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TTMYGH - Taper Talk

TTMYGH - Taper Talk

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TTMYGH - Taper Talk
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Hmmm...

THINGS THAT MAKE YOU GO
A walk around the fringes of finance

By Grant Williams

To learn more about Grant's new investment newsletter, Bull's Eye Investor, Click here »

24 JUNE 2013

Call My Bluff
Taper: ta■per: v. a) to gradually decrease, as in action or force b) to grow gradually lean "Committee — a group of men who keep minutes and waste hours." – Milton Berle "Consistency requires you to be as ignorant today as you were a year ago." – Bernard Berenson "If it were done when 'tis done, then 'twere well It were done quickly." – William Shakespeare, Macbeth: Act I, Scene VII Taper: ta■per: n. a long, waxed wick used especially for lighting fires

© Copyright Mauldin Economics. Unauthorized disclosure prohibited. Use of content subject to terms of use stated on last page.

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THINGS THAT MAKE YOU GO

Contents
THINGS THAT MAKE YOU GO HMMM... ....................................................3
Another Shameful Day for Europe as EMU Creditor States Betray South .....................21 Harvard’s Grumpy Ferguson Says World Is Going to Hell ........................................22 A Million Engineers in India Struggling to Get Placed in an Extremely Challenging Market 24 Wobbling Along .........................................................................................25 "You F—Ked Up, You Trusted Us": Talking Ratings Agencies with Chris Hayes .................26 EU Bank Bail-Out Talks Deadlocked Over Saver Protection .....................................28 The Fed's Exit Strategy ...............................................................................29 Snowden Spy Row Grows as US Is Accused of Hacking China ...................................30 The Rise of the Fearmongers: Germany's New Euroskeptic Elite ..............................32 Letter from Nicosia: Cyprus Says It Needs More Help from EU .................................33

CHARTS THAT MAKE YOU GO HMMM... ..................................................35
Buybacks, dividends, and M&A ......................................................................35 Greg Weldon turns ....................................................................................36 Fixed-Income Party Is Over — For Now .............................................................37

WORDS THAT MAKE YOU GO HMMM... ...................................................38 AND FINALLY ................................................................................39

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Things That Make You Go Hmmm...
(Wikipedia): Call My Bluff was a long-running British game show between two teams of three celebrity contestants. The point of the game is for the teams to take it in turn to provide three definitions of an obscure word, only one of which is correct. The other team then has to guess which is the correct definition, the other two being "bluffs". Among the first things we learn in school are the rules of grammar — the building blocks of proper communication which underpin the English language. Among the first things we forget when we leave school are the rules of grammar — the infuriating and extremely irritating rules rendered completely unnecessary in a world in which texting seems to be the most popular form of communication and where most sentiments can be adequately conveyed by acronyms, abbreviations, and the ubiquitous emoticon.

Source: Explosm.net

It's amusing therefore to watch as "the market" (a collective expression of the grammatical competence of billions around the world) tries to dissect every utterance made by the likes of the Federal Open Market Committee, which itself spends an inordinate amount of time structuring its prose so as to convey, via the most intricate inflection imaginable, exactly what it intends to do.

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Bizarrely, the reason it spends so much time on its statements is entirely because of the scrutiny afforded it by the market, and the reason the market scrutinizes the statements so assiduously is because it is looking for the tiniest nuance that might be a guide to the future actions of the FOMC. Wouldn't it all be so much simpler if the FOMC told the world, in plain English, exactly what it was thinking and the signs it was looking for that would cause it to change course? But no. That would be far too easy. Why lay out what's going on in plain language when you can hide behind nuance? What we SHOULD get from the FOMC is a statement that looks something like this: The committee feels that the economy is moribund and growth is faltering despite our best efforts at reviving it. We have kept rates at zero for the last several years and will be forced to do so for the foreseeable future — likely several years if the bond markets allow us to. We fully realize that at some point we will have to work out how to wean the world off freshly printed money, but that day is a long way off; and so, for now, there is absolutely no need to worry about that eventuality. We have said that we will begin to wind back QE once unemployment falls at least to 6.5%, but we very carefully said "at least" so that we had some wiggle room, because the chances are that, should we reach that target, things won't actually be in a state where we can withdraw stimulus, and then we will need to change our language. The Committee has decided to confiscate your savings through ZIRP and inflation so you will be forced to invest your money in risky assets, which policy we hope — oh how we hope — will stimulate some growth. We understand that you may think you have the right to live off the interest on the nest egg you have so carefully saved over your working life, but right now the needs of the many outweigh your own. We will try to let you know when we are serious about pulling back on the monetary throttle; but in the meantime, get out there and spend, spend, spend. Please. The second a new communique from Ben Bernanke and the Hole in the Wall Gang is released, the race starts to be the first to publish the customary "comparison" (see example below, which I found in my trash can) and pick apart any tiny change in language or tone that might be instructive in trying to determine what the esteemed members of the committee are thinking. Markets react according to the consensus assessment of the communique, and then the FOMC is forced to react to the market reaction if the market reaction isn't in keeping with the reaction expected by the FOMC when they carefully craft the words that are disseminated to the expectant markets.

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It's all so tiresome. Why the mystery? Why the intrigue? Why not just have a full and frank dialogue with the world so we all know where we stand? Why? I'll tell you why. Because then they would have no room to change course when it was proven that they had no idea what they were doing. Actually, since this edition of Things That Make You Go Hmmm... starts off talking about the importance of the rules of grammar, I should perhaps amend that last sentence to include an independent clause in order to justify beginning it with the word because.

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Try this: Because the Fed has no idea what it is doing, it is much more sensible for it to be as vague as possible in its choice of language so as to leave itself room to change course when the magic pixie dust it is sprinkling on the world turns out to be largely ineffective. Much better. For just about as long as I can remember now, the focus has been on the Fed's "exit strategy", a phrase first coined in this context in an op-ed in July of 2009 by none other than the esteemed Chairman himself, Ben Bernanke: (WSJ, July 21 2009): At some point, however, as economic recovery takes hold, we will need to tighten monetary policy to prevent the emergence of an inflation problem down the road. The Federal Open Market Committee, which is responsible for setting U.S. monetary policy, has devoted considerable time to issues relating to an exit strategy. We are confident we have the necessary tools to withdraw policy accommodation, when that becomes appropriate, in a smooth and timely manner. The exit strategy is closely tied to the management of the Federal Reserve balance sheet. When the Fed makes loans or acquires securities, the funds enter the banking system and ultimately appear in the reserve accounts held at the Fed by banks and other depository institutions. These reserve balances now total about $800 billion, much more than normal. And given the current economic conditions, banks have generally held their reserves as balances at the Fed. Let's interrupt the Chairman at this point and take a look at those excess deposits that were held at the Fed when he wrote that op-ed. As you can see from the chart below, $800 billion was, indeed "much more than usual" (such a quaint, innocuous turn of phrase for something so clearly, wildly removed from anything seen at any time in the preceding sixty years).

