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“Self-reliance can turn a salesman into a merchant; a politician into a statesman; an attorney into a jurist; an unknown youth into a great leader. All are to be tomorrow's big leaders - those who in solitude sit above the clang and dust of time, with the world's secret trembling on their lips.”
“A politician thinks of the next election, a statesman, of the next generation.”
“History doesn't repeat itself, but it does rhyme.”
“...back in the Seventies and Eighties many [politicians] had a life outside politics, but now the majority seemed to have very little experience of life beyond Westminster. They had gone from university to jobs as political advisers and public relations consultants and then into Parliament without ever doing real jobs with real people.”
THINGS THAT MAKE YOU GO HMMM... ....................................................3
Secret and Lies of the Bailout .......................................................................15
An amazing mea culpa from the IMF’s chief economist on austerity ..........................16
If Bonds Are A Bubble, Why Haven't They Already Burst? ........................................17
Egyptian pound hits record lows; banks running out of dollars ................................18
Death of Hugo Chavez could set off shock waves across region ...............................19
Chinese anti-corruption drive nets official with 47 mistresses .................................20
Merkel's To-Do List for 2013 ..........................................................................21
America’s European moment ........................................................................23
CHARTS THAT MAKE YOU GO HMMM... ..................................................25
WORDS THAT MAKE YOU GO HMMM... ...................................................28
AND FINALLY ................................................................................30
Folks, let me be absolutely clear at the outset. I am definitely NOT someone with any kind of political agenda. I am not a Republican nor am I a Democrat. I am neither Labour nor Conservative. I hold just about all politicians in equally low regard, the only exceptions being those I hold in utter contempt (yes Tony, I'm talking about you).
I know, as I put finger to keyboard this week, that my thoughts are likely to raise the hackles of many, cause an outpouring of sympathy in others and, possibly, cost me a few subscribers (such is the strange spell cast by politics over normally reasoned and rational human beings). But frankly, I am so utterly outraged by what I have been forced to watch that I can't stop myself from venting any longer.
For those of you who feel a Brit has no right criticizing the US political system, I will point to my already-on-the-record love of America as well as the fact that I lived in Connecticut and worked in Manhattan for the best part of nine years; and so I like to think I have paid enough taxes (and claimed no benefits, I might add) to justify at least a little time in the pulpit. But, as Piers Morgan has recently demonstrated, American intolerance of British opinions is quite high at the moment. For what it's worth, though, I hope America still has the receipt, because we do NOT want him back.
'Why the US? Why not stick it to the UK?' you might ask. Well, frankly, US politics matter more to the rest of the world, the people involved are just too damn good at being ridiculous (Herman Cain? Maxine Waters? Sarah Palin? Michelle Bachmann? MAXINE WATERS?), and it'll be the UK's turn again soon enough, don't worry.
For some reason, talking about politics is a hugely divisive thing to do. People extrapolate what they want from your opinion, stick a nice, tidy label on you, and file you under the letter 'F' for either 'Friend' or 'Foe'. Once declared, your politics define you, and that is a great shame.
If I could find a politician worthy of my vote, I would vote for that politician regardless of the party he or she represented—that is the hallmark of a leader: someone who transcends the aisle of any house.
There are a few elected representatives out there for whom I have a great deal of respect and admiration—chief amongst them Ron Paul in America and Nigel Farage in the UK; but whilst, as characters upon the world's political stage, the two men couldn't be farther apart (the quiet, respectful, grandfatherly bearing of Dr. Paul is a world away from the pugnacious, outspoken lightning rod that is Mr. Farage), they have something in common that marks them out (in my mind at least) as leaders: they have taken a stand against institutions that they see as bringing great harm to their fellow citizens and have both fought tirelessly and consistently to try and change the impact those institutions have upon the electorate in their respective countries.
For Dr. Paul the bugbear has been the Federal Reserve and 'big government', whilst for Mr. Farage it is the Confederacy of Dunces in Brussels.
This past few weeks, the world has been in thrall to something that was dubbed 'the fiscal cliff' (probably by Willem Buiter, who gave birth to the irritating 'Grexit'). To recap—for those amongst you who have perhaps been incarcerated in North Korea for the past six months—this was a set of automatic spending cuts and tax increases that the honorable men and women deemed worthiest to represent their fellow citizens in Washington DC set up to come into force simultaneously at the end of 2012. One can only assume this was done to inspire the necessary urgency amongst them to 'get a deal done'.
Source: Goldman Sachs
At its gravest (chart, previous page) the 'cliff' would have meant a near-6% dent in US GDP (so, clearly, that was never going to be allowed to happen); at its least harmful, the can would be re-kicked and the whole thing would end up being another drama of little or no substance—a tempest in a teacup as Jamie Dimon would probably have called it (and that was by far the most likely outcome). Throw into the mix the need to raise the US debt ceiling, a deadline that again occurred almost simultaneously, and it was easy to see why so much attention was being paid to the outcome. Except...
The outcome was never in doubt. These fools were always going to go over the cliff—once the requisite degree of drama had been generated—before frantically agreeing to a deal that cast them as tireless heroes but solved nothing and kicked the can further down the road. The only question marks were, which side would score a political victory from the fiasco, and how big would the relief rally be before reality set in again?
So, how did the solution play out? Well, at one minute after midnight a deal was struck which essentially put a line through all of the tax increases that were due to come into effect (except those on the very wealthy) and postponed all of the spending cuts that were to take effect, too. The net result, it is estimated, will be a 1% drag on the US economy in 2013.
