in inventories EVER.

(Zerohedge): As we reported earlier, while on the surface the headline revised Q3 GDP number was a stunner coming at 3.6%, the reality is that more than 100% of the growth from the initial estimate came from a revised estimate of how many private Inventories were stockpiled in the quarter. The reality was that of the $230 billion in total increase in SAAR GDP, $146 billion of this, or over 63%, was due to inventory stockpiling.

OK... so the housing recovery is not all it seems; GDP growth is reliant on inventory buildup; corporate profits, though already at all-time highs, are projected to continue climbing to ever-more rarefied levels; real inflation is far higher than the government would have the world believe; and wages are stagnant.

But what about elsewhere in the world? Is all that lovely money is generating real growth in Europe, perhaps?


Errr... not really, no.

(Zerohedge): Spain's youth unemployment rate has re-surged to a record 57.4% (just below that of Greece which still tops the scary chart list at 58%). Italy and Portugal also saw notable rises (despite the former's record low short-dated bond yields) at 41.2% and 36.5% respectively. Ireland and France saw modest improvements, but overall the Euro-zone's youth unemployment just keeps rising. In spite of all the rhetoric from Merkel, Van Rompuy, and Barroso, 24.4% of Europe's under-25 population is unemployed...

Unemployment is still a problem...


Source: Zerohedge

The euro is far too strong in a world where weaker is better...


Source: Bloomberg

... and the only reason it IS so strong is that the world realizes that the ECB is hamstrung by its mandate and the lack of cohesion amongst the members of the EU.

Of course, that indecision is having a predictable effect on growth:

( Disappointing growth figures in the eurozone and Japan driven by weak export numbers have dashed hopes that a global economic recovery would gather pace in the second half of the year.

Growth in the eurozone faltered in the third quarter, expanding 0.1 per cent following growth of 0.3 per cent in the second quarter. The figures came a week after the European Central Bank cut rates in response to fears about deflation.

"The near stagnation of the eurozone economy underlines the fragility of the recovery and the growing dangers of a damaging bout of deflation in the region," said Jonathan Loynes, chief European economist at Capital Economics.

The currency bloc's two largest economies both stuttered in the second quarter. Germany, the main eurozone engine, saw growth slip to 0.3 per cent in July to September, from 0.7 per cent, while France's economy shrank 0.1 per cent after hitting 0.5 per cent growth in the three months to June. The weak performance in France will cause concern over the durability of a eurozone recovery, which Brussels proclaimed in August had started to justify its crisis response of austerity and structural reform.

Blame for the poor figures was placed on weak trade figures for France and Germany — a day after the eurozone's economic engine faced accusations from Brussels that its export surplus could be harming the bloc's economy.

Asia is no better, I'm afraid. Warning signs are everywhere. Take India, for example, whose problems were neatly summed up in a recent piece by Asia Confidential:

(Asia Confidential): The largest signs of excess instead lay in Asia. I've mentioned the Indian stock market reaching record highs. It was only in July that the country was in turmoil with a currency in free fall. Since then, stocks have surged, out-performing all other major markets in Asia.

The country's problems haven't gone away. The economy is still growing at decade-lows. The current account deficit remains one of the largest in emerging markets. And politics remain uncertain ahead of a general election next year.

Now some will argue that the stock market is just forecasting a better economy ahead. Maybe. But your starting point is a market at record highs, on a not-so-cheap 16x trailing earnings, arguably distorted by low interest expenses given low rates.

Sound familiar? Different continent, same lousy story.

I could go on — Japan, Australia, and the UK all seem far rosier when viewed through the prism of stock market performance and government bond prices than when examined realistically by means of a long, hard look at the underlying economies — particularly if the necessary adjustment is made to account for the extraordinary level of stimulus applied by all and sundry.

Which provides the perfect segue into today's final chart.

My friends Raoul Pal and Remi Tetot of Global Macro Investor (one of, if not the, very best macro publications available anywhere) put this chart together for their most recent monthly and kindly gave me permission to use it.

It is without question the single best chart I've seen to explain the reality of all-time highs on the S&P 500 in relation to the application of trillions of stimulus dollars. This chart obviously applies solely to the USA, but no doubt we would find a similar pattern in just about all the major, QE-riddled markets.

The chart shows the S&P 500 deflated by QE — and it's breathtaking:


Source: Raoul Pal/Remi Tetot GMI

There's your all-time-high stock market, folks.

Just another primate dolled up like a sailor, I'm afraid.

Don't follow the crowd and dive into markets just because everybody else is doing so.

That's how monkeys end up getting hanged.


OK ... so this week has been an interesting one. I began it in Singapore, spent 36 hours each in San Francisco and Sydney and another 44 hours on planes, and end it in a full-length leg brace swallowing painkillers like they're M&Ms (acute tendinitis in my knee, apparently).

Through the narcotics, though, I regret to say the world doesn't look any rosier to me. I was hoping for unicorns and rainbows but have encountered nothing of the sort.

