Hmmm...

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

By Grant Williams

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30 December 2013

That Was The Weak That Worked: Part I
"The best perfumes in the world are laced with something nasty." — Rosalyn Rosenfeld (Jennifer Lawrence), American Hustle "That was the week that was, It's over, let it go" — Millicent Martin, "That Was The Week That Was" And the hardest part Was letting go, not taking part Was the hardest part And the strangest thing Was waiting for that bell to ring It was the strangest start I could feel it go down Bittersweet, I could taste in my mouth Silver lining the cloud Oh and I, I wish that I could work it out — Coldplay, The Hardest Part
© Copyright Mauldin Economics. Unauthorized disclosure prohibited. Use of content subject to terms of use stated on last page.

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Contents
THINGS THAT MAKE YOU GO HMMM... ....................................................3
Turkey First of Fed Taper Victims as Political Crisis Scares Investors ..........................23 The Unintended Consequences of Abenomics .....................................................24 Still Lying After All These Years ......................................................................25 The Rise and Fall of a Local Official Obsessed with GDP Growth ..............................27 What's Behind the Khodorkovsky Pardon? ..........................................................28 U.S. Stocks: Heading for a Bubble? .................................................................30 Miss Japan Ikumi Yoshimatsu Joins Battle Against Mafia in the Media .........................31 2013 Year in Review ...................................................................................32 Moguls Rent South Dakota Addresses to Dodge Taxes Forever ..................................33 Spend, Spend, Spend. Because Your Savings Aren't Worth a Damn ............................35

CHARTS THAT MAKE YOU GO HMMM... ..................................................37 WORDS THAT MAKE YOU GO HMMM... ...................................................40 AND FINALLY... .............................................................................41

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Things That Make You Go Hmmm...
2013 saw the passing of many beloved celebrities, but one who perhaps seemed to receive less attention than merited was Sir David Paradine Frost, who died of a heart attack, aged 74, whilst aboard the MS Queen Elizabeth, where he had been due to give a speech the following day. Those aboard the ship were deprived of a chance to hear the words of a journalist and broadcaster without peer in the modern world, whilst the rest of us woke to find ourselves being reminded of the high points of his remarkable life, particularly his famous interviews with Richard Nixon, which were immortalized a few short years ago in the stage play and subsequent movie Frost/Nixon. But Frost's star was set on its upward trajectory via a completely different type of vehicle when, after graduating from Cambridge University in 1962, he was selected to present a new weekly satirical review devised, produced, and directed by Ned Sherrin and entitled That Was The Week That Was or, as it became colloquially known, TW3. The writing staff of TW3 was a who's who of British comedy (John Cleese, Peter Cook, Eric Sykes, and Ronnie Barker were all amongst the contributors) but also included literary greats such as Dennis Potter, Roald Dahl, and Sir John Betjemin; and some of its sketches became the stuff of British comedy folklore. Wikipedia describes TW3 thus: (Wikipedia): The programme is considered a significant element of the satire boom in the United Kingdom in the early 1960s. It broke ground in comedy through lampooning the establishment and political figures. To receive Grant Williams' Things That Make You Go Hmmm... delivered to your inbox: SUBSCRIBE NOW!

You can probably figure out why I'm a fan. TW3 liked to point out the absurdities of the political system and take pot-shots at political figures. If only they'd had some kind of financial crisis in the 1960s, the symmetry would have been perfect ... but no. Instead, after a tumultuous four years between 1957 and 1961, the US, though saddled with high unemployment and huge excess capacity, embarked upon a middecade boom, which — hard though it is to believe — was actually helped by constructive government policy in the form of the Kennedy-Johnson tax cuts.

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Of course, there was the little matter of a war police action in Vietnam which led to a sudden 3.5% surge in the PPI in 1965, but let's not let anybody get any ideas as to how combat might be used to create a little desired (but controllable) inflation, shall we? Let's change the subject. Slightly. The end of the year is inevitably a time when even the most hard-bitten amongst us wax nostalgic and reflective, looking back on the previous 12 months as though the arbitrary break in the calendar should have some meaningful effect on fortune or fate. Of course, it doesn't, except for the fact that enough people tend to subscribe to that line of reasoning that it feels as though it actually matters. Human beings change their behaviour around the end of one year and the beginning of the next because over time they've been conditioned to believe that changes are justified. The appropriation of that mindset by various groups over the course of the past twelve months has been, for me, perhaps the most noticeable evolution in 2013. The title of this week's Things That Make You Go Hmmm... says it all: "That Was The Weak That Worked" Throughout 2013, the distortions created by intervention in once-free markets have left many (myself included) scratching their heads. The interventions have worked — almost faultlessly — but for them to do so has required the suspension of one belief system (economic reality) and the adoption of another — namely, that everything will be OK because ... well, just because. Can the fantasy persist into 2014? Yes. It most certainly can. Will it continue into 2014? Most likely. Will this new belief system become the new economic reality? Not a chance. So we're going to end 2013 by taking a three-part look at "The Weak That Worked" to try to get a sense of what could take place in 2014 if it happens to be the year that economic reality finally reasserts itself. This week in Part I, I will focus largely on equities, and next week we'll take a look at the bond and housing markets before heading to Europe and beyond. So let's get cracking, shall we?

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2013 was another year brought to you by the letters Q and E.
Quantitative easing spanned the entirety of 2013 and, as was no doubt intended, the market, the public at large, and most certainly just about every single inhabitant of Capitol Hill became so inured to the creation of $85 billion each and every month that the enormity of that policy dissolved from the collective consciousness like early morning mist. But amidst all the commentary and the debate surrounding QE, most people lost sight of what it actually is — even when we received the muchanticipated news in December that there would, in fact, be a Taper after all. Before we get to the Taper that happened, though, it's important to revisit the one that didn't. On May 22nd, 2013, Ben Bernanke, in a question and answer session, said the following: We're trying to make an assessment of whether or not we have seen real and sustainable progress in the labor market outlook. If we see continued improvement and we have confidence that that is going to be sustained, then we could in — in the next few meetings — we could take a step down in our pace of purchases. Boom! The consequences of that statement — and in particular, the last 20 words — reverberated around the financial world and wrought havoc in all sorts of weird and wonderful places. (In a presentation entitled "A Confederacy of Dunces" that I gave to a small group in Spain in late June, after Bernanke's comments, I pointed out the effects of the Taper threat and pinpointed some of those weird and wonderful places.) The effect Ben's pronouncement on both the S&P 500 and the US 10-year yield were immediately obvious:

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1670 1660 1650 1640 1630 2.2 1620 1610 1600 1590 1580 1570 20 May 2.6 2.4

S&P500 Index vs US 10-Year Treasury Yield (inverted)
May 20 2013 - June 30 2013

1.8

2.0

%

30 May

10 June 2013

20 June

28 June

Source: Bloomberg

The S&P dropped a quick 6%, and 10-year rates (seen inverted in the chart above) spiked from below 2% to 2.6% — a big move. But some of the other instruments affected by Bernanke's carefully floated idea weren't quite so readily apparent. Nonetheless, they demonstrated just how pernicious and far-reaching the tendrils of QE had grown. Like all the way to Indonesian bond yields, for example:

