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THINGS THAT MAKE YOU GO

A walk around the fringes of finance

By Grant Williams

To learn more about Grant's new investment newsletter, Bull's Eye Investor, click here

02 JANUARY 2013

Janus, Cassandra & Pollyanna

"Oh, yes; the game was to just find something about everything to be glad aboutno matter what 'twas." Eleanor H. Porter, "Pollyanna" "Antiquity! thou wondrous charm, what art thou? that being nothing art everything? When thou wert, thou wert not antiquitythen thou wert nothing, but hadst a remoter antiquity, as thou calledst it, to look back to with blind veneration; thou thyself being to thyself flat, jejune, modern! What mystery lurks in this retroversion? or what half Januses are we, that cannot look forward with the same idolatry with which we for ever revert! The mighty future is as nothing, being everything! the past is everything, being nothing!" Charles Lamb "I willingly accept Cassandra's fate To speak the truth, although believed too late." Anne Killigrew

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

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Contents
THINGS THAT MAKE YOU GO HMMM... ...................................................3
France's 75% "Supertax" Thrown Out as Unfair and Unconstitutional ..........................18 The EU: So Where Did It All Go Wrong? ............................................................19 The Truth Is That Politicians Are Telling Lies ......................................................20 THE MATTERHORN INTERVIEWReview 2012: Alasdair Macleod ................................21 Narrative of an Empty Space ........................................................................23 Schuble's Secret Austerity Plan for Germany ....................................................24 Negative Rates on Deposits Would Force EU Core Banks to Repay Their LTRO Funding ....26 Angelo Mozilo Claims He Doesn't Know What "Verified Income" Is .............................27

CHARTS THAT MAKE YOU GO HMMM... ..................................................29 WORDS THAT MAKE YOU GO HMMM... ...................................................33 AND FINALLY ................................................................................34

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Things That Make You Go Hmmm...

Last year at this time, I wrote a year-in-review piece for 2012, which, from a retrospective angle, looked back at the events that I foresaw happening over the last twelve months (stay with me here). How did I do? Well, frankly, appallingly. How would I have done without the interference of the good men and women of the European Idiotocracy? Well, I suspect rather better, but that is besides the point. In an effort to demonstrate that I learn from my past mistakes, I will not be making any predictions about 2013 (at least not aloud), but shall instead be calling upon some special guests to give us their own, far more qualified and hopefully far more accurate predictions as to what will happen over the next year now that we have gotten that pesky "End of Days" thing out of the way. My first guest is an orphan who lives with her Aunt Polly in Beldingville, VT. This young lady is the author of "The Glad Game: Finding the Positive in Every Situation," a regular guest on CNBC, former head of the BLS, and one-time spokesperson for Kim JongilMs. Pollyanna Whittier. Don't let her youthful appearance fool you. Ms. Whittier has an opinion on just about everything, as you will soon see. And so, without further ado, I shall turn things over to the young lady to my right. Take it away, Pollyanna: Why, thank you, Mr. Williams. I must say you are looking incredibly handsome this morning. Well, 2012 didn't turn out to be such a bad year, despite all the doom and gloom of late 2011 when so many people predicted terrible things for this past year. Personally, I thought we'd sail through 2012 unscathed, that markets would regain previously lofty heights, that Greece would remain in the loving bosom of the European Union, that President Obama would be reelected, and that I'd get a new iPad Mini for Christmas. I think I did pretty well. But you didn't come here to read a recap of my predictions from last year, did you? It's 2013 you're interested in, so let's get to it, and we'll begin with the Fiscal Cliff and the debt ceiling. On December 26, President Obama announced to the world that he was selflessly flying home early from his Christmas holiday in Hawaii to work on single-handedly fixing the budget impasse despite the fact that Congress remained on recess. What a guy! Now, I read a whole bunch of stuff on the Internet that said he must have known he would do this before he went to Hawaii in the first place and that this whole thing was just a self-serving exercise in making him look good to the American public, but that would be manipulative and sneaky, so I think it's pretty safe to say we can rule that out.
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The very same day, the widely respected Secretary of the Treasury, Timothy F. Geithner, announced that he was taking what he called "extraordinary measures" in order to find $200 billion under the debt ceiling to avoid a US "default" on December 31. That $200 billion would fund the US for an entire two monthswhich is great! In a letter to congressional leaders, Mr. Geithner pointed out just how foolish certain Republicans people were being when they suggested that spending be capped. In a letter addressed to Tea Party leading light Republican Senator Jim DeMint, he wrote: In your letter, you suggest that the debt limit should not be raised, and instead the federal debt be "capped" at the current limit. You further propose that after the government's borrowing authority is exhausted in August, the United States should for some indefinite period pay only the interest on its debt, while stopping or delaying payment of a broad swath of other commitments the country has made under the law. I have expressed my concerns about this idea before, but I will restate them to be clear: this "prioritization" proposal advocates a radical and deeply irresponsible departure from the commitments by presidents of both parties, throughout American history, to honor all of the commitments our nation has made. The debt limit applies to past decisions of Congress. Increasing the debt limit is necessary to allow the United States to honor obligations previously authorized and appropriated by Congress. Bravo, Mr. Geithner, sir! Bravo! I predict that, despite all the hand-wringing, the two sides will come together in an agreed compromise and find a way to work together in order to kick the can a little farther down the road extend the debt ceiling by six months and create some sort of bipartisan plan to make sure the United States lives within its means, pays down its debt, and becomes more fiscally responsible. When it is unveiled, the world will let out a huge cheer! In Europe, I see great things happening in 2013. Greece will remain in the European Union, and it will meet all the targets set by the Troika. In fact, by the end of the year, estimates for GDP will be revised up, unemployment will shrink, and the promises of the likes of Antonis Samaras will be proven to be rock solid. Angela Merkel will be reelected on an emotional tide driven by the German people's compassionate desire to help fund their less-fortunate neighbours to the south.