What did I run into? Well, Ambrose Evans-Pritchard's take on Franco-German relations, for starters; then Hugh Hendry doing exactly what I warn against in this letter; Alan Greenspan FINALLY spotting a "bubble" (though his reasons for calling it that either demonstrate that the Maestro has a wicked sense of irony — or he really is clueless. You decide); and Alasdair Macleod explaining why there is just too little gold in the West.

Mexican housing schemes go horribly wrong for US investors (who coulda seen THAT coming?); the ECB is considering "extreme crisis measures" (whilst simultaneously hailing the "recovery"); BoJ Governor Kuroda manages to be the poster boy for his own problems; and we hear how George Osborne's "recovery" is also built on sand.

Maybe I should petition to have the quotation marks around "recovery" made permanent?

Shinzo Abe tries an interesting tack to keep things quiet; my great friend David Hay of Evergreen in Seattle laments the "Every-Which-Way-But-Down Market"; and Nick Laird corrects an egregious error I made last week (thanks, Nick).

Charts, videos, yada yada yada ... you know the drill, so all that leaves for me to say is:

Until Next Time...


France fights back against German "Sick Man of Europe"

The overriding strategic story in Europe today is the breakdown of Franco-German condominium.

The two great nations have together run the EU on a foundation of equality since the 1950s, always finding some way to bridge the chasm between North and South.

It was stretched a little after France lost Algeria — a French Department, not a colony — and with it lost population parity. But that hardly mattered as long as Germany wished to tuck behind France, usually letting Paris take the lead.

It was stretched a great deal further with the Reunification of Germany, driven home a few years later when a Brandeburg "Ossi" who spoke fluent Russian — but no French — became Chancellor.

The formalities go on. Angela Merkel and François Hollande still meet to celebrate the Élysée Treaty of 1963: "Convinced that the reconciliation of the German people and the French people, ending a centuries-old rivalry, constitutes a historic event which profoundly transforms the relations between the two peoples.

Recognising that a reinforcing of cooperation between the two countries constitutes an indispensable stage on the way to a united Europe, which is the aim of the two peoples …"

Yet it is a loveless marriage now. The two have been quarrelling over Libya, Mali, Syria, and much else besides. Nothing is quite as toxic as the fundamental clash over monetary union, and the deflationary bias of macroeconomic policy.

Hollande campaigned on a growth ticket, pledging to end austerity overkill and to pull the eurozone out of depression. And yes, it is a depression. Output is still 3pc below the 2008 peak almost six years later, and industrial output is 12pc lower. As you can see from this Krugman chart, it is worse than the 1930s. Nor is there much evidence that this will change soon.


Instead, Hollande is subject to almost daily strictures from Germany on the need for reform. The language is polite — mostly — and much of the German critique is correct. France desperately needs reform. The encephalitic state is 55pc of GDP. The tax wedge is one of the highest in the world. But the French know that. The unsolicited advice is mixed up with a lot of ideology, Teutonic pedantry, and disguised self-interested. It is starting to grate on the nerves....

*** Ambrose Evans-Pritchard / link

Hugh Hendry Throws In The Bearish Towel

What if I were to tell you I was turning more bullish? Is that something you might be interested in?

We are macro investors. That means that we are constantly exposed to the shifting sands that the world's increasingly powerful gaggle of central bankers — and the capital flows they encourage — impose on global financial markets. However we tend to stick to our big (and often bearish) views, something that means our performance comes with hot and cold spells. The most recent one — and it doesn't take a genius to see this — has been cold. It hasn't been as bad as it could have been for the simple reason that we make big bets when we are doing well and small bets when we aren't. We allocate increasing amounts of capital to winning trades and cut losing trades rapidly. We've been cutting a lot recently.

The good news is that this has minimised our drawdown. The even better news is that our returns have improved lately; it looks as if we are entering a hot spell, and we have begun to re-allocate significantly more risk capital to our endeavours.

So what makes me think we are heading hot at the moment? Let me tell you about the character of Bob Ryan, from the US cable TV show Entourage. The show chronicles the workings of Hollywood and Ryan is a legendary movie producer credited with a string of box office winners. His problem is that his success was rather a long time ago. So no one is certain of his skills anymore. His reaction is to make seemingly absurd promises — think along the lines of "...what if I were to tell you that this movie will cost peanuts to make, will earn you four Oscars and will gross $100m... is that something you might be interested in?" In some walks of life (well, mine anyway) such is the popularity of the show that the expression has entered the modern lexicon as a catchphrase for offering up fantastical, if not actually impossible, ideas. With that in mind, what if I were to tell you that I have adopted a tactically bullish outlook? Is that something you might be interested in?

Last bear standing? Not any more...


I know what you are thinking. You are thinking that the last bear is capitulating. It isn't a good sign. Maybe it is that simple. But I think it is a little more complicated. We, and I accept we aren't the first here, sense that US monetary officials may now be willing to subordinate the demands of their own economy to the perils confronting emerging market economies. If that is the case, the great peril is not that the Fed finally tightens monetary policy and US stock prices suddenly tumble from what are very obviously overpriced levels.