Source: Bloomberg / Grant Williams, "A Confederacy of Dunces"

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Or those here in Singapore:

Source: Bloomberg / Grant Williams, "A Confederacy of Dunces"

And even those who held Brazilian bonds saw something meaningful shaved off:

Source: Bloomberg / Grant Williams "A Confederacy of Dunces"

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Bernanke also committed the cardinal error of announcing that QE would END once unemployment fell to 7% — a statement he had to back away from, rather embarrassingly, as the slump in the participation rate brought 7% unemployment closer, rather faster than expected: (WSJ, Dec 6, 2013 ): Back in June, when Fed Chairman Ben Bernanke laid out a tentative timeline for winding down the bond-buying program, he said 7% is where the Fed expected the unemployment rate to be when it ended the purchases. He said central bank officials expected that to occur around mid-2014. Friday's jobs report showed the jobless rate hit that level in November, and the Fed hasn't even started scaling back the program. The jobless rate for May, the latest data Mr. Bernanke had when he laid out that guidepost, stood at 7.6%. Then it fell much more quickly than Fed officials expected, dropping to 7.4% in July and 7.3% in August. In September, the Fed surprised many market participants and held the quantitativeeasing program steady. At his press conference after that meeting, Mr. Bernanke made no mention of the 7% guidepost he'd set out a mere three months earlier. When asked about it, he downplayed the importance. "There is not any magic number that we are shooting for," he said. "We're looking for overall improvement in the labor market." In short, the trial balloon floated to gauge potential reaction to a $20 bn per month Taper was a disaster, and that meant that when the September FOMC meeting came around, the governors in the voting seats just couldn't bring themselves to pull the trigger. Oopsies! When the minutes of the October meeting were released in November, it became clear that the FOMC, lessons duly learned, were going to try out the Taper again — perhaps in December: (Fox Business): Federal Reserve policy makers are still struggling to find the right message for conveying to investors their plans for scaling back their easy-money policies, notes from the Fed's October meeting reveal. The minutes, released Wednesday, also said members of the policy-setting Federal Open Markets Committee could see the central bank trimming its $85-billion-a-month bondbuying program at "one of its next few meetings." If at first you don't succeed... But they had clearly realized that even a $20 bn Taper was going to be taken poorly by the markets, and so the FOMC (and in particular its soon-to-be-retired chairman) needed to pull off a delicate balancing act.

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On the one hand, Bernanke would want to leave the Fed with the wind-down of his expansionist policy underway so that he would have the kind of plausible deniability that history has gradually been stripping away from Alan Greenspan. ("Hey, don't blame ME. We were exiting QE when I left office!") On the other hand, though, he wouldn't want to hand Janet Yellen an impossible situation. The solution?

Taper Lite!
"All the goodness of the Taper with no bitter aftertaste!" ... and the markets, after the scares in May and June, LOVED it!! (CNBC): U.S. stocks surged on Wednesday, with the S&P 500 and Dow industrials closing at records, after the Federal Reserve moved to cut stimulus, saying it expects the labor market will continue to improve and vowing to keep interest rates low. "Investors are looking past the taper and looking at the strength of the economy that is perceived with this news," said Chris Gaffney, senior market strategist at EverBank. "The Fed did a great job telegraphing it to the markets, as stocks are moving in the opposite direction than you'd think," he added of equities rallying on the news. Errrr ... sorry to spoil the party, but a couple of things here: Firstly, the reason the market spiked is that the Fed's Taper turned out to be a paltry $10 bn a month and not the "whopping" $20 bn a month that had been floated by various Fed mouthpieces back in May cough-cough-cough-hilsenrath-cough. Secondly, the Fed were at great pains to promise low rates for much, much longer — so the free-money party can continue. (WSJ): The Fed went to great lengths to send the message that interest rates are staying low even longer than the Fed indicated earlier. It said today that it will keep interest rates low "well past" the time when the unemployment rate reaches 6.5%.

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"The Committee now anticipates, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent." Got that folks? Repeat after Ben:

"Tapering isn't tightening."
Thirdly, they managed to communicate that this policy will be reversible at the drop of a hat should things start to look as though the vaunted "recovery" is nothing more than a mirage conjured by their actions. The danger in that reversibility is one for discussion another day. For now, the markets reacted just as you would expect, once they realized that they had faced down the Fed in the summer and forced them into a taper that is essentially a non-event. "Only" $75 bn a month from now on? Of course the market went up after the announcement!

Source: WSJ

But amazingly, the mere fact that the Fed had committed to a tiny reduction in their rabid spending led to all sorts of people heralding the greatest monetary victory of the modern age. Ambrose Evans-Pritchard, for whom I have a great deal of respect despite his somewhat Keynesian leanings, wrote a piece almost inconceivably entitled (and this deserves a line all of its own): "Farewell QE, You Have Been a Magnificent Success"

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Wait ... WHAT? Now, I've seen a few medals handed out halfway through races in my time ... but THIS??? Ambrose, puh-leeze. (Ambrose Evans-Pritchard): As the US Federal Reserve starts to drain dollar liquidity from the global system at long last, let us celebrate success. Quantitative easing has worked marvellously well. Monetary policy has been vindicated. That's just for starters. Once he hits his stride, Ambrose looks like a thoroughbred racehorse. QE Biscuit, if you will: (Ambrose Evans-Pritchard): The US, UK and Japan are all recovering, moving closer to "escape velocity". The Swiss National Bank — that bastion of orthodoxy — has kept its economy on an even keel by quietly amassing a bond portfolio equal to 85pc of GDP. Call me old-fashioned, but "amassing a bond portfolio equal to 85pc of GDP" simply to keep your economy on an "even keel" doesn't sound like success to me. Before he's done, Ambrose takes time out to laud Abenomics; and buried within the story of the stunning success of Abe's policy, there lies, as the Bard would say, the rub: (Ambrose Evans-Pritchard): Japan, too, has grasped the nettle, breaking free of its deflation trap with the most radical policy experiment of modern era, a repeat of Takahashi Korekiyo's brilliant policies from 1931 until his assassination by military officers in 1936. After two decades of monetary tinkering the Bank of Japan is mopping up 7.5 trillion yen worth of bonds each month, almost as much as the Fed in an economy barely more than a third the size. It is buying long-term debt for the first time. This ignites the broad M3 supply, now humming at a 3.4pc growth rate, the highest this century. Japan was the fastest growing economy in the OECD bloc in the first half of this year. There was a hiccup in the third quarter, causing the faint-of-heart to write off Abenomics. Yet Nomura's Shuichi Obata says the December Tankan survey of business shows that confidence is at last spreading from big companies to small firms, with the services index rising above zero for the first time since 1991. Much can still go wrong. Next year's rise in consumption tax from 5pc to 8pc could abort recovery. The "Third Arrow" of Thatcherite reform planned by premier Shinzo Abe has yet to fly with much force. The Japanese bond market may take fright once inflation nears the 2pc target. Yet the Bank of Japan's belated panache under Haruhiko Kuroda at least gives Japan a chance of averting slow collapse.
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Yes, Japan has a chance of averting a slow collapse ... and it may now be able to avoid that fate — in favour of a swift one. Back in the 1930s, the rub came when Takahashi's policies needed to be reversed once Japan, too, was on a somewhat "even keel." Whilst "Takahashinomics" (as the policies would no doubt have been dubbed had the Japanese press of the 1930s possessed any panache) did engineer a remarkable turnaround in Japan's fortunes, it featured military spending that increased as a percentage of the total budget every year, from 31% in 1931, at the beginning of his tenure, to 47% in 1936. When Takahashi set about unwinding his mammoth stimulus in 1936, however, things got a bit ... sticky, as Myung Soo Cha notes in a paper entitled "Did Takahashi Korekiyo Rescue Japan from the Great Depression?": ... when the worst seemed over, Takahashi began to be concerned about inflation and tried to revert to stabilization. Reducing expenditures, he attempted to put an end to debt financing, while at the same time urging the Bank of Japan to absorb money it had supplied in the course of debt monetization. Ahhhh ... the first Taper. "What happened next?" I hear you ask. Well, I'll tell you: (Wikipedia): Despite considerable success, his fiscal policies involving reduction of military expenditures created many enemies within the military, and he was among those assassinated by rebelling military officers in the February 26 Incident of 1936. The original Taper Tantrum, whilst extreme, demonstrates the problems that may be associated with taking away stimulus. That is, the people who have benefitted from it may not like it. They didn't in 1936, and they won't in 2014. Before we move on, let's see what Ambrose's "Farewell To QE" looks like in graphical form.

