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The Slip 'n' Fail Mutts
Now the news has arrived
From the Valley of Vail
That a Chippendale Mupp has just bitten his tail
Which he does every night before shutting his eyes
Such nipping sounds silly. But, really, it's wise.
He has no alarm clock. So this is the way
He makes sure that he'll wake at the right time of day.
His tail is so long, he won't feel any pain
'Til the nip makes the trip and gets up to his brain.
In exactly eight hours, the Chippendale Mupp
Will, at last, feel the bite and yell "Ouch!" and wake up.
– Dr. Seuss
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A walk around the fringes of fnance
By Grant Williams
23 June 2014
23 JUNE 2014
THINGS THAT MAKE YOU GO HMMM... ....................................................3
Merkel Tosses Cameron Like Hot Potato ...........................................................22
No Paper Tiger .........................................................................................24
Banks Urge Indian Government Not to Write Off Gold Loans ...................................25
Lois Lerner’s Emails Likely Gone Forever ..........................................................26
How Nouri Al-Maliki Fell Out of Favour with the US .............................................27
Inside Snowden's Germany File ......................................................................29
Vice Chairman of [China's] Top Political Advisory Body Faces Inquiry .........................30
What Will Argentina Do with Its Vultures? .........................................................32
Putin's Aide Proposes Anti-Dollar Alliance to Force US to End Ukraine's Civil War ...........33
CHARTS THAT MAKE YOU GO HMMM... ..................................................35
WORDS THAT MAKE YOU GO HMMM... ...................................................38
AND FINALLY... .............................................................................39
23 JUNE 2014
Things That Make You Go Hmmm...
Theodore Seuss Geisel was a master of anapestic meter.
An anapest is a metrical foot used in poetry which comprises two short syllables, followed by
a long one. More familiarly (particularly in the world created by Seuss), it consisted of two
unstressed syllables followed by a stressed one:
"Twas the night before Christmas and all through the house..."
Or, in keeping with this week's theme:
"The sun did not shine.
It was too wet to play.
So we sat in the house
All that cold, cold, wet day."
Simple, but at the same time extremely diffcult to pull
off effectively.
Geisel was an English major at Dartmouth who
eventually became the editor-in-chief of the college
humor magazine, the Dartmouth Jack O' Lantern; but after being forced by the dean to resign
his post after being caught drinking gin in his dorm room, he rather cunningly adopted the nom
de plume "Seuss" in order to continue to be able to write for the magazine.
Apparently, nobody at the Ivy League college fgured out the identity of the mysterious "Seuss."
When banned from his post for a gin-drinking crime
The scribe picked a name and then bided his time.
In a different guise he remained on the loose
By pretending to be the mysterious "Seuss."
Geisel graduated from Dartmouth and left the USA to pursue a PhD in English literature at
Lincoln College, Oxford; but, whilst there, he met a lady named Helen Palmer who persuaded
him that he should give up his dream of becoming an English teacher and pursue a career as a
Returning home without a degree but with a
fancée (named Helen Palmer), Geisel found
that his drawing ability allowed him to earn a
rather handsome living as a cartoonist after he
succeeded in getting his frst cartoon published
in the Saturday Evening Post on July 16, 1927.
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Things That Make You Go Hmmm...
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23 JUNE 2014
Geisel took a job as a writer and illustrator at the humourous magazine Judge in October of
1927, married Palmer a month later, and fve months after that, his frst work was published
and credited simply to "Dr. Seuss."
A successful career as an illustrator allowed Geisel and his wife to travel extensively. According
to Geisel himself it was on the journey home from an ocean voyage to Europe that the rhythmic
noise of the ship's engines inspired him to write his frst book, the anapestically titled And to
Think That I Saw It on Mulberry Street.
While at Oxford (in England) a lady supposed
To suggest he choose drawing instead of his prose.
When the young man relented his future unfurled
And he ended up famous all over the world.
And that, Dear Reader, is how Theodore Geisel became Dr. Seuss.
Thirty-fve years after the publication of And to Think That I Saw It on Mulberry Street, Seuss
wrote The Sleep Book, the brilliant story of a contagious yawn, started by a small bug called
Van Vleck, that would lull even the most spirited toddler successfully off to sleep.
On page 32 of The Sleep Book, we are introduced to the Chippendale Mupp, a curious creature
with an extraordinarily long tail. The Mupp bites the end of that tail when he goes to sleep
every night, and its length ensures that the sensation of pain only reaches him eight hours later,
causing him to wake up. It's a brilliant and fawless alarm clock.
Of course, once the Mupp has bitten his tail, the end result — in this case, a rather nasty, sharp
pain — though delayed for quite some time, is assured; and there is nothing he can do about it.
I was discussing the Chippendale Mupp with Steve Diggle recently as we pondered the actions
of central banks in recent years and, more specifcally, the great infation/defation debate
that has raged constantly ever since the dawn of QE. As the ECB battles to stave off what looks
like defationary pressures, Japan continues to struggle to generate the promised 2% infation,
and the US continues to pretend to the world that the cost of living from sea to shining sea is
rising at just 1.46% per annum, it's abundantly clear to me that the day QE was unleashed into
the world was the very same day that the world's central bankers — the Slip 'n' Fail Mutts — bit
their own tails.
23 JUNE 2014
The pain from that bite is now working its way towards the brain and will, at some point,
manifest itself in an almighty "OUCH!" that will wake the entire world; BUT there is one
X-factor at this point: none of us knows exactly how long the Slip 'n' Fail Mutts' tail actually is.
We will fnd out.
1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011
US CPI % Change YoY
1956 - 2013
Source: St. Louis Fed
Back in 2012 — July 26th to be precise — Mario Draghi, in a speech at the Global Investment
Conference in London, uttered those famous words which put an end to the seismic volatility
roiling European debt markets once and for all for the time being:
(Mario Draghi): ...the third point I want to make is in a sense more political.
When people talk about the fragility of the euro and the increasing fragility of the
euro, and perhaps the crisis of the euro, very often non-euro area member states or
leaders underestimate the amount of political capital that is being invested in the euro.
And so we view this, and I do not think we are unbiased observers, we think the euro is
irreversible. And it’s not an empty word now, because I preceded saying exactly what
actions have been made, are being made to make it irreversible.
But there is another message I want to tell you.
Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And
believe me, it will be enough.
Almost instantaneously, the clouds seemed to part, the oceans calmed, and the storm abated —
all based on an ephemeral promise from a man under immense pressure who, let's face it, if he
was prepared to DO whatever it took, would most certainly SAY whatever it took.
23 JUNE 2014
Source: Bond Vigilantes
As the chart above clearly demonstrates, Draghi's words marked the absolute apex of peripheral
European yields; and from that day to this, the convergence trade has been the moneymaker —
as it was always designed to be.
Prior to Lehman's collapse, spreads between core and periphery stayed within a handful of basis
points of each other; but after the Eurozone crisis erupted in late 2009, they spiked to several
hundred basis points. Since then, it has taken a Herculean effort on behalf of Draghi's ECB to
bring them back into line.
The REAL question, however, is whether they should have been trading so closely in the frst
When addressing the crowd Draghi sounded the bell
"Whatever it took" he would quiet and quell.
The markets were happy, the Chairman was feted,
But Europe's economy stalled and defated.
Now, with barbarians stood at the gates,
It was time to impose on them negative rates.
Two weeks ago, Draghi was both back in front of the world's press and struggling under the
weight of yet another creeping burden which had been haunting him for some time — the
spectre of defation currently manifesting itself as disinfation (in some places).
Like Kuroda in Japan, Yellen in the USA, and Carney in the UK, Draghi has been struggling to get
the rising prices he needs in order to help ease the crippling debt burden that has piled up not
just in Europe but across the globe over the last four decades.
