Grant Williams Newsletter - Things That Make You Go HMMMM

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THINGS THAT MAKE YOU GO

A walk around the fringes of finance
By Grant Williams
To learn more about Grant's new investment newsletter, Bull's Eye Investor, Click here
19 AUGUST 2013
The Hypocritic Oath

"It's discouraging to think how many people are shocked by honesty and how few by deceit." Nol Coward, Blythe Spirit "If anyone says that the best life of all is to sail the sea, and then adds that I must not sail upon a sea where shipwrecks are a common occurrence and there are often sudden storms that sweep the helmsman in an adverse direction, I conclude that this man, although he lauds navigation, really forbids me to launch my ship." Lucius Annaeus Seneca, The Stoic Philosophy of Seneca: Essays and Letters "Hypocrisy is a tribute that vice pays to virtue." Franois de La Rochefoucauld, Reflections or Sentences and Moral Maxims "The louder he talked of his honor, the faster we counted our spoons." Ralph Waldo Emerson, The Conduct of Life: A Philosophical Reading
Copyright Mauldin Economics. Unauthorized disclosure prohibited. Use of content subject to terms of use stated on last page.
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Contents
THINGS THAT MAKE YOU GO HMMM... ....................................................3
Spanish Skyscraper Missing Elevators in Monster Goof ...........................................20 Happiness Is a Hamlet All To Yourself In Rural Spain ..........................................21 Dodgy Data May Add $1 Trillion to Chinese Economy ............................................23 Crisis of Faith: Doubts Grow Over Spanish Reforms ..............................................24 Fight the Flight ........................................................................................26 Michael Pettis on China's Urbanization Fallacy ...................................................27 Regulatory Concern Grows Along with Surge in Interbank Business ...........................29 Cyprus: Holiday Suntrap of Sea, Sun, Sand, Food Banks and Desperation ....................30 Debt of One Quadrillion Yen? Not a Problem ......................................................32
CHARTS THAT MAKE YOU GO HMMM... ..................................................34 WORDS THAT MAKE YOU GO HMMM... ...................................................37 AND FINALLY ................................................................................38
19 AUGUST 2013
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Things That Make You Go Hmmm...

