Things That Make You Go Hmmm...

Quoth The Maven, “Evermore”

December 16, 2013

To learn more about Grant's new investment newsletter,
Bull's Eye Investor,
Click here »


Quoth The Maven, "Evermore"



A person who has special knowledge or experience; an expert.




"The ideas of debtor and creditor as to what constitutes a good time never coincide."





"A man without debts is a man without anything to live for. Debt is collateral for life. It provides you with obligations to others, gives you duty, gives you purpose: the purpose to protect those possessions which you would not otherwise have without your debt. Debt is the most responsible way to elevate your social position."

"'Nature is an expert in cost-benefit analysis,' she says. 'Although she does her accounting a little differently. As for debts, she always collects in the long run...'"


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

Samsung Shifts Plants from China to Protect Margins ...........................................23

Jim Chanos, Bad News Bear, Urges Market Prudence ...........................................24

Japan GPIF Must Cut Bonds, Create Board, Ito Tells Lawmakers ..............................26

Swift Too Quick to Hail Yuan as a Major Currency in Trade Finance ..........................27

Welcome Back to the Eurozone Nightmare .......................................................28

Coal Industry Finds Itself at a Crossroads .........................................................30

World's Biggest Investor BlackRock Says US Rally Nearing Exhaustion ........................31

Nearly $1 Trillion Was Smuggled Out of Developing Countries in 2011 .......................33

Russia in Stagnation: Putin Speech Hints at Big Problems ......................................34

Why Do We Value Gold? ..............................................................................35



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

Things That Make You Go Hmmm...

On January 29, 1845, the New York Evening Mirror published a poem that would go on to be one of the most celebrated narrative poems ever penned.


It depicted a tragic romantic's desperate descent into madness over the loss of his love; and it made its author, Edgar Allan Poe, one of the most feted poets of his time.

The poem was entitled "The Raven," and its star was an ominous black bird that visits an unnamed narrator who is lamenting the loss of his true love, Lenore. (We'll get back to Bart Simpson dressed as the Raven later on.)

Today, the sad tale would be splashed on the cover of a million tabloid magazines with a title such as "Lenore Dumps Narrator," "I'll Never Find True Love Again — Narrator Spills on Tragic Split With Lenore," or even "Kanye & Lenore — It's Love! But Don't Tell The Narrator." But 1845 was the very epitome of "old school," and so the poor, bereft narrator's tale was shared with the world through a complex rhyme and metering scheme that was popularized by Elizabeth Barrett Browning in her poem "Lady Geraldine's Courtship."


Quiet at the back or I'll have you removed.

Now, as the narrator slips slowly, desperately into the pit of insanity, he discovers that the raven, with the license afforded the poet, can talk; and so he sets about asking the mysterious bird for guidance in navigating his torment:

Then this ebony bird beguiling my sad fancy into smiling,
By the grave and stern decorum of the countenance it wore,
"Though thy head be shorn and shaven, thou," I said, "art sure no craven,
Ghastly grim and ancient Raven wandering from the Nightly shore —
Tell me what thy lordly name is on the Night's Plutonian shore!"
Quoth the Raven "Nevermore."

Unfortunately for the narrator, the raven's vocabulary is limited to the single word nevermore, which, in a rare moment of clarity, the narrator reasons can only have been learned from an unhappy former owner:

Startled at the stillness broken by reply so aptly spoken,
"Doubtless," said I, "what it utters is its only stock and store
Caught from some unhappy master whom unmerciful Disaster
Followed fast and followed faster till his songs one burden bore —
Till the dirges of his Hope that melancholy burden bore
Of 'Never — nevermore'."

It's at this point that the narrator demonstrates beyond any last vestige of remaining doubt that he is, in fact, completely insane when, knowing full well that there is only one possible answer to any question he might pose his strange visitor, he pulls up a "cushioned seat" in front of the bird and proceeds to question him:

But the Raven still beguiling my sad fancy into smiling,
Straight I wheeled a cushioned seat in front of bird, and bust and door;
Then, upon the velvet sinking, I betook myself to linking
Fancy unto fancy, thinking what this ominous bird of yore —
What this grim, ungainly, ghastly, gaunt, and ominous bird of yore
Meant in croaking "Nevermore."

So, with the vision firmly planted in your mind's eye of a man completely out of touch with reality, seeking wisdom from a mysterious talking bird — knowing that there is only one response, no matter the question — Dear Reader, allow me to present to you a chart.

It is one I have used before, but its importance is enormous, and it will form the foundation of this week's discussion (alongside a few others that break it down into its constituent parts).

Ladies and gentlemen, I give you (drumroll please) total outstanding credit versus GDP in the United States from 1929 to 2012:


Source: St. Louis Fed

This one chart shows exactly WHY we are where we are, folks.

From the moment Richard Nixon toppled the US dollar from its golden foundation and ushered in the era of pure fiat money (oxymoron though that may be) on August 15, 1971, there has been a ubiquitous and dangerous synonym for "growth": credit.

The world embarked upon a multi-decade credit-fueled binge and claimed the results as growth.


Floated ever higher on a cushion of credit that has expanded exponentially, as you can see. (The expansion of true growth would have been largely linear — though one can only speculate as to the trajectory of that GDP line had so much credit NOT been extended.) The world has congratulated itself on its "outperformance," when the truth is that bills have been run up relentlessly, with only the occasional hiccup along the way (each of which has manifested itself as a violent reaction to the over-extension of cheap money.

Along the way, the cost of that cheap money has drifted consistently lower from its peak in 1980 — and the falloff was needed in order that we be able to keep squeezing juice from an increasingly manky-looking lemon:


Source: Bloomberg

But the Fed has decided that when life gives you lemons, you make Lemon-aid.

Of course, the problem comes when you reach the point where you are no longer charging for that "cheap" money but rather giving it away — or in the case of the interest paid on excess reserves held at the Fed, paying people to take it.

Excess reserves held on deposit at the Federal Reserve currently total $2.4 trillion, which at an a rate of 0.25% per annum equates to $6,000,000,000 (that's $6 billion to you and me) in interest payable to US banks.


Source: St Louis Fed

Remember when that used to be real money? Seems such a long time ago, doesn't it? Now it doesn't even cover the fines payable for market manipulation. In actual fact, it's almost twice the amount required just 15 years ago in order to save LTCM and stop the global financial system from melting down.

Deflation? Not in the cost of bailouts there isn't.

Naturally, when you have no more room to juice one side of the equation, the other side suffers accordingly; and though it may not have happened yet, and though the geniuses in charge of coming up with the next great delaying tactic are still in the game, the end isn't very far away.

This issue of debt is one that just won't go away — and it isn't just a modern phenomenon, of course. In fact, as David Graeber pointed out in his wonderfully titled book Debt: The First 5,000 Years, debt formed the very foundations of one of the world's first and, to this day, most august central banking institutions: the Bank of England:

In fact this is precisely the logic on which the Bank of England — the first successful modern central bank — was originally founded. In 1694, a consortium of English bankers made a loan of £1,200,000 to the king. In return they received a royal monopoly on the issuance of banknotes. What this meant in practice was they had the right to advance IOUs for a portion of the money the king now owed them to any inhabitant of the kingdom willing to borrow from them, or willing to deposit their own money in the bank — in effect, to circulate or "monetize" the newly created royal debt.

This was a great deal for the bankers (they got to charge the king 8 percent annual interest for the original loan and simultaneously charge interest on the same money to the clients who borrowed it), but it only worked as long as the original loan remained outstanding. To this day, this loan has never been paid back. It cannot be. If it ever were, the entire monetary system of Great Britain would cease to exist.

You see? THAT'S the problem. Right there.

The debt that underpins the banking systems of the world can never be paid back. Period. If it were, everything would collapse.

Just this week, a buddy of mine in Hong Kong who watches everything (and I mean everything) like a hawk sent me an email about some of the finer points of the latest Fed quarterly report, which was released this week.

In particular, he wanted to point out something that isn't exactly new news but that is perhaps forgotten amidst the general hue and cry over QE: the solidity of the Fed's balance sheet.

The quarterly report contains a wealth of useful information. For instance, the maturity distribution of all those treasuries that the Fed has been so graciously accumulating, to the tune of $45 billion a month:

Maturity Distribution of Treasury Securities

<1 Year

$389 million

1-5 Years

$659 billion

5-10 Years

$878 billion

>10 Years

$535 billion

Avg. Weighted Life

5.9 years

Source: Federal Reserve

Or the MBS they've been splashing out $40 billion a month on:

Maturity Distribution for GSE MBS

5-10 Years

$2.6 billion

>10 Years

$1,340 billion

Avg. Weighted Life

3.3 years

Source: Federal Reserve

But the best little nugget in this whole 32-page report is the table that displays the assets, liabilities, and capital of the Federal Reserve System:


Source: Federal Reserve

Yes, the Fed has $55 billion of total capital and assets of $3.843 trillion, which means that the Federal Reserve is leveraged roughly 70x.