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This is a chart I've used many times, but the good folks at ZeroHedge have kindly updated it for me to reflect the reality of Taper Lite:

Source: Zerohedge

Farewell QE, indeed! But, although 2013 was most definitely the year of QE, there were other interesting facets of "The Weak That Worked" that also bear scrutiny. Take the strength in the US stock market, for example. The S&P 500 made a seemingly relentless series of new highs as it powered through 2013. With a couple of light sessions still remaining, the total number of new highs for the year is an astonishing 44. To put that into perspective, it means a new high was made by the S&P 500 Index — arguably the most important equity benchmark in the world — every 5.68 trading sessions during 2013. On average that's nearly a new all-time high once a week throughout the entire year! Of course, that's not how these things work, but the point is valid. The winning strategy for this year was to buy equities. Not companies. Equities.

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Let me explain what I mean.
S&P500 Index
2013

1875 1825 1775 1725 1675 1625 1575 1525 1475 1425

2013

Source: Bloomberg

Behold the mighty S&P 500 Index as it makes its way from bottom left to top right with nothing but a few short-lived corrections impeding its stately progress. Now behold the flows out of mutual funds and into ETFs:

Source: Gerard Minack (via Dave Collum)

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At the risk of harping on, this is a phenomenon I've also spoken about before: the dumbingdown of investing. In today's markets, which function at the whim of the Federal Reserve as opposed to market forces, the art of researching companies, analyzing their balance sheets and the strengths and weaknesses of their business, and then trying to sort the wheat from the chaff has been lost. Only a tiny minority buys companies anymore — everybody else just buys markets. And it's hard to blame them. A look at the correlation of the S&P 500 to the Fed's balance sheet tells you just about all you need to know. Since 2009, the correlation has been an astonishing 89.7%. Why would anybody not just buy markets, given that they are going to go up based purely on the Fed's aggressive stimulus? Sure, you could make more money by buying all the shares that might go up because they were good, well-managed companies with good businesses, and by shorting those that were going to go down because they weren't, but contained within THAT strategy (which used to be called "investing") is the risk that you could be (GASP!) wrong — so why bother? Bizarrely, by creating an environment that forces those with capital to seek out additional risk due to the paltry returns afforded by zero percent rates, the Federal Reserve has steered investors to seek out the least-risky place to invest their money, and that has been equities.

Source: Greg Weldon

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And 2013 saw the Fed take a BIG step up after what, in hindsight, was a rather anemic 2012 campaign. Below is the percentage change in the Fed's balance sheet during the calendar year 2012. The chart also shows the date QE4 was announced in December:
US Federal Reserve Total Assets
101

(% Change) Jan 2012 - Dec 2012

100

99

%

98

QE4 Announced
97

96

95

2012

Source: Bloomberg

And THIS is the same chart for 2013:
Federal Reserve Total Assets
140

(% Change) Jan 2013 - Dec 2013

130

37% Increase In 12 Months

120

110

100

2013

Source: Bloomberg 30 December 2013 16

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See how this works now? Nice and reliable. Consistent amounts of "liquidity" are pumped into the system every month, and things gently float ever higher. The only real hiccup for equities in all of 2013 was, in fact, the Taper Tantrum in May, when this stability was briefly threatened. Doesn't bode well, I'm afraid. The chart below, deflating the S&P 500 by the ongoing QE experiment, which I included a few weeks ago courtesy of Raoul Pal & Remi Tetot of Global Macro Investor, strips away the effect of the Fed's pumping and lays bare the market's real performance. It's one of the best charts I've seen this year, and it speaks volumes.
20

S&P500 Deflated by QE
2005 - 2013
15

10

5

0 2005 2006 2007 2008 2009 2010 2011 2012 2013

Source: Raoul Pal & Remi Tetot, GMI

Equity prices used to be a reflection of the strength of the underlying economy — after all, the component pieces of benchmark indices were functioning companies that existed in the real world where they need to manufacture something and sell it to a buyer in order to stay in business and make a profit.

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So how have companies and the economy they constituted done in 2013? Well, the companies themselves have done incredibly well at tightening their own belts and squeezing every last drop of juice out of the lemons they've been handed. In fact, corporate profits have never been higher; and as a percentage of GDP they have scaled new and almost unimaginable heights, as the chart below demonstrates:
US Corporate Profits As % Of GDP
0.12

1947 - 2013

0.10

0.08

0.06

0.04

0.02

0.00

1947

1957

1967

1977

1987

1997

2007

2013

Source: St. Louis Fed

But under the surface and in the wider economy, the story is very different, indeed, as the mountain of cash on corporate balance sheets has led to an avalanche of buybacks, which has in turn boosted earnings and given the impression that things are roaring, when in fact the true story is a familiar one of an increase in debt. And it's one that we saw not so very long ago: (Karl Denninger): The second important thing to understand is that the other claim — "record corporate cash" — is true but intentionally misleading. What's also at records is corporate debt, and what you must look at is not tangible assets (which includes cash, of course) but rather such assets less obligations, that is, debt. And when you do and compare against equity prices what do you see? Let's put not-so-fine a point on it — leverage, as expressed in the form of stock price to assets less liabilities, is at an all-time post-war high. Yes, worse than 2000 and worse than 2007.

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Assets less liabilities for corporations economy-wide are approximately where they were in the last quarter of 2004 or the first quarter of 2005. But stock prices are much higher in aggregate. That's the correct measurement of operating leverage relative to the market — not how much cash they have or how many dollars of earnings they return today. It's what the "corpus", that is, what your ownership interest as a stockholder (that's what you are when you buy stock) is that underlies your investment and thus how much you're paying for a given unit of tangible assets less liabilities.