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Silvio Berlusconi will return to power in Italy a changed and contrite figure and will set about tackling Italy's burgeoning unemployment situation while the illegal flight of money across Italy's borders in an attempt to avoid taxes will cease voluntarily as Italians work together to get through the recent period of uncertainty (a phenomenon that will spread to Greece as the current generation throw off a multi-generational refusal to pay taxes and do their bit to fill the public coffers), the coalition government in the UK will put their differences behind them and, through the generous application of more "fauxsterity," will get Britain back on track. Elsewhere, Japan will decide that immigration is the answer to its demographic problem and will welcome hundreds of thousands of "Gaijin" with open arms, which will bring in enough additional tax revenue to avoid the debt disaster that the likes of meanspirited Kyle Bass are predicting could finally materialize in 2013, Argentina will stop expropriating assets and return them to their rightful owners, Iran and Israel will resolve their differences, and in North Africa, that silly little misunderstanding about the new constitution proposed by the Muslim Brotherhood will be resolved peacefully. Syria? Don't worry. It's all good. The Australian housing market (it still makes me laugh that people call it a "bubble" when it is so clearly nothing of the sort) will continue its inexorable rise higher as the level of household debt in the sun-burned country proves that the "new normal" levels are sustainable indefinitely while Australia's customer-in-chief, China, will rebound from its recent temporary slowdown (if you can even call it that), and the new leaders will right the ship, get GDP growing at 10% again, and manage the housing market as well as bank balance sheets perfectly to ensure that everything gets back on track. In sport, the New York Mets will win the World Series, Fulham will win the English Premier League, and Andy Murray will win the Grand Slam. Well, after that rosy assessment of the upcoming year, it is time to turn to my second guest to ask her for an assessment of the points made by the charming Ms. Whittier as well as any predictions of her own that she would like to make. The gorgeous lady in question is the daughter of King Priam and Queen Hecuba of Troy. Her renowned beauty is such that none other than Apollo, god of light and the sun, truth and prophecy, healing, plague, music and poetry (amongst other things) bestowed upon her the rather useful gift of being able to prophesy the futurealthough, after a rather unsavoury spat, he somewhat selfishly cursed her, ensuring that none of her predictions would be believed.

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Don't let that deter you from hearing what she has to say, though, because whether you believe her or not, her track record is pretty darned good. She warned the Trojans about the Wooden Horse, but they ignored her. She foretold of both her own and King Agamemnon's death, but, again, nobody listened and, supposedly, she also foretold that James "Buster" Douglas would knock out Mike Tyson in the tenth, but that was yet another prediction that fell upon deaf ears. Anyway, I shall place you in the safe hands of the lady in question, Cassandra of Troy. Thank you for that warm introduction, Mr. Williams. It's funny, but you look a lot older and much greyer in person than you do in photographs. I'm sorry, folks, but what you have read thus far is so completely removed from reality as to be nothing short of ridiculous. Allow me to explain. First of all, this whole Fiscal Cliff/Debt Ceiling nonsense. These bozos will come to a compromise, but most likely not until it's too late because they loathe each other and are desperate to score political points wherever possible. They do this because they believe (most likely correctly) that the population of the United States don't really understand what is at stake here, and they do it because each side genuinely believes that they have a mandate to stop the other from doing what they want to. It's ridiculous, but it's reality. A simple cursory glance at the history of the debt ceiling over the last 37 years (left) is enough to tell you what will happen here. It will get raised. End of conversation. The most likely outcome to the whole Fiscal Cliff fiasco? We go right over the damn thing before agreement is reached, with each side loudly blaming the other like a pair of eight-year-olds found standing over a broken vase. They sadly believe that, after August 2011's short-lived reaction to the supposedly disastrous credit-rating downgrade, they can get away with just about anything. They are wrong. Speaking of "wrong," let's move on to the bond market, shall we? "Wrong" doesn't even come close to describing where the prices of sovereign debt instruments are currently trading, and in 2013 that, I believe, will be the biggest story to unfold.

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If, as I foresee, a sweeping wave of reality begins to wash over the investment world, then sovereign bond holders (and the institutions that produce them) are in for a world of hurt. Where this cascade begins is anybody's guess, though. It could be in Japan now that the era of "Abenomics" seems to be upon us. To recap, Japan has the world's most outrageous debt-to-GDP ratio at roughly 240%, and as that super-smart guy Kyle Bass has so eloquently pointed out recently, their debt will shortly reach 1 quadrillion yena hard-to-fathom number which he simplifies thus: "If you were to try and count to a quadrillion and every number took you one second to get there, how long do you think it would take you to count to a quadrillion? Thirty-one million years." Kyle's assessment of the ramifications of that? "There is no chance the Japanese can ever repay their debts. Plain and simple."
One Quadrillion Yen (1,000,000,000,000,000)

1000

800

600

400

200

Japan Government Total Outstanding Government Bonds & Borrowing (tn)

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

Source: Bloomberg

Kyle is right. In fact, Kyle has been right for a couple of years. But Kyle has been a victim of his own peerless ability for clear thoughthe has been early. No matter. 2013 will be the year Kyle is proven oh-so-right.

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300 250

Japan Debt-to-GDP Level (IMF Estimates) 1980-2017 I M F

200

%
150

F O R E
100

C A S T

50

0 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016

Source: Bloomberg

Adding to Japan's woes is their demographic situation, which will now lurch from problematic to perilous almost overnight:
Population in millions

Japanese Population 1870-2100 (est)

130 120 110 100 90 80 70 60 50 40 30 20 10 0

PROJECTED

1875

1895

1915

1935

1955

1975

1995

2015

2035

2055

2075

Source: The Housing Time Bomb

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2095

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Now, charts are great to outline the problems facing Japan, but what about "Abenomics" as the possible solution to Japan's woes? Well, according to one of the smartest Japanwatchers I know, BAML's Pawan Kalia, far from being Japan's saviour, Abenomics could, in fact, be the final straw that pushes the Land of the Rising Sun towards sunset in a hurry. Pawan's logic? Simple. Abe won election on a platform of aggressive fiscal expansion, and although 3-4 trillion is priced into the market, the final number may well be closer to 10 trillion or 2% of GDP (in fact, if you listen very carefully, you can even hear numbers like 200 trillion over 10 years being waved around with abandon in certain circles). If that is even close to what eventually transpires, it will require massive new bond issuance. Ironically, just as fixing the confidence problem will sound the Fed's death knell, in Japan, generating the much-hyped "2-3% inflation" will also bring the bond market crashing down around the government and the BoJ's ears. Be careful what you wish for. In Europe, that cute little blonde girl couldn't be more hopelessly wrong about everything being fine and the EU putting all its problems behind it in 2013. Let's begin with Greece. Beware Alex Tsipras. The charismatic and combative leader of the left-wing, anti-austerity Syriza party came from nowhere last year to almost sweep into power on a wave of anti-European sentiment, and, though Antonis Samaras' New Democracy Party (the original architects of Greece's cooked books) narrowly won the election, Tsipras is not lying down quietly: (UK Guardian): Public opinion surveys have repeatedly put his party in the lead since the summer. He has his sights on power. Demands for fresh elections are likely to be heard frequently over the course of 2013. "This government does not have a long lifeline," he says, waving his arms for emphasis as he lists the measures adopted by his "dogmatic neo-liberal" political enemies that, he continues, have been tried and failed miserably. "Greece is unique. Even after its debt was restructured it continued to go up," he says. Because the measures were self-defeating, he adds, they were doomed to exacerbate the country's economic death spiral. "A haircut is inevitable and it will happen after the German elections [next September]." Sound like a recipe for stability to you? Greece will announce it is wildly missing yet another set of targets, and Europe's "core" countries (post the German elections) will force them out of the EU once the idea of further austerity is soundly trounced by the rise of Syriza and, more worryingly, Golden Dawn in yet another hastily called election.

