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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

25 November 2013

Avenomics
"It's unfortunate that there are people who tout the mostly unfounded fears of hyperinflation." Shinzo Abe "Living in a world such as this is like dancing on a live volcano." Kentetsu Takamori, Unlocking Tannisho: Shinran's Words on the Pure Land Path "Japan likewise put her hopes of victory on a different basis from that prevalent in the United States.... Even when she was winning, her civilian statesmen, her High Command, and her soldiers repeated that this was no contest between armaments; it was a pitting of our faith in things against their faith in spirit." Ruth Benedict, The Chrysanthemum and the Sword: Patterns of Japanese Culture "There are no bad ideas, Lemon, only great ideas that go horribly wrong." Jack Donaghy, 30 Rock "The miserable have no other medicine But only hope." William Shakespeare, Measure For Measure
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
Historic Defeat for EU As Ukraine Returns to Kremlin Control .................................21 Warned on Budget, Italy Is Given Leeway by EU .................................................22 Chinese Gold Demand and the World Gold Council's Estimates ................................23 "Fat Cat" Backlash: Swiss Executive Pay Debate Gets Ugly .....................................25 1,430,000,000,000 (That's 1.43 Trillion): Britain's Personal Debt Timebomb ..............26 The Solution That Cannot Be Named ...............................................................27 OECD Warns of Eurozone Deflation Risks; Suggests ECB Consider Non-Conventional Measures ................................................................................................29 No Sugarcoating It: A Hard Landing Is Likely ......................................................30 Bitcoin Gaining Validity Fuels Rally in Virtual Currency .........................................32 The Euro Debate Greece Is Not Having ............................................................33

CHARTS THAT MAKE YOU GO HMMM... ..................................................34 WORDS THAT MAKE YOU GO HMMM... ...................................................37 AND FINALLY... .............................................................................38

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Things That Make You Go Hmmm...

In 1853 the French romantic composer Charles Gounod wrote a melody that was especially designed to sit over the Prelude No. 1 in C Major written by Johann Sebastian Bach over a century earlier. He titled it (somewhat unimaginatively, perhaps) "Meditation sur le Premier Prelude de Piano de S. Bach." Interestingly enough, Gounod's father-in-law, the magnificently named Pierre-Joseph-Guillaume Zimmerman, transcribed the improvised melody and arranged it for violin, piano, and harmonium; and thus a piece that Gonoud himself never actually wrote down went on to become one of the most-recorded and most-played pieces of music in the history of mankind. It was the addition by Jacques Leopold Heugel in 1859 of the words from the Latin text of the prayer Ave Maria that put Gonoud's noodlings on the road to ubiquity at church ceremonies throughout the Christian world. Ave Maria is of course a traditional Christian prayer that asks for the intercession of the Virgin Mary in one's life, to deal with any number of tricky situations that may arise and leave the supplicant feeling as though divine intervention is the only solution. The Ave Maria is more commonly known to most people by its English translation: Hail Mary. As the last refuge of the hopeless, the Hail Mary has also taken its place in the sporting lexicon over the years, particularly in American football, where it was popularized through the play of two members of the fabled Four Horsemen (Notre Dame's legendary 1924 backfield, consisting of Don Miller, Harry Stuhldreher, Elmer Layden, and Jim Crowley) in an era when sports reporters such as Grantland Rice (who brought the Hail Mary to the gridiron) were capable of prose seldom seen on the sports pages today. Exhibit A is the lead for the piece in which Rice introduced the Hail Mary in October 1924, after Notre Dame upset a heavily favoured Army team: Outlined against a blue-gray October sky, the Four Horsemen rode again. In dramatic lore their names are Death, Destruction, Pestilence and Famine. But those are aliases. Their real names are Stuhldreher, Crowley, Miller and Layden.

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They formed the crest of the South Bend cyclone before which another fighting Army team was swept over the precipice at the Polo Grounds yesterday afternoon as 55,000 spectators peered down upon the bewildering panorama spread out on the green plain below. Beautiful! Exhibit B is the opening paragraph from a NY Post recounting of a NY Jets loss to the Buffalo Bills: The Jets brought Ed Reed in on Thursday to help a leaky pass defense, one that has proven vulnerable to the deep ball. But despite being shoehorned right into the lineup, the future Hall of Famer couldn't keep that Achilles' heel from being exposed over and over in a 37-14 loss to the Bills. Call me old-fashioned, but where are the modern-day Grantland Rices? (Or is the plural "Grantlands Rice"? I don't know.) But I digress. The definition of the term Hail Mary as it pertains to football, provided here by Wikipedia, does a sterling job of setting the stage for this week's topic: A Hail Mary pass or Hail Mary route is a very long forward pass in American football, made in desperation with only a small chance of success, especially at or near the end of a half. Ah... Yes, the Hail Mary is used in desperation, near the end of a contest when there is only a small chance of success... When Abenomics was unveiled in Japan upon the re-election of Shinzo Abe as prime minister in late 2012, it is safe to say that, having been mired in a 20-year deflationary spiral and with debt totaling 240% of GDP, Japan was nearing an endgame of sorts. For two decades the country had watched the yen strengthen and endemic deflation thwart any and all attempts to generate even moderate inflation, as repeated bouts of quantitative easing failed to administer the desired antidote to Japan's ever-increasing debtload. Realizing just how late in the game he found himself, Abe promised to change all this, but in order to do so he needed to pursue a high-risk strategy with a low probability of success. The press (ever hungry for a new, catchy portmanteau word) dubbed it "Abenomics." Personally, I prefer to call it "Avenomics": the economics of the hopeless.

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Abe's opening (and perhaps his most important) gambit was the politicization of the Bank of Japan. Without a complicit governor quarterbacking Japan's printing press, any attempt at reaching the endzone would be futile. Whilst campaigning for office, Abe took verbal swipes at incumbent BoJ president Masaaki Shirakawa, criticizing him for failing to do enough to lift Japan out of its deflationary malaise, but Shirakawa stood firm: (Japan Times, November 2012): Bank of Japan Gov. Masaaki Shirakawa pushed back Tuesday against pressure on the central bank, criticizing the unlimited easing advocated by opposition leader Shinzo Abe and urging respect for the BOJ's independence. "I seek respect for the BOJ's independence as it's doing its utmost to conduct appropriate monetary policy," Shirakawa said. Without naming Abe, Shirakawa said that unlimited money-printing could worsen the national debt and that a 3 percent inflation goal, also suggested by the head of the Liberal Democratic Party, would be unrealistic. Abe's opponents were quick to point out a few minor problems with his raft of promises: Cabinet ministers criticized recent remarks by Abe, saying direct financing of the government by the BOJ could destabilize the economy and would threaten the bank's independence. "That would be off limits," Finance Minister Koriki Jojima told reporters after Abe, head of the Liberal Democratic Party, said the BOJ should purchase government bonds to finance public works projects to boost the flagging economy. "It would weaken fiscal discipline, trigger a surge in interest rates and cause excessive inflationary pressure," Jojima said. But, of course, in this day and age such fiscal and monetary prudence was unacceptable; and the idea of money printing to solve the problems, as opposed to the collective tightening of belts, was just irresistible (particularly when all the other cool kids were printing), so Abe won in a landslide. Once installed in the Sri Daijin Kantei (official residence of the Japanese prime minister), Abe went right to work, and job one was to get rid of Shirakawa: (WSJ, December 2012): It is scarcely a secret that Shinzo Abe, who will become Japan's prime minister this week, hasn't much time for Masaaki Shirakawa, governor of the Bank of Japan. Abe has already said he will replace Shirakawa when the central banker's term of office expires in April. In the meantime he is threatening to resort to law to get Shirakawa to adopt the 2% inflation target Abe has been championing in an attempt to inflate the Japanese economy back into growth.

