Things That Make You Go Hmmm...

The Greatest?

November 20, 2012

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The Greatest?


"I never thought of losing, but now that it's happened, the only thing is to do it right. That's my obligation to all the people who believe in me. We all have to take defeats in life."




"The fight is won or lost far away from witnesses."





"The man whose whole life is spent in performing a few simple operations, of which the effects are perhaps always the same, or very nearly the same, has no occasion to exert his understanding or to exercise his invention in finding out expedients for removing difficulties which never occur. He naturally loses, therefore, the habit of such exertion, and generally becomes as stupid and ignorant as it is possible for a human creature to become."




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

Prison of Debt Paralyzes West .......................................................................19

S&P: Australia is Spain in Waiting ...................................................................20

Where Spain Is Worse Than Greece .................................................................21

The Time-Bomb at the Heart of Europe ............................................................22

The Brave New Fed ....................................................................................23

China’s Xi May Unveil Plan for Change Late 2013 ................................................25

Can Xi Jinping Bring About the Change China Needs? ............................................26

The Central Bankers' Potemkin Village .............................................................27

Abe Threatens to Turn BOJ into an Unlimited Piggy Bank for the Government ..............28

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

WORDS THAT MAKE YOU GO HMMM... ..................................................34

AND FINALLY ................................................................................35

Things That Make You Go Hmmm...

I was just a kid during the golden age of heavyweight boxing.


I would lie in bed in the middle of the night listening to fights being held in faraway places between giants whose names were all too familiar to me. Ken Norton, George Foreman, Joe Frazier, Ernie Shavers, Leon Spinks, and, of course, the greatest of them all: Muhammad Ali. Before cable TV, all we had in the UK were radio commentaries, but as a young boy with a vivid imagination, I could picture every punch landing as the commentators described the violent dance that was unfolding in places I had never even heard of. Zaire and Manila meant nothing to me but conjured up images of palm trees and jungles, and I reveled in every stolen moment of every fight.

I was seven years old when Ali fought Foreman—in what was then Zaire but now goes by the far less evocative name of the Democratic Republic of the Congo—in the famous Rumble in the Jungle, and I was eight when Ali and Frazier met in the Thrilla in Manila a year later.

Back then, heavyweight boxing WAS Muhammad Ali. Foreman, Frazier, Norton, et al. were all benchmarked by how they fared against Ali. When they fought each other, it was always an event, but when Ali took his place in one corner of the ring, it became a spectacle.

In July 1979, having reclaimed the heavyweight title after a shock loss to the unfancied Spinks eight months earlier and in the process becoming the first man to win the world heavyweight title on three occasions, Ali announced his retirement.

As a young boxing fan, I was devastated that the greatest boxer of my (or arguably any) lifetime was hanging up his gloves and that I would never again listen to him fight (though history and hindsight have taught me that relief and delight were the appropriate emotional responses to the news). Yes, Ali was going out on his own terms as a legend, but for one young boy in England, the realization that I had listened to him dancing round the ring on the other side of the world for the last time was a hard thing to come to terms with. The beauty of listening to Ali's fights on the radio was that, in my mind's eye, he was forever Cassius Clay—young, lithe, and lightning-fast. The reality, of course, was that by 1979 he was a shadow of his imperious younger self.

Had I known then what I know now about human nature in general and the egos of athletes in particular, I would have known full well that I hadn't heard my last Muhammad Ali fight, but the circumstances under which I would witness his return were tragic in the extreme.

In early 1980, Ali announced that he was coming out of retirement to face the new, undefeated heavyweight champion of the world, his former sparring partner, Larry Holmes.

Holmes was eight years younger than the 38-year-old Ali and was in his prime. He had taken the title by defeating Norton in June of 1978 and had been unbeaten ever since. Holmes was in great shape, and his body had suffered a fraction of the damage that had been inflicted upon his former employer, but Ali was still Ali, and fans around the world truly believed that their hero could defy both time and the ageing process to beat Holmes and cement his legacy once and for all. For Ali, alongside a longed-for return to the spotlight, an $8 million purse was temptation enough to bring him back to the sport that had given him everything and to which he had given everything in return.

Around the time of this fight, Ali had begun to ail, and although it wasn't widely known, his health had begun to deteriorate quickly. It was only with the subsequent release of Thomas Hauser's book "Muhammad Ali, His Life and Times" in 1989 that the truth became clear:

(James Slater): Now, for the first time, it was apparent just how dangerous it was for Ali to have fought again. No doubt the majority of fans will be aware of the 1980 findings of the Mayo Clinic; how they noted that Ali had "mild ataxic dysarthria," which is a problem using the muscles required to coordinate speaking, and how Ali had problems even conducting a basic finger-to-nose coordination test. Despite all this and more, however, the most beloved boxer in history was allowed to risk serious injury, perhaps even a fatality, against a primed and peaking heavyweight champion of the world.

Ali's rapidly deteriorating health was hidden by his bluster, hyperbole, and outlandish statements about how fit and strong he was. His confident assertions were enough to fool fans into thinking this was a fight in which he stood a good chance of winning, even though, deep down, they most likely all knew something was wrong.

(James Slater): People had such faith in the great man that if he said he was going to do something, no matter how illogical it seemed, they believed he would do as he said. No one was ever going to tell Ali he was a shot fighter and that he was unable to do what he said he would. Ali was bigger than life, and even members of his own family were unable to stop him doing what his ego told him he still could. Putting it more succinctly, promoter Don King asked, "How are you gonna tell God he can't make thunder and lightning anymore?!"

By now, a couple of pages into this week's Things That Make You Go Hmmm..., you are possibly wondering once again where the hell I am going with this. Well, seeing as you've made it this far, I'll tell you.

Ali was so confident and had so much apparent belief in what he said about the state of his health and his chances of success that a public who genuinely wanted to believe in him were easily convinced that he would triumph even though the cold, hard facts should have been apparent to any objective observer.

There is absolutely no difference whatsoever between the reality behind Ali's pronouncements and those of today's politicians and central bankers, and the reaction of boxing fans in 1980 and those of the investing public in 2012.

Investors desperately want to believe the words of the likes of Schaeuble, Geithner, Merkel, Bernanke, Obama, Hollande, and the rest of the gang, while they in turn are desperate to convey a sense of invincibility in the hope that nobody will see the real sickness that lies beneath the thin veneer of confidence.

As I travelled through the United States recently, I was caught up in the frantic final days of an election campaign that reached feverish intensity. The day of my arrival coincided with the release of the latest US unemployment numbers, and, with a headline number of 171,000 new jobs being created (which was far above the "estimated" 125,000), things looked good for the US economy—at least that is what the showman in the blue corner would have had you believe.

Naturally, the hype came thick and fast:

(VoA): At a rally near Columbus, Ohio, Friday, the president concentrated on the better-than-expected number of new jobs.

"This morning we learned that companies hired more workers in October than at any time in the last eight months," said Obama.