Remember that whole GFC thing a few years ago? No? Well, let me refresh your memory:

(Wikipedia): The financial crisis of 2007—2008, also known as the Global Financial Crisis and 2008 financial crisis, is considered by many economists the worst financial crisis since the Great Depression of the 1930s. It resulted in the threat of total collapse of large financial institutions, the bailout of banks by national governments, and downturns in stock markets around the world. In many areas, the housing market also suffered, resulting in evictions, foreclosures and prolonged unemployment. The crisis played a significant role in the failure of key businesses, declines in consumer wealth estimated in trillions of U.S. dollars, and a downturn in economic activity leading to the 2008-2012 global recession and contributing to the European sovereign-debt crisis.

Ohhhhh... THAT GFC thing. It all seems soooooo 2008, doesn't it?

Anyway, Wikipedia goes on:

(Wikipedia): The U.S. Financial Crisis Inquiry Commission reported its findings in January 2011. It concluded that "the crisis was avoidable and was caused by: widespread failures in financial regulation, including the Federal Reserve's failure to stem the tide of toxic mortgages; dramatic breakdowns in corporate governance including too many financial firms acting recklessly and taking on too much risk; an explosive mix of excessive borrowing and risk by households and Wall Street that put the financial system on a collision course with crisis; key policy makers ill prepared for the crisis, lacking a full understanding of the financial system they oversaw; and systemic breaches in accountability and ethics at all levels."

(Emphasis well and truly mine)

Those financial firms "acting recklessly and taking on too much risk" looked something like this:


Sources: Wikipedia, company reports

What's that blue bar? Oh, the one on the right? Oh... well, that's the leverage of the Federal Reserve today. Isn't it amazing the latitude that is available when you can conjure money out of thin air?

But it wasn't just the banks that caused all the problems, according to the US Financial Crisis Commission. An "explosive mix of excessive borrowing and risk by households" was also to blame.

So, with everything seemingly hunky-dory now, that excessive borrowing must have been sorted out, no?

Not so fast.

The UK has recently seen the coalition government trumpeting what they call a "recovery," except that, once again, a lot of the newfound "strength" in the once-moribund UK economy can be attributed — you guessed it — to our old friend household debt:

(BBC): Household debt in the UK has reached a record level, according to figures from the Bank of England.

Individuals now owe a total of £1.43 trillion, including mortgage debt, slightly above the previous high.

The previous record was set in September 2008, just before the effects of the financial crisis and the recession began to bite.

Record household debt levels? Will we never learn?

Of course, the government had a handy way of looking at this development that made it all seem like... what's the phrase I'm looking for...?


Ah yes... thanks Jamie... a "tempest in a teapot":

(BBC): But the government said that relative to household income, debt had actually fallen.

The rise may reflect the willingness of consumers to borrow more, as a recovery comes into sight.


Reality check, please, BBC:

(BBC): However, the figures may also show that families are having to borrow to deal with the higher cost of living, and to pay household bills.

The precise amount of total household debt is £1,429,624,000,000. That compares with the previous high of £1,429,595,000,000 five years ago, a difference of just £29m.

On average, that means each adult in the UK owes £28,489, including any home loans....

The news of the record debt level may increase concerns that the UK's recovery is based on increased borrowing, rather than growth sustained by rising incomes.

Hmmm... but the trouble is that it's not just the UK which is going debt-crazy again. Elsewhere we see similar issues manifesting themselves. And it's happening in places you maybe wouldn't think of. Like Malaysia and Thailand, for example:

(The Star): Malaysia's rising household debts, while still manageable in this current economic condition, would be "problematic" if the country's growth rate slows, according to Standard & Poor's.

A study by the World Bank identified Malaysia and Thailand as having the largest household debts, as a share of gross domestic product (GDP), among Asia's developing economies.

Household debts in Malaysia have now exceeded 80% of GDP, prompting the government to introduce measures to curb credit growth.

S&P last month cut its credit outlook for four Malaysian banks on concerns that rising home prices and household debt are contributing to economic imbalances.

"Thailand and Malaysia economies are fine at this point in time," S&P financial rating services' managing director and lead analytical manager Ritesh Maheshwari said yesterday.

"But an unfavourable global economic event could affect Malaysia adversely, and this is why we have been highlighting in our reports that Thailand and Malaysia face risks," he said in a teleconference on Asia-Pacific's outlook for 2014.

And Canada:


Source: Bloomberg

(CTV News): Canadians' debt-to-income ratio has soared to 163 per cent, much higher than previously believed, according to revised Statistics Canada figures.

The household debt level has increased 1.8 per cent in the second quarter, bringing it to a similar level seen in the United States before the housing bust and the 2008 financial crisis.

Statistics Canada said the new figures are the result of a revised method used to measure household net worth, which is more in line with international accounting standards. Non-profit institutions have been removed from the household category to get a better representation of family finances.

While the latest figures are troubling, RBC Chief Economist Craig Wright says they shouldn't necessarily trigger alarm bells.

The Canadian household debt "doesn't strictly compare with the U.S.," he told CTV's Power Play Monday.

About 70 per cent of household credit is mortgage-related, Wright said, but new data suggests housing markets across Canada, except in Vancouver, are cooling off.

The Canadian Real Estate Association said Monday that sales of existing homes fell 15.1 per cent in September from a year ago, although last month's numbers were slightly higher than in August.

"So as we move forward we hope (the debt) ratio will stabilize," Wright said.

Let's "hope" he's right.

How about those bastions of financial probity, the Swedes?

(The Local): In an interview with the Bloomberg news agency, Martin Andersson, the head of Sweden's Financial Supervisory Authority (Finansinspektionen), expressed his concern about Swedes' mounting debts.

"Swedish households today are among the most indebted in Europe, and we cannot have household lending that spirals out of control," Andersson said....

Last year, Swedes' household debt hit a record 173 percent of disposable income, well above the 135 percent level during the height of Sweden's banking crisis in the early 1990s.

According to Sweden's National Housing Board (Boverket), Sweden is already in the midst of a housing bubble, with homes overvalued by around 20 percent.

As property prices have risen 25 percent since 2006, Andersson warned of a possible "downturn" in the Swedish housing market.

"House prices cannot just continue upwards in eternity," he told Bloomberg.


(WSJ): Iceland's government unveiled a 150 billion Icelandic kronur ($1.25 billion) household-debt relief program Saturday, with the plan calling for increased taxes on the financial-services industry to help fund mortgage write-downs for Icelanders equivalent to several thousand dollars per mortgage holder.

The program, unveiled by Prime Minister Sigmundur Davíð Gunnlaugsson about six months after taking office, comes after a 2013 election where promises to address high levels of household debt in the small island nation was a central issue. While the economy has rebounded following a financial meltdown five years ago, people still struggle to pay mortgages.

I could go on... in fact I will.


(The Star): The debt burden carried by South Korean households edged up this year as debts grew at a brisker pace than incomes, a survey said on Tuesday, putting pressure on policy-makers aiming to maintain a steady recovery in Asia's fourth-largest economy.

Total debt at South Korean households grew by an average 6.8% to 58.18 million won (US$55,000) as of March this year, of which 39.67 million won was in the form of financial debt, the survey by the central bank and two top local authorities found.

In comparison, annual disposable income rose by 4.9% in 2012, resulting in the ratio of financial debt to disposable income rising to 108.8% in this year's survey, from 106% in 2012.

"Pressure on households has grown as South Koreans have increased their debt in comparison to the assets they carry, resulting in worse financial soundness," said an official at the Bank of Korea.


(FT): Russia's central bank has warned that Russia's consumer lending sector threatens the country's "financial stability", the same day that it revoked the licence of Master Bank, a midsized retail lender.

Addressing the Russian Duma, central bank head Elvira Nabiullina reiterated the need for setting a maximum interest rate level for consumer loans due to growing concerns of a bubble in the sector.

"There are already visible elements of overheating," Ms Nabiullina said, noting the "exceptionally high level" of households' indebtedness, especially compared with real growth in wages. "Consumer loans may not be so much the engine of growth as a threat to financial stability."