Source: The Market Ticker

This chart was bad at the end of 2012 — in bubble territory, for sure — which was a big part of why I didn't think we'd get through 2013. Well, we did — and now it's worse, because this is only updated through the end of September and of course the market has gone screaming higher in the last three months. With that said, that which cannot go on forever won't, and this clearly can't — and thus won't. The only question is exactly when, and what, triggers the corrective move back down. US Q3 GDP was revised up to an eye-watering 4.1% annualized rate, and that headline was received as confirmation that the Fed's policies are working; but a rudimentary dig beneath the surface reveals that a significant contributor to the strong performance was our old friend consumer spending:

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(USA Today): Boosting optimism for the new year ahead, the government announced Friday that the economy in the third quarter grew at its fastest rate in nearly two years and much better than previously estimated. Higher consumer spending was largely responsible for the economy's annual growth rate of 4.1% from July through September, the Commerce Department said. Last month, it estimated a 3.6% rate. In the second quarter the economy grew at a 2.5% annual pace. Last quarter's better-than-expected performance was spurred by consumers spending more over the summer on health care, recreation and other services. The government says consumer spending grew at an annual rate of 2.0%, up from 1.6% in its previous estimate last month. "The consumer is back in the game," exulted Chris Rupkey, chief financial economist of Bank of Tokyo-Mitsubishi UFJ, in a client note Friday. "Is this economic growth fast enough to put America back to work? The answer is, yes. The wheels of the economy are turning fast enough to bring down the unemployment rate further." Folks, take it from me, any time you see the words "chief financial economist" and "exulted" in the same sentence, be afraid. Be very afraid. Meanwhile, over a third of the strength in the economy was down to private inventory buildup — the biggest such buildup since records began almost 70 years ago:

Source: St. Louis Fed

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And the farm component of that particular datapoint provides an even more staggering anomaly:

Source: St. Louis Fed

So, despite equity markets making all-time highs in 2013 more often than Miley Cyrus gave offence, beneath the surface, the economy — which equities are supposed to reflect — didn't perform as well as the headlines would have you believe; and by far the biggest driving force behind the strength of the equity market was free money courtesy of QE. Though QE has morphed into the means to create trickle-down wealth through higher equity markets, quantitative easing was, of course, a program originally designed to save stabilize bond markets; but there's only so much you can do once bond prices reach the levels they did this past year. And so next week, in Part II of "The Weak That Worked," we'll take a look at ground zero for the Fed's intervention and a few related issues that unwittingly saw themselves dragged into the ring. As we take a look at the bond and housing markets, we'll see a bunch more headlines that don't quite tally with what's going on under the hood and that show that the "recovery" is really not all that it's cracked up to be.

Until next time... ******* This week has turned into something of a world tour. We begin in Turkey, where a new
scandal threatens to topple the government, and then move on to Japan for a look at the unintended consequences of Abenomics. Then we're off to Argentina, where the government is at least consistent, before we head to China to lift the veil off a corruption scandal that couldn't possibly happen in the West involving an official obsessed with reporting growth — whether it was genuine or not <coughcoughcough>.
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Russian President Vladimir Putin shocked the world this week when he pardoned Mikhail Khodorkovsky, so we'll head to Moscow to try to learn the real reason for such an out-ofcharacter move, before we return to the United States to find equity markets in a bubble and billionaires heading to South Dakota in droves, thanks to an obscure tax loophole. Unflagging, we'll then scoot over to Japan to hear how a beauty queen is taking on the Yakuza, power on to the UK where one journalist has figured out the motive behind QE, and then zip on back to Upstate New York for my friend Dave Collum's review of 2013. Interviews include the aforementioned Mr. Collum discussing his thoughts with Chris Martenson, as well as the views of both Jim Rickards and Saxo Bank's Steen Jakobsen on the Taper. Charts of GDP, the reality of consumer confidence, and declining unemployment in America wrap things up for the week and the year; and all that remains is for me to add a personal note as 2013 turns into 2014: This year has been a pivotal one for me, and I want to take this opportunity to thank my friends and family, the folks at Mauldin Economics, and of course you, the readers of Things That Make You Go Hmmm... for all the support you've given, not just in 2013 but over the past several years. When I began writing this thing in 2009, I had no idea where it would lead me nor the tiniest inkling as to the number of wonderful, smart, engaged, and entertaining people it would bring me into contact with; and this past year has been the best so far. My travel schedule has been brutal, but it has taken me to many corners of the world and given me the opportunity to meet and speak to an incredibly diverse collection of people who humbled me by the mere extension of an invitation, let alone the gift of their attention. Last, but most definitely not least, 2013 finally provided a victorious end to a threeyear legal battle I had been fighting against an investment bank, which had put me under tremendous financial and emotional strain. Due to the brilliance of two wonderful lawyers and the unwavering support of some extraordinary friends, I managed to stay the course, and justice was conclusively done. Thank you. You know who you are. THAT little story is definitely one for another day (perhaps a book), but it will certainly make you go "Hmmm..."

Until Next

Time

Year... *******

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Turkey first of Fed Taper victims as political crisis scares investors
The Turkish lira has tumbled to a record low amid a deepening political crisis in Ankara, the first emerging market domino to wobble as the US Federal Reserve starts to wind down global dollar stimulus. The currency has weakened by 6pc against the euro over the last two days, culminating a 25pc fall this year. Foreign funds have cut holdings of Turkish debt by a quarter since the May. Turkey has gone from star performer to "sick man" of the emerging market block as the Fed begins to taper bond purchases, a move that threatens to set off a further rotation of funds back into US dollar assets.

Turkey is the most vulnerable of the emerging market nexus. An estimated $4 trillion of foreign capital has flowed into the developed world since 2009, much of it "hot money" chasing asset bubbles. Regulators are nervously eyeing yields on 10-year Treasuries as they touch 3pc, levels that could set off a scramble for dollars. Pressure has been building this month on Indonesia, one of the "Fragile Five" (along with India, Brazil, South Africa, and Turkey) with big current account deficits. The rupiah fell to the lowest since 2008 yesterday, down 22pc this year. Even the much lauded Philippines has been hit in recent days on fears of a broad-based "taper tantrum", akin to events in May last year when tougher talk from Washington set off worldwide jitters.

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Mark Carney, Governor of the Bank of England, warned before Christmas that the epicentre of global stress has shifted from West to East. "The greatest risk is the parallel banking sector in the big developing countries," he said. Emerging markets have been sputtering since 2011, with Brazil and Russia flirting with recession this year. Some have hit the buffers as the commodity supercycle fades or because they have exhausted the low hanging fruit from their catch-up growth models. The MSCI Emerging Markets index is down 9pc this year, in stark contrast to the 28pc boom on Wall Street's S&P 500. Investors appear deeply divided over whether this is a "contrarian" chance to buy cheap. The global bond giant Pimco says Fed tapering is already priced into markets, while countries have ample foreign reserves to counter shocks, unlike earlier Fed tightening episodes in the 1980s and 1990s. Yet Goldman Sachs — once the cheerleader of the 'BRICS' — said the shift in global economic power had been over-dramatised and advised clients to trim emerging market holdings from 9pc to 6pc of their portfolio until the dust settles. "The returns were not as attractive as expected, the economic growth rates were not as sustainable as imagined, and the countries were not as stable as believed," it said. Berkeley professor Barry Eichengreen said the coming turn in the Fed's liquidity cycle remains a threat, with no guarantee that those with stronger fundamentals will be spared. "A revival of last summer's emerging economy turmoil is a real concern," he said. Turkey has become the immediate flash point as the country's political storm turns into a constitutional crisis. Recep Tayyip Erdogan, Turkey's Islamist premier, fired half his cabinet on Thursday to tighten his grip....
*** AMBROSE EVANS-PRITCHARD / LINK

The unintended consequences of Abenomics
As discussed earlier, Japan continues to struggle in its endeavor to generate demand-driven inflation. To a large extent, price increases have been the result of costlier imports due to a weaker yen, particularly items related to food and energy. Outside of those sectors, prices remain soft. The danger of Japan's current policy (Abenomics) is that the outcome could turn out to be the exact opposite of what was originally intended. With wages stagnant, these import-driven price increases are hitting the Japanese consumer quite hard. As a result, spending on domestically produced goods and services could end up falling, constraining domestic prices instead of increasing them.

