Professional Documents
Culture Documents
By Grant Williams
To learn more about Grant's new investment newsletter, Bull's Eye Investor, Click here
29 JULY 2013
The Candyman
Who can take tomorrow Dip it in a dream Separate the sorrow And collect up all the cream? The candyman, the candyman can The candyman can 'cause he mixes it with love And makes the world taste good. And the world tastes good 'cause the candyman thinks it should. "The Candyman", Willy Wonka and the Chocolate Factory
Copyright Mauldin Economics. Unauthorized disclosure prohibited. Use of content subject to terms of use stated on last page.
Hmmm...
THINGS THAT MAKE YOU GO
Contents
THINGS THAT MAKE YOU GO HMMM... ....................................................3
When Youre Rattled by Collateral, Do the Fed Taper Talk .....................................19 IMF Fears Fed Tapering Could "Reignite" Euro Debt Crisis .......................................21 Only Hope for Italy Is Bankruptcy ...................................................................22 When Giants Slow Down ..............................................................................24 Questions as Developers Spend Big on Land Deals ...............................................25 World's Tallest Skyscraper Remains a Hole in Chinese Ground .................................27 Greek Public Broadcaster Goes Underground .....................................................28 Is the Emerging Market Boom Over? ................................................................29 This Is the Most Feeble Recovery in Our History ..................................................31
CHARTS THAT MAKE YOU GO HMMM... ..................................................33 WORDS THAT MAKE YOU GO HMMM... ...................................................36 AND FINALLY ................................................................................37
22 APRIL 2013
Hmmm...
THINGS THAT MAKE YOU GO
22 APRIL 2013
Hmmm...
THINGS THAT MAKE YOU GO
During each childs fiasco, Mr. Wonka alienates the parents with his nonchalant reaction to the childs seeming demise. He remains steadfast in his belief that everything will work out in the end.... After each childs trial, the Oompa-Loompas beat drums and sing a moralizing song about the downfalls of greedy, spoiled children. When only Charlie remains, Willy Wonka turns to him and congratulates him for winning. The entire day has been another contest, the prize for which is the entire chocolate factory, which Charlie has just won. Charlie, Grandpa Joe, and Mr. Wonka enter a great glass elevator, which explodes through the roof of the factory. (Source: iSL Collective) In the movie's first act, Bill, the owner of the sweetshop, sings a song written by Anthony Newly and Leslie Bricusse, called "The Candyman", which praises the wonderful world created by Wonka and espouses the pure joy of living in a place where everything is deliciously sweet; miracles, dreams, and rainbows are ubiquitous; and any sorrow is separated and discarded in favour (yes, there's a u in favour deal with it!) of cream ... pure cream. As Bill hands out free candy to a group of wide-eyed kids, you can see in their eyes the pure joy that only comes of living in a world where everything is wonderful and nothing bad ever happens. Ladies and gentlemen, I give you ... the S&P 500.
1750
1650
1550
1450
1350
1250 Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul
Source: Bloomberg
Yes, the US equity markets have bought firmly into the idea that everything is right in the world and that nothing will ever be allowed to go wrong. A prime example of this attitude emerged last Thursday, when we were greeted with two irreconcilable headlines on the same day:
22 APRIL 2013
Hmmm...
THINGS THAT MAKE YOU GO
22 APRIL 2013
Hmmm...
THINGS THAT MAKE YOU GO
(Reuters): Bernanke, speaking before the Senate banking committee, reiterated comments he made on Wednesday to the House Financial Services Committee. He stressed that the timeline for winding down the Fed's stimulus program was not set in stone. "We got no negative surprises from the Fed chairman today, so the market liked that," said Bucky Hellwig, senior vice president of BB&T Wealth Management in Birmingham, Alabama. Ladies and gentlemen, I give you Ben Bernanke the Candyman. (Or perhaps that should be the Bendyman? Quite suitable, given the extent of his flexibility, don't you think?)
As Bucky Hellwig points out, the market likes it when there are no negative surprises from the Fed chairman the corollary of which is that the market HATES it when the Candyman threatens to stop with the sugar last month's Taper Tantrum being the obvious and most recent example. But in its adherence to whatever is being handed out by Bernanke, the market is failing to pay attention to signals that would ordinarily call for caution. That is the danger of getting kids hooked on candy: rationality tends to fall by the wayside and behaviour becomes harder and harder to understand until, ultimately, a sugar crash occurs: (Wikipedia): A sugar crash or glucose crash is the term used in American popular culture to refer to a supposed sense of fatigue after consuming a large quantity of carbohydrates, also known as reactive hypoglycemia. It is variously described as a sense of tiredness, lethargy, irritation, or hangover, although the effects can be less if one has undertaken a lot of physical activity within the next few hours after consumption.
22 APRIL 2013 6
Hmmm...