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Talking of elections, 2013 sees several key votes across Europe, and there will be some interesting resultsparticularly when, as I foresee, anti-European platforms do well in some of the earlier ones. Politicians are never shy to leap on a bandwagon, and though it is getting crowded, the one carrying the anti-Europeans looks far more comfortable than the one with the wonky wheel upon which the incumbents are perched.
Country Cyprus Italy Italy Germany Election Type Presidential Parliamentary Presidential Parliamentary Date February 17 February 24 May September

Angela Merkel will win another term in Germany in September but will come under immense pressure over the continuing need to funnel money into Greeceand, by that point, Spainas the kingdom slides ever deeper into the mire. The true state of Spain's finances will still not be revealed in 2013 as, should that happen, Europe will have no chance of survival in its current form, but the microdata out of Spain will continue to deteriorate (though, miraculously, the headline GDP number will remain suspiciously resilient). This has already begun with a damning new assessment of Spain's housing situation by the country's top consultants, which was highlighted by Ambrose Evans-Pritchard this past week: (UK Daily Telegraph): RR de Acua & Asociados expects home prices in Madrid, Barcelona and other major cities to fall a further 30pc in a relentless slide until 2018, but it may be even worse in sunbelt regions where 400,000 Britons either live or own homes. Fresh losses could reach 50pc and drag on for 10 to 15 years in those places where construction ran wild during the bubble, bringing the total decline from peak to trough towards 75pc. "The market is broken," said Fernando Rodrguez de Acua, the group's vicepresident. "We calculate that there are almost 2m properties waiting to be sold. We have made no progress at all over the past five years in clearing the stock," he said. "There are 800,000 used homes on the market. Developers are sitting on a further 700,00 completed units. Another 300,000 have been foreclosed and 150,000 are in foreclosure proceedings, and there are another 250,000 still under construction. It's crazy." The overhang is vast for a country with 48m inhabitants and annual demand near 200,000. It is coupled with an outflow of workers and the start of an aging population crisis.

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What else? Well, Q4 2012 is going to be a disappointing one for holders of (seemingly) fairly priced stocks, I am afraid. The Christmas shopping period will disappoint, and there will be a slew of lowered forecasts for Q1 to deal with after some downbeat earnings conference calls as the global economy finally decouples from the optimistic outlook fostered by fake central bank confidence. Results in Q1 will confirm what the realists amongst us have known for a whilethat the US and Europe are both in recession (the chart below demonstrates how Eurozone IP has plummeted after the post-2008 rebound), along with the UK and Japan. Several other countries will soon join them. Equities, which have returned to within touching distance of lifetime highs, due in large part to stupidly high bond markets, will be forced to rerate and that means one thinglower prices. Money printing will continue at a rapid pace with QE5 a necessary evil before the summer rolls around, and as European data deteriorates even further, Mario Draghi will be called upon to make good on his promise to do "whatever it takes" to save the euro and will need to pull one more rabbit out of his hat. Can he? I don't think so.
10

%
-5

-10

Eurostat Eurozone Industrial Production (ex-construction) 1991-2012

-15

-20 Q1 91 Q1 93 Q1 95 Q1 97 Q1 99 Q1 01 Q1 03 Q1 05 Q1 07 Q1 09 Q1 11 Q3 12

Source: Bloomberg

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Gold and silver will reassert themselves as viable alternatives to fiat currency (despite continued and inexplicable sharp sell-offs on days when all logic would dictate they go higherparticularly, and, of course, quite coincidentallyimmediately ahead of nonfarm payroll numbers and FOMC decisions) as central banks continue to buy physical bullion as fast as they sell paper futures contracts can, and a group of hedge funds will begin to accumulate COMEX futures in readiness to stand for delivery en masse in order to flush out any missing gold from storage warehouses. Gold and silver miners will finally see their stocks perform as they should (although a look at the chart below shows that, 2012 aside, the miners have outperformed the S&P 500 quite handily since 2009), and the sector will end the year amongst the best-performing.

Source: Bloomberg

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Tensions in the Middle East will ratchet up again as Iran shows no signs of softening, and the spat between Japan and China will be exacerbated by Shinzo Abe's government's decision to increase the 1% of GDP cap on defense spending in order to help with his illjudged pledge to generate 3% inflation.

Japan Defense Expenditure

Defence expenditure growth rate (US$bn)

70 60 50 40 30 20 10 0 2008 2009 2010 2011 2012

Defense expenditure (US$bn)

Defense expenditure growth rate (%)

Source: Japan budget

Egypt and Syria will both be concerns (though to differing degrees) in the first half of 2013, and there will be social unrest in China as well as some of the smaller Asian nations in the latter half of the year as food inflation begins to rise alarmingly. This will lead to a new wave of protectionism as countries strive to ensure their populations are adequately fed. There are plenty more speed bumps facing the world in 2013, but, seeing as nobody listens to me anyway, I'll leave it there for now. Good luck to all of you (especially New York Mets and Fulham fansyou'll need it with the terrible year you have in store). Well, my thanks to Cassandra for her views on the upcoming year. That was certainly a contrast to those of Ms. Whittier. All that remains is to sum things up, and to do that, I have enlisted the help of the ideal arbiter: Janus, god of beginnings and transitions. A man who simultaneously looks to both the past and the future. If anybody can make sense of what we are about to witness, it's him.

02 JANUARY 2013

Defence expenditure growth rate (%)

16% 14% 12% 10% 8% 6% 4% 2% 0% -2% -4%

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Mr. Janus (or should I just call you "Janus"?), over to you for a few closing thoughts. Thanks, Grant. Please, feel free to call me by the name I prefer to use these days: J-Diddy. Well, we've certainly been given two contrasting views of what 2013 could end up looking like to the world. Pollyanna's rose-tinted view in which everything runs smoothly, problems get "fixed" (usually by benevolent governments) and nothing untoward actually happenswhich certainly has been the case by and large in 2012and Cassandra's more, let's just call it "skeptical," outlook. The truth is likely somewhere in between. As 2012 closes, despite all the problems facing Europe, equities have performed rather well and the euro, miraculously, has actually strengthened 1%, thanks entirely to Mario Draghi and the power of hot air.
35

30

European Benchmark Indices 2012 Performance (local ccy)

25

20

15

10

-5 ASE (Greece) Dax SMI (Germany) (Switzerland) CAC-40 (France) Euro Stoxx MIB (Italy) FTSE 100 (UK) IBEX (Spain)

Source: Bloomberg

It is highly unlikely, however, that the status quo can be maintained for another year. The forces at work here are just too powerful.

