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Hmmm.....
A walk around the fringes of finance

THINGS THAT MAKE YOU GO

"Living on a t The expecta ime we have to borr o t But I dont w ions getting higher a w nd highe anna w Stop the wo And find my rld I want to get off s Stop the wo elf a better ride r Payed in fu ld I want to get off l Stop the wo l and now goodbye And find my rld I want to get off self a bett er GO
R K Y PA R K , STO P T H E W O R L D (I WA N N A G E T O F F)

ait no more

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y en onl h days w old e he san ought g t I miss eople b p razoyum c e C ll

Da v

"I am an ob s draft and tessive rewriter, doing usually fivhen another and anot one to say, but e. In a way, I have not her, h a great dea G O R E V ID l to add ing AL
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The 174-room Algonquin Ho-

tel is situated at 59 West 44th street in Manhattan. It was opened in 1902 and is designated as a New York City Historic Landmark. Originally conceived as an apartment hotel in the grand New York style of the era, the owner, Frank Case, failed to sell enough long leases and decided to turn it into a regular hotel which he intended to name the Puritan. thankfully, after discovering the first inhabitants of West 44th street were in actual fact the Algonquin tribe (admittedly this was before street signs), Case decided to rename the hotel the Algonquin. History would cast this decision in a very favourable light. there are many idiosyncrasies that separate the Algonquin from the rest of the hotel world, amongst which is the tradition that has been in place since the 1930s whereby a hotel cat has been given free reign throughout the property; a practice that originated the day Case took in a stray: (Wikipedia): Hotel lore says actor John Barrymore suggested the cat needed a theatrical name, so he was called Hamlet. Decades later, whenever the hotel has a male he carries on the name; females are named Matilda. The current Algonquin cat, a Matilda, is a Ragdoll that was named 2006 cat of the year at the Westchester (New York) Cat Show. Visitors can spot Matilda on her personal chaise longue in the lobby; she can also be found in her favorite places: behind the computer on the front desk, or lounging on a baggage cart. The doormen feed her and the general managers executive assistant answers Matildas e-mail. During 2011, Matilda was temporarily confined to upper floor or to the limits of a leash tethered to the check-in

desk, due to a directive from the city Department of Health. As of late 2011, Matilda has been confined to the non-food areas of the lobby by an electronic pet fence. But more than a decade before the original Hamlet took residence at the Algonquin, another tradition was begun when Dorothy Parker, Robert Benchley and Robert E. sherwoodVanity Fair writers allbegan meeting for lunch daily in the Rose Room. this gathering quickly expanded to include many literary figures, actors and journalists of the day (this was a time when a daily luncheon was an integral part of the routine somewhat akin to the City of London until the late 1990s). Amongst the glitterati that attended these gatherings regularly were george s. Kaufman, F. scott Fitzgerald and Ernest Hemingway. It was this august body that founded the New Yorker Magazine (a publication which is, incidentally, given free of charge to all hotel guests to this day). Legend tells of one such lunch at which Hemingway was present along with several writers of the day during which a discussion on the skill of concise story-writing evolved to the point that a wager was made. Hemingway bet $10 of his own against each $10 stake of his companions that he could write a six-word-long short story. six words that would contain a beginning, a middle and an end. the wager was duly accepted by all and one of the more junior members dispatched to fetch drinks for the bon vivants gathered at the Round table. Hemingway took a napkin and scribbled six words upon it which he then presented to the group. It read simply: For sale: Baby shoes. Never worn. Wager won. Brilliantly. I was reminded of this tale a few days ago as I listened to the words of Mario Draghi and the immense amount of speculation surrounding his incendiary words last week at a nondescript event in London. Draghi was making unprepared remarkswhich is always dangerous in

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a position such as hisand yet markets, bereft of optimism, ripped the words from his lips and clutched them feverishly to their collective bosom in the hope that this, finally, was the watershed Europe had been waiting for. this week saw statements released by both the Federal Reserve Open Market Committee and the ECB and, as is the norm when these pronouncements are made, every word is scrutinized for the tiniest clue as to future action. One cant help but wish for Hemingway-like brevity from these clowns, but such a flight of fancy is akin to great Britains chances of topping the medals table at the London 2012 Olympics; a beautiful dream, but one that will never, ever, EVER come true. Before we get to the nitty gritty (such as it was) of this weeks events, however, a little expansion on my thoughts in the last things that Make You go Hmmm..... about Draghis comments in London late last week.

come? probably there was something in the atmosphere, in the air, that made the bumblebee fly. Now something must have changed in the air, and we know what after the financial crisis. The bumblebee would have to graduate to a real bee. And thats what its doing. Fair enough, Mario. Personally, I would have opted perhaps for a duck-billed platypus or even Frankensteins monster, but, at the risk of mixing my metaphors, well run with the bee. the next part of Draghis speech was where the fun began: (ECB): The first message I would like to send, is that the euro is much, much stronger, the euro area is much, much stronger than people acknowledge today. Not only if you look over the last 10 years but also if you look at it now, you see that as far as inflation, employment, productivity, the euro area has done either like or better than US or Japan. Classic Central Bank jawboning there; Ben would be proud. Mario was telling the world something it can plainly see is absolutely not true in such certain terms as to make those paying attention think for a brief second that maybe, just maybe, they are mistaken. Mario, the euro is NOt strong. Really. It isnt.

The innocuously-titled Global

Investment Conference in London on June 26th hardly seemed likely to generate headlines around the globe until ECB governor, Mario Draghi stepped to the podium to give a speech for which there was no pre-prepared transcriptindicating decisively that these remarks were very much off-thecuff and definitely NOt approved ECB policy. Draghi began by comparing the Euro, rather curiously, to a bumble bee: (ECB): The euro is like a bumblebee. This is a mystery of nature because it shouldnt fly but instead it does. So the euro was a bumblebee that flew very well for several years. And now and I think people ask how

Euro vs USD

SOURCE: BLOOMBERG

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As for the Eurozone, that may well be stronger 10.0% in June 2011. The EU271 unemploythan people acknowledge (though recent data ment rate was 10.4% in June 2012, also stawould suggest that perhaps it isnt as strong as ble compared with May. It was 9.5% in June YOu acknowledge), but 2011. the same problem re- ... We and the rest of Europe Eurostat estimates that mains: however strong 25.112 million men and are approaching the end of the the Eurozone is right now, women in the EU27, of it is forever basically one tunnel - Mario Monti whom 17.801 million were poor decision by either in the euro area, were units leaders, the ECB or a combination of the two employed in June 2012. Compared with May away from total implosion and, I am afraid to 2012, the number of persons unemployed inhave to tell you, Mario, you guys have hardly creased by 127 000 in the EU27 and by 123 given us cause to think that perhaps youll all sail 000 in the euro area. Compared with June through this without making one. 2011, unemployment rose by 2.165 million But back to the speech. in the EU27 and by 2.024 million in the euro area... Leaving aside inflation which, as we all know is amongst the most easily-manipulated of governCompared with a year ment statistics, its hard to make a case for the ago, the unemEurozones employment picture being anything ployment rate fell other than dire, quite frankly as the chart bein seven Member low demonstrates. the chart shows unemployStates, increased ment rates in the Eurozone, greece, spain, Italy in nineteen and reand France since 1991. Yes, Picking greece and mained stable in spain was easy, which is why I included France Sweden. and Italy, but the key line is the purple line; total the New York times Eurozone unemployment. Helpfully, five days afweighed in: ter Draghis bullish assessment of the unemployment situation in Europe, Eurostat were kind (NY Times): Unemployment in enough to publish the latest numbers: the countries that use the euro remained at a record high in June, official fig(Eurostat): The euro area (EA17) seasonallyures showed Tuesday, underlining the deadjusted unemployment rate was 11.2% in bilitating effect of Europes continuing debt June 2012, stable compared with May. It was crisis on its economy. With the European economy paying the price for an acute lack of business confidence, hopes are high that the president of the European Central Bank, Mario Draghi, will follow through on his pledge, made in London last week, to do whatever it takes to preserve the euro. We and the rest of Europe are approaching the end of the tunnel, Mr. Monti said.