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Scotiabank: Key here is that the Japanese CPI inflation figures continue to showcase evidence of a relative price shock driven by imported food and energy price spikes significantly related to yen depreciation. Most CPI components not related to food and energy either continue to fall or remain soft as shown in the accompanying chart. The big gainers are prices for fresh food, utilities due to soaring electricity prices in the wake of the Tōhoku disaster coupled with rising imported energy costs, and the energy impact on rising transportation prices. CPI ex-food-and-energy remains largely flat. We maintain the year-long view that Abenomics would impose a relative price shock that would force wage- and credit-constrained consumers to spend more upon what they have to (food and energy) by restraining spending elsewhere in the economy in disinflationary fashion on the second- and third-round effects. That's a very different inflation dynamic than would be the effects of a generalized increase in economywide prices in that it counsels future effects that will be bearish for the outlook for Japanese consumers. At the same time, the other main supposed benefit of Abenomics is an improvement in the trade account by stimulating export growth through yen depreciation, yet this is only evident via a price effect as export volumes remain weak. One sad consequence of Abenomics is the impact on Japan's elderly, whose ranks are swelling rapidly (see post). Isolation combined with rising prices on food and electricity makes survival for many older Japanese citizens a struggle. According to the National Police Agency survey, shoplifting incidents accounted for close to 10 percent of all crimes. And the number of shoplifting offenses is only growing among people 65 and older — with 68 percent of those cases representing food items. The latest 18.6 trillion yen stimulus package from the government is supposed to (among other things) provide additional help for the elderly, but it remains unclear how sustainable such efforts will ultimately be.
*** SOBER LOOK / LINK

Still lying after all these years
FOR years the IMF turned a blind eye as Argentina doctored its inflation index and plumped up its numbers for economic growth. Then last February the fund steeled itself and censured the country, warning it to improve its statistics by September or face potential suspension or expulsion.

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This threat was unprecedented in the fund's history. Yet it seems it was a largely empty one. On December 9th the IMF board met to review Argentina's progress on a new inflation index. It declared that, although the country had not adopted the measures the fund wanted, it "recognised" the government's "ongoing work" and deferred further action until March. Certainly, those who care about the integrity of statistics cheered the recent resignation of Guillermo Moreno, the secretary for interior commerce. Mr Moreno was the man who intervened at INDEC, the statistics institute, in 2007, after which it began to fudge inflation data. Many officials nowadays take less care to pretend that inflation is around 10% rather than the true figure of around double that. Some economists believe the new inflation index will be an improvement. Others doubt that the government has suddenly embraced numerical honesty. INDEC is likely to cherry pick items for which the government has ordered price freezes and leave out those whose prices rise, thinks Juan Luis Bour of FIEL, a think-tank in Buenos Aires. Covering up the true rate of inflation has knock-on effects on other statistics. Take poverty. The government says only 4.7% of the urban population is poor. Oddly, the UN Economic Commission for Latin America and the Caribbean has an even lower number, at 4.3%. But the Catholic University of Argentina calculates that, going by the true cost of living, the correct figure is 27%.

Source: Economist

Similarly, underestimating inflation has had the effect of bloating the official calculation of GDP since 2007 (see chart). In September the government raised eyebrows when it reported suspiciously buoyant quarterly growth figures. That was despite the IMF's warning and the fact that the official numbers could trigger a multibillion-dollar payment to holders of GDP-linked bonds. The economy ministry's forecast of 5.1% growth in 2013 exceeds that of most private analysts by more than two percentage points.

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The problem of dodgy statistics goes much wider. For example, while INDEC claims construction expanded by 4.7% in the first ten months of 2013, EconViews, a consultancy which makes its own calculations, puts this number at just 0.5%. In 2008 and 2009 private and official estimates of the expansion in industrial production varied by up to ten percentage points. Although the deviation has since decreased, private economists still prefer to rely on their own numbers. Farm-watchers were confused when their estimates for the 2013 maize harvest of around 25.5 billion tonnes trailed that of the agriculture ministry by more than 6 billion tonnes. It turned out the ministry had quietly included maize retained by farmers to feed their livestock, contrary to its previous practice. When it comes to official economic numbers, only those of the Central Bank still command some credibility....
*** ECONOMIST / LINK

The Rise and Fall of a Local Official Obsessed with GDP Growth
A November 27 statement by the Communist Party's anti-corruption watchdog confirmed that the deputy governor of Hubei Province, Guo Youming, was being investigated for graft. Three days later, Guo was removed from his post, becoming the 13th official with the rank of deputy minister or higher to fall from grace over corruption since the party's 18th National Congress in November 2012. Guo, 57, is a native of the central province of Hubei and has spent much of his career in the water industry. In 2000, Guo, then vice director of the Hubei water bureau, was named deputy party secretary of Yichang. He was later promoted to Yichang mayor and the city's party general secretary. Since August 2011, Guo had been the deputy governor of Hubei, overseeing the province's land, agriculture, forestry and water management. He is also in charge of works related to poverty relief, the Three Gorges Dam and the country's major water transportation projects. Several sources say Guo's corruption was uncovered during a nationwide inspection launched by the party's anti-corruption watchdog, the Central Discipline Inspection Commission. An entrepreneur in Yichang said the inspection team arrived at the city in June and visited dozens of companies. An official at the Hubei anti-corruption bureau said Guo's violations mainly occurred during his tenure in Yichang between 2000 and 2012. During that decade, Guo was known for his support in attracting outside investment and calls for aggressive economic growth. From 2008, when Guo became Yichang's party boss, to 2011, the city's GDP rose from 104 billion yuan to 214 billion yuan. The rapid growth attracted nationwide attention.