No mention, obviously, of the fact that the unemployment rate had ticked up one-tenth of a percentage point to 7.9% (after miraculously falling below the magic 8% number the previous month). Nor, for that matter, was the U16 Unemployment number referred to, as the 14.6% of the US workforce that it covers is not the kind of statistic that will win an election. The 7.9% print, whilst ignored by Obama on the campaign trail, was significant in that it represented a level of joblessness that was one-tenth of a percentage point higher than it was when he took office in January 2009. But Obama was hardly the lone cheerleader whipping up fans into a frenzy of misplaced belief. Romney was no better:

(AP): Mitt Romney says the one-tenth-of-a-point increase in the unemployment rate to 7.9 percent is, quote, "a sad reminder that the economy is at a virtual standstill."

The Republican presidential nominee says voters will decide Tuesday between what he calls stagnation and prosperity.

He made the comments in a statement while traveling from Norfolk, Va., to Milwaukee, to continue campaigning in the final days of the White House race.

Romney argues that President Barack Obama's policies have crushed America's middle class, and that the nation can do better. He's also promising to make real changes that will lead to a real recovery.


Source: Barry Ritholtz

This desire to hide the truth about the dire situation facing the global economy is something that is shared by leaders all around the world and that in itself should be reason enough for investors to listen to that creeping sense of something not being right that they no doubt feel deep down inside.

It's not just Obama and Romney, though. Everywhere you look, there are political boxers telling the world why they are still "The Greatest" with all the enthusiasm they can muster and, thus far, they have been successful in generating the kind of blind belief the world had in Ali in 1980—the belief that, no matter how strong the evidence, they will be able to win the fight.

At some point, though, these clowns are going to have to get in the ring with a global economy that is meaner, more menacing, and far nastier than Larry Holmes ever was.

When the dancing around in the form of Quantitative Easing, LTROs, OMTs, and Operation Twist has run its course, when the boasting is done and the seconds are called out from the ring, we will be left with the sad sight of pale, past-their-prime governments and central banks being pounded by a remorseless economy. It will be a one-sided fight, and investors will be begging for the referee to step in and stop it, just like Ali's fans did 32 years ago. Unfortunately, the referee that night allowed the fight to continue way too long—simply because Ali was Ali and he had persuaded everybody that he was far healthier than he actually was. After several years of rose-tinted prognostications by anybody with a political interest in things getting better, don't expect the referee to step in anytime soon once the bell rings and the battering begins.

This past week, Greece has once again become the focus of the world's interest (despite the fact that many believed that Greece—and its €208 billion economy—had been discounted long ago) as the game continued to keep it from defaulting and being forced back to the Drachma.

Amazingly enough, Greece managed to sell €4 billion in short-term debt (and when I say "short-term," I mean €2.76 billion of FOUR-WEEK bonds yielding 3.95% and a further €1.3 billion of three-month debt yielding 4.2%). Of course, this wouldn't have been possible without the ECB once again relaxing their collateral rules to enable Greek banks to buy these bonds from the Greek government and then deposit them back at the ECB as collateral for "real" money. As Ponzi schemes go, this one really is up there, as you can see from the graphic on the next page.

There are two variables at play on the Greek fiasco right now; time and money. The money variable (i.e., the willingness and the ability to increase the amount of it thrown pointlessly into the Black Hole of Greek finances) is, at this stage, pretty much exhausted—which basically leaves the time variable. Greece is asking for two more years to get its house in order, and it looks as though it may well get it, despite the recent Troika report, which was scathing in its assessment of all things Greek. Unfortunately, though, relations between the IMF and European governments appear to be a little shaky right now:

(UK Daily Telegraph): Jean-Claude Juncker, president of the Eurogroup of finance ministers, announced Greece would be given an extra two years to meet its debt reduction target of 120pc of GDP by 2022 instead of 2020.

"The target, as far as the time-frame is concerned, has been postponed to 2022," he said.

A visibly angered Mrs. Lagarde, the managing director of the IMF, shook her head and rolled her eyes at the announcement that breaches the Washington-based fund's condition that Greek debt must become sustainable by 2020.

"We clearly have different views," she said. "In our view the appropriate target is 120pc by 2020. It is critical that the Greek debt be sustainable."

The 2020 "debt sustainability" target was agreed as the condition for the IMF's involvement in the second Greek bail-out agreed in March this year and an EU decision to breach it could jeopardise the whole international package.

The one thing that wasn't up for discussion, however, was the possibility that official holdings of Greek debt would ever take a haircut. Or was it?

Belgian Central Bank Governor and ECB Governing Council member Luc Coene seemed to think it was inevitable that a public-sector haircut would be necessary in order to deal with Greece's mounting debt problems:

(Reuters): Resolving Greece's problems will probably require a writedown of at least part of its debt, and Spain urgently needs to seek a bailout, European Central Bank Governing Council member Luc Coene was quoted as saying.

Coene made the comments at a debate at the University of Ghent, Belgian daily De Standard reported on Thursday.


On Greece, Coene appeared to share the position of the International Monetary Fund, which believes that some Greek debt must be written down to make the burden manageable.

A matter of a few hours later, Europe brought out the big guns to make it abundantly clear that no such thing was going to happen:

(Vancouver Sun): The European Union's top economic official sought to rule out any write-off of Greece's debt to governments on Thursday after a European Central Bank policymaker said for the first time that a "haircut" on part of it was probable.

A row between euro zone governments and the International Monetary Fund over how to make Greece's giant debt mountain manageable is holding up the release of 31 billion euros ($39.5 billion) in emergency loans needed to keep Athens afloat.

IMF officials have argued privately that some writedown for euro zone governments is necessary to make Greece solvent, but Germany, the biggest contributor to the bloc's bailout funds, has repeatedly rejected the idea of taking a loss on holdings of Greek debt, saying it would be illegal.

EU Economic and Monetary Affairs Commissioner Olli Rehn told reporters in Helsinki: "The solution will be a combination of various elements, one is not enough.

"But it is essential that the principal not be touched. There is a strict unanimity on this within the euro zone."

Just in case Olli Rehn wasn't a big enough name, Angela Merkel sought to add her considerable (political) weight to the debate:

(UK Daily Telegraph): I hope that the time is near when we can reach the solution that is needed [...] we did not talk about debt haircuts, you know our view and that has not changed, nor should it.

Ahhh... the good old clarity of message from European leaders.

All this noise came in the wake of the latest Troika report, which attempts to provide the world with an unequivocal view of the reality of the situation in Greece, and nobody should ever feel as though perhaps they are pulling the kind of tricks that Muhammad Ali did thirty years ago in trying to make everybody believe that Greece's health is far better than it actually is. I mean, why would they?

The Troika have a long history of accurate forecasts and can be relied upon to, if anything, err on the side of caution when it comes to making prognostications about future economic growth in a particular country.

Their track record on predicting the likely path of Greece's economy is, frankly, nothing short of 100%—which, in such a difficult arena as economic projection, is a very difficult trick to pull off. There's only one, tiny problem...

As you can see from the chart (below), their forecasts have become steadily more optimistic as the Greek economy has fallen further and further into recession/depression.*


Source: Zerohedge

*delete where applicable

Jean-Claude Juncker, the man who admitted that "when it gets serious, you have to lie," assured the world that Greece "will" be given an extra two years and that extra time "will" mean they are able to hit their target. Hmmm...