SOURCE: BLOOMBERG

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Draghi then moved swiftly onwards in his comparison of the Eurozone to those two other deadbeats, Japan and the usA to talk about debt and deficits: (ECB): Then the comparison becomes even more dramatic when we come to deficit and debt. The euro area has much lower deficit, much lower debt than these two countries. And also not less important, it has a balanced current account, no deficits, but it also has a degree of social cohesion that you wouldnt find either in the other two countries. Ok Mario, Ill score you a point for a favourable comparison against Japanthe most debt-ridden nation in historyand the usAowners of the worlds reserve currency and inveterate money-printers, but did you really just talk about the degree of social cohesion that is present in Europe that you wont find in Japan?

office workers to replace their stiff suits and ties with loose shirts and more casual outfits. (Associated Press): Spanish police fired rubber bullets and charged protestors in central Madrid early Friday at the end of a huge demonstration against economic crisis measures. The protest was one of over 80 demonstrations called by unions across the county against civil servant pay cuts and tax hikes which drew tens of thousands of people, including police and firefighters wearing their helmets. Hands up, this is a robbery! protesters bellowed as they marched through the streets of the Spanish capital. At the end of the peaceful protest dozens of protestors lingered at the Puerta del Sol, a large square in the heart of Madrid where the demonstration wound up late on Thursday. Some threw bottles at police and set up barriers made up of plastic bins and cardboard boxes in the middle of side streets leading to the square and set them on fire, sending plumes of thick smoke into the air.

(UK Daily Telegraph, November 2011): The [Japanese] government has launched a nationwide Warm Biz campaign, calling on ... the second message I would the public to resist the like to send today, is that progtemptation to turn the ress has been extraordinary in heating up as temperthe last six months atures fall. The indications are that this winter may be a particularly cold one in Japan, with the seasons first snowfall in the northern prefecture of Hokkaido recorded on October 2, some 20 days earlier than usual and the earliest since 1898. The Environment Ministry is encouraging people to limit their use of air conditioners and heaters by setting room temperatures at offices and in homes no higher than 20 degrees Centigrade (68F). Officials are also suggesting that people wear more layers of clothing and eat food that will be both filling and warming, such as meals containing root vegetables. The campaign comes on the heels of the governments Cool Biz effort, which was instituted in the summer of 2005 and encouraged

Riot police then charged some of the protestors, striking them with batons when they tried to reach the heavily-guarded parliament building. social cohesion, you say? OK. Moving on... Draghi then explained how much things had improved during the preceding six months and how much better the entire world is today. No, he really did, look: (ECB): ...the second message I would like to send today, is that progress has been extraordinary in the last six months. If you compare today the euro area member states with six months ago, you will see that the world is entirely different today, and for the better.

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I...how...what are...that must be some good stuff youre...arent they... oh whats the point? On we go. the next few minutes went something like this: Blah blah blah...progress...blah, blah, blah... structural reform...blah, blah, blah...complex process...blah, blah, blah...the last summit was a real success. then Mario dropped the hammer on the markets with the words that caused the violent upward moves in the Euro and peripheral debt as well as equity markets in the days that followed. this is what he said, verbatim: (ECB): When people talk about the fragility of the euro and the increasing fragility of the euro, and perhaps the crisis of the euro, very often non-euro area member states or leaders, underestimate the amount of political capital that is being invested in the euro. And so we view this, and I do not think we are unbiased observers, we think the euro is irreversible. And its not an empty word now, because I preceded saying exactly what actions have been made, are being made to make it irreversible. But there is another message I want to tell you. Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough. Believe me, it will be enough Boom! By making this speech, (you can read the full, official transcript HERE if you are so inclined) Draghi backed himself into the tightest of corners ahead of the ECB meeting which would follow a week later so lets think for a second about the implications of what he said. What is enough? Well, in order to provide a long-term solution to the problems facing the Eurozone, enough

is basically trillions of freshly-printed Euro notes and a fiscal union to provide common backing for individual debts. thats it. Nothing else will do at this stage. so Draghi, essentially, promised the world the debt union European leaders have thus far managed to avoid putting in place due largely to the objections of Frau Merkel and the Bundesbank (represented latterly by Jens Weidmann after such proposals led to the resignation of its former head, Axel Weber).

It struck me

as odd at the time that, if such an agreement HAD been put in place, it would be announced to the world at a small investment conference in London and not at a triumphant press conference accompanied by a million flashbulbs and the tawdry sight of Hollande and Monti climbing over each other to be given the lions share of the credit for saving Europe. Was Frau Merkel really likely to allow Draghi to tell the german electorate that theyd better get their checkbooks out? Hardly.

CLICK TO ENLARGE

SOURCE: THE BASIS POINT

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Well get to last thursdays eagerly-antic-

ipated ECB announcement from Draghi shortly, but before that, the FOMC minutes were released on Wednesday and, once again, the night before their dissemination, hopes were high after Fed mouthpiece-in-chief, Jon Hilsenrath coincidentally popped-up in the Wall street Journal: (WSJ): The Fed could unveil a new program for buying mortgage or government securities to bring down long-term interest rates, or take other actions to spur growth, or simply promise to do more later if necessary. Officials might wait until September, when they will formally update their economic forecasts, before deciding anything significant. When reached for a comment on Hilsenraths article and the FOMCs strategy, the cast of the Broadway musical, West side story had this to say:
Could be! Who knows? Theres something due any day; I will know right away, Soon as it shows. It may come cannonballing down through the sky, Gleam in its eye, Bright as a rose! Who knows? Its only just out of reach, Down the block, on a beach, Under a tree. I got a feeling theres a miracle due, Gonna come true, Coming to me! Could it be? Yes, it could. Somethings coming, something good, If I can wait! Somethings coming, I dont know what it is, But it is Gonna be great!

Im no Hemingway (as if you needed telling) and six words is a stretch, so hopefully youll allow me eight when attempting to shorten the FOMC minutes: Help needed urgently. One bullet left. Mustnt waste Which brings us nicely on to thursday, and the most eagerly-awaited ECB press conference since...well, the last one.

