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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

10 February 2014

The End Of The Innocence


Unus pro omnibus, omnes pro uno Traditional Motto of Switzerland O' beautiful, for spacious skies But now those skies are threatening They're beating plowshares into swords For this tired old man that we elected king Armchair warriors often fail And we've been poisoned by these fairy tales The lawyers clean up all details Since daddy had to lie Don Henley, The End Of The Innocence "Then the great hour struck and every man showed himself in his true colours." Fyodor Dostoyevsky
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
Greek-Swiss Tax Deal Remains Elusive .............................................................19 Paul Singer's January Investment Letter (Extract) ...............................................20 JPMorgan's Masters Said to Quit CFTC Panel After One Day ....................................21 Why Global Water Shortages Pose Threat of Terror and War ...................................22 German Court Defers to Draghi as Euro's Judge And Jury ................................ .......24 Troubled Times: Developing Economies Hit a BRICs Wall ........................................25 Why Is the Fed Tapering? ...................................................................... .......27 Who Should Pay for Trusts That Go Bust? ..........................................................29 How Many Criminals Have NSA's Phone Records Busted? Maybe One ..........................31

CHARTS THAT MAKE YOU GO HMMM... ..................................................33 WORDS THAT MAKE YOU GO HMMM... ...................................................36 AND FINALLY... .............................................................................37

10 February 2014

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Things That Make You Go Hmmm...


Take a long, hard look, Janet. The landscape over which you cast your eyes when you accepted the poisoned chalice prestigious role of Fed Chair changed last week just two days before you were confirmed in a rather lovely ceremony. On January 30, in an interview in Mumbai, Raghuram Rajan (one-time Chief Economist at the IMF and current Governor of the Reserve Bank of India) rather UNceremoniously dropped something of a bombshell that went largely unreported (perish the thought, in this era of dogged journalism) but that most definitely queers your pitch in a major way: (Bloomberg): India central bank Governor Raghuram Rajan warned of a breakdown in global policy coordination after the Federal Reserve further cut stimulus, weakening emerging-market currencies from the rupee to the Turkish lira. Rajan, a former chief economist at the International Monetary Fund, called for greater cooperation among policy makers weeks before finance chiefs from the world's top developed and emerging markets gather in Sydney. The Fed's Jan. 29 statement made no mention of developing economies. "International monetary cooperation has broken down," Rajan, 50, said yesterday in an interview in Mumbai with Bloomberg TV India, noting how emerging markets helped pull the global economy out of crisis starting in late 2008. "Industrial countries have to play a part in restoring that, and they can't at this point wash their hands off and say we'll do what we need to and you do the adjustment." Now this is going to be a problem, Janet. Potentially, a BIG one. The standout feature of central bank policy over the last five years has been the spirit of cooperation amongst the men ("And women!" Sorry, Janet, "and women") in charge of the world's central banks. Whilst this spirit of cooperation has been somewhat unwilling in a few cases (yes, Glenn, I'm talking about you), it has been vital to establish a unified message that would give investors the sense that these guys ("And girls!" Sorry, Janet, "and girls") were talking (a) to each other and (b) to us from a common perspective, that perspective being low rates and free money forever. Then came The Taper.
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The mantra being chanted by FOMC officials around The Taper has been this: "Tapering isn't tightening." Well maybe it hasn't been yet in the USA, but thanks to the unintended consequences of Fed actions, it sure as hell has been elsewhere: (IOL): South Africans should expect more shocks to their finances as the Reserve Bank is poised to raise interest rates further to stem inflation. This prediction was made yesterday by Citi Research, which said the bank's monetary policy committee (MPC) would raise interest rates twice more by July despite the view held by many economists that this would happen only in the second half of this year. Citi said that the MPC was likely to raise interest rates by at least 150 basis points to dampen domestic demand and inflation but said the economy was likely to suffer as a result. This statement follows last week's 50 basis point rate hike, the first in almost five years. For those of you keeping score at home, the chart below shows what South African interest rates have looked like for the past five years when everybody was, to quote the cast of High School Musical, "all in this together." (Finally, all the years of having that damned thing playing on a TV in the background on a continuous loop have paid off! Thanks, Bront. Thanks, Molly.) Everyone is special in their own way We make each other strong (we make each other strong) We're not the same We're different in a good way Together's where we belong We're all in this together Once we know That we are We're all stars And we see that We're all in this together And it shows When we stand Hand in hand

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Sorry got distracted. Where were we? Oh yes, the chart:


12

South Africa Reserve Bank


Repo Average Rate 2008-2014

10

Looky Here 6

4 2008 2009 2010 2011 2012 2013

Source: Bloomberg

Nothing to worry about, I hear you cry ... except, HERE'S what it looks like going back to 1998:
25

South Africa Reserve Bank


Repo Average Rate 1998-2014

20

15

10

Average Rate: 9.51%

1998

2000

2002

2004

2006

2008

2010

2012

2014

Source: Bloomberg

Yes... that average line is correct. Rates in South Africa have averaged 9.51% over the last 15 years (a number which includes record low rates for the last three years).

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But it isn't just South Africa feeling the pinch of the Fed's tightening tapering. Ohhhhh no. Across the world, emerging markets are suffering from the Fed's unilateral declaration that it's every man ("And woman!" Sorry, Janet, "and woman") for him- or herself. In Brazil, as The Economist points out this week, the timing couldn't have been worse: (Economist): Later this month [Dilma Rousseff] will launch her campaign to win a second term in a presidential election due on October 5th. Normally at this stage of the political cycle, as in the run-up to elections in 2006 and 2010, the government would be ramping up spending. But when Ms Rousseff spoke to the World Economic Forum in Davos last month, with the So Paulo stockmarket and the real dipping along with other emerging economies, she felt impelled to stress her commitment to being strait-laced. So far so predictable: Brazil's economy has disappointed since she took office in January 2011. Growth has averaged just 1.8% a year; inflation has been around 6%; and the current-account deficit has ballooned, to 3.7% of GDP. Her government has some good excuses. She inherited an overheating economy, the world has grown sluggishly, and cheap money in the United States and Europe prompted an exaggerated appreciation of the real. So, tepid growth, persistent inflation, and a painfully strong currency. What could POSSIBLY have caused that situation, I wonder? But Ms Rousseff has scored some own goals as well. Her predecessor, Luiz Incio Lula da Silva, left monetary policy to the Central Bank and mostly stuck to clear fiscal targets. By contrast, Ms Rousseff chivvied the bank into slashing interest rates; her officials tried to micromanage investment decisions with subsidies and to cover up the fiscal damage through accounting tricks. Rather than the promised recovery of growth, the result was that Brazilian businessmen and foreign investors lost confidence in the economic team and just at the wrong time. When America's Federal Reserve last year announced a possible "tapering" of its bond-buying, the real began to slide. Against the dollar, it is now 17% below its value in May. Stick around, here comes the rub: A weaker currency is just what Brazil needs if it is to balance its external accounts and its manufacturers are to thrive. But it also risks adding to inflation, the upward creep of which was one factor (along with poor public services) in mass protests that shook Ms Rousseff's government last year. This has prompted a change of mind. Alexandre Tombini, the Central Bank governor, has been allowed to raise interest rates (from 7.25% to 10.5%). Rising rates. We know a word for that, don't we boys and girls? It begins with T and rhymes with frightening.

