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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

17 March 2014

Crimea River
" ." (Fire begins with sparks.) Ukrainian proverb "We all want to believe in impossible things, I suppose, to persuade ourselves that miracles can happen." Paul Auster, The Book of Illusions "He possessed the logic of all good intentions and a knowledge of all the tricks of his trade, and yet he never succeeded at anything, because he believed too much in the impossible. Surprising? Why so? He was forever in the act of conceiving it!" Charles Baudelaire . (Give him a fingernail he will ask for a forearm.) Russian Proverb You drove me, nearly drove me, out of my head While you never shed a tear Remember, I remember, all that you said "Cry Me A River," written by Arthur Hamilton, immortalized by Ella Fitzgerald
Copyright Mauldin Economics. Unauthorized disclosure prohibited. Use of content subject to terms of use stated on last page.

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Contents
THINGS THAT MAKE YOU GO HMMM... ....................................................3
Paralysed ECB Leaves Europe at the Mercy of Deflation Shock from China ..................19 Bundesbank Warns ECB Against Overstepping Boundaries .......................................20 Parallels to 1914? What History Teaches Us about the Ukraine Crisis .........................21 In-the-Know Insiders Are Dumping Stocks .........................................................23 Russia Must Stop U.S. Expansion in Ukraine .......................................................24 Jilted U.S. Investors and Debtors on the Run .....................................................26 How China's Official Bank Card Is Used to Smuggle Money ......................................27 Fire-Sale of US Treasuries Is a Warning of Acute Stress across the World .....................29 Russia Counts Cost as West Tightens Sanctions Noose ...........................................30

CHARTS THAT MAKE YOU GO HMMM... ..................................................31 WORDS THAT MAKE YOU GO HMMM... ...................................................34 AND FINALLY... .............................................................................35

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Things That Make You Go Hmmm...


(Marina Lewycka): Public clashes between Ukrainians and Russians in the main square in Sevastopol. Ukrainians protesting at Russian interference; Crimean Russians demanding the return of Sevastopol to Russia, and that parliament recognise Russian as the state language. Ukrainian deputies barred from the government building; a Russian "information centre" opening in Sevastopol. Calls from the Ukrainian ministry of defence for an end to the agreement dividing the Black Sea fleet between the Russian and Ukrainian navies. The move is labelled a political provocation by Russian deputies. The presidium of the Crimean parliament announces a referendum on Crimean independence, and the Russian deputy says that Russia is ready to supervise it. A leader of the Russian Society of Crimea threatens armed mutiny and the establishment of a Russian administration in Sevastopol. A Russian navy chief accuses Ukraine of converting some of his Black Sea fleet, and conducting armed assault on his personnel. He threatens to place the fleet on alert. The conflict escalates into terrorism, arson attacks and murder. Sound familiar? All this happened in 1993, and it has been happening, in some form or other, since at least the 14th century. So begins an article in the UK Guardian this week, written by a British novelist of Ukrainian origin, Marina Lewycka; and amidst all the furore surrounding the events in Ukraine these past couple of weeks, it's important to gain a little perspective in order to understand the history surrounding the country's fractious relationship with Russia and its recent dalliance with European suitors.

RUSSIA

UKRAINE

Source: Wikipedia 17 March 2014 3

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The key to the stand-off over Ukraine is the Crimean Peninsula no stranger to conflict over the years and home to the infamous "Valley of Death" into which rode the 600 whom Tennyson commemorated in his epic poem recounting the ill-fated Charge of the Light Brigade. The order that sent those gallant young men to their inevitable doom is symptomatic of the kinds of catastrophic misjudgements that get made when emotions are running high. At 10:45 a.m. on October 25th, 1854, the following order, signed by the Quartermaster General Richard Airey, was delivered to Field Marshall, Lord Lucan (no, not him. HE was the 7th Earl of Lucan. THIS was the 3rd Earl his great, great grandfather): Lord Raglan wishes the cavalry to advance rapidly to the front follow the enemy and try to prevent the enemy carrying away the guns Troop Horse Artillery may accompany French cavalry is on your left. R Airey. Immediate. The vagueness of Raglan's order confused Lucan, as it made no mention of which guns the Light Brigade were being ordered to keep from leaving the battlefield; but when he questioned the order, Captain Louis Nolan of the 15th The King's Hussars damned his impudence: "Attack, sir!" "Attack what? What guns, sir?" "There, my Lord, is your enemy!" said Nolan indignantly, vaguely waving his arm eastwards. "There are your guns!" And with that, not daring to challenge a direct order further, Lucan ordered the Earl of Cardigan to lead the 600 men of the 13th Light Dragoons, the 17th Lancers, the 11th Hussars, the 4th Light Dragoons, and the 8th Hussars into the teeth of the Russian battery two kilometres distant, with further guns flanking their advance on either side.

Source: Wikipedia 17 March 2014 4

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Cannon to right of them, Cannon to left of them, Cannon in front of them Volley'd and thunder'd; Storm'd at with shot and shell, Boldly they rode and well, Into the jaws of Death, Into the mouth of Hell Rode the six hundred.

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The result of one of the most famous military blunders of all time, the destruction of the Light Brigade at the Battle of Balaclava, demonstrated the dangers of military miscalculation in the Crimea; and 160 years later the possibility of another such misjudgment on the part of a commander looms heavily over the region. However, rather than tracing every twist and turn in the Crimea between 1854 and today, we shall focus on the more recent history of the isolated and vulnerable peninsula that juts out into the Black Sea from Ukraine's southern coastline; and, with a little help from the NY Times, we'll begin with a look at how things stood after the first week of the crisis:

Source: NY Times

As you can see from the map, there were two major Russian military installations in Crimea prior to tensions getting a little elevated in Ukraine: the airbase at Gvardeyskoye and, far more importantly, the home of Russia's Black Sea Fleet at Sevastopol. These are marked by the blue dots. The red dots? We'll get to them shortly but first, a little more history.