Hopes were high

going in that this timesurely this timeDraghi was going to back up his promises from the previous week and do enough. (Economist): At the press conference following the councils meeting attention then turned to what Mr Draghi had to say. Once again there was some disappointment stockmarkets fellwith the fact that he did not follow through his remarks in London with concrete action. Instead he sketched out a plan under which the bank would play its part along with the euro areas rescue funds together with undertakings by governmentsmost likely Spain and Italyto carry out reforms and get their public finances back into shape. Under the plan, beleaguered governments in southern Europe would request help from either the European Financial Stability Facility (EFSF), the temporary rescue fund, or the European Stability Mechanism (ESM), the permanent but not yet operational fund. That help would be granted only if the governments complied with conditions. It would take the form of the fund buying their debt when they borrow (primary issuance), something the ECB cannot do because monetary financing of deficits is banned. The ECB, for its part, would buy government bonds in the secondary market, restarting its Securities Markets Programme (SMP) which has been inactive since early March after making purchases worth over 200 billion ($245 billion) from May 2010 when it was established.

the bottom line? Minor language changes (see side-by-side comparison, previous page) a whole lot of poring over every nuanced detail but, ultimately, no action. Just hints of further action. Maybe.

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Mr Draghi also indicated that he was ready to deal with one of the main worries markets have had about the ECB buying bonds again: that it could backfire because bondholders would fear subordination. This fear arose after the central bank insisted that it should not participate in the swingeing restructuring of Greek government debt in March. He said today that if the ECB were to carry out market purchases under the plan the concerns of private investors about seniority will be addressed. the lack of concrete action by Draghi seemed to catch markets by surprise and, as the chart below demonstrates, spanish 10-year bonds instantaneously gave back most of the gains they had made in the aftermath of his believe me speech, but whether through masterful manipulation of the press or the use of the Jedi Mind trick, the analysis that followed over the next 24 hours hinted that Draghi may just have the kernel of a plan that may just be workable and may just save the euro. Possibly. Ambrose Evans-Pritchard of the uK Daily telegraph was amongst the first to accentuate the positive in a blog post titled Draghi Delivers: (UK Daily Telegraph): Wow, the ECB really is preparing to hit the nuclear button. Mario Draghi has activated the ECBs monetary policy, risk, and market committees to draw up drastic plans.

This will include open-market operations ie bond purchases that may be unlimited and may be unsterilized (ie QE net stimulus). The missile is being loaded. The launch trigger is being cocked (if you cock such things). Markets have tanked because they dont get instant gratification, but I rather suspect that they have missed the point. All this can only happen when the EFSF/ESM bail-out funds are activated by governments, because only they have the power to force supplicant states to sign a Memorandum and give up fiscal sovereignty. That is the famous conditionality demanded by the Teutonic bloc and on which the whole package hinges. Over to you, Mariano Rajoy. Now you must fall on your political sword, sacrifice your career for the EMU cause, and request a formal rescue for Spain to set this whole process in motion. Suerte, Caballero. the reason for Ambroses somewhat uncharacteristic burst of enthusiasm? this piece of Draghis statement: (ECB): As implementation takes time and financial markets often only adjust once success becomes clearly visible, governments must stand ready to activate the EFSF/ ESM in the bond market when exceptional financial market circumstances and risks to financial stability exist with strict and effective conditionality in line with the established guidelines. The adherence of governments to their commitments and the fulfilment by the EFSF/ESM of their role are necessary conditions [for some action on the ECB side]. The Governing Council, within its mandate to maintain price stability over the medium term and in observance of its independence in determining monetary policy, may undertake outright

Believe Me

I Got Nuthin For Ya

Spain 10-Yr Yield

SOURCE: BLOOMBERG

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open market operations of a size adequate to reach its objective. In this context, the concerns of private investors about seniority will be addressed. Furthermore, the Governing Council may consider undertaking further non-standard monetary policy measures according to what is required to repair monetary policy transmission. Over the coming weeks, we will design the appropriate modalities for such policy measures. When asked to comment on Draghis statement, the cast of the Broadway musical Chicago had this to say:
Give em the old razzle dazzle Razzle Dazzle em Give em an act with lots of flash in it And the reaction will be passionate Give em the old hocus pocus Bead and feather em How can they see with sequins in their eyes? Give em the old flim flam flummox Fool and fracture em Give em the old double whammy Daze and dizzy em Back since the days of old Methuselah Everyone loves the big bambooz-a-ler Give em the old three ring circus Stun and stagger em When youre in trouble, go into your dance Give em the old Razzle Dazzle Razzle dazzle em Show em the first rate sorceror you are Long as you keep em way off balance How can they spot youve got no talent Razzle Dazzle em And theyll make you a star!

fatal time and presume they will be given all the time they need to put the fix in. Can they do it, finally, after all this time? the Economist, looking at what might go wrong, remains skeptical: (Economist): But will the plan really work? There are a number of potential pitfalls. First, the German constitutional court is currently considering whether the ESM is consistent with the German constitution. That judgment will not be passed until September 12th, so even if it is favourable there could be a delay until then, since the EFSF has already committed much of its firepower (including most recently funds to support Spains banking bail-out). Second, a small creditor county in northern Europe may throw a spanner in the works. Finlands government in particular is wary of using the rescue funds to purchase bonds and is now calling for real guarantees such as public property if they are used in the primary market. That could be a bitter pill for a government in southern Europe to swallow: not the least of the difficulties in making the plan fly is the reluctance of proud Spain to request help beyond the aid it has already secured for its banks. And third, Mr Draghi has to reckon with opposition from the German Bundesbank, which forms part of the Eurosystem along with the other national central banks and the ECB. The Buba has from the outset been neuralgic about bond-buying, which it regards as blurring the lines of fiscal and monetary policy. Jens Weidmann, its president, may have only one vote on the 23-strong ECB governing council, but in remarks pointedly published on the Bundesbanks website this week, he said that we are the largest and most important central bank in the Eurosystem and we have a greater say than many other central banks in the Eurosystem. Backing up words with more words is always a problem, particularly when there are so

Now I have a huge amount of respect for Ambrose and I value his opinions highly, but I have to say this smacks of yet more promises designed to buy time. the stakes are sO high now that, based on experience to date, there is a very real chance that the Eurocrats misjudge this situation one last,

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many moving parts, as in the euro area. In an ominous sign, Spanish 10-year bond yields climbed back above 7%. Now they know what Mario really meant, the markets may remain unconvinced until his plan actually takes off. It boils down to this: Draghi has potentially opened the door to providing bailout funds to spain and, potentially Italy, on the proviso that they formerly request a bailout and submit themselves to being put in a program. this is what the excitement is all about. However, youll have to colour me skeptical because, as the last several years have proven beyond all reasonable doubt, getting anything agreed and then implemented in Europe is a task that sisyphus himself would likely call somewhat tricky. In fact, the cast of the Broadway musical Man of La Mancha described it thus this week during a break from rehearsals:
To dream ... the impossible dream ... To fight ... the unbeatable foe ... To bear ... with unbearable sorrow ... To run ... where the brave dare not go ... To right ... the unrightable wrong ... To love ... pure and chaste from afar ... To try ... when your arms are too weary ... To reach ... the unreachable star ... This is my quest, to follow that star ... No matter how hopeless, no matter how far ... To fight for the right, without question or pause ... To be willing to march into Hell, for a Heavenly cause ... And I know if Ill only be true, to this glorious quest, That my heart will lie will lie peaceful and calm, when Im laid to my rest ... And the world will be better for this: That one man, scorned and covered with scars, Still strove, with his last ounce of courage, To reach ... the unreachable star ...