In the first nine months of the year, consumer lending rose 36 per cent, with non-performing loans now totalling 7.7 per cent, versus 5.9 per cent at the start of the year. The number of people with four consumer loans or more has close to doubled, signalling a deterioration in banks' credit portfolios.

You take my point?

I don't like to flog a dead horse, but it's high time people took the time and the trouble to really understand what's going on here; and it's ALL about debt.

Meanwhile, in the USA, the "recovery" seems to have miraculously coincided with — guess what — a slowing in the deleveraging cycle that began so dramatically in 2008:

(Quartz): During the third quarter of 2013, total US consumer debt outstanding rose $127 billion, to a total of $11.28 trillion. That's the largest quarter-on-quarter increase since the first quarter of 2008, when the financial crisis was nothing but a glimmer in the eye of the financial markets.


Source: Quartz/FRB NY

Basically, this just shows that the mortgage market was really starting to get to work during the third quarter. Mortgage debt rose by $56 billion during the quarter. Some of that might have had to do with a rush from people to lock in low mortgage rates, amid signs that the Fed might scale back monetary easing that has pushed rates down. Student debt also continued its long-term march higher, increasing by $33 billion during the quarter. Auto loans — crucial to another part of the American economy — rose by $31 billion. Here's a look at the non-mortgage debt growth.


Wasn't it debt that got us into the problems the US economy has faced in recent years? Well, yes. Too much debt — especially home loans made by the banks to people with little reasonable chance of paying them off — was central to causing the crisis.

But at the same time, restarting demand for borrowing remains the key to restarting economic growth. The hard fact is that capitalism runs on debt. It's the fuel that makes the whole system work. If you don't like it, you're more than welcome to go search for another hegemonic economic paradigm to live under. Good luck.

Good luck indeed.

This fixation with debt is fine BUT, if you want to live in a society where everybody borrows from everybody else and we all get fat, rich, and happy, there ARE a couple of trade-offs that you have to sign up for.

The first trade-off is that there WILL be periodic points in time when the debt load gets too heavy and people get nervous. Companies will go bankrupt, people will too — it's the natural order of things.

The second is that, when those moments arrive, it is wholly unfair to punish those who decided not to climb aboard the Debt Express and chose instead to save assiduously.

The Austrian economist Joseph Schumpeter called this part of the cycle "creative destruction" — although he took his inspiration from a somewhat unusual source:

Modern bourgeois society, with its relations of production, of exchange and of property, a society that has conjured up such gigantic means of production and of exchange, is like the sorcerer who is no longer able to control the powers of the nether world whom he has called up by his spells....

It is enough to mention the commercial crises that by their periodical return put the existence of the whole of bourgeois society on trial, each time more threateningly. In these crises, a great part not only of existing production, but also of previously created productive forces, are periodically destroyed. In these crises, there breaks out an epidemic that, in all earlier epochs, would have seemed an absurdity — the epidemic of over-production.

Society suddenly finds itself put back into a state of momentary barbarism; it appears as if a famine, a universal war of devastation, had cut off the supply of every means of subsistence; industry and commerce seem to be destroyed; and why? Because there is too much civilisation, too much means of subsistence, too much industry, too much commerce.

The productive forces at the disposal of society no longer tend to further the development of the conditions of bourgeois property; on the contrary, they have become too powerful for these conditions.... And how does the bourgeoisie get over these crises? On the one hand by enforced destruction of a mass of productive forces; on the other, by the conquest of new markets, and by the more thorough exploitation of the old ones. That is to say, by paving the way for more extensive and more destructive crises, and by diminishing the means whereby crises are prevented.

Those are the words of none other than Karl Marx, and THESE:

Politics is the art of looking for trouble, finding it everywhere, diagnosing it incorrectly, and applying the wrong remedies.

... are the words of Groucho Marx.

Each had a point.

Now, as far as the first trade-off goes, we have found a magical way to get around that part of the natural order: it's called "printing money."


And the second? Well, unfortunately those doomed savers are the only ones who actually HAVE any real money with which to plug the holes; so, at the risk of getting a little quote-happy, we must resort to the logic of everybody's favourite Vulcan:

"The needs of the many outweigh the needs of the few."

Sorry, Spock, that may fly on Vulcan but not down here on Earth.

If you want to live high on the hog, you have to accept that when the bills come due, they must be paid. In 2008 those bills came due, but the payment of them would have caused so much creative destruction that the politicians (and central bankers) felt compelled to step in. They found the trouble, diagnosed it incorrectly, and then applied the wrong remedies.

2008 was two things:

1) The result of far too much debt

2) The nearest thing to a truly global financial calamity the world has ever seen.

However, since 2008 the debt level has been increased massively and shifted to the public balance sheet in order to fix the problem. Now, with "recoveries" being hailed left and right, households are once again taking on new debt, which is seen as a sign of confidence.

Has the old debt been expunged? No. Have governments taken on debts which they intend to pay down as soon as the ship is righted? Of course not.

Take another look at this chart:


Source: St. Louis Fed

See that tiny downdraft I've circled?

That was what ALLLL the fuss was about, and THAT tiny reduction in credit — aka "The Great Deleveraging" — was what caused all the pain.

Think this is going to get voluntarily fixed in the way nature dictates any time soon?

Of course it isn't. It can't be.

Everything we get, outside of the free gifts of nature, must in some way be paid for. The world is full of so-called economists who in turn are full of schemes for getting something for nothing. They tell us that the government can spend and spend without taxing at all; that it can continue to pile up debt without ever paying it off, because "we owe it to ourselves."

What part of this does anybody have a hard time understanding?

And now we come to Christmas — when balance sheets are forgotten and the splurge that every Western consumer knows is his birthright takes place regardless of personal financial probity.

Nowhere is this tendency more entrenched than the United Kingdom, as a recent article in The Guardian pointed out:

(UK Guardian): There have been credible predictions of a 3.5% rise in 2013, and yuletide spending exceeding £40bn. Certainly, the seasonal noise suggests pathological consumerism is back in full effect, with near riots on so-called Black Friday, internet shopping breaking records, and adverts — adverts! — being treated as news events. "Britain's Christmas spending binge leaves US trailing" was a headline last week on Bloomberg, which surely spoke volumes.

In some parts of the country, then, the giddiness sown by a hyped-up recovery and rising house prices — up by an annual average of 7.7%, according to Halifax, with George Osborne's Help To Buy scheme having played its part — is evidently doing its work.

Meanwhile, the grim state of far too much of the economy is unchanged: 21% of employees are paid less than the living wage, and part-time and temporary jobs run rampant. The weekend brought news that, for the first time, more than half the 13 million Britons classified as being poor live in working households: a real watershed that needs to be endlessly highlighted. Even for people higher up the income scale, life remains pinched and anxious: petrol bought journey by journey; bills deferred; dread when a replacement car has to be bought. The fact that the ongoing fall in real wages has become a political cliche does not make it any less real: between 2010 and 2012, real earnings fell in every part of the UK — by 7.5% in London, and a mind-boggling 8.1% in Yorkshire and the Humber.

So, what pays for the sticky chicken lollipops and iPads? People are raiding their savings, which have lately undergone their biggest drop in 40 years, enough to prompt a former Downing Street adviser to warn that such figures are "desperately worrying… If you just withdraw money and spend you are talking about a recipe for long-term economic decline."

Desperately worrying, indeed — but without this dynamic, George Osborne's "recovery" is dead in the water.

Looking into the composition of the debt in the UK becomes more and more frightening the deeper you go:

(UK Guardian): And then there is debt. The Office for Budget Responsibility says the ratio of household debt to income is set to start increasing again, and at a faster rate than it predicted in March. By 2015, household debt, including mortgages, is projected to exceed £2tn. the critical point is how it is distributed. Last week, the Resolution Foundation's ever-insightful Gavin Kelly had a piece in the Financial Times warning that a sixth of private debt is held by households that have less than £200 a month to cover anything more than basic essentials. Nearly a third of mortgage debt, he pointed out, is owed by people who have borrowed more than four times their annual income.


The author then hammers home his point about the great British consumer, but he nets a far broader cross-section than he perhaps intended:

(UK Guardian): And a watershed moment will be reached when interest rates start to go up again.

Ahhhhh... yes. That.

Folks, rates WILL have to go up again. They cannot stay at zero forever. We all know that. When they DO, because of all the additional debt that has been ladled atop the existing pile, the whole thing will come tumbling down.

All of it.

There is simply no way out, I am afraid. But that is clearly a problem for another day. Right now, everything is fine, so we can all go on pretending it will continue that way.


So all that remains is for me to answer the one question I KNOW has been on your mind: why did this week's Things That Make You Go Hmmm... open with a picture of Bart Simpson dressed as the raven?

