Hmmm Apr 09 2012

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THINGS THAT MAKE YOU GO

HmmmA walk around the fringes of nance

09 April 2012 1

For AFREE Subscription to Tings Tat Make You Go Hmmm..... clickHERE

...disbursements to Greece by the EFSF and the IMF will

still be conditional on compliance with conditionality EUrOpEAN COMMiSSiON ,THE SECOND ECONOMIC ADJUSTMENT PROGRAMME FOR GREECEVIA MISH

But when someone is on a winninghorse, and everything looks wonderful,its very hard as an outsider to persuade

them something is wrong James Wolensohn

i st astde fe ke a bad de on a hose. i ony owe t tothe horses good nature that I am not thrown o at thisvey moment

Ludwig Wittgenstein

A good hose shoud be sedom sued homas Fuller

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Tis week asi was mung ove

how to oganze the

chaoc collecon

of thoughts n my

head, a stange

thng haened; i

had a banwave and,

literally a maer of min-

utes aerwards, a friend

of mne hee n Sngaoe

seendtousy sent me a

nk to

a vdeofeatu-

ing the exact event that I had decided to use to

e that bundle of chaos together (thanks Craig).

What was that event, i hea you ask? We, t

was a tale of two Dicks.

In April 1956, at the storied Aintree racecourse,

just outsde lveoo n the Noth of Engand,

29 horses milled around waing for the starter

to ase the tae and begn the 110th un-

ning of the Grand Naonal the most famous

steeplechase in the world, run over 4 miles and856 yards with 30 daunng fences to conquer

before horses cross the nish line.

Among the favoutes that yea was a 10 yea-

od gedng beongng to HM Queen Ezabeth

the Queen Mother (one of two runners she had

in the eld) called Devon Loch, sired by Loch

Lomond, which had won two races already that

year. Sing astride Devon Loch was Her Maj-

estys favourite jockey, Richard Stanley Dick

Francis, a man who would go on to become one

of Britains most successful authors once his rid-ing career ended a year later aer a serious fall.

The rst fence of the 30 claimed the favourite,

Must along with the highly-fancied High

Guard and Devon Loch sat nicely in the pack

just o the lead, jumping well within himself

and looking completely at ease. By the me the

hoses had un two mes, howeve, the gue-

ing race began to take its toll and horse aer

hose fe by the waysde. Nne hoses woud fa

at the last ten fences unl, as they rounded the

nal bend and hit the home straight, there were

just 10 horses sll standing, thundering towards

the nish:

the crowd surged to the rails and the

cheers all centred on the faraway, bobbing

head and swinging hooves of Devon Loch.

With three others he took the last thorn

fence with great li and rhythm. You could

see some of the hooves hing the brush-

wood but no one came down. Devon Loch

got rst into stride and was soon pounding

past the stands, ve lengths clear of ESB,

with Francis already stretching out a hand

for his bay-leaves.

Francis had the race in his grasp. Forty yards

from the line, all fences jumped and a clear run

home with the crowd cheering him on there

was nothing that could possibly go wrong.

Meanwhile, trailing behind Francis, on E.S.B.

was another Dick David Dick a gregarious,

larger-than-life man (no mean feat for a jockey)

who, according to perhaps the worlds most

illustriously-tled sports pundit, John Georey

Tristram Lawrence, 4th Baron Trevethin, 2ndBaron Oaksey, was quite a character;

The stories he told that evening were

unforgeable too - the foxes theyd killed,

the fences he had jumped, the beauful

ladies he had chased and how pleased they

all were to be caught. All the me I knew

him, on gallops or schooling grounds, in

racecourse changing rooms, Turkish baths,

restaurants and bars, even, occasionally,

posh London clubs, Dave was always burst-

ing with comparable tales.Somemes they needed a sizeable pinch of

salt and most, Im glad to say, were about

as polically incorrect as any such tales can

be.

Go on then you, lucky devil Dick later recalled

saying out loud as he watched Francis and Dev-

on Loch accelerate away from him, but then,

without any warning, something uerly bizarre

and completely unexpected happened:

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(UK Daily Telegraph): ...what happened next

remains one of sports greatest mysteries;

50 yards from the line and with the enrenaon cheering a Royal victory, Devon Loch

pricked up his ears, appeared to jump a

phantom obstacle, and belly-opped to the

turf with his four legs splayed out like Bambi

on iceIn what can have been no more than

two seconds - but it seemed like an age -

Francis threw his weight forward and his

mount struggled to his feet. Could be sll do

it? It looked as though he might. The rst

royal victory in the Naonal since 1900 only

forty yards away.

The crowd was shocked: almost hamstrung

itself. It was like a modern nightmare, the

will without the power. But down went the

hind legs again as ESB rushed triumphantly

past. Francis dismounted, threw down his

whip and wept

Nobody will ever be able to oer an explana-

on for Devon Lochs unexpected tumble that

doesnt contain a certain amount of conjecture;

Francis himself maintained that a loud cheer

from the crowd unseled the horse whilst oth-ers cited cramp, a heart aack and even the

presence of a shadow cast by the Water Jump

fence as the reason behind the fall, but the

tuth w neve be known. A we DO know s

that an outcome that was taken as certain by

everybody watching it suddenly proved any-

thing but and a far dierent ending transpired

that caught everybody o-guard.

Recently, the debate ovethe fate of the global economy has connuedto rage with each release of a major economic

data point being picked apart and tossed back

and forth from bears to bulls as each group

aempts to make the unequivocal case for the

outcome they feel sure awaits us at the nish

ne.

Over the last few months, the short-priced

favorite - judging by the performance of US

equity markets - has been Recovery - a three-

year old sired by Intervenon, with Return to

Gowth, a somewhat moody yeang aso at-

tracng some decent aenon from punters.

But, as we enter the laer stages of this parcu-

lar race, it is worth taking another look at the

other horses in the eld that, should the favou-

rites stumble, could come storming through and

cross the line rst. Many of them are outsiders

that have only been backed by those twisted

and totued sous who send evey wakng

hou studyng the fom, sevea of them ae

popular with psters but have struggled to

win over a disbelieving public and more than a

few have been acvely talked down as contend-

ers by the owners of Recovery and Return toGrowth. The one thing they ALL have in com-

mon though, is that, this being a horse race, as

the 1956 Grand Naonal proved, we shouldnt

take a win for the favourite for granted unl it

has crossed the line.

And with that, lets take a look at a selecon of

the runners and riders and oer a lile back-

ground as to their chances of a surprise victory:

LADY OF SPAIN

Jockey: Mariano Rajoy

Form: 7-09--800

This lly has confused

many observers of late

with her errac perfor-

mances over longer distances. Last year she

was wrien o as a serious contender as the

debate raged over whether Grecian Earn

would be scratched and all eyes turned to

the big stallion Arrivederci Roma who was

looking a good bet with some steady work

on the gallops.

General awareness of the issues facing Spain

is nally rising - the 22% unemployment rate

and the 50% youth unemployment rate have

become stascs that roll o the tongue of

even the most casual observer of the countrys

scal and societal dynamics. But Spains real

obems e n the eaty of he ubshed

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govenment debt numbes and at the heat of

her banking system. It is in these two places

that any clues lie as to her chances of upsengRecovery on its dash for the line.

Spain is a big economy - the worlds 12th-larg-

est in fact, which puts it just behind Russia and

ahead of Australia (13th), Mexico (14th) and

South Korea (15th) - and if it were to require a

baout, the sze of that baout woud soak u

the vast majority of the EFSF/ESM combined

repower.