(Economist): ...extending the bailout by two more years means Greece will need to borrow some €32.6 billion more from its euro-zone partners. That amounts to a third bail-out.

Even if this extra help is agreed somehow, Greece will be far from safe. The previous bailout, which included a big haircut on private bondholders (aka Private Sector Involvement, or PSI), was supposed to bring Greece's debt below 120% of GDP by 2020. That will be missed by a wide margin.

Quite how wide is still a matter of dispute. The "debt sustainability analysis" has been omitted from the troika's report. But sources say the IMF reckons Greek debt will be around 160% of GDP in 2020, while the European Commission puts it lower at about 140% of GDP. Massaging of the figures, which are sensitive to forecasts of the rate of economic growth (or Greece's case, of shrinkage) and the interest rate should eventually reconcile the two.

Wolfgang Schaeuble seemed to think that perhaps the targets were unrealistic:

(UK Daily Telegraph): Wolfgang Schaeuble, Germany's finance minister, risks widening the rift with Christine Lagarde by describing Greece's 2020 debt sustainability target as "possibly a little too ambitious".

He also said that the €32.6bn (£26bn) funding gap created by the two-year extension should be plugged by lowering the rate that Greece pays on its loans, NOT via governments taking a writedown on their holding of Greek bonds, something that the IMF has long advocated.

Amazingly enough, in a sign that capitulation may, in fact, not be so far away, Schaeuble seemed to confirm a story in Bild that there was a plan afoot to give Greece the next three tranches of bailout funds (€31.3 billion due now, €5 billion due in Q3, and €8.3 billion due in Q4) in one go as if they are sick of listening to the Greeks continually begging for more money.

"Fine! Take all your money, but don't come crying to me when it's all gone." Yeah, right.

So Europe's leaders dance around, talking smack and telling the world that everything is under control—just like Ali did—but they are not the only ones trying to create the impression that things are a lot better on the surface than they are beneath.

Take the UK government, for example.

Last week, the UK government announced they were suspending their Quantitative Easing program due to the fact that the effects of it were not easily provable (hello?? It cost you £325 billion to work that out???).

(UK Daily Telegraph): When QE was last raised in July, there was more pessimism about the outlook, but the long-term projections were not much different.

No, what changed was the Bank's view of QE and whether doing more money printing would help growth. Spencer Dale, the chief economist who has long had his reservations about QE, was the first to have a stab at the problem—warning that rather than driving growth, it was fanning the fires of inflation. As inflation has arguably been the strongest domestic headwind to recovery, he concluded that more QE could actually be harmful.

Last week, the respected former rate-setter Charles Goodhart added his voice to the argument, suggesting QE might be "counterproductive" by pushing up pension deficits and forcing companies to divert cash from investment into their retirement schemes.

Others, such as Charlie Bean, the deputy governor, have said QE works but might not be delivering much economic value anymore. Paul Tucker, the other deputy governor, put it more pithily—saying the policy was losing its "bite". In other words, the MPC appears to be falling out of love with QE in its current form.

So let's get this straight; the chief economist thinks that printing money out of thin air might increase inflation, a "former rate-setter" thinks that it might cause problems for pensions, and the deputy governor of the Bank of England believes that pushing on a string might not work very well?

Ladies and gentlemen, I give you some of the finest financial minds in British public service.

This announcement was closely followed by the announcement that there had been a "shock" rise in UK inflation:

(UK Daily Telegraph): UK inflation jumped to a surprise five-month high of 2.7pc in October as higher university tuition fees and food costs pushed up the cost of living for British households.

The figures from the Office for National Statistics were higher than expected. Economists had forecast that the consumer price index (CPI) would rise from a 34-month low of 2.2pc in September to between 2.3pc and 2.5pc in October.

The figures also showed that the Retail Prices Index (RPI), which includes housing costs, rose to 3.2pc in October from 2.6pc in September as mortgage rates also increased. The RPI rise between September and October was the largest monthly increase for two and a half years.


Source: UK Guardian

The interesting thing about UK inflation statistics is that, in January 1989, with the traditional measurement of RPI (Retail Price Index) standing at 7.5%, the government decided to adopt the CPI as its measurement of inflation. The CPI basically stripped out a bunch of housing-related costs and taxes, oh, and happened to instantly lower "inflation" to 4.9%.

Float like a butterfly, sting like a bee.

The talk about ceasing the BoE's QE program was quickly denied by none other than Merv The Swerve himself:

(UK Daily Mail): But answering recent speculation that the Bank may be stepping back from further QE, Sir Mervyn [King] said in today's quarterly inflation report: "The committee has not lost faith in asset purchases as a policy instrument, nor has it concluded that there will be no more purchases."

But hidden amongst the weeds was the real reason for halting QE (albeit temporarily):

(Jeremy Warner): So now we know why the Bank of England's Monetary Policy Committee called a halt to more Quantitative Easing this week—it's because the Chancellor and the Governor of the Bank of England have concocted a backdoor way of doing the same thing.

The latest little (actually quite big at a tidy £35bn) money printing wheeze comes about as close to outright monetizing of government spending as it is possible for the Bank of England to go without simply creating the money and handing it by the lorry load to the Treasury, a la Weimar.

What the Treasury has decided to do is take the accumulated interest payments on the stock of government debt the Bank of England has bought under quantitative easing, and credit it to the Government's books rather than the Bank of England's. The total is £35bn, of which the government intends to take £11bn this financial year and £24bn next.

Amazingly enough, the government then went on to justify its actions in the most extraordinary way possible—by basically saying "It's OK. The other kids do it all the time":

(Jeremy Warner): The Government excuses its actions by saying that it is only bringing itself into line with practice in Japan and the US, the other major economies to be practicing substantial QE right now. It might also be argued that to the extent the European Central Bank indulges in bond purchases, it practices something quite similar too.

Each economy is as sick as the next, and now the central banks are pointing to each other as the reason for continuing to do what they are doing to disguise the truth about their health. It has become so bad that late last month, Japan's economy minister laid his cards firmly on the table:

(Mike Shedlock): Economy Minister Seiji Maehara pressed the Bank of Japan for more action yesterday, saying the nation is "falling behind" in monetary stimulus and is at risk of another credit-rating downgrade.

"There's a high chance that Japan's economy will have two consecutive quarters of contraction through December," said Yoshimasa Maruyama, chief economist at Itochu Corp. in Tokyo. "The slump in advanced nations is spreading to emerging economies." ... In a speech in Tokyo today, BOJ Governor Masaaki Shirakawa vowed to conduct "seamless" monetary easing as the Japanese economy is "leveling off."

And there you have it. "Falling behind." It has officially become a race to debase currencies.

Sorry? What is "seamless monetary easing"? Well, I'm not entirely sure. Let's ask Mish:

(Mike Shedlock): Inquiring minds might be wondering "What the hell is seamless easing?" (as opposed to good old-fashioned QE).

It's a good question, and one I cannot answer for sure, but I very much suspect Governor Shirakawa is simply adding superfluous words to make it sound important, so as to appear as if the BOJ is not impotent (which of course it is).