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1000

Excess Reserves of Depositary Institutions
(1959-2009) ($bn)

800

600

400

200 Milennium Bug ‘Panic’ 0

1960

1970

1980

1990

2000

2010

Source: St. Louis Fed

So Bernanke & Co. were well aware of how screwy things had gotten by that point in time. It was, I seem to remember, a great relief to many that the Fed seemed alert to the dangers of those excess deposits and was monitoring them carefully to ensure they didn't get out of hand. Back to the Chairman's 2009 missive: But as the economy recovers, banks should find more opportunities to lend out their reserves. That would produce faster growth in broad money (for example, M1 or M2) and easier credit conditions, which could ultimately result in inflationary pressures—unless we adopt countervailing policy measures. When the time comes to tighten monetary policy, we must either eliminate these large reserve balances or, if they remain, neutralize any potential undesired effects on the economy. A simple yet excellent plan! As the economy responded to the stimulus applied liberally by the FOMC, these excess deposits (which represent the raw fuel for severe inflationary pressure should they fail to be contained) would be either "eliminated" or "neutralized", thus removing the threat of inflationary pressure altogether.

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Of course, according to the latest statement from the FOMC itself, whilst not exactly red-hot: ... economic activity has been expanding at a moderate pace ... Not only that, but... The Committee expects that, with appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. This language has been evident in FOMC statements for some months now; so it's clear the Fed thinks that, to use a term favoured by the Chairman himself, "... economic recovery has taken hold", albeit in a somewhat anemic fashion. So what now, we all wonder. Well, as Bernanke said in his 2009 op-ed, one could expect banks to find more opportunities to lend out their reserves, which could ultimately lead to those excess reserves seeping into the economy and, aided by the nitrous oxide of fractional reserve banking, sparking huge inflationary danger unless the Fed took action to try and contain those pressures. It's hard to argue that $800 billion is certainly "much more than usual". Except... The $800 billion of July 2009 is now coming up on $1.9 trillion. Yes, "trillion". You know, with a t:

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2000

Excess Reserves of Depositary Institutions
(1959-2013) ($bn)

1500

1000

500

Milennium Bug ‘Panic’ 0 1960 1970 1980 1990 2000 2010

Source: St. Louis Fed

The blue part of the line shows the growth in excess reserves since the Bernanke op-ed in 2009; and, as can clearly be seen, what was "much more than usual" has now become "much, much more than much more than usual" and has indeed officially crossed the Rubicon into "What the hell are we gonna do NOW?" territory. This past month there have been some interesting developments in the language employed by the FOMC in general and Chairman Bernanke in particular; but before we get to that, there is some other language that may turn out to be remarkably important in determining the direction taken by the Fed, and it came from a rather surprising source: President Barack Obama. In an interview with Charlie Rose that aired last Monday, Obama was asked about the Fed Chairman, and his response was a little surprising: (USA Today): President Obama let slip this week that he may not be inclined to dissuade Federal Reserve Chairman Ben Bernanke from stepping down when his term ends in January. In an interview with talk show host Charlie Rose, Obama compared Bernanke to departing FBI Director Robert Mueller, saying, "He's already stayed a lot longer than he wanted or he was supposed to."

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... Obama said Bernanke "has been an outstanding partner along with the White House in helping us recover much stronger than, for example, our European partners, from what could have been an economic crisis of epic proportions." Cue pandemonium: (CNBC.com): President Barack Obama "essentially fired" Fed Chairman Ben Bernanke in televised remarks this week, former Federal Reserve Governor Laurence Meyer said Tuesday. "I almost fell off my chair when I heard the president's remarks last night," he said on CNBC's "Fast Money." "He essentially fired Ben Bernanke on the spot and gave him a fairly tepid testimonial afterward. It's time to really now focus on who the next chairman might be." But it wasn't just Larry Meyer who was stunned by Obama's words. Ben Eisen of Marketwatch weighed in on the inevitable fallout from the Charlie Rose interview and the obvious frenzy the President's words generated amongst "Fed watchers" everywhere: (Marketwatch): Like the subject of his comments, President Obama’s sparse words to Charlie Rose about Federal Reserve Chairman Ben Bernanke were almost uncanny in their ability to send Fed watchers into a state of convulsion.... ... the reactions to Obama’s comments certainly struck a nerve, and that speaks to the lack of certainty over the economy after Bernanke’s departure. Bernanke’s likely exit has been on the radar for some time, but Tuesday’s developments forced Fed watchers to start seriously considering a post-Bernanke era. Even by his standards, it was quite an extraordinary comment from Obama, and two days later the stakes were raised when the now seemingly lame-duck Chairman stepped to the microphone and began to read his latest cryptograph to the assembled media. What Bernanke said has, it is fair to say, placed the cat squarely amongst the pigeons. Bernanke made it clear that the Fed intended (assuming, of course, that its economic forecasts are correct) to begin 'tapering' asset purchases later this year, with the hopeful expectation that QE will be drawn to a graceful close by the middle of 2014. This intention was presented amidst a scenario that was meant to communicate that the Fed believes downside risks to the "economic recovery" have diminished. In his speech, Bernanke laid out what the "taper" might look like for all to see: (Bernanke press conference transcript): 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....

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... 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. In this scenario, when asset purchases ultimately come to an end, the unemployment rate would likely be in the vicinity of 7 percent, with solid economic growth supporting further job gains, a substantial improvement from the 8.1 percent unemployment rate that prevailed when the Committee announced this program.

Source: TTMYGH

In what used to pass for ordinary times, the economy would be strengthening, unemployment would have fallen to an acceptable level, and the temporary stimulus applied by the Fed to help steward the economy through a lean patch would be removed as the economy stood once again on its own two feet. All this would, of course, in turn be good for the equity markets — after all, a strong economy is always bullish for equities, right? Right? Ah... yes, well there we may have a minor problem. Amidst an economy that, in the Chairman's own words, is growing at a "moderate pace", we find the S&P 500 hovering around its all-time high. Hmmm...

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2000

S&P500 Index
2003-2013

1500

1000

‘Moderate Economic Recovery’
500

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Source: Bloomberg

So, naturally, in the topsy-turvy world that exists through the looking glass of quantitative easing, the declaration by the Fed Chairman that the economy is gaining sufficient strength to be allowed to stand on its own two feet sent the market into a tailspin. As you can see from the chart below, all was well until the Chairman began speaking to the press; and then, after a few gyrations as the market struggled to decipher Bernanke's words, it dawned upon the collective conscious that the free-money party might just be coming to an end.
Bernanke Begins Speaking

1650

1645

1640

S&P500 Intraday Chart
June 19, 2013

1635

1630

1625 09:30 10:30 11:30 12:30 13:30 14:30 15:30 16:00

Source: Bloomberg

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And there, in a nutshell, is the corner into which the Fed and the other central banks of the world have backed themselves. There is one reason and one reason only why the world's major equity markets are, for the most part, floating around their all-time highs: QE. Period. It has absolutely nothing to do with the strength of the underlying economy and everything to do with the corruption of traditional price signals that central banks have, in their desperation wisdom felt happy to allow in pursuit of rainbows and unicorns for everybody. Now, as I spoke about in my Mines & Money presentation, "Risk: It's Not Just A Board Game", the Fed finds itself confronting the realities of market confidence. As they have striven to generate confidence in a moribund economy by continually talking in the most optimistic language they can feasibly muster, markets have been blithely ignoring the jawboning and focusing solely on the free money being handed out by a generous but thoroughly misguided Fed. The gerrymandering of the boundaries of central bank influence has led to the Jerrymaguiring of markets. Now, however, the Fed is going to have to face reality in the world it has created, and it will not be pretty. Their choice is a stark one: Pull back on the monetary lever as they continue to threaten to do (and watch as markets crumble in front of their eyes) or be forced into continuing (perhaps even expanding) the purchase of both treasuries and mortgage-backed securities in order to avert disaster. Already, as they overplay their hand and people genuinely begin to fear that they will be as good as their word and begin "tapering" as soon as this fall, wheels are coming off the clown car all over the place. It's not just equities that have been punched in the head. Elsewhere around the financial world, all sorts of risk assets that have been the indirect beneficiaries of Fed largesse are taking a look over the edge of the cliff and recoiling in horror. In Europe, where the former problem children of the EU, Italy and Spain, had seen their fortunes (and borrowing costs) turned around by the confidence instilled in markets by Mario Draghi's now-infamous promise to "do whatever it takes" to save the euro, we already see genuine fear over the removal of free money manifesting itself in sharply rising rates (something neither country can afford):

