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The Underpants Gnomes

I think best in a hot bath, with my head
tilted back and my feet up high.
Elizabeth Jane Howard, Mr. Wrong
Now, I want yall to read a newspaper or better still,
watch television and come up with something current
to do a report on.
Mr. Garrison
Business is all about solving peoples
problems at a proft.
Charles Baudelaire
A dream business that doesnt
make money is a living
nightmare.
Habeeb Akande
Proftable bookstores sell books.
Unproftable book sellers store books.
Mokokoma Mokhonoana
To learn more about Grant's new investment newsleter,
Bull's Eye Investor, Click here
THINGS THAT MAKE YOU GO
Hmmm...
A walk around the fringes of fnance
By Grant Williams
27 May 2014
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THINGS THAT MAKE YOU GO
Hmmm...
27 May 2014
Contents
THINGS THAT MAKE YOU GO HMMM... ....................................................3
Europes Centre Crumbles As Socialists Immolate Themselves on Altar of EMU .............18
Barclays Fined for Manipulating Price of Gold for a Decade ....................................19
Wall Street Finds New Subprime with Brokers Pitching 125% Loans ...........................20
Century-Old Gold Benchmark Back in Focus After Barclays .....................................22
Decade of Sino-Russian Talks on Natural Gas Finally Yields Agreement .......................23
Thailands Military Stages Coup, Thwarting Populist Movement ...............................25
We Ought to Be EU-Skeptic ..........................................................................26
A Question of Velocity ................................................................................28
Are There Major Mistakes in the Bombshell Economics Book of the Year? ....................30
CHARTS THAT MAKE YOU GO HMMM... ..................................................32
WORDS THAT MAKE YOU GO HMMM... ...................................................35
AND FINALLY... .............................................................................36
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THINGS THAT MAKE YOU GO
Hmmm...
27 May 2014
Things That Make You Go Hmmm...
This weeks TTMYGH will be a little shorter than usual (Thank heavens! I hear you cry) owing
to my presence at the Strategic Investment Conference 2014 this past week and the travel time
to and fro.
Due to the hectic schedule and the fact that there were
so many interesting people in attendance, I had planned
to spend my week dragging as much knowledge as I
possibly could out of those who made the trip to San
Diego rather than committing fnger to keyboard; but a
chance encounter with a delightful young lady initiated
an engaging conversation which, in turn, led to my
discovery of the Underpants Gnomes.
Those of you who have ever attended an event such as
the SIC know full well how such conversations arise.
Those of you who havent will likely think Ive taken
another step towards the light (and will wonder just
what sort of a dialogue we engaged in), but allow me to
elaborate.
I will spare the name of the young lady in question to protect her modesty, but if she happens
to be reading this back home in Bath, my thanks for the inspiration even though I fnd myself
awake at 3 AM rather worriedly thinking about underpants.
On December 16th, 1998, Comedy Central broadcast the seventeenth episode of the second
season of South Park. In the episode, written by Trey Parker and Matt Stone, Harbucks (a
franchise coffee shop chain with no similarity to any real-life company) planned to enter the
South Park coffee market, thus threatening the local business owners.
Through a rather convoluted series of developments, the boys (Stan, Kenny, Kyle, and
Cartman), are tasked with writing a school report on the threat that corporatism poses to small
businesses. The report mobilizes the South Park community to take action against the insurgent
corporate behemoth.
In true South Park style, what starts off as an attack on the culture of greed surrounding
corporate interests ends up taking a pot-shot at the work ethic and merchandise quality of the
small business owner.
Somewhat surprisingly, the TV critic (and sometime Austrian economist) Paul Cantor referred
to this particular episode as the most fully developed defense of capitalism ever which
simultaneously speaks volumes regarding both the South Park writers and all those who have at
one point or another defended capitalism.
(If youd like to watch the full episode, you can fnd it HERE. Aint the internet grand?)
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THINGS THAT MAKE YOU GO
Hmmm...
27 May 2014
So... those Underpants Gnomes.
In the middle of the episode, Stan, Kyle, Kenny, and Cartman fnally manage to lay eyes upon
a pack of mysterious gnomes and ask them if they know anything about business. The gnomes
assure the boys that they do and lead them into the cave where the gnomes stash their
contraband underpants.
Once there, the gnomes lay out their business plan... a thing of beauty and simplicity that
has been emulated by many companies in the age of the Internet of Things (a phrase whose
constant occurrence in recent years has never failed to get my hackles up, but one that has,
amazingly, been in existence since the early 1990s).
Surprisingly enough, many investors seem to have bought into things that even Eric Cartman
could see through. Ah well, theres no helping some folks.
Behold, the Underpants Gnomes business plan in all its majesty:
PHASE 1 PHASE 2 PHASE 3
?
Proft
Collect
Underpants
Now, in the real world, during the frst internet boom (which peaked the year after this episode
of South Park aired), the business model of the Underpants Gnomes was commonplace, as
scores of companies fooded the marketplace, sustained purely by the promise of future profts
that would somehow magically appear.
It was the corporate embodiment of George
Costanzas yada, yada, yada: First we build
a company... yada, yada, yada... we make
billions.
Of course, most of these companies went the
way of the dodo; but remarkably, a mere 14
years after the bursting of the original internet
bubble, there are signs of what Yogi Berra so
beautifully referred to as dj vu all over
again signs which some real heavyweight fnancial minds have recently highlighted:
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THINGS THAT MAKE YOU GO
Hmmm...
27 May 2014
(Seattle Times): Venture capital rising to levels not seen since 2001. Companies with no
profts going public. Billions of dollars being paid for startups.
These and other signs that the tech boom may be taking an irrational turn are leading
some notable investors to utter the dreaded word bubble, waking up the ghosts of an
era many in Silicon Valley would prefer to keep buried.
Has Silicon Valley once again lost its collective mind?
Hedge-fund manager David Einhorn thinks so.
There is a clear consensus that we are witnessing our second tech bubble in 15
years, he warned in a note to his clients in late April. What is uncertain is how
much further the bubble can expand, and what might pop it.
Of course, as we saw in 1998/9, there are plenty of people who believe in fairy tales, and they
are happy to explain why THIS time is different:
Venture capitalists and entrepreneurs insist the Silicon Valley tech economy is not in
bubble territory. Yes, they misjudged just how fast the Internet would change the world
a decade ago and let things get a little bit out of hand.
But this time, they say, the revolution of mobile and cloud services justifes big, bold
bets. And most of the companies going public are proftable, with real businesses that
are transforming the way we live.
To some tech insiders, the regions economy is in a Goldilocks moment. Not too hot.
Not too cold. Enough of a boom to be just right.
Seriously?... Goldilocks? Again with that?
12
14
16
18
20
22
24
May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr -14 May-14
-29%
SOCL Social Media ETF
May 2013 - May 2014
Source: Bloomberg
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Hmmm...
27 May 2014
As you can see from the chart above, the Social Media ETF (SOCL) has fallen in almost a straight
line since it peaked on Feb 19, 2014. Quite coincidentally, that was the day when $19 billion
was paid for Whatsapps 450 million users.
The day that rationality returns to investing in
technology stocks will be the day that we see some
high-fyers (which had previously been given a pass
on their poor performance because the promise of a
bright tomorrow was just SO compelling) fall to earth
in a hurry.