The very first Simpsons "Treehouse of Horror" episode, in 1990, contained a parody of The Raven in which Homer played the poor mad narrator and Bart the brooding bird.

It was good enough for The Simpsons, so I figured I'd take my own stab at updating Poe's epic poem. So now, if you'll indulge me in a little poetic license (not to mention there being not one but four mysterious strangers in my offering), I give you, "The Maven" (abridged version):


Once upon a midnight dreary, while I pondered, weak and weary,
Over many a quaint and curious volume of financial lore
While I nodded, nearly napping, suddenly there came a tapping,
As of some one gently rapping, rapping at my chamber door.
"'Tis some visiter," I muttered, "tapping at my chamber door
Only this and nothing more."


Ah, distinctly I remember it was in the bleak December;
And each separate dying ember wrought its ghost upon the floor.
Eagerly I wished the morrow; — for the world had sought to borrow
From both friend and foe and neighbour — borrow, borrow, borrow more
For the cheap and easy money which the bankers forth did pour
Shall be paid back nevermore.


Deep into that darkness peering, long I stood there wondering, fearing,
Doubting, dreaming dreams no mortal ever dared to dream before;
But the silence was unbroken, and the stillness gave no token,
And the only word there spoken was the whispered words, "Some More?"
This I whispered, and an echo murmured back the words, "Some More"
Merely this and nothing more.


Open here I flung the shutter, when, with many a flirt and flutter,
In there stepped four stately Mavens from the Central Banks of yore;
Not the least obeisance made they; not a minute stopped or stayed they;
But, with air of lord or lady, stood inside my chamber door —
Standing by a mug from Dallas just inside my chamber door —
Stood, and stared, and nothing more.


Then these tired-looking men beguiling my sad fancy into smiling,
By the grave and stern decorum of the countenance they wore,
"Though thy faces look unshaven, thou," I said, "art sure enslaven'd,
Ghastly grim and ancient Mavens wandering from the Nightly shore —

To free money ever after lest the markets pitch and yaw."
Quoth the Mavens, "Evermore."



While I marvelled this ungainly bearded man explained so plainly,
Though his answer little meaning — little relevancy bore;
For he cannot help a-printing, brand new currency a-minting
Ever yet was blessed with seeing nothing wrong in doing more
Mortgage bonds upon his balance sheet he'll place, then markets jaw
With the promise "Evermore."


Startled at the stillness broken by reply so aptly spoken,
"Doubtless," said I, "what's it matter? Long as stocks they have a floor
Rising sharply, rising faster, never chance of some disaster
Until finally, at last the bubble bursts amidst a roar
Till the dirges of his Hope that melancholy burden bore
Of 'Ever — evermore.' "


But the Maven, still eyes glinting, more fresh money kept on printing,
Straight I wheeled a cushioned seat in front of Ben, and locked the door;
Then, upon the velvet thinking, I betook myself to linking
Money unto money, thinking what this ominous man of more
What this grim, ungainly, ghastly, gaunt, and ominous man of more
Meant in croaking "Evermore."



Then, methought, the air grew denser, perfumed from an unseen censer
Swung by Mario whose foot-falls tinkled on the tufted floor.
"Wretch," I cried, "thy words have spared thee — troubled markets haven't dared thee
Though the Bundesbank declared thee cannot simply conjure more;
Stop, oh stop this printing money and accept the final score!"
Quoth the Maven, "Evermore."


"Profit!" said I, "on your buying? You'll be broken, battered, crying
Whether markets pause, or whether markets climb a little more,
Rising fear amongst the masses, each and every player has his
Line which crossing will restore his sense of what has gone before
Will he — will they just rely on that of which you seemed so sure?
Quoth the Maven, "Evermore."



"You there" said I, "standing muted — what is there to do aboot it?"
In a heavy accent quoth he — that by God he was quite sure
That more money being printed and, new measures being hinted
At would quell all fear of meltdown and the markets all would soar
Would this mean the printing presses would forever roar?
Quoth the Maven, "Evermore."



Lastly to the fore there strode a small and bookish man,
Who with glint of eye did warn that he was happy to explore
Measures once thought so outrageous as to never mark the pages
In the history of finance — but those times were days of yore
Drastic printing was required, this was tantamount to war
Quoth the Maven, "Evermore."


And the Mavens, never blinking, only sitting, only thinking
By the Cowboys mug from Dallas just inside my chamber door;
Really do believe their action has created decent traction,
And that freshly printed money can spew forth for evermore;
But the truth about the ending shall be seen when markets, bending
Shall be lifted — nevermore!

(My thanks to the wonderfully named "Virtues," who for a small fee drew the Simpsons characters for me. Should you wish to have your own then contact her HERE. Her work is excellent, and she turned these around in 24 hours for me!)


OK ... so let's get to it, shall we?

This week we hear how Samsung is protecting its margins and why that's not good news for China; Jim Chanos is bearish (yeah, no sin of HIM throwing in the towel); Japan's GPIF — the largest pension fund in the world — faces up to a stark reality; and the good folks at SWIFT may have jumped the gun with a landmark announcement.

The Eurozone nightmare is back, and Liam Halligan explains what that means; the world's largest investor sounds the alarm (surely people will listen to THEM?); China's coal industry reaches a crossroads; and Vladimir Putin's recent speech suggests trouble in Mother Russia.

A trillion dollars goes missing from developing countries; Indians drive gold prices up to unprecedented premiums; and we look at the complete history of Bitcoin.

David Stockman, the 1%ers, and even a Bloomberg reporter who seems to get the joke on gold ('tis the season, I guess) round things out for another week.

All that remains is for me to wish all of you a Merry Christmas and a happy, healthy, and prosperous 2014. Thanks for your company this year. It's been a hell of a ride.

Until Next Time...

Samsung Shifts Plants From China to Protect Margins

Samsung Electronics Co. (005930) built the world's largest smartphone business by tapping China's cheap and abundant workforce. Not for much longer: it's shifting output to Vietnam to secure even lower wages and defend profit margins as growth in sales of high-end handsets slows.

By the time a new $2 billion plant reaches full production in 2015, China's communist neighbor will be making more than 40 percent of the phones that generate the majority of Samsung's operating profit. The Suwon, South Korea-based company's second handset factory in Vietnam is due to begin operations in February, according to a Nov. 22 statement on the local government's website.

Samsung surged past Apple Inc. to the top of the mobile-phone industry by offering cutting-edge devices for more than $900 to basic models costing less than $150. With demand sagging in the most-profitable top end and Chinese rivals driving prices lower, Samsung is joining technology companies such as Nokia Oyj (NOK1V) and Intel Corp. (INTC) to be drawn to Vietnamese wages that are about a third those in China.

"The trend of companies shifting to Vietnam from China will likely accelerate for at least two to three years, largely because of China's higher labor costs," said Lee Jung Soon, who leads a business-incubation team of the Korea Trade-Investment Promotion Agency in Ho Chi Minh City. "Vietnam is really aggressive in fostering industries now."

It seems to be working.

The government has approved $13.8 billion of new foreign projects this year through Nov. 20, a 73 percent increase on a year earlier, according to the General Statistics Office in Hanoi. South Korea led with $3.66 billion.

China's $8.4 trillion economy, 59 times the size of Vietnam's, received $97 billion of foreign direct investment — although this was actually utilized — in the first 10 months, 6 percent up on a year earlier.

Intel, the world's largest chipmaker, opened a $1 billion assembly and testing plant in Ho Chi Minh City in 2010. Nokia said its facility near Hanoi producing Asha smartphones and feature handsets became fully operational in the third quarter. LG Electronics Inc. (066570), Samsung's smaller South Korean rival, is building a new 400,000 square meter complex to make TVs and appliances as part of a $1.5 billion investment plan.

"The country is politically stable and has a young, increasingly well-educated workforce," LG said in an e-mailed statement. "Like Korea, Vietnam understands what it takes to rebuild an economy after a devastating war."

Samsung's new plant is expected to make 120 million handsets a year by 2015, said two people familiar with the company's plans, who asked not to be identified because the matter is private. That would double the current output from the country and compares with the 400 million global total Samsung shipped last year. In an e-mailed response to questions, the company declined to comment.

With about one-third of the global smartphone market, Samsung may eventually produce as many as 80 percent of its handsets in Vietnam, said Lee Seung Woo, an analyst at IBK Securities Co. in Seoul who has been tracking the company for more than a decade.

"The handset business is all about assembling well-sourced components," Lee said. "The most important thing is manpower."...