Recently, focus has trained

on the veracity of the

decit numbers being dis-

semnated by the Sansh

egona govenments wth

many commentators and

observers posing that

perhaps things arent quite

as they seem:

(NYTimes): And there

is that hidden debt,

most of it in unpaid

bills, which is not in-cluded in Spains total

naonal indebtedness

of $915 billion. That

could easily amount to $25 billion to $40 bil-

lion more, experts say.

And the bad news probably is not over.

Some experts believe that as newly elected

members of Mr. Rajoys Popular Party take

control of some regional administraons,

they are sure to unearth even more nancial

excesses. That is what happened in Cata-lonia, where the hidden debt problem

rst popped up this year. When elecons

were held there in 2010, the rao of debt to

regional G.D.P. was believed to be less than

2 percent. But aer the vote, the deparng

government disclosed that its full year de-

cit could be 3.3 percent. The new govern-

ment later revised that gure again, to 3.8

percent.

Experts believe that this kind of markup is

possible elsewhere, including Andalusia in

the south, which has Seville as its capital.

Andalusia could be spectacular, Mr. deQuirs said...

Greece, anybody?

Spains regional governments account for 50%

of public spending and the problem of unpaid

debts held by local and regional governments

is not geng any beer as can be seen in the

chart, below.

But t s at the heat of he bankng system that

Sans ea obem es.

Spains property bubble was truly epic and

the eadjustment needed has smy not been

eected as can-kicking has reached a whole

new dimension in Spain. Roughly 20% of the

400bln in loans outstanding are believed to be

ethe n defaut of key to be shoty and theprovisions currently held against them (50bln)

are woefully inadequate (assuming, of course,

these gures arent hugely understang the

problem once again).

A recent report by Open Europe, ad bae the

obems at the heat of the Sansh bankng

system for all the world to see:

(Open Europe): The housing boom and bust

in Spain is well documented. However, de-

spite the massive increase in prices over the

SOURCE: BANK OF SPAIN/OPEN EUROPE

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last decade housing prices in Spain are yet

to fully adjust. This is parcularly stark when

compared to Ireland, which experienced a

similar bubble but has seen prices fall much

more steeply:

On the surface the lower reducon in house

prices may seem posive for Spain, but the

decline picked up substanally at the end of

last year (annual fall of 11.2%). The mas-sive oversupply of housing and collapse in

demand, means prices have much further to

fall. In all likelihood, given

the similar situaon, house

prices will have to fall as far

as they did in Ireland, that

is, another 35%. Due to the

greater exibility in wage

costs and output costs in

Ireland (thanks to its exi-

ble labour market and open

economy), the sector wasable to adjust aer the bust

much more quickly than in

Spain. A similar adjustment

must and will take place

in Spain but due to wage

sckiness it is taking much

longer.

A steep decline in real

estate prices will in turn increase the num-

ber of residenal and commercial borrowers

defaulng on their loans, exposing banks to

large losses... The level of doubul loans

on the books of Sansh banks has sky-

rocketed since the start of the nancial crisisand now stands at 136bn. This means that,

of all their loans dispersed, 7.6% are now

judged as doubul, and can be seen as po-

tenally toxic and at serious risk of default.

Taken together, there are currently 80bn in

doubul loans to the real estate and con-

strucon sectors - equal to 20% of all loans

to these sectors. This results from around a

20% fall in real estate prices. If a further 35%

decrease is sll to come, things could get a

lot worse. Proporonately, we could expectthe number of doubul loans to double. In

any case, with further falls in prices many of

these currently doubul loans will default

while an even larger share will become

viewed as uncertain.

This means that the 50bn (shown by thin

red line on graph, below) that the govern-

ment recently ordered banks to put aside to

cover potenal losses is far from adequate.

The current provisions cover only 37% of

total doubul loans and 62.5% of doubulloans to the construcon and real estate

sectors. This seems inadequate even in the

current posion, but will be woefully short if

the condions worsen.

SOURCE: EUROSTAT

SOURCE: BANK OF SPAIN

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Thee s enty moe n the Oen Euoe eot

and plenty more to come from Spain, but lets

move on to anothe unne that mght have asay in the outcome:

FRENCH FRIED

Jockey: To Be Decided

Form: 6009----0

Jockey selecon for this

temperamental mount

is going to be a last-

minute decision and the outcome of theselecon process will go a long way towards

determining whether French Fried could

potenally upset One Europe, Recovery

and Return to Growth.

put A 22nd n you day foks. That s the

day when the rst round of jockey selecon

begins as France goes to the polls.

As recently as a couple of weeks ago, Nico-

las Sarkozy was trailing Socialist frontrunner

Fanos Hoande handy n a suveys but hehas recently staged something of a come-from-

behind charge of his own.

This week, the diminuve Frenchman nally un-

veiled his manifesto and a leer to the French

people ahead of the Presidenal elecons in

two weeks:

(UK Daily Telegraph): ...Mr. Sarkozy said

France faced a historic choice between his

austerity measures or uncontrolled spending

that would bring the country to its knees.

Certain countries in Europe are today on

the edge of a precipice, he warned, accus-

ing Mr. Hollande, his Socialist challenger,

of promising a fesval of new spending

that no-one knows how to pay for, as if the

world did not exist, Europe did not exist, the

crisis did not exist.... The situaon today

that our Spanish friends are going through,

that our Greek friends have gone through,

reminds us of reality. Look at the situaon

in Spain, aer seven years of Socialist rule,

Mr. Sarkozy said... Promising to balance the

budget by 2016, he said parliament wouldpass a golden rule in July obliging govern-

ments to have a plan to balance their books.

The Right-winger said he would connue to

reduce the size of the French state, mainly

by replacing half of rering state sector

workers and would save 115 billion euros

three quarters through cuts and the rest via

tax rises.

You have to hand it to Sarkozy - campaigning

in France on a plaorm of austerity is a brave

thng to do.

Frances welfare expenditure (including educa-

on) is an astounding 34.9% of GDP, according

to the OECD, pung it behind only Denmark

and Sweden in percentage terms (by way of

comparison, the UK gure is 25.9%, the US

19.4% and Greece 28.4%). As we have wit-

nessed in recent elecons across the world,

there are two phenomena which play out with

almost universal regularity:

Incumbents get voted out; and Austerity is NOT what one would call a

vote-geer

Fo hs at, Hoande has gone the othe way

and made some very populist pledges:

(Reuters): French presidenal front-runner

Franois Hollande promised on Wednesday

to freeze fuel prices, slash government min-

isters salaries and boost welfare payouts

to families in a rush of legislaon in his rst

eight weeks in oce...

The measures largely re-packaged Hol-

landes elecon manifesto, launched in Janu-

ary, but put a rm metable on a series of

economic reforms between the nal round

of vong on May 6 and the parliamentary

recess at the end of June.

They included a three-month freeze on fuel

prices, a 25 percent increase in annual al-

lowances for parents of school children and

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guaranteed above-inaon interest rates

on tax-free savings accounts, as ways to

bolster consumers purchasing power.

Hollande said he would also cut the sala-

ries of the president and cabinet minis-

ters by 30 percent and set new limits on

ministerial sta numbers. Other measures

centred on employment, consumer spend-

ing and managing public nances.

The Economist took a less-policized view of

Frances situaon in a recent arcle jaunly

entled A Country In Denial:

(Economist): ...Yet what is most strikingabout the French elecon is how lile

anybody is saying about the countrys dire

economic straits... The candidates dish

out at least as many promises to spend

more as to spend less. Nobody has a

serious agenda for reducing Frances eye-

watering taxes. Mr. Sarkozy, who in 2007

promised reform with talk of a rupture,

now oers voters proteconism, aacks on

French tax exiles, threats to quit Europes

passport-free Schengen zone and (at leastbefore Toulouse) talk of the evils of immigra-

on and halal meat. Mr. Hollande promises

to expand the state, creang 60,000 teach-

ing posts, parally roll back Mr. Sarkozys

rise in the pension age from 60 to 62, and

squeeze the rich (whom he once cheerfully

said he did not like), with a 75% top income-

tax rate...