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And here, in all its glory, is the Brazilian real versus the US dollar, alongside the reserves of the Banco Central do Brasil (with a couple of milestones added for clarity):
Brazilian Real vs US Dollar Brazil US Dollar Reserves
Feb 2013 - Feb 2014

2.45

381,000

2.35

376,000

2.25 First Mention Of Taper 371,000

2.15

366,000 2.05

Real Weakness
1.95

Dollar Strength

361,000

1.85 Feb Mar Apr May Jun Jul 2013 Aug Sep Oct Nov Dec Jan Feb 2014

356,000

Source: Bloomberg

To defend their ailing currency, the Brazilian central bank has had to prop up the real and, finally, to raise interest rates to try and stem the outflows and dampen inflation, just as GDP turns negative on a Q0Q basis and falls below 2% annually hardly the kind of number the world has come to expect from a member of the BRICs. Perfect. The results of this shift in Brazilian viability have shown up in some rather surprising places as return-seeking investors who piled into "Brazil" through a real-denominated ETF suddenly decided that the currency, which had been steadily weakening for months, had apparently passed the point of no return: (Bloomberg): The WisdomTree Brazilian Real Fund (BZF), an exchange-traded fund tracking Brazil's currency, lost more than 90 percent of its assets this week after redemptions of $473 million. The fund, which had $513 million under management as of Jan. 24, lost the assets on Jan. 28 and 29, according to data compiled by Bloomberg and the latest fund data from New York-based WisdomTree Investments Inc.... It's the only U.S.-registered ETF that follows the real, which fell to a five-month low on Jan. 29. Data posted on WisdomTree's website show the fund received an inflow of more than $500 million on Oct. 10. Brazil's currency has depreciated 9.6% since then, the secondmost among major currencies tracked by Bloomberg.
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I've said it before and I'll say it again: Nothing matters to anybody until it matters to everybody and by then it's too late. Brazil and South Africa aren't the only poor unfortunates being forced by decisions made in the Marriner S. Eccles Building into taking actions they would otherwise shy away from. This year may be only a month old, but already several of the world's central bankers have been busy trying to keep intact their New Year's resolutions to stay fit and healthy by hiking more:
Country Brazil India Indonesia South Africa Turkey Current Rate 10.50% 8.00% 7.50% 5.50% 10.00% Direction Previous Rate 10.00% 7.75% 7.25% 5.00% 4.50%

At the bottom of that little table you see the current champion, Turkey, whose central bank recently took aggressive action to stem an unpleasant tide: (NY Times): Turkey's central bank aggressively raised rates late Tuesday, in a drastic move aimed at bolstering the currency. But it is unclear whether the move will be enough to satisfy international investors and repair the central bank's reputation. Turkey is facing increased political and economic pressure to take action. The Turkish lira has been among the most battered of developing-market currencies in recent weeks. After the central bank's decision, the lira strengthened in after-hours trading. See? I told you they took aggressive action. It looked like this:
Central Bank of Turkey Overnight Rates
Feb 2013-Feb 2014
Overnight Lending Rate: 12%

12

10

Overnight Repo Rate: 10%

Overnight Borrowing Rate: 8%

2 Feb 13 Jul 13 Feb 14

Source: Bloomberg 10 February 2014 8

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The Turkish lira did, indeed, respond to the more-than-doubling of rates for about 24 hours:
Turkish Lira vs US Dollar
24

Jan 27 2014 - Feb 8 2014

23

Pre-Rate Hike Level

22

24-Hour Roundtrip 21 Jan 27 Jan 28 Jan 29 Jan 30 Jan 31 Feb 03 Feb 04 Feb 05 Feb 06 Feb 07

Tyler & the gang naturally had a few thoughts on the goings-on in Ankara: (ZeroHedge): So much for the credibility of the CBRT? After the Lira soared, and the USDTRY plummeted by just under 1000 pips yesterday when the Turkish Central Bank announced its "shock and awe" intervention, it has since pared back virtually all gains, and at last check was just over 2.24 having nearly roundtripped in 12 hours. Why the loss of faith? Two reasons: First, as we pointed out yesterday, suddenly the domestic situation in Turkey takes front stage again, with 4.25% added elements of instability, causing the political instability to soar, leading to an even higher probability of a social and political overhaul. Second, as Goldman pointed out overnight, "the CBRT stated that liquidity ' will be provided primarily from one-week repo rate instead of the marginal funding rate in the forthcoming period'. This implies that the effective rate hike is 225bp (to 10.00%; the 1-week repo rate), as the Non-PD lending rate was 7.75% prior to the announcement." In other words, when looked at on a corridor basis, the CBRT hiked not by a shocking and awing 425 bps but by precisely the predicted 225 bps! Which means the central bankers merely went along consensus, and not a basis point above it, which is the worst of all worlds giving the impression of massive tightening (for domestic political purposes), while in reality not doing all that much. Indeed.

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The poor old Turks just couldn't catch a break as, late on Friday, those "evil" ratings agencies just HAD to join the dogpile: (Bloomberg): Turkey's credit rating outlook was cut to negative from stable by Standard & Poor's, which said there's a growing risk of a "hard economic landing" as reserves decline and policy makers spar over interest rates. The move by S&P, the only one of the three main credit rating companies that doesn't classify Turkish debt as investment grade, comes after the country's central bank reversed policy and raised interest rates to halt a currency slump. The government has been calling for borrowing costs to be kept low, and says it has alternative plans to revive the economy and the lira. "Turkey's policy environment is becoming less predictable" and "this could weigh on the economy's resilience and long-term growth potential," S&P said in a statement explaining its decision. It cited "constraints on the independence and transparency" of Turkey's central bank. "Constraints on the independence and transparency of the central bank," eh? Well that's nice. On a completely and totally unrelated tangent, let's look at Argentina. Back on January 23rd, the Central Bank of Cristina Fernndez de Kirchner Argentina decided that to senselessly throw away more of its rapidly dwindling reserves was a foolish thing to do, and so it withdrew its support for the peso. Remember this chart from the last edition of Things That Make You Go Hmmm...?
Argentine Peso vs US Dollar
Exchange Rate 2009 - 2014
9 Matters To Everyone TOO LATE

7 Doesnt Matter To Anyone 6 Starts To Matter To Some

3 2009 2010 2011 2012 2013

Source: Bloomberg

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Well, admittedly, not ALL of the blame can be laid at the door of the Fed for THIS particular disaster, as the Argentine government and its puppet central bank have been serial offenders, defaulting (to name but a few occasions ) in 1826, 1870, 1989 and, of course, 2001 when its default on $93 billion of external debt set a new high (or low, depending on your point of view). What happened next is in the books, but let's recap anyway: (Wikipedia): Foreign investment fled the country, and capital flow toward Argentina ceased almost completely during 2002 and 2003. The currency exchange rate (formerly a fixed 1-to-1 parity between the Argentine peso and the U.S. dollar) was floated, and the peso devalued quickly to nearly 4-to-1, producing a sudden rise in inflation to over 40% and a fall in real GDP of 11% in 2002. This time WAS different, though, as the geniuses at the Argentine central bank threw everything at the problem and by everything, I mean most of their foreign currency reserves, which were depleted to the point where Kirchner felt compelled to delve into The Book Of Idiotic Economic Ideas once again: (Libre Mercardo via Google Translate): The fourth day of falling reserves has the Argentine central reeling. This Wednesday reserves fell by 180 million and this month reserves declined by $2 billion. Due to demand and the low level of foreign exchange reserves, the central bank has stopped payment of imports, according to Argentine newspaper La Nacion. "Almost all the customers who went to the bank did so to hoard dollars," claimed the cashier of a national bank to the southern newspaper. "Today almost no imports were approved," confided the head of the table of a major bank in the nation. After banning imports (due to their own mismanagement of reserves), the Kirchner government turned on the stupidity afterburners: (El Economista via Google Translate): Economic war has moved to Argentina. The Argentine government said it will apply an "iron fist" against the shops and businesses that raise prices following the sharp devaluation of the local currency last week, hoping to avoid tripping high inflation in the country. Argentina has one of the highest inflation rates in the world, which in 2013 was around 25% according to private estimates. Prices of products with imported components such as appliances and vehicles rose immediately after the devaluation. Moody's expects a devaluation of the Argentine peso by 50% in 2014. Before the devaluation, the government launched a plan to fix maximum prices on about a hundred products sold in supermarkets. But the incentive is limited and includes products that are hard to find on the shelves.
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How depleted were Argentina's reserves? Well, it turns out that it's hard to tell. Optically according to the Argentine central bank, at least they look like this:
Argentina Foreign Currency Reserves (US$ mln)
55,000