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Shirakawa has led the Bank with extreme caution. He has not embraced aggressive monetary policy to the extent of his counterparts in the other large economies. Last week he announced an expansion of the Bank's asset buying program to 91 trillion yen ($1.1 trillion) but ignored Abe's calls for a 2% inflation target. All too little, too late, in Abe's view. In short, Shirakawa's refusal to crank up the presses to warp speed wasn't satisfactory to Abe, so he had to go. Abe knew exactly who his preferred candidate was, and he kept up the pressure on Shirakawa even as he basked in the glow of his election victory. Eventually, Shirakawa had enough: (Bloomberg): Bank of Japan Governor Masaaki Shirakawa will step down on March 19, almost three weeks before his term was due, accelerating a leadership transition that may aid Prime Minister Shinzo Abe's campaign for aggressive easing. Shirakawa, 63, will exit the same day as two deputy governors, he told reporters in Tokyo yesterday. He was scheduled to leave on April 8.... "It's the equivalent of waving a white flag for unconditional surrender," said Shuichi Obata, senior economist at Nomura Securities Co. in Tokyo. "Shirakawa didn't share the government's view that the central bank is responsible for ending deflation." In true Japanese style, however, on his way out of the revolving door at the Bank of Japan, Shirakawa declined to lay blame and made sure the drama was minimized: "There was no pressure at all from the government, this was my own decision," Shirakawa told reporters last night after a meeting with Abe, saying it was not an act of protest. He said he made the decision yesterday so that the central bank's new leadership could start together. Number of people fooled? Zero. Into the void created by Shirakawa's premature evacuation stepped none other than Abe's preferred candidate, Haruhiko Kuroda, who also wasted no time in getting to work: (Japan Times): Bank of Japan Gov. Haruhiko Kuroda on Thursday revealed his strategy for ending more than a decade of deflation by expanding the central bank's purchases of government bonds and allowing it to buy riskier assets. The bank will "enter a new phase of monetary easing in terms of quantity and quality," Kuroda said in explaining that the moves will double Japan's monetary base and the amount of outstanding Japanese government bonds and exchange-traded funds within two years.

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"This is coming from a different level in both quality and quantity," Kuroda told reporters after the two-day Policy Board meeting. "We have put forward everything there is to do at this point," he said. The rest, until recently, anyway, is well-documented. The yen fell...
110

Nov 2012 - Nov 2013

Japanese Yen

100

90

80 November 2012 May 2013 November 2013

Source: Bloomberg

The Nikkei soared (kinda, though not without testing a few nerves along the way)...
16000

Nikkei 225 Index

Nov 2012 - Nov 2013

15000

14000

13000

12000

11000

10000

9000 November 2012

May 2013

November 2013

Source: Bloomberg 25 November 2013 7

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And Japanese government bond prices? Well, unfortunately, they did what they OUGHT to do in a situation where investors are being promised 2% inflation: they fell off a cliff...
147

Nov 2012 - Nov 2013

146

JGB Future

145

144

143

142

141 November 2012 May 2013 November 2013

However, the BoJ's massive bond-buying program countered that trend (for the time being), and though it looks as if the JGB market is well and truly on its way to running out control, the BoJ once again has the upper hand. Sort of. For now. Central to Abe's problem of somehow finding a way to generate the required inflation, however, is the malaise in Japanese wages, a problem that has beset the country for many years.
8 7 6 5 4 3 2 1 0 -1 -2 -3 -4 -5 -6 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

Japan Average Monthly Real Cash Earnings (% Change YoY)

1991 - 2013

Source: Japan Ministry of Health, Labour & Welfare

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The wages issue has meant that the problems facing Abe and his new lackey BoJ governor are as much psychological as fiscal or monetary, since entrenched expectations of stagnant wages and falling prices have led Japan's citizens into a rather unfortunate mindset: (Bloomberg, January 2013): More than 80 percent of respondents in a Bank of Japan survey released this month who noticed rising prices last year said it was bad. More than a third of those who said prices fell were happy about it. Ruh-Roh! After two decades of persistent deflation, Japanese households have modified their behaviour to the point where they now hold more than half of their savings in cash.

Source: Bank of Japan

The other casualty, as far as the BoJ is concerned, is the net change in the bond holdings of the famed "Mrs. Watanabe," which have fallen materially for eight straight quarters, as can be seen in the chart below. Cash deposits (in red) are the only asset that has risen in each of the periods represented, whilst bond holdings (in blue) are the only asset that has declined in each quarter. Also noticeable is the sharp increase in equity holdings (in green) since the Japanese people were "promised" higher equity prices. Hey! This Avenomics thing is easy.

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35 30 25 20 15 10 5 0 -5 -10 -15 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Others Insurance & Pension Shares & Other Equity Investment Trusts Bonds Currency & Deposits Total Assets

Source: Bank of Japan

The current allocation of Japanese household assets, when viewed as a pie chart, speaks a thousand words as to the mindset of the Japanese citizen and the motives behind Avenomics:
Japan: Financial Assets Held By Households
Q2 2013

Others Insurance & Pensions Shares Investment Trusts Bonds Currency & Deposits

Source: Bank of Japan

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But let's get back to that whole "wages" thing and a former BoJ official's thoughts on the subject: (Bloomberg, Jan 2013): "The key is wages," said Nobuyasu Atago, principal economist at the Japan Center for Economic Research and a former BOJ official in charge of price data. "Without pay increases, the economy won't recover and households will only suffer from inflation." Japan's main business lobby signaled it won't endorse pay rises at regular wage negotiations with labor unions this spring, Kyodo News reported Dec. 20. Prime Minister Shinzo Abe's Liberal Democratic Party is considering tax breaks for companies that raise pay or expand hiring. Indeed. The key is wages. Unless they rise, Avenomics is DoA, so I was very surprised at an article I read a few weeks back that received scant coverage and, amazingly, even less commentary. First, to set the scene, a little history on a company called Chubu Electric Power: The company, founded in 1951, is an electric utilities provider for central Chubu on the main Japanese island of Honshu. It has 199 generating stations with a total capacity of 32,473 MW, of which 183 are hydroelectric generating stations, 12 are thermal power stations, and making up the total are 1 wind and 2 solar stations as well as the company's lone nuclear power plant, which was shut down in May 2011 on government instructions after the Fukushima tragedy. Chubu Electric employs 17,345 people and is one of the "Big 4" Nagoya-based companies (alongside Meitetsu, Matsuzakaya, and Toho Gas). In short, Chubu Electric Power ain't a small business. So with that as background, let's get to the article: (Kyodo News, October 22, 2013): Chubu Electric Power Co. plans to cut its workers' wages by around 20 percent from April in a bid to gain customer approval for raising electricity rates from that month, sources close to the utility said Tuesday. It presented to its labor union Tuesday a plan to reduce unionized employees' basic wages by around 5 percent, halve their summer bonuses and cut other allowances, the sources said. The planned cut of basic wages will be the first since the company's founding in 1951.