The Economist goes on to provide some details

around those dire economic straits:

France has not balanced its books since

1974. Public debt stands at 90% of GDP

and rising. Public spending, at 56% of GDP,

gobbles up a bigger chunk of output than

in any other euro-zone countrymore even

than in Sweden. The banks are undercapi-

talised. Unemployment is higher than at

any me since the late 1990s and has not

fallen below 7% in nearly 30 years, creang

chronic joblessness in the crime-ridden ban-

lieues that ring Frances big cies. Exports

are stagnang while they roar ahead in

Germany. France now has the euro zones

largest current-account decit in nominal

terms. Perhaps France could live on credit

before the nancial crisis, when borrowing

was easy. Not any more. Indeed, a sluggish

and unreformed France might even nditself at the centre of the next euro crisis.

It is not unusual for policians to avoid

some ugly truths during elecons; but it is

unusual, in recent mes in Europe, to ignore

them as completely as French policians are

doing.

Whichever jockey wins the run-o on May

6th (and its hard to see how that could be

anything but a straight ght between Sarkozy

and Hollande, despite the gains at the polical

extemes by Mane le pen on the ght and

Jean-Luc Mlenchon on the le), there is one

fact that cant be denied; if whoever ends up

astride French Fried DOESNT take steps to try

and x Frances nances, the markets will NOT

be happy:

(Economist): The inconvenient truth is that

whoever emerges the victor on May 6th

will need to show a tough approach to the

decit, in the face of wary bond markets

SOURCE: ECONOMIST

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and possible recession. A President Sarkozy

would need to nd new budget savings,

despite his promise to protect the Frenchfrom austerity. A President Hollande would

be forced to postpone or scrap some of his

spending pledges, and would get a taste of

German steeliness if he insisted on pushing

Chancellor Angela Merkel on the subject of

reviewing the scal compact. Either way,

the result would be a shock for the French,

and one that neither candidate has remotely

prepared them for.

The temeamenta mount may soon begn to

aract a lot of smart money...

Yankee Douleur

Jockey: Ben Bernanke

Form: 11-232----

This big, strong horse

used to be a happy

frontrunner but, since a

nasty fall in 2008 he has been content to sit

in the pack while trying to regain his for-mer condence. Weak runs by other horses

rather than any great strength of his own

have tended to push him to the front of the

pack

There is only one real jockey on this horse and

it isnt Barack Obama or any of the pretenders

to his crown currently inging custard pies at

each other in the race for the Clown of the Year

Awad vying for the Republican nominaon.

The acvies of the Bernanke Fed have beengrowing ever-more errac of late and one cant

he but wonde whethe they know somethng

the est of us dont.

Having spent the last several years wildly cheer-

ing any improvement in economic data and

championing even mildly stronger data as the

start of a strong recovery (anybody remember

those Green Shoots?), the Bernanke Fed has

atey gone out of ts way to ay DOWN any

sgns of stength and hghght the ongong

concern about the strength of the economy.

Of course, having promised the world zero rates

fo anothe two yeas, Benanke s keeny awae

that a REAL recovery would entail raising those

ates and by now, even the Chaman of the

Fedea reseve has obaby eased that, wth

markets now addicted to the sugar rush of free

money and wth the eve of US debt needng

to be renanced presenng a very clear and

very present danger, being backed into a corner

where he had to ghten the spigots would most

key end vey bady ndeed.

It is doubtless no coincidence that recently, Ber-

nanke has been gracing various media outlets

more frequently than the Kardashians. There

were the series of lectures to George Washing-

ton University students (during which Bernanke

pounded gold and proclaimed the Fed was the

reason the world was saved), we saw the as-

tounding cover of The Atlanc which portrayed

Bernanke as a quasi Green Hornet (sans mask),

and, of course, the Prime Time ABC interview

with Diane Sawyer, during which The Chairman

SOURCE: THE ATLANTIC

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- a man who, n the wods of Sawye, ...aey

speaks but agreed to speak to us today con-

sstenty ayed down Sawyes ugng that heproclaim the recovery real or sustaining.

But the reason for Bernankes recence to once

again trumpet even mildly encouraging data

(unlike President Obama who wastes no oppor-

tunity to proclaim the rebirth of the American

economy) most likely lies in the debt renanc-

ing schedule of the United States in the coming

two yeas.

In 2012, roughly $3 trillion or 30% of US pub-

licly-traded debt comes due (chart, below),

making this year the biggest renancing in US

history. Of that $3 trillion, April sees a colossal

$600bln of debt coming due (part of a stagger-

ing $1.5trln scheduled to roll over in Q2 alone)

which means one thing - buyers of US bonds

MUST be kept willing to pay current market

prices (or higher) for US federal debt and the

best way to ensure that happens is to connue

to warn that the economy is sll fragile andcould p over at any second (my thanks to my

good friend AR for those numbers).

Any weakness n the bond makets dung the

rest of this quarter will surely have the FOMC

deciding it was in the best interests of all con-

cerned that just a lile QE3 be unveiled - tem-

porarily, of course.

The recent release of the minutes from the

most recent FOMC meeng roiled markets with

what they DiDNT say as any ea hnt of futhe

easing was played down:

*FOMC SAW NO NEED TO EASE ANEW UN-

LESS GROWTH SLOWS, MINUTES SHOW

Anothe stange henomenon atey has been

the unanmty of message fom a boad of Fed

govenos who have habtuay hed wdy df-

fering views on the necessity for any kind of

further smulus. There has been a noceably

consistent message in speeches given by com-

miee members of late - in direct contrast to

the mxed messages that they have gven us n

yeas ast.

But having a consistent message that is causingdsaontment to makets s not aways the

shewdest move to make and so, ght on

cue, the day AFTER the release of the FOMC

minutes, we saw this lile gem hit the wires:

FEDS WILLIAMS SAYS QE3 NOT OFF THE

TABLE

Sgh.

its an outsde bet at best ght now - based

upon the relave strengths of the other

horses in the eld - but any stumble byRecovery or Return to Growth could pave

the way for Yankee Douleur to come screaming

through the eld.

CHINESE DIRTY LAUNDRY

Jockey: Xi Jinping

Form: ??-88--6-

Very lile is known about

the chances of this huge

beast who will be racing

under a new jockey. Opinions are divided

amongst some of the best judges in the

game and equally strong cases have been

made for both a strong nish and a steady,

unevenul race. This horse may be one to

watch next year.

The municipality of Chongqing in Chinas south-

west consists of 19 districts, 19 counes, 1,259

SOURCE: BLOOMBERG

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towns, townships and sub-districts and 1 hell of

a personality clash.

The egon s steeed n the knd of hstoy one

only nds in China:

(Wikipedia): Tradion associates Chongqing

with the semi-legendary State of Ba that the

Ba people supposedly established during the

eleventh century BCE. By 316 BCE, however,

it had been overrun by the State of Qin.

The Qin emperor ordered a new city to be

constructed, which was called Jiang and Chu

Prefecture.

Chongqing was subsequently renamed in581 CE and later 1102, to Yu Prefecture and

then Gong Prefecture. It received its current

name in 1189, aer Prince Zhao Dun of the

Southern Song Dynasty described his crown-

ing as king and then Emperor Guangzong as

a double celebraon. Hence, Yu Prefecture

became Chongqing subprefecture to mark

the occasion.

