TTMYGH - Candyman

7/27/2019 TTMYGH - Candyman

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Copyright Mauldin Economics. Unauthorized disclosure prohibited. Use of content subject to terms of use stated on last page.

The Candyman

Who can take tomorrow

Dip it in a dream

Separate the sorrow

And collect up all the cream?

The candyman, the candyman can

The candyman can 'cause he mixes it with love

And makes the world taste good.

And the world tastes good 'cause the candyman

thinks it should."The Candyman", Willy Wonka and the Chocolate Factory

o learn more about Grant's new investment newsleer,

Bull's Eye Investor, Click here

THINGS THAT MAKE YOU GO

Hmmm...A walk around the fringes of nance

By Grant Williams

29 JULY
http://www.mauldineconomics.com/go/bxgUc/MEChttp://www.mauldineconomics.com/go/bxgUc/MEC


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ContentsTHINGS THAT MAKE YOU GO HMMM... ....................................................3

When Youre Rattled by Collateral, Do the Fed Taper Talk .....................................19IMF Fears Fed Tapering Could "Reignite" Euro Debt Crisis .......................................21

Only Hope for Italy Is Bankruptcy ...................................................................22

When Giants Slow Down ..............................................................................24

Questions as Developers Spend Big on Land Deals ...............................................25

World's Tallest Skyscraper Remains a Hole in Chinese Ground .................................27

Greek Public Broadcaster Goes Underground .....................................................28

Is the Emerging Market Boom Over? ................................................................29

This Is the Most Feeble Recovery in Our History ..................................................31

CHARTS THAT MAKE YOU GO HMMM... ..................................................33

WORDS THAT MAKE YOU GO HMMM... ...................................................36

AND FINALLY ................................................................................37
http://-/?-http://-/?-


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Things That Make You GoHmmm...In 1964, Roald Dahl penned what is arguably his most famous book. It tells the story of a poorboy who, thanks to the discovery of a golden ticket concealed in a bar of chocolate, wins his

way into a magical factory run by a mysterious oddball named Willy Wonka.

The book, Charlie and the Chocolate Factory, was asmash hit; and inevitably the book was turned into ascreenplay, which spawned a 1971 movie in which theword Charlie was replaced in the title with the nameof the character the movie's producers felt was farmore important to the narrative: Willy Wonka. And soit was that one of cinema's great transformations fromwritten page to silver screen took place, and in the

process one of its nest characters was born.Gene Wilder's Willy Wonka is the only portrayal ofcially recognised and endorsed by ThingsThat Make You Go Hmmm.... Accept no imitations.

As much respect and admiration as I have for the extraordinary talents of Johnny Depp, just ...no, sorry. There is only one Willy Wonka, and it's Gene Wilder.

Now that I've claried my position on that particular issue, let's proceed.

I am sure that, somehow, there may be readers who haven't either read the book OR seenthe movie; and so for them I include a short synopsis of the story. Please be apprised that it

contains spoilers that, well, give away the entire plot and the ending, to be honest. If you haveread the book or seen the movie, it may be worth reacquainting yourself with the plot beforewe dive in any deeper:

Mr. Willy Wonka, the eccentric owner of the greatest chocolate factory in the world,

has decided to open the doors of his factory to ve lucky children and their parents. Inorder to choose who will enter the factory, Mr. Wonka devises a plan to hide ve goldentickets beneath the wrappers of his famous chocolate bars. The search for the ve

golden tickets is fast and furious....

Charlie Bucket, the unsuspecting hero of the book, dees all odds in claiming the fth

and nal ticket. A poor but virtuous boy, Charlie lives in a tiny house with his parents,Mr. and Mrs. Bucket, and all four of his grandparents.

In the factory, Charlie and Grandpa Joe marvel at the unbelievable sights, sounds, andespecially smells of the factory. Whereas they are grateful toward and respectful of Mr.

Wonka and his factory, the other four children succumb to their own character aws.Accordingly, they are ejected from the factory in mysterious and painful fashions.


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During each childs asco, Mr. Wonka alienates the parents with his nonchalant reactionto the childs seeming demise. He remains steadfast in his belief that everything willwork out in the end....

After each childs trial, the Oompa-Loompas beat drums and sing a moralizing song

about the downfalls of greedy, spoiled children. When only Charlie remains, WillyWonka turns to him and congratulates him for winning. The entire day has been another

contest, the prize for which is the entire chocolate factory, which Charlie has justwon. Charlie, Grandpa Joe, and Mr. Wonka enter a great glass elevator, which explodesthrough the roof of the factory. (Source: iSL Collective)

In the movie's rst act, Bill, the owner of the sweetshop, sings a song written by AnthonyNewly and Leslie Bricusse, called "The Candyman", which praises the wonderful world createdby Wonka and espouses the pure joy of living in a place where everything is deliciously sweet;miracles, dreams, and rainbows are ubiquitous; and any sorrow is separated and discarded infavour (yes, there's a u in favour deal with it!) of cream ... pure cream.

As Bill hands out free candy to a group of wide-eyed kids, you can see in their eyes the purejoy that only comes of living in a world where everything is wonderful and nothing bad everhappens.

Ladies and gentlemen, I give you ... the S&P 500.

1250

1350

1450

1550

1650

1750

Jul Aug Sep Oct Dec Feb Mar AprNov Jan May Jun Jul

S&P500 July 2012-July 2013

Source: Bloomberg

Yes, the US equity markets have bought rmly into the idea that everything is right in the worldand that nothing will ever be allowed to go wrong. A prime example of this attitude emergedlast Thursday, when we were greeted with two irreconcilable headlines on the same day:
http://en.islcollective.com/resources/search_result?Tags=charlie+summary&searchworksheet=GO&type=Printableshttp://en.islcollective.com/resources/search_result?Tags=charlie+summary&searchworksheet=GO&type=Printables


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Detroit declares bankruptcy, becominglargest city in U.S. history to go belly up

That was courtesy of the New York Post, and the opening paragraph in true New York Poststyle went straight to the meat of the story:

(NY Post): Detroit on Thursday became the largest city in U.S. history to le forbankruptcy, as the state-appointed emergency manager led for Chapter 9 protection.

In paragraph 10 of the article, the Post went on to disclose the size of the hole on Detroit'sbalance sheet:

Detroit's budget decit is believed to be more than $380 million. [State-appointedbankruptcy expert Kevin] Orr has said long-term debt was more than $14 billion and

could be between $17 billion and $20 billion.

Wait ... what?

"... more than $14 billion and could be between $17 billion and $20 billion."

Sadly, this is the world we live in where a state-appointed bankruptcy expert talks about apossible discrepancy of $6 billion in a city's accounts and the gure is relegated to paragraph10. Unicorns and rainbows. (Jefferson County, AL, the biggest previous municipal bankruptcy,totaled only $4 billion.)

Meanwhile, gracing Reuters on the same day was this little beauty:

Dow, S&P 500 end at all-time highs onearnings, BernankeThe rst paragraph of that story read as follows:

(Reuters): The Dow and the S&P 500 closed at record highs on Thursday after Morgan

Stanley and others reported better-than-expected earnings and Federal ReserveChairman Ben Bernanke's comments further reassured markets.

A little higher up in the story than the Detroit balance sheet shortfall in the New York Postpiece (in paragraph 6, for those of you keeping score at home) was this expansion on theheadline:


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(Reuters): Bernanke, speaking before the Senate banking committee, reiterated

comments he made on Wednesday to the House Financial Services Committee. Hestressed that the timeline for winding down the Fed's stimulus program was not set in

stone.