Would that it were — our curmudgeonly portfolio structure (think dynamic volatility targeting and stop losses) works well with big stock market reversals. Instead the greater peril is that the current backdrop will turn out to mark a rapid acceleration in the ongoing move to the upside.

A hint that this might be the case comes from looking back through the 113 years of price data for the Dow Jones Industrial Average. We have done this (so you don't have to), searching along the way for the comparable periods that fit most tightly to the last 500 trading days. What is clear is that periods of trading similar to the one we have seen over the last two years don't often seem to end quietly: they boom big time or they crash. Which is it to be this time? Looking at the markets of 1928, 1982 or even 1998, all of which have scarily similar looking historical charts to today's, we wonder if it won't be both. Starting with the boom bit....

*** hugh hendry (via zerohedge) / link

Mexico Housing Hits U.S. Investors as Plan Collapses

Three years into her home-ownership dream, Martha Orozco has had enough. Stuck in a government-sponsored complex called Parque San Mateo that's two hours away from her $8,000-a-year job as a hospital secretary in Mexico City, Orozco sees only broken promises and blight all around her.

Power outages drag on for hours at a time. Neighboring townhouses lie abandoned by the hundreds, giving criminals a growing foothold in the community. The stench of overflowing sewage permeates the development. And then there's the commute: Until Orozco started driving to work, it was a van-to-train-to-bus odyssey whose cost consumed 20 percent of her pay.

Orozco, a 52-year-old widow, is looking to leave her $18,500 house and move with her daughter and granddaughter closer to Mexico City. If she does, she'll join an army of disenchanted homeowners who moved in the past 10 years to the sprawling new towns that have sprung up in most of Mexico's 31 states. The buyers all signed up for a government-backed program that helped finance construction of millions of homes. The complexes ring the country's major cities from Veracruz to Mexico City to Tijuana.

The program has been a disaster. Hundreds of thousands of homes are now derelict after buyers such as Orozco concluded they were located too far from city centers and moved out. Developers, their profits assured by government guarantees, built houses faster than municipalities could connect them to water systems and power grids.

Promised schools were never constructed. Now, the developers have halted construction on what have become rural slums. European lenders that helped finance the housing frenzy are suing the builders.

In 2013 alone, the industry's collapse wiped out $1.69 billion in the combined market value of the three biggest developers: Desarrolladora Homex SAB, Corp. Geo SAB and Urbi Desarrollos Urbanos SAB. Geo and Urbi shares have been suspended from the Mexican stock exchange. All three builders have defaulted on their dollar-denominated bonds, many of them bought by U.S. investment firms.

Total losses in stocks and the face value of dollar bonds added up to about $3.95 billion as of Dec. 4, according to data compiled by Bloomberg.

Because the bond purchases were private, over-the-counter transactions, it isn't known how much was lost by U.S. and European investors.

The housing crisis is a blot on what investors say has been a promising start to the six-year term of President Enrique Pena Nieto, who took office on Dec. 1, 2012.

"It's a hair in the soup," says Eric Conrads, who oversees $750 million in Latin American stocks at ING Investment Management in New York.

Pena Nieto, 47, has passed sweeping constitutional changes to increase competition in the telecommunications industry and is pushing for an overhaul of the constitution to open up the oil industry to foreign investors. Yet under Pena Nieto the economy is stagnating. Finance Minister Luis Videgaray has repeatedly amended his 2013 forecast for gross domestic product growth; his ministry set it at 1.3 percent on Nov. 21, down from 3.5 percent at the beginning of the year. On Sept. 11, he told lawmakers that the housing industry was contributing to slow growth.

Among the losers in the housing debacle is Pacific Investment Management Co., the world's biggest bond fund firm. Pimco said in a June 30 investment report that its holdings in Mexican homebuilders were partly to blame for a 6.6 percent loss in the second quarter of 2013 in its $1.6 billion Pimco Emerging Markets Corporate Bond Fund. (PEMIX) It was the fund's worst quarter ever.

In addition to Pimco, losers in Mexican-housing stocks, bonds, loans and derivatives contracts included London-based Barclays Plc (BARC), BlackRock Inc.'s funds, New York-based Citigroup Inc., Zurich-based Credit Suisse Group AG and Frankfurt-based Deutsche Bank AG. None of the firms will disclose the impact on their portfolios of their Mexican-housing investments....

*** bloomberg / link

Weapons of Last Resort: ECB Considers Extreme Crisis Measures

The European Central Bank wants to spur lending by banks in Southern Europe, but conventional methods have shown little success so far. On Thursday, ECB officials will consider monetary weapons that were previously considered taboo.

From Mario Drahgi's perspective, the euro zone has already been split for some time. When the head of the powerful European Central Bank looks at the credit markets within the currency union, he sees two worlds. In one of those worlds, the one in which Germany primarily resides, companies and consumers are able to get credit more cheaply and easily than ever before.

