Debt No Jubilee7

Debt: There is
No Jubilee
DEBT: THERE IS NO JUBILEE
The world has too much debt.
In the book of Leviticus (Old Testament),

a Jubilee year is mentioned to occur
every fifty years, in which slaves and
prisoners would be freed, debts
would be forgiven.
Today there is no Jubilee.
Gold & Silver Investment Summit All material is compiled from sources believed to be accurate, but no accuracy can be guaranteed.
Monday, 8th November 2010 The presentation is for information purposes only and is not a solicitation to invest.
Unauthorized reproduction or distribution is strictly prohibited.
Deleveraging: Growth, Austerity,
Devaluation or Default
“Capitalism without failure is like religion without sin.”
Charles Kindleberger, Manias, Panics and Crashes
How do you get rid of debt without Jubilee?

Deleveraging:
1. Grow your way out: US post WW2, Japan post 1989
2. “Belt-tightening”: Scandinavia 1990s, S Korea, Malaysia post 1997
3. Currency devaluation: US 1934 Gold Reserve Act, UK 1949, 1967, (2008?)
4. Explicit default: Russia 1998, Argentina 2002 - 08
Debt Supercycle Ends:
No Normal Deleveraging
DELEVERAGING PROCESS
Deleveraging
Recession
Real GDP growth
Debt GDP
10 years 1-2 years 2-3 years 4-5 years 10 years

10-year Economic Downturn Economic 10-year trend
historic trend downturn starts continues during ‘bounce-back’ while post-deleveraging
as economy still the first years of deleveraging
leverages up deleveraging continues
Average annual
real GDP growth, %
1 Belt-tightening 4.7 0.6 -0.6 4.8 3.2
n=16
2 High Inflation 4.3 -1.7 -1.4 4.1 4.2

n=8
3 Massive Default 4.3 -1.8 -3.0 5.7 4.8

n=7
4 Growing out of debt 7.9 0.8 12.81 2.3

n=1
Total 4.6 -0.5 -1.3 5.1 3.8
n=32
1 Deleveraging driven by off-trend growth is not linked to a recession.