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The Black Sea Fleet, founded in 1783 by Prince Potemkin, has enormous historical and political importance to Russia. The revolt by the crew of the battleship Potemkin in 1905 is widely accepted as being the catalyst for the Russian Revolution (Lenin himself wrote that the uprising sowed the seeds of the Revolutionary Army), and so the history of activities in Sevastopol being somewhat disruptive goes back a long, long way and forward just as far: (Taras Kuzio, "The Crimea: Europe's Next Flashpoint," November 2010): [P]resident Viktor Yushchenko had repeatedly pointed out that the Black Sea Fleet (BSF) is an agent of instability in Crimea, Ukraine that facilitates separatism. In a letter to Russian president Medvedev, Yushchenko stated that "Throughout the period of the BSFs base on Ukrainian territory, its commanding structures had systematically permitted a great number of infringements of bilateral agreements and Ukrainian legislation, which the Ukrainian side had regularly informed the Russian side." That paper was written somewhat presciently after the Ukraine government had announced that the leases on Russia's naval bases in Crimea would not be extended beyond 2017 (the existing agreement provided that, as long as mutual consent was reached, Russia would pay $98 million per year in rent for her bases (or roughly the same price as a four bedroom apartment here in Singapore). Somewhat miraculously (and, I'd like to stress, after NO money WHATSOEVER found its way into any presidential pockets), in April 2010, newly installed pro-Russian stooge President Yanukovych and then-Russian President Medvedev reached an agreement whereby the Russian lease on naval facilities in Crimea would be extended beyond 2017 by 25 years, with an additional 5-year renewal option (204247) in exchange for a multi-year discounted contract to provide Ukraine with Russian natural gas. Which was nice. (Incidentally, for those of you who have been asking after his health, Yuschenko has made a complete recovery from the freak and unexplained accidental dioxin poisoning which occurred in late 2004 during a bitterly fought election campaign in which he defeated pro-Russian stooge his main rival, Yanukovych. I will pass along your good wishes.) Anyway, within a few days of the closing ceremonies of the Sochi Winter Olympics, as the world turned its eyes away from Russia for the first time in several weeks, all hell let loose as Russian mysterious, unidentified troops coincidentally seized key locations across the peninsula in a series of coordinated completely random operations.

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Remember those red dots we were going to get back to? Well, they represent the targets seized during the completely random operations carried out by the mysterious, unidentified troops; and they included air bases, naval bases, border crossings, and the parliament building. What are the odds? A look at another map, this time showing military installations on the Crimean Peninsula and beyond into Ukraine, paints something of a misleading picture:

Source: NY Times

(NY Times): Russia's military abilities dwarf those of Ukraines, which is underfunded and poorly positioned to counter an attack from the east. According to a recent report by the International Institute for Strategic Studies, Ukraines armed forces use mainly Soviet-era equipment, much of which needs to be upgraded or replaced. Ukrainian air defenses are considered weak and its naval fleet is far inferior to Russias. Now, in order to fast forward to the key points here, some background and a couple more maps will be useful, as they explain very clearly the ethnic and political divide that splits Ukraine. Ready? OK, here we go. Ukraine sits between Europe and Russia, bordering Belarus, Poland, Slovakia, Hungary, Romania, Moldova, and, of course, Russia herself. A former Soviet Republic, Ukraine was granted independence in August of 1991, and its eastern border marks the farthest reaches of Europe. At 603,628 sq km, Ukraine is the largest country in Europe and is home to some 44 million people.

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Those 44 million people are split in their allegiance between Europe and Mother Russia, and that split has been growing since the very first independent presidential elections were held in the country in December of 1991. In those elections, Leonard Kravchuk was voted the country's first president; and just twenty days after his victory, he joined the leaders of Russia and Belarus in signing the declaration which formally dissolved the Soviet Union and established the Commonwealth of Independent States. The joy of independence was short-lived, however, as the country plunged into a recession which stripped away 60% of its GDP and led to record hyperinflation: (Wikipedia): Ukraine experienced its worst inflation between 1992 and 1994. In 1992, the Ukrainian karbovanets was introduced, which was exchanged with the defunct Soviet ruble at a rate of 1 UAK = 1 SUR. Before 1993, the highest denomination was 1,000 karbovantsiv. By 1995, it was 1,000,000 karbovantsiv. In 1996, during the transition to the Hryvnya and the subsequent phase-out of the karbovanets, the exchange rate was 100,000 UAK = 1 UAH. By some estimates, inflation for the entire calendar year of 1993 was 10,000% or higher, with retail prices reaching over 100 times their pre-1993 level by the end of the year. In 1996, it was taken out of circulation, and was replaced by the Hryvnya at an exchange rate of 100,000 karbovantsi = 1 Hryvnya (approx. USD 0.50 at that time, about USD 0.20 as of 2007). Start and End Date: Jan. 1992 Nov. 1994 Peak Month and Rate of Inflation: Jan. 1992 285% The recession lasted eight years, devastating the country's economy; and despite many initiatives launched to stabilize the country, the enormous corruption and graft which riddled the ruling political class made real progress largely impossible. In 2004, in some of the most blatantly rigged elections of modern times, our friend Viktor Yanukovych first muscled his way to power, but almost by way of testament to just HOW severely rigged the results were Yanukovych was cast into opposition by the peaceful Orange Revolution. By promising the people of Ukraine far less obvious and slightly more palatable corruption, Viktor Yuschenko and Yulia Tymoshenko (a highly-corrupt successful businessswoman who once placed third on Forbes Magazine's list of the world's most powerful women, on the back of her extremely sketchy highly successful gas company which was wrapped up in a number of money-laundering and conspiracy cases high-profile dealings with the likes of Russia's Gazprom) assumed power.

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Yanukovych would return to power in yet more clearly rigged elections in 2010, and this time his first order of business was to lay corruption charges at the feet of Tymoshenko who, after a not in the least bit surprisingly short trial, was convicted of embezzlement and abuse of power, sentenced to seven years in prison, and ordered to pay the state $188 million. At least nobody could say Yanukovych doesn't learn his lessons. But it was in January 2008, during negotiations between Ukraine's leaders and NATO about the country's potential membership in the NATO Member Action Plan (MAP), that the seeds of the reaction to recent events were sown. Russia was not too keen on having NATO missile "defence" systems on her borders and made her objections clear in no uncertain terms, while the West seemed perplexed that the Russians would have a problem with such a move. After all, why should Russia object to having such weapons in close proximity to her borders? It's not as though the West would kick up a fuss if the tables were turned. (Oh, while I think of it, on a completely unrelated topic, I recently read Thirteen Days: A Memoir of the Cuban Missile Crisis, by Robert F. Kennedy and found it to be an excellent read just in case anybody is looking for book suggestions.) Now, where was I? Oh yes, Russia's baffling opposition to NATO missiles a handful of miles from her borders... Well, the Russians hated the idea, whilst NATO thought it was in everybody's best interests. From that moment on, Ukraine has been "in play." I promised you maps, and right about now things are gonna get all cartographical up in here. First up, a look at Ukraine split along political and ethnic divides. As you can clearly see, this is a country very much of West and East of pro-Europe and pro-Russia:

Source: BBC 17 March 2014 9

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Taking that map one step further we get this:

Source: Washington Post

As you can see, the divide is very clear indeed. Thank God for maps. That's a lot of "splainin" saved. So... that's how things stack up ethnically, politically, and militarily; but this next map, which has suddenly entered the collective conscious of the wider world, likely holds the key to how this situation plays out. It's a map of Ukraine and the gas pipes that crisscross the country:

Source: Zerohedge

There, in one simple map, is the crux of the struggle over Ukraine.
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Russian gas enters Europe largely through Ukraine's pipelines; and, as you can see in yet another map (this time courtesy of the Wall Street Journal), most of Europe is somewhat reliant upon its continuing to do so, and some of Europe is totally dependent upon its doing so. Score a point for Vlad:

Source: WSJ

The Russians have the vital flow of gas into Europe as their primary leverage in this power struggle, and they have shown in quarrels past that they are not afraid to turn the taps off if they feel it is in their best interests to do so. Based upon the stand-off in Crimea and the tension it is steadily elevating, the questions that need to be answered are these: What happens next? Does Putin once again run rings around the West, or is he forced to back down? Will somebody, somewhere miscalculate and overplay their hand? Is this just a flashpoint for trouble that's been brewing for a while? Is there a wider picture here that Ukraine is just a small part of? Well, as week one turned into week two, Putin's plans became clearer. While the West was running around trying to get consensus, Vlad the Impatient continued doing what those not hamstrung by such things as due process do: he fortified his position by adding a couple more air bases, another navy base, a few missiles, and an airport (see map below) and all of this ahead of the one event which might be the basis for a possible miscalculation or overreaction.

