Things That Make You Go Hmmm...

White Bits

December 18, 2012

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White Bits

"If I had to choose a religion, the Sun as the universal giver of life would be my god."




"As soon as we abandon our own reason, and are content to rely upon authority, there is no end to our troubles."





"Government is not the solution to our problem. Government is the problem."



"Don't worry about a thing,

'Cause every little thing, gonna be all right"

"'Wow, that orange spray tan really suits you!'... Said no one, ever."


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

Latest Eurozone Summit Ends in Stalemate .......................................................16

Merkel's Dispassionate Approach to the Euro Crisis ..............................................16

Ambrose Evans-Pritchard Interviewed by Lars Schall ............................................17

It's Time .................................................................................................19

How a Platinum Coin Could Solve the Debt-Ceiling Problem ...................................20

French in Denial as Crisis Deepens ..................................................................21

Leszek Balcerowicz: The Anti-Bernanke ...........................................................22

In Bo Xilai's City, a Legacy of Backstabbing ........................................................24

Roach Motel Monetary Policy ........................................................................25

CHARTS THAT MAKE YOU GO HMMM... ..................................................27

WORDS THAT MAKE YOU GO HMMM... ...................................................31

AND FINALLY ................................................................................32

Things That Make You Go Hmmm...

It all started, believe it or not, in the mid-1950s.


A decade that began with Britain's recognition of Taiwan and troops from the North Korean Army crossing the 38th Parallel on their way to Seoul in June of 1950, and ended with the signing of the Antarctic Treaty, by which twelve countries including the USA and the USSR (remember them?) set aside Antarctica as a scientific preserve and banned all military activity on that continent, saw enormous changes take place in a post-WWII world that was struggling to come to terms with its new identity.

The Suez Crisis in 1956 heralded the beginning of the end for the once-mighty British Empire, and the Cuban Revolution brought to power Fidel Castro who, when he stepped down from office 52 years and 62 days later, had become the world's longest-serving ruler (eclipsing Kim Il-sung of Korea by almost seven years). But somewhere in between the Taipei "Hello" and the "Keep off the Snow," an amazing discovery took place that would have its moment in the sun half a century later.

The origins of this world-changing find are largely unknown, though it is commonly believed to have originated purely by accident when a nurse treating a diabetic patient accidentally spilled some dihydroxyacetone (DHA) on his chest whilst changing his drip. The following day, the nurse noticed that the patient's skin was discoloured.

In no time at all, a product incorporating this discovery hit the marketplace in America that was, rather curiously, aimed at the less likely half of the human demographic. Its name said it all: Man-Tan.

Prior to the 1920s, a deep tan was considered déclassé—the result of a peasant life working on the land—but all that was to change when Coco Chanel stepped off a friend's yacht in Cannes in the blisteringly hot summer of 1923 sporting a nasty case of sunburn. Just like that, a tan became the must-have accessory for the glitterati:

(UK Guardian): "Coco Chanel made suntans the height of fashion in the 1920s, as a key component of Riviera chic," says Justine Picardie, author of a new Chanel biography. "In doing so, she turned fashion on its head, so that bronzed skin became emblematic of glamour rather than peasantry; of a leisured life rather than outdoor labour." By the end of the decade, the poor had left the fields for factories, and, helped along by Chanel, the trend for brown skin began.

But in the search for a shortcut to a wealthy-looking appearance, Man-Tan (and many of its early antecedents) came up woefully short:

Man-Tan turned its users a rich beige-orange—less "tan" coloured, more "swum through a lake of fruit juice". Quick Tan Lotion by Coppertone was launched soon after—it speckled skin, stained palms and discoloured clothes...

Half a century later, though, what has euphemistically become known as the "self-tan" (though for the purposes of today's discussion, I shall refer to it by its more apropos monicker—"fake tan") had become the fastest-growing sector of the international cosmetics market. By 2005, 30% of British women were using fake tan, and by 2008, Liverpool was awarded the dubious epithet "Britain's most-tanned city" with a staggering 59% of women applying fake tan lotion upwards of five times per month.

The arrival on US TV screens of Jersey Shore helped cement the fake tan's place at the center of US culture and the public's love affair with obtaining a quick-and-easy, seemingly healthy appearance was established.

A year-round tan implies the sort of wealth and status that allows for regular trips to the sun and gives the wearer a surge in self-confidence, but, of course, human nature being what it is, the wheel inevitably turns full circle and the backlash against the fake tan has now begun.

The simple truth that has reasserted itself is timeless; fake is just... well, fake.

Human beings have a visceral dislike of anything fake—though sometimes they will put up with imitations on a temporary basis if needs must (show me an owner of a fake Mulberry handbag who doesn't aspire to owning the real thing, and I'll show you a liar)—and that deep-rooted sense is fast going to become a big problem for none other than Ben Bernanke.

This past week, the Fed chairman once again reached into his magic bag of tricks and announced yet more stimulus—this time in the form of an additional $40 billion of outright Treasury purchases each and every month. Added to QE3's promise to buy $45 billion of MBS on a monthly basis, a grand total of $85 billion will be sucked up every 30 days until... well, therein lies the big change. This time around, the monetary spigots were opened wide and we were told to watch the BLS-generated rate of unemployment (amongst other things) for clues as to when they'd be closed again:

(FOMC): "In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. The Committee views these thresholds as consistent with its earlier date-based guidance. In determining how long to maintain a highly accommodative stance of monetary policy..."

Bernanke and his fellow Beltway insiders continue to apply fake tan in an attempt to make the US economy look more healthy than it is, but even though the public has been in love with the bronze monetary sheen that has been sprayed onto a decidedly pasty economy repeatedly since 2008, the backlash I spoke about is picking up steam and broadening its reach.

