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TTMYGH - Horse, Pig, Helmet, Man, Woman
TTMYGH - Horse, Pig, Helmet, Man, Woman
TTMYGH - Horse, Pig, Helmet, Man, Woman
By Grant Williams
To learn more about Grant's new investment newsletter, Bull's Eye Investor, Click here
22 JULY 2013
Hmmm...
THINGS THAT MAKE YOU GO
Contents
THINGS THAT MAKE YOU GO HMMM... ....................................................3
Nigel Farage and Marina Hyde Go for A Pint ......................................................14 The Painful Truth: Greece Needs a Debt Haircut Now ...........................................15 Gold Futures Hiccup Indicates Demand Outpacing Supply ......................................17 "Detroit Will Rise Again": Glimmers Of Defiance After City's Bankruptcy .....................18 Man With Plan ..........................................................................................19 How an Airline Buyer's Buddies Crashed, Burned .................................................20 Now That Detroit's Gone Bust, Is Your City Next? .................................................22 How To Spot a Liar ....................................................................................24 Maybe It's May? .........................................................................................25 Cooking the Numbers in Buenos Aires ..............................................................27
CHARTS THAT MAKE YOU GO HMMM... ..................................................29 WORDS THAT MAKE YOU GO HMMM... ..................................................33 AND FINALLY ................................................................................34
23 JULY 2013
Hmmm...
THINGS THAT MAKE YOU GO
23 JULY 2013
Hmmm...
THINGS THAT MAKE YOU GO
The pictograms contained in Linear B were simple in construction let's face it, even I could have figured this little lot out:
Horse
Pig
Helmet
Man
Woman
... but the rest of the inscriptions were baffling. In fact, after 40 years of studying them, Evans had managed to decipher just a single word: total. This word appeared at the bottom of what were clearly accounts and inventories, but the wider meanings of the components of those accounts were shrouded in mystery. Ventris didn't come across Kober's life's work until two years after her death at age 43. Then, using an all-important "key" derived from her exhaustive research, he finally unlocked the code and solved the riddle. By then, of course, it was too late for Evans and too late for Kober. It may well be that, in 40 years or so, historians will uncover the recent comments and testimony of Ben Bernanke and his fellow Fed governors and spend a lifetime parsing them to detect any semblance of sense contained therein. Unfortunately, we who would invest or do business are forced to try and decipher them in the here and now, and that causes enormous problems. Lately, Fedspeak Nonlinear B has plummeted to new depths of indecipherability as frantic Fed governors, terrified by the extent of the reaction to the slightest hint that the Free Money Express is pulling into the station, have scrambled to fine-tune the effects their hieroglyphics have had on markets.
23 JULY 2013
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THINGS THAT MAKE YOU GO
Bernanke himself has been the "key" to solving the latest riddle, but so far the Da Benci Code has remained an enigma. Take for example this week's Humphrey Hawkins testimony his last before he retires in January 2014 . The closest we have to a "key" these days is something called the "Hilsenrath Stone", which was uncovered a few years ago based on word-frequency patterns in Bernanke's speech. Using the Hilsenrath Stone, we can readily discern the specific bits of language that Bernanke himself thought were important, and by extension we may be able to decipher the wider code. Let's begin. In his recent post-testimony piece in the Wall Street Journal, Hilsenrath highlights four key passages from Bernanke that the Fed wants us to focus on he thinks are important and then comments on them. I lay them out below with the keys from the Hilsenrath Stone underlined in bold. Using these 'keys' we can decipher a message hidden amidst the runes: (WSJ): 1) WHAT HE SAID: "The risks remain that tight fiscal policy will restrain economic growth over the next few quarters by more than we currently expect, or that the debate concerning other fiscal policy issues, such as the status of the debt ceiling, will evolve in a way that could hamper the recovery. More generally, with the recovery still proceeding at only a moderate pace, the economy remains vulnerable to unanticipated shocks, including the possibility that global economic growth may be slower than currently anticipated." WHAT IT MEANS: Lots of focus on downside risks here which is striking, because the Fed said in its June policy statement that downside risks to the economy had diminished. That's a slightly "dovish" tilt toward easy money. 2) WHAT HE SAID: "I emphasize that, because our asset purchases depend on economic and financial developments, they are by no means on a present course. On the one hand, if economic conditions were to improve faster than expected, and inflation appeared to be rising decisively back toward our objective, the pace of asset purchases could be reduced somewhat more quickly. On the other hand, if the outlook for employment were to become relatively less favorable, if inflation did not appear to be moving back toward 2 percent, or if financial conditions which have tightened recently were judged to be insufficiently accommodative to allow us to attain our mandated objectives, the current pace of purchases could be maintained longer."
