HMMM PDF

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
27 NOVEMBER 2012
The Mousetrap
"Nay, indeed, if you had your eyes, you might fail of
the knowing me: it is a wise father that knows his
own child. Well, old man, I will tell you news of
your son: give me your blessing: truth will come
to light; murder cannot be hid long; a man's son
may, but at the length truth will out."
Launcelot Gobbo, The Merchant of Venice, Act II, Scene 2
"I play to win and if it looks like I've lost, it's only because it's not
over yet."
Kiera Dellacroix, Engravings of Wraith
"Is it more childish and foolish to insist that
there is a conspiracy or that there is not?"
China Miville, The City and the City
"You see a mousetrap; I see free cheese and a f****** challenge!"
Scroobius Pip
Copyright Mauldin Economics. Unauthorized disclosure prohibited. Use of content subject to terms of use stated on last page.
Hmmm...
Contents
THINGS THAT MAKE YOU GO HMMM... ....................................................3
Death Metal: Tin Mining in Indonesia ...............................................................22
Treasury to Crack Down on UK's Offshore Tax Havens ...........................................23
The PMIs Warn Europe Is Getting Worse ...........................................................25
Argentina Nearing Technical Default ...............................................................26
Why Can't India Feed Its People? ....................................................................28
Goodbye Petrodollar, Hello Agri-Dollar? ............................................................29
The Faustian Bargain Between States and Banks .................................................30
Obama 2.0 and the World ............................................................................32
Catalans Take Step Towards Break-up Vote ........................................................33
Going Up in Flames ....................................................................................34
CHARTS THAT MAKE YOU GO HMMM... ..................................................36

WORDS THAT MAKE YOU GO HMMM... ...................................................40
AND FINALLY ................................................................................41
27 NOVEMBER 2012
Hmmm...
Things That Make You Go Hmmm...

October 6, 1952 saw the debut of a new play at the Theatre Royal Nottingham in England that
was based upon a short radio play titled Three Blind Mice. The playwright, Agatha Christie,
asked that the short story upon which the original radio play was based not be published in the
United Kingdom for as long as her stage play ran
because it contained a twist in the ending that she
desperately wanted to protect.
The play would tour Britain, being staged in Oxford,
Birmingham, Liverpool, Manchester, and Newcastle
before it reached the West End of London where it
was to take up residence at the New Ambassador's
Theatre on November 25, 1952.
The author was forced to rename the play at the
insistence of Emile Littler, who had produced a play
in the West End with the same title prior to WWII,
and, when casting around for a suitable title, Christie
sought the counsel of her son-in-law, Anthony Hicks,
who suggested a tip of the hat to a famous scene in
Shakespeare's Hamletspecifically Act III, Scene 2:
Hamlet. Madam, how like you this play?
Queen. The lady doth protest too much, methinks.
Hamlet. O! but she'll keep her word.
King. Have you heard the argument? Is there no offence in 't?
Hamlet. No, no, they do but jest, poison in jest; no offence i' the world.
King. What do you call the play?
Hamlet. The Mouse-trap. Marry, how? Tropically. This play is the image of a murder
done in Vienna: Gonzago is the duke's name; his wife, Baptista. You shall see anon; 'tis
a knavish piece of work: but what of that? your majesty and we that have free souls, it
touches us not: let the galled jade wince, our withers are unwrung.
And so it was that Christie's play about a murder came to be titled The Mousetrap.
27 NOVEMBER 2012
Hmmm...
For his contribution to the play, Hicks received the author's profound thanks, but Lady Luck
would smile far more profoundly on Christie's young grandson, Matthew Prichard, whose 9th
birthday coincided with Christie's writing of the play. By way of a gift to the young boy, Christie
bequeathed him the rights to a play which she expected to have a reasonably successful run
(though not as successful as others predicted):
(Wikipedia): Christie herself did not expect The Mousetrap to run for such a long time.
In her autobiography, she reports a conversation that she had with Peter Saunders:
"Fourteen months I am going to give it", says Saunders. To which Christie replies, "It
won't run that long. Eight months perhaps. Yes, I think eight months."
Now, eight months wasisa respectable time for a play to run, but both Saunders and Christie
were a little off with their predictions concerning the longevity of The Mousetrap.
In April of 1955, the play celebrated its 1,000th performance. In September 1957, The
Mousetrap broke the record for the longest-running play in the West Endan event marked by a
telegram to Christie from a rather begrudging Noel Coward, who wrote:
"Much as it pains me, I really must congratulate you...."
By December 1964, it had racked up 5,000 performances, by 1976, 10,000, by December 2000,
20,000, and on 25 November 2002, it celebrated a remarkable 50-year continuous run with a
gala performance in front of Queen Elizabeth II and Prince Philip.
Last Sunday, November 18th, 2012, a cast of theatrical celebrities staged the 25,000th
performance of a play that keeps on going year after year.
Amazingly, a film version of The Mousetrap has never been made because Christie stipulated,
when the play opened in 1952, that no such project could be undertaken until the West End
production had been closed for at least six months. How little she knew.
The thing that sets Christie's play apart is the big twist in the tale that has been delighting
and surprising audiences for years. So integral to the audience's enjoyment of the play is the
dramatic shift, that Christie worried that, should the killer's identity be leaked by those who
had seen the play, its impact would be ruined.
After much deliberation, she and her director, Peter Saunders, came up with a simple yet
ingenious plan by which to keep the identity of the killer a secretthey would simply ask the
audience, at the end of each performance, not to tell anybody who it was that did away with
Mrs. Boyle (a character described as "A critical older woman who is pleased by nothing she
observes") at the end of Act I, Scene 2.
Somewhat amazingly, this worked beautifully.
Audiences, imbued with a sense of involvement in a great secret, gave the play glowing reviews
to their friends and relatives but stopped short of revealing whodunnitencouraging people to
instead go and find out for themselves. And go they did. In their droves.
27 NOVEMBER 2012
Hmmm...
Since its opening night, an estimated 10 million theatregoers have seen The Mousetrap in
London alone. Throw in those who have watched any of the 60 productions that have been
licensed in places such as China, Russia, the US, South Africa, and Canada, and the number
increases significantly.
And yet...
The identity of the killer remained a closely guarded secret for over 50 years. So much so that,
when, in August 2010, Wikipedia opted to reveal the identity online, it caused uproar:
(UK Daily Mail): For 58 years, the identity of the killer in Agatha Christie's The
Mousetrap has been one of theatreland's most closely guarded secrets.
At the end of each performance of the world-famous countryhouse whodunit, the
audience is asked not to reveal the name of the killer when they leave.
It was supposed to prevent the ending of the world's longest-running play from being
spoilt for those who hadn't yet seen it.
Until now, it appeared to have worked.
But the identity of the killer has been published online by Wikipedia, despite protests
from the author's family and petitions from fans to remove the spoiler.
Wikipedia tells readers the famous play is "known for its twist ending, which at the end
of every performance, the audience is asked not to reveal."
But anyone who keeps reading will be told who the murderer iswithout any warning.
Matthew Prichard, Christie's grandson, described the online encyclopedia's decision as
"unfortunate".
So, after 58 years and with well over 10 million people in on the "conspiracy," the secret of the
identity of Christie's most famous killer was revealed to a wide audience. Still, if you can keep
10 million people quiet for over 50 years, I'd say you were doing pretty well.
One would have
to hazard a guess that there are substantially less than 10 million

people who know the truth behind both the amount of gold bullion held by Western central
banks as well as the degree to which prices are manipulated in order to maintain price
stabilitybut, as conspiracies go, this one is right up there with the killing of JFK (certainly in
financial circles).
27 NOVEMBER 2012
Hmmm...
Now, these conspiracy theories have polarized some of the finest minds in finance for many
years, and many commentators for whom I have the utmost respect feel they are all utter
nonsense. Personally, I believe there is no smoke without fire, and I always apply the two
criteria of motive and means to any suspected conspiracy. In the case of gold (and silver), I
cannot help but conclude that central banks and governments certainly have the motive to
suppress prices (as they reveal only too clearly the extent to which the purchasing power of fiat
currency is being debased), and as for the means...? Well, based on what we have seen in terms
of intervention in the far larger sovereign bond markets in recent years, I think arguments over
that particular part of the equation have been rendered somewhat redundant.
How ridiculous has government intervention become in the bond markets? Ladies and
gentlemen, I give you the US Treasury curves of November 2000 and November 2012 plotted
against a backdrop of the US Public Debt Outstanding:
US Treasury Yield Curves vs Public Debt Outstanding