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Wait, what? (Japan Times, October 22, 2013): Chubu Electric Power Co. called on its labor union Tuesday to accept a 20 percent cut, excluding overtime, in the year starting next April. The steep salary cut is designed to win public understanding for when the company seeks government approval for a full-fledged increase in electricity charges for household users beginning in April. As part of the pay cut, the monthly basic salary would be reduced by 5 percent, the first wage cut since the firm was launched in 1951. Summer bonuses would be halved from last year to the equivalent of one month of basic salary. Winter bonus levels have yet to be determined. The company will carry out an even steeper pay cut for managers. Yep, you heard right. The Japan Times, however, went further: Chubu Electric has had to deal with soaring fuel costs for thermal power plants since it halted its Hamaoka nuclear power station in Omaezaki, Shizuoka Prefecture, in May 2011 at the request of the government. Fuel costs for the year ending next March are expected to total 1.25 trillion, 1.8 times the level prior to the suspension of the Hamaoka plant. The company may incur a third consecutive annual net loss this year. "Soaring fuel costs" since the shutting of its lone nuclear facility. Exactly a week after announcing the proposed wage cut, Chubu played their second card: (Japan Times): Chubu Electric Power Co. made it official Tuesday and applied for approval to raise household electricity fees, the seventh utility to seek higher rates amid the nuclear shutdown caused by the Fukushima disaster. In its request filed with the Ministry of Economy, Trade and Industry, Chubu Electric Power said it wants to raise electricity prices for households by an average of 4.95 percent next April 1. The utility, which covers the Nagoya region, is already planning to raise rates for corporate customers by an average of 8.44 percent. This increase, which does not need government approval, also takes effect April 1. And there, in two press announcements from one company within a seven-day window, is the problem facing both Japan in general and Avenomics in particular: stagnant (or falling) wages and a cost of living that is rising exactly as Abe promised.

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So let's recap: Since Fukushima, oil as a percentage of Japan's energy consumption has doubled, consumption of LNG has almost doubled, and nuclear power has declined to essentially zero. The huge shift is due to the fact that whilst all of Japan's nuclear power was generated domestically, it is a different story for oil and LNG, as Japan is the world's third-largest importer of oil (behind the US and China) and the world's largest importer of LNG. The energy picture looks horrible, of course, when put up next to the "success" of Avenomics with regard to the yen. First up, Brent Crude priced in US dollars:
130

Brent Crude Oil Priced In US$

March 2011 - November 2013

120 Fukushima Disaster 110

100

90

80 Mar 2011 Mar 2012 Mar 2013 Nov 2013

Source: Bloomberg

So, since the Fukushima disaster in March 2011, there has been a reasonable 5% decline in one of the most basic components of global inflation. Not great for Abe's drive to generate inflation, but undoubtedly a good thing for the citizens of Japan.

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Next up, the same commodity priced in yen:

12000

Brent Crude Oil Priced In Yen

March 2011 - November 2013

10000 Fukushima Disaster

8000

6000 Mar 2011 Mar 2012 Mar 2013 Nov 2013

Source: Bloomberg

For those of you keeping score at home, that's a 16% increase in the price of oil to the Japanese consumer. Inflation! Bravo! Avenomics is a roaring success. I bring up the energy example to show the flip-side of Avenomics with regard to a commodity upon which Japan is almost totally reliant, but the really important thing is the proposed wage cut by Chubu. The Japanese government hopes to promote wage hikes needed to help generate the inflation it deems necessary, yet one of its largest utility companies is simultaneously proposing to CUT wages by TWENTY PERCENT (think, for a moment, about the reaction that would meet with in the US ... or France!) and hike the cost of what they produce something everybody in Japan consumes by between 5 and 8%. Avenomics was built around a "three-arrow" economic plan that was lauded as visionary and daring. Many thought it would generate the sort of shock and awe (oh how I've grown to hate that phrase) needed to guarantee Japan's exit from its long slump. The first arrow was a 10.3 trillion fiscal stimulus program that would increase public spending (well, that's just more freshly printed cash). The second arrow was (believe it or not) yet more easing of monetary policy in order to increase investment, demand, and of course inflation. Then there was that third arrow: structural reforms.
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Together these initiatives were supposed to increase incomes as well as Japan's competitiveness and productivity and bring the higher wages that are an integral part of of Avenomics. Now I will happily admit that on paper Avenomics is a thing of beauty. I mean, what's not to love? Wages go up, prices go up (less than wages, ideally), the yen weakens, exports increase, Japan Inc. gets back on its feet, and Japan's debt is gently inflated away. Everything gets fixed, and Japan can once more hold its head up high. Hey, I'd vote for that! Except... Dammit, we've been here before, and for an eloquent summation of the futility inherent in pressing the same button over and over again, I shall cede the floor to my friend Satyajit Das: The government's spending program follows 15 stimulus packages between 1990 and 2008. Based on previous experience, it may provide a short-lived boost to economic activity but will not create a sustainable recovery in demand. Investment will be mainly in non-tradable, non-competitive sectors like public infrastructure and construction, frequently adding to over-capacity and earning poor returns. The OECD recently identified the inefficient and ultimately wasted investment that characterized previous packages. Das continues: Japan has maintained a zero interest rate policy ("ZIRP") for over 15 years and implemented several rounds of QE. The new plan will assist the Japanese government to finance its spending. It may also help devalue the Yen and boost asset prices. But given that short term rates were near zero and 10 year rates around 0.50% before the announcement of the plan, the effect of monetary initiatives on real economic activity are likely to be less significant. Structural reform requires deregulation of inefficient sectors of economy, opening them up to domestic and foreign competition. Reform is needed of taxation, trade policy, labor markets, environmental laws, energy policy, healthcare, services as well as population and immigration. Many "reforms" are vague statements of objectives. Many of the ideas are old. Many policies have been tried before unsuccessfully. The required changes are also politically and culturally difficult. Aha, that third arrow! "Culturally difficult." I'll say. Avenomics relies on two very familiar things: Hope and Change. The hope is that Japan can make all these bold moves without encountering any resistance and without any of the countries Avenomics will affect (think Korea and China) taking countermeasures.