"We got no negative surprises from the Fed chairman today, so the market liked that,"said Bucky Hellwig, senior vice president of BB&T Wealth Management in Birmingham,Alabama.

Ladies and gentlemen, I give you Ben Bernanke the Candyman. (Or perhaps that should bethe Bendyman? Quite suitable, given the extent of his exibility, don't you think?)

Source: Warner Brothers/Zimbio

As Bucky Hellwig points out, the market likes it when there are no negative surprises fromthe Fed chairman the corollary of which is that the market HATES it when the Candymanthreatens to stop with the sugar last month's Taper Tantrum being the obvious and mostrecent example.

But in its adherence to whatever is being handed out by Bernanke, the market is failing to pay

attention to signals that would ordinarily call for caution. That is the danger of getting kidshooked on candy: rationality tends to fall by the wayside and behaviour becomes harder andharder to understand until, ultimately, a sugar crash occurs:

(Wikipedia): A sugar crash or glucose crash is the term used in American popularculture to refer to a supposed sense of fatigue after consuming a large quantity of

carbohydrates, also known as reactive hypoglycemia. It is variously described as a senseof tiredness, lethargy, irritation, or hangover, although the effects can be less if one hasundertaken a lot of physical activity within the next few hours after consumption.


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The symptoms of a sugar crash are of interest in the context of this discussion:

(Wikipedia): Symptoms associated with sugar crashes are similar to those experiencedduring periods of hypoglycemia, though not as severe ...

Confusion and difculty concentrating on daily tasksAnxietyLight-headednessFatigue

Headache

Irritability

The majority of these symptoms, often correlated with feelings of hunger, mimic theeffect of inadequate sugar intake as the biology of a crash is similar in itself to the

bodys response to low blood sugar levels following periods of glucose deciency.

Hmmm... OK... now that we know what a sugar crash looks like, let's le that informationsafely away under "To Be Continued..." and get back to Willy Wonka and the Chocolate Factory,and in particular to the moment when the ve eager children who have found the goldentickets get their rst glimpse inside the magical wonderland created by Willy Wonka, whereeverything is both edible and almost painfully sweet.

Huge toadstools are made of cream, trees bear candy canes by the hundreds, gigantic lollipopssprout from the ground, and a waterfall of pure chocolate cascades into a chocolate river thatbisects Wonka's wondrous world.

As the kids go hog-wild, falling over themselves to gorge on all the free candy made available

by their generous, if sartorially challenged, benefactor, Wonka begins to sing:

Come with me

And you'll beIn a world of

Pure imagination

Take a look

And you'll seeInto your imagination

We'll beginWith a spin

Traveling inThe world of my creation

What we'll see

Will defy

Explanation


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If you want to view paradiseSimply look around and view itAnything you want to, do it

Wanna change the world?

There's nothing to it

There is no

Life I knowTo compare with

Pure imagination

Living thereYou'll be free

If you truly wish to be

Wonka's message naturally nds favour (yep, still with the u) with the kids because, let's faceit, they're not really listening to the rantings of the strange man with the crazy hair in thepurple suit; all they see is free candy, and that's all they care about. The scene reminds me of acartoon by one of the greatest cartoonists of the modern era, and one of my idols, Gary Larson.

I rst saw these panels whilst living in Japan in thelate 1980s (the Far Side cartoon in theJapan Timeswas invariably a highlight in the days after the Nikkeibubble burst!), and they have stayed with me eversince. (Incidentally, one of the nest birthday giftsI ever received was The Complete Far Side 1980 1994. If you are a fan or know one with an upcoming

birthday it's spectacular.)

This need to suspend reality and venture into a worldof pure imagination is becoming ever more necessaryas the S&P scores a series of new highs against abackdrop of sobering indicators and events such as thebiggest municipal bankruptcy in US history.

The market, like Larson's "Ginger", hears just thewords it is interested in. Words like stimulus and zero

percent for the foreseeable future.

To put the Detroit situation into proper perspective,Tyler Durden and the team at Zerohedge have

published a list of 25 facts about Detroit that make clear the momentous proportions of thedemise of what was once America's fourth-largest city.

To pick a few beauties at random:
http://www.amazon.com/Complete-Far-Side-1980-1994/dp/0740721135/ref%3Dsr_1_1%3Fs%3Dbooks%26ie%3DUTF8%26qid%3D1374730542%26sr%3D1-1http://www.amazon.com/Complete-Far-Side-1980-1994/dp/0740721135/ref%3Dsr_1_1%3Fs%3Dbooks%26ie%3DUTF8%26qid%3D1374730542%26sr%3D1-1http://www.amazon.com/Complete-Far-Side-1980-1994/dp/0740721135/ref%3Dsr_1_1%3Fs%3Dbooks%26ie%3DUTF8%26qid%3D1374730542%26sr%3D1-1http://www.amazon.com/Complete-Far-Side-1980-1994/dp/0740721135/ref%3Dsr_1_1%3Fs%3Dbooks%26ie%3DUTF8%26qid%3D1374730542%26sr%3D1-1


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At this point, the city of Detroit owes money to more than 100,000 creditors.

Detroit is facing $20 billion in debt and unfunded liabilities. That breaks down to morethan $25,000 per resident.

At this point, there are approximately 78,000 abandoned homes in the city.About one-third of Detroit's 140 square miles is either vacant or derelict.

But, in our world of pure imagination, the S&P 500 shrugged off Detroit to make another newhigh, despite warnings about possible future defaults:

(CNBC): "Everyone will say, 'Oh well, it's Detroit. I thought it was already in bankruptcy,'"said Michigan State University economist Eric Scorsone. "But Detroit is not unique. It'sthe same in Chicago and New York and San Diego and San Jose. It's a lot of major citiesin this country. They may not be as extreme as Detroit, but a lot of them face the same

problems.

"Anyone who lives within their means suffers from a lack of imagination."

Oscar Wilde

As the chart below so clearly demonstrates, the S&P 500 has decided that the assets on theFed's balance sheet are a far better indicator of the health of the economy than such outdatedthings as, oh, I don't know ... revenues, maybe? Sales? Growth? And why not; the sugar is stillbeing doled out left and right, and investors can gorge with abandon.

Source: ZeroHedge/@not_jim_cramer

But it's not just the S&P 500 living in a world of pure imagination.


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Everywhere you look there are signs of a severe disconnect between the real world and theworld of free candy and everowing chocolate rivers that investors are being urged to believein.

Take Europe please. (Hat tip, Henny "I'm here all week" Youngman)

"Everything you can imagine is real." Pablo Picasso

Source: ECB/Soc Gen

(Zerohedge): Presenting Europe's annual change in M3, alongside the far more important

bank lending to the Euro area private sector. It is the latter which just dipped at arecord low, indicating once more that Europe's monetary transmission mechanism is

not only clogged up (a rising M3 should have a favorable impact here) but hopelesslybroken. In other words, it is the brown line in the chart [above] that is ... giving theECB chairman nightmares, and is leading to such secondary effects as record high

unemployment and negative GDP growth virtually across the entire Eurozone.

"Reality leaves a lot to the imagination."

John Lennon


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Yes, the monetary transmission mechanism in Europe remains broken despite the trillionsspent in trying to free up the blockages in the system. No matter how strong the nancialencouragement given to European banks, their desire (and, more importantly, their ability)to lend remains impaired; but you would never know it from behaviour of the euro, which, asyou can see from the rst chart below (courtesy of Greg Weldon), seems set to break throughoverhead resistance and strengthen further. That development, perversely, is exactly whatMario Draghi doesn't want and Europe cannot possibly allow to happen. (For a free trial ofGreg's phenomenal, and to my mind indispensable, work, click HERE.)

