TTMYGH The Consequences of The Economic Peace

Hmmm...
THINGS THAT MAKE YOU GO
A walk around the fringes of finance
By Grant Williams
06 October 2014
The Consequences of the Economic Peace

There is no subtler, no surer means of overturning the
existing basis of society than to debauch the currency.
The process engages all the hidden forces of economic
law on the side of destruction, and does it in a manner
which not one man in a million is able to diagnose.
John Maynard Keynes
The ideas of economists and political philosophers, both when
they are right and when they are wrong, are more powerful than
is commonly understood. Indeed, the world is ruled by little else.
Practical men, who believe themselves to be quite exempt from
any intellectual influences, are usually slaves of some defunct
economist. Madmen in authority, who hear voices in the air, are
distilling their frenzy from some academic scribbler of a few years
back.
John Maynard Keynes
I find economics increasingly
satisfactory, and I think I am
rather good at it.
John Maynard Keynes
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
Mass Default Looms As World Sinks Beneath a Sea of Debt .....................................30
The Messaging App Thats Powering the Hong Kong Protests ...................................31
Argentina Central Bank Governor Juan Carlos Fabrega Resigns ................................32
Moscow Is Provoking a Number of Its Neighbors ..................................................33
Hong Kong Crisis Exposes Impossible Contradiction of Chinas Economic Growth ...........35
A Final Splurge ........................................................................................36
CHARTS THAT MAKE YOU GO HMMM... ..................................................38

WORDS THAT MAKE YOU GO HMMM... ...................................................41
AND FINALLY... .............................................................................42
06 october 2014
Hmmm...
Things That Make You Go Hmmm...

This weeks TTMYGH is going to be a little different.
After several weeks on the road and staring down a couple more, I am going to make an
attempt to turn the presentation I have been delivering into written form, after many requests
for a version that people can look at in the comfort of their own homes (and, presumably,
without my annoying voice clouding the issue).
Im hoping I can turn a very visual and fluid presentation into a more static one; but Im sure
that if I fail miserably, youll let me know.
This will make for a chart-heavy and consequently much longer piece than usual (though lighter
on additional articles in the interest of saving your time and space this week), but lets see if
we cant make this work.
The presentation, entitled The Consequences of the Economic Peace, is a look at the
ramifications of several decades of easy credit and an attempt to draw parallels with a time in
history when the world looked remarkably similar to how it does now.
That last time didnt end so well, Im afraid.
So... without further ado, here we go.
The Consequences of the Economic Peace
The 19th century was a time of upheaval right across the world.
There were no fewer than 321 major conflicts in a century which encompassed, among others,
the Napoleonic Wars, the Crimean War, the US Civil War, the Boxer Rebellion, the Opium Wars,
and the Boer War.
06 october 2014
Hmmm...
That single century saw no fewer than 52 major conflicts in Europe alone.
Britain, as the worlds preeminent superpower, was involved in an astounding 73 conflicts in
that single 100-year span. In addition, France fought 50 wars and Spain fought in 44.
How crazy was Europe in the 19th century?
Well, Britain and France fought on the same side in six major conflicts; the Spanish and the
French sided together on nine occasions; and Britain and Spain found themselves in alliance in
seven different wars.
HOWEVER
Britain and France fought each other in no less than eight separate wars between 1803 and
1900; and in 1815 alone Spain and France fought each other on four occasions, while the British
and Spaniards were on opposing sides six times during the century.
And people wonder why the EU is such a tricky proposition
The serious point to be made, though, is that once it comes to war, former alliances count for
nothing.
Anyway, as the 19th century made way for the 20th, Jan Bloch, a Polish banker, wrote a book
entitled Is War Now Impossible?, in which he predicted that the lightning wars of the past
where cavalry ranks and infantrymen faced each other in hand-to-hand combat, deciding
victory and defeat in short, brutal fashion were to be replaced by drawn-out, grinding trench
warfare.
Everybody will be entrenched in the next war. It will be a great war of
entrenchments. The spade will be as indispensable to a soldier as his rifle.
Jan Bloch, Is War Now Impossible?
Cheerful soul, was old Jan.
But, despite Blochs dire predictions, the first decade of the 20th century was blissfully
peaceful, with no conflicts between European powers anywhere on the continent.
By the time 1910 rolled around, however, political tensions were rising across Europe.
The Franco-Prussian war that had so inspired Bloch had led to the creation of a German Empire
and the ascension of Wilhelm II to the German throne in place of arch diplomat Otto von
Bismarck. It had also made the country more bellicose.
Russia, meanwhile, had lost most of its Baltic and Pacific fleets in the Russo-Japanese War of
1905, and that defeat had led to revolution. Defeat in the Far East forced the country to turn
its attentions westward towards the Balkans a region it eyed lasciviously as did its old rival
Austria-Hungary.
06 october 2014
Hmmm...
Meanwhile, in 1907, Britain and France had signed the Entente Cordiale, which finally put to
bed a thousand years of almost continual conflict between the two countries (or at the very
least reduced the warfare between the two to bouts of French impoliteness countered by
silent indignance with some heavy tutting on the part of the British).
In 1908, Austria-Hungary had annexed Bosnia & Herzegovina; and in 1912 Serbia, Greece,
Montenegro, and Bulgaria formed the Balkan League to challenge the Ottoman Empire.
After some classic in-fighting when Bulgaria turned on its allies (only to be defeated inside a
month), the Balkan League emerged victorious a victory that disturbed Austria-Hungary, who
feared nothing more than a strong Serbia on her southern border.
06 october 2014
Hmmm...
So heres where Europe stood in 1914:

Great Britain, her power receding, was struggling to play the role of the worlds policeman;
Germany, newly industrialised and ruled by a nationalistic leader, was puffing her chest out to
the rest of the continent; and good old France was in steady decline and (no doubt painfully)
reliant upon her old foe Britain for support.
And yet, despite such geopolitical turmoil everywhere, the man in the street was remarkably
sanguine about the state of the world:
The projects and politics of militarism and imperialism, of racial and cultural
rivalries, of monopolies, restrictions and exclusion, which were to play the
serpent to this paradise, were little more than the amusements of his daily
newspaper.
John Maynard Keynes, The Economic Consequences of the Peace
Those words were written by none other than everybodys favourite economist, John Maynard
Keynes, in his book The Economic Consequences of the Peace, a publication which made him
a household name all around the world.
Its a sad indictment of todays society that the only way for a modern-day economist to
achieve Keynes level of fame would be to become a serial killer or marry a Kardashian.
But I digress... lets get back to Europe in 1914. Despite the numerous mounting problems, as
Keynes had pointed out, everyday life went on as usual and the men and women of Europe in
general and the UK in particular assumed that nothing untoward would happen.
Europes leaders would make sure everything got sorted out.
Sound familiar?
Then, on the 28th of June, 1914, amidst all the known knowns, a young man called Gavrilo
Princip stepped up to a passing car in Sarajevo and with a single shot became a Black Swan that
changed the course of history when he assassinated Archduke Franz Ferdinand of Austria.
I wont go into the details of WWI at this stage;
but in case you dont know about it, Im told
there have been several books written on the
subject (Barbara Tuchmans The Guns of August
being my own personal favourite). Anyway, after
four years of warfare that tore the world apart
like never before, a peace was finally reached.
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But it was a peace which one man in particular