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The change? Well that's a whole other matter, I'm afraid. The Japanese do NOT like change (something I saw up close during my three-year stay in that beautiful country in the late 1980s/early 1990s at the peak of the bubble and in its early aftermath), and they like BIG changes like those required by Avenomics even less. Nowhere is that more obvious than in the case of Japanese demographics one of the country's two biggest hurdles. Japan's aging population hasn't suddenly snuck up on anybody the situation they are in now is exactly where they were projected to be a quarter of a century ago when I lived there. But back then, the demography curve facing Japan was something to be worried about another day. Well, guess what? That day has arrived, and in the intervening time nothing has been done to address Japan's chronic demographic problem. Now it's too late. Japanese births have been falling for 40 years:

Source: Forbes

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The net result? Horrible:

Source: Japan Ministry of Internal Affairs/Washington Post

The solution WOULD have been to start relaxing immigration laws decades ago, but there we run into that little problem of cultural unwillingness to make major changes. And so, because of strict adherence to deeply rooted cultural norms, Japan has attained the condition that the Germans so tenderly call "schrumpfende Gesellschaft" a "shrinking society." Amazingly, in a country that boasts a population of 127,650,000 (according to 2012 census estimates), there are barely more than 2 million foreigners resident in Japan an extraordinarily low 1.6%. In the USA that number is 13%. Want some more amazing facts about Japan's demographic nightmare? Well, try these on for size (courtesy of the US Census Bureau projections and Nicholas Eberstadt): By 2040, the ratio of newborns to centenarians in Japan will be roughly 1:1. Over 75% of the people who will make up the population of Japan in 2040 are already alive today. In 2008, 40% percent as many Japanese babies were born as in 1948. If current projections come to pass, Japan will not have many more newborns in 2050 than it did in the 1870s. By 2040, more than a third of Japanese will be 65 or older. Japan is already the world's grayest society, with a median age of almost 45 years.
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By 2040 the median age in Japan will rise to an almost inconceivable 55. (By way of comparison, the median age in the retirement haven of Palm Springs, California, is currently under 52 years.) And finally, in case you didn't get the joke yet, by the country's own projections, Japan's population will decline from about 127 million today making it the 10th most populous country in the world to about 106 million in 2040. The working-age population (ages 1564) will plunge 30 percent, from 81 million to 57 million. In 2040, by these projections, the total population will be declining by about one percent annually (roughly one million people per year) and the working-age population by almost two percent annually. Got it? Trouble. Demographically speaking, Avenomics is in need of divine intervention. Then there's the other "D" facing Japan, the one EVERYBODY has heard about: debt. Back to Das for a succinct recap: Japan is one of the most heavily indebted developed countries. Its total debt to GDP is over 500%, compared to the US's 370%. Japanese gross sovereign debt is around 240% of GDP, while its net debt is around 135%, substantially higher than most developed countries. The government borrows to finance over 50% of its spending. Then there's that magic number that Japan breached this past summer when its public debt hit 1 quadrillion. That number, hard to picture, looks like this:

1,000,000,000,000,000
Or, as I pointed out in a recent presentation, if you wanted to count to a quadrillion ... it would take you 31,709,792 years. That's a hell of an IOU to run up. So the reason why Abe desperately needs inflation is clear; but let's face it, 2% ain't gonna do the trick. The government needs higher inflation than that (something an aging population living on fixed incomes will not be happy about, once they figure it out) and revenue. Hiking the consumption tax from 5% to 8% is a start, and the planned rise to 10% in 2015 is another step in the right direction; but, like everything in Japan, that further rise is "dependent upon economic conditions," and those are not exactly rosy, I'm afraid.
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Couple the outrageous level of debt, the declining population, the stagnant wages, and the rising cost of living with Japan's plummeting savings rate...
60000

OECD Japan Net Household Saving Value

1960 - 2013

50000

40000

30000

20000

10000

-10000 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2013

Source: Bloomberg/OECD

... and you can clearly see just how far the clock has run down on Shinzo Abe. So here he is Japan's great hope with time about to expire and the pressure mounting. Facing the rush of a moribund economy, entrenched price deflation, an aging demographic that has drawn down its savings and actually likes the idea of lower prices, and a debt mountain that eclipses that of every other major economy on earth, is it any wonder that Abe-san has decided to hurl the ball into the endzone and hope that a helpful pair of hands hauls it in for a TD? Of course, popular thinking goes that, since Japan has been doing the constant-stimulus thing for two decades without any noticeable consequences, all will be well; but the problem lies in the fact that, throughout the nineties and noughties, Japan was basically scrimmaging on its own practice field alone, behind closed doors.

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Now they find themselves in a competitive game with every other major economy in the world suited up and also needing higher inflation, weaker currencies, and genuine growth after littering the field with trillions in stimulus. Say a prayer for Shinzo Abe, folks. For Avenomics to score, he's gonna need a miracle.

******* OK ... so after my recent trip to Perth to present at the ASFA conference, it's nice to be back
in the saddle again, and there's plenty to get our teeth into this week. We begin with Ambrose Evans-Pritchard and his take on Ukraine's "shock" decision to pull out of talks about membership in the EU and return to the bosom of the Kremlin. From there we travel to Italy, where the EU has decided to bend the rules a little; to Switzerland, where "fat cats" are in the crosshairs of an angry public; to the UK, where the "recovery" is being undermined by an explosion in household debt; and finally to Greece, where we hear an extremely persuasive argument about a debate that ought to be had and quickly. Alasdair Macleod backs Eric Sprott on his gold demand numbers; Andy Xie spells out the reasons why a Chinese hard landing is baked in the cake; the OECD warns the ECB that this is the time for extreme measures; and we hear The Economist's views on Larry Summers and The Solution That Cannot Be Named. The charts section includes a couple that need no comment, as well as looks at this "recovery" compared to its predecessors and the relative length of expansionary periods. And, in the week that saw the 50th anniversary of the assassination of JFK, we find that conspiracy-theory fatigue has led to a lot of capitulation amongst the tin-foil-hat crowd. Finally, in our videos section, we begin with more from Barry Sternlicht of Starwood Capital, who offers his views on markets and likely Fed action; move on to an absolute must-see interview with the great Stan Druckenmiller; and finish up with a fascinating update on the gold and silver markets from Andrew Maguire. OK... I've taken up enough of your time for another week, so I'll bid you farewell.

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

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Historic defeat for EU as Ukraine returns to Kremlin control

Twenty years after the collapse of the Soviet Union, Ukraine is slipping back under Kremlin control. Ukraine's shock decision to opt for Vladimir Putin's Russia and pull out of EU talks on the eve of an historic deal is a dramatic upset to the European balance of power. It is the first major defeat for the EU in its eastward march since the fall of Communism. While the region's geo-politics remain fluid, the upset may prove as fateful as the move by the Kossack chief Bohdan Khmelnytsky to turn his back on the West and accept Tsarist suzerainty in the 1640s. "Ukraine's government suddenly bowed deeply to the Kremlin. The politics of brutal pressure evidently work," said Sweden's foreign minister Karl Bildt. Ukraine's prime minister, Mykola Azarov, told Ukraine's parliament that the country has been forced to cancel its trade and pre-accession deal with the EU because Russian sanctions are strangling the economy, "pushing Ukraine to the brink of a huge social crisis." The accord was due to be signed at the EU's Vilnius summit next week. The volte-face stunned EU officials, torn between fury over Ukraine's conduct and deep alarm over what has happened. Kiev said it acted in the "national security interest". It has emerged that President Viktor Yanukovych flew secretly to Moscow two weeks ago to see Mr Putin. The pro-Kremlin outlet Russia Today said Ukraine had wisely stepped back from the EU "horror show" and accepted the real worth of Russian ties rather than hot air from Brussels. Ukraine had dodged a "death spiral" by protecting its eastern trade flows. Mr Putin has been tightening the screws for months, blocking shipments of goods and targeting heavy industry in the eastern region that depends on the Russian market. A freeze on imports of railway carriages has hit 80pc of Ukraine's carriage output. Another victim is Roshen chocolate, owned by Petro Poroshenko, a champion of the EU cause in Ukraine's parliament. Roshen sales in Russia have been banned for "toxic impurities". The guerrilla warfare tactics have pushed Ukraine to the brink of financial collapse. Foreign reserves have fallen by 30pc this year to $20.6bn (12.7bn). This is just 2.3 months of imports, far below the "safe" cover level of six months. The economy contracted 1.5pc in the third quarter, pushing bad loans in the banking system have to 30pc. Total foreign debt has reached 77pc of GDP. The country has to roll over or repay $10.8bn in foreign debt by the end of 2014, an almost impossible task given that capital markets are effectively closed.