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As we've seen in recent years in Europe, the idea of a referendum which gives people the right to have their say in how they're governed is an extremely unpopular one amongst the political class, and the one called in Crimea for March 16th is even more unpopular than most. Granted, in Russia and its former republics and current satellites, the chances of such referenda being interference-free are roughly the same as those of Justin Bieber writing a bestseller on humility, but still...

Source: NY Times

It's the path to this referendum that is the main cause for concern. Immediately following the ousting of Yanukovych from Ukraine, Crimea's parliament "elected" a staunchly pro-Russian PM whose first act of business was to call a referendum to decide whether Crimea would break away from Ukraine and join Russia. No fuss. No prevaricating. Day one, job one: referendum. Now, there is an old adage which applies more in politics than in almost any other field, and it goes like this: "Never ask a question to which you don't already know the answer." I am writing this on Saturday, the day before the Crimea referendum, but I am willing to go out on a limb and predict a handy victory for the pro-Russian faction, and that is when things may get nasty. May.
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Is it such a completely bizarre idea for a power to hold a territorial stake in a very hostile foreign land particularly when that piece of territory is an important naval base? Well, maybe not. On the left is an aerial map of Sevastopol, the Russian naval base. The image has been rotated roughly 90to make alignment easier. On the right? Well that would be Guantanamo Bay, the US naval base on the southeastern tip of that most anti-American of environments, Cuba. The US has leased the base since 1903 and against strenuous Cuban opposition since 1959.

Source: Google Maps/TTMYGH

Just sayin'... Folks, the "Yes" vote is a foregone conclusion, hence the build-up of tanks on the Russian/ Ukrainian border in recent days; and the pantomime being played out amongst the likes of John Kerry, Sergei Lavrov (the Russian foreign minister), Putin himself, and various heads of state across Europe has the potential to be horribly misjudged in an environment where any number of presidents and prime ministers are desperate to look strong to their voting populaces. STOP THE PRESSES!! (NY Times): With thousands of heavily-armed Russian troops occupying this perennially embattled peninsula, an overwhelming majority of Crimeans voted on Sunday to secede from Ukraine and join Russia, resolutely carrying out a public referendum that Western leaders had declared illegal and vowed to punish with economic sanctions. The outcome, in a region that shares a language and centuries of history with Russia, was a foregone conclusion even before exit polls showed more than 93 percent of voters favoring secession. Key European elections are a matter of weeks away, and all the incumbent parties are under intense pressure from previously harmless fringe elements. US midterm elections will be here before you know it, and this past week Barack Obama's approval ratings dipped to a new all-time low of 41%. Meanwhile, in Russia, Putin himself has been under considerable strain domestically as the Russian economy crumbles.
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All these contributing factors, plus the fact that the global economy is still in critical condition (no... don't listen to THEM. It IS), make it ever more likely that (a) not being seen to back down to a Russian mobster/bunch of decadent Western imperialists is paramount to both sides and (b) a little armed conflict might be just the thing to rally the troops behind a leader or two. It's happened before, many times. Just not recently (well, unless you include Afghanistan, Iraq, or Afghanistan again).

Source: Bloomberg

Sanctions have been threatened against Russia should Putin overstep the mark, and with the ruble in freefall lately, the weakness in the global economy hurting Russia's oil revenue, and the inevitable pressure being brought to bear on Russia's hard man ratcheting higher, the stakes grow bigger every day. Draconian sanctions by the West would back Putin into a VERY tight corner indeed and would make a lot of very powerful allies reconsider their backing of the ex-KGB man. A look at the damage already inflicted upon Russia Inc. is instructive, as can be seen from the charts above.
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Now ordinarily I would bet the ranch on this spat being defused diplomatically and everybody leaving the negotiating table a little disgruntled (which would mean the outcome was just about perfect), BUT whilst on balance I still think that is the most likely outcome, I suspect that markets have become dangerously conditioned by one perfectly executed landing after another in recent years to expect (and position for) the best. As I was mulling all this over today, a good friend emailed me and asked me my thoughts on exactly this topic. The man in question is one of the very brightest minds it is my pleasure to be able to call on for advice and counsel, and so I thought, what better way to tidy up this week's many questions than by including the culmination of our email conversation (though with the odd expletive removed and certain names changed to protect the innocent): On 15 Mar, 2014, at 12:10 pm, Mr. Big <mrbig@gmail.com> wrote: apples to apples? ok, so why, how, what to do? On Sat, Mar 15, 2014, at 12:26 AM, Grant Williams <ttmygh@me.com> wrote: My worry is this (I'm writing about it right now): Markets have become conditioned to Goldilocks outcomes manufactured by CBs & govts over a period of three years when EVERYTHING should have gone wrong but nothing has. The Taper hasn't mattered (yet) because everybody believes that, if the wheels come off, the Fed will blink and crank it up again. China's problems are starting to become too difficult to ignore. (GDP 7.7% & PMI sub-50 for a manufacturing economy? Righto. Don't even get me started on the shadow banking system, which is straining at every seam right now.) Abenomics is just beginning to be shown up for the farce it really is just in time for the consumption tax hike coming in a few weeks. Abe's fabled "three arrows" are not the ones everybody imagines but rather the kind of arrows with a sucker rather than a point on the end. Actually, in this case, on BOTH ends. Putin is in a corner, and we KNOW he don't take to backin' down none. Obama's approval is at all-time lows with midterms on the horizon, so he needs to look Presidential at home. Draghi is trying to force the BuBa to BEG him for QE before turning the taps on, and it is crushing Europe, but he won't blink (I don't think). The Fed meets next week and will taper another $10 bn.