vociferously condemned and that man was
John Maynard Keynes.
06 october 2014
Hmmm...
Keynes had left Cambridge University to work at the Treasury in 1915, and he had been
hand-picked to attend the Versailles Conference as an advisor to the British Government. He
was staunchly against reparations of any kind and advocated the forgiveness of war debts
(yeah, I know go figure); but as it turned out, his advice to focus on economic recovery was
disregarded; and Keynes resigned his position, returned to Cambridge, and set about scribbling
furiously in his notebooks.
In just two months, Keynes wrote the book that would make him a household name around the
world The Economic Consequences of the Peace.
In the book, Keynes was highly critical of the deal struck at Versailles, which he felt sure would
lead to further conflict in Europe describing the agreement as a Carthaginian peace and
with the passing of a surprisingly short period of time, he would be proven correct.
The three major figures on the Allied side of the negotiating table at Versailles were President
Woodrow Wilson of the USA, President Georges Clemenceau of France, and British Prime
Minister David Lloyd George.
Wilson wanted what he called a fair and lasting peace, which was based upon his famous
Fourteen Points plan and which would create a League of Nations (the forerunner to the UN)
as well as reduce the armed forces of all countries.
The French? Well they were just pissed.
Understandably, they wanted Germany to be punished and proposed severe reparations
alongside punitive confiscation of land, arms, industry and even citizens.
Britains Lloyd George was caught between a rock and a hard place. Privately, he agreed
with Wilson on each of his points, but public opinion in Britain dictated that he side with
Clemenceau, and so it was the French proposal that won out.
On the other side of the table was, of course, Germany; and, in truth, based purely on the
numbers, Keynes claims about the nature of the peace are hard to dispute.
Germany was forced to pay 6.6 billion in reparations.
Now, to put that into perspective, thats about 320 billion in todays money. Want a little more
perspective? Well, the amount of money that Germany was forced to pay back after WWI an
amount so punishing that it led, as well see, directly to WWII was conjured up out of thin
air by the Bank of England INFLATION-ADJUSTED, ID LIKE TO STRESS in just 33 months
between January 2007 and September 2009.
06 october 2014
Hmmm...
Along with those reparations, Germany lost 13% of its land in total and 15% of its agricultural
land, 12% of its population, 48% of its iron ore production, and 10% of its coal (which was given
directly to the French). Meanwhile, Germanys army was cut to 100,000 men, its navy to 36
ships (and no submarines), and the nation was banned from having an air force.
The peace hammered out at Versailles would end up having grave consequences just 20 years
later as the economic straitjacket into which Germany was buckled enabled a firebrand former
lance corporal in the Bavarian army to seize control of the country and once more plunge the
world into the darkness of war.
Alongside warfare, there are few things that affect a greater proportion of a nations citizens
than economics; and as hard as it is to believe, given todays apathy towards the subject,
before the advent of cable TV, the study of economics was the stuff of rock stars.
Until Sismondis Nouveaux Principes dconomie Politique was published in 1819, classical
economists had either denied the existence of business cycles or blamed them on external
factors chief amongst them, funnily enough, war.
06 october 2014
Hmmm...
In 1860 the French economist Clement Juglar had identified repeating economic cycles lasting
7 to 11 years, and Joseph Schumpeter had expanded upon Juglars work by identifying four
separate stages within the Juglar Cycle:
expansion, crisis, recession, and recovery.
These four stages form what we used to lovingly refer to as the Business Cycle. (I say used
to because the downward half of the business cycle has been abolished by the Federal Reserve
for reasons we shall come to shortly.)
However, in 1920, a year AFTER the Treaty of
Versailles, a Russian economist called Nikolai
Kondratieff founded something he named The Institute
of Conjuncture (not conjecture, conjuncture), at
which he and a team of fellow economists studied,
yes, conjuncture or business cycles, with a
particular focus on the long waves they identified
within those cycles.
Over the years since Kondratieff first laid out his
theory on long-wave cycles, a tremendous debate
has ensued as to the usefulness of such long-term
prognostication; but there is one very good reason
why I (and many others) believe there to be a
significant advantage gained through the study of
long-wave cycles
(Wikipedia): Long-wave theory is not accepted by most academic economists.
Good enough for me.
But lets get back to our Russian friend.
Kondratieff, being a Russian, of course took the long view.
He took Schumpeters four stages and equated them to the four seasons in a year. Once he had
identified what he felt to be the length of each Spring, Summer, Autumn, and Winter,
Kondratieff had his Wave; and, as it turned out, that Wave ran for approximately 53 years.
In 1925, when he published his book The Major Economic Cycles, using existing data,
Kondratieff overlaid his wave on world history and projected it forward meaning that
everything for the 89 years that followed was conjecture on his part (not conjuncture,
conjecture).
06 october 2014
Hmmm...
Howd he do? Well, as it turns out, surprisingly well. Kondratieff nailed far too many major
turns to have his work simply dismissed, and his most recent turn into Winter occurred in 2000
or, for those of you who measure the passing of time by such things, precisely at the bursting of
the tech bubble.
The blue shaded area shows how far into the current
Kondratieff downwave we are and far more
importantly how much farther we have to go before
things are supposed to turn around.
But what do the inner workings of a Kondratieff Winter
look like? And are we in the middle of one, as a nearly
90-year-old forecast would have us believe?
Like Schumpeters cycles, the four seasons in a
Kondratieff Wave are broken down and characterised
by the phenomena usually seen during each specific
phase of the full cycle.
I wont go through all four seasons now, as we dont
have time, but rather well focus on the longest phase
Winter as its the one we find ourselves mired in.
In a Kondratieff Winter, the first major phenomenon is
a bout of deflation. So how are we doing on that score?
06 october 2014
10
Hmmm...
In the USA, after a short bout during the depths of 20089, the Fed has managed to turn the
ship around nicely. The Eurozone? Well, theyre in the middle of a pitched battle against the
spectre of deflation; and so far, not to put too fine a point on it, theyre getting their arses
kicked. The UK, a country utterly addicted to debt, is in fine health (assuming you measure a
countrys health by its strong inflationary forces and its massive debt load dont laugh, many
people do); and then of course theres Japan the country its impossible to ignore when
having these kinds of discussions.
Japan suffered from a prolonged period of deflation lasting the best part of 20 years, but
Abenomics has seemingly fixed that little problem for now at least.
So I think its fair to say that there is no outright deflation, but its equally fair to say that
this is clearly an ongoing struggle, so lets hold off on making a definitive judgment on that
particular piece of the puzzle.
Next up is the premise that equities will be in a bear market during a Kondratieff Winter.
As Im sure everybody reading this knows, thats a big fat FAIL, and we need no charts to show
equity markets around the world at all-time highs.
Which brings us to another key signal of a Kondratieff Winter the mass repudiation of debt.
During Winter, debt one of the major causes of the onset of that season is , well,
repudiated. Nobody wants anything to do with it.
06 october 2014
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Hmmm...
As you can see from this chart, as the world went into the Kondratieff Winter in 2000, far from
repudiating debt, wed been embracing it like never before:
By the end of 2007, before things got nasty, the total global issuance of debt securities (as
measured by the BIS) had doubled since 2000 to reach a staggering $69.2 TRILLION.
From there?
Well, its not exactly what youd call repudiation. In fact, another $21.6 trillion has been
added to the mountain of debt hanging over the world.
Why the massive surge? Well that would largely be down to our old friends at the Fed again,
and well come to why shortly. The truth is, weve all been beaten over the head with stories of
the Credit Crunch and tales of austerity, or tales of how hard it has been to find access to credit
since 2008; but, as always, the reality is somewhat different.
Since December 2007, total debt in the financial sector has increased a mere 0.5% OK, again,
its hardly what youd call repudiation.
Its a start, but the nonfinancial sector has taken the baton up with some relish and run with
it, increasing total debt by 67% in just over six years.
And then, of course, theres government that body of men and women to whom the word
repudiate means spend more (just like austerity or cutback).
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Hmmm...
They too have layered on another 67% of debt burden while struggling manfully to balance the
budget and be responsible in these new, austere times.
Based on these numbers, if they REALLY decided to impose austerity, the debt burden would
skyrocket.
So thats ANOTHER big fat fail. Comrade Kondratieff is starting to look a wee bit unhinged.
But now we get to the middle of the order, and heres where things pick up a bit.
Bankruptcies? Well, they spiked in the US in 2005 as people rushed to declare themselves
bankrupt before new rules made it harder to do so. Those new rules slashed personal filings
by almost 75% in 2006, but guess what? Up they went again on a far steeper trajectory than
prior to the alterations to the rules.
06 october 2014
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Hmmm...
Ill give Kondratieff that one.