(November 2000 - November 2012)
1M 3M 6M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y
10Y
20Y
30Y
20 Trillion
6%
November 2000
5%
15 Trillion
4%
3%
10 Trillion
er 2012
Novemb
2%
1%
5 Trillion
12
No
v
11
No
v
10
No
v
09
No
v
08
No
v
07
No
v
06
No
v
05
No
v
04
No
v
03
No
v
02
No
v
01
No
v
No
v
00
0%
Source: Bloomberg
27 NOVEMBER 2012
Hmmm...
As you can see, as the US has plunged deeper and deeper into debt, its cost of borrowing money
has gotten lower and lower. In fact, the US can currently borrow 10-year money lower than at
any time in the country's history (see chart, bottom of next page). How has that happened?
Well, in large part it can be explained by the chart at the top of the next page, which shows
the US Federal Reserve's holdings of US Treasury Securities between 2002 and today. As you can
see, those holdings have trebled in that time period, which has helped yields hit those all-time
lows depicted on the second chart.
Meanwhile, on the debt side of the ledger, as Kyle Bass pointed out most recently:
(Kyle Bass): It took the United States 193 years (1789-1981) to aggregate $1 trillion of
government debt. It then took 20 years (1981-2001) to add an additional $4.8 trillion
and, in the last 10 years (2001-2011), a whopping $9.8 trillion has been added to
the federal debt. Since 1981, the US increased its sovereign debt by 1,560% while its
population increased by only 35%
2,000,000
US Federal Reserve Holdings

of US Treasury Securities
1,500,000
US$ millions
(November 2002- November 2012)
1,000,000
12
No
v
11
No
v
10
No
v
09
No
v
08
No
v
07
No
v
06
No
v
05
No
v
04
No
v
03
No
v
No
v
02
500,000
Source: Bloomberg
27 NOVEMBER 2012
Hmmm...
Source: Global Financial Data
All the debt that has been accumulating across the globe (and, as I have discussed ad nauseam,
it is not just in the US) against the backing of an ever-dwindling public hoard of gold bullion is
eventually going to matter, and probably to everybody at the same time, for that is generally
the way these things work in the 21st century, and when it does, very few people seem to grasp
the full implications. What better reason for governments to attempt to engineer the lowest
gold price they possibly can?
Recently, there has been renewed focus on the amount of physical gold actually held by central
banks and, potentially more worryingly, where it is held. Allow me to elaborate.
It began in August 2011 with Hugo Chavez.
The ailing Venezuelan dictator demanded that the Bank of England return the 99 tons of gold
bullion that was stored in its vaults below Threadneedle Street in the heart of the City of
London.
(Bloomberg): Venezuelan President Hugo Chavez ordered the central bank to repatriate
$11 billion of gold reserves held in developed nations' institutions such as the Bank of
England as prices for the metal rise to a record.
Venezuela, which holds 211 tons of its 365 tons of gold reserves in U.S., European,
Canadian and Swiss banks, will progressively return the bars to its central bank's vault,
Chavez said yesterday...
"We've held 99 tons of gold at the Bank of England since 1980. I agree with bringing that
home," Chavez said yesterday on state television. "It's a healthy decision."
27 NOVEMBER 2012
Hmmm...
As I wrote at the time (Things That Make You Go Hmmm..... August 20, 2011):
Chavez's move this week could set in motion a chain of events whereby central banks
that store the bulk of their gold overseas in "safe" locations scramble to repossess their
country's true "wealth." If that happens, the most high-stakes game of musical chairs the
world has ever seen will have begun...
Personally, if I were a central bank governor, I know I would want to be absolutely
certain that my gold was a) exactly where it was supposed to be, b) held in the amount
advertised, and c)... well... made of gold, ideallyas opposed to tungsten.
Now, it has taken a little longer than I had expected for some movement to occur in the central
bank gold market, but then so has the collapse of the European Union, the demise of the euro,
the top of the US bond market, and the unmasking of France (more on that next week), but at
last, the first signs are becoming apparent that ever so quietly, the game of musical chairs that
I predicted would soon commence may finally be beginning.
It started at the end of October, when those traditional guardians of fiscal propriety (at least
until recently), the Germans, reverted to type:
(Zerohedge): The German court of auditors (Bundesrechnungshof) has demanded
that the Bundesbank undertake an audit of its gold reserves. In an "audit-the-Fed"
style effort, the court wants to ensure that the nearly 3400 tons of gold is in fact
in existence"because stocks have never been checked for authenticity and weight".
Furthermore, the Bundesbank's gold is stored in three other vaults around the world:
The Bank of England, The Bank of France, and the US Federal Reserve. The court
questions the practice of relying on a written confirmation from the custodians (foreign
central banks). The decision means negotiating with the three foreign central banks
for physical verification, but in anticipation, the Bundesbank has begun the process of
shipping 50 tons per year from the Fed back to Germany for the next three years.
Der Spiegel added a little more colour (emphasis added):
(Der Spiegel): For quite some time now, [Peter] Gauweiler [CSU politician] has been
pestering the government and the Bundesbank with questions concerning where and how
the country's reserves are stored, and how often they are checked. He has submitted
requests and commissioned reports on the topic.
27 NOVEMBER 2012
Hmmm...
Last week, Gauweiler celebrated his greatest triumph to date in his gold campaign,
which has been a source of some amusement for many fellow German politicians: A
secret report by the Federal Audit Office had been made publicand it contained stern
criticism of the German central bank in Frankfurt. The Bonn-based auditors urged a
better inventory system, including quality checks.
This demand, which even the bank's inspectors
saw as nothing more than routine, alarmed
the Berlin political establishment. Indeed,
the partially blacked-out report read like the
prologue to an espionage thriller in which the
stunned central bankers could end up standing in
front of empty vaults in the US.
For decades, German central bankers have
contented themselves with written affirmations
from their American colleagues that the gold still
remains where it is said to be stored. According to
the report, the bar list from New York stems from
"1979/1980." The report also noted that the Federal
Reserve Bank of New York refuses to allow the gold's
owners to view their own reserves.
Not surprisingly, this prompted strong reactions in Berlin: The relevant Bundesbank
board member Carl-Ludwig Thiele was summoned to Berlin to provide an explanation to
the parliamentary budget committee. Heinz-Peter Haustein of the business-friendly
Free Democratic Party (FDP) was even quoted by Germany's mass-circulation Bild
newspaper as saying that "all the gold has to be shipped back."
As the late Michael Jackson once said:
"You wanna be startin' somethin'?"
A couple of days later, folks in the Netherlands (supposedly the world's 9th largest holder of
gold by tonnage) began to get a little twitchy:
(Nederlands Dageblad): Almost 300 "concerned Netherlands citizens" have joined the
German initiative for insight about the gold reserves.
In a petition the citizens committee demands "full openness on the quantity and storage
location of the Netherlands' physical gold, and on the extent and nature of the gold
claims."
In Germany, a lot of uneasiness has risen about the quantity, value, and quality of the
gold reserves, which have not been audited in many years at various storage locations.
Led by the tabloid newspaper Bild, German news media are wondering whether the
3.4-million kilograms of ingots are really there (valued at about 150 billion).
27 NOVEMBER 2012
10
Hmmm...
Under pressure from the German federal audit office, part of the gold stock will be
repatriated from the United States to Frankfurt.
The Netherlands faces similar uneasiness about the position of its gold
treasure612,000 kilograms with of a value of about 25 billion. The gold, in part
located at De Nederlandse Bank in Amsterdam (about 10 percent), is also located at the
Federal Reserve Bank of New York, in Ottawa, and London.
A few more days went by before Ecuador dived for a chair:
(Zerohedge): Ecuador's government wants the nation's banks to repatriate about onethird of their foreign holdings to support national growth, the head of the country's tax
agency said.
Carlos Carrasco, director of the tax agency known as the SRI, said today that Ecuador's
lenders could repatriate about $1.7 billion and still fulfill obligations to international
clients. Carrasco spoke at a congressional hearing in Quito on a government proposal to
raise taxes on banks to finance cash subsidies to the South American nation's poor.
According to official statistics, Ecuador holds just 26.3 tonnes of gold which, in the scheme of
things, isn't a whole lotbut to the good people of Quito and beyond, that represents about
16.5% of their wealth. Is it any wonder they'd prefer to have it under their own mattress?
Considering national gold holdings are supposed to be the property of the citizens of a given
country, there seems to be an enormous amount of sensitivity surrounding any independent
audit or verification of many of these stockpiles. Various excuses are always trotted out
about the cost of an audit, but it seems as though the idea of even showing the gold to an
outside party who could vouch for its existence is anathema to central banks and governments
everywhere. You'd think they'd be kind of proud of all that shiny yellow metal?
Eric Sprott, a man who knows more about gold than most, recently penned another wonderful
piece titled "Do Western Central Banks Have Any Gold Left???". The multiple question marks
were Eric's, not mine. The set-up began thus:
(Sprott): Collectively, the governments/central banks of the United States, United
Kingdom, Japan, Switzerland, Eurozone, and the International Monetary Fund (IMF)
are believed to hold an impressive 23,349 tonnes of gold in their respective reserves,
representing more than $1.3 trillion at today's gold price. Beyond the suggested
tonnage, however, very little is actually known about the gold that makes up this
massive stockpile. Western central banks disclose next to nothing about where it's
stored, in what form, or how much of the gold reserves are utilized for other purposes.
We are assured that it's all there, of course, but little effort has ever been made by the
central banks to provide any details beyond the arbitrary references in their various
financial reserve reports.
27 NOVEMBER 2012
11
Hmmm...
But soon Eric moved on to the nitty-gritty, providing a series of compelling metrics to back up
his argument:
Global annual gold mine supply ex Russia and China (who do not export domestic
production) is actually lower than it was in year 2000, and ever since the IMF announced
the completion of its sale of 403 tonnes of gold in December 2010, there hasn't been
any large, publicly disclosed seller of physical gold in the market for almost two years.
Given the significant increase in physical demand that we've seen over the past decade,
particularly from buyers in Asia, it suffices to say that we cannot identify where all the
gold is coming from to supply it but it has to be coming from somewhere.
After identifying the various sources of demand for gold bullion, Eric pondered the supply side
of the equation:
What entities are releasing physical gold onto the market without reporting it? Where is
all the gold coming from?
There is only one possible candidate: the Western central banks. It may very well be
that a large portion of physical gold currently flowing to new buyers is actually coming
from the Western central banks themselves. They are the only holders of physical gold
who are capable of supplying gold in a quantity and manner that cannot be readily
tracked.
Indeed.
But what has happened to this missing gold (if, as Eric and many othersincluding myself
believe, it is missing)?
Well, per the Central Bank Gold Agreement (CBGA), Western central banks were restricted in
the amount of gold they could sell on an annual basis and, over the first two five-year periods
that the agreement was in place, they took full advantage, as you can see from the shaded area
in the chart below:
27 NOVEMBER 2012
12
Hmmm...
1,350
1900
1800
Official Central Bank Gold Holdings