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That's the broad backdrop. Now, let me ask you this: What if this next $10 bn taper is the "bang" moment when markets suddenly realize that the Fed ARE serious about continuing to wind it down? What if the latent fear over all of the above issues, combined with that next $10 bn and the words of smart guys like Seth Klarman ringing in their ears, tells managers it's "safety time"? At some point the market factors QE at $0 if the Taper continues and that time ISN'T after they withdraw the last $10 bn. Above all, what if (and the marginal signs have been nagging away at me the last ten days or so) everything goes back to trading how it SHOULD, based on everything we know about markets and economics, instead of lingering in the Magical Fairydust World created by central banks since 2009? Markets have been reacting correctly and beginning to decorrelate over the past several sessions. Where does everything trade if a stimulus level of zero suddenly gets discounted? I don't know EXACTLY, but I'll hazard a guess at "a ****-load lower" to kick things off. Gold is talking loudly, so is copper. JGBs and equities are mumbling, so are bonds. Something is happening, right now, in all the dark corners of the dance hall, and whatever that "something" is, it will NOT lead to an extension of the bull market. Do we "crash"? I think that's the wrong question. The right questions (I think) are these: If a major correction begins, at what stage do they turn on the printing presses again? 10% lower? 15%? 20%? When they DO (and it is WHEN, not IF), what happens now that the last vestige of their credibility has evaporated? A quick spike then a crash, or does the patient flatline on the bed no matter how much juice they pump into it?

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I'm nervous as hell and feel a sharp disturbance in The Force. We've been here before and pulled back from the brink every time, but this time that outcome is expected again by most, and that is extremely dangerous. Markets are most assuredly NOT ready for reality. What say you, Wise Man? On Sat, Mar 15, 2014, at 12:33 AM, Mr. Big <mrbig@gmail.com> wrote: EVERY new Fed chief gets a serious test. Every one. I have been trying to figure Yellen's. I know this: A weakened/prone US, scared Russia, and nervous China is not good and not priced in. On 15 Mar, 2014, at 12:42 pm, Grant Williams <grantwilliams2@icloud.com> wrote: Agreed 100%. I've been saying for two years that nothing matters to anybody until it matters to everybody, and I have a nasty feeling that the test is this: Suddenly, in one moment, EVERYTHING matters to everybody. That's something even central banks won't be able to stop. Every new Fed chair gets a test. Burns had the run on gold that led to Nixon's closing of the window; Miller had the Oil Shock; Volcker had the inflation tiger to wrestle; Greenspan had the '87 crash; and Bernanke had the subprime crisis followed by the 2008 crash. Now it's Yellen's turn. After fifteen months of steady and predictable (thanks largely to the Fed's largesse and Draghi's promise to do "whatever it takes"), we are about to enter a period of extreme unpredictability right at the moment when the Fed is about to demonstrate to the markets that, yes, they really ARE serious about continuing to taper $10 bn every month. This past week we have seen markets wobble in many unexpected ways as Ukraine has provided the background noise, Japan's JGB market has been weak, US equities acted very poorly and failed to shrug off bad news as they have been doing for as long as many can recall, and Asia, taking its cue from China, was very weak indeed particularly Japan. Commodities were battered (copper and iron ore particularly); bond markets didn't see the flight-to-safety rally we have become used to; and gold blasted through resistance to new six-month highs and did what it is SUPPOSED to do in periods of geopolitical uncertainty something we haven't seen for almost two years.
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Ukraine's referendum may well herald a return to Cold War conditions or, perish the thought, to an armed confrontation between East and West on European soil, but Ukraine is merely the current flashpoint. The troubles facing the world are far, far broader than just the messy politics of Ukraine; and there is a very real chance that those troubles coalesce into one giant ball of concern that is big enough to shatter the fake sense of calm we've all been lulled into by the passage of time between crises. If they do coalesce, I can't think of a single asset anywhere in the world that is priced correctly for such a situation. THAT is something worth thinking about.

******* Singapore to San Francisco to Seattle to Toronto and then home in the space of 12 days,
with all the attendant climate changes, was a racing certainty to make me sick, and boy did it. Through my dreadful cold, however, I'd like to offer a big thank you to all those of you who braved the cold in Toronto to come and say hello at PDAC and to my friends on the West Coast (you know who you are) for taking such good care of me. I had asked Vlad if he wouldn't mind holding off on the whole Ukraine thing whilst I was traveling, but as always he just does what he wants. There's no point in trying to reason with him. Ambrose Evans-Pritchard is on fire this week, and we call upon him no less than three times as he examines a possible deflationary shock being sent from China to Europe (with love), sees a "fire-sale" in US treasuries, and examines the likely fallout in Russia from any sanctions imposed by the West. Ambrose aside, we take a look at the Ukraine crisis through a different set of eyes those of the editor of the Moscow Times (and, surprisingly, the story takes on something of a different hue), hear how insiders are dumping stocks at a record pace, listen in as the Bundesbank issues a warning to the ECB, and examine parallels between Ukraine and the events which led to WWI exactly 100 years ago. In China, US interests are finding the playing field anything but level, and Reuters reports on how billions of dollars are being smuggled out of the country using the simple ATM card; videos include a look at Europe's fluid borders and a couple of interviews I gave whilst in Toronto last week; and Axel Merk gives us the benefit of his considerable wisdom on Japan. Charts include Chinese pollution, Dr. Copper, and long-term looks at a variety of asset classes and that'll just about do it for another week.

Until Next Time... *******


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Paralysed ECB leaves Europe at the mercy of deflation shock from China
Most of western Europe is already in outright deflation. So are the Balkans, the Baltic states and the old Habsburg core. The Continent has left its flank open to an external shock from Asia. There is a high chance that this will occur as China attempts to extricate itself from a $24 trillion credit misadventure by debasing its currency to regain lost competitiveness and bail out its export industry. The yuan has fallen by nearly 2pc against the dollar since early January, and 4pc against the euro. For all the talk of weaning China off chronic over-investment, Beijing engineered a record $5 trillion of investment in fixed capital last year up 20pc from the year before, and as much as the US and Europe combined. This has created a vast overhang of excess manufacturing capacity in the global system. It is coming our way in the form of a slow, powerful, deflationary undercurrent. Europe's headline price data understate the full deflation risk. Eurostat's HICP index "at constant taxes" stripping out the one-off effects of austerity shows that 23 of the EU's 28 countries have seen a fall in prices over the past seven months. "The risk of deflation is definitely before us," said Olivier Blanchard, the International Monetary Fund's chief economist. By this measure, inflation since June has been running at a rate of -1pc in France, -2pc in Holland, Belgium and Slovenia, -4pc in Italy, Spain and Portugal, -6pc in Greece and -10pc in Cyprus. Sweden and Switzerland are also in deflation. Germany rolled over in July. The UK still clings to a little inflation now a precious commodity but it too turned negative in September. This is a nightmare for the debt-stricken states of southern Europe, still trapped in a slump with mass unemployment regardless of whether they manage to eke out the odd quarter of miserable growth. With Germany at zero inflation, they have to go into even deeper deflation to claw back lost competitiveness within EMU under "internal devaluations". This, in turn, plays havoc with debt dynamics through the denominator effect. Their debt loads are rising on a base of flat or contracting nominal GDP. It is a key reason why Italy's public debt has risen from 119pc to 133pc of GDP since 2010 despite achieving a primary budget surplus, or why Portugal's debt jumped from 94pc to 129pc (IMF data). These countries have an impossible task, damned if they do and damned if they don't. Mr Blanchard said their gains in competitiveness risk being overwhelmed by a rise in the "real value" of their debt. "The danger is that the second effect dominates the first, leading to lower output and further deflation."...
*** AMBROSE EVANS-PRITCHARD / LINK