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The government has been trying to play off Russia against the EU and International Monetary Fund, but the strategy has blown up in their faces. The IMF suspended a $15bn stand-by credit in 2011 for non-compliance, and has continued to demand radical reforms before any more money is released. Mr Azarov said the "straw that broke the camel's back" on the EU deal was a fresh list of harsh demands by the IMF this week, including a 40pc rise in gas bills, a salary freeze, big budget cuts, and lower energy subsidies. "All they were willing to lend us is enough to pay them back again," he said. An IMF spokesman said Ukraine needs "deep-reaching structural reforms" and exchange rate flexibility, IMF code for a devaluation....
*** AMBROSE EVANS-PRITCHARD / LINK

Warned on Budget, Italy Is Given Leeway by E.U.

After Italy rebuffed warnings about its budget, euro-area finance ministers late Friday agreed to give the country additional opportunities to show it can make savings and bolster revenue. The tensions over Italy's budget grew after Enrico Letta, the country's prime minister, warned on Friday that "ayatollahs" in Europe were seeking to promote austerity even though it was killing Italy's chances of recovery. The meeting here came a week after Olli Rehn, the European Union's commissioner for economic and monetary affairs, warned that Italy and Spain faced debt and deficit problems under their current spending plans for 2014. The main topic on the agenda was whether the verdicts by Mr. Rehn, who has gained authority to review national spending plans, should be followed. Ministers held "a very open and direct debate" about countries that risked missing targets, the head of the group of finance ministers from the euro area, Jeroen Dijsselbloem, said at a news conference late Friday after the meeting. "We scrutinized each other's draft budgets," said Mr. Dijsselbloem, adding, "I think we've shown that we're not afraid to confront and question each other." He said it was the first time that euro area ministers had met to assess one another's spending plans for the next year. Italy had pushed back hard against Mr. Rehn's findings and his refusal to grant the country an exemption that would have enabled it to spend additional billions of euros already included in its budget for next year, saying that he failed to take into account revenue from privatizations and a spending review.

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On Friday, Mr. Rehn dryly rebutted Mr. Letta's "ayatollahs" comment, rejecting any suggestion that he was too tough on Italy. "I trust Mr. Letta meant the negotiations on the Iranian nuclear program," Mr. Rehn told a Finnish broadcaster. "It is very important that all E.U. member states, including Italy, aim at the stability of their public finances." But the meeting of ministers and European officials avoided, for now at least, a full-blown fight with Italy by agreeing to give Rome a chance to meet its budgetary targets with additional measures to raise revenue and trim spending. "I am aware of the recent announcements by the government regarding privatizations, and I look forward to receiving further details of this, and especially of how the spending review underway could deliver savings already in 2014," Mr. Rehn told the news conference, referring to Italy. "Provided these measures are substantiated and formalized in the coming weeks, we would be able to take them into account." Fabrizio Saccomanni, the Italian minister of economy and finance, expressed relief at the end of the meeting, telling reporters that the government had passed "the latest test." In the case of Spain, the euro-area ministers said that they had agreed to take into account additional measures "under preparation" in Madrid. The meeting of the finance ministers was part of a newly introduced process in Europe of vetting budgets of euro-area members before they are approved by national parliaments....
*** NY TIMES / LINK

Chinese gold demand and the World Gold Council's estimates

There is considerable disagreement about Chinese gold demand, with delivery figures on the Shanghai Gold Exchange and import/export figures for Hong Kong suggesting the real totals are far higher than those published by the World Gold Council and Thompson-Reuters GFMS. Recently Eric Sprott of Sprott Global Resource Investments Limited tackled this issue and wrote an open letter to the WGC pointing out that import/export figures show far higher levels of gold demand than the WGC's estimates for Asia, particularly China, Hong Kong, Thailand, India and Turkey. The response is not on the WGC website, though it appears to be partially quoted elsewhere. It seems that Sprott and the WGC are trying to do two different things. Sprott is interested in how much gold is actually taken into a country net of exports, irrespective of its use category, taking the view that there can be no more accurate estimate of overall gold demand, irrespective of how it is used. The WGC is trying to identify how much gold is used for specific purposes, which given the opaqueness of the market means they will never track all of it down. Crudely put it is top-down versus bottom-up.

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To see how different the results can be let's look at the solid figures for China and Hong Kong for the first nine months of 2013 which are set out in the table below, before comparing the result with that of the WGC.
Chinese mainland Shanghai Gold Exchange delivered HK exports to China Less Chinese exports to HK Net imports into China Hong Kong Total imports Less exports to China Less re-exports to China Less exports to rest of the world Less re-exports to rest of the world Net imports into HK (vault storage) Total identified imports for China and Hong Kong 1,926.2 -164.9 -1,077.5 -46.0 -78.8 559.0 2130.7 1,671.6 164.9 -264.9 1,571.7

All these are published figures which we can assume to be accurate. Mainland China does not release import/export statistics for gold but we know what has been physically delivered through the Shanghai Gold Exchange, the monopoly physical market, and we know what Hong Kong imports exports and re-exports. We can also be reasonably certain that these figures exclude off-market government transactions, such as direct purchases from the mines of all China's gold production, given that Chinese-refined bars are never seen in circulation. Exports from Hong Kong refer to gold processed into a materially different form from that imported, typically jewellery; so exported to the Mainland they are additional to SGE deliveries. Re-exports refers to imports re-exported with no material processing, and therefore can be assumed to be bullion trans-shipped and destined for the SGE, ignoring for simplicity's sake that some may have bypassed the SGE and been sent directly to private buyers. Exports and re-exports to the rest of the world obviously must be deducted. The conclusion is that between them gold absorbed by private sector purchases in Hong Kong and China amount to at least 2,130.7 tonnes in the first nine months of this year, or 2,841 tonnes annualised. This compares with the WGC's estimates from their quarterly Gold Demand Trends of only 818.6 tonnes for the same period, or 1,091.5 annualised. Given the hard evidence of Hong Kong and SGE statistics it appears that the WGC's figures substantially understate the true position. Furthermore, any analysis of gold demand will fail to account for the increase in gold ownership not constrained by national boundaries....
*** ALASDAIR MCLEOD / LINK