23 JUNE 2014
1979 1989 1999 2009 2013
US Fed Funds Rate vs Total Credit Outstanding
December 1979 - December 2013
Source: St. Louis Fed
% $bln
Taking the US as an easily graphable example, the world has seen ever-decreasing rates pump
up an ever-increasing mountain of debt; and now we have reached the end of the road for one
of those variables — namely the falling interest-rate component, which has reached zero.
As a countermeasure to the wickedly defationary forces which the collapse of Lehman set
loose, rates were slashed to (almost) unprecedented levels (as you can see from the chart,
above, US rates were set at roughly zero once before — in the early 1930s, funnily enough),
which effectively leaves no room for further maneuver.
23 JUNE 2014
Not only that, but with all the focus on the running change in CPI measurements around
the world, it's perhaps a good idea to take a step back and take a look at the actual indices
themselves for a change, to get a better perspective on what the cumulative effects of infation
have been over the last 50+ years... 1.46% per annum sounds so innocuous, right?
There's your cost of living. Right there.
1955 1960 1965 1975 1985 1995 2005 2010 2013 1970 1980 1990 2000
CPI Indices (2010=100)
1955 - 2013
Source: St. Louis Fed
Gold Window
When we do that (chart above), we see two things: the relentless climb in the cost of living (a
curve that has steepened considerably since the closing of the gold window) and the infrequent
nature of defationary periods (in the West at least). I chose the UK, US, and Australia as
examples of Western, debt-fueled nations and Japan as the poster child both for what is facing
the West and for what happens when persistent defation in the aftermath of a huge credit
expansion sets in. That gently downward sloping green line represents two lost decades in
Japan and shows you just WHY the Western central banks are throwing everything they have at
the prospect of defation.
One look at the red line representing the US shows you that, after a brief shock in 2008, the CPI
has just kept right on trucking — just as intended when QE was unsheathed.
All of this helps explain Draghi's latest promise, given to the world on June 5th after months of
speculation about what the ECB might (or might not) do to combat a somewhat stubborn case
of... let's call it "disinfation," shall we?
Draghi fnally crossed the Rubicon and took decisive action, imposing negative rates in Europe.
23 JUNE 2014
(UK Daily Telegraph): “Are we fnished? The answer is no,” said Mario Draghi, the ECB’s
president. “If required, we will act swiftly with further monetary policy easing. The
Governing Council is unanimous in its commitment to using unconventional instruments
within its mandate should it become necessary to further address risks of prolonged low
Once again, Draghi — fushed with the success of his "whatever it takes" statement (something
he NEVER had to legitimize with action) — threw out a veiled threat to everyone thinking about
betting against him, in the hope that such a threat would be enough to once again hold hostile
action at bay.
Maybe it will be. I suspect the Law of Diminishing Returns may come into play at some point
here, though...
"Are we fnished?", he asked then he answered himself:
"If required, we've plenty more left on the shelf."
Rather amazingly, Draghi made a big deal of the fact
that the ECB would cut the benchmark rate by 10 bp
to 15 bp (the way he spoke, it really did feel like he
thought that cut might actually spur some lending...
yeah, really), introduce a negative rate of -10 bp on
its excess deposit facility to encourage banks to lend
(yeah, that'll do it. The banks will NEVER fgure out a
way around THAT, Mario), and introduce targeted LTROs
(TLTROs) — because, well, the world is just a little
acronym-light right now...
David Stockman summed the farce up perfectly:
(David Stockman): How could any adult believe that a benchmark rate cut of 10 bps
from an already microscopic level of 25 bps would move the needle in an economic zone
that is already groaning under of the weight of $60 trillion in public and private credit
market debt?
Similarly, what exactly is the point of negative rates on excess bank funds deposited at
the ECB when there will never be any takers? After all, Euro banks do have alternative
parking lots for idle cash. Likewise, how does inventing a grand new acronym called
TLTRO hide the fact that it's essentially a free toaster program for clever loan book
managers? As instructed by this swell new ECB writ, they will presently shuffe some
funds out of mortgages, sovereign debt or other speculative purposes yet to be defned
and into approved “productive” loans. And then they will pass “go”, collect some cheap
TLTRO funding from the ECB and collect their own performance bonus for all the bother.
At this point, let's take a look at Euro Area CPI (which only goes back around 20 years):
23 JUNE 2014
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Euro Area CPI (2005=100)
1996 - 2013
Source: St. Louis Fed
See any persistent defation there? Me neither. The trajectory is set. Bottom left to top right.
Japan has been a huge outlier, but the fear is that other nations will go the way of the Land of
the Rising Sun — and we can't have that, can we?
Every action taken by the central banks since September 15th, 2008, has been wildly
WILDLY infationary.
The only problem is, that infation hasn't shown up yet — in many places quite the reverse.
However, when trying to understand the lack of infationary pressure, please remember the
Chippendale Mupp. The infation, just like the pain, is working its way down the tail and
towards the brain.
Central to the problems facing the Slip 'n' Fail Mutts is their focus on the shocking deceleration
in the velocity of money all around the world. This is an area they are targeting aggressively,
feeling that, if they can drag it higher, infation will increase by juuust the right amount.
23 JUNE 2014
It has to be said — the chart is an absolute shocker:
1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 2014
Velocity of M2 Money Stock (Quarterly)
1959 - 2014
(relatively) Plain Sailing
Source: St. Louis Fed
Many have argued that, should we see signs of a turn in velocity, infationary pressures will
be right behind — not only that but, given the low base from which that velocity will bounce
and the sheer weight of additional money now in the system thanks to the Fed's actions, those
pressures will be of the kind that has led, in the past, to shhhhhh.....
The above chart has been doing the rounds recently, and plenty of people have weighed in on it
— people such as Michael Snyder:
(Investing.com): This is a highly defationary chart.
It clearly indicates that economic activity in the U.S. has been steadily slowing down.
And if we are honest, we have to admit that we are seeing signs of this all around
us. Major retailers are closing down stores at the fastest pace since the collapse of
Lehman Brothers, consumer confdence is down, trading revenues at the big Wall Street
banks are way down, and the steady decline in home sales is more than just a little bit
... and we all know what a visceral reaction the Slip 'n' Fail Mutts have to ANY whiff of
defation, don't we?
However, many, including the great Henry Hazlitt, have concerns as to whether the velocity
of money is all that important. Hazlitt's studies found that the level of speculation in places
such as Wall Street would have a strong effect on the velocity of money and that there was no
consistent pattern. Occasionally it would surge on falling prices and other times it would surge
when they rose. Either way, posited Hazlitt, it is far too sweeping a generalization to claim that
higher velocity defnitely equals higher infation:
23 JUNE 2014
Monetary theory would gain immensely if the concept of an independent or causal
velocity of circulation were completely abandoned. The valuation approach, and the
cash holdings approach, are suffcient to explain the problems involved.
Either way, there's something that just can't be ignored, I'm afraid... and it's this:
1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 2014
M2 Velocity vs S&P500
1959 - 2014Source” St. Louis Fed/Bloomberg
Source: St. Louis Fed/Bloomberg
See anything a little strange? Over there. On the right-hand side of the chart. THERE!
Yes... that's what it looks like when outside agencies interfere with market forces and corrupt
the signals that have historically driven little things like the S&P 500, just to make people feel
I'm sorry to be the one to tell you, folks, but divergences like that one do NOT get fxed quietly
over time. They revert suddenly, and usually for entirely obvious reasons that absolutely nobody
saw as potential catalysts at the time.
Sharply higher velocity of money which will lead to sharply higher infation (I seldom disagree
with Hazlitt, but I shall take the liberty of doing so on this occasion), or a sharply lower S&P
Pick one. Sorry, but you can't have both.