That people have the gall to call that any sort of solution beggars belief—and yet US stock markets rallied about 3% on the news that nothing bad had happened and wouldn't for another couple of months.
This deal did absolutely nothing to stop the rampant entitlement spending, and the additional revenue which will (supposedly) be garnered from the deal will make virtually no dent in the annual deficit, as can be seen from the chart at left.
This kick-the-can approach, followed by press conferences announcing the miraculous, hard-fought solution which was actually designed to merely sell the public on the ability of their elected representatives to do their job, put me in mind of another political locale—Europe.
Yes, the home of political dysfunction now has a rival for its formerly undisputed crown, and that rival is in similarly dire political straits, as the Economist pointed out in a that I read after penning this piece:
(Economist): For the past three years America’s leaders have looked on Europe’s management of the euro crisis with barely disguised contempt. In the White House and on Capitol Hill there has been incredulity that Europe’s politicians could be so incompetent at handling an economic problem; so addicted to last-minute, short-term fixes; and so incapable of agreeing on a long-term strategy for the single currency.
Those criticisms were all valid, but now those who made them should take the planks from their own eyes. America’s economy may not be in as bad a state as Europe’s, but the failures of its politicians—epitomised by this week’s 11th-hour deal to avoid the calamity of the “fiscal cliff”—suggest that Washington’s pattern of dysfunction is disturbingly similar to the euro zone’s.
In no more than a handful of weeks, we will go through the whole fiasco all over again as Republicans (no doubt still stinging from what was portrayed in the media—fairly accurately, I might add—as complete capitulation) and Democrats (who will finally have to confront their own Waterloo when spending cuts are addressed) come together to do battle over the sequester and the raising of the debt ceiling.
The problem is that both parties are addicted to spending money that they don't have, as can be readily seen from the chart below, which shows the US federal debt increase by president.
Source: Truthful Politics
Whilst Obama's presidency has seen the debt levels go parabolic, Reagan and both Bushes certainly did their bit to get us to where we are today. (Funnily enough, the real fun didn't get started until immediately after Nixon severed the dollar's link to gold. But that is a story for another day. Let's not cloud the issue here).
It seems as though the only thing there is no bubble in right now is leadership. Where are the leaders? Where are the statesmen and -women? It's not just the USA; Europe and the UK are suffering from a similar vacuum, whilst China is riddled with graft as a few powerful individuals attempt to squirrel away as much money as they can without upsetting the apple cart. The problem is so endemic and reaches such high levels of the Party that Xi Jinping's promise to address the issue is already doomed to failure. How bad is it?
(Time, June 2011): Last week, the People's Bank of China published a report that looked at corruption monitoring and how corrupt officials transfer assets overseas. The report quotes statistics based on research by the Chinese Academy of Social Sciences: 18,000 Communist Party and government officials, public-security members, judicial cadres, agents of state institutions and senior-management individuals of state-owned enterprises have fled China since 1990. Also missing is about $120 billion.
The People's Bank of China report stresses that until now, nobody has been able to provide an authoritative figure of the exact sum pilfered, and the figure of $120 billion is still only an estimate. It is nonetheless an astronomical sum. It is equivalent to China's total financial allocation for education from 1978 to '98. Each escaped official stole, on average, $7 million. But the real numbers might be even higher. Some media have reported that the wife of the deputy chief engineer of the Ministry of Railways, Zhang Shuguang, who was recently caught for corruption, owns three luxury mansions in Los Angeles and has bank savings of as much as $2.8 billion in the U.S. and Switzerland. This example gives a glimpse into the broader picture.
But I digress. Let's stick to the West and specifically America for now.
The last quote on the front page of this week's Things That Make You Go Hmmm... comes from Anthony Jay, the octogenarian writer of the UK's greatest political satire, Yes Minister, a show about an incompetent junior minister in the UK government that ran on British TV in the 1980s (the show evolved into Yes, Prime Minister when the bumbling hero of the show, the Right Honourable Jim Hacker MP, ascended to the rank of Prime Minister despite his obvious ineptitude for the post). Jay and his writing partner, Jonathan Lynn, have recently been commissioned to resurrect the series, setting it in the modern political arena; and, since Jay has spent a considerable amount of time immersed in the environs of Westminster, his observation is both important and, sadly, points to a phenomenon which extends far beyond the UK.
As far back as 2009, JP Morgan's Michael Cembalest published an article on Forbes.com entitled 'Obama's Business Blind Spot'. In it he took issue with the low level of private-sector experience amongst the President's cabinet:
I looked back at the history of the Presidential Cabinet. Starting with the creation of the Secretary of Commerce back in 1900, I compiled the prior private-sector experience of all 432 cabinet members, focusing on those positions one would expect to participate in this discussion: Secretaries of State; Commerce; Treasury; Agriculture; Interior; Labor; Transportation; Energy; and Housing & Urban Development (a).
Many of these individuals started a company or ran one, with first-hand experience in hiring and firing, domestic and international competition, red tape, recessions, wars and technological change. Their industries included agribusiness, chemicals, finance, construction, communications, energy, insurance, mining, publishing, pharmaceuticals, railroads and steel; a cross-section of the American experience. [I even gave partial credit to attorneys focused on private-sector issues, although one could argue this is a completely different kettle of fish]. One thing is clear: The current administration, compared with past Democratic and Republican ones, marks a departure from the traditional reliance on a balance of public- and private-sector experiences.
This lack of private-sector experience is totally in keeping with the behaviour of governments that fundamentally believe they are the solution to every problem. In actual fact, the truth is far closer to Ronald Reagan's famous remark:
[G]overnment is not the solution to our problem; government is the problem.