Source: International Monetary Fund; McKinsey Global Institute analysis
Global Debt Reduction:
What you should do?
1. Slash expenditure on entitlements
2. Reduce marginal tax rates on income and corporate profits to stimulate growth
3. Raise taxes on consumption to reduce deficits
4. Deliver by writing down liabilities in line with fall in asset prices
5. Structural reform – law and taxation changes
Global Debt Reduction:
what actually happens
Financial Oppression:
1. Oblige (enforce) commercial banks to hold government debt and condemn bond investors
to negative real interest rates
2. Central banks cut interest rates beyond “market” rate
3. Explicit default on debt commitments to politically weak groups or foreign creditors
4. Implicit default – inflate vis a vis quantitative easing and currency devaluation
5. Revalue risk assets higher vis a vis qualitative easing eg UK Asset Purchase Program
Excessive Debt That Cannot
Be Repaid in Full
Most developed countries had debt levels going into the Great Financial Crisis far beyond their
means to service them.
DEBT BY COUNTRY 2008 % OF GDP
500
450
400
350
300
250
200
150
100
50
0
UK
US
Japan
Canada
South Korea
Spain
Russia
Italy
France
Germany
China
Switzerland
India
Brazil
Financial Institutions Households
Non-financial business Government
Source: McKinsey Global Institute
Pensions: Off Balance Sheet Liabilities
Real situation is much worse than perceived. Pension liabilities will explode public sector debt
levels. Politically, cutting pensions is intolerable.
TOTAL DEBT & LIABILITIES AS % OF GDP
400%
200%
0%
-200%
-400%
-600%
-800%
-10,00%
-1,200%
-1,400%
-1,600%
-1,800%
Italy Germany France Portugal United United Spain Ireland Greece
States Kingdom
Cost of ageing Structural deficit Initial debt level
Source: EU Commission, Eurostat, CBO, IMF, Morgan Stanley Research
Ageing Society: Fewer Taxpayers,
More Pensioners
A third of expenditure for governments is age and health related costs, which will surge
as generation of baby- boomers retires and dependency ratios worsen (next 15-20yrs).
OLD-AGE DEPENDANCY RATIOS – POPULATION 65+ / WORKING AGE, %
FRANCE
70
GERMANY
60 ITALY
50 SPAIN
SWEDEN
40
UK
30
EU-25
20
US
10
JAPAN
0 CHINA
1995 2005 2015 2025 2035 2045
Source: CBO, European Commission, National Institute of Population and Social Security Research
Governments Will Be Unable
to Reduce Debt Levels
Long term stable level of govt debt to GDP approx. 60%, the aging population negates
likelihood of this target by 2030: Govts need to run a consistent primary surplus
(ex-ante interest) of > 4%, ie achieving a run of 15 yrs at best surplus years ever to meet target.
PRIMARY BALANCE REQUIRED TO STABILIZE DEBT/GDP AT 60% BY 2030
10 JAPAN
5
US
UK
GERMANY
-5
-10
-15
1970 1980 1990 2000 2010 2020 2030
Source: Citi Investment Research and Analysis, IMF, OECD. Projections taken from IMF Staff Position Note SPN/09/21.
Sovereign Debt: Crowding Out
All countries are trying to borrow at the same time.
GOVERNMENT DEBT OUTSTANDING (2010 FORECAST, % GDP)
JAPAN
GREECE
ITALY
IRELAND
BELGIUM
EURO AREA
UNITED STATES
PORTUGAL
FRANCE
U.K.
CANADA
GERMANY
MALTA
AUSTRIA
NETHERLANDS
SPAIN
CYPRUS
FINLAND
SLOVENIA
SLOVAKIA
AUSTRALIA
CHINA
LUXEMBOURG
0 50 100 150 200
Sovereign Debt Rollover Risk
Most countries have very low average maturity levels, exposing them to rollover risk.
Any increase in interest rates will raise borrowing costs.
AVERAGE MATURITY IN YEARS OF SOVEREIGN DEBT
14
12
10
Belgium
UK
Norway
US
Japan
Czech Republic
Canada
Greece
Finland
Hungary
Denmark
Ireland
Spain
Italy
Austria
France
Sweden
Germany
Poland
Netherlands
Australia
Switzerland
Portugal
The Market Knows The Game is Over
Governments are now held in such low regard by investors that in many countries corporate
bonds trade at tighter spreads than their parent sovereigns. Corporate CDSs are tighter than
sovereign CDSs.
COMPANIES VS SOVEREIGNS CDSs
180 180
160 160
140 140
120 120
100 100
80 80
60 60
40 40
Jul-10
Jul-10
Jul-10
Jul-10
Aug-10
Aug-10
Aug-10
Sep-10
Sep-10
Sep-10
Sep-10
Apr-10
Apr-10
Apr-10
Apr-10
Oct-10
Oct-10
Oct-10
Jun-10
Jun-10
Jun-10
May-10
May-10
May-10
SovX Country CDS Index Itraxx Main CDS Index
When Does the Game End?
Either you cannot service your debt or your lenders lose confidence in your ability to service
it at a particular rate.
Excessive interest payments – Coupon payments too high to be serviced
Excessive reliance on foreign capital – Foreigners tire of lending to you
Governments will indulge in deficit financing
UK: A Case Study In How
To Reduce Your Debt
“Major” King: How I learned to Stop Worrying and Love Inflation

UK: Poster Boy of the Credit Crisis
“As I have said before Mr Deputy Speaker:
No return to boom and bust”
UK Chancellor, Gordon Brown 1997 and 2006
Extended business cycle caused by rates too low too long.
Stability breeds instability.
Rising house prices masked household debt to asset ratio reality.
Housing ‘ATM’ and cheap money enabled unprecedented consumption boom.
Government nominal spending doubled (1997- 2010). Govt. spending is 45% of GDP.
Government did not reign in unfunded liabilities as life expectancy extended beyond retirement age.
PEOPLE BELIEVED THEIR OWN BULLSH*T.
UK Household Leverage was on a High
Household leverage measured by debt relative to disposable income illustrates the obscenely large
increases that took place from 2000 to 2008
HOUSEHOLD LEVERAGE MEASURED AS DEBT/INCOME INCREASED IN MOST COUNTRIES
Total household debt 2000