August 2006 - January 2014

50,000

45,000

40,000

35,000

30,000

25,000 Aug 06 Aug 07 Aug 08 Aug 09 Aug 10 Aug 11 Aug 12 Aug 13 Jan 14

Source: Bloomberg

... BUT ... (there's always a "but" when dealing with Argentina) there MAY just be a slight wrinkle: (Bloomberg): The gap between the Argentine central bank's preliminary international reserves figures and official data released 48 hours later is at the widest since 2008, a discrepancy that may lead investors to question the bank's reliability, according to JPMorgan Chase & Co. The central bank said yesterday that reserves in January fell $2.85 billion to $27.7 billion, a loss that's $365 million, or 15 percent, bigger than what was reported in the bank's preliminary reserve statement, according to central bank data compiled by Bloomberg.... Hey, guys ("And gals!" Sorry Janet, "and gals"), economics shouldn't stretch to the truth: A year after the country was censured by the International Monetary Fund for misreporting economic data, the central bank's tactic may backfire as the bank risks damaging its own reputation, he said.

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"It is a dangerous game to play," Werning wrote in a report yesterday. "During a balance of payments crisis as Argentina is undergoing such manipulation of official statistics (and one so critical for market sentiment) is detrimental to the needed confidence building around the transition" in the foreign exchange regime. Central bank preliminary data has over-stated reserves by an average $257 million per day since the government began devaluing the peso Jan. 22, compared with an average $15 million in the previous month. The central bank declined to comment on the discrepancy. So, as Argentine central bankers were put on the spot over falsifying their reserves data, it seemed as though there was no way out for them. They would have to own up to fudging the numbers and admit to the... wait... what? A fire? What fire? Where? (Washington Post): Nine first-responders were killed, seven others injured and two were missing as they battled a fire of unknown origin that destroyed an archive of bank documents in Argentina's capital on Wednesday... The destroyed archives included documents stored for Argentina's banking industry, said Buenos Aires security minister Guillermo Montenegro. The cause of the fire wasn't immediately clear. Boston-based Iron Mountain manages, stores and protects information for more than 156,000 companies and organizations in 36 countries. Its Argentina subsidiary advertises that its facilities have multiple protections against fire, including advanced systems that can detect and quench flames without damaging important documents. Oh come ON!!!! Guys, really? ("And gals!" Look, Janet, I'm using it as a unisex term, OK? Can we drop it now? We all KNOW that you're there now, and we're all very much looking forward to your coming-out party on Tuesday.) Now, I won't bother going into the capital controls instituted in Ukraine as that country falls apart, or the "Law of Fair Prices" being instituted by the Venezuelan government ("Atlas se encogi de hombros," anybody?) as they try to stop another unraveling; but the point is that at precisely the time when the world's central banks are going to need to present a unified front, they are being forced to splinter as tightening tapering by the FOMC sucks capital away from the all-too-fragile developing economies. Everywhere you look, concern is rising amongst those charged with applying the copious amounts of sticking plaster that are vital to ensuring the world financial system doesn't fall apart; and so, a couple of days after Rajan delivered his incendiary comments, IMF head Christine Lagarde was wheeled out to try and get the kids to play nice in the sandbox again: (WSJ): The head of the International Monetary Fund on Monday called for greater collaboration among the world's central banks, citing the threat of turmoil spreading through the global financial system.
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Global stakeholders must take "collective responsibility for managing the complex channels of the hyperconnected world," IMF managing director Christine Lagarde said in a speech prepared for the Richard Dimbleby Lecture in London. That translates into "all monetary institutions cooperating closely mindful of the potential impacts of their policies on others," she said.... Ms. Lagarde said the proliferation of global financial and trade linkages over the past decade, combined with the emergence of the major developing economies, requires greater global collaboration. She called it "a new multilateralism." "In such an interwoven labyrinth, even the tiniest tensions can be amplified, echoing and reverberating across the world often in an instant, often with unpredictable twists and turns," she said. "The channels that bring convergence can also bring contagion," she added. Best of luck with that, Christine. It's every "man" for himself now; and a big problem is that, over the course of the ongoing financial crisis (yes, it is), the power wielded by central bankers has reached unprecedented levels as one extraordinary measure after another has been implemented simply in order to maintain the status quo. Not only that, but the emerging-market countries that have seen strong inflows as the Fed's QE program sent billions of dollars their way in search of returns, are now in a bit of a fix, as the chart below demonstrates:
EM Policymakers

Hike Rates

Tighten Defend Do Currency Nothing Fiscal Policy

Slower Growth

Reserves Depleted

Currency Falls

Upcoming Elections

Loss of Confidence

Loss of Confidence

Loss of Confidence

Further Selling Turkey India South Africa Indonesia

Further Selling Ukraine Indonesia Argentina Venezuela

Further Selling

Source: Cliff Kuhle

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Jeremy Warner tackled the subject earlier this week, and his comments resonate: (UK Daily Telegraph): More or less everywhere, from Britain to America and Japan, and from Nigeria to India and Europe, central bankers have become the first, second, third and last line of defence for almost every economic problem that arises. In Japan, the central bank has been ordered to print money until deflation is finally exorcised; Shinzo Abe's second and third arrows of economic rebirth fiscal and structural reform are meanwhile fast running into the sand, leaving the promised return to decent levels of nominal GDP growth entirely reliant on whatever further actions the central bank can conjure up. In America, they've had money printing, credit easing and just about everything else the central bank armoury has to offer, but are now finding it impossible to rid themselves of the addiction. Already Federal Reserve tapering has prompted financial chaos in the developing world, while new data announced on Monday suggest that easing back on the monetary accelerator is once again causing the domestic economy to lose steam. Engage in quantitative easing, and the economy grows; start to turn off the printing press and the economy slows to stall speed. In the end, central banks can offer no more than sticking-plaster solutions, yet both the power and the expectation vested in them grows by the day. Precisely, Jeremy. The great Anatole Kaletsky put his own twist on the problems facing central bankers on the eve of Ben Bernanke's last day in office; and in doing so, not only did he hit the nail squarely on the head, he also laid bare a truth that far too many people are happy to willfully ignore: (Anatole Kaletsky): Federal Reserve Chairman Ben Bernanke, who retires this week as the world's most powerful central banker, cannot be trusted. Neither can Janet Yellen, who will succeed him this weekend at the Federal Reserve. And neither can Mark Carney, governor of the Bank of England; Mario Draghi, president of the European Central Bank, or any of their counterparts at the central banks of Turkey, Argentina, Ukraine and so on. I am not trying to aim a valedictory insult at Bernanke or his central banking colleagues. On the contrary, I am drawing attention to the skill and determination required by central bankers to perform one of the world's most demanding and important jobs. For just as James Bond has a "License to Kill" in the Ian Fleming books, so central bankers possess a "License to Lie" or, putting it more diplomatically and politely, to make promises about the future that cannot be honored and often turn to be false.