But back to that whole infation/CPI thing...
As I was putting together this week's Things That Make You Go Hmmm..., the US CPI for May
was announced; and it relegated the argument about the importance of velocity to what a
dear friend of mine who, thanks to the World Cup, happens to be a new convert to "soccer"
might call "the subs' bench." Instead, the discussion switched rather rapidly to whether forward
guidance (the most important plank of Fed policy now that ZIRP has been reached) might
actually be rather useless.
23 JUNE 2014
(Incidentally, if anyone out there can explain to me why forward guidance is listened to by
ANYBODY, I'd be extremely grateful. I mean, is there anything higher than a 0% chance the Fed
will NOT raise rates when required to — no matter WHEN that day may arrive — because they'd
previously promised they wouldn't? People... please...)
US Core CPI % Change YoY
June 2008 - June 2014
June 2008 June 2009 June 2010 June 2011 June 2012 June 2013 June 2014
2%: The Holy Grail of Infation
Souce: Bloomberg
(Capital Economics): With core CPI infation rising to 2.0% in May, from 1.8% in April, the
Fed will have to acknowledge in tomorrow’s policy statement that price pressures are
building. The chances that it will hike interest rates before the middle of next year are
The 0.4% m/m increase in consumer prices in May was twice as large as the consensus
forecast of 0.2% m/m, and it pushed the annual infation rate up to 2.1%, from 2.0% in
April. Both food and energy prices played a part.
The 0.5% m/m rise in food prices was the biggest since August 2011 and followed large
increases in each of the previous three months. Given that food producer prices fell
in May, this will probably be the last of the big gains in consumer prices caused by the
earlier extreme weather and the outbreak of disease. The 0.9% m/m increase in energy
prices was due to gains in both gasoline (0.7% m/m) and utility (1.4% m/m) prices.
The 0.3% m/m gain in core prices was also larger than expected (consensus +0.2%). The
speed at which core infation has risen from 1.6% in March to a 16-month high of 2.0% is
remarkable. The three-month annualised rate has shot up to 2.8%.
Emphasis mine.
23 JUNE 2014
Hedgeye took up the baton:
(Hedgeye): Shelter infation (~31% weight), which almost singularly supported the
headline number most of the last year, accelerated +10bps to +2.9% YoY while protein
(meat, poultry, fsh, eggs) price growth accelerated another +130 bps sequentially to
+7.7% YoY...
But it's not just the inconsequential little things like food, energy, and shelter that are
seemingly setting a course for higher ground. No.
23 JUNE 2014
Right across the spectrum, since the turn of the year, there has been a very sharp turnaround in
the number of items that are beginning to refect the pressure which — whilst felt by everybody
who drives a car, eats food, or has a roof over their head — policymakers insist is nonexistent:
(Hedgeye): Indeed, the percentage of components registering sequential acceleration
made a new multi-year high in May and is looking similar to the commodity price cycle-
catalyzed acceleration in 2011.
Even everybody's favourite former disinfationist, David Rosenberg, is sounding the alarm:
(Breakfast With Dave): US consumer prices have risen at a 2.6% annual rate year-to-
date. The comparable trend at the end of 2013 was 1.4%. This is the second fastest start
in the past six years.
The core CPI has accelerated to a +2.3% annual rate in the frst fve months of the year
versus 1.6% at the end of 2013. So no, this is no longer just about food and fuels. This
is actually the fastest start to any year for core infation since 2006, when the Fed was
about to complete its two-year tightening cycle, as opposed to being quarters away as
seems to be the case today.
Fortunately, in a conversation with CNBC's Steve Liesman, Janet Yellen explained why we
shouldn't worry:
(Zerohedge): So I think recent readings on, for example, the CPI index have been a bit
on the high side, but I think it's — the data that we're seeing is noisy.
I think it's important to remember that, broadly speaking, infation is evolving in line
with the committee's expectations.
The committee has expected a gradual return in infation toward its 2 percent
objective. And I think the recent evidence we have seen, abstracting from the noise,
suggests that we are moving back gradually over time toward our 2 percent objective,
and I see things roughly in line with where we expected infation to be.
So... it's just noise? Phew!
"Don't worry, it's nothing" said Chairwoman Janet.
"Everything's happening just as we plan it.
Ignore all the pundits (the girls AND the boys)
Have faith when I tell you, forget it, it's noise."
In her press conference, Yellen then went on to insist that there is she saw no bubble in the
equity market:
(WSJ): On a day when the S&P 500 set yet another all-time high, Fed Chairwoman Janet
Yellen said she isn’t particularly concerned about stock prices at current levels.
23 JUNE 2014
In her press conference Wednesday afternoon, Ms. Yellen said she and her committee
look at several different metrics to gauge stock valuations relative to earnings and
dividends, and how they stack up against historical comparisons.
When asked whether the market is trading outside of those norms, she responded: “I
still don’t see that for equity prices broadly,” while adding she currently doesn’t see
bubble-like conditions in the market.
(There are some things people say that you just KNOW you're going to be hearing them talk
about again one day... just sayin'.)
1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 2014
No Bubble Here: S&P500
1959 - 2014
Source: Bloomberg
Is she not seeing, or not looking, I wonder?
Meanwhile, across the pond in Dear Old Blighty, some rather strange goings-on were... well,
going on.
Remember when Mark Carney (like Ben Bernanke before him) tied UK forward interest-rate
guidance to unemployment statistics? No? OK, well here's a refresher from August of 2013:
(Business Insider): "The MPC [Monetary Policy Committee] intends at a minimum to
maintain the current exceptionally accommodative stance of monetary policy until
economic slack has been substantially reduced," said Carney.
"That means the MPC intends not to raise Bank Rate above its current level of 0.5%, at
least until the Labour Force Survey headline measure of unemployment has fallen to a
threshold of 7%...
23 JUNE 2014
To paraphrase S. E. Hinton, though, that was then, this was six months later...
(UK Daily Telegraph): Bank of England Governor Mark Carney has revised the forward
guidance he gave at his frst infation report ... in August by dramatically broadening
the number of economic indicators used by the Bank to decide when it will be
appropriate to raise interest rates....
He has done this to reassure markets that a rate rise is not imminent even though
unemployment is fast-approaching the 7pc level which he named as a threshold for the
Bank to consider an increase.
UK Unemployment Rate (%)
1999 - 2014
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
7% (Movable) BoE Threshold
Source: Bloomberg
Back in August, when he introduced the guidance, the Bank did not expect
unemployment to dip below 7pc for three years, but just six months later the rate had
fallen to 7.1pc....
In other words, the UK economy has picked up steam faster than the Bank of England
forecasters had anticipated. But policymakers are concerned that although the headline
fgures look strong, the economy has not yet reached "escape velocity" and could not
withstand a rate rise. This is in part because the headline unemployment, taken alone,
gives a falsely upbeat picture of the economy, since more jobs do not necessarily lead to
more output. The Bank of England had wrongly predicted that productivity would pick
up in line with jobs growth, but this has not yet happened.
The headline unemployment rate therefore has failed as an effective gauge for
the fundamental strength of the economy, so it is no longer much use as a forward
guidance tool.
Emphasis? Guess who!!
23 JUNE 2014
Now Yellen and Carney have both been caught short
By numbers refusing to do what they ought.
"No matter" says Carney. "Agreed", says the Fed,
"We'll just pick another statistic instead."
(FT): Mark Carney has defended the Bank of England’s decision to abandon guidance
linking interest rates to unemployment, saying persistent obstacles to a lasting
economic recovery mean that policy makers can “responsibly take their time” before
raising borrowing costs.