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One of the most important projects supported by Guo was a 20 billion yuan investment in the Three Gorges Quantong Coated and Galvanized Plate Co., which opened in late 2008. Starting in mid-2011, the company has faced big debts and suspended production. Guo graduated from college in 1982, and joined officialdom in 1993 by becoming human resources director of the Hubei water bureau. An expert at the Hubei Academy of Environmental Science said the position was a springboard for Guo. At that time, he was believed to be one of the most promising young officials in the province. Three years later, the 39-year-old Guo was appointed deputy director of the provincial water bureau. Later, he became Yichang's deputy party chief. Yichang carries a special weight in Hubei because two major water projects are in its territory: the Gezhou Dam and the Three Gorges Dam. Over the past two decades, Yichang has grown from a small town to a major city. In 2004, Yichang's GDP hit 54 billion yuan, which trailed only the province capital, Wuhan. In 2008, in the face of a slowdown linked to the Global Financial Crisis and the completion of the Three Gorges Dam, Guo pushed forward a number of major industrial and infrastructure projects, attracting investors in a bid to maintain the city's growth. During the first half of 2009, city officials traveled the country aiming to promote the city and invite investors. Tens of billions of yuan in agreements were signed, the biggest being the Quantong galvanized plate project, which started out as an 11 billion yuan deal. In 2010, Guo said the city should have GDP of 400 billion yuan by 2016, emphasizing chemical, equipment manufacturing, electricity, food and medicine industries. Guo's economic success led to a promotion to the provincial level. In August 2011, he was promoted to deputy governor of Hubei and in July the next year he left Yichang. His successor soon ran into trouble. Quantong, once the pride of Yichang, faced a crisis....
*** CAIXIN / LINK

What's Behind the Khodorkovsky Pardon?
A few weeks ago, Maxim Dbar, the spokesman for jailed Russian oligarch Mikhail Khodorkovsky, was sitting in a Moscow café and talking about the former oil tycoon's current situation. Dbar said it boiled down to the old struggle between the hardliners surrounding Russian President Vladimir Putin and the relatively liberal politicians in Prime Minister Dmitry Medvedev's camp.

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For months now, Russian judicial authorities have been preparing a third trial against the former magnate. The public prosecutor has also targeted German law professor Otto Luchterhandt, who has criticized the verdicts handed down against Khodorkovsky. Then Dbar lowered his voice: "We have a glint of hope again." And he dropped another hint: "Ten years behind bars of course take their toll, even on a man with Khodorkovsky's enormous willpower and energy." It's very possible that Khodorkovsky's lawyers and closest aides already realized back then that he was about to abandon his long-standing policy of not seeking a pardon. On Friday morning, Mikhail Khodorkovsky walked out of a prison camp in northern Russia a free man for the first time in a decade. Putin signed a decree pardoning him on the basis of "humanitarian principles," officially releasing the staunch Kremlin critic and former oil magnate who was once Russia's richest man. Hours later, Russian prison authorities reported he was being flown to Germany. The decree came just one day after Putin made the surprise announcement that he planned to pardon Khodorkovsky following his marathon annual press conference on Thursday, adding that the prisoner had already submitted a request for his release. The news hit like a bombshell. Kremlin critic and nationalist-communist writer Eduard Limonov called the upcoming release the "sensation of the decade." Sergei Guriev — the former rector of Moscow's New Economic School who fled to Paris in April — was also quick to comment on the news. "Khodorkovsky was released because Russia's image has continuously deteriorated lately," he said. There has been widespread speculation that Guriev will also be charged in a third trial against the oligarch. The timing of Putin's announcement of the Khodorkovsky pardon is clever. For weeks now, he has been criticized for his handling of the situation with Ukraine. The United States and the European Union allege that the Russian leader exerted massive pressure on Kiev to reject an association agreement with the EU — all in a bid to pull the neighboring country back into Russia's sphere of power. Critics say Putin's actions disregard the nearly 50 percent of Ukrainians who favor closer relations with Europe. With his decision to release Khodorkovsky, Putin intends to show that he knows how to use not only the stick, but also the carrot — and that the West's allegations that Russia is a profoundly undemocratic country do not line up with reality. Given this situation, it's not surprising that Putin has explicitly pointed out that he was moved to issue the pardon by humanitarian concerns: In his speech, he cited the critical condition of Khodorkovsky's 78-year-old mother. Svetlana Bakhmina, a former legal executive who worked for Khodorkovsky and has herself spent four years in prison, confirmed on Thursday that the poor health of his mother "is the only possible reason Mikhail could have asked for a pardon. Nothing else could have forced him to yield."

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The seamlessness between Putin's announcement and his signing of the decree probably indicates that the president himself is pulling the strings when it comes to Khodorkovsky's fate. This approach is reminiscent of the case of prominent opposition politician and blogger Alexey Navalny. In July 2013, Navalny was convicted of embezzlement by a court in Kirov and sentenced to five years in prison, effectively making him ineligible to hold any political office. One day later, he was surprisingly released, and was later even allowed to run in the Moscow mayoral election. Putin had a major hand in that decision, as well. He had arranged the pardon of sorts with Moscow's incumbent mayor to take the wind out of the sails of the opposition and Western critics. Putin publicly stated he found Navalny's initial verdict "strange," because a co-defendant had received a suspended sentence, but not Navalny. The intervention suggests there must have been divergent opinions on this issue among the Kremlin elite....
*** DER SPIEGEL / LINK

U.S. Stocks: Heading For A Bubble?
A global resynchronized recovery is good news for corporate profits. But better profit growth is no longer news for the stock market because the S&P 500 has already discounted a 10% increase in forward earnings in the next 12 months. Therefore, if stock prices make continued advances, the expected price gains will have to primarily come from a multiple expansion. U.S. equity prices are no longer cheap. Various valuation indexes suggest the market is either fairly valued or borders on slight overvaluation. Nonetheless, macroeconomic and financial conditions are conducive for further P/E inflation. There is a clear link between equity multiples and the yield curve. A steeper yield curve is indicative of better growth and very easy monetary policy. As such, it often coexists with expanding equity multiples. If our macroeconomic story of synchronized global growth with low inflation plays out, then the yield curve will likely stay rather steep for a while longer: the long end of the curve will be held high by real economic growth and better profitability, while the short end of the curve will be suppressed by the Fed. This creates fertile ground for asset price inflation. In addition, once in a liquidity trap where interest rates reach the zero boundary, the linkage between monetary policy and the real economy is asset markets: zero rates act to subsidize corporate profits, drive up asset prices and encourage risk-taking.

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At present, we could be at the very early stages of a broad transition from strengthening asset values to better spending power by businesses and consumers. Nonetheless monetary policy will stay extremely easy to ensure this process takes hold firmly. Bottom Line: We are still operating in an environment where monetary conditions are hyper stimulative and inflation is extremely low, and corporate profits will accelerate. This environment ferments asset bubbles, and underscores why there are high odds that equity prices move into bubbly territory next year.
*** BCA RESEARCH / LINK