vs. Spot Gold Price
1,300
1700
1600
1500
(Millions of Ounces) (IMF)

1965-2011
1,250
1400
1300
1,200
1200
1100
1,150
Gold
Holdings
(moz)
1000
900
1,100
800
700
1,050
600
500
1,000
400
300
950
200
100
0
900
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
Source: IMF, Bloomberg
That didn't stop the price going up, but concerted selling on the part of the largest holders of
gold would certainly have dampened its upward trajectory somewhat.
So what has been happening to all this physical gold over what has become a 12-year bull
market (or, in the eyes of many who simply look at the price of the yellow metal, a gigantic
bubble)?
Well, in order to help readers understand this, I turned to my good friend Nick Laird of
Sharelynx, who is among the savviest of all gold-watchers. Nick's database of gold-related
charts is, in my opinion, the most complete anywhere on the planet, and you can find out a lot
more about them by visiting his excellent website, www.sharelynx.com.
The direction of physical-bullion movement has been consistent and telling throughout the
entire bull-run; West to East. If you'd like to know what that looks like, thanks to Nick, I can
show you.
The shape of this chart you will recognize from the one above, but by adding one extra line,
the story it tells is significantly different.
The gold bars represent the total official holdings of gold as per the IMF that you saw in the
previous chart. The red line illustrates the percentage of world official gold holdings that are
in the hands of Asian central banks. As can be seen quite clearly, this number had been growing
consistently until the beginning of the 2008 financial crisis, at which point it went parabolic.
27 NOVEMBER 2012
13
Hmmm...
Source: Sharelynx
A look at the demand statistics that make up those numbers is even more compelling. First up,
fabrication demand from the East and the West:
Source: Sharelynx
27 NOVEMBER 2012
14
Hmmm...
Throw in investment demand and you get the complete picture of the flows of gold bullion over
the last twenty-five years; and it makes for a sobering illustration of prudence versus folly:
Source: Sharelynx
Since the turn of the century, Western fabrication and investment demand has fallen 50%
whilst that from the East has grown 30%and when people talk of "The East," invariably they
mean Chinaso let's take a look at what has been happening in everybody's favourite mystery
kingdom.
Source: Sharelynx
27 NOVEMBER 2012
15
Hmmm...
Since 1980 (coincidentally, when the previous gold "bubble" was at its peak), Chinese gold
production has increased at a staggering pace from around ten tonnes per year in 1980 to 365 in
2011, which made China the world's largest producer of gold.
Not one ounce of that gold is allowed to (legally) leave China. Instead, in addition to worldleading production, Chinese imports through Hong Kong have also jumped at a mind-numbing
pace, as can be seen in the chart below, which shows net imports up almost 1,000% since 2007.
Source: Sharelynx
Putting that into perspective over a longer time frame is even more telling, as can be seen from
the chart below, which Nick assembled using data going back to 1930:
27 NOVEMBER 2012
16
Hmmm...
Source: Sharelynx
As of today, China's official gold holdings total 1,054 tonnesor approximately 1.8% of their
reserves. That number was released by the PBOC in 2009. Since then? Silence. All we know is
that over the last four years, China has produced a similar amount of gold to that which they
officially held in 2009none of which has left the countryand has imported roughly the same
again through Hong Kong.
When they made the 2009 announcement that they had bought around 600 tonnes of gold, thus
increasing their reserves by 76%, it sparked a 20% rally in the gold price, and even though the
fact that China is voraciously accumulating gold is staring the world in the face, until an official
announcement is made, there will be no great rush into gold by investors trying to piggyback
China.
But here's the thing...
Western governments are bankrupt. They all have huge, stifling, unfunded liabilities after a
credit binge the like of which the world has never seen before. Their balance sheets are in
disarray and are expanding monthly as they try desperately to keep things together long enough
for "growth" to magically return and fix everything. In order to buy the time they believe they
need, they have instituted a series of policies that are potentially wildly inflationary and that,
in days gone by, would have seemed to the world to be exactly what they arefarcical. But
community hides culpability, and so, as a group, these governments are able to act in unison
to try and devalue their currencies whilst suppressing interest rates in a doomed experiment of
Frankenstein dimensions.
27 NOVEMBER 2012
17
Hmmm...
Meanwhile, across the world, in Asia, stands a collection of governments that entered 2008 in
far better shape from a balance sheet perspectivefor the simple reason that, when their own
crisis hit in 1997/1998, they were forced to take the pain that came with a credit-fuelled bust.
The Asian currency crisis of 1997/1998 was horrendous for this region, and yet, amazingly, many
outside Asia don't know much about it. The havoc wreaked throughout Asia was significant (as
the tables below highlight), but it had the effect of lowering debt levels significantly (mostly
through default... are you listening, Europe? The USA?) and preparing Asia for 2008.
Currency
Exchange Rate per US$
Change
June 1997
July 1998
Thai Baht
24.5
41
- 40.2%
Indonesian Rupiah
2,380
14,150
- 83.2%
Philippine Peso
26.3
42
- 37.4%
Malaysian Ringgit
2.5
4.1
- 39.0%
South Korean Won
850
1,290
- 34.1%
Source: R Cheatham/Wikipedia
Currency
GNP (US$1 billion)
Change
June 1997
July 1998
Thailand
170
102
- 40.0%
Indonesia
205
34
- 83.4%
Philippines
75
47
- 37.3%
Malaysia
90
55
- 38.9%
South Korea
430
283
- 34.2%
Source: R Cheatham/Wikipedia
A look at government debt-to-GDP levels and forecasts (courtesy of Blackrock) shows just how
skewed the regions have become and how they are headed in different directions:
27 NOVEMBER 2012
18
Hmmm...
Government Debt-to-GDP Levels
%
140
120
100
80
60
40
20
0
G7 (Developed Markets)
2011
Emerging Asia
Emerging Markets
2012 Forecast
2013 Forecast
2014 Forecast
Source: IMF/Blackrock
So... we have a group of nations in the West (and I include Japan, the world's third-largest
and most-indebted economy) whose biggest problem is debt and which, to counter that, have
implemented a series of desperate measures designed to avoid taking the necessary pain to
purge the systempreferring to set about trying to create the inflation they deem necessary to
dissolve the debt in the most politically expedient way possible.
This monetary debasement is showing up in weakening currencies and a steadily (but in the
scheme of things, slowly) increasing gold price (though inflation remains mysteriously muted
certainly if you choose to believe the various official CPI statistics instead of your own monthly
food and energy bills).
On the other side of the world, you have a series of countries that don't have the massive debt
overhang that so tortures the West, but that are at the mercy of inflation, with vast populations
who need feedinga task that gets harder with every new dollar printed by Benny and the (ink)
Jets.
So what happens?
Well, as we have seen, Western central banks have been consistently selling their gold over
the last 30 years, whilst the Asian nations have been steadily accumulating it. In addition to
outright sales, the spectre of central bank gold having been leased out many times over has
bubbled away for years before raising its head spectacularly this past week when Austria's
central bank boasted about how they had made a "profit" of $300 million from gold leasing.
(Bullion Street): Austria announced earning a whopping 300,000,000 through leasing its
280 tons of gold in the last ten years.
Replying to questions in the country's parliament, Austrian central bank, National Bank
(OeNB) governor Wolfgang Duchatczek said 224. 4 tonnes (around 80%) of Austrian gold
reserves were in the United Kingdom, around 6.9 tonnes (around 3%) are in Switzerland
and around 48.7 tonnes (around 17%) are in Austria itself.
27 NOVEMBER 2012
19
Hmmm...
The OeNB said that the reason to store gold abroad was that because in a time of crisis
it could be speedily traded. Since 2007, Austria's National Bank had had a constant
reserve of around 280 tons of gold.
Through leasing of its gold, the Austrian National Bank has in the last 10 years earned
around 300,000,000.
My friend, Ronni Stoeferle of Erste Bank in Vienna emailed me immediately after this news hit
the wire with his own take on things:
I actually gave our central bankers a really hard time today... after they stated that
they've "earned" 300 mln in 10 years by lending the gold, I made a back-of-the-envelope
calculation, which had the result that 300 mln is impossible (given the lease rates in
the last 10 years), unless they've leased out 100% (or even more??) of their gold...
I think I have stirred up a hornet's nest, because they shot out a press release
immediately... stating that "only" 16% are lent out anymore... again: the numbers just
don't add up...
Believe me when I tell you, Ronni knows his gold... Either way, in Austria, like many other
nations, we have gold leasing and bullion stored outside the countrya familiar pattern that
continues to crop up with alarming regularity.
The West sees gold as a means to hide the existence of inflation while the East sees it as
protection from inflation. That means the West is selling gold whilst the East is buying it.
The longer the price of gold is kept as low as possible by Western central banks, the more
bullion will flow from West to East, and the more gold emerging nations accumulate, the more
they are likely to want custody of that gold.
The more central banks ask for audits and repatriation of their gold, the faster that trend will
accelerate; and the faster that trend accelerates, the less gold will be left in the "safe" confines
of the Federal Reserve and the Bank of England.
So let me ask you this, dear reader:
Just suppose for a moment that you apply means and motive to this little conundrum. And just
suppose thatGod forbidcentral bank data was either misleading or downright wrong and the
gold supposedly in vaults beneath the Bank of England and the Federal Reserve (amongst other
places) had, in fact, been leased out through the bullion banks in return for a little interest.
Now suppose that the creeping trend for audit and repatriation that started with Hugo Chavez
and seems to be spreading rapidly to other nations continues to gather pace, and suppose that
everybody decides that they'd rather err on the side of caution and have their gold back.
If the gold isn't all there, what do you suppose would happen?
"Is it more childish and foolish to insist that there is a conspiracy or that there is not?"
27 NOVEMBER 2012
20
Hmmm...
The secret of the killer's identity in The Mousetrap was kept intact by over 10 million
people for half a century until the good folks at Wikipedia decided that they were doing the
public a favour by revealing it. Now, if you want to know who the killer is, you just have to
Google it.
If the truth about the bullion holdings of the world's central banks is finally revealed and
it turns out that the rumours surrounding them are based in fact, all hell will let looseI
guarantee it. Consequently, don't expect any great admissions anytime soon. However, you
might want to keep an eye on the increasing number of requests for repatriation. They may just
flush out the truth anyway...
Until next time...