% of disposable income 2008
180
155
160
140 139
130 128 124
111 112 114
105
96 98
81
69 69
60
48
34
Switzer- United South Canada Spain United Japan Germany France Italy
land Kingdom Korea States
Increase
9 52 73 25 88 33 -10 -14 44 75
%
Canada includes non corporate business, which exagerates its relative size compared to other countries
Source: Hever Analytics; McKinsey Global Institute
UK: NICE Decade Turns NASTY
“Who would be prepared to lend with the fear of being
repaid in depreciated currencies always before his eyes?”
Georges Bonnet, the French foreign minister of the 1930s
NICE (Non-inflationary consistent expansion) turned nasty 2008
UK household debt as % of disposable income 160%; at worst US was 130%
UK overall debt is nearly 5 x GDP; excluding unfunded liabilities,
£10 trillion debt incl. unfunded liabilities, or £170,000 for every man woman and child
UK Government, When in Doubt Spend
£671bn Total Government spending in the financial year 2009-2010
Govt support for Britain’s Banks £850 bn + £100 mm on financial advice
£280bn Insurance cover for bank assets

£250bn guaranteeing of wholesale borrowing by banks
£200bn indemnification of BoE against losses for liquidity support
£76bn purchase of RBS shares
£40bn loans and funding to Building Society and Financial Compensation Scheme
Source: National Audit Office
Most Growth in the UK GDP is Coming
From Government
Public sector is plugging the gap emanating from an ongoing deleveraging private sector.
Governments effectively socialised private sector losses.
UK NOMINAL GDP: PUBLIC AND PRIVATE
(September 1961 = 100)
8,000 33%
7,000 31%
6,000
29%
5,000
27%
4,000
25%
3,000
23%
2,000
1,000 21%
- 19%
Mar-61
Mar-63
Mar-65
Mar-67
Mar-69
Mar-71
Mar-73
Mar-75
Mar-77
Mar-79
Mar-81
Mar-83
Mar-85
Mar-87
Mar-89
Mar-91
Mar-93
Mar-95
Mar-97
Mar-99
Mar-01
Mar-03
Mar-05
Mar-07
Mar-09
Private GDP Public GDP
Public/Private (RHS)
UK Fiscal Balance:
the Deficit does Matter
“Major” King says UK faces a SOBER decade: Savings, Orderly Budgets,
and Equitable Re-balancing
EUROPE: DEFICIT/SURPLUS % GDP
-2
-4
-6
-8
-10
-12
-14
-16
GERMANY
BRITAIN
ITALY
FRANCE
JAPAN
SPAIN
EUROZONE
CANADA
STATES
UNITED
IRELAND
Now 1 Year Ago
UK Biggest Overall Debt in G20
The UK has a debt problem much worse than the US’s. We are the most leveraged country
in the world per capita.
DEBT BY COUNTRY 2008 % OF GDP
500
450
400
350
300
250
200
150
100
50
0
UK
US
Japan
Canada
South Korea
Spain
Russia
Italy
France
Germany
China
Switzerland
India
Brazil
Financial Institutions Households
Non-financial business Government
Source: McKinsey Global Institute
uk current account:
can things only get better?
Domestic Private Sector Financial Balance + Govt Fiscal Balance – Current Acct Balance = 0
“The underlying principle flows from the financial balance approach: the domestic private sector and the government sector cannot both
deleverage at the same time unless a trade surplus can be achieved and sustained. Yet the whole world cannot run a trade surplus.”
Rob Parenteau (2010)
But the UK will have a damn good go at exporting its way to growth.
UK CURRENT ACCOUNT
2 10
0
0
-2
-4 -10
Rolling 12 month
Quarterly
-6
-20
-8
-10 -30
-12
-40
-14
-16 -50
Mar-93
Mar-94
Mar-95
Mar-96
Mar-97
Mar-98
Mar-99
Mar-00
Mar-01
Mar-02
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Current Account (Quarterly) 12 month
Gilty Pleasures: PSNBR explodes
After bailing out banks government borrowing is still rising. PSNBR is £140bn on a
twelve month rolling basis. This is a rise by almost a factor of 4 from 12 months ago.
PUBLIC SECTOR NET BORROWING (£bn)
160
140
120
100
80
60
40
20
-20
-40
Sep-94
Dec-96
Sep-97
Dec-99
Sep-00
Dec-02
Sep-03
Dec-05
Sep-06
Dec-08
Sep-09
Jun-95
Jun-98
Jun-01
Jun-04
Jun-07
Jun-10
Mar-96
Mar-99
Mar-02
Mar-05
Mar-08