*** bloomberg / link

Jim Chanos, bad news bear, urges market prudence

Prominent short-seller Jim Chanos is probably one of the last true "bad news bears" you will find on Wall Street these days, save for Jim Grant and Nouriel Roubini. Almost everywhere you turn, money managers still are bullish on U.S. equities going into 2014 even after the Standard & Poor's 500's 27 percent returns year-to-date and the Nasdaq is back to levels not seen since the height of the dot-com bubble in 1999.

"We're back to a glass half-full environment as opposed to a glass half-empty environment," Chanos told Reuters during a wide ranging hour-long discussion two weeks ago. "If you're the typical investor, it's probably time to be a little bit more cautious."

Chanos, president and founder of Kynikos Associates, admittedly knows it has been a humbling year for his cohort, with some short only funds even closing up shop.

But he told Reuters that the market is primed for short-sellers like him and as a result has gone out to raise capital for his mission: "Markets mean-revert and performance mean-reverts and even alpha mean-reverts if at least my last 30 years are any indication. And the time to be doing this is when you feel like the village idiot and not an evil genius, to paraphrase my critics."

Chanos' bearish views are so well respected that the New York Federal Reserve has even included him as one of the money managers on its investment advisory counsel. By his own admission, Chanos said he tends to be the one most skeptical on the markets.

Chanos knows bad news when he sees it as he is known as the man who almost single handedly vindicated short sellers by revealing the ongoing fraud at Enron and WorldCom. And he sounded the alarm bell early on struggling computer giant Hewlett Packard. Just last week, he sent shares of CGI Group Inc., the parent of CGI Federal, which is the main contractor behind the U.S. government's glitch-plagued website, under selling pressure after Newsweek revealed that Chanos had placed a major short position.

Chanos spoke about his other shorts including Caterpillar and — yes, just in time for Christmas — coal stocks at the Reuters Global Investment Outlook Summit and even shared some of his observations on the 1 percent and what they owe the rest of us.

On the U.S. stock market

Chanos: "A few years back, I felt the U.S. was the best house in a bad neighborhood for a cliché hackneyed term and certainly there were better places that I think on a macro basis to be short like China. Our thinking is changed on that now. I think that the U.S. market is pretty fully discounting an awful lot of good news. While one can never be precise on markets and that's not why my clients pay me, we're finding many more opportunities (on the short side) in the U.S markets than we found a few years ago.

The U.S. market at roughly 1,800 on the S&P is trading at 19 times earnings. I am always sort of befuddled because people use a much lower figure on that…we went back and triple-checked trailing 12-month S&P 500 earnings and they are only $95. A lot of companies report earnings before the bad stuff and we're talking about GAAP earnings — actually talking about real accounting earnings — they are only $95. So for you to believe that the market is only at 14 times, 15 times next year's number, you have to make some pretty robust assumptions on earnings growth to get to $95 to that $120 or $125 figure."

Déjà vu all over again...

*** Reuters / link

Japan GPIF Must Cut Bonds, Create Board, Ito Tells Lawmakers

The world's largest manager of retirement savings should reduce holdings of domestic bonds and create a board of directors to replace the current governance structure, an expert panel told Japan's ruling party.

The 124 trillion yen ($1.2 trillion) Government Pension Investment Fund should decrease its allocation to Japanese government bonds and increase investments in other assets, Takatoshi Ito, chairman of a group advising lawmakers on pension allocations, said to a Liberal Democratic Party committee today in Tokyo. A new board of directors should take charge of decision-making and the law governing the fund must be changed if GPIF is unable to overhaul its leadership itself, Ito said.

"GPIF needs to review its governance and portfolio at the same time," Ito told the LDP study group on economic revitalization and finance. "We must change who takes responsibility for the fund."

Ito was discussing a report submitted last month by his government-appointed advisory panel that urged GPIF to review domestic bond holdings and look at investing more in overseas assets. The LDP needs to consider whether to table a bill to make the pension fund more independent of bureaucrats, amid pressure on GPIF to cover retirement payouts as the world's oldest population ages.

"Lawmakers want to change GPIF so that it will adopt government policy and become a vehicle to buy stocks and other risk assets," said Kyoya Okazawa, head of global equities and commodity derivatives at BNP Paribas Securities (Japan) Ltd. "They think Abe's rating won't fall below 40 percent as long as stocks rise and the economy is strong."

A poll published by the Asahi newspaper on Dec. 7 showed Abe's support at 46 percent, down from 49 percent on Dec. 2.

GPIF should have about five directors, compared to the one allowed by law now, Ito said. The law needs to be changed to make this possible, he said. The Ministry of Health, Labor and Welfare, which currently oversees the fund, won't move fast to revise the legislation, so efforts are needed to ensure it happens, said Kozo Yamamoto, a lawmaker and member of the LDP committee.

Ito said in an interview last week GPIF needs to cut local debt holdings now. The fund should pare domestic bonds immediately to 52 percent of assets, its lower limit, he said.

Adjustments can be made within the fund's current deviation limit, Teruyuki Katori, head of pensions at the health ministry, said today. When questioned whether that means he agrees with Ito's recommendation to sell within deviation limits, Katori said "yes," while adding he doesn't want to give details on reallocation.

GPIF President Takahiro Mitani said last week the fund must aim to keep assets as close to the target as possible....

*** bloomberg / link

Swift too quick to hail yuan as major currency in trade finance

The yuan has surpassed the euro to become the second most commonly used currency in global trade finance, after the US dollar. Yuan usage in trade finance grew to 8.66 per cent in October from 1.89 per cent in January last year, according to the Society for Worldwide Interbank Financial Telecommunication (Swift).

SCMP, December 4

Hip, hip, hurrah! And now, if we have done cheering, let's look a little more closely at this remarkable statistic.

Swift has used a narrow definition. It has measured only the portion of global trade financed by the traditional means of letter of credit, which interposes a bank between buyer and seller to help guarantee payment and delivery. It is not surprising that Swift should use the narrow definition. Swift is a bank international payment service. It is therefore primarily interested in how banks profit from trade finance, which happens to be when trade is conducted through letter of credit.

But an estimated 80 per cent of international trade is now conducted on open terms. Trade partners who have long done business with each other increasingly don't see the need for a bank intermediary. They decide to trust each other and not pay for this costly extra level of security.

China's foreign trade in yuan, however, is still dominated by letter of credit. Thus the only thing that the Swift ranking of global trade indicates is that exporters and importers who settle their accounts in yuan do not have that same high level of trust in each other that is enjoyed by most other traders. I can't see that yuan boosters have anything to crow about.

There is more. Along with the bar chart showing China's No2 position in letter of credit trade, Swift published another bar chart showing a ranking of currencies by value of worldwide payments.

In this one, the yuan was No 12 with only a 0.84 per cent worldwide share, slightly behind the Thai baht and a smidgen head ahead of the Norwegian krone. Norway has a population of five million, China of 1,360 million at latest count.

And China actually slipped a little in October with growth for all payments of 1.5 per cent against a worldwide growth of 4.6 per cent.

All of which is just another roundabout way of saying that the cheerleader squad for worldwide use of the yuan is starting to go a little over the top these days with its unending chorus of "Rah, Rah, Renminbi".

Take chief cheerleader Anita Fung Yuen-mei, of HSBC, for instance. We had her in this newspaper again the other day saying that yuan deposit growth in Hong Kong is so big, so huge, that it might put the squeeze on Hong Kong dollar liquidity. I haven't the space here to tell you why this is a theory from Never Never Land but will someone from the Hong Kong Monetary Authority please pull her in to tell her how the peg works. It seems she played truant from HSBC training school the day that the lesson on origins of money was taught.

Here is a little factoid on why we have seen more settlement of trade accounts in yuan over the past few years. The chart tells the story. The yuan has been pushed steadily stronger against the US dollar by the People's Bank of China.

This means that merchants in Hong Kong are quite happy to accept yuan for payment of goods shipped to the mainland. They then have the means of speculating on further yuan strength. It's a gift given them by PBOC policy.

Don't ask what might happen should the PBOC finally decide to call a halt to this policy. That's grim. Let's not go there.

*** south china morning post / link

Welcome back to the eurozone nightmare

The eurozone has recently been off our news radar. We Britons have become smug of late given our new-found growth, now that we're the most rapidly expanding economy in the Western world (almost).

We certainly have a sense that the "Continental" economies aren't doing as well as ours. Apart from those pesky Germans, of course, who are annoyingly good at making stuff the rest of the world wants to buy.

Yet, the fear of the euro as a tinderbox, which at any minute could spark financial meltdown, seems to have gone. The euro as a ticking-time bomb, about to explode, causing another Lehman-style Minsky moment on global markets — all that has been dealt with, we think, sorted, solved?