The BoE governor issued upbeat forecasts for rapid growth and low infation in the UK
economy last week, but said interest rates might nonetheless need to remain low for
some time. A change would depend not on the headline unemployment rate — already
near the level that policy makers had previously said would justify action — but on more
complex measures of slack in the labour market.
Yeah... "complex" measures. "Complex" in the sense of "too diffcult for the likes of YOU to
understand, so just leave it to us. Trust us. We're on this."
Uuuuuuuunfortunately, along with the US CPI numbers, the BoE's MPC minutes were released
this week, and... well... let's just say things are starting to get a little awkward for the central
bankers when it comes to that nonexistent infation they keep talking about:
(UK Daily Telegraph): Bank of England policymakers are preparing for a rise in interest
rates before the end of this year, minutes from their latest meeting showed on
The nine-member monetary policy committee (MPC) were revealed to have held an
intense discussion over the possibility of a 2014 rate hike and expressed “surprise” that
markets appeared unprepared for such an event.
They said there was a risk that stronger than expected growth in coming months could
drive sharper wage growth and trigger a rate rise to curb infation.
“In that context, the relatively low probability attached to a Bank Rate increase this
year implied by some fnancial market prices was somewhat surprising,” the minutes of
the June meeting said.
Now, when the MPC expresses "surprise" at the actions of the market, take note. Seriously.
Business Secretary Vince Cable did — the very same day:
(UK Daily Telegraph): An early rise in interest rates could put the economic recovery in
jeopardy, Vince Cable warned on Wednesday.
The Business Secretary cautioned the Bank of England against increasing rates solely to
cool the booming housing market.
23 JUNE 2014
He made his remarks after the Bank’s Monetary Policy Committee gave another signal
that rates could start rising earlier than many economists had expected....
Speaking in the City of London, Mr Cable said he was worried that rapidly rising
property prices could destabilise the economy by leading the Bank to raise rates early.
“If these incipient infationary pressures lead to a rise in interest rates sooner and
further than is warranted by the economy as a whole, it could place in jeopardy our
hopes for a sustained and balanced recovery,” he said.
God forbid that Cable should allow the prospect that rates might rise sooner than expected to
percolate for even 24 hours — that could be dangerous to confdence levels. A BIG no-no.
When the hiking of rates was a likely next shoe
For Carney and Yellen (to name only two),
The warnings came fying from anyone able,
From Krugman (of course), from Lagarde and
from Cable.
The market was sanguine, no panic was seen,
The VIX was as low as it had ever been.
Refuse to believe me? Then look to your right.
The VIX couldn't rally — try as it might.
Are the markets ready (and, more importantly, able)
to withstand higher rates? Well, with the Fed tapering another $10 bn this week to a chorus of
"meh" from the markets, it certainly seems to suggest that this whole taper thing is going to
trundle along harmlessly until it's been completed without disruption, BUT I have a very nasty
feeling about all this.
Those higher rates will not be something the Slip 'n' Fail Mutts will CHOOSE — but infation could
force them into a rather nasty corner. That must be avoided at all costs, and these people
genuinely believe they can do so.
Essentially, the central bank heads all around the globe are engaged in a must-win confdence
game. They HAVE to make people believe that everything is under control and getting better,
BUT at the same time they must ALSO make them believe that the accommodative policies
currently in place will be here, essentially, forever (forever in market-time is normally about 18
months to two years).
If the general consensus becomes that they are wrong about either of those statements (or, God
forbid, both) then they — and by extension, we — are in for a world of hurt.
On the other hand, if they do manage to convince people they are right and that they will
ultimately be successful, then the infation genie will burst forth from the bottle in which it has
been imprisoned as the great credit defation runs its course; and with the massive amount of
kindling heaped on the fre in the shape of QE, the confagration will be enormous.
23 JUNE 2014
But just in case you were still harbouring (yes I put a u in harbouring. I'm English. That's how we
roll) a misguided faith in offcial CPI statistics, check this out:
Living Expense Jan 2000 March 2014 % Increase
Barrel Of Oil $24.11 $100 314.80%
Fuel Oil (Per Gallon) $1.19 $4.07 242.00%
Gallon of Gas $1.27 $3.51 176.40%
One Dozen Eggs $0.97 $2.00 106.20%
Annual Healthcare Spending (Per Capita) $4,550 $9,300 104.40%
Ground Beef (Per lb) $1.90 $3.73 96.30%
Movie Ticket $5.25 $10.25 95.20%
Average Private College Tuition $22,000 $37,000 68.20%
Electricity (Per Kwh) $0.08 $0.13 59.50%
New Car $20,300 $31,500 55.20%
Cofee (Per lb) $3.40 $5.20 52.90%
Natural Gas (Per Therm) $0.71 $1.08 51.40%
Avg. Home Price (Case Shiller) $161,000 $242,000 50.30%
Postage Stamp $0.33 $0.49 48.50%
Avg Monthly Rent (Case Shiller) $635 $890 40.20%
CPI $168.80 $234.78 39.09%
PCE Defator (Fed's Preferred Measure) $81.78 $107.66 31.65%
Source: David Stockman
Bernanke gave us ZIRP; now Draghi — damned by his own lack of earlier action — has been
forced to add NIRP to the acronym lexicon of modern fnance.
One central bank is fghting defation by forcing banks to pay interest on their deposits, another
is fghting the same (potential) battle by doing the exact opposite.
Think both strategies can be successful in fghting the same enemy?
Infation whispers are EVERYWHERE right now, and those whispers are all it may take to fuel
expectations of future rate hikes — and THAT is the road to perdition.
The Slip 'n' Fail Mutts know that.
In reality, it's not about Zero Interest Rate Policy or, for that matter, Negative Interest Rate
It's about Broken Interest Rate Policy.
23 JUNE 2014
There isn't a bubble in equity prices,
Nor housing, nor bonds — there will be no surprises.
The Slip 'n' Fail Mutts have their eyes on the ball,
There's no need to worry, there's no need at all.
But wait just a second here, what if they're wrong?
What if they've had no idea all along?
The tech bubble fooled them, the market got caned,
remember when Ben said subprime was "contained"?
These people are clueless I'll venture to say,
Not that they'll listen (to me, anyway).
But time after time when they face a new bubble,
They never once think they're the CAUSE of the trouble.
This time, however, the Mutts are in peril,
And Citi, and Morgan, Wells Fargo, and Merrill.
Infation/defation, the argument rages
For pages and pages (and pages and pages).
The argument's moot, though — there's no point engaging,
The Mutts have no hope in the war that they're waging
They've bitten their tails and that means just one thing:
Somewhere a fat lady's starting to sing.
The pain from the bite is now making its way
From the tail to the brain — it'll get there one day.
A matter of time now? A fait accompli?
Infation is coming believe me — you'll see.
Try as they might (they can use all their tools)
Infation is going to clobber these fools.
And when it arrives there'll be no ifs or buts;
Time will be up for the Slip 'n' Fail Mutts.
Ok... so at the risk of pushing things too far, I may as well fnish off this week's introduction as I
began it, so here's what you can expect to fnd as you turn the pages of this week's Things That
Make You Go Hmmm... — Seuss-style:
This week is a doozy, the greatest of shows,
With Merkel and Cameron coming to blows.
The reason? It's Junker — the vilest of bugs,
Cameron hates him, but Merkel just shrugs.
23 JUNE 2014
In Hong Kong they're angry, Iraqis are pissed,
Maliki is off Barry's Christmas card list.
And what of the hard drive in Lois' locker?
Coincidentally wiped? What a shocker!
In Germany, Snowden has caused an eruption,
While China is facing endemic corruption.
Rocketing metals and charts on infation,
Chinese cement, and the growth of a nation.
Russia is playing a tactical game,
While in Buenos Aires it's more of the same.