This was underlined this past week when the curious announcement was made that Timothy Geithner will not only be stepping down as Treasury Secretary but will be leaving before the debt-ceiling negotiations are concluded. But, as strange as I found that piece of news, it was an article on Bloomberg about his likely successor that had me banging my head on my desk:
Treasury Secretary Timothy F. Geithner plans to leave the administration at the end of January, even if President Barack Obama and congressional Republicans haven’t reached an agreement to raise the debt ceiling, according to two people familiar with the matter.
After giving in to Obama’s previous entreaties to stay as long as needed, Geithner has indicated to White House officials and Wall Street executives that he is unlikely to change his departure plans this time, increasing pressure on the president to name his successor at Treasury, said the people, who requested anonymity to discuss the private talks…
So far, so good, but then, this:
White House Chief of Staff Jack Lew remains the leading contender for the Treasury job, the people said. Because Lew’s experience in financial markets is thin, Obama may seek to name a Wall Street executive as deputy Treasury secretary, they said.
While Lew, 57, worked as a managing director for Citigroup from July 2006 until the end of 2008, he’s spent most of his career in government. He served as director of the Office of Management and Budget for both Obama and President Bill Clinton and was an aide to the late Tip O’Neill, former speaker of the U.S. House.
How in the name of all that is remotely sensible can your leading candidate for the Treasury Secretary role have 'thin' financial markets experience? Now? After 2008? With all the problems facing the banking sector? Lew may well be an extremely smart guy; but surely, a man who spent two years at Citigroup in his 50s after a career in government isn't the smart choice. Presumably, however, the likes of Jamie Dimon or Lloyd Blankfein wouldn't be quick to subject themselves to the confirmation process...
But then, to top it all off, things took yet another turn for the absurd.
How utterly ridiculous have things become? Well, this week we find ourselves in the truly bizarre situation of actually spending more time discussing the '$1 trillion coin'.
A google search for the phrase '$1 trillion coin' already yields close to 2 million results, and that number is climbing faster than the signatories to the 'Deport Piers Morgan' petition.
But what the hell is this all about? Are we seriously talking about producing a magical coin that will solve the debt problem? Folks, it looks like that's the world we now live in—a world inhabited by 'journalists' who actually spend their time writing articles with headlines such as:
Can a $1 Trillion Coin End Debt Ceiling Crisis?
Allow me. No.
Is a $1 Trillion Coin a Good Way to Avoid Another Debt-Ceiling Impasse?
I'll take this one too. NO!
Hell, CNN even aired a TWO-AND-A-HALF-MINUTE segment on whether this was a feasible solution, which included the opinion of 'economist' Joe Gagnon, who thought it was a good idea:
It's better than a government shutdown, it's better than defaulting on the debt. It's better than the bad alternatives.
It gets even better.
A Democratic Senator from Brooklyn, NY, whose name—and I wish I were kidding—is Jerry Lewis Nadler, said:
I'm being absolutely serious... It sounds silly but it's absolutely legal.
But perhaps the pick of the quotes is this one from the segment anchor, Brian Todd:
...and by the way, none of this requires Congressional consent, so that's what makes it attractive to so many observers here.
It may be technically legal, but why do these people insist on opening their mouths and letting the words escape before engaging their brains?
You cannot simply mint a 1-oz platnum coin, stamp '$1 Trillion' on it, and assume it is worth $1 trillion dollars.
This is simply a cute way for politicians to technically stay within the law and have free reign over spending again. Jeez.
The last I saw, at the close of the market on Friday, 1 oz of platinum was worth precisely $1,559 (almost exactly $100 less than an ounce of gold), and yet we still have to put up with crap like . Folks, just take a look at the chart (left) from Zerohedge. Case closed. Please.
The whole idea for the coin stems from a rather obscure article in legal statute , which is entitled 'Denominations, specifications, and design of coins' and contains the following thirty-seven words:
(k) The Secretary may mint and issue platinum bullion coins and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to time.
Of course, there is the now-obligatory petition on the White House website and, as I write this, over 3,000 4,000 people sufficiently detached from reality have signed it. Such is the world in which we live.
When will this end? When will the world wake up to the fact that large parts of it are hopelessly broke? When will the public become sufficiently engaged in the world around them to demonstrate the requisite level of outrage? At what point does the cavalier attitude of 'the 1%' come face to face with any kind of justice? Will anyone ever go to jail? Mozilo? Fuld? Corzine? ANYBODY?
With one last thumbing of the nose to the 99%, on Friday it emerged that ex-Vice President Al Gore had attempted to save himself $5 million in higher taxes by rushing through the $500mn sale of Current TV to Qatari-sponsored Al Jazeera before the fiscal cliff deadline. Sadly (for Gore, at least) he was unsuccessful and will be subject to the 5 percent increase in capital gains tax that came into effect on Jan 2nd.
(NYT): Al Jazeera did not disclose the purchase price, but people with direct knowledge of the deal pegged it at around $500 million, indicating a $100 million payout for Mr. Gore.
Mr. Gore and his partners were eager to complete the deal by December 31st, lest it be subject to higher tax rates that took effect on January 1st, according to several people who insisted on anonymity because they were not authorised to speak publicly.
But the deal was not signed until Wednesday.
There is an insidious pattern of ineptitude, corruption, and outright dishonesty amongst public servants at the highest levels today—made possible by a public too lazy to try to understand the ramifications of the lies to which they are being subjected.
With each successful escape from detection and prosecution, the audacity of those perpetrating the crimes (yes, crimes) increases. Where will it end? I don't know, but if history is any guide, it won't end either well or peacefully.