THINGS THAT MAKE YOU GO
The symptoms of a sugar crash are of interest in the context of this discussion: (Wikipedia): Symptoms associated with sugar crashes are similar to those experienced during periods of hypoglycemia, though not as severe ... Confusion and difficulty concentrating on daily tasks Anxiety Light-headedness Fatigue Headache Irritability The majority of these symptoms, often correlated with feelings of hunger, mimic the effect of inadequate sugar intake as the biology of a crash is similar in itself to the bodys response to low blood sugar levels following periods of glucose deficiency. Hmmm... OK... now that we know what a sugar crash looks like, let's file that information safely away under "To Be Continued..." and get back to Willy Wonka and the Chocolate Factory, and in particular to the moment when the five eager children who have found the golden tickets get their first glimpse inside the magical wonderland created by Willy Wonka, where everything is both edible and almost painfully sweet. Huge toadstools are made of cream, trees bear candy canes by the hundreds, gigantic lollipops sprout from the ground, and a waterfall of pure chocolate cascades into a chocolate river that bisects Wonka's wondrous world. As the kids go hog-wild, falling over themselves to gorge on all the free candy made available by their generous, if sartorially challenged, benefactor, Wonka begins to sing: Come with me And you'll be In a world of Pure imagination Take a look And you'll see Into your imagination We'll begin With a spin Traveling in The world of my creation What we'll see Will defy Explanation
22 APRIL 2013
Hmmm...
THINGS THAT MAKE YOU GO
If you want to view paradise Simply look around and view it Anything you want to, do it Wanna change the world? There's nothing to it There is no Life I know To compare with Pure imagination Living there You'll be free If you truly wish to be Wonka's message naturally finds favour (yep, still with the u) with the kids because, let's face it, they're not really listening to the rantings of the strange man with the crazy hair in the purple suit; all they see is free candy, and that's all they care about. The scene reminds me of a cartoon by one of the greatest cartoonists of the modern era, and one of my idols, Gary Larson. I first saw these panels whilst living in Japan in the late 1980s (the Far Side cartoon in the Japan Times was invariably a highlight in the days after the Nikkei bubble burst!), and they have stayed with me ever since. (Incidentally, one of the finest birthday gifts I ever received was The Complete Far Side 1980 1994. If you are a fan or know one with an upcoming birthday it's spectacular.) This need to suspend reality and venture into a world of pure imagination is becoming ever more necessary as the S&P scores a series of new highs against a backdrop of sobering indicators and events such as the biggest municipal bankruptcy in US history. The market, like Larson's "Ginger", hears just the words it is interested in. Words like stimulus and zero percent for the foreseeable future. To put the Detroit situation into proper perspective, Tyler Durden and the team at Zerohedge have published a list of 25 facts about Detroit that make clear the momentous proportions of the demise of what was once America's fourth-largest city. To pick a few beauties at random:
22 APRIL 2013
Hmmm...
THINGS THAT MAKE YOU GO
At this point, the city of Detroit owes money to more than 100,000 creditors. Detroit is facing $20 billion in debt and unfunded liabilities. That breaks down to more than $25,000 per resident. At this point, there are approximately 78,000 abandoned homes in the city. About one-third of Detroit's 140 square miles is either vacant or derelict. But, in our world of pure imagination, the S&P 500 shrugged off Detroit to make another new high, despite warnings about possible future defaults: (CNBC): "Everyone will say, 'Oh well, it's Detroit. I thought it was already in bankruptcy,'" said Michigan State University economist Eric Scorsone. "But Detroit is not unique. It's the same in Chicago and New York and San Diego and San Jose. It's a lot of major cities in this country. They may not be as extreme as Detroit, but a lot of them face the same problems.
"Anyone who lives within their means suffers from a lack of imagination." Oscar Wilde
As the chart below so clearly demonstrates, the S&P 500 has decided that the assets on the Fed's balance sheet are a far better indicator of the health of the economy than such outdated things as, oh, I don't know ... revenues, maybe? Sales? Growth? And why not; the sugar is still being doled out left and right, and investors can gorge with abandon.
Source: ZeroHedge/@not_jim_cramer
But it's not just the S&P 500 living in a world of pure imagination.
22 APRIL 2013
Hmmm...
THINGS THAT MAKE YOU GO
Everywhere you look there are signs of a severe disconnect between the real world and the world of free candy and everflowing chocolate rivers that investors are being urged to believe in. Take Europe please. (Hat tip, Henny "I'm here all week" Youngman)
(Zerohedge): Presenting Europe's annual change in M3, alongside the far more important bank lending to the Euro area private sector. It is the latter which just dipped at a record low, indicating once more that Europe's monetary transmission mechanism is not only clogged up (a rising M3 should have a favorable impact here) but hopelessly broken. In other words, it is the brown line in the chart [above] that is ... giving the ECB chairman nightmares, and is leading to such secondary effects as record high unemployment and negative GDP growth virtually across the entire Eurozone.
22 APRIL 2013
10
Hmmm...
THINGS THAT MAKE YOU GO
Yes, the monetary transmission mechanism in Europe remains broken despite the trillions spent in trying to free up the blockages in the system. No matter how strong the financial encouragement given to European banks, their desire (and, more importantly, their ability) to lend remains impaired; but you would never know it from behaviour of the euro, which, as you can see from the first chart below (courtesy of Greg Weldon), seems set to break through overhead resistance and strengthen further. That development, perversely, is exactly what Mario Draghi doesn't want and Europe cannot possibly allow to happen. (For a free trial of Greg's phenomenal, and to my mind indispensable, work, click HERE.)
Ordinarily, with the region's troubled currency going precisely where it can't be allowed to go and creating significant headwinds to corporate profit growth, European equity markets would of course be under pressure. The following chart demonstrates that far from suffering mightily under pressure, the DAX and CAC40 have entered the realm of pure imagination.
German DAX Index vs French CAC40 Index
9000
2012-2013
4200
3900 8000
3600
7000
3300
6000 Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul
3000
Hmmm...
