Hmmm

A walk around the fringes of finance

THE lEGEND OF ZElDA

THINGS THAT MAKE YOU GO

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LETS PLAY MONEY MAKING GAME

Reality is broken. Game designers can fix it.

Jane McGonigal

Prepare for unforseen consequences.

The G-Man, a character in Valves Half Life: Episode Two

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hardly a household name with the exception perhaps in the Silicon Valley area of Northern California. Alcorn was born on the first day of 1948 in San Francisco and has remained in the Bay Area his entire life. He attended UCal Berkeley, graduating in 1971 with a BSc in Electrical Engineering and Computer Sciences and went to work for a company called Ampex. Back then, Silicon Valley was a small place and interconnectivity between the pioneers of the computer industry was inevitable (in fact, Alcorn was the other guy in many early meetings as Steve Jobs and Steve Wozniak demonstrated their prototype Apple I) which is how Alcorn ended up working for Nolan Bushnell and Ted Dabney at Atari in 1972. Under Dabneys direction, Alcorn turned his mind to an area in which he had no previous experience a new phenomenon called video games and was tasked with writing the code for what he was told was a project for General Electric but that was, in actuality, just a means to give Alcorn some experience in writing a video game: (Wikipedia): Bushnell asked Alcorn to create a simple game with one moving spot, two paddles, and digits for score keeping Feeling the basic game was too boring, Alcorn added features to give the game more appeal. He divided the paddle into eight segments to change the balls angle of return. For example, the center segments return the ball a 90 angle in relation to the paddle, while the outer segments return the ball at smaller angles. He also made the ball accelerate the more it was returned back and forth between paddles; missing the

Allan Alcorn is

ball reset the speed. Another feature was that the in-game paddles were unable to reach the top of screen. This was caused by a simple circuit that had an inherent defect. Instead of dedicating time to fixing the defect, Alcorn decided it gave the game more difficulty and helped limit the time the game could be played; he imagined two skilled players being able to play forever otherwise. Three months into development, Bushnell told Alcorn he wanted the game to feature realistic sound effects and a roaring crowd Dabney wanted the game to boo and hiss when a player lost a round. Alcorn had limited space available for the necessary electronics and was unaware of how to create such sounds with digital circuits. After inspecting the sync generator, he discovered that it could generate different tones and used those for the games sound effects. To construct the prototype, Alcorn purchased a black and white television set from a local store, placed it into a 4 feet (1.2 m) wooden cabinet, and soldered the wires into boards to create the necessary circuitry. And so, on a cheap black and white TV set, was born a true gamechanger in every sense of the word: Pong. (For those amongst you born of the videogame generation who have never seen the glory of Pong, click HErE and bask in what we children of the 1970s called cutting edge entertainment. The very fact that this video clip is over 2 minutes long and has over half a million views is proof positive that nostalgia for a forty-something truly knows no bounds)

In the wake of Pong, video game

development took off and over the next 5 years, games such as Hunt The Wumpus, Maze War and Zork became familiar to the more tech-savvy teen but, in 1977, the singularity of videogames allied to the fact that a deluge of Pong clones flooded the market led to the collapse of the industry as manufacturers were forced into slashing the prices of their systems

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and RCA and Fairchild cried uncle , abandoning their video game consoles). But from the ashes of Pongageddon rose the phoenix that was Taitos Space Invaders and, after its false start, the video game boom was well and truly off and running. Asteroids begat Pac-Man and the revenues generated by arcade video games hit $5billion in 1981 ($12.3billion in 2011 dollars even with the CPI running at under 3%) before peaking in 1982 at $8bln ($18.5bln today, but whos counting? John Williams, thats who) which was more than Hollywood box office ($3bln) and music sales ($4bln) combined as game designers found their stride. After a brief downturn in 1983-4, the advent of the first real home gaming consoles in 1985, when Nintendos lovable plumber Super Mario became a massive worldwide hit, was the moment when the videogame industry became an unstoppable juggernaut.

About now I can sense many of you are saying to yourselves hes REALLY lost it this time. Where the hell is he going with THIS one?, well for those of you who have stayed the course, we will leave the videogame industry here, in the mid-90s, for the time being (we will return to it later), as it gets ever more complex and travel a little way back in time to turn our attention to the American and Philadelphia Stock Exchanges in 1989 and the advent of Index Participation Shares (IPS). Unlike FPS, IPS were nice and simple.

The advent of portfolio or pro-

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North America Videogame Sales US$ Billions

gram trading which became popular in the late 1970s and early 1980s, allowed managers to trade an entire portfolio (which often consisted of every stock in the S&P500) by placing a single order with a brokerage house. The launch of an S&P500 futures contract on the Chicago Mercantile Exchange had provided an arbitrage between stock and futures and Exchanges For Physical (EFPs) allowed for positions in stocks to be exchanged simply and easily for positions in futures contracts. The increase in this kind of activity generated a strong desire for a vehicle which enabled smaller investors to trade in similar fashion in large baskets of stock and one of the first such products to achieve that aim were IPS. Their introduction was not without conflict though:

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25 2007 2008 2009 2010 2011

SOURCE: BLOOMBERG/TTMYGH

Videogames increased in complexity from Legend of Zelda to Final Fantasy to Warcraft to the Sims as increased computing power, better graphics, realistic sounds and designers pushing the boundaries with each new release combined to make games ever more complex and ever more challenging until, in the mid-90s, the Quake Engine was written that would become the base architecture for a generation of firstperson shooter games (FPS).

(Omniglot): The Index Participation Shares were a relatively simple, totally synthetic, proxy for the Standard and Poors 500 Index. While Index Participation Shares on other indexes were also available, Standard and Poors 500 Index Participation Shares were the most active. They began trading on the American Stock Exchange and the Philadelphia Stock Exchange in 1989. Index Participation Shares traded with a level of activity that showed significant public interest, in spite of a lawsuit by the Chicago Mercantile Exchange and the Commodity Futures Trad-

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ing Commission, which charged that Index Participation Shares were futures contracts. As futures contracts, they would be required by law to trade on a futures exchange regulated by the Commodity Futures Trading Commission, not on a securities exchange. In spite of the cloud cast by this litigation, Index Participation Shares volume and open interest began to grow. The Index Participation Shares were, candidly, much like a futures contract; but they were margined and collateralized like stocks. Like futures, there was a short for every long and a long for every short. Index Participa-

developed the Standard & Poors Depositary Receipts (SPY), an Exchange Traded Fund that would once again attempt to replicate the performance of the S&P500 in one simple, easyto-trade vehicle. The Spiders were launched in January 1993 and would go on to become the largest ETF in the world (currently, their market cap stands at $105.6bln). And so, from a rather complex beginning, the ETF market began to take the opposite path to that of the videogame industry as the simplicity inherent in being able to push a button and buy an entire index in the correct weightings became catnip to investors and led to an ongoing effort to simplify investing in general by providing one-stop shopping for anyone with an idea, no matter how broad that idea may be.

tion Shares were carried and cleared by the Options Clearing Corporation and they provided a returned essentially identical to the long or short return on the underlying shares in the index with an appropriate quarterly credit for dividends on the long side and a debit for dividends on the short side. So far so good, but these simple instruments were found, by a Federal Court in Chicago, to be illegal futures contracts and ordered they be traded on a futures exchange or not at all. They chose not at all and investors had to liquidate their positions. This was the first time these simplified products ended up creating unforeseen losses for investors; it wouldnt be the last. It wasnt until 1993, however, that the idea of a simple, tradeable index proxy gained real traction and, for that, we have Nathan Most and Steven Bloom to thank, for it was they who