However, so as not to call out any specifc companies,
I am going to take the South Park approach and lay
out a hypothetical fable about one such giant, high-
fying corporate darling which has been embraced for its willingness to follow the Underpants
Gnomes ingenious business plan.
The company has designs on becoming absolutely essential to all of mankind; and at that point,
it has promised, it will fgure out how to make a proft from the massive turnover that comes
with ubiquity.
Lets call this company... Spamazon.
(I should point out that Spamazon is an entirely fctional company. I offer no
recommendation whatsoever, implied or otherwise, to either buy or sell the
imaginary shares of this completely made-up entity.)
Spamazon was founded in 1994 in the mythical town of Beattle by an ex-investment banker and
Harvard graduate named Jim Beeswax, a man with a passion and talent for engineering who
had seen the internet wave swelling and wanted to ride it to the shore, where riches and fame
awaited.
Supposedly, his frst big idea was selling $100 bills on the internet for $99, but he was dissuaded
from pursuing that plan by a friend who told him that while he would very likely build a HUGE
business, it would be extremely diffcult for the company to turn a proft. Also, the relative
scarcity of hundred dollar bills at the time was an impediment to his strategy. Had Beeswax
waited for the onset of QE, of course, he would have had more of a fghting chance, as the
number of $100 bills in existence took a turn for the plentiful:
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THINGS THAT MAKE YOU GO
Hmmm...
27 May 2014

0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
$100
$50
$20
$10
$5
$1
2012 2002 1992
T
o
t
a
l

$

A
m
o
u
n
t
(
m
l
n
)
Source: US Bureau of Engraving and Printing
Number of Bills in Circulation
1992 - 2012
Ultimately, by the time Beeswax launched Spamazon, he had refned his thinking into what
turned out to be a very simple business model one the Underpants Gnomes would have been
proud of.
Initially, the company would sell books online on the basis that there are millions of titles in
print and they have a relatively low price point. From there it would expand by selling a ton of
other stuff and, eventually, become the biggest company in the world.
Profts? Yeah... sure, profts too. Someday.
PHASE 1 PHASE 2 PHASE 3
Be the
Biggest
Company
in the
World
Sell
Books
Sell a Bunch
of Other
Stuf
Spamazon Business Plan
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THINGS THAT MAKE YOU GO
Hmmm...
27 May 2014
The company grew rapidly after being founded in Beeswaxs garage, and, from the sale of its
very frst book, Douglas Hofstadters Fluid Concepts and Creative Analogies: Computer Models
of the Fundamental Mechanisms of Thought, it achieved phenomenal sales growth and most
defnitely caught the wave that Beeswax had seen coming.
The companys strategy was clear and consistent; it was all about the future and the growth in
top-line revenues. It was Eyeballs 2.0.
Beeswaxs plan to make customers happy and then fgure out how to make money off of
them was something investors were content to buy into; and over the years, despite testing
the patience of his investors at various times, Beeswax stuck to his plan. Spamazon grew its
revenues rapidly as consumers embraced the idea that they could sit on their couches and shop
at lower prices than they would fnd at the store and save the time and trouble of driving to the
mall.
If something they bought didnt ft, then no problemo they just sent it back at no cost to
themselves or the company.
As word of Spamazons brilliant business plan caught the imagination of the market, it didnt
take long for investors to extrapolate the knock-on effects and, more importantly, who
the chief benefciaries would be namely Federal Express, who would be shipping stuff to
EVERYBODY (and from everybody back to Spamazon if it didnt ft/was the wrong colour/theyd
had a change of heart).
0
30
60
90
120
150
FedEx
(RHS)
Spamazon
Spamzon (Fictional Stock Price) vs FedEx
1997 - 2014
May 97 May 99 May 01 May 03 May 05 May 07 May 09 May 11 May 13May 14
Source: Bloomberg
The stock price of FedEx spiked nicely in tandem with the fctional stock price of Spamazon,
but then came the popping of the tech bubble and both shares fell. Hard.
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Hmmm...
27 May 2014
However, as hundreds of internet companies previously headed for the stratosphere crashed to
earth like poorly maintained Russian satellites, Spamazon showed tremendous resilience and
continued selling ever more stuff to more people at a loss; and as investors soon fgured out, it
didnt matter whether Spamazon made any money just as long as it kept getting bigger and
collecting more underpants selling more stuff. FedEx shares almost quadrupled on the promise
of all the additional business that would come once Spamazons dominance (as well as that of
other fctional online retailers) was established. How much would Spamazon make from the
additional shipping? Who cares? Certainly not FedEx.
2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997
Spamazon Fictional Sales
1997 - 2013
Source: Bloomberg
For Spamazon, the profts, like Christmas, would come (except not like Christmas, which comes
once a year).
The spottiness of those profts led to a somewhat overinfated P/E ratio, something that people
argued back and forth about for hours on the internet (whilst shopping, presumably); but it was
hard to argue for such a lofty valuation from a pure value perspective when the world could
look at Apple, a former growth stock that made the transition to a value stock with the grace
of a prima ballerina, or Walmart, which also sold everything to everyone (though it was most
defnitely a victim of the spread of Spamazons tentacles).
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Hmmm...
27 May 2014
0
20
40
60
80
100
Wal-Mart
May 04 May 05 May 06 May 07 May 08 May 09 May 10 May 11 May 12 May 13 May 14
Apple
Apple vs Wal-Mart P/E Ratios
2004 - 2014
Source: Bloomberg
Over the past decade, Apple has watched its P/E ratio fall from 90 to a far more respectable
level in the teens as it has delivered spectacularly on its promise of outsized growth.
Meanwhile, Walmart, with steady sales of everything to everyone, has maintained very stable
multiples, as one would expect.
However, the fctional company Spamazon needs a chart all of its own, because if I put it in the
same chart as Apple and Walmart, the scale on the Y axis would have to be extended so far that
the changes in the P/E ratios of the two REAL companies would be completely indiscernible.
I guess I could have just plumped for a different fctional P/E that ft better on the above chart
(seeing as how Spamazon is a fctional company and all), but that would have made the story
less compelling, so Ill stick to my guns and keep the numbers as they originally were (you
know, in my head):
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27 May 2014
Elsewhere in the fctional world of Spamazon, things were looking equally shaky as fctional
margins and sales growth fell steadily as the number of fctional employees on the fctional
payroll soared:
Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13
20%
25%
30%
35%
40%
45%
50% 100,000
90,000
80,000
70,000
60,000
50,000
40,000
30,000
20,000
Spamazon Fictional Total Employees vs Fictional YoY Sales Growth
2010 - 2013
Employees (fctional), LHS
Worldwide Net Sales Growth YoY (excl. FX) (fctional), RHS
Trailing 12-mo Proft Margin (fctional), RHS
Source: Zerohedge/Bloomberg
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
But is there any point in going over the fctional metrics of a fctional internet behemoth just to
belabor a point? After all, its not as though it actually matters in the real world. And its not as
if Spamazon is the ONLY fctional company purusing the Underpants Gnomes business playbook.
Take Flutter, for example.
(For the sake of clarity, I should point out that Flutter, too, is an entirely fctional
company. I offer no recommendation whatsoever, implied or otherwise, to either
buy or sell the imaginary shares of this completely made-up entity.)
