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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

28 October 2013

Let It Be: Fiat Monkees & Golden Beatles


"And when the brokenhearted people Living in the world agree There will be an answer, let it be." Let It Be, The Beatles "Oh, and our good times starts and end Without dollar one to spend. But how much, baby, do we really need?" Daydream Believer, The Monkees "But today there is no day or night Today there is no dark or light. Today there is no black or white, Only shades of gray." Shades of Grey, The Monkees "Living is easy with eyes closed Misunderstanding all you see." Strawberry Fields Forever, The Beatles
Copyright Mauldin Economics. Unauthorized disclosure prohibited. Use of content subject to terms of use stated on last page.

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THINGS THAT MAKE YOU GO

Contents
THINGS THAT MAKE YOU GO HMMM... ....................................................3
Frexit Fever Reaches Heart Of French Establishment ...........................................19 The Missing Millions ...................................................................................21 Krugtron The Invincible, Parts 1, 2 & 3 ............................................................22 Citi Forecasts Greek Devastation, Unstoppable Debt Spirals in Italy and Portugal .........24 Help Wanted in Fukushima: Low Pay, High Risks and Gangsters ...............................25 Special Deal ............................................................................................26 NSA Surveillance: Germany to Send Intelligence Officials to US ...............................28 Tesco's Reduced-to-Clear Aisle: "It's a Taste of the Serengeti" ..................................30 Why Expanded Iron Ore Production Doesn't Mean Lower Prices ...............................31

CHARTS THAT MAKE YOU GO HMMM... ..................................................33 WORDS THAT MAKE YOU GO HMMM... ...................................................36 AND FINALLY... .............................................................................37 To subscribe to Grant Williams' Things That Make You Go Hmmm..., please click here: subscribe

28 October 2013

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THINGS THAT MAKE YOU GO

Things That Make You Go Hmmm...


Madness!! Auditions. Folk & Roll Musicians-Singers for acting roles in new TV series. Running Parts for 4 insane boys, age 17-21. Want spirited Ben Frank's types. Have courage to work. Must come down for interview. On September 8-10, 1965, this ad appeared in the Hollywood Reporter and Daily Variety, as two aspiring filmmakers, Bob Rafelson and Bert Schneider, inspired by what was to become one of the best and most influential musical films of all time, set about trying to cast the leads in a television show about four crazy kids living the rock 'n' roll lifestyle that the protagonists in the aforementioned film had made so appealing to the masses. That film was A Hard Day's Night, its stars The Beatles, and the four young men (chosen from 437 applicants) who would be groomed to supplant them in Americans' hearts and minds were Davy Jones, Mickey Dolenz, Peter Tork, and Mike Nesmith. Together, these four part-time musicians and wannabe actors would become The Monkees; and Rafelson & Schneider's plan was to make them bigger than even The Beatles could dream of being. Armed as they were with the power of television entering its golden age, they had the odds stacked in their favour or so it seemed. In 1965, the Beatles were the preeminent band in the world and at the very peak of their power. The time seemed right for a knock-off band that would enable its architects to live the high life and create untold riches out of thin air. After all, The Beatles were genuinely talented songwriters and musicians, and those were in limited supply, even in the 1960s. It was far easier to produce a band that didn't have to rely on something tangible, such as talent, in order to be accepted by the public as long as you could sell it to people by capitalizing on The Beatles' success. That band was to be The Monkees. The premise was, in the words of Dolenz, to produce "a TV show about an imaginary band ... that wanted to be The Beatles, [but] that was never successful". The Beatles were music's gold standard; the Monkees would be a convenient fiat alternative. Interestingly enough, given this week's reference to The Beatles, the word fiat comes from the Latin fiat, meaning "let it be" (or "it shall be"; but, since Paul McCartney didn't choose that as the title of his anthem to the assumption that everything will magically work out in the end, it's not quite as convenient for the purposes of my ramblings).

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How did the fiat alternative to John, Paul, George, and Ringo fare? Well, the answer is perhaps somewhat surprising. Initially, The Pre-Fab Four, Mike, Davy, Peter, and Mickey (it just doesn't have the same ring[o] to it, I'm afraid), were assiduously kept away from the musical instruments they were supposed to play when recording the songs that would, according to Rafelson & Schneider's strategy, sell by the millions and make everybody rich despite the fact that they were all reasonably accomplished musicians and, in the case of Nesmith and, latterly, Dolenz, capable of composing successful pop songs. Jones was chosen to sing lead vocals (something that rankled with the rest of the band, who felt that Dolenz's more distinctive voice was far more likely to set the band apart); Dolenz was picked as the drummer (even though Jones was far more accomplished in that role, but his diminutive stature meant he disappeared behind the high-hat cymbals); Nesmith took lead guitar (even though Dolenz was an accomplished guitarist but had never played drums before); and that left Tork, who picked up the bass (even though Nesmith was skilled in the playing of that instrument) and keyboards. In short, an alternative to the most successful band of the day was created by parties interested in having a simpler, more lucrative alternative under their control. It was created and configured not with its long-term viability in mind but rather with appearances as the main driver, in the expectation that, even though the level of talent underpinning the band was hardly of the calibre of Lennon & McCartney, it would be enough at least for a while. And guess what? It was. In August 1966, the Monkees' debut single, "Last Train to Clarksville", was released and Monkeemania was born. The group's network TV show debuted a month later, in September 1966 (in the days when there were only a handful of channels to watch). It was designed to appeal to the teen audience enthralled with the lovable Brits, and so the band's popularity was assured despite the impracticalities of the project, which were highlighted very clearly in a review that ran in the Washington Post: The series stars a fearsome foursome in the Monkees, a wholly manufactured singing group of attractive young men who come off as a combination of The Beatles, the Dead End Kids and the Marx Brothers. Critics will cry foul. Longhairs will demand, outraged, that they be removed from the air. But the kids will adore the Monkees .... unlike other rock 'n' roll groups, the boys had never performed together before. Indeed, they'd never even met .... they've been working to create their own sound. In reality, the Monkees didn't play their own instruments on their debut album (which led to enormous conflict between the band and their producers), but the popularity of "The Fiatles" was undiminished. Their "upbeat, young, happy, driving, pulsating sound" was all that mattered to both their creators and their audience. As long as the masses accepted The Monkees, the talent underpinning their success was of altogether secondary importance.