Adding superfluous words to change perception? Come on now, surely not. Ali would never have done that...

Japan's former prime minister and now prime-minister-in-waiting (for such is the nature of Japanese politics) seemed to get the message this week and placed the easing bit firmly between his teeth:

(Chicago Tribune); Japan's main opposition leader Shinzo Abe said on Wednesday that the Bank of Japan should continue monetary easing until it achieved 3 percent inflation, signalling the central bank could come under more political pressure after the next general election.

Abe's Liberal Democratic Party (LDP) leads in opinion polls, which puts the former prime minister in pole position to become the next premier in an election expected within months.

"The Bank of Japan basically needs to continue unlimited easing till 3 percent inflation is achieved," Abe told a gathering of business executives and academics, stressing that beating deflation and countering the yen's strength were Japan's most urgent economic policy issues.

For those of you who haven't really followed Japan (except to have a vague understanding that whatever they have been doing is, apparently, not the way to go), a little history lesson is in order and what better (and faster) way to do that than via a picture?

In the chart below, the blue shaded area represents the time over the last 25 years that Japan has had inflation at or in excess of 3%, demonstrating just how Herculean a task Abe-san has set himself.


Source: Bloomberg

It's a long way from -0.5% to +3% and, whilst getting there in a vacuum may just be possible, trying to do it when just about all the major currencies against which you are trying to ease are attempting to do the same thing may be a bridge too far for Japan.

Although Abe's words this week seemed to be taken at face value as volume in the EWJ ETF exploded, the yen flirted with the 81.5 level, and the Nikkei 225 breached 9,000, it remains to be seen whether all the bluster is just more Ali-type hype. Time will tell.

And that brings us to perhaps the biggest showboats of them all: Barack Obama, Nancy Pelosi, Harry Reid, and John Boehner.

This week has seen a cacophony of noise around the Fiscal Cliff as all parties tried to convince the world that there was a strong likelihood that a deal could be struck in time to avert disaster. But before we get to the main protagonists, let's turn things over to a man whose job title should be "First Cheerleader," Timothy Geithner:

(The Hill): Treasury Secretary Tim Geithner said Friday that he believed a budget deal could be accomplished "within several weeks" and stated that the tone of a meeting with congressional leaders was "very good."

"You heard each of the leaders say coming out that it was a very constructive meeting," Geithner told Bloomberg TV. "You know, they said what you'd hope for them to say at this point, which is that this is something we can do, we're committed to do it, we want to do it as soon as we can, we know the stakes are very high."

Boehner's take?

(USA Today): "I believe that we can do this and avert the fiscal cliff that's right in front of us today..."



(USA Today): "It has to be about cuts, it has to be about revenue, it has to be about growth, it has to be about the future," she said. "[The meeting] was good. I feel confident that a solution may be in sight."


Mr. President?

(BBC): "I think we're all aware that we have some urgent business to do. We've got to make sure that taxes don't go up on middle-class families, that our economy remains strong."

"So our challenge is to make sure that we are able to cooperate together, work together, find some common ground, make some tough compromises, build some consensus to do the people's business," Obama said.

Wait a minute... "remains'"strong? OK... another time.

This is certainly better than the kind of hardline rhetoric we saw in August of 2011 during the debt ceiling negotiations, but I can't help but feel as though this is a whole bunch of Ali-style showboating, designed to disguise the fact that there is a serious division amongst Democrats and Republicans after four years in which the two parties have somehow managed to drift even farther apart (see previous Things That Make You Go Hmmm...) and now find themselves in a situation where the GOP feel as though, based on the close popular vote, they have a mandate from the people of the US, whilst the Democrats—returned to the White House in an electoral-college landslide—feel likewise:

(UK Guardian): President Barack Obama used the first weekly radio address of his second term Saturday to vow that he would stick to an election promise to raise tax contributions from the richest Americans to tackle the "fiscal cliff".

Obama's first order of business following Tuesday's victory at the polls is to tackle a series of tax hikes and spending cuts that will be triggered in the new year if there is no wide-ranging deal with Congress on a deficit-trimming budget.

If such a deal fails, many experts are predicting the US economy could fall back into recession. But the Republican-controlled House of Representatives has said it will not countenance any tax rises as part of the agreement.

In his new address, Obama said that was not acceptable: "I refuse to accept any approach that isn't balanced. I will not ask students or seniors or middle-class families to pay down the entire deficit while people making over $250,000 aren't asked to pay a dime more in taxes."

The president added that he believed this election victory over the Republican challenger Mitt Romney had given him a mandate to carry out his promise. "This was a central question in the election. And on Tuesday, we found out that the majority of Americans agree with my approach," he said.

The simple truth is this: Obama is a lame duck and will be unable to get anything enacted into law without the acquiescence of the Republican House which, in turn, cannot enact any legislation that the Democrat majority on the Senate doesn't approve of and that President Obama doesn't sign into law.

Now, showboating aside, does that sound like a situation whereby a solution is going to be easy to come by? I don't think so either.

So we find ourselves in the bizarre situation whereby the only people capable of effecting policy in the United States (at least for the time being) appear to be Academic-in-Chief Ben Bernanke and the Fed governors.

What is their plan to solve things? Why, moneyprinting, of course:

(Bloomberg): A number of Fed officials said the central bank may need to expand its monthly bond purchases after the expiration in December of a program known as Operation Twist that swaps $45 billion of short-term Treasuries on its balance sheet each month for longer-term debt, minutes of the Federal Open Market Committee’s Oct. 23-24 meeting showed yesterday. The FOMC in October voted to keep buying $40 billion in mortgage bonds per month to spur the job market.

Federal Reserve Bank of San Francisco President John Williams said the central bank will probably buy about $85 billion in bonds per month starting in early 2013 and continue purchasing securities well into the second half of the year.

So... in a nutshell, the likely "Grand Plan" is to double the amount of Treasuries purchased through Operation Twist?

As my great friend Billy Baars used to say sing: Second verse, same as the first, a little bit louder and a little bit worse.

Folks, ignore the showboating. Ignore the promises that everything is going to be OK and that everything is all under control. It isn't.

Just as, thirty years ago, Muhammad Ali tried to trick the world into thinking he was still his once-mighty self, the politicians and central bankers of the world are desperately trying to trick us into believing the same thing—that once-mighty economies are still the force they were.

They're not.

Whether it's Greece's chances of staying in the euro (they can't), Germany's chances of agreeing to pay for their profligate southern neighbours (they won't), the UK's idea that fictional interest payments are actually real money (they're not), or the US's belief that their economy remains strong (it doesn't)—eventually, reality is going to hit home, and hit home hard.

For Muhammad Ali, the day when reality finally crashed through his carefully constructed facade of invincibility was October 4, 1980. There's no telling when the various days of reckoning are coming to global economies, but one thing is for certain; no matter how hard they try to dance around the issues, no matter how strong we are told they really are, ultimately, the "seconds" will be told to leave the ring, and they will have to stand and fight on their own.

I fear the battering they are in for will be similar to that Ali suffered at the hands of Holmes that night—only this time, there is no referee to stop it.