Source: Greg Weldon

Ordinarily, with the region's troubled currency going precisely where it can't be allowed to go

and creating signicant headwinds to corporate prot growth, European equity markets wouldof course be under pressure. The following chart demonstrates that far from suffering mightilyunder pressure, the DAX and CAC40 have entered the realm of pure imagination.

6000

7000

8000

9000

3000

3300

3600

3900

4200

CAC 40 IndexDAX Index

German DAX Index vs French CAC40 Index2012-2013

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

Source: Bloomberg
mailto:eileen%40weldononline.com?subject=TTMYGH%20-%20Free%20Trialmailto:eileen%40weldononline.com?subject=TTMYGH%20-%20Free%20Trial


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"You can't depend on your eyes when your imagination is out of focus."

Mark Twain

The folks at Zerohedge have been on a tear lately, and this weekend they showed us yet

another chart which, against the backdrop of all-time equity market highs, highlights thefantasyland created by the Candymen of the central banks: US GDP revisions.

Source: Zerohedge

(Zerohedge): There appears to be a level of optimism priced into every macro-economicforecast. Whether this is simply mean-reverting models or a systematic need to justifyan ever-increasing equity market is unclear, but over the past few years the consensusGDP growth forecast has fallen by around 0.7 percentage points over the year beforeits nal release (as hope turns to reality). So just how bad is the current environment?With the latest update of Q2 2013's GDP consensus forecast now at 1.0%, the last yearhas seen the consensus drop a stunning 2.0 percentage points (almost triple the averageloss of hope). Of course, as we noted here, we'll make it all up in H2 2013 (even as CEO

after CEO adjust down their outlooks).

In the real world, forward-looking predictions of weakening GDP would be akin to what BobGeldof described as "clanging chimes of doom" and send equity investors scurrying for the safetyof the bond market before slowing growth showed up in corporate prots; but unfortunately(see earlier comments on the Taper Tantrum), as long as the Sugar Daddy is still in control, thereal world can take a hike, and we'll all live in the Funny Money Factory.


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"Disneyland will never be completed. It will continue to grow as long as there isimagination left in the world."

Walt Disney

If investors didrush into the bond market, they would discover another world where traditionalsafe-haven assets are priced at all-time highs, on the pure fantasy of low rates forever.

"Logic will get you from A to Z; imagination will get you everywhere."

Albert Einstein

The Candyman of the Federal Reserve has promised low rates until unemployment drops to 6.5%(kinda), and since he made that linkage explicit, the rate has been falling fairly consistently:

2

4

6

8

10

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

US Unemployment Rate1998-2013

%

Source: BLS


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But, as everybody now surely realizes (but I will show again), the labor force participation ratehas been falling in similar fashion, which adds an element of fantasy to the headline number:

55

56

57

58

59

60

61

62

63

64

65

66

67

68

69

70

1948 1958 1968 1978 1988 1998 2008 2013

US Labor Force Participation Rate1948-2013

%

Source: BLS

Buried elsewhere in the reality of the unemployment statistics are such irritating details as thepercentage of the labor force who have bachelor's degrees and full-time jobs:

75.0

75.7

76.4

77.1

77.8

78.5

79.2

79.9

80.6

81.3

82.0

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

US Employment Participation (%)

Bachelors Degree

1992 - 2013

%

Source: BLS

Oops! Never mind.


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There are no rules of architecture for a castle in the clouds.

G.K. Chesterton

Everywhere you look (as long as you are prepared TO look), the differences between the

evidence surrounding us every day and the vision of a perfect world being generated by theCandymen are so blindingly apparent that it makes the willingness to believe in the fantasysimply ... fantastic (and I mean that in the literal sense).

Slowly, surely, despite ofcial headlines that suggest strength is returning and economies areabout to embark on a miraculous growth spurt, commentators are looking out through thebubble walls of the fantasy and into the harsh light of reality. What they are nding isn't pretty.

Last week, as headlines suggested the UK economy was nothing short of "robust" after a surprise0.6% increase in GDP in the second quarter, Liam Halligan pointed out both the fantasy

(UK Daily Telegraph): Among our political classes, this latest GDP data is widely viewedas "game-changing". The Tories, while not wanting to tempt fate by claiming to havespotted the "green shoots of recovery", are nevertheless cock-a-hoop. The economy is"on the mend", says George Osborne, the newly emboldened Chancellor. On the surface,at least, that seems plausible.

Between March and June, the economy grew at its fastest rate since the third quarterof 2012, the time of the London Olympics. Aside from that one growth boost lastsummer, the latest 0.6pc expansion represents the quickest growth since the secondquarter of 2010.

The GDP ne-print also shows that all four main UK sectors services, manufacturing,construction and agriculture grew over the last three months. Again, that hasnthappened since 2010. So nobody could credibly argue these latest statistics arent goodnews.

and the reality:

Despite that, it would be foolish to suggest that the British economy is out of the

woods, or that a sustainable recovery is now probable or even likely. Grave economicdangers lurk on the global horizon not least in the shape of the eurozone bond marketand the oil price.

Whats more, the growth were now seeing in Britain is, Im sorry to say, largely illusory the result of still massive government borrowing and ongoing money printing, whichin turn has kept headline interest rates articially low.

... consider that we remain locked in the most feeble economic recovery in our history.While other leading Western nations like Germany and the US have more than recoveredthe GDP losses sustained during the sub-prime crisis, the British economy, even afterthis latest growth icker, is still 3.3pc smaller than at the time of its pre-Lehman peak.


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Beyond the headline numbers, real wages continue to shrink as ination which hasbeen above the Bank of Englands 2pc target for more than three and a half yearsnow, despite extremely weak growth continues to erode purchasing power. Including

population growth, British GDP per head is actually some 7pc below its 2007 peak.

There has been no sign, either, of the "rebalancing" away from consumption and towardsexports and investment that the Coalition said it wanted. Back in 2010, Osbornedeclared his condence in "a march of the makers", claiming that manufacturers would

power growth via a surge in exports. It hasnt happened.

This is anemic growth (from a historical perspective), coated in a nice, sugary shell.

But there's a nasty twist in the tale, folks. I'm afraid that the creation of today's world of pureimagination was made necessary not by the 2008 crisis, as many will argue, but by anotherfantasy that has perpetuated itself for almost 40 years and convinced just about everyone thatit is a beautiful, blissful, incorruptible reality.

The chart below is one I have used before, but it illustrates beautifully that the illusion of awave of increasing prosperity sweeping across the world since the early 1970s is just that. Thereality is that a preposterous amount of borrowed money was used to create the illusion ofgrowth and skyrocketing wealth. All 2008 did was call in some of the loans:

-10,000

0

10,000

20,000

30,000

40,000

50,000

60,000

1929 1939 1949 1959 1969 1979 1989 1999 2009 2012

All Sectors: Credit Market Instruments (liabilities)

United States: Total Credit Market Instruments vs GDP1929-2012

US Gross Domestic Product

Source: Bloomberg

Today's world of pure imagination harbours so many departures from reality that it is impossibleto point them all out in these pages, but try looking at the lumber price versus the "housingrecovery" or at the "growth" in US personal income (hint: -5% and falling).

Look at China's shrinking GDP and poor PMI numbers. Survey the reality of life in Greece (whichwill no doubt be front and centre in these very pages again soon) or Spain ... or Italy.