This week's announcement of QE4—against a backdrop of no real material deterioration in the US economy since QE3 was announced—looks to have been a watershed in the evolution of unlimited and regular stimulus as the reactions of various instruments demonstrated.


Source: Zerohedge

It's not just the tying of this round of QE to the unemployment rate that is different. No, sir. It's also the market's reaction to what is essentially unlimited moneyprinting.

Yes. Unlimited. Now, I know what they said about unemployment, but if you read the statement again carefully, you'll see where all the wriggle room is:

"...this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored."


Obviously, if there were a hard-and-fast commitment to cease all stimulus as soon as the unemployment rate hit 6.5%, the market would begin frontrunning that event way in advance of it happening (and that frontrunning would, rather inconveniently, take the form of mass selling of the very bonds for which the Fed has provided a bid). By adding two other contingent conditions to be simultaneously met, and ensuring the 6.5% level is simply a guideline, the Fed has essentially given itself all the justification it needs to not cease stimulus until it is good and ready to do so.

But just like the female inhabitants of Liverpool, whose fake tan needed to be applied with ever-increasing frequency, the gaps between applications of cosmetic stimulus actions by the world's central banks are also narrowing quickly:


Source: Zerohedge

Chris Martenson, of Peak Prosperity, put the strange reaction to QE4 this week beautifully:

If you had stopped me on the street a few years ago and asked me what I thought would have happened in the stock, bond, foreign currency, and commodity markets on the day the Fed announced an $85 billion per month thin-air money printing program directed at government bonds, I never would have predicted what has actually come to pass.

I would have predicted soaring stock prices on the expectation that all this money would have to end up in the stock market eventually. I would have predicted the dollar to fall because who in their right mind would want to hold the currency of a country that is borrowing 46 cents (!) out of every dollar that it is spending while its central bank monetizes 100% of that craziness?

Further, I would have expected additional strength in the government bond market, because $85 billion pretty much covers all of the expected new issuance going forward, plus many entities still need to buy U.S. bonds for a variety of fiduciary reasons. With little product for sale and lots of bids by various players, one of which—the Fed—has a magic printing press and is not just price insensitive but actually seeking to drive prices higher (and yields lower), that's a recipe for rising prices.

Then I would have called for sharply rising commodity markets because nothing correlates quite so well with thin-air money printing as commodities.

That's what should have happened. But it's not what we're seeing.

No. It's not. Not yet.

Chris goes on to make the very point that I have been making for some time now:

The markets are now well and truly broken. Not because they don't conform to my predictions, but because they are no longer sending useful price signals.

Underneath the fake tan applied by Benny & The (Ink)Jets is a pasty economy as can be seen from a cursory glance at a few recent economic statistics, starting with the number of foodstamp SNAP recipients in the United States—a number that has grown in unbelievable fashion since 2009. In September and August combined, over 1 million Americans entered the Supplementary Nutritional Assistance Program.


Source: Zerohedge

Comparing the number of new SNAP recipients to jobs created since December 2007 shows again just how pasty white the US economy is underneath the fake tan:


Source: Zerohedge

But it's not just SNAP, Buckle, and Drop.


Source: Bloomberg

The chart above shows the S&P 500 (yellow line) versus the Institute of Supply Managers (ISM) Purchasing Manufacturers Index (PMI). The PMI is a barometer of the economic health of US manufacturing, and, as you can see from the chart, it has slipped back into contraction (below 50). Not only that, but the drop-off has been sharp and the last time we saw divergence like this between the PMI and the S&P (red boxes), it didn't end very well.

Next we look at real annual earnings (courtesy of Doug Short) and see that not only have they gone sideways for the last three years, but that they are currently falling at the sharpest rate since the (alleged) last throes of the 2008 recession:


Source: Doug Short

Which brings us back to unemployment—something that is now going to be the focus of Fed-watchers after policy was linked to the unemployment rate this past week.

Headline unemployment numbers are (CPI notwithstanding) some of the hardest to understand/easiest to spin, and that doesn't bode well for anyone who believes that there will be a cut-and-dried end to quantitative easing the second the unemployment rate hits 6.5%.

The unemployment rate (U3) targeted by the Fed has fallen from 10% to its current 7.7% since October 2009, and that has, understandably, been cause for a lot of chest thumping and backslapping, but there are a couple of other metrics that bear inspection in order to gain a better understanding of the realities of US unemployment.

First is the U6 unemployment measurement. This, according to the BLS website, includes:

Total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force.

And second is the participation rate (which has been the real key to the fall in the headline U3 unemployment rate in the past two years).

As people have fallen out of the workforce in their droves (green line), the headline rate has come down dramatically, but, as you can see from the chart below, the gap between U6 (blue shaded line) and U3 unemployment (yellow line) has not narrowed:


Source: Bloomberg

It doesn't end there. We could look at consumer confidence numbers, small business sentiment, trade deficit numbers, and many others—but we won't.

Cast your minds back to the era of "Green Shoots" (remember them?) and try to remember when you last heard that phrase. There is a very good reason for that—the same way there is a very good reason for the Fed's renewed and seemingly open-ended application of monetary steroids this past week; beneath the fake tan, the economy is positively anemic.

By linking the application of QE to the unemployment rate (though not hard and fast), the Fed has taken one more step down a road it is just itching to travel but can't quite take the first step.

If only somebody else would lead the way...