SPDRs and, at the same time as the Quake Engine in all its ground-breaking technological magnificence was being unveiled to the videogame world in 1996, the Barclays World Equity Benchmark Shares (WEBS) were being rolled out to equity investors in an attempt to reduce complexity by allowing people to invest - with just the click of a mouse button - in exotic faraway locales they might not be able to find on a map and would most likely never visit. The WEBS (later renamed iShares) were (and are) a series of ETFs designed to track MSCI country indices around the world and open up foreign markets - with all their local complexities and idiosyncrasies to a generation of daytraders. Now, i understand the usefulness of these tools for many investors, but the net effect was that a man in Des Moines, IA could now wake up one morning, read a story in the newspaper about something that happened in Taiwan, for example, and decide to buy Taiwan by going long the EWT ETF which, according to Bloomberg: ...seeks to provide investment results that correspond to the performance of the Taiwanese market, as measured by the MSCI Taiwan Index. Investing distilled to its simplest form.

The SPY begat the MidCap

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From country-tracking ETFs the traveling circus moved to sectors as State Street introduced the Sector Spiders in 1998 which tracked the nine sectors constituting the S&P500 Index and, later that year, the DIA (or DIAmonds as it is colloquially known) gave gamers investors the means to buy or sell the Dow Jones Industrial Average. The following year, months before the NASDAQ bubble finally burst, the QQQQ (cubes) NASDAQ-tracker ETF was launched. After beginning at a country level, ETF issuers narrowed the focus of their products - to indices and to sectors, but then, a curious thing began to happen as it became apparent that, in what had become known as the videogame age (a term that bizarrely implies dumbing down in an area that has done nothing but get ever-more complex over the years) ETFs were succeeding in sucking in huge amounts of investment dollars while they found ever-simpler ways to express often quite abstract views. Perhaps unsurprisingly, the providers of ETFs began to look for new ways to simplify even complex ideas in an attempt to attract the relatively easy money that seemed to flow into their products and so they began constructing ETFs that would make it possible to express a more broad idea through one easy purchase or sale. This led to commodity ETFs that allowed the investor to take a view on such things as oil, precious metals or soft commodities as well as ETFs that focused on Treasurys, high grade corporate debt and 1,200 even junk bonds. From there, the ETF industry exploded as more and more complex products were created - paradoxically with the intention of simplifying the investment process. Think the S&P is going lower? Well why not buy the proShares Short S&P500 ETF? Have a feeling in your gut that High Yield bonds are where the action is but dont want to take the time and trouble to do the necessary reading and inves1,000

tigation required to find the best-value credit? No problem at all. Just buy the iShares iBoxx $ High Yield Corporate Bond ETF. The guy you buy your bagel from in the morning said something about Asia being where all the smart money is going but youre not sure exactly what he meant? Easy. The BLDRS Asia 50 ADR Index ETF will give you exposure to a group of 50 ADRs of Asian companies trading in the US. Sorted.

of an idea, investors grew hungry for more and when we talk about investors and more we are never very far away from the L-word; Leverage. If you want to be long the Dow, well youd obviously LOVE to be DOUBLY-LONG, surely? Well there is a vehicle that will notionally give you 2x the performance of the Dow Jones Industrial Average (though in practice, the tracking of these instruments only really makes them capable of potentially performing as advertised over very short timeframes. No matter - Im sure its in the small print somewhere). Have an urge to be double short copper? Check. 3x short Natural Gas? Bingo. There are now over 1,400 ETFs in the US alone holding over $1 trillion in assets (chart, below) and there are no signs that the pace of increase in this number is going to slow down any time
US-Listed ETF Total Asset Value (US$ Billions)

Newly-provided with easy, simple ways to express the concept

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0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

SOURCE: BLOOMBERG/TTMYGH

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soon. In fact, in the five years to December 31, 2011, Exchange-Traded Products (ETPs) have attracted more than half of all US fund deposits and, according to Yahoo Finance, the future is decidedly rosy: (Yahoo Finance): According to McKinsey & company, over the last ten years, assets in ETFs have expanded over 30% annually, compared to a 5% to 6% growth in mutual funds... The firm projects global ETP assets to increase to between $3.1 trillion and $4.7 trillion from a little over $1.5 trillion today. McKinsey predicts that the ETF industry has hit an inflection point where product proliferation, specialization, price competition and additional actively managed funds will shift the ETF universe away traditional lowbeta ETFs. But the signs are becoming more evident that perhaps the dumbing-down of investing is going a little bit too far. Every year, dozens of ETFs close down and, in 2011, those casualties included amongst their number the FaithShares Catholic Values ETF, Methodist Values ETF, Baptist Values ETF and Lutheran Values ETF, all of which were listed in the Religiously Respectful sector and screened stocks on best practices according to the guidelines of the related denominations. The Faithshares Christian Values Fund lasted an extra month but that too was shuttered in July (Im not certain whether Lloyd Blankfein doing Gods work was enough to make Goldman Sachs stock eligible for inclusion in the various portfolios but the point is now moot). This past month has seen another example of how simplification can be an extremely dangerous thing for the investing public. Now, my background is decidedly NOT steeped in the mathematical precision of volatility, but I recently attended the

Global Volatility Summit in New York, where a colleague of mine (who just happens to be one of the finest volatility traders in the world) was speaking on a panel which included some of the best and brightest minds in that particular part of the business. A topic to which the panel returned on numerous occasions was the recent popularity of an ETN that, according to Bloomberg, provided investors with: ...a cash payment at the scheduled maturity or early redemption based on 2X the performance of the underlying index, the S&P 500 VIX Short-Term Futures Index less the Investor Fee. In essence, gamers investors could buy a simple instrument that would give them DOUBLE the performance of the underlying VIX index (and why buy something that offers 1x performance when you can buy something that offers 2x, right?). It cant really get any simpler than that, and with headlines about the VIX hitting 5 year lows abounding, plenty of people were applying simplistic logic and deciding that anything at a 5-year low could only really go up (personally, instead of such logic, I prefer fact - such as the fact that something can fall 5% a day, every day forever and NEVER reach zero, but.....) and, as a consequence, money flooded into the ETN as can be seen in the lower panel of the chart below.

SOURCE: BLOOMBERG

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Allow me to recount an anecdote
from the afore-mentioned Global Volatility Summit in order to set up the next part of our discussion.