I will leave you this week with a great observation from JPMorgan's Kenneth Langdon, who had this to say about the coordinated interventions of central banks and politicians in the global economy:

The net result of this partnership between fiscal and monetary authorities is a continuous drain of productive capital from the private sector into the non-productive public sector. Little of that capital will be put to productive use once in the hands of government bureaucrats. As a result of this decimation of capital formation in the private sector, growth will be permanently lower, which in turn creates a negative feedback for the collection of taxes. Major economies are literally being bled to death by this drain of capital from productive uses. Voters are sanctioning this economic suicide.

Amen, Kenneth. Amen.

Until next time...


Be it the United States or the European Union, most Western countries are so highly indebted today that the markets have a greater say in their policies than the people. Why are democratic countries so pathetic when it comes to managing their money sustainably?

In the midst of this confusing crisis, which has already lasted more than five years, former German Chancellor Helmut Schmidt addressed the question of who had "gotten almost the entire world into so much trouble." The longer the search for answers lasted, the more disconcerting the questions arising from the answers became. Is it possible that we are not experiencing a crisis, but rather a transformation of our economic system that feels like an unending crisis, and that waiting for it to end is hopeless? Is it possible that we are waiting for the world to conform to our worldview once again, but that it would be smarter to adjust our worldview to conform to the world? Is it possible that financial markets will never become servants of the markets for goods again? Is it possible that Western countries can no longer get rid of their debt, because democracies can't manage money? And is it possible that even Helmut Schmidt ought to be saying to himself: I too am responsible for getting the world into a fix?

The most romantic Hollywood movie about the financial crisis isn't "Wall Street" or "Margin Call," but the 1995 film "Die Hard: With a Vengeance." In the film, an officer with the East German intelligence agency, the Stasi, steals the gold reserves of the Western world from the basement of the Federal Reserve Bank of New York and supposedly sinks them into the Hudson River. Bruce Willis hunts down the culprit and rescues the 550,000 bars of gold, which, until the early 1970s, were essentially the foundation on which confidence in all the currencies of the Western world was built.


Source: Der Spiegel

Until 1971, gold was the benchmark of the US dollar, with one ounce of pure gold corresponding to $35, and the dollar was the fixed benchmark of all Western currencies. But when the United States began to need more and more dollars for the Vietnam War, and the global economy grew so quickly that using gold as a benchmark became a constraint, countries abandoned the system of fixed exchange rates. A new phase of the global economy began, and two processes were set in motion: the liberation of the financial markets from limited money supplies, which was mostly beneficial; and the liberation of countries from limited revenues, which was mostly detrimental. This money bubble continued to inflate for four decades, as central banks were able to create money out of thin air, banks were able to provide seemingly unlimited credit, and consumers and governments were able to go into debt without restraint.

This continued until the biggest credit bubble in history began to burst: first in the United States, because banks had bundled the mortgages of millions of Americans, whose only asset was a house bought on credit, into worthless securities; then around the globe, because banks had foisted these securities onto customers in many countries; and, finally, when these banks began to totter, debt-ridden countries turned private debt into public debt until they too began to totter, and could only borrow money from banks at even higher interest rates than before.

At the moment, the world has only one approach to getting out of this labyrinth of debt: incurring trillions of even more debt.

*** der spiegel / link

Australia must find a budget surplus before 2014 or it will lose its AAA rating, according to Kyran Curry, S&P sovereign analyst via the AFR:

"If there's a sustained delay in returning the balance to surplus, as the economy gathers momentum and as people start spending again, as the import demand picks up and current account blows out, we might not see the government's fiscal position as being strong enough to offset weaknesses on the external side, and that's what worries us…Australia's already, as we see it, got some credit metrics that are right off the scale when it comes to assessing Australia's external position… It's got high levels of external liabilities, it's got very weak external liquidity, and that basically means the banks are very highly indebted compared to their peers… For us, we look to Spain, which was Australia's closest peer four or five years ago in terms of having a very strong fiscal position, very similar to what Australia has at the moment; its external position was weaker, like Australia's, and it got routed very quickly… The government needed to provide support to the banks, it had to shore up growth in the economy and its debt levels more than doubled… We can see that happening in Australia's case."

I've feared this outcome since the GFC. Here's what I wrote back in June:

In short, if the sovereign gets downgraded, so do the banks and their cost of funds rises, either raising the price of credit and/or restricting its distribution. The RBA will aim to offset this with rate cuts, but how low can they go? In a global recession scenario, the RBA is probably also constrained by the need to keep some yield spread between our rates and those overseas so that capital doesn't flee our shores. Potentially, then, the resulting hit to asset prices raises unemployment further than otherwise, and the automatic stabilisers become more onerous for the Budget requiring more cuts or borrowing or both. Another downgrade might follow, so on and so forth.

I would alter that now a little. Given the mining boom peak is in sight, there is no longer any need for a global recession scenario for this to play out. The RBA has already been forced into cutting interest rates to emergency levels. The great likelihood is that they will go lower still. In short, all that needs to happen is that China continues a steady adjustment towards consumption-led growth and bulk commodity prices remain in current ranges and the rating will come under pressure, risking the feedback loop.

The kicker of course is that it may happen anyway because fiscal tightening is already required to support the rating when the economy is not strong enough. That is, we are already in the feedback loop.

*** macrobusiness / link

By most measures, Greece's economy is in worse shape than Spain's. Greece has been largely shut off from financial markets for more than two years; yields on its bonds are still sky high. Gross domestic product has fallen nearly 20% over the previous three years. Spain can still borrow from private investors, and its GDP has fallen around 5% during the crisis.

But if you take forecasts from the European Commission seriously, Greece enjoys one formidable advantage over Spain: Its economy is running well below capacity, while the Spanish economy, despite an unemployment rate around 25%, is operating relatively close to full steam.

Why is that an advantage? According to the commission, it means that the Greek unemployment rate should fall sharply if the economy starts to recover again, without causing inflation. Spain faces a much more difficult situation. If the structure of its labor market doesn't change, the commission's analysis suggests that a nascent economic recovery in Spain could be hampered by labor shortages that would spark wage inflation.

Seems like a strange thing to believe for a country with 25% of its workforce sitting idle. How can this be?

The reason is the commission's view of the Spanish labor market. During the previous decade, the Spanish unemployment rate dropped sharply as millions of Spaniards found work in the booming Spanish real estate sector.

But the bubble has burst, probably for good. This means, according to the commission's analysis, that millions of Spaniards need to be retrained to do non-real-estate-bubble-related jobs. In the meantime, their labor won't be available to do the new jobs that will drive Spanish growth in the future.

Greece faces similar problems, but they are less serious, according to the commission's analysis. Yes, the "government-borrows-money-and funds-consumption" model of growth won't be available to Greece anymore. But it didn't endure the same private-sector credit bubble that hit Spain during the previous decade.

The differences between Greece and Spain can be seen in several economic metrics published by the commission. There is the output gap, or the difference between actual GDP and potential GDP (as a percentage of potential GDP). The figure is a whopping 13% for Greece but just 4.6% for Spain.