The fctional premise behind Flutters completely fctional business proposition is simple:
millions of users sign up and gain the ability to fute whatever they happen to be thinking at
the moment although the length of those futes is restricted to a handful of characters.
Essentially, this is the ideal way for fctional celebrities to engage with their audience and
fanbase, for angry fctional men and women to let the world know what ails them, and for
millions of ordinary fctional people to demonstrate to anyone who will listen to them just how
smart/funny/erudite/witty/desperate/misguided/batshit crazy* they are.
*delete where fctionally applicable
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Hmmm...
27 May 2014
The Flutter business model is eerily similar to that of Spamazon:
PHASE 1 PHASE 2 PHASE 3
Make a
Ton of
Money
Out of
Them
Sign
People
Up
Sign a
Bunch
More
People
Up
Flutter Business Plan
After its fctional IPO, Flutters stock soared 70% on the promise of Phase 3, despite the fact
that it lost more money in 2013 than it did in 2012. In fact, those fctional losses increased fve-
fold.
Fast-forward to April of 2014, when Flutter announced that it had doubled its fctional
revenues... oh, and managed to lose four and a half times as much as it did in the comparable
quarter 12 months prior. Not only that, but its fctional user growth had slowed enormously. The
only good news was that it had lost less in Q1 2014 than it did in Q4 2013, when it racked up
over half a billion dollars in fctional losses.
The fctional stock took a very real 10% beating.
This surge in companies being awarded huge valuations based solely on the fact that, like
the Underpants Gnomes, Phase Three of their business plans calls for gargantuan profts has
reached a level seen only once before.
Can you guess when that was?
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Hmmm...
27 May 2014
Yep... the share of companies coming to market with negative earnings reached 74% in early
2014, a level surpassed only in........ drumroll, please........ February 2000.
(Fox Business): According to CB Insights, 600 startups in the IPO pipeline have raised
more than $55 billion thats nearly $100 million apiece. And 47 venture-backed
companies including Palantir, Pinterest, Box, Spotify, Fab, and Square are valued at
more than a billion dollars.
And THOSE companies arent even fctional.
And then theres BookFace.
(OK... last time: BookFace is also an entirely fctional company. Just as with
Spamazon and Flutter, I offer no recommendation whatsoever, implied or otherwise,
to either buy or sell the imaginary shares of this completely made-up entity.)
BookFace is a fctional social network that allows people to post pictures of meals they have
eaten, amusing cat videos, photos of themselves in copper bathtubs wearing sunglasses,
inspiring messages about what a wonderful place the world is, and joke posters about what
wine means to women.
Its an absolutely invaluable service.
It also has a business model the Underpants Gnomes would be proud of one that takes the
plans of the likes of Spamazon and Flutter and adds a unique and compelling twist:
Mobile, people. M-O-B-I-L-E.
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Hmmm...
27 May 2014
Mr. McGuire may have been right when he told Benjamin Braddock that there was a great
future in plastics, but time has yet to tell whether BookFaces omnipresent fctional CEO Dirk
Puckerbergs assertion that mobile is the plastics of the 21st century is indeed correct and,
if he IS right, whether BookFace can continue to keep a choke-hold on its fctional subscriber
base without spending billions on what might seem at frst glance like desperation purchases of
fctional messaging apps, for example.
BookFace paid $42 per fctional user when it recently splurged on fctional messaging app
WhataSap?
Now, BookFace actually DID eventually manage to make some fctional profts; but even then,
there was a little creative accounting involved, so that the fctional non-GAAP numbers were
actually double those reported under GAAP between 2012-2014.
I dont want to dig too deeply into BookFaces imaginary numbers because I promised you a
short-than-usual read this week. Whichever way you cut it, though, I am afraid we are back in
the same neighborhood where we found ourselves in 2000 when the frst great internet bubble
caught so many people off guard. The promise of future profts has been enough to drive insane
valuations even if just in the fctional world of Spamazon, Flutter, and BookFace.
Stepping away from all these fctional companies, there are a few real ones that defy
explanation, too (unless you apply the Underpants Gnomes business plan):
(Jonathan Weil): This is one of those days where I realize I dont understand anything
about fnance or capital markets. Im a dinosaur. I dont get it. People are saying things
like this time is different again in news articles about initial public offerings by
Internet companies, and they mean it. All I can do is watch, dumbfounded.
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Hmmm...
27 May 2014
What was it that made Jonathan question his own intelligence? This:
Coupons.com, with Goldman Sachs as its lead underwriter, raised $168 million, selling
10.5 million shares for $16 each. And the stock rose as much as 103 percent to $32.43,
making it todays biggest gainer by far. If that doesnt remind you of 1999, then you
probably werent following the stock market back then.
The company has about a $2.3 billion stock-market value, which is more than 13 times
its $167.9 million of revenue last year, when its net loss was $11.2 million. But like so
many other companies in these golden times, Coupons.com simply told investors to
exclude about $13 million of normal everyday expenses and, abracadabra, it claims to
be proftable on a nonstandard, cockamamie adjusted Ebitda basis. Its all part of the
show.
Coupons.com is a real company that takes the Underpants Gnomes business plan and cranks it
all the way up to 11.
BookFace, Flutter, Spamazon, and other fctional companies we just dont have time for this
week (fctional companies like Mynga, HoodwinkedIn, and Ponedora) have all benefted from
the suspension of traditional investing practices in favor of promises of good things to come.
All of them currently fnd themselves in Phase 2 of the Underpants Gnomes ingenious business
plan, and they do so juuuuust as reality begins to dawn on a few people and that has led to
some nasty corrections in recent weeks.
How potentially dangerous could this be? Well, you may be surprised by the identity of one man
who fears that this may be only the beginning of the bad times for these stocks.
Step forward Jim Bear-Stearns-is-FINE Cramer:
(CNBC): [W]hat matters here is that the selloffs in momentum stocks have been
signifcant, and Cramer knows you may be wondering how much more they should
decline before they rebound.
Considering the declines are signifcant, shrewd investors may even be wondering
should I buy the dip?
If youre asking yourself that question, Im afraid youre not going to like the answer,
Cramer said. If history is any guide, then the high-fying biotechs, Internet plays, and
of course the cloud-based software-as-a-service stocks could still have a long way to
fall.
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27 May 2014
If weve reached the point where even Cramer has spotted that this bubble may have burst,
then we must already be pretty far advanced in the process.
Hell, CNBC have even given the recent move a catchy alliterative name: the Momentum
Meltdown. We must be close.
We never did fnd out how the Underpants Gnomes business plan worked out for them, and
South Park has yet to revisit them. Perhaps another boom in the underpants-gathering business
has been gathering momentum, and perhaps the Gnomes have been successful raising money
based solely on their three-phase model. (Lets face it, theirs certainly isnt the MOST ludicrous
model ever devised.)
However, I suspect their business plan as applied by fctional companies like Spamazon, Flutter,
and BookFace will end up a colossal failure.
The only question is, when?
Eventually, momentum based upon future promises will cease, and when it does (or if it has)
then anybody taking a long hard look at the stocks they bought during the mania will fnd only
one word to describe the quality of many of those companies:
Pants.
(Neither I personally nor Vulpes Investment management hold any positions in any
of the companies either real or fctional mentioned in this weeks Things That
Make You Go Hmmm... We make no recommendations about any of them.)