In 1362, (Yuan Dynasty), Ming Yuzhen, a

peasant rebelling leader, established the

Daxia Kingdom at Chongqing for a shortme.

In 1621 (Ming Dynasty), another short-lived

kingdom of Daliang was established by She

Chongming with Chongqing as its capital.

Between 16271645, with the fall of the

Ming Dynasty, Chongqing, together with

the rest of Sichuan, were captured by the

Revolts who overthrew the Ming Dynasty

across the naon. Later during the Qing

Dynasty, immigraon to Chongqing andSichuan took place with the support of Qing

emperor.

Chongqing also houses Consulates General for

the UK, France, Japan, the US and Germany

(amongst others) and, in 1891 became the rst

nand ot oen to foegnes. in Febuay,

2010 it was designated one of the ve Naonal

Central/Core cies along with Beijing, Shanghai,

Guangzhou and Tanjn

Chongqing may well be the most important city

in China nobody had heard of - at least not unl

the recent events surrounding Bo Xilais ousteras Party Chief - and, pung aside the debate

ove whethe Chna s n fo a had andng o

some form of the fabled Goldilocks outcome,

the events in that part of China potenally

represent the biggest chance of an unexpected

surge by Chinese Dirty Laundry upseng both

Recovery and Return to Growth.

We have covered Bos spectacular fall from

grace in recent edions of this form guide, but

with the 18th NPC sll six months away, the

smouldering wreckage of Bos polical careercould potenally reignite without warning and

cause all kinds of trouble.

2012 marks only the third me since the ouster

of Chiang Kai Sheks Kuomintang (KMT) by the

Communist Party of China (CPC) in 1949 that

both US elecons and Chinas Naonal Party

Congress (NPC) will be held in the same year -

this me within weeks of each other. The last

two such events were each of signicance to

Chna n the own way.

1992 saw B Cnton defeat Geoge H.W. Bush

in the US whilst a few weeks earlier, the 14th

Congress in China was the rst since the rere-

ment of Deng Xiaoping and the tragic events of

Tiananmen Square. Jiang Zeminin was installed

as CPC General Secretary and Hu Jintao made

his rst appearance on the Politburo Standing

Commiee.

In 1956, Dwight D. Eisenhowers re-elecon in

a landslide over Adlai Stevenson, was preceded

by the 8th Chinese NPC at which Mao ZedongThought was removed from the constuon

and Deng rst gained real prominence.

The eod mmedatey foowng 8th Congess

was one of temendous uheava n Chna as

the Great Proletarian Cultural Revoluon culmi-

nated n a uge of the vast majoty of those n

polical power. Deng was labeled a traitorous

scab and renegade and removed from oce

while Maos closest comrade-in-arms, Lin Biao

(not to be confused with Happy Days Sco

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11.THINGS TH AT MAKE YOU GOHmmm...

09 April 2012 11

Baio) was designated as

his successor.

Deste Nxons and-

mak vst to Chna, The

Gang of Fou sezed

owe and unged Ch-

na deeper into isolaon

and ntena tumo

unl a PLA-led coup

toppled them in Oc-

tobe 1976 - estong

Deng to prominence.

Whateve iS gong on n

the corridors of Chi-

nese owe s unknown

to the West, but what

is for certain is that

SOMETHiNG s haen-

ing and the chances that this something could

be both surprising and signicant are, for the

me being at least, of far more importance in

the wider context than the economic data being

eeased by the Chnese govenment.

People oen ask me whether we can believeChinese economic numbers and my answer is

always the same:

No. Of course we cant. BUT, in their way, Chi-

nese gures possess an honesty that you wont

nd in supposedly legimate Western numbers.

The Chnese aent bg on evsons o seasona

adjustments ke the ees n the West, but,

most motanty, thee s always a message

implicit in ocial Chinese communicaons.

The recent growth number just below 8%, for

exame, s Chnas way of sayng thngs aesowng, but not n a dsastous way. lowe you

expectaons, but understand that we are in

control of this.

The Ocial PMI reading showing mild expan-

sion - in direct contradicon to the HSBC ver-

sion which showed contracon - was a mes-

sage that the Chinese SoE sector is strong and

receiving the government support it needs to

connue expansion - albeit at a slower pace.

Whatever ocial news comes out of China

regarding the fallout from Bo Xilais evicon

from power will need to be watched extremelycarefully so we can understand exactly how this

horse is likely to run. Events of a polical nature

could very easily spur Chinese Dirty Laundry

past the rest of the eld.

In the interests of not takng utoo much more of your me, a few other horses

with the potenal to upset Recovery and

retun to Gowth ae sted beow wth a bef

form guide:

BROKEN BRITAIN

Jockey: Cameron Clegg

Form: --0783-0

Previously a thorough-

bred, this nag has fallen

on slender mes of late

and connues to aer to deceive. Tough

talk out of the stable has aracted a lot of

dumb money but an outside chance to causea big upset means many a wary eye should

be focused here.

The UKs fauxstety ogam has done nothng

to sele her debt problems and the gures for

the next couple of years make horrible reading

(see Things That Make You Go Hmmm..... March

25 2012).

GRECIAN EARN

Jockey: Angela Merkel

Form: --0783-0

This once mighty horse

collapsed last year and

was lucky not to be shot

on the course. Instead, an internaonal

medical team worked relessly in an at-

tempt to salvage something many thought

t only for glue. Running again, though with

something of a limping gait, this horse has

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12.THINGS TH AT MAKE YOU GOHmmm...

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been largely forgoen. Punters shouldnt

completely write o its chances of having a

say in the outcome.

Greeces exchanged bonds are currently trad-

ing at 0.1825 implying a further default is all

but nevtabe. i have sad t befoe, i w say t

again; Greece will ulmately be forced to exit

the euro - the only queson is; will it be an

odey ext?

SETTING SUN

Jockey: Father Time

Form: --0783-0

A prolonged slump in

form has caused most

punters to give up on

this horse completely, despite its strong

pedigree. A long line of weak jockeys

and a poor trainer who has shown a

tendency to sck with methods that

have been proven not to work have

made this horse a huge disappoint-

ment to many punters.

Japans twin debt and demographic

nightmares will eventually come home

to oost and when they do, the esuts

w be a whoe new knd of ugy. We

arent there yet, but each day that passes sees

Japans demographic me-bomb get closer to

detonaon and when the end comes, it will be

swi and brutal.

BLACK BEAUTY

Jockey: Unknown

Form: --??--??

A real dark horse this

one and nobody knows

whether it will enter

the race, how it will run if it does or who

will ride it. Last ran back in 2008 when it

notched up a stellar season with big wins in

both March and September. A really tough

one to handicap.

Potenal Black Swan events are myriad - rang-

ing from an aack on Iran to an overthrow of

the Saudi government to increased belligerence

from the new regime in Pyongyang, mulple

sovereign downgrades or an oil shock.

Coordinated recessions in the US and the Euro-

zone cant be ruled out and nor can a collapse

of the dollar, civil unrest in Russia or more geo-

logical events such as those seen in Fukushima

last March.... in short, the list is long.

To sum up; it is sll anybodys race and the bestwe can do is hope that neither Recovery nor

Return to Growth end up at on their belly as

another, far less fancied horse storms by them.

Once again I have taken u waytoo much of your valuable me so I shall leave

you alone to discover what awaits you in the

ages of Thngs That Make You Go Hmmm.....

ths week.

You will nd gold, Spain, Greece, German solar

companies, Easter eggs, Gulf oil consumpon,

John Mauldin, Ambrose Evans-Pritchard, Ted

Butler, a professor wearing a cowboy e, Niall

Ferguson, charts, more charts, Blythe Masters,

more charts and some black & white footage of

a horse race run over 50 years ago.