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But, as is usually the case, there was a slight problem and that slight problem came in the fact that this particular exercise on dumbingdown had perhaps bitten off more than it could chew and any investor who had bought the ETF to try to make 2x the increase of something that was trading at a 5-year low had perhaps neglected one tiny thing - volatility is complicated stuff. Dont believe me? Lets ask the CBoE: VIX is the square root of the annualized forward price of the 30-day variance of the S&P 500 return. This forward price is based on the replication of total variance by a portfolio of options delta-hedged with stock index futures. The construction of the replicating portfolio and the determination of its forward price from listed S&P 500 option prices is described below in greater detail. Replication of Total Variance The construction of the portfolio which replicates total variance is based on two observations: (1) (1)The total variance of the instantaneous rate of return of the S&P 500 over a period T is equal to:

My colleague on the panel in NY made a point of describing, in what I shall simply call extremely plain language, what he thought of this particular product and expressed his opinion that it would end very badly for investors. I think it is fair to say that he took great pains to labour the point. Ten minutes after the panel ended, he and I were chatting to a group of investors when a rather irate man appeared at his side and introduced himself as one of the architects of the ETN about which my colleague had been so disparaging. He had clearly sworn to defend his progeny against enemies both foreign and bombastic and he proceeded to do so with great vigour. The conversation was fairly short and the man left in a short-paced and, from the back at least, unsatisfied stride for pastures less skeptical. Sadly, he didnt leave a card. Two weeks after this conversation, the following story appeared on my Bloomberg terminal: (Bloomberg): The plunge of an exchange-traded note backed by Credit Suisse Group AG highlights the growing risks for investors in some of Wall Streets most complex exchange-traded products. The VelocityShares Daily 2x VIX Short-Term ETN, which seeks to provide twice the daily return of the VIX volatility index, fell 30% on March 23 after Credit Suisse said it would begin issuing new shares. The Zurich-based bank stopped creating shares a month ago, unhinging the funds price from the index and leading to a premium over the indicative value that peaked at 89% on March 21 before plunging to about 7% two days later.

(2) A Taylor expansion of the logarithmic term ln(FT/F0) shows that it can be replicated by trading stock index futures and a continuum of out-of-the-money options

I could go on (the CBoE do HErE if youre interested) but I believe my point is made; how many of the buyers of the 2x VIX ETN had ANY clue what they were actually buying and how it would work? i would happily buy an ETF that provided me with 2x the inverse of that percentage.

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Futures Index. The price quickly developed a premium over the notes targeted value that peaked at 89% on March 21. Hours before the bank said it would resume issuing new shares, the ETNs price began falling on March 22 even as the index was rising. By the end of March 23, the premium had collapsed to 6.9% as the notes tumbled.

Premium

SOURCE: BLOOMBERG

The story behind the plunge in the ETN is a cautionary tale that bears highlighting and a recent Bloomberg article on the subject illustrates perfectly how dangerous the dumbing-down of investing can be: (Bloomberg): Michael Gamble, a 67-yearold retiree, doubled down on a volatility exchange-traded note backed by Credit Suisse Group AG last week as it declined to a record low price. When it started to fall, I bought more because I couldnt believe how low it was going, he said in a telephone interview. I didnt realize I was playing with a hand grenade. Gamble, who lives in Frisco, Texas, didnt know the product was trading at a premium to its targeted value, a rare event for ETNs, or that institutional investors were selling the notes short on a bet they would fall. The note tumbled by more than 50% on March 22 and March 23, costing Gamble about $20,000. The problem had been caused by the enormous inflows into the ETN which meant Credit Suisse could not issue more Notes: (Bloomberg): Credit Suisse stopped issuing new notes on Feb. 21 after the market value more than quadrupled from the end of 2011, unhinging the share price from the index it tracked, the S&P 500 VIX Short-Term

Ordinarily speaking, nobody who REALLY understood what they were doing would buy something that was trading at an 89% premium to the underlying index it was tracking, but there was enough dumb money pouring into this ETF to drive it to completely the wrong price, ensuring a lot of money was lost when sanity returned. That money flowed in because an instrument was made available which made investing in something extremely complicated extremely simple. Convenience investing: (Bloomberg): The iPath S&P 500 VIX ShortTerm Futures ETN was among the 10 fastest growing exchange-traded products in the world in the first two months of 2012, gathering $1.1 billion in new assets... For investors in the Credit Suisse ETN who didnt pay enough attention, the freedom to access a complex market backfired after the Zurich bank ran into size limits on the derivative positions it took to ensure it could match TVIXs targeted return. Issuers typically stop adding shares when they reach a limit on their derivative positions that is either imposed internally or by an exchange or regulator... But the fall of the TVIX wasnt the first such collapse. An ETN which tracked natural gas prices had similar problems: ...The price of the iPath Dow Jones-UBS Natural Gas Total Return Sub-Index ETN, a note issued by London-based Barclays Plc, followed a similar trajectory over the past eight weeks, rising to a premium as high as 134 percent over its indicative value before falling to a premium of 56 percent over six trading days.

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ETFs definitely provide

easy diversification, tax efficiency and low expenses to investors while offering the benefits of ordinary shares such as limit orders, shortselling and options markets BUT, the desire to entice investors into the market by making a cornucopia of investment opportunities to them through simple vehicles has led to a dumbingdown of the investment process in a neverending quest for the simplest possible route into an idea when the plain truth is, there ArE no substitutes for doing the necessary research required when thinking about investing money into something. The unevenness of the regulatory regime surrounding these instruments has not exactly helped matters in that it has made investors believe that if they are allowed to do something, it must be safe. The pejorative term Videogame Generation is frequently aimed at the youth of the 90s and 00s who, it is alleged, sit in front of their TV screens mindlessly pushing buttons and paying no attention to the world around them. It is synonymous with a group of people who, it is felt, look for simplicity and convenience and cannot be bothered to engage with the world. It implies a certain amount of intellectual desertion on their part which, when one looks at the complexity of the games they are playing, is perhaps not justified. If you have ever watched a rapt teen playing Guitar Hero or trying to infiltrate an enemy lair in Call of Duty, you will know, as i do, that these are extremely complex, hard to master and provide enormous gratification to those successful in winning. It used to be the same with investing, but now that too has been dumbed-down - a dangerous direction in which to go.

desperately to keep the financial system from imploding through the application of neverbefore tried ideas on a massive scale and it will be remembered for generational moves in bond markets and precious metals. For twelve months analysts pored over data in an attempt to make sense out of a situation so complex as to literally leave the finest financial minds of their era baffled and at complete odds with one another. Fortunately, amidst all this confusion, there was a way to cut through the fog and invest in a simple, convenient fashion through the use of two ETPs; Risk On (ONN) and Risk Off (OFF). It doesnt get any easier than that.

************** This weeks edition of Things

(Positions in any individual stocks discussed: NONE)

That Make You Go Hmmm..... contains words of wisdom from Jim Grant, John Mauldin, Barry Ritholtz and Caroline Baum, we look at Spains housing problems and need for draconian austerity, hear how two big names in HK have found themselves on the wrong side of the law, dig further into the mysterious case of a British businessmans death in Chongqing and see how Angela Merkel is coming to terms with the implications of French opinion polls. We look at gold, personal spending, Argentine inflation (or lack of it) and much, much more as the first quarter comes to an end. Im all out of space so I will leave you to it.

2011 will long be remembered

as the year in which a political union comprising some 27 different countries (17 of which formed a union within the union) reached the point of evaporation. It will be remembered for Central Bankers around the world trying

Until next time...

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Contents
Jim Grant Crucifies The Fed The Mother Of All Housing Bubbles Russias Gold Sale Was First In Five Years Neil Heywood Feared For His Safety As Strains Grew Around Bo Xilai

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Printing Money Does Not Lead To Inflation, Argues Argentine Central Bank President Fed Buying A Stunning 61% Of U.S. Government Debt Barry Ritholtz On Causes Of The Financial Crisis Even A 1-Trillion Euro Firewall Wouldnt Be Enough Kwok Brothers Arrested By HK Watchdog Four Numbers Add Up to an American Debt Disaster Merkel Braces For Possible Sarkozy Election Defeat Starting to Worry Charts That Make You Go Hmmm..... Words That Make You Go Hmmm..... And Finally.....