*******
Having criss-crossed the globe once again to attend the SIC, I am back home in
Singapore and back in the saddle. In my extended absence I had numerous emails asking why I
had disappeared and was I coming back? Well, this may or may not disappoint a few of you, but
I AM back, and my plan from here on out is to write Things That Make You Go Hmmm... every
fortnight regular as clockwork. The only exception will be if travel intervenes, in which case
Ill look to send something out in the off week to maintain a schedule that readers can at least
plan a holiday around, if not set their watches by.
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27 May 2014
What do I have for you this week? Well, there is quite a bit of follow-through from the SIC
(including the theme for this weeks missive), and that includes an audio interview with John
Mauldin, who does a fantastic job of outlining many of the themes discussed last week. There
is also a great piece on the velocity of money (or rather the lack of it) from my friend David
Hay of Evergreen Capital (avert your eyes now, Dave) one of the nicest, smartest, and most
humble men to grace the investment business. Be sure to click on the link and get the full
article to read the thoughts of Evergreens CEO, Tyler Hay, and Director of Wealth Management,
Jeff Eulberg, who also have some fascinating insights about what they heard at the conference.
Away from the San Diego sunshine, Europes problems continue; and as the results start coming
in from the EU elections after Sundays big day of voting, its clear, as I predicted a few
months back, that there will be shockwaves right across the continent beginning in the UK,
where Nigel Farages Ukip has gained both ground and traction, and continuing to France and
Marine Le Pen and beyond. By the time you read this, the full picture will have been revealed.
Ambrose Evans-Pritchard decries the state of the political left, former German President Roman
Herzog explains why the EU faces potential disintegration, and French economist Thomas
Piketty gets a good old-fashioned shoeing from, of all publications, the FT.
We head to Thailand to get the lowdown on the latest military coup (for those of you keeping
score at home, its the 12th since 1932 but the frst in some 8 years!) and fnd a country going
about its business very much as usual, apart from the 10 PM curfew and closure of most TV
stations. (When reached for comment, Frosty, a friend of mine living in Bangkok, had this to say
about conditions on the ground: Panic is striking husbands up and down Thailand as their wives
suggest a nice quiet night in because of the curfew.) Then its off to London, where shock has
been widespread at the news that Barclays have apparently been manipulating the gold fx to
their own advantage for a decade.
Yes... shock, apparently. Whatever next? Libor? Sure. Mortgages? Of course. FX markets? Why
not. But GOLD? How is that POSSIBLE?
China and Russia shake hands on a deal ten years in the making; subprime is back in fashion
on Wall Street; and we hear the views of one of my investing heroes, Bill Fleckenstein, as well
as watch Marc Faber and Ian Bremmer (another who put in an impressive shift in San Diego)
discuss the real state of Chinas economy.
Lastly, there is an historical look at what might be the worlds next reserve currency the
renminbi and an examination of the correlation between volatility and sharp drops in the
equity market. (Hint: if you have a tin hat in the closet it may be time to dig it out.) And a
house-price heatmap of the UK tells its own story loud and clear.
We round things off with another in Jimmy Kimmels hilarious series of Mean Tweets.
Thats it from me. Im off to Sydney to see my girls. See you all back here in two weeks.
Behave yourselves.
Until Next Time...
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27 May 2014
Europes centre crumbles as Socialists immolate themselves
on altar of EMU
By a horrible twist of fate, Europes political Left has become the enforcer of reactionary
economic policies. The great socialist parties of the post-war era have been trapped by
the corrosive dynamics of monetary union, apologists for mass unemployment and a 1930s
defationary regime that subtly favour the interests of elites.
One by one, they are paying the price. The Dutch Labour Party that fathered the Polder
Model and ran Holland for half a century has lost its bastions of Amsterdam, Rotterdam and
Utrecht, its support dwindling to 10pc as it meekly ratifes austerity policies that have led to
debt defation and left 25pc of mortgages in negative equity.
Contractionary policies are poisonous for countries leveraged to the hilt. Dutch household debt
has risen from 230pc to 250pc of disposable income since 2008, while British debt has fallen
from 151pc to 133pc over the same period. This calamitous development in the Netherlands is
almost entirely result of the EMU policy structure, yet the Dutch Labour Party has no coherent
critique because its pro-EU refexes compel near-silence.
Old Marxists now rebranded under the Socialist Party have eaten into their fank, running at
20pc with daily broadsides against the myopia of pro-cyclical EMU defcit rules at a time when
more than half the currency bloc is stuck in depression, albeit one punctuated by short episodes
of seeming recovery. The Netherlands relapsed yet again in the frst quarter.
The Socialist Party has never believed in the euro and we dont believe in it now. We must
therefore stop offering up ever more sacrifces in order to maintain it, said Dennis de Jong,
the partys leader in Strasbourg. He calls for a Plan B to dismantle the currency union in an
orderly fashion, with capital controls if need be.
Each country is sui generis. The Panhellenic Socialist Movement (PASOK) that steered Greece
to democracy after the colonels is down to 5.5pc, a dead shell displaced by the hot-headed
Syriza party of Alexis Tsipras, now leading at 25pc with vows to tear up Greeces EU-IMF Troika
Memorandum and stiff creditors.
PASOK deserves its annihilation. It conspired in the backroom coup of November 2011, agreeing
to EU demands to overthrow its own prime minister and annul Greeces referendum on the
bail-out. It recoiled from a cathartic and necessary showdown with Brussels, too frightened to
risk ejection from the euro. That referendum is now being held. Mr Tsipras has turned the EU
elections this week into a verdict on debt servitude.
One can understand why the Left in small countries may feel too weak to buck the EMU
system. The mystery is why a French Socialist president with a parliamentary majority should
so passively submit to policies that are sapping the lifeblood of the French economy and
destroying his presidency.
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Francois Hollande won the presidency two years ago on a growth ticket, vowing to lead an
EMU-wide refation drive that would lift Europe out of slump. He promised to veto the EU Fiscal
Compact. He asked to be judged on his record in bending the curve of unemployment, and to
his chagrin the people are holding him to his word.
The jobless rate has risen from 10.1pc to 10.4pc (Eurostat) since he took offce. The economy
shed a further 23,600 jobs in the frst quarter as GDP growth fell back to zero. Some 57,000
jobs have been lost over the past year. Mr Hollandes approval rating has in turn crashed to
18pc in the latest Ifop poll, the worst ever for a French leader....
*** AMBROSE EVANS-PRITCHARD / LINK
Barclays Fined For Manipulating Price Of Gold For A Decade
It was almost inevitable: a week after we wrote From Rothschild To Koch Industries: Meet
The People Who Fix The Price Of Gold and days after Barclays Head Of Gold Trading, And
Gold Fixer, Is Leaving The Bank, earlier today the UK Financial Conduct Authority fnally
formalized what most in the tin-foil hat community had known for years, when it announced
that it fned Barclays 26 million for manipulating the setting of the price of gold in order to
avoid paying out on a client order. Furthermore, the FCA confrmed that those inexplicable
gold raids which come as if out of nowhere, and slam gold with a vicious force so strong
sometime they halt the entire market, had a very specifc source: Barclays, whose trader Daniel
James Plunkett, born 1976, sent out a burst of orders aimed at moving the price of the yellow
metal.
This took place for a decade. As the FT reports:
The FCA said Barclays had failed to adequately manage conficts of interest between itself and
its customers as well as systems and controls failings, in relation to the gold fxing between
2004 and 2013.