Banking crisis? Cmon!! Ill give him that one too AND the damn credit crunch while Im at it.
Which brings us nicely to rising interest rates.
Im sure there are a few people reading this who are old enough to remember those, but of
course rates have been falling and then falling some more for decades now, so the average
memory gets a little shaky.
Lets face it, as the major tool available to supposedly help smooth out the business cycle,
youd expect interest rates to at least look SOMEWHAT cyclical in nature, no?
Most people assumed that once rates got to zero they couldnt fall any more.
How could those people BE so foolish?
Zero is only the lower bound for interest rates in the REAL world, but we live in a central bankcreated Fantasyland, so normal rules dont apply.
Either way, we need to stick another one in the Kondratieff fail column.
Currency crises? Well there have certainly been plenty of those since the turn of the century, so
Kondratieff scored on that one, too which just leaves a rising gold price.
06 october 2014
14
Hmmm...
It seems so long ago for those of us who believe in the yellow metal that gold rose year
after year, but from the beginning of the Kondratieff Winter gold climbed relentlessly, and even
the setbacks of the past couple of years havent been enough to steal this one from me, so it
goes in the Kondratieff win column.
So there you have it. Its close and hardly conclusive, but by a narrow majority it looks as
though we ARE in a Kondratieff Winter. However, the fact that the score is so close is actually
rather misleading, so lets take a look at the missing ingredients and see if they have anything
in common.
The misses deflation, an equity bear market, debt repudiation, and rising
interest rates are all, of course, inextricably linked. They ALL flow directly from
interest-rate policy.
Rising interest rates generally dictate that equities enter bear markets, deflation becomes a
threat (or at the very least, inflation becomes much less of one), and debt is discharged or
defaulted upon.
Of course, the policy of the Fed has been one of lowering rates consistently and at the first sign
of any trouble in the economy (trouble that USED to be called a normal part of the business
cycle); and those falling rates have had a predictable effect on equities, debt, AND inflation.
Falling interest rates. Every central bankers first (and until recently, last) line of defence
against the downward part of the business cycle.
06 october 2014
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Hmmm...
By lowering rates to zero and thereby staving off those three important components of the
Kondratieff Winter, the Fed (and its cohort around the world) has, optically at least, made it
look as though things are not so bad.
But even interest rates are beholden to the law of diminishing returns, and as the zero bound
is reached and the effect of another marginal cut in rates diminishes to virtually zero, new
measures are called for.
Those new measures have largely been in the form of QE these past few years, but even magic
money conjured out of thin air has its limits in terms of effectiveness which is why the
Europeans are now experimenting with negative interest rates.
The longer this goes on, the more desperate their measures become.
The question is, WHY?
The answer has its roots in another peace treaty of sorts that again involved Keynes this time
the Bretton Woods agreement, which was thrashed out at the Mount Washington Hotel in New
Hampshire after WWII.
That agreement, which (like those at Versailles in 1919) went against the proposals of Keynes,
established the IMF and the World Bank, cemented the dollars status as the worlds reserve
currency, and ushered in an era of unprecedented economic peace, as a quarter of a century
passed between its signing and the oil shocks of the 1970s.
That economic peace, however, would have far-reaching consequences.
If we take a look at the growth of both credit and GDP in the US after WWII, we see a
remarkable story unfold.
06 october 2014
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Hmmm...
I know, I know... its a busy chart. It was easier in the live presentation where I could build it
sequentially, but bear with me.
Clearly, credit growth has accelerated away from real growth, and the reasons for that
acceleration are clear. They begin with our old friend, the federal funds rate (blue line).
Now, as you can see (in the red-dotted box in the bottom left-hand corner of the chart), for the
first 20 years after WWII, credit and GDP grew in lock-step. So what changed?
Well, of course, the soundness of money changed.
When Nixon closed the gold window on August 15, 1971, to ... protect the dollar from
speculators, he also ensured that credit creation would become as easy as just saying yes.
Immediately after the dollar was saved from speculators, the divergence between growth and
credit creation began to increase, even as interest rates soared due to the inflation unleashed
by Nixons actions.
Finally, though, interest rates reached their peak and began the journey lower from a little
over 18% to where we find them today, and that meant the gloves were off and credit creation
could take off like a rocket, fueled by those rapidly declining rates and a growing sense that
the Fed would continue to lower them at the first sign of any trouble.
The business cycle was sooooo 1960s.
Interestingly enough, if we highlight the period between 1954 and 1969 (dark grey triangle) we
see that credit and GDP both grew steadily despite interest rates increasing 11-fold.
06 october 2014
17
Hmmm...
A close-up look is even more instructive when it comes to the nature of the unchecked business
cycle.
As I pointed out, between October 1954 and October 1969, rates (blue line) climbed 11-fold;
but more tellingly, during that 15-year period they fluctuated along with the business cycle,
adjusting up as well as down as conditions warranted.
Rates quadrupled, fell by five-sixths, rose nearly seven-fold, fell by three-quarters, quadrupled
again, halved, then doubled all in the space of 15 years.
However, if we overlay the business cycle (represented by the PMI Composite Index red line),
we see something that today would be considered extraordinary: a business cycle that ebbs and
flows without ever getting out of hand, despite the extreme interest rate moves that occurred.
In fact, the PMI was in expansion (above 50) far more often than it was contracting (below 50),
DESPITE a rise in interest rates from bottom to top of 8.5%!
Anybody care to hazard a guess as to what the US economy would do today if rates were to
hit 9%? Never mind that debt-service payments would wipe out every dollar of tax revenue
collected by the US government several times over.
Sticking with our chart, its easy to see the next consequence of this peaceful economic
environment and easy credit was an explosion in equity markets, with the S&P 500 following
the trajectory of the expansion in credit until the mid-90s, when it became clear that the
Feds default response would be to slash rates in the face of any sign of a faltering business
cycle... and then the party REALLY got going.
06 october 2014
18
Hmmm...
A reversion to the credit growth trendline when the tech bubble burst was followed by a return
to trend growth along with even sharper credit creation and then came 2008 and the Feds
massive blitz of funny money, which was absolutely vital in order to stop everything falling