(Wikipedia): The Hippocratic Oath is an oath historically taken by physicians and other healthcare professionals swearing to practice medicine honestly. It is widely believed to have been written either by Hippocrates, often regarded as the father of western medicine, or by one of his students. The oath is written in Ionic Greek (late 5th century BC), and is usually included in the Hippocratic Corpus. Classical scholar Ludwig Edelstein proposed that the oath was written by Pythagoreans, a theory that has been questioned due to the lack of evidence for a school of Pythagorean medicine. Of historic and traditional value, the oath is considered a rite of passage for practitioners of medicine in many countries, although nowadays the modernized version of the text varies among them. The Hippocratic Oath (orkos) is one of the most widely known Greek medical texts. It requires a new physician to swear upon a number of healing gods that he will uphold a set of professional ethical standards. There is absolutely no legal obligation whatsoever for any medical graduate to swear an oath to any healing god; and yet some 98% of American students make such a pledge upon graduation. In Britain, the number is only 50%, but I am presuming that's because dentists are exempted. The situation in Europe is slightly different. In 1948, the Declaration of Geneva was adopted by the General Assembly of the World Medical Association in, you've guessed it, Geneva in order to standardize the Hippocratic Oath. As is the way of large, global organizations, the General Assembly amended the oath in 1968 ... and 1983 ... and 1994, before it was "editorially revised" in 2005 ... and again in 2006. That's Europe for you, folks. In accordance with the International Code of Medical Ethics, the Declaration of Geneva was intended to create a formulation of the Hippocratic Oath that would allow "the oath's moral truths [to] be comprehended and acknowledged in a modern way". Which is nice. The current version of the Declaration of Geneva (subject, obviously, to further amendment, since I am writing this on Saturday and it probably won't reach you before Tuesday) reads as follows:
19 AUGUST 2013
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At the time of being admitted as a member of the medical profession: I solemnly pledge to consecrate my life to the service of humanity; I will give to my teachers the respect and gratitude that is their due; I will practice my profession with conscience and dignity; The health of my patient will be my first consideration; I will respect the secrets that are confided in me, even after the patient has died; I will maintain by all the means in my power, the honour and the noble traditions of the medical profession; My colleagues will be my sisters and brothers; I will not permit considerations of age, disease or disability, creed, ethnic origin, gender, nationality, political affiliation, race, sexual orientation, social standing or any other factor to intervene between my duty and my patient; I will maintain the utmost respect for human life; I will not use my medical knowledge to violate human rights and civil liberties, even under threat; I make these promises solemnly, freely and upon my honour. Personally, if I were about to start practicing medicine, I think I would prefer to take the original Oath, which supposedly started out like this (though it has been argued that these exact words do not appear in the text as written by Hippocrates): First, do no harm. Simple, pithy, easy to remember. That's how you start an oath, Pope Pius X. "I profess that God, the origin and end of all things, can be known with certainty by the natural light of reason from the created world" (the Oath Against Modernism, 1910) just doesn't have the same kind of zip. And I don't know what you radical Republicans over there in the corner are snickering about. "I do solemnly swear that I have never voluntarily borne arms against the United States since I have been a citizen thereof" is hardly going to sell a whole bunch of T-shirts at rallies, now, is it? No. It's not. I must say, though, that the Omerta is a little more like it. Legend has it that it originated when a wounded man said to his assailant, "If I live, I'll kill you. If I die, I forgive you". Now THAT is a bumper sticker I could get behind but unfortunately I promised not to talk about it.
19 AUGUST 2013
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Unfortunately for Hippocrates and all his successors in the medical arena, however, the Greek word for "jealous", "play-acting", "acting out", "cowardly", or "dissembling" is or hypokrisis; and this is the etymological root of the word hypocrisy, which is defined as: The state of falsely claiming to possess characteristics, such as religiosity or virtues, that one lacks. Hypocrisy involves the deception of others and is thus a kind of lie. Over the last several years, a new oath has appeared in the world of finance as global investment banks have been hauled in front of Senate committees, Congressional panels, various regulatory bodies, and (what always used to be the harshest of judges) the public: the Hypocritic Oath. It begins thus: First, admit no wrong. In just the past two years, JPMorgan alone has paid some $7 billion in fines for a series of transgressions, including a whopping $5.29 billion fine over the robo-signing scandal, a further $300 million for misleading investors about the quality of mortgages underlying MBS securities, $150 million over risky structured investments, $230 million over the alleged rigging of various bond auction processes, and $153 million for misleading investors in one of those oh-so-common allow-a-hedge-fund-to-select-a-portfolio-of-bonds-to-sell-to-investors-that-they-then-short scams. In most of these cases, the bank paid to settle the charges "without admitting or denying the allegations". Now, before anybody assumes this is another of those "bash JPMorgan" diatribes, it isn't. The Hypocritic Oath has been adopted by a multitude of banks in recent years and, like the Fifth Amendment, once it was rolled out, it seems to have been accepted absolutely without question (though the skeptics out there will naturally wonder why someone would pay a fine of several hundred million dollars when they had done nothing wrong those pesky skeptics just can't mind their own business, I guess). Way back in November 2011, Citi agreed to a $285 million fine whilst neither admitting nor denying wrongdoing something the judge in the case took issue with: (CNN Money): But why would Citi agree to such a payment and reforms if they didn't violate regulations? This conundrum is not a new one for Judge [Jed] Rakoff and one he raised in an SEC settlement case two years ago involving Bank of America. In that case, although Bank of America had originally neither admitted nor denied the violations, when the case came under scrutiny by Rakoff, Bank of America went ahead and denied.
19 AUGUST 2013
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So Rakoff asked a reasonable question: why would a bank pay out shareholder dollars for something it had denied committing? If the bank did the deeds as the SEC contended, why weren't individuals being punished in line with SEC guidelines, he had asked? Along similar lines, in this most recent Citi case, Rakoff has asked the SEC to explain why the court should "impose a judgment in a case in which the SEC alleges a serious securities fraud but the defendant neither admits nor denies wrongdoing." Either there was a violation or there wasn't. Which is it? Which indeed? Or how about Wells Fargo (then Wachovia) and allegations of bond-market rigging, also in 2011: (SEC): The SEC alleges that Wachovia generated millions of dollars in illicit gains during an eight-year period when it fraudulently rigged at least 58 municipal bond reinvestment transactions in 25 states and Puerto Rico. Wachovia won some bids through a practice known as last looks in which it obtained information from the bidding agents about competing bids. It also won bids through set-ups in which the bidding agent deliberately obtained non-winning bids from other providers in order to rig the field in Wachovias favor. Wachovia also facilitated some bids rigged for others to win by deliberately submitting non-winning bids. Sounds sort of unsavoury to me, and Wachovia fell on its sword pretty much straightaway, as the very next paragraph in the SEC press release reveals: Wachovia agreed to settle the charges by paying $46 million to the SEC that will be returned to affected municipalities or conduit borrowers. Wachovia also entered into agreements with the Justice Department, Office of the Comptroller of the Currency, Internal Revenue Service, and 26 state attorneys general that include the payment of an additional $102 million. The settlements arise out of long-standing parallel investigations into widespread corruption in the municipal securities reinvestment industry in which 18 individuals have been criminally charged by the Justice Departments Antitrust Division. Then, after an outline of the complaint, find this (emphasis mine): Without admitting or denying the allegations in the SECs complaint, Wachovia has consented to the entry of a final judgment enjoining it from future violations of Section 17(a) of the Securities Act of 1933 and has agreed to pay a penalty of $25 million and disgorgement of $13,802,984 with prejudgment interest of $7,275,607.
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Followed by this: Four financial institutions have so far paid a total of $673 million in the ongoing investigations into corruption in the municipal reinvestment industry. Other financial institutions that the SEC has previously charged are: J.P. Morgan Securities LLC $228 million settlement with SEC and other federal and state authorities on July 7, 2011; UBS Financial Services Inc. $160 million settlement with SEC and other federal and state authorities on May 4, 2011; and Banc of America Securities LLC $137 million settlement with SEC and other federal and state authorities on Dec. 7, 2010. Each of the other three institutions named in the suit also neither admitted nor denied the allegations, but simply got out their cheque books and signed away the accusations. Simple. First, admit no wrong. A look at the "trusted bank brands ladder", based on a survey conducted by BAV Consulting in late 2012, demonstrates the damage done to the large banks by their seemingly continuous visits to Capitol Hill in recent months and also makes clear the debt of thanks JPMorgan and HSBC owe to Barclays, Citi, and Bank of America for being just that little bit less trustworthy:
Source: BAV Consulting
19 AUGUST 2013
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We saw wrongdoing in the Libor scandal (though in this case the banks were forced to admit their transgressions, but the march of bad behavior goes on. Copping to a fine of $200 million, Barclays would only go so far as to admit that "the manipulation of the submissions affected the fixed rates on some occasions"). Meanwhile, there are swirling rumors of wrongdoing around the pricing of ISDAFix (a benchmark off which hundreds of trillions of dollars of interest-rate swaps are priced by a group of 15 of those same household-name banks). And of course there are the machinations in the gold market (about which I recently wrote a piece for King World News, here). But whenever possible, banks pay huge fines, and quickly on the condition that the terms of their deals with prosecutors and regulators are subject to the Hypocritic Oath: First, admit no wrong. The admission of wrongdoing is something to be avoided at all costs by many of the big players in the financial system; and certainly, there are those who would accuse the Federal Reserve itself of hypocritical behaviour. The Fed's "dual mandate" was reassessed by Fed Governor John Williams in a 2012 speech: Its often said that Congress assigned the Federal Reserve a dual mandate: maximum employment and stable prices. But, thats not quite accurate. In fact, the Fed has a triple mandate. Section 2A of the Federal Reserve Act calls on the Fed to maintain growth of money and credit consistent and I quote with the economys long-run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates. The "dual mandate" is, it seems (at least in the eyes of one Fed Governor), a triple mandate; but all three components are most certainly designed to try to ensure that no harm is done to the economy or the public. Everything the Fed has done since the dog days of 2008 has been intended, in their eyes, to cure the patient; and, in the words of none other than the Fed Chairman himself at Jackson Hole in 2009, without the Fed's actions (and, by implication, the actions of their peers around the world), things would have been a LOT worse: (Bernanke Speech, September 15, 2009): [T]he world has been through the most severe financial crisis since the Great Depression. The crisis in turn sparked a deep global recession, from which we are only now beginning to emerge. As severe as the economic impact has been, however, the outcome could have been decidedly worse. Unlike in the 1930s, when policy was largely passive and political divisions made international economic and financial cooperation difficult, during the past year monetary, fiscal, and financial policies around the world have been aggressive and complementary.
19 AUGUST 2013 8
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Without these speedy and forceful actions, last October's panic would likely have continued to intensify, more major financial firms would have failed, and the entire global financial system would have been at serious risk. We cannot know for sure what the economic effects of these events would have been, but what we know about the effects of financial crises suggests that the resulting global downturn could have been extraordinarily deep and protracted. Bernanke went on to say that "In this episode, by contrast, policymakers in the United States and around the globe responded with speed and force to arrest a rapidly deteriorating and dangerous situation", and that the policy response "averted the imminent collapse of the global financial system, an outcome that seemed all too possible to the finance ministers and central bankers". However, what might have happened is something we will never know for sure, so the threat of a cataclysm has been a convenient justification for any action taken in the name of preventing one. But and it's a big but a recent study by two prominent Fed economists, Vasco Curdia and Andrea Ferrero of the Federal Reserve Bank of San Francisco (home stomping ground of onetime shoo-in for Bernanke's job, Janet Yellen), suggests that, in fact, the protracted policy response of the Fed has been far less successful than the Chairman would have you believe: In November 2010, the Feds policy committee, the Federal Open Market Committee (FOMC), announced a program to purchase $600 billion of long-term Treasury securities, the second of a series of large-scale asset purchases (LSAPs). The programs goal was to boost economic growth and put inflation at levels more consistent with the Feds maximum employment and price stability mandate. In Chen, Crdia, and Ferrero (2012), we estimate that the second LSAP program, known as QE2, added about 0.13 percentage point to real GDP growth in late 2010 and 0.03 percentage point to inflation. Our analysis suggests that forward guidance is essential for quantitative easing to be effective. Without forward guidance, QE2 would have added only 0.04 percentage point to GDP growth and 0.02 to inflation. Under conventional monetary policy, higher economic growth and inflation would usually lead the Fed to raise interest rates, offsetting the effects of LSAPs. Forward guidance during QE2 mitigated that factor by making it clear that the federal funds rate was not likely to increase. Our estimates suggest that the effects of a program like QE2 on GDP growth are smaller and more uncertain than a conventional policy move of temporarily reducing the federal funds rate by 0.25 percentage point. In addition, our analysis suggests that communication about when the Fed will begin to raise the federal funds rate from its near-zero level will be more important than signals about the precise timing of the end of QE3, the current round of LSAPs.
19 AUGUST 2013
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And so it is that, with its policy decisions, the Fed has impoverished a generation of savers through the confiscation of safe interest income (thus violating the Hippocratic Oath, if Fed Governors are economic doctors); and now, courtesy of Curdia and Ferrero, it looks for all the world as though the Fed has also broken the Hypocritic Oath and admitted doing wrong.
1400 1375 1350 1325 1300 1275 1250 1225 1200
Personal Interest Income Jan 2007 - July 2013
$bln
Recession 1175 Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 Jul 12 Jan 13 Jul 13
Source: St. Louis Fed
Yes, it's not an explicit admission, but if buying $600 billion in long-term treasuries and reinvesting another $250 million of proceeds from earlier MBS purchases has resulted in just 0.13% of real growth, I'm afraid the question has to be asked, was it worth making a direct transfer from savers on the order of hundreds of billions of dollars in order to stop the banking system melting down? How about the efficacy of Operation Twist? Or QE3 or QE4? What's next, I wonder, now that we have interest rates pinned at zero for at least a couple more years (you would have to be truly foolhardy to believe that the goalpost of 6.5% unemployment is set in stone) and inhabit a world where hundreds of billions of dollars in asset purchases now barely moves the needle. We may well learn more about the ultimate effectiveness of the Fed's programs when we hear at their September meeting whether they will begin their dreaded tapering; but in advance of that watershed moment, we were recently given some great insights into what might happen by developments across the pond in the land of my birth, the United Kingdom. Our story begins on August 1st, when new BoE governor and all-around knight in shining armour Mark Carney announced that the Bank's bond-buying program would be placed on hold at 375 billion and interest rates would be held at 0.50%.
19 AUGUST 2013 10
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Now this was no surprise. Of 42 economists surveyed by Bloomberg, 41 had already called Carney's moves perfectly, and a respected member of that august profession had laid out just what a snoozefest this announcement was: (Bloomberg): It was always looking likely to be a non-event ahead of the announcement about forward guidance, said Vicky Redwood, an economist at Capital Economics Ltd. in London and a former BOE official. Recent economic news has supported the [Monetary Policy Committees] forecast for a gradual recovery. Even though the committee might return to the QE option further ahead if the recovery wobbles, we think that it will prefer to wait to see what impact forward guidance has. Redwood's assessment that recent data had supported the MPC's forecast and justified the freezing of QE was a common one after all, they could wait to see if things really were improving as much as the data suggested; and if not, they could always restart QE after all, there are no consequences of printing money out of thin air, when required. Barely a week later, clearly feeling confident in his new role, Carney opened his shoulders: (Euromoney): Bank of England (BoE) governor Mark Carney on Wednesday introduced a new era in UK monetary policy when he provided forward guidance for the first time on the future direction of interest rates. In an eagerly anticipated move, Carney said during his inaugural inflation report press conference that the BoE would not consider raising interest rates until the unemployment rate has fallen to 7% or below. Carney said he expected this would require the creation of about 750,000 jobs and could take three years. The UK unemployment rate stands at 7.8%. It is now more important than ever for the Monetary Policy Committee (MPC) to be clear and transparent about how it will set monetary policy in order to avoid an unwarranted tightening in interest rate expectations as the recovery gathers strength, said Carney. That is why the MPC is today announcing explicit state-contingent forward guidance. Again, as is the custom in this post-2008 landscape, the big news was telegraphed well in advance so as not to scare the horses. What was NOT quite so well-disseminated prior to their official release a week later was the minutes of the MPC meeting.
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11
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And therein, as the Bard once didn't exactly say, lay the rub: (WSJ): Dissent within the Bank of England's interest-rate setting panel fueled investor doubts Wednesday over whether the central bank can stick to its new governor's pledge not to raise interest rates until joblessness in the U.K. falls sharply. New BOE Gov. Mark Carney, in his debut news conference last week, outlined a major shift in the central bank's policy framework, vowing to keep interest rates at record lows at least until the U.K. jobless rate falls to 7%. BOE officials predict such a drop could take until 2016. But minutes of this month's policy meeting published Wednesday showed Martin Weale, an external member of the central bank's monetary policy committee, voted against the introduction of the BOE's "forward guidance" strategy. Mr. Weale, a British economist who has long fretted about inflationary pressures in the U.K. economy, was the lone dissenter. The remaining eight officials backed the plan, and the newly minted central bank governor announced the pledge Aug. 7. One out of 42 economists going with a different view is not a problem. One out of 8 members of the Monetary Policy Committee piping up is a bigger deal, it would seem; and the lone dissension of Mr. Weale was enough to force UK investors to face the (admittedly slim) possibility of their own "tapering". The results were not pretty: (UK Daily Telegraph): The rates at which banks lend to one another usually a key indicator of the future direction of fixed rate mortgage rates have been rising in recent weeks, in spite of Bank Governor Mark Carney's clear "guidance" that the Bank would cap rates until 2016. The interbank rates reflect the demand for and cost of money changing hands between large institutions. These are rising, suggesting market participants are not convinced by Mark Carney's commitment made on August 7 to keep rates low until certain economic conditions notably unemployment targets are met. But will rising interbank or "swap" rates as they are also known, translate into higher mortgage rates? And if so, how quickly? Swap rates, like mortgages, apply over set periods. Two-year swap rates have risen by 16pc in the fortnight since July 30, from 0.68pc to 0.79pc. Five-year swap rates have risen by a greater 21pc, from 1.37pc to 1.66pc. In effect, these increases mean the market expects the Bank rate to rise sooner than Carney has indicated. "It shows that while Carney says one thing, the markets think another with at least one base rate rise priced in," according to Mark Harris of mortgage broker SPF Private Clients. "Can he really keep a lid on rates until 2016?"
19 AUGUST 2013
12
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That's the (inflation-adjusted) 64-bazillion-dollar question. Can Carney do what he says he will? Can any of the world's central bankers bend markets to their will forever? Unfortunately for Carney and his counterparts at other central banks, they believe that the decision will ultimately be theirs and that the markets will do what they say, because ... well, because for the last few years they have done. Big mistake. These decisions are NEVER made by central banks in the long term just ask Arthur Burns, who, interestingly enough as we contemplate a Larry Summers-led Fed, had a reputation of being overly influenced by political pressure in his monetary decisions during his time as Fed Chairman. No more than a couple of days after the MPC minutes were released, the commentators looked at the market reaction to Mr. Weale's lone voice of dissent (incidentally, Weale voted for a 0.25% hike for seven consecutive months in 2011, so his contrarian stance can hardly have come as a shock) and let loose: (UK Daily Telegraph): Morgan Stanley predicts that sterling will fall from a current value of around $1.56 to $1.48 in three months time a 5pc fall as Bank of England Governor Mark Carney continues to pursue measures to stimulate the economy. A series of positive economic news has boosted the pound recently, sending it to eightweek highs against the dollar, but Morgan Stanleys head of foreign exchange strategy Hans Redeker said significant slack remains in the economy and that Mr Carney may even pursue an expansion of the Banks 375bn quantitative easing programme. Philip Aldrick had similar concerns: (Philip Aldrick): Top economists said the Monetary Policy Committee (MPC) could relaunch quantitative easing (QE) within months if markets did not move into line with the forward guidance unveiled by Governor Mark Carney last week. The warning came after another rise in both sterling and government borrowing costs, and as traders brought forward their forecasts for a first rate rise to the third quarter of 2015 roughly a year earlier than the Bank has signalled.
19 AUGUST 2013
13
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And Liam Halligan went one step further outlining why he was worried about Carney's bold plan: (Liam Halligan): Id like to be positive. The new Governor has barely got his feet under the table and is a decent man. Amidst sky-high expectations, he faces a formidable task. Yet my instincts tell me that forward guidance is counter-productive and could even be highly dangerous. Carney delivered his much-anticipated monetary sermon on August 7. Already, the policy appears to be unravelling. Since the Governor spoke, 10-year UK gilt yields have spiralled, up over 20 basis points to 2.64pc, the highest level since October 2011. So borrowing has become dearer, not only for the Government but across the economy. That, presumably, is not what Carney intended.... Forward guidance is losing traction for reasons that go beyond recent improvements in the growth data. Investors are also concerned that the Bank will need to raise rates sooner than it says in order to counter inflation. The Consumer Price Index rose 2.8pc during the year to the end of July, we learnt last Tuesday. While that was marginally down from 2.9pc the month before, inflation still remains way above the Banks 2pc target, as it has been for no less than 45 months in a row. While the Governments pet economic commentators are doing their best to ignore oil prices, its also the case that, despite a sluggish global economy, crude prices remain firmly above $110 per barrel. Egyptian unrest notwithstanding, oil markets remain tight, amidst ever-growing demand from the Eastern giants and, despite the fracking hype, an ongoing struggle to source new supplies. That can only aggravate inflation. Ahhh... yes, inflation. I remember that. So here we are. One dissenter, and the QE program that was put on hold just TWO WEEKS prior is being touted as the solution to a problem that hasn't even occurred yet, simply because markets won't "move into line". Oh, Mama! But it's not just the UK. Over in the USA, the signs are already appearing that rates are starting to be set not by the Fed but by the market, and that spells trouble.
19 AUGUST 2013
14
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Exhibit A: Mortgage Rates
Source: Mike Shedlock
That is not going to help the housing "recovery" that has done so much to inspire confidence in the US economy; and indeed, as Mike Shedlock pointed out this week, mortgage application data is already cause for concern: (Mish): From the latest Mortgage Bankers Association Weekly Application Survey ... Mortgage applications decreased 4.7% from the previous week The Refinance Index decreased 4% from the previous week The seasonally adjusted Purchase Index decreased 5% from the previous week The unadjusted Purchase Index decreased 6% compared with the previous week One week does not make a trend, but the trend looks ominous. The weekly application surveys show a decline in mortgage applications for the 13th time in 15 weeks. Curiously, refinance applications, although trending lower, still account for about 63% of applications. I spoke with my friend Michael Becker, a mortgage broker at WCS Funding Group, and he commented that he is still refinancing people with rates over 6%. Some people just now have the equity available to refinance. Yet, with rising rates, the drop in affordability, the pent-up demand to buy declining, and the decline in the number of applications, don't expect too much more (if any), rise in home values. And don't expect mortgage applications to break this trend either.
19 AUGUST 2013
15
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What does that look like graphically? Well, like this:

Mortgage Bankers Association Weekly Mortgage Applications
(% change) May - August 2013
8 6 4 2 0
-2 -4 -6 -8 -10 -12
3 May 10 May 17 May 24 May 31 May 7 Jun 14 Jun 21 Jun 28 Jun 5 Jul 12 Jul 19 Jul 26 Jul 2 Aug 9 Aug
Source: MBA/Bloomberg
Central banks are now reaching the point of no return. They have pegged rates at zero; they have bought what would have been, until a few short years ago, an utterly incomprehensible amount of bonds; and now they have promised to keep rates at zero for years to come but the markets are finally beginning to rebel. Bill Fleckenstein likes to call this part of the process "the market taking away the printing press", and if that is in fact the phase we are about to enter, then all hell could be let loose. The markets wresting control from the central banks will signify that the endgame has begun. Already, as you can see from the chart below, interest rates have backed up across the world (though Japan whose bond market went through some wild convulsions in the wake of BoJ governor Kuroda's pledge seems once again to be under control ... for the time being) as investors start to realize that eventually market forces will ride roughshod over central bankers, and at that point they will need to take drastic measures.
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16
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Source: Bloomberg
Unlike in the 1980s, though, raising rates into the teens is categorically not an option this time in fact, raising rates back to the average over the last 25 years is not even on the table, since, despite a consistently falling yield during that extended time period, the average rate is still 5.25% (see chart below); and THAT, dear reader, is a number that isn't affordable today due to the explosion in the amount of debt issued by the US.
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17
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10
US 10-Year Treasury Yield 1988 - 2013
6 Average: 5.25% Yield (%) 4
0 1988 1993 1998 2003 2008 2013
Source: Bloomberg
But surely, if the market WERE in the process of removing the printing presses from the central banks of the world, there would be signs elsewhere that a race had begun to buy some sort of asset that would perform well in an environment where things were getting out of control, no? Surely, if the prospect of inflation picking up was real, there would be SOME way to tell?
Spot Gold (COMEX)
15
June 2013 - August 2013
12
+12%
-3
June 2013
July 2013
August 2013
Source: Bloomberg
19 AUGUST 2013
18
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If only there were an asset that might act as some kind of early warning signal... Hmmm... So, to summarize: As if by magic, markets are no longer doing exactly what is required of them, when required. Interest rates are backing up as fears of "tapering" mount; and no matter how hard Bernanke, Carney, or any of their mouthpieces try to reassure folks that any taper won't be a disaster and that rates will be low for a VERY long time, they are having to keep the helicopters gassed up and ready to drop more money at a moment's notice, because that is Mr Market's default response: "I want more cowbell!" In our through-the-looking-glass world where down is up and bad is good, markets conditioned to expect stimulus are reacting poorly to "strong data", and fears that the flood of free money may be about to be stemmed are growing. After several years of bad news being good, we are now at the point where good news is bad. That's bad (and by bad, I don't mean good). What is actually happening is that, once you subtract the injection of bountiful free money by central banks, that "strong data" is seen exactly for what it is: weak data. And the prospect of a low-growth world emptied of easy money is hardly one that inspires confidence amongst investors. (UK Daily Telegraph): Strong data sparks market sell-off on fears stimulus is over Stock markets across the world slumped and government borrowing costs soared after strong economic data from the US and the UK renewed fears that central banks would soon start withdrawing stimulus and move towards interest rate rises. That's it in a nutshell. So ... it's all about the taper. What happens now? Do we get the dreaded taper, followed by a measured retreat in bond markets with equities stabilizing at all-time highs and central bankers having the world graciously bend to their will forever? Or do we get a taper that is accompanied by a big break lower in equity markets that causes one last panic-driven rush into sovereign debt, making things look optically OK for a little while longer? Or maybe we get a taper followed by a break in equities, a continued sell-off in bonds, and a panic into real assets like precious metals? But there's one more scenario that worries me: what if they taper ... and everything falls anyway? What then?
*******
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OK, so another week is in the books; and revisiting the high (well, low) points, our first port of call is that nearly forgotten thorn in the side of Europe: Spain. Not only do we find a 47-storey building with a minor flaw, but we discover entire villages for sale and take a look through German eyes at the progress being made in Spain on the path to reform. China features prominently this week, too, as Michael Pettis exposes the urbanization fallacy; Caixin examines the tremendous increase in interbank business; and, in a development that will shock precisely nobody, we contemplate the possibility that Chinese economic data is "dodgy". Japan's debt passes a major milestone that seems to have not even registered; we drop in on Cyprus to remind ourselves that there is still a problem or two in parts of Europe that don't rhyme with "Hermany"; and in our charts section we examine the Summers vs Yellen race to the Mariner S. Eccles Building, ETF holdings of gold and silver, and the housing "recovery". Our videos include a classic exchange between Rick Santelli and that wide-eyed ingenue Steve Liesman, and there's an Eric King double bill as both Bill Kaye and yours truly talk about the ongoing drama in the gold market.
Until Next Time. ******* Spanish skyscraper missing elevators in monster goof
What goes up must walk down. In what will surely go down in history as one the greatest architectural blunders, the town of Benidorm in Alicante, Spain, had almost completed its 47-story skyscraper when it realized it excluded plans for elevator shafts. Despite its name, the InTempo skyscraper was, seemingly rushed through the blueprint process, and its attempted message of prosperity through the country's economic tumult has become one that is more fitting to the current state of things in Spain as a whole. As El Pas headlines, "InTempo, an incompetence of high stature," the construction of the massive building has been plagued with problems beyond the oversight of being inaccessible. The construction was initially funded by the bank Caixa Galicia, but as of December 2012, financing for the project was taken over by Sareb, which is "known as the bad bank" in Spain. The notorious title of "bad bank" was bestowed upon banks created by the European Central Bank, the European Commission and the International Monetary Fund to focus toxic estate assets.
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The bad banks would be entitled to bailouts from the European Union for payments of their purchased assets that are damaged. Essentially, "bad banks" are like real estate paper shredders. With an initial investment of $4,140, construction company Olga Urbana promoted the project as "an unquestionable standard for the future" that would stretch 200 meters into the clouds. The now-extinct Caixa Galicia had lent $122.8 million in 2005, and when the bad bank took the reins of InTempo, it did so for 50% of that price and an arbitrary $14.7 million. The bizarre nature of the practices put in place in the construction of InTempo doesn't stop at bad banks and missing elevator shafts. The initial backer of the project, Caixa Galicia, stopped paying workers for four months around the time it realized after about 23 floors had been completed that a service elevator hadn't been installed for the 41 workers who had been hauling materials up 23 flights of stairs. Today InTempo has 94% of its structure completed and 35% of its apartments sold. The building is currently scheduled to be finished in December, but the project is beset with allegations of fraud from both customers and suppliers, who are owed $3.3 million. As for the elevator issue, there is still a solution to be found. Because of the way the building was constructed, there is no space for a shaft anywhere. The most likely solution, given the circumstance, is a series of external elevators like those found on the Bonaventure Hotel in Los Angeles, which would add a significant increase to the price tag. The building that was set to be a "standard for the future" has instead become a terrible reminder of the present age of decadence and excess.
*** NY DAILY NEWS / LINK
Happiness is a hamlet all to yourself in rural Spain