Now, I'm not normally one to start making predictions about outrageous possible outcomes, but, as George Santayana famously said:
Those who do not remember the past are condemned to repeat it.
So, by way of illustrating exactly what he was referring to, I give you the following passage lifted in its entirety from Wikipedia. The passage is extremely interesting (particularly for any 'Les Miserables' fans out there) and explains events during the lead-up to the French Revolution:
(WIkipedia): At a governmental level the sequence of events leading to the revolution was sparked by France's effective bankruptcy due to the enormous cost of previous wars.
The attempt to challenge British naval and commercial power in the Seven Years' War was a costly disaster, with the loss of France's colonial possessions in continental North America and the destruction of the French Navy. French forces were rebuilt and performed more successfully in the American Revolutionary War, but only at massive additional cost. France's inefficient and antiquated financial system was unable to finance this debt, a problem both partially caused and exacerbated by a grossly inequitable system of taxation. Faced with a political impasse, the king called an Assembly of Notables in 1787.
Meanwhile, the royal court at Versailles was seen as being isolated from, and indifferent to, the hardships of the lower classes. While in theory King Louis XVI was an absolute monarch, in practice he was often indecisive and known to back down when faced with strong opposition.
While he did reduce government expenditures, opponents in the parlements successfully thwarted his attempts at enacting much needed reforms. Those who were opposed to Louis' policies further undermined royal authority by distributing pamphlets (often reporting false or exaggerated information) that criticized the government and its officials, stirring up public opinion against the monarchy.
Many other factors involved resentments and aspirations given focus by the rise of Enlightenment ideals. These included resentment of royal absolutism; resentment by peasants, laborers and the bourgeoisie toward the traditional seigneurial privileges possessed by the nobility; resentment of the Catholic Church's influence over public policy and institutions; aspirations for freedom of religion; resentment of aristocratic bishops by the poorer rural clergy; aspirations for social, political and economic equality, and (especially as the Revolution progressed) republicanism; hatred of Queen Marie-Antoinette, who was falsely accused of being a spendthrift and an Austrian spy; and anger toward the King for firing finance minister Jacques Necker, among others, who were popularly seen as representatives of the people.
Interesting, huh? Now, I could rewrite that last passage and give it some modern-day context; but that would be too easy, so just to make things a little more fun, as we continue with our little history lesson I'll give you a few modern-day terms (at left) and let you choose where in the passages on this page and the following page you'd like to insert them.
The Wikipedia entry continues under the subheading 'Pre-revolution':
Louis XVI ascended to the throne amidst a financial crisis; the state was nearing bankruptcy and outlays outpaced income. This was because of France’s financial obligations stemming from involvement in the Seven Years War and its participation in the American Revolutionary War. In May 1776, finance minister Turgot was dismissed, after he failed to enact reforms. The next year, Jacques Necker, a foreigner, was appointed Comptroller-General of Finance. He could not be made an official minister because he was a Protestant.
Necker realized that the country's extremely regressive tax system subjected the lower classes to a heavy burden, while numerous exemptions existed for the nobility and clergy. He argued that the country could not be taxed higher; that tax exemptions for the nobility and clergy must be reduced; and proposed that borrowing more money would solve the country's fiscal shortages. Necker published a report to support this claim that underestimated the deficit by roughly 36 million livres, and proposed restricting the power of the parlements.
This was not received well by the King's ministers, and Necker, hoping to bolster his position, argued to be made a minister. The King refused, Necker was fired, and Charles Alexandre de Calonne was appointed to the Comptrollership. Calonne initially spent liberally, but he quickly realized the critical financial situation and proposed a new tax code.
The proposal included a consistent land tax, which would include taxation of the nobility and clergy. Faced with opposition from the parlements, Calonne organised the summoning of the Assembly of Notables. But the Assembly failed to endorse Calonne's proposals and instead weakened his position through its criticism. In response, the King announced the calling of the Estates-General for May 1789, the first time the body had been summoned since 1614. This was a signal that the Bourbon monarchy was in a weakened state and subject to the demands of its people.
Quotes about history from the likes of Mark Twain and George Santayana are well-known for a reason. History does have a habit of repeating itself, and people really do need to stop taking what they read and hear about at face value and take a good look around them.
Does anybody in America really think that inflation is running at just 1.8%? Has anybody's cost of living increased just 1.8% over the past 12 months?
What about Europe? Does 50% youth unemployment in Greece and Spain really sound like their problems are fixed and about to go away any time soon?
Is there a Frenchman alive who, having seen what has happened since Hollande's 75% tax rate was imposed, still believes that the measure will raise the money they said it would?
How about Japan? Anybody care to explain to me how Abe-san can generate 3% inflation AND keep Japanese government bonds from collapsing? The two are mutually exclusive—or they used to be.
'The first duty of a man is to think for himself', said José Marti, a Cuban philosopher and political theorist who died in 1885 at the tender age of 32; but today so very few people heed that sage advice that it is enough to make me weep.
What is going on around us, right now, here, in 2013, is going to shape the world for a generation; and the 'solutions' being put in place—and then spun by those lurching from one crisis to another, desperate to staunch the flow of blood—are the solutions of dire necessity and of political survival. Nothing more.
The debt is not being addressed. The spending is not being addressed. Magic coins are being tossed in the air as potential solutions.
It's simple: Too much has been borrowed. Too much has been promised. Too much has been spent.
The time has come to take the pain, and for that to happen the world needs not politicians but leaders.
I fear the places from whence they may spring.