apart and the lines for credit and GDP growth converging again, as they hadnt since 1971.
Fast.
But the twin milestones of the closing of the gold window in 71 and peak rates in 81 created
even more instability elsewhere.
Next up? The US budget deficit; and once again you can see the difference made by the
abandonment of the gold standard, compounded by the peaking of interest rates.
06 october 2014
19
Hmmm...
The US monetary base has followed a familiar path at least up until 2008 when, after
dropping rates to essentially zero and running headlong into the law of diminishing returns, the
Fed was forced to expand the base from $800 billion to its current nearly $4 trillion or face a
shattering of the economic peace.
All of which brings us to the Feds balance sheet.
The cost of maintaining the economic peace is staggering way beyond anything we thought
we understood just a few short years ago.
Assets on the Feds balance sheet now stand at $4.4 trillion, as opposed to the $925 billion they
owned on September 10, 2008.
But its when we take a look at the Feds total assets versus their capital that things get
interesting.
In order to keep the peace, with interest rates already pegged at 0%, the only option open to
the Fed was to massively increase the wrong side of their balance sheet which of course they
did without hesitation.
Now, if we take a dozen snapshots each 12 months apart and do a little measuring, we start to
get a better sense of the ledge out onto which the Fed has so gleefully sauntered:
As you can clearly see, the degree to which the Fed has been forced to lever itself to maintain
the economic peace is downright terrifying, and their solvency is (how can I put this delicately?)
questionable.
At least it WOULD be if they couldnt create money out of thin air.
06 october 2014
20
Hmmm...
Back in 2007, the issue of leverage in the investment banking community (which hadnt
mattered to anybody for many years) suddenly mattered to everybody and for the usual reason
in such cases: people started to worry about losing money.
Amazingly, having financial institutions levered 30x became something to fear seemingly
overnight; and, of course, whilst things like that can go on for a long time, as soon as the fear
takes hold, its GAME OVER.
Today, in 2014, after the massive expansion of its balance sheet in the name of peacekeeping,
the Feds leverage far exceeds what was enough to cripple the world financial system back in
2008.
Major US Financial Institutions
Leverage Ratios
80x
75x
70x
65x
60x
Bear Stearns
Goldman Sachs
Merrill Lynch
Lehman Bros
Morgan Stanley
Federal Reserve (Q3 2014)
55x
50x
45x
40x
35x
30x
25x
20x
15x
10x
2003
2004
2005
2006
2007
2014
The price of peace has been heavy indeed; and generally speaking, throughout history, when
the price of peace finally becomes too high, the pendulum tends to swing back to the other
extreme
Now, you may not have noticed it, but since the turn of the century and the onset of the
Kondratieff Winter, the number of wars in which we are all embroiled one way or another has
taken a significant turn higher. There are wars going on everywhere, and some of the enemies
being found to rally people against are a little abstract, to say the least Fox News War on
Christmas being a prime example of the extremes to which things have traveled.
Nevertheless, the drums are beating.
06 october 2014
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Hmmm...
HOWEVER, theres one war thats far more insidious than any of the overt conflicts you hear
about from endless men and women behind microphones and podiums.
Its the one war that isnt talked about and the one war the public ISNT kicking up a fuss
about which is a shame, as its the one war that affects just about everybody:
The last remaining pool of untapped capital is the worlds savings, and that is firmly in the
sights of central banks and governments everywhere.
If you think about this war in its basic terms, its really quite scary.
As weve already seen, the expansion of the last 40 years has come down to one long orgy of
credit creation, and this orgy has required more and more punch to keep the party going.
The increase in real GDP generated by each additional dollar of debt has plummeted from $4.61
in the immediate aftermath of WWII to just $0.08 in 2012:
(At this point, the charts were just getting a bit too depressing, so I thought Id flower this one
up for you a bit.)
All the while, every major central bank in the world has been trying its damnedest to create
2% inflation to help lessen the impact of the soaring debt burden a burden enabled by two
things:
1.The dollars status as the worlds reserve currency
2.The economic peace
06 october 2014
22
Hmmm...
Paying off your debt in a currency you yourself can debase is a tried and tested strategy of just
about every central bank in the world, but never before have so many countries needed to
employ that strategy simultaneously. And with currencies essentially being a zero-sum game, it
is impossible for them all to be successful.
Now, allowing the imbalances created over the last 40-odd years to correct themselves would
plunge the world into a depression thus desperate measures are called for. The Fed (as well
as every other major central bank around the world) has been forced into doing absolutely
everything necessary to maintain the economic peace and keep the expansion of credit going
including abolishing the downward half of the business cycle to try to ensure that deflation and
all the other deadly facets of the Kondratieff Winter are avoided.
The situation is akin to that faced by the swordfishmen in Sebastian Jungers book The Perfect
Storm. The men get caught in the biggest storm of the century and face a life-and-death battle
for survival at sea. Jungers book was made into an excellent movie by Wolfgang Peterson.
In the climactic scene of the movie, ruggedly handsome skipper George Clooney (who, it has
to be said, looks NOTHING like any fisherman IVE ever seen) and ruggedly handsome fisherman
Mark Wahlberg (ditto), having battled against 100-foot waves for hours, finally catch a glimpse
of sunlight, and think theyve made it to the other side of the storm.
Immediately though, the sunlight disappears, the skies darken, and they realise they are back
in the middle of the maelstrom.
Worse still, they find themselves faced with one more giant wave, 150 feet high.
Clooney guns the boats weary engines, and they try desperately to climb the near-vertical face
of the wave; but as they near the top, the forces of nature are simply too much for them, and
the boat plunges down the face of the wave, is turned over, and vanishes forever.
The Fed, the BoE, the BoJ, and the ECB are on the face of that wave gunning the engines for
all theyre worth and running into diminishing returns everywhere they turn as the suffocating
debt load threatens to overwhelm them.
Zero interest rates, QE1, QE2, QE3, Operation Twist, ABS purchases, the doubling of the
Japanese monetary base, and now negative interest rates. Theyve tried everything, and the
wave continues to rise up to meet them.
At some point maybe soon the forces of nature that drive the business cycle will
overwhelm their futile efforts.
Meanwhile, in the background, stealth efforts to create inflation with the aim of getting
citizens to pay for government profligacy continue apace.
06 october 2014
23
Hmmm...
There is no subtler, no surer means of overturning the existing basis of society