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Bundesbank Warns ECB Against Overstepping Boundaries


Germany's Bundesbank Thursday warned the European Central Bank against overstepping its boundaries on monetary policy. In its annual report, the Bundesbank made no reference to specific measures but said nonstandard measures must stay within monetary policy bounds. "Even non-standard crisis measures must not push monetary policy beyond its bounds by, for example, straying into fiscal policy territory, from where it might then find it very hard to return to the straight and narrow path," the Bundesbank said. Speaking during a press briefing following the release of the Bundesbank annual report, Bundesbank President Jens Weidmann also reiterated that it currently sees no risks of deflation. An exit from easy policy must not be "unduly delayed" because of financial stability considerations, Weidmann said. "While current accommodative policy is justified, low interest rates cannot be permanent," Weidmann said. Monetary authorities should not leave any doubts that policy will remain aimed at ensuring price stability, he asserted. The ECB last week cemented its forward guidance the pledged to keep interest rates at current or lower levels for an extended period of time, noting that the large output gap implies no tightening even as the economy begins to recover. Weidmann reiterated that he currently sees no risks of deflation in the common currency area. Fears of downward spiral of prices have sparked calls for more radical ECB policy measures. Refraining from making an reference to specific measures, the Bundesbank said non-standard measures must stay within monetary policy bounds. "Even non-standard crisis measures must not push monetary policy beyond its bounds by, for example, straying into fiscal policy territory, from where it might then find it very hard to return to the straight and narrow path," the Bundesbank said. The Bundesbank has opposed some of the ECB's more aggressive policy measures taken in the crisis, in particular the OMT bond-buying programme. In its report, the Bundesbank warned that the central bank's independence must be protected, but it must therefore also interpret its price stability mandate narrowly. "Independence does not give a central bank carte blanche to do as it pleases; it obligates the central bank to interpret its monetary policy mandate narrowly."

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Separately on banking union, the Bundesbank urged a "swift conclusion" to talks between European governments and the European Parliament over the completion of a Single Resolution Mechanism and fund, the final components of a banking union designed to shore up the Eurozone's financial system.
*** MNI / LINK

Parallels to 1914? What History Teaches Us About the Ukraine Crisis


On the 100th anniversary of World War I, it is tempting to compare events in Ukraine to 1914. But the current crisis bears little resemblance to the geopolitical situation of the time. The answers history provides are anything but singular and absolute. The current emergency in Ukraine on this everyone seems to agree is rich in historical resonances. But which histories in particular are pertinent to the recent events? The complexity of the situation in the Ukraine arises precisely from the plurality of quite different historical narratives entangled in it. One thing is clear: the crisis can neither be understood nor solved using a single historic logic. Exactly one hundred years after the outbreak of World War I, the comparison with 1914 inevitably comes to mind in this anniversary year. In its complexity and swiftness of escalation, the "July Crisis" of 1914 is without parallel in world history. On June 28 of that year, the Austrian heir to the throne and his wife were slain in Sarajevo by Bosnian Serb students acting for a shadowy Belgrade-based ultranationalist network. The Austrian government in Vienna offered its support and resolved to serve an ultimatum on its Serbian neighbor. Berlin promised support for Austria on July 5. Encouraged by Paris, Russia opted to defend its Serbian client by mobilizing against Austria and Germany. Unsatisfied by the Serbian reply to its ultimatum, Austria declared war on Serbia. Russia mobilized against Austria and Germany. Germany first declared war on Russia and then on France. France asked London for help. And, on August 4, 1914, following the German breach of Belgian neutrality, Britain entered the war. The spectre of that war is useful as a reminder of how terrible the costs can be when politics fails, conversation stops and compromise becomes impossible. But in fact the alignments implicated in the Ukrainian emergency bear little relation to the geopolitical constellations of 1914. At that time, two central powers faced a trio of world empires on Europe's eastern and western peripheries. Today, a broad coalition of Western and Central European states is united in protesting Russia's interventions in Ukraine. And the restless, ambitious German Kaiserreich of 1914 scarcely resembles the European Union, a multi-state peace framework that finds it difficult to project power or to formulate external policy.

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The Crimean War of 1853-1856 might offer a better fit. Here, at least, we can speak of a coalition of "Western" states united in opposition to Russian imperial ventures. This war, which ultimately consumed well over half a million lives, began when Russia sent 80,000 troops into the Ottoman-controlled Danubian principalities of Moldavia and Wallachia. Russia argued that it had the right and obligation to act as the guardian of orthodox Christians within the Ottoman Empire, much as it today claims the right to safeguard the interests of ethnic Russians in eastern Ukraine. But here, too, it would be a mistake to push the analogy too far. In the 1850s, the Western powers feared that Russian predations against the Ottomans would destabilize the entire zone from the Middle East to Central Asia, undermining the security of the British and French world empires. Since the Ottoman Empire no longer exists, the mechanisms of transimperial destabilization are absent in the current crisis, which involves the relationship between Russia and one relatively isolated former client state on its periphery. Pushing back further into the past, we can discern more distant precedents: the Russian annexation of the Eastern half of Ukraine after 1654 and its evolution into Cossackdom over the next century and a half, followed by the push south into the Crimea from the reign of Peter the Great onwards. This is the long, slow story of Russian territorial expansion, a process lasting centuries in which Muscovy acquired on average every year an area equivalent in size to modern Holland. What none of these historical genealogies captures is the unruly dynamic of revolution and civil strife in Ukraine today, a phenomenon that evokes very different precedents. Following the news over the last few weeks, it has been difficult (for historians at least) to ignore the many parallels with the English Civil War of the 1640s. Then as now, an increasingly selfconfident parliament confronted a controversial head of state. It was not the office of the king or president as such whose legitimacy was in question, but the conduct of the person discharging it. And just as President Viktor Yanukovych fled to an undisclosed location after the breakdown of order in Kiev, so Charles I, having tried and failed to arrest the ringleaders of the parliamentary opposition, left London for Windsor in 1642, to return seven years later for his trial and execution. In both cases, news of a provincial tumult in support of the beleaguered sovereign (Irish Catholics in the English case, Ukrainian Russians in the Ukrainian) triggered a decisive escalation....
*** DER SPIEGEL / LINK

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In-the-know insiders are dumping stocks