THINGS THAT MAKE YOU GO
"You can't depend on your eyes when your imagination is out of focus." Mark Twain
The folks at Zerohedge have been on a tear lately, and this weekend they showed us yet another chart which, against the backdrop of all-time equity market highs, highlights the fantasyland created by the Candymen of the central banks: US GDP revisions.
Source: Zerohedge
(Zerohedge): There appears to be a level of optimism priced into every macro-economic forecast. Whether this is simply mean-reverting models or a systematic need to justify an ever-increasing equity market is unclear, but over the past few years the consensus GDP growth forecast has fallen by around 0.7 percentage points over the year before its final release (as hope turns to reality). So just how bad is the current environment? With the latest update of Q2 2013's GDP consensus forecast now at 1.0%, the last year has seen the consensus drop a stunning 2.0 percentage points (almost triple the average loss of hope). Of course, as we noted here, we'll make it all up in H2 2013 (even as CEO after CEO adjust down their outlooks). In the real world, forward-looking predictions of weakening GDP would be akin to what Bob Geldof described as "clanging chimes of doom" and send equity investors scurrying for the safety of the bond market before slowing growth showed up in corporate profits; but unfortunately (see earlier comments on the Taper Tantrum), as long as the Sugar Daddy is still in control, the real world can take a hike, and we'll all live in the Funny Money Factory.
22 APRIL 2013
12
Hmmm...
THINGS THAT MAKE YOU GO
"Disneyland will never be completed. It will continue to grow as long as there is imagination left in the world." Walt Disney
If investors did rush into the bond market, they would discover another world where traditional safe-haven assets are priced at all-time highs, on the pure fantasy of low rates forever.
"Logic will get you from A to Z; imagination will get you everywhere." Albert Einstein
The Candyman of the Federal Reserve has promised low rates until unemployment drops to 6.5% (kinda), and since he made that linkage explicit, the rate has been falling fairly consistently:
US Unemployment Rate
1998-2013
10
%
6
2 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: BLS
22 APRIL 2013
13
Hmmm...
THINGS THAT MAKE YOU GO
But, as everybody now surely realizes (but I will show again), the labor force participation rate has been falling in similar fashion, which adds an element of fantasy to the headline number:
70 69 68 67 66 65 64
Source: BLS
Buried elsewhere in the reality of the unemployment statistics are such irritating details as the percentage of the labor force who have bachelor's degrees and full-time jobs:
82.0 81.3 80.6 79.9
79.2 78.5 77.8 77.1 76.4 75.7 75.0 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Source: BLS
22 APRIL 2013
14
Hmmm...
THINGS THAT MAKE YOU GO
There are no rules of architecture for a castle in the clouds. G.K. Chesterton
Everywhere you look (as long as you are prepared TO look), the differences between the evidence surrounding us every day and the vision of a perfect world being generated by the Candymen are so blindingly apparent that it makes the willingness to believe in the fantasy simply ... fantastic (and I mean that in the literal sense). Slowly, surely, despite official headlines that suggest strength is returning and economies are about to embark on a miraculous growth spurt, commentators are looking out through the bubble walls of the fantasy and into the harsh light of reality. What they are finding isn't pretty. Last week, as headlines suggested the UK economy was nothing short of "robust" after a surprise 0.6% increase in GDP in the second quarter, Liam Halligan pointed out both the fantasy (UK Daily Telegraph): Among our political classes, this latest GDP data is widely viewed as "game-changing". The Tories, while not wanting to tempt fate by claiming to have spotted the "green shoots of recovery", are nevertheless cock-a-hoop. The economy is "on the mend", says George Osborne, the newly emboldened Chancellor. On the surface, at least, that seems plausible. Between March and June, the economy grew at its fastest rate since the third quarter of 2012, the time of the London Olympics. Aside from that one growth boost last summer, the latest 0.6pc expansion represents the quickest growth since the second quarter of 2010. The GDP fine-print also shows that all four main UK sectors services, manufacturing, construction and agriculture grew over the last three months. Again, that hasnt happened since 2010. So nobody could credibly argue these latest statistics arent good news. and the reality: Despite that, it would be foolish to suggest that the British economy is out of the woods, or that a sustainable recovery is now probable or even likely. Grave economic dangers lurk on the global horizon not least in the shape of the eurozone bond market and the oil price. Whats more, the growth were now seeing in Britain is, Im sorry to say, largely illusory the result of still massive government borrowing and ongoing money printing, which in turn has kept headline interest rates artificially low. ... consider that we remain locked in the most feeble economic recovery in our history. While other leading Western nations like Germany and the US have more than recovered the GDP losses sustained during the sub-prime crisis, the British economy, even after this latest growth flicker, is still 3.3pc smaller than at the time of its pre-Lehman peak.
22 APRIL 2013
15
Hmmm...