Miss Japan joins battle against mafia in the media
A softly spoken, willowy beauty who weeps when she describes her ordeal, Ikumi Yoshimatsu seems an unlikely figure to lead a fight against one of Japan's most powerful talent agencies. Yet she has become the heroine in a drama that her supporters say has exposed one of the nation's dirtiest secrets: claims that the Yakuza helps to run the entertainment industry. Since she became the first Japanese woman to win the Miss International title, Ms Yoshimatsu says she has been blackballed by the industry, stalked and threatened for refusing to join a talent agency. She is now in hiding after filing a criminal complaint against a top executive with the firm. "I am afraid for my life," she said in a telephone interview. Last week, Ms Yoshimatsu went public and accused the executive, Genichi Taniguchi, of starting a campaign of intimidation against her shortly after she was crowned Miss International Japan in 2012. She claimed she refused to sign a contract with Mr Taniguchi when an internet search revealed allegations that his company had alleged links to the Yamaguchi-gumi — Japan's largest crime syndicate. "I told them, morally and ethically I cannot work with such people," she said. In documents and tape recordings submitted to the police, Ms Yoshimatsu claims Mr Taniguchi threatened her and used his industry connections to hound her out of modelling and acting work. At one point, he allegedly burst into a television studio and, she claims, tried to abduct her. Ms Yoshimatsu's lawyer, Norio Nishikawa, said: "We have recordings proving all this." He has filed civil and criminal complaints demanding his client be left alone. Calls to Mr. Taniguchi and the talent agency went unanswered, and the police also declined to comment on the case. Mr Taniguchi has denied doing anything to Ms Yoshimatsu. "I'm no stalker," he told The Japan Times. "I called her father at least twice to try and reach her manager to solve my financial dispute with him. I have no grudge against her." Coverage of Ms Yoshimatsu's claims by the television networks, however, has been strangely muted. Critics claim this is due to the influence of the talent agency and other powerful agencies that keep them supplied with actors and stars. Jake Adelstein, a specialist on Japan's crime syndicates, said that Ms Yoshimatsu's fight had embarrassed the industry. "Most of the mainstream media has refused to cover the story because that means no access to talent," he said.
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On Tuesday last week, the scandal deepened at a Tokyo ceremony to hand the Miss International crown to Ms Yoshimatsu's successor, Bea Rose Santiago of the Philippines. The chair of the current title-holder was empty because, Ms Yoshimatsu claimed, she was barred from attending. She said sponsors and shareholders had been threatened and she was told to "play sick" and stay away. When asked about the situation, a spokesperson for the event organiser, International Culture Association, told the AP news agency it did not want the controversy "to overshadow the event".
*** THE UK INDEPENDENT / LINK

2013 Year In Review
Who's to say that markets are under- or overpriced? The price is the price, right? Two New York Federal Reserve economists delivered a paper concluding that U.S. stocks were as cheap today as any time in history, which is a little odd given they were 60% cheaper in March 2009. Although the world equity markets rise, the GDP is looking a little green around the gills (Figure 10, below). You can graphically overlay anything on anything and say anything, but Figure 10 does seem to say something.

Let's focus on the U.S. forward-looking earnings, which are said to appear reasonable. Of course, these earnings do not exist except in the minds of optimistic analysts. By contrast, the Case-Shiller p/e using time-averaged earnings is in the scary 24 zone. John Hussman, a brilliant analyst who must be losing clients by the scores owing to his attempts to protect them, suggests bear market bottoms occur at a Case-Shiller p/e of about 8. The S&P 500 price/ revenue ratio of 1.6 is twice its pre-bubble historical norm of about 0.8.

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(The 1987 peak occurred at a price/revenue ratio of less than 1.0.) The Russell 2000 is now sporting a p/e of 40 using 2014 fabricated earnings but a p/e of 60 times trailing earnings. Stockman says that by excluding charges—"ex-items"—companies fabricate an additional 30% to the earnings numbers. You can find distortions of comparable magnitude by using the forward earnings that are invariably waaaay too optimistic. As the forward earnings become discredited by reality, analysts quickly switch to forward earnings. There are smart guys questioning whether price discovery is working (Fama aside). Jeremy Grantham, the wise old man with $150 billion under management, puts fair market value on the S&P 70% below the current levels, coincidentally the same percentile as the bloated profit margins. Cliff Asness, looking across all markets, concludes that "the 60-40 portfolio has been cheaper than it is now 98% of the time." (Cliff wins no award for direct prose.) David Einhorn notes that "the S&P 500 index has advanced this year mostly through multiple expansion"; the gains of 2012 were all multiple expansion as well. Are the distortions attributable to "ex-items" and "forward earnings" additive? I don't know, but Peter Boockvar summed it up nicely: "There is 0% chance this ends well."...
*** DAVE COLLUM (VIA PEAK PROSPERITY) / LINK

Moguls Rent South Dakota Addresses to Dodge Taxes Forever
Among the nation's billionaires, one of the most sought-after pieces of real estate right now is a quiet storefront in Sioux Falls, South Dakota. A branch of Chicago's Pritzker family rents space here, down the hall from the Minnesota clan that controls the Radisson hotel chain, and other rooms held by Miami and Hong Kong money. Don't look for any heiresses in this former five-and-dime. Most days, the small offices that represent these families are shut. Even empty, they provide their owners with an important asset: a South Dakota address for their trust funds. In the past four years, the amount of money administered by South Dakota trust companies like these has tripled to $121 billion, almost all of it from out of state. The families needn't actually move to South Dakota, or deposit their money at a local bank, or even touch down in the private jet. Little more than renting an address in Sioux Falls is required to take advantage of South Dakota's tax-friendly trust laws. States like South Dakota are "creating laws that are conducive to a massive exploitation of a federal tax loophole," said Edward McCaffery, a professor at the University of Southern California's Gould School of Law. "We have a tax haven in our midst."

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South Dakota's sudden popularity illustrates how, at a time of rising U.S. economic inequality, the wealthiest Americans are embracing ever more creative ways to reduce taxes legally. Executives at South Dakota Trust Co., one of the biggest in the state, estimate that one-quarter of their business comes from special vehicles known as "dynasty trusts," which are designed to avoid the federal estate tax. Creation of such trusts has surged in recent years as changes in federal law enabled more money to be placed in them. While the super-rich use various tools to escape the levy — some have exotic names like the "Jackie O" trust and the "Walton GRAT" — the advantage of dynasty trusts is that they shield a family's wealth forever. That defies the spirit of the estate tax, enacted almost 100 years ago to discourage the perpetuation of dynastic wealth. The dynasty trust isn't South Dakota's only lure. Another attraction, for customers in places like New York and Massachusetts, is the chance to shelter their investments from income taxes in their home states. In November, a government commission in New York recommended tightening trust laws to avoid income-tax leakage to states like South Dakota, estimating the change would raise an extra $150 million a year. Still others are drawn to South Dakota's iron-clad secrecy, and protections of trust assets from creditors and ex-wives. Many of these features emulate those available in Bermuda and other island havens. Some wealthy families are also attracted by South Dakota rules that enhance their control over investment decisions and make it easier for them to set up their own trust companies rather than rely on a bank trustee. In South Dakota, a farm state that's home to two of the 10 poorest counties in the U.S., lawmakers say they're bolstering the trust industry to generate work for local law firms and bankers, and forge ties with prosperous families that may one day decide to build a factory or a warehouse here. The legislators are turning the Mount Rushmore State into the Bermuda of the prairie. As much as anyone, Pierce H. McDowell III can take credit for this transformation. He works upstairs from the hall of empty offices, on the second floor of the old Kresge five-and-dime, where he's president of South Dakota Trust Co. At 56, McDowell has been promoting the state he affectionately calls "North America's Siberia" for most of his career. In 1993, he published an article in a national estate-planning journal recommending that wealthy people across the country establish dynasty trusts in South Dakota. Because the estate tax is imposed on large fortunes at death, McDowell wrote, wealth that's big enough to last for generations will have to contend with multiple tax bills. A father pays the tax when he leaves his money to his children, who pay again when they pass it down. Each generation faces a toll. The current rate is 40 percent.