As luck would have it, the appointment of Mark Carney as the new governor of the Bank of England this month could turn out to provide them with the powerful ally they need:

(FT): In his first speech since winning the top job at the Bank of England, Mr Carney, now governor of the Bank of Canada, suggested three measures that central banks could take in "exceptional times" such as the present.

When central banks had exhausted the possibility of cutting rates, Mr Carney said, they could pledge to keep rates on hold for an extended period...


...If that did not work, then they could promise to keep rates low until unemployment fell...


Both are measures that Sir Mervvn [King] has rejected. If neither of those had the desired effect, Mr Carney suggested, there is a more radical alternative: scrap the inflation target in favour of a nominal gross domestic product target.


Ahhh... now there's a thought... unlimited money printing until a pre-arranged level of growth has returned. Well... I suppose if the Bank of England is doing it...

At the point where nominal GDP is targeted instead of an unemployment rate, we will have finally crossed the Rubicon. The way things look right now, the only way we may not get there is if the bond market revolts before they can conjure up the right set of circumstances. Otherwise we are headed in that direction.

If, ultimately, we reach the stage where central banks are using nominal GDP targeting to determine when to stop the printing presses, who knows how ridiculous the Fed chairman will look?


I couldn't leave you this week without mentioning the rather extraordinary recent goings-on in the vaults beneath the Bank of England.

As regular readers will know, below the Bank of England, gold is stored on behalf of the central banks of many countries around the world. The reason given for this is the proximity to the London Bullion Market—by far the world's largest OTC bullion trading centre.

As has been documented (both in these pages and countless others lately), the trend towards repatriation of gold reserves by governments has been quietly picking up a head of steam in recent months with the Bundesbank the most recent and most high-profile institution seemingly set upon perfecting their assets.

(Mineweb): Last week, a report by Germany's Federal Auditors Office was made public by the media including the Associated Press. The document observed Germany's gold bars "have never been physically checked by the Bundesbank itself or other independent auditors." Instead, it relies on "written confirmations by the storage sites."

Bizarrely, we were treated this week to not one, but two looks inside the Bank of England's bullion vault as first the rather excitable Professor Martyn Poliakoff (see video on page 31) took a cameraman inside the hallowed room for a look around that received plenty of exposure, and then, just a couple of days later, the somewhat less-excitable Queen Elizabeth II toured the facility, which received even greater publicity right around the world.


With the question marks surrounding the veracity of the reported holdings in not just the Bank of England's vaults but those of the Federal Reserve as well as Fort Knox in the US growing larger with each request for repatriation, what better time to wheel Britain's monarch through a room full of gold bars to show the world that everything is just hunky-dory.

Cynics and conspiracy theorists will no doubt have a field day with these stories, but away from the calming effect that the sight of all that gold bullion was no doubt designed to have, another fact struck me as far more pertinent.

The story of Poliakoff's visit to the vault as reported in the UK Daily Telegraph began thus:

(UK Daily Telegraph): Beneath the Bank of England in London lies 4,600 tons of gold.

The Bank's precious metal reserves, worth £197 billion ($315bn) according to the mostly recently published figures, are rarely seen by outsiders...

Two days later came the FOMC statement:

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will purchase longer-term Treasury securities after its program to extend the average maturity of its holdings of Treasury securities is completed at the end of the year, initially at a pace of $45 billion per month.

So, to put that into perspective, in the space of just under four months, the Fed will buy Treasury bonds and MBS that exceed the value of all the gold held beneath the Bank of England on behalf of multiple central banks around the world.

This disconnect seems to be lost on most market participants (as the strangely muted reaction of the gold price after the FOMC announcement demonstrates), but, with the amount of gold in the world increasing by roughly just 2% per year, the incredible (in the truest sense of the word) increase in the monetary base is one day going to be seen for what it is, and the mathematics of the situation will permeate the collective consciousness.

In closing, I'll just point out that, in roughly 6,000 years of recorded history, approximately $8 trillion of gold (at today's price) has been mined.

On August 31, 2008, the combined value of the balance sheets of the US, UK, ECB, Germany, France, China, and Switzerland stood at $8.16 trillion. By October 31, 2011, that total had reached $15.05 trillion.

In other words, it took eight central banks about five years to fabricate the equivalent value of 6,000 years' worth of gold production and, since the chart below finished, they have added another couple of trillion dollars.


Source: The Big Picture

Or, if it helps, look at it another way; in just under seven years, US public debt alone has increased from a little over $8 trillion to $16.3 trillion—a difference equal almost exactly to all the gold ever produced in the last 6,000 years.


Source: Zerohedge

Call me old-fashioned, but I'm sorry. Gold ain't no bubble.


Once again, I have rambled on far longer than I had intended when I began writing, so I'll leave you with a quick rundown of what you can expect to find in the pages that follow.

Working backwards, in the videos section we have the wisdom of Bill Fleckenstein and Jim Grant, the ramblings of yours truly (the interview is part of Financial Sense's premium service and will consequently cost you 99c to listen to) and an extremely excitable chemistry professor surrounded by gold bullion.

We have charts of welfare spending, the Japanese yen, US house prices, and Henry Blodget's take on the mobile industry as well as 140 years of US inflation.

We travel to Chongqing, China, to see the legacy left by Bo Xilai, hear from Poland's central banker extraordinaire, Leszek Balcerowicz, get Ambrose Evans-Pritchard's thoughts on a wide range of topics, and hear from Germany why France is in denial.

Another Euro Summit ends in stalemate, we take a close look at Angela Merkel's role in the euro crisis, find out that all Tim Geithner has to do is say the word and a $1 trillion platinum coin could ride to his rescue, and John Hussman explains "Roach Motel Monetary Policy."