Driving into the picturesque Spanish hamlet of Openso, nestled in a valley of eucalyptus and pine trees, estate agent Mark Adkinson says the clutch of houses has generated a lot of international interest. Weve had British, American and Dutch groups coming to visit it, theyre very interested in buying, he explains as he pulls up aside a crumbling granite stone house.
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Given the price, their interest is not surprising. For 220,000 (188,000), buyers can pick up not just a house in the village, but the village itself. The cost of a studio flat in south London buys five houses, several outbuildings and 100 acres of arable land running down to a trout-filled river here. Mr Adkinson, a former livestock breeder originally from Lancashire, has lived in the verdant north-western province of Galicia, where Openso is located, for nearly 30 years. He mostly sells country houses but says there has been a growing interest recently in small, rural hamlets known as aldeas. He has identified 400 abandoned hamlets in the area that could potentially be sold. Some are on the market for several hundred thousand euros; other smaller, more dilapidated ones go for as little as 40,000 (34,000). People are coming here looking for a different way of life, Mr Adkinson says. The previous owners are getting older and dying or moving away to be closer to medical facilities, but there is a lot you could do with these villages. Like many of the nearly 3,000 other empty villages in rural Spain, Openso was gradually abandoned by its original inhabitants during the 20th century. More than half of the countrys slowly-crumbling hamlets are in Galicia, a largely rural province that is also home to the famous pilgrimage site of Santiago de Compostela. It is estimated that up to three million people left Galicia between the turn of the last century and the 1970s. They went to the coastal cities or abroad first to Latin America and later to Switzerland and Germany seeking a better life than they had as subsistence farmers. There was a time when Galicia, the home region of General Franco, was a byword in Spain for rural poverty, hunger and mass migration. These days it is better known for its Catholic pilgrimage trail and pulpo (fresh Galician-style octopus), but few migrs have returned to the rural areas. The traditional granite-built villages that the migrants left behind may still house the odd elderly resident or see visits on high holidays, but for the most part they lie almost empty. Until recently, abandoned homes were usually left to be gently taken over by lush vegetation. Inheritance laws mean that numerous members of an extended family often own a share of a property and have to give their permission for it to be sold, even if they moved to Argentina in the 1950s and have not been heard of since. But now, a combination of demographics and economics means dozens of hamlets are coming on to the market. Spains economic downturn, sparked by the collapse of house prices in 2008, has pushed owners to reconsider the value in their village properties as they face the prospect of negative equity on their main residences.
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The regions ageing population also means that there are more villages than ever being left completely abandoned. Jose Luis Alvarez Blanco, the mayor of Panton in southern Galicia, presides over an ever-shrinking community. As we know, this has always been an area of high emigration, he says, sitting behind an imposing mahogany desk in a small office off a cobbled square in Ferreia de Panton. When there was a census in the 1960s, there were 13,000 people living here. Now there are 3,000. We have three abandoned villages and several others where there is only one resident [who is] over the age of 80....
*** THE INDEPENDENT / LINK
Dodgy data may add $1 trillion to Chinese economy