I would like to tell you that's true. But I can't, because it isn't. The eurozone's deep structural flaws remain as ever they were.

This jerry-built monetary union, for all the fanfare, arrogance and "solidarity", is fundamentally just as vulnerable as it was in the summer of 2012, when, suddenly, everyone started worrying that the single currency wasn't, as we'd always been told, "irreversible".

Until then, it was only been "nutters" like me who openly questioned the eurozone's long-term survival. We raised such "mad" questions not because we'd spent much of our adult lives studying economics, history and the minutiae of currency unions — oh no — but because we were "cranks" and "xenophobes".

Back in that Olympic summer, however, as government bond yields in the likes of Greece, Spain and Italy spiked, and riots broke out in previously laid-back European capitals, everyone realised that some profligate members could crash-out of monetary union, forced by market vigilantes and window-smashing thugs, or maybe even kicked-out by Germany (with the Finns and the Dutch providing moral cover).

But then the newish European Central Bank president, Mario Draghi, promised to do "whatever it takes" to save the euro. At the same time, politicians began talking about a "banking union" — and with extremely serious faces. As if by magic, there was calm. The markets relented and bond yields fell back.

Since then, while it hasn't been plain sailing, there's been far less talk of a stormy "break-up" of monetary union. The euro is actually set to end 2013 as one of the best-performing main currencies — up from $1.32 in early January to around $1.37 today.

The fact that the US government wanted this dollar depreciation, deliberately stoking it by expanding the Fed's balance sheet $85bn (£52bn) a month is, of course, completely irrelevant.

To say the eurozone is out of danger is so complacent as to be laughable. All kinds of people have all kinds of reasons for painting as rosy a picture as possible, whether they're trying to sell something, gain re-election or just because and this is entirely understandable. They're sick to death of all this post-sub-prime angst.

Yet, consider the facts, and then ask yourself if the single currency really is a coherent, sustainable structure, or if, in fact, the entire edifice is balanced on the head of a pin.

Yes, Draghi pledged to do "whatever it takes". And so he set up the Outright Monetary Transactions programme, endlessly cited as the eurozone's main stabilising factor as it allows the ECB to buy "unlimited" bonds issued by otherwise bankrupt eurozone nations, essentially out of printed money.

As soon as the OMT was announced, the "doom-loop", within which busted banks and governments drag each other down, was apparently broken. The clouds parted, and the eurozone's turmoil was no more.

The trouble is that the OMT is a mirage. Under it, Draghi hasn't yet bought a single government bond. Nor can he, because it can only be used if a country is already in a Greek-style bail-out involving endless humiliating conditions and democratic subjugation at the hand of the International Monetary Fund and others....

*** liam halligan, THE TELEGRAPH / LINK

Coal Industry Finds Itself at a Crossroads

Times are getting rough for Wang Guangchun, a 10-year veteran sales manager of a state-owned coal operations. Last year, coal for the first time stopped selling itself. This year it's becoming downright difficult to move it.

"During the golden era of the past, clients came to find me," Wang said. "Starting last year, we had to go looking for them."

Wang is employed by a subordinate company of the Datong Coal Group in the northern province of Shanxi, which sits at the center of China's coal belt. His clients have primarily been in Shanxi, Shandong and the Beijing-Tianjin-Hebei region, but recently those outside Shanxi Province grow scarcer by the day.

"Many provinces and municipalities have issued policies for coal designated for electricity, which force power plants to use local coal," Wang said.

He added that the Beijing-Tianjin-Hebei region and Shandong, in the east, have also passed strict policies limiting the usage of coal. "Competition for coal sales in those regions has become extremely fierce."

The strict polices Wang mentioned were triggered by smog problems rampant in cities across China. This winter the government began implementing rigorous atmospheric pollution prevention controls in the Beijing-Tianjin-Hebei region. Restrictions on the usage of coal comprise a major component of the measures. Edicts from the State Council, the country's cabinet, and the Ministry of Environmental Protection demand that by 2017 the proportion of coal used to total energy consumption be reduced to 65 percent or less; the Beijing-Tianjin-Hebei Region and surrounding areas are to reduce coal consumption by 93 million tons; and regions such as Beijing-Tianjin-Hebei, the Yangtze River Delta and the Pearl River Delta are increasing the consumption of natural gas by 150 billion cubic meters a year.

Faced with sagging prices and a smaller market, coal companies have had no choice but to change their business line. More and more coal businesses are opting to expand into downstream areas such as chemical refining. Meanwhile, the country's top planning agency, the National Reform and Development Commission (NDRC), has greatly accelerated the approvals process for new coal-to-chemical projects, ushering in a wave of applications for such projects.

As coal companies consider the transition to coal chemical industry, many in academic and industry circles are expressing concern. Many have noted that this industry can indeed help companies transform, but efficiency problems and pollution are worrisome.

Over the past year, coal prices have dropped by over 20 percent, but in late September the price rebounded, regaining most of the lost ground. Wang says this does not constitute a turning point for his industry. "This is merely a seasonal price inflation caused by preparations for winter heating. What about what comes after winter?"

Beginning in June, Wang's company began operating at a loss, and its coal reserves swelled to over 100,000 tons by December.

His company is not alone. Data from the Shanxi statistics bureau show that from January to September, the province's coal industry was operating at as high as 48 percent losses. The industry's total losses came to 13.38 billion yuan, year-on-year growth of 79.3 percent. The coal industry accounted for 40.7 percent of all industrial losses in the province over that period.

Data from Wind Information shows that in the third quarter, the entire coal industry's operating revenue marked a year-on-year drop of 3.54 percent, and a year-on-year profit drop of 8.13 percent. The coal industry might be entering an era of low profits, say insiders.

The chairman of the Shandong Energy Group Co. Ltd., Bu Changsen said that as the economy enters a period of intense restructuring, new energy and non-conventional oil and gas will gradually pull the rug from under traditional fossil fuels. As the government pushes out policies aimed at reduced emissions, energy savings, environmental protection and the reordering of industries with excess production capacity, demand for coal will be suppressed, Bu said.

The director of the National Energy Administration's Coal Bureau, Fang Junshi, said that a recently issued Action Plan for the Prevention of Atmospheric Pollution will put new pressures on the development of the coal industry.

"Given that we make ample consideration for the usage of new energy, renewable energy sources and natural gas, the proportion of coal to total energy consumption will decrease," said Fang....

*** caixin / link

World's biggest investor BlackRock says US rally nearing exhaustion

BlackRock, the world's biggest investor, has warned that central banks are poised to tighten monetary policy in the Anglo-Saxon countries and China, advising clients to be ready to pull out of global stock markets at any sign of serious trouble.


"2014 is the year to squeeze more juice out of risk assets. But investors should be ready to discard the fruit when it starts running dry," said Ewen Cameron Watt, chief strategist for the BlackRock Investment Institute.

The group said in its 2014 Investment Outlook that investors have "jumped on the momentum train, effectively betting yesterday's strategy will win again tomorrow", but vanishing liquidity could leave them trapped if the mood changes. "Beware of traffic jams: easy to get into, hard to get out of," it said.

BlackRock, which manages funds worth $4.1 trillion, said the global system is still in the doldrums and far from achieving sustainable recovery. "The eurozone, Japan and emerging markets are all trying to export their way out of trouble. Who is going to buy all this stuff? The maths does not work. Not everybody's currency can fall at once," it said.

The report said Wall Street is not in a bubble yet but BlackRock's risk indicator — measuring "enterprise value" against earnings, adjusted for volatility — is almost as high as it was just before the dotcom bust. "The ratio of the two is the key. High valuations combined with low volatility can make for a lethal mix. This market gauge sounded the alarm well before the Great Financial Crisis," it said.

It advises sticking to European and Japanese equities, with a contrarian bet on carefully chosen emerging markets through the medium of foreign multinationals. The wrong emerging markets face the risk of "currencies in freefall, capital controls and expropriations".

BlackRock said there is a 20pc risk that world events could go badly wrong, either because the eurozone acts too late to head off deflation or because of a chain reaction as the US Federal Reserve starts to wind down stimulus in earnest.


"The banking system in the eurozone periphery is under water, with a non-performing loan pile of €1.5 trillion to €2 trillion. Germany and other core countries are unlikely to pick up the tab. Eastern Europe could become the epicentre of funding risk in 2014 due to big refinancings," it said. BlackRock said the eurozone is "stuck in a monetary corset", failing to generate the nominal GDP growth of 3pc to 5pc needed for economies to outgrow their debt burdens.