Until next time...


European leaders wound up their final summit of 2012 on Friday in much the same manner as they started the year—kicking the euro crisis can down the road, playing for time, crossing their fingers, hoping the worst is behind them.

In almost three years since the Greek drama erupted in February 2010 and spread quickly around the fringes of the eurozone, the leaders have never quite managed to get ahead of the curve despite 22 summits and countless meetings of eurozone finance ministers.

This week's two-day summit in Brussels repeated the pattern. It was supposed to lay out a grand plan and timetable for reforming and stabilising the euro regime through a battery of federalising political and fiscal moves. In the event, the documents from the EU council president, Herman Van Rompuy, were shredded amid more clashes over fundamentals between Berlin and Paris, while an even more ambitious blueprint from the Commission president, José Manuel Barroso, was simply ignored.

"One wonders how these two gentlemen will enjoy Christmas," quipped Andrew Duff, the Liberal Democrat MEP and ardent European federalist.

Van Rompuy, who has had a very bad month, was told to come back in the middle of next year with a better, more modest plan. The mood was darkened further by German Chancellor Angela Merkel dismissing claims that the worst was over for the eurozone and stressing that the bloc faced two years of painful reforms, slow growth and high unemployment.

"The changes we are going through are very difficult and painful," she said. "We have tough times ahead of us that cannot be solved with one big step."

Despite the stalemate and the seeming complacency, leaders concluded their summit keen to list the year's achievements...

*** uk guardian / link

Angela Merkel has more power in Europe than any of her postwar predecessors. Yet there is little passion in her relationship with the EU, with the chancellor preferring instead a strategy that can only be described as pedagogical imperialism. She sees the bloc primarily in terms of euros and cents—and worries that it is rapidly losing relevance.

The crisis has its comical sides, of course. Take, for example, the story with the submarine. Angela Merkel starts to giggle. It was lopsided. Suddenly she snorts with laughter, as tears run down her cheeks. She can't even talk anymore. Lopsided, she says, trying to pull herself together. But she can't. The chancellor of the Federal Republic of Germany has succumbed to an uncontrollable fit of laughter.

The story Merkel is having so much trouble relating goes like this: The Greeks ordered a state-of-the-art, class 214 submarine from the Howaldtswerken-Deutsche Werft shipyard in the northern port city of Kiel. But when the vessel was ready, they refused to pay. The Greek military experts who had traveled to Kiel explained that the Papanikolis listed even in slight swells, and they declined to take delivery of the vessel.

The Germans tested, measured and checked the sub, but found nothing amiss. The boat's lopsidedness is apparently something only Greeks, up to their eyeballs in debt, can detect—an anecdote that still sends the chancellor into fits of laughter years later.


Source: Der Spiegel

Oh, those Greeks. Sometimes, when things get really bad, Merkel resorts to gallows humor. But it doesn't really help. The show must go on, and in the end, it all comes back to her, anyway.

For three years now, the euro crisis has been smoldering. It has brought down governments in Ireland and Spain, in Italy and Slovenia, and has led to countless summit meetings in Brussels, at which first a temporary and then a permanent bailout fund was established.

European leaders [met] in the Belgian capital once again [last] Thursday and Friday, at what [was] expected to be the year's most important summit. The agenda consists of nothing less than the political realignment of the euro zone and the question of whether members can agree to a European banking union to save the Continent's ailing banks. In the midst of it all, as always, is German Chancellor Angela Merkel...

*** der spiegel / link

Lars Schall.: Do you consider it as significant that central banks outside the Western hemisphere have become big buyers of gold?

Ambrose Evans-Pritchard.: Yes, I'd say it is. I mean, I think it is certainly for an investor in gold. As you know, the Western central banks were selling short in the gold market essentially for many, many years in the late 1990's until the early part of this decade, and they are—or were—a major force in the global gold market.

But of course these days the Western central banks don't really have any reserves, as you know; I mean, the Bank of England has nothing, basically.

The reserves that are being built up are all in the developing countries, they are in China, in Taiwan and Philippines, and so on. And in the case of China, only two percent of its reserves are in gold. I think they probably would like to target a level of more like ten percent, as Russia has said it is already doing. I mean, given that China has reserves of 3.2 trillion, it is going to have to buy an awful lot of gold to get there.

So I think it is incredibly important, but what the Western central banks do and the European countries do is almost secondary. The net buyers, the ones who are really going to influence the market, are going to be emerging economies that have far too little gold at the moment in their portfolios and far too many dollar bonds, and Eurobonds to a lesser extent.

They suspect that one of the ways out of this global crisis is going to be massive monetary reflation at some point. And that means if you are holding all this stuff, you are going to get burned, and that doesn't just apply to central banks, it applies to anybody holding bonds frankly. If you are in government bonds in any of the Western countries, I think you are going to get brutally burned in the next fifteen to twenty years. If you are hoping that this is going to be your pension, you need to think again because once inflation comes in earnest, that stuff is coming up in smoke. You can see why people would want gold, as a big chunk of their portfolio.

L.S.: We hear sometimes—in my humble opinion, from very foolish people—that gold is in a bubble, but isn't it the truth that the bond market is in a bubble?

A.E.P.: I think the bond market is fantastically mis-priced. I think the relationship of sovereign bonds to equities is completely out of proportion. This is unprecedented. I know this continued to occur in Japan and people said back in the nineties that bond yields couldn't fall any further, and here we are fifteen years later and they are still falling. You know they've gone below one percent on ten-year bonds and so it could continue, but I don't think the rest of the world is Japan. They think that Europe and America are not going to go that route; I think they will reflate, they will engage in massive monetary stimulus to get out of this, they will not allow deflation to take root. So the outcome is going to be different, and that means bonds will be massacred.