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(Urban Dictionary): Sugar Rush: The intense physiological effect of consuming too much

sugar or glucose...; eating excessive amounts of sugar makes the brain release dopamineand endorphins, often inducing a mild sense of euphoria and happiness. This is often

accompanied by a strong surge of energy as the sugar hits the bloodstream.

Sounds pretty much on the money to me, only that's not where the denition ends:

Sugar highs cause twitchiness, spasms, and hyperexcitability. Sugar highs do not lastvery long, and leave a person feeling drained afterwards.

In order to sustain this euphoria, the system needs constant sugar to be introduced to thebloodstream. The moment that stops, the crash will begin in earnest.

Beware the day the Candyman runs out of candy.

*******

OK ... Here we go again.

Another crazy week comes to an end, and here I go dumping a bunch more reading materialinto your no doubt already crowded brains.

This week you'll nd yourself transported to Italy, Greece, and China, where the respectivetopics du jour are bankruptcy, underground public broadcasting, and the world's tallestskyscraper/hole in the ground.

Then we look into the matter of collateral in light of all the taper talk (this will be VERYimportant at some point, I suspect ... just not yet, it seems), and we hear how the IMF is afraid

that all that taper talk will bring the Eurozone crisis roaring back.

Elsewhere, Nouriel Roubini looks at the faltering BRICs and the Economist wonders whathappens when giants slow down, whilst Liam Halligan takes a realistic look at the supposedlystrong UK economy and gives us a welcome dose of reality.

We have charts of hurricane exposure ahead of the North Atlantic hurricane season, gold'sbest-t price, and some perspective on the gargantuan scale of Detroit's bankruptcy, courtesyof Barry Ritholtz, Frank Holmes, and the New York Post. Our three interviews all touch onthe intriguing recent developments in the gold bullion leasing market, courtesy of Egon vonGreyerz, Alasdair Mcleod, Mike Maloney, and ... yours truly.

Until Next Time.

*******


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When youre rattled by collateral, do the Fed taper talkTim Duy, professor of practice at the department of economics at the University of Oregon, isconfusing Brad DeLong, professor of economics at Berkeley, with his observation that the Fedseems to be striving to change the mix but not the level of outright accommodation. This, at

least, seems to be the motivation for taper talk.

Were less confused, and quite like what Duy is saying.

Note the following (our emphasis):

Bernanke is talking as if the goal is to change the mix of monetary policy but not thelevel of accommodation, essentially trading some reduced accommodation from endingasset purchases for additional accommodation by extending the forward guidanceon interest rates. But why? If the level of accommodation is the same, does the mixmatter? Thats an interesting question does the Fed have research saying the mix

matters, and why?

I can see two reasons. One is that somehow asset purchases have a more negativedistortionary impact. Another is that there exists an internal bias in the FOMC againstexpanding the balance sheet. Arguably, some elements of both where on display inBernankes testimony today:

The second reason for increases in rates is probably the unwinding of leveraged andperhaps excessively risky positions in the market. Its probably a good thing to have thathappen, although the tightening thats associated with that is unwelcome. But at least

the benet of that is that some concerns about building nancial risks are mitigated in

that way and probably make some FOMC participants comfortable with this tool goingforward.

The point is simple. For some reason, Bernanke and the Fed have opted to rein in assetpurchases in favour of pure interest rate steering. In Duys opinion there are two possiblereasons for this: one is that the Fed is aware of some sort of negative side-effect associatedwith asset purchases that it wishes to suspend, the other is that the body is gettinguncomfortable with ongoing balance sheet expansion.

This is a fair observation.

So lets consider for a second that the motivation is really the rst explanation. If its true thatthe Feds asset purchases are creating liquidity problems in the underlying so much so thatshort squeezes are impeding daily market operations, causing settlement fails and negativerepo rates this leaves Bernanke in a tricky communication position.

For one, the mechanics of QE are not easy to explain to Congress, or the market both ofwhom have become far too accustomed to the notion that QE equals pure money printing.


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Second, to say "we have to suspend QE because there arent enough assets for us to purchasewithout us becoming the market" is to admit that the Feds most important tool QE is nowbroken, which risks freaking out the market completely.

Even if its not, its still important for the Fed to maintain the illusion that QE remains a viable

option. If the illusion can be maintained, then communication and rate-steering alone may besufcient to keep the market supported.

If the illusion is shattered, its unlikely that ination expectations will be easy to manage withwords alone, opening the door to even more drastic policy shifts such as unsterilised money-printing, expanded asset purchases into Reits and ETFs (a la Japan) or something even moreexotic.

So its better to pretend that the economy is strong enough to handle a taper, than to admitthat the taper is the result of checkmated Fed.

Whats more theres plenty of market clues to suggest this is really whats going on.

For example, Ben Bernanke may have publicly denied that the Feds purchases were hinderingliquidity or causing market dysfunction but when examined more closely what he toldCongress this week was hardly reassuring.

For example in response to a question proposing that the Fed had become the market formortgage-backed securities, he said (our emphasis):

But our assessmentand, of course, were in that market quite a bit, so we have a lot ofinformation about itour assessment is that that market is still working quite well, and that our

purchases are not disrupting the normal price discovery and liquidity functions of that market.

What immediately draws our eye, of course, is the use of the word quite.

Then theres the fact that the comments refer only to the MBS market and overlook theTreasury security market completely (which fair enough, he wasnt asked about).

Bernankes reassurances about market liquidity to our eyes conict with the fact that we knowthe market experienced enough of dysfunction this year to prompt the Fed to call for a largeposition report from the market.

We also know that there has been a signicant shift in the pattern of Fed purchases since March2013 about the time of that large position request.

*** FT ALPHAVILLE / LINK
http://ftalphaville.ft.com/2013/07/19/1573892/when-youre-rattled-by-collateral-do-the-fed-taper-talk/http://ftalphaville.ft.com/2013/07/19/1573892/when-youre-rattled-by-collateral-do-the-fed-taper-talk/


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IMF fears Fed tapering could "reignite" euro debt crisisThe tapering of stimulus by the US Federal Reserve risks reigniting the eurozone debt crisis andpushing the weakest countries into a "debt-deation spiral", the International Monetary Fundhas warned.

"The macroeconomic environment continues to deteriorate," said the Fund in its annual "ArticleIV" health check on the eurozone.

"Recovery remains elusive. Growth has weakened further and unemployment is still rising, andthe risks of prolonged stagnation and ination undershooting are high. Mounting social andpolitical tensions pose an increasing threat to reform momentum."

The report warned that the onset of a new tightening cycle in the US had already led to majorspill-over effects in the eurozone, pushing up bond yields across the board.

Early tapering by the Fed "could lead to additional, and unhelpful, pro-cyclical increases inborrowing costs within the euro area. This could further complicate the conduct of monetarypolicy and potentially damage area-wide demand and growth. Financial market stresses couldalso quickly reignite," it said.

The Fund said the European Central Bank must take countervailing action to prevent "avicious circle setting in," ideally by cutting interests, introducing a negative deposit rate, andpurchasing a targeted range of private assets.

It should launch "credit-easing" policies to alleviate the deepening lending crunch in Spain,Italy, and Portugal, where borrowing costs for rms are 200 to 300 basis points higher than in

Germany, with small businesses struggling to raise any money at all. The IMF said the more theFed tightens in the US, the more the European authorities need to offset this with other formsof stimulus.

The report came as fresh data from the ECB showed that loans to the private sector contractedby 46bn in June, after falling by 33nbn in May , and 28bn in April. The annual rate ofcontraction has accelerated to 1.6pc.