China may be exaggerating the size of its economy to the tune of $1 trillion by releasing "willfully fraudulent" inflation and GDP [gross domestic product] data, according to a study out this week. Numbers from the world's second largest economy are treated with skepticism by some economists, but this latest report has attempted to quantify the scale of discrepancy. "There is strong evidence indicating that the rate of real Chinese GDP growth, and ultimately total real GDP, may be significantly over stated," said Christopher Balding, associate professor at Peking University's HSBC Business School, and the report's author. Through "significant and systematic irregularities", official estimates overstate China's true GDP by 8 to 12 percent, or $1 trillion, according to Balding. Balding looked at data from between 2000 and 2011, and found that inflation numbers had been manipulated in a way that distorted other measures such as GDP and disposable income. "If inflation data is not accurate, or is willfully fraudulent, as appears to be the case, it will impact many other areas of economic and financial data leading to large disparities over time," said Balding. "It is disturbing that a statistical body would so obviously manipulate and produce blatantly fraudulent data." In particular, the report focused on housing inflation data, which is one of the biggest items in the Consumer Price Index (CPI). China's booming economy has caused people to migrate from rural areas to the expanding cities, causing house prices to rocket in industrialised areas. Yet official statistics showed rural house prices increasing more than those in urban areas, said Balding. According to the National Bureau of Statistics China, the price of private housing in rural areas grew at 1.67 percent per year on average, more than three times faster than prices in urban areas, which averaged 0.53 percent.
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In addition, official statistics suggest the price of private housing in China rose by a very modest 8.14% over the 11-year period, despite a housing market boom and a quintupling in nominal GDP. "The claim that the housing component of CPI grew by less than 10 percent between 2000 and 2011 is nothing less than comical," Professor Balding wrote. Analysts have long-been been cautious of official Chinese data. Qinwei Wang, China economist at Capital Economics, told CNBC that the discrepancy between official Chinese GDP data and Capital Economics' own growth indicator became more apparent in 2012. "Since 2012, our indicator suggests the slowdown in China has been faster than what official data showed. Our data suggests that the growth of China's economy is 1-2 percent lower than official data, growing slightly above 6 percent." Balding said he hoped his research would change the way the Chinese authorities deal with data. "I think the Chinese leadership is really struggling with the data. I don't think they even know what is really going on within their own country," he told CNBC. "Hopefully this paper will spur the Chinese government to come up with better statistics to see what's going on in the own country."
*** CNBC / LINK
Crisis of Faith: Doubts Grow Over Spanish Reforms

Measures to pull Spain out of the crisis are failing to bear fruit and exacerbating social tensions. While some are optimistic, the core problems remain, and many are questioning the old elite's ability to clean up the financial sector and reform the country. Beln Romana merely has to step out of her office and into the street to be reminded of the battle she is waging. Outside, at the end of Madrid's Paseo de la Castellana, the two slanted office towers owned by the Bankia conglomerate jut into the sky. They have become a symbol of the crash in the Spanish real estate and savings bank sector -- as well as of the entire country's dire problems. Romana's job is to dispose of the remains. She is the head of Sareb, a so-called bad bank onto which eight Spanish lenders were allowed to unload more than 30 billion ($40 billion) in real estate and loans last winter. This toxic legacy of debt is supposed to be paid off over the next 15 years.
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The reorganization of Spain's financial sector is seen as the most important part of the reforms introduced by conservative Prime Minister Mariano Rajoy to overcome his country's economic and debt crises. But whether the plan will succeed remains uncertain, as real estate prices continue to slide amid continued concerns over the country's financial institutions.
Source: Der Spiegel
There are also growing doubts about Rajoy's abilities as a crisis manager. A corruption scandal surrounding Luis Brcenas, the former treasurer of the governing People's Party party, is a reminder to Spaniards of how a group of political and economic elites has taken the country to the brink of ruin. Brcenas has admitted to maintaining a network of illicit accounts filled with money from various individuals, including developers, who made substantial donations to the party and its officials in return for lucrative contracts. It was this climate that allowed real estate prices to become more and more inflated. But now the past is also catching up to Rajoy. "Chin up!" and "Stay strong!" he allegedly wrote in text messages to the man in charge of the illicit accounts, even long after Brcenas' intrigues had been exposed. Political commentators in Madrid are beginning to question the strength of Rajoy, who is scheduled to appear before parliament this week to face questions over the corruption scandal. At any rate, crisis management is not getting any easier for Rajoy. Only about 30 percent of the electorate still supports his government's policies. Although there have been some successes, a number of reforms have been ill-conceived and only exacerbated societal divisions. Unemployment stands at 27 percent, and 2 million Spaniards get their meals from soup kitchens operated by social welfare organizations. "Spain has three core problems," says Clemens Fuest, head of the Center for European Economic Research (ZEW) in the western German city of Mannheim, "the extremely overinflated construction and real estate sector, the ailing banks and rapidly growing government debt."
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All three problems are closely related. Public debt is growing because the economy isn't gaining momentum. This can be partially attributed to the fact that the banks aren't lending enough money because they are still struggling with consequences of the precipitous end of the construction boom....
*** DER SPIEGEL / LINK
Fight the flight