Until next time.....

?

?

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09 April 2012 13

Contents 09 A 2012

Keeng it To Themseves

Cocoa Prices Are Falling, So Why Is Your Chocolate Egg More Expensive?

Crunch Time For Greece

Bankruptcies Have German Solar On The Ropes

US Weaons Fu Of Fake Chnese pats

Just Trying To Keep Up

San W Ext The Euozone FstThs Yea

Gold Crash On Fed Tightening And Euro Salvaon Looks Premature

The Who, How, And Why Behind Silver Price Manipulaon

Chats That Make You Go Hmmm.....

Wods That Make You Go Hmmm.....

And Fnay.....

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Everyone knows whyoprices, at around $125 for a barrel of Brent

crude, are so high. The long-term trends are

meage suy gowth and soang demand

from China and other emerging economies. And

in the short term, the market is ght, supplies

have been dsuted and ian s makng evey-

one nevous.

Saud Aaba, the ony OpEC

member with enough spare ca-

pacity to make up supply short-

fas, s the best hoe of keeng

the maket stabe. The Sauds e-cently reiterated their pledge to

kee the maket we sued as

American and European Union

sancons hit Iran. Over me,

other producers in the Persian

Guf may be abe to um moe.

Iraqand Iran itselfhave vast

oilelds that could eventually

ovde makets wth mons

more barrels a day (b/d). All this

is convenonal wisdom.

Yet these calculaons do not

take account of the regions growing thirst

fo ts own o. Between 2000 and 2010 Chna

increased its consumpon of oil more than any

other country, by 4.3m b/d, a 90% jump. It now

gets through more than 10% of the worlds oil.

More surprising is the country that increased

its consumpon by the second-largest incre-

ment: Saudi Arabia, which upped its oil-guzzling

by 1.2m b/d. At some 2.8m b/d, t s now the

worlds sixth-largest consumer, geng through

more than a quarter of its 10m b/d output.

Saudi Arabia is not the only oil-producer that

chugs its own wares. The Middle East, home

to six OPEC members, saw consumpon grow

by 56% in the rst decade of the century, four

mes the global growth rate and nearly double

the rate in Asia (see map).

Energy use per head is also rising. According to

Bp, n 1970 n the Mdde East t was haf what

t was n othe emegng makets. By 2010 t

was three mes higher. Global oil consumpon

stayed at roughly 4.6 barrels a head annu-

ay between 2000 and 2010, but the aveageIranian and Saudi was geng through roughly

30% more by the end of the decade. The Saudis

consume 35.1 barrels each. Overall energy

consumpon per head, at 7.3 tonnes of oil

equivalent, is roughly the same as in America

(see chart), which is much richer.

There are three explanaons for this growing

taste for oil. The rst is demography. Popula-

ons in the Persian Gulf, and in OPEC as a

whole, are growing fast. Tiny Qatars populaon

tebed between 2000 and 2010. Saud Aa-

bias grew from around 20m to 27.4m, a 37%

increase. Demand for power, water and petrol

has risen accordingly. Saudi power-generang

capacity has doubled in the past decade. Partly

this is to migate the fearful heat: according

to a eot fom Chatham House, a thnk-tank,air-condioning units soak up half of all power

generated at peak consumpon periods.

O O O ECONOMIST/ LINK

For those tucking nto Easteeggs ths weekend, a eot that suemakets

are raising the price of the chocolate treat as

cocoa prices are falling will leave a bier taste

n the mouth.

SOURCE: DEUTSCHE BANK/ECONOMIST

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Despite cocoa prices tumbling by a third in just

a year, some easter eggs have doubled in price,

research by comparison website mySupermar-ket has shown.

The site claims that the price of Tescos own

brand 200g Milk Chocolate Egg Hunt Bag has

risen 100pc from 1 to 2; Nestles Retro Smart-

ies Mug and Egg cost 4.99 two years ago at

Tesco but is now 7 at the same store; and

Lindts 500g Gold Bunny at 15 in Tesco and

Asda is 50pc more expensive than two years

ago.

Cash-strapped customers will be wondering

why prices are rising when the cost of cocoa in

top producer areas, including the

Ivory Coast, connues to fall.

Cocoa producers blame droughts

for causing beans to shrink, pung

o buyers.

Thee ae bg buyng waehouses

that have closed because, not only

is there no cocoa, but the small

amount coming in is of bad quality,

sad Abe Konan, who fams neaDaoa. The buyes say ou beans

are very small, black and contain no

chocolate.

James Foord at mySupermarket,

said: Although cocoa prices have fallen over

the past two years, Easter egg prices have

connued to rise, partly due to the eects of

inaon on chocolate brands businesses.

MySupermarket advises customers to shop

online and be wary of excess packaging, whichmight make the chocolate egg inside look bigger

than t t eay s.

O O O UK DAILY TELEGRAPH / LINK

Hello MishI have spared you having to read the at-

tached 195 page sleeping pill and I have

discovered a major problem.

The rst disbursement to Greece was on

March 20. Disbursements are paid quarterly

and no sooner, which eecvely means that

June 20 is the earliest next disbursementdue date. Greece was originally supposed to

receive 74 billion in the rst tranche,(Page

56 on the document), it received 7.5 billion.

Someone needed to put the decimal point

one place to the right.

We know Greece is insolvent and it raided

University accounts held at the Bank of

Greece to eect the March bond swap.

We know the bond swap oer (450 million

Euro) for issue XS0147393861 was rejected

and is payable on May 15 (6 Weeks to go).

Somehow it has to pay this before the next

tranche.

Of the 7.4 billion it received in the rst

tranche a Greek government ocial stated

that Greece would use this money to pay

4.66 billion euros to the European CentralBank and other eurozone naonal central

banks for the capital amount of a three-year

bond that expired yesterday.

This leaves 2.74 billion over 3 months to sur-

vive with. Even if you believe the 1% decit

for 2012 forecast (complete nonsense on

page 99) Greece is in arrears 1.25 billion per

month. This consumes enrely the remain-

ing distributed money from the EU & IMF.

Plus there is 5.2 billion Euros of Treasury bills

CLICK TO ENLARGE SOURCE: EC

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16.THINGS TH AT MAKE YOU GOHmmm...

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due in April and May.

Below is my favorite line from the document.

However, the disbursements to Greece by

the EFSF and the IMF will sll be condional

on compliance with condionality.

Why even bother?

Regards

Bre

O O O MIKE SHEDLOCK/ LINK

It wasnt so ong ago that eoeviewed Q-Cells as an energy company of thefutue. At one ont, t was the wods agest

manufacturer of solar cells and quarter aer

quarter, it topped analysts expectaons. The

company proved to be a money-making ma-

chine even during the nancial crisis, with some

believing it might one day grow to become part

of Germanys DAX index of benchmark compa-

nies on the stock exchange.

At the end of 2007, the company was valued at

close to 8 billion ($10.7 billion at todays rates).Q-Cells producon facilies were located in

the city of Bierfeld-

Wofen, n a fome

gnte mnng aea n

the easten Geman

state of Saxony-

Anhat. The aea was

even dubbed Soa

Vaey, a ay on

Californias Silicon

Vaey.

For a some me now, though, the days have

been gowng dake n Soa Vaey, and wth

this weeks bankruptcy announcement by Q-

Ces, thngs ae ookng to get even dake. On

Tuesday, the company as expected submied

its ocial request to begin bankruptcy proceed-

ings. The energy company of the future looks as

though it may no longer have one. The compa-

ny, t tuns out, smy wasnt eaed fo the

fast changes that have bueted the industry.