BoE: Plugging the Hole
There is not enough foreign demand for the amount of gilts issued. Sterling is not a reserve
currency. No one needs to own £ denominated bonds.
FOREIGN HOLDINGS OF GILTS AND YOY CHANGE IN ALL GILTS OUTSTANDING

60%
245,000
50%
195,000 40%
30%
145,000
20%
10%
95,000
0%
45,000 -10%
Mar-96
Mar-97
Mar-98
Mar-99
Mar-00
Mar-01
Mar-02
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Foreign Holdings (£ mns) (LHS)
Foreign Holdings as % of Gilts Outstanding
YoY Change in All Gilts Outstanding
“Real” Spending Cuts: When Less
is Not More
Nominal Spending will not reduce over projected horizon of 2014/15, as Treasury/OBR will not
maintain spending in line with inflation. Inflation assumptions used are 3.2 to 4.2% not the BoE
target rate of 2%. And there you have the INFLATIONARY dynamic!
Source: The BBC
BoE: Money Printing Never
Felt So Good
The Bank of England has been more aggressive than any other central bank in expanding
its balance sheet.
EXPANSION OF MONETARY BASE FOR BOJ, BOE AND FED
0 ON HORIZONTAL AXIS = MARCH 2000 FOR BOJ;
MARCH 2008 FOR BOE AND FED
300
275
250
Change in Monetary Base
225
(0 Months = 100)
200
175
150
125
100
75
0 6 12 18 24 30 36 42 48 54 60 66 72 78 84 90 96 102 108 114 120 126
Months from 1 year before QE was implemented
QE Starts Here BoJ BoE Fed
BoE Becomes The Gilt Market
BoE bond purchases have been over £200 bn. BoE owned almost a third of all conventional
Gilts outstanding last year. BoE’s proportion of Gilt holdings have gone down slightly,
only because it has paused its buying while the DMO has been issuing new gilts like they
are going out of fashion.
BANK OF ENGLAND GILT HOLDINGS AS A % OF OUTSTANDING
35%
March 09 is when the BoE's Asset

30% Purchase Facility (ie QE) began.
The BoE now holds close to a third
of all conventional gilts.
25%
20%
15%
10%
5%
0%
Jul-09
Aug-09
Sep-09
Nov-09
Dec-09
Jul-10
Aug-10
Sep-10
Apr-09
Oct-09
Apr-10
Oct-10
Jun-09
Jan-10
Jun-10
May-09
May-10
Mar-09
Feb-10
Mar-10
UK - It’s the Level Stupid
“It’s the level, stupid – it’s not the growth rates, it’s the levels
that matter here”
Mervyn (Major T.J.) King (“Kong”)
UK NOMINAL GDP: PUBLIC AND PRIVATE
400,000 95,000
85,000
350,000
75,000
300,000
65,000
250,000
55,000
200,000
45,000
150,000
35,000
100,000 25,000
Mar-90
Mar-91
Mar-92
Mar-93
Mar-94
Mar-95
Mar-96
Mar-97
Mar-98
Mar-99
Mar-00
Mar-01
Mar-02
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Total GDP Govt GDP
NICE one MERV: Inflation is Doing its Job
UK Debt to Nominal GDP is falling. UK Nominal GDP is at new highs.
Debt is fixed, while GDP grows nominally. The real burden of debt is eroded as inflation
rises unexpectedly.
UK RPI Vs CPI
6%
4%
2%
0%
-2%
-4%
Jul-00
Jul-01
Jul-02
Jul-03
Jul-04
Jul-05
Jul-06
Jul-07
Jul-08
Jul-09
Jul-10
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
RPI - CPI RPI CPI
UK: This Time is NOT Different
The UK has suffered a severe banking crisis, whereby debts have merely been transferred,
not extinguished... yet. Large banking crises and deleveraging processes typically lead
to sovereign crises. The UK will be no exception.
PROPORTION OF COUNTRIES WITH BANKING AND DEBT CRISES
WEIGHTED BY THEIR SHARE OF WORLD INCOME
45 45
Banking Crises
40 40
35 Debt Crises 35
30 30
Percent of Countries
25 25
20 20
15 15
10 10
5 5
0 0
1900 1904 1908 1912 1916 1920 1924 1928 1932 1936 1940 1944 1948 1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008
Year
Source: Reinhart and Rogoff, Banking Crises, An Equal Opportunity Menace
Too Much Debt Leads to Inflation
UK implicit default risk high as inflation arises potentially from debt monetisation.
INFLATION AND EXTERNAL DEFAULT: 1900-2006
50
Share of countries in default Correlations:

45 1900 – 2006 0.39
excluding the Great Depression 0.60
40 1940 – 2006 0.75
35
Share of countries with

30 inflation above 20 percent
25
20
15
10
0
1900 1904 1908 1912 1916 1920 1924 1928 1932 1936 1940 1944 1948 1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004
Year
Source: Reinhart and Rogoff, Banking Crises, An Equal Opportunity Menace
High (hyper) Inflation is a Political
Occurrence
“The figures demonstrate clearly that deficits amounting to
40 percent or more expenditures cannot be maintained.
They lead to high inflation and hyperinflations…”
Peter Bernholz “Monetary Regimes & Inflation...pp.71”
High (hyper) inflation is caused by financing huge public deficits through money creation.
Even 20% deficits were behind all but four cases of hyperinflation.
The UK deficit may be 11.5% the size of the UK economy, but currently the UK deficit is over
25% of all government spending.
Deficit Levels Relative to
Expenditures before Hyperinflation
King monetized 100% of the UK budget deficit. This makes the UK a prime candidate for
hyperinflation. Unfortunately we don’t have any gold to protect us.
BUDGET DEFICITS BEFORE FIVE HYPERINFLATIONS
100%
FRANCE
BOLIVIA
80% BRAZIL
POLAND
% of Spending monetised
GERMANY
60%
40%
20%
30%
-4 -3 -2 -1 0 1
Source: Monetary Regimes and Inflation, Peter Bernholz Years prior to money reform
Japan: Monetary Mikado
Japanese debt is like a bundle of “Mikado” sticks, try to remove one and the whole
lot could collapse...
Japan: A Tipping Point for
Sovereign Debt
Japan over the last year issued more JGBs than tax revenues it collected. This is not sustainable.
Japan’s fiscal situation has been dire for some time.
Either Japan will right itself through political reform, ie debt restructuring and tax increases -
and these would likely not be enough - or it will be a prime candidate for hyperinflation.
!"#$%&&'()*+$,-(./$0
JGB TAXES, EXPENDITURES AND JGBs ISSUED TAX REVENUE, EXPENDITURES AND JGBs ISSUED
100% 120 120
90%
100 100
80%
70%
80 80
60%
50% 60 60
40%
40 40
30%
20%
20 20
10%
0% 0 0
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
JGBs Issued / Tax Revenue JGBs Issued Tax Revenues
Tax Revenue / Tax Expenditures Tax Expenditures
1(2+$3
Hyperinflation,
‘Baburu Keizai’ encore?
Japan’s debt levels are now at levels only seen historically in hyperinflationary countries. By 2010 gross debt to GDP will be over 200%.
Net debt is 110% of GDP, which is better, but the asset side is owned by private sector, so does not help government financing even if they
attempted confiscation.
To understand Japan debt dynamics click here: http://www.hindecapital.com/reports
GOVERNMENT DEBT / GDP
300
250
200
150
100
50
Zimbabwe
Japan
Lebanon
Jamaica
Singapore
Italy
Greece
Spain
Belgium