A positive ruling, a hedge fund assault,
And once more the country is set for default.
Nigel Farage is on one of his rants,
And Yellen? She fies by the seat of her pants.
Lastly yours truly (a long overdue)
Gold presentation that might interest you.
Starring Goldfnger, it looks at the friction
That happens when suddenly fact springs from fction.
That's all I have for you, I'm out of rhyme
So it's farewell from me...
Until Next Time...
Merkel Tosses Cameron Like Hot Potato
German Chancellor Angela Merkel would like to help British Prime Minister David Cameron in his
quest to stop Jean-Claude Juncker from becoming European Commission president.
Neither she nor Cameron wants Juncker as EC president. But chameleons like Merkel can
change their colors at a moment's notice.
When public opinion in Germany unexpectedly sided with Juncker, Merkel did the politically
expedient thing, tossing Cameron like a hot potato.
Cameron to Go Down in Flames
All that's left is the fnal humiliating defeat with Cameron to Go Down Fighting Over
Juncker’s EU Appointment.
23 JUNE 2014
David Cameron has vowed to go down fghting in his battle to stop Jean-Claude Juncker
becoming European Commission president, challenging other EU leaders at a summit
next week to vote him down in an unprecedented showdown.
The UK’s prime minister is increasingly isolated and faces almost certain defeat, but he
is determined to force a vote of leaders at the European Council, a body that has always
previously made decisions on top Brussels jobs by consensus.
British offcials say that if Mr Cameron “caved in” now it would send a signal to other
EU members that he will be weak in subsequent negotiations on a new deal for Britain
ahead of his planned 2017 in-out referendum.
His hard line will make for a highly uncomfortable summit; British offcials believe
Angela Merkel, German chancellor, will be among those worried about establishing a
principle that big countries could be outvoted on such a big issue.
Opposition to Mr Juncker has weakened to such an extent that some EU offcials believe
it is now unnecessary to discuss his candidacy as part of a package of top EU jobs, a
practice frequently used in the past as a way of horse-trading support from reluctant
member states.
Senior EU offcials involved in negotiations said Mr Juncker’s appointment is now all but
assured for Friday, day two of next week’s summit, which will begin with a dinner in
Ypres and move on to Brussels.
Mr Van Rompuy had considered postponing the “jobs” discussion to avoid an Anglo-
German dispute at Ypres, the site of ferce fghting between the two countries in the
frst world war, but has now decided to press ahead.
Ms Merkel’s decision to back a quick decision to avoid domestic political upheaval has
largely killed any hope of delaying his nomination, offcials said.
Members of European parliament do not get to choose the EC president. Rather, top politicians
in each country do.
Cameron banked on the fact that objections of a key country (Germany, France, Italy, UK) are
typically not overridden (actual votes be damned).
Cameron lost his gamble when members of Merkel's CDU/CSU coalition backed Juncker as did
the German public who accused Merkel of giving in to Cameron's blackmail. Merkel quickly
changed her tune, as she always does in such circumstances.
It's possible they toss Cameron a bone, but even if so, this will be a humiliating defeat for
Cameron who pledged to UK voters that he would get numerous rule changes in the EU before
holding an up-down vote on the UK remaining in the EU....
23 JUNE 2014
No paper tiger
PEOPLE in Hong Kong have responded with alarm, and some defance, to a white paper issued
by China's leaders about the city’s political future. In rallies outside Beijing’s representative
offce in Hong Kong on June 11th, politicians and protesters burned copies of the report and
accused offcials of treating the city’s constitution “like toilet paper”.
Legislators accused Beijing of reneging on its treaty obligations under the 1984 Sino-British
declaration, signed between Margaret Thatcher and Prime Minister Zhao Ziyang, to make Hong
Kong a semi-autonomous region of China. The agreement said Hong Kong would enjoy a high
degree of autonomy and maintain its capitalist system for a period of 50 years until 2047;
and many of the city’s social and political freedoms (such as being able to protest against the
Communist Party) have indeed been retained.
But the white paper stressed that Hong Kong's high degree of autonomy “is not full autonomy”
and the city’s ability to run its local affairs comes solely from the authorisation of the central
leadership. It also says that Hong Kong residents hold “too many wrong views” with regard to
the "one country, two systems" principle that governs the territory's relationship with Beijing.
The white paper’s suggestion to “above all be patriotic” has grated with many who object to
equating patriotism with support for the Communist Party. The report also provoked the ire
of the city’s judiciary for suggesting that judges have a "basic political requirement" to love
the country. The Hong Kong Bar Association hit back with a statement warning that imposing
political tests on judges would undermine Hong Kong’s rule of law.
Some protesters see a silver lining. Coming days after tens of thousands of people held a
candlelit vigil to commemorate the 25th anniversary of the Tiananmen Square massacre in
Beijing and weeks before an annual pro-democracy march on July 1st, many observers say the
white paper may prompt bickering local politicians to work together and motivate the public to
participate in pro-democracy demonstrations. “We should thank Beijing for adding fuel to the
fre,” said Benny Tai, one of the leaders of Occupy Central, a protest group. It has threatened
to rally thousands of protesters to paralyse the city’s fnancial centre if the electoral proposal
that the Hong Kong government is scheduled to release by the end of the year does not
meet international standards. On June 22nd Occupy Central will hold an informal city-wide
referendum asking citizens to vote for their preferred type of electoral reform.
The chief executive of Hong Kong (a city of 7m people) is currently picked by a committee of
1,200 people. The Chinese government has promised to allow the selection of Hong Kong’s next
leader, in 2017, through universal suffrage, but insists it has no obligation to allow an open
nominating process. Many in Hong Kong believe that limits will be imposed on who is able to
23 JUNE 2014
Banks urge Indian government not to write of gold loans
In what is being termed the single biggest populist measure initiated by any state government
in India, Andhra Pradesh's new Chief Minister (CM) Chandrababu Naidu is all set to waive off a
staggering $9 billion (Rs 540 billion) in loans taken by farmers from various banks.
At the frst Cabinet meeting on Thursday at Vishakpatnam, discussion on farm loans waiver took
centre stage. Ministers expressed their opinions on conditions for the farm loan waiver, which
has been set at a limit of $1,681 (Rs 100,000) per loan. While some of them sought to exclude
gold loans, others wanted it to be included. Instead of repaying the banks, the state is set to
issue bonds to them.
Koti Reddy, a farmer from Chavuluru village of Guntur district, Andhra Pradesh, is awaiting
clearance on the waiver of his gold loan.
Along with his friend Ramesh Seshagiri, another farmer, Reddy had obtained a loan of $5,039
(Rs 300,000) mortgaging his ancestral gold ornaments. Seshagiri, on the other hand, refused to
mortgage his gold, and had taken a $3,000 loan from the bank with his crop as surety.
While Seshagiri was certain his loan would be reduced by the $1,681 limit, easing off some
pressure and given the new state government's mandate, Reddy was not so sure.
"We have voted for the Telugu Desam Party in the hope that CM Naidu would write off all our
loans. He cannot discriminate between farm loans and gold loans. The gold loans were taken
for farming purposes,'' said Reddy.
However, he added that CM Naidu was committed to the development of farmers, and had
reposed his faith in the new government. Many other farmers have also pinned their hopes on
the new CM.
"Before the elections, they had promised to waive off all agricultural loans after coming
to power. Chandrababu Naidu asked people not to repay their loans taken for agricultural
purposes, and also gold loans. Advertisements in newspapers were also issued promising waiver
of crop loans, tractor loans and gold loans,'' said Mohanna Shetty, another farmer.
The total burden on the state exchequer for implementing the loan waiver has been pegged at
$9 billion. If loans taken by mortgaging gold armaments are also included, it would cross $10
billion (Rs 600 billion).