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8

Italian & Spanish 10-yr Bond Yields
2012-2013

7

6

5

4

Italy 10 yr Spain 10 yr

3

2012

2013

Source: Bloomberg

High-yield corporate bonds have been another favoured corner into which QE dollars have flowed, and they are also being punished as the Fed's jawboning finally begins to sound as though it carries a semblance of truth. Maybe this time IS different?
97 96 95 94 93 92 91 90 89 88 87 86 85 2012 2013

iShares IBOXX $ High Yield Corporate Bond Fund (HYG)
2012-2013

Source: Bloomberg

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Risk currencies? Take a look at the Australian dollar:
1.06

1.03

1.00

Australian Dollar vs Us Dollar
0.97

2012-2013

0.94

0.91

2012

2013

Source: Bloomberg

Even gold too another battering in the past week:
2000

Gold (US$)
2012-2013

1500

1000

2012

2013

Source: Bloomberg

But if this time is in fact different, then the most troubling sign can be found in the scariest place imaginable, the US 10-year Treasury:

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3.0

US 10-yr Treasury Yield
2012-2013

2.5

2.0

1.5

1.0

2012

2013

Source: Bloomberg

Every time we have seen weakness in the markets since QE1 hit movie theatres back in late 2009, sanctuary has been sought in sovereign bonds — in particular the US 10-year — but, as you can see from this chart of the benchmark's yield, it is now being sold heavily, along with the rest of the beneficiaries of the Fed's frivolity. Ten-year rates have hit 2.53% from 1.62% as recently as May. Seems like a small enough move in the scheme of things, right? It isn't. It's a big move and an even bigger deal as, apart from anything else, it has the power to kill the nascent recovery in the US housing market upon which so much hope for the future is being heaped. Which brings us to the $64,000 question: When push comes to shove and instability slithers across multiple asset classes, will the Fed actually go ahead and taper? Can it afford to? A complex question, but fortunately one with a simple answer: No. In fact, Bernanke's comments which so terrified markets were actually not hawkish at all when viewed through dispassionate eyes (if such things still exist). A few selections from Bernanke's press statement away from the passage about tapering later this year that so terrified investors demonstrate how Bernanke was at pains to reassure investors that the party is far from over (emphasis all mine):

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For today, I will note that, in the view of most participants, the broad principles set out in June 2011 remain applicable. One difference is worth mentioning. While participants continue to think that, in the long run, the Federal Reserve's portfolio should consist predominantly of Treasury securities, a strong majority now expects that the Committee will not sell agency mortgage-backed securities during the process of normalizing monetary policy, although in the longer run limited sales could be used to reduce or eliminate residual MBS holdings. I emphasize that, given the outlook and the Committee's policy guidance, these matters are unlikely to be relevant to actual policy for quite a while. "... the Committee reaffirmed its expectation that the current exceptionally low range for the funds rate will be appropriate at least as long as the unemployment rate remains above 6 and 1/2 percent so long as inflation and inflation expectations remain well-behaved in the senses described in the FOMC's statement. As I have noted frequently, the phrase at least as long in the Committee's interest rate guidance is important. The economic conditions we have set out as preceding any future rate increase are thresholds, not triggers. For example, assuming that inflation is near our objective at that time, as expected, a decline in the unemployment rate to 6 and 1/2 percent would not lead automatically to an increase in the federal funds rate target, but rather would indicate only that it was appropriate for the Committee to consider whether the broader economic outlook justified such an increase. All else equal, the more subdued the outlook for inflation at that time, the more patient the Committee would likely be in making that assessment." I would like to emphasize once more the point that our policy is in no way predetermined and will depend on the incoming data and the evolution of the outlook, as well as on the cumulative progress toward our objectives. If conditions improve faster than expected, the pace of asset purchases could be reduced somewhat more quickly. If the outlook becomes less favorable, on the other hand, or if financial conditions are judged to be inconsistent with further progress in the labor markets, reductions in the pace of purchases could be delayed; indeed, should it be needed, the Committee would be prepared to employ all of its tools, including an increase in the pace of purchases for a time, to promote a return to maximum employment in a context of price stability. Folks, the party isn't over; the DJ just acquiesced to a request to play "Hazard" by Richard Marx.

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Bernanke went out of his way, in my opinion, to reassure people that what has become normal service will continue unabated, despite his wanting to set out plans for a taper. What was behind all this? Well, the most interesting explanation I have found comes from my friend Paul Brodsky of QBAMCO, who can always be relied upon to cast an intelligent eye over the most baffling of situations and come up with an astute interpretation. Paul's brilliant observations came in the form of a short piece entitled "That Pesky Marketplace — A Political Fable", which I include here in its entirety. (I hope that's OK, Paul!!): That Pesky Marketplace — A Political Fable The Fed Chairman tells the President that his administration must work with Congress to cut spending or else the Fed will begin reducing its balance sheet. The President thanks him for his years of service. The Chairman, concerned with his legacy of having been too accommodative, hints to the public about tapering the Fed’s asset purchases. The dollar rallies and asset prices fall. Perturbed, the President then publicly thanks the Fed Chairman for his years of service. The Fed Chairman escalates, publicly setting a time frame when he’ll begin tapering. The markets fall even more dramatically. The President, fearful that the Fed’s actions could destroy his legacy, quickly names a replacement for the Chairman, one that reliably plays ball. The markets rally. Through the optics of the capital markets, the President successfully perpetuates the temporary appearance of a healthy economy. The Fed Chairman returns to the private sector with dignity, his legacy defined by providing abundant credit when necessary and then trying to set a course back to normalcy. Yet the Fed never diverges from its accommodative posture; its zero interest rate policy remains in force and quantitative easing INCREASES to record levels. The capital markets rally further as the real economy continues to contract. Washington and Wall Street are happy while real output and employment continue to fall. A crisis “no one could have foreseen” occurs. Financial markets plunge. Banks inform the Fed their loan books are deteriorating. The Fed triples QE and yet employment rolls continue to drop. The Fed informs Congress and the President that the monetary system must be reset. The public grows angry that, just like in 2008, banks and the government gained funding through newly created money but it, the public, did not. (Civil unrest?) The State Department concurs with the Fed; foreign exporters to the US no longer want US dollars in exchange, and the system must be changed. At the urging of the President, Congress directs the Fed to devalue the Dollar to gold, and to reset a fixed exchange rate. Few still dispute that the capital markets are priced at the pleasure of elected and appointed authorities.