than to debauch the currency. The process engages all the hidden forces of
economic law on the side of destruction, and does it in a manner which not one
man in a million is able to diagnose.
John Maynard Keynes
Keynes was never more right than when he identified the pernicious effects of inflation, and
todays disengaged society just makes the task of debasing a currency that much easier.
Kondratieffs research into cycles turned up another extraordinary phenomenon that further
cemented the link between economics and war.
It became apparent that those same 53-year economic cycles could be relied upon to mark
major conflicts as well as major economic turning points.
Now, as you can see, the bad news is that these long wave cycles are uncannily accurate at
predicting major conflicts, but the good news is that we seem to be in mid-cycle, which would
suggest that we are at the furthest point from war that we could be.
But of course, just as Kondratieff expanded upon Juglar & Schumpeters shorter cycles to find
the larger wave, the process goes both ways; and nestled within the 53.5-year war cycle is
another cycle of shorter duration this time 17.7 years.
06 october 2014
24
Hmmm...
and the news from THAT cycle isnt so good, Im afraid

War and economics have always been inextricably linked, and they will forever remain so. If
youre not used to that idea already, get used to it.
Fast.
The worse the economic situation gets, the higher the likelihood of conflict. That has been
the case since the dawn of money, and its just as true today, regardless of the fact that most
people firmly believe that a major war is now impossible.
06 october 2014
25
Hmmm...
Remember this slide? It showed the geopolitical state of the world right before the outbreak of
WWI.
Well, exactly a century on, the echoes from the past are too loud to simply ignore, as the slide
below demonstrates only too clearly:
Not only is the big picture eerily reminiscent of 1914, but if we dig a little deeper into the
detail, we find that though the names have changed, the mechanics of todays world are a little
too close for comfort to those of 1914.
Territorial claims, religious unrest, heavily armed unstable nations, proxy wars, terrorism, and
above all complacency.
06 october 2014
26
Hmmm...
But it doesnt end there, Im afraid.
Fear in the West over the growing economic strength of China, Chinas own desire for a bigger
role on the world stage, globalisation, and increased tourism are all prevalent as is the
general assumption that war is unthinkable (and theres that word again).
Keynes description of life right before the outbreak of
WWI could have been written for today, only instead
of his daily newspaper wed have to substitute
American Idol, Big Brother, or my own favourite The
Great British Bake Off, a top-rated show from the UK
about which one of a dozen ordinary people... can
bake the best cake.
Dont laugh. An argument on that show between this
man and this woman a few weeks ago over a baked
Alaska knocked both Ukraine and ISIS off the front
pages of the broadsheets FOR A WEEK.
I despair.
The Treaty of Versailles ushered in an era of peace
after WWI, but that peace was short-lived because,
from an economic standpoint, it heaped enormous
pressure on Germany, pressure that was enough to
drive them back to war just 20 years after its signing.
06 october 2014
27
Hmmm...
The Bretton Woods Agreement a new financial system recognised as being so crucial that
it was hammered out while the world was still at war demonstrated that the lessons of
Versailles had been learned to a degree and that the importance of money in relation to
warfare was understood.
Its signing began an era of economic peace that lasted a quarter of a century, but that too
began to fray in the early 1970s as the dollar came under pressure from those evil speculators
(and by evil speculators Nixon essentially meant the De Gaulle administration in France, who
continued to run down their dollar reserves by exchanging hundreds of millions of dollars for
gold, as they were perfectly at liberty to do thanks to the Bretton Woods agreement).
In order to keep that peace, America was forced to renege on the agreement. But by doing so,
the money spigot was opened wide, and the US embarked upon an era of credit creation which
just got more extreme the longer it continued, seemingly consequence-free.
The bursting of the tech bubble was the first real sign that something was wrong, but the
response from the Fed was both instant and desperate and designed solely to prevent the
wheels from coming off a decision that would merely set the world firmly on course for an
epic disaster.
Many thought that in 2008 we faced our global Day of Reckoning and survived, but the truth
is that 2008 was actually just another tremor albeit a major one warning of a massive
impending quake.
The real day of reckoning, when the unconscionable level of debt that has been built up during
the fiat money era finally topples over under its own weight like the giant wave in The Perfect
Storm, lies ahead of us.
06 october 2014
28
Hmmm...
Both war and financial collapse occur in cycles and are subject to the overwhelming laws of
nature.
Those inherent characteristics of the natural order are permanent. They cannot be altered.
What the Fed and the rest of the central banks have done in trying to rewrite the natural laws
of finance and human behaviour is likely to lead either to war or to a collapse of the financial
system or both. At this point, the exact outcome is undecided, but the options have narrowed
considerably.
Over the past six years, those at the helm have pulled every lever and pushed every button
available to them in a desperate attempt to stave off an inevitable and natural cleansing of the
business cycle, because all those years of economic peace have resulted in an unprecedented
credit inflation. And, as my friend Dylan Grice recently said,
If youve had an unprecedented credit INflation, you WILL have an
unprecedented credit DEflation
All that the central banks of the world have ended up doing as they have desperately tried to
maintain the economic peace these past several decades is to make that credit inflation larger
and therefore infinitely more dangerous than anything that has gone before it.
The consequences WILL be dire.
*******
OK... so that was a slog (for which I apologise), but in my defence the charts made it seem a
LOT longer.
I promise.
The rest of this weeks Things That Make You Go Hmmm... is devoted to the ongoing disquiet
in Hong Kong (about which I will write a lot more in the coming weeks), the insufferable debt
mountain hanging over the world (about which I have rambled on for so long this week), the
resignation of Argentinas central bank governor, and the amazing spending spree of Brazils
Dilma Rousseff ahead of this weeks general election.
Charts? Well, we have them of course, and this week we take a look at US inequality (which is
worse than... well, just about ever), a possible global equity market top, and Great Britains
gold hoarders.
Finally, there are interviews with Bill Fleckenstein, Steve Keen, and an amazing chat between
Mark Hart and Raoul Pal that you just wont want to miss (and that is NOT bias on my part
trust me!).
Until Next Time...
06 october 2014
29
Hmmm...
Mass Default Looms As World Sinks Beneath A Sea Of Debt

As if the fast degenerating geo-political situation isnt bad enough, heres another lorry load of
concerns to add to the pile.
The UK and US economies may be on the mend at last, but thats not the pattern elsewhere.
On a global level, growth is being steadily drowned under a rising tide of debt, threatening
renewed financial crisis, a continued squeeze to living standards, and eventual mass default.
I exaggerate only a little in depicting this apocalyptic view of the future as the conclusion of
the latest Geneva Report, an annual assessment informed by a top drawer conference of
leading decision makers and economic thinkers of the big challenges facing the global economy.
Aptly titled Deleveraging? What Deleveraging?, the report points out that, far from paying
down debt since the financial crisis of 2008/9, the world economy as a whole has in fact geared
up even further. The raw numbers make explosive reading.
Contrary to widely held assumptions, the world has not yet begun to de-lever. In fact global
debt-to-GDP public and private non financial debt is still growing, breaking new highs by
the month.
There was a brief pause at the height of the crisis, but then the rise in the global debt-GDP
ratio resumed, reaching nearly 220c of global GDP over the past year. Much of the more
recent growth in this headline figure has been driven by China, which in response to the crisis,
unleashed a massive expansion in credit.
However, even developed market economies have struggled to make progress, with rising
public debt cancelling out any headway being made in reducing household and corporate
indebtedness..
Reduced mortgage finance during the banking crisis temporarily succeeded in capping and
partially reversing the growth in UK household debt. Yet with a reviving housing market, these
reductions may have come to an end, with the Office for Budget Responsibility expecting
household debt to income ratios to start climbing again shortly.
In the meantime, the government has been piling on borrowings like topsy, not withstanding
attempts by the Chancellor, George Osborne, to bring the deficit under control. Total national
non financial indebtedness has therefore barely budged since the start of the crisis.
The UK remains the fourth most highly indebted major economy in the world after Japan,
Sweden and Canada, with total non financial debt of 276pc of GDP. The US is not far behind
with debt of 264pc of GDP.
However, the real stand-out is China, which since the crisis began has seen debt spiral from
a very manageable 140pc of GDP to 220pc and rising. This is obviously still lower than many
developed economies, but the speed of the increase, combined with the fact that it is largely
private sector debt, makes a hard landing virtually inevitable.
06 october 2014
30
Hmmm...
The only way the world can keep growing, it would appear, is by piling on debt. Not good, not
good at all.
There are those that say it doesnt matter, or that
rising debt is merely a manifestion of economic growth.
And in the sense that all debt is notionally backed by
assets, this may be partially true. But when rising asset
prices are merely the flip side of rising levels of debt,
it becomes highly problematic. Eventually, it dawns on
the creditors that the debtors cannot keep up with the
payments. Thats when you get a financial crisis.
Crisis or no crisis, the Geneva Reports authors
Luigi Buttiglione of Brevan Howard, Philip Lane of
Trinity College Dublin, Lucrezia Reichlin of the London
Business School and Vincent Reinhart of Morgan Stanley argue that rising indebtedness in
developed economies has been crimping potential output growth ever since the 1980s....
*** JEREMY WARNER / LINK
The Messaging App Thats Powering The Hong Kong Protests