Remember late-2010? When

spain wasnt a problem, but merely a potential problem? I do: (FT, November 17, 2010): For some of the worlds biggest hedge funds, typically regarded as the savviest traders in the market, there is now one big question facing the eurozone: what is going to happen to Spain? While Europes politicians are grappling with the crisis unravelling in Ireland, hedge fund managers are already turning their attention to the issue of how and if a peripheral crisis in Ireland could leap via Portugal and Spain to become a systemic crisis for the eurozone as a whole. The Irish problem will be contained, says Guillaume Fonkenell, chief investment officer at Pharo, one of Europes biggest and most successful macro funds, which specialises in trading on macroeconomic events and trends. For us contagion is the issue . . . If the market loses confidence in Spain, then all bets are off. Spain is too big to bail.... Back then, the general opinion was that if the contagion spread to spain the game was over because there wasnt enough money with which to bail out an economy the size of the Kingdom of spain. Im not sure exactly what happened maybe I wasnt paying attentionbut suddenly, almost two years on and in an environment where even the rich nations of Europe are seeing an undeniable slide towards recession, there is no talk about spain being too-big-to-bail anymore. Did somebody repeal the laws of mathematics? Presumably, if the contagion reaches Italy that would be OK too now, I guess. As it first hit the headlines as a potential problem, spain made a presentation to potential investors that highlighted how strong the country actually was despite the conjecture amongst market participants. the presentation is highly educational and can be found in full HERE, but as a taster, heres one particular slide that caught my eye:

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Oh, to hell with it... heres another:

SOURCE: KINGDOM OF SPAIN

plunged, and got it wrong over the subsequent 3 months when bond prices rose, only to collapse to new lows (and in the case of Spain - record high yields as of two weeks ago). Back then, the ECB merely bought a few months time with its transitory intervention. This time it has at best bought a few days with the lack of any actual action. And yet, Draghi did leave a way out, for at least another brief respite (where unless Europe expands the available bailout machinery yet again, the respite will have an even briefer half life than that from the LTROs). The way out is simple, and in order to avoid any confusion, we will use an allegory from the movie Batman: Spain and Italy can be saved. But first they must be destroyed.

Why? Because the market may or may note have gotten the desired knee jerk response right - higher - eventually, but what it got absolutely wrong is the fact that in the new normal, attempts to front-run politicians, whose motivations are entirely different from those of the market, are always and without fail self-defeating. In other words, by sending the Spanish and SOURCE: KINGDOM OF SPAIN Italian curve short-ends soaring (and yields tumbling), the market just made the some opportunity. only catalyst that would validate the kind of Anyway, late on saturday night, my friends at response to Draghis comment that we witZerohedge published a lengthy piece that refernessed in a few short trading hours, meanences Citis Jrgen Michaels and, in essence, it ingless. lays out precisely where things stand in Europe. so there you have it. In a ten-day period, the I include a longer excerpt and a link to the arheads of two of the worlds big central banks ticle in its entirety on Page 20 but for now, here have succeeded in doing nothing but someis part of the introduction: how buying themselves just a little more time in (ZeroHedge): The reality is that, just like all which to do it. You have to give them props for other central bankers, Draghi did what he that. does best: use big words and threats of acthe FOMC now runs the risk of being seen to be tion in hope it will buy him a few extra days taking sides in the November Presidential elecof time. The reality is also that, just like when tion if it acts in septemberwhether justified the LTRO was announced, the market did or not, while the ECB Mario Draghi has backed get it right initially, when peripheral bonds

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itself himself into a corner, the like of which it he will do extremely well to escape. In fact, pretty much the only thing Draghi has going for him at the moment is the apparent doglike ease with which the market is seemingly distracted from contemplating Europes imminent doom by his promises of action at some future date. that cannot last forever. I suspect strongly that the Fed is waiting until the last possible moment to unleash QE3 because they realise that it is the only bullet they have left in their gun and I suspect that Draghi is doing whatever he thinks he can to try and get Europes leaders on the same page, but, as he himself said in London last week, ...very often non-euro area member states or leaders, underestimate the amount of political capital that is being invested in the euro I have a nasty feeling that the extent of political capital at stake as Europe teeters on the brink of implosion is something he, himself is underestimating severely. Yes, he managed to lower the short-end of the curve in spain and Italy with his jawboning, but that is not where the problem necessarily lies if this ongoing nightmare is to cease to haunt the world. these countries need access to affordable medium-to-long term debt markets if they are to buy themselves time and that, it would seem, is only going to happen if the ECB step in all guns blazing. Well, Mario? You told us you would do whatever it takes. You told us to believe you. You told us it would be enough.

Whatever it is, the talking has to stop. Its time you made us believers.

*******
week, after that lengthy introduction, here is a quick list of what you can expect to find in the pages of things that Make You go Hmmm.....: John Mauldin greece Bo Xilais wife BoJ stimulus the demise of san Bernadino Facebook tax problems An audit of the Feds gold the imminent destruction of spain & Italy Anarchy within the troika Jim Puplava the Knight Capital fiasco Mike Krieger A (broken) promise from Barack Obama James turk A Eurozone recession Mario gold & silver charts Household wealth Photos from the Olympics

OK, so this

Until next time...

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Contents
Japan Foreign-Bond Debate May Boost BOJ stimulus Odds Burst Balloons: the Frightening Lessons Of the Bo Xilai Affair san Bernardino, California, Files Chapter 9 Bankruptcy ECB Disappoints Investors With No Euro Action California says tax Revenue At Risk From Facebook Drop

05 August 2012

Whats In Your Vault? uncle sam Audits Its stash Of gold At the New York Fed Why the Long, Painful Correction Is Nowhere Near Over In Order to Be saved, spain And Italy Must First Be Destroyed For greece, ECB = End Close, Beware greece: Anarchy Inside the troika Charts that Make You go Hmmm..... Words that Make You go Hmmm..... And Finally.....

The Gonnie, Gonnie Banks

# 40 Bank Waukegan Savings Bank, Waukegan, IL Total Cost to FDIC Deposit Insurance Fund Assets ($m) 88.9 Deposits ($m) 77.5 Cost ($m) 19.8 19.8

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An emerging debate over authorizing

the Bank of Japan to buy foreign-currency bonds may spur the central bank to take alternative stimulus action next week, as board members seek to forestall an option they have opposed.

not to implement this policy is for the government to decide. takehiro sato, a former economist at Morgan stanley who joined the BOJ board last month, said July 24 that buying foreign bonds is one option for the central bank. takahide Kiuchi, a fellow newcomer to the board, said the same day that the bank may need to consider new forms of monetary easing.
O O O

seiji Maehara, the policy chief of Japans ruling party, yesterday said it was desirable for the government and BOJ to reach a deal allowing purchases of foreign securities. A former BOJ deputy governor has advocated a 50 trillion yen ($640 billion) initiative to combat the yens gains through foreign- debt buying.