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The spectacle called “economy” should continue as-is, predictably reflexive, until it is in the interest of authorities to change its rules (not as predictable yet still entirely rational and quite in the American tradition). On and on it goes until it no longer can. Moral: When the financial markets no longer reflect the human condition, authorities must answer to true power — the marketplace. Another man in whom I place enormous trust to be able to cut through the smoke and see things for what they really are is Bill Fleckenstein, and this week Bill had this to say about the events that so roiled the marketplace: In a QE-driven world, many of us have become used to the predictability of markets doing what central banks wanted, and have operated under the assumption that exit signs would be in giant neon lights. If in fact bond markets are quietly revolting against the nauseating central planning of incompetent economists with PhDs, that is going to be very big news, and will mean much weaker equity prices, and bond prices as well. Of course, at some point all of that weakness feeding back into the economy brings up the subject of additional QE, but if the bond market has changed its tune, that will be even more problematic... Eventually folks will realize that the Fed is not only clueless regarding the economy (they haven't fixed anything) but also trapped. That means it and other central banks should have zero credibility versus the huge amount they have had up to this point. That mindset should lead people to worry about stagflation instead of dreaming about Goldilocks, but more events have to play out before we get to that point. But perhaps it's fitting to leave the last word to the ultimate Fed watcher, the man with a true ringside seat, Jon Hilsenrath, who, in the wake of the market's nervous reaction, swiftly authored a piece designed to set the record straight on behalf of the Fed about Bernanke's dovishness and explain just why the Chairman was misunderstood: In the two days since Fed Chairman Ben Bernanke said the central bank expects to curb its big bond-buying program later this year, stocks tumbled, long-term interest rates rose and interest-rate futures contracts fell, meaning investors bet the Fed would raise short-term interest rates sooner than previously expected. “The FOMC was more hawkish than we had expected,” economists at Goldman Sachs concluded after the Wednesday Fed policy meeting, a view widely held on Wall Street trading floors. However, a close look at Mr. Bernanke’s press conference comments and Fed official’s interest-rate projections released after the meeting show the Fed took several steps aimed at sending the opposite signal. Mr. Bernanke emphasized that even though the Fed might pull back on bond-buying later this year ... it would be a long time before it took the more aggressive step of raising short-term interest rates ...
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He also emphasized in his prepared statement that when rate increases come, they “are likely to be gradual,” a hint of future caution about rate increases he hasn’t given before. Mr. Bernanke suggested the Fed could keep short-term interest rates near zero even longer than previously planned... Fifteen Fed officials expect the central bank won’t need to raise short-term interest rates until 2015 or 2016, and just four said it would need to do so before then.... Mr. Bernanke said “a strong majority” of Fed officials had concluded the Fed won’t ever sell its growing portfolio of mortgage-backed securities, and instead will let it shrink as mortgages are paid off.... A hawk became a very vocal dove. St. Louis Fed president James Bullard dissented from the Fed’s policy statement, saying he thought the central bank should be leaning toward even easier money policies.... Mr. Bernanke emphasized the conditional nature of the Fed’s plan to withdraw bondbuying... Taper. A verb describing an ongoing effort to decrease something in action or force ... or a noun describing something used to start fires? We shall see...

*******
OK ... not much room left, so here's a quick rundown of the contents of this week's Things That Make You Go Hmmm...: A grumpy Niall Ferguson, a bunch of unemployed Indian engineers, shameful European politicians, Matt Taibbi, Greg Weldon, the latest on the Snowden spying scandal, Marc Faber, Egon von Greyerz, a splintering Greek coalition, a trip back in time with Ben Bernanke, the rise of Germany's Euroskeptic movement, fixed income's slide, a history of high yield bonds, and ... me.

Until Next Time. *******

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Another shameful day for Europe as EMU creditor states betray South
Anybody with serious banking exposure to any EMU state on the front line of Europe's macroeconomic crisis now knows what to expect. The deal reached by EMU finance ministers on the use of the bail-out fund (ESM) to recapitalise distressed banks makes clear who will in fact suffer the real losses: first shareholders, then bondholders and then deposit holders above €100,000. They stand to lose almost everything, as we saw with Laiki in Cyprus. Officials from the European Central Bank and the European Commission warned during the Cyprus crisis that it would be dangerous to set such a precedent, fearing contagion. The Portuguese were openly alarmed. So has that risk of contagion since dissipated? One should have thought quite the opposite, given the yield spike in Portugal, Spain, Italy et al since the Bernanke Fed dropped its taper bomb this week. Furthermore, as Yanis Varoufakis points here, the deal resiles from the solemn agreement by EU leaders in June 2012 to break vicious circle between crippled banking systems and crippled sovereign states, each dragging the other down. The states that are already in trouble will have to carry most of the burden of recapitalising banks, pushing them over the edge into actual insolvency. They will have to come up with the money needed to raise capital ratios to 4.5pc of assets. Then come the private haircuts, which of course risk devastation for the host country, and the collapse of investor confidence. Only then does Europe step in to share part — not all — of any further recap needs. The original promise of an ESM blanket to cover "legacy assets" has come to almost nothing. The vassal states may possibly get some relief later on the past losses from the EMU credit bubble, but only as a reward for good behaviour and on a case by case basis. "Legacy losses will be used as a disciplinary device: Greece, Spain and Ireland will now have to tussle, beg and plead for debt relief regarding the funds already borrowed from the EFSF-ESM for their banks," said Dr Varoufakis. "As the grand total for all bank recapitalisations, past and future, is to be limited to the puny sum of €60bn, Europe’s peripheral nations can only at best receive a tiny amount of debt relief; enough to ensure that Ireland, Greece and Spain are competing against one another as to which proud nation will be a better ‘model prisoner’ than the rest." Indeed, it is an abject spectacle. Dr Varoufakis rightly calls it a "a truly shameful day for Europe".

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The creditor states of the North are still calling all the shots, and presumption remains that the countries in trouble are victims of their owns failures, fecklessness and folly. There is no recognition that this disaster was a joint venture, caused by the dysfunctional structure of monetary union; nor that Northern creditors and their banks share half the blame for flooding the South with cheap credit; nor that the ECB played a huge part in stoking unstable credit bubbles in Club Med and Ireland by gunning M3 money supply at double-digit rates to help nurse Germany through its slump. Nor is there even a sensible analysis of what is needed to solve the crisis. One can understand why Germany, Holland, Finland and Austria do not wish to accept any mutualisation of EMU debt, or admit to their own taxpayers that the euro project costs real money. But what sticks in the craw is the relentless propaganda by EU leaders that they will stand shoulder to shoulder in solidarity with fellow members of EMU, and that they will do whatever it takes to uphold a project upon which the peace of Europe allegedly depends. Quite obviously they will do no such thing. What sticks, too, is the oft-repeated claim that Anglo-Saxon outsiders failed to understand the degree of pan-European political will behind the EMU project. This cliche is the opposite of the truth. Anglo-Saxon investors believed so gullibly in the total sanctity of EMU that they were willing to buy Greek 10-year bonds for a wafer-thin margin of just 26 basis points (bps) over Bunds (and Spanish debt for just extra 4bps). They believed the dream, too. The reason why the EMU crisis metastasized — when debt levels were lower than in the US or Japan — was the horrible discovery that Germany might not stand behind the project after all, and certainly would not stand behind Greece. Those who stayed to the end lost 75pc (de facto) in Greek haircuts....
*** AMBROSE EVANS-PRITCHARD / LINK

Harvard’s Grumpy Ferguson Says World Is Going to Hell
Not too many years ago, in “Colossus” (2004), Ferguson was advocating that the U.S. face up to its Imperial destiny. And in “Civilization: The West and the Rest” (2011) he described how “six killer apps” made the West great. No more Churchill’s sunny uplands for us, apparently, as “The Great Degeneration: How Institutions Decay and Economies Die,” makes clear. Ferguson writes, “My over-arching question is: What exactly has gone wrong in the Western world in our time?” Surely, “everything’s going to hell” is the old man’s lament. Ferguson, who once personified the Oxford history don as sex symbol, turned 49 this year, so “Degeneration” feels a bit rushed, premature. On the other hand, looking at the last five years would depress anyone.