Call it a bubble? Difficult to tell. I mean, it's a safe haven flow, but also there's a lot of regulatory repression, I know in Britain the pension funds are forced to buy this stuff by regulations, and unfortunately they are creating a long-term disaster for people probably my age; when we get to retirement, we're going to find that stuff has gone up in smoke.

So yes, the bond markets are massively mis-priced; that's an accident waiting to happen, but it's not a prediction that it will happen immediately because the crisis right now is deepening, and as long as that is the case the bond yields will continue to fall.

L.S.: What are your thoughts on the controversial topic of the German gold reserves that are held in New York City, London and Paris?

A.E.P.: Well, I think that it is quite extraordinary that the Bundesbank pulled out two-thirds of its gold from London in early 2001, I believe it was. This seems an odd thing to do, I mean, they had a very large share of the gold reserves sitting in London, and why did they do this?

It happened to be a time when Gordon Brown had ordered the Bank of England to sell over half of Britain's gold. We were doing so at the bottom of the market, I might add. We managed to create the bottom of the market, these auctions were the lowest points reached—I think 252 dollars an ounce and Britain sold off some of its gold, a lot of it under 300 dollars; fantastically stupid thing to do in retrospect, but then Gordon Brown thought it was a "barbarous relic" and thought it had no place in modern finance. He entirely bought into the modern fiat triumphalism.

So the word going around in London is that the Bundesbank had reason to fear that those holdings were not secure anymore and that maybe the Bank of England had sold short some of its gold, leasing it out; or maybe got overextended. Clearly that didn't prove to be the case as far as we know, but maybe they were concerned about that at the time. Apparently these gold bars in London were not numbered, so the Bundesbank was keeping unnumbered bars there. All they had was a metal account in the Bank of England. They didn't have specific allocated bars under their name, which is, I find, a completely extraordinary situation as they should have done that. I would think the Bundesbank might want to answer to its German citizens about why it was doing that.

*** gold switzerland / link

According to most died-in-the-wool hard money advocates, there is a "Gold Cartel" that suppresses the gold price. They tend to argue that US banks continually short gold (and silver) futures nakedly, clipping significant yield each quarter without sufficient metal in stock to deliver to futures buyers if exercised. They further argue that these banks do not fear regulatory reprisal, and in fact that their actions are blessed by the powers that be because runaway gold prices would signal to the world that there is something wrong with the currencies gold competes with, notably US dollars. Thus, as the argument goes, banks have the means, motive and implicit sovereign go-ahead to suppress the gold price.

Mmmm, maybe. We certainly agree that gold should fundamentally be priced much higher than where it is presently and that the way gold futures seem to be reliably stepped on before Treasury auctions and Fed meetings is a bit snarky, but as for the progenitors of the crime? It might be better to look east.

Conspiracy theorists should consider foreign dollar reserve holders that would like to take delivery of as much physical gold (and silver?) as possible in a very short time, and do so at cheap prices. It would be simple to do: fund offshore hedge funds that continually short gold futures through US bank accounts, thereby keeping the spot price and London fixings down. Physical gold could then be delivered to sovereign accounts directly from mines and through exports at the suppressed prices.

Why would sovereigns like China, Russia, even Japan and South Korea want to take physical possession of bullion at current prices and so quickly? The short answers are that they could not buy size required on exchanges without driving prices multiples higher and because there is likely to be a reset of the global currency system, soon. Again, we have discussed this before and are talking our book, so take it with a grain of salt, but the logic supporting a coordinated move is too clear to ignore.

First, we think all currencies are in the process of being devalued against global resources. Ask yourself what $3 trillion in Chinese dollar-denominated reserves is worth when it takes an act of parliament to spend CAD $15 billion on an energy acquisition? Clearly, the future purchasing power of surplus dollar reserves is not equal to its current notional amount in natural resource terms. What is the motivation of Chinese businesses to continue trading cheap human resources for US dollars so that they may use those dollars to buy global natural resources (at any price)?

We expect the rational Asian (and South American) mind is already discounting the real forward purchasing power of the US dollar and all other fiat currencies exchangeable for it. Given the necessary future currency de-leveraging among debtor nations, we would not be surprised if economic policy makers of creditor nations have already discounted the present value of their currency reserves (e.g., $3 trillion in today's USDs should have the purchasing power equivalent of $500 billion in a few years).

Our speculation goes beyond natural market incentives and how economic participants have already reacted. We presume Western policy makers have also been quite aware of currency-based incentives, which would explain why ongoing meetings between representative treasury officials have also included State Department officials (check). And diplomatically, we would speculate that creditor nations would also continue purchasing US Treasuries at negative real rates until they amass enough of whatever it may be that US dollars would be devalued against (check, check).

Along these lines, global gold (and silver?) price suppression makes sense (just as FX currency intervention has made sense). We think it does exist and that it serves two purposes...

*** Brodsky/quaintAnce / link

Tim Geithner shows up at the neo-Florentine fortress that houses the Federal Reserve Bank of New York and asks to make a deposit on behalf of the U.S. Treasury. But instead of handing over a check—or the Treasury wiring one over—he unveils a single coin to be deposited. It is worth … $1 trillion. And with that, the debt-ceiling standoff would be resolved. Instead of issuing debt in the form of Treasury bonds to fund the gap between taxes and spending, the trillion-dollar coin would cover the deficit and Congress wouldn't have to worry about raising the debt ceiling, at least for a while. But there must be something wrong with with this scenario, right?