In 2011, Q-Cells posted a loss of 846 million.

As of last Tuesday, the rm had a marginal value

of only 35 million and Q-Cells share price hadplunged to just 9 cents. In Bierfeld-Wolfen,

concerns are growing about massive job losses

among the 2,200 Q-Cells workers in the city.

But Q-Cells insolvency also comes as a great

shock to the Germanys solar industry. It is

already the fourth major bankruptcy in a sector

in crisis, and it underscores the degree to which

German solar rms are being outpaced by com-

peon from Asia -- despite billions in German

government subsidies granted each year to the

ndusty. And deste soa enegy gaduaybecoming more compeve, the setbacks are

rapidly mounng.

In December 2011, two major solar companies

slid into bankruptcy: Berlin-based Solon and

Erlangen-based Solar Millennium. In the case of

Solon, Indian rm Microsol acquired the core

business; but of the companys 1,000 employ-

ees, only 400 remain employed today. Solar

Millenniums bankruptcy came as a major blow

to thousands of sma nvestos who had ent

the rm money.

In March 2012, Freiburg-based Scheuten Solar,

the rm that presented what was the worlds

largest solar module at the me eight years ago,

declared bankruptcy. The same month, power

plant producer Solarhybrid and the Frankfurt

an der Oder-based Odersun, which had been

presge projects supported by polical leaders

in the eastern state of Brandenburg, also led

for insolvency proceedings. Other bankruptcies

ae key to foow.

The worst hit in the German solar crisis are

companies that made bad business decisions.

Most of the companies eected failed to wean

themselves from reliance on government

subsidies. The companies had all been aware

that the market was rapidly changing, but they

reacted too late or too slowly. Solar subsidies

had been a highly eecve polical means of

promong the environmentally friendly tech-

noogy, but n a ady matung maket, they

are quickly losing their impact.

... For a some time now,though, the days have beengrowing darker in Solar Valley,and with this weeks bankrupt-cy announcement by Q-Cells,things are looking to get evendarker

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And the problem isnt the recent cuts to solar

subsdes. The obem has been msmanage-

ment across the industry in Germany.O O O DER SPIEGEL / LINK

Tousands o UnitedStates warplanes, ships and missiles contain

fake electronic components from China, leaving

them open to malfuncon, according to a US

Senate commiee.

The US Senate Armed Services Commiee said

its researchers had uncovered 1,800 cases in

which the Pentagon had been sold electronicsthat may be counterfeit.

In total, the commiee said it had found more

than a mon fake ats had made the way

nto waanes

such as the

Boeng C-17

tansot jet

and the Lock-

heed Marn

C-130J Super

Hercules.

It also found fake components in Boeings CH-46

Sea Knight helicopter and the Theatre High-

Altude Area Defence (THAAD) missile defence

system.

A mon ats s suey a huge numbe. But i

want to repeat this: we have only looked at a

poron of the defence supply chain. So those

1,800 cases are just the p of the iceberg, said

Senato Ca levn.

In around seven in 10 cases, the fake partsoriginated in China, while invesgators traced

another 20 per cent of cases to the United

Kngdom and Canada, known esae onts fo

Chinese counterfeits.

In the southern Chinese province of Guang-

dong, counterfeit microchips are oen smug-

gled out of factories, or burned o old comput-

er circuit boards before having their idenfying

marks sanded o and repainted as new.

In Chinese bazaars, military grade microchips

are openly adversed, although these chips are

oen commercial chips that have been modi-ed and relabelled.

Military grade chips are designed to withstand

fa geate extemes of temeatue and hu-

mdty, and thee ae feas that the fake Chnese

parts could suddenly fail.

We cannot tolerate the risk of a ballisc missile

interceptor failing to hit its target, a helicopter

pilot unable to re his missiles, or any other

mission failure because of a counterfeit part,

said John McCain, the senior Republican Sena-

tor on the commiee.

Exets sad the obems ae not new, and

have dated from a decision in the 1990s by the

Clinton administraon to cut costs by asking

the Pentagon to buy o-the-shelf electronics,

athe than desgnng ts own systems.

O O O UK DAILY TELEGRAPH / LINK

March saw only 120,000jobs created. Expectaons were for 200,000

new jobs. it wasnt a that ong ago that any

posive number would have been seen as good,

but wth the ast sx months aveagng 200,000

jobs, this was disappoinng. It gives force to the

worry that once again we could see the employ-

ment numbers get so during the spring and

summer. And adding to interest in the topic, the

employment numbers will take on a decidedly

polical tone this summer, as every poll shows

that jobs and the economy is the #1 thing on

voters minds. This will be underscored only

four days before the presidenal elecon onTuesday, Novembe 6, as the jobs eot fo

October is scheduled to be released on Friday,

Novembe 2. Thnk that one wont be anayzed

more than usual? I keep wring that the current

release is adjusted so oen that it is hard to see

more than a trend in the actual monthly releas-

es, but that w not kee undts fom usng the

release to support their candidate with all the

spin they can muster.

Thee s eason to beeve that todays owe

.. Te US Senate Armed ServicesCommittee said its researchers haduncovered 1,800 cases in which thePentagon had been sold electronicsthat may be countereit.

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number was parally due to the weather being

so good n the eae at of the yea, so that

what s usuay seasona emoyment statedearlier than is typical; so it might be beer to

average the last two months, which is sll disap-

poinng in that it barely stays ahead of popula-

on growth. At this rate it will be another three

years before we get back to new employment

highs, and that does not factor in any popula-

on growth. And it also assumes there is no

recession in the meanme. Given that the

US must stat at some ont to get ts budget

balanced, there is lile hope that more govern-

ment spending (aka smulus) is on the way.

The Bureau of Labor Stascs churns out a mas-

sive amount of data each month. Lets look at

one table and then discuss what we see. This is

Employment Situaon Summary Table A of the

Househod Data eot, seasonay adjusted.

First, the unemployment rate fell by 0.1%, to8.2%. But we see that the number of people

who are actually employed dropped by 31,000,

so how can the unemployment rate fall? Be-

cause the number of people looking for a job

dropped by 164,000. If you arent looking for a

job, you are not considered unemployed. Thus

the parcipaon rate, or the number of adults

ethe wokng o ookng fo wok, doed by

0.1% to 63.8%.

Note that ths tabe shows 133,000 new jobs.

This is the HOUSEHOLD report, which is the re-

port created from a survey of households. The

120,000 new jobs numbe s fom the ESTAB-

LISHMENT report, which is a survey of estab-shed busnesses, us a guess as to the numbe

of jobs created from new businesses that have

been bon n the ast month, aso known as the

birth/death rao. This month the birth/death

numbe added 90,000 new jobs to the tota

number. The B/D rao is a very volale number.

It is based on data from the last ve years and

is projected forward. Again, the unemployment

numbe s taken fom the househod suvey,

and the new jobs numbe s taken fom the

establishment survey. While you can get a new

jobs numbe fom the househod suvey, t s

notoriously volale and essenally useless as

a month to month indicator. As an example,

it was 428,000 in February. Variaons can run

n the hgh hundeds of thousands month to

month.

O O JOHN MAULDIN/ LINK

Spains GDP in 2011 was1.05 trillion (US$1.33 trillion). In 2012, as

previously menoned, the general consensusis that it will shrink by between 1.5% and

perhaps as much as 2.5%; a gure of 1.75%

seems easonabe.

Unemployment in Spain is 24%. Youth unem-

ployment (under 24 years old) is a shocking

53%. Both gures will rise during 2012 as the

economy connues to contract. An unem-

ployment of 30% by years end is within the

eam of the ossbe. He, wthn the eam

of the key, even.