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Nobody ever blamed a central banker for promising to support the currency and then suddenly allowing a massive devaluation as happened in Argentina last week and may soon happen in Turkey, Ukraine, Russia and many other emerging markets. To mislead investors is actually a key skill required by a central banker's job description. Revealing the true state of national finances at a time when a devaluation or comparable financial crisis is looming might be to guarantee the loss of the central bank's entire reserves. Yes, folks, central bankers lie. The job demands it. That means that they join politicians in the category marked "cannot be trusted," and yet investors the world over are not only relying on the promises made by these individuals but also trusting them to be both transparent and honest when the job demands they be neither. Given that they lie to us, and given that they are making two key representations to us, should we not perhaps take a moment to think about the two inputs to this particular equation? Politicians across the globe are assuring us that (amongst other lies things): 1) The "recovery" is either here or right around the corner. In fact, it is neither. 2) Remaining in the EU is the best option for Greece, Spain, Italy (and France). It is not. 3) Soaking the rich is the answer to a multitude of problems. It isn't. 4) Raising taxes will generate the necessary revenue without having a negative effect on the economy. It won't. 5) Future promises of entitlement payments are solid. They aren't. Defaults are inevitable. Meanwhile, the central bankers of the world are promising us that: 1) Interest rates will remain low for a very long time. In the end, it's not central bankers' choice to make. 2) Quantitative easing has no ill effects and can be withdrawn at will without causing any problems. It can't be. 3) Printing money will not translate into higher inflation. It will. It just hasn't yet. 4) They will do "whatever it takes," and that will be enough. There is a limit to what they can do, and it will ultimately not be enough.
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5) They are all in this together. They're not. It is every man for himself now, and the Fed will screw them all. So here we are. Having established that, like politicians, central bankers are required to lie to us in order to be able to do their jobs, we are left facing a couple of crucial questions. First, IS tapering tightening, or not? Secondly, what does all this chaos in emerging markets in the wake of The Tighten Taper mean, and where does it take us from here? Fortunately, the great Albert Edwards of Soc Gen fame took the words right out of my mouth this week: (Albert Edwards): Tapering is tightening, which inevitably ends in recession, bailout and tears. Our warnings throughout last year that an unraveling of emerging markets (EM) was the final tweet of the canary in the coal mine have still not been taken on board. The ongoing EM debacle will be less contained than sub-prime ultimately proved to be. The simple fact is that US and global profits growth has now reached a tipping point and the unfolding EM crisis will push global profits and thereafter the global economy back into deep recession. Our thesis on how EM would be pushed to crisis was simple, especially as we saw close parallels with the 1997 Emerging Asia currency crisis. We saw yen weakness further undermining an already weak balance of payments situation in the emerging world as a direct replay of 1997. A strong dollar/weak yen environment is typically an incendiary combination for EM, and so it has proved once again. Having reached tipping point the yen will often rally strongly as it has now and as it did in May 1997. This may or may not delay the impending EM implosion for a few weeks. Indeed the Thai Baht, the first domino to fall in the Asian crisis, briefly rallied strongly (vs the US$) in early June 1997, reassuring investors just ahead of its ultimate collapse. There has never been any shadow of doubt in my mind that tapering = tightening, and I marvel that the Fed convinced anyone otherwise. A Fed tightening cycle inevitably plays a key role in triggering the next crisis (see below). Plus a change, hey? 1970 Recession/Penn Central Railroad 1974 Recession/Franklin National Bank 1980 Recession/First Penn/Latin America 1984 Continental Illinois Bank 1987 Black Monday 1990 Recession/S&L and banking crisis 1997 Asian currency collapse/Russian default/LTCM 2007 The Great Recession/Collapse of almost the entire global financial system 2014 Emerging Market collapse/deflation/recession/another banking collapse etc.
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Albert is right, of course. Not only is tapering most definitely tightening (don't listen to what they say, watch the results), but we have likely seen just the beginning of the fallout from the Fed's new course. Will they stick to it? No. They won't be able to. They MAY taper another $10 bn in March when Janet Yellen's first rate decision is announced, but I suspect that by then markets will be in such a state of disrepair that excuses will be made as to why the taper has been suspended. You can bet your bottom dollar that there will be some frantic calls put in to Ms. Yellen's office by her peers around the world between now and March 20, all of which will be begging calling for an end to The Taper. Ultimately, QE will continue to be expanded until it implodes in a fireball the like of which has never been seen before. There's no choice, I am afraid, because the alternative would involve the telling of some very harsh truths by politicians and central bankers and the bestowing of some serious pain on an electorate that already holds them in contempt. Think those truths are going to be volunteered? Me neither. The splintering of central bank policy is just the beginning. This is the end of the innocence.

******* Right then, let's ... get to it, shall we?


This week's fun and games begin in Greece, where a deal with the Swiss to reveal hidden millions is suffering from a distinct lack of leverage (which makes a welcome change). From there we get a chance to hear the wisdom of one of the greats, Elliot's Paul Singer; see an amazing about-turn end a somewhat farcical appointment; hear how the German Constitutional Court took a knee on a crucial ruling; and learn how water shortages could stir up trouble for future generations. Der Spiegel gives us a distinctly German take on the troubles in the BRICs; Paul Craig Roberts tries to explain why the Fed is tapering and finds some more curious behaviour in the gold market; Andy Xie has a few thoughts on China's shaky trust industry; and the NSA's phone taps prove to be not as productive in certain areas as concerned citizens might have hoped. Charts? Well, how do Portugal, gold deposits, and anemic recoveries grab you? That just leaves interviews with Nigel Farage, Bill FLeckenstein, and Argentine blogger "FerFal" before we wrap things up with a jerk called David Thorne.

Until Next Time...


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Greek-Swiss tax deal remains elusive


Greece and Switzerland remain divided on how to resolve the problem of untaxed money stashed away by Greeks in Swiss banks, the countries' finance ministers said on Tuesday, more than two years after talks between their governments began. Debt-laden Athens, desperate for revenue to plug fiscal holes, is seeking a tax deal of the kind Switzerland had signed in 2011 with Britain, which imposed a one-off levy on secret account holders to settle their tax liabilities. The Swiss had also signed a similar deal with Germany but Germany's upper house threw it out in November 2012. But Swiss Finance Minister Eveline Widmer-Schlumpf said in Athens that Switzerland does not do such deals any more, focusing instead on automatic information exchange between tax authorities, currently negotiated at international level. "Models we had earlier considered and discussed to prevent untaxed money in Swiss banks are partly outdated," Widmer-Schlumpf said after meeting Greece's Yannis Stournaras. Stournaras, however, insisted on a deal like the one struck with Britain, under which existing funds held by British taxpayers were subject to a one-off deduction of 19-34 percent. "We continue talks, we insist on our view, we want the British model to apply to us," he said in a joint news conference with Widmer-Schlumpf. Widmer-Schlumpf said the Swiss had proposed a roadmap to continue the talks, but refused to give details. "Dragging out talks is a well-known Swiss negotiating tactic," a Greek official told reporters after the meeting, speaking of condition of anonymity. Swiss banks are under intense pressure by countries such as the United States and Germany to reveal bank accounts held by their citizens there to avoid taxes. But Greece lacks the leverage these countries have to squeeze Switzerland. Swiss banks do not have any large activity in Greece that Athens might block to force their hand. Greek authorities have also not purchased data on secret Swiss bank accounts from whistleblowers, like Germany did. On the contrary, Greek authorities bungled its handling of the only CD with secret Swiss bank accounts it obtained in 2010. Confidentially given to them by French authorities, the original CD was lost and they have yet to track down any tax cheats. Giorgos Papaconstantinou, the finance minister who obtained the so-called "Lagarde list," is to face an ad hoc court trying former ministers, accused of having tampered with it to delete the names of relatives.