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McDowell's solution was for the father to establish a never-ending trust that pays each generation of heirs only what they spend, while the rest of the money grows. In 1993, when McDowell was writing, that wasn't possible in 47 of the 50 states because of an ancient rule limiting the duration of trusts to the lifetime of a living heir, plus 21 years. The concept has been a part of Anglo-American jurisprudence since a case decided by England's Lord Nottingham in 1681....
*** BLOOMBERG / LINK

Spend, spend, spend. Because your savings aren't worth a damn
Organising my 2012-13 UK tax return this month, I compiled the year's interest earnings. Joint current account: net interest received £1.68, tax £0.39. Personal current account: interest received £0.19, tax £0.06. Then the big kahuna, my savings account, where I really sock away what I might need for a rainy day: interest received £14.10, tax £3.55. Wow — at least enough to pick up a handsome selection of Quality Street. I can't be the only UK taxpayer who records these miserable bank payments in a state of rage. I could have earned more than I made in interest last year in the time it took me to type the account numbers. Such a pittance does interest income now produce that savers would at least appreciate the issuance of a blanket policy statement: "Not wishing to add insult to injury, HMRC no longer requires taxpayers to humiliate themselves by reporting contemptuously small interest payments, in which the nation's fiscal authorities are complicit. FYI, we'll no longer dun your pathetic interest for taxes, either, as it costs us more than 6p to extract those pennies from your current account." The recent economic recovery in the UK is apparently driven not only by a renewed property boom, but by savers spending their reserves — quite sensibly, too. With interest zilch and inflation at 2.1% — down from 5.2% in September 2011, the highest in the history of the consumer price index — keeping cash in the bank is like stuffing your refrigerator with red meat. It doesn't accrue value. It rots. It's little wonder that rational citizens are rushing out to turn their putrefying pounds into iPads and Xboxes before the smell sets in. This is just the behaviour that the government and the Bank of England have hoped for. Spending born of hysteria that money is spoiling helps to jack up the GDP stats. But for the economy, the spree is a short-term windfall. Sadly for account holders and statisticians both, savings run out.

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More crucially, unprecedentedly low interest rates for five years and counting have protected debtors — mortgage holders, of course, but also this country's biggest debtor by a mile, Her Majesty's Government. Negligible interest rates so brilliantly depress the cost of servicing government debt that neither Whitehall nor Threadneedle Street has any motivation to raise them — well, ever. So you'd be a fool to imagine that the governor of the Bank of England is happy that unemployment is dropping to the supposed benchmark of 7% much faster than expected, perhaps even by the end of this year — at which point interest rates were meant to rise. On the contrary, Mark Carney has been cool on the matter. A 7% unemployment rate will not, he's made clear, obligate him to raise interest rates a jot. The metaphorical goalposts will simply shimmy down the field, for inflation combined with an artificially farcical interest rate — "financial repression" — is a nefariously lucrative form of tax. Of course, we occasionally hear lip service paid to what a pity it is that we are "punishing savers" — in the same casual spirit in which people say: "Isn't it a shame the pub has run out of prawn crackers?" Anyone who has built a nest egg by scrimping, canniness, and self-denial — we are not talking of the super-rich here — has been railroaded into choosing between unpalatable options: 1) put capital at risk in shares. This option explains the growing stock-market bubble — money has to go somewhere. But many an investment ends in tears. 2) Watch the cash evaporate, an even more miserable exercise than watching paint dry. 3) Spend everything now. Alas, how many tins of chilli con carne can the average household stockpile?...
*** UK GUARDIAN / LINK

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Charts That Make You Go Hmmm...
After falling
to a low near 6,500 in March 2009, the Dow Jones Industrial Average doubled to hit an all-time high in March 2013. This is the first time since October 2007, but investors have called it quits. A look at then and now suggests what may be driving this behavior. "The stock market's volatility has scared retail investors for several years. A total of $556 billion has been taken out of mutual funds focused on American stocks since October 2007, according to the Investment Company Institute. That is an enormous pot of money that largely missed out on the market's recovery. —The New York Times, March 5, 2013.
*** US GLOBAL INVESTORS

CLICK HERE TO VIEW INFOGRAPHIC

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Average Real GDP By Decade
7

You Are Here
6

5

4

Average: 3.86%
3

2

1

0

?
1800 1810 1820 1830 1840 1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020

Source: Dave Collum / Measuring Worth

A couple of charts stood out in Dave Collum's year-end review (page 32), but I felt this
one deserved a page of its own. As you can see, current real GDP — the result of trillions in stimulus from the Federal Reserve over the last 5 years — is currently at its lowest level in over 200 years. Something is very wrong in paradise; and whatever this chart might say, there is one thing that it doesn't say: "Buy equities at all-time highs."

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Source: Washington Post

Unemployment has reached multi-year lows in 27 states, a bit of positive news
for state labor markets that are still struggling through a mild recovery. In just over a third of states, there are more jobs now than there were when the recession began, according to an analysis of new Labor Department data by the Economic Policy Institute, a think tank focused on the needs of low- and middle-income workers. There may be more jobs in many states since the recession, but there are also more people. In only one state, oil-rich North Dakota, has the growth in jobs outpaced the growth in the working-age population, according to the EPI analysis. Forty nine states have added more adults in their working prime than jobs for them to fill. And the share of the working-age population that has jobs has declined in every state since 2007, though the fall has only been statistically meaningful for 35 of them, according to a Pew analysis....
*** WASHINGTON POST (VIA BARRY RITHOLTZ) / LINK

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Words That Make You Go Hmmm...
Dave Collum
is the most knowledgable finance guy many of you have never heard of. An amateur investor with a distinctly professional eye, Dave puts many in my industry to shame. Dave's "2013 Year in Review" (Page 32) is a tour de force, and in this interview with Chris Martenson, Dave discusses the issues with his customary insight and sardonic wit. CLICK TO WATCH

Steen Jakobsen

of Saxo Bank is a man I listen to and read whenever I get the chance. He is amongst the rare few who seem to be able to call things exactly as they see them from within the confines of an investment bank, and so Steen's views are always worth hearing. This week, we get to hear his take on the dreaded Taper. (via Zerohedge) CLICK TO LISTEN

Jim Rickards

has been absent from these pages for quite some time, but he's back today to discuss the history of the recent tapering announcement by the Fed as well as the likely effects on various asset classes and markets, particularly gold.

CLICK TO LISTEN

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and finally...
Simon Beck
is one crazy guy! Who else would walk miles in the snow to create beautiful art when he knows the odds are heavily stacked against its surviving 24 hours? The result of Simon's calculated wanderings, however, are utterly breathtaking, as this set of amazing pictures shows. Don't let the rather dull-looking teaser photo deter you from clicking on the link... I didn't want to spoil it for you! (Thanks Dody!)

CLICK HERE TO VIEW PHOTOS

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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.

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Follow me on Twitter: @TTMYGH YouTube Video Channel: http://www.youtube.com/user/GWTTMYGH ASFA Annual Conference 2013: 'Wizened In Oz' 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' 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 website, Yield Shark, Bull's 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, LLC's proprietary rights, or any other reason determined in the sole discretion of Mauldin Economics, LLC.

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