Yesterday we blogged about Indias worrying imposition of new capital controls, announced on the evening of August 14th to stop cash flowing out of the country and stem the decline of the rupee. Ive just had a briefing from local officials about the policy. The local media has been uncharacteristically quiet about the measures, but foreign investors and well-off Indians should be watching closely. Our colleagues at the Financial Times are. They published a well-judged leader in todays paper. Indias financial markets had have had another tough day. The main equity index fell 4% on Friday, August 16th, making it the worst-performing big bourse worldwide. The rupee reached a new low of 61.7 to the dollar. Indian money market rates leapt again, indicating stress in the system. And the Indian banks most reliant on wholesale funding got clobbered. Yes Banks stock price sank by more than 10% during the day. It has halved since May. To recap, on the 14th the central bank clamped down on Indians ability to take money out of the country in two ways. The limit on personal remittances has been cut to $75,000 per year, from $200,000 per year. And companies are now barred from spending more than their own book value on direct investments abroad, unless they have specific approval from the central bank. Previously they could spend up to four times their own net worth. Both changes reverse the gradual liberalisation of Indias balance of payments over the last decade. The restriction on personal outflows is, apparently, to deal with incipient signs of capital flight by Indias rich. Brokers, bankers and assorted hustlers, mainly based offshore, have been rushing to offer wealthy Indians cash extraction services. Marketing emails from them have been circulating widely. The pitch is primitive: take your dough out now, convert it into a hard currency, wait for the rupee to fall to 70 against the dollar, then bring it back into the country and convert it back to rupees at the more favourable rate. Outbound personal remittances by Indians have been small historicallyperhaps $1bn a year, a drop in the ocean given Indias current-account deficit of $70-80 billion. But the Indian authorities aim is to crack down on these schemes before they cause a much bigger speculative outflow and a self-fulfilling panic. The second measure, the prevention of firms investing much abroad, is more nuanced. Such outflows are already a significant drain on the balance of payments.
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In the year to March 2013 gross outbound direct investments by Indian firms were $13 billion (some Indian firms sold foreign assets and brought the money home, so the net figure was lower, at $7 billion). Under the new system most firms will need official permission for deals. The aim, apparently, is not to restrict legitimate activity, whatever that means, but to put grit into the wheels. The new red tape involved will slow down the pace at which deals happen and probably lead some firms to postpone their plans, thus lowering short term demand for dollars. Probably, the authorities want to do some intimidation too. Any dodgy companies that were hoping to speculate on the rupee, for example by doing takeovers of specially created cash-rich shell companies abroad, will now think twice. Are these measures sensible? They have a narrow logic to them. But by stepping into the arena of capital controls, Indias authorities have planted a seed of doubt: might India do a Malaysia if things get a lot worse? Malaysia famously stopped foreign investors from taking their money out of the country during a crisis in 1998. Indian officials regard this suggestion as absurd. But investors do not. Your correspondent happened to interview the head of currency trading for a big global bank in Singapore on June 19th, before Indias difficulties began in earnest. The offshore market for rupee trading has exploded in size in the past year or so. It probably accounts for more than half of all rupee trading volumes. His view was that speculators and investors traded outside of Indias borders because they were that scared India might freeze funds inside the country. Right now, these people will not be reassured. To try to limit the damage, Indias finance ministry and central bank need to make clear in public that they have no intention of tightening capital controls on foreign investors, as opposed to unlucky locals. Beyond that, they will try to find more tricks up their sleeve. They could raise an IMF loan to augment Indias $270 billion of foreign reserves and make clear it has ample firepower to cope with a freezing-up of markets. (Indias total financing needs are about $250 billion over the next year, measured by its current account deficit and the debt it needs to roll-over.) But that seems to be off the table. With a general election due by next year the politicians do not want the stigma involved. Another option is launching a big sovereign bond denominated in dollars to achieve the same end. But officials are rightly worried that this could backfire . The government has long eschewed borrowing in foreign currency, precisely because it links its solvency to volatile currency markets....
*** THE ECONOMIST / LINK
Michael Pettis On China's Urbanization Fallacy

The latest default bull argument supporting higher levels of growth in China than I believe possible is the urbanization argument. Beijing is planning another major urbanization push, and according to this argument China can resolve the problem of wasted investment by investing in the urbanization process, that is, it can engage in a massive investment program related to the need to build infrastructure for all the newly urbanized. Here is the Financial Times on Chinas urbanization policy:
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Li Keqiang, the countrys recently appointed premier, has vowed to put urbanisation at the core of his economic and social agenda. Government departments are drawing up a set of policies, expected to be announced this year, that are intended to guide more than 100m rural citizens into cities over the next decade. The prospect of a concerted push for urbanisation is viewed with excitement by everyone from mining companies to property developers and local officials to stock brokers. As Chinas growth slows, they hope the urbanisation campaign will give the country a boost. They are counting on it to unleash a fresh wave of investment, create a vast body of consumers and ultimately propel China past the US as the worlds biggest economy. China, which is already highly urbanized for such a poor country, is determined to urbanize further, and Beijing plans to move hundreds of millions more people out of the countryside and into the city. Moving so many people off their farms and into new cities should create a surge in demand for housing and infrastructure, so much so that urbanization has become the new reason to predict that Chinese growth rates have already bottomed out and will soon begin to surge again. With so much future demand for apartments, roads, hospitals, schools, subway systems, and so on, after all, how could China not possibly grow by 7% or 8% a year for many, many more years? Tom Holland has a good, if skeptical, summary of the bull argument in the South China Morning Post. Any conversation about China these days rapidly turns into a discussion about the economic promise of urbanisation. Urbanisation is not just the centrepiece of new Premier Li Keqiangs economic policies. According to enthusiasts, it is the engine that will power Chinas future development, justifying sky-high investment levels, and even propelling a long-sought switch to a more sustainable consumption-driven growth model. Believers in the potential of urbanisation point out that today only just over half of Chinas population lives in cities. If that proportion were to rise over the next couple of decades to 75 per cent, in line with the rich worlds levels, they reckon 300 million people equivalent to the entire population of the United States will have to migrate from the countryside to the cities. To accommodate them, China would have to build a new city the size of Shanghai every year for the next 20 years. That would entail massive investment in housing and infrastructure, supporting everything from commodity to property prices. Whats more, argue the enthusiasts, because city-dwellers earn more than their country cousins, urbanisation will boost consumer demand, accelerating Chinas economic rebalancing.
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Like so many of the earlier bull arguments, however, this new belief that urbanization is the answer to Chinas growth slowdown is based on at least one fallacy and probably more. The first and obvious reason is that urbanization is not an act of God, and therefore indifferent to earthly conditions. Urbanization itself responds to growth. Countries do not grow because they urbanize, in other words, they urbanize because they are growing and there are more good, productive jobs in the cities than in the countryside. In that sense urbanization is not a growth machine. It is simply a pro-cyclical process that accommodates growth when growth is rising and reduces it when it falls....
*** MICHAEL PETTIS / LINK
Regulatory Concern Grows along with Surge in Interbank Business