The M3 broad money supply is also zzling out, withgrowth dropping to 2.3pc year-on-year. There hasbeen almost no growth in M3 since October 2012.

The money data tends to act as an early warningindicator for the economy a year or so ahead, andtherefore casts doubt on recent claims by EU leadersthat the crisis is over.

"Today's gures put serious question marks over thestrength of the nascent recovery," said Martin vanVliet from ING.


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The data is at odds with the recent rebound in industrial output and rising PMI survey indexesfor manufacturing.

The IMF said the eurozone economy would shrink by 0.6pc this year, the same as in 2012.It is expected to grow by 0.9pc next year but this will not be enough to make a dent on

unemployment, and could easily be thrown off course by a fresh global shock.

"There is a high risk of stagnation, especially in the periphery. Such an outcome could push theperiphery toward a debt-deation spiral," it said.

The report said that it may take years to unwind the colossal credit boom of the early EMUyears. "Historically, almost all of the run-up in household debt tends to be reversed. But inthe euro area, the reduction in debt-to-GDP ratios has barely started, and the boom was morepronounced."

"Furthermore, in past deleveraging episodes, the debt reversal was largely facilitated by

high ination and growth, and supported by expansionary scal policy. Because these factorswill not contribute much to the ongoing deleveraging process in the euro area periphery, theadjustment is likely to be protracted and have to rely more on reductions in nominal debt. Thecontrast with history is similarly sobering when it comes to corporate debt," said the Fund,adding that the EMU periphery has the daunting task of triple deleveraging by governments,households, and rms all at the same time.

*** AMBROSE EVANS-PRITCHARD / LINK

Only Hope for Italy Is BankruptcyVia Mish-modied Google translation from Libre Mercado (LM), Enrico Colombatto, Professorof Economics at the University of Turin, says in an interview, "The only hope for Italy is thebankruptcy of the State".

Enrico Colombatto (EC), Professor of Economics at the University of Turin and director of theCenter of Economic Research in the Piedmontese town, offers a groundbreaking proposal: "Donot pay the debt."

It seems unthinkable, but he believes it will be the only way to start fresh, leaving those who

have lent money to irresponsible politicians to pay for their mistake.LM: Spain and Italy have very large states, but they are very inefcient. Our laws arestiing, heavy.
http://www.telegraph.co.uk/finance/economics/10202278/IMF-fears-Fed-tapering-could-reignite-euro-debt-crisis.htmlhttp://www.telegraph.co.uk/finance/economics/10202278/IMF-fears-Fed-tapering-could-reignite-euro-debt-crisis.html


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EC: In Italy, the public sector is not intended as an aid to the production of wealth andpublic goods and services. It has been conceived as an observatory to generate politicalconsensus and to please its own clientele. The concept of public is of assistance but not

to the public, but the public sector employee. The beneciary of the public sector isdependent on this sector, not the public.

LM: After six years of crisis we have more spending, more laws, more intervention ...Where does change start?

EC: By the mentality. It has aggravated the welfare spirit that we have within us. Thestate is the problem, not the solution.

LM: A few days ago there was a poll in which the public demanded more taxes.

EC: It is a matter of propaganda. The State says "Do not worry, I will only raise taxeson the rich". However, the rich pay more, but also the poor. For example, in Italy, the

Monti government introduced a tax on real estate, and 85% of Italians are owners. Thisis a middle class tax hike. And a country that sties and suffocates its middle class cannot grow.

LM: From your perspective as a university professor, do you have bad omens in regardsto a lost generation for Italy and Spain?

EC: Yes and no. It could be 50 years, not just 15. The key will be in the new politicalclass.

LM: Some people think it might not be so bad that we intervene. They prefer to let

Germany or the troika decide instead of our politicians.

EC: Because the Germans have many Spanish and Italian bonds, they always favor highertaxation so Southern Europe can pay back those loans. I trust the Chinese more than theGermans. We need a new ruling class because the existing system is corrupt and must beeliminated no IMF, EU bureaucrats, or Germany.

LM: Where to begin?

EC: You have to start by deregulation. Monti's government has made things worse,especially in the labor market. The regulation is where it was 10 years ago ... well,maybe as it was 150 years ago.

LM: It is always said that Spain and Italy need to get to compete globally, but many ofthe labor laws limit the growth of companies, with more regulation and more taxes tothe largest companies.


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EC: Yes, there are two elements. First, regulation, both in general and the labor market

in particular, changes to the size of companies. Often the entrepreneur thinks "It's notworth growing, because I will have many new demands." There is also an issue of taxevasion: it is much harder to do it when you're big. And nally, we have the element of

funding. To grow you need a functioning credit market. And in Italy in the last thirtyyears, the credit market has served to nance the public debt. There are so manyresources that should be used to nance the growth of businesses but have only servedto nance the growth of the state. As a result, businesses remain small, because theyare funded with self-nancing.

*** MIKE SHEDLOCK / LINK

When giants slow down

This year will be the rst in which emerging markets account for more than half of world GDPon the basis of purchasing power, according to the International Monetary Fund (IMF). In 1990they accounted for less than a third of a much smaller total. From 2003 to 2011 the share ofworld output provided by the emerging economies grew at more than a percentage point a year(see chart 1). The remarkably rapid growth the world has seen in these two decades marks thebiggest economic transformation in modern history. Its like will probably never be seen again.

According to a recent study by Arvind Subramanian and Martin Kessler, of the Peterson Institute,a think-tank, from 1960 to the late 1990s just 30% of countries in the developing world forwhich gures are available managed to increase their output per person faster than America

did, thus achieving what is called "catch-up growth". That catching up was somewhatlackadaisical: the gap closed at just 1.5% a year. From the late 1990s, however, the tables wereturned. The researchers found 73% of developing countries managing to outpace America, anddoing so on average by 3.3% a year. Some of this was due to slower growth in America; most wasnot.

The most impressive growth was in four of thebiggest emerging economies: Brazil, Russia, Indiaand China, which Jim ONeill of Goldman Sachs, aninvestment bank, acronymed into the BRICs in 2001.These economies have grown in different ways and for

different reasons. But their size marked them out asspecial on purchasing-power terms they were theonly $1 trillion economies outside the OECD, a richworld club and so did their growth rates (see chart2). Mr ONeill reckoned they would, over a decade,become front-rank economies even when measured atmarket exchange rates, and he was right. Today theyare four of the largest ten national economies in theworld.
http://globaleconomicanalysis.blogspot.sg/2013/07/only-hope-for-italy-is-bankruptcy.htmlhttp://globaleconomicanalysis.blogspot.sg/2013/07/only-hope-for-italy-is-bankruptcy.html


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The remarkable growth of emerging markets in general and the BRICs in particular transformedthe global economy in many ways, some wrenching. Commodity prices soared and the cost ofmanufactures and labour sank. Global poverty rates tumbled. Gaping economic imbalancesfuelled an era of nancial vulnerability and laid the groundwork for global crisis. A growing andvastly more accessible pool of labour in emerging economies played a part in both wagestagnation and rising income inequality in rich ones.

The shift towards the emerging economies willcontinue. But its most tumultuous phase seems tohave more or less reached its end. Growth rates in allthe BRICs have dropped. The nature of their growth isin the process of changing, too, and its new mode willhave fewer direct effects on the rest of the world.The likelihood of growth in other emerging economieshaving an effect in the near future comparable to that

of the BRICs in the recent past is low; they do nothave the potential for catch-up the BRICs had in the1990s and 2000s. And the BRICs growth has changedthe rest of the world economy in ways that willdampen the disruptive effects of any similar surge inthe future. The emerging giants will grow larger, andtheir ranks will swell; but their tread will no longershake the Earth as once it did.