In the other, mainly Southern European world, it is extremely difficult for small and medium-sized businesses to get affordable loans. Fears are too high among banks that the debtors will default.

For Draghi and many of his colleagues on the ECB Governing Council, this dichotomy is a nightmare. They want to do everything in their power to make sure that companies in the debt-plagued countries also have access to affordable loans — and thus can bring new growth to the ailing economies.

The ECB has already gone to great lengths to achieve this objective. It has provided the banks with virtually unlimited high credit and drastically lowered the collateral required from the institutions. The central bank has also brought down interest rates to historical lows. Since early November, financial institutions have been able to borrow from the ECB at a rate of 0.25 percent interest. By comparison, the rate was more than 4 percent in 2008.

The only problem is that all those low interest rates have so far barely been put to use. Lending to companies in the euro zone is still in decline. In October, banks granted 2.1 percent less credit to companies and households than in the same period last year.

In addition to a further cut in interest rates to zero percent, the central bankers are considering new, drastic measures to combat the negative trend. Some of them are likely to be hotly debated when the Governing Council meets this Thursday in Frankfurt.

So what measures are still on the table and how would they effect the European economy?

One scenario that drives fear into the hearts of all savers is the so-called negative interest rate. It would mean that the banks would have to pay a fee for the money they park, currently without interest, at the ECB — a kind of penalty interest rate. The idea is to create an incentive for the institutions to loan out extra money to other banks, in Southern Europe for instance. This, it is hoped, would then lead to more lending to businesses and consumers.

The penalty interest rate was already a topic at the last Governing Council meeting in early November. ECB board member Benoit Coeure recently confirmed that the negative interest rate had been discussed and considered from both a technical and legal perspective. "The ECB is ready," he said.

It's questionable, however, whether the negative interest rate will actually be employed. Some economists doubt its effectiveness. "The question is whether the banks won't simply place less money at the ECB," said Hans-Peter Burghof, a professor of banking and economics at the University of Hohenheim in Germany. Thus, the problem of the lack of lending would not be solved.

Experiences with negative interest rates have so far been rather poor. Denmark tried it in 2012 with an interest rate of -0.1 percent on deposits at the country's central bank. The result: Many banks simply passed on the higher cost to the consumer.

The ECB already lent a helping hand to banks with long-term, cheap loans at the end of 2011 and during early 2012, lending financial institutions a total of €1 trillion for the exceptionally long period of three years — a step it has so far only taken one time. Central bank head Draghi spoke at the time of using "Big Bertha," a reference to a World War I-era howitzer, to battle the crisis.

As a monetary weapon, it had mixed results. Many banks used the cheap money to purchase loans that had been issued at significantly higher interest rates in their home countries. For banks and the countries, it was a lucrative business, but it wasn't an intended side effect....

*** der spiegel / link

Greenspan Says Bitcoin a Bubble Without Intrinsic Currency Value

Former Federal Reserve Chairman Alan Greenspan said Bitcoin prices are unsustainably high after surging 89-fold in a year and that the virtual money isn't currency.

"It's a bubble," Greenspan, 87, said today in a Bloomberg Television interview from Washington. "It has to have intrinsic value. You have to really stretch your imagination to infer what the intrinsic value of Bitcoin is. I haven't been able to do it. Maybe somebody else can."

Bitcoins, which exist as software and aren't regulated by any country or banking authority, surged to a record $1,124.76 on Nov. 30. The currency has rallied on growing interest from investors, while merchants are starting to accept Bitcoins and U.S. officials have told lawmakers such payments could be a legitimate means of exchange.

"I do not understand where the backing of Bitcoin is coming from," the former Fed chief said. "There is no fundamental issue of capabilities of repaying it in anything which is universally acceptable, which is either intrinsic value of the currency or the credit or trust of the individual who is issuing the money, whether it's a government or an individual."

There are about 12 million Bitcoins in circulation, according to Bitcoincharts, a website that tracks activity across various exchanges. Bitcoin was introduced in 2008 by a programmer or group of programmers going under the name of Satoshi Nakamoto.

A Justice Department official said Nov. 18 Bitcoins can be "legal means of exchange" at a U.S. Senate committee hearing, boosting prospects for wider acceptance of the virtual currency.

"We all recognize that virtual currencies, in and of themselves, are not illegal," Mythili Raman, acting assistant attorney general at the department's criminal division, told the Committee on Homeland Security and Governmental Affairs.

Fed Chairman Ben S. Bernanke told the Senate committee the U.S. central bank has no plans to regulate the currency.

"Although the Federal Reserve generally monitors developments in virtual currencies and other payments system innovations, it does not necessarily have authority to directly supervise or regulate these innovations or the entities that provide them to the market," Bernanke wrote to lawmakers.