“One of the saddest lessons of history is this: If we’ve been bamboozled long enough, we tend to reject any evidence of the bamboozle. We’re no longer interested in finding out the truth. The bamboozle has captured us. It’s simply too painful to acknowledge, even to ourselves, that we’ve been taken. Once you give a charlatan power over you, you almost never get it back.”
- Carl Sagan
“Most human beings have an almost infinite capacity for taking things for granted. That men do not learn very much from the lessons of history is the most important of all the lessons of history.”
- Aldous Huxley
Until next time...
Britain's recent food price rises are "just the tip of the iceberg," and consumers should brace themselves for "massive" hikes in some commodities this year, the managing director of Waitrose has warned.
Mark Price said food price inflation would rise further as the heavy rainfall last year meant that many farmers did not plant crops for 2013.
Mr Price told the Sun: “We’re seeing input food inflation of around 3 to 3.5pc, but we expect it go up to as much as five.
“In some commodities, the increases will be massive,” he added.
“It’s bread, vegetables, all produce. The apple crop was down 20 to 30 per cent so apple prices have to go up. You have only seen the tip of the iceberg,” said Mr Price.
Last year was the second wettest year across the UK in records dating back more than a century to 1910.
Mr Price's comments came as the upmarket supermarket group enjoyed record sales over Christmas as it grabbed more customers from Britain’s “big four” supermarkets.
It has been four long winters since the federal government, in the hulking, shaven-skulled, Alien Nation-esque form of then-Treasury Secretary Hank Paulson, committed $700 billion in taxpayer money to rescue Wall Street from its own chicanery and greed. To listen to the bankers and their allies in Washington tell it, you'd think the bailout was the best thing to hit the American economy since the invention of the assembly line. Not only did it prevent another Great Depression, we've been told, but the money has all been paid back, and the government even made a profit. No harm, no foul – right?
It was all a lie – one of the biggest and most elaborate falsehoods ever sold to the American people. We were told that the taxpayer was stepping in – only temporarily, mind you – to prop up the economy and save the world from financial catastrophe. What we actually ended up doing was the exact opposite: committing American taxpayers to permanent, blind support of an ungovernable, unregulatable, hyperconcentrated new financial system that exacerbates the greed and inequality that caused the crash, and forces Wall Street banks like Goldman Sachs and Citigroup to increase risk rather than reduce it.
The result is one of those deals where one wrong decision early on blossoms into a lush nightmare of unintended consequences. We thought we were just letting a friend crash at the house for a few days; we ended up with a family of hillbillies who moved in forever, sleeping nine to a bed and building a meth lab on the front lawn.
But the most appalling part is the lying. The public has been lied to so shamelessly and so often in the course of the past four years that the failure to tell the truth to the general populace has become a kind of baked-in, official feature of the financial rescue. Money wasn't the only thing the government gave Wall Street – it also conferred the right to hide the truth from the rest of us. And it was all done in the name of helping regular people and creating jobs. "It is," says former bailout Inspector General Neil Barofsky, "the ultimate bait-and-switch."
The bailout deceptions came early, late and in between. There were lies told in the first moments of their inception, and others still being told four years later. The lies, in fact, were the most important mechanisms of the bailout. The only reason investors haven't run screaming from an obviously corrupt financial marketplace is because the government has gone to such extraordinary lengths to sell the narrative that the problems of 2008 have been fixed. Investors may not actually believe the lie, but they are impressed by how totally committed the government has been, from the very beginning, to selling it.
Consider it a mea culpa submerged in a deep pool of calculus and regression analysis: The International Monetary Fund’s top economist today acknowledged that the fund blew its forecasts for Greece and other European economies because it did not fully understand how government austerity efforts would undermine economic growth.
The new and highly technical paper looks again at the issue of fiscal multipliers – the impact that a rise or fall in government spending or tax collection has on a country’s economic output.
That it comes under the byline of fund economic counselor and research director Olivier Blanchard is significant. Fund research is always published with the caveat that it represents the views of the researcher, not the institution itself. But this paper comes from the top, and attempts to put to rest an issue that has been at the center of debate about how fast countries should move in their efforts to tame large debts and deficits.
If fiscal multipliers are small, countries can cut spending faster or raise more in taxes without much short-term damage. If they are large, then the process can become self-defeating, at least in the short run, with each dollar of government spending cuts, for example, costing the economy more than a dollar in lost output and thus actually increasing debt-to-GDP ratios.
That is what has been happening with a vengeance in Greece, where fund forecasters, as part of the country’s first bailout program in 2010, predicted that the nation could cut deeply into government spending and pretty quickly bounce back to economic growth and rising employment.
Two years later, the Greek economy is still shrinking and unemployment is at 25 percent.
Of course no two circumstances are alike. Shut out of international bond markets, Greece had little choice but to begin bringing its public finances into line or face a catastrophic default. Financing wasn’t available to sustain prior spending levels. For an economy that has been reeling for several years, however, a billion or two in extra government programs or investment could have kept a few small businesses open and kept a few more families employed and spending.
“Forecasters significantly underestimated the increase in unemployment and the decline in domestic demand associated with fiscal consolidation,” Blanchard and co-author Daniel Leigh, a fund economist, wrote in the paper.
This held that the yield on equities would always be lower than that on government bonds because, unlike bonds, equities offered a hedge against inflation. It was a principle that held good for well on 50 years, and was a surprisingly difficult mentality, once engrained, to shake off.
Many, therefore, missed out on the long bull market in government bonds. The cult of equity continued to hold sway for much longer than it deserved. But it was not always so, hence the term “reverse” yield gap.