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Slender by Ferguson standards at 174 pages, the book is based on the author’s four BBC Reith Lectures delivered last year. Ferguson, who has been a professor at Harvard since 2004, diagnoses the maladies facing the U.S. and, to a lesser degree, the U.K. And these are? We spend too much, especially on intergenerational transfer programs like Medicare, Medicaid and Social Security. We seek redemption in elaborate regulation, which is guaranteed to throttle the economy. We are in danger of replacing the rule of law with the rule of lawyers. Our system of education perpetuates the existence of a mandarin class. Finally, we have abdicated our responsibility as citizens in favor of the state. Ferguson made his reputation as a historian who combined a non-academic style with statistical analysis, most notably in “The Pity of War” (1998), a history of World War I. What works at book length is decidedly less pleasing in the much-shorter “Degeneration,” where frequent quotation and reliance on data make for choppy going. Or perhaps I am inured to the necessarily selective use of data, even by a writer as normally persuasive as Ferguson. “According to the International Monetary Fund, the gross government debt of Greece will reach 182 percent of GDP in 2012,” Ferguson writes. “For Italy the figure is 128, for Ireland 119, for Portugal 124 and for the United States 112.” Alarming, indeed, I guess. But also stale. In revising its outlook on the U.S. to stable last week, Standard & Poor’s said that government debt as a percentage of gross domestic product would remain around 84 percent over the next several years, the result of an improving economy and the sequestration’s cuts in spending. Further on, in his chapter on the rule of law, Ferguson notes that it may be declining in the U.S. but it is markedly improving in Africa. “I recently delved into the World Bank’s treasure trove, the World Development Indicators database, to see which countries in Africa” were ranked highly in terms of public administration, the regulatory environment, property rights and rule-based governance, publicsector management and institutions, transparency, accountability and corruption in the public sector, Ferguson writes. The countries that appear in the top 20 developing economies in four or more of these categories are Burkina Faso, Ghana, Malawi and Rwanda. And I thought — actually, I didn’t know what to think. I gather we’re supposed to think that unless we let business run riot, they’ll all move away. And then I thought: Really? You go do business in Malawi or Rwanda....
*** BLOOMBERG / LINK

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A million engineers in India struggling to get placed in an extremely challenging market
Somewhere between a fifth to a third of the million students graduating out of India's engineering colleges run the risk of being unemployed. Others will take jobs well below their technical qualifications in a market where there are few jobs for India's overflowing technical talent pool. Beset by a flood of institutes (offering a varying degree of education) and a shrinking market for their skills, India's engineers are struggling to subsist in an extremely challenging market. According to multiple estimates, India trains around 1.5 million engineers, which is more than the US and China combined. However, two key industries hiring these engineers — information technology and manufacturing — are actually hiring fewer people than before. For example, India's IT industry, a sponge for 50-75% of these engineers will hire 50,000 fewer people this year, according to Nasscom. Manufacturing, too, is facing a similar stasis, say HR consultants and skills evaluation firms. According to data from AICTE, the regulator for technical education in India, there were 1,511 engineering colleges across India, graduating over 550,000 students back in 2006-07. Fuelled by fast growth, especially in the $110 billion outsourcing market, a raft of new colleges sprung up — since then, the number of colleges and graduates have doubled. Jobs have, however, failed to keep pace. "The entire ecosystem has been built around feeding the IT industry," says Kamal Karanth, managing director of Kelly Services, a global HR consultancy. "But, the business model of IT companies has changed ... customers are asking for more. The crisis is very real today." Placement numbers across institutes — including tier-I colleges such as IIT Bombay — have mirrored these struggles. In 2012-13, in IIT Bombay, a total of 1,501 students opted to go through the placement process. At the time of writing, only 1,005 had been placed (placements are currently underway in the institute).

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In 2011-12, 1,060 of the 1,389 students were placed. Further down the pecking order, at the Amity School of Engineering and Technology, placements are muted. The number of companies visiting is down from 86 last year to 67 in 2013 at the time of writing (placements are currently underway). Batch sizes have reduced drastically at its Noida campus this year, with 365 students placed so far in a batch size of 459, compared to 1,032 being placed in a batch size of 1,160 last year. "Some companies have delayed the joining dates of students who passed out last year and they are still waiting to be placed," says Ajay Rana, director, Amity Technical Placement Centre. "We can expect joining dates of students who passed out this year to be deferred by a minimum of six months."...
*** ECONOMIC TIMES / LINK

Wobbling along
It seemed a good idea at the time. On June 11th Antonis Samaras, the prime minister, eager to show that his fractious coalition could push through public-sector reform, shut the overstaffed state broadcaster ERT without warning and sacked its 2,650 employees. Few Greeks watch ERT’s four television channels; its programmes are dull and its news anchors are political stooges (a leaked list found dozens of employees earning six-figure salaries). And the European Union and the IMF, who oversee Greece’s bail-out, were waiting impatiently for the government to come up with the names of 2,000 public-sector workers to be sacked by June 30th. Mr Samaras pledged to have a lean new public broadcaster, with only 1,200 employees, up and running by August. But hundreds of protesters camped outside ERT’s headquarters. Other European public broadcasters voiced outrage at the closure; ERT employees streamed unofficial news programmes over the internet. The opposition Syriza party talked of “a coup against democracy.” And Mr Samaras’s coalition partners, the PanHellenic Socialist Movement (Pasok), and the Democratic Left, demanded the withdrawal of the decree closing ERT. Then a ruling by Greece’s highest court, in response to an appeal by the ERT’s trade union, said the broadcaster should reopen, though it backed the government’s right to restructure it. For a few days, it seemed the government might collapse, but it is still wobbling along. Most Greeks prefer to keep the coalition and avoid a snap election. If one were held, Pasok might not win the 3% needed to enter parliament, according to polls; and Democratic Left’s leader might be unseated. A fiery speech by Alexis Tsipras, the Syriza leader, at an open-air rally outside parliament on June 17th drew fewer people than expected. Mr Samaras promises a cabinet reshuffle. The ERT affair makes it harder to sell Greece’s “success story” of reform. In its year in office the coalition has done well on budget targets: there may be a small primary surplus (ie, before interest) this year.