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There are a few things I believe bear watching very closely in 2013 as I fear all of them will have a profound impact on how the year plays out. Firstly, as has already been mentioned, Japan's attempts to generate inflation and the possible rout in her bond market that those attempts may cause is a situation to watch very closely. The weakening of the yen has been quite drastic so far, as has the effect on Japan's Nikkei 225 Index (see chart below), but don't expect other nations to allow Japan to steal a march on them in the race to debase. Japan may well have given the other competitors too large a head start to catch upbut the tenacity with which Abe pursues his preelection promise will have severe and wide-reaching implicationsnot least in the US Treasury market, where any dollars accumulated by the BoJ will be stashed.

Source: Bloomberg

Secondly, the continuing explosion in US student debt delinquencies will also have its day in the spotlight. It will not be pretty: (Zerohedge): We have already discussed the student loan bubble and its popping previously... As of September 30, federal (not total, just federal) rose to a gargantuan $956 billion, an increase of $42 billion in the quarterthe biggest quarterly update since 2006. What also shouldn't be a surprise, at least to our readers who read about it here first, but what will stun the general public are the two charts below, the first of which shows the amount of 90+ day student loan delinquencies, and the second shows the amount of newly delinquent 30+ day student loan balances. The charts speak for themselves.
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Source: Zerohedge

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And lastly, keep an eye on foodstamp recipients in the US (which will blow through 50 million in 2013), the ongoing crackdown on graft in China (a tightening net, which will catch some big names), weakening economic data out of the Netherlands and Finland (which will threaten to fracture the Northern European alliance), and the stubbornly high price of Brent crude in the face of all kinds of promises of abundant natural gas supplies coming out of the USA. 2013 could also be the year Meredith Whitney's much-vaunted Municipal Meltdown call has its day in the sun. Lastly, before I go, I know who the New York Mets are, but who the hell are Fulham? Well, there you have it, folks. A Pollyanna 2013, a Cassandra 2013, and something in between. All in all, making predictions is always a folly of sorts, but being aware of the issues that may well have an effect is an extremely useful exercise indeed. There is no way of telling what will happen next year, other than to say that the road down which multiple cans have been kicked for several years now most certainly ends somewhere. Will it be in 2013? I don't know... but I fear it might. Like several other people, I personally believe that Japan will be the big story this coming year as Abe-san hits the "Print" button like a frantic game of Whack-a-Mole without paying attention to the line of dominoes that begins right by his feet. That line leads in all sorts of directions and ends up firmly in the US and European bond markets, but whether the dominoes fall in one smooth line or not is anybody's guess. Whatever happens, we all get to sit and watch it play out together, so all that remains for me to do is to thank you all sincerely for reading my weekly ramblings in 2012 and to wish each and every one of you all the very best for 2013. ********

This week's articles include a few recent ones and some that I read over the holiday
period that I think deserve a wider audience, so if you've seen them already, skip over them. They include a fascinating interview with Alasdair Macleod on gold and silver, a history of the Senkaku Islands, and an explanation of why China and Japan are squabbling over "a clutch of five uninhabited islets and three rocks," a look inside Wolfgang Schuble's "secret plan," and a retrospective on the EU appropriately titled "Where Did It All Go Wrong?" We hear about the latest setback to Francois Hollande's socialist agenda, delivered by Les Sages, find out that (horror of horrors) politicians are prone to telling lies, and discover how negative deposit rates in Europe could be a disaster for its core banks. Wanna know if you qualify as "rich"? Check out the WSJ's infographic, take a look at the last full day of trading in the S&P 500 for 2012 and the corresponding movement in the VIX, the improving US housing market, and real interest rates (the true signal for any end to the precious metals bull market).
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We hear from good friends John Mauldin and Dave Collum and watch a stark documentary from the BBC on Spain's demise, plus the smartest guy many of you have never heard of shows us what "The End Game" looks like. Don't miss that one!

Happy New Year! France's constitutional council has dealt a blow to beleaguered Socialist

president Franois Hollande by rejecting the new 75% rate of income tax due to come into effect on Tuesday. It declared the measure, the backbone of the French leader's successful presidential election campaign earlier this year, to be unfair and therefore unconstitutional. Immediately after the surprise legal ruling on Saturday, the French government pledged to redraft and resubmit the proposal. The so-called "supertax" rate of 75% on individual incomes over 1m a year had provoked anger and angst in recent weeks after French national hero Grard Depardieu announced he was moving just over the border into Belgium, reportedly for tax reasons. After the French prime minister, Jean-Marc Ayrault, described the actor's move into tax exile as "shabby", Depardieu wrote a furious open letter in which he accused the Socialist government of seeking to "punish success, creation and talent". Hollande had called on the country's wealthy to show some economic "patriotism" and said the 75% tax band would be a temporary two-year measure. The tax was expected to affect only 1,500 people and raise 500m in 2013 as part of a raft of measures aimed at helping reduce France's public deficit. The measure was broadly supported by the French left, but criticised by the right and business leaders as likely to provoke a flood of entrepreneurs and the wealthy moving abroad. The politically independent constitutional council, made up of nine judges and three former presidents known as les sages (the wise), was asked to rule on the tax by the centreright opposition UMP party. It did not declare the tax too high, but said its application was unconstitutional because it "failed to recognise equality before public burdens". Unlike regular income tax, which is levied on households, the 75% rate would have been applied to individuals. This meant an individual earning over 1m a year would have been subject to the tax, but a couple each earning 900,000 would not. The council ruled this was unconstitutional as it could lead to two households with identical incomes being taxed differently. Ayrault's office said in a statement on Saturday that it would draw up a "new proposal taking into account the principles raised by the constitutional council's decision" to be part of the next budget. No details were given on when or how this would be done. Finance minister Pierre Moscovici told BFM television: "Our deficit-cutting path will not be affected."

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The council's decision comes as a triple whammy for Hollande in a week that saw unemployment leap to a 15-year high and the International Monetary Fund reduce France's growth forecasts to well below the 0.8% Hollande is seeking to reduce the deficit.
*** UK GUARDIAN / LINK