*** bloomberg / LINK

There Is Too Little Gold in the West

Western central banks have tried to shake off the constraints of gold for a long time, which has created enormous difficulties for them. They have generally succeeded in managing opinion in the developed nations but been demonstrably unsuccessful in the lesser-developed world, particularly in Asia. It is the growing wealth earned by these nations that has fuelled demand for gold since the late 1960s. There is precious little bullion left in the West today to supply rapidly increasing Asian demand. It is important to understand how little there is and the dangers this poses for financial stability.

An examination of the facts shows that central banks have been on the back foot with respect to Asian gold demand since the emergence of the petrodollar. In the late 1960s, demand for oil began to expand rapidly, with oil pegged at $1.80 per barrel. By 1971, the average price had increased to $2.24, and there is little doubt that the appetite for gold from Middle-Eastern oil exporters was growing. It should have been clear to President Nixon's advisers in 1971 that this was a developing problem when he decided to halt the run on the United States' gold reserves by suspending the last vestiges of gold convertibility.

After all, the new arrangement was: America issued the petrodollars to pay for the oil, which were then recycled to Latin America and other countries in the West's sphere of influence through the American banks. The Arabs knew exactly what was happening; gold was simply their escape route from this dodgy deal.

The run on U.S. gold reserves leading up to the Nixon Shock in August 1971 is blamed by monetary historians on France. But note this important passage from Ferdinand Lips' book GoldWars:

Because Arabs did not understand bonds and stocks they invested their surplus funds in either real estate and/or gold. Since Biblical times, gold has been the best means to keep wealth and to transfer it from generation to generation. Gold therefore was the ideal vehicle for them. Furthermore after their oil reserves are exhausted in the distant future, they would still own gold. And gold, contrary to oil, could never be wasted.

According to Lips, Swiss private bankers, to whom many of the newly-enriched Arabs turned, recommended that a minimum of 10% and even as much as 40% should be held in gold bullion. This advice was wholly in tune with Arab thinking, creating extra demand for America's gold reserves, some of which were auctioned off in the following years.

Furthermore, Arab investors were unlikely to have been deterred by high dollar interest rates in the early eighties, because high interest rates simply compounded their rapidly-growing exposure to dollars.

Using numbers from BP's Statistical Review and contemporary U.S. Treasury 10-year bond yields to gauge dollar returns, we can estimate gross Arab petrodollar income, including interest from 1965 to 2000, to total about $4.5 trillion. Taking average annual gold prices over that period, ten percent of this would equate to about 50,500 tonnes, which compares with total mine production during those years of 62,750 tonnes, over 90% of which went into jewellery.

This is not to say that 50,000 tonnes were bought by the Arabs; it could only be partly accommodated even if the central banks supplied them gold in very large quantities, of which there is some evidence that they did. Instead, it is to ram the point home that the Arabs, awash with printed-for-export petrodollars, had good reason to buy all available gold. And importantly, it also gives substance to Frank Veneroso's conclusion in 2002 that official intervention — i.e., undeclared sales of significant quantities of government-owned gold — was effectively being used to manage the price in the face of persistent demand for physical gold as late as the 1990s....

*** Alasdair macleod / link

The Every-Which-Way-But-Down Market

It was one of those strange thoughts I admittedly have more frequently than most people. In the middle of a conversation about the US stock market's Teflon-like ability to effortlessly shed any concerns, a future Wall Street Journal headline suddenly hit me: "China Invades Japan; Dow Soars on Expectations of More Fed Easing".

And although this mental flash was obviously just a figment of my often over-active imagination, there is a kernel of truth in it. From a statistical standpoint, it is stating the obvious to note the boa constrictor-tight correlation between the Fed's money printing (more technically, reserve creation) and rising stocks. Yet, as esteemed money manager and PhD, John Hussman, observes, this may be more due to psychology than reality. His logic revolves around the fact that the Fed's frantic easing in the wake of the bursting of both the tech and housing bubbles did not prevent two of the worst bear markets in history.

Regardless, psychology is one of the most powerful forces when it comes to the direction of asset prices, perhaps the single most powerful. And, for the time being, the guiding belief among millions of investors, large and small, is that as long as the Fed is rivaling New Orleans as the Big Easy, stocks are going higher — almost irrespective of whatever calamity might occur.

One of the mistakes I made a year ago, when I felt stocks were fully priced and likely to essentially tread water in 2013, was not being more vocal about an upside overshoot. By May, I started to entertain this possibility when I wrote these words:

"What lies ahead, no one knows. However, I believe that one of two paths are likely: Either the Fed stays on its present path and we get 1987 revisited — with a bull becoming a bubble, followed by the big pop — or it tries to gracefully exit stage left, triggering a more immediate but much less painful'adjustment'."

Since then, the market is up another 8% and although it would be a stretch to call this gradual ascent over six months anything approaching the hockey stick-like finale typical of a rampaging bull market, there are some disquieting elements. As previously noted, there are plenty of signs of speculative fervor run amok if you look in places like the new nifty-fifty (Netflix, LinkedIn, Twitter, et al), the biotech index at 170 times earnings, bitcoins up over 5000%, or the growing number of business plans masquerading as companies going public at astronomical valuations despite an absence of profits. (In fact, 60% of IPOs are losing money, a level not seen since 2000.)