The Gonnie, Gonnie Banks

# 16 Bank Fidelity Bank, Dearborn, MI Total Cost to FDIC Deposit Insurance Fund Assets ($m) 818.2 Deposits ($m) 747.6 Cost ($m) 92.8 92.8

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My friends and neighbors, i

thank you for this opportunity. You know, we are friends and neighbors. Grants makes its offices on Wall Street, overlooking Broadway, a 10-minute stroll from your imposing headquarters. For a spectacular vantage point on the next ticker-tape parade up Broadway, please drop by. Well have the windows washed. You say you would like to hear my complaints, and, on the one hand, I do have a few, while on the other, I cant help but feel slightly hypocritical in dressing you down. What passes for sound doctrine in 21st-century central bankingso-called financial repression, interestrate manipulation, stock-price levitation and money printing under the frosted-glass term quantitative easingpresents us at Grants with a nearly endless supply of good copy. Our symbiotic relationship with the Fed resembles that of Fox News with the Obama administration, orin an earlier erathat of the Chicago Tribune with the Purple Gang. Grants needs the Fed even if the Fed doesnt need Grants. In the not quite 100 years since the founding of your institution, America has exchanged central banking for a kind of central planning and the gold standard for what I will call the Ph.D. standard. I regret the changes and will propose reforms, or, i suppose, re-reforms, as my program is very much in accord with that of the founders of this institution. Have you ever

read the Federal Reserve Act? The authorizing legislation projected a body to provide for the establishment of the Federal Reserve banks, to furnish an elastic currency, to afford means of rediscounting commercial paper and to establish a more effective supervision of banking in the United States, and for other purposes. By now can we identify the operative phrase? Of course: for other purposes. You are lucky, if I may say so, that Im the one whos standing here and not the ghost of Sen. Carter Glass. One hesitates to speak for the dead, but I am reasonably sure that the Virginia Democrat, who regarded himself as the father of the Fed, would skewer you. He had an abhorrence of paper money and government debt. He didnt like Wall Street, either, and Im going to guess that he wouldnt much care for the Fed raising up stock prices under the theory of the portfolio balance channel. It enflamed him that during congressional debate over the Federal Reserve Act, Elihu Root, Republican senator from New York, impugned the anticipated Federal Reserve notes as fiat currency. Fiat, indeed! Glass snorted. The nation was on the gold standard. It would remain on the gold standard, Glass had no reason to doubt. The projected notes of the Federal Reserve wouldof coursebe convertible into gold on demand at the fixed statutory rate of $20.67 per ounce. But more stood behind the notes than gold. They would be collateralized, as well, by sound commercial assets, by the issuing member bank anda point to which I will return by the so-called double liability of the issuing banks stockholders.
O O O

JIM GRANT (VIA ZEROHEDGE) / LINK

Spain had its own housing bubble,

in most ways worse than that of the US. In 2006, the Guardian wrote that 50% of new EU jobs had been created in Spain during the previous five years. But in 2011 housing starts were down by 94% and new mortgages by 81% (IMF, 2011). The IMF notes that The stock of unsold units may take around another four

SOURCE: THE BLOOMBERG

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years to clear. The lowest estimates of the stock of unsold units are at close to 700,000 units, with considerable regional variations but with a downward adjustment that has only started at the end of 2010. These only include newly completed units, and do not fully include units repossessed by financial institutions, unsold secondary market houses, or unfinished units.

meant the bank then takes over the house for just half its originally assessed value, and wipes the amount off the remaining debt leaving the borrower still owing a bundle. The legislation passed last week raises the proportion the bank has to effectively pay in the event of non-sale to 60 percent. Home prices have fallen just 10-20%, as banks cannot afford to write down mortgages (more on that later). Realistic estimates assume a 40-50% total drop is more likely, and anecdotal evidence suggests it could be even more if the economy does not recover soon. And as we will see, that is going to be tough.
O O O

...Only Ireland can rival Spain for the largest housing bubble...

The Wall Street Journal suggests the number may be more than double that:

Some 1.5 million unfinished, unsold or unwanted residential units stand scattered across the country, products of a still-deflating housing bubble that threatens to undermine Spains broader economy for years to come. It is the hangover after an epic fiesta, a period Spaniards now refer to as cuando pensbamos que ramos ricoswhen we thought we were rich. Lets put that in context. The US has about 6.5 times more people than Spain. There are 2.43 million existing homes for sale plus shadow inventory in the US, estimates of which vary. Using the WSJ number, this would suggest Spain has the equivalent of 15 million-plus homes for sale. That in a country where unemployment is more than double ours and where population growth and household formation is certainly slower than in the US. Only Ireland can rival Spain for the largest housing bubble. The number of homes being foreclosed on is estimated to triple in Spain. About 120 evictions take place every day. Those who default on their mortgages cannot walk away from the debt, as in the US. A story is out tonight about one resident who lost her job and is being foreclosed on. She will still owe over about half her debt, or more than 100,000, plus court costs and penalties. From the Huffington Post: If the bank manages to sell a foreclosed home, that amount is struck off the remaining debt. But the norm these days is that the property is put up for auction and nobody bids. That has

JOHN MAULDIN / LINK

Russia sold gold in February

for the first time in five years, according to data released by the International Monetary Fund. The sale, while relatively small at just 3.8 tonnes worth about $200m at current prices, was unexpected since Russia has over the past five years been one of the largest buyers of gold among central banks. The Russian central bank has more than doubled its reserves from 387 tonnes in mid-2006 to 833 tonnes in January this year, making it the worlds eighth-largest holder of gold in the so-called official sector. Central banks last year bought 440 tonnes of gold on a net basis, according to Thomson Reuters GFMS, a consultancy, the largest purchases by the sector since before the collapse of the Bretton Woods system of fixed exchange rates in 1971. The shift among central banks from heavy selling in the 1990s and 2000s to large buying has been one of the most important drivers of the sevenfold rally in gold prices from $253 a troy ounce in 2001 to a peak of $1,920 last September. On Thursday, gold prices traded at $1,649, down 0.8 per cent on the day. Russias gold reserves as a proportion of its total foreign exchange reserves have risen from 2.5 per cent in mid-2008 to 9.8 per cent last week,

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three months earlier, apparently of natural causes. Now the message to a Chinese investigative journalist from an unidentified number was suggesting he had been murdered. The suspicion, another Chinese reporter revealed last week, was that Mr Heywood was a Bai Shoutao - literally a white glove, brokering a series of secretive business deals for a powerful Chinese politician not supposed to soil his hands with commerce. On Saturday a startling new report surfaced that Mr Heywood had told friends in China that he feared for his safety after falling out with Gu Kailai, Mr Bos wife. Concerned that somebody in the familys inner circle had betrayed them, she was said to have asked Mr Heywood to divorce his wife and swear an oath of loyalty, which he refused, according to the Wall Street Journal, the newspaper which broke the original story about Heywoods death last week. Whatever the truth of the claims, they have put Mr Heywood at the centre of a political storm in China and led to suggestions that the late 41-year-old Harrow-educated businessman may have been a British spy. Disquiet in Britains expat community in Beijing about the official version of events - that the abstemious Mr Heywood may have been drinking heavily before his death - led the Foreign Office to ask the Chinese to reopen the case. Now The Sunday Telegraph has learned that the Foreign Secretary William Hague is being personally briefed on the affair and, in the US, the Vice President Joe Biden has intervened after calls for a Congressional hearing into the ensuing events. Heywood arrived in China more than a decade ago after graduating in international relations from Warwick University. His only previous business experience had been in an unsuccessful