In the first week of 1973, the week Britain joined the Common Market, the Government

put on a festival of European culture so that the British people could share what their Prime Minister, Edward Heath, called his heart full of joy at their countrys shiny new Euro-future. Alas, the "Fanfare for Europe", though now entirely forgotten, ended up symbolising the ambivalence of the 40-year relationship that has followed. A plan to borrow the Bayeux Tapestry and show it in Westminster Hall was dropped after it was pointed out that the butchery of Saxons by Normans was hardly a suitable theme for the occasion. Instead, the centrepiece was a showcase of European treasures at the V&Athe French refused to lend the Mona Lisa, despite Heath's personal plea, on the grounds that the British Museum had just refused them a loan of the Rosetta Stone. As an alternative, with a certain unintended symbolism, they offered Georges de la Tour's Le Tricheur, a picture of someone cheating at cards. There was also, among other things, an exhibition of European sweets at the Whitechapel Art Gallery; a "Dutch breakfast" and food festival at a London hotel; and co-ordinated demonstrations of "Continental cooking" at Scottish gas and electricity board showrooms. Three hundred anti-EEC demonstrators gathered outside the Royal Opera House, booing and chanting "Sieg Heil" as the Queen, Prince Philip and Heath arrived for a gala performance to celebrate the new dawn. Yet despite all the oppositionand it was seriouswhat also strikes one now is the strength of support. Every single national newspaper, including the Daily Mail, the Daily and Sunday Telegraphs and Rupert Murdoch's Sun, was enthusiastic (the Express papers had been opposed, but came round). Most of the business community was fervently pro-EEC. Despite widespread doubts over whether Britain would ever actually join, and despite the opposition of the Labour Party to membership on the terms proposed, the key Commons vote had been won comfortably, 356 to 244. Sixty-nine Labour rebels voted for entry; only 39 Tory rebels voted to stay out. And within two years, 67 per cent of the British people endorsed the UK's membership in a referendum. The Labour leadership reversed its positionand one Margaret Thatcher, leader of the opposition, also took a prominent role in the Yes campaign. The No forces were represented by the likes of Tony Benn and the Tory hard Right. In the end, only the Western Isles and Shetland voted against. Both on the political spectrum and geographically, it seemed that only people on the margins were against the EEC. So exactly 40 years on, with a substantial majority of the British peopleand even members of the Cabinetnow apparently backing withdrawal, how did Britain's relationship with Brussels go sour?
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Part of the difficulty had, of course, been sown decades before 1973, when Britain, still seeing itself as much a world as a European power, chose to stand apart from the Common Market, and its forebear, the European Coal and Steel Community. So now we were entering a club whose rules were set long before we joined, without our involvement, and not necessarily in our favour. The terms of British membership were particularly poor. At the beginning, Britainthough one of the less prosperous memberswas the second-biggest net contributor to the EEC, behind only the far richer Germans, pouring large sums into subsidising French farmers, butter mountains and wine lakes through the Common Agricultural Policy. Not until 1984, 11 years after joining, did Margaret Thatcher secure a permanent twothirds rebate. "They say it's their money, and I say it's mine," she remarked at the Brussels summit in March of that year.
*** UK DAILY TELEGRAPH / LINK

Was 2012 the year when the democratic world lost its grip on reality? Must we assume

now that no party that speaks the truth about the economic future has a chance of winning power in a national election? With the results of presidential contests in the United States and France as evidence, this would seem to be the only possible conclusion. Any political leader prepared to deceive the electorate into believing that government spending, and the vast system of services that it provides, can go on as beforeor that they will be able to resume as soon as this momentary emergency is overwas propelled into office virtually by acclamation. So universal has this rule turned out to be that parties and leaders who know betterwhose economic literacy is beyond questionare now afraid even to hint at the fact which must eventually be faced. The promises that governments are making to their electorates are not just misleading: they are unforgivably dishonest. It will not be possible to go on as we are, or to return to the expectations that we once had. The immediate emergency created by the crash of 2008 was not some temporary blip in the infinitely expanding growth of the beneficent state. It was, in fact, almost irrelevant to the larger truth which it happened, by coincidence, to bring into view. Government on the scale established in most modern Western countries is simply unaffordable. In Britain, the disagreement between Labour and the Conservatives over how to reduce the deficit (cut spending or increase borrowing?) is ridiculously insignificant and out of touch with the actual proportions of the problem. In the UK, the US, and (above all) the countries of the EU, democratic politics is being conducted on false premises. Of course, once in power all governments must deal with realityeven if they have been elected on a systematic lie. As one ex-minister famously put it when he was released from the burden of office: "There's no money left." So that challenge must be met. How do you propose to go on providing the entitlements that you have sworn never to end, without any money? The victorious political parties of the Left have a ready answer to that one. They will raise taxes on the "rich". In France and the United States, this is the formula that is being presented not only as an economic solution but also as a just social settlement, since the "rich" are inherently wicked and must have acquired their wealth by confiscating it from the poor.

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Of course, the moral logic of this principle is absurd. The amount of wealth in an economy is not fixed so that one person having more means that somebody else must have less. But, for the purposes of our problem, it is the fault in the economic logic that is more important. The amount of money that is required to fund government entitlement programmes is now so enormous that it could not be procured by even very large increases in taxation on the "rich". Assuming that you could get all of the rich members of your population to stand still and be fleeced (rather than leaving the country, as Grard Depardieu and a vast army of his French brethren are doing), there are simply not enough of them to provide the revenue that a universal, comprehensive benefits system requires. And if all the French rich did stay put, and submit to President Hollande's quixotic 75 per cent income tax, they would soon be too impoverished to invest in the supply side of the economy, which would undermine any possibility of growth.
*** UK DAILY TELEGRAPH / LINK

Lars Schall: Can I interrupt you because I would like to bring it both together. The Yuan in China, theres now a lot of talk about the Yuan being the next reserve currency and we see the Chinese buying gold like crazy. Do you think they have something in mind with backing up their currency with gold? Alasdair Macleod: Yes, I do. I think they do have a plan, and we don't know what it is, but we can guess. My starting point in this is that all the Chinese and Russian Marxian economists were taught that capitalism destroys itself. Now, whether you believe that or not isn't the point, but the Chinese economists actually have this in mind. And they can see the dangers of the way the US dollar is going. We must also understand that the dollar is for security reasons not something they want to use for their international trade settlements. Remember that every dollar transaction done in the world is reflected in a bank account in New York. So, the Chinese want to get away from the potential control and the intelligence information that it gives America. They want to use a different settlement medium. Now, they agreed about 10 years ago with the Russians to set up the Shanghai Cooperation Organisation (SCO), and the last unsatisfied objective of the SCO is to have a common trade settlement system between the members of the SCO, which at the moment are Russia, China, and the various "stans" in middle-Asia. But interestingly, the next wave of members who will join are India, Iran, Pakistan, Mongolia and Afghanistan (as soon as NATO has left). So you've really got the bulk of Asia's four billion people, and they're going to be settling cross-border trade not with the dollar but with something else. They need to be gold-rich to give confidence to their currencies.I suspect that the Chinese Yuan will play a big role in Asia. What they're doing with Iran is interesting. They're settling net balances in gold, and gold is being re-monetized in that sense.