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But unless the government can restructure the civil service and curb tax evasion, the bail-out will veer off track, fears the “troika” of the European Commission, the European Central Bank and the IMF. Blips are appearing. The state health service is still overspending, despite the launch of a hightech electronic prescription system designed to prevent chronic over-prescription by corrupt doctors and procurement staff. An overhaul of the tax administration is moving at snail’s pace, partly because young, well-qualified auditors are reluctant to sign up. Tax evasion by the rich continues unabated, according to the troika. Privatisation has also fallen behind. Gazprom, the only prospective bidder, failed this month to make a binding offer for Depa, the state natural-gas supplier. Greece will miss this year’s target of €2.6 billion ($3.6 billion) from selling state assets, says Taiped, the privatisation agency. Yet one bright spot emerged on June 18th: Socar, Azerbaijan’s state gas company, agreed to pay €400m for a stake in Desfa, which runs the gas-pipeline network. The deal could herald investment in new pipelines to Bulgaria and Albania carrying Azeri natural gas to western Europe, says Makis Papageorgiou, the energy minister.
*** ECONOMIST / LINK

"You F—ked Up, You Trusted Us": Talking Ratings Agencies With Chris Hayes
"Standard & Poor's has long had strict policies to reinforce the independence of our analytical processes. . . . We make our methodology transparent to the market." That was among the responses of a spokesperson for the ratings agency Standard & Poor's when I contacted him a few weeks ago in advance of a new Rolling Stone feature, "The Last Mystery of the Financial Crisis," which describes the role the ratings agencies played in causing the 2008 crash. The company was genuinely miffed that anyone would impugn its honesty. In one relatively brief e-mail, the spokesperson used variables of terms like "independent," "integrity" and "transparent," upwards of nine times. Hold that thought. "The Last Mystery of the Financial Crisis" makes great use of documents uncovered in years of painstaking research by attorneys at Robbins Geller Rudman & Dowd, a San Diego-based firm that was at the forefront of major lawsuits against the industry. The material those lawyers found leaves virtually no doubt that the great ratings agencies like Moody's and S&P essentially put their analysis up for sale in the years leading up to the crash. I picked some of the more damaging of these documents to ask about. Like for instance, an email from a company executive reading, "Lord help our f*****g scam. . . . This has to be the stupidest place I have worked at."
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Out of context, they said. What about other highly suggestive emails, like the one in which an analyst joked that "we have just stuck our preverbal [sic] finger in the air!!", or the one in which an analyst admitted his quantitative model was only marginally more reliable than "flipping a coin"? Not only cherry-picked and out of context, but "contradicted by other evidence," is how the S&P man put it. "They do not reflect our culture, integrity or how we do business," he said. Note the word integrity again. I point this out because the ratings agencies' responses to the questions we posed for the piece were almost as revealing as the extremely damaging emails and internal documents the Robbins Geller lawyers uncovered. It wasn't just that there was apparently an entire generation of internal email correspondence that had been taken out of context (apparently, the context was taken out of context). More interesting was another line of defense. Not long before I contacted them, S&P had made, in a very graphic and comical manner, a very strange argument in court. In an attempt to dismiss a federal Justice Department lawsuit pending against S&P, the company had, in a court motion, cited a Florida court case, Boca Raton Firefighters and Police Pension Fund v. Bahash. In that case, the Second Circuit ruled that the plaintiffs suing S&P could not make a fraud claim based upon the company's reassurances in its Code of Conduct of its "objectivity, integrity and independence." Moreover, the Court said, plaintiffs could not make a claim based on a public statement by S&P touting its "credibility and reliability," or another saying, "[S&P] has a longstanding commitment to ensuring that any potential conflicts of interest do not compromise its analytical independence." Why, you might ask, could one not make a fraud claim based upon those statements? Because, the Second Circuit ruled, those statements were transparently not meant to be taken seriously. The following passage is a summary written by S&P's own lawyers describing the Second Circuit ruling (emphasis mine): The Second Circuit affirmed the district court's dismissal of the plaintiffs' claims in their entirety, finding that the statements concerning the "integrity and credibility and the objectivity of S&P's credit ratings" were exactly "the type of mere 'puffery' that we have previously held not to be actionable." More from that same memo from S&P's lawyers:

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The Court found . . . that "generalizations about [S&P's] business practices and integrity" were "so generalized that a reasonable investor would not depend on [those statements]. . . ." Because S&P's statements about its objectivity, independence and integrity are the sort of vague, general statements that courts both within and outside this Circuit have found insufficient to support a fraud action, the Government's first "alleged scheme to defraud" fails....
*** MATT TAIBBI / LINK

EU bank bail-out talks deadlocked over saver protection
The European Union has failed to agree rules on who should pay in the event of a global banking collapse after eurozone countries clashed with those outside the single currency over how flexible the system should be. Talks in Luxembourg aimed at ensuring shareholders and bondholders bear the brunt of bank failures rather than taxpayers, failed in the early hours of yesterday morning after almost 20 hours of negotiations. They were described as “chaotic”. The talks were split over how savers should be treated, with Germany and other eurozone countries insisting on rigid rules that would impose losses on those with more than €100,000 (£85,000) in their account. France and Britain, together with other non-eurozone EU members, want more flexibility to tailor action on failing banks to protect savers. European finance ministers will reconvene on Wednesday in an attempt to break the deadlock. “I think we can reach a deal if we take a few more days,” said Michel Barnier, the European commissioner in charge of banking regulation. “We are not far off now from a political agreement.” But Michael Noonan, the Irish finance minister who chaired the talks, said there were “still real issues, core issues outstanding”. “It is principally an issue of the non-euro and the euro,” he said, adding that the gulf between negotiators was so wide there had been no point in continuing. One official at the meeting described it as “chaotic”. Both sides of the debate are aiming to avoid a repeat of the bank bail-outs that cost taxpayers hundreds of billions of pounds between 2008 and 2011. Agreement is seen as vital to stabilising the European financial system amid continuing recession and political instability in southern Europe.

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Earlier at the talks, eurozone financial ministers had agreed rules for how a €500bn central bailout fund should operate. Non-eurozone countries will not be part of that system and when they joined the negotiations on Friday argued they should not be bound by rigid rules on who pays when banks fail. Britain, France, Denmark and Sweden insist there should be more leeway to take account of differences in national regulatory regimes. Sweden’s finance minister, Anders Borg, called a one-size-fits-all approach “very dangerous”. The German-led group sought to use the tax imposed on savers in Cyprus — part of the rescue of the island’s banks in March — as a template for all future bank failures across the 27 EU states. German finance minister Wolfgang Schaeuble said the new rules should not vary because that could put some banks based in smaller, poorer countries at a competitive disadvantage. Wealthier countries could continue to prop up their banks with public funds, he argued. Spain’s economic minister, Luis de Guindos, said agreement was vital. “What’s fundamental is there is agreement over the bail-in hierarchy and the protection of small depositors,” he said. Mr Barnier sought to encourage a compromise. “We need a clear hierarchy for the bail-in while allowing flexibility for national resolution authorities — but it should be constrained,” he said....
*** UK DAILY TELEGRAPH / LINK

The Fed's Exit Strategy (2009)
The depth and breadth of the global recession has required a highly accommodative monetary policy. Since the onset of the financial crisis nearly two years ago, the Federal Reserve has reduced the interest-rate target for overnight lending between banks (the federal-funds rate) nearly to zero. We have also greatly expanded the size of the Fed’s balance sheet through purchases of longer-term securities and through targeted lending programs aimed at restarting the flow of credit. These actions have softened the economic impact of the financial crisis. They have also improved the functioning of key credit markets, including the markets for interbank lending, commercial paper, consumer and small-business credit, and residential mortgages.