**********
27 NOVEMBER 2012
21
Hmmm...
Suge doesn't have a mobile phone, so he uses a friend's to tell us the news: he
doesn't want any visitors and he won't talk. His boss has told him not to say anything. They're
neighbours and the mine's just up the road and he needs this jobthe job he hopes to go back
to when he gets better, inshallahbecause mining is good money. Everything is OK. Just please
don't come.
We leave at dawn. In the black morning sky the two-lane highway cuts west across the island
towards Suge's village, a cluster of wooden and cinderblock houses near mangroves so deep the
palm trees look like drowned bonsais. There are mosques with orange gates and lime roofs,
clapboard shacks selling sweets to schoolchildren, and then, every so often, vast expanses of
seeming desert.
At the bottom of the sandy dunes sit wide turquoise
craters, looked over by gritty hills where haphazard
tents made from tarpaulins and thatch serve as
shelters for the men descending into the hollowedout pools with pickaxes and buckets. Fifteen metres
deep, they scavenge for tin, cutting into the sand with
their hands and feet, just like Suge used to do, until
one day in August his pit collapsed, burying him alive
and snapping his left shin in half. His cries of "Longsor!
Longsor!"Landslide!were drowned by the mud that
killed the three friends who had been working beside him.
The tin that 44-year-old Suge has mined over the past 12 years on Bangka islanda granite
outcrop just east of Sumatra in Indonesiahas been in heavy demand for the past few
centuries. Bangka is a key point in its global trade. A long, boot-shaped belt of the metal
stretches from Burma all the way down through Thailand, Malaysia, Singapore and Indonesia,
with Bangka and its sister island Belitung comprising its toe.
When the Dutch colonised Indonesia in the early 19th century, one of their first tasks was to
carve out vast mines on the island where locals and Chinese coolies worked side by side digging
for dark specks of cassiteritethe main mineral in tin oreto be used in alloys, conductors and
tin plating. Today that same tin is mined for use primarily as solder in consumer electronics,
according to tin industry group ITRI, holding together the circuit boards, transistors and
resistors in items such as smartphones and tablets and mobiles. Around seven grams of tin goes
into every mobile phone.
There is a chain here: Bangka and Belitung produce 90% of Indonesia's tin, and Indonesia is
the world's second-largest exporter of the metal. A recent Businessweek investigation into tin
mining in Bangka found that Indonesia's national tin corporation, PT Timah, supplies companies
such as Samsung directly, as well as solder makers Chernan and Shenmao, which in turn supply
Foxconn (which manufactures many Apple products).
27 NOVEMBER 2012
22
Hmmm...
Chernan has also supplied Samsung, Sony and LG. So it is highly likely that the smartphone
or tablet you use has Bangkanese tin in it, perhaps mined by Suge or one of the many tens of
thousands of men like him, most of whom earn around 5 a day in a local industry that fetches
roughly 42m of revenue for Indonesia every year.
It is still early morning when we knock on Suge's peeling front door, the village chief in tow to
help him feel comfortable talking about his accident. Inside, Suge is propped up on a mattress
on the floor watching soap operas, an overflowing spittoon at his side. Dangling from the rafters
is the rope that keeps his leg elevated at night; today it whirls around his head like a noose not
quite reaching its target.
Suge's father tells us that his son's accident was unavoidable. "The act of Allah," he splutters, "a
big warning from God for him to change his life!" Suge is crying, spitting tears into the spittoon,
moved by his father's accusation that he never prayed enough before the accident. He begins
describing the crumbling wall of mud that enveloped him, the image of his young daughter
propelling him to fight to the surface and take his first breath of air. "Look, mining has changed
our community," he says, trembling. "People are wealthier now. They can send their kids to
school."
But he knows that change is afoot. Two of his neighbours recently died while mining, bringing
the unofficial death toll this year to 78, and the number of police crackdowns on informal
miners has increased significantly in the past month. "We are on the cusp of a revolution here,"
Suge says quietly. "My accident was a small sacrifice to give happiness to people in the world,
to give them phones and electronics." He begins likening himself to Napoleon Bonaparte, "the
leader of the revolution", until his father cuts in suddenly: "It's silly. We are the ones producing
the tin but we don't use it. We don't have handphones."
*** UK GUARDIAN / LINK
Radical plans to
force the UK's tax havens to reveal the names behind hidden
companies, account holders and trusts have been drawn up by the Treasury.
The news has delighted tax justice campaigners, who predict that the move, which is expected
to be unveiled in the chancellor's autumn statement and come into force in 2014, will have
major consequences for those trying to hide their money offshore.
A leaked document reveals that the UK plans to impose its own version of the US Foreign
Account Tax Compliance Act (Fatca) on the crown dependencies of Jersey, Guernsey and the Isle
of Man, as well as its overseas territories, such as the Cayman Islands.
Fatca, which will come into force in the middle of next year, requires foreign banks to report
American account holders to the US Inland Revenue Service. The draft UK equivalent, seen
by the magazine International Tax Review, will require British tax havens to make similar
disclosures about UK account holders to UK tax authorities.
27 NOVEMBER 2012
23
Hmmm...
"It's a complete bombshell for these places," Richard Murphy, a tax expert who has seen the
draft plan, told the Observer. "Some people will try to flee, but this is going to change the
whole of the offshore market."
He explained that the draft plan amounted to the UK using US legislation to give tax havens an
ultimatum: "It's either they give the UK the same data that they want to give the US or the UK
won't pass their laws to let data flow to the US."
The ultimatum is crucial, Murphy suggested. If the UK refuses to pass the laws, its tax havens
"might just as well shut up shop since there would be almost no banks or other institutions
willing to locate there".
News of the plans is likely to surprise many tax experts. This month, responding to an
international development committee report, the government publicly rejected the need for a
UK version of Fatca.
Joseph Stead, Christian Aid's senior adviser on economic justice, said that if the draft was
implemented it "would be the beginning of the end for tax haven secrecy".
However, he said it was vital that it should not just be the UK which obtains full information
disclosure from its tax havens: "We should ensure that other countries get it too, so they can
catch up with people and companies hiding money. Otherwise there will be tax haven secrecy
for some countries and not others.
"Poor countries lose billions every year to tax dodging and tax havens are often involved. We
hope the UK government will use the G8 meeting it is hosting next year to agree action to
ensure a global end to tax haven secrecy."
The Treasury declined to comment but confirmed to the Review that it was assisting the UK's
crown dependencies and overseas territories to produce their response to Fatca.
However, former Liberal Democrat Treasury spokesman Lord Oakeshott was sceptical about
whether the plan could succeed. "Tax havens really coming clean are as likely as a snowy
Christmas day in the Cayman Islands," he said.
Last night the Labour shadow chancellor, Ed Balls, outlined a five-point plan for tackling tax
avoidance. In an article for the Huffington Post, Balls writes: "We urgently need to look at how
UK tax laws can be made stronger so as to properly deter tax avoidance."
*** UK GUARDIAN / LINK
27 NOVEMBER 2012
24
Hmmm...
More Purchasing Manufacturers Index (PMI ) data overnight. Comments from