Corporate insiders are more bearish than they have been in almost 25 years. That isnt good news for the stock market, since these insiders corporate officers and directors know more about their companies prospects than the rest of us. In fact, you may want to take their pessimism as a signal to ditch some of your stocks or shift into industries in which insiders arent heavily selling, such as energy, financials and basic industrials. Just be aware that this record bearishness isnt evident from the insider indicator that gets widespread attention on Wall Street the ratio of shares of company stock that insiders have recently sold versus the number they have bought. According to the Vickers Weekly Insider Report, published by Argus Research, this sell-to-buy ratio, when applied to transactions over the previous eight weeks, is higher than average but no higher today than it was one year ago when the S&P 500 was poised to produce an impressive double-digit gain. And in late 2003, just as the 2002-07 bull market was gathering steam, the insiders sell-to-buy ratio rose to even higher levels than it is today. But this measure is misleading, says Nejat Seyhun, a finance professor at the University of Michigan who has extensively studied insider behavior. That is because it uses a government definition of insiders that includes a group of investors whose past transactions, on average, have shown no correlation with subsequent market moves: those who own more than 5% of a companys shares. Though on rare occasions a large shareholder also will be an officer or director, in almost all cases it will be an institutional investor such as a mutual fund or a hedge fund. Because the transactions of these big shareholders often involve a far greater number of shares than those of the insiders who do show more insight officers and directors the raw sell-tobuy ratio is heavily dominated by insiders with the least forecasting ability. For example, Seyhun found that far from being a laggard, the average stock sold by these largest shareholders actually outperformed the market by 0.7% over the subsequent 12 months. For his calculation, Seyhun strips out the largest shareholders from the sell-to-buy ratio. Currently that adjusted figure shows a record level of insider bearishness. According to this measure, corporate officers and directors in recent weeks have sold an average of six shares of their companys stock for every one that they bought. That is more than double the average adjusted ratio since 1990, which is when Seyhuns data begin.

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One year ago, Seyhuns adjusted ratio was solidly in the bullish zone, he says. And in late 2003, the ratio was more bullish still. The current message of the insider data is as pessimistic as Ive ever seen over the last 25 years, he says....
*** MARKETWATCH / LINK

Russia Must Stop U.S. Expansion in Ukraine


Today, as a result of the Ukrainian crisis, U.S.-Russian relations have hit their lowest point since the invasion of Afghanistan in 1979 or of Czechoslovakia in 1969 or perhaps even since they bottomed out during the Cuban Missile Crisis. The Crimean crisis, which began as a power struggle between the ruling authorities in Kiev and opposition forces, transformed in to an attempt to overthrow Ukrainian President Viktor Yanukovych by pro-Western and nationalist opposition forces with the support of the U.S. and European Union. The crisis escalated into a conflict between the U.S. and Russia after the West supported a coup, then lied by violating the Feb. 21 agreement when it recognized the formation of a new and illegitimate government of extremists. This conflict has the potential of sparking a new Cold War something I never thought could happen in modern times since I believed it would have to be rooted in ideological differences. Instead, Moscow and Washington have billions of dollars of economic interests at stake, making this a geopolitical rather than an ideological Cold War. Moscow does not see the revolution in Ukraine as an attempt to create a more democratic or law-based society. Instead, it sees the events in Kiev as an attempt to make Ukraine as antiRussian as possible. The new government represents a minority of the Ukrainian population. It wants to suppress the Russian-speaking majority and violate their right to representation by holding unfair elections on May 25. Moreover, U.S. President Barack Obama and German Chancellor Angela Merkel deceived President Vladimir Putin when they pursuaded him to convince Yanukovych to refrain from using force to quell the Maidan, and then to sign the Feb. 21 agreement which they refused to uphold. Instead, they told Russia to accept the new reality in Ukraine. But why should Moscow accept that reality when it is directed against Russia, democracy and human rights? What did Russia do to become the focus of so much animosity? Is it because it prevented the West from bombing Syria? Because it persuaded Yanukovych not to sign the Association Agreement a treaty of little real importance to the EU? Those are trivial reasons for starting a new Cold War.

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It seems that the West simply does not like Putin. He is a huge obstacle who prevents them from achieving global hegemony. For this reason alone he must be broken. Nobody in Moscow has any doubt that what happened in Ukraine will be repeated in Moscow in two or three years. Without Putin, there will be few world leaders left who have the power or courage to stand up to Washington. When this happens, the entire world will have to quickly accept the new reality. Russia is not in Crimea to expand its territory but to oppose the immense power of West and its financial institutions in New York and London. Washington wants to characterize this as a conflict between Moscow and Kiev, thereby forcing Russia to negotiate with an illegitimate regime determined to destroy everything Russian in Ukraine. However, everyone understands that this is a conflict between Moscow and Washington and that these countries should negotiate a solution. The question here is not Crimea but which reality the two sides are prepared to accept. Should Moscow allow Washington to force it into humiliating submission and accept the possibility of a violent overthrow of the Putin regime? Or should Washington acknowledge that it can no longer impose its will on others? Both sides are unwilling to admit their weakness, thus making a geopolitical Cold War likely. The West will hit Russia with economic sanctions to pressure Russian oligarchs into forming a fifth column, just as it did in Ukraine. To avoid this, Moscow will have to force oligarchs to bring their overseas assets back to Russia. If Washington wins this geopolitical Cold War, it will install a pro-Western government in Moscow which could lead to the breakup of Russia. Siberia, the Caucasus and the Far East will demand autonomy, and the country's oil and gas resources will be transferred from the government to multinational corporations. However, it is possible that Russia can resist, thereby fulfilling its historical mission of foiling the designs of those who long for world domination. Just as Russia stopped Hitler in the 20th century, Napoleon in the 19th century and Frederick the Great in the 18th century, it will stop Washington in the 21st century. This is nothing personal, just business. Russia has its historical mission to fulfill....
*** MOSCOW TIMES / LINK

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Jilted U.S. Investors and Debtors on the Run


U.S. investor Bill Wells went hunting for profits in China but was eventually hung out to dry. Now, he wants to know what happened. Wells and his Tennessee-based firm Pope Asset Management LLC (PAM) are trying to recover US$ 15 million invested six years ago in a now-defunct pharmaceutical company, Laiyang Jiangbo Pharmaceuticals Co. Ltd. Yet the prospects look grim, based on Wells' ongoing probe and a Caixin investigation. The money trail from PAM's 2008 purchase of Jiangbo-issued convertible bonds leads to the company's delisting on America's Nasdaq Stock Exchange. And it appears to lead to a Jiangbo executive with high-level government connections in the eastern province of Shandong. PAM is not the only firm waiting and hoping for repayment in the wake of Jiangbo's 2011 failure. Dozens of suppliers and leasing firms who did business with a biotechnology company run by Jiangbo's chairman, Cao Wubo, are also standing in line. Wells suspects Cao used money from the bonds issued to U.S. investors including PAM and stock issued on the Nasdaq exchange to start the company that's now in arrears to its suppliers, Shandong Hilead Biotechnology Co. Ltd. Hilead was founded in April 2008, one year after Jiangbo listed, with registered capital of 10 million yuan. It has been increased to 360 million yuan, and business records show 323 million yuan of that capital came from Cao. Wells' hunch is based on a 2011 violation notice issued by the State Administration of Foreign Exchange (SAFE), a government agency that oversees the country's inbound and outbound currency flows. Jiangbo was cited for breaking SAFE's rules by transferring US$ 27.7 million raised overseas to Hilead and a brother company of Jiangbo without regulatory permission. Jiangbo officials initially told regulators they planned to buy real estate with the money raised in the United States. Cao could not be reached for comment, even though he's also a public figure who serves on the Yantai people's congress, a legislative body for the Shandong city. Calls to his number led to a recording that said his phone service was suspended. Hilead is in deep financial trouble. Caixin learned from sources who asked to remain anonymous that suppliers and other creditors are waiting to be paid. They might have grounds to seek help from police. The company's start-up funds, as well as generous loans issued by local governments and big banks, have apparently dried up.