BoJ Shirakawa goes
‘STRANGE love-Ly’ Nuclear
Shirakawa rides the Bomb, Oct. 5th BoJ statement allows unlimited bond purchases and
all but the kitchen sink.
October 5th, 2010 BOJ implements comprehensive monetary easing policy change 35 tln yen:
1. Overnight call rate to remain at 0 to 0.1 % (“encouraged”).
2. Maintain ZIRP on basis of the “medium – to long term price stability” (“forever”).
3. Establishment of a 5 tln yen Asset Purchase Program – “temporary” measure to purchase

government securities, ABCP, corporate bonds, ETFs, J-REITS.
Land of Rising Sun Sets Sooner
Japan has a history of 180 degree turns:
Isolation to engagement and militarism to pacifism.
Meji Restoration – restored Imperial rule in 1868 and disposed of Shogunate rule enabling
capitalism on Western scale instead of feudalism.
Yoshida Doctrine – post WW2 pacifism and economic development, in spite of US

encouragement for rearmament.
PM Yoshida: Japan renounces “war as a sovereign right of the nation and the threat
or use of force as means of settling international disputes.”
A Golden Jubilee 2010...
Ms. Watanabe sells her bonds as Japan reflates, rearms and purchases gold.
900 tln yen worth JGBs is 10.588 tln USD at 85 yen
At $1,300 troy oz gold = 8.14bn ounces or 253,000 tonnes (8.14bn/31250) gold
But if gold at $13,000, Mrs Watanabe only needs 25,000 tonnes
Bubbles: Nasdaq and Sovereign Bonds?
Public debt, actually, has always had a Ponzi-like characteristic.
“The global financial system continues to be unsound in the same way that a Ponzi scheme
is unsound: there are not enough cash flows to ultimately service the face value of all the
existing obligations over time. A Ponzi scheme may very well be liquid, as long as few people
ask for their money back at any given time. But solvency is a different matter – relating to
the ability of the assets to satisfy the liabilities.”
John Hussman
250
Equity fund inflows Bond fund inflows

200
150
100
50
-50
-100
-150
-200
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Source: Behavioral Investing, James Montler
Debt is Money, Gold was Money,
will be Money...
1914 Federal Reserve Act: Fed could create currency and reserves as long as Federal
Reserve kept a minimum of 40% gold reserve against FRN (dollars).
US Money Supply Backed by Gold = US Gold Reserves x Gold Price ($/oz)

US Monetary Base
Theoretical Gold Price ($/oz) = (US Monetary Base x 0.40)

US Gold Reserves
Gold: The Currency of First Resort
Solving our equation for additional monetary base of $600bn by June 2011, using 40%
rule implies a fair value gold price of U$4,000 / oz.
US GOLD RESERVES AND GOLD PRICE
$10,000
Current Theoretical Gold Price (end 2009)
100% of Monetary Base = $7,700/oz

40% of Monetary Base = $3,100/ozz
$1,000 Actual Gold Spot Price = $1,355/oz

Price of Gold ($ oz)
100% of Monetary Base

40% of Monetary Base
$100
$10
1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
Source: Thanks to EIV Investments, LLC : Dr. F. Conrad Engelhardt IV
When are we Wrong?
Korean and Vietnam “American” War saw surge in US money supply.
In 1971 using a 40% ruling the price of gold should have been $119 troy oz. It was $35.
It was fixed. This discrepancy led to Nixon breaking the gold window and voting for gold.
US GOLD RESERVES AND MONEY SUPPLY
160% $2,100
140% Gold Reserves to Money Money Supply $1,800

Gold Reserves as Percent Money Supply
Supply Ratio High Doubles

(gold Expensive)
120%
$1,500
100%
$1,200
80%
Historical $900
60% Range of Gold
Reserves to Money
$600
40% Supply Ratio
Gold Reserves to
20% $300
Money Supply Ratio Low
(Gold Undervalued)
0% $0
1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
Source: Thanks to EIV Investments, LLC : Dr. F. Conrad Engelhardt IV
A Crisis of Confidence: Gold is the
Default Choice
“When you run these big debts, the problem is not with your children or your grandchildren, it’s in our lifetime.”
Kenneth Rogoff 2010
Sovereign countries rarely default alone. The world may survive a Dubai, Greek or Latvian default but what happens if a major G7 country
defaults such as Japan or...?
SOVEREIGN EXTERNAL DEBT: 1800-2006