Then take a look at the commission's estimates of the so-called non-accelerating wage rate of unemployment (NAWRU) in Greece and Spain. This is the unemployment rate below which the commission believes the inflation rate starts to rise. It's also known as the "natural rate" of unemployment. The natural unemployment rate for Greece is around 14.8%; it is 21.5% for Spain. This despite unemployment rates around 25% in both countries.

These numbers speak to the depth of the structural transformation that the commission believes Spain must endure before it can return to sustainable, non-inflationary growth.

*** wsj / link

The threat of the euro's collapse has abated for the moment, but putting the single currency right will involve years of pain. The pressure for reform and budget cuts is fiercest in Greece, Portugal, Spain and Italy, which all saw mass strikes and clashes with police this week. But ahead looms a bigger problem that could dwarf any of these: France.

The country has always been at the heart of the euro, as of the European Union. President François Mitterrand argued for the single currency because he hoped to bolster French influence in an EU that would otherwise fall under the sway of a unified Germany. France has gained from the euro: it is borrowing at record-low rates and has avoided the troubles of the Mediterranean. Yet even before May, when François Hollande became the country’s first Socialist president since Mitterrand, France had ceded leadership in the euro crisis to Germany. And now its economy looks increasingly vulnerable as well.

As our special report in this issue explains, France still has many strengths, but its weaknesses have been laid bare by the euro crisis. For years it has been losing competitiveness to Germany, and the trend has accelerated as the Germans have cut costs and pushed through big reforms. Without the option of currency devaluation, France has resorted to public spending and debt. Even as other EU countries have curbed the reach of the state, it has grown in France to consume almost 57% of GDP, the highest share in the euro zone. Because of the failure to balance a single budget since 1981, public debt has risen from 22% of GDP then to over 90% now.

The business climate in France has also worsened. French firms are burdened by overly rigid labour- and product-market regulation, exceptionally high taxes and the euro zone's heaviest social charges on payrolls. Not surprisingly, new companies are rare. France has fewer small and medium-sized enterprises, today's engines of job growth, than Germany, Italy or Britain. The economy is stagnant, may tip into recession this quarter and will barely grow next year. Over 10% of the workforce, and over 25% of the young, are jobless. The external current-account deficit has swung from a small surplus in 1999 into one of the euro zone's biggest deficits. In short, too many of France's firms are uncompetitive, and the country's bloated government is living beyond its means.

With enough boldness and grit, Mr Hollande could now reform France. His party holds power in the legislature and in almost all the regions. The left should be better able than the right to persuade the unions to accept change. Mr Hollande has acknowledged that France lacks competitiveness. And, encouragingly, he has recently promised to implement many of the changes recommended in a new report by Louis Gallois, a businessman, including reducing the burden of social charges on companies. The president wants to make the labour market more flexible. This week he even talked of the excessive size of the state, promising to "do better, while spending less".

Yet set against the gravity of France's economic problems, Mr Hollande still seems half-hearted. Why should business believe him when he has already pushed through a string of leftish measures, including a 75% top income-tax rate, increased taxes on companies, wealth, capital gains and dividends, a higher minimum wage and a partial rollback of a previously accepted rise in the pension age? No wonder so many would-be entrepreneurs are talking of leaving the country.

*** the economist / link

In the wake of last week's presidential election, financial markets appear to be coming to terms with its implications. Yet, as they focus on threats like the fiscal cliff, there doesn't seem to be much reflection on what the outcome means for the Fed. In my opinion, the impact on the Fed is vitally important from an investor perspective. Now that Mitt Romney is no longer poised to send current Fed Chairman Ben Bernanke packing off into premature academic repose, the future course of monetary policy is coming into sharper relief. And it's my contention that bond markets should feel far from relieved, at least looking out a few years.

As I wrote in the October 12th EVA, in which I attempted to outline post-election scenarios, Mr. Obama returning to office is likely to be less bond market destabilizing, on a short-term basis, than if Mr. Romney won. Thus far, based on the fall in government bond yields since the election, that seems to be the case. Mr. Bernanke will almost certainly serve out his term through next year, and he'll also plausibly have a considerable influence on the choice of his successor. Just as logically, his replacement will share his conviction that the Fed needs to continue to drench the financial system with half a trillion dollars annually that the Fed simply wills into existence.

Consequently, in the near term, the bond market is anesthetized by the belief that the Fed will remain the buyer of 100% of Treasury issuance with maturities five years or longer to facilitate the funding of its trillion-dollar deficits. (See Figure 2). But the crucial words above are "near term." In the fullness of time, the continuation of current monetary policies has to be as big a negative for the US bond market as the appointment of Paul Volcker was a positive in 1979. Yet, as previously noted, it took a few years for bond investors to catch on to how dramatically the atmospheric conditions were about to change.


Source: Evergreen GaveKal

For me, this is a poignant point in time. A master strategy that has guided me so well and benefited my clients for so long is coming to the end of its useful life. As you can see above, it's been an amazing ride. (See Figure 3).

Now, however, with 10-year Treasury note rates at 1.6%, below even today's quiescent inflation rate (instead of 10% or more above as in the early to mid-1980s), future returns are certain to be paltry at best, and certificate of confiscation-like at worst. This outlook assumes we avoid a Japan-like bout of deflation. However, given that Mr. Bernanke has made it LCD clear that his printing will know no bounds to avoid deflation, a persistently contracting CPI seems to be a most unlikely outcome.

As I have repeatedly admitted in print and innumerable conversations, the timing of when the great bond bull market meets its maker is highly debatable. It's true that our economy continues to be burdened by the lingering deflationary effects of the bursting of the real estate and lending bubble. It's also valid to say that with the Fed overtly suppressing interest rates, and announcing its intention to do so for years to come, income investors have almost no choice but to play along with the game economists call "financial repression." The key word here is almost...


China's new leadership, headed by Xi Jinping, will probably unveil new market-oriented changes in late 2013, according to Li Jiange, head of the country's biggest investment bank.

Li, chairman of China International Capital Corp. and a vice chairman of state-owned Central Huijin Investment Co., which holds stakes in the nation's biggest lenders, said the focus will probably be on reducing government intervention in the economy and breaking up state monopolies. Li spoke at Caixin Media's annual conference in Beijing yesterday.

China last week completed the most important phase of a once-a-decade power transition with Xi taking over as head of the ruling Communist Party and Li Keqiang, set to become premier in March, made No. 2 in the party hierarchy. They inherit an economy burdened by slower growth, an aging population, widening income disparity and environmental degradation that's fueling social unrest.

"Expectations are high" for the new leadership to make changes as government intervention, ranging from excessive regulation to rigid price controls, has become "unbearable" over the last couple of years, said Li, who previously worked for the Development Research Center, an organization that advises the State Council, China's cabinet.

"When inflation was high, many Chinese stores, merchants and even producers received phone calls from regulators telling them not to increase prices," Li said. "But how can a supermarket not change the price of pork if hog prices are rising," he said.

At a separate conference in Beijing yesterday, central bank Governor Zhou Xiaochuan said it was "hard to reach consensus" on detailed reforms as China is a big and unbalanced country.