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The following year, 1967, something rather extraordinary happened. That year, The Beatles released a collection of songs in an album entitled Sgt. Pepper's Lonely Hearts Club Band which would go on to be voted the number-one album of all time by Rolling Stone magazine (a position it retains to this day). Meanwhile, another popular rock combo of the day, The Rolling Stones, released two albums, Between the Buttons and Their Satanic Majesties Request; Jimi Hendrix introduced the public to Are You Experienced?; and The Doors unveiled their eponymous debut album, featuring "Break on Through", "The End", and "Light My Fire". Well, guess what? The number-one, top-selling album of 1967 was (drum roll, please): Yes folks, More of The Monkees, featuring "When Love Comes Knockin' (At Your Door)", written by Carole Bayer Sager and Neil Sedaka; "Sometime in the Morning", penned by Gerry Goffin and Carole King; "(I'm Not Your) Steppin' Stone", by Boyce and Hart; and the instant classic "I'm A Believer" ... hot off the pen of Neil Diamond. Not only that, but if we let our eyes wander down the list of 1967's best-selling albums, we find at number two The Monkees, which included "(Theme from) The Monkees" and "Last Train to Clarksville" both of which were writen by Boyce and Hart. Now, to be absolutely clear, I am not bagging the Monkees I happen to love their music but merely making the (somewhat labored) point that sometimes a fiat alternative to something backed with something a little more valuable, can have its day in the sun and even supplant its intrinsically more sound cousin for a brief period. But ultimately, over time, something which is real will always be recognized by the masses as superior to something created for superficial purposes particularly during times of crisis. For those keeping score at home, The Beatles and The Rolling Stones are second only to Bob Dylan's 11 albums in the top 500, with 10 each, and the Beatles have 4 albums in the top 10 (including, of course, the number-one album of all-time in Sgt. Pepper). The Monkees don't appear in the top 500.
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Why do I bring this up? Well, of course, this is one of those weeks when I'm going to be talking about gold again yes, finally! and my thoughts were triggered by an article I read in, of all places, the Hindu Business Line. India's love affair with gold is well-understood in this part of the world and completely misunderstood in the West a phenomenon I have always found fascinating but recently it has become abundantly clear that this disconnect is widening almost daily as the Western fixation with The Gold Price and the Eastern obsession with The Price of Gold take ever more divergent paths. After the recent frenzied activity at the Reserve Bank of India (which, if it had taken place in the USA, would absolutely have been labeled "The War on Gold" by CNN) as they tried every means possible to stop Indian citizens from buying gold (something I documented in "Never The Twain", TTMYGH August 27 2013), I set about thinking why it is that attitudes in the opposing hemispheres are so different regarding the yellow metal. As I ruminated, a good friend of mine, who has forgotten more about gold than most will ever know, pointed me towards the Hindu Business Line; and there I stumbled upon a couple of pieces by S. Gurumurthy which, rather conveniently, do a lot of the heavy lifting for me. In the first piece, entitled "Gold: Villain or Saviour?", S. tackles the stark disparity between economists' views of the "barbaric [sic] relic" and the views of the ordinary Indian citizen. And he does so beautifully: (Hindu Business LIne): Modern economists and the Indian people seem to operate on two different paradigms with regard to gold. In the modern West, gold is more a state asset than a private possession. Gold constitutes just three per cent of family wealth there, but a third in India. Western states, socialist or capitalist, expropriated all private gold during the last century. Even the liberal US outlawed private gold in 1936 and built official gold reserves of over 20,000 tonnes by 1950. Modern economics views gold as an uneconomic, wasteful, private investment. But traditionally, in India, gold has been the preferred asset of the rural masses who hold 70 per cent of the nation's stocks. Indian gold habits clearly mock at modern economic theories. So far, so good. Now at this point S. begins laying down a few facts and figures, and as he does so, the clouds surrounding the question of how important gold is to the average Indian quickly start to evaporate: Market Oracle, a UK-based market analysis and forecasting online publication, captures the relation between India and gold thus: Indians own 20,000 tonnes of gold worth $1 trillion almost half of India's GDP. For Indians, gold is not just money or asset; it ensures the financial security and stability of families. It has religious overtones. More than a commodity or money, it is integral to the warp and weft of family life. Investments in gold and jewelry are indistinguishable. Jewelry is the working capital of families; families collateralize it for commercial borrowing.
28 October 2013

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Some 13 per cent of Indian families, more from rural areas, borrow against gold as collateral; while rural India borrows from the unorganized financial sector, urbanites access bank loans. The authors of Market Oracle seem to understand India's family-gold nexus better than Indian policymakers. Yet, despite such a paradigmatic difference, economic laws on gold based on the Western experience are continuously being tried out in India. Result: the establishment hates what the people love. Do Indian policy makers not understand "India's family-gold nexus"? Of COURSE they do but gold is the only refuge from inflation for the Indian population; something that just isn't acceptable to "The Establishment", because India's national debt has been run up by politicians amidst a corrupt and totally inefficient bureaucracy, whilst Indian citizens have patiently and painstakingly accumulated real wealth a gram at a time over many centuries. They are not about to give that up. The Reserve Bank of India (RBI) set up a working group to investigate what every one of its members already knew instinctively (yet more taxpayer money being put to good use), and the conclusion they reached after a year's expensive extensive study was this: (Reserve Bank of India): Demand for gold appears to be autonomous and a function of several influences and factors in India and may not be strictly amenable to policy changes. Supply of gold, through organised channels can be constricted, but buyers may take recourse to unauthorised channels to buy gold. The share of banks in importing gold has already been on decline over the years. Since it is difficult to vary the demand for gold the policy focus will have to be directed to (i) design and offer gold investors, alternative instruments that may fetch positive returns with a flexibility of liquidity; and (ii) increased unlocking of the hidden value locked in idle gold stocks through increased monetisation of gold. In this context encouraging gold jewellery loans from Banks and NBFCs, ensuring customer protection of borrowers and changes in the practices of NBFCs is desirable. Brilliant! Welcome back, Captain Obvious! Seriously, though, this is perhaps the most ludicrous government-funded study since US$3 million was spent on helping the National Science Foundation study shrimp running on a treadmill (no, really). Back to S. again for some rather compelling numbers:
7

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But, are Indians fools to have invested in gold as the economists would have us believe? No. Actually, gold seems to have fooled the economists. The RBI working group study finds that gold has outperformed stocks and bank deposits in the last five years more than three times over Nifty, six times over bank deposits and 10-year government bonds. Only gold, no other asset, has so consistently beaten inflation.

Source: RBI/Bloomberg

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The average inflation during 2001-02 to 2005-06 was 4.7 per cent but gold yielded 9.2 per cent almost double. The average inflation for 2006-7 to 2010-11 was 6.7 per cent but the yield on gold was 23.7 per cent three times plus. Average inflation for 2012 is 9 per cent but gold returned 33.5 per cent almost four times. Traditional India intuitively seems to understand the value of gold. OK, so here's where we start to get an understanding of how this all works. Westerners aren't used to the kind of inflation levels, government confiscation, and currency volatility so common in places like India; and so the need to own gold as protection isn't fully appreciated in the West. Westerners pay lip service to gold's being "an inflation hedge" or "a currency" or "a safe asset", but these terms are used in an extremely abstract way by the vast majority of the investing public, who see gold as mostly just another trading vehicle. Yes, there are Western investors who have a deeper understanding of the reasons for owning physical gold, but they are a tiny minority. Perhaps the simplest way to illustrate this point is to look at trading volumes in gold ETFs a simple, effective way of renting gold for the short term for punters investors to see how Western and Eastern volumes compare. For the purposes of this exercise, there's nowhere better to go than the heavyweight champion of the gold ETF world, GLD:
GLD ETF Daily Traded Volume NYSE (# of shares)
October 2012 - October 2013

100,000,000

80,000,000

60,000,000

40,000,000

20,000,000

Average:10,787,000

0 Oct 2012 Dec 2012 Feb 2013 Apr 2013 Jun 2013 Aug 2013 Oct 2013

Source: Bloomberg

As you can see from this chart, the average daily turnover of GLD on the NYSE is a little shy of 11 million shares. At current prices, that is roughly US$1,419,127,163 or $1.4 billion. Every day.
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Fortunately, the GLD ETF is also listed on the Tokyo, Hong Kong, and Singapore stock exchanges (and you'd better believe that the reason it is listed is because Asians just luuuuuve gold); so a comparison is extremely straightforward. What do the volumes in Asian trading of paper shares offering "ownership" of gold custodied in the London vault of HSBC look like? Well, they look like this:
GLD ETF Daily Traded Volume TSE/HKSE/STI(# of shares)
October 2012 - October 2013

500,000

400,000

300,000

200,000 Singapore HK Japan 100,000

Oct 2012

Dec 2012

Feb 2013

Apr 2013

Jun 2013

Aug 2013

Oct 2013

Source: Bloomberg

Now, eagle-eyed readers will have noticed that I didn't include the average lines for the three Asian exchanges. The reason for that is simple: they are so close to the X axis as to be almost invisible. To provide a clear picture of the contrast between GLD volumes on the Western and Eastern exchanges, what I will do instead is show the average daily turnover on all four exchanges as dollar figures on the same chart (below). I actually had to delete the line that demarcated the X axis, because, with a 1pt stroke on it in Adobe Illustrator, it became too difficult to see the bars for Japan, Hong Kong, and Singapore; so the chart looks a little strange. What's that? The Asian exchange volumes are a little difficult to make out? Ah... well, in that case, let me clarify it for you: The volume on the NYSE is approximately 700x that of both Tokyo and Hong Kong and a mere 350x that of Singapore.