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My colleagues and I believe that accommodative policies will likely be warranted for an extended period. At some point, however, as economic recovery takes hold, we will need to tighten monetary policy to prevent the emergence of an inflation problem down the road. The Federal Open Market Committee, which is responsible for setting U.S. monetary policy, has devoted considerable time to issues relating to an exit strategy. We are confident we have the necessary tools to withdraw policy accommodation, when that becomes appropriate, in a smooth and timely manner. The exit strategy is closely tied to the management of the Federal Reserve balance sheet. When the Fed makes loans or acquires securities, the funds enter the banking system and ultimately appear in the reserve accounts held at the Fed by banks and other depository institutions. These reserve balances now total about $800 billion, much more than normal. And given the current economic conditions, banks have generally held their reserves as balances at the Fed. But as the economy recovers, banks should find more opportunities to lend out their reserves. That would produce faster growth in broad money (for example, M1 or M2) and easier credit conditions, which could ultimately result in inflationary pressures — unless we adopt countervailing policy measures. When the time comes to tighten monetary policy, we must either eliminate these large reserve balances or, if they remain, neutralize any potential undesired effects on the economy. To some extent, reserves held by banks at the Fed will contract automatically, as improving financial conditions lead to reduced use of our short-term lending facilities, and ultimately to their wind down. Indeed, short-term credit extended by the Fed to financial institutions and other market participants has already fallen to less than $600 billion as of mid-July from about $1.5 trillion at the end of 2008. In addition, reserves could be reduced by about $100 billion to $200 billion each year over the next few years as securities held by the Fed mature or are prepaid. However, reserves likely would remain quite high for several years unless additional policies are undertaken. Even if our balance sheet stays large for a while, we have two broad means of tightening monetary policy at the appropriate time: paying interest on reserve balances and taking various actions that reduce the stock of reserves. We could use either of these approaches alone; however, to ensure effectiveness, we likely would use both in combination....
*** BEN BERNANKE / LINK

Snowden spy row grows as US is accused of hacking China
Edward Snowden, the former CIA technician who blew the whistle on global surveillance operations, has opened a new front against the US authorities, claiming they hacked into Chinese mobile phone companies to access millions of private text messages.

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His latest claims came as US officials, who have filed criminal charges against him, warned Hong Kong to comply with an extradition request or risk complicating diplomatic relations after some of the territory's politicians called for Snowden to be protected. The latest developments will raise fears that the US's action may have pushed Snowden into the hands of the Chinese, triggering what could be a tense and prolonged diplomatic and legal wrangle between the world's two leading superpowers. Snowden, whose whereabouts have not been publicly known since he checked out of a Hong Kong hotel on 10 June, was reported by the Chinese media on Saturday to be in a "safe place" in the former British colony. The 30-year-old intelligence analyst has over the past three weeks leaked a series of documents to the Guardian revealing how US and UK secret services gain access to huge amounts of phone and internet data, raising serious questions about privacy in the internet age. On Friday, based on documents from Snowden, the Guardian reported that Britain's spy agency GCHQ has secretly gained access to the network of cables carrying the world's phone calls and internet traffic, without the authorities having made this known to the public. It was also reported that GCHQ is processing vast streams of sensitive information which it is sharing with its US partner, the National Security Agency. On Saturday the former British foreign secretary Sir Malcolm Rifkind, who now chairs the intelligence and security committee, said the committee would launch an investigation into the latest revelations. The committee will receive an official report from GCHQ about the story within days and will then decide whether to call witnesses to give oral evidence. If it is then thought necessary, the committee can require GCHQ to submit relevant data. Within hours of news breaking that the US had filed charges against Snowden, the South China Morning Post reported that the whistleblower had handed over a series of documents to the paper detailing how the US had targeted Chinese phone companies as part of a widespread attempt to get its hands on a mass of data. Text messaging is the most popular form of communication in mainland China where more than 900bn SMS messages were exchanged in 2012.Snowden reportedly told the paper: "The NSA does all kinds of things like hack Chinese cellphone companies to steal all of your SMS data." The paper said Snowden had also passed on information detailing NSA attacks on China's prestigious Tsinghua University, the hub of a major digital network from which data on millions of Chinese citizens could be harvested. As Snowden made his latest disclosures, the US issued an extradition request to Hong Kong and piled pressure on the territory to respond swiftly. "If Hong Kong doesn't act soon, it will complicate our bilateral relations and raise questions about Hong Kong's commitment to the rule of law," a senior Obama administration official said....
*** UK GUARDIAN / LINK

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The Rise of the Fearmongers: Germany's New Euroskeptic Elite
Many Germans believe it is time to abandon the euro. They're part of a growing movement spurred by influential populists from the worlds of business and academia. Their arguments stoke fear but offer no clear alternatives. The day the euro falls apart will feel like paradise, or at least if Dirk Müller is there to host the event. Müller can come up with an unforgettable melody for even the worst of calamities. And to do so, he needs nothing more than his warm, dark voice, which can even cloak horror in ghoulish but beautiful sounds. The refrain would probably consist of a quote Müller has repeated often, because it seems to fit to every occasion: "That's it, Mr. Müller. Mr. Müller, that's it." But, at the moment, Mr. Müller still has a problem being Mr. Müller, because his voice is threatening to abandon him. He has spent too much time in TV studios lately, talking his new book "Showdown" onto the best-seller lists, and his voice has become hoarse. The man who likes to go by the nickname "Mister Dax," because he was once a well-known stock trader and gave a face to the German stock market (and its blue-chip DAX index), still has to endure this evening in Rottweil, a town on the edge of the Black Forest in southwestern Germany. He has taken a pill against hay fever, another against the flu and a cough suppressant. It's mid-May, a week in which the masscirculation newspaper Bild is warning against inflation, the weekly magazine Stern is running a cover story titled "Is My Money at Risk Now?" and the local paper, the Schwarzwalder Bote, is running the headline "Passion For Europe in Free Fall." It's Müller time. In a side room at a decommissioned power plant that has been converted into an auditorium, Müller is preparing for his appearance. With a cough, he announces his "grand tour through Europe." Perhaps there is no better way to illustrate Europe's condition than in a power plant that has lost power, where a red carpet is unrolled for a man who is a gifted speaker and who plays with his initials as if they were a promise — Dirk Müller, DM (the symbol for the former German currency, the deutsche mark). The parking lot outside is full. It's an ordinary Thursday evening in a German town, and close to 500 people have come to the event, for which tickets cost €69.90 ($94), about the price of entry to a pop concert. But the topic is Europe's crisis, and the event turns out to be one of the most heavily attended at the Neckartal Power Plant. In a few minutes, when Müller begins speaking, a few in the audience will pull out their notepads and jot down his key points. Müller has even secured the rights to the name "Mister Dax," which is how many people address him.