Joshua Wong, a 17-year-old student in Hong Kong, had a problem. You will have experienced
a version of it yourself: you are at a football match or a gig and you need to find a friend. But
the crowd means that the network is overloaded, and you cant get a signal on your phone. The
thing that means you need to call someone is the very thing that means you cant.
For Wong, the problem was more serious: he wasnt at a football match, but playing a leading
role in the organisation of the pro-democracy protests that have shaken his city over the past
week. And he wasnt just worried the network would be overloaded he was worried the
authorities would block it on purpose.
Every major display of social unrest these days seems to come with a game-changing
technological accompaniment. The London riots were narrated on BlackBerry Messenger. Twitter
played an essential role in the Arab spring. Turkish protesters who found the internet blocked
turned to censor-proof Virtual Private Networks. But none of those innovations was much use
without a connection. For Wong and his allies in Hong Kong, the answer was an app that allows
people to send messages from phone to phone without mobile reception, or the internet:
FireChat.
When you download it, FireChat looks like an unexceptional venue for inane online chat about
sport and TV. But its more than that. If the network is down, FireChat can use Bluetooth
really just a sexed-up radio signal to talk to nearby users. The protesters may find something
satisfying in the way the system works, gaining strength like a movement, or a radical idea, not
through a top-down imposition, but from thousands of little connections.
06 october 2014
31
Hmmm...
Every new participant increases the networks range and strength. Usually, the more people
there are in the same location, the less connectivity you get, says Micha Benoliel, one of the
apps creators. But with our system, its the opposite.
FireChat has already been used in protests in Taiwan, Iran and Iraq, but never on the scale
being seen in Hong Kong. After Wong urged his movement to use it, FireChat got more than
100,000 new sign-ups in Hong Kong in under 24 hours; it has registered 800,000 chat sessions
since. If the Communist party isnt quite reeling, its opponents lives have at least got a little
easier.
Of course, users would do well to take care: there is nothing to stop the authorities hopping
on to the network as well. Benoliel recommends people avoid real names; this is, he says, for
information-sharing, not for secrets. Still, in a sense, that is exactly the point. Our mission has
always been freedom of speech, to help information to spread. So this is perfect.
*** UK GUARDIAN / LINK
Argentina Central Bank Governor Resigns

Argentine President Cristina Kirchner replaced the head of the central bank Wednesday,
marking the second overhaul of her economic team in less than a year.
Mrs. Kirchner named her top securities and exchange regulator, Alejandro Vanoli, as central
bank governor after she accepted Juan Carlos Fabregas resignation, according to a statement
posted on the presidencys press website.
Mr. Fabregas resignation came a day after Mrs. Kirchner in a televised speech accused central
bank employees of helping local bankers to speculate against the Argentine peso in hopes of
forcing the government to devalue the currency. Argentinas central bank has little autonomy
from the federal government and the president in practice can hire and fire its senior
executives at whim.
Mr. Vanoli, who had served as head of the National Securities Commission since November 2009,
takes the helm of a central bank whose main task is financing the federal government. Unable
to borrow abroad due to a legal dispute with creditors, Mrs. Kirchner has relied on money
printing to cover spending deficits at the expense of inflation that is thought to be around 40%.
Since 2010, the Kirchner administration has also borrowed tens of billions of U.S. dollars from
the central banks reserves to pay creditors. High inflation and declining reserves, now at $27.9
billion, have undermined faith in the currency and spurred some Argentines to seek the safe
haven of the U.S. dollar.
06 october 2014
32
Hmmm...
Mr. Fabrega was widely respected among the countrys bankers thanks to a career of more than
40 years at the countrys largest bank, state-run Banco de la Nacion. Unusual among central
bankers for not having a university degree, Mr. Fabrega started as a line employee in a Banco de
la Nacion branch and worked his way up the ranks to eventually become president of the bank
during Mrs. Kirchners first term.
She tapped him to run the central bank in November last year as part of a broad shake-up
of her cabinet that included naming a new economy minister and chief of staff. Mr. Fabrega
is credited with helping to stem a run on the central banks hard currency reserves back in
January by devaluing the peso 20% and doubling interest rates to almost 30%.
However, local media reported that he frequently clashed with Economy Minister Axel Kicillof
a young technocrat who has pushed for greater government intervention in the economy over
monetary policy and the devaluation. Mr. Kicillofs spokeswoman has denied reports of a rift
between the two officials.
*** WSJ / LINK
Moscow Is Provoking a Number of Its Neighbors

Finnish Prime Minister Alexander Stubb, 46, discusses relations with neighboring Russia
and his countrys flirtation with NATO. He says Finland will make a decision without
asking for permission.
SPIEGEL: Mr. Stubb, Moscow is following with great concern just how sympathetic you are to the
idea of Finland joining NATO. Do you see it as a threat when President Vladimir Putin speaks of
the special attention he devotes to economic relations with your country?
Stubb: Russia for us is a large, powerful neighbor with which we share a 1,300 kilometer-long
(810-mile) border and against which we have waged war in the past. We know how the Kremlin
speaks and acts. But Im not anxious or afraid, because Finland is an integral part of the
European Union.
SPIEGEL: Putin confidant Sergei Markov has explicitly warned of the consequences of NATO
membership, saying it could trigger a World War III.
Stubb: Rhetoric can be razor sharp, and just as one needs to take some comments seriously,
others should not be.
SPIEGEL: Currently, though, youre playing down tensions even though Russian jets have
repeatedly breached Finnish air space recently.
Stubb: Finland is not an isolated case in that regard. Moscow is provoking a number of its
neighbors. The most dismaying example is Ukraine. The message is: Look, Russia is still a
superpower.
06 october 2014
33
Hmmm...
SPIEGEL: Putin wouldnt simply accept Finland joining NATO.