THINGS THAT MAKE YOU GO
Beyond the headline numbers, real wages continue to shrink as inflation which has been above the Bank of Englands 2pc target for more than three and a half years now, despite extremely weak growth continues to erode purchasing power. Including population growth, British GDP per head is actually some 7pc below its 2007 peak. There has been no sign, either, of the "rebalancing" away from consumption and towards exports and investment that the Coalition said it wanted. Back in 2010, Osborne declared his confidence in "a march of the makers", claiming that manufacturers would power growth via a surge in exports. It hasnt happened. This is anemic growth (from a historical perspective), coated in a nice, sugary shell. But there's a nasty twist in the tale, folks. I'm afraid that the creation of today's world of pure imagination was made necessary not by the 2008 crisis, as many will argue, but by another fantasy that has perpetuated itself for almost 40 years and convinced just about everyone that it is a beautiful, blissful, incorruptible reality. The chart below is one I have used before, but it illustrates beautifully that the illusion of a wave of increasing prosperity sweeping across the world since the early 1970s is just that. The reality is that a preposterous amount of borrowed money was used to create the illusion of growth and skyrocketing wealth. All 2008 did was call in some of the loans:
60,000
50,000
40,000
30,000
20,000
10,000
0
All Sectors: Credit Market Instruments (liabilities) US Gross Domestic Product
-10,000
1929
1939
1949
1959
1969
1979
1989
1999
2009 2012
Source: Bloomberg
Today's world of pure imagination harbours so many departures from reality that it is impossible to point them all out in these pages, but try looking at the lumber price versus the "housing recovery" or at the "growth" in US personal income (hint: -5% and falling). Look at China's shrinking GDP and poor PMI numbers. Survey the reality of life in Greece (which will no doubt be front and centre in these very pages again soon) or Spain ... or Italy.
22 APRIL 2013 16
Hmmm...
THINGS THAT MAKE YOU GO
Read about the depositors in Cyprus who still can't get their life savings back, or the impending fragmentation of the Portuguese government. How about the increasing volatility in the JGB market or the swirling talk of a major shortage of physical gold? Everywhere you look, the reality is far from the sweet-tasting sugar rush that the Candymen in authority keep trying to get us hooked on. Remember those symptoms that signal a sugar crash? Confusion and difficulty concentrating on daily tasks Anxiety Light-headedness Fatigue Headache Irritability Well colour me crazy, but I've got the first five symptoms and they are really making me irritable. So there we have it, folks. The synopsis of Willy Wonka and the Chocolate Factory included a description of Wonka's response to the procession of disasters that befell the children who entered his fantasy world: During each childs fiasco, Mr. Wonka alienates the parents with his nonchalant reaction to the childs seeming demise. He remains steadfast in his belief that everything will work out in the end. Sound like anybody we know? The world of pure imagination created by the Candymen of the world's major central banks seems like an innocuous and, frankly, pleasant place in which to live, but investors should beware. The levels of complacency made worse as we enter the summer doldrums are terrifying to me. The VIX Index is bumping along its all-time lows (below 13), suggesting risk is just about as low as it has ever been; Angela Merkel's re-election in mid-September's German parliamentary vote is seemingly underwritten (even by Frau Merkel herself); problems in Syria and Egypt are seemingly inconsequential; and Mario Draghi's as-yet untested vow to "do whatever it takes" to preserve the euro still rides roughshod over the obvious decay eating at the PIIGS and now threatening to engulf France. Oil prices remain stubbornly high and growth anemic; corporate results, whilst optically passing the smell test, are less than stellar; but poor results are not being punished as one would expect in a normally functioning market; and bond markets remain priced for near-perfection. In short, a sugar rush is coursing through just about every artery of the market and leading to the kind of symptoms one would expect from such a massive injection of monetary glucose:
22 APRIL 2013 17
Hmmm...
THINGS THAT MAKE YOU GO
(Urban Dictionary): Sugar Rush: The intense physiological effect of consuming too much sugar or glucose...; eating excessive amounts of sugar makes the brain release dopamine and endorphins, often inducing a mild sense of euphoria and happiness. This is often accompanied by a strong surge of energy as the sugar hits the bloodstream. Sounds pretty much on the money to me, only that's not where the definition ends: Sugar highs cause twitchiness, spasms, and hyperexcitability. Sugar highs do not last very long, and leave a person feeling drained afterwards. In order to sustain this euphoria, the system needs constant sugar to be introduced to the bloodstream. The moment that stops, the crash will begin in earnest. Beware the day the Candyman runs out of candy.
*******
OK ... Here we go again. Another crazy week comes to an end, and here I go dumping a bunch more reading material into your no doubt already crowded brains. This week you'll find yourself transported to Italy, Greece, and China, where the respective topics du jour are bankruptcy, underground public broadcasting, and the world's tallest skyscraper/hole in the ground. Then we look into the matter of collateral in light of all the taper talk (this will be VERY important at some point, I suspect ... just not yet, it seems), and we hear how the IMF is afraid that all that taper talk will bring the Eurozone crisis roaring back. Elsewhere, Nouriel Roubini looks at the faltering BRICs and the Economist wonders what happens when giants slow down, whilst Liam Halligan takes a realistic look at the supposedly strong UK economy and gives us a welcome dose of reality. We have charts of hurricane exposure ahead of the North Atlantic hurricane season, gold's best-fit price, and some perspective on the gargantuan scale of Detroit's bankruptcy, courtesy of Barry Ritholtz, Frank Holmes, and the New York Post. Our three interviews all touch on the intriguing recent developments in the gold bullion leasing market, courtesy of Egon von Greyerz, Alasdair Mcleod, Mike Maloney, and ... yours truly.
22 APRIL 2013
18
Hmmm...
THINGS THAT MAKE YOU GO
22 APRIL 2013
19
Hmmm...