"I love the platinum-coin idea. If I were Secretary Geithner, that's what I would do. I would prefer to strike a deal, of course, but it's all just silliness," says Joe Gagnon, who used to be an economist at the Federal Reserve and is now a senior fellow at the Peterson Institute for International Economics.

Although it's the Federal Reserve that has the power over printing dollar bills (and the electronic money in the form of bank reserves it uses to execute monetary policy), the Treasury, through a weird kink in the law, has the authority to strike a platinum coin of any value).

As of the Treasury's most recent report on the national debt, the debt that counts toward the statutory-debt limit stands at $16.327 trillion, "just" $67 billion short of the statutory $16.394 trillion debt limit, which it is estimated to hit in February. And with no raise in the debt ceiling looking particularly likely, some are clamoring for perhaps the most clever of all the creative ways for the federal government to skirt the limit: the platinum-coin option (which may or may not have been inspired by an episode of The Simpsons).

Although, as the Washington Post's Brad Plumer reports, it's highly unlikely that the Obama administration will go down this road, the fact that some serious people are at least willing to talk to journalists about striking a large-denomination coin to give the government some space from the debt limit puts into stark relief the somewhat strange limits the government puts on itself when it comes to spending and borrowing money.

The way Gagnon explains it, the platinum-coin option holds particular appeal because of how few distortionary effects it would have. Unlike, say, the president simply ignoring the debt ceiling, the platinum-coin option might not provoke a nasty constitutional fight. The platinum coin would, instead, merely allow the federal government to make good on money Congress has already instructed the federal government to spend.

*** the daily Beast / link

In the midst of the economic crisis, France's Socialists are denying reality. The minister of industrial renewal is calling for nationalization of some industries, while the president shies away from necessary structural reforms. Business leaders fear the clock has been turned back 30 years.

The minister compares his office with a position on the battlefield, one that you only leave as a fallen soldier—or when the last bullet has been shot.

Arnaud Montebourg, the French minister of industrial renewal, carries his head high. In his mind, politics is a combat sport. A shiny, decorative sword hangs on the wall behind him in his office on the third floor of the enormous Ministry of the Economy, Finances and Industry in Paris. The 50-year-old combative politician tends to rush headlong into battle, but he is often left with no choice but to carry out the maneuver he despises the most: retreat.

That was the case last weekend, after Montebourg had become locked in a spectacular wrestling match with the steel giant ArcelorMittal, which employs 20,000 people at 150 sites in France. In Florange, north of the city of Metz, which sits near the borders with Germany and Luxembourg, the company planned to permanently shut down two blast furnaces and lay off 630 workers.

The industrial site, in the economically depressed Lorraine region, has long been unprofitable, and ArcelorMittal suffers from overcapacity. The plant closing probably wouldn't have attracted much attention, but Montebourg, who sees the preservation of industrial jobs as his primary goal, needed a success—and forgot the principle of proportionality.

Instead, he brought out the biggest gun in the Socialist government's arsenal, and threatened the company with the temporary nationalization of the Florange site, and declared its main shareholder and CEO, Indian steel magnate Lakshmi Mittal, to be a persona non grata because he doesn't respect France. Mittal was shocked and requested a meeting with French President François Hollande. Prime Minister Jean-Marc Ayrault was forced to recognize that Montebourg had set a fuse which, if lit, could cause the government to explode.

France's business leaders felt as if they had been set back 30 years, to a time when the first Socialist president of the Fifth Republic, François Mitterrand, began his term with a wave of nationalizations and, after two years, was forced to reverse his policy. Some even drew a comparison with 1945, when the government nationalized automaker Renault after accusing it of having collaborated with the enemy. Wasn't Montebourg, who had always been an eloquent preacher of deglobalization, dividing business owners into different camps, good and evil, patriotic and unpatriotic?

"Has the government forgotten that nationalization means expropriation?" asked Laurence Parisot, the appalled head of MEDEF, the employers' union.

The liberal economist Nicolas Baverez, who predicted "France's downfall" 10 years ago and has just written a book titled "Réveillez-Vous" ("Wake Up"), saw the wrangling over Florange as proof that the French left still hasn't accepted globalization, and acts as if the country were an economic and cultural preserve. "The idea of nationalization sends an ominous message to all investors," Baverez said.

*** der spiegel / LINK

As an economic crisis manager, Leszek Balcerowicz has few peers. When communism fell in Europe, he pioneered "shock therapy" to slay hyperinflation and build a free market. In the late 1990s, he jammed a debt ceiling into his country's constitution, handcuffing future free spenders. When he was central-bank governor from 2001 to 2007, his hard-money policies avoided a credit boom and likely bust.

Poland was the only country in the European Union to avoid recession in 2009 and has been the fastest-growing EU economy since. Mr. Balcerowicz dwells little on this achievement. He sounds too busy in "battle"—his word—against bad policy.

"Most problems are the result of bad politics," he says. "In a democracy, you have lots of pressure groups to expand the state for reasons of money, ideology, etc.

"Even if they are angels in the government, which is not the case, if there is not a counterbalance in the form of proponents of limited government, then there will be a shift toward more statism and ultimately into stagnation and crisis."

Looking around the world, there is no shortage of questionable policies. A series of bailouts for Greece and others has saved the euro, but who knows for how long. EU leaders closed their summit in Brussels on Friday by deferring hard decisions on entrenching fiscal discipline and pro-growth policies. Across the Atlantic, Washington looks no closer to a "fiscal cliff" deal. And the Federal Reserve on Wednesday made a fourth foray into "quantitative easing" to keep real interest rates low by buying bonds and printing money.