PERCENT OF COUNTRIES IN DEFAULT OR RESTUCTURING
60
50
40
30
20
10
0
1800 1810 1820 1830 1840 1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
Year
Source: Reinhart and Rogoff, This Time Is Different
“Gold is the hedge against political instability
and government default”
(A Gold Warrior, 2010)
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HGF RELATIVE PERFORMANCE: GOLD (Last 12 Months)

15%
10%
5%
0%
-5%
Nov-09
Dec-09
Jul-10
Aug-10
Sep-10
Apr-10
Oct-10
Jan-10
Jun-10
May-10
Feb-10
Mar-10
Monthly Relative Outperformance

Cumulative Relative Outerformance
(RHS)
Hinde Gold Fund
Hinde Gold Fund has performed well against other assets since its inception.
HGF COMPARATIVE PERFORMANCE: SINCE INCEPTION

160
Inception to Oct 2008 - Fund Benchmark: 50% Equity, 50% Bullion
Nov 2008 to Present - Fund Benchmark: 100% Bullion
140
120
100
80
60
40
May-08
May-09
May-10
Mar-08
Mar-09
Mar-10
Nov-07
Nov-08
Nov-09
Sep-07
Jan-08
Jul-08
Sep-08
Jan-09
Jul-09
Sep-09
Jan-10
Jul-10
Sep-10
Hinde Gold Fund
MSCI World
GDM
Our Golden Secret to success:
A brilliant Computer model...
Hinde Capital: Investment Managers
Ben Davies, CEO
Ben Davies ran trading for RBS Greenwich Capital in London where he managed a macro
portfolio. He started his career in 1995, trading in the Credit fixed income market at Credit
Lyonnais, moving to IBJI as a fixed income specialist and finally to Greenwich Capital in 1999.
He graduated with a BSc in Management from Loughborough University. Ben Davies and Mark
Mahaffey, former colleagues from RBS Greenwich Capital, established Hinde Capital in early
2007, primarily to focus on the precious metals and commodity sector.
Mark Mahaffey, CFO

Mark Mahaffey has 24 years’ experience in the international markets, having held senior
posts at several leading investment banks. He trained as a fixed income specialist at Daiwa
Securities before joining Midland Montagu as Director of the US government trading desk.
In 1990 he jointly set up the Greenwich Capital office in London where he managed a portfolio
focusing on global macro themes, before joining IBJI in 2001. His most recent appointment
from 2005 was Managing Director of Bank of America London Proprietary desk.
Hinde Capital:
Contact Information
Hinde Capital
10 New Street
London EC2M 4TP
United Kingdom
Email Ben Davies, CEO: ben.davies@hindecapital.com
Email Mark Mahaffey, CFO: mark.mahaffey@hindecapital.com
Phone +44 (0)20 7648 4600
www.hindecapital.com
Hinde Capital: Disclaimer
Hinde Gold Fund Ltd is an open-ended multi-class investment company incorporated in the British Virgin Islands.
This document is issued by Hinde Capital Limited, 10 New Street, London EC2M 4TP, which is authorised and regulated by the Financial
Services Authority. This document is for information purposes only. In no circumstances should it be used or considered as an offer to sell
or a solicitation of any offers to buy the securities mentioned in it. The information in this document has been obtained from sources believed
to be reliable, but we do not represent that it is accurate or complete. The information concerning the performance track record is given
purely as a matter of information and without legal liability on the part of Hinde Capital. Any decision by an investor to offer to buy any of the
securities herein should be made only on the basis of the information contained in the relevant Offering Memorandum. Opinions expressed
herein may not necessarily be shared by all employees and are subject to change without notice. The securities mentioned in this document
may not be eligible for sale in some states or countries and will not necessarily be suitable for all types of investor. Questions concerning
suitability should be referred to a financial adviser. The financial products mentioned in this document can fluctuate in value and may be
subject to sudden and large falls that could equal the amount invested. Changes in the rate of exchange may also cause the value of your
investment to go up and down. Past performance may not necessarily be repeated and is not a guarantee or projection of future results.
The Fund is categorised in the United Kingdom as an unregulated collective investment scheme for the purposes of the Financial Services
and Markets Act 2000 and their Shares cannot be marketed in the UK to general public other than in accordance with the provisions of
the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, the Financial Services and Markets Act 2000 (Promotion
of Collective Investment Schemes) (Exemption) Order 2001, as amended, or in compliance with the rules of the Financial Services Authority
made pursuant to the FSMA. Participants in this investment are not covered by the rules and regulations made for the protection of investors
in the UK. Participants will not have the benefit of the rights designed to protect investors under the Financial Services and Markets Act
2000. In particular, participants will lose the right to claim through the Financial Services Compensation Scheme. The securities referenced
in this document have not been registered under the Securities Act of 1933 (the “1933 Act”) or any other securities laws of any other U.S.
jurisdiction. Such securities may not be sold or transferred to U.S. persons unless such sale or transfer is registered under the 1933 Act or
is exempt from such registration. This information does not constitute tax advice. Investors should consult their own tax advisor or attorney
with regard to their tax situation.