THINGS THAT MAKE YOU GO
Second, to say "we have to suspend QE because there arent enough assets for us to purchase without us becoming the market" is to admit that the Feds most important tool QE is now broken, which risks freaking out the market completely. Even if its not, its still important for the Fed to maintain the illusion that QE remains a viable option. If the illusion can be maintained, then communication and rate-steering alone may be sufficient to keep the market supported. If the illusion is shattered, its unlikely that inflation expectations will be easy to manage with words alone, opening the door to even more drastic policy shifts such as unsterilised moneyprinting, expanded asset purchases into Reits and ETFs (a la Japan) or something even more exotic. So its better to pretend that the economy is strong enough to handle a taper, than to admit that the taper is the result of checkmated Fed. Whats more theres plenty of market clues to suggest this is really whats going on. For example, Ben Bernanke may have publicly denied that the Feds purchases were hindering liquidity or causing market dysfunction but when examined more closely what he told Congress this week was hardly reassuring. For example in response to a question proposing that the Fed had become the market for mortgage-backed securities, he said (our emphasis): But our assessmentand, of course, were in that market quite a bit, so we have a lot of information about itour assessment is that that market is still working quite well, and that our purchases are not disrupting the normal price discovery and liquidity functions of that market. What immediately draws our eye, of course, is the use of the word quite. Then theres the fact that the comments refer only to the MBS market and overlook the Treasury security market completely (which fair enough, he wasnt asked about). Bernankes reassurances about market liquidity to our eyes conflict with the fact that we know the market experienced enough of dysfunction this year to prompt the Fed to call for a large position report from the market. We also know that there has been a significant shift in the pattern of Fed purchases since March 2013 about the time of that large position request.
*** FT ALPHAVILLE / LINK
22 APRIL 2013
20
Hmmm...
THINGS THAT MAKE YOU GO
22 APRIL 2013
21
Hmmm...
THINGS THAT MAKE YOU GO
The data is at odds with the recent rebound in industrial output and rising PMI survey indexes for manufacturing. The IMF said the eurozone economy would shrink by 0.6pc this year, the same as in 2012. It is expected to grow by 0.9pc next year but this will not be enough to make a dent on unemployment, and could easily be thrown off course by a fresh global shock. "There is a high risk of stagnation, especially in the periphery. Such an outcome could push the periphery toward a debt-deflation spiral," it said. The report said that it may take years to unwind the colossal credit boom of the early EMU years. "Historically, almost all of the run-up in household debt tends to be reversed. But in the euro area, the reduction in debt-to-GDP ratios has barely started, and the boom was more pronounced." "Furthermore, in past deleveraging episodes, the debt reversal was largely facilitated by high inflation and growth, and supported by expansionary fiscal policy. Because these factors will not contribute much to the ongoing deleveraging process in the euro area periphery, the adjustment is likely to be protracted and have to rely more on reductions in nominal debt. The contrast with history is similarly sobering when it comes to corporate debt," said the Fund, adding that the EMU periphery has the daunting task of triple deleveraging by governments, households, and firms all at the same time.
*** AMBROSE EVANS-PRITCHARD / LINK
22 APRIL 2013
22
Hmmm...
THINGS THAT MAKE YOU GO
EC: In Italy, the public sector is not intended as an aid to the production of wealth and public goods and services. It has been conceived as an observatory to generate political consensus and to please its own clientele. The concept of public is of assistance but not to the public, but the public sector employee. The beneficiary of the public sector is dependent on this sector, not the public. LM: After six years of crisis we have more spending, more laws, more intervention ... Where does change start? EC: By the mentality. It has aggravated the welfare spirit that we have within us. The state is the problem, not the solution. LM: A few days ago there was a poll in which the public demanded more taxes. EC: It is a matter of propaganda. The State says "Do not worry, I will only raise taxes on the rich". However, the rich pay more, but also the poor. For example, in Italy, the Monti government introduced a tax on real estate, and 85% of Italians are owners. This is a middle class tax hike. And a country that stifles and suffocates its middle class can not grow. LM: From your perspective as a university professor, do you have bad omens in regards to a lost generation for Italy and Spain? EC: Yes and no. It could be 50 years, not just 15. The key will be in the new political class. LM: Some people think it might not be so bad that we intervene. They prefer to let Germany or the troika decide instead of our politicians. EC: Because the Germans have many Spanish and Italian bonds, they always favor higher taxation so Southern Europe can pay back those loans. I trust the Chinese more than the Germans. We need a new ruling class because the existing system is corrupt and must be eliminated no IMF, EU bureaucrats, or Germany. LM: Where to begin? EC: You have to start by deregulation. Monti's government has made things worse, especially in the labor market. The regulation is where it was 10 years ago ... well, maybe as it was 150 years ago. LM: It is always said that Spain and Italy need to get to compete globally, but many of the labor laws limit the growth of companies, with more regulation and more taxes to the largest companies.
22 APRIL 2013
23
Hmmm...
THINGS THAT MAKE YOU GO
EC: Yes, there are two elements. First, regulation, both in general and the labor market in particular, changes to the size of companies. Often the entrepreneur thinks "It's not worth growing, because I will have many new demands." There is also an issue of tax evasion: it is much harder to do it when you're big. And finally, we have the element of funding. To grow you need a functioning credit market. And in Italy in the last thirty years, the credit market has served to finance the public debt. There are so many resources that should be used to finance the growth of businesses but have only served to finance the growth of the state. As a result, businesses remain small, because they are funded with self-financing.
*** MIKE SHEDLOCK / LINK
Hmmm...