Chris Williamson, Chief Economist at Markit economics, sum it up nicely:
The eurozone economy continued to deteriorate at an alarming pace in November, and

is entrenched in the steepest downturn since mid-2009. Officially, the region saw only
a very modest slide back into recession in the third quarter, with GDP falling by a mere
0.1%, but the PMI suggests that the downturn is set to gather pace significantly in the
fourth quarter. The final three months of the year could see GDP fall by as much as
0.5%.
While it is reassuring to have seen signs of stabilisation in some survey indicators, the
overall rate of decline remains severe and has spread to encompass Germany, suggesting
the situation could deteriorate further in the coming months. With jobs being cut at
the second-fastest rate since January 2010 and expectations for the year ahead in the
services sector slumping to the lowest since March 2009, firms have clearly become
increasingly anxious about the economic outlook and are seeking to control costs as
much as possible. All this suggests that any swift return to growth is unlikely.
There isn't much new here, this is the same dynamic I have been commenting on for well over
a year now. In recent weeks it has become all too obvious that economic weakness has now
got a firm grip on "the core" of the EZ with the downgrade of France and the acceleration of a
downturn in the Netherlands. Germany too is slowly weakening as the PMI report shows.
So no surprises here, and we continue to travel along the path of expected outcomes.
Attempts at internal devaluation across Southern Europe are crushing aggregate demand
in those countries, this is flowing back into the "core" via the tradeable sectors, lowering
manufacturing production and output, which is in turn pulling down the service sectors of those
countries. External surpluses require a counterparty external deficit, and, as I've explained
many times before, when you're all each other's trade partners and are all trying the same
trick, it simply becomes a race to the bottom.
Source: Markit
27 NOVEMBER 2012
25
Hmmm...
The fact is that the "fiscal compact" is forcing further retrenchment on an already indebted
private sector in much of the periphery, and the inevitable outcome is lower aggregate
demand. Without demand, in the absence of debt relief, there's no trade. Without trade, there
is no income, and so unemployment rises, industrial production lowers, bad debts and defaults
begin to accumulate and inevitably government finances sink. Over the last 6 months, we've
seen a swathe of countries attempt to counteract this outcome with even more ambitious fiscal
tightening, but as you are surely aware by now, this is akin to strangling someone in an attempt
to save them from choking to death.
What worries me most about this situation is that Eurozone leaders appear well aware that the
fundamental issue is the economic imbalance across the region, yet again they seem completely
unable to consider any credible plan to address this. There is no sign that northern creditors
are about to loosen fiscal policy in order to bring forwarded consumeristic demand from the
populace, in fact the reverse is true, and there is certainly no new capital investment flowing
into the periphery in order to support the transformation into those "export machines" they are
supposed to become. All we have seen up until now is a crushing of demand in the south, met
with fiscal tightening in the north as everyone frets that the economy is slowing while debts
continue to rise. I'm simply not sure what else they thought would happen.
The current political convulsions over Greece show the European leadership are once again
losing their grasp on the situation with politically sanitised "kick the can" solutions up for
offer while they hope for god-knows-what to occur to dig them out of the hole they've all
dug themselves. Previously this type of failure would inevitably be met with another round of
emergency action from the ECB, but with the OMT in place, Draghi looks to be at his limits.
That all being the case, 2013 is certainly looking extremely risky in terms of political and social
stability in many nations because, as you can see from the data, this just ain't getting any
better.
*** MACROBUSINESS / LINK
Argentina CDS spread has blown out to new highs last week. In spite of Argentina's
government driving the nation's economy into the ground, this widening was caused by
increased risks of the so-called "technical default" rather than deteriorating economic
conditions.
For years, bond holders of Argentina's government debt (issued under NY law), who did not
participate in Argentina's restructuring plan from the 2001 default, have been fighting to be
treated equally (pro rata) with those who had accepted the restructuring terms. But Argentina
has insisted that that those who did not play ball in their restructuring planthe "holdouts"
should get nothing. Last week, however, a US judge gave Argentina a Thanksgiving surprise by
ruling in favor of the holdouts. That means the holdouts will need to be paid everything that
the restructuring participants got over the years, including all the interest.
27 NOVEMBER 2012
26
Hmmm...
JPMorgan: - Last Wednesday, District Judge Griesa issued his decision in the pari passu
ruling ahead of Thanksgiving ... in favor of holdout creditors. Griesa defined a pro rata
payment formula that requires full upfront payment by Argentina to holdouts of US$1.3
billion...
3000
Argentina 5-Year Sovereign CDS