BLOOMBERG / LINK

world will hear the guilty verdict handed down governor Masaaki shirakawa is among BOJ ofby a Chinese court on gu Kailai, the wife of Bo Xificials who have opposed the idea, which would lai, a disgraced Chinese politician. Chinas rulers challenge the bank to identify appropriate forhope this will draw a line under an embarrasseign assets and manage the domestic liquidity ing, lurid murder trial. they may get away with that would result. the BOJ has instead focused it. But the episode gives the lie to many of the asset purchases on Japanese government bonds myths they foster: that, and a limited amount of despite being unelected, other items, including ... Should politicians calls for they are meritocrats, in real-estate investment such foreign debt-buying intheir jobs because they trusts and exchange- tradtensify, the BOJ may be forced are good at them; that ed funds. the BOJ next to seek some other monetary they are, if not entirely meets Aug. 8-9. stimulus step as an alternative. honest, then at least corPolitical calls on the BOJ rupt within forgivable to help curb the yens bounds; and that the way strength are gaining momentum, said Chotaro a new generation of leaders is chosen every ten Morita, a fixed- income strategist at Barclays years is orderly and consensual. the Bo Xilai case Plc in tokyo. should politicians calls for such has lifted a curtain on a world of thuggery, banforeign debt-buying intensify, the BOJ may be ditry and vicious, personalised power struggles, forced to seek some other monetary stimulus reminiscent in some ways of the ten-year nightstep as an alternative. mare from which the country spent a generation trying to awaken: the Cultural Revolution. With interest rates near zero, the asset-purchase program is the banks main policy tool for fighting deflation and stimulating the economy. shirakawa hasnt clearly stated his view on the effectiveness of buying foreign bonds as part of this program. such a policy would be aimed at easing yen appreciation and currency intervention is the jurisdiction of the finance minister, shirakawa said at a news conference on May 23. Leaving aside whether this policy is right or wrong, it can be done even now by using the foreign reserves special accounts, shirakawa said at the press conference. Whether its right or Ms gu and an employee are accused of poisoning Neil Heywood, a British businessman, last November. the case will be presented as a kind of freak incident that has been dealt with: the crime solved, the perpetrators punished, and the political repercussions contained, with the dashing of Mr Bos ambition to reach the pinnacle of power in China, the nine-member standing committee of the Communist Partys Politburo. the party can get on with its autumn Congress, which will name the people who will run the country for the next decade.

Thugs and bandits. Any day now, the

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thanks to the internet and microblogs, however, Chinese citizens now know things about the Bo family that make the party look, well, not quite the vanguard of the proletariat. Mr Bo was a Politburo member until April, and until the previous month was party secretary in the city of Chongqing and its province-sized hinterland. tales have spread of the Bo familys millionsor billionsin assets salted away overseas, of their sons education in elite British and American institutions, of his mothers access to the private jet of a tycoon buddy.

in advance, the first Cultural Revolution generation that took over in 2002 did so without open dissension. Fear of the chaos of that earlier decade (1966-76) demanded no less. But the Cultural Revolution must also have warped the perceptions of those, like Mr Bo, who took part. He is alleged to have joined struggle sessions against his own father, before spending five years in jail and labour camps. He learned that politics is as ruthless as war. In power, he broke with tradition by campaigning more or less openly for his own promotion, using a crackdown on the mafia and, bizarrely, Maoist revivalism, as populist tools. He Of all her antics, however, it is the balloon that might have succeeded had he not fallen out with really bugs Banyan. In 1999, having seen a nice his former chief of police, one from the window of Wang Lijun, who is now her penthouse in Bour- ... Chinas leaders are highly also in Chinese custody afnemouth, on Britains sensitive to the notion that the ter fleeing to an American south coast, she report- Bo-Gus are not freaks, but actuconsulate. that made the edly decided to buy pasmurder allegations public, senger-carrying helium ally typical of the ruling class dooming the effort to porballoons to grace Dalian, tray Heywoods death as an accident. the north-eastern Chinese city her husband was If the party looks corrupt and divided, the lerunning at the time. No role model is more salubrious than Bournemouth, of course. But Ms gu gal system, its pliant tool, is weak. the gu Kailai apparently wanted the balloon-winch supplier trial will take place in Hefei in Anhui province, to pad his price to cover her sons school fees. although, as Donald Clarke, an American scholDo high-flyers such as Ms gu really have to sweat ar, notes on his blog, there is nothing in Chinas the small stuff like that? criminal-procedure law to suggest that a court outside Chongqing should have jurisdiction. Chinas leaders are highly sensitive to the noPresumably, however, Chongqing judges are tion that the Bo-gus are not freaks, but actually untrustworthy. unusually, the announcement typical of the ruling class. Bloomberg, a news of the trial (which, calling the evidence irrefutagency, has suffered sanctions for reporting on able, anticipated the verdict) also attributed a the wealth amassed by relations of Xi Jinping, motive to Ms gu: that Heywood was threatenChinas next leader. Mr Xi, like Mr Bo, is a revoing her son. that may allow Ms gu to avoid the lutionary aristocrat, the son of a civil-war hero. death penalty. the courts are bit-players in a some princelings feel themselves born to rule. party-scripted drama. the transition this autumn will be the fourth the O O O ECONOMIST / LINK party has been through since the revolution in 1949. Only one, the most recent, in 2002, has filed been smooth. Mao Zedongs passing in 1976 for municipal bankruptcy after disclosing a $46 led to the arrest of his widow and her gang of million shortfall in the citys budget, the third Four. In 1989 the looming succession to Deng California city to seek court protection from Xiaoping was fought out in part on the streets, creditors since June 28. before power passed to a generation of largely soviet-trained technocrats. California cities from the Mexican border to san Francisco Bay are confronting rising pension Perhaps because Deng had endorsed them long

San Bernardino, California,

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costs as they contend with growing unemployment and declining property- and sales-tax revenue. the costs stem from decisions made when stock markets were soaring and retirement funds were running surpluses.

san Bernardino officials sped up the timing of the bankruptcy filing because they were concerned san Bernardino has reduced its workforce by 20 that some creditors may take legal action against percent in the past four years and negotiated lathe city, Mayor Patrick J. Morris said yesterday in a phone interview. unbor cuts valued at about der Chapter 9, all court ... Pension liabilities in the Cali$10 million annually, accases and other legal ac- fornia cities of Fairfield, Inglecording to a June 26 budtions against the city will get analysis posted on its wood, Pomona, San Bernardino, be halted until the bankwebsite. Stockton and Vallejo rose 6% to ruptcy case is over. One of the main prob$4.3 billion for the year ending the city was forced to lems is the high cost of seek court protection June 30, 2010, from $4.1 billion the citys union contracts, in 2009 so abruptly because of particularly for police and actions by plaintiffs in fire service, City Councilthree cases involving the san Bernardino Police man Fred shorett said in a phone interview. Department, prompting the city to submit an under the city charter, which is like a constituemergency filing, according to an e-mailed tion for municipal governments, city officials statement from the san Bernardino city attormust use a specific formula for determining wagneys office. es and other benefits paid to its police and fire san Bernardino, a city of 209,000 about 60 miles employees, shorett said. that formula requires (97 kilometers) east of Los Angeles, listed assets the city to set compensation by comparing employee pay in san Bernardino, which has one of and debt of more than $1 billion in a filing yesterday with the u.s. Bankruptcy Court in Riverthe highest home foreclosure rates in California, side, California. with cities in the state that are about the same size and have more money to spend, shorett All of our vital service bills will continue to be said. paid, Mayor Morris said. We are going to keep We are set up for failure, he said. our city services running. Pension liabilities in the California cities of Fairfield, Inglewood, Pomona, san Bernardino, stockton and Vallejo rose 6 percent to $4.3 billion for the year ending June 30, 2010, from $4.1 billion in 2009, according to the most recent data available from the California Public Employees Retirement system. In the northern California municipality of Fairfield, near the Napa Valley winegrowing region, 18 percent of the general- fund budget goes toward pension costs, up from 14 percent in fiscal 2008, said David White, the deputy city manager.
O O O

Fairfield, Inglewood, Pomona and other California municipalities including Compton are on a list of cities on the precipice compiled by Matt Fabian, a managing director for Concord, Massachusetts-based Municipal Market Advisors, who cited news reports in identifying them in a July 23 research note.