Before 1959, the norm was for equities to yield more than bonds, both in the UK and the US. Since the crisis began, we’ve reversed spectacularly back to the pre-1959 norm. The yield on gilts is now substantially lower than that on shares.
And indeed, in some respects, it is this norm which is the more logical. It is entirely rational at a time when investors fear deflation that the relative security of bonds should become overpriced, and that equity yields should be relatively higher to reflect the threat of a sustained collapse in dividends.
The big investment question for this year is whether the yield gap might again begin to close, or even reverse back to its pre-crisis state. In any case, one of the most fashionable calls among investment analysts right now is that at some stage in the next 12 months, we’ll see the start of a great rotation out of bonds and back into equities.
Certainly, it is quite hard to believe bond yields could sink any lower. But here’s a question. If everyone thinks government bonds are a bubble riding for a fall, how come it’s not already happened?
Growth and inflation are two sides of the same coin, so if you think there is some chance of a cyclical recovery over the next year, you’d certainly be selling bonds. Equities are already to some extent reflecting such an outcome, with some substantial gains over the past year.
So to bet on a significant rotation is also to bet on the return of growth.
Well, everyone hopes for the best, but beyond the bounce in equity markets, which may be more driven by hunt for yield than faith in rip-roaring earnings growth, evidence for it is pretty thin on the ground.
I’m perfectly prepared to believe that bond yields could rise a bit from present, historic lows, where they offer the absurdity of a negative real rate of return.
Indeed, I can even envisage 10-year gilt yields rising by as much as 100 basis points. But such a rise would only take them back to where they were a year ago.
BBC: - The Egyptian pound has fallen further against the US dollar, despite efforts by the country's financial authorities to halt its slide on the money markets.
The renewed decline came as the central bank held the second in a series of currency auctions.
It sold $74.8m at a cut-off price of 6.3050 Egyptian pounds to the dollar, less than the equivalent price of 6.2425 in Sunday's first auction.
The auctions are aimed at rationing the availability of dollars, in a first step towards allowing the Egyptian pound to float freely.
As always the government is "not concerned" about this situation. Here is a quote from the official source (ESIS):
ESIS: - Egypt is not concerned about the dollar’s recent rise against the Egyptian pound, President Mohamed Morsy said on Monday 31/12/2012.
The market will stabilize within days and funds are being pumped in to balance the market, Morsi said during a meeting with Arab media members.
And the Presidential Spokesman Yasser Ali had this to say:
The Central Bank of Egypt has put in place urgent measures and kept watchful eye on the monetary market after some people aroused panic over the entire banking system of the country...
All is well...
In the mean time the pound hit a record low this morning vs. the US dollar in an unprecedented move.
On Thursday, the ideologue – who has used his country's oil riches to bankroll left-wing bed-fellows across Latin America, forged a cosy alliance with Iran and assailed the US from its back yard - is due to be celebrating his next inauguration.
But there will be no joyous scenes. For this weekend, he is lying close to death in a Cuban hospital bed, quite possibly being kept alive on a ventilator, suffering from respiratory problems and a severe lung infection after his fourth round of surgery in 18 months for an undisclosed type of pelvic cancer.
His illness has already sparked a constitutional crisis in Venezuela, where he won a hotly-contested election in October but has not yet started a new term. His death would send shock waves across the region and could endanger the survival of Cuba's communist regime which is dependent on his largesse for cheap oil.
And despite their protestations of socialist solidarity, his senior lieutenants have already begun a power struggle to replace the 58-year-old former paratroop commander who has ruled the country as a one-man show since 1998.
With the president's demise, several factions will be vying for control of the country's political future and oil wealth -- the diehard ideologues known as Chavistas; his former comrades in the powerful armed forces; the rich and powerful Chavez clan, led by his older brother Adan; and the new breed of politically-connected tycoons who have enriched themselves hugely even as its leader pursued his "21st century socialism".
On Friday night, Nicolas Maduro, the country's vice-president and Mr Chavez's anointed successor, gave the clearest indication that the inauguration might not take place on Thursday, claiming that Mr Chavez could instead be sworn in by his Supreme Court appointees, at a later date and unspecified location - if still alive.
That stance will infuriate opposition leaders who insist that the constitution requires Mr Chavez to take the oath on Jan 10 or for new elections to be called within 30 days.
But their view is unlikely to win the day in a country where the ruling party dominates all branches of government.
And on Saturday, Diosdado Cabello was re-elected as National Assembly leader, putting him inline to become caretaker president if Mr Chavez does not recover.
The vote cemented his position as the third most powerful figure after the president and Mr Maduro, his potential rival.
"As a patriot ... I swear to be supremely loyal in everything I do, to defend thefatherland, its institutions, and this beautiful revolution led by our Comandante Hugo Chavez," Mr Cabello said as he took the oath. Outside, red-clad Chavez supporters chanted their support for their absent leader.
Amid this manoeuvring, the newspaper El Nacional lamented an "information vacuum" and compared the situation to the secrecy that surrounded the deaths of Soviet dictator Josef Stalin and Mao Zedong in China.
An anti-corruption drive in China has netted suspects that include an executive accused of cavorting with gigolos, a young woman who owns 11 apartments, a provincial official with 47 mistresses and a vice-mayor with ties to a drug gang. Many alleged misdeeds were exposed by internet users – mostly whistleblowers and rogue journalists – and promulgated via unusually freewheeling coverage in state-owned media.
Another, less vaunted government clampdown – this one on dissenting views – leaves little hope for a Chinese people-power renaissance. Over the past week authorities have surreptitiously replaced an outspoken editorial in a liberal newspaper with brazen propaganda, scrubbed an open letter calling for constitutional governance from the internet, and closed down an outspoken Beijing-based magazine for advocating political reform.