Bankers are, however, insisting that CM Naidu not waive off gold loans. Bad farm loan
recoveries have bankers worried.
Bankers said that recovering outstanding loans would become a major problem in the face of
uncertainty over the exact guidelines for waiver of farm loans in Andhra Pradesh, since there
were no clear guidelines on the scale of waiver, no time frame, and no specifcations to identify
debt ridden farmers.
23 JUNE 2014
Loans exceeding the $1,681 limit by a few thousand could be included, but a loan of $2,521 (Rs
150,000) would not be entertained over the limit, said bankers.
They added that the waiver of gold loans would more or less disable bankers....
Lois Lerner’s emails likely gone forever
Ex-IRS offcial Lois Lerner’s crashed hard drive has been recycled, making it likely the lost
emails of the lightning rod in the tea party targeting controversy will never be found, according
to multiple sources.
“We’ve been informed that the hard drive has been thrown away,” Sen. Orrin Hatch of Utah,
the top Republican on the Finance Committee, said in a brief hallway interview.
It may just be standard government procedure, but the revelation is signifcant because some
lawmakers and observers thought there was a way that tech experts could revive Lerner’s
emails after they were washed away in a computer crash in the summer of 2011. House
Oversight and Government Reform Committee Chairman Darrell Issa (R-Calif.), for example,
subpoenaed her damaged hard drive earlier this week, when he asked for “all hard drives,
external drives, thumb drives and computers” and “all electronic communication devices the
IRS issued to Lois G. Lerner.”
“IT experts have weighed in and said yes — we can get those” emails, said Rep. Charles
Boustany (R-La.) earlier Wednesday.
The latest news suggests such professionals may never get the chance to try again — and the
IRS has even said its criminal investigators who specialize in rebuilding hard drives to recover
hidden information from criminals were unable to restore the data back in 2011. But this is only
likely to further enrage Republicans, who are fuming over the matter and suspect Washington
offcials drove the selective scrutiny.
The IRS told congressional investigators on Friday that the emails of Lerner, the former head of
the tax exempt division that was found to have singled out conservative groups for additional
scrutiny, were lost from 2009 to 2011 in a computer hard drive crash in early summer 2011. IRS
chief John Koskinen will face angry Republicans at a hearing on Friday.
The time frame is signifcant because the tea party targeting began in spring of 2010, and
Republicans think if there was a smoking gun connecting the Obama administration to the IRS
treatment of conservative groups, it could be found during that period.
“We believe the standard IRS protocol was followed in 2011 for disposing of the broken hard
drive. A bad hard drive, like other broken Information Technology equipment, is sent to a
recycler as part of our regular process,” an IRS spokesman said in response to a query from
23 JUNE 2014
On Wednesday, the White House retorted that for the time frame in which Lerner’s emails are
missing, there are no direct communications between 1600 Pennsylvania Ave. and the now-
retired Lerner.
Earlier this week, Ways and Means Republicans said as many as six IRS employees involved in
the scandal also lost email in computer crashes, including the former chief of staff for the
acting IRS commissioner.
That’s because before May 2013, the IRS backed up emails only for six months on a tape,
then recycled the tapes, so they essentially threw out the data. Many agencies do the same,
transparency experts say.
The Treasury Inspector General for Tax Administration, which wrote the May 2013 report that
uncovered the practice of IRS workers singling out some applicants for tax breaks with the
words “tea party” for added scrutiny, is currently in possession of Lerner’s laptop and her new
hard drive, according to an IRS letter.
The IRS has been able to retrieve about 24,000 of Lerner’s emails sent to other IRS employees
by recovering them from other agents who received, sent or were copied on the emails.
However, Koskinen has acknowledged that the IRS wouldn’t be able to fnd emails Lerner sent
outside the agency.
How Nouri al-Maliki fell out of favour with the US
In October 2011, Barack Obama and his national security committee sat down for the most
important conference call they had held on Iraq. On the videolink from Baghdad was Nouri al-
Maliki, a man whom the US had backed as a second-term leader a year earlier.
Folders and briefng pads were piled in front of the Americans. In Baghdad, Maliki sat with only
a translator. He wanted no discussion about an extension of the US presence in Iraq, not even
a token contribution for training or mentoring. Maliki's stance was welcomed by many in the
room, who viewed Iraq as a politically consuming misadventure.
But they were just as surprised as the hawks at the Iraqi leader's defance. After eight long
years, most of them as partners of sorts, it had come to this; there was no longer anything to
negotiate. Maliki's Iraq would go it alone; the US could turn the lights off when it left.
For almost three years since, that seminal meeting has defned the relationship between
the Obama White House and Maliki — a rising single-minded strongman and the increasing
irrelevance in Iraq of a conquering superpower.
23 JUNE 2014
As US eyes turned away from Iraq, Iraqi eyes looked elsewhere for support. Some in Washington
began to wonder whether, after almost $1tn (£590bn) and close to 4,500 combat losses, Iraq
really wanted a strategic partnership with the US at all. The turmoil surrounding the Arab
uprisings put answers to that on hold, for a while at least. It also pushed Maliki towards a
deeper relationship with Iran.
With much of the Sunni Arab world in uproar, Maliki wanted the safety in numbers that his Shia
neighbours offered. While embracing Iran, Maliki put distance between his government and
Iraq's Sunni minority, arresting several tribal leaders, laying siege to a protest camp in Ramadi,
and brazenly issuing an arrest warrant for the Sunni former vice-president Tariq al-Hashimi days
after US forces left.
He set about co-opting key institutions left behind by the Americans; the Iraqi National
Intelligence Service, which was soon stacked with offcials from his Dawa party, and Iraq's elite
special forces unit, which became his praetorian guard.
Some in Washington started believing that Maliki's moves were consolidating power along
nakedly sectarian lines. "It was more out of making sure that power could never be stripped
from him," said one senior US diplomat.
Another American offcial who acted as senior US adviser to the Iraqi government from 2004-
11 said: "The only thing that I saw with my eyes that could be construed as sectarian was his
appointments, especially in the military." While they were not all sectarian, most were; and the
competence of the candidate was not an issue.
Evermore disturbed, Washington protested loudly and made calls for political inclusiveness. But
the former occupier no longer had the leverage — or apparently the will — to force Maliki to
Today, as the state he tried to build through a ruthless consolidation of power, and a strong
dose of paranoia, crumbles around him, critics and foes are circling. First among them is the
US. Slighted by three years of neglect and stunned by the three-day capitulation of the Iraqi
military, Washington is strongly signalling it has lost faith in Maliki.
The embattled leader has sensed the change in mood and on Wednesday said he would not
resign in return for US airstrikes against insurgents.
On Thursday, when asked if Maliki should step aside, Obama said: "It is not our job to choose
Iraq's leaders, but I don't think there is any secret that, right now at least, there are deep
divisions between Sunni, Shia and Kurdish leaders."...
23 JUNE 2014
Inside Snowden's Germany File
Just before Christmas 2005, an unexpected event disrupted the work of American spies in the
south-central German city of Wiesbaden. During the installation of a fber-optic cable near the
Rhine River, local workers encountered a suspicious metal object, possibly an undetonated
World War II explosive. It was certainly possible: Adolf Hitler's military had once maintained a
tank repair yard in the Wiesbaden neighborhood of Mainz-Kastel.
The Americans — who maintained what was offcially known as a "Storage Station" on Ludwig
Wolker Street — prepared an evacuation plan. And on Jan. 24, 2006, analysts with the National
Security Agency (NSA) cleared out their offces, cutting
off the intelligence agency's access to important
European data streams for an entire day, a painfully
long time. The all-clear only came that night: The
potential ordinance turned out to be nothing more than
a pile of junk.