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In short, Asians like their gold to be heavy, shiny, and made of ... well, gold.
GLD ETF Daily Traded US$ Volume NYSE/TSE/HKSE/SGX
October 2012 - October 2013

1,500,000,000

1,200,000,000

900,000,000

600,000,000 $4,199,149 $2,623,414 $2,166,621 $1,419,127,163 300,000,000 Singapore HK Japan US

Source: Bloomberg

This massive disparity in appetite for "placeholder gold" is just one side of the coin, however; and India is just one of the Eastern countries that has been soaking up copious amounts of physical gold in recent months. Why? Well, I'll hand it back to S. again, as he finishes his article with something of a flourish: The economic establishment wails that gold does not obey its policies. Gold defies government policies because of the disconnect between the policies and the people. Indians revere, not simply love, gold. But the State policies are founded on the economic theories of the West which treat gold like any other commodity for trade and profit. It is no surprise that the theories, which work in the West but not here, project gold as India's villain. Yet, gold has emerged as the winner in economics successfully hedging inflation and beating the stocks and banks. With the unalterable basic facts about gold in India known, the real challenge is how to frame a practical and workable policy for gold and how to ensure that gold imports do not affect the macro economy. Gold buying by Indians is seen as weakening India. But buying is economic power as well in fact, the ultimate economic power is a nation's market. Yet, surprisingly, India has not put to use its enormous power as one quarter of the world's retail market for gold. India has to strategise and use its huge market to overcome the weakness of its people for gold. How to do it is the challenge and a topic by itself. Indeed. How do you get the gold out of Indian citizens' hands and into government coffers? I can think of one way, but I wouldn't advocate trying it.
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The evidence of physical gold's being sucked ever more violently from West to East grew hugely this past week when figures were released for gold exports to Switzerland through London: (Reuters): A surge in gold exports from the United Kingdom to Switzerland this year may largely be the result of metal sold out of exchange-traded funds being shipped for rerefining before making its way to Asia, according to Australian bank Macquarie. UK gold exports to Switzerland, Europe's major bullion refining hub, jumped to 1,016.3 tonnes in the first eight months of this year, data from European Union statistics agency Eurostat shows, from 85.1 tonnes in the same period of 2012.... A surge in gold exports from the United Kingdom to Switzerland this year may largely be the result of metal sold out of exchange-traded funds being shipped for re-refining before making its way to Asia, according to Australian bank Macquarie. UK gold exports to Switzerland, Europe's major bullion refining hub, jumped to 1,016.3 tonnes in the first eight months of this year, data from European Union statistics agency Eurostat shows, from 85.1 tonnes in the same period of 2012.... Asia is by far the world's largest centre for physical gold demand, with China and India between them responsible for nearly half of global gold fabrication demand, which includes jewellery manufacture. Buying in Asia shot higher in the second quarter of the year after a sharp drop in gold prices, which spurred consumer demand. "Given the outflows from ETPs, strong demand in Asia and refining capacity in Switzerland, it is possible the metal is headed for Asia through Switzerland," Barclays Capital analyst Suki Cooper said. That is a twelve-fold increase in bullion traffic between the primary vault in London and the major refineries in Switzerland. Extraordinary. Now, we don't know with absolute certainty where that gold is ultimately bound but we know it isn't Switzerland. If we throw into the mix the widely covered movement of gold into China through HK, a picture begins to emerge of an incredible wave of physical metal heading from West to East, even as the price continues to languish. One of the primary sources of supply in this steady transfer of physical bullion has been the GLD warehouse. I've touched on the subject of the incredible vanishing ETF gold holdings before, but it's worth revisiting the phenomenon and reminding readers of a chart I included in the July 16th edition of Things That Make You Go Hmmm..., entitled "What If?":

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Gold Price vs Comex Inventories vs ETF Holdings
July 2011 - July 2013
2000 Gold Price (US$) 11 90 100 10

9 1500 COMEX HOLDINGS (oz mln) Bundesbank Repatriation Request ETF HOLDINGS (oz mln) 80 8

7 70 6

1000

July 2011

July 2012

July 2013

60

Source: TTMYGH/Bloomberg/COT

This chart shows the precipitous drop-off in both ETF holdings and gold stored in the COMEX warehouses. (I included the Bundesbank's now-infamous repatriation request in this particular chart, but let's leave that little coincidence aside for the time being and concentrate on the "what" and not the "why".) The gold in London is heading somewhere and it's heading there via Switzerland, by the looks of it. Taking that chart a step further, we find yet more evidence of a major disconnect between the two biggest precious metals ETFs, GLD and SLV. As you can see from the first chart below, the prices of both "monetary metal" ETFs have performed pretty badly so far this calendar year, with GLD falling a chunky 20%:
120

GLD vs SLV Price 2013 YTD


(Jan 1 2013=100)

100

80

60

SLV US Equity GLD US Equity

40

2013

Source: Bloomberg
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The extent of this decline is cited by mainstream commentators as the reason for the hollowing out of the amount of metal held in custody on behalf of the GLD ETF. The silver ETF has fared even more poorly, with its customary volatility pushing it 27.5% lower year-to-date. Tough times to be a precious metals bull, to be sure. Now, however, take a look at the total reported physical metal holdings of all precious metals ETFs. (These figures extend wider than simply GLD and SLV and take into account all the major competing products.)
Total Known Holdings of Silver & Gold ETFs
2013 YTD
120

+8%

100 Silver Gold

80

-28%

60

2013

Source: Bloomberg

Notice anything? Yes... holdings of silver in ETFs have actually increased as the price has fallen nearly 30%, while gold bullion in custody has plummeted. Now, if there's anybody out there who can explain this phenomenon to me, I am genuinely interested in hearing any and all plausible explanations. I said "plausible", folks. This draining of physical metal was always going to cause stresses somewhere in the machinery at some point it was only a matter of time and the Indian central bank's "war on gold" seems to have been the final straw. As the RBI's working group so neatly summarized on page 9 of their 224-page paper: "Demand for gold is not strictly amenable to policy changes and also is price inelastic due to varied reasons."
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Of course, despite the fact that gold isn't "strictly amenable to policy changes" (oh how I love that phrase), nor does it have any price elasticity, the Indian government went ahead and made a raft of policy changes designed to curb gold buying. The upshot? (Bloomberg): Gold premiums in India, the world's largest user, climbed to a record as jewelers rushed to secure supplies to meet soaring demand during festivals and weddings amid government curbs on imports. The fees paid by jewelers to banks and other importers climbed to as much as $120 an ounce over the London price this week compared with a discount of $60 a month earlier, said Bachhraj Bamalwa, a director at the All India Gems & Jewellery Trade Federation. Premiums may surge to $150 to $200 if the shortage persists, he said. The raw material scarcity is worsening as imports slumped after the government linked shipments to re-exports in July and increased tax on overseas purchases for a third time this year to curtail demand. Purchases of gold and silver tumbled to $800 million last month from $4.6 billion a year earlier, the Commerce Ministry said Oct. 9. "There is a shortage in the market and there will be panic in the market with each passing day" if supplies don't increase, Bamalwa said. "The government is comfortable because import of gold is reduced but it's a problem for consumers. Gold is in our culture and we can't change that." Those final ten words are the key. There now exists something of a perfect storm in the physical gold market as we move deeper into the Indian festival season. Demand at this time of the year in the subcontinent is "inelastic" (as the geniuses at the RBI eventually surmised). The GLD ETF has already lost nearly 35% of its bullion this year; China has been hoovering up as much physical gold as it possibly can (through Hong Kong and, most likely, Switzerland); and we are now set to move into what has been, for the last 40 years, the strongest part of the year with regard to the price performance of gold (driven largely by that Indian festival season). The chart below shows seasonal gold price performance since 1969. (Although the data stops at 2010, so that there are a couple of down years missing, the pattern is the important thing here.) I have laid the chart out from September to August to better illustrate the phase we are moving into. October has traditionally been the weakest month of the year, while November through January has been the strongest period:

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Gold Spot Price: Seasonal Monthly Performance


1969-2010
3.0

2.5

2.0

1.5

%
1.0

You Are HERE

0.5

0.0

-0.5
ay ne ly y y ar ch er be be be il Ap r ar ar to b M Ju Ju pt em No ve m ce m Se De Fe b Oc Ja Au g nu ru M us t r r r

Source: US Global Investors

To complicate matters further, the supply and demand information available in the alwaysopaque gold market has been questioned this past week by none other than Eric Sprott, who, as he always does, laid out his case simply and beautifully allowing the numbers to speak for themselves. In an open letter to the World Gold Council, Eric demonstrated that either the numbers are wrong, or the shortage of supply is enormous. And the reason for these conflicting data points? Why, demand from Asia. Of course: (Eric Sprott): Over the past few years, we have seen incredible incremental demand from emerging markets. Indeed, so much so that the People's Bank of China has announced that it is planning to increase the number of firms allowed to import and export gold and ease restrictions on individual buyers. In India, the government has been fighting a losing battle against gold imports by imposing import taxes and restrictions. Moreover, Non-Western Central Banks from around the world are replacing their U.S. dollar reserves by increasing their holdings of gold. But, demand statistics reported by the World Gold Council (WGC) consistently misrepresent reality, mostly with regard to demand from Asia.

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To illustrate my point, Table 1 below contrasts mine production with demand from some of the world's largest gold consumers. According to WGC/GFMS data, the world will mine, on an annualized basis, about 2,800 tonnes of gold for 2013. But, I adjusted these figures to reflect mine production from China and Russia, which never leaves the country and is used solely to satisfy domestic demand. After adjustments, we have a total world mine supply of about 2,140 tonnes. On the demand side, I make some in-house adjustments to better represent demand from emerging markets. To proxy for gold consumption in China, Hong Kong, India, Thailand and Turkey, I use net imports of gold, as reported by their various governmental agencies. While imports might in general be an imperfect proxy for demand, those countries see very little re-export of what they import and keep most of it for themselves, so it is not unreasonable to assume that what they import they "consume", on top of their domestic production. To this I add the demand, as estimated by the GFMS, from other countries and that of central banks. I annualized the year-to-date figures and found that for this year, annualized total demand is approximately 5,200 tonnes. On that basis, "core" annualized demand is approximately 3,000 tonnes more than mine supply.

Source: Sprott Funds

Pretty compelling. So, how does this all play out? Well, I've been watching this situation unfold through most of this past year with an increasingly bemused look on my face, because the numbers just don't add up. But so far, despite clear evidence of massive demand for physical gold, "The Gold Price" has continued to trade poorly. However, the longer this situation persists, the more definitely it will resolve itself; and it's very hard to see how that resolution ends in anything but higher prices.

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Demand levels from Asia continue to soar while production increases just a couple of percent each year; and leaving aside Indian festivals and increasing central bank purchases, the fiat alternative to gold bullion the US dollar is coming under renewed pressure in the wake of the Taper That Never Was and the appointment of Janet Yellen as Ben Bernanke's successor. Which brings us neatly back to the Monkees and the Beatles. Although, for a short space of time (in this case, a single year) the Monkees managed to become so popular that they outsold what has become widely recognized as the greatest collection of songs ever assembled on a single album, in due course the record-buying public returned to the gold standard of Lennon & McCartney; and it is the Beatles who, with sales estimated at 600 million records, remain the accepted store of musical value some 50 years after their heyday. Because there hasn't been any kind of gold standard for the past 42 years, most people assume that it will never happen again; but this chart (which I originally put together a couple of years ago) demonstrates that over the last 200 years the dollar has been on a gold standard of some sort for longer than it has relied on the power of fiat it just hasn't been that way lately:

Gold Price/Oz (USD)


$1800

Floating
$1500

Fixed

$1200

$900

$600

$300

0 1800 1810 1820 1830 1840 1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

Source: TTMYGH

But, like the infatuation America had with the Monkees in 1967, this fascination with the fiat dollar will prove to be nothing more than a passing fad; and one day perhaps soon the citizens of the West will, like their cousins in Asia and the Indian subcontinent, realize that there really is no alternative to sound money. The only problem is, when the realization finally dawns, where will all the gold be?

*******

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OK ... so, with all that said (and a heartfelt apology to any Monkees fans feeling slighted),
let's move on to see what we have on the slate this week. We kick things off with the first of two Ambrose Evans-Pritchard articles in which he looks at recent developments in Europe. First up, France and the increasing disillusionment with "all things Europe" that is eating away at the establishment. From there Ambrose heads to Portugal, Spain, Italy, and Greece for some rather concerning datapoints which suggest more troubled times ahead for our old friends the PIGS (Ireland, you are excused). Another clue appears in the mystery surrounding US unemployment numbers, courtesy of The Economist; the NSA surveillance scandal comes to a fever pitch (despite Jay Carney's carefully worded assurances this week); we take a walk on the wild side in an English supermarket just before closing time; and Niall Ferguson slams Krugtron The Invincible not once but three times. The murky world of the American Medical Association is uncovered in a startling expos; we get an up-close look at the clean-up operation at Fukushima (only to find that conditions there would make even the most hard-nosed health & safety officer blanch); and we learn why expanded iron ore production doesn't mean lower prices are in the offing. If it's charts you want, then we've got you covered as we take a look at Caterpillar's earnings and what they might portend for the global economy, US finances (ugh!), and a fantastic graphic that illustrates just how enormous Africa is. There are interviews with Andrew Maguire and Eric Sprott (who touch on a lot of the themes about which I've written this week), a link to the movie The Four Horsemen (one for a rainy Sunday morning), and Jon Stewart's epic takedown of Healthcare.gov. And, if you have the stomach for it, stay tuned for an interview with a seemingly forgetful Alan Greenspan.

Until Next Time... ******* Frexit fever reaches heart of French establishment
Calls for EMU break-up are spreading into the upper echelons of the French foreign policy establishment, and the pro-European core. An astonishing new book by Franois Heisbourg La Fin du Rve Europen (The end of the European dream) argues that the "euro cancer" must be cut out to save the rest of the EU Project before it is too late. "The dream has given way to nightmare. We must face the reality that the EU itself is now threatened by the euro. The current efforts to save it are endangering the Union yet further," he writes:

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There is nothing worse than having to confront the sunless mornings (matins blmes) of an endless crisis, but we are not going to avoid it by denying the reality, and God knows denial has been for a long time, by default, the operating mode of those in charge of EU institutions. At some time in the future, he insists, Europe's leaders should relaunch the euro, but only after they have established the necessary federalist foundations, and only among a vanguard willing to accept the full implications of a federal currency. The call to "put the euro to sleep" for Europe's own good is a new twist. We heard a little of this from Germany's AfD anti-euro party, but they had other baggage. The Heisbourg book is a headon challenge to the Merkel Doctrine (largely rhetorical, contradicted by Germany's actions) that a collapse of EMU would stir up all the old demons of the 20th century. Yes, a disintegration of the euro might indeed lead to such a calamitous outcome if events are allowed spin out of control after years of festering crisis the current course but what kind of an argument is that? It happens only if they let it happen. It is high time somebody from within the EU elites exposed this sentimental Quatsch and misuse of history for what it is. Prof Heisbourg is certainly an insider, a different kettle of fish from the Front National's Marine Le Pen, now leading French opinion polls with vows to kill off EMU and restore the French franc. A product of the Quai d'Orsay, he is an ardent European federalist and long-time champion of EMU, and currently chairman of the very blue-chip International Institute for Strategic Studies (IISS). He says Europe's leaders have lost sight of priorities, seeming to think that the European system must be convulsed and refashioned for the needs of the euro, as if pre-Copernican the sun rotates around earth. "You cannot create a federation to save a currency. Money has to be at the service of the political structure, not the other way around," he says. While he would dearly love to see the great leap forward to an EU federal superstate which he deems necessary to render monetary union workable over time this dream is now "pure fantasy". Attempts to create a "European demos" have obviously failed. The nations are drifting further apart. A referendum on any such concentration of power in the EU institutions would fail almost everywhere. "Integration has reached the limits of legitimacy", he writes. The EU intrusions once tolerated as "disagreeable" have now become "insupportable". Reading between the lines, he seems to have been shocked into writing this book by Germany's role in the Libyan crisis, its refusal to provide transport planes (a routine courtesy for Nato allies) to help France "stop another Srebrenica massacre" in Benghazi, even after intervention had been approved by the UN Security Council and the Arab League. The splendid Joschka Fischer called Germany's decision to line up with Russia and China "a scandalous mistake," warning that Germany risked waking up one day to find itself in "a very precarious position" if it continued to play this game.
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You can perhaps read too much into the Libya episode, but the Franco-German body language has not improved much over Syria. Or as my esteemed Telegraph colleague Con Coughlin puts it: that Germany's default position is now pro-Moscow....
*** AMBROSE EVANS-PRITCHARD / LINK

The missing millions


IN THE early 1980s the distressing persistence of high unemployment in Europe was labelled "Eurosclerosis". Some now wonder whether "Amerisclerosis" is the right word to describe America's labour market. It is true that unemployment has slowly dropped from a peak of 10% in late 2009, to 7.3% at present. But this decline overstates the health of the jobs market. The labour-force participation rate, the share of the working-age population either working or looking for work, has plunged from 66% in 2007 to 63.2% in August, a 35-year low. If those people who have simply dropped out of the labour force were classified as unemployed, the headline jobless rate would be much higher. This drop in the participation rate is striking by international standards, too. Among 34 (mainly rich-country) OECD countries, only in Ireland and Iceland did participation rates fall farther between 2007 and 2012. In Italy and Britain, where unemployment rates have risen by a roughly similar amount as in America, labour-force participation rose (see left-hand chart).

Source: Economist

Many economists believe much of this decline in participation is structural. They argue it reflects increased college enrolment by the young, the approach of retirement for the babyboomers and a levelling-off in women's participation after rapid post-war increases. That is doubtless part of the story, but it does not explain everything. Participation rates have declined sharply for "prime-age" men and women between 25 and 54, and risen slightly for those aged 55 and over.

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By contrast, participation has generally risen for prime-age women in other OECD countries, and risen or fallen only slightly for men. Cyclical factors are also at work. The unemployed may give up looking for work after long spells of unemployment. Bart Hobijn of the Federal Reserve Bank of San Francisco says that in much of Europe, jobless benefits, which generally require recipients to keep looking for work, are more generous and last longer than in America. That may explain why participation rates there have not fallen. In America, he says, workers are more likely to go back to study or stay at home. The so-called U-6 unemployment rate, which includes those who want jobs but haven't looked lately or have given up, and those who work part-time because they cannot find fulltime work, rose more in the past five years than the official unemployment rate. In a 2011 paper* Mr Hobijn and three co-authors noted that many of those reported as newly unemployed have in fact been out of work for months but have not previously been recorded as unemployed, probably because they have taken a break from the job search. The authors reckon that these "fringe" workers are much more prevalent than in previous cycles. The big question is whether such workers will start looking for work again in time. The signs are worrying. If you look at U-6 unemployment over just the past two years, rather than the past five, it has fallen faster than official unemployment. That suggests many of the people on the periphery of the labour force have now left it entirely. One explanation for that may be government benefits that affect incentives to look for work....
*** ECONOMIST / LINK

Krugtron the Invincible, Parts 1, 2 & 3


It's an ill wind that blows no one any good. The financial crisis that came to a head five years ago with the failure of Lehman Brothers has been especially beneficial to the economist Paul Krugman. In his widely read New York Times column and blog, Krugman regularly boasts that he has been "right" about the crisis and its consequences. "I (and those of like mind)," he wrote in June last year, "have been right about everything." Those who dare to disagree with him myself included he denounces as members of the "Always-Wrong Club." Readers of his blog have just been treated to another such sneer. "Maybe I actually am right," Krugman wrote back in April, "and maybe the other side actually does contain a remarkable number of knaves and fools.... Look at the results: again and again, people on the opposite side prove to have used bad logic, bad data, the wrong historical analogies, or all of the above. I'm Krugtron the Invincible!" That last allusion is to the 1980s science fiction superhero, Voltron. The resemblance between Krugman and Voltron was suggested by one of the gaggle of bloggers who are to Krugman what Egyptian plovers are to crocodiles. Yesterday one of these thought, wrongly, that he had caught me out. Unwisely, the crocodile snapped its jaws shut.

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As a Princeton professor and Nobel Prize winner, Krugman is indeed widely believed to be intellectually invincible. He himself acknowledges having made only two mistakes, both predating the crisis: the impact of information technology on productivity, which he underestimated, and the significance of the federal deficits of the Bush administration, which he overestimated. "In the Great Recession and aftermath, however, I went with [my] models and they worked!" "Let those who are without error cast the first stone," Krugman wrote back in 2010. Unfortunately, this is not an injunction he himself has heeded. Repeatedly, over the last five years, he has heaped opprobrium on others. His latest performance is characteristic; perhaps not quite intentionally he even refers to "my own unpleasantness with Ferguson". Let us leave for the moment the question of the future size of the federal debt, which I have dealt with elsewhere and shall return to in a subsequent article. My purpose here is simply to challenge Krugman's right to behave in this way. Even if he were nearly always right, there would be no justification for his lack of civility. But he is not nearly always right. There is therefore no justification for his unshakeable certainty either. Krugman reserves a special contempt for people who, in his words, "take a position and refuse to alter that position no matter how strongly the evidence refutes it, who continue to insist that they have The Truth despite being wrong again and again." He calls this "derping." The awkward thing for Krugman is that "being wrong again and again" perfectly characterizes his own commentary on what proved to be one of the crucial issues of the financial crisis: whether or not Europe's monetary union would survive it. To begin with, Krugman was blithely confident that Europe would weather the economic storm better than the United States. On January 11, 2008, he hailed it as "The Comeback Continent": ... Since 2000, employment has actually grown a bit faster in Europe than in the United States ... If you think Europe is a place where lots of able-bodied adults just sit at home collecting welfare checks, think again.... Europe's economy looks a lot better now both in absolute terms and compared with our economy than it did a decade ago. Krugman explained Europe's comeback in terms of "deregulation", a more competitive broadband market than the U.S., "strong social safety nets" and "very high taxes." On May 19, 2008, after a visit to Berlin, he even told his faithful readers: "I have seen the future, and it works ... in the heart of "old Europe"." (Admittedly this column was a standard "peak oil" piece, exhorting to Americans to have German-style cars and public transport, as opposed to, say, developing new technology to unlock hitherto inaccessible domestic supplies of oil and natural gas.) Finally, in December 2008, Krugman woke up to the fact that the "Comeback Continent" was in fact an "economic mess."...
*** NIALL FERGUSON / PART 1 / PART 2 / PART 3