In less than three years, the interbank business has expanded rapidly in China, creating huge off-balance-sheet assets that are starting to worry regulators. By the end of the first quarter of 2013, interbank assets in listed Chinese banks reached a total of 11.6 trillion yuan, accounting for nearly 13 percent of their total assets. In 2006, the figure was 1.6 trillion yuan. Banks use these assets to bypass lending quotas and capital restraints, and some small banks rely on the market for funding, too. Interbank business was initially limited to lending between commercial banks to address short-term liquidity issues. Since 2010, it has undergone a gradual but fundamental change, expanding a variety of off-balance-sheet assets and creating many types of interbank products that are often purchased by themselves: through money amassed by their own wealth management products. The scale of banks' wealth management products, which have grown since 2010, reached 9.85 trillion yuan at the end of June. For most banks, this is a way to expand business while reduce what they call "regulatory costs." To smaller banks, it means easy and fast growth. Guangxi Beibu Gulf Bank, with regular lending of only some 30 billion yuan, is able to boost its total assets to 120 billion yuan. The secret to this is massive interbank lending. It is an open secret that many city commercial banks, in order to meet regulatory requirements on assets for listing or conducting cross-regional business, inflate their asset size by frequent interbank activities costing tens of millions of yuan in transaction fees. Industrial Bank, known as the "interbank king" for its active role in the market, has moved beyond the initial stage of moving assets off balance sheets and entered the next stage: boosting revenues.
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Its interbank assets account for 36 percent of its total assets, but profits from interbank business make up half of its total profits. Behind this is a unique business model. Industrial Bank has built a bank-to-bank platform and become a broker: on its left hand is money from small and medium-sized banks' wealth management products or interbank lending, and on its right hand is interbank repos from its peers that are up for sale. Industrial Bank does the selling and buying simultaneously, reaping all the intermediate business income. But with assets being shifted on and off balance sheets in the banking system, risk has become an issue. In effect, the activity nullified regulatory policies, accumulated risk and largely limited the effectiveness of restrictive credit policies to rein in local government financing platforms and real estate developers. Regulators are aware of this. In March, Vice Premier Ma Kai asked the central bank and the China Banking Regulatory Commission (CBRC) to pay attention to interbank assets and bank wealth management. Authorities first tried to control the overall amount of credit to curb interbank lending. In March, the CBRC issued Document No. 8, which stated that non-standard wealth management assets at commercial banks could not account for more than 25 percent of total assets. The proportion of interbank business to assets at many banks is indeed more than 30 percent. The so-called cash crunch that occurred in the interbank market in June, which forced up interest rates and froze a large amount of liquidity, once again exposed the rapid fluctuations in this market. It also showed that some banking institutions' liquidity risks are alarmingly high. The central bank is leading the CBRC, China Securities Regulatory Commission (CSRC) and China Insurance Regulatory Commission (CIRC) to prepare targeted measures for standardizing interbank market operations....
*** CAIXIN / LINK
Cyprus: Holiday Suntrap Of Sea, Sun, Sand, Food Banks And Desperation
"How's business?" the taxi driver shouts, echoing the question. "It's terrible! Terrible!" Chris Georgeo, 52, is at the wheel of his beaten-up minibus negotiating the tight roads of Larnaca, the holiday resort on the south-east coast of Cyprus, but he still takes both hands off the wheel to give a double thumbs down. "We can't survive, there are no jobs," he says. "There are far less tourists. They're scared to come here after the TV reports showing people not being able to get money out of the banks."
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In March, Cyprus's banks froze all withdrawals and savers with the Bank of Cyprus later learned they had lost 47.5% of their savings above 100,000 (86,000), while savers with Laiki Bank lost all their money above 100,000 as part of a deal to secure a 10bn (8.6bn) bailout from the European Union, European Central Bank and International Monetary Fund. Earlier it had been feared that all savers, no matter how much they had in the bank, would be forced to surrender a slice of their money. There had been panic. "Tourists are what makes this island: without them we have nothing," Georgeo says. It is the height of the tourist season and the latest figures from the Cyprus Central Bank say visitor numbers in June fell by 6.6% to 308,000. But anecdotal reports suggest things are far worse than that number would indicate. "Look, it is just you in my bus," Georgeo says. "Last year it would have been full, now it's just you My boss won't make money. He'll cut my pay again, or go bust." Even if he keeps his job, Georgeo, who is going both bald and grey and whose jeans have so many holes I could tell you what sort of underwear he was wearing, says he "can't afford life". His monthly pay has been cut from 1,100 to 800: "I've got to pay rent, electricity, water, food which keeps going up and have two daughters at university in England. I've got to send them money. But I can't." It's a similar story everywhere. Unemployment in July officially stood at 17.5%, at a record of more than 48,000 people. Surveys suggest the true figure is closer to 70,000, accounting for those who do not register for unemployment benefit, which is stopped after just six months. Cypriot unemployment is the third-highest in the EU, behind Greece (26.9%) and Spain (26.3%). This compares with just 4.6% in Austria, 5.4% in Germany and 7.8% in the UK. As in other troubled areas of Europe, young people are particularly badly affected. Official youth unemployment stood at 37.8% last month, up from 26.4% last month and far above the 13.8% long-term average. The official unemployment rate which is 32% higher than this time last year is likely to spike far higher at the end of the summer season because thousands are employed in temporary tourism-related jobs. Cyprus has entered its third year of recession, with GDP showing a 5.4% decline in the second quarter compared with last year. Tourism accounts for almost a third of the island's GDP. Maria Eracleous, a British-born Cypriot single mother, has just got a job 10 months after being one of hundreds laid off by Larnaca airport the country's busiest because the airport in the capital, Nicosia, has been closed since the 1974 Turkish invasion and remained in a United Nations buffer zone for years. "It's much, much less money, but at least I have a job half of my friends are unemployed," says Eracleous, who earns 700 a month as a receptionist at the Amorgos boutique hotel set back from Larnaca's beach behind two larger 1970s tower block hotels. "But I worry about how long it will last. Lots of immigrants will work for less. If I make it to the end of the season, that'll be a relief, but then what will I do in the winter?"
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Eracleous came to Cyprus in the good times of 2008 to be with the father of her 14-year-old son, but now the strain is beginning to show. And that worries her too. "We still have to offer good holidays, we still have to make people happy," she says. She pauses as a tanned British couple in vests, shorts and sandals approach the reception desk, and breaks into a bright white smile. "We still have to smile, at all times." Zivile, a 26-year-old receptionist at Sun Hall Beach hotel, the tallest hotel lining the beach,, says the rooms are 30% empty despite it being the middle of the peak season: "We're not busy, it's very quiet. People have decided not to come, they know it's not so good here. They have probably decided to go somewhere else, somewhere cheaper. Because of the euro, we can't be that cheap"....
*** UK GUARDIAN / LINK
Debt of One Quadrillion Yen? Not a Problem

Haruhiko Kuroda doesnt wear a wizards hat when he arrives at Bank of Japan headquarters each morning. Once inside, I do wonder if he dons a cloak, waves a magic wand and concocts mysterious potions. Kuroda has done something truly supernatural in his five months as governor of the central bank. The more yen he conjures up to produce inflation, the more he mesmerizes markets. Investors are more bewitched by Kuroda than they are by the number 1,000,000,000,000,000. The 15 zeros now needed to express Japans national debt almost have a dark-arts quality all their own. Yet a week after Japans IOUs reached the 1 quadrillion yen ($10.28 trillion) mark, yields have actually declined. What is Kurodas secret? Ben Bernanke at the Federal Reserve would love to know as he fends off bond vigilantes, that mysterious cast of characters who protest fiscal or monetary policies they deem dangerous. Kuroda is winning bondlands full obedience with two forms of trickery. The first is what economists call financial repression essentially transferring money via monetary policy from citizens to the government. The second is outright monetization of public debt. Of course, Kuroda cant admit hes engaging in either practice. The first would anger Japans 126 million people; the second might have hedge funds the world over shorting Japanese government bonds and credit-rating companies pouncing. So far, Kuroda is getting away with it. The longer he does, the better the chances Prime Minister Shinzo Abe can pull off his own miraculous feat of deregulating the economy.
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It all depends on how long investors are willing to suspend their disbelief over the facts in Japan: an impossibly large debt load, an aging population and a propensity for political paralysis. Were that moment of clarity to arrive, the global economy would be shaken by the worst debt crisis in history. Forget Greece Japans debt burden is larger than that of Germany, France and the U.K. combined. The entire world has a vested interest in Kuroda keeping the magic alive. Last month, Deputy Economy Minister Yasutoshi Nishimura admitted something quite profound: This is the last chance for Japans economy. Many worry Kuroda is hastening what they see as Tokyos demise. Hedge-fund manager J. Kyle Bass, whose Hayman Capital Management LP has been predicting a Japanese collapse since 2010, is now surer than ever in his bet. The usual argument against a crash is that well over 90 percent of government debt is held domestically, eliminating capital-flight risks. But that doesnt explain how Kuroda has so masterfully silenced the vigilantes. Remember the violent yield swings of May and June? Ten-year yields now sit docile at 0.74 percent. That compares with 2.76 percent in the U.S., which prints the worlds reserve currency, holds a higher credit rating and boasts a growing population. Sure, Kuroda crushed the skeptics with overwhelming monetary force. But the powers of financial repression deserve far more credit. The yield volatility that accompanied the first wave of Kurodas doubling of the monetary base in April shook Japan Inc. to its core. Government bonds are the main financial asset held by banks, companies, pension funds, universities, endowments, insurance companies, government-run institutions, the postal-savings system and individuals. Rather than reduce their debt exposure, the Japanese doubled down. Kuroda didnt exactly tell them to do so it was more a matter of spin, with no direct BOJ fingerprints. Bondholders got the message that it would be in everyones best interest to keep a lid on debt yields. What some might label a pyramid scheme, Japanese view as financial security. This dynamic is accelerating a huge redistribution of wealth within society from creditors (the people) to debtors (Japans Ministry of Finance). Thats pushing inflationadjusted interest rates even further into negative territory and giving the government cheaper financing....
*** BLOOMBERG WILLIAM PESEK / LINK
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Charts That Make You Go Hmmm...
US Population Reference Bureau