THINGS THAT MAKE YOU GO
The remarkable growth of emerging markets in general and the BRICs in particular transformed the global economy in many ways, some wrenching. Commodity prices soared and the cost of manufactures and labour sank. Global poverty rates tumbled. Gaping economic imbalances fuelled an era of financial vulnerability and laid the groundwork for global crisis. A growing and vastly more accessible pool of labour in emerging economies played a part in both wage stagnation and rising income inequality in rich ones. The shift towards the emerging economies will continue. But its most tumultuous phase seems to have more or less reached its end. Growth rates in all the BRICs have dropped. The nature of their growth is in the process of changing, too, and its new mode will have fewer direct effects on the rest of the world. The likelihood of growth in other emerging economies having an effect in the near future comparable to that of the BRICs in the recent past is low; they do not have the potential for catch-up the BRICs had in the 1990s and 2000s. And the BRICs growth has changed the rest of the world economy in ways that will dampen the disruptive effects of any similar surge in the future. The emerging giants will grow larger, and their ranks will swell; but their tread will no longer shake the Earth as once it did.
*** ECONOMIST / LINK
22 APRIL 2013
25
Hmmm...
THINGS THAT MAKE YOU GO
Representatives from about 70 developers participated in a recent land auction in the capital, an auction that offered a highly sought-after plot in Xiajia Hutong in downtown Beijing. Fourteen property firms participated in the auction of the Xiajia plot. Within five minutes, the price reached the 1.77 billion yuan cap set by the municipal land bureau. Buyers then started to compete over proposals for the required building of subsidized housing on the land. Beijing Maoyuan Real Estate Co. won the bidding by promising to build another 28,000 square meters of subsidized housing in addition to the required 10,000 square meters. The total area for subsidized houses promised by Maoyuan accounted for 49.6 percent of the plot. Excluding the subsidized housing, the price for commercial housing at the plot was 41,000 yuan per square meter, much higher than the average in the surrounding area. "I don't know how they calculated the deal," said an employee of a large property firm. "The sales price will have to be higher than 70,000 yuan per square meter." With such a target, the Xiajia Hutong project has to be labeled luxury, the source said, but with such a large area of subsidized housing, it will be quite challenging for the developer to operate. Three other plots went under the hammer at the auction, where land worth a total of 6.7 billion yuan was sold. Major developers Evergrande Group and China Vanke Co. both clinched deals. Research by property agent Homelink Real Estate Co. found that during the first half of the year Beijing reported 100 land deals with a total transaction value of 66.4 billion yuan, 4.5 times more than for the same period last year. In the first week of July, another six plots were sold in the city, pushing the total to 74.6 billion yuan, exceeding the figure for 2012. Beyond the capital, land markets in large cities like Shanghai and Guangzhou have also boomed. An estimate by Caixin based on public information found that Shanghai has registered more than 70 billion yuan in land transactions in the first half. In 2012, the figure was 87.6 billion yuan. Yang Hongxu, deputy director of Shanghai Yiju Real Estate Research Institute, said the revival has affected China's first- and second-tier cities. (Property market analysts in the country tend to divide its cities into four tiers. The four first-tier cities are Beijing, Shanghai, Shenzhen and Guangzhou. The second tier comprises mainly provincial capitals and the larger cities in each region. Most cities in the west are put in the third and fourth tier.) Falling inventories in these top two categories, coupled with fast growth of housing prices, have prompted developers to seek new land. But in smaller and underdeveloped cities, the markets have remained sluggish, Yang said.
22 APRIL 2013
26
Hmmm...
THINGS THAT MAKE YOU GO
A source at a large property company said that this year developers have sought plots with good locations and higher profit potential in large cities. But competition for land in first- and second-tier cities is always strong, pushing up prices. A survey by Shanghai Yiju found that total land sales revenue in the country's ten largest cities reached 314 billion yuan in the first half, growth of 160 percent from the same period last year. Meanwhile, housing prices in the ten cities have returned to 2010 levels.
*** CAIXIN / LINK
Hmmm...
THINGS THAT MAKE YOU GO
That last possibility is the most likely explanation for the companys defiant claim in Thursdays South China Morning Post that in fact it has obtained all relevant permits for Sky City, and that news of the suspension was obtained "from an official who is not overseeing the project and who is unfamiliar with the progress." Meanwhile, an unnamed employee of Hunans Housing Department, presumably the local supervising authority, could only muster, "We are very confused at the moment," when questioned by the paper. Its a reasonable response. The Chinese Communist Party has long embraced giant engineering projects as a means of projecting national vitality to its subjects, and the outside world. Nonetheless, its rare that those projects are built with an eye to a sustainable future. Sky City may be ostentatious and ill-advised under current real estate market conditions, but as a sustainable technology demonstration project, its the kind of risk-taking that Chinese entrepreneurs and their government feel they need to be taking. Lets just hope it doesnt topple over.
*** BLOOMBERG / LINK
22 APRIL 2013
28
Hmmm...