Stubb: That may well be. But for us the question has to be whether this step would increase our
security. And if doing so would provide us with greater influence over European security policy.
This is a decision we will make without asking for permission.
SPIEGEL: In contrast to you, many in your country are critical about joining NATO.
Stubb: We should have become a member in 1995 when we joined the EU. Nevertheless, we
are very satisfied with the close partnership we maintain with NATO even if things like the
security guarantee in the event of an attack are formally missing. Still, even though we are
paying great attention to the issue, for the time being I dont see any broad majority for joining
soon.
SPIEGEL: During the Cold War, Finland remained neutral in order to keep from provoking the
Soviet Union. Does intimidation by the Kremlin still have an effect today?
Stubb: On the contrary. Each threatening gesture strengthens those who support NATO
membership. But of course some of my compatriots become cautious when Moscow falls back
into the tone that prevailed during the Soviet era.
SPIEGEL: Russia is Finlands third most important export market after Sweden and Germany.
Do the EU sanctions and Russias counter boycott threaten to create an economic crisis in your
country?
Stubb: The sanctions arent the problem. Were suffering from the crisis in the Russian
economy. Instead of modernizing it, Putin has placed his bet on profits from the natural gas
and oil industries. This crisis is being amplified by the sanctions and we Finns are going to feel
the effects. When the Russian economy does well, the Finns also do well. Thats why we are
stressing a diplomatic solution of the Ukraine conflict.
SPIEGEL: If Finland isnt suffering existentially over the sanctions, then why did you so
vehemently resist their tightening recently?
Stubb: I first have to make something clear here. My government did not fight against this new
round of sanctions.
SPIEGEL: But your foreign minister
Stubb: ... didnt consider the timing to be very good and he stated this publicly.
SPIEGEL: He said it was a question of war and peace....
*** DER SPIEGEL / LINK
06 october 2014
34
Hmmm...
Hong Kong Crisis Exposes Impossible Contradiction Of

Chinas Economic Growth
Chinas Xi Jinping cannot make any serious concessions to Hong Kongs democracy movement.
The Umbrella Revolution spreading from the affluent Island to the poorer quarters of Kowloon is
an existential threat to the Chinese Communist Party.
If he were to give way, it would set off contagion across the mainland, said George Walden, a
veteran British diplomat who survived the Cultural Revolution inside China and later negotiated
Hong Kongs future with Deng Xiaoping. Beijing has already blocked all images of the protests in
the Chinese media as a political quarantine measure.
Xi Jinping has a horror of what happened to the Communist Party in the Soviet Union. If things
get seriously out of hand, he may mobilise patriotic compatriots (Beijing-controlled agitators)
on the streets. In the end he will bring out the troops, if he has to, he said.
President Xi will surely play for time, hoping the protests will fizzle as Hong Kongs business
elites try to rein in their unruly children, or try to buy them off quietly. But he cannot yield.
The authorities see this as a matter of life and death, a fuse that can take down their world,
said Zhao Chu, a Chinese columnist and star on Weibo Chinas Twitter.
Whether it escalates to full coercion depends on whether Hong Kongs poor join the students
in serious numbers. We know from the Tiananmen Papers that Deng Xiaoping was willing to
let the democracy protests run for a while in 1989, until workers threatened a general strike
and set up their own blockades. The real massacre was at Beijings Gongzhufen and Muxidi
crossroads, three miles west of Tiananmen Square, where the students were gathered.
The next few days are key. It will determine which way the silent majority goes, said
Jonathan Fenby, a former editor of the South China Morning Post, now at Trusted Sources. Most
of Hong Kongs 7m people prize stability. They may think these militant youths are troublemakers, but they dont like being pushed around by Beijing either.
The students did win a victory in 2012, blocking the imposition of Chinas patriotic education
in Hong Kong. That is where Joshua Wong the star of todays protests cut his teeth. It may
have given him false confidence. He is now listed as a threat to internal stability by Chinese
state security.
That triumph came at the end of the Hu Jintao era, a time of drift, corruption and a pervasive
belief that uber-growth would last forever. Xi Jinping is a different animal, leading a different
country. All can now see that China has picked the low-hanging fruit of catch-up growth, and
has reached the limits of credit.
Mr Xi is Chinas most ruthless leader since Mao Zedong. He has purged his enemies one by one,
whether Bo Xilai in his Chongqing fiefdom or former security chief Zhou Yongkang, all in the
name of Party ethics. He has revived Maoist self-criticism sessions to tighten his grip.
06 october 2014
35
Hmmm...
He chairs the Central Military Commission unlike his weak predecessor and has imposed
an absolute loyalty test on the army high command. He has clamped down on dissent in the
Uighur regions of Xinjiang with an iron fist. A chill is spreading through Chinese academia and
through Weibo.
Some in Britain urge a pressure campaign, demanding that Beijing adhere to its vague promise
of universal suffrage for the people of Hong Kong, not quite the same thing as free elections,
though this was never clarified. The chorus of tut-tutting bordering on liberal infantilism is
misguided on every count.
Chinas state media is already trying to discredit the students as tools of Western agitation,
just as the Kremlin has exploited the (inconsequential) presence of EU and US diplomats in
Kievs Maidan Square to portray Ukraines home-grown revolution as a Nato coup, more readily
believed than you might imagine.
*** AMBROSE EVANS-PRITCHARD / LINK
A Final Splurge
THAT governments splurge in election years is a hallowed democratic tradition. True to form,
Brazils left-wing administration, led by President Dilma Rousseff who is seeking a second term
in an election on October 5th, has gone on a spending spree. Just how big became apparent on
September 30th, when the treasury released its August accounts.
The primary deficit (before interest payments) reached 14.4 billion reais ($5.9 billion) in
that month, the fourth in a row in which the government has failed to put aside cash to pay
creditors. The consolidated primary surplus in the eight months to August stood at just 0.3% of
GDP. Most of that came from the states; the central government managed just 1.5 billion reais,
a piffling 0.05% of GDP and the worst result for the period since 1998. The overall budget deficit
climbed to 4% of output, the highest level since Ms Rousseffs predecessor and mentor, Luiz
Incio Lula da Silva, embarked on a huge stimulus package in 2009, as the global financial crisis
took hold.
Part of the fiscal deterioration is a good sign, after a fashion. The government has at last
decided to stop pedalling, as critics mockingly call the dubious procedure of putting off
payments to state-owned banks charged with disbursing benefits such as unemployment
insurance, or cash handouts for the poor (which Ms Rousseff raised three months ago). In
recent months these lenders have had to finance such payments from their own funds. Now the
treasury has finally footed the bill.
It does, however, mean that in order to meet the self-imposed primary-surplus target of 1.9%
of GDP in 2014, all levels of government must save a total of 22.2 billion reais a month until
the end of the year, an impossible task. A disappointing auction this week for fourth-generation
mobile spectrum hardly helped. The treasury was hoping to rake in at least 8 billion reais; it
only managed 5 billion reais.
06 october 2014
36
Hmmm...
One reason was that the 4G sale, brought forward from 2016 to plump up state coffers this
year, came too soon after an earlier one in 2012. Some operators stayed away as a result.
Private-sector economists now reckon that the structural surplus, which excludes such oneoff injections, has turned into a small deficit.
If Brazil is to keep its investment grade the next government will need to reverse this trend.
A month ago Moodys revised its outlook for government debt from stable to negative. On
September 30th the ratings agency told an investors conference in So Paulo that it will refrain
from re-appraising Brazils credit risk until 2016, once it becomes apparent what the next
government is doing to tackle weak growth (which will average just 1.5-1.7% a year during Ms
Rousseffs four years in power), and a wonky budget.
On paper, Marina Silva, candidate of the centrist Brazilian Socialist party, promises a more
responsible fiscal policy. So does Acio Neves of the Party of Brazilian Social Democracy, the
most market-friendly of the main contenders. If the latest polls are any guide, however, neither
is likely to get a chance to implement a new course. Ms Rousseff, who in August trailed Ms Silva
by as much as ten points in second-round simulations, now enjoys a healthy lead over either
challenger, thanks to ample media exposure that has allowed her to play up successes and bash
rivals.
Markets despair at the thought of Ms Rousseffs re-election. On Monday they swooned after a
poll released over the weekend showed the incumbent consolidating her lead and hinted at
a possibility of an outright victory in the first round. Pricing in this (admittedly still remote)
scenario, the stockmarket had its worst session in three years, falling by 4.5%. The shares of
Petrobras, the state-controlled oil giant which was mismanaged on Ms Rousseffs watch and the
subject of corruption probes, plummeted by 11%. The real also weakened against the dollar;
September saw it lose one-tenth of its value against the greenback, also the most since 2011....
*** ECONOMIST / LINK
06 october 2014
37
Hmmm...
Charts That Make You Go Hmmm...
As we previously noted, only the highest income earners have seen any gains in
compensation since the crisis began around 2007 to the current recovery tops. It is perhaps
not entirely surprising then that, the total income controlled by the Top 1% is drastically above
that of the slave-included times of Ancient Rome and as high as the peak in the roaring 20s.
Current inequality is almost 50% worse than in Ancient Rome and as large as the end of the
roaring 20s....
*** ZEROHEDGE / LINK
06 october 2014
38
Hmmm...
Global Equity Market Top?
Nick Laird
of Sharelynx proves hes not JUST a gold guy with these fantastic charts
showing possible equity market tops around the world and the havoc a strong dollar is
wreaking.
Check out Nicks great service HERE and tell him I sent you.
06 october 2014
39
Hmmm...
Stevenage, in Hertfordshire, has been revealed as the gold hoarding capital of