*** ECONOMIST / LINK

Questions as Developers Spend Big on Land DealsOfcial statistics show that total land transactions for commercial development in Beijing,Shanghai and Guangzhou in the rst half of the year reached 167.5 billion yuan, close to thetotal for all of 2012.

Since the beginning of the year, land transactions have rapidly revived in larger cities, andauction records have been broken in various cities since the beginning of May.

Behind this increase in sales of land plots was a boom in the housing market in the rst quarter.Sound performance has improved property developers' liquidity and encouraged them to makemore purchases.

However, analysts say the land market usually lags behind the housing market by about aquarter. Housing sales started to slow in the second quarter, posing uncertainties for developerswho recently bought plots.
http://www.economist.com/news/briefing/21582257-most-dramatic-and-disruptive-period-emerging-market-growth-world-has-ever-seenhttp://www.economist.com/news/briefing/21582257-most-dramatic-and-disruptive-period-emerging-market-growth-world-has-ever-seen


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Representatives from about 70 developers participated in a recent land auction in the capital,an auction that offered a highly sought-after plot in Xiajia Hutong in downtown Beijing.

Fourteen property rms participated in the auction of the Xiajia plot. Within ve minutes, theprice reached the 1.77 billion yuan cap set by the municipal land bureau. Buyers then started

to compete over proposals for the required building of subsidized housing on the land.

Beijing Maoyuan Real Estate Co. won the bidding by promising to build another 28,000 squaremeters of subsidized housing in addition to the required 10,000 square meters. The total areafor subsidized houses promised by Maoyuan accounted for 49.6 percent of the plot.

Excluding the subsidized housing, the price for commercial housing at the plot was 41,000 yuanper square meter, much higher than the average in the surrounding area.

"I don't know how they calculated the deal," said an employee of a large property rm. "Thesales price will have to be higher than 70,000 yuan per square meter."

With such a target, the Xiajia Hutong project has to be labeled luxury, the source said, butwith such a large area of subsidized housing, it will be quite challenging for the developer tooperate.

Three other plots went under the hammer at the auction, where land worth a total of 6.7billion yuan was sold. Major developers Evergrande Group and China Vanke Co. both clincheddeals.

Research by property agent Homelink Real Estate Co. found that during the rst half of the yearBeijing reported 100 land deals with a total transaction value of 66.4 billion yuan, 4.5 times

more than for the same period last year. In the rst week of July, another six plots were sold inthe city, pushing the total to 74.6 billion yuan, exceeding the gure for 2012.

Beyond the capital, land markets in large cities like Shanghai and Guangzhou have also boomed.An estimate by Caixin based on public information found that Shanghai has registered morethan 70 billion yuan in land transactions in the rst half. In 2012, the gure was 87.6 billionyuan.

Yang Hongxu, deputy director of Shanghai Yiju Real Estate Research Institute, said the revivalhas affected China's rst- and second-tier cities. (Property market analysts in the country tendto divide its cities into four tiers. The four rst-tier cities are Beijing, Shanghai, Shenzhen and

Guangzhou. The second tier comprises mainly provincial capitals and the larger cities in eachregion. Most cities in the west are put in the third and fourth tier.)

Falling inventories in these top two categories, coupled with fast growth of housing prices, haveprompted developers to seek new land. But in smaller and underdeveloped cities, the marketshave remained sluggish, Yang said.


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A source at a large property company said that this year developers have sought plots withgood locations and higher prot potential in large cities. But competition for land in rst- andsecond-tier cities is always strong, pushing up prices.

A survey by Shanghai Yiju found that total land sales revenue in the country's ten largest cities

reached 314 billion yuan in the rst half, growth of 160 percent from the same period last year.Meanwhile, housing prices in the ten cities have returned to 2010 levels.

*** CAIXIN / LINK

World's Tallest Skyscraper Remains a Hole in Chinese

Ground

Ground was broken for the worlds tallest skyscraper in an empty eld in Chinas HunanProvince last weekend. It was a festive and audacious occasion: the Broad Group, developerof the Sky City project, promised to build 202 oors stretched over 838 meters (2,749 feet) ina mere 10 months, using pre-fabricated modular, stackable pods that require less energy andmaterials than traditional construction methods.

The joy was short-lived.

On Tuesday, four days into the turbo-charged construction schedule, Sky City hit a snag:according to a (now-deleted) article in the local Xiaoxiang Morning Post it was subsequentlyquoted widely in national-level Chinese media local government ofcials suspended the

project pending completion of a government approval process designed to ensure "safety andlegality." In effect, the Broad Group hadnt obtained a building permit.

This surprised nobody. China is currently in the midst of an economic slowdown, and its widelybelieved that over-capacity in infrastructure and housing, particularly is a leading cause.The last thing China needs is another empty shell of a building, and the government has beenworking to limit the number of new ones.

But even if over-capacity and a slowing economy werent a concern, Broad Groups claims thatSky City will be so well-built that it can withstand a 9.0 earthquake surely is. If ever therewas a role for government intervention, its when developers - even those capable of building

30-story hotels in 15 days, as Broad did in 2012 - claim that they can stack blocks nearly onekilometer in the air and all-but guarantee that they cant be knocked over.

Yet, despite the on-the-face absurdity of Broads claims, the companys status as one of Chinasmost innovative and successful private enterprises has given it the benet of the doubt amongsome architects in China, and among many environmentalists outside of China, who view pre-fabricated, modular pods as a more sustainable means of constructing humanitys urban future.More critically, Broad might have the support of Chinese ofcials with standing to over-ruleHunan Provinces cautious bureaucrats.
http://english.caixin.com/2013-07-23/100559481.htmlhttp://english.caixin.com/2013-07-23/100559481.html


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That last possibility is the most likely explanation for the companys deant claim in ThursdaysSouth China Morning Post that in fact it has obtained all relevant permits for Sky City, and thatnews of the suspension was obtained "from an ofcial who is not overseeing the project andwho is unfamiliar with the progress." Meanwhile, an unnamed employee of Hunans HousingDepartment, presumably the local supervising authority, could only muster, "We are veryconfused at the moment," when questioned by the paper.

Its a reasonable response. The Chinese Communist Party has long embraced giant engineeringprojects as a means of projecting national vitality to its subjects, and the outside world.Nonetheless, its rare that those projects are built with an eye to a sustainable future. SkyCity may be ostentatious and ill-advised under current real estate market conditions, butas a sustainable technology demonstration project, its the kind of risk-taking that Chineseentrepreneurs and their government feel they need to be taking. Lets just hope it doesnttopple over.

*** BLOOMBERG / LINK

Greek Public Broadcaster Goes UndergroundGreek public television channel ERT may have been shut down, but rather than disappear, thestation has gone underground. Meanwhile, the government of Antonis Samaras is trying to buildup a new broadcaster, free of the patronage that plagued the old.

The search for Greece's public broadcaster of the future is a complicated one. Initial clues leadone to the Athens suburb of Paiania, where a studio that used to belong to the private station

Mega is located. Is this the origin of the lms that Greeks have recently been able to watch onthe public broadcaster ERT? Studio employees say that those responsible have already left, ontheir way to the Greek Press Ministry. There, however, one is told that there is no knowledge ofany studio. "Nobody here can tell you anything," says a visibly anxious employee.