Residents in Mainz-Kastel knew nothing of the incident.
Of course, everybody living there knows of the
20-hectare (49-acre) US army compound. A beige wall
topped with barbed wire protects the site from the
outside world; a sign outside warns, "Beware, Firearms
in Use!"
Americans in uniform have been part of the cityscape
in Wiesbaden for decades, and local businesses have
learned to cater to their customers from abroad. Used-
car dealerships post their prices in dollars and many
Americans are regulars at the local brewery. "It is a
peaceful coexistence," says Christa Gabriel, head of
the Mainz-Kastel district council.
But until now, almost nobody in Wiesbaden knew that Building 4009 of the "Storage Station"
houses one of the NSA's most important European data collection centers. Its offcial name is
the European Technical Center (ETC), and, as documents from the archive of whistleblower
Edward Snowden show, it has been expanded in recent years. From an American perspective,
the program to improve the center — which was known by the strange code name
"GODLIKELESION" — was badly needed. In early 2010, for example, the NSA branch offce lost
power 150 times within the space just a few months — a serious handicap for a service that
strives to monitor all of the world's data traffc.
23 JUNE 2014
On Sept. 19, 2011, the Americans celebrated the reopening of the refurbished ETC, and since
then, the building has been the NSA's "primary communications hub" in Europe. From here, a
Snowden document outlines, huge amounts of data are intercepted and forwarded to "NSAers,
warfghters and foreign partners in Europe, Africa and the Middle East." The hub, the document
notes, ensures the reliable transfer of data for "the foreseeable future."
Soon the NSA will have an even more powerful and modern facility at their disposal: Just fve
kilometers away, in the Clay Kaserne, a US military complex located in the Erbenheim district
of Wiesbaden, the "Consolidated Intelligence Center" is under construction. It will house data-
monitoring specialists from Mainz-Kastel. The project in southern Hesse comes with a price tag
of $124 million (€91 million). When fnished, the US government will be even better equipped
to satisfy its vast hunger for data.
One year after Edward Snowden made the breadth of the NSA's global data monitoring public,
much remains unknown about the full scope of the intelligence service's activities in Germany.
We know that the Americans monitored the mobile phone of German Chancellor Angela Merkel
and we know that there are listening posts in the US Embassy in Berlin and in the Consulate
General in Frankfurt.
But much remains in the dark. The German government has sent lists of questions to the US
government on several occasions, and a parliamentary investigative committee has begun
looking into the subject in Berlin. Furthermore, Germany's chief public prosecutor has initiated
an investigation into the NSA — albeit one currently limited to its monitoring of the chancellor's
cell phone and not the broader allegation that it spied on the communications of the German
public. Neither the government nor German lawmakers nor prosecutors believe they will
receive answers from offcials in the United States.
German Left Party politician Jan Korte recently asked just how much the German government
knows about American spying activities in Germany. The answer: Nothing. The NSA's promise to
send a package including all relevant documents to re-establish transparency between the two
governments has been quietly forgotten by the Americans....
Vice Chairman of [China's] Top Political Advisory Body Faces
A vice chairman of the country's top political advisory body is being investigated for "serious
violations of discipline," the Communist Party's anti-graft fghter says.
The Central Discipline Inspection Commission (CDIC) did not provide details of Su Rong's alleged
crimes, but the phrase usually means graft.
23 JUNE 2014
Su, the vice chairman of the Chinese People's Political Consultative Conference (CPPCC), is the
highest-level offcial to be investigated since the party's anti-corruption campaign started soon
after its 18th congress in November 2012.
The CPPCC has more than 2,000 members who advise the government on a range of topics,
from sports to the economy. It usually meets once a year in the capital at the same time as
the legislature. The 23 CPPCC vice chairmen are technically "state leaders," along with the
president, premier, government ministers and others.
Su, a 66-year-old native of the northeastern province of Jilin, was appointed the vice chairman
of the CPPCC in March 2013. Before that he was party boss of the eastern province of Jiangxi, a
job he took in 2007.
The inquiry into Su is linked to his time Jiangxi, sources close to the investigation said. The
CDIC had an investigation team in the province from May 27 to August 20, last year. The ex-wife
of a former offcial told investigators that Su's wife took bribes linked to land and construction
deals. She also accused Su of protecting his wife and framing her husband.
Wang Hongju, the head of the investigation team, said in a September report that the probe
in Jiangxi uncovered a series of problems, including offcials and their relatives taking bribes
and seeking personal gain in construction deals. The team reported these cases to the CDIC for
further investigation, Wang said.
Su's last public appearance was on June 10 when he visited Yushu, in the northwestern province
of Qinghai, for the opening of an investment fair. Su was the party head of Qinghai from 2001 to
Su started his career as an accountant in a village in Jilin. He later served as the party head of
the provinces of Jilin, Qinghai, Gansu and Jiangxi.
The CDIC inspection team arrived in Jiangxi in late May 2013 as part of a nationwide
examination of local governments and their offcials. This was shortly after Su left the province
to take up the CPPCC post in Beijing.
The inspection caused a storm in Jiangxi, as a number of senior offcials have stepped down
over corruption inquiries, including three provincial-level leaders.
A report on the inspection published in the Jiangxi Daily newspaper in February this year said
the team investigated 610 major government investment projects dating back to 2011 and
uncovered wrongdoing in infrastructure, mining and water projects. Graft was also found on
university campuses, it said.
Since December 2013, the CDIC has announced investigations into Chen Anzhong, vice chairman
of provincial people's congress standing committee; Yao Mugen, vice governor of Jiangxi; and
Zhao Zhiyong, secretary general of the provincial party committee.
23 JUNE 2014
More than a dozen lower-level offcials in the province have also fallen from grace, including He
Jinming, party secretary of Dexing City, and Liu Qingcheng, president of East China Institute of
Technology in Nanchang.
As party boss in Jiangxi, Su backed an anti-corruption drive targeting local offcials and won
high praise from offcial media outlets.
One well-known case involved bribery charges against Zhou Jianhua, the former deputy party
head of Xinyu City. In January, a court in Yichun handed Zhou what amounted to a suspended
death sentence for taking 14 million yuan in bribes....
What Will Argentina Do With Its Vultures?
On Monday, Argentina lost its appeal against Elliott Management in the U.S. Supreme Court.
That means that, leaving aside this footnote, Argentina needs to either negotiate a settlement
with Elliott over billions of dollars in unpaid debt in the next two weeks, or default on its
current debts on June 30. This seems bad for Argentina, and it is. But in a weird way, it almost
puts Argentina in a stronger negotiating position than Elliott.
On the one hand: Default is bad for Argentina. But it might not be that bad. It's a strange
technicality-driven default, not a "real" one: Argentina has the desire and capacity to make its
interest payments on the exchange bonds; it can't because a vulture fund (Argentina's words)
and a New York court won't let it.
Now bondholders like desire and capacity, but they prefer money; "we tried, but we can't give
you your money" is not a great thing to tell them. But there are ways to get them their money
even after default. I mean, Argentina has lots of experience with that! You default, you offer
bondholders something in exchange for their bonds, and they take it. If what you give them
preserves value, they're not that mad at you and are willing to continue to lend to you.
That seems to be what Argentina has in mind. It has said as much (though, to be fair, it has
said a bunch of things). The idea would be to offer bondholders the chance to swap their newly
defaulted bonds into new, Argentine-law, Argentine-payment-system bonds.