23 JULY 2013
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THINGS THAT MAKE YOU GO
WHAT IT MEANS: Mr. Bernanke tries to be even-handed here about the outlook for bond purchases, but he spends a lot more time talking about the conditions that could convince the Fed to leave bond buying in place than he does on the conditions that would convince the Fed to pull back sooner than planned. Another dovish tilt. 3) WHAT HE SAID: "If a substantial part of the reductions in measured unemployment were judged to reflect cyclical declines in labor force participation rather than gains in employment, the committee would be unlikely to view a decline in unemployment to 6.5 percent (unemployment rate) as a sufficient reason to raise its target for the federal funds rate. Likewise, the committee would be unlikely to raise the funds rate if inflation remained persistently below our longer-run objective." WHAT IT MEANS: The Fed has said it won't raise the fed funds rate until after the jobless rate falls below 6.5%. These comments, along with others Bernanke has made, suggest the Fed could wait for a while even after the jobless rate falls below 6.5% before trying to raise short-term rates. The 6.5% threshold appears to carry less and less meaning as the Fed tries to emphasize low rates for a long time. 4) WHAT HE SAID: "The [Fed] is certainly aware that very low inflation poses risks to economic performance for example by raising the real cost of capital investment and increases the risk of outright deflation. Consequently, we will monitor this situation closely as well, and we will act as needed to ensure that inflation moves back toward our 2 percent objective over time." WHAT IT MEANS: There seems to be a little shift in emphasis here. The Fed's preferred measure of inflation is around 1%, below the Fed's 2% goal. In his press conference in June, Mr. Bernanke emphasized his view that inflation has been driven down by "transitory factors." Wednesday he seemed to emphasize the damaging effects of low inflation. A little tilt toward keeping monetary policy easy. Yes, the Hilsenrath stone makes it quite clear that Bernanke's testimony is decidedly dovish, and it's hardly surprising he would lean that way, given the market's reaction to this little Bernanke nugget contained in the June FOMC statement: (Marketwatch): If the incoming data are broadly consistent with this forecast, the Committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year. And if the subsequent data remain broadly aligned with our current expectations for the economy, we would continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around midyear .... The market saw these words and deciphered them instantly to mean that the Fed was going to begin "tapering" later this year and end bond purchases altogether around halfway through 2014.
23 JULY 2013
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THINGS THAT MAKE YOU GO
Now, I have absolutely no idea how the market could possibly read that into Bernanke's statement, do you? Thanks to the total clarity of his statement, experienced commentators were able to immediately hop up on Twitter and share their conclusive opinions on the Da Benci Code. Felix Salmon, who knows a bit about these things, tweeted: "The message I'm getting from FOMC/Bernanke is dovish; the markets are hearing it as hawkish." John Carney another experienced watcher disagreed with him 100%: "You are wrong." Mission accomplished. Another great result for the communications arm of the Federal Reserve. In his subsequent press conference, Bernanke then tossed a few more confusing crumbs to the faithful, to help them decipher the code: ... the Committee expects a considerable interval of time to pass between when the Committee will cease adding accommodation through asset purchases and the time when the Committee will begin to reduce accommodation by moving the federal funds rate target toward more normal levels. Dovish! No, hawkish! No, Dovish! Wait ... what was the question again? In the end, the S&P 500 decided that discretion was the better part of valor ... and promptly fell out of bed:
S&P500 Index June 19 2013
1655
1 2 3
1650
1645
1640
1
1635
FOMC Statement Released Bernanke Press Conference Begins Market deciphers code
2 3
1630
1625
10:00am
11:00am
12:00pm
1:00pm
2:00pm
3:00pm
4:00pm
Hmmm...
THINGS THAT MAKE YOU GO
While the yield on the US 10-year treasury spiked higher in anticipation of the taper:
US 10-Year T reasury Yield (%) 2013
Damage Control Begins
3.0
2.5
2.0
1.5
January
February
March
April
May
June
July
Source: Bloomberg
Yet another brilliant chunk of the Code was delivered to the marketplace by the same people who brought you the document entitled "FOMC Policy on External Communications of Committee Participants" (updated on January 29, 2013). Its preamble states: The Federal Open Market Committee (FOMC) is committed to providing clear and timely information to the public about the Committee's monetary policy actions and the rationale for those decisions. Do you want to tell them, or shall I? In the Q&A that followed the first day of his testimony this week, however, in the midst of yet more confusing and contrary words, Bernanke may have given us a true "key" that will enable us to finally decipher FOMC communications. When asked how the Fed would prevent a spike in interest rates, Bernanke chose to play the answer for laughs: "By communicating, by not surprising people, by letting them know what our plan is and how it relates to the economy." When asked how the Fed would exit its easy money policy, he went for hubris: "We know how to exit. We know how to do it without inflation.... We have all the tools we need to exit without any concern about inflation." When asked about the market's addiction to Fed policy, he just plain went off the reservation: "Well, the main thing that supports the stock market or other markets is the underlying economy ...."