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'Fat Cat' Backlash: Swiss Executive Pay Debate Gets Ugly

In Switzerland's current, polarized debate about executive salaries, Bern businesswoman Pia Tschannen could be considered a defector a woman in cahoots with the Young Socialists, the Social Democrats and the trade unions because she is campaigning for the 1:12 initiative, which is being put to referendum on Sunday. The initiative's aim is to ensure managers cannot earn more in a month than a normal employee earns in a year. It would mean that nobody would be able to earn much more than 500,000 Swiss francs (400,000) annually. "Ever higher salaries for managers imply that a company's success depends solely on one person. I don't believe that," says Tschannen. In comparison, board members at Commerzbank, Germany's second biggest bank, were outraged at the government's insistence their pay be limited to 500,000 when the bank was bailed out with government money. Given Switzerland's historical association with Calvinism which is supportive of economic success the campaign has gathered surprisingly widespread support beyond the traditional left-wing. For a while, polls suggested advocates of the initiative were in a dead heat with their rivals, though support has now dropped. The referendum campaign focuses on what the young Socialists call "the fat cats" extremely well-paid managers in the business world. These include Daniel Vasella, former head of pharmaceuticals giant Novartis, who was scheduled to receive an exit payment of 72 million Swiss franc (58 million) in spring 2013.Despite having waived the money following the outcry, Vasella is still seen as an archetypal greedy manager and his notoriety has fed the popularity of the 1:12 campaign, which would have had no chance of succeeding just a few years ago. Public anger about golden handshakes clauses in executives' employment contracts allowing for generous severance has already lead to a tightening of the legislation regulating executive pay. A two-thirds majority of Swiss voters supported a ban on excessive exit and signing bonuses. Furthermore, shareholders will now be able to decide executive salaries. The Young Socialists are already presenting the campaign as a success, irrespective of Sunday's outcome, because they have managed to break a taboo: Discussing salaries was long seen as inappropriate in Switzerland. Now citizens have been discussing executive pay for months and the Young Socialists' campaign has proven so effective that business groups have had to reply with a high-profile counter-campaign. "The arsonists from the Young Socialists want to ruin Switzerland's successful economic model," warns the Swiss Trade Association (SGV) in a pamphlet distributed to all the country's households. The front page features a photograph of stone-throwing anarchists in front of burning barricades. The Young Socialists' idea is a "socialist experiment," they say: Communists playing with fire.

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The "arsonists" work from a trade union office in Bern, all six of them. Marco Kistler, one of the campaign's strategists, is working with his colleagues on using social media such as Facebook and Twitter to mobilize support during the final spurt of the campaign. They connect with their supporters in all 26 of the country's cantons via live stream as the music from Johnny Depp's "Pirates of the Caribbean" plays in the background. "We've assembled all of the worst communists here," one of them jokes. In truth none of the young activists look like class warriors. Twenty-nine-year-old Kistler looks more like a shy computer science student. He answers questions briefly and deliberately, without a trace of revolutionary rhetoric....
*** DER SPIEGEL / LINK

1,430,000,000,000 (that's 1.43 trillion): Britain's personal debt timebomb

Britain faces a timebomb as the cost of living crisis forces more people into crippling debt they will not be able to repay, according to a major study published today. The Centre for Social Justice (CSJ) think tank, founded by Iain Duncan Smith in 2004, warned that two of the flagship policies he is implementing as Work and Pensions Secretary the "bedroom tax" and universal credit could plunge more people into debt. It revealed that more than 5,000 people are already being made homeless each year because they cannot pay their mortgage or rent. The study, "Maxed Out," said that despite the return to economic growth, personal debt in the UK totals 1.43 trillion, close to its all-time high. Average household debt stands at 54,000 almost twice the level a decade ago. Although much of it stems from mortgages, the report warned that poor people were hit hardest as unsecured consumer debt almost tripled in the last 20 years to nearly 160bn. According to the CSJ, households owe the equivalent of 94 per cent of the UK's economic output last year. Only Ireland has a higher ratio of personal debt to GDP amongst European countries. Privately, ministers are worried that, while interest rates have been held at a record low of 0.5 per cent, less personal debt has been repaid in the UK than countries like the United States. The Bank of England will consider raising rates when unemployment falls from its current 7.6 per cent rate to 7 per cent, triggering a rise in mortgage rates for millions of home-buyers. The CSJ said more than 26,000 UK households have been classed as "homeless" by local authorities in the past five years, and warned that the number could increase if interest rates rises. Some 3.9m families do not have enough savings to cover their rent or mortgage for more than a month.
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Another timebomb is the number of people retiring before they have paid off their mortgage. About 40,000 interest-only mortgages are due to mature each year between 2017 and 2032 where the householder will be over 65. Between now and 2020, a third of the shortfalls on endowment mortgages will amount to more than 50,000. Although the CSJ backed the principle of the "bedroom tax" imposed on tenants in public housing, it said the "spare room subsidy" should not have been removed unless they had refused a "reasonable offer" to "downsize" or work longer hours. It warned there had been "genuine confusion" about the impact of the change and discovered that some local authorities are failing to fully allocate their share of the 25m set aside for discretionary housing payments. "The potential short-term impact of removing the spare room subsidy on rent arrears is concern in relation to the threat of problem debt," said the report. There was evidence of some "property swaps" being put on hold until tenants had paid off all their rent arrears, which risked more debts piling up....
*** THE INDEPENDENT / LINK

The solution that cannot be named

Earlier this month the IMF held a research conference in honour of Stanley Fischer. It featured a murderer's row of macroeconomic stars as speakers including, to round out the event, one Larry Summers. The video of Mr Summers' talk is now publicly available and is being heralded, with some justification, as an important and incisive piece of analysis. It also perfectly and maddeningly encapsulates the problem at the heart of the rich world's economic debate and its economy, for that matter.

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Mr Summers' argument is short and sweet. The rich world risks following the path blazed by Japan in the 1990s. That is not a place we should want to go, Mr Summers reminds us. He recounts an exercise conducted in the early days of the Clinton administration, when the president's economic advisers assembled a series of long-run economic forecasts. "Japan's real GDP today is about half what we believed it would be at the time," Mr Summers somberly intones. To diagnose the malady leading the rich world down this road, he highlights two observations. First, he points out, the expansion prior to the crisis was a strange one. Borrowing and asset prices soared, he notes, but by most key measurescapacity utilisation, unemployment, and inflation the economy was not bumping up against its potential. "Even a great bubble wasn't enough to produce any excess in aggregate demand," Mr Summers says. And second, more than four years after the end of the downturn real output isn't anywhere close to regaining its pre-crisis trend. On the contrary, it has fallen farther behind that trend. There has been no recovery in the share of population working. And there is little sign that central banks will be willing or able to raise short-term interest rates meaningfully above zero any time in the next few years. The way to explain these dynamics, he suggests, is to imagine that the real, natural rate of interest is negative. And so at prevailing rates of inflation there is no way to get short-run nominal interest rates low enough to generate the sort of strong recovery that used to be common after deep recessions. What's more, he says, this state of affairs may persist for quite a long time. And that means that the crisis is not over. Monetary policy is only going to get tighter. Fiscal policy will probably get tighter and almost certainly won't be appreciably looser. Mr Summers closes by saying: We may well need, in the years ahead, to think about how we manage an economy in which the zero nominal interest rate is a chronic and systemic inhibitor of economic activity, holding our economies back, below their potential. I think it's important and welcome for someone of Mr Summers' stature to point out how serious a problem the zero lower bound is and to note that it is not going away any time soon. But this discussion sorely needs a dose of real talk, and soon. Or nominal talk, I should say. Just why the real natural rate of interest is so low is an interesting question. Maybe it's down to a global savings glut, spurred by emerging-market reserve accumulation and exchange-rate management. Maybe it is a transitory symptom of widespread deleveraging. Maybe its roots are more structural in nature: a product of demographic or technological trends. I have my own suspicions, but the important thing to point out is that for the purpose of this discussion and this crisis it doesn't matter.