SOURCE: SHARELYNX

according to data from the central bank. In 2005, Maria Guegina, head of external reserves management, told an industry conference in Johannesburg that the Russian central bank had calculated that about 10 per cent of gold in reserves could be appropriate. Traders said Moscow had in private stressed that it had no fixed target for its gold reserves. Alexei Ulyukayev, first deputy chairman of the central bank, in October told parliament that Russia would continue buying gold. We are not planning to step away from this path. We are acquiring huge volumes, he said.
O O O

FT / LINK

daily over the death of British businessman Neil Heywood since the surprise ousting of Politburo grandee Bo Xilai in Chongqing. The text message on the mobile phone screen was to the point: Neil Heywood was killed. Sent anonymously in the middle of the night last February, it referred to the case of a British businessman found dead in a hotel room in the city of Chongqing, in South West China,

New questions arise

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14.

venture with his father, attempting to produce a blind date auction television show. There were no takers. His break came when Bo Xilai, mayor of the city of Dalian until 2000, hired him to teach his son English and he became close to the whole family - including Mr Bos wife, Gu Kailai, a lawyer who is believed to handle much of the family business. It is this connection that is now at the centre of the intrigue.
O O O

ment the increase in prices are caused by an excess of demand, something we do not see in Argentina. In our country the means of payment are adjusted to the growth of demand and tensions with prices must be looked on the supply side and the external sector. Marc del Pont remarked that criticism of the way the state is funding itself have a clear ideological condiment, it is that or either the public sector has to make adjustments or go abroad to get credits and/or loans. She added that the debate is very similar to that referred to the use of BCRA reserves to pay for sovereign debt. Under the new charter of the bank the primary and main task of the BCrA will not be only to preserve the value of the currency but must also include inflation, jobs, economic development with social fairness, financial stability and the need to coordinate with government policies. Were recovering the sovereign capacity to formulate and implement economic policy, said Marc del Pont who anticipated some pictures will be coming down from the banks hall of fame beginning with Milton Friedman.
O O O

UK DAILY TELEGRAPH / LINK

Argentinas Central Bank (BCRA), Mercedes Marc del Pont, stressed the importance of the recently approved banks charter reform and denied that printing currency leads to the creation of an inflationary state since inflation is rooted in other causes. The new charter will provide the government with more tools to deepen the development model and to give priority to investment credit said Marc del Pont in a Sunday interview with two pro-government local newspapers Pgina 12 and Tiempo Argentino.

The president of

... it is totally false to say that printing more money generates inflation, price increases are generated by other phenomena like supply and external sectors behaviour...

The banker added that it is totally false to say that printing more money generates inflation, price increases are generated by other phenomena like supply and external sectors behaviour. in that sense, the BCrA president explained that the priority right now is the investment credit, because it is one of the issues in which Argentina is still with insufficient coverage. We look for credits of longer-term investment plans at reasonable rates with the return of these investment projects. We discard that financing the public sector is inflationary because according to that state-

MERCOPRESS / LINK

ping up the entire U.S. economy by buying 61 percent of the government debt issued by the Treasury Department, a trend that cannot last, Lawrence Goodman, a former Treasury official and current president of the Center for Financial Stability, writes in a Wall Street Journal opinion article published Wednesday.

The Federal Reserve is prop-

Last year the Fed purchased a stunning 61 percent of the total net Treasury issuance, up from negligible amounts prior to the 2008 financial crisis, Goodman writes. Goodman also warns that U.S. economy and markets are at risk for a sharp correction if conditions arent normalized. This not only creates the false appearance of

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with credit.
O O O

15.

limitless demand for U.S. debt but also blunts any sense of urgency to reduce supersized budget deficits. The U.S. government is growing increasingly more dependent on borrowing to finance itself, with net issuance of Treasury securities hitting 8.6 percent of gross domestic product (GDP) on average per annum, more than double levels before the crisis. Fed intervention in the government debt market makes demand for Treasury bonds appear higher than it really is, as foreign creditors and other investors have fled U.S. government debt instruments and are looking elsewhere until the government makes serious attempts to curb spending and narrow its gaping deficits. Goodman notes that foreign investors like Japan and China that once scooped up U.S. debt are shunning it. In 2009, ... The U.S. government is such foreign purchases of U.S. debt growing increasingly more amounted to 6 perdependent on borrowing to and has finance itself, with net issuance cent of GDPby over since falled of Treasury securities hitting eighty percent to a 8.6% of GDP... paltry 0.9 percent. Without foreign buyers and a shrinking base of U.S. corporate and bank buyers, the Treasury has had to resort to the Federal Reserve itself to make the purchases. The Fed purchasing not only makes up the shortfall, but can keep long term interest rates artificially low. The Fed is in effect subsidizing U.S. government spending and borrowing via expansion of its balance sheet and massive purchases of Treasury bonds. This keeps Treasury interest rates abnormally low, camouflaging the true size of the budget deficit, Goodman writes. Similarly, the Fed is providing preferential credit to the U.S. government and covering a rapidly widening gap between Treasurys need to borrow and a more limited willingness among market participants to supply Treasury

BLANCHARDONLINE / LINK

we were going to be talking about Wall Street today. But I got the sense from some of your book choices that one of the biggest offenders wasnt based on Wall Street at all, but on Constitution Avenue in Washington DC. (Barry Ritholtz): When you get bit by a dog, you dont just look at the dog, you have to look at the owner who is holding the leash. To me, a lot of the regulatory changes, and a lot of what the Federal Reserve did, stand on their own as a major factor. But if youve read David Hume, if youve studied the philosophy of causation, you have to look at what motivated those changes. I have these debates with friends. One group blames everything on big government; the other group blames everything on big corporations. The sad news is that theres really no difference between the two: Big government and big corporations work hand-in-hand. If you want to know who is the puppet and who is the puppet master, it sure looks like Wall Street has been pulling the strings of Congress for many, many, many years. I remember the Dick Durbin quote, right in the middle of the crisis. He was astonished at all the bankers and bank lobbyists running around the halls of Congress, and said, I cant believe these guys they act as if they own the place. The fact is, its not an act they do own the place. But the Federal Reserve itself should be insulated from those kinds of pressures. BR: They should be, except in the person of Alan Greenspan. Hes just this gnarly mass of contradictions. Hes an acolyte of Ayn Rand believes that no intervention in free markets is the right approach and yet he proceeded to spend his entire career, from 1987 through 2005, with his hands on the levers of Federal Reserve policy. He manipulated

I originally thought

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16.