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Citi forecasts Greek devastation, unstoppable debt spirals in Italy and Portugal
If Citigroup is right, the slight rebound in Europe over the summer will not be enough to stop Club Med going from bad to worse, with a string of soft defaults/restructurings. I pass their latest forecasts on to readers. I do not endorse them. Italy will bounce along in near-permanent recession with growth of 0.1pc in 2014, zero in 2015, and 0.2pc in 2016. The debt will punch above 140pc of GDP, beyond the point of no return for a country with no economic growth or sovereign currency. "We do not expect the public debt ratio will enter a downtrend in coming years, and we suspect that some form of debt restructuring (maturity lengthening and/or coupon reductions) may be likely eventually," said the bank. Portugal is in an even worse state, with growth of: 0.6pc, 0.0pc, 1.0pc, over the next three years, with debt hitting 149pc of GDP by 2015, and unemployment rising again to 18.3pc: Given the fiscal tightening still to come, ongoing private deleveraging and ensuing poor nominal GDP growth prospects, doubts still exist about the sustainability of the Portuguese public debt in our view." A second full bail-out programme remains a clear risk in the event of market sentiment deteriorating. In any case, we think a Greek-style public debt restructuring unlikely in the near future, but a restructuring of some government contingent liabilities is still possible. Greece continues to be a catastrophe. The alleged stabilisation will prove to be a false dawn. The economy will contract by a further 2.9pc in 2014, and 1.4pc in 2015, pushing unemployment to 32.4pc, and the debt to 201pc of GDP. Spain will not default or need debt restructuring, which looks to me like a change in forecast. However, growth will be just 0.1pc next year, 0.3pc in 2015, and 0.7pc in 2016, not enough to stop unemployment rising yet further to 27.9pc. Ireland will make it. The country is highly competitive and has little in common with the others. If Citigroup is broadly correct, Europe faces a lost decade that is far worse than anything suffered by Japan, which will render the region marginal in coming world affairs, and is likely to have non-linear political consequences. The lesson of the 1930s is that you have to discredit both the moderate Left and Right in turn before voters turn to extreme parties en masse. I cannot see how perma-slump and rising unemployment can continue through to 2017 without patience snapping. But such judgements are entirely political, and therefore intuitive. You have to speak the languages of these countries and know them very well to have any useful insights.

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Citi's team is headed by ardent euro-federalist Willem Buiter, and most of his team are from eurozone countries, so this is not an Anglo-Saxon report. Of course, there is always the possibility that they are completely wrong. They had better be wrong.
*** AMBROSE EVANS-PRITCHARD / LINK

Help wanted in Fukushima: Low pay, high risks and gangsters


Tetsuya Hayashi went to Fukushima to take a job at ground zero of the worst nuclear disaster since Chernobyl. He lasted less than two weeks. Hayashi, 41, says he was recruited for a job monitoring the radiation exposure of workers leaving the plant in the summer of 2012. Instead, when he turned up for work, he was handed off through a web of contractors and assigned, to his surprise, to one of Fukushima's hottest radiation zones. He was told he would have to wear an oxygen tank and a double-layer protective suit. Even then, his handlers told him, the radiation would be so high it could burn through his annual exposure limit in just under an hour. "I felt cheated and entrapped," Hayashi said. "I had not agreed to any of this." When Hayashi took his grievances to a firm on the next rung up the ladder of Fukushima contractors, he says he was fired. He filed a complaint but has not received any response from labor regulators for more than a year. All the eight companies involved, including embattled plant operator Tokyo Electric Power Co, declined to comment or could not be reached for comment on his case. Out of work, Hayashi found a second job at Fukushima, this time building a concrete base for tanks to hold spent fuel rods. His new employer skimmed almost a third of his wages about $1,500 a month and paid him the rest in cash in brown paper envelopes, he says. Reuters reviewed documents related to Hayashi's complaint, including pay envelopes and bank statements. Hayashi's hard times are not unusual in the estimated $150-billion effort to dismantle the Fukushima reactors and clean up the neighboring areas, a Reuters examination found. In reviewing Fukushima working conditions, Reuters interviewed more than 80 workers, employers and officials involved in the unprecedented nuclear clean-up. A common complaint: the project's dependence on a sprawling and little scrutinized network of subcontractors many of them inexperienced with nuclear work and some of them, police say, have ties to organized crime.

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Tepco sits atop a pyramid of subcontractors that can run to seven or more layers and includes construction giants such as Kajima Corp and Obayashi Corp in the first tier. The embattled utility remains in charge of the work to dismantle the damaged Fukushima reactors, a government-subsidized job expected to take 30 years or more. Outside the plant, Japan's "Big Four" construction companies Kajima, Obayashi, Shimizu Corp and Taisei Corp oversee hundreds of small firms working on government-funded contracts to remove radioactive dirt and debris from nearby villages and farms so evacuees can return home. Tokyo Electric, widely known as Tepco, says it has been unable to monitor subcontractors fully but has taken steps to limit worker abuses and curb the involvement of organized crime. "We sign contracts with companies based on the cost needed to carry out a task," Masayuki Ono, a general manager for nuclear power at Tepco, told Reuters. "The companies then hire their own employees taking into account our contract. It's very difficult for us to go in and check their contracts." The unprecedented Fukushima nuclear clean-up both inside and outside the plant faces a deepening shortage of workers. There are about 25 percent more openings than applicants for jobs in Fukushima prefecture, according to government data. Raising wages could draw more workers but that has not happened, the data shows. Tepco is under pressure to post a profit in the year to March 2014 under a turnaround plan Japan's top banks recently financed with $5.9 billion in new loans and refinancing. In 2011, in the wake of the disaster, Tepco cut pay for its own workers by 20 percent. With wages flat and workers scarce, labor brokers have stepped into the gap, recruiting people whose lives have reached a dead end or who have trouble finding a job outside the disaster zone. The result has been a proliferation of small firms many unregistered. Some 800 companies are active inside the Fukushima plant and hundreds more are working in the decontamination effort outside its gates, according to Tepco and documents reviewed by Reuters....
*** YAHOO / LINK

Special Deal
On the last week of April earlier this year, a small committee of doctors met quietly in a midsized ballroom at the Renaissance Hotel in Chicago. There was an anesthesiologist, an ophthalmologist, a radiologist, and so on thirty-one in all, each representing their own medical specialty society, each a heavy hitter in his or her own field.

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The meeting was convened, as always, by the American Medical Association. Since 1992, the AMA has summoned this same committee three times a year. It's called the Specialty Society Relative Value Scale Update Committee (or RUC, pronounced "ruck"), and it's probably one of the most powerful committees in America that you've never heard of. The purpose of each of these triannual RUC meetings is always the same: it's the committee members' job to decide what Medicare should pay them and their colleagues for the medical procedures they perform. How much should radiologists get for administering an MRI? How much should cardiologists be paid for inserting a heart stent? While these doctors always discuss the "value" of each procedure in terms of the amount of time, work, and overhead required of them to perform it, the implication of that "value" is not lost on anyone in the room: they are, essentially, haggling over what their own salaries should be. "No one ever says the word 'price', a doctor on the committee told me after the April meeting. "But yeah, everyone knows we're talking about money." That doctor spoke to me on condition of anonymity in part because all the committee members, as well as more than a hundred or so of their advisers and consultants, are required before each meeting to sign what was described to me as a "draconian" nondisclosure agreement. They are not allowed to talk about the specifics of what is discussed, and they are not allowed to remove any of the literature handed out behind those double doors. Neither the minutes nor the surveys they use to arrive at their decisions are ever published, and the meetings, which last about five days each time, are always closed to both the public and the press. After that meeting in April, there was not so much as a single headline, not in any major newspaper, not even on the wonkiest of the TV shows, announcing that it had taken place at all. In a free market society, there's a name for this kind of thing for when a roomful of professionals from the same trade meet behind closed doors to agree on how much their services should be worth. It's called price-fixing. And in any other industry, it's illegal grounds for a federal investigation into antitrust abuse, at the least. But this, dear readers, is not any other industry. This is the health care industry, and here, this kind of "price-fixing" is not only perfectly legal, it's sanctioned by the U.S. government. At the end of each of these meetings, RUC members vote anonymously on a list of "recommended values," which are then sent to the Centers for Medicare and Medicaid Services (CMS), the federal agency that runs those programs. For the last twenty-two years, the CMS has accepted about 90 percent of the RUC's recommended values essentially transferring the committee's decisions directly into law.