23 JULY 2013 8
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THINGS THAT MAKE YOU GO
But wait, there's more: "The reason I think that markets have improved so much since 2009 is because Fed policy and other policies have succeeded in providing a stronger economy with low inflation." Oh Boy! But then, when questioned about the strength of the economy, Bernanke gave us what looks to be the true key to deciphering the confusing symbols around the "taper": "I don't think the Fed can get interest rates up very much, because the economy is weak, inflation rates are low. If we were to tighten policy, the economy would tank." Yes, when you use that key, everything magically falls into place, just as it did for Michael Ventris when he saw Alice Kober's notes on Linear B. However, just to muddy the waters a bit further, on the same day July 13 Fed governors Charles Plosser and James Bullard both spoke on the subject of tapering, and the symbols were once again ... perplexing: (Dow Jones): Mr. Bullard said that if inflation goes under 1%, he'd want the Fed to act. He said the "simplest" way the Fed could counter under-target inflation is by extending its current bond-buying stimulus program for longer than currently planned, and take off the table for now any move toward shrinking the monthly size of the effort.... Mr. Bullard's outlook was countered by Philadelphia Fed leader Charles Plosser, who also spoke Friday. "The time has come for us to exit our current asset purchase program and commit to a way forward that seeks to normalize monetary policy," the official said in a speech. Mr. Plosser wants the bond-buying effort completed by year end. He said that he's open shrink the program whenever other policymakers are ready, and he said he was agnostic about the strategy for slowing the purchases. The official also doubts that pressing forward with bond buying could push up inflation over the medium term. The difference? The dovish Bullard is a voting member of the FOMC, and the hawkish Plosser isn't. In talking about a "tanking" economy, Bernanke was referring to ZIRP not QE and was at great pains to reinforce the idea that rates will be held essentially at zero for some considerable time to come; but the crucial point is his statement that "the Fed [can't] get interest rates up very much, because the economy is weak...." In a nutshell, that is the problem. The US economy and by extension the US government simply cannot afford to let interest rates rise, because the economy is too weak to support higher rates, and the government can't afford to pay higher interest rates on its massively increased debt load.
23 JULY 2013 9
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THINGS THAT MAKE YOU GO
The important point is that, ultimately, it won't be the Fed that decides where interest rates are, but rather the market; and should the Fed follow through on its trial balloon and begin to wind back bond purchases, the market has demonstrated that it will send rates higher very quickly indeed a completely unaffordable outcome. As always, Bill Fleckenstein (readers can subscribe to Bill's peerless service his thoughts are the very first thing I read each and every morning by clicking HERE) put things into calm perspective this week, and his comments on the situation the Fed finds itself in bear repeating to a wider audience: Thus, when I contemplate the amount of damage that will be done by four years (and counting) of QE, I really just shudder in wonder at how big the disaster might be, though there is no doubt it will be a disaster. The Fed has expanded its balance sheet to $3.5 trillion and now owns over 20% of outstanding U.S. debt. Either it is going to continue to buy bonds forever, which is impossible, or there is going to be a massive dislocation at some moment in time because someone else is going to have to buy that debt when the Fed ultimately stops, even if it doesn't choose to sell anything (and just lets the debt run off). There will be no painless extrication from QE, and as I have said, I don't believe the Fed will be able to leave ZIRP willingly. Precisely. But it's not only Bernanke and his cronies who talk in mysterious dialects. Everywhere we look over the past few years, strange communications have been popping up, such as this peculiar one from May 2010 that I've pored over and can't seem to make heads or tails of: (Reuters): European finance ministers triggered a record 110 billion euro ($147 billion) bailout for debt-stricken Greece on Sunday after Athens committed itself to years of painful austerity. After weeks of tough talk and procrastination due to fierce public opposition to handouts for the Greeks, German Chancellor Angela Merkel finally threw her full support behind the EU/IMF package, vowing to fight for parliamentary approval by Friday. Euro zone ministers, meeting in emergency session, approved the three-year package of emergency loans and agreed the first funds would be released in time for Athens to make a big debt repayment to creditors on May 19. In exchange for by far the largest bailout ever assembled for a country, Prime Minister George Papandreou announced further spending cuts and tax increases totaling 30 billion euros over three years on top of tough measures already taken.... "These sacrifices will give us breathing space and the time we need to make great changes," he said....