the UK according to research from bullion dealer BullionByPost.
The analysis, conducted exclusively for the Telegraph, reveals the secret gold buying habits in
the UK. Online gold bullion dealer BullionByPost analysed sales figures to its customers over
the last six years to reveal where in the UK the highest average value in gold bullion has been
delivered.
We believe Stevenage has topped the list for a combination of reasons. Its on the London
commuter belt, just 30 minutes from Kings Cross, attracting successful professionals with high
disposable income, said Rob Halliday-Stein founder of BullionByPost.
Demand is also high in the surrounding areas. According to the Office for National Statistics,
Hertfordshire is the fourth highest in England for Gross Household Income per head.
Perhaps more surprisingly, following the top three urban areas, is a hub of Midlands counties
made up of Herefordshire, Leicestershire and Worcestershire, reflecting a demand in rural
areas....
*** UK DAILY TELEGRAPH / LINK
Source: UK Daily Telegraph
06 october 2014
40
Hmmm...
Words That Make You Go Hmmm...

Meet Mark Hart.
Mark may well be

the smartest guy youve never heard of (as
well as one of the nicest), and recently my
friend and colleague Raoul Pal sat down with
Mark for a fascinating interview about a range
of subjects that provide a far deeper insight
into how some of the really big trades of the
last decade or so have been constructed.
I began watching this at 1:15 AM one morning
in Singapore and was riveted from beginning
to end...
CLICK TO WATCH
When my friend Bill Fleckenstein
calls an interview one of the best Ive done,

youd better believe its going to feature
here.
After his bewildering appearance recently
on CNBC online (when he handled himself
flawlessly in the face of what I can only
describe as abject stupidity), Bill discusses
the Fed, gold, the bond market, and a subject
dear to my own heart financial reporting.
The result is some of Bills best work.
CLICK TO LISTEN
This guy will be a familiar face to
many readers, but its his words that will

resonate.
Profesor Steve Keen talks why the current
economic recovery is doomed to end much
sooner than you think. He also explains what
has caused the current housing bubble and
argues that bank reform is essential if the
economy is to move away from an unhealthy
dependence upon asset speculation.
CLICK TO WATCH
06 october 2014
41
Hmmm...
and finally...
If you still
have a little time left after ploughing through this weeks Things That Make
You Go Hmmm..., then prepare to spend 4:57 on the edge of your saddle as a group of cyclists
take a trail very definitely NOT for the faint of heart...
CLICK HERE TO WATCH VIDEO
Hmmm...
06 october 2014
42
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.
06 october 2014
43
Hmmm...
Use of this content, the Mauldin Economics website, and related sites and applications is provided under the Mauldin Economics Terms
& Conditions of Use.
Unauthorized Disclosure Prohibited

The information provided in this publication is private, privileged, and confidential information, licensed for your sole individual use
as a subscriber. Mauldin Economics reserves all rights to the content of this publication and related materials. Forwarding, copying,
disseminating, or distributing this report in whole or in part, including substantial quotation of any portion the publication or any release
of specific investment recommendations, is strictly prohibited.
Participation in such activity is grounds for immediate termination of all subscriptions of registered subscribers deemed to be involved
at Mauldin Economics sole discretion, may violate the copyright laws of the United States, and may subject the violator to legal
prosecution. Mauldin Economics reserves the right to monitor the use of this publication without disclosure by any electronic means it
deems necessary and may change those means without notice at any time. If you have received this publication and are not the intended
subscriber, please contact service&MauldinEconomics.com.
Disclaimers
The Mauldin Economics web site, Yield Shark, Bulls Eye Investor, Things That Make You Go Hmmm, Thoughts From the Frontline, Outside
the Box, Over My Shoulder, and Conversations are published by Mauldin Economics, LLC. Information contained in such publications is
obtained from sources believed to be reliable, but its accuracy cannot be guaranteed. The information contained in such publications
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Grant Williams, the editor of this publication, is an adviser to certain funds managed by Vulpes Investment Management Private Limited
and/or its affiliates. These Vulpes funds may hold or acquire securities covered in this publication, and may purchase or sell such
securities at any time, all without prior notice to any of the subscribers to this publication. Such holdings and transactions by these Vulpes
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06 october 2014
44

TTMYGH The Consequences of The Economic Peace

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Hmmm...

THINGS THAT MAKE YOU GO

A walk around the fringes of finance

The Consequences of the Economic Peace

CHARTS THAT MAKE YOU GO HMMM... ..................................................38

Things That Make You Go Hmmm...

The Consequences of the Economic Peace

So heres where Europe stood in 1914:

To receive Grant Williams'

But it was a peace which one man in particular

Ill give Kondratieff that one.

There is no subtler, no surer means of overturning the existing basis of society

and the news from THAT cycle isnt so good, Im afraid

But it doesnt end there, Im afraid.

Until Next Time...

Mass Default Looms As World Sinks Beneath A Sea Of Debt

The Messaging App Thats Powering The Hong Kong Protests

Argentina Central Bank Governor Resigns

Moscow Is Provoking a Number of Its Neighbors

SPIEGEL: Putin wouldnt simply accept Finland joining NATO.

Hong Kong Crisis Exposes Impossible Contradiction Of

Charts That Make You Go Hmmm...

Global Equity Market Top?

Stevenage, in Hertfordshire, has been revealed as the gold hoarding capital of

Source: UK Daily Telegraph

Words That Make You Go Hmmm...

Mark may well be

When my friend Bill Fleckenstein

calls an interview one of the best Ive done,

This guy will be a familiar face to

many readers, but its his words that will

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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