2500
November 2011-November 2012
2000
bps
1500
1000
500
Nov 11 Dec 11 Jan 12
Feb 12 Mar12 Apr 12 May 12 Jun 12
Jul 12
Aug 12 Sep 12 Oct 12
Nov 12
Source: Bloomberg
The judge told Argentina's lawyers that the nation needs to put $1.3 billion into escrow by
December 15th, pending the Appeals Courts ruling. If Argentina fails to do so and the country's
appeals process in the US is exhausted, the sovereign CDS will be triggered.
JPMorgan: - A potential refusal by Argentina to comply with an adverse ruling would
threaten "technical" default on 2005 and 2010 restructured claims (92% of total debt
defaulted in 2001). This would occur if US courts considered the remedy (pro rata
payments) adequate and equitable.
Based on the Argentine government's belligerent behavior toward the rest of the world (see
discussion), the odds of the $1.3bn showing up in the escrow account next month are not great.
That, combined with the Appeals Court (as well as whatever other appeals Argentina can come
up withpossibly appealing to the US Supreme Court) agreeing with Judge Griesa, will put the
nation into defaultagain. By the way, those who still don't think Argentina's government is
acting like thugs toward foreigners, just read this story from the Mail.
The market-implied peso exchange rate (the so-called "shadow" exchange ratesee discussion)
now puts the peso at 42.3% discount to the official rate as the currency continues to decline.
Should the technical default take place, the US will begin freezing the Argentine government's
dollar accountswhich will push the shadow exchange rate to new lows.
*** SOBER LOOK / LINK
27 NOVEMBER 2012
27
Hmmm...
It was 1958, my father was still a child, and India was running out of food. That years
wheat crop had slumped by 15 percent, the rice harvest by 12 percent, and prices in the
markets were soaring. Far from his village in eastern India, ships loaded with wheat were
steaming toward the country, part of Dwight Eisenhowers plan to sell surplus grains, tobacco,
and dairy products to friendly countries. All India Radio gave daily updates on the convoys, and
the army barricaded ports in Mumbai and Kolkata against the hungry crowds.
"It was this very coarse, red wheat," says Narsingh Deo Mishra, a childhood friend of my father's
and now a local politician in Auar, their home village. "We were told it was meant for American
pigs," says Mishra. "Back then, we weren't any better than American pigs. So we ate it. We ate
it all, and we begged for more."
My father, Dinesh, grew up during the toughest years in modern India's history, a time of
droughts and floods. At 18 he weighed about 40 kilograms (90 pounds). In a photograph taken at
the time, his cheeks are sunken, his Adam's apple is prominent, and his eyes bulge from a gaunt
skull. As he grew into his teens and early adulthood, however, the Green Revolution took hold:
The fields were sown with hybrid seeds and enriched with chemical fertilizers, enabling the
country first to feed itself and later to sell its grain on the global markets. India is a generation
removed from those "ship-to-mouth" days; fewer than 2 percent of Indians now go without two
square meals a day, and far fewer still die of starvation.
And yet, in places like Auar, malnutrition persists. The vast majority of Indians, especially
villagers, are suspended in nutritional purgatorythey eat enough to fill their stomachs but not
enough to stay healthy. In the early 1970s the number of calories the average Indian ate began
rolling backward. In 1973 villagers ate just under 2,300 calories a day, according to the National
Sample Survey Office, a branch of the Ministry of Statistics and Programme Implementation. By
2010 that number had dropped to about 2,020, compared with the government floor of 2,400 a
day to qualify for food aid. The mismatch manifests itself in some of the world's worst health
score cards: Half of all children younger than three years old in India weigh too little for their
age; 8 in 10 are anemic.
During months of reporting on malnutrition in India, I spoke almost daily to my father, who had
long since escaped Auar and now runs a national scientific research center in Kolkata, where
I grew up. This June I returned by myself to the dusty, hot village of my father's childhood,
hoping to understand more. I drove about 800 kilometers (500 miles) southeast from New
Delhi to Auar, deep in the heart of Uttar Pradesh state. The local district of Pratapgarh is in
the poorest third of the country's 640 districts, according to the government. I'd been to the
village beforefirst as a child and again in 2000, when I was getting ready to leave for college
in Virginia. My father, who wanted me to remember my family's origins, stood out then from
cousins and old friends in his starched white shirt and tailored trousers, no longer comfortable
sitting cross-legged in the dust.
27 NOVEMBER 2012
28
Hmmm...
On that visit he pointed out the few reminders from his childhood. There was the elementary
school built, according to family legend, with the proceeds from a single gold coin saved by a
great-granduncle during years of toil in Burma in the 1920s; and there were the brick additions
made to the mud house that belonged to my grandfather. By then the house was falling apart
and emptied of family, who were now scattered in cities across India.
*** BLOOMBERG / LINK
Structurally, China is at a huge disadvantage as it accounts for 20% of the world's
population but only 7% of arable land. Compare that with Brazil, which has the reverse of those
ratios. What that does for a country like China is to incentivise the adoption of technification.
Let's look at their porcine market, which represents 50% of global production and consumption.
In China, to slaughter roughly 600 mn pigs per year, which is about six times the demand in the
US, they have a breeding herd of about 50 mn animals. In the US, the comparable number is
only about 6 mn, so there is a huge productivity lag.
Owing to its structural disadvantages, China is much more focused on increasing efficiency.
For that, it needs to accelerate technification. So, we're seeing a whole series of government
incentives at a national level, a provincial level and a local level, focusing on the need to move
toward integrated pork production because that's a key way to optimise total economics, both
in terms of pig production, slaughtering, processing and also actually taking the pork out into
the marketplace.
Source: FAO
The Chinese government is important as a customer to us because of its clarity of vision on food
security. It has seen the Arab Spring, and it is cognisant of the strong socio-political implications
of higher food prices. Pork prices could account for about 25% of the CPI, so it knows it can be a
major issue. It's because of all these pressures that China is more focused on responding to the
food challenge. It's a sort of a burning platform there.
27 NOVEMBER 2012
29
Hmmm...
... Take milk production in China and India. China is basically trying to leapfrog and avoid smallscale farming by adopting a US model. In the US, you tend to have very large herds. Today
about 30% of US milk production is from herds of 2,000 plus, and we expect that to reach 60%
within the next five years. Today in China, there are already several hundred dairy herds of
over 1,000. However, in India, there'll be less than 50. The average dairy herd size is closer to
five, so it's very fragmented. So the reality is that a place like China, because of government
policies, subsidies and a much more demanding, focused approach to becoming self-sufficient,
has a much greater ability to respond to a supply challenge rapidly.
The problem for China, and to a lesser extent India, however one defines it, is that it will need
increasingly more food, processed with ever greater efficiency for the current conservative
regime to be able to preserve the status quo, all else equal. And for a suddenly very food trade
deficit-vulnerable China, it means that the biggest winners may be Brazil, the US and Canada.
Oh, and Africa. The only question is how China will adapt in a new world in which it finds itself
in an odd position: a competitive trade disadvantage, especially its primary nemesis: the USA.
*** KARIM BITAR (VIA ZEROHEDGE) / LINK
States and banks have made a deal with the devil. Banks buy the sovereign bonds
needed to prop states up in the tacit understanding that the states will bail them out in a
pinch. But experts warn that this symbiotic arrangement might be putting the entire financial
system at risk.
When he presented his proposals for taming banks in late September, Peer Steinbrck was once
again spoiling for a fight. The Social Democratic candidate for the Chancellery in next year's
general election railed against the chase for short-term returns and excesses within the sector
and harshly criticized the "market-conforming democracy" in which politics and people's lives
had become mere playthings of the financial markets.
Steinbrck's speech lasted half an hour, or a minute for each of the pages of a document he had
prepared on the same issue. The paper lists a whole series of suggested regulations, most of
which seem entirely sensible. Most interesting, however, is what's missing from the paperand
what has thus far been absent from almost all of the proposals of other financial reformers: the
disastrous degree to which countries are now dependent on banks.
As European countries have dug themselves deeper and deeper into debt in recent years, there
has been a dramatic increase in this dependence. Governments are addicted to borrowed
moneyand banks meet this need by purchasing sovereign bonds. As an unspoken reward, the
banks expect nothing less than a guarantee of their own survival. Should a bank run the risk of
collapse, the state is expected to use taxpayer money to prop it up.
This government-bank bargain is somewhat of a Faustian pact: States need the help of credit
institutions if they want to take on more debt. But, in doing so, they place their fate in the
hands of the financial markets. Indeed, the European Central Bank (ECB) estimates that
European banks now hold some 1.6 trillion ($2.1 trillion) in sovereign bonds.
27 NOVEMBER 2012
30
Hmmm...
What's happening in Greece right now provides a dramatic example of how a state can make
itself dependent on banks. The country is de facto insolvent and can no longer secure any loans
on the financial markets. Nevertheless, it continues to be able to secure fresh funds by issuing
short-term bonds, primarily to Greek banks, as it has recently to make up for a lack of liquidity
as euro-zone member states continue to delay the release of the next tranche of emergency
aid. Greek banks, for their part, finance their ailing country not only because the bonds have
high yields, but also because they can deposit the bonds as collateral at Greece's central bank
in return for fresh cash infusions of their own.
Source: Der Spiegel
The books of many Spanish and Italian banks are also brimming with sovereign bonds issued
by their home countries. They have taken out huge amounts of cheap loans at the ECB and
reinvested most of the money in sovereign bonds. The business logic behind this strategy is
clear: While the ECB only charges 1% interest on loans, sovereign bonds have yields up to 6%.
Such returns make great sense for the banks in the short term but present a massive problem
in the medium term as they enter more and more risky assets into their ledgers. "It's important
for the institutes to diversify their assets," says Hans-Peter Burghof, professor of banking at the
University of Hohenheim, in southwestern Germany. Burghof also believes that their massive
holdings in sovereign bonds are putting the entire financial sector at risk. "If one wants a stable
banking system," he concludes, "one cannot abuse it as a vehicle for state financing."
*** DER SPIEGEL / LINK
27 NOVEMBER 2012
31
Hmmm...
Obama won reelection despite a high unemployment rate, declining average
incomes and skyrocketing government debt because voters blamed his predecessor for the
economic problems and didn't trust his opponent, Mitt Romney.
Even though the economy has improved somewhat in the past three years, the United States'
situation remains dire: the poverty rate is at a historic high of 15 percent; middle class income
is back to the 1995 level and wealth to 1983; the unemployed who find jobs end up with
significantly lower pay than at their prior employment; and the combined local and federal
government deficit at 9.5 percent of GDP and debt stock at 120 percent of GDP.
The Republican Party put up a strange candidate to run against Obama. Romney is a former
private equity person. So soon after a financial crisis caused by people like him, it seemed an
odd choice, even though he was not one of the crooks responsible. His background just didn't
pass the smell test. The contest was so close towards the end because Obama screwed up in
the first debate.
The role of the government was the issue during the contest. The Republicans campaigned on
shrinking the government, the Democrats on a caring government. The election result, however,
didn't give a clear verdict on the issue. On the surface, the election kept the status quo: the
Democrats kept the White House and Senate, the Republicans the House. The undercurrents
suggest a country much more divided than before.
Romney won the traditional Republican states that are poorer than the national average and
are net beneficiaries of federal tax dollars. Voting for a smaller government is hardly in their
best interest. Also, he won among the older population who are more dependent on Medicare
and Social Security. Voting for a smaller government is hardly in their interest, either.
This election was more about race than anything else. Romney won 70 percent of the white
vote. Obama won over 90 percent of the black vote and over 70 percent of the Hispanic and
Asian vote. The tilt of the Asian vote toward Obama demonstrates the importance of race in
this election. In 1992, Bill Clinton won only 31 percent of the Asian vote. Asian-Americans have
relatively high incomes and are least dependent on government help. They should be a natural
constituency of small-government Republicans. That they are not shows that the raison d'tre
of the Republican Party is not economics anymore.
The party is a coalition of business interests who want low taxes and fewer regulations and
evangelical Christian voters. The latter block delivered all states Romney won. It shows what's
important in the Republican Party. As demography tilts further toward the Obama coalition,
the Republican Party can compete by becoming more like the Democrats or shift to extremist
tactics. I'm afraid the latter is more likely.
27 NOVEMBER 2012
32
Hmmm...
The American democratic system is designed to slow, but not prevent change. In the 2012
general election, the Democrats actually won more votes than the Republicans in the elections
for the House. But the Republicans retain a comfortable majority there. The reason is that
the seats are contested one at a time within a district. The majority party at the state level
can redraw the district to make the election more favorable to it. In theory, 26 percent of
the voters could elect a majority in the congress or a president. Of course, it is statistically
difficult. But, the system gives incumbents an advantage to overcome a majority. It prevents
a temporary and irrational flare up in popular sentiment to change the political system and
damage the country. If the popular sentiment is lasting, the system eventually conforms to the
will of the people.
*** ANDY XIE / LINK
Catalonia has delivered a sweeping mandate to political parties pledging to hold a