23 JULY 2013
10
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THINGS THAT MAKE YOU GO
Economists were more positive. "The aid package will help defuse the primary cause of concern for creditors which is the imminent risk of default," said Lena Komileva, head of G7 market economics at Tullett Prebon.... Papaconstantinou said the deal would cover a large part of Greek borrowing needs for the next three years. In return Athens promised to slash its budget deficit to the EU limit of three percent of GDP by 2014 from 13.6 percent last year. Papaconstantinou said Greece's public debt would soar to nearly 150 percent of GDP a higher peak than forecast earlier but start falling from 2014. Both he and EU and IMF officials insisted there had been no talk of restructuring Greece's debts. Now, I am familiar with some of these character combinations, but others baffle me. "Debt-stricken Greece" I can understand immediately, and "Eurozone ministers, meeting in emergency session" is another very familiar string of characters, but then we get to the more cryptographically challenging chunks, such as "These sacrifices will give us breathing space and the time we need to make great changes" and "The aid package will help defuse the primary cause of concern for creditors which is the imminent risk of default". I have no idea what these symbols, strung together, might mean. Then there's this weird and wonderful string: Athens promised to slash its budget deficit to the EU limit of three percent of GDP by 2014 from 13.6 percent last year. Now, generally speaking, as we have discussed, when trying to decipher strange languages, a key is used that comprises known symbols that can be matched against the text in order to discern patterns. In the case of the above runes, one might, for example, use a set of symbols that makes perfect sense, such as this one that was uncovered during a recent dig at the famous Der Spiegel site in Germany: The Greek recovery may be facing yet another hurdle. According to a report by German daily Sddeutsche Zeitung, the beleaguered country needs another massive influx of money if it is to avoid insolvency. The paper cites an unnamed official at the European Commission as saying that the "financial gap" could be as large as 10 billion. A shortfall in Greek accounts of 10bn? Now THAT makes far more sense. The unknown characters "defuse ... the imminent risk of default" look vaguely similar to another passage uncovered at Der Spiegel that might offer clues to their meaning: Greek Economy Minister Kostis Hatzidakis told German daily Die Welt earlier this month that he expects Europe to agree to another debt haircut for the country. ... but it's hard to align the two and make any kind of real sense out of them.
23 JULY 2013 11
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THINGS THAT MAKE YOU GO
The simple truth is that, despite strange pronouncements to the contrary, Greece is coming back to the trough again; and, over time, even another 10bn will not be enough to solve the country's problems. Greece is bankrupt. Still. It is trussed up in the straitjacket of the euro when it needs flexibility in its currency; and the decisions being made in the name of preserving the European dream are condemning the nation to disaster but that reality never seems to tally with what policy makers, intent on doling out catnip to the masses, are saying. The whole matter of the disconnect is itself a baffling sort of meta-code that could stand some deciphering. Why can't these economic officials talk straight? What all this clearly demonstrates is that everywhere you look, the language emanating from governments and central banks is becoming more and more difficult to sort out; and I am afraid there is a very simple reason for that: they have ventured into uncharted realms and have absolutely no idea how they will ever find their way back. The one thing I am certain of, though, is that the trip our so-called leaders are taking us on will end in disaster, and perhaps by using a disastrous outcome as the cipher key we may find that all the symbols fall neatly, if disturbingly, into place. Shortly before he turned 30, Michael Ventris, an architect (who, rather improbably for such a profession, had never attended university), finally solved the mystery of Linear B by simply using three-symbol strings to phonetically spell out Cretan place names. As he plugged in various cities, a chain reaction began, and the language unmasked itself before his grateful eyes. On June 1, 1952, Ventris announced to the world that he had solved the riddle of Linear B, a language that had been spoken 500 years before Homer and 700 years before the Greek alphabet was devised. Four years later, he was dead, victim of a car crash that looked suspiciously like suicide. Laboring to decipher the indecipherable can lead to the most unpredictable of outcomes. Had the Minoans known that people like Evans, Kober, and Ventris would be haunted to their graves trying to figure out what was to the Minoans a perfectly straightforward way to communicate, perhaps they would have tried to do things a little differently but then, they weren't actually trying to hide anything or guide anyone to a preferred conclusion. They were just counting horses, pigs, helmets, men, and women. Pay careful attention, folks, and do your best to discern the true meanings behind the words that tumble, willy-nilly, from the mouths of policy makers around the globe. What they say and what they really mean are, I am afraid, two completely different things; and unlike the simple Minoan accounts, the ones we have to reconcile today are corrupted by trillions of dollars of freshly printed money.