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Papaconstantinou, a US- and British-educated economist, has denied tampering with the list, and says he is the victim of an attempt to incriminate him. No date has been set for the trial. No official numbers exist on how much money Greeks keep in Swiss banks, with unofficial estimates ranging between 30 and 60 billion euros ($40-80 billion). But Greek officials have warned that not all of these deposits would be subject to Greek tax. They might, for instance, be holding money owned by shipowners who are not residing or doing business in Greece.
*** EKATHIMERINI / LINK

Paul Singer's January Investor Letter (extract)


Imagine how mainstream experts would have reacted to the following set of predictions in 2006: "In two years Lehman will be bankrupt; Merrill and Bear will be acquired in distressed takeunders; Citicorp, AIG, Chrysler, GM, Delphi, Fannie and Freddie will be taken over by the government facing possibly hundreds of billions of dollars of losses; and only 13 global megabanks will survive." The 2008 crisis had a lasting and profound impact on virtually the entire developed world. The financial system was brought to the brink of collapse; conditions were created for the radical monetary policy of the past five years and a severely distorted recovery; the plans and dreams of hundreds of millions of people were disrupted, in some cases catastrophically; and societal values were significantly twisted away from individual responsibility toward dependency. In fact, the consequences of the bubble, the bust and the policy aftermath are not yet in full historical view. Despite all the pain, policymakers refuse to take responsibility for the bubble, the distortions of the bubble years, the ensuing failure to lay the groundwork for strong post-bust growth, the continued riskiness and fragility of the major financial institutions, the lack of appropriate policies to deal with the bust, or their total inability to deal with competitive and technological challenges in the labor market. It is not that the path toward destruction was impossible to see. On the contrary, a number of people saw the disaster coming, even if they did not all see the timing or the shape of it. The strangest part of the whole series of events is that only a few large professional investors noticed the smoke and shouted "fire." Policymakers, particularly at the Fed and including (importantly) Janet Yellen, paid some small lip service to the building risks, but they were wedded to their primitive "models" and had a completely inadequate grasp of modern financial instruments, leverage and the interconnectivity of financial institutions.

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Not only did policymakers fail to understand what was happening and how to deal with the crisis and its aftermath, but also many of those same policymakers, and ALL of the structures and assumptions that prevailed pre-crash, are still in place today. No apologies have been issued. There has been a great deal of partisan back-and-forth and successful lobbying, but sadly the financial system is still not sound. This may be impossible to prove until the next crisis, but you could have said the same about conditions leading up to the last one. Policymakers were and remain asleep at the wheel. The lack of introspection at the Treasury, the Fed, Congress, the White House and other regulatory bodies is astounding. Instead of taking reasonable and conservative steps to strengthen the financial system and to reach consensus on what is necessary to generate growth, there has been a series of cronyist, ideological, punitive steps that have neither catalyzed the growth that this country needs nor made financial institutions safe. At the same time, the Administration has allowed (and encouraged) the Fed to carry the ball all by itself, heaping praise on it for saving the world at the very time that the White House is shirking its own responsibilities. The Fed's "dual mandate" (to promote "maximum employment" as well as "price stability") is bunk in today's context. It seems as if the entire world is acting as if the Fed actually has a "total mandate" and the rest of the federal government gets to stand around and applaud its heroic efforts. In fact, what we have now is a lopsided recovery, gigantic price risk in financial markets because of QE, and unknown but potentially massive risks of inflation and the ultimate loss of confidence in the major paper currencies, all because the federal government is more interested in ideology than in getting the country back on track, and the Europeans are more interested in preserving the euro than promoting the prosperity of the sovereign nations of Europe....
*** PAUL SINGER (VIA ZEROHEDGE) / LINK

JPMorgan's Masters Said to Quit CFTC Panel After One Day


Blythe Masters, JPMorgan Chase & Co. (JPM)'s commodities head, withdrew from an advisory committee of the U.S. Commodity Futures Trading Commission a day after her appointment was disclosed, according to two people with direct knowledge of the decision. The regulator may include another executive from New York-based JPMorgan on the global markets committee, said one person close to the bank who requested anonymity because the move hasn't been publicly announced. Masters, 44, stepped down because the company's sale of its physical commodities unit will keep her occupied, the person said. JPMorgan is selling a division that deals in assets such as metals and oil, as government watchdogs examine whether federally backed lenders should be involved in such markets. Masters's appointment drew criticism from Twitter users who questioned the propriety of her advising the regulator of futures and swaps.

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Masters, whose name appeared on a list of committee members on the CFTC's website yesterday, had been scheduled to participate in a Feb. 12 meeting to discuss cross-border guidance on rules. She was invited to the panel by acting Chairman Mark Wetjen, said one of the people. Her name has since been removed from the list. JPMorgan, the biggest U.S. bank, agreed in July to pay $410 million to settle Federal Energy Regulatory Commission claims the firm manipulated power markets. The settlement released the company and its employees from future enforcement actions by the agency. Masters, whose division includes the unit involved in that case, wasn't named as a defendant. Masters probably wouldn't join Mercuria Energy Group Ltd., the Geneva-based firm that's in exclusive talks to acquire the unit from JPMorgan, a person with knowledge of the auction said this week. The CFTC's global markets committee is composed of industry executives and includes representatives from firms including Goldman Sachs Group Inc., Citigroup Inc., Morgan Stanley and Bloomberg LP, the parent company of Bloomberg News. The CFTC has been enacting rules required by the 2010 Dodd-Frank Act designed to reduce risk and increase transparency in the global swaps market, after some firms' bets on the derivatives helped fuel the 2008 credit crisis.
*** BLOOMBERG / LINK

Why global water shortages pose threat of terror and war


On 17 January, scientists downloaded fresh data from a pair of Nasa satellites and distributed the findings among the small group of researchers who track the world's water reserves. At the University of California, Irvine, hydrologist James Famiglietti looked over the data from the gravity-sensing Grace satellites with a rising sense of dread. The data, released last week, showed California on the verge of an epic drought, with its backup systems of groundwater reserves so run down that the losses could be picked up by satellites orbiting 400km above the Earth's surface. "It was definitely an 'oh my gosh moment'," Famiglietti said. "The groundwater is our strategic reserve. It's our backup, and so where do you go when the backup is gone?" That same day, the state governor, Jerry Brown, declared a drought emergency and appealed to Californians to cut their water use by 20%. "Every day this drought goes on we are going to have to tighten the screws on what people are doing," he said. Seventeen rural communities are in danger of running out of water within 60 days and that number is expected to rise, after the main municipal water distribution system announced it did not have enough supplies and would have to turn off the taps to local agencies.