Some further details on Plunketts preferred means of manipulating the gold price.
The FCA said Mr Plunkett had manipulated the market by placing, withdrawing and re-placing a
large sell order for between 40,000 oz and 60,000 oz of gold bars.
He did this in an attempt to pull off a mini puke, which the FCA took to mean a sharp fall
in the price of gold. As a result, the bank was not obliged to make a $3.9m payment to the
customer under an option contract.
Which is precisely what we have shown many times here for example in Vicious Gold Slamdown
Breaks Gold Market For 20 Seconds, when a sell order so aggressive comes in it not only takes
out the entire bid stack with an intent not for best execution but solely to reprice the market
lower. Recall from September:
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There was a time when, if selling a sizable amount of a security, one tried to get the best
execution price and not alert the buyers comprising the bid stack that there is (substantial)
volume for sale. Of course, there was and always has been a time when one tried to manipulate
prices by slamming the bid until it was fully taken out, usually just before close of trading, an
illegal practice known as banging the close. It appears that when it comes to gold, the former
is long gone history, and the latter is perfectly legal. As the two charts below from Nanex
demonstrate, overnight just before 3 am Eastern, a block of just 2000 GC gold futures contracts
slammed the price of gold, on no news as usual, sending it lower by $10/oz.
However, that is not new: such slamdowns happen
every day in the gold market, and the CFTC constantly
turns a blind eye. What was different about last
nights slam however, is that this time whoever was
doing the forced, manipulation selling, just happened
to also break the market. Indeed: following the hit,
the entire gold market was NASDARKed for 20 seconds
after a circuit breaker halted trading!
To summarize: a humble block of 2000 gold futs (GC)
taking out the bid stack, and slamming the price of
gold, managed to halt the gold market: one of the
largest asset markets in the world in terms of total
notional, for 20 seconds.
And Mr. Plunkett in action (chart, left):
To be sure Barclays was truly sorry, and pinky swears that having been caught manipulating the
gold market for ten years it will never do it again ...
*** ZEROHEDGE / LINK
Wall Street Finds New Subprime With Brokers Pitching 125%
Loans
Doug Naidus made his fortune selling a mortgage company to Deutsche Bank AG months before
the U.S. housing market collapsed. Now hes found a way to proft from loans to business
owners with bad credit.
From an offce near New Yorks Times Square, people trained by a veteran of Jordan Belforts
boiler room call truckers, contractors and forists across the country pitching loans with annual
interest rates as high as 125 percent, according to more than two dozen former employees and
clients. When borrowers cant pay, Naiduss World Business Lenders LLC seizes their vehicles
and assets, sometimes sending them into bankruptcy.
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Naidus isnt the only one turning to subprime business lending. Mortgage brokers and former
stock salesmen looking for new ways to make fast profts are pushing the loans, which arent
covered by federal consumer safeguards. Goldman Sachs Group Inc. (GS) and Google Inc. are
among those fnancing his competitors, which charge similar rates.
This is the new predatory lending, said Mark Pinsky, president of Opportunity Finance
Network, a group of lenders that help the poor. And the predators, just as they did in the
mortgage market, have gotten increasingly aggressive.
Subprime business lending the industry prefers to be called alternative has swelled to
more than $3 billion a year, estimates Marc Glazer, who has researched his competitors as head
of Business Financial Services Inc., a lender in Coral Springs, Florida. Thats twice the volume of
small loans guaranteed by the Small Business Administration.
Naidus, 48, chief executive offcer of World Business Lenders, declined to be interviewed.
Marcia Horowitz, a spokeswoman at public relations frm Rubenstein Associates Inc., said
the company explains loan terms in plain English and takes steps to ensure that borrowers
understand.
World Business Lenders sales and marketing techniques, as well as the interest rates it
charges and the default rates it experiences, are generally consistent with those throughout
the industry, Andy Occhino, general counsel for the company, wrote in a May 21 letter. In
serving the underserved small-business community along Main Street USA, World Business
Lenders complies with all applicable laws and endeavors to ensure a positive experience for its
customers.
Maher and Tamer Kasem, a father and son who sell cigarettes and cosmetics to corner stores in
Brooklyn and Philadelphia, are typical customers. They borrowed from World Business Lenders
in December to keep their company afoat after being rejected by a bank and turned down for a
hurricane-recovery loan.
A saleswoman initially talked about an unsecured $45,000 loan, they said. They had fallen
further behind on bills by the time they received the fnal terms to borrow $12,500. The money,
plus almost $1,000 in fees, was to be repaid over six months with $144.73 deducted from their
bank account each business day, according to a contract they provided. That worked out to a
total of $18,236 or an annualized rate, inclusive of fees, of about 110 percent.
Tamer and his mother Lamis said they signed personal guarantees that they would repay the
money even if the business went bust, and the family put up a vacant lot as collateral.
I was just wanting to get money to survive my business any way, Maher Kasem, 57, said in
an interview at his offce in the Bensonhurst section of Brooklyn, where he keeps boxes of
fruit-favored cigars and makeup ruined in Hurricane Sandy stacked on the crumbling tile foor.
Theyre slick.
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World Business Lenders sued the Kasems and obtained a judgment for $22,828, which included
a $3,879 prepayment fee. The frm hasnt yet foreclosed on the property, Kasem said....
*** YAHOO FINANCE / LINK
Century-Old Gold Benchmark Back in Focus After Barclays
The century-old benchmark used by the $18 trillion global gold market is under scrutiny after
one of its four member banks was fned for manipulating prices.
The U.K.s Financial Conduct Authority said yesterday it fned Barclays Plc 26 million pounds
($44 million) because one of its traders sought to infuence the price-setting process two years
ago. The bank alerted the regulator to the issue, a person with knowledge of the situation said.
The London gold fxing, whose prices are used by mining companies, central banks and the U.S.
Mint, was already under review by the FCA.
I dont think we would invent the gold fx mechanism as it is now, if it was just starting up,
Brian Lucey, a fnance professor at Trinity College Dublin who has been an economist for the
Central Bank of Ireland, said yesterday by phone. That leads to the obvious question of do we
then need it?
Regulatory focus on fnancial benchmarks is intensifying after rigging was uncovered in
everything from interbank lending rates to currencies. Economists and academics have said the
gold fxing is susceptible to manipulation and lacks suffcient regulation, while traders say the
process is effcient and a crucial reference point for the market.
Societe Generale SA, Bank of Nova Scotia, HSBC Holdings Plc and Barclays (BARC) are the four
remaining members of the fxing, after Deutsche Bank AG withdrew this month. A similar price-
setting mechanism in the silver market will end in August after HSBC and Bank of Nova Scotia
were left as the last two participants...
Unusual trading patterns around the afternoon fxing in London are a sign of collusive behavior
and should be investigated, Rosa Abrantes-Metz, a professor at New York Universitys Stern
School of Business, wrote in a draft research paper, which was reported by Bloomberg News in
February.
Price fuctuations are a consequence of supply and demand, not manipulation, Ross Norman,
the chief executive offcer of London physical gold broker Sharps Pixley Ltd., said in March.
The volatility also refects differing views on the value of metal rather than attempts to rig the
price, said Norman, who has traded gold for 30 years and worked at Johnson Matthey Plc, N.M.