Additionally, there are clear signs of recklessness returning to the credit markets to a degree fully reminiscent of the anything-goes lending attitude prevalent in 2007. Suffice to say, pretty much everything did go — as in down the tubes, shortly thereafter.

Yet, as all experienced investors are aware, markets can overshoot on both the up- and down-side, often most dramatically. On this point, I read Jeremy Grantham's latest comments with great interest. As avid EVA readers (all three of you) are aware, Mr. Grantham and the firm he co-founded, GMO, has one of the best, if not THE best, records of forecasting long-term returns for the major asset classes. But notwithstanding his reputation for being a bit bearishly inclined, and his firm's long-range forecast of negative after-inflation returns from US stocks over the next seven years, he believes a further 20% to 30% spike by the S&P 500 is entirely possible.

For a moment, let's just assume this "up-losion" plays out, as it easily could. That would be a wonderful thing, at least for investors who decide to jump in with both feet now, right? As they say in France, to just about everything, especially the appalling notion of a longer work week, au contraire!

When good is bad…Perhaps it's just my oh-so-contrarian genetic disposition but I can't imagine a worse scenario than US stocks going vertical from here. Such a surge is almost certain to accelerate what are already near record inflows into stocks (admittedly, after years of outflows). Retail investors are increasingly growing very restive about not having enough invested in US stocks, often even if they are holding an "age appropriate" level. Another upside bolt is likely to prove irresistible to the millions who still hold trillions in cash.

And, as those bulling stocks love to point out, valuations are not as egregiously elevated as they were in 2007, much less where they topped out in 2000. While this is technically true, given subsequent performance, it is also not especially comforting.

Even the keeper of the Cyclically Adjusted P/E (CAPE), recent Nobel prize recipient Robert Shiller, conceded in a recent Wall Street Journal interview that the overall market is not in the extreme danger zone yet, though it is clearly well above its long-term average. He did state, however, that another 20% rise would push equities decidedly into the bubblesphere...


Kuroda $235,000 Salary Highlights Goldman Concern

Bank of Japan Governor Haruhiko Kuroda's payslip is 38 percent less than his predecessor's 15 years ago, underscoring Goldman Sachs Group Inc.'s warning that wages must rise for Abenomics to succeed.

The central bank chief's pay is about 24 million yen ($235,000) for the year ending March 31, down from an inflation-adjusted 39 million yen in fiscal 1998, based on a BOJ statement on Nov. 29. Swaps signal an average inflation rate of 1.2 percent over the coming five years, compared with 2.03 percent in the U.S. and 1.38 percent in the euro zone.

Japan's cost of living rose in October by the most in five years even as salaries extended declines from June 2012, threatening to derail Prime Minister Shinzo Abe's efforts to sustain a recovery in the world's third-largest economy. Goldman's chief Japan strategist Kathy Matsui on Dec. 4 called for higher wages, while Kuroda told regional business leaders this week that he expects an increase in basic pay.

"Unless wages gain in Japan, higher prices will reduce purchasing power, hurting consumer spending and risking a slowdown in the economy," said Akio Kato, the team leader of Japanese debt in Tokyo at Kokusai Asset Management Co., which manages the equivalent of $38 billion. "It would be meaningful for the BOJ to take the initiative by hiking the governor's pay," which is "rather low," Kato said.

Federal Reserve Chairman Ben S. Bernanke is set to receive $199,700 this year, while European Central Bank President Mario Draghi pulled in 374,124 euros ($511,200) last year. Bank of England Governor Mark Carney earns a basic salary of 480,000 pounds ($784,000).

Kuroda would need 25 years of his current salary to be able to afford a 10-year-old condominium with three bedrooms in central Tokyo that was priced at the equivalent of $5.8 million, according to a listing on Nomura Real Estate Holdings Inc.'s website. A similar-sized home in the city's eastern suburbs 30 minutes by train from downtown sells for about $672,000.

Consumer prices excluding fresh food rose 0.9 percent in October from a year earlier, government data showed. BOJ policy makers forecast the price growth, stripped of the effects of tax increases planned starting April, will quicken to 1.3 percent next fiscal year and to 1.9 percent in 2015.

"Modest pay gains are expected considering the recovery in the labor market, but we can't anticipate a wage rise that's fast enough for the BOJ to achieve its 2 percent price goal," said Toru Suehiro, a market economist in Tokyo at Mizuho Securities Co. "Once it gets clear that the upward price path foreseen by the BOJ is unlikely to happen, it will provide a catalyst for nominal yields to decline."...

The central bank cut the governor's salary last year by 30 percent as a temporary measure to reduce costs while the nation rebuilt after the March 2011 earthquake. The decrease wasn't reversed this year with the pay kept at the same level.

"Salaries for the Bank of Japan's officers are determined in consideration of the remuneration and other circumstances of national public officers, as stipulated by the BOJ Act," Yasutaka Hirata, a central bank spokesman, said without elaborating further.