The European Central Bank has allowed passive tightening to occur as banks repay funds under the ECB's long-term lending operations. The group says the ECB may have to start printing money, but the politics are toxic. "German opposition is a roadblock, unless the risk of deflation expands beyond Europe's southern tier," it said.

The risk in the US is that Fed tapering could cause the housing recovery to stall. The Fed has purchased three times all net issuance of US mortgages so far in 2013....

*** Ambrose Evans-Pritchard / LINK

Nearly $1 trillion was smuggled out of developing countries in 2011

It's hard to build your country when the money keeps slipping away.

Foreign capital flight has been a problem for developing countries this year, but a bigger problem might be the funds smuggled out by tax evaders, corrupt officials and criminals—$946.7 billion in 2011, according to the latest estimates released today by a team of economists at the non-profit Global Financial Integrity, an increase of more than 10% over the previous year. For comparison, total foreign aid to developing nations in 2011 was just $141 billion.


Russia topped the list, with $191.14 billion slipping out of its borders in 2011, followed by China with $151.35 and India with $84.93 billion. Economists at GFI identified the money by sorting through aggregate balance-of-payments data and finding mismatches that show where traders used creative invoicing to slip money out of the country — the bulk of illicit flows — or, about 20% of the time, through shell companies and tax havens. The global recession didn't slow illicit financial flows, which have grown faster than global GDP each year between 2002 and 2011.

The specific reasons to get money out of a country vary by context, but include secreting away the proceeds of corruption; tax evasion, corporate and individual; fear of political reprisal, and drug and human trafficking.

The nations most hamstrung by illicit flows are in Africa, where illicit flows are the equivalent of 5.7% of GDP; the average developing country lost 3.7% of GDP in 2011. That's a huge amount of money to lose that could otherwise be invested in private or public enterprise that might improve the lives of people living there. Instead, it winds up in tax havens—including the United States and the United Kingdom. "This isn't really just a developing world problem it's facilitated by developed country banks and tax havens," Brian Leblanc, one of the economists behind the study, told Quartz.

Indeed, with six times more money leaving developing countries illicitly than entering them as aid, advocates for these nations might do well to back policies to block these flows. Promoting tax-haven crackdowns and convincing powerful multinationals to submit their transactions to more scrutiny is hard to do, but it could pay dividends for development down the line.

*** quartz / link

Russia in Stagnation: Putin Speech Hints at Big Problems

In his annual state of the nation address on Thursday, Russian President Vladimir Putin spoke about the need to rein in corruption and called for technological progress. But he also hinted at the bigger problems that will plague his country in years to come.

Sometimes a sigh says more than words. On Thursday, Russian President Vladimir Putin held his annual state of the nation address in front of members of his government and both chambers of parliament, the State Duma and the Federal Council. And when, during his speech, he lamented that "very corrupt" officials were preventing local authorities from giving vacant community property to large families, he let out a quiet sigh.

Russia's head of state spoke about his country's apparatus of state like a teacher speaks about students whose poor grades threaten their graduation. It was also a throwback to May 2012, when he announced directives aimed at improving the country's administration — none of which have been implemented.

Putin complained about "administrative barriers" for exporters, mentioned "grueling conversations" with the finance minister and asked civil servants to fulfill their duties "without excuses" and without "watering down" assignments.

Putin hinted at the dramatic effects of corruption by mentioning "rising ethnic tensions." He also warned about "corruptible employees of the law enforcement agencies building a shelter for the ethnic mafia."

Putin touched on another sensitive subject when he called for the "de-offshorization" of the economy. He was referring to the habit of government-owned and -affiliated companies to avoid paying Russian taxes by registering themselves in sunny island havens. Some listeners in the hall smiled mischievously during this part of the speech because they knew full well which practices he meant. So far, Putin said, "de-offshorization" had yielded "barely noticeable" results.

On the brink of his 15th year in power, this was a de facto acknowledgment that, despite his czar-like powers, the head of state is still helpless in the face of kleptocratic administrators. Russian society is currently in a phase of stagnation. Even the loyal state workers who once again voted for Putin a year and a half ago are noticing more and more similarities to the crisis in Soviet society at the end of General Secretary Leonid Brezhnev's era of leadership.

Putin called for a "broad social discussion" and for greater control of the administration through "civil society," and, in a change, he vowed to "support the civil rights movements." Nevertheless, he did not make any self-critical remarks about his repressive approach to the non-parliamentarian opposition in the past year — including the disastrous verdict against the young women of Pussy Riot.

Putin's speech confirms what Moscow analyst Mikhail Delyagin warned about a decade ago, when he said the president could become a "hostage of bureaucracy." Putin's call, before the applauding bureaucrats of the Kremlin's Georgievski Hall, to "finally" achieve a "technological breakthrough" will likely be as ineffective as his previous appeals.

In his last address to the nation, in Dec. 2012, Putin had clearly spelled out the dangers caused by bureaucrats who slow things down: Those who miss out on progress, Putin said, will become "outsiders" in a world of increased competition and will "inevitably lose their independence." It's a warning he did not repeat this year, though circumstances remain the same....

*** der spiegel / link

Why Do We Value Gold?

Mankind's attitude to gold is bizarre. Chemically, it is uninteresting — it barely reacts with any other element. Yet, of all the 118 elements in the periodic table, gold is the one we humans have always tended to choose to use as currency. Why?

Why not osmium or chromium, or helium, say — or maybe seaborgium?

I'm not the first to ask the question, but I like to think I'm asking it in one of the most compelling locations possible — the extraordinary exhibition of pre-Columbian gold artefacts at the British Museum?

That's where I meet Andrea Sella, a professor of chemistry at University College London, beside an exquisite breastplate of pure beaten gold.

He pulls out a copy of the periodic table.

"Some elements are pretty easy to dismiss," he tells me, gesturing to the right-hand side of the table.

"Here you've got the noble gases and the halogens. A gas is never going to be much good as a currency. It isn't really going to be practical to carry around little phials of gas is it?

"And then there's the fact that they are colourless. How on earth would you know what it is?"

The two liquid elements (at everyday temperature and pressure) — mercury and bromine — would be impractical too. Both are also poisonous — not a good quality in something you plan to use as money. Similarly, we can cross out arsenic and several others.

Sella now turns his attention to the left-hand side of the table.

"We can rule out most of the elements here as well," he says confidently.

"The alkaline metals and earths are just too reactive. Many people will remember from school dropping sodium or potassium into a dish of water. It fizzes around and goes pop — an explosive currency just isn't a good idea."

A similar argument applies to another whole class of elements, the radioactive ones: you don't want your cash to give you cancer.

Out go thorium, uranium and plutonium, along with a whole bestiary of synthetically-created elements — rutherfordium, seaborgium, ununpentium, einsteinium — which only ever exist momentarily as part of a lab experiment, before radioactively decomposing.

Then there's the group called "rare earths", most of which are actually less rare than gold.

Unfortunately, they are chemically hard to distinguish from each other, so you would never know what you had in your pocket.

This leaves us with the middle area of the periodic table, the "transition" and "post-transition" metals.

This group of 49 elements includes some familiar names — iron, aluminium, copper, lead, silver.

But examine them in detail and you realise almost all have serious drawbacks.

We've got some very tough and durable elements on the left-hand side — titanium and zirconium, for example.

The problem is they are very hard to smelt. You need to get your furnace up into the region of 1,000C before you can begin to extract these metals from their ores. That kind of specialist equipment wasn't available to ancient man.

Aluminium is also hard to extract, and it's just too flimsy for coinage. Most of the others in the group aren't stable — they corrode if exposed to water or oxidise in the air.

Take iron. In theory it looks quite a good prospect for currency. It is attractive and polishes up to a lovely sheen. The problem is rust: unless you keep it completely dry it is liable to corrode away.

"A self-debasing currency is clearly not a good idea," says Sella.

We can rule out lead and copper on the same basis. Both are liable to corrosion. Societies have made both into money but the currencies did not last, literally.

So, what's left?

Of the 118 elements we are now down to just eight contenders: platinum, palladium, rhodium, iridium, osmium and ruthenium, along with the old familiars, gold and silver....

*** BBC / link

Charts That Make You Go Hmmm...

This definitive chart of the history of Bitcoin is a great reference.

Its past goes back farther than you might think. The questions is, how far forward will its future go?




Another week, another chart from my buddy Nick Laird. This one puts the mad dash for physical gold in India into stark relief.

A premium of almost 25% means that an ounce of gold in India will set you back about $1511.

Bear market, you say?