BLOOMBERG / LINK

have liked what European Central Bank head Mario Draghi had to say on thursday, but it was the clearest indication yet that a plan is finally taking shape to reduce borrowing costs for spain and Italy. germany remains wary, though, and commentators say the outcome could be disastrous. the markets were disappointed. European Central Bank head Mario Draghis press conference on thursday sent stock indexes around the

Investors may not

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world plummeting, as investors had been hoping the bank would immediately resume buying up sovereign bonds from crisis-stricken euro-zone countries. Even worse, spains borrowing costs on 10-year bonds rocketed above the critical 7 percent mark -- a product of Draghis pressconference pledge that the SOURCE: DER SPIEGEL CLICK TO ENLARGE ECB would only step in if a country applies for a euro-zone bailout. Many politicians in germany, however, were ecstatic. Leaders from most of the countrys major parties welcomed Draghis inaction, including lawmakers from parties in Chancellor Angela Merkels governing coalition. I completely agree with ECB President Mario Draghi that decisive consolidation and reform policies at the national level should be the absolute top priority and are indispensable, said Economy Minister Phillip Rsler. the leader of Merkels junior coalition partner, the Free Democratic Party (FDP), Rsler is also deputy chancellor. He added that monetary policy cannot replace national efforts and does not offer a lasting solution to the crisis. senior FDP member Rainer Brderle, who was economy minister prior to Rsler, added that the ECB should concentrate on its core competency. Fundamentally, it is not the duty of a central bank to participate in state financing. Opposition leaders likewise welcomed Draghis reticence and took the opportunity to criticize Merkels crisis management strategy. Instead of

fighting for Europe, she is taking what she thinks is the easier path and is driving the ECB into another round of buying up sovereign bonds, said Frank-Walter steinmeier, floor leader in Berlin for the social Democrats. It has become clear that such purchases do not offer a lasting solution to the crisis. germany has long been wary of ECB bond purchases and opposition has only grown since the Frankfurt-based central bank largely ceased buying sovereign bonds last year. Jens Weidmann, head of germanys central bank, the Bundesbank, has been particularly vociferous in his criticism of bond purchases, saying they rewarded debt-ridden countries without demanding reforms in return. Draghi even mentioned Weidmanns opposition to the program in his thursday press conference. still, the widespread resistance in germany to ECB action, and to many other euro-crisis proposals that could increase german taxpayer liability, has painted Merkel into a corner. With the opposition in Berlin showing a decreased willingness to rubber stamp her euro-crisis measures and a growing rebellion within the ranks of her own government, her ability to respond to the worsening crisis may become increasingly limited.
O O O

DER SPIEGEL / LINK

Facebook Inc.s declining

price may cost California hundreds of millions of dollars in revenue expected from taxes on capital gains, the states fiscal analyst said.

the owner of the worlds largest online social network, touched $19.82 today, the lowest price since the Menlo Park, California-based company first offered shares to the public at $38 on May 17. the most populous u.s. states $91.3 billion budget, signed by governor Jerry Brown in June, counted on $1.9 billion in income-tax revenue from company insiders such as Chief Executive Officer Mark Zuckerberg exercising options or sell shares, assuming an average price of $35.

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according to the Legislative Analysts Office.

18.

Facebook, which touched $45 May 18, has averaged $29.49 on the Nasdaq stock market. Facebook share prices have fallen far below levels assumed in the states revenue projections, the nonpartisan Legislative Analysts Office said yesterday in a report. If the lower share prices persist through November and December, hundreds of millions of dollars of income-tax revenue assumed in the state budget plan are at risk. Ashley Zandy, a Facebook spokeswoman, said the company didnt have a comment. Executives and investors were expected to sell 157.4 million shares in the initial public offering, according to a regulatory filing.

California, the worlds ninth-biggest economy, took in $7.2 billion from income taxes in April.
O O O

BUSINESSWEEK / LINK

For decades, the

Or has it?

u.s. government has stashed gold five stories beneath Manhattan in a vault under the Federal Reserves fortress near Wall street. some conspiracy theorists suspect that the billions of dollars worth of bullion might have been looted in a dramatic heist, a la the movie Die Hard: With a Vengeance. Others claim that the gold has been used in a shadowy government transaction, or swapped with gold-painted bars. Its even caught the attention of politicians like Rep. Ron Paul and members of germanys ParliaDepartment ment. Now all of us may finally get some answers. the federal government has quietly been completing an audit of u.s. gold stored at the New York Fed. the effort included drilling small holes in the bars to test their purity.

Facebook, which hasnt closed above the $38 IPO price since May 18, its first day of trading, last week said second-quarter sales growth was 32 percent from the same period a year ear- ... The Treasury lier, down from 45 per- has refused to disclose what the cent in the previous three audit has revealed so far, saying months. the company still needs to prove to inves- the results will be announced tors that it can profit from by years end. But as one former the growing number of top Fed official said recently, users who access the site the testing may finally prove on mobile devices, said that Goldfinger didnt sneak in tom Forte, an analyst at telsey Advisory group in at night and take the gold New York. Zynga Inc., an online-game developer based in san Francisco, went public in December and has declined from a $15.91 high on March 2 to as low as $2.68 today, a record. A Zynga investor sued the company and the IPO underwriters this week, claiming shareholders were misled about its financial health. the company reported lower-than-expected secondquarter earnings July 25, and fell 37 percent the next day. state finance officials typically update revenue estimates when presenting the governors proposed budget in January. New information on Facebook probably will be used in that update,

the treasury Department has refused to disclose what the audit has revealed so far, saying the results will be announced by years end. But as one former top Fed official said recently, the testing may finally prove that goldfinger didnt sneak in at night and take the gold. the calls for audits are saying, We dont trust the government for the last 200 years, said ted truman, a former assistant treasury secretary and Fed official. He called perennial questions about the countrys reserves the gold bug equivalent of the birther movement. the treasurys auditing operation, including drilling, is a first for the New York Fed. the depart-

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ments inspector general previously audited and tested only gold it keeps under heavy guard at Ft. Knox, West Point and the u.s. Mint in Denver. these three locations hold 95% of the countrys bullion. In New York, about $21 billion in u.s. gold is locked inside the Feds vault. Its stored alongside bullion from three dozen other countries and organizations such as the International Monetary Fund. All told, about 23% of the worlds official gold reserves are stored in the central banks vaults.

cess, with the remaining granules returned to the government. the New York Fed refused to comment.
O O O

CHICAGO TRIBUNE / LINK

Where were you when the global financial crisis began five years ago this month? I remember the start of the credit crunch in August 2007 as if it were yesterday, ironically because I nearly missed it altogether. When we headed off to our friends log cabin for our summer holiday in the New England woods all was well.