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The zero lower bound is a nominal problem. However low the real interest rate, an economy can keep nominal rates safely in positive territory by running a sufficiently high rate of inflation. Back in August, another eminent economist, Robert Hall of Stanford University, contributed a paper on the zero lower bound to the Kansas City Fed's Jackon Hole conference, in which he estimated that the market-clearing real rate of interest is -4%. Now again, just why the real, natural rate of interest is currently -4% is an interesting question, but it's irrelevant to the challenge of closing the output gap. All that matters there is that expected inflation is between 1% and 2% instead of near 4%. That's the problem; that's what's keeping tens of millions of people out of work and hundreds of millions languishing in a perpetually weak economy: a couple of percentage points of inflation. And central banks are entirely to blame for that.
*** THE ECONOMIST / LINK

OECD warns of Eurozone deflation risks; suggests ECB consider non-conventional measures
As a follow-up to an earlier discussion on rising deflationary risks in the Eurozone, it seems that the OECD is now also growing concerned about this issue. The latest economic report is openly suggesting that the ECB consider non-conventional policy measures (such as LTRO or securities purchases). Below is a good summary of OECD's assessment of the situation in the euro area. OECD: In the euro area, recovery is lagging and uneven, unemployment especially among the young remains very high and inflationary pressures are very subdued. The ECB should consider further policy measures if deflationary risks become more serious. Current account adjustment is advancing in the periphery but price adjustment alone will not work given the impossibility of reconciling deflation, needed to regain competitiveness, and achieving nominal growth to support debt sustainability. Much less adjustment, if any, is taking place in surplus countries. More durable and symmetric adjustment is needed through reforms to labour and product markets, including liberalisation of services in Germany that would strengthen and rebalance demand. Weakness in the banking system remains a major drag on growth in the euro area. The Asset Quality Review and stress tests in 2014 must be implemented rigorously and followed up by bank recapitalisation where needed to restore the transmission of monetary policy, strengthen financial-system stability and get credit moving again to enhance the effectiveness of structural reforms and support growth. Failure to use this opportunity could impair confidence in European banks and sovereigns. There is progress towards banking union but the transition promises to be complex and delicate as the criteria and responsibility for regulation, supervision, and resolution of banks have to be clarified.

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OECD's chief economist, Pier Carlo Padoan, said that the Eurozone deflationary risks "may be slowly increasing" and "the ECB must be very careful and be prepared to use even nonconventional measures to beat any risk of deflation becoming permanent."

Some at the Bundesbank will likely oppose any such action by the ECB. But it's becoming increasingly difficult for German central bankers to argue that deflation is not a threat to the area's economy. Today we saw the German PPI number fall below analysts' expectations, with the year-over-year measure moving deeper into negative territory....
*** SOBER LOOK / LINK

No Sugarcoating It: A Hard Landing Is Likely

The Rise of the Carry Trade The carry trade is the most important and speculative force in international capital flows. Interest rates are different in different currencies and the across spectrum of credit quality. When the interest rate is higher in one currency than in another, it usually reflects a higher inflation rate in the former, which would lead to its depreciation against the latter. The interest rate difference reflects the inflation difference and the former's depreciation. Similarly, when two bonds have different interest rates, the difference reflects their different bankruptcy probability. Because currency depreciation and corporate bankruptcy happen infrequently, many investors or speculators cannot resist the temptation of arbitraging interest rate differences.

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This force has come to China lately and in force, especially after the Fed defied market expectations and declined to taper its US$ 85 billion monthly QE in September. The money has shown up as foreign exchange reserves, prompting the rise of shadow bank financing and land kings lately in big cities. Credit grew by roughly 14 trillion yuan in the first ten months of 2013. Nearly half is from nonbank institutions like trusts or entrusted loans. Bank loans dominated credit creation in the past. Diversification could be a good thing. But, if the change is due to rising risk and declining appetite of the banking system to lend, it is definitely a bad thing. China's situation fits the latter scenario. Land and property speculation has reached such a ridiculous level that a sane bank will try to extricate itself as fast as possible. Hence, the borrowers have to increase the interest rate for other sources of funding. The rise of the carry trade into China is due to the combination of the Fed's delaying tapering and the declining appetite of banks to lend. The cross-border carry trade has a powerful effect on the monetary condition in the recipient country. Rising forex reserves lead to rising money supply. The resulting inflationary pressure supports speculation. Hence, when land prices rise, it seems that speculation is working, which attracts more to follow. The supply side of the carry trade is, ironically, driven by declining profitability in nonspeculative businesses. Many, if not most, private businesses in the eastern part of the country have slowed dramatically. Some have preserved past profits and are looking at loan sharking as a new business. Some are looking to speculation to bet on the recovery of their businesses. For example, as the property market has struggled in most smaller cities, some developers have gone to loan sharks for funding to bet on land in big cities. They have often borrowed from the local businesses that are shifting from production to lending. Even some of the biggest developers have gone to trusts for loans with high interest rates. Such loans go for double-digit interest rates even for the highest quality borrowers. The extra financing cost, compared to bank loans, is similar to the profit margin for the industry now. Hence, the high-interest loan can only be justified by betting on land prices surging continuously. The carry trade and land speculation are closely intertwined. The declining profitability in the real economy has driven many to either loan sharking or land speculation. The Fed's QE incentivizes them. China's high interest rate, supported by expected speculative profit, pulls them in. The resulting monetary surge makes the speculation profitable for the time being....
*** ANDY XIE / LINK

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Bitcoin Gaining Validity Fuels Rally in Virtual Currency