Communist party secretary Xi Jinping said corruption could lead to the "end of the party". His administration has ruthlessly singled out venal officials and is implementing a series of regulations to limit displays of official waste. Yet analysts say that Xi's anti-graft drive is only skin-deep, and that party leaders will be hard pressed to eradicate corruption while maintaining their perennially hard line on dissent.
"For a short period of time, you can have draconian measures that can deter corruption, but in the long term the best way to deal with it is to make sure that there are checks and balances," said Steve Tsang, a professor of Chinese studies at the University of Nottingham.
Yet there are many reasons why a culture of corruption will persist – officials are low-paid and poorly supervised, and the lack of a free press and independent judiciary eliminates any prospect of well-measured oversight.
"What we are likely to see, following Xi Jinping's commitment to his new policy, is that government officials will be a lot more careful in not displaying their ill-gotten gains," said Tsang. "They will do enough to reassure Xi that things are under control, and that is as far as they will go."
Since Xi became the top Communist party leader in November, the central leadership has made an all-out drive to appear transparent and down to earth. Xi has banned a number of wasteful government practices, including prolonged speechifying and traffic-disrupting motorcades. A ban on expensive liquor at military banquets caused some prestigious brands' stock prices to plummet. The state news agency Xinhua has published extensive profiles of the country's seven most powerful leaders, a well-meaning stab at transparency, although they offer little more than breathless praise.
The recent explosion of corruption allegations on China's popular micro-blogs, however, has done more to reveal the depth of the problem than validate official efforts to eliminate it. A blog post on 30 December accused the party secretary of an impoverished county in Yunnan province of purchasing 10 SUVs and getting drunk with a group of attractive women.
The vice-mayor of a small city in Guangdong province lost his job after a subordinate exposed his connection to a local drug ring. Blog posts accuse the deputy chief of the province's Land Resource Bureau of having affairs with 47 mistresses and receiving almost £2.8bn in bribes.
Chinese media have accused the twentysomething daughter of a former housing official in Zhengzhou, capital of central Henan province, of owning 11 flats. Her 27-year-old brother may own as many as 14. Her family is under investigation.
As such, there are five things that Merkel ought to tackle in 2013 as the election approaches:
Taking a Stand
"Those who show courage, inspire courage," Merkel said in her annual New Year's address, quoting the words of beatified Catholic priest Adolph Kolping. She would do well to take those words to heart herself, instead of allowing debates to go on for months without taking a position. She has, for example, criticized the far-right National Democratic Party (NPD), but hasn't said whether she supports renewed efforts to have it banned. Poverty among the elderly must be addressed, she said, without offering any suggestions as to how that might be achieved. Gay and lesbian married couples don't necessarily need to be given the same tax privileges that heterosexual couples receive, she said, but that decision should be left up to the courts.
Merkel is the master of vagueness. She waits, and then changes course at the last moment in accordance with mainstream opinion -- if at all. This way she avoids causing anyone any pain and removes the risk of her own defeat. But a bit more clarity is to be expected from a chancellor, and in 2013, voters want to know what they can expect after the next election.
Source: Der Spiegel
Risking a Bit More Enthusiasm
Merkel is not a gifted orator. Her speech often feels wooden, and sometimes sentences slip out that sound unintentionally funny, but aren't particularly rousing. The chancellor is an emotional person, though, and she should show it more often.
Certainly Merkel's measured demeanor has something to do with the fact that people trust her in times of crisis. Verbal sedatives and cultivated tedium don't inspire any enthusiasm for politics, though. A bit more passion in the Chancellery would do the country good.
Stabilizing Europe against the Crisis
Merkel stoked big expectations for the last euro crisis summit, saying she wanted to set the course for building an economic and currency union with her European colleagues. But by the time leaders of the 27 European Union member nations sat down together in Brussels in December, Merkel's zeal for reform had dwindled. A roadmap for the future had to suffice rather than any major goals.
There may be good reasons for that, such as sputtering French-German relations, or the fact that the prosperous North and ailing South have different ideas about what "more Europe" should mean. The upcoming election may also have something to do with it, as people tend to bristle when they hear that Brussels might gain more power.
Still, holding back now would be both reckless and sad. Just because the euro crisis has eased up doesn't mean it's over. The chancellor ought to use this time to create further economic and fiscal policy coordination, strengthen budgetary controls and implement a financial transaction tax. These tasks are immense -- and Merkel should tackle them.
For the past three years America’s leaders have looked on Europe’s management of the euro crisis with barely disguised contempt. In the White House and on Capitol Hill there has been incredulity that Europe’s politicians could be so incompetent at handling an economic problem; so addicted to last-minute, short-term fixes; and so incapable of agreeing on a long-term strategy for the single currency.
Those criticisms were all valid, but now those who made them should take the planks from their own eyes. America’s economy may not be in as bad a state as Europe’s, but the failures of its politicians—epitomised by this week’s 11th-hour deal to avoid the calamity of the “fiscal cliff”—suggest that Washington’s pattern of dysfunction is disturbingly similar to the euro zone’s in three depressing ways.
The first is an inability to get beyond patching up. The euro crisis deepened because Europe’s politicians serially failed to solve the single currency’s structural weaknesses, resorting instead to a succession of temporary fixes, usually negotiated well after midnight. America’s problems are different. Rather than facing an imminent debt crisis, as many European countries do, it needs to deal with the huge long-term gap between tax revenue and spending promises, particularly on health care, while not squeezing the economy too much in the short term. But its politicians now show themselves similarly addicted to kicking the can down the road at the last minute.