Rothschild & Sons Ltd. and Credit Suisse Group AG. He reiterated those comments yesterday.
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Because the fx takes part while the open market is still in operation, manipulation would be
diffcult, James Moore, an analyst at FastMarkets Ltd. in London who previously dealt in fxings
at Bank of Nova Scotia, said yesterday by phone. The fx is a globally recognized and very
important benchmark.
An alternative to fxings could be taking a price snapshot during the day when the market is
most active, said Trinity Colleges Lucey. The price could be set on a volume-weighted basis by
taking an average and discarding the highest and lowest trades during a window, he said.
Taking a 10-minute snapshot of the London spot market but moving the timing each day without
notice would help deter manipulation, said Peter Fertig, the owner of Quantitative Commodity
Research Ltd. in Hainburg, Germany.
Alternatively, a benchmark could be provided by the London Metal Exchange if it added
precious metals to its foor trading, Fertig said. That would allow for larger volumes and
provide greater transparency and regulatory oversight, he said.
The gold fxing dates to 1919 when representatives from fve dealers met at Rothschilds offce
on St. Swithins Lane in Londons fnancial district. Rothschild pulled out in 2004.
There are at least 26 lawsuits related to the gold fxing in U.S. federal courts, 24 of them in
front of Judge Valerie Caproni in New York. One is fled in New Jersey and one in California.
Germanys Bafn is looking at benchmarking processes such as gold and silver price fxing at
individual banks, Ben Fischer, a spokesman for the Bonn-based regulator, said in April. The U.S.
Commodity Futures Trading Commission also discussed reviewing how gold prices are set in
private meetings in 2013, a person with knowledge of the matter said in November.
*** BLOOMBERG / LINK
Decade of Sino-Russian Talks on Natural Gas Finally Yields
Agreement
China and Russia signed a 30-year natural gas supply contract in Shanghai on May 21, a decade
after the two countries started negotiations.
China National Petroleum Corp. (CNPC) signed the US$ 400 billion deal with Russias Gazprom,
which will supply natural gas through pipeline that will enter China in the northeastern
province of Heilongjiang from 2018.
The contract says that in the frst fve years the annual supply is to be from 5 to 30 billion cubic
meters and from the sixth year it will 38 billion.
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During the years of negotiations, China and Russia signed a number of documents on
cooperation, but no deal could be agreed, largely due to differences on price. In 2011,
Gazprom deputy chief executive Alexander Medvedev said the sole sticking point in talks was
pricing.
The current contract does set clear pricing, only a possible arrangement, said a source at
PetroChina Co. Ltd., the listed arm of CNPC, who handles investor relations.
The rough price would be about US$ 0.38 to US$ 0.39 per cubic meter, more than that for
imports from Central Asia (US$ 0.34) but less than Russias price last year for Germany, France
and Italy (US$ 0.49).
Newly found gas reserves, improved technologies and changing international conditions all
helped China reach this agreement with Russia.
While China and Russia were talking, China turned to Turkmenistan, a Central Asian country
with the ffth-largest gas reserve in the world. In 2007, China signed a contract with
Turkmenistan to get an annual supply of natural gas supply of 30 billion cubic meters. The
countries signed other deals in 2008 and 2011 that raised the fgure to 65 billion.
China imported 53 billion cubic meters of natural gas last year, about 31 percent of what it
used. Of that, 28 billion cubic meters came from Central Asia.
China also has long-term contracts to import liquefed natural gas from Qatar, Australia,
Indonesia and Malaysia. And Canada and the United States are potential suppliers since the two
countries are increasing output of shale gas.
By 2006, the United States had developed new technologies to exploit shale gas at low costs.
Its former suppliers in the Middle East and West Africa then put their wares on the international
market. This helped Europe, Russias largest market, diversify its supply.
Last year, European countries outside the Commonwealth of Independent States, a grouping of
Russia and 11 other countries that used to be part of the Soviet Union, imported 174.3 billion
cubic meters gas from Russia, one-quarter of the total consumed.
But in recent years countries like Ukraine, Belarus and Poland raised the transit fees for gas
Russia sent to Europe and expected Russia to cut its price. The relationship between Russia and
Europe was further complicated by the crisis in Ukraine.
In 2010, Russian energy authorities formulated a plan for the next 20 years. Russia would
exploit gas from its eastern areas and develop China as a customer. One main target of the plan
was to see exports of gas to the Asia-Pacifc region rise from nil to about 20 percent of total
exports.
Gazprom, the worlds largest supplier of gas, was to take the lead by expanding its business to
East Asia, and the annual report it published last year said the company aimed to increase its
market share in emerging markets, a further sign China was the energy darling of Russian eyes.
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The contract CNPC and Gazprom signed says the major sources for the natural gas will be felds
in eastern Siberia, namely the Kovykta feld in the Irkutsk region and a feld in a region called
Sakha....
*** CAIXIN / LINK
Thailands Military Stages Coup, Thwarting Populist
Movement
The Thai military seized control of the country on Thursday and detained at least 25 leading
politicians in a culmination of months of maneuvering by the Bangkok establishment to sideline
a populist movement that has won every national election since 2001.
It was the second time in a decade that the army had overthrown an elected government, but
there were signs that this takeover could be more severe and include sharp curbs on Thailands
freewheeling news media.
The coup was seen as a victory for the elites in Thailand who have grown disillusioned with
popular democracy and have sought for years to diminish the electoral power of Thaksin
Shinawatra, a former prime minister who commands support in the rural north. Unable to win
elections, the opposition has instead called for an appointed prime minister, and pleaded with
the military for months to step in.
Pedestrians strolled past armed Thai soldiers guarding a government building in Bangkok after
martial law was declared.
Thai troops guarded a checkpoint near a pro-government encampment in suburban Bangkok
on Tuesday, but in many neighborhoods, not a soldier could be seen. As soldiers spread out
throughout Bangkok on Thursday, the generals issued a series of announcements, declaring
most of the Constitution terminated, banning gatherings of more than fve people, imposing a
curfew and shutting schools.
The Thai Army chief, Gen. Prayuth Chan-ocha, announced a coup after his efforts to reconcile
rival political factions failed, and Bangkok residents reacted to the news.
The coup was at least the 12th military takeover since Thailand abandoned the absolute
monarchy in 1932. But unlike many previous coups, which involved infghting among generals,
Thursdays military takeover had as a subtext the political awakening among rural Thais who
have loyally supported Mr. Thaksin and benefted from patronage and policies such as universal
health care and microloans.
Critics of Mr. Thaksin, a billionaire tycoon who lives in self-imposed exile abroad, say he also
took corruption to a new level.
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With one of Southeast Asias largest economies, Thailand has long been attractive to foreign
investors and tourists drawn by its reputation as the land of smiles. But in recent months, it
has made headlines for the many attempts by antigovernment protesters to suspend democracy,
a jarring contrast with its open, cosmopolitan image.
The military and Bangkok establishment now face the question of either retaining the power
gained from the coup or returning the country to democracy with the likelihood that Mr.
Thaksin and his proven political machine would again return to power in elections. The coup in
2006 unseated Mr. Thaksin, but his backers came back to win at the polls, leading to his younger
sister, Yingluck Shinawatra, becoming prime minister in 2011.