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The RUC, in other words, enjoys basically de facto control over how roughly $85 billion in U.S. taxpayer money is divvied up every year. And that's just the start of it. Because of the way the system is set up, the values the RUC comes up with wind up shaping the very structure of the U.S. health care sector, creating the perverse financial incentives that dictate how our doctors behave, and affecting the annual expenditure of nearly one-fifth of our GDP. It's fairly common knowledge at this point that Congress does not allow Medicare to negotiate with pharmaceutical companies over the amount the government pays for their drugs. Each drug company simply sets a price for its own product, and Medicare either takes it or doesn't. While that arrangement undoubtedly drives up Medicare spending and health care spending more generally it at least allows for some competition among the drug companies that manufacture similar products. But when it comes to paying doctors for the services and procedures they perform, the system is even more backward. In this case, Medicare actually asks the suppliers the doctors themselves to get together first, compare notes, and then report back on how much each of them ought to get paid. Medicare is not legally required to accept the RUC's recommended values for doctors" services and procedures, but the truth is, it doesn't have much of a choice. There is no other advisory body currently capable of recommending alternative prices, and Congress has never given the CMS the resources necessary to do the job itself. The consequences of this set-up are pretty staggering. Allowing a small group of doctors to determine the fees that they and their colleagues will be paid not only drives up the cost of Medicare over time, it also drives up the cost of health care in this country writ large. That's because private insurance companies also use Medicare's fee schedule as a baseline for negotiating prices with hospitals and other providers. So if the RUC inflates the base price Medicare pays for a specific procedure, that inflationary effect ripples up through the health care industry as a whole....
*** WASHINGTON MONTHLY / LINK

NSA surveillance: Germany to send intelligence officials to US


New claims emerged last night over the extent that US intelligence agencies have been monitoring the mobile phone of Angela Merkel. The allegations were made after German secret service officials were already preparing to travel to Washington to seek explanations into the alleged surveillance of its chancellor. A report in Der Spiegel said Merkel's mobile number had been listed by the NSA's Special Collection Service (SCS) since 2002 and may have been monitored for more than 10 years. It was still on the list marked as "GE Chancellor Merkel" weeks before President Barack Obama visited Berlin in June.

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In an SCS document cited by the magazine, the agency said it had a "not legally registered spying branch" in the US embassy in Berlin, the exposure of which would lead to "grave damage for the relations of the United States to another government". From there, NSA and CIA staff were tapping communication in Berlin's government district with high-tech surveillance. Quoting a secret document from 2010, Der Spiegel said such branches existed in about 80 locations around the world, including Paris, Madrid, Rome, Prague, Geneva and Frankfurt. Merkel's spokesman and the White House declined to comment on the report. The nature of the monitoring of Merkel's mobile phone is not clear from the files, Der Spiegel said. It might be that the chancellor's conversations were recorded, or that her contacts were simply assessed. Ahead of the latest claims , the German government's deputy spokesman, Georg Streiter, said a high-level delegation was heading to the White House and National Security Agency to "push forward" investigations into earlier surveillance allegations. Meanwhile several thousand people marched to the US Capitol in Washington yesterday to protest against the NSA's spying programme and to demand a limit to the surveillance. Some of them held banners in support of Edward Snowden, the former CIA contractor who revealed the extent of the NSA's activities. The march attracted protesters from both ends of the political spectrum as liberal privacy advocates walked alongside members of the conservative Tea Party movement. The delegation will include senior officials from the German secret service, according to German media reports. Germany and Brazil are spearheading efforts at the UN to protect the privacy of electronic communications. Diplomats from the two countries, which have both been targeted by the NSA, are leading efforts by a coalition of nations to draft a UN general assembly resolution calling for the right to privacy on the internet. Although non-binding, the resolution would be one of the strongest condemnations of US snooping to date. "This resolution will probably have enormous support in the GA [general assembly] since no one likes the NSA spying on them," a western diplomat told Reuters on condition of anonymity. The Brazilian president, Dilma Rousseff, had previously cancelled a state visit to Washington over the revelation that the NSA was scooping up large amounts of Brazilian communications data, including from the state-run oil company Petrobras. The drafting of the UN resolution was confirmed by the country's foreign ministry. The Associated Press quoted a diplomat who said the language of the resolution would not be "offensive" to any nation, particularly the US. He added that it would expand the right to privacy guaranteed by the international covenant on civil and political rights, which went into force in 1976.

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The draft would be sent next week to the general assembly subcommittee on social, humanitarian, cultural and human rights issues, and be put to the full general assembly in late November. Germany and France demanded on Thursday that the Americans agree to new transatlantic rules on intelligence and security service behaviour by the end of the year. Merkel added that she wanted action from Obama, not just apologetic words.
*** UK GUARDIAN / LINK

Tesco's reduced-to-clear aisle: "it's a taste of the Serengeti"


"You see, I don't want that watermelon. But if I did, that would stop it going in to landfill." Simon Barnes, 47, and I are standing by the reduced aisle in a Tesco store in Kennington, south London. In fact, I do want the watermelon. However, I feel that it would be infra dig to conduct this interview carrying a watermelon. This was the week in which Tesco revealed that it had binned 30,000 tonnes of food waste in the first half of 2013. Like holding their nose and jumping into a cold pool, Tesco bosses decided that the transparency was worth the opprobrium, which I think will turn out to be true. The main thing that struck a chord was not the profligacy of supermarkets but the elegiac decay of the bagged salad: more than two-thirds of it thrown out, half by customers, half by stores. So much waste, so little actual ingestion. It's like a leafy metaphor for the good intention. Picturing Tesco's statistic, however, one imagines heaps of food out back, baked goods piled high on maroon plastic crates, a totem of pointless waste. That's just not how it works any more. The total waste along the food value chain (this is how they talk, OK?) is 32%; 16% is wasted in "agriculture and supply"; 16% by the consumer. The amount wasted by retailers is, they say, less than 1%. Shoppers could and do argue that their waste is spurred by supermarket offers; farmers could and do argue that their waste is caused by factors outside their control, such as: "I cannot eat this parsnip because it looks like the gnarly hand of a wizard." The fact remains that, when you go into a Tesco superstore, the operation is as lean as a hare. "People come in at around half eight, because that's when things start to get really cheap," Barbara, the deputy store manager in Kennington, explains. "We make an announcement on the PA and people will be here immediately." Nigel Leigh, 58, is a one-time university lecturer and documentary maker. He arrives from nowhere, like Nanny McPhee. A minute ago, there was only a fruit salad, a watermelon, and some pre-cooked rice noodles, only modestly reduced from 1.20 to 71p. Suddenly, there are three ready meals, one of which is a mushroom risotto for 36p, 10% of its original price, and Nigel has it. His manner is that of a mischievous soothsayer.

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How did he know? There was no announcement. "I'm the guy you're looking for. There's a certain kind of bottom feeding shopper. And I'm it," Nigel explains. There are people who will buy things simply because they're on the reduced shelf, before they have been marked down still further. Those people are stupid, thinks Nigel. "But you can make a mistake the other way. You can see something that you actually really want, but you know it's not as reduced as it could be. So you leave it for a while. But guess what there are other people in this store as well, and they will buy it. You can't let yourself go home miserable if you've only got a discount of 50%." Nigel does, inevitably, have rivals. "There's a guy who comes in, I think he's a Korean student. If I see him, I may as well go home. He'll have the lot." And there are other people who don't abide by the code of honour. "They go to the shelf, put everything in their cart, and then, like an animal, they'll take it away and look at it somewhere else. Bring back the stuff they've decided they don't want." But if there's competition, there's no ill-will. "Me and them, the guy who supplies the shelf, the guy who takes it off the shelf, we're all victims of a world economy over which we have very little control." There's a tub of clotted cream sitting like an orphan on the shelf. "The important thing is," Simon underlines by picking it up and waving it about, "never to buy things that you're not going to eat." Earlier Svetlana, 29, made a similar point. "I am always throwing away cream." I catch up with Nigel again near the dried goods. "I've got wealthy friends with big houses in Barnes, they love me to regale them with tales from the reduce-to-clear life. Their wives think it's there-but-for-the-grace-of-God-go-I. But I think it's a little taste of the Serengeti. It's a system that rewards the quick and the brave. The decisive. You need to know what you want, know where it is, and take it. "I'm just playing around with capitalism's artificial pricing system. I will get it at my price. David can win against Goliath, but only if he comes in after eight o'clock."
*** UK GUARDIAN / LINK

Why Expanded Iron Ore Production Doesn't Mean Lower Prices


International banks are increasingly getting involved in the iron ore trade. The purchasing manager at a Hebei-based steel mill said Fortescue Metals Group (FMG), Australia's third-largest iron ore exporter, is now selling iron ore to banks.