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And I think that China has accumulated a lot more gold than they officially tell us. So they have the potential to use gold as money. I can see gold being re-monetized in the loosest sense for the largest internal market the world has ever seen. Believe me, it's happening now. L.S.: Okay, let me then connect another thing with this question. Do you think the Chinese will get paid in gold for perhaps helping out in the Euro crisis? So they're helping to prop up the Euro, and they get in turn some of the European gold? A.M.: I dont think China is going to get sucked into supporting the Euro, no, I don't see that at all. What I think is possible is they would very much like to cash in Euros for gold. I am sure they would consider taking physical gold as collateral for Eurozone loans. But for now, every time a Eurozone country goes to China and says "We'll be very grateful for some of your money," the Chinese listen very politely and then just show them the door. China is not in that role as they've got enough of their own problems. L.S.: Yes. A.M.: And look at it also this way, the average European has a standard of living perhaps ten times better than the average Chinese. China is not interested. L.S.: Let us then talk about the three big stories in gold this year, and I think the one thing out of the different campaigns for repatriation of gold reserves into the respective countries. A.M.: Yes. That was going to be my overall story for 2012, and that owes much to the work that you have done. Teasing out of the German authorities exactly how much gold they think they have got and where was a great achievement, a journalistic scoop. And what I particularly liked was not only did you manage to do that, but you have encouraged others to do the same thing elsewhere. The journalist in Mexico who has got the Mexican central bank to talk. We now discover from Austria that the bulk of their gold is in England, and not only that, but they earned 300 million Euro in leasing fees. What a mistake to tell us that! L.S.: Yes, but can you elaborate on this. Why was it a mistake? A.M.: Well, I think it was a mistake because the sensible thing for a central banker to do when asked questions about this, given that a lot of the gold has probably disappeared through leasing, is actually to say as little as possible. The real reason for having gold as part of your foreign reserves is to have the ultimate protection of it for your country and currency. Are you telling us, central bankers, that you have compromised that role by leasing it with the risk that it won't come back? You know that must be the next question you journalists will ask. L.S.: Yes.

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A.M.: And of course, to that they all clam up. So I think it was a mistake for the Austrian central bank to admit it. And the most recent story has been the Netherlands where it has just been revealed by the central bank after lots and lots of pressure that they have got 50 per cent of their gold in New York, they've got 20 per cent in Canada, 20 per cent in London and 10 per cent only 10 per cent in Amsterdam. L.S.: So we come to the question, what is a gold reserve. I would say a gold reserve is gold that you have in your possession and at your disposal at any time? A.M.: Yes, a central banker has actually got to be able to go down into the basement, into the strong room, and count it. L.S.: Yes. A.M: It's as simple as that.
*** GOLD SWITZERLAND / LINK

A clutch of five uninhabited islets and three rocks, cast adrift out in the currents of the

Western Pacific, recently demonstrated their power to convulse East Asia. China, which (along with Taiwan) claims them, calls them the Diaoyu islands; to Japan, which controls them, they are the Senkaku islands. In September the Japanese government bought the three islets it did not already own from their private landlord. That set off a storm of protests in China, a slump in Japanese exports to China and in Chinese tourists to Japan, and incursions by Chinese vessels into the waters around the Senkakus. In theory, ownership is straightforward. But out in the ocean, things are not so clear. The question of who the islands belong to is obscured by the fog of history, and many furlongs of water. The Senkakus have long been known to sailors from the Okinawa chain of islands, and Okinawa is part of Japan. But Okinawa was once an independent kingdom, a peaceful place which avoided conflict with the two great powers on either side of it by paying tribute to both. And the islands' geography is as ambiguous as their history.The Senkakus are closer to Japan than to China, but they lie on the edge of China's continental shelf, just as it plummets into the Okinawa Trough, 2,300 metres (7,500 feet) at its deepest. China insists the trough proves that the continental shelves of China and Japan are not connected, and that the trough "serves as a boundary between them". Japan understands geography differently: the trough is a mere "incidental depression". Japan's diplomats say their country "discovered" the islands in 1884. In early 1895, when the government had ascertained that the islands were terra nullius, that is, a no-man's-land controlled or claimed by no one, it annexed them.
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A man from Fukuoka, Tatsushiro Koga, was given leave to "develop" the islands. Koga brought in some 200 Okinawans. They processed katsuobushidried, smoked bonito, out of which dashi, a staple stock in Japanese cooking, is made. And they caught the short-tailed albatross, which bred there, selling the prized feathers for down. The last of Koga's employees left in 1940. (No family is so closely associated with the near-extinction of a once-abundant species.) After Japan's defeat in the second world war, America took control of Okinawa prefecture, including the Senkaku islands, which it liked to bomb, for practice. Only in 1972 did it hand the whole lot back to Japan, which it said still had "residual sovereignty" over the Senkakus. Case closed, says Japan: there is no territorial dispute at all. Its arguments are couched in the hard, cold legal language of modern nation states. But the Japanese do not mention that in 1895 Qing China lay prostrate, defeated the previous year by an aggressive, expansionist and rapidly Westernising Japan. As part of the spoils from that war, Japan took Taiwan, a hop and a skip from the newly annexed Senkakus. China's claims, by contrast, are redolent of the old China-centred world that shattered in 189495. It was a world in which status and stability in relations across Asia were regulated through a system of tributary states acknowledging Chinese centrality. Everything had its placeincluding the Diaoyu islands. In 1893 the Empress Dowager Cixi bestowed on a doctor in the imperial household the right to collect from them a prized medicinal herb. Only in China would gathering sea lavender count as evidence of possession. But the Chinese also say that the Diaoyus have been part of the Chinese order since at least the Ming dynasty. They are recorded in "Voyage with a Tail Wind", published in 1403, a portolano recounting a journey from Fujian province to Ryukyu, the old name for the Okinawa chain of islands. By the following century, in "A Record of an Imperial Envoy's Visit to the Ryukyu Kingdom", Chinese names were given to all the islets in the Diaoyu group. Japanese diplomats do not bring it up, but the great Japanese military scholar, Shihei Hayashi, followed convention in giving the islands their Chinese names in his map of 1785, "A General Outline of Three Countries" (see map). He also coloured them in the same pink as China.
*** ECONOMIST / LINK

German Finance Minister Wolfgang Schuble has an inimitable way of misleading

his listeners with a torrent of obfuscating words. When asked if the Greek bailout would cost more money, he responded: "Not necessarily," adding that there was merely "a greater financial requirement on the timeline." It could soon be a similar story with yet another gem from Schuble's repertoire of quotations. "Germany is clearly a gainer from the euro," as the minister likes to say. But if what his team has been writing over the past few weeks is true, Germans will soon find that their presumed winnings have transformed into losses. The government in Berlin is living in a dual reality. Strategists in the center-right coaliton parties are planning to enhance benefits for families, pensioners and the long-term unemployed in a bid to woo voters in the upcoming elections.