Finding the old state television station is much easier. The ERT building in downtown Athens,which already stands out, is now covered with posters from employees who have beenessentially occupying their employer for more than a month. They refuse to accept that PrimeMinister Antonis Samaras unilaterally shut down ERT as a particularly egregious example ofpublic waste. "I turned on my television at home," says a 32-year-old technician, "and I suddenly

heard that as of midnight I would no longer have a job."What, then, does the ERT closure represent? Is it an example of decisive action taken in acountry that has become notorious for postponing needed reforms? Or is it a particularly horricexample of the arbitrariness of the Greek state?
http://www.bloomberg.com/news/2013-07-25/world-s-tallest-skyscraper-remains-a-hole-in-chinese-ground.htmlhttp://www.bloomberg.com/news/2013-07-25/world-s-tallest-skyscraper-remains-a-hole-in-chinese-ground.html


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Host Fanis Papathanasiou is surprisingly calm when speaking about the loss of his job and thoseof roughly 2,700 colleagues as he sits in the ERT news studio. As a former war correspondentin Iraq and Afghanistan, the 43-year-old has seen worse. Still, Papathanasiou says, the newworking conditions he now faces are challenging. The satellite connection no longer worksand they likewise have been cut off from news agencies like Reuters. Not even the telephonesystem works anymore. "This is my private phone," Papathanasiou, who also once served as theERT correspondent in New York, says pointing at his mobile device. "We have huge problems."

But Papathanasiou and his co-workers are still going nonetheless, hoping that somehow theywill be able to avoid closure after all. In the process, ERT has essentially become a privatebroadcaster that can be reached almost exclusively by Internet.

Still, Papathanasiou believes that ERT, which suffered from plunging ratings prior to its closure,has now become more popular. "We are now independent and show a different view," he says.Decisions on what stories they are going to pursue are made by committee. During the recentvisit to Athens by German Finance Minister Wolfgang Schuble, for example, they reported onthe impending aid shortfall. "That wasn't mentioned on the private channels," Papathanasiousays.

Despite the widespread resistance to the closure, the Greek government has shown noindication that it might reverse its decision. In the coming months, Athens plans to build acompletely new state broadcaster from the ground up. Just on Monday, 600 temporary positionswere announced.

Indeed, it is those job announcements that help to clear up the mystery as to where theunderground ERT is coming from. The new hires are to be made to bridge the gap between now

and when the new public broadcaster is ready to go on air. In other words, they are to do whatPapathanasiou and his colleagues are doing now. And on Sunday, Pantelis Kapsis, the deputyminister responsible for public broadcasting, told Greek parliament that the ERT broadcasts arein fact originating from his ministry. He says that secrecy was necessary because "some unionmembers wanted to shut us down and we wanted to prevent that from happening."

*** DER SPIEGEL / LINK

Is the emerging market boom over?During the last few years, a lot of hype has been heaped on the Brics (Brazil, Russia, India,China, and South Africa). With their large populations and rapid growth, these countries, sothe argument goes, will soon become some of the largest economies in the world and, inthe case of China, the largest of all by as early as 2020. But the Brics, as well as many otheremerging-market economies have recently experienced a sharp economic slowdown. So, isthe honeymoon over?

Brazil's GDP grew by only 1% last year, and may not grow by more than 2% this year, with itspotential growth barely above 3%.
http://www.spiegel.de/international/europe/greek-public-broadcaster-ert-is-still-on-the-air-despite-closure-a-912714.htmlhttp://www.spiegel.de/international/europe/greek-public-broadcaster-ert-is-still-on-the-air-despite-closure-a-912714.html


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Russia's economy may grow by barely 2% this year, with potential growth also at around 3%,despite oil prices being around $100 a barrel. India had a couple of years of strong growthrecently (11.2% in 2010 and 7.7% in 2011) but slowed to 4% in 2012. China's economy grew by10% a year for the last three decades, but slowed to 7.8% last year and risks a hard landing. AndSouth Africa grew by only 2.5% last year and may not grow faster than 2% this year.

Many other previously fast-growing emerging-market economies for example, Turkey,Argentina, Poland, Hungary, and many in Central and Eastern Europe are experiencing asimilar slowdown. So, what is ailing the Brics and other emerging markets?

First, most emerging-market economies were overheating in 2010-2011, with growth abovepotential and ination rising and exceeding targets. Many of them thus tightened monetarypolicy in 2011, with consequences for growth in 2012 that have carried over into this year.

Second, the idea that emerging-market economies could fully decouple from economicweakness in advanced economies was far-fetched: recession in the eurozone, near-recession

in the United Kingdom and Japan in 2011-2012, and slow economic growth in the United Stateswere always likely to affect emerging-market performance negatively via trade, nanciallinks, and investor condence. For example, the ongoing eurozone downturn has hurt Turkeyand emerging-market economies in Central and Eastern Europe, owing to trade links.

Third, most Brics and a few other emerging markets have moved toward a variant of statecapitalism. This implies a slowdown in reforms that increase the private sector's productivityand economic share, together with a greater economic role for state-owned enterprises (andfor state-owned banks in the allocation of credit and savings), as well as resource nationalism,trade protectionism, import-substitution industrialisation policies, and imposition of capital

controls.This approach may have worked at earlier stages of development and when the global nancialcrisis caused private spending to fall; but it is now distorting economic activity and depressingpotential growth. Indeed, China's slowdown reects an economic model that is, as formerPremier Wen Jiabao put it, "unstable, unbalanced, unco-ordinated, and unsustainable," andthat now is adversely affecting growth in emerging Asia and in commodity-exporting emergingmarkets from Asia to Latin America and Africa. The risk that China will experience a hardlanding in the next two years may further hurt many emerging economies.

Fourth, the commodity super-cycle that helped Brazil, Russia, South Africa, and many other

commodity-exporting emerging markets may be over. Indeed, a boom would be difcult tosustain, given China's slowdown, higher investment in energy-saving technologies, less emphasison capital- and resource-oriented growth models around the world, and the delayed increase insupply that high prices induced.

The fth, and most recent, factor is the US Federal Reserve's signals that it might end its policyof quantitative easing earlier than expected, and its hints of an eventual exit from zero interestrates, both of which have caused turbulence in emerging economies' nancial markets.


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Even before the Fed's signals, emerging-market equities and commodities had underperformedthis year, owing to China's slowdown. Since then, emerging-market currencies and xed-incomesecurities (government and corporate bonds) have taken a hit. The era of cheap or zero-interest money that led to a wall of liquidity chasing high yields and assets equities, bonds,currencies, and commodities in emerging markets is drawing to a close.

Finally, while many emerging-market economies tend to run current-account surpluses, agrowing number of them including Turkey, South Africa, Brazil, and India are runningdecits. And these decits are now being nanced in riskier ways: more debt than equity; moreshort-term debt than long-term debt; more foreign-currency debt than local-currency debt; andmore nancing from ckle cross-border interbank ows.

*** NOURIEL ROUBINI / LINK

This is the most feeble recovery in our history[C]onsider that we remain locked in the most feeble economic recovery in our history. Whileother leading Western nations like Germany and the US have more than recovered the GDPlosses sustained during the sub-prime crisis, the British economy, even after this latest growthicker, is still 3.3pc smaller than at the time of its pre-Lehman peak.

Beyond the headline numbers, real wages continue to shrink as ination which has beenabove the Bank of Englands 2pc target for more than three and a half years now, despiteextremely weak growth continues to erode purchasing power. Including population growth,British GDP per head is actually some 7pc below its 2007 peak.