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Debt No Jubilee7

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Debt: There is

In the book of Leviticus (Old Testament),

Today there is no Jubilee.

How do you get rid of debt without Jubilee?

1. Grow your way out: US post WW2, Japan post 1989

2. “Belt-tightening”: Scandinavia 1990s, S Korea, Malaysia post 1997

3. Currency devaluation: US 1934 Gold Reserve Act, UK 1949, 1967, (2008?)

4. Explicit default: Russia 1998, Argentina 2002 - 08

10 years 1-2 years 2-3 years 4-5 years 10 years

2 High Inflation 4.3 -1.7 -1.4 4.1 4.2

3 Massive Default 4.3 -1.8 -3.0 5.7 4.8

4 Growing out of debt 7.9 0.8 12.81 2.3

1 Deleveraging driven by off-trend growth is not linked to a recession.

3. Raise taxes on consumption to reduce deficits

4. Deliver by writing down liabilities in line with fall in asset prices

5. Structural reform – law and taxation changes

2. Central banks cut interest rates beyond “market” rate

3. Explicit default on debt commitments to politically weak groups or foreign creditors

Source: McKinsey Global Institute

Cost of ageing Structural deficit Initial debt level

Source: EU Commission, Eurostat, CBO, IMF, Morgan Stanley Research

1995 2005 2015 2025 2035 2045

1970 1980 1990 2000 2010 2020 2030

0 50 100 150 200

AVERAGE MATURITY IN YEARS OF SOVEREIGN DEBT

COMPANIES VS SOVEREIGNS CDSs

SovX Country CDS Index Itraxx Main CDS Index

Excessive interest payments – Coupon payments too high to be serviced

Excessive reliance on foreign capital – Foreigners tire of lending to you

Governments will indulge in deficit financing

“Major” King: How I learned to Stop Worrying and Love Inflation

Extended business cycle caused by rates too low too long.

Stability breeds instability.

Rising house prices masked household debt to asset ratio reality.

Housing ‘ATM’ and cheap money enabled unprecedented consumption boom.

PEOPLE BELIEVED THEIR OWN BULLSH*T.

HOUSEHOLD LEVERAGE MEASURED AS DEBT/INCOME INCREASED IN MOST COUNTRIES

Total household debt 2000

NICE (Non-inflationary consistent expansion) turned nasty 2008

UK household debt as % of disposable income 160%; at worst US was 130%

UK overall debt is nearly 5 x GDP; excluding unfunded liabilities,

£280bn Insurance cover for bank assets

Source: National Audit Office

Now 1 Year Ago

DEBT BY COUNTRY 2008 % OF GDP

Source: McKinsey Global Institute

PUBLIC SECTOR NET BORROWING (£bn)

FOREIGN HOLDINGS OF GILTS AND YOY CHANGE IN ALL GILTS OUTSTANDING

Source: The BBC

QE Starts Here BoJ BoE Fed

March 09 is when the BoE's Asset

UK NOMINAL GDP: PUBLIC AND PRIVATE

INFLATION AND EXTERNAL DEFAULT: 1900-2006

Share of countries in default Correlations:

Share of countries with

100% 120 120

To understand Japan debt dynamics click here: http://www.hindecapital.com/reports

GOVERNMENT DEBT / GDP

4. Deliver by writing down liabilities in line with fall in asset prices

3. Establishment of a 5 tln yen Asset Purchase Program – “temporary” measure to purchase