Total government debt is projected to be 79.8%

of GDP in 2012that is, 800 billion. Much

moe toubngy, the debt ast yea was ony

680 billionbut that was sll 21% higher than

n 2010. So at ths ateassumng the status

quo remains unchanged, and without factoring

in the contracon of GDPin 2013 the pro-

jected Spanish government debt could well rise

to 90% of GDP.

(Throughout this Supplement, when discussing

govenment debt, i am efeng both to Ma-

SOURCE: BLS/MAULDIN

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19.THINGS TH AT MAKE YOU GOHmmm...

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drids and to the autonomous regions consoli-

dated debt situaon.)

Private debt is an addional 75% of GDPand

lets not even start talking about the delinquen-

cy rateswhile the banks have a capital short-

fall esmated at a mere 78 billion.

On to of a thsas f a ths weent bad

enoughs the ssue of the outstandng Sansh

debt

Spain has redempons totalling 149 billion in

2012. it w ssue a tota of 186, wth an eye

to extend the matuty of the outstandng debt.

But even wththese concerted

eorts, in 2012,

the matuty of

Sansh debt

will in fact shrink

from 6.4 years to

6.2 yeas. Add to

that, n 2011, nteest ayments totaed 28.8

bonu fom 22.1 bon the yea befoe.

Why? Because of rising bond yields: Spain is

considered riskierdue to the Troikas inabilityto nally x Greece and Spains own obvious

domesc nancial issuesand thus Spain has

to ay moe to boow money.

In other words, Spain has fallen into the classic

borrowed-short-but-my-income-is-long-and-

on-top-of-that-my-loans-are-geng-more-

exensve ta.

Last week, April 4, Spains Treasury held a bond

auconand [boy] was it nasty: Of the expect-

ed 2.5 to 3.6 bon, San baey managed

to get bds fo 2.6 bonand the yed onthe 10-year spiked to 5.85%, before seling at a

sll-way-high 5.75%.

Worldwide markets all got down on this auc-

onbut heres the thing: Spain has a lot more

of these aucons coming upon average one

evey two weeks.

They have to ase 186 bon n 2012.

And of the rst of these, they had a quasi-failed

aucon.

One hunded eghty-sx bon euosn ess

than a yea.

Theye not gong to ase that knd of money

simple as that. The April 4 aucon was not an

outets whats n the ost fo a of the next

17 aucons.

And the Gemansbeng the assve-agges-

sive d*cks that they are (my maternal grand-

mothe s Geman-Danshso i know wheeof

I speak)will not allow the ECB to open the

money spigot to Spain. Just like they did with

Greece, Germany will dither, while all the whileblocking money to Spain unl it s too late.

Gemany s thnkngn ts assve-aggessve

waythat it can string Spain along (just like

it did Greece), and then save Spain at the last

minute (just like Greece was sort-of saved).

But theres one dierence: Spain is bigger

much biggerthan Greece. You cant pull an all-

nighter and save Spain like they did Greece. You

want to save Spain, you best be starng now.

Of course, theyre not.

O O O GONZALO LIRA / LINK

Until the rising eseve owesof Asa, russa and the Guf egan tust n the

shaered credibility of the worlds two great

at currencies - if they ever do - gold is unlikely

to crash far or remain in the doldrums for long.

`Peak gold cements the price oor in any case.

It has been an unseling experience for late-

comers who joined the gold rush near all-mehighs of $1923 an ounce last September. The

slide has become deeply threatening since the

US Federal Reserve took quantave easing

(QE3) o the table six weeks ago - or appeared

to do so - and sgnaed the stat of a new

ghtening cycle. Spot gold ended the pre-Easter

week at $1636.

The game has changed, says Dennis Gartman,

apostle of the long rally who now scornfully

tells gold bugs that he is just a mercenary, not

... Worldwide markets all gotdown on this auctionbut heresthe thing: Spain has a lot moreo these auctions coming uponaverage one every two weeks...

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20.THINGS TH AT MAKE YOU GOHmmm...

09 April 2012 20

a member of their cult. They genuect in golds

direcon; we merely acknowledge that it exists

as a trading vehicle and nothing more. Thereare mes to be bullish, and mes to be bearish

to every season, as Ecclesiastes tells us.

God has sen sevenfod fom ts nad beow

$260 in 2001, that Indian summer of American

hegemony, when the 10-yea US Teasuy bond

was the ulmate risk-free asset , and Gordon

Brown ordered the Bank of England to aucon

haf ts meta.

The stock markets of Europe, America, and

Japan churned sideways over the same decade,

and that precisely is the clinching argument

against gold for contrarian traders. You avoid

yestedays stas ke the ague. God s fa too

popular, said James Paulsen from Wells Capital.

It has reached a half-century high against a bas-

ket of indicators: equies, treasuries, homes,

and wokes ay.

Each interim low in price has been lower, and

charsts tell us that golds 100-day moving aver-

age has faen though ts 200-day aveage fo

the rst me since March 2009. It is a variant ofthe `deaths cross. Ugly indeed, though Ashraf

lad fom Cty index sad the moe owefu

monthy tend-ne emans unboken.

Whethe o

not the goba

economy has

eay ut the

nghtmae o

2008-2009

behnd t and

embaked ona durable cycle

of gowth s

of course the elemental queson. The answer

depends on what you think caused the crisis in

the rst place.

If you think, as I do, that the root cause was the

deformed structure of globalizaon over the

last twenty years - a $10 trillion reserve accu-

mulaon by China and the emerging powers,

with an investment bubble in manufacturing to

ood saturated markets in the West, disguised

fo a whe by debt bubbes n the Ango-shee

and Club Med -- then lile has changed.

In some respects it is now worse. Chinas per-

sonal consumpon has fallen to 37pc of GDP

from 48pc a decade ago. The mercanlist pow-

ers (chiey China and Germany) are sll hold-

ng on to the tade suuses though gged

currencies, the dirty dollar-peg and the dirty D-

Mark peg (euro), exerng a contraconary bias

on output in the decit states - though China at

least recognizes that this must change.

There is sll too much world supply, and too

lile demand, the curse of the inter-War years.

That at least is the Weltanschauung of the pes-

simists. If correct, we face a globalized Lost

Decade, a string of false dawns as each recov-

ery runs into the headwinds of scarce demand,

and debt eveagng gnds on.

There are two implicaons to this: central

banks will have to keep prinng money for a

long me, and the Asian surplus powers - as

we as russa and the Guf states - w have to

nd somewhere to park their growing foreigneseves.

O O O AMBROSE EVANS-PRITCHARD/ LINK

Ted, youre widely recognized as the foremostexpert on manipulation in the silver futures

market. How do you dene manipulation, and

how are the main players beneting from that?

Manipulaon is another way of saying someone

controls and dominates the market by means

of an excessively large posion. So, just byholding such a large concentrated posion, the

manipulaon is largely explained. In real terms,

whenever a single enty or a few enes come

to domnate a maket, a sots of aams shoud

be sounded. This is at the heart of U.S. antrust

law. It is no dierent under commodity law.

Price manipulaon is the most serious market

crime possible under commodity law. In fact,

there is a simple and eecve and me-proven

andote to manipulaon that has existed for

... Tere are two implications tothis: central banks will have to keepprinting money or a long time,and the Asian surplus powers - as

well as Russia and the Gul states -

will have to fnd somewhere to parktheir growing oreign reserves

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21.THINGS TH AT MAKE YOU GOHmmm...

09 April 2012 21

almost a century, and that soluon is specula-

ve posion limits. Currently, the Commodies

Futues Tadng Commsson

(CFTC) is aempng to instute posion limits

in silver, but the big banks are ghng it tooth

and na.