the audit, which began in January, took place 80 feet below the Feds limestone and sandstone Italian Renaissance building in ManhatWhen we emerged a couple of weeks later all tans financial district. Visitors to the vault make hell had broken loose and the journey to todays their way through a steel and concrete entrance income-hungry world had begun. the events of where a 90-ton door rowhich we were blissfully ... With the benefit of hindtates open. unaware as we enjoyed sight, it is clear that the world our thoreau at Walden Inside, a massive scale is Pond moment added up we left behind as we headed ringed by 122 blue cages to the first full-blown that hold about 530,000 into the woods disappeared panic of a crisis that had gold bars 34,021 of during those two happy weeks been quietly brewing for which belong to uncle the six months since HsBC sam. the auditing team blamed us sub-prime loans (whatever they counted the u.s. stash, selecting more than 350 were!) for its first ever profits warning. bars from which to extract samples for assaying. the process involved about half a dozen employees of the Mint, the treasury inspector generals office and the New York Fed. It was monitored by employees of the government Accountability Office, Congress investigative arm. the bars were first weighed on a small electronic scale, then transferred to a table mounted with a long, thin drill used to burrow into the gold, said a person familiar with the operation who was not authorized to speak publicly. Workers were careful to collect any stray gold bits, the source said. Based on the market price of about $1,600 per troy ounce, the treasury removed more than $110,000 worth of gold samples. A Mint spokesman said about 1 to 1.5 grams of each sample is destroyed in the assaying protwo months later, mortgage lender New Century Financial filed for bankruptcy, then in June, Bear stearns bailed out one of its hedge funds, let another go under and halted redemptions at a third. By July, home foreclosures were running at almost twice the level of a year earlier. In early August, shortly after we lost radio contact with the outside world, BNP Paribas stopped investors redeeming cash from some of its funds, saying that the turmoil in the sub-prime market meant it was unable to value them. the next day central banks pumped billions of pounds into the banking system to head off a feared credit seizure. European shares suffered their biggest one-day fall in more than four years and the Federal Reserves new chairman, Ben Bernanke, swung into action, cutting the primary discount rate at which the Fed lends money to

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Americas banks. the plunge to the zero-bound world shown in the chart had begun. With the benefit of hindsight, it is clear that the world we left behind as we headed into the woods disappeared during those two happy weeks. Flicking through press reports of a debt-fuelled takeover bid for sainsburys or the preposterous battle between RBs and Barclays for control of ABN Amro is like looking at photos of young people larking about in the summer of 1914. Did they really have no idea what was coming?

activate the ECBs new facility, Spain and Italy have to ask the EFSF for assistance, and the Eurogroup (backed by the German parliament) has to approve the request....Mr. Draghi was very explicit in respect to the conditions for ECB assistance for governments in bond markets, but Spanish PM Mariano Rajoy and Italian PM Mario Monti ignored that part of the ECB statement.

some did, but not many. Five years ago, the Daily Reckoning website said this: Never before in To us, this is another exthe history of the world are now certain to not even conample of the Spanish govhave so many people be- sider asking for a bailout ernments poor communilieved so many things that cation, and highlights the couldnt be true. Now need to restore credibility by getting external they owe more money to more people than ever monitoring (at least from the EU Commisbefore. And it could take a long, painful correcsion and the ECB, probably with technical tion ... or worse ... to straighten things out. How assistance from the IMF). Given the strong prescient was that? resistance of the Spanish government to askBut it was not the conventional wisdom five ing the EFSF/ESM to activate the primary years ago. this from the International Monetary market purchase facility although a MemFund was closer to what most of us convinced orandum of Understanding regarding the ourselves was the case: these events are likely required conditionality is already available to have some negative impact on growth not with the existing bank support programme only in the united states but also in a number and with no planned issuance in coming of other countries, so wherever forecasts were a weeks, we do not expect that Spain will ask month ago they should be cut a little bit. go on for assistance in August. then, just a trim. Forced by a further increase in its funding the day the Fed cut interest rates for the first costs, we expect the Spanish government to time, August 17, 2007, the London market rose make a U-turn and to ask for assistance durby more than 3pc. german 10-year bund yields ing September. edged back up to 4.3pc that day. gold hit a And what is true for spain, is true for its far bigpeak of $663.50! ger, and just as financially distressed cousin, Italy. If someone had said five years ago that those therein lies the rub: by pushing the funding costs silly American home loans would, within half a on the short-end far cheaper, both Rajoy and decade, have torn the eurozone asunder, left the Monti are now certain to not even consider askus on the brink of a fiscal abyss and driven the ing for a bailout - after all the market just validatChinese economic locomotive into the buffers, ed their failed policies (or so they think)! to the very few would have taken them too seriously. career politician and unappointed technocrat, O O O UK DAILY TELEGRAPH / LINK instead of having to ask for aid, the markets re-

While Mr. Monti, as before, left open whether Italy would requeEFSF/ESM assistance, Mr. Rajoy, also in line with pre... by pushing the funding vious statements, declined tostate that Spain would costs on the short-end far ask for such assistance. cheaper, both Rajoy and Monti

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cult decisions have to be made. In the process, the deficit gets bigger and bigger, even as the country can still continue to fund itself at seemingly sustainable rates (very soon both Italy and spain will be forced to keep rolling its debt every several months as anything beyond Bills will be trading at ridiculous rates, while the short-end will be anchored by fears of more brutal Draghi rhetoric). All this comes to a head eventually when the spread between reality and central bank ivory towers becomes so wide not even the most stockholm syndrome-addled bond vigilantes can continue to ignore it any longer.
O O O

ZEROHEDGE / LINK

CLICK TO ENLARGE

SOURCE: CITI/ZEROHEDGE

sponse is one which precludes said aid request... until, at least such time as the market realizes it was once again manipulated by politicians. What happens then is the same rinse-repeat cycle we have grown to hate and loathe so well: the spanish and Italian curves go bidless, in the process inverting once again, followed by the same summit/ECB announcement response with promises that both spain and Italy will demand a bailout, sending bonds soaring, and making a bailout demand unnecessary. Of course, this Catch 22 of confounding cause and event can continue seemingly indefinitely, although in reality it cant. Because fundamentally what the bond market does is keep sovereigns honest - just as schauble said a week ago, spanish yields at 7% are not the end of the world - instead what they are is a signal to the country to get its spending in control in order to reduce its deficit, and fundamentally get its house in order - yes, that means getting government spending to a sustainable level and firing hundreds of thousands of workers, as well as probably raising taxes even more. It also means pain all around, but the pain is inevitable and will only be worse the longer reality is denied. thus all the ECB does, with every incremental attempt to manipulate the bond curve, is delay the day when the inevitable hard choices and diffi-

Banks decision on Friday to stop accepting greek government bonds as collateral was not the first such move made by Frankfurt but there was something distinctly ominous about the timing and implications of its choice. the ECB will assess their potential eligibility following the conclusion of the currently ongoing review, by the European Commission in liaison with the ECB and the IMF, of the progress made by greece under the second adjustment program, the central bank said. the ECB has twice before this year refused greek banks the ability to use government bonds to draw much-needed liquidity. the first was after the bond restructuring, or PsI, and the other was before the start of the bank recapitalization process. In both cases, greek banks were excluded and had to rely on Emergency Liquidity Assistance (ELA) to gain access to funds. they have reportedly drawn more than 60 billion euros this way. ELA means that the banks are able to borrow from the Bank of greece, rather than the ECB, by putting up collateral that is theoretically more risky than bonds, such as small business loans or mortgages. While ELA is a useful stopgap measure, it is no more than that. First of all, it is not sustainable. ELA funding requires a spread of about 200 basis points above