interest rates and money supply in order to win the love of traders. In 2001 he took rates down to unprecedented levels below 2% and kept them there for three years. Rates were at 1% for a full year! That had simply never occurred before in history. If you look at the late 1950s and early 1960s, rates would dip below 2%, but only for weeks at a time. In the Who is to blame? game Alan Greenspan is number one with the bullet, hes top of the list. You cant blame everything on him, but hes the one who let all the gas fumes into the enclosed warehouse, knowing that a bunch of smokers were coming in to have a cigarette. Taking rates down to irresponsibly low rates is what set the stage for everything that took place over the next decade. Are you saying that just as Ben Bernanke admitted the Federal Reserve had caused the first Great Depression, this crisis can also be blamed on our central bank? (BR): The world isnt black and white. We cant just say, The butler did it. There were many causes, lots of poor judgements. If you look in the centrefold of my book, Bailout Nation, we try to depict everything in a visual form. Its a great infographic by Jess Bachman that shows all ...The world isnt black the different factors that and white. We cant just came together to cause a say, The butler did it. big collapse. The Federal Reserve was a significant element. But if you want to do it chronologically, you may want to go back further into the history. The bailout of Chrysler in 1980 set the stage. The rescue of Long Term Capital Management (LTCM) in 1998 encouraged a lot of moral hazard. Then there was all the radical deregulation, the undoing of some of the post-Depression rules that had operated so successfully for 75 years to prevent a major meltdown. The undoing of Glass-Steagall didnt cause the crisis, but it made it much worse. Then there was the Commodity Futures Monetization Act (CFMA) of 2000, which completely

exempted derivatives from any oversight or regulation and removed all reserve requirements. These all built to set up a situation that was extremely dangerous. So maybe the fumes were already in the warehouse and Greenspan taking rates down to 1% was the spark that ignited the conflagration.
O O O

THE BROWSER / LINK

the grip of petrol panic. Just the prospect of a tanker drivers strike, with the Easter holiday season looming, and we lost our collective nerve. Snaking petrol station tail-backs became commonplace and jerry can sales soared. On Friday, a third of UK filling stations actually ran out of petrol, with demand up 170pc on the same day the week before. Some say the Tories deliberately stoked the petrol panic, to get rows over cash-for-access Downing Street dinners and post-budget granny-tax squirming off the nations frontpages. Ministers will certainly have known that a potential fuel crisis piles serious pressure on Labour, given the partys financial reliance on Unite, the union representing the 2,000 fuel tanker drivers threatening to strike. Fearing public opprobrium, perhaps, Unite late on Friday ruled out industrial action over the upcoming Easter weekend. Yet, still, the panic buying continued. Does anything better demonstrate our overwhelming addiction to oil? Commercially, logistically, culturally and even psychologically, the worlds advanced countries cant do without crude. The UKs latest petrol spasm, even if now in abeyance, points to a stark bigger picture. For even if the euro-crisis has been contained for now (and thats a big if), concerns are mounting that its a spiraling oil price, rather than European monetary meltdown, that could slam the world economy back into the doldrums. The threatened UK fuel strike is a downstream issue. The danger is that striking tanker drivers refuse to transfer existing petrol from our

The UK remains locked in

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17.

refineries to the tanks under station forecourts. Even the threat of that - the final-stage delivery of fuel we already have - is enough to spark political chaos, while goading otherwise rational people into getting up at 3am to buy petrol. But such little local difficulties are as nothing compared to the upstream issues that loom. It is on global energy markets, where physical crude is bought and sold in the billions of barrels, that our attention should be focused. The fuel scare weve seen in UK villages, towns and cities over the last week is just a microcosm of a worldwide energy struggle.
O O O

Fekter expressed her confidence that Fridays move would be enough to calm the financial markets. The markets are already signaling relative calm, she said. That shows that the markets can work with what we have set up here. On Thursday evening, in the run-up to Fridays summit, German Finance Minister Wolfgang Schuble had said he was prepared to combine the existing bailouts with the new permanent mechanism. He said that the 800 billion capacity was convincing and sufficient. But not everyone shares his view that the sum is enough. On Thursday, French Finance Minister Franois Baroin called for the permanent euro bailout fund to be increased to 1 trillion, to shore up market confidence and prevent contagion in the euro crisis. The firewall, its a little like the nuclear option in military planning, its there for dissuasion, not to be used, Baroin said in a radio interview. He was echoing calls made by the Organization for Economic Cooperation and Development (OECD) earlier in the week to boost the firewall to 1 trillion. At the beginning of the week, SpiEGEl reported that Merkel and Schuble had dropped their long-held resistance to allowing both the temporary European Financial Stability Facility (EFSF) and the ESM, which was supposed to replace it, to operate in parallel for a period, thereby expanding the scope of the funds available. Berlin had come under massive international pressure to increase the size of the firewall so that it was large enough to potentially bail out countries such as Spain and Italy.
O O O

LIAM HALLIGAN / LINK

gang Schuble, have been accused of crossing many of the red lines that they have set for themselves over the course of the euro crisis, making U-turn after U-turn as the crisis escalated. They officially stepped ... The firewall, its a little like the nuclear option in military planning, over the latest red line on its there for dissuasion, not to be Friday, when used... European Union finance ministers meeting in Copenhagen agreed to boost the scope of the euro zones firewall to over 800 billion ($1 trillion). Berlin had long rejected such an expansion out of hand. Austrian Finance Minister Maria Fekter announced on Friday that the permanent euro rescue fund, the European Stability Mechanism (ESM), would be expanded, by considering the around 200 billion in current bailouts as being separate from the 500 billion earmarked for the ESM -- originally, the 500 billion figure was to have included the 200 billion in existing aid. The ESM, which is due to come into operation in mid-2012, will also be boosted by including around 100 billion in bilateral aid that was given to Greece in 2010, as well as aid from other EU funds, bringing the firewalls total capacity to over 800 billion.

German Chancellor Angela Merkel and her finance minister, Wolf-

DER SPIEGEL / LINK

The billionaire brothers

who run Hong Kongs largest property company were arrested on Thursday in connection with a corruption investigation that has stunned the territorys tight-knit business community. Raymond and Thomas Kwok, who took control of Sun Hung Kai Properties after their octogenarian mother retired last year, are the most

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18.

prominent tycoons ever arrested by the citys powerful independent Commission Against Corruption. Rafael Hui, Hong Kongs second highest-ranking official from 2005-2007, was also arrested in the same case, according to local media reports. Neither Mr Hui nor the Kwok brothers, whose family wealth exceeds $15bn according to Forbes magazine, have been formally charged. The ICAC declined to comment on the investigation, saying only that two senior executives of a listed company ... and a former principal official of the Hong Kong government have been arrested for corruption. A Sun Hung Kai executive director, Thomas Chan, was arrested by the iCAC last week, although he was also not charged and the details of any allegations against him remain unclear. The board of Sun Hung Kai, which had sales of HK$62.6bn (US$8bn) last ... the arrests, which are year, held an emergency unprecedented in a terri- board meeting at which it tory where tycoons wield was decided that the Kwoks would continue to serve as exceptional economic joint chairmen and managand political power. ing directors. The board has resolved that it is in the best interests of the company for Messrs Thomas and Raymond Kwok to continue to undertake and discharge their duties to the group including their duties as joint chairmen and managing directors of the company, the company said in a statement to the Hong Kong stock exchange. Sun Hung Kais shares, which were suspended, will resume trading on Friday. Li Ka-shing, Asias richest man, who has competed against Sun Hung Kai for decades, expressed surprise at the arrests, which are unprecedented in a territory where tycoons wield exceptional economic and political power. Sun Hung Kai may be our rival but they are also good friends ... I hope it will end well, Mr Li said at his own company results briefing.
O O O