Source: Economist

Welcome to our Daily chart Advent calendar, a collection of the 24 most popular maps, charts, data visualisations and interactive features published on our site over the last 12 months. You'll find one behind each door, with a new door available to open every day until Christmas Eve, when our most popular infographic of 2013 will be revealed. There's also an entirely new graphic behind door number 25 — a Christmas gift to all our readers who've been good this year.

Season's greetings from everyone at The Economist.

*** economist / link

Words That Make You Go Hmmm...



Those pesky 1%-ers. CNBC trawled through a long CBO report this week so we wouldn't have to.

What they found throws up a few interesting questions about just who is paying their "fair share" and just how much that fair share equates to.

It all revolves around "a nugget on page 13"...


David Stockman is not afraid to call things as he sees them — and neither is Rick Santelli.

Put the two of them together and throw in a fresh budget agreement to discuss, and you KNOW where this is gonna go.

Joke? Betrayal? Epic can-kicking? Hell yeah...




OK, so once in a while something weird happens. So in this clip a Bloomberg reporter seems to get the joke about the movement of bullion around the world this year.

The anchors? Meh... not so much... but one step at a time.


and finally...

As it's approaching Christmas, I thought it was time to give back; and so, in a break from tradition on this page, I have two very special offers for you, my wonderful readers.

I recently bought two pairs of sandals as gifts for my daughters for Christmas, from a fledgling Singapore company, and was so blown away by the quality of everything from the shoes themselves to the packaging and the entire experience that I contacted the founder of the company, and she has kindly agreed to give readers of Things That Make You Go Hmmm... a 20% discount on any sandals ordered in December (along with free worldwide shipping).

The company is called George Blue, and the sandals are leather, handmade in Tuscany, Italy, and simply gorgeous.

If you are looking for a gift for any lady who loves shoes, I can say with complete confidence that she will absolutely love these sandals. Click HERE to visit the site, and enter the code "GB-TTMYGH" to enjoy the 20% discount.


(FYI: There is no financial benefit for me whatsoever if you buy a pair of these sandals — they are just beautiful shoes and I thought readers would love them!)



Secondly, the acclaimed new documentary Money For Nothing: Inside the Federal Reserve is now available on DVD and digital download at


Narrated by the award-winning actor Liev Schreiber, Money For Nothing features interviews with incoming Fed Chair Janet Yellen and former Fed Chair Paul Volcker, as well as Jeremy Grantham, John Mauldin, Jim Grant, and many of the world's best financial minds.

Money For Nothing is the first film to take viewers inside the world's most powerful financial institution. It has been featured on CNBC, NPR, Bloomberg TV, MSNBC, and Fox Business.

With the debate about Fed "tapering" making headlines every day, Money For Nothing DVDs make a great holiday gift for friends, family, and clients.

The makers of this important documentary have very kindly offered TTMYGH readers a 10% discount, so please click here to visit the site and order your copy with the promo code "TTMYGH".

Click HERE To View Trailer.

(Again, in extending this offer I receive no compensation from the makers of Money For Nothing. It's just a movie I think everybody should see — and it makes a great Christmas gift!!)

There... never let anybody say this is a one-way street!!




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

16 December 2013


Use of this content, the Mauldin Economics website, and related sites and applications is provided under the Mauldin Economics Terms & Conditions of Use.

Unauthorized Disclosure Prohibited

The information provided in this publication is private, privileged, and confidential information, licensed for your sole individual use as a subscriber. Mauldin Economics reserves all rights to the content of this publication and related materials. Forwarding, copying, disseminating, or distributing this report in whole or in part, including substantial quotation of any portion the publication or any release of specific investment recommendations, is strictly prohibited.

Participation in such activity is grounds for immediate termination of all subscriptions of registered subscribers deemed to be involved at Mauldin Economics’ sole discretion, may violate the copyright laws of the United States, and may subject the violator to legal prosecution. Mauldin Economics reserves the right to monitor the use of this publication without disclosure by any electronic means it deems necessary and may change those means without notice at any time. If you have received this publication and are not the intended subscriber, please contact


The Mauldin Economics website, Yield Shark, Bull’s Eye Investor, Things That Make You Go Hmmm…, Thoughts From the Frontline, Outside the Box, Over My Shoulder, and Conversations are published by Mauldin Economics, LLC. Information contained in such publications is obtained from sources believed to be reliable, but its accuracy cannot be guaranteed. The information contained in such publications is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. The opinions expressed in such publications are those of the publisher and are subject to change without notice. The information in such publications may become outdated and there is no obligation to update any such information.

Grant Williams, the editor of this publication, is an adviser to certain funds managed by Vulpes Investment Management Private Limited and/or its affiliates. These Vulpes funds may hold or acquire securities covered in this publication, and may purchase or sell such securities at any time, all without prior notice to any of the subscribers to this publication. Such holdings and transactions by these Vulpes funds may result in potential conflicts of interest, although the editor believes that any such conflict of interest will be mitigated by the nature of such securities and the limited size of the holdings of such securities by the applicable Vulpes funds.

John Mauldin, Mauldin Economics, LLC and other entities in which he has an interest, employees, officers, family, and associates may from time to time have positions in the securities or commodities covered in these publications or web site. Corporate policies are in effect that attempt to avoid potential conflicts of interest and resolve conflicts of interest that do arise in a timely fashion.

Mauldin Economics, LLC reserves the right to cancel any subscription at any time, and if it does so it will promptly refund to the subscriber the amount of the subscription payment previously received relating to the remaining subscription period. Cancellation of a subscription may result from any unauthorized use or reproduction or rebroadcast of any Casey publication or website, any infringement or misappropriation of Mauldin Economics, LLC’s proprietary rights, or any other reason determined in the sole discretion of Mauldin Economics, LLC.

Affiliate Notice

Mauldin Economics has affiliate agreements in place that may include fee sharing. If you have a website or newsletter and would like to be considered for inclusion in the Mauldin Economics affiliate program, please go to Likewise, from time to time Mauldin Economics may engage in affiliate programs offered by other companies, though corporate policy firmly dictates that such agreements will have no influence on any product or service recommendations, nor alter the pricing that would otherwise be available in absence of such an agreement. As always, it is important that you do your own due diligence before transacting any business with any firm, for any product or service.

© Copyright 2013 by Mauldin Economics, LLC.

Discuss This


We welcome your comments. Please comply with our Community Rules.


Nick Proferes

Dec. 21, 2013, 2:30 p.m.

I guess, as Benjamin Disrali noted “there are lies, damn lies, and statistics”.  But it seems to me that rising debt in the UK is much less of an issue than net wealth.  The mean (average) net wealth (and that is net of debt) in the UK according to the latest Credit Suisse report, is $US243,570 per adult and the median is $US111,524.  Now, the quoted £28,489 of mean debt translates as $46,543 at today’s rates against a figure of $US53,976 for 2012 per adult in the UK (from the Credit Suisse report for that year).  That against the 2012 net median wealth per adult of $US115,245 and a net mean wealth per adult of $US250,005.  Now, we may need to allow for changes in exchange rates here but it seems there has been little change and that the important thing for most UK residents is not their relative wealth or debt in US dollars but in their local currency. In that regard, the 2013 Credit Suisse report concludes “At 17% of
gross wealth, debt is not exceptionally high by international standards.”

Dallas Kennedy

Dec. 18, 2013, 6 a.m.

Nice Margaret Atwood quote. Emerson said something similar, “always pay,” because you will sooner or later.

The rising dependency of federal and (some) state income tax revenues on the top 10-20% helps to explain the increasingly plutocratic orientation of the Democratic party. California is a case study/laboratory for this trend—a government highly dependent on large but volatile income tax revenue from the wealthy, supported by a demographic with sharply higher income inequality as the middle class has fled the state. Interestingly, it’s the “red” states that have *less* income inequality—fewer people dependent on government, more people working.

It should be pointed out that these numbers don’t include payroll (FICA) or sales taxes, which are much more regressive.

Dec. 18, 2013, 12:54 a.m.

In addition to ‘Money For Nothing’ I would also recommend these recent BBC Radio 4 documentaries:


Inside The Fed


Dec. 16, 2013, 9:39 p.m.

People are raiding their savings, which have lately undergone their biggest drop in 40 years, enough to prompt a former Downing Street adviser to warn that such figures are “desperately worrying… If you just withdraw money and spend you are talking about a recipe for long-term economic decline.”

Downing Street is desperately worried!!!!!???????  Are they mad?????
What did they think the result of near zero interest rates on savings would be?
Obviously if you can’t get any interest on savings, you might as well spend it before it devalues into nothing.