Bitcoin's rally is accelerating as the U.S. Department of Justice's description of the digital currency as a "legal means of exchange" bolsters the prospect of wider acceptance as an alternative payment system. Bitcoins, which exist as software and aren't regulated by any country or banking authority, surged to a record $744 on Bitstamp, an active Web-based exchange where they trade for dollars, euros and other currencies, after the remarks at a hearing by the U.S. Senate's Homeland Security and Governmental Affairs Committee. The gains extended an advance that has seen the price of Bitcoins quadruple in the past two months and climb 45-fold so far this year. Growing interest from investors in China and a limited supply of Bitcoins have also been fueling the increase in price, while last month's closing of the Silk Road Hidden Website where people could obtain drugs, guns and other illicit goods using Bitcoins was already spurring speculators to bet Bitcoins would gain more mainstream acceptance. Now, government agencies from the U.S. Secret Service to the Financial Crimes Enforcement Network have weighed in to say that the virtual currency that's designed to be difficult to trace has potential benefits, as well as risks. "These hearings mean Bitcoin is finally coming into its own; it's a real thing and it's not going anywhere and these hearings highlight that," said Jerry Brito, senior research fellow at the Mercatus Center at George Mason University. Introduced in 2008 by a programmer or group of programmers going under the name of Satoshi Nakamoto, Bitcoin is being used to pay for everything from Gummi bears to smartphones on the Internet. There are 12 million Bitcoins in circulation, according to Bitcoincharts, a website that tracks activity across various exchanges. Bitcoins can potentially reduce banking-transaction fees, making it an attractive tender for those seeking to trade via the Web or in stores. Tom Carper, a Democrat from Delaware who is chairman of the Senate committee, said today that while "knowledge and expectation gaps are wide," the government should establish rules to ensure legitimate use. "We all recognize that virtual currencies, in and of themselves, are not illegal," Mythili Raman, acting assistant attorney general at the Justice Department's criminal division, said at the hearing. "We are nimble enough and aggressive enough to be able to combat the threat. We are up to the challenge." Speculative trades exceeded transactions for goods and services by 20 to 25 times in the latest quarter, said Vladimir Maslyakov, co-founder of brokerage Exante Ltd., which has set up a Bitcoin investment fund. "The real economy is not growing as fast as the price," said Maslyakov, who said his firm now holds about 60,000 Bitcoins and is seeking approval to solicit funds from U.S. investors. "Speculators are usually much faster."
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Justin Hanneman, who does technology support for a Web-hosting company in Austin, Texas, said he has invested more than $9,000 in Bitcoins since April. "I cling to them for dear life," said the 23-year-old, who plans to hold onto almost all of his 50plus Bitcoins now worth about $30,000 for at least a year. The demand for Bitcoins, governed by rules embedded in the software of the virtual currency, is outstripping supply, fueling the price surge. That also makes it difficult for people to use the digital money to buy goods and services, since the value of items priced in Bitcoins is difficult to pin down....
*** BLOOMBERG / LINK

The Euro Debate Greece Is Not Having

You may be amongst those who are not convinced of the devastating effect that the policy mix and pace of fiscal contraction in Greece is having on society. If so, you may subscribe to the official line trotted out by the countrys lenders that the program is helping the country regain competitiveness and the economy fix its external imbalances. This is the greater cause that is demanding such a sacrifice. There is no gain without pain, goes the argument. However, more than three years into the troika program there is very little evidence that one of these key objectives has actually been achieved. It is extremely doubtful whether the Greek economy is indeed regaining part of the competitiveness it lost after joining the euro. There is no dispute that Greece's current account, from a staggering deficit of close to 35 billion euros in 2008, is nearing balance. But the majority of the correction of the trade deficit is covered by a collapse in imports due to domestic demand almost evaporating after three years of austerity and disposable incomes plummeting by almost a third. It is a fact that Greek exports are on the rise and that 2013 will be a record year for tourism but Greece's total exports will still fall short of the 56-billion-euro level they reached in 2008, a time when the country was uncompetitive, if you believe the prevailing argument. In a June document evaluating its involvement in the Greek program back in May 2010, the IMF includes the chart below, which shows that although labour costs have nosedived since 2010, prices which really reflect how competitive you are have hardly moved to cover the lost competitiveness. There is much to be debated about the prices resistance to falling at the same pace as wages, and it is often one of the troika's arguments that there is not enough competition in the products markets. However, aside from the fact that prices are known to be sticky downwards, in a cash-starved economy that is in a downward spiral it may even be a prudent management decision to keep prices up, despite falling wages. This helps compensate for shrinking revenues and profits.

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The internal devaluation rationale is that, in the absence of the currency devaluation which automatically makes everything produced domestically cheaper to the outside world, you suppress domestic demand with the aim of reducing imports and correcting the trade balance. You also implement cuts in costs which are variable, such as wages, unlike other input factors that further feed the effort to push down domestic demand. This naturally leads to higher unemployment and more people without disposable income further suppressing domestic demand. This places the wage negotiating advantage on the employers side due to the oversupply of labour pushing wages downward either via new collective agreements or wage negotiations at the enterprise level. Overall, it creates a perfect feedback loop and a concerted effort to sink an economy. You might think all this is worth it if there is light at the end of tunnel but that is not true in Greece's case. After three years of brutal austerity policies, Greece remains in a heavily overpriced currency for its economic standards....
*** MACROPOLIS / LINK

Charts That Make You Go Hmmm...

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Source: Google Trends

Source: The Economist

Fifty years ago this week President John Kennedy was assassinated by Lee Harvey

Oswald, a Castro-supporting communist who had learned to shoot straight while in the US Marines. Books such as Gerald Posner's "Case Closed" have painstakingly debunked the various alternative theories: that he fell victim to multiple gunmen, elaborate plots involving the CIA, the Mafia and who knows what other shadowy groups. The "magic bullet", modern ballistics show, behaved normally. There was no second gunman. Nothing interesting happened on the grassy knoll. And the idea that Dallas, the "city of hate", was somehow collectively to blame, is absurd.

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Yet still the conspiracy theories live on, inspired by popular books such as Mark Lane's "Rush to Judgment", by Oliver Stone's preposterous movie "JFK", and by endless speculation online. Was Lyndon Johnson involved in a dastardly coup d'tat, as Mr Stone hints? Of course not. But half a century later, 61% of Americans believe in a conspiracy. Amazingly, this is the lowest level since the late 1960s....
*** ECONOMIST / LINK

With the current bull market now the 4th longest in history, we thought it worth

noting just how unusual this business cycle has been. As the following chart shows, the current "expansion" has lasted longer than 80% of all the 33 previous NBER expansionary periods. Of course, given projections from Wall Street to the Fed, there will never be another recession (by decree) ever again....

Source: Zerohedge

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Words That Make You Go Hmmm...

Barry Sternlicht has
been vocal in recent weeks about his fears over both the state of the US balance sheet and the general euphoria he observes in all kinds of markets. In this clip he answers the question "What will the Fed do and when?" both succinctly and brilliantly... CLICK TO WATCH

Candid and brilliant

This interview with the great Stanley Druckenmiller is absolutely not to be missed. Opportunities to gain insight into the minds of investors as accomplished as Mr. Druckenmiller are rare and should be grasped with both hands. Fifteen minutes of your life you will NOT want back. Guaranteed. CLICK TO WATCH

Andrew Maguire's latest

interview with Eric King is as fascinating as we've come to expect when these two get together to discuss the gold and silver markets. Andrew delves into the set-ups in both metals and looks for answers to the recent sell-off as well as the likely next moves...

CLICK TO LISTEN

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and finally...

Street art has become something of a phenomenon in recent years, and this slideshow,
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Hmmm...

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

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

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