The new government will continue to value changes initiated at local level although it will also still attach great importance to overall planning, he said. China must allow trial reforms so that it can test what could go wrong, he said.

Zhou, 64, wasn't named to the new central committee of the Communist Party during last week's leadership transition that saw Xi take over from Hu Jintao as head of the party, heightening speculation that he will retire from the People's Bank of China.

Xi, set to succeed Hu as president in March, may face economic growth of 7 percent in 2013, the slowest in 23 years, according to Pacific Investment Management Co., which runs the world's largest bond fund. Standard Chartered Plc sees a risk of annual expansion slumping to between 3 percent and 4 percent within 10 to 15 years without market-driven change to introduce more competition for state enterprises.

Growth this year may slide to 7.7 percent, according to the median estimate of economists surveyed by Bloomberg News from Oct. 18-22. That would be the slowest pace since 1999 and down from an annual average pace of 10.6 percent in the decade through 2011.

Li Jiange added his voice to calls by economist Wu Jinglian, billionaire entrepreneur Liang Wengen and liberals including the son of late party chief Hu Yaobang for the government to allow a bigger role for market forces, roll back the dominance of state-owned enterprises and give equal treatment to private companies.

*** bloomberg / link

In contrast to his predecessor, Hu Jintao, who always seemed to be reciting an officially approved text, the stocky, 59-year-old Xi seemed to speak with genuine personal feeling of what needs to be done in this nation of 1.3 billion people.

He talked of people's desire for a better life, for better jobs, education and health care—and for less pollution. He flashed his chubby smile unlike the ever dour Hu. His slightly bearlike stance contrasted with the ramrod backs of the Communist Party elite standing with him on the stage in the cavernous Great Hall of the People in Beijing.

There was even an impromptu element in an unexplained hour's delay in starting this final event of the week-long Communist Party Congress which has installed the country's new leadership.

Some observers with long memories of the old Soviet Union compared it to the early appearance of Mikhail Gorbachev as he sought to move the USSR towards a more relaxed and responsible system. But any comparison with Gorbachev would be an anathema to Xi and his colleagues—Gorbachev is a dirty name in China as the man who relaxed the Party's grip and brought disaster down upon it.

Therein lies the basic paradox as China moves into the Xi Jinping era.

On the one hand, its leaders acknowledge the major challenges facing them but, on the other, they are extremely reluctant to alter the power structure or the reliance of economic growth which have produced many of these problems. Meanwhile they indulge in backstairs politicking worthy of any Western party.

They fear that political reform would bring the whole edifice tumbling down, Gorbachev style. They stress Party unity above all, particularly since the drama surrounding the fall of the maverick politician, Bo Xilai, who crashed to earth this year accused of crimes, corruption and womanising after the mysterious death of the British businessman, Neil Heywood, in his southwestern fiefdom of Chongqing—but whose real sin was to have emerged as a challenger to the consensus machine that runs the People's Republic.

The bureaucracy and powerful vested interests, especially in the huge state sector of the economy, oppose reform that could affect their privileged positions. Popular protests, running to some 150,000 a year, have been met by an expansion of spending on state security, now larger than the military budget. Media are tightly controlled and censors patrol the internet.

While individual liberties have greatly increased, anybody who tries to organise political opposition is likely to end up in jail, as in the case of the Nobel Peace Prize winner Liu Xiabao who is serving 11 years for having organised a petition in favour of democracy. Xi may smile for the cameras, but this remains an iron-fisted regime which has control in all forms at its heart.

Yet, outside the serried ranks of delegates in the Great Hall of the People, everyday life in Beijing and across China went on last week in a way that takes as little account as possible of the ruling autocracy. Rather than Communism or Confucianism, the "ism" that rules in today's China is materialism. Having had a terrible 30 years under Mao, the Chinese have grasped the opportunities of market-led economic reform with both hands.

*** UK Daily Telegraph / link

Central bankers are feverishly attempting to create their own new world: a utopia in which debts are never restructured and there are no consequences for fiscal profligacy, i.e., no atonement for prior sins. They have created Potemkin villages on a Jurassic scale. The sum total of the volatility they are attempting to suppress will be less than the eventual volatility encountered when their schemes stop working. Most refer to comments like this as heresy against the orthodoxy of economic thought. We have a hard time understanding how the current situation ends any way other than a massive loss of wealth and purchasing power through default, inflation or both.

In the Keynesian bible (The General Theory of Employment, Interest and Money), there is a very interesting tidbit of Keynes' conscience in the last chapter titled "Concluding Notes" from page 376:

"It would mean the euthanasia of the rentier, and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity value of capital. Interest today rewards no genuine sacrifice, any more than does the rent of land. The owner of capital can obtain interest because capital is scarce, just as the owner of land can obtain rent because land is scarce. But whilst there may be intrinsic reasons for the scarcity of land, there are no intrinsic reasons for the scarcity of capital.


Thus we might aim in practice (there being nothing in this which is unattainable) at an increase in capital until it ceases to be scarce, so that the functionless investor will no longer receive a bonus. (emphasis added)"

This is nothing more than a chilling prescription for the destruction of wealth through the dilution of capital by monetary authorities.


Central banks have become the great enablers of fiscal profligacy. They have removed the proverbial policemen from the bond market highway. If central banks purchase the entirety of incremental bond issuance used to finance fiscal deficits, the checks and balances of "normal" market interest rates are obscured or even eliminated altogether. This market phenomenon does nothing to encourage the body politic to take their foot off the spending accelerator. It is both our primary fear and unfortunately our prediction that this quixotic path of spending and printing will continue ad infinitum until real cost-push inflation manifests itself. We won"t get into the MV=PQ argument here as the reality of the situation is the fact that the V is the "solve for" variable, which is at best a concurrent or lagging indicator. Given the enormity of the existing government debt stock, it will not be possible to control the very inflation that the market is currently hoping for. As each 100 basis points in cost of capital costs the US federal government over $150 billion, the US simply cannot afford for another Paul Volcker to raise rates and contain inflation once it begins.

*** Kyle Bass (via Zerohedge) / link

The persistent slump in the Japanese economy has accelerated.

Reuters: - Sentiment among Japanese manufacturers fell for a fourth straight month, a Reuters poll showed, providing more evidence that the world's third-biggest economy is slipping into recession amid a global slowdown and tensions with China.

The monthly poll, which closely correlates with the Bank of Japan's quarterly tankan survey, comes after data this week showed the economy shrank 0.9 percent in July-September, the first contraction in three quarters.

Sentiment among non-manufacturers including retailers and construction firms tumbled in November after holding steady this year, a sign that private consumption is losing momentum after a recovery led by rebuilding from last year's earthquake and tsunami.

A slew of weak data is likely to keep the central bank under pressure to ease monetary policy further after having boosted monetary stimulus for a second straight month in October as a strong yen and weak global demand threatened the export-reliant economy.

But politicians always come to the rescue. Except rather than focusing on structural issues plaguing Japan, Shinzo Abe, the likely next prime minister of the nation, wants to use BOJ as a direct lender to the government. Of course he is not the first politician in recent months to use a nation's central bank to solve structural problems (such as excessive government debt).