These bonds, and the banks in Buenos Aires that processed the payments, would not be subject
to U.S. court orders, so Argentina could just keep paying interest on them. The economics of
the swap could be very simple — for every $X face amount of Y-year, Z percent, U.S. dollar, New
York-law bonds that you own now, you get $X of Y-year, Z percent U.S. dollar local-law bonds —
and so would preserve value for holders, mostly. There are other, reasonably equivalent ways
to get to the same place, like defaulting, doing a local-law offering for cash, and using the
proceeds to fund a buyback of the defaulted bonds.
23 JUNE 2014
This would be a pain, and there's plenty of uncertainty about the process of the exchange and
the viability of local-law bonds, but it might work. Importantly, there's a hint of this outcome
— temporary default but preservation of value — in market prices. Credit default swaps on
Argentina trade at levels that imply around a 50/50 probability of default in the next couple
of weeks. But Argentine bonds are trading at levels that ... look, they're not great, but I see
the 8.28 of 2033 trading at around 76 cents on the dollar, for a yield of a bit under 12 percent.
You would not pay $76 for something with equal odds of (1) being worth zero in two weeks and
(2) being worth, I don't know, $85 in two weeks.7 The conclusion has to be: There's a high (50
percent, not 90 percent) likelihood of default, but there's also a high likelihood that default
would work out more or less OK for the exchange bondholders.
Which means that it would work out OK for Argentina. The goal, for Argentina, is to get on
decent terms with capital markets. If its exchange bondholders are happy, or happy-ish — if it
keeps its promises to them, and preserves value for them — then it's happy.
On the other hand: Default is terrible for Elliott! Elliott's leverage over Argentina is that it can
force Argentina to default on its bonds, which would be a big setback in its efforts to rejoin
the world capital markets. But that's a one-time event: Once it happens, Elliott's leverage
Putin's aide proposes anti-dollar alliance to force US to end
Ukraine's civil war
Sergey Glazyev, the economic aide of Vladimir Putin, published an article outlining a plan
for "undermining the economic strength of the US" in order to force Washington to stop the
civil war in Ukraine. Glazyev believes that the only way of making the US give up its plans on
starting a new cold war is to crash the dollar system.
In his article, published by Argumenty Nedeli, Putin's economic aide and the mastermind behind
the Eurasian Economic Union, argues that Washington is trying to provoke a Russian military
intervention in Ukraine, using the junta in Kiev as bait. If fulflled, the plan will give Washington
a number of important benefts.
Firstly, it will allow the US to introduce new sanctions against Russia, writing off Moscow's
portfolio of US Treasury bills. More important is that a new wave of sanctions will create a
situation in which Russian companies won't be able to service their debts to European banks.
According to Glazyev, the so-called "third phase" of sanctions against Russia will be a
tremendous cost for the European Union. The total estimated losses will be higher than 1
trillion euros. Such losses will severely hurt the European economy, making the US the sole
"safe haven" in the world. Harsh sanctions against Russia will also displace Gazprom from the
European energy market, leaving it wide open for the much more expensive LNG from the US.
23 JUNE 2014
Co-opting European countries in a new arms race and military operations against Russia will
increase American political infuence in Europe and will help the US force the European Union
to accept the American version of the Transatlantic Trade and Investment Partnership, a
trade agreement that will basically transform the EU into a big economic colony of the US.
Glazyev believes that igniting a new war in Europe will only bring benefts for America and only
problems for the European Union. Washington has repeatedly used global and regional wars for
the beneft of the American economy and now the White House is trying to use the civil war in
Ukraine as a pretext to repeat the old trick.
Glazyev's set of countermeasures specifcally targets the core strength of the US war machine,
i.e. the Fed's printing press. Putin's advisor proposes the creation of a "broad anti-dollar
alliance" of countries willing and able to drop the dollar from their international trade.
Members of the alliance would also refrain from keeping the currency reserves in dollar-
denominated instruments. Glazyev advocates treating positions in dollar-denominated
instruments like holdings of junk securities and believes that regulators should require full
collateralization of such holdings. An anti-dollar coalition would be the frst step for the
creation of an anti-war coalition that can help stop the US' aggression.
Unsurprisingly, Sergey Glazyev believes that the main role in the creation of such a political
coalition is to be played by the European business community because America's attempts
to ignite a war in Europe and a cold war against Russia are threatening the interests of big
European business. Judging by the recent efforts to stop the sanctions against Russia, made
by the German, French, Italian and Austrian business leaders, Putin's aide is right in his
assessment. Somewhat surprisingly for Washington, the war for Ukraine may soon become the
war for Europe's independence from the US and a war against the dollar.
23 JUNE 2014
Charts That Make You Go Hmmm...
Concrete has been the foundation (literally) for the massive expansion of urban areas
over the past several decades, and it has been a big factor in cutting the global rate of extreme
poverty in half since 1990. In 1950, the world made roughly as much steel as cement (a key
ingredient in concrete); by 2010, steel production had grown by a factor of 8, but cement had
gone up by a factor of 25...
23 JUNE 2014
My good friend Ronni Stoeferle of Incrementum in Liechtenstein is all set to publish his
latest In Gold We Trust report, and as anyone who follows the gold space knows by now, Ronni's
annual masterpiece is an absolute must-read.
This year's is 100 pages of pure information, and Ronni was kind enough to give me a sneak
preview, which I'm passing on to you.
Click on the link below to request your own copy when it is published in the next week or so.
In the meantime, over to Ronni:
We are convinced that infation is a monetary phenomenon. Because of the dynamics of
“monetary tectonics”, infationary and defationary phases can alternate.
To measure how much monetary infation actually reaches the real economy, we utilize
a number of market-based indicators, which result in a proprietary signal. This method
of measurement can be compared to a “monetary seismograph”, which we refer to as
the “Incrementum Infation Signal”. In order to achieve this, we combined different
quantitative factors, one of them being the Gold/silver Ratio.
For the fund we manage, we take according positions for rising, neutral or falling
infation trends.Historically we found there where time periods of about 6-24 months
during which disinfationary forces were dominant. These phases were particularly
painful for the holders of infation sensitive assets. Right now it looks as if we could be
moving towards the end of such a phase. By mid June, the signal has reversed to rising
23 JUNE 2014
Silver has just broken through its long-term downtrend line and broken out with gusto
with a $1 move. Gold at $1320 is about to do the same. Today's price rises on strong volume are
indicative that the PM's have bottomed & are now set to rise & are now "back in play" to the
long side...
23 JUNE 2014
Words That Make You Go Hmmm...
Brian Wesbury asks the question
that is surely on many lips around the world:
"Is the Fed fying by the seat of its pants?"
Almost inevitably, the answer is in the
affrmative, and that has implications for all
kinds of things — particularly interest rates,
volatility, and infation...
Better late than never is this
interview with Nigel Farage after Ukip's
seismic victory in last month's EU elections.
Farage shares his concerns about extremism
and reveals what effect the surge in anti-EU
sentiment across the continent has had on
Brussels-based politicians. If you are surprised
by what he says, then you haven't been paying
"Gold & Bad: A Tale of Two Fingers" is
a presentation I gave in Toronto a couple of
months ago, but it's taken me a while to put
it up here because I have been working on
another incredibly exciting project which is
very important to me — Real Vision Television.
You'll be hearing a lot more about that soon,
but in the meantime please sit back and enjoy
a look at what happens when fact meets
fction in the gold markets.
Also, please sign up at www.realvisiontv.com
to make sure you are there when truth meets
23 JUNE 2014
and fnally...
Regular readers will know I am a photography nut, and this set of images was just
too good not to share.
Viewed from above, the ordinary becomes extraordinary and the familiar becomes
Below... Venice!
23 JUNE 2014
Grant Williams
Grant Williams is portfolio 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 frm and its investors.
Grant has 29 years of experience in fnance 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
refect the positioning of one or all of the Vulpes funds—though I will not be
making any specifc recommendations in this publication.
23 JUNE 2014
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