referendum on independence in elections that place the northern Spanish region on a collision
course with Madrid.
In a result likely to heap uncertainty on the government of Mariano Rajoy, Spain's prime
minister, as he considers requesting a European bailout, political parties favouring an
independence vote won a majority in the Catalan regional parliament, according to the results.
However, the ruling Convergncia i Uni lost seats, while more radical pro-independence
parties gained ground, with Esquerra Republicana, a left-wing separatist party becoming the
second largest party in the Catalan parliament for the first time.
In a vote billed as "the most decisive elections in the history of Catalonia" by Artur Mas, the
region's president, pro-referendum parties won 87 of the Catalan parliament's 135 seats.
Of these, the CiU party slipped from 62 to 50 seats, while the ER surged from 10 to 21, and the
green ICV rose from 10 to 13. The CUP, a new independence party, won three seats.
Spain's ruling Popular Party increased its number of seats by one to 19, while the Catalan
socialist party fell sharply from 28 to 20. Ciutadans, an anti-separatist party, rose from three to
nine seats.
Following weeks of intense debate about Catalonia's future relationship with Spain, turnout was
69.5 per cent, the highest for a Catalan regional election in nearly 30 years.
The vote comes amid pressure from various regions around Europe for more independence,
including proposals for a referendum on the issue in Scotland in 2014.
Spain's central government has said any move to push ahead with a referendum on
independence for Catalonia, which has an economy the size of Portugal's and makes up about a
fifth of Spanish output, would be illegal and against the Spanish constitution.
27 NOVEMBER 2012
33
Hmmm...
"What is at stake is much more than election results; what is at stake is our future, our ability
to live harmoniously together," said Alicia Snchez-Camacho, leader of Mr Rajoy's Popular Party
in Catalonia ahead of the vote.
The Catalan president, whose demands that Catalonia is granted greater control over its tax
revenues were rejected by Mr Rajoy earlier this year, has maintained that he will ignore any
attempts by Madrid to block independence.
Catalonia has built up a debt pile of 42bn, the largest of all of Spain's 17 regions, and is
currently locked out of international capital markets. Earlier this year the region was forced to
request an emergency 5bn credit line from Spain's central government to avoid defaulting on
payments.
*** FT / LINK
Critics have labeled it a Reichstag fire moment, a reference to when Hitler
consolidated power in Germany. Admirers describe it as a brave and necessary, albeit

temporary, move to prevent a drift towards chaos. In either case Muhammad Morsi, Egypt's
recently elected president, has pitched his country into a crisis as dire as any since the uprising
in January 2011 that ended six decades of military-backed dictatorship. Seeking to break a
deadlock with secular opponents, he issued a shock decree on November 22nd granting himself
sweeping new powers. The move has left Egypt starkly and dangerously polarised. Whether Mr
Morsi succeeds, and whether this turns out well or disastrously for Egypt, remains to be seen.
Mr Morsi has had a rough ride since his wafer-thin election victory last June. The president's
Freedom and Justice Party, a snazzier-clothed clone of the dowdy Muslim Brotherhood to
which he owes his real allegiance, had pumped his candidacy with promises of sweeping
improvements to government services during his first hundred days. This was to be followed
by the launch of a so-called Renaissance Project, touted as a grand design formulated by
Brotherhood experts to yank Egypt into prosperity.
Yet it took the gruff, folksy Mr Morsi six weeks just to name a cabinet, which has since been
widely dismissed as lame, bland and ineffective. Not only has there been no discernible uplift
to living standards. Mr Morsi's brief administration has been plagued by reminders of creaking
government such as power cuts, worse-than-ever traffic jams, accumulating piles of rubbish,
and public sector strikes including one by doctors protesting appalling hospital conditions.
A hideous accident at a level crossing last week, when a speeding train ploughed into a bus
illegally overstuffed with more than 60 schoolboys on their way to a weekend Koran-reading
lesson, proved a sickening reminder of just what a shoddy state Egypt is in.
Mr Morsi enjoyed a moment of glory in August when he abruptly dismissed the powerful
generals, appointed under the fallen regime of Hosni Mubarak, who had commanded the
unsteady transition leading to his own election.
27 NOVEMBER 2012
34
Hmmm...
The purge seemed to augur a real and long-delayed switch to full civilian rule. Yet it soon
transpired that the exiting generals had left by agreement, following a rumoured commitment
by Mr Morsi not to trespass too deeply into such "sovereign" matters as internal security,
intelligence, defence or foreign policy. Egypt's president seems to have stuck to his word,
avoiding criticism of the police, who remain deeply tainted by a culture of torture, corruption
and impunity, while assiduously attending every possible military pageant or parade.
But Mr Morsi has clashed repeatedly with another part of Egypt's "deep state"the judiciary and
public prosecution service. It was Egypt's high courts, still packed with Mubarak-era appointees,
that infuriated the Brotherhood in June by ruling to disband the post-revolutionary parliament,
three quarters of whose seats had been won by Islamists only six months earlier. Having last
spring dissolved one constituent assembly, a body chosen by the parliament and tasked with
drafting a new constitution, but which secularists said the Brothers had packed with Islamists,
the courts have again been threatening to dissolve a second, also heavily Islamist assembly. This
was meant to complete its draft constitution in December, but the resignation en masse of the
third of its members who happen not to be Muslim Brothers or fellow-travellers has called its
legitimacy into question.
In October Mr Morsi faced humiliation when the country's judges closed ranks to block him
from firing Egypt's public prosecutor. Yet another Mubarak appointee, the powerful attorneygeneral had dismayed many Egyptians by mysteriously failing to secure any serious convictions
for the killings, by Mr Mubarak's police, of more than 800 people during Egypt's 2011 revolution,
and of dozens more in post-revolutionary violence. Still, antipathy to the Brotherhood runs so
deep that even hardened revolutionaries leapt to his defence against the president. Forced to
reinstate the prosecutor, Mr Morsi looked weak and ill-advised.
In what appeared to be another poorly-judged move, Mr Morsi passed up an opportunity last
week to soothe relations with Egypt's large Coptic Christian minority. Battered for a decade
by nasty sectarian attacks, and understandably nervous at seeing Islamists increasingly
empowered, Egyptian Christians were puzzled and disappointed by the president's failure to
accept an invitation to attend the crowning of the new Coptic pope, Tawadros II. His apparent
disdain for minority feelings added to a growing sense that despite posing as an impartial
leader, Mr Morsi instinctively embodies the Brotherhood's attitude that it is they, and their
version of Islam, that represents the "true" Egypt..
*** ECONOMIST / LINK
27 NOVEMBER 2012
35
Hmmm...
Charts That Make You Go Hmmm
Source: UK Guardian
The Spanish region
of Catalonia is going to be somewhere readers will want to

familiarize themselves with in coming weeks as important elections take placenot only its
whereabouts but also the history of its fractious relationship with the rest of Spain. This corner
of the country with its desire for independence could well provide the spark that lights an
already smouldering tinder box. Click HERE to view the full interactive graphic.
Meanwhile, CLSA's Russell Napier
this week published what he calls "The