The nation's public debt has ballooned to more than 1 quadrillion yen and is expected by the International Monetary Fund to grow to the equivalent of 244 percent of gross domestic product this year, the highest ratio globally. Abe approved raising Japan's consumption tax to 8 percent from 5 percent in April 2014 and will decide whether to increase it to 10 percent the following year.

"Considering Japan's finances, the sales tax may have to go higher even after being hiked to 10 percent," said Maiko Noguchi, a former BOJ official and a Tokyo-based senior economist at Daiwa Securities Co., Japan's second-biggest brokerage. "It will be a problem if the economy experiences a sharp fall every time the sales tax is raised and voters cry out in displeasure."...

*** bloomberg / link

George Osborne's recovery is built on sand

''Britain's economic plan is working, but the job is not done"; with these words, George Osborne opened his latest Autumn Statement. It was a message the Chancellor stuck to religiously throughout, as indeed he had to, given what little else he had to announce. In other respects, this was a speech notable only for containing virtually nothing we didn't already know about. With minor exceptions, most of it had been leaked or pre-announced.

There were no rabbits out of the hat. Instead, the Chancellor was determined to wallow in the warm glow of an increasingly positive economic news flow. This is fair enough, I suppose, in light of the Opposition's insistence that there would be no economic recovery as long as the Government's austerity programme persisted. They've been forced to eat their words, and as a consequence, unconvincingly switched their attack to the squeeze on living standards.

The lack of anything substantive also marks a welcome return to what the Autumn Statement was meant to be — an update on the public finances and the economic forecasts, rather than an alternative Budget.

In any case, after three bruising years, the Chancellor is entitled to his moment in the sun; for a rather more realistic assessment, however, you have to turn to the Office for Budget Responsibility.

In a former life, the OBR's chairman, Robert Chote, was a journalist, and pretty merciless he was then about the business of economic prediction, which he considered an almost comically futile endeavour. He now finds himself as Britain's economic forecaster in chief, and therefore frequently the butt of much similar criticism. So while the Chancellor trumpets his success in turning the economy around, it is worth noting that all the OBR's latest forecasts do is return the outlook to where it was a year ago.

There is a long-standing joke in economics that forecasting is difficult, especially when it comes to the future. Along with many others, the OBR sharply cut its expectations last March just as the economy was turning the corner, thereby confirming a well-established failing in much forecasting; it unerringly seems to focus on the rear-view mirror rather than the road ahead. Many might therefore struggle to take the latest "back to where we were" forecasts too seriously. Indeed, the OBR itself seems pretty sceptical about them.

This is not to argue that growth is about to deteriorate again. If anything, I suspect Mr Chote and his colleagues still somewhat underestimate the potential for expansion over the next two years. There's already a lot of momentum in the recovery.

Yet if you look at the long-run OBR predictions, they haven't changed very much. Yes, the goal of declining public debt as a proportion of GDP is expected to be achieved a year earlier than forecast last March — in 2016/17 rather than 2017/18. It is also true that the OBR now expects the Government to borrow £73 billion less over the next five years than it thought at the time of the last Budget. An improving economy will bring higher tax receipts.

Perhaps more significantly, however, the OBR's forecasts for the underlying, "structural" deficit haven't improved at all. This is the sticky bit of the deficit that demands real surgery to make it go away —the shortfall between spending and tax receipts that doesn't vanish simply as a result of normal cyclical recovery.

Of course it is good news that the economy is growing much more quickly than most thought likely a year ago, yet there is also a sense in which this is only growth borrowed from the future. Without fundamental change to improve the productive potential of the economy, and cure it of its addiction to consumption, it will merely peter out....

*** UK Daily Telegraph / link

Japan's Abe Secures Passage of Secrecy Law as Opposition Revolts

Prime Minister Shinzo Abe secured final passage of a bill granting Japan's government sweeping powers to declare state secrets, a measure aimed at shoring up defense ties with the U.S. that prompted a public backlash and revolt by the opposition.

The upper house of the Diet gave final approval of the measures in Tokyo late yesterday after opposition parties first forced a no-confidence vote in Abe's government in the lower house. The wrangling over the bill forced the government to extend the parliamentary session, due to end yesterday, for two more days.

The bill, which forms part of Abe's broader push to strengthen Japan's defense policy in the face of China's military assertiveness, stiffens penalties for bureaucrats who leak secrets and journalists who publish them. It gives government officials the power to define what constitutes a state secret under categories from defense to diplomacy, terrorism and safety threats.

"There is rationale in the secrecy bill, but the government has been too hasty and has lacked efforts to provide a framework for information disclosure which is the flip side of secrecy," said Hidenori Suezawa, a financial market and fiscal analyst at SMBC Nikko Securities Inc.

Abe offered to create additional oversight boards to try to address criticism that the law would allow the government to potentially hide any type of information from public scrutiny.