Consider the following

Now consider them in context:

numbers: 2.2, 62.8, 454, 5.9. Drawing a blank? Not to worry. They dont mean much on their own. 1) 2.2 percent is the average interest rate on the U.S. Treasurys marketable and nonmarketable debt (February data). 2) 62.8 months is the average maturity of the Treasurys marketable debt (fourth quarter 2011). 3) $454 billion is the interest expense on publicly held debt in fiscal 2011, which ended Sept. 30. 4) $5.9 trillion is the amount of debt coming due in the next five years. For the moment, Nos. 1 and 2 are helping No. 3 and creating a big problem for No. 4. Unless Treasury does something about No. 2, Nos. 1 and 3 will become liabilities while No. 4 has the potential to provoke a crisis. In plain English, the Treasurys reliance on shortterm financing serves a dual purpose, neither of which is beneficial in the long run. First, it helps conceal the depth of the nations structural imbalances: the difference between what it spends and what it collects in taxes. Second, it puts the U.S. in the precarious position of having to roll over 71 percent of its privately held marketable debt in the next five years -- probably at higher interest rates. And thats a problem. The U.S. is more dependent on short- term funding than many of Europes highly indebted countries, including Greece, Spain and Portugal, according to Lawrence Goodman, president of the Center for Financial Stability, a non- partisan New York think tank focusing on financial markets. The U.S. may have had a lot more debt in relation to the size of its economy following World War II, but the structure was much more favorable, with 41 percent maturing in less than

FT / LINK

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19.

five years, 31 percent in five-to-10 years and 21 percent in 10 years or more, according to CFS data. Today, only 10 percent of the public debt matures outside of a decade. Based on the current structure, a one percentage-point increase in the average interest rate will add $88 billion to the Treasurys interest payments this year alone, Goodman says. If market interest rates were to return to more normal levels, well, you do the math. Some economists have cited the Treasurys ability to borrow all it wants at 2 percent as an argument for more fiscal stimulus. Why not, as long as its cheap?

rowly beat Hollande in the first round of voting on April 22. But in the run-off ballot on May 6, Hollande is still expected to win. That means that Frances future president could well be Hollande, a possibility for which the countrys neighbors must begin making preparations. And that includes in Berlin, where the Chancellery has begun forging tentative ties with Hollandes camp. German Chancellor Angela Merkel still hopes Sarkozy will ultimately win, having found in him a dependable ally, despite their personality differences. Particularly during the euro crisis, she and Sarkozy have stood side by side, most recently in advocating Merkels pet project, the European fiscal pact, which obliges the 25 EU member states who have signed up to pursue greater budget discipline. Meanwhile, Sarkozys challenger Hollande has already announced that as president he would immediately try to renegotiate parts of the fiscal pact. From Merkels perspective, that would be fatal, as it could destabilize the complete financial architecture of the new European Union. But her hands are tied. The Chancellery seems to have resigned itself to accepting Hollande as the French leader, if necessary. The important Berlin-Paris alliance must continue to function. And hence the first tentative ties are being forged between Hollandes and Merkels camps. They are, of course, off the record and are only currently conducted through working-level channels. After all, anything else would seem a tad strange, after the chancellor took a clear stance in support of Sarkozy in the French election campaign. Merkel still has no plans to meet personally with Hollande, even though the Socialist candidate officially requested a meeting. SPIEGEL recently reported that Merkel and other conservative EU leaders had even jointly discussed boycotting Hollande during the campaign.
O O O

... Some economists have cited the Treasurys ability to borrow all it wants at 2 percent as an argument for more fiscal stimulus. Why not, as long as its cheap?

Goodman says the size of the deficit (8.2 percent of gross domestic product) or the debt (67.7 percent of GDp) is only part of the problem. The bigger threat is rollover risk: the same thing that got countries from Portugal to Argentina to Greece into trouble, he says. Its the repayment of principal that often provides the catalyst for a market event or a crisis. The U.S. is unlikely to go from all-you-want-at2-percent to basket-case overnight. That said, policy makers would be wise to view recent market volatility as a taste of things to come.
O O O

CAROLINE BAUM / LINK

Angela Merkel initially

refused to receive French presidential candidate Franois Hollande when he offered a meeting recently. But as his victory against Nicolas Sarkozy seems more likely, the German Chancellery has made its first contacts with the Socialist Party politicians camp. After all, Berlin and Paris must stick together. For weeks, French President Nicolas Sarkozy fell hopelessly behind in polls against his Socialist Party opponent Franois Hollande, but in recent days he has narrowed the gap. Current polls show that Sarkozy might even manage to nar-

DER SPIEGEL / LINK

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THINGS THAT MAKE YOU GO

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three decades.)

20.

honeymoon is over for Mariano Rajoy. Spains prime minister has lost an important regional election. Bond yields are creeping up again. On March 29th disgruntled Spanish workers were due to hold a general strike to protest against the governments reforms and austerity. Spain, the euro zones fourth-biggest economy, is once more becoming its biggest headache. On March 25th Mr Rajoys centre-right Peoples Party (PP) confounded the opinion polls by failing to wrest control of Andalusia, Spains biggest region, from the Socialists. The result is bruising to the pp not only because of the loss of a big prize. it also suggests that angry and anxious voters are losing faith in a government that took office less than four months ago. At Novembers general election 46% of Andalusians voted PP. At the regional election that fell to 41%, allowing the Socialists to keep control (albeit only with help from the communist-led United Left, which performed strongly). In a separate election in the small northern region of Asturias, the pp was placed a poor third. Euphoric leftists have already hailed the start of a backlash against Mr Rajoy. They will have plenty more to get worked up about. A day after the general strike Mr Rajoy will publish what is likely to be one of the harshest budgets seen in Europe since the eruption of the euro crisis. It will be very, very austere, he pledged. (So austere, in fact, that he delayed it until after the Andalusia election, hoping in vain to win a region held by the Socialists for

After 100 days in office, the

Mr Rajoy has little choice but to get nasty. The European Union wants him to find 20 billion ($27 billion) in new savings this year. Yet if Spain is to meet its deficit target, the true figure could be even worse. As the country enters a downward spiral of spending cuts, recession, unemployment and falling tax revenues, some economists say fully 55 billion will have to be found. That is 1,166 per Spaniard. If Mr Rajoy follows that projection, Spains governments, central and regional, will have to find savings worth 40 billion this year, on top of 15 billion already announced in December. His decision to delay his budget until after the Andalusian vote means this must be accomplished in eight months. The economy is expected to shrink by 1.7% this year, and unemployment is 23% of the workforceand still climbing. Spanish economists talk of an epic struggle or, simply, of mission impossible. Savage cuts lie ahead. Mr Rajoy says ministries, for example, must reduce spending by an average of nearly 15%.
O O O

ECONOMIST / LINK

01 April 2012

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CHARTS THAT MAKE YOU GO

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21.

a ratio of the XAU (Philadelphia Gold and Silver Index) divided by the price of the gold itself. As you can see, for most of the bull market in gold, at least until 2008, it traded at between 20% and 25% of the price of gold. As gold went up, so did the index. Then the crash came and investors were burnt by the miners. Since then, the miners have not come close to recovering the old ratio. Even more amazingly, the ratio is getting SOURCE: BLOOMBERG pretty close to the panic lows of late 2008. That turned out to be a great time to own the XAU as it proceeded to more than triple over the next year and change.
O O O

The chart, left is

KOMRADE KUPPY / LINK

they have pretty much maxed out at around 10mln barrels per day for very brief periods over that 40 year period while 8mln bpd seems to have been the norm. The red line? Oh, Im glad you asked me about that. The red line represents the 12.5mln bpd that the Saudis are promising everyone they will pump to make up for any supply shortfalls...