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By contrast, due to the economic slowdown, experts in Schuble's ministry are anticipating an entirely different scenario: The next governmentno matter who will be chancellor and which parties will be in powerwon't be able to boost spending. Instead, it will have to impose rigorous spending restraint. According to the recommendations made by Schuble's team, in order to brace itself for the consequences of the euro crisis, Germany will have to drastically increase taxes and make painful cuts in social services over the coming years. These ideas don't fit with the current political climate in Germany, which has been characterized for months by a passionate debate about how additional money could be used to combat poverty among the elderly and improve life for low-wage earners. Schuble nevertheless feels that his experts' forecasts are realistic. He has expressly approved their proposals and ordered them to continue to work on the cost-cutting program. At the same time, he has ordered strict secrecy to avoid any adverse effects on his party's campaigns for the upcoming state election in Lower Saxony in January and the general election in the fall of 2013. The Germans face a bitter dj vu. It was only 10 years ago that then-Chancellor Gerhard Schrder of the center-left Social Democrats (SPD) and his conservative challenger Edmund Stoiber fought an election campaign that was primarily focused on social justice. After Schrder's victory, it became clear that Germany was strapped for cash. Subsequently, the chancellor introduced his radicaland widely unpopular"Agenda 2010" reforms of the labor market and welfare system. This time, Schuble's team has calculated that even deeper cuts may be needed. What the Finance Ministry officials have listed under the seemingly innocuous title "MediumTerm Budget Goals of the Federal Government" is nothing less than the most comprehensive austerity program in postwar German history. In order to avoid forcing the government to incur additional debt, the officials are scrutinizing subsidies, entitlements and welfare benefits worth tens of billions of euros. There are also plans to raise taxes. Finance Ministry officials propose increasing the reduced VAT rate of 7 percentwhich currently applies to such items as food, books and tickets for public transportationto the regular VAT rate of 19 percent. This alone would allow the state to collect an extra 23 billion ($30 billion) every year. Schuble's team wants to slash 10 billion from the federal government's contributions to the German health fund, which currently helps to stabilize premiums in the statutory health insurance system. At the same time, they know that Germany's statutory insurers will require more money over the coming years as the population's life expectancy increases. This has led them to consider introducing a surcharge on income tax to support the system. The experts call this a "health solidarity tax."

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The plan also calls for state pension funds to do their part. At the same time, Schuble intends to counteract the expected labor shortage. Since the baby boomer generation of the '50s and '60s will go into retirement in the future, Germans will be expected to work longer. The ministry envisages the retirement age remaining at 67, but the retirement benefit period will have "to be linked to life expectancy." In other words, the older Germans get, the longer they will have to workif need be, beyond the age of 67.
*** DER SPIEGEL / LINK

There is concern among some Eurozone banks that the ECB may push the deposit rates
on excess reserves into negative territory next year. In fact, the 12-month EUR OIS rate (the socalled EONIA swap rate), which is the market expectation of where the overnight rates will be next year, briefly dipped below zero recently.

Source: Soberlook

If that were to happen, banks would in effect be penalized for holding excess reserves at the ECB. Such action would force those who are able (more likely the core banks) to pay down their borrowings from the ECB (otherwise they are paying 1% for the LTRO funding and then paying again for depositing the cash at the ECB). JPMorgan: There has been renewed speculation that the ECB will set a negative rate on its deposit facility. Indeed, the EONIA curve, which tracks the deposit facility, dipped into negative territory for the first time last week. Negative interest rates on deposits are like safe deposit chargesthe idea is that they should incentivize banks to lend out money rather than suffer an erosion of capital. Core banks are more susceptible to negative deposit rates. The first response by core banks would be to repay back most of the extra funds they borrowed via the 3y LTROs, which they can do from January 30th. We previously argued that core banks could repay 100bn of 3y LTRO funds as yield compression makes carry trades less attractive. But an ECB deposit rate cut to -25bp could induce them to pay back perhaps all of the 140bn they borrowed on net via the 3y LTROs.
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In preparation for this potential event, banks have been paying down the shorter-term LTRO balances (not all LTRO is 3 years). In fact, the ECB is showing a gradual but consistent decline in LTRO funding provided to the euro area banks. According to JPMorgan, the effect of a negative deposit rate on excess balances would help the Eurozone periphery by pushing capital out of the core.
*** SOBER LOOK / LINK

Another day, another corporate titan suffering from devastating amnesia. This

time, the memory-loss patient is none other than Angelo Mozilo, the former CEO of Countrywide Financial. Deposed in the landmark lawsuit between the monoline insurer MBIA and Countrywide/ Bank of America, Mozilo professed not to know the difference between "verified" income and "stated" income. He also made some incredible remarks regarding his notorious "Friends of Angelo" lending program, in which, among others, political figures like North Dakota Senator Kent Conrad and Connecticut Senator Chris Dodd received Countrywide mortgages on highly advantageous terms just because they were tight with the CEO. As chief of Countrywide, Mozilo headed the single most corrupt subprime mortgage lender in America during the period preceding the crisis. Charged with mass fraud and headed for trial in October of 2010, Mozilo and the SEC ultimately settled four days before opening arguments were set to begin in Los Angeles. Ultimately, Mozilo got away with no jail time, paying a $67.5 million settlement, $20 million of which was covered by Countrywide, which by then had been acquired by Bank of America, a major bailout recipient. Just in the years between 2000 and 2008, Mozilo made over half a billion dollars$521.5 million, according to one corporate research firm. If you were going to assign blame to any single person for the financial crisis, Angelo Mozilo would rank right up there with people like Lehman's idiot CEO Dick Fuld, deranged creditdefault-swap peddler Joe Cassano of AIG's Financial Products unit, and deregulatory pioneers like Bob Rubin and Phil Gramm. Mozilo's role, however, was probably the single most shameful, as he represented the conscious decision of mortgage underwriters to abandon lending standards in order to claim ever-larger chunks of market share. Mozilo was actually deposed last June in the MBIA lawsuit, but the Mozilo depo only just became public recently. In the suit, the insurer claimed to have been fraudulently induced to insure mortgages that did not conform to Countrywide's stated underwriting standards. The "Friends of Angelo" program was therefore highly relevant to the MBIA action, because Mozilo was apparently unilaterally approving loans for people who didn't meet underwriting guidelines simply because Mozilo knew them.

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In the deposition, Mozilo, demonstrating admirable chutzpah, claimed that the "FOA" program (which he denied was organized"it was not a program," he said, adding that people would just put things on his desk marked "FOA") was not just for the chairman of the Senate Banking Committee, but also for "taxi drivers" and other such ordinary folk: Waiters, taxi drivers, limo drivers, stewardesses, gardenersand I'd give them my card, and when they called, I put those loans into our underwriting system. My people decided to label "FOA." They were not friends. But it was business. That the "business" also involved giving discounts of roughly $2,700 a year to Dodd and $10,000 a year to Conrad seems to be immaterial to Mozilo. In any case, in the deposition, he is asked about how the "Friends of Angelo" program worked. I'll add more to this later in the day, but to me this pair of passages is the money shot. Unfortunately, the names of the particular "friends" remain sealed by the court: Q. Can you turn ahead to the document dated April 6th, 2006 You say in that, in that request, you say: "Close the loan right away, and thank [REDACTED] for this business. He is a close, personal friend." Do you see that? MR. SIEGEL: Hang on a second, Angelo, while I try to find this document. THE WITNESS: Towards the end. MR. SIEGEL: Oh, it's towards the end. Okay. Got it. Q. Again, my question is: Do you see that you stated: "Close the loan right away, and thank [REDACTED] for this business. He is a close, personal friend"? Do you see that? A. Yes. Q. And was that true? MR. SIEGEL: Question's irrelevant. THE WITNESS: A close friend, yeah. So we've established that Mozilo is okaying loans for close friends. Does he bend at all to get the deal done? Read for yourselves:...
*** MATT TAIBBI / LINK

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Charts That Make You Go Hmmm...