As a former central banker, Mr. Balcerowicz struggles to find the appropriate word for Fed Chairman Ben Bernanke's latest invention: "Unprecedented," "a complete anathema," "more uncharted waters." He says such "unconventional" measures trap economies in an unvirtuous cycle. Bankers expect lower interest rates to spur growth. When that fails, as in Japan, they have no choice but to stick with easing.

"While the benefits of non-conventional [monetary] policies are short lived, the costs grow with time," he says. "The longer you practice these sorts of policies, the more difficult it is to exit it. Japan is trapped." Anemic Japan is the prime example, but now the U.S., Britain and potentially the European Central Bank are on the same road.

If he were in Mr. Bernanke's shoes, Mr. Balcerowicz says he'd rethink the link between easy money and economic growth. Over time, he says, lower interest rates and money printing presses harm the economy—though not necessarily or primarily through higher inflation.

First, Bernanke-style policies "weaken incentives for politicians to pursue structural reforms, including fiscal reforms," he says. "They can maintain large deficits at low current rates." It indulges the preference of many Western politicians for stimulus spending. It means they don't have to grapple as seriously with difficult choices, say, on Medicare.

Another unappreciated consequence of easy money, according to Mr. Balcerowicz, is the easing of pressure on the private economy to restructure. With low interest rates, large companies "can just refinance their loans," he says. Banks are happy to go along. Adjustments are delayed, markets distorted.

By his reading, the increasingly politicized Fed has in turn warped America's political discourse. The Lehman collapse did help clean up the financial sector, but not the government. Mr. Balcerowicz marvels that federal spending is still much higher than before the crisis, which isn't the case in Europe. "The greatest neglect in the U.S. is fiscal," he says. The dollar lets the U.S. "get a lot of cheap financing to finance bad policies," which is "dangerous to the world and perhaps dangerous to the U.S."

*** WSJ / link

A deathbed plea brought an unexpected guest to Li Zhuang's home one day last March, setting in motion a legal process that soon may clear the Beijing lawyer's name, throw out a number of convictions, and close a sordid chapter of the Bo Xilai story.

The visitor was Gong Ganghua, a businessman from the city of Chongqing, where Bo served as Communist Party chief before being deposed last spring on corruption charges in the run-up to China's latest leadership transition.

Gong and his brother-business partner Gong Gangmo hired Li as a defense attorney in 2009 after they were targeted during a Bo city government campaign to clear out organized crime.

But later the Gongs, coaxed by authorities who wanted defense lawyers out of their hair, turned on Li.

The brothers, following alleged torture sessions for Gong Gangmo, cooperated by testifying in court that Li had advised lying on the witness stand.

Gong Gangmo and Li were convicted at separate trials in 2010, joining an estimated 3,000 people found guilty of various crimes during the 2008-'11 campaign ordered by Bo.

Li served 18 months in prison for inciting perjury before being released in June 2011. Gong Gangmo is serving a life sentence after being convicted on nine counts including organized crime, murder, illegal weapons possession and trade and drug trafficking.

Li insisted that he is innocent, as do many of others still jailed after being rounded up during the three-year sweep. Dozens have already been executed.

Months after Li's release—and just weeks before Bo's career blew up—Gong had a change of heart. He decided that he and his imprisoned brother should try to right the wrongs they committed by sealing the lawyer's fate by lying at his trial—lies that helped seal his own fate.

Gong also wanted to satisfy the dying wish of his brother's wife, Cheng Qi, who first met the lawyer and directed him to her family while she was being treated for cancer in Beijing.

So Gong traveled to Li's home. He apologized for his damaging testimony. And he delivered two old smartphones that Cheng, as she lay dying, asked her brother-in-law to return to Li.

The lawyer told Caixin he was especially pleased to get the phones, which he said could be the key to his fight for justice. Stored inside each phone were videos shot during three, client-attorney meetings he held with Gong Gangmo in 2009.

Li is seeking to overturn his conviction. And if a court allows, he said, the videos could be used as evidence to prove beyond a doubt that he never promoted perjury.

Li's day in court may come soon. He told Caixin that on November 23 he met Supreme People's Procuratorate representatives and was told, "We will handle this incident very seriously." Six days later, he met officials from the Chongqing Municipal First Intermediate People's Court, who echoed the procuratorate's assurance.

A new trial would add another twist to the saga of Bo, who has been stripped of his post and party membership, and in early December was awaiting trial for alleged abuse of power and bribery. His wife Bogu Kailai was convicted in August of murder and sentenced to life with a two-year reprieve. And Bo's former police chief who directed the anti-mafia campaign, Wang Lijun, has been sentenced in September to 15 years for abuse of power, corruption and attempting to defect to the United States.

"My appeal is a weather vane" for the future direction of the Bo drama and Chongqing's justice system, Li told Caixin. "It sends out a sensitive signal about rectifying mistakes.

"All those wronged during Chongqing's 'organized crime' crackdown are watching and waiting."

*** CAIXIN / link

Last week, Ben Bernanke announced that the current "Twist" program (where the Fed buys long-term Treasuries and sells an equal amount of shorter-dated Treasuries) will be replaced with outright "unsterilized" bond purchases. In doing so, Ben Bernanke has put the economy on course to choke down 27 cents of monetary base for every dollar of nominal GDP by the end of next year—in an economy where even the slightest normalization to interest rates of just 2% would require the monetary base to be cut to just 9 cents per dollar of GDP to avoid inflationary outcomes. The chart [next page] is a reminder of where we are already.