23 JULY 2013
12
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THINGS THAT MAKE YOU GO
Something just doesn't add up. (The amazing story of Linear B is the subject of a wonderful book called The Riddle of the Labyrinth, by Margalit Fox, and a BBC documentary, "A Very English Genius", which you can watch by clicking on the links here: Part I Part II Part III Part IV)
*******
With all that cleared up nicely, let's get into the meat of this week's Things That Make You Go Hmmm..., which leads off with perhaps the only truly straightforward politician of them all, Nigel Farage, whom we find enjoying a pint in an English pub with Marina Hyde. From the pub we venture to Detroit in the aftermath of the biggest municipal bankruptcy in US history; to Greece to hear all about that little matter of a 10bn shortfall; to Japan, where last weekend's Diet election (the Diet is the Japanese parliament, not a slimmed-down vote) has cleared the way for Abenomics to really hit its stride; to Buenos Aires, where the Kirchner government continues to meddle in the kitchen; and to China, where an airline magnate has crashed and burned in spectacular fashion. The upheaval in the bullion market is front and center again this week, as we take another look at what the disturbance in the GOFO rate means, view some great long-term charts from Nick Laird of ShareLynx, marvel at collapsing COMEX inventories, and enjoy a magnificent interview with Andrew Maguire, who does a superb job of clarifying some of the more confusing action in the world of gold. We have a rare chance to hear from John Paulson; Mike Shedlock covers a wide range of subjects in a great interview; we find out how to spot a liar and take in an interesting chart on America's missing money; and finally there is a welcome return by my great friend David Hay of Evergreen, who kindly shares his thoughts on the current state of the US bond market and points out some strong parallels with days gone by. That's all from me for now....
23 JULY 2013
13
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THINGS THAT MAKE YOU GO
23 JULY 2013
14
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(I need hardly tell you which joyless international political body is planning that, but the good news is that Farage has promised to get on a plane to Brussels and ruddy sort them out.) We establish that he'd never do reality TV, unless they do Strictly Come Drinking, and marvel that Ukip has got where it is with a mere nine nine! paid staff, and a war chest Farage classifies as "two bob and a bag of marbles". He cheerfully admits he couldn't name a favourite novel even from the days he still had time to read them, and can only narrow down his cinematic tastes to "spy stuff" and Richard Curtis-style "English stuff". Scrupulous about standing his round, he stresses that as a point of principle, he'd never, ever, involve his wife or four children in his work, which is partly the reason he was up in the plane that day to avoid the cliched snap of them all striding en famille to the polling station. Of the other leaders, he marvels: "They talk about doing school runs and things like that. I do that twice a term." So do they, probably. "Well, who knows, but they all tell you how wonderful they are with children. They're really good at doing the nappy changes and all this sort of thing, and I've got to tell you: I'm useless with young children. Completely useless. I mean, so bad it's frightening." In the absence of domestic-bliss propaganda, perhaps the Ukip message would benefit from some celebrity endorsement? "I'm working on some big ideas," Farage confides. No names, no pack drill, obviously, though he will say that: "Jamie Oliver's comments were very interesting the other day. When I get time off, I'm going to follow up and go and see him. Posh Spice," he adds, "is vehemently Eurosceptic. She's made some very, very strong comments about it." My gut feeling is that she'll stay out of it. "I don't know," he replies, shortly before confirming his personal credo as: "I travel optimistically".
*** UK GUARDIAN / LINK
23 JULY 2013
15
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THINGS THAT MAKE YOU GO
Athens gives Schuble a good opportunity to view the rubble of the failed policies toward Greece of recent years. At the beginning of the crisis, experts with the European Union and the International Monetary Fund (IMF) predicted a short period of pain for the country. If it worked hard to achieve its austerity homework, the worst would soon pass, they said. Instead, the Greek economy has been in a state of recession for five years now, with no end in sight. Unemployment is at 27 percent. And the country's so-called rescuers would consider it a success if that figure were to climb just a little bit slower. Of course there are no easy fixes for a crisis this deep nor is there a single culprit. The forces of inertia among Greece's political and administrative elite contributed a great deal to the current misery. But Schuble has also played a rule by blocking possible paths out of the crisis for the country. The issue now is a further debt haircut that would make it possible for the country to shed itself of a tremendous burden. During the current calendar year, Greece's mountain of debt will grow by around 330 billion ($432 billion). That's almost 180 percent of annual economic output. Few other countries in the world have liabilities that high at least none with the kind of weak economic structure Greece has. The interest payments the Greek state has to send abroad are making the recession even worse, which in turn is causing debt levels to rise. How is Greece ever going to get itself out of this vicious circle? It already happened once, at the beginning of 2012, that private creditors forgave a part of Greece's debt. But it was already clear at the time that it wouldn't go far enough. In order to truly and sustainably help the country out, public creditors (e.g. the governments of countries like Germany) would also have to write off part of the money they lent to Greece. Currently, two-thirds of Greece's bonds are held by public creditors abroad.