THINGS THAT MAKE YOU GO
Host Fanis Papathanasiou is surprisingly calm when speaking about the loss of his job and those of roughly 2,700 colleagues as he sits in the ERT news studio. As a former war correspondent in Iraq and Afghanistan, the 43-year-old has seen worse. Still, Papathanasiou says, the new working conditions he now faces are challenging. The satellite connection no longer works and they likewise have been cut off from news agencies like Reuters. Not even the telephone system works anymore. "This is my private phone," Papathanasiou, who also once served as the ERT correspondent in New York, says pointing at his mobile device. "We have huge problems." But Papathanasiou and his co-workers are still going nonetheless, hoping that somehow they will be able to avoid closure after all. In the process, ERT has essentially become a private broadcaster that can be reached almost exclusively by Internet. Still, Papathanasiou believes that ERT, which suffered from plunging ratings prior to its closure, has now become more popular. "We are now independent and show a different view," he says. Decisions on what stories they are going to pursue are made by committee. During the recent visit to Athens by German Finance Minister Wolfgang Schuble, for example, they reported on the impending aid shortfall. "That wasn't mentioned on the private channels," Papathanasiou says. Despite the widespread resistance to the closure, the Greek government has shown no indication that it might reverse its decision. In the coming months, Athens plans to build a completely new state broadcaster from the ground up. Just on Monday, 600 temporary positions were announced. Indeed, it is those job announcements that help to clear up the mystery as to where the underground ERT is coming from. The new hires are to be made to bridge the gap between now and when the new public broadcaster is ready to go on air. In other words, they are to do what Papathanasiou and his colleagues are doing now. And on Sunday, Pantelis Kapsis, the deputy minister responsible for public broadcasting, told Greek parliament that the ERT broadcasts are in fact originating from his ministry. He says that secrecy was necessary because "some union members wanted to shut us down and we wanted to prevent that from happening."
*** DER SPIEGEL / LINK
Hmmm...
THINGS THAT MAKE YOU GO
Russia's economy may grow by barely 2% this year, with potential growth also at around 3%, despite oil prices being around $100 a barrel. India had a couple of years of strong growth recently (11.2% in 2010 and 7.7% in 2011) but slowed to 4% in 2012. China's economy grew by 10% a year for the last three decades, but slowed to 7.8% last year and risks a hard landing. And South Africa grew by only 2.5% last year and may not grow faster than 2% this year. Many other previously fast-growing emerging-market economies for example, Turkey, Argentina, Poland, Hungary, and many in Central and Eastern Europe are experiencing a similar slowdown. So, what is ailing the Brics and other emerging markets? First, most emerging-market economies were overheating in 2010-2011, with growth above potential and inflation rising and exceeding targets. Many of them thus tightened monetary policy in 2011, with consequences for growth in 2012 that have carried over into this year. Second, the idea that emerging-market economies could fully decouple from economic weakness in advanced economies was far-fetched: recession in the eurozone, near-recession in the United Kingdom and Japan in 2011-2012, and slow economic growth in the United States were always likely to affect emerging-market performance negatively via trade, financial links, and investor confidence. For example, the ongoing eurozone downturn has hurt Turkey and emerging-market economies in Central and Eastern Europe, owing to trade links. Third, most Brics and a few other emerging markets have moved toward a variant of state capitalism. This implies a slowdown in reforms that increase the private sector's productivity and economic share, together with a greater economic role for state-owned enterprises (and for state-owned banks in the allocation of credit and savings), as well as resource nationalism, trade protectionism, import-substitution industrialisation policies, and imposition of capital controls. This approach may have worked at earlier stages of development and when the global financial crisis caused private spending to fall; but it is now distorting economic activity and depressing potential growth. Indeed, China's slowdown reflects an economic model that is, as former Premier Wen Jiabao put it, "unstable, unbalanced, unco-ordinated, and unsustainable," and that now is adversely affecting growth in emerging Asia and in commodity-exporting emerging markets from Asia to Latin America and Africa. The risk that China will experience a hard landing in the next two years may further hurt many emerging economies. Fourth, the commodity super-cycle that helped Brazil, Russia, South Africa, and many other commodity-exporting emerging markets may be over. Indeed, a boom would be difficult to sustain, given China's slowdown, higher investment in energy-saving technologies, less emphasis on capital- and resource-oriented growth models around the world, and the delayed increase in supply that high prices induced. The fifth, and most recent, factor is the US Federal Reserve's signals that it might end its policy of quantitative easing earlier than expected, and its hints of an eventual exit from zero interest rates, both of which have caused turbulence in emerging economies' financial markets.
22 APRIL 2013
30
Hmmm...
THINGS THAT MAKE YOU GO
Even before the Fed's signals, emerging-market equities and commodities had underperformed this year, owing to China's slowdown. Since then, emerging-market currencies and fixed-income securities (government and corporate bonds) have taken a hit. The era of cheap or zerointerest money that led to a wall of liquidity chasing high yields and assets equities, bonds, currencies, and commodities in emerging markets is drawing to a close. Finally, while many emerging-market economies tend to run current-account surpluses, a growing number of them including Turkey, South Africa, Brazil, and India are running deficits. And these deficits are now being financed in riskier ways: more debt than equity; more short-term debt than long-term debt; more foreign-currency debt than local-currency debt; and more financing from fickle cross-border interbank flows.
*** NOURIEL ROUBINI / LINK
22 APRIL 2013
31
Hmmm...