Understand that Fed policy now requires interest rates to remain near zero indefinitely, because competition from non-zero interest rates would reduce the willingness to hold zero-interest currency, provoking inflationary outcomes unless the monetary base was quickly reduced. Given an economy perpetually at the edge of recession, so far, so good. But as interest rates essentially measure the value that an economy places on time, Ben Bernanke's message to the U.S. economy is clear: time is worthless.


Source: Hussman Funds

Monetary policy has become a roach motel—easy enough to get into, but impossible to exit. Bernanke seems pleased to note that inflation presently remains low, but why shouldn't it? In a structurally weak economy, velocity drops in exact proportion to new monetary base, with zero effect on real output or inflation. The problem is that Bernanke seems incapable of running thought experiments. Suppose the economy eventually strengthens at some point past 2013. At that point, the Fed would have to sell nearly $3 trillion of U.S. debt into public hands in order to reabsorb the money creation he claims "is only a temporary matter." These sales would add to the stock of U.S. debt already held by the public, very likely while a significant government deficit is still in place. Such a sale would be, by two orders of magnitude, the largest monetary tightening in U.S. history. Is that possible to achieve without disruption? I doubt it.

So instead, the Fed must rely on the economy remaining weak indefinitely, so it will never be forced to materially contract its balance sheet. To normalize the Fed's balance sheet without contraction and get from 27 cents back to 9 cents of base money per dollar of GDP without rapid inflation, we would require over 22 years of suppressed interest rates below 2%, assuming GDP growth at a 5% nominal rate. Indeed, Japan is on course for precisely that outcome, having tied its fate 13 years ago to Bernanke's experimental prescription (stumbling along at real GDP growth of less than 1% annually since then). Bernanke now sees fit to inject the same bad medicine into the veins of the U.S. economy. Of course, a tripling in the consumer price index would also do the job of bringing the monetary base back from 27 cents to 9 cents per dollar of nominal GDP. One wonders which of these options Bernanke anticipates. Psychotic.

*** john hussman / link

Charts That Make You Go Hmmm...


Source: Mike Shedlock

Based on data from the Congressional Research Service, cumulative spending on means-tested federal welfare programs, if converted into cash, would equal $167.65 per day per household living below the poverty level. By comparison, the median household income in 2011 of $50,054 equals $137.13 per day. Additionally, spending on federal welfare benefits, if converted into cash payments, equals enough to provide $30.60 per hour, 40 hours per week, to each household living below poverty. The median household hourly wage is $25.03.

*** CBO (via mish) / link


Source: JPM/CoreLogic/BLS (via Soberlook)

The chart above shows how US home prices have mean-reverted to per-capita income after the bursting of a bubble so clear that only the Greenspan Federal Reserve was unable to see it.

Monthly inflation from 1872 to the present day. Firstly as the BLS calculates it. Secondly including John Williams' Shadowstats estimate (grey shading).



Source: Doug Short

You will be hearing a lot about Japan's upcoming efforts to weaken the yen and reverse years of deflation. PM-elect Abe has stipulated a 3% target for inflation in Japan.

He has his work cut out. Below are two charts that show both the meaningful move in the yen recently after Abe's promise and how much that move is in context with 40 years of strength:



Henry Blodget's recent presentation on the future of mobile contains a wealth of great slides—none more so than these two, which highlight how sales of smartphones have, in a remarkably short time, eclipsed those of PCs and how iOS and Android rule the roost.

Click on the link to view the entire presentation...



Source: Business Insider

Words That Make You Go Hmmm...



In the foreground is Martyn Poliakoff, a chemistry professor at the University of Nottingham. In the background is the Bank of England bullion vault. Martyn is extremely excited about the £197 billion in gold bars sitting behind him...


As always, Bill Fleckenstein can be relied upon to provide a sanguine and balanced view of the investing world without hyperbole.

In this interview, he talks about the big inflection point the bond market has reached as well as discussing why the gold market is approaching a similarly important juncture. Fascinating as always...




This past week, I had the great pleasure of chatting once again with Jim Puplava about a wide range of issues including gold stocks, Japan, the complete mis-pricing of bond markets and the coming capital controls that look to be the only way broke governments can raise the revenues they need to function...(FS Insider)

Alternatively, you can watch the great Jim Grant interviewed by the wonderful Lauren Lyster on Capital Account and watch as Jim dismantles the Fed, the BoJ, and the bond market. Boy, it's hard to beat that combo.

Pick a name and click on it...


And finally...



Juventus Striker Leonardo Bonucci had only the goalkeeper to beat...



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


Follow me on Twitter: @TTMYGH

YouTube Video Channel:

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

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

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




A walk around the fringes of finance


By Grant Williams

18 DECEMBER 2012


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1 comment

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Dec. 19, 2012, 3:15 a.m.

HELLO and thank you i can read your artice (analysis) i was sure nothing will change
sometime the word is not eoungh ..(to say ) front what we believe ..or instict send this article is very inristing ..
EU (MSS MERKEL )NEEDED to be more open heart ..not so stric with the poor ,and to much strict with the rich countries..
GR.have to continue to pass difficult
IT ..have really political and fiscal problem (just M.DRAGHI)HELP THAM BUT THERE HAVE TO HELP THAM SELF FIRST
GOLD..ah ..(i don’t know )WHAT IS THIS ?

just i know is the only who can save the economy now who is shhhhhh.
but too highe inflation is NOTHING seriose before the unemployment ‘’
Japan..will fix the economy very soon
this will help and global economy too for short term ...
ah,,,smartphonne ..i wiil buy one present for my self
nobody do to me (just me) and me for others too.
enjoy the day