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There are other shock moments ahead and not just for California in a world where water is increasingly in short supply because of growing demands from agriculture, an expanding population, energy production and climate change. Already a billion people, or one in seven people on the planet, lack access to safe drinking water. Britain, of course, is currently at the other extreme. Great swaths of the country are drowning in misery, after a series of Atlantic storms off the south-western coast. But that too is part of the picture that has been coming into sharper focus over 12 years of the Grace satellite record. Countries at northern latitudes and in the tropics are getting wetter. But those countries at mid-latitude are running increasingly low on water. "What we see is very much a picture of the wet areas of the Earth getting wetter," Famiglietti said. "Those would be the high latitudes like the Arctic and the lower latitudes like the tropics. The middle latitudes in between, those are already the arid and semi-arid parts of the world and they are getting drier." On the satellite images the biggest losses were denoted by red hotspots, he said. And those red spots largely matched the locations of groundwater reserves. "Almost all of those red hotspots correspond to major aquifers of the world. What Grace shows us is that groundwater depletion is happening at a very rapid rate in almost all of the major aquifers in the arid and semi-arid parts of the world." The Middle East, north Africa and south Asia are all projected to experience water shortages over the coming years because of decades of bad management and overuse. Watering crops, slaking thirst in expanding cities, cooling power plants, fracking oil and gas wells all take water from the same diminishing supply. Add to that climate change which is projected to intensify dry spells in the coming years and the world is going to be forced to think a lot more about water than it ever did before. The losses of water reserves are staggering. In seven years, beginning in 2003, parts of Turkey, Syria, Iraq and Iran along the Tigris and Euphrates rivers lost 144 cubic kilometres of stored freshwater or about the same amount of water in the Dead Sea, according to data compiled by the Grace mission and released last year. A small portion of the water loss was due to soil drying up because of a 2007 drought and to a poor snowpack. Another share was lost to evaporation from lakes and reservoirs. But the majority of the water lost, 90km3, or about 60%, was due to reductions in groundwater. Farmers, facing drought, resorted to pumping out groundwater at times on a massive scale. The Iraqi government drilled about 1,000 wells to weather the 2007 drought, all drawing from the same stressed supply.

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In south Asia, the losses of groundwater over the last decade were even higher. About 600 million people live on the 2,000km swath that extends from eastern Pakistan, across the hot dry plains of northern India and into Bangladesh, and the land is the most intensely irrigated in the world. Up to 75% of farmers rely on pumped groundwater to water their crops, and water use is intensifying. Over the last decade, groundwater was pumped out 70% faster than in the 1990s. Satellite measurements showed a staggering loss of 54km3 of groundwater a year. Indian farmers were pumping their way into a water crisis....
*** UK GUARDIAN / LINK

German Court Defers to Draghi as Euro's Judge and Jury


Germany's supreme judges have decided to let Mario Draghi be the euro's monetary judge, at least for now. While doubting the legality of the European Central Bank's 2012 bond-buying plan that defused the euro crisis, the top German court conceded yesterday that it is powerless to impose a veto. It bowed to a future judgment by the European Union's high court, leaving Draghi's pledge to do "whatever it takes" to save the euro unquestioned for a year or more. "This German court, which everyone's so frightened of, turns out to be a bit of a toothless tiger," Charles Dumas, chairman of Lombard Street Research, a London-based consulting firm, said in a Bloomberg Television interview. "They're copping out." The ruling captured the contradictory forces driving Germany's response to the European economic crisis: a reluctance to provide aid to debt-swamped governments, coupled with the realization that a refusal to do so would imperil the currency, at an even greater cost for Germany. Questions about Chancellor Angela Merkel's credibility as a crisis manager, Germany's domestic battles over aid for fiscal sinners like Greece, and the wrangling between Berlin and Brussels over who rules the European economy were all telescoped into the decision by the court in Karlsruhe. By a vote of 6-2, the German judges sided with the Bundesbank which plays the role of an economic supreme court in the German imagination in arguing that Draghi's ECB overstepped its authority in rolling out the bond-buying initiative known as Outright Monetary Transactions, or OMT. At the same time, acknowledging that Europe's largest economy is bound by EU laws, the court stopped short of overstepping its own authority and asked for a ruling from the European Court of Justice in Luxembourg, made up of judges from all 28 EU countries.

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"While the legal risk has materialized to some extent, it has probably not done so to an extent that could restart the euro crisis," Holger Schmieding, chief economist at Berenberg Bank in London, said in an e-mailed note. The EU court takes an average of 16 months to deal with cases relayed from national courts. German opponents of the ECB's "unlimited" bond-buying pledge, as yet unactivated, contend that it would provide an illegal subsidy to governments in southern Europe that have lost control of their finances, eventually sowing inflation in Germany as well. Detractors have rallied under the banner of the Alternative for Germany party, which wants Germany to bail out of the currency it was instrumental in creating. The party denounced the ruling, saying it's "as clear as daylight" that the European court won't interfere with the ECB policy. In an e-mailed statement, party leaders Hans-Olaf Henkel and Alexander Gauland regretted a "fatal signal" that Germany's economic destiny will be decided by European judges, not German ones. The party fell short of the 5 percent minimum for getting into the German parliament in last September's election. It has its sights set on European Parliament elections in May....
*** BLOOMBERG / LINK

Troubled Times: Developing Economies Hit a BRICS Wall


It was 12 years ago that Jim O'Neill had his innovative idea. An investment banker with Goldman Sachs, he had become convinced following the Sept. 11, 2001 terror attacks that the United States and Europe were facing economic decline. He believed that developing countries such as China, India, Brazil and Russia could profit immensely from globalization and become the new locomotives of the global economy. O'Neill wanted to advise his clients to invest their money in the promising new players. But he needed a catchy name. It proved to be a simple task. He simply took the first letter of each country in the quartet and came up with BRIC, an acronym which sounded like the foundation for a solid investment. O'Neill, celebrated by Businessweek as a "rock star" in the industry, looked for years like a vastly successful prophet. From 2001 to 2013, the economic output of the four BRIC countries rose from some $3 billion a year to $15 billion. The quartet's growth, later made a quintet with the inclusion of South Africa (BRICS), was instrumental in protecting Western prosperity as well. Investors made a mint and O'Neill's club even emerged as a real political power. Now, the countries' leaders meet regularly and, despite their many differences, have often managed to function as a counterweight to the West. "The South has risen at an unprecedented speed and scale," reads the United Nations Human Development Report 2013, completed just a few months ago. Historian Niall Ferguson wrote in his 2011 book "Civilization: The West and the Rest" of "the end of 500 years of Western predominance." It is, he suggested, an epochal change.
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But now, after having become so used to success in recent years, reality has begun to catch up to the BRICS states. Growth rates in 2013 were far below where they were at their high-water marks. Whereas China's growth rate reached a high of 14 percent just a few years ago, for example, it topped out at just 8 percent last year. In India, economic expansion fell from a onetime apex of 10 percent to less than 5 percent in 2013; in Brazil growth went from a high of 6 percent to 3 percent. Such values are still higher than those seen in the EU, but they are no longer as impressive. And worry is spreading. Now, there is a new moniker being used to describe the developing giants: the "fragile five." It was coined by James Lord, a currency expert at Morgan Stanley and is meant as a warning to the now brittle-seeming countries of Brazil, India and South Africa as well as to Turkey and Indonesia, both of which are threatened with collapse. What has happened? Have the economic climbers reached the end of their tethers or is it merely a temporary slow-down? Some have warned of overreacting, but the development raises questions for the global economy and for the people in those countries where economic success went at least partially hand-in-hand with increased political freedoms and a new selfconfidence. The bad news is quickly mounting. On Tuesday of last week, India's central bank raised interest rates higher than expected in an effort to get massive inflation under control. That night, Turkey did the same thing, raising its prime lending rate to 10 percent. Soon thereafter, South Africa followed with an increase of its own. Developing countries have become uneasy and are doing all they can to slow investor flight and the collapse of their currencies.