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"The specific model is that banks give financing to FMG, which in turn gives banks long-term agreements for a certain volume at below-market prices," the purchasing manager said. "The volumes given to banks aren't that big. Banks have a lot of steel customers and trader customers. They're able to sell several million tons." Many people familiar with the iron ore trade confirmed that many foreign banks are involved in iron ore trade, mainly by helping companies obtain financing. This demonstrates a preference in the banking industry. However, market views on the future of iron ore prices and supply and demand are inconsistent. In mid-August, the Platts index for the 62 percent grade iron ore reached a high of US$ 142.5 per ton. Later, amid increasing iron ore shipments from Australia and Brazil, prices fell somewhat, the Platts index fell to US$ 132 per ton on October 9. In late September, a Morgan Stanley report forecast iron ore prices would fall to US$ 125 per ton in the fourth quarter of this year and US$ 120 per ton in the first quarter of next year. Citigroup is bearish in the short term, reasoning that due to increased expectations for shipping market supply in the fourth quarter, the price would fall to US$ 115 per ton in the fourth quarter. Macquarie Securities said that supported by Chinese steel mills replenishing inventories and other factors, iron ore prices could reach US$ 150 to US$ 160 per ton in the fourth quarter. At the end of August, Rio Tinto began delivering goods from its 290 million ton iron ore expansion project, the largest in Western Australia and the world's second largest. The supplyside risks of the mine expansion are once again raising concern. No one doubts that iron ore supply growth is faster than the growth of demand, but the current situation is akin to homeostasis. Rio Tinto's Iron Ore Division CEO, Andrew Harding, said he expected long-term equilibrium between the supply and demand of iron ore. After reaching 290 million tons, Rio Tinto's next step is 360 million tons. The infrastructure construction for this phase has already begun. Harding predicts that the expansion will happen in the first half of 2015. For this two-stage capacity growth, Rio Tinto approved US$ 3.1 billion of capital expenditures in 2010 and US$ 3.4 billion in 2012. BHP Billiton's expanded production in Western Australia is mainly from the Jimblebar project. After going into production in the coming December, BHP Billiton's annual production will reach 220 million tons. A source from a large mining company said that in the next three years almost all traditional and emerging mines would invest in expansion, and products from mainstream, low-cost mines would enter the market. The industry has already reached the point where supply growth is outstripping growth in demand, he said.

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In 2009, FMG launched an ambitious expansion plan, increasing production capacity to 155 million tons. Although in the third quarter of last year the plan was scaled back due to poor market conditions, with the completion of the 40 million ton Kings mining area, FMG said that the goal of 155 million tons of capacity would be reached by December. But not all projects can be successfully implemented. According to Rio Tinto statistics, more than 600 million tons of expansion projects were planned from 2008 to 2010, while only 200 million tons were completed in the fourth quarter of 2010. Of the 800 million tons of expanded capacity the company said it would complete from 2010 to 2014, only 200 million had been completed by the second quarter of this year....
*** CAIXIN / LINK

Charts That Make You Go Hmmm...

Source: Zero Hedge

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It's different this time, right... even the CAT CEO found a silver lining of hope for the
future (admittedly 5,10, 200 years in the future), but, the sad reality is we have seen exactly this kind of disconnect between CAT's idiocyncratic revenues and world GDP before... and it didn't end well....

*** ZERO HEDGE / LINK

www.mediate.com

Presented without comment ...except to say PLEASE click on the link above to
read some incredible facts about this enormous continent. Truly amazing.
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When Washington raised the debt ceiling this week, the Beltway media

breathlessly reported that the fiscal crisis had ended. Lawyers danced in hallways, bureaucrats twerked on the Metro, congressional aides kissed strangers in the streets: the Tea Party has been defeated! It was like VJ day for wonks. As our political class exchanged high fives and reporters praised a return to "sanity," I wondered how these odd creatures defined insanity. America's fiscal crisis is not that our debt ceiling was too low, the fiscal crisis is that our debt is too high. When I mentioned this to left-leaning folks, they seemed indifferent. "Obama lowered the deficit." "I think Bush spent more." "It's Reagan's fault!" So I made this infographic:

*** JON C GABRIEL / LINK

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Words That Make You Go Hmmm...


Come for Jon
Stewart's hilarious skewering of the Healthcare.gov website fiasco, and stay for an amazing piece of revisionist history courtesy of none other than The Maestro himself, Alan Greenspan, who advocates a course of action that he might want to rethink, lest he find himself wearing an orange jumpsuit... CLICK TO WATCH

After penning this week's missive,


I came across this interview that Andrew Maguire and Eric Sprott gave just today, and it couldn't have been more fitting, given the content of this edition of Things That Make You Go Hmmm... Sometimes, things just fall right into your lap... CLICK TO LISTEN

Courtesy of my buddy Peter in Sydney


comes this link to the full-length documentary The Four Horsemen, which, in the words of the filmmakers "is an award-winning independent feature documentary which lifts the lid on how the world really works". Total Film said: "It's Inside Job with bells on..." I say: "It's an interesting movie". Excited? Click... CLICK TO WATCH

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and finally...

Do babies dream when they sleep, or do they simply rest peacefully? Queenie Liao,
a free-lance artist and mother of three boys living in California, has tried to answer this question by sharing the adventurous dramas that her child Wengenn dreams of while asleep. Combining artistry and imagination with photography, Queenie has created captivating photos using plain cloth, stuffed animals, and other common household materials to create the background setting. Her album, Wengenn in Wonderland, is a compilation of over 100 creative photos that depict the explorations of her son Wengenn in his magical land of charm and wonder. Absolutely beautiful... CLICK HERE TO SEE THESE WONDERFUL IMAGES

Hmmm...
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Grant Williams
Grant Williams is the portfolio manager of the Vulpes Precious Metals Fund and strategy advisor to Vulpes Investment Management in Singapore a hedge fund running over $280 million of largely partners" capital across multiple strategies. The high level of capital committed by the Vulpes partners ensures the strongest possible alignment between the firm and its investors. Grant has 28 years of experience in finance on the Asian, Australian, European and US markets and has held senior positions at several international investment houses. Grant has been writing Things That Make You Go Hmmm... since 2009. For more information on Vulpes, please visit www.vulpesinvest.com.

*******
Follow me on Twitter: @TTMYGH YouTube Video Channel: http://www.youtube.com/user/GWTTMYGH 66th Annual CFA Conference, Singapore 2013 Presentation: "Do The Math" Mines & Money, Hong Kong 2013 Presentation: "Risk: It's Not Just A Board Game" Fall 2012 Presentation: "Extraordinary Popular Delusions & the Madness of Markets" California Investment Conference 2012 Presentation: "Simplicity": Part I : Part II As a result of my role at Vulpes Investment Management, it falls upon me to disclose that, from time to time, the views I express and/or the commentary I write in the pages of Things That Make You Go Hmmm... may reflect the positioning of one or all of the Vulpes funds though I will not be making any specific recommendations in this publication.

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