The European Central

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the ECBs marginal lending facility rate, which is currently at 1.5 percent. this means that cashstrapped greek banks borrow at about 3.5 percent, more than double what lenders in other eurozone countries are paying. ELA also spells trouble for the Bank of greece because it bears the risk of the loans rather than the ECB. If greek banks are borrowing via the ELA, the ECB and the Eurosystem is less exposed to a default. In the time that greek lenders drew 62 billion euros from ELA, they have borrowed 74 billion from the ECB, according to Reuters. If there is an underlying intention from Frankfurt to hedge its bets, it doesnt seem to have done badly. Finally, ELA leaves greeces financial sector at the mercy of the ECB board. the Bank of greece needs Frankfurts approval to accept assets from local lenders. A two-thirds majority decision by the ECBs governing council could deny greeces central lender the right to fund local banks through ELA. ECB politics means that it could only take one or two important members such as the head of germanys central bank, Jens Weidmann, to swing the decision and stop the liquidity program.

which have been losing deposits steadily over the last three years, to be left in this liquidity limbo, cut-off from ECB credit. there must be serious doubts about whether the greek financial system can survive such a test at this challenging time.
O O O

EKATHIMERINI / LINK

The European Central

Bank has snatched greek survival from the jaws of sovereign bankruptcy. Its done this by securing interim financing in the form of additional emergency loans from the Bank of greece, Die Welt reported today (saturday). Its emerged that the ECBs governing Council agreed at its meeting on thursday to increase the upper limit for the amount of greek shortterm loans the Bank of greece can accept in exchange for emergency loans, Die Welt asserted.

Well zipperteedoo-dah what a wonderful day, but how will this meld with the euronotes that greece is still printing (while the ECB quietly burns them on receipt) and the hard-to-ignore reality that technically, without a constant supply of Frankfurtergeld, the Bog would be insolvent itself? Nobody cares any more, for this is However, the technicalities of the ELA are the now the Bunker-whacky world of eurozone fileast of greeces worries at the moment. It is the nance: short terms are safer than emergencies, implications of the ECBs toilet paper can bail out decision that should have ... ELA funding requires a whole nations, and Berthe alarm bells ringing in spread of about 200 basis lin is the guarantor of last Athens. points above the ECBs margin- resort.except when the Bundesbank in Frankfurt While Frankfurts two pre- al lending facility rate, which is suggests otherwise. vious refusals to accept greek bonds this year were linked to specific events and served as a brief parenthesis in the liquidity process, by linking its latest decision to the troika report on greece, the ECB has opened a bracket without knowing when or if it will be closed.

currently at 1.5 percent

thus, a decision made in private will have approximately a hundred times the effect of Mario Draghi publicly vowing to do Whatever it takes up to but not defining whatever.
O O O

the troikas assessment of the greek program is not due until the end of August and will not be discussed at a European level until september. this is a worryingly long time for greek banks,

THE SLOG / LINK

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23.

while since we checked in with Jesse for a look at gold and silver charts so lets put that right. Bases are building that suggest we COuLD see some powerful upside action but, as always with the precious metals, we are one piece of Officialspeak away from an air-pocket. Personally, I tend to try and look a lot farther into the future where these particular assets are concerned. I find the skies a lot clearer there...

Its been a

CLICK TO ENLARGE

SOURCE: JESSES CAFE AMERICAIN

CLICK TO ENLARGE

SOURCE: JESSES CAFE AMERICAIN

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recession (which started months ago) worsens, the areas manufacturing activity, as measured by the PMI index, is contracting at a pace not seen since 2009. A great deal of this decline however is now driven by germany (rather than the periphery), whose manufacturing PMI is showing a rapid deterioration. It is somewhat surprising, given that we had signs of economic improvements in germany as recently as May. But the german decoupling hopes did not materialize, as the economy is pulled down by the rest of the Eurozone combined with the slowdown in China, one of the nations largest export markets.
O O O

As the Eurozone

SOBERLOOK / LINK

SOURCE: MARKIT

Any Questions?

CLICK TO ENLARGE

SOURCE: DOUG SHORT

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In April 2007, while forecasters predicted at least two more years of increases, the first Beyond the Horizon article stated: Earnings have increased at double-digit growth rates for five consecutive years although many agree that earnings growth may be slowing, its beyond almost everyones foreseeable horizon that earnings might actually experience a decline. By the end of 2007, earnings per share (EPs) for the s&P 500 declined versus 2006. By the end of 2008, after an 80%+ decline in reported earnings, it was beyond almost everyones horizon that reported net earnings would recover to more than $90 per share over the subsequent several years ... yet this years forecast is now $93 and next year is expected to top $103 per share. since the fundamental principles of the business cycle cause history to repeat itself, a decline in EPs should not be beyond your horizon! Currently, profit margins are cyclically high, near historical highs, and already at unsustainable levels, with projected further increases over the next two years. Beware.
O O O

JOHN MAULDIN / LINK

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and will not sustain deficits like these without end. Contrary to the prevailing wisdom in Washington these past few years, we can not simply spend as we please and defer the consequences to the next budget, the next administration or the next generation. We are paying the price for these deficits right now. In 2008 alone we paid $250 billion in interest on our debt, that is more than three times what we spent on education that year, more than seven times what we spent on VA healthcare. So if we confront this crisis without also confronting the deficits that helped cause it, we risk sinking into another crisis down the road as our interest payments rise, our obligations come due, confidence in our economy erodes and our children and grandchildren are unable to pursue their dreams because they are saddled with our debts. Thats why today I am pledging to cut the deficit we inherited by half by the end of my first term in office. this will not be easy - it will require us to make difficult decisions and face challenges we have long neglected but I refuse to leave our children with a debt they can not repay. And that means taking responsibility right now in this administration, for getting our spending under control. CLICK TO WATCH
O O O

We can not

VIA ZEROHEDGE / LINK

James Turk on
Fascinating.

gold & silver, the dollar, Fed policy and the problems facing monetary authorities as they keep interest rates artificially low in an attempt to subvert centuries of monetary precedent.

insight to offer. Always. this week Jim Puplava (left) talks to Eric Hunsader of Nanex about High-Frequency trading and the Knight Capital fiasco this past week and its a must-listen for anyone involved in markets. On the right is Mike Krieger who returns to New York this week from the wilds of Colorado to talk to Lauren Lyster of Capital Account about Fridays jobs number and the truth behind the slew of statistics that belie the real condition of the us economy as well as Louis Bacons decision to return $2bln of investors capital.

Below are two

friends of mine who both have a lot of

CLICK TO LISTEN

CLICK TO LISTEN

CLICK TO WATCH

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and finally
Regular readers will be familiar with my passion for photography and the Olympics
always provides plenty of amazing images but this collection from the uK Daily telegraph is both interesting and different as it takes a look at the games from a variety of unusual angles...

CLICK TO VIEW

Hmmm
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COMMENTS

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THINGS THAT MAKE YOU GO

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Grant Williams
Grant Williams is a portfolio and strategy advisor to Vulpes Investment Management in Singapore - a hedge fund running over $250million 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 which 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

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.

Grant

www.vulpesinvest.com

05 August 2012

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