*** ZEROHEDGE / LINK
Not long ago, the identity of the next Fed Chairmanperson seemed assured: Janet Yellen
was the annointed one, and it looked for all the world as though her ascent to the top would be unimpeded. There was mention of Don Kohn giving her a run for her money, but that was seen as an attempt to at least make it look as though there was a competition underway. Then a few whispers about Larry Summers being a candidate began to circulate, but with Summers being the polarising character that he is, the enmity towards him was made clear and he promptly sank back into the shadows again. But the Obama administration is nothing if not tenacious when it wants to be; and so, after a breathtaking campaign in the captive independent media, we find ourselves here, on the eve of Larry Summers' appointment as the next Fed Chairman. Remarkable.
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Precious Metals ETF Holdings

Percentage Change In Total ETF Holdings of Gold & Silver
August 2012 - August 2013
10
-5
-10
-15
-20 August 2012
April 2013
August 2013
After my recent
piece "What If?", I was inundated with emails concerning the physical stocks of gold (and silver) in warehouses and, above all, ETF vaults. Following on from the conversation I had with Mike Maloney a couple of weeks ago, I put this chart together to demonstrate the anomaly between the massive withdrawals of gold from the ETFs and those of silver. Clearly this wasn't a precious metals phenomenon, but rather exclusively an exercise in getting physical gold bullion. Silver stocks (grey shaded area) are 10% higher over the last year while almost 20% of physical bullion in the gold ETF vaults has disappeared (yellow line). Something is rotten in the State of Denmark...
19 AUGUST 2013
35
Hmmm...
Many economists have been expecting the housing boom to provide a visible lift to
the US economy. So far the results have been underwhelming. In spite of strong homebuilder optimism, housing starts remain subdued. The momentum we saw in late 2012 has dissipated and last year's forecasts (for example Goldman and ISI Group) turned out to be too optimistic. The direct impact on jobs has been almost nonexistent, as the number of residential construction jobs has barely budged (still below the level it was in January of 2010).
*** SOBER LOOK / LINK
19 AUGUST 2013
36
Hmmm...
Words That Make You Go Hmmm...

Just way too good... Rick Santelli
and Steve Liesman are always entertaining when pitted against each other, but watching this clip makes something abundantly clear for the first time (to me at least): Liesman really DOES believe it all... Wow! Thank heavens for Santelli...
CLICK TO WATCH
Bill Kaye is often called "outspoken"
and a "maverick", but the simple truth is, he's smart, shrewd, and experienced. Bill's observations on the precious metals markets are always insightful and well-informed, so climb out of that pile of adjectives and listen to his latest interview. If you're at all interested in gold and silver, you'll be glad you did...
CLICK TO LISTEN
Last week I had the opportunity to
chat with Eric King about the recent gyrations in the gold market. We discussed fractional reserve lending, warehouse shortages, the Mexican stand-off amongst central banks, and what might happen next...
CLICK TO LISTEN
19 AUGUST 2013 37
Hmmm...
and finally...
Trawling the internet can lead to some amazing discoveries, and this week a case
in point is this set of amazing colorized photographs. Bringing to life a world that has previously only existed in our minds in black & white is an amazing feat of skill and artistry that today's Photoshop wizards are able to accomplish effortlessly...
CLICK HERE TO VIEW
Hmmm...
19 AUGUST 2013
38
Hmmm...
Grant Williams
Grant Williams is the portfolio manager of the Vulpes Precious Metals Fund 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 66th Annual CFA Conference, Singapore 2013 Presentation: "Do The Math" Mines & Money, Hong Kong 2013 Presentation: "Risk: It's Not Just A Board Game" Fall 2012 Presentation: "Extraordinary Popular Delusions & the Madness of Markets" California Investment Conference 2012 Presentation: "Simplicity": Part I : Part II As a result of my role at Vulpes Investment Management, it falls upon me to disclose that, from time to time, the views I express and/or the commentary I write in the pages of Things That Make You Go Hmmm... may reflect the positioning of one or all of the Vulpes fundsthough I will not be making any specific recommendations in this publication.
19 AUGUST 2013
39
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 is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. The opinions expressed in such publications are those of the publisher and are subject to change without notice. The information in such publications may become outdated and there is no obligation to update any such information. 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 funds may result in potential conflicts of interest, although the editor believes that any such conflict of interest will be mitigated by the nature of such securities and the limited size of the holdings of such securities by the applicable Vulpes funds. John Mauldin, Mauldin Economics, LLC and other entities in which he has an interest, employees, officers, family, and associates may from time to time have positions in the securities or commodities covered in these publications or web site. Corporate policies are in effect that attempt to avoid potential conflicts of interest and resolve conflicts of interest that do arise in a timely fashion. Mauldin Economics, LLC reserves the right to cancel any subscription at any time, and if it does so it will promptly refund to the subscriber the amount of the subscription payment previously received relating to the remaining subscription period. Cancellation of a subscription may result from any unauthorized use or reproduction or rebroadcast of any Casey publication or website, any infringement or misappropriation of Mauldin Economics, LLCs proprietary rights, or any other reason determined in the sole discretion of Mauldin Economics, LLC.
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19 AUGUST 2013
40

Grant Williams Newsletter - Things That Make You Go HMMMM

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Hmmm...

THINGS THAT MAKE YOU GO

The Hypocritic Oath

Things That Make You Go Hmmm...

Source: BAV Consulting

1400 1375 1350 1325 1300 1275 1250 1225 1200

Personal Interest Income Jan 2007 - July 2013

Source: St. Louis Fed

Exhibit A: Mortgage Rates

Source: Mike Shedlock

What does that look like graphically? Well, like this:

US 10-Year Treasury Yield 1988 - 2013

6 Average: 5.25% Yield (%) 4

0 1988 1993 1998 2003 2008 2013

June 2013 - August 2013

Happiness is a hamlet all to yourself in rural Spain

Dodgy data may add $1 trillion to Chinese economy

Crisis of Faith: Doubts Grow Over Spanish Reforms

Source: Der Spiegel

Fight the flight

Michael Pettis On China's Urbanization Fallacy

Regulatory Concern Grows along with Surge in Interbank Business

Debt of One Quadrillion Yen? Not a Problem

Charts That Make You Go Hmmm...

US Population Reference Bureau

Precious Metals ETF Holdings

-20 August 2012

Words That Make You Go Hmmm...

Bill Kaye is often called "outspoken"

Last week I had the opportunity to

CLICK HERE TO VIEW

Unauthorized Disclosure Prohibited

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