Most Important Chart in the World," which shows the year-on-year growth in China's foreign
exchange reserves:
"It is the most important chart in the world. The growth in Chinese reserves has
determined all the key developments in financial markets in the last two decades. It
printed lots of currency and artificially depressed the US yield curve. It has been the
cornerstone of global growth, and now it's over."
*** VIA ZEROHEDGE / LINK
27 NOVEMBER 2012
36
Hmmm...
Source: CLSA/Zerohedge
The big news today is Freddie Mac's Weekly Primary Mortgage Market Survey. The 30year fixed has set another all-time low, now at 3.31 percent.
Here is a snapshot of selected yields and the 30-year fixed mortgage starting shortly before the
Fed announced Operation Twist.
Source: Doug Short
27 NOVEMBER 2012
37
Hmmm...
A box of ten Twinkies typically sells for around $5 in American supermarketsbut that was
before its maker, Hostess Brands, began closing its bakeries and liquidating its business (as an
article in this week's issue explains). Yet consumers in search of revolting cream-filled sponge
cakes can still buy them from eBay for anything ranging from 40 cents to $100,000 apiece.
The mean price on offer is around $2,000 (though we don't know how many have actually been
sold or at what price), while the modeie, the most common price on offeris $3 (see chart).
Although some sellers are using the limited supply as an opportunity to raise money for charity,
the majority are hoping to profit from the iconic American brands collapse. For those who
can not live without the golden cakes, eBay also lists Twinkies "bake sets" for as little as $30;
together with the recipe for $1.49, consumers can simply bake their own. With such outpouring
of affection, the "Twinkie" brand (along with Hostess' other food-like snacks) might yet find a
buyer.
*** ECONOMIST / LINK
Source: Economist
With last Sunday's elections approaching, the desire for an independent Catalonia had
been soaring as Spain's problems deteriorate seemingly daily. As a microcosm for what to expect
when things get really tough in Europe, this was a highly illustrative situation:
(Soberlook): This desire for independence is a fairly new phenomenon in Catalonia.
Being the wealthier region, Catalonia's citizens think that they are being asked to bear
disproportionate burden of the nation's high taxes.
27 NOVEMBER 2012
38
Hmmm...
Yes, folks, apply that same logic to Europe, only substitute Germany as the unhappy "wealthy"
region, and you see why the entire project is doomed. If Spaniards don't want to pick up the
tab for their own countrymen, it's hard to understand why Germans will be happy to do likewise
for the citizens of another country.
Source: Credit Suisse
27 NOVEMBER 2012
39
Hmmm...
Words That Make You Go Hmmm...

Hinde Capital's Ben
Davies is
always worth listening to, and this week is
no exception as he chats with Eric King about
Japan's problems and the likely course of
action to be taken in the land of the Rising
Sun as well as the similarities amongst
the other central banks and the wider
implications their actions are likely to have.
CLICK TO LISTEN
Why are TV
anchors so fixated on the

price of gold? Rob McEwen talks to Bloomberg
about the barriers presenting themselves to
miners across the globe and, as is the norm
on mainstream shows, is badgered for a price
forecast.
Ignore the price and focus on the market
dynamics. Gold is a currency that is getting
harder to produce and should be evaluated as
such...
CLICK TO WATCH
Jim Rickards' book Currency Wars
is a terrific read and here, in this fascinating

video, he lays out a simulation of his fears as
to what an extreme currency war scenario
could look like.
It's interesting, frightening and polarizing.
Many will discount it as too far-fetched.
Me? Well, I always used to think that the US
10-year trading at 1% was impossible...
CLICK TO WATCH
27 NOVEMBER 2012
40
Hmmm...
And finally...
CLICK HERE TO VIEW PICTURES
A lone apartment
building stands in the middle of a newly built Chinese road after an

elderly couple refused to relocate.
Luo Baogen and his wife insist on living in the half-demolished building in the city of Wenling,
in Zhejiang province, China, because they believe that the relocation compensation offered by
the government is not enough.
Now the only building left standing, the five-storey block is a strange sight as cars drive around
it while the couple remain living inside.
Who said there was no room to take on the State in China?
Hmmm...
27 NOVEMBER 2012
41
Hmmm...
Grant Williams
Grant Williams is a portfolio and strategy advisor to
Vulpes Investment Management in Singaporea hedge
fund running over $250 million of largely partners'
capital across multiple strategies.
The high level of capital committed by the Vulpes
partners ensures the strongest possible alignment
between us and our investors.
In Q4 2012, we will be launching the Vulpes Agricultural
Land Investment Company (VALIC), a globally
diversified agricultural land vehicle that will provide
truly diversified exposure to the agricultural sector
through a global portfolio of physical farmland assets.
Grant has 26 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
California Investment Conference 2012 Presentation: "Simplicity": Part I : Part II
2012 Fall 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 fundsthough I will not be making any
specific recommendations in this publication.
27 NOVEMBER 2012
42
Hmmm...
Use of this content, the Mauldin Economics website, and related sites and applications is provided under the Mauldin Economics Terms
& Conditions of Use.
Unauthorized Disclosure Prohibited

The information provided in this publication is private, privileged, and confidential information, licensed for your sole individual use
as a subscriber. Mauldin Economics reserves all rights to the content of this publication and related materials. Forwarding, copying,
disseminating, or distributing this report in whole or in part, including substantial quotation of any portion the publication or any release
of specific investment recommendations, is strictly prohibited.
Participation in such activity is grounds for immediate termination of all subscriptions of registered subscribers deemed to be involved
at Mauldin Economics sole discretion, may violate the copyright laws of the United States, and may subject the violator to legal
prosecution. Mauldin Economics reserves the right to monitor the use of this publication without disclosure by any electronic means it
deems necessary and may change those means without notice at any time. If you have received this publication and are not the intended
subscriber, please contact service@MauldinEconomics.com.
Disclaimers
The Mauldin Economics web site, Yield Shark, Bulls 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, LLCs proprietary rights, or any other reason determined in the sole discretion of Mauldin
Economics, LLC.
Affiliate Notice
Mauldin Economics has affiliate agreements in place that may include fee sharing. If you have a website or newsletter and would like to be
considered for inclusion in the Mauldin Economics affiliate program, please email us at affiliate@MauldinEconomics.com Likewise, from
time to time Mauldin Economics may engage in affiliate programs offered by other companies, though corporate policy firmly dictates
that such agreements will have no influence on any product or service recommendations, nor alter the pricing that would otherwise be
available in absence of such an agreement. As always, it is important that you do your own due diligence before transacting any business
with any firm, for any product or service.
Copyright 2012 by Mauldin Economics, LLC.
27 NOVEMBER 2012
43

HMMM PDF

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

HMMM PDF

Uploaded by

Copyright:

Available Formats

Hmmm...

THINGS THAT MAKE YOU GO

A walk around the fringes of finance

To learn more about Grant's new investment newsletter,

CHARTS THAT MAKE YOU GO HMMM... ..................................................36

Things That Make You Go Hmmm...

One would have

to hazard a guess that there are substantially less than 10 million

US Treasury Yield Curves vs Public Debt Outstanding

US Federal Reserve Holdings

(November 2002- November 2012)

Source: Global Financial Data

Official Central Bank Gold Holdings

(Millions of Ounces) (IMF)

Source: IMF, Bloomberg

Exchange Rate per US$

South Korean Won

GNP (US$1 billion)

Government Debt-to-GDP Levels

Until next time...

More Purchasing Manufacturers Index (PMI ) data overnight. Comments from

The eurozone economy continued to deteriorate at an alarming pace in November, and

Argentina 5-Year Sovereign CDS

November 2011-November 2012

Feb 12 Mar12 Apr 12 May 12 Jun 12

Aug 12 Sep 12 Oct 12

Structurally, China is at a huge disadvantage as it accounts for 20% of the world's

Source: Der Spiegel

Obama won reelection despite a high unemployment rate, declining average

Catalonia has delivered a sweeping mandate to political parties pledging to hold a

Critics have labeled it a Reichstag fire moment, a reference to when Hitler

consolidated power in Germany. Admirers describe it as a brave and necessary, albeit

Charts That Make You Go Hmmm

The Spanish region

of Catalonia is going to be somewhere readers will want to

Meanwhile, CLSA's Russell Napier

this week published what he calls "The

Source: Doug Short

Source: Credit Suisse

Words That Make You Go Hmmm...

anchors so fixated on the

Jim Rickards' book Currency Wars

is a terrific read and here, in this fascinating

CLICK HERE TO VIEW PICTURES

building stands in the middle of a newly built Chinese road after an

Unauthorized Disclosure Prohibited

You might also like