WSJ: - Japan's main opposition leader Shinzo Abe said Saturday he would consider having the Bank of Japan underwrite construction bonds, a type of Japanese government debt, once he returns to power, Kyodo News reported.

"Money will be forced to go out to the market by (the government) having the BOJ buy construction bonds directly if possible," Abe said regarding steps to overcome deflation during a speech in the southern Japanese city of Kumamoto, according to the report. Construction bonds are issued by the government to finance infrastructure projects.

This new effort may make the recent QE efforts by BOJ (chart below) seem small in comparison.


Source: Soberlook

*** soberlook / link

Charts That Make You Go Hmmm...


Source: Bloomberg

The recent move in the yen seems to be gathering pace as it finally dawns on the Japanese that the strength in their currency has been killing their export economy. My friend Mac pointed out this week that each time the spot price has crossed the 2-year moving average, it has signalled a big change in direction. The last time such a cross occurred after a similarly long 60-month period, the yen weakened by about 40%...

The Boston Globe this week published a simple by-the-numbers guide to the Fiscal Cliff that provides a handy reference for something you are all going to be bashed over the head with relentlessly for the next 8 weeks:


More than $500 billion

The amount taxpayers will pay in increased taxes in 2013, due to the expiration of the Bush-era tax cuts and other tax increases, according to a Tax Policy Center analysis.

$30 million

The number of people who will be subject to the alternative minimum tax, or AMT, up from 4 million currently, accounting for more than $221 billion in additional revenue for the United States between fiscal years 2012 and 2013, the Congressional Budget Office estimates.

$3,500 per year

The amount in increased taxes each household, on average, will pay in taxes in 2013, according to the Tax Policy Center.

$2,000 per year

The amount in increased taxes a middle-income family will pay in 2013, according to the Tax Policy Center.

$1,000 per year

The amount someone making $50,000 a year will pay a year from the expiration of a payroll tax cut — the 2 percentage point break in Social Security taxes enacted in 2010, which is set to expire at year's end.

$412 per year

The amount the lowest 20 percent of earners would pay more, on average, in taxes, the Tax Policy Center calculates.

$14,000 per year

The amount the top 20 percent of earners would pay on average in more taxes.

$121,000 per year

The amount the top 1 percent of earners would pay on average in more taxes.


$110 billion

The total amount of annual spending reductions that will kick in for 2013.

$55 billion

Half the spending cuts will come from the defense budget, which accounts for about a 10 percent decrease from its current funding.

$55 billion

The other half of spending cuts comes from domestic programs like highway funding, aid to state and local governments, and health research - a total reduction of around 8 percent.

$11 billion

Amount of cuts from a reduction in Medicare payment rates for physicians.

2 million

The number of people who will lose extended unemployment benefits, which provide up to 73 weeks of aid per unemployed job seeker. It will save $26 billion in spending.


$607 billion

The amount the deficit will be reduced through the tax hikes and spending cuts.

3.4 million

The number of jobs that could be lost in 2013 due to the tax hikes and spending cuts, a Congressional Budget Office report estimates.

9.1 percent

The level that the US unemployment rate could rise to, up from the current 7.9 percent, according to a CBO estimate.


The number of jobs Massachusetts would lose over the next two fiscal years - the fifth most among states, according to a study prepared at George Mason University for the Aerospace Industries Association.

$200 million

The amount that Massachusetts teaching hospitals would lose through cuts to indirect Medicare support, which would cost the state 5,000 jobs. Only two other states would get hit harder.

At some point, Australia's problems are going to become a huge surprise to many and a long-overdue reckoning to a few, but this week the tapestry unraveled a little bit further when the RBA released their latest data including "other outright" transactions:

(AFR): Further evidence that the Reserve Bank of Australia may be passively intervening in currency markets by selling Australian dollars off-market has been released by the central bank on Thursday morning.

The total volume of "other outright" transactions, which take place between the RBA and other central banks and overseas institutions, reached $483 million in the month of October, the highest level since June 2009.

In the last three months, inflows of $1.37 billion have been recorded in this category, compared to $360 million in the previous three months.


Source: Macrobusiness/RBA

This week's Economist contains a great reference tool for comparing the economies of Europe in all their glory. The chart below shows their public debts, but if unemployment levels, GDP, or budget deficits are what float your boat, then they've got you covered... Click HERE to view the interactive graphic.


Source: Economist

So far, the Fed's securities purchases have not had a material impact on bank reserve balances. As discussed earlier (see post), reserve balances will be the key indicator to watch in order to assess the level of monetary expansion...


Source: Soberlook

Words That Make You Go Hmmm...



Ron Paul is a great American who will one day be recognized for what he has tried to do to rein in the profligacy of the US government. Sadly, that time is not now. This week, Dr. Paul gave his last speech to the floor of the House, and as he leaves, perhaps the last remaining barrier to the complete debasement of the US dollar is removed.

A sad day indeed.


When Fleck speaks, I listen, and here he talks to Eric King about all things Greek, Draghi's options, the likelihood of Europe "muddling through" and the Fiscal Cliff as well as the landscape post-last week's elections in the US, gold & silver, and much more.

As always, Fleck removes the hyperbole and gives a sanguine and realistic appraisal of the current situation. If only there were a few more like him... As Bill says:

"If you liked the last four years, you're gonna LOVE the next four..."




On my travels, I have been surprised at how many Americans fail to grasp the real problems that lie at the core of the European debacle; namely that nations now expected to band together in times of trouble have been fighting each other for centuries.

Watch as Kyle Bass lays out beautifully the simple truth about the Eurozone...


And finally...




The upcoming movie Money for Nothing (watch the official trailer HERE) takes an in-depth look at the Federal Reserve and the influence it has had on the global economy—particularly over the last few years.

It never ceases to amaze me just how little the "man-in-the-street" understands about perhaps the most important institution in the world, but Jim Bruce and his team have taken a run at trying to explain it to a much wider audience and have managed to put an incredibly impressive cast of insiders in front of the camera along with the likes of Jim Grant, Jeremy Grantham, Gary Shilling, and my friend John Mauldin.

Jim has kindly given me permission to share this clip with you, so please watch it and pass it on to your friends and family.

The movie still needs funding, so if you would like to contribute to the cost of this important project, you can donate (and pick up some cool "stuff") by clicking HERE.



Grant Williams

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

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

In 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.

For more information on Vulpes, please visit


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

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As a result of my role at Vulpes Investment Management, it falls upon me to disclose that, from time to time, the views I express and/or the commentary I write in the pages of Things That Make You Go Hmmm... may reflect the positioning of one or all of the Vulpes funds—though I will not be making any specific recommendations in this publication.




A walk around the fringes of finance


By Grant Williams

20 NOVEMBER 2012


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Bill Geer

Nov. 22, 2012, 4 a.m.

This particular “Things that…” is an exercise equivalent to a graduate level degree education.  while there can be some aspects that might be debated the overall quantity and quality of information on the macro-scale to ignore it in sum is to position yourself for some very unpleasant financial surprises.