As the Fiscal Cliff approached, Doug Short took a look at an hourly chart of December's
trading in the S&P and showed how the VIX spiked aggressively into the close with one trading session still to run in 2012. By the time this is published, we will know whether that presaged any wild action on the 31st or not...

Source: Doug Short

According to housingtracker, median asking prices were up 2.5% year-over-year

in December. We can't read too much into this increase because these are just asking prices, and median prices can be distorted by the mix. As an example, the median asking price might have increased just because there are fewer low-priced foreclosures listed for sale. Note: The Trulia asking price index is adjusted for both mix and seasonality, but the housingtracker data is just the median, the 25th percentile and 75th percentileand is impacted by both changes in the mix and seasonality. But with those caveats, here is a graph of asking prices compared to the year-over-year change in the Case-Shiller composite 20 index. The Case-Shiller index is in red. The Case-Shiller Composite 20 index was up 4.3% year-overyear in October, and will probably be up close to 6% in 2012. The brief period in 2010 with a year-over-year increase in the repeat sales index was related to the housing tax credit. Also note that the 25th percentile took the biggest hit (that was probably the flood of low-end foreclosures on the market).
*** CALCULATED RISK / LINK

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Ahead of the Fiscal Cliff denouement, The Wall Street Journal published a handy

reference guide to help their readers understand who qualifies as "rich". Barry Ritholtz picked it up, and I'm shamelessly stealing it from him! Thanks, Barry: "The top 1% of U.S. households have a net worth above $6.8 million or at least $521,000 in income, according to data from the Federal Reserve and the Tax Policy Center in Washington. The cutoffs for the top 5% are $1.9 million in net worth, or $209,000 in income."

Source: WSJ (via Barry Ritholtz)

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There's an interview piece coming out at Seeking Alpha sometime in the next few

days on the subject of "Positioning for 2013" and, during the discussion, the subject of inflation and real interest rates in relation to the gold price came up. Here's a chart that explains much of the current gold bull market:

Source: Tim Iacono

As should be clear from above, it's not the absolute level of inflation or interest rates that really mattersits the relative level of the two. It just so happens that average real interest rates over the last ten years have been almost exactly the same as they were in the mid- to late-1970sabout -1 percentthat culminated with the spectacular blow-off top in early 1980 under Fed Chairman Paul Volcker. The gold price then declined for the next 20 years while real interest rates were positive, averaging about 4 percent.
*** TIM IACONO / LINK

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This year's most-read article on Zerohedge (in fact, the most-read of all time on

the number one financial blog in the world) was the brilliant Raoul Pal's presentation "The End Game," which he gave to a no-doubt-spellbound audience in Shanghai in May. In my humble opinion, Raoul is one of the best and brightest minds out there, and his insightful and wholly realistic appraisals of the state of the world are such a breath of fresh air to me as to be borderline intoxicating. Like Kyle Bass, Raoul's predictions haven't played outyetbut I honestly believe that when the next phase of the ongong crisis is finally allowed to take place, Raoul will take his rightful place among the household names of investing. The charts below, culled from his presentation, are as follows: 1. 2. 3. 4. MSCI World Index IBEX Index SMI Index SXEP Index (Energy Stocks)

Click HERE to view the entire R-rated presentation "The End Game"

Source: Raoul Pal

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Words That Make You Go Hmmm...

Forget what you are told by various
European officials. Ignore the endless parade of manipulated market savants who "see" sovereign spreads falling and claim that indicates all is well in Europe. To truly understand the situation, watch this must-see documentary from the BBC's Paul Mason on the rise and fall of Spain. (via Zerohedge) CLICK TO WATCH

My good friend John Mauldin spoke with Eric King this

past week to discuss his thoughts on what 2013 holds in store for us. Fortunately, we get to listen in. John focuses on some themes that we have spoken about in this edition of TTMYGH, including Japan (which John has called "a bug in search of a windshield" for some time now), France (which I have been calling way worse than that), and China...

CLICK TO LISTEN

Dave Collum is not a professional

investor. Dave Collum is a chemistry professor at Columbia. However, Dave Collum is also one of the most astute market-watchers you could ever hope to come across (as well as being a really great guy!). Listen in as he discusses his review of 2012 and his thoughts on what 2013 has in store for us with Chris Martenson of Peak Prosperity. CLICK TO LISTEN

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And Finally...

Source: Lars Lindqvist

Each year the World Press Photo contest awards prizes to the best photographs taken
during the year in a number of categories. Every year, the quality of the exhibition (which travels around the world) surpasses that of the previous year. 2012 is no exception. If you get the chance to go and see the World Press Photo exhibition, it is well worth doing, but in the meantime, to see some truly amazing photos taken around the world in 2012, click HERE. Alternatively, for some slightly less highbrow festive entertainment, you can watch a (hopefully) drunk German man make a fool of himself by clicking HERE.

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Grant Williams
Grant Williams is a portfolio and strategy advisor to Vulpes Investment Management in Singaporea hedge fund running over $250 million of largely partners' capital across multiple strategies. The high level of capital committed by the Vulpes partners ensures the strongest possible alignment between us and our investors. In Q4 2012, we will be launching the Vulpes Agricultural Land Investment Company (VALIC), a globally diversified agricultural land vehicle that will provide truly diversified exposure to the agricultural sector through a global portfolio of physical farmland assets. Grant has 26 years of experience in finance on the Asian, Australian, European, and US markets and has held senior positions at several international investment houses. Grant has been writing Things That Make You Go Hmmm... since 2009. For more information on Vulpes, please visit www.vulpesinvest.com

*******
Follow me on Twitter: @TTMYGH YouTube Video Channel: http://www.youtube.com/user/GWTTMYGH Fall 2012 Presentation: "Extraordinary Popular Delusions & the Madness of Markets": California Investment Conference 2012 Presentation: "Simplicity": Part I : Part II As a result of my role at Vulpes Investment Management, it falls upon me to disclose that, from time to time, the views I express and/or the commentary I write in the pages of Things That Make You Go Hmmm... may reflect the positioning of one or all of the Vulpes fundsthough I will not be making any specific recommendations in this publication.

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