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So far, Caixin learned, not a single creditor has asked authorities to intervene. They apparently fear that Hilead executives, and perhaps Cao, will react to an official investigation by making sure no one gets repaid. Wells was no stranger to this and other particularities of the business-credit landscape in China. PAM, which has nearly US$ 500 million under management, made money in Chinese company stock investments before buying Jiangbo bonds. The bond purchase, Wells said, followed a recommendation from an investment banker he trusted who said Jiangbo was a sound bet. Looking back, Wells said he should have pursued due diligence before jumping into the deal. Jiangbo issued US$ 35 million worth of stock-convertible bonds in 2007 and 2008 to PAM and other U.S. institutional investors. PAM's initial purchase totaled US$ 22 million. It had sold US$ 7 million worth of bonds before Jiangbo's delisting. Jiangbo joined Nasdaq in October 2007 through a reverse merger, a listing procedure once commonly used by Chinese companies that wanted to sidestep Chinese government's restrictions on foreign investment. Through the arrangement, the Chinese company's profits and obligations would be entirely held by an overseas entity, in this case, a Florida-based shell company, in which foreign individuals and businesses make investment. Executives at Jiangbo arranged the bond sales after the Nasdaq listing failed to raise enough cash to suit the company's needs, the investment banker told Wells....
*** CAIXIN / LINK

How China's official bank card is used to smuggle money


Growing numbers of Chinese are using the country's state-backed bankcards to illegally spirit billions of dollars abroad, a Reuters examination has found. This underground money is flowing across the border into the gambling hub of Macau, a former Portuguese colony that like Hong Kong is an autonomous region of China. And the conduit for the cash is the Chinese government-supported payment card network, China UnionPay. In a warren of gritty streets around Macau's ritzy casino resorts, hundreds of neon-lit jewellery, watch and pawn shops are doing a brisk business giving mainland Chinese customers cash by allowing them to use UnionPay cards to make fake purchases a way of evading China's strict currency-export controls.

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On a recent day at the Choi Seng Jewellery and Watches company, a middle-aged woman strode to the counter past dusty shelves of watches. She handed the clerk her UnionPay card and received HK$300,000 ($50,000) in cash. She signed a credit card receipt describing the transaction as a "general sale", stuffed the cash into her handbag and strolled over to the Ponte 16 casino next door. The withdrawal far exceeded the daily limit of 20,000 yuan, or $3,200, in cash that individual Chinese can legally move out of the mainland. "Don't worry," said a store clerk when asked about the legality of the transaction. "Everyone does this." Internal discussion documents prepared by UnionPay and by financial authorities in Macau and China show these fake sale cash-backs are widespread in such retail stores. The practice violates China's anti-money-laundering regulations as well as restrictions on currency exports, according to Chinese central bank documents reviewed by Reuters. Chinese authorities also fear the UnionPay conduit is being used by corrupt officials and business people to send money out of the country. It's unclear why the central bank, the Peoples Bank of China (PBOC), hasn't cracked down harder on the practice, although the documents Reuters reviewed show the bank was aware it had become a growing problem. Industry experts point to a weak enforcement culture in China, a reluctance to hurt Macau financially with 80 percent of the city's revenues drawn from gambling, and a willingness to tolerate some capital flight especially if it can be tracked through names on bank cards. Moreover, the rapid growth of UnionPay, including the spread of its terminals at retail stores across the world, is playing a key role in China's strategy for making the yuan a global currency. No one knows for sure how much Chinese money is being channeled illegally into Macau. Tam Chi Keong, an assistant professor at the Macau University of Science and Technology, puts the total at HK$1.57 trillion ($202 billion) a year through various channels.. Tam says his estimate is based on his analysis of Macau's finances and interviews with gambling industry participants. A senior UnionPay executive said the Shanghai-based company has long been aware of the payment card abuse in Macau and elsewhere, but was limited in its ability to act. That's because the primary responsibility lies with authorities in Macau or any other country where the fraud is taking place, he said. "The problem you are talking about has existed for several years," said the executive, who spoke on condition of anonymity. "We have continuously taken measures."...
*** REUTERS / LINK

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Fire-sale of US Treasuries is a warning of acute stress across the world


Somebody is a selling a fistful of US Treasuries. It could be Russia, or China, Turkey, South Africa, or Indonesia, or all frantically selling bonds at the same time for different reasons. We dont yet know. All we know is that the US Federal Reserves custody holdings on behalf of foreign central banks plunged by $106bn in the week ending March 12, the biggest one-week drop on record. Russias central bank is undoubtedly liquidating reserves at a breakneck pace to prevent a collapse of the rouble, as foreign companies scramble to get all their spare cash out of Russian accounts before the G7 guillotine comes down on the Putin clan next week. It is certainly trying to remove its assets beyond the jurisdiction of the US authorities though that will not be easy. The SEC takes no prisoners. In the end, the world is more frightened of US regulators than it is of Putin's tanks or his polonium. Soft power can trump hard power. One investor told me that clients in Russia are literally loading up cars with computers, machinery, and anything that will fit, and rushing them out of the country for fear that assets will nationalised. Whatever happens, nobody will forget this in a hurry. Yet the latest financial ructions go beyond Russia, they reek of stress in the international system. Countries are intervening all over the place to defend their currencies (which means they are tightening). Their central banks built up huge war chests of reserves for a rainy day, and now it is raining, said David Bloom, currency chief at HSBC. Indeed it is. The international order is unravelling. Russia is of course smashing the postCold War order by seizing Ukraine, and blowing up the global architecture of nuclear nonproliferation. Let us not forget that Ukraine agreed to give up its nuclear weapons the worlds third biggest arsenal at the time in exchange for a guarantee by the great powers in 1994 that its territorial integrity would be upheld. Russia was one of the signatories. China is laying claim to large parts of the East China and South China Seas, and has established an air identification control zone over the Japanese-controlled Senkaku islands. China and Japan are one blow or misjudgement away from outright military conflict. The battle on the Pacific Rim is ultimately even more dangerous than the Wests clash with Russia over Ukraine. Whether or not the wheels really are falling off the Chinese economy remains to be seen, but the discussion has crept into the market. You can smell the beginnings of fear. The global situation is extremely serious, Lars Christensen from Danske Bank. Russia is committing economic suicide, there is a massive corruption scandal in Turkey, and capital outflows from China threaten to have huge ramifications.