The measure, criticized by much of Japanese media, has prompted rare public protests. Thousands of demonstrators gathered outside parliament this week, while the ending of debate on the law sparked an outcry from opposition lawmakers.

Hideaki Igarashi, 40, who works for a trading company and was among the protesters outside parliament on Dec. 5, said he opposed the law because too much information could be classed as secret without external checks. "It looks odd that they're rushing it," he said. "If it was a good thing they could take time over it."

The approval rating of Abe's government fell 4 percentage points from a month ago to 49 percent, the first time it dropped below 50 percent since Abe's election almost a year ago, according to a recent poll by the Asahi newspaper.

Half of those surveyed opposed the bill that punishes leaks of government information with jail terms of as much as 10 years. The newspaper polled 1,001 people by phone Nov. 30 to Dec. 1 and didn't give a margin of error.

Public criticism heightened after Shigeru Ishiba, secretary general of the LDP, wrote a blog post Nov. 29 likening those who demonstrate against the bill to terrorists.

Abe prioritized the secrecy bill over pending economic measures aimed at ending 15 years of stagnation, reflecting growing regional tensions as China asserts itself. With the Diet not reconvening until January, it will take weeks or months for Abe to advance the "third arrow" of his economic plan after the monetary easing and fiscal stimulus that revived growth and drove stock market gains.

"Abe must offset the negative impact of the secrecy bill on his approval rating by sticking to economic policies," said SMBC Nikko Securities' Suezawa. "I expect a deeper commitment to the three arrows next year."

The bill passed less than two weeks after China established an air defense zone over a large swathe of the East China Sea that includes islands at the heart of a territorial spat between Asia's two biggest economies. The law will strengthen Japan's security alliance with the U.S., which has pushed for stricter controls on information to bolster intelligence sharing.

As part of his security push, Abe also set up a National Security Council modeled on the NSC in the U.S. to better coordinate defense policy. He’s considering reinterpreting the U.S.-imposed pacifist constitution to be able to more freely use the country’s defense forces. U.S. officials have supported Abe’s push for collective self-defense and said they welcome the secrecy bill.

*** bloomberg / link

Charts That Make You Go Hmmm...

Sometimes there are no excuses.

Last week's edition of Things That Make You Go Hmmm..., "Twisted (By The Pool)," was missing three charts that would have driven the point home like a piledriver. They include two of my favourite charts, and I have referenced them many times.

This time I simply forgot to include them.

Luckily, my buddy Nick Laird is far more on his game than I am, and he pinged me immediately to point out my oversight and then kindly updated the charts for me.

I include them here once again and offer my thanks to Nick for his generosity.

I have said it before, and I'll say it again — if you follow gold and silver, you absolutely need to be familiar with Nick's wonderful website, It is by far the best repository of precious metals charts anywhere in the world.

So, without further ado, I give you the charts of the 5-year average intraday movement in gold, the LBMA intraday gold fix, and the LBMA overnight gold fix.

Please pay careful attention to these charts. They speak volumes.




Over the last three years, Black Friday sales have accounted for anywhere from 51 percent to 56 percent of all holiday season sales, according to per-person spending estimates from the National Retail Federation.

Not many businesses can say they do more than half their season's sales in one day.

*** CNBC (via tim iacono) / link


Source: CNBC



Words That Make You Go Hmmm...



Glenn Greenwald of The Guardian blew the secret world of government surveillance wide open this year (with a little help from Edward Snowden, of course).

Greenwald recently appeared on the BBC's HardTalk to discuss how Snowden contacted him and what happened next.

Greenwald's views on the role of the media hearken back to a (sadly) bygone era.

A fascinating interview.


Bill Fleckenstein is one of the best and most objective market observers around (and an incredibly nice guy to boot). Whilst I have finally found something to disagree with him over — the potential future of Bitcoin — hearing his considered opinions always makes me recheck my own.

Bitcoin aside, Bill's views on the Fed's straitjacket and their loss of control of the bond market are fascinating, as always.




OK, so here you get to make one of three choices:

1) Listen to a recent interview I did with Eric King, during which we discussed a lot of the issues about which I wrote in last week's edition of Things That Make You Go Hmmm...

2) Watch the slideshow I promised you of my ASFA presentation.

3) Skip straight to the "and finally..." section...

Hey!!!! Come back.....


and finally...

We've all done it.


Every one of us has, at one time or another, sent a text message to the wrong phone number.

Not many of us come up with the perfect response to those stray communications.

Click on the link below to see 28 of the funniest responses to errant texts, including the lewd, the crude, and the downright hilarious.

If you can get through all of these without laughing, you are a better person than me...









Grant Williams

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

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

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

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

For more information on Vulpes, please visit


Follow me on Twitter: @TTMYGH

YouTube Video Channel:

ASFA Annual Conference 2013: "Wizened In Oz"

66th Annual CFA Conference, Singapore 2013 Presentation: "Do The Math"

Mines & Money, Hong Kong 2013 Presentation: "Risk: It's Not Just A Board Game"

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

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

9 December 2013


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