23 JULY 2013
16
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THINGS THAT MAKE YOU GO
Whether one wants to call that step a haircut, debt forgiveness or a state bankruptcy is of secondary importance the different designations only define the conditions under which the debt is trimmed. What is clear, though, is that Greece would be given a fair chance to grow its way out of the crisis on its own. Of course, there is one hitch. The pain would no longer be felt exclusively by the Greeks it would also hit taxpayers in the rest of Europe, especially those in Germany. For the first time in the four years of the crisis, their pocketbooks would be hit massively because the money from the loans to Greece that are written off would then be missing somewhere else in government budgets.
*** DER SPIEGEL / LINK
23 JULY 2013
17
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THINGS THAT MAKE YOU GO
The high demand lately for spot physical delivery has played a part in the yellow metal's recent rebound from its low of US$1200 per troy ounce at the end of June to US$1283 on July 18. But analysts say it is difficult to determine both the cause of the backwardation and whether it will persist. "It could be a whole range of factors; a bullion bank may have overcommitted in the physical market, miners have reinitiated hedging programs since the April price dive and have to borrow gold to hedge, and that may have cascaded up the chain of physical demand," said Robin Bhar, commodities strategist at Societe Generale. "With the gold market you don't find out the reasoning or explanation for an event until days, weeks, or even months after the event. What's strange here is that a time of seasonal demand weakness we have strong physical demand and backwardation."
*** REUTERS / LINK
23 JULY 2013
18
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THINGS THAT MAKE YOU GO
As it stands, 40% of Detroit street lights are broken. It takes, on average, an hour for police or ambulance services to respond to emergency calls. Gang murders are carried out in vacant buildings that are then set on fire, in the knowledge that overstretched emergency services will not attempt a search. The flight from blighted areas appears to be accelerating in the past decade alone, Detroit's population has fallen by 26%. It now stands at 700,000, having once been two million. Remaining residents in districts such as Brightmoor, north-west of the centre, are besieged by vandalism and crime. Streets have been turned into ad hoc dumps for car tyres and abandoned boats. One spray-painted sign reads simply: "Dumpers will be shot." What isn't dumped is stolen. Factories and homes have largely been stripped of anything of value, so thieves now target cars' catalytic converters. Illiteracy runs at around 47%; half the adults in some areas are unemployed. In many neighbourhoods, the only sign of activity is a slow trudge to the liquor store. In 1950, Detroit was 82% white. The "white flight" after the 1967 race riots flipped the ratio it's now 82% black. When the 2008 financial crisis reduced the cost of living in the suburbs, the black population moved out of the centre, too. "No other city in America has been blighted like Detroit but I think the bankruptcy will bring an end to it," said Lenon Smith, a lifelong Detroit resident. "Everybody is optimistic that we can now reinvest in our communities and amenities."
*** THE OBSERVER / LINK
Hmmm...
THINGS THAT MAKE YOU GO
In particular, the fizz of "Abenomics", the programme of monetary easing, fiscal stimulus and structural reforms, has caught on with the country. Businesses large and small, along with their employees, are the loudest cheerleaders for the economic revival plan. So uncannily high and stable is the popular support for Mr Abe's government in opinion polls, that Shisaku, a wry blog on Japanese politics, wonders whether the LDP is replicating thousands of supporters in a biocomplex under its Tokyo headquarters. Mr Abe's cabinet is the first in twodozen years to have had rising approval rates for three straight months after taking office, according to the Yomiuri Shimbun, the country's biggest newspaper. Some 57% of Japanese approve of the cabinet today, according to the public broadcaster, almost twice the typical rate for Japanese governments at the same stage (and much higher than Mr Abe's first one). Such popularity gives the LDP every chance of winning back control of the powerful upper house, allowing the government more easily to bring in deep-seated changes. Supply-side measures such as making the labour market more flexible are the most far-reaching part of Abenomics, but they require radical legislation. Just how big a win the LDP will pull off is the question. Polls for the seats to be allocated by proportional representation suggest that around 40% of Japanese back the party, compared with just 6% for the DPJ. With New Komeito, its coalition partner, the LDP looks likely to win the 63 seats needed to control the upper house. Mr Abe is openly aiming for a 70-seat win, which would allow the coalition to dominate the chamber's legislative committees. Mr Abe's dearest wish is to secure the two-thirds majority, including allies, that he already enjoys in the lower house. It would allow him radically to revise the meek constitution imposed by America after Japan's wartime defeat. It is a key part of his dreams for a "beautiful country". Yet the electoral arithmetic looks too daunting, for he would need 92 more seats.