There has been no sign, either, of the "rebalancing" away from consumption and towardsexports and investment that the Coalition said it wanted. Back in 2010, Osborne declared hiscondence in "a march of the makers", claiming that manufacturers would power growth via asurge in exports. It hasnt happened.

Despite the pound falling some 20pc against our main trading partners in recent years, UKexports have slumped, doing nothing to foster growth, improve our national accounts nor tacklethe chronic job insecurity felt by millions.

Last year, UK exports were worth 310bn compared to 420bn of imports, landing us with

an absolutely massive trade decit, second only to America in absolute terms. Despite ourmatchless trading heritage, Britains external sector remains a drag on net growth, adding toour ever-deepening indebtedness.

This weak export performance is a big reason why manufacturing output remains more than10pc below where it was prior to the credit crunch.
http://www.guardian.co.uk/business/2013/jul/23/emerging-market-boom-over-nouriel-roubinihttp://www.guardian.co.uk/business/2013/jul/23/emerging-market-boom-over-nouriel-roubini


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And for all the governments rhetoric about the UK being "in a global race" and our exports"reconguring towards the fast-growing markets of the East", the sale of British goods in thelargest emerging markets Brazil, Russia, India and China amounted to just 27bn in 2012.Thats 5.2pc of total exports, or less than we sell to Belgium.

Britains construction sector has also failed to deliver. The 0.9pc growth registered betweenMarch and June was only compared with a deep decline the quarter before. Accounting for achunky 6pc of our economy, the building industry remains 16pc smaller than it was prior to thecredit crunch.

It shouldnt be the governments job to export on behalf of British companies or to subsidisethe construction sector. But it is the case that the Coalition has shirked some tough decisionsthat could have bolstered manufacturing, exporting and construction activity in terms ofcutting red tape, easing our still ridiculously prescriptive planning laws and, above all, xingthe banking sector in order that it may once again provide a steady stream of nance toresponsible and credit-worthy businesses and households, so facilitating the growth the UKeconomy and our public nances so desperately need.

Taking such decision requires vision, grit and a erce determination to take on entrenchedvested interests be they public sector administrators or land-banking property developers.In so many parts of our economy, despite our free-market image, the UK remains in the gripof anti-competitive cartels, driven only to strive for self-preservation through lobbying andlegislation not least in our nancial sector.

The 2008 crash, despite the undoubted human suffering, was an incredible opportunity forreform. Yet we created in its aftermath a nancial services industry that, previously hooked on

private sector credit, is now addicted to central bank largesse.*** LIAM HALLIGAN / LINK
http://www.telegraph.co.uk/finance/comment/liamhalligan/10206688/This-is-the-most-feeble-recovery-in-our-history.htmlhttp://www.telegraph.co.uk/finance/comment/liamhalligan/10206688/This-is-the-most-feeble-recovery-in-our-history.html


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Charts That Make You GoHmmm...It's been a while since my buddy Barry Ritholtz has graced these pages, but my thanksto him for this series of charts that show the $ value of mortgages at risk from natural hazards(tornados and hurricane winds) by state readers in Florida and Texas, buckle up!

Source: Corelogic (via The Big Picture)
http://www.ritholtz.com/blog/2013/07/hurricaine-exposure/http://www.ritholtz.com/blog/2013/07/hurricaine-exposure/


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What? You thought you'd get away without a gold chart this week? Not a chance.

Frank Holmes of US Global Investors is another who has forgotten more about the gold marketthan many will ever know. Here is his take on how far gold is off course:

Gold has been in extremely oversold territory lately despite drivers for the metalremaining in place.

Heres a different way to look at how far gold has been off course. The chart below

tracks the correlation of the price of an ounce of gold to global liquidity, with global

liquidity dened as the sum of the U.S. monetary base and the foreign holdings of U.S.Treasuries. Since June 2000, as the U.S.s monetary base and foreign holdings increased,so did the price of gold.

The correlation suggests the current level of liquidity supports a gold price of $1,780per ounce, well above the current spot price around $1,300.

Source: US Global Investors


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22 APRIL 2013

Detroit Bankruptcy A Little Perspective

Source: New York Post


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22 APRIL 2013

Words That Make You GoHmmm...

Whilst Max Keiser's bombasticstyle isn't my cup of tea, he does invitesome interesting guests onto his show, andthis week Alasdair Mcleod has some startlingcalculations on the Bank of England's goldleasing program worth paying attention toin light of the GOFO activity covered recentlyin these pages...

CLICK TO WATCH

Egon von Greyerz is a charmingman. He also happens to be one of thesmartest minds in the gold market. In thisinterview with Eric King he discusses theshortage of gold bullion and what couldhappen if things got ever so slightly out ofcontrol...

CLICK TO LISTEN

This weekend, I had a fascinatingconversation with Mike Maloney of Goldsilver.com about the fractional reserve gold lendingmarkets.

Mike took my recent chart of gold in the wakeof the Bundesbank repatriation request to thenext level.

The outcome, in my opinion, adds a lot of fuelto an already raging re...

CLICK TO WATCH
http://jessescrossroadscafe.blogspot.sg/2013/07/macleod-bank-of-england-may-have.htmlhttp://kingworldnews.com/kingworldnews/Broadcast/Entries/2013/7/27_Egon_von_Greyerz_files/Egon%20von%20Greyerz%207%3A27%3A2013.mp3http://www.youtube.com/watch?v=fIJFOjZKHpwhttp://www.youtube.com/watch?v=fIJFOjZKHpwhttp://kingworldnews.com/kingworldnews/Broadcast/Entries/2013/7/27_Egon_von_Greyerz_files/Egon%20von%20Greyerz%207%3A27%3A2013.mp3http://jessescrossroadscafe.blogspot.sg/2013/07/macleod-bank-of-england-may-have.html


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22 APRIL 2013

and fnally...OK, so it'sbeen around awhile and already has over 5,000,000 YouTube hits, but how couldI not include this as this week's and nally...?

CLICK HERE TO WATCH

Hmmm...
http://www.youtube.com/watch?v=LO2eh6f5Go0http://www.youtube.com/watch?v=LO2eh6f5Go0


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22 APRIL 2013

Grant Williams

Grant Williams is the portfolio manager of the VulpesPrecious Metals Fund and strategy advisor to VulpesInvestment Management in Singapore a hedge fundrunning over $280 million of largely partners capitalacross multiple strategies.

The high level of capital committed by the Vulpespartners ensures the strongest possible alignmentbetween the rm and its investors.

Grant has 28 years of experience in nance on theAsian, Australian, European, and US markets andhas 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

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 uponme to disclose that, from time to time, the views I express and/or thecommentary I write in the pages of Things That Make You Go Hmmm... mayreect the positioning of one or all of the Vulpes fundsthough I will not bemaking any specic recommendations in this publication.
http://www.vulpesinvest.com/https://twitter.com/ttmyghhttp://www.youtube.com/user/GWTTMYGHhttp://www.youtube.com/watch?v=wzzoBVK3fyEhttp://www.youtube.com/watch?v=b4zOAHoncF0http://www.youtube.com/watch?v=Ri6rIF40iSAhttp://www.youtube.com/watch?v=xoMAYAKHQqUhttp://www.youtube.com/watch?v=xoMAYAKHQqUhttp://www.youtube.com/watch?v=Ri6rIF40iSAhttp://www.youtube.com/watch?v=b4zOAHoncF0http://www.youtube.com/watch?v=wzzoBVK3fyEhttp://www.youtube.com/user/GWTTMYGHhttps://twitter.com/ttmyghhttp://www.vulpesinvest.com/


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