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He steps onto the stage and turns on his laptop. He shows the audience a photo of American warships and talks about the "battle for future global dominance." He switches to an image of a paper airplane flying in a thunderstorm. The paper airplane is a €50 bill. "In my opinion, the euro cannot function," Müller says. Suddenly the laptop crashes and the screen goes dark. Müller could simply say: "Sorry, my computer crashed." Instead, he says: "The system has collapsed." Müller is a warner. He warns against running Europe into the ground "out of convenience," merely for the purpose of preserving the euro, which, according to Müller, is much too strong for the weak countries in the south but too weak for the strong German economy. He warns against conditions like those in Greece. "Flags with swastikas on them; that's Greece in 2013." He warns against "lost generations" in Portugal and Spain. "The euro isn't bringing us peace," he says. "In fact, the euro is the spirit of discord." "A potential for infection is developing," he says, "and it can break out at any time." He insinuates, quips and laces his speech with sarcasm. He doesn't claim that the Americans tried to subjugate the International Monetary Fund (IMF), or that the IMF subsequently took Europe hostage. He expresses himself more deftly rather than allowing himself to be pinned to an ideology. He doesn't shout, and he remains perfectly pleasant. The top 10 percent of the German population owns two-thirds of all wealth in in Germany, he says. He then stops and insists that he is not a leftist....
*** DER SPIEGEL / LINK

Letter from Nicosia: Cyprus Says It Needs More Help from EU
In a letter to euro-zone leaders, Cypriot President Nicos Anastasiades has asked that the bailout package for his country be revisited. The effects on the island nation's economy have been much greater than expected, he writes. EU leaders are "puzzled." Less than three months have passed since the European Union, together with the International Monetary Fund (IMF), assembled a €10 billion ($13.4 billion) bailout package for Cyprus to prevent the country's banking system from collapsing. But Nicosia, according to reports in the Financial Times and the Wall Street Journal, already finds itself in need of additional help. In a letter sent to euro-zone leaders last week, and obtained by both business dailies on Tuesday, Cypriot President Nicos Anastasiades says that the bailout package, which included the restructuring of the country's two largest banks, was "implemented without careful preparation" and that it has damaged the island nation's economy to a greater degree than expected.

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"The economy is driven into a deep recession, leading to a further rise in unemployment and making fiscal consolidation all the more difficult," Anastasiades wrote, according to a passage quoted by the Financial Times. "I urge you to review the possibilities in order to determine a viable prospect for Cyprus and its people." The Cyprus bailout was, if not the most expensive, certainly the most rancorous of the aid packages the euro zone has yet assembled for an ailing member state. A first deal, which called on all savers with deposits of €20,000 or more to participate in propping up the country's wobbly banks, was rejected by the government in Nicosia. It accepted a similar deal seven days later — with only savers holding more than €100,000 in savings required to take part. In addition to closing Cyprus' second-biggest bank, Laiki, and merging parts of it with the Bank of Cyprus, the country's largest financial institution, the deal also included a €13 billion package of austerity measures pledged by Nicosia. The EU aid package was to prevent the government from going bankrupt, with none of the money earmarked for the country's banks. Brussels' bumbling in the lead up to that bailout package has been widely criticized. And Anastasiades' letter comes just weeks after the IMF itself also criticized the EU's bailout strategy, though its assessment focused specifically on the first Greek bailout, worth €110 billion. The IMF, however, has also noted the risks associated with the Cyprus bailout. In May, the institution noted in a staff report that the impact of the bank restructuring and consolidation plans were "highly uncertain" and that risks were "substantial and tilted to the downside." Still, the Cypriot president's letter has left EU officials "puzzled," according to the Financial Times. He asks that the restructuring of Laiki and the Bank of Cyprus be partially undone, a request that would more or less mean the renegotiation of the entire package. "Essentially, he is asking for a complete reversal of the program," an unnamed EU official told the paper.
*** DER SPIEGEL / LINK

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Charts That Make You Go Hmmm...

Barclays, GS Global ECS Research

Buybacks, dividends, and M&A all depend on firms' abilities to borrow cheap.

With leverage ratios rising (and micro fundamentals weakening) as we noted here, macro fundamentals deteriorating, and the visible hand of the Fed now lifting off the repressed neck of risk managers, we have a simple question — What Happens Next? Simply put, your glowing stocks cannot rally in a world of surging debt finance costs. Remember — and it's important — there is no rotation that drives high-yield credit spreads wider without punishing equities. They are liabilities on the same capital structure and rise and fall in a highly correlated (well non-linear co-dependence) manner as the underlying business risk rises and falls. Do not, repeat do not, see high yield credit weakness as a sign of rotation to stocks — if the credit cycle has turned then stocks are set to fall. And bear in mind that while HY yields are at all-time lows, spreads are not and in fact being short stocks relative to credit makes more sense if you are you are a bear on the credit cycle here. The only problem being that the epic flows that sustained a credit market at non-economic levels for so long will exit in a hurry.
*** ZEROHEDGE / LINK

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Source: WeldonOnline

Greg Weldon turns his peerless eye towards the stress appearing in China's interbank
Greg's charting and analytical skills are second to none, and you can sign up for a free trial of Greg's work by simply clicking on the link above.

market this past few weeks and highlights the terrifying spike in short-term rates that definitely bears watching.

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Source: SoberLook

Fixed-Income Party Is Over — For Now
This has been one of the worst months for fixed-income assets in years. Active investors are dumping bonds of all types. Here is what the performance looks like over a period of a month (through today). A great deal of this selling has been forced by ETFs. Lower valuations force the exchange of shares for the underlying securities, which are then sold into the market. Mutual funds are losing capital as well. Firms like BlackRock (BLK) have had an amazing run in recent years, but the party is over. BLK is down 11.5% over the past month.

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Words That Make You Go Hmmm...
Marc Faber explains to Bloomberg
TV why the S&P 500 could fall 20-30%, why he thinks Lazslo Birinyi is wrong about his gold short, and why believing in Ben Bernanke is akin to believing in Father Christmas. Marc's reaction to the idea of believing that Bernanke will do what he says is classic Faber. CLICK TO WATCH

I had the distinct pleasure of finally

meeting a man I have admired for many years in Hong Kong last week. Egon von Greyerz is the founder of Matterhorn Asset Management and one of the smartest minds around. He also turns out to be an extremely nice man! In this interview with Eric King, Egon talks about the gold and silver markets, the debt load that has been heaped upon today's youth, and what the next stage of QE might look like. CLICK TO LISTEN

Last week, whilst in Hong Kong and

nursing a cold, I spoke to Jordan Roy-Byrne of The Daily Gold about — yes, you guessed it, precious metals. Jordan and I chatted about the fundamentals of the gold market (before Thursday's sharp sell-off) as well as the reasons to keep a beady eye on the Japanese bond market. Despite gold's falling below $1,300 this week, I still feel that the fundamental reasons to own it are as sound as ever — we shall see. CLICK TO LISTEN
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THINGS THAT MAKE YOU GO

and finally...
This is the first time I have repeated an "and finally...", but I think that under the
circumstances it's more than merited. Back in early November of 2012, my friend Charles showed me a YouTube video of an ad campaign his company had just dreamed up to promote a safety awareness campaign for Metro Trains in Melbourne, Australia. After a delicious dinner he casually handed me his iPad and showed me the video, which had been posted that week. It had 300 hits. This week, in Cannes, the advert was voted the best in the world, scooping five Grand Prix awards — the most in the history of the Cannes International Festival of Creativity. It now has 50 million hits ... and an app, a song, a karaoke version, etc. etc. etc. If you haven't seen this already then be prepared to have a catchy song in your head for days on end. If you HAVE already seen it, then you'll probably want to see it again — I did!

CLICK HERE TO WATCH

Hmmm...

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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 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 funds—though I will not be making any specific recommendations in this publication.

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THINGS THAT MAKE YOU GO
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The Mauldin Economics web site, Yield Shark, Bull’s Eye Investor, Things That Make You Go Hmmm…, Thoughts From the Front Line, 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, LLC’s proprietary rights, or any other reason determined in the sole discretion of Mauldin Economics, LLC.

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