*** ECONOMIST / LINK
23 JULY 2013
20
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Authorities say Huiran, set up in March 2005 with registered capital of a mere 10 million yuan in borrowed cash, was little more than a shell for a financing scheme that funneled borrowed money into the deal. And Li raised the cash by massaging his personal connections to highranking military, government and business leaders. "I don't have money" personally, he said. "I'm just foolishly bold." The airline succeeded, winning Li respect for his business savvy. Today, Shenzhen Airlines operates a fleet of nearly 100 aircraft, and serves 135 domestic and international routes. But since 2010, Huirun has been only a minor stakeholder while Air China holds a 51 percent stake. One morning in late 2009, police stopped Li on a highway while he drove to Chongqing from Hunan Province. He was detained and held until last April, when he was brought to Beijing to stand trial with five other former Shenzhen Airlines executives, including ex-chairman Zhao Xiang and former China Southern Airlines chief Li Kun. Each man was charged in Beijing Second Intermediate People's Court with embezzling some of the more than 2 billion yuan tied to the airline takeover. Prosecutors say Li, for example, fleeced the airline to pay back Huirun's original investors. Li once admitted that to finance the airline's takeover he had "borrowed a chicken to lay eggs, borrowed a ship to make a voyage." In other words, his plan was always based on leveraging what was expected to be growing equity in the airline for new loans, which in turn would be used to pay down debt. Li was confident the company would grow quickly, and his financing strategy, at least for awhile, succeeded. Prosecutors say the executives embezzled airline funds for personal gain. Li is also charged with breaking his parole requirements, and thus could be forced to serve not only prison time for embezzlement a crime that carries a maximum life in prison but also serve the six years remaining on his previous prison term when he was released in 2003. As of late June, Li had been brought into the Beijing court for three hearings. At the first hearing in April, an emotional Li suffered a serious nose bleed. He showed up for the May hearing with an IV tube in his arm. And in June, a haggard Li faced judges while wearing an oxygen mask. As of early July, Li and his former colleagues were awaiting court rulings. There was no timetable for decisions.
*** CAIXIN / LINK
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Source: Zerohedge
And here are the top 15 ranked by the percentage decline (for this list, I required a population of at least 125,000 in or before 1960):
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Finally, each game included two minutes of videotaped conversation in which the receiver could grill the allocator with questions, prior to deciding whether to accept or reject the offer. This provided ample opportunity for the allocator to tell the truth about the money, lie, or try to avoid the subject altogether. "We wanted to create a situation where people could choose to lie or not lie, and it would happen naturally," Van Swol says. Ultimately, the receiver had to decide whether the proposed allocation was fair and honest, based only on a conversation with the allocator. Thus, it behooved the allocator to be either a fair person or a good liar. As it turned out, 70 percent of the allocators were honest, telling the receivers the true amount of the endowment and/or offering them at least half of the pot. The remaining 30 percent of allocators were classified either as liars (meaning they flat-out lied about the amount of the endowment) or as deceivers by omission (meaning they evaded questions about the amount of the endowment, but ultimately offered the receiver less than half).
*** HARVARD BUSINESS SCHOOL/WORKING KNOWLEDGE / LINK
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Of course, as Mark Twain was wont to say, history doesn't repeat itself but it does rhyme; thus, this year has not been an exact clone of 2004. However, there's been a lot of rhyming happening based on the fact that nearly the entire run-up in Treasury yields that would happen over the full Fed tightening cycle from June of 2004 until December of 2006 was achieved by mid-May of that year. To be precise, even though the Fed would soon embark on a tightening campaign that would last for two and a half years, during which it raised its overnight rate 17 times by a total of 400 basis points (4%), almost the entire increase in longer term Treasury yields was over by the second week in May of 2004! And, as you can see in Figure 12 on the previous page, this was before the Fed even raised rates once, a move it didn't make until late June of that year. Although it's true that the 10-year Treasury note did poke its head above a 5% yield numerous times over the next few years, the reality is that the bulk of the rate rise occurred before then Fed-head Alan Greenspan ever lifted his finger (or overnight rate). Remarkably, in early 2007 despite rising inflation, surging commodity prices, and a credit-fueled housing and consumer spending boom the yield on the 10-year treasury note was right where it was in mid-May of 2004: 4.8%. By contrast, 10 years earlier, in 1994, the bond market pasting which bankrupted Orange County, California coincided with actual Fed hikes and played out over a much longer time frame, as you can see below. (See Figures 13 and 14.)