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Indeed, it almost seems as though the supposed decline of the West was but an illusion. In recent years, hundreds of billions was invested in the sovereign bonds of developing nations because returns in the established Western markets were comparatively weak. But last May, it took just a few words from then-Federal Reserve head Ben Bernanke to reverse the flow. He hinted that the US central bank could begin pumping less money into the financial system if the American recovery continued. A first wave of investors fleeing the developing world was the result.
*** DER SPIEGEL / LINK

Why is the Fed tapering?


In former times, the rise in the gold price was held down by central banks selling gold or leasing gold to bullion dealers who sold the gold. The supply added in this way to the market absorbed some of the demand, thus holding down the rise in the gold price. As the supply of physical gold on hand diminished, increasingly recourse was taken to selling gold short in the paper futures market. We illustrated a recent episode in our article. Below we illustrate the uncovered short-selling that took the gold price down today (January 30, 2014). When the Comex trading floor opened January 30 at 8:20AM NY time, the price of gold inexplicably plunged $17 over the next 30 minutes. The price plunge was triggered when sell orders flooded the Comex trading floor. Over the course of the previous 23 hours of trading, an average of 202 gold contracts per minute had traded. But starting at the 8:20AM Comex, there were four 1-minute windows of trading here's what happened: 8:21AM: 8:22AM: 8:31AM: 8:47AM: 1766 5172 3242 3515 contracts contracts contracts contracts sold sold sold sold

Over those four minutes of trading, an average of 3,424 contracts per minute traded, or 17 times the average per minute volume of the previous 23 hours, including yesterday's Comex trading session.

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The yellow arrow indicates when the Comex floor opened for gold futures trading. There was not any news events or related market events that would have triggered a sell-off like this in gold. If an entity holding many contracts wanted to sell down its position, it would accomplish this by slowly feeding its position to the market over the course of the entire trading day in order to avoid disturbing the price or "telegraphing" its intent to sell to the market. Instead, today's selling was designed to flood the Comex trading floor with a high volume of sell orders in rapid succession in order to drive the price of gold as low as possible before buyers stepped in. The reason for this is two-fold: Driving down the price of gold assists the Fed in its efforts to support the dollar, and the Comex is running out of physical gold available to be delivered to those who decide to take delivery of gold instead of cash settlement. The February gold contract is subject to delivery starting on January 31st. As of January 29th, 2 days before the delivery period starts, there were 2,223,000 ounces of gold futures open against 375,000 ounces of gold available to be delivered. The primary banks who trade Comex gold (JP Morgan, HSBC, Bank Nova Scotia) are the primary entities who are short those Comex contracts. Typically toward the end of a delivery month, these banks drive the price of gold lower for the purpose of coercing holders of the contracts to sell. This avoids the problem of having a shortage of gold available to deliver to the entities who decide to take delivery. With an enormous amount of physical gold moving from the western bank vaults to the large Asian buyers of gold, the Comex ultimately does not have enough gold to honor delivery obligations should the day arrive when a fifth or a fourth of the contracts are presented for delivery. Prior to a delivery period or due date on the contracts, manipulation is used to drive the Comex price of gold as low as possible in order to induce enough selling to avoid a possible default on gold delivery.
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Following the taper announcement on January 29, the gold price rose $14 to $1270, and the Dow Jones Index dropped 100 points, closing down 74 points from its trading level at the time the tapering was announced. These reactions might have surprised the Fed, leading to the stock market support and gold price suppression on January 30. Manipulation of the gold price is a foregone conclusion. The question is: why is the Fed tapering? The official reason is that the recovery is now strong enough not to need the stimulus. There are two problems with the official explanation. One is that the purpose of QE has always been to support the prices of the debt-related derivatives on the balance sheets of the banks too big to fail. The other is that the Fed has enough economists and statisticians to know that the recovery is a statistical artifact of deflating GDP with an understated measure of inflation. No other indicatoremployment, labor force participation, real median family income, real retail sales, or new constructionindicates economic recovery. Moreover, if in fact the economy has been in recovery since June 2009, after 4.5 years of recovery it is time for a new recession. One possible explanation for the tapering is that the Fed has created enough new dollars with which to purchase the worst part of the banks' balance sheet problems and transfer them to the Fed's balance sheet, while in other ways enhancing the banks' profits. With the job done, the Fed can slowly back off. The problem with this explanation is that the liquidity that the Fed has created found its way into the stock and bond markets and into emerging economies. Curtailing the flow of liquidity crashes the markets, bringing on a new financial crisis. We offer two explanations for the tapering. One is technical, and one is strategic....
*** PAUL CRAIG ROBERTS / LINK

Who Should Pay for Trusts that Go Bust?


While preventing a systemic crisis in coping with failing trust products should be a priority, indiscriminate bailouts would merely delay the inevitable and leave a bigger blowup in a year. In resolving the current problems, the central government must deal with two evil forces that are poisoning China's financial system: moral hazard and adverse selection. The banks that distributed the problematic trust products must be held responsible. Their sales commissions are too high to suggest that they are just neutral brokering agents. Indeed, investors bought such products mostly due to the reputation of the distributing banks. Trust companies, while less guilty than the banks, are complicit too because they often know how unreliable the borrowers are. The banks and the trust companies should be liable up to 5 to 10 times their commissions and not more than the principal. Investors should know that high interest rates mean high risk. They blindly believe in the opinions of sales agents and their verbal guarantees. They should be liable for the remaining losses.
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Such an arrangement would minimize the wholesale exit of investors from viable products. As commissions are often low in high-quality products, the exit may prompt more losses than waiting it out. A fair compensation scheme for bad trust products should prevent a systemic crisis. High interest rates come with high risk. This common sense is the foundation of the credit market. However, bad money driving out good is a natural force in finance. Unless sound, prudent regulations and healthy financial intermediaries dominate the market, a race to the bottom is inevitable. China's financial system is very young. While the prudent regulations are all there, the enforcement capability is underdeveloped. This is why bad money driving out good has become such a big factor, especially in the shadow banking system, like the trust product industry. While there are numerous trust companies, this industry could not have taken off without big banks entering the picture. In a few short years, the trust industry has risen from nothing to 10 trillion yuan in assets. The distribution power of big banks made this possible. The banks became involved to increase income from fees. As their lending capacity became constrained by capital and sometimes government directive, they embraced trust products as the main off-balance-sheet vehicle to increase lending to their high-risk clients. These clients are usually willing to pay high fees. The banks could charge 4 to 8 percent commission on such products. When the products mature in, say, three years, they need to be rolled over. The banks could get 4 to 8 percent again. Some trust companies are big and have distribution power. Most, I believe, are vehicles at the service of big banks. They charge a commission, too, though it is much smaller than the banks. The adverse selection problem begins with who is willing to pay such high fees and high interest rates at the same time. Let's say the interest rate is 10 percent. The product is for three years. The commissions for banks and trust companies total 10 percent. The borrower gets 90 percent of the loan amount for a 30 percent interest payment over three years. Few businesses in China earn such a high return. The trust loan borrowers, mainly mining companies and property developers, often have greenfield projects. Their future depends greatly on the macro environment. The borrowers essentially gamble with other people's money. When one is willing to gamble on a project with a high-cost trust loan, it is usually not a great project. Otherwise, it would have gotten cheap funding. Marginal projects are more likely to go to the trust market. The trust industry essentially attracts people who are likely to go bankrupt....
*** ANDY XIE / LINK