THINGS THAT MAKE YOU GO
And for all the governments rhetoric about the UK being "in a global race" and our exports "reconfiguring towards the fast-growing markets of the East", the sale of British goods in the largest emerging markets Brazil, Russia, India and China amounted to just 27bn in 2012. Thats 5.2pc of total exports, or less than we sell to Belgium. Britains construction sector has also failed to deliver. The 0.9pc growth registered between March and June was only compared with a deep decline the quarter before. Accounting for a chunky 6pc of our economy, the building industry remains 16pc smaller than it was prior to the credit crunch. It shouldnt be the governments job to export on behalf of British companies or to subsidise the construction sector. But it is the case that the Coalition has shirked some tough decisions that could have bolstered manufacturing, exporting and construction activity in terms of cutting red tape, easing our still ridiculously prescriptive planning laws and, above all, fixing the banking sector in order that it may once again provide a steady stream of finance to responsible and credit-worthy businesses and households, so facilitating the growth the UK economy and our public finances so desperately need. Taking such decision requires vision, grit and a fierce determination to take on entrenched vested interests be they public sector administrators or land-banking property developers. In so many parts of our economy, despite our free-market image, the UK remains in the grip of anti-competitive cartels, driven only to strive for self-preservation through lobbying and legislation not least in our financial sector. The 2008 crash, despite the undoubted human suffering, was an incredible opportunity for reform. Yet we created in its aftermath a financial services industry that, previously hooked on private sector credit, is now addicted to central bank largesse.
*** LIAM HALLIGAN / LINK
22 APRIL 2013
32
Hmmm...
THINGS THAT MAKE YOU GO
22 APRIL 2013
33
Hmmm...
THINGS THAT MAKE YOU GO
What? You thought you'd get away without a gold chart this week? Not a chance.
Frank Holmes of US Global Investors is another who has forgotten more about the gold market than many will ever know. Here is his take on how far gold is off course: Gold has been in extremely oversold territory lately despite drivers for the metal remaining in place. Heres a different way to look at how far gold has been off course. The chart below tracks the correlation of the price of an ounce of gold to global liquidity, with global liquidity defined as the sum of the U.S. monetary base and the foreign holdings of U.S. Treasuries. Since June 2000, as the U.S.s monetary base and foreign holdings increased, so did the price of gold. The correlation suggests the current level of liquidity supports a gold price of $1,780 per ounce, well above the current spot price around $1,300.
22 APRIL 2013
34
Hmmm...
THINGS THAT MAKE YOU GO
22 APRIL 2013
35
Hmmm...
THINGS THAT MAKE YOU GO
is a charming man. He also happens to be one of the smartest minds in the gold market. In this interview with Eric King he discusses the shortage of gold bullion and what could happen if things got ever so slightly out of control... CLICK TO LISTEN
This weekend,
I had a fascinating conversation with Mike Maloney of Goldsilver. com about the fractional reserve gold lending markets. Mike took my recent chart of gold in the wake of the Bundesbank repatriation request to the next level. The outcome, in my opinion, adds a lot of fuel to an already raging fire...
CLICK TO WATCH
22 APRIL 2013
36
Hmmm...
THINGS THAT MAKE YOU GO
and finally...
OK, so it's been around awhile and already has over 5,000,000 YouTube hits, but how could
I not include this as this week's and finally...?
Hmmm...
22 APRIL 2013
37
Hmmm...
THINGS THAT MAKE YOU GO
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 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.
22 APRIL 2013
38
Hmmm...
THINGS THAT MAKE YOU GO
Use of this content, the Mauldin Economics website, and related sites and applications is provided under the Mauldin Economics Terms & Conditions of Use.
Disclaimers
The Mauldin Economics web site, Yield Shark, Bulls Eye Investor, Things That Make You Go Hmmm, Thoughts from the Frontline, Outside the Box, Over My Shoulder and Conversations are published by Mauldin Economics, LLC. Information contained in such publications is obtained from sources believed to be reliable, but its accuracy cannot be guaranteed. The information contained in such publications is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. The opinions expressed in such publications are those of the publisher and are subject to change without notice. The information in such publications may become outdated and there is no obligation to update any such information. Grant Williams, the editor of this publication, is an adviser to certain funds managed by Vulpes Investment Management Private Limited and/or its affiliates. These Vulpes funds may hold or acquire securities covered in this publication, and may purchase or sell such securities at any time, all without prior notice to any of the subscribers to this publication. Such holdings and transactions by these Vulpes funds may result in potential conflicts of interest, although the editor believes that any such conflict of interest will be mitigated by the nature of such securities and the limited size of the holdings of such securities by the applicable Vulpes funds. John Mauldin, Mauldin Economics, LLC and other entities in which he has an interest, employees, officers, family, and associates may from time to time have positions in the securities or commodities covered in these publications or web site. Corporate policies are in effect that attempt to avoid potential conflicts of interest and resolve conflicts of interest that do arise in a timely fashion. Mauldin Economics, LLC reserves the right to cancel any subscription at any time, and if it does so it will promptly refund to the subscriber the amount of the subscription payment previously received relating to the remaining subscription period. Cancellation of a subscription may result from any unauthorized use or reproduction or rebroadcast of any Casey publication or website, any infringement or misappropriation of Mauldin Economics, LLCs proprietary rights, or any other reason determined in the sole discretion of Mauldin Economics, LLC.
Affiliate Notice
Mauldin Economics has affiliate agreements in place that may include fee sharing. If you have a website or newsletter and would like to be considered for inclusion in the Mauldin Economics affiliate program, please go to http://affiliates.pubrm.net/signup/me. Likewise, from time to time Mauldin Economics may engage in affiliate programs offered by other companies, though corporate policy firmly dictates that such agreements will have no influence on any product or service recommendations, nor alter the pricing that would otherwise be available in absence of such an agreement. As always, it is important that you do your own due diligence before transacting any business with any firm, for any product or service. Copyright 2013 by Mauldin Economics, LLC.
22 APRIL 2013
39