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With inflation numbers understated (and unlikely to improve), the real GDP growth is made to look far better than it really is. And given that the economy will be a major determinant of the October 2013 mid-term elections outcome, the Cristina Fernandez government continues to cook the country's key economic indicators.
*** SOBER LOOK / LINK
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The contrast between the Shanghai Gold Exchange (SGE) and the COMEX is put into
clear focus by this collection of charts from Stacy Herbert. Though volume on the COMEX dwarfs that of the SGE, it's clear from the massive disparity between these two exchanges, as far as deliveries of physical metal are concerned, that one is a paper market and the other a real market for physical gold. More and more, the bullion markets are beginning to focus on Shanghai to find out what the real demand is like for physical metal.
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Source: ZeroHedge
With a national debt approaching $17 trillion, Uncle Sam is tightening his belt and
looking under the cushions for extra change. But a closer look at his pocket book reveals just how little he knows about where your money is going. The following infographic provides a few examples that will make you think twice about Uncle Sam's accounting skills.
*** ZEROHEDGE / LINK
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Source: ShareLynx
is one of a series of fantastic long-term gold and silver charts that Nick Laird of ShareLynx has painstakingly put together over an extended time period. He has made them available to nonsubscribers to his work, and they make fascinating viewing for anybody interested in precious metals. Any chart that goes back EIGHT CENTURIES can be relied upon to give a pretty good perspective, in my opinion, and these charts do just that. Yet more phenomenal work from Nick.
For over
a month, JPMorgan managed to mysteriously avoid matching up the gold held in its (world's largest) vault with the Comex delivery notice update. However, as of today, that particular can will be kicked no more. Starting yesterday, JPM reported that just under 12,000 ounces of Eligible gold (the same Registered gold that two days earlier saw its warrants detached and converted to Eligible) were withdrawn from its warehouse 100 feet below CMP 1. But it was today's move that was the kicker, as a whopping 90,311 ounces of Eligible gold were withdrawn, accounting for a massive 66% of the firm's entire inventory of non-Registered gold, and leaving a token 46K ounces, or a little over 1 tonne, in JPM's possession.
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Needless to say, today's massive move, which increasingly puts JPM's gold holdings in the danger zone vis-a-vis future delivery notices which just refuse to stop, has pushed total JPM vault gold to a new all time low of just 436k ounces, or a little under 14k tonnes, with just 12 tonnes, or 390k ounces, of Registered gold left and rapidly draining. And to think that two years ago around this time JPM had over 3 million ounces of gold in its possession.
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CLICK TO LISTEN
Following on
from last week's Things That Make You Go Hmmm... and the ongoing disappearance of gold from storage facilities, Andrew Maguire gives a great interview with Eric King on the tight supply being seen in the gold (and silver) bullion markets. Andrew has an incredible understanding of the mechanics of the bullion markets, and he explains what is happening with great clarity. This is a must-listen for anyone interested in trying to figure out what all the evidence means for gold.... CLICK TO LISTEN
become synonymous with gold over the past few years, and the amount of scorn heaped upon the performance of his gold fund has been utterly ridiculous. In this excellent interview, Paulson discusses this fact and the rationale around his gold trade and offers a bunch of other fascinating insights on money printing, inflation, the Fed, and the housing market to name but a few. A great chance to spend twenty minutes with one of the sharpest minds in the business.... CLICK TO WATCH
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and finally...
Rory McIlroy has
beaten just about every human on the planet, so for the latest European Tour challenge he's up against a robot. Or a Golf Laboratory Computer Controlled Hitting Machine, to be precise...
CLICK TO WATCH
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Grant Williams
Grant Williams is the portfolio manager of the Vulpes Precious Metals Fund and strategy advisor to Vulpes Investment Management in Singapore a hedge fund running over $280 million of largely partners' capital across multiple strategies. The high level of capital committed by the Vulpes partners ensures the strongest possible alignment between the firm and its investors. Grant has 28 years of experience in finance on the Asian, Australian, European and US markets and has held senior positions at several international investment houses. Grant has been writing Things That Make You Go Hmmm... since 2009. For more information on Vulpes, please visit www.vulpesinvest.com.
*******
Follow me on Twitter: @TTMYGH YouTube Video Channel: http://www.youtube.com/user/GWTTMYGH 66th Annual CFA Conference, Singapore 2013 Presentation: 'Do The Math' Mines & Money, Hong Kong 2013 Presentation: 'Risk: It's Not Just A Board Game' Fall 2012 Presentation: 'Extraordinary Popular Delusions & the Madness of Markets' 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 fundsthough I will not be making any specific recommendations in this publication.
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