The Chart below shows Saudi oil production going back to 1970. As you can see,

SOURCE: BLOOMBERG/TTMTGH

01 April 2012

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CHARTS THAT MAKE YOU GO

Hmmm...

22.

The savings rate decreased to 3.7% in February.

Personal saving -- DPI less personal outlays -- was $438.7 billion in February, compared with $509.5 billion in January. The personal saving rate -- personal saving as a percentage of disposable income -- was 3.7 percent in February, compared with 4.3 percent in January. This graph shows the saving rate starting in 1959 (using a three month trailing average for smoothing) through the February Personal Income report. After increasing sharply during the recession, the saving rate has been moving down for the last two to three years - so spending growth has increased a little faster than income growth. This was especially true in February with spending increasing 0.8% and income only increasing 0.2%.
O O O

RGE

CALCULATED RISK

CLICK TO ENLARGE

SOURCE: CALCULATED RISK

pared with an increase of $1.6 billion in January.

Personal current transfer receipts increased $3.0 billion in February, com-

Other government social benefits to persons increased $1.3 billion, in contrast to a decrease of $15.8 billion; the January change was reduced $13.6 billion reflecting the expiration of the Making Work Pay refundable tax credit. Offsetting these changes, government social benefits for social security increased $2.9 billion in February, compared to an increase of $20.3 billion in January; the January change was boosted by a 3.6-percent cost-of-living adjustment (COLAs) to social security benefits.
O O O

CALCULATED RISK

CLICK TO ENLARGE

SOURCE: CALCULATED RISK

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23.

Down 5% from recent

highs, fresh concerns over a China slowdown have driven the Aussie into a critical nexus of support formed by the 200 day MA, 38% Fibonacci Retracement Level, low end Cloud support, and the symmetrical trend lines from the July High and August lows. With MACD on a sell and the currency trading below the 50 day MA for the better part of March, Thursdays Bullish intraday reversal (Hammer) at 1.04 was huge for the Aussie, Emerging Markets, Global Growth and the institution of risk taking. I have overlaid the MSCI EM Index (Blue) on top of the Aussie to reinforce the high degree of positive correlation between the benchmark EM Index and this key macro proxy for risk.
O O O

SOURCE: RICHARD ROSS

RICHARD ROSS / EMAIL

CHINESE is ideal for micro-blogs, which typically restrict messages to 140 sym-

bols: most messages do not even reach that limit. Arabic requires a little more space, but written Arabic routinely omits vowels anyway. Arabic tweets mushroomed last year, though thanks to the uprisings across the Middle East rather than to its linguistic properties. It is now the eighth mostused language on Twitter with over 2m public tweets every day. Romance tongues, among others, generally tend to be more verbose, as the chart below shows. So Spanish and Portuguese, the two most frequent European languages in the Twitterverse after English, have tricks to reduce the number of characters. Brazilians use abs for abraos (hugs) and bjs for beijos (kisses); Spanish speakers need never use personal pronouns (I go is denoted by the verb alone: voy). Some people use English to avoid censorship. Micro-bloggers on Sina Weibo (where messages containing some characters are automatically blocked) wrote Bo in English the roman alphabet in order to comment freely about Bo Xilai, a purged party chief.
O O O

ECONOMIST / LINK

SOURCE: ECONOMIST

01 April 2012

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24.

which kicked off this edition of Things That Make You Go Hmmm..... then you will no doubt be glad of the chance to see the man himself discuss his appearance before the targets of his ire with CNBCs Maria Bartiromo. As always, Jim is brilliant.

If you enjoyed Jim Grants speech to the Fed

CLICK TO WATCH

Chris Martenson interviews

Charles Biderman about the dangers of investing in rigged markets and they examine how the massaging of data can create problems for investors

CLICK TO LISTEN

Earlier this week I had the chance to talk to Jim Puplava about a wide
range of topics - many of which I have covered in recent editions of Things That Make You Go Hmmm..... including China, the UK, government bonds and the oil price. For those of you interested in listening to our conversation, just click on the ugly mug to the left...

CLICK TO LISTEN

01 April 2012

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and finally
Only 500 people have been to space, only three people
have been to the bottom of the ocean, but no one has ever attempted to journey to the core of an active volcano. Until now. Using patented carbon-carbon materials pioneered for deep space exploration, Virgin is proud to announce a revolutionary new vehicle, VVS1, which will be capable of plunging three people into the molten lava core of an active volcano. In its first three years of operation, VVS1 will target the five most active volcanoes in the world: Etna, Stromboli, Yasur, Ambrym and Tinakula. Sir Richard Branson will go on the first expedition along with Tom Hanks, Academy Award winning actor and star of Joe Versus the Volcano; Black Eyed Peas recording artist and science enthusiast Will.i.am; actor/producer Seth Green; and two-time Academy Award winning documentary filmmaker Barbara Kopple. Tom Hanks said: A window seat for a journey to the liquid core of our home planet would be a bargain at twice the price. Documentary filmmaker Barbara Kopple has closed a deal with Virgin Produced to direct a documentary around the Virgin Volcanic project utilising groundbreaking 3D technology called VD. Additionally, recording artist (and passenger) Will.i.am plans to record the first volcanic soundtrack for the film, recorded entirely inside a live active volcano. The soundtrack will be released in conjunction with the documentary. Volcanologist Frederick Smith, based in the Republic of Vanuatu currently conducting preliminary tests on Yasur, said: The project will derive important scientific results to help control and monitor active volcanoes. It is believed a new level of the Volcanic Explosivity Index could be found above and beyond the current high of Level 8 Supervolcanic. The team behind Virgin Volcanic believes going to the core of the five most active volcanoes is just the first step. In future this technology can be developed as a clean, safe and fast alternative to trans- continental commercial aviation. By taking the heat from molten lava Virgin Volcanic plans to develop a totally renewable energy source to power the VVS1. It is seen as a way to literally fulfil Richard Bransons philosophy of screwing business as usual. This would involve going through the Earth rather than round it. Experts predict that one could travel from Hawaii to Naples in a couple of hours via the molten lava flows, with passengers boarding and disembarking from a network of Earthports close to the worlds volcanoes. The first Virgin Volcanic trips are scheduled for 2015. Do you have what it takes to join the Virgin Volcanic back-up team? Tell us why below, or use the #virginvolcanic hashtag.
O O O

VIRGIN VOLCANIC / LINK

Hmmm
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COMMENTS

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Grant Williams
Grant Williams is a portfolio and strategy advisor to Vulpes Investment Management in Singapore - a hedge fund running $200million of largely partners capital across multiple strategies. In 2012, all Vulpes funds will be opened to outside investors. Grant has 26 years of experience in finance on the Asian, Australian, European and US markets and has held senior positions at several international investment houses. Grant has been writing Things That Make You Go Hmmm..... for the last three years. For more information on Vulpes please visit www.vulpesinvest.com

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 funds - though I will not be making any specific recommendations in this publication.

Grant

www.vulpesinvest.com

01 April 2012

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