As far as any benets the manipulators may

reap, it varies with each enty. But if you domi-

nate and control a market by means of a large

concentrated posion, you can put the price

wherever you desire at mes, and thats exactly

what the sve manuatos do eguay. Ths

explains why we have such wicked sell-os in

silver; because the big shorts pull all sorts of

dirty market tricks to send the price lower.

Could you tell us when and how you got start-ed researching this matter?

It started around 1985, when a brokerage client

asked me to explain how silver could remain

so low in price (in

the single digits)

when the wod was

consuming more

meta than was beng

produced. I accepted

the intellectual chal-

enge, and t took me

more than a year to gure out that the paper

short posions on the COMEX were so large as

to constute an almost unlimited supply. It was

this paper supply that was depressing the price.

Who are the main players in this manipulationscheme? On average, what percentage of CO-

MEX silver contracts are controlled by thesemain players?

Under U.S. commodity law, the names of indi-

vidual traders are kept condenal. However,

it is no secret that the commercial traders are

the big shorts. It is also no secret that these big

commercial shorts are mostly money center

banks and nancial instuons. Based upon

government data and correspondence, the

largest such short almost certainly is JPMorgan

Chase & Co. (NYSE: JPM), who inherited their

big silver short posion from Bear Stearns when

JPM took over that rm in 2008.

Together, the eight largest commercial silver

shorts on the COMEX generally account for 50%

to 60% of the enre net COMEX silver market,

with JPMorgan alone holding around 25% or

more of the enre market. I would hold that

those percentages of concentraon and control

constute manipulaon, in and of themselves.

By the way, there is no comparable concentra-

on on the long side; only the short side of

sve.

What exactly are the dominant players doingto manipulate the price?

The current exact mechanism they use to sud-

denly rig the price lower is High Frequency

Trading (HFT). This is the placing of sell orders

in great quanes by computer programs that

suddenly appear as legimate orders, but are

eay mosty soofs, o odes enteed and

canceled immediately (in the fracons of a

second). When the sell orders rst appear,

they sook othes nto seng as they gve the

appearance of great selling about to hit themarket. Instead, it is all a blu, intended only

to scare others into selling, as the vast majority

of these original sell orders are never executed,

nor were they ever intended to be executed.

They wee desgned fo one uose ony - to

scare others into selling.

O O O MONEY MORNING/ LINK

... ogether, the eight largestcommercial silver shorts on the

COMEX generally account or50% to 60% o the entire netCOMEX silver market

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22.CHARTS THAT MAKE YOU GO Hmmm...

09 April 2012 22

Its time againfo an udate of ou rea

Mega-Bears, an inaon-

adjusted oveay of thee

secular bear markets. It

aligns the current S&P 500

from the top of the Tech

Bubble in March 2000, the

Dow n of 1929, and the

Nkke 225 fom ts 1989

bubbe hgh.

The chart [top, le] is con-

sistent with my preference

for real (inaon-adjusted)

anayss of ong-tem ma-

ket behavo. The nomna

all-me high in the index

occurred in October 2007,

but when we adjust fo

inaon, the real all-me

high for the S&P 500 oc-

curred in March 2000.

Here [le] is the nominal

version to help clarify the

impact of inaon and

deaon, which varied

signicantly across these

thee makets.

O O O DSHORT/ LINK

CLICK TO ENLARGE

CLICK TO ENLARGE

SOURCE: DSHORT

SOURCE: DSHORT

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23.CHARTS THAT MAKE YOU GO Hmmm...

09 April 2012 23

Want the low-down on last Fridays non-farm payrolls number? Mike Shedlockhas just about every breakdwn you could possibly need to determine whether the number was

good o bad...

O O O MIKE SHEDLOCK/ LINK

SOURCE: MIKE SHEDLOCKCLICK TO ENLARGE

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24.CHARTS THAT MAKE YOU GO Hmmm...

09 April 2012 24

Recovery? What Recovery?4 years aer central banks have progressively

injected over $7 trillion in liquidity into the global

markets (and thus, by Fed logic, the economy), and

who knows how many trillion in scal aid has been

misallocated, to halt the Second Great Depression

which ocially started in December 2007, the US

recovery is the weakest in modern US history!

How many moe tons w have to be nted

(and monezed) before the central planners realize

that ghng mean reversion by using debt to defeat

recore debt, just doesntt work? Our guess - lots.

Incidentally, the US has now generated 3 million

jobs since the trough of the recession in Septem-

ber 2010, unl which point it had previously lost 8

million. Unfortunately, since the real labor force has

grown by 4.6 million over the same period, or at the

convenonally accepeted 90,000 labor pool en-

tants e month fo 51 months, deste what the

BLS may say, because America is aer all growing,

this means that the Obama administraon has cre-

ated a negave 1.6 million jobs net of demograph-

ics, which in turn have cost the US a modest $5.1ton n new debt, o an even modest $3.1 mon

n debt fo evey job ost.

O O O ZEROHEDGE/ LINK

CLICK ALL IMAGES TO ENLARGE SOURCE: MINNEAPOLIS FED

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25.

09 April 2012 25

WORDS THAT MAKE YOU GO Hmmm...

Niall Ferguson recentlygave an outstand-ing presentaon in Sydney entled Empires On The Edge Of

Chaos.

Feguson at hs bant best.

A rare interviewwthBlythe Masters in which she addresses

the claims against JPMorgan in the

sve makets.

i w eave you to make u you ownmnds...

Proessor emeritus oPhysics at Univ of Colorado-Boulder, Albert Bartleslecture on Arithmec, Populaon and Energy to a parcularly disinterested group of students has

graced the pages of this publicaon once before - a long me, and many new subscribers ago.

My good friend, Bob Fitzwilson sent me this clip again earlier this week (thank you, Bob) and it

reminded me just how fantasc this lecture is. For those of you

who HAVENT seen ths befoe, enjoy t. Fo those of you who

HAVE, remind yourselves just how brilliant simple mathema-

cal logic can be.

Yes, there are eight parts to this lecture, but each of them is

worth 9 minutes of your me I promise.

pat 2

pat 3

Part 4

pat 5

pat 6

pat 7

pat 8CLICK TO WATCH

CLICK TO WATCH

CLICK TO WATCH

8/2/2019 Hmmm Apr 09 2012

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SUBSCRIBE UNSUBSCRIBE COMMENTS

and fnally

09 April 2012 26

Hmmm

Fortunately or us, Pathe news was on hand at Aintree in 1956 to record theemakabe events of that day fo ostety.

Here, in all its marvellous, clipped-toned glory, is how Brish news saw Devon Lochs sad de-

nouement...

THING S THAT MAKE YOU GO HMMM..... 2012

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27.THINGS TH AT MAKE YOU GOHmmm...

As a result of my role at Vulpes Investment Management, it falls upon me to disclose that, from me-to-me,

the views I express and/or the commentary I write in the pages ofThings That Make You Go Hmmm..... may

reect the posioning of one or all of the Vulpes funds - though I will not be making any specic recommen-

daons in this publicaon.

Grant

www.vulpesinvest.com

Grant Williams

Grant Williams is a portfolio and strategyadvisor to Vulpes Investment Manage-ment in Singapore - a hedge fund running$200million of largely partners capitalacross multiple strategies.

In 2012, all Vulpes funds will be opened to

outside investors.

Grant has 26 years of experience in nance

on the Asian, Australian, European and USmarkets and has held senior positions atseveral international investment houses.

Grant has been writing Things That Make You Go Hmmm..... for the last three years.

For more information on Vulpes please visit www.vulpesinvest.com