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How many criminals have NSA's phone records busted? Maybe one
The U.S. Congress needs to help restore global trust in the nation's technology vendors by reining in surveillance programs at the National Security Agency, an industry representative told lawmakers Tuesday. Recent revelations about NSA surveillance programs have created a "misimpression" about the U.S. technology industry and are eroding trust in those companies, said Dean Garfield, president and CEO of the Information Technology Industry Council (ITI). The furor over the NSA surveillance programs could lead to lost income in the tens of billions of dollars for U.S. cloud providers, and many U.S. tech vendors are already hearing complaints, he said. The U.S. needs a "public policy course correction" on NSA surveillance, Garfield told the U.S. House of Representatives Judiciary Committee. "Made in the U.S.A. is no longer a badge of honor, but a basis for questioning the integrity and the independence of U.S.-made technology," Garfield said. "Many countries are using the NSA's disclosures as a basis for accelerating their policies around forced localization and protectionism." To stop a "protectionist downward spiral," Congress needs to ensure greater transparency over NSA surveillance and provide stronger oversight, including a civil liberties advocate at the U.S. Foreign Intelligence Surveillance Court. Congress also needs to find ways to restore trust in the encryption standards process at the U.S. National Institute of Standards and Technology (NIST), he said, after revelations by former NSA contractor Edward Snowden that the NSA worked to compromise the process. Some witnesses and lawmakers seemed to call for larger changes to NSA surveillance programs, with several calling for President Barack Obama's administration to scrap the NSA's bulk collection of U.S. telephone records. Representatives of Obama's Review Group on Intelligence and Communications Technology, which recently recommended major changes to the phone records program, and the U.S. Privacy and Civil Liberties Oversight Board, which called the program illegal, testified at the hearing. Several lawmakers, both Republicans and Democrats, questioned the legality of the phone records program. Representative Ted Poe, a Texas Republican, questioned how many criminal cases federal investigators have filed using information from the phone records program. There "may be one," said James Cole, deputy attorney general in the U.S. Department of Justice.

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"One criminal case?" Poe said. "[The program] is an invasion of personal privacy, and it's justified on the idea that we're going to capture these terrorists. The evidence that you've told is all this collection has resulted in one bad guy having criminal charges filed on him." Cole defended the phone records program, saying the information it provides helps with large investigations. "The point of the statute is not to do criminal investigations," he said. "The point of the statute is to do foreign intelligence investigations." Officials with the Obama administration haven't accurately described the NSA programs to Congress, said Representative Trent Franks, an Arizona Republican. "We feel that we have been blatantly deceived on what some of these programs have done," he said. Congress should pass the USA Freedom Act, an NSA reform bill that has several Judiciary Committee sponsors, said David Cole, a constitutional law professor at the Georgetown University Law School. The bill would allow the DOJ and NSA to collect U.S. phone records only when they are connected to a suspected terrorist. "That is how the administration sold what they were asking Congress to do" when it asked for new authority in the Patriot Act to collect information relevant to a terrorism investigation, he said. "I don't think a single member of Congress thought, 'what we mean by that is there are no limits on the business records that you can get.'" But Steven Bradbury, a former DOJ official, defended the phone records program. Some NSA reform proposals "would expose the nation to vulnerability by substantially weakening or even destroying outright the effectiveness" of the phone records program, he said. Proposals to add a civil liberties lawyer at the surveillance court would slow down the collection-approval process there, and would, I fear, prove dangerously unworkable in the event of the next catastrophic attack on the United States, he added.
*** PCWORLD / LINK

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Charts That Make You Go Hmmm...

Source: Tortus Capital

Tortus Capital has published an excellent look at the precarious state of Portugal's
finances titled "Rehabilitating Portugal." The presentation is filled with the kinds of charts that would make many investors run screaming into the streets if it weren't for the backstop currently held in place by the ECB. So... what would happen if that backstop were removed? By a court ruling, for example? Take a look at these charts and draw your own conclusions...
*** TORTUS CAPITAL / LINK

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Source: Visual Capitalist

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Ed Easterling, president of Crestmont Holdings, LLC, created the chart below

comparing various economic recoveries. He selected those that followed similar annual declines in real gross domestic product. As the chart shows, the present economic recovery is the most sluggish we have seen. We can attribute this to numerous factors (i.e., take a guess): Depth of the prior balance sheet recession More modest federal spending and hiring than in past recessions Ongoing deleveraging Economic weakness in emerging markets Political troubles in the eurozone And so forth Whatever the rationalization you prefer for the current weakness, the chart strongly suggests it isn't your imagination: this is a subpar, mediocre recovery.
*** BARRY RITHOLTZ / LINK

Source: Barry Ritholtz/Ed Easterling

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Words That Make You Go Hmmm...


Sadly too late
to make the last edition of Things That Make You Go Hmmm..., "Behold Politics," Nigel Farage spoke to Eric King recently and laid out the views of a European Parliamentary insider on many of the topics I covered, including the state of the UK economy and the potential for great political upheaval around the time of the EU elections in late May, as anti-EU parties gain significant ground, leading the polls in many countries across the region. CLICK TO LISTEN

Bill Fleckenstein is back and not


before time. In this excellent interview, Bill casts his sanguine (if somewhat jaded) eye over the latest developments amongst central banks as The Taper continues to cause tremors, looks at the prospects for the gold market, and explains what the investment landscape would look like if a dose of reality were administered. CLICK TO LISTEN

As Argentina collapses (again) it's


hard to get an understanding of what such a collapse looks like from inside the country. Into that void steps "FerFal," an Argentine citizen who has been blogging the collapse from its midst. In this fascinating interview, Chris Martenson digs into the practicalities of an event that has been commonplace in Argentina over the years. Forewarned is forearmed. CLICK TO LISTEN

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and finally...
David Thorne is kind of a jerk.
However, the proof of this statement is hilarious. David received ten formal office complaints in six months. Wanna know why? Click on the link.

CLICK HERE TO SEE JUST HOW BIG A JERK DAVID THORNE IS

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 fundsthough I will not be making any specific recommendations in this publication.

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The Mauldin Economics web site, Yield Shark, Bulls Eye Investor, Things That Make You Go Hmmm, Thoughts From the Frontline, Outside the Box, Over My Shoulder, and Conversations are published by Mauldin Economics, LLC. Information contained in such publications is obtained from sources believed to be reliable, but its accuracy cannot be guaranteed. The information contained in such publications is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. The opinions expressed in such publications are those of the publisher and are subject to change without notice. The information in such publications may become outdated and there is no obligation to update any such information. Grant Williams, the editor of this publication, is an adviser to certain funds managed by Vulpes Investment Management Private Limited and/or its affiliates. These Vulpes funds may hold or acquire securities covered in this publication, and may purchase or sell such securities at any time, all without prior notice to any of the subscribers to this publication. Such holdings and transactions by these Vulpes funds may result in potential conflicts of interest, although the editor believes that any such conflict of interest will be mitigated by the nature of such securities and the limited size of the holdings of such securities by the applicable Vulpes funds. John Mauldin, Mauldin Economics, LLC and other entities in which he has an interest, employees, officers, family, and associates may from time to time have positions in the securities or commodities covered in these publications or web site. Corporate policies are in effect that attempt to avoid potential conflicts of interest and resolve conflicts of interest that do arise in a timely fashion. Mauldin Economics, LLC reserves the right to cancel any subscription at any time, and if it does so it will promptly refund to the subscriber the amount of the subscription payment previously received relating to the remaining subscription period. Cancellation of a subscription may result from any unauthorized use or reproduction or rebroadcast of any Casey publication or website, any infringement or misappropriation of Mauldin Economics, LLCs proprietary rights, or any other reason determined in the sole discretion of Mauldin Economics, LLC.

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