Although the leader of the antigovernment movement, Suthep Thaugsuban, was detained
Thursday, his supporters praised the coup. This is a victory day for the people, Samdin
Lertbutr, an antigovernment protest leader, said in an interview. The military has done their
job. And we have done our job....
*** NY TIMES / LINK
We Ought To Be EU-Skeptic
The European Union is in a deep crisis. The reasons for the crisis are manifold, and would,
each on its own, have been endurable, even over decades. In the present situation, however,
they have become intertwined and so will persist. If those responsible dont face up to them
decisively, the long-term prospects for Europe do not look good.
The debt and currency crisis makes it abundantly clear there is something very wrong with the
constitutional structure of the EU, as well as with the political conduct of particular members.
One doesnt know which is more puzzling: that some new members could trick their way into
the euro zone and into the EU itself with false fgures, or that those in Brussels failed to notice
bogus applications.
Average citizens, even halfway informed about current developments, will be concerned and
will expect reassurance above all on two points: They would like the prosperity achieved
in Europe to be reasonably secure, and they will also want Europe to be strong enough for
Europes voice to be heard in the newly forming world concert. Such citizens deserve to be
understood.
The description of the new tasks may sound brief. In reality it encompasses a huge program,
which only a very strong institution would be capable of mastering. Whether todays EU is able
to display this strength is open to doubt, therefore this issue is worth pursuing in greater detail.
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In hindsight, the EU has not been strengthened by the numerous new entrants of recent
years, but weakened. Political strength of the kind needed today in Europe is something
fundamentally different from size, especially mere territorial size. It is delusional to think that
an institution like the EU simply has to be as big as possible for it to be strong and capable of
surviving under pressure.
Size can equally make it become rigid and infexible, because of excessively fast growth and
even more so because of the challenges of internal uniformity. This is particularly risky at a
time such as ours, when every day brings new risks and problems but also new opportunities.
In such situations, size can be an advantage. But it can only be agile and quick to respond if it
limits itself to the most essentially shared issues, and doesnt try to play the all-encompassing
superstate.
The bigger an institution becomes, the more fragile its inner homogeneity. Political and
ideological consensus, without which such a community of states has no real chance of long-
term survival, was present for all the new entrants in the past decades. But our current debt
crisis showed that economic homogeneity was awry. Of course, not all members can be equally
strong economically.
The EU has always accepted economically stronger and weaker states; the weaker were
supposed to be helped to rise to the level of the stronger. But this much should surely have
been ascertained: whether a candidate for entry could be expected, with the help of the EU, to
reach an economic level which would allow it to stand on its own two feet within a reasonable
period of time.
Let us leave the examination of the EUs reality aside for the moment. It is evident that
the state of affairs in the EU is a sorry one. The idea and the reality are poles apart, and
corrections will have to be made above all to the reality if the EU is to achieve what European
citizens expect of it. The awkward predicament, however, is that this will require considerable
changes to the EU treaties and these are diffcult to renegotiate, as they require the assent of
all member governments as well as member parliaments.
Of course, it is harder to get 28 member states into one camp than six, particularly when the
28 contain groups with quite different historical experiences. This has obviously been the case
since the entry of the former Eastern Bloc countries. For half a century these states had to
suffer the pain of handing over their sovereignty to Moscow, and now joining the EU has again
forced them to endure sensitive incursions into their sovereignty.
It is entirely understandable that some of their politicians have a highly skeptical attitude
to further changes. But in turn, those other states in Europe, which are already prepared for
further integration, must have the right to form smaller circles and, for example, throw their
combined weight on the scales in world politics. The treaties include a specifc instrument
for this purpose: enhanced cooperation. This is sometimes perceived with some skepticism
as two-speed integration, but it is one which would allow courageous individual states to
move forward and with them advance the integration of the whole the same kind of moving
forward as the act of founding was for the original six.
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All this has only one catch: Enhanced cooperation along these lines requires the permission
of heads of state, and this permission has to be unanimous. This is hard to understand. As
mentioned before, while there has to be sympathy for the eastern members not wanting to
accept further losses of sovereignty, no individual member state of the EU, however small,
should be in a position to prevent others from closer cooperation. This is the most serious
weakness of the Lisbon treaty....
*** DER SPIEGEL / LINK
A Question of Velocity
Velocity, in the monetary sense, refers to how rapidly money circulates in our fnancial system.
(For those technically inclined, it is specifcally the total size of the economy, i.e., GDP, divided
by the amount of money in circulation.)
The reason that the rate at which money turns over is such a huge issue relates back to the
Feds hyperkinetic creation of banking reserves in the last fve years, the infamous QEs, now
amounting to over $3 trillion. Typically, banks multiply their reserves by almost 10 to 1, using
them to generate mortgages, auto fnancing, business loans, etc. Doing some simple math, this
means that there is the potential for close to $30 trillion of new credit extensions thanks to the
Feds binge printing.
A full utilization of this staggering sum would almost certainly precipitate an immense surge in
demand for goods and services. Of course, it would also mean a veritable explosion in consumer
prices, otherwise known as infation and, nearly instantaneously, interest rates, at least those
beyond the Feds control. Should velocity start returning to anything close to normal, the Fed
would have to do a complete 180 if they want to avoid a return to the infation-plagued 1970s,
or even worse. In other words, they would have to quickly become as aggressively tight as they
have been exceptionally easy.
With Evergreens considerable exposure to yield-oriented investments, this issue is naturally of
paramount concern to us, but we think all investors should be riveted on it as well. Going into
the SIC, my team and I were, as conveyed in recent EVAs, on high alert about indications that
velocity was coming out of its long bear market. The charts below give you some sense of why
our nerves have become increasingly frayed.
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David Rosenberg was one of the frst speakers at the Mauldin event, and he sits frmly in the
acceleration camp, as he displayed various graphics similar to those above. (I should further
mention that my partner, Anatole Kaletsky, who also spoke, is largely in agreement with
Rosie.) Considering that for nearly 20 years, David was a bull on bonds, and a pooh-pooher of
any infation revival, his dramatic about-face is defnitely noteworthy.
But on day two, Lacy Huntthe epitome of dapper in a white shirt, bow tie, and crisp
seersucker suitlaunched into one of the most powerful and persuasive counter-arguments Ive
ever witnessed.
First, as conveyed in numerous bygone EVAs, Hunt asserted that QEs 2 and 3 actually raised
longer rates. If youre skeptical, consider that since the taper was activated in December,
long-dated Treasury yields have been falling, fummoxing almost the entire investment
community (but rewarding our numerous against-the-grain purchases of beaten-down yield
issues in the second half of last year).
Second, Hunt affrmed my view that the notion of the Great Deleveraging (there are a lot
of Greats foating around these days) is much more myth than reality. While the US has
experienced a minor amount of debt pay-down since 2009, debt levels are now 435% of global
GDP versus 403% pre-crisis. Some deleveraging!
Next, he pointed out that once economies hit the 275% debt-to-GDP level (both private and
public), growth begins to fatten out. This happened in the US in 1997 and, consequently, our
economys normal 3% expansion clip has melted to 2% (actually 1.8% since 2000). Japan and
Europe hit the 275% threshold much earlier, and have continued piling on IOUs, but they also hit
the growth wall much earlier than America did. Ergo, at a certain point, when debt is roughly
three times as large as a given economy, growth becomes very diffcult. This is despite Al Gores
invention of the Internet in the 1990s, which arguably rivals the printing press (I dont think
even Al would claim to have created that!) as the ultimate breakthrough technology.