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If the US dollar were to strengthen drastically at this point, we would go straight into a global recession. That is indeed the risk. Let us hope the Fed can pull its head out of its closed-economy macro model for once and take a look at the world before it tightens again next week. Tread very carefully Madame Chairman.
*** AMBROSE EVANS-PRITCHARD / LINK

Russia counts cost as West tightens sanctions noose


Russia risks a wave of capital flight and a shattering economic crisis as the West prepares a package of sanctions over the seizure of Crimea. German Chancellor Angela Merkel spelled out the danger for Russia in a speech that silenced pro-Kremlin voices in her own coalition and left no doubt that Europe is now fully behind the US on punitive measures. If Russia continues on its course of the past weeks, that will not only be a great catastrophe for Ukraine. It will cause massive damage to Russia, both economically and politically, she said. None of us wants it to come to this, but we are determined to act. Let me be absolutely clear; the territorial integrity of Ukraine is not up for discussion. The West has threatened visa bans and an asset freeze on individuals as early as Monday unless Russia steps back from the brink on the annexation of Crimea. This now looks certain since Russian troops are continuing to dig in across the peninsula before this Sundays vote on secession. It can get ugly fast if the wrong choices are made, and it can get ugly in multiple directions, said John Kerry, US Secretary of State. The US and the EU will escalate to additional and far-reaching measures if the picture deteriorates, a likely outcome since Ukraines premier Arseniy Yatsenyuk has vowed to resist any loss of sovereign soil. Russia has threatened to retaliate with symmetrical sanctions but Tim Ash, from Standard Bank, said it is a one-sided contest that Moscow cannot win. Russia is facing the entire West. Its economy is already very weak and this could end up being as bad as 2008-2009, when GDP contracted by 9pc, he said. Russia cannot suspend oil and gas exports without cutting off its own source of foreign revenue. Any such move would destroy its credibility as a supplier of energy, accelerating Europes longterm switch to other sources.

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Russian companies have $653bn (392bn) of foreign dollar debt, and must roll over roughly $150bn this year. Yields on five-year bonds have already spiked 200 basis points, even for bluechip firms. The rouble has fallen 11pc this year after dropping 8pc last year, making dollar debts harder to repay. It is going to be very difficult to roll over these bonds, and it will be at much higher cost, said Mr Ash. Capital flight reached $63bn last year. Former finance minister Alexei Kudrin said this could reach $50bn a quarter as the crisis deepens. The central bank has already raised interest rates sharply to stem outflows, pushing the economy into recession. Russia has $480bn of foreign reserves but these cannot easily be used in a downturn since it entails monetary tightening. The Kremlin caused a drastic fall in the money supply and a banking crisis when it ran down reserves by $200bn after the Lehman crisis....
*** AMBROSE EVANS-PRITCHARD / LINK

Charts That Make You Go Hmmm...

Source: Sober Look

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Chinas leaders want to lift the gray blanket of deadly smog that often chokes

Beijings residents by shifting power plants to the less populated western part of the country inhabited by minorities. Thats turning into a nightmare for Ani Yetahon who lives in Oriliq, a village about 1,800 miles from the capital where some residents still walk to the well for their water. Ever since a $2.1 billion plant that converts coal into natural gas began operating in August on a hill above his village, the 37-year-old ex-policeman and his family have suffered a burning sensation in their throats that keeps them awake at night. So have his fellow villagers, who also complain of dizziness and repeated colds...
*** BLOOMBERG / LINK

Source: Zerohedge/Macro_Tourist

Want to see what a chart of the gold price looks like going back to 1776 (that's the date,
not the price)?

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Well, thanks to Zerohedge and a gentleman by the name of @Macro_Tourist, you can not only do that but also see US stock prices, interest rates, and commodity prices during the same period in some truly stunning charts.
*** ZEROHEDGE (VIA MARKETSHADOWS) / LINK

Source: Richard Ross 17 March 2014 33

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Words That Make You Go Hmmm...


I've included this
video before a long time ago but felt that the events in Ukraine justified dusting it off once again, and so here is a short demonstration of just how fluid Europe's borders have been over the last 500 years or so. For a slightly more light-hearted look at the same problems, check out this video from The Economist (yes, I used "light-hearted" and "The Economist" in the same sentence). CLICK TO WATCH

Axel Merk is talking Japan to Tom

Keane and Mike McKee at Bloomberg, and Axel is always worth listening to. Has Bill Gross called him? Has his gold helped his stellar performance? What happens in Ukraine? The answers to all these questions and a few more are contained within this interview... CLICK TO LISTEN

Whilst in Toronto recently to present


at PDAC, I sat down with the good folks from Cliff Kle for a chat about markets, gold, credit, and a bunch of other topics. Before we knew it, 45 minutes had flown by. In case you'd like to listen in on what we discussed, here is the video. I also got the chance to chat with my good friend Al Korelin after my presentation, and the audio for that conversation is HERE. CLICK TO WATCH
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and finally...
Humans of New York is an ongoing project of photographer Brandon to capture the
people of New York City on film. In his own words: "I began Humans of New York in the summer of 2010. I thought it would be really cool to create an exhaustive catalogue of New York Citys inhabitants, so I set out to photograph 10,000 New Yorkers and plot their photos on a map. I worked for several months with this goal in mind, but somewhere along the way, HONY began to take on a much different character. I started collecting quotes and short stories from the people I met, and began including these snippets alongside the photographs. Taken together, these portraits and captions became the subject of a vibrant blog. With nearly four million followers on social media, HONY now provides a worldwide audience with daily glimpses into the lives of strangers in New York City. It has also become a #1 NYT bestselling book... Its been quite a ride so far. Feel free to follow along." Here is one recent example: "Want to hear a great Ringo Starr story?" "Absolutely." "Once I was walking into the Staples Center, and I look next to me and Ringo Starr is walking right beside me. Id been working on a project with his son, so to make conversation, I said: Ive really been enjoying getting to know your son. I said it very casually, but he got very reflective and said: Maybe its time I got to know him too." CLICK HERE TO FOLLOW ALONG space space space space space

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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 ASFA Annual Conference 2013: "Wizened In Oz" 66th Annual CFA Conference, Singapore 2013 Presentation: "Do The Math" Mines & Money, Hong Kong 2013 Presentation: "Risk: It's Not Just A Board Game" Fall 2012 Presentation: "Extraordinary Popular Delusions & the Madness of Markets" As a result of my role at Vulpes Investment Management, it falls upon me to disclose that, from time to time, the views I express and/or the commentary I write in the pages of Things That Make You Go Hmmm... may reflect the positioning of one or all of the Vulpes fundsthough I will not be making any specific recommendations in this publication.

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