This week’s agreement, hammered out between Republican senators and the White House on New Year’s Eve, passed by the Senate in the early hours of New Year’s Day and by the House of Representatives later the same day, averted the spectre of recession. It eliminated most of the sweeping tax increases that were otherwise due to take effect from January 1st, except for those on the very wealthy, and temporarily put off all the threatened spending cuts (see article). Like many of Europe’s crisis summits, that staved off complete disaster: rather than squeezing 5% out of the economy (as the fiscal cliff implied) there will now be a more manageable fiscal squeeze of just over 1% of GDP in 2013. Markets rallied in relief.
But for how long? The automatic spending cuts have merely been postponed for two months, by which time Congress must also vote to increase the country’s debt ceiling if the Treasury is to be able to go on paying its bills. So more budgetary brinkmanship will be on display in the coming weeks.
And the temporary fix ignored America’s underlying fiscal problems. It did nothing to control the unsustainable path of “entitlement” spending on pensions and health care (the latter is on track to double as a share of GDP over the next 25 years); nothing to rationalise America’s hideously complex and distorting tax code, which includes more than $1 trillion of deductions; and virtually nothing to close America’s big structural budget deficit. (Putting up tax rates at the very top simply does not raise much money.) Viewed through anything other than a two-month prism, it was an abject failure. The final deal raised less tax revenue than John Boehner, the Republican speaker in the House of Representatives, once offered during the negotiations, and it included none of the entitlement reforms that President Barack Obama was once prepared to contemplate.
The reason behind this lamentable outcome is the outsize influence of narrow interest groups—which marks a second, unhappy parallel with Europe. The inability of Europeans to rise above petty national concerns, whether over who pays for bail-outs or who controls bank supervision, has prevented them from making the big compromises necessary to secure the single currency’s future. America’s Democrats and Republicans have proved similarly incapable of reaching a grand bargain; both are far too driven by their parties’ extremists and too focused on winning concessions from the other side to work steadily together to secure the country’s fiscal future.
A great interactive chart that plots the borrowing costs of the UK, France, Germany and the USA against each other with key inflection points noted. Perhaps most telling of all is how the fact that the UK's borrowing costs have climbed above those of <gasp> France is singled out as a concern. The implication is clear...
Perhaps the one bright spot (at least on face value) right now in the USA is the unemployment numbers, which continue to show improvement...
As these charts demonstrate, the headline rate is falling swiftly towards the magical 6.5% level. What happens then? Anybody's guess, but mine is that the goalposts get moved. We shall see...
Jesse updates the gold & silver pictures, after a fairly torrid start to 2013:
Macau will be the fastest growing economy this year, according to the latest estimates from our sister company, the Economist Intelligence Unit (EIU). Growth is expected to return to a faster pace as new casino projects are resumed and Chinese visitors (with rising wages) continue to raise gambling revenues. Mongolia, in second place, can also thank China for boosting its growth rate. China’s demand for minerals has driven investment in Mongolia’s mining sector. This year Oyu Tolgoi, one of the world’s largest copper and gold mines, will begin commercial production. China itself is set to grow by over 8% this year, and potentially more, depending on how the rest of the world fares. Meanwhile, Europe will still be ailing, with Greece leading the decline. Germany’s chancellor recently contended that the euro area crisis was far from over.
Georg Vrba uses a Coppock Indicator to examine the gold price and likes what he sees. According to his study:
It would appear that the indicator is now in the early stages of forming a trough as can be seen in the more detailed figure 2. It is interesting that other models (for an example see the commentary Light at the End of the Tunnel for Gold) are also expecting gains for gold. A chart from this commentary is replicated in the appendix. Once a buy signal is generated, then the odds are good for a significant increase of the gold price to occur.
It's a new year, but Rick Santelli is still alone in fighting the attitude that spending is an issue that may just be worth addressing? Certainly on CNBC, at least... It never ceases to amaze me that Rick is looked upon as some kind of 'kook', when he's the only one on this channel who says anything that is remotely realistic... (via Barry Ritholtz)
Eric Sprott's latest interview with Eric King deals with the 'trench warfare' of investing in gold after the latest FOMC minutes and the dichotomy between paper selling and physical buying of the yellow metal, as well as the recent trend for repatriation of bullion by central banks.
As always, if you're at all interested in the precious metals markets, Eric's insight is invaluable.
Thorstein Polleit asks the pertinent question, "What do Bankers Know About Money & Banking?"
Thorstein's conclusion is perhaps not one that most bankers might agree with. (Thanks, Bob)
It's hard to decide which is more amazing, the fact that Russian drivers are so bad or the fact that so many Russians drive around with their video cameras running, capturing the insanity for the rest of the world to marvel at.
I guess one leads to the other. Either way, here is thirteen minutes of Russian motorized mayhem—falling trees, gunshots, lightning strikes, and low-flying military aircraft; this one has it all...
Grant Williams is a portfolio and strategy advisor to Vulpes Investment Management in Singapore—a hedge fund running over $250 million of largely partners’ capital across multiple strategies.
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In Q4 2012, we will be launching the Vulpes Agricultural Land Investment Company (VALIC), a globally diversified agricultural land vehicle that will provide truly diversified exposure to the agricultural sector through a global portfolio of physical farmland assets.
Grant has 26 years of experience in finance on the Asian, Australian, European, and US markets and has held senior positions at several international investment houses.
Grant has been writing Things That Make You Go Hmmm... since 2009.
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
THINGS THAT MAKE YOU GO
By Grant Williams
08 JANUARY 2013
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