*** DAVID HAY / EMAIL FOR FULL ARTICLE
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Are there major mistakes in the bombshell economics book of
the year?
Thomas Pikettys Capital in the 21st Century has been at the center of the economic
conversation this year, raising questions about inequality and what to do about it. While
disagreements over his conclusions abounded, nearly everyone agreed that collecting the
historic data underlying the work was an important accomplishment.
Now, the Financial Times Chris Giles reports errors and strange practices in Pikettys
spreadsheets, akin to the errors found in a similarly conversation-defning publication, Carmen
Reinhardt and Ken Rogoffs working paper Growth in a Time of Debt.
Piketty collected historical data from numerous wealthy countries to assemble his accounting of
centuries worth of national wealth. But data can be spotty and imprecise, so he needed to
adjust raw data for the book. Giles, examining his spreadsheets, fnds transcription errors,
adjustments that dont add up, and unexplained assumptions about inequality data in years
without much information.
While you should read Giles whole article for all the
details (its not behind the FTs usual paywall), heres
an example to provide the favor: When constructing
an average measure of European wealth inequality,
he does not control for population but uses a simple
average across countries, which would distort the fnal
product (table, left):
Ultimately, it appears to come down to a question of
country-by-country analysis. When the FT compares
other UK datasets to Pikettys data, it fnds a glaring discrepancy: Piketty sees British inequality
rising again in the last four decades, where other sources show it falling, albeit with a blip in
the middle (chart, below):
But when it comes to France, where Pikettys own
knowledge and the datasets are stronger, there is a
better match (chart, right):
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The US is harder than either the UK or France because it has comparatively little data on
wealth. Giles didnt try to make his own set for that reason, but theres not as much divergence
between Pikettys data and other estimates as in the UK, and American wealth inequality does
appear to rise after 1980 by almost every measure:
And that is the bulk of Pikettys defense, too. In a
letter responding to the FTs analysis, Piketty did not
address some of the very specifc errors or suspect
decisions Giles identifedwe hope, in the future, he
doesbut says that he expects public access to this
data will result in improvements to it that confrm his
conclusions.
While he notes that offshore wealth may lead to
undercounting in some sources, his primary defense
is that another data set (pdf), created by economists Emmanuel Saez (a frequent Piketty
collaborator) and Gabriel Zucman, was built with different sources and methods after Pikettys
book was published but still shows rising inequality in the US.
*** QUARTZ / LINK
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27 May 2014
Charts That Make You Go Hmmm...
Source: @Not_Jim_Cramer
Just a matter of time...
*** ZEROHEDGE
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27 May 2014
www.Zerohedge.com
With de-dollarization escalating and Chinese offcials now openly calling for
a new and more effcient system, specifcally one which is not dominated by the US and the
dollar, it appears the day of a rebalancing is approaching more rapidly than most would like to
believe. On the heels of the vice president of Chinas central bank commenting that renminbi
will become the reserve currency we thought it time to look at the long-run history of the
Chinese currency and its rapidly rising internalization efforts.
As Simon Black of Sovereign Man noted recently, Chinese fnancial magazine Caijing has
reported that the vice president of Chinas central bank Pan Gongsheng made some rather
candid remarks about the dollar and renminbi at a recent monetary seminar.
Over the past several years, the dollar has lost signifcant ground to other currencies, in its
share of international trade transactions and national reserves settlement.
This means that, more and more, people around the world are dealing in currencies other than
US dollars when they trade with one another....
*** ZEROHEDGE / LINK
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THINGS THAT MAKE YOU GO
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27 May 2014
A respected group of economists, the OECD, has called on the British authorities to
rein in house price growth. It is the latest in a series of warnings which suggest that house price
infation poses a threat to Britains economic recovery...
Outside London and the surrounding regions, prices remain some way below their 2007 peak, as
this map produced by property adviser Savills and based on the latest Land Registry data from
March this year makes clear....
*** UK DAILY TELEGRAPH / LINK
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27 May 2014
Words That Make You Go Hmmm...
I never miss a chance to avail myself of
Bill Fleckensteins wisdom, as I believe he is one
of the shrewdest, most objective observers of
markets youll fnd anywhere in the world.
This week he chats with Eric King about the
ECBs increasingly desperate jawboning and the
likelihood of some action at their next meeting,
the real strength of the recovery, the
upcoming bang moment for the taper and, of
course, the gold market.
CLICK TO LISTEN
No, its not a still from Silence of
the Lambs... its Mark Faber talking to
Bloomberg about Chinas economy, its
shadow banking system, IPO issuance, and
what he calls a gigantic credit bubble.
Ian Bremmer of Eurasia Group weighs in
on the geopolitical aspects and offers a
perspective contrary to that of Faber,
making for a fascinating exchange.
Just dont ask Mark WHEN any of this will
happen (or whether hell sell you his gold).
CLICK TO WATCH
Freshly returned from the excellent
Mauldin/Altegris Strategic Investment
Conference in San Diego, I concluded that
having John Mauldin himself sum up what was
talked about is too good an opportunity to pass
up, so here he is, chatting to Eric King about
the thoughts of the speakers at what is without
question one of the strongest investment
conferences youll fnd anywhere in the world.
The conference continues to go from strength
to strength, and it is defnitely something you
should try to put in your diary for 2015.
CLICK TO LISTEN
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THINGS THAT MAKE YOU GO
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27 May 2014
and fnally...
Jimmy Fallons Mean Tweets series is something Ive featured before on
this page, and I make no excuses for doing so again because the latest edition is phenomenal!
Amongst others, youll fnd Julia Roberts, Andy Garcia, Ethan Hawke, and Courtney Cox all
reading aloud some of the more hurtful tweets directed at them. The last word, however, goes
to Sofa Vergara...
CLICK HERE TO WATCH VIDEO
Hmmm...
37
THINGS THAT MAKE YOU GO
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27 May 2014
Grant Williams
Grant Williams is portfolio and strategy advisor to
Vulpes Investment Management in Singapore a hedge
fund running over $280 million of largely partners
capital across multiple strategies.
The high level of capital committed by the Vulpes
partners ensures the strongest possible alignment
between the frm and its investors.
Grant has 28 years of experience in fnance on the
Asian, Australian, European, and US markets and
has held senior positions at several international
investment houses.
Grant has been writing Things That Make You Go Hmmm... since 2009.
For more information on Vulpes, please visit www.vulpesinvest.com.
*******
Follow me on Twitter: @TTMYGH
YouTube Video Channel: http://www.youtube.com/user/GWTTMYGH
ASFA Annual Conference 2013: Wizened In Oz
66th Annual CFA Conference, Singapore 2013 Presentation: Do The Math
Mines & Money, Hong Kong 2013 Presentation: Risk: Its Not Just A Board Game
Fall 2012 Presentation: Extraordinary Popular Delusions & the Madness of Markets
As a result of my role at Vulpes Investment Management, it falls upon
me to disclose that, from time to time, the views I express and/or the
commentary I write in the pages of Things That Make You Go Hmmm... may
refect the positioning of one or all of the Vulpes fundsthough I will not be
making any specifc recommendations in this publication.
38
THINGS THAT MAKE YOU GO
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27 May 2014
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