HMMM November 10

Hmmm...
THINGS THAT MAKE YOU GO
A walk around the fringes of finance
By Grant Williams
11 November 2014
Hato No Naka No Neko ()

To sum up what is most crucial in Japanese
political culture: the Japanese have never been
encouraged to think that the force of an idea could
measure up to the physical forces of a government.
The key to understanding Japanese power relations
is that they are unregulated by transcendental
concepts. The public has no intellectual means to
a consistent judgment of the political aspects of
life. The weaker, ideologically inspired political
groups or individuals have no leverage of any kind
over the status quo other than the little material
pressure they are sometimes able to muster. In
short, Japanese political practice is a matter of
might is right disguised by assurances and tokens
of benevolence.
Karel Van Wolferen, The Enigma of Japanese Power: People and Politics in a
Stateless Nation
Living in a world such as this is like dancing on a live volcano.

Kentetsu Takamori
Copyright Mauldin Economics. Unauthorized disclosure prohibited. Use of content subject to terms of use stated on last page.
Hmmm...
Contents
THINGS THAT MAKE YOU GO HMMM... ....................................................3
Inflation or Deflation? .................................................................................20
HK Property Prices Continue to Rise ................................................................22
Dollar Smashes Through Resistance as Mega-Rally Gathers Pace ..............................23
Mario Draghis Efforts to Save EMU Have Hit the Berlin Wall ...................................25
Is It Time to Get Long Volatility? ....................................................................26
Billionaire Enclave Prices Drop on Singapore Property Curbs ...................................27
The Colder War by Marin Katusa: An Exclusive Extract ..........................................29
Bob Rodriguez: New Great Recession Coming In 3 Years ........................................31
Deep Divisions Emerge over ECB Quantitative Easing Plans ....................................33
The Dodgiest Duo in the Suspect Six ...............................................................35
CHARTS THAT MAKE YOU GO HMMM... ..................................................37

WORDS THAT MAKE YOU GO HMMM... ...................................................40
AND FINALLY... .............................................................................41
11 November 2014
Hmmm...
Things That Make You Go Hmmm...

Last week, appropriately enough on Halloween, the Bank of Japan did something truly scary.
As shocks go, this one though it had been fairly well-telegraphed to the markets that
something wicked this way might be coming was in a league of its own.
Im sure that by now youre well aware of what Kuroda-san (the Governor of the Bank of Japan)
announced to the world; but in case youre not, heres a little recap:
(Japan Times): The bank will enter a new phase of monetary easing in terms of
quantity and quality, Kuroda said.... This is coming from a different level in
both quality and quantity, Kuroda told reporters after the two-day Policy Board
meeting. We have put forward everything there is to do at this point, he said....
The former chief of the Asian Development Bank said the BOJ will aim to expand the
amount of outstanding JGBs by hiking purchases to an annual pace of 50 trillion.
Increasing the amount outstanding of the banks JGBs at an annual pace of 50
trillion will bring the current balance of 89 trillion to about ... 190 trillion by the
end of 2014.
It also will target longer-term debt, including JGBs with maturities as long as 40
years, as well as ETFs and real estate investment trusts, it said....
Kuroda said hed allow this monetary experiment to run until the inflation target is
met.
He also said the main target of the BOJs operations would switch from the
uncollateralized overnight call rate to the monetary base, which will be fattened
via money market operations to the tune of about 60 trillion to 70 trillion a year.
11 November 2014
Hmmm...
Kuroda also pledged that the BoJ:

Will invest 1 trillion in exchange-traded funds and 30 billion in real-estate
investment trusts annually.
Vows to continue quantitative and qualitative monetary easing until 2 percent
inflation is achieved in a stable manner.
Will conduct monetary market operations so Japans monetary base expands at
an annual pace of about 60 trillion to 70 trillion per year. The monetary base is
cash in circulation and the balance of current-account deposits held by financial
institutions at the BOJ.
Shocking? Unprecedented? Foolhardy?
All of the above... except...
That was the announcement Kuroda made in April of 2013 as the first of Abenomics Three
Arrows was fired.
Last week, barely 19 months after the world digested
the news that Japan was going all-in, Kuroda pointed
over the shoulders of all the other players at the table,
said Look! Behind you! An Austrian economist! And in
the ensuing panic, he slipped a bunch of freshly minted
chips from a secret pocket in his jacket onto the table
and, once calm had returned, went all-in again.
This time, apparently, he was serious.
The Bank of Japan, said Kuroda, would first be
increasing its purchases of JGBs to 80 trillion a year
from the previous range of 60-70 trillion.
What does this mean in real(ish) money? Well thats
about $720 billion. Sounds OK, right? After all, TARP was $787 billion, and that hasnt done any
damage whatsoever, has it?
However, theres this age-old problem with comparing apples to oranges; and so, once we get
our citrus fruits straight and convert the BOJs stimulus to a number proportionate to the larger
economy of the USA, we find ourselves staring at the equivalent of the BoJs splashing out
almost $3 trillion. Each year.
JP Morgan swiftly pointed out that this means the BoJ will be buying more than double the
amount of new JGBs issued by the government.
Yes. You read that right. Double the total new government issuance. The Fed are lightweights
compared to this mob.
11 November 2014
Hmmm...
Well get back to why theyre doing this a little later.

But this is just the beginning.
The BoJ will also triple its purchases of ETFs and J-REITs (yes, direct intervention by a Central
Bank into the stock market is now not something to be afraid of, but rather embraced) which
will make the BoJ the largest buyer of Japanese equities.
Do you smell anything wrong with this, Dear Reader?
Well, by way of a change, a few mainstream commentators are also beginning to question the
logic of Kuroda-sans latest incursion into monetary madness:
(Gavyn Davies, FT): [The BoJs] gigantic increase in QE activities... [is] ...of first
order global importance ensuring that the total central bank injection of liquidity
into the global economy in 2015 will be much larger than it has been in the last
year....
The Japanese injection... relative to the size of the economy, is far larger than
anything attempted by the other central banks.
[Japan is now conducting] a laboratory experiment... [and] Governor Kurodas
monetary experiment has in effect morphed into a strategy of devaluation plus
financial repression.
But Davies isnt alone in highlighting the sheer madness of Kurodas latest move:
(Richard Katz, The Oriental Economist): In the face of growing loss of faith in the
Bank of Japans ability to either achieve its 2% inflation target in the foreseeable
future or to help boost real growth, Kuroda has doubled down his strategy of lots
of confident talk and even more money-creation.... (I)t is well known that Prime
Minister Shinzo Abe, who keeps a stock monitor in his offices, sees rising stock
prices as critical to voter confidence in Abenomics and hence his own approval
ratings.... Moves to lower the yen and raise stock prices are key to the BoJs own
strategy and tactics; Kuroda is an Abe ally, not a puppet.
However, leave it to David Stockman one of the shoutiest sane people youll ever come across
to dispense with journalistic niceties.
In a piece entitled The BOJ Jumps the Monetary Shark Now the Machines, Madmen and
Morons Are Raging, Stockman takes Kuroda and the BoJ to task as only he can:
This is just plain sick. Hardly a day after the greatest central bank fraudster of
all time, Maestro Greenspan, confessed that QE has not helped the main street
economy and jobs, the lunatics at the BOJ flat-out jumped the monetary shark. Even
then, the madman Kuroda pulled off his incendiary maneuver by a bare 5-4 vote.
Apparently the dissenters Messrs. Morimoto, Ishida, Sato and Kiuchi are only
semi-mad.
11 November 2014
Hmmm...
Never mind that the BOJ ... balance sheet which had previously exploded to nearly
50% of Japans national income or more than double the already mind-boggling US
ratio of 25%.
In fact, this was just the beginning of a Ponzi scheme so vast that in a matter of
seconds it ignited the Japanese stock averages by 5%. And heres the reason: Japan
Inc. is fixing to inject a massive bid into the stock market based on a monumental
emission of central bank credit created out of thin air. So doing, it has generated
the greatest frontrunning frenzy ever recorded.
The scheme is so insane that the surge of markets around the world in response
to the BOJs announcement is proof positive that the mother of all central bank
bubbles now envelopes the entire globe.
The surge of markets to which Stockman refers illustrates the madness that has consumed
both equity and bond markets in the wake of the 2008 ceding of custody of formerly free
markets to the worlds central banks.
These are the two charts that people care about when discussing the Bank of Japans moves.
Firstly, the Nikkei 225:
Nikkei 225
20,000
March 2013 - November 2014
+41.6%
(+24.3% Annualized)
+30.19%
(586% Annualized)
15,000
QE11*
+16.96%
(+1,643% Annualized)
QE10*
* Estimate only. Opinions vary

10,000
Mar 2013
Jun 2013
Sep 2013
Dec 2013
Mar 2014
Jun 2014
Sep 2014
Nov 2014
Source: Bloomberg
As you can see, stocks have exploded in Japan since the beginning of Abenomics, rising 41.6%
in just 19 months but it wasnt a straight line. Initially, after a 30% surge, the doubts set
in and the Nikkei retraced most of its gains before beginning a long grind higher as investors
reluctantly bought into the idea that Abenomics might just work raise the Nikkei 225.
11 November 2014
Hmmm...
Taking a step back, we get to see just how poorly stocks have behaved since the bursting of the
twin Japanese bubbles in real estate and equities back in the late 1980s, as well as the clear
breakout, retest, and break higher from the 25-year downward trendline:
Nikkei 225
Jun 1984 - Nov 2014 (quarterly)

40000
35000
30000
-79.51%
25000
20000
+37.09%
15000
Abenomics
10000
5000
Jun 1984
Jun 1987
Jun 1990
Jun 1993
Jun 1996
Jun 1999
Jun 2002
Jun 2005
Jun 2008
Jun 2011
Jun 2014
Source: Bloomberg
The second chart that folks care about in the wake of the BoJs moves is this one, the yen:
Japanese Yen (inverted)

Feb 2013 - Nov 2014
90
QE10*
100
-23.86%
110
* Estimate only. Opinions vary

120
Feb 2013
Apr 2013
Jun 2013
11 November 2014
QE11*
Aug 2013
Oct 2013
Dec 2013
Feb 2014
Apr 2014
Jun 2014
Aug 2014
Oct 2014
Source: Bloomberg
Hmmm...
Again, as you can clearly see, QE10 and now QE11 jumpstarted the yen. (Are you paying
attention, Janet? Do you think for a second that when the BoJ announced QE1, it was as the
first installment of a cunning 11-part plan to be implemented over a couple of decades?)
However, jumpstarted tends to imply a positive effect, as does a chart that travels from
bottom-left to top-right. In the chart above, I have inverted the yen to better reflect the
damage being done to it by the BoJ rather than the kinda-cool-looking chart where it explodes
higher.
Of course, thanks to the wisdom of guys like
To receive Grant Williams'
Kyle Bass (whose Rational Investor Paradox
Things That Make You Go Hmmm...
warned of a plummeting yen and a skyrocketing
delivered to your inbox:
Nikkei) and Dylan Grice (whose 63,000,000 call
for the Nikkei by 2025 is occasioning fewer
SUBSCRIBE NOW!
chuckles by the day), everybody is riding both
these horses hard. However, the fact that
everybody got long the Nikkei and everybody
got short the yen when Abenomics first arrow
was fired is the wrong reason to be cheering Kurodas interference in the natural forces that
used to drive markets.
Now, long the Nikkei and short the yen is undoubtedly a great trade and has much further
to go something my friend Jared Dillian pointed out in his excellent Daily Dirtnap recently.
Pointedly, the piece was entitled Unlimited Upside:
(The Daily Dirtnap): I am starting to wonder if nobody understands why this trade
works and why it will continue to work, and why, in November 2012, I called it THE
GREATEST TRADE EVER. The reason it is the greatest trade ever is because you
literally have unlimited upside. JPY can infinitely weaken. The stock market can go
infinitely high....
So USDJPY is going to get to 120 in a hurry, then what? Youve seen the chart. If it
gets through that trendline, the sky is the limit. Where could the Nikkei go? Beats
the heck out of me. But that is the great and interesting thing about this trade, is
that if Japan really does find itself in trouble, they cant default well, I suppose
they could, and that actually would be the smart thing to do, but no, they will print
their way out.
No arguments from me there, Jared, BUT... the charts that people need to be looking at to try
to understand the dire state Japan is in (as well as the ultimate futility of the Keynesian free
lunch) are charts of things that cant be directly influenced by the BoJ but which are instead
supposed to be indirect beneficiaries of Abenomics and to generate the organic growth needed
to revive Japans moribund economy.
11 November 2014
Hmmm...
Charts like... oh, I dunno, Japanese industrial production:
Japan: Industrial Production

1996 - 2014
2010=100
120
Abenomics
100
80
60
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Source: Bloomberg
Orrrr... perhaps that relatively unimportant macroeconomic datapoint, GDP:
Japan: Gross Domestic Product

3.0
Q3 1994 - Q3 2014
2.5
2.0
Abenomics
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
-2.0
-2.5
-3.0
-3.5
-4.0
Q3 94 Q3 95 Q3 96 Q3 97 Q3 98 Q3 99 Q3 00 Q3 01 Q3 02 Q3 03 Q3 04 Q3 05 Q3 06 Q3 07 Q3 08 Q3 09 Q3 10 Q3 11 Q3 12 Q3 13 Q3 14
Source: Bloomberg
11 November 2014
Hmmm...
Then there are the places my friend Paul Mylchreest of ADM ISI looked at this week in an
excellent piece that landed in my inbox places like real Japanese household incomes:
(Paul Mylchreest): You only know with hindsight, but theres a good chance that
Japans economy has just moved into the terminal ward of mismanagement and
decline.
Kuroda went nuclear just as Mr and Mrs Watonabe never mind the rest of the
world had begun to realise that Abenomics wasnt working.
Real household incomes in Japan are running 6.0% lower year-on-year, which is
close to the worst theyve been in a decade and most of the bad data points have
followed the implementation of Abenomics.
Japan: Real Household Income YoY

2008 - 2014
8
7
6
5
4
Abenomics
3
2
1
0
-1
-2
-3
-4
-5
-6
-7
-8
Nov 08
Nov 09
Nov 10
Nov 11
Nov 12
Nov 13
Nov 14
Source: ADM ISI/Bloomberg
And then of course there are the twin charts from my presentation at the Strategic Investment
Conference back in May: Japans trade balance and current account (updated here to show the
improvement in the data):
11 November 2014
10
Hmmm...
Japan: Current Account and Trade Balance

1986 - 2014
2000
1500
1000
Abenomics
500
2
0
1
-500
Current Account (% GDP) RHS
Trade Balance (Y bln) LHS
-1000
-1500
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
-1
Source: Bloomberg
In his most recent Global Macro Investor, my friend and colleague Raoul Pal pointed out a
couple more problems with the Japanese economy that no amount of prestidigitation can hope
to cure, beginning with the reaction to Abes recent sales tax hike and moving swiftly along
to exports (ordinarily the natural beneficiary of a plummeting currency for an exporter like
Japan):
(Global Macro Investor): Japans economy has reacted as it always has with regards
to the tax hike it got flushed down the toilet. It puts to rest any stupid notions
that you can falsely raise inflation and see it stick. It also shows that QE does not
help the economy in any way.
We can also see that massive Japanese QE has not helped its industrial production
base. And exports are just not picking up with a cheaper currency. And even
after a massive currency move versus the RMB, it is still not able to export its way
out of trouble demand is just not there, regardless of price.
11 November 2014
11
Hmmm...
Ahem!
So the simple truth is this:
Japans only solution to its crippling debt burden and seemingly
unbreakable deflationary spiral is to weaken its currency.
Period.
Yes, there is plenty of talk of reform, though given Japans
corporate culture that is far harder to achieve and much farther in
the distance than most outside observers could possibly imagine;
but were the narrative presented to the world simply as we are
going to destroy our currency, even the market monkeys who
continue to see no evil would be forced to take drastic action.
By maintaining the pretense that weakening the yen is actually part of a broader strategy which
will ultimately be successful, the Bank of Japan is engaged in simply that: pretense.
Now dont get me wrong: Im not saying the necessary reforms CANT be achieved in Japan
just that they wont. Not in time to save the country from disaster at the hands of Abe, Kuroda,
and the rest of the Crazy Gang, anyway.
Those stagnant exports are a huge, flashing-red warning sign in the face of what can only be
described as a resounding success in beginning the complete destruction of weakening the yen.
Lets face it, if you are Japan and a chart like the one below doesnt have a significant
positive effect on your exports, something is structurally wrong and structural change is not
something the Japanese like (or do):
Asias Currency War: % Appreciation vs Japanese Yen
April 2013 - November 2014
25
20
15
10
-5
11 November 2014
NE
SI
A
IN
DO
A
IN
DI
ND
LA
AI
NE
IP
PI
IL
TH
A
PH
RE
AY
SI
M
AL
NG
AP
O
SI
NG
W
AN
TA
I
KO
or
e)
NG
HO
ffs
h
(o
NA
CH
I
A
IN
CH
SO
UT
H
KO
RE
(o
ns
ho
re
)
Source: Bloomberg
12
Hmmm...
Now, after 18 months of a one-sided assault on the Asian currency markets, several countries
are nearing a line in the sand. Raoul again:
(Global Macro Investor): This all leads me to another important topic for discussion,
and that is Japan and China. There is a war going on and we need to understand
it... with a chart of the Chinese Yuan versus the Japanese Yen. This is going to
become increasingly important in understanding what is likely to develop.
The JPY has just wiped out 21 years of Yuan weakness.
This is an aggressive competitive devaluation against Japans largest competitor
China. This is a big deal. But in the case of Japan it is not all about dollar
strength; something much more troubling is going on, and that is a currency war
with its competitors. The JPY/KRW cross is also getting close to some very key
levels. The JPY/TWD cross is equally troubling.
JPY vs CNY/KRW/TWD
25
20
Chinese Yuan
15
10
1992
Last Price
1994
1996
1998
2000
2002
20
2004
2006
2008
2010
2012
2014
0.40
Korean Won
0.35
15
Taiwan Dollar
0.30
10
0.25
5
0.20
0
1981
0.15
1986
1991
1996
2001
2006
2011 2014
1989
1994
1999
2004
2009
2014
Source: Bloomberg/Global Macro Investor
11 November 2014
13
Hmmm...
Think the Bank of Korea or the Central Bank of the Republic of China (Taiwan to you and me)
are about to sit idly by and watch their exporters get put out of business by Japan Inc.? Me
either... and that spells T-R-O-U-B-L-E, as Raoul ominously points out:
(Global Macro Investor): The issue here is the mercantile trade policies of Asia in a
highly-indebted, imbalanced, low-demand world the only answer is currency war
and trade war.
Thus, I think it will not have escaped the notice of the other Asian countries
that Japan is trying to steal an advantage from them in a desperate bid to
counterbalance the gigantic debts within Japan itself.
Their response will be the only answer they can make allowing their own
currencies to fall sharply (I think the charts in the previous section show that).
In a currency war in Asia, four possible risk
events could occur:
1. Someone loses control of their
currency, and economic collapse and
de facto defaults occur (devaluation or
hyperinflation).
2. The dollar absolutely skyrockets
(almost a certainty).
3. The Yuan is forced to devalue
sharply.
4. War.
So it appears that Japan is playing some highrisk games, both with its own markets and with its mercantile neighbours.
Scary stuff perfect for Halloween.
JGB Holdings
(% of outstanding JGBs)
But what of the bond market? Well, fortunately for

Japan, the profile of those poor unfortunate souls who
own JGBs looks like this (left):
Banks
33%
Insurance/
Private
Pension
Funds
27%
Other
5%
Intra-govt
BoJ
23%
(incl. GPIF)
8%
Overseas
4%
As you can see, only 4% of JGBs are owned by overseas

investors, which helps keep this little problem inhouse for a while longer, and in-house is something
Japan needs, because the Japanese ability (and
willingness) to take pain for the greater good is
beyond the comprehension of most market watchers.
Thats the good news.
Source: Capital Economics
11 November 2014
14
Hmmm...
The bad news brings us back to what we were discussing earlier the reason why the BoJ is
ramping up its bond buying to levels which have left madness in the dust.
As I wrote in Things That Make You Go Hmmm... back in 2011 when Japans Government
Pension Investment Fund (GPIF) first announced that they would be turning seller of JGBs to
fund retirees demands for cash, that shift, when it occurred, was going to cause significant
problems for the BoJ. Well, right around the time Kuroda was scaring the kids with his latest
news conference, the GPIF made an announcement of their own quite coincidentally and in no
way coordinated with Kurodas:
(Bloomberg): GPIF, which manages 127.3 trillion yen, revealed plans to reduce
domestic bonds, while setting allocation targets of 25% each for Japanese and
overseas equities, up from 12% each.
Under the new plan, GPIF would need to cut about 23.4 trillion yen of its domestic
bond holdings to achieve the 35% target, according to data
Japan GPIF Allocations
compiled by Bloomberg based on the plan. The funds new
as at June 2013
target allows for a 10% deviation. GPIF held 67.9 trillion
yen of local debt, which accounted for about 53% of its
portfolio as of the end of June.
The announcement of the BOJs added stimulus on the
same day GPIF revealed its new investment plan was
no coincidence, according to Takatoshi Ito, who led a
government pension advisory panel last year.
Domestic Bonds
Int'l Bonds
Domestic Stocks
Int'l Stocks
Short-Term Assets
Source: Bank of Japan
Everybody involved was on the same wavelength, Ito

said in a telephone interview from Bangkok. It is quite a
coordinated action, whether consciously or unconsciously.
It was beautifully timed, and I would call it a Halloween
treat.
A Halloween treat? Really?

REALLY?
William Pesek of Bloomberg took a rather dimmer view:
(Bloomberg): In announcing that it will boost purchases of government bonds to a
record annual pace of $709 billion, the central bank has just added further fuel to
the most obvious bond bubble in modern history and helped create a fresh one
on stocks. Once the laws of finance, and gravity, reassert themselves, Japans debt
market could crash in ways that make the 2008 collapse of Lehman Brothers look
like a warm-up. Worse, because Japans interest-rate environment is so warped,
investors wont have the usual warning signs of market distress.
11 November 2014
15
Hmmm...
Even before Fridays bond-buying move, Japan had lost its last honest tool of price
discovery. When a nation that needs 16 digits in yen terms to express its national
debt (it reached 1,000,000,000,000,000 yen in August 2013) sees benchmark
yields falling, youve entered the financial Twilight Zone. Good luck fairly pricing
corporate, asset-backed or mortgage-backed securities....
Kurodas latest move means Japans QE scheme could last forever. The BOJ has
willingly become the Ministry of Finances ATM; reversing the arrangement will be
no small task.
Pesek continued, taking aim at the GPIF:
All this liquidity has made for surreal events in Tokyo. Take the news that Japans
$1.2 trillion Government Pension Investment Fund will dramatically rebalance
its portfolio away from bonds. Japan has enormous public debt and a fast-aging
population, and now the worlds biggest pension pool is shifting to stocks. Yet
somehow, 10-year yields are just 0.43 percent. The explanation, of course, is
that the parts of the market the BOJ doesnt already own are sedated by its
overwhelming liquidity. The BOJ is now on a financial treadmill thats bound to
accelerate, demanding ever more multi-trillion-dollar infusions to keep the market
in line.
And what of Japans households the people who have been promised that the value of any
cash holdings will be systematically destroyed by the men entrusted to steward the country
successfully across the river of deflation to the safety of inflation waiting on the other side in
the sunlit uplands? What of them?
Well, if the most recent flow of funds report, released by the BoJ in September, is anything to
go by, poor old Mrs. Watanabe is about to get what is known in the West as the shaft:
Japan: Financial Assets Held By Households
September 2014
Bonds
1.8%
Inv
Trusts
5%
Shares
&
Equities
9.1%
Insurance
&
Pension Reserves
26.8%
Others
4%
Cash
&
Deposits
53.1%
Source: Bank of Japan
11 November 2014
16
Hmmm...
Yep... the BoJ has made the Japanese people a promise. They will continue trashing 53.1% of
their assets (having already knocked roughly 20% off them since the beginning of Abenomics);
BUT, not to worry, because they will simultaneously inflate the value of the 9% of their assets
held in equity portfolios by an as yet unspecified amount.
Now, rudimentary math would suggest that the Nikkei would have to double to compensate
them for the confiscation of 20-odd percent of their cash and that is assuming no further
erosion but a promise is a promise.
Pesek finished his piece on a high, taking aim squarely at Kuroda:
(Bloomberg): Kuroda is turning the BOJ into the worlds biggest asset-management
company. The BOJ wont admit it, but its monetizing Japans debt on a massive
scale, and probably even retiring large blocks of it just as the government did
in the 1930s. What happens when the BOJ decides Japan needs a credible and
functioning bond market in the years ahead? Kurodas successors face terrible odds
disengaging from a market hes effectively nationalized.
Perhaps history will vindicate Kurodas genius. That depends on whether Abe
musters the courage to attack structural impediments to growth in employment,
industry, trade and energy. More likely, Kuroda is demonstrating that its one
thing to go long on a market, and quite another if you have to stick with that bet
forever. To avoid being remembered as a madman, Kuroda had better devise an exit
strategy from historys most audacious bond trade.
I feel certain that when we finally emerge from this dystopian Keynesian nightmare and the
books are written about this sorry period in monetary history, the day Kuroda finally went
Colonel Kurtz on the world will be seen as the beginning of the end.
Back in 2010, my friend Dylan Grice wrote these words:
Despite the Japanese government paying a mere 1.5% on its bonds, interest
payments amount to a hair-raising 27% of tax revenues. Including rolled government
bills (which Japans MoF defines as debt service) takes the share to an eyebrowsingeing 57%.
Any meaningful repricing of Japanese sovereign risk would push yields to a level the
government would be unable to pay. Moreover, since the domestic financial system
is loaded up to the eyeballs with JGBs, a crisis of confidence there would soon
transmit itself beyond the public sector.
The BoJ is now paying even less on its bonds such is the temporary miracle of faith in a
central banks ability to control the unintended consequences of its actions no matter the level
of sheer lunacy involved but, as Dylan pointed out, the BoJs course of action was set in stone
four years ago.
11 November 2014
17
Hmmm...
Kurodas move was inevitable; and that, sadly, also applies to the end game. Back to Dylan:
So the path of least political resistance will presumably be to keep yields at levels
which the Japanese government can afford to pay, and to stabilise JGBs at levels
which wont blow up the financial system. This will involve the BoJ buying any/all
bonds the market can no longer absorb, probably under the intellectual camouflage
of a quantitative easing program aimed at breaking Japans deflationary
psychology. Economists might applaud such a step as finally showing the BoJ was
getting serious about Japans problems. In fact, it will be the opening chapter of a
long period of inflation instability.
Is Dylan a psychic? No. Hes just a very smart, incredibly astute observer of both market
psychology and, perhaps more importantly, history.
The die is already cast, and all we can do now is wait for the inevitable to happen and Japans
bond market and currency to be destroyed and the Nikkei to head in the direction of Dylans
63,000,000 target.
In his always-brilliant Epsilon Theory this week, Ben Hunt looked at the BoJ move through the
prism of Game Theory, threw in a lesson learned the hard way from getting schooled by his
Grandmothers bridge partners, and reached his own conclusions conclusions that echo the
fears of Raoul, Dylan, and myself. (Incidentally, I sat down with Ben in New York recently for a
chat with my RealVision hat on, and what he had to say was fascinating:)
(Epsilon Theory): For five and a half years the BOJ has had a clear field to take
whatever actions they wished without fear of some other, stronger central bank
smacking them in the mouth. There has been a coordination of central bank purpose
and effort that hasnt been seen since the 1985 Plaza Accords? Bretton Woods?
Whatever your reference point might be from an economic history perspective,
its been a very long time since weve seen such a very long period of such a nonstrategic, were-all-in-this-together decision-making backdrop for second tier
central banks like the BOJ or the BOE. So it really doesnt surprise me at all that
the BOJ did what it did last Friday. Like you and me and market participants
everywhere, the BOJ Governors have been very well trained to expect that the Fed
has got their back, that they can act according to their own narrow and immediate
self-interests without concern or fear that their actions will result in someone
smacking them in the mouth.
Unfortunately for the BOJ, I think that this happy state of coordinated policy
bliss ended about six months ago. I think that they have redoubled this particular
contract as if they were playing bridge with doting grandparents rather than
chain-smoking, penny-pinching old crones. I think that there is a clear and growing
divergence between the US and the rest of the world when it comes to balance sheet
expansion and monetary policy intentions, and I think that for China in particular
this latest BOJ action is perceived as an aggressive provocation that must be
responded to forcefully.
11 November 2014
18
Hmmm...
So whats next? Im waiting for Chinas response. I have no idea whether the
response will be (to use the political science terminology) symmetric or asymmetric
in scale and delivery. That is, the response could be larger or smaller than the
perceived provocation, and it may or may not be a response delivered through
monetary policy. I have no idea exactly when the response will occur. But I have
zero doubt that a forceful response is coming. I have zero doubt that Japan is about
to get smacked in the mouth. And when that happens, the monetary policy calculus
in Japan and the UK and even the EU will take on a very different shape.
Kuroda has fired the shot that looks likely to trigger the next phase of the crazy monetary
experiment weve all been living in for the last five years. Unfortunately, the next phase is
where things start to get nasty. Just because equity markets cheered the latest sugar rush he
guaranteed them should not make smart investors lower their guard quite the opposite, in
fact.
Colonel Kuroda has gone up-country into the Heart of Darkness, and all we can do is await the
Apocalypse now.
*******
OK... so this weeks slamdown in gold came after Id gotten knee-deep into the BoJs
scarefest, but you can rest assured that next week Ill be addressing the gold market. Until
then, however, Ive got a bunch of goodies lined up for you, beginning with a wonderful piece
on the inflation versus deflation debate from Charles Gave of GaveKal. Charles is a brilliant
mind held captive in a charming Frenchman a powerful combination if ever there was one.
11 November 2014
19
Hmmm...
After hearing from Charles, we stay in Hong Kong to find out a little about the ongoing property
bubble in the Fragrant Harbour as prices continue to climb, head to Europe to hear how Mario
Draghis ability to save the world may just have limits after all, before returning to Asia this
time to my home, Singapore to find out that theres another property bubble in this part of
the world, which is heading in an altogether different direction to that of Hong Kongs.
The need for QE in the EU is creating a schism at the heart of the Europes banking and political
elite; Russia and Brazil take their place as the Dodgy Duo amidst the Suspect Six; we hear
the thoughts of my friend Steve Diggle on the volatility markets; and, in an exclusive extract
from his fabulous book The Colder War, Marin Katusa brings a historical perspective to todays
oil markets.
Lastly, there is a fantastic, no-holds-barred interview with one of the all-time greats: Robert
Rodriguez of FPA. Dont miss that.
Charts? Well, Global Precious Metals (a Singapore-based company on whose board I sit, by way
of full disclosure) have produced what I think is the definitive guide to buying, shipping, and
storing gold; we extract from that and look at the chart which Bob Rodriguez (and many other
smart investors) considers the worlds most important the Dollar Index. Next, we bring you a
page to bookmark the 100 most important charts in the world right now, courtesy of Business
Insider.
Lastly, Marc Faber discusses what he calls the Japanese Ponzi scheme; Alan Greenspan finds
religion (again); and yours truly chats with Gordon T. Long about financial repression.
Lest we forget.
*******
Inflation or Deflation?
As the reader is aware, I have been of the opinion for quite a while that Capitalism was
returning to its deflationary roots.
In my view, the evidence is beginning to be overwhelming. Thirteen OECD countries already
have a negative reading for their Y/Y CPI. Another eight are below 1%. In Europe, when it
comes to the so called goods inflation which is fairly easy to measure, ALL the countries have
a negative reading y/y The German PPI is negative Y/Y which kills any hope to engineer an
internal devaluation elsewhere. If I look at the US CPI ex shelter (I have a big problem with this
measure and its weight in the US CPI), I reach a level of roughly 1% y/y and I have a roughly
similar measure for the US CPI ex food (up) Energy (down) and shelter (up).
11 November 2014
20
Hmmm...
My own leading indicator of inflation based mostly on prices actually reached in markets (such
as the Australian dollar) is plunging again as evidenced by the graph below. This has tended to
lead falling or decelerating prices by roughly 6 months. My index of economic sensitive prices
has broken down in the last few days, and is highly correlated to world trade. World trade in
volume is probably going to shrink, with falling prices to boot.
So the deflationary forces seem to be gathering momentum. But a few more remarks must be
made here. What are these forces?
Let us assume that we have three deflationary forces at work in the world today.
1. The first one is the result of the shale oil and gas technologies and should lead to a fall in
energy prices. This is good deflation, equivalent to a tax cut. What I do not know is how
much debt has been incurred in dollars to develop new energy resources which would not been
profitable anymore if the price of oil kept falling. And then the borrowers would go bankrupt,
which is hardly good news. After all, after the 1985 crash in oil prices, the Texas banks went
bust and the Texan economy did not do too well for quite awhile. Let us avoid the Texas of
tomorrow, if possible.
2. The second one is the emergence of things like the robots. Robots use to do stupid and
repetitive things. Now they do smart and repetitive things like surgery. Intelligent and
repetitive things are where the middle class jobs are. The good news is that the price of surgery
will go down, the bad news that the surgeon will be out of a job. This is classical creative
destruction, but hitting the middle class.
11 November 2014
21
Hmmm...
3. The third one is the deflation in classical goods, cars, washing machines etc. Most of the
debt due to banks or financial markets tends to be issued by the so called good producers and
these companies could be very badly hurt by the arrival of disruptive technologies such as
the ability to store electricity efficiently. This would lead to the replacement of the combustion
engine by the electric engine and to the bankruptcy of a big chunk of our industrial systems.
To summarize, both creation and destruction forces have never been as powerful as they are
now....
*** CHARLES GAVE / REQUEST COMPLETE ARTICLE
HK Property Prices Continue To Rise

Despite slowing growth, street protests and the prospect of higher interest rates, Hong Kong
property prices already the worlds highest are continuing to rip even higher.
Average prices, as measured by local agency Centaline, clocked up a fresh record in October,
presenting another challenge to the Hong Kong government, which is also facing a mass civil
disobedience campaign now into its second month.
Despite the protests, which have shut down major highways across the citys main business
districts, new developments have continued to attract strong interest. When sales began last
month at Pavilia Hill, a new luxury development, demand was such that a raffle had to be held
simply for the right to put down a deposit.
The first round of apartments the cheapest of which carried an asking price of more than
US$2M sold out within hours.
The strength of the property market poses a serious challenge to Hong Kongs embattled
government as many people struggle to find affordable housing. Average home prices are now
14.9 times median household income, according to research from Demographia, compared with
7.3 in London.
Prices have more than doubled since 2008 fuelled by
record low interest rates, imported from the US; a
buoyant economy, and interest from mainland Chinese
buyers.
The reality is that interest rates will remain low and
supply will remain constrained. Uncertainty in other
parts of the world will persist, and I think that will
act to support values, said Simon Smith, head of Asia
research at Savills, an estate agent.
11 November 2014
22
Hmmm...
In a city suffering from worsening inequality, sky-high home prices are a key political issue.
CY Leung, Hong Kongs chief executive, acknowledged in a recent interview that the cost of
housing was a major concern and one that the government must do more to fix.
Poll after poll has shown that the one issue thats uppermost on the minds of the people,
particularly the younger generation, is the cost of housing, said Mr Leung, himself a former
developer. The shortage of housing has worsened to such an extent that some young married
couples live apart. It is not acceptable.
He also admitted that cooling measures such as tighter lending requirements and increased
stamp duty had proved only temporarily effective.
Mr Leungs answer to the problem is to increase new supply. There are some hopeful signs on
this front in the first nine months of the year housing starts jumped more than 30 per cent,
according to Barclays.
The end of quantitative easing in the US could also act as a dampener by raising borrowing
costs. Hong Kong effectively imports interest rate policy from the US through its currency peg,
meaning that mortgage rates have been at rock bottom for a number of years, despite robust
economic growth and low unemployment....
*** FT / LINK
Dollar Smashes Through Resistance As Mega-Rally Gathers

Pace
The US dollar has surged to a four-year high against a basket of currencies and has punched
through key technical resistance, marking a crucial turning point for the global financial system.
The so-called dollar index, watched closely by traders, has finally broken above its 30-year
downtrend line as the US economy powers ahead and the Federal Reserve prepares to tighten
monetary policy.
The index a mix of six major currencies hit 87.4 on Monday, rising above the key level of
87. This reflects the plunge in the Japanese yen since the Bank of Japan launched a fresh round
of quantitative easing last week.
Data from the Chicago Mercantile Exchange show that speculative dollar bets on the derivatives
markets have reached a record high, with the most extended positions against the euro, the
yen, the Australian dollar, Mexican peso, the Canadian dollar, the Swiss franc, sterling, and the
New Zealand dollar, in that order. The Swedish and Norwegian currencies are also coming under
heavy pressure.
11 November 2014
23
Hmmm...
David Bloom, currency chief at HSBC, said a seismic change is under way and may lead to a
20pc surge in the dollar over a 12-month span. The mega-rally of 1980 to 1985 as the Volcker
Fed tightened the screws saw a 90pc rise before the leading powers intervened at the Plaza
Accord to cap the rise.We are only at the early stages of a dollar bull run. The current rally is
unlike any we have seen before. The greatest danger for markets and forecasters is that they
fail to adjust their behaviour to fully reflect a very different world, he said.
Mr Bloom said the stronger dollar buys time for other countries engaged in currency warfare to
steal inflation, now a precious rarity that economies are fighting over. The great unknown is
how long the US economy itself can withstand the deflationary impact of a stronger dollar. The
rule of thumb is that each 10pc rise in the dollar cuts the inflation rate of 0.5pc a year later.
Hans Redeker, from Morgan Stanley, said the dollar rally is almost unstoppable at this stage
given the roaring US recovery, and the stark contrast between a hawkish Fed and the prospect
of monetary stimulus for years to come in Europe.
We think this will be a four to five-year bull-market in the dollar. The whole exchange system
is seeking a new equilibrium, he said. We think the euro will reach $1.12 to the dollar by next
year and will be even weaker than the yen in the race to the bottom.
Mr Redeker said US pension funds and asset managers have invested huge sums in emerging
markets without considering the currency risks. They may be forced to start hedging their
exposure, and that could catapult the dollar even higher in a self-fulfilling effect.
The dollar revival could prove painful for companies in Asia that have borrowed heavily in the
US currency during the Feds QE phase, betting it would continue to fall.
Data from the Bank for International Settlements show that the dollar carry-trade from
Hong Kong into China may have reached $1.2 trillion. Corporate debt in dollars across Asia has
jumped from $300bn to $2.5 trillion since 2005.
More than two-thirds of the total $11 trillion of cross-border bank loans worldwide are
denominated in dollars. A chunk is unhedged in currency terms and is therefore vulnerable to a
dollar short squeeze.
The International Monetary Fund said $650bn of capital has flowed into emerging markets as a
result of QE that would not otherwise have gone there. This is often fickle low-quality money
that came late to the party.
Many of these countries have picked the low-hanging fruit of catch-up growth and are suffering
from credit exhaustion. They have deep structural problems and a falling rate of return on
investment. The worry is that a tsunami of money could rotate back out again as investors seek
higher yields in the US, possibly through crowded exits.
*** AMBROSE EVANS-PRITCHARD / LINK
11 November 2014
24
Hmmm...
Mario Draghis Efforts To Save EMU Hit The Berlin Wall

Mario Draghi has finally overplayed his hand. He tried to bounce the European Central Bank into
1 trillion of stimulus without the acquiescence of Europes creditor bloc or the political assent
of Germany.
The counter-attack is in full swing. The Frankfurter Allgemeine talks of a palace coup,
the German boulevard press of a Putsch. I write before knowing the outcome of the ECBs
pre-meeting dinner on Wednesday night, but a blizzard of leaks points to an ugly showdown
between Mr Draghi and Bundesbank chief Jens Weidmann.
They are at daggers drawn. Mr Draghi is accused of withholding key documents from the ECBs
two German members, lest they use them in their guerrilla campaign to head off quantitative
easing. This includes Sabine Lautenschlager, Germanys enforcer on the six-man executive
board, and an open foe of QE.
The chemistry is unrecognisable from July 2012, when Mr Draghi was working hand-in-glove
with Ms Lautenschlagers predecessor, Jorg Asmussen, an Italian speaker and Left-leaning Social
Democrat. Together they cooked up the do-whatever-it-takes rescue plan for Italy and Spain
(OMT). That is why it worked.
We now learn from a Reuters report that Mr Draghi defied an explicit order from the governing
council when he seemingly promised to boost the ECBs balance sheet by 1 trillion. He also
jumped the gun with a speech in Jackson Hole, giving the very strong impression that the ECB
was alarmed by the collapse of the so-called five-year/five-year swap rate and would therefore
respond with overpowering force. He had no clearance for this.
The governors of all northern and central EMU states - except Finland and Belgium - lean
towards the Bundesbank view, foolishly in my view but that is irrelevant. The North-South split
is out in the open, and it reflects the raw conflict of interest between the two halves.
The North is competitive. The South is 20pc overvalued, caught in a debt-deflation vice. Data
from the IMF show that Germanys net foreign credit position (NIIP) has risen from 34pc to
48pc of GDP since 2009, Hollands from 17pc to 46pc. The net debtors are sinking into deeper
trouble, France from -9pc to -17pc, Italy from -27pc to -30pc and Spain from -94pc to -98pc.
Claims that Spain is safely out of the woods ignore this festering problem.
David Marsh, author of a book on the Bundesbank and now chairman of the Official Monetary
and Financial Institutions Forum, says the Bundesbank has been quietly seeking legal advice
on whether it can block full-scale QE. It is looking at Articles 10.3 and 32 of the ECB statutes,
arguably relevant given the scale of liabilities.
The let-out clauses would make QE the sole decision of the 18 national governors - shutting out
Mr Draghi - based on the shareholder weightings. Germany would have 26pc of the votes, easily
enough to mount a one-third blocking minority. Mr Draghi would not even have a say.
11 November 2014
25
Hmmm...
Mr Marsh said this has echoes of the Emminger Letter invoked in September 1992 to justify
the Bundesbanks refusal to uphold its obligation to defend the Italian lira in the Exchange Rate
Mechanism. The lira crashed. The Italians were stunned. One of them was the director of the
Italian Treasury, a young Mario Draghi.
Lena Komileva, from G+ Economics, says the ECB is heading for a crisis of legitimacy whatever
happens. If the bank tries to press ahead with a QE-blitz, Mr Weidmann will resign. If it does
not do so, the eurozone will remain stuck in a lowflation trap and the ECB will go the way of
the Bank of Japan in the late 1990s, in which case Mr Draghi will resign.
Mr Draghis balance sheet pledge was muddled and oversold from the start. Much of it was
predicated on banks taking out super-cheap loans (TLTROs) from the ECB, but they have so far
spurned it. You cannot make a horse drink. These loans are not the same as QE money creation
in any case. They are an exchange for collateral....
*** AMBROSE EVANS-PRITCHARD / LINK
Is It Time To Get Long Volatility?

I would argue that for at least three fundamental reasons the experience of 2008 is unlikely
to repeat itself and that the balance of probability is that the buyers of volatility are likely to
be disappointed by the results... In 28 years in the investing business I have constantly been
mystified by otherwise intelligent investors inability to understand the purpose of hedging. Put
simply the ideal objective of a hedge is that it will make a loss. Naturally the rational investor
would prefer to make a smaller loss than a larger one, but a hedge should, if things go well,
lose money. The reason for this is simple: The purpose of a hedge is not to make money on what
you expect to happen but, to protect you against what you fear may possibly happen. Therefore
if things go as you expect (and hope) the hedge will be unnecessary and lose some money.
Investigating the price of hedging is always worth doing, and when the downside is very serious
it should be regarded as essential. We intuitively understand this in terms of our personal life
and the value of insurance but very often ignore it when investing in markets.
We currently see little value in OECD stock markets and have largely exited them having been
very long in 2009-2012. We are not short and we are not long volatility. We are simply investing
our capital elsewhere. Please contact us if youd like to know where, and why we are having a
good year.
For those who are heavily invested in markets, hedging today looks moderately expensive. As of
writing today 21 October 2014 the S&P 500 stood at 1904, 5.7% below an all time high. With a
P/E of 17 and a cash yield of 2% it could hardly be described as in the bargain basement but a
June 2015 1700 put option (10.7% out of the money) at 55 points or 2.9% of spot or 22% implied
volatility does not looks like a bargain either.
Which brings us to my first reason against the long volatility trade:
11 November 2014
26
Hmmm...
Prices are not low enough to bring the balance of probability to be in your favour.
If we take the above as a benchmark for prices, 22% implied volatility means that the US stock
market would need to move approximately 1.4% every day for the next seven months to make
a market neutral (with daily re-hedging) trade profitable. If you are not an experienced option
trader you can find an explanation for what this means elsewhere, but its very important to
distinguish between a directional bet and a market neutral one.
If you buy a naked put and the market falls you should make money. For various technical
reasons it doesnt always work that way and this causes outrage amongst small investors who
feel they have been cheated when they got the market right and still lost money, but thats a
story for another day. But a market neutral bet is always both long and short the market so its
the quantum of moves that matter, not the direction.
The 999 day historic volatility of the S&P500 is 15.67%, the 500 day is 11.5% so to make money
buying at 22% the volatility of the next 150 days needs to be 40% above the last 1000 days and
91% above the last 500. Back in 2005-2007 Artradis was only having to pay historic volatility
levels for options, one bank volatility trader notoriously went offer only on his volatility
prices, in other words his bid was zero and his offers very low. This is no longer the case for
the simple reason that prior to 2007-08 markets had enjoyed an unprecedentedly long period
of very stable markets with volatility prices constantly falling this was termed The End of
Volatility in one BIS paper, or The Volocaust by market traders. As a consequence volatility
prices were low and sellers did not demand a cushion in the price to protect them from
spikes in volatility as they believed they wouldnt need a cushion. After 2008 the folly of this
assumption was fully recognised and is priced in. Investors have famously short memories
but when it comes to option pricing, they still remember 2008 and this will keep prices at a
premium. Of course experienced volatility above 22% is far from impossible, the past 1000 days
have been a period of historically low volatility, but ceteris paribus, the odds are against the
bet. Which brings us to my second reason...
*** STEVE DIGGLE / COMPLETE LETTER
Billionaire Enclave Prices Drop on Singapore Property Curbs

Australian hedge-fund manager Stephen Fisher says he was lucky to have bought his luxury
home on Sentosa, a Singapore resort island that has attracted the wealthy, in 2005, before
property curbs kicked in.
I would be very wary of buying a second property in Singapore as I would have to pay higher
taxes, which makes it less attractive, Fisher, 50, chairman of First Degree Global Asset
Management, said in a phone interview.
Sentosa, where Australias richest woman, Gina Rinehart, and telecommunications billionaire
Bhupendra Kumar Modi have homes, is losing its appeal. Taxes as high as 18 percent on
foreigners purchasing property introduced in 2013 have depressed prices and sales.
11 November 2014
27
Hmmm...
Condominium prices in the residential enclaves that line the seafront with sweeping views
across the Singapore Strait are near their lowest levels since the end of 2006 based on 15
transactions, according to Maybank Kim Eng Securities Pte. Some bungalows are being sold for
more than 50 percent below the peak in 2012, Urban Redevelopment Authority, or URA, data
show.
Singapore has been trying to rein in the property market since 2009, with the toughest
measures, including stricter lending, introduced last year. The island-state is unlikely to
ease the curbs until a meaningful correction takes place, Finance Minister Tharman
Shanmugaratnam said Oct. 28.
The way prices have fallen is like during the crisis time in 2008, Alan Cheong, a Singaporebased director at broker Savills Plc, said, referring to values on Sentosa Island. The measures
have impacted demand and we are seeing a diversion of interest by foreigners away from
here.
Home prices on Sentosa have fallen about 40 percent since 2012, compared with a 28 percent
drop in 2008, Cheong said.
Among the governments curbs have been a cap on debt at 60 percent of a borrowers income
and higher stamp duties on home purchases. Additional taxes for foreigners buying residential
property were raised to 15 percent in 2013 from 10 percent, on top of the basic buyers stamp
duty rate of about 3 percent. All home sellers need to pay 16 percent in levies if they sell
within the first year.
Singapore home prices reached a record high in the third quarter last year amid low interest
rates. They have fallen every quarter since, sliding 3.8 percent in the longest stretch of
declines since the global financial crisis in 2008.
In 2004, the island-state eased rules to allow foreigners to buy land for development on
Sentosa, luring buyers from Australia to Russia. Sentosa Cove, home to marinas and sprawling
houses, became the first location where foreigners were allowed to own stand-alone homes
with easy approval from the Singapore Land Authority.
The curbs were to help the Singaporeans, but in the process they are also curtailing the
growth prospects of the country, Modi, who estimates his net worth at $2 billion, said in a
phone interview. The government needs to differentiate between global and local citizens....
Homes larger than 2,000 square feet that cost between S$4 million and S$5 million have been
hit the hardest by the stamp duties on purchases and sales, Han said.
Prices of some condominiums slumped as much as 45 percent from 2007, when they were first
sold, at auctions earlier this year by banks that repossessed them, according to Maybank Kim
Eng.
11 November 2014
28
Hmmm...
A bungalow on 11,280 square feet of land on Treasure Island in Sentosa Cove was sold for 53
percent below the peak this year, while a 7,341-square-foot property on Paradise Island was
priced 39 percent below the record S$3,214 per square foot, URA data showed.
Homes purchased after 2006 and sold in the last 12 months lost between 5 percent and 21
percent of their value, Ng Wee Siang, a Singapore-based analyst at Maybank Kim Eng estimates.
Its now taking two to three months longer to sell, Mok Sze Sze, head of auctions in Singapore
at broker Jones Lang LaSalle Inc., said.
*** BLOOMBERG / LINK
The Colder War, by Marin Katusa: An Exclusive Extract

Putins plan to undo the petrodollar and elbow the US out of the way in world affairs rests on
the energy resources of the Middle East. Turmoil there is his best friend, which is reason enough
for a careful look at the recent histories of the regions three big oil producers (which pump
20% of the worlds oil) and their neighbors.
Religion is a divider that can unite Middle Easterners living under different governments in the
important business of attacking their own countrymen. Conflict between Shia and Sunni in one
country induces conflict between the same two groups in other countries. It happens easily,
almost unavoidably, because the differences between the two traditions are not details, like
the differences between onebutton Baptists and twobutton Baptists. The differences are
absolutes. No one has found any room, even in principle, for reconciling them. The career of
any wouldbe ecumenical, should one appear, would likely be brief.
What separates Sunni from Shia is a succession dispute that erupted after the death of
Mohammed in 632 A.D. Those who accepted Abu Bakr, Mohammeds fatherinlaw, as the rightful
successor became known as Sunnis. Those who believed that Ali, Mohammeds soninlaw, was
properly the successor became known as Shiites. Theyve been fighting ever since.
Worldwide, about 85% of all Muslims are Sunni. However, in two of the Middle Easts three
biggest oilproducing countries, Iran and Iraq, they are outnumbered by a Shia majority.
The third, Saudi Arabia, is overwhelmingly Sunni although its restless Shia minority is
concentrated inconveniently in the countrys oilproducing east.
Iran: Sanctions, Coups, and Revolutions
Lets start with a known name, Winston Churchill. Churchill is remembered by most as Englands
World War II prime minister, but there is much else to remember about him. At the time he was
rallying his countrymen to oppose the Nazis, he was already an old man. Three decades earlier,
in 1911, before World War I, he was First Lord of the Admiralty, with responsibility for the Royal
Navy. Being more a visionary than a functionary, he set out to bring the Royal Navys aging fleet
into the 20th century.
11 November 2014
29
Hmmm...
The Royal Navy still dominated the oceans of the world, but it was in danger of falling behind
the Americans and, more ominously, the Germans. To keep up, Britain needed ships with the
efficiencies that oil had made possible.
Most ships of the Royal Navy still burned coal, which Britain had in abundance but which was
not nearly as well suited for warships as oil was proving to be. A pound or a cubic foot of the
new stuff, oil, yielded far more energy, more gopower, than the same amount of coal. Oil
burned without need for heavy, spaceeating furnaces and required less shipboard manpower
for handling. The economies of space and weight for carrying the fuel, for burning the fuel, and
for feeding and berthing fuel handlers made oil essential for ships that could win wars.
Building oilfueled naval ships would be expensive but in no way difficult for Britain. The
difficulty was the oil: the British Isles didnt have any. So securing a reliable supply of oil
became a matter of paramount importance to Churchill.
He also considered how technology would change ground warfare. It was still the business of
armies to establish lines, dig trenches, lay barbed wire, and mass troops to attack an enemy
that was doing the same things with trenches, wire, and troops. Churchill saw beyond that.
He encouraged the development of armed, armored vehicles powered by internal combustion
engines, vehicles that could push through barbed wire, roll over trenches, and annihilate enemy
troops. Tanks (as they came to be called from British disinformation that they were water
carriers) would need still more oil. But where to get it?
The Americans were in their first oil rushes in Texas and California. That was one possible
source, but American oil was an ocean away. Russia? It was a big producer but was also a rival
empire, and its output was controlled by the Rothschilds, who couldnt be relied upon.
The ambitions of a Briton, William K. DArcy, found what Churchill was looking for. In 1900
DArcy, whose interest had been attracted by Persias natural oil seeps, paid the ruler, Mozaffar
alDin Shah Qajar, 20,000 for a 60year concession to explore for oil in an area of 480,000
square miles, which was the entire country save for five provinces in the north. The Persian
government reserved a royalty of 16% of the oil companys profit.
After exhausting his personal fortune in exploring the area, DArcy farmed out most of the
concession to Burmah Oil, which spent another 500,000 on exploration. In 1908, on the last
hole their budget could cover, Burmah drilled into a major oil reserve. The following year, to
exploit the mammoth opportunity the well had proven, Burmah Oil formed a subsidiary, Anglo
Persian Oil Company, or APOC, which would later become the British supermajor BP.
Developing an oilfield takes capital, especially in a land short on modern infrastructure.
So APOC needed to raise money. In May 1914, at Churchills urging, the British government
provided the money in exchange for 51% of the company and the right to appoint directors to
the board who would have controlling authority on any question relating to the British national
interest. Additionally, the Royal Navy was guaranteed a 30year oil supply at a fixed price.
11 November 2014
30
Hmmm...
It was a brilliant bit of maneuvering by Churchill. Britain had beaten the Germans to the first
great Middle Eastern oil reservoir, and they would draw on it to win the war that started three
months later.
*** MARIN KATUSA, THE COLDER WAR / LINK
Bob Rodriguez: New Great Recession Coming in 3 Years

THINKADVISOR: Whats your take on the market and the economy?
ROBERT RODRIGUEZ: Were living on borrowed time. When this market breaks, youre
going to see so many money managers and others washed out to sea who will never see
land again. It will happen between now and 2018.
Why?
The federal government isnt controlling their spending. For the past two years, 60%
of investment returns have been a function of P/E expansion. Earnings growth is being
driven by a fair amount of financial engineering on the part of the Federal Reserve and
corporations. Im sitting here for two years saying, Hel-lo! Doesnt anybody get this?
You must be frustrated.
For some time, Ive hated the financial market. When the history of this period is
written, the Fed presidents and those who have deployed quantitative easing will be
glorified as great snake-oil marketers.
How would you characterize the economy right now?
Is this a vibrant economy? Absolutely not. I dont know what people are smoking! No
amount of monetary stimulus thats driving up the illusion of stock prices is going to get
back to the basic elements of improving fundamental elements in the economy. Debt
and entitlements are growing at more than twice the rate of nominal GDP growth. Its an
absurdity!
Doesnt the financial services industry realize whats happening?
I get on a tangent; but I sit here in utter amazement that all this goes on, and the
industry proceeds as usual. Hel-lo! The world has changed! It changed in 2008. Were in
a different and fundamentally more volatile environment than any weve seen prior to
2008.
11 November 2014
31
Hmmm...
Whats your advice to advisors?

I dont live in the here and now; I live five and 10 years in the future and always have.
Lots of things will be coming together in the next two years. Your readership [could] be
deployed in risky assets: Do you believe the assets youre invested in compensate you
with sufficient margin of safety for the volatility of whats likely to transpire in the next
two to three years? If the answer is yes, be happy. If the answer is no, then maybe you
need more cash or liquidity in your asset-allocation structure.
Whats in your own portfolio?
I sold my last direct ownership stock in July of this year. So, for the first time in 43 years,
I dont own any equities directly. I own stocks through our mutual funds.
You got out of individual equities entirely?
Yes. The underlying fundamentals of equities are deteriorating. So I think exposure
should be low.
What strategy do you live by to make money in the market?
Being successful in longer-term investing requires 5 elements. The first is discipline: You
have to have discipline in how you analyze your securities. The 2nd is patience to wait
for those securities to present themselves in an attractive way. Next is the most difficult:
courage. You have to have the courage to execute when all else says dont. Then you
need patience again to allow those investments to work out over a period of time.
And finally?
You need discipline again to sell because youve been correct or to sell because your
analysis has been incorrect. So you have to have double doses of discipline, double doses
of patience; and then you mix in courage. With that concoction, the odds are youll be a
successful investor longer term.
What research do you rely on?
I believe the most important chart to look at is the dollar index, DXY Index GP. When
monetary policy fails with QE, the only thing left in the bag of arrows will be currency.
That is, how do you cheapen your currency to improve the competitiveness of your
product to sell it? We will see aggressive currency realignment and at some point, if it
gets out of control, currency war.
When could that happen?
Well find out in approximately two or three years whether the Feds monetary policies
have worked their magic. By that time the U.S. will have been on QE of some type for
going on nine years.
11 November 2014
32
Hmmm...
Whats your forecast for the stock market in 2015?

Lower! It will be easily 20% or 30% lower from what it is now.
What specifically do you see happening in the economy in 2015?
The unintended consequences of monetary policy and lack of fiscal resolve in this
country, as well as in other countries, is only expanding the balloon. Nothing I was
concerned about in 2009 has been addressed. GDP is not going to be a 3% growing
number. It will be weaker again. The quality of the growth recovery in employment is
questionable. Thats reflected in the fact that incomes are not really improving. Median
income is still below where it was in 1999. Were going along a road thats not healthy. It
will lead to sluggish GDP growth that will result in pressures on the system....
*** ROBERT RODRIGUEZ / LINK
Deep Divisions Emerge over ECB Quantitative Easing Plans

At first glance, theres little evidence of the sensitive deals being hammered out in the Market
Operations department of Germanys central bank, the Bundesbank. The open-plan office on
the fifth floor of its headquarters building, where about a dozen employees are staring at their
computer screens, is reminiscent of the simple set for the TV series The Office. There are
white file cabinets and desks with wooden edges, there is a poster on the wall of football team
Bayern Munich, and some prankster has attached a pink rubber pig to the ceiling by its feet.
The only hint that these employees are sometimes moving billions of euros with the click of a
mouse is the security door that restricts access to the room. They trade in foreign currencies
and bonds, an activity they used to perform primarily for the German government or public
pension funds. Now they also often do it for the European Central Bank (ECB) and its so-called
unconventional measures.
Those measures seem to be coming on an almost monthly basis these days. First, there were
the ultra low-interest rates, followed by new four-year loans for banks and the ECBs buying
program for bonds and asset backed securities -- measures that are intended to make it easier
for banks to lend money. As one Bundesbank trader puts it, they now have a lot more to do.
Ironically, his boss, Bundesbank President Jens Weidmann, is opposed to most of these costly
programs. Theyre the reason he and ECB President Mario Draghi are now completely at odds.
Even with the latest approved measures not even implemented in full yet, experts at the ECB
headquarters a few kilometers away are already devising the next monetary policy experiment:
a large-scale bond buying program known among central bankers as quantitative easing.
The aim of the program is to push up the rate of inflation, which, at 0.4 percent, is currently
well below the target rate of close to 2 percent. Central bankers will discuss the problem again
this week.
11 November 2014
33
Hmmm...
It is a fundamental dispute that is becoming increasingly heated. Some view bond purchases as
unavoidable, as the euro zone could otherwise slide into dangerous deflation, in which prices
steadily decline and both households and businesses cut back their spending. Others warn
against a violation of the ECB principle, which prohibits funding government debt by printing
money.
Is it important that the ECB adhere to tried-and-true principles in the crisis, as Weidmann
argues? Or can it resort to unusual measures in an emergency situation, as Draghi is demanding?
The key issues are the wording of the European treaties, the deep divide in the ECB Governing
Council and, not least, the question of what monetary policy can achieve in a crisis. Is a
massive bond-buying program the right tool to inject new vitality into the economy? Or does it
turn central bankers into the accomplices of politicians unwilling to institute reforms?
The question has been on the minds of monetary watchdogs and politicians since the 1990s,
when a German economist working in Tokyo invented the term quantitative easing. Its
purpose was to help former economic miracle Japan pull itself out of crisis after a crash.
The core idea behind the concept is still the same today: When a central bank has used up its
classic toolbox and has reduced the prime rate to almost zero, it has to resort to other methods
to stimulate the economy. To inject more money into the economy, it can buy debt from banks
or bonds from companies and the government.
The Bank of Japan finally began to implement the concept, between 2001 and 2006, but the
country sank into years of deflation nonetheless. After the financial crisis erupted, central
bankers in Tokyo tried a second time to acquire government bonds on a large scale, in the hope
that earlier programs had simply not been sufficiently forceful. Between 2011 and 2012, the
central bank launched emergency bond-buying programs worth 900 billion ($1.125 trillion).
Finally, in 2013, the new prime minister, Shinzo Abe, opened up the money supply completely
when he had the central bank announce a virtually unlimited bond buying program.
But the strategy, known as Abenomics, worked only briefly. After a high in 2013, in which Abe
proudly proclaimed that Japan was back, industrial production declined once again. With
a debt-to-GDP ratio of 240 percent, much higher than that of Greece, investments declined
again, despite the flood of money released under Abenomics....
*** DER SPIEGEL / LINK
11 November 2014
34
Hmmm...
The Dodgiest Duo In The Suspect Six

INVESTORS in emerging markets know how quickly things can turn sour. In the mid 1990s
fast-growing Thailand and Indonesia became known as the Asian Tigers. By 1997 they were
suffering currency crises and had to be bailed out by the IMF. Nearly 20 years on two members
of the BRICs (Brazil, Russia, India and China) lionised for propping up global growth in 2010,
are close to recession. The mixture Brazil and Russia facefalling currencies, high inflation and
slow growthcould make 2015 a very bad year.
Trouble has been brewing for a while. Over a year ago James Lord of Morgan Stanley, a bank,
labelled Brazil, India, Indonesia, South Africa and Turkey the fragile five of the emerging
markets. His concern was that the combination of high inflation and big current-account deficits
meant exports were too dear; their currencies topped his list of those likely to tumble. Four
of the five have since lost ground against the dollar, but a sixth emerging-market currency, the
Russian rouble, has fallen much further (see chart 1). On November 5th the central bank scaled
back its expensive and futile efforts to prop the currency up, leaving it floating almost freely.
These countries have common problems, particularly high inflation. Each of the fragile five
has a twin deficit: budget shortfalls that mean debts are piling up and current-account gaps
that make them reliant on foreign capital inflows. Yet their prospects have diverged. India
and Indonesia look secure. The rupee is up against the dollar since August of last year and the
public-sector deficit is falling. The Indonesian rupiah has been less solid, losing 10% since endAugust, but inflation has moderated and growth is strong (see chart 2).
The remaining four are faring less well. The South African rand and Turkish lira look likely
to fall further since both still combine big current-account gaps with high inflation. Yet for
government economists in Pretoria and Ankara there are chinks of light. Energy prices have
droppedgreat news for Turkey since oil and natural gas account for 60% of its energy supply,
of which over 90% is imported. In South Africa, strikes which have stunted exports of minerals
have abated; the economy could grow by 2.5% next year.
11 November 2014
35
Hmmm...
Brazil and Russia, by contrast, are in really bad shape. The largest emerging economies after
China, together they have the heft of Germany. In both countries the currency is sliding. The
real hit new lows in November after data revealed the budget deficit reached a record in
September. The rouble is dropping faster, down 27% in a year and 10% in the past month. Both
face stagflation: bubbly prices coupled with growth rates likely to be below 1% this year.
Some of their pain comes from abroad. Brazils main trading partners are slowing (China),
stagnant (the euro area) or tanking (Argentina). Not only are export volumes down; the prices
of things Brazil sellsiron ore, petroleum, sugar and soyabeansare dropping as global demand
falters. Russia is feeling the slowdown too, as energy prices fall. It is one of the worlds biggest
producers of oil and natural gas. Its big five energy firms employ close to 1m workers. Exports
worth $350 billion flowed through pipelines to Europe and Asia in 2013. As prices drop, Turkeys
gain is Russias loss.
But Brazil and Russias problems have domestic roots too. Since the 1990s Brazil has tended to
aim for a primary surplus (before interest payments) of close to 3% of GDPenough to begin
reducing its debts. But Dilma Rousseff, the newly re-elected president, has played havoc with
Brazils public finances. In 2014 spending has expanded at twice the rate of revenues despite
one-off gains from the sale of Libra, an oilfield, and the 4G telecoms spectrum. Brazils debtto-GDP ratio is rising fast....
*** ECONOMIST / LINK
11 November 2014
36
Hmmm...
Charts That Make You Go Hmmm...
Recently, I have fielded a lot of questions about the best way to buy and store gold
outside the banking system; and in an attempt to provide investors with a reference guide that
will outline all the options available and help them navigate the various pitfalls of the exercise,
I did the smart thing and asked somebody else to do it for me!
Vincent Malherbe of Singapore-based Global Precious Metals has put together a comprehensive
resource that does the job brilliantly. How do I know? Well, I sit on the board of GPM and
helped Vincent put the guide together, so I can vouch that hes done a bang-up job!
If you want a copy of the guide, just click on the link to the right, and Vincent will send you a
copy.
*** LINK
11 November 2014
37
Hmmm...
US Dollar Index (DXY
89
Oct 2013 - Nov 2014
88
87
86
85
84
83
82
81
80
79
Oct 2013 Nov 2013 Dec 2013 Jan 2014 Feb 2014 Mar 2014 Apr 2014 May 2014 Jun 2014 Jul 2014 Aug 2014 Sep 2014 Oct 2014 Nov 2014
US Dollar Index (DXY)

Quarterly 1967 - 2014
160
150
140
130
120
110
100
90
80
70
60
1967
1972
1977
1982
1987
1992
1997
2002
2007
2012
2014
Source: Bloomberg
The most important
chart in the world? Two of the brightest minds in the business

think so Robert Rodriguez and Raoul Pal, who had this to say about the bottom chart:
If we break the trendline we will be entering potentially one of the biggest dollar
bull markets in decades, if not ever. This would be the biggest technical break in
the history of fiat currencies. Considering the dollar is the worlds funding currency,
this has the ability to create havoc on the unprecedented $5tln carry trade with
China at the epicentre.
11 November 2014
38
Hmmm...
Business Insider recently published a fantastic piece on the most important charts
in the market, as determined by the brightest minds in the business. Here are a couple that
caught my eye. Click on the link for the full list.
*** BUSINESS INSIDER / LINK
11 November 2014
39
Hmmm...
Words That Make You Go Hmmm...

Mark Faber shocks
a Bloomberg
anchor by suggesting Japan is engaging in a
Ponzi scheme. Apparently, they are buying all
their own debt with freshly printed yen.
Doesnt sound like a Ponzi scheme to me
either.
Except it does.
Oh... and that whole independent Fed
thing? Not so much, according to Alan
Greenspan...
CLICK TO WATCH
Talking of Greenspan, the former
Fed chair sure seems to have found religion

again as far as gold is concerned, now that he
isnt employed as Hater-in-Chief.
In this remarkable audio clip from a recent
session at the CFR, Greenspan matter of factly
goes against just about everything he asserted
around gold whilst employed in the Marriner
Eccles Building all those years.
Funny how the world turns.
CLICK TO LISTEN
Last week I had the great pleasure of

chatting with Gordon T. Long as part of his
collection of Financial Repression Authority
interviews.
Gordons website is HERE, and you can listen

in on our conversation by clicking the link
below.
CLICK TO WATCH
11 November 2014
40
Hmmm...
and finally...
They went with songs to the battle, they were young,
Straight of limb, true of eye, steady and aglow.
They were staunch to the end against odds uncounted,
They fell with their faces to the foe.
They shall grow not old, as we that are left grow old:
Age shall not weary them, nor the years condemn.
At the going down of the sun and in the morning
We will remember them.
For The Fallen by Laurence Binyon
CLICK HERE TO WATCH VIDEO
Hmmm...
11 November 2014
41
Hmmm...
Grant Williams
Grant Williams is the 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 firm and its investors.
Grant has 28 years of experience in finance on the
Asian, Australian, European, and US markets and
has held senior positions at several international
investment houses.
Grant has been writing Things That Make You Go Hmmm... since 2009.
For more information on Vulpes, please visit www.vulpesinvest.com.
*******
Follow me on Twitter: @TTMYGH
YouTube Video Channel: http://www.youtube.com/user/GWTTMYGH
PDAC 2014 Presentation: Gold and Bad: A Tale of Two Fingers
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
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.
11 November 2014
42
Hmmm...
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Hmmm...

THINGS THAT MAKE YOU GO

A walk around the fringes of finance

Hato No Naka No Neko ()

Living in a world such as this is like dancing on a live volcano.

CHARTS THAT MAKE YOU GO HMMM... ..................................................37

Things That Make You Go Hmmm...

Kuroda also pledged that the BoJ:

Well get back to why theyre doing this a little later.

March 2013 - November 2014

* Estimate only. Opinions vary

Jun 1984 - Nov 2014 (quarterly)

Japanese Yen (inverted)

* Estimate only. Opinions vary

Charts like... oh, I dunno, Japanese industrial production:

Japan: Industrial Production

Orrrr... perhaps that relatively unimportant macroeconomic datapoint, GDP:

Japan: Gross Domestic Product

Japan: Real Household Income YoY

Japan: Current Account and Trade Balance

Source: Bloomberg/Global Macro Investor

But what of the bond market? Well, fortunately for

As you can see, only 4% of JGBs are owned by overseas

Source: Capital Economics

Everybody involved was on the same wavelength, Ito

A Halloween treat? Really?

HK Property Prices Continue To Rise

Dollar Smashes Through Resistance As Mega-Rally Gathers

Mario Draghis Efforts To Save EMU Hit The Berlin Wall

Is It Time To Get Long Volatility?

Billionaire Enclave Prices Drop on Singapore Property Curbs

The Colder War, by Marin Katusa: An Exclusive Extract

Bob Rodriguez: New Great Recession Coming in 3 Years

Whats your advice to advisors?

Whats your forecast for the stock market in 2015?

Deep Divisions Emerge over ECB Quantitative Easing Plans

The Dodgiest Duo In The Suspect Six

Charts That Make You Go Hmmm...

US Dollar Index (DXY

Oct 2013 - Nov 2014

US Dollar Index (DXY)

The most important

chart in the world? Two of the brightest minds in the business

*** BUSINESS INSIDER / LINK

Words That Make You Go Hmmm...

Talking of Greenspan, the former

Fed chair sure seems to have found religion

Last week I had the great pleasure of

Gordons website is HERE, and you can listen

CLICK HERE TO WATCH VIDEO

As a result of my role at Vulpes Investment Management, it